Eastnine — Annual Report 2008

Apr 7, 2009

E^{A S T C A P I T A L E X P L O R E R A B}

Annual Report 2008

Contact

Investor Relations- and media contact: Louise Hedberg Head of Communications/IR +46 8 505 97 720 louise.hedberg@eastcapitalexplorer.com

Visiting address: Kungsgatan 30, Stockholm

Postal address: Box 7214 SE-103 88 Stockholm Sweden

www.eastcapitalexplorer.com

Your opinion is very welcome

How can we improve our financial reports, investor service and website? Please email your suggestions or ideas to us at ir@eastcapitalexplorer.com.

Change of address

Changes of address of physical persons who are registered as Swedish residents are made automatically by Euroclear Sweden AB (formerly VPC). Please note that shareholders who have chosen not to have their addresses updated automatically must, themselves, notify their accountoperating institute.

Shareholders whose holdings are registered in the name of a trustee, should notify the trustee as soon as possible of any changes in their name, address or account number. Other shareholders must notify changes of address and changes of account number to Euroclear Sweden AB (formerly VPC), phone: +46 8 402 90 00, e-mail: info@euroclear.eu.

More information about our investment region

Do you want to know more about what happens in our investment region? Please visit our Investment Manager East Capital's website www.eastcapital.com for news, analyses and market comments.

Financial information and calender

• Monthly Net Asset Value report on the fifth working day after the end of each month
• Annual General Meeting in Stockholm on 27 April 2009
• Interim report 1 January 31 March 2009 on 14 May 2009
• Interim report 1 January 30 June 2009 on 20 August 2009
• Interim report 1 January 30 September 2009 on 12 November 2009

The annual report, other financial reports and information as well as press releases, are available on www.eastcapitalexplorer.com. Shareholders and other interested persons may sign-up on the website for a subscription to East Capital Explorer's reports and press releases to be sent directly to their e-mail address. The printed annual report is sent to shareholders who have notified East Capital Explorer that they wish to receive printed financial information from the Company.

AGM 2009

The Annual General Meeting of East Capital Explorer AB (publ) will be held at 4.00 p.m. CET on Monday 27 April 2009 in Grünewaldsalen at Konserthuset in Stockholm, Sweden. Entrance from Kungsgatan 43.

Programme

• 1.30 Registration opens
• 2.00 Seminar on Eastern Europe with representatives from East Capital
• 3.00 Guest presentation with explorer Ola Skinnarmo about his upcoming adventure through the North East Passage 2009, sponsored by East Capital
• 3.30 Coffee break
• 4.00 Annual General Meeting begins

Participation

To be entitled to participate in the Annual General Meeting, shareholders must:

• Be recorded in the register of shareholders maintained by Euroclear Sweden AB (formerly VPC) as per Tuesday, 21 April 2009
• Have notified the company of their attendance no later than 4.00 p.m. CET on Tuesday, 21 April 2009

Notification of attendance may be made:

• On the web: www.eastcapitalexplorer.com/agm
• By e-mail: agm@eastcapitalexplorer.com
• In writing to: East Capital Explorer AB (publ) Att: Sandra Mårtensson Box 7214 SE-103 88 Stockholm Sweden
• By telephone to: Sandra Mårtensson, +46 8 505 977 27

When notifying attendance please state name, personal/company registration number, address, daytime telephone number, e-mail, number of shares as well as any assistants attending (maximum two).

Please note that shareholders whose shares are not registered in the name of a nominee, must temporarily re-register their shares in their own name. Such registration must be in effect with Euroclear Sweden AB (formerly VPC) no later than Tuesday, 21 April 2009. Shareholders are requested to inform their nominees well in advance of this date.

THIS IS EAST CAPITAL EXPLORER

This is East Capital Explorer Wrangel Island
Comment from the CEO
The East Capital Explorer share
Bering Strait RCLE g e n
a

2 4 6

This is East Capital Explorer

How we invest

Our portfolio

HOW WE INVEST

Eastern Europe during 2008	8
Our investment region	10
Key sectors targeting long-term growth	14
How we invest	16
Our Investment Manager: East Capital	17
Q&A with the Chairman of East Capital	18

OUR PORTFOLIO

Our portfolio on 31 December 2008	20
East Capital Bering Russia Fund	22
East Capital Bering Ukraine Fund	24
East Capital Bering Balkan Fund	26
East Capital Bering Central Asia Fund	28
East Capital Bering New Europe Fund	30
East Capital Power Utilities Fund	32
East Capital Russian Property Fund	34
Melon Fashion Group (MFG)	36

CORPORATE GOVERNANCE

Corporate Governance Report	38
Q&A with the Chairman of the Board of Directors	39
The Board of Directors	40
Management	47
Internal control	48
Managing our risks	50
Corporate responsibility	53
Fees	54

FINANCIAL STATEMENTS

Administration Report	58
Financial statements	60
Notes to the financial statements	65
Audit Report	80

This is East Capital Explorer

BALTIC SEA

WARSAW

POLAND

BRATISLAVA BUDAPEST

HUNGARY

SLOV. ROMANIA

BELGRADE BUCHAREST LJUBLJANA ZAGREB

SERBIA

PRAGUE

CZECH REP. SLOVAKIA

SARAJEVO

CROATIA

BOSNIA& H.

MONTENEGRO

In November 2007, we opened a new door to investing in Eastern Europe by launching East Capital Explorer on the Stockholm Stock Exchange, making hard-to-reach investments in our investment region easily accessible to all investors.

TIRANA PODGORICA SKOPJE ALBANIA MACEDONIA Our business concept is to offer our shareholders investment exposure to unlisted and listed companies in otherwise hard-to-reach parts of the Eastern European markets. This is primarily accomplished through investing in East Capital's special fund products, such as the East Capital Bering funds and East Capital's private equity funds. We also have the possibility to make direct investments in specific companies.

Our objective is to achieve long-term capital appreciation for our shareholders. Investing in emerging markets is often related with significant risks, therefore all investments in these markets should be made assuming a long-term perspective.

Our strategy is primarily to invest in sectors that have the most to gain from the long-term development trends of the region, in this context, but not limited to, the catch-up process and EU convergence. Examples of some of our key sectors providing interesting investment opportunities over the long-term are the power utilities, retail and consumer goods, real estate and finance sectors. Read more about our current view on our key sectors on pages 14–15.

Dividend policy

East Capital Explorer does not intend to pay any dividends, although the Board of Directors retains the flexibility to propose to do so. Any returns will, instead, be reinvested in accordance with the investment policy. This dividend policy reflects the judgment that the continuous reinvestment of the capital will best allow us to build a strong investment base and to generate longterm value for our shareholders.

The East Capital Explorer share offers access to:

CASPIAN

BAKU TBILISI YEREVAN

AZERB.

^Volg^a

Volgograd Astrakhan'

Kazan'

Samara Orenburg

SEA

Kam^a

Perm'

Ufa

BLACK SEA

ANKARA

TURKEY

CHISINAU (KISHINEV)

UKRAINE

Istanbul Izmir

MOSCOW

St Petersburg

^Tigri^{s Eu}phrate^s

5642 Elbrus

GEORGIA

ARMENIA

Saratov

Rostov-na-Donu Voronezh

Ryazan' Penza

Tula

Arkhangel'sk

Nizhniy Novgorod

Lake Ladoga

MINSK

KIEV

MOLDOVA

BELARUS

Lake Onega

Yaroslavl'

Dan^ub^e

BULGARIA

SOFIA

VILNIUS

RIGA

TALLINN

ESTONIA LATVIA LITHUANIA

A dynamic region: Eastern Europe is one of the most dynamic regions in the world - including almost 30 countries and 450 million people across 12 time zones

KARA SEA

Irtysh

KYRGYZSTAN

TAJIKISTAN

W e s t

S i b e r i a n

P l a i n

Lake Zaysan

Barnaul

7439 Pik Pobedy

Lake

Almaty (Alma-Ata)

ASTANA

BISHKEK

Ob

Tomsk Novosibirsk

⁴⁵⁰⁶ Belukha

Yenisey

T aymyr Peninsula

R U S S I A N F E D E R A T I O N

ARCTIC CIRCLE ARCTIC CIRCLE

Ishi^m

Yekaterinburg

Aral Balkhash

KAZAKH STAN

TASHKENT

DUSHANBE ASHGABAT

Sea

TURKMENISTAN

UZBEKISTAN

U

r a l M

ou

Irtysh

Chelyabinsk Omsk

O^b

^{Z e m l y a}

New

1895

s

n t a i n

An experienced Investment Manager: the investment activities of East Capital Explorer are managed by East Capital who is one of the largest investors dedicated to the region, having an on-the-ground presence, a wide network and a 11 year trackrecord

A well-diversified portfolio: we primarily invest in East Capital's Private Equity and Semi-public Equity funds which otherwise require high minimum investments and long investment periods, many of which are currently closed to new investors. At the end of December 2008, our portfolio included exposure to approximately 400 companies

Attractive sectors: East Capital Explorer invests broadly across a number of sectors, all of which stand to gain from the long-term growth prospects and development in the region

	2008 IN FIGURES

Per 31 December (EUR)	Total	Per share
Net Asset Value	265m (SEK 2,883m)	7.31 (SEK 79.53)	Three new investments and one commitment totalling EUR 70m: 21 April: EUR 10m invested in new East Capital Bering New Europe Fund
Market capitalisation	134m (SEK 1,458m)	3.69 (SEK 40.20)	27 May: EUR 40m committed to new East Capital Russian Property Fund 28 October: First direct investment: EUR 10m invested in unlisted Russian fashion retailer MFG
Total cash and deposits	176m	4.85	13 November: Additional EUR 10m invested in newly issued shares in the
• Committed capital	39m	1.08	East Capital Bering Balkan Fund
• Available capital	137m	3.78

Comment from the CEO

So much has been written about the historic events of 2008, I will only make a few observations. Most importantly, how have the changes in the world affected East Capital Explorer? Is our business model still valid?

2008 was a stark reminder of just how dynamic and fast-changing our world is. The year began with economic growth in much of the world booming and inflation running out of control. Policymakers worried about overheating and record high commodity prices. By year end, those concerns had disappeared and attention shifted to the aftermath of the financial crisis and addressing its effect on the real economy.

It became obvious that the world economy is truly global. Decoupling, the theory that emerging markets could keep on powering ahead despite problems in the west, was quickly debunked. It turned out that whether Americans or Russians, we live on the same planet, and the global financial system is very interdependent indeed.

We were also reminded what a fragile thing confidence is. While the positive sentiment lasted, confidence was so high that political risks, economic imbalances and unsustainable business models fuelled by excessive debt were often overlooked as the rising tide lifted nearly all boats. Once confidence disappeared, the sentiment changed so completely that markets and companies were punished by equal measure, no matter the fundamentals or inherent values. The shift from overly optimistic to totally pessimistic, especially regarding Eastern Europe, has been quick and total. Is it rational?

As befits turbulent times and periods of high uncertainty, there has been lots of speculation about "paradigm shifts". Do the events of 2008 signal the end of free market economic systems? Will the role of the financial sector be fundamentally changed? Was investing in emerging markets simply a fad that is now over? Well, the truth is that things are not black or white and it is wise not to get carried away by dramatic prophesies, in any direction. The current environment makes

it even more important to be patient and long-term and to see through all the noise and data out there in order to discover the valuable pieces of information. Having experts one can trust is therefore of even greater value.

So, how did we do in 2008? Our investments that were made in 2007 and early 2008, according to what we had promised at the time of our IPO in November 2007, were down by about 60 percent during the year. As market uncertainty spread and turbulence increased, we held off investing, and focused on preserving our cash, which at the year end stood at at

ly, a crisis always presents opportunities. For some countries, it is an opportunity to stop being overly reliant on one sector or commodity and diversify their economies, thus building a much more sustainable foundation for future growth. For others, it is an opportunity to correct the imbalances that have been so easy to build up over the last few years due to relatively cheap credit and high capital inflows. For nearly all countries in our region, it is an opportunity to improve in terms of transparency, governance, rule of law, so that once markets stabilise and attention returns to fundamentals, they can once again benefit. When risk appetite and sentiment recover, we are convinced that more investors will come back to these markets to get better returns as the long-term development outlook of these economies remains good. We have not substantially revised our list

We look for companies with low debt and strong management teams, who are likely to be able to turn the tough market conditions to their advantage. " "

EUR 176m, contributing to almost 70 percent of our net asset value. This is obviously a great strength in today's environment, where access to external financing is limited and investors are receiving cash calls from many companies.

Looking ahead to 2009, we are quite optimistic about our potential to continue building an attractive portfolio for our shareholders. First, East Capital, our Investment Manager, has in its spine the invaluable experience from 1998-99, the previous time our region was hit by a crisis. In fact, East Capital's reputation was earned very much by sticking to its vision in a time when these markets were out of favor, when it was possible to find great companies at bargain prices as few others dared to invest.

Our region will clearly experience a growth slow-down and many of the countries will go into recession in 2009. The convergence trend has not reversed, though, just the pace has slowed. Actualof favorite sectors due to the events of 2008. It is true that banking is a challenging sector currently as considerable risks remain, but here too opportunities will arise once greater stability has returned. For now, we focus very much on sectors that are relatively more resilient to challenging economic circumstances, such as basic consumer goods and retail. Within these sectors, we look for companies with low debt and strong management teams, who are likely to be able to turn the tough market conditions to their advantage. Also, interesting opportunities have started to appear in real estate, where distressed developers are looking to sell assets to raise cash. We remain ready to take advantage of these opportunities, but we are not in a rush.

Also, our general investment approach remains unchanged. Having a diversified portfolio continues to be an important mechanism to mitigate company-specific risks. Our core focus remains on private

equity and illiquid investments, although now that valuations in public markets have come down substantially, we may take advantage of opportunities that arise in listed small- and mid-caps. Finally, our business model continues to be one that does not rely on leverage, and nowadays it need not be explained why this is a clear advantage.

We are not calling a bottom; market timing is not our business. Similarly, we are not looking for a specific trigger that would change investors' attitudes. We are looking for great companies with sustainable business models, which need capital to grow and which are ready to invite us in at the right terms. The good news is that "old-fashioned" values and business models are back: hard work, prudence and humility are more important than lofty goals, sophisticated financial engineering and loud self-promotion. Fortunately for us, there are many hard-working entrepreneurs and solid companies out there in our part of the world.

We realize that our strong cash position now has several times the purchasing power it had just a year ago. But we also realize the responsibility it entails, especially given the discount our share has been trading at compared to our net asset value. As the value of cash has grown significantly for everyone, we must work even harder now to ensure that our investments deliver attractive returns for our shareholders.

Stockholm, March 2009

Gert Tiivas CEO

The world looks very different from when you launched in November 2007. How has this affected East Capital Explorer's business concept and objectives?

In short: yes, the world has changed very much, and no, this has not changed our business model. We are confident that the events of 2008 have not fundamentally altered the long term attractiveness of investing in Eastern Europe, and that our favorite sectors will continue to offer good investment opportunities. The next few years will surely be more challenging for many of our countries and companies. But we have a well-diversified portfolio, a business model that does not rely on leverage, and we still have substantial financial resources. Those key competitive advantages will allow us to deliver long term attractive returns for our shareholders.

With the benefit of hindsight, would you have done anything differently during 2008?

Well, I think nearly all investors in the world would wish they had just stayed in cash during 2008. We made an active decision not to invest when markets became turbulent and announced during the summer that markets conditions would affect the speed of our investments. This has been appreciated by our investors. Clearly, our substantial financial resources are even more valuable now. I think that is an attractive proposition for both existing and potential shareholders.

How has the harsh economic climate affected your view on the region?

The people in our region have experienced tough times and challenges many times before. Eastern Europe really deserves credit for the great job done in improving the economy in the last 10-15 years. So I am convinced that also this crisis will show that many countries can turn it around into an opportunity to push ahead with muchneeded reforms. We will see these economies emerge even stronger and better diversified in a few years time. We should not underestimate our region's capacity to change – the hunger for a better life is a very powerful driver. And even when the

convergence process will not proceed as quickly as the optimists would wish, what really matters is the trend and motivation to improve, which has not broken.

Why don't you just invest in some of the large caps now trading at much reduced valuations?

As a small investment company, we must have a clear focus: our niche remains providing easy access to hard-to-reach investments in Eastern Europe. We can be a bit opportunistic in public markets too, as it is now possible to find good small and mid cap companies at quite attractive valuations, but our core focus has not changed.

The turbulence could continue for quite some time. When will you be fully invested?

We made a couple of new investments late in 2008. We are now working on a number of ideas, which look quite interesting. Again, we are not participating in any race against a clock, our job is to make good investments that will produce attractive returns for our shareholders. So you can continue to expect us to be very cautious with the shareholders' money. We have therefore decided not to set a new date for being fully invested.

The East Capital Explorer share

The East Capital Explorer share was listed on the Stockholm Stock Exchange on 9 November 2007. The share is traded on NASDAQ OMX Nordic List, Mid Cap. The closing price on 30 December 2008 was SEK 40.20, giving East Capital Explorer a market capitalisation of SEK 1,458m.

OMXSPI: includes all share on NASDAQ OMX Nordic Exchange Stockholm. Volume East Capital Explorer RTS 2 Index MSCI EM Europe Index RTS Index SAX Index Explorer NAV

RTS Index: includes the 50 largest companies traded on the Russian Trading System (RTS).

: The East Capital Explorer NAV

RTS 2 Index: includes 78 companies on the RTS that have limited trading volumes. MSCI EM Europe Index: includes Russian, Polish, Hungarian, Czech and Turkish equities. Volume East Capital Explorer RTS 2 Index MSCI EM Europe Index RTS Index SAX Index Explorer NAV

Net Asset Value and share price development	2008	2007*
Net Asset Value per share, EUR	7.31	10.87
Net Asset Value per share, SEK	79.53	102.61
Net Asset Value development during the year, EUR	-32.8%	0.7%
Share price on 31 December, SEK	40.20	100
Market capitalisation on 31 December, MSEK	1,458	3,627
Share price development during the year	-59.8%	0%
Lowest, SEK	37.30	95.50
Highest, SEK	102	108
Total turnover, shares	15,696,617	6,157,487
Average daily turnover, shares	62,288	186,591
Development of relevant indices
OMXSPI	-42.0%	-5.3%
RTS 1	-66.9%	1.8%
RTS 2	-75.1%	10.9%
MSCI EM Europe	-61.7%	3.4%
Share capital and number of shares
Share capital at 31 December, EUR	3,627,016	3,627,016
Number of shares at 31 December	36,270,160	36,270,160
Average number of shares	36,270,160	35,032,755
Ownership structure
Number of shareholders on 31 December	9,984	11,648
% shares held outside Sweden	35.1%	46.8%

* 9 November – 31 December 2007.

20 largest shareholders and custodians1 on 31 December 2008

	Number of
	shares	Holding. %
Alecta Pensionsförsäkring	2,400,000	6.6
Morgan Stanley & Co Intl PLC.	2,217,880	6.1
East Capital Eastern European Fund	2,050,000	5.7
SEB-Stiftelsen	1,500,000	4.1
DNB NOR Bank ASA	1,456,200	4.0
East Capital Partners2	1,425,350	3.9
Apoteket AB Pension Foundations	1,409,828	3.9
Volvo Related Foundations	1,304,800	3.6
Stena Sphere	1,114,400	3.1
Omnibus Account, State Street	981,958	2.7
Avanza Pension	769,173	2.1
SEB Trygg Liv	672,679	1.9
Handelsbanken fonder incl XACT	523,907	1.4
ABN AMRO BANK N.V.	490,860	1.4
Nordnet Pensionsförsäkring AB	483,182	1.3
Skandia	460,000	1.3
Fjärde AP-Fonden	441,000	1.2
JP Morgan Bank	394,930	1.1
Nordea Bank Finland ABP	379,113	1.0
SIX SIS AG	376,770	1.0
Total top 20 shareholders and custodians	20,852,030	57.4
Other 9,964 shareholders and custodians	15,418,130	42.6
Total	36,270,160	100.0

1 A majority of the shares registered by foreign shareholders are registered through custodians. This implies that the beneficial shareholders are not officially registered.

2 East Capital's own investment and investments by Partners in East Capital.

Shares and voting rights

East Capital Explorer has one class of shares, in total 36,270,160 shares. One share entitles the holder to one vote and all shares have equal rights in the assets and profits of the Group.

Distribution of ownership by size of holding

		% of		% of
No. of shares	No. of	share	No.	shares
per holding	shareholders	holders	of shares	and votes
1-500	7,770	77.8	1,653,220	4.6
501-1,000	918	9.2	811,054	2.2
1,001-5,000	920	9.2	2,390,502	6.6
5,001-10,000	147	1.5	1,160,190	3.2
10,001-15,000	45	0.4	557,669	1.5
15,001-20,000	38	0.4	715,320	2.0
20,001-	146	1.5	28,982,205	79.9
Total	9,984	100.0	36,270,160	100.0

Distribution of ownership by country*

* A majority of the shares registered by foreign shareholders are registered through custodians. This means that the beneficial shareholders are not officially registered and the actual domicile of the shareholder cannot be verified and may be different from the domicile of the custodian.

Distribution of ownership by type of shareholder

Source: Euroclear Sweden AB (formerly VPC).

Own shares

The 2008 Annual General Meeting authorized the Board to decide on acquiring the company's own shares. As of 31 December 2008, no shares had been bought back by the company. See also "Key events after the end of the financial year" on page 58.

SHARE FACTS
Listing:	NASDAQ OMX Nordic, Mid Cap
Listed since:	9 November 2007
ISIN-code:	SE002158568
GICS-code:	40203010
Ticker:	ECEX
Reuters:	ECEX.ST
Bloomberg:	ECEX SS Equity
	Latest share price: See www.eastcapitalexplorer.com

Eastern Europe during 2008

Certain important events in the region

On 1 January Slovenia becomes the first Eastern European country to assume the Presidency of the EU.

Ukraine is welcomed as a WTO member.

Dmitri Medvedev wins the Russian presidential election on 2 March, with 70% of the votes.

The Ukrainian government approves a list of 406 companies set to sell their state-owned shares during 2008.

Russian RTS index reaches an all-time-high on 19 May, closing at 2,488 and a market capitalization of USD 1,600bn.

Central banks in Russia and Ukraine actively intervene on the issue of increasing inflation. Increases in banking reserve requirements are announced in order to suppress the countries' appetite for foreign currency.

and several larger EU members acknowledge Russia and Serbia do not.

The ownership conflict between Russian TNK and British Petroleum over the joint venture, TNK-BP, turns into a long-drawn out power struggle over differing views on the company's international expansion.

Serbia signs the Stabilisation and Association Agreement (SAA), an important milestone in Serbia's integration with Europe.

Croatia and Albania are invited to join NATO at the summit in Bucharest.

President Saakashvili's ruling party wins the parliamentary elections in Georgia.

Turkey's stand-byarrangement with the IMF comes to an end. In November, Turkey and IMF start discussions over a new stand-by arrangement.

Bosnia and Herzegovina signs the SAA agreement, a first step towards membership of the EU.

On 6 June, Russian power utility giant, RAO EES' shares stop trading on the Russian exchanges ahead of the break up of the power monopoly and unbundling into 23 separate companies on 1 July. This is an important milestone in the ongoing power reform and will attract private investors into the sector to help finance the significant investments needed in coming decades.

On 11 July, oil prices rise to a new record peak at USD 147.27.

On 21 July, Serbian authorities arrest the war criminal Radovan Karadzic. EU leaders hail this as a key step in the Balkan nation's accession to the Union.

Turkish Constitutional Court rules against closure of the AKP which had been accused of undermining the country's secular system. Uncertainty increases as regards the Russian steel company Mechel. Prime Minister Putin publicly announces that Mechel has been applying unfair transfer pricing by selling coking coal more expensively to domestic customers than through exports. International investors draw negative parallels with Yukos in 2004, and the Mechel share plunges more than

60%.

Several Eastern European countries report record harvests. In Ukraine the grain harvest increased by almost 90%, compared to 2007.

An armed conflict breaks out between Russia and Georgia over the break-away republic of South Ossetia.

Lehman Brothers declares bankruptcy on 15 September, sending shock waves through global financial markets including Eastern Europe. Moscow stock exchanges, RTS and MICEX, close for several days following the strict Russian market rules to freeze market activity in turbulent trading.

Orange coalition in Ukraine breaks down. Despite this, political progress is made on certain new corporate regulations which will improve the investment climate.

Serbia takes another step on its convergence path by ratifying the SAA with the EU.

For the fifth year in a row, Eastern Europe is the region that has implemented most business-friendly reforms in the world, according to the World Bank's yearly report, "The Cost of Doing Business".

Heavy leverage among Russian oligarchs becomes publically known. Loans from state-owned banks are offered to assist these companies through the crisis.

Turkey improves bilateral relations with Armenia with the first Turkish state visit in Armenia in ten years.

IMF approves a standby arrangement with Ukraine totalling USD 16.4bn and a 17 month stand-by arrangement with Hungary totalling EUR 12bn.

On 19 December, the IMF, together with Nordic countries, announces plans to lend USD 2.4bn to Latvia to support the stabilization of the country's economy.

On 21 December, oil is trading at a year-low of USD 33.87 per barrel, less than one fourth of the peak price in July.

EBRD announces investments of EUR 7bn and additional investments of up to EUR 20bn together with partners during 2009.

Serbia begins negotiations with IMF which result in a 15 month EUR 402m stand-by arrangement being approved in mid-January 2009.

Kazakhstan announces comprehensive financial stimulus package of USD 18bn. The package, equivalent to 20% of the country's GDP, includes emergency funding for the banking, property and agricultural sectors and small and medium sized businesses.

Russian Central bank decides to expand the band in which the rouble trades, effectively a soft depreciation through a number of mini-devaluations.

The Latvian state takes control of the country's second largest bank Parex Banka in order to guarantee the stability of the financial system.

Gas conflict between Russia and Ukraine. The conflict intensifies in January 2009 with gas shortages in several countries in Eastern Europe.

Our investment region

A new chapter in modern economic history

The abrupt halt in global economic activity witnessed during the second half of 2008 has no precedents in modern economic history in terms of speed and severity. The better-than-expected performance in early 2008 was a sharp contrast to the financial turmoil that followed, with many economies around the world facing recession. Forecasts for GDP growth and other key indicators have been revised constantly, and only in one direction.

Whilst acute financial shock and sharp economic losses characterised, in particular, the US economy in 2008, it is clear that all economies of the world have been affected. The US economy is set to shrink by closer to 4 percent during 2009 while the GDP in the 16 countries using the Euro will shrink by closer to 3 percent in 2009, and will record modest growth of 0.6 percent in 2010.

As widely confirmed as the difficult economic scenario for 2009 may be; certain countries in the world, those that are better balanced, less reliant on exports and more capital rich are relatively better positioned to be able to withstand this challenging period.

Eastern Europe in the global economy

So how have Eastern European economies fared in the general havoc of 2008? No doubt, 2008 meant the end to the decoupling hypothesis, the theory that emerging economies would be able to remain immune to the events in the rest of the world and to continue to grow. The current crisis, although it may have originated in the US, has had clear and painful repercussions all over the world. With the signs of recession now evident in many countries, including the economies in our investment region, attention has turned from the credit crisis, so predominant during the last half of 2008, to the impact on the real economies. It goes without saying that there will be a focus on gauging the gradual impact of the tremendous amount of liquidity provided via the wide variety of government and multilateral rescue packages.

2008 saw increased activity from multilateral institutions, such as the IMF, World Bank and the European Central Bank (ECB), promising increased support to the countries of Eastern Europe. IMF has come to the help of Ukraine, Latvia, Serbia, Belarus, and several other countries are in the negotiation process with the IMF or very close to needing its help. A significant contribution has also come from the European Bank for Reconstruction and Development (EBRD) announcing a plan to invest EUR 7bn on its own, and up to EUR 20bn together with commercial partners, during 2009. Meanwhile, the European Investment Bank (EIB) has promised a EUR 1bn loan to Romania and EUR 250m to Serbian small and medium-sized enterprises. Apart from the direct supportive effect of these measures in the short-term, long-term effects due to the conditions attached to this support can also be expected. Economically necessary, but politically difficult, reforms and tighter fiscal policies will hopefully be realised, ensuring that these economies will come out stronger in the end. There is also a growing discussion about the extent of help to be provided by the European Union, and its various institutions, to the Eastern European states, both those that are members and those that are not.

