Risk Management & Interna Control


Risks are an inherent part of doing business. X5, as any other company, is constantly dealing with risks and opportunities that can either negatively or positively influence its business. In order to minimise the negative impact of risks and to capitalise on opportunities, X5 has introduced a risk management and internal control system geared to providing transparency in our operations while being mindful of our risk appetite.

The overall objective of this system is to obtain reasonable assurance that the Company’s goals and objectives are achieved and that the resources used for this are effectively employed.

Our risk management system is designed both to encourage entrepreneurial spirit and provide sufficient assurance that risk is fully understood and managed through a systematic process of risk identification, assessment and control.

We do, however, understand that risk management and internal control gives a reasonable, but not an absolute guarantee that we will achieve our objectives, because:

  • Risk identification and assessment are almost always subject to uncertainty as they deal with the future;
  • Certain risks are out of the Company’s control, thus cannot be fully mitigated;
  • Some control procedures may be degraded by human errors, carelessness, and errors of judgment or misunderstanding.


The Management Board, supported by the Executive Board has primary accountability for managing the risks associated with our activities, and for the establishment and adequate functioning of appropriate risk management and control systems.

The Supervisory Board and its Audit Committee, as stated in Corporate Governance section of this Annual Report, is responsible for overall supervision and monitoring activities with respect to the internal control and risk management system.


The risk management and internal control process at X5 is guided by the recommendations of the Committee of Sponsoring Organizations (COSO) and its Enterprise Risk Management – Integrated Framework and Internal Control – Integrated Framework.

X5 maintains a Key Risk Register that covers the key risks faced by the Company, key risk owners and controls and procedures to be implemented for mitigating those risks. The content of the Register is determined through regular discussions with senior management and reviewed by the Executive Board and the Audit Committee.

Risk Profile

This section describes the main risks X5 currently faces that can have a significant impact on the achievement of the Company’s strategic goals and objectives. X5 is exposed to additional risks that apply to all companies operating on the Russian market, and the retail market globally, as well as other risks that are not presently known to us.

Following the economic recovery at the end of 2010, the consumer environment softened in the second half of 2011, impacted by reduced consumer confidence and disposable incomes, and food and fuel price volatility. This affected X5’s sales and like-for-like performance in 2011. However, the underlying industry fundamentals in Russia remain solid, with a growing modern retail penetration rate.

  • X5’s leadership in the Russian retail market depends largely on how well we define our strategy in the context of the macroeconomic and competitive industry environment, and how well we communicate and execute on the right strategic vision.

To ensure that the Company continues to pursue the right strategy, the Supervisory Board and its Strategy Committee, together with senior management, hold specific sessions on all key aspects of X5’s business, to review internal and external issues that could influence our strategy.

Our strategic initiatives are described in detail in the “Letter from the Chief Executive Officer” section of this Annual Report.

We believe that by choosing and pursuing a proper and well-executed strategic vision we strengthen our leadership position in the Russian retail market, and achieve long-term profitable growth for the benefit of our stakeholders.

Human Resources
Our success in achieving the Company’s strategic objectives relies heavily on the dedication of our employees and the effectiveness of our organisation. In order to be a desirable employer, we recruit, develop and reward employees by following leading HR practices. We constantly assess HR policies in order to effectively address the following risk factors:

  • Our ability to recruit, train and retain the optimal number of staff at both managerial and operational levels;
  • Our ability to create a balanced organisational structure that enables and motivates personnel to achieve key objectives;
  • The success of our organisational transformation in fostering a new corporate culture, with strong internal communication and decision-making processes.

A competitive compensation package is provided to our executive and line managers, whose performance is evaluated through key performance indicators (KPIs) to ensure alignment with the Company’s goals.

Due to X5’s rapid growth we are continually hiring a significant number of new employees from the labour market and are constantly improving and developing new recruitment methods. We have a strong commitment to our employees’ integration and education, with programmes in place to develop and promote talented employees through vertical and horizontal career-building opportunities. Corporate events and activities help us build a strong, motivated workforce eager to achieve X5’s objectives.

