ȽɈȾɈȼɈɃɈɌɑȬɌ OJSC VolgaTelecom annual statement

2006 CONTENTS

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VOLGATELECOM

Kirov

Izhevsk

Ioshkar Ola Nizhny Novgorod Cheboksary

Saransk Ulyanovsk Samara Penza Orenburg

Saratov

GENERAL INFORMATION Full brand name: Open Joint Stock &RPSDQ\9ROJD7HOHFRP

Location: 'RP6Y\D]L0*RUN\VTXDUH1L]KQ\1RYJRURGWKH5XVVLDQ)HGHUDWLRQ

The date of state registration of the Company and the registration number: 'HFHPEHUȱ &HUWLÀFDWHRIOHJDOHQWLW\·VVWDWHUHJLVWUDWLRQVHULHVǙǜǛǙǙȱ LVVXHGRQ-XQH

OJSC VolgaTelecom was registered in Uniform State Register of Legal Entities by the Inspection of Russia’s Ministry of Taxation for Nizhegorodskyi district of Nizhny Novgorod city on August 1, XQGHUWKHEDVLFVWDWHUHJLVWUDWLRQQXPEHU

6 Annual statement / 2006 VOLGATELECOM The Company was registered by Order of the IHGHUDOGLVWULFW head of administration of Nizhny Novgorod The majority of VDF population lives in towns FLW\ ȱ Ǽ RI 'HFHPEHU  DV DQGFLWLHV7ZRFLWLHVZLWKSRSXODWLRQ Open Joint Stock Company Svyazinform of RYHUPLOOLRQSHRSOH1L]KQ\1RYJRURGDQG 1L]KQ\ 1RYJRURG REODVW 2-6& 1L]KHJRURG 6DPDUDDUHLQWKH&RPSDQ\·VFRYHUDUHD svyazinform) as a result of privatization of state enterprise of communication and IT Rossvyazinform and is the cessionary of all The region’s LWVULJKWVDQGREOLJDWLRQV macroeconomics

Basing on the resolution of general meeting Year 2006 was marked by the growth of in of shareholders of OJSC Nizhegorodsvyazin dustrial production and the improvement of form of November 9, 2001 the Company was VRFLDOVLWXDWLRQLQ9)'6RZLWKWKHDYHUDJH UHRUJDQL]HGE\ZD\RIDIÀOLDWLRQWRLWRI2-6& growth of consumer cost by 8% the real in Kirovelectrosvyaz, OJSC Martelcom, OJSC come of VFD population grew by 18%, and Svyazinform of the Republic of Mordovia, WKH VDODU\  E\  ,Q  WKH DYHUDJH OJSC Electrosvyaz of Orenburg oblast, OJSC ZDJHLQ9)'DFFRXQWHGIRU5857KH Svyazinform of Penza oblast, OJSC Svyazin growth of the production sector in VFD was form of Samara oblast, OJSC Saratovelec 6%, and direct capital investments grew by trosvyaz, OJSC Udmurt Telecom, OJSC Uly 12% which is higher than in Russia upon the anovskelectrosvyaz, and OJSC Svyazinform ZKROH RI&KXYDVK5HSXEOLF Such industries as machine manufacturing On June 28, 2002 general meeting of share and fuel and energy complex are the lead holders of OJSC Nizhegorodsvyazinform HUV LQ WKH VWUXFWXUH RI SURGXFWLRQ VHFWRU passed the resolution to rename the Com Agricultural sector, chemical industry and SDQ\LQWR2-6&9ROJD7HOHFRP light industry make a substantial input into the volume of industrial production of the 9ROJD )HGHUDO 'LVWULFW (OHFWULFSRZHU VXS The Volga Federal District ply industry is an important industry of VFD PDUNHW VSHFLDOL]DWLRQ /DUJH K\GURHOHFWULF OJSC VolgaTelecom basic licensed territory power stations on the Volga and Kama riv for providing communication services cov ers are located in the district; nuclear power ers 11 regions of the Volga Federal District LV UHSUHVHQWHG E\ %DODNRYR·V $SODQW ² WKH KHUHLQDIWHU9)' ZKLFKFRPSULVHVVXE ODUJHVWLQWKHUHJLRQ/DUJHLQYHVWPHQWSURM jects of the Russian Federation, including: ects are successfully realized in VFD, and also national priority projects: “Education”, UHSXEOLFV%DVKNRUWRVWDQ0DUL\(O ´+HDOWKFDUHµ´+RXVLQJµDQG´$JURLQGXVWULDO Mordovia, Tatarstan, Udmurtia, and Chu FRPSOH[GHYHORSPHQWµ vashia; REODVWV .LURY 1L]KQ\ 1RYJRURG Orenburg, Penza, Samara, Saratov and Uly anovsk, 3HUPDUHD WKHUHJLRQFRPSULVHV3HUP REODVW DQG .RPL3HUP\DN $XWRQRPRXV $UHD  VFD territory is 1 038 thousand km2, which is equal to 7,27% of the Russian Federation WHUULWRU\WKRXVDQGSHRSOHDUHOLYLQJ KHUHRIWKHWRWDOSRSXODWLRQRI5XV VLD7KLVLVWKHVHFRQGRXWPDQ DIWHU&HQWUDO )HGHUDO'LVWULFW DQGWKHPRVWPXOWLQDWLRQDO

Annual statement / 2006 7 VOLGATELECOM Russia’s telecommunica VFD telecommunications market is develop LQJDWKLJKUDWHV,QWKHDFWXDOYROXPH WLRQVLQGXVWU\WUHQGV of telecommunications services in the re The Company’s position in gions where OJSC VolgaTelecom is operating DPRXQWHGWRDERXW585ELOOLRQ2-6&9RO the industry gaTelecom’s share is 36% of all the revenues RIWHOHFRPVHFWRU Changes of the industry’s legislation relating WRWKHSULQFLSOHVRIORQJGLVWDQFHFRPPXQLF Telecommunications market in the sector of DWLRQ VHUYLFHV SURYLVLRQ WR HQGXVHUV DQG À[HGOLQH ORFDODQGLQWUDUHJLRQDO FRPPXQLFD also the principles of operators’ interaction tion was developing with damping of demand when rendering these services had material for services among new clients, improvement effect on the situation in telecommunications of competition with alternative operators and LQGXVWU\LQ$PHQGPHQWWRFODXVH PRELOHFRPPXQLFDWLRQFRPSDQLHV of Federal law “On communication” abolish ing payment for incoming calls to any phone The market of Internet wideband access ser ²´&DOOLQJ3DUW\3D\VµSULQFLSOH²FDPHLQWR YLFHVLVDFWLYHO\JURZLQJ5HGXFWLRQLQFRVWRI IRUFH $OVR WKH OLPLW SULFHV IRU FRQQHFWLRQ VHUYLFH DFFHVV DQG WUDIÀF FRVW HQFRXUDJHG DQGWUDIÀFWUDQVLWVHUYLFHVZHUHLQWURGXFHG WKHJURZWK7KHUHLVDVWDEOHWUHQGRIFKXUQ RI ,QWHUQHW GLDOXS DFFHVV XVHUV WRZDUGV ZLGHEDQGDFFHVVWHFKQRORJLHV

THE COMPANY’S SHARE OF TELECOMMUNICATIONS SERVICES MARKET

100% Market share at 2006 end,%* 88,5%96,3% 68,4% 73,7% 0% Local intra-regional Internet services Dial-up telephony telephony via leased channel Internet services

* market share was calculated with due account for: - preliminary estimates of telecommunications market segments volume; - adjustment of indicators for Internet services market by taking into account the development of connection technology via “home” networks which are highly fragmented.

8 Annual statement / 2006 9,,,VOLGATELECOM ǜǟǍǜǔǖnj

Annual statement / 2006 9 GENERAL DIRECTOR’S ADDRESS

$W\HDUHQG2-6&9ROJD7HOHFRPKDV become the leader among Svyazinvest group companies by the number of Inter net wideband access users, is ranked the VHFRQG E\ WKH YROXPH RI À[HG OLQH VXE scribers’ base and is the third by digitaliza WLRQOHYHO

High level of competition encourages the Company to follow advanced trends of tele FRPPXQLFDWLRQV PDUNHW DQG DFWLYHO\ XWLO ize new technologies in order not to lose WKHOHDGHUVKLSSRVLWLRQ7KLVIDFWZRUNVWR ZDUGVGLYHUVLÀFDWLRQRIUHYHQXHVWUXFWXUH It is important to note that the revenues IURPQHZWHFKQRORJ\VHUYLFHVKDYHVLJQLI LFDQWO\LQFUHDVHG7KHPDMRUVKDUHLQWKHLU structure is data transfer and Internet ac FHVVVHUYLFHV0RUHRYHUWKHKLJKHVWJURZWK Dear shareholders, LVLQWKHVHFWRURI,QWHUQHWXVHUVZLWK$'6/ EDVHGDFFHVV,QWURGXFWLRQRQWKHPDUNHW of new trademark “J” in May 2006 contrib

We are aware of prime importance and

Annual statement / 2006 11 BASIC EVENTS 9,,,BASIC ǜǟǍǜǔǖnj EVENTS February participated in the First economic forum “Modern trends of regional economics OJSC VolgaTelecom participated in the ex hibition of IT of Nizhny Novgorod oblast; the development” organized by the govern exhibition was occasional to holding the vis PHQWRI8O\DQRYVNREODVW iting session of the presidium of RF State council on the problems of IT and communi June FDWLRQWHFKQRORJLHVGHYHORSPHQW OJSC VolgaTelecom was a nominee of Na 9ODGLPLU 3XWLQ  WKH 3UHVLGHQW RI WKH 5XV WLRQDO $ZDUG ´7D[SD\HU RI WKH \HDUµ LQVWLW sian Federation using videoconferencing XWHG E\ 0HJD5HJLRQDO 2UJDQL]DWLRQ RI (Q equipment installed at VolgaTelecom exhi trepreneurs with the support of Accounting bition stand was able to communicate with Chamber of the Russian Federation, faction the students of four rural schools of Nizhny “United Russia” of State Duma of the Rus 1RYJRURGREODVW sian Federation and the Committee for bud get and taxes of State Duma of the Russian 2-6&9ROJD7HOHFRP ,QWHUQHWVLWH ZDV UHF )HGHUDWLRQ ognized as the best site at regional contest of corporate editions and sites “Tambour OJSC VolgaTelecom Saratov branch took part ²3RYRO]KLHµ7KH&RPSDQ\·VFRUSRU LQ WKH WK VSHFLDOL]HG H[KLELWLRQ ´&LW\VWURL ate newspaper “VolgaTelecom is on line” H[SRµ RUJDQL]HG E\ ([KLELWLRQ &HQWHU ZDVUDWHGWKHWKLUGIRU´HIÀFLHQWHGLWRULDO ´6RÀW([SRµFRPSDQLHVIURPUHJLRQV FOLPDWHDQGFRQWHQWµ RI5XVVLDSDUWLFLSDWHGLQWKHH[KLELWLRQ April Annual general meeting of shareholders of The Company’s management participated OJSC VolgaTelecom in the form of compres in conference “Communications and invest HQFHZDVKHOGRQ-XQH ments in Russia” and made the presentation of the Company’s activities and the pros July SHFWVRILWVGHYHORSPHQW OJSC VolgaTelecom Orenburg branch was the winner of the sixth annual contest “Leader in OJSC VolgaTelecom Ulyanovsk branch took HFRQRPLFV²µKHOGE\WKHJRYHUQPHQW SDUWLQVSHFLDOL]HGH[KLELWLRQ´(&20081,& DQG/HJLVODWLYHDVVHPEO\RI2UHQEXUJREODVW ATIONS” which brought together IT market The prize was awarded in nomination “Entity leaders of Ulyanovsk oblast and of neighborr RIKLJKVRFLDOHIÀFLHQF\µ LQJUHJLRQV OJSC VolgaTelecom was a prize winner of VolgaTelecom Kirov branch participated in International project “Transparency Award”, WKH,,,UGPHJDUHJLRQDOH[KLELWLRQ´,QIRUPUHV WKLV SURMHFW LV D MRLQW LQLWLDWLYH RI 5XVVLDQ ource 2007”, the visitors were able to see the Swiss business club (Switzerland), High in entire range of new services provided by the stitute of business and management INSAM &RPSDQ\%\WKHHQGRIWKHH[KLELWLRQ2-6& (Switzerland) and is realized with the sup VolgaTelecom was awarded the diploma “For port of audit company “PricewaterhouseCoo the best information system of real business pers”, Center of anticorruption investigations VXSSRUWµ and initiatives “Transparency International”, and International public organization “The May commonwealth” association of accountants OJSC VolgaTelecom branch in Udmurtia DQGDXGLWRUVµ Republic took part in exhibition “City of the ǡǡ,VW FHQWXU\µ LQ ,]KHYVN ([SRFHQWHU DQG presented the latest telecommunication WHFKQRORJLHV OJSC VolgaTelecom Ulyanovsk branch

