9. COMMITMENTS AND CONTINGENCIES

Amendment to Mass Media law

On October 14, 2014, President Putin signed into law an amendment to the Russian law "On Mass Media", which will reduce the permitted level of foreign ownership in Russian mass media companies, including television broadcasters, from 50% direct ownership to 20% beneficial ownership or control, direct or indirect. The law does not provide for "grandfathering" of existing foreign ownership interests. The law will come into force on January 1, 2016, by which time each Russian mass media entity, including television broadcasters, must comply with the requirement that non-Russian entities and individuals in the aggregate beneficially own no greater than 20% of the relevant mass media entity. Russian entities and individuals that beneficially own interests in Russian mass media businesses greater than 20% through off-shore holding structures will have an additional year in which to restructure such foreign holding structures.

CTC Media is a Delaware corporation that directly and indirectly owns 100% of the shares of a series of Russian legal entities that operate the CTC business in Russia. CTC Media's Russian operations have historically contributed more than 96% of the group's revenues and net income. CTC Media's stockholders include MTG Russia AB, a Swedish company that is 100% indirectly owned by Modern Times Group MTG AB, a Swedish listed company, which holds approximately 39% of CTCM's outstanding common stock; Telcrest Investments Limited, a Cypriot limited company that we understand is indirectly beneficially owned by Russian entities and individuals, which holds approximately 25% of CTCM's outstanding common stock; and a number of public stockholders, which we understand include numerous US and European investors, which together hold the remaining approximately 36% of CTCM's outstanding common stock. As a consequence, neither the Company nor the current beneficial ownership structure of the group would currently comply with the requirements of the new law. In the event of non-compliance by the stated deadline, the Russian government would have the authority to revoke the mass media registration and broadcasting licenses of our business, and the Company would be unable to exercise its voting rights in its Russian subsidiaries. The enactment of this law therefore creates significant uncertainty regarding the Company's ownership, and may materially adversely affect the value of its common stock.

Our Board of Directors, through its Advisory Committee, is continuing to work with the Company's management and with external legal, financial and tax advisors to identify, evaluate and implement an appropriate response that achieves compliance with the requirements of the new law while safeguarding the interest of all of the Company' stockholders. The Board continues to consider a variety of potential alternatives. These alternatives include a potential sale transaction of the group's Russian businesses or of the shares of common stock of the Company, along with a redomiciliation of the parent company to Russia.

As of the date these financial statements are publicly released, no affirmative decision on the alternatives has been made. Depending on further developments and Board decisions, if the Board were to pursue a sale of the business, there can be no assurance that it would be successful in negotiating a transaction on acceptable terms or at all. In particular, any disposal may not result in proceeds at a level that reflects the underlying value of the Company's business, particularly in light of ongoing volatility of Russian economy and contraction of the advertising market, as well as the limitation of the pool of potential purchasers to Russian persons that are not subject to applicable international sanctions. As a result, the value of the common stock of the Company could further decline.

In addition, the Company's response to this new law will require significant Board and management time and attention, which will continue to distract from the normal operations of the Company's business. A sale or restructuring of the Company's Russian operations may also result in significant taxes, in particular in connection with complex corporate transactions in which the application of tax laws may be unclear.

Operating environment

Economic environment—Significant uncertainty exists surrounding the current geopolitical situation in Ukraine. The United States, the European Union and other countries have imposed economic sanctions on certain Russian government officials, other individuals and certain Russian companies in connection with recent developments in Ukraine and Crimea. Neither the Company, nor any of its Russian subsidiaries or other operations or assets, are a target of current sanctions and the Company does not appear on the United States and European Union lists of sanctioned parties. However, there is significant uncertainty regarding the extent or timing of any potential further economic or trade sanctions, or the ultimate outcome of the Ukrainian crisis. The current situation in Ukraine has negatively affected the Company's sublicensing sales of certain programming in that country and has also had a broader impact on the macroeconomic environment of the region. These factors in conjunction with global macroeconomic weakness, may adversely affect the Company's business.

In 2014 and early 2015, Russia has experienced significant economic instability, characterized by substantial depreciation of its currency, sharp fluctuations of interest rates and a steep decline in the value of shares traded on its stock exchanges. Any continuing economic and political instability, potentially including continued or additional international economic sanctions, could have negative impact on television advertising spending in future periods. If overall spending by the largest multinational advertisers in the Russian television advertising market falls substantially, the Company's advertising revenues may be significantly reduced, materially adversely affecting its results of operations.

Exchange Rate—Although the Company's reporting currency is the U.S. 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 U.S. dollar and the Russian ruble. In the three months ended March 31, 2015, the Russian ruble depreciated against the U.S. dollar by 4%, and was on average 44% lower than the average value of the Russian ruble compared to the U.S. dollar during the three months ended March 31, 2014.