Our ongoing results and expansion plans for the future are significantly influenced by:

  • Our ability to find and eff ectively manage retail locations and negotiate appropriate purchase and lease terms;
  • Eff ective development and implementation of plans and procedures to support organic growth.

X5’s management pays particular attention and allocates significant resources to optimising its organic expansion strategy and supporting processes. When identifying and leasing or purchasing suitable properties, our internal real estate professionals perform comprehensive feasibility studies to identify and reduce risks of not obtaining necessary approvals from various state and local authorities for construction work, and to secure X5’s right to proceed with store openings and refurbishments. Our investment decisions are supported by a range of financial and non-financial indicators to ensure that we obtain attractive facilities at attractive prices.

In addition to organic growth, selective acquisitions of attractive retail chains are an important part of X5’s expansion strategy. Success requires proper identification and valuation of appropriate acquisition targets by our experienced M&A team. Upon completion of M&A transactions, successful acquisitions depend to a great extent on:

  • Our ability to effectively integrate the acquired business to realize the full economies of scale and synergy potential.

To ensure timely and effective integration, a special integration team with representatives from all major business functions is created. The team develops and delivers detailed integration plans, taking into account lessons learned from previous integration processes. Importantly, our integration team is monitored, assessed and held directly accountable for results.

Our customers are our main focus. In order to provide them with the best quality of goods and services on the market at a reasonable price, we constantly analyse and improve key operational processes such as assortment management (including private label), pricing, supplier relationships, merchandising, sales and customer management. The key risks and focus of our attention are:

  • Our ability to define assortment that is in line with customer needs;
  • Effective relationships with suppliers and producers of private label goods to support adequate availability of supply while meeting our quality standards;
  • Our ability to establish strict food safety and quality control policies and procedures and ensure full adherence to these at all times;
  • Our ability to maintain a competitive price position with our customers and remain socially responsible;
  • Eff ective inventory management to ensure the continuous flow of a wide selection of goods to our customers, while minimising shrinkage and excessive stock;
  • Transport and warehouse logistics infrastructure and management systems to ensure efficient distribution across the entire supply chain.

Our corporate responsibility commitments, including community activities, HR development and food product safety procedures are described in the “X5 and Society” section of this Annual Report.

Business Support
In order to support current growth plans and build a foundation for future development, X5 invests in required IT infrastructure and business support processes. The key risk factors associated with these are:

  • Adequacy of IT facilities and systems for ensuring business continuity and supporting the growth of our business;
  • Availability of internal electronic and physical document-flow systems.

During 2011, the implementation of SAP for HR and SAP for Retail reached its final stage, bringing tangible results to operational efficiency. Additionally, a new project for financial planning and budgeting was successfully launched and has already delivered early positive results. We believe that these systems should provide a strong platform that not only supports our Company’s development, but also enhances internal control of major processes and drives Company-wide efficiency gains.

Financial and Management Reporting
Implementation of SAP for Finance during 2011 supports preparation of IFRS and Russian statutory accounts as well as automation of consolidated IFRS reporting. In addition, SAP for Finance reduces the risk of failure of proper recording and classification of accounting transactions and has improved our ability to make accurate and reliable business projections estimates. A crucial risk factor in this area is:

  • Availability of effective and reliable management reporting systems that support analysis of business results and strengthen decision–making processes.

SAP for Finance will facilitate the improvement of internal controls over the financial reporting process and the availability of a wide range of management reports to support decision-making.


  • Effective resource management depends to a significant extent on our ability to prevent and detect corruption and fraud at all levels in the Company.

