Interim Results Report
(Thomson Reuters ONE) - 18 September 2009 Prosperity Russia Domestic Fund Limited Half-yearly results for the six months ended 30 June 2009Prosperity Russia Domestic Fund Limited ("PRDF") a Guernseyincorporated, closed-ended investment company admitted to AIM, todayannounces its half-yearly results for the six months ended 30 June2009. PRDF has been established with the principal purpose ofproviding investors with a listed vehicle through which toparticipate in the investment opportunities arising from thecorporate restructuring and consolidation which are currently takingplace in the small and mid-cap markets in Russia and, to a lesserextent, other newly independent states of the former Soviet Union.Key developments: * Unaudited net asset value per share of US$0.373 (based on mid-prices) at 30 June 2009, representing an increase in the first half of the year of 57%, against an increase in the Russian RTS index of 56% * Key investments at 30 June 2009 were Center Telecom (9.9% of net assets), M Video (7.6% of net assets), Efes Breweries (7.6% of net assets), Magnit (6.8% of net assets), Dixy Group (6.5% of net assets), Bashkirenergo (5.9% of net assets) and Sistema (5.1% of net assets) * Latest unaudited net asset value per share of US$0.522 (based on mid-prices) at 11 September 2009, an increase of 120% since the last year end resulting in a significant outperformance of the RTS index which rose by 84% in the same periodThe half-yearly results are unaudited.Commenting, Sir David Kinloch, Chairman said:"I am pleased to be able to report that we have witnessed somethingof a sea change in investor sentiment during the half year to 30 June2009 and this has continued to the time of writing. Although theRussian economy remained rather flat during the first half of 2009,there are now some pointers towards a return to growth, aided in partby a recovery in commodity prices and in particular the oil price. Atthe time of writing we believe that the fundamentals of ourinvestment portfolio are attractive. However, there remainuncertainties and accordingly we continue to be cautiously optimisticregarding longer term prospects."Enquiries:Prosperity Capital Management LimitedElly WordsworthTel: 020 7299 6950Kleinwort Benson (Channel Islands) Fund Services LimitedCompany SecretaryTel: 01481 727111CHAIRMAN'S STATEMENTI am pleased to be able to report that we have witnessed something ofa sea change in investor sentiment during the half year to 30 June2009 and this has continued to the time of writing. This wasparticularly welcome following the dramas of 2008 which persistedinto the first quarter of 2009.During the 6 months ended 30 June 2009 our NAV per share increased by57% to $0.373, which was slightly ahead of the performance of the RTSindex over the period. However, by the end of August 2009 ourreported NAV per share of $0.465 had increased by 96% since 31December 2008, which was well ahead of the advance in the RTS indexof 68% over the same period. The main driver of our performance wasour focus on domestic stocks which have moved ahead strongly inrecent months as sentiment improved, particularly in our chosensectors.Although the Russian economy remained rather flat during the firsthalf of 2009, there are now some pointers towards a return to growth,aided in part by a recovery in commodity prices and in particular theoil price which has risen significantly since the beginning of theyear.During the latter part of 2008 and early 2009 the Russian CentralBank achieved a carefully managed devaluation of the ruble of some30%. Foreign Exchange reserves rose to over $400 billion by July2009. There are clear signs of a return of confidence although thebanking sector remains fragile.As more fully described in the accompanying Manager's Report, we haveadhered to our policy of remaining fully invested and we haveretained a strong bias towards the domestic sector. This has stood usin good stead, particularly during the second quarter of 2009.At the time of writing we believe that the fundamentals of ourinvestment portfolio are attractive. However, there remainuncertainties relating to the sustainability of the present slowrecovery in economies worldwide, and sentiment towards the globalbanking sector is understandably fragile so soon after the creditcrisis. Accordingly, we continue to be cautiously optimisticregarding longer term prospects.Yours sincerely,Sir David KinlochChairmanSeptember 2009MANAGER'S REPORTAfter an extremely challenging year in 2008, the first half of 2009has been much more promising for the Prosperity Russia Domestic Fund(the "Fund" or "PRDF"). Although the economy did not quite manage anunequivocal return to growth during the first six months of the year,share prices staged a strong, partial recovery, particularly duringthe second quarter.By the end of June, the RTS index of leading Russian stocks was up56% from the beginning of the year. PRDF held its own, gaining 57%during H109, even though the Fund's domestic focus meant it wasunder-weight in the export-focussed oil and gas "blue chips" that ledthe first-half rally as commodity prices rose.By the end of August, amid strong signs that Russia's economy hasturned the corner and economic growth has resumed, the RTS had risenfurther and was up 69% year to date. As retail and consumer goodstocks have come back into favour, PRDF has surged. The Fund was up96% by the end of last month - an out-performance over the marketindex of 27 percentage points.MARKET/ECONOMIC UPDATEAs the credit crunch intensified, and the global economy lurched,2008 became the most financially volatile year since the Second WorldWar. Having weathered the storm well during the first half of lastyear, Russia was hit badly during the summer of 2008 by falling oilprices, perceived political risks linked to the Georgia conflict and,following the collapse of Lehman Brothers in September, by the global"rush from risk".During 2008 as a whole, the Russian economy grew 5.6% - but much ofthat growth took place during the first six months. After prolongedbouts of "forced selling", as leveraged portfolio investors struggledto meet margin calls and offloaded shares into a falling market, theRTS ended 2008 down 73% - the first annual drop in eight years.Not surprisingly, this sentiment spilt over into 2009 as the globaloutlook remained gloomy. During the first quarter of this year, theRTS was relatively flat, oscillating within a 500-650 point corridor(compared to its 2,488 peak in May 2008). Share prices languished atmultiples that, for the most part, remained well below "fundamentalvalue". By the end of the first quarter, though, as commodity pricesbegan to recover, the RTS was up 10% year-to-date. But PRDF remained4% down at the end of March, in part due to its oil/gas-underweight.During Q109 especially, currency fears and a lack of bank lendingstarved firms of liquidity, causing double-digit percentage drops inindustrial production and investment. During March, real GDP was 9.5%lower than