Annual statement / 2006 13 BASIC9,,, EVENTS ǜǟǍǜǔǖnj September OJSC VolgaTelecom Ulyanovsk branch won VolgaTelecom Nizhny Novgorod branch took WKH VW SODFH LQ VKRZFRQWHVW RI WKH EHVW organization of safety arrangements and SDUW LQ WKH WK ,QWHUQDWLRQDO LQGXVWULDO  precautions work among the enterprises of HFRQRPLFIRUXP´5XVVLD8QLÀHGµ 8O\DQRYVNREODVW7KHVKRZFRQWHVWZDVKHOG within the framework of the oblast’s program 2-6&9ROJD7HOHFRPEUDQFKLQ8GPXUWLD5HS ublic in Administration of Izhevsk city made of improving labor conditions and safety arr the presentation of modern communication UDQJHPHQWVDQGSUHFDXWLRQV services provided by the Company within the IUDPHZRUNRI´(,]KHYVNµSURJUDPLQWHQGHG to implement new telecommunication tech nologies in different industries of municipal VHUYLFHV

OJSC VolgaTelecom Ulyanovsk branch held UHJLRQDOFRQIHUHQFH´,QWHUQHWDQGEXVLQHVVµ

October OJSC VolgaTelecom took part in International H[KLELWLRQ ´,QIR&RPµ KHOG XQGHU WKH auspices of Ministry of IT and communica WLRQV RI WKH 5XVVLDQ )HGHUDWLRQ 7KH PDMRU WRSLF RI WKH H[KLELWLRQ ² XWLOL]DWLRQ RI PRG HUQ LQIRFRPPXQLFDWLRQ WHFKQRORJLHV LQ VR FLDOVSKHUH 7KH H[KLELWLRQ ZDV WR GHPRQ strate the innovations and achievements of WHOHFRP LQGXVWU\ DQG LQIRFRPPXQLFDWLRQ technologies in such areas as healthcare, HGXFDWLRQLQIRFRPPXQLFDWLRQWHFKQRORJLHV LQ JRYHUQPHQW DQG EXVLQHVV PDQDJHPHQW OJSC VolgaTelecom presented its exhibit at WKHVWDQGLQ6DPDUDFLW\

2-6& 9ROJD7HOHFRP 3HQ]D EUDQFK SDUWLFLS DWHG LQ WKH ,9WK PHJDUHJLRQDO VSHFLDOL]HG H[KLELWLRQIDLU´(3HQ]Dµ

November 2Q 1RYHPEHU  LQ /RQGRQ DQG 6WRFN KROPWKH&RPSDQ\SDUWLFLSDWHGLQURDGVKRZ ´2-6& 9ROJD7HOHFRP 5HVXOWV DQG DFKLHYH PHQWV 'HYHORSPHQW SURVSHFWVµ  ,Q WKH FRXUVHRIWKHURDGVKRZWKH&RPSDQ\·VPDQ December DJHPHQWKHOGPHHWLQJVZLWKUHSUHVHQWDW OJSC VolgaTelecom Saratov branch was a LYHVRIEDQNVDQGLQYHVWPHQWFRPSDQLHV winner of annual oblast’s contest of the best organization of HR relations; the contest was OJSC VolgaTelecom Samara branch was a held by the Ministry of healthcare and social winner of regional contest of PR projects DVVLVWDQFHRI6DUDWRYREODVW ´%ROVKRLNUXJµLQQRPLQDWLRQ´7KHEHVW 35SURMHFWIRUFRPPHUFLDOVHFWRUµ

14 Annual statement / 2006 BASIC EVENTS

OJSC VolgaTelecom Samara branch was a Government regulation under the auspices of ZLQQHURIWKH9WKDQQXDOFRQWHVW´7KH&RP ministries and authorities and with the partic pany of the year: the salt of the earth and the LSDWLRQRIDOO5XVVLDQDVVRFLDWLRQVRIHPSOR\ best enterprises of Samara oblast” among HUVDQGWUDGHXQLRQV2-6&9ROJD7HOHFRPZDV FRPPXQLFDWLRQLQGXVWU\HQWHUSULVHVLQQRP awarded the prize for winning in nomination LQDWLRQ´)RUKLJKFRVWHIIHFWLYHQHVVµ ´6WDII TXDOLÀFDWLRQ V\VWHP RI VWDII WUDLQLQJ OJSC VolgaTelecom branch in Mordovia Re DQGUHWUDLQLQJµ SXEOLF ZDV D ZLQQHU RI $OO5XVVLD FRQWHVW ´EHVWSURGXFWVRI5XVVLDµ

At year 2006 end OJSC VolgaTelecom department of bookkeep 3DUWLFLSDWLRQ LQ $OO5XVVLD FRQWHVW ´7KH EHVW ing and reporting was a winner of contest “The 5XVVLDQ SHUVRQQHO VHUYLFH ² µ 2-6& EHVW5XVVLDQERRNNHHSLQJVHUYLFHµ VolgaTelecom was awarded the diploma of KRQRURIWKHFRQWHVW·VZLQQHU

3DUWLFLSDWLRQ LQ $OO5XVVLD FRQWHVW ´5XVVLDQ FRPSDQ\RIKLJKVRFLDOHIÀFLHQF\µWKHFRQWHVW was held according to the Russian Federation

Annual statement / 2006 15 RESULTS OF FINANCIAL AND ECONOMIC ACTIVITIES RESULTS OF FINANCIAL AND ECONOMIC ACTIVITIES KEY ECONOMIC INDICATORS

Rate Indicator’s description Measure unit 2005 2006 of indicators’ change Sales proceeds of commodities, RUR, million products, works and services 21 348,4 21 691,2 101,6% Communication services RUR, million 20 787,6 20 367,0 revenues 98,0% Expenditures, RUR million RUR, million 16 059,4 16 949,8 105,5%

Sales profit RUR, million 5 289,0 4 741,5 89,6%

Pretax earnings RUR, million 3 424,0 3 534,2 103,2%

Net profit RUR, million 2 255,6 2 453,6 108,8%

The growth of core activities revenues is ac Since January 1, 2006 the Company’s pro counted for structural changes which oc ceeds include agency fee revenue paid by DLD curred in telecommunication market due to & ILD operators for servicing the subscribers the enactment of a number of regulatory doc ZKRXVHGWKHVHUYLFHVRIORQJGLVWDQFHFRP XPHQWV $V D UHVXOW VLQFH -DQXDU\   PXQLFDWLRQVRSHUDWRUV the Company does not provide DLD & ILD serr YLFHVWRVXEVFULEHUV

REVENUE STRUCTURE 2005 2006

16,5% 12,9% 39,5% 7,2% 10,6% 43,1%

6,7% 7,5% 3,3% 6,9% 30,4% 15,3%

DLD, ILD Urban Rural Connection Value-added Other and Intra-regional telephony telephony and traffic services services telephony transit services

Annual statement / 2006 17 RESULTS OF FINANCIAL AND ECONOMIC ACTIVITIES In 2006 the growth rate of communication services revenue net of DLD ,/'UHYHQXHDFFRXQWHGIRU Enacted new statutory regulations considerably changed the Company’s UHYHQXHVWUXFWXUH,QDGGLWLRQDFWLYHSURPRWLRQRIYDOXHDGGHGVHUYLFHV resulted in 3,4% growth of this item in revenue structure or by RUR 660 PLOOLRQ YV 

EXPENDITURE PATTERN

Indicators’ description 2005 2006

Labor costs (uniform social tax including) 42,5% 43%

Material costs 7,7% 7,8%

Depreciation & amortization 16,6% 16,9%

Rostelecom expenses 12,6% 0,8%

Traffic payments 3,3% 8,8%

Other expenses 17,3% 22,7%

In 2006 due to new business environment the share of expens HVIRU5RVWHOHFRPWUDIÀFSD\PHQWVFRQVLGHUDEO\UHGXFHG$WWKH same time the item related to payments to operators for the Com SDQ\·VWUDIÀFWHUPLQDWHGDWWKHLUQHWZRUNVKDVJURZQ7KHJURZWK RIH[SHQVHVIRUWKLVLWHPYVDPRXQWHGWR585PLO OLRQRU

KEY INDICATORS OF THE COMPANY’S OPERATING EFFICIENCY

Measure Rate Indicators description 2005 2006 of indicators unit change Net profit margin % 14,0 14,5 +0,5%

EBITDA RUR million 6 767,4 7 136,6 105,5%

EBITDA margin % 31,7 32,9 +1,2%

Revenue per a line RUR. 4 605 4383 95,2%

Sales profit per a line RUR 1 141 958 84,0%

Revenue per an employee* RUR 459 609 509 244 110,8%

Sales profit per an employee* RUR 113 868 111 315 97,8%

Number of lines per an employee* Lines 99,8 116,2 116,4%

* - staff on the payroll for the reporting period is taken into account

18 Annual statement / 2006 9,,, ǜǟǍǜǔǖnj

ǏǺǰǺǮǺǵǺǾȃȌǾ 19 9,,, ǜǟǍǜǔǖnj One of strategic trends of OJSC VolgaTelecom revenue performance in FUHDVH LV YDOXHDGGHG VHUYLFHV GHYHORSPHQW ,Q  WKHVH VHUYLFHV JHQHUDWHG585PLOOLRQZKLFKLVE\PRUHWKDQLQ In 2006 the revenue from Internet services via leased lines amounted WR585PLOOLRQ585PLOOLRQJDLQYV\HDUUHYHQXH This market sector is the fastest growing sector and OJSC VolgaTelecom LQGLFDWRUVPDWFKPDUNHWWUHQGV7KHEDVLFIDFWRUZKLFKHQDEOHGWRVHF ure dynamic development of Internet wideband access services is the LQFUHDVHLQWKHYROXPHRISURYLGHGVHUYLFHV

VALUE-ADDED SERVICES REVENUE STRUCTURE

Internet dial-up access 773,6 services 35,7 Internet services via 1084,6 Leased lines 50,1

Data transfer network services 118,1 5,5

Other 187,9 Revenue amount, RUR million 8,7 Share, %

2164,2 Total for OJSC VolgaTelecom 100

THE COMPANY’S NET ASSETS VALUE

Asset description 01. 01. 2007

Net assets value (RUR thousand) 18 335 183

Authorized capital (RUR thousand) 1 639 765

Required reserve (RUR thousand) 81 988

Net assets to authorized capital ratio (%) 1 118,16

Ratio of net assets to the amount of authorized capital and required reserve (%) 1 064,91

Net assets value grew by RUR 1 837 771 thousand or by 111,14%.

NET PROFIT ALLOCATION

25,82% (RUR 633 401,6 thousand)

74,18% (RUR 1 820 186,2 thousand)

Gains in shareholder's equity Dividends payment as related to undistributed profit (% to net profit) of the reporting year (% to net profit)

20 Annual statement / 2006 RESULTS OF FINANCIAL AND ECONOMIC ACTIVITIES

Financial operations $PLFDEOHVHWWOHPHQWZLWK5)0LQLVWU\RI Finance and Vnesheconombank was signed 7KHFRVWRIVHUYLFLQJWKH&RPSDQ\·V to settle indebtedness under the Company’s GHEW REOLJDWLRQV ZDV UHGXFHG E\  )RU 2006 the saving amounted to RUR 153 mil GHEWREOLJDWLRQVZRUWK(XURPLOOLRQ OLRQ $UUDQJHPHQWVZHUHPDGHWRUHLPEXUVH 'HEW REOLJDWLRQV ZRUWK 585   UHFHLYDEOHV IRU EHQHÀWV WR FHUWDLQ SRSXOD million were restructured to optimize credit WLRQJURXSVIURPIHGHUDOEXGJHW7KHDUUHDUV were reduced by RUR 480,3 million (from SRUWIROLR'XHWRWKHSODFHPHQWRIWKHWK ERQGHGORDQ DPRXQW²585ELOOLRQPDW 585PLOOLRQWR585PLOOLRQ  XULW\\HDUVRIIHULQ\HDUVUDWHRIWKH VWFRXSRQSHUDQQXP WKHVDYLQJRI money resources for debt servicing account HGIRU585PLOOLRQ

Annual statement / 2006 21 INVESTMENT POLICY In 2006 OJSC VolgaTelecom investment activities were in line with the in YHVWPHQWSROLF\GHÀQHGE\WKH&RPSDQ\·VVWUDWHJ\DQGLQWHQGHGWRVROYH SULRULW\WDVNVRIFRPPXQLFDWLRQQHWZRUNVGHYHORSPHQW,QWKHWRWDO LQYHVWPHQWVDPRXQWHGWR585PLOOLRQ585PLOOLRQZHUH LQYHVWHGLQWRÀ[HGFDSLWDODVVHWV585PLOOLRQZHUHDOORFDWHGIRU FRPPXQLFDWLRQIDFLOLWLHV

,QRILQYHVWPHQWDFWLYLWLHVZHUHÀQDQFHGDWWKHFRVWRI2-6& 9ROJD7HOHFRPSURSULHWDU\UHVRXUFHVDQGWKHUHPDLQLQJVKDUH² IDOOVDWUDLVHGIXQGV7KH&RPSDQ\LQFUHDVHGWKHVKDUHRILQYHVWPHQWVÀ QDQFHGDWWKHFRVWRIUDLVHGIXQGVE\YV7KLVLQFUHDVHZDV caused by equipment supply under leasing agreements for the projects of FRPPXQLFDWLRQQHWZRUNVXSJUDGLQJRQWKHEDVLVRI1*1HTXLSPHQW

BASIC TRENDS OF INVESTMENT ACTIVITIES

1511,4 1 713,9

- Fixed-line telephony

- Mobile telephony

- Intra-regional telephony 707,2 - New services and technologies Data transfer network and arrangement of x-DSL access to Internet services.