Major challenges during 2009

Inflation, one of the major concerns in 2008, will come down considerably in 2009 on the back of falling commodity prices and reduced growth. However, it is less clear how interest rates will adjust as many economies have had negative or very low real interest rates. Some of the more advanced economies in Eastern Europe will probably lower rates, but not as much as or as rapidly as in Western Europe, and certain countries will be forced to maintain, or even increase, rates to defend their currencies, at least during the first half of the year.

Investments, which have been one of

GDP growth, %

Source: Deutsche Bank, as of 11 March 2009 (2007 data on GDP and C/A is IMF WEO Oct 2008).

the key driving forces behind the positive development in Eastern Europe, have now seen a particularly abrupt decline, reflecting the impact of weakening demand, a drop in investor confidence, tighter financing conditions for companies and a lower availability of credit. This cycle is likely to continue during 2009.

Also, capital inflows, both portfolio and foreign direct investment flows, already in 2008 reduced significantly from the highs reached in 2007, and these inflows are expected to fall further in 2009. Many countries in Eastern Europe have benefitted from access to capital markets, as well as from bank financing, often through Western banks that have been active in the region. Capital market financing is now less available for all players. Consequently, it is quite likely that loan growth, which has been in high double digits in many countries, will now fall substantially, or even turn negative, putting a break on growth for even the healthier companies and countries.

Trade, which has been an important growth driver for certain countries in our region, is also falling. In spite of the devaluation of real exchange rates throughout many countries in Eastern Europe, it is

Russia: a comparison with 1998

	1998	2008
GDP (USDbn)	271	1,779
FX Reserves (USDbn)	8	427
Gov't External Debt (% GDP)	50	2.89
GDP/Capita (USD)		1,834 12,579
Market capitalisation (USDbn)	17	265
Average monthly wage (USD)	63	608
Retail sales, yoy growth (%)	-15	12.95
Mobile penetration (%)	0.5	119.3
Car sales (mn)	1.2	2.7
Oil price USD/barrel	13	51
Inflation rate (%)	84	14
Interest rate (%)	150	13
Political stability	Weak	Strong
Valuation (P/E)	3	3
RTS performance
following year (%)	197	?

Sources: Haver, IMF WEO Oct 2008, Autostat, EBRD, BOFIT, Bloomberg, East Capital.

Source: Bloomberg.

much more difficult for a country to export itself out of a negative scenario due to the fact that many of the Western countries are also going into recession and reducing their imports. Another barrier could be growing protectionism; we have recently seen worrying trends in the car industry and other sectors under pressure to enact anti-competition and protectionist measures. On the other hand, falling real exchange rates make local production cheaper in relative terms and countries with large domestic markets can, in particular, benefit from import substitution, thus supporting, or even creating, industries that could serve as the base for the next growth phase.

VARIANCES BETWEEN COUNTRIES

Taking a closer look at the countries in our investment universe, variances are exaggerated by the rapid developments and heavy volatility of the past six months, making it even more difficult to generalise about the region.

Russia

In Russia, the sharply falling oil prices put major pressure on the rouble, and the Russian Central Bank spent hundreds of billion of dollars to defend the currency. Russia was particularly hit by an increasing aversion to risk during 2008 and the global deleveraging process that followed, forcing hedge funds and other international investors and overleveraged oligarchs to aggressively sell off Russian assets.

Specific corporate and political events in Russia during 2008, such as the power struggle in TNK-BP, the dispute in the steel company Mechel and, not least, the conflict between Russia and Georgia over the breakaway republics of South Ossetia and Abkhazia, contributed to deteriorating confidence in Russian markets. These developments also turned the spotlight back onto the political risks of investing in Russia and emerging markets. International media and investors were quick to draw parallels with the financial crisis Russia experienced in 1998. Arguably, the dramatic decline of the Russian RTS index of -75 percent in the seven months following its all-time-high on 19 May 2008, jogged investors' memories of the turbulent 1998 financial markets. However, it is important to remember that the current crisis originated in the US, spreading across the world, and is not primarily a Russian crisis as was the case in 1998. It is equally important to grant Russia credit for being a fundamentally very different country today, compared with 1998 (see table to the left: Russia: a comparison with 1998).

The Russian government's response during the autumn was relatively farreaching, including a wide variety of measures spanning from tax cuts, such as decreased customs duties, quicker VAT refunds, reduced tax on profits for businesses, to higher welfare payments and continued commitments to stimulate housing. Although the package was launched quickly, which was impressive, the government was less efficient in materialising many of these measures, with Russia loosing both valuable time and investor confidence as a consequence.

After a nine-year stretch of strongly positive growth in Russia, 2009 will, according to the latest forecasts, see negative growth. The severity of the current crisis will hopefully provide sufficient incentive for the country to push ahead with muchneeded structural reforms, public infrastructure investments and the instigation of pension reforms that should provide the equity market with the stable longterm capital it is lacking today. In addition, Russia has a well-educated population pressure on the currency added to the country's problems. In November the IMF announced a EUR 16.4bn loan that will provide some liquidity and help drive reforms in the country. For 2009, steel, mining, and machinery sectors are expected to face the steepest declines, while financially healthy companies in consumption sectors, such as food and agriculture, will be better positioned in the current economic climate.

Czech Republic, Slovakia and Slovenia The many smaller economies show major differences, both in terms of the degree of development and in terms of economic status quo. The Czech Republic, Slovakia and Slovenia are well-developed economies with no macro imbalances, but they are also very dependent on export and foreign direct investment. Furthermore,

The current crisis could accelerate a well-needed move away from commodities dependence towards a more diversified economy. " "

with strong capabilities in science and engineering and this advantage has not been fully utilised in the corporate sector. In other words, the current crisis could accelerate a well-needed move away from commodities dependence towards a more diversified economy.

Kazakhstan

Kazakhstan, also oil price dependent, has significant national reserves amounting to USD 47 billion, greater than the total foreign debt of the entire banking sector. The country has also been negatively affected by falling commodity prices and significant capital outflows. Here a massive stimulus plan was put into place in 2008, equivalent to around 20 percent of GDP, making it the largest rescue package in the world in relation to the size of the economy. Significant support packages to the banking sector have provided stability to the most important banks in the region, with nationalization of BTA and Alliance banks in early 2009 as a consequence.

Ukraine

Ukraine, where corporate profitability had been at a record high in the first half of 2008, suffered significantly during the second half of 2008. High political turbulence, weak state finances and the exposure to the car industry, with 20 percent of the Czech GDP and 25 percent for Slovakia, will be a negative factor. With recent structural changes, political reforms, and the convergence with the EU, these countries are forecasted to be able to record some degree of growth during 2009.

Romania, Serbia and Croatia

Romania, Serbia and Croatia will also experience a sharp slow-down in growth, but are growing from relatively low levels. The countries have certain imbalances and currency problems could arise in certain of the Southeastern European economies. Depreciating exchange rate levels could have a negative psychological impact on investors, even if these countries are not facing acute external debt problems. The convergence process with Europe/EU continues to progress, with Serbia, for instance, receiving IMF support in the form of a stand-by agreement and instigating fiscal reform measures, for example, a limit on the 2009 deficit of 1.75 percent.

Georgia

The fighting in Georgia's breakaway region of South Ossetia in August resulted, tragically, in many unnecessary deaths and widespread destruction. Whilst the current situation is more stable, the complex issues are far from being completely resolved and many geopolitical analysts have tried to understand the origins of the conflict, going beyond the personalities of the individual leaders involved. Donor aid estimated at USD 4.5bn and the removal of US import duties on 3,500 Georgian products can support some rebuilding of the economy, but the long-term geopolitical basics indicate uncertain or uneven economic development.

Baltic region

The Baltic region is not one of East Capital Explorer's key target areas, but we carefully monitor developments. Similar to Bulgaria and Hungary, the Baltic countries, which are very dependent on exports, have accumulated large imbalances and these countries were hit by recession already in the third quarter 2008. Crisishit Latvia succeeded in obtaining mediumterm financial aid from the EU, up to EUR 3.1bn, EUR 1.7bn from the IMF, as well as EUR 1.8bn from Sweden, Denmark, Finland and Norway. This bailout and other support are provided in exchange for an austerity plan keeping the exchange rate pegged and pushing down real wages and budget spending.

Turkey

Turkey, although a smaller part of East Capital Explorer's portfolio, could benefit from certain aspects of the current economic environment, such as a lower oil price. This country went through a financial crisis as late as 2001, which implies that the banking sector is better capitalised and is subject to stricter rules, and is, consequently, in relatively good shape. The reform momentum that has served Turkey well since 2001 should be reinvigorated with another IMF agreement.

Smaller frontier markets

Our investment universe also includes a number of smaller, diverse economies in the Caucasus, Central Asia, Balkans as well as Belarus and Moldavia. These are still frontier markets, which are less dependent on global financial systems, but which are very dependent on the outside world for trade and remittances. Here, some, but limited growth can perhaps be foreseen.

History meets the future: Guardsman of the Semenovsky Regiment in front of the modern type business center that today are a common sight in Moscow.

East Capital Explorer AB Annual Report 2008 13

Key sectors targeting long-term growth

The selection of East Capital Explorer's key sectors and preferred investment exposure is based on the experience and track-record that our Investment Manager has acquired during more than ten years of investing in Eastern Europe. Our key sectors are the areas of the economy that stand the most to gain from the generally strengthened macroeconomic frameworks and the continuing structural reforms in the region. Our sector focus is likely to remain the same over time, but market conditions will mean that we, at times, choose to prioritise and focus on certain sectors more than on others.

POWER UTILITIES

Rationale: Russia is the fourth largest energy market in the world in terms of installed capacity and electricity output. The powerhouse nature of the Russian economy during the past ten years has resulted in increased domestic energy consumption, with the main limitation being the capacity of the country's power production facilities. Insufficient investments over the years have left the country with outdated technology, unable to produce sufficient power for the fast-growing economy, especially in major centres.

With major investments required in power generation and other important sub-sectors, a restructuring programme for the entire sector was initiated in 2000. In 2006, a five-year plan was adopted for the development of the electricity and gas markets. The plan stipulates that the electricity market should be fully deregulated by 2011 and that electricity generation, sales and repair companies will be privatized to be able to operate in open and competitive markets with market prices. We believe that the restructuring and price liberalisation will improve the cost structure and efficiency of the Russian power sector, which is currently lagging behind Western Europe and, consequently, increase the valuations of Russian power companies.

Current view: 2008 held many important milestones for the sector. 25 percent of the production was set at market prices and the large Russian power monopoly, RAO EES, was unbundled according to plan. A number of foreign and domestic investors entered the sector in the first half of 2008 on the back of the reform process. With the current downturn in manufacturing dampening demand, the production facilities can perhaps focus on improving on the fundamental side in the face of privatisation and consolidation. Most recently, during December 2008, the utilities sector was a favourite among investors reflecting the Russian Ministry of energy's willingness to support delays in new capacity introductions by generators. Coal and hydro generating companies will benefit from rising gas prices and the determined liberalisation process of the wholesale power market.

Read more about the power utilities sector and our investment in the East Capital Power Utilities Fund on pages 32–33.

REAL ESTATE

Rationale: In recent years, healthy GDP growth and an improved macroeconomic situation have led to a general lack of modern property across Eastern Europe, especially in Russia and other CIS countries. In spite of rapid developments, there have remained significant shortages in supply, not the least as regards retail and office space. Premises usually are of a low standard and are unsuitable for new businesses, such as modern retail concepts.

Current view: Despite recent market developments, the longterm fundamentals and underlying key drivers of the Russian real estate market remain the same. The market is undersupplied in both quantity and quality of retail and office space and regional city development is just beginning. With developers' problems resulting in fewer completed projects and delays in completion, the undersupply is likely to persist.

Current market corrections should, in a medium to long-term perspective, generally be seen as healthy for real estate markets in Eastern Europe. Following many recent years of exceptional growth, increasing rent levels and hardly any vacancies, these markets have been showing clear signs of overheating.

After at least four years of compressed yields in Moscow and other Russian cities, yields are currently moving upward due to forced selling and liquidity problems. This could result in unique opportunities to acquire properties with good tenants and reasonable rental rates at low, or even distressed, prices.

In June East Capital Explorer committed EUR 40m to the newly launched East Capital Russian Property Fund, read more about the fund on page 34.

RETAIL AND CONSUMER GOODS

Rationale: Western consumption patterns are well entrenched within the Eastern European economies with these populations having seen significant major increases in the level of disposable income during recent years. Low levels of private income tax, low indebtedness, relatively low levels of utilities and other fixed living costs have kept income free for increased consumption of cars, clothes, better food and holidays. There is also a great deal of potential to develop the general structure of the retail sector. Modern retail concepts, such as large supermarkets, shopping centres and retail chains are still relatively uncommon in Eastern Europe. Western concepts in marketing, display techniques, shop interiors, and cross selling can be introduced and utilised to further jump start strong consumer activity.

Current view: Basic retail and consumer goods with defensive characteristics probably offer the best investment opportunities also in a more difficult economic scenario. Although consumption will be dampened against the current economic back-drop, the new consumption patterns will continue to fuel consumer

demand. Not the least, in the larger economies, we deem that household consumption will continue, primarily due to the lack of dependence on credits. Total household loans (retail credit and mortgages) are only 10 percent of GDP in Russia and Turkey and 22 percent in Poland, which can be compared to around 100 percent in the US and the UK or over 40 percent in Estonia and Croatia, which have the highest ratios in Eastern Europe.

Even in the downward revised growth outlook for the region, there are companies offering basic consumer goods, with low leverage that are likely to be more resilient in the downturn. Our first direct investment was announced in 2008; East Capital Explorer invested EUR 10m in the unlisted Russian fashion retailer Melon Fashion Group. MFG, offering basic fashion in a middle-lower price segment, is a good example of the type of company that can outperform in a harsher economic climate. Read more about MFG on pages 36-37.

BANKING AND FINANCE

Rationale: Investing in the banking and finance sector is generally one of the best ways of gaining exposure to a developing economy as banks with well diversified client bases are, effectively, a naturally leveraged investment into the broader economy. A growing economy creates the need for efficient financial intermediation, so each economy needs a banking system in which transactions are undertaken smoothly and financing is accessible at appropriate risk-based pricing levels. Since a developed banking system is essential for a sound economy, the majority of governments make a concerted effort to develop their banking systems and the regulatory framework in the sector.

Despite growth in recent years, the banking sector is still underdeveloped in Eastern Europe. In Russia for example, ratio of banking assets and loans to GDP amounted to 67 percent and 40 percent, respectively, at the end of 2008 compared to the euro area average of 332 percent and 115 percent. The retail banking market has been the most rapidly expanding sector in Russian banking in recent years, but there is still a clear need for development of basic retail banking products, such as credit cards and savings products. The average household loans per capita in 2008 was only USD 900 in Russia, while it was around USD 19,300 in euro area and USD 45,500 in US. Furthermore, the Russian banking market remains heavily fragmented with over 1,000 banks which will mean a need for consolidation in the future.

Current view: There is currently a risk that the global crisis may delay the development of the banking sectors in our markets, not the least by diminishing the activity levels of foreign banks and sharply reducing access to external financing. The banking sector, which generally showed resilience in the first half of 2008, in spite of some growth deceleration, is now facing major problems, which are compounded in many countries by devaluation of the local currency. Liquidity has been injected by the majority of governments into the sector, although it is clear that not everyone who has applied for state funding will be bailed out. The programs to recapitalise and provide liquidity for banks in many Western European countries will hopefully imply that their subsidiaries in Eastern Europe will receive the support they need in tough markets. Also, consolidation is expected to accelerate, as stronger banks will take over smaller and weaker institutions. Finally, once some stability returns, the banks that come through this turbulence will be stronger and able to earn higher profits due to weaker competition.

How we invest

The East Capital Explorer share, listed on the NASDAQ OMX Nordic Exchange, offers all investors, private as well as institutional, easy access to private equity and other less liquid investments in this region. The investment activities of East Capital Explorer are managed by East Capital, under the terms of an Investment Management Agreement and within the framework of an Investment Policy.

INVESTMENT POLICY

The Investment Policy describes East Capital Explorer's key geographical segments and investment themes and the types of investments which may be undertaken. It also stipulates certain limitations in order to assure diversification and an appropriate risk level. The key elements of our investment policy can be summarised in the following points:

Countries

East Capital Explorer may invest in Russia and the CIS countries, the Balkans, the Baltics, Central Asia and Central Europe.

Sectors

East Capital Explorer targets the sectors standing the most to gain from the positive long-term development trends in Eastern Europe. The key sectors that we have identified, based on this, include power utilities, retail and consumer goods, real estate, as well as banking and finance. We always take a long-term view when making decisions on the target weighting of the portfolio. Although our sector focus is likely to remain the same over time, sectors are monitored on an ongoing basis. Market conditions will mean that we, at times, choose to prioritise and focus on some sectors more than others. Read more about our current view on our key sectors on pages 14–15.

Asset types

East Capital Explorer invests primarily in East Capital's existing and future semipublic equity funds (with both listed and unlisted investments), as well as East Capital's future private equity (unlisted investments) and real estate funds.

East Capital Explorer also has the possibility to make direct investments in selected companies, as well as smaller investments in East Capital's open-ended daily-traded funds.

More specifically, investments can be made in several asset types, including fund units, shares, options, convertibles, derivative instruments and other equityrelated instruments. Debt investments are also permitted if related to an equity investment. In conjunction with investments in the real estate sector, permitted investments also include land, real estate and other property.

Cash management

Pending investments or draw-downs to a fund to which capital has been committed, the Investment Manager may invest cash in deposits, investment grade securities and other marketable securities or capital guarantee products or East Capital's public equity funds.

Investment restrictions

East Capital Explorer is subject to the following investment restrictions:

Investments in any one of East Capital's funds must not exceed 40% of East Capital Explorer's NAV at the time of the investment.

No single direct investment may exceed 15% of East Capital Explorer's NAV at the time of the investment.

Investments in East Capital's openended, daily-traded equity funds may in total not exceed 5% of East Capital Explorer's NAV at the time of the investment.

Debt may not exceed 30% of East

INVESTMENT DECISION PROCESS

East Capital Explorer AB (publ) Board appointed by shareholders

• Major asset allocations (>15% of NAV)

• Investments outside Investment Policy
• Direct Investments
• Conflicts of interest

East Capital Explorer Investments AB Board appointed by Investment Manager

• Fund investments and co-investments within the Investment Policy
• Cash management: deposits outside cash management mandate

Capital Explorer's NAV at the time debt is incurred, except in real estate investments where a maximum debt-to-equity ratio of 80/20 may be applied. Such real estate investments may, however, not exceed 30% of East Capital Explorer's NAV at the time of investment.

Focused approach to private equity investing

The exposure to unlisted investments that East Capital Explorer offers is significantly different from the typical private equity investments found in Western Europe and in the US. Instead of taking a majority stake in a company using high leverage and a turn-around approach, our Investment Manager's approach is based on strong minority stakes (10–30%) with board representation. Leverage is generally not used at all.

Strong emphasis is placed on the quality of the existing management team and other shareholders, in order to ensure a common interest for the future of the company. Even as a minority investor, it is an advantage to be able to exercise active participation through the Board of Directors. East Capital Explorer and East Capital can contribute sector knowledge, financial structuring experience and know-how to the portfolio company, as well as enhance standards of corporate governance and other best practices. This is valuable for companies needing to raise capital in international capital markets, or in implementing new business strategies. East Capital's broad network in the region and senior advisor relationships are clearly key competitive advantages in sourcing unlisted investment opportunities.

INVESTMENT MANAGEMENT AGREEMENT

The Investment Management Agreement stipulates the duties and responsibilities of the Investment Manager including the identification, evaluation and negotiating of potential investments. The Agreement specifically defines the allocation of responsibilities between the Investment Manager and East Capital Explorer, and assures East Capital Explorer of preferential access to new semi-public, private equity and real estate funds launched by East Capital.

Significant investment decisions undertaken by the Board

Whilst the ordinary investment decisions within the investment policy framework are taken in East Capital Explorer Investments AB, the Board of East Capital Explorer always decides upon the following, more significant matters:

Decisions concerning investments constituting more than 15% of NAV at the time of the investment

Direct investments (with no coinvestment)

Deviations to the Investment Policy, as agreed with the Investment Manager

Investments implying a conflict of interest between East Capital Explorer and East Capital which are not already contemplated by the Investment Policy

Controlling and supervisory function of the Board

The Corporate Governance Report (see page 38) describes both the role of the Board in monitoring the investment activities undertaken by the Investment Manager and the responsibilities of the Audit Committee regarding the review of the Investment Policy and the investment activities.

Control duties of the executive management

The control duties of the executive management team are also described in the internal control report and include comments on the continuous work undertaken to minimise all material risk impacting the optimum achievement of the investment strategy. These control activities include, amongst other things, reviewing the processes for valuations and NAV calculations in order to assure the reliability of the NAV reporting and continuous discussions and contacts with the key individuals within the Investment Manager.

OUR INVESTMENT MANAGER: EAST CAPITAL

East Capital was founded in 1997 by individuals with a common interest in investing in the Eastern European markets, convinced that the region would develop into functional, mature and stable markets. By combining fundamental macroeconomic and political knowledge with the input of personal visits and meetings in the region, East Capital's managers continuously review and analyse the most important development trends in the region. The investment teams spend a great deal of time travelling in the region, in validating the investment themes, in selecting the companies with the greatest potential for value growth and, as a final step, in determining the most appropriate financial instruments for the investment in question.

As per 31 December 2008, East Capital had EUR 1.8bn in assets under management and is, thereby, one of the largest independent asset managers in the world specialising in Eastern Europe. East Capital manages eight public equity funds, six semi-public equity funds, two private equity funds and two real estate funds. A number of the funds have received numerous awards, including Lipper Fund Awards and Golden Star Awards from Dagens Industri and Morningstar.

The members of East Capital's investment teams (many of whom are nationals of the countries in which they invest) have the regional experience and the network key to identifying forthcoming investment opportunities, especially companies that are located in less developed areas in the investment region. East Capital's investment teams are known for their focus, local presence and extensive travelling which helps retain and create new contacts, providing an important competitive advantage.

East Capital has 170 employees, with 26 different nationalities, and different investment teams with a total of 38 investment professionals. There are 7 offices worldwide.

For further information regarding East Capital refer to www.eastcapital.com.

Peter Elam Håkansson, Chairman of the Investment Manager, East Capital

How have the events of 2008 affected your view on Eastern Europe? East Capital has been investing in Eastern Europe for

more than 10 years, and we actually launched our first public equity fund in the midst of the Russian crisis in 1998. Throughout the years, we have experienced significant market turbulence on several occasions, but have always maintained our long-term positive view on this dynamic region. We have been impressed by the strong and resourceful populations in these countries, in particular when it comes to using tougher times as a catalyst for positive change. Based on our previous experience, we are fully convinced that the longterm trends of convergence and catching up with the western world will continue as a key driver for positive change and development in this region.

What is your current view on East Capital Explorer's key sectors?

East Capital Explorer's key sectors are based on the same investment strategy as East Capital's products – to gain exposure to companies and sectors that stand the most to gain from the long-term positive development trends mentioned above. This strategy has certainly paid off in the last 10 years, and we are confident that these sectors will continue to offer the best long-term investment opportunities.

This said, from time to time we may naturally come to focus more on certain sectors than on others. In the banking sector, for example, we certainly still see the longterm potential of the sector, but the risks and uncertainties are currently still very high. At the same time, we know that the banks that survive this crisis will be the most profitable and best positioned once the turmoil settles. That was the case in Sweden in the 1990's, in Turkey in 2001 and this will also be the case in countries like Kazakhstan, Ukraine and Russia.

Is Russia strong enough to manage its way out of the crisis?

Certainly, Russia is a much stronger nation today than in 1998 and the country's development in just ten years is truly remarkable, and can be illustrated with some photos I have taken on site (see below). The Russian leadership has recognized the importance of international investors and their confidence in the market place. They launched an impressive support package and also met with international investors, including ourselves, to try and restore confidence in Russia. What is quite typical for Russia, however, is the delayed implementation of the swiftly launched measures. We are still waiting to see the full effects of the package.

I hope that recent market events will encourage the Russian leadership to focus on diversifying the Russian economy from oil and gas dependence, and to push ahead with pension reforms that will create stronger and longer-term domestic investors. In times like these, I think we will also see the population stand behind this leadership.

How do you view the risks in Russia?

A key dimension when considering investments in Eastern Europe is the continuous evaluation of both risks and the longterm opportunities. Arguably, the risks in Russia and other emerging markets are, and rightly should be, perceived as higher than in more developed markets.

During 2008 there were a number of

events that significantly damaged investor confidence in Russia, which had a broad impact across the entire financial market. These events also underlined the importance of a stock picking approach based on a fundamental understanding of the markets. In volatile markets a general risk diversification becomes more important than ever. Already today, we have made sure that East Capital Explorer offers a broad and well-diversified portfolio, and we will naturally continue with this strategy.

Valuations on listed companies are at a historic low, is Private Equity still an attractive route for East Capital Explorer?

Yes, one of our main reasons for launching East Capital Explorer in the fall of 2007 was to offer investors easy access to investments that are otherwise hard to reach. Investing in unlisted and small and mid cap companies is also often the only way to gain exposure to our key sectors. Shareholders who wish to complement this exposure with large caps can easily buy these equities, themselves, or invest through daily traded funds.

Today we also see a large number of companies struggling with their debt situations. This could mean interesting investment opportunities, as East Capital Explorer is very well capitalized and does not rely on leverage to create value.

What are your expectations for 2009?

2009 will be challenging for many countries in our region, but it will also offer many opportunities for us as focused specialist investors, just as in the years following the Russian crisis in 1998-99. I am confident that once stability and risk appetite returns, we will see a significant inflow of investors into this region in search of attractive returns.

Ukraine's capital Kiev is the seventh largest city in Europe in terms of inhabitants. Despite significant political instability, Ukraine has made many important positive developments since the Orange revolution in 2004. Although 2009 will be a challenging year for Ukraine, the country remains one of the most important in the region.

East Capital Explorer AB Annual Report 2008 19

Our portfolio on 31 December 2008

East Capital Explorer's portfolio comprises investments in Semi-public Equity Funds, Private Equity Funds, Public Equity funds, Direct Investments, as well as cash and short-term deposits. On 31 December 2008, total net asset value amounted to EUR 265m, corresponding to EUR 7.31 per share.

The fair value change of the total portfolio was -32.8 percent during 2008. The fair value change of East Capital Explorer's investments was approximately -60 percent during the year. Cash and short-term deposits constituted a major part of the portfolio and amounted to EUR 176m, corresponding to EUR 4.85 per share on 31 December 2008.

			Fair value
		Acquisition	31 Dec	Fair value	Fair value	NAV/
	Number of	value	2007	31 Dec 2008	change, %	Share	% of
	units	tEUR	tEUR	tEUR	1 Jan–31 Dec	EUR	NAV
Semi-public Equity Fund Investments
East Capital Bering Russia Fund	537,844	23,590	23,981	7,377	-69.2	0.20	2.8
East Capital Bering Ukraine Fund	1,212,296	24,411	- 1	7,630	-68.7	0.21	2.9
East Capital Bering Balkan Fund	4,538,686	34,938	25,684 2	17,631	-50.6	0.49	6.7
East Capital Bering Central Asia Fund	2,486,454	19,528	- 1	7,389	-62.2	0.20	2.8
East Capital Bering New Europe Fund	1,560,000	9,997	- 3	6,842	-31.6	0.19	2.6
East Capital Power Utilities Fund4	162,000	81,000	82,152	26,515	-67.7	0.73	10.0
		193,465		73,383	-60.5	2.02	27.7
Direct investments
MFG (OAO Melon Fashion Group)	4,996	9,941	- 5	9,941	-	0.27	3.8
Private Equity Fund Investments
East Capital Russian Property Fund	400	855	- 6	513	-	0.01	0.2
Public Equity Fund Investments
East Capital (Lux) Eastern European Fund (EUR)	182,500	18,250	17,903	5,814	-67.5	0.16	2.2
Short-term Investments
Cash and deposits7				175,789		4.85	66.3
Total Portfolio				265,440		7.32	100.2
Other assets and liabilities net				-415		-0.01	-0.2
Net Asset Value (NAV)				265,025	-32.8	7.31	100.0

¹ The fund units were received on 2 January 2008.

² An additional investment of EUR 10m, corresponding to 2,449,648 newly issued shares, was made in December 2008. The initial investment of 2,089,038 shares amounting to EUR 24.9m in acquisition value has decreased 70.3% during 2008. The total decrease of East Capital Explorer's investment in the fund was 50.6% for 2008.