it was during the same month the year before. Strong GDPgrowth during the first half of 2008 meant that annual GDP numberscontinued to be weighed-down by "adverse base" effects during thesecond quarter of 2009 as well, even as economic activity began torecover.In recent months, though, ultra-low valuations, and genuine signsthat the economy is through the worst, have seen renewed investorinterest across a range of sectors. In April and May, for instance,the RTS rose 22% and 31% respectively as the Russian economy began tostabilise and domestic investors (for the most part) started toreturn to the market.During Q209, real GDP was no less than 7.4% higher than it was duringthe first quarter of 2009, even though it remained heavily downyear-on-year. At the same time, Russia's All-sector PMI index, havingdipped sharply during the five months to January 2009, has risen forthe last seven months in a row. In August, the Manufacturing PMIindex reached an 11-month high, signalling that the industry is onthe brink of expansion, with the Service PMI showing thatincreasingly important sector of the Russian economy growing for thefirst time since September 2008.In the coming months, Russia should benefit from strongcommodity-prices, recovering global demand (from other emergingmarkets, at least) and a 30% depreciation of the ruble since lastsummer - not to mention a sizeable fiscal boost. At the same time,the Central Bank of Russia (the "CBR") has lowered its main interestrate six times since April, in a bid to stimulate bank lending. Themost recent cut in mid-September saw rates fall to 10.5%. Furtherreductions could happen before the end of the year.While Russia's economic recovery is fragile, the Investment Manager("the Manager") believes that the country is in the relatively earlystages of a period of strong long-term growth - based oncommodity-linked exports and a domestic expansion that will play anincreasingly important role in the years to come. Although Russiawill this year run a fiscal deficit for the first time in a decade -not least due to anti-crisis measures - the macro backdrop remainssolid.In June, Russia had a trade surplus of $10.3bn and a current accountsurplus equal to 1% of GDP. During the first six months of 2009 aswhole, the trade surplus was $52.9bn - down from $109.9bn during thefirst half of last year. While exports fell 47% during this period,not least due to lower commodity prices, imports also contractedsharply - by 43%. This illustrates the ability of the Russian economyto react quickly to adversity. Faced with a slowdown and fallingincomes, large parts of the Russian population simply switched fromexpensive imported food and other consumer goods to cheaper domesticproducts. Many Russian companies also cancelled or postponedpurchases of capital goods from overseas - which, as recently as2008, made up 40% of all imports.Crucial to the strong performance of the Russian market during H109has been the CBR's management of the ruble. On January 22nd 2009, theauthorities announced they would defend the currency within a band ofbetween 26 and 41 against the combined dollar-euro basket. While thisannouncement was greeted with derision from some quarters, the newruble band has held firm - and, as of the end of June, the currencystood at 36.8 to the basket. From $386bn in January, CBR reservesgrew during H109 to $412bn (the world's third largest haul).Crucially, bank deposits have also increased in recent months as thegeneral population switches back into rubles, amidst a growing beliefthe domestic currency is "safe" once more.One reason that the ruble stabilised is that oil prices have risenconsiderably during the first half of 2009, with crude averagingalmost $72/barrel during June. The currency has also been helped byRussia's trade and current account surpluses. For the last sevenmonths, the ruble basket has oscillated between a relatively narrowrange of 36.5 to 41. Such stability, if sustained, is likely to bepositive for Russian asset prices, as currency concerns, which werelegion last autumn and winter, feature less prominently inassessments of investment risk.In August, CBR Chairman Sergei Ignatiev said the central bank had"considerably" lessened the scope and frequency of its interventionsin recent months and, for the most part, once again become a netbuyer of foreign currency. He stressed that the CBR wanted"gradually" to move toward inflation targeting, with the aim ofallowing the ruble to float freely by 2011.During Q408 and Q109, it is no exaggeration to say that Russia'scurrency went through a perfect storm - with oil prices falling from$147 all the way down to below $40 in February and the world'scurrency markets smelling blood as the country's economy stalled.During Q209 though, and into this autumn, the fact that the currencystabilised, and households and companies didn't lose any of theirbank deposits, has significantly enhanced the credibility - both athome and abroad - of the CBR. The Manager views this as a significantpositive development.THE FUNDThe net asset value per share of PRDF gained 57% during the first sixmonths of 2009 and, by the end of August, was 96% up year-to-date.The RTS index rose 69% during the year to the end of August.During H109, the Manager stuck to the Fund's broad investmentprinciples - pursuing a research-driven, unlevered, "fundamentalgrowth and value" investment strategy. The strategy maintained itsfocus on firms benefiting from the on-going development of Russia'sconsumer sector and domestic capital investment, with exposureprimarily to small/mid cap companies and particularly those set tobecome more liquid as the domestic economy develops.The Fund's telecoms exposure rose from 13.6% of AUM at the start ofthe year to 22.4% by the end of June, at which point the sector hadthe highest weighting and Center Telecom amounted to PRDF's singlebiggest position. In August, though, the Manager divested the Fund'sstake in Center Telecom at a significant premium to the market. Bythe end of June, PRDF's telecom exposure traded at 7x 2009 P/E.Retail and consumer stocks suffered during the first quarter of theyear, as investors switched into energy blue chips. But the Fund'sexposure to these sectors performed well during the second quarter,as the domestic economy started to recover, a trend that continuedover the summer. By the end of June, retail and consumer goodsaccounted for 21.5% and 18.4% of the Funds assets respectively, upfrom 14.2% and 12.6% at the end of March.Quite a few companies in these two sectors have continued to deliverstrong revenue growth during the first half of 2009, despite theslowdown. Food retailer Magnit, a company long-favoured by PCM andthe Fund's second-largest position as of the end of August, sawannual ruble-terms EBITDA growth of no less than 97% during H109.The Fund has benefited during this period from the strong performanceof Efes breweries (not least after its main owner offered to buy thefree-float) and M.Video (which became Russia's