435,8 - IT investments 203,2 - Other 331,2 807,4

,QWKHLQYHVWPHQWVLQWRWKHGHYHORSPHQWRIKLJKWHFKFRPPXQLFD WLRQ VHUYLFHV KDYH FRQVLGHUDEO\ JURZQ 7KH VKDUH RI LQYHVWPHQWV LQWR new services and technologies of data transfer network amounted to 37,7% of the total volume of investments, which exceeded the level of LQYHVWPHQWVLQWLPHV585PLOOLRQZHUHDOORFDWHGIRU WKHVHREMHFWLYHV

In 2006 OJSC VolgaTelecom joined national project “Education” and as a UHVXOWWKHLQYHVWPHQWVLQWRVRFLDODQGVSHFLDOSURMHFWVKDYHJURZQ7RUHD lize the program of providing Internet access to educational institutions of the Volga Federal District within “Education” project in 2006 the Company DOORFDWHG585PLOOLRQDQGFRQQHFWHGVFKRROV

AnnualǏǺǰǺǮǺǵǺǾȃȌǾ statement / 2006 23 BUSINESS DEVELOPMENT BUSINESS DEVELOPMENT Basic trends of the Compa ,QWUDUHJLRQDO ny’s activities in 2006 communication

• Building of data transfer networks and In 2006 OJSC VolgaTelecom continued the Internet wideband access technology devel FRQVWUXFWLRQRIÀEHURSWLFULQJOLQNVHQVXULQJ opment WKHWUDQVLWRIJURZLQJWUDIÀFRIGDWDWUDQVIHU QHWZRUNV DQG WUDGLWLRQDO WHOHSKRQ\   ‡%XLOGLQJDQGXSJUDGLQJRILQWUDUHJLRQDO NPRIÀEHURSWLFOLQNVDQGNPRIGLJLWDO WUDQVSRUWQHWZRUNVLQWUDUHJLRQDOÀEHURSWLF PLFURZDYHUDGLROLQNVZHUHSXWLQWRVHUYLFH links 7KH WRWDO OHQJWK RI LQWUDUHJLRQDO QHWZRUNV DFFRXQWHGIRUNPLQFOXGLQJÀEHU • Improvement in quality of communica RSWLF²NPDQGPLFURZDYHUDGLR tion through network digitalization and equip ²NP'LJLWDOL]DWLRQRILQWUDUHJLRQDO ment upgrade QHWZRUNV

• Building of new and expansion of exist Communication networks are being devel LQJQHWZRUNVRIRQDLUGLJLWDOEURDGFDVWLQJRI oped on the basis of NGN technology, which '9%7VWDQGDUG comprises the convergence of PSTN, mobile telephony, the networks of wire and wireless ‡,PSOHPHQWDWLRQRIPHDVXUHVWRSUHS ZLGHEDQG DFFHVV 7KLV WHFKQRORJ\ HQDEOHV are PSTN for introduction of Russian system to expand the range of rendered services on and plan of numbering in accordance with the basis of intelligent networks, new con RUGHU RI 5) 0LQLVWU\ RI ,7 DQG &RPPXQLF tent and services provided within Triple Play DWLRQVȱRI FRQFHSW,379LQFOXGLQJ

COMMUNICATION NETWORK DEVELOPMENT Thousand numbers %

5110 80 5200 70 4950 68,5 5000 63,4 60

4800 56,6 4759 50 4704 4627 40 4600 30 4400 4379 20

4200 10

4000 0 2004 2005 2006 Installed capacity Equipped capacity Digitalization

Annual statement / 2006 25 BUSINESS DEVELOPMENT URBAN AND RURAL TELEPHONY

2005 2006 PBX installed capacity, numbers 4 950 533 5 109 645 Urban telephone network(UTN) 4 169 642 4 307 754 Rural telephone network (RTN) 780 891 801 891 Equipped capacity, numbers 4 627 009 4 759 260 UTN 3 920 050 4 025 161 RTN 706 959 734 099 Capacity utilization 93,5% 92,49% UTN 94% 93,44% RTN 91% 91,54% Digitalization 63,3% 68,5% UTN 70% 74,4% RTN 30% 37,3% Capacity commissioning, numbers 517 621 451 157 UTN 420 013 369 062 RTN 97 608 82 095 Gain in basic phone sets 257 564 152 984 UTN 210 703 119 610 RTN 46 861 33 374 Number of unmet applications 197 477 104 809 UTN 115 864 54 278 RTN 81 613 50 531 Telephone penetration (per 100 residents) 24,0 24,9 UTN 28,5 30,6 RTN 13,0 12,6

NUMBER OF INTERNET USERS

Growth rate – 118,2 % Growth rate – 376,9 % 576 440 120 030

487 715 31 845

2005 2006 2005 2006 Dial-up access Leased line access

Data transfer and Internet market of territories where OJSC VolgaTele FRPSURYLGHVFRPPXQLFDWLRQVHUYLFHV access services ,Q WKHQXPEHURI,QWHUQHWGLDOXSDF nternet wideband cess users was 576 400, and Internet wide strategic trend for EDQGDFFHVV²  (VVHQWLDO required for keep ecommunications

26 Annual statement / 2006 BUSINESS DEVELOPMENT ,QWKH&RPSDQ\FRQWLQXHGDFWLYHGHY 7KH FRQVWUXFWLRQ RILQ HORSPHQW RI ['6/EDVHG VHUYLFH  ´,QWHUQHW data transfer network w ZLGHEDQGDFFHVVµ7KHVKDUHRI$'6/VXE length is more than 4 scribers of the total number of leased line ac will connect all 11 reg FHVVXVHUVIRUJUHZIURPWR E\2-6&9ROJD7HOHFRP In 2006 to ensure the capability of providing carrying capacity of dat wideband access services the number of in be 2,5 Gbps, and the stalled xDSL ports were increased 3,3 times IRUUDLVLQJWKHUDWHWR (from 48 000 to 159 100 ports) which result ed in the growth of xDSL users subscriber’s EDVHIURPWR Services of Call Processing ,Q$'6/EDVHGXQLIRUPEUDQG´-µZDV Centers designed and introduced to the market of 11 UHJLRQVRIWKH9ROJD)HGHUDO'LVWULFW7KHVXE Call Processing Center scribers were offered tariff plans with includ SURYHWKHTXDOLW\DQGH HGWUDIÀFYROXPH ´-867µ´-803µDQG´-(7µ  service and to enhanc DQGXQOLPLWHGWDULIISODQV ´-23(1µDQG DOW\WRWKH&RPSDQ\DQ ´-23(1µ  6LQJOH ,QWHUQHWSRUWDO ZLWK 7HOHFRPFRQWLQXHGWKH HQWHUWDLQPHQWFRQWHQW´-QHWµ´-]RQHµDQG uary 1, 2007 Call Pro ´-SOD\µ ZDV SXW LQWR VHUYLFH IRU $'6/ VXE operating in Kirov, Niz VFULEHUV Samara, Saratov, Ulya in VolgaTelecom branc The executed business events resulted 0DUL\(O 0RUGRYLD 5H in the following: in 2006 the gain in the 5HSXEOLF number of wideband access service users amounted to 88 185, and by 2006 end the The priority trend of C total number of leased line access sub ment is the improvem VFULEHUVZDV YLFH TXDOLW\ ,Q  L nical support services In 2006 OJSC “VolgaTelecom” branches assist to “Internet wide carried out the activities of expansion and XVHUV,QIRUPDWLRQVXS modernization of regional data transfer FRUSRUDWHFOLHQWV QHWZRUNV:LWKLQWKHIUDPHZRUNRIWKHSURM ect’s realization of NGN building in 2006 to arrange the connections the transport data transfer networks were modernized in Kirov, Penza, Samara branches, in the EUDQFKHV RI 8GPXUWLD DQG &KXYDVK UHS XEOLFV´-XQLSHUµEDFNERQHURXWHUVZHUHLQ VWDOOHGWUDQVSRUWQHWZRUNVDUHEHLQJGHY HORSHGRQWKHEDVLVRI:'0WHFKQRORJ\

Annual statement / 2006 27 BUSINESS DEVELOPMENT Key corporate clients’ rela tions

28 Annual statement / 2006 BUSINESS DEVELOPMENT Tariff policy DSSURYHG IRU 2-6&9ROJD7HOHFRP &UXFLDOO\ new condition was the fact that subscrib In 2006 the Company continued to shape HUVUHVLGHQWVLIWKHUHLVWHFKQLFDOFDSDELOLW\ tariff policy intended to increase earnings to meter the duration of local calls, were of fered three tariff plans at option: IURPFRPPXQLFDWLRQVHUYLFHVSURYLVLRQ2QH of essential conditions which had the effect on OJSC VolgaTelecom tariff policy was the WDULIISODQZLWKWLPHEDVHGELOOLQJ SD\ approval of new procedure of settlements ment is made for every minute of a call); between communication operators and of WDULIIVIRUWKHVHVHUYLFHV6LQFH-XO\ WDULIISODQZLWKFRPELQHGSD\PHQWV\V WKLVSURFHGXUHFDPHLQWRIRUFHIRULQWUDRS WHP À[HG PRQWKO\SD\PHQW LQFOXGHV EDVLF volume of local calls, the calls in excess of HUDWRUV·LQWHUDFWLRQ this volume are paid extra for every minute Implementation of “Calling Party Pays” (CPP) of a call); principle, when incoming calls to a mobile phone are paid by the call’s initiator, is one WDULIISODQZLWKVXEVFULEHU·VIHH À[HG monthly payment for unlimited volume of lo more event which had the effect on the situ  ation at communications market as a whole FDOFDOOV  DQGRQHDFKRSHUDWRULQGLYLGXDOO\)RUWDULI ÀQJ SKRQH FDOOV ZLWK GXH DFFRXQW IRU &33 New tariff rates are effective since Febru principle OJSC VolgaTelecom since July 1, ary 1, 2007 on the entire territory of OJSC KDVSUHVFULEHGDGGLWLRQDOWDULII,QWKH 9ROJD7HOHFRPRSHUDWLRQ0RUHWKDQRI FLUFXPVWDQFHVWKHSURYLVLRQRILQWUDUHJLRQDO 9ROJD7HOHFRP·V VXEVFULEHUVUHVLGHQWV KDYH calls has become one of revenue items of WKHRSSRUWXQLW\WRVHOHFWWKHWDULIISODQ WKH&RPSDQ\·VEXGJHW 2QHRIVLJQLÀFDQWWUHQGVRI2-6&9ROJD7HOH :LWKLQ WKH IUDPHZRUN RI WDULII FDPSDLJQ com tariff policy was design and introduction 2006 pursuant to the resolution of the Man on the market of a line of tariff plans for In agement of Russia’s Federal Service for Tar ternet wideband access services under uni iffs (FST) of November 17, 2006 new tariff IRUPWUDGHPDUN´-µVLQFH0D\ SODQVIRUORFDODQGLQWUDUHJLRQDOFDOOVZHUH

Annual statement / 2006 29 SUBSIDIARY BUSINESS DEVELOPMENT SUBSIDIARY BUSINESS DEVELOPMENT In 2006 in accordance with the “Model of In the reporting year OJSC VolgaTelecom took subsidiary business reorganization” and the active measures to set up overall control over “Strategy of cellular business development” subsidiary companies of mobile sector and approved by the Company’s Board of direc their amalgamation on the basis of CJSC tors OJSC VolgaTelecom acquired the follow ´1L]KHJRURGVND\D6RWRYD\D6Y\D]µ3XUVXDQW ing equity stakes: to the approved Strategy of cellular business development the following measures were RIDXWKRUL]HGFDSLWDO executed: RI&-6&´6DUDWRY0RELOHµ FRRUGLQDWLRQRIDFWLRQVDQGHQVXULQJFRQ RIDXWKRUL]HGFDSLWDO WUROLQEXGJHWDU\ÀQDQFLDODFWLYLWLHVFHQWUDO of CJSC “Penza Mobile”; ization of activities in technical policy and IT development; RIDXWKRUL]HGFDSLWDO of CJSC “Chuvashia Mobile”; DUUDQJHPHQWRI]RQHRISUHIHUHQWLDOURDP ing between subsidiary companies providing RIDXWKRUL]HGFDSLWDO mobile communication services; of CJSC “Nizhegorodteleservice”;    FRQGXFWLQJ FHQWUDOL]HG PDUNHWLQJ FDP RIDXWKRUL]HGFDSLWDO paigns to create, implement and apply uni RI&-6&´7UDQVVY\D]µ IRUPEUDQG²WDULIISODQ´21µ

Region’s Number Company Region population, Penetration Market of subscribers, thousand share thousand CJSC “Nizhegorodskaya Nizhny Novgorod 3524 99% 37% 1 201 Sotovaya Svyaz” oblast The Republic 404 OJSC “TATINCOM-T” of Tatarstan 3 774 98% 11% CJSC “Ulyanovsk-GSM” Ulyanovsk oblast 1340 65% 29% 249

