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. 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, resulted in reduced growth in the advertising market. In the first half of 2012, the Russian and Kazakh governments continued to take measures to support their economies in order to overcome the consequences of the economic downturn. A continuation of this economic downturn could adversely affect further economic growth, access to capital and cost of capital, advertisers and business confidence, which could negatively affect the Company's future financial position, results of operations and business prospects. Despite some indications of recovery there continues to be uncertainty regarding further economic growth in Russia, the depth and duration of the European area recession, and consequently the extent of the global economic slowdown, which could negatively affect the Company's future financial position, results of operations and business prospects.

Although 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 resulted in reduced advertiser demand. The instability in the macroeconomic environment adversely affected the Company's expectations for the total advertising market in the 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 $106,382 related to certain intangible assets and goodwill. For a discussion of the 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. The Peretz reporting unit and the Peretz umbrella license, as well as several regional broadcasting licenses, are the most sensitive to changes in television advertising growth assumptions. During the first half 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.

In addition, the Production Group reporting unit is highly sensitive to the volume of programming that the Company produces in-house. As of December 31, 2011, the Company concluded that, based on management's projections of internally-produced volumes, the fair value of the Production reporting unit exceeds its carrying value by more than 15%. A significant decline in in-house production compared with planned volumes, or downward revisions of long-term projections, could result in decreases in the fair value of the Production Group reporting unit, and the Company may then be required to record an impairment of goodwill of this segment. As of June 30, 2012, there were no downward revisions to the Company's in-house production 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.

In addition, the Russian government has announced plans to introduce digital broadcasting in various stages throughout Russia, with several packages of digital signals, or "multiplexes", to be launched over time. The specific terms of the transition have not yet been fully determined. The Company's channels are not included in first multiplex; In August 2012, the Russian press reported that the Russian Prime Minister had ordered the Ministry of Communications to hold a tender for the second multiplex by the end of 2012. In addition, media reports have indicated that, according to the Ministry of Communications, each channel participating in the second multiplex is expected to pay up to $30 million annually to fund the construction of the infrastructure and signal transmission. These costs will be specified after the exact terms of the tender are established. The Company has begun preparation for the tender process. However, the Company will assess, based on its economic modeling, the value of the participation of each of its CTC, Domashny and Peretz channels in the tender for the second multiplex after the specific terms, including the costs of investments and legal framework, have been specified. To date, no information on these terms is available.

Depending on the terms of the digital transition and the related regulatory framework, the Company may revise its estimates of the useful lives of its existing broadcasting licenses from indefinite to definite lives. As of June 30, 2012, the carrying value of its broadcasting licenses, which are recorded as indefinite-lived intangible assets, totaled $160 million. If there are indicators that the life of these assets are no longer indefinite, the Company must first test these assets for impairment, and then prospectively amortize these assets over their estimated remaining useful lives. These impairment losses and subsequent amortization, if required, could significantly impact the Company's earnings.

The estimate of economic useful lives is highly dependent on the particular milestones of the transition to digital broadcasting and the related regulatory framework and on the historical experiences of such transitions in other countries. In order to evaluate the sensitivity of the impact of the revision of useful lives to the Company's earnings, the Company assumed hypothetical terms ranging from 2015 to 2020. Based on information currently available, the revision of useful lives of broadcasting licenses from indefinite to definite until 2015 would result in impairment charges of broadcasting licenses of approximately $96 million and a subsequent annual amortization charge of approximately $17 million through 2015; the revision of useful lives of broadcasting licenses from indefinite to definite until 2020 would result in impairment charges of broadcasting licenses of approximately $39.5 million and a subsequent annual amortization charge of approximately $13.4 million through 2020. This sensitivity analysis assumes a hypothetical revision of economic lives, and it does not consider the effect of changes on other key assumptions; in addition, the sensitivity analysis does not consider any changes in business modeling that could occur to mitigate the impact of any adverse changes in operations.

In addition, the transition to digital broadcasting could also impact the Company's historical economic models and its assessment of the carrying value of its goodwill. As of June 30, 2012, the carrying value of goodwill related to the CTC, Domashny and Peretz reporting units was $47.9 million, $15.8 million and $56.6 million, respectively. Depending on the terms of transition to digital broadcasting and the Company's decisions regarding participation in the tender for the second multiplex, the Company could revise its projected cash flows, which could adversely impact the fair value of its reporting units.

The Company believes that the introduction of digitalization will not adversely affect its existing analog broadcasting in the medium term as its channels will continue to broadcast in the analog format under existing analog licenses until the full transition to digital format is completed. However, there is currently great uncertainty regarding the timeframe for implementation of digital broadcasting with respect to each of the multiplexes and regions to be covered. Subject to the availability of further information from the government and market participants, and the Company's ability to make further assessments of the government's plans, we are unable to determine if impairment and amortization charges may be required in the foreseeable future.

