Russia and Kazakhstan continue to implement economic reforms and to develop the legal, tax and regulatory frameworks to support 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 their 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 continuation of this economic downturn could adversely affect further economic growth, access to capital and cost of capital, which could negatively affect the Company's future financial position, results of operations and business prospects. In the three months ended March 31, 2012, the Russian and Kazakh governments continued to take measures to support their economies in order to overcome the consequences of the economic downturn. Despite some indications of recovery there continues to be uncertainty regarding further economic growth, access to capital and cost of capital, which could negatively affect the Company'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.

The Company has assets recorded on its consolidated balance sheet, such as broadcasting licenses, trademarks 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 our expectations for 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. For the year ended December 31, 2011, the Company recorded non-cash impairment losses totaling $106.4 million related to certain intangible assets and goodwill. For discussion on sensitivity of major assumptions on fair values of indefinite-lived assets, refer to the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2011. Peretz reporting unit and Peretz umbrella license, as well as several regional broadcasting licenses are the most sensitive to changes in the television advertising growth assumptions. During the first quarter of 2012, internal and external estimates of the TV advertising markets in which the Company operates were for the most part unchanged and there were no downward revisions to the Company's internal cash flow projections. There were no indicators of additional impairment for the Company's goodwill or long-lived assets, and the Company was not required to record any additional impairment charges.

The Company considers all current information in respect of determining the need for impairment loss; however, future changes in events or circumstances, such as a continuation or worsening of the current economic instability, decreases in audience shares or ratings, increased competition from cable providers or others, or changes in the audience measurement system, could result in decreases in the fair value of our long-lived assets and require the Company to record additional impairment charges that could have a material adverse impact on its net income.

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. In the three months ended March 31, 2012, the Russian ruble appreciated against the US dollar by 8.9%, but was on average 3% lower than the average value of the Russian ruble compared to the US dollar during the three months ended March 31, 2011.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, would be adversely affected.

As part of its risk management strategy, the Company uses derivative financial instruments, primarily foreign exchange forward contracts, to mitigate its exposure to currency exchange risk related to US-dollar denominated payments. The Company's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. 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 following table summarizes the fair value of the Company's assets and liabilities related to derivative financial instruments and the respective line items in which they were recorded in the Company's condensed consolidated balance sheets as of the dates presented:

		March 31,

	Balance sheet location	2011		2012
Assets:
Derivatives designated as hedging instruments:
Foreign exchange forward contract	Other current assets	$	—	$	1,034

Total		$	—	$	1,034

Derivatives non designated as hedging instruments:
Foreign exchange forward contract	Other current assets	$	—	$	224

Total		$	—	$	224

Liabilities:
Derivatives designated as hedging instruments:
Foreign exchange forward contract	Other current liabilities	$	—	$	2,150

Total		$	—	$	2,150

From January 2012, the Company entered in certain foreign exchange forward contracts designated as fair value hedges to protect the value of its existing foreign currency assets, liabilities and firm commitments. For these derivative instruments that were designated and qualify as fair value hedges, the Company recognized the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item immediately in the foreign currency gain (loss) on the condensed consolidated statement of income (loss). The notional amount of these foreign exchange forward contracts was $42,800 as of March 31, 2012. The following tabular disclosure summarizes the effect of the Company's derivative financial instruments designated as fair value hedges on the condensed consolidated statement of income (loss) for the periods presented:

		March 31,

	Location of gain (loss) recognized in the statement of income (loss)	March 31,
Fair Value Hedging Instrument		2011		2012
Foreign exchange forward contract	Foreign currency gain (loss)	$	—	$	(1,609	)
Hedged items	Foreign currency gain (loss)	$	—	$	1,451

Total		$	—	$	158

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". Changes in the fair value of these non-designated hedging instruments are recognized in the expense line item in the condensed consolidated statement of income that is consistent with the nature of the hedged risk. During the first quarter of 2012, the Company entered into short-term non-designated hedges to mitigate its exposure related to US-dollar denominated payments of dividends. The notional amount of these foreign exchange forward contracts was $12,000 as of March 31, 2012. The following tabular disclosure summarizes the effect of the Company's outstanding economic hedges as of the dates presented:

The table below summarizes information with respect to our commitments as of March 31, 2012:

	Total		Through 2012		Through 2013		Through 2014		Through 2015		Through 2016

	(in thousands)
Acquisition of programming rights	$	265,477	$	162,641	$	74,488	$	28,348	$	—	$	—
Transmission and satellite fees	$	105,582	$	15,563	$	20,994	$	21,904	$	22,988	$	24,133
Leasehold obligations	$	26,915	$	4,023	$	5,411	$	5,598	$	5,820	$	6,063
Cable connections	$	10,016	$	3,553	$	1,720	$	1,581	$	1,581	$	1,581
Acquisition of format rights	$	2,700	$	2,700	$	—	$	—	$	—	$	—
Payments for intellectual rights	$	3,825	$	734	$	776	$	774	$	772	$	769
Network affiliation agreements	$	2,531	$	663	$	596	$	570	$	524	$	178
Other contractual obligations	$	1,713	$	708	$	1,005	$	—	$	—	$	—
Total	$	418,759	$	190,585	$	104,990	$	58,775	$	31,685	$	32,724

Leasehold obligations—The Company has several operating leases for satellite transponders and office space with terms ranging from one to eleven years. Pursuant to the lease agreements, the Company is leasing an aggregate of 9,365 square meters of office space in an office building in central Moscow, with annual rent fees of $4,432 (at the exchange rate as of March 31, 2012). 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 the total amount of $613 annually.

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, 2011 and March 31, 2012. 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 have also aggressively imposed material tax assessments on Russian businesses, at times without a clear legislative basis.

As of December 31, 2011 and March 31, 2012, the Company included accruals for contingencies related to non-income taxes totaling $2,722 and $2,800, respectively, as a component of accrued liabilities, including amounts relating to pre-acquisition operations of the Channel 31 Group of $1,700 and $1,707, 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 March 31, 2012, management estimates such contingencies related to non-income taxes to be up to approximately $1,272.

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. 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.

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

The broadcasting license of Channel 31 in Kazakhstan contains various restrictions and obligations. Recently, the Kazakh government enacted a law requiring 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 their 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 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 late 2011, a lawsuit was filed in Russia against the Company (Peretz Channel) and other unrelated parties concerning alleged patent infringement in connection with a process used in a TV program aired in 2009 and 2010. As of December 31, 2011, the Company assessed any potential liability as not material. In March 2012, the plaintiffs filed an amended claim substantially increasing the amount of damages sought and alleging joint liability on the part of the Company and the other defendants. Under Russian law, plaintiffs may recover the full claimed amount from any of the defendants found to be jointly liable.

As of the date of this report, the plaintiffs have not provided support for their claimed damages, as instructed by the court during preliminary hearings. The Company intends to vigorously defend this claim. Although the course and outcome of litigation cannot be predicted with certainty, the Company expects that this matter will be resolved in the next year. The Company has reassessed the minimum amount of damages that it has determined to be probable; such amount is not material. If the Company is unsuccessful in defending this claim, it is possible that the damages could be significant, but management is unable to estimate any additional losses that are reasonably possible of being incurred in this matter at this time. As of the date of this report, a court date has not been established to commence hearings on the merits of this case.