CJSC “Orenburg-GSM” Orenburg oblast 2 229 83% 9% 161 OJSC VolgaTelecom The Republic (branch in the Republic of Mariy-El) of Mariy-El 716 80% 37% 209 CJSC “Saratov-Mobile” Saratov oblast 2669 86% 5% 114 CJSC “RTCOM” Mordovia Republic 840 91% 12% 88

CJSC “Chuvashia Mobile” Chuvash Republic 1280 78% 4% 46

CJSC “Penza Mobile” Penza oblast 1500 79% 0% 1

TOTAL for the group of companies 17 776 86% 16,1% 2 473

All these measures enabled to strengthen the companies’ competitive positions in the marr NHWDQGUHVXOWHGLQHQKDQFHPHQWRIHIÀFLHQF\ RIÀQDQFLDOHFRQRPLFDFWLYLWLHV

In 2006 the subscribers’ base of cellular sub sidiary companies grew by 33,8% and amount HGWRPLOOLRQ7KHFRPSDQLHVZHUHDEOHWR keep the gross share of market in the Volga re gion at the level of 16% in the circumstances RIWKHKLJKHVWPDUNHWFRPSHWLWLRQ

Annual statement / 2006 31 HR RELATIONS HR RELATIONS

OJSC VolgaTelecom personnel policy is in &RUSRUDWH WUDLQLQJ LQLWLDWHG DQG DU WHQGHG  WR IRUP KLJKO\VNLOOHG WHDPRULHQW ranged within the frameworks of OJSC Svy ed collective able to promptly solve the set D]LQYHVW KROGLQJ 7RS DQG PLGGOH PDQDJH WDVNV ment is trained according to programs which are common for all the Companies of the With this aim in mind in 2006 systematic KROGLQJ ZRUNZDVFDUULHGRXWLQWHQGHGWRUDLVHSURI essional level of employees, improve corpo 2-6&9ROJD7HOHFRP FHQWUDOL]HG WUDLQ rate structure, labor remuneration and in ing elaborated for line management and centive, search for more effecient forms and the Company’s personnel reserve candi methods of HR relations, corporate culture GDWHV,WLVLQWHQGHGWRDFTXLUHNQRZOHGJH GHYHORSPHQW in modern methods of management and to GHYHORSOHDGHUVKLSSRWHQWLDO)RUWKHSHULRG In 2006 OJSC VolgaTelecom HR department from 2004 till 2006 150 managers of vari was awarded honorary title “The best Rus ous levels were trained, and more than 50 VLDQ SHUVRQQHO VHUYLFH ² µ 7KLV EOXH RI WKHP ZHUH SURPRWHG 7KH JUDGXDWHV RI ribbon is the incentive for improving person modular programs get the diploma of suc nel policy and the structure of HR manage cessful graduation from OJSC VolgaTelecom ment, and thus contributes to the Company’s &RUSRUDWHXQLYHUVLW\ GHYHORSPHQWLQQHZHQYLURQPHQW 9ROJD7HOHFRPFRPPHUFLDOEORFNHPSOR\ Personnel training ees training and development organized for managers and specialists of General direc and development torate marketing Department and the mar keting Departments (services) of branches At corporate policy implementation in the under the following topics: “Training in direct sphere of personnel development the main sales”, “Sales channels management”, “In emphasis is put on the formation of condi centive tools in management”, “How to work tions for maximum realization of each em out a marketing plan: comments and recom ployee’s labor and creative potential, forma PHQGDWLRQVµ´3URMHFWPDQDJHPHQWµ tion of corporate solidarity and loyalty to the &RPSDQ\·VLQWHUHVWV In addition, great attention was paid in  WR WUDLQLQJRI ZRUNHUV LQ EDVLF WHFK In 2006 staff professional education system nical courses, courses in safety arrange ZDVKLJKO\HYDOXDWHGDWWKHIHGHUDOOHYHO$W PHQWV DQG SUHFDXWLRQV 7KLV WUDLQLQJ ZDV $OO5XVVLDQFRQWHVW´5XVVLDQFRPSDQ\RIKLJK RUJDQL]HGRQVLWHDQGZDVLQVHUYLFHWUDLQLQJ VRFLDOHIÀFLHQF\µWKH&RPSDQ\ZDVDZDUGHG ZLWKWKHLQYROYHPHQWRIWUDLQHUV,Q the second degree diploma in nomination 000 employees were trained in these cours ´6WDII TXDOLÀFDWLRQ V\VWHP RI VWDII WUDLQLQJ HVZKLFKLVE\PRUHWKDQLQ DQGUHWUDLQLQJµ In the reporting year OJSC “VolgaTelecom” The prime tool of corporate policy implemen also realized unique personnel projects: “Im tation in the sphere of personnel develop plementation of Model of competencies and ment in the Company is vocational training, Uniform Policies in HR management” and selection, hiring and adaptation of young FRQWHVW´3HUVRQQHOUHVHUYH²µ VSHFLDOLVWVH[HFXWLYHVUHVHUYHWUDLQLQJ The contest made it possible to form quality   SHUVRQV ZHUH WUDLQHG LQ  YV personnel reserve and was further extended WKHJURZWKUDWHDFFRXQWHGIRU  RYHUDOOWKHEUDQFKHVRIWKH&RPSDQ\ The share of trained employees in the total KHDGFRXQW ZDV   7KH SULRULW\ IRUPV RI Implementation of project “Implementation the Company’s personnel training are: RI0RGHORIFRPSHWHQFLHVDQG8QLIRUP3ROLF

Annual statement / 2006 33 9,,, ǜǟǍǜǔǖnj

ies in HR management” and also the devel ÀOOPHQW RI ÀQDQFLDOHFRQRPLF DFWLYLW\ LQGLF opment and correlation of training programs ators and on the principle of management by in order to develop corporate and special objectives ensuring the employees’ incentive competencies enabled to substantially en WRDFKLHYHKLJKSHUIRUPDQFHUHVXOWV KDQFHWKHTXDOLW\RI+5UHODWLRQV During 2006 OJSC VolgaTelecom carried out System of compensation the activities on improvement of labor remu neration system based on working positions and labor incentive JUDGLQJ7KHXQLYHUVDOLVPRIJUDGHVV\VWHPLV LQWKHIDFWWKDWLWHQDEOHVWRGHÀQHWKHOHYHO of wage exactly with the value of particular Since 2006 uniform bonus plan for the em working position for the Company and its in SOR\HHV LV HIIHFWLYH LQ 2-6& 9ROJD7HOHFRP The bonus plan is built in such a way that ÁXHQFHRQWKHUHVXOWVRIWKH&RPSDQ\·VDFWLY LWLHVXSRQWKHZKROH7KHWUDQVLWLRQWRJUDGH DOOWKHHPSOR\HHVDUHSDLGERQXVHVIRUÀQDO system of remuneration of labor is scheduled results of activities: IRUVWHSE\VWHSLPSOHPHQWDWLRQGXULQJ combining it with wage indexation in the VWUXFWXUDOVXEGLYLVLRQHPSOR\HHV²E\ EUDQFKHV WKHUHVXOWVRIWKHVWUXFWXUDOVXEGLYLVLRQRS eration, Corporate structure im WKHHPSOR\HHVRIDGPLQLVWUDWLYHVWDII provement RI D EUDQFK ² E\ WKH UHVXOWV RI WKH EUDQFK operation, In 2006 the activities for the improvement of corporate structures of branches were going HPSOR\HHVRIWKH*HQHUDOGLUHFWRUDWH RQWKHQDPHVRIVXEGLYLVLRQVDQGSRVWVZHUH ²E\WKHUHVXOWVRIWKH&RPSDQ\·VRSHUDWLRQ FRPSOHWHO\ XQLÀHG XQLÀHG VWDII VFKHGXOHV XSRQWKHZKROH were put into effect, the activities are under ZD\IRUFRPPHUFLDORSHUDWLRQRI5HOHDVHRI The Company’s executive employees are 0DVWHUV\VWHPRIVHFWLRQ´6WDIIµ,QWKHPDMRU SDLGERQXVHVIRUIXOÀOOPHQWRINH\LQGLFDWRUV ity of branches the works were carried out on RI RSHUDWLQJHIÀFLHQF\ LQ IXQFWLRQDO DUHDV enlarging local communication centers and es The provision on bonus payment stipulates 2 tablishment in oblast’s/republican centers of NLQGVRIERQXVSD\PHQWWLPHERQXV²IRUIXO WHOHFRPPXQLFDWLRQVWHFKQLFDOFHQWHUV

34 Annual statement / 2006 HR RELATIONS In the second half of year 2006 the “Concept Corporate culture develop RIRUJDQL]DWLRQGHYHORSPHQWRI2-6&9ROJD 7HOHFRPIRUµZDVHODERUDWHG ment

The Concept of organization development of For the time of OJSC VolgaTelecom operation the Company is one of the most important its corporate values have formed an integral documents governing the Company’s activity system and serve as a reliable basis for the IRUWKHQH[W\HDUVLWGHÀQHVWKHWUHQGVRI realization of the Company’s most ambitious reforming commercial block, of improving orr SODQV 2-6&9ROJD7HOHFRP HPSOR\HHV DUH ganization structure of local communications WKHXQLWHGWHDPRITXDOLÀHGH[SHUWVHDFKRI FHQWHUVDQGFLW\·VWHFKQLFDOVXEGLYLVLRQVRI them possessing wide practical experience management functions centralization, of la and reputation of a professional of its busi ERUUDWHVHWWLQJLPSURYHPHQW QHVV

The Company carries out the activities of The prime tool of intracorporate communica KHDGFRXQWRSWLPL]DWLRQ$VDUHVXOWRIPHD tion is “VolgaTelecom is on line” newspaper sures carried out the average headcount was ZKLFKLVSXEOLVKHGVLQFH,QWKH reduced by 9,5% (the scheduled reduction newspaper highlighted the topics relevant for of headcount was 8,2%) and on average it the Company; the Company’s top executives’ DPRXQWHGWRPHQIRUWKH\HDU LQWHUYLHZVZHUHUHJXODUO\SXEOLVKHGLQLW7KH publication placed high emphasis on social The average monthly wages increased by DQG SHUVRQQHO WRSLFV 7KH WRSLF ZDV GLV DQGDPRXQWHGWR585'XULQJ closed by publication in each issue of news the year the wages were adjusted in all the from different branches, the stories about EUDQFKHV social programs carried out in the regions,

75 000 15 000

11 301 49 117 10 110 50 000 10 000 47 633 8 171 43 122

25 000 5 000

0 2004 2005 2006 Average headcount, persons

Average monthly wages, RUR

Annual statement / 2006 35 HR RELATIONS portraits of persons who are creative in their ,QWUDFRUSRUDWHHYHQWV work, and the contests held by the editorial VWDII For the purpose of creating positive labor During 2006 the newspaper time and again incentives of the Company’s employees in ZDV D ZLQQHU RI LQWUDUHJLRQDO FRQWHVWV 2006 the Company approved Provision on DPRQJFRUSRUDWHSXEOLFDWLRQV corporate emulation of OJSC VolgaTelecom EUDQFKHV FROOHFWLYHV 7KH REMHFWLYH RI FRUU In 2006 in OJSC “VolgaTelecom” General porate emulation is to raise the branches’ Directorate the project was realized on In RSHUDWLQJHIÀFLHQF\ SURÀW WR LPSURYH WHOH WUDQHWSRUWDOFUHDWLRQWKLVSRUWDOUHSUHVHQWV communications quality, expand the range internal information system on the basis of RISURYLGHGVHUYLFHVHQFRXUDJHYDOXHDGGHG ,QWHUQHWWHFKQRORJLHV7KHPDLQREMHFWLYHRI VHUYLFHVDQGWHFKQRORJLHVGHYHORSPHQW7KH the project is the formation of reliable source, results of corporate emulation will be sum structuring and prompt access to intracorpo marized by May 7 of the year following the UDWHLQIRUPDWLRQ$WSUHVHQWVLPLODUSURMHFWV reporting year basing on the results of the DUHUHDOL]HGLQWKH&RPSDQ\·VEUDQFKHV EUDQFKHVRSHUDWLRQIRUD\HDU

36 Annual statement / 2006 HR RELATIONS

The branches collectives which have won of employees’ corporate solidarity, sense of top places in corporate competition are community and pride in its achievements, awarded Diplomas of I, II and III degree and and also for physical and intellectual devel FDVKERQXVHV RSPHQW 2-6& 9ROJD7HOHFRP LQWHUQDO SROLF\ is intended to provide each employee with 3URYLVLRQ RQ %RRN RI +RQRU RI 2-6&9ROJD the opportunity to develop improving his/her Telecom was approved in December 2006, SURIHVVLRQDOVNLOOVDQGUHDOL]LQJKLVKHUSRW LW JRYHUQV WKH SURFHGXUH DQG GHÀQHV WKH HQWLDO 2-6&9ROJD7HOHFRP HPSOR\HHV DUH grounds for entering the Company’s employ proud of its traditions of common corporate HHVWR%RRNRI+RQRU3XEOLFDWLRQRI%RRNRI events and holidays intended for banding Honor is manifestation of solid respect to the the collective together, shaping uniform val merits of employees who made particular ues, enhancing true corporate spirit, which contribution to the development of operating beyond all doubt is one of the major factors DQGVRFLDODFWLYLW\7KHHPSOR\HHVRIEUDQFK RIWKH&RPSDQ\·VVXFFHVV es and General directorate, who specially distinguished themselves in labor activity, In the reporting year traditional contests of immaculately observed discipline and having professional skills, events dedicated to the at least 10 years record of work in the Com Day of Radio, various holidays and branches pany and in entities for which the Company is DQQLYHUVDULHV IRU H[DPSOH WK DQQLYHU

