Russia and Kazakhstan continue economic reforms and development of their legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian and Kazakh economies is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the governments.

The Russian and Kazakh economies are vulnerable to market downturns and economic slowdowns elsewhere in the world. Although conditions generally improved in 2010, considerable uncertainty remains concerning economic stability globally in the medium-term. The economic downturn experienced in the second half of 2011, in both the European and global economies, has resulted in reduced growth in the advertising market. A continuance of this economic downturn could adversely affect further economic growth, access to capital and cost of capital, which could negatively affect the Group's future financial position, results of operations and business prospects.

While management believes it is taking appropriate measures to support the sustainability of the Company's business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Company's results and financial position in a manner not currently determinable.

Although the Company's reporting currency is the US dollar, it generates almost all of its revenues through the sale of advertising, which in Russia is sold primarily in rubles. The ruble is also the functional currency of the Company's principal operating subsidiaries. As a result, the Company's reported revenues and results of operations are impacted by fluctuations in the exchange rate between the US dollar and the Russian ruble. Additionally, given that substantially all of its revenues are generated in rubles, the Company faces exchange rate risk relating to payments that it must make in currencies other than the ruble. The Company generally pays for non-Russian produced programming in US dollars. Although the Company had entered in the past and continues to enter into hedging transactions in an effort to reduce some of its foreign exchange risk (see below), it could be negatively impacted by any future depreciation of the ruble against the US dollar.

In 2011, the Russian ruble depreciated against the US dollar by 5.3%, but was on average 3% higher than the average value of the Russian ruble compared to the US dollar during 2010. In 2009 and 2010, the Russian ruble depreciated approximately 2.9% and 1%, respectively, against the US dollar.

If the exchange rate between the ruble and the US dollar were to depreciate, the revenues and operating results of the Company, as reported in US dollars, will be adversely affected.

In October 2008, the Company entered into foreign currency exchange forward transactions to reduce a portion of the Company's foreign exchange risk related to a credit facility agreement, which was denominated in US dollars. In 2009, the Company purchased $48 million under this forward contract.

In October 2009, the Company entered into foreign currency exchange forward transactions to reduce its foreign exchange cash flow risk related to a portion of its US-dollar denominated payments for foreign programming. In 2010, the Company purchased $20 million under this forward contract.

In October 2011, the Company entered into a foreign exchange forward contract to hedge a portion of its US-dollar denominated liabilities. On October 27, 2011, the Company purchased $38 million under this forward contract. As of December 31, 2011, there were no outstanding amounts under the foreign exchange forward contract on the Company's consolidated balance sheet. See also Note 21.

While certain of the Company's derivative instruments are designated as hedging instruments, the derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments are referred to as an "economic hedge" or "non-designated hedges". The Company's foreign exchange arrangements in 2009, 2010 and 2011 were not designated as hedging instruments and represented economic hedges. Changes in the fair value of these non-designated hedging instruments are recognized in the expense line item in the consolidated statement of income that is consistent with the nature of the hedged risk.

The tabular disclosure of the effect of the forward transactions on the consolidated statement of income is presented below:

	Location of gain (loss) recognized in the consolidated statement of income	2009		2010		2011

Foreign exchange forward contract	Foreign currency gains (losses)	$	1,112	$	513	($	1,027	)

It is the Company's policy to enter into foreign currency derivative transactions only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into these transactions or any other hedging transactions for speculative purposes.

The Company's revenues sold through Video International accounted for 94% of total operating revenues of $506,113 in 2009 and 92% of total operating revenues of $601,285 in 2010. Effective 2011, most of the Company's sales are made through its internal sales house (See Note 14—"Television advertising sales"). The Company's revenues received from the top ten advertisers accounted for 30% of the Company's total operating revenues of $766,360 in 2011.

The Company has assets recorded on its consolidated balance sheet, such as broadcasting licenses and goodwill, which have indefinite lives and represent a significant portion of the Company's total assets. Assets with indefinite useful lives are not subject to amortization but are tested for impairment annually, in the fourth quarter, or between annual tests if events or changes in circumstances indicate that an asset might be impaired. Outside the annual review, there are a number of factors which could trigger an impairment review, including under-performance of operating segments or changes in projected results; changes in the manner of utilization of an asset; severe and sustained declines in the traded price of the Company's common stock that are not attributable to factors other than the underlying value of its assets; negative market conditions or economic trends; and specific events, such as new legislation, new market entrants, changes in technology or adverse legal judgments that the Company believes could have a negative impact on its business.

