SISTEMA PJSFC

Annual report 2018

CONTENTS

PAGE

1. RESPONSIBILITY STATEMENT 2 2. PROFILE OF SISTEMA 5 3. MANAGEMENT REPORT 6 3.1 KEY EVENTS 7 3.2 STRATEGY 10 3.3 SHAREHOLDERS’ EQUITY 13 3.4 REPORT ON DIVIDENDS DECLARED (ACCRUED) ON SISTEMA 15 SHARES

3.5 CONSOLIDATED FINANCIAL RESULTS OVERVIEW 17

3.6 RISKS 65 3.7 CORPORATE GOVERNANCE SYSTEM 72 3.8 REMUNERATION POLICY 90 3.9 CORPORATE SOCIAL RESPONSIBILITY 93 4. AUDITED CONSOLIDATED FINANCIAL STATEMENTS 105

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1. RESPONSIBILITY STATEMENT

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To whom it may concern

29 April 2019

Responsibility Statement

To the best of my knowledge (a) the consolidated financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of Sistema PJSFC and the undertakings included in the consolidation taken as a whole; and (b) the management report includes a fair review of the development and performance of the business and the financial position of Sistema PJSFC and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Yours sincerely,

Andrey Dubovskov President and Chief Executive Officer Sistema PJSFC

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2. PROFILE OF SISTEMA

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2. Profile of Sistema

2.1 Overview Sistema PJSFC (“Sistema” or the “Company” or the “Corporation”, together with its subsidiaries, “the Group”) is one of the largest private investors in Russia's real economy. Sistema's investment portfolio is dominated by Russian companies in various sectors including telecommunications, consumer retail, paper and packaging, agriculture, high-tech, real estate, healthcare, financials and hospitality. Sistema holds controlling interests in most of its portfolio companies.

 Russia's biggest private non-resource corporation  A TOP 20 public Russian company from Forbes Global 2000  Traded on the Moscow Exchange (AFKS, shares) and on the LSE (SSA, global depositary receipts1). One GDR represents 20 ordinary shares.  Investments and competences in over 15 sectors  A unique portfolio of assets in promising sectors of the Russian economy  Public assets: MTS, Detsky Mir, Etalon2  Credit ratings from international and Russian rating agencies: Fitch: BB-; S&P: B+; RAEX: RuA-

Sistema's strategic goal is to create long-term growth of shareholder value by boosting returns on investments in existing assets and reinvesting available cash in new investment projects to diversify its portfolio and increase overall return on investment.

Sistema focuses on improving the operational efficiency of the assets it acquires by restructuring and by working with industrial partners to enhance expertise and mitigate financial risks.

Key highlights 20183

Revenue: RUB 777.4 billion Assets: RUB 1,465.4 billion

Sistema’s credit ratings Date of most recent Rating agency Long-term credit rating Outlook rating update Standard & Poor’s 26 April 2019 B+ Positive

Fitch 19 January 2018 BB- Negative

Expert RA 08 October 2018 ruA- Stable

1 One GDR represents 20 ordinary shares. 2 Sistema acquired a 25% stake in Etalon Group Plc in February 2019. 3 Here and hereinafter, consolidated results of Sistema and its subsidiaries for 2018 are presented in accordance with new accounting standards IFRS 9, 15 and 16 unless specified otherwise. Results for 2017 are presented without the impact of the new standards.

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3. MANAGEMENT REPORT

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3. MANAGEMENT REPORT

3.1 KEY EVENTS

KEY EVENTS OF 2018

New President and Vice President for Finance and Investments appointed In April 2018, Vladimir Travkov was appointed as Vice-President, Chief of Financial and Investment Department (CFO). Since 2003 he has held management positions in MTS Group, including as director of the Functional Control Department since 2016. In March 2018, Sistema's Board of Directors approved the appointment as President of Sistema of Andrey Dubovskov, the former president of MTS. Andrey Dubovskov took office on 13 March 2018.

Settlement agreement with Rosneft and Bashneft In 2018 Sistema fulfilled in full all of its financial obligations under the Settlement Agreement which settled all litigations between the Claimants, Sistema and Sistema-Invest relating to the ownership and or management of Bashneft and or its affiliated entities by Sistema and Sistema-Invest.

Active presence in debt markets In February and March 2018, Sistema successfully placed exchange-traded bonds of series 001P-07 and 001P- 08 with the total nominal value of RUB 10bn and RUB 15bn, respectively. The rates for coupons 1-2 were set at 9.80% p.a. for series 001P-07 bonds and at 9.25% for series 001P-08 bonds. The bonds mature in 10 years with put options exercisable 1 year and 1.5 years after the dates of placement respectively. .

Increased scale and crystalized value of pharmaceuticals business In December 2018, Sistema acquired a stake in a leading pharmaceutical company, OBL Pharm, for RUB 1.83 billion. Sistema made the acquisition as a member of a consortium of investors that also included VTB Bank and members of the OBL Pharm management team. The strategic aim of the transaction is the merger of OBL Pharm with Sistema’s pharmaceutical holding, Binnopharm, and utilisation of synergies in marketing and sales, combining R&D functions and reducing administrative costs. The medium-term goal of the combined company is to become a top-5 Russian pharmaceuticals producer in the non-state segment, the fastest-growing segment in the Russian pharma market.

Strengthened position in the FTSE4Good index Sistema received a high score for its environmental activities and social responsibility practices. FTSE Russell, an analytical agency of the London Stock Exchange, has upgraded Sistema's sustainable development rating and confirmed its status of a participant of the FTSE4Good4 index following a revision in June 2018. The high rating and participation in the index confirm the Corporation's commitment to responsible investment and asset management.

EVENTS AT PORTFOLIO COMPANIES AND SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD

MTS: unlocking synergies with the banking business and developing new revenue streams In August 2018, MTS used the expertise of its subsidiary, system integrator NVision Group, and its 5,000+ IT specialists across the country to enter the outsourced IT services market. In July 2018, MTS increased its equity holding in MTS Bank to 55.2%, which will make it possible to unlock further synergies between the telecom and banking businesses, simplify management and reduce the time-to- market of new fintech products. In February 2019, Sistema's direct ownership interest in MTS Bank was reduced to 5.0%, while MTS's stake increased from 55.2% to 94.7%. In May 2018, MTS placed Russia's first commercial bonds using smart contracts based on blockchain. The total nominal value of the issue was RUB 750m.

4 The FTSE4Good indices were created by FTSE Russell to assess companies' effectiveness in environmental, social and governance practices (ESG).

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In April 2018, MTS partnered up with Ericsson to open a research centre in Tatarstan that will develop innovative products and solutions based on 5G, IoT and Big Data. In February 2018, MTS acquired Ticketland.ru and Ponominalu.ru, two major Russian e-ticketing operators.

Detsky Mir: chain expansion and new markets In 2018, Detsky Mir entered a new market - pet products - in accordance with its expansion strategy. The management estimates the size of the pet products segment in Russia at RUB 200bn. In December 2018, the company opened 4 pilot pet stores under the Zoozavr brand. The total selling space of all the stores of the Group is 768,000 sq m (+11.6% YoY).

Detsky Mir intends to enter a new geography - Belarus - and become a key player there in the medium term. The first store in Belarus was opened in Minsk (Evroopt shopping mall) in February 2019. Its total area is 1,690 sq m. Detsky Mir will develop in Belarus under the DetMir brand.

Medsi: telemedicine and patient care centre In April 2018, Medsi and MTS launched a telemedicine platform, SmartMed, which will be used for developing digital healthcare products and services.

In July 2018, the company established a patient care centre, the main mission of which is to study customers' satisfaction and preferences with regard to healthcare and other services provided at Medsi, implement the world's best practices of patient-centric medicine, and develop internal processes and culture aimed at meeting customers' needs.

Steppe AgroHolding: capacity increase Steppe AgroHolding is actively increasing its capacity in the dairy farming segment. In March 2018, the company commissioned its fifth dairy farm for 1,800 cows. The new farm is expected to reach its design capacity of 20,000 t of milk per year in 2021. At the end of 2018, Agroholding announced its plans to build another dairy farm in the Rostov region. Together with the farm launched in March 2018 in the Krasnodar region and another new enterprise under construction there, it will increase production more than 3-fold, from 40,000 tonnes in 2017 to over 120,000 tonnes in 2023, making Steppe Agroholding one of the top 3 players in the Russian market.

Segezha Group: increasing output and enhancing efficiency In March 2018, Mikhail Shamolin, former president of Sistema, was appointed president of Segezha Group. In July 2018, the company launched the second line at the Vyatka Plywood Mill, which will enable it to increase its plywood output to 192,000 cu m and expand the range of high-margin products, including large-size long- grain plywood.

In December 2018, a pellet plant with an annual capacity of 70,000 t of pellets was opened at the Lesosibirsk Woodworking Plant. Pellets are produced from waste (sawdust) generated at the woodworking facility.

In the fourth quarter of 2018, Segezha Pulp and Paper Mill commissioned a multi-fuel boiler that runs on bark waste, which will increase heat generation at the mill by 25% and reduce use of expensive fuel oil.

RTI: creation of a combined microelectronics components company In February 2019, RTI Microelectronics, an RTI Group company, signed a legally binding agreement with State Corporation Rostec and JSC Roselectronica to create a combined microelectronics components company. The parties will combine under the new company controlling stakes in 19 microelectronics component development, production and design companies.

New funds’ investments and exits - Sistema Asia Fund In May 2018, Sistema’s venture fund Sistema Asia Fund added HealthifyMe, an Indian mobile health and fitness application, to their portfolio In March 2019, Sistema Asia Fund, a Sistema venture capital fund, sold its holding of Qwikcilver, an Indian technology company specialising in gift cards and stored-value solutions. The transaction is the first exit for the Sistema Asia Fund. Sistema Asia Fund invested in Qwikcilver in 2016 and after three years exited having achieved a high return on invested capital.

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- SVC In May 2018, Sistema’s venture fund Sistema Venture Capital invested in TraceAir, a start-up developing a platform for monitoring construction sites using unmanned aerial vehicles, in Connecterra, a start-up which deploys AI solutions for dairy farming, and in SQream, a company that enables enterprises to maximize and leverage their big data analytics by using GPU.

Strategic transactions - Ozon: strengthened position in the fast-growing e-commerce market In February 2019, Sistema acquired 18.7% of Russia's leading multi-category online retailer, Ozon Holdings, from MTS for RUB 7.9 billion. The decision to increase the stake is based on Sistema’s strategic bet on growth prospects for e-commerce and market consolidation through investments in the market leader.

- Etalon: Added operational scale in real estate development In February 2019, Sistema sold 51% of JSC Leader Invest to Etalon Group, while retaining a 49% stake in the company. Following this transaction, Sistema acquired 25% of Etalon Group for USD 226.6 million. The transactions create a top-3 player in the Moscow and St Petersburg markets, bring together complementary development portfolios, allow Leader Invest’s projects to leverage Etalon’s general contracting capacity and regional sales network to accelerate construction and sales, and realise significant synergies in construction as well as reduction of administrative expenses.

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3.2 STRATEGY Mission Sistema’s mission is to build Russia's leading investment company, with diversified expertise and a strong track record, which will become an investment platform for managing both Sistema’s and third-party capital while providing access to unique investment opportunities in the most attractive sectors of the Russian economy and high-potential technologies, and oriented towards long-term growth of equity value.

Sistema's strategic goals • Maximising total shareholder return (TSR) and reducing the discount of market capitalisation to net asset value (NAV); • Raising and managing outside capital to expand available investment resources;

Strategic focus (components of the strategy) • Growing existing assets in high-potential segments (private healthcare, agriculture, pulp & paper) into businesses with valuations between USD 1-2 billion each; • Taking advantage of unique investment opportunities in traditional sectors in Russia; • Focusing on investments in the high-potential technology sector; • Ongoing generation of value in existing assets, including through adoption of advanced technologies and digital solutions; • Ongoing improvement of management structures and corporate governance.

Partnership management model The Corporation has adopted a partnership management model that allows key executives of the Corporation (Managing Partners) to share the risks and returns from investment activities with shareholders:

 Managing Partners are responsible for implementation of portfolio companies' investment strategies. This means they: - organise asset management (mostly via the Board of Directors) and take full responsibility for the asset’s KPIs and financial performance; - in most cases, the chair of the asset's Board of Directors, bear responsibility for its composition and work, and recruit and appoint the CEO and senior management.

 Incentives of the Managing Partners are aimed at: (1) increasing Sistema's capitalisation; (2) maximising the value of assets under management and monetising this value; (3) raising outside capital for management. Managing Partners co-invest in assets under their management

Asset management principles Investing in the development of existing portfolio assets to increase their value is one of the key stages of Sistema's value creation model. Value creation includes a number of mandatory steps, starting from active management of a newly acquired asset

Value creation at assets A Board of Directors is formed at companies controlled by Sistema, and must have independent members with recognised industry and/or functional expertise.

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The boards supervise, coordinate and support the activities of portfolio companies' management in decision-making in key functional areas: strategy and key transactions, budget planning, HR policy, internal audit;

• effective managers are recruited; an incentive system is established that is aimed at creating shareholder value; • strategic and financial planning cycles are introduced based on best international practices of corporate governance; • new technologies are identified, with testing and adoption to increase efficiency, streamline processes, develop innovative products and services for customers, and expand current markets of portfolio companies.

Basic principles of the investment strategy Current investments

- Focus: Investments in Sistema’s high-potential portfolio companies that can develop into businesses with valuations exceeding USD 1 billion in the medium term and require investments from Sistema. Investment strategy: Investments in portfolio companies to increase their market share and or enter adjacent/synergetic business segments Geography of investments: in accordance with the approved strategy for portfolio companies Industries: companies' industries and adjacent/synergetic industries Discounted payback period (DPBP) of 3-10 years

New investments

- Focus: Direct investments by Sistema's Corporate Centre in unique opportunities in traditional sectors in Russia • Mature undervalued assets – Investment strategy: investments in significant and controlling stakes of large assets in attractive markets in Russia. Acquisition at a significant discount to the market value and with the possibility of quickly reducing the discount and selling within 2-3 years

• Growing assets – Investment strategy: buy and consolidate players. Generating value by ousting competitors, consolidating the industry, using economies of scale and market growth. Exit in 4-5 years through sale to a strategic investor/IPO

Geography of investments: predominantly Russia Sectors: sectors with large markets (at least USD 1 billion), high growth rates, import substitution potential and export prospects.

- Focus: Investments in future technologies

• Investments in large technology companies – Investment strategy: direct investment by Sistema's Corporate Centre in big stakes in technology companies that do not meet the investment criteria of Sistema's funds, with an opportunity to build businesses worth over USD 1 billion and monetisation prospects in 5- 7 years

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• Venture projects – Investment strategy: investments within existing and new venture funds under Sistema's management, monetisation of investments via closing of funds. Mandatory participation of outside investors as financial partners (share of outside partners: at least 20%)

Geography of investments: no restrictions Sectors: Software development, e-commerce, e-businesses, IoT, virtual assistants, machine learning and neural networks, cybersecurity, medtech, AR/VR and others.

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3.3 SHAREHOLDERS’ EQUITY Sistema has 9,650,000,000 ordinary shares outstanding with a nominal value of RUB 0.09 each. Its authorised capital is RUB 868,500,000.

Sistema held an initial public offering in 2005. Its shares trade on the London Stock Exchange in the form of global depositary receipts (GDRs) under the ticker SSA. One GDR represents 20 ordinary shares. The Corporation’s ordinary shares are also listed on Moscow Exchange in the first listing level under the ticker AFKS. The GDRs traded on the London Stock Exchange represent about 15.9% of Sistema's equity, while the shares traded on Moscow Exchange represent 16.5%.

Sistema's shares are included in Moscow Exchange’s two key indices, the MOEX Russia Index (formerly MICEX) and RTS, as well as its Broad Market Indices5.

Shares of MTS, a Sistema subsidiary, are traded on Moscow Exchange under the ticker MTSS and on the New York Stock Exchange (NYSE) in the form of ADRs under the ticker MBT.

Shares of Detsky Mir, a Sistema subsidiary, began trading on Moscow Exchange in February 2017 under the ticker DSKY in the first listing level.

In February 2019, Sistema acquired 25% of Etalon Group. Etalon’s GDRs listed on London Stock Exchange under the ticker “ETLN” since 2011.

Sistema's principal shareholder is its Chairman Vladimir Evtushenkov, who owns 59.2% of the Corporation's equity.

Sistema's shareholding structure6

Mr Vladimir Evtushenkov 59,2% Free-float (shares) 16,5% Free-float (GDRs) 15,9% Other 7 8,4%

Changes in Sistema's GDR and ordinary share prices8

In 2018, Sistema's share price fell by 35.2% and the price of its GDRs by 47.8%. Despite the strong operational and financial performance of Sistema's portfolio companies, its share price was under pressure due to the Corporate Centre's high debt burden and absence of substantial monetisations.

On the first trading day of 2018, the closing price of one GDR on the London Stock Exchange was USD 4.4, corresponding to Sistema’s total market capitalisation of USD 2,145.2 mn. On the last trading day of the year, the closing price was USD 2.3, with Sistema's total market capitalisation standing at USD 1,119.4 mn.

On the first trading day of 2018, the closing price of one ordinary share on the Moscow Exchange was RUB 12.4, corresponding to Sistema’s total market capitalisation of RUB 119.2 bn. On the last trading day of the year, the closing price was RUB 8.0, with Sistema's total market capitalisation standing at RUB 77.2 bn.

The closing price of GDRs reached a record high of USD 4.5 on 26 February 2018, and the ordinary shares peaked at RUB 12.8 on 15 January 2018. The lowest closing GDR and ordinary share prices were recorded on 27 December 2018 at USD

5 Broad Market Indices of the Moscow Exchange include top 100 securities selected based on the criteria of liquidity, capitalisation and the number of shares in free float and form the bases for calculation of the Moscow Exchange's other indices. The calculation bases include the shares whose free float coefficient is at least 5%. 6As of December 31, 2018. 7 Ordinary shares and GDRs owned by Sistema Group companies, members of the Board of Directors and the management of Sistema. 8 Source: Bloomberg

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2.2 and on 26 October 2018 at RUB 7.7, respectively. Average daily trading volume on the London Stock Exchange in 2018 was 327,489 GDRs, and on Moscow Exchange 16,646,315 ordinary shares.

30% 20% 10% 0% -10% -20% -30% -40% -50% 01.01.2018 01.03.2018 01.05.2018 01.07.2018 01.09.2018 01.11.2018

Sistema's ordinary shares Sistema's GDRs RTSI$ Index IMOEX Index

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3.4 REPORT ON DIVIDENDS DECLARED (ACCRUED) ON SISTEMA SHARES Dividend policy In April 2017, Sistema’s Board of Directors approved a revised dividend policy. In accordance with the new policy, the amount of dividends recommended by the Board for each reporting year will be the higher of either an amount equivalent to a dividend yield of at least 6% or RUB 1.19 per ordinary share. The Corporation determines the final amount of dividends payable with due regard to its financial results, current cash flow and investment needs.

When determining dividends for 2017, the Board of Directors took into account the priority of the strategic goal to reduce the Corporation's debt and recommended paying dividends for 2017 in the amount of RUB 0.11 per share, supporting the Corporation's deviation from the current dividend policy. To maintain a balance between the rights and interests of all shareholders and the Corporation's ability to pay dividends, the Board of Directors, when determining the amount of dividends, will take into account the acceptable rate of Sistema's debt reduction and the proportionality of dividends to the current cash flow of the Corporation. Sistema plans to continue to pay dividends in accordance with the current dividend policy after achieving the goal of debt reduction

Dividends distributed for the first nine months of 2017 On 03 November 2017, an Extraordinary General Meeting of shareholders (Minutes No 2-17) approved the distribution of RUB 6,562,000,000.00, or RUB 0.68 per ordinary share in Sistema, as dividends.

As of 31 December 2017, the total amount of dividends distributed equalled RUB 2,121,721,383.40 (the total amount of dividends to nominee shareholders and custodians who are professional participants of the securities market and who are included in the shareholders register).

As of 31 December 2017, dividends payable to persons included in the shareholders register, with the exception of nominee shareholders and custodians who are professional participants of the securities market, were not due for payment. These dividends were paid in 2018.

As of 31 December 2018, the total amount of dividends distributed for 9 months of 2017 equalled RUB 2,348,863,483.40. Withholding tax on dividends distributed to foreign shareholders totalled RUB 2,798,048.00.

Dividends distributed for the full year 2017 On 30 June 2018, the Extraordinary General Meeting of Sistema's shareholders (Minutes No 1-18) approved the distribution of RUB 1,061,500,000.00, or RUB 0.11 per ordinary share in Sistema, as dividends.

As of 31 December 2018, the total amount of dividends distributed equalled RUB 1,061,461,415.52. Withholding tax on dividends distributed to foreign shareholders totalled RUB 429,305.00.

Unpaid dividends As of 31 December 2018, the total amount of unpaid dividends equalled RUB 4,213,722,383.52, including: . RUB 4,213,003,658.88 not paid in accordance with a written request from a shareholder; . RUB 718,724.64 not paid due to absence of information about dividend recipients necessary to transfer the due amounts.

Total amount of declared Declaration Dividend per share, RUB Payment date dividends, RUB date 2013 (for the full year 2012) RUB 9,264,000,000 RUB 0.96 29/06/2013 26/08/2013 2014 (for the full year 2013) RUB 19,879,000,000 RUB 2.06 28/06/2014 31/07/2014 2015 (for the full year 2014) RUB 4,535,500,000 RUB 0.47 27/06/2015 29/07/2015 2016 (for the full year 2015) RUB 6,465,500,000 RUB 0.67 25/06/2016 27/07/2016 2016 (for H1 2016) RUB 3,667,000,000 RUB 0.38 23/09/2016 20/10/2016 2017 (for the full year 2016) RUB 7,816,500,000 RUB 0.81 24/06/2017 28/11/2017

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22/12/20179 - 2017 (for 9M 2017) RUB 6,562,000,000 RUB 0.68 28/11/2017 19/01/201810 2018 (for the full year 2017) RUB 1,061,500,000 RUB 0.11 30/06/2018 31/07/2018

9 Date of payment of dividends to the nominee shareholders and custodians being professional participants of the securities market, who are included in the shareholders register. 10 Date of payment of dividends to other persons included in the shareholders register.

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3.5 CONSOLIDATED FINANCIAL RESULTS OVERVIEW

The following table sets forth a summary of our financial results for the years ended 31 December 2018 and 2017. This financial information should be read in conjunction with our Financial Statements.

Years ended December 31,

2018 % of 2017 % of revenues revenues (Amounts in millions of Russian Rubles, except percentages)

Revenue 777,405 100.0% 693,424 100.0%

TOTAL REVENUES 777,405 100.0% 693,424 100.0%

Cost of sales (366,021) (47.1)% (330,597) (47.7)%

Selling,general and administrative (141,605) (18.2)% (153,162) (22.1)% expenses Depreciation and amortisation (130,941) (16.8)% (95,100) (13.7)%

Impairment of long-lived assets (1,360) (0.2)% (8,011) (1.2)%

Impairment of financial assets (5,934) (0.8)% (5,748) (0.8)%

Taxes other than income tax (6,411) (0.8)% (5,781) (0.8)%

Share of the profit or loss of associates 1,715 0.2% 3,030 0.4% and joint ventures, net Other income 7,540 1.0% 5,625 0.8%

Other expences (5,786) (0.7)% (13,394) (1.9)%

OPERATING INCOME 128,602 16.5% 90,286 13.0%

Finance income 8,421 1.1% 8,056 1.2% Finance cost (68,024) (8.8)% (48,852) (7.0)% Expense under the Settlement - - (100,000) (14.4)% Agreement Currency exchange loss (16,771) (2.2)% (411) (0.1)%

Profit/(loss) before tax 52,228 6.7% (50,921) (7.3%)

Income tax expense (32,809) (4.2)% (11,199) (1.6)%

Profit/(loss) from continuing operations 19,419 2.5% (62,120) (9.0%)

Loss from discontinued operations (57,723) (7.4)% (4,408) (0.6)%

NET LOSS FOR THE YEAR (38,304) (4.9%) (66,528) (9.6%)

(Loss)/profit attributable to: Shareholders of Sistema PJSFC (45,896) (5.9)% (94,602) (13.6)% Non-controlling interests 7,592 1.0% 28,074 4.0%

(38,304) (4.9%) (66,528) (9.6%)

OIBDA* 259,543 33.4% 185,386 26.7%

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*OIBDA represents operating income before depreciation and amortisation. OIBDA is not a measure of financial performance under IFRS. You should not consider it an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Our calculation of OIBDA may be different from the calculation used by other companies and therefore comparability may be limited. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions of subsidiaries and other investments and our ability to incur and services debt. While depreciation and amortisation are considered operating costs under IFRS, these expenses primarily represent non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods.

The following table presents a reconciliation of OIBDA to operating income for the periods indicated:

For the year ended 31 December 2018 2017 (In millions of Russian Rubles)

Operating income 128,602 90,286 Depreciation and amortisation (130,941) (95,100) OIBDA 259,543 185,386

In our comparison of period-to-period results of operations we analyze changes, developments and trends in revenues by reference to individual segment revenues. We present our revenues on an aggregated basis after elimination of intra- segment (between entities in the same segment) transactions, but before intersegment (between entities in different segments) eliminations. Amounts attributable to individual companies, where appropriate, are shown prior to both intra- segment and inter-segment eliminations.

The following tables set forth a summary of revenues and operating income by reportable segment for the years ended 31 December 2018 and 2017.

Revenues by segment:

Year ended 31 December

% of total % of total 2018 2017 revenues revenues

(In millions of Russian Rubles, except percentages) MTS 490,961 63.2% 461,016 66.5% Detsky mir 110,874 14.3% 97,003 14.0% RTI 22,886 2.9% 30,793 4.4% Corporate 3,196 0.4% 2,640 0.4% Other 158,679 20.4% 108,613 15.7% Aggregated revenue 786,596 101.2% 700,065 101.0% Intersegment eliminations (9,191) (1.2%) (6,641) (1.0%) Total 777,405 100.0% 693,424 100.0%

In 2018, Sistema’s consolidated revenue increased by 12.1% year-on-year as a result of increased revenue from key assets: MTS, as the core telecoms business benefitted substantially from a better pricing environment in Russia, data usage increased, revenue from new business lines accelerated rapidly and smartphone sales were strong; Detsky Mir, on the back of new store openings, growth in like-for-like sales, growth in the e-commerce segment and increased traffic at previously opened stores; Segezha Group, as a result of increased sales volumes of paper and packaging, higher prices for paper and sawn timber, and weakening of the rouble; Agroholding Steppe, due to growth of the field crop segment as wheat prices have increased, strong growth of the agrotrading division and increased milk production; Medsi, due to increased capacity utilisation and as a result in-patient revenue, higher revenue from the CDC at Krasnaya Presnya and expansion of the chain of clinics; and real estate assets, driven by sales growth and earlier revenue recognition due to the adoption of the IFRS 15 standard.

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Operating income/(loss) by segments:

Year ended 31 December

% of total % of total 2018 2017 operating operating income income (In millions of Russian Rubles, except percentages) MTS 112,379 87.4% 94,046 104.2% Detsky mir 11,232 8.7% 8,024 8.9% RTI 921 0.7% (5,772) (6.4%) Corporate (11,946) (9.3%) (12,670) (14.0%) Other 18,611 14.5% 5,160 5.7% Aggregated operating income 131,197 102.0% 88,788 98.3% Intersegment eliminations (2,595) (2.0%) 1,498 1.7% Total 128,602 100.0% 90,286 100.0%

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KEY PORTFOLIO ASSETS

MTS

PJSC Mobile TeleSystems ("MTS") is a leading Russian company offering mobile and fixed-line services, Internet access, cable and satellite TV, digital services and mobile apps, financial and e-commerce services, and convergent IT solutions in the field of system integration, the Internet of things, monitoring, data processing, and cloud computing.

MTS Group has over 105m mobile subscribers in Russia, Armenia, Ukraine and Belarus. MTS is a leader in the Russian telecom market in terms of key mobile business indicators: subscriber base, revenue and OIBDA.

Sistema’s stake 50.01%11

Leadership

President, Chairman of the Management Board: Alexey Kornya Chairman of the Board of Directors: Ron Sommer

Digital business:

In order to increase the profitability and efficiency of its core business MTS, in addition to operations in the mobile and fixed telephony markets, is developing convergent products, promoting its own mobile apps, and improving and expanding the portfolio of projects in the Big Data segment. It is also implementing a project for internal digitalisation of business processes. The strategy of MTS also provides for developing such new business segments as fintech, entertainment and B2B/IoT, both organically and through mergers and acquisitions (M&As).

Industry overview for 201812

In 2018, the Russian telecommunications market was worth RUB 1.7tn. Revenue growth rate reached a 5-year high of 3.4%. The growth was mostly driven by revenue from fixed telephony. Moreover, broadband and pay TV networks also enjoyed stable growth. The segments of fixed telephony and inter-operator services continued to shrink, though at a slower pace.

The mobile telecommunications market benefited from the initiative of mobile operators launched in 2017 and aimed at stabilising the market. The initiative provided for scrapping price competition and unlimited tariff plans, and expanding the offer of core and extra services. Revision of tariff plans was caused by changes in legislation, in particular, amendments to the Law on Communications that provided for abolition of domestic roaming charges and required mobile operators to introduce a single tariff for all domestic calls. The federal law will come into force on 1 June 2019.

On 1 October 2018, a new law on storage of the information transmitted via communication networks took effect. According to the law, Russian mobile operators will have to store user internet traffic for 30 days and increase storage capacity by 15% annually for the next 5 years.

Introduction of the 5G standard in Russia is expected in 2022 and is currently being actively discussed by the Ministry of Communications, the Federal Anti-Monopoly Service and mobile operators. The Union of LTE Operators, which comprises MTS, Megafon, Vimpelcom, and Tele2, is against market monopolisation and creation of a single infrastructure operator. However, the Union supports setting up a consortium for joint use of 5G frequencies in the 3.4-3.8GHz spectrum.

11 Hereinafter refers to effective stake for MTS, MTS Bank and BPGC and to total ownership for other assets. The stake in Ozon.Ru includes all shares controlled by Sistema Group. 12 According to TMT Consulting report "Russian telecommunications market in 2018-2023".

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In 2019, the operators will face a number of challenges related to the saturation of some market segments. The events of 2017-2018 showed that despite the unfavourable environment the market may be expected to grow at 2-3% p.a. in the medium term.

Business development in 2018

In 2018, MTS achieved strong operating and financial results on the back of healthy market growth in Russia and increasing penetration of digital services in all the regions of the company's operations. Growth of revenue in the mobile business enabled the company to post an all-time high OIBDA in 2018. The main events of 2018 are related to entering new markets and business segments. For example, MTS acquired Russia's two leading ticket distributors Ticketland.ru and Ponominalu.ru; bought a stake in Russia's biggest online service connecting customers with service providers for performing household errands and business tasks Youdo; launched the Smart University educational platform and the MTS Marketing Expert digital platform.

MTS and Medsi Group started strategic cooperation in the area of digital healthcare and launched a telemedicine platform SmartMed. On the basis of this platform the companies will develop a range of products and services for digital healthcare. At the end of 2018, MTS started selling SmartMed services to retail customers in Moscow and the Moscow region.

In Q3 2018, MTS acquired LLC Avantage, one of the largest data processing centres in Russia, which will significantly bolster the operator's position in the fast-growing market of cloud services. This is the tenth data centre in MTS's federal network.

In July 2018, MTS acquired 28.63% of shares in PJSC MTS Bank for RUB 8.27bn from Sistema. As a result of the transaction MTS's shareholding in the bank increased from 26.61% to 55.2%13. The transaction enabled MTS to consolidate its fintech business in Russia and to simplify operational management, making it possible to launch new products faster and to utilise the retail network of MTS more effectively in order to expand the bank's footprint. In Q3 2018, MTS started consolidating the results of MTS Bank, which had a positive impact on revenue.

MTS continued active development of digital products in the retail and corporate markets and launched a number of strategic initiatives aimed at developing the digital businesses of MTS. In March 2018, MTS launched an in- house accelerator StartUp Hub enabling technological startups to integrate their solutions and products with the company's business.

MTS was granted a permission to use 900 MHz frequencies and announced that it was ready for commercial operation of the Narrowband Internet of Things (NB-IoT) network. In 2018, MTS commissioned NB-IoT networks in 50 cities of Russia.

MTS continued implementing its strategy for ensuring high returns for the shareholders. In April 2018, the Board of Directors of MTS approved dividends payable for 2017 in the total amount of RUB 46.762bn, RUB 23.4 per share. In October 2018, the Board of Directors of MTS approved dividends for the first half of 2018 in the total amount of RUB 5.196bn, RUB 2.6 per share. The total amount of MTS's dividends in 2018 reached RUB 51.958bn, which is in line with the payments made in the previous year.

Business development strategy

Since 2016 MTS has been implementing its 3D strategy (Data, Digital and Dividends). In 2018, the board of directors of MTS approved an updated strategy for 2019-2021, according to which the company will offer its subscribers services united into one ecosystem. The new 3D strategy is focused on digital transformation and development of new business segments:

1) Data  Retention of core mobile revenue via increased penetration of services, data transfer and V&D tariffs, competitive development of 4G networks, optimal use of the spectrum and a competitive 5G spectrum.

13 MTS's stake in MTS Bank was increased to 94.72% in February 2019.

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 Growth of revenue from fixed telephony through expansion of the BB and TV subscriber base in Moscow and Russia's regions, increasing ARPU by selling additional services and developing B2B products and IT as a service. 2) Digital  New digital businesses: IoT, system integration, е-commerce, fintech, applications, Big Data, e- ticketing, etc.  Internal transformations: emphasis on interaction with customers, innovations in corporate culture, atomisation of product and business management. 3) Dividends  High shareholder returns;  Investment and operational efficiency;  Optimal amount of debt.

MTS's investment programme provides for implementation of nation-wide projects aimed at improving the quality of communications, expanding coverage and rolling out LTE network, increasing the capacity of intra- areal and trunk networks to enable data traffic growth, developing new priority business segments (Big Data, Cloud, IoT, OTT, financial technologies) and B2B projects for customers, and preparing communication networks for the commercial operation of 5G in Russia.

2018 financial performance

Excluding impact of new IFRS standards (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 480,292 442,910 8.4% 482,469 8.9% Operating income 114,245 94,671 20.7% 106,817 12.8% Adj. OIBDA14 218,833 178,358 22.7% 188,795 5.9% Profit attributable to Sistema 3,424 28,038 (87.8%) 4,591 (83,6%) Adj. profit attributable to Sistema14 32,951 29,926 10.1% 34,118 14.0%

In 2018 revenue at MTS rose by 8.4% year-on-year, driven by robust performance of Russian operations as the core telecoms business benefitted substantially from a better pricing environment in Russia, data usage increased, revenue from new business lines accelerated rapidly, smartphone sales were strong, and as a result of the consolidation of MTS Bank. The new IFRS standards had a non-material negative effect on revenue. Adjusted OIBDA grew by 22.7% in 2018, due to the effect of new accounting standards, revenue growth, the consolidation of MTS Bank and strong performance of the Ukrainian business. The abolition of internal roaming and increased payments for frequency spectrum in Russia had a negative impact on OIBDA. Excluding the effect of the new standards, adjusted OIBDA increased by 5.9% in 2018. The adjusted OIBDA margin strengthened by 5.3 p.p. to 45.6%. In 3Q 2018 MTS recorded a provision of RUB 55.8 billion as the potential liability in respect of an investigation by the US Securities and Exchange Commission (SEC) and the US Department of Justice (DOJ). On 7 March 2019 MTS announced a settlement with the SEC and DOJ under which MTS has agreed to pay USD 850 million. In March 2019 a proposed class action complaint on behalf of Shayan Salim and all other persons similarly situated has been filed in the United States District Court for the Eastern District of New York against MTS and certain of its managers. The complaint is alleging certain securities law violations relating to the recently announced resolution of US government investigations related to the MTS’s former operations in Uzbekistan (Note 5). MTS is reviewing the allegations and intends to defend its interests. It is currently impossible to measure possible implications and amount of claim reliably. Including the provision, MTS’s net profit attributable to Sistema for FY 2018 was RUB 3.4 billion. Excluding the effect of this one-time factor, adjusted profit for FY 2018 was RUB 33.0 billion.

14 Here and hereinafter see Attachment A for definitions and reconciliations of adjusted OIBDA, adjusted operating income, adjusted profit attributable to Sistema, with IFRS financial performance.

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During calendar year 2018 MTS paid dividends totalling RUB 52 billion, or RUB 26.0 per ordinary share, in line with the company's dividend policy for 2016-2018.

Detsky Mir

Detsky Mir Group15 is a multi-format retail operator and a leader in the segment of children’s goods in Russia and Kazakhstan, comprising the national retail chain Detsky Mir, the ELC and ABC stores, and the chain of pet stores Zoozavr.

At the end of 2018, Detsky Mir Group had 743 stores: 673 Detsky Mir stores in 252 cities of Russia and Kazakhstan and 66 ELC and ABC stores. The total selling space is 768,000 sq m.

Sistema’s stake 52.1%

Leadership CEO: Vladimir Chirakhov Chairman of the Board of Directors: Alexey Katkov

Business model

The concept of retail trade in the chain of Detsky Mir is a combination of five key components:  A multi-category store of children’s goods with the broadest and unique product mix  Affordable prices with a focus on the “medium”/“medium-” segment  Convenient stores in modern shopping malls and densely populated residential areas  Building long-term customer relationships using the loyalty programme  Smart visual merchandising taking into account the specifics of children and parents

Industry overview for 201816 Detsky Mir Group operates mainly in Russia and Kazakhstan, and since February 2019 also in Belarus. At the end of 2018, the Company had a 23% share in the Russian market of children’s goods by revenue and a 15% share in the e-commerce segment. Russia’s market of children’s goods grew in 2018 by 0.1% YoY to RUB 522.1bn. The market’s CAGR over the last actual four years was 0.4%. Analysts project that the market will grow by an average of about 1% per year and will reach RUB 532.2bn by 2020. The categories of clothing and footwear traditionally account for a substantial part of the children’s goods market. Their total share in 2018 was 38.5% (29.6% and 9.0%, respectively). Baby products and toys have 31.0% and 17.9%, respectively. The highest growth rate was registered in the category of baby products. In 2018, this category reached RUB 162bn in money terms compared to RUB 158bn in 2017; CAGR over the last actual 4 years was 9.5%. In 2018, some specialised players left the market or shut down most of their stores, and the remaining federal and regional chains were losing traffic and closing their stores, with a significant decrease in like-for-like sales. Nevertheless, specialised retailers remain the main sales channel for children’s goods, along with hypermarkets and supermarkets (39.1% and 38.9%, respectively, in 2018). The share of e-commerce in the market of children’s products is growing steadily: it reached 12.6% in 2018 compared to 10.1% in 2017. CAGR in 2010-2018 was 27%. In money terms, sales of children’s goods in specialised stores increased from RUB 119bn in 2010 to RUB 204bn in 2018. Online sales of children’s goods in 2018 amounted to RUB 66bn. The Company’s share in the children’s goods market among specialised retailers increased from 14% in 2011 to 59% in 2018, which was driven by the opening of a large number of stores during this period and the attraction of consumer traffic from competing retail chains. Toys and baby goods were the key drivers of the Company’s

15 As of 31 December 2018, the Group included PJSC Detsky Mir, LLC Kub-Market (ELC and ABC), LLP Detsky Mir Kazakhstan, JSC Detsky Mir Orel, LLC DM NORTH-WEST, LLC Detmir BEL and LLC DM Capital. 16 According to the research agency Ipsos Comcon.

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market share growth in 2018 amounted to 45.6% and to 26.8%, respectively. At the same time, Detsky Mir’s market share increased in all categories of children’s goods in 2018. Business development in 2018 In 2018, Detsky Mir achieved impressive results in terms of business growth. Detsky Mir Group’s revenue increased 14.3% in 2018 to RUB 110.9bn against RUB 97.0bn in 2017. One hundred new stores were launched. In addition, Detsky Mir continued active regional and international expansion. In 2018, 33 debut stores opened in the cities of Russia and Kazakhstan that are new for the Company. The Company entered a new region – the Far East. Its stores opened in Blagoveshchensk, Vladivostok and Khabarovsk.

The Republic of Kazakhstan remains a promising market for the international development of the Detsky Mir retail chain. In 2018, the Company expanded its retail chain there by eight supermarkets and almost doubled its revenue, while the growth of like-for-like sales in tenge was 30%. Detsky Mir has a total of 30 stores in 15 biggest cities of the Republic of Kazakhstan.

In addition to retail stores, Detsky Mir Group offers the full range of its products for purchase online. The e- commerce business segment was launched in 2011 and still remains the fastest growing sales channel. The online store had more than 178m visits and fulfilled over 5.1m online orders in 2018. The online channel’s revenue doubled in 2018 and amounted to RUB 8.8bn.

One of the key drivers of revenue growth in 2018 was the promotion and expansion of the In-Store Pickup service. Now customers can pick up their orders collected inside stores within 60 minutes after placing the order. The development of logistics infrastructure is a key element of the Company’s strategy. In 2018, the Company launched a second distribution centre (DC) in the class A+ industrial park PNK Bekasovo in the Naro-Fominsk district of the Moscow region. Thus, the Company owns DCs Bekasovo-1 and Bekasovo-2 with a total area of 132,500 sq m and leases DC Krekshino with an area of 20,000 sq m. The Company works on optimisation of purchase prices, efficient product mix management and improvement of quality assurance by signing direct contracts with major specialised manufacturers or their representatives in Russia and by reducing the share of distributors. It helps Detsky Mir get attractive prices and minimise currency risks, and also provides direct access to goods. At the end of 2018, the Company opened 4 pilot stores of the Zoozavr chain – a new business line for Detsky Mir. The market of pet products is promising because of its volumes, expected growth rates and a high level of fragmentation, as well as the opportunities it offers for the management to make the most of their experience gained in the children’s goods market. The Company expects to open 6 more stores by the end of 2019. The decision regarding further development of this chain will be based on the results of the pilot stores.

Business development strategy The key strategic goal of Detsky Mir is consolidation of the children’s goods market in Russia and Kazakhstan. It’s possible to achieve it by expanding the chain, developing omni-channel sales and offering affordable and diverse products, including store brands. Strategic development areas of Detsky Mir Group:  Expansion across Russia and abroad  Development of omni-channel sales  Development of private labels  Enhancement of operational efficiency

There are opportunities in the markets of Russia and Kazakhstan to open at least 265 new stores in the next 3-4 years, including at least 80 stores in 2019. As part of its geographical expansion strategy, Detsky Mir made a decision to enter the market of Belarus. The Company’s goal in the medium term is to open at least 35 stores in Belarus, including at least 10 stores in 2019. Thus, Detsky Mir’s growth potential, taking into account regional and international expansion, is 300 stores over the next 3-4 years. Key initiatives in 2019: • Become a number one player in the market of Kazakhstan by the end of 2019 with 35 stores of the Detsky Mir chain.

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• Enter the market of the Republic of Belarus with a volume of more than RUB 40bn and open at least 10 stores in 2019. • Enter the market of pet products with a volume of approximately RUB 212bn and open up to 10 pilot Zoozavr stores by the end of 2019. • Retain the number one position in the online market for children’s goods. Increase the online segment’s share in the Group’s total revenue to the two-digit level in 2019 by improving the service quality (“Ideal In-Store” and “Last Mile” projects; for more details see the E-Commerce section). • Increase the share of private labels + direct imports in toys to 25% and in diapers to 15% in 2019.

2018 financial performance Excluding impact of new IFRS standards (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 110,874 97,003 14.3% 110,874 14.3% Operating income 11,232 8,024 40.0% 9,770 21.8% Adj. OIBDA 21,115 10,664 98.0% 12,666 18.8% Profit attributable to Sistema 2,967 2,506 18.4% 3,440 37.3% Adj. profit attributable to Sistema 3,292 2,871 14.6% 3,765 31.1%

In FY 2018 Detsky Mir’s revenue grew by 14.3% year-on-year. Growth was driven by new store openings, an increase in like-for-like17 (LFL) sales and online sales, as well as the continued ramp-up of stores opened in 2017. LFL sales in Russia increased by 4.3% for FY 2018. Growth of LFL sales in Kazakhstan increased by 30% year-on-year in KZT terms. The online segment18 remained the fastest-growing channel, with revenue almost doubling for FY 2018 to RUB 8.8 billion. The online store accounted for 7.9% of total sales in FY 2018, compared to 4.8% in 2017. Adjusted OIBDA increased by 98.0% year-on-year to RUB 21.1 billion. Excluding the impact of new accounting standards, Adjusted OIBDA increased by 18.8% to RUB 12.7 billion, due in large part to optimisation of purchasing costs, effective management of the assortment and increased operational efficiency. Adjusted profit attributable to Sistema increased substantially in FY 2018 due to increased operational efficiency and a reduction in SG&A to RUB 15.7 billion. Excluding the effect of the new accounting standards, profit increased by 31.1% in 2018.

Segezha Group

Segezha Group is a leading Russian forest holding with a vertically integrated structure and a full cycle of logging and advanced wood processing. Segezha Group comprises forest, wood processing and pulp and paper assets in Russia and Europe. The main production facilities are located in the European part of Russia and EU countries, with representative offices in 12 countries. Segezha Group’s enterprises employ 13,000 people. Segezha Group:  No 1 in Russia and No 3 globally by output of brown sack paper  No 1 in Russia and No 2 in Europe by output of paper sacks  No 5 globally by output of high-quality large-size birch plywood  No 1 in Russia by output of sawn timber  No 1 in Russia by output of prefab glulam houses

Sistema’s stake 99.9%

Leadership

17 Like-for-life sales (LFL) growth was calculated based on the results of the Detsky Mir retail chain in Russia, which were in operation for at least 12 full calendar months preceding the reporting date. 18 The segment includes online orders on the site www.detmir.ru including orders for collection at Detsky Mir stores.

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President: Mikhail Shamolin Chairman of the Board of Directors: Ali Uzdenov

Business model Segezha Group’s business model is based on the principle of maximum vertical integration aimed at creating added value and ensuring business sustainability in the changing macro environment through diversification of risks. High efficiency and presence in all key stages of value creation – from in-house logging at leased forest plots to selling high-margin products to consumers – allow Segezha Group to have leading positions in terms of the cost of finished products in all business segments.

Business development in 2018

Birch plywood In 2018, Segezha Group was the fifth biggest producer of large-size birch plywood in the world. Segezha Group’s key strategic markets are Germany, the United Kingdom, the United States, the Benelux and South Asia. In 2018, plywood output increased by 36% YoY to 135,700 cu m. Production growth was achieved due to the launch of a new plywood production line in the Kirov region in July 2018. The new plywood production line doubled the capacity of Vyatka Plywood Mill to 192,000 cu m and allowed the company to enter new markets with a new product – long-grained plywood. The share of plywood exports rose from 78% to 80% in 2018.

Indicator 2017 2018 % Plywood sales, K cu m 95 120 +26%

Sack paper

In 2018, Segezha Group retained its number one position in terms of production of unbleached sack paper in Russia and climbed to number three globally (from number four in 2017). Segezha Group’s main sack paper plant – Segezha Pulp and Paper Mill (PPM) – reached its design capacity in 2018 after the launch of the new paper-making machine at the end of 2017 and produced 355,000 t of high-quality paper. Segezha Group exports 95% of marketable sack paper (37% of produced paper goes to the company’s converting facilities for the production of paper packaging). The key export markets for Segezha Group’s sack paper are Southeast Asia, Africa, and Central and South America. The anti-dumping duties introduced by China for most producers from Europe, North America and Japan have created advantages for sack paper producers from Russia and Canada. The key event in 2018 was the completion of a three-year programme of upgrades at Segezha PPM. At the end of the year, a new multi-fuel boiler was installed with a capacity of 120 t of steam per hour. In order to protect the environment, it was equipped with an electrostatic precipitator with purification efficiency of 99.7%.

