4 Comments from the Chairman 5 Message from the CEO 7 Overview

Annual Report 2009

Contents

1 Shareholder information 3 2009 in brief

4 Comments from the Chairman 5 Message from the CEO 7 Overview

8 Aims and strategy

9 Organisation and legal structure 10 Investment Advisory Committee 11 Operational development 14 Operations

16 Subsidiary Developments 17 Financial Performance 20 Outlook

21 Share capital and ownership 22 Board of Directors and Management 24 Directors’ Report

26 Consolidated Income Statement

27 Consolidated statement of comprehensive income 28 Consolidated statement of financial position 29 Consolidated statement of changes in equity 30 Consolidated cash flow statement

31 Notes to the consolidatedfinancial statements

59 Audit Report

Shareholder information

Annual General Meeting 20 May 2010 The Annual General Meeting of shareholders in RusForest AB (publ) will be held at 3 p.m. on Thursday 20 May 2009, at 7A Konferens, Strandvägen 7A, Stockholm.

Participation

To be entitled to participate at the Annual General Meeting, shareholders must be registered in the share register maintained by Euroclear Sweden AB no later than 14 May 2010 and notify the company of their inten- tion to attend the Annual General Meeting by 4 p.m. on 14 May 2009.

Notification

Notification of participation may be made:

By post to RusForest AB (publ), Hovslagargatan 5, SE-111 48 Stockholm By e-mail to agm@rusforest.com By telephone to +46 8 771 85 00

Notification should include name, personal identification number (corporate registration number), address and daytime telephone number.

Trustee-registered shares

Shareholders whose shares are held in the name of a trustee must temporarily re-register the shares in their own name to be entitled to participate in and exercise their voting rights at the Meeting. Such registration must be completed with Euroclear no later than 14 May 2010.

This means that the shareholder must request such regis- tration prior to this date.

Dividend

The Board of Directors proposes that no dividend be paid for the 2009 financial year.

Financial information

The net result amounted to SEK 119.5 million

⦁

(SEK –102.3 million for the same period 2008), in large part due to the significant acquisition gain which arose from the acquisition of 50 per cent of RusForest Limited from Vostok Nafta Investment Ltd on June 1, 2009. The acquisition gain has been restated from the amount reported in the Interim Report for the six months ended June 30, 2009, as fixed assets were then taken up at cost. As per May 31st, 2009, the fixed assets have been re-valued at fair market value, by an independent appraiser, in accordance with IFRS 3. The acquisition gain was largely offset by the goodwill impairment, amounting to SEK 142.6 million, recorded on acquisi- tion of the subsidiaries between 2006 and 2008.

RusForest AB became a pure play forestry company

⦁

through the acquisition of 50 per cent of RusForest Ltd from Vostok Nafta.

– On June 1st Varyag Resources AB, a listed com- pany making investments primarily in unlisted natural resource related companies in Russia and the rest of the CIS, acquired 50 per cent of RusForest Limited from its joint venture partner Vostok Nafta Investment Ltd. The acquisition was made through an issue in kind of 8,537,640 shares in Varyag to a wholly owned subsidiary of Vostok Nafta in exchange for, inter alia, 50 per cent of the shares in RusForest Ltd and claims of SEK 212.2 million on RusForest. The acquisition gave Varyag Resources AB 100 per cent ownership of the shares and votes in RusForest Limited (Bermuda), the parent company of the RusForest Group, and was part of Varyag Resources AB’s transition from a private equity com- pany to a forestry company.

– Aleksandr Williams was appointed as new board member and CEO of the Company on June 2, 2009.

– After a decision taken at the EGM held on August 5, 2009, Varyag Resources AB changed its name to RusForest AB (publ).

The Company achieved significant growth in both

⦁

harvesting operations (20.8 per cent growth compared to 2008) and in sawmilling (37.9 per cent growth com- pared to 2008) during the year.

Record production reached at the Boguchansky saw-

⦁

mill in December 2009, with 6,000 m ³ of output and cash positive result.

A settlement agreement was signed with the 20 per

⦁

cent shareholder of PIK-89 under which RUB 42.5 mil- lion (SEK 9.9 million) of debt owed by PIK-89 to the minority shareholder was transferred to RusForest AB for a consideration of RUB 30,000 (SEK 6,971), resulting in a financial gain of RUB 44.2 million (SEK 10.3 million including accrued interest).

RusForest signed an agreement whereby the Russian

⦁

shareholders of Russian Gravel Co transferred 41.7 per cent of their shares to RusForest. Following this completion RusForest’s ownership has increased from 51 per cent to 92.7 per cent.

– Russian Gravel Co. received certification from Russian State Railways for fraction 25–60 mm, and is as a result the sole certified producer in Karelia.

– At the end of the third quarter of 2009, the decision was taken to stop production at Russian Gravel Co until market conditions improve as it is less expen- sive to close down, as opposed to running at well below break-even volumes over winter and spring.

Rus

⦁ Forest AB has amended the interim reported year- end financial information by making a deferred tax liability accrual in the amount of SEK 50.5 million origi- nated from fair valuing the property plant and equip- ment acquired through the business combination with Vostok Nafta Investments Limited on June 1, 2009.

The deferred tax charge has not affected the consoli- dated statement of comprehensive income, however, it had an effect of SEK 50.5 million on the Group’s retained earnings.

Significant events after the end of the period For the purpose of guaranteeing a steady log supply

⦁

and continuing its expansion programme including continuing work at the new sawmill in Magistralny, RusForest has carried out a bond issue with a 12 month maturity and a volume of SEK 50 million. The bond can be redeemed early, at the option of RusForest, after 6 months and runs with a fixed interest rate of 15.00 per cent. E. Öhman J:or Fondkommission AB has placed the bond.

All sawmill operations stopped at Tuba, assets

⦁ were

sold to other group companies and Tuba-Les applied for creditor restructuring.

Extreme cold weather from December 2009 to February

⦁

2010 disrupted harvesting operations throughout East Siberia, the Company’s harvesting operations lost about 300 working hours in each of January and February 2010. As a result winter stock targets have been missed at PIK-89, but met at Bogouchan and Lesprom. The lower than planned stock levels at PIK-89 mean that sawmilling will be slower than planned until summer harvesting begins around June.

2009 in brief

Developments in Russia

Russia was greatly affected by the economic crisis in 2008–2009. The fall in oil prices had a major impact on the Russian economy and, consequently, Russian state finances. Previous GDP growth turned into a fall in GDP of 8 per cent in 2009, budget surpluses turned into defi- cits, and the rouble initially fell by 30 per cent against the dollar, while the unemployment rate rose to nearly 10 per cent.

The government introduced powerful counter-meas- ures and, wise from the experience of the economic crisis in 1998, utilized the large currency reserves that they had saved during the high growth years of 2000–2007.

Naturally, the situation was helped by the surge in oil prices in 2009 from 30 dollars per barrel to the current 80 dollars, with Russia exporting around 160 million tonnes of oil per year. The government currently levies an export duty of 270 dollars per tonne, which yields the Russian state budget around 40 billion dollars; this is equivalent to the size of the defence budget.

