Risk management

The management of NCSP Group pursues a focused policy to minimize the influence of external factors that could have a negative impact on the business of the Group’s companies.

The principles and approaches on which NCSP Group’s risk management system is built and operates make it possible to identify risks, assess their significance, respond to them and try to reduce the likelihood of them being realized. The scope of steps taken depends on the particulars of the situation in each specific case.

Internal control and risk management in the Group are integrated into the multilevel system of management and are an essential part of it, so their development is one of the key objectives of corporate governance.

The Company has created a specialized body for the risk management and internal control system, the Internal Control and Risk Management Service (ICRMS, or the Service).

The main functions of the ICRMS are to:

  • Analyze and assess contracts for financial and business risks
  • Evaluate management accounting
  • Conduct scheduled and unscheduled audits in order to identify risks inherent to the Company’s financial and business activities
  • Develop, update and improve local regulations in the area of internal control and risk management
  • Generally coordinate risk management processes
  • Analyze the risk portfolio and develop proposals for the response strategy in regard to managing these risks
  • Prepare reports on risk management

The Group uses the following methods for managing risks:

  • Mitigate risk:

The main and priority option for risk management, it includes a set of preventive measures aimed at keeping the risk at the existing level while actively mitigating it on the part of the Company to reduce the chances of a risk event occurring and/or reducing potential losses to the level of the risk appetite.

  • Eliminate source of risk:

Method of risk management that implies partially refraining from a business process or modifying a decision in a given area that holds the greatest risk. However, such modification must be economically sound.

  • Share risk:

Whole or partial transfer of the risk to other parties through the instruments of insurance, hedging, financial guarantees and so on. This option is used when, among other things, it is economically ineffective to mitigate the risk and accepting it is not possible due to the intolerably high level of risk.

  • Change the consequences:

Set of measures aimed at offsetting the negative consequences arising from a risk event. The costs of changing the consequences should be reasonable and commensurate to the benefits of using this option.

  • Accept risk:

Refraining from any mitigation of the risk because it is negligible, in other words within the bounds of the risk appetite, or when the expense of managing the risk is economically unjustified. Acceptance of risk can only occur when other methods of management, other than risk avoidance, are ineffective. As a result of accepting a risk, the Company might make various financial provisions. Acceptance of risk simultaneously means applying a management option such as changing the consequences to the modified part of the risk.

  • Avoid risk:

Implies refraining from carrying out certain actions (not beginning, not continuing or not resuming activities) that carry a high risk. The use of this method should be of an exclusive nature and it should be applied only when the overall cost of mitigating the risk is economically unviable or such mitigation and sharing the risk are not possible.

Most significant risks for NCSP Group’s business
Risk description Risk management measures
Risk of increase in interest rate on credit agreement (growth of LIBOR) Control cash flow to ensure sufficient liquidity reserve

Centralized placement of NCSP Group deposits to achieve best interest rate performance

Continuous monitoring of LIBOR

Risk of changes in currency exchange rates Consider entering into a loan agreement in RUB

Place deposits in foreign currency

Risk of loss of cargo volumes in case of sanctions being imposed against customers Analyze workload and use of handling facilities to assess capacity made available in the event of sanctions and suspension of cargo traffic

Find an alternative cargo base in case cargo traffic is suspended

Hold negotiations with customers to quickly replace lost volumes

Risk of decrease in NCSP Group cargo traffic as a result of construction of new port facilities in the Azov-Black Sea basin Work with customers: sign strategic agreements and memorandums to maintain volumes; offer advantageous terms for cooperation, flexible pricing; provide best service

Timely implementation of investment projects

Operating risks related to breakdown of or damage to handling equipment and hydraulic works Highly skilled workers are hired to operate equipment, and handling equipment is regularly serviced and updated. Scheduled repairs and latest certifications of hydraulic works are carried out
Publication of negative, distorted information that can hurt the business reputation of Group companies Regularly monitor mentions of Group companies in the media and  on the Internet; proactively work with journalists; comply with regulations for approval and disclosure of information at all levels

Key measures to manage risks and develop risk management system in 2018

  • Extension of the PJSC NCSP Risk Management Methods that were approved on June 10, 2015 to subsidiaries and affiliates in order to standardize the risk management system within NCSP Group
  • Preparation of corporate risk maps
  • Insurance of company assets and third party liability
  • Analysis of existing local regulations for effectiveness and consistency with the Company’s goals and business environment

3.7.3.1. Country and regional risks

  • Redirection of substantial amounts of Russian oil exports from western and southern routes to eastern destinations
  • Decrease in demand for certain traditional export cargo traffic due to overproduction and surplus supply of certain goods / cargo (oil, iron ore, coal) on world markets with the discovery of new deposits and reduction of production costs with the application of new technologies

3.7.3.2. Political risks

  • Escalation of tensions in the Bab-el-Mandeb and Aden straits due to fighting in Yemen
  • Erosion of solvency of countries involved in local conflicts (Middle East)
  • Imposition and/or expansion of sectoral and economic sanctions against Russia by the United States, European Union and a number of other countries
  • Unstable military and political situation in countries of the former Soviet Union and the Balkan Peninsula, resumption of active operations in frozen conflicts in Russia’s sphere of interest (Ukraine, Armenia, Azerbaijan, Georgia, Serbia, Moldova)