Whilst we continually strive to ensure adherence to X5’s high integrity standards among our staff , the potential for fraud and other inappropriate activity exists at all levels of the business, from store level to senior management. X5 provides clear guidance on expected behaviour to its employees through the communication of the Company values and Guiding Principles of Business Conduct. The Company constantly emphasises its Corporate Code for Reporting of Alleged Irregularities (“Whistleblower Policy”) and operates an ethics hotline. The Fraud Investigation Team of the Corporate Audit Department, and in some cases the Security Department, investigate allegations of fraud. The findings of such investigations are reported to the CEO, CFO, the Executive Board, the Management Board, and the Supervisory Board and its Audit Committee, as necessary.

Regulatory Environment

The procedures for obtaining and renewing licences and permits required by X5’s operations and with respect to various quality, health and safety, packaging, labeling and distribution standards are subject to supervision and regulation by various government authorities and agencies. Russia is in a process of structural, economic and political transition, and the regulatory regimes applicable to X5’s operations are still developing. Operating successfully in this regulatory environment thus depends on:

  • Our ability to identify, quickly respond to and attempt to modify proposed unfavourable changes in applicable laws and regulations stemming from changes in political and economic conditions;
  • Our ability to correctly interpret and establish compliance with newly applicable standards in a timely manner.

The Company monitors regulatory developments and enforces a strong compliance regime. Moreover we engage with public and governmental organisations to ensure that the interests of our customers are represented. In addition, X5 is consulted on and invited to contribute to important government regulations concerning the retail industry.

Legal Risks
X5 is exposed to pervasive contractual and litigation risks due to the Company’s operational scale, number of employees and scope of commercial activities including interactions with suppliers and vendors as well as real estate and M&A transactions.

Our legal team participates in every stage of important business activities and analyses contract terms to minimise risks. In addition, we protect ourselves by seeking to comply with all applicable laws and regulations, and by vigorously preparing and defending our position in litigation and enforcing our rights in relation to contracts, using all means provided by law.

Russian tax, currency and customs legislation is subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to X5’s transactions and activities could be challenged by the relevant regional and federal tax authorities.

Management regularly reviews the Company’s compliance with applicable tax legislation, regulations and decrees, including current interpretations published by governmental authorities. It also thoroughly reviews judicial precedents resulting from tax disputes involving other companies operating in Russia. The Company further protects itself against tax risks by establishing appropriate provisions in its IFRS consolidated financial statements.

Note 33, “Commitments and Contingencies” to the ?onsolidated financial statements in this Annual Report contains a description of tax uncertainties and an estimate of the related liabilities.

Financial Risks
The main financial risks faced by Company relate to the availability of funds to meet business needs (liquidity and credit risks) and fluctuations in interest and foreign exchange rates. The central treasury function is responsible for managing the Company’s monetary assets, funding requirements, interest rate, currency and credit exposures and the associated risks, as well as insurance of assets. The treasury function does not operate as a profit centre and speculative transactions are strictly prohibited.

Note 29 “Financial Risks Management” to the consolidated financial statements in this Annual Report contains a detailed description of financial risks faced by the Company and the instruments it employs to mitigate these risks.

Management Summary

The Management Board has reviewed and analysed the risks to which the Company is exposed, as well as the effectiveness of the Company’s internal risk management and control systems over the course of 2011. The conclusions of this review have been shared with the Audit Committee and the Supervisory Board and discussed with X5’s external auditors.

The Management Board believes that the risk management and control systems related to financial reporting risks have functioned properly during the year, and provide reasonable assurance that the Company’s 2011 financial statements do not contain any errors of material importance.

In view of the above, the Management Board believes that it is in compliance with the requirements of II.1.4 and II.1.5 of the Dutch Corporate Governance Code. In addition, in accordance with section 5.25c of the Dutch Financial Supervision Act, the Management Board confirms that to the best of its knowledge:

  • The annual financial statements provide an accurate and fair view of the assets, liabilities, financial position and profit or loss of the Company and its consolidated companies; and
  • The annual report gives an accurate and fair overview of the situation as per the balance sheet date, the state of aff airs during the financial year of the Company and its Group companies included in the annual financial statements, together with a description of the principal risks it faces.

The Management Board
12 April 2012