Other costs and profit tax

Cost of other sales

In 2018, cost of other sales decreased by -USD 10 million to USD 622 million.

Russian rouble depreciation contributed to the reduction of the cost of other sales by -USD 41 million.

Cost of other sales increased in real terms by +USD 31 million primarily due to inflation, higher volumes of services provided by the Group’s transportation subsidiaries, indexation of RUB-denominated salaries and wages, and growth of other services.

Selling and distribution expenses (USD million)
Expense item 2017 2018 Change, %
Transportation expenses 38 39 3
Marketing expenses 14 31 2x
Staff costs 13 14 8
Other 10 8 -20
Total 75 92 23

In 2018, selling and distribution expenses increased 23% (or +USD 17 million) to USD 92 million primarily due to increase of marketing expenses (+USD 17 million), including sponsorship of various sport activities.

General and administrative expenses (USD million)
Expense item 2017 2018 Change, %
Staff costs 478 541 13
Taxes other than mineral extraction tax and income tax 79 103 30
Third party services 97 93 -4
Depreciation and amortisation 32 38 19
Rent expenses 25 23 -8
Transportation expenses 8 9 13
Other 40 52 30
Total 759 859 13

In 2018, general and administrative expenses increased 13% (or +USD 100 million) to USD 859 million. Positive effect of Russian rouble depreciation amounted to -USD 50 million. General and administrative expenses increased in real terms primarily due to the following:

  • +USD 95 million – increase in staff costs mainly due to one-off payments related to bonuses paid for the completion of key projects, changes in the Management Board as well as salary indexation;
  • +USD 29 million – higher property tax owing to changes in tax legislation in 2018 and additions of property, plant and equipment on the books of Polar division and GRK “Bystrinskoye”.
Other operating income and expenses (USD million)
Expense/income item 2017 2018 Change, %
Social expenses 303 207 -32
Change in allowance for obsolete and slow-moving inventory 11 15 36
Change in allowance for expected credit losses 19 6 -68
Net income earned during the pre-commissioning stage – -106 -100
Other, net 29 -27 n. a.
Total 362 95 -74

In 2018, other net operating expenses decreased -USD 267 million to USD 95 million driven by the following factors:

  • Decrease of social expenses by -USD 96 million primarily owing to the completion of large-scale one-off social projects;
  • Net income earned by GRK “Bystrinskoye” from products sale during the hot commissioning stage (-USD 106 million).
Finance costs (USD million)
Expense item 2017 2018 Change, %
Interest expense on borrowings net of amounts capitalized 386 384 -1
Unwinding of discount on provisions and payables 133 100 -25
Changes in fair value of cross-currency interest rate swap – 51 100
Changes in fair value of non-current liabilities – 46 100
Other, net 16 -1 n. a.
Total 535 580 8

Increase in finance costs by 8% y-o-y to USD 580 million was mainly driven by changes in fair value of derivative contracts, namely cross-currency interest rate swaps, and non-current liabilities. Interest expense on borrowings (net of amounts capitalized) marginally decreased.

The Company managed to maintain the average cost of debt at the prior-year level, despite an increase of base interest rates (LIBOR) in the reporting period, as the result of a number of debt optimization initiatives, including:

  • Refinancing some relatively expensive bilateral credit lines with the proceeds of 5-year USD 2.5 billion syndicated term loan, secured by the Company at the end of 2017 at interest rate of Libor 1M+1.50% per annum;
  • Decrease in the effective interest rate on a number of existing credit lines totaling USD 755 million; and
  • Early termination of relatively expensive GRK “Bystrinskoe” Project Finance Loan in August 2018.

Income tax expense

In 2018, income tax expense increased by 17% to USD 843 million driven mostly by the increase of taxable profit, partly offset by Russian rouble depreciation against US Dollar in 2018.

The effective income tax rate in 2018 of 21.6% was above the Russian statutory tax rate of 20%, which was primarily driven by non-deductible social expenses.

Income tax expense (USD million)
Index 2017 2018 Change, %
Current income tax expense 686 812 18
Deferred tax expense 35 31 -11
Total 721 843 17
The breakdown of the current income tax expense by tax jurisdictions (USD million)
Country of presence 2017 2018 Change, %
Russian Federation 672 789 17
Finland 8 11 38
Other countries 6 12 100
Total 686 812 18