Indicator 2017 2018 % Sack paper sales, K t 204 244 +20%

In 2018, Segezha Group increased paper output by 18% to 375,400 t. The growth was mainly due to fact that the new paper-making machine was launched and reached its design capacity. Sack paper sales increased by 20%, to 244,000 t, mainly due to the increase in shipment volumes under current contracts and expansion of the client portfolio. Paper sacks In 2018, Segezha Group’s paper packaging output increased by 6% to 1,286m bags. The growth was due to the launch of the second bag-making line (Triumph 5 QT SK) in Salsk, the Rostov region, with a capacity of 25m bags per year. The year-on-year increase was also driven by the improvement of the order planning system and, consequently, an increase in productivity.

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In 2018, the share of sales of Segezha Packaging in the Russian market was 64%. Products for the construction industry account for more than 82%. During the year, the company continued to work on increasing the share of high-margin products in its sales portfolio.

Indicator 2017 2018 % Paper sack sales, m items 1191 1284 +8%

In 2018, Segezha Packaging was able to implement its priority plans to retain the share in the key European markets such as Italy, France, Germany and Spain. The plans for 2018 for the Russian enterprises of the Group were to increase output to 560m sacks. The company exceeded the target and produced a record number of sacks (590m), mainly due to the increased planning efficiency regarding utilisation of converting capacities, as well as the expansion of the client portfolio. Sawn timber Segezha Group exports 99% of its sawn timber to more than 30 countries, with more than 95% exported to China, Egypt and the EU. The Group’s products are mainly consumed by construction and furniture manufacturing industries. In 2018, Segezha Group’s enterprises increased output of sawn timber by 3% YoY, to 924,000 cu m, due to increased production efficiency at Lesosibirsk Woodworking Plant (WP). Sales increased by 4% following the increase in output, as well as due to debottlenecking in shipment of products by rail and launching of new shipment channels.

Indicator 2017 2018 % Sawn timber sales, K cu m 894 931 +4%

In 2018, Segezha Group implemented a number of measures to ensure that its specifications and internal requirements for the quality of sawn timber are in line with the market requirements. The company actively worked with customers and expanded its product line during the year. In October 2018, Lesosibirsk WP launched a pellet production line with a capacity of 70,000 t of finished products, which will provide additional income from waste processing. Laminated beams and prefab houses

Output and sales of prefab houses in 2016-2018, K cu m 2017 2018 %

Output 18.3 26.3 44% Sales 19.2 27.9 45%

Output and sales of laminated beams in 2016-2018, K cu m 2017 2018 % Output 44.4 50.6 14% Sales 43.1 51.1 19%

In 2018, Segezha Group managed to increase its sales of prefab houses by 45% due to active work with construction dealers, product promotion, launch of a new premium product (prefab glulam houses with a height of 280 mm or more) and improved product quality. Sokol WP, the leader in its segment, supplies prefab houses mainly to the Russian market.

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Sales of laminated beams in 2018 grew 26% YoY. The growth was driven by increased productivity due to optimisation of the production process. A significant contribution to the increase in sales was Sokol WP’s entry to new markets such as Spain, Turkey and Israel. Most of laminated beams are exported.

Business development strategy Segezha Group’s development strategy was updated in 2018, taking into account the Russian Forest Sector Development Strategy Until 2030, and is aimed at creating an industry leader in production efficiency on the basis of a vertically integrated and diversified business model.

Segezha Group’s strategic priorities

Wood resources Manufacturing assets  Increasing the share of own wood supply at all  Modernisation of existing production facilities of the Group’s enterprises by expanding  Construction of new energy efficient facilities allowable cut and increasing utilisation of to meet the growing demand for forest existing allowable cut products in global markets  High-quality reproduction of forests

Sustainable development Innovation  Employee safety and health  R&D within the Company  Reduction of environmental impact  Creation of new products, manufacturing  Striving for zero waste production processes and future solutions  Development of the regions of operations

Industry overview for 201819 Paper sacks The products of Segezha Packaging’s 7 enterprises located in Europe are sold mainly in the European market, while its enterprises located in the Republic of Karelia and the Rostov region operate in the markets of Russia and the CIS. European market The European market of paper sacks is characterised by a high degree of consolidation. About 50% of demand comes from Germany, Italy, France and Spain. The volume of the European paper packaging market in 2018 remained at the level of 2017 – about 5.4bn items. Prices for paper packaging grew about 5% YoY, following a sharp increase in paper prices during the year. Experts expect that the main drivers of market growth until 2021 will be food industry and segments of animal feed and chemicals. In 2018, construction industry remained the main consumer of paper sacks with a share of about 60%. Russian market The consumption of paper sacks in the Russian market in 2018 remained at the level of 2017 – 766m units – amid a slowdown in construction, which, as in the previous year, accounted for the bulk of demand (88% in 2018). Prices for paper packaging grew about 4% YoY, which was driven mainly by an increase in global kraft paper prices. In general, Russia maintains a balance of production and consumption of industrial paper sacks. This situation is expected to continue until 2023.

Sack paper Segezha Group produces more than 60% of all sack paper in Russia. The Company uses 37% of produced paper for the production of sacks at its own enterprises in Russia and Europe. The remaining 63% of products are sold

19 Source: Company data

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in international markets (approximately 60 countries in 2018). The key export markets are the Middle East and Southeast Asia. Significant volumes are also exported to the EU, Africa, and Central and South America. In 2018, the global market for sack paper was estimated at 7.2m t (vs 6.9m t in 2017). In 2018, there was a huge shortage of paper in the global market, which was caused by high demand and limited supply. The demand was driven mostly by a construction boom in Asia, the Middle East and Africa.

Sawn timber The global market of sawn softwood timber reached 350 million cu m in 2018. Over the past five years, global sawn timber consumption has grown by an average of 2.5% per year due to growth in the construction and furniture markets of the United States and China, which are the largest consumers of sawn timber in the world. Russia is the fourth largest producer of sawn softwood timber in the world after Europe, the US and Canada with a market share of 11%. Russia’s output of sawn softwood timber in 2018 grew 3.6% YoY to 39 million cu m, while exports increased 7% to 30 million cu m, mainly due to high demand in the market of China, the largest consumer of Russian sawn softwood timber. Laminated beams and prefab houses

Laminated beams Segezha Group’s production of laminated beams at Sokol WP is export-oriented, primarily for the European market. In 2018, Italy, Germany, Austria and Spain accounted for 92% of the Group’s sales. Europe and Japan remain the main global consumers of laminated beams, which are mainly used in the construction industry. In 2018, the global consumption of laminated beams did not change significantly and remained at the level of about 4.1 million cu m. In 2019, demand for laminated beams is expected at the same level amid increasing competition. Prefab houses Segezha Group supplies prefab houses mainly (~98%) to the Russian market and is the leader in it with a share of 18% in 2018. The total size of Russia’s market of prefab glulam houses in 2018 was estimated at 155,000 cu m. The key regions for prefab houses in Russia are the Central, North-West and Volga federal districts. Plywood Exports accounted for 88% of Segezha Group’s plywood sales in 2018. The main importers are European countries, primarily Germany, the Netherlands, Belgium, France, Italy, Norway, Finland and the Czech Republic. The global consumption of birch plywood has been steadily growing in recent years at an average rate of 2.0%– 2.7% per year. In 2018, the global market for birch plywood was estimated at 4.9 million cu m, with Russian birch plywood accounting for 75%-80% of it. In 2018, Russia’s plywood exports grew by 8.7% to 2.68 million cu m, or 67% of total output. The bulk of demand comes from construction industry, furniture manufacturing, transport, shipbuilding and packaging industry. Consumption growth in 2019 is projected at 3% in Russia and 2%-4% globally.

Financial performance Excluding impact of new IFRS standards (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 57,889 43,725 32.4% 57,889 32.4% Operating income 8,178 3,132 161.1% 7,703 145.9% Adj. OIBDA 12,984 7,081 83.4% 12,090 70.8% (Loss)/Profit attributable to Sistema (77) (591) - 193 132.6% Adj. profit attributable to Sistema 54 81 (33.9%) 323 297.2%

Segezha Group’s revenue grew by 32.4% in 2018. The main growth driver was revenue from the Paper and Packaging division, which accounted for 70% of total revenue. Revenue growth was driven by increased sales volumes and higher prices for paper. Revenue for the year was also positively affected by growth of prices for sawn timber through the first nine months of the year and the depreciation of the rouble. In 2018 the average rouble rate decreased by 7.5% against the dollar and by 12.2% against the euro.

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Adjusted OIBDA increased year-on-year by 83.4% for 2018. Growth was driven by increased prices for most of Segezha’s key products, as well as the commissioning of a new paper-making machine at the end of 2017, which added RUB 2.6 billion at the OIBDA level. The adjusted OIBDA margin increased by 6.2 p.p. for 2018 to 22.4%, due to price increases. The introduction of the new IFRS 16 standard had a positive effect on adjusted OIBDA of RUB 894 million in FY 2018.

Steppe AgroHolding

JSC Steppe AgroHolding (hereinafter, "Steppe AgroHolding") is one of the biggest agricultural companies in southern Russia with a diversified asset portfolio: crop farming (No 6 by land holdings in Russia), dairy farming, grain trading and logistics, sugar and cereals trading, fruit and vegetable growing.

AgroHolding's assets are located in southern Russia, in the most favourable regions in terms of climate, crop yields and logistics. Steppe AgroHolding also owns 50% of RZ Agro, a major producer of grain and oil crops jointly controlled by Sistema and the Louis-Dreyfus family.

Sistema’s stake 92.8%20

Leadership

CEO: Andrey Neduzhko Chairman of the Board of Directors: Ali Uzdenov

Steppe AgroHolding's business model The company's business model is designed to build a vertically integrated diversified agricultural player with a focus on crop farming, grain trading and logistics, sugar and cereals trading, and dairy farming, holding leading positions in each segment of operations.

Industry overview for 2018

Crop farming The output of grain and leguminous crops in Russia in 2018 totalled 113.3m t (vs 135.5m t in 2017, i.e. - 16% year-on-year), with the output of wheat equalling 72.1m t (vs 86.0m t in 2017, i.e. -16% year-on-year). The 16% decrease in gross grain harvest compared to the unprecedented harvest of 2017 was due to a reduction in the crop area and lower crop yields in some regions of Russia caused by unfavourable weather conditions. Gross grain and grain legume harvest in Russia, m t

135,3 140,0 120,7 113,3 120,0 105,3 104,8 100,0 94,2 92,4 80,0 70,9 60,0 40,0 20,0 0,0 2011 2012 2013 2014 2015 2016 2017 2018

20 84.63% as of December 31,2018.

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The expected reduction in global carry-over grain crops in the season 2018/2019 and grain consumption growing higher than its production had a positive effect on global grain prices, which enabled Russian agricultural producers to make up for the slight decrease in the gross harvest. Today, Russia remains one of the world's leading grain exporters, having exported some 29.0m t of grain in July-December 2018, an increase of 4% from the same period of 2017 (27.8m t).

In the medium term, the prices of land assets in Russia are expected to continue growing, since land is a limited natural resource and global grain consumption is on the rise.

Dairy farming

Russia's milk output demonstrated positive trends in 2018: total milk yield grew by 1.5% vs 2017 to 30.6m tonnes, while milk yield per cow in the corporate sector exceeded 6,000 l (+4% vs 2017), which made up for a gradual decrease in the livestock numbers.

In Russia, raw milk competes with dairy products made of milk fat substitutes, but the government is taking steps to reduce the share of counterfeit products in the market, including by introduction of the Mercury programme that makes it possible to control movement of dairy products and their history from the field to the store counter. In the region where Steppe AgroHolding operates, the raw milk processing capacity is gradually growing, which has a positive effect on producers of high-quality raw milk able to supply it in large batches. The milk output of AgroHolding's dairy farms has grown due to the increase both in the number of lactating cows and milk yield per cow. In March 2018, Steppe AgroHolding commissioned a new dairy farm for 1,800 cows and is currently building two new mega farms for 3,000 and 3,100 cows in the Krasnodar and Rostov regions, respectively.

Fruit growing

The fruit growing segment in Russia has been demonstrating a gradual increase of the output: gross pomaceous fruit harvest in 2018 amounted to 1.9m t, according to preliminary estimates (+31% vs 2017). The growth was driven, among other things, by planting of new orchards: the area under pomaceous fruit crops reached 229,000 ha in 2018 (+3,800 ha vs 2017). Despite the increase of domestic production, imports of pomaceous fruits remained high, totalling 843,000 t in 2018 (+18.7% vs 2017).

Vegetable growing In 2018, the production of protected-ground vegetables continued growing actively due to commissioning of new greenhouses. The total area of greenhouses now equals 2,500 ha, an increase of 8% from 2017. The total output of protected-ground vegetables in 2018 exceeded 1m t (+17% vs 2017), while imports of tomatoes and cucumbers reached 701,000 t (+7% vs 2017). Business development in 2018

The main focus areas for Steppe AgroHolding's development in 2018 were crop farming, dairy farming, and grain trading and logistics. In 2018, the company improved its operating and financial performance through the implementation of the organic growth strategy and M&A deals.

Crop farming Steppe AgroHolding's land assets as of the end of 2018 totalled 401,000 ha (after an acquisition of land in the Rostov region in the second half of the year). Yields of the main crops remained high in 2018, exceeding the average regional yields despite the drought in Russia's grain-producing regions. Global grain consumption grew faster than its production and, combined with the expected decrease of carry-over grain, ensured the recovery of global grain prices. The average export price of Steppe AgroHolding's

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wheat in 2018 grew by 15% year-on-year, which, together with the high share of quality grain and increased export amounts, made up for a slight decrease in the gross harvest.

Steppe AgroHolding's gross harvest (incl. RZ Agro), K t

Crop 2018, tonnes 2017, tonnes % Beetroot 251,811 347,900 -28% Wheat 685,943 723,600 -5% Corn 40,113 68,900 -42% Winter barley 24,982 19,200 30% Sunflower 49,362 42,700 16% Other 102,374 153,000 -33% Total 1,154,585 1,355,300 -15%

Grain trading & logistics In 2018, Steppe AgroHolding began actively developing the segment of grain trading and established a full-fledged trading structure. Grain exports by the trading business exceeded 1.1m t in 2018 (having grown more than 4-fold year-on-year), making Steppe AgroHolding one of Russia's top 6 grain exporters in the first half of the crop year 2018. Grain exports, K t

1 115

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2017 2018 Dairy farming In 2018, Steppe AgroHolding commissioned a new dairy farm for 1,800 cows. Its aggregate number of lactating cows as of the end of 2018 was 4,800. In H2 2018, the company started construction of 2 dairy farms: for 3,000 cows in the Krasnodar region and for 3,100 cows in the Rostov region. Steppe AgroHolding is the leading company in Russia for milk yield per cow. High milk yields are achieved through having highly productive cattle and using state-of-the-art agricultural technologies. The operating performance of the dairy farming segment demonstrated a steady growth: gross milk yield in 2018 exceeded 46,500 t, and milk yield per cow was over 10,500 l per year.

Fruit and vegetable growing Vegetable output in 2018 amounted to 46,300 t (+3% year-on-year), which is an all-time high for Steppe AgroHolding. In 2018, the company optimised its vegetable and fruit sales, developing a single brand, Steppe AgroHolding, for all produce sold to retail chains. Sales of produce under one brand increases brand recognition, enables the company to get a price premium due to a broader product range and increases its investment appeal as its products are carried by retail chains.

Business development strategy

Today, Steppe AgroHolding is a big player in the Russian agricultural industry with substantial land assets (401,000 ha, No 6 in Russia). The key goal of further development is to create a major agricultural company in Russia, a leader in all its key segments in terms of both business size and operating efficiency, with favourable conditions for an IPO/finding an investor. Steppe AgroHolding's development strategy envisages further increase of its land assets, intensive development of grain trading and logistics, achieving a leading position in sugar and cereals trading, construction of new dairy farms, and organic growth in the fruit and vegetable growing segments.

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Operational results

Steppe AgroHolding

Parameter UoM 2018 2017 Change, % Gross harvest, total (crop K tonnes 814.1 973.2 -16% farming) Milk production K tonnes 46.7 39.4 18% Vegetable harvest 46.3 44.9 3% - Tomatoes K tonnes 25.1 23.2 8% - Cucumbers 21.2 21.8 -3% Gross apple harvest K tonnes 18.5 21.8 -15%

Steppe AgroHolding: gross harvest

2017, Crop 2018, tonnes % tonnes Beetroot 212,657 303,800 -30% Wheat 454,502 487,900 -7% Corn 34,834 51,600 -32% Winter barley 18,888 15,200 24% Sunflower 17,710 13,700 29% Other 75,487 101,000 -25% Total 814,078 973,200 -16%

RZ Agro: gross harvest

2017, Crop 2018, tonnes % tonnes Beetroot 39,154 44,100 -11% Wheat 231,441 235,700 -2% Corn 5,279 17,300 -69% Winter barley 6,094 4,000 52% Sunflower 31,652 29,000 9% Other 26,887 52,000 -48% Total 340,507 382,100 -11%

Steppe AgroHolding: crop yields

2018, 2017 Crop % tonnes/ha t/ha Beetroot 45.1 54.2 -17% Wheat 4.2 4.9 -14% Corn 3.7 5.3 -30% Barley 6.4 6.1 5% Sunflower 1.5 2.6 -43%

2018 financials

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Excluding impact of new IFRS standards (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 24,161 10,210 136.6% 24,161 136.6% Operating profit 3,261 2,647 23.2% 3,147 18.9% OIBDA 4,909 4,019 22.1% 4,617 14.9% Profit attributable to Sistema 1,095 1,130 (3.1%) 1,243 10.0%

Agroholding Steppe delivered significant revenue growth of 136.6% year-on-year in 2018, to RUB 24.2 billion. The revenue increase was driven by growth in the field crop segment, the intensive development of agrotrading and entry into sugar and groceries trading segments, as well as increased production volumes in the Dairy segment.

OIBDA grew by 22.1% year-on-year to RUB 4.9 billion for FY 2018 as a result of higher operational efficiency in the field crop segment and the impact of growth in the Agrotrading segment.

Capex increased by 18.8% to RUB 1.9 billion for 2018 due to the beginning of new projects implementation in the Dairy segment and logistics which provide for production increase and vertical integration of the business.

Medsi

JSC Medsi Group is Russia's largest national healthcare chain that offers a full range of preventive, diagnostic, treatment, and rehabilitation services for children and adults. Number of facilities

Number Clinical diagnostic centres (CDCs), total 4 Children's clinics 2 Primary care clinics 19 Hospitals 2 Wellness centres and sanatoriums 4 Regional clinics, total 11

Sistema’s stake 98.5%

Leadership President: Elena Brusilova Chairman of the Board of Directors: Artyom Sirazutdinov

Industry overview for 201821

In 2018, the Russian commercial healthcare market reached 59422 billion roubles (+7.6% from 2017). The market growth of recent years is fueled by a generally rising private demand for quality healthcare, which benefits commercial players. The trend is expected to grow even stronger in the next few years, as the general socio-economic situation in Russia stabilizes and household earnings go up. while government spending on healthcare Medsi has also made visible progress in the market of voluntary medical insurance (VMI), having managed to achieve an insurance revenue growth that is 4-5 times greater than the average market growth rate, both in Moscow and in the wider Russia.

21 Source: Company data, BusinesStat 22 Total revenue received from both insured and self-pay patients

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The company's 2018 sales growth in the private sector of the market (self-pay patients) in Moscow and the Moscow region outpaced the market by almost 4 times (7.7% in Moscow and 20.6% in the Moscow region). The strong growth enabled Medsi to boost its share in the Moscow region market to 2.9% (from 2.6% in 2017). Medsi has also become a stronger player in the space of obligatory medical insurance (OMI), with a market share in Moscow and the Moscow region increased by over 2.6 times (to 1.8% from 0.5% in 2017). The dynamic growth is in large part a result of Medsi becoming a provider of some of the most sought-after and economically sound hospital services. The OMI channel has become one of the main sources of customers for Medsi's in- patient assets. Medsi remains the private market's largest player in terms of geographical footprint and an undisputed leader in the VMI segment, which benefits both occupancy figures and revenues of specific assets. In the first half of 2018, Medsi already outperformed the 2017 national leader in terms of revenue, Mother and Child, by more than 7%.

Business development in 2018 Existing assets New precision diagnostic equipment and modern surgical technology brought about significant progress in the quantity, quality and volumes of medical services, with a 6% rise in visits and an almost 18% increase in the volume of services. Picking up the trend started in 2017, the company drove up its OMI revenues (+269% from 2017) and became a stronger player in the market of specialised and hi-tech hospital care, notably in cardiovascular surgery, oncology, injury treatment, and rehabilitation of patients after surgical operations, injuries, and strokes. In 2018 Medsi became the absolute leader among private clinics across the Moscow region in terms of volume of services provided to patients with cancer (having serviced more than 11 thousand people). The Botkinsky Proezd clinical hospital in Moscow became the seat of a specialised cancer centre, which attracted a vast flow of patients and drove up the hospital's occupancy rates, with more than 8,000 patients treated in 2018 alone. With a view to building strong partnerships with leading global vendors of diagnostic and surgical equipment, in 2018 Medsi signed new memorandums of cooperation with Siemens and Olympus. In 2018 Medsi started preparing for international JCI accreditation as evidence of the high standards of quality and safety of healthcare services provided across the chain. Moreover, Medsi became Russia's first private medical company to launch patient experience centres, family support centres, and a fundraising centre. The centres are expected to boost patient participation and loyalty and serve as an important component of the new "P4 medicine" strategy. Flagship assets Medsi's largest clinical & diagnostic centre CDC Krasnaya Presnya, with a floorspace of over 20,000 square metres and a successful track record building up ever since its opening in late 2015, is steadily evolving in terms of both occupancy rates (9% up from 2017) and financials (with revenue more than doubled from 2017). New centres of excellence launched here in 2018 use state-of-the-art equipment and best-in-class experts. Starting from Q1 2018, CDC Krasnaya Presnya has been using the trail-blazing hi-tech robotic surgical system da Vinci to operate on patients with gynaecological, urological, and endocrine pathologies. New assets Organic growth In 2018 Medsi embarked on the construction of a flagship CDC for children and adults on Michurinsky Prospekt in Moscow. The new multi-specialty medical centre (MSMC) with a floor area of over 28,000 sq m is scheduled to open in 2020. Inorganic growth The large medical centre in St. Petersburg that was acquired in 2017 (the former Medem) combines 28 departments, a first-rate diagnostic centre, and a hi-tech surgery block, all of which occupy an area of 6,800 sq m. The asset is by now fully integrated in Medsi's business processes.

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In Q3 of 2018 Medsi became the sole owner of LLC Medlife Health Clinics (the first 60% in which was acquired in 2017), the largest multi-specialty medical chain in the city of Perm (comprised of 7 specialised clinics and a customer service centre). In the next few years to come, Medsi is planning to further strengthen its role in the private healthcare markets of both St. Petersburg and Perm by heavily developing its local assets. Plans for 2019 Medsi's priorities in 2019 are expanding the capacity and spectrum of services offered at CDC Krasnaya Presnya and launching the final construction stage at MSMC Michurinsky. In parallel with that, the company is renovating two family clinics in residential neighbourhoods of Moscow and the Moscow region (to be opened by the end of the year) and planning to launch new facilities in another two regions of Russia (also by the end of 2019). Another priority item on the company's agenda is to make it to the Ministry of Health's Hi-Tech Healthcare Providers List, which would give it access to federal financing and so bring hi-tech care to Medsi's hospitals from 2020 onwards. At the moment, Medsi only provides hi-tech services to residents of the Moscow region, financed by OMI funds in Moscow and the Moscow region. In January of 2018, Medsi first launched its telemedicine platform developed in conjunction with MTS. In 2019, the company plans to further evolve the solution through new services and a special mobile app. In addition to telemedicine, Medsi is looking to start a "third opinion" project that would rely on neural decision support systems. Business development strategy: operations and investment Medsi's strategy aims to build Russia's first multi-functional national-scale medical operator that would provide a full spectrum of services. This long-term goal requires specific steps:  Expansion of geographical footprint across the country  Evolving the existing large local facilities into regional vertically integrated hubs (to cover the full spectrum of services, from outpatient to hospital care) while referring the most challenging medical cases to the flagship assets in Moscow  Increasing market shares in Moscow and the Moscow region through new outpatient and diagnostic clinics in residential neighbourhoods  Launching a third flagship hospital on Michurinsky prospekt in Moscow to widen the range of services (which would include a children's hospital)  As a matter of medical strategy, establishing a Chief Specialists Department charged with implementation of unified quality & safety standards across all specialties and of the new patient routing strategy, preparation and introduction of innovative treatment methods, and education of medical staff  Developing and implementing unified quality and safety standards to guarantee strong quality of treatment in compliance with JCI standards  Enhancing on-the-job education and training programmes provided by the Medical Academy and launching international education programmes  Taking auxiliary back functions from the management company to a single service centre, while automating and/or partly outsourcing routine day-to-day functions in order to optimise the management company's costs  To progress the IT strategy, enhancing the existing online solutions for the patients (e.g., by introducing new options in personal accounts and upgrading the telemedicine app) and for staff (e.g., by providing reliable decision support systems, case conferences, etc.) and upgrading the ERP system to ensure effective management and prompt decision-making

Financial performance Excluding impact of new IFRS standards (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 17,747 11,670 52.1% 17,747 52.1% Operating income 693 1,142 (39.3%) 557 (51.2%)

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Adj. OIBDA 3,600 1,968 82.9% 3,151 60.1% Profit attributable to Sistema 319 1,567 (79.3%) 456 (70.9%) Adj. profit attributable to Sistema 1,061 837 26.7% 1,189 42.1%

Medsi’s revenue for 2018 increased by 52.1% to RUB 17.7 billion due to increased capacity utilisation and, as a result, an increase in revenue from in-patient services of 27.7% to RUB 5.4 billion, higher revenue from the CDC at Krasnaya Presnya in Moscow as well as the expansion of the clinic network following acquisitions of clinics in St Petersburg and Perm and the opening of three new clinics in Moscow. Adjusted OIBDA increased by 82.9% in 2018, due to the continued ramp-up of facilities and increase in revenue per sq m of medical space. The new IFRS standards had an impact of RUB 449 million in 2018. The adjusted OIBDA margin grew by 3.4 p.p. to 20.3% thanks to growth in capacity utilisation and an increase in efficiency per sq m. Adjusted profit attributable to Sistema increased by 26.7% in 2018. Excluding the effect of new accounting standards, adjusted profit increased by 42.1%.

RTI JSC RTI (hereinafter, “RTI”) is a major research and production company that develops, produces and supplies radars, comprehensive automated control systems, command centres, communications means, electronic devices and microelectronics23.

RTI’s products ensure border protection, security of air and maritime traffic, and safety in all areas of life.

Leadership CEO: Maxim Kuzyuk Chairman of the Board of Directors: Oleg Mubarakshin

Industry overview for 201824 2018 was marked by diverse trends in RTI’s areas of operations. In the market of surveillance and reporting systems, the total volume of expenditures on armaments declined in 2018 by 6.3% YoY. The volume of expenditures in 2019–2021 is expected to remain at the level of 2018. In the Russian market of automated control systems, high growth rates (10%-15%) in 2019 are expected in the segment of service solutions (geoinformation platforms; business intelligence) and control systems for executive authorities. Global trends include an increasing role of automation and smartification (including artificial intelligence) in the area of control and security systems. The global market of microelectronics in 2018 grew by 12% YoY to USD 462bn. The growth in production of 200 mm wafers (the segment where Mikron is present) was 14%. Demand was driven by industrial electronics, automotive electronics and the Internet of things. The Russian market of microelectronics in 2018 grew by 3% to RUB 135bn. The largest segment is still the production of microcircuits for the defence industry and aerospace equipment, including for the medical and industrial sectors. The increasing digitalisation of business processes and automation of production facilities/infrastructure generate demand for microcontrollers, which is an additional driver of demand for Mikron’s products. Business development in 2018 RTI is the largest research and production concern uniting more than 10 enterprises in various segments – from microelectronics to radars and communications. JSC Mintz Radio Technology Institute, one of the leading research and production enterprises of RTI Group, was commissioned by Roscosmos to develop prototypes of on-board radars and fulfilled export orders for on-board broadband communication systems in 2018. The company has developed a new method of real-time functional control of complex radio systems, including early warning radar systems. Its algorithms can reduce the time required for identifying and removing problems and preventing the risks of incorrect operations of radar systems.

23 Results of RTI for 2018 are presented to reflect the reclassification of RTI's microelectronics assets as discontinued operations. In February 2019 RTI Microelectronics, which is part of RTI Group, concluded a legally binding agreement envisaging the creation of a combined company in the field of microelectronics components. The parties will contribute to the combined company in total controlling stakes in 19 enterprises in the areas of development, production and design centres of microelectronics components. 24 Source: company data; World Semiconductor Trade Statistics.

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PJSC Yaroslavl Radio Factory, a leading Russian manufacturer of professional radio communications equipment, conducted technical upgrades and launched an advanced assembly shop for spacecraft payload and drastically increased the volume of work on space programmes (incl. GLONASS). Following the commissioning of this production facility Yaroslavl Radio Factory became one of the key links in the production chain of new spacecraft. The enterprise will increase its competitive advantages by obtaining a certificate of compliance from its foreign partners Thales Alenia Space, which will allow it to export products for foreign satellites. The company actively worked on the quality management system in 2018 to increase the level of process stability and the traceability of order execution. Yaroslavl Radio Factory and JSC Russian Space Systems also signed an agreement on cooperation in the development and production of on-board space equipment. Yaroslavl Radio Factory will become the centre of excellence in navigation and space communications.

Advances in microelectronics For more than 30 years, Mikron has been the undisputed leader of the Russian microelectronics market. In 2018, the company continued to use growth opportunities in new markets, consistently updating its product portfolio and developing its customer base. Implemented projects include the expansion of the client and distribution network: 54 new clients and 38 distributors, dealers and integrators. Automotive electronics and IoT components are in the list of new segments that the company plans to enter in the future. In 2018, Mikron produced chip samples for automotive electronics and received the letter of conformance to the international standard IATF regarding its quality management system, which is necessary to enter the exports market. In 2018, Mikron began supplies of microcontrollers protecting transmitted data of IoT devices for municipal services. It is expected that after pilot applications in 2018, supplies will grow 5x-7x in 2019. Total produced:  1,381m microchips  7m chip modules  892m export chips  482m chips for the Russian market

CJSC RTI Microelectronics, a member of RTI Group, signed a legally binding agreement with Rostec and JSC Ruselectronics (part of Rostec) in February 2019 to establish a joint venture in the area of microelectronic components base. The parties will contribute to the joint venture controlling stakes in 19 enterprises in the field of development, production and design of microelectronics.

Business development strategy RTI’s strategy is aimed at strengthening its market position, pursuing organic growth in the segments of the company’s operations, entering adjacent market segments and civilian markets, boosting export in all segments and increasing operating efficiency. In the segment of government contracts, RTI is focused on maintaining leading positions in the area of radio, surveillance and communication systems, as well as information systems for managing and supporting decision- making. In addition to its traditional segment of very long-range radars, RTI is planning to develop sales in adjacent segments, increase exports and enter civilian markets. The company’s plans in the microelectronics segment include consolidation of production and customer bases, development of export sales through expansion of the product offering to meet the needs of the digital economy and partnerships with manufacturers of electronic equipment and systems integrators. The industry’s key growth drivers in the near future will be IoT and AI, which require a huge number of various microchips, most of which are produced using technologies available at Mikron’s facilities.

Financial results in 2018

Excluding impact of new IFRS standards (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 22,886 30,793 (25.7%) 22,886 (25.7%) Operating income / (loss) 921 (5,772) - 825 - Adj. OIBDA 4,919 1,835 168.1% 4,611 151.3%

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Profit/(loss) attributable to Sistema (2,491) (9,420) - (2,512) - Adjusted profit/(loss) attributable to Sistema (531) (4,178) - (546) -

In 2018 RTI’s revenue decreased year-on-year due to the high-base effect: In 2017 a large volume of work was done as part of long-term contracts under the government contracts. For the full year adjusted OIBDA increased by 168.1% as SG&A expenses declined by 31.5% year-on-year to RUB 3.7 billion. In 2018 the Adjusted OIBDA margin rose by 15.5 p.p. to 21.5%, due to the decrease in SG&A expenses and the increased share of work done in-house in the cost of sales structure.

Real estate assets Leader Invest JSC Leader Invest (hereinafter, "Leader Invest") is a development company carrying out housing and commercial real estate projects in Moscow. Its portfolio includes over 40 projects with a total area of about 3 million square metres in well-developed and comfortable city districts with healthy environment. The company both builds residential complexes in a range of classes from "comfort+" to "premium" and carries out large-scale housing estate projects.

Sistema’s stake 49%25

Leadership President: Oleg Mamayev Chairman of the Board of Directors: Oleg Mubarakshin

Business model Leader Invest is a company growing in the segments of the Moscow real estate market that are most stable and attractive in terms of investment. The company's development model relies on the following pillars: . Strong marketability and quality of assets: all LI properties are of the comfort, business, premium class and are located in the residential areas of the "old" Moscow with excellent public transport accessibility and strong social infrastructure. . A unique niche product: competitive prices, fast construction, focus on modern architectural trends. . A strong professional team. . Innovations: latest technologies and solutions in design and construction. . Social responsibility: the company acts in the interests of the city and its residents, supports new initiatives in Moscow's construction industry, creates new points of growth (residential, social and infrastructure facilities) and jobs, and looks at construction projects as a chance to enrich urban areas through comprehensive and sustainable development.

Industry overview for 2018 2018 was a year of unprecedented buoyancy on Moscow's business-class residential properties market. Like in the mass segment, the spending spike here was primarily driven by a cheapening of mortgage rates. 40% of all of the sales in the segment in 2018 involved mortgage contracts, which is quite untypical for the business class space (cf. 50+% in the mass segment)26. To put it in perspective, in 2017 mortgage penetration in the segment was 30%, and in 2016, just 27%. The recent trend, in turn, is driven by two factors: all-time low mortgage rates and an abundance of new, highly attractively priced properties. By the end of the year, Moscow's average home price in the primary mass-segment residential market peaked at 162,090 roubles per square metre. The number of off-plan sales contracts signed in Moscow in 2018 is 47% up from 2017, to 80,000.

25 Sistema acquired a 25% stake in Etalon Group in February 2019. Sistema owns 49% of Leader Invest as a result of the transaction in February 2019 and 100% as of December 31, 2018. 26 All statistics provided in this industry overview are according to Metrium.

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By the end of the year, the primary business-class market was represented by 94 residential complexes with some 14,550 apartments (or 1.07 million sq m in total), with 6 projects having just entered the sales space in Q4. The average home price in the segment at the year-end was 228,525 roubles per sq m, 2.3% up from 2017. Similarly with the mass market, the residential business class segment in 2019 will be under the influence of a number of factors, primarily of recent legislative changes (amendments to Federal Act 214-FZ governing off-plan property development projects) coming into effect on 01 July 2019 and requiring that buyers' money be kept in escrow accounts until commissioning, which means that project financing will become the only source of funding available to developers. According to experts, the move will toughen competition and put smaller developers out of business, while larger professional players with wide expertise will thrive and consolidate their market shares.

Business development in 2018 In 2018, Leader Invest was focused on systematisation of business processes and improvement of efficiency, including by optimising project solutions, reducing costs due to introduction of new procurement procedures, strengthening the project management function and increasing the efficiency of its own sales service. Leader Invest's portfolio comprises more than 40 projects at various stages. The company leads the market in terms of the number of ongoing projects. In 2018, it launched the brand "Happiness" to sell small-footprint infill properties in residential neighbourhoods while heavily developing its landmark project Wings at 120 Lobachevskogo Street and the grand-scale housing estate Central Park in Moscow's gentrified district of Nagatino. The company also progressed with the development of its other housing estate ZIL-Yug and commissioned a residential building at 15 Demyana Bednogo St. The team worked hard all through 2018 to finalise ZIL-Yug's marketing concept, phasing, and cash inflow calendar; speed up the launch of sale for the Wings after an expansive redesigning (with an upgraded master plan and optimised apartment layouts and façade solutions); and start active construction of Central Park, a unique business-class housing estate occupying over 450,000 square metres and using a concept prepared by the British architecture firm AHR. The Phase 1 construction permit for the Wings was granted in 2018. Leader Invest welcomes digitalisation as yet another avenue to leadership and uses it in day-to- day operations. The recently adopted BIM system significantly enhances the quality of designing and makes cost control a lot easier. In November 2018, the international rating agency S&P Global Ratings affirmed the long-term and short-term corporate credit ratings of Leader Invest at "B/B". The outlook is "stable". Today, Leader Invest is among Moscow's three highest-rated developers, sharing the top position with a major mass-segment operator. The high international expert rating is primarily the product of an exceptional new management team, a broad portfolio of projects, and healthy liquidity and leverage ratios. Largest projects commissioned in 2018

Site Area, K sq m Happiness Mnevniki 15 Demyana Bednogo St. 13.5

Business development strategy

In February 2019, Sistema divested a 51% stake in Leader Invest to Etalon Group for RUB 15.2 bn. In a separate transaction, Sistema bought 25% in Etalon for USD 226.6 mn from Viacheslav Zarenkov, Etalon Group’s founder, and his family. As a result of the transaction, two representatives of Sistema joined Etalon’s Board of Directors Sistema signed an agreement confirming its commitment to the highest standards of disclosure and transparency, and ensuring that transactions (if any) between Sistema and Etalon Group will be

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conducted on an arm's length basis, and that representatives of Sistema on the Company’s Board of Directors will not vote on any such transactions Etalon Group is one of the largest and oldest residential property developers in the Russian market, occupying a leading position in St Petersburg and increasing its presence in the Moscow Metropolitan Area. Etalon’s shares are listed under the “ETLN” ticker on London Stock Exchange. Etalon Group’s portfolio comprised 39 projects at different development stages, primarily in the highly profitable comfort and business-class segments, with total unsold net sellable area exceeding 2.73 million sq m. As of 30 June 2018, Knight Frank valued Etalon Group’s real estate portfolio at over RUB 132 billion. In 2018, Etalon Group’s real estate sales totalled 628 thousand sq m, or RUB 68.7 billion. In 2017, Etalon Group’s total revenue amounted to RUB 70.6 billion, and EBITDA reached RUB 13.2 billion. The combined assets and expertise of Etalon Group and Leader Invest will create a leader on the residential market with a portfolio of projects with a total area of 4 million square metres.

Value creation through synergies • Focus on the same regions (Moscow and St Petersburg) and segments (primarily business-, comfort- and premium-class) • Complementary portfolios: no overlap in Moscow • Attractive profitability across project portfolio and significant return on investments

2018 financials Excluding impact of new IFRS standards (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 12,676 6,308 100.9% 2,978 (52.8%) OIBDA 3,129 415 654.6% (1,038) - Operating income / (loss) 2,990 221 1,253.3% (1,178) - Profit/(loss) attributable to Sistema 772 164 372.2% (2,104) -

Leader Invest’s revenue grew by 100.9% year-on-year to RUB 12.7 billion in 2018. The main sources of revenue recognition were the Vsevolozhsky, Pokrovsky, Chertanovskaya and Michurinsky developments, as well as Daev, Demyana Bednogo, Kavkazky Plyus, Yana Rainisa and Fabritsiusa. As of the end of 2018 the sales portfolio including commercial real-estate and parking spaces totalled 209.3 thousand sq m. Revenue in 2018 was driven primarily by an increased level of completion of projects under construction and higher volumes of NSA available for sale, primarily due to 120 Lobachevsky with most of the IFRS 15 impact due to earlier recognition of revenue. Excluding the effect of new accounting standards, revenue decreased in 2018 due to the decrease in deliveries of new developments – in 2017 the premium class Daev and Serpukhovsky projects were delivered, while in 2018 one business class project was delivered, the Schastye v Mnevnikakh residential complex at 15 Ul. Demyana Bednogo. Positive trends in OIBDA and the OIBDA margin in 2018 were due to higher sales volumes and supply dynamics, as well as the impact of new IFRS standards. Factors driving the net loss for FY 2018 excluding the effect of new standards were the decrease in revenue due to a lower number of project deliveries, and also increased advertising spend.

Business Nedvizhimost

Business Nedvizhimost Group is one of the largest property owners in Moscow. The main assets of the company are JSC Business Nedvizhimost (lease and sale of commercial real estate) and JSC Mosdachtrest (lease of cottages/sale of land plots).

Leadership CEO: Vyacheslav Khvan

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Chairman of the Board of Directors: Sergey Shishkin

Industry overview for 201827 In 2018, the total space of commissioned offices reached 114,000 sq m. The size of the Moscow quality office space market was 20.5m sq m, with class A offices accounting for 4.94m sq m, class B+ offices – 7.43m sq m, and class B- offices – 8.43m sq m. Companies operating in the consumer sector accounted for about 17% of real estate market demand. Demand from the IT sector also increased, reaching 15% of the total. Trading companies continue to generate steady demand and account for 14% of the total number of bids. At the end of 2018, the average rental rate grew in all classes of property. Class A properties saw the highest growth. Overall, the average rental rate in class A segment rose by 9%, reaching 26,160 RUB/sq m per annum (without VAT) by the end of 2018. The average weighted rental rate in class B+/B properties also increased and reached 15,180 RUB/sq m per annum (without VAT). In class C segment rental rate amounted to 11,160 RUB/sq m per annum, having increased by 1.1% year-on-year.

Business development in 2018 Business Nedvizhimost has a unique pool of properties: mansions in the centre of Moscow, office and commercial buildings, manufacturing and storage facilities, elite cottages, land plots. In 2018, the company continued to implement its strategy in two core areas: (1) effective management of property portfolio in ownership, (2) providing services of professional and effective management and operation of commercial real estate, including third-party properties.

In terms of designated use Business Nedvizhimost's assets are divided into three key groups: (1) leasing, (2) development (3) monetisation as part of the M&A programme. The objectives of the company for 2019 include creation of an IT platform for commercial real estate management, renovation of own properties jointly with partners and launching a programme for replacing the existing assets, redevelopment of own high- potential properties and acquisition of investment-grade assets from the market.

Assets of Business Nedvizhimost as of 31 December 2018

Area Asset type (sq.m) For rent 155,377 For sale outside of Sistema Group 54,667 For renovation 36,626 TOTAL 246,670

Business Nedvizhimost's operating results in 2018

Total property portfolio, K Properties generating sq m rental income, units 246.7 50

Mosdachtrest is a subsidiary of Business Nedvizhimost whose operations are mostly related to the lease of cottages and office buildings in Moscow. Mosdachtrest's key assets are land plots in Serebryany Bor and the Moscow region. In 2018, Mosdachtrest completed the project for renovation of 50 properties in Serebryany Bor.

Mosdachtrest's operating results in 2018 Total property portfolio, K sq Properties generating rental Land assets, ha m income, units Serebryany Bor Moscow region 52.3 144 19.3 82.7

Business development strategy

27 Source: Rosstat, Metrium.

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The development strategy of Business Nedvizhimost includes three key areas: . Maximising the value of assets through their renovation; . Rotation of tenants to maintain rental income at a minimum of 10% per annum; . Replacement of assets at their peak value by assets from the market with potential for improvements and value growth of at least 30%.

According to its strategy for 2019-22, Business Nedvizhimost will conduct rotation of its commercial property portfolio in order to replace the assets that have reached their peak value by investment-grade assets with growth potential and to expand the area of residential rental real estate in ownership by building new residential properties.

Operating results 28 Indicator UoM 2018 2017 % Area of commercial real estate K m2 248.7 302.9 -18% in Moscow, - Land area ha 19.3 19.3 (Serebryany Bor) х - Land area ha 82.7 87.2 -5% (Moscow region) Cottages for rent, (Serebryany Bor, K m2 46.7 48.3 -3% Barvikha and Trudovaya)

Financial results in 2018 Excluding impact of new IFRS standards (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 7,887 6,019 31.0% 7,887 31.0% Operating income 4,184 2,629 60.9% 4,229 59.1% OIBDA 4,598 2,887 59.3% 4,553 57.7% Profit attributable to Sistema 3,147 1,655 90.1% 3,163 91.1%

In 2018 revenue from Sistema’s rental assets (Business Nedvizhimost and its Mosdachtrest subsidiary) increased by 31.0% year-on-year to RUB 7.9 billion, primarily due to sales of real estate. In FY 2018 69.3 thousand sq m was sold. OIBDA increased by 59.3% year-on-year to RUB 4.6 billion, in line with revenue and due to optimisation of a number of costs.

Binnopharm

JSC Binnopharm (hereinafter, “Binnopharm”) is one of the largest Russian full-cycle biopharmaceutical companies with an in-house R&D division. The company produces biotechnological drugs, including hepatitis B vaccine, a line of pulmonology and neurology drugs, infusion solutions, and anti-viral and immunomodulating drugs. Binnopharm operates two state-of-the-art pharmaceutical plants in the Moscow region.

Sistema’s stake 74.0%

Leadership CEO: Andrey Mladentsev29 Chairman of the Board of Directors: Dmitry Zubov

Business model

28 As of 31 December 18 29 Since 5 February 2019. As of 31 December 2018 – Alexey Chupin.

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Binnopharm is a full business cycle company with all the necessary competences – from development/registration of drugs and production of finished products to marketing/promotion of drugs and sales to distributors/pharmacy chains. The company is focused on expansion in the commercial segment of the market, while maintaining limited sales of hospital products. An in-house sales service has been established to promote the line of commercial prescription (Rx) and over-the-counter (OTC) drugs. The target segments of Binnopharm's portfolio are pulmonology, neurology, and antiviral and immunomodulating drugs. Modern production facilities allow the company to produce a wide range of dosage forms, including tablets, capsules, ampoules, suppositories, syringes and solutions.

Industry overview for 2018 The Russian pharmaceutical market in 2018 grew by 6.1% to RUB 1,329bn.30 The share of the commercial segment – the core of Binnopharm's business – increased to 73%. At the same time, the commercial segment's CAGR (8%) exceeds that of the market as a whole (7%). The growth forecast for 2019 is 1.8% for the pharmaceutical market and 3.5% for the commercial segment. The continuing trend in the market is the growing demand for cheaper generic drugs31 preferred by consumers over more expensive original drugs. The share of generics in the total volume of the commercial market increased by 1 percentage point in 2018 compared with 2017 and amounted to 62% in monetary terms and 84% in physical terms32. In money terms, imported drugs continue to lose market share and account for less than 70%. Legislative initiatives aim to further clear the market of poor-quality and illegal products and to simplify and speed up the procedures for registering new drugs. For example, the Ministry of Education and Science has developed a bill allowing the federal government to make decisions on issuing compulsory licenses for the release of generics when patents on original drugs are still valid. When the bill is passed, it will be easier for Russian companies to bring generics to the market, while the level of localisation of foreign drugs may decrease.

Business development in 2018 In 2018, Binnopharm continued to implement the strategy of strengthening its positions in the commercial segment and diversifying its proprietary drug portfolio. The company set its own record by completing the registration of 14 new drugs, including Hydroxyethyl Starch, Moxifloxacin, Levofloxacin, Inspirax in two dosage forms and a combination of Lidocaine and Tolperisone. A total of over 30 drugs are under development and are expected to be released in 2019-2021, further strengthening the company's market presence. The company continued to develop direct partnerships with pharmacy chains, as this promotion channel has the highest efficiency. Several projects with low margins in the area of commercial distribution of third-party products were terminated. The creation of a joint venture with OBL Pharm following the deal reached at the end of 2018 will be a logical step in implementing the strategy to increase capacity utilisation and business profitability. Binnopharm's revenue structure in 2018:  Own products: 89.4%  Commercial distribution: 7.8%  Other: 2.8%

Binnopharm's revenue structure by segment:  Commercial segment: 66.0%  Hospital segment: 34.0%

Business development strategy At the end of 2018, Sistema announced a deal that significantly strengthens the company's position in the Russian pharmaceutical market. The Corporation acquired a stake in JSC Obolenskoye Pharmaceutical Enterprise (“OBL Pharm”), one of the leading Russian pharmaceutical companies. The goal of the deal is to create a leading pharmaceutical group and a top 10 player in the Russian market by merging OBL Pharm and Binnopharm. The combined diversified product portfolio currently includes about 200 drugs. Leaders in their segments are Venarus (venotonic drugs), Maxilac (probiotic supplements) and Urdoxa

30 According to the analytical agency AlphaRM. 31 Generic drugs are drugs that are equivalent to brand-name products in composition and effect. Generic drugs may differ from brand-name products in presentation and trade name, and they generally have a lower price. 32 According to the analytical agency DSM Group.

