Annual report 2009 For people Annual report 2009 to understand each other, it is important to assist them communicate Bright colors of communication

Annual report 2009 Infocommunications is the most dynamic branch of Reporting today to our shareholders, partners and Russian economy, and the interregional telecommuni- clients, we can firmly say that despite the challenges cations companies of Group, including and complicated tasks we faced in 2009, we North-West Telecom, are generally recognized as its honourably fulfilled our main mission to provide our leaders. clients with reliable telecommunications services, including Internet access, local telecommunications In recent years, JSC North-West Telecom made a services, IP-TV and VPN networks. breakthrough in the market for broadband Internet access services and implemented large scale social We create the most important, invaluable opportunity programs so that now in every point of the North- for anyone – to communicate with others, and making West Federal Region of the most up-to-date communication brighter and more diverse with the telecommunications services are accessible. Thus the use of innovative telecommunications technologies. most important task was implemented, set by the state This is because all the ports installed by us, the and branch authorities – that of ensuring equal access thousand of kilometers of cables laid, the most to telecommunications services for all inhabitants of sophisticated equipment installed – all these are Russia regardless of their geographical location and intended for people to say over the telephone, living standards. perhaps, the most important words of their lives, to conclude a profitable deal, to find information on the For North-West Telecom, 2009 was another year of Internet which could profoundly change the lives of ongoing financial indicators and business efficiency people in their life for the better, to meet with like- growth, but another serious landmark lies ahead: the minded persons on a chat site or write in their blogs state, as the key shareholder of JSC Svyazinvest, is something which could resolve and old dispute. And, interested not only in the development of separate perhaps, it could be invaluable information for companies of the group as successful business units, ensuring a safe and peaceful sky for all the inhabitants but also in moving to a brand new level. And I hope of the North-West Federal Region under which to live, “In recent years, JSC North-West that the shareholders, taking into account the transferred through our secure network. “We create the most important, Telecom made a breakthrough in extremely positive development dynamics of North- invaluable opportunity for the market for broadband Internet West Telecom in recent years, will support the initia- Our efforts and the positive changes which have taken anyone – to communicate with tives aimed at the creation of a united telecommuni- place in the Company have certainly reflected on the access services and implemented cations company. To the best of my belief, the united operational indicators. We have succeeded in building others, and making communica- large scale social programs so that company which is being created today will become an an effective competitive business, satisfying all our tion brighter and more diverse with now in every point of the North- undisputed leader in the industry. clients’ requirements. We have laid the foundation for the use of innovative telecommuni- a growth in the Company’s investor attractiveness, West Federal Region of Russia the which will allow our shareholders to receive dividend cations technologies” most up-to-date telecommunica- income at above the average industry level and tions services are accessible” proceeds from a growth in the share price.

Chairman of the Board of Directors General Director of JSC North-West Telecom of JSC North-West Telecom Evgeny Valerievich Yurchenko Vladimir Aleksandrovich Akulich Key Performance Indicators Revenue from telecommuni- Revenue per line, cations services, RUR mln RUR thousand

Financial indicators, RUR mln 2007 2008 2009 25,000 6,000 5,850 5,800 Revenue 23,643 24,521 26,295 24,000 24,103 Costs 17,689 20,683 23,987 5,600 23,000 Sales profit 5,955 3,883 2,308 22,732 5,487 5,400 Net profit 11,305 3,622 3,473 5,340

22,000 21,926 +6.6% Assets 47,632 53,118 56,528 +6.0% 5,200

Long-term liabilities 5,673 13,450 8,121 +2.7% 21,000 +3.7% 5,000 Short-term liabilities 5,070 2,686 8,643 2007 2008 2009 2007 2008 2009 EBITDA 18,551 9,637 10,818

Net assets 28,962 31,216 33,825

Financial ratios Share of new services Number of broadband access Capex / Revenue, % 41.2 56.7 26.6 in revenue, % subscribers, thousand EBITDA margin, % 78.5 39.3 41.1

Net profit margin, % 47.8 14.8 13.2 20 20.0 1,000 ROA (Return on Assets), % 28.4 7.2 6.3 893.4 18 800 ROE (Return on Equity), % 48.1 12.1 10.7 17.4 635.8 Equity / Assets, % 61.0 58.7 60.0 16 600

Net debt / EBITDA, % 0.57 1.57 1.52 14 +2.6% 400 Current liquidity, % 0.80 0.64 0.43 311 12.3 +40.5% 12 200 Operational indicators +5.1% +104% 10 0 2007 2008 2009 2007 2008 2009 Installed capacity, thousand lines 5,080.4 5,175 5,234 Digitalization level of local network, % 61.5 66.6 67.8 Installed capacity of broadband access ports, thousand 466 971 1,283

Securities Revenue per employee, Number of lines per

Market capitalization, RUR mln 43,824 6,829 22,666 RUR thousand employee

Market capitalization, USD mln 1,779 232 749 1,200 210 Dividends, RUR per 1 share: 1,192 204 common shares 0.642 0.617 0.591 200 197 1,100 1,081 privileged shares 3.997 1.281 1.228 190

Dividend yield, %: 1,000 180 177 common shares 2.3 7.5 2.7 942.8 +3.6% +10.2% 170 privileged shares 14.9 16.4 6.1 900 160 +11.3% EPS (weighted), RUR 20.00 6.45 6.14 +14.7% 800 150 2007 2008 2009 2007 2008 2009 Table of contents

Main Business Corporate Securities...58 Corporate Events...10 Description...16 Governance...42 61 Shareholder Structure 12 Corporate Events 18 Industry Overview 44 Shareholder Relations 62 Company Position 2009 21 Characteristics of the Region 45 The Board of Directors on the Stock Market 15 Corporate Events where the Company 47 General Director 65 Dividends 2010 Operates 48 Management Board 66 Bonds 24 Market Position 49 Internal Audit Commission of the Company 49 Internal Audit 29 Network Infrastructure 50 External Audit 34 IT-Solutions 50 Corporate Governance Ratings 34 Finances 51 Investment Community 39 Property Complex Relations 40 2010 Plans 55 Subsidiaries and Dependent Companies

Risks...68 Social Reference and Contact Appendix...95 Responsibility...76 Information...88 70 Sovereign and Regional Risks 78 Human Resources Policy 70 Industry Risks 82 Social Policy and Charity 71 Financial Risks 73 Legal Risks 73 Risk Management

ANNUAL REPORT 2009 TABLE OF CONTENTS 8 9

MAIN CORPORATE EVENTS

Communication makes Bright colors of sense when there is communication someone to share the success with

ANNUAL REPORT 2009

MAIN CORPORATE EVENTS

Bright colors of communication

ANNUAL REPORT 2009 communications line from to mative of allowances for accrual of • A regional representative office of 2009 Ivangorod (in the Leningrad Region) the Board of Directors, and the 2008 North-West Telecom in the Flagman was completed. Annual report and the annual account- category was opened in the Komi • A digital interactive television ser- ing statements, including the profit Republic. Corporate Events vice under the Avangard TV trademark and loss statement, were determined. • The size of interest rate of 6th cou- was put into commercial operation in The shareholders adopted the divi- pon of series 05 bonds was set at the Kaliningrad. dends for 2008 which totaled 1.281 level of 9.65% annually. 2009 • The updated official website of the rubles per each privileged share and • Payment of 5th coupon on 05 bond Company, www.nwtelecom.ru, was pre- 0.617 rubles per each common share. issue was fully performed. The 5th cou- sented, corresponding with the latest The meeting of shareholders elected pon interest rate totaled 15% p.a., 37 trends of Internet development and W3C the new composition of the Board of rubles 40 kopecks was accrued per • The Board of Directors of North- markup validation standards. Directors and Internal Audit Commis- each bond.

West Telecom adopted a resolution • The 5th coupon interest rate on 05 sion and appointed the external audi- • Payment of 18th coupon on 03 on placement of four issues of bond issue was set at 15% p.a. tor CJSC PriceWaterhouseCoopers bond issue was fully performed. The

exchange-traded bonds (series BO-01, • Payment of 4th coupon on 05 bond Audit. 18th coupon rate totaled 8.6% p.a., 2009 2009 BO-02, BO-03, BO-04) with duration issue was performed in full volume. 21 rubles 44 kopecks was accrued per

of up to three years. The overall The rate upon 4th coupon totaled 15% each bond. volume of each issue is RUR 1 bln. annually, 37 rubles 40 kopecks was Nominal value of each bond is RUR accrued per each bond. • First syndicated loan totaling 50 mil- • In accordance with the order of the 1,000. • An agreement on the collection of lion euro, attracted in December 2009 Federal Tariff Service of Russia, tariffs • CJSC PriceWaterhouseCoopers Au- debts of subscribers – legal entities and with the assistance of leading organi- on local telephony of North-West dit was recognized the winner of the individuals — with collection agency zers Citibank N.A., ING Bank (Eurasia), Telecom were changed and additional tender for the selection of an indepen- LLC “Russian Debt Corporation” Bank Societe General Vostok and Mos- unlimited tariffs on payment of intra- 2009 dent audit organization for North-West (“Russkaya Dolgovaya Korporatsia”) cow Narodny Bank Limited, was fully zonal telephony services were Telecom. was concluded. 2009 repaid. introduced. • The 700,000th subscriber using • The last North-West Telecom decade- • Payment of 17th coupon upon series • A supplementary agreement to the broadband Internet access under the • The Board of Directors of North- step automatic telephone exchange in the 03 bonds was fully performed. The existing Agreement on mutual Avangard trademark of North-West West Telecom adopted a resolution North-West Federal Region was put out 17th coupon interest rate totaled 8.6% cooperation between the Government Telecom was connected. on placement of 06 bond issue. • An Agreement on mutual coopera- of operation in in the p.a., 21 rubles 44 kopecks was accrued of the and North-West • The fiber optic telecommunications The volume of issue is RUR 3 bln. The tion between the administration of Region. per each bond. Telecom on the prospects for line - (the Komi Republic), duration is 10 years. The price of place- the Region and North-West Tele- • The attestation of the information development of telecommunications in with a length of 350 km, began. ment is RUR 1,000 rubles (nominal com was signed and the prospects system of the Company’s HR depart- the region for 2009 was signed. • The 2008 RAS financial and opera- value). for telecommunications development ment in terms of compliance with the • An Agreement with NGENIX tional results of North-West Telecom • The results of the financial and in the region for 2009-2010 were requirements of Russian legislation in Company, operator of the first network were summarized and published. operational activity of North-West Tele- considered. the field of personal data protection in Russia for content delivery and • Victor Ivanovich Plyachenko, who com for the 1H 2009, were summa- • The honorary signing of an Agree- was successfully completed. ment on cooperation between North- distribution, on the direct interaction of earlier headed the Pskov branch of rized in accordance with RAS. West Telecom and North-West networks at the St. Petersburg point of North-West Telecom, was appointed • The Board of Directors adopted re- 2009 bank of Sberbank of Russia (JSC), Internet traffic exchange (SPB-IX) was to the position of Regional Director – solution on the creation of Committees was performed, determining the foun- concluded. Director of the St. Petersburg branch of the Board of Directors and on the dation principles of mutually ben- • Payment of the 9th coupon on 04 of North-West Telecom. election of Chairmen and members of bond issue was fully performed. The 9th eficial cooperation on the territory • The results of the financial and the Committees. coupon interest rate totaled 8.1% p.a., 20 of St. Petersburg, Leningrad, Kalin- operational activity of North-West • The Board of Directors of North- rubles 19 kopecks was accrued per each ingrad, Murmansk, the Novgorod Telecom for 2008 were summarized West Telecom determined the terms of 2009 bond. and Pskov Regions, and the and published in accordance with powers and adopted the new composi- • O. G. Koroleva, the Chairwoman of Republic on the realization of: joint International Financial Reporting tion of the Company’s Management the Company’s new Board of Directors, special offers for clients, the forma- Standards (IFRS). Board. was elected. tion of joint privileged programs for • In St. Petersburg, systems for detect- • The results of financial and opera- • Eduard Ivanovich Tumashevsky, employees; the use of channels for ing and countering of network security tional activity of North-West Telecom for who earlier held the position of 2009 promotion of services provided by the risks were put into test operation. the 1st quarter of 2009 were summarized parties on mutually favorable con- Technical Director of Karelia branch of • The 4th coupon interest rate on 05 in accordance with International Finan- ditions; and the study of the needs North-West Telecom, was appointed to bond issue was set at 15% p.a. cial Reporting Standards (IFRS). of individuals and legal entities in ser- the position of Regional Director – • The 3rd coupon on 05 bond issue • The results of the financial and • Payment of 10th coupon on 04 vices and tools. Director of Pskov branch of North-West was paid in full volume. The 3rd cou- operational activity of North-West Tele- bond issue was fully performed. The • The first Report on corporate social Telecom. pon interest rate was 15% p.a., 37 com for the 1st quarter of 2009 were 10th coupon rate totaled 8.10% p.a., 2009 responsibility (CSR) of North-West rubles 40 kopecks was accrued per summarized and published in accor- 20 rubles 19 kopecks was accrued per Telecom for 2007-2008 was published each bond. dance with Russian accounting stan- each bond. in which were presented in detail all • Payment of the 16th coupon on 03 dards (RAS). • The Annual General Meeting of “non-financial” aspects of the Compa- bond issue was fully performed. The • North-West Telecom took part in the shareholders of North-West Telecom • An 06 bond issue (registration num- ny’s activity. 16th coupon interest rate was 8.6% p.a., XXI International Svyaz-Expocom-2009 was held, at which the amended ber 4-06-00119-A) with overall nomi- • Payment of 11th coupon on 04

21 rubles 44 kopecks was accrued per exhibition in . Charter and Provision on the Board of nal value RUR 3 bln at 11.7% p.a. inte- bond issue was fully performed. The each bond. • Construction of the fiber optic tele- Directors were adopted, and the nor- rest rate was successfully placed. 11th coupon rate totaled 8.1% p.a.,

ANNUAL REPORT 2009 CORPORATE EVENTS 12 13 20 rubles 19 kopecks was accrued per service to use licensed antivirus protec- each bond. tion by “Dr. Web Antivirus”. 2010 • Trading of the Company’s 06 • The results of financial and opera- bond issue started at MICEX stock tional activity of North-West Telecom exchange. for the 9 months of 2009 were summa- Corporate Events • The results of financial and opera- rized in accordance with IFRS. tional activity of North-West Telecom • Payment of dividends for common for the 1H 2009 were summarized in 2009 and privileged shares accrued on the accordance with IFRS. 2008 results of financial activity of Only joint victories Telecom, Siemens Ltd and Step Logic • The introduction of contact manage- North-West Telecom was completed. Ltd. ment system PETER – SERVICE CMS The total sum of dividends paid is RUR • Rodion Faratovich Fathullin, who was concluded. • 03 and 06 bond issues of North- 839,219 thousand. of the team bring earlier headed the department of tele- • North-West Telecom connected the West Telecom were included in the • One of the stages of modernization communications of the Company, was 10,000th subscriber of PON techno- base for calculation of the corpo- of the Company’s own interregional greatness to personalappointed to the position of Regional logy-based services. rate bonds index of MICEX (MICEX transport network on the basis of 2010 Director – Director of Novgorod branch 2010 • The amended Agreement on mutual CBI). DWDM technology was concluded, of North-West Telecom. cooperation between the administra- • Payment of 1st coupon on 06 bond during which in 2008-2009 were success • Aleksey Vladimirovich Shalagin was tion of the Nenetsk Autonomous issue was fully performed. The 1st put into operation sectors of interre- appointed to the position of the First coupon rate totaled 11.7% p.a., 29 Region and North-West Telecom gional DWDM transport network, con- • An Agreement on interaction and Deputy General Director of North-West • By May 1st, 2010, North-West rubles 17 kopecks was accrued per each was signed, the subject of which necting St. Petersburg and Petroza- cooperation between the government of Telecom. Telecom had fully satisfied requests bond. is cooperation between parties on vodsk, St. Petersburg and , the Murmansk Region and North-West • As part of the Concept of developing for the installation of telephones • Triple Play service on the basis of the creation and development of tele- Vologda and Arkhangelsk, and Vologda Telecom was signed, the subject of channels for receipt of payments and received from veterans and invalided PON (Passive Optical Network) tech- communications networks in the and . which is cooperation of the parties for optimization of its distribution network veterans of the Great Patriotic War Nenetsk Autonomus Region and maxi- nology was put into operation in Kalin- the creation and development of net- in the client servicing centers of North- (1941-1945). mum satisfaction of the local residents’ ingrad. works in the region and maximum satis- West Telecom in the North-West Fe- • A System for exploitation support of demand for telecommunications ser- • Avangard TV service was put into faction of the demand of population for deral Region, Sberbank ATMs were telecommunications lines in St. Peters- vices. commercial operation in the Komi telecommunications services. placed and connected. burg was put into operation allo- • The 8th coupon rate on 05 bond • North-West Telecom contested tax Republic, which is the fourth region wing for the organization of a broad issue was set at 7.78% p.a. claims for the years 2005-2007 at RUR where IP-TV service is accessible for the range of resources and services for • Payment of 7th coupon on 05 bond 204 mln. Company’s subscribers. access networks, transport networks • Payment of 6th coupon on 05 bond issue was fully performed. The 7th and data transmission networks aimed issue was fully performed. The 6th coupon rate totaled 9.65% p.a., 24 at the automation of main business coupon rate totaled 13.51% p.a., 33 rubles 6 kopecks was accrued per each processes and unification of activity of rubles 68 kopecks was accrued per each bond. the Company’s key divisions on the • Payment of 20th coupon on 03 bond bond. whole territory of the North-West Fe- 2010 issue was fully performed, and 30% of • Payment of 19th coupon on 03 deral Region. the nominal value of the bond issue bond issue was fully performed. The • The 2009 results of financial and was paid out. The 20th coupon rate operational activity of North-West Tele- 19th coupon rate totaled 8.6% p.a., 21 totaled 8.6% p.a., 21 rubles 44 kopecks 2009 • North-West Telecom, Siemens and com were summarized in accordance rubles 44 kopecks was accrued per each was accrued per each bond. bond. LLC STEP LOGIC concluded a three- with RAS. The financial statements party Agreement on the distribution of audit was performed by CJSC Pricewa- • The Company’s Board of Directors a national software product for exploi- terhouseCoopers Audit. tation support of telecommunications approved the 2010 investment priori- • The tender winner for the audit of lines. ties of North-West Telecom. North-West Telecom in 2010 was deter- • Payment of 2nd coupon on 06 • The software and hardware com- mined. The Tender Committee, on selec- bond issue was fully performed. The plex of the Contact-center in St. Peters- tion of an independent audit organization 2nd coupon rate totaled 11.7% p.a., 29 burg was put into operation, uniting for North-West Telecom, evaluated tech- rubles 17 kopecks was accrued per reference and information services 2010 nical and financial bids from four partici- 2009 each bond. of all regional branches of the Com- pants and awarded the tender to the inde- • The A System for detecting and pany into a unified information pendent audit organization CJSC Price- countering of network security risks waterhouseCoopers Audit. space. was jointly put into operation with • Payment of 13th coupon on 04 bond • Payment of 12th coupon upon series • Payment of 3rd coupon on 06 bond • An agreement with LLC STEP LOGIC Envision Group. The anti-spam module, issue was fully performed. The 13th 04 bonds was performed in full volume issue was performed in full volume. was concluded on continuing work capable of automatically tracking and coupon rate totaled 8.1% p.a., 15 and was paid out 25% of nominal value The 3rd coupon rate totaled 11.7% p.a., toward the introduction of a system blocking subscribers of the Company rubles 15 kopecks was accrued per of the series 04 bonds. The rate upon 29 rubles 17 kopecks was accrued per for the exploitation support of telecom- sending harmful e-messages, was com- each bond. 12th coupon totaled 8.1% annually, 20 each bond. munications lines aimed at the automa- missioned. • A Supplementary agreement to the rubles 19 kopecks was accrued per tion of main business processes • The tripartite Agreement on distri- Agreement on mutual cooperation each bond. and a unification of activity of the bution of joint domestic software between the Komi Republic and North- • Internet service Dr. Web AV-Desk Company’s core divisions at the whole SOSCN (System of operational sup- West Telecom, concerning prospects territory of the North-West Federal was put into operation, allowing St. port of a communication network) for the development of communication Region. Petersburg subscribers of the Avangard was signed up between the OJSC N.W. for 2010, was signed.

ANNUAL REPORT 2009 CORPORATE EVENTS 14 15 20 rubles 19 kopecks was accrued per The Company’sservice to credituse licensed antivirus protec- • “Best design, polygraphy and concept for a 2008 annual each bond. ratings aretion among by “Dr. Web Antivirus”. report” at2010 the XII Annual federal contest of annual reports • Trading of the Company’s 06 • The results of financial and opera- and sites organized jointly by Securities market magazine bond issue started at MICEX stock best amongtional activity of North-West Telecom and MICEX SE, and took 2nd place in the “Best level of exchange. for the 9 months of 2009 were summa- informationCorporate disclosure in the annual reportEvents of the issuer” • The results of financial and opera- peer companies:rized in accordance with IFRS. tional activity of North-West Telecom • Payment of dividends for common category; for the 1H 2009 were summarized in 2009 • Standard & andPoor’s: privileged international shares accruedlong-term on creditthe rating accordance with IFRS. of North-West 2008Telecom: results “BB-”; of financial “Stable” activity outlook, of national • “Best information disclosure in the annual reportTelecom, of the Siemens Ltd and Step Logic

• The introduction of contact manage- rating is ruAA-;North-West Telecom was completed. companies with capitalization from RUR 10 toLtd. 100 bln” ment system PETER – SERVICE CMS The total sum of dividends paid is RUR and “Best annual report of telecommunications• sectorRodion of Faratovich Fathullin, who was concluded. • 03 and 06 bond issues of North- 839,219 thousand. economy” within the XII Annual contest of annualearlier reports headed the department of tele- • North-West Telecom connected the West Telecom were included• Fitch in theRatings: international long-term credit rating • One of the stages of modernization organized by the RTS stock exchange. communications of the Company, was 10,000th subscriber of PON techno- base for calculation of (defaultthe corpo- ratingof ofthe issuer) Company’s of North-West own interregional Telecom: “BB”, appointed to the position of Regional logy-based services. rate bonds index of MICEXnational (MICEX long-term transport credit network rating: on AA the (rus) basis with of “Stable” 2010 Director – Director of Novgorod branch 2010 • The amended Agreement on mutual CBI). outlook. Short-termDWDM rating technology in foreign was currency: concluded, “B”. of North-West Telecom. cooperation between the administra- • Payment of 1st coupon on 06 bond during which in 2008-2009 were The Company’s First • Aleksey Vladimirovich Shalagin was tion of the Nenetsk Autonomous issue was fully performed. The 1st put into operation sectors of interre- appointed to the position of the First coupon rate totaled 11.7% p.a., 29 Region and North-West Telecom gional DWDM transport network, con- Corporate• An Agreement Social on interaction and Deputy General Director of North-West • By May 1st, 2010, North-West rubles 17 kopecks was accrued The per each Company’s was signed, the subject of which necting St. Petersburg and Petroza- cooperation between the government of Telecom. Telecom had fully satisfied requests bond. Responsibility Report: is cooperation between parties on corporatevodsk, governance St. Petersburg and Vologda, the Murmansk Region and North-West • As part of the Concept of developing for the installation of telephones • Triple Play service on the basis of the creation and development of tele- Vologda and Arkhangelsk, and Vologda Telecom was signed, the subject of channels for receipt of payments and received from veterans and invalided PON (Passive Optical Network) scores tech- highly: communications networks in the and Syktyvkar. • Won inwhich the “Bestis cooperation corporate of socialthe parties responsibility for optimization report” of its distribution network veterans of the Great Patriotic War Nenetsk Autonomus Region and maxi- nology was put into operation in Kalin- categorythe at thecreation annual and federaldevelopment contest of ofnet- annualin the reports client servicing centers of North- (1941-1945). mum satisfaction of the local residents’ ingrad. • Expert RA agency increased corporate governance score and sitesworks organized in the regionjointly and by maximumSecurities satis- marketWest magazine Telecom in the North-West Fe- • A System for exploitation support of demand for telecommunications ser- • Avangard TV service wasof North-Westput into Telecom to NRKU 8 – “Developed corporate and MICEXfaction SE; of the demand of population for deral Region, Sberbank ATMs were telecommunications lines in St. Peters- vices. commercial operation in governancethe Komi practice”; telecommunications services. placed and connected. burg was put into operation allo- • The 8th coupon rate on 05 bond • North-West Telecom contested tax Republic, which is the fourth region • Was included by the Russian Union of Industrialists and wing for the organization of a broad where IP-TV service is accessible for the issue was set at 7.78% p.a. range of resources and services for claims for the years 2005-2007 at RUR • The corporate governance service of Standard & Poor’s Entrepreneurs in the national registry of non-financial Company’s subscribers. • Payment of 7th coupon on 05 bond access networks, transport networks 204 mln. gave a GAMMA (Governance accountability, management, • Payment of 6th coupon on 05 bond reports. issue was fully performed. The 7th and data transmission networks aimed metric and analysis) score of “GAMMA 5+” to North-West issue was fully performed. The 6th coupon rate totaled 9.65% p.a., 24 at the automation of main business coupon rate totaled 13.51%Telecom. p.a., 33 Employees of the Company rubles 6 kopecks was accrued per each processes and unification of activity of rubles 68 kopecks was accrued per each bond. the Company’s key divisions on the • Payment of 20th coupon on 03 bond bond. are some of the best whole territory of the North-West Fe- 2010 issue was fully performed, and 30% of • Payment of 19th coupon on 03 deral Region. The Company’s level of in the industry: the nominal value of the bond issue bond issue was fully performed. The • The 2009 results of financial and information transparency is was paid out. The 20th coupon rate 19th coupon rate totaled 8.6% p.a., 21 operational activity of North-West Tele- 2009 • Specialists of North-West Telecom are recognizedtotaled 8.6% as p.a., 21 rubles 44 kopecks rubles 44 kopecks was accrued significantly per each higher than the • North-West Telecom, Siemens and com were summarized in accordance winners of the IX All-Russian contest “Engineerwas – accrued 2008” per each bond. bond. Russian average: LLC STEP LOGIC concluded a three- with RAS. The financial statements and “Engineerparty Agreement – 2009”; on the distribution of audit was performed by CJSC Pricewa- • The Company’s Board of Directors a national software product for exploi- terhouseCoopers Audit. tation support of telecommunications approved the 2010 investment priori- • Standard & Poor’s Indicator of information transpar- • Deputy General Director – Commercial Director Oleg • The tender winner for the audit of lines. ties of North-West Telecom. ency is at 70%, 13th among 90 largest Russian public com- Viktorovich Popov was included in best commercial direc- North-West Telecom in 2010 was deter- • Payment of 2nd coupon on 06 • The software and hardware com- panies. tors (marketing directors) in the telecommunications mined. The Tender Committee, on selec- bond issue was fully performed. The plex of the Contact-center in St. Peters- tion of an independent audit organization industry 2nd(4th coupon position rate in totaled the ranking); 11.7% p.a., 29 burg was put into operation, uniting for North-West Telecom, evaluated tech- The Company’s 2009 rubles 17 kopecks was accrued per reference and information services 2010 nical and financial bids from four partici- 2009 • Advisoreach to bond.the General Director Leonid Zigmundovich of all regional branches of the Com- Annual Report won pants and awarded the tender to the inde- Tufrin was• Theawarded A System with forthe detectingmedal “Order and of Merit for pany into a unified information the following awards: pendent audit organization CJSC Price- Country counteringof II degree”. of network security risks waterhouseCoopers Audit. space. was jointly put into operation with • Payment of 13th coupon on 04 bond • Payment of 12th coupon upon series • Payment of 3rd coupon on 06 bond • An agreement with LLC STEP LOGIC Envision Group. The anti-spam module, issue was fully performed. The 13th 04 bonds was performed in• full “Best volume annual report in transport and telecommunica- issue was performed in full volume. was concluded on continuing work The capableCompany’s of automatically official tracking and coupon rate totaled 8.1% p.a., 15 and was paid out 25% of nominaltions” valueat the VI Annual open contest of annual reports held The 3rd coupon rate totaled 11.7% p.a., toward the introduction of a system blocking subscribers of the Company rubles 15 kopecks was accrued per of the series 04 bonds. Theby rate the uponadministration of the Krasnodar Region; website: www.nwtelecom.ru: 29 rubles 17 kopecks was accrued per for the exploitation support of telecom- sending harmful e-messages, was com- each bond. 12th coupon totaled 8.1% annually, 20 each bond. munications lines aimed at the automa- missioned. • A Supplementary agreement to the rubles 19 kopecks was accrued per tion of main business processes • “Best presentation of a 2008 annual report on the cor- • Was a •prize The winnertripartite in Agreementthe national on contestdistri- ofAgreement corporate on mutual cooperation each bond. and a unification of activity of the porate site of the Company” and “Best electronic version media resourcesbution of(“Silver joint threadsdomestic – 2009”)software in thebetween main ca-the Komi Republic and North- • Internet service Dr. Web AV-Desk Company’s core divisions at the whole of a 2008 annual report” at the III St. Petersburg contest of tegory (“BestSOSCN corporate (System website”)of operational for the sup- secondWest consecu- Telecom, concerning prospects was put into operation, allowing St. territory of the North-West Federal annual reports and sites; tive year.port of a communication network) for the development of communication Region. Petersburg subscribers of the Avangard was signed up between the OJSC N.W. for 2010, was signed.

ANNUAL REPORT 2009 CORPORATE EVENTS 14 15 20 rubles 19 kopecks was accrued per The sixthservice bond to use issue licensed antivirus protec- each bond. tion by “Dr. Web Antivirus”. 2010 • Trading of the Company’s 06 of the Company• The results was of financial and opera- bond issue started at MICEX stock given a hightional activityrating: of North-West Telecom exchange. for the 9 months of 2009 were summa- Corporate Events • The results of financial and opera- rized in accordance with IFRS. tional activity of North-West Telecom • Standard & •Poor’s: Payment national of dividends rating: ruAA-;for common for the 1H 2009 were summarized in 2009 and privileged shares accrued on the accordance with IFRS. • Fitch ratings:2008 long-term results nationalof financial rating: activity A+ (rus).of Telecom, Siemens Ltd and Step Logic • The introduction of contact manage- North-West Telecom was completed. Ltd. ment system PETER – SERVICE CMS RecognitionThe total of sum the of dividends paid is RUR • Rodion Faratovich Fathullin, who was concluded. • 03 and 06 bond issues of North- 839,219 thousand. earlier headed the department of tele- • North-West Telecom connected the West Telecom were included Company in the • Onein variousof the stages areas:of modernization communications of the Company, was 10,000th subscriber of PON techno- base for calculation of the corpo- of the Company’s own interregional appointed to the position of Regional logy-based services. rate bonds index of MICEX (MICEX • Best taxpayertransport in 2008 network in St. Petersburg; on the basis of 2010 Director – Director of Novgorod branch 2010 • The amended Agreement on mutual CBI). DWDM technology was concluded, of North-West Telecom. cooperation between the administra- • Payment of 1st coupon on 06 bond during which in 2008-2009 were • Aleksey Vladimirovich Shalagin was • Three-times winner of adventure race “Saint-Petersburg tion of the Nenetsk Autonomous issue was fully performed. The 1st put into operation sectors of interre- appointed to the position of the First coupon rate totaled 11.7% p.a., 29 Region and North-West Telecom Urban Race” ingional “Business” DWDM class; transport network, con- • An Agreement on interaction and Deputy General Director of North-West • By May 1st, 2010, North-West rubles 17 kopecks was accrued per each was signed, the subject of which necting St. Petersburg and Petroza- cooperation between the government of Telecom. Telecom had fully satisfied requests bond. is cooperation between parties on • Seventeenthvodsk, among St. 50 Petersburg of the most and strategic Vologda, telecom- the Murmansk Region and North-West • As part of the Concept of developing for the installation of telephones • Triple Play service on the basis of the creation and development of tele- munications companiesVologda and Arkhangelsk,providing telecommunicationsand Vologda Telecom was signed, the subject of channels for receipt of payments and received from veterans and invalided PON (Passive Optical Network) tech- communications networks in the services in Russian,and Syktyvkar. in the ratings of the center for certifi- which is cooperation of the parties for optimization of its distribution network veterans of the Great Patriotic War nology was put into operation in Kalin- the creation and development of net- in the client servicing centers of North- (1941-1945). Nenetsk Autonomus Region and maxi- cation and ratings of the IES (Institute for Economic Strat- ingrad. works in the region and maximum satis- West Telecom in the North-West Fe- • A System for exploitation support of mum satisfaction of the local residents’ egies); demand for telecommunications ser- • Avangard TV service was put into faction of the demand of population for deral Region, Sberbank ATMs were telecommunications lines in St. Peters- vices. commercial operation in the Komi telecommunications services. placed and connected. burg was put into operation allo- • Laureate of the annual international award “Best com- • The 8th coupon rate on 05 bond • North-West Telecom contested tax Republic, which is the fourth region wing for the organization of a broad issue was set at 7.78% p.a. claims for the years 2005-2007 at RUR where IP-TV service is accessiblepany for– 2009” the with the honorary title “Socially responsible range of resources and services for • Payment of 7th coupon on 05 bond 204 mln. Company’s subscribers. company” within the VII ceremony of official public recog- access networks, transport networks • Payment of 6th coupon nitionon 05 bond“Elite of the National Economy”; issue was fully performed. The 7th and data transmission networks aimed issue was fully performed. The 6th coupon rate totaled 9.65% p.a., 24 at the automation of main business rubles 6 kopecks was accrued per each coupon rate totaled 13.51%• Silverp.a., 33laureate of the all-Russian award “HR-brand” in processes and unification of activity of rubles 68 kopecks was accrued per each bond. the Company’s key divisions on the the “Federation” category (Best employer in Russia 2009). • Payment of 20th coupon on 03 bond bond. whole territory of the North-West Fe- The organizer of the award is the HeadHunter Group of 2010 issue was fully performed, and 30% of • Payment of 19th coupon on 03 deral Region. the nominal value of the bond issue bond issue was fully performed.Companies. The • The 2009 results of financial and was paid out. The 20th coupon rate operational activity of North-West Tele- 19th coupon rate totaled 8.6% p.a., 21 totaled 8.6% p.a., 21 rubles 44 kopecks 2009 • North-West Telecom, Siemens and com were summarized in accordance rubles 44 kopecks was accrued per each was accrued per each bond. bond. LLC STEP LOGIC concluded a three- with RAS. The financial statements party Agreement on the distribution of audit was performed by CJSC Pricewa- • The Company’s Board of Directors a national software product for exploi- terhouseCoopers Audit. tation support of telecommunications approved the 2010 investment priori- • The tender winner for the audit of lines. ties of North-West Telecom. North-West Telecom in 2010 was deter- • Payment of 2nd coupon on 06 • The software and hardware com- mined. The Tender Committee, on selec- bond issue was fully performed. The plex of the Contact-center in St. Peters- tion of an independent audit organization 2nd coupon rate totaled 11.7% p.a., 29 burg was put into operation, uniting for North-West Telecom, evaluated tech- rubles 17 kopecks was accrued per reference and information services 2010 nical and financial bids from four partici- 2009 each bond. of all regional branches of the Com- pants and awarded the tender to the inde- • The A System for detecting and pany into a unified information pendent audit organization CJSC Price- countering of network security risks waterhouseCoopers Audit. space. was jointly put into operation with • Payment of 13th coupon on 04 bond • Payment of 12th coupon upon series • Payment of 3rd coupon on 06 bond • An agreement with LLC STEP LOGIC Envision Group. The anti-spam module, issue was fully performed. The 13th 04 bonds was performed in full volume issue was performed in full volume. was concluded on continuing work capable of automatically tracking and coupon rate totaled 8.1% p.a., 15 and was paid out 25% of nominal value The 3rd coupon rate totaled 11.7% p.a., toward the introduction of a system blocking subscribers of the Company rubles 15 kopecks was accrued per of the series 04 bonds. The rate upon 29 rubles 17 kopecks was accrued per for the exploitation support of telecom- sending harmful e-messages, was com- each bond. 12th coupon totaled 8.1% annually, 20 each bond. munications lines aimed at the automa- missioned. • A Supplementary agreement to the rubles 19 kopecks was accrued per tion of main business processes • The tripartite Agreement on distri- Agreement on mutual cooperation each bond. and a unification of activity of the bution of joint domestic software between the Komi Republic and North- • Internet service Dr. Web AV-Desk Company’s core divisions at the whole SOSCN (System of operational sup- West Telecom, concerning prospects territory of the North-West Federal was put into operation, allowing St. port of a communication network) for the development of communication Region. Petersburg subscribers of the Avangard was signed up between the OJSC N.W. for 2010, was signed.