3 The fund units were received on 2 May 2008.

⁴ The East Capital Power Utilities Fund is reported as an investment in the portfolio report above but is consolidated in the financial statements.

⁵ The investment in MFG was completed in November 2008.

⁶ The acquisition value of EUR 0.9m is a first draw-down of the total committed EUR 40m to the East Capital Russian Property Fund. The total commitment of EUR 40m is for the total amount of 400 shares.

⁷ Includes the remaining EUR 39.1m that has been committed to the East Capital Russian Property Fund but that has not yet been drawn-down.

The portfolio on 31 December 2008

* EUR 39.1m of cash is committed to the East Capital Russian Property Fund but has not yet been drawn-down.

NAV and share price development during 2008

Net asset value calculation

A monthly indicative net asset value (NAV) per share is calculated per the last day of each month. East Capital Explorer's net asset value is calculated as the value of total assets (all investments plus all other assets, such as cash) less all liabilities, divided by the number of issued shares. The value of East Capital Explorer's investments is based on the monthly net asset value reported for each respective East Capital fund in which we have invested. For more information on the applied valuation principles, Note 1, page 67.

The net asset value is published through a press release and on our website five working days after the end of the month. The net asset value reports are not subject to review by the Company's auditors.

Net asset value and share price

East Capital Explorer's monthly net asset value per share and share price development during 2008 are presented in the graph to the left. The net asset value per share decreased 32.8 percent (EUR) during 2008, while the share price decreased 59.8 percent (SEK).

During the first half of 2008, East Capital Explorer traded in a narrow range to the net asset value, at an average discount between the net asset value and the share price of 4 percent. During the second half of the year, the discount widened following the increased turbulence on the global financial markets. On 31 December 2008, the East Capital Explorer share traded at a discount to NAV of 50 percent. Average discount during 2008 was 19 percent.

Please note that the base currency for East Capital Explorer's net asset value is EUR, while the base currency for the share price is SEK. Conversions of the net asset value to SEK and the share price to EUR are made only for information purposes. The resulting figure may vary according to the source and point in time of the conversion. East Capital Explorer has obtained the applied exchange rates from Reuters at 16.00 GMT +01:00 on the respective dates.

The latest portfolio report and net asset value report are always available on our website: www.eastcapitelexplorer.com

East Capital Bering Russia Fund

FUND FACTS

Launch date: 1 June 2004 Risk: High Volatility: 33.8% Sharpe ratio: 0.5 Alpha: 117.5% Number of holdings: 150 Listed/unlisted exposure: 75%/18% Fees: 2% management fee, 20% performance fee ISIN code: KYG290611014 Bloomberg: BERINGF KY Benchmark index: RTS2 Index

OUR INVESTMENT

Invested amount: EUR 24m Date of investment: 3 December 2007 Number of fund units: 537,844 Fair value on 31 Dec 2008: EUR 7.4m % of NAV on 31 Dec 2008: 2.8 Change in value 2008 (EUR): -69.2%

For definitions, see pages 54–55 and 81.

11.0 Metals & Mining 9.3 Engineering 7.2 Retail 5.9 Constr. & Constr. Mtrl. 4.5 Consumer Goods 4.4 Electronics 3.7 Real Estate 16.3 Other sectors 7.2 Cash

Aim of the fund

The aim of the fund is to achieve long term capital appreciation from investments in listed and unlisted equities in Russia and the former Soviet Union. The Fund may also invest in companies that have significant trade with, or active investments in Russia or the countries of the former Soviet Union.

Fund performance during 2008

The NAV per unit of the East Capital Bering Russia Fund decreased 69.2% in EUR terms during 2008. In USD terms, the NAV per unit decreased 70.6% during the year compared to the RTS2 Index which posted a decline of 79.6% during the same period. On 31 December 2008 the NAV per unit in the fund amounted to USD 19.34.

Performance 2008 (EUR)

See page 81 for an index definition.

with Jacob Grapengiesser, Partner and member of the Portfolio Management Team, East Capital

What were the main events affecting the fund during 2008? 2008 was a year of highs and lows for Russia. Highs included the alltime-high on the Russian RTS ex-

change on 19 May and the oil price peaking at USD 147 in July. In August we saw global markets go into full reverse and rapidly falling oil prices that did not help the financial markets, or the economy. The effect was a prompt change in sentiment and the investors' fear of risk at very high levels not seen in the markets for a very long time. Wanting to decrease the risk in their portfolios, investors typically exited Russian investments – at any price. This, in turn, led to a number of days during the autumn during which margin calls led to collapsing stock prices and, in effect, dysfunctional exchanges.

What are the main differences between the crisis in 2008 and 1998?

First of all, Russia deserves great credit

for being a fundamentally different country today compared to 1998. Russia has come along in these ten years – structurally, financially and socially.

While 1998 was a Russian crisis, with the country going into bankruptcy, defaulting on its debt obligations, the crisis we saw unfolding during 2008 is a global crisis that originated in the US and then spread across the world, including to Russia. Recent market turbulence has, of course, reminded the international investor community that emerging markets are more volatile and sensitive to external shocks, such as the US crisis, than developed markets.

How are the companies in the fund performing?

Performance has naturally varied depending on the sector. Most companies are carrying on with their operations, but adjusting to changing economic conditions. The largest threat to companies in Eastern Europe and Russia, in particular, is leverage. Debt levels in the companies in the fund, however, are mostly under control with 102 companies having a net debt/EBITDA of less than 1 and only 13 companies with a net debt/EBITDA level of more than 3.

Looking ahead to 2009, where do you see the most attractive investment opportunities?

Of course, the rapidly falling oil price affects the entire Russian economy, with the budget balancing at USD 50 per barrel. Looking at companies on the market, there are certainly opportunities which are less exposed to lower prices of raw materials. The fund has less than 3% exposure to the oil sector and the strategy is, rather, to focus on sectors providing exposure to the growing domestic economy and on the fact that more and more Russians come under better social circumstances. Although the current economic climate will certainly affect the economy as a whole and certain sectors more than others, we maintain our positive view on basic consumer goods, for example. In current markets we will increase our focus on investments in this sector and on companies such as Progress Capital (see below), with a strong position on the Russian baby food market.

Food for the youngest Russians

Example of a portfolio company in East Capital Bering Russia Fund

Progress Capital is an unlisted Russian consumer goods company with a total turnover of USD 250m in 2008. The company has two main divisions: baby food (40% of revenues) and mineral water (60% of revenues). These divisions were formerly part of Russian Lebedyansky JSC, the largest juice producer in Eastern Europe. When Lebedyansky's juice production business was sold to PepsiCo in August 2008, the baby food and water divisions were spun-off into Progress Capital.

With a market share of approximately 10%, Progress Capital is, today, one of the main players in the Russian baby food market. The company has a strong portfolio of brands. Baby food and purees are marketed under the "FrutoNyanya" brand and mineral water products are marketed under the "Lipetsky Byuvet" brand.

From an investment perspective, Progress Capital offers a good defensive play in current markets where fast consumer goods are less likely to be affected in a slowing economy. The company is relatively well-positioned to be able to preserve its margins (EBITDA 2008 of approximately 26%). Recently implemented family friendly state policies have boosted Russian birth rates and the market for baby food to an annual growth of 20–25%. In 2008, the company's revenues from baby food grew by 50% and mineral water by 100%. The current baby boom coupled with the global focus on health and nutrition, also witnessed in Russia, provides strong ground for Progress to continue to enjoy robust organic growth.

Investment facts: East Capital invested since: 2008 East Capital Bering Russia Fund's holding in company: 0.6%

East Capital Bering Ukraine Fund

FUND FACTS

Launch date: 29 July 2005 Risk: High Volatility: 29.9% Sharpe ratio: -0.1 Alpha: 26.9% Number of holdings: 54 Listed/unlisted exposure: 24%/65% Fees: 2% management fee, 20% performance fee ISIN code: KYG290651028 Bloomberg: BERINGU KY Benchmark index: PFTS Index

OUR INVESTMENT

Invested amount: EUR 24m Date of investment: 2 January 2008 Number of fund units: 1,212,296 Fair value on 31 Dec 2008: EUR 7.6m % of NAV on 31 Dec 2008: 2.9 Change in value 2008 (EUR): -68.7%

For definitions, see pages 54–55 and 81.

6.4 Banking & Finance 3.4 Electronics 1.9 Power Utilities 1.8 Agriculture 1.6 Constr. & Constr. Mtrl. 1.2 Oil & Gas 2.6 Other sectors 11.9 Cash

Aim of the fund

The aim of the fund is to achieve long term capital appreciation from investments in Ukrainian equities, both listed and unlisted. The Fund may also invest in companies that have significant trade with, or exposure to, the Ukraine and other countries of the former Soviet Union.

Fund performance during 2008

The NAV per unit of the East Capital Bering Ukraine Fund decreased 68.7% in EUR terms during 2008. In USD terms, the NAV per unit decreased 69.3% during the year compared to the PFTS Index which posted a decline of 83.1% during the same period. On 31 December 2008 the NAV per unit in the fund amounted to USD 8.87.

Performance 2008 (EUR)

See page 81 for an index definition.

with Aivaras Abromavicius, Partner and member of the Portfolio Management Team, East Capital

What were the main events affecting the fund during 2008? While Ukraine was one of the best performing stock markets in the world in 2007, with a 137%

gain of the PFTS Index, it was one of the world's worst performing markets in 2008, with PFTS loosing more than 80%. This is the kind of volatility we can experience in emerging markets which is challenging to us as fund managers.

One of the highlights during the year was our investment during the spring in Chumak (see below). This is an inspiring company that we have come to known well during quite a long time, and we are happy that we finally were given the opportunity to become shareholders.

What is your view on the tension between Russia and Ukraine, most

recently demonstrated in the gas dispute?

The gas dispute has become a recurring annual conflict in past years but this year the conflict was considerably more acute, partly because of the forthcoming presidential elections in Ukraine in January 2010. Russia-Ukraine relations are at an all time low and it is very likely that they will improve considerably following the elections in Ukraine.

How are the companies in the fund performing?

Similar to the majority of companies in our investment region, Ukrainian companies generally performed as usual during most of 2008. However, 2009 will no doubt be a difficult year for Ukraine and surely also as regards certain of our fund holdings. So far, we have seen one real estate company in the fund portfolio, albeit with very marginal weight in the fund, showing troublesome leverage levels that are likely to jeopardize the future survival of the company.

Looking ahead at 2009, where do you see the most attractive investment opportunities?

Ukraine is facing some tough decisions and major challenges. 2009 could well be the most difficult year for the Ukrainian economy since the era of hyperinflation in the early 1990's. One of the major challenges for companies in Ukraine is potential debt defaults triggered by the ongoing devaluation of the Ukrainian hryvna. Although general debt levels are low, most debt is issued in foreign currency. This will mean difficulties for companies without a natural hedge from cash inflows.

Investors will return but not before they see stabilisation in the hryvna and a stabilisation in the global equity markets. As an investor in the region, we keep the leverage situation under special observation and continue to focus on companies providing products to meet basic consumer demands.

From field to table

Example of a portfolio company in East Capital Bering Ukraine Fund

Chumak is a leading Ukrainian producer of high-quality food products, such as ketchup, mayonnaises, condiment sauces, salad dressings, cooking sauces, tomato paste, juices, pasta and canned vegetables. The company was founded in 1996 in Kakhovka, South Ukraine, and Chumak is currently one of the most important companies in this region.

The Swedish founders, a family with strongly rooted traditions in food processing and packaging, entered Ukraine at the beginning of the 90s at a time of upheaval within the agriculture sector. The strategy was to provide high quality vegetable based products with tastes tailored to Ukrainian consumers, in modern packaging and promoted under a local brand. The Chumak brand has, since then, developed into one of the most popular food brands in the country, holding a 30% market share of the local ketchup and cooking sauce markets and almost 50% of the local dressing and tomato paste market. The primary focus is on a nationwide distribution to retail and food service outlets, but the company also exports selectively to Russia, other CIS countries and to Ukrainian/Russian diasporas consumers in the United States, Israel and Canada.

Chumak has a modern agriculture and has introduced world-standard cultivation technologies such as drip-irrigation, hybrid seedling and other best practices. Production sites close to the fields ensure an uninterrupted supply of raw materials during harvest season and are a key competitive advantage. A suitably dry climate in the heart of one of the world's largest man-made channel irrigation systems provides an excellent foundation for agriculture with sustainable advantages.

Chumak is owned by the management and two financial investors, Dragon Capital and East Capital Bering Ukraine Fund. The 2008 turnover amounted to USD 72m and the EBITDA-margin was 12%. Chumak employs approximately 900 year

round staff and also represents a significant indirect employment source for up to 20,000 agricultural workers during the growing season. Over 450 people are directly involved in sales and promotion, ensuring that the Chumak assortment can be found at over 40,000 points of sale throughout Ukraine.

Investment facts:

East Capital invested since: 2008 East Capital Bering Ukraine Fund's holding in company: 22%

Learn more about Chumak on: www.chumak.com/eng

East Capital Bering Balkan Fund

FUND FACTS

Launch date: 31 July 2006 Risk: High Volatility: 36.8% Sharpe ratio: -0.6 Alpha: 9.0% Number of holdings: 72 Listed/unlisted exposure: 66%/18% Fees: 2% management fee, 20% performance fee ISIN code: KYG290601031 Bloomberg: BERINGB KY Benchmark index: The fund currently has no relevant benchmark index

OUR INVESTMENT

Invested amount: EUR 25m (2007), additional EUR 10m (2008) Date of investment: 3 December 2007, 2 December 2008 Number of fund units: 2,089,038 (2007), additional 2,449,648 (2008) Fair value on 31 Dec 2008: EUR 17.6m % of NAV on 31 Dec 2008: 6.7 Change in value 2008 (EUR): -50.6%

For definitions, see pages 54–55 and 81.

8.3 Investment Companies 7.8 Consumer Goods 6.6 Constr. & Constr. Mtrl. 3.4 Real Estate 3.3 Hotels 2.5 Engineering 2.3 Oil & Gas 12.7 Other sectors 16.3 Cash

Aim of the fund

The aim of the fund is to achieve long term capital appreciation from investments in Balkan equities, both listed and unlisted. The Fund's investment focus is linked to the Balkan economy and geographically comprises Albania, Austria, Bosnia-Herzegovina, Bulgaria, Croatia, Greece, Macedonia, Montenegro, Romania, Serbia, Slovenia and Turkey.

Fund performance during 2008

The NAV per unit of the East Capital Bering Balkan Fund decreased 70.3% in EUR terms during 2008. In USD terms, the NAV per unit decreased 69.5% during the year. There is currently no relevant benchmark index available for this fund. On 31 December 2008 the NAV per unit in the fund amounted to USD 5.52. East Capital Explorer has made two investments in the fund and the total change in value of the investment during 2008 was -50.6%.

Performance 2008 (EUR)

with Jacob Grapengiesser, Partner and member of the Portfolio Management Team, East Capital

What were the main events affecting the fund during 2008? The Balkan markets are still relatively small and young, with investors first starting to show interest in these

markets as recently as 1–2 years ago. During this market turbulence, we saw a lot of international investors heading for the exit, not really looking at fundamentals or valuations. When stability returns to global markets and the focus is, again, allowed to shift to fundamentals, there should be room for increasing stock prices.

What about the parallel that many draw with the negative developments in the Baltics?

The expansion in the Baltic States has been fuelled, in part, by credit from the Scandinavian banks in the region. Leverage among companies and private individuals in the Balkan countries is significantly lower compared to the Baltic economies. This is a key difference. Development in terms of GDP/capita is another obvious difference. The average GDP/capita in the Baltic States of USD 9,000 is almost twice as high as the GDP average in the Balkans of USD 4,900. This means that the Balkan countries still have significant catch-up potential.

In November East Capital Explorer made an additional investment of EUR 10m in newly issued shares in the fund. How will you invest this capital?

East Capital Explorer's additional investment means that we can capitalize on some of the opportunities we see in this part of our investment region. Per 31 December, cash in the fund amounted to 16.3%. Following the unjustly harsh derating of Balkan markets, we currently see plenty of undervalued investments. One example is the Romanian privatization funds with attractive holdings currently trading at a 70% discount to their net asset value. We will also look at increasing exposure to companies that are noncyclical with stable cash flows and which are attractively valued. Pinar Et, the largest meat processing company in Turkey (see below), certainly fulfills all these prerequisites.

Looking ahead to 2009, where do you see the most attractive investment opportunities?

Looking at Eastern Europe from a relative point of view, the Balkan region probably offers the best macroeconomic prospects in 2009, even though there are many questions marks at this point in time. The EU-convergence process progresses and the advantages of being a part of the EU become even more evident in current markets. Contribution from EU funds, as much as 4% of GDP in Romania and Bulgaria for example, will be helpful and I think these countries can expect extra help from EU, if needed.

Tasty products for the Turkish consumers

Example of a portfolio company in East Capital Bering Balkan Fund

Pinar Et is one of Turkey's leading vertically integrated meat processors, including both a feed mill, slaughter-house and a meat processing unit. The company is a pioneer in the Turkish meat industry and today offers a wide range of premium beef and turkey based fresh, processed and frozen products as well as meat-based ready meals. Pinar Et is a clear market leader with a 20% share of the Turkish processed meat market. The company is listed on the Istanbul Stock Exchange.

By meeting demand from an increasingly health-conscious young population, the company has demonstrated strong growth with a 10% annual growth rate for the period 2004 to 2007. In the first nine months of 2008, turnover increased 12% with an estimated turnover for the full year 2008 at USD 235m. The business is profitable with relatively stable gross margin levels of 22%, EBITDA margin levels of 14.5% and net margin levels of 10% in the past few years.

From an investment perspective, Pinar Et is well-positioned to continue to grow on the Turkish market for processed meat products. Competitive advantages include high quality EU standard production, a strong and valuable brand image and wide-spread distribution network. 83% of sales is distributed through the group's distribution company (second largest food sales and distribution network in Turkey) while 16% is direct sales and 1% is exported.

Investment facts:

East Capital invested since: 2007 East Capital Bering Balkan Fund's holding in company: 3.5%

Learn more about Pinar Et on: http://eng.pinar.com.tr/

East Capital Bering Central Asia Fund

FUND FACTS

Launch date: 28 February 2007 Risk: High Volatility: 30.8% Sharpe ratio: -1.5 Alpha: 7.6% Number of holdings: 35 Listed/unlisted exposure: 70%/18% Fees: 2% management fee, 20% performance fee ISIN code: KYG2906R1048 Bloomberg: BERINGC KY Benchmark index: KASE Index

OUR INVESTMENT

Invested amount: EUR 20m Date of investment: 2 January 2008 Number of fund units: 2,486,454 Fair value on 31 Dec 2008: EUR 7.4m % of NAV on 31 Dec 2008: 2.8 Change in value 2008 (EUR): -62.2%

For definitions, see pages 54–55 and 81.

Aim of the fund

The aim of the fund is to achieve long term capital appreciation from investments in Central Asian equities, both listed and unlisted. The Fund can invest in Armenia, Azerbaijan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Uzbekistan, Russia, Ukraine, Kazakhstan and Georgia.

Fund performance during 2008

The NAV per unit of the East Capital Bering Central Asia Fund decreased 62.2% in EUR terms during 2008. In USD terms, the NAV per unit decreased 62.8% during the year compared to the KASE Index which posted a decline of 66.1% during the same period. On 31 December 2008 the NAV per unit in the fund amounted to USD 4.19.

Performance 2008 (EUR)

See page 81 for an index definition.

Q&A

with Aivaras Abromavicius, Partner East Capital and member of the Portfolio Management Team, East Capital

What were the main events affecting the fund during 2008? In short, 2008 was an eventful year in this region with a rapidly changing economic out-

look in Kazakhstan and the unfortunate conflict in Georgia. Although Kazakhstan, is better positioned to withstand an economic downturn than certain of the other countries in Central Asia, it has also been negatively affected by falling commodity prices and significant capital outflows. Major support packages to the banking sector have provided stability to the systemic banks in the region, with nationalization of BTA and Alliance banks in early 2009 as a consequence.

Going forward, major concern remains as regards Kazakhstan's ability to maintain their sound public finances. Political stability appears to remain intact.

What effects did the Russia-Georgia conflict have on the region?

While the tragic consequences for the civilian population are obvious, the full effects of the conflict on the real economy are still difficult to estimate. Investor interest in Georgian stocks decreased considerably because of the increased country risk and unstable political situation, even after the military activities came to an end.

The global financial markets meltdown pressured Georgian shares even further in the last quarter of the year. On 31 December 2008, the fund's exposure to Georgia amounted to 19.5% of the portfolio and we continue to invest actively in Georgia where we currently see interesting investment opportunities such as the Populi retail chain (see below).

When do you foresee an increase in investment activities in countries like Tajikistan, Turkmenistan and Kirgizstan?

These are very underdeveloped, completely illiquid markets and will most probably stay off the investors' radar screens for at least another couple of years. We will continue to concentrate on our key markets, Kazakhstan and Georgia, which currently offer many attractive investment opportunities at low valuations.

Looking ahead to 2009, where do you see the most attractive investment opportunities?

Although 2009 will be a challenging year also for this region, there will be interesting investment opportunities when investors, once again, start focusing on fundamentals. Companies with strong balance sheets, limited debt and foreign currency revenues should do best in an environment of weakening domestic currencies. Kazakh resource companies should do fairly well in the long run.

Retail from Express to XL

Example of a portfolio company in East Capital Bering Central Asia Fund

Unlisted Populi is the true pioneer of the organized Georgian food retail market and is today the largest multi-format food retailer in Georgia. The company's turnover has grown from USD 1m in 2005 to around USD 50m in 2008. Populi has grown significantly in recent years and the net selling space totalled 15,750 m2 in 2008 with more than 1,500 employees working across three well-defined retail formats. Populi's retail network includes 27 Populi Supermarkets, ten Populi XL

stores and four Populi Express stores. With 34 locations in Tbilisi, Populi stores are a common sight in the Georgian capital. With an estimated market share of 6-7%, the Populi retail network welcomed over 30,000 customers every day in 2008.

Products from more than 300 international and local suppliers as well as more than 100 products under the Populi brandname, can be found in the stores. Many of the stores also offer fresh fish, butchery and bakery services, as well as Populi's own ready-made takeaway cuisine.

From an investment perspective, the Georgian food retail sector is interesting because it is still in its nascent form, with over 55% of food sales taking place in open air markets. In the next three years, the sector is projected to grow at 20% annu-

ally. Currently, there are only a few competitors within the different retail formats, most of them are smaller and less well capitalised. The recent successful launch of the Populi Express format is a good example of how the company creates growth by extending formats to efficiently satisfy diverse customer preferences. Introducing "Populi Credit", a credit card for Populi customers, during 2008 was

another means to expand the service offering.

In an agreement with the European Bank for Reconstruction and Development, Populi has recently received debt financing of up to USD 12m at attractive interest rate and leverage conditions. This makes Populi well-positioned to add new stores to its retail network and continue to

gain market shares during 2009.

Investment facts:

East Capital invested since: 2006 East Capital Bering Central Asia Fund's holding in company: 14%

Learn more about Populi on: www.populi.ge

East Capital Bering New Europe Fund

FUND FACTS

Launch date: 30 April 2008 Risk: High Volatility: n/a Sharpe ratio: n/a Alpha: n/a Number of holdings: 34 Listed/unlisted exposure: 51%/23% Fees: 2% management fee, 20% performance fee ISIN code: KYG2906N1034 Bloomberg: BERINGN KY Benchmark index: The fund currently has no relevant benchmark index

OUR INVESTMENT

Invested amount: EUR 10m Date of investment: 2 May 2008 Number of fund units: 1,560,000 Fair value on 31 Dec 2008: EUR 6.8m % of NAV on 31 Dec 2008: 2.6 Change in value 2008 (EUR): -31.6%

For definitions, see pages 54–55 and 81.

Sector exposure, % Country exposure, %

Aim of the fund

The aim of the fund is to achieve long term capital appreciation from investments in Central European and Baltic equities, both listed and unlisted. The Fund's investment focus geographically comprises the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Slovakia and Poland.

Fund performance during 2008

The East Capital Bering New Europe Fund was launched on 30 April 2008. The NAV per unit of the fund had decreased 31.6% in EUR terms on 31 December 2008. In USD terms, the NAV per unit had decreased 38.2% during the same period. The fund currently has no relevant benchmark index. On 31 December 2008 the NAV per unit in the fund amounted to USD 6.18 and slightly more than 70% of the fund was invested.

Performance 2008 (EUR)

with Andras Szalkai, Member of the Portfolio Management Team, East Capital

What were the main events affecting the fund during 2008? Central European equities, which in a historic perspective were attractively valued in the

spring of 2008, fell even further during the year. Until December 2008, Poland and Slovakia were still booming, reporting 4.8% and 7% GDP growth for 2008, respectively. During the fourth quarter the global economic outlook worsened significantly, reaching also Central Europe. The investment policy of the fund has been reshaped somewhat to reflect the economic reality and we have preserved the high cash level in the fund. We have focused on investments in companies benefiting from public construction and IT infrastructure projects financed by EU funds, as we expect that these investments will be able to continue to perform relatively well.

The outlook for Poland and Hungary are very different, why is that?

Poland's economy has been booming in the past couple of years, with strong domestic demand, relatively little dependency on exports and guest workers' remittances contributing to the economy. Hungary had significantly overspent its 2004- 2005 budgets and was, consequently, forced to bring budget levels back in line with normal European levels, dampening growth and delaying necessary tax reforms. Relative to Poland, Hungary is much more dependent on sustaining export levels. Another large risk in Hungary is, currently, the extensive loans in foreign currencies which will become burdensome in times of limited credit market access and currency depreciation.

Many of the countries in this region are already members of the European Union, what will comprise the next incentive for reform?

The path to the European Union has been a strong driver for reforms in many of the countries in Central Europe in the past few years. On the one hand, the negative developments within the current economic environment, unfortunately, impose risk of delaying or even overruling important reform activities. It is still too early to tell whether the crisis will delay or completely halt important reforms currently on the agenda, such as healthcare and pension reforms. On the other hand, many of the countries in Eastern Europe will find EU funds a helpful contribution to GDP, and have welcomed financial support offered by the ECB. This support has certain conditionality of reforms attached to it, so we will still see some degree of economic reforms push ahead.

Looking ahead to 2009, where do you see the most attractive investment opportunities?

The current depreciation of the local currencies creates a new situation. Companies with more defensive characteristics such as Pegas Nonwovens SA (see below) are clearly more attractive and are more likely to benefit from higher export revenues. We look for deep value, a stable and safe product portfolio and good cash flows. Another interesting theme is to shift focus back onto companies with high dividend yields and companies that may become takeover targets, as we expect the current crisis to become a catalyst for consolidation in some industries.

Meeting demand of personal hygiene products Example of a portfolio company in East Capital Bering New Europe Fund

Pegas Nonwovens SA is a large Czech manufacturer of textiles from polypropylene and polyethylene. The company has grown steadily in the last five years at an average growth rate of 10%. Full year turnover 2008 is estimated to reach EUR 150m. Pegas Nonwovens is a profitable company with EBIT 2008 expected to amount to EUR 25-30m, resulting in an EBIT margin of over 20%. The company is listed on the Prague stock exchange since 2006, and market capitalization on 31 December 2008 was EUR 78m.

Pegas Nonwovens' materials are used in diapers, women's hygiene products, towels, filters and crop row covers. The largest customers are international consumer goods producers including Procter & Gamble, Johnson & Johnson, SCA and Kimberly Clark. The company has increased its share of the European market from 8% in 2005 to more than 10% in 2008.

From an investment perspective, the company is interesting since it supplies the basic consumer goods industry which is more resilient in a deteriorating economic climate. The company currently has a low valuation offering a 10% dividend yield in EUR and a cash flow yield exceeding 20% generating a stable cash flow. The weakening Czech koruna and significantly lower oil prices are other factors that make the Pegas case interesting.

Investment facts:

East Capital invested since: 2008 East Capital Bering New Europe Fund's holding in company: 1.4%

Learn more about Pegas Nonwovens on: www.pegasas.cz

East Capital Power Utilities Fund

FUND FACTS

Launch date: 5 December 2007 Risk: High Volatility: n/a Sharpe ratio: n/a Alpha: n/a Number of holdings: 73 Listed/unlisted exposure: 80%/1% Fees: 2% management fee, 15% performance fee and 5% profit share after 7% hurdle and a 50/50 catch-up ISIN code: - Bloomberg: - Benchmark index: RTSeu

OUR INVESTMENT

Invested amount: EUR 81m Date of investment: 5 December 2007 Number of fund units: 162,000 Fair value on 31 Dec 2008: EUR 26.5m % of NAV on 31 Dec 2008: 10.0 Change in value 2008 (EUR): -67.7%

For definitions, see pages 54–55 and 81.