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(hepatoprotective drugs). The combined company's production facilities will include four pharmaceutical plants in Moscow and the Moscow region. The establishment of the combined company is expected to be completed in 2019.

Financial results in 2018

(RUB million) FY 2018 FY 2017 Change Revenue 2,122 2,363 (10.2%) Operating income 342 323 5.8%

OIBDA 508 482 5.3% Profit/(loss) attributable to (10) 14 - Sistema

Revenue in 2018 declined by 10.2% year-on-year to RUB 2.1 billion, after Binnopharm ceased commercial distribution of some low-margin third-party products. Sales of Binnopharm’s own products grew by 18.5% in 2018. Binnopharm is continuing to pursue its strategy to reduce the share of the hospital segment in revenue. OIBDA growth in 2018 of 5.3% was driven by the launch of sales of new products, as well as savings on commercial expenses. This was reflected in OIBDA margin growth of 3.5 p.p. to 23.9%.

BPGC JSC Bashkir Power Grid Company (BPGC) is one of Russia's largest regional energy companies. BPGC runs a chain of holding companies that transmit electricity between central Russia and the Urals, distribute power to end users in Bashkortostan (a constituent republic of Russia and home of the company), and perform engineering, construction and refurbishment works at power lines and electrical substations. BPGC's subsidiaries include LLC Bashkir Grid Company (hereinafter, "BGC") (transmission grids), LLC Bashkirenergo (distribution grids), and LLC BPGC Engineering (engineering company).

Sistema’s stake 91.0%

Leadership CEO: Dmitry Sharovatov Chairman of the Board of Directors: Oleg Mubarakshin Business model BPGC's activities are aimed at reliable, high-quality and affordable power supply to consumers. In addition to the core operating activities, the company pays close attention to its role in driving local economic growth, sustainable development, and cooperation. Most of the company's revenue is generated by its transmission business, which is naturally monopolistic by definition and therefore has its prices closely regulated by the government. Other businesses of the group include utility hookup services, engineering and construction of power lines and electrical substations, as well as lease, IT, and communication services.

Industry overview for 2018 Power generation in Russia in 2018 went up 1.7%, to 1,091.6 billion kWh, while new connections grew to 4.5 GW, with more than 400,000 new users hooked up to power grids. Total consumption of electrical power in Russia in the reporting year is up 1.6%, to 1,076.1 billion kWh.33

33 Source: AK&M Information Agency

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According to a recent forecast by the nation's Ministry of Economic Development, by 2020 power generation volumes in Russia will have grown by 2.2%, and power consumption, by 2.4%. To phase out cross-subsidisation, the government has scheduled a 5% p.a. growth of electricity rates for residential customers and a 3% p.a. growth for all other users throughout 2018-2020.

The market of electric grid services is naturally monopolistic. All regional distribution grid companies operate under similar market conditions and abide by the same tariff policy. A leader in operational efficiency among Russia's power grid companies, Bashkirenergo achieves high profit margins despite below-average prices. In 2018, the average straight-line "common pot" electricity rate in Bashkortostan reached 1 rouble per kilowatt hour, up 7.5% from 2017. The indexation of straight-line electricity rates effective from July 2018 averaged 9.4% for all voltages, while electrical grid maintenance rate grew by an average of 5.7%, and power loss coverage rate, by 19.0%. The relatively high growth of the latest electricity rates was driven by a number of nationwide factors: growth of wholesale electricity prices in the past few years, statutory adoption of cost standards for default suppliers of electrical power, and a 20x growth of prices charged by PJSC FGC UES (Russia's largest transmission-grid company that serves about half of the country's energy consumption).

Business development in 2018 With a view to enhancing operating efficiency, BPGC carried on with its long-term programmes: • energy conservation and improvement of energy efficiency; • overhaul of distribution grids in Ufa (Bashkortostan's capital) and implementation of Smart Grid solutions; • automation of business processes through the use of information technology and ERP systems; • migration to a two-tier system of operational and technological management at LLC Bashkirenergo as an optimisation move

Distribution grids In 2018, LLC Bashkirenergo installed more than 50,000 meters designed specifically for state-of-the- art automated power control and metering systems. As a result, the company now operates some 220,000 meters and 286,000 metering channels across the republic. Power losses in distribution grids decreased from 8.36% to 8.23% year-on-year as a result of a comprehensive programme of technological solutions.

To improve the reliability and quality of power supply to Ufa's consumers, BPGC refurbished over a hundred distribution and transformer substations across the city and laid 15 km of cable as part of a long-term project aimed at comprehensive renovation of Ufa's distribution grids. In 2019, the company will refurbish another 87 distribution substations, lay another 8 km of cable, and install another 17,000 meters.

At the end of 2018, BPGC opened a new subdivision near Ufa ("Novoufimsky Distribution Zone") to meet growing demand for electrical power connections in the suburbs around the Bashkortostan's capital. A product of a long multi-stage process, the facility includes a 110 kV substation ("Zubovo") and a standalone distribution grid with a staff of 72 people. The new facility will improve the reliability of power transmission, reduce power outages, speed up connections of new users, and provide desired employment to Bashkortostan's people.

Development strategy BPGC's key long-term goals include: 1. Maintaining leadership in operational efficiency among Russian power grid assets.

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2. Generating stable cash flows for shareholders and maintaining dividends at the current level, while maximising shareholder value both organically and through M&As.

Operating results Parameter Units 2018 2017 % Bashkirenergo BGC Bashkirenergo BGC Bashkirenergo BGC Power in m kWh 22,512 27,327 22,152 26,138 1.6% 4.5% m kWh 1854 326 1,853 333 0.04% - 2.3% Power losses -0.09 % 8.2 1.2 8.4 1.3 -0.13 p.p. p.p. connec- New connections 19,321 1 19,547 1 - 1.16% 0% tions Connected MW 380.2 4 334 2.4 13.8% 69.5% capacity

Financial performance in 2018

Excluding impact of new IFRS standards (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 19,130 17,671 8.3% 19,569 10.7% Operating income 3,872 2,926 32.3% 3,273 11.8% OIBDA 6,369 5,259 21.1% 5,741 9.2% Profit attributable to Sistema 2,930 2,369 23.7% 2,492 5.2%

In 2018 BPGC’s revenue grew by 8.3% to RUB 19.1 billion. Revenue growth in 2018 was also by tariff indexation and an increase in electricity consumption and capacity as consumers switched to two-part tariffs. OIBDA growth of 21.1% for 2018 followed revenue and was also due to reduced expenses on network losses and the introduction of new accounting standards. The OIBDA margin for 2018 increased by 3.5 p.p. versus 2017 to 33.3% as a result of the new IFRS standards. Excluding the effect of the new accounting standards, the OIBDA margin for 2018 decreased by 0.3 wp.p. as a result of an increase in costs for services provided by PJSC Federal Grid Company of Unified Energy System due to an increase in paid-for capacity. The net profit increased following OIBDA. In 2018 BPGC paid RUB 2 billion in dividends.

Hospitality assets

Cosmos Group is one of Russia's leading hotel management companies that provides a full range of hotel development services: from project consulting and preparing a hotel for opening to cost cutting and increasing asset capitalisation. Cosmos Group has more than 4,000 rooms under management in 3-5 star hotels located in tourist and business centres: city business hotels and luxury resorts in Russia, Italy, Namibia and the Czech Republic. Sistema’s stake 100%

Leadership President: Christian Meyer Chairman of the Board of Directors: Artyom Sirazutdinov

Business model Cosmos Group provides a broad range of services from hotel concept development and design and construction support to brand selection and hotel management.

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Cosmos Group specialises in managing the existing hotels, including implementation of service standards, introduction of quality assurance system, recruitment, training and regular assessment of personnel, administrative and business operations, adoption of security standards, improvement of the sales, income management and centralised procurement systems. Business development in 2018 The main event of 2018 was the FIFA World Cup that attracted more than 2.7m tourists to 11 Russian cities. Sistema's hotels located in the cities that hosted the Football Championship showed substantial growth of year- on-year operating results34. In 2018, in order to increase the efficiency of its business Cosmos Group separated the functions of hotel ownership and management: Cosmos Group is in charge of operational management, while Sistema Hotel Management is responsible for managing the hotels. As part of its strategy for hotel assets Sistema will conduct a rebranding of Russian hotels. The Group's hotels will start operating under the Cosmos Hotels & More brand, with the exception of Holiday Inn Express and Park Inn hotels that will continue operating under international brands. The chain will be comprised of four brands: My Cosmos for economy-class city hotels, Cosmos for classical business hotels, Cosmos Collection for premium hotels and CosmosStay for serviced apartments. In 2019, Cosmos Group will actively increase its presence in the key region (Russia) by taking new hotels under management.

Industry overview for 201835

In 2018, 7 hotels operating under international brands were opened in Moscow (including the airports of the Moscow aviation hub) with the total accommodation capacity of 1,728 rooms, which means an 8.9% increase in the hotel room supply in Moscow. In 2018, the supply of quality hotel rooms grew at the same rate as in 2017. It is expected that 19 new hotels will be built in Moscow in 2019, including 5 hotels operating under international brands, with the total of 1,105 rooms.

The average occupancy rate of Moscow hotels in 2018 was 75%, which is 1.8 p.p. higher than in 2017. At the beginning of 2019, for the first time in many years the occupancy of Moscow hotels during the New Year holidays reached 90%36, which is comparable with the occupancy during the FIFA World Cup in 2018.

Hotel accommodation prices increased by 34% year-on-year on average in all segments, mostly due to the World Football Championship. The maximum growth of 50.3% was shown by the luxury Moscow hotels.

The steady growth of demand resulted not only in increased occupancy rates but also enabled hotels to increase revenue per room after the FIFA World Cup.

Following a slump in demand for hotel services in 2014-2015, the hotel market of Moscow is now highly competitive. Hotels mostly compete for low-budget tourist groups. In these conditions Sistema's hotel assets are diversifying their services, expanding sales channels and improving internal business processes.

Cosmos Group's market share in terms of accommodation capacity in the medium price category is more than 5%, which is one of the key drivers of the company's competitiveness enabling it to regulate prices in accordance with the supply. Business development strategy Sistema's development strategy in the hospitality business envisages an increase in the share of "asset light" business segment (a model based on the concept of hotel management as opposed to hotel ownership) through expansion of the portfolio of assets under management by adding hotels of external owners. Cosmos Group's expertise enables the management company to get contracts for managing both independent and international branded hotels.

34 Cosmos, HIEX Paveletskaya and Courtyard by Marriott in Moscow, Park Inn Sochi City Centre, Park Inn Volgograd, Park Inn Kazan, and Intourist Kolomenskoye in Moscow that is owned by a third party and managed by Cosmos Group. 35 Source: JLL Hotels 36 Source: the Tourism Committee of Moscow.

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The company intends to focus primarily on developing the segment of 3-4 star business hotels. The hotels of this segment enjoy the highest demand in Russia, which makes it possible to increase the speed of business expansion and its further capitalisation. The main strategy for developing the 5-star recreational hotels Altay Resort and Izumrudny Les consists in improving their operating results. These hotels have been rebranded as Cosmos Collection (a premium brand of the Cosmos Hotels and More brand line). The overall social and economic situation in Russia is expected to have a favourable effect on the implementation of this strategy. Operational performance in 2018 Parameter, RUB m 2018 2017 % Hotels RevPAR37 2,415 1,849 31% incl. (Russia) 2,019 1,516 33% Occupancy rate 65% 56% 9 p.p. incl. (Russia) 65% 56% 9 p.p. Rooms 4,049 4,049 0%

Financial performance in 2018 Excluding impact of new IFRS standards (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 5,301 4,318 22.8% 5,301 22.8% Operating profit 555 198 180.3% 530 167.7% OIBDA 1,314 849 54.7% 1,272 49.7% (Loss) attributable to Sistema (532) (517) - (524) -

Revenue growth from hospital assets of 22.8% year-on-year was driven by higher occupancy rates and an increase in the average daily rate (ADR), as well as by the World Cup.

Revenue from hotels outside Russia accounted for 20.7% of the total in 2018, down by 2.1 p.p., due to the faster pace of revenue growth at Russian assets.

The OIBDA in the hospitality segment in 2018 increased by 54.7% compared to 2017 on the back of revenue growth and due to effective cost control. The OIBDA margin for the year increased by 5.1 p.p. to 24.8%.

The average occupancy rate in 2018 was 62.5%, an increase of 6.3 p.p. on the previous year. The leader in terms of growth was the Cosmos hotel, where the rate increased by 11.1 p.p to 69.8%.

37 Revenue per available room per day.

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OTHER ASSETS

Concept Group LLC Concept Group is one of the leaders in the Russian segment of children's and women's clothes and underwear. The company has been successfully developing retail chains under the Acoola and Concept Club brands with an aggregate of over 380 stores, many of which are franchised.

Sistema's stake: 43%

Concept Group's portfolio includes such brands as Acoola (clothes for children aged 0-14), Concept Club (clothes for women, men and children, home textile38), Infinity Lingerie (underwear). Concept Group's business is based on a multi-brand and multi-channel model that allows the company to diversify its revenue. A significant part of revenues is generated by the nation-wide retail chain. The company is operating in the markets of Russia (in more than 130 cities), Belarus, Kazakhstan, Armenia, Azerbaijan and India both through its own retail chain and in partnership with franchise and wholesale partners. In 2018, the company signed an agreement with its key lenders on restructuring the Group's loan portfolio. The shareholding structure of the company was changed after Sberbank became one of its shareholders. In 2018, the company appointed Elena Bogomolova, who has strong competences in the clothing retail segment, as its new CEO. The key objectives of Concept Group for 2019 include active development of online sales and enhancement of the company's operational efficiency. Another important goal of the company is development of a new strategy that will enable Concept Group to become one of the top 5 market players by opening new-format retail outlets, strengthening its design expertise and changing the marketing policy for its brands.

Kronstadt

Sistema's effective stake: 96%

LLC Kronstadt Group is a Russian high-tech company that engineers and manufactures knowledge- intensive products and solutions for the production, deployment, and safe use of sophisticated air-, sea-, and land-based systems. The Group's substantial intellectual and engineering potential, its portfolio of key technologies and competences and state-of-the-art manufacturing resources enable it to create high-tech products and solutions that are in demand in Russia and are also able to successfully compete on international markets. In 2018, Kronstadt Group continued to fulfil the government contract for development of an unmanned aerial vehicle (UAV) complex (Orion project). The company also started developing a new business segment: provision of commercial services by using drones. It also conducted active operations in the segment of maritime solutions and provision of modern equipment for museums. In 2018, Kronstadt created and updated electronic navigation maps for 10,000 km of internal water routes in Russia, signed three contracts with the government for the supply of state-of-the-art hydrographic on- board equipment for Rosmorrechflot (the Russian Federal Agency for Maritime and River Transport), supplied seven sets of equipment for correcting stations ordered by Rosmorrechflot, obtained a patent for the development of a unique automated hydrographic trawling system. Moreover, the company carried out works for implementation of hardware and software designed to generate and update digital terrain data, and supplied four sets of interactive shooting ranges. Kronstadt Group continued making a substantial contribution to the development of culture and provision of cutting-edge equipment to museums. In 2018, the company supplied an interactive 5D unit for the Memorial Museum of Space (Moscow), equipment for the Space and Aviation Pavilion at VDNKh (Moscow), and started providing high-tech equipment for the largest car museum in Russia (Yekaterinburg).

38 All lines except for women's clothing were introduced in 2018.

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Kronstadt continued pursuing its CSR policy by participating in the national Donor's Days, enhancing cooperation with cancer charitable foundations, and organising volunteer work. The priority area of the company's business is development of high-tech services by using UAV systems as a platform for additional monetisation of the existing technological competences.

SISTEMA'S INVESTMENT FUNDS

Sistema continues developing a range of funds specialising in venture and PE investments. Sistema's funds and investment companies offer investors access to a unique portfolio of hi-tech assets, as well as assets in real estate, industrial manufacturing, and healthcare.

Sistema Venture Capital Sistema Venture Capital (Sistema_VС) is Sistema's fund focused on investment in tech companies. Sistema's stake in the fund 80% The fund's target size RUB 10bn Year of establishment 2016 Geography Russia, US, Europe, Israel Industry focus Growth-stage internet projects and technology Life No fixed term, investment stage fixed for Q2 2016 - Q2 2019 Target returns 25-30% (in RUB)

Investment targets and focus Sistema VC invests in fast-growing internet projects with potential for industrial leadership as well as early- stage deep tech projects. Priority investment areas:  Projects leveraging AI and machine learning technologies;  Computer vision;  Next-generation infrastructure solutions (SDN, NFV);  SaaS/PaaS/Marketplace platform solutions (software as a service, platform as a service), including advertising technologies, fintech, and e-commerce.

In 2018, the fund carried on with its dynamic strategy by investing in three new companies:  ТraceAir (Russia/USA)  Connecterra (Netherlands)  SQream (Israel)

It also supported new rounds of financing of existing portfolio companies, such as Ozon, VisionLabs YouDo, Web Technologies, MEL Science, DataSine, and GOSU, having brought along new partners, such as the French fund Ventech (a co-investor in GOSU), the British fund Pentech and US fund Propel Venture Partners (in Datasine), and Alibaba Group (in SQream). As at the end of 2018, the fund was 85% invested. Some of the deals closed in the reporting year (YouDo, Gosu.ai, TraceAir) made it to the top venture capital deals of 2018 in a ranking published by Inc. Russia. Sistema_VC also organised a number of events involving both large corporations and startups from the fund's own portfolio, such as a big data conference dubbed Big Data, Meet Big Brother!, an international computer vision & machine learning summit Machines Can See (co-hosted with VisionLabs), and #public_tech, a series of open discussions of modern technology's role in various industries. New investments made in 2018

TraceAir (USA) is a startup that helps construction companies reduce errors through automation. It uses data collected with drones and other sensors (including GPS receivers) to create accurate cloud copies of actual construction sites. The platform greatly speeds up design work and reduces contracting costs. The product has already attracted some large development companies in the USA, such as ENGEO (geotechnical engineering) and Independent Construction (construction), which are now co-investors in TraceAir along with some business angels.

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SQReam (Israel) is a developer of a leading GPU-accelerated database for massive data. The company's core product is a data warehouse that relies on machine learning algorithms and makes it possible to process terabytes of data 100 times faster and 10 times cheaper than CPU-based solutions. The product is already used by some major companies in telecom, advertising, media, and other industries (Orange, Cellcom, Amdocs, PubMatic). The company received the prestigious Big Data Excellence Award 2018 for providing the technology for a large-scale cancer research programme.

Connecterra (Netherlands), founded by the former Microsoft executive Yasir Khokhar, specialises in AI solutions for the food industry and agriculture. The technology that uses artificial intelligence to increase the productivity of dairy farms relies on wearable tracking devices that monitor cow health. The company's core product is the Connecterra IDA platform that analyses and predicts behavioural patterns based on data collected from neck sensors. IDA informs farmers about behavioural changes, provides early diagnosis, gives recommendations about optimising fertility cycles of cattle, etc. The solution is already used by Danone and ZLTO (a large farm chain in the Netherlands).

Key investments made in 2016-2017: VisionLabs is a developer of computer vision and machine learning solutions YouDo is an online marketplace for personal services MEL Science is an international company offering scientific and educational products based on VR/AR technologies. Luden.io is a developer of educational games Segmento is a platform that uses machine learning technologies for target advertising SCP/Sistema Finance Sistema Finance S.A. (or SF) is Sistema's investment platform focusing on Europe and the United States. Sistema Capital Partners (or SCP) is SF's arm that invests Russian institutional capital in developed real estate markets in Europe and the United States. In 2018 SCP and SF went through a reorganisation aiming to improve the efficiency of both businesses. From 2019 on, the funds are operating under a single brand, The SCP Group. SCP's strategic goal is in building an integrated and diversified investment company with focus on scalable investments in capital-intensive assets on mature markets.

Sistema's stake in the 100% company (SF) Geography Mature economies Industry focus Residential, retail and hotel rental properties, etc. Target returns  Target IRR > 15%  Target Cash-on-Cash > 5%

Investment targets and focus  Industries that benefit from restructuring or rapid growth  Assets that acutely need capital but are often beyond the scope of interest of institutional investors due to a relatively small size of investment required (a typical transaction amount ranging from €10m to €100m) From 2015 to date, SCP has created a strong track record both in Europe and in Russia. It completed a full round of deals involving German properties (Highstreet IV and HS Prime I) comprising a total of 29 assets in various towns of Germany with a total area of 120,000 sq m, which were sold to the BVK, bringing an IRR of 28-36% in EUR.

LLC Sistema Capital MC

Sistema's effective stake: 100% Among Russia's 10 largest asset managers AUM39: RUB 68.3bn

39 AUM means Assets Under Management

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Sistema Capital is a leading Russian asset manager with more than 18 years of experience in asset management on global financial markets for individual and corporate customers. The company offers investment products in both Russian and foreign markets: bonds of Russian and foreign issuers in various economic segments and geographies, equity shares of companies from various countries, and derivative financial instruments. As of the end of 2018, the company's assets under management stood at 68.3 billion roubles, which is 1.3 times higher than they were in 2017 and 6.4 higher than they were in 2014. The company is ranked No.9 in Russia by net asset value of mutual investment funds (MIFs), with an aggregate NAV of RUB 11bn as of the end of 2018. Sistema Capital's MIFs are among yield leaders of the 2018 open-end mutual funds ranking of domestic funds with NAVs of over 50 million roubles that use bonds as an investment instrument, released by the national portal Investfunds. In 2018, RAEX (Expert RA) rating agency confirmed Sistema Capital's rating at A+, with a stable outlook. The agency praised the company's high-quality IT system, strong investment process, reliability of counterparties, and sound quality of assets under management. The company acts as a trust manager for three non-government pension funds, including Sberbank's Pension Fund. At the same time, Sistema Capital remains an active player in the personal capital management market. In cooperation with MTS, the company has already launched MTS Investments, a "mass-market" app, with another collaboration B2C project––integration of an option to purchase investment fund units in the widely popular MTS Money Wallet app––now on the way. In 2019, Sistema Capital expects to see a growth in its assets under management, driven by a general trend where investors increasingly favour managed investments over bank deposits with ever-decreasing interest rates. The strategic goal of Sistema Capital is to develop as a leading asset management company oriented towards private and institutional investors (Retail Online, HNWI, non-government pension funds) while continuing as a manager of Sistema Group's liquidity and the vehicle for investment of Sistema's funds in marketable securities with varied risk levels. Yields of mutual investment funds Currency Yield/year, in specified currency 2015 2016 2017 2018 SC Rezervny. Foreign currencies (Eurobonds) USD +20.4% +7.2% +5.2% +2.0% SC Mobile. Bonds. Foreign currencies (Eurobonds) USD n/a n/a +5.8% +0.8% SC Rezervny (bonds) RUB +17.3% +12.1% +14.3% +7.4% SC Mobile. Bonds (bonds) RUB n/a n/a +15.1% +7.5% SC Mobile. Equity (equity shares) RUB +56.3% +23.4% +4.2% +13.9%

Sistema Asia Fund

Sistema Asia Fund is Sistema's VC fund, an active and recognisable player in the Indian VC market, which has become integrated into the country's entrepreneurial ecosystem. The fund's goal is to efficiently place investors' money in promising projects in the fast-growing Indian tech market

Sistema's stake in the fund 100% The fund's target size USD 120 million with potential increase to USD 150m Year of establishment 2015 Geography India, South -East Asia Industry focus Consumer tech (e-commerce, healthcare, transport, media, finance and education) and enterprise tech (IoT, VR/AR, platform solutions, big data, AI and machine learning) Life 8 years mandatory + 2 years optional, with an investment stage of 4 yeas Target returns 3x cash-on-cash

Investment targets and investment focus

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Sistema Asia Fund invests in tech startups in India (predominantly) and South-East Asia (in exceptional cases) that meet the following criteria: . a proven business model and/or loyal audience; . solutions specific for the Indian market; . startup founders heavily involved in business management; . co-investors.

In 2018, the team of Sistema Asia Fund reviewed over 150 projects, thoroughly studied over 70 companies, made three new successful investments, and participated in subsequent investments in portfolio companies. The investment rounds were done at valuations exceeding pre-money valuation, which testifies to the strong quality of the fund's investments. LendingKart, one of the fund's earliest projects, maintains a presence in the Fintech 100, a collaboration between fintech investment firm H2 Ventures and KPMG Fintech, for a third consecutive year, being the only Indian lender in the list. The new Sistema Business Scalerator, a product of cooperation between Sistema Asia Fund and MTS India, is a business scale-up platform solution designed for organising sales for retail and B2B companies and streamlining operations in marketing, brand management, and customer service. In March of 2018 the platform joined forces with LendingKart Finance, a non-bank finance arm of LendingKart. First exit In March of 2019 SAF performed its first monetisation by selling a stake in Qwikcilver, an Indian end-to- end service provider of gift card and prepaid solutions. Sistema Asia Fund invested in Qwikcilver in 2016 and exited three years after with solid returns on the invested capital. With the first exit in the bag, Sistema Asia Fund remains an investor in 9 businesses.

New investments made in 2018 HealtifyMe is India's biggest digital fitness platform (4m users and over 200 sports instructors and nutritionists) that allows controlling consumed calories, setting personal fitness goals and monitoring progress. What makes it really effective is access to online consultations of nutritionists and instructors. At the end of 2017, the company launched a new service, Ria, which is the world's first virtual AI-based nutritionist. The company’s biggest corporate customers include P&G, Unilever, Accenture, Cognizant, Shell, and Philips. Faasos is India's biggest “food on demand” company using the cloud kitchen technology. It is also the world's biggest company operating in this format. It currently manages five brands but is likely to further diversify its products. Kissht is an online consumer lending platform based on a proprietary algorithm for assessing creditworthiness with AI elements. Investments made in 2016-2017

Licious is a comprehensive brand operating in the meat-selling business and leveraging a full value chain, from sourcing suppliers to processing to delivering to customers Lendingkart is a fintech lender that has created its very own data-based lending algorithm to provide loans to small and medium-sized businesses Mobikon is a marketing platform for restaurants to attract customers Netmeds.com is India's biggest online pharmacy present all over the country Seclore is a developer of an EDRM (Enterprise Digital Rights Management) system that enables corporations to control the usage of electronic files within and outside the company

Ozon

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Sistema's direct stake: 21.2%40. Ozon is a leading Russian multi-category online retailer. It is 2nd by orders and 7th by revenue in the 2017 E-Commerce Index TOP-100 ranking. Ozon:  #4 player in the Russian e-commerce market by sales turnover  1.6m SKUs offered, across 24 categories  #1 E-commerce brand by awareness  73% Ozon.ru GMV growth in 2018 Y-o-Y41  1.5m unique customers daily  15.5m orders in 2018 (29 orders per minute)  40% of Russia's population have access to next-day delivery  115% growth of warehouse areas expected in 2019 (new fulfilment centre in the Moscow region and in Tver)

In March of 2019, Sistema bought 18.7% of equity shares in Ozon Holdings Limited from PJSC MTS for RUB 7.9 billion. The acquisition made Sistema the owner of 19.3% of the company's equity. On top of that, Sistema_VC, a venture capital fund that is part of Sistema Group and specialises in investment in growth- stage tech companies, also holds 16.3% in Ozon. E-commerce is among Russia's most promising markets. Even though online orders in Russia have more than doubled in the last 5 years42, the market has yet to reach its full potential. The world's seventh largest country by number of internet users, Russia still lags far behind leading economies by e-commerce penetration: while it is just 5% of total retail revenue in Russia, it reaches 10-15% in mature economies and exceeds 20% in China and South Korea. By 2023, e-commerce penetration in Russia is expected to reach 10%, with the market growing from RUB 1.1tn in 2018 to RUB 3.5tn, which corresponds to a CAGR of 24% p.a43. Since Russia's e-commerce market is heavily fragmented, there is clear potential for gaining leadership through consolidation, a task Ozon has every chance to achieve. All through 2018, the company has been growing at a pace surpassing any numbers accomplished over the past 10 years. Its GMV4 growth in the reporting year reached 73% YoY, with GMV totalling 42.5 billion roubles before VAT. In some categories, such as clothing and groceries, the growth rate exceeded 100%. As at the end of 2018, the company was operating 8 fulfilment centres with a total floor area of around 100,000 sq m, enabling next-day deliveries to 40% of Russians. In December 2018, Ozon hit an all-time high by number of processed orders (138,000 per day). Looking to 2019, the company plans to stick to its aggressive strategy aiming to conquer the wider market. Its immediate initiatives include large-scale investments in logistics infrastructure, expanding a distribution centre operating in Tver, and launching a new fulfilment centre near Moscow with a total floorspace of over 100,000 sq m.

40 Since March of 2019. 41 Gross Merchandise Value. Including VAT. 42 Source: research by the Russian associations of electronic communications (RAEC). 43 Source: research by Morgan Stanley 4 Gross Merchandise Value, or total revenue (marketplace included) net of loyalty programme effects

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Cash Flows

A summary of our cash flows is presented in the table below for the periods indicated: Year ended 31 December 2018 2017 (Amounts in millions of Russian Rubles)

Cash flows

Net cash provided by operating activities 88,628 98,602

Net cash used in investing activities -127,935 -107,202

Net cash (used in)/provided by financing activities 90,605 12,330

Effect of foreign currency translation on cash and cash equivalents 3,408 -3,961

Net increase/ (decrease) in cash and cash equivalents 54,706 -231

Net cash provided by operating activities

Net cash provided by operating activities in the reporting year decreased by RUB 9,974 million, or 10% from RUB 98,602 million in the year ended December 31, 2017 to RUB 88,628 million in year ended December 31, 2018. The decrease was mainly caused by changes in working capital, payments in accordance with the Settlement Agreement and the increase in interests paid. Partially this decrease was offset by increased operating profit for 2018.

Net cash used in investing activities

Net cash used in investing activities increased from RUB 107,202 million in the year ended 31 December 2017 to RUB 127,935 million in the year ended 31 December 2018 by RUB 20,733 million, or 19%. The change was resulted mainly from the increase in the Group’s capital expenditures by RUB 19,596 million, or 19%.

Net cash used in financing activities

In the reporting year, net cash provided by financing activities amounted to RUB 90,605 million as compared to the previous year cash inflow of RUB 12,330 million. Net proceeds from borrowings increased from RUB 65,599 million in 2017 to RUB 163,968 million in 2018 by RUB 98,369 million, or 150%.

Working Capital

Working capital is defined as current assets less current liabilities. As at 31 December 2018 the Group’s short-term liabilities exceeded current assets by RUB 87,317 million. The Group determines that it generates sufficient operating cash flow and has sufficient cash available to repay the Group’s current liabilities, including, if necessary, unused credit facilities of RUB 180,946 million. The cash flow forecast prepared by the management of the Group for a period of at least twelve months after the end of the reporting period demonstrates the Group’s ability to pay off current liabilities within the terms set by the contractual obligations. Capital Requirements

Sistema PJSFC and each of its subsidiaries require funding to finance the following:

 Capital expenditures, which consist of purchases of property, plant and equipment and intangible assets;  Acquisitions;  Repayment of debt;  Changes in working capital;  General corporate activities, including dividends;  Potential payments of obligations under other contractual obligations.

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We anticipate that capital expenditures, acquisitions and repayment of long-term debt will represent the most significant uses of funds for several years to come.

Our capital expenditures in the years ended 31 December 2018 and 2017 were RUB 124,040 million and RUB 104,444 million, respectively. We expect to continue to finance most of our capital expenditure needs through our operating cash flows, and to the extent required, additional indebtedness, such as borrowings or additional capital raising activities.

In addition to our capital expenditures, we spent RUB 21,424 million and RUB 24,726 million in the years ended 31 December 2018 and 2017 respectively on acquisitions of non-controlling interests in existing subsidiaries. See Note 8 of the Financial Statements for further description of our acquisitions.

As of 31 December 2018 and 2017 short-term debt equaled RUB 105,893 million and RUB 139,403 million respectively. As of 31 December 2018 and 2017, short-term debt accounted for 15% and 27%, respectively, of our overall debt.

Capital Resources

We plan to finance our capital requirements through operating cash flows and financing activities, as described above.

Cash

As of 31 December 2018 and 2017 we had cash and cash equivalents of RUB 114,183 million and RUB 59,959 million.

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Loans and Borrowings

As of 31 December 2018, our indebtedness consisted mainly of bank loans, corporate bonds and other financial institutions. Total indebtedness as of 31 December 2018 was RUB 698,335 million, consisting of RUB 592,442 million in long-term debt and RUB 105,893 million in short-term loans payable. The table below sets forth our loans from banks and financial institutions as of 31 December 2018 and 31 December 2017. Interest rate (actual at 31 December 31 December 31 December Maturity 2018) 2018 2017

USD-denominated: Calyon, ING Bank N.V, - 17,076 Nordea Bank AB, Raiffeisen Zentralbank Osterreich AG China Development Bank 2019-2021 LIBOR 6m+3.15% 10,421 8,640

Citibank 2019-2024 LIBOR + 0.9% 10,980 10,592 Other 2019-2021 5,109 4,996

26,510 41,304

EUR-denominated: ING Bank 2019-2027 3.99% 4,946 25,040 Alfa Bank 2019-2028 3.92% 15,892 - Other 2019-2027 1,352 1,284

22,190 26,324

RUB-denominated: Sberbank 2019-2023 8.45%-14.50% 235,909 188,222 VTB 2019-2022 7.20%-10.50% 132,421 37,733 CBR+2.5%-4.8% Gazprombank 2019-2025 9%-11.5% 23,554 21,021 Otkrytie 2019-2025 8.9%-9.50% 19,125 - Alfa Bank 2019-2023 9.0%-11.87% 24,795 15,501 CBR+2.0% Other 6,297 5,918

442,101 268,395

Other currencies 217 559

Total bank loans 491,018 336,582

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As of 31 December 2018 and 2017, the Group’s notes consisted of the following:

31 December 31 December Currency Interest rate 2018 2017

MTS International Notes due 2023 USD 5.00% 31,090 26,188 Sistema International Notes due May 2019 USD 6.95% 24,705 23,441 MTS International Notes due USD 8.63% 20,870 17,621 Sistema PJSFC Notes due February 2028 RUB 9.25% 15,000 - Sistema PJSFC Notes due March 2027 RUB 8.90% 14,964 15,000 Sistema PJSFC Notes due November 2026 RUB 9.90% 9,635 9,953 Sistema PJSFC Notes due January 2028 RUB 9.80% 9,482 - Sistema PJSFC Notes due October 2026 RUB 9.80% 6,115 4,536 Sistema PJSFC Notes due September 2025 RUB 12.50% 2,136 5,000 MTS Notes due 2022 RUB 7.70% 14,958 14,947 MTS Notes due 2023 RUB 6.85% 9,348 9,997 MTS Notes due 2022 RUB 9.00% 9,993 9,991 MTS Notes due 2021 RUB 8.85% 9,990 9,986 MTS Notes due 2021 RUB 7.10% 9,988 - MTS Notes due 2025 RUB 7.25% 9,986 - MTS Notes due 2031 RUB 9.40% 1,080 9,995 MTS Notes due 2020 RUB 7.50% 40 49 Detskiy Mir due 2024 RUB 9.50% 3,000 3,000 Sistema PJSFC Notes due 2018 RUB 12.70% - 10,000 Sistema PJSFC Notes due October 2025 RUB 10.90% - 1,700 MTS Notes due 2018 RUB 7.70% - 9,986 Other 3,952 2,086

Total notes 206,332 183,476

The following table presents the aggregate scheduled maturities of debt outstanding as of 31 December 2018:

1-2 2-3 3-4 4-5 <1 year 5+ years years years years years

Borrowings 105,893 162,666 224,693 75,106 98,327 31,650

Commitments and Contingencies

For a detailed discussion of our commitments and contingencies, see Note 39 of our Financial Statements.

Capital commitments – A capital commitment is a contractual obligation to make payment in the future, mainly in relation to buy assets such as network infrastructure. These amounts are not recorded in the consolidated statement of financial position since the Group has not yet received goods or services from suppliers. At 31 December 2018, the Group had capital commitments of RUB 45,282 million (31 December 2017: RUB 42,323 million) relating to the acquisitions of property, plant and equipment.

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Guarantees – At 31 December 2018, MTS Bank guaranteed loans for several companies which totalled RUB 10,587 million (31 December 2017: RUB 5,580 million). These guarantees would require payment by the Group in the event of default on payment by the respective debtor. Such guarantee contracts issued by the Group are initially measured at their fair values and are subsequently measured at the higher of the amount of the obligation under the contract, as determined in accordance with IAS 37, and the amount initially recognized less, where appropriate, cumulative amortisation recognized in accordance with the revenue recognition policies.

Telecommunication licenses – In 2012, the Federal Service for Supervision in the Area of Communications, Information Technologies and Mass Media allocated MTS the necessary license and frequencies to provide LTE telecommunication services in Russia. Under the terms and conditions of the LTE license, MTS is obligated to fully deploy LTE networks within seven years, commencing from 1 January 2013, and deliver LTE services in each population center with over 50,000 inhabitants in Russia by 2019. Also, MTS is obligated to invest at least RUB 15 billion annually toward the LTE roll-out until the network is fully deployed.

In March 2015, upon winning a tender, MTS-Ukraine, a subsidiary of MTS, has acquired a nationwide license for the provision of UMTS (3G) telecommunications services. The license with the cost of UAH 2,715 million (RUB 6,015 million at the acquisition date) has been granted for 15 years. In accordance with the terms of the license MTS-Ukraine is required to provide coverage across Ukraine by April 2020.

In accordance with the terms of the license, MTS-Ukraine also concluded agreements on conversion of provided frequencies with the Ministry of Defense of Ukraine, Ministry of Internal Affairs of Ukraine and State Service of Special Communications and Information Protection of Ukraine. For conversion of frequencies MTS-Ukraine paid UAH 358 million (RUB 865 million as of the payment date) in 2015 and UAH 299 million (RUB 645 million as of the payment date) in 2017, and UAH 230 million (RUB 535 million as of the payment date) adjusted for the rate of inflation in 2018.

Management believes that as of 31 December 2018 the Group complied with the conditions of the aforementioned licenses.

Agreement with Apple – In April 2017, the Group entered into an unconditional purchase agreement with Apple Rus LLC to buy 615,000 iPhone handsets at the prices relevant as at the dates of purchases over a period ending 30 June 2019. Pursuant to the agreement the Group is also required to arrange iPhone advertising campaign. As of 31 December 2018 the Group fully completed total purchase installment outlined by the agreement.

Restriction on transactions with the shares of BPGC – In 2014, in the course of litigation, which the Group is not a party to, the court imposed restrictions on transactions with the shares of BPGC owned by the Group. The restrictions do not limit the Group’s voting rights, rights to receive dividends or any other shareholders rights.

Taxation – Laws and regulations affecting business in the Russian Federation continue to change rapidly. Management’s interpretation of such legislation as applied to the activity of the Group may be challenged by the relevant regional and federal authorities. Recent events suggest that the tax authorities are taking a more assertive position in their interpretation of the legislation and assessments and as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. Fiscal periods

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generally remain open to tax audit by the authorities in respect of taxes for three calendar years preceding the year of tax audit. Under certain circumstances reviews may cover longer periods. Management believes that it has provided adequately for tax liabilities based on its interpretations of tax legislation. However, the relevant authorities may have different interpretations, and the effects on the financial statements could be significant.

Where uncertainty exists, the Group has accrued tax liabilities as management’s best estimate of the probable outflow of resources which will be required to settle such liabilities. As of 31 December 2018, provisions for additional taxes and customs settlements comprised RUB 1,102 million (31 December 2017: RUB 1,216 million).

The Group also assesses the following contingent liabilities in respect of additional tax settlements:

31 December 31 December 2018 2017

Contingent liabilities for additional taxes other than income tax 730 732 Contingent liabilities for additional income taxes 2,051 2,591

In accordance with the rules on controlled foreign companies, undistributed profits of the Group foreign subsidiaries, qualifying as controlled foreign companies, should be included in the income tax base of the controlling entities in particular cases. The management of the Group does not expect any significant effect of these changes on the consolidated financial statements of the Group.

Potential adverse effects of economic instability and sanctions in Russia – Starting from 2014, sanctions have been imposed in several packages by the U.S. and the E.U. on certain Russian officials, businessmen and companies. This led to reduced access of the Russian businesses to international capital markets.

The impact of further economic and political developments on future operations and financial position of the Group might be significant.

Political and economic crisis in Ukraine – During the year ended 31 December 2014, a deterioration in the political environment of Ukraine has led to general instability, economic deterioration and armed conflict in eastern Ukraine.

Economic risks especially apply to funds deposited in Ukrainian banks, whose liquidity is affected by the economic downturn. As of 31 December 2018, the Group held RUB 6,596 million in current accounts and deposits in Ukrainian banks.

Anti-terror law – On 7 July 2016, a series of anti-terror laws (also known as “Yarovaya-Ozerov packet of laws”) was enacted by the signature of the President of Russia. The laws provide for mandatory storage of recorded phone conversations, text messages of subscribers, images, sounds, video and other types of messages by telecommunications operators for certain periods of time. These requirements become effective starting 1 July 2018. Compliance with laws may require construction of additional storage, processing and indexing centers. The Group expects the increase in related capital expenditures, which cannot be measured reliably.

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Legal proceedings – In the ordinary course of business, the Group is a party to various legal proceedings, and subject to claims, certain of which relate to the developing markets and evolving regulatory environments in which the Group operates. At 31 December 2018, management estimates the range of possible losses, if any, in all pending litigations or other legal proceedings being up to RUB 10,078 million.

In 2017, Federal Antimonopoly Service of the Russian Federation (FAS Russia) issued a warning to MTS and some other federal operators regarding signs of violation of the antimonopoly laws by establishing unreasonable differences in tariffs of communication services for subscribers in home region and outside. Following non-compliance with the warning to terminate such actions, FAS Russia has opened antimonopoly proceeding against MTS. FAS Russia has also opened antimonopoly proceeding against MTS for establishing high prices for communication services in national roaming. In 2018, MTS changed the principles and terms of its tariffs when travelling about the country. FAS Russia held MTS administratively liable and imposed administrative fines on MTS in the amount of RUB 1 million in respect of each proceeding.

In August 2018, FAS Russia has charged MTS and other federal operators with violation of antimonopoly laws in respect to establishing distinguished terms and conditions for SMS pricing for the entities with state-owned equity interest as compared to the terms and conditions for the other entities and establishing unreasonably high SMS prices. Investigation is currently in process. Following the case examination a fine may be imposed on MTS or illegally obtained income may be recovered.

FAS Russia determines the amount of illegally obtained income as the difference between the amount of revenue received from applying monopolistically high prices and the amount of revenue that could have been received if «reasonable» prices were applied. There is no information regarding the level of prices that FAS Russia considers economically justified. It is not possible to make a reliable estimation of amount of fine that could be imposed.

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Attachment A KEY NON-IFRS PERFORMANCE METRICS Operating Income Before Depreciation and Amortisation (OIBDA) and OIBDA margin. OIBDA represents operating income before depreciation and amortisation. OIBDA margin is defined as OIBDA as a percentage of our net revenues. Our OIBDA may not be similar to OIBDA measures of other companies; is not a measurement under accounting principles generally accepted under IFRS and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of profit and loss. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions of businesses and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under IFRS, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. OIBDA is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies.

Adjusted OIBDA, operating income and profit attributable to Sistema shareholders. The Company uses adjusted OIBDA, adjusted operating income and adjusted profit/(loss) attributable to Sistema shareholders to evaluate financial performance of the Group. These represent underlying financial measures adjusted for a number of one-off gains and losses. We believe that adjusted measures provide investors with additional useful information to measure our underlying financial performance, particularly from period to period, because these measures are exclusive of certain one-off gains and losses.

Adjusted operating income and adjusted OIBDA can be reconciled to our consolidated statements of profit and loss as follows:

Excluding impact of

new IFRS standards RUB millions 2018 2017 2018 Operating income 128,600 90,286 114,003 Impairment of long-lived assets in - 3,775 - Turkmenistan (MTS) Gain on investments at Medsi - (730) - Accruals related to LTI program at portfolio 1,651 821 1,651 companies Impairment of long-lived assets (Segezha 672 Group and others) - - Provisions for litigation and amounts due 2,260 6,025 2,260 under contracts with clients at RTI Other non-recurring (gains) / losses, net 1,821 1,604 1,821 Adjusted operating income 134,332 102,457 119,735 Depreciation and amortisation 130,941 95,100 100,094 Adjusted OIBDA 265,273 197,558 219,829

Adjusted loss attributable to Sistema shareholders can be reconciled to our consolidated statements of profit and loss as follows:

Excluding impact of

new IFRS standards RUB millions 2018 2017 2018 Loss attributable to Sistema (45,898) (94,602) (46,952) Loss on Settlement Agreement net of - 90,000 - deferred tax One-off write-off of deferred tax assets 12,621 - 12,621 Provision for liability with regards to the U.S. Department of Justice and the U.S. Securities and Exchange Commission 29,527 - 29,527 investigation, including revaluation (MTS)

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Impairment of long-lived assets in 1,887 - Turkmenistan (MTS) - Other non-recurring (gains) / losses, net 1,705 1,283 1,705 Gain on investments at Medsi - (730) - Accruals related to LTI program at 1,194 366 1,194 portfolio companies Impairment of long-lived assets (Segezha 672 - Group and others) - Provisions for litigation and amounts due 1,966 5,242 1,966 under contracts with clients at RTI Adjusted profit attributable to Sistema 1 ,114 4,119 60

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3.6 RISKS

Enterprise risk management and risk appetite

Sistema defines risks as adverse processes and factors over which it has little or no influence. However, the Corporation can take measures to reduce the negative consequences of such factors should a certain risk occur. This makes efficient assessment of existing risks and the probability of their occurrence, as well as efficient risk management, an important part of Sistema’s strategy.

Risk management is part of all processes at Sistema, and is integrated into strategy planning and execution, the investment process, budgeting, procurement and day-to-day operations. The enterprise risk management (ERM) system operating at Sistema was built in compliance with international standards and recommendations, as well as best risk management practices. It is designed to keep risks at a level acceptable to Sistema’s shareholders and management.

As part of quarterly ERM procedures, the risk managers of Sistema Group:  compile risk registers for subsidiaries and a consolidated risk register for the Group;  prioritise risks and aggregate them into portfolios;  assess the probability and materiality of all risks;  study the impact that material risks have on the financial results of specific subsidiaries and Sistema Group as a whole, using simulation and financial modelling methods.

One of the key principles of risk management in Sistema Group is to take proper account of risk appetite. This approach implies identifying and monitoring the Corporation’s target risk profile in accordance with its strategic goals and in the context of their integration into risk management procedures.

Sistema Group’s risk appetite determines the level of risk that is acceptable for shareholders, and includes the following basic provisions:

 the amount of potential losses under the risks accepted by Sistema Group must not reach a level leading to the termination of the Group’s operations, including under stressed conditions;  the cash flows of Sistema Group companies must be sufficient to guarantee timely fulfilment of obligations to counterparties in the short and long term;  in its operations, the Group aims to avoid any increased concentration of risk by counterparty, industry and region;  the Group must be able to support sustainable growth and economic efficiency in the long term;  all members of the Group must comply with the requirements of national regulators in countries where they operate, as well as the standards and recommendations of international authorities;  the Group must maintain an impeccable reputation;  the Group must maintain high credit ratings as assigned by international rating agencies.

Risk management reports are submitted for review to the relevant collective governance bodies of the Corporation at least once a quarter. Each risk management report contains a revaluation of risks and their impact on the Corporation’s financials, an assessment of the effectiveness of risk mitigation and response plans, and potential risk areas (areas of concern) identified for future periods.