ANNUAL REPORT 2009 CORPORATE EVENTS 14 15 BUSINESS DESCRIPTION

The ultimate goal Bright colors of of innovation is to bring communication completely different people close to each other

ANNUAL REPORT 2009 BUSINESS DESCRIPTION

Bright colors of communication

ANNUAL REPORT 2009 North-West (40.3), Central (39.6) and Urals (34) Federal Distribution of Over a period of several years, JSC Svyazinvest has been Industry Overview Regions of Russia. information technologies the unrivaled leader in the household broadband services market – the Group Companies held 36% of the market as of Similar statistics were also presented by the Ministry of the end of 2009, whereas the closest competitors – Comstar- Economic Development and Trade of the Russian Federa- OTS, -Telecom and VimpelCom hold only 9%, 7% and 7% In recent years the telecommunications industry has 60 59.7 rightly become the backbone of the Russian economy. tion. The Ministry notes that the volume growth of telecom- of the market respectively.2 The dynamic development of the industry and annual munications services was driven by the development of tele- 52.3 increases in the contribution it made to GDP drew attention communication networks and the introduction of new types 55 In 2009, when a number of federal operators suspended toward information and communications technologies from of services. The main factors restraining the demand for regional project development, interregional telecommunica- the state, and underlined the increasing importance of these telecommunications services and slowing growth in the sec- tion companies of the Group broadened the subscriber base services in all spheres of human activity and everyday life. tor were, according to the Ministry, decreases in household 50 for broadband access services nearly by 45% against the income and corporate activity as a result of the general market average of 31%. financial crisis. 46.99 45 45.4 The share of Information and Communication According to data provided by the Ministry, telephony According to expert forecasts, the number of home Technologies (ICT) rose to 4.6% of GDP in 2009. services prevailed in the structure of telecommunications 40 broadband access users in 2010 will increase by The share of telecommunications services in overall services in 2009: over 40% of the services provided were 2008 2009 21% to 16 million persons. By 2014, more than industry turnover totaled 72% mobile services, around 10% were long distance/interna- a half of all households will be connected to tional telephone services and over 11% was made up by Internet users, million persons broadband access (21 million persons) and the local telephony and payphone services. PC, million units volume of broadband access market will exceed Unlike other branches of the real economy, the telecom- RUR 100 bln munications industry demonstrated positive profit dyna- The strongest influence was exerted by the crisis on two In 2009, Internet access became a service on mics even under the complicated macroeconomic conditions segments of services – long-distance (down by 8%) and which the population does not economize of 2009. According to data from the Ministry of Telecoms & mobile services (an increase of 2%, two times less than the Mass Communications of Russia, telecommunications ser- average market indicators of industry growth). At the same For Russian regions as a whole, the current penetration vices revenues in 2009 increased by 4.2% as compared with time, in the corporate segment, mobile operators lost of broadband Internet access is three times lower than in 2008, reaching RUR 1,273 bln. During the reporting period around 9% of their revenues in comparison with 2008. most cities. It is expected that within the next 2 or 3 years All this resulted in an ARPU decrease in the corporate the main growth will take place due to the connection of the revenues of traditional operators increased by 4.3% segment, which was only compensated by those who could new subscribers in the large cities, where there are commu- reaching RUR 389.4 bln. The revenues from telecommuni- In addition, the crisis sprang another surprise: for the ensure the sufficient inflow of new subscribers. nities with a comparatively high income and business acti- cations services provided to the population increased by first time in the history of the industry an outflow of local vity is concentrated. At the same time only 29% of Russians 5.4% and reached RUR 690,627 bln. telephone network subscribers was observed at the end of the year. The number of telephones installed in a local (city As in the previous two years, in 2009 data transmission live in cities with a population of over 500,000 (including and Internet access services were the main drivers of indus- the capitals) and long-term growth can be achieved only by The density of fixed-line telephony totaled 32 telephones or rural) telephone network during the year decreased by try development, having demonstrated 22% growth by the those providers which have already expanded in the second- per 100 persons. The highest telephone density is in the nearly 173,000. This required fixed telecom providers to act to retain subscribers and increase the subscriber base for end of the year and 36% growth in the household services tier cities. Revenues from telecommunications value-added services. segment. In terms of revenues from individuals, Pay-TV is included services, RUR mln According to data provided by the Ministry of Telecom in the top-five segments. Despite the fact that in 2009 the Yet again the crisis demonstrated that the and Mass Communications of Russia, the number of Inter- crisis decreased rates of growth, Pay-TV experienced a 6% net users at year's end totaled around 59.7 million persons, growth instead of a decline. At the end of 2009, 14.5 million telecommunications industry is almost the only 1,300 1,273 31% more than at the end of the previous year. The overall Russian subscribers used Pay-TV services. In comparison industry in the Russian economy without a raw number of personal computers totaled 52.3 million with 2008, the Pay-TV subscriber base in 2009 increased material component that constantly develops (+11%). almost 21%. 1,250 and continues to offer clients the most up-to- 1,221.69 1,179.3 date services The general financial crisis prompted the population and The leading players in the Russian Pay-TV market are: 1,200 +4.2% companies to decrease spending and fixed costs. As a result Tricolor-TV, Comstar-OTS, R-Telecom, Multiregion, NTV+ telephony and Internet services became a “preferred substi- and interregional telecommunication companies of the 1,150 1,136.13 The year 2009 was also challenging in the corporate seg- tute” for the population in the field of entertainment and Svyazinvest Group. ment, distinguished by the active migration of subscribers. leisure and as a tool for looking for employment, whereas 1,100 The number of subscribers in the overall subscriber base for companies and organizations these services helped to Pay-TV has become an integral part of the everyday life that migrated during the year was as much as 25%, owing cut administrative costs and optimize business processes. of Russian citizens. There are 2.9 TV sets connected to Pay- 1,050 2009 to which the telecommunications companies acquired the TV per 10 Russian households. This is 14 times fewer than 2008 experience of developing strategies for retaining clients and At the end of 2009 in Russia, 13.2 million subscribers the number of SIM-cards per 10 households but it exceeds (around one fourth of Russian households) were connected the number of computers with broadband Internet access. Communtication services ARPU levels. Apart from moving to new offices, over the Telecom industry course of the year the corporate segment observed the ten- to broadband Internet, with 9 million of these in the regions. At the same time every 32nd Pay-TV subscriber and every revenues, total 3 dency to cut telecommunications services costs by restric- The overall growth of the market totaled 36%, increasing 12th subscriber of digital television watches IP-TV. ting access to long-distance and international telephony and due to households in large “half million citizen cities” hi- In comparison to 2008, the share of decreasing expenditures on local and mobile services. To therto not covered by high speed connections getting con- Despite the fact that the service price is two times higher mobile, long distance/international tele- nected (not including Moscow and St. Petersburg, where than the price for services on the Russian phony in the overall volume of industry avoid mass outflows of clients the telecommunications com- the subscriber base is already close to exhaustion).1 services decreased, whereas the purchase panies had to react in real time: firstly to swiftly provide of document and postal services increased telecommunications services at new facilities and secondly 2 Data provided by AC&M. to offer discounts sufficient to hold clients. 1 Data provided by iKS-Consulting. 3 Estimates, J`Son & Partners Consulting.

ANNUAL REPORT 2009 SOCIALBUSINESS RESPONSIBLITY DESCRIPTION 18 19 5% of overall household expenses, whereas similar world Revenues from physical 25 24 indicators vary from 10% to 15%. This is evidence of suffi- Characteristics of persons, USD bln* cient potential for an increase in the amount spent on tele- 20 communications services but at the same time the potential 18 2008 is connected with the services of traditional operators as the Region where 2009 only they can provide the clients with a variety of additional 15 services. the Company

10 According to expert forecasts, in 2010 the number of IP-TV subscribers will increase by 63% and Operates 6.9 5 total 1.6 million persons 4.5 3.9 3.9 North-West Telecom licensed territory is the North-West * Source: data of field studies, J' Son & Partners 1.5 1.6 Federal Region of Russia – the most developed Russian 0.78 0.83 Consulting. 0 The telecommunications industry is developing, and new region from the telecommunications development stand- Mobile Digital Telephony Broadband Pay-TV players entering the market are beginning to realize their telephony terminals Internet access point. The penetration level of telecommunications services development strategies. While JSC Svyazinvest retains the in the North-West Federal Region is significantly higher position of one of the market leaders, the share of the than the Russian average and closely approaches the similar Svyazinvest Group of Companies in the revenues of the tele- market on average, the number of IP-TV subscribers Assessing the prospects for future industry development, it indicators of economically developed countries. increases dynamically. is worth pointing out that despite the annual penetration communications industry gradually decreases primarily due to the activity of integrated providers (JSC VimpelCom and growth of telecommunications services and that currently This is largely due relatively high levels of income, urban- JSC MTS which are currently active players not only in the At the end of 2009, the IP-TV service subscriber base in nearly 80% of Russians regularly use telecommunications ization and the good standard of education of the popula- segment of mobile services, but also in fixed telephony and Russia increased by 70%, reaching 1 million subscribers in services, the average level of expenses on telecommunica- tion. In addition, during the whole development of commu- comparison with 0.6 million subscribers at the end of 2008.4 tions services in Russia is relatively low and does not exceed data transmission services). The state, as a key shareholder of JSC Svyazinvest, has assigned to the company the objec- nications, the North-West Federal Region has served as a tive of transforming the holding into a powerful national particular launching pad for the testing of new types of ser- vices: that was the case with wire-based communications, Penetration of telecommunications in the everyday life of Russians operator providing a whole range of telecommunications services. mobile communications and 3G services. at the end of 20095 In December 2009, the Government Commission on The most developed market of the North-West Federal Per 10 households or 27 persons in Russia there are: Transport and Telecommunication adopted a plan to reorga- Region is the St. Petersburg telecommunications market nize JSC Svyazinvest. A development strategy was formed, (67.8% of the total market of the North-West Federal instruments for its realization were determined and princi- Region), but lately, due to active development of telecom- ples of large-scale reorganization were established. munications services in the regions and to a greater involve- 40.5 SIM-cards ment of the population in consumption of such services, the According to the plan, interregional telecommunications regions have gradually gained a piece of the overall regional companies will merge with JSC , and as a result telecommunications pie. Cellular phones of the merger an integrated competitive company with a 18.2 purchased within whole range of telecommunications services will be created. North-West Telecom is the largest fixed telecommunica- the last three years At the same time, savings will be made by decreasing dupli- tion provider in the North-West Federal Region – the Com- cated infrastructure and redundant managerial levels. pany operates over 19% of the regional telecommunications

Fixed-line telephones 6.6 IT and telecommunications services penetration level6 Computers with broadband 2.7 Internet access Region Penetration, %

fixed telephony mobile broadband 2.9 TV sets connected to Pay-TV Russia 32 143 20 North-West Federal Region 40 165 38 Registered users of social St. Petersburg 54 187 60 7.8 networks

6 Source: data of Ministry of Telecom and Mass Communications, 4 Source: Analytical report, ComNews Research. 5 Source: data of field studies, J`Son & Partners Consulting. ACM-Consulting, in-house estimations.

ANNUAL REPORT 2009 SOCIALBUSINESS RESPONSIBLITY DESCRIPTION 20 21 Regional structure of the NWFR West Telecom attributes all efforts and has chances to telecommunications market at the end of 2009* Competitive head the consolidation of regional assets, thus further strengthening the Company’s market positions. Environment 2.6% North-West Telecom confidently conquers regional 5.7% markets and occupies the leading positions on the broad- As described above, the North-West Federal Region is band Internet access services market because in the 4.8% 67.8% one of the most developed in Russia in terms of urbaniza- regions there are currently practically no competing pro- tion. At the same time the population of the Region is viders capable of providing their clients with such a broad 3.7% marked by a high level of technical competence and aver- range of high quality services and additional tools as age per capita income which provide the operators with North-West Telecom. 4.8% St. Petersburg The Kaliningrad Region relatively high payable demand for telecommunications services. As a consequence, the Region is indispensable in In St. Petersburg, broadband Internet services are pro- 2.2% The The Leningrad Region the regional expansion of federal operators and is charac- vided by over 120 home networks. The market leaders are The Komi Republic The Murmansk Region 3.5% terized by a large number of active local operators, the JSC North-West Telecom and JSC Telecompany St. Peters- number of which gradually decreases due to incapacity of 2.4% The Arkhangelsk Region The Novgorod Region burg Cable Television. The largest players are InterZet and compliance with growing client needs. (earlier known as Corbina Telecom) as well as the 2.4% The Vologda Region The Pskov Region networks Eltel, Anthill, and Westcall. The Company share

* Source: Ministry of Telecom and Mass Communications, The most acute competitive struggle takes place in the is over one third of the broadband Internet services mar- Ministry of Economic Development and Trade, segment of broadband Internet access, and, while the St. ket in St. Petersburg. calculations of Rustelecom analytical agency. Petersburg market has become practically fully formed in recent years, the regional markets in 2009 were in the In the local and intrazonal telephony segment, from most active phase of market formation. Consequently, the the point of view of competition from alternative opera- regional fixed telecommunications services market (103%). services, including over 47% of broadband Internet access St. Petersburg market is becoming mature and has already tors, which are present as a rule in only a few cities of the It is noteworthy that such results were achieved by the Com- services and nearly 75% of local telephony services. begun consolidating (70% of the market is controlled by North-West of Russia, there are no alternatives to North- pany on the most competitive Russian market. the five largest players), and regional markets will follow West Telecom at the level of the North-West Federal

The successful implementation of its marketing strategy the same trend in future years. At the same time, North- Region in services comparable by price/quality ratio. in 2009 allowed to the Company to strengthen its leading Only CJSC Peterstar, which a year ago entered the market positions in the most profitable segments of the telecommu- Share of leading providers, broadband Internet in several towns in the Leningrad Region, is able to com- nications market in the North-West Federal Region.7 At the end of 2009, North-West Telecom’s revenue access market of St. Petersburg, 2009*, % pete due to its main line resource, but rather with local growth from telecommunications services exceeded players and not with North-West Telecom. Revenue growth of JSC North-West Telecom telecommu- the growth rates of the telecommunications nications services totaled 106% at the end of the year, market of the North-West Federal Region, the Mobile operators represent a more serious threat in exceeding the growth rates of the telecommunications ser- most competitive telecommunications market 32% this sector for the Company. This is due to licensing pecu- vices market of the North-West Federal Region as a whole in in Russia liarities (the specifics of allocation of numbering capacity terms of revenues (101.5%) and the growth rates of the 30% for operators of cellular mobile telecommunication allows its providers to tariff the intrazonal calls as local ones) and the increasing mobility of the population, as well as its demand for ubiquitous access toward voice communi- cation services.

Position of North-West Telecom on the telecommunications At the same time, the necessity of owning a home tele- services market of the North-West Federal Region phone line remains uncontested, which together with re- latively cheap unlimited tariffs sustains the demand for 9% the local telecommunications services of North-West Tele- 16% Market share in the North-West com. Positive results have also been seen as a result of Indicator Federal Region, by revenues, % market initiatives aimed at increasing the value of sub- 13% scribers' lines. All this means that the market for local 2008 2009 telephony has stabilized and in the near future sharp • North-West Telecom upward or downward changes in market share will not Telecommunications services, total 17.6 19.2 • Vimpelcom occur. Local telephony, 73.2 74.9 • InterZet including: Over 30 companies operate on the corporate clients • TKT market of the North-West Federal Region: more than 90% households 94.5 94.6 • Other of the market is held by the twelve largest of these. The legal entities 48.0 49.1 remaining volume of the market is held by small-size

Intrazonal telephony 94.0 94.0 * Source: AC&M Consulting. operators, which as a rule service one or two business centers. The leaders occupying over 50% of the market in Broadband Internet access 36.6 47.1 JSC North-West Telecom is the largest terms of revenues are JSC North-West Telecom, CJSC broadband Internet access provider in the Peterstar and JSC Vimpelcom. All of these companies 7 Excluding mobile services, in which North-West Telecom St. Petersburg market work with the largest legal entities. does not operate.

ANNUAL REPORT 2009 SOCIALBUSINESS RESPONSIBLITY DESCRIPTION 22 23 This segment suffered from the financial crisis more than Nevertheless, the aggressive policy of North-West Tele- Average revenue dynamics per line, RUR Internet access ARPU is due to a general downward tendency others: from the beginning of the crisis the corporate tele- com in the field of corporate sales in 2009, where earlier in the number of users of this service, which is caused by the communications market decreased in monetary terms by under the conditions of a more favorable environment no active development of broadband Internet access services.

25-30%, whereas within in previous years it demonstrated evident results were achieved, allowed the Company to 500 an annual growth rate of 22-25%. In 2009 a painful surprise strengthen positions in this no less competitive and strategi- 490 for business telephony operators was the relatively high out- cally important segment. 487 Due to successful implementation of the marketing flow of consumers – around 10% by the end of the year. strategy of North-West Telecom, the annual revenue 480 per employee of the Company's commercial division totaled RUR 6.1 mln Market Position 470 460 457 Due to tariff growth in local telephony and stabilization of the Company 450 445 of broadband Internet access ARPU in 2009 the Company also increased the average revenue per month line by 6.6% Subscriber base of North-West Telecom 440 2007 2008 2009 to RUR 487 per month.

Service Subscribers, persons

2007 2008 2009 2009/2008 (%) Organizations that optimized costs decreased the quan- tity of phone lines, whereas the population was decreasing Broadband 311,430 635,873 893,409 140.5 Voice Services (Local and call duration. The situation was further aggravated by the fact that mobile providers, facing a sharp MOU9 decrease, IP-TV – 4,326 16,076 371.6 Intrazonal Telephony) had to introduce a number of competitive and attractive ta- riff plans. Local telephony 4,439,352 4,473,092 4,452,528 99.5 One of the Company’s main tasks in the segment of local In such conditions the Company decreased the price of ARPU8 dynamics, RUR telephony in 2009 was preventing the outflow of subscrib- the “entrance ticket” for the clients, setting the price of con- ers from the North-West Telecom network and maintaining necting a service at the level of 1 ruble and increasing the value of a subscriber line, and offering significant discounts the level of subscribers using the unlimited tariff plan at a on package solutions for unlimited tariff plan users. level no lower than 40% of the overall subscriber base for Indicator ARPU telephony. North-West Telecom’s advertizing campaign for tariff plans under the “Region” umbrella, which includes unli- 2007 2008 2009 At the same time, this segment acutely reflected the finan- mited intrazonal calls was continued with the aim of stimu- cial crisis in the national economy. lating the use of intrazonal telephony. Local telephony 210 210.7 222.6 Broadband 544 481.7 433.5 IP-TV – 109.1 121.0 Company subscriber breakdown based on tariff plans Dial-up 213 191.6 172.4 (from the number of subscribers having the technical capability)

The year 2009 saw the successful promotion of the Com- the aim of the Company is not only to increase its broad- Tariff plan Share of subscribers, % pany’s services on the telecommunications market of the band Internet subscriber base, but also to retain its existing North-West Federal Region. The Company significantly subscriber base for local telephony. 2008 2009 increased its own broadband Internet subscriber base, households organizations households organizations expanded the geographical scope of IP-TV service provision, In 2009 the Company was able to increase the average and started the development of a distribution network. revenue per user (ARPU) in the segment of local telephony mainly due to the tariff increase on local telephony services. Time-based 28.75 25.40 30.00 26.30 At the same time the reporting year was marked by nega- In the segment of broadband Internet access, the ARPU tive trends in the segment of local telephony, where for the decreased by 10% to RUR 433.5, mainly following the Unlimited 45.75 64.34 43.80 63.80 increase of its subscriber base and due to the high level of first time in its history at the end of the year North-West Combined 25.50 10.26 26.20 9.90 Telecom recorded an insignificant (less than 1%) outflow of competition in the Region. subscribers. Therefore in the reporting year and in future At the same time, the IP-TV ARPU increased by 11%, mainly due to a growing demand for additional paid services 8 ARPU – Average Revenue Per User (per month). (“Video on demand”, “network VCR” etc.). The fall in dial-up 9 MOU – Minutes Over User – average call time of subscriber.

ANNUAL REPORT 2009 SOCIALBUSINESS RESPONSIBLITY DESCRIPTION 24 25 In the future, the Company plans to improve the quality In 2009 two more regional branches (Komi and Kalinin- The reporting period became the most complicated for function to the St. Petersburg branch of the Company, which of the services provided owing to a more active promotion grad) launched the IP-TV service. Thus, the Triple Play this segment, as consequences of the financial crisis were will allow for the replacement of revenues lost due to the of digital telephony services under the “New telephony” package of services is now available to more than half of fully reflected in it. Under conditions of economical volati- decrease in attractiveness of the services provided by long- trademark implemented on the basis of passive optical net- North-West Telecom clients. lity consumers primarily cut non-essential services con- distance operators. works (PON) and providing voice services with the use of sumption, meaning long-distance and international tele- the IP-protocol. phony services, which was immediately reflected by the The Company maintained broadband Internet overall volume of outgoing traffic and on Company reve- No client was lost during renegotiation of connection The Company considers the telephonization of newly access ARPU at near previous year levels – RUR nues earned in agent fees. and network resources agreements from CJSC constructed residential premises and new commercial real 433. This is especially valuable under conditions P.T.T. At the end of 2009, revenues of North-West Telecom estate facilities as an important factor in the future success of economical volatility in the segment. from connection and traffic transmission services decreased by 7.4% in comparison to the previous year to RUR 2,516 Understanding it and promptly reacting to market million, the revenues from agent services decreasing by requirements, North-West Telecom developed new package In 2009, with the aim of cost cutting, the Company’s 7.1% to RUR 659 million. solutions branded AlliancePro for legal entities, formed advertising budget was significantly sequestrated with the Distribution depending on the size of office: AlliancePro-Standard (1-3 funds channeled only at the most effective advertising and With the aim of returning traffic from the local level to a employees) and AlliancePro-Office (over 4 employees). Dur- information campaigns. Thus, within a joint offer with Intel zonal one and excluding illegal connection of other opera- Network ing the nine months of this campaign (the solution was (Avangard+PC campaign) over 3,000 subscribers were con- tors to the Company’s network, a “White Lists” function was launched in March 2009) 1,900 legal entities became sub- nected. In the summer , which is a weak season, the “Con- introduced in nine branches of the Company. The innova- scribers of these new packages (connecting over 4,500 tele- nect a Friend” program was launched and about 2,000 sub- tion allowed for the receipt of an additional RUR 20 million During the reporting year one of the most crucial tasks in phone lines). In addition, North-West Telecom subsidized scribers were connected during this time. Avangard TV sub- worth of revenues from operators only in Q4 of 2009. the Company's commercial activity was the continuing the purchase of telephone stations when customers were scribers were offered additional discounts for simultaneous restructuring of its own distribution network and an connected to the Company’s services, which increased the connection of several TV sets. This and other popular mar- Owing to the technical development of the network, the increase in the sales level due to attracted agents. In 2009 loyalty of corporate clients and provided an additional keting initiatives (Housewarming, Sky Link in Avangard, Company strengthened its positions in the field of sale of net- two new regional client offices of North-West Telecom image effect. Excited Client and others) as well as regular contests among work resources, Internet and data transmission services. At (Flagman category) were opened in the Komi Republic and users of broadband Internet from North-West Telecom sup- the end of 2009, due to active sales, revenues from channels Novgorod. North-West Telecom continued its interaction with other ported the rapid growth of Avangard services’ users in the leasing increased by 52% to RUR 697 million, whereas the companies in the area of the promotion of telecommunica- highly competitive market for Internet access services. revenues from sales of Internet and data transmission ser- tions services with the aim of broadening market proposals: vices (to operators) increased by 54.7% to RUR 230 million. Flagman offices are central regional points of sales In the future, North-West Telecom will continue to marketing actions which are popular among clients due to and servicing aimed at promoting telecommunications the opportunity to make significant economies by use of the develop its line of high-speed tariff plans on the basis of In addition in 2009, due to the cessation of the activity of products and services from North-West Telecom services and connections to JSC Mobile TeleSystems and PON technology and will stimulate the transition of sub- North-West Telecom's subsidiary company CJSC P.T.T., the JSC North-Western Bank of Sberbank of Russia were suc- scribers to more up-to-date services such as digital tele- Company conducted work with counteragents of CJSC P.T.T. through the organization of full cycles of sales cessfully implemented. phony, high-speed Internet access (over 10 Mbps) and inter- to renegotiate connection and network resource agree- and servicing to provide maximum comfort for active television. ments. clients with the use of demonstration zones and active advertising Developing the product line in 2010, North-West Tele- In the future, North-West Telecom plans to strengthen its Internet and Data com plans to launch services on the basis of PON technology positions on the operator market, increase revenues from in four branches (Arkhangelsk, Vologda, Murmansk, Komi). sales of network resources and introduce the “White Lists” Avangard-TV service will be available for subscribers in Transmission After concluding agreements with the most popular pay- Arkhangelsk, Vologda and Murmansk. ment systems as well as with the largest regional and federal banks in the North-West Federal Region, North-West Tele- In 2009 the Company continued active development of In the field of development of additional services, it is North-West Telecom revenues from channels com broadened the number of payment receiving outlets broadband Internet access services with xDSL technologies planned to offer subscribers “Turbo-button” services using leasing and sales of Internet and data and diversified the channels of payments receipt for services under the trademark Avangard across the North-West Fe- xDSL technology and additional services (Shareman, rendered. deral Region, with PON technology (Mega Avangard) in St. Datagrad, Screen agent). The offers in the field of paid-con- transmission services for operators, RUR Petersburg, and carried out PON commissioning in Kalinin- tent services and equipment sales (WiFi-modems, new PC As part of the Concept for the development of payment grad. models, web-cameras etc.) will be broadened. acceptance channels for subscribers and the optimization of 700 696.664 its own distribution network, North-West Telecom performed The growth of broadband Internet access accounted for measures to place and connect payment kiosks and Sberbank more than 250,000 subscribers, with 75% of new connec- 600 ATMs in its client service centers in the North-West Federal tions carried out in the Company’s regional branches. Services Region. By the autumn of 2010, the number of up-to-date ter- for Telecommunications 500 minals and Sberbank ATMs placed in North-West Telecom’s To increase the attractiveness of the Avangard service for 455.637 points of sale and client servicing will increase from 90 to consumers, the Company developed additional services: in 400 Operators more than 160. 2009 such services as Turbo-button, Private office, Night +52% acceleration and others were introduced. 300 Owing to implementation of measures aimed at increasing An increase in the level of broadband Internet access ser- 214.030 200 of the quality of services and diversifying payment channels, In an effort to economize on telecommunications ser- vices penetration and as a consequence a cross-flow of sig- 171.566 x 2.1 North-West Telecom expects to increase the loyalty of the vices, “express” contracts and package solutions became nificant traffic volumes to IP-network explains to a large 100 Company's subscribers, thus creating stable ground for cash common: these allow subscribers to save around 20% of extent gradual revenue decreases from the operators seg- +25% 2006 2007 2008 2009 flows. their costs on packages of telecommunications services. ment in recent years.

ANNUAL REPORT 2009 BUSINESS DESCRIPTION 26 27 In 2009, united standards of requirements for the person- referral and information services of all regional branches of Volume of the Company’s investment into nel of North-West Telecom's sales and service offices were the Company into a unified information space. Network transmission lines and infrastructure developed and introduced, the sales offices’ regional network facilities, RUR million was optimized, and the system of key performance indicators The Contact center is designed for the optimization of the (KPI) of the Company’s distribution network was introduced. interaction between the telecommunications operator and Infrastructure clients, and it includes several key functional directions: 3,000 2,876 As information and telecommunications services pene- 1) Support of core business services (analogous with existing 2,750 At the end of the year, 78% of monetary funds services for technical support and the repair office): trate more deeply into the life of each Russian, the need from the mass services provided were received • Users’ technical support; for the constant modernization of the network, channel 2,500 through the Company’s partners • Settlements' referral (opening balance, current payments infrastructure development, and the introduction of techni- etc.); cal platforms for the realization of the most up-to-date tele- 2,250 • Company services, existing tariffs and marketing communication services becomes necessary. 2,162 proposals referral; 2,000 To broaden distribution channels for the Company ser- 1,918 • Telemarketing. vices apart those within its own network, North-West Tele- In the last three years North-West Telecom 1,750 com actively worked with partners, and its own web site and 2) Information and referral services: Contact center. invested nearly RUR 7 bln into the construction • Traditional referral desk (09); and modernization of data transmission lines 1,500 • Paid referral desk (009). 2007 2008 2009 With the aim of improving the quality of client service, and infrastructure facilities broadening the range of services provided and obtaining 3) Provision of access to intrazonal, long-distance and inter- additional revenues, the 800 code for the provision of intelli- national telephony with the assistance of an operator, code gent services was implemented in 2009. This is used both for and dial plan of intrazonal, long-distance and international In recent years the Company has channeled significant Decrease in volume, but qualitative the technical support of basic services from North-West Tele- telephony referral. funds toward modernizing its own network , owing to which growth of investment com and for outgoing telemarketing. currently it has the most powerful and branched technical infrastructure in North-West Russia: it is the biggest local Structure of sales for North-West Telecom and intrazonal network, has its own interregional transpor- In 2009, under conditions of investment curtailment, The launch of the Contact center into commercial North-West Telecom implemented only fast-payback projects services provided to mass clients tation network connecting all local regional centers, and operation allowed for an increase in the level of provides a broadband Internet network, the overall installed to allow it to accomplish a set of tasks facing the Company: technical support to clients, uniting all elements capacity of which exceeds a million ports, as well as a pay- • to sustain and modernize network infrastructure; 25% in the client-servicing business process into a phone network covering all the most remote and sparsely united information and technological space as populated communities of the North-West Federal Region. • to develop and offer new high-tech and value-added well as offering new services to clients services; The installed capacity of the Company's local network • to ensure maximum satisfaction of applications for totaled 5.23 million unit numbers at the end of 2009 with connection of subscribers to the public telephone 86% equipped capacity, while local network digitalization network and broadband Internet access services; 1% The Contact center hardware and software complex of reached almost 68%. The total length of North-West Tele- • to fulfill the Company’s social obligations. North-West Telecom fulfills the full cycle of work to process 72% 2% com telephone lines is 236,000 kilometers. incoming calls: processing calls with caller identification, In 2009, North-West Telecom broadened its broadband interactive processing of calls at the “pre-operator” stage The Company’s network is present in each inhabited set- Internet network by 270,000 xDSL ports and 70,000 PON 10 using the interactive servicing system IVR , and provision of tlement of the North-West Federal Region. ports, modernized local networks and also increased the primary information from databases to the automated work- length of its own fiber-optic lines by almost 3,000 kilome- place of operator. The availability of a developed and relatively modern ters. technical infrastructure against the background of growing The infrastructure of the Contact center provides a com- business requirements and consequently the increasing vo- In 2009, the Company constructed and commissioned plex technological cycle of sales and client servicing that is lumes of traffic transmitted via the Company’s network FOTLs (fiber-optic transmission lines) in the following direc- integrated with the information system of North-West Tele- require constant development and improvement of network tions: Contact center Partner networks com and allows for the receipt of the necessary information for servicing the client: telecommunications network exploi- infrastructure. Web portal Own distribution network • Arkhangelsk branch: – Konevo – , tation support system of, measurement system, united infor- Arkhangelsk – Severodvinsk – , Arkhangelsk – mation billing system, service-activator and others. North-West Telecom was one of the first in the country In 2008 the share of sales via alternative to launch the construction of a broadband Internet network Karpogory; channels did not exceed 10% In future, due to the availability of a developed multi-ser- on the basis of PON (Passive Optical Networks) technology, • Vologda branch: – , – vice network and without incurring extra expenses, North- and one of the first among interregional telecommunica- Verkhovazhye; West Telecom will unite the core of Contact center with tions companies in the Svyazinvest Group to construct its • Kaliningrad branch: Kaliningrad – Ladushkin – regional platforms, creating automated operator stations own transportation network and increase network capacity Mamonovo – Bagrationovsk – Pravdinsk – with access to common databases thus ensuring the realiza- from 10-20 Gbps standard, for most providers, to 80 Gbps. Zheleznodorozhny, Neman – Krasnoznamensk; Contact Center tion of a united end-to-end business process of client servi- • Karelian branch: Lodeynoye Pole – , cing for the whole North-West Federal Region. Timely technical modernization has allowed the Com- Kem` – Kalevala – ; pany to increase its revenues, strengthen market positions in • Komi branch: Inta – Vorkuta; • Leningrad Region branch: St. Petersburg – Vsevolozhck – In October 2009 North-West Telecom launched into com- 10 IVR – Interactive Voice Response – system allowing the subscriber highly competitive markets and improve the quality and the mercial operation the Contact center hardware and software to obtain access to the necessary information using a special voice range of the services provided. Sosnovo – Priozersk, Kolpino – Lodeynoye Pole; complex in St. Petersburg which will subsequently unite the menu through pressing telephone buttons in the tone mode. • Murmansk branch: Kandalaksha – Kovdor; • St. Petersburg branch: St. Petersburg – Kolpino.

