Finance (Costs)/Income, Net

Finance costs include interest expenses and amortisation of the costs incurred in connection with financing arrangements. Finance income includes interest income on bank accounts and deposits, dividends received, gain on extinguishment of debt, gains on disposal of available-for sale and other investments. Finance costs decreased by 4% or U.S.$16 million in 2010 as compared to 2009. In 2009, the controlling shareholder of the Company pledged shares of OAO “TMK” to guarantee certain TMK long-term loans. TMK incurred expenditures on commission fees which were amortised over the term of the debt using the effective interest method and recognised in finance costs. At the end of 2010, TMK repaid part of the debts and negotiated amendments cancelling the security in respect of the outstanding part of the affected loans. Furthermore, the Company recognised as expense the remaining unamortised part of the commission fees as finance costs which resulted in an increase in related expenses from U.S.$19 million in 2009 to U.S.$76 million in 2010. Excluding this effect on expenses, finance costs decreased by 17% or U.S.$ 73 million in 2010 as compared to 2009. During 2010 TMK negotiated lower interest rates with major creditors. As a result, the weighted average nominal interest rate declined gradually throughout the year and reached 7.86% as of 31 December 2010 as compared with 10.72% as of 31 December 2009. The favorable effect from the decrease in interest rates decrease was partially offset by new loans to finance capital expenditures and working capital. Finance costs were also affected by the changes in the currency structure of the credit portfolio and the volatility of the US dollar, the Euro and the Russian ruble.

Finance income decreased by 56% from U.S.$43 million in 2009 to U.S.$ 19 million in 2010.

As a result of the changes stated above net finance costs increased by 2% or U.S.$8 million in 2010 as compared with 2009.

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