The Corporation’s long-established common compliance system serves to mitigate anti-corruption, anti- monopoly, stock exchange and sanctions compliance risk, as well as risks relating to security of personal data, confidential information, and prevention of money laundering and financing of terrorism.

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Below is provided a description of key risks covered in Sistema’s ERM system.

Global and country risks

These are risks associated with changes in Russia’s political and economic environment. Although most of Sistema’s business is carried out in Russia, some companies are also present in other countries of the CIS, as well as the EU, Turkey and India. Many of their products are sold in other CIS markets, Southeast Asia, Eastern Europe and North Africa. In the event of any major political turmoil in these regions, the Group’s business may be discontinued or put on hold, which may lead to material losses. The company’s businesses may also potentially suffer from the imposition of additional sanctions, a full freeze on imports and/or exports in the event of political changes, and military conflicts involving Russia.

Recent developments in Ukraine have caused Western countries to impose sanctions on several Russian individuals and companies. The potential remains for the sanctions list to be extended to include more names or introduce new categories of sanctions, which could affect some companies of the Group or their management. Any further increase in tensions between Russia and other countries, as well as any escalation of related conflicts, potential new sanctions, or continuing uncertainty as to the scale of any such sanctions, may adversely impact Russia’s economy, the financial status of the Group’s partners and suppliers, the Group’s ability to undertake commercial and financial activities and obtain funding on commercially reasonable terms, and the volatility of Sistema’s securities.

Industry risks

These are risks related to Sistema’s involvement in various industries. The most material risks in this category are those associated with the telecoms business, power generation, retail, hospitality, healthcare, pharma, the forest products industry, agriculture and real estate.

Sistema’s external risks

Financial risks Sistema’s business is inextricably connected to the global economy and financial markets, and is sensitive in particular to movements in prices for oil, gas, and other commodities that Russia exports. Further weakening of the rouble against the US dollar and the euro amid a slump in the oil prices and sanctions being imposed on Russia may result in a rise in costs and a drop in revenues or impede the achievement of financial targets and repayment of debt by Sistema Group companies.

An exodus of foreign investors from Russia, as well as restrictions introduced on foreign companies in Russia as a result of sanctions, may have a negative impact on Sistema Group’s joint ventures (partnerships) and new investment projects.

A rise in inflation may result in higher expenses and therefore put pressure on profit margins, and also affect demand in Russia for products and services of Sistema Group companies.

Servicing of the Corporation’s current and future debt may require substantial amounts of cash. If sanctions are maintained over the medium term and Russian banks and businesses continue to have restricted access to foreign debt, this may significantly increase the current liquidity deficit in the market and result in a further increase in interest rates, making it difficult for Sistema Group to raise funding for its operations

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and to refinance the debt of the Corporation and its portfolio companies. Should the Corporation prove unable to obtain sufficient funding when and how required, it may face significant barriers to business development as well as to its operating and investment activities.

An unfavourable macroeconomic environment in many countries where Sistema’s assets operate may make it necessary to re-evaluate goodwill at some of the assets.

Currency control and restrictions on capital repatriation may adversely affect Sistema’s business by posing barriers to capital flows, and reduce the value of Sistema’s investments in Russia.

The bankruptcy of any of the Russian banks with which Sistema routinely cooperates may result in a reduction in sources of borrowing for the Corporation and portfolio companies, and may lead to direct losses of funds deposited in the accounts of such banks.

Political, social, and environmental risks The influence of geopolitical risks on the Corporation and its portfolio companies remains strong, as protectionism and economic sanctions are increasingly being used as a tool for achieving geopolitical goals.

The imposition of sanctions against Russia as a state or against individual Russian companies and Russian citizens may result in disruptions to international payment systems, which in turn may prevent the Corporation and its portfolio companies from properly making payments and reduce Sistema’s investment appeal.

Decreasing living standards and a potential rise in social unrest in the regions where Sistema Group companies operate may threaten the Corporation’s profits. The operational activities of a number of Sistema’s portfolio companies involve potential threats to employees’ health and safety. Emergencies and incidents at Sistema Group’s production sites may have a significant impact on the environment, such as pollution of land and water, emissions above allowable limits, discharge of waste waters or leaks of hazardous substances. Irrational use of natural resources (land, forest) by Sistema’s portfolio companies may deplete their raw materials/production base and compromise economic performance.

In view of the increased threat of global and regional terrorist attacks, any such incidents at the Group’s enterprises and infrastructure facilities may cause significant economic damage and affect health and life.

Legal risks There is a risk of unpredictable court rulings and administrative decisions with respect to Sistema Group’s business. Such rulings or decisions may have an adverse effect on the Group’s business as a result of numerous factors including:  possible discrepancies and ambiguities in: (i) federal and other laws; (ii) bylaws issued by executive authorities in states where Sistema Group operates; (iii) regional and local laws, rules and requirements;  gaps in legislation and a lack of court and administrative guidelines regarding the interpretation of some laws, as well as conflicts between some court guidelines and rulings;  influence of political, social and commercial factors on the judicial system;  potential selective or arbitrary actions of government authorities.

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Gaps in Russia’s existing corporate and securities legislation may create barriers to raising funds in the future.

A lack of clarity about the applicability to Sistema’s business of the Federal Act on the Procedure for Foreign Investment in Companies of Strategic Importance to the National Defence and State Security and the regulations of the Eurasian Customs Union (EACU) may have a negative impact on Sistema Group’s business, as the Group has foreign shareholders.

There is a risk of legislative amendments being adopted in countries where Sistema Group companies operate, due to potential changes in laws and regulations governing international trade and investments that may be introduced by foreign states or international organisations.

Since Russian corporate law makes shareholders liable for the obligations of a company’s affiliates, Sistema may incur financial losses related to the liabilities of its portfolio companies.

Minority shareholders of Sistema’s subsidiaries may contest or vote against related-party or other transactions, which may limit Sistema’s ability to close investment deals and restructures businesses.

If the Russian Federal Anti-Monopoly Service concludes that Sistema PJSFC or one of its material subsidiaries has violated existing anti-monopoly legislation, this may result in serious administrative sanctions involving losses for the Corporation. The Federal Anti-Monopoly Service may also prevent the Corporation and its portfolio companies from closing and/or undertaking certain transactions, which may also limit Sistema’s capacity to do investment deals and restructure businesses.

Tax risks Tax laws, regulations and practices of jurisdictions where Sistema’s assets operate are intricate, opaque and prone to frequent modifications and ambiguous interpretations. If the Corporation’s actions are interpreted as being in breach of tax law, this may have an adverse effect on the business of Sistema Group.

Russian law on transfer pricing may make it necessary to introduce adjustments to price-setting practices used at Sistema Group’s companies and result in additional tax liabilities related to some transactions.

On 1 January 2015, new rules were introduced relating to the taxation of retained profits of controlled foreign companies and gains on indirect sales of Russian real estate properties, along with a new concept of beneficiary owners and tax residency for foreign companies in Russia. These rules have undergone a series of revisions, with all the amendments having retroactive effect. As a result of the need to apply new taxation rules, the Group’s companies may face new tax liabilities arising due to uncertainty around interpretation of tax law and a lack of relevant precedents.

Capital market risks A deterioration of the geopolitical situation, the imposition of sanctions on Russian companies, a worsening of the macroeconomic environment, and capital and investor flight from the Russian market led to a reduction in market valuations of Russian companies in 2014-2018. In view of these circumstances Sistema’s access to investor funding through capital markets may be restricted further as a result of the introduction of sectoral sanctions against Russian companies in business segments where Sistema operates and/or due to a cautious approach among investors to Russian companies in general. In particular, Sistema’s

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ability to raise funding via bond issues may be limited, potentially leading to a lack of working capital and cash available for investment and affecting the Corporation’s financial performance.

Risks related to activities of Sistema PJSFC

Implementation of the business strategy

The Corporation’s strategy aims to develop a balanced and diversified asset portfolio in sectors and regions where Sistema PJSFC has expertise and competitive advantages, and to attract leading international and Russian partners. Despite having a clearly formulated strategy, Sistema PJSFC cannot guarantee the achievement of its stated goals, efficient management of portfolio companies, or benefits from new investment opportunities. This is due to a variety of reasons, including a high level of debt and a constrained investment budget. Sistema’s failure to achieve goals set out in its strategy may undermine its financial results.

The development of Sistema Group companies depends on numerous factors, including receipt of necessary permits from state authorities, sufficient demand from consumers, successful development of technologies, efficient risk and cost management, timely completion of R&D and the introduction of new products and services. Weaknesses in any of these areas may have a detrimental effect on the development of Sistema Group companies and on the Corporation’s financial performance.

Acquisition, integration, disposal or restructuring of assets

Sistema PJSFC implements its strategy via acquisitions, disposals, and restructuring of assets. New investment opportunities come with certain risks, including failure to find relevant targets or their not being available for acquisition, inadequate due diligence of the target company’s operations and/or financial situation, and potential overvaluation of assets. These risks can also affect Sistema’s financial performance. Acquisition of assets may increase pressure on the Corporation’s cash position and create a need to raise external funding.

Delays to the completion of investment deals or failure to close them may obstruct the achievement of Sistema’s strategic goals and affect its performance, financial position and investment case. Sistema may struggle to construct an efficient system for managing and controlling new assets. The top risks in this area include:  inability to efficiently integrate operating assets and personnel of an acquired company;  inability to establish and integrate necessary control mechanisms, including those related to logistics and distribution;  conflicts among shareholders;  hostility and/or unwillingness to cooperate on the part of the management and staff of an acquired asset;  loss of customers by the acquired asset. If one or several of the above risks materialise, the relevant asset may lose part of its value and/or experience in deterioration in its financial performance.

When disposing of its assets the Corporation may face the following risks:  delays or failure to close the transaction due to an inability to obtain corporate or state approvals;  mistakes in asset valuation;  assumption of excessive obligations towards the buyer;  loss of synergies with other assets remaining in the portfolio. If one or several of the above risks materialise, the Corporation may lose potential profit and thus see poorer financial performance.

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Management and key personnel

The implementation of Sistema’s strategy in many respects depends on the efforts and professionalism of the management team. Failure to hire a sufficiently competent and motivated management team can jeopardise Sistema’s business, performance, financial position and development prospects.

Cash flow from Sistema Group companies

The Corporation’s financial performance depends on the ability of Sistema Group companies to generate the cash flows needed to service the Corporation’s financial liabilities, including repayment of debt and interest, and to make other investment activities in the future. This cash-generation capacity may be restricted due to regulatory, tax or any other barriers, which may have an adverse effect on the financial position and liquidity of the Corporation.

Borrowings

Cash flows from portfolio companies may be insufficient to absorb all of the Corporation’s expenses scheduled for a particular time. This can make it necessary to borrow more funds, increasing the Corporation’s debt burden, which in turn can compromise the credit ratings of Sistema and its portfolio companies. A downgrading of a credit rating can lead to a rise in the cost of servicing of existing loans, higher interest rates, barriers to borrowing, and in some cases even demands for early repayment of credit facilities. The risk of downgrades or withdrawals of credit ratings correlates with reputational and liquidity risks.

Loan covenants

Loan and debt securities agreements signed by Sistema and its portfolio companies contain certain restrictive covenants. These covenants restrict further borrowings, encumbrance of property with pledges, sale of assets, and transactions with affiliates. They may also restrict certain aspects of Sistema’s operations, such as financing of capital expenses, or limit its capacity to repay debts and service other liabilities. Breach of covenants, however inadvertent, may entitle creditors of the Corporation and/or its portfolio companies to demand early repayment of loans, which represents a threat to the Corporation’s financial performance.

Licences and permits

The operations of Sistema Group’s companies are regulated by different government bodies and agencies that issue and renew licences, approvals and permits, and also depend on applicable laws, regulations, and standards. Regulating authorities to a large extent rely on their own judgment when interpreting and implementing legal requirements, issuing and extending licences, approvals and permits, and monitoring compliance with such licences. There is no guarantee that the existing licences and permits, including those issued to the Group’s companies, will be extended, that new licences and permits will be issued, or that the companies will be able to comply with the terms of such licences. Any of these circumstances can have material negative consequences for the business of Sistema PJSFC.

Privatised companies

Sistema’s portfolio contains several privatised assets. It is also probable that the Corporation will take part in privatisations in the future. Since Russia’s privatisation-related legislation remains somewhat unclear and inconsistent, and contradicts some other legal provisions, the privatisation of many companies can potentially be contested, however selectively, which may have a material adverse effect on the Corporation’s business, financial status, performance and development prospects.

Anti-corruption rules

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Sistema’s operations are regulated by anti-corruption law of relevant jurisdictions, including Russian legislation, the UK Bribery Act and/or the US Foreign Corrupt Practices Act (FCPA). Any investigation into potential violations of the FCPA, Bribery Act or other anti-corruption laws of the US, UK or other jurisdictions may affect the reputation, business, financial position and performance of Sistema PJSFC.

Competition

All business segments in which Sistema PJSFC operates are open to competition. The telecom, retail, media, tourism, private healthcare, pharma, property development, forestry and agricultural markets in Russia and elsewhere are highly competitive. Any inability of Sistema Group’s companies to compete efficiently may have a material negative impact on the business, performance, financial situation and development prospects of the Corporation.

Brand quality and reputation

Developing and maintaining brand awareness for the Group’s companies is crucial to shaping public opinion around their existing and future products and services. Sistema believes that company brand is becoming increasingly vital in highly competitive markets.

Successful development and improvement of brand awareness depends in large part on the efficiency of marketing and ability to provide quality products and services at competitive prices. Effort and money spent on brand development may prove greater than the income yielded, which means potential financial losses for the Group’s companies.

Sistema’s reputation may be damaged in the event of unethical business conduct, professional errors (including medical), gross negligence, abuse of human rights, leakage of inside information and corrupt practices at Sistema and/or its portfolio companies.

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3.7 CORPORATE GOVERNANCE SYSTEM

Corporate governance principles

Sistema believes that high-quality corporate governance and information transparency are important elements of the Corporation’s strategy as an investment company. Sistema aims to meet best international standards of corporate governance and transparency, and improve its corporate governance practices on an ongoing basis through timely implementation of required changes and high efficiency of managerial decision-making.

Sistema’s corporate governance principles  Clear and effective procedures for taking investment decisions;  Reasonable transparency of management processes for investors and partners;  A dividend policy that takes due account of both the reasonable expectations of investors and Sistema’s financial resources;  Professionalism of the Board of Directors and its active involvement in strategic planning, management and oversight of business processes;  Special focus of the Board of Directors on related-party transactions and potential conflicts of interest.

Sistema is guided by these principles in all of its activities, including strategic and financial management, HR and social policy, preparation of financial statements, control and audit, and risk management. These principles form the foundation for strengthening the Corporation’s investment case.

In its corporate governance practices Sistema abides by applicable legislation, the Listing Rules of Moscow Exchange, the recommendations of the Russian Corporate Governance Code44 and the guidelines set out in the UK Corporate Governance Code4546. In accordance with Russian legislation and best international practice, the Corporation’s Charter and internal regulations define its corporate governance principles and procedures, as well as the composition, procedures and powers of its governance and control bodies. The Corporate Governance and Ethics Code of Sistema sets out the additional commitments of the Corporation, its top management and employees in terms of social responsibility, transparency and ethical business principles.

Sistema’s corporate governance bodies . General Meeting of shareholders; . Board of Directors; . President; . Management Board.

General Meeting of shareholders The General Meeting of shareholders is the supreme governing body of the Corporation. The activities and powers of the General Meeting of shareholders are governed by Russian legislation, the provisions of

44 The text of the Corporate Governance Code recommended by the letter of the Bank of Russia No 06-52/2463 dated 10 April 2014 is available at: http://www.cbr.ru/Queries/XsltBlock/File/48285?fileId=-1&scope=1518 (in Russian) 45 The conformity of Sistema's corporate governance practices with the standards set out in the Corporate Governance Code of Russia and the UK Corporate Governance Code is analysed in Annexes 5 and 6 to this report. If Sistema's corporate governance practices diverge from the standards recommended in the above documents, the Corporation provides an explanation of how it ensures that the balance of interests envisaged in applicable corporate governance standards is observed. 46 The text of the UK Corporate Governance Code is available at: https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0- d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf

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Sistema’s Charter and the Terms of Reference of the General Meeting of shareholders. The Corporation seeks to create the most favourable conditions for shareholders to participate in the General Meeting. Observance of shareholders' rights Proposing agenda items for the General Meeting of shareholders and nominating candidates to the Corporation’s governance bodies Shareholders who own at least 2% of the Corporation’s voting shares are entitled to propose items for the agenda of the Annual General Meeting of shareholders (AGM) and nominate candidates to the Corporation’s governance and control bodies. Such proposals should be submitted to the Corporation no later than 100 days after the end of the reporting year, in accordance with the Terms of Reference of the General Meeting of shareholders and other internal regulations of the Corporation.47 Candidates nominated by shareholders to the governance and control bodies of the Corporation are provisionally reviewed by the Nomination, Remuneration and Corporate Governance Committee of the Board of Directors.

i. Participation in General Meetings of shareholders and voting on agenda items. Sistema aims to ensure maximum protection of the right of shareholders to take part in the governance of the Corporation by participating in the General Meetings of shareholders, voting on agenda items and receiving income in the form of dividends.

To ensure shareholders have the right to take part in the General Meeting, all materials relating to the General Meeting’s agenda items are published on the Corporation’s website in Russian and in English (www.sistema.ru and www.sistema.com, respectively) at least 30 days before the date of the meeting. The notice of the General Meeting of shareholders, ballots and all other materials are also sent by mail to shareholders whose rights to the shares of the Corporation are recorded in the shareholder register, and to nominee shareholders in electronic form.

Each shareholder is entitled to take part in General Meetings of shareholders and to vote on agenda items either in person or through a representative (if the General Meeting is held as an in-person meeting of shareholders).

Shareholders may complete ballot papers and send them to Sistema ahead of the General Meeting. Sistema’s shareholders may also use the e-voting system available on the website of the Corporation’s registrar, JSC Reestr. To use this service, shareholders should apply for access to a personal shareholder account on the website of JSC Reestr. If a shareholder has a personal account on the e-government portal, they may get access to the service without applying to the registrar. More detailed information on the procedure for connecting to the e-voting service is available on the website of the Corporation’s registrar http://www.aoreestr.ru/shareholders/e-voting.

Holders of Sistema’s global depositary receipts (GDRs) may vote on General Meeting agenda items by a proxy vote in line with the established procedure via a depositary bank servicing Sistema’s GDR programme. In 2018, Sistema’s depositary bank was Citibank, N.A. For more information on the depositary bank and voting procedures please visit the bank’s website www.citiadr.idmanagedsolutions.com. Votes of GDR holders about whom information has been disclosed to the depositary are collected by the depositary bank via clearing systems and are included in the general ballot along with all votes cast for and against proposed draft resolutions, as well as abstentions.

47 If an Extraordinary General Meeting of shareholders is conducted and its agenda contains an item on election of the Board of Directors, shareholders who own a sufficient number of shares are entitled to nominate candidates to the Board of Directors. Proposals to this effect must be received by the Company no later than 30 days before the date of such a meeting.

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The results of voting on agenda items of General Meetings of shareholders held as in-person meetings are announced before the close of the meeting. After the minutes of the meeting are drafted, shareholders may also view the voting results on the Corporation’s website. ii.Dividend policy The Corporation announces the amount of dividends recommended by the Board of Directors and the record date in advance. Shareholders are thus able to take informed decisions with respect to disposing of their shares.

In determining the recommended amount of dividends for 2017, the Board of Directors took due account of the priority of the strategic goal of reducing the Corporation’s debt, and recommended that the General Meeting of shareholders approve dividends totalling RUB 1,061,500,000, or RUB 0.11 per share, thus supporting the Corporation’s deviation from the current dividend policy48.

After the end of the reporting period, the Board of Directors, taking into account the need to maintain a balance between reducing debt, continuing investment activities and ensuring returns for shareholders, recommended that the General Meeting of shareholders approve dividends for 2018 in the amount of RUB 0.11 per share.

To maintain a balance between the rights and interests of all shareholders and the Corporation’s ability to pay dividends, the Board of Directors, when determining the amount of dividends, will take into account the acceptable rate of debt reduction and the proportionality of dividends to the Corporation’s current cash flows. After achieving the goal of reducing the debt burden, the Board of Directors plans to return to consideration of dividend payments as a means of strengthening Sistema’s equity investment case.

Shareholders' access to the Corporation’s documentation An important guarantee of the right of shareholders to participate in managing the company is the right to access documents that the Corporation is obliged to provide to shareholders in accordance with article 91 of the Federal Law on Joint-Stock Companies. To exercise this right, shareholders should send a written request for access to the relevant documents to Sistema’s Corporate Secretary. After the time for providing the documents is agreed upon, the requested documents will be provided to the shareholder. When shareholders are granted access to confidential documents, they sign a written non-disclosure obligation, thereby guaranteeing the rights of all the Corporation’s shareholders are protected. If shareholders require any copies of documents, the shareholders bear the costs incurred by the Corporation (RUB 10 per page).

Information about General Meetings of shareholders in 2018 Annual General Meeting of shareholders Date and venue 30 June 2018, Moscow, 13/1 Mokhovaya St Form of the meeting Meeting (in-person) Items reviewed and decisions . Annual report and financial statements for 2017 were approved; taken . Dividend for 2017 of RUB 1,061,500,000, or RUB 0.11 per ordinary share (RUB 2.2 per GDR), was approved; . The Board of Directors and the Audit Review Commission were elected; . Auditors were appointed for RAS and IFRS audits for 2018. Attended Shareholders holding a combined 78.5% of votes

48 The current version of the Dividend Policy was adopted in April 2017.

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Date and reference number of 4 July 2018, No 1-18 the minutes

Board of Directors The Board of Directors is a collective governance body in charge of oversight and strategic management of the Corporation. Under Sistema’s Charter the responsibilities of the Board of Directors include: . Supervising the operations of the Corporation in general; . Formulating strategic and financial development plans; . Determining investment principles and criteria; . Assessing management’s performance; . Defining corporate governance principles; . Approving transactions and strategic projects in accordance with applicable legislation and the Corporation’s internal regulations.

The Composition of the Board The Board of Directors effective as of 31 December 2018 was elected at the AGM held on 30 June 2018. Independent directors account for 45% of the Board of Directors.

The Composition of the Board The Board of Directors of Sistema PJSFC effective as of 31 December 2018 was elected at the Company’s AGM held on 30 June 2018. Independent directors account for 45% of the Board of Directors.

Composition of the Board of Directors of Sistema PJSFC in 2018 (re-elected on 30 June 2018) 1. Vladimir Evtushenkov (Board Chairman) 49 2. Anna Belova50 51 3. Sergey Boev (Deputy Chairman of the Board of Directors until 31 March 2018) 4. Andrey Dubovskov 5. Felix Evtushenkov (Deputy Chairman of the Board of Directors until 12 October 2018) 6. Ron Sommer 7. Robert Kocharyan4 52 8. Jeannot Krecké4 9. Roger Munnings453 10. Mikhail Shamolin 11. David Iakobachvili454

The Board of Directors has 11 members.

Meetings of the Board of Directors Sistema’s Board meetings are held on a regular basis in accordance with the approved annual work plan of the Board of Directors, which is made based on Sistema’s strategic planning and reporting cycle.

49 Chairman and Deputy Chairmen of the Board of Directors were elected at the first Board meeting on 30 June 2018. 50 A. Belova was nominated to the Board of Directors by a group of minority shareholders. 51 Independent Director. 52 R. Kocharyan was recognised as independent by the Corporation in accordance with the Listing Rules of the Moscow Exchange. Information on this decision was disclosed on Sistema's website. 53 R. Munnings was recognised as independent by the Corporation in accordance with the Listing Rules of the Moscow Exchange. Information on this decision was disclosed on Sistema's website. 54 D. Iakobachvili was recognised as independent by the Corporation in accordance with the Listing Rules of the Moscow Exchange. Information on this decision was disclosed on Sistema's website.

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In 2018, the Board of Directors held 12 meetings: eight scheduled in-person meetings and four unscheduled meetings with absentee voting. The Board of Directors reviewed a total of 74 agenda items in 2018.

2018 2017 Number of in-person meetings 8 8 Number of absentee votes 4 7 Number of items in accordance with the Board’s work plan 48 46 Actual number of items reviewed by the Board 74 81

Over the reporting period the Board of Directors considered the following key items: 1) Sistema’s development strategy; 2) Sistema Group’s strategic planning cycle; 3) Investment policy, strategy of Sistema’s investment funds and priority areas for investment in 2018- 2019; 4) Managing and creating value for Sistema’s investments in the following areas: . Telecom assets; . Consumer (retail) assets, including e-commerce assets; . Agricultural assets; . Timber processing and pulp and paper assets; . Banking assets; . Assets in financial services and investment management in capital markets; . High-tech assets; . Real estate assets; . Healthcare assets; . Power grid assets; . Hotel assets. 5) Sistema’s results and performance against budget; 6) Budget planning, approval of the consolidated budget of Sistema PJSFC and management’s KPIs for 2018-2019; 7) Functional strategies (for financial management and financial planning, human resources management, corporate security, etc); 8) Management of the Corporation’s risks; 9) Report of the Internal Control and Audit Department; 10) HR matters and employee incentive systems; 11) Assessment of corporate governance including the results of assessment of the Board of Directors and Committees of the Board of Directors of Sistema PJSFC; 12) Corporate Social Responsibility; 13) Mandatory corporate procedures, including calling the AGM and developing the work plan of the Board of Directors; 14) Composition of Board Committees and determining the status of Board members; 15) Approval of internal regulations; 16) Approval of transactions, including acquisition of equity stakes.

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Subjects of the items considered by the Board of Directors in 2018

5% Business strategies, investments & new business segments 11% 32% 8% Appointments and HR policy

Corporate governance and securities 3% Approval of transactions

Approval of internal documents

16% Shareholding in portfolio companies, groups, JVs; branches 15% Financial reporting, planning and audit 10% Functional strategies

2017 2018 30

24

14 11 11 12 8 8 7 6 7 4 5 4 2 2

Business Appointments Corporate Approval of Approval of Shareholding Financial Functional strategies, and HR policy governance transactions internal in portfolio reporting, strategies investments & and securities documents companies, planning and new business groups, JVs; audit segments branches

Most of the items considered by the Board of Directors in 2018 related to the Corporation’s business strategy, value creation by its investments in various industries, HR policy and approval of transactions (including shareholdings in companies). In light of the goals of the Corporation for strategic and structural optimisation, a substantial proportion of items regarding business strategy and HR policy also focused on corporate governance at Sistema Group. i. Preparation for meetings and quorum of the Board of Directors Current preparation procedures for Board meetings are designed to ensure best use of the experience and expertise of Board members. Materials on the agenda items are published on the Board’s electronic portal at least 10 days before the meeting, which gives members sufficient time to form an informed opinion on all agenda items. Most agenda items (including approval of transactions) undergo a mandatory preliminary review at meetings of the Board’s Committees.

The Corporation has introduced a procedure of challenging speakers on key items of the Board’s agenda to enable Board members (as a rule, independent members) to conduct an in-depth review of materials and hold discussions with management. This makes it possible to increase the involvement of Board members in the development of the Corporation’s strategy.

Meetings of Sistema’s Board of Directors usually have a high attendance rate: the average quorum of meetings in 2018 was 95.5%.

Participation of Board members in meetings of the Board of Directors and its Committees in 2018

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Nomination, Investor Audit, Finance Remuneration and Ethics and Board of Strategy Relations and and Risk Corporate Control Directors Committee Dividend Policy Committee Governance Committee Committee Committee Attendance V. Evtushenkov 12/1255 12/12 A. Belova 12/12 13/14 7/8 5/5 S. Boev 11/12 8/12 10/10 8/8 A. Dubovskov 12/12 10/12 F. Evtushenkov 9/12 9/12 6/8 R. Sommer 12/12 5/12 14/14 10/10 R. Kocharyan 11/12 6/12 9/10 7/8 J. Krecké 12/12 14/14 5/5 R. Munnings 12/12 14/14 10/10 8/8 5/5 M. Shamolin 11/12 10/12 D. Iakobachvili 12/12 5/12 13/14 8/10 5/5

ii. Assessment of the work of the Board of Directors and its Committees Assessment of the Board of Directors' performance is an important tool that helps identify areas where the work of the Board of Directors may be improved.

In 2018, Sistema continued the practice of an annual comprehensive assessment of the work of the Board of Directors and all its Committees. The assessment was carried out in the form of a survey of members of the Board covering the following areas: (1) Composition and structure of the Board of Directors: number of Board members and balance of their knowledge, skills and industry experience; (2) Organisation of the work of the Board of Directors: content of agendas of the meetings, quality and timeliness of submission of materials, and quality of discussion at the meetings. (3) Functional areas of the Board’s work, including strategic management, finance and internal control, HR policy and corporate governance.

As a result of the analysis of the Board’s performance the total score on a 5-point scale was 4.33, an improvement compared to 4.16 score in 201656). Further increase in the quality of work with proposals and initiatives from the executive management team was indicated as an area for improvement.

Moreover, each Board member was requested to identify general strengths and weaknesses of the Board of Directors, and to indicate projects and functional areas where he or she could contribute. The assessment results illustrated the high effectiveness of the Board of Directors and its Committees.

Committees of the Board of Directors Sistema has five committees of the Board of Directors:

. Strategy Committee; . Audit, Finance and Risk Committee; . Nomination, Remuneration and Corporate Governance Committee; . Ethics and Control Committee; . Investor Relations and Dividend Policy Committee;

55 The first number shows the number of meetings attended by the Board member, the second number is the total number of meetings. 56 In 2016 and 2018, the Board of Directors was assessed according to the same methodology, which makes it possible to compare the results of analysis.

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The main role of the Committees is to assist the Board in preparation and adoption of decisions in specific functional areas, as well as to ensure prior in-depth scrutiny of matters put forward for consideration by the Board of Directors.

The status, procedures for nominating members, responsibilities and decision-making processes of the Board’s Committees are regulated by the Terms of Reference of the relevant committees as approved by the Board of Directors and published on the Corporation’s website in the Corporate Documents section http://www.sistema.ru/o-kompanii/korporativnoe-upravlenie/korporativnye-dokumenty/.

Functions of the Board committees Committee Functions . Analysis of strategic management issues of Sistema Group; . Reviewing the strategy planning methodology; . Reviewing M&A transactions with a value exceeding USD 100m; Strategy Committee . Reviewing Sistema Group’s investment projects related to entry into new geographies or industries and projects with significant state ownership. . Facilitating and supervising the processes of preparing and auditing the Company’s financial statements; . Assessing the quality of audit services based on the audit of Sistema’s financial statements and making preliminary recommendations to the Board of Directors with respect to the selection of RAS and IFRS Audit, Finance and Risk auditors; Committee . Assessing the risk management system and ensuring compliance with applicable legal requirements in financial reporting, audit and planning; . Provisional appraisal of transactions submitted to the Board of Directors; . Budgeting and financial modelling. . Facilitating the development of an efficient corporate governance system meeting international standards at the Corporation and its portfolio companies; . Preliminary review of candidates: a. for the Board of Directors of Sistema PJSFC; Nomination, Remuneration b. for the boards of directors of portfolio companies; and Corporate Governance c. for senior management positions at the Corporation and its Committee portfolio companies; d. for the position of the Corporation’s Corporate Secretary; . Development of the Corporation’s incentive and remuneration policies; . Organising the assessment of the performance of the Board of Directors. . Forming an efficient system of economic and corporate security; . Monitoring compliance with the requirements of the Ethics Code of Ethics and Control the Corporation; Committee . Introducing a system for preventing corruption and fraud and other misconduct related to violations of applicable legislation at Sistema Group companies. . Strengthening the Corporation’s investment case; . Supporting effective relations with the financial community; Investor Relations and . Developing Sistema’s dividend policy, including recommendations Dividend Policy Committee for the Corporation’s Board of Directors with respect to the amount of payable dividends; . Protection of the rights and interests of Sistema’s shareholders.

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Members of the Committees of the Board of Directors of Sistema PJSFC in 2018*

Nomination, Investor Audit, Finance Remuneration and Ethics and Strategy Relations and and Risk Corporate Control Committee Dividend Policy Committee Governance Committee Committee Committee** V. Evtushenkov A. Belova S. Boev A. Dubovskov F. Evtushenkov R. Sommer R. Kocharyan J. Krecké R. Munnings M. Shamolin D. Iakobachvili Independent; Independent; Non- Independent; Non- Independent; Non- Members of the Independent; Non- Non- Executive; Executive; Executive; Executive; Executive Executive; Committee Executive Executive Executive Executive

* Committee Chairman Members of the committee

** The President of Sistema PJSFC attends Committee meetings in the capacity of a permanent invitee and does not vote on the matters submitted for consideration of the Committee.

Matters considered by the Committees of the Board of Directors of the Corporation

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Committee Number of Topics discussed meetings in 2018

Strategy Committee 12  Value creation by the Corporation’s investments in various industries;  Investment projects;  Strategic management and planning system. Audit, Finance and Risk 14  Assessment of the quality of audit services, Committee results of the tender for provision of audit services, recommendations for the Board of Directors on appointing an external auditor;  Review and approval of the Corporation’s quarterly and annual financial reports, the annual report, annual budget and report on performance against the Corporation’s budget;  Review of management’s reports on risk management at Sistema, risk maps and mitigation plans;  Preliminary review and evaluation of transactions to be submitted to the Board of Directors. Nomination, Remuneration 10  Development of corporate governance at Sistema and Corporate Governance Group, including the structural transformation of Committee the Corporate Centre;  Incentive system and key parameters, performance assessment and bonuses for the key managers and employees of Sistema;  HR process and preview of candidates to top management positions at Sistema and nominees to the boards of directors of the key portfolio companies. Ethics and Control 8  Performance of the Internal Control and Audit Committee Department in 2017 and work plan for 2019;  Results of ethics assessment of the Corporation’s employees;  Compliance system at Sistema;  System for preventing fraud and corruption at Sistema. Investor Relations and 5  Communications and interaction with minority Dividend Policy Committee shareholders;  Amount of dividends and dividend policy of the Corporation;  The Corporation’s charity strategy  Market analysis and monitoring, perception of Sistema by the investment community. President The President is a permanent chief executive officer whose main tasks include managing the current operations of the Corporation and dealing with matters outside the remit of the General Meeting of shareholders, the Board of Directors and the Management Board, with the aim of ensuring the Corporation’s profitability and safeguarding the rights and legitimate interests of its shareholders. The President reports

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to the Board of Directors and General Meeting of shareholders of Sistema PJSFC. The President performs the functions of chairman of the collective executive body (Management Board).

On 13 March 2018, the Board of Directors approved Andrey Dubovskov’s appointment as President and Chairman of the Management Board of Sistema PJSFC for a three-year term.

Andrey Dubovskov Born in Alma-Ata (now Almaty) in 1966.

In 1993, graduated from the Gerasimov Institute of Cinematography.

Has extensive experience in telecoms companies: since 1993, held multiple managerial positions at Millicom International Cellular S.A., Millicom International Cellular B.V., LLC Regional Cellular Telecommunications, CJSC 800, and other companies in Moscow, Alma- Ata, Nizhny Novgorod, Yekaterinburg, Perm and Kiev.

2002-2004 – CEO, Tele2 (Nizhny Novgorod).

In 2004, joined OJSC MTS as head of the company’s Nizhny Novgorod branch.

2006-2007 – Director of the MTS Ural Macroregion.

In 2007, became First Deputy CEO of CJSC UMS (MTS Ukraine); in 2008, appointed head of the MTS Ukraine business unit.

2011-2018 – President of PJSC MTS.

On 13 March 2018, appointed President of Sistema PJSFC following approval by the Board of Directors.

Member of the Board of Directors of Sistema PJSFC and the Board of Trustees of Sistema Charitable Foundation. Management Board The Management Board of Sistema PJSFC determines methods for implementation of the Corporation’s development strategy, formulates development plans, determines and monitors investment processes and previews most matters subsequently submitted to the Corporation’s Board of Directors.

In 2018, the Management Board held 11 meetings and reviewed 43 agenda items in the following key areas: 1) Sistema’s development strategy; 2) Management strategy and structure of Sistema’s investment funds; 3) Sistema Group’s strategic planning cycle; 4) Development strategy, value creation and monetisation of Sistema’s investments in various industries; 5) Sistema’s functional strategies; 6) Budget execution, budget planning and key performance indicators; 7) Debt and liquidity management; 8) Sistema’s corporate social responsibility; 9) Review of specific transactions.

In April 2018, the powers of the previously elected Management Board were terminated, and the Board of Directors approved a new Management Board for a three-year term. As of 31 December 2018, the Corporation’s Management Board consisted of 14 members.

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Members of the Management Board of Sistema PJSFC as of 31 December 201857

1. Andrey Dubovskov President, Chairman of the Management Board 2. Igor Alyoshin Vice President for Security 3. Alexey Guryev Vice President for HR 4. Artyom Zasursky Vice President for Strategy 5. Alexey Katkov Managing Partner 6. Oleg Mubarakshin Managing Partner 7. Andrey Pilipenko Vice President for Government Relations 8. Vsevolod Rozanov Managing Partner 9. Artyom Sirazutdinov Managing Partner 10. Joshua Tulgan Vice President for External Relations 11. Vladimir Travkov Vice President for Finance and Investment 12. Ali Uzdenov Managing Partner 13. Sergey Shishkin Vice President for Corporate Governance and Legal Matters 14. Maxim Yanpolsky Managing Partner

Changes to Sistema’s Management Board in 2018

M. Shamolin 12 March 2018 Dismissed as President and Chairman of the Management Board.

A. Dubovskov 13 March 2018 Appointed President and Chairman of the Management Board.

A. Gorbunov 01 April 2018 Dismissed as members of the Management Board. F. Evtushenkov L. Monosov M. Cherny E. Chuikov V. Shukshin

I. Alyoshin 02 April 2018 Elected members of the Management Board. A. Katkov V. Travkov

J. Tulgan 24 July 2018 Elected a Board member.

A. Pilipenko 07 September 2018 Elected a Board member.

M. Yanpolsky 24 September 2018 Elected a Board member.

57 Short biographies of members of the Management Board and information about their shareholdings in Sistema PJSFC are available in Annex 1.

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Committees reporting to the President and the Management Board To improve management decision-making, Sistema has committees that report to the President and the Management Board, namely the Finance and Investment Committee, the Risk Committee and the Tender Committee.

These committees are permanent consultative collective bodies tasked with detailed analysis of current affairs and processes within their remit and with assisting the President and the Management Board in decision-making.

Finance and Investment Committee The responsibilities of the Finance and Investment Committee include: . Review of the Corporation’s investment projects at different stages from conception to completion; . Approval of financial models, business plans and key performance indicators of investment projects; . Recommendations regarding feasibility of projects, exit scenarios and sources of financing; . Review of external financing terms.

The Committee consists of 10 members. As of 31 December 2018, the Chairman of the Committee was the Corporation’s President Andrey Dubovskov, and the Deputy Chairman was Vladimir Travkov, Vice President for Finance and Investment.

In 2018, the Committee held 30 meetings.

An Expert Council reports to the Finance and Investment Committee and considers all of the Corporation’s new investment ideas and projects for acquisitions of assets in new and related industries, as well as in industries where Sistema already has a presence.

The Expert Council consists of 13 members. As of 31 December 2018, the Chairman of the Expert Council was Artyom Zasursky, Vice President for Strategy.

In 2018, the Expert Council held 12 meetings.

Risk Committee The Risk Committee’s responsibilities include: . Assessment of risks facing the Corporation and its portfolio companies; . Ensuring preparation of a risk register and a generalised risk map of Sistema; . Preparation of proposals regarding acceptable risk level for Sistema (Sistema’s risk appetite); . Coordination of risk management action plans and monitoring of their implementation.

The Committee consists of 10 members. As of 31 December 2018, the Chairman of the Committee was Vladimir Travkov, Vice President for Finance and Investment.

In 2018, the Committee held five meetings.

Tender Committee The responsibilities of the Tender Committee include: . Organising tenders for goods, works, and services; . Ensuring acquisition of goods, works, and services and sale of the Corporation’s property on the best terms available; . Ensuring transparency of purchasing procedures;

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. Facilitating prevention of corruption and other wrongdoing in purchasing.

The Committee consists of seven members. As of 31 December 2018, the Chairman of the Committee was chaired by Vladimir Travkov, Vice President for Finance and Investment.

In 2018, the Tender Committee held 24 meetings. Specific characteristics of risk management, internal control and internal audit systems Risk management Sistema’s risk management system employs a two-level approach, under which the risks identified at Sistema and its portfolio companies are consolidated to assess their impact on Sistema Group as a whole.

The enterprise risk management system (ERM) used in the Corporation addresses the following tasks:

. Identification of risks at all levels of the management (from the top to line management), which includes identifying risk owners and making risk passports; . Primary assessment of the materiality of identified risks and their analysis (VaR methodology); . Ranging risks by management levels; . Assessment of the aggregate influence of material risks on the Corporation’s key financial indicators (Monte Carlo modelling); . Development of plans to mitigate identified risks at all management levels; . Regular monitoring of performance against mitigation plans and assessment of their effectiveness; . Risk monitoring, quarterly reports on risks facing the Corporation.

Sistema’s risk management procedures are carried out by a dedicated risk management unit.

The Corporation’s risks are monitored on a quarterly basis by Sistema’s Management Board and Risk Subcommittee, which review the effects of mitigation and response measures taken and reassess persisting and/or new risks.

Sistema’s senior executives make regular reports on risk management at the Corporation to the Audit, Finance and Risk Committee. The annual report is submitted to the Board of Directors of Sistema PJSFC.

Internal control system The Internal Control Policy was approved by the Corporation’s Board of Directors and is an internal top level document describing the key principles of internal control as a continuous and integrated process that involves all units and governance bodies of the Corporation.

The key objectives of the internal control system are: . Creating control mechanisms that will ensure efficient business processes and the implementation of the Corporation’s investment projects; . Ensuring the safety of the Corporation’s assets and efficient use of its resources; . Protecting the interests of the Corporation’s shareholders and preventing and resolving conflicts of interest; . Creating conditions for timely preparation and submission of reliable reports and other information that is legally required to be publicly disclosed; . Ensuring the Corporation’s compliance with applicable laws and requirements of regulators.

In accordance with the "three lines of defence" principle, the efficiency of the Corporation’s internal control system is ensured at three levels (in addition to the Board of Directors and the Corporation’s senior management):

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. Level 1: Heads of subdivisions and employees of the Corporation are responsible for assessing and managing risks and building an efficient internal control system within their remit; . Level 2: At this level, the function is performed by several subdivisions and Committees of the Corporation. For example:  The risk management function and the Risk Subcommittee are responsible for developing and monitoring the implementation of an effective risk management practice;  The Finance and Investment Committee of the Corporation approves and monitors the implementation of investment projects;  The Discipline Committee reviews matters related to breaches of the Ethics Code and disciplinary offences;  The Security Department is responsible inter alia for economic security, prevention of corruption, and information security. . Level 3: The Internal Control and Audit Department conducts independent assessments of the efficiency of the internal control system, as well as risk management and the corporate governance procedures. All of the Corporation’s employees in charge of various control procedures bear responsibility for the efficiency of such controls and risk management activities as prescribed in their job descriptions and internal regulations.

Internal audit The body in charge of internal control at the Corporation and the companies of Sistema Group is the Internal Control and Audit Department, which reports to the Board of Directors (functionally) and Sistema’s President (administratively). The head of the Department is appointed and dismissed by the President based on resolutions passed by the Corporation’s Board of Directors following preliminary approval by the Board’s Ethics and Control Committee.

The main objectives of the Internal Control and Audit Department are:

. Helping shareholders and management improve the internal control system by performing regular audits of the efficiency of the Corporation’s internal control, risk management and corporate governance systems; . Supplying management and shareholders with objective information on existing internal risks and their probability; . Enhancing awareness among the Corporation’s management team about the performance of Sistema Group companies; . Monitoring achievement of the goals of shareholders of the Corporation and Sistema Group companies.

To meet these objectives, the Internal Control and Audit Department carries out the following functions:

. Performing independent audits of individual operations, processes and units; . Assessing the effectiveness of the internal control system; . Assessing the effectiveness of the risk management system; . Assessing the effectiveness of the corporate governance system, preventing violations of legislation and the Corporation’s regulations, ensuring observance of professional and ethical standards and preparing recommendations for improving them; . Developing recommendations to remedy deficiencies identified and monitoring execution of remedial actions;

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. Monitoring compliance with procurement procedures; . Administering the Hotline and ethics assessment.

The Internal Control and Audit Department has all the resources and powers required to perform the above functions.

The Internal Control and Audit Department works closely with independent auditors, coordinates audits and offers consultations in the course of preparing the Department’s annual audit plans with regard to assessment of the efficiency of internal controls applied to financial statements, as well as during discussions and assessment of identified risks.

In 2018, the Internal Control and Audit Department conducted 49 audits to assess the effectiveness of the Corporation’s internal control, risk management and corporate governance systems. Audits performed by the Internal Control and Audit Department did not uncover any weaknesses or risks that could affect the sustainability of the Corporation’s business as a whole.

Regular reports on the results of the work of the Internal Control and Audit Department are reviewed by the Audit, Finance and Risk Committee and Ethics and Control Committee of the Board of Directors, and are also submitted for consideration by the Board of Directors at the end of the year.

Resolution of conflicts of interest Matters related to conflicts of interest are governed by the Corporation’s Code of Ethics. The Corporation has an ethics assessment procedure: all top managers of the Corporation annually (or as conflicts of interest arise) fill out Ethics and Conflict of Interest Declarations. All new employees must complete the training course and learn the requirements of the Code of Ethics and the procedure to fill out the Declaration.

In 2018, the Corporation held its ethics assessment for the third time. The results were reviewed by the President and the Ethics and Control Committee of Sistema’s Board of Directors. In most cases, declared conflicts of interest were not confirmed and did not require any resolution measures. However, action plans on conflict resolution were implemented with respect to several declarants in accordance with best corporate governance practice.

Ethics assessment makes it possible to identify and manage conflicts of interests in a timely manner, thus preventing shareholders' interests from being compromised.

External audit In compliance with the decision of the Audit, Finance and Risk Committee, the Corporation uses the following procedures to appoint the independent auditors of Sistema’s financial statements. The Committee performs an annual assessment of the quality of audit services received. If the quality of services provided by the current auditor is deemed insufficient, the Audit Committee organises a tender to hire a new auditor. If the quality is deemed sufficient, Sistema negotiates the price of services with the current auditor for the following period. According to the decision of the Audit, Finance and Risk Committee, a tender for external audit services should be held at least every five years to ensure the auditor’s impartiality and objectivity. Corporate governance across Sistema Group The quality of strategic planning and investment appeal of Sistema’s portfolio companies depends, inter alia, on the quality of the corporate governance procedures. To increase the value of its investments Sistema pays special attention to improving the quality of corporate governance at its portfolio companies.

The Corporation aims to carry out strategic management of its key portfolio companies through their boards of directors by including professional independent members with expertise in the companies' industries, as well as in strategy, finance, audit and corporate governance. Independent directors account for about one-

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third of members of the boards of key portfolio companies (depending on the level of the company’s organisational maturity).

The Corporation continuously improves its corporate governance system in order to increase efficiency and remain in line with best practice. Improving the quality of corporate governance processes at portfolio companies and attracting competent professionals to their boards of directors is designed to increase the quality of decision-making and the shareholder value of Sistema’s portfolio assets.

Boards of directors of portfolio companies ensure control and coordination, and support management in decision-making in the following functional areas:  Strategy and key transactions;  Budget planning;  HR policy;  Internal audit;

Development of the corporate governance system in 2018 Independent directors on the Corporation’s Board of Directors In 2018, 11 members were elected to the Corporation’s Board of Directors. Five of them qualify as independent directors or are recognised as independent according to Moscow Exchange’s Listing Rules and the Russian Corporate Governance Code. The current Board includes the following independent directors:

. Anna Belova; . Robert Kocharyan; . Jeannot Krecké; . Roger Munnings; . David Iakobachvili.