Aim of the fund

The aim of the fund is to target the many investment opportunities arising from the ongoing power sector reform in Russia. The fund invests in both listed and unlisted companies across subsectors of the industry including electricity generation, distribution and services.

Fund performance during 2008

The NAV per fund unit in the East Capital Power Utilities Fund decreased 67.7% in EUR terms during 2008. In USD terms, the NAV per unit decreased 66%, outperforming the Russian power utilities sector index, RTSeu, which decreased 72% during the same period. On 31 December 2008 the NAV per unit in the fund amounted to EUR 163.67 and 81% of the fund was invested.

Performance 2008 (EUR)

See page 81 for an index definition.

with Aivaras Abromavicius, Partner and member of the Portfolio Management Team, East Capital

What were the main events affecting the fund during 2008?

The Russian utilities sector started to underperform before the broad market selloff in the

fall of 2008. Once the wave of sales of generation assets to strategic investors had passed, portfolio investors started to look at the sustainability of the electricity market liberalization process. With Anatoly Chubais, the ideologist behind the electricity reform, leaving the position of CEO of RAO EES, investors started to doubt if Russia would be able to fully liberalize the electricity sector according to the initial plan and allow electricity prices to increase at a time of already high inflation. On 1 July, EES was divided into 23 separate companies which created a massive share overhang, putting significant additional pressure on sector performance.

What will trigger a revaluation of the sector?

Russian utilities stocks have fallen 80–95% in value and valuations are currently very low. Many companies in the sector trade at a negative enterprise value and have more cash on their balance sheets than their respective market capitalizations. The tariff hikes announced in December 2008 had a positive affect on share prices.

A major test of the market will take place in July 2009 when 50% of the electricity market is expected to be liberalized. If this proceeds according to plans, the Russian government will have proved its commitment to sector reforms. A widely discussed and already much delayed introduction of capacity market payments would also be welcomed by investors.

How will the current market development affect sector reforms and investments?

It is very unlikely that the utilities sector reforms will stop at this stage, as the government officials understand the importance of sector modernization in meeting Russia's need for increased capacity. Current bottlenecks in electricity infrastructure would limit or prevent economic growth, once the economy starts to recover.

Is this one of Russia's "strategic sectors" and do you see any risks for foreign investors?

Formally, the utilities sector is not in the list of strategic sectors of the Russian Federation. The government has allowed a handful of foreign strategic investors to acquire majority stakes in some of the largest power generators in Russia, including Fortum, Enel and EON which have already made significant investments in Russia.

Has price liberalization been negative for consumers in terms of decreased disposable incomes?

Russians still spend fifty percent less of their disposable incomes on electricity than Western Europeans do, and recent hikes have had limited impact. Looking at the price development of electricity on the free market, current prices are not very different from regulated prices. The continuing sector liberalization is not expected to imply a dramatic increase in prices and will, therefore, not negatively impact consumers in a harsher economic climate.

Looking ahead to 2009, where do you see the most attractive investment opportunities?

Some of the most interesting opportunities can be found among the companies which shares fell the most during 2008. Many companies in the power generation sub-sector, for example, are trading at below the level of cash on account. There are also interesting examples in other subsectors, such as the Federal Grid Company with a market capitalization of almost USD 4bn and around USD 5.8bn in cash.

Clean energy to a low cost

Example of a portfolio company in East Capital Power Utilities Fund

RusHydro is the largest hydrogeneration company in Russia with 2008 revenues amounting to more than USD 2.2bn and is currently the second largest hydro power company in the world with a total installed capacity of 25.3 GW. The company is listed on Russian RTS and MICEX and is included in MSCI Russia and MSCI EM Europe. 60.4% of the shares and votes are held by the Russian state.

From an investment perspective, hydro power companies are especially interesting in current markets. In addition to being a clean, renewable natural resource with operational reliability, the cost structure of hydro power is significantly lower than alternative sources of energy. Hydro power is consumed before all other types of power, which is a strong advantage over fuel-fired generators.

RusHydro has the lowest operating costs among domestic peers, enjoying a strong 36% EBIT margin as a result. Margins are likely to continue growing in the next few years thanks to favourable regulated tariffs and continued liberalization of the electricity market. The company has a relatively strong financial position with no debt repayments falling due before 2010 and no need to borrow at market rates during 2009. RusHydro will also receive substantial state support through 20092010 – helped by large regulated tariff increases, preferential loans from state banks, and state participation in share issues at relatively high prices. All in all, this makes RusHydro one of the least financially vulnerable generating companies, a significant advantage in current market conditions.

Investment facts:

East Capital invested since: 2003 East Capital Power Utilities Fund's holding in company: 0.2%

Learn more about RusHydro on: http://eng.rushydro.ru

East Capital Russian Property Fund

OUR INVESTMENT

Commited amount: EUR 40m Date of commitment: 27 May 2008 Amount drawn-down: EUR 0.9m Number of fund units: 400

% of NAV on 31 Dec 2008: 0.2

See pages 54–55 for fee glossary.

Fund performance during 2008

was still placed in cash and short-term deposits.

Fair value of amount drawn-down on 31 Dec 2008: EUR 0.5m

Per 31 December 2008, no investments had been made in the fund. An initial capital draw-down of EUR 0.9m to cover costs in the fund was made during the fourth quarter. The remaining part of East Capital Explorer's commitment amounting to EUR 39.1m

FUND FACTS

Launch date: 2 July 2008 Risk: High

Fees: 1% annual management fee on gross asset value. Profitsharing arrangement (investors 80% and East Capital 20%) above a hurdle rate of 10% and following a so-called 50-50 catch-up.

ISIN code: SE0002577445

Aim of the fund

The aim of the fund is to invest in shopping centres and other types of cash flow generating retail real estate in regional cities with more than 500,000 inhabitants, primarily in Russia but also in Ukraine and Kazakhstan.

Q&A

with Biljana Bozic, Head of the Real Estate Team at East Capital.

What were the main events affecting the fund during 2008?

A lot has happened since the fund was launched. Global real estate markets, including Eastern

Europe and Russia, have deteriorated significantly following the collapse in the US housing market. Globally there is a lack of liquidity in the market, resulting in very few real estate transactions and new development projects being put on hold. What has not changed is our view on the long term fundamentals of the Russian real estate market and as regards the fact that the market is significantly undersupplied in both quantity and quality across almost all asset classes. The fund has not made any investments. Although markets are admittedly very challenging, we strongly believe that will be able to invest on attractive terms.

Which new challenges do you have to deal with in your investment process? To respond to the new challenges we have, of course, reviewed the fund's investment

strategy in different ways. Firstly, we are giving major cities some more attention. Initially not of primary focus, Moscow and St Petersburg have become more interesting following the recent tumble in property values and outflow of foreign capital.

Secondly, due to lack of reasonably priced debt financing, it is now an important consideration for our team to be able to assume existing debt from a seller when considering potential property acquisition. We also analyze even more carefully the current tenants in the properties that we are considering, in order to ensure that they are positioned for long-term stability in the economic slowdown.

Valuations of listed property companies are at historic lows, are these companies a possible investment route for the fund?

No, we will not look to invest in property companies. Listed property companies are in fact development companies with very few if any income generating properties and many development projects and land bank. Our investment strategy is to acquire properties that are income generating and we will work actively with them to initiate further improvements. We are confident that our real estate competence and investment strategy will generate more attractive returns for our investors by investing directly in properties.

Looking ahead to 2009, where do you see the most attractive investment opportunities?

The current market conditions present a very interesting opportunity in terms of acquiring well-performing shopping centres and retail properties in strategic locations at attractive prices. While there have been very limited transactions recently, (as there is a mismatch between sellers and buyers' price expectations), the properties that we are analyzing are offered at the yields exceeding 13-16%. We expect that in 2009 there will be more motivated sellers in the market willing to accept new pricing realities, as many property owners and developers are pressed to repay their short-term loans that are maturing, but have very few opportunities to refinance these loans in the current credit environment.

The East Capital Russian Property Fund shall invest in attractive shopping centers and other commercial properties. For wellcapitalized international retail concepts, the current economic climate offers an opportunity to expand at better terms and thereby gain market shares. In March 2009, H&M entered the Russian market under the slogan "Get ready for some real shopping".

East Capital Explorer AB Annual Report 2008 35

Melon Fashion Group

In October 2008, East Capital Explorer made its first direct investment, investing a total of EUR 10m in the unlisted Russian fashion retailer Melon Fashion Group (MFG).

European design for the Russian woman

MFG's history begins in a small, local sewing school established in St Petersburg at the end of the 19th century (see separate article). Following more than 100 years of operations, MFG has developed into one of the ten largest retailers of women's clothes in Russia, with a vision to be one of Russia's leading fashion groups.

Based on a "European design adapted for the mentality of the Russian woman", MFG has acquired a market share of 2-3% of the Russian branded women's clothes market. The company expanded the number of stores from 14 in 2003 to 192 in December 2008. Approximately half of the stores are located in St. Petersburg and Moscow and half in Russia's fast-growing regional cities such as Kazan, Krasnodar and Nizhny Novgorod. MFG's stores are typically found in popular shopping malls and other high street locations with good customer flows.

MFG has a team of in-house designers. 90% of the manufacturing has been outsourced to external producers, mainly in China, while the remaining 10% is produced in the company's own manufacturing facility in Ostrov, Pskov region in Northwest Russia.

Fast-growing retail chain

MFG has exhibited a strong development in recent years thanks to its ambitious management team and continuous improvements in its structure and operations. Although the current economic slowdown will negatively affect consumption growth, MFG's brands in the mid-market segment are likely to be more resilient than many other brands. The company has stable cash flows and no financial debt, which makes MFG better positioned to participate in the consolidation of the highly fragmented Russian fashion retail market.

Fashion and football

MFG has a well-balanced brand portfolio comprising three retail chain concepts: Zarina, befree and recently acquired TAXI. While Zarina appeals to the classic woman aged 35-45, befree's target audience is a more fashion-oriented, trendier woman aged 25-35. TAXI targets the glamorous, self-assertive young woman between 17 and 25 and will be re-branded into Love Republic during 2009.

Behind MFG's success lies a modern management approach and an increased focus on innovative marketing. In spring 2008, MFG invited the Russian football player Andrey Arshavin to design his own guest collection for the befree concept. Arshavin became world famous after playing a key role in taking the Russian national football team to the semifinal in the European Championship 2008. As a fashion designer at MFG, Arshavin

During 2008, the Russian football player Andrey Arshavin designed a guest collection for the befree concept.

The Zarina fashion concept appeals to the classic woman.

was equally popular and participated in a befree campaign and different action marketing events. As a result of the campaign, befree's brand recognition in Moscow and St Petersburg increased from 37% to 50% during the first 6 months of 2008.

Read more about the MFG transaction on page 52.

Per 31 Dec.	2008E	2007	2006
Turnover (RUB)	2.1bn	1.4bn	1.0bn
EBITDA margin	7%*	8%	9%
Total number
of stores	192	117	93
• Zarina	82	55	50
• befree	89	62	43
• TAXI	21	-	-
Employees	1,639	1,144	938

with Mikhail Urzhumtsev, CEO of Melon Fashion Group

What were the highlights for Melon Fashion Group in 2008?

2008 has been an exciting year with many highlights. We completed the acquisition of the TAXI chain with its 16 stores, which was an important step in making our brand portfolio even more well-balanced. I am also very happy with our celebrity cooperation projects. In spring 2008, football superstar Andrey Arshavin helped us design a successful guest collection for befree. We also invited the famous circus performers and brothers, Edgar and Askold Zapashnye, to take part in our marketing campaign, which was popular among our customers. The share issue completed in late 2008 makes us well-positioned to continue growing – both organically with our own fashion concepts and through the acquisition of other brands.

How has recent financial turbulence affected Russian consumption patterns?

Well, of course the effects of the global financial turmoil are now very notable also in Russia. We saw a clear effect during the last quarter of 2008 and I believe the Rus-

SHAREHOLDERS
March 2009	Holding, %	Since
SMApS Group/
Kellerman family	36.3	1996
East Capital Explorer	16.0	2008
Swedfund	14.8	2002
East Capital Holding	11.6	2002
Management and other
private investors	21.3	-

sian consumer market rather challenged further affected during 2009. On the other hand, MFG products are attractively priced basic consumer products which I expect will be better positioned to withstand an economic slowdown than more expensive capital goods.

A number of international fashion retail companies are establishing in Russia, how will you manage increased competition?

This is not really a new phenomenon, many international fashion retailers have been present for a long time now – wellknown fashion brands like Mexx, Mango, Benetton and Zara have all been around for at least 3–4 years. This hasn't affected us negatively but has rather challenged us to grow even stronger as a company. Competition is not always negative since it forces you to evaluate both your own and your competitor's strengths and weaknesses, which I believe is fundamental to a company's continued success.

Looking at 2009, what are your goals and main opportunities?

Our first and foremost goal is to continue the expansion of stores. Right now we are focusing on the regional cities in Russia and I hope we will be able to reach our goal of doubling the number of stores between 2008 and 2011. But what is also very important this year is to keep monitoring the market. The financial crisis will undoubtedly affect all markets, but at the same time, people will need to continue to buy clothes. Nevertheless, tougher markets always mean looking at further optimization of company structures and business processes. I believe our well-known brands and our strong financial position will continue to be key in profitable expansion and strengthening our market position.

The history of MFG

From a small sewing school to Melon Fashion Group

Late 19th century A sewing school for girls is established in St Petersburg in the same building where MFG today has its headquarters.

1926 The sewing school is turned into a state-owned factory producing women's clothes.

1991 The factory's employees acquire the company, creating the closed jointstock company Pervomayskaya Zarya. The products are sold in the first Zarina shop owned by the company. An additional three shops are opened in the next few years.

1993 Launch of a product line for larger sized women under the slogan "Big is beautiful", and sold under the brand name "Zarina Plus".

1996 Swedish fashion entrepreneur family, Kellermann, invest in MFG.

1997 The "Zarina" trademark is licensed.

2002 The fashion concept "befree" is launched. East Capital makes its first investment in MFG.

2005 To increase efficiency and transparency, Pervomayskaya Zarya is divided into two companies; the OAO Melon Fashion Group offering women's clothing; and Pervomayskaya Zarya, focusing on real estate development.

2008 East Capital Explorer invests EUR 10m, corresponding to 16% of the shares in MFG.

For further information on MFG, please visit: www.melonfashion.ru/eng/, www.zarina.ru and www.befree.ru

Corporate Governance Report for East Capital Explorer AB (publ)

The Company's Corporate Governance report has not been reviewed by the Company's auditors.

Corporate governance at East Capital Explorer is about how we operate and are structured so that we safeguard the interests of all our shareholders in our overall objective of delivering long-term attractive returns.

Framework for corporate governance

East Capital Explorer is a public company listed on NASDAQ OMX Stockholm, Sweden. Corporate governance at East Capital Explorer is based on both external and internal frameworks. External frameworks comprise the Swedish Companies Act, the rules of NASDAQ OMX Nordic Exchange including the Swedish Code of Corporate Governance, as well as other applicable Swedish and foreign laws and rules. The Company's internal framework includes the Articles of Association, the Investment Management Agreement with East Capital, the rules and procedures of the Board of Directors and the charter of the Audit Committee, the instructions to the CEO and the policies that we have adopted.

Purpose and nature of the Company

East Capital Explorer is a public limited liability company investing in Russia and other countries within the Commonwealth of Independent States (CIS), the Balkans, the Baltic States, Central Asia and Central Europe, mainly indirectly through a selection of East Capital's current and future funds. In addition, the Company may also invest directly in unlisted companies in this region.

The Investment Manager and investment structure

East Capital Explorer is structured to best meet our objective to achieve long-term capital appreciation for our shareholders. East Capital Explorer is closely linked with the Investment Manager East Capital. This close association is governed by the Investment Management Agreement (as described further below). The governance structure – in which the Investment Manager retains significant control over the investment activities of East Capital Explorer – is tailor-made to ensure that our Board and our Audit Committee are granted sufficient independence and control tools to fulfil their important monitoring duties as regards the investment activities of the Investment Manager.

The structure creates the appropriate conditions for making investments in accordance with what is stated in the Company's Investment Policy and East Capital Explorer's prospectus to list on the NASDAQ OMX Exchange in November 2007. The structure also offers operational competitive advantages by allowing for a short decision-making process within the framework of the Investment Policy. It also creates stability and creates a clear division of responsibilities between the Investment Manager and the Company's Board.

Paul Bergqvist, Chairman of the Board of Directors

What is the Board's main role in the corporate structure?

The main responsibility of the Board of Directors is, of course, to ensure the best interests of all shareholders in East Capital Explorer.

Although the Board does not decide on the day-to-day investment activities, it does have significant responsibility to ensure that the Investment Policy, on which the Investment Manager bases the investment activities, suits our objectives; to decide on certain more significant investment decisions and, not the least, to monitor the operations of the Investment Manager and control that the investment activities are in accordance with the Investment Management Agreement and the Investment Policy. Also, the independent members of the Board safeguard thatconflicts of interest with East Capital do not emerge during the course of the investment activities.

To what extent can you influence or veto an investment decision?

Except for significant investment decisions (see page 17), we cannot veto any decisions made by the Investment Manager within the framework of the Investment Policy. This corporate structure and the investment management agreement have been carefully designed to ensure that we create the best returns for our shareholders in a cost-efficient manner. East Capital manages the investment activities, allowing us to draw on the existing experience, track-record and network of one of the largest independent investors in this region. We do not intend to duplicate this investment competence, neither in the Board nor in the Company's management team.

The members of the Board are always invited to participate as guests in the meetings of the board of East Capital Explorer Investments AB (see structure on page 38). I participated in a majority of these meetings during 2008. Members of the Board are always welcome to contribute with their own insights, or to question the current investment activities.

What have you done in 2008 to further strengthen Corporate Governance within the Company?

While a lot of the Board's work during 2007 was related to setting up the Company and company structures in preparation for our initial public offering in November 2007, clearly 2008 has been spent on further refining and strengthening these structures and processes. In April 2008, we welcomed Anders Ek as an additional independent member and a valuable addition to the Board.

Although we continuously evaluate the work of the Board, we also decided to conduct an external evaluation of the Board in October 2008. The results, which overall were positive, were presented to the Nomination Committee in December 2008. Although the Board is working well, there is always room for improvement and we have identified additional areas on which to focus in 2009. As a step in ensuring that we have a wellworking system for internal control, we asked PricewaterhouseCoopers, who are independent from our regular auditors, to conduct an audit of our internal control (read more about Internal Control on page 48).

Two of the members are closely related to the Investment Manager, how do you handle conflicts of interest?

We have decided to define Justas Pipinis and Kestutis Sasnauskas as dependent Board members although they are not, according to the definitions relating to stock exchange rules or Swedish Code of Corporate Governance, technically dependent. With our stricter definition of the concept of dependence, we wish to underline that we are aware of the close relationship between our companies and the potential for conflicts of interest that could be perceived in our corporate structure.

In discussions in which there has been a risk for conflict of interest, we have requested these Board members to refrain from participating in the discussions or in that portion of the meeting.

How have you as a Board reasoned in the case of share buy backs?

We have appreciated having the tool at our disposal and the Board has continuously discussed share buy-backs since July 2008 when the global market turbulence intensified.

We must always evaluate buying back our own shares in the context of the investment opportunities that our Investment Manager presents to us. The returns and implications of share buy backs should be weighed against the long-term returns that we expect these investment opportunities to generate for our shareholders. This holds especially true in the extreme market development we saw during the autumn, as the value of a strong cash position became increasingly clear in a market where financing is difficult, if not impossible.

In mid-March 2009, we decided to utilize the authorization to repurchase shares to signal our confidence in our NAV, our strong financial position and our business concept. It is also a way to create immediate value for our shareholders.

To summarize, despite a tough year 2008, we remain confident in the opportunities in our investment region and our ability to create long-term attractive returns for our shareholders.

Paul Bergqvist, Chairman of the Board

Board of Directors

Paul Bergqvist Chairman of the Board since 2007. Independent of the Company, Company management and the Company's major shareholders. Born 1946.

Anders Ek

Education

Work experience

sity.

Board member since 2008. Independent of the Company, Company management and the Company's major shareholders. Born 1948.

Bachelor's degree from Stockholm Univer-

2004–2008 Executive vice president and head Strategic and International Banking at Swedbank, 2000–2004 CEO of Robur, 1994–2000 Chief Investment Officer and deputy CEO of SPP (currently named Alecta), 1991–1994 Senior Portfolio Manager and member of Group Executive Management Trygg Hansa, 1985–1991 Executive vice president and Chief Investment Officer of the Swedish National Pension Fund.

Lars Emilson

Board member since 2007. Independent of the Company, Company management and the Company's major shareholders. Born 1941.

Education

Engineering and business studies at Linköping University.

Work experience

2000–2006 Deputy CEO of Carlsberg A/S, 1995–2000 CEO Pripps-Ringnes AB, 1992–1995 CEO Procordia Beverage AB, 1988–1992 Deputy CEO PLM AB.

Other board assignments

Board member and chairman of Sveriges Bryggerier AB, HTC Sweden AB and AB Pieno Zvaigzdes. Board member of Telenor ASA, TrygVesta AS, Svenska Lantmännen Ek För, AB Svenska Returpack, Björk. Eklund Group AB and JSC Nova Liniya (a portfolio company of the East Capital Bering Ukraine Fund).

Shareholding in East Capital Explorer AB 4,300 shares.

AB.

Shareholding in East Capital Explorer AB 3,000 shares.

Board member of Catella KAG, Sparinstitutens Pensionskassa and CA Fastigheter

Other board assignments

Education

Bachelor's degree from Lund University.

Work experience

2004–2007 CEO Rexam PLC, 2000– 2004 Group Director Rexam Beverage Global can operations, 1999–2000 Managing Director PLM AB, 1970–1999 Various positions within PLM AB's packaging operations in Sweden and the US.

Other board assignments

Chairman of Charter PLC and non-executive director of Filtrona PLC and Luvata OY.

Shareholding in East Capital Explorer AB 1,500 shares.

Alexander V. Ikonnikov Board member since 2007. Independent of the Company, Company management and the Company's major shareholders. Born 1971.

Justas Pipinis Board member since 2007. Not independent with regard to affiliation to the Investment Manager. Born 1973.

Kestutis Sasnauskas Board member since 2007. Not independent with regard to affiliation to the Investment Manager. Born 1973.

Education

PhD in Economics, Moscow State University of Oil and Gas.

Work experience

Since 2005 Senior partner and co-founder of ZAO Board Solutions, a Russian board and executive search services firm, 2001–2004 Co-founder of the Investor Protection Association in Russia.

Other board assignments

Non-executive chairman of the Independent Directors Association. Director and head of the audit committee of Baltika Breweries and independent director in the National Depository Center, Russia.

Shareholding in East Capital Explorer AB 2,000 shares.

Education

Bachelor of Science from Stockholm University, studies at Vilnius University and Gotland University.

Work experience

Partner of East Capital since 2004, CEO of East Capital Holding AB (since 2005) and CEO of East Capital International AB (since 2007), 2002–2005 CEO of East Capital Asset Management AB, 2000 joined East Capital and established the Private Equity fund East Capital Amber Fund, 1997–2000 Siemens Business Services AB.

Other board assignments

Board member and owner of Stingray Holding AB. Also holds a number of board and other assignments within East Capital.

Shareholding in East Capital Explorer AB 14,100 shares.

Education

Studies at Vilnius University, Gotland University and the Stockholm School of Economics.

Work experience

Since 1997 Co-founder and partner of East Capital, CEO of East Capital Private Equity AB since 2005. Previously responsible for Baltic Research at Enskilda Securities.

Other board assignments

Board member and partner of Rytu Invest AB. Board member of the Investment Manager, East Capital PCV Management AB, East Capital Holding AB, East Capital International AB and the East Capital Baltic Real Estate Fund.

Shareholding in East Capital Explorer AB 10,000 shares.

Continued Corporate Governance Report (from page 38)

The investment activities of East Capital Explorer are performed by East Capital PCV Management AB (the "Investment Manager"), a subsidiary within the East Capital group, within the framework set out by the Investment Management Agreement and the Investment Policy.

The main function of the Investment Manager is to handle the day-to-day activities related to investments made by East Capital Explorer and to source and plan the deployment of the remaining capital in accordance with the intended strategy. Another important function is to manage the cash of East Capital Explorer pending investments. In order to perform these duties, the Investment Manager utilizes other functions and resources within the East Capital organization.

The board of the Investment Manager, consisting of East Capital partners Peter Elam Håkansson, Kestutis Sasnausakas, Jacob Grapengiesser and Aivaras Abromavicius, meets on a frequent basis in order to discuss East Capital Explorer's investment portfolio and plan for the deployment of the remaining capital of East Capital Explorer. Recommendations for fund or direct investments are then presented for consideration of the board of East Capital Explorer Investments AB, which holds the investment portfolio. All investment decisions, except for those decisions that are specifically the responsibility of the Board of the Company, are made by the board of East Capital Explorer Investments AB.

East Capital Explorer Investments AB is owned by the Company and the Investment Manager. The Company holds all financial rights, while the Investment Manager controls and manages East Capital Explorer Investments AB. Currently, the CEO of the Company, Gert Tiivas and the Board member Justas Pipinis are members of the board of East Capital Explorer Investments AB, together with Magnus Lekander, General Counsel of East Capital and appointed by the Investment Manager.

Investment Management Agreement

The Investment Management Agreement sets out the terms and conditions upon which the investment activities will be performed by the Investment Manager and stipulates the manner in which the duties and responsibilities of the Investment Manager and the Company are allocated between them. The Agreement also assures the Company preferential access to new Semi-public, Private Equity and Real Estate funds launched by East Capital.

Under certain circumstances, the Company has the right to terminate the Investment Management Agreement, for example if the Investment Manager does not act in accordance with the Investment Policy or the Investment Management Agreement.

The Company also has the right, at its total discretion and without any breach of the Agreement, to give notice to terminate the Investment Management Agreement with the approval of a majority of at least 75% of the votes cast, as well as shares represented at a general meeting of shareholders of the Company. If the Investment Management Agreement is terminated within five years from listing on the NASDAQ OMX Exchange, the Investment Manager shall be reimbursed for the offering costs related to the listing.

Investment Policy

The Investment Policy prescribes the types of assets, investment themes and geographical segments in which investments may be made and stipulates certain limitations in order to assure diversification and an appropriate risk level. The Investment Policy may be revised from time to time, as the investing environment is changing. Any change in the Investment Policy would require approval of both the Company and the Investment Manager. The abstract of the Investment Policy of the Company can be seen under "How we invest" on page 16.

Share capital and voting rights

The Company's share capital as at 31 December 2008 was EUR 3,627,016 distributed among 36,270,160 ordinary shares. All shares entitle the holder to one vote per share and carry equal rights to the Company's profits and assets, as well as equal rights in terms of dividends.

Ownership structure

According to the share register held by Euroclear Sweden AB (the Swedish Central Securities Depository & Clearing Organisation, formerly VPC), as at 31 December 2008 East Capital Explorer AB had 9,984 shareholders. The shares held by the twenty largest shareholders and custodians, based on number of votes, corresponded to approximately 57.5% of voting rights and total share capital. Approximately 35.1% of the share capital was owned by foreign natural or legal entities. The majority of foreign-owned shares are nominee-registered, which means that the beneficiary ownersare not officially registered. See page 7 for a list of the 20 largest shareholders in East Capital Explorer AB per 31 December 2008.

Trading and market capitalisation

The East Capital Explorer share was listed on the NASDAQ OMX Nordic Exchange in Stockholm on 9 November 2007. The Company's market capitalisation was SEK 1,458m per 31 December 2008.

Functions of the Board of the Company

Although the ordinary investment management activities are assigned to the Investment Manager, the Company's Board will always take decisions in conjunction with the following: (i) investments exceeding 15% of the Company's net asset value, (ii) certain direct investments, and (iii) any investments that might give rise to a conflict of interest between East Capital and the Company not contemplated by the Investment Policy.

The Board of the Company continuously monitor the Investment Policy and evaluates whether it continues to be in the best interest of the shareholders of the Company. The Board expects to initiate changes in the Investment Policy, should the Board find that an update or revision is needed. The Board also monitors management performance and decides on remuneration of the employees of the Company.