The economic slowdown experienced in the second half of 2011, in both the European and global economies, has resulted in reduced advertiser demand. The instability in the macroeconomic environment adversely affected the Company's expectation on the total advertising market in medium-term, and in turn, affected the fair values of certain of the Company's assets as of December 31, 2011. As of the year ended December 31, 2011, the Company recorded non-cash impairment losses totaling $106,382 related to certain intangible assets and goodwill. Of the total impairment losses, $23,558 related to the impairment of certain broadcasting licenses and $71,688 related to impairment of Peretz goodwill, recorded in connection with the acquisition of DTV Group in 2008 (effective October 2011 operating under "Peretz" brand). In addition, of the total impairment losses, $11,136 related to impairment of DTV trade name as result of the re-branding of the channel.

Further downturns in macroeconomic environment, particularly the global economic recession, may further adversely affect the total advertising market, and in turn, the fair values of the respective assets or reporting units. See Note 10 for valuation sensitivity discussions.

The Company considers all current information in respect of determining the need for or calculating any impairment loss, however, future changes in events or circumstances, such as adverse changes in the economy and television advertising market, further decreases in the Company's audience shares or ratings, increased competition from cable or other providers, or changes in the audience measurement system could result in decreases in the fair value of the Company's intangible assets and may require the Company to record additional impairment losses that could have an adverse impact on its net income. In addition, the Russian government has announced plans to introduce digital broadcasting in various stages throughout Russia. The specific terms of the transition are not yet fully determined. The transition to digital broadcasting also could adversely impact the Company's operations or the value of its broadcasting licenses and goodwill.

The Company has commitments to purchase programming rights, for which the license period has not started or the underlying program is not yet available. As of December 31, 2011, such commitments amounted to $222,838 (at the US dollar/ruble exchange rate as of December 31, 2011). The Company is obligated to pay $160,716, $49,461 and $12,661 in 2012, 2013 and 2014, respectively, under these commitments.

In addition, the Company has commitments to purchase format rights. As of December 31, 2011, these commitments amounted to $1,346 (at the US dollar/ruble exchange rate as of December 31, 2011), all of which is payable in 2012.

The Company also has commitments to purchase transmission and satellite services. As of December 31, 2011, these commitments amounted to $102,875 (at the US dollar/ruble exchange rate as of December 31, 2011), of which $17,581, $19,149, $20,842, $22,439 and $22,864 is payable in the years from 2012 to 2016, respectively. The amounts for these commitments depend on future inflation rates in Russia, which could change the prices for such services.

The Company also has commitments for cable connections to secure the right of our stations to be connected by cable to additional households. As of December 31, 2011, these commitments amounted to $8,829 (at the US dollar/ruble exchange rate as of December 31, 2011), which is payable in the years from 2012 through 2016.

The Company has several operating leases for satellite transponders and office space with terms ranging from one to eleven years.

On December 30, 2010, the Company entered into definitive lease agreements in respect of new headquarter facilities in Moscow. These definitive leases have retroactive effect from November 17, 2010. Pursuant to the lease agreements, the Company is leasing an aggregate of 7,000 square meters of office space in an office building in central Moscow. The lease agreements have 10-year initial terms and the Company has the right to extend the term for an additional 10-year period, at the current market rate. The base rent is approximately $0.420 per square meter per annum (at the exchange rate as of December 31, 2011), for a total of approximately $2,936 per year inclusive of all taxes and levies and exclusive of VAT. On April 4, 2011, the Company entered into definitive lease agreements in respect of additional space of 2,365 square meters in these headquarters. The lease agreements have 10-year initial terms and the Company has the right to extend the term for an additional 10-year period, at the current market rate. The base rent is approximately $0.465 per square meter per annum (at the exchange rate as of December 31, 2011), for a total of approximately $1,101 per year inclusive of all taxes and levies and exclusive of VAT. In 2011, the Company recognized rental expense related to these leases of $4,802 and expects to recognize rental expense under these leases of approximately $40,586 for 2012-2020 (at the US dollar/ruble exchange rate as of December 31, 2011). In addition to the lease payments described above, the Company is also required to pay technical costs arising from maintenance of the premises, taxes and some supplementary municipal services, in total amount of $558.