Additionally, given that substantially all of the Company's revenues are generated in Russian rubles, the Company faces exchange rate risk relating to payments that the Company must make in currencies other than the Russian ruble. The Company generally pays for non-Russian produced programming in U.S. dollars. As of March 31, 2015, the Company had U.S. dollar denominated contractual commitments for the acquisition of approximately $39.3 million in programming rights for the remaining of 2015 and $20.3 million in 2016. As of March 31, 2015, U.S. dollar-denominated cash and cash deposits comprised approximately $75.9 million; in addition, as of March 31, 2015, the Company had outstanding foreign exchange forward contract to purchase $3.0 million at an exchange rate of RUR 48.2 to $1, to reduce a portion of its foreign exchange risk related to U.S.-dollar denominated payments. The Company has not entered into any arrangements to reduce the foreign exchange risk with respect to the remaining future U.S.—dollar denominated payments.

The prevailing exchange rate as of March 31, 2015 was RUR 58.46 to $1.00. If the exchange rate between the ruble and the U.S. dollar were further to depreciate, the revenues and operating results of the Company, as reported in U.S. dollars, would be adversely affected.

Transition to Digital Broadcasting—The Company believes that the introduction of digitalization will not adversely affect its ability to broadcast in the medium term, as its channels will continue to broadcast in the analog format under existing analog licenses until the transition to the digital format is completed. However, there is currently great uncertainty regarding the effect of the implementation of digital broadcasting on the Company's business models, as it is difficult to predict accurately how the digitalization of broadcasting may affect the market. While digital broadcasting would increase CTC's and Domashny's overall technical penetration, the necessary investments for digital migration may not be fully monetized. Also, uncertainty exists about Peretz's technical penetration and its impact on advertising revenues. 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.

On an ongoing basis, the Company meets key participants of the media industry and governmental representatives for discussion and analysis of the transition to digital broadcasting, as well as the development of current business and industry initiatives.

Derivative Financial instruments

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 U.S.-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 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 derivative instruments with the notional amount of $6.5 million that were designated and qualify as fair value hedges, the Company recognized loss on the derivative instruments of $0.1 million, as well as offsetting foreign currency gain on the hedged item in its condensed consolidated statement of income for the three months ended March 31, 2015. In addition, during the three months ended March 31, 2015, the Company entered into short-term non-designated hedges with the notional amount of $6.0 million to mitigate its exposure related to U.S.-dollar denominated payments and recognized foreign currency loss of $0.4 million on derivative instruments in its condensed consolidated statement of income for the three months ended March 31, 2015.

Purchase commitments

The table below summarizes information with respect to the Company's commitments as of March 31, 2015:

	Total		Through 2015		2016		2017		2018		2019		2020
	(in thousands)
Acquisition of programming rights	$	127,738	$	96,096	$	31,403	$	239	$	—	$	—	$	—
Transmission and satellite fees		73,062		10,541		14,762		15,593		16,386		7,893		7,887
Leasehold obligations		30,781		3,860		5,444		5,760		5,016		5,451		5,250
Network affiliation agreements		8,100		1,301		1,835		1,912		2,007		510		535
Payments for intellectual rights		13,090		1,500		2,093		2,209		2,323		2,435		2,530
Other contractual obligations		22,104		2,774		3,580		3,777		3,951		4,128		3,894

Total	$	274,875	$	116,072	$	59,117	$	29,490	$	29,683	$	20,417	$	20,096

In addition, in connection with the planned digitalization in Russia and Kazakhstan, the Company will incur additional costs. In March 2013, the Company entered into 10-year transmission agreements with the Russian Television and Radio Network ("RTRS"). Under the terms of these agreements, RTRS will provide to CTC and Domashny all services required for the channels to broadcast their signals in digital format throughout Russia to approximately 140 million viewers, once the rollout of digital broadcasting is complete throughout the territory of the Russian Federation. In July 2014, the Company amended the agreements to specify service fees for 2014 and cash payments for the period from 2014 to 2018. The Company's digital transmission expense related to broadcasting in the cities with populations more than 50,000 ("50+ coverage") will be approximately $4.1 million in 2015 for CTC and Domashny channels in aggregate; the expense for 2016 and beyond will be calculated on an annual basis according to rates that RTRS will set by October 1st of the prior year. In addition, RTRS will construct the digital broadcasting infrastructure in smaller cities with populations less than 50,000 ("50– coverage") until 2018. It is expected that this infrastructure will be put into operation in 2019. Starting from 2014, in addition to the transmission services in the 50+ coverage cities described above, the Company made advance payments of 444 million rubles or $7.6 million towards the construction of the digital infrastructure in the 50– coverage regions for CTC and Domashny channels as of March 31, 2015. In aggregate the Company expects to advance approximately 644 million rubles in 2015, 271 million rubles in 2016, 68 million rubles in 2017 and 51 million rubles in 2018 resulting in total advances of approximately 1,424 million rubles or $24.4 million by the end of 2018 (at an exchange rate of RUR 58.5 to $1.00 as of March 31, 2015). Under the amended terms, these advances will be offset against service payments otherwise required for digital transmission services subsequent to 2018.

In addition, the Company expects to continue incurring analog transmission costs during the analog-to-digital transition period. In 2014, the Company incurred approximately $24 million of such expenses.

Compliance with Licenses terms

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 currently have a standard term of ten years. In addition, the Company holds universal licenses, permitting each of its channels to broadcast through free-to-air, cable and satellite broadcasting, in either digital or analog format.

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.

Legal and Tax Proceedings

In the ordinary course of business, the Company may be party to various legal and tax proceedings, including tax audits, 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.