Annual statement / 2006 37 SOCIAL POLICY

Crucial conditions of OJSC VolgaTelecom suc cessful activities are effective social policy, responsible partner relations with its employ HHVVWDWHDQGVRFLHW\

Social partnership Relations between employees and employ er within the framework of social and labor sphere are regulated within OJSC VolgaTele com single Collective agreement which was VLJQHGLQ)HEUXDU\

7KH&ROOHFWLYHDJUHHPHQWVWLSXODWHVWKHSURY ision of compulsory social schemes and cor porate social schemes to the employees for  7KHVH DUH H[WUD GD\V WR OHDYH pecuniary aid to employees, corporate lump sum remuneration, payments in employee’s IDYRU,QDOOWKH&RPSDQ\·VREOLJDWLRQV RISURYLGLQJVRFLDOEHQHÀWVDQGJXDUDQWHHV within the Collective agreement were per IRUPHGLQIXOO SOCIAL POLICY The Company pays great attention to social Charity and sponsored programs intended to assist families having NLGV,QDFFRUGDQFHZLWKWKH&ROOHFWLYHDJUHH SURJUDP ment pecuniary aid was paid in 2006 to large IDPLOLHV DQG WR VLQJOH PRWKHUV ORZLQFRPH During 2006 the Company continued spon families were partially paid for their kids stay soring social infrastructure institutions (pre in preschool institutions, for permits to chil school educational institutions, children’s dren’s recreation camps, young parents were libraries, city hospitals and others), projects SDLG SHFXQLDU\ DLG LI D NLG ZDV ERXUQ 1RQ in the spheres of science, education, culture, working pensioners were paid pecuniary aid sport, former employees of the Company, and to festive dates; they were partially paid for also socially unprotected community groups, VXEVFULEHU·VIHHRISKRQHVHUYLFHV LQFOXGLQJFKLOGUHQDQGGLVDEOHGSHUVRQV

One of the major tasks of OJSC VolgaTelecom During the reporting year OJSC VolgaTelecom in social policy area is the creation of favor Commission on sponsorship and charity func able job conditions for the employees in the tioning since 2005 considered more than &RPSDQ\ 7KHVH FRQGLWLRQV PHDQ QRW RQO\ 80 employees’ and pensioners’ applications worthy wages but comprehensive social pack of pecuniary aid provision due to hard living DJHZKLFKLQFOXGHVQRQJRYHUQPHQWSHQVLRQ FRQGLWLRQV IXQGVFKHPHRIWKH&RPSDQ\·VHPSOR\HHV At the end of 2004 a contract was concluded The Company’s priority within the framework E\DQGEHWZHHQ2-6&9ROJD7HOHFRPDQGQRQ of charity is the activities with the youngsters, JRYHUQPHQW SHQVLRQ IXQG ´7HOHFRP6R\X]µ and the Company realizes a number of pro and on the basis of this Contract the employ grams of youngsters and children develop HHV DUH SURYLGHG QRQJRYHUQPHQW SHQVLRQ PHQW  3DWURQDJH DVVLVWDQFH SURJUDP WR LQVXUDQFH educational institutions is based on contacts with schools, orphan homes and is intended )RU WKH SXUSRVH RI NHHSLQJKLJKO\ TXDOLÀHG to create conditions contributing to effective perspective employees at the enterprise in realization of educational process, children’s 2006 OJSC VolgaTelecom and OJSC IC “ROS development and their labor nurturing in in 12µFRQFOXGHGWKHFRQWUDFWRIYROXQWDU\PHG VWLWXWLRQVXQGHUSDWURQDJH ical insurance; according to this contract more than 460 key experts of the Company were Year in year out OJSC VolgaTelecom renders LQVXUHGWKRXVDQGHPSOR\HHVRI2-6&9RO charitable support to Russian fund of history gaTelecom were insured against industrial ac RIFRPPXQLFDWLRQV 6DLQW3HWHUVEXUJ  cidents within the framework of the contract between the Company and CJSC “Insurance Since 2003 OJSC VolgaTelecom is the spon Company “COSTARS” to the total amount of VRURI1L]KQ\1RYJRURGZRPDQ·VÀHOGKRFNH\ 585PLOOLRQ team “VolgaTelecom”; the team is the basis of 5XVVLD·VQDWLRQDOWHDPLQWKLVVSRUW,Q the team became champion of Russia for the ÀIWKWLPHZRQ(XURSHDQ&KDPSLRQ·V&XSDQG 5XVVLD·V&XSIRUWKHWKLUGWLPHDWDUXQ

Annual statement / 2006 39 CORPORATE GOVERNANCE CORPORATE GOVERNANCE The Company considers corporate gover OJSC VolgaTelecom corporate governance nance system primarly as an instrument of Code, the Board of directors’ Committees its shareholders’ rights protection and safe are operating: the Committee for audit, JXDUGLQJ(IÀFLHQWFRUSRUDWHJRYHUQDQFHLV corporate governance committee, strategic one of crucial factors of OJSC VolgaTelecom development committee and staff and re FRPSHWLWLYHDELOLW\7KH&RPSDQ\·VGHYHORS ZDUGVFRPPLWWHH7KH%R'FRPPLWWHHV·DF PHQWLVLPSRVVLEOHZLWKRXWHIIHFWLYHRUJDQ WLYLWLHVDUHJRYHUQHGE\WKHUHOHYDQW3URYLV L]DWLRQ GHSDUWPHQW GHÀQLQJ WKH UHODWLRQV LRQV7KH&RPPLWWHHVSUHOLPLQDU\FRQVLGHU between the Board of directors, the Man the issues referred to the competencies of agement board and the shareholders, and the Board of directors, and prepare the rec DOVRZLWKRXW WKH VKDUHKROGHUV FRQÀGHQFH ommendations on them, agree upon some that their funds are rationally used, and of the issues not referred to the Board of thus contribute to the Company’s capital directors competencies but requiring more L]DWLRQJURZWK detailed and careful approach when re VROYLQJWKHP$FWLYHSDUWLFLSDWLRQRILQGHS The traditions to follow the corporate gover endent directors of the Board of directors nance principles and standards accepted in in the Committees’ operation contributes JOREDOSUDFWLFHFRQWULEXWHLQWKHÀUVWSODFH even more to comprehensive development to successful development of the Company and improvement of OJSC VolgaTelecom and enhancement of its attraction as an in FRUSRUDWHJRYHUQDQFHSUDFWLFH YHVWPHQW Since August 19, 2004 the institute of OJSC VolgaTelecom corporate governance Corporate secretary is effective in OJSC Code was approved by the Company’s 9ROJD7HOHFRP 7KH &RUSRUDWH VHFUHWDU\ %RDUGRIGLUHFWRUVRQ0DUFK7KH is an authorized person and solves the latest changes put in force article “Corpo problems of ensuring the compliance by rate ethics” containing ethic norms of busi WKH&RPSDQ\·VERGLHVDQGRIÀFLDOVRIFRUU ness communication which are the basis of porate governance rules and procedures the Company’s corporate governance prin guaranteeing realization of the rights and FLSOHVVKDSLQJ interests of shareholders, and also of or ganizing interaction between the Company Within the framework of enhancement of DQGLWVVWRFNKROGHUV,QEDVLQJRQWKH FRUSRUDWH JRYHUQDQFH HIÀFLHQF\ WKH &RP results of the activities, OJSC VolgaTelecom mittee for corporate governance with the &RUSRUDWHVHFUHWDU\0UV1DWDOL\D3RNURYV %RDUG RI GLUHFWRUV DJUHHG XSRQ WKH 3URY ND\DEHFDPHDZLQQHURI$OO5XVVLDFRQWHVW LVLRQ RQ VHWWOHPHQW RI FRUSRUDWH FRQÁLFWV ´/HDGHUVLQFRUSRUDWHJRYHUQDQFHµLQ of OJSC VolgaTelecom; this Provision was “The best corporate secretary” nomination; approved by the Company’s Management the contest was held by the Association for ERDUG LQYHVWRUVULJKWVSURWHFWLRQ

7KHSULQFLSOHVDQGWKHUXOHVRI2-6&9ROJD In accordance with the Code of corporate Telecom Code of corporate governance governance requirements OJSC VolgaTele meet international standards of corporate com has the service of internal control over governance practice and contain require WKH &RPSDQ\·V ÀQDQFLDOHFRQRPLF DFWLYLW ments to the functioning of the Company’s ies independent of the Company’s execu bodies of management and control and to WLYHERGLHV,QDXGLWVRIEUDQFKHV compliance with high ethic norms and busi were conducted including 4 complex and ness communication culture by all employ FDVHDXGLWVDXGLWVRIVWUXFWXUDOVXE HHVRIWKH&RPSDQ\ divisions of the Company’s branches were conducted, including 27 complex and 43 )RUHIÀFLHQWIXQFWLRQLQJRIWKH%RDUGRIGL FDVHDXGLWV rectors in accordance with requirements of

Annual statement / 2006 41 OJSC VolgaTelecom information interoperability strategy is based on the principles of information transparency, reliability and regularity DVUHODWHGWRGLVWULEXWLRQRILQIRUPDWLRQDERXWWKH&RPSDQ\·VDFWLYLW LHV0HHWLQJVKHOGZLWKUHSUHVHQWDWLYHVRI5XVVLDQDQGIRUHLJQLQYHVW ment companies and funds, active interaction with rating agencies FRQWULEXWHWRLW

OJSC VolgaTelecom corporate governance permanent improvement policy and commitment to information transparency principles was QRWHGE\EXVLQHVVFRPPXQLW\,QFRUSRUDWHJRYHUQDQFHUDWLQJ service of “Standard & Poor’s” raised OJSC VolgaTelecom corporate JRYHUQDQFHUDWLQJIURP&*5WR&*5RQLQWHUQDWLRQDOVFDOHDQG DOVR IURP &*5 WR &*5 RQ 5XVVLDQ VFDOH ´([SHUW 5$µ UDWLQJ agency having conducted the monitoring of the Company’s corporate governance in 2006 raised earlier assigned rating to A level and recognized OJSC VolgaTelecom as one of the leaders in corporate gov HUQDQFHTXDOLW\LQ5XVVLD

42 Annual statement / 2006 CORPORATE GOVERNANCE The Company’s active position in terms of information transparency was appraised by transparency index of Standard & Poor’s agency; 2-6&9ROJD7HOHFRP ZDV UDWHG WKH WK DPRQJ 5XVVLDQ FRPSDQLHV At the contest of annual statements in 2006 held by Stock Exchange “Russian Trading System” jointly with “Expert RA” rating agency the &RPSDQ\·VVLWHZZZYWUXZDVDZLQQHULQ´&RUSRUDWHVLWHµQRPLQDWLRQ and it was awarded the diploma of the third degree “For the best level RIGLVFORVLQJLQIRUPDWLRQIRULQYHVWRUVDWWKHLVVXHU·VVLWHµDWWKH,;WK DQQXDOIHGHUDOFRQWHVWRIDQQXDOVWDWHPHQWVDQGVLWHVKHOGE\ 6WRFN([FKDQJH0,&(;DQG´6HFXULWLHVPDUNHWµPDJD]LQH

ǏǺǰǺǮǺǵǺǾȃȌǾ 43 9,,, ǜǟǍǜǔǖnj BOARD OF DIRECTORS, MANAGEMENT BOARD, AUDITING COMMITTEE According to the Company’s Charter the following management structure is functioning in the Company:

*HQHUDOPHHWLQJRIVKDUHKROGHUVVXSUHPHPDQDJHPHQWERG\RI the Company %RDUGRIGLUHFWRUV *HQHUDOGLUHFWRUVLQJOHH[HFXWLYHERG\ 0DQDJHPHQWERDUGFROOHJLDOH[HFXWLYHERG\ $XGLWLQJFRPPLWWHH²FRQWUROOLQJERG\

In the reporting year the Board of directors consisting of 11 persons elected at annual meeting on June 26, 2006 was functioning in the Com SDQ\7KH%RDUGRIGLUHFWRUVKHOGVHVVLRQVFRQVLGHUHGLVVXHV including strategic issues of development of the Company itself and of its subsidiary business, including strategy of cellular business development, ÀQDQFLDO VWUDWHJ\ LQIRUPDWLRQ FRQFHSW GRFXPHQWV UHJXODWLQJ ÀQDQFLDO DQGHFRQRPLFDFWLYLWLHVFRUSRUDWHJRYHUQDQFHV\VWHPDQGRWKHUV

Active participation of four committees of the Board of directors con tributed to effective operation of the Board of directors, these com mittees made recommendations on making appropriate decisions by means of preliminary consideration of some issues referred to the %RDUGRIGLUHFWRUV·FRPSHWHQFLHV