Total operating lease expenses were $4,950, $5,130 and $6,905 in 2009, 2010 and 2011, respectively.

As of December 31, 2011, future minimum lease payments (including the lease of new headquarters facilities described above) are as follows:

For the year ended December 31,

2012		4,775
2013		4,878
2014		5,004
2015		5,129
2016 and thereafter		28,804

	$	48,590

The Company's policy is to accrue for contingencies related to non-income taxes in the accounting period in which the liability is deemed probable and the amount is reasonably determinable. In this regard, because of the uncertainties associated with the Russian tax system, the Company's final Russian taxes may be in excess of the estimated amount expensed to date and accrued at December 31, 2010 and December 31, 2011. This is due to a combination of the evolving nature of applicable tax legislation, varying approaches by regional and local tax inspectors, and inconsistent rulings on technical matters at the judicial level. The tax authorities from time to time have also aggressively imposed material tax assessments on Russian businesses, at times without a clear legislative basis.

As of December 31, 2010 and December 31, 2011, the Company included accruals for contingencies related to non-income taxes totaling $5,023 and $2,722, respectively, as a component of accrued liabilities, including amounts relating to pre-acquisition operations of the Channel 31 Group of $3,589 and $1,700, respectively.

Additionally, the Company has identified possible contingences related to non-income taxes, which are not accrued. Such possible non-income tax contingencies could materialize and require the Company to pay additional amounts of tax. As of December 31, 2011, management estimates such contingencies related to non-income taxes to be up to approximately $1,200.

It is the opinion of management that the ultimate resolution of the Company's tax liabilities, to the extent not previously provided for, will not have a material effect on the financial condition of the Company. However, depending on the amount and timing of an unfavorable resolution of any contingencies associated with taxes, it is possible that the Company's future operations or cash flows could be materially affected in a particular period.

All broadcast television stations in Russia are required to have broadcasting and other operating licenses. Only a limited number of such licenses are available in each locality. These licenses generally require renewal every five years. Pursuant to legislation that came into force in November 2011, the term of broadcast licenses will be extended to ten years, and new licenses will cover both digital and analog broadcasting.

A broadcaster must conform its programming to the programming concept outlined in the broadcasting license. In particular, the broadcaster is obliged to ensure compliance of its programming with the declared genres of the channel and to sustain the necessary balance in a volume-genre ratio of broadcasted materials both prescribed in the license.

In November 2011, the federal law "Improving Regulation of Mass Media, Television and Radio Broadcasting" came into force and introduced the new concept of a so-called "universal license". A universal license permits the channel to broadcast through free-to-air, cable and satellite broadcasting, in either digital or analog format. Currently, it is uncertain how this law will be interpreted by the applicable authorities.

The broadcasting license of Channel 31 in Kazakhstan contains various restrictions and obligations. Recently, the Kazakh government enacted a law that requires that broadcasters broadcast at least 50% of their programming in the Kazakh language during every six-hour slot.

The Company may not always be in full compliance with these requirements. Also, the Company's independent affiliates have not always been in full compliance with all requirements of their licenses or obtained all the licenses necessary for broadcasting. If the terms of a license are not complied with, or if a television station otherwise violates applicable Russian legislation or regulations, the license, after a warning notice from the regulator, may be suspended or terminated (which decision may be appealed in court). If an independent affiliate were to broadcast without all the necessary licenses, broadcasting may be terminated and fines could be imposed. Management believes that the probability of initiation of action against any material owned-and operated station or independent affiliate is remote.

In accordance with Russian legislation, joint stock companies must maintain a level of equity (net assets) that is greater than its charter capital. In the event that a company's net assets, as determined under Russian accounting legislation, fall below certain minimum levels, specifically below zero, the company can be forced to liquidate.

Certain of the Company's regional subsidiaries have had, and some continue to have, negative equity as reported in each of their Russian statutory financial statements. Management believes that the risk of the initiation of statutory liquidation procedures or other material adverse actions is remote. However, if such actions were taken, it could have a material adverse effect on the Company's results of operations, financial position and operating plans.

In the ordinary course of business, the Company may be party to various legal and tax proceedings, and subject to claims, certain of which relate to the developing markets and evolving fiscal and regulatory environments in which the Company operates. In the opinion of management, the Company's liability, if any, in all pending litigation, other legal proceedings or other matters, will not have a material effect upon the financial condition, results of operations or liquidity of the Company.