As with the economic crisis of 1998, the Russian economy recovered quickly. The fourth quarter of 2009 and the first quarter of 2010 showed growth, and GDP is projected to increase by 3–5 per cent in the current year. Inflation fell during 2009 to just below 9 per cent and is estimated to decline further this year. The rouble exchange-rate has stabilized at around 29–30 against the dollar. Despite the large withdrawals from the foreign exchange reserve and the oil stabilization funds during 2008 and 2009, the total Russian foreign exchange reserve remains at 450 billion dollars and is still the third largest in the world after China and Japan.

In the short term, the economic outlook looks good for Russia. Nevertheless, Russia has serious structural prob- lems with an outdated infrastructure, a one-way bet on the energy sector, a poorly functioning credit system and a ter- rifying bureaucracy and corruption culture. The political leadership recognizes these problems, as well as the neces- sity to modernize trade and industry. Actions are now being taken to facilitate foreign investments in Russia, for example by accepting Western technology standards without re-trial. The deregulation of all permits, that plagues the Russian economy and contributes to corrup- tion, continues. The government is devoting significant resources to technological innovations, where nanotech- nology is one example.

While Vladimir Putin as prime minister, along with Finance Minister Kudrin, has responsibility for the eco- nomic policy (which continues to be governed top-down), President Medvedev is looking to extend the moderniza- tion policy to include civil society, particularly the judi- ciary, but to some extent also the political life in terms of the influence of political parties and citizens. It is clear that the economic crisis has made the political leadership in Moscow more responsive to public demands and wishes.

Russia and the rest of the world

Foreign policy has seen a certain rapprochement between Russia and the United States after President Obama’s inauguration. The two countries have, thus, recently signed a new agreement on reduction of strategic nuclear weapons. Fundamental disagreements remain on several other issues, not least in relation to several of Russia’s neighbours. After the presidential elections in the Ukraine, relations between Russia and the Ukraine should become more relaxed, which are in their mutual economic interest.

Relations between Russia and the EU have not evolved greatly over the past year. It is interesting to see the impor- tance that Russia attaches to the development of bilateral relations with countries like Germany, Italy and France and what response they will receive.

From Sweden’s point of view, it was a success that the Russia–EU summit took place in Sweden during the Swedish EU Presidency in the autumn of 2009 and that Prime Minister Reinfeldt paid an official visit to Moscow in March 2010. With the economic crisis retreating in Russia and growth rates once again increasing, there is great potential for continued lively trade between Sweden and Russia.

RusForest welcomes the future

For RusForest, as a large Russian forestry company, it is essential that modernization and liberalization is actu- ally implemented in the Russian economy. We feel that we enjoy strong support from the Russian authorities for our industrial activities. We have, when needed, been able to solve encountered problems at the highest level with federal and regional authorities. With our strong resource base, we therefore face the future with confidence and are studying interesting acquisition opportunities

Sven Hirdman Chairman

Comments from the Chairman

Message from the CEO

Forestry

2009 was certainly a tough year as RusForest contended with weak market conditions at the same time as bringing two major production facilities (the Boguchansky saw- mill and the Belomorsk quarrying business) on stream.

The completion of both investments represents a major milestone in that the shareholders now own two new production facilities, which won’t require any material capital expenditure in the foreseeable future. Furthermore, Boguchansky was cash positive in December with a record production volume of 6,000 m ³ . The gravel business was cash negative in 2009 due to a collapse in the Russian gravel market.

The Company achieved significant growth in both harvesting operations (20.8 per cent growth compared to 2008) and in sawmilling (37.9 per cent growth compared to 2008) during the year. Although there was a reduction in sawnwood prices, the Company was never in a posi- tion where volume demand was significantly reduced, and the Company was able to expand sales even at a time when most competitors were closing down capacity.

The Company’s ability to sell is firstly a function of the quality of the forest holdings, where the Company argu- ably has the best quality softwood resources anywhere in the world. Secondly, the Company’s location allows it to access Far East, Central Asian and European markets.

During 2009, our ability to switch volumes from Northern Africa to Central Asia has been critical to maintaining sales volumes.

Cash was clearly the main focus for 2009 and whilst in absolute terms the cash result for 2009 was not inspiring (cash balance fell by SEK 29.6 million during the year) this has to be seen within the context of two large start-ups and weak external conditions. The Company was partially able to offset cash outflows by taking on a USD 4 million credit facility at the Boguchansky sawmill. It is important to remember that credit conditions were extremely tight in Russia during 2009; specifically PIK-89 was required to repay all of its bank debt in 2009, which was successfully achieved. Accordingly, although PIK-89 took on new debt in December, PIK-89 actually repaid a net of SEK 8.3 mil- lion in debt during the year.

Although the company has overcome some very sig- nificant operational risks in building two new facilities, there is still a huge amount of work to do on improving the existing operations. PIK-89, Lesprom (a logging opera- tion) and the Trade House were all operating cash flow positive for 2009 but the result does not yet fully reflect the Company’s inherent competitive advantage, principally the low cost access to high quality timber. The process of improving operations never finishes and in 2009 it was decided to stop sawmilling operations at Tuba and move the resulting logs to PIK-89 in order to increase

working on the three initiatives described in the Q3 report, in summary these are;

1. To build a significant “snow stock” of logs and stems over the winter period to guarantee the smooth supply of logs over the summer months.

2. The Company is working to reduce the range of sawn- wood that it sells in order to simplify product flow through the sawmills.

3. The Company is working to secure funding to complete the third sawmill at Magistralny to expand the earnings base without increasing overhead.

Even though sawnwood prices are increasing, it is critically important that the Company makes material progress in all three of these areas, in particular item 2 is just one of several initiatives aimed at reducing costs at PIK-89. Failure to address these issues will leave the Company exposed to weather patterns and will result in erratic cash earnings over the summer months.

Beyond 2010, it is important that value added sectors develop around RusForest; this will allow the Company to sell by-products (particularly pulpwood) to the pulp and paper and related industries. So far the Russian Government’s attempts to force investment in value added processing by increasing log export duties have not been particularly successful. However over time the pros- pect of increased export duties coupled with Russia’s large forest holdings and low costs will likely spur development of pulp and related industries. The Company will stick to its core harvesting and sawmilling operations, but it can also act as a catalyst to encourage this process by seeking investors to establish value-added operations in our geo- graphic area of operation in order to boost local pulpwood demand.

Gravel

2009 was an important year for our gravel business as

we went into production in April having completed two

years of construction work and an enormous amount of

license permitting. It is a fact that 2009 was a difficult year

to start-up operations as both general construction was

down by some 20 per cent and more importantly govern-

ment funding for road building was cut by an estimated

20 per cent. Since road building and other infrastructure

projects are budget-financed at the Federal level and at

the regional level, the outlook for infrastructure projects is

driven by political decisions. In the long term, there is an

obvious need to build roads in Russia and this is reflected

in the Russian government’s Transport Strategy. The

Transport Strategy calls for 20,000 km of roads to be built

in 2010 to 2015 and 3,000 km of new railway lines, in order

to develop the infrastructure described in the Transport

Clearly 2009 was not the year to begin major infrastruc- ture projects given the unexpected pressure on Federal and regional budgets. Going forward the Russian govern- ment still has significant savings planned, but the road building programme should never the less be restarted in the near term. However, it is not certain that this will happen in 2010.