All of the Corporation’s independent directors have extensive experience in managing large organisations and strong professional reputations. They are therefore able to exercise independence in their judgements and freedom from the influence of the Corporation’s management and shareholders when making decisions. Roger Munnings and Jeannot Krecké, as members of the Audit, Finance and Risk Committee, are experts in finance and audit with extensive relevant experience.

Independent directors are directly involved in discussing and formulating the strategy of the Corporation. For this purpose, working groups headed by independent members of the Board and including representatives of the Strategy Function and the Finance and Investment Function are established to formulate substantiated positions of the Board of Directors on strategic issues related to development of the Corporation.

Managing Partners In 2018, Sistema adopted a partnership management model that allows key executives (Managing Partners) to share the risks and returns from investment activities with shareholders. Managing Partners are fully responsible for implementation of the investment strategies of their portfolio companies, including the creation and maintenance of effective corporate governance systems. In most cases, Sistema’s Managing Partners chair the boards of directors of their respective portfolio companies.

Incentives offered to Managing Partners are linked to increasing Sistema’s market capitalisation, maximising the value of assets under management and monetisation, and raising outside capital under management. Managing Partners co-invest in their portfolio assets, thereby sharing risks with the Corporation.

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Relations with minority shareholders A page for shareholders' questions has been created on the Corporation’s website in the Investors & Shareholders section. Any shareholder or potential investor interested in information about the Corporation can submit questions using the electronic form and get answers. That page also provides answers to frequently asked questions.

Incentive system In 2018, a new long-term incentive programme (over one year) for the Corporation’s employees was developed and approved – the Option Plan. The main focus of the Option Plan is increasing the Corporation’s market capitalisation, and the remuneration of key employees is linked to this.

Participants in the Option Plan are granted the right to receive a certain share of the amount of any increase in market capitalisation. The programme is designed for four years and represents a mechanism that directly links the goals of Sistema’s shareholders and managers.

A new version of the Policy on Remuneration and Compensations for Members of the Board of Directors will be submitted for consideration by the General Meeting of shareholders in 2019, and will link the amount of additional remuneration of members of the Board of Directors to any increase in Sistema’s market capitalisation in the reporting year.

Plans for development of corporate governance The Nomination, Remuneration and Corporate Governance Committee of Sistema’s Board of Directors each year develops and approves an action plan for improving corporate governance at Sistema in the following year. The plan for 2019 envisages the following activities: 1) Introducing changes to the system of remuneration payable to members of the Board of Directors in order to harmonise it with the incentive system for senior management (in the first half of 2019); 2) Introducing changes to the Corporation’s internal documents regulating the activities of its governing bodies in order to integrate new provisions of corporate law (in the first half of 2019); 3) Improving the management structure of the Corporation’s investment funds and determining the remuneration policy for the funds' management (during 2019); 4) Formalising a succession plan for key managers of the Corporation (during 2019).

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3.8 REMUNERATION POLICY APPLIED TO BOARD MEMBERS AND SENIOR MANAGEMENT

Remuneration policy applied to Board members of Sistema PJSFC Remuneration for the work of members of the Board of Directors is calculated and paid in accordance with the Policy on Remuneration and Compensations Payable to Members of the Board of Directors of Sistema PJSFC58.

Basic remuneration of members of the Board of Directors Basic remuneration of members of the Board of Directors amounts to RUB 13.7m or RUB 17.8m per year depending on whether a director is a tax resident of Russia. Basic remuneration is paid to Board members in cash in equal quarterly instalments.

Supplementary remuneration of members of the Board of Directors In accordance with the Policy on Remuneration and Compensations Payable to Members of the Board of Directors of Sistema PJSFC effective in 2018, additional remuneration of members of the Board of Directors is paid once a year in the form of ordinary shares of Sistema PJSFC subject to achievement of the Corporation’s investment targets in the reporting year: (i) the arithmetic mean of TSR and iTSR exceeds or equals CoE59, or (ii) TSR exceeds or equals the amount of change of the MSCI index (ΔMSCI), provided that iTSR exceeds or equals CoE. The number of ordinary shares to be provided to members of the Board of Directors is calculated using the following formula:

Amount of remuneration in monetary terms For the purpose of calculating the Weightednumber of averageshares to price be transferred of one share to members of the Board of Directors, the amount of remuneration in monetary terms is equal to the amount of basic remuneration less applicable taxes, and the weighted average price of one share is calculated based on the price of the Corporation’s global depositary receipts during the month preceding the date of the Annual General Meeting of shareholders.

In 2019, the General Meeting of shareholders of the Corporation will be asked to approve a new version of the Policy on Remuneration and Compensations Payable to Members of the Board of Directors of Sistema PJSFC in which the terms of payment and the amount of additional remuneration are harmonised with the long-term management incentive scheme. Additional remuneration will be payable only subject to growth of Sistema’s market capitalisation in the relevant financial year. The amount of additional remuneration is set as a variable amount equal to 0.1% or 0.125% (depending on tax residency) of the increase in capitalisation for the financial year, but in any case not higher than the amount of basic remuneration less applicable taxes.

Remuneration for performance of additional duties Board members who perform additional duties, i.e., the Chairman of the Board, Deputy Chairman of the Board and Chairmen of the Board Committees, receive remuneration on a quarterly basis in the amount stipulated by the Policy on remuneration and compensations payable to members of the Board of Directors of Sistema PJSFC.

Compensations and other conditions

58 Approved by the General Meeting of shareholders on 27 June 2015. 59 This investment target was not achieved in 2018, since TSR was -32.9% and iTSR was 7%, while CoE was 17% and ΔMSCI was -5.5%. CoE represents the minimum level of return that a company must provide to its shareholders for the expectation of profit and risk. CoE is calculated as the sum of risk-free returns (such as government bonds) and the risk premium associated with investing in the stock market, taking into account the capital structure of the asset in question and country risk.

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Members of the Board of Directors are reimbursed for expenses incurred during performance of their duties, including participation in meetings of the Board of Directors and Board Committees.

Sistema PJSFC insures the liability of members of the Board of Directors.

Sistema PJSFC does not grant loans to members of the Board of Directors.

Remuneration policy applied to senior management of Sistema PJSFC Short-term incentive system The short-term (up to 1 year) incentive scheme for the top managers of Sistema PJSFC in 2018 consisted of:

. A fixed monthly salary determined in line with the internal system of job categories (grades); . Bonuses paid for project implementation and generating cash income. Remuneration is paid based on employees' individual performance and positive cash flow generated by projects implemented by the teams of Managing Partners and Departments of Sistema. Payments may amount to up to 20% of cash income.

For the purpose of calculating bonuses, cash income means the increase in the value of an asset (in case of an asset sale or an IPO) or the amount of dividends (in case of dividend payment), net of the following amounts:

. A hurdle rate determined by the Finance and Investment Committee of the Corporation prior to the commencement of a project or the acquisition of an asset; . Investment in an asset and project costs.

Long-term incentive system In 2018, a new long-term (more than 1 year) incentive programme for Sistema’s employees was developed and approved – the Option Plan. The main focus of the Option Plan is increasing the Corporation’s market capitalisation. Participants of the Option Plan are granted the right to receive a share of the amount of increase in market capitalisation. The programme is designed for four years and represents a mechanism that directly links the goals of Sistema’s shareholders and managers.

Co-investment programme In 2016, the Board of Directors approved a programme enabling Sistema's senior managers to co-invest in the Corporation and/or its portfolio companies (“the Co-Investment Programme”). The Co-Investment Programme is designed to align the interests of the Corporation’s shareholders and senior executives in terms of long-term management and development of portfolio companies by granting rights to acquire participation interests in the Corporation’s privately held portfolio companies with growth prospects.

The Co-Investment Programme is designed for the President, heads of departments, as well as employees of the Corporation who hold positions not lower than Executive Director or Senior/Chief Investment Director.

Participants of the Co-Investment Programme use their own funds to acquire: . Shares/interests in Sistema’s portfolio companies; and/or . Ordinary shares in Sistema PJSFC.

The amount of co-investment is limited by one average annual income of a participant.

Other terms and conditions No extra compensation above the level stipulated by Russian labour legislation is paid to the President or other senior executives in case of termination of employment.

Sistema does not pay remuneration to members of executive bodies for serving on the Management Board.

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The Corporation does not grant loans to senior executives.

Remunerations paid to Sistema’s Board members and senior management in 201860 Members of Sistema’s Board of Directors received the following remuneration in 2018:

2018 2017 Cash remuneration RUB 432,497,258 RUB 320,193,625 Remuneration for the work in the Board of Directors and additional duties, as well as salaries and bonuses for 2018 paid to those Board members who were also employees of the Corporation in 2018.61

Remuneration in the form of ordinary shares of RUB 062 RUB 218,287,983 Sistema PJSFC Remuneration to Board members for corporate year 2017-2018 and remuneration under the long-term incentive programme paid to those Board members who were also employees of the Corporation in 2018.2

Reimbursement of expenses incurred by Board RUB 1,191,028 RUB 2,477,710 members in connection with their duties

Members of Sistema’s Management Board63 received the following remuneration in 2018:

2018 2017 Cash remuneration RUB 1,705,947,92765 RUB 1,768,437,846 The amount includes fixed salaries and bonuses.64

Remuneration in the form of ordinary shares RUB 066 RUB 245,821,873 of Sistema PJSFC The shares transferred under the long-term incentive programme.

60 All figures in this section are given before the applicable income tax. 61 Excluding members of Sistema's Board of Directors who were members of its Management Board. 62 Additional remuneration in the form of shares was not paid to members of the Board of Directors in 2018 due to non-compliance with the conditions for its payment established by the Policy on Remuneration and Compensations Payable to Members of the Board of Directors of Sistema PJSFC. 63 Including the President of Sistema PJSFC. 64 Bonuses for 2018 were paid to Sistema's employees in February 2019. 65 In February 2019, members of the Management Board spent part of their cash bonuses for 2018 to purchase ordinary shares of the Corporation, which is consistent with Sistema's strategy to increase the shareholding of its employees in the Corporation. Members of the Management Board and other employees of Sistema PJSFC purchased a total of 19,669,389 shares in the Corporation. 66 Remuneration in the form of shares was not paid to members of the Management Board in 2018 due to non-compliance with the conditions for its payment established by the Corporation internal regulations.

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3.9 CORPORATE SOCIAL RESPONSIBILITY

RESPONSIBLE INVESTMENT

Sistema' responsibility as a strategic investor in Russia's socio-economic, innovative, and technological development is in the efficient management of portfolio assets and funds with a view to increasing their capitalisation, contributing to the sustainable development of industries and regions where Sistema operates, and building shared value for the state, business, society, and the environment.

ESG and corporate responsibility principles

Sistema shares the international financial community's commitment to integrating principles for responsible investment in asset valuation and decision-making practices and does business in conformity with the UN Global Compact and the Social Charter of Russian Business, taking due account of environmental, social, and governance (ESG) factors when choosing industries and assets to invest in and interacting with all those concerned: shareholders, investors, employees, partners, suppliers, consumers, the government, nonprofits, and local communities. When carrying out investments or social programmes, Sistema draws upon its versatile expertise and synergistic partnerships with the government, academia, and civic and nonprofit organisations.

Sistema sees its primary responsibility in creating and maintaining a level of strategic planning, corporate governance, and controls that is conducive to a reasonable balance of financial and non-financial (environmental, social, technological, etc.) risks and opportunities required for a sustainable development of the investment portfolio in terms of its impact on the economy, society, and nature.

Sistema implements ESG and responsible business principles through:

 choosing industries and assets for investment in accordance with the UN Sustainable Development Goals as well as national and regional priorities;  fair competition, non-discrimination, strict adherence to business ethics and human rights, and compliance with shareholder, antitrust, anti-corruption, employment, and environmental law;  a multi-level system of selection and examination of investment projects based on both financial and non-financial parameters and involving a collective deal approval mechanism;  assessment of potential effect of key industrial, regional, and other ESG risks on the financial stability of certain assets and Sistema's investment portfolio as a whole;  promotion of transparency and implementation of uniform corporate governance standards, best practices, advanced digital technologies, and certified management systems across the entire Sistema Group;  helping portfolio companies and funds in raising funds, finding partners, structuring deals, and developing businesses;  enhancement of operating efficiency and financial performance by refining critical business processes (procurement, supply chain management, corruption control, risk management, corporate communications, and CSR initiatives);  building synergies between assets and funds across the group via joint business and social projects, with and without outside partners;  consolidated management of the social investment portfolio through the corporate charitable foundation and by means of general corporate initiatives in CSR67;  monitoring compliance with sustainable development requirements put forward by shareholders and investors by means of regular publications of corporate non-financial reports.

Contribution to socio-economic development

67 Corporate Social Responsibility.

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Sistema and its portfolio companies make a significant contribution to forming a competitive labour market and procurement market (including purchases from small and medium-sized businesses), modernising infrastructure, industry and agriculture, increasing affordability of housing and essential products, goods and services, improving technological, social, food and drug security, developing the healthcare and education systems, and ensuring social and environmental well-being of regions through the implementation of large-scale investment programmes, digitalisation of businesses, support for innovative projects, as well as social, charitable, educational and volunteer programmes that contribute to building up intellectual capital, adapting and humanising new technologies, and increasing digital literacy, social activity and quality of life. To learn more, please refer to the Table “Contribution to socio-economic development” in the Annex.

Social investment in technology and human capital

The total volume of the Corporation's social investments over the past three years amounted to approximately RUB 4bn, of which about a third was spent by Sistema Charitable Foundation (hereinafter, “SCF”), which accumulates funds from Sistema Group companies for the Corporation's infrastructure programmes.

In 2018, Sistema Charitable Foundation thoroughly revised the strategy of charitable activities in accordance with the general development strategy of the Corporation, shifting the focus to technology- related projects, i.e. development and adoption of modern digital tools that can improve the efficiency of social sector practices. The foundation's activities were aimed at achieving two global objectives at once: development of human capital and creation of technologies to improve the quality of life. Over RUB 200m was allocated for the implementation of three key programmes: Lift to the Future, Culture and Arts, and Social Projects and Volunteering. Meanwhile, Sistema Group companies spent more than RUB 840m on charity in 2018, including 30% as contributions to SCF and 70% to implement their own social programmes.

The flagship corporate programme Lift to the Future, created seven years ago to support modern engineering education in Russia, has been transformed into a whole range of technological and educational initiatives. For instance, SCF in partnership with Sistema Group's Mikron, the largest Russian microelectronics enterprise, established its own supplementary education programme for student teams from Russia's nine leading technology universities. Publishing and literary projects in the field of technology have become a logical step for Lift to the Future. Almost 2,000 authors from 32 countries took part in the new project Future Time, which supports talented science fiction writers. The best sci-fi stories selected in this contest with a prize fund of RUB 1m were published as an anthology, and part of its proceeds will be used towards SCF's new literary projects. Also in 2018, the foundation, in partnership with the publishing house Delo, translated into Russian and published three foreign bestsellers about the way technology affects our lives. Educational and cultural institutions can get books from SCF's collection for free.

In the Year of Volunteers in Russia, Sistema started a project to help volunteer search and rescue teams. A lack of effective technologies to search for missing people in the natural environment prompted SCF to launch a large-scale research initiative Odyssey, which became the first attempt of the charitable sector to engage the tech community in solving social problems. Contestants with the best technical solutions to find a person lost in a forest without any means of communication in less than 10 hours – rain or shine, day or night – will be able to receive funding of up to RUB 75m. More than 120 engineering teams from 40 cities of Russia are already willing to offer their ideas to complete this socially significant task.

Support to volunteering also became part of the Social Projects and Volunteering programme. SCF launched two national contests with an aggregate grant pool of RUB 3m: Search Trajectory for volunteer rescuers across the country and Good Cause System for corporate volunteers in order to support the most relevant and socially important projects initiated by the Corporation's volunteer movement, which had been

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developing on a systemic basis for several years already. SCF received an award from the Russian national contest Good Cause Champions for its contribution to the development of corporate volunteering, while Medsi won in the Competence Volunteering category with its Volunteer Ambulance project, in which its doctors provided volunteer ambulance services to senior persons supported by the Ageing Gracefully Foundation. In two years of cooperation between Medsi and the foundation, volunteers performed off-site medical examinations of over 300 persons and organised several corporate charitable events around the International Day of Older Persons, during which Medsi employees collected over 400 kg of humanitarian supplies for nursing homes.

In 2018, SCF and Medsi continued provision of high-tech medical aid to war veterans under a programme developed in conjunction with the Moscow city government and the Moscow City Council of Veterans. Since 2015, over 2,000 WWII veterans and similar categories of citizens have received free outpatient care and rehabilitation services. Segezha Group annually gives drugstore certificates to war and labour veterans: in 2016-2018, almost 1,000 people received the company's subsidies for buying medications.

SCF has been supporting development in the key areas of the country's cultural life for many years. Last year, one-third of the total funds allocated for charity (or 2% of all investments in culture, sports and entertainment in the country) went to the Culture and Art programme, which includes support to the Russian State Museum and the new Cultural Weekend outreach project. As part of the long-term partnership programme with a budget up to RUB 500m to be disbursed through 2023, Sistema assisted the museum with organising large-scale exhibitions, which were visited by more than 220,000 people last year. The Cultural Weekend national project, which seeks to make museums more affordable and promote culture and art, gathered an unprecedented amount of visitors, 70,000 people in 10 Russian cities.

External assessment of sustainable development

Information openness and a continuous dialogue with stakeholders are the basic principles of Sistema's operations as a public company, reducing potential reputational risks and increasing the Corporation's attractiveness for investors and partners that take into consideration sustainable development efforts and independent ESG assessments.

Sistema views public non-financial reporting under GRI standards as an important component of its CSR and sustainable development management system. Since 2015, it has annually received public assurance of its consolidated reports on sustainable development from the Russian Union of Industrialists and Entrepreneurs (RUIE). In accordance with the best practices of responsible asset management, Sistema encourages its key portfolio companies and funds to disclose significant non-financial information. As of 2018, reports on CSR and sustainable development have been issued by MTS, Detsky Mir, Segezha Group, BPGC, and Sistema Charitable Foundation.

In June 2018, FTSE Russell, an analytical agency of the London Stock Exchange, upgraded Sistema's ESG rating and confirmed its status as a constituent of the FTSE4GOOD Index Series, which measures the performance of public companies in environmental, social and governance practices across more than 110 criteria, including labour relations, adherence to human rights, impact on local communities, anti-corruption practices, responsible supply chain management, and climate and environmental impact.

Since 2016, Sistema has invariably been among leaders of RUIE indices related to sustainable development, which became stock market indices in 2019. In 2018, the Corporation made it to the Top 5 companies in the national corporate transparency ranking68 of private and strategic Russian companies, getting maximum scores for disclosure of information on anti-corruption efforts and procurement, and high scores for corporate and strategic governance and sustainable development practices. The AK&M rating agency included Sistema in the first-ever social efficiency ranking of major Russian companies judged to be of

68 According to the annual survey conducted by the Russian Regional Network for Integrated Reporting.

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highest value to society per unit of ecosystem load. The Corporation was also ranked among the Top 20 companies for information openness. In addition, Sistema was declared Leader in Corporate Charity 201869.

Sistema was the only private listed Russian company to be included in the list of 250 best regarded international companies from the Forbes Global 2000 for reliability, work ethics, socially responsible conduct, quality of products and services, and as an employer. The list is compiled based on assessments of 15,000 respondents from 60 countries70.

69 According to the Russian national ranking of the Donors' Forum, PwC and the Vedomosti newspaper. 70 Global 2000: Best Regarded Companies 2018.

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Annex Table “Contribution to socio-economic development”

Material Key areas of Useful contribution / impact from Sistema Group's aspects of the CSR investments Corporation's impact Economic Sistema Group In 2018, Sistema's revenue grew by 6 p.p. faster than GDP. development. annually invests The Corporation generates about 1% of the economy's gross over RUB 100bn income and of all private investment in fixed assets in in the Russian Russia. economy and pays approximately Its aggregate investments in the development of structurally RUB 100bn to the important industries in the last 3 years exceeded RUB 385bn. consolidated Annual increase of the Group's capital investment was Russian budget. almost 7 times higher the country's overall result. Investment in the fixed assets of the Corporation's portfolio companies The Corporation equals the share of all capital expenses in GDP and exceeds contributes to the share of private investments by 6 p.p. higher labour productivity by In 2018, the Corporation accounted for: acquiring state-of- 15%+ of all investments in telecoms and IT; ~3.5% of all the-art machines capital investments in the timber, pulp and paper industry; and equipment 1%+ of all investments in retail - the money went to expand and digitalising the chain of stores selling affordable goods for children. and computerising production Aggregate taxes paid by Sistema Group to the federal and processes. regional budgets in 2016-2018 equalled almost RUB 244bn.

Innovation and Sistema is Sistema has signed an agreement with the Russian Academy technology. building an of Sciences for cooperation in research, technological, innovative innovative and expert activities related to the development ecosystem that and introduction of latest technologies in various sectors. comprises both own R&D centres Sistema's digital office has identified technologies for key and collaborations production assets of the Group the implementation of which with leading may enhance efficiency, optimise processes, develop research institutes innovative products and services for customers: machine and laboratories, learning and Big Data, the Internet of Things, virtual and in order to involve augmented reality, PropTech, Industry 4.0. a broad range of researchers, Sistema Asia, the Russian Export Centre, Skolkovo developers and Foundation and Enterprise Singapore, a state agency of startup businesses Singapore promoting enterprise development, have signed a in creating memorandum of understanding with regard to the solutions for the establishment of a Russian-Singaporean centre of digital digital economy innovation and information and telecommunication and smart technologies technologies. improving people's lives and

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business MTS has launched a corporate accelerator, MTS Startup efficiency. Hub, for high-tech startups in six areas: cloud technology, artificial intelligence, financial services, digital medicine, RTI invests automation of procurement and logistics, and online almost 20% of its education. Following two rounds of admissions to the annual revenue in accelerator, the company allocated RUB 30m for the R&D, both using development of startup businesses. its own funds and acting as a In 2018, MTS signed an agreement with Skolkovo contractor Technopark on cooperation in the development of Smart performing design City technologies and became the first Russian operator to and development deploy national IoT infrastructure on an NB-IoT platform, work for external which will be used in transportation, power generation, customers. manufacturing, the utilities sector, retail, healthcare, and other sectors. About 150 inventions, utility MGTS and NVision Group, which are part of MTS Group, models, and other assets of the Corporation are involved in the databases, development of comprehensive solutions for smart and safe integrated cities and enterprise automation. Notably, RFID chips for microcircuits, etc. identification manufactured by Mikron and a contactless fare are created within payment system developed by Sitronics and installed at 28 the Corporation's stations of the Moscow metro were successfully used during perimeter the World Football Cup 2018. annually. Mikron Group annually launches serial production of about 25+ technological 30 new RFID products for digitalisation of companies and startups in the business processes. portfolio of Sistema's funds. Leader Invest and Panasonic Russia signed a memorandum on long-term cooperation in the area of implementation of The Corporation innovative solutions for sustainable city development, is among the top 3 including energy-efficient technologies, security systems, corporate VC and video surveillance and analytical systems. investors in the Russian IT sector Segezha Group is developing state-of-the-art technologies of for the number of multi-floor wooden housing construction, using CLT panels deals in 2016- as an eco-friendly alternative to traditional construction 2018. technologies, with performance characteristics similar to that of concrete. Quick-mounting houses on the basis of prefabricated wooden structures are relevant not only for rural, but also for urban areas, in order to implement the national Housing and Urban Environment project, which, among other things, envisages replacement of dilapidated housing and construction of municipal housing. Ensuring Sistema ~130,500 popular jobs in the area of science and technology, employment of contributes to manufacturing and services in 2018, or 0.15%+ of the entire the local employment of Russian workforce. population, population, decent and safe including in In 2018, BPGC and the trade union of power industry work conditions, Russian regions, workers of Bashkortostan signed a collective bargaining and equal rural areas and agreement and an industry tariff agreement for 2019-2021, employment one-company which regulates social and employment relations and mutual opportunities. towns, while not obligations of the employer and employees. The term of

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allowing use of collective bargaining agreements at 6 key assets of Segezha illegal labour, Group was extended till the end of 2020. including child and forced labour. MTS has been carrying out an HR project named “MTS: a

With respect to its company for all ages” since 2017. Its goal is to hire, adapt personnel, the and retain older employees and to develop communications Corporation is between employees and customers of various ages. guided by the national labour In 2018, MTS Bank launched a pilot programme for legislation and the recruitment of young IT specialists, Digital Generation, norms of the which includes training and internships with a possibility of World Labour subsequent employment, which can become a great start for Organisation, programmers, developers, testers and analysts. including freedom of association. Social ~RUB 1bn of 1m+ people participated in programmes of Sistema's development. direct social corporate charitable foundation, an increase of almost 100% investment from 2017. annually. The foundation's total allocations for programme ~RUB 25bn implementation in 2016-2018 reached almost RUB 1.3bn. invested in the social sphere in In its CSR practices, Detsky Mir, which takes care of over form of payments 350,000 underprivileged children from more than 220 cities to the social, and towns of Russia, focuses on support to orphans and pension and disabled children. The company helps to improve the living medical insurance conditions at orphanages, and assists children with funds. socialising and unlocking their creative potential. In 2018, Detsky Mir's charitable foundation delivered RUB 590m worth of goods to supported institutions.

MTS has been carrying out a comprehensive charitable programme, Generation M, for several years already. It combines development of creative abilities of young people from Russian regions and assistance to severely ill children. Using innovative mechanisms of philanthropy, the company creates a mass movement of young donors and converts all activities on the project's online platforms into real money. The project has collected over RUB 17m for 49 surgeries for children.

In 2018, Segezha Group launched so-called “umbrella” social projects in all regions where it operates in four key areas: sports, environment, education and urban infrastructure. The company's social investment amounted to some RUB 75m in three years.

Starting from 2016, the Group's companies have regularly participated in the global initiative #GivingTuesday, which unites various social and charitable projects of Sistema, other companies, non-profits and individuals. Health The Corporation Medsi's social responsibility is associated with providing protection. accounts for 1%+ affordable comprehensive medical care for children and

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of all capital adults, ensuring continuous training of medical personnel expenditures in and promoting healthy lifestyles and ideas of social the Russian inclusion. The company aims at the new quality of medicine healthcare in and interaction with patients and partners, including through 2018. joint participation in charitable and social projects with specialised non-profit organisations. Development of high-tech full- 35,000+ people participated in 2017-2018 in the company's cycle P4 medicine flagship social and educational project Be Healthy With Medsi!, which included more than 250 events for employees with a patient- of partner companies, lectures, consultations, etc. centred approach

and launch of Since 2016, the joint initiatives of Medsi and Volnoe Delo effective and Foundation within the framework of the charitable “convenient” programme Women's Health, designed to fight breast cancer, drugs contribute have covered more than 1,000 people. to the improvement of As part of a social partnership with the Ageing Gracefully medical care and Foundation aimed at providing medical care to nursing homes, volunteer doctors examined more than 400 elderly public health. patients in one and a half years.

SmartMed telemedicine app, launched in 2018 jointly with MTS, has significantly expanded the availability of qualified medical care, including for residents of remote regions of the country.

Establishment of a large pharmaceutical complex on the basis of Binnopharm and OBL Pharm with its own R&D laboratory and several modern manufacturing facilities producing about 200 drugs in accordance with the GMP standard will help provide the population with affordable and domestically produced vital drugs, including hepatitis B vaccine and medicines for the treatment of cardiovascular, neurological and other diseases.

As part of its charity project Operation Toys, Detsky Mir equipped 400 playrooms in 129 children's medical institutions across the country over the past 5 years. Food security. Intensification of Sistema's agriculture assets are the leaders in testing and agriculture and adopting advanced agricultural and digital technologies for increase in production. Steppe AgroHolding implements no-till production farming, which preserves soil fertility in risk farming areas capacity help to with lack of moisture and reduces carbon dioxide emissions meet growing due to lower fuel consumption. The introduction of a new IT demand for high- platform in crop farming will significantly improve quality food efficiency by reducing costs and expanding the ability to products both for control production processes. It is expected that the domestic introduction of this system can reduce fuel consumption by consumption and 20% to 30% and consumption of plant protection products for export. and fertilizers by up to 10%.

Increase in capital In the dairy business, a similar platform has been introduced expenditures in long ago, which helped Steppe AgroHolding become a agriculture by leader in Russia in terms of milk yield per cow. 18.8% to RUB

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1.9bn in 2018, due Investments in the modernisation and improvement of the to the start of the efficiency of the agricultural sector help overcome the implementation of shortage of fresh domestically produced vegetables, fruit and new large-scale milk, which is necessary for good nutrition. investment projects in dairy farming and logistics, will insure further growth in production and optimisation of product delivery to consumers. Ensuring The Corporation As one of the largest private forest users in Russia, Segezha environmental seeks to maintain Group is consistently engaged in reforestation in Karelia, safety, a balance between Krasnoyarsk, Arkhangelsk, Vologda and Kirov regions. In preserving the needs of 2018, investments in reforestation increased by 4% and biodiversity and economic growth approached RUB 56m, with reforestation covering almost combating and the stability of 23,000 ha, up 25% YoY. The company adopts the intensive climate change the ecosystem, forest use model in the Republic of Karelia, which will allow and to reduce the it to significantly upscale its felling volumes in existing areas impact of its assets while also improving the state of forests. About 95% of the on the forest area leased by the company is certified according to environment the international standard for responsible forest management through rational of the Forest Stewardship Council (FSC). use of natural resources and Segezha Group consistently promotes environmentally adoption of friendly packaging as an alternative to plastics for both sustainable industrial and consumer needs in order to minimise the production and carbon footprint, as the carbon footprint of paper bags is consumption about 2.5x less than that of polyethylene bags. During the patterns. European Paper Bag Day, Segezha Group and Detsky Mir had a joint environmental initiative in 78 Russian cities, The Corporation distributing over 40,000 paper bags for free in almost 240 also promotes stores. Segezha Group's European paper packaging assets environmental ranked among top 30 companies according to EcoVadis, and awareness and international platform that assesses companies in terms of supports research CSR. and educational projects. In the first Russia Environmental Pulp and Paper Company Index compiled by WWF, Segezha Group ranked second among the largest pulp and paper companies and became the leader in use of raw materials from sustainable sources.

Since 2010, Sistema has been supporting projects of the Russian Geographical Society. The Corporation donated RUB 15m in 2018, which was used for 17 grant projects for popularisation of science and research into the geography of Russia and global environmental problems. Energy and The Corporation Segezha Group abides by the EC's energy efficiency resource aims at the careful directives that encourage companies to drive down the efficiency use of renewable energy component of product costs and stimulate the resources and production of bioenergy. The company takes technological systematically measures to cut the consumption of energy, water and other

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increases the share natural resources, organises the recycling of its production of energy from waste and treatment of waste water, moving towards waste- renewable sources free production technologies, limits emissions of greenhouse in its gases and other harmful substances, and localises the impact manufacturing on the environment. assets. In 2018, the company completed two large projects in this

area, the total investment in which over 4 years amounted to The introduction approximately RUB 4.3bn. The launch of a multi-fuel of “smart” biomass boiler using wood waste and sewage residue to technologies in produce steam at Segezha PPM will reduce fuel oil the power consumption by up to 30% and emissions by up to 40% per industry, as well year. as the principles of lean and cyclical The launch of biotechnological production meeting production in international quality standards as part of a comprehensive industry, reduces programme for recycling of sawmill by-products at energy losses, Lesosibirsk WP helps reduce the annual waste volume of energy costs of Russia's largest sawmill and export up to 70,000 tonnes of enterprises and the pellets per year. Compared with fossil fuels (coke, coal and carbon footprint. natural gas), biofuels produce an order of magnitude less CO2 emissions – one of the key causes of climate change. Annual

investments in the BPGC fully fulfils its investment obligations within the energy system of framework of the regulated asset base (RAB) method of Bashkortostan tariff regulation (applicable from 2014 to 2023), consistently amount to over implements the programme of complex modernisation of RUB 3.5bn; new Ufa's power grid complex using Smart Grid technology and construction and adopts a smart power control and metering system in adoption of Bashkortostan. innovations

ensure reliable Over 50,000 smart meters were installed in 2018, and their and high-quality total number reached about 220,000, which significantly energy supply to reduced energy losses and relieved consumers of costs of consumers in the maintenance of metering devices. Electricity losses in the region, as well as distribution grids of Bashkirenergo, which added more than the transit of 19,000 new consumers in 2018, decreased from 8.36% to electricity 8.23% compared with 2017, due to the technical policy between the centre pursued by BPGC. of the country and the Urals. The company was included in the independent ranking of 71 Russia's top 10 most reliable power grids in 2018 . Mikron was the first Russian microelectronics enterprise to develop and implement an energy management system five years ago, and in 2018 it confirmed compliance with the requirements of the international standard ISO 50001:2011.

71 According to a study of reliability of regional power grids in 70 constituent entities of the Russian Federation in 2018 conducted by the rating agency Energonews Media.

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Sistema's property development assets apply and promote green construction standards such as Green Zoom City – a list of practical recommendations on how to reduce energy consumption and improve the environmental friendliness of housing estate projects with sustainability in mind. Leader Invest advocates tax breaks for buyers of energy-efficient housing and together with Panasonic develops a pilot project of high-tech urban vertical greenhouses for growing vegetables in residential complexes. Education and The Group's hi- An extensive network of partner universities and research science. tech assets are institutes around RTI gives access to best scientists and latest actively involved knowledge not just to the business itself, but to every with academia member of the RTI ecosystem, from high schools under the aiming to enrich company's patronage to whole research institute the nation's departments, such as the Smart Radiophysics Systems system of Department at Mintz Radio Technology Institute or the engineering and Long-Range Communications Department at the Radio technological Technology and Telecommunication Systems Institute. RTI education, grow Group is an eager research and training partner of multiple talents to drive universities across the country, including Moscow Institute innovation in the of Physics and Technology, the National Nuclear Research future, and University, Moscow State Aviation Institute, Bauman promote cutting- Moscow State Technical University, Ogarev Mordova State edge learning University, Demidov Yaroslavl State University, Yaroslav- technology. the-Wise Novgorod State University, etc.

Sistema has more Since 2017, 17 key employees of RTI Group companies than ten research have been taking undergraduate courses at the Higher School & production of Systems Engineering of the nation's science powerhouse arms employing MIPT (Moscow Institute of Physics and Technology). over 15,000 engineers, RTI's microelectronic arm Mikron provided internship to designers, and over 50 students in 2018. researchers. After years of running an internal Academic Council, in Medsi invests 2017 Medsi took a step further by establishing its very own some 20 million Medical Academy designed to develop medical training roubles a year in programmes, which have already benefited over 1,500 MDs educating doctors from Medsi and beyond. On top of that, Medsi is a partner to numerous medical colleges, working hard to educate the and leads a MDs of tomorrow. In 2018 alone, the Academy launched thrilling more than 70 training cycles for over 950 medical partnership professionals. project to build an innovation-driven Another knowledge hub within the group, the MTS platform for Corporate University, has launched a new digital learning training doctors platform dubbed Smart University, inviting subscribers to from Medsi and take fun online courses. The first course in the project's other clinics and portfolio was English for high school students preparing for promoting best the final Unified State Exam. medical practices. Last but not least, Steppe AgroHolding signed a partnership agreement with Don State Technical University, aiming to help educate new agricultural talents while being a part of

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the university's research projects. The company will provide internship opportunities to students (both under- and post- graduate) that seek employment at one of the nation's industry leaders while also improving the skills and knowledge of existing staff, in addition to hands-on involvement in the university's research work. Human When bringing Not settling for merely hiring the best talents off the market, resources, together talents Sistema puts a lot of stock in cultivating desired business, expertise, and from across the professional, and soft skills, as well as instilling a corporate corporate country's many culture of responsibility and focus on results. culture. regions and industries, In 2018 Sistema increased its representation in the annual Sistema ranking Top 1,000 Russian Managers72 from 83 to 93 welcomes executives from 19 companies across the group. diversity and strives to bring Sistema hosts monthly Knowledge Days with master classes out the best for everyone as well as regular off-site Innovation Days professional and inviting the corporation's senior management and key personal potential employees to discuss the latest market and technology in each employee, trends. providing them with extensive At the end of 2018, Sistema's employees gained access to a learning and corporate online library (organised in conjunction with the career growth nation's non-fiction heavyweight Alpina Publisher) opportunities. accessible from mobile devices and offering more than 1,800 books on management, marketing, leadership, personal By prioritising effectiveness, etc. internal communications In December 2018, Sistema's headquarters had its first-ever and professional Bring Your Child to Work Day, welcoming some 100 kids growth, the aged 3 to 12. Corporation fuels personnel The 2018 Annual Sports Games, Sistema's signature athletic engagement, event that involves nearly all the companies under the which in turn Sistema umbrella and has always been about summer sports drives up business up until now, became a semi-annual activity after the efficiency. Corporation's eco hotel Izumrudny Les hosted the first-ever Winter Games.

Social & Sistema's time- For years now, Sistema has been an anchor investor in the Economic tested partnership economies and communities of Russia's Karelia and the Partnerships. model draws Altai republic, especially as regards tourism infrastructure. together the Agreements on social and economic cooperation designed to resources, create favourable economic, investment and social interests, and environments were also signed with the Vologda, Kirov, expertise of Kostroma, Samara, and Krasnodar regions. businesses, the government, and Throughout 2018, several companies of the Group signed local and more than 10 agreements with business partners and regional professional governments to develop digital infrastructures, healthcare, communities in agriculture, and the forest industry through inspiring the collective investment projects like CLT panel production at Segezha's effort to evolve Sokol Woodworking Plant and a new plywood mill near the

72Released by the Russian Managers' Association & the Kommersant Publishing House.

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the economy and city of Galich. MTS signed an agreement with the social administration of Saint Petersburg to digitise the city's urban environments in infrastructure, while Medsi undertook to develop a local geographies chain of clinics with broad diagnostic and therapeutic where the capabilities. Corporation operates. Steppe AgroHolding entered into a cooperation memorandum with the Rostov Region government to build A case in point, the region's largest dairy farm, a future supplier of raw milk MTS intends to complying to best European standards of quality and a invest 9.7 billion provider of over 150 jobs. roubles in the development of A long-standing strategic partnership between Sistema and innovation- the Altai Republic Government (that entered its third year in intensive 2018) extends to a large-scale philanthropic programme economy including a plethora of cultural and social initiatives, such as segments of the free tickets to the Anokhin National Museum, sightseeing Voronezh, tours, theatre shows, master classes for children, and Rostov, numerous other initiatives in support of the local social, Novosibirsk educational, and medical causes. To name just a few, since regions, 2016 Sistema has been helping local underprivileged Primorye, and families, donating books to the Chevalkov National Library, Ingushetia and giving grants for environmental projects. Joining through 2020. Sistema's efforts in the Altai Republic, Detsky Mir shipped 15 trucks with humanitarian supplies worth RUB 11.5m and Steppe sponsored 17 playrooms in 10 local hospitals. AgroHolding will invest some RUB 2bn in a state-of- the-art dairy “mega-farm” in the Rostov region.

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SISTEMA PJSFC AND SUBSIDIARIES

Consolidated Financial Statements for 2018 and Independent Auditor’s Report

106 SISTEMA PJSFC AND SUBSIDIARIES

TABLE OF CONTENTS

Page

STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR 2018 108

INDEPENDENT AUDITOR’S REPORT 109-114

CONSOLIDATED FINANCIAL STATEMENTS FOR 2018:

Consolidated statement of profit or loss 115 Consolidated statement of comprehensive income 116 Consolidated statement of financial position 117-118 Consolidated statement of changes in equity 119-120 Consolidated statement of cash flows 121-122

Notes to the consolidated financial statements

1. General 123 2. Basis of preparation 123 3. Significant accounting policies, judgements, estimates and assumptions 123 4. Segment information 126 5. Investigations into former operations in Uzbekistan 128 6. Discontinued operations 129 7. Business combinations 132 8. Capital transactions of subsidiaries 135 9. Revenue 136 10. Impairment of long-lived assets 139 11. Impairment of Financial assets 140 12. Income taxes 140 13. Employee benefits expenses 142 14. Property, plant and equipment 142 15. Investment property 144 16. Goodwill 145 17. Other intangible assets 148 18. Investments in associates and joint ventures 150 19. Other financial assets 153 20. Restricted cash 159 21. Inventories 159 22. Accounts receivable 160 23. Equity 161 24. Accumulated other comprehensive income 161 25. Borrowings 161 26. Lease Liabilities 164 27. Bank deposits and liabilities 166 28. Other financial liabilities 166 29. Provisions 167 30. losses per share 168 31. Capital and financial risk management 168 32. Derivative instruments 171 33. Fair values 172 34. Related party transactions 174 35. Subsidiaries 175 36. Non-cash transactions 177 37. Reconciliation of liabilities arising from financing activities 177 38. Legal claim of Rosneft and Bashneft 178 39. Contingencies and commitments 178 40. Application of new and revised International Financial Reporting Standards (IFRS) 181 41. Events after the reporting date 185

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STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

Management is responsible for the preparation of the consolidated financial statements that present fairly the financial position of Sistema Public Joint Stock Financial Corporation and its subsidiaries (the “Group”) as of 31 December 2018, and the results of its operations, cash flows and changes in equity for 2018, in compliance with International Financial Reporting Standards (“IFRSs”).

In preparing the consolidated financial statements, management is responsible for:

 Properly selecting and applying accounting policies;  Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;  Providing additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s consolidated financial position and financial performance;  Making judgements and assumptions that are reasonable and prudent;  Stating whether IFRSs have been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and  Making an assessment of the Group’s ability to continue as a going concern.

Management is also responsible for:

 Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group;  Maintaining adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the consolidated financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRSs;  Maintaining statutory accounting records in compliance with the Russian legislation and accounting standards;  Taking such steps as are reasonably available to them to safeguard the assets of the Group; and  Preventing and detecting fraud and other irregularities.

The consolidated financial statements of the Group for 2018 were approved by:

______Andrey Dubovskov Vladimir Travkov President and CEO Vice President, Finance and Investments (CFO)

1 April 2019

108 AO Deloitte & Touche CIS 5 Lesnaya Street Moscow, 125047, Russia Tel: +7 (495) 787 06 00 Fax: +7 (495) 787 06 01 deloitte.ru

INDEPENDENT AUDITOR’S REPORT

To the Shareholders and the Board of Directors of Sistema Public Joint Stock Financial Corporation

Opinion

We have audited the consolidated financial statements of Sistema Public Joint Stock Financial Corporation (“Sistema”) and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2018 and the consolidated statement of profit or loss, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2018 and its consolidated financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRSs”).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (the “IESBA Code”) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the Russian Federation, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms. © AO Deloitte & Touche CIS. All rights reserved. Why the matter was determined to be How the matter was addressed in the audit a key audit matter Diversified structure of the Group We obtained an understanding of the group-wide controls over the consolidation process and the Sistema is a holding company that owns mainly preparation of the consolidated financial controlling stakes in its subsidiaries, whose statements, including instructions of the Group’s results are included in the consolidated financial management to its subsidiaries. statements. The large number of entities of the Group and diversified nature of their operations Our audit approach was developed considering require the Group’s management to design and the Group’s diversified structure and associated implement group wide controls, including risks of material misstatement of the monitoring and control activities to ensure consolidated financial statements. It included timely, reliable and complete financial determination of necessary procedures and audit information received from its subsidiaries. scope in relation to each component’s financial information, depending on its significance for the Audit procedures regarding the financial Group and identification of risks of misstatement information of the subsidiaries included in of their financial information. The nature and the consolidated financial statements may be extent of our involvement in the component performed by us or by the auditors of those auditors’ work was also dependent on our subsidiaries (“components”) acting under our assessment of their professional competence supervision. As the group auditor, we are fully in the context of allocated scope. responsible for conducting the audit and forming our audit opinion. To obtain reasonable assurance of fair presentation of the components’ financial We focused on this matter, because the information, we assessed risks and determined diversified structure of the Group has a audit procedures performed by the component significant impact on our audit approach, auditors, and evaluated the results of the and the nature and extent of our involvement procedures. This included a critical analysis of in component auditors’ work is significant. the component auditors’ documentation, discussion of significant matters with the component auditors, component or Group management and, if applicable, designing and performing additional audit procedures.

We also performed procedures with respect to consolidation adjustments to the financial information of the subsidiaries in order to assess their nature, completeness and accuracy.

110 Why the matter was determined to be How the matter was addressed in the audit a key audit matter Significant non-routine transactions Our procedures included reviewing legal documents to fully understand the terms and In light of its strategy, the Group regularly conditions of each transaction and therefore the conducts complex acquisitions and disposals, associated accounting implications and debt restructurings and other significant non- evaluating documentation of management’s routine transactions. positions on how IFRSs were applied to the transactions. We focus on these matters because the appropriate accounting treatment of such In relation to the acquisition of the shareholding transactions is often complex and requires in Obolenskoe, we analyzed the legal documents exercise of significant judgement. and evaluated the appropriateness of the management’s conclusion that the Group does In the current period, this included, for not control Obolenskoe as at 31 December 2018 example, an acquisition of a shareholding in and that this shareholding should be recognized JSC “PE “Obolenskoe” (“Obolenskoe”) and an and accounted for as an investment in a joint anticipated joint venture with “Rostec” State venture. Corporation. See Notes 18 and 6 to the consolidated financial statements. In relation to the anticipated joint venture with “Rostec” State Corporation, we analyzed available information of the anticipated transaction and evaluated the appropriateness of the classification of the companies that will be transferred to the joint venture as a disposal group held for sale and of the presentation of their financial results in discontinued operations. Investigation in respect of discontinued Our audit procedures included: operations in Uzbekistan  review of signed agreements with the As disclosed in Note 5 to the consolidated authorities obtaining an understanding of the financial statements, subsequent to the year- settlement including any post settlement end, MTS PJSC (“MTS”), a subsidiary of the obligations; Group, reached a resolution with the U.S.  reading the minutes of the MTS Board Department of Justice (“DOJ”) and a settlement meetings; with the U.S. Securities and Exchange  inquiry of and discussions with the MTS Commission (“SEC”) relating to previously compliance function and external legal disclosed investigations concerning the former counsel about the facts and circumstances subsidiary of MTS in Uzbekistan. In connection related to the settlement; and with the agreements, MTS will pay the  evaluating the classification and aggregate amount of USD 850 million (RUB measurement of the recognized provision 59.1 billion at the exchange rate as of 31 as well as the adequacy of disclosures. December 2018).

We focused on this area because assessing the recorded provision and disclosure of contingent liabilities during 2018 required significant judgements and estimates to be made by management and the settlement reached with the authorities has a significant impact on the financial position of the Group.

111 Why the matter was determined to be How the matter was addressed in the audit a key audit matter

Early adoption of IFRS 16, Leases We obtained an understanding of the Group’s processes and procedures over the formation of As disclosed in Note 40 to the consolidated a registry of lease agreements and the financial statements, the Group has early identification of key inputs required in the adopted IFRS 16, Leases, as at 1 January 2018. measurement of right-of-use assets and lease The Group applied an acceptable transition liabilities. option provided by the standard and did not restate the comparative periods as a result of Our procedures included an analysis as to its adoption. whether the Group’s accounting policy was in line with IFRS 16, as well as verification of its We consider this to be a key audit matter appropriate application by means of a sample- because the early adoption of the standard based analysis of the Group’s accounting for required the Group to modify existing business particular lease contracts. This included an processes, IT systems and control procedures analysis of: had a material impact on the consolidated financial statements and required management  determining whether the contract is, or to apply significant judgment, in particular, contains, a lease; when determining whether the contract is, or  correctness of separation of lease contains, a lease, the lease term and discount components from non-lease components; rates.  correctness of the identification and classification of lease payments and the assessment of right-of-use assets and lease liabilities;  assessment of the discount rate;  assessment of the lease term;  compliance of methods used in measurement of right-of-use asset and lease liability with the requirements of IFRS 16; and  accuracy of management’s calculations.

We also reviewed the completeness and assessed the consistency of disclosures in the consolidated financial statements with the requirements of IFRS 16.

Other Information

Management is responsible for the other information. The other information comprises the information included in the annual report and quarterly report, but does not include the consolidated financial statements and our auditor’s report thereon. The annual report and quarterly report are expected to be made available to us after the date of this auditor’s report.

Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

When we read the annual report and quarterly report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

112 Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.  Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

113 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period, which constitute the key audit matters included herein.

Vladimir Kozyrev Engagement leader

1 April 2019

The Entity: Sistema Public Joint Stock Financial Corporation Audit Firm: AO Deloitte & Touche CIS

Certificate of state registration № 025.866, issued by the Certificate of state registration № 018.482, issued by the Moscow Registration Chamber on 16.07.1993 Moscow Registration Chamber on 30.10.1992.

Primary State Registration Number: 1027700003891 Primary State Registration Number: 1027700425444

Certificate of registration in the Unified State Register Certificate of registration in the Unified State Register № 77 011222220 of 11.11.2002, issued by Moscow № 77 004840299 of 13.11.2002, issued by Moscow Interdistrict Inspectorate of the Russian Ministry of Taxation Interdistrict Inspectorate of the Russian Ministry of Taxation № 46 № 39.

Address: building 1, 13 Mokhovaya st., Moscow, Russia, Member of Self-regulated organization of auditors “Russian 125009 Union of auditors” (Association), ORNZ 11603080484.

114 SISTEMA PJSFC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF PROFIT OR LOSS (In millions of Russian Rubles, except for per share amounts)

Notes 2018 2017

Continuing operations Revenue 9 777,405 693,424 Cost of sales (366,021) (330,597) Selling, general and administrative expenses (141,605) (153,162) Depreciation and amortisation (130,941) (95,100) Impairment of long-lived assets 10 (1,360) (8,011) Impairment of financial assets 11 (5,934) (5,748) Taxes other than income tax (6,411) (5,781) Share of the profit or loss of associates and joint ventures, net 18 1,715 3,030 Other income 7,540 5,625 Other expenses (5,786) (13,394)

Operating income 128,602 90,286

Finance income 8,421 8,056 Finance costs (68,024) (48,852) Expense under the Settlement Agreement 38 - (100,000) Currency exchange loss (16,771) (411)

Profit/(loss) before tax 52,228 (50,921)

Income tax expense 12 (32,809) (11,199)

Profit/(loss) from continuing operations 19,419 (62,120)

Discontinued operations Loss from discontinued operations 6 (57,723) (4,408)

Net loss for the year (38,304) (66,528)

(Loss)/profit attributable to: Shareholders of Sistema PJSFC (45,896) (94,602) Non-controlling interests 7,592 28,074

(38,304) (66,528)

Losses per share (basic and diluted), in Russian Rubles: 30 From continuing operations (1.84) (9.72) From continuing and discontinued operations (4.84) (10.01)

The accompanying notes are an integral part of these consolidated financial statements.

______Andrey Dubovskov Vladimir Travkov President and CEO Vice President, Finance and Investments (CFO)

1 April 2019

115 SISTEMA PJSFC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In millions of Russian Rubles)

Notes 2018 2017

Net loss for the year (38,304) (66,528)

Other comprehensive income/(loss):

Items that may be reclassified subsequently to profit or loss: Currency translation gain on foreign operations in subsidiaries 17,429 14,443 Currency translation gain/(loss) on foreign operations in associates and joint ventures 324 (499) Net fair value (loss)/gain on financial instruments (3,947) 5,307

Items that will not be reclassified subsequently to profit or loss: Unrecognised actuarial gain/(loss) 167 (41)

Other comprehensive income, net of tax 13,973 19,210

Total comprehensive loss (24,331) (47,318)

Attributable to: Shareholders of Sistema PJSFC (35,973) (78,387) Non-controlling interests 11,642 31,069

(24,331) (47,318)

The accompanying notes are an integral part of these consolidated financial statements.

______Andrey Dubovskov Vladimir Travkov President and CEO Vice President, Finance and Investments (CFO)

1 April 2019

116 SISTEMA PJSFC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (In millions of Russian Rubles)

31 December 31 December Notes 2018 2017

Assets

Non-current assets

Property, plant and equipment 14 422,321 411,467 Investment property 15 23,310 24,664 Goodwill 16 59,488 53,832 Other intangible assets 17 112,125 97,915 Right-of-use assets 26 194,247 - Investments in associates and joint ventures 18 34,507 20,783 Deferred tax assets 12 32,648 35,809 Other financial assets 19 95,557 104,395 Deposits in banks 186 - Other assets 15,618 18,169

Total non-current assets 990,007 767,034

Current assets

Inventories 21 97,131 81,401 Contract assets 7,297 - Accounts receivable 22 63,517 54,836 Advances paid and prepaid expenses 16,984 15,324 Current income tax assets 4,195 3,274 Other taxes receivable 18,641 17,190 Other financial assets 19 106,329 99,798 Deposits in banks 15,506 28,068 Restricted cash 20 8,614 8,591 Cash and cash equivalents 114,183 59,959 Other assets 3,090 2,174 455,487 370,615

Assets held for sale 6 19,911 -

Total current assets 475,398 370,615

Total assets 1,465,405 1,137,649

117 SISTEMA PJSFC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONTINUED) (In millions of Russian Rubles)

31 December 31 December Notes 2018 2017

Equity and liabilities

Equity

Share capital 23 869 869 Treasury shares 23 (4,759) (5,816) Additional paid-in capital 73,375 67,856 Accumulated loss (63,572) (17,375) Accumulated other comprehensive income 24 11,204 2,332

Equity attributable to shareholders of Sistema 17,117 47,866 Non-controlling interests 45,911 74,957

Total equity 63,028 122,823

Non-current liabilities

Borrowings 25 592,442 381,561 Lease liabilities 26 183,161 12,090 Bank deposits and liabilities 27 3,414 33,419 Deferred tax liabilities 12 40,161 38,160 Provisions 29 4,368 3,399 Liability to Rosimushchestvo 8,097 13,427 Other financial liabilities 28 1,473 6,514 Other liabilities 6,546 7,537 Total non-current liabilities 839,662 496,107

Current liabilities

Borrowings 25 105,893 139,403 Lease liabilities 26 24,206 2,765 Liability under the Settlement Agreement 38 - 80,000 Accounts payable 126,917 114,402 Bank deposits and liabilities 27 129,872 83,873 Income tax payable 2,775 1,833 Other taxes payable 20,409 14,378 Dividends payable 4,415 4,578 Provisions 29 73,244 13,038 Liability to Rosimushchestvo 8,113 9,601 Contract liabilities and other liabilities 9 50,141 48,789 Other financial liabilities 28 9,904 6,059 555,889 518,719

Liabilities directly associated with assets classified as held for sale 6 6,826 -

Total current liabilities 562,715 518,719

Total equity and liabilities 1,465,405 1,137,649

The accompanying notes are an integral part of these consolidated financial statements.

______Andrey Dubovskov Vladimir Travkov President and CEO Vice President, Finance and Investments (CFO)

1 April 2019

118 SISTEMA PJSFC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (In millions of Russian Rubles)

Accumulated other Retained comprehensive Equity earnings/ (loss)/income attributable to Non- Additional Treasury (Accumulated Currency shareholders controlling Share capital paid-in capital shares loss) reserve Other of Sistema interests Total equity

1 January 2017 869 87,369 (6,575) 91,290 (14,457) 705 159,201 57,770 216,971

(Loss)/profit for the period - - - (94,603) - - (94,603) 28,075 (66,528) Other comprehensive (loss)/income, net of tax - - - - (1,187) 4,973 3,786 (1,326) 2,460 Total comprehensive (loss)/income - - - (94,603) (1,187) 4,973 (90,817) 26,749 (64,068)

Settlements under long-term motivation program of Sistema PJSFC - (2,240) 2,240 ------Accrued compensation cost (Note 13) - 1,484 - - - - 1,484 - 1,484 Purchases of own shares - - (1,601) - - - (1,601) - (1,601) Capital transactions of subsidiaries (Note 8) - 8,674 - - - - 8,674 (11,135) (2,461) RCOM agreement (Note 6) - (27,431) - - 12,298 - (15,133) 30,632 15,499 Dividends declared by Sistema PJSFC - - - (14,062) - - (14,062) - (14,062) Sale of own shares - - 120 - - - 120 - 120 Dividends declared by subsidiaries ------(29,059) (29,059)

31 December 2017 869 67,856 (5,816) (17,375) (3,346) 5,678 47,866 74,957 122,823

119 SISTEMA PJSFC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (In millions of Russian Rubles)

Accumulated other (Accumulated comprehensive Equity loss)/ (loss)/income attributable to Non- Additional Treasury retained Currency shareholders controlling Share capital paid-in capital shares earnings reserve Other of Sistema interests Total equity

1 January 2018 869 67,856 (5,816) (17,375) (3,346) 5,678 47,866 74,957 122,823

Effect of new standards (Note 40) - - - 746 - (1,051) (305) 1,769 1,464 1 January 2018 (revised) 869 67,856 (5,816) (16,629) (3,346) 4,627 47,561 76,726 124,287

(Loss)/profit for the period - - - (45,896) - - (45,896) 7,592 (38,304) Other comprehensive income/(loss), net of tax - - - - 13,570 (3,647) 9,923 4,050 13,973 Total comprehensive (loss)/income - - - (45,896) 13,570 (3,647) (35,973) 11,642 (24,331)

Settlements under long-term motivation program of Sistema PJSFC - (1,057) 1,057 ------Settlements under long-term motivation program of subsidiaries - 1,511 - - - - 1,511 337 1,848 Accrued compensation cost of subsidiaries - (815) - - - - (815) - (815) Capital transactions of subsidiaries (Note 8) - 5,880 - - - - 5,880 (13,971) (8,091) Dividends declared by Sistema PJSFC (Note 23) - - - (1,047) - - (1,047) - (1,047) Dividends declared by subsidiaries ------(28,823) (28,823)

31 December 2018 869 73,375 (4,759) (63,572) 10,224 980 17,117 45,911 63,028

The accompanying notes are an integral part of these consolidated financial statements.

120 SISTEMA PJSFC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (In millions of Russian Rubles)

2018 2017

Cash flows from operating activities

Net loss for the year (38,304) (66,528)

Adjustments for: Expense under the Settlement Agreement - 100,000 Provision related to SEC investigation 55,752 - Depreciation and amortisation 132,019 96,490 Share of the profit or loss of associates and joint ventures, net (1,715) (3,030) Finance income (8,421) (8,069) Finance costs 68,024 48,983 Income tax expense 32,809 11,443 Currency exchange loss 20,069 398 Gain from discontinued operations - (593) Profit on disposal of property, plant and equipment (5,173) (251) Amortisation of connection fees (3,904) (2,876) Impairment of loans to customers 704 360 Dividends received from associates and joint ventures 3,777 4,218 Non-cash compensation to employees 1,511 1,653 Impairment of long-lived assets 1,360 8,061 Impairment of financial assets 5,935 5,744 Other non-cash items 5,299 8,420 269,742 204,423

Movements in working capital:

Bank loans to customers and interbank loans due from banks (2,995) (12,432) Bank deposits and liabilities 14,136 7,938 Restricted cash (23) 1,507 Financial assets at fair value through profit or loss 2,974 (5,834) Accounts receivable (8,174) (1,795) Advances paid and prepaid expenses (1,679) 1,553 Other taxes receivable (2,386) (1,840) Inventories (27,402) (12,648) Accounts payable 9,997 (630) Subscriber prepayments 3,500 4,025 Other taxes payable 6,288 (1,531) Advances received and other liabilities (537) 11,025

Payments in accordance with the Settlement Agreement (Note 38) (80,000) (20,000) Interest paid (67,421) (46,261) Income tax paid (27,392) (28,898)

Net cash provided by operating activities 88,628 98,602

121 SISTEMA PJSFC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) (In millions of Russian Rubles)

2018 2017

Cash flows from investing activities

Payments for purchases of property, plant and equipment (93,754) (78,441) Payments for a data center by MTS (7,559) - Proceeds from sale of property, plant and equipment 6,533 7,745 Payments to obtain and fulfill contracts (5,645) - Payments for purchases of intangible assets (30,286) (26,003) Payments for businesses, net of cash acquired (4,324) (4,132) Payments for investments in associates and joint ventures (12,036) (5,260) Proceeds from sale of investments in affiliated companies 113 5,181 Payments for financial assets, long-term (17,316) (30,100) Proceeds from sale of financial assets, long-term 10,155 11,081 Payments for financial assets, short-term (23,514) (28,139) Proceeds from sale of financial assets, short-term 43,280 34,594 Interest received 9,356 8,011 Other (2,938) (1,739)

Net cash used in investing activities (127,935) (107,202)

Cash flows from financing activities

Proceeds from borrowings 398,905 215,956 Principal payments on borrowings (234,937) (150,357) Debt issuance costs (702) (111) Principal payments of lease liabilities (21,044) - Acquisition of non-controlling interests in existing subsidiaries (21,424) (24,726) Payments to purchase treasury shares - (1,601) Proceeds from transactions with non-controlling interests 740 13,607 Dividends paid (29,952) (38,792) Proceeds from sale of own shares - 120 Cash outflow under credit guarantee agreement related to foreign currency hedge (981) (1,766)

Net cash provided by financing activities 90,605 12,330

Effect of foreign currency translation on cash and cash equivalents 3,408 (3,961)

Net increase/(decrease) in cash and cash equivalents 54,706 (231)

Cash and cash equivalents at the beginning of the year 59,959 60,190

Cash and cash equivalents at the end of discontinued operations (482) -

Cash and cash equivalents at the end of the year 114,183 59,959

The accompanying notes are an integral part of these consolidated financial statements.

122 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

1. GENERAL

Sistema Public Joint Stock Financial Corporation or Sistema PJSFC (the “Company”, together with its subsidiaries, the “Group”) invests in, and manages a range of companies which operate in various sectors of economy, including telecommunications, retail, high technology, finance, pulp and paper, utilities, pharmaceuticals, healthcare, agriculture, real estate and tourism. The Company and the majority of its subsidiaries are incorporated in the Russian Federation (“RF”). The Company’s registered address is building 1, 13 Mokhovaya street, 125009, Moscow.

The majority shareholder of the Company is Vladimir Evtushenkov. Minority holdings are held by certain top executives and directors of the Company. The shares are listed on the London Stock Exchange in the form of Global Depositary Receipts (“GDRs”) and on the Moscow Exchange.

2. BASIS OF PREPARATION

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards Board (“IASB”).

These consolidated financial statements have been prepared on the assumption that the Group will continue to operate in the foreseeable future. The Group’s net loss for the year 2018 was 38,304 million rubles, its short-term liabilities as of 31 December 2018 exceeded current assets by 87,317 million rubles. The Group determines that it generates sufficient operating cash flow and has sufficient cash available to repay the Group’s current liabilities, including, if necessary, unused credit facilities of RUB 180,946 million. The cash flow forecast prepared by the management of the Group for a period of at least twelve months after the end of the reporting period demonstrates the Group’s ability to pay off current liabilities within the terms set by the contractual obligations.

These consolidated financial statements were approved by the Company’s President and CEO and authorised for issue on 1 April 2019.

3. SIGNIFICANT ACCOUNTING POLICIES, JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

This note sets out significant accounting policies that relate to the Group’s consolidated financial statements as a whole and describes the critical accounting judgements that management has identified as having a potentially material impact on the Group’s consolidated financial statements. When an accounting policy is generally applicable to a specific note to the accounts, the policy is described within that note.

Summary of significant accounting policies

Basis of consolidation. The consolidated financial statements incorporate the financial statements of the Company, entities controlled by the Company and their subsidiaries. Control is achieved when the Company:

 has power over the investee;  is exposed, or has rights, to variable returns from its involvement with the investee; and  has the ability to use its power to affect its returns.

The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

123 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including:

 the size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;  potential voting rights held by the Company, other vote holders or other parties;  rights arising from other contractual arrangements; and  any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss from the date the Company gains control until the date when the Company ceases to control the subsidiary.

Profit or loss and each component of other comprehensive income is attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

Non-controlling interests. Non-controlling interests represent the equity in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are presented separately in the consolidated statement of profit or loss and within equity in the consolidated statement of financial position, separately from parent shareholders’ equity.

Functional currency. Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The functional currency of the Group and the majority of its subsidiaries operating in Russia is the Russian Ruble (“RUB”). The presentation currency of the consolidated financial statements of the Group is also the Russian Ruble.

Sources of estimation uncertainty

In the application of the Group’s accounting policies management is required to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Lease liabilities. The Group uses management’s judgement to estimate:

 Lease term. The lease term corresponds to the non-cancellable period of each contract except in cases where the Group is reasonably certain of exercising renewal options. The Group also considers the cases where the Group is reasonably certain of not exercising early termination options. When assessing such options management assesses residual useful life of the asset located on the leased site, investment strategy of the Group and relevant investment decisions and duration of the renewal and early termination options.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

 Discount rate. When calculating the present value of the lease payments the Group uses the incremental borrowing rate. Discount rate is determined for each asset based on the incremental borrowing rate at the inception of the contract. As of 1 January 2018 the weighted average borrowing rate applied by the Group to discount its lease liabilities amounted to 9.54%.

Stage of completion of project type contracts. The Group uses management’s judgement to estimate stage of completion to recognize revenue under project type contracts. This estimate is based on costs forecasts and calculations and historical experience on similar projects.

Impairment of financial assets. The Group regularly reviews its financial assets to assess for impairment. The Group uses management’s judgement to estimate allowance for Expected Credit Losses (ECL) for financial assets at amortized cost. ECL are measured in a way that reflects the unbiased and probability-weighted amount, the time-value of money and reasonable and supportable information at the reporting date pertaining to past events, current conditions and forecasts of future economic conditions.

ECL are measured as probability-weighted present value of all cash shortfalls over the expected life of each financial asset. For receivables from financial services, ECL are mainly calculated using a statistical model based on three major risk parameters: probability of default, loss given default and exposure of default.

The estimation of these risk parameters incorporates all available relevant information, not only historical and current loss data, but also reasonable and supportable forward-looking information reflected by the future expectation factors. This information includes macroeconomic factors (unemployment rate, inflation rate) and forecasts of future economic conditions. Significant changes in risk parameters could affect the estimated amount of ECL.

Impairment of long-lived assets. IFRS requires management to perform impairment tests annually for indefinite lived assets and, for finite lived assets, if events or changes in circumstances indicate that their carrying amounts may not be recoverable. Impairment testing requires management to judge whether the carrying value of assets can be supported by the higher of the fair value of the asset or the net present value of future cash flows that they generate. Calculating the net present value of the future cash flows requires assumptions to be made in respect of highly uncertain matters.

Deferred tax assets. Deferred tax asset is recognized for all temporary deductible differences, provided in case that there is a taxable profit in respect of the temporary deductible differences could be utilized. The valuation of probability is based on management estimation of future taxable profit.

Fair value measurements. Some of the Group’s assets and liabilities are measured at fair value for financial reporting purposes. Where the fair value of assets and liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques, including discounted cash flow models. The inputs to these models are taken from observable markets where possible, but when this is not feasible, a degree of judgment is required in establishing fair values. Information about assets and liabilities measured at fair value on recurring basis is disclosed in Note 33.

Useful lives of property, plant and equipment and intangible assets. Estimates may change due to technological developments, competition, changes in market conditions and other factors and may result in changes in the estimated useful life and in the amortization or depreciation charges. Technological developments are difficult to predict and management views on the trends and pace of development may change over time. The estimated useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Provisions and contingencies. The Group is subject to various legal proceedings, disputes, claims and regulatory reviews related to the Group’s business, licenses, tax positions and investments, where the outcomes are subject to significant uncertainty. Management evaluates, among other factors, the degree of probability of an unfavourable outcome and the ability to make a reasonable estimate of the amount of loss or related expense. Unanticipated events or changes in these factors may require the Group to increase or decrease the amount recorded or to be recorded for a matter that has not been previously recorded because it was not considered probable. See Notes 29 and 39 for further information.

4. SEGMENT INFORMATION

As a diversified holding corporation, the Company invests in a range of businesses, which meet its investment and return criteria. The Company has determined that the chief operating decision maker (“CODM”) is its Management Board. Information reported to the Management Board for the purpose of resource allocation and the assessment of segment performance is focused on each individual business. No operating segments have been aggregated in arriving at the reportable segments of the Group. The Group’s reportable segments are businesses that offer different products and services and are managed separately.

In connection with the acquisition of 28.63% share in MTS Bank by Mobile TeleSystems (“MTS”) in 2018 (Note 8), information reported to the Management Board for the purpose of resource allocation and the assessment of segment performance is prepared together for MTS Bank and MTS. As a result, MTS Bank results are included in the MTS operating segment. Segment data for a prior period presented for comparative purposes was restated to reflect this change.

The Group’s reportable segments are Mobile TeleSystems , Detsky mir, RTI and Corporate. MTS is one of the leading telecommunications group in Russia and the CIS, offering mobile and fixed voice, broadband, internet access, pay TV as well as content and entertainment services in Russia, Ukraine and Armenia. Reportable segment MTS also includes results of MTS Bank, which provides banking services rendered to customers across regions of Russia. Detsky Mir is the largest retail chain in the children’s goods market in the Russian Federation and Kazakhstan. Activity of Detsky mir is the sale of children’s clothing and goods through retail and internet stores. RTI is a Russian industrial holding, which develops and manufactures high-tech products and infrastructure solutions in the fields of radio communication and space technology, threat monitoring and control solutions, microelectronics and system integration. Corporate segment comprises the Company and entities, which hold and manage the Company’s interests in its subsidiaries, joint ventures and associates. The Other category includes other operating segments including East-West United Bank (EWUB), Segezha Group, Sitronics, Kronshtadt Group, Binnopharm, Medsi, Agroholding Steppe, Sistema Venture Capital, Intourist, Leader Invest, Bashkirian Power Grid Company (“BPGC”) and Business Nedvizhimost, none of which meets the quantitative thresholds for determining reportable segments.

The accounting policies of the operating segments are the same as those described in the significant accounting policies. The Group’s CODM evaluates performance of the segments on the basis of operating income and OIBDA. OIBDA is defined as operating income before depreciation and amortisation.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The following is an analysis of the Group’s revenue and results from continuing operations by reportable segment for 2018 and 2017:

External Inter-segment Segment operating revenues revenue income/(loss) 2018 2017 2018 2017 2018 2017

MTS 486,385 456,868 4,576 4,148 112,379 94,046 Detsky mir 110,871 96,985 3 18 11,232 8,024 RTI 22,701 30,704 185 89 921 (5,772) Corporate 2,351 1,763 845 877 (11,946) (12,670) Total reportable segments 622,308 586,320 5,609 5,132 112,586 83,628

Other 155,097 107,104 3,582 1,509 18,611 5,160

777,405 693,424 9,191 6,641 131,197 88,788

Inter-segment eliminations (2,595) 1,498

Operating income 128,602 90,286

Finance income 8,421 8,056 Finance costs (68,024) (48,852) Expense under the Settlement Agreement - (100,000) Currency exchange loss (16,771) (411)

Profit before tax 52,228 (50,921)

The following is an analysis of the Group’s depreciation and amortisation, additions to non-current assets (comprising property, plant and equipment, investment property, other intangible assets and right-of-use assets) and other non-cash items (comprising impairment of certain long-lived assets, current assets and financial assets and gain on acquisition) by reportable segment:

Additions to Depreciation non-current assets and amortisation Other non-cash items 2018 2017 2018 2017 2018 2017

MTS 139,913 89,452 104,858 80,466 3,454 7,057 Detsky mir 6,674 2,501 9,100 1,818 220 121 RTI 2,496 3,014 1,739 1,582 1,032 926 Corporate - 1,538 565 566 914 1,402 Other 13,581 33,647 14,679 10,668 1,674 4,660

162,664 130,152 130,941 95,100 7,294 14,166

127 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The following is an analysis of the Group’s segment assets and liabilities by reportable segment:

2018 2017

Segment assets

MTS 931,891 694,302 Detsky mir 86,532 44,415 RTI 65,505 62,721 Corporate 115,494 115,990 Total reportable segments 1,199,422 917,428

Other 341,997 306,021 Total segment assets 1,541,419 1,223,449

Inter-segment eliminations (76,014) (85,800)

Consolidated total assets 1,465,405 1,137,649

Segment liabilities

MTS 838,525 533,303 Detsky mir 87,929 44,938 RTI 86,409 79,603 Corporate 249,141 226,833 Total reportable segments 1,262,004 884,677

Other 214,711 193,165 Total segment liabilities 1,476,715 1,077,842

Inter-segment eliminations (74,338) (63,016)

Consolidated total liabilities 1,402,377 1,014,826

As of 31 December 2018 and 2017, the amount of investment in MTS Belarus, an associate of MTS, included in its reportable segment assets was RUB 4,051 million and RUB 3,660 million, respectively. Other associates and joint ventures represent separate operating segments and are reported in the Other category.

The Group’s revenue from continuing operations from external customers by location of operations and information about its non-current assets by location of assets are detailed below.

Revenue from external customers Non-current assets 2018 2017 2018 2017

Russia 690,824 621,226 752,969 547,528 Other 86,581 72,198 63,087 44,456

777,405 693,424 816,056 591,984

5. INVESTIGATIONS INTO FORMER OPERATIONS IN UZBEKISTAN

In March 2019, MTS reached a resolution with the United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) relating to the previously disclosed investigation of the its former subsidiary in Uzbekistan.

MTS consented to the issued administrative cease-and-desist order (the “Order”) by the SEC.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The United States District Court for the Southern District of New York approved a deferred prosecution agreement (“DPA“) entered by MTS and a plea agreement entered into a subsidiary of MTS in Uzbekistan. Under the agreements with the DOJ, MTS agreed to pay a total criminal penalty of USD 850 million (RUR 59.1 billion as of 31 December 2018) to the United States. The Group provided a provision of USD 850 million (RUB 55.8 billion as of the date of accrual), which was recognized as a part of discontinued operations in the consolidated statements of profit or loss for the year ended 31 December 2018.

Under the DPA and the Order, MTS agreed to appoint an independent compliance monitor. Pursuant to the DPA and the Order, the monitorship will continue for a period of three years, and the term of the monitorship may be terminated early or extended depending on certain circumstances, as ultimately determined and approved by the DOJ and SEC.

6. DISCONTINUED OPERATIONS

The Group enters into transactions to sell shares of subsidiaries, which result in the Group losing control over its subsidiaries. The results of disposed subsidiaries during the reporting period are included in the consolidated financial statements prior to the date of loss of control over subsidiaries. Information on the sale of shares in subsidiaries and their impact on the Group's results is provided below.

The amounts recognized in loss from discontinued operations are as follows:

2018 2017

Provision related to investigations into former operations in Uzbekistan (Note 5) (59,050) - Microelectronics assets results 1,687 587 Loss on disposal of SSTL (360) (428) SSTL results up to the disposal date - (5,587) Gain on disposal of SG-trading - 1,146 Loss on disposal of Targin - (125) SG-trading results up to disposal date (1)

Loss from discontinued operations (57,723) (4,408)

Contribution of microelectronics assets in a joint venture – In December 2018, RTI board of directors approved the contribution of microelectronics assets in a JV with Rostec. The Group concluded that microelectronics assets were available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups and their sale is highly probable as of 31 December 2018. The Group classified microelectronic assets as assets held for sale as at 31 December 2018, and presented their results for 2017 and 2018 as discontinued operations.

RCOM agreement – In November 2015, the Group signed an agreement with Reliance Communications Ltd. (RCOM) regarding the demerger of the telecommunication business of SSTL. On 31 October 2017, the Group completed the demerger. As a result of the transaction, the telecommunication business of SSTL, including licenses and obligations to the Department of Telecommunications of India (the “DoT”) for the 800-850 MHz spectrum, was transferred to RCOM. SSTL received a 10% equity stake in RCOM as a result of the additional issue of shares. If the DoT and courts confirm that SSTL spectrum may be used to deploy fourth generation networking without additional charges, SSTL will get the right for additional payment from RCOM. Non-controlling shareholders of SSTL received the right to exchange own SSTL shares to equivalent share of RCOM equity before 20 March 2018. The Group concluded that this puttable instrument should be classified as a financial liability. As a result, the Group derecognized accumulated non-controlling interests of RUB 30.6 billion, recognized a financial liability of RUB 1.1 billion with a corresponding effect on additional paid-in capital in 2017. As a result of the exchange SSTL’s equity share in RCOM was reduced to 7.48%. During 2018, the Group sold residual RCOM shares for a total consideration of RUB 3.2 billion.

129 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The results of microelectronics and SSTL are reported as discontinued operations in the accompanying consolidated statements of profit or loss for all periods presented. In accordance with IFRS, the consolidated statement of financial position and consolidated statements of cash flows were not retrospectively restated for discontinued operations.

Gain/(losses) of the disposed subsidiaries included in discontinued operations in the consolidated statements of profit or loss for 2018 and 2017 are as follows:

2018 2017 Microelectronics Microelectronics assets assets SSTL SG-trading

Revenue 12,242 11,065 3,898 1,754 Expenses (10,521) (10,234) (9,485) (1,783)

Profit/(loss) before income tax 1,721 831 (5,587) (29) Income tax (expense) / benefit (34) (244) - 28

Results for the period / up to disposal date 1,687 587 (5,587) (1)

Cash flows from discontinued operations included in the consolidated statements of cash flows are as follows:

2018 2017 Microelectronics Microelectronics assets assets SSTL SG-trading

Net cash received / (used) in operating activities 498 (60) (3,631) (124) Net cash (used)/received in investing activities (562) (346) 22 (53) Net cash used from financial activities (335) (541) - -

Total net cash used (399) (947) (3,609) (177)

The loss/gain on disposal is as follows:

2017 SSTL SG-trading

Net assets as at disposal date 12,233 (204) Accumulated other comprehensive income (16,619) - Fair value of consideration received 3,958 1,350

(Loss)/gain from disposal (428) 1,146

130 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Assets held for sale as of 31 December 2018 consisted of the following:

31 December

2018

Assets

CURRENT ASSETS:

Cash and cash equivalents 482 Restricted cash 2,150 Trade and other accounts receivable 2,628 Other financial assets 4 Contract assets 673 Advances paid and prepaid expenses 798 Inventories 3,881 Other current assets 188

Total current assets 10,804

NON-CURRENT ASSETS:

Property, plant and equipment 7,602 Other intangible assets 1,017 Other assets 301 Deferred tax assets 187

Total non-current assets 9,107

Total assets 19,911

Liabilities directly associated with assets classified as held for sale as of 31 December 2018 consisted of the following: 31 December

2018 Liabilities

CURRENT LIABILITIES Trade and other accounts payable 2,181 Contract liabilities and other liabilities 3,022 Income tax payable 13 Other tax payable 296 Borrowings 99 Lease liabilities 248 Other liabilities 328

Total current liabilities 6,187

NON-CURRENT LIABILITIES: Lease liabilities 295 Borrowings 12 Deferred tax liabilities 221 Other liabilities 111

Total non-current liabilities 639

Total liabilities 6,826

131 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

7. BUSINESS COMBINATIONS

Acquisitions of businesses are accounted for using the acquisition method, with assets and liabilities of acquired entities being measured at their fair values as of the date of acquisition. Goodwill is determined as the excess of the consideration transferred plus the fair value of any non-controlling interests in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. The excess of the fair values of the identifiable net assets acquired over the cost of the business combination plus the fair value of any non-controlling interests in the acquiree at the acquisition date is credited to income (“negative goodwill”).

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the acquisition occurs, the Group reports in its consolidated financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, which could be up to one year from the acquisition date, the Group retrospectively adjusts the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date.

Business combinations in 2018

The information on business combinations which took place in 2018 is summarized below:

Principal Date of Interest Acquiring Purchase Acquiree activity acquisition acquired segment price

Sale of tickets for cultural and Kulturnaya entertainment Sluzhba LLC (KS) events January 78% MTS 321

Sale of tickets for cultural and entertainment MDTZK LLC events February 100% MTS 3,190

Progressivniye Fixed-line Technologii CJSC (ProgTech) services August 99% MTS 395

Cloud services IT-Grad 1 Cloud LLC providers December 100% MTS 2,422

Agroholding Agriculture businesses Agriculture November 96-100% Steppe 1,725

Voloma-Invest LLC Lumbering June 100% Segezha 963 Total 9,016

132 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The following table summarizes the amounts of the assets acquired and liabilities assumed relating to such acquisitions at the acquisition date: Prog- Agriculture Voloma- KS MDTZK Tech IT-Grad businesses Invest

Total consideration satisfied by: Cash 267 3,190 392 1,515 350 649 Equity instruments of ordinary shares of subsidiary - - - - 1,375 - Contingent consideration arrangement 54 - 3 907 - -

321 3,190 395 2,422 1,725 649 Fair value of previously held interest in the acquiree - - - - - 314

Fair value of businesess less NCI 321 3,190 395 2,422 1,725 963

Recognised amounts of identifiable assets acquired and liabilities assumed: Other intangible assets 166 1,506 123 643 103 539 Other non-current assets 43 145 172 32 1,724 643 Other current assets 156 744 43 57 555 238 Current liabilities (383) (868) (80) (59) (1,031) (92) Non-current liabilities (140) (370) (76) (128) (238) (501)

Net assets (158) 1,157 182 545 1,113 827

Non-controlling interest - - - - - (170)

Goodwill 479 2,033 213 1,877 612 306

Fair value of businesess less NCI 321 3,190 395 2,422 1,725 963

The excess of the consideration paid over the value of net assets was allocated to goodwill mainly arising from the following: The acquisition of one of the leading players in the Russian event MDTZK LLC ticketing industry and expected synergies The acquisition of one of the leading players in the Russian event Kulturnaya Sluzhba LLC ticketing industry and expected synergies ProgTech Expected synergies Agriculture businesses Assembled workforce and expected synergies IT-Grad 1 Cloud LLC Expected synergies and market position obtained

The initial accounting for the acquisition of agriculture businesses, IT-Grad 1 Cloud LLC and Voloma-Invest LLC have only been provisionally determined at the end of the reporting period. At the date of finalisation of these consolidated financial statements, the necessary market valuations and other calculations had not been finalised and they have therefore only been provisionally determined based on the management’s best estimate of the likely fair values.

Business combinations in 2017

In 2017 MTS, Agroholding “Steppe” and Medsi acquired several companies related to their operating segments for RUB 1,195 million, RUB 3,171 million and RUB 661 million respectively.

The following table summarizes the amounts of the assets acquired and liabilities assumed relating to such acquisitions at the acquisition date:

133 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Agroholding MTS «Steppe» Medsi

Cash consideration 1,195 3,171 661 Recognised amounts of identifiable assets acquired and liabilities assumed: Property, plant and equipment - 2,443 193 Other non-current assets 594 1,159 20 Current assets 461 913 59 Deffered tax liabilities - (203) - Loans and borrowings - (1,362) (169) Other non-current liabilities (516) - - Current liabilities (138) (251) (152)

Non-controling interest - - 46

Goodwill 794 472 664

The excess of the consideration over the value of net assets of MTS acquired in the amount of RUB 794 million was allocated to goodwill. Goodwill is mainly attributable to the expected synergies and to the company employees.

The excess of the consideration paid over the value of net assets of agriculture businesses was allocated to goodwill mainly arising from expected synergies on economies of scale related to operating and capital expenditures.

The excess of the consideration paid over the value of net assets of Medsi was allocated to goodwill mainly arising from assembled workforce, expertise of effective management of medical clinics and established business process.

Pro forma results of operations

Pro forma financial information for 2018 and 2017 which gives effect to the acquisitions as if they had occurred as of 1 January 2018 is not presented because the effects of these business combinations, individually and in aggregate, were not material to the Group’s consolidated results of operations.

Loss and revenue for 2018 attributable to financial results of business acquired in 2018 is not material.

The following table summarises the details of purchase of subsidiaries, net of cash acquired, reported in the statements of cash flows:

2018 2017

Cash consideration 7,327 5,027 Payables at the end of the year (1,302) (270) Cash acquired (737) (450) Contingent liability (964) (175)

Acquisition of subsidiaries, net of cash acquired 4,324 4,132

134 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

8. CAPITAL TRANSACTIONS OF SUBSIDIARIES

The Group enters into transactions to acquire or dispose ownership interests in its existing subsidiaries that do not result in the Group losing control over the subsidiaries. Also, the entities of the Group enter into transactions with each other to transfer ownership interests in subsidiaries within the Group. Such transactions are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests (“NCI”) are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity in additional paid-in capital (“APIC”) and attributed to shareholders of the Company.

Transactions in 2018

The information on capital transactions of subsidiaries which took place in 2018 and their impacts on the Group’s equity is summarised below:

Increase of Decrease of additional non-controlling paid-in capital interests

MTS shares tender offer 971 (11,284) Changes in share capital of subsidiaries 1,390 (32) Intragroup transfer of MTS Bank 1,552 (1,552) Other 1,967 (1,103)

Total impact 5,880 (13,971)

MTS shares tender offer – Under the MTS tender offer to repurchase its ordinary shares (including shares represented by American depository shares), MTS purchased a total of 82,669,046 shares at a price per share from RUB 191 to RUB 338, for a total cost of RUB 22.6 billion, including 45,269,718 shares from Sistema Finance S.A., a subsidiary of the Group, for an aggregate purchase price of RUB 12.3 billion.

Changes in share capital of subsidiaries:

 In December 2018, the Group purchased 25% from a minority shareholder of PJSC “VAO “Intourist” for a cash consideration of RUB 0.5 billion. Following the acquisition, the Group's ownership interest in “VAO “Intourist” is 91.24%.  In November 2018, Agroholding Steppe acquired several companies in exchange for an additional issue of its own shares. The fair value of the consideration is for RUB 1.9 billion. As a result of the transaction, the Group’s ownership in Steppe decreased to 84.63% (Note 7).  In July 2018, the Company acquired 19% of EWUB from MTS Bank for a cash consideration of RUB 1.2 billion. As a result of the transaction, Sistema’s effective ownership in EWUB increased to 100%.

Intragroup transfer of MTS Bank – In July 2018, the Company sold 28.63% of MTS Bank for a cash consideration of RUB 8.3 billion to MTS. As a result of the transaction, the Company’s effective ownership in MTS Bank decreased to 72.29%.

135 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Transactions in 2017

The information on capital transactions of subsidiaries which took place in 2017 and their impacts on the Group’s equity is summarised below:

Increase/ (Decrease)/ (decrease) of increase of additional paid- non-controlling in capital interests

Initial public offering of Detsky mir 10,094 (107) MTS shares tender offer (1,369) (10,858) Intragroup transfer of 47% in EWUB 678 (678) Other (729) 508

Total impact 8,674 (11,135)

Initial public offering of Detsky Mir – In February 2017, Detsky Mir completed an initial public offering on the Moscow Exchange. The offering price was set at RUB 85 per share. The Company sold 151,301,256 shares during the offering retaining a 52.1% ownership interest in Detsky Mir.

MTS shares tender offer – In 2017 under the MTS tender offer to repurchase its ordinary shares (including shares represented by American depository shares), MTS in a series of transactions purchased a total of 42,484,404 shares for a total cost of RUB 12.2 billion from non-controlling shareholders. Simultaneously, MTS purchased 33,223,980 shares from Sistema Finance S.A., a subsidiary of the Group, for an aggregate purchase price of RUB 9.6 billion.

Intragroup transfer of 47% in East-West United Bank – In May 2017, the Company acquired 47% in East-West United Bank from MTS Bank for RUB 2.6 billion and increased its effective interest to 97%.

9. REVENUE

The Group receives its revenue primarily from the sale of goods and rendering services in Russia.

Revenue from contracts with customers specific to the reporting segments of the Group is recognized in the following way.

MTS – Revenues derived from wireless, local telephone, long distance, data and video services are recognized when services are provided. This is based upon either usage of minutes of traffic processed and volume of data transmitted or period of time (monthly subscription fees).

The Group capitalizes costs of obtaining contracts (such as sales commissions) and costs of fulfilling contracts and amortizes over the period expected to benefit from the contract. The Group used the practical expedient allowed by of IFRS 15 whereby such costs may be expensed if the amortization period is one year or less.

Revenue from sales of goods (mainly cellphones and other mobile devices) is recognized when the significant risks and rewards of ownership have been transferred to the customer.

Revenue from providing financial services mainly relates to interest bearing assets of MTS Bank. Such revenue is recognized on an accrual basis using the effective interest method.

Detsky mir – The Group recognizes revenue when or as a performance obligation is satisfied, i.e. when the goods are sold in retail stores for retail revenues or delivered to customers for online sales (including in-store pick-up).

The Group sells gift cards to its customers in its retail stores. The gift cards have an expiration date and are required to be used during specified periods of time. The Group recognizes income from gift cards either when the gift card is redeemed by the customer or when the gift card expires.

136 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Detsky mir runs a customer loyalty program "Yo-Yo" which allows customers to earn points for each purchase made in any of the Detsky mir's retail stores. Points earned enable customers to receive a cash discount on future purchases, provided the purchase is made within one year of earning the points. Proceeds from sales to members of the loyalty programs are allocated between the loyalty points and the other components of the sale. The consideration allocated to the loyalty points is measured by reference to their fair value, i.e. the amount for which the loyalty points could be sold separately. This amount is deferred and recognized as revenue when the points are redeemed. Other administrative costs of the customer loyalty program are recorded in Selling, general and administrative expenses as incurred.

RTI – RTI contracts with customers include project type contracts, serial production contracts and other works and services.

Project type contracts include contracts performed under specifically agreed statement of work with a customer. Revenue under these contracts is regognized over time. Revenue is determined by reference to the stage of completion of works estimated using input method, i.e. based on the proportion of costs incurred for work performed to date relative to the estimated total contract costs. Revenue is recognized cumulatively as at reporting date as total contract revenue multiplied by percentage of completion as at reporting date. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately.

Manufactured goods under serial production contracts are mostly recurring and standardized. Such goods may be produced either based on customer orders or for storing in warehouses because in case of a refusal of one customer it may be offered to other interested parties without significant modifications. Revenue under serial production contracts is recognized when a customer obtains the right to control goods and benefit from their usage.

The following is analysis of the Group’s revenue from continuing operations for 2018:

Reportable segments Detsky MTS mir RTI Corporate Other Total

Type of goods/services Mobile and fix line services 393,338 - - - - 393,338 Sale of goods 69,402 110,871 - - - 180,273 Works under specification - - 15,891 - 4,800 20,691 Production - - 5,642 - 84,130 89,772 Financial services 20,851 - - - 1,378 22,229 Other services - - - 2,351 47,197 49,548 Other 2,793 - 1,168 - 17,593 21,554

486,384 110,871 22,701 2,351 155,098 777,405

Revenue from goods or services transferred to customers At a point in time 69,402 110,871 6,730 2,351 139,499 328,853 Over time 416,982 - 15,971 - 15,599 448,552

486,384 110,871 22,701 2,351 155,098 777,405 -

Contract assets and liabilities

Contract balances include trade receivables related to the recognized revenue, contract assets and contract liabilities.

Trade receivables represent an unconditional right to receive consideration (primarily in cash).

Contract assets represent accrued revenues that have not yet been billed to customers due to certain contractual terms other than the payments terms.

137 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Contract assets of MTS represent accrued revenue in a bundled offering which combines the sale of a mobile device and the provision of mobile services for a fixed-period. The mobile device is invoiced at a reduced price leading to the reallocation of a portion of amounts invoiced for mobile communication services to the supply of the mobile phone. The excess of the amount allocated to the mobile phone over the price invoiced is recognized as a contract asset and thus transferred to trade receivables as the service is rendered.

Contract assets also relate to the MTS’s rights to consideration for work completed but not yet billed for integration services projects.

Contract assets and liabilities of RTI are recorded under project type contracts. RTI has the right to consideration for the performed services before their completion and acceptance by a client. This right is recognized as a contract asset which increases as a result of increasing percentage of completion. Project type contracts typically provides customer prepayments which are a contract liability for the Group.

Contract liabilities represent amounts paid by customers to the Group before receiving the goods or services promised in the contract. Contract liabilities consisted of advances received from customers and also amounts invoiced and paid for goods or services that are yet to be transferred.

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:

31 December 1 January 2018 2018

Accounts receivable 30,884 17,572 Contract assets 7,297 5,788

Total assets 38,181 23,360

Less: current portion (38,171) (23,360)

Total non-current assets 10 -

Contract liabilities (33,014) (28,824) Thereof: Mobile telecommunication services (21,835) (18,240) Project type works (10,859) (10,363) Loyalty programmes (320) (221)

Total liabilities (33,014) (28,824)

Less: current portion 22,565 17,696

Total non-current liabilities (10,449) (11,128)

Changes in the contract assets and the contract liabilities balances during the period are as follows: Contract Contract assets liabilities

Balance as of 1 January 2018 5,788 (28,824)

Revenue recognized that was included in the contract liability balance at the beginning of the period - 16,273 Increase due to cash received, excluding amount recognized as revenue during the period 1,517 (22,319) Transfer to assets held for sale/liabilities directly associated with assets classified as held for sale (674) 2,159 Effect of changes in estimates 666 - Business combinations - (303)

Balance as of 31 December 2018 7,297 (33,014)

138 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The Group expects to recognize revenue related to performance obligations that were unsatisfied (or partially unsatisfied) as of 31 December 2018 as follows:

 For mobile telecommunication services, revenue in amount of RUB 21,277 million will be recognized during 2019. Afterwards revenue will be recognized in the amount of RUB 558 million.  For project type works, revenue of RUB 10,859 million will be recognized until 2029.  For loyalty programmes, revenue of RUB 320 million will be recognized until 2029.

Cost to obtain and fulfill a contract

The Group capitalizes certain incremental costs incurred in acquiring or fulfilling a contract with a customer if the management expects these costs to be recoverable.

Costs of acquiring a contract include commissions paid to a third-party distributors as well as the associated remuneration of the Group’s commercial employees for obtaining a contract with a customer. These costs are amortized on a straight-line basis over the average subscriber life.

Costs to fulfil a contract mainly relate to costs of equipment transferred to the subscribers required for the provision of services. These costs are amortized on a straight-line basis for the shorter of equipment useful life or average subscriber life.

The Group uses a practical expedient from IFRS 15 which allows to expensing of contract costs as incurred when the expected contract duration is one year or less.

As of 31 December 2018 and 1 January 2018 the balances of cost to obtain and fulfil contracts capitalized by the Group amounted to:

31 December 1 January 2018 2018

Cost to obtain contracts 6,899 6,952 Cost to fulfil contracts 1,720 966

As of 31 December 2018 and 1 January 2018, the accumulated amortization expense related to cost to obtain and fulfill contracts amounted to 16,908 RUB million and 12,420 RUB million, respectively. Amortization expense related to cost to obtain and fulfill contracts recognized for the year ended 31 December 2018 amounted to 4,371 RUB million. There was no impairment loss relating to the costs capitalized.

10. IMPAIRMENT OF LONG-LIVED ASSETS

Impairment of long-lived assets includes impairment of property, plant and equipment, goodwill, impairment in “MTS Turkmenistan” in 2017 and other intangible assets.

2018 2017

Impairment of other long-lived assets 836 4,807 Impairment of goodwill 524 - Impairment in "MTS Turkmenistan" - 3,204

Total impairment of long-lived assets 1,360 8,011 1

139 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

11. IMPAIRMENT OF FINANCIAL ASSETS

Impairment of financial assets for 2018 and 2017 comprise the following:

2018 2017

Allowance for expected credit losses of accounts receivable 5,734 - Impairment of other financial assets 200 150 Allowance for doubtful accounts - 3,724 Impairment of loans carried at amortised cost - 1,874

Total impairment of financial assets 5,934 5,748

Provision for financial assets attributable to MTS Bank and East-West United Bank is reported in cost of sales.

12. INCOME TAXES

The Group measures and records its current income tax payable and its tax bases in its assets and liabilities in accordance with the tax regulations of the countries where the Group and its subsidiaries operate, which may differ from IFRS.

The Group is subject to permanent tax differences due to the non-tax deductibility of certain expenses and certain income being treated as non-taxable for tax purposes. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.

Deferred tax assets are not recognized when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making such determination, the Group considers all available positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operations.

The tax rate used for the reconciliations below is the corporate tax rate of 20% payable by corporate entities in the RF on taxable profits (as defined) under tax law in that jurisdiction.