ANNUAL REPORT 2009 SOCIALBUSINESS RESPONSIBLITY DESCRIPTION 28 29 Key development indicators of the Company’s network The realization of these projects, as well as work per- The introduction of the System will help to solve the key formed on the migration of the network core allowed North- problems of telecommunications network management: West Telecom to achieve the following results in 2009: • simplify processes of network support; Indicators Unit 2007 2008 2009 2009/2008 • increase the network capacity twofold (from 40 Gbps to • diminish the time taken to render services; (%) 80 Gbps); • decrease operational costs; • distribute external channels symmetrically by two edge • increase the adaptability of the network and the speed of routers; reaction of the operator to constantly changing market Local telephone network, • organize connection in the points of traffic exchange requirements. cable length km 209,135 217,597 219,496 100.8 SPB-IX, MSK-IX, which allowed for up to 30% of incoming traffic to pass through nominally free chan- For the definitive fulfillment of the revenue plan and with FOCLs*, total length km 15,138 23,280 27,706 119.0 nels; the aim of avoiding illegal connections to the North-West • perform the dynamic increase of Internet access speed Telecom network during the reporting year the Company Local telephone network, during the night; introduced the “White Lists” system on its own network (at installed capacity units 4,735,785 5,174,875 5,234,102 101.1 • optimize the usage of multiservice network resources. long-distance/international, intrazonal and local levels).

Main telephone sets units 4,439,350 4,475,541 4,455,669 99.6 During the reporting year, the development of the broad- Due to realization of the “White Lists” function, North- band Internet network of North-West Telecom continued West Telecom managed to establish control over traffic trans- Local telephone network, with the installation of xDSL and xPON-ports. The geogra- mission from the connected operators, automate the process digitalization level % 61.48 66.65 67.75 101.7 phy of the PON project was broadened at the same time: in of change of automatic number identification categories on 2009 over 12,000 xPON ports were installed in the Kalinin- local networks and also perform automatic traffic transmis- * FOCLs – fiber-optic communication lines. grad branch, which allowed for the broadening of the sub- sion denial in the case of absence of the operator on the scriber base, an increase in the quality of services provided “White Lists” at transit-zonal communication hubs. and consequently an increase in the Company’s competitive- During the reporting year, North-West Telecom has its own network based on DWDM technology with an ness in the region. At the end of 2009, the “White Lists” function was intro- completed one of the stages of a long-term project to mo- overall length of around 14,500 kilometers with the most duced in nine North-West Telecom branches, which allowed dernize its transportation network on the basis of Dense complicated topological structure among all Russian DWDM In 2009, North-West Telecom jointly with Russian inte- for the redistribution of the load significantly (from local to Wavelength Division Multiplexing (DWDM) technology. networks. grator LLC “STEP Logic”, concluded another stage of the intrazonal level) from a number of connected providers The peculiarity of the realization of this project was the re- introduction of an Operations Support System designed for (JSC Megafon, LLC SCS Sovintel, JSC Vimpelcom). This led solution of a complicated task of switching various network This project is implemented in accordance with the automation of main business processes and the unifica- to an increase of the load of up to 50% at the long-distance/ segments to the new interregional transportation network, the worldwide trend to develop networks based on wave- tion of key divisions in the Company in the whole of the international and intrazonal levels. At the local level the vo- which was built upon “PUSK” equipment produced length-division multiplexing. As compared with SDH-net- North-West Federal Region. This system is based upon the lume of traffic diminished due to the avoidance of illegal by Russian company LLC STC “IRE-Polus”. Front- works, this technology increases the capacity of existing Ironman platform (which was used in similar projects by connections to the Company’s network. end engineering and design, installation and start-up fiber-optic communication channels by many times, it telecommunications companies British Telecom and France work was also performed by LLC “T-8” specialists (Russian has good scalability and fail-safety. This will allow North- Telecom), but is unique because in this configuration the legal entity). West Telecom to cope with an explosive increase in heavy specific needs of Russian operator were taken into account. traffic which has been growing exponentially in recent Technologies may appear, change, modify and In the process of the realization of this stage of the mod- years. die, but the modern infrastructure based on New ernization during 2008-2009, sections of interregional Generation Networks (NGN) will exist no less than transport DWDM-network connecting the following loca- Broadband internet access ports – installed 50 years, according to expert evaluations tions were commissioned: The overall length of channels of various level capacity dynamics, thousand ports organized by North-West Telecom since 2006 totals • St. Petersburg and Petrozavodsk; 13,600 kilometers, with the length of separate 1,600 • St. Petersburg and Vologda; channels of up to 700 kilometers 1,548 In future, the Company will continue the modernization • Vologda and Arkhangelsk; 1,400 of existing technical infrastructure with the aim of realizing • Vologda and Syktyvkar. 1,283 priority commercial projects, creating a unified flexible mul- 1,200 As part of work of the construction and broadening of an tiservice infrastructure on the basis of NGN (New Generation interregional data transmission traffic network the Com- 1,000 971 Networks) technologies, which will bring about the further A new generation of DWDM equipment for fiber pany has organized: broadening of the range of services provided and additional 800 optic data transmission systems with wavelength- tools, as well as improving the quality of their provision. • 10GE channel between St. Petersburg – Petrozavodsk; division multiplexing “PUSK” significantly increases 600 +21% • Two 10GE channels between Petrozavodsk – Murmansk; 466 the effectiveness of network operations, increases 400 The realization of North-West Telecom’s technical policy • Reserve 10GE channel along electric PL on the +32% capacity, increases commutation and managing in the medium-term will be performed through: Murmansk – Kandalaksha section; 200 +110% opportunities, and also saves costs on network • 10GE channel on the St. Petersburg – Kolpino – 121.66 • the development of existing fixed telecommunication exploitation Petrozavodsk section; 100 +280% 2006 2007 2008 2009 2010 F networks via broadening of coverage and carrying • Two 10GE channels between Vologda – Arkhangelsk; capacity of the multiservice network with the • Two 10GE channels between Vologda – Syktyvkar; introduction of solutions based on PON technology; In 2009 the overall number of installed Data transmission at speeds of up to 20 Gbps is organized • Two 10GE channels and one STM-64 channel between • the creation of infrastructure for a broadband mobile broadband Internet access ports exceeded by spectral channels of the DWDM network on these sec- St. Petersburg – Vologda; telecommunication network. LTE is considered a core tions. Modernization of other sections of the DWDM net- • 10GE channel between St. Petersburg – Novgorod; 1.28 million and in 2010 it will surpass 1.5 million technology. At the first stages the usage of telecommu- work was conducted earlier. Thus, the Company currently • 10GE channel between Novgorod – Vologda.

ANNUAL REPORT 2009 SOCIALBUSINESS RESPONSIBLITY DESCRIPTION 30 31 Fiber optic network of North-West Telecom

Novaya Zemlya

Pechenga Zaozersk Zapolyarny Snezhnogorsk Gadzhievo Polyarny Severomorsk Nickel Murmansk Kola Revda

Lovozero Olenegorsk Monchegorsk Kirovsk Apatity Naryan-Mar Kovdor Vorkuta Polyarniye Zori Kandalaksha Umba 175 km Inta

Loukhi Kosyu Sinya

Ust’- Tsilma 168 km Kalevala Kem Izhma ’ Kadzherom

Irasl’ 65 km Solovetsky Yushkozero (to Arkhangelsk) Malaya Pera Kostomuksha Leshukonskoye 113 km Severodvinsk Arkhangelsk Muezersky Vodniy 28 km Karpogory Chinyavorik Malenga 54 km Voyvozh Maloshuyka Blagoevo Kholmogory 114 km Ropcha 112 km Onega Troitsko-Pechersk Emetzk Usogorsk Sindor Obozerskaya 107 km Trakt 105 km Bereznik Emva Plesetsk Mirny 165 km ’ Pomozdino 96 km Konevo Soyga Vogvozdino (Igumnovskoye) Storozhevsk Essoil Suoyarvi Petrozavodsk Aykino 116 km 111 km Ust’-Kulom lake Verkhnyaya Kortkeros Onega Kargopol’ Krasnoborsk Vyl’gort Syktyvkar Lakhdenpokhya 96 km Vel’sk Oktyabrsky Ilyinsko- 68 km 37 km Podomskoye Valaam island Olonen 93 km Priozersk 60 km 68 km Svetogorsk lake Podporozhye Vizinga 97 km Ladoga 55 km 17 km Krasavino Sosnovo Verkhovyazhye Tarnogsky 107 km 154 km Lodeynoye Pole 52 km Veliky Koygorodok Toksovo Issad 124 km Obyachevo Schlisselburg Syamzha Ustyig 95 km Lipin Bor Nyuksenitsa Vsevolozhsk Totma Kirovsk 25 km Ust’ Settlement named Kichmengsky St. Petersburg 48 km Belozersk Letka Sosnoviy Kolpino Kubenskoye 195 km after Babushkin Gorodok Lomonosov Tosno Bor 74 km Babayevo Kirillov 42 km 54 km Pikalevo Sokol Boksitogorsk Lyuban Shuyskoye 45 km Kingisepp Chudovo Kaduy 46 km Ljubityno Nikolsk Ivangorod Volosovo Vologda Slantsy 112 km Khvoynaya 85 km Сherepovetz FOTL Strugi Batetsky Pestovo Krasnye 51 km Luga Ustuzhna Zaplusye Proletary 27 km Krestsy Moshenskoye Pechori 78 km Okulovka Existing own FOTLs Stary Pskov Valday Volot Palkino Lytchkovo Existing own FOs in FOCs of other Poddorye Demnyansk operators Ostrov Marevo Sovetsk Kholm Slavsk Gory settlement Pionersky Zelenogradsk Existing own RR Lines Krasnoznamensk Svetlogorsk Neman Guryevsk Loknya Polessk FOs leasing Svetly Kaliningrad Kaliningrad Baltiysk Chernyahovsk Kunya Nesterov region Gusev Commissioned in 2009 Ladushkin Gvardeysk 33 km 28 km Pustovka Usvyati Mamonovo Pravdinsk 2010 plans

Bagrationovsk Ozersk

ANNUAL REPORT 2009 SOCIALBUSINESS RESPONSIBLITY DESCRIPTION 32 33 nications network on the base of CDMA-450 technology access and data transmission increased by 22% and reached Expenses is planned; Finances RUR 5,062 mln, whereas the revenues from intrazonal and • the usage of broadband Internet infrastructure during local telephony increased by 7% and 4% to RUR 2,594 mln deployment of a mobile telecommunications network and RUR 13,358 mln respectively. (connecting wireless communication including on the In 2009, the Company’s expenses totaled RUR 23,987 mln Revenues basis of femtocell technologies); and increased 16.2% in comparison with 2008. The most sig- The Company is gradually increasing its level of diversifi- nificant growth was observed in the following expenses: • the introduction of solutions aimed at the support of convergence between fixed, mobile and data Due to the successful realization of marketing initiatives cation: currently, new services bring about 20% of the • “amortization” – the increase in expenses totaled 29% in transmission networks; total revenue of North-West Telecom. It means that under conditions of market uncertainty and an increase in comparison with the level of the previous year. Such a • the gradual removal from operation of TDM commuta- the Company not only has a firm foundation – a relatively the quality of client servicing and active expansion toward significant increase is due to a large volume of fixed tion systems as well as systems of data transmission and stable revenue base derived from local telephony services, the corporate client sector in the reporting year, the Com- assets commissioning following the implementation of communication lines using copper-wire cables; pany increased its revenues by 7% in comparison with the but also has drivers for revenue growth – value-added large scale investment programs in recent years; • the development of a telecommunications and services proceeds from Internet and data transmission services, • “outsourced services” – the increase of expenses totaled management center. previous year (RUR 26.3 bln). which occupy a more significant role in the revenue stream 41% mainly due to posting of expenses on maintenance As in the previous years, local telephony services made each year. and servicing of payphones as part of provision of universal telecommunications services; up the bulk of the Company’s revenues (over 55%). The po- • “electricity” – growth of expenses (28.5%) is primarily pulation remains the main consumer of the Company’s In 2009, the Russian state fulfilled all liabilities toward due to the increase of electricity tariffs. IT-Solutions telecommunications services, forming 58% of received the Company and reimbursed RUR 4,282 mln from the Uni- versal Service Fund for the expenses incurred in the provi- revenues. In 2009, the Company managed to decrease labor costs to In 2009, North-West Telecom conducted active imple- sion of universal services by means of payphones. These re- 27% in comparison with 31% in 2008. The volume labor costs mentation of key IT projects. venues are accountable as part of miscellaneous income, increased during the reporting year only by 3.6% which is For the Company, 2009 became the second year in which also allowed for the improvement of the business explained by the necessity of ensuring social protection of To ensure operative connection of subscribers to broad- a row of onward increases in financial indicators effectiveness indicators of North-West Telecom. North-West Telecom employees with the aim of increasing band Internet services and Triple Play (data, voice and video and business effectiveness their motivation and retaining the most qualified personnel. transmission over Internet providers’v networks) to the Sys- tem of automated activation of services, another three In terms of labor expenses, the structure of total branches of the Company (Kaliningrad, Komi, Novgorod) Dynamics and revenue structure of The main drivers of revenue growth generated by tele- costs at North-West Telecom gradually approaches were connected with automation to the corresponding busi- North-West Telecom, RUR mln ness processes. The system allows for the automatic confi- communications services were new services (Internet and those of Western analogues guration of network equipment as well as the hardware and data transmission), and intrazonal and local telephony. In software complex, which allows for the significant decrease comparison with 2008, revenues from provision of Internet Structure of expenses of labor costs in the technical support service and to syste- 20,473 +15.5% 23,643 +3.7% 24,521 +7.2% 26,295 of North-West Telecom matize all the equipment involved. 6% 7% 6% 7% New services’ 10% 13% 18% 20% Transition to the Unified master system (UMS) of the share in the revenue, % accounting processes for fixed assets and wages of all 22% 18% 14% 12% employees of North-West Telecom was concluded under the 32.6% 30.9% 27.5% Program of introduction of the Unified ERP system Oracle 9% 9% 10% 10% E-Business Suite in 2009. The financial accounting business processes of the Company’s headquarters and six branches 7.1% 6.6% 6.0% (Arkhangelsk, Kaliningrad, Komi, Leningrad Region, Pskov 17.0% 20.2% 22.6% and St. Petersburg) were fully transferred to UMS. To ensure 53% 53% 52% 51% the productive work of all branches within UMS the Com- 5.2% 6.1% 5.7% pany performed an upgrade of the server equipment of the 91.1% 87.7% 82.6% 80% 78% 10.5% 8.7% 7.2% data processing center. 0.7% 0.5% 0.9% 12.4% 12.9% 15.6% 2006 2007 2008 2009 1.4% 1.2% 1.5% With the aim of ensuring the correspondence of the activi- 13.3% 11.4% 9.8% ties of North-West Telecom with the requirements of Federal Others 2007 2008 2009 Law No. 152 “On personal data”, the Company began work on New services (Internet and data transmission, telematic Labor costs Expenses for services modernizing the systems for protection of information sys- 17.4% 20% 22% services) of JSC Rostelecom tems that process personal data. This project is aimed at 8.9% 12.3% Social insurance contribu- tions Outsourced services 2006 2007 2008 2009 2010 F Connection and traffic transmission (including agent ensuring a high level of protection of the personal data of sub- fee) scribers and employees of North-West Telecom. Amortization Rent payments Intrazonal telephony New services Material expenditures Miscellaneous expense Local telephony Traditional services Expenses for telecommuni- cation operators’ services

Steady growth of value added services in Revenue growth, despite the impact of the Decrease of the labor costs in the overall revenues financial crisis volume of expenses

ANNUAL REPORT 2009 SOCIALBUSINESS RESPONSIBLITY DESCRIPTION 34 35 At the same time, in 2009, the Company improved all 10,818 mln, and the EBITDA margin increased 1.8 percent struction of FOTLs in the North-West Federal Region), client North-West Telecom investment structure, industry indicators of labor productivity in comparison with to reach 41%. Thus North-West Telecom achieved business projects and projects dealing with the telephonization of RUR thousand 2008: effectiveness levels analogous to Western counterparts. This newly constructed residential premises with a payback term happened despite the fact that the Company has no mobile of seven years. • revenue per line increased 6.6% and totaled RUR 5,850 assets and it operates an extensive loss-making rural tele- • revenue per employee increased 10.3% reaching RUR communications network as a component of North-West In future it is planned that the investment policy aimed 1,192,357; Telecom's social responsibilities. 748,287 at realizing the Company’s strategic objectives will continue. • number of lines per employee increased 3.5% and totaled 204 lines. The priority directions of the Company’s 2010 investment activity are the development of the multiservice network, As a result of fruitful work on cost-cutting, the including broadband access (on the basis of DSL technology 568,986 6,546,857 business effectiveness was analogous to Western [digital subscriber line] and PON), IP-TV, improving interac- Business Effectiveness counterparts – 41% of the EBITDA margin tion with corporate clients (realization of complex turn-key 5,593,289 projects) and telephonization of new residential construc- 1,084,295 2,589,619 tions. The majority of new ports and growth in numbering In 2009, the Company’s profit on sales totaled RUR 2,308 1,493,358 302,799 North-West Telecom’s net profit for 2009 totaled capacity is oriented at the tenants of new buildings (mainly 619,205 mln, which is 41% less than in 2008. The decrease in profit 752,322 RUR 3,473 mln, which is 4% less than in 2008. At the same 1,752,147 on sales is due to the existing methodology of cost account- in St. Petersburg). 917,671 time the organic increase of the Company’s net profit 3,610,228 ing, which is connected with the realization of the state pro- 1,973,392 1,807,560 during 2009 totaled 26.3% (excluding from 2008's net gram on the provision of a universal telecommunications profit one-off transactions of disposal and re-evaluation service. The expenses on provision of this service are 2007 2008 2009 of assets: the sale of a 25% stake in CJSC Medexpress reflected by the Company as part of operational costs, but The implementation of the 2009 investment plan and a re-evaluation of the contribution to the charter capi- the reimbursement from Universal Service Reserve is maintained the current share of the traditional reflected in the composition of miscellaneous incomes. Ta- tal of CJSC RPK Svyazist). telephony market and strengthened positions on king into account the reimbursement, the Company’s profit the new services market Other on sales increased 5% as compared to the previous year and Centralized projects reached RUR 6,591 mln. The organic increase in North-West Telecom’s net Telephony (replacement of automatic telephone profit in 2009 was 26.3% stations, automatic trunk exchanges, building of line and cable constructions) The effectiveness indicators of North-West Telecom de- monstrate positive dynamics for 2009 in comparison with FOTLs and RRLs the previous year. EBITDA grew by 12% to reach RUR 2009 investment structure, payback Commerical projects (broadband internet access, periods breakdown IP-TV) EBITDA (RUR, mln), Investment Policy EBITDA margin (%) of the Company Volume of investment of North-West Telecom, In 2009, the Company’s investment policy was imple- RUR billion mented in accordance with the goal of reaching all of 12,000 45 28% 41.0 North-West Telecom’s objectives: 10,818 39.2 40 14 10,000 9,637 • achievement of target indicators for the introduction 13.5 35.3 35 of numbering capacity and broadband Internet 8,365 access ports; 12 8,000 30 32.7 • development of new high-tech and value-added 57% 25 services; 6,658 6,000 • ensuring maximum possible satisfaction of applica- 10 9.8 20 tions for connection of subscribers to the public telephone network and broad- 15% 4,000 15 band Internet access; 8

10 • implementation of socially important state projects. 7.0 2,000 6 +25.6% +15.2% +12.2% 5 The increase in other investments in 2009 is explained

by posting RUR 2.2 bln of investment in non-monetary 5.0 4.7 0 0 forms – the cost of CJSC P.T.T. equipment accepted into 2006 2007* 2008 2009 ownership by North-West Telecom after CJSC P.T.T. ceased Projects with low payback period (over 8 years) 4 EBITDA EBITDA margin to operate. Projects with medium payback period (from 3 to 5 years)

* With the aim of comparability, data for 2007 is given excluding the one-off Projects with high payback period (up to 3 years) 2 disposal transaction of a 15% stake in JSC Telecominvest. In 2009, North-West Telecom significantly decreased its investment program to RUR 7.0 bln, with priority given to projects with a payback period of up to five years (projects EBITDA growth – 12%, EBITDA margin Increasing the quality of investments through 0 growth – 1.8% of broadening the broadband Internet network and con- decreasing of payback periods 2006 2007 2008 2009 2010 F

ANNUAL REPORT 2009 BUSINESSSOCIAL RESPONSIBLITY DESCRIPTION 36 37 Weighted average cost of borrowings, state banks, which was not typical for the Russian capital Overall Debt RUR , % p.a. market in 2009.

At the same time, North-West Telecom could, despite unfavorable market conditions, decrease the cost of the funds attracted. At the end of 2009 the Company’s leverage 16% remains at a comfortable, moderate level 14% 13.75% 13.75% 12% When attracting borrowed funds, the Company 10.88% 10% 9.71% followes the principles of increasing the terms of 8.37% 8.34% borrowing, decreasing the cost of borrowing and Overall debt RUR 16,765 mln 8% 8.40% 7.69% 7.09% diversifying the sources of financing 6% 6.25% including long-term liabilities 48 % 4.84% 4% 2.57% 2% The efficiency of North-West Telecom’s financial strategy Net debt/EBITDA 1.52 0% was recognized by the leading international rating agencies 2007 2008 2009 S&P and Fitch Inc., which affirmed in 2009 the credit Equity/Total Assets 0.60 ratings of the Company at BB- level with a stable outlook. Overall debt At the same time, the experts noted the following positive Current Ratio 0.43 factors in the activity of North-West Telecom: Public debt Debt portfolio average duration 1.28 years Conditionally public debt • revenue structure improvement; Non-public debt • growth of business efficiency; • observance of strict control over expenses.

The average cost of debt servicing for North-West Telecom debt structure, Participants of the 6th bond North-West Telecom is 7.09%, while the at 31.12.09 issue placement average cost of debt servicing for interregional Property telecommunications companies is 11.25% p.a. (RUR) Complex 4.5% 1.7% 1.7% 20% 20.0% Under conditions of a worsening macroeconomic situa- 5.0% tion and the following the drastic increase in the cost of bor- The property complex of North-West Telecom has rowing, a sharpening liquidity crisis and nearly a 100% lately played a large part in revenues from the non-core claim of bonds for buyback by investors in case of a put- activities of the Company. As a result of the Program for 11.7% option execution, North-West Telecom fully and punctually development of JSC North-West Telecom's property com- 3.3% fulfilled its obligations without attracting additional costly plex for 2009-2010, the aims of which are the improvement financing. of economic indicators of the Company’s activities through 3.3% 55% 1.2% effective usage of property, receiving proceeds from the This is largely due to the fact that in recent years the disposal of non-core and unused facilities and lease of free 5.0% 5.0% Company conducted a strict borrowing policy, observing a premises, rent-related and maintenance of buildings rational balance between long- and short-term liabilities, and construction costs optimization, the following measures 25% terms of duration of debt obligations and the overall amount were fulfilled: 10.0% of debt. The aim of North-West Telecom's financial strategy 18.3% is to observe the following debt load parameters: 1) Decrease of the excessive immovable property through: 6.7% • sale of non-strategic objects; 2.7% • Net debt/EBITDA: not more than 2.5; • decrease of space rented. • Equity/Total assets:not less than 0.5; Public debt • Medium-term target current ratio: 1. 2) Acquiring new objects of immovable property. Conditionally public debt When the capital markets slightly stabilized, North-West The realization of these measures allowed the Company Citibank MetKomMosbank Investement bank Non-public debt Otkrytiye Telecom used this favorable market conjuncture and, due to to receive an additional RUR 113.8 mln in cash flow, which Promsvyazbank Novikombank its reputation as a high-quality borrower, placed under favo- under conditions of decreasing consumption of telecommu- Sberbank NOMOS bank ING Bank rable conditions a RUR 3 bln 6th bond issue for a ten-year nications services by the population and organizations, is Troika Dialog term. The demand for bonds exceeded the supply by 5 times especially valuable for sustaining the growth rate of the The majority of borrowed funds fall on bonds CIT Finance bank Bank St. Peters- burg Roscreditbank and the placement was conducted without participation of Company’s overall revenue. traded on the MICEX stock exchange BKS InterfinTrade Raiffeisenbank

ANNUAL REPORT 2009 BUSINESS DESCRIPTION 38 39 The Company’s items of immovable For 2010 the Company sets ambitious goals, including: property and related revenues

2008 2009 In the field of business development:

Number of items 2,451 2,485 • retaining leading positions in the segments of local • introduction of a united APM for servicing management; telephony and broadband Internet access; • ensuring the growth of sales through the Contact center (for Immovable property, area 1,277.5 thousand sq. m. 1,263.3 thousand sq. m. • achieving 1 million broadband Internet users; mass clients) of up to 31%; • stabilization of broadband Internet ARPU; • development and realization of a loyalty program for • launch of services based on PON technology in the Vologda, corporate clients; Plots of land, area 3,970.4 thousand sq. m. 4,854.8 thousand sq. m. Arkhangelsk and Murmansk branches; • realization of services based on PON technology for legal • retaining no less than a 40% share of subscribers of the entities; Immovable property in St. Petersburg, area 493.5 thousand sq. m. 490.6 thousand sq. m. unlimited tariff plan; • launch of IP-TV services for legal entities; • development in sales of equipment (WiFi-modems, new • introduction of services based on a “virtual office” platform model of PCs, web-cameras etc.); for corporate clients; Plots of land in St. Petersburg, area 316.5 thousand sq. m. 303.1 thousand sq. m. • development of the matrix of SLA/OLA indicators; • launch of Flagman territorial points of servicing in three • development and implementation of the loyalty program for branches (Vologda, Arkhangelsk, Murmansk); Revenues from immovable property disposal 312,544.6 RUR thousand 113,801 RUR thousand corporate clients; • increase of revenues from channels leasing by 4%. • development of SLA11 for corporate clients; Revenues from immovable property leasing 437,577 RUR thousand 713,600 RUR thousand • development of an Internet portal for sales and equipment; • introduction of a “virtual reception desk” service channel; Lease out areas 91.6 thousand sq. m. 89.2 thousand sq. m.

Rented areas 100.1 thousand sq. m. 92.1 thousand sq. m. In the field of telecommunications infrastructure development:

• commissioning of over 170,000 xDSL ports; • building of an experimental zone of high definition • commissioning of over 170,000 PON ports; television (HD-TV); • extension of external channels capacity from 80 Gbps to 160 • subsequent introduction of OSS in the Company’s network; Gbps; • construction of a dedicated level of L2 aggregation based on realize packaged solutions for users based on the principle • twofold increase of peering12 channels capacity; ETH/DWDM technology; 2010 Plans “all services from one operator”. At the same time, the rea- • introduction of “White Lists” at the St. Petersburg branch; • introduction of systems for automatic management of lization of these intentions must be built taking into account subscribers` devices on the basis of TR-069. the maximum usage of the existing infrastructure of the The main purpose of North-West Telecom in the midterm telecommunications network. is the successful competitive development of the telecom- In the field of IT solutions: munications market of the North-West Federal Region The year 2010 must become another year in North-West aimed at the most complete satisfaction of the client needs Telecom’s dynamic development. The Company could pass • connection to the centralized system of automatic activation • introduction of Client relations management (CRM) within in the field of telecommunications services. through a period of market uncertainty having increased of services for broadband Internet access and Triple Play in the Unified program toensure settlements and interactions revenue and business efficiency. Therefore, during the cur- all Company branches; with clients. The choice and positioning of technologies for the deve- rent growth in demand for telecommunications services, • conclusion of transition to the Unified management system lopment of North-West Telecom must ensure effective North-West Telecom is ready to offer its clients the most up- of the branches’ financial accounting processes; schemes for the provision of services and the opportunity to to-date telecommunications services. In the field of the increase of business effectiveness (financial and economic development):

• maintaining EBITDA margin at a level of no less than 40%; • exceeding revenue growth rate over expenses growth rate The realization of its plans will give North-West Telecom the opportunity to by two times; strengthen its leadership on the telecommunications market of the North-West • ensuring total revenue of no less than RUR 27.6 bln; • improvement of financial stability and solvency indicators Federal Region, broadening the range of the services it offers to consumers and due to the RUR 3.4 bln net debt decrease. corporate clients alike, and also allowing it to cope with the deferred demand for telecommunications services as well as create a foundation for stable cash flows 11 SLA – Service Level Agreement. and support a high level of business effectiveness 12 Peering – agreement between Internet providers on traffic exchange between networks as well as technical interaction, which realizes the agreement: connection of networks and exchange of information on network routes upon BGP (Boarder Gateway Protocol) – main protocol of dynamic routing in Internet.

ANNUAL REPORT 2009 BUSINESS DESCRIPTION 40 41 CORPORATE GOVERNANCE

Perfection Bright colors of in communication communication lies in the vivid details

ANNUAL REPORT 2009 CORPORATE GOVERNANCE

Bright colors of communication

ANNUAL REPORT 2009 North-West Telecom has paid close attention to the deve- established mechanisms of interaction between manage- For the shareholders’ convenience, a telephone hotline is issues were considered by the Board of Directors at mee- lopment and improvement of corporate governance since ment bodies and a clearly built system of internal and exter- active in St. Petersburg (+7[812] 312 5289) and in other tings held “in presentia”. the first days of the Company’s existence. The current nal control contributing to an increase in the transparency regional centers of the North-West Federal Region (see “Ref- level of the Company’s corporate governance is character- of decision-making procedures by the Company’s manage- erence and Contact Information” section) where all share- Following the best international and Russian corporate ized by a developed organizational structure with well- ment. holders can get answers to questions regarding the holding governance practices and provisions of the Corporate of meetings, dividends payment, and to clarify information Governance Code, North-West Telecom annually evalu- Organizational chart of the Company’s management concerning the execution of shareholders’ rights. ates the effectiveness of the Board of Directors’ activity. bodies interactions and the Company’s auditor In 2010, in accordance with the resolution of the Appoint- ments and Remuneration Committee, the evaluation of effectiveness was based on the existing System of evalu- The accessibility and completeness of the Company’s Elections ation (using a questionnaire). General Meeting of shareholders information during the financial crisis allowed shareholders to take more informed decisions on The main aim of the evaluation was a dynamics analy- securities transactions. Approximately 958,000 Elections / sis of the level of the realization of the functions of the Re-elections visits to the Company’s website per month were Recommendations Appointment Board of Directors in the field of the Company’s strategic recorded on average in 2009 management, Board of Directors’ activity and organiza- Committees: Appointment Appointment Organizational activity – Appointments and Board of Directors tion of work of the Board of Directors in comparison with Remuneration Report (11 members) Corporate the previous year. With the aim of increasing the fairness Secretary Committee; Regarding the observance of ADR holders’ voting rights, of the evaluation in particular directions (for instance, – Strategic Development apparatus the role of the Board of Directors in the Company’s strate- Committee; Appointment Control Report North-West Telecom closely cooperates with depository bank – Corporate Governance JP Morgan Chase Bank and custody bank ING Bank (Eurasia) gic management and interaction with management), as Committee; CJSC. in the previous year, a survey was conducted among – Audit Committee. General Director Coordination members of the Management Board upon particular Preparation of activities of materials / issues. report

Control Report Control / External appointment Management The Board Structure of issues considered at Accounting independent statements audit, Board the meetings of the Board of Directors of auditor including IFRS audit General Directorate (11 members) North-West Telecom in 2009 (headquarters) Report of Directors

Internal 18% audit 17% Activities monitoring Report The Company’s Board of Directors is the center of stra- tegic planning and management, ensures the effective- Internal Auditing results / error deletion Coordination ness of the risk management and control systems over audit Coordination recommendations Branches: of the Company’s Council financial and economic activity, performs control and Department • Arkhangelsk activities (15 members) •Vologda provides for effective management activity, realization •Kaliningrad and protection of shareholders’ rights, participates in the •Karelia improvement of corporate governance, and ensures infor- 17% •Komi mation disclosure and interaction with other stakehol- •Leningrad Region •Murmansk ders. External audit •Novgorod •Petersburg Four Committees of the Company’s Board of Directors 40% •Pskov are active: 8%

• Strategic Development Committee; • Corporate Governance Committee; Strategic issues • Appointments and Remuneration Committee; Shareholders • Audit Committee. Interested party transactions In turn, to justify the confidence of investors, the Com- Management Board reports pany puts maximum effort into granting shareholders real- Relations The aforementioned Committees of the Board of Direc- Human resources time access to all actual information on the main aspects of tors are formed annually. The current composition of the the Company’s activities. Shareholders as well as other Current activity issues Committees was formed on July 21st, 2010. Over 30,000 private and institutional investors both in stakeholders may become acquainted with the latest news, financial and operational indicators, information about the Russia and abroad are North-West Telecom shareholders. In 2009 the Company’s Board of Directors held 32 Having chosen the Company as an investment object, the securities price and other useful information about the The timely approval of anti-crisis measures meetings, including 7 meetings “in presentia” and 25 by the Board of Directors allowed for a shareholders have thus demonstrated trust in its manage- Company’s activities at the official website of the Company: meetings “in absentia”. In accordance with a practice significant decrease in the impact of the ment, its implemented development strategy and the quality www.nwtelecom.ru. All information on the website is established by the Company, strategically important financial crisis on the Company’s activities of its corporate governance. equally accessible in both Russian and English.

