Risk management system
Highlights
Risk monitoring and forecasting is an integral part of the strategic and operational management at Russian Railways. The Company has an effective risk management system to identify, handle and mitigate risks.
Russian Railways complies with the risk management principles of the Committee of Sponsoring Organisations of the Treadway Commission (COSO ERM: Enterprise Risk Management – Integrated Framework), ISO 31000 (Risk Management – Principles and Guidelines) and the relevant provisions of the Corporate Governance Code (Bank of Russia’s Letter No. 06-52/2463 dated 10 April 2014).
The risk management system seeks to:
- ensure uninterrupted operations of Russian Railways by limiting its exposure to negative external and internal factors;
- provide a reasonable level of assurance about achieving the target benchmarks envisaged by the by-laws of Russian Railways in the view of the Company's exposure to the external and internal factors;
- promote harmonisation based on a common methodology and unified principles taking into account the interconnectedness of risks, their mutual influences and possible implications;
- ensure integration of risk management practices as an essential part of all management processes, including strategic and operational planning;
- provide continuity by conducting regular monitoring and updating inputs for Russian Railways' risk management system;
- cover all business lines by integrating risk management procedures in all functional areas of the Company’s operations, including as part of the Company's process approach to management;
- strike a reasonable balance between criteria determining the risk response, including the balance between potential losses and growth opportunities or the balance between risk management costs and potential damage caused by a risk.
Key risks of the Group
The following external risks may have the greatest impact on the Company's performance:
- weaker macroeconomic environment as compared to the outlook embedded in the Long-Term Development Programme of Russian Railways;
- insufficient indexation of tariffs against growing prices for products consumed by Russian Railways;
- no government resolutions on long-term financing of the railway transport development or a failure to implement such resolutions;
- liberalisation of the freight and passenger transportation markets.
To prevent these risks and timely respond to them, Russian Railways stays in regular contact with the Government and key customers keeping them informed about potential adverse effects of the adopted decisions. To mitigate potential risk impacts, Russian Railways enhances its customer focus and the quality of its services while also running an efficiency improvement programme.
| Risk category | Risk description | Probability | ImpactFrom the point of view of achieving the Company’s objectives: 1 – no threat; 2 – could have impact if combined with other adverse factors; 3 – has significant impact; 4 – could lead to a failure to achieve goals. | Mitigants |
|---|---|---|---|---|
| Macroeconomic | Weaker than forecasted macroeconomic performance | 20–50% | 4 | Implementing a set of efficiency improvement measures such as enhancing energy efficiency, introducing resource-saving technologies, curbing price growth, and launching various organisational and technical initiatives |
| Insufficient indexation of tariffs against growing prices for products consumed by Russian Railways | 20–50% | 4 | Keeping in constant touch with the Government and key customers to provide the stakeholders with complete and objective information about potential adverse effects of the adopted decisions for Russian Railways. Implementing a set of efficiency improvement measures | |
| State regulation | No government resolutions on long-term financing of the railway transport development or a failure to implement such resolutions | 20–50% | 3 | Searching for alternative sources of financing. Optimising technical solutions for capital investment projects. Breaking down projects into stages with their subsequent implementation in the order of priority |
| Changes in the regulatory framework, including regulations providing support to other transport modes and weakening the competitiveness of railway transport | 20–50% | 3 | Keeping in constant touch with the Government and key customers to provide the stakeholders with complete and objective information about potential adverse effects of the adopted decisions for Russian Railways | |
| Liberalisation of the railway passenger transportation market | 5–20% | 4 | ||
| Liberalisation of the railway freight transportation market | 5–20% | 4 | ||
| A gap between the existing regulatory framework and ongoing railway transformations | 5–20% | 3 | Submitting timely proposals on regulatory amendments to the Government with a detailed explanation of economic and safety concerns and best global practices behind them | |
| Market | Significant changes in cargo types and transportation routes versus the forecast | 5–10% | 2 | Building long-term relations with customers and improving consumer feedback strategies. Enhancing market flexibility and expanding business in deregulated segments. Strengthening logistics capacities to satisfy customer demand for comprehensive services |
| Aggressive pricing policies from operators of other transport modes | 5–20% | 3 | Building long-term relations with customers and improving consumer feedback strategies | |
| Investment | Insufficient investment in infrastructure development | 5–20% | 4 | Optimising technical solutions. Breaking down projects into stages with their subsequent implementation in the order of priority |
| Failure to comply with the investment programme implementation schedule | 5–20% | 2 | Improving the management framework and project management competencies. Breaking down implementation plans into project roadmaps. | |
| Tax | Higher tax burden driven by tighter fiscal policies in Russia amidst social and economic uncertainties | 20–50% | 4 | Staying in constant contact with the federal and regional tax authorities |
| Management | Insufficient management competencies | 5–10% | 2 | Improving the management framework by consolidating and streamlining organisational and functional structures and developing efficient management procedures and methods |
