Further to the announcement made on 10 October 2018, Urals Energy (AIM:UEN), the independent exploration and production company with operations in Russia, provides the following update on the actions that were previously carried out by Mr S Kononov, without the knowledge or approval of the Board. Mr Kononov is the president of JSC Petrosakh, the Company's 98.56% owned subsidiary ("JSC Petrosakh").  JSC Petrosakh owns, inter alia, the Company's oil and gas interests at Petrosakh and its shares in the Kholmsk commercial seaport (the "Kholmsk Port"). 

On 10 October 2018, the Company announced that the Board of Urals Energy (the "Board") had become aware of an unauthorised loan of the Group's funds of approximately US$1.5 million to a third party.  The principal terms of this loan (the "Loan"), which was authorised by Mr Kononov, are as follows: 

• Lender: JSC Petrosakh.
• Borrower: An individual, Mr Y L Freidis, an employee of JSC Petrosakh.
• Purpose: To acquire a 19.9% voting interest in the Kholmsk Port from the relevant Russian State organization, which acquired the voting interest at the time of the bankruptcy of the previous holder.
• Amount: Approximately 87 million Russian Roubles, equivalent to approximately US$1.3 million at current exchange rates.
• Interest: 7.5% per annum, rolled up to maturity.
• Repayment date: 22 December 2022.
• Security: None. 

The Board considers that this Loan is wholly inappropriate and unacceptable. The Board is investigating whether the documentation relating to the Loan, and the granting of the Loan, is valid.  

On 10 October 2018, the Company also announced that the Board believed that Mr Kononov had made an unapproved disposal of part of the Group's shareholding in the Kholmsk Port to a third party, on deferred payment terms.  Following further investigation, it has become clear to the Board that the shares in the Kholmsk Port sold under this transaction were not part of the Group's original shareholding in the Kholmsk Port (as announced on 6 August 2018), but instead represented additional shares in the Kholmsk Port, equivalent to approximately 11.9% of the voting rights of the Kholmsk Port (the "Additional Shares"), which were acquired by JSC Petrosakh and then subsequently sold to a third party (being the JSC Lipetsk Distillery Company) on deferred settlement terms. 

The terms of the deferred payment agreement for the sale of the Additional Shares are as follows: 

• Seller: JSC Petrosakh.
• Buyer: JSC Lipetsk Distillery Company ("LDC").
• Shares sold: equivalent to approximately 11.9% of the voting rights of the Kholmsk Port.
• Sale value: approximately 22 million Russian Roubles, equivalent to approximately US$0.3 million at current exchange rates.
• Payment details: payment in respect of approximately 40% has been received by the Group, while the balance is callable on demand with seven days' notice. 

The Board believes that the completion of the above measures will restore the Group's significantly constrained current working capital position, as described in the Company's announcement of 10 October 2018.  However, the Board is also seeking additional alternative interim working capital solutions, although at present, discussions regarding such solutions are at an early stage of development.  Potential solutions to the Group's working capital needs could involve short-term loan finance being provided to the Group.  The Board is also seeking to expedite the process for the planned tanker shipment from Arcticneft, as described in the Company's announcement of 10 October 2018. 

Subject to the successful completion of the above measures, the restoration of the Group's working capital position, and no other relevant adverse factors arising, the Board would re-consider the payment of a dividend for the year to 31 December 2017.   

However, the Board cautions that there can be no guarantee of success in respect of the remedial actions described above.  The Board remains of the opinion that if none of the potential solutions to the Group's current working capital deficit can be put in place by the end of this month, then the Board will have to take steps to protect the interests of the Group's creditors.  Further announcements will be made in due course.   

In addition, the Group has significantly augmented its control framework to seek to avoid future breaches of the Group's systems, procedures and controls.  Under Russian Law, the President or General Director of a joint stock company, which is the legal incorporation status of JSC Petrosakh, has authority to approve any action, including contracts, loans and asset sales within a limit of 25% of the capital employed of that company, and in this case the employed capital of JSC Petrosakh is approximately US$30 million. However, it has been the rule and practice of the Group that these powers will only be used with the approval of the Board, and prior to the advent of the events described above, Mr Kononov has followed this practice.  

All senior employees have been made aware of the need for the Group's rules and practices to be adhered to and the consequences of non-compliance. On the basis that the Board has had confidence in Mr Kononov over the last few years, and that he has recognised that the transactions described above must be reversed, the Board has decided to allow Mr Kononov to continue in his position for the time being, provided that he adheres to the Group's rules and practices and its control and supervision framework.