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 44 45 As a result of the conducted evaluation and an analysis of ensuring open communication with the independent audi- If during a quarter there is a change in personnel on the Remuneration is decreased by 25% in the following the results, the following should be noted: tor, the Internal Audit Commission, the internal audit Board of Directors and/or condition of fulfillment by the cases: department and also at improving the effectiveness of inter- member of the Board of Directors of his/her functions • An increase in the effectiveness of the Board of Directors’ nal control and risk management procedures in North-West (paid/free basis), the remuneration is accrued and paid in • no change of the Company’s capitalization against activities as a whole was recorded; Telecom. Particular attention during the reporting period proportion to the time during which the member of the growth of average industry value; • Improvements in the interaction between the Board of was paid toward risks arising due to the upcoming consoli- Board of Directors performed such functions on a paid • a decrease of the Company’s capitalization is more than Directors and the top management and the organization dation of companies of JSC Svyazinvest; basis. the average industry value; of work of the Board of Directors were noted; • the Company’s capitalization decreased while the • The identification of separate directions of activity • Sixteen meetings of Appointments and Remuneration Composition Annual remuneration for the whole composition of the average industry value is unchanged; claimed attention. Committee were held, at which 33 issues were considered. Board of Directors is set as a sum of allocations in accor- • the Company’s capitalization decreased while the The activity of the Committee was aimed at increasing the dance with normatives (percentages): average industry value increased. effectiveness and the quality of decision-making of the of the Board Board of Directors in the field of attracting high-class spe- • from the Company’s EBITDA according with the IFRS The annual remuneration of members of the Board of The practice of considering strategically important cialists to key positions as well as the creation of an effective reporting data for the reporting year; Directors is decreased by 50% in cases where he/she parti- issues only at the meetings of the Board of Directors system to motivate top managers and members of the Com- of Directors• from the sum of the Company’s net profit upon the cates in less than a half of all meetings of the Board of Direc- held “in presentia” allows for the organization of pany’s Board of Directors; results of the reporting year directed at payment of tors held during his/her term. comprehensive and constructive discussions of the dividends. Upon the results of 2008, the Annual General Meeting of agenda with the participation of the Management • Twelve meetings of the Corporate Governance Commit- tee were held, at which 29 issues were considered. The If within the period from election of the Board of Direc- shareholders adopted the following normative (percentage) Board members for calculation of annual remuneration to members of the activity of the Committee in 2009 was aimed at increasing tors at the Annual General Meeting until the next Annual Board of Directors: the effectiveness and the quality of work of the Board of General Meeting of shareholders there has been a change Directors in the field of improving the corporate governance in personnel on the Board of Directors and/or the condi- • 0.26% of the EBITDA according to IFRS 2009 report; of North-West Telecom by introducing recommendations tions of fulfillment by a member of the Board of his func- • 0.78% of the net profit directed at dividend payment and best practice standards of corporate governance. tions (paid/free basis) has changed, the remuneration is upon 2009 results. Board of Directors’ accrued and paid in proportion to the time during which Committees the member of the Board of Directors performed his/her The overall sum of remuneration of members of the Remuneration of Members functions on a paid basis. Board of Directors in 2009 totaled RUR 39,862.3 thousand, including: The activity of the Committees is aimed at increasing the of the Board of Directors Normatives (percentages) for the estimation of annual effectiveness and the quality of the work of the Board of remuneration are set by a resolution of the Annual Ge- • RUR 36,478.6 thousand paid to the members of the Directors through preliminary consideration of particular neral Meeting of shareholders and are used for determi- Board of Directors active until the General Meeting of issues and preparing recommendations to the Board of Direc- Remuneration of the members of the Board of Directors’ ning the remuneration of persons performing the func- shareholders dated 22.06.2009; tors based upon issues that are in the competence of the includes quarterly and annual parts. tions of members of the Board of Directors until the next • RUR 3,383.7 thousand paid to the members of the Committees. With the aim of fostering comprehensive pre- Annual General Meeting. Board of Directors active after the General Meeting of liminary consideration of particular issues, in 2009 North- Quarterly remuneration to members of the Board of shareholders dated 22.06.2009. West Telecom continued the practice of attracting members Directors’ is set at RUR 300,000. The Chairman of the Board Annual remuneration is corrected on the basis of of two profiled committees to the discussion of issues and of of Directors is paid remuneration with a 1.5 coefficient. changes in the Company’s capitalization during the year holding joint meetings of committees. (from April 1st of the previous year to April 1st of the cur- The members of the Board of Directors’ participating in rent year) relative to the average growth of capitalization General Director In 2009: Committees of the Board of Directors are accrued and paid of all interregional telecommunications companies in the quarterly remuneration connected with fulfillment of the Svyazinvest Group (average value). • Sixteen meetings of the Strategic Development Commit- function of a Committee member to the amount of RUR In accordance with the Charter of North-West Telecom, Remuneration is increased in case of excess by the tee were held, of which three were held “in absentia”. Forty- 126,000 (RUR 42,000 per month). the General Director is the sole executive organ performing Company’s capitalization growth over the average value six issues were considered. The activity of the Committee the management of the Company’s current activity, by: was aimed at increasing the effectiveness and quality of The quarterly remuneration to a member of the Board of appointed by the Board of Directors. Since August 1st, 2008 work of the Board of Directors in the field of the strategic Directors’ is decreased by: the General Director of North-West Telecom is Vladimir • 5% if the excess is less than 15%; management of North-West Telecom. Taking into account Aleksandrovich Akulich. the current economic situation as part of anti-crisis mea- • 10% in case if she/he does not participate in 25% and • 15% if the excess is from 15% to 30%; sures, the Strategic Development Committee gave the Board more meetings of the Board of Directors; • 25% if the excess is over 30%. of Directors recommendations on the approval of transac- • 30% in case if she/he does not participate in over 25% tions with the aim of hedging the currency risks of the Com- but less than 50% (inclusively) meetings of the Board of Remuneration remains unchanged in the following General Director pany, considered the Company’s M&A suggestions, and Directors; cases: shared information about the activities of the largest subsi- • 100% in case if she/he does not participate in more than Remuneration diaries; half of the meetings of the Board of Directors. • no change in the Company’s capitalization in case of a fall in or unchanged average industry value; • Sixteen meetings of the Audit Committee were held, at In addition, the quarterly remuneration would decrease • a decrease in the Company’s capitalization is less than The General Director’s labor conditions, guarantees and which 52 issues were considered. The activity of the Com- by 5% for each meeting of the Board of Directors held “in a decrease in average industry value; compensations during the period of fulfillment of his func- mittee was aimed at increasing the effectiveness and the presentia” if the member of the Board of Directors does not • an increase in the Company’s capitalization is less than tions are determined by the labor agreement that is adopted quality of the work of the Board of Directors in the field of attend it in person. the average industry value. by the resolution of the Board of Directors.

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 46 47 As a result of the conducted evaluation and an analysis of ensuring open communication with the independent V. I. Adzhalov audi- D. V. Kulikov If during a quarter there is a change in personnel on the Remuneration is decreased by 25% in the following the results, the following should be noted: tor, the Internal Audit Commission, the internal audit Board of Directors and/or condition of fulfillment by the cases: department and also at improving the Borneffectiveness June 11, 1954. of inter- Born July 9,member 1975. of the Board of Directors of his/her functions • An increase in the effectiveness of the Board of Directors’ nal control and risk management proceduresMember in of North-Westthe Board of Directors Member of(paid/free the Board of basis), Directors the remuneration is accrued and paid in • no change of the Company’s capitalization against activities as a whole was recorded; Telecom. Particular attention during sincethe reporting 2009, independent period director. since 2008,proportion independent to the time during which the member of the growth of average industry value; Member of Strategic Develop- director*. • Improvements in the interaction between the Board of was paid toward risks arising due to the upcoming consoli- Board of Directors performed such functions on a paid • a decrease of the Company’s capitalization is more than ment Committee and Appoint- Member of Strategic Develop- the average industry value; Directors and the top management and the organization dation of companies of JSC Svyazinvest;ments and Remuneration ment Committeebasis. and Corporate of work of the Board of Directors were noted; Committee of the Board of Governance Committee of the • the Company’s capitalization decreased while the • The identification of separate directions of activity • Sixteen meetings of AppointmentsDirectors and Remuneration of North-West Telecom. Board of Directors Annual of North-West remuneration for the whole composition of the average industry value is unchanged; claimed attention. Committee were held, at which 33 issuesPresident were ofconsidered. LLC Equipment and Telecom. Board of Directors is set as a sum of allocations in accor- • the Company’s capitalization decreased while the The activity of the Committee was aimedtechnologies at increasing of optical the telecom- Executive directordance with of Investor normatives (percentages): average industry value increased. effectiveness and the quality of decision-makingmunications. Occupies of the the protection association. Occupies position of Chairman of the Board the following positions: Board of Directors in the field of attracting high-class spe- • from the Company’s EBITDA according with the IFRS The annual remuneration of members of the Board of of Directors of CJSC Projects- • Member of the Board of Directors is decreased by 50% in cases where he/she parti- The practice of considering strategically important cialists to key positions as well as the creationTechnologies-Integration. of an effective Directors of JSC reporting South tele- data for the reporting year; issues only at the meetings of the Board of Directors system to motivate top managers and members of the Com- communication• from company; the sum of the Company’s net profit upon the cates in less than a half of all meetings of the Board of Direc- held “in presentia” allows for the organization of pany’s Board of Directors; Holds no shares in the Company. • Member of the results Board of of the reporting year directed at payment of tors held during his/her term. comprehensive and constructive discussions of the Directors of JSCdividends. OGK-2; • Twelve meetings of the Corporate Governance Commit- • Member of the Board of Upon the results of 2008, the Annual General Meeting of agenda with the participation of the Management Directors of JSC MOEK. tee were held, at which 29 issues were considered. The If within the period from election of the Board of Direc- shareholders adopted the following normative (percentage) Board members for calculation of annual remuneration to members of the activity of the Committee in 2009 was aimed at increasing tors at the Annual General Meeting until the next Annual Board of Directors: the effectiveness and the quality of work of the Board of General Meeting of shareholders there has been a change Directors in the field of improving the corporate I. V. Belikov governance D. V. Levkovskyin personnel on the Board of Directors and/or the condi- • 0.26% of the EBITDA according to IFRS 2009 report; of North-West Telecom by introducing recommendations tions of fulfillment by a member of the Board of his func- • 0.78% of the net profit directed at dividend payment and best practice standards of corporateBorn governance. October 1, 1956. Born Augusttions 24, 1965.(paid/free basis) has changed, the remuneration is upon 2009 results. Board of Directors’ Member of the Board of Directors Member ofaccrued the Board and of Directors paid in proportion to the time during which since 2009, independent director. since 2001.the Deputy member Chairman of the of Board of Directors performed his/her Committees Member of Audit Committee and the Board of Directors of The overall sum of remuneration of members of the functions on a paid basis. Remuneration of MembersAppointments and Remuneration North-West Telecom. Chairman of Board of Directors in 2009 totaled RUR 39,862.3 thousand, Committee of the Board of Audit Committee of the Board of including: The activity of the Committees is aimed at increasing the of the Board of DirectorsDirectors of North-West Telecom. Directors of North-West Normatives Telecom, (percentages) for the estimation of annual effectiveness and the quality of the work of the Board of Director of non-commercial member ofremuneration Corporate Gover- are set by a resolution of the Annual Ge- • RUR 36,478.6 thousand paid to the members of the partnership Russian Institute of nance Committee of the Board of Directors through preliminary consideration of particular neral Meeting of shareholders and are used for determi- Board of Directors active until the General Meeting of Directors. Directors ofning North-West the remuneration Telecom. of persons performing the func- issues and preparing recommendations to the Board of Direc- Remuneration of the members of theOccupies Board theof Directors’following positions: Director for corporate gover- shareholders dated 22.06.2009; tors based upon issues that are in the competence of the includes quarterly and annual parts. • Member of the Board of nance of thetions Moscow of members representa- of the Board of Directors until the next • RUR 3,383.7 thousand paid to the members of the Committees. With the aim of fostering comprehensive pre- Directors of JSC Akron; tive office Annualof NCH Advisors, General Inc. Meeting. Board of Directors active after the General Meeting of liminary consideration of particular issues, in 2009 North- Quarterly remuneration to members• Member of the of theBoard Board of of shareholders dated 22.06.2009. West Telecom continued the practice of attracting members Directors’ is set at RUR 300,000. The Chairman Directors of of the Interdepartmental Board Holds no shares Annual in the Company.remuneration is corrected on the basis of analytical center. of two profiled committees to the discussion of issues and of of Directors is paid remuneration with a 1.5 coefficient. changes in the Company’s capitalization during the year (from April 1st of the previous year to April 1st of the cur- holding joint meetings of committees. Holds no shares in the Company. The members of the Board of Directors’ participating in rent year) relative to the average growth of capitalization General Director In 2009: Committees of the Board of Directors are accrued and paid of all interregional telecommunications companies in the quarterly remuneration connected with fulfillment of the Svyazinvest Group (average value). • Sixteen meetings of the Strategic Development Commit- function of a Committee member to the amount of RUR In accordance with the Charter of North-West Telecom, V. I. Koresh M. A. Leshenko Remuneration is increased in case of excess by the tee were held, of which three were held “in absentia”. Forty- 126,000 (RUR 42,000 per month). the General Director is the sole executive organ performing Company’s capitalization growth over the average value six issues were considered. The activity of the Committee the management of the Company’s current activity, was aimed at increasing the effectiveness and quality of The quarterly remuneration to a memberBorn November of the Board 18, 1953. of Born Marchby: 20, 1975. Member of the Board of Directors Member of the Board of Directors appointed by the Board of Directors. Since August 1st, 2008 work of the Board of Directors in the field of the strategic Directors’ is decreased by: since 2009. Member of Strategic the General Director of North-West Telecom is Vladimir since 2008, independent director. • 5% if the excess is less than 15%; management of North-West Telecom. Taking into account Member of Strategic Development Development Committee and Aleksandrovich Akulich. the current economic situation as part of anti-crisis mea- • 10% in case if she/he does not participateCommittee in 25% and andAppointments Appointments• 15% and Remunerationif the excess is from 15% to 30%; sures, the Strategic Development Committee gave the Board more meetings of the Board of Directors;and Remuneration Committee of Committee• of 25%the Board if the of excess is over 30%. • 30% in case if she/he does not participatethe Board in overof Directors 25% of Directors of North-West Telecom. of Directors recommendations on the approval of transac- Deputy General Director of JSC tions with the aim of hedging the currency risks of the Com- but less than 50% (inclusively) meetingsNorth-West of the Telecom. Board of Remuneration remains unchanged in the following Vice-president for regional Svyazinvest. General Director Directors; cases: pany, considered the Company’s M&A suggestions, and development of JSC Comstar-OTS, Occupies the following positions: • Member of the Board of shared information about the activities of the largest subsi- • 100% in case if she/he does not participateGeneral Directorin more ofthan Comstar- Remuneration Directors of JSC ; diaries; half of the meetings of the Board of Regions.Directors. Occupies the following • no change in the Company’s• Member capitalizationof the Board of in case of a • Member of the Board of positions: fall in or unchanged average Directors industry of JSC ; value; Directors of JSC Rostelecom; • Member of the Board of • Member of the Board of • Sixteen meetings of the Audit Committee were held, at In addition, the quarterly remuneration would decrease • Member of• the a decrease Board of in the Company’s capitalization is less than The General Director’s labor conditions, guarantees and Directors of CJSC Kornet-AM; Directors of JSC ; which 52 issues were considered. The activity of the Com- by 5% for each meeting of the Board of Directors held “in Directors of JSC a decrease in average • Memberindustry of value; the Board of compensations during the period of fulfillment of his func- Chairman of the Board of presentia” if the member of the Board of Directors does not Uralsvyazinform;• an increase in the Company’s Directors capitalizationof JSC South is less than tions are determined by the labor agreement that is adopted mittee was aimed at increasing the effectiveness and the Directors of JSC Regional • Member of the the Board average of industry value.telecommunications company; quality of the work of the Board of Directors in the field of attend it in person. technical center; by the resolution of the Board of Directors. Directors of JSC Central • Member of the Board of • Member of the Management Telegraph; Directors of JSC Svyazinvest; Board of JSC Comstar-OTS. • Member of the Board of • Member of the Management Directors of JSC Centertelecom; Board of JSC Svyazinvest. Holds 59,546 common shares and • Member of the Board of 4,206 privileged shares in the Directors of JSC Volgatelecom; Holds no shares in the Company. Company. ANNUAL REPORT 2009 CORPORATE GOVERNANCE 46 47 As a result of the conducted evaluation and an analysis of ensuring open communication with the independent O. V. Petrova audi- E. V. Umnova If during a quarter there is a change in personnel on the Remuneration is decreased by 25% in the following the results, the following should be noted: tor, the Internal Audit Commission, the internal audit Board of Directors and/or condition of fulfillment by the cases: department and also at improving the Borneffectiveness January 4, of 1973. inter- Born Augustmember 10, 1954. of the Board of Directors of his/her functions • An increase in the effectiveness of the Board of Directors’ nal control and risk management proceduresMember in of North-West the Board of Directors Member of(paid/free the Board of basis), Directors the remuneration is accrued and paid in • no change of the Company’s capitalization against activities as a whole was recorded; Telecom. Particular attention during sincethe reporting 2009, independent period since 2009.proportion to the time during which the member of the growth of average industry value; director*. Deputy Chairman of the Board of • Improvements in the interaction between the Board of was paid toward risks arising due to the upcoming consoli- Directors ofBoard North-West of Directors Telecom. performed such functions on a paid • a decrease of the Company’s capitalization is more than Member of Appointments and the average industry value; Directors and the top management and the organization dation of companies of JSC Svyazinvest;Remuneration Committee, Member ofbasis. Audit Committee and of work of the Board of Directors were noted; Chairwoman of Corporate Strategic Development • the Company’s capitalization decreased while the • The identification of separate directions of activity • Sixteen meetings of AppointmentsGovernance and Remuneration Committee of the Committee of Annualthe Board remuneration of for the whole composition of the average industry value is unchanged; Directors of North-West Telecom. claimed attention. Committee were held, at which 33 issuesBoard were of Directors considered. of North-West Board of Directors is set as a sum of allocations in accor- • the Company’s capitalization decreased while the Telecom. Deputy General Director of JSC average industry value increased. The activity of the Committee was aimed at increasing the Svyazinvest.dance with normatives (percentages): Head of methodology and effectiveness and the quality of decision-making of the Occupies the following positions: information unit of the • Member of the Board of The annual remuneration of members of the Board of Board of Directors in the field of attractingdepartment high-class of corporate spe- • from the Company’s EBITDAtelecommunication according company; with the IFRS Directors of JSC Giprosvyaz; • Member of the Board of Directors is decreased by 50% in cases where he/she parti- The practice of considering strategically important cialists to key positions as well as the creationgovernance of an and effective legal support of reporting data for the reporting year; • Member of the Board of Directors of JSC Dalsvyaz; issues only at the meetings of the Board of Directors system to motivate top managers and membersJSC Svyazinvest. of the Com- • from the sum of the Company’s net profit upon the cates in less than a half of all meetings of the Board of Direc- Directors of JSC Rostelecom; • Member of the Management Occupies the following positions: tors held during his/her term. held “in presentia” allows for the organization of pany’s Board of Directors; • Member of the results Board of of the reporting Board year of directed JSC Svyazinvest. at payment of comprehensive and constructive discussions of the • Member of the Board of Directors of JSCdividends. • Twelve meetings of the Corporate Governance Directors of Commit-JSC CenterTelecom; Uralsvyazinform; Holds no shares in the Company. Upon the results of 2008, the Annual General Meeting of agenda with the participation of the Management • Member of the Board of tee were held, at which 29 issues were considered. The • Member of the If within Board of the period from election of the Board of Direc- shareholders adopted the following normative (percentage) Board members Directors of JSC Ulyanovsk-GSM. Directors of JSC Centertelecom; for calculation of annual remuneration to members of the activity of the Committee in 2009 was aimed at increasing tors at the Annual General Meeting until the next Annual • Member of the Board of Board of Directors: the effectiveness and the quality of workHolds ofno theshares Board in the of Company. DirectorsGeneral of JSC South Meeting of shareholders there has been a change Directors in the field of improving the corporate governance in personnel on the Board of Directors and/or the condi- • 0.26% of the EBITDA according to IFRS 2009 report; of North-West Telecom by introducing recommendations tions of fulfillment by a member of the Board of his func- E. V. Yurchenko A. Y. Provotorov • 0.78% of the net profit directed at dividend payment and best practice standards of corporate governance. tions (paid/free basis) has changed, the remuneration is Board of Directors’ upon 2009 results. Born May 14, 1968. Born Novemberaccrued 7, 1974. and paid in proportion to the time during which Member of the Board of Directors Member ofthe the memberBoard of Directors of the Board of Directors performed his/her The overall sum of remuneration of members of the Committees since 2009. since 2009. Chairman of the functions on a paid basis. Board of Directors in 2009 totaled RUR 39,862.3 thousand, Remuneration of MembersBoard of Directors of North-West Chairman of Strategic Development Committee of the including: Telecom. General Director of JSC Normatives (percentages) for the estimation of annual The activity of the Committees is aimed at increasing the of the Board of DirectorsSvyazinvest. Board of Directors of North-West effectiveness and the quality of the work of the Board of Telecom. Firstremuneration Deputy General are set by a resolution of the Annual Ge- • RUR 36,478.6 thousand paid to the members of the Directors through preliminary consideration of particular Occupies the following positions: Director ofneral JSC Svyazinvest. Meeting of shareholders and are used for determi- Board of Directors active until the General Meeting of Occupies the following positions: issues and preparing recommendations to the Board of Direc- Remuneration of the members of the• Chairman Board of of Directors’ the Board of ning the remuneration of persons performing the func- shareholders dated 22.06.2009; Directors of JSC Rostelecom; • Chairmantions of the of Board members of of the Board of Directors until the next tors based upon issues that are in the competence of the includes quarterly and annual parts. Directors of JSC Giprosvyaz; • RUR 3,383.7 thousand paid to the members of the • Chairman of the Board of • Member ofAnnual the Board General of Meeting. Board of Directors active after the General Meeting of Committees. With the aim of fostering comprehensive pre- Directors of JSC • Member of the Board of Directors of JSC Rostelecom; Directors of JSC MGTS; liminary consideration of particular issues, in 2009 North- Quarterly remuneration to members Uralsvyazinform; of the Board of shareholders dated 22.06.2009. • Member of the Board of • Member of the Board of West Telecom continued the practice of attracting members Directors’ is set at RUR 300,000. The Chairman• Chairman of of the the Board Board of Annual remuneration is corrected on the basis of Directors changesof JSC in the Company’s Directors capitalization of JSC Nizhniy during the year of two profiled committees to the discussion of issues and of of Directors is paid remuneration with a Directors 1.5 coefficient. of JSC Central Uralsvyazinform; (from April 1st of the previous Novgorod year Cellular to April 1st of the cur- holding joint meetings of committees. Telegraph; • Member of the Board of Communication; The members of the Board of Directors’• Chairman participating of the Board in of Directors rentof JSC year) Central relative to the• Member average of growth the Management of capitalization Committees of the Board of Directors are Directors accrued of JSCand Centertelecom; paid Telegraph;of all interregional telecommunications Board of JSC Svyazinvest. companies in the General Director In 2009: • Chairman of the Board of quarterly remuneration connected with fulfillment of the • Member ofSvyazinvest the Board of Group (average value). Directors of JSC Volgatelecom; Directors of JSC Centertelecom; Holds no shares in the Company. • Sixteen meetings of the Strategic Development Commit- function of a Committee member to• the Chairman amount of the of BoardRUR of In accordance with the Charter of North-West Telecom, Remuneration is increased in case of excess by the tee were held, of which three were held “in absentia”. Forty- 126,000 (RUR 42,000 per month). Directors of JSC Dalsvyaz; the General Director is the sole executive organ performing Company’s capitalization growth over the average value six issues were considered. The activity of the Committee • Chairman of the Board of the management of the Company’s current activity, Directors of JSC Sibirtelecom; I. I. Rodionovby: was aimed at increasing the effectiveness and quality of The quarterly remuneration to a member of the Board of appointed by the Board of Directors. Since August 1st, 2008 Directors’ is decreased by: • Chairman of the Board of work of the Board of Directors in the field of the strategic Directors of JSC South the General Director of North-West Telecom is Vladimir management of North-West Telecom. Taking into account Born November• 5% 30, if 1953.the excess is less than 15%; telecommunications company; Member of the Board of Directors Aleksandrovich Akulich. the current economic situation as part of anti-crisis mea- • 10% in case if she/he does not participate• Member in 25%of the and Board of • 15% if the excess is from 15% to 30%; since 2002.• Member 25% if of the Audit excess is over 30%. sures, the Strategic Development Committee gave the Board more meetings of the Board of Directors; Directors of JSC MGTS; Committee and Strategic of Directors recommendations on the approval of transac- • 30% in case if she/he does not participate• Member in ofover the 25% Council of the Development Committee of the tions with the aim of hedging the currency risks of the Com- but less than 50% (inclusively) meetings non-governmental of the Board ofpension fund Board of Directors Remuneration of North-West remains unchanged in the following “Telecom-Soyuz”; General Director Directors; Telecom. cases: pany, considered the Company’s M&A suggestions, and • Member of the Management shared information about the activities of the largest subsi- • 100% in case if she/he does not participate in more than Professor of Economics and Remuneration Board of the “Russian Company Finance at the Higher diaries; half of the meetings of the Board of Directors. Foundation of • no change in the Company’s capitalization in case of a School of Economics, fall in or State unchanged average industry value; Telecommunications History”; University. • Sixteen meetings of the Audit Committee were held, at In addition, the quarterly remuneration• Chairman would of decreasethe Management Occupies the• following a decrease positions: in the Company’s capitalization is less than The General Director’s labor conditions, guarantees and Board of JSC Svyazinvest. which 52 issues were considered. The activity of the Com- by 5% for each meeting of the Board of Directors held “in • Member of the a decrease Board of in average• Memberindustry of value; the Board of compensations during the period of fulfillment of his func- presentia” if the member of the Board of Directors does not Directors• of JSC an increase Svyazinvest; in the Company’s Directors capitalizationof JSC Agrogard- is less than tions are determined by the labor agreement that is adopted mittee was aimed at increasing the effectiveness and the Holds 9,250,000 common shares • Member of the the Board average of industry value.Finance; quality of the work of the Board of Directors in the field of attend it in person. in the Company. by the resolution of the Board of Directors. Directors of JSC Phosagro; • Member of the Board of • Member of the Board of Directors of JSC Investment Directors of JSC IBS; Company Rusinvest. • Member of the Board of Directors of JSC Rostelecom; Holds no shares in the Company.

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 46 47 As a result of the conducted evaluation and an analysis of ensuring* In accordance open communication with the Order with No. the07-102/pz-n independent dated audi- 09.10.2007 of If during a quarter there is a change in personnel on the Remuneration is decreased by 25% in the following the results, the following should be noted: tor, the the Internal Federal Service Audit for Commission, Financial Markets the ofinternal Russia. audit Board of Directors and/or condition of fulfillment by the cases: department and also at improving the effectiveness of inter- member of the Board of Directors of his/her functions • The active composition of the Board of Directors was elected at the • no change of the Company’s capitalization against • An increase in the effectiveness of the Board of Directors’ nal control Annual and General risk management Meeting of shareholders procedures on in 22.06.2009. North-West (paid/free basis), the remuneration is accrued and paid in activities as a whole was recorded; Telecom. Particular attention during the reporting period proportion to the time during which the member of the growth of average industry value; • Improvements in the interaction between the Board of was paid• Information toward risks about arising the members due to of the the upcoming Board of Directors consoli- given as of Board of Directors performed such functions on a paid • a decrease of the Company’s capitalization is more than Directors and the top management and the organization dation 31.12.2009. of companies of JSC Svyazinvest; basis. the average industry value; of work of the Board of Directors were noted; • the Company’s capitalization decreased while the • The identification of separate directions of activity • Sixteen• All members meetings of the of BoardAppointments of Directors and of North-West Remuneration Telecom have Annual remuneration for the whole composition of the average industry value is unchanged; higher education and are citizens of the Russian Federation. claimed attention. Committee were held, at which 33 issues were considered. Board of Directors is set as a sum of allocations in accor- • the Company’s capitalization decreased while the average industry value increased. The activity• During of the the period Committee from the wasdate aimedof his election at increasing as a member the of the dance with normatives (percentages): effectiveness Board of Directorsand the inquality the reporting of decision-making year E. V. Yurchenko of the concluded Board oneof Directors transaction in with the thefield shares of attracting of North-West high-class Telecom spe- – 1,564,800 • from the Company’s EBITDA according with the IFRS The annual remuneration of members of the Board of The practice of considering strategically important cialists common to key positions shares and as 4,095,800 well as the privileged creation shares of an wereeffective sold on reporting data for the reporting year; Directors is decreased by 50% in cases where he/she parti- issues only at the meetings of the Board of Directors system 29.09.2009. to motivate top managers and members of the Com- • from the sum of the Company’s net profit upon the cates in less than a half of all meetings of the Board of Direc- tors held during his/her term. held “in presentia” allows for the organization of pany’s• DuringBoard theof Directors; reporting year no transactions to acquire and sell shares results of the reporting year directed at payment of comprehensive and constructive discussions of the were performed by other members of the Board of Directors. dividends. Upon the results of 2008, the Annual General Meeting of agenda with the participation of the Management • Twelve meetings of the Corporate Governance Commit- tee were held, at which 29 issues were considered. The If within the period from election of the Board of Direc- shareholders adopted the following normative (percentage) Board members for calculation of annual remuneration to members of the activity of the Committee in 2009 was aimed at increasing tors at the Annual General Meeting until the next Annual Board of Directors: the effectiveness and the quality of work of the Board of General Meeting of shareholders there has been a change Directors in the field of improving the corporate governance in personnel on the Board of Directors and/or the condi- • 0.26% of the EBITDA according to IFRS 2009 report; of North-West Telecom by introducing recommendations tions of fulfillment by a member of the Board of his func- • 0.78% of the net profit directed at dividend payment and best practice standards of corporate governance. tions (paid/free basis) has changed, the remuneration is upon 2009 results. Board of Directors’ accrued and paid in proportion to the time during which Committees the member of the Board of Directors performed his/her The overall sum of remuneration of members of the Remuneration of Members functions on a paid basis. Board of Directors in 2009 totaled RUR 39,862.3 thousand, including: The activity of the Committees is aimed at increasing the of the Board of Directors Normatives (percentages) for the estimation of annual effectiveness and the quality of the work of the Board of remuneration are set by a resolution of the Annual Ge- • RUR 36,478.6 thousand paid to the members of the Directors through preliminary consideration of particular neral Meeting of shareholders and are used for determi- Board of Directors active until the General Meeting of issues and preparing recommendations to the Board of Direc- Remuneration of the members of the Board of Directors’ ning the remuneration of persons performing the func- shareholders dated 22.06.2009; tors based upon issues that are in the competence of the includes quarterly and annual parts. tions of members of the Board of Directors until the next • RUR 3,383.7 thousand paid to the members of the Committees. With the aim of fostering comprehensive pre- Annual General Meeting. Board of Directors active after the General Meeting of liminary consideration of particular issues, in 2009 North- Quarterly remuneration to members of the Board of shareholders dated 22.06.2009. West Telecom continued the practice of attracting members Directors’ is set at RUR 300,000. The Chairman of the Board Annual remuneration is corrected on the basis of of two profiled committees to the discussion of issues and of of Directors is paid remuneration with a 1.5 coefficient. changes in the Company’s capitalization during the year holding joint meetings of committees. (from April 1st of the previous year to April 1st of the cur- The members of the Board of Directors’ participating in rent year) relative to the average growth of capitalization General Director In 2009: Committees of the Board of Directors are accrued and paid of all interregional telecommunications companies in the quarterly remuneration connected with fulfillment of the Svyazinvest Group (average value). • Sixteen meetings of the Strategic Development Commit- function of a Committee member to the amount of RUR In accordance with the Charter of North-West Telecom, Remuneration is increased in case of excess by the tee were held, of which three were held “in absentia”. Forty- 126,000 (RUR 42,000 per month). the General Director is the sole executive organ performing Company’s capitalization growth over the average value six issues were considered. The activity of the Committee the management of the Company’s current activity, by: was aimed at increasing the effectiveness and quality of The quarterly remuneration to a member of the Board of appointed by the Board of Directors. Since August 1st, 2008 work of the Board of Directors in the field of the strategic Directors’ is decreased by: the General Director of North-West Telecom is Vladimir • 5% if the excess is less than 15%; management of North-West Telecom. Taking into account Aleksandrovich Akulich. the current economic situation as part of anti-crisis mea- • 10% in case if she/he does not participate in 25% and • 15% if the excess is from 15% to 30%; sures, the Strategic Development Committee gave the Board more meetings of the Board of Directors; • 25% if the excess is over 30%. of Directors recommendations on the approval of transac- • 30% in case if she/he does not participate in over 25% tions with the aim of hedging the currency risks of the Com- but less than 50% (inclusively) meetings of the Board of Remuneration remains unchanged in the following General Director pany, considered the Company’s M&A suggestions, and Directors; cases: shared information about the activities of the largest subsi- • 100% in case if she/he does not participate in more than Remuneration diaries; half of the meetings of the Board of Directors. • no change in the Company’s capitalization in case of a fall in or unchanged average industry value; • Sixteen meetings of the Audit Committee were held, at In addition, the quarterly remuneration would decrease • a decrease in the Company’s capitalization is less than The General Director’s labor conditions, guarantees and which 52 issues were considered. The activity of the Com- by 5% for each meeting of the Board of Directors held “in a decrease in average industry value; compensations during the period of fulfillment of his func- mittee was aimed at increasing the effectiveness and the presentia” if the member of the Board of Directors does not • an increase in the Company’s capitalization is less than tions are determined by the labor agreement that is adopted quality of the work of the Board of Directors in the field of attend it in person. the average industry value. by the resolution of the Board of Directors.