All the members of the Board of directors are professionals; each of them focuses its knowledge, experience and skills on organization of the Com SDQ\·VDFWLYLWLHVLQRUGHUWRDFKLHYHORIW\JRDOV7KH%RDUGRIGLUHFWRUV FRQVLVWVRIH[SHUWVLQWHOHFRPPXQLFDWLRQVHFRQRPLVWVODZ\HUVVHFXULW LHVPDUNHWDQGFRUSRUDWHJRYHUQDQFHH[SHUWV Annual statement / 2006 9,,, ǜǟǍǜǔǖnj

.8=1(7629 OMELCHENKO Sergey Ivanovich Sergey Valerievich Chairman of the Board Deputy to the Chairman of directors of OJSC of the Board of direc VolgaTelecom tors of the Company, OJSC VolgaTelecom General Director

ANDREEV Vladimir Alexandrovich Rector of Povolzhskyi state academy of tele communications and IT

SAVCHENKO BULANCHA Victor Dmitrievich Sergey Anatolievich Executive director Deputy to the head of ²GLUHFWRURIOHJDODQG Federal Agency of Com corporate governance munications Department of OJSC Svyazinvest

0252=29 Andrey Vladimirovich Chief of legal sector of Moscow’s representa WLRQRIÀFHRI´1&+ $GYLVRUV ,1& µ

CHERNOGORODSKYI Sergey Valerievich Director of the Depart PHQWRIMRLQWVWRFN capital of OJSC Svyazinvest

ENIN Evgenyi Petrovich Deputy to the director RI1RQ&RPPHUFLDO Partnership “Russian institute of directors”

Annual statement / 2006 9,,, ǜǟǍǜǔǖnj MANAGEMENT

BOARD The Management board as a collegial ex ecutive body organizes the performance of resolutions of general meeting of stockhold ers and decisions of the Company’s Board RIGLUHFWRUV

In 2006 the Company’s Management board KHOGVHVVLRQVDQGFRQVLGHUHGLVVXHV OMELCHENKO Sergey Valerievich Quantitative and individual composition of Chairman of the Man DJHPHQWERDUG²2-6& WKH0DQDJHPHQWERDUGLVGHÀQHGE\WKH VolgaTelecom General decision of the Company’s Board of direc Director tors following the proposal of the General Director, members of the Company’s Board RIGLUHFWRUV ERSHOV On July 31, 2006 the Oleg Vladimirovich Board of directors upon Deputy to the General the General Director’s 'LUHFWRURIWKHMRLQW VWRFNFRPSDQ\²FRP recommendation formed mercial director the Company’s Manage PHQWERDUG

ASTAKHOVA KETKOV Svetlana Leonidovna Alexander Yulievich Deputy to the General Deputy to the General 'LUHFWRURIWKHMRLQW 'LUHFWRU²WHFKQLFDO VWRFNFRPSDQ\²SHU director sonnel director

PETROV Mikhail Victorovich Deputy to the General 'LUHFWRURIWKHMRLQW stock company

ULYANOV Vladimir Vasilievich Deputy to the General Director for security

Annual statement / 2006 9,,, ǜǟǍǜǔǖnj AUDITING COMMITTEE

effected by the Auditing committee which held 7 sessions and con GXFWHGDXGLWRQDVDPSOHEDVLVRIÀQDQFLDODQGHFRQRPLFDFWLYLWLHVRI the General Directorate, Nizhny Novgorod branch, Saratov, Samara and 2UHQEXUJEUDQFKHV

Auditing committee is the Company’s independent body of control elect ed at the annual general meeting of shareholders for the period till the QH[WDQQXDOJHQHUDOPHHWLQJRIVKDUHKROGHUV

7KHFRQWURORYHU2-6&9ROJD7HOHFRPÀQDQFLDODQGHFRQRPLFDFWLYLWLHV in 2006 was effected by the Auditing committee elected at the annual general meeting of shareholders on June 26, 2006; the committee’s members: Koroleva Olga Grigorievna, Belyakova Nataliya Yurievna, Gol XELWVN\L%RJGDQ,YDQRYLFK=XERYD7DWLDQD

• Monitoring of legality of decisions and actions of the &RPSDQ\·VH[HFXWLYHRIÀFHUVLQFOXVLYHRIPDGHWUDQVDFWLRQV

• The check of compliance of conditions of transactions made by the Company with the conditions of transactions made in comparable circumstances

requirements

dures of bookkeeping

yp

ntained in annual stateements for 2006

Annual statement / 2006 47 DIVIDEND POLICY DIVIDEND POLICY RECORD OF DECLARED (ACCRUED) DIVIDENDS ON THE COMPANY’S SHARES (AS PER A SHARE)

Measure Type of securities 2004 2005 2006* unit

Ordinary shares RUR 1,3779 1,4744 1,5776

Preferred type A shares RUR 2,5082 2,7583 2,9928

* dividend size is stated which was proposed by the Company’s Board of directors for approval at annual general meeting of shareholders.

OJSC VolgaTelecom dividend policy underlying When determining preferred shares dividend principles are based on safeguarding share amount recommended to the shareholders holders’ interests and maintaining optimum JHQHUDOPHHWLQJWKH%RDUGRIGLUHFWRUVSURF balance between cash payments of dividends eeds from the fact that the total amount al and investments in the Company’s develop located to dividend payment is to be at least PHQW+RZHYHUDVEHIRUHWKH&RPSDQ\·VSUL RIQHWSURÀWGHÀQHGRQWKHEDVLVRIWKH orities are raising the Company’s attraction as &RPSDQ\·V5$6ÀQDQFLDOVWDWHPHQW an investment and strict observance of share holders’ rights stipulated by current Russian The Company is regularly increasing the Federation legislation, the Company’s Charter DPRXQWRIGLYLGHQGSD\PHQWV$W'HFHPEHU DQGLWVLQWHUQDOGRFXPHQWV 31, 2006 the amount of paid dividends (at year 2005 end) accounted for RUR 543, 876 PLOOLRQ

Annual statement / 2006 49 SHAREHOLDER’S EQUITY AND SECURITIES SHAREHOLDER’S9,,, ǜǟǍǜǔǖnj EQUITY AND SECURITIES At January 1, 2007 OJSC VolgaTelecom authorized capital amounts to 5856KDUHVSDUYDOXHLV585

The Company’s placed and declared shares

Shares categories (types) Quantity (pieces) Placed shares: 327 952 994 v ordinary shares – total 245 969 590 v preferred type A shares – total 81 983 404 Declared shares: 1 830 589 v ordinary shares 1 299 093 v preferred type A shares 531 496

Shareholder’s equity structure

Ordinary Preferred Shareholders Number registered stock, registered stock, Share in authorized of shareholders share in authorized share in authorized capital, % capital,% capital,%

Legal entities, including 188 71,96 19,28 91,24

Owners, including 165 39,66 0,76 40,42

OJSC Svyazinvest 1 38,00 - 38,00

Nominee holders 23 32,30 18,52 50,82

Natural persons 26,938 3,04 5,72 8,76

SHAREHOLDER’S EQUITY DISTRIBUTION AMONG SHAREHOLDERS POSSESSING AT LEAST 1% OF AUTHORIZED CAPITAL

12.03% 24.49%

OJSC Svyazinvest “ING Bank (Eurasia) CJSC” 5.61% CJSC “Depositary-Clearing Company” NCP “National Depositary Center” 2.95% CJSC Commercial Bank “Citibank”

1.82% CJSC “Raiffeisen Bank Austria”

1.73% Commercial bank “JPMorgan Bank International” (LLC) 1.08% OJSC “RTK-Leasing” CJSC “UBS Nominees” Other shareholders 1.04% 11.25% 38.00%

Annual statement / 2006 51 SHAREHOLDER’S EQUITY AND SECURITIES

SHAREHOLDER’S EQUTY DISTRIBUTION AMONG RESIDENTS AND NON-RESIDENTS AS OF THE DATE OF MAKING UP THE LIST OF PERSONS/ENTITIES HAVING THE RIGHT TO PARTICIPATE IN ANNUAL GENERAL MEETING OF SHAREHOLDERS HELD IN 2006

Residents, (%)Non-residents, (%) Non-residents (ADR holders), (%)

100% 11,49% 12,26%

80%

32,44% 30,01% 60%

40% 56,07% 57,73%

20%

0% May 10, 2005 May 7, 2006

,Q2-6&´9ROJD7HOHFRPµVKDUHVFLUFXODWHGDWWKUHHVWRFNH[FKDQ JHVRI5XVVLDQVHFXULWLHVPDUNHW

INFORMATION ABOUT STOCK EXCHANGES WHERE THE COMPANY’S SHARES AND ADRS ARE QUOTED.

Quotation Trading volume Ticker list in money terms for 2006

Ordinary shares NNSI A2 US$41 949 120 NCP “RTS” Preferred shares NNSIP A2 US$6 452 569

Ordinary shares NNSIG A2 RUR 281 858 564 OJSC “RTS” Preferred shares NNSIPG A2 RUR 130 152 867

Ordinary shares VTEL A2 RUR 2 698 276 950 CJSC “SE MICEX” Preferred shares VTELP A2 RUR 840 767 549

 lowing stock indexes:

‡ 576LQGH[576LQGH[756WHOHFRPPXQLFDWLRQVLQGH[

‡ $. 0LQGH[ FRQVROLGDWHG$. 0LQGH[LQGXVWU\$. 0LQGH[ 

‡ 06&,(0

52 Annual statement / 2006 OJSC VolgaTelecom American Depositary Receipts are traded at the 86$RYHUWKHFRXQWHUPDUNHW 27&86$  $'5WLFNHU²9/*$< DQGLQ (XURSHDW)UDQNIXUW )6(  $'5WLFNHU1=+ %HUOLQ %HU6(  $'5WLFN HU²1=+ DQG6WXWWJDUWVWRFNH[FKDQJHV 66(  $'5WLFNHU²1=+ 

TRADING VOLUME OF THE COMPANY’S SHARES AT DIFFERENT STOCK EXCHANGES IN 2006

140 000 31 216 120 000

100 000

80 000 100 564 60 000

40 000 6 453

41 949 4 774 20 000 10 301 15 862 MICEX NCP RTS OJSC RTS USA over- Classical market Stock market the-counter market

Ordinary shares, US$ thousand Preferred shares, US$ thousand

Annual statement / 2006 53 SHAREHOLDER’S EQUITY AND SECURITIES

BEHAVIOUR OF OJSC VOLGATELECOM STOCK PRICES AT NCP “RTS”

9.00

7.00

5.00

3.00

1.00 January 2006 March 2006 May 2006 July 2006 September 2006 November 2006

OJSC VolgaTelecom ordinary shares at RTS, US$

BEHAVIOUR OF ADR PRICES FOR OJSC VOLGATELECOM ORDINARY SHARES AT THE USA OVER-THE-COUNTER MARKET 13.00

11.00

9.00

7.00

5.00

3.00 January March May July August October December

ADRs for OJSC VolgaTelecom ordinary shares, US$

54 Annual statement / 2006 9,,, ǜǟǍǜǔǖnj OJSC VOLGATELECOM CREDIT RATING

Rating agency Rating on international scale Rating Date on national of assign- In foreign currency/ In native currency / scale ment Outlook Outlook

Standard & Poor's ǎ%6WDEOH ǎ%6WDEOH ru AA- 27.09.2006

OJSC VOLGATELECOM CORPORATE GOVERNANCE RATINGS

Rating agency Rating name Value Date of assignment

Corporate governance Standard & Poor's 5 rating on international scale 02.08.2006 Corporate governance rating on Standard & Poor's 5,1 national scale 02.08.2006

Expert RA National rating of corporate governance nj 20.07.2006

The information about credit ratings and the Company’s corporate governance rating is avail DEOHLQWKH,QWHUQHWDWKWWSZZZYWUX"LG KWWSZZZYWUX"LG  KWWSZZZVWDQGDUGDQGSRRUVUXKWWSZZZUDH[SHUWUXUDWLQJVFRUSRUDWH

Information about the Company’s auditors

/LPLWHG/LDELOLW\&RPSDQ\´(UQVW 

LLC “Ernst &Young” provides OJSC VolgaTelecom with the services of audit of accounting state PHQWSUHSDUHGLQDFFRUGDQFHZLWK5)OHJLVODWLRQDQGRIFRQVROLGDWHGÀQDQFLDOVWDWHPHQWGUDZQ XSLQDFFRUGDQFHZLWK,)56

,QIRUPDWLRQDERXWWKH&RPSDQ\·VUHJLVWUDU

2SHQ-RLQW6WRFN&RPSDQ\´2ELHGLQHQQD\DUHJLVWUDWVLRQQD\DNRPSDQL\Dµ /LFHQVHȱLVVXHGRQE\5)))06ZLWKQROLPLWDWLRQRIYDOLGLW\ WHUP 0DLODGGUHVV32%R[.DODQFKHYVND\DVWUHHW´$µ0RVFRZ 7HOHSKRQH)D[  (PDLODGGUHVVRUN#RUNUHHVWUUX :HEVLWHKWWSZZZRUNUHHVWUUX AnnualǏǺǰǺǮǺǵǺǾȃȌǾ statement / 2006 55 ACCOUNTING 67$7(0(17 AUDIT OPINION

ACCORDING TO RUSSIAN ACCOUNTING STANDARDS $&&2817,1*67$7(0(17 AUDIT OPINION BALANCE SHEET

CODES

)RUPȱE\2.8' 0710001

Date (year, as of December 31, 2006 month, day) 2006.12.31

Organization OJSC “VolgaTelecom” by OKPO 01142788 Taxpayer Identification 5260901817 Number TIN 5260901817