The Group’s income tax expense for 2018 and 2017 comprise the following:

2018 2017

Current income tax expense (28,393) (28,914) Deferred income tax (expense)/benefit (4,416) 17,715

Total income tax expense recognised in the current year relating to continuing operations (32,809) (11,199)

Income tax expense calculated by applying the Russian statutory income tax rate to income from continuing operations before income tax differs from income tax expense recognized in the consolidated statements of profit or loss as a consequence of the following adjustments: 2018 2017

Profit/(loss) before tax 52,228 (50,921)

Income tax (expense)/benefit calculated at 20% (10,445) 10,184 Adjustments due to: Earnings distribution from subsidiaries and associates (3,440) (3,833) Increase of unrecognised deferred tax assets (20,959) (14,991) Other non-deductible expenses (1,266) (2,704) Different tax rate of subsidiaries 330 (86) Non-taxable income 309 335 Other 2,662 (104)

Income tax expense (32,809) (11,199)

140 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The following is the analysis of deferred tax assets/(liabilities) presented in the consolidated statements of financial position:

Recognised Effect Opening in profit Recognised of new Acquisitions Closing 2018 balance or loss in OCI standards /disposals balance

Deferred tax (liabilities)/ assets in relation to:

Accrued expenses and accounts payable 6,144 (1,161) 51 119 425 5,578 Property, plant and equipment (23,730) 787 142 1,632 395 (20,774) Intangible assets (10,577) 1,827 9 - (302) (9,043) Cost capitalization - (31) - (1,290) - (1,321) Deferred connection fees 562 (340) 15 717 - 954 Inventory obsolescence 964 (49) - - - 915 Allowance for expected credit losses 826 (570) 85 - - 341 Deferred revenues 122 23 - - - 145 Undistributed earnings of subsidiaries and joint ventures and assoсiates (5,992) 437 (394) - - (5,949) Right-of-use asset 2,363 1,736 - (1,400) - 2,699 Tax losses carried forward 25,404 (8,662) 100 94 (93) 16,843 Debt modification - (478) - (597) - (1,075) Other 1,563 2,100 (669) 180 - 3,174

Total (2,351) (4,381) (661) (545) 425 (7,513)

Recognised Opening in profit Recognised Recognised Acquisitions Closing 2017 balance or loss in OCI in Equity /disposals balance

Deferred tax (liabilities)/ assets in relation to:

Accrued expenses and accounts payable 8,103 413 (9) - - 8,507 Property, plant and equipment (24,189) 498 (39) - - (23,730) Intangible assets (10,632) 168 17 - (130) (10,577) Deferred connection fees 540 32 (10) - - 562 Inventory obsolescence 1,292 (328) - - - 964 Allowance for doubtful accounts and loans receivable 962 (106) (30) - - 826 Deferred revenues 164 (42) - - - 122 Undistributed earnings of subsidiaries and joint ventures and assoсiates (5,831) (280) 119 - - (5,992) Tax losses carried forward 13,895 13,908 - (2,399) - 25,404 Other (872) 3,078 (555) - (88) 1,563

Total (16,568) 17,341 (507) (2,399) (218) (2,351)

As of 31 December 2018 and 2017 the Group reported the following deferred income tax assets and liabilities in the consolidated statements of financial position:

2018 2017

Deferred tax assets 32,648 35,809 Deferred tax liabilities (40,161) (38,160)

Net deferred tax liabilities (7,513) (2,351)

As of 31 December 2018 and 2017 the tax losses carried forward, for which deferred tax assets were recognized, amounted to RUB 84,215 million and RUB 127,021 million, respectively.

141 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Federal law №401-FZ dated 30 November 2016 allowed for the indefinite carry forward of tax losses, whereas this was previously restricted to 10 years. Also the law specified that the tax base for the years 2017-2020 may not be reduced by tax losses carried forward in an amount exceeding 50% of the base. The following table summarizes temporary differences, for which deferred tax assets were not recognized in the consolidated statements of financial position as of 31 December 2018 and 2017:

Carry-forward Jurisdiction period 2018 2017

India 2019-2027 133,691 113,591 Russia Unlimited 219,879 187,517

Total 353,570 301,108

13. EMPLOYEE BENEFITS EXPENSES

Employee benefits expenses consist of salaries, bonuses and social security contributions. Employee benefits expenses included in cost of sales and selling, general and administrative expenses for 2018 and 2017 comprised RUB 134,031 million and RUB 132,419 million, respectively.

Share options granted under the Company’s employee share option plan – In 2017 and 2016 the Company’s Board of Directors established two-year motivational programs for senior and mid-level management. Participants of the programs, upon fulfilment of certain performance conditions and subject to continuing employment with the Group, are granted ordinary shares in the Company.

As a result, the Group recognized an expense of RUB 0 million and RUB 1,484 million in the consolidated statements of profit or loss for 2018 and 2017, respectively. The fair value of awards granted was measured based on the fair value of the Company’s ordinary shares. The awards are equity-settled and are recognized in additional paid-in capital.

14. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at historical cost. Cost includes major expenditures for improvements and replacements, which extend useful lives of the assets or increase their revenue generating capacity. Repairs and maintenance, including preventive maintenance, are charged to the consolidated statement of profit or loss as incurred.

The cost of major overhauls and replacements, which extend useful lives of the assets or increase their revenue generating capacity, are capitalised to the cost of the assets.

Depreciation for property, plant and equipment is computed under the straight-line method utilizing estimated useful lives of the assets as follows:

Buildings 20-50 years Leasehold improvements the term of the lease Base stations 7 years Other network equipment up to 31 years Power and utilities up to 35 years Other up to 15 years

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. The Group considers a construction period of more than six months to be substantial. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognized in profit or loss in the period in which they are incurred.

142 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Property, plant and equipment, net of accumulated depreciation, as of 31 December 2018 and 2017 consisted of the following: 2018 2017

Carrying amount Switches, transmission devices, network and base station equipment 230,241 235,503 Buildings and leasehold improvements 82,755 77,360 Power and utilities 28,123 26,269 Land 21,710 19,959 Other 59,492 52,376

Total 422,321 411,467

Switches, transmission devices, Buildings network and and leasehold Power base station improve- and equipment ments utilities Land Other Total Cost

Balance at 1 January 2017 577,718 101,461 37,708 18,133 105,509 840,529 Additions 55,144 6,746 3,560 337 24,954 90,741 Disposals (42,796) (3,298) (131) (43) (7,264) (53,532) Business combinations 8 291 - 1,532 805 2,636 Reclassified to assets held for sale (1,408) - - - (22) (1,430) Reclassified to work-in-progress - - - - (3,981) (3,981) Currency translation adjustment (4,562) 382 - - (97) (4,277) Impairment (764) - - - - (764) Other 334 (69) (123) - (639) (497)

Balance at 31 December 2017 583,674 105,513 41,014 19,959 119,265 869,425

Additions 51,557 13,573 4,446 358 27,331 97,265 Disposals (26,444) (1,294) (59) (135) (3,632) (31,564) Business combinations 123 770 - 1,520 245 2,658 Reclassified from investment property - 1,500 - - - 1,500 Reclassified to assets held for sale (752) (5,923) - - (7,303) (13,978) Currency translation adjustment 12,929 1,638 - 8 2,103 16,678 Reclassified to right-of-use assets (10,124) - - - (4,404) (14,528) Other (1,728) (831) (124) - (404) (3,087) Balance at 31 December 2018 609,235 114,946 45,277 21,710 133,201 924,369

143 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Switches, transmission devices, Buildings network and and leasehold Power base station improve- and equipment ments utilities Land Other Total

Accumulated depreciation and impairment Balance at 1 January 2017 (334,369) (24,292) (12,502) - (61,236) (432,399) Disposals 38,255 692 62 - 6,722 45,731 Reclassified to assets held for sale 940 - - - 22 962 Depreciation expense (53,258) (4,114) (2,179) - (12,234) (71,785) Currency translation adjustment 2,892 (79) (126) - 216 2,903 Impairment (2,175) (393) - - (295) (2,863) Other (456) 33 - - (84) (507)

Balance at 31 December 2017 (348,171) (28,153) (14,745) - (66,889) (457,958)

Disposals 25,554 405 30 - 3,108 29,097 Reclassified to assets held for sale 223 1,696 - - 4,457 6,376 Depreciation expense (50,062) (5,916) (2,439) - (12,408) (70,825) Currency translation adjustment (9,148) (970) - - (1,587) (11,705) Reclassified to right-of-use assets 2,070 - - - - 2,070 (Impairment)/recovery of impairment - 308 - - 49 357 Other 540 439 - - (439) 540 Balance at 31 December 2018 (378,994) (32,191) (17,154) - (73,709) (502,048)

15. INVESTMENT PROPERTY

Investment property primarily includes cottages, office and commercial space and business centres owned by the companies of the Group operating in real estate segment, mainly including Business Nedvizhimost.

Investment property is stated at cost less accumulated depreciation and impairment losses.

Depreciation for investment property is computed under the straight-line method utilising average estimated useful lives of the assets of 25 years. Accumulated depreciation as of 31 December 2018 and 2017 amounted to RUB 4,208 million and RUB 3,461 million respectively.

2018 2017

Balance at the beginning of the year 24,664 22,647 Reclassified to property, plant and equipment (1,500) - Additions 4,657 3,203 Disposals (755) (757) Depreciation expense (747) (426) Reclassified to other assets (3,053) - Reclassified from/(to) inventories 44 (3)

Balance at the end of the year 23,310 24,664

Included in revenue is investment property rental income for 2018 of RUB 2,623 million (2017: RUB 2,396 million). Operating expenses arising from the investment property that generated rental income during 2018 totalled RUB 1,108 million (2017: RUB 436 million).

144 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

In estimating the fair value of the investment property, the Group classified the properties within Level 3 of the fair value hierarchy. As of 31 December 2018 and 2017, the Group determined the fair values of the investment property at RUB 61,488 million and RUB 62,808 million, respectively.

The fair values as of 31 December 2018 and 2017 were determined either based on discounted cash flows or by reference to market values of similar properties in the relevant region. The main inputs to the fair value measurement are the post-tax discount rate, revenue growth rates, OIBDA margin and adjustments to market values of similar properties. OIBDA determined as operating profit, adjusted on depreciation and amortization.

16. GOODWILL

Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.

The carrying amounts of goodwill attributable to operating segments are as follows:

Segezha MTS SSTL RTI Steppe Group Other Total

Balance as of 1 January 2017 Gross amount of goodwill 47,386 16,578 8,323 5,843 3,454 7,874 89,458 Accumulated impairment loss (4,982) (16,578) (8,219) - (241) (7,214) (37,234)

42,404 - 104 5,843 - 660 52,224

Business combinations 794 - - 472 - 578 1,844 Currency translation adjustment (198) - - - - (38) (236)

Balance as of 31 December 2017 Gross amount of goodwill 47,982 - 8,323 6,315 3,454 8,414 74,488 Accumulated impairment loss (4,982) - (8,219) - (241) (7,214) (20,656)

43,000 - 104 6,315 3,213 1,200 53,832

Business combinations 4,602 - - 612 306 - 5,520 Impairment (524) - - - - - (524) Currency translation adjustment 748 - - - - - 748 Disposals - - - - - (88) (88)

Balance as of 31 December 2018 Gross amount of goodwill 53,332 - 8,323 6,927 3,760 8,326 80,668 Accumulated impairment loss (5,506) - (8,219) - (241) (7,214) (21,180)

47,826 - 104 6,927 3,519 1,112 59,488

The Group performs impairment tests for the goodwill assigned to cash-generating units (CGUs) at least annually and when there are any indications that the carrying amount of the cash- generating unit is impaired. When the carrying amount of the cash-generating unit to which goodwill is allocated exceeds its recoverable amount, goodwill allocated to this cash-generating unit is impaired.

145 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

MTS – For the purposes of impairment testing, goodwill attributable to the MTS segment is allocated to cash-generating units for the years ended 31 December as follows:

2018 2017

Russia convergent 30,658 28,781 Moscow fixed line 1,377 1,164 Ukraine 106 87 Other 6,966 4,249 Unallocated 8,719 8,719

Total 47,826 43,000

The “Russia convergent” CGU represents mobile and fixed line operations, which encompasses services rendered to customers across regions of Russia, except for “Moscow fixed line”, which represents the results of fixed line operations carried out in Moscow by MGTS, a subsidiary of MTS. “Armenia” and “Ukraine” represent operations carried out by subsidiaries of MTS in the respective countries. Goodwill allocated to these CGUs has arisen on acquisitions made by MTS. The Group does not allocate goodwill recognized as a result of its purchases of MTS shares by the Group to CGUs as it is monitored for internal management purposes at the level of the MTS segment as a whole. Unallocated amount of goodwill is tested for impairment with the reference to the market capitalisation of MTS.

The recoverable amounts of the CGUs are determined based on their value in use. In assessing value in use, the estimated future cash flows are discounted to present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the CGU.

Future cash flows calculations are based on a five-year operation plan. Estimation of future cash flows requires assumptions to be made in respect of uncertain factors, including management’s expectations of OIBDA margins, timing and amount of future capital expenditure, terminal growth rates and appropriate discount rates to reflect the risks involved.

During 2017 no impairment charges were recorded in respect of the MTS goodwill balances.

During the year ended 31 December 2018 the MTS recognized impairment charges in the amount of RUB 677 million in respect of the goodwill and non-current assets of the CGU “Oblachniy Retail”, from which RUB 524 million related to the goodwill.

CGU “Oblachniy Retail” operates as retail software developer, cash register distributor and provider of integrated digital cash management solutions for business to business (“B2B”) clients. The impairment in the CGU “Oblachniy Retail” reflects lower operating performance and uncertainty in respect to the ability to meet its operational targets.

The key assumptions used in the value in use calculations are as follows

Forecasted OIBDA margin and capital expenditure were primarily derived from internal sources, based on past experience and extended to include management expectations.

The table below presents forecasted OIBDA margin and capital expenditure as a percentage of revenue over the following five years utilised for value in use calculation of related CGUs:

Capital expenditure OIBDA margin as a percentage of revenue CGU 2018 2017 2018 2017

Russia convergent 42.4%-42.9% 38.0%-39.1% 19.0% 17.2% Armenia 45.0%-47.4% 40.2%-41.2% 16.9% 17.8% Moscow fixed line 56.0%-59.2% 41.0%-48.5% 21.6% 20.6% Ukraine 50.0%-51.6% 31.4%-40.6% 18.4% 22.7%

146 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The terminal growth rate has been determined based on the nominal gross domestic product rates for the country of operation, adjusted for specific characteristics of the CGUs business. The discount rate is the weighted average cost of capital, being equity and debt, according to the industry average finance structure. The cost of equity is calculated based on the risk free rate for long-term bonds issued by the government in the respective market. These rates are adjusted for a risk premium to reflect both the increased risk of investing in equities and the specific risk of the particular CGU. The cost of debt is defined as the rate effective for borrowings drawn by the Group at or near the date of the impairment test.

The table below presents terminal growth rate and pre-tax rates for discounting cash flows in functional currencies utilized for value in use calculation of related CGUs:

Terminal growth rate Discount rate CGU 2018 2017 2018 2017

Russia convergent 1% 1% 16.0% 16.0% Armenia nil nil 15.2% 15.2% Moscow fixed line 1% 1% 14.5% 14.5% Ukraine 3% 3% 20.8% 20.8%

Management believes that no reasonably possible change in any of the above key assumptions would cause the carrying value of any cash-generating unit to exceed its recoverable amount.

Agroholding “Steppe” – The recoverable amounts of the CGUs are determined based on their value in use. Cash flow models were prepared in Russian rubles. These calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flow beyond the 5-year period were extrapolating using growth rates stated below. The growth rate do not exceed the long-term average growth rate for the business sector of the economy in which CGU operates.

The key assumptions used in the value in use calculations are as follows:

Key assumptions used for value-in-use calculations are determined on the basis of market analysis which is performed regularly. The table below presents key assumptions used for value-in-use calculations:

2018 2017

Terminal cash flows growth rate 4% 4% Discount rate 14% 16-16.25% Range of average annual market price growth rate 4-5% 4-6%

Management believes that no reasonably possible change in any of the above key assumptions would cause the carrying value of any cash-generating unit to materially exceed its recoverable amount.

147 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

17. OTHER INTANGIBLE ASSETS

Other intangible assets are mainly represented by billing and telecommunication software and other software, operating licenses, acquired customer bases of MTS.

Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and impairment losses. Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and impairment losses, on the same basis as intangible assets that are acquired separately.

All finite-life intangible assets are amortised using the straight-line method utilising estimated useful lives of the assets as follows:

Operating licenses 3-20 years Billing and telecommunication software 1-20 years Radio frequencies 2-15 years Customer base 1-8 years Software and other 1-10 years

The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

Trademarks with indefinite contractual life are not amortised, but are reviewed, at least annually, for impairment.

Intangible assets other than goodwill as of 31 December 2018 and 2017 consisted of the following:

2018 2017 Carrying amounts of: Amortised intangible assets: Billing and telecommunication software 55,465 54,992 Operating licenses 25,605 19,605 Radio frequencies 2,061 3,090 Acquired customer base 2,300 2,149 Software and other 13,166 11,455 Cost to obtain contracts 6,899 - 105,496 91,291

Unamortised intangible assets: Trademarks 6,629 6,624

Total 112,125 97,915

148 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Billing and Software Cost to telecom Operating Customer Radio and Trade - obtain software licenses bases frequencies other marks contracts Total

Cost

Balance at 1 January 2017 96,835 54,697 12,527 8,949 22,341 6,569 - 201,918 Additions 24,686 1,660 27 13 3,400 49 - 29,835 Disposals (8,429) (19,041) (50) (1,112) (1,394) - - (30,026) Business combinations 163 260 - - 1,470 - - 1,893 Currency translation - - adjustment (980) (1,131) - - (35) 6 - (2,140) Other (6) (2) - 1 55 - - 48

Balance at 31 December 2017 112,269 36,443 12,504 7,851 25,837 6,624 - 201,528 Transition to IFRS 15 ------19,320 19,320 Balance at 1 January 2018 112,269 36,443 12,504 7,851 25,837 6,624 19,320 220,848

Additions 20,884 7,513 59 19 2,845 - 3,961 35,281 Disposals (8,215) (223) (63) (1,223) (439) - - (10,163) Reclassified to assets held for sale - (1,066) - - (712) - - (1,778) Business combinations 68 - 1,530 - 1,482 - - 3,080 Currency translation adjustment 2,977 4,656 - - 158 5 79 7,875 Other 89 - - - (103) - (118) (132)

Balance at 31 December 2018 128,072 47,323 14,030 6,647 29,068 6,629 23,242 255,011

Accumulated depreciation and impairment

Balance at 1 January 2017 (48,569) (17,810) (9,221) (4,829) (13,773) - - (94,202) Disposals 8,345 3,391 50 1,108 1,385 - - 14,279 Amortisation expense (17,614) (2,989) (1,184) (1,042) (1,450) - - (24,279) Impairment (148) - - - (542) - - (690) Currency translation adjustment 726 570 - - 33 - - 1,329 Other (17) - - 2 (35) - - (50)

Balance at 31 December 2017 (57,277) (16,838) (10,355) (4,761) (14,382) - - (103,613) Transition to IFRS 15 ------(12,368) (12,368) Balance at 1 January 2018 (57,277) (16,838) (10,355) (4,761) (14,382) - (12,368) (115,981)

Disposals 7,994 193 63 971 392 - - 9,613 Amortisation expense (20,941) (3,315) (1,438) (796) (1,835) - (3,876) (32,201) Reclassified to assets held for sale - 338 - - 423 - - 761 Impairment (124) - - - (447) - - (571) Currency translation adjustment (2,187) (2,114) - - (27) - (99) (4,427) Other (72) 18 - - (26) - - (80)

Balance at 31 December 2018 (72,607) (21,718) (11,730) (4,586) (15,902) - (16,343) (142,886)

149 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

MTS operating licenses. In connection with providing telecommunication services, the Group has been issued various GSM operating licenses by the Russian Ministry of Information Technologies and Communications (the «Ministry»). In addition to the licenses received directly from the Ministry, the Group has been granted access to various telecommunication licenses through acquisitions of subsidiaries. In foreign subsidiaries, the licenses are granted by the local communication authorities.

Operating licenses contain a number of requirements and conditions specified by legislation. The requirements generally include the start date of service, territorial coverage and expiration date. Management believes that the Group is in compliance with all material terms of its licenses.

The Group’s operating licenses do not provide for automatic renewal. As of 31 December 2018, all expired licenses covering the territories of the Russian Federation were renewed. The cost to renew the licenses was not significant. The weighted-average period until the next renewal of licenses in the Russian Federation is five years.

The license for the provision of telecommunication services in Ukraine was renewed in 2013 and is valid until 2026. During 2018, MTS purchased 4G licenses in Ukraine. The license for the provision of telecommunication services in Armenia is valid until 2019.

18. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

The Group holds interests in several associates, the most significant of which is MTS Belarus, and joint ventures represented by real estate projects, OZON, Razvitie, Michurinskiy project and JSC Pharmaceutical Enterprise Obolenskoe. All investments in associates and joint ventures are accounted for using the equity method.

Investments in associates and joint ventures as of 31 December 2018 and 2017 consisted of the following:

2018 2017 Voting Carrying Voting Carrying power value power value

OZON 34.96% 9,533 22.37% 4,678 MTS Belarus 49.00% 4,051 49.00% 3,660 Real estate projects 48%-50% 4,823 48%-50% 3,204 Razvitie 50.00% 2,238 50.00% 2,238 Michurinskiy project 50.00% 1,381 50.00% 1,270 OBL Pharm 12.80% 1,832 - Other 10,649 5,733

Total 34,507 20,783

Investments in OZON – During 2018, the Group additionally invested in Ozon Holdings Limited, Russian online retailer, as part of right issue for RUB 5.9 billion. As result of the transaction, the total share of the company as of 31 December 2018 is 34.96% and the carrying amount is RUB 9.5 billion.

Investments in JSC Pharmaceutical Enterprise Obolenskoe – In December 2018, the Group acquired an equity interest in JSC Pharmaceutical Enterprise Obolenskoe (“OBL Pharm”), a leading Russian pharmaceutical company, for RUB 1.83 billion. The stake was acquired jointly with VTB Bank (“VTB”) and management of OBL Pharm from Alvansa Ltd, which is majority-owned by Gazprombank and UFG Private Equity. The partners made their investments through a joint holding company, Ristango Holding Limited, and have signed a shareholders agreement securing rights of all of the investors to participate in management of the business. Sistema and VTB have also signed an agreement whereby Sistema will acquire VTB’s stake in Ristango Holding Limited within three years of the initial transaction. The fair value of this financial instrument as of 31 December 2018 is nil. The share of the Group in Ristango Holding Limited has been pledged in accordance with the forward contracts. The Group concurred that Sistema’s representation in the Board of Directors does not give the current ability to direct the relevant activities of OBL Pharm and thus OBL Pharm is not controlled by Sistema as at 31 December 2018.

150 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The financial position and results of operations of significant associates and joint venture as of and for the years ended 31 December 2018 and 2017 were as follows:

2018 Real Michu- MTS estates OBL rinskiy Belarus OZON projects Razvitie Pharm project

Non-current assets 17,659 8,466 18,937 4,003 5,878 2,444 Current assets 11,652 11,705 612 467 6,948 6,852 Total assets 29,311 20,171 19,549 4,470 12,826 9,296

Non-current liabilities (7,089) (511) (8,042) - (5,441) (4,828) Current liabilities (13,955) (14,263) (1,047) (2) (1,839) (243) Total liabilities (21,044) (14,774) (9,089) (2) (7,280) (5,071)

Equity attributable to owners of the Company 8,267 5,397 10,460 4,468 5,546 4,225 Group’s ownership interest 49.00% 34.96% 48%-50% 50.00% 12.80% 50.00% Fair value adjustment on the date of obtaining significant influence - 7,646 (198) 4 1,122 (732) Carrying amount of the Group’s interest 4,051 9,533 4,823 2,238 1,832 1,381

Total revenues 27,695 37,263 31 - 6,863 2,076 Total profit/(loss) for the year 7,752 (4,509) (259) 21 1,553 222 The Group’s share in profit/(loss) 3,799 (1,576) (124) 11 - 111 Total comprehensive income/(loss) 8,400 (4,509) (259) 21 1,553 222

The Group’s share in comprehensive income/ (loss) for the year 4,116 (1,576) (130) 11 - 111

151 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

2017 RealMichu- MTS estatesrinskiy BelarusOZONprojects Razvitieproject

Non-current assets 9,819 4,656 6,863 4,003 4,030 Current assets 8,117 8,189 8,421 465 21 Total assets 17,936 12,845 15,284 4,468 4,051

Non-current liabilities(703) (572) (1,361) - (5) Current liabilities(9,764) (7,789) (5,064) (1) (43) Total liabilities(10,467) (8,361) (6,425) (1) (48)

Equity attributable to owners of the Company7,469 4,484 8,859 4,467 4,003 Group’s ownership interest 49.00%22.37%48%-50%50.00% 100% Fair value adjustment on the date of obtaining significant influence- 3,674 (1,048) 4 (731) Carrying amount of the Group’s interest3,660 4,678 3,204 2,238 1,270

Total revenues23,037 21,998 25- - Total profit/(loss) for the year6,552 (1,589) 3 7 - The Group’s share in profit/(loss)3,210 (355) 1 3 - Total comprehensive income/(loss)6,027 (1,589) 3 7 -

The Group’s share in comprehensive income/ (loss) for the year2,953 (355) 1 3 -

The following is a summary of the aggregated financial information of other associates and joint ventures that are not individually material:

2018 2017

Group’s share of (loss)/profit from continuing operations (505) 171 Group’s share of total comprehensive (loss)/income (817) 428 Aggregate carrying amount of the Group's interests in these associates and joint ventures 10,649 5,734

152 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

19. OTHER FINANCIAL ASSETS

The Group’s financial assets, other than cash and cash equivalents, deposits in banks and accounts receivable shown separately on the face of the consolidated statements of financial position, primarily comprise assets of MTS Bank and East-West United Bank, the Group’s subsidiaries engaged in banking activities, and investments of the Corporate segment.

The Group applies new classification and measurement categories in accordance with IFRS 9. The table below compares the classification of financial assets in accordance with IAS 39 with their new classification in accordance with IFRS 9 as of 1 January 2018:

31 December 1 January Categories 2017 2018 under under (under (under IAS 39 IFRS 9 IAS 39) IFRS 9)

Cash and Not assigned to Measured at cash equivalents a category amortized cost 59,959 59,959 59,959 59,959 Measured at Measured at Debt and equity fair value through fair value through securities profit or loss profit or loss 37,414 37,414 37,414 37,414 Measured at Debt and equity Available-for-sale fair value through securities financial assets profit or loss 9,997 9,997

Measured at fair value through Debt and equity Available-for-sale other comprehensive securities financial assets income 12,198 12,198

Debt and equity Available-for-sale Measured at securities financial assets amortized cost 5,968 5,968 28,163 28,163 Debt and equity Held-to-maturity Measured at securities financial assets amortized cost 27,346 27,346 27,346 27,346 Bank loans to Measured at customers Loans and receivables amortized cost 64,708 62,626 64,708 62,626 Interbank loans due Measured at from banks Loans and receivables amortized cost 15,512 15,510 15,512 15,510 Measured at Other loans Loans and receivables amortized cost 22,647 22,169 22,647 22,169

Measured at Accounts receivable Loans and receivables amortized cost 54,836 53,998 54,836 53,998

Measured at Interest rate swaps Measured at fair value through designated as fair value through other comprehensive cash flow hedges profit or loss income 8,403 8,403 8,403 8,403

Total 318,988 315,588

153 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The Group applies expected credit losses model for impairment analysis of financial assets classified at amortized cost. The Group applies the simplified approach permitted by IFRS 9 for its trade and other receivables which requires recognition of expected credit losses from initial recognition of trade receivables.

Financial assets are recognized initially at fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial asset, except for a financial asset accounted for at fair value through profit or loss, in which case transaction costs are expensed. Subsequently such financial assets are measured either at amortized cost or fair value depending on the classification of those assets.

Financial assets are classified into the following specified categories depending on their nature and purpose: Financial assets measured at fair value through profit or loss (FVTPL), financial assets measured at fair value through other comprehensive income (FVTOCI), financial assets measured at amortised costs.

If the financial assets are held for collecting contractual cash flows in the form of principal and interest on the specified dates, it is classified as carried at amortized cost.

If the financial assets are held not only for collecting contractual cash flows in the form of principal and interest on the specified dates, but also for potential sale, they are classified as measured at fair value through other comprehensive income.

All other financial assets are classified as measured at fair value through profit or loss.

At 31 December 2018 financial assets, other than those shown separately on the face of the statements of financial position, less allowance for impairment losses, comprise:

31 December 2018

Financial assets measured at fair value through profit or loss Debt and equity securities 45,085 Currency derivatives not designated as hedge instruments 3,049 Interest rate swaps not designated as hedge instruments 2,837

50,971

Financial assets measured at fair value through other comprehensive income Cross-currency swaps designated as cash flow hedges 2,797 Debt and equity securities 10,153

12,950

Financial assets measured at amortized cost Debt and equity securities 41,187 Bank loans to customers 68,227 Interbank loans due from banks 6,416 Other loans 22,135

137,965

Total financial assets 201,886

Current 106,329 Non-current 95,557

201,886

154 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The following table summarizes changes in the allowance for financial assets other than for loan losses and accounts receivable for the year ended 31 December 2018:

Balance, beginning of the year calculated under IAS 39 11,268

Additional allowance under IFRS 9 500

Balance, beginning of the year, calculated under IFRS 9 11,768

Additions charged to the operating results 446 Amounts written off against the allowance (6,327) Currency translation adjustment 64

Balance, end of the year, calculated under IFRS 9 5,951

At 31 December 2018 and 2017, included in the above categories as well as cash and cash equivalents, financial assets attributable to the Group’s banking activities (MTS Bank and its subsidiaries, East-West United Bank) comprise: 1 January 31 December 2018 2018 (adjusted) Financial assets measured at fair value through profit or loss Debt and equity securities 13,654 16,106

13,654 16,106

Financial assets measured at fair value through other comprehensive income Debt and equity securities 10,153 5,517

10,153 5,517

Financial assets measured at amortized cost Cash and cash equivalents 23,500 31,758 Bank loans to customers 78,089 75,126 Interbank loans due from banks 6,416 15,553 Debt and equity securities 39,943 33,315

147,948 155,752

Less: allowance for loan losses (9,862) (10,459)

161,893 166,916

The movement in the allowance for loan losses during 2018 and 2017 was as follows:

2018 2017

Allowance for loan losses, 1 January 10,459 36,905 IFRS 9 impact 2,060 - Additions charged to the operating results 705 199 Amounts written off against the allowance (3,970) (26,374) Transfer to accounts receivable (495) - Disposal (356) - Recovery of bad debt written-off 780 - Currency translation adjustment 679 (271)

Allowance for loan losses, 31 December 9,862 10,459

155 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

In accordance with IFRS 9 the Group records an allowance for expected credit losses (ECL) for all financial assets not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due under the contract and cash flows that the Group expects to receive. The shortfall is discounted at an approximation to the asset’s original effective interest rate.

The expected credit-loss approach uses three stages for allocating impairment losses:

Stage 1: expected credit losses within the next twelve months.

Stage 1 includes all contracts with no significant increase in credit risk since initial recognition and usually contains new contracts that are fewer than 31 days past due date. The portion of the lifetime expected credit losses resulting from default events possible within the next 12 months is recognized.

Stage 2: expected lifetime credit losses– not credit impaired.

If a financial asset has a significant increase in credit risk since initial recognition but is not yet credit impaired, it is moved to stage 2 and measured at lifetime expected credit loss. This is defined as the expected credit loss that results from all possible default events over the expected life of the financial instrument.

Stage 3: expected lifetime credit losses – credit impaired

If a financial asset is defined as credit impaired or in default, it is transferred to stage 3 and measured at lifetime expected credit loss. The Group considers a financial asset to be in default when the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realizing security (if any is held).

Movements in provision for impairment losses on loans to legal entities for the year ended 31 December 2018 were as follows:

Stage 1 Stage 2 Stage 3 POCI* Total

Balance as at 1 January 2018 273 245 5,702 215 6,435

IFRS 9 application 332 95 996 - 1,423 - Transfer to stage 1 3 - (3) - - - Transfer to stage 2 (22) 22 - - - - Transfer to stage 3 (1) (47) 48 - - New financial assets originated or purchased 182 177 - 124 373 Change due to change of credit risk (415) 98 (369) (84) (104) Sales of financial assets - - (356) - (356) Write-offs - - (1,840) - (1,840) Recovery of previously written-off assets - - 260 - 260 Foreign exchange difference 4 15 689 - 152

Balance as at 31 December 2018 356 605 5,126 255 6,342

* POCI - financial assets purchased or originated credit-impaired

156 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Movements in provision for impairment losses attributable to loans to individuals for the year ended 31 December 2018 were as follows:

Stage 1 Stage 2 Stage 3 POCI Total

Balance as at 1 January 2018 97 230 2,803 358 3,488

IFRS 9 effect 449 85 53 - 587 - Transfer to stage 1 450 (290) (160) - - - Transfer to stage 2 (145) 189 (44) - - - Transfer to stage 3 (2) (647) 649 - - New financial assets originated or purchased 585 - - - 585 Change due to change of credit risk (678) 751 188 40 301 Write-offs - - (2,004) - (2,004) Recovery of previously written-off assets - - 520 - 520

Balance as at 31 December 2018 756 318 2,005 398 3,477

The following valuation categories represent the Group’s classification of credit quality of the loans:

 Low to fair risk – loans of high credit quality and low probability of default, not past due or immaterially overdue;  Monitoring – loans with increased probability of default including restructured loans;  Impaired – impaired loans including more than 90 days overdue.

The table below summarizes information regarding the quality of loans to individuals as of 31 December 2018:

Stage 1 Stage 2 Stage 3 POCI Total

Low to fair risk 37,139 445 - - 37,584 Monitoring - 534 5 - 539 Impaired - - 2,814 398 3,212 Loss allowance (756) (318) (2,005) (398) (3,477)

Total 36,383 661 814 - 37,858

The table below summarizes information regarding the quality of loans to legal entities as of 31 December 2018:

Stage 1 Stage 2 Stage 3 POCI Total

Low to fair risk 24,658 1,555 - - 26,213 Monitoring - 3,930 270 - 4,200 Impaired - - 6,038 260 6,298 Loss allowance (356) (605) (5,126) (255) (6,342)

Total 24,302 4,880 1,182 5 30,369

157 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Analysis by credit quality of loans to individuals outstanding as of 31 December 2018 is as follows:

Provision for Provision for impairment to As at December 31, 2018 Gross loans impairment Net loans gross loans

Collectively assessed Not past due 37,140 (756) 36,384 2% Overdue: up to 30 days 445 (80) 365 18% 31 to 60 days 197 (84) 113 43% 61 to 90 days 136 (77) 59 57% 91 to 180 days 340 (245) 95 72% over 180 days 2,079 (1,579) 500 76%

Total 40,337 (2,821) 37,516 7%

Individually impaired Not past due 599 (475) 124 79% Overdue: up to 30 days - - - - 31 to 60 days 4 (1) 3 25% 61 to 90 days 1 - 1 0% 91 to 180 days 27 - 27 0% over 180 days 367 (180) 187 49%

Total 998 (656) 342 66%

Total 41,335 (3,477) 37,858 9%

Analysis by credit quality of loans to medium-sized enterprise outstanding as of 31 December 2018 is as follows:

Provision for Provision for impairment to As at December 31, 2018 Gross loans impairment Net loans gross loans

Collectively assessed Not past due 1,223 (24) 1,199 2% Overdue: up to 30 days 7 (1) 6 16% 31 to 60 days 2 (1) 1 40% 61 to 90 days 4 (2) 3 40% 91 to 180 days 15 (7) 8 47% over 180 days 689 (414) 275 60%

Total collectively assessed loans 1,940 (449) 1,491 23%

The table below summarizes carrying value of loans to customers analysed by type of collateral obtained by the Group: December 31, 2018

Loans collateralized by guaranties of legal entities 17,984 Loans collateralized by pledge of real estate 14,971 Loans collateralized by pledge of own promissory notes 326 Loans collateralized by pledge of equipment 143 Loans collateralized by securities 32 Loans collateralized by rights of claim 15 Loans collateralized by pledge of inventories 12 Unsecured loans 44,606 Allowance for impairment losses (9,862)

Total loans to customers, net 68,227

158 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

20. RESTRICTED CASH

According to the amendments to the law “On State Defence Orders”, cash received under state defence orders has to be held on special accounts and its spending is restricted to activities related to these orders. As of 31 December 2018 and 31 December 2017, RTI has RUB 8,614 million and RUB 8,591 million of cash on special accounts which was presented as restricted cash within current assets.

21. INVENTORIES

Inventories mainly include goods for resale of Detsky Mir and the retail network of MTS and construction in progress of Leader Invest.

Inventories are stated at the lower of cost or market value. Inventories are accounted for using the weighted-average cost method. Inventory should be accounted further at the lower of net realisable value and carrying amount. The Group periodically assesses its inventories for obsolete or slow-moving stock.

The cost of raw materials includes the cost of purchase, customs duties, transportation and handling costs. Work-in-progress and finished goods are stated at production cost which includes direct production expenses and manufacturing overheads.

Inventories as of 31 December 2018 and 2017 consisted of the following:

2018 2017

Detsky mir finished goods and goods for resale 34,865 26,287 Construction in progress of Leader Invest 14,452 16,084 Raw materials and spare parts 13,772 10,665 MTS finished goods and goods for resale 18,654 9,995 Other finished goods and goods for resale 8,400 9,239 Other work-in-progress 7,835 3,875 Costs and estimated earnings in excess of billings on uncompleted contracts - 11,908

Subtotal 97,978 88,053

Excluding non-current inventories (847) (6,652)

Total 97,131 81,401

The cost of inventories recognized as an expense during the year in respect of continuing operations was RUB 182,666 million (2017: RUB 159,940 million). The cost of inventories recognized as an expense includes RUB 5,204 million (2017: RUB 4,659 million) in respect of write-downs of inventory to net realisable value and has been reduced by RUB 2,315 million (2017: RUB 509 million) in respect of the reversal of such write-downs.

159 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

22. ACCOUNTS RECEIVABLE

Accounts receivable include amounts owed by the customers to the Group.

The carrying value of all trade receivables is reduced by appropriate allowances for ECL. For trade receivables the Group applies a simplified approach and calculates ECL based on lifetime expected credit losses.

Accounts receivable, net of allowances, as of 31 December 2018 and 2017 consisted of the following:

2018 2017

Accounts receivable 70,392 60,018 Allowance for ECL (6,875) - Allowance for doubtful accounts - (5,182)

Total 63,517 54,836

Below is the age analysis of receivables that are past due but not impaired:

2018 2017

60-90 days 1,974 3,334 more than 91 days 4,187 2,201

Total 6,161 5,535

Movement in the allowance is as follows:

2018 2017

Balance, beginning of the year calculated under IAS 39 (5,182) (8,691)

Additional allowance under IFRS 9 (694) -

Balance, beginning of the year, calculated under IFRS 9 (5,876) n/a

Transfer from allowance for loan losses (495) - Provision for doubtful accounts (4,407) (3,791) Accounts receivable written off 3,645 6,433 Amounts recovered during the year 99 43 Foreign exchange translation gains and losses 159 107 Disposal of subsidiaries - 717

Balance at end of the year (6,875) (5,182)

160 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

23. EQUITY

Share capital – As of 31 December 2018 and 2017, the Company had 9,650,000,000 voting common shares with a par value of RUB 0.09 issued, of which 9,479,170,532 and 9,437,514,653 shares were outstanding, respectively.

Treasury shares – Movement of treasury shares during 2018 and 2017 years was as follows:

2018 2017

Balance at the beginning of the year 212,485,347 252,625,702 Purchase of own shares - 72,823,265 Purchase of own shares of the Company by empoyees - (5,536,162) Settlements under long-term motivation program (41,655,879) (107,427,458)

Balance at the end of the year 170,829,468 212,485,347

Dividends – Dividends declared to the holders of the Company’s ordinary shares are included in the financial statements in the period in which the dividends are approved for distribution by the shareholders.

On 30 June 2018, an annual general meeting of shareholders approved the total dividend payment of RUB 1,061.5 million for 2017 (including dividends on treasury shares of RUB 14.5 million) representing RUB 0.11 per ordinary share or RUB 2.2 per one global depository receipt. The dividends were paid in 2018.

24. ACCUMULATED OTHER COMPREHENSIVE INCOME

Components of accumulated other comprehensive income balance, net of taxes, as of 31 December 2018 and 2017:

2018 2017

Accumulated currency translation gain/(loss) 9,911 (7,842) Unrealised gain on financial instruments 197 5,195 Unrecognised actuarialgain/(loss) 92 (75)

Total accumulated other comprehensive income/(loss) 10,200 (2,722)

Less: amounts attributable to non-controlling interests 1,004 5,054

Total accumulated other comprehensive income attributable to Sistema PJSFC 11,204 2,332

25. BORROWINGS

The Group’s borrowings primarily comprise bank loans and corporate bonds. The Group enters into variable-to-fixed interest rate swap agreements to manage exposure to changes in variable interest rates related to a portion of its obligations, as well as into cross-currency interest-rate swap agreements to mitigate the impact of both, interest rate and exchange rate fluctuations, for a certain portion of its USD- and Euro-denominated borrowings.

Borrowings are initially recognized at fair value less transaction costs and subsequently measured at amortised cost using the effective interest method.

Finance costs in profit or loss consist of interest expense for financial liabilities not classified as at FVTPL. In 2018, finance costs did not include borrowing costs that were included in the cost of qualifying assets in amount of RUB 460 million (2017: RUB 307 million).

161 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

At 31 December 2018 and 2017, the Group’s borrowings comprised:

2018 2017

Bank loans 491,018 336,582 Corporate bonds 206,332 183,476 Other 985 906

698,335 520,964

Current 105,893 139,403 Non-current 592,442 381,561

Bank loans – As of 31 December 2018 and 2017, the Group’s loans from banks and financial institutions consisted of the following:

Interest rate (actual at 31 December 31 December 31 December Maturity 2018) 2018 2017

USD-denominated: Calyon, ING Bank N.V, - 17,076 Nordea Bank AB, Raiffeisen Zentralbank Osterreich AG China Development Bank 2019-2021 LIBOR 6m+3.15% 10,421 8,640

Citibank 2019-2024 LIBOR + 0.9% 10,980 10,592 Other 2019-2021 5,109 4,996

26,510 41,304

EUR-denominated: ING Bank 2019-2027 3.99% 4,946 25,040 Alfa Bank 2019-2028 3.92% 15,892 - Other 2019-2027 1,352 1,284

22,190 26,324

RUB-denominated: Sberbank 2019-2023 8.45%-14.50% 235,909 188,222 VTB 2019-2022 7.20%-10.50% 132,421 37,733 CBR+2.5%-4.8% Gazprombank 2019-2025 9%-11.5% 23,554 21,021 Otkrytie 2019-2025 8.9%-9.50% 19,125 - Alfa Bank 2019-2023 9.0%-11.87% 24,795 15,501 CBR+2.0% Other 6,297 5,918

442,101 268,395

Other currencies 217 559

Total bank loans 491,018 336,582

162 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Corporate notes – As of 31 December 2018 and 2017, the Group’s notes consisted of the following:

31 December 31 December Currency Interest rate 2018 2017

MTS International Notes due 2023 USD 5.00% 31,090 26,188 Sistema International Notes due May 2019 USD 6.95% 24,705 23,441 MTS International Notes due 2020 USD 8.63% 20,870 17,621 Sistema PJSFC Notes due February 2028 RUB 9.25% 15,000 - Sistema PJSFC Notes due March 2027 RUB 8.90% 14,964 15,000 Sistema PJSFC Notes due November 2026 RUB 9.90% 9,635 9,953 Sistema PJSFC Notes due January 2028 RUB 9.80% 9,482 - Sistema PJSFC Notes due October 2026 RUB 9.80% 6,115 4,536 Sistema PJSFC Notes due September 2025 RUB 12.50% 2,136 5,000 MTS Notes due 2022 RUB 7.70% 14,958 14,947 MTS Notes due 2023 RUB 6.85% 9,348 9,997 MTS Notes due 2022 RUB 9.00% 9,993 9,991 MTS Notes due 2021 RUB 8.85% 9,990 9,986 MTS Notes due 2021 RUB 7.10% 9,988 - MTS Notes due 2025 RUB 7.25% 9,986 - MTS Notes due 2031 RUB 9.40% 1,080 9,995 MTS Notes due 2020 RUB 7.50% 40 49 Detskiy Mir due 2024 RUB 9.50% 3,000 3,000 Sistema PJSFC Notes due 2018 RUB 12.70% - 10,000 Sistema PJSFC Notes due October 2025 RUB 10.90% - 1,700 MTS Notes due 2018 RUB 7.70% - 9,986 Other 3,952 2,086

Total notes 206,332 183,476

The Group has an unconditional obligation to repurchase certain notes at par value if claimed by the noteholders subsequent to the announcement of the sequential coupon. Such notes are disclosed maturing in the reporting period when the demand for repurchase could be submitted, irrespective of the Group’s expectations about the intentions of the noteholders. The dates of the announcement for each particular note issue are as follows:

MTS PJSC Notes due 2031 September 2019 MTS PJSC Notes due 2023 March 2020 Sistema PJSFC Notes due January 2028 February 2019 Sistema PJSFC Notes due February 2028 September 2019 Sistema PJSFC Notes due November 2026 February 2020 Sistema PJSFC Notes due October 2026 November 2020 Sistema PJSFC Notes due March 2027 April 2022 Sistema PJSFC Notes due September 2025 April 2022

Covenants – Loans and notes payable by the Group are subject to various restrictive covenants and events of default, which permit lenders to demand accelerated repayment of debt. Such covenants and events include noncompliance with certain financial ratios, cancellation of principal telecom licenses, credit ratings downgrade, significant court rulings, encumbrances and confiscation of certain assets and other material adverse changes.

163 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

As of 31 December 2018 the Group had long-term debt denominated in Russian rubles, presented as part of current liabilities in the consolidated statement of financial position for the following reasons:

2018 2017

Noncompliance with other non-financial covenants 16,915 16,957 Ongoing arrest of shares of the Group’s shares of subsidiaries (Note 38) - 9,703 Noncompliance with certain financial ratios by the Group’s subsidiaries - 381

Total 16,915 27,042

To the date when these consolidated financial statements were authorized for issue, the lenders have not exercised their rights for early redemption.

Assets pledged as security – As of 31 December 2018 and 2017 land and buildings with carrying amounts of RUB 25,025 million and RUB 31,358 million, respectively, have been pledged to secure borrowings of the Group. The freehold land and buildings have been pledged as security for bank loans under a mortgage. The Group is not allowed to pledge these assets as security for other borrowings or to sell them to another entity. As of 31 December 2018 and 2017, other assets including inventories and deposits with carrying amounts of RUB 2,729 million, RUB 3,877 million respectively have been pledged to secure borrowings of the Group.

The following shares of the Group have been pledged to secure borrowings of the Group: 87% shares of RTI, 16.01% shares of MTS и 100% shares of certain subsidiaries of Leader Invest, Segezha and Intourist segments.

26. LEASE LIABILITIES

For contracts concluded after 1 January 2018, the Group assesses whether a contract is or contains a lease at inception of a contract. The Group recognizes a right-of-use asset and a corresponding lease liability with respect to all lease agreements (including sub-lease and lease of intangible assets), which conveys the right to control the use of identified assets for a period of time in exchange for consideration, except for short-term leases (with lease term of 12 months or less). For these leases, the Group recognizes the lease payments as operating expense on a straight-line basis over the term of the lease. When identifying the lease, the Group uses practical expedient of IFRS 16 permitting the lessee not to separate non-lease components of the contract and, instead, to account for any lease and associated non-lease components as a single arrangements.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the incremental borrowing rate of the Group.