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 46 47 For operational results, high labor achievements, and ment Board elaborates materials which are subject to subse- Proceeding from the tasks assigned to the DIA and its conscientious fulfillment of labor obligations, the Company quent consideration by the Board of Directors Committees. Internal Audit functions, the activity of the department in 2009 was aimed has the right to pay quarterly, annual and one-off awards to at the evaluation of the system of internal control over pro- the General Director. The quarterly award is paid for consci- In 2009, five of seven meetings of the Board of Directors cesses performed in North-West Telecom and providing the entious fulfillment of labor obligations and upon the results held “in presentia” took place with the members of the Ma- Commission Company’s managerial organs with control information over of fulfillment of quarterly budget indicators in the amount nagement Board. During 2009 the Management Board of various issues of economic activity. The DIA received such of up to 40% of quarterly payments on the position wage. North-West Telecom held 41 meetings, at which were con- information through undertaking of control measures upon The annual award is paid for conscientious fulfillment of sidered 242 issues (24 meetings “in absentia” – 143 issues, The Internal Audit Commission of North-West Telecom is the results of which the managerial organs of North-West labor obligations and upon the results of fulfillment of 17 meetings “in presentia” – 99 issues). Compositionelected annually at the Annual of General Meeting of share- Telecom were provided with the data upon the breaches/ annual performance indicators adopted by the Board of holders, is composed of seven persons, and is an indepen- weaknesses of internal control systems as well as recommen- Directors in the amount of up to 80% of the annual pay- Of all issues considered at the meetings of the Board of dent control organ of the Company. dations about their avoidance. ments on the position wage. The resolutions upon payment Directors in 2009 around 90% were preliminarily elabo- the Management of awards are adopted by the Board of Directors. rated and considered by the Management Board. The competence of the Internal Audit Commission Control actions were performed in the form of follow-up includes: control and preventive control. Both follow-up and preven- Board tive control measures were targeted at increasing the Compa- • verification of the accuracy of data contained in reports ny’s effectiveness and compliance of its separate elements Management Board and other financial documents of North-West Telecom; with the interests of North-West Telecom. Control was also Management • identification of facts of breaches of the order of performed in terms of observance of legislative requirements, Members’ Remuneration accounting and presentation of financial statements local normative acts, and fulfillment of the resolutions of the established by the legislative norms of the Russian managerial organs. Board Federation; Remuneration for work on the Management Board con- • verification of legal norms’ observance during Twenty-one actions of follow-up control were fulfilled in sists of a fixed salary, the amount of which is determined by computation and payment of taxes; accordance with the DIA’s 2009 Plan of work , including: The active composition of the Management Board as of the labor agreement with the member of the Management • identification of facts of breaches of the legal acts of the end of 2009 was adopted by the Board of Directors on Board (additional agreement to the labor agreement), the Russian Federation in accordance with which the • on-site audits of the financial and operational activities 30.07.2009 and started fulfillment of its functions on conditions of which are adopted by the Board of Directors of Company performs its financial and operational of all the Company’s branches (10 audits); 01.08.2009. The composition of the Management Board, North-West Telecom, and the quarterly award. having 11 members, includes the Company’s General Direc- activities; • thematic audits for separate activities of the Company tor, his deputies responsible for directions of the Company’s The amount of the quarterly award for work in the Ma- • evaluation of economic expedience of financial and (11 audits). activities and two regional directors (directors of North- nagement Board is determined by resolution of the Board of operational activities of North-West Telecom. West Telecom branches). Directors and cannot exceed RUR 175,000 per quarter to each Within the measures indicated above the structural divi- member of the Management Board and RUR 227,500 to the The amount and order for payment of renumeration to sions of North-West Telecom were verified in the following Chairman of Management Board. Commission members are determined by the Provision on areas: the Internal Audit Commission of North-West Telecom Interaction between The amount of the quarterly award to Management Board adopted on June 23rd, 2008 by the Annual General Meeting • evaluation of internal control system (ICS) for forming of members is determined by the Board of Directors taking into of shareholders. The Internal Audit Commission members profiled revenues; the Management Board and account the fulfillment of target indicators: are compensated for the expenses incurred due to fulfillment • evaluation of ICS for investment purchases; of their functions and paid quarterly renumeration. The • evaluation of ICS for operational purchases; the Board of Directors • upon the results of evaluation of fulfillment of the quarterly renumeration to each member of the Commission • evaluation of ICS for forming of accountancy; indicator “Results of fulfillment of main economic is set at RUR 280,000, and the Chairman receives renumera- • executive discipline; budget indicators for the quarter”; tion with a 1.3 upgrading coefficient. • evaluation of ICS for usage/integrity of the Company’s One of the key elements of the Company’s corporate go- • upon the results of evaluation of fulfillment of the assets. vernance system is the interaction between the Manage- indicator “Results of fulfillment of the earlier adopted For the quarter during which re-election of members of ment Board and the Board of Directors. The effectiveness of resolution of the General Meeting of shareholders and Internal Audit Commission or exit of separate members of Preventative control was fulfilled by the DIA in 2009 such interaction is build upon the principles of constructive the Board of Directors subject to fulfillment in the the Commission from its composition has taken place, renu- through the following procedures: reporting quarter and the quality of materials prepared dialogue and is a part of the system of observing the balance meration to the member of Internal Audit Commission is for the meeting of the Board of Directors”. of interests between the shareholders, the Board of Direc- paid proportionally to the time worked during the quarter. • inspection and coordination of regulation documents of tors and the management. North-West Telecom; Upon evaluation of the quality of materials prepared for • inspection and coordination of agreements concluded on the meetings by the Company’s Board of Directors the timeli- In 2009 the overall amount of renumeration paid to the Internal Audit Commission members totaled RUR 7,320 the level of the general directorate (the Company’s head- ness of preparation and presentation of materials is taken quarters); The involvement of a collegial executive organ in into account, their compliance with current legislation, the thousand. • inspection of materials about transactions on which the strategy development ensures the transparency Charter and internal documents of the Company as well as notification requirement is applied (within participation established standards. of key aims set by the Board of Directors and in procedures of coordination of document packages for indicators of their fulfillment transactions); In 2009 the overall amount of remuneration to members of the Management Board totaled RUR 11,201.1 thousand, of Internal Audit • participation in working groups; which: • conducting consultation. The Management Board preliminarily considers at its meetings and elaborates all strategically important issues in • To the members of the Management Board active until With the aim of improving internal control procedures in Procedures of preventative control were conducted by DIA the competence of the Board of Directors and directs analyti- 01.08.2010 – RUR 7,929 thousand; North-West Telecom, a department of internal audit (DIA), in following areas: cal materials for subsequent consideration as well as decision- • To the members of the Management Board active after reporting to the Board of Directors of North-West Telecom, making by the Board of Directors. In addition the Manage- 01.08.2010 – RUR 3,272.1 thousand. was created and is active. • correspondence of operations to the Company’s interests;

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 48 49 For operational results, high labor achievements, and ment Board elaborates materials which are V. subjectA. Akulich to subse- O. V. Popov Proceeding from the tasks assigned to the DIA and its conscientious fulfillment of labor obligations, the Company quent consideration by the Board of Directors Committees. Internal Audit functions, the activity of the department in 2009 was aimed has the right to pay quarterly, annual and one-off awards to Born August 23, 1956. Born May 24, 1968. at the evaluation of the system of internal control over pro- the General Director. The quarterly award is paid for consci- In 2009, five of seven meetings of theChairman Board of theDirectors Management Deputy General Director – cesses performed in North-West Telecom and providing the entious fulfillment of labor obligations and upon the results held “in presentia” took place with theBoard, members General of the Director Ma- of CommercialCommission Director of North- Company’s managerial organs with control information over of fulfillment of quarterly budget indicators in the amount nagement Board. During 2009 the ManagementNorth-West Telecom. Board ofMember of West Telecom. Member of the various issues of economic activity. The DIA received such the Management Board since Management Board since 2004. of up to 40% of quarterly payments on the position wage. North-West Telecom held 41 meetings,2004. at which Member were of Strategic con- information through undertaking of control measures upon The annual award is paid for conscientious fulfillment of sidered 242 issues (24 meetings “in absentia”Development – 143 Committee issues, of the Holds no shares The in Internal the Company. Audit Commission of North-West Telecom is the results of which the managerial organs of North-West labor obligations and upon the results of fulfillment of 17 meetings “in presentia” – 99 issues).Board of Directors of North-West elected annually at the Annual General Meeting of share- Telecom were provided with the data upon the breaches/ annual performance indicators adopted by the Board of Telecom. holders, is composed of seven persons, and is an indepen- weaknesses of internal control systems as well as recommen- Directors in the amount of up to 80% of the annual pay- Of all issues considered at the meetingsOccupies of the followingBoard of positions: dent control organ of the Company. dations about their avoidance. ments on the position wage. The resolutions upon payment Directors in 2009 around 90% were• preliminarilyChairman of the elabo- Supervisory Council of the “Gradient” The competence of the Internal Audit Commission of awards are adopted by the Board of Directors. rated and considered by the Management foundation Board. for the support of Control actions were performed in the form of follow-up state higher education; includes: control and preventive control. Both follow-up and preven- • Member of the Council of the tive control measures were targeted at increasing the Compa- “Telecom-Soyuz” non- • verification of the accuracy of data contained in reports ny’s effectiveness and compliance of its separate elements Management Board government pension fund. and other financial documents of North-West Telecom; with the interests of North-West Telecom. Control was also Management • identification of facts of breaches of the order of performed in terms of observance of legislative requirements, Holds no shares in the Company. Members’ Remuneration accounting and presentation of financial statements local normative acts, and fulfillment of the resolutions of the established by the legislative norms of the Russian managerial organs. Board Federation; Remuneration for work on the Management Board con- V. S. Vitman O. A. Semanov• verification of legal norms’ observance during Twenty-one actions of follow-up control were fulfilled in sists of a fixed salary, the amount of which is determined by computation and payment of taxes; accordance with the DIA’s 2009 Plan of work , including: The active composition of the Management Board as of the labor agreement with the member of the Management Born September 12, 1957. Born May 29,• identification1967. of facts of breaches of the legal acts of the end of 2009 was adopted by the Board of Directors on Board (additional agreement to the labor agreement), the Regional Director – Director of Deputy General Russian Director Federation – in accordance with which the • on-site audits of the financial and operational activities 30.07.2009 and started fulfillment of its functions on conditions of which are adopted by the Board of Directors of the Murmansk branch of Technical Director Company of North-West performs its financial and operational of all the Company’s branches (10 audits); 01.08.2009. The composition of the Management Board, North-West Telecom, and the quarterly award. North-West Telecom. Member of Telecom. Member activities; of the • thematic audits for separate activities of the Company having 11 members, includes the Company’s General Direc- the Management Board since Management Board since 2003. (11 audits). tor, his deputies responsible for directions of the Company’s The amount of the quarterly award2009. for work in the Ma- • evaluation of economic expedience of financial and activities and two regional directors (directors of North- nagement Board is determined by resolution of the Board of Holds 19,466 operationalcommon shares activities and of North-West Telecom. West Telecom branches). Directors and cannot exceed RUR 175,000Holds per 483,136 quarter common to each shares 4,368 privileged shares in the Within the measures indicated above the structural divi- member of the Management Board andand RUR 18,750 227,500 privileged to the shares in Company. The amount and order for payment of renumeration to sions of North-West Telecom were verified in the following Chairman of Management Board. the Company. Commission members are determined by the Provision on areas: the Internal Audit Commission of North-West Telecom Interaction between The amount of the quarterly award to Management Board adopted on June 23rd, 2008 by the Annual General Meeting • evaluation of internal control system (ICS) for forming of members is determined by the Board of Directors taking into of shareholders. The Internal Audit Commission members profiled revenues; the Management Board and account the fulfillment of target indicators: are compensated for the expenses incurred due to fulfillment • evaluation of ICS for investment purchases; of their functions and paid quarterly renumeration. The • evaluation of ICS for operational purchases; the Board of Directors • upon the results of evaluation of fulfillment of the quarterly renumeration to each member of the Commission • evaluation of ICS for forming of accountancy; indicator “Results of fulfillment of main economic is set at RUR 280,000, and the Chairman receives renumera- • executive discipline; budget indicators for the quarter”; tion with a 1.3 upgrading coefficient. • evaluation of ICS for usage/integrity of the Company’s One of the key elements of the Company’s corporate go- • upon the results of evaluation of fulfillment of the assets. vernance system is the interaction between the Manage- indicator “Results of fulfillment of the earlier adopted For the quarter during which re-election of members of ment Board and the Board of Directors. The effectiveness of resolution of the General Meeting of shareholders V. I. Plyachenko and M. M. SemchenkoInternal Audit Commission or exit of separate members of Preventative control was fulfilled by the DIA in 2009 such interaction is build upon the principles of constructive the Board of Directors subject to fulfillment in the the Commission from its composition has taken place, renu- through the following procedures: reporting quarter and the quality of materials prepared dialogue and is a part of the system of observing the balance Born January 24, 1958. Born July 20,meration 1967. to the member of Internal Audit Commission is for the meeting of the Board of Directors”. of interests between the shareholders, the Board of Direc- Regional Director – Director Chief Accountantpaid proportionally of North-West to the time worked during the quarter. • inspection and coordination of regulation documents of tors and the management. of St. Petersburg branch of Telecom. Member of the North-West Telecom; Upon evaluation of the quality of materialsNorth-West prepared Telecom. for Member Management Board since 2002. In 2009 the overall amount of renumeration paid to the • inspection and coordination of agreements concluded on the meetings by the Company’s Board ofof Directorsthe Management the timeli- Board the level of the general directorate (the Company’s head- since 2009. Holds no sharesInternal in the Audit Company. Commission members totaled RUR 7,320 ness of preparation and presentation of materials is taken quarters); The involvement of a collegial executive organ in into account, their compliance with current legislation, the thousand. • inspection of materials about transactions on which the strategy development ensures the transparency Charter and internal documents of theHolds Company 59,016 as common well as shares and 39,194 privileged shares in the notification requirement is applied (within participation established standards. of key aims set by the Board of Directors and Company. in procedures of coordination of document packages for indicators of their fulfillment transactions); In 2009 the overall amount of remuneration to members of the Management Board totaled RUR 11,201.1 thousand, of Internal Audit • participation in working groups; which: • conducting consultation. The Management Board preliminarily considers at its meetings and elaborates all strategically important issues in • To the members of the Management Board active until With the aim of improving internal control procedures in Procedures of preventative control were conducted by DIA the competence of the Board of Directors and directs analyti- 01.08.2010 – RUR 7,929 thousand; North-West Telecom, a department of internal audit (DIA), in following areas: cal materials for subsequent consideration as well as decision- • To the members of the Management Board active after reporting to the Board of Directors of North-West Telecom, making by the Board of Directors. In addition the Manage- 01.08.2010 – RUR 3,272.1 thousand. was created and is active. • correspondence of operations to the Company’s interests;

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 48 49 For operational results, high labor achievements, and ment Board elaborates materials which areI. subjectV. Tambovskaya to subse- V. I. Shumeiko Proceeding from the tasks assigned to the DIA and its conscientious fulfillment of labor obligations, the Company quent consideration by the Board of Directors Committees. Internal Audit functions, the activity of the department in 2009 was aimed has the right to pay quarterly, annual and one-off awards to Born August 3, 1970. Born January 21, 1956. at the evaluation of the system of internal control over pro- the General Director. The quarterly award is paid for consci- In 2009, five of seven meetings of theDirector Board of of human Directors resources First Deputy General Director of cesses performed in North-West Telecom and providing the entious fulfillment of labor obligations and upon the results held “in presentia” took place with thedepartment members of North-Westthe Ma- North-West Telecom. Member of Company’s managerial organs with control information over the ManagementCommission Board since of fulfillment of quarterly budget indicators in the amount nagement Board. During 2009 the ManagementTelecom. Member Board of theof various issues of economic activity. The DIA received such Management Board since 2005. 2004. of up to 40% of quarterly payments on the position wage. North-West Telecom held 41 meetings, at which were con- information through undertaking of control measures upon The annual award is paid for conscientious fulfillment of sidered 242 issues (24 meetings “in absentia”Holds no –shares 143 issues,in the Company. Holds 1,219 common The Internal shares Audit of Commission of North-West Telecom is the results of which the managerial organs of North-West labor obligations and upon the results of fulfillment of 17 meetings “in presentia” – 99 issues). the Company.elected annually at the Annual General Meeting of share- Telecom were provided with the data upon the breaches/ annual performance indicators adopted by the Board of holders, is composed of seven persons, and is an indepen- weaknesses of internal control systems as well as recommen- Directors in the amount of up to 80% of the annual pay- Of all issues considered at the meetings of the Board of dent control organ of the Company. dations about their avoidance. ments on the position wage. The resolutions upon payment Directors in 2009 around 90% were preliminarily elabo- of awards are adopted by the Board of Directors. rated and considered by the Management Board. The competence of the Internal Audit Commission Control actions were performed in the form of follow-up includes: control and preventive control. Both follow-up and preven- tive control measures were targeted at increasing the Compa- • verification of the accuracy of data contained in reports ny’s effectiveness and compliance of its separate elements Management Board and other financial documents of North-West Telecom; with the interests of North-West Telecom. Control was also Management • identification of facts of breaches of the order of performed in terms of observance of legislative requirements, Members’ Remuneration accounting and presentation of financial statements local normative acts, and fulfillment of the resolutions of the established by the legislative norms of the Russian managerial organs. Board Federation; Remuneration for work on the Management Board con- E. I. Tomilina G. B. Chernyak• verification of legal norms’ observance during Twenty-one actions of follow-up control were fulfilled in sists of a fixed salary, the amount of which is determined by computation and payment of taxes; accordance with the DIA’s 2009 Plan of work , including: The active composition of the Management Board as of the labor agreement with the member of the Management Born December 15, 1964. Born October• identification20, 1949. of facts of breaches of the legal acts of the end of 2009 was adopted by the Board of Directors on Board (additional agreement to the labor agreement), the Deputy General Director for Russian Federation in accordance with which the • on-site audits of the financial and operational activities 30.07.2009 and started fulfillment of its functions on conditions of which are adopted by the Board of Directors of corporate affairs of North-West Deputy General Company Director performsfor its financial and operational of all the Company’s branches (10 audits); 01.08.2009. The composition of the Management Board, North-West Telecom, and the quarterly award. Telecom. Member of the property management activities; and • thematic audits for separate activities of the Company having 11 members, includes the Company’s General Direc- Management Board since 2006. general issues of North-West (11 audits). tor, his deputies responsible for directions of the Company’s The amount of the quarterly award for work in the Ma- Telecom. Member• evaluation of the of economic expedience of financial and activities and two regional directors (directors of North- nagement Board is determined by resolutionHolds no of sharesthe Board in the of Company. Management operationalBoard since 2002. activities of North-West Telecom. West Telecom branches). Directors and cannot exceed RUR 175,000 per quarter to each Occupies the following positions: Within the measures indicated above the structural divi- member of the Management Board and RUR 227,500 to the • Member of the The Board amount of and order for payment of renumeration to sions of North-West Telecom were verified in the following Chairman of Management Board. DirectorsCommission of CJSC -Cable; members are determined by the Provision on areas: • Chairmanthe of theInternal Board ofAudit Commission of North-West Telecom Directors of CJSC RPK-Svyazist; • evaluation of internal control system (ICS) for forming of Interaction between The amount of the quarterly award to Management Board • Chairmanadopted of the Management on June 23rd, 2008 by the Annual General Meeting members is determined by the Board of Directors taking into Board of Russianof shareholders. The Internal Audit Commission members profiled revenues; the Management Board and account the fulfillment of target indicators: Telecommunicationsare compensated History for the expenses incurred due to fulfillment • evaluation of ICS for investment purchases; Foundation;of their functions and paid quarterly renumeration. The • evaluation of ICS for operational purchases; the Board of Directors • upon the results of evaluation of fulfillment of the • Chairmanquarterly of the Management renumeration to each member of the Commission • evaluation of ICS for forming of accountancy; Board of non-commercial indicator “Results of fulfillment of main economic is set at RUR 280,000, and the Chairman receives renumera- • executive discipline; partnership “Russian club budget indicators for the quarter”; • evaluation of ICS for usage/integrity of the Company’s of telecommunicationstion with a 1.3 workers”; upgrading coefficient. One of the key elements of the Company’s corporate go- • upon the results of evaluation of fulfillment of the • Member of the Council of assets. vernance system is the interaction between the Manage- indicator “Results of fulfillment of the earlier adopted Founders of Forthe “OBDD-Neva”the quarter during which re-election of members of ment Board and the Board of Directors. The effectiveness of resolution of the General Meeting of shareholders and foundationInternal for road Audit safety Commission or exit of separate members of Preventative control was fulfilled by the DIA in 2009 such interaction is build upon the principles of constructive the Board of Directors subject to fulfillment V. A. in Husnutdinova the in St. Petersburg;the Commission from its composition has taken place, renu- through the following procedures: reporting quarter and the quality of materials prepared • Member of the Board of dialogue and is a part of the system of observing the balance meration to the member of Internal Audit Commission is of interests between the shareholders, the Board of Direc- for the meeting of the Board of Directors”.Born August 27, 1973. Directors of LLC Management • inspection and coordination of regulation documents of Companypaid “IT-park”. proportionally to the time worked during the quarter. tors and the management. Deputy General Director – North-West Telecom; Upon evaluation of the quality of materialsDirector for prepared economics for and Holds 306,190 common shares • inspection and coordination of agreements concluded on the meetings by the Company’s Board offinance Directors of North-West the timeli- Telecom. In 2009 the overall amount of renumeration paid to the Member of the Management and 69,400Internal privileged Audit shares Commission in members totaled RUR 7,320 the level of the general directorate (the Company’s head- ness of preparation and presentation of materials is taken the Company. quarters); The involvement of a collegial executive organ in into account, their compliance with currentBoard sincelegislation, 2004. the thousand. • inspection of materials about transactions on which the strategy development ensures the transparency Charter and internal documents of the Company as well as Holds no shares in the Company. notification requirement is applied (within participation established standards. of key aims set by the Board of Directors and in procedures of coordination of document packages for indicators of their fulfillment transactions); In 2009 the overall amount of remuneration to members of the Management Board totaled RUR 11,201.1 thousand, of Internal Audit • participation in working groups; which: • conducting consultation. The Management Board preliminarily considers at its meetings and elaborates all strategically important issues in • To the members of the Management Board active until With the aim of improving internal control procedures in Procedures of preventative control were conducted by DIA the competence of the Board of Directors and directs analyti- 01.08.2010 – RUR 7,929 thousand; North-West Telecom, a department of internal audit (DIA), in following areas: cal materials for subsequent consideration as well as decision- • To the members of the Management Board active after reporting to the Board of Directors of North-West Telecom, making by the Board of Directors. In addition the Manage- 01.08.2010 – RUR 3,272.1 thousand. was created and is active. • correspondence of operations to the Company’s interests;

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 48 49 For operational results, high labor achievements, and ment•Information Board elaborates about materialsmembers ofwhich the Management are subject Boardto subse- is given as of Proceeding from the tasks assigned to the DIA and its conscientious fulfillment of labor obligations, the Company quent consideration31.12.2009. by the Board of Directors Committees. Internal Audit functions, the activity of the department in 2009 was aimed has the right to pay quarterly, annual and one-off awards to at the evaluation of the system of internal control over pro- •All Management Board members have higher education and are the General Director. The quarterly award is paid for consci- In 2009, citizens five of theof seven Russian meetings Federation. of the Board of Directors cesses performed in North-West Telecom and providing the entious fulfillment of labor obligations and upon the results held “in presentia” took place with the members of the Ma- Commission Company’s managerial organs with control information over of fulfillment of quarterly budget indicators in the amount nagement•During Board. the reporting During year 2009 no the transactions Management to acquire Board and of sell shares various issues of economic activity. The DIA received such of up to 40% of quarterly payments on the position wage. North-West were performed Telecom heldby Management 41 meetings, Board at members.which were con- information through undertaking of control measures upon The annual award is paid for conscientious fulfillment of sidered 242 issues (24 meetings “in absentia” – 143 issues, The Internal Audit Commission of North-West Telecom is the results of which the managerial organs of North-West labor obligations and upon the results of fulfillment of 17 meetings “in presentia” – 99 issues). elected annually at the Annual General Meeting of share- Telecom were provided with the data upon the breaches/ annual performance indicators adopted by the Board of holders, is composed of seven persons, and is an indepen- weaknesses of internal control systems as well as recommen- Directors in the amount of up to 80% of the annual pay- Of all issues considered at the meetings of the Board of dent control organ of the Company. dations about their avoidance. ments on the position wage. The resolutions upon payment Directors in 2009 around 90% were preliminarily elabo- of awards are adopted by the Board of Directors. rated and considered by the Management Board. The competence of the Internal Audit Commission Control actions were performed in the form of follow-up includes: control and preventive control. Both follow-up and preven- tive control measures were targeted at increasing the Compa- • verification of the accuracy of data contained in reports ny’s effectiveness and compliance of its separate elements Management Board and other financial documents of North-West Telecom; with the interests of North-West Telecom. Control was also Management • identification of facts of breaches of the order of performed in terms of observance of legislative requirements, Members’ Remuneration accounting and presentation of financial statements local normative acts, and fulfillment of the resolutions of the established by the legislative norms of the Russian managerial organs. Board Federation; Remuneration for work on the Management Board con- • verification of legal norms’ observance during Twenty-one actions of follow-up control were fulfilled in sists of a fixed salary, the amount of which is determined by computation and payment of taxes; accordance with the DIA’s 2009 Plan of work , including: The active composition of the Management Board as of the labor agreement with the member of the Management • identification of facts of breaches of the legal acts of the end of 2009 was adopted by the Board of Directors on Board (additional agreement to the labor agreement), the Russian Federation in accordance with which the • on-site audits of the financial and operational activities 30.07.2009 and started fulfillment of its functions on conditions of which are adopted by the Board of Directors of Company performs its financial and operational of all the Company’s branches (10 audits); 01.08.2009. The composition of the Management Board, North-West Telecom, and the quarterly award. having 11 members, includes the Company’s General Direc- activities; • thematic audits for separate activities of the Company tor, his deputies responsible for directions of the Company’s The amount of the quarterly award for work in the Ma- • evaluation of economic expedience of financial and (11 audits). activities and two regional directors (directors of North- nagement Board is determined by resolution of the Board of operational activities of North-West Telecom. West Telecom branches). Directors and cannot exceed RUR 175,000 per quarter to each Within the measures indicated above the structural divi- member of the Management Board and RUR 227,500 to the The amount and order for payment of renumeration to sions of North-West Telecom were verified in the following Chairman of Management Board. Commission members are determined by the Provision on areas: the Internal Audit Commission of North-West Telecom Interaction between The amount of the quarterly award to Management Board adopted on June 23rd, 2008 by the Annual General Meeting • evaluation of internal control system (ICS) for forming of members is determined by the Board of Directors taking into of shareholders. The Internal Audit Commission members profiled revenues; the Management Board and account the fulfillment of target indicators: are compensated for the expenses incurred due to fulfillment • evaluation of ICS for investment purchases; of their functions and paid quarterly renumeration. The • evaluation of ICS for operational purchases; the Board of Directors • upon the results of evaluation of fulfillment of the quarterly renumeration to each member of the Commission • evaluation of ICS for forming of accountancy; indicator “Results of fulfillment of main economic is set at RUR 280,000, and the Chairman receives renumera- • executive discipline; budget indicators for the quarter”; tion with a 1.3 upgrading coefficient. • evaluation of ICS for usage/integrity of the Company’s One of the key elements of the Company’s corporate go- • upon the results of evaluation of fulfillment of the assets. vernance system is the interaction between the Manage- indicator “Results of fulfillment of the earlier adopted For the quarter during which re-election of members of ment Board and the Board of Directors. The effectiveness of resolution of the General Meeting of shareholders and Internal Audit Commission or exit of separate members of Preventative control was fulfilled by the DIA in 2009 such interaction is build upon the principles of constructive the Board of Directors subject to fulfillment in the the Commission from its composition has taken place, renu- through the following procedures: reporting quarter and the quality of materials prepared dialogue and is a part of the system of observing the balance meration to the member of Internal Audit Commission is for the meeting of the Board of Directors”. of interests between the shareholders, the Board of Direc- paid proportionally to the time worked during the quarter. • inspection and coordination of regulation documents of tors and the management. North-West Telecom; Upon evaluation of the quality of materials prepared for • inspection and coordination of agreements concluded on the meetings by the Company’s Board of Directors the timeli- In 2009 the overall amount of renumeration paid to the Internal Audit Commission members totaled RUR 7,320 the level of the general directorate (the Company’s head- ness of preparation and presentation of materials is taken quarters); The involvement of a collegial executive organ in into account, their compliance with current legislation, the thousand. • inspection of materials about transactions on which the strategy development ensures the transparency Charter and internal documents of the Company as well as notification requirement is applied (within participation established standards. of key aims set by the Board of Directors and in procedures of coordination of document packages for indicators of their fulfillment transactions); In 2009 the overall amount of remuneration to members of the Management Board totaled RUR 11,201.1 thousand, of Internal Audit • participation in working groups; which: • conducting consultation. The Management Board preliminarily considers at its meetings and elaborates all strategically important issues in • To the members of the Management Board active until With the aim of improving internal control procedures in Procedures of preventative control were conducted by DIA the competence of the Board of Directors and directs analyti- 01.08.2010 – RUR 7,929 thousand; North-West Telecom, a department of internal audit (DIA), in following areas: cal materials for subsequent consideration as well as decision- • To the members of the Management Board active after reporting to the Board of Directors of North-West Telecom, making by the Board of Directors. In addition the Manage- 01.08.2010 – RUR 3,272.1 thousand. was created and is active. • correspondence of operations to the Company’s interests;

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 48 49 • usage and integrity of assets’ effectiveness; nance”. Thus, upon the results of monitoring conducted by ments of Russian legislation in the field of corporate go- • operational effectiveness; Corporate Expert RA, North-West Telecom became a leader in Russian vernance, follows the majority of recommendations con- • observance of legislative and other normative acts corporate governance. tained in the Russian Corporate Governance Code and (including local normative acts) regulating the activity of separate recommendations of advanced international North-West Telecom; Governance The “8” assessment means that North-West Telecom corporate governance practices. • presence of required control procedures. has low corporate governance risks, observes the require-

The inspection was conducted in respect of draft docu- Ratings ments which form the basis for activities and operations to Corporate governance scores of North-West Telecom be conducted in future. The high level of corporate governance in North-West as of the end of 2009 Telecom is regularly confirmed by independent experts.