The gravel business was shut over winter in order to avoid operating at below break-even levels, and given prevailing external conditions RusForest has decided to extend the closure of operations until the market improves, while taking all available measures to reduce the cash burn. This includes the restructuring of lease pay- ment schedules for the crushing equipment, the introduc- tion of a “forced shutdown” regime to reduce payroll and arranging of short-term leases of the equipment.

Cash and Liquidity

The Group’s closing net cash position was SEK 26.1 mil- lion compared to SEK 55.7 at December 31, 2008. The opening cash position relates to cash held at Varyag AB as at December 31, 2008. Following the 1st June 2009 acquisi- tion of assets from Vostok Nafta Investment Limited, cash balances are consolidated across all group companies.

The total net cash outflow for the twelve months ending December 31, 2009 was SEK 29.6 million in respect of cash held by Varyag Resources AB as compared to the closing consolidated group cash position.

The result reflects the fact that we started up two new facilities in 2009 as well as dealing with very weak external markets. The fully developed operating businesses at PIK-89 and our logging business at OOO Lesprom and the Trade House partially cross-subsidised operating cash outflows at the Boguchansky sawmill. The Boguchansky sawmill secured a SEK 28.6 million (USD 4 million) credit line in September 2009 in order to finance log purchases and start-up completion. Accordingly, the forestry divi- sion showed positive net cash movement of SEK 24.4 mil- lion. In addition to taking up debt, PIK-89 was required to repay in full all outstanding credit lines during 2009, and the company repaid SEK 19.8 million (RUB 83.3 million) in bank debt during the year. Even though PIK-89 took on some new debt in December 2009, there was a significant net debt reduction at PIK-89 during 2009 of SEK 8.3 mil- lion (RUB 34.9 million).

Alex Williams

CEO

RusForest is a company active within the forestry sector in Eastern Siberia, Russia. The company was established in 2006 through the acquisitions of Tuba-Les and PIK-89 in the Ust Ilimsk region. Since then, RusForest has reached a considerable scale, both in terms of forest resources and sawmilling capacity, through strategic acquisitions and

“brown field” development projects.

The company currently controls over 850,000 hectares of forest land with an annual allowable cut (AAC) of 1,443,200 m ³ . The Group’s current sawmilling capacity of approximately 200,000 m ³ is expected to increase to around 300,000 m ³ within the near future as a result of the completion of the Boguchansky sawmill, which is approaching full capacity, and the assembly of the RusForest Magistralny sawmill.

Russia has the world’s largest timber reserves by a significant margin, and Eastern Siberia is known for its high quality Angarsk Pine and Siberian Larch. The forest resources in this area are of high density and therefore well suited to produce sawnwood of exceptional quality.

RusForest’s operations are favourably positioned, in the southern part of Eastern Siberia, to effectively reach the rapidly growing Asian markets. Subsequently, most of the company’s production is currently directed at cus- tomers in Central Asia, the Middle East, Northern Africa, Japan and China (the world’s largest importer of wood and wood products). All of RusForest’s products are sold through the wholly owned trading company, RusForest Trading.

RusForest is the sixth largest forestry company in Russia in terms of harvest volumes according to data col- lated by Lesprom.ru.

Overview

Forest Area by Country, thousand Hectares

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000

Indonesia Australia China USA Canada Brazil Russia

H ec tar es

Forest Land Owned or Controlled, thousand Hectares

0 500 1,000 1,500 2,000 2,500 3,000 3,500

Bergs Timmer Sino-Forest*

Tornator RusForest*

Holmen Bergvik Skog SCA Södra UPM*

Svea skog

Source: Company Data for 2007, rusForest: Total forest land under long term lease on December 31, 2009

Source: un Food and Agriculture Organisation

Aims and strategy

Business concept

RusForest’s business concept is to be an efficient sup- plier of high quality sawn timber. The Company’s aim is to utilise its access to high quality forest land and low input costs to produce high quality sawnwood in order to generate a return for its shareholders. The Company has achieved its first aim of acquiring and consolidating sig- nificant forestry and sawmilling assets. Going forward the Company will focus on improving existing operations and completing its investment programme.

Overall objective

RusForest’s long term objective is to continue to monetise its significant forestry resource by increasing its saw- milling capacity and value-added activities whilst gener- ating an acceptable return on capital.

Strategy

To fully utilize the competitive advantage over western competitors, of having access to an abundance of cheap raw material, low power and personnel costs, RusForest seeks to increase productivity and efficiency throughout its value chain. The Company has achieved its first target of achieving management control over a significant forest resource base and sawmilling capacity. Going forward it is important to improve operational efficiency and increase the Company’s scale by completing the investment pro- gramme by bringing the Magistralny sawmill on stream.

In the longer term RusForest seeks to be a catalyst for domestic investment in value-added processing in the geographical areas where the Company is active.

RusForest’s core business will remain harvesting and saw- milling operations, but the Company aims to encourage vertical integration and modernisation by seeking inves- tors to establish value-added operations in conjunction with RusForest’s operations.

Operational and Financial targets

RusForest has reached a scale where focus can shift from acquisitions and land bank growth towards finalising projects and improving operational efficiency. During 2009 the company utilized 49.7 per cent of its consolidated AAC and the intention is to steadily increase this figure to around 65 per cent or approximately 1 million m ³ going forward. Sawnwood production is also planned to increase to approximately 300,000 m ³ , on an annual basis over time. The planned increase in harvesting volumes will allow for a larger internal supply of raw material, which decreases costs and supply related risks. Achieving these production capacity increases is important in order for RusForest to match its sawnwood production with Russia’s implementation of export duties on roundwood, which should be enforced in the medium term. The duties were originally planned to come into effect on 1 January 2009, but have since been postponed. The Russian Govern ment confirms its long term intention to stimulate domestic wood processing through the introduction of a prohibitively high export duty, but has agreed to delay the planned export duty increase for 2010 and possibly longer.

In order to fully utilize the competitive advantage, over western competitors, of having access to cheap raw mate- rial and lower power costs, RusForest seeks to increase productivity and efficiency throughout its value chain.

This is a never ending task and the Company is still in the early stages of this process at the older PIK-89 facilities.

In the nearest future, the Company is focused on the fol- lowing key initiatives;

1. To build a significant “snow stock” of logs and stems over the winter period to guarantee the smooth supply of logs over the summer months.

2. The Company is working to reduce the range of sawn- wood that it sells in order to simplify product flow through the sawmills.

3. The Company is working to secure funding to complete the third sawmill at Magistralny to expand the earnings base without increasing overhead.

The key to achieving these objectives is to have a highly motivated and competent management team; this is a major challenge in the Company’s areas of operations which tend to rural and semi-rural. Some of the manage- ment group members have achieved outstanding results in 2009 by completing two major investments and particu- larly bringing the Bogouchan sawmill up to full capacity.

Having said that, a lot of work remains to be done par- ticularly at PIK-89. Although PIK-89 achieved record sawmilling volumes in summer 2009 a lot of work remains to be done to increase operating efficiency. This involves a major programme of cost control and cost reduction which will be implemented in Q2 2010.