The Company considers all current information in 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 its 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 the 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. In the three months ended June 30, 2012, the Russian ruble depreciated by 11% against the US dollar, and was on average 10% lower than the average value of the Russian ruble compared to the US dollar during the three months ended June 30, 2011. In the six months ended June 30, 2012, the Russian ruble depreciated by 2% against the US dollar, and was on average 7% lower than the average value of the Russian ruble compared to the US dollar during the six months ended June 30, 2011. If the exchange rate between the ruble and the US dollar were to depreciate further, 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 fair values of the Company's derivative assets of $1,743 and derivative liabilities of $677 have been classified as Level 2. The fair value of the Company's foreign exchange forward contracts is determined based on the present value of future cash flows using market-based observable inputs such as forward rates, discount rates and foreign currency exchange rates. Counterparty credit risk did not have a material impact on derivative fair value estimates. The Company's derivative instruments are short-term in nature, primarily one month to one year in duration.

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:

	Balance sheet location	December 31, 2011	June 30, 2012

Assets:
Derivatives designated as hedging instruments:
Foreign exchange forward contract	Other current assets	$—	$1,287

Total		$—	$1,287

Derivatives non designated as hedging instruments:
Foreign exchange forward contract	Other current assets	$—	$456

Total		$—	$456

Liabilities:
Derivatives designated as hedging instruments:
Foreign exchange forward contract	Accrued liabilities	$—	$677

Total		$—	$677

From January 2012, the Company entered into certain foreign exchange forward contracts designated as fair value hedges to protect the value of its existing foreign currency 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. The notional amount of these foreign exchange forward contracts was $22,829 as of June 30, 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 for the periods presented:

		Three months ended June 30,			Six months ended June 30,

	Location of gain (loss) recognized in the statement of income (loss)	Three months ended June 30,			Six months ended June 30,
Fair Value Hedging Instrument		2011	2012		2011	2012
Foreign exchange forward contract	Foreign currency gain (loss)	$—	$1,104		$—	$(505	)
Hedged items	Foreign currency gain (loss)	$—	$(1,271	)	$—	$180

Total		$—	$(167	)	$—	$(325	)

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 half 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 $4,000 as of June 30, 2012. The following tabular disclosure summarizes the effect of the Company's outstanding economic hedges as of the dates presented:

		Three months ended June 30,		Six months ended June 30,

	Location of gain recognized in the statement of income	Three months ended June 30,		Six months ended June 30,
Fair Value Hedging Instrument	Location of gain recognized in the statement of income	2011	2012	2011	2012
Foreign exchange forward contract	Foreign currency gain	$—	$1,089	$—	$595

The table below summarizes information with respect to the Company's commitments as of June 30, 2012:

	Total	Through 2012	2013	2014	2015	2016

	(in thousands)
Acquisition of programming rights	$266,508	$139,152	$92,004	$31,068	$4,284	$—
Transmission and satellite fees	$98,169	$10,040	$20,577	$21,367	$22,523	$23,662
Leasehold obligations	$32,625	$3,201	$6,779	$7,162	$7,551	$7,932
Cable connections	$5,425	$757	$1,167	$1,167	$1,167	$1,167
Acquisition of format rights	$3,158	$3,158	$—	$—	$—	$—
Payments for intellectual rights	$3,331	$328	$694	$732	$770	$807
Network affiliation agreements	$6,727	$1,452	$1,988	$1,847	$1,273	$167
Other contractual obligations	$1,401	$855	$469	$24	$26	$27

Total	$417,344	$158,943	$123,678	$63,367	$37,594	$33,762

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 June 30, 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 may take a more assertive position in their assessment of the legislation and it is possible that transactions and activities that have not been challenged in the past may be challenged retroactively.

As of December 31, 2011 and June 30, 2012, the Company included accruals for contingencies related to non-income taxes totaling $2,722 and $2,911, respectively, as a component of accrued liabilities, including amounts relating to pre-acquisition operations of the Channel 31 Group of $1,700 and $1,688, respectively.

Additionally, the Company has identified possible contingences related to non-income taxes that are not accrued. Such possible non-income tax contingencies could materialize and require the Company to pay additional amounts of tax. As of June 30, 2012, management estimates such contingencies related to non-income taxes to be up to approximately $1,277.

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.

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 historically generally required renewal every five years, and starting November 2011, every ten years. Also, in November 2011, the federal law "Improving Regulation of Mass Media, Television and Radio Broadcasting" came into force and introduced a standard license term of ten years, as well as 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. Kazakh law currently 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 the 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. 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. In July 2012, the plaintiffs further amended the claim to decrease the amount of damages and remove their claim for joint liability. As of the date of this report, the plaintiffs have not provided support for these claimed damages. The court has scheduled a hearing on the merits of the plaintiffs' claim for August 29, 2012.

The Company believes it has meritorious defenses against the claim. The Company has reassessed the probability of an unfavorable outcome in the case and the minimum amount of damages that it has determined to be probable as of the balance sheet date; such amount is not material. Management is unable to estimate any additional losses that may reasonably be incurred with respect to this matter at this time.

The Company intends to continue 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 within one year.