largest electronicsretailer by market share). At the end of June, the Fund's retailholdings traded at 10x 2009 P/E and its exposure to Russia's consumergoods sector was valued at 7x 2009 P/E.Mriya (Ukrainian agricultural firm) and MHP (integrated Ukrainianpoultry producer) each accounted for nearly 5% of the Fund's netassets at the end of H109. The Manager feels that both holdings havehigh-growth potential, and they have recently performed well (withMriya up 9.1% in June and MHP rising no less than 42.3% during thesame month). The Manager also acquired a stake in Furshet, Ukraine'sthird largest supermarket chain, which has a joint-venture withFrench retailer Auchan.PRDF's exposure to Kazkommertsbank weighed on the Fund's performance, given the adverse conditions in the Kazakh banking sector. Thecountry's financial services sector remains among the hardest hitfrom the credit crunch. The Manager remains convinced, though, thatKazakhstan's largest bank will emerge as a strong going-concern andfinds the stock extremely cheap, trading at 2009 P/E of 1.0x and 0.2xprice-to-book at the end of June.Overall, at the end of H109, the Fund's assets were valued at anaverage 2009 P/E of 5.6x and a 2010 P/E of 4.6x. As of the end ofAugust, these diagnostics had risen to 7.4x and 4.8x respectively -still representing a 20% discount to RTS. The Manager expects most ofPRDF's mid-cap stocks to be re-rated as the Russian market continuesto recover and liquidity improves. It is also pleasing that while theFund still trades at a discount to its NAV on AIM, after considerableefforts to find buyers this discount is much narrower than many othertraded emerging market funds.LOOKING FORWARDIt is the belief of Prosperity Capital Management ("PCM") that globalmacroeconomic trends could bode well for Russian asset prices in themonths and years to come. Given on-going currency stability, and thecontinued recovery of the domestic economy, the market could not onlyattract more domestic money but also enjoy more inflows from abroad -not least due to low economy-wide leverage and the country'sabundance of real assets.Both these factors - Russia's relatively low household, corporate andsovereign debt service, and its enviable stock of tangible assets -should prove increasingly attractive as the Western world"de-leverages" and Western central banks undermine faith inpaper-based fiat currencies with so-called "quantitative easing". Thedrop in the value of the ruble should also provide Russia with asignificant competitive boost as global investors retain some oftheir risk appetite and begin, once again, to search for yield.Amid on-going uncertainty on global markets, PCM maintains its strongbelief in the long-term growth potential of Russia. Our position inthe market and the scope of our investments reflects the fact thatthe country is well on its way to becoming a fully-fledged Westerneconomy - with capital needs that go way beyond oil and gas. Weacknowledge that much of the rest of the world remains to beconvinced, but we maintain that while that gap between perception andreality is a huge challenge, it also represents an enormousinvestment opportunity.Despite signs of recovery, the economic situation is materiallydifferent from a year ago - and, even if the economy surges duringthe second half of 2009, GDP for the year as a whole will certainlycontract. Having said that, most forecasters are predicting growth of3-5% next year. In the meantime, while Russia faces economicchallenges, many firms remain in a situation where restructuring andconsolidation can lead to enhanced profitability even in a low-growthenvironment. The assets owned by the Fund are, for the most part,unimpaired and continue to trade at extremely low valuations by anymeasure.Political risk is often seen as the key concern among globalportfolio investors interested in Russia. While Russia is arelatively new market economy and institution-building remains a workin progress, the situation is rarely as bad as described by theWestern press - which, over many years, has generally covered thecountry in a very "negative" manner.As the Manager has long maintained, corporate governance is anyway amuch bigger risk than political considerations when investing inRussia. That is why PCM continues to be a highly "active"shareholder, with a large on-the-ground presence in Moscow and oftenholding significant minority stakes and boards seats, so enabling aproper monitoring of management performance. The Manager, and theentire PCM team, works hard to stand up for our shareholder rightsand brings litigation and other legitimate pressures to bear oncounterparties whom we feel have acted in an illegal or otherwiseimproper manner.CONCLUSIONIn summary, during the first half of this year PRDF slightlyout-performed the RTS - despite the Fund's considerable under-weightin the large energy blue-chips which led the rally. During the yearto the end of August, amid signs of economy recovery in Russia, PRDFconsiderably out-performed its RTS benchmark.This encouraging performance has been achieved by an investmentstrategy that has continued to focus on well-managed, unimpairedcompanies - not least in the consumer-retail sector - which arebenefiting from the continued development of Russia's fast-developingdomestic sector.Given that the RTS is still trading at one of the lowest valuationsof any major stock index in the world - and small- and mid-cap stockssuch as those targeted by PRDF at even lower multiples the Managerfeels that the Fund remains extremely good value.PRDF's performance during 2008 was obviously disappointing. As aresult of last year's fall in Russian assets prices, as of the end ofAugust the Fund's NAV remained 52% below its price at the time of itsinception in February 2007. Having said that, the Fund's H109performance has been promising and the Manager expects thefundamental value of our portfolio companies to rise as the Russianmarket continues to recover - and, once again, attracts the attentionof significant money from overseas portfolio investors.Please rest assured that the Manager will continue to work hard forFund shareholders throughout the rest of 2009 and into the new year.We will maintain our established channels of communication - throughour monthly performance reports, PCM newsletters and investorconference calls. We are fully focused on realizing the value of ourholdings and will continue to be an "active" investor - doingeverything we can to guard against poor corporate governance.While the Russian market has, in some sense, been through a "perfectstorm", asset prices are now showing considerable improvement. At thetime of writing, Russia is the third best performing stock market inthe world so far in 2009. In that context, along with the managers ofour portfolio companies, we at PCM will continue to do everything inour power to deliver healthy shareholder returns.KEY INVESTMENTS (as of 30th June 2009)Center Telecom (9.9% of net assets)The largest regional fixed-line telecom subsidiary