In the medium term, the Company’s aim is to generate a cash return which reflects the amount of capital invested in the business and the risks taken on by shareholders. Our logging business has been consistently cash positive and PIK-89 has shown erratic cash results, Bogouchan is now becoming cash positive as volumes increase. The Company has worked its way through a lot of operational risks in 2009 by completing two effectively new production facili- ties. Going forward it is critical that working capital is man- aged more effectively and that costs are controlled at PIK- 89. The exposure to weather cycles makes working capital a major issue and failure to secure logs over winter means that summer production volumes are subject to the risk of bad weather over the summer months. The Company needs to overcome this seasonal volatility firstly through building winter stocks and in the long term by improving access to the forest through road building.

Dividend policy

Dividend payments to shareholders are dependent on RusForest’s results, financial position and investment needs. Considering RusForest’s current investment and growth prospects, in addition to the Company’s liquidity and financial position in general, dividends are not expected to be paid in the foreseeable future. RusForest currently intends to retain future earnings to fund the development and growth of the Company.

The Board has not proposed any dividend distributions

for the 2009 financial year.

Organisation

RusForest AB is the Group’s Parent Company, with its reg- istered office in Stockholm. Operations began on 1 August 2006 and the company has been listed on the First North list of the Stockholm Stock Exchange since 7 August 2006.

A change of name from Varyag Resources AB to RusForest AB was made effective in August 2009.

Since the date of incorporation the Company has been investing and further managing the unlisted natural resources companies in Russia in forestry and mining segments. The investments into forestry segment were made under the partnership agreement with Vostok Nafta Investment Ltd on the equilibrium basis. The investments were made via RusForest Ltd (Bermuda) for the purpose of operating under U.K., rather than Cyprus law.

On June 1, 2009 RusForest AB exchanged 8,537,640 newly issued RusForest AB shares for the 50 per cent shareholding in RusForest Limited, 1 share in RusForest (Cyprus) Limited, 10 per cent in Tuba-Les LLC, 10 per cent in Tublesprom PLC and 50 per cent in RusForest Angara LLC (formerly TSLKK LLC). Additionally, the loans issued to RusForest (Cyprus) Limited of SEK 212 205 thousand were assigned to RusForest AB. As a result of the transac- tion, consideration paid totalled SEK 156,239 thousand (calculated as 8,537,640 shares at the share price at First North on June 1, 2009 of SEK 18.3 per share).

In addition to the Parent Company, the Group consists of the subsidiary RusForest Ltd (Bermuda). RusForest Ltd was incorporated in Bermuda on 8 March 2005 as a private company with limited liability under the Bermuda

Companies Act 1981. Initially the Company was incor- porated under the name Vostok Caspian Oil Limited and on 29 March 2006, it changed its name to RusForest Ltd.

The Russian subsidiaries are owned via RusForest Ltd’s wholly owned subsidiaries RusForest (Cyprus) Ltd and Varyag Capital (Cyprus) Ltd with registered offices in Nicosia, Cyprus. RusForest AB also owns Varyag Finance GmbH with its registered office in Zug, Switzerland.

Varyag Capital (Cyprus) Ltd had, between July 31, 2006 and June 1, 2009 a management agreement with Taiga Capital Ltd, which managed the company’s investments.

As part of the restructuring of RusForest, the manage- ment agreement with the management company, Taiga Capital Ltd, was terminated. As consideration for the performance based compensation relating to future dis- posals within forestry-related business the management company received 1,987,834 warrants in Varyag in accord- ance with the decision taken at the extraordinary general meeting held on May 25, 2009. These warrants will entitle the holder to subscribe for 1,987,834 new shares at a sub- scription price of SEK 63 per share during the period 1 July 2009 up to and including 1 January 2012. The management company will retain the right to performance based com- pensation upon a disposal of Russian Gravel Co.

Investment decisions are made by Varyag Capital (Cyprus) Ltd on the basis of proposals made by the Management Company and advice from the Investment Advisory Committee; see next page.

PIK-89 was renamed to RusForest Ust-Ilimsk on April 1st, 2010.

Simplified legal structure, 31 December 2009

Organisation and legal structure

PIK 89 Tuba-Les Bogouchanski LPK RusForest Magistralny OOO Lesprom

Ust Ilimsk, Irkutsk AAC 734 700 m3

Sawmilling 105 700 m3

Ust Ilimsk, Irkutsk AAC 235 000 m3

Sawmilling 26 000 m3

Bogouchan, Krasnoyarsk

Sawmilling 100 000 m3

RusForest Limited Bermuda Russian Gravel Co.

Cyprus Ltd

RusForest AB

RusForest Cyprus Limited

Magistralny, Irkutsk

Sawmilling (planned) 100 000 m3

Magistralny, Irkutsk

AAC 128 100 m3

OOO Belomorski Karier Tuba-Lesprom ZAO Bamlesstroi

Belomorsk, Karelia Ust Ilimsk, Irkutsk Bogouchan, Krasnoyarsk Magistralny, Irkutsk

TSLKK 93%

100%

100%

100%

100%

100% 100% 100%

90% 100% 100%

Investment Advisory Committee

The Group has an Investment Advisory Committee con- sisting of three members. All investment and divestment proposals from the Management Company are reviewed by the Investment Advisory Committee, with the aim of receiving advice and recommendations. Accordingly, the Investment Advisory Committee is a key resource in con- nection with RusForest’s considerations ahead of invest- ments and exits. The following is a brief presentation of the members of the Investment Advisory Committee during 2009.

MIKHAIL M. ZADORNOV Moscow, born 1963 Member since 2007 Education: Graduate of the Plekhanov Russian Academy of Economics and post-graduate stud- ies at the Institute of the Academy of Science of the USSR.

Holding in RusForest AB: None Mikhail M. Zadornov is currently President of VTB24 (ZAO), a subsidiary of Vneshtorgbank focused on serving retail banking customers and small businesses. Zadornov held a number of important positions in Government of the Russian Federation, including: from November 1997 to May 1999 – Minister of Finance of the Russian Federation, in May 1999 he was appointed the First Deputy Prime Minister of the Russian Federation, June–October 1999 Zadornov was Special Representative of the President of the Russian Federation on International Finance Institutions Relations being in position of the First Deputy Prime Minister, he was also appointed Special Adviser of the President of the Sberbank of the RF in October 1999. In 1997 Zadornov was a Member of the Board of the Sberbank of the RF and acted as Deputy Chairman of the Sberbank’s Supervisory Board.

SERGEI VASILIEV Moscow, born 1957 Member since 2006

Education: Doctor of economics and graduate of the Leningrad finance economics institute

N.A. Voznesenskovo (1979).

Holding in RusForest AB: None Sergei Vasiliev is senator and represents the St. Petersburg Region in the Federation Council; He is Chairman of the Federation Council’s committee on the Securities Market.

Prior to being appointed a senator, Vasiliev held a number of important posts in the Russian Government; in particu- lar he was Deputy Minister of the Economy between 1994 and 1997. Vasiliev was a key architect of reforms in today’s Russia and formed part of the core team that designed and implemented Russia’s transformation to a market economy.

ALEXANDER JAMES STEWART London, born 1950 Member since 2006

Education: Stewart is a graduate of Oriel College Oxford and speaks four foreign languages.