When measuring lease liabilities as of 31 December 2017, the Group discounted lease payments using its incremental borrowing rate at 1 January 2018. The weighted average rate applied 9.54%.

1 January 2018 Operating lease commitment as 31 December 2017 as disclosed in the Group's consolidated financial statements 88,675 Discounting using the incremental borrowing rate at 1 January 2018 (15,666)

Finance lease liability recognised as at 31 December 2017 14,855 Reassesment of options to extend and cancel lease contracts 113,061 Other 2,836

Lease liability as 1 January 2018 203,761

164 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The following table presents a summary of net book value of rights-of-use assets:

31 December 2018

Sites for placement of network and base station equipment 92,501 Land and buildings 95,316 Other 6,430

Rights-of-use assets, net 194,247

Depreciation of the rights-of-use assets for the twelve months ended 31 December 2018 included in depreciation and amortization expense in the accompanying consolidated statement of profit or loss was as follows: 2018

Sites for placement of network and base station equipment 7,784 Land and buildings 19,168 Other 1,201

Depreciation charge, total 28,153

Additions to the assets leased during the twelve months ended 31 December 2018 amounted to RUB 25,856 million.

The following table presents expenses related to lease, recognised in the consolidated statement of profit and loss for 2018:

2018

Depreciation of right-of-use assets 28,153 Interest expense on lease liabilities 18,382 Impairment 143 Expenses relating to variable lease payments not included in the measurement of the lease liability 1,177

The following table presents future minimum lease payments under lease arrangements together with the present value of the net minimum lease payments as at 31 December 2018:

31 December 2018 Minimum lease payments, including: Less than 1 year 40,141 From 1 to 5 years 143,957 Over 5 years 134,653 Total minimum lease payments 318,751

Less amount representing interest (111,384)

Present value of net minimum lease payments, including: Less than 1 year 24,206 From 1 to 5 years 89,556 Over 5 years 93,605 Total present value of net minimum lease payments 207,367

Less current portion of lease obligations (24,206)

Non-current portion of lease obligations 183,161

Total cash outflows for leases for the year ended 31 December 2018 totaled to RUB 39,193 mln, including in interest paid RUB 18,149 mln.

165 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

27. BANK DEPOSITS AND LIABILITIES

Liabilities of MTS Bank and East-West United Bank primarily consist of customer accounts and deposits. These liabilities are initially measured at fair value, net of transaction costs. Liabilities are subsequently measured at amortised cost using the effective interest method and classified based on their contractual maturity.

Bank deposits and liabilities as of 31 December 2018 and 2017 consisted of the following:

2018 2017

Customer accounts 128,156 115,105 Bank loans received 2,435 - Debt securities issued 1,235 2,074 Other liabilities 1,460 113 133,286 117,292

Less: amounts maturing within one year (129,872) (83,873)

Total bank deposits and liabilities, net of the current portion 3,414 33,419

28. OTHER FINANCIAL LIABILITIES

Other financial liabilities as of 31 December 2018 and 2017 consisted of the following:

2018 2017

Liability for RTI shares 3,600 3,489 MTS liabilities under put option agreement (MTS Armenia) 3,629 2,012 Contingent obligation to pay purchase price 936 - Factoring operations debt 542 - Interest rate and cross-currency swaps not designated as hedging instruments 265 1,104 Forwards not designated as hedge instruments 85 - SSTL liabilities to non-controlling shareholders (Note 6) - 2,348 Credit guarantee agreement related to foreign currency hedge - 1,045 MTS liabilities related to hedging activities - 664 Other 2,320 1,185

Non-current 1,473 6,514 Current 9,904 6,059

Total other financial liabilities 11,377 12,573

166 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

29. PROVISIONS

Provisions primarily consist of provisions related to employees’ bonuses and other rewards, decommissioning and restoration obligations.

Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of obligation. Provisions are measured at the management’s best estimate of the expenditure required to settle the obligation at the reporting date and are discounted to present value where the effect is material.

Provisions as of 31 December 2018 and 2017 consisted of the following:

2018 2017

Employees’ bonuses and other rewards 11,624 11,924 Provisions for decomissioning and restoration obligations 3,109 1,049 Tax provisions other than for income tax 252 310 Provision on SEC investigation (Note 5) 59,050 - Other 3,577 3,154

Total 77,612 16,437

Current 73,244 13,038 Non-current 4,368 3,399

Employees’ Tax bonuses and Provisions provisions other for decomis- other than SEC rewards sioning income tax provision Other Total

Balance at 1 January 2017 (10,348) (1,192) (457) - (2,166) (14,163)

Additional provisions recognized (15,776) (108) (229) - (1,930) (18,043) Payments 12,769 5 342 - 694 13,810 Unwinding of discount and - effect of changes in the - discount rate 49 (103) - - - (54) Unused amounts reversed 1,283 339 33 - 325 1,980 Currency translation adjustment 99 10 1 - (77) 33

Balance at 31 December 2017 (11,924) (1,049) (310) - (3,154) (16,437)

Effect of IFRS 15 - - - - (597) (597) Additional provisions recognized (16,146) (1,912) (487) (55,752) (4,470) (78,767) Payments 14,846 18 336 - 1,727 16,927 Unwinding of discount and effect of changes in the discount rate 177 (223) - - - (46) Unused amounts reversed 1,229 89 211 - 2,170 3,699 Transfet to financial liabilities - - - - 700 700 Transfer to liabilities held for sale 300 - - - - 300 Currency translation adjustment (106) (32) (2) (3,298) 47 (3,391)

Balance at 31 December 2018 (11,624) (3,109) (252) (59,050) (3,577) (77,612)

167 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

30. LOSSES PER SHARE

Losses per share is the amount of loss for the year attributable to ordinary shares of the Company divided by the weighted average number of ordinary shares outstanding during the year.

The earnings and weighted average number of ordinary shares used in the calculation of basic and diluted losses per share are as follows: 2018 2017

Loss for the year from discontinued operations attributable to shareholders of Sistema PJSFC (28,483) (2,792) Loss for the year from continuing operations attributable to shareholders of Sistema PJSFC (17,413) (91,810)

Losses used in the calculation of basic and diluted earnings per share (45,896) (94,602)

Weighted average number of ordinary shares for the purposes of basic and diluted earnings per share 9,476,241,839 9,448,453,265

Losses per share – basic and diluted (4.84) (10.01) From continuing operations (1.84) (9.72) From discontinued operations (3.01) (0.29)

31. CAPITAL AND FINANCIAL RISK MANAGEMENT

Capital risk management – The Group manages its capital to ensure that entities of the Group will be able to continue as a going concern while maximising the return to the shareholders through the optimisation of the debt and equity balance.

The capital structure of the Group consists of net borrowings (borrowings offset by cash and cash equivalents) and equity of the Group.

The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. The Group may sell assets to reduce debt, maintain or adjust the capital structure.

The Board of Directors monitors the net borrowings to OIBDA ratio. Since these are not IFRS measures, the Group’s definition of OIBDA and net borrowings may differ from that of other companies. The Group’s net borrowings to OIBDA ratio was as follows:

2018 2017

Net borrowings 584,152 475,860 OIBDA 259,543 185,386

Net borrowings to OIBDA ratio 2.25 2.54

The Group is subject to certain externally imposed capital requirements and restrictions that are incorporated into the management of capital.

MTS Bank – The CBR requires that banks comply with the minimum capital adequacy ratio of 8% calculated on the basis of statutory standalone financial statements. MTS Bank met the requirements established by the CBR. As of 31 December 2018 and 2017, MTS Bank’s capital adequacy ratio was 11.9 % and 14.54%, respectively.

Limitations on cash distribution – There were certain limitations on cash distribution in Ukraine (Note 39) as of 31 December 2018. Cash balances in Ukraine were as of 31 December 2018 RUB 6,596 million (31 December 2017:RUB 1, 330 million).

168 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Financial risk management objectives – The Board of Directors has overall responsibility for the establishment and ongoing management of the Group’s risk management framework, and the implementation and operation of the Board’s policies are handled by the Management Board.

The Management Board monitors and manages the financial risks relating to the operations of the Group through internal management reports, which analyse exposures by degree and magnitude of risks. These risks include market risk (including foreign currency risk, interest rate risk and other price risk), liquidity risk and credit risk.

Foreign currency risk – Foreign currency risk is the risk that the financial results of the Group will be adversely impacted by changes in exchange rates to which the Group is exposed. The Group undertakes certain transactions denominated in foreign currencies and is primarily exposed to the US Dollar and Euro.

The Group manages its net exposure to foreign exchange risk by balancing both financial assets and financial liabilities denominated in Russian Ruble, US Dollar and Euro and by using certain derivative instruments (Note 32).

The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities (excluding hedged items) at the year-end are as follows.

Liabilities Assets 2018 2017 2018 2017

US Dollar 155,029 181,508 49,729 85,254 Euro 25,076 31,969 20,608 22,074

The table below details the Group’s sensitivity to the strengthening of the US Dollar and Euro against the Russian Ruble by 20%. This analysis assumes that all other variables, in particular interest rates, remain constant. This analysis is based on foreign currency exchange rate variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis was applied to monetary items at the year-end denominated in the respective currencies.

2018 2017

Profit or loss before tax 21,954 17,815

The effect of a corresponding strengthening of the Russian Ruble against the US Dollar and EUR is equal and opposite.

Interest rate risk – Interest rate risk arises from the possibility that changes in interest rates will affect finance costs. The Group is exposed to interest rate risk because entities in the Group borrow funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings and by using certain derivative instruments (Note 32).

The table below details the Group’s annualised sensitivity to a change of floating LIBOR rate by 1% which would impact its operations. The analysis was applied to borrowings (excluding hedged items) based on the assumption that amount of the liability outstanding at the date of statements of financial position was outstanding for the whole period.

2018 2017

Profit or loss before tax 214 192

Fixed rate loan agreements often stipulate creditor’s right to increase interest rates under certain circumstances, including increase of the key rate of the Central Bank of Russia. Therefore, in addition to the effect from changes in floating interest rates, the Group is also exposed to interest rate risk arising from these agreements.

169 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Other price risks – Price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices. These changes may be caused by factors specific to the individual security or its issuer or factors affecting all securities traded in the market. The sensitivity analysis below has been determined based on the exposure to price risks at the end of the reporting period. Sensitivity analysis was prepared on pre-tax basis.

If prices of securities as of the year-end had been 10% higher/lower:

2018 2017

Profit before tax increase/decrease 2,393 3,741 Other comprehensive income increase/decrease 812 2,253

Liquidity risk – Liquidity risk is the risk that the Group will not be able to settle all its liabilities as they fall due.

The Group’s liquidity position is monitored and managed at the level of operating segments. The Group manages liquidity risk by continuously monitoring forecasted and actual cash flows, by matching the maturity profiles of financial assets and liabilities and by maintaining available credit facilities.

At 31 December 2018, the schedule of repayments of undiscounted financial liabilities (except for lease liabilities which is presented in Note 26) of the Group for the next five years and thereafter was as follows:

<1 year 1-2 years 2-3 years 3-4 years 4-5 years 5+ years

Borrowings 105,893 162,666 224,693 75,106 98,327 31,650 Accounts payable 126,917 - - - - - Bank deposits and liabilities 129,872 2,166 464 309 155 320 Liability to Rosimushchestvo 8,113 8,097 - - - - Other financial liabilities 9,904 1,473 - - - -

Total financial liabilities 380,699 174,402 225,157 75,415 98,482 31,970

At 31 December 2018, the schedule of repayments of undiscounted financial liabilities of the Corporate segment for the next five years and thereafter was as follows:

<1 year 1-2 years 2-3 years 3-4 years 4-5 years 5+ years

Borrowings 50,564 33,548 45,303 17,100 59,250 - Accounts payable 6,638 - - - - - Liability to Rosimushchestvo 8,113 8,097 - - - - Other financial liabilities 3,694 - - - - -

Total financial liabilities 69,009 41,645 45,303 17,100 59,250 -

For day to day liquidity requirements the Group had unused credit facilities of RUB 180,946 million as of 31 December 2018, including RUB 99,000 million related to Corporate segment.

Credit risk – Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Group. The Group is exposed to credit risks on cash and cash equivalents, deposits, derivatives and certain other financial instruments with financial institutions, loans and receivables carried at amortised cost and debt securities.

The determination of whether a financial asset has experienced a significant increase in credit risk is based on an assessment of the probability of default, which is made at least quarterly, incorporating external credit rating information as well as internal information on the credit quality of the financial asset. For debt instruments that are not receivables from financial services, a significant increase in credit risk is assessed mainly based on past-due information.

170 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

For contract assets, trade and other receivables, a simplified approach is applied whereby ECL are initially measured over the lifetime of the instrument.

Financial assets in financial institutions – the Group maintains mixture of cash and cash equivalents, deposits, derivatives and certain other financial instruments in financial institutions. These financial institutions are located in different geographical regions and the Group’s policy is designed to limit exposure to any one institution. As part of its risk management processes, the Group performs periodic evaluations of the relative credit standing of the financial institutions.

As of 31 December 2018 the Group has a significant cash balances in the following financial institutions:

2018 2017

VTB 33,357 207 Sberbank 16,613 27,712 The Central bank of Luxemburg 13,729 18,416 The Central bank the Russian Federation 4,877 9,908

Total 68,576 56,243

Bank loans to customers and interbank loans due from banks – MTS Bank performs daily monitoring of future expected cash flows on clients’ and banking operations, which is a part of assets/liabilities management process. The credit risk exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines established by the MTS Bank’s risk management policy are not breached. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to geographical segments.

Other loans and receivables carried at amortised cost – Concentrations of credit risk with respect to loans and trade receivables are limited given that the Group’s customer base is large and unrelated. Management believes there is no further credit risk provision required in excess of the normal provision for bad and doubtful receivables.

32. DERIVATIVE INSTRUMENTS

The Group uses derivative instruments, including interest rate and foreign currency swaps, to manage foreign currency and interest rate risk exposures. The Group measures derivatives at fair value and recognizes them either other current or other non-current financial assets or liabilities in the consolidated statement of financial position. Cash flows from derivatives are classified according to their nature. The Group reviews related fair value hierarchy classifications on a quarterly basis. The fair value measurement of the Group’s derivative instruments is based on the observable yield curves for similar instruments.

The Group designates derivatives as either fair value hedges or cash flow hedges in case the required criteria are met.

Fair value hedges – Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss immediately together with any changes in the fair value of the hedged asset or liability that is attributed to the hedged risk.

Cash flow hedges – The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in other comprehensive income.

The gain or loss relating to the ineffective portion is recognized immediately in profit or loss. Gains or losses accumulated in other comprehensive income are immediately reclassified into consolidated statement of profit and loss when related hedged transactions affect earnings.

For derivatives that do not meet the conditions for hedge accounting, gains and losses from changes in the fair value are recorded immediately in profit or loss.

171 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Assets and liabilities related to multiple derivative contracts with one counterparty are not offset by the Group.

Cross-currency interest rate swap agreements – The Group has entered into several cross- currency swap agreements. The contracts are designated to manage the exposure to changes in currency exchange rate. The contracts assumed periodic exchange of principal and interest payments from RUB-denominated amounts to USD- and Euro- denominated amounts at a specified rate. The rate was determined by the market spot rate upon issuance. Cross-currency interest rate swap contracts mature in 2019-2021.

In aggregate the Group entered into cross-currency interest rate swap agreements designated to manage the exposure to changes in currency exchange rate for 48% of the Group’s bank loans denominated in USD and EUR outstanding as of 31 December 2018 (2017: 21%).

The notional amounts related to currency derivative instruments amounted to RUB 58,949 million, RUB 28,669 million as of 31 December 2018 and 2017, respectively.

Variable-to-fixed interest rate swap agreements – The Group’s bank loans denominated in USD and EUR bear primarily floating interest rates. To eliminate the exposure to changes in variable interest rates related to its debt obligations, the Group enters into variable-to-fixed interest rate swap agreements, so that interest rate swap matches the exact maturity dates of the underlying debt allowing for highly-effective cash flow hedges. In aggregate, the Group entered into variable-to-fixed interest rate swap agreements designated to manage the exposure of changes in variable interest rates related to 22% of the Group’s bank loans with variable rates outstanding as of 31 December 2018 (2017: 42%).

Fixed-to-variable interest rate swap agreements – The Group’s notes and bank loans denominated in Russian Rubles bear primarily fixed interest rates. To eliminate the exposure to changes in fair value of debt obligations, the Group enters into fixed-to-variable interest rate swap agreements. In aggregate the Group entered into fixed-to-variable interest rate swap agreements designated to manage the exposure to changes in value of the debt related to 3% of the Group’s notes and bank loans with fixed rates outstanding as of 31 December 2018 (2017: 5%).

The notional amounts related to interest rate derivative instruments amounted to RUB 44,187 million and RUB 49,429 million as of 31 December 2018 and 2017, respectively.

33. FAIR VALUES

The following fair value hierarchy table presents information regarding Group’s financial assets and liabilities measured at fair value on a recurring basis at 31 December 2018 and 2017. Fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety. Level 1 classification comprises financial instruments where fair value is determined by unadjusted quoted prices in active markets for identical assets or liabilities that the Group can access at the measurement date; Level 2 – from inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; Level 3 – from unobservable inputs.

172 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

31 December 2018 1 January 2018 (adjusted) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Financial assets At fair value through other comprehensive income 10,153 2,797 - 12,950 12,198 8,403 - 20,601 At fair value through profit or loss 23,933 16,591 10,447 50,971 28,334 9,082 9,995 47,411

34,086 19,388 10,447 63,921 40,532 17,485 9,995 68,012

Financial liabilities Derivative instruments - (350) - (350) - (1,766) - (1,766) Contingent considerations - - (936) (936) - - (180) (180) Liabilities under put option agreements - - (3,735) (3,735) - - (2,424) (2,424) Liabilities of SSTL on RCOM shares sale - - - - (2,348) - - (2,348)

- (350) (4,671) (5,021) (2,348) (1,766) (2,604) (6,718)

The fair value of financial assets and liabilities categorised into Level 3 is primarily measured using the discounted cash flows technique. The unobservable inputs to the models include assumptions regarding the future financial performance of the investee, its risk profile, and economic assumptions regarding the industry and jurisdiction in which the investee operates.

There were no changes made during the year to valuation methods or the processes to determine classification and no transfers were made between the levels in the fair value hierarchy. Carrying value of the Group’s financial instruments accounted for at amortised cost approximates their fair value due to their short-term nature and market interest rates, except for borrowings as disclosed in the table below:

31 December 2018 31 December 2017 Carrying value Fair value Carrying value Fair value

Financial liabilities Borrowings 698,335 696,948 535,819 540,255

The table below presents information regarding reconciliation of Level 3 fair value measurements as of 31 December 2018 and 2017.

Liabilities under Other Other put option financial financial agreements assets liabilities Total

Balance at 1 January 2017 (2,243) 8,294 (3) 6,048 Total gains/(losses): - in profit or loss 120 - - 120 - in other comprehensive income 111 1,009 - 1,120 Purchases (412) 694 (177) 105

Balance at 31 December 2017 (2,424) 9,997 (180) 7,393

Total gains/(losses): - in profit or loss (719) (551) 184 (1,086) - in other comprehensive income (592) 237 - (355) Reclasses to other categories - (715) - (715) Disposals - (627) - (627) Purchases - 2,106 (940) 1,166

Balance at 31 December 2018 (3,735) 10,447 (936) 5,776

173 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

During 2018 and 2017, unrealized gains or losses were not recognized as a result of the assessment of level 3 liabilities at fair value.

34. RELATED PARTY TRANSACTIONS

The Group has a number of related parties including its controlling shareholder and entities under common control, associates and joint ventures, and key management personnel.

Trading transactions – The Group’s trading transactions with related parties that are not members of the Group comprise sales and purchases of goods and services in the normal course of business. During the year ended 31 December 2018, sales to related parties comprised RUB 1,091 million (2017: RUB 651 million), purchases from related parties comprised RUB 1,048 million (2017: 273 million). As of 31 December 2018, trade balances receivable from and payable to related parties comprised RUB 5,591 million and RUB 1,242 million, respectively (31 December 2017: RUB 5,227 million and RUB 1,464 million).

Financial transactions – The Group’s financial transactions with related parties primarily comprise loans, deposits and other debt instruments issued to or by the Group entities. At 31 December 2018 and 2017, amounts owed by or to related parties under such arrangements are as follows:

Amounts owed by related parties Amounts owed to related parties 31 December 31 December 31 December 31 December 2018 2017 2018 2017

Controlling shareholder and entities under common control 9,519 3,783 28,996 33,442 Key management personnel - - 6,785 3,095 Other related parties - - 8,168 1,322

Finance costs related to such transactions with related parties and recognized in the consolidated statement of profit or loss in 2018 amounted to RUB 1,690 million (2017: 2,222 million).

Compensation of key management personnel – In 2018 and 2017, the aggregate compensation for key management personnel, being the members of the Company’s Board of Directors and Management Board and the independent directors was as follows:

2018 2017

Short-term benefits 2,143 2,096 Share-based payments - 737

Total 2,143 2,833

174 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

35. SUBSIDIARIES

Details of the Group’s most material direct subsidiaries at the end of the year are as follows:

Beneficial ownership as of 31 December Significant entities Short name Principal activity 2018 2017

Mobile TeleSystems PJSC MTS Telecommunications 50.01% 50.25% RTI JSC RTI Technology 87.00% 87.00% Detsky mir PJSC Detsky mir Retail trading 52.10% 52.10% Medsi Group JSC Medsi Healthcare services 98.50% 100% Bashkirian Power Grid Company JSC BPGC Energy transmission 90.96% 90.96% Segezha Group LLC Segezha Group Pulp and paper 99.93% 100% Leader-Invest JSC Leader-Invest Real estate 100% 100% Agroholding Steppe JSC (Note 8) Steppe Agriculture 84.63% 90.50%

The table below shows details of non-wholly owned subsidiaries of the Group that have material non-controlling interests:

Profit / (loss) allocated to Accumulated non-controlling Name of Principal place of non-controlling interests interests subsidiary business 2018 2017 2018 2017

MTS Russia 3,422 28,004 23,570 57,880

175 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Summarised financial information in respect of each of the Group’s subsidiaries that has material non-controlling interests is set out below. The summarised financial information below represents amounts before intragroup eliminations. The consolidated financial information presented below is indicative of pre-exclusion of intra-group transactions. MTS 2018 2017

Current assets 268,934 146,032 Non-current assets 647,059 405,038 Total assets 915,993 551,070

Current liabilities 295,471 156,671 Non-current liabilities 542,957 270,194 Total liabilities 838,428 426,865

Equity attributable to shareholders of Sistema 41,704 62,246 Non-controlling interests 35,861 61,959

Revenue 480,293 442,910 Expenses (472,461) (386,320) Profit for the year 7,832 56,590

Profit attributable to shareholders of Sistema 3,426 28,586 Profit attributable to the non-controlling interests 4,406 28,004

Other comprehensive income/(loss) attributable to shareholders of Sistema 3,907 (1,413)

Other comprehensive income/(loss) attributable to the non-controlling interests 3,892 (1,413)

Other comprehensive income/(loss) for the year 7,799 (2,826)

Total comprehensive income attributable to shareholders of Sistema 7,333 27,173 Total comprehensive income attributable to the non-controlling interests 8,298 26,592

Total comprehensive income for the year 15,631 53,765

Dividends paid to non-controlling interests 25,643 26,584

Net cash inflow from operating activities 154,390 144,640 Net cash outflow from investing activities (78,389) (81,510) Net cash outflow from financing activities (25,924) (50,445) Net cash inflow 50,077 12,685

176 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

36. NON-CASH TRANSACTIONS

The Group entered into the following non-cash investing and financing activities which are not reflected in the consolidated statements of cash flows: 2018 2017

Additions to the assets leased 25,856 - Equipment and licenses acquired under capital leases - 2,628 Amounts owed for capital expenditures 1,128 2,715 Payables related to business acquisitions 1,302 270

37. RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES

Non-cash changes Cash flows Cash flows Disposal/ Changes from from acquisition in financial operation of the Other 1 January activities activities subsidiaries Currency share changes 31 December 2018 (i) (ii) (Note 6, 7) exchange capital (iii) 2018

Loans and borrowings 517,981 163,266 - 131 22,965 17 (6,025) 698,335 Capital transactions of subsidiaries - (10,354) - - - 6,725 3,629 - Lease liability 203,761 (21,044) (18,383) 532 - - 42,501 207,367 Liability under agreement with Rosimuchestvo 23,028 (10,330) - - 3,607 - (95) 16,210 Dividents payable 4,578 (29,952) - - - 29,789 - 4,415 Other financial liabilities 12,573 (981) - - - - (215) 11,377

Total 761,921 90,605 (18,383) 663 26,572 36,531 39,795 937,704

Non-cash changes Cash flows from Disposal New financial of financial Changes Other 1 January activities subsidiaries lease Currency of the share changes 31 December 2017 (i) (Note 6) arrangements exchange capital (iii) 2017

Borrowings 478,126 65,488 (5,107) 2,628 (4,880) (11) (425) 535,819 Capital transactions of subsidiaries - (33) - - - 3,499 (3,466) - Operations with own shares - (1,481) - - - 1,481 - - Liability to Rosimushchestvo 33,065 (8,532) - - (1,446) - (59) 23,028 Dividends payable 249 (38,792) - - - 43,121 - 4,578 Other financial liabilities 33,499 (4,320) (19,840) - (308) - 3,542 12,573

Total 544,939 12,330 (24,947) 2,628 (6,634) 48,090 (408) 575,998

(i) The cash flows from bank loans, loans from related parties and other borrowings make up the net amount of proceeds from borrowings and repayments of borrowings in the consolidated statement of cash flows. (ii) The cash flows are represented by interest paid. (iii) Other changes include interest accruals and payments.

177 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

38. LEGAL CLAIM OF ROSNEFT AND BASHNEFT

In May 2017, PJSC NK Rosneft, PJSOC Bashneft and the Ministry of Land and Property Relations of the Republic of Bashkortostan (the “MLPR of the RB”) filed legal claims against the Company and its subsidiary JSC Sistema-Invest with the Republic of Bashkortostan Arbitration Court seeking to recover RUB 106,630 million of damages allegedly suffered by Bashneft as a result of its reorganization (the “Claim”), arranged by the Group in 2014. The Republic of Bashkortostan Arbitration Court accepted the Claim and opened case #А07-14085/2017. The amount of damages under the Claim was subsequently increased to RUB 170,619 million.

On 22 December 2017, Sistema, Sistema-Invest, Rosneft, Bashneft and the MLPR of the RB signed a settlement agreement under the Claim (the “Settlement Agreement”). According to the Settlement Agreement, all sides recall all their lawsuits and abandon all claims against each other, and the Company is obliged to pay Bashneft RUB 100 billion by 30 March 2018 in three tranches: RUB 20 billion before 29 December 2017, RUB 40 billion before 28 February 2018 and RUB 40 billion before 30 March 2018.

On 26 December 2017, the Republic of Bashkortostan Arbitration Court approved the Settlement Agreement. The decision of the court on approval of the Settlement Agreement stipulated that on approval of the Settlement Agreement the dispute is considered to be resolved and the decision of the Republic of Bashkortostan Arbitration Court of 30 August 2017 under the Claim should not be enforced.

In February and March 2018, the Company raised loans of the total amount of RUB 80 billion from Gazprombank and Sberbank which are secured by 52.09% of the shares of Detsky Mir and shares of MTS, which are recorded as collateral in proportion to the drawdown of the loan from Sberbank.

By 5 March 2018, the Group early repaid the liability under the Settlement Agreement partially from its own funds and partially from borrowed funds.

On 21 March 2018, the Arbitration Court of the Republic of Bashkortostan satisfied a motion by Bashneft, Rosneft and the MLPR of the RB regarding the withdrawal of claims totalling RUB 131.6 billion that were filed against the Company and Sistema-Invest in December 2017, and terminated the proceedings on case #А07-38665/2017.

The Company and Sistema-Invest have also withdrawn previously filed claims as per the terms of the Settlement Agreement.

The parties have thus fully and duly performed the Settlement Agreement.

39. CONTINGENCIES AND COMMITMENTS

Capital commitments – A capital commitment is a contractual obligation to make payment in the future, mainly in relation to buy assets such as network infrastructure. These amounts are not recorded in the consolidated statement of financial position since the Group has not yet received goods or services from suppliers. At 31 December 2018, the Group had capital commitments of RUB 45,282 million (31 December 2017: RUB 42,323 million) relating to the acquisitions of property, plant and equipment.

Guarantees – At 31 December 2018, MTS Bank guaranteed loans for several companies which totalled RUB 10,587 million (31 December 2017: RUB 5,580 million). These guarantees would require payment by the Group in the event of default on payment by the respective debtor. Such guarantee contracts issued by the Group are initially measured at their fair values and are subsequently measured at the higher of the amount of the obligation under the contract, as determined in accordance with IAS 37, and the amount initially recognized less, where appropriate, cumulative amortisation recognized in accordance with the revenue recognition policies.

178 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Telecommunication licenses – In 2012, the Federal Service for Supervision in the Area of Communications, Information Technologies and Mass Media allocated MTS the necessary license and frequencies to provide LTE telecommunication services in Russia. Under the terms and conditions of the LTE license, MTS is obligated to fully deploy LTE networks within seven years, commencing from 1 January 2013, and deliver LTE services in each population center with over 50,000 inhabitants in Russia by 2019. Also, MTS is obligated to invest at least RUB 15 billion annually toward the LTE roll-out until the network is fully deployed.

In March 2015, upon winning a tender, MTS-Ukraine, a subsidiary of MTS, has acquired a nationwide license for the provision of UMTS (3G) telecommunications services. The license with the cost of UAH 2,715 million (RUB 6,015 million at the acquisition date) has been granted for 15 years. In accordance with the terms of the license MTS-Ukraine is required to provide coverage across Ukraine by April 2020.

In accordance with the terms of the license, MTS-Ukraine also concluded agreements on conversion of provided frequencies with the Ministry of Defense of Ukraine, Ministry of Internal Affairs of Ukraine and State Service of Special Communications and Information Protection of Ukraine. For conversion of frequencies MTS-Ukraine paid UAH 358 million (RUB 865 million as of the payment date) in 2015 and UAH 299 million (RUB 645 million as of the payment date) in 2017, and UAH 230 million (RUB 535 million as of the payment date) adjusted for the rate of inflation in 2018.

Management believes that as of 31 December 2018 the Group complied with the conditions of the aforementioned licenses.

Agreement with Apple – In April 2017, the Group entered into an unconditional purchase agreement with Apple Rus LLC to buy 615,000 iPhone handsets at the prices relevant as at the dates of purchases over a period ending 30 June 2019. Pursuant to the agreement the Group is also required to arrange iPhone advertising campaign. As of 31 December 2018 the Group fully completed total purchase installment outlined by the agreement.

Restriction on transactions with the shares of BPGC – In 2014, in the course of litigation, which the Group is not a party to, the court imposed restrictions on transactions with the shares of BPGC owned by the Group. The restrictions do not limit the Group’s voting rights, rights to receive dividends or any other shareholders rights.

Taxation – Laws and regulations affecting business in the Russian Federation continue to change rapidly. Management’s interpretation of such legislation as applied to the activity of the Group may be challenged by the relevant regional and federal authorities. Recent events suggest that the tax authorities are taking a more assertive position in their interpretation of the legislation and assessments and as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. Fiscal periods generally remain open to tax audit by the authorities in respect of taxes for three calendar years preceding the year of tax audit. Under certain circumstances reviews may cover longer periods. Management believes that it has provided adequately for tax liabilities based on its interpretations of tax legislation. However, the relevant authorities may have different interpretations, and the effects on the financial statements could be significant.

Where uncertainty exists, the Group has accrued tax liabilities as management’s best estimate of the probable outflow of resources which will be required to settle such liabilities. As of 31 December 2018, provisions for additional taxes and customs settlements comprised RUB 1,102 million (31 December 2017: RUB 1,216 million).

The Group also assesses the following contingent liabilities in respect of additional tax settlements:

31 December 31 December 2018 2017

Contingent liabilities for additional taxes other than income tax 730 732 Contingent liabilities for additional income taxes 2,051 2,591

179 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

In accordance with the rules on controlled foreign companies, undistributed profits of the Group foreign subsidiaries, qualifying as controlled foreign companies, should be included in the income tax base of the controlling entities in particular cases. The management of the Group does not expect any significant effect of these changes on the consolidated financial statements of the Group.

Potential adverse effects of economic instability and sanctions in Russia – Starting from 2014, sanctions have been imposed in several packages by the U.S. and the E.U. on certain Russian officials, businessmen and companies. This led to reduced access of the Russian businesses to international capital markets.

The impact of further economic and political developments on future operations and financial position of the Group might be significant.

Political and economic crisis in Ukraine – During the year ended 31 December 2014, a deterioration in the political environment of Ukraine has led to general instability, economic deterioration and armed conflict in eastern Ukraine.

Economic risks especially apply to funds deposited in Ukrainian banks, whose liquidity is affected by the economic downturn. As of 31 December 2018, the Group held RUB 6,596 million in current accounts and deposits in Ukrainian banks.

Anti-terror law – On 7 July 2016, a series of anti-terror laws (also known as “Yarovaya-Ozerov packet of laws”) was enacted by the signature of the President of Russia. The laws provide for mandatory storage of recorded phone conversations, text messages of subscribers, images, sounds, video and other types of messages by telecommunications operators for certain periods of time. These requirements become effective starting 1 July 2018. Compliance with laws may require construction of additional storage, processing and indexing centers. The Group expects the increase in related capital expenditures, which cannot be measured reliably.

Legal proceedings – In the ordinary course of business, the Group is a party to various legal proceedings, and subject to claims, certain of which relate to the developing markets and evolving regulatory environments in which the Group operates. At 31 December 2018, management estimates the range of possible losses, if any, in all pending litigations or other legal proceedings being up to RUB 10,078 million.

In 2017, Federal Antimonopoly Service of the Russian Federation (FAS Russia) issued a warning to MTS and some other federal operators regarding signs of violation of the antimonopoly laws by establishing unreasonable differences in tariffs of communication services for subscribers in home region and outside. Following non-compliance with the warning to terminate such actions, FAS Russia has opened antimonopoly proceeding against MTS. FAS Russia has also opened antimonopoly proceeding against MTS for establishing high prices for communication services in national roaming. In 2018, MTS changed the principles and terms of its tariffs when travelling about the country. FAS Russia held MTS administratively liable and imposed administrative fines on MTS in the amount of RUB 1 million in respect of each proceeding.

In August 2018, FAS Russia has charged MTS and other federal operators with violation of antimonopoly laws in respect to establishing distinguished terms and conditions for SMS pricing for the entities with state-owned equity interest as compared to the terms and conditions for the other entities and establishing unreasonably high SMS prices. Investigation is currently in process. Following the case examination a fine may be imposed on MTS or illegally obtained income may be recovered.

FAS Russia determines the amount of illegally obtained income as the difference between the amount of revenue received from applying monopolistically high prices and the amount of revenue that could have been received if «reasonable» prices were applied. There is no information regarding the level of prices that FAS Russia considers economically justified. It is not possible to make a reliable estimation of amount of fine that could be imposed.

180 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

40. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

The total impact of changes described below on the consolidated statement of financial position as of 1 January 2018 is as follows:

31 December Impact of 1 January 2017 IFRS 9 IFRS 15 IFRS 16 2018

Non-current assets Property, plant and equipment 411,467 - (966) (12,458) 398,043 Right-of-use assets - - - 200,483 200,483 Other intangible assets 97,915 - 6,952 (203) 104,664 Investments in associates and joint ventures 20,783 - (37) - 20,746 Deferred tax assets 35,809 22 268 326 36,425 Other financial assets 104,395 (1,810) - - 102,585 Other assets 18,169 - 1,186 (1,051) 18,304

Total non-current assets 767,034 (1,788) 7,403 187,097 959,746

Current assets Inventories 81,401 - (7,366) (125) 73,910 Contract assets - - 5,788 - 5,788 Accounts receivable 54,836 (694) (142) (2) 53,998 Advances paid and prepaid expenses 15,324 - 8 (5) 15,327 Other financial assets 99,798 (750) - - 99,048

Total current assets 370,615 (1,444) (1,712) (132) 367,327

Total assets 1,137,649 (3,232) 5,691 186,965 1,327,073

Equity Retained earnings (17,375) (215) 1,450 (489) (16,629) Accumulated other comprehensive income/(loss) 2,332 (1,051) - - 1,281 Equity attributable to shareholders of Sistema 47,866 (1,266) 1,450 (489) 47,561 Non-controlling interests 74,957 626 1,170 (27) 76,726

Total equity 122,823 (640) 2,620 (516) 124,287

Non-current liabilities Borrowings 381,561 (3,189) - - 378,372 Lease obligations 12,090 - - 164,287 176,377 Deferred tax liabilities 38,160 391 546 224 39,321 Other liabilities 7,537 - (1,004) (1,082) 5,451

Total non-current liabilities 496,107 (2,798) (458) 163,429 656,280

Current liabilities Borrowings 139,403 206 - - 139,609 Lease obligations 2,765 - - 24,619 27,384 Accounts payable 114,402 - 44 (428) 114,018 Other liabilities 48,789 - 2,888 (139) 51,538 Provisions 13,038 - 597 - 13,635

Total current liabilities 518,719 206 3,529 24,052 546,506

Total equity and liabilities 1,137,649 (3,232) 5,691 186,965 1,327,073

181 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Lease liabilities as of 31 December 2017 include financial lease obligations recognized in accordance with IAS 17, Leases. Contract liabilities and other non-financial liabilities as of 31 December 2017 include advanced received and subscriber prepayments.

IFRS 16, Leases

The standard requires lessees to recognize assets and liabilities for all leases and to present the rights and obligations associated with these leases in the statement of financial position. The standard also includes a new definition of a lease and requirements for its presentation, new disclosures requirements and changes in the accounting for sale and leaseback transactions. For all types of leases lessees should recognize: (a) assets and liabilities related to lease contracts and (b) depreciation of right-of-use assets separately from lease obligations interest in the statement of comprehensive income. IFRS 16 replaced IAS 17, Leases and all related interpretations.

Transition. The standard is effective for annual periods starting 1 January 2019 or after that date, the Group early adopted the standard effective 1 January 2018 concurrent with the adoption of the new standard IFRS 15, Revenue from Contracts with Customers.

According to the transition provisions of IFRS 16, Leases, the Group selected the modified retrospective method of transition with the cumulative effect of initially applying the standard as an adjustment to retained earnings. In accordance with this method the Group did not restate comparative information for the previous period.

The Group made use of the following practical expedients on the date of transition:

 relief from the requirement to reassess whether a contract is, or contains the lease;  application of a single discount rate to a portfolio of leases with reasonably similar characteristics;  use of assessment of whether leases are onerous applying IAS 37, Provisions, Contingent Liabilities and Contingent Assets, immediately before the date of initial application as an alternative to performing an impairment review;  permission to exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application;  use hindsight, such as in determining the lease term if the contract contains options to extend or terminate the lease.

Effect from the adoption. As a result of adoption of IFRS 16, Leases, the Group recognized right-of-use assets of RUB 200,483 million. The effect from the adoption of IFRS 16, Leases, is presented in the table above.

IFRS 15, Revenue from Contracts with Customers

IFRS 15, Revenue from Contracts with Customers is effective since 1 January 2018. It replaces the existing standards IAS 18, Revenue, IAS 11, Construction Contracts, IFRIC 15, Agreements for the Construction of Real Estate, and other related interpretations.

The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard provides a single, principles-based five-step model for the determination and recognition of revenue to be applied to all contracts with customers.

In accordance with IFRS 15 the Group recognizes revenue when or as a performance obligation is satisfied, i.e. when the control over goods or services that form a performance obligation of the Group is transferred to a customer.

Transition. The Group applied IFRS 15 retrospectively with the cumulative effect as an adjustment to retained earnings as at 1 January 2018.

182 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Effect from the adoption. The most significant impact from the adoption of IFRS 15 on the Group’s consolidated financial statements related to the deferral of certain incremental costs incurred in acquiring or fulfilling a contract with a customer. Capitalized cost of obtaining contracts is included in line “Other assets” of non-current assets in the consolidated statement of financial position.

Another impact of the standard includes later recognition of revenue in cases, where “material rights” (such as offering additional products and services free of charge) are granted to the customers, and there is a reallocation of remuneration between components of contracts with customers.

Additionally, as a result of changes in criteria of principal versus agent evolution in IFRS 15, the Group recognizes revenue for content services as an agent except for contracts where the Group controls the respective content.

The effects of IFRS 15 adoption on the Group’s consolidated statement of financial position as of 31 December 2018 are presented below:

As if IFRS 15 was not applied IFRS 15 As reported

ASSETS

NON-CURRENT ASSETS:

Property, plant and equipment 423,880 (1,559) 422,321 Other intangible assets 105,018 7,107 112,125 Investments in associates 34,544 (37) 34,507 Other assets 418,877 2,177 421,054

Total non-current assets 982,319 7,688 990,007

CURRENT ASSETS:

Other assets 349,497 (4,548) 344,949

Total current assets 479,946 (4,548) 475,398

TO TAL ASSETS 1,462,265 3,140 1,465,405

As if IFRS 15 was not applied IFRS 15 As reported

EQUITY AND LIABILITIES

EQUITY:

Accumulated loss (68,049) 4,477 (63,572) Accumulated other comprehensive loss 11,110 94 11,204

Equity attributable to owners of the Company 12,546 4,571 17,117 Non-controlling interests 45,802 109 45,911

Total equity 58,348 4,680 63,028

NON-CURRENT LIABILITIES:

Deferred tax liabilities 38,998 1,163 40,161

Total non-current liabilities 837,901 1,761 839,662

CURRENT LIABILITIES:

Other liabilities 312,233 (3,300) 308,933

Total current liabilities 566,015 (3,300) 562,715

TOTAL EQUITY AND LIABILITIES 1,462,265 3,140 1,465,405

183 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

The effects of IFRS 15 adoption on the Group’s consolidated statements of profit or loss for the twelve months ended 31 December 2018 are presented below:

As if IFRS 15 was not applied IFRS 15 As reported

Revenue 770,197 7,208 777,405 Revenue 770,197 7,208 777,405

Cost (363,093) (2,928) (366,021) Selling, general and administrative expenses (145,559) 3,954 (141,605) Depreciation and amortization (127,055) (3,886) (130,941)

Operating profit 123,712 4,890 128,602

Profit before tax 48,145 4,083 52,228

Income tax expense (31,992) (817) (32,809)

Loss for the period (41,571) 3,267 (38,304)

Loss attributable to Sistema (49,075) 3,179 (45,896)

The effects of IFRS 15 adoption on the Group’s consolidated statements of cash flows for the twelve months ended 31 December 2018 are presented below:

As if IFRS 15 was not applied IFRS 15 As reported

CASH FLOWS FROM OPERATING ACTIVITIES:

Loss for the period (41,483) 3,179 (38,304)

Adjustments for: Depreciation and amortization 128,123 3,896 132,019 Income tax expense 33,626 (817) 32,809

Movements in operating assets and liabilities: Accounts payables 11,519 (1,522) 9,997

NET CASH PROVIDED BY OPERATING ACTIVITIES 83,892 4,736 88,628

CASH FLOWS FROM INVESTING ACTIVITIES:

Payments to obtain and fulfill contracts - (5,645) (5,645) Other (909) 909 -

NET CASH USED IN INVESTING ACTIVITIES (123,199) (4,736) (127,935)

The effect from the adoption of IFRS 15, Revenue from Contracts with Customers is presented in the table above.

IFRS 9, Financial Instruments

The standard replaces IAS 39, Financial Instruments: Recognition and Measurement, and brings together the following aspects of accounting for financial instruments: classification and measurement, impairment, derecognition and general hedge accounting. IFRS 9 introduces following categories of financial instruments measurement: at amortized cost, at fair value through Profit and Loss and at fair value through Other Comprehensive Income.

184 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Transition. The Group did not restate 2017 comparatives in accordance with IFRS 9. Thus 2017 comparatives are recognized in accordance with IAS 39 and cannot be compared with financial information for 2018. The Group recognized the cumulative effect arising from the transition to IFRS 9 as an adjustment to the opening balance of retained earnings. Effect of adoption is presented above.

Effect from the adoption. The main impact of IFRS 9 is in the way the Group accounts for the impairment of financial assets. Application of expected credit losses model under IFRS 9 resulted in earlier recognition of credit losses for other financial assets and trade receivables of RUB 3,254 million. Also as a result of IFRS 9 adoption the Group recognized RUB 2,983 million gain relating to modification of its financial liabilities.

Standards, interpretations and amendments in issue but not yet effective

The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective:

Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures (1) IFRIC 23 Uncertainty over Income Tax Treatments (1) Amendments to IFRS 9 Prepayment Features With Negative Compensation(1) Amendments IFRSs Annual Improvements to IFRSs 2015-2017 Cycle (1) Amendments to Conceptual Framework Conceptual Framework in IFRS standards (2) IFRS 17 Insurance Contracts (3) Amendments to IFRS 10 Sale or Contribution of Assets between an Investor and its and IAS 28 Associate or Joint Venture (4)

(1) Effective for annual periods beginning on or after 1 January 2019, with earlier application permitted. (2) Effective for annual periods beginning on or after 1 January 2020, with earlier application permitted. (3) Effective for annual periods beginning on or after 1 January 2021, with earlier application permitted. (4) The effective date for these amendments was deferred indefinitely. Early adoption continues to be permitted.

These IFRS pronouncements are not expected to have a material impact on the Group’s consolidated financial statements.

41. EVENTS AFTER THE REPORTING DATE

Acquisition of shares under the Share Repurchase Plan – Since the end of the reporting period MTS acquired 38,358,388 shares of its common stocks representing 1.92% of share capital issued by MTS.

Sale of investment in Ozon Holdings Limited – In February 2019 the Group purchased 18.69% stake in Ozon Holdings Limited from MTS for RUB 7.9 billion.

Ruble bonds placement – In February Sistema issued exchange-traded bonds series 001P-09 totaling RUB 10 billion a maturity of 10 years. The Group has an unconditional obligation to repurchase bonds in 3 years. The coupon period is 182 days.

Purchase of additional stake in MTS-Bank – In February 2019 Sistema and Sistema Telecom Aktivy, its 100% subsidiary, sold 39.5% stake in MTS Bank to Mobile TeleSystems B.V., 100% subsidiary of MTS, for RUB 11.4 billion. As a result of the transaction, Sistema’s share in MTS Bank decreased to 5.0% and MTS’s share increased from 55.2% to 94.7%.

Sale of stake in Leader Invest – In February the Group sold 51% of the shares of JSC Leader Invest to Etalon Group PLC for RUB 15.2 billion. As result of the transaction, the Group’s stake in Leader Invest will amount to 49%.

Acquisition of stake in Etalon Group PLC – In February the Group purchased 25% stake in Etalon Group PLC from Viacheslav Zarenkov, it’s founder and the largest shareholder, and his family members, for USD 226.6 million.

Ruble bonds placement – In January 2019, MTS issued exchange-traded bonds totaling RUB 10 billion with a coupon rate of 8.70% and a maturity of 5 years.

185 SISTEMA PJSFC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions of Russian Rubles, unless otherwise stated)

Class action complaint – In March 2019 a proposed class action complaint on behalf of Shayan Salim and all other persons similarly situated has been filed in the United States District Court for the Eastern District of New York against MTS and certain of its managers. The complaint is alleging certain securities law violations relating to the recently announced resolution of US government investigations related to the MTS’s former operations in Uzbekistan (Note 5). MTS is reviewing the allegations and intends to defend its interests. It is currently impossible to measure possible implications and amount of claim reliably.

Ruble bonds placement – In March Sistema issued exchange-traded bonds series 001P-10 totaling RUB 10 billion a maturity of 10 years. The Group has an unconditional obligation to repurchase bonds in 3.5 years. The coupon period is 182 days.

Acquisition of own shares in Agroholding Steppe – In March 2019, Agroholding Steppe purchased own shares from a minority shareholder for RUB 2.0 billion. As a result of the transaction, the Group's ownership in Agroholding Steppe increased to 92.75%.

186