of astate-controlled holding company - with over 6m access lines inoperation. Low financial multiples (P/E 4.9x) and high dividendyield (over 20% for preferred shares) provide a solid basis for shareprice appreciation.Efes Breweries International (7.6% of net assets)EFES Breweries International, which is 70% owned by the largestTurkish brewer, Anadolu Efes, has 10% of the Russian beer market and25% of the Kazakh beer market via a JV with Heineken, as well asdominant positions in Moldova and Georgia. Russia is the thirdlargest beer market in the world and still has too many players. Thestock trades at 7.6x 2009 P/E and 6.1x 2010 P/E.M Video (7.6% of net assets)Having registered $3bn of sales in 2008 (+44% YoY), M Video recentlybecame the largest consumer electronics retailer in Russia. Itoperates over 140 standardized hypermarkets on mainly leased premisesin shopping centers in over 40 Russian cities. The stock trades at6.3x 2009 P/E and 3.4x 2010 P/E.Magnit (6.8% of net assets)Magnit operates an ever-growing number of discount supermarkets. Inaddition to trading with a 10.9x 2009 P/E and 7.3x 2010 P/E thecompany has a strong history of reporting double-digit sales growth -even during the recent slowdown. Magnit operates in a cost-conscioussegment of the market and has seen its market share increase amid theoverall market contraction.Dixy Group OJSC (6.5% of net assets)With $1.9bn sales (+34% YoY in 2008) Dixy Group is the third largestdiscount food retailer in Russia. The company operates over 450leased (70%) and owned (30%) stores in residential areas of large andsmall cities in Central Russia, the North-West and in the Urals. Wesee an upside to profitability relative to the peer group and viewthe 3.8x 2010 P/E as undemanding given structural undersupply ofmodern retail in Russia and significant space growth potential.Bashkirenergo (5.9% of net assets)A 4,600 MW capacity integrated power utility in the region ofBashkiria. The company trades at a significant discount to itsRussian peers on capacity valuation and has a 2010E P/E of only3.7x. The stock has risen over 200% so far in 2009 following thepurchase of a majority control of the Bashkirian energy assets,including Bashkirenergo, by Sistema Holding. This is seen as apositive catalyst for the company's development and Sistema's capitalmarket credentials should raise Bashkirenergo's profile withinternational investors. We see further potential upside coming fromunbundling and new ownership so as to eliminate the significantdiscount to the value of the component assets.Sistema JSFC (5.1% of net assets)Sistema is the conglomerate owning a controlling share in MTS, thelargest Russian mobile operator; Comstar, national CLEC operator;Sitronics, an IT manufacturing company; private pharma, tourism andfinancial companies and a recently acquired oil company - Bashneft -which is the eighth largest in Russia. The company trades at a deepdiscount to the sum of its parts and has a 5.6x 2009 P/E and a 2.8x2010 P/E.MHP SA (4.8% of assets)MHP SA is a low-cost Ukrainian integrated poultry-producer. Thecompany has a 45% market share in poultry production (over 80% ofMHP's sales) and trades at a 10% discount to its meat processingpeers based on a 12-month forward EV/EBITDA. MHP has a 5.9x 2010 P/Eand is another deep-value play.Mriya Agro Hldg (4.7% of net assets)Mriya Agro is an agricultural company in Ukraine with a 15-year trackrecord of superior yields and control over 250,000 hectares of land.We expect the company to generate significant EBITDA, which in theManager's view will show strong YoY growth - largely driven by thecultivation of 180,000 hectares in 2009. The company trades with a2.1x 2010 P/E that is viewed by the Manager as excellent value for afirm with high growth potential.Mobile Telesystems OJSC (4.2% of net assets)Mobile Telesystems (MTS) provides mobile telephone services in Russiaand the CIS. The company has a 3x EBITDA, stable revenue and dividendyield. Mobile Telesystems trades at a 12.7x 2009 P/E and 6.2x 2010P/E.TOP POSITIONS (as of 30th June 2009)+--------------------------------------------------------------+| | % of Net | || Name | Assets | US$m ||-----------------------------------+--------------+-----------|| Center Telecom | 9.9% | 12.7 ||-----------------------------------+--------------+-----------|| Efes Breweries International | 7.6% | 9.7 ||-----------------------------------+--------------+-----------|| M Video | 7.6% | 9.7 ||-----------------------------------+--------------+-----------|| Magnit | 6.8% | 8.7 ||-----------------------------------+--------------+-----------|| Dixy Group | 6.5% | 8.4 ||-----------------------------------+--------------+-----------|| Bashkirenergo | 5.9% | 7.5 ||-----------------------------------+--------------+-----------|| Sistema | 5.1% | 6.5 ||-----------------------------------+--------------+-----------|| MHP SA | 4.8% | 6.2 ||-----------------------------------+--------------+-----------|| Mriya Agro | 4.7% | 6.1 ||-----------------------------------+--------------+-----------|| Mobile Telesystems | 4.2% | 5.4 ||-----------------------------------+--------------+-----------|| | 63.1% | 80.9 |+--------------------------------------------------------------+SECTOR ALLOCATION+---------------------------------------------------------+| | % of Net | || Sector | Assets | US$m ||-------------------------------+--------------+----------|| Consumer, non-cyclical | 40.15% | 51.5 ||-------------------------------+--------------+----------|| Telecommunication | 22.37% | 28.7 ||-------------------------------+--------------+----------|| Power | 13.73% | 17.6 ||-------------------------------+--------------+----------|| Industrial | 8.47% | 10.9 ||-------------------------------+--------------+----------|| Financial | 6.58% | 8.4 ||-------------------------------+--------------+----------|| Consumer, cyclical | 4.97% | 6.4 ||-------------------------------+--------------+----------|| Transport | 0.25% | 0.3 ||-------------------------------+--------------+----------|| Energy | 0.13% | 0.2 ||-------------------------------+--------------+----------|| Media | 0.09% | 0.1 ||-------------------------------+--------------+----------|| Real Estate | 0.02% | 0.1 ||-------------------------------+--------------+----------|| | 96.76% | 124.2 |+---------------------------------------------------------+Prosperity Capital Management LimitedGrand CaymanSeptember 2009Consolidated Supplemental Schedule of Investments (unaudited)As at 30 June 2009(All amounts stated in United States Dollars) 30 June 2009 31 December 2008 % of net % of netDescription Cost Fair Value assets[1] Cost Fair Value assets[1]Analysis of securities byindustry:Consumer,Cyclical 3,234,852 6,386,726 4.97% 5,292,846 1,494,459 1.88%Consumer,Non-cyclical 83,582,030 51,531,785 40.15% 89,331,236 22,464,842 28.23%Energy 464,000 163,313 0.13% 490,167 224,959 0.28%Financial 32,509,621 8,442,020 6.58% 56,483,597 17,687,652 22.24%Industrial 46,842,981 10,870,116 8.47% 46,908,654 