Holding in RusForest AB: None

Alexander James Stewart has over 20 years of capital markets experience with an emphasis on emerging mar- kets. Stewart has been involved in both equity sales and research. He has held a number of positions in leading investment banks working out of the City of London.

Stewart’s previous responsibilities included Head of Equities at RZB; Head of Equities at Banco do Brasil and Head of Emerging Market Equity Sales at Deutsche Morgan Grenfell. He is currently Head of Institutional Research at Eden Financial, a specialist firm providing independent research to institutional investors.

Alexander James Stewart left the Investment Advisory Committee in September 2009.

Investment Advisory Committee

External environment

Macro and Market

The effects of the global financial crisis on industrial output, and sawmilling in particular, have been widely documented. The forest products market is global, and exceptionally sensitive to the economic cycle on the back of its close links to the construction sector. As a result, our industry has been fundamentally affected during the reporting period in focus.

What happened?

The US housing market began to see significant increases in foreclosure rates during 2006 and 2007, which lead to escalating problems with, among others, the subprime mortgage markets.

Key benchmarks, housing sales and construction rates in the US, plummeted between 2006 and the end of 2008, and on December 30, 2008, the Case-Shiller home price index reported the largest drop in its history – a devel- opment which did not bode well for the sector in 2009.

This was true for the first half of the year, when US Con- struction rates fell to the lowest rates recorded since the great depression. US Housing Starts and US Housing Sales had decreased by as much as 79 per cent (April 09) and 81 per cent (Feb 09) respectively, in comparison with their peaks in 2005 and 2006.

In the Euro zone the construction industry has been one of the hardest hit sectors of the economy, and the decrease in construction activity during the 3rd quarter of 2009 totalled 9.6 per cent according to the ECB. The area has witnessed a large decline in housing supply, partially due to declining real housing investments since the middle of 2007. Real residential investment decreased by 8.3 per cent year-on-year in Q3 2009 and building permit issuance in the region remains at low levels, indicating that the weak- ness could persist for some time longer.

The Japanese economy bottomed out in the middle of 2009, and most projections point towards mild recovery in 2010. The IMF is projecting that the Japanese economy will grow by 1.7 per cent in 2010 after a significant contrac- tion of 5.7 per cent in 2009. Construction levels in Japan were around 30 per cent lower in 2009 compared to the previous year, but the country enjoyed relatively stable construction levels during the latter part of the year with increases in dwelling starts of 16 per cent between August and December 2009. Wooden house construction was also less affected, and “only” decreased around 20 per cent year-on-year, which increased the market share to approx- imately 55 per cent, and supported domestic sawnwood demand.

Effect on the forestry sector

In North America, around half of the sawmilling capacity has been closed or mothballed since the industry peak in 2007. In Europe, sawnwood consumption declined by around 10 per cent in 2009 compared to 2008 and pre- liminary production volumes, of approximately 100 mil- lion m ³ , are 25 per cent lower than in 2007. In Sweden sawnwood production dropped by 9 per cent during the year, while sawn softwood production in Finland decreased by 22 per cent, to 7.6 million m ³ .

Even though production decreased, Swedish sawn and planed softwood exports remained stable in 2009 (an increase of 2 per cent compared to 2008). However, the sales destinations of Scandinavian timber have changed.

Swedish exports to other European markets decreased when these markets collapsed during 2009, and to make up for this producers redirected more of their exports to some of RusForest’s main markets; Northern Africa (Egypt +13 per cent, other northern Africa +33 per cent), Japan (+9 per cent) and the Middle East (+3 per cent).

Operational development

Housing Data, 2004 to 2009 (April 04 = 100)

Source: u.S. Census Bureau

0 20 40 60 80 100 120 140

Jan

2010

Jul

2009

Dec

May

2008

Oct

Mar

2007

Aug

Jan

2006

Jun

2005

Nov

Apr

2004

RusForest’s main markets are located in Northern Africa, the Middle East, Central Asia, Japan and Korea. During 2009 the company’s sales destinations remained rela- tively unchanged in contrast to most other suppliers.

This clearly reflects the consistency in demand which the Company experienced and shows the relative stability enjoyed by the Northern African and Middle Eastern mar- kets throughout the financial crisis even with significant increases in mainly Scandinavian and Canadian supply.

RusForest has long standing, significant, log sales into China and during December 2009 deliveries to this market exceeded 8,000 m ³ .

Pricing

On the back of market improvements during the second half of 2009, and increasing confidence regarding the future, global sawnwood production and pricing started to increase once more during that period. For RusForest, average sawnwood prices stabilised during the second quarter, and increased during the third, after a sharp downturn at the beginning of the year. These increases were fuelled by supply side pressure forcing customers to accept higher prices. The price appreciation continued in most markets during the fourth quarter, and RusForest witnessed continuing increases in contract pricing and demand.

After positive developments in the third quarter the increases in weighted average prices levelled out during Q4 2009 in spite of stronger demand and increases in negotiated prices. This was the result of two main factors.

The Company had to supply under “old” pricing in order to clear out an order backlog. In addition, the quality dis- tribution in the sawmills fell during the fourth quarter due to log shortages.

2010

Economic growth returned and solidified during the second half of 2009, in large part fuelled by an unprec- edented amount of policy stimulus in western economies.

Even slow moving advanced economies like Germany and Great Britain came out of recession during this period, while some emerging markets even achieved meaningful growth over the year – in particular China which steamed on reaching a growth rate of 8.7 per cent according to the IMF.

In most advanced economies recovery should prove to be relatively slow. In 2010 the IMF is projecting that the output in advanced economies will increase by just 2 per cent, from already depreciated levels. But in most emerging markets the upturn should prove to be more forceful, with consolidated growth expectations of around 6 per cent and with double digit growth rates once more expected in China for 2010 – backed by the country’s extraordinary internal demand.

Europe, 2%

Northern Africa, 39%

Middle East, 21%

Japan and Korea, 12%

Domestic

, 9%

China, 3%

Central Asia, 13%

RusForest’s Sawnwood Sales Geography, 2009

Source: rusForest Trading

1) predominantly volumes delivered domestically but for further processing to Japanese specifications.

USD/m

0 50 100 150 200 250 300

2010Jan Nov Sep Jul May Mar 2009Jan Nov Sep Jul May Mar 2008Jan Nov Sep Jul May Mar 2007Jan Nov Sep 2006Jul

Sawnwood Export Prices, delivered to port, 2006–2009

Source: pIK-89, Sawnwood export prices delivered to port

In the US, housing industry analysts predict a recovery in housing starts during 2010 backed by a growing under- lying need for investments in the sector. US construction of privately owned housing units amounted to 794,000 units during 2009 and the seasonally adjusted annual rate of housing starts is currently only around 600,000 units.

Long term sustainable construction rates, based on the demographics of the country, are approximately 1.5 mil- lion units per year. The North American softwood markets have seen two years of severe downturns, and 2010 is con- sequently expected to be the year when growth returns.

The Japanese construction sector shrank by 30 per cent in 2009, but wooden house construction decreased less – by around 20 per cent year-on-year – which helped to keep sawnwood demand up. The reduction of imports of Russian logs to the Japanese market is expected to continue in light of the export duties already in place.

This supports sawnwood imports from Russia, which are expected to remain stable during 2010, even though we expect to see increases of predominantly North American supply on the market.