Another function of the Board is to monitor the operations of the Investment Manager, for example by ensuring that the investment activities are carried out in accordance with the Investment Policy and the Investment Management Agreement. This task is mainly executed by the Company's Audit Committee, which consists of the Company's Board members who are independent from East Capital and from the executive management of the Company. The Board members also have the right to attend the Board meetings of East Capital Explorer Investments AB and have access to the Board minutes and all supporting material for the investment decisions carried out. The Company also has the right to appoint the auditor for East Capital Explorer Investments AB.

THE ANNUAL GENERAL MEETING

The Annual General Meeting of Shareholders (AGM) is the Company's highest decision-making body and is where shareholders exercise their influence. The AGM must be held within six months from the end of the financial year. All shareholders who are registered in the register of shareholders and who notify the Company in time are entitled to take part at the meeting. Shareholders may vote for the full number of shares they own and may be accompanied by a maximum of two assistants. Shareholders who cannot attend may be represented by proxy.

The AGM considers, among other things, matters relating to election of the Board, when applicable the appointment of auditors, dividend distribution, adoption of the income statement and balance sheet, and the discharge from liability of the members of the Board and CEO. Shareholders are entitled to have a matter considered at the meeting provided a legitimate request has been submitted to the Company well in advance to publication of the notice of the AGM.

The AGM is an important channel in communicating with shareholders. Shareholders are encouraged to participate at the AGM and all shareholders receive a printed invitation and notice to attend the meeting. The full Board and Company management attend the meeting and are available to answer questions from the shareholders.

Annual General Meeting 2008

The 2008 AGM was held at 4:00 p.m. on 21 April 2008 at China Teatern in Stockholm. The full documents from the 2008 AGM including notice, documents were presented at the AGM. Full minutes from the meeting are available on

www.eastcapitalexplorer.com.

The 2008 AGM was attended by 250 persons, including shareholders, all the members of the Board, all employees as well as a number of invited guests.

The resolutions passed at the meeting included:

The Meeting approved the Board's proposal that no dividends be distributed in accordance with dividend policy of the Company, and that the profit/loss be carried forward.

The Meeting granted the members of the Board and the CEO discharge from liability for the reporting period.

The Meeting resolved to amend the articles of association so that the Board of Directors shall consist of 3-6 members with no deputy members, and that an editorial clarification be included in the same section of the articles.

All current members of the Board were re-elected: Paul Bergqvist, Lars Emilson, Alexander Ikonnikov, Kestutis Sasnauskas and Justas Pipinis. The Meeting also resolved to elect Anders Ek as a new member of the Board. The meeting re-elected Paul Bergqvist as Chairman of the Board.

The Meeting resolved that the compensation to the Board of Directors for 2008 remain unchanged as SEK 700,000 to the Chairman of the Board of Directors and SEK 300,000 to each member of the Board of Directors that is not employed in the East Capital group. Members of the Board that are employed in the East Capital group have waived remuneration. The meeting resolved that compensation for work in the Audit Committee be remunerated with SEK 50,000 to the chairman of the Audit Committee and SEK 30,000 to each of the other members. Furthermore, it was resolved that fees to the auditor be paid according to approved invoices on the basis of a specific offer for such services.

The Meeting approved the Board's proposal for guidelines for remuneration to senior management.

The Meeting authorized the Board to acquire the Company's own shares in accordance with the proposed resolution.

The Meeting approved the proposal for Nomination Committee.

NOMINATION COMMITEE

The role of the Nomination Committee includes evaluating the Board and its work prior to the AGM, and to prepare and present proposals to the AGM on issues, such as the Chairman of the meeting, members of the Board, Chairman of the Board, as well as appointment of auditors, when appropriate. The Nomination Committee also proposes remuneration to the members of the Board, remuneration (if any) for Committee work and fees to be paid to the Company's auditors, as well as proposing the process for electing a Nomination Committee prior to the next AGM. All shareholders have had the opportunity to submit proposals to the Nomination Committee.

The work of the Nomination Committee 2008

The Nomination Committee for the Annual General Meeting of 2008 was comprised of five members, three members each appointed by the three largest shareholders in the Company as at 31 December 2007, East Capital Explorer's Chairman of the Board and the Investment Manager's Chairman of the Board: Ramsay Brufer, Alecta (Chairman); Anders Klein, SEB; Robert Vikström, Handelsbanken (approved by the Stena Sphere); Paul Bergqvist, as Chairman of the Board of East Capital Explorer and Peter Elam Håkansson, as Chairman of the Board of the Investment Manager.

East Capital Explorer's Head of Communications/IR, Louise Hedberg, was co-opted to attend the Nomination Committee's meetings as secretary.

No fees were paid to the members of the Nomination Committee for their work. The Nomination Committee's report, which describes the work of the Committee in detail, is available on www.eastcapitalexplorer.com.

The work of the Nomination Committee 2009

In accordance with a resolution by the 2008 AGM, the Nomination Committee for the 2009 AGM comprises five members; three members appointed by each of the three largest shareholders in the Company as at 30 September 2008, East Capital Explorer's Chairman of the Board and the Investment Manager's Chairman of the Board:

• Ramsay Brufer, Alecta (Chairman)
• Anders Klein, SEB
• Eddie Dahlberg, Volvo-related Foundations

Paul Bergqvist, as Chairman of the Board of East Capital Explorer

Peter Elam Håkansson, as Chairman of the board of the Investment Manager

The composition of the Nomination Committee was published through a press release and posted on the website on 27 October 2008. East Capital Explorer's Head of Communications/IR, Louise Hedberg, was co-opted to the Nomination Committee's meetings as secretary.

No fees were paid to the members of the Nomination Committee for their work.

Shareholders have been invited to submit their own proposals to the Nomination Committee. The Nomination Committee's proposals prior to the 2009 AGM are specified in the notice of the meeting and are also available on www.eastcapitalexplorer.com.

Annual General Meeting 2009

The 2009 shareholders' meeting will be held at 4:00 p.m. on 27 April 2009 at Konserthuset (Grünewaldsalen) in Stockholm. For more information please visit: www.eastcapitalexplorer.com.

BOARD OF DIRECTORS

Composition of the Board

According to the articles of association of the Company, the Board shall consist of three (3) to six (6) members without deputies. Further, the Investment Manager always has the right to appoint a Board member. Board members are elected for a one-year term. The 2008 AGM re-elected the following Board members to serve until the 2009 shareholders' meeting: Paul Bergqvist (Chairman), Alexander V. Ikonnikov, Lars Emilson, Justas Pipinis and Kestutis Sasnauskas and also elected Anders Ek as a new Board member.

Independence of the Board

Under applicable regulations, Paul Bergqvist, Anders Ek, Lars Emilson and Alexander V. Ikonnikov are regarded as independent in relation to the Company. The independent members of the Board have been proposed based on their significant experience from international management and business, specifically Eastern Europe and Russia, as well as their board work in various listed companies.

Justas Pipinis and Kestutis Sasnauskas are not defined as independent in relation to the Company as they are affiliated to East Capital that, due to the Investment Management Agreement and other relationships, must be regarded as having extensive business ties with the Company and affiliated enterprises.

Regarding the Board members' independence in relation to major shareholders, it can be noted that as of 31 December 2008 there are no major shareholders of the Company as the term is defined in the stock exchange rules and the Swedish Code of Corporate Governance.

For more information about each Board member please see pages 40–41.

The Board and its work

The work of the Board is governed by the rules of procedure adopted by the Board. The Chairman of the Board, Paul Bergqvist, directs the work conducted by the Board and maintains continuous contact with the CEO and the Company's other management functions, in order to monitor the Company's operations. The Board has also prepared and approved a Charter for the Audit Committee, a work instruction for the CEO as well as a number of policy documents.

Given the special nature and aims of the Company, the work of the Board mainly involves the control and monitoring of investment activities handled by East Capital Explorer Investments AB and the Investment Manager.

Chairman of the Investment Manager, Peter Elam Håkansson, the Company's CEO, Gert Tiivas, CFO Pia Tell Svensson and Head of Communications/IR, Louise Hedberg also participate in the meetings to report on their respective areas. The Board calendar and Board meetings are coordinated by Head of Communications/IR, Louise Hedberg. Magnus Lekander, General Counsel at East Capital, is the Board's secretary and keeps the minutes. Other representatives from the Investment Manager are invited, from time to time, to participate in Board meetings to make presentations on particular investment proposals or other matters.

The Board holds at least seven ordinary Board meetings per year. Additional meetings may be held to discuss and decide on investment proposals. One meeting per year is typically held in conjunction with an East Capital Investor Summit. The Investor Summits are investor conferences which East Capital organises in different parts of our investment region. Participation in an East Capital summit provides the members of the Board with new insights into the investment region and an update on current financial and political events, and always include company visits.

				Shareholdings per
Name	Position	Citizenship	Dependence	31 Dec 2008	Elected	Audit Committee
Paul Bergqvist	Chairman	Swedish	No	4,300 shares	2007	Yes
Anders Ek	Board member	Swedish	No	3,000 shares	2008	Yes
Lars Emilson	Board member	Swedish	No	1,500 shares	2007	Yes
Alexander Ikonnikov	Board member	Russian	No	2,000 shares	2007	Yes
Justas Pipinis	Board member	Swedish	Yes	14,100 shares	2007	No
Kestutis Sasnauskas	Board member	Lithuanian	Yes	10,000 shares	2007	No

The composition of the Board

Board meetings and main discussions

During 2008, a total of 13 Board meetings were held. Examples of the main discussions held during the meetings were:

Meeting	Main discussion
1/2008	Approval of the year-end report 2007
2/2008	Approval of the Annual Report 2007
3/2008	Approval of the Board's proposals to the Annual General Meeting 2008 and remuneration to Exe cutive Management
4/2008	Discussion on investment plan and investor acti vities
5/2008	Approval of the Rules of procedure of the Board of Directors, election of Audit Committee
6/2008	Approval of the Interim Report 1 January– 31 March 2008. Participation in East Capital Investor Summit in Vilnius, Lithuania
7/2008	Discussion on investment opportunities and share buy-backs
8/2008	Approval of the Interim Report 1 January– 30 June 2008
9/2008	Telephone meeting to discuss current market development
10/2008	Discussion on investment proposal
11/2008	Telephone meeting to approve investment pro posal
12/2008	Approval of the Interim Report 1 January– 30 September 2008. Presentation of the results of the Board evaluation
13/2008	Review of budget 2008 and approval of budget 2009. Approval of Code of Conduct and Princip les for Responsible Investment

Board meeting attendance

	Board

Name	Position	meetings (13 during 2008)
Paul Bergqvist	Chairman	13/13
Anders Ek	Board member	8/131
Lars Emilson	Board member	13/13
Alexander Ikonnikov	Board member	13/13
Justas Pipinis	Board member	11/132
Kestutis Sasnauskas	Board member	12/132

1 Anders Ek participated in all but one meeting after being elected.

2 Justas Pipinis was absent from the Board meeting 12/2008 and Justas Pipinis and Kestutis Sasnauskas refrained from participating in the Board meeting 11/2008 due to risk of conflict of interest.

In addition, Gert Tiivas, in the capacity of Board member of East Capital Explorer Investments AB, participated at 12 meetings for East Capital Explorer Investments AB (of which 1 were per capsulam) during 2008. Paul Bergqvist was also present at 8 meetings, as a non-member attendee.

Evaluation of the Board

The work of the Board is continuously evaluated. The evaluation is used to develop the work and processes in the Board, and as a basis for the Nomination Committee's evaluation of the composition of the Board. In October 2008, an evaluation of the Board was carried out through an external consultant with broad experience of board evaluations. The evaluation included both a comprehensive questionnaire comprising a range of questions about the work of the Board, as well as individual interviews with each member. The results were also evaluated against an average benchmark of board evaluation processes completed by the consultant in other listed companies.

The results of the evaluation in 2008 were, overall, positive and above the applied benchmark. As a result of this evaluation, the Board has also identified certain areas in which the work procedures of the Board will be further improved during 2009.

AUDIT COMMITEE

The Audit Committee is appointed annually by the Board, primarily to serve in an advisory function to the Board with respect to financial reporting, valuation and auditing matters. Given East Capital Explorer's investment structure, the Audit Committee has extended responsibilities, compared to many other companies, and also monitors the economic relationship with East Capital Explorer Investments and its investments, as well as the Company's cooperation and contractual relationship with the Investment Manager. The Charter of the Audit Committee governs the work of the Committee. The work of the Committee is reported to the Board on a regular basis.

The Audit Committee shall consist of at least three members appointed by the Board from among the independent members of the Board. The Audit Committee comprises Paul Bergqvist (Chairman), Anders Ek, Alexander V. Ikonnikov and Lars Emilson.

The Audit Committee may invite, as it sees fit, representatives from the Company, East Capital Explorer Investments or the Investment Manager as non-member attendees and may appoint appropriate legal counsel, audit expertise and independent valuation expertise for consultation in the performance of its duties.

Carl Lindgren, the Company's authorized auditor representing KPMG, participates in all meetings at which financial reports are approved, in order to present his findings to the Audit Committee prior to approval of these reports in the Board.

The Audit Committee regularly reports its conclusions and decisions in conjunction with the meetings of the Board.

Audit Committee meetings and main discussions

During 2008, a total of 5 Audit Committee meetings were held. Examples of the main discussions held during the meetings were:

Meeting	Main discussion
01/2008	Discussion on the year-end report 2007 and investment policy
02/2008	Discussion on the Annual Report 2007
03/2008	Discussion on Interim Report 1 January-31 March 2008
04/2008	Review of compliance with Investment Management Agreement, investment policy, cash management policy, service agreement and information policy. Discussion on Interim Report 1 January - 30 June 2008
05/2008	Discussion on Interim Report 1 January-30 September 2008

Audit Committee meeting attendance

		Audit Committee meetings
Name	Position	(5 during 2008)
Paul Bergqvist	Chairman	5/5
Anders Ek	Board member	3/51
Lars Emilson	Board member	3/52
Alexander Ikonnikov	Board member	4/53

1 Anders Ek participated in all but one meeting after being elected

2 Lars Emilson was absent from the Audit Committee meetings 03/08 and 04/08 3 Alexander Ikonnikov was absent from the Audit Committee meeting 03/08

Directors' fees

On 21 April 2008, the Annual General Meeting resolved that the Chairman of the Board will receive annual compensation of SEK 700,000 for the period until the 2008 AGM. Each member of the Board, other than the Chairman, will receive annual compensation of SEK 300,000 for the same period. Board members Justas Pipinis and Kestutis Sasnauskas waived their directors' fees.

Remuneration for work in the Audit Committee amounts to SEK 50,000 for the Chairman of the Audit Committee and SEK 30,000 per year to other members of that Committee.

Remuneration Committee

In light of the Company's limited number of employees, the Board has concluded that no Remuneration Committee should be established. The duties that would have been assigned to such Committee are instead performed by the Board as a whole.

CEO

The CEO, Gert Tiivas, is responsible for the day-to-day administration of East Capital Explorer in line with the instructions from the Board, other guidelines and policies. Together with the Chairman of the Board, the CEO prepares the agenda for Board meetings and prepares the requisite materials and information to allow for decision-making at Board meetings. In addition, the CEO ensures that the Board continually receives information on East Capital Explorer's development and market information from the Investment Manager in order to be able to make valid decisions.

The Board has approved the CEO's significant assignments outside the Company and regards these assignments as compatible with the position of CEO of East Capital Explorer. For more information about the CEO, see next page.

Remuneration to the Chief Executive Officer

			Pension and
SEK	Fixed salary	Variable salary	insurance cost
2008	1,009,200	0	205,500
20091	1,024,800	Discretionary	254,400

¹ Based on the CEO's salary in January 2009.

During 2008 a variable salary of SEK 160,000 has been paid to the CEO. This variable remuneration is related to the financial year of 2007.

Remuneration to the CEO consists of fixed salary, variable salary and pension and insurance benefits. The Board determines, at its own discretion, according to certain key performance indicators, whether the CEO should be paid any variable salary. The CEO can receive a maximum variable salary corresponding to 50% of his fixed salary. The CEO has an individual premiumbased pension plan, pursuant to which the Company pays premiums corresponding to 10% of his fixed salary up to 10 Swedish income base amounts and premiums corresponding to 20% of his fixed salary on the portion of his fixed salary exceeding 10 Swedish income base amounts.

Other management functions

Other management functions include the CFO and Head of Communications/IR. The CFO is responsible for the Company's financial statements, internal control and the cash management function. The Head of Communications/IR is responsible for external and internal communication, as well as investor relations and similar matters.

Share-related incentive programme

East Capital Explorer does not have a share-related incentive programme.

AUDIT

External auditors

The extraordinary general shareholders' meeting on 25 May 2007 elected registered auditing company KPMG as auditors for East Capital Explorer AB for a four-year term until the 2011 AGM, with authorised auditor Carl Lindgren as auditor in charge.

Compensation to auditors

The Company's auditors received compensation for audits and other requisite reviews, as well as for advisory services occasioned by observations made in the course of such reviews. During financial year 2008 the total compensation paid to the auditors was SEK 863,000 (corresponding to EUR 83,000), all relating to auditing services.

Communication with the Company's auditors

The Audit Committee maintains regular contact with the auditors. In addition, the auditors participate in the Audit Committee meetings at which the interim reports and full year report are addressed. The auditors report at that time on their observations from the audit and assessment of the Company's internal controls.

Auditors: KPMG AB

Auditor in charge: Carl Lindgren

Born 1958 Authorized public accountant at KPMG AB. Chairman of the Board of KPMG AB. Auditor in charge for East Capital Explorer since 2007.

Other auditing assignments: Intrum Justitia AB, Investor AB, Modern Times Group

MTG AB and Nordea. Carl Lindgren is also auditor in charge for the East Capital Group.

Shareholding in East Capital Explorer AB: 0 shares

Management

Gert Tiivas CEO since September 2007 Born 1973

CEO Other management functions

Louise Hedberg Head of Communications/IR since August 2007 Born 1974

Pia Tell Svensson CFO since July 2007 Born 1970

Education

Bachelor of Arts from Bentley College and a Master of International Affairs from George Washington University.

Work experience

2006–2007 Head of East Capital's Tallinn office, 2004–2006 President of Growth Markets for OMX Group, 1998 – 2004 CEO of the Tallinn Stock Exchange.

Other board assignments

Board member in East Capital Baltic Property Fund AB and East Capital Real Estate AS. Board member in East Capital Power Utilities Fund AB, East Capital Explorer Investments AB and AS Baltika.

Shareholding in East Capital Explorer AB 9,000 shares.

Education

Master of Science in Economics and Business from the Stockholm School of Economics.

Work experience

2002–2007 Head of Investor Relations Dometic Holding AB, 1998–2002 Communications consultant JKL Group AB.

Shareholding in East Capital Explorer AB 2,700 shares.

Education

Bachelor of Economics and Business Administration from the School of Economics at the University of Gothenburg.

Work experience

CFO of East Capital since 2005 and retained as CFO in East Capital Explorer since July 2007 pursuant to the Service Agreement with East Capital, 2005 Regional Finance Manager, Nordics VERITAS Software AB, 1993–2005 Various financial positions within the IT sector.

Shareholding in East Capital Explorer AB 2,000 shares.

Internal control

This description of the internal control is presented by the Board of East Capital Explorer in accordance with the Swedish Companies Act and the Swedish Code of Corporate Governance and describes the manner in which internal control regarding the financial reporting is organized.

The internal control within East Capital Explorer is designed in order to manage the risks within the financial reporting processes, but also to ensure an efficient and reliable accounting of buy and sell transactions of securities, and of the valuation of the securities holdings, and that the information is efficiently and correctly communicated to the market. East Capital Explorer has, during 2008, established an internal audit function. Öhrlings PricewaterhouseCoopers is responsible for the execution of the internal audit.

Internal control is usually described according to the framework developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). According to this committee's definition, internal control is comprised of the following components: control environment, risk assessment, control activities, information and communication and monitoring.

Control environment

By control environment is meant the overall structure of the Company ensuring sound internal control as regards financial reporting. The Board is ultimately responsible for the financial reporting. Reflecting the specific nature of the Company's operations, one important function of the Board is to monitor the investment activities carried out by East Capital Explorer Investments AB and East Capital PCV Management AB.

The Company's accounting and reporting manual as well as its Information Policy, which are also appendices to the Investment Management Agreement with the Investment Manager, contain detailed provisions regarding how financial and other information in relation to East Capital Explorer Investment's portfolio shall be treated and provided to the Company and stipulate, amongst other things, that the Company shall fulfill its obligations pursuant to applicable law, regulations and stock exchange regulations.

Risk assessment

The company management is responsible for the internal control required in order to manage the significant risks in the ongoing operations. Here is included the identification and assessment of possible risks in the portfolio reporting and the financial reporting from East Capital Explorer Investments AB and the Investment Manager, including the reliability of the monthly reporting of indicative net asset value of East Capital Explorer. The company management is responsible for designing a control system to prevent and identify, assess and mitigate these risks. The company management reports regularly to the Board regarding these issues.

Control activities

East Capital Explorer primarily undertakes monitoring and controls to ensure that the investment activities are executed in accordance with the investment policy and the Investment Management Agreement established with the Investment Manager.

In addition to the Company's accounting and reporting manual, and the information policy, the Company's Board has the right to attend East Capital Explorer Investments AB's Board meetings and to review the minutes of the Board meetings.

Furthermore, the Company may request that the Investment Manager make presentations to the Company's Board regarding the investment portfolio in order to assist the Board to monitor the Investment Manager's and East Capital Explorer Investments AB's compliance with the Investment Management Agreement. Furthermore, currently both the Company's CEO, Gert Tiivas, and the East Capital Explorer Board member, Justas Pipinis, are board members of East Capital Explorer Investments AB. The majority of this monitoring work is performed by the Audit Committee and the executive management of the Company.

East Capital Explorer works continuously with the elimination and reduction of significant risks impacting the internal control regarding financial reporting. Examples of control activities implemented in order to handle these risks are:

Active participation in the work of the Board of East Capital Explorer Investments AB.

On-going discussions and contacts with key individuals within East Capital.

On-going review of documentation for decisions and formalia in conjunction with the investment activities.

On-going review of internal methods and processes in order to ensure correct reporting of East Capital Explorer's indicative net asset value and portfolio.

Information and communication

East Capital Explorer has produced governance documents aimed at ensuring the quality of the internal control regarding financial reporting.

The Information Policy describes the manner in which East Capital is to communicate financial and other information to the market in accordance with the regulations of the stock market. Furthermore, there are policies and instructions for, among other things, investing activities, short-term investments, including deposits and cash, accounting and financial reporting.

Monitoring

The monitoring of the internal control of financial reporting is undertaken by the Board, the Audit Committee, CEO and management. The monitoring of the efficiency of the internal control is performed at each Board meeting during which the financial position of the Company is reviewed. The Audit Committee meets regularly and addresses and discusses accounting issues, the forms of monthly reporting, the internal audit and reviews the investment decisions made by East Capital Explorer Investments. The CEO and management monitor, on an ongoing basis, compliance with the policies, instructions and the Investment Management Agreement in order to ensure adherence to these.

The internal audit is an auditing function independent of the board and has as its purpose to audit, on an ongoing basis, the operations within the Company. The work of the internal audit in 2008 was based on a risk analysis performed by the management of East Capital Explorer AB and representatives from Internal Audit. During the year internal audit has audited a number of areas identified in the risk analysis. Those areas included in the audit plan for 2008 included those processes relating to investing activities, short-term investments, including deposits and cash, asset valuation, financial and other reporting to the market, and conflict of interest issues. The results of the audit are reported to the Audit Committee.

The Bayterek Tower in Astana, Kazakhstan is a famous landmark and symbolizes the transfer of the capital from Alma-Aty to Astana in 1997. The 97 meter tall tower represents a mythological tree of life with a golden egg containing the secrets of human desires and happiness.

Managing our risks

East Capital Explorer's business involves different types of risk. In addition to the risks that we take in our investments with the intent to create value for our shareholders, there are also a number of business risks and financial risks with possible impact on our business. Risk management deals with risks and opportunities affecting value creation or value preservation. Managing risks is an important part of achieving our objectives as an investment company. Upon launching East Capital Explorer in November 2007, we made significant efforts in designing our structure to ensure our ability to do so. Our main business risks and how we manage them in our day-to-day business are outlined below. Our financial risks are presented in Note 16 on page 76.

POLITICAL RISKS

Political systems are generally less stable in emerging markets than in developed economies and the legal systems are often less mature. This may imply certain specific investment and ownership risks. For example, amendments to the regulatory framework for the financial markets including changes on the protection of minority shareholders' rights, could adversely impact our business. Political risks also include the capacity of a country's leadership to govern, and its ability to decide on and implement reforms which are well-needed for the transition phase the whole region is going through. In the aftermath of the credit crisis all the countries of our investment universe face various challenges and not all of them have the same readiness to tackle those.

Managing these risks:

Political risks vary between countries and sectors, and our access to the local presence, experience, know-how and to the network our Investment Manager East Capital has established during more than 10 years of operations, implies that we are able to integrate a well-grounded analysis of the political risks in the investment decisions and in the management of the portfolio in a long-term perspective.

Our access to East Capital's network in the region, and their relations with other foreign investors that are active in these countries, is also valuable when jointly applied measures are made in order to make regulatory progress on issues which are important to us as foreign investors. For example, promotion of good corporate governance, independent regulatory regimes and authorities and anti-corruption measures, to limit the political interventions and assure the integrity in local business life.

East Capital avoids association with any political group and strives to keep neutral in its investment activities, thus reducing the likelihood of being a direct target of political intervention.

COUNTRY RISKS

Investing in emerging markets may generally mean a higher level of risk in the business environment than when investing in more developed countries. These markets are less mature and, thereby, also more volatile and more vulnerable to external shocks, as experienced during the autumn 2008 and the first quarter of 2009. This is common to all the countries in our investment region and not just associated with exposure to one specific company or investment in a fund.

Country risks also include instability in financial, legal and political systems and other country specific aspects, such as quality of corporate governance, reliability of settlement and clearing systems, lack of appropriate custody services, level of financial reporting and general availability to other reliable corporate information. If any of these country specific aspects should not develop as anticipated in any of the countries in our investment region, we are at risk of being less successful in our investments.

Managing these risks:

Our access to East Capital's investment teams, with local presence and both personal and professional experience of living and working in our investment region, provides East Capital Explorer with the capability to analyze, integrate and, to the extent possible, mitigate or even avoid certain country specific risks. Through the knowledge and experience of the advisory committees associated with East Capital, the investment team has access to sophisticated analysis and expertise in order to better evaluate any country specific political or macro-economic risk.

Our investment policy assumes that the vast majority of the assets are invested in East Capital funds, which in turn are diversified into 5 – 100+ holdings, depending on the strategy of the fund. No single fund investment made may exceed 40 percent of East Capital Explorer's total net asset value at the time of the investment, and no direct investment made by East Capital Explorer may exceed 15 percent of the total net asset value at the time of the investment. This effectively diversifies our portfolio across both sectors and the different geographic areas within our investment region.

Both East Capital Explorer and East Capital each have a Code of Conduct which clearly stipulate that corruption will not be tolerated in any manner or form. East Capital has, through its long term presence in the region, established a network of contacts and relationships which contribute to stay clear of counterparties, projects and situations in which corruption and other inappropriate business practices might be known.

INVESTMENT STRATEGY RISK

Our business plan and objectives are dependent on the availability of interesting investments. This includes timing the market to enter, and exit, at the most beneficial moment. There is a risk that we are neither efficient in choosing or developing our investments, nor successful in timing the market conditions at the most profitable moment.

Managing this risk:

Our access to the experienced investment teams at East Capital provides us with a structure to make well-grounded investment decisions and to effectively follow-up on the companies to which we have investment exposure.

The members of our Board have been selected on the basis of their respective experience of doing business in our investment region and their own merits relevant to the Board composition, as a whole. This provides the Board with the right background to evaluate the investment activities of the Investment Manager, and also contributes to the continuous discussions with the Investment Manager on the investment opportunities in our region.

The independent members of the Board also continuously review the Investment Policy to asses whether revisions may be justified as the investment environment changes. Any possible changes will be addressed by the Board, together with the Investment Manager in order to make the investment strategy most suitable over time.

The Investment Manager continuously reports on the latest developments in the investment region and follows up on the current pipeline of investment proposals as a standing item at all Board meetings. This provides the Board with updated information on which to base its evaluation of the Investment Manager's activities and the suitability of the Investment Policy.