13,264,589 16.68%Media 9,396,309 114,329 0.09% 9,396,309 94,329 0.12%Power 39,484,010 17,627,401 13.73% 58,689,788 10,739,651 13.51%Real Estate 52,446 23,399 0.02% 6,902,555 1,641,151 2.06%Telecommunication 45,509,646 28,717,175 22.37% 69,241,129 11,666,283 14.67%Transport 3,232,298 320,990 0.25% 3,232,298 362,408 0.46% 264,308,193 124,197,254 96.76% 345,968,579 79,640,323 100.13%Concentration of investments:As of 30 June 2009, the Group invested in certain companies which hadestimated fair market values that were individually in excess of 5%of net assets. These companies are identified in the schedule below: 30 June 2009 31 December 2008 Fair % of net Fair % of net Value assets[1] Value assets[1]Center Telecom 12,712,142 9.90% 5,516,128 6.94%M Video OJSC 9,745,247 7.59% - -Efes BreweriesInternational 9,728,688 7.58% 4,650,060 5.85%Magnit 8,715,151 6.79% - -Dixy Group OJSC 8,354,440 6.51% 4,520,107 5.68%Bashkirenergo 7,544,430 5.88% - -Sistema 6,485,477 5.05% - -Kazkommertsbank - - 5,630,954 7.08%Alliance Bank - - 5,435,648 6.83%Sberbank Rossii - - 4,222,077 5.31% 63,285,575 49.30% 29,974,974 37.69%[1] Except as otherwise expressly indicated, the term "net assets"(total assets less total liabilities) as used in the financialstatements refers to net assets as determined in accordance with IFRSand as reflected on the Consolidated Statement of Financial Position. 30 June 2009 31 December 2008 % of % of Fair net Fair netDescription Cost Value assets[1] Cost Value assets[1]Analysis of securities:Totalunlistedsecurities 8,188,248 1,628,979 1.27% 8,188,248 1,255,239 1.58%Totallistedsecurities* 256,119,945 122,568,275 95.49% 337,780,331 78,385,084 98.55% 264,308,193 124,197,254 96.76% 345,968,579 79,640,323 100.13%[1] Except as otherwise expressly indicated, the term "net assets"(total assets less total liabilities) as used in the financialstatements refers to net assets as determined in accordance with IFRSand as reflected on the Consolidated Statement of Financial Position.* In the absence of readily ascertainable market values from anexchange and where the 'Over The Counter' (OTC) market is consideredmore appropriate, listed securities representing 4.82% of net assets(31 December 2008: 9.11% of net assets) when valued at bid prices hadtheir values estimated by the Manager, for which the Administratorreceives confirmation from independent brokers and are approved ingood faith by the Board of Directors. (See note 5, regarding theCompany's policy with respect to determining the fair value ofinvestments).Consolidated Statement of Comprehensive Income (unaudited)For the six months ended 30 June 2009(All amounts stated in United States Dollars) Note Six months ended Six months ended 30 June 2009 30 June 2008 US$ US$Investment incomeIncome 3 3,207,582 3,343,581Net gain/(loss) oninvestments designated at 4 (45,203,764)fair value throughprofit or loss 47,295,201Net foreign exchange (28,105) 3,152(loss)/gainTotal investment gain/(loss) 50,474,678 (41,857,031)Operating expenses 11 (1,395,833) (4,678,533)Total comprehensive 49,078,845 (46,535,564)income/(loss) before financecostsFinance costsWithholding tax (260,774) (492,499)Interest expense - (22,693)Total finance costs (260,774) (515,192)Total comprehensive 48,818,071 (47,050,756)income/(loss) for the periodEarnings/(loss) per ordinaryshareBasic & diluted 7 US$0.14 (US$0.13)Weighted average ordinaryshares outstanding Number NumberBasic & diluted 350,000,000 350,000,000All items in the above statement are derived from continuingoperations.All income is attributable to the ordinary shareholders of theCompany.The accompanying notes form an integral part of the financialstatements.Consolidated Statement of Changes in Equity (unaudited)For the six months ended 30 June 2009(All amounts stated in United States Dollars) Ordinary Share Share Other Retained Shares capital premium Reserves earnings Total Number US$ US$ US$ US$ US$Balance at 31December 2007 350,000,000 3,500,000 134,400,629 200,000,000 63,427,372 401,328,001Totalcomprehensiveloss for theperiod - - - - (47,050,756) (47,050,756)Balance at 30June 2008* 350,000,000 3,500,000 134,400,629 200,000,000 16,376,616 354,277,245Balance at 31December 2008 350,000,000 3,500,000 134,400,629 200,000,000 (258,363,321) 79,537,308Totalcomprehensiveincome forthe period - - - - 48,818,071 48,818,071Balance at 30June 2009 350,000,000 3,500,000 134,400,629 200,000,000 (209,545,250) 128,355,379The accompanying notes form an integral part of the financialstatements.*In line with IAS 34, the comparative period for the ConsolidatedStatement of Changes in Equity is the six months ended 30 June 2008.The balance at that period end will not equate to the balance at 31December 2008, the date of the comparative Consolidated Statement ofFinancial Position.Consolidated Statement of Financial Position (unaudited)As at 30 June 2009(All amounts stated in United States Dollars) Note 30 June 31 December 2009 2008 US$ US$AssetsFinancial assets at fair value 5through profit or loss 124,197,254 79,640,323Cash 6 5,043,949 670,588Dividends receivable 1,475,819 54,986Amounts receivable on investmentssold 962,337 1,293,260Total assets 131,679,359 81,659,157LiabilitiesAmounts payable on investmentspurchased 2,560,175 1,049,690Accrued expenses 11 763,805 1,072,159Total liabilities 3,323,980 2,121,849Net assets 128,355,379 79,537,308EquityShare capital 8 3,500,000 3,500,000Share premium 9 134,400,629 134,400,629Other reserves 200,000,000 200,000,000Net deficit (209,545,250) (258,363,321)Equity attributable to equityholders 128,355,379 79,537,308These consolidated financial statements were approved by the Board ofDirectors on 16 September 2009.The accompanying notes form an integral part of the financialstatements.Consolidated Statement of Cash Flows (unaudited)For the six months ended 30 June 2009(All amounts stated in United States Dollars) Note Six months ended Six months ended 30 June 2009 30 June 2008 US$ US$Operating activitiesTotal comprehensive 48,818,071 (47,050,756)income/(loss)Adjustments for:Changes in net unrealised 4 (126,217,320)loss/(gain) on investments 52,748,061Realised loss/(gain) on 4 78,922,119investments (7,544,297) 1,522,870 (1,846,992)Increase in receivables (1,420,833) (1,239,533)Decrease in payables (308,354) (13,624,766)Net proceeds from repurchase -agreements 4,090,500Cash used in operations (1,729,187) (10,773,799)Cash flows used in operating (206,317)activities (12,620,791)Cash flows from investingactivitiesPurchases of investments (34,347,447) (43,930,586)Proceeds from sale of 69,027,252investments 38,927,125Cash flows provided byinvesting activities 4,579,678 25,096,666Net increase in cash 4,373,361 12,475,875Cash at beginning of period 670,588 323,681Cash at end of period 5,043,949 12,799,556Supplementary informationInterest received 547 10,948Dividends received 1,623,476 1,595,165The accompanying notes form an integral part of the financialstatements.Notes to the Consolidated Financial Statements (unaudited)1. Organisation and