The Russian economy was one of the most severely affected by the global financial crisis with a GDP contrac- tion of 9 per cent in 2009 according to IMF. Fears of a debt crisis in the west, US recovery and uncertainty regarding global oil price developments make projections difficult in the near term regarding the rate of Russia’s recovery.

However, for 2010 growth is most likely to be somewhat muted and most analysts and businesses look to 2011 for a return to higher growth rates in Russia once more.

The crisis has led to the stagnation of domestic bank lending, and the Russian credit market was frozen during the most part of 2009. However, in an effort to fuel eco- nomic recovery by jump starting bank lending (and to mitigate the rouble appreciation seen in recent time) the Central Bank of Russia (CBR) cut the refinancing rate by a further 25 basis points, to 8.50 per cent, during February 2010. This is a post Soviet era low, but seeing as inflation is still decreasing – on account of the crisis – new cuts seem likely going forward. The Russian credit market needs a boost to get out of the doldrums, and the CBR is still under pressure to stimulate economic growth. As a result, con- tinued easing by the CBR during the first half of the year is probable, and with pressure on domestic banks to follow suit, the credit markets should steadily improve during the course of the year.

The crisis also had a silver lining for Russia, it helped

stifle inflation and the enormous foreign borrowing before

levels got out of hand. It also helped mitigate wage appre-

ciation, employee turnover and hiring costs, while forcing

companies to change focus from the pure growth mantra

of good times to well needed rationalisation, cost cutting

and efficiency measures.

Location of the subsidiaries

RusForest’s forestry subsidiaries are located in eastern Siberia, an area dense in high-quality Angarsk pine and Siberian larch, and also well-situated for reaching the rap- idly growing Asian markets, and especially China.

Karelia in north-western Russia, where RusForests’

gravel company, OOO Belomorsky Karyer is located, is the region in Russia with the largest aggregates reserves totalling upwards of 1,700 billion m ³ . The region also has a well-developed transport infrastructure, linking it to end- users of aggregates in the construction and road-building sectors.

Forestry

RusForest operational data 2009 Actuals

unit pIK Group

Tuba

Group lesprom Boguchansky Bamlesstroi

Consolidated

12M 2009 12M 2008 %

rusForest ownership interest 31-Dec-09 90% 100% 100% 100% 100%

Annual Allowable Cut (AAC) m

734,700 235,000 128,100 112,400 233,000 1,443,200 1,654,100 (12.8%)

utilised AAC m

460,373 92,932 69,317 94,204 – 716,826 593,529 20,8%

utilistion of AAC (annualised) % 62.7% 39.5% 54.1% 83.8% – 49.7% 35.9% 38.4%

Sawnwood volumes m

105,688 15,971 1,526 43,149 – 166,333 120,617 37.9%

Forest area Hectares 436,033 117,514 30,988 48,695 231,554 864,784 1,005,020 (14.0%)

1) The figures shown above are given for reference purposes only to make possible comparisons between the Group companies’ operational performance in 2009 versus 2008, and do not constitute part of the rusForest AB financial statements for the twelve months ending December 31, 2009. pIK Group includes pIK-89, pIK 2005 and TD rusForest; TuBA Group includes Tuba-les and Tublesprom; Boguchansky includes Boguchansky lpK and rusForest Angara. physical harvesting and sawmilling vol- umes, and forest resources, for 12M 2008 are adjusted for volumes attributable to nebelsky lpH. Boguchansky lpK harvesting volumes 2009 have been restated from log equivalent to stem equivalent.

Operations

= Forestry

= Aggregates

Operationally, 2009 was an eventful year. The start of oper- ations at the greenfield sawmill in Boguchan, and the asso- ciated harvesting enterprise RusForest Angara (formerly TSLKK), contributed to the significant increase in output RusForest has achieved. As a result of these assets going online, and thanks to general operational improvements in the Company’s other subsidiaries, RusForest achieved volume increases in harvesting and sawmilling of 20.8 per cent and 37.9 per cent respectively. Not a bad achievement, given the weak market conditions which were preva- lent for the most part of the year. The fact that RusForest achieved such increases in output without waning cus- tomer demand, once more highlights the strength, and quality of our products.

However, disruption of summer harvesting opera- tions, and consequently in sawmilling output, due to rain remains a perennial problem. On a long term basis, this problem will only be fully solved once we are able to build adequate log stocks, which can be drawn down over summer, to ensure uninterrupted sawmilling operations.

Forestry Operations

On a consolidated basis RusForest has increased its har- vested volume by 20.8 per cent, to 716,826 m ³ , during 2009 compared to the previous year (593,529 m ³ ). This increase is in large part due to the start of forestry opera- tions at RusForest Angara (formerly TSLKK) contributing 94,204 m ³ (0), in addition to a volume increase of 17.5 per cent at the PIK Group.

RusForest saw increases in harvesting volumes during each quarter of 2009 when compared to the same periods the previous year. In Q4 2009 the company’s combined harvesting output was 16.4 per cent higher than for the same period in 2008, and a record harvesting output was achieved in December 2009 with just under 86,000 m ³ of stem equivalents. These increases came in spite of temper- atures below -40 Celsius as early in the harvesting season as November and December.

The log flow at Boguchansky LPK was erratic throughout the summer as RusForest Angara did not gain access to summer harvesting plots until August, and external suppliers delivered only a small fraction of their contracted volumes. As a result of the lack of reliable log suppliers, the management team started negotiations to acquire standing timber and is also looking to acquire additional AAC in the Boguchan region.

Sawmilling

RusForest’s consolidated sawnwood output increased by 37.9 per cent, to 166,333 m ³ , in 2009 compared to 2008 (120,617 m ³ ). The Company’s major sawmilling subsidi- aries posted significant increases in production compared to the corresponding period in 2008, despite weak market conditions prevailing throughout most of the year.

The PIK Group has been producing stable volumes throughout 2009 and achieved an average production rate of 9,100 m ³ per month during the second half of 2009 which was a year on year increase of 10 per cent (from 8,300 m ³ ). Overall the PIK Group increased its sawnwood output by 6 per cent during 2009.

Production at Boguchansky LPK was constrained, mainly during summer and early autumn, by log short- ages from RusForest Angara and the absence of reliable external suppliers. However, the company has still shown steady increases in sawnwood output, and produced over 6,000 m ³ in December for the first time in the history of the plant.

Harvesting – stem equivalent m³ 0 20,000 40,000 60,000 80,000 100,000

Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan 2009 Dec Nov Oct Sep 2008

RusForest Group Harvesting, Sep 08 – Dec 09

Source: rusForest

Sawmilling – stem equivalent m³ 6,000 8,000 10,000 12,000 14,000 16,000 18,000

Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb 2009 Jan Dec Nov Oct 2008 Sep

RusForest Group Sawmilling, Sep 08 – Dec 09

Source: rusForest

Subsidiary Developments

PIK Group

In March 2009, RusForest removed the entire manage- ment of PIK-89. This step was taken after several months of underperformance and negative cash flows. Although these developments were largely due to external fac- tors, RusForest felt that the management had not taken adequate steps to insure PIK against the perennial prob- lems in raw material sourcing during the summer period.