Activity type electric communication by OKVED 64.20

Form of incorporation Open Joint Stock Company by OKOPF/ 47/16 /ownership form / private OKFS

Measure unit: RUR thousand by OKEI 384 Address: 603000, N.Novgorod city, M.Gorky square, Dom Svyazi The date of approval The date of 30.03.2007 dispatch (receipt)

Explanati Index Line As of the As of the end ASSET ons code code beginning of of the the reporting reporting period period 1 Ǭ234 Ǭ

I. NON-CURRENT ASSETS Intangible assets 110 110 40 270

Fixed assets 6.1 120 120 22 492 980 25 342 279 Capital investments 6.2 130 130 795 576 759 115 Income-bearing placements into tangible assets 135 135 12 311 110 621

Long-term financial investments 6.3 140 140 1 309 098 2 141 709 including: investments into subsidiaries 141 1 273 033 1 888 459 investments into associated companies 142 12 475 6 271 investment into other organizations 143 21 701 67 274 other long-term financial investments 144 1 889 179 705

Deferred tax assets 6.4 145 145 200 918 276 920 Other non-current assets 6.5 150 150 2 503 132 3 388 567 Total for section I 190 190 27 314 055 32 019 481

Annual statement / 2006 57 $&&2817,1*67$7(0(17 AUDIT OPINION

Explanati Index Line code As of the As of the end ASSET ons code beginning of of the the reporting reporting period period 1 Ǭ234 Ǭ

II.CURRENT ASSETS Inventories 210 210 623 615 629 098 including: raw materials, supplies and other similar 6.6 211 211 451 877 463 508 values work in progress expenses (distribution costs) 213 213 168 593 finished goods and goods for resale 214 214 47 647 47 156

_ goods shipped 215 215 330 prepaid expenses 216 216 123 923 117 511 other inventories and expenditure 217 217 _ _ VAT for acquired valuables 220 220 959 066 584 096

Accounts receivable (payments are expected 230 230 13 836 8 587 in over 12 months after the report date)

including: buyers and customers 6.7 231 231 2 319 1 286 advances paid out 232 _ _ other debtors 233 11 517 7 301 Accounts receivable (payments are expected within 12 months after the report date) 240 240 1 754 936 2 732 630

including: buyers and customers 6.8 241 241 1 450 998 1 978 204 advances paid out 242 103 176 136 085 other debtors 6.9 243 200 762 618 341 Short-term financial investments 6.3 250 250 4 762 9 837 Cash 260 260 1 134 960 222 716 Other current assets 270 270 773 496

Total for section II 290 290 4 491 948 4 187 460 BALANCE (sum of lines 190+290) 300 300 31 806 003 36 206 941

58 Annual statement / 2006 $&&2817,1*67$7(0(17 AUDIT OPINION

Explanati Index Line As of the As of the end LIABILITIES ons code code beginning of of the the reporting reporting period period

1 Ǭ234 Ǭ III. CAPITAL AND PROVISIONS Charter capital 6.10 410 410 1 639 765 1 639 765 Capital surplus 420 420 3 812 947 3 731 945 Surplus 430 430 81 988 81 988 _ Treasury stock 411 440 _ Retained profits (uncovered loss) of past years 470 460 10 746 158 10 233 857 Retained profits (uncovered loss) _ of the reporting year 470 470 2 453 588 Total for section III 490 490 16 280 858 18 141 143

IV.NON-CURRENT LIABILITIES Credits and loans 6.13 510 510 7 340 869 8 965 335 including: credits 511 1 925 150 320 000 loans 512 5 415 719 8 645 335 Deferred tax liabilities 6.14 515 515 712 558 1 019 123 Other non-current liabilities 6.15 520 520 1 110 066 1 221 226 ǔǾǺǯǺǻǺǼǬdzǰDZǷǿ,9 590 590 9 163 493 11 205 684

V. CURRENT LIABILITIES Credits and loans 6.13 610 610 2 289 598 1 441 018 including: credits 611 1 004 024 1 318 926 loans 612 1 285 574 122 092 Accounts payable, 620 620 3 513 237 4 381 541 including: suppliers and contractors 6.16 621 621 2 059 629 3 535 440 advances received 6.16 625 622 317 657 331 553 wages payable 622 623 67 842 59 233 debt to government extrabudgetary funds 623 624 35 437 42 329 tax debt 6.16 624 625 399 845 133 853 other creditors 6.16 625 626 632 827 279 133 Debt to participants (founders) for income 630 22 844 payments 630 23 802 Unearned revenue 6.17 640 640 216 554 235 261 Provision of costs to be incurred 6.18 650 650 307 799 659 609 Other current liabilities 660 660 11 620 118 883 Total for section V 690 690 6 361 652 6 860 114 BALANCE (sum of lines 490+590+690) 700 700 31 806 003 36 206 941

Annual statement / 2006 59 9,,, ǜǟǍǜǔǖnj

Reference on availability of valuables being accounted on off-balance-sheet accounts

Explanati Index Line As of the As of the end Item description ons code code beginning of of the the reporting reporting period period

1 Ǭ234 Ǭ Rented fixed assets 910 901 611 053 887 691 including under leasing 911 911 66 106 42 855 Inventory items received in custody 920 902 4 399 36 302 Commodities received for commission 930 903 3 748 12 674 Accounts receivable of insolvent debtors written-off as a loss 940 904 249 430 261 742 Cover funds for liabilities and payments received 950 905 7 065 160 11 500 459 Cover funds for liabilities and payments given 960 906 5 984 126 5 692 516

Housing facilities depreciation 970 907 16 840 14 644 Depreciation of land improvement objects and other similar objects 980 908 2 849 1 861 Payments for communication services 909 214 199 150 467

Reference on net assets worth

Explanati Index Line As of the As of the end Item description ons code code beginning of of the the reporting reporting period period 1 Ǭ234 Ǭ Net assets 1000 16 497 412 18 376 404

CEO Omelchenko S.V. Chief accountant Popkov N.I.

March 30, 2007

60 Annual statement/ 2006 INCOME STATEMENT

CODES

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Organization 2-6&9ROJD7HOHFRP E\2.32 01142788 7D[SD\HU,GHQWLILFDWLRQ 1XPEHU 5260901817 TIN 5260901817

$FWLYLW\W\SH (OHFWULFFRPPXQLFDWLRQ E\2.9(' 64.20

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0HDVXUHXQLW 585WKRXVDQG E\2.(, 384

Explanati Index Line For the For similar Item description ons code code reporting period of the period previous year

1 Ǭ234 Ǭ I. INCOME AND EXPENSES OF ORDINARY ACTIVITIES Proceeds (net) from sales of goods, products, works, services (minus VAT, excise taxes and similar mandatory payments) 7.1 010 010 21 691 242 21 348 394 including from sales: of telecommunication services 011 20 366 969 20 787 642 Prime cost of sold goods, products, works and services 7.2 020 020 (16 949 759) (16 059 357) including: of telecom services 021 (16 137 856) (15 610 538) Sales profit (loss) (lines 010 -020) 050 050 4 741 483 5 289 037

Annual statement / 2006 61 $&&2817,1*67$7(0(17 AUDIT OPINION

II. OTHER INCOME AND EXPENSES Interest receivable 060 060 13 253 14 839 Interest due 070 070 (735 967) (829 016) Income from participation in other enterprises 080 080 47 074 34 720 Other income 7.3 090 090 900 393 424 675 7.3 Other expenses 100 100 (1 432 031) (1 510 238) Profit (loss) before tax (lines 140 3 534 205 3 424 017 050+060-070+080+090-100) 140 Income tax expenses (lines 150 (1 080 617) (1 168 405) -151+/-152+/-153) including: 7.4 deferred tax liabilities 142 151 (307 103) (133 551) deferred tax assets 141 152 76 002 (100 279) Current tax on income 150 153 (1 003 930) (935 466) Additional payments of income tax for the 891 previous tax periods 151 154 154 414 Net profit (loss) of the reporting period 7.5 190 190 2 453 588 2 255 612 (lines 140-150) BY REFERENCE Income tax contingent expenses /income 201 (848 209) (823 144)

Recurrent tax liabilities 200 202 (335 838) (376 171) Recurrent tax assets 200 203 103 430 30 910

Explanati Index Line For the For similar period of the Item description ons code code reporting period previous year

1 Ǭ234 Ǭ

Basic earnings (loss) per share 7.6 301 0,00898 0,00827

Diluted earnings (loss) per share 302 _ _

* It is completed in annual accounting statement

62 Annual statement / 2006 $&&2817,1*67$7(0(17 AUDIT OPINION Breakdown of single profits and losses For similar period For the reporting period Item description Index Line of the previous year code code profitloss profit loss 1 Ǭ 23 4 5 6

Fines, penalties and forfeits which were acknowledged or to be collected according to court (arbitration court) judgement 401 66 558 (14 089) 28 615 (10 992) Past years profit (loss) 402 177 776 (107 939) 42 451 (166 557) Reimbursement of damages caused by default or inadequate performance of obligations 403 26 872 (688) 7 210 (1 263) Foreign exchange differences in foreign 404 310 (677) 9 612 (3 174) currency operations Deductions to allowances 405 542 037 (206 226) 160 645 (152 221)

Debt amortization of payables and receivables 406 99 786 (6 726) 36 321 (12 001)

CEO Omelchenko S.V. Chief accountant Popkov N.I.

March 30, 2007

Annual statement / 2006 63 $&&2817,1*67$7(0(17 AUDIT OPINION

AUDIT OPINION ON OJSC VOLGATELECOM ACCOUNTING STATEMENT BY INDEPENDENT AUDIT COMPANY

To OJSC VolgaTelecom stockholders INFORMATION ABOUT THE AUDITED EN TITY INFORMATION ABOUT THE AUDITOR Name: OJSC “VolgaTelecom” 1DPH//&´(5167 <281*µ /RFDWLRQ'RP6Y\D]L0*RUN\6TXDUH1L /RFDWLRQ %XLOGLQJ 6DGRYQLFKHVND\D 1DE ]KQ\1RYJRURGFLW\ HUH]KQD\D0RVFRZ5XVVLD State registration: OJSC VolgaTelecom is &HUWLÀFDWHRIPDNLQJDQHQWU\DERXWWKHOH UHJLVWHUHGE\FLW\·VSURSHUW\DQGODQGUHV gal entity registered before July 1, 2002 in ources management Committee of the the Uniform State Register of Legal Entities, $GPLQLVWUDWLRQRI1L]KQ\1RYJRURGRQ'HF the date of making the entry: December HPEHU  ȱ EDVLF VWDWH UHJ   VHULHV  ȱ  UHJ LVWUDWLRQ QXPEHU  7KH istered by the State Institution of Moscow GDWHRIPDNLQJDQHQWU\$XJXVW registration chamber on June 20, 2002 &HUWLÀFDWHVHULHVȱ ȱEDVLFVWDWHUHJLVWUDWLRQQXPEHU  We audited the accompanying accounting statement of OJSC VolgaTelecom for the /LFHQVH IRU DXGLW DFWLYLW\  ȱǑDS period from January 1 till December 31, proved by Order of the Ministry of Finance of LQFOXVLYH7KHDFFRXQWLQJVWDWHPHQW WKH 5XVVLDQ )HGHUDWLRQ ȱ RI 6HSWHP comprises balance sheet, income state EHU²ZDVLVVXHGIRUWKHSHULRGRI ment, statement of changes in sharehold ÀYH\HDUV HUV· HTXLW\ FDVK ÁRZ VWDWHPHQW VXSSOH ment to balance sheet and the explanatory Membership in accredited professional au PHPRUDQGXPLWHPV GLWDVVRFLDWLRQ²//&´(5167 <281*µLVD 2-6&9ROJD7HOHFRP PDQDJHPHQW LV UHV member of Noncommercial partnership ponsible for accounting, preparation and “Institute of professional accountants and SUHVHQWDWLRQRIWKLVDFFRXQWLQJVWDWHPHQW DXGLWRUVRI5XVVLDµ 13´,3$RI5XVVLDµ  Our responsibility is to express an opinion on the reliability in all material respects of this statement and on the compliance of the bookkeeping procedure, as related to