structureProsperity Russia Domestic Fund Limited (the "Company") wasregistered on 29 December 2006 with registered number 46129, isdomiciled in Guernsey, Channel Islands, and commenced its operationson 22 February 2007. The Company is a closed-ended investment companyincorporated in Guernsey with limited liability under the CompaniesLaw of Guernsey (the "Companies Law"), and its ordinary shares arelisted on the Alternative Investment Market ("AIM") of the LondonStock Exchange. The registered office of the Company is Dorey Court,Admiral Park, St. Peter Port, Guernsey, Channel Islands. "Group" isdefined as the Company and its subsidiary, Roselia Limited.The Company's investment objective is to achieve capital growth byinvesting in a portfolio of securities issued by companies in thesectors of the domestic economies of Russia and other NIS (NewlyIndependent States) countries which are expected to benefit from theincrease in consumer demand and capital investment in such countries.The Group will invest primarily in small and medium-sized companies,with the aim of being an active and influential minorityshareholder.The Group will invest at least 75% of its gross assets in thesecurities of companies established or having their principaloperations in Russia. The Group may invest up to 25% of its grossassets in the securities of companies established or having theirprincipal operations in NIS countries other than Russia, which theManager expects to be primarily the Ukraine and Kazakhstan, however,the Group may, within such limitation and on an opportunistic basis,invest in the securities of companies established or having theirprincipal operations in other NIS countries.The Group's investment management activities are managed byProsperity Capital Management Limited (the "Manager"). It wasincorporated with limited liability and registered as an exemptedcompany under the laws of the Cayman Islands. The Group has enteredinto a management agreement (the "Management Agreement") under whichthe Manager, subject to the overall supervision and control of theDirectors, has responsibility for identifying, analysing, timing andmaking the Group's investments, as well as monitoring and disposingof such investments. The Manager will assist and advise the Directorsif required with the valuation of the Group's assets generally. Underthe terms of the Management Agreement, the Company has agreed to paythe Manager a management fee and a performance fee. Refer to note 11for further details. The Company is administered by Kleinwort Benson(Channel Islands) Fund Services Limited (the "Administrator").Investors Fund Services (Ireland) Limited (IFSIL) provides certainadministration services to the Group under a sub-administrationagreement between IFSIL, the Administrator and the Group. Thissub-administration agreement novated from Investors Fund Services(Ireland) Limited (IFSIL) to State Street Fund Services (Ireland)Limited on 17 July 2009.The Company owns 100% of the share capital of Roselia Limited, aCyprus company. Roselia Limited is a subsidiary of the Company asProsperity Russia Domestic Fund Limited retains control over thecompany through its retention of all the risks and rewards of theassets transferred to, or purchased from Roselia Limited.2. Significant accounting policiesStatement of complianceThese unaudited interim consolidated financial statements include theaccounts of the Company and its wholly owned subsidiary, RoseliaLimited (the "Subsidiary") (together "The Group") and are prepared inaccordance with International Financial Reporting Standards ("IFRS")and interpretations approved by the International AccountingStandards Board ("the IASB").Except as described overleaf, the principle accounting policiesapplied in the preparation of these financial statements areconsistent with those applicable for the annual audited financialstatements.Basis of preparationThe consolidated financial statements are presented in United StatesDollars which is the functional currency of the Group reflecting thefact that the Company's shares are issued and redeemed in UnitedStates Dollars and distributions to investors are also made in UnitedStates Dollars.Change in accounting policyThe following new standards and amendments to standards are mandatoryfor the first time for the financial year beginning 1 January 2009.(i) IAS 1 (revised), 'Presentation of financial statements'. Therevised standard prohibits the presentation of items of income andexpenses (that is 'non-owner changes in equity') in the statement ofchanges in equity, requiring 'non-owner changes in equity' to bepresented separately from owner changes in equity. All 'non-ownerchanges in equity' are required to be shown in a performancestatement.Entities can choose whether to present one performance statement (thestatement of comprehensive income) or two statements (the incomestatement and statement of comprehensive income). The Company haselected to present one statement; a statement of comprehensiveincome. The interim financial statements have been prepared under therevised disclosure requirements. Since the change in accountingpolicy only impacts presentation aspects, there is no impact onearnings per share.(ii) On 30 November 2006, the International Accounting StandardsBoard issued IFRS 8, Operating Segments, which replaces IAS 14Segment Reporting. This puts an emphasis on the "management approach"to reporting on operating segments. It does not have any impact onthe interim financial statements of the Company.(iii) Amendment to IAS 32, Financial Instruments: Presentationclarifies under which circumstances puttable financial instrumentsand obligations arising on liquidation have to be treated as equityinstruments. The adoption of the amendment does not have asignificant impact on these financial statements.(iv) Amendment to IFRS 7, Financial Instruments: Disclosureswas issued by the IASB on 5 March 2009. These amendments require theinclusion of an explicit three-level fair value hierarchy whichgroups fair value measurements based on their observability andrequires numerical disclosure of fair values recognised in a tabularformat organised by the level within each hierarchy.Use of estimates and judgementsThe preparation of consolidated financial statements in accordancewith the recognition and measurement principles of IFRS requiresmanagement to make judgements, estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of income and expensesduring the period.The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to bereasonable under the circumstances, the results of which form thebasis for making the judgements about carrying values of assets andliabilities that are not readily apparent from other sources. Actualresults could differ from those estimates.Basis of consolidationThese Consolidated Financial Statements comprise the financialstatements of the Company and the Subsidiary for the period ended 30June 2009. The Subsidiary has been consolidated from the date onwhich control was transferred to the Company and will cease to beconsolidated from the date on which control is transferred from theCompany. At 30 June 2009, the Subsidiary was the Company's onlysubsidiary.SubsidiaryThe Company expects to make the majority of its investments throughits Cyprus subsidiary. The Russia/Cyprus double taxation treaty isexpected to provide for a reduced rate of Russian withholding tax ondistributions made by securities in the Group's portfolio.Financial instruments(i) ClassificationFinancial instruments designated at fair value through profit or lossupon initial recognition include investments in listed and unlistedequity instruments.All other assets are carried at amortised cost.Financial liabilities are carried at amortised cost.