COMPANY SPECIFIC RISK

Our success depends on our ability to provide our shareholders with a portfolio of interesting and profitable investments. This also includes being able to manage our investments effectively during our ownership and to create progress on investor friendly issues, such as corporate governance. There is a risk that certain companies, from time to time, may be adversely affected by internal and external factors and that they will, thereby, have a negative impact on the value of our investments.

Managing this risk:

Diversification is key to managing company specific risk. Our preferred route to gaining investment exposure is, therefore, through investments in East Capital's semi-public equity funds and private equity funds, effectively diversifying our portfolio across approximately 400 companies in our investment region on 31 December 2008, and thereby limiting the specific risk of any one company.

Our Investment Policy ensures that the focus is kept on the agreed countries and sectors, and that the mode for gaining investment exposure is in agreement with our view on risk-return. It is the responsibility of our Board to review and ensure that our Investment Policy suits our objectives.

Our access to the experienced investment teams at East Capital provides us with a structure to make well-grounded investment decisions and to effectively follow-up on the companies to which we have investment exposure.

When managing the unlisted portfolio companies to which we are exposed through our fund investments, our Investment Manager aligns interest with both the local management, as well as with other major shareholders, in order to set a common agenda for the investment period and preferred exit strategy. One important aspect in managing investments includes introducing and following up on improvements in corporate governance issues which we, as investors, firmly believe help to strengthen the operations of any company.

OPERATIONAL RISK

Well-structured and relevant internal administrative processes and systems are important in any corporate structure to minimise the operational risks related to the business operations. Lack of internal control, inadequate administrative systems and processes, infrastructure or technology failures, risk of theft or fraud or risks that East Capital Explorer's or East Capital's reputation in the marketplace is damaged could lead to unexpected economic losses or loss in confidence in us. As almost all operative functions are in-sourced from East Capital, East Capital Explorer is highly dependent on the successful ongoing operations of East Capital.

Managing this risk:

Operational risks are managed on the basis of our structure for internal control, including adequate routines and instructions, a clearly defined division of responsibility, IT-based support and reporting systems with relevant authorizations, our internal structure for information and reporting, as well as both information and physical security.

Through East Capital, we also have access to risk management functions adapted to the investment activities and operations of East Capital, which should also reduce the overall operative risks related to our business.

Through a service agreement with East Capital we are able to

cost-efficiently source general office and administrative resources from East Capital including office premises, reception, HR, IT and legal services. The costs for the service agreement are continuously evaluated by the Board and are estimated to be significantly more cost-efficient than if we were to source these services on our own.

As a part of our ongoing monitoring of the Investment Manager, when needed, we also engage external advisors to audit certain functions or processes of East Capital, in order to identify and address any risks related to the operative functions that are administrated by East Capital.

RELATED PARTY RISK

With East Capital as our Investment Manager, we have ensured our shareholders access to one of the most capable and merited investment teams active in the region. We rely on the team's capacity to manage our investment activities rather than having our own in-house investment teams. This could imply a risk that the investments undertaken are not in accordance with the best interest of the Company, or could imply a breach of limits and authority, unfair valuations or unauthorised risk exposure.

Managing this risk:

Considering our close relationship with East Capital, we have paid specific attention to ensuring the best interests of our shareholders. This includes a detailed Investment Management Agreement between our two companies that effectively stipulates the manner in which the investment activities should be undertaken, and assures that conflicts of interest between ourselves and East Capital can be appropriately handled.

In particular, in order to avoid any concerns related to the merits of a direct investment presented by East Capital where no other East Capital fund or other co-investors simultaneously participate, such direct investment is within the exclusive decision making powers of our Board. This way, the investment can be evaluated on its own merits by the members of the Board who are independent from East Capital.

Similarily, investments may not be made in any new funds launched by East Capital with terms which materially adversely deviate from the terms of any prior fund managed by East Capital without the consent of our Board. This prevents East Capital from introducing new terms which could be unfavourable to us.

Managing this risk also means avoiding investment situations in which the fairness or suitability of a transaction, or its valuation, could be questioned. For this reason, our Investment Policy clearly stipulates that we shall only invest in East Capital's new private equity funds, to avoid valuation issues or a discussion concerning the terms or timing at which we invest. In existing semi-public equity funds, we only invest in newly issued shares, providing new capital for new investments in the funds, thereby avoiding a situation in which East Capital Explorer could be seen as buyer of last resort.

The Audit Committee of East Capital Explorer, comprising all four independent Board members, has extended responsibilities compared to many other companies' audit committees. The Audit Committee is responsible for initiating review of our Investment Policy and monitors the Investment Manager's compliance with the Investment Policy and our Investment Management Agreement. In practice, this means reviewing all investment proposals and decisions made on East Capital Explorer's behalf.

Our independent Board members have important duties in this regard in order to safeguard the interests of our shareholders, as they resolve conflicts of interest (which are not already contemplated by the Investment Policy), for example, in relation to direct investments in which there is no other East Capital entity involved in the investment, or when assets are acquired from any other East Capital fund.

In order to ensure full transparency in the day-to-day investment activities and to enable the Audit Committee to fulfil these responsibilities, all members of the Board also receive materials, investment proposals and invitations to participate in the meetings and discussions of East Capital Explorer Investments AB. Our CEO is also a member of the Board of East Capital Explorer Investments AB.

Example of East Capital Explorer's decision making process in a direct investment

In October 2008, East Capital Explorer was offered the opportunity to join East Capital as an investor in the Russian fashion retailer, OAO Melon Fashion Group, where East Capital has been an investor since 2002. This transaction can be used to describe East Capital Explorer's decision making process when offered direct investments by our Investment Manager.

The transaction was structured in two steps where East Capital Explorer first acquired 2,421 shares from 26 direct investors in MFG. The shares were sold to East Capital Explorer through MFG Intressenter AB, a wholly owned subsidiary of East Capital Holding AB which is the company that also holds East Capital's own shares in MFG. Following the acquisition of these shares, East Capital Explorer acquired an additional 2,575 new shares in the share issue that was completed in November 2008. Our total investment in MFG amounted to EUR 10m, comprising 4,996 shares.

The shares were valued at market price based on company information and market comparables. To verify the valuation, the Board of East Capital Explorer asked for an independent fairness opinion from PricewaterhouseCoopers. In the discussion and decision to invest that followed in East Capital Explorer's Board, Justas Pipinis and Kestutis Sasnauskas, both partners in East Capital, refrained from participating. Following the share issue, East Capital Explorer and the East Capital Group hold respectively 16% and 11.6% of the shares in MFG. East Capital Explorer and East Capital will together hold 2 out of 9 seats on MFG's board, following the AGM in MFG in May 2009.

Corporate responsibility

Investments are an important contributor to growth and innovation in Eastern Europe but with investments come also influence and responsibility. We believe that a responsible and respectful approach to doing business is vital to the long-term success of any company.

Our view on corporate responsibility

We believe that corporate responsibility (CR) means acknowledging a company's obligations when it comes to environmental, social and governance issues. For East Capital Explorer, this is related to our direct actions as a company, but also to our responsibility when it comes to the cooperation with our Investment Manager and our portfolio companies in Eastern Europe.

As an investment company, our objective is to achieve long-term capital appreciation for our shareholders by investing in parts of the Eastern European markets that are hard-to-reach. While doing this, we strive to maintain a respectful approach and we expect our Investment Manager to do the same.

An important part of CR is related to a company's environmental impact. Whilst the largest portion of our overall environmental impact is indirect – resulting primarily from our investment activities – we acknowledge that our day-to-day business operations also have a direct, but limited, impact on the environment. We strive to limit this impact to enable a more efficient use of resources within our operations and to aim to reduce consumption of materials and promote recycling and the greater use of recycled materials.

CR in our investment region

Eastern Europe is still lagging behind Western markets in corporate responsibility issues, but the signs that we see are encouraging. The countries in our investment region have developed quickly and during recent years we have seen general progress in, for example, the area of corporate governance. More and more companies are run on the basis of clear governance principles, with a focus on independent boards and improved financial reporting. This has been an important and obvious step for many companies in their efforts to attract investors.

With corporate governance policies and financial reporting in place, we hope that more and more companies in Eastern Europe, also in a time of sharp economic slowdown, will recognize the importance of environmental and social issues by allotting time and resources to address these areas in their operations. As a significant investor, we trust that our engagement in these issues can contribute to this development.

MANAGING CR

East Capital Explorer is a relatively new company and our first priority in terms of CR has been to define our guidelines and principles. This process has resulted in two important documents defining how East Capital Explorer addresses environmental, social and governance issues. During 2008, our Investment Manager also launched two similar policies that mirror our policies.

Code of Business Conduct

Our Code of Business Conduct serves as the ultimate common denominator as regards principles of conduct and guidance for East Capital Explorer's employees and board members. The Code's core principle is respect, which in our view is inseparable from responsibility and high ethical standards. The Code agrees with the ten internationally accepted principles of the United Nations Global Compact in the areas of human rights, labour, environment and anti-corruption.

Principles of Responsible Investment

In the Principles of Responsible Investment we state our specific expectations towards our Investment Manager. We expect our Investment Manager to base investment decisions on an in-depth analysis of factors that may impact the future return of sectors and individual stocks. The analysis should include the financial outlook, as well as the risks and opportu-

The hydrogeneration company RusHydro (a portfolio company in the East Capital Power Utilities Fund) produces clean, renewable energy. Read more about RusHydro on page 33.

nities related to environmental, social and governance challenges.

In late 2008, our Code of Business Conduct and Principles of Responsible Investment were approved by the Board of Directors. The next step in our CR process will be to, in cooperation with our Investment Manager, structure priorities, the definition of targets and further develop our plans to achieve and report on our stated goals.

The policies can be found on our website, www.eastcapitalexplorer.com.

For more information on the principles of the United Nations Global Compact: www.unglobalcompact.org

Fees

East Capital Explorer's investment structure has been designed to ensure cost-efficient management of the Company's investment portfolio for attractive long-term returns for the shareholders. Fees are paid only on the underlying fund level at the same terms as other fund investors. East Capital Explorer does not pay any fees to East Capital for their service in managing the investment portfolio. Fee structures vary between the different funds, with the main terms presented below. Total fund fees paid during 2008 amounted to EUR 3.6m.

Investment	Subscription Fee	Annual Management Fee	Performance Fee	Hurdle	Catch Up
Fee for managing East Capital Explorer's investment portfolio	N/A	N/A	N/A
East Capital Bering Russia Fund	0% (Ordinarily 5%)	2% on NAV	20% above a high watermark, paid quarterly
East Capital Bering Ukraine Fund	0% (Ordinarily 5%)	2% on NAV	20% above a high watermark, paid quarterly
East Capital Bering Balkan Fund	0% (Ordinarily 5%)	2% on NAV	20% above a high watermark, paid quarterly
East Capital Bering Central Asia Fund	0% (Ordinarily 5%)	2% on NAV	20% above a high watermark, paid quarterly
East Capital Bering New Europe Fund	0% (Ordinarily 5%)	2% on NAV	20% above a high watermark, paid quarterly
East Capital Power Utilities Fund	N/A	2% on NAV1	15%	7%	50/50
East Capital Russian Property Fund	0%	1% on GAV2	N/A	10%	50/50
Direct investments	N/A	2% on NAV1	20%	8%	0/100
East Capital (Lux) Eastern European Fund (EUR)	0% (Ordinarily up to 5%)	2% (accrued daily)	N/A
Cash management	N/A	N/A	N/A
Committed capital	N/A	N/A	N/A
Total

FEE GLOSSARY

Allocation target = Level of net proceeds of the fund whereafter the net proceeds are paid according to set profit sharing arrangement. This level is typically set to 80–20 meaning that 80% of the net proceeds are paid to investors and 20% are paid to East Capital.

Catch-up = Allocation of the net proceeds of the fund, once hurdle has been reached. May be set to 50/50 meaning that 50% of the net proceeds are paid to investors and 50% to East Capital up to a given allocation target of the total net proceeds of the fund. Purpose is to incentivize the manager to create good returns (above hurdle).

Clawback = Upon termination of the fund, if East Capital has received profit share distribution in excess of 20% of the fund's net profits from all portfolio investments, East Capital will return the excess amount to the fund. This can for example occur if a portfolio investment is sold at a loss at the end of the fund term, and profit share has been paid out to East Capital in prior divestments of the fund. GAV = The gross asset value (GAV) of a fund at a certain point in time.

High Watermark = Level of NAV above which performance fee is paid.

Hurdle = Net return on fund or investment, calculated on a cumulative annual basis, to be paid to investors before catch-up and profit share/performance fee can be paid to East Capital.

Performance fee with high watermark. A performance fee of 20 percent is paid to East Capital quarterly, when the NAV exceeds the previous highest watermark. In the example above, performance fees of 20 percent of the performance above the last high watermark are paid in Q1 and Q3 during the first year and in Q3 in the second year. Performance fees for any performance above the high watermark during a given quarter are not locked in.

With regards to the performance of the funds since East Capital Explorer's investment, the NAV of the funds on 31 December 2008 was significantly below their respective high watermarks.

Example fee structure in East Capital Bering Funds Example fee structure in East Capital Private Equity Funds

Profit distribution waterfall with 10 percent hurdle rate, 50/50 catch-up and 80/20 profit share arrangement. In the example above, investors receive the full return on an investment upon exit up to a 10 percent hurdle. After the hurdle, there is a catch-up in which investors and East Capital each receive 50 percent of the return on the investment until the allocation target of 80 percent of the return to investors and 20 percent of the return to East Capital, has been reached (in this case at a 16.8 percent return on investment). Thereafter, all excess returns are allocated 80 percent to investors and 20 percent to East Capital. A so called claw back protects investors against over-distribution of profits to East Capital.

Total fees paid	Performance fees	Management fees
during 2008	paid 2008	paid 2008		Profit
(EUR thousands)	(EUR thousands)	(EUR thousands)	Redemption Fees	share
N/A	N/A	N/A
708.9	258.7	450.2	Payable to Fund: 10% during the first year of ownership of the shares to be redeemed, 7.5% during the second year, 5% during the third year and 2.5% during the fourth year
370.1	-	370.1	Payable to Fund: Investor's first year 20%, second year 15%, third year 10%, fourth year 5%
365.3	-	365.3	Payable to Fund: Investor's first year 20%, second year 15%, third year 10%, fourth year 5%
304.8	-	304.8	Payable to Fund: Investor's first year 20%, second year 15%, third year 10%, fourth year 5%
115.0	-	115.0	Payable to Fund: Investor's first year 20%, second year 15%, third year 10%, fourth year 5%
1,545.1	-	1,545.1	N/A (no redemption possible, capital returned upon fund termination)	95/5
-	-	-	N/A (no redemption possible, capital returned upon fund termination)	80/20
37.4	-	37.4	N/A (capital returned upon exit of investment)	N/A
171.8		171.8	Up to 1% (on the net asset value of the shares being redeemed)
N/A	N/A	N/A
N/A	N/A	N/A
3,618.4	258.7	3,359.7

Management fee = Fee paid to Investment Manager. Calculated monthly and subtracted in the monthly net asset value calculation of each fund.

NAV = Net asset value. The value of net assets, i e total assets less net debt. An indicative NAV for East Capital Explorer is calculated on a monthly basis and is published five working days after the end of the month.

Performance fee = Fee paid to encourage East Capital to create better returns for the fund investors. A high watermark ensures that only performance above level of investment or the latest previous "highest value" is remunerated.

Profit share = Arrangement where future proceeds are divided according to preagreed level. Typically set to 80–20 meaning that after hurdle has been reached and full catch-up has been paid, East Capital is entitled to a 20% preferred profit share of the returns generated above this and the remaining 80% is distributed among investors.

Redemption fee = Fee paid to the fund (not to East Capital) to compensate the fund for redeeming capital which may lead to the fund divesting assets to meet redemption. The redemption fee compensates the other fund investors for the possible loss of returns that the fund makes from divesting the investment.

Subscription fee = Fee paid upon investment in a fund, amounting to a certain percent of invested capital. East Capital Explorer has been waived all subscription fees.

1 Based on audited annual accounts at the end of the preceding year.

In Krasnaya Polyana, preparations are well underway for the 2014 Winter Olympic Games in Sochi. The Olympics are seen as a strategic investment in stateof-the art infrastructure and public services and as an opportunity to inspire to higher ecological standards across Russia.

56 East Capital Explorer AB Annual Report 2008

East Capital Explorer AB

financial year

1 January – 31 December 2008

Contents

Administration Report	58
Financial statements	60
Notes to the financial statements	65
Consolidated key figures	78
Audit Report	80

Administration Report

The Board of Directors of East Capital Explorer AB ("the Company"), corporate registration number 556693-7404, hereby submits the consolidated financial statements for the period 1 January – 31 December 2008 and the annual report for the Parent Company for the financial year 1 January – 31 December 2008. Comparable figures of 2007 comprises approximately six months.

Operations

East Capital Explorer AB is a Swedish company which business idea is to offer all types of investors access to unique investments in Eastern Europe. The listing on NASDAQ OMX Nordic Exchange Stockholm also entails advantages such as liquidity and transparency, which is new for our markets and our type of investments.

The Group consists of the Parent Company, East Capital Explorer AB and the subsidiaries, East Capital Explorer Investments AB, East Capital Explorer Investments (Cyprus) Ltd, East-Capital Power Utilities Fund AB and Consibilink Ltd. East Capital Explorer Investments AB manage the Company's investment activities in accordance with the Investment Policy and manage the Company's investment portfolio. East Capital Explorer Investments AB has a controlling stake in East Capital Power Utilities Fund AB, which means that this holding is consolidated. In the future East Capital Power Utilities Fund AB may be opened to additional investors, which could change the subsidiary status. Consibilink Ltd manage the East Capital Power Utilities Fund AB's investments.

The Company's presentation currency is the euro.

Share information

The total number of outstanding shares at 31 December 2008 was 36,270,160. No new shares were issued during the reporting period and the average number of shares between 1 January 2008 and 31 December 2008 was therefore 36,270,160. All shares entitle the holder to one vote per share and carry equal rights to the Company's profits and assets, as well as equal rights in terms of dividends. There are no direct or indirect shareholders holding more than 10 percent of the total shares.

Board of Directors

The Board shall consist of three to six directors without deputies. Board members are elected annually at the annual general meeting for the time until the next annual general meeting is held. East Capital PCV Management AB, corporate registration number 556729-6941, has the right to appoint one Board member for the same period of time, for as long as the Investment Management Agreement to which the Company is a party, (described in §13 of the articles of association), is in force. Resolutions to amend such articles are only valid if supported by shareholders with at least 75% of the votes cast and of the shares represented at the meeting of shareholders. The complete articles of association can be found on www.eastcapitalexplorer.com.

Key events during the financial year

On 31 December 2008, East Capital Explorer had investments totaling EUR 265m in various Semi-public Equity funds, Private Equity funds, Direct investments and Short-term Investments. East Capital Explorer invested EUR 10m in East Capital Bering New Europe Fund in May 2008.

In June 2008, East Capital Explorer made a commitment to invest a total of EUR 40m in East Capital Russian Property Fund, whereof EUR 39.1m still has not been drawn down for investments. East Capital Explorer made a direct investment in MFG (OAO Melon Fashion Group) in October 2008, amounting to EUR 10m and in November 2008 an additional EUR 10m was invested in East Capital Bering Balkan Fund.

Net loss for the Group was EUR -151.1m, which corresponds to earnings per share of EUR -3.56. The main profit or loss account items include EUR -152.3m in unrealized changes in the value of investments, EUR -3.3m in realized change in value of investments, EUR 9.5m in financial income from short-term interest-bearing investments, EUR -3.6m in operating expenses and EUR -2.3m in income taxes.

The Parent Company's net loss was EUR -127.4m, of which EUR -126.5m refers to write down of shares in group companies. These shares have been valued to the lower of fair value and acquisition value. Operating expenses amounted to EUR -1.4m. No investment activities are carried out within the Parent Company.

Net asset value and share price

Net asset value on 31 December 2008 was EUR 265m (EUR 7.31 per share).

On 31 December 2008, short-term liquid investments, cash and cash equivalents amounted to EUR 4.85 per share.

The closing price per share on 30 December, the last trading day of the year, was SEK 40.20 (corresponding to EUR 3.69). East Capital Explorer AB's share price therefore decreased 59.8% during the period, while the OMXSPI decreased 42%. By comparison, the RTS Index decreased 66.9%, the RTS 2 Index decreased 75.1% and the MSCI EM Europe Index decreased 61.7% during the same period.

Key events after the end of the financial year Net asset value

On 31 January 2009, East Capital Explorer's indicative net assetvalue amounted to EUR 7.19 per share, compared with EUR 7.31 on 31 December 2008. The closing price per share on 31 January 2009 was SEK 45.40 (corresponding to EUR 4.28)1.

On 28 February 2009, the indicative net asset value amounted to EUR 7.13 per share while the closing price per share on the same date was SEK 40.00 (corresponding to EUR 3.50)2.

Investment in East Capital Special Opportunities Fund

In mid-March 2009, East Capital Explorer decided to invest EUR 35m (corresponding to approximately SEK 395m) in the new East Capital Special Opportunities Fund. The Fund targets investment opportunities that due to market or owner specific reasons can be acquired at low valuations. The Fund is mandated to invest in Russia and the rest of Eastern Europe.

Utilization of authorization to repurchase own shares On 12 March 2009, East Capital Explorer announced that the

¹ EUR=10.60 SEK on 31 January 2009. Source: Reuters

² EUR=11.42 SEK on 27 February 2009. Source: Reuters

Board in East Capital Explorer had decided to utilize the authorization to repurchase the Company's own shares. The authorization was approved by the 2008 Annual General Meeting for the purpose of giving the Board wider freedom of acting in the work with the Company's capital structure and thus creating more value for the shareholders. Shares can be purchased up to and including 9 April 2009, observing blackout periods before reports and all other applicable rules.

At the time of the decision, East Capital Explorer owned no own shares and the authorization from the 2008 Annual General Meeting encompasses acquisition of so many shares that the Company's holding of own shares after the purchase amounts to a maximum of one-tenth of all the shares in the Company. The latest data on the Company's repurchased shares is available on the Company's website.

Material risks and uncertainties

East Capital Explorer has an investment and finance policy that has the purpose of providing guidelines for managing and controlling the effects of the risks inherent in the investments.

Many risks are also associated with opportunities. The goal is to eliminate those risks that are not associated with opportunities (e.g. inadequate procedures). One material risk in East Capital Explorer's business is the commercial risk associated with exposure to certain industries, geographic regions or individual holdings. The Group's finance policy for management of financial risk has been prepared by the Board and is a framework of guidelines and regulations in the form of risk mandates and

limits for financial activities. The Parent Company's finance function is responsible for central management of the Group's financial transactions and risks.

Operational risk is defined as the risk of loss resulting from inadequate internal processes or systems, or from external events. Operational risks occur throughout the business and are managed by constantly improving the management of systemrelated issues, administrative processes, information security and legal matters. Moreover, the Company monitors obligations arising from external regulations and laws, agreement-related undertakings and the Company's internal rules.

For more information, please see Note 16 Financial risks and financing policies for the Group's material risks and uncertainties and pages 50-52 in the unaudited part of the annual report for a more detailed description of business risks.

Personnel and remuneration guidelines

On 31 December 2008, the Group had four employees, three of whom are women.

In accordance with current guidelines, the Board proposes the annual general meeting 2009 the following with regard to remuneration of senior executives, in this case the CEO, to: Remuneration to the CEO consists of fixed salary, variable salary and pension and insurance benefits. The Board decides at its own discretion according to certain key performance indicators whether the CEO should be paid any variable salary. The CEO can receive a maximum variable salary corresponding to 50% of his fixed salary. The CEO has an individual premium-based pension plan, pursuant to which the Company pays premiums corresponding to 10% of his fixed salary up to 10 Swedish income base amounts and premiums corresponding to 20% of his fixed salary on the portion of his fixed salary that exceeds 10 Swedish income base amounts. In the event the Company terminates the CEO's employment, the Company is required to observe a sixmonth notice period. In addition, the CEO is entitled to a severance payment corresponding to six months' salary.

Information about salaries and remunerations paid, other compensation and social charges for the Board and CEO as well as other employees can be seen in Note 4 on page 70.

Corporate Governance and the work of the Board

For information about how the Company is governed and controlled, such as through the Board and committees, and for information on the Board's internal control, please refer to the Corporate Governance section on page 38.

Shareholders' meeting and dividend

East Capital Explorer AB's annual shareholders' meeting will be held on 27 April 2009 in Stockholm.

The Board intends to recommend to the shareholders' meeting that no dividend be paid. Our dividend policy reflects our attitude that continually reinvesting capital in accordance with our Investment Policy optimally promotes our strategy of building a strong investment company and generating long-term value for our shareholders.

Expectations for future performance

East Capital Explorer's original target was to be fully invested 18 months after its first day of trading on the NASDAQ OMX Nordic Exchange. In conjunction with the interim report for the reporting period 1 January – 30 June, East Capital Explorer communicated that the Company's first and foremost target is to make investments that will generate attractive long-term returns for its shareholders and that market conditions will have an impact of the speed of investments and whether or not the Company is fully invested in May 2009. As market conditions remain challenging, the Company has decided not to set a new target date for being fully invested. The main investment focus continues to be East Capital's Semi-public Equity funds and Private Equity funds. East Capital Explorer has also the possibility to make selected direct investments in specific companies. The Company deems the supply of conceivable investments in underlying funds to continue to be large.

Proposed appropriation of profit

The following funds are at the disposal of the annual general meeting:

387,652,039
1,167,289
-127,421,649
261,397,679

The Board recommends that the profits be distributed as follows:

To be carried forward	261,397,679
Total in EUR	261,397,679

For further information about the Company's financial position and performance, please see the following income statements, balance sheets and cash flow statements.

