Annual report and accounts 2012

Commitments and contingencies

OAO Severstal and Subsidiaries
Notes to the Consolidated Financial Statements
31. Commitments and contingencies

for the years ended December 31, 2012, 2011 and 2010
(Amounts expressed in thousands of US dollars, except as otherwise stated)

a. For litigation, tax and other liabilities

The taxation system and regulatory environment of the Russian Federation, Kazakhstan, Burkina Faso and Guinea are relatively new and characterized by numerous taxes and frequently changing legislation, which is often unclear, contradictory and subject to varying interpretations between the differing regulatory authorities and jurisdictions, who are empowered to impose significant fines, penalties and interest charges. Events during recent years suggest that the regulatory authorities within these countries are adopting a more assertive stance regarding the interpretation and enforcement of legislation. This situation creates substantial tax and regulatory risks. Management believes that it has complied in all material respects with all relevant legislation.

At the reporting date, the actual and potential contingent claims for taxes, fines and penalties made by the Russian tax authorities to certain Group’s entities amounted approximately US$ 18.1 million (December 31, 2011: US$ 17.7 million made by the Russian tax authorities; December 31, 2010: US$ 113.6 million made by the Russian, Kazakhstan, Burkina Faso and Guinea tax authorities). Management does not agree with the tax authorities’ claims and believes that the Group has complied with existing legislation in all material respects. Management is unable to assess the ultimate outcome of the claims and the outflow of financial sources to settle such claims, if any. Management believes that it has made adequate provisions for other probable tax claims.

b. Long-term purchase and sales contracts

In the normal course of business group companies enter into long-term purchase contracts for raw materials, and long-term sales contracts. These contracts allow for periodic adjustments in prices dependent on prevailing market conditions.

c. Capital commitments

At the reporting date the Group had contractual capital commitments of US$ 777.0 million (December 31, 2011: US$ 1,085.9 million; December 31, 2010: US$ 1,546.6 million).

d. Insurance

The Group has insured major part of its property and equipment to compensate for expenses arising from accidents. In addition, certain Group’s entities have insurance for business interruption on various basis, from reimbursement of certain fixed costs to a gross profit reimbursement and/or insurance of a third party liability in respect of property or environmental damage. The Group believes that, with respect to each of its production facilities, it maintains insurance at levels generally in line with the relevant local market standards. However, the Group does not have full insurance coverage.

e. Guarantees

At the reporting date the Group had US$ 39.1 million (December 31, 2011: US$ 88.2 million; December 31, 2010: US$ 38.2 million) of guarantees issued, including guarantees issued for related parties, of US$ 23.0 million (December 31, 2011: US$ 74.9 million; December 31, 2010: US$ 10.0 million).