(ii) RecognitionThe Group recognises financial assets and financial liabilities onthe date it becomes a party to the contractual provisions of theinstrument.Transactions are recognised using trade date accounting.(iii) MeasurementFinancial instruments are measured initially at fair value(transaction price). Transaction costs on financial assets designatedat fair value through profit or loss are expensed immediately.Subsequent to initial recognition, all financial instrumentsclassified at fair value through profit or loss are measured at fairvalue with changes in their fair value recognised in the consolidatedstatement of comprehensive income.All other assets and liabilities are carried at amortised cost.(iv) DerecognitionThe Group derecognises a financial asset when the contractual rightsto the flows from the financial asset expire or it transfers thefinancial asset and the transfer qualifies for derecognition inaccordance with IAS 39.The Group uses the First in - First out (FIFO) method to determinerealised gains and losses on financial asset derecognition.A financial liability is derecognised when the obligation specifiedin the contract is discharged, cancelled or expired.Repurchase transactionsSecurities sold subject to a simultaneous agreement to repurchasethese securities at a certain later date at a fixed price areretained in the financial statements and are measured in accordancewith their original measurement principles. The proceeds of the saleare reported as liabilities and are carried at amortised cost as loanamounts outstanding.Foreign currency translationTransactions in foreign currency are translated into the functionalcurrency at the foreign exchange rate prevailing on the transactiondate. Monetary assets and liabilities denominated in foreigncurrencies at the statement of financial position date are translatedto United States Dollars at the foreign exchange rates ruling at thatdate. Non-monetary assets and liabilities denominated in foreigncurrencies that are stated at fair value are translated to thefunctional currency at the foreign exchange rates ruling at the datesthat the values were determined. Foreign exchange differencesarising on translation and realised gains and losses on disposals arerecognised in the consolidated statement of comprehensive income.Foreign exchange gains and losses on financial assets and financialliabilities at fair value through profit or loss are recognisedtogether with other changes in the fair value. Included in theconsolidated statement of comprehensive income line item net foreignexchange loss are net foreign exchange gains/(losses) on monetaryfinancial assets and financial liabilities other than thoseclassified at fair value through profit or loss.Interest incomeInterest income arises from cash deposits and is recognised in theconsolidated statement of comprehensive income by the Group using theeffective interest rate method on an accrual basis.Dividend incomeDividend income is recognised in the consolidated statement ofcomprehensive income on the later of the day the board of theinvestee company recommends the dividends and the ex-dividend date tothe shareholders for approval (where the board recommends anex-dividend date prior to the recommendation date); and theex-dividend date. In prior periods, dividend income was recognisedin the consolidated statement of comprehensive income on the approvaldate of the dividend. In accordance with IFRS 8, this represents achange in accounting policy. This change was applied as theDirectors considered that it was a more appropriate method ofrecognising dividend income as it results in a more accurate netasset value. This change in accounting policy was considered to havean immaterial effect on the prior period results and therefore norestatement of the comparative figures was deemed necessary.In some cases, the Group may receive or choose to receive dividendsin the form of additional shares rather than cash. In such cases theGroup recognises the dividend income for the amount of the cashdividend alternative, with the corresponding debit treated as anadditional investment.Dividend income received by the Group may be subject to withholdingtax imposed in the country of origin. Dividend income is recordedgross of such taxes and the withholding tax is recognised as afinance expense.ExpensesAll expenses are recognised in the consolidated statement ofcomprehensive income on an accrual basis.Capital expensesThe expenses of the Group directly attributable to the issuance ofshares are charged to the share premium account.3. Income Six months ended Six months ended 30 June 2009 30 June 2008 US$ US$Interest income from cash and cash 547 10,948equivalentsDividend income 3,207,035 3,332,633 3,207,582 3,343,5814. Gains and losses on investments designated at fair value throughprofit or loss upon initial recognition Six months ended Six months ended 30 June 2009 30 June 2008 US$ US$Net realised (loss)/gain on (78,922,119) 7,544,297investmentsNet unrealised gain(loss) on 126,217,320 (52,748,061)investments 47,295,201 (45,203,764)5. Investments in securities designated at fair value throughprofit or loss upon initial recognitionThe following is the Group's policy with respect to determining thefair value of investments:(i) At the reporting date, the fair value of financial instrumentsis based on quoted market prices traded in active markets, withoutany deduction for estimated future selling costs. An active marketexists if quoted prices are regularly and readily available from anexchange, dealer, broker, industry group, pricing services orregulatory agency, and those prices represent active and regularlyoccurring market transactions on an arm's length basis. For financialinstruments that are exchange traded and where the exchange has beendetermined to be the appropriate active market for these instruments,the quoted market price is based on the bid price obtainable fromeither the Russian Trading Systems (RTS), the Moscow InterbankCurrency Exchange (MICEX), Ukrainian Stock Exchange (PFTS) orKazakhstan Stock Exchange (KASE). These securities fall into Level 1of the fair value hierarchy as defined by IFRS 7 (see note 12).