Income Statement – Group

EUR thousands	Note	1 Jan – 31 Dec 2008	19 Jun – 31 Dec 2007
Result from financial assets at fair value through profit or loss		-152,342	3,466
Realized losses from financial assets through profit or loss		-3,334	-
Total operating income	2	-155,676	3,466
Other operating expenses	3	-2,967	-782
Staff expenses	4	-612	-223
Operating profit/loss		-159,255	2,461
Financial income	6	10,438	1,794
Financial expense	6	-22	-35
Profit/loss after financial items		-148,838	4,220
Income tax	7	-2,287	-255
NET PROFIT/LOSS FOR THE PERIOD		-151,124	3,965
Profit/loss distribution:
Shareholders of the Parent Company		-129,236	3,298
Minority interest		-21,888	667
		-151,124	3,965
Earnings per share, EUR - shareholders of the Parent Company	8	-3.56	0.09

No dilution effects

Balance Sheet – Group

EUR thousands	Note	31 Dec 2008	31 Dec 2007
Assets
Financial non-current assets
Shares and participations in investing activities	10,15	95,092	109,969
Deferred tax assets	7	-	97
Total non-current assets		95,092	110,066
Current receivables
Other short-term receivables	15	20	43,941
Accrued income and prepaid expenses	11	2,617	677
Total current receivables		2,637	44,618
Short-term investments	15	-	17,903
Cash and cash equivalents	15
Short-term investments comprising deposits		175,190	198,700
Cash		8,453	62,001
Total current assets		186,280	323,222
Total assets		281,372	433,288
Shareholders' equity	12
Share capital		3,627	3,627
Other contributed capital		387,652	387,652
Reserves		-316	-316
Retained earnings including profit for the year		-125,938	3,298
Equity attributable to shareholders of the Parent Company		265,025	394,261
Minority interest		10,425	32,313
Total shareholders' equity		275,450	426,574
Liabilities
Deferred tax liabilities	7	589	70
Total long-term liabilities		589	70
Tax liabilities		1,953	339
Other liabilities	13,15	2,482	5,585
Accrued expenses and prepaid income	14	898	720
Total current liabilities		5,333	6,644
Total liabilities		5,922	6,714
Total equity and liabilities		281,372	433,288

PLEDGED ASSETS AND CONTINGENT LIABILITIES 10

Pledged assets

Contingent liabilities

Changes in equity – Group

		Other contrib		Retained earn ings incl. profit	Total equity shareholders in
EUR thousands	Share capital	uted capital	Reserves	for the year	Parent Company	Minority	Total equity
Opening equity 1 July 2007	11	-	-		11		11
New share issue 6 July 2007	44	-	-		44		44
Redemption of shares 9 Nov 2007	-55	-	-		-55		-55
New share issue 9 Nov 2007	3,380	361,628	-	-	365,008		365,008
New share issue 11 Dec 2007	247	26,024	-		26,271		26,271
Contribution from minority			-			31,761	31,761
Exchange rate difference	-	-	-316		-316	-115	-431
Net profit for the year	-	-		3,298	3,298	667	3,965
Opening equity 1 Jan 2008	3,627	387,652	-316	3,298	394,261	32,313	426,574
Net profit/loss for the period	-	-	-	-129,236	-129,236	-21,888	-151,124
Per 31 Dec 2008	3,627	387,652	-316	-125,938	265,025	10,425	275,450

Cash Flow Statement – Group

EUR thousands	1 Jan – 31 Dec 2008	19 Jun – 31 Dec 2007
Operating activities
Operating profit/loss	-159,255	2,461
Adjusted for unrealised change in value	152,342	-3,435
Realized profit from disposals	3,334	-
Interest received	7,626	1,254
Interest paid	-22	-35
Tax paid	-57	57
Cash flow from current operations before changes in working capital	3,968	302
Cash flow from changes in working capital
Increase (-)/decrease (+) in other current receivables	-38	-136
Increase (+)/decrease (-) in other current payables	-2,913	6,305
Cash flow from operating activities	1,017	6,471
Investing activities
Investment in shares and participations	-130,866	-168,810
Sale of shares and participations	52,124	-
Cash flow from investing activities	-78,742	-168,810
Financing activities
New share issue	-	55
Redemption of shares	-	-55
New share issue incl over-allotment option	-	391,279
Contributed minority interest	-	31,761
Cash flow from financing activities	-	423,040
Cash flow for the period	-77,725	260,701
Cash and cash equivalents at beginning of the year1	260,701	-
Exchange rate differences in cash and cash equivalents	667	-
Cash and cash equivalents at end of the period	183,643	260,701

1 Cash equivalents comprise deposits and cash.

Short-term investments have been classified as cash and cash equivalents based on the following assumptions:

• They are subject to an insignificant risk of changes in value

• They are readily convertible to cash

• They have a maturity of three months or less at balance sheet date

Income statement – Parent Company

	Note	1 Jan – 31 Dec 2008	1 July – 31 Dec 2007
EUR thousands
Other operating expenses	3	-770	-219
Staff expenses	4	-612	-223
Operating profit/loss		-1,382	-442
Financial income	6	36	665
Financial expense	6	-126,4681	-
Profit/loss after financial items		-127,813	223
Income tax	7	392	-63
NET PROFIT/LOSS FOR THE PERIOD		-127,422	160

1 Financial expense includes write-down of shares in group companies.

Balance Sheet – Parent Company

EUR thousands	Note	31 Dec 2008	31 Dec 2007
Assets
Financial non-current assets
Participations in group companies	9	263,764	390,174
Total non-current assets		263,764	390,174
Current receivables
Other current receivables		1,399	-
Accrued income and prepaid expenses	11	23	136
Total current receivables		1,422	136
Cash and cash equivalents
Cash		286	1,441
Total current assets		1,708	1,577
Total assets		265,472	391,751
Shareholders' equity	12
Restricted equity
Share capital		3,627	3,627
Total restricted equity		3,627	3,627
Non-restricted equity
Share premium reserve		387,652	387,652
Retained earnings		1,168	-
Profit for the year		-127,422	160
Total non-restricted equity		261,398	387,812
Total shareholders' equity		265,025	391,439
Liabilities
Tax liabilities		63	63
Other liabilities	13,15	128	60
Accrued expenses and prepaid income	14	256	189
Total current liabilities		447	312
Total liabilities		447	312
Total equity and liabilities		265,472	391,751
PLEDGED ASSETS AND CONTINGENT LIABILITIES

Pledged assets	-	-
Contingent liabilities	-	-

Changes in Equity – Parent Company

	Restricted equity		Non-restricted equity
			Retained earnings incl.
EUR thousands	Share capital	Share premium reserve	profit for the year	Total equity
Opening equity 1 July 2006	11	-	-	11
New share issue 6 July 2007	44	-	-	44
Redemption of shares 9 Nov 2007	-55	-	-	-55
New share issue 9 Nov 2007	3,380	361,628	-	365,008
New share issue 11 Dec 2007	247	26,024	-	26,271
Profit for the year	-	-	160	160
Opening equity 1 Jan 2008	3,627	387,652	160	391,439
Profit for the year	-	-	-127,422	-127,422
Group contribution received	-	-	1,399	1,399
Tax effect on Group contribution	-	-	-391	-391
Closing equity 31 Dec 2008	3,627	387,652	-126,254	265,025

Cash flow statement – Parent Company

EUR thousands	1 Jan – 31 Dec 2008	1 Jul 2006 – 31 Dec 2007
Operating activities
Operating profit/loss	-1,382	-442
Interest received	36	665
Tax paid	335	-
Cash flow from current operations before changes in working capital	-1,011	223
Cash flow from changes in working capital
Increase (-)/decrease (+) in other current receivables	-1,286	-136
Increase (+)/decrease (-) in other current payables	134	249
Cash flow from operating activities	-2,163	336
Investing activities
Acquisition of subsidiaries	-	-390,174
Cash flow from investing activities	-	-390,174
Financing activities
New share issue	-	55
Redemption of shares	-	-55
Group contribution received	1,008	-
New share issue incl over-allotment option	-	391,279
Cash flow from financing activities	1,008	391,279
Cash flow for the period	-1,155	1,441
Cash and cash equivalents at beginning of the year1	1,441	-
Cash and cash equivalents at end of the period	286	1,441

1 Cash equivalents comprise deposits and cash.

Short-term investments have been classified as cash and cash equivalents based on the following assumptions:

• They are subject to an insignificant risk of changes in value

• They are readily convertible to cash

• They have a maturity of three months or less at balance sheet date

Notes to the financial statements

NOTE 1 ACCOUNTING PRINCIPLES

Compliance with standards and legislation

The consolidated accounts have been prepared in accordance with the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") with the interpretive statements from the International Financial Reporting Interpretations Committee ("IFRIC"), as approved by the European Commission for application within the European Union. Furthermore, the Swedish Financial Reporting Board recommendations RFR 1.1 and 2.2, Supplementary Accounting Rules for Groups and Accounting for Legal Entities, have been applied.

The Parent Company applies the same accounting principles as the East Capital Explorer Group except in the instances presented below in the section "Parent Company's accounting principles."

The annual report and the consolidated financial statements were approved for issue by the Board on 18 March 2009. The income statements and balance sheet of the Parent Company and the Group will be submitted to the shareholders' meeting for adoption on 27 April 2009.

Measurement basis for preparing the Parent Company and Group's financial reports

Assets and liabilities are recognised at historical cost, except for shares and participations in investing activities and short-term investments, which are recognised at fair value through profit or loss.

Functional currency and presentation currency

The Parent Company's functional currency is the euro (EUR), which is also the presentation currency for the Parent Company and the Group. This means that the financial statements are presented in EUR. All amounts, unless otherwise stated, are rounded off to the nearest thousand.

Estimates and assumptions in the financial statements

Preparing financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the application of the accounting principles and the reported amounts for assets, liabilities, revenue and expenses. Actual outcomes may differ from these estimates and assumptions, and the latter are reviewed regularly. Changes in estimates are recognised in the period in which they arise if the change affects that period alone or, alternatively, in the period in which they arise and during future periods if the change affects both the period in question and future periods.

Management has discussed with the Audit Committee the developments, choices and information regarding the Group's most important accounting principles and estimates, as well as the application of these principles and estimates.

Significant judgements in the application of the Group's accounting principles

Some of the significant accounting judgements used in application of the Group's accounting policies are described below.

The measurement of financial assets at fair value will mainly be

based on price quotes from active markets. In cases where the market for a financial instrument cannot be seen as active, such assets will be measured using market information as much as possible and company-specific information as little as possible. Whether a market for a specific financial instrument is considered active is largely a matter of professional judgement.

A judgement has been made to consolidate East Capital Explorer Investments AB despite the fact that the share of votes is less than 50%. This judgement was based on the fact that East Capital Explorer AB has all economic rights to East Capital Explorer Investments AB. The majority of the proceeds from the share issue have been transferred to East Capital Investments AB through conditional shareholders' contributions since all investing activities take place in this subsidiary. Another judgement was made that the holdings in East Capital Power Utilities Fund AB and Consibilink Ltd should be consolidated. Through its ability to terminate the shareholder agreement and by doing so place the subsidiaries in liquidation, the company can exercise a controlling influence over the party which is the formal holder of voting rights at the annual meeting of shareholders, and therefore in effect is the party that exercises substantial control over the subsidiaries.

Key sources of uncertainty in the estimates

The sources of uncertainty in the estimates below refer to those that entail significant risk of substantial adjustments to reported assets or liabilities for the next financial year.

In those cases where investments are not traded on a market seen as an active market and fair value is not set against the background of actual bid quote, but by means of valuation models (see below financial instruments), there is uncertainty that the holding will be assigned fair value. The Group applies its models consistently between the periods, but the calculation of fair value is characterised by uncertainty. Based on controls and reliability procedures, the Group considers the fair values recognised in the balance sheet to be carefully calculated and balanced and reflect the underlying economic values.

Significant accounting principles

The accounting principles presented below have been consistently applied to all periods presented in the Group's financial statements, unless otherwise stated below. Furthermore, the Group's accounting policies have been consistently applied by group companies.

New IFRSs and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations are effective as of the 2009 financial year, and have not been applied in preparing these consolidated financial statements. The effects of the new standards on financial reporting have not been evaluated.

Classification, etc.

Noncurrent assets and noncurrent liabilities consist predominantly of amounts expected to be used or paid more than 12 months after the balance sheet date. Current assets and current liabilities consist predominantly of amounts expected to be used or paid within 12 months of the balance sheet date.

Segment Reporting

An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses whose operating results are regularly reviewed and for which discrete financial information is available. The Group has the following four operating segments: investments in Semi-public Equity Funds, Private Equity Funds, Direct Investments as well as Short-term Investments. Per 31 December 2008, East Capital Explorer had invested in Semi-public Equity Funds, Private Equity Funds, Direct Investments and Short-term Investments. Segment information is presented in accordance with IFRS 8 only for the Group.

CONSOLIDATED ACCOUNTS

Subsidiary

Subsidiaries are companies under the controlling influence of East Capital Explorer AB. Controlling influence means the direct or indirect right to govern the financial and operating policies of an entity so as to obtain financial benefit. In assessing whether the controlling influence exists, potential shares conveying voting rights, and which can be converted or utilised without delay, will be taken into consideration.

Subsidiaries are accounted for using the purchase method. In accordance with this method, an acquisition is treated as a transaction in which the Group indirectly acquires the subsidiary's assets and assumes its liabilities and contingent liabilities. The consolidated cost is determined by an analysis at the time of the business combination. In such an analysis, the cost of the business combination is established, as are the fair values of recognised identifiable assets, liabilities and contingent liabilities. The difference between the cost of the shares of the subsidiary, including transaction costs directly attributable to the acquisition, and the fair value of acquired assets, assumed liabilities and contingent liabilities constitute, if the difference is positive, consolidated goodwill. When the difference is negative it is recognised directly in the income statement.

The financial statements of subsidiaries are consolidated from the date of the acquisition until the date when control ceases.

One of the companies in the Group, Consibilink Ltd, has changed their functional currency from USD to EUR and therefore no currency translation differences in shareholders' equity arised in 2008.

Transactions eliminated on consolidation

Intra-group balances and any unrealised income and expenses or gains and losses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.

Foreign currency transactions

Transactions in currencies other than euro are translated into the functional currency at the exchange rate prevailing on the transaction date. The functional currency is the currency in the primary economic environment in which the companies operate. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the closing rate of exchange. Exchange rate differences arising on currency translations are recognised net as either financial income or financial expense in the income statement.

Income

Income consists primarily of realised and unrealised value changes regarding securities and of dividends. Revenue is recognised in the income statement when it is likely that the future economic benefits will accrue to the company, and when these benefits can be calculated in a reliable manner. Income is reported at the fair value of the amount expected to be received.

For balance sheet items included at both the beginning and end of the period, changes in value comprise the difference in the values at these times. For balance sheet items realised during the period, changes in value comprise the difference between the payment received and the value at the beginning of the period. For balance sheet items acquired during the period, changes in value comprise the difference between the value at the end of the period and the acquisition cost.

Income from dividends is recognised when the right to receive the dividends can be determined.

Expenses

Operating expenses refer to costs of an administrative nature, such as staff costs, notary fees and bank fees. Costs for operating leases are recognised in the income statement on a straightline basis over the term of the lease.

Financial income and expenses

Interest income and interest expenses on financial instruments are recognised in the income statement in the period to which the amounts refer. Financial income consists of interest income from bank balances, receivables, as well as interest-bearing securities and exchange rate differences. Financial expenses consist of interest expenses on borrowings and other interestbearing liabilities and exchange rate differences. Exchange rate gains and losses are reported net. Moreover, fair value changes in short-term investments classified as financial instruments measured at fair value through profit or loss (fair value option) are reported as financial income or expense.

Interest income on receivables and interest expenses on liabilities are calculated applying the effective interest method. The effective interest is the interest required to be applied in order that the current value of all estimated future receipts and payments during the expected fixed-interest term is equal to the reported value of the receivable or liability.

Interest income includes the allocated amount of transaction costs and any discounts, premiums and other differences between the original value of the receivable and the amount to be received upon maturity.

Interest expenses include the allocated amount of issue expenses and similar direct transaction costs for loans raised.

Taxes

Income tax comprises current and deferred tax. Income tax is reported in the income statement, except when the underlying transaction is reported directly against equity. In such cases, associated tax effects are reported in equity.

Current tax is tax to be paid or received during the current year, using the tax rates that have been enacted or substantively enacted by the balance sheet date, and adjustments of current taxes attributable to previous periods.

Deferred tax is calculated according to the balance sheet method on the basis of temporary differences arising between the reported and tax values of assets and liabilities, applying the tax rates which have been enacted or announced as per the balance sheet date. Temporary differences are not considered in goodwill arising on consolidation or in differences attributable to subsidiaries and associated companies which are not expected to be taxed within the foreseeable future. Deferred tax assets attributable to deductible temporary differences and loss carryforwards are recognised only to the extent it is likely that they will be utilised and will result in lower tax payments in the future. The value of deferred tax assets is reduced when it is no longer considered likely that they can be utilised. Deferred tax assets and deferred income tax liabilities in the same country are reported net.

Financial Instruments

Financial Instruments recognised in the balance sheet include short-term investments and shares and participations in investing activities, cash and cash equivalents and other short-term receivables on the asset side and accounts payable and other current liabilities on the liability side.

Recognition and derecognition

A financial asset or liability is recognised in the balance sheet when the Company becomes party to the terms and conditions of the instrument. Acquisitions and sales of financial assets are recorded on the transaction date, which is the date on which the company becomes obligated to acquire or sell the asset. Borrowings are recognised on the date on which the transaction is completed, the settlement date.

Accounts receivable are recognised in the balance sheet when an invoice is sent. Liabilities are recognised when the counterparty has fulfilled its undertaking and a contractual payment obligation exists, regardless of whether or not an invoice has been received. Accounts payable are recognised when the invoice has been received.

A financial asset (or part thereof) is removed from the balance sheet when the rights in the agreement are realised or expire, or when the company has transferred substantially all of the risks and benefits associated with ownership. A financial liability (or part of thereof) is removed from the balance sheet when the obligation specified in the agreement is discharged or in any other manner extinguished. A financial asset and financial liability are offset and recognised in the balance sheet in a net amount only when there is legal right to offset and when it is intended to settle the item with a net amount or to simultaneously realise the asset and settle the liability.

Classification and measurement

Financial instruments are initially recognised at an acquisition cost equivalent to the fair value of the instrument, plus, in the case of receivables and liabilities valued at accrued acquisition cost, the addition of transaction costs. Financial instruments are classified upon first recognition based on the purpose for which the instrument was acquired. The classification determines how the financial instrument is valued after first recognition, as described below.

Loans and receivables

Loans, receivables and short-term investments comprising deposits in the balance sheet consist of immediately available balances at banks and equivalent institutions as well as other accounts receivable. Loans and receivables are recognised at amortised cost.

Financial assets at fair value through profit or loss

Shares and participations in investing activities and short-term investments are recognised in accordance with IAS 39 and the "Fair value option" at fair value including any change in value in profit or loss. The Group uses the "fair value option" because it bases follow-up of its holdings on fair value. In accordance with IAS 28.1, equity-related investments where the Group has a significant influence are also recognised according to IAS 39 at fair value, with fair value changes recognised in profit or loss ("fair value option"). Fair value is determined as follows:

Listed holdings on active markets

Financial instruments measured at fair value in the balance sheet are measured, at fair value based on bid quotes received on active markets.

Bid quotes are deemed representative if criteria such as bid and ask spread is less than 1%, only bid quotes are observed or last traded price is below the bid quote are met. If this is not the case, the following hierarchy is used for valuation:

• 1. Last traded price
• 1. Mid price
• 1. Last available reliable market information (LARMI)

A financial instrument is regarded as listed on an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. Fair value is defined in terms of a price agreed by a willing buyer and a willing seller in an arm's length transaction.

Listed holdings on non-active markets

If the conditions for an active market are not met the market is seen as non-active. Listed holdings on a non-active market will be measured according to IPEVC Guidelines as all private equity (unlisted) holdings described below.

Unlisted holdings and holdings where market data is not reliable

All private equity holdings ("unlisted") shall be initially measured at their acquisition price and shall be measured with the following methodologies, in order of priority depending on availability and relevance:

1. The Price of Recent Investment as set out in the IPEVC Guidelines.

2. The value determined by a independent broker, analyst or other knowledgeable party, which has become known to the Valuation Committee, after it was concluded by the Valuation Committee that (i) there is sufficient documentation available to support the valuation, (ii) such valuation is compliant with valuation methodologies set out in the IPEVC Guidelines, and that (iii) the value can be validated by at least one additional independent broker, analyst or other knowledgeable party.

3. Any other valuation methodology set out in the IPEVC Guidelines if a unanimous Valuation Committee considers that it clearly and indisputably provides a better estimate of the fair value.

4. As set out in the IPEVC Guidelines, in situations where Fair Value cannot be reliably measured the Valuation Committee may conclude that the Fair Value at the previous reporting date remains the best estimate of Fair Value. The Valuation Committee is required to consider whether events or changes in circumstances indicate that impairment may have occurred.

5. The Valuation Committee may, when it may consider it required, or in accordance with the instructions of the Board of directors of the fund in question, ask an independent valuer to perform a valuation of any investment or other holding based on the principles set out in this policy and the IPEVC Guidelines.

Other holdings

Redeemable funds are measured based on official NAV, as soon as such is published.

Other financial liabilities

This category includes loans and other financial liabilities, such as accounts payable. Liabilities are valued at amortised cost.

Classification of the Group's financial assets and liabilities and their carrying amounts can be seen in Note 15. Recognition of financial income and expenses is also addressed under the principle financial income and expenses above.

Impairment of financial assets

The carrying values of the Group's assets, excluding financial assets reported at fair value with changes in value reported in the income statement in accordance with IAS 39, are tested each balance sheet date for indications of impairment.

On each reporting date, the Company evaluates whether there is objective evidence that a financial asset or pool of assets is impaired. Objective evidence comprises observable conditions that occurred and that have a negative impact on the possibility of recovering the cost of the asset.

The recoverable amount of assets in the category loans and receivables, which are recognised at amortised cost, is determined as the present value of future cash flows discounted at the effective rate at initial recognition of the asset. Assets with short maturities are not discounted. An impairment loss is recognised as an expense in the income statement.

Impairment losses of loans and receivables that are reported at amortised cost are reversed if a later increase in the recoverable amount can objectively be attributed to an event that occurred after the impairment loss was made.

Earnings per share

Earnings per share are calculated by dividing the profit or loss in the Group attributable to ordinary shareholders of the Parent Company by the weighted average number of ordinary shares outstanding during the year. When calculating diluted earnings per share, earnings and the average number of shares are adjusted to take account of the dilutive effects of potential ordinary shares. There were no dilutive effects during the reported periods.

Employee remuneration

Obligations related to contributions to defined contribution plans are expensed in the income statement as they arise.

Contingent liabilities

A contingent liability is recognised when there is a possible obligation relating to past events and whose existence is confirmed only by one or more uncertain future events or when there is an obligation that is not recognised as a liability or provision as it is not probable that an outflow of resources will be required.

Accounting principles of the Parent Company

East Capital Explorer AB applies the same accounting principles as the Group except in the instances specified below. The variances arising between East Capital Explorer AB and the Group's principles result from limitations in the possibility of applying IFRS in East Capital Explorer AB due to the Swedish Annual Accounts Act (1995:1554).

East Capital Explorer AB prepares its annual report in accordance with the Swedish Annual Accounts Act and the Swedish Financial Reporting Board recommendations RFR 2.1, Accounting for Legal Entities, as well as the pronouncements of the Swedish Financial Reporting Board for listed companies. Application of RFR 2.1 (former RR 32:06) stipulates that, in its preparation of the annual report for the legal entity, East Capital Explorer AB apply all of the IFRS and interpretive statements approved by the European Union to the extent possible within the framework of the Swedish Annual Accounts Act and with consideration for the relationship between reporting and taxation. The recommendation states which exceptions and additions to IFRS are to be made.

The accounting principles specified below for the Parent Company have been consistently applied to all periods presented in the financial statements, unless otherwise specified.

Subsidiary

The Parent Company reports shares in subsidiaries according to the cost method. Dividends received are recorded as revenue only on condition that these derive from profits arising after the acquisition date. Dividends in excess of these profits are regarded as a repayment of the investment and reduce the carrying amount of the company's interest.

Shareholders' contributions

In accordance with the pronouncement from the Swedish Financial Reporting Board, shareholders' contributions are recognised directly against equity at the recipient and capitalised in shares and participations at the donor to the extent write-downs are not required.

NOTE 2 SEGMENT REPORTING

East Capital Explorer has chosen to classify the segments based on the nature of its investments. The Group's operating segments consist of Semi-public Equity Funds, Direct investments, Private Equity Funds as well as Short-term Investments. Per 31 December 2008, East Capital Explorer had invested in Semi-public Equity Funds, Direct investments, Private Equity Funds and Short-term Investments.

Segment results, assets and liabilities include items directly attributable to the segment as well as those that can be allocated on a reasonable basis.

Group	Semi-public Equity Funds	Direct Investments	Private Equity Funds	Short-term Investments	Other & unallocated	Total consolidated
EUR thousands	1 Jan – 31 Dec 2008	1 Jan – 31 Dec 2008	1 Jan – 31 Dec 2008	1 Jan – 31 Dec 2008	1 Jan – 31 Dec 2008	1 Jan – 31 Dec 2008
Result from financial assets at fair value through profit or loss	-139,911	-	-342	-	-12,089	-152,342
Realized losses on financial assets through profit of loss	-3,334	-	-	-	-	-3,334
Other expenses	-	-	-	-	-3,579	-3,579
Operating profit/loss	-143,245	-	-342	-	-15,668	-159,255
Financial income	-	-	-	9,502	937	10,438
Financial expense	-	-	-	-22	-	-22
Profit/loss after financial items	-143,245	-	-342	9,480	-14,731	-148,838
Income tax for the period	-	-	-	-	-2,287	-2,287
Net profit/loss for the period	-143,245	-	-342	9,480	-17,018	-151,124
Assets	73,383	9,941	513	189,457	8,078	281,372
Liabilities	-	-	-	-	5,922	5,922

Group	Semi-public Equity Funds	Short-term Investments	Unallocated	Total consolidated
EUR thousands	2007	2007	2007	2007
Unrealised changes in value	3,813	-347	-	3,466
Other expenses	-	-	-1,005	-1,005
Operating profit/loss	3,813	-347	-1,005	2,461
Financial income	-	1,794	-	1,794
Financial expense	-	-35	-	-35
Profit/loss after financial items	3,813	1,412	-1,005	4,220
Tax expense for the year	-	-	-255	-255
Net profit for the year				3,965
Assets	109,969	278,604	44,715	433,288
Liabilities	-	-	6,714	6,714

The above tables provide information about allocating revenues to segments for the group. Expenses are not allocated to segments, since a majority of these expenses can not be attributed to one certain segment.

NOTE 3 OTHER OPERATING EXPENSES

		Group	Parent Company
EUR thousands	2008	2007	2008	2007
Management fee and carried interest in
consolidated subsidiary	1,989	542	-	-
Communication	223	2	223	2
Internal services1	164	67	164	67
Rent2	33	9	33	9
Audit assignments3	128	58	106	53
Travel	50	15	50	15
Other external costs	380	89	194	73
Total	2,967	782	770	219

1 Internal services are included in the service agreement with East Capital International AB. Comprise all services except rent charges. See note 17.

2 Rent is included in the service agreement with East Capital International AB. See note 17.

3 Audit assignment refers to auditing of the annual report, the accounting recordsand the administration of the Board of directors and the CEO, other tasks incumbent on the Company's independent auditor, and advice or other assistance prompted by observations from such audits or the performance of other such tasks. This is the total fee for all audit related assignments including fees for PWC internal control.

NOTE 4 EMPLOYEES, STAFF EXPENSES AND EXECUTIVE MANAGEMENT COMPENSATION

		Group		Parent Company
EUR thousands	2008	2007	2008	2007
Wages, salaries and remuneration	262	101	262	101
Directors' fees	152	69	152	69
Social charges	198	53	198	53
of which pensions	67	-	67	-
Total	612	223	612	223

On 31 December 2008, the Group had four (three) employees, three (two) of whom are women.

Salaries and other remunerations

	Group		Parent Company
EUR thousands	2008	2007	2008	2007
Board and CEO	303	103	303	103
Other employees,	111	67	111	67
average 2.2 people
Total	414	170	414	170

Executive management compensation

Remuneration to the Board

On 21 April 2008, the Company's shareholders' meeting resolved that the Chairman of the Board will receive annual compensation of SEK 700,000 for the period until the next shareholders' meeting. Other Board members will receive SEK 300,000 per person in compensation for the time until the next shareholders' meeting. Renumeration for Audit Committee is SEK 50,000 to the chairman of the Audit Committee and SEK 30,000 to each director in the Committee.

Remuneration to senior executives and other terms of employment Guidelines for salary and other remuneration to the Company's CEO will be resolved on a yearly basis at the shareholders' meeting, based on proposals by the Board. Remuneration to the CEO consists of fixed salary, variable salary and pension and insurance benefits. The Board decides at its own discretion whether the CEO should be paid variable salary. The CEO can receive a maximum variable salary corresponding to 50% of his fixed salary. The CEO has an individual premium-based pension plan, pursuant to which the Company pays premiums corresponding to 10% of his fixed salary up to 10 Swedish income base amounts and premiums corresponding to 20% of his fixed salary on the portion of his fixed salary that exceeds 10 Swedish income base amounts. In the event the Company terminates the CEO's employment, the Company is required to observe a sixmonth notice period. In addition, the CEO is entitled to a severance payment corresponding to six months' salary. In the event the CEO terminates his employment, he is required to observe a six-month notice period. If the CEO terminates his employment, he is not entitled to any severance payment.

Remuneration and other benefits, Parent Company

			2008			2007
	Fixed	Board		Fixed	Board
EUR thousands	salary		fee Total	salary		fee Total
Paul Bergqvist,	-	70	70	-	37	37
Chairman
Anders Ek,	-	21	21	-	-	-
Board member1
Lars Emilson,	-	31	31	-	16	16
Board member
Alexander V. Ikonnikov,	-	31	31	-	16	16
Board member
Justas Pipinis,	-	-	-	-	-	-
Board member
Kestutis Sasnauskas,	-	-	-	-	-	-
Board member
Gert Tiivas,	105	-	105	34	-	34
CEO
Total	105	152	257	34	69	103

Board members Justas Pipinis and Kestutis Sasnauskas waived their directors' fees.

1 Anders Ek was appointed a director of the Board on 21 April 2008.

NOTE 5 FEES AND EXPENSES FOR AUDITORS

	Group			Parent Company
EUR thousands	2008	2007	2008	2007
KPMG
Audit assignments	83	58	61	53
Other assignments	26	-	26	-
Total	109	58	87	53

Audit assignment refers to auditing of the annual report, the accounting records and the administration of the board of directors and the CEO, other tasks incumbent on the company's independent auditor, and advice or other assistance prompted by observations from such audits or the performance of other such tasks. All other work constitutes other assignments.