64 Annual statement / 2006 $&&2817,1*67$7(0(17 AUDIT OPINION the preparation of accounting statement, In our opinion, the bookkeeping procedure with the Russian Federation legislation LQ UHVSHFW RI SUHSDUDWLRQ  RI  2-6& 9ROJD EDVHGRQRXUDXGLW Telecom accounting statement in 2006 met in all material respects the requirements of We conducted the audit in accordance with )HGHUDO ODZ ´2Q  ERRNNHHSLQJµ ȱ ǠǓ Federal Law “On the audit activity”, Federal of November 21, 1996, and the above ac Rules (Standards) of audit activity, Rules counting statement prepared in accordance (Standards) of audit activity approved by the ZLWKWKHVDPH/DZUHÁHFWVWUXO\LQDOOPDWHUL &RPPLWWHH RQ $XGLW DFWLYLW\ ZLWK WKH 3UHV DOUHVSHFWVWKHÀQDQFLDOSRVLWLRQRI2-6&9RO ident of the Russian Federation, and Inter gaTelecom as of December 31, 2006 and QDWLRQDODXGLWVWDQGDUGV WKHUHVXOWVRILWVÀQDQFLDODQGHFRQRPLFDF WLYLWLHVIRUWKHSHULRGIURP-DQXDU\WR'HF ember 31, 2006 inclusive, in accordance The audit was planned and conducted to with the Russian Federation legislation re UHFHLYHUHDVRQDEOHFRQÀGHQFHWKDWWKHDF quirements as related to the preparation of counting statement contains no essential DFFRXQWLQJVWDWHPHQW PLVVWDWHPHQWV7KHDXGLWZDVFRQGXFWHG on the sample basis and included the study E\WHVWLQJRISURYHVFRQÀUPLQJWKHYDOXHV The accompanying accounting statement is DQGWKHGLVFORVXUHRILQIRUPDWLRQRQÀQDQ QRWLQWHQGHGWRSUHVHQWÀQDQFLDOVWDWXVDQG cial and economic activity in the account the activity results according to the account ing statement, the assessment of obserr ing principles or methods generally accepted vance of bookkeeping principles and rules LQFRXQWULHVDQGRWKHUDGPLQLVWUDWLYHWHUULWR applied at preparation of the accounting rial formations other than the Russian Fed statement, the consideration of essential HUDWLRQ $FFRUGLQJO\ WKH DFFRPSDQ\LQJ DF assessed values received by the manage counting statement is not designated for the ment of the audited entity, and also the persons unfamiliar with bookkeeping prin evaluation of overall presentation of the ciples, procedures and methods accepted in DFFRXQWLQJVWDWHPHQW:HEHOLHYHWKDWRXU WKH5XVVLDQ)HGHUDWLRQ audit provides a reasonable basis for the expression of our opinion on the reliability April 02, 2007 in all material respects of the accounting statement and on the compliance of the Ulrich Schroeder bookkeeping procedure, as related to the Partner preparation of accounting statement, with WKH5XVVLDQ)HGHUDWLRQOHJLVODWLRQ Audit executive head Svetlana Eduardovna Sarnatskaya *HQHUDODXGLWTXDOLÀFDWLRQFHUWLÀFDWH ȱǖLVVXHGRQ1RYHPEHU for unlimited term

Annual statement/ 2006 65 FINANCIAL 67$7(0(17 AUDIT OPINION

IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS ),1$1&,$/67$7(0(17 AUDIT OPINION

Consolidated balance sheet at December 31, 2006 (RUR thousand)

ASSETS Notes 2006 2005 as adjusted

Non-current assets Property, plant and equipment 6 31 332 348 28 525 610

Intangible assets and goodwill 7 4 454 189 2 745 615

Investments in associates 9 129 103 119 980

Long-term investments 10 28 226 24 910

Long-term accounts receivable and other assets 11 35 062 39 931

Long-term advances given 12 517 655 749 055 Deferred income tax asset 28 16 476 27 049

Total non-current assets 36 513 059 32 232 150 Current assets Inventories, net 13 535 925 544 087 Accounts receivable, net 14 1 872 300 1 296 011 Current income tax asset 343 276 38 813

Other current assets 15 1 099 296 1519748

Cash and cash equivalents 16 461 417 1 338 713

Total current assets 4 312 214 4 737 372

TOTAL ASSETS 40 825 273 36 969 522

Annual statement / 2006 67 9,,, ǜǟǍǜǔǖnj

EQUITY AND LIABILITIES Notes 2006 2005 as adjusted

Owners’ equity of parent company’s shareholders Authorized capital 18 3 853 690 3 853 690 Unrealized gain on available-for-sale investments 5434 2134 Undistributed profit 15 810 202 14 228 313 Total owners’ equity of parent company’s shareholders 19 669 326 18 084 137 Minority share 473 302 415 614

Total equity 20 142 628 18 499 751 Non-current liabilities Long-term borrowings 19 9 497 836 7 589 666

Non-current liabilities under finance lease 20 596 516 727 768

Pension liabilities 23 1287295 1 106 204 Deferred revenue 316 030 331 618 Deferred income tax liability 281 444 233 1 336 072

Total non-current liabilities 13 141 910 11 091 328 Current liabilities Accounts payable and accrued expenses 213 970 717 2 574 536 Payables to Rostelecom 96 307 108 100 Income tax payable _ 76 541

Taxes and social security payable 22 321 999 812 712

Dividends payable 64 672 63 641

Short-term borrowings 19 1 582 707 683 741 Share of long-term borrowings to be repaid during the year 19 707 181 2 699 872

Current portion of finance lease liabilities 20 797 152 359 300

Total current liabilities 7 540 735 7 378 443

Total liabilities 20 682 645 18 469 771

TOTAL EQUITY AND LIABILITIES 40 825 273 36 969 522

68 Annual statement / 2006 ),1$1&,$/67$7(0(17 AUDIT OPINION Consolidated income statement for the year ended December 31, 2006 (RUR thousand)

Notes 2006 2005 as adjusted

Revenues 24 24 848 703 23 756 233

Wages, salaries, other benefits and payroll taxes (8 424 514) (7 954 563)

Depreciation and amortization 6,7 (4 453 961) (3 417 659)

Supplies, repairs and maintenance, utilities (2 658 736) (2 185 768)

Taxes other than income tax (624 204) (550 307)

Expenses on carriers’ services (2 220 734) (2 634 267)

(Expenditure) recovery of provision for doubtful debts 14 320 540 (12 020)

Gain (loss) on disposal of property, plant and equipment 2 308 (103 699)

Other operating expenditure 25 (2 513 437) (2 274 446) Operating profit 4 275 964 4 623 504

Share of result of associates 9 11 912 20 713

Interest expense, net 26 (1 020 783) (843 532)

Income (loss) of financial investments 27 (48 371) 41 842

Foreign exchange gain at currencies revaluation, net 22 633 53 118

Profit before taxation 3 241 355 3 895 645

Tax on income 28 (1 106 921) (1 391 621) Profit for the reporting period 2 134 434 2 504 024

Profit related to the parent company equity holders, for the reporting period 2 073 895 2 465 295

Profit related to minority interests of subsidiaries, for the reporting period 60 539 38 729

Profit for the reporting period 2 134 434 2 504 024

Basic and diluted earnings per share (RUR) with regard to annual profit attributable to the parent company equity holders 29 6,32 7,52

ǏǺǰǺǮǺǵǺǾȃȌǾ 69 ),1$1&,$/67$7(0(17 AUDIT OPINION

INDEPENDENT AUDITORS’ REPORT

eholders and Board of directors Auditors’ Responsibility gaTelecom” Our responsibility is to express an opinion udited the accompanying con  RQ WKHVH FRQVROLGDWHG ÀQDQFLDO VWDWHPHQWV QDQFLDOVWDWHPHQWVRI2SHQ-RLQW EDVHG RQ RXU DXGLW ([FHSW IRU WKH PDWWHU any “VolgaTelecom” and its sub  GHVFULEHGLQWKH%DVLVIRU4XDOLÀHG2SLQLRQ ereinafter “the Company”), which we conducted our audit in accordance with e consolidated balance sheet as ,QWHUQDWLRQDO 6WDQGDUGV RQ $XGLWLQJ 7KRVH mber 2006 and the consolidated standards require that we comply with ethi tement, consolidated statement cal requirements and plan and perform the in equity and consolidated cash audit to obtain reasonable assurance wheth HQWIRUWKH\HDUWKHQHQGHGDQG HUWKHFRQVROLGDWHGÀQDQFLDOVWDWHPHQWVDUH RIVLJQLÀFDQWDFFRXQWLQJSROLFLHV IUHHIURPPDWHULDOPLVVWDWHPHQW [SODQDWRU\QRWHV An audit involves performing procedures to obtain evidence about the amounts and Management’s Responsibil GLVFORVXUHVLQWKHÀQDQFLDOVWDWHPHQWV7KH procedures selected depend on the auditors’ ity for the Financial State judgment, including the assessment of the ments ULVNVRIPDWHULDOPLVVWDWHPHQWRIWKHÀQDQ cial statements, whether due to fraud or er nt is responsible for the prepara URU ,Q PDNLQJ WKRVH ULVN DVVHVVPHQWV WKH USUHVHQWDWLRQRIWKHVHFRQVROLG auditor considers internal control relevant to DOVWDWHPHQWVLQDFFRUGDQFHZLWK the entity’s preparation and fair presentation O)LQDQFLDO5HSRUWLQJ6WDQGDUGV RIWKHÀQDQFLDOVWDWHPHQWVLQRUGHUWRGHVLJQ sibility includes: designing, im audit procedures that are appropriate in the and maintaining internal control circumstances, but not for the purpose of the preparation and fair presen expressing an opinion on the effectiveness QVROLGDWHG ÀQDQFLDO VWDWHPHQWV RIWKHHQWLW\·VLQWHUQDOFRQWURO$QDXGLWDOVR ee from material misstatement, includes evaluating the appropriateness of e to fraud or error; selecting and accounting policies used and the reason ppropriate accounting policies; ableness of accounting estimates made by g accounting estimates that are management as well as evaluating the over LQWKHFLUFXPVWDQFHV DOOSUHVHQWDWLRQRIWKHÀQDQFLDOVWDWHPHQWV

We believe that the audit evidence we have REWDLQHGLVVXIÀFLHQWDQGDSSURSULDWHWRSUR YLGHDEDVLVIRURXUDXGLWRSLQLRQ

70 Annual statement / 2006 ),1$1&,$/67$7(0(17 AUDIT OPINION

%DVLVIRUTXDOLÀHGRSLQLRQ

As described in No erty, Plant and Eq 6WDQGDUGV ,)56 D of International Fin HTXLSPHQWDWWKHG However, we were SODQWDQGHTXLSPH were unable to de 'HFHPEHU able to satisfy ours (ii) the deferred ta IRUWKH\HDUVWKHQ

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In our opinion, except for the effects of such adjustments, if any, as might have been deter mined to be necessary had we been able to satisfy ourselves as to the matter described in the %DVLVIRU4XDOLÀHG2SLQLRQSDUDJUDSKWKHFRQVROLGDWHGÀQDQFLDOVWDWHPHQWVUHIHUUHGWRDERYH SUHVHQWIDLUO\LQDOOPDWHULDOUHVSHFWVWKHÀQDQFLDOSRVLWLRQRIWKH&RPSDQ\DVRI'HFHPEHU LWVÀQDQFLDOSHUIRUPDQFHDQGLWVFDVKÁRZVIRUWKH\HDUWKHQHQGHGLQDFFRUGDQFHZLWK ,QWHUQDWLRQDO)LQDQFLDO5HSRUWLQJ6WDQGDUGV

May 31, 2007 Ernst&Young LLC

Annual statement / 2006 71 CONTACT INFORMATION CONTACT INFORMATION

General directorate Penza branch Dom Svyazi, Maxim Gorky square, Kuprin street 1/3, Penza city, 440606 Nizhny Novgorod city, 603000 3KRQH   3KRQHID[   )D[    (PDLORIÀFH#SHQ]DYWUX (PDLOJG#YWUX KWWSZZZSHQ]DYWUX KWWSZZZYWUX

Kirov branch Samara branch Drelevsky street 43/1, Krasnoarmeiskaya street 17, Kirov city, 610000 Samara city, 443010 3KRQH   3KRQH   )D[   )D[   (PDLOGLU#NLURYYWUX (PDLOGLUHFWRU#VDPDUDYWUX KWWSZZZNLURYYWUX KWWSZZZVDPDUDYWUX

%UDQFKLQWKH5HSXEOLFRI0DUL\(O Saratov branch Sovetskaya street 138, Ioshkar Ola town, Kiselev street 40, Saratov city, 410012 7KH5HSXEOLFRI0DUL\(O 3KRQH   3KRQH   ID[   )D[   (PDLORIÀFH#VDUDWRYYWUX (PDLOLQIR#PDULYWUX KWWSZZZVDUDWRYYWUX KWWSZZZPDULYWUX

Branch in the Republic of Mordovia Branch in Udmurtia Republic Bolshevistskaya street 13, Saransk town, Pushkinskaya street 278, Izhevsk city, The Republic of Mordovia, 430000 Udmurtia Republic, 426008 3KRQH   3KRQH   )D[   )D[   (PDLORIÀFH#UPYWUX (PDLOXWF#XWFUX KWWSZZZUPYWUX KWWSZZZXGPYWUX

Nizhny Novgorod branch %3RNURYVND\DVWUHHW Ulyanovsk branch Nizhny Novgorod city, 603000 /7ROVWR\VWUHHW8O\DQRYVNFLW\ 3KRQH   3KRQH   )D[   )D[   (PDLOGLUHFWRU#QQRYYWUX (PDLORIÀFH#XOYWUX KWWSZZZQQRYYWUX KWWSZZZXOYWUX

Orenburg branch Volodarsky street 11, Branch in Chuvash Republic Orenburg city, 460000 Lenin avenue 2, Cheboksary town, 3KRQH   Chuvash Republic, 428000 )D[   3KRQH   (PDLORIÀFH#UHJHVRRUX )D[   KWWSZZZRUHQEXUJYWUX (PDLOGLUHFWRU#FKUYWUX ZZZFKUYWUX

Annual statement/ 2006 73 OJSC VolgaTelecom annual statement 2006

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