In addition to removing the management, certain claims were presented to the 20 per cent minority shareholder of PIK-89. Subsequently, a settlement agreement was signed which resulted in RUB 42.5 million (SEK 9.9 million) of debt owed by PIK-89 to the minority shareholder being transferred to RusForest AB for a consideration of RUB 30,000 (SEK 6,971). This resulted in a financial gain of RUB 44.2 million (SEK 10.3 million including accrued interest).

RusForest also increased its shareholding in PIK-89 from 80 per cent to 90 per cent, in December 2009, as part of an associated shareholder agreement.

In absence of these organisational steps it was likely that 2009 would have shown a repeat of PIK’s poor per- formance in 2008. However, PIK’s new management immediately took steps to buy sawlogs from external sup- pliers, and as a result the PIK Group was able to produce stable volumes of approximately 10,000 m ³ per month throughout the three month period ended September 2009 (an increase of 12.6 per cent compared to the same period in 2008). Furthermore, a record production level of 10,346 m ³ was reached in August 2009.

Boguchansky LPK

Following production trials in November and December 2008, the Boguchansky sawmill and the associated har- vesting operations (RusForest Angara) went into full oper- ation during 2009. In the period March through to May 2009, Boguchansky LPK was producing steady volumes of around 5,000 m ³ of sawnwood per month. This was fol- lowed by a significant reduction over summer as the com- pany cleared inventories and was inhibited by log short- ages from RusForest Angara together with the absence of reliable external suppliers. The sawmill only produced approximately 3,500 m ³ per month during July–September 2009, which was approximately half of the potential sales that the company could have made during the period.

Major initiatives have been taken in the sawmill (also at the PIK Group) in order to dramatically reduce the range of products being produced, and thereby ensuring larger batches and longer run-times. The aim of the changes was to make product flow much less complex and con- sequently increase operational efficiency. Boguchansky LPK showed steady increases in sawnwood output during the fourth quarter of 2009, and produced over 6,000 m ³ in December for the first time in the history of the plant. We are now confident that the operational initiatives taken will continue to positively impact output volumes in 2010.

On the financing side, OOO Boguchansky LPK received a credit line, amounting to USD 4 million, from Unicredit for working capital in Q2 2009. This facility was intended to be used to acquire sawlogs from third party suppliers to cover the slowdown in in-house harvesting at TSLKK in May and June 2009.

Tuba Group

In 2009 the decision was taken to stop sawmilling opera- tions at the small scale sawmill in Tuba and move the logs to the PIK Group, in order to increase throughput at the main sawmilling operations there.

The Tuba operations are run from two legal entities, OOO Tuba-Les and ZAO Tublesprom. During the year all of Tuba-Les’ moveable fixed assets were sold to other Group companies and all employees were transferred from OOO Tuba-Les to ZAO Tublesprom.

At the beginning of 2010, OOO Tuba-Les applied for creditor restructuring in respect of unpaid taxes and other payables and the initial petition was granted.

OOO Tuba-Les now has approximately three months to come up with a creditor restructuring plan which will then be presented to an external judge. These developments are not expected to have a material effect on the Group apart from the impaired goodwill attributable to the initial acquisition of OOO Tuba-Les.

RusForest Magistralny, Lesprom and Bamlesstroi

A new sawmill with a base capacity of 100,000 m ³ of kiln dried sawnwood is under construction at RusForest Magistralny. RusForest has however stopped work at the site until suitably priced debt funding is available.

Negotiations with banks were broken off during 2009 as a result of the ongoing credit crisis. Credit conditions are still tight in Russia but significantly better than they have been during the past year, and the Group has therefore once more entered into discussions with various banks in order to secure funding.

Almost all necessary capital expenditure investments have been made at RusForest Magistralny, with the mill foundations ready and all equipment delivered from Italy. The sawmilling site is on a skeleton operation until suitably priced working capital is available to fund pro- duction start-up, which in the case of Boguchansky took 6 months.

RusForest’s Lesprom and Bamlesstroi subsidiaries

will act as log suppliers to RusForest Magistralny once

the sawmill is fully operational. Consequently no further

work is being done at Bamlesstroi until the sawmill starts

operations, while Lesprom performs continuous har-

vesting operations for export to predominantly China and

Japan.

Key Financial Data

Item 2009 2008

In thousands of SEK 1/1 – 31/12 1/1 – 31/12

Turnover 207,526 –

Costs of Sales (201,101) –

EBITDA (79,163) (91,744)

Income from rusForest acquisition 380,009 –

Goodwill impairment (142,570) –

net profit 119,522 (102,317)

Cash Flow During period (29,019) (253,977)

per Share Data

SEK 31-Dec 31-Dec

Earnings 6.53 (7.69)

Shareholders Equity

32.46 41.06

Share price 19.00 11.00

Equity/Assets ratio 74.2% 93.2%

1) Shareholders equity per share for 2008 is calculated from the shareholders’

equity and number of shares as per December 31, 2008.

Overview

The 2009 accounts cover the period when Varyag Resources AB was treated as a holding company until 1 June 2009 and subsequently as a consolidated forestry operation. Accordingly, the financial statements reflect five months of investment activities combined with seven months of operation as a forestry business together with an available-for-sale gravel asset. Financial analysis and interpretation is therefore somewhat complicated by the transitory nature of the 2009 accounts.

In general terms the 2009 results reflect the fact that RusForest (formerly Varyag Resources) largely completed its investment plans during the year with the exception of the Magistralny sawmill. During start-up both the Boguchansky sawmill and the Belomorsk Gravel opera- tions were cash negative as they went into production. The Boguchansky sawmill reduced both operating cash flows and earnings at the forestry division. The gravel business contributed a net loss and correspondingly an investment requirement at the corporate segment level.

The treatment of the gravel business as an available- for-sale asset means that its profit & loss account is not consolidated into the forestry profit & loss data on a line- by-line basis.

The profit & loss statement shows a small gross margin for the forestry operations effectively for seven months of 2009 (from 1 June 2009 onwards); the gross margin is not enough to cover distribution expenses plus other admin- istrative expenditure. The low gross margin result reflects the fact that the Boguchansky sawmill was loss making until such times as it reached proper production volumes in December 2009. Furthermore, sawnwood prices were generally low in 2009 and disrupted log flows at PIK-89 over the summer led to poor cash results in June to August 2009.

Going forward, the fact that Boguchansky has achieved capacity and that sawnwood prices have strengthened towards the end of 2009 will have a positive impact in 2010. It is important to reduce the high administrative expenses as far as possible. A significant portion of these cost items relate to audit fees and the considerable work that needs to be done to transform the accounts of the group subsidiaries into IFRS accounts.

The gravel business’ net result is shown as a loss from discontinued operations (SEK 19.5 million) for 2009. The net result reflects both a combination of start-up related costs incurred from April 2009 together with the extra- ordinarily weak market conditions that the Company saw in 2009. It is difficult to gauge the extent of any improve- ment in 2010 as yet; however there is a strong probability that 2010 will be better than 2009. The expected sale of this asset will eliminate this item from the profit & loss statement.

In terms of the balance sheet, the company’s activities are almost entirely financed by equity capital and gearing levels remain minimal when compared to equity. The forestry (and Group) balance sheet has been expanded following a revaluation of fixed assets, which added SEK 265.1 million on to fixed assets. The Group has entered into discussions with various banks in order to secure funding to complete the RusForest Magistralny sawmill.