NOTE 6 FINANCIAL INCOME AND EXPENSE

		Group	Parent Company
EUR thousands	2008	2007	2008	2007
Interest income on financial assets measured at fair value (fair value option)	11	2	11	2
Interest income on financial assets not measured at fair value	10,427	1,792	25	663
Total financial income1	10,438	1,794	36	665
Financial expense	-	-	-126,4102
Interest expense on financial liabilities measured at amortised cost	-22	-7	-	-
Exchange rate difference	-	-28	-58	-
Total financial expense	-22	-35	-126,468	-
1 Financial income includes FX gains.

2 Financial expense includes write-down of shares in group companies.

NOTE 7 TAXES

Recognised in the income statement

		Group		Parent Company
EUR thousands	2008	2007	2008	2007
Current tax expense (-)
Tax expense for the period	-1,671	-282	392	-63
Deferred tax income (+)
Deferred tax for temporary differences	-616	27	-	-
Total recognised tax expense	-2,287	-255	392	-63

Reconciliation of effective tax

				Group			Parent Company
EUR thousands	2008 (%)	2008	2007 (%)	2007	2008 (%)	2008	2007 (%)	2007
Profit after financial items		-148,838		4,221		-127,813		223
Tax as per applicable tax rate for the Parent Com	28.0	41,675	28.0	-1,182	28.0	35,788	28.0	-63
pany
Difference in tax rate in foreign operations	0.6	-846		-		-		-
Tax effect of non-taxable income		-	25.3	1,068		-		-
Tax effect of non-taxable expense	28.7	-42,656		-	27.7	-35,396		-
Increase in loss carryforward without equivalent capitalisation of deferred tax	0.3	-464	3.3	-141		-		-
Effect of changed tax rate	0	4		-		-		-
Recognised effective tax	1.5	-2,287	6.0	-255	-0.3	392	28.0	-63

Recognised in the balance sheet

Recognised deferred tax assets and liabilities

Deferred tax assets and tax liabilities relate to the following:

Group	Deferred tax asset	Deferred tax liability	Net	Net
EUR thousands	2008	2008	2008	2007
Financial non-current assets	-	-	-	97
Tax allocation reserve	-	-589	-589	-70
Total	-	-589	-589	27

NOTE 8 EARNINGS PER SHARE

Earnings per share

EUR	2008	2007
Earnings per share, basic and diluted	-3.56	0.09

The origin of the numerator and denominator used in the above calculations of earnings per share is shown below.

Earnings per share, basic and diluted

Profit for the year attributable to the holders

of ordinary shares in the Parent Company
EUR thousands	2008	2007
Profit/loss attributable to the holders of ordi	-129,236	3,298
nary shares in the Parent Company.

Weighted average number of outstanding ordinary shares In thousands of shares 2008 1 Jan – 31 Dec 2007 9 Nov – 31 Dec Total number of outstanding shares, 1 January 36,270 1 New share issue 6 July 2007 549 Share redemption 9 Nov 2007 -550 New share issue 9 Nov 2007 33,795 New share issue 11 Dec 2007 2,475 Total number of outstanding shares, 31 December 36,270 36,270 Weighted average number of ordinary shares, basic and diluted 36,270 35,033

NOTE 9 GROUP COMPANIES

Holdings in subsidiaries

			Share of
	Subsidiary's		Equity in %
	domicile, country	2008	2007
East Capital Explorer Investments AB	Stockholm, Sweden	100	100
East Capital Explorer Investments (Cyprus) Ltd	Nicosia, Cyprus	100	-
East Capital Power Utilities Fund AB	Stockholm, Sweden	73	73
Consibilink Limited	Nicosia, Cyprus	100	100

Parent Company

EUR thousands
Acquisition	31 Dec 2008	31 Dec 2007
At 1 January	390,174	-
Acquisitions	-	390,174
Write downs	-126,410	-
At 31 December	263,764	390,174

Specification of the Parent Company's direct holdings of participations in subsidiaries

Total		263,764	390,174
Stockholm
/556693-7370/
Investments AB
East Capital Explorer	3,410	263,764	390,174
Subsidiary / Corporate regist ration number / Domicile	No. of shares	Carrying amount	Carrying amount
		2008	2007
		31 Dec	31 Dec

East Capital Explorer AB owns all preference shares in the subsidiary. The percentage of votes is 4.3%.

NOTE 10 SHARES AND PARTICIPATIONS

Group

EUR thousands	2008	2007
Acquisition
At 1 January	106,156	-
Reclassification of the holding East Capital (Lux) Eastern European Fund (EUR)	18,250	-
Acquisitions	175,020	106,156
Disposals	-52,471	-
At 31 December	246,955	106,156
Change in fair value through profit or loss
At 1 January	3,813	-
Fair value change through profit or loss	-152,342	3,813
Realized losses through profit or loss	-3,334	-
At 31 December	-151,863	3,813
Carrying amount 31 December	95,092	109,969

The Group has the following holdings:

Holdings 2008	Number of shares/Units	Cost	Losses	Carrying amount
East Capital Bering Russia Fund	537,844	23,590	-16,213	7,377
East Capital Bering Ukraine Fund	1,212,296	24,411	-16,781	7,630
East Capital Bering Balkan Fund	4,538,686	34,938	-17,307	17,631
East Capital Bering Central Asia Fund	2,486,454	19,528	-12,139	7,389
East Capital Bering New Europe Fund	1,560,000	9,997	-3,155	6,842
East Capital Power Utilities Fund
RusHydro	401,447,850	18,900	-13,176	5,724
OGK-4	221,005,495	2,638	-443	2,195
MRSK Tsentra	223,033,866	7,470	-5,366	2,104
OGK-6	287,268,642	3,594	-1,648	1,946
Other		74,170	-54,184	19,986
MFG (OAO Melon Fashion Group)	4,996	9,941	-	9,941
East Capital (Lux) Eastern European Fund (EUR)	182,500	18,250	-12,436	5,814
East Capital Russian Property Fund	400	855	-342	513
Total		248,282	-153,190	95,092

Holdings 2007	Number of shares/Units	Cost	Gains/losses	Carrying amount
East Capital Bering Balkan Fund	2,089,038	24,938	746	25,684
East Capital Bering Russia Fund	538,027	23,590	391	23,981
East Capital Power Utilities Fund
Bashkir Energo	6,400,000	8,917	295	9,212
RAO EES	9,960,000	8,767	-68	8,699
Zhigulevskaya GES	20,500,000	6,959	1,392	8,351
Other		32,985	1,057	34,042
Total		106,156	3,813	109,969

All shares and participations are classified as financial assets carried at fair value through profit or loss in the sub-category held for trading.

Contingent liabilities

East Capital Explorer made a commitment to invest EUR 39.1m in the East Capital Russian Property Fund. The investment will be made as the Fund calls for the capital, which takes place when the Fund has identified an investment object.

NOTE 11 PREPAID EXPENSES AND ACCRUED INCOME

		Group	Parent Company
	31 Dec	31 Dec	31 Dec	31 Dec
EUR thousands	2008	2007	2008	2007
Accrued income	2,460	657	-	116
Prepaid expenses	157	20	23	20
Total	2,617	677	23	136

NOTE 12 SHAREHOLDERS' EQUITY

Share capital and share premium

	Ordinary shares
	2008	2007
Issued at January 1	36,270	1
New share issue 6 July 2007		549
Share redemption 9 Nov 2007		-550
New share issue 9 Nov 2007		33,795
New share issue 11 Dec 2007		2,475
Issued at 31 December	36,270	36,270

Holders of common shares are entitled to dividends. The size and timing is to be proposed and approved at the annual general meeting each year. Additionally each share grants the right to one vote at the shareholders' meeting and all shares carry the same right to the company's remaining net assets.

Shareholders' equity in the Group

Other contributed capital

Pertains to shareholders' equity contributions. The share premium paid in conjunction with new issues is included here.

Reserves – translation reserve

The translation reserve consists of all exchange differences arising on translation of the financial statements of foreign operations prepared in a currency other than that used by the Group. The Parent Company and the Group prepare their financial reports in euro.

Retained earnings including profit for the year

Retained earnings including profit/loss for the year include profits earned in the Parent Company and its subsidiaries.

Non-restricted equity – Parent Company

Share premium reserve

When new shares are issued at a premium, meaning that the price to be paid for a share is higher than the previous quota value of the share, an amount corresponding to the amount received in excess of the share's quota value is transferred to the share premium reserve.

Retained earnings

Retained earnings comprise retained profit from previous years

after any provisions to reserves and after payment of any dividends. This consists of profit/loss for the year and total non-restricted equity, which is the amount available for distribution to the shareholders.

Capital management

Capital is defined as total capital excluding minority interests, which amounts to EUR 265m. Per 31 December EUR 89.7m was invested and additional investments of EUR 39.1m had been announced but not drawn down yet. In total these investments amounted to EUR 128.8m, corresponding to 49 percent of the total portfolio. The remaining 51 percent comprised cash and deposits. Investment activities will continue in accordance with the investment strategy. The main investment focus continues to be East Capital's Private Equity- and Semi-public Equity funds.

The objective is to offer investors long-term capital appreciation of the NAV. The risk of short-term fluctuations in capital appreciation is deemed to be high due to the high risk with which the markets in which the Company invests are encumbered. The return of the NAV for the period 1 January to 31 December 2008 is -32.8%.

As stated in the dividend policy, the Company will not pay any dividends as long as it deems that continuous reinvestment of capital in accordance with the Investment Policy will best allow the Company to build a strong investment base and generate long-term value for the shareholders.

The future liquidity will depend primarily on (i) the timing and sales of investments, (ii) the Company's management of available cash, (iii) cash distributions from existing investments, (iv) capital contributions that are received in connection with the issuance of additional equity and (v) the issuance of indebtedness, if any.

The Company may enter into a line of credit facility with one or more lenders for the purpose of obtaining an additional source of liquidity to fund short-term liquidity needs and for investments. The Company does not anticipate drawing on a line of credit until the Company has invested a significant portion of its capital. The aggregate amount drawn by the Company under any line of credit facility may not exceed an amount equal to 30% of the Company's net asset value, excluding the debt and net asset value attributable to direct investments in real estate.

There are no externally imposed capital requirements on any of the companies in the Group.

NOTE 13 OTHER LIABILITIES

		Group	Parent Company
EUR thousands	31 Dec 2008	31 Dec 2007	31 Dec 2008	31 Dec 2007
Other current liabilities
Accounts payable	155	4	87	3
Purchase of shares – shares delivered but cash not paid	2,253	5,571	-	-
Other	74	10	41	57
Total	2,482	5,585	128	60

NOTE 14 ACCRUED EXPENSES AND PREPAID INCOME

	Group			Parent Company
EUR thousands	31 Dec 2008	31 Dec 2007	31 Dec 2008	31 Dec 2007
Prepaid income	-	11	-	-
Vacation pay	21	12	21	12
Management fee	606	155	-	-
Carried interest	-	365	-	-
Other accrued expenses	271	177	235	177
Total	898	720	256	189

NOTE 15 FINANCIAL ASSETS AND LIABILITIES

Fair value

	Financial assets at
Group 2008	fair value through	Loans and	Other	Total carrying
EUR thousands	profit or loss	receivables	liabilities	amount	Fair value
Shares and participation in investing activities	95,092	-	-	95,092	95,092
Other receivables	-	20	-	20	20
Short-term investments comprising deposits	-	175,190	-	175,190	175,190
Cash	-	8,453	-	8,453	8,453
Total	95,092	183,663	-	278,755	278,755
Other liabilities	-	-	2,482	2,482	2,482
Total	-	-	2,482	2,482	2,482

Financial assets at
fair value through	Loans and	Other	Total carrying
profit or loss	receivables	liabilities	amount	Fair value
109,969	-	-	109,969	109,969
-	43,941	-	43,941	43,941
17,903	-	-	17,903	17,903
-	198,700	-	198,700	198,700
-	62,001	-	62,001	62,001
127,872	304,642	-	432,514	432,514
-	-	5,585	5,585	5,585
-	-	5,585	5,585	5,585

		2008				2007
Parent Company EUR thousands	Other liabilities	Total carrying amount	Fair value	Other liabilities	Total carrying amount	Fair value
Other liabilities	128	128	128	60	60	60
Total	128	128	128	60	60	60

Calculation of fair value

The following summarises the main methods and assumptions used to determine the fair value of the Group's financial instruments.

Financial instruments measured at fair value through profit or loss

For a description of the method used to measure financial instruments recognised at fair value through profit or loss, see Note 1 on page 65.

Financial instruments not measured at fair value through profit or loss

For accounts receivable and accounts payable, the carrying amount is deemed to reflect fair value since the remaining maturity is generally short.

NOTE 16 FINANCIAL RISKS AND FINANCING POLICIES

The Group is exposed to various types of financial risks through its business activities.

The term "financial risks" refers to fluctuations in the Company's earnings and cash flow as a result of changes in exchange rates, interest rates, refinancing and credit risks. The Group's finance policy for the management of financial risk has been prepared by the Board and is a framework of guidelines and regulations in the form of risk mandates and limits for financial activities. The Parent Company's finance function is responsible for central management of the Group's financial transactions and risks. For a more detailed description of business risks, please see pages 50–52 in the unaudited part of the annual report.

Market risk

Market risk is the risk that the value of a financial instrument will fluctuate due to changes in market prices. There are three types of market risks: currency risk, interest rate risk and other price risks. Equity price risk and currency risk are the most important market risks in the Group's business activities.

The Group's exposure to market risk generally consists of the risk of the value of its investments being affected by the markets in which such investments are located. The Group invests in enterprises based in Russia and the other CIS countries, the Balkans, the Baltic States, Central Asia and Central Europe. Investing in companies based in these emerging markets involves market risks and certain other considerations, such as political risks, that are not typically associated with investments in companies established in other parts of Europe.

The Group limits risk by following an investment policy that provides guidelines based on the following factors:

• Industry
• Geography
• Financial instruments
• Reinvestments
• Hedging

Equity price risk

Equity price risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Equity price risk is a key risk in the business activities, which consist of investing in various forms of equities and equityrelated derivatives in emerging markets. Factors that affect this price risk are:

• Investments in emerging markets
• Country-specific risks
• Investments in the power utilities sector
• Investments in the financial sector
• Investments in the retail and consumer goods sector
• Investments in the real estate sector

When the Group realises an investment and is seeking an alternative investment in which to re-invest the capital realised, suitable investment opportunities may not always be available. It may take a significant amount of time to re-invest the capital. Although the Group has adopted a policy of active management of cash and liquid investments portfolio to enhance returns, such management may form time to time generate returns that are substantially lower than the returns that the company anticipates receiving from investments in any East Capital Funds or any direct investments.

Concentration risk

The Company and the subsidiaries are not classified as investment funds in accordance with the Swedish Investment Funds Act (lag 2004:46 om investeringsfonder) nor are they subject to the supervision of Finansinspektionen, the Swedish Financial Supervisory Authority. Therefore the Group is not required to comply with the investment restrictions and requirements for risk diversification applicable for investment funds. Apart from the fact that no investment in any single East Capital Fund may represent more than 40% of East Capital Explorer's net asset value at the time of the investment, that no single direct investment may exceed 15% of East Capital Explorer's net asset value at the time of the investment and that total direct investments in real estate may not exceed 30% of East Capital Explorer's net asset value, East Capital Explorer's investment policy only contains limited diversification requirements for the portfolio. In addition, East Capital Explorer's investment policy does not impose any limitations on the terms of the funds through which the Company may invest, including with respect to fund size, affiliation with East Capital, geographic focus or other diversification, investment parameters or industry focus. In the event that the portfolio is concentrated on relatively few investments, adverse performance by even one of those investments could have a material adverse effect on East Capital Explorer.

Interest rate risk

Interest rate risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market rates. Interest rate risk arises for the Group's business activities when cash from new issues is received before final investment takes place. During this period, the cash from the issue is invested on a short-term basis. Changes in the level of interest rates can affect the rate of return on the Group's cash and cash equivalents.

Changes in the level of interest rates can also affect, among other things: (i) the cost and availability of debt financing and hence the Group's ability to achieve attractive rates of return on its investments, and (ii) the debt financing capability of companies whose capital structures have a significant degree of leverage in which the Group has invested either through fund investments or direct investments.

The neutral position regarding the interest rate risk for the shortterm investment portfolio has been estimated to be an average fixed interest term of three months.

The Group does not hold any derivatives as of the closing day.

Foreign exchange risk

Currency risk is the risk that the value of the assets will fluctuate due to changes in exchange rates.

The Group's exposure to exchange rates mainly arises through investments in East Capital's funds which are primarily denominated in euro (EUR) and US dollars (USD). However, a majority of the underlying investments may be denominated in currencies other than the euro, primarily the local currencies in the target region. Changes in rates of exchange may have an adverse effect on the value, price or income of the Group's investments.

Currency hedging may be carried out to provide protection against the impact of fluctuating exchange rates on the Group's performance and financial position. Spot, forward or option transactions may be used as part of the currency hedging strategy. Hedging transactions entail costs and may result in losses. The East Capital Funds in which the Group has invested do not use currency hedging.

The primary strategy in the financial policy is not to hedge foreign exchange risk in the underlying investments. In the future, however, the company may hedge any dividends and operating expenses, since these will mainly be denominated in Swedish kronor (SEK).

The consolidated income statement includes exchange differences of EUR 881,000 (EUR 28,000) in net financial items.

Liquidity risk

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

Liquidity risk refers to the risk that a financial instrument cannot be divested without considerable extra costs, and to the risk that liquidity will not be available to meet payment commitments. Liquidity risk is always considered with respect to investments. The Group's investments in illiquid markets mean that liquidity risk is present with respect to the ability to quickly divest holdings, but this is calculated and offset by the assessed potential for returns. Because of the Group's high equity ratio the risk of suspension of payments is deemed low.

In accordance with the financial policy, liquidity risk will be minimised through continual evaluation of exposure in the portfolio with respect to investments in illiquid markets, taking liquidity risks into account.

Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.

East Capital Explorer's exposure to credit risk is mainly through the investment of excess liquidity in interest-bearing securities. Credit risk also arises as a result of derivatives with positive market values.

The financial policy regulates counterparty exposure to minimise credit risk. According to this policy, credit risk is limited by only granting credit to counterparties with strong credit ratings, based on Standard & Poor's, Nordic Rating and Moody's Rating. Investments in deposits in larger Swedish banks and investments in Swedish Treasury bonds without ratings are also accepted.

As of the closing day, the company does not have any derivative agreements or interest-bearing securities.

Sensitivity analysis

The table below indicates the effect of the most important factors on East Capital Explorer's results.

		2008		2007
Factors	Change, %	Effect on operating profit, EUR thousands	Change, %	Effect on operating profit, EUR thousands
Currency EUR/USD	+/- 5	4,063	+/- 5	10,875
Interest	+/- 5	475	+/- 5	476
Equity price (investments)	+/- 5	4,755	+/- 5	6,394

NOTE 17 RELATED PARTIES

Related party relationships

East Capital Explorer AB has a related party relationship with its subsidiaries, see Note 9, and with other companies in East Capital, see below.

License agreements

The Company and East Capital Explorer Investments AB have a licensing agreement with East Capital Explorer Licensing AB, pursuant to which East Capital Explorer Licensing AB has granted a non-exclusive, royalty-free license to use the trade name and trademark "East Capital Explorer."

Management agreement

East Capital PCV Management AB (the "Investment Manager"), a subsidiary of East Capital Holding AB, that implements investments according to the investment policy and provides investment management services pursuant to the Investment Management Agreement. The company has an Investment Management Agreement with the Investment Manager and East Capital Explorer Investments AB.

Service agreement

The company has a service agreement with East Capital International AB, a service company in East Capital, pursuant to which the company buys certain administrative and other services and sublets premises. During the year the Group purchased services for EUR 197,000 (EUR 76,000) and the Parent Company for EUR 197,000 (EUR 76,000).

Employees

Two employees in the Group also have a contractual relationship with East Capital International AB where they perform certain tasks and duties.

The CEO is a Board member of the following: East Capital Baltic Property Fund AB, East Capital Real Estate AS, East Capital Power Utilities Fund AB, East Capital Explorer Investments AB and AS Baltika.

Transactions with key management personnel and associated companies

The Company's management, Board members and their close relatives and associated companies control 9.8% (9.5%) of voting rights in the company. For information about remuneration of senior executives please refer to Note 4 on page 70.

Potential conflicts of interest

The Investment Management Agreement entered into between the Company and the Manager contains provisions and procedures to address potential conflicts of interest between the Company and East Capital. Any conflict of interest which is not contemplated by the investment policy agreed between the Company and the Manager from time to time, shall be referred to the Board of the Company for resolution. Such conflicts include for example any (i) investments in any East Capital fund on terms which are materially adverse compared to existing East Capital funds or any fund of similar type (it being understood that any increase with respect to fees and carried interest shall be deemed as "materially adverse"); and (ii) any co-investments made on terms which adversely deviate from the terms on which other co-investors make their investments. There are also other terms in the agreement designed to assure that fees payable by the Company are always on market terms. The Investment Management Agreement further provides that direct investments offered by the Manager with no co-investment by any other East Capital fund or by East Capital itself, shall be referred to the Board of the Company for resolution. In any such matter referred to the Board, the Board members affiliated with East Capital will not take part, in accordance with the rules of conflict of interest under the Companies Act.

In addition, East Capital has in place a policy for managing conflicts of interests in relation to its investment business, the overriding principle of which is that East Capital will treat its clients fairly and will at all times act in accordance with its position as investment manager of the various East Capital funds. The policy sets out a strategy and provides measures which will enable the Manager's team to actively identify, monitor and address any conflicts of interest that may arise in connection with the allocation of investment opportunities.

Other

During 2008, East Capital Explorer Investments AB acquired 2,421 shares in OAO Melon Fashion Group from 26 direct investors in MFG through MFG Intressenter AB, a wholly owned subsidiary of East Capital Holding AB. An additional 2,575 shares were acquired in a new share issue that was completed during November 2008. Following the share issue, East Capital Explorer and the East Capital Group hold respectively 16% and 11.6% of the shares in MFG. The shares were valued at market price and verified through a fairness opinion issued by PricewaterhouseCoopers. Total acquisition value was EUR 10m. For more information on the transaction, see page 52.

NOTE 18 INFORMATION ABOUT THE PARENT COMPANY

East Capital Explorer AB is a registered Swedish limited liability company domiciled in Stockholm. The Parent Company's shares are registered on the NASDAQ OMX Nordic Exchange Stockholm. The address to corporate headquarters is Kungsgatan 30, Box 7214, 103 88 Stockholm, Sweden. The consolidated financial statements for 2008 include the Parent Company and its subsidiaries, together comprising the Group.

Consolidated key figures

	1 Jan – 31 Dec	19 Jun – 31 Dec		1 Jan – 31 Dec	19 Jun – 31 Dec
	2008	2007	Key figures/share	2008	2007
Equity ratio	97.9%	98.5%	Earnings, EUR	-3.56	0.09
Net asset value, EURt	265,025	394,261	NAV, SEK1	79.53	102.61
Change in NAV	-32.8%	0.7%	NAV, EUR	7.31	10.87
Market capitalisation, SEKm	1,458	3,627	Share price, SEK	40.20	100
Market capitalisation, EURt1	134,013	383,810	Share price, EUR1	3.69	10.58
Number of employees	4	3

1 Some currency translations are made for informational purposes. 1 EUR = SEK 10.88 on 31 December 2008 and SEK 9.44 on 31 December 2007. Source: Reuters.

The Board and the CEO assure that the annual report and the consolidated accounts have been prepared in accordance with generally accepted accounting principles in Sweden and the international financial reporting standards referred to in Regulation (EC) no. 1606/2002 of the European Parliament and of the council of 19 July 2002 on the application of international accounting standards. The annual report and the consolidated accounts give a true and fair view of the financial position and results of the Parent Company and the Group. The statutory Administration Report of the Parent Company and the Group provides a fair review of the development of the Parent Company's and the Group's operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group.

Stockholm, 18 March 2009

Paul Bergqvist Gert Tiivas Chairman of the Board Chief Executive Officer

Anders Ek Lars Emilson Board member Board member

Alexander V. Ikonnikov Justas Pipinis Board member Board member

Kestutis Sasnauskas Board member

Our Auditors' Report was submitted on 18 March 2009

KPMG AB

Carl Lindgren Authorised Public Accountant

The annual report and consolidated annual report, as indicated above, have been approved by the Board for publication on 18 March 2009. The income statements and balance sheet of the Parent Company and the Group will be submitted to the shareholders' meeting for adoption on 27 April 2009.

Audit Report

To the annual meeting of the shareholders of East Capital Explorer AB (publ) Corporate identity number 556693-7404

We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the managing director of East Capital Explorer AB (publ) for the year 2008. The annual accounts and the consolidated accounts of the company are included in the printed version of this document on pages 57-79. The board of directors and the managing director are responsible for these accounts and the administration of the company as well as for the application of the Annual Accounts Act when preparing the annual accounts and the application of international financial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act when preparing the consolidated accounts. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit.

We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts and the consolidated accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the board of directors and the managing director and significant estimates made by the board of directors and the managing director when preparing the annual accounts and the consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the managing director. We also examined whether any board member or the managing director has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below.

The annual accounts have been prepared in accordance with the Annual Accounts Act and give a true and fair view of the company's financial position and results of operations in accordance with generally accepted accounting principles in Sweden. The consolidated accounts have been prepared in accordance with international financial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act and give a true and fair view of the group's financial position and results of operations. The statutory administration report is consistent with the other parts of the annual accounts and the consolidated accounts.

We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the profit of the parent company be dealt with in accordance with the proposal in the statutory administration report and that the members of the board of directors and the managing director be discharged from liability for the financial year.

Stockholm 18 March 2009

KPMG AB

Carl Lindgren Authorised Public Accountant

Definitions

See pages 54–55 for definitions related to fees.

Alpha

The result of active asset management measured in generated return in excess of a relevant benchmark index.

Commitment

An investor's pledge to investing a specified sum of money in a private equity fund over a specified period of time.

Draw-down

When a private equity fund has decided on an investment for the fund, it will approach its investors for part payment of the money the investors have already pledged to the fund. A draw-down is the actual act of transferring the money to the investment target.

IPEVC (formerly EVCA)

International Private Equity and Venture Capital. A member-based, non-profit trade association that represents the interests of the private equity and venture capital industry. Has published guidelines for valuation of unlisted companies that is widely used as an industry standard.

Market capitalisation

Total number of outstanding shares times price per share.

Net asset value (NAV)

Corresponds to the value of East Capital Explorer's net assets, i e total assets less net debt. An indicative NAV is calculated on a monthly basis and is published five working days after the end of the month.

Private Equity

Unlisted companies, meaning companies which shares are not listed on a stock exchange or other market place.

Public Equity

Companies listed on a stock exchange or market place.

Semi-public Equity

Companies that, despite being listed on a stock exchange or market place, have shares with very limited trading volumes, and therefore are inaccessible for most investors. Trading is done on the so called second and third tier markets.

Sharpe-ratio

Risk-adjusted measurement used to compare how well the return of an investment compensates the investor for the risk taken. The higher the Sharpe ratio, the better the investments historical risk-adjusted performance.

Short-term investments

Investments that have the potential to generate attractive returns while remaining available for future investments.

KASE Index

Main index of the Kazakhstan stock exchange.

MSCI EM Europe Index

Includes Russian, Polish, Hungarian, Czech and Turkish equities.

OMXSPI

Includes all shares listed on NASDAQ OMX Nordic Exchange Stockholm.

PFTS Index

Includes equities traded on the largest marketplace in Ukraine.

RTS Index

Includes the 50 largest companies traded on the Russian Trading System (RTS).

RTS 2 Index

Includes 78 companies on the RTS that have limited trading volumes.

RTSeu Index

Sector index that includes 14 electric utility equities listed on RTS.

Please note that the benchmark indices are provided solely as reference to evaluate fund performance. Although the provided indices may be regarded as the most suitable available benchmarks for the different funds in which we invest, these indices are not fully comparable benchmarks as the sector and country weighting in these indices currently are significantly different from the weighting in the respective funds.

Photos: Viktor Brott (23, 25, 39-41, 47), Stig-Göran Nilsson (31, 34) Peter Elam Håkansson (18), Anatoliy Otchkovskiy (14, 35), Shutterstock and portfolio companies. Translation and editing: PricewaterhouseCoopers Language Services.

Print & Preprint: Alfa Print AB

East Capital Explorer AB Annual Report 2008

Kungsgatan 30, Box 7 2 1 4 SE-103 88 Stockholm, Sweden Tel: +46 8 505 97 700 Coroporate identity no: 556693-7404 www.eastcapitalexplorer.com