The Department of Internal Audit presents to the In November 2009, the Corporate Governance Score Ser- Audit Committee the results of efficiency verifications vice of Standard & Poor’s gave North-West Telecom a Rating Score Date of Change agency attribution of the current internal control procedures and, GAMMA score (Governance, Accountability, Management if needed, provides recommendations on their Metrics & Analysis) of “GAMMA 5+”. improvement developed together with the executive Standard & Poor’s Corporate governance score The GAMMA score represents a new format for evaluat- on national scale “5.8” 25.11.2009 organs of North-West Telecom ing corporate governance and replaces the earlier Corporate Governance Score (CGS). Up to the moment of transition to Standard & Poor’s Corporate governance score on international scale “5+” 25.11.2009 the new GAMMA score, the Corporate Governance Score of North-West Telecom in accordance with the international Standard & Poor’s CG, reporting and scale was confirmed at “CGS 5+”, while the Corporate Go- management analysis External Audit vernance Score in accordance with the Russian scale was and efficiency appraisal First-time increased from “CGS 5.7” to “CGS 5.8”. “GAMMA-5+” 25.11.2009 attribution “RID-Expert RA” Corporate governance The independent audit of the financial statements of score “NRKU 8” 03.09.2009 North-West Telecom is performed by an independent Standard & Poor’s gave North-West Telecom a audit organization that is appointed by the Annual Gen- eral Meeting of the Company. GAMMA score, replacing the former CGS rating, of “GAMMA 5+” The tender committee for selection of an independent audit organization, comprising five Board of Directors’ members of North-West Telecom, recognized independent The GAMMA score gives more complete evaluation of the Investment During 2009, the Company’s management took part in audit organization CJSC PricewaterhouseCoopers Audit structure and practice of corporate governance. During its over 20 personal meetings with investment community rep- as a tender winner in 2009, which was subsequently application an improved CGS procedure including two new resentatives, and held around 10 conference-calls with appointed by the Annual General Meeting of shareholders methods for analysis of corporate governance is used: the Community experts from Russian rating agencies for a more clear evalu- dated June 22, 2009. risk management system and strategic planning process. ation of the Company’s credit worthiness. Among the parti- cipants of the meetings were representatives of manage- Upon scoring, the following evaluations (from 1 to 10) Relations In 2009, North-West Telecom concluded with CJSC ment companies and funds such as Morgan Stanley, ING, were made: PricewaterhouseCoopers the following agreements: Robur, East Capital, and Charlemagne Capital. According to the evaluation of independent experts, in • Ownership structure and external influence: 5; • On conducting of an audit of Russian accounting recent years North-West Telecom has become one of the In 2009 the trend, that began in 2008, of an increasing • Shareholder’s rights: 7; number of contacts by investors (e-mails, telephone calls) statements for the 2009 reporting year, conducting of • Transparency, audit and risk management: 6+; most transparent companies in the industry. During the an audit in accordance with international audit stan reporting year the Company strengthened its leadership in directly to the investor relations department was strength- • Board of Directors’ effectiveness, strategic process, ened, which allowed for the conduct of more targeted inves- dards in respect to the financial statements prepared in motivation system: 5+. the field of transparency among interregional telecommuni- accordance with IFRS standards as of 31.12.2009; cations companies due to the following factors: tor relations, operatively providing them with the required information. • On provision of consulting services; The high score reflects the fact that the system of corpo- • On provision of consulting services in the form of a rate governance in North-West Telecom is developing • the operative disclosure of all information which may short seminar upon the subject of “Appraising influence investors’ sentiment, both in Russian and Apart from personal communications, one of the main quickly due to strategic initiatives by the Company’s ma- communication channels with stakeholders is the corporate the value of the company”. nagement and shareholders. This is confirmed by the high English; • high level of corporate governance, clear regula- website where the Company presents to interested parties the evaluation of the Company’s corporate governance practices most accurate information, annually improving the fullness tions for internal procedures; During 2009 the Company paid upon the given agree- by recognized experts as well as numerous awards received of the information disclosed. In addition, the corporate we ments RUR 15,259,760. by North-West Telecom during the reporting year for its • active interaction of investor relations department with site serves as a platform for Internet conferences. Introducing high level of information disclosure. investment community; new modern communications tools on the basis of the best In 2009, settlements with independent audit organiza- • high level of management involvement in a dialogue foreign practice, the Company in 2009 organized a webcast tion LLC Ernst & Young, which was selected by the Com- In September 2009, the Expert RA rating agency, within the with the investment community; (a telephone conference accompanied by a presentation on pany in 2008 as external auditor, were also performed. “RID-Expert RA” national rating of corporate governance, • improvement of tools and development of the Internet) under the title of “Q1 2009 IFRS results. 2009 The amount paid upon agreements concluded with LLC announced an increase in the evaluation of North-West Tele- communication channels with stakeholders Plans”. The webcast included over 20 participants (repre- Ernst & Young totaled RUR 24,399,518. com CG to “NRKU-8” – “Developed practice of corporate gover- (shareholders). sentatives of investment banks – main pool of analysts cover-

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 50 51 13 ing North-West Telecom ), which received full replies from total number of messages in the reporting period Geographical distribution of requests for Understanding the importance of publishing high quality the Company’s management concerning the main trends in and which were distinguished with more precise wording the Annual report of North-West Telecom analytical materials, particularly under conditions of finan- the telecommunications market of the North-West Federal and the analytical quality of material with a focus on cial crisis, during the reporting year, the Company short- Region, performance results and medium-term plans. factual data. 14% The investment community positively evaluated the Compa- ened the period of preparation for quarterly and annual ny’s innovation: the perception analysis results for the event reports for investors. In addition, the Company in 2009 gave evidence that the completeness of information pre- In 2009 for the first time North-West Telecom organized started publishing unaudited quarterly IFRS statements sented exceeded the analysts’ expectations. The share price a webcast – a telephone conference accompanied (earlier semi-annually),which was marked as a positive fac- of North-West Telecom was also positively affected: by a presentation on the Internet tor by all categories of investors. on the day of the conference the Company’s capitalization 14% increased by 1.2%. • Forming of non-financial statements: issue of Corpo- To ensure coverage of a broader audience and main- rate Social Responsibility Report. tain the liquidity of securities on foreign markets, North- 72% In 2009 the first Corporate Social Responsibility Report of The total volume of assets under investment West Telecom published English versions of press releases North-West Telecom for the years 2007-2008 was issued. funds’ management, the representatives of which on Google News and other publicly available news portals The publication of the Report is aimed at increasing the met with the Company’s management in 2009, on the Internet with subsequent storage in the archives of stakeholders’ trust in the Company and consequently the totaled USD 1.5 trillion the world’s largest media databases (LexisNexis, Acquire- creation of prerequisites for the investor attractiveness of Media, Comtex, Dialog, Factiva etc.) Key releases from North-West Telecom. the Company are distributed through the Bloomberg North-West Telecom considers it equally important that information system, which is the most popular among a the investment community relations function participates in broad range of investors. Great Britain By the end of the year the pool of analysts covering conferences organized by leading professional participants Scandinavia on the stock market. These conferences are an effective plat- In addition, the Company’s information in the format the Company exceeded 200 representatives of Remaining continental Europe form to present the results of the Company’s activity and of a “mini-site” was placed at international portal RUS- the investment community development prospects, grounding the potential of its mar- TOCKS.com, through which was also organized distribu- ket value growth for existing and potential shareholders. In tion of information releases of North-West Telecom on a nies that conducted a similar promotion campaign 2009 the most urgent matter was the issue of debt obliga- distribution list exceeding 3,500 subscribers together (the average portfolio for these companies is approxi- tions, therefore North-West Telecom, as an issuer of four with releases announcing appearances on the portal. mately 20 million euro). Forty-eight percent of investors • Strengthening debt relations bond issues outstanding, took part in two large scale events: answered that they use Annual report of the Company as Taking into account the need for more active communica- the “Bond market. Re-load-2009” conference organized by For a more precise identification of shareholders and an investment instrument and 61% answered that they tion with the debt investors in a period of instability on the the Uralsib financial corporation and the Cbonds Congress analysis of potential investors, North-West Telecom con- believed the Annual report to be an important instrument financial markets, in 2009 the Company activated commu- organized by information agency Cbonds. At these confe- tinued to use Thomson One (IR-channel) database in for decision-making. nications with credit analysts, and clearly formed and rences, the Company’s management conducted meetings 2009, which is a global database for investors located all announced plans for restructuring the liabilities and hedg- with over ten representatives of the investment community. over the world. With the help of this database, partial ing the currency risks of North-West Telecom. identification of the Company’s shareholders was made. One of the main events in the area of investor relations This is especially important in view of JSC Svyazinvest’s Analytical Coverage (IR) in 2009 was the placement of a 6th bond issue large-scale reorganization as it allowed work to be con- • Conducting an analysis of the perception of North-West accompanied by a dynamic IR campaign, the culmination ducted with investors aimed at the lowering of the num- Telecom by interested parties. of which was a meeting with analysts in Moscow a week ber of shares claimed for buyback, thus decreasing the Despite the analytical coverage of North-West Telecom In 2009 the Company undertook polling of leading analysts before the placement of the issue organized by Svyaz- funds spent in the buyback procedure. being at a relatively high level in recent years, the number of the telecommunications sector on the basis of a unique Bank. Analysts from leading banks participated in the of analysts monitoring the Company continues to grows questionnaire it developed, encompassing all aspects of the event, thus demonstrating high interest toward the secu- North-West Telecom, together with European consul- from year to year. Along with analysts in the oil and gas sec- Company’s activities and its investor relations. Such polling rities of North-West Telecom. The confirmation of high tants Investor Direct, participated in the program of dis- tor, telecommunications sector analysts are the only ones contributed to the initiation of a closer and more construc- interest toward Company’s securities was the successful tributing Annual reports of the Company – Annual Report who kept their positions under conditions of sharp person- tive dialogue with the representatives of the investment Promotion – for the fourth consecutive year. During the placement of the 6th bond issue: demand exceeded sup- nel decreases at investment banks. This is evidence of a high community, detailed analysis of the current factors of inves- reporting year the geography of distribution for annual ply by four times and the rate of first coupon was set at demand for shares in the telecommunications sector due to tor attractiveness by independent market experts, and iden- 11.7% which is significantly below the target before the reports was broadened across continental Europe and many investors opting for such shares as “protective” ones. North America. In addition, a campaign to distribute tification of the main risks and drivers of the market value placement. The better dynamics of the telecommunications sector in Annual reports to the international media was organized, growth of North-West Telecom. comparison with the main stock exchange indexes also due to which the distribution geography of the report was An integral part of the IR activity of any issuer and increased interest toward the Company. additionally broadened through introducing it to Asian North-West Telecom in particular is maintaining countries as well as those in Europe. The results of this high information transparency and ensuring provision The first CSR Report of the Company for 2007-2008 campaign show that interest in North-West Telecom from By the end of 2009, the growth in analysts covering of operative information concerning the Company’s acti- was named the best among similar reports at a both individual and large institutional investors has been North-West Telecom totaled 20 investment banks experts vities to all stakeholders. In 2009, 130 press releases and maintaned: in 2009, nearly 1,300 Annual reports of the and investment funds managers. contest organized by Securities market magazine information messages (compared to 131 in 2008) were Company were requested. and the MICEX stock exchange published. At the same time, particular attention Among the main measures undertaken to increase the was paid to IR releases, which formed over half of the The average volume of institutional investors’ portfo- investor attractiveness of North-West Telecom in 2009, the following can be highlighted: 13 lios having requested the Annual report of North-West The Company’s analytical coverage to a wide extent implies Telecom is 122 million euro, while the average portfolio As part of the polling, expert evaluation of the activities availability of regular recommendations from global investment of North-West Telecom’s IR-service was given. According to structures, availability of actual analytical reports as well as analysts of all investors is 30 million euro, which is significantly • Introduction of modern reporting principles, issuing who can comment. higher than the similar indicator for most of the compa- quarterly IFRS statements. 92% of the respondents, the IR-service of North-West Tele-

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 52 53 com is a high quality service (“Best IR-service among inter- investment community representatives. On the whole, the strengthening the Company’s positions on the market for regional telecommunications companies”, “Corresponds polling results confirmed the high level of openness of the Subsidiaries such services. with advanced IR-practices, conceding only to IR-services of Company’s management and the high quality of its IR. mobile operators”), while 8% are not satisfied with the The main goals of the management of the portfolio of activity of the investor relations department. Methods of contributing to a significant increase in inte- and Dependent investments in subsidiary businesses is revenue growth and rest toward the Company’s securities among the broadest strengthening the positions of North-West Telecom on the Conference-calls, personal meetings and road-shows are range of investors were determined as a result of the percep- telecommunications services market and, consequently, the most attractive instruments for communication with tion study. Companies competitive growth and increase in the Company’s market value. The management of subsidiaries and dependent compa- nies (SDCs) is performed in accordance with the Provision on Attractiveness of communication Main principles of subsidiary business management. instruments as marked by respondents Results of Activities of Com- to the Company’s perception study Taking into account that the Company has nearly fully implemented recommendations on the reorganization of its panies Providing Telecom- subsidiary business adopted in 2004, in December 2009 the 100% Company’s Board of Directors approved the upgraded Model munications Services With for the reorganization of subsidiary businesses of North- West Telecom, providing for subsequent restructuring and Share Participation 80% optimization of investment in other organizations. of North-West Telecom The development strategy of North-West Telecom is aimed at the further development of promising business 60% In 2009, North-West Telecom ceased participation in the 58% activities and provides for opportunities of purchasing only closed joint-stock company “Petersburg Transit Telecom” core businesses, the key activity of which is the provision of (CJSC P.T.T.) through liquidation of the subsidiary. The reso- telecommunications services, capable of significantly lution on the voluntary cessation of the Company was 40% Conference-calls 33% 33% Webcasts 25% 25% 25% Internet conferences 20% Personal meetings IR-breakfasts Companies providing telecommunications services with 0% Road-shows share participation of North-West Telecom 2007 2007 2008 20092008 2009

Organization Main type Share in Contribu- Key performance of activity the charter tion to the indicators capital, charter Number Revenue, чистаяNet Main ways to improve the investor attractiveness of North-West Telecom % capital, of sub- RUR прибыль,profit, RUR scriber thousand тыс. руб.RUR according to the perception study’s results thousand lines thousand

1. CJSC Novgorod • Data transmission services Revenues Expenses Investment Datacom • Channel leasing services • Internet access services 100 68,007 34,227 153,168 42,484 Activate the expansion Decrease the rate of The most investment 2. CJSC • Data transmission to the market of services expenses growth; potential is in FTTx Parma-Inform and telematic services for corporate clients; network construction; • Channel leasing services Increase business Decrease operating costs. • Cable broadcasting During consideration of M&A diversification; transactions, the asset’s telecommunications services 100 100 1,625 63,191 13,288 Find new “points of attractiveness must depend growth”; on its price. 3. JSC • Channel leasing services Kola-telecom • Cable television Develop clear tactics broadcasting 13,775, for countering the penetration services 50 75 of which 72,010 –2,661 of integrated operators into the regions. cable television subscribers 6,382 Investor • Data transmission Leverage attractiveness Investor relations via cable television network

Decrease the share of liabilities Need to increase the level Conduct quarterly conference-calls internet subscribers 7,393 denominated in foreign of return on invested about the results of the currency to 30% of the total debt. Company’s activities. 4. CJSC VBT • Local, long-distance capital (ROIC). and international telephony services • Data transmission services • Telematic services 28 11,343 35,687 264,178 23,753

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 54 55 adopted due to the achievement of the main market goals JSC Kolatelecom provides services for cable television, Supporting companies Non-core companies connected with acquisition of the asset and the synergy and Internet access by cable television channels in Mur- effects achieved due to: mansk. The client base for dedicated Internet access in 2009 totaled 7.4 thousand, with the outflow of subscribers LLC NWT-Finance CJSC RPK “Svyazist” • realization of the unique opportunity for acquiring full amounting to 0.5 thousand subscribers. The 2009 revenue control over a core company operating in the North-West totaled RUR 72,010 thousand, which is 10% lower than the LLC NWT-Finance performs collateral actions during CJSC RPK “Svyazist” has provided services in the field Federal Region without competitors across all business previous year, the loss on sales totaled RUR 2,357 thousand, issue of securities by North-West Telecom. It is planned that of organizing vacations for children and citizens at sanato- activities as of the moment of acquisition; and EBITDA and EBITDA margin amounted to RUR 10,691 the Company will perform its activities during the whole ria (traditional health resorts and vacation premises) in • creation of a temporary barrier for the entrance to the thousand and 14.8% respectively. The 2009 net loss totaled period that the securities with provided collateral will be the Leningrad Region for the last 50 years. The company’s market of other operators with dumping offers which RUR 2,661 thousand. outstanding. services also ensure the fulfillment of the important social protected the existing operator’s income of North-West function of providing the employees of North-West Tele- Telecom; CJSC WestBalt Telecom (share of participation in char- CJSC Rostelegraph com and members of their families with sanatoria services • significant strengthening of competitive positions on the ter capital – 28%) at acceptable prices. telecommunications markets of St. Petersburg and the CJSC Rostelegraph ensures settlements for internal and international telegraph services on the territory of the Rus- Leningrad Region; CJSC WestBalt Telecom provides the whole range of the CJSC AMT sian Federation, performs the administration of the Bureau- • significant broadening of technical opportunities for telecommunications services of common usage (local, long- fax facsimile service and other services provided by interre- accelerated modernization of the network and distance, international telephony), Internet services (under One of the main types of CJSC AMT’s activities is to per- gional telecommunications companies, JSC Central tele- broadening the range of provided services. BiteCity trademark), access to points of provision of data form investments in securities for forming the investment transmission and telematic services for the Kaliningrad graph and the telegraph operators not included in JSC Svyazinvest. portfolio. CJSC AMT’s main assets are North-West Telecom Due to the liquidation of CJSC “P.T.T.” in 2009, the num- Region. Its main clients are households and SMEs. The reve- shares. nue of the Company as of the end of 2009 totaled RUR ber of organizations in which North-West Telecom holds JSC Svyazintek participating interest and the economic activity of which 264,178 thousand, which is 11% lower than the level of JSC AKB Svyaz-Bank 2008, with net profit amounting to RUR 23,753 thousand. corresponds with the Company’s activity (provision of tele- JSC Svyazintek was created for the introduction and sub- communications services) decreased to four companies by sequent support of the functioning of information systems in JSC AKB Svyaz-Bank provides a whole range of banking the end of 2009. the Svyazinvest Group as well as for the coordination, ma- services and is one of the banks with which North-West Financial Results from nagement and realization of centralized industry programs in Telecom presently cooperates. In accordance with the CJSC Novgorod Datacom (share of participation in the IT field in the holding company. The main activity is the upgraded Model for reorganization of subsidiary busi- charter capital – 100%) SDCs’ Participation provision of IT services, project management, and the intro- nesses of North-West Telecom it is planned that participa- duction and supporting of software and hardware complexes. tion in the charter capital of the Bank will cease. CJSC Novgorod Datacom provides data transmission and dedicated Internet access services in the Novgorod and The overall financial effect as dividends received from Pskov Regions. The client base for dedicated Internet access SDCs included in the structure of the Company’s subsidiary is 34,000 subscribers, with absolute growth for 2009 total- business in 2009 totaled RUR 54.3 million, of which RUR Information on the Company’s participation in organizations ing around 4,600 subscribers. CJSC Novgorod Datacom is a 32.2 million came from the participation of CJSC P.T.T. In not providing telecommunications services progressive and stable provider of telecommunications ser- 2010 it is planned that RUR 27 million will be received as vices in the Regions. Revenue increased by 15% from RUR dividends from SDCs. 132,640 thousand in 2008 to RUR 153,168 thousand in 2009, with EBITDA and EBITDA margin amounting to RUR The financial results from the cessation of CJSC P.T.T. Company Type of activities Share of Volume of 56,872 thousand and 37.1% respectively. The 2009 net (positive margin between the price of received assets of the Norh-West investment of profit totaled RUR 42,484 thousand which exceeds the pre- liquidated organization and value of financial investment) Telecom in North-West totaled RUR 14 million. vious year’s level by 24%. the chapter Telecom in the capital, % chapter capital

CJSC Parma-Inform (share of participation in charter The dividends from the participation SDCs in capital – 100%) 2009 totaled RUR 54.3 million. Consolidated Supporting organizations indicators (EBITDA), including the core businesses, CJSC Parma-Inform is the operator of data transmission 1. LLC NWT-Finance Collateral activities during network and telematic services complex in the Komi Repub- increased to RUR 202 million. issue of securities of lic. Its main clients are households and SMEs (small and North-West Telecom 100 10 medium-sized enterprises). Since 2008 the Company has Consolidated indicators of North-West Telecom in 2009 2. CJSC Rostelegraph Intermediary services 11.76 48 constructed “home networks” in Syktyvkar (under the including the core subsidiaries in terms of revenues increased trademark SKS “Metro”). The client base for dedicated RUR 628 million, and in terms of EBITDA increased RUR 202 3. CJSC Svyazintek IT Internet access totaled 1.6 thousand subscribers, the abso- million. services 11 12,591 lute growth in 2009 totaled around 0.8 (thousand) sub- scribers. Non-core organizations

The 2009 revenue totaled RUR 63,191 thousand, with Supporting 4. CJSC RPK “Svyazist” Organization of EBITDA and EBITDA margin amounting to RUR 18,790 vacations for children thousand and 29.7% respectively. The 2009 net profit and Non-core Businesses and citizens 100 873,217 totaled RUR 13,288 thousand. 5. CJSC AMT Investment in securities 100 19,572 At the end of the reporting year North-West Telecom con- JSC Kolatelecom (share of participation in charter cap- tinues to participates in three supporting and three non-core 6. JSC AKB Svyaz-Bank Banking services 0.0124 2,303 ital – 50%) businesses:

ANNUAL REPORT 2009 CORPORATE GOVERNANCE 56 57 SECURITIES

The language of joy and Bright colors of tears requires communication no translation

ANNUAL REPORT 2009 SECURITIES

Bright colors of communication

ANNUAL REPORT 2009 General information about shares in JSC North-West Telecom (31.12.2009) Trading platforms on which to the Company’s shares are traded Share price, MICEX (closing price, USD)

Common shares Securities Common Privileged 1st level ADR issued RUR 21.18 shares shares on common shares USD 0.7 Privileged shares Stock Berlin and USA, RUR 16.00 exchange Frankfurt Over-the-counter (brief name) MICEX SE RTS USD 0.53 MICEX SE RTS stock exchanges market

Quotation Trading volume, MICEX (for the reporting year, million shares) list not included in Freiverkehr / – Common shares 224 Level А2 А2 А2 quotation lists Open Market Privileged shares 276 SPTL / SPTLP / SQ4.BE (Berlin) Ticker Market capitalization SPTL SPTLG SPTLP SPTLPG SQ4.F (Frankfurt) NWTEY RUR million 22,666 USD million 749 Weight of shares in indices, into calculation of which the shares are included MICEX-Telecom (%) Common shares 5.98 Composition of charter capital Privileged shares 2.60 of North-West Telecom (31.12.2009)* RTS-Telecom (RTStl) (%) Shareholder Common shares 5.50 Privileged shares 3.55 Structure

RTS Common shares (%) 0.10 RTS -2 (%) The Company’s largest shareholder is Telecommunica- 10.6% Common shares 0.82 tion Investment Open Joint Stock Company (JSC Svyazin- Privileged shares 0.53 vest). It holds the controlling stake in the Company’s voting 39.8% MSCI Russia Small Cap (%) shares, which is 50.76% of the total number of common shares. Common shares 0.05 Privileged shares 0.02 Significant shareholdings in JSC North-West Telecom common shares are held by the nominal holding of Non- 19.5% Shares outstanding commercial partnership NDC, CJSC UBS Nominees, CJSC DCC, and ING Bank (Eurasia) CJSC. The majority of the Common shares 881,045,433 Company’s common shares are in nominal holding. The fact Privileged shares 250,369,337 that the main nominal holders are Non-commercial partner- ship NDC and CJSC DCC, the clearing depositories of Rus- 5.1% Nominal value of common and privileged shares 1 ruble sian stock exchanges, shows that most shares of North-West Telecom are free-floated. The majority of shares held by ING 13.2% 11.8% Size of charter capital (RUR) 1,131,414,770 Bank (Eurasia) CJSC are shares deposited under ADR issue.

Number of shares declared Physical persons hold mainly privileged shares (31.8% of the total number of privileged shares). Common shares 6,098 Privileged shares 32,486 During 2009 the most significant changes in the struc- • JSC Svyazinvest ture of the charter capital of North-West Telecom happened • CJSC Deposity-Clearing Company Dividends per share (RUR) in the re-distribution of privileged shares from the largest nominal holders to Non-commercial partnership “National • CJSC UBS Nominees Common shares 0.591* Depository Center” (the holding share of the Partnership • CJSC ING Bank (Eurasia) Privileged shares 1.228* increased from 29.6% as at the end of 2008 to 35.1%). • CJSC NDC • Physical persons ADRs outstanding (thousand) 2,812

* Size recommended by the Company’s Board of Directors for approval at the Annual General Meeting of shareholders. * Data provided by JSC ORK.

ANNUAL REPORT 2009 SECURITIES 60 61 which arose in the autumn of 2008. However, a gradual During the reporting year, investor interest in North- recovery of the stock market was observed in the second half West Telecom shares grew steadily, which was reflected in Market Multipliers Company Position of February, which grew into a steady trend from March. an increase in trading volumes and the quantity of transac- During the year the MICEX index increased twofold. Against tions with common and privileged shares on the MICEX of JSC North-West Telecom the background of the overall recovery of the Russian stock stock exchange on which, in recent years, the Company’s on the Stock market the Company’s shares demonstrated significant securities have mostly been traded. Thus, in comparison growth that surpassed both stock market growth and indus- with 2008, the trading volume of common shares increased When analyzing main market multipliers of the Com- Market try index growth. by 65% and privileged shares 106%. The number of transac- pany formed as of the end of 2009, one can outline an tions in common shares increased by 14% with privileged apparent undervaluation of the Company’s shares in At the end of 2009 the Company’s common share price shares increasing by 45%. comparison with shares of Russian peer companies. Un- At the beginning of 2009 the Company’s shares increased 230% from USD 0.212 USD to USD 0.7, whereas dervaluation on yet a greater scale can be observed if in common with the entire Russian stock market were influ- the privileged shares price increased 192% from USD At the same time, trading volumes and the number of the shares of North-West Telecom are compared with the enced by the tough conditions on world financial markets 0.181 USD to USD 0.529. transactions with privileged shares exceeded similar indica- companies in developing and developed markets. Such tors for common shares for the first time. Increased investor undervaluation can be explained by investors’ preferences interest in the Company’s privileged shares was due to a to more diversified telecommunications companies than Dynamics of the Company’s capitalization large extent to the expectations of a high dividend yield on North-West Telecom (those operating in the mobile business). versus MICEX indices, 2009* shares of this type.

240%

200% Main market multipliers* of North-West Telecom and the industry average 160%

120% EV/EBITDA P/E 80%

40% 2009 2010 2009 2010

0% North-West Telecom 2.4 1.8 8.1 5.8 –40% December January February March April May June July August September October November December Industry indicator for Russia 3.0 2.4 7.5 5.4

North-West Telecom capitalization MICEX MICEX Telecommunications * In accordance with MICEX SE data. Premium (+) / Discount(-) to interregional telecommunication companies –20% –25% 8% 7% The Company’s capitalization increased threefold during the year from USD 232 mln to USD 749 mln Developing markets 4.6 4.5 11.8 11.3

Premium (+) / Discount(-) Trade volume at MICEX*, million shares Number of transactions ar MICEX SE*, thousand to developing markets –48% –60% –31% –49%

Developed markets 5.1 5.0 11.7 10.7 300 276 70 61 250 60 Premium (+) / Discount(-) 224 50 50 to developed markets –53% –64% –31% –46% 200 44 42 40 * According to the Company’s in-house data. 150 136 134 30 100 97 20 17 50 50 11 10 Depository Receipts (ADR) ber of ADRs issued on North-West Telecom shares had decreased by 0.95%. It is worth pointing out that the main 0 0 decrease fell during the summer. After August and until the 2007 2008 2009 2007 2008 2009 The Company launched the ADR 1st level program on com- end of the year the number of the Company’s ADRs Common shares * In accordance with MICEX SE data. Common shares * In accordance with MICEX SE data. mon shares, and, by the end of 2009, 2,812,420 ADRs on remained practically unchanged. Privileged shares Privileged shares 28,124,200 common shares were issued, which is 3.19% of the total number of the Company’s common shares outstanding. An analysis of the Company’s ADRs’ largest holders shows that the most interest toward the depository receipts During the last three years interest has grown significantly in the Company’s shares. Trading During 2009, foreign investors pulled funds out of Rus- of the Company was demonstrated by Artio Global Manage- volume has increased 3.5 times, while the number of transactions has increased 4 times sian assets. Because of this, at the end of the year the num- ment LLC company (1.55% of the total number of common

ANNUAL REPORT 2009 SECURITIES 62 63 shares in circulation) and Scandinavian institutional inves- of the demand on ADRs from investors preferring reporting period divided by the number of shares which tors, Carnegie funds in particular. growth strategy.14 At the end of 2009 the share of speculative Dividends compose 25% of the Company’s charter capital. The size of investors (investing in rapidly growing assets) totaled dividends on common shares is adopted by the General The structure of ADRs’ holders during the year practically 74% of the overall number of holders. The remaining Meeting of shareholders on the basis of recommendations did not change: the analysis of the ADRs’ holders structure 26% of the holders are investors prone to combine investment The North-West Telecom dividend policy is based upon of the Company’s Board of Directors. based on the type of investment strategy gives evidence strategy. strict observance of the balance of interests of the Company and its shareholders, and increasing market value and inves- Despite a complicated period, the Company provided its General information about the Company’s ADRs issued on common shares tor attractiveness of North-West Telecom. shareholders with relatively high dividend yield in 2008 and 2009, exceeding the yield of almost all interregional During accrual and payment of dividends, North-West telecommunications companies and the average dividend Date of registration of ADR 1st level program September 4th, 2001 Telecom is governed by the requirements of the Federal yield of the shares traded on the Russian stock market. For law “On joint-stock companies” and the provisions of the common shares it totaled 7.5% and for privileged shares Depository bank JPMorgan Chase Bank Charter. In accordance with the Charter of North-West 16.4% which is higher than the previous year’s level, when Telecom, the overall sum paid as the dividend for each the Company received an extraordinary net profit as a result Custody bank ING Bank (Eurasia) ZAO privileged share is set at 10% of the net profit for the of the disposal of JSC Telecominvest shares in 2007.

ADR coefficient 1 ADR = 10 common shares

Main sellers of the Company’s ADRs in 2009 Dividend yield of 16.4 % North-West Telecom shares 14.9 %

Assets under Country Number of ADR of Share of Common shares management, North-West Telecom the total Privileged shares USD million As of the As of the number of Company beginning end of the common of the period shares, % period

7.5 % Carnegie Asset 3,423 Denmark 550,000 450,000 6.1 % 5.9 % Management A/S 0.51 5.4 % Caisse de Depot et 69,180 33,020 18,375 Canada 0.04 * Yield indicated on the basis of Placement du Quebec 2.9 % 2.7 % the amount of dividends suggested 2.5 % 2.3 % 2.3 % for approval at the Annual Goldman Sachs Asset 469,190 1.1 % Management (US) 103,438 USA 0 0 General Meeting of shareholders 0.9 % 0.8 % by the Board of Directors of North-West Telecom. 2005 2006 2007 2008 2009* Interregional Russian telecom stock market Share of ownership of the largest holders from the companies (2009) (2009) total number of ADRs outstanding (31.12.2009)* During the reporting year the dividend yield of North-West Telecom shares reached a record level

48.71% 16.00%

Upon resolution of the AGM dated June 22nd, 2009 RUR • common shares – RUR 539,415,300.39; 4.36% 864 mln (24% of the net profit) was directed toward • privileged shares – RUR 303,123,483,67. • Artio Global Management LLC dividends for 2008, which is 63% higher than in 2006 and 1.78% 45% lower than in 2007. The decrease of dividends for 2008 The share of dividends paid relative to overall sum of di- • Carnegie Management Fondsmaglerselska b A/S 1.17% in comparison with 2007 is due to a sharp increase in the vidends subject to payment totaled: • Sydinvest Company’s net profit in 2007, including the financial results • Neptune Investment Management Limited of a one-off transaction upon the disposal of the Company’s • common shares – 99.23%; stake in JSC Telecominvest. • Caisse de Depot et Placement du Quebee • privileged shares – 94.51%. The payment of dividends • Other Payment of dividends for 2008 was conducted from 27.98% The payment of dividends was not made in a full volume 15.08.2009 to 15.12.2009. As of December 31st, 2010 the * According to ADR.com data. due to incomplete or incorrect requisites for the transferral volume of dividends paid totaled: of dividends indicated in the list of persons having the right to receive payments on the Company’s securities for 2008.

14 Growth strategy involves investing in shares with high growth rates. As a rule, such assets are high-risk. The profit is earned via sale of securities at a higher price.

ANNUAL REPORT 2009 SECURITIES 64 65 Net profit volume channeled Share of net profit directed at General information on North-West Telecom at dividends payment, RUR mln dividends payment, % bond issues outstanding

1,566 Number ISIN code Volume of issue Date of Redemtion* 900 864 100 828 of issue (RUR million) placement 800 90

700 80 +63% 1) 25.02.2010 – 30% 70 600 2) 26.08.2010 – 30% 529 60 500 3 RUОООAОDZQM6 3,000 03.03.2005 3) 24.02.2011 – 40% 50 397 400 40 1) 10.12.2009 – 25% 300 2) 09.12.2010 – 25% 30 24 24 22 22 4 RUОООAОJNZB3 2,000 14.12.2006 3) 08.12.2011 – 50% 200 20 +33% +196% –45% –4% 13 100 10 1) 22.05.2012 – 25% 0 0 2) 20.11.2012 – 25% 2005 2006 2007 2008 2009* 2005 2006 2007 2008 2009* 5 RUОООAОJPS91 3,000 27.05.2008 3) 21.05.2013 – 50%

* Indicated net profit volume based on the amount of dividends suggested for approval * Indicated percentage of net profit based on the amount of dividends suggested 1) 26.07.2017 – 30% on the Annual General Meeting of shareholders by the Board of Directors for approval on the Annual General Meeting of shareholders by the Board of Directors of North-West Telecom. of North-West Telecom. 2) 25.07.2018 – 30% 6 RUОООAОJQ8U1 3,000 05.08.2009 3) 24.07.2019 – 40% 3.997

Dividends per North-West Telecom * Redemption of the nominal value of bonds is performed partially. share, RUR

• 4th bond issue – four coupons were paid out totaling lume of the issue by nearly four times. As a result, the issue RUR 161.5 mln; was placed under a record interest rate for that period: Common shares • 5th bond issue – four coupons were paid out totaling 11.7% p.a. At the end of the reporting year the sixth bond 1.281 1.228 RUR 437.6 mln; issue of North-West Telecom had the longest duration among Privileged shares • 6th bond issue – one coupon was paid out at all bond issues of Russian fixed-line telecommunications RUR 87.5 mln. operators. Due to the funds attracted from the placement of 0.858 sixth issue the Company created a significant liquidity cu-

0.652 0.642 shion, which, if necessary, will resolve the task of servicing 0.617 0.591 In addition, in accordance with the resolutions on series 04 bond issue, the Company performed 25% partial 2010 debt obligations including the fulfillment of put-option 0.357 on the fifth issue in May-June 2010. * Indicated amount of dividends redemption of the nominal value of bonds (RUR 500 mln). suggested for approval on the Annual 0.265 General meeting of shareholders by the Board of Directors of North-West Despite complicated conditions in the global economy, Telecom. North-West Telecom did not abstain from opportunities to Solving the task of attracting borrowed funds, 2005 2006 2007 2008 2009* use public sources for debt financing in the future. On April including via placement of public instruments, 27th, 2009 the Company’s Board of Directors approved a North-West Telecom originates from the position Based on 2009 results, the Board of Directors of North-West Telecom recommended that the resolution to place four issues of exchange-traded bonds Annual General meeting of shareholders approve the following dividends: RUR 1.228 per one with the nominal value of RUR 1 bln each issue with dura- of cost minimizing and extending the duration privileged share and RUR 0.591 per one common share tion of up to three years and in May these securities were of borrowing admitted for trading on the MICEX SE.