Credit conditions are still tight but significantly better than they have been during the past year.

During Q4 2009 both PIK and Lesprom (our logging business) showed reasonable gross margins, but the overall margin was dragged down by operating losses at the Boguchansky sawmill.

Cash outflows from discontinued operations (gravel division) totalled SEK 9.2 million. When the costs of main- taining the corporate centre are included, the Group cash flow was negative, at SEK 29.0 million, during the twelve months ended December 31, 2009.

Comparative data from prior years is not provided as the Group accounted for investments in forestry using the equity method up until 100 per cent ownership com- menced on June 1st 2009.

Financial performance

Profit & Loss statement Revenue

Group revenue for 2009 amounted to SEK 207.5 million.

Effectively this figure only relates to seven months of sales which were consolidated following the 1st June 2009 acquisition of the forestry assets from Vostok Nafta. The Group revenue for the period had the following composi- tion: Sawnwood, SEK 128.3 million; Sawlogs, SEK 36.8 million; Pulpwood, SEK 12.0 million; Chips, SEK 5.3 mil- lion and Other revenue SEK 25.1 million.

Primarily during the third quarter of 2009 RusForest saw continuous increases in USD-denominated sales prices driven by both market factors and the USD depreciation to major currencies. However, the average export sawnwood price received at PIK-89 during 2009 was 14.4 per cent lower than in 2008.

Operating Expenses

RusForest’s cost of sales for the period was SEK 201.1 mil- lion. One major driver, apart from sales volume, for the cost of sales was the extensive usage of purchased sawlogs during the period. Purchased logs cost, on average, SEK 400 per m ³ compared to self-harvested sawlogs which cost approximately SEK 250 per m ³ . The Group has however implemented a cost saving policy which positively con- tributed to the operating margin.

Distribution expenses amounted to SEK 49.7 million and represented customs duties, railway tariffs, loading and hauling-to-loading costs. These costs are directly asso- ciated with the volumes shipped.

Personnel costs have decreased on monthly basis as the portfolio companies’ new management has terminated the employment of unproductive staff, reviewed the produc- tion process and are re-allocating tasks.

Other Expenses Financial Expenses

Financial expenses amounted to SEK 3.9 million during the period. The Group drew down the remaining part of the UniCredit Bank loan (SEK 20.7 million) during September 2009, which resulted in additional interest payments.

Income Tax

All of the Group subsidiaries generated losses during the period, and tax losses will consequently be carried forward.

Net Profit

The Group’s net result was SEK 119.5 million during twelve months ended December 31, 2009, in large part due to the significant acquisition gain which arose from the acquisition of 50 per cent of RusForest Limited from Vostok Nafta Investment Ltd on June 1, 2009. The acquisi- tion gain has been restated from the amount reported in the Interim Report for the six months ended June 30, 2009, as fixed assets were then taken up at cost. As per May 31, 2009 the fixed assets have been re-valued at fair market value, by an independent appraiser, in accordance with IFRS 3.

The Group has during the third quarter signed a set- tlement agreement to write-off of loans payable to the minority shareholder of PIK-89, in the amount of SEK 10.3 million, which positively affected the Group’s result for the quarter.

RusForest has decided that given the higher asset values resulting from the fixed asset valuation, it is pru- dent to remove all positive goodwill via impairment. As a result of this decision all positive goodwill created prima- rily in the period from 2006 to 2008 of SEK 142.6 million will be written down in 2009 (note 14).

Balance sheet Assets and Investment

The opening balance sheet at December 31, 2008 reflects Varyag Resources balance sheet as a holding company.

The current year-end balance sheet reflects the replace- ment of investments with the consolidated assets and liabilities of various group companies. All property plant and equipment have been valued to fair market value as of 31 May, 2009, as required by IFRS 3 to account for the fair value of the acquired assets and liabilities in the busi- ness combination. The valuation was performed based on reports prepared by independent appraisers, who hold a recognised and relevant professional qualification and who have recent experience of valuations of assets of similar location and category. The basis used for the appraisal was market value of the assets, and fair values were estimated using appropriate valuation techniques.

The increase of the value of fixed assets totalled SEK 265.1 million.

Sawnwood, 61.8%

Sawlogs, 17.7%

Pulpwood, 5.8%

Chips, 2.6%

Other, 12.1%

Revenue Breakdown FY 2009, percentage of total

On the liability side, the Company is primarily financed through equity with total equity of SEK 709 million com- pared to non-current interest bearing liabilities of SEK 20.2 million, primarily reflecting SEK 17.6 million of long-term portion of Sberbank loans and the fair value of a SEK 2.6 million Unicreditleasing lease obligation. SEK 37.7 mil- lion of current interest bearing loans primarily reflect the UniCredit Bank loan in the amount of SEK 25 million, the short-term portion of Sberbank loans in the amount of SEK 6.2 million and the current portion of Unicreditleasing lease obligation in the amount of SEK 5.0 million. The parent company does not have any interest bearing debt as at 31 December 2009.

Balance sheet data from the gravel business is shown both as an asset line under assets classified as held for sale (SEK 128.5 million) and as a liability line under liabilities directly associated with the assets classified as held for sale (SEK 43.5 million). The gravel businesses’ assets pri- marily reflect the capitalised value of work done at the site including over-burden removal, blasting, road building, the value of the railhead and the acquisition of equip- ment. The main crushing plant is being acquired under a finance lease and the associated liability figure primarily reflects the amount of the finance lease which remains out- standing at December 31, 2009.

Cash Flow and Financial Position

The Group’s closing net cash position was SEK 26.1 million compared to SEK 55.7 million at December 31, 2008. The opening cash position relates to cash held at Varyag AB as at December 31, 2008. Following the 1 June 2009 acquisition of assets from Vostok Nafta Investment Limited, cash balances are consolidated across all group companies. The total net cash outflow for the twelve months ending December 31, 2009 was SEK 29.6 million in respect of cash held by Varyag Resources AB as compared to the closing consolidated group cash position.

Looking at the cash results of the operating subsidi- aries for 2009 shows that the cash outflow reflects the fact that the Company had to finance capital expenditure for the completion of the Boguchansky sawmill and the Belomorsky Gravel asset; furthermore there was a signifi- cant start-up cost for both subsidiaries during 2009. Within the context of the two major start-ups the cash result for 2009 is felt to be reasonable. In particular, the fully devel- oped operating businesses at PIK-89, our logging business at OOO Lesprom and the Trade House partially cross- subsidised operating cash outflows at the Boguchansky sawmill. The Boguchansky sawmill secured a SEK 28.6 million (USD 4 million) credit line in September 2009 in order to finance log purchases and start-up completion.

Accordingly the forestry division showed positive net cash movement of SEK 24.4 million. In addition to taking up debt, PIK-89 was required to repay in full all out- standing credit lines during 2009; PIK-89 repaid SEK 19.8 million (RUB 83.3 million) in bank debt during the year.

Even though PIK-89 took on some new debt in December

2009, there was a significant net debt reduction at PIK-89

during 2009 of SEK 8.3 million (RUB 34.9 million).