(ii) At the reporting date, the market prices for non-exchangetraded financial instruments, and exchange traded financialinstruments, where the exchange is not considered by the Directors tobe an appropriate active market for these instruments, are estimatedby the Manager using market information. The Administrator receivesconfirmation of these bid prices from independent brokers. Thesesecurities fall into Level 2 of the fair value hierarchy as definedby IFRS 7 (see note 12).(iii) The values of assets or liabilities in currencies other thanUnited States Dollars are converted into United States Dollars at theprevailing market rate for such currencies at the close of businessin the local market as at the last available trading date in theperiod.In the absence of readily ascertainable market values for theunquoted investments and for certain listed securities which are notactively traded, the Board of Directors has approved the estimatedmarket values determined by the Manager as an estimate of the amountthat might reasonably be realised on their sale. This market valuedetermination was made after considering certain pertinent factorsincluding the inherent worth of the security. In addition, theAdministrator has received independent confirmation from independentbrokers that these prices correspond to fair value. However, becauseof the inherent uncertainty of valuation, those estimated values maydiffer from the values that would have been used had a ready marketfor the investments existed and the differences could be material.The details are as follows:Fair market values 30 June 2009 % of net 31 December % of netestimated by the US$ assets 2008 US$ assetsManager in accordancewith IFRSListed securities 6,189,934 4.82% 7,244,225 9.11%Unlisted securities 1,628,979 1.27% 1,255,239 1.58%Total 7,818,913 6.09% 8,499,464 10.69%The net unrealised loss on investments whose values were estimated bythe Manager using market information is US$13,908,442 (31 December2008: net unrealised loss of US$32,888,286).The Group invests in countries with limited and developing capitalmarkets. Investing in Russian and CIS securities involves risks notnormally associated with investing in more developed markets andpolitically and economically stable jurisdictions. These risksinclude political, economic and legal uncertainties, delays insettling portfolio transactions and the risk of loss from Russia'sand the CIS underdeveloped systems for share registration andtransfer. The limited size of the Russian and the CIS markets forsecurities also potentially results in a lack of liquidity. As aresult, the Group may be unable to liquidate its positions easily andmay not receive proceeds approximating estimated fair values.The Group has certain investments in relatively illiquid securitiesand currencies for which there is no guarantee of a return on theinvestment and no guarantee that a return or repatriation of anyinvested amounts in a convertible currency will be possible. Theseinvestments may involve greater risks than investments in moredeveloped markets and the prices of such investments may be volatiledue to the perceived credit risk. The consequences of political,social or economic changes in these markets may also have disruptiveeffects on the market prices of the Group's investments and theincome they generate.The Russian Federation has historically experienced political andeconomic instability, which has affected and may continue to affectthe activities of enterprises operating in this environment.Consequently, operations in the Russian Federation involve riskswhich do not typically exist in other markets. These consolidatedfinancial statements reflect the Board's assessment of the impact ofthe Russian business environment on the investments held by theGroup. The future business environment may differ from the Manager'scurrent assessment. The impact of such differences on the investmentsheld by the Group may be significant.The immediate effects of such risks could include declines ineconomic growth, a reduction in the availability of credit andborrowers' ability to service debt, an increase in interest rates,changes and increases in taxes, an increased rate of inflation,devaluation of the Russian Rouble, restrictions on convertibility ofthe Russian Rouble and movements of hard currency, an increase in thenumber of bankruptcies of entities (including bank failures), labourunrest and strikes resulting from the possible increase inunemployment and political turmoil. These and other potentiallysignificant economic and political conditions and future policychanges could have a material adverse effect on the operations of theGroup and the realisation and settlement of its assets andliabilities.6. CashCash balances are held by Investors Trust and Custodial Services(Ireland) Limited (a State Street Bank and Trust Company). Thecredit rating of State Street Bank and Trust is A1.7. Earnings per share 30 June 2009 30 June 2008Earnings for the purpose of the basicand diluted earnings per share is:Net income/(loss) attributable to US$48,818,071 (US$47,050,756)shareholdersWeighted average number of shares 350,000,000 350,000,000outstanding - basic and dilutedBasic and diluted earnings per share US$0.14 (US$0.13)for the period8. Share capitalAuthorised share capital - 30 June 2009 Number of ordinary shares 30 June 2009 US$Ordinary shares of par value 1,000,000,000 10,000,000US$0.01 eachIssued and fully paid - 30 June2009 Number of ordinary 30 June 2009 shares US$Balance at beginning and end of 350,000,000 3,500,000periodAuthorised share capital - 31 December 2008 Number of ordinary shares 31 December 2008 US$Ordinary shares of par 1,000,000,000 10,000,000value US$0.01 eachIssued and fully paid - 31December 2008 Number of ordinary 31 December 2008 shares US$Balance at beginning and end of 350,000,000 3,500,000yearThe authorised share capital of the Company on incorporation wasUS$10,000, divided into 1,000,000 ordinary shares of US$0.01 each.By special resolution dated 5 February 2007, the authorised sharecapital of the Company was increased to US$10,000,000, divided into1,000,000,000 ordinary shares of US$0.01 each. On incorporation, 2ordinary shares were issued, fully paid to the subscribers to thememorandum of association of the Company. Those ordinary shares havebeen made available under the initial placing. The placing price ofUS$1 per placing share represents a premium of 99 cents to thenominal value of an ordinary share.Every shareholder present in person or by proxy at the annual generalmeeting has one vote. Upon a poll, every member present in person orby proxy has one vote for each share held by him.On winding-up of the Company, after paying all the debts attributableto and satisfying all the liabilities of the Company, shareholdersshall be entitled to receive by way of capital any surplus assets ofthe Company attributable to the shares as a class in proportion oftheir holdings.9. Share premium 30 June 2009 31 December 2008 US$ US$Balance at the beginning of theperiod/year 134,400,629 134,400,629Balan
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