One of the most important advantages of exchange- The Company puts maximum effort into sustaining a posi- into A1 quotation list of the stock exchange and are also traded bonds is the possibility of their operative placement depending on the Company’s current requirements and the tive public credit history, high financial and economic per- Bonds included in the Lombard list of securities by the Central formance, a stable position on the telecommunications ser- market conjuncture, which will allow North-West Telecom Bank of Russia i.e. the list of securities admitted as colla- vices market and transparency in the field of corporate go- to set comfortable maturity and redemption terms. teral for direct REPO transactions. vernance which bestows confidence in the Company’s reli- At the end of 2009, four bond issues of JSC North-West ability as a borrower to investors and allows funds to be Telecom with total nominal value of RUR 10.5 bln (exclu- Under conditions of world financial and economic crisis Additionally, against the background of an improvement in bond market conditions at the beginning of August in the attracted on favorable terms. ding partially redeemed nominal value of series 04 bonds the Company yet again proved its reliability by fully and reporting year, North-West Telecom conducted the success- for RUR 0.5 bln) were outstanding. promptly fulfilling servicing obligations on the bond issues. ful placement of a sixth bond issue with ten-years, duration Thus, in 2009: All JSC North-West Telecom bond issues are traded on registered in 2008 at RUR 3 bln, which was accompanied by excessive demand from investors. During the auction 169 the MICEX SE, and the bond issuers series 03, 04 and 05 • 3rd bond issue – four coupons were paid out totaling bids totaling RUR 13 bln were filed, which exceeded the vo- were admitted for trading on the MICEX SE with inclusion RUR 257.2 mln;

ANNUAL REPORT 2009 SECURITIES 66 67 RISKS

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ANNUAL REPORT 2009 RISKS

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ANNUAL REPORT 2009 The Company’s activity entails risks which under certain • Provision of on-network roaming at the price of local Implementation circumstances may significantly affect its operational and Industry Risks connections; financial performance. The Company estimates each • Provision of mobile Internet services; of Social Projects detected risk and determines the level of its impact on the • Activization of promotional activities for services for the achievement of its strategic goals within the period under “corporate client” segment (due to saturation in the review. Risks Associated with “population” segment of the market); Increases in the volume of projects of social importance • Grounding of mobile operators’ zonal traffic at lower and special projects fulfilled by North-West Telecom as part Changes in Industry costs through local networks and/or alternative opera- of federal and regional target programs (aimed at develop- tors’ networks. ing information and communications infrastructure, as well Sovereign and Legislation as broadening the range and quality of telecommunications The indicated factors create the risk of replacement by services) may lead to a shortage of financing for some pro- mobile telephony of fixed-line telephony and a slowing in fitable projects that form its investment program, lead to Regional Risks The main risk to which North-West Telecom is exposed the revenue growth rates of North-West Telecom. This lower returns from the Company’s investment programs and is constantly changing industry legislation and controver- sharpening of competition represents the most significant lower profits in the future. sial interpretations of the normative and legal acts (changes risk for the Company in the long-term. North-West Telecom operates in the Russian Federation and amendments) that set the methods and mechanisms Existing risks connected to increases in the cost of equip- and carries sovereign risks specific to the Russian Federa- of state regulation, including service tariffs provided by North-West Telecom, having won the tenders on the pro- ment, electricity and other services needed for the Company tion, the majority of which are political and economic. Eco- the Company to individuals and telecommunications vision of universal services in 2006-2007, is recognized as to operate may lead to a rise in the cost of North-West Tele- the universal telephony services operator (with the usage nomic reforms and the development of a legal, tax and providers. com’s services, and consequently a decrease in operational of payphones) in the North-West Federal Region. By provi- administrative infrastructure to meet the requirements of a performance. market economy continue in Russia. The stability of the Rus- According to the Federal law “On natural monopolies” ding universal services, the Company generates losses which are defined as the difference between North-West Telecom’s sian economy depends to a great extent on the implementa- No.147-FZ dated 17.08.1995, tariffs on the services of ope- Under possible unfavorable conditions in the market, the revenue and expenses from provision of such services car- tion of these reforms as well as on the effectiveness of deci- rators recognized as natural monopolies are subject to state Company plans to undertake the following actions; sions made by the Government in the fields of economic, regulation. ried by the operator during their provision. These losses are subject to compensation in the amount not exceeding the financial, monetary and credit policy. • Optimize production costs structure; The state regulation of the telecommunications industry amount of compensation stipulated by agreement on provi- sion of universal telecommunications services concluded • Reduce investment program; A downturn in the oil price and a liquidity crisis may con- contributes to the risks and uncertainty common for • Adapt marketing policy to concrete market conditions; tribute to disinvestment from Russia by non-resident inves- upon the tender results. all interregional telecommunications companies of • Change the structure of services provided to maximize tors, a decrease in the Russian balance of trade, and a the Svyazinvest Group, and is connected to tariff changes on profit. decrease in international reserves of the country and telecommunications services for consumers and prices for North-West Telecom is exposed to the risk of the denial to ruble devaluation. traffic connection and transmission services for operators. of compensation for losses arising from the provision of uni- versal telecommunications services (with the usage of pay- A worsening of the economic situation in the North-West Changes in regulated tariffs for operator services/natu- phones), or incomplete compensation from the Universal Federal Region of Russia may lead to a decrease in produc- ral monopolies are made in accordance with forecasts Services Fund, due to: Financial Risks tion and agricultural business in the region, an increase in for the social and economic development of Russia adopted • Breach of terms of agreements on universal telecommu- unemployment and a decrease in the purchasing power of by the Government of Russia and require approval nications services – the untimely commissioning of pay- Negative trends in the monetary and credit policies of the population. from Russian state organs, and therefore may fall be- phones due to a long term of license receipt on the radio the state, currency exchange rates and an increase in inter- hind changes in the real economy and cost changes by the frequencies usage; est rates on borrowed funds attracted by North-West Tele- The appearance of negative trends in the Russian eco- operator. • Non-fulfillment of normative acts for the organization of com, as well as significant increases in the rate of inflation, nomy may lead to a slowdown in the Company’s investment the accounting of profit and losses generated by univer- lead to an increase in expenses incurred by the Company program, a curtailment in the volume growth of telecom- Thus the risk of untimely tariff changes is important sal telecommunications services; and, consequently, negatively affect the financial perfor- munications services provided by the Company in the for North-West Telecom. These may decrease the Company’s • Incomplete calculation of losses from the provision of mance of the Company. Additionally, it is impossible to fully Region and a slow down in revenue base growth. competitiveness and negatively influence its profitability universal telecommunications services; eliminate the possibility of changes in the composition and as well as opportunities for it to fulfill its obligations • Low quality of accounting procedures; professional level of the Company’s managers which may The probability of war, the introduction of a state of on securities. • Legal limitations on referral of losses (non-conformity of negatively affect the effectiveness of adopted managerial emergency and the appearance of industrial action in the amortization with agreements validity terms). decisions including those connected with hedging to country, and in the regions where the Company operates, is decrease the negative consequences of the aforementioned too insignificant to assess insofar as such risks could signifi- With the aim of decreasing the risk of denail of/incom- risks. cantly affect the Company’s activities. Increase in Industry plete compensation of losses associated with provision of universal telecommunications services, the Company Risks connected with the geographical peculiarities of Competition makes all possible efforts to avoid situations which may the region including the increased probability of natural lead to such risks. Currency Risks hazards, and a probable discontinuation of transport due to remoteness and inaccessibility, are evaluated as minimal. The Russian telecommunications services market is cha- racterized by growing competition both from alternative A decrease in world commodities prices, including oil fixed-line telecommunications operators and cellular Licensing prices, may cause a decrease in the ruble exchange rate rela- (mobile phone) operators. tive to the dollar-euro basket (the benchmark for the exchange rate policy of the Central Bank of Russia). A sig- Increased competition is due to: Change in the licensing conditions for separate telecom- nificant increase in currency rates may lead to a growth in munications services may lead to the need to redistribute North-West Telecom’s expenses, which may lead to a • Decrease in prices on internal long-distance connection resources and North-West Telecom plans amendments on decrease in reserves and/or fewer opportunities to service by mobile operators; provision of such services. the Company’s debts.

ANNUAL REPORT 2009 RISKS 70 71 North-West Telecom uses, and plans to use, various The management of liquidity risk is undertaken by North- make a claim upon the transactions and methods of instruments to decrease risks on foreign currency payments Interest Rates Risks West Telecom through cash flow planning, and analysis of accounting on which they did not make claims earlier. As a for the period up to 2012 based on the market price of cur- planned and actual cash flows for the Company as a whole result, additional significant penalties, fines and fees may rency risks hedging and taking into account the Company’s and for its branches. be accrued . Tax verifications may cover three calendar plans to reach free cash flow. Changes in the country’s monetary and credit policy may years of the Company’s activity directly preceding the year speed up inflation, interest rates on borrowed funds used by With the aim of decreasing liquidity risks, North-West Tele- of verification. The Government and the Central Bank of Russia will be North-West Telecom, and cause a significant growth in com maintains the volume of free bank credit limits at a level able to sustain the ruble exchange rate according to a num- costs. of not less than RUR 2.0 bln, and forms a credit portfolio with The tax obligations of North-West Telecom for the ber of economic factors, including: an average duration exceeding two years and a flat repayment reporting and previous tax periods were accrued in a Depending on the character of interest rate changes, the schedule. proper way and are fully reflected in the Company’s • commodities and capital markets; following subtypes of credit risks can be identified: accounting statements. • the rate of inflation; • sustaining currency reserves at a sufficient level. • risks of overall change in interest rates – risk of Some equipment bought by North-West Telecom for the increases/falls in interest rates on all investments in one Inflation Risks provision of telecommunications services is produced from

Under the conditions of a sharp change in the currency or several currencies, regardless of their term structure parts made abroad, thus possible changes in customs con- rates with the aim of minimizing adverse impacts on finan- and credit rating level; trol rules and custom tariffs may affect the Company’s • risk of changes in the interest rate curve – risk of change In accordance with data provided by the Federal Service cial and operational activities, the Company has the oppor- of State Statistics (Rosstat), inflation in Russia totaled 8.8% risks associated with price increases in acquired fixed tunity to lower the share of foreign currency liabilities, and in interest rates on shorter investments in comparison assets. with longer ones (or vice versa), possibly unconnected in 2009. In 2010, according to a forecast made by the Cen- orient itself toward suppliers whose settlements are made tral Bank of Russia, the inflation rate will remain at 2009 in rubles. with changes in the overall level of interest rates; • risk of changes in credit spreads – risk of change in inte- levels. rest rates on investments with particular credit ratings in Significant ruble devaluation may adversely affect the The level of inflation that would mean that North-West profitability of North-West Telecom because tariff increases comparison with interest rates on investments with other Risk Management ratings levels, possibly unconnected with changes in the Telecom would begin to encounter difficulties in terms of may not compensate for a fall in the volume of services in fulfilling its obligations on securities lies significantly higher natural terms. overall level of interest rates. than the rate of inflation forecast for 2010 and totals In 2008, North-West Telecom implemented a Risk ma- 30-40% p.a., which is higher than the level of inflation fore- nagement system (RMS) aimed at increasing the effective- In the case of significant ruble devaluation and inflation North-West Telecom uses both floating and fixed interest cast for the years immediately ahead. ness of managing opportunities and threats as well as the risks, North-West Telecom may undertake the following rate instruments which increases durations and broadens Company’s capitalization growth. The Program of risk man- measures; the potential investor base. However, in conditions of high volatility of interest rates on the Russian and international An increase in prices may lead to a fall in consumption of agement in North-West Telecom (later referred to as the telecommunications services by subscribers as well as to Program) was developed by the RMS executive organs • optimize (cut) costs; financial markets, the Company is subject to risk of possible losses during the cost increase of financial obligations ser- cost increases for North-West Telecom (for instance, through (Commission and Working group on risk management). • revise capital investment program; increases in the price of energy), increases in cost of bor- • undertake measures to increase receivables turnover. vicing in case of usage of floating interest rate borrowings. As a possible instrument for hedging interest rate risks, the rowed funds and therefore become a reason for a drop in The Program’s main goal is to increase the effectiveness Company can use interest swap agreements (exchange of profitability. In this case, an increase in ruble tariffs may be of managing opportunities and threats which must contri- interest rate payments on the definite conditional sum at a insufficient to compensate for the fall in the volume of ser- bute to the process of North-West Telecom’s capitalization Market Risks specified date agreed earlier). vices in natural terms. growth. The Program is a document setting key principles and approaches to the Company’s risk identification, deter- To decrease interest rate risks under unfavorable condi- mines the methods of risk management within North-West In unfavorable financial and economic conditions, the tions, North-West Telecom will attract new debts, mainly at Telecom’s current activity, and distributes and assigns possibility exists of a slow down in consumers’ business acti- fixed interest rates. Lеgal Risks responsibilities to concrete managers and managerial organs vity and, correspondingly, their demand for telecommunica- in the Company’s risk management system. tions services. In addition, consumers may become partly If there is a negative impact due to a change in interest or fully unable to pay for the Company’s services. Under such rates on the activities North-West Telecom, the Company North-West Telecom is subject to legal risk to the same The adopted Program of risk management is aimed at conditions, non-monetary funds (counter deliveries, promis- can undertake the following measures: extent as other Russian companies. The Company performs managing the following types of risks: sory notes etc.) may be used as payment which may also its activities as a telecommunications operator and does negatively affect the Company’s financial performance and • usage of hedging instruments (interest rate swap); not export goods, labor or services, therefore legal risks • Strategic risks – threats and opportunities arising at the liquidity. • limitation of the share of liabilities with floating connected with the Company’s activities are described only level of adopting strategic decisions by the management; interest rate; for the national market. • Operational risks – opportunities and threats arising Besides, there is the possibility to “mortify” the Company’s • investment program revision. from the fulfillment of daily/regular operational activi- cash in the bank were there a crisis in the whole banking sys- Currency regulation risks are currently considered as ties targeted at the implementation of the Company’s tem of Russia and/or separate banks. minimal due to the Government policy of currency regula- strategy. tion/liberalization. With the aim of decreasing possible losses if there were to Liquidity Risks Key procedures of the risk management process include be a banking system crisis in Russia, North-West Telecom Risks connected to the possibility of changes in tax le- identification, classification and assessment of risks. The intends to sustain a high level of current liquidity, form free gislation are currently considered as standard for the com- risks may be identified within: credit li-mits in commercial banks, and form a portfolio of lia- The risks indicated above form liquidity risk, i.e. the possi- mon operational activity of North-West Telecom. However, bilities with a long average duration and equitable debt servi- bility of making losses due to lack of monetary funds Russian tax legislation in a number of cases allows for dif- • original identification – initial composition of the Com- cing schedule. The Company uses tools oriented toward Rus- within required terms, and, consequently, the inability of ferent interpretations of its norms and is subject to fre- pany’s Risks Registry within the RMS ; sian and Western financial market participants (syndicated North-West Telecom to fulfill its obligations. The occurrence quent amendments. Due to this, tax authorities may take a • regular revision of the Company’s Risks Registry con- cre-dits). At the same time, monetary funds are deposited in of such risks may lead to penalties, fines, damage to business strict stance during interpretation of tax legislation and ducted annually and providing for the regular revalua- highly reliable banks. reputation etc. tax settlements. As a consequence, tax authorities may tion of the earlier identified risks;

ANNUAL REPORT 2009 RISKS 72 73 • identification of potential risk – detection of potential • plans of consequent action against the risk event (action grated Risk Management System Concept developed by within management's accounting for risk management risk during current activities. against the consequences of risk). JSC Svyazinvest in 2009 were taken into account during for each risk included in the consolidated Company’s the elaboration of the Program of risk management in Risks Registry, information on the funds needed for As a result of evaluation, the risks are ranked by their sig- Risk management plans of action are prepared for less North-West Telecom for 2010. In accordance with the effective risk management was systemized; nificance and are distributed by the respective managerial than once a year and are reconsidered as necessary (but no requirements the following amendments were introduced • notions of “residual factual risk” and “residual planned levels. The responsibility for risk management is distributed less than quarterly). Control over the implementation of the into the Program of risk management of North-West Tele- risk” were introduced; by managerial levels depending on the level of significance. plans of action is performed through provision of risk ma- com were introduced: • quarterly reporting on managing essential risks to the Adoption of resolutions upon the essential risks falls within nagement regular reports by the risk owners. The owners of Company’s Board of Directors was introduced; the competence of the Company’s Board of Directors. the measures – RMS participants who are responsible for • a new participant was included to control risk manage- • conditions of amendments introduced during the year to fulfillment of separate measures – report quarterly to the ment processes and perform methodological support in the approved Program of risk management and the Com- During the risk classification process, some of the earlier risk owners on the fulfillment of risk management measures the RMS organizational system – the division of metho- pany’s Risks Registry were clarified and described; identified risks may be recognized as irrelevant and existing within the approved risk management plan. dology and risk control; • a motivation system for employees involved in the risk risks may be redistributed by the level of significance inside • as part of the solution of the task of expenses allocation management process was begun. the Company’s Risks Registry. Detailed consideration of the status of risk management actions is conducted at the meetings of the Risk Manage- A reporting system on the status and results of imple- ment Commission and, if necessary, by the division of mentation was introduced in accordance with the Program methodology and risk control, the Management Board, the the. Plans of actions, including one or both of the types Board of Directors or the Audit Committee of the Board of stated below, were developed to manage risks : Directors.

• plans of preventative action against risk (actions against The Company’s RMS is constantly developed and the cause of risk or risk-forming factors); improved. The requirements of the new version of Inte-

Process of North-West Telecom’s RMS function

2 Goal setting

3 Risk identification

6 Control RMS Information over risk 4 Risk assessment database management RMS monitoring 7

5 Risk management

Continuous process of risk management

1 Internal environment

ANNUAL REPORT 2009 RISKS 74 75 SOCIAL RESPONSIBILITY

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ANNUAL REPORT 2009 SOCIAL RESPONSIBILITY

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ANNUAL REPORT 2009 cipated in events developed to help them adapt comfortably Qualitative staff composition • 1st level – reserve for “top” positions in Human to corporate life. of North-West Telecom North-West Telecom (“Corporate leader” project); • 2nd level – reserve for positions of regional branch managers (“Prospective” project). Resources Policy 9,000 Personnel Training 8,000 In the process of implementation of these projects, the 7,634 7,939 7,000 following tasks are conducted: The human resources policy (HR policy) of North- During the reporting year, North-West Telecom paid par- 6,216 West Telecom is based on the principle of a rational combi- 6,000 5,768 ticular attention to personnel training and qualitative staff • evaluation of employees, potential – assessment of nation of renewal processes and sustaining the optimal 5,000 knowledge, abilities, skills, experience, personal qualities improvement. In each quarter the Company undertook mea- 4,563 quantitative and qualitative workforce capable of achieving 4,179 and capabilities; sures to qualitively and quantitively analyse the composition 4,000 the Company’s tasks on a highly professional level. of the staff, the results of which show evidence of an • determination of the managerial readiness of 3,000 increase in employees with special education: employees, evaluation of competence resources, The Company’s main efforts in the area of HR policy in 2,000 determination of gaps in managerial skills. 2009 were aimed at carrying out the following tasks: • 35.9% employees have higher professional education; 1,000 • 26.1% employees have secondary vocational education; 0 • maintaining human resources potential; • 18.9% employees have basic vocational education. In 2009, 204 managers and specialists in the • increasing loyalty; 2008 2009 • ensuring the “succession” of management and Company took part in HR projects, with 40 of social stability; Higher education them selected for participation in subsequent • increasing the educational level and improving As a result of the implementation of in-house training Secondary vocational education actions, including “Corporate leader” project the qualifications of personnel; programs in 2009, 2,873 employees increased • engaging young specialists. their professional level. Over 100 employees of Basic vocational education various types took part in 28 events (seminars, These tasks were undertaken by improving the system conferences, round-tables) organized upon the Organizational of training and development for personnel, undertaking initiative of JSC Svyazinvest and the Ministry of measures aimed at the development of the non-mate- The number of employees with higher Development rial motivation system, promoting the corporate brand Telecommunication and Mass Communication education increased by 305 persons in 2009 of North-West Telecom, forming a human resources reserve of Russia while the number of employees with secondary and basic vocational education decreased of young specialists in universities and specialized seconda- In 2009, North-West Telecom concluded working out the 7% and 8% respectively ry education establishments, and ensuring the timely functionality of the structural divisions of the Company’s payment of wages and provision of social benefits and branches, which had begun in 2008, and responsibility As of the end of the year a decrease in the number of matrixes to determine the power boundaries and responsi- guarantees. sonal development opportunities. For this purposes, on employees with general secondary education was observed. bility of divisions, optimize business processes, and re-con- the internal corporate Internet portal of North-West Tele- sider and re-distribute available resources were developed. com, a “Library of learning programs” representing a broad Job cuts conducted in 2009 helped to boost the qualita- The result of this work was the adoption of standards of collection of books, articles, presentations and video courses tive level of personnel because the number of personnel detailed functionality of the Company’s branch structural Engagement of Staff was created. The average number of visits to the Library with the lowest qualifications and education level was divisions. by the Company’s employees varies from 800 to 1,000 reduced. per month. During the reporting year, the basis for the Company’s The main changes in the Company’s internal structure HR management activity was to take a complex approach to Wishing to increase the educational and professional were aimed at: It is planned that the practice of internal training will ensuring the high quality provision of telecommunications level of its employees, the Company actively applies a broad continue in 2010. With the aim of increasing the quality of services to the population by the Company’s employees range of training methods, including organizing corporate • increasing the effectiveness of the Client Service Centers through precise personnel selection for vacant positions, seminars with specially developed programs. During 2009, this type of training and the subsequent scaling of internal (CSCs); accelerated adaptation, the conduct of personnel evaluation North-West Telecom undertook measures aimed at training, training programs in North-West Telecom, the development • eliminating duplication of functions in the divisions; and development of corporate culture. improving qualifications and the development of personnel of a complex program of training for internal coaches is • centralizating the function of telecommunications in such priority areas as the study of new equipment and planned. operators’ relations; technologies, new methods of sales and servicing, increa- • optimizating business processes in the area Significant activity on the labor market of the sing qualifications of the personnel, and conductiing cross- of providing long-distance and international telephony. North-West Federal Region, due to the economic functional training. crisis, broadened the opportunities for professional Personnel Reserve The transition of North-West Telecom’s branches to a staff selection by North-West Telecom Due to the optimization of personnel training costs in standard unified internal structure has allowed for the 2009, North-West Telecom shifted from programs by exte- One of the most important areas of HR policy at North- implemention of a single approach toward usage of telecom- rior counteragents to conducting in-house corporate train- West Telecom is personnel reserve forming. During appoint- munications facilities and optimized the quantity of struc- ing. This was possible due to the development and adoption ment to management positions, the Company is primarily tural divisions. of the unified Provision on internal training of employees of aimed at realizing the internal potential of its own employ- In 2009, North-West Telecom hired 1,837 new employ- North-West Telecom that regulates the main principles for ees through selection of the most talented and profession- ees. All candidates for vacant positions underwent a strict the implementation of centralized training programs. ally competent employees to these positions. As a result of measures to improve the internal evaluation procedure including psychological testing and a organizational structure of the Company, the mini-assessment to determine the level of conformity to cor- Contributing to the increase in the professional level Forming and development of the personnel reserve in number of structural divisions of North-West porate competences. In addition, all the newly hired employ- of employees and their aspirations toward self-improve- North-West Telecom is conducted in accordance to a two- Telecom decreased by 206 units (17%) in 2009 ees underwent a two-stage evaluation procedure and parti- ment, the Company provides employees with broad per- level system:

ANNUAL REPORT 2009 SOCIAL RESPONSIBLITY 78 79 Taking into account the completion of the development Dynamics of the average headcount Headcount breakdown by of the detailed functionality of the structural divisions, its and average wages of the employees personnel categories, % unification and implementation in the branches in 2010, the of North-West Telecom Company intends to start the next level of optimization which will be conducted on the basis of a comparative ana- lysis of the headcount of identical structural divisions in the 5.7% 5.9% branches and the volume of tasks fulfilled (benchmarking). persons RUR 27,000 27,000

24,021 24,357 Labor Renumeration and 24,000 24,000 25,238 43.2% 40.25% Headcount 21,000 21,000 22,784 22,106 17,174 50.8% 18,000 18,000 The terms of labor renumeration for North-West Telecom 53.6% employees are regulated by Collective agreement for 15,000 15,000 2009-2011, the Provision on labor renumeration, and the Provision on corporate social programs. 2007 2008 2009

0.25% 0.3% Unlike many Russian companies North-West Telecom did not conduct massive job and wage Average headcount, persons cuts in 2009, thus it strengthened the trust of as 31.12.2008 Managers Clerks as 31.12.2009 Average wages, RUR employees toward the Company as a reliable Specialists Workers employer

In comparison with 2008, the share of workers and clerks in the Company’s headcount decreased Due to the economic crisis, North-West Telecom took the The average wage of the employees of by 3% North-West Telecom increased by 1.4% decision not to conduct a centralized pay rise for the Com- and totaled RUR 24,357 in comparison pany’s employees and not to increase the salary fund. The with 2008 Company only made selective rises in wages following increases in the employees’ functional loading, and which were individual in character. This was performed without North-West Telecom follows a policy of non-discrimina- Age headcount composition of increasing the salary fund through the release of funds due tion toward workers by age and tends to maintain the opti- North-West Telecom, % to job cuts and business process improvements. mal balance in the employee base from various age groups depending on the current need of the Company for particu- Despite the economic crisis in 2009, the Company fully lar specialists. and promptly fulfilled its obligations toward employees: 10.6% 7.0% wages were paid on time and in full, employees were pro- At the end of 2009 there were 750 employees of pension vided with full-time work, and all norms of labor legislation age in North-West Telecom, which totals 3.4% of the overall and social guarantees were provided. number of personnel. An insignificant increase in the share of employees of pension age in comparison with 2008 was 20.7% The unification and optimization of business processes, due to the inexpediency of hiring new personnel for the the centralization of functionality and the liquidation of period of transition and replacement of outdated equipment separate duplicate functions allowed the Company during of the automatic telephone stations with digital ones. Employees under 25 the reporting year to conduct headcount reduction in accor- Employees aged 25-35 dance with the 2009 budget parameters. Employees aged 35-55 Non-financial Recognition Employees aged 55 and older

61.7% By the end of 2009 the Company’s headcount One of the most important elements of employee motiva- had decreased by 1,137 persons (-4.9%) tion to which North-West Telecom pays close attention is the recommendation of the best employees for state and industry/corporate awards.

As of 31.12.2009 the Company’s headcount totaled The title “Honorable Telecommunications Operator” was The age composition of the Company’s headcount is sufficiently stable. Around one third of 22,099 persons including: 10,706 (48.4%); women, and given to 11 employees in 2009 for active participation in the employees are under 35 years old 11,393 (51.6%); men. activity and development of radio and television, for

ANNUAL REPORT 2009 SOCIAL RESPONSIBLITY 80 81 achievements in the fields of science, equipment, produc- level of its employees and their families, and the material of grounds for appointment of non-governmental pension • material help to retired employees on the Radio tion, exploitation, organization of tele- and radio- broad- support of veterans and pensioners of the Company, North- (minimal work experience etc.); Day Holiday for employees of all telecommunications casting and longstanding conscientious labor. During the West Telecom implements a number of large scale social and • by means of monthly personal contributions of the branches (May 7th); the Day for the Elderly on October, reporting year, the highest industry award – “Master of Tele- charitable projects. employee determined in the Individual pension 1st; as well as to participants of the Great Patriotic War communications” – was given to 68 employees of North- agreement concluded by the employee with the non- (1941–1945) on May 9th; West Telecom for personal development and improvement governmental pension fund “Telecom-Soyuz”; • one-off renumeration on birthdays depending on of telecommunications and quality of telecommunications • due to fixed monthly contributions of North-West work experience; services, as well as for longstanding and conscientious Voluntary Medical Telecom (solidary payments). • one-off renumeration for work experience; labor. • one-off renumeration connected to the receipt of Insurance At the end of 2009, 13,523 employees participated in the ranks and awards; corporate NPP program. This is 61.2% of the Company’s • one-off renumeration of employees for the holidays of Radio Day; on the anniversary of North-West Telecom on In 2009, 242 employees of the Company were The creation of favorable labor conditions, the protection headcount. distinguished by receiving various awards of health and ensuring a high level of social protection for November 1st; and at New Year. its employees is one of the main goals of the Company’s social policy. One of the most important aspects in the rea- The overall amount of NPP contributions paid Twenty-six employees of the Company were given Hono- lization of this task is the provision of high quality medical by the Company in 2009 totaled RUR 230.2 Development rary certificates of the open joint-stock company Investment services for employees. million company of telecommunications awards for success in deve- of Internal Corporate lopment and improvement of telecommunications, and for All Company employees with a record of work exceeding longstanding and conscientious labor. For making a signifi- one year are provided with voluntary medical insurance Relations During 2009, the non-governmental pension was granted cant contribution to establishing and developing the Com- policies by North-West Telecom and in special cases when pany and the telecommunications industry as a whole the work is connected with the risk of a loss in life with volun- to 726 former employees and, thus, as of 31.12.2009 the highest award of North-West Telecom – Honorary Award Pin tary insurance policies against accidents. In 2009, within number of former employees of North-West Telecom recei- North-West Telecom realizes that the Company’s success – was given to five employees of the Company in 2009. For the unified agreements on medical insurance, 22,214 ving the non-governmental pension totaled 8,656 persons. is the result of the joint work of all employees which personal contribution to the development and improvement employees having a record of work in the Company of not depends among other things from the motivation of team of telecommunications, merit in the modernization and devel- less than a year were covered, and 7,547 employees were members toward the achievement of results and their readi- opment of the telecommunications complex, the Honorary insured against accidents. Material Encouragement of ness to achieve them, their opportunities to demonstrate diploma of North-West Telecom was awarded to 101 employ- and develop potential and, what is more important, from ees, while 31 employees of the Company were given the offi- Personnel whether they recognize themselves as team members. cial Gratitude of the General Director of North-West Telecom. In 2009, North-West Telecom directed RUR 82.6 million toward the insurance of its employees Traditionally the employees of North-West Telecom partici- Within the tariff system of North-West Telecom are set The creation of conditions under which the Company pate in the All-Russian contest “Engineer of the year”, con- two main principles of renumeration of labor: forms a team of like-minded persons oriented ducted by the Russian union of scientific and engineering at the achievement of results is the main goal of non-governmental organizations together with the Interna- Within voluntary medical insurance programs, the • renumeration in accordance with time expenses – time- insured employees received complex polyclinic outpatient the field of corporate communications and the tional union of scientific and engineering non-governmental based payment; treatment and dental treatment and, in the cases of threat development of corporate culture unions and the Interregional non-governmental foundation • renumeration in accordance with labor expenses – to life and health, planned and emergency hospital treat- for the contribution to scientific and technical progress. piece work payment (in separate cases). Eleven employees of North-West Telecom took part in the ment with provision of emergency and acute assistance. contest “Engineer of the year – 2009” in categories for The labor renumeration of the Company’s employees In the field of improving internal corporate relations, the “Radiotechnics, electric engineering, telecommunications” consists of the following parts: following work was continued in 2009: and “Informatics, information networks and computing tech- Non-governmental Pension niques” , nine of whom won in the first round and two of • basic wages – official salary and payments of a • increase of the level of corporate culture; whom were recognized as laureates of this prestigious annual Provision compensating and stimulating character; • the personification of communications and the contest. • bonus payments upon the results of operational activity; creation of conditions for the realization of the personal • payments within voluntary social obligations of the potential of employees; By providing a high level of social protection to its employer in favor of employees and former employees. • forming a sustainable Company business vision employees, the Company cares about them not only in the among employees; Social Policy period of fulfillment of professional duties, but also after In addition to programs of voluntary insurance and non- • popularization of the most important and retirement. North-West Telecom manages a Program of non- government pension provision, North-West Telecom, being relevant professions among the Company’s employees; governmental pension provision (NPP) within the frame- a socially responsible company, provides employees with an • establishing new levels of employee loyalty and Charity work of which retired employees are provided with addi- additional social package, including: (North-West Telecom’s interest = my interests). tional non-governmental pensions. North-West Telecom adheres to a policy of high social • expenses for cultural and sports work; Following the traditions of recent years, North-West Tele- com selected a “concept of the year” and announced that responsibility relative to its employees, their family mem- The existing NPP program represents aggregated pay- • provision of vouchers for health resort treatment 2009 was the Year of the Businessman (following the Year bers, the population of the regions in which it operates and ments: and recreation of employees and members of their to society as a whole. families; of the Employee of the Technical Division in 2008). The con- ceptual approach toward the organization of corporate • by means of “basic” contributions by North-West Telecom • material help for vacations; events (both internal and external) means that attention In order to realize its goals – ensuring favorable work which are paid to the employee at the moment of his • material help connected with birth of a child, death can be paid to particular groups among the Company’s conditions, increasing the living standards and educational dismissal under conditions of observance a combination of close relatives and other special cases;

ANNUAL REPORT 2009 SOCIAL RESPONSIBLITY 82 83 employees with the aim of developing their creative and prestige of working professions and increasing employee To ensure qualitative work in this area, the Company professional potential and increasing the social prestige of motivation. These included: Social Projects for the adopted a unique payphone management system including their professions. Population of the North- nine regional centers and a central interregional control • contest for the title “Best Call Processing Center center. The main internal corporate events conducted at North- Employee 2009”; West Federal Region Within the framework of providing broadband Internet West Telecom during the Year of the Businessman (and also • contest for the title “Best Cableman-Joiner 2009”; access on the territory of most branches of North-West Tele- during the Year of Youth as decreed by the President of Rus- • contest for the title “Best Driver 2009”; com, the Company, together with the Intel Corporation, sia) were: • contest for the title “Best Line Facilities, Telephony North-West Telecom carries out social obligations not implemented the “Computer for a Teacher” program in and Radio-fixing Wireman 2009”. only toward its employees but toward society as a whole and 2009. The program, part of national education policy, • “Formula of the Firsts”, an interregional contest between the population of the North-West Federal Region. With the ensures access to modern educational resources for school- aim of increasing the level of provision of telecommunica- the employees of North-West Telecom’s commercial Each year several thousand new employees join the Com- children and teachers. tions services for the population of the North-West Federal division, the main aims of which were: the identification pany. In 2009 the foundation of a new tradition was laid: a Region and forming a unified information and communica- and public recognition of active employees, stimulating The realization of an active social policy by North-West Tele- ceremony to celebrate the “Initiation among Telecommuni- tion space, the Company participates in socially important com in the regions is contributed to by Agreements concluded initiatives, and creating conditions for the self-realiza- cations Employees”: over 500 employees who joined North- regional and federal programs. with the administrations and governments of the North-West tion of employees not only due to their position in the West Telecom and successfully underwent the probation Federal Region, providing for the coordination of efforts by the Company, but also due to the recognition of their period were invited to this event. One of such priority project for North-West Telecom is parties for the development of the telecommunications infra- personal qualities; the realization of the program for the introduction and pro- structure of the North-West, and contributing to the origina- • “Ideas to Take Flight”, a festival of advertising, the aim To effectively inform employees about all events happen- vision of universal telephony services with the use of pay- tion of new possibilities for the creation and subsequent deve- of which was the identification and public recognition of ing within the Company, North-West Telecom has developed phones in nine regions of the North-West Federal Region. lopment of modern telecommunications and the realization of unique and large scale projects, including social ones. the Company’s active employees, an increase an intra-corporate web site, “Relevant Topics.” On average, in the level of awareness by employees about the services more than 1,500 employees use the site every day. Agreements on mutual cooperation with the administra- of North-West Telecom and the formation of a database During 2009, the Company conducted scrupulous tions of the Arkhangelsk Region, Nenetsk Autonomous Region, of creative, image and advertising ideas; For a long time, the Company has had a rich tradition of work to service and maintain the operating Pskov Region, and the Komi Republic were concluded in 2009. • “HR-Brand North-West Telecom”, a contest among HR group sports, and has actively worked each year to develop conditions of the network of 25,824 payphones divisions of North-West Telecom branches. The main aim this program. In 2009: in the distant communities of the North-West North-West Telecom considers the full and timely payment of the contest was to determine the best HR-practices for Federal Region of taxes as one of the main conditions of the social responsibi- realization as an HR management concept; • Within the limits of an “Olympics” sports event lity of business. • “Best Seller”, a contest in which specialists from the organised by all branches of North West Telecom, 4,520 divisions of sales and corporate client servicing from all persons took part in various competitions (from eight to branches of North-West Telecom took part. The aim of 17 different events); Accrued tax payments of Sponsorship and Charity the contest was an increase in the volume of sales of • Two-hundred employees of the Company participated in North-West Telecom, RUR bln telecommunications services and an increase in the competitions for the General Director’s VI Cup, which is Since the moment of its founding North-West Telecom effectiveness of the activity of the commercial unit comprised of four sports (three of which are annual 0.726 has conducted active charitable activity and provided sup- specialists. The winners were determined in two autumn events – track and field, sprint and swim relay, port to the representatives of the most unprotected groups categories: those among specialists in the field of active billiards – with the fourth event changing annually – in of the population: orphaned children and the disabled, as sales and those among specialists in the field of client 2009, this event was female volleyball); well as veterans of wars. In addition, the Company partici- servicing; • In countrywide competitions, North West Telecom pates in programs connected with development of the scien- • other specialized contests for professional skills: “Best teams took second place in the All-Russian competition tific and technical potential of the telecommunications Employee of the Sales and Servicing Division 2009”; for cross-country skiing among telecommunications industry. a contest for telecommunications operators(“Best workers in Ufa and in the All-Russian competition for 3.32 Installer”), “The Hot Ten” and many others. table tennis among Sochi telecommunications workers; There are 30 institutions, mainly children’s • In international FIS competitions for veteran track and 1.97 The development of the corporate identification system field athletes, employees of the Company won the 400 m medical and educational institutions, under the was also continued in 2009. In particular, the Honorary relay race; patronage of North-West Telecom Award Pin of North-West Telecom was instituted, and in its • In regional city competitions for team and individual ath- Provisions were stipulated the traditions of honoring North- letes, North West Telecom participated in 15 sports; West Telecom employees who have dedicated more than 10 • 2,067 employees took part in fitness and health recre- Due to an intensive flow of requests (most of which are years of work to the Company and a ceremony of initiation ational events ( meetings and “Days of Health” in requests for help for children, disabled children, orphans, for telecommunications employees. branches, paintballing and rafting competitions, health- Federal budget the disabled and the sick) that require a qualified and improvement activities, including: swimming, yoga and Budget of subjects of Russian Federation methodical approach toward the targeting of funds, the Contests of professional skill among mass workers, con- calisthenics and various sports sections for 10 sports). Non-budgetary funds Company decided to choose organizations under patronage in each region where the Company operates. sisting of several stages that included highly complicated In comparison with 2008, the volume of In total, in 2009, 6,587 employees participated in compe- and diversified tasks were organized with the aim of accrued tax payments by the Company Among these institutions are, in particular: increasing levels of theoretical knowledge and practical titions at various levels, while in 2008 almost 5,600 employ- increased by 26.9% and totaled RUR 6.02 skills, developing creativity, identifying and extending ees of North West Telecom’s employees were active in diffe- bln, comprising 19.3% of the Company’s • The K. K. Grot Special Barding School No.1 advanced methods and patterns of work, and increasing the rent athletic endeavors. revenues in St. Petersburg for blind and visually impaired children;