| HR | Deficit of qualified staff due to the insufficient competitiveness of Russian Railways as an employer | 5–10% | 3 | Keeping compensation on a level above the Russian average. Offering staff development opportunities in line with best practices in professional training. Building a stronger employer brand |
| Stronger competition in the labour market on the back of a decrease in Russia's working population in the medium term | 5–10% | 3 | Offering professional guidance for young talents from educational institutions and pre-university education facilities, including at children's railways. Organising sponsored education programmes and building partnerships with universities and vocational schools. Implementing the Russian Railways’ Youth target programme to train and retain young talent. Taking consistent steps to offer competitive employee compensation. Developing a compensation and benefits package that meets employee needs | |
| R&D and technology | Weaker competitiveness of the railway transport due to a technology gap with other modes of transport | 5–20% | 3 | Implementing the Comprehensive Innovative Development Programme of Russian Railways Group for 2016–2020 |
| Underperformance in adoption and utilisation of innovative R&D solutions | 5–20% | 2 | ||
| Insufficient cooperation with global railway engineering leaders | 5–20% | 2 | ||
| Technology (internal) | Poorer traffic safety due to: a) deterioration in rolling stock reliability; b) deterioration in infrastructure reliability | 5–20% | 2 | Conducting timely overhauls, upgrades and reconstruction of infrastructure facilities, performing repairs and maintenance on the rolling stock. Implementing the investment programme |
| Technology (external) | Slower debottlenecking at associated transport facilities (port capacities, warehouse terminals) versus the forecasts contained in the Company’s investment programme | 5–20% | 2 | Keeping in constant touch with the operators of associated transport modes to synchronise the investment programmes and adjust the timing of Russian Railways’ investment programme where necessary |
| Failure to meet the freight transportation market needs due to the inefficient freight railcar fleet | 5–20% | 3 | Cooperating with rolling stock operators to improve railcar fleet management efficiency |
Risks associated with dedicated business lines
| Business line | Risks | Mitigants |
|---|---|---|
| Passenger transportation |
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| Freight transportation and logistics |
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| Railway transportation and infrastructure |
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| International operations |
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Financial risk management
The Company lays a special emphasis on managing financial risks and insuring its property and liability. All related decisions are made by the Financial Risk Management Commission, a collective body comprised of dedicated department employees and headed by the First Deputy CEO of the Company.
In 2017, key objectives in the realm of financial risk management included adjustment of the system to external pressures such as international sanctions, strong financial market volatility and increased uncertainty, and application of single financial risk management principles across the Group.
Credit risks
To manage its credit risks, Russian Railways approved methods to calculate credit limits and regulatory documents governing operations with bank guarantees and sureties, including the unified corporate standard of Russian Railways Group for dealing with collateral instruments. The Company uses the credit limit calculation methods to assess financial institutions and calculate relevant credit limits so as to manage bank transactions involving deposits and bank guarantees based on the assessment of the respective financial institution.
In its dealings with the real sector companies, Russian Railways relies on a system of management standards that include standard terms of settlement with counterparties, provisional remedies, treasury control, limitation of receivables and payables, bank guarantees underpinning the parties' commitment, proper performance (including over the warranty periods for supply contracts) and repayment of advances, and sureties from the parent companies. These tools help to protect Russian Railways against the risk of counterparty default (improper or delayed fulfilment of obligations). Financial institutions that issue bank guarantees and sureties are selected based on their credit record and existing credit limits.
Liquidity risk
The Company manages its liquidity based on the balance of payments, payment schedule and payment position as per the approved budgets. Depending on the current liquidity situation, the Company promptly raises or deposits funds under the best available market conditions.
Currency and interest risks
To assess this category of risks, the Company builds models and evaluates budget parameters factoring in potential volatility of the relevant market indicators.
Assessment of Russian Railways' currency risks and selection of a currency risk management tool are based on the analysis of the Company’s foreign currency exposure. In order to estimate the foreign currency exposure, the Company’s operations are broken down into and analysed by investment, operating and financial activities. The amount and structure of the estimated foreign currency exposure have further implications for the Company’s borrowing policy and hedging approach.
Insurance
The Company insures its real estate, rolling stock, employees, liability of a railway infrastructure owner, carrier liability, and also liability of directors and officers working in the Company and its 73 subsidiaries and affiliates.
682 insurance claims were settled in the reporting year, with total insurance compensation exceeding RUB 1 bn.
To ensure a common approach to subsidiary insurance, in 2010, the Company put in place a single corporate framework for insuring subsidiaries and affiliates of Russian Railways.
As part of its ongoing push to improve the insurance of Russian Railways’ property and provide the strongest possible insurance coverage, the Company selected the most expensive and riskiest property items subject to insurance. The total value of these facilities exceeds RUB 407 bn. Each year, the Company purchases facultative reinsurance policies for said items from the leading global reinsurance companies, including Swiss Re, Munich Re, Allianz, Zurich Insurance Company, etc.