ANNUAL REPORT 2009 SOCIAL RESPONSIBLITY 84 85 • The Special Home for Children with Central The main areas and measures upon organization of • regulation of the quality of waste management, Nervous System Injuries and Mental Disorders, a State Environmental Protection environmental protection at North-West Telecom facilities decrease in the volume and hazard of waste formed health institution in Arkhangelsk; were: and deployed, observing the conditions and methods • City Special Children’s Home, a municipal of their deployment, enabling efficient use of resources, health institution in the Arkhangelsk Region; One of the important aspects of social responsibility for • rationing of the atmospheric emissions, decrease in utilization of waste, creation of low-waste technologies; • The State Regional Hospital for War Veterans North-West Telecom is care for the environment and the volume and toxicity of pollutants discharged into • regulation of the issues of usage of subsurface of the Department of Health of the Arkhangelsk Regional friendliness toward natural resources. Observing Federal the atmosphere, sustaining quality of the atmosphere resources, observing the conditions of well operation; Administration, and the Great Patriotic War veterans’ laws “On environmental protection”, “On protection of in the regions of facilities at the normative level; • organization of sanitary protection zones, decrease organization “The Last Wartime Draft” in Severodvinsk; atmospheric air”, and “On Production and Consumption • rationing of the discharge of pollutants into water of impact of facilities upon residential construction; • The municipal educational institution The Coast objects, decrease in the volume and toxicity of of Hope children’s home in Pravdinsk; Wastes”, the Company operates by orienting itself toward • introduction of payments for the negative impact on causing minimal damage to the surrounding environment. pollutants discharged into bodies of water, sustaining the surrounding environment. • State educational institution for orphaned children quality of water in the regions of facilities at the and youth “Hope” in Ozerskiy city district of the normative level; Kaliningrad Region; In 2009 North-West Telecom adopted Regulations on • Children’s Home No. 3 for orphans in Syktyvkar; the organization of work in the field of environmental • The A. A. Katolikov Agricultural boarding school in protection at the Company’s facilities that was developed the Komi Republic; Funds directed to environmental protection in 2009 in accordance with the current legislation of Russia, • State educational boarding school “Art Gymnasium” by North-West Telecom, RUR thousand in the Komi Republic; requirements of normative and legal acts of Russia and • Kochponsky boarding school-children’s home for local normative documents of the Company. The aim of mentally handicapped children in Syktyvkar; the Regulations was to bring in order the interaction of the • Preschool Children’s Home No. 7 in the structural divisions of North-West Telecom, ensuring a Funds directed to environmental Murmansk Region; unification of approaches, principles and methods during protection, total 14,552.9 • State educational institution Type VIII Boarding provision of environmental protection at the Company’s School in Myakishevo of the Khvoyninsky district facilities as well as interaction with territorial organs of of the Novgorod Region; the Ministry of Natural Resources and the Federal service including: • State health service institution Regional Children’s Clinical Hospital in the Novgorod Region; of oversight in the sphere of the protection of consumer on protection and rational • Dance On Wheels Sporting Club, a public organization rights and human welfare. usage of water resources 1,902.0 for the disabled in St. Petersburg; • Krasnogorodskaya Correctional Boarding School, The main measures of environmental protection on protection of the atmosphere 4,083.2 and many others. undertaken by the Company in 2009, including the measures in the field of decreasing negative impacts on on protection of the environment against The Company traditionally pays special attention to the environment, were: the production and consumption waste the support of projects and programs of the Russian Fund (including for receiving and utilization of for Telecommunications History, including financing of • development and coordination of documents in the waste, receiving permission documentation) 8,567.7 the creation and technical equipping of the unique expo- field of environmental protection, receiving permission sition in the A. S. Popov Central Telecommunications documentation, fulfilling the rules of controlling Museum. Participating within programs of the Fund for authorities; educational and public awareness events connected with • utilization of production and consumption waste only the history of Russian radio technology and telecommu- at plants and landfills having the respective licenses; nications, North-West Telecom contributes to the dissemi- • analytical control over the quality of emissions nation of knowledge about the history of telecommunica- to the atmosphere and discharge of water pollutants; tions in Russia. • study of the pollution of the atmosphere and the During the reporting year RUR 450,000 was directed noise levels for approval of the nature protection at corporate sponsorship. Among the projects in which zones’ boundaries at North-West North-West Telecom has traditionally taken part was the Telecom’s facilities; largest European adventure race, the “Saint-Petersburg • training of specialists at North-West Telecom in the Urban Race”, the participants of which are over 300 busi- field of ecological safety in accordance with the plan ness organizations from St. Petersburg. In 2009, North- of training and attestation, approved by Russian West Telecom became a third-time winner of the city Technical Supervisory Authority; adventure race in the “Business” class, yet again confir- • capital repair of the cleaning facilities of ming its champion’s status. administrative and fecal drainage at the Otradnoye recreation base, installation of an additional system of On the whole, in 2009 North-West Telecom biological filtering at the cleaning facilities, channeled toward charitable and sponsorship development of a program for regular observation of Otradnoye lake; purposes RUR 13,767 thousand of which RUR • withdrawal from service of outdated automobiles 13,317 thousand went toward the provision of and purchasing new Euro-3 standard vehicles, charitable help and contributions to organizations replacement of acid accumulators of open type with under patronage sealed accumulators of closed type;

ANNUAL REPORT 2009 SOCIAL RESPONSIBLITY 86 87 REFERENCE AND CONTACT INFORMATION

In the circles of life there Bright colors of is always a pause communication for communication

ANNUAL REPORT 2009 REFERENCE AND CONTACT INFORMATION

Bright colors of communication

ANNUAL REPORT 2009 General Directorate and Branches

Komi Branch of North-West Telecom Leningrad Region Branch of North-West Telecom

Address 60 Lenina St., Syktyvkar, Address 15 Pochtamtskaya St., Komi Republic, 167981 St. Petersburg, 190000 Regional Director – Vikenty Regional Director – Vitaly Director of the Branch Alexandrovich Kozlov Director of the Branch Yevgenyevich Strizhkov General directorate (location of OJSC North-West Telecom's executive body) Telephone (8212) 29-98-05 Telephone (812) 571-84-78 Fax (8212) 21-50-40 Fax (812) 315-48-50 Address 14/26 Gorokhovaya St., Fax (812) 710-62-77 Internet- Internet- St. Petersburg, 191186 Web site www.nwtelecom.ru representation komi.nwtelecom.ru representation lenobl.nwtelecom.ru Administrative (812) 595-45-56 E-mail [email protected] E-mail [email protected] E-mail [email protected] office telephone

Arkhangelsk Branch of North-West Telecom Vologda Branch of North-West Telecom Murmansk Branch of North-West Telecom Novgorod Branch of North-West Telecom

Address 45 Troitsky Avenue, Address 4 Sovetsky Avenue., Address 82-a Lenina Avenue, Address 2 Lyudogoshcha stSt., Veliky Arkhangelsk, 163000 Vologda, 160000 Murmansk, 183038 Novgorod, 173001 Regional Director – Vladimir Regional Director – Andrey Regional Director – Vitaly Regional Director – Rodion Director of the Branch Ivanovich Belokaminsky Director of the Branch Stepanovich Ganov Director of the Branch Stanislavovich Vitman Director of the Branch Faratovich Fathullin

Telephone (8182) 20-50-20 Telephone (8172) 72-40-58 Telephone (8152) 45-45-45 Telephone (8162) 78-25-10 Fax (8182) 65-40-96 Fax (8172) 72-61-23 Fax (8152) 45-00-45 Fax (8162) 73-19-15 Internet- Internet- Internet- Internet- representation arkhangelsk.nwtelecom.ru representation vologda.nwtelecom.ru representation murmansk.nwtelecom.ru representation novgorod.nwtelecom.ru E-mail [email protected] E-mail [email protected] E-mail [email protected] E-mail [email protected]

Kaliningrad Branch of North-West Telecom Karelia Branch of North-West Telecom Petersburg Branch of North-West Telecom Pskov Branch of North-West Telecom

Address 32 Leninskiy Avenue, Address 4 Maxima Gorkogo St., Address 24 Bolshaya Morskaya St, Address 17 Lenina St., Pskov, 180000 Kaliningrad, 236006 Petrozavodsk, 185035 St. Petersburg Regional Director – Eduard Regional Director – Andrey Regional Director – Sergey Director of the Branch Ivanovich Tumashevsky Regional Director – Viktor Director of the Branch Alexeyevich Kulazhenkov Director of the Branch Mikhaylovich Gavryushev Director of the Branch Ivanovich Plyachenko Telephone (8112) 66-57-77 Telephone (4012) 45-18-20 Telephone (8142) 76-51-11 Telephone (812) 710-68-38 Fax (8112) 66-97-35 Fax (4012) 45-15-52 Fax (8142) 76-61-44 Fax (812) 595-45-95 Internet- Internet- Internet- representation pskov.nwtelecom.ru Internet- representation kaliningrad.nwtelecom.ru representation karelia.nwtelecom.ru representation www.ptn.ru E-mail [email protected] E-mail [email protected] E-mail [email protected] E-mail [email protected]

ANNUAL REPORT 2009 REFERENCE AND CONTACT INFORMATION 90 91 Auditor

(Prior to 22.06.2009) Location of St. Petersburg branch:, 36/40 Sredny Avenue, Vasilievsky Island, St. Petersburg, 199004 Bonds depositary ADR program Depositary bank Limited Liability Company Ernst & Young Mailing address: 10 Butirsky Val, Moscow 125047 Telephone: (495) 967-60-00, (812) 326-69-69 Closed joint-stock company National Depositary Center JPMorgan Chase Bank Location of St. Petersburg branch: 23 Malaya Morskaya St., Fax: (495) 967-60-01, (812) 326-66-99 Location 1/13, Building 4, Sredny White Nights Business Center, St. Petersburg, 190000 E-mail: [email protected] Kislovsky Lane, Moscow Mailing address: 77, Building 1, Sadovnicheskaya [email protected] Location 60 Victoria Embankment Embankment, Moscow, 115035 Mailing address 13, Building 1, Mashkova St., London EC4Y 0JP Telephone: (812) 703-78-00 License: for audit activity Moscow, 105062 Telephone + 44 (0) 207 325 6365 Fax: (812) 703-78-10 License No.: E000376 Telephone (495) 223-63-92 E-mail: [email protected] Date of issue: 20.05.2002 Validity period: 10 years Fax (495) 956-09-38 Fax + 44 (0) 207 777 2989 License: for auditing Authority issuing the license: E-mail [email protected] License No.: E002138 RF Ministry of Finance Date of issue: 30.09.2002 Validity period: 5 years, prolonged by the Order of the RF Information on the membership of auditor in self-regulated Ministry of Finance No.573 of September 17th 2007 till auditor organizations: September 30th, 2012 Full name: Non-commercial partnership Audit Chamber of Authority issuing the license: RF Ministry of Finance Russia Location: 3/9, Building 3, 3rd Syromiatnichesky Lane, (From 22.06.2009) Moscow, 105120 Investor relations department Public relations department Closed joint-stock company Pricewaterhouse Information on membership of auditor in collegiate organs, Coopers Audit associations and other professional unions (organizations): Telephone (812) 719-94-77 Telephone (812) 719-93-45 Auditor is the member of Non-commercial partnership Fax (812) 719-93-50 Location: 10 Butirsky Val, Moscow 125047 Auditor chamber of Russia, date of joining 22.04.2004 Fax (812) 719-94-14 E-mail [email protected] E-mail [email protected]

Shareholders relations department Contact telephones for shareholders in regional Registrar (in St. Petersburg and the Leningrad Region) centers of the North-West Federal Region

Open joint-stock company Obyedinyonnaya Telephone Arkhangelsk (8182) 20-50-90 Registratsionnaya Kompaniya (United Registration Mailing address: POB 151, Moscow, 115280 (for individual persons) (812) 312-52-89, Vologda (8172) 72-83-39 Company) Telephone/fax: (495) 775-18-20, (495) 504-28-86 (for legal entities) (812) 719-92-34 Kaliningrad (4012) 45-33-15 E-mail: [email protected] Location of St. Petersburg branch: License: on activity of maintenance of register Fax (812) 719-92-47 Petrozavodsk (8142) 79-43-60 16 Bolshaya Monetnaya St., St. Petersburg, 197101 License No.: 10-000-1-00314 Syktyvkar (8212) 29-92-88 Telephone: (812) 336-51-06 Date of issue: 30.03.2004 Location: 4th floor, 19 Leninskaya Sloboda St., Omega Validity: for an indefinite term Official printed media for information disclosure Murmansk (8152) 48-51-85 Plaza Business Center, Moscow Issuing authority: Federal Service for Financial Markets Novgorod (8162) 73-92-02 Pskov (8112) 66-80-77 Izvestiya – St. Petersburg, newspaper

ANNUAL REPORT 2009 REFERENCE AND CONTACT INFORMATION 92 93 Company mission

To assist the development of society, ensuring freedom of communication and access to information

Company profile

North-West Telecom is the largest operator North-West Telecom services over 4.5 million sub- of fixed telephony in the North-West Federal Region scribers to local telephony and around 900,000 subscrib- Appendix of Russia. ers to broadband Internet access, as well as a payphone network covering all the distanced and sparsely populated The North-West Federal Region is one of the most communities of the North-West. Local network digitaliza- developed in terms of its economy and telecommunica- tion is nearly 70%. The Company has a vast transport tions among all Federal Regions of Russia: the popula- infrastructure uniting all regions of the North-West into a tion is 13.6 million, 82% of which live in cities – the joint network: the overall length of telephone lines of highest urbanization level among all Federal Regions. North-West Telecom exceeds 200,000 kilometers of which The penetration level of telecommunications services in nearly 30,000 kilometers are up-to-date fiber optic tele- the Region is significantly higher than the average in communications lines. Russia – the broadband Internet access penetration level is 38%, while the telephone density is 40 telephones per The Company’s common and privileged 100 residents. shares are traded on the largest Russian stock exchanges – MICEX SE and RTS SE. The Company has launched an North-West Telecom provides a broad range of ADR 1st level Program issued on common shares, and telecommunications services including local and intra- ADRs are traded on the USA OTC market and on the zonal telephony, data transmission services, Internet Frankfurt and Berlin stock exchanges. The depositary access, channels leasing, IP-TV, call processing centers bank is JP Morgan Chase Bank. etc., and provides opportunities of access to long dis- tance and international telephony services from long- International credit rating of North-West distance providers in the licensed area. As of the end of Telecom assigned Fitch Ratings: “BB”, “Stable” outlook; 2009 (in terms of revenues) North-West Telecom holds assigned Standard & Poor’s: “BB-”, “Stable” outlook. 75% and 90% of the telecommunications market of the North-West Federal Region in the segments of local and Corporate governance score of North-West intra-zonal telephony respectively and about 47% Telecom assigned Standard & Poor’s: GAMMA-5+; (including subsidiaries) in the broadband Internet assigned RID-Expert RA: NRKU 8. access segment. № Parties of Information about Minutes No., Subject of agreement Price of agreement Information on the Most Material agreement interested party date (parties) of the Transactions Concluded by the transaction 1 North-West Shareholder of No. 19-01/32(09) Technical equipment deployment RUR 140,250.00 Telecom, North-West Telecom dated 25.12.2009 and maintenance Company in 2009 CJSC (JSC Svyazinvest), Novgorod being an affiliate of Datacom North-West Telecom In observance of Article 81 of the Federal Law “On joint- updating of the List of interested persons (affiliates), which is an interested party in the transaction, as stock companies” (as amended on 27.12.2009) North-West is located at the Company’s web site, www.nwtelecom.ru, in the second party of Telecom in 2009 monitored interested party transactions. the “For investors and shareholders” section. transaction CJSC One of the important factors that allows for the operative Novgorod Datacom is monitoring of interested party transactions is the operative included in North- West Telecom Group and therefore in JSC List of interested party transactions approved by the Company’s Board of Svyazinvest Group and is an affiliate of Directors and concluded in 2009 JSC Svyazinvest 2 North-West Kiselev A.N., No. 19-01/01(09) Additional agreement to agreement RUR 111,000.00 Telecom, Zhelonkin V.B. and dated 21.01.2009 for provision of location for JSC Alexeev M.A. – deployment of equipment № Parties of Information about Minutes No., Subject of agreement Price of agreement Rostelecom members of the Board agreement interested party date of Directors of (parties) of the North-West Telecom transaction and members of the Board of Directors of 1 North-West North-West Telecom as No. 19-01/01(09) Additional agreement to – JSC Rostelecom Telecom, an affiliate of JSC dated 21.01.2009 agreement for CJSC Svyazinvest, holding telecommunications network Shareholder of No. 19-01/02(09) Additional agreement on cessation – Novgorod over 20 percent of connection North-West Telecom dated 09.02.2009 of agreement for Datacom voting shares of (JSC Svyazinvest), telecommunications services North-West Telecom, holding over 20 provision holds over 20 percent perсent of voting No. 19-01/04(09) Ensuring the functioning of RUR 286,740.00 of voting shares of the shares of the Company, dated 05.03.2009 equipment located at JSC second party of the holds over 20 percent Rostelecom facilities transaction (CJSC of voting shares of the Novgorod Datacom) second party of the No. 19-01/07(09) Additional agreement to agreement RUR 76,305.56 transaction (JSC dated 07.04.2009 for ensuring the functioning of Shareholder of No. 19-01/07(09) Additional agreement to – Rostelecom) equipment North-West Telecom dated 07.04.2009 agreement for data transmission Rodionov I.I. – No. 19-01/14(09) Provision of services on ensuring RUR 104,098.80 (JSC Svyazinvest), network connection being an affiliate of member of the Board dated 16.06.2009 the functioning of equipment North-West Telecom is of Directors of No. 19-01/07(09) Agency contract – North-West Telecom an interested party in dated 07.04.2009 the transaction, as the and member of the second party of Board of Directors of No. 19-01/10(09) Additional agreement to RUR 2,068,153.32 JSC Rostelecom transaction CJSC dated 23.04.2009 agreement for provision of place Shareholder of Novgorod Datacom is in cable duct system included in North-West North-West Telecom Telecom Group and (JSC Svyazinvest), No. 19-01/26(09) Additional agreement to RUR 2,331,027.00 therefore in JSC holding over 20 dated 29.10.2009 agreement for provision of place Svyazinvest Group and percent of voting in cable duct system is an affiliate of JSC shares of the Company, Svyazinvest holds over 20 percent No. 19-01/30(09) Data transmission network RUR 4,800,000.00 of voting shares of the dated 08.12.2009 connection second party of the transaction (JSC No. 19-01/30(09) Additional agreement to – Rostelecom) dated 08.12.2009 agreement for data transmission Yurchenko E.V., No. 19-01/17(09) Provision of services for ensuring RUR 817,435.20 network connection Provotorov A.Y., dated 21.07.2009 the functioning of equipment Leschenko М.А., No. 19-01/32(09) Provision of fiber optics into RUR 77,245.22 Rodionov I.I., Umnova dated 25.12.2009 usage E.V. – members of the Board of Directors of No. 19-01/32(09) Rent of immovable property RUR 689,057.28 North-West Telecom dated 25.12.2009 and members of the Board of Directors of JSC Rostelecom

ANNUAL REPORT 2009 APPENDIX 96 97 № Parties of Information about Minutes No., Subject of agreement Price of agreement № Parties of Information about Minutes No., Subject of agreement Price of agreement agreement interested party date agreement interested party date (parties) of the (parties) of the transaction transaction 2 North-West Shareholder of No. 19-01/17(09) Provision of services for RUR 85,226,400.00 4 North-West Kiselev A.N. – Chairman No. 19-01/02(09) Additional agreement to agreement RUR Telecom, North-West Telecom dated 21.07.2009 connection and traffic transfer to Telecom, of the Board of Directors dated 09.02.2009 of non-governmental pension 209,881,000.00 JSC (JSC Svyazinvest), provide access to Internet Non-govern- of North-West Telecom provision Rostelecom holding over 20 resources mental and Chairman of the percent of voting No. 19-01/17(09) Additional agreement to RUR 434,160.00 pension fund Board of Non- shares of the Company, dated 21.07.2009 agreement for provision of fiber “Telecom- governmental pension holds over 20 percent optics into usage Soyuz” fund “Telecom-Soyuz” of voting shares of the No. 19-01/22(09) Additional agreement to RUR 600,000.00 second party of the Yurchenko E.V. – No. 19-01/30(09) Additional agreement to agreement RUR dated 07.09.2009 agreement on change of the list of transaction (JSC Chairman of the Board of dated 08.12.2009 of non-governmental pension 34,920,000.00 equipment deployed Rostelecom) Directors of North-West provision No. 19-01/26(09) Provision of services for ensuring RUR 2,398,864.00 Telecom and member of dated 29.10.2009 the functioning of equipment the Board of Non- No. 19-01/27(09) Additional agreement to RUR 234,349.48 governmental pension dated 12.11.2009 agreement for deployment of fund “Telecom-Soyuz” equipment Akulich V.A. – Chairman No. 19-01/32(09) Additional agreement to agreement RUR No. 19-01/27(09) Additional agreement on – of the Management dated 25.12.2009 of non-governmental pension 257,620,000.00 dated 12.11.2009 cessation of agreement Board of North-West provision No. 19-01/28(09) Additional agreement to – Telecom and member of dated 26.11.2009 agreement for provision of local the Board of Non- and intra-zonal telephony governmental pension services fund “Telecom-Soyuz” No. 19-01/30(09) Provision of services for ensuring RUR 1,054,612.00 5 North-West Chernyak G.B. – member No. 19-01/03(09) Rent of dispatcher workplace RUR 191,817.01 dated 08.12.2009 the functioning of equipment Telecom, of the Management dated 24.02.2009 CJSC Board of North-West No. 19-01/32(09) Additional agreement to – Medexpress Telecom and member of dated 25.12.2009 agreement for the Supervisory Council telecommunications network of CJSC Medexpress connection 6 North-West North-West Telecom as No. 19-01/03(09) Rent of immovable property RUR No. 19-01/32(09) Ensuring functioning of RUR 760,500.00 Telecom, an affiliate of JSC dated 24.02.2009 3,305,880.05 dated 25.12.2009 equipment CJSC St. Svyazinvest, holding over 3 North-West Popov O.V., Semanov No. 19-01/01(09) Additional agreement to rent RUR 6,873,393.36 Petersburg 20 percent of the voting Telecom, O.A. and Tufrin L.Z. – dated 21.01.2009 agreement Payphones shares of North-West CJSC members of the Telecom, holds together Petersburg Management Board of with its affiliate (CJSC No. 19-01/17(09) Connection of telephone networks RUR 256,000.00 Transit North-West Telecom AMT) over 20 percent of dated 21.07.2009 at the subscriber level + depending on Telecom and members of the voting shares of the traffic volume Board of Directors of second party of the CJSC Petersburg transaction (CJSC St. Transit Telecom Petersburg Payphones) North-West Telecom as No. 19-01/07(09) Provision of connections for data – an affiliate of JSC dated 07.04.2009 transmission network 7 North-West Shareholder of North- No. 19-01/04(09) Fulfillment of work under ERP RUR Svyazinvest, holding Telecom, JSC West Telecom (JSC dated 05.03.2009 program 6,732,802.40 over 20 percent of Information Svyazinvest), holding technologies together with its voting shares of No. 19-01/14(09) Rent of telecommunications RUR 13,309,909.02 No. 19-01/17(09) Additional agreement to RUR 843,306.45 of telecom- affiliates (interregional North-West Telecom, dated 16.06.2009 equipment, communication lines per month dated 21.07.2009 agreement for fulfillment of work munications telecommunications holds over 20 percent and power supply equipment under ERP program of the voting shares of companies (paragraph 2 the second party of the of Article 81 of the No. 19-01/32(09) Provision of consulting services RUR transaction (CJSC Federal Law “On dated 25.12.2009 23,719,322.03 Petersburg Transit joint-stock companies”) over 20 percent of the Telecom) No. 19-01/32(09) Provision of services for RUR voting shares of the dated 25.12.2009 centralized management of the 11,927,120.00 North-West Telecom as No. 19-01/26(09) Cession agreement RUR 100,000.00 second party of the United Program for ensuring an affiliate of JSC dated 29.10.2009 transaction (JSC settlements and client relations Svyazinvest, holding Information technologies over 20 percent of of telecommunications), voting shares of holds over 20 percent of No. 19-01/32(09) Engineering work under the RUR North-West Telecom, the voting shares of the dated 25.12.2009 System of personal data protection 8,793,266.95 holds over 20 percent Company of the voting shares of the second party of the transaction (CJSC Petersburg Transit Telecom)

ANNUAL REPORT 2009 APPENDIX 98 99 № Parties of Information about Minutes No., Subject of agreement Price of agreement № Parties of Information about Minutes No., Subject of agreement Price of agreement agreement interested party date agreement interested party date (parties) of the (parties) of the transaction transaction 8 North-West Shareholder of No. 19-01/10(09) Provision of telecommunications – 12 North-West Shareholder of No. 19-01/14(09) Connection of telecommunications RUR 32,400.00 Telecom, North-West Telecom dated 23.04.2009 services with the aim of connection Telecom, North-West Telecom dated 16.06.2009 networks at local level per month JSC (JSC Svyazinvest), of educational institutions to VPN CJSC Globus- (JSC Svyazinvest) RTKomm.RU together with its “Education” Telecom together with its affiliate (JSC affiliate (JSC Rostelecom) holds over No. 19-01/11(09) Provision of services of access to RUR 8,500,000.00 dated 14.05.2009 data transmission network Rostelecom) holds over 20 percent of the voting 20 percent of the shares of the second No. 19-01/13(09) Additional agreement to agreement RUR 60,390.00 voting shares of the party of the transaction dated 28.05.2009 for deployment of equipment second party of the (JSC RTKomm.RU) transaction (CJSC No. 19-01/17(09) Additional agreement to agreement RUR 3,629,194.92 Globus-Telecom) dated 21.07.2009 for provision of telecommunications services with the aim of connection 13 North-West North-West Telecom No. 19-01/14(09) Provision of place in cable duct RUR 558,622.68 of general educational institutions Telecom, as an affiliate of JSC dated 16.06.2009 system to VPN “Education” CJSC Svyazinvest holding No. 19-01/17(09) Deployment and ensuring RUR 84,375.00 WestBalt over 20 percent of the dated 21.07.2009 functioning of technical equipment Telecom voting shares of North-West Telecom, No. 19-01/22(09) Deployment and ensuring the RUR 142,500.00 holds over 20 percent dated 07.09.2009 functioning of technical equipment of the voting shares of the second party of the No. 19-01/27(09) Additional agreement to agreement RUR 140,085.00 transaction (CJSC dated 12.11.2009 for provision of telecommunications WestBalt Telecom) services with the aim of connection of general educational institutions 14 North-West Yurchenko E.V. and No. 19-01/17(09) Organization and provision of RUR 596,840.00 to VPN “Education” Telecom, JSC Leschenko M.A. – dated 21.07.2009 telecommunications channels 9 North-West Chernyak G.B. – No. 19-01/11(09) Supply of cables and conducting RUR 19,621,388.47 - members of the Board between payphones assigned for Telecom, member of the dated 14.05.2009 materials Telecom of Directors of provision of universal CJSC Management Board of North-West Telecom telecommunications services Neva-Cable North-West Telecom and members of the and member of the Board of Directors of Board of Directors of JSC VolgaTelecom CJSC Neva-Cable Shareholder of 10 North-West Chernyak G.B. – No. 19-01/11(09) Target provision of charitable help RUR 9,000,000.00 North-West Telecom Telecom, member of the dated 14.05.2009 (JSC Svyazinvest), Russian Fund Management Board of holding over 20 of telecom- North-West Telecom percent of the voting munications and Chairman of the shares of the Company, history Management Board of holds over 20 percent Russian Fund of of the voting shares of telecommunications the second party of the history transaction (JSC Gogol А.А. – member VolgaTelecom) of the Board of Directors of North-West 15 North-West Shareholder of No. 19-01/10(09) Provision of telecommunications RUR Telecom and member Telecom, North-West Telecom dated 23.04.2009 services – dedicated digital 17,461,654.23 of the Management CJSC (JSC Svyazinvest) channels Board of Russian Fund Parma- being an affiliate of of telecommunications Inform North-West Telecom, is No. 19-01/18(09) Connection of data transmission RUR history an interested party in dated 30.07.2009 networks 3,518,640.00 concluding of the 11 North-West Gogol A.A. – member No. 19-01/14(09) Organizationof non-paid production – transaction, as the Telecom, of the Board of dated 16.06.2009 internship in North-West Telecom second party of the Saint- Directors of North-West by students of the No. 19-01/20(09) Additional agreement on RUR 724,692.00 transaction, CJSC Petersburg Telecom and sole Telecommunications College dated 14.08.2009 amendments to the agreement of Parma-Inform, is State executive organ immovable property rental included in North-West University of (rector) of Saint- Telecom Group and Telecom- Petersburg State therefore is part of JSC No. 19-01/20(09) Additional agreement on RUR 722,394.00 munications University of Svyazinvest Group and dated 14.08.2009 amendments to the agreement on named after Telecommunications is the affiliate of JSC deployment of equipment Bonch- named after Bonch- Svyazinvest Bruevich Bruevich No. 19-01/32(09) Additional agreement to agreement RUR 325,000.00 dated 25.12.2009 on connection of data transmission per month networks

ANNUAL REPORT 2009 APPENDIX 100 101 № Parties of Information about Minutes No., Subject of agreement Price of agreement № Parties of Information about Minutes No., Subject of agreement Price of agreement agreement interested party date agreement interested party date (parties) of the (parties) of the transaction transaction 16 North-West Adzhalov V.I. – member No. 19-01/20(09) Provision of consulting services RUR 336,600.00 19 North-West Shareholder of No. 19-01/27(09) Expansion of broadband Internet RUR Telecom, of the Board of Directors dated 14.08.2009 Telecom, North-West Telecom dated 12.11.2009 access network based on DSL 2,720,535.59 LLC of North-West Telecom JSC (JSC Svyazinvest), technology Equipment and sole executive organ Giprosvyaz holding over 20 and (president) of LLC percent of voting No. 19-01/27(09) Expansion of broadband Internet RUR 84,407.00 technologies Equipment and shares of the Company, dated 12.11.2009 access network based on DSL of optical technologies of optical holds over 20 percent technology communi- communication of the voting shares of cation the second party of the No. 19-01/27(09) Expansion of broadband Internet RUR 399,744.96 transaction (JSC dated 12.11.2009 access network, second stage 17 North-West Shareholder of North- No. 19-01/21(09) Connection of data RUR 10,618,200.00 Giprosvyaz) Telecom, West Telecom (JSC dated 28.08.2009 transmission networks No. 19-01/28(09) Fulfillment of design for the object RUR JSC Svyazinvest) being an dated 26.11.2009 “Construction of fiber optic 1,075,258.00 Kolatelecom affiliate of North-West telecommunications line Belozersk- Telecom, is an interested No. 19-01/25(09) Additional agreement to RUR 294,463.25 Kirillov” party in concluding of the dated 15.10.2009 agreement for deployment of transaction, as the second equipment party of the transaction, No. 19-01/28(09) Fulfillment of design for the title RUR 607,138.55 dated 26.11.2009 “Expansion of broadband Internet JSC Kolatelecom, is No. 19-01/27(09) Additional agreement to RUR 531,355.88 access network of the Komi branch included in North-West dated 12.11.2009 agreement for deployment of of North-West Telecom” Telecom Group and equipment therefore is part of JSC Svyazinvest Group and is No. 19-01/27(09) Additional agreement to RUR 1,597,279.97 No. 19-01/28(09) Fulfillment of design for the title RUR 517,855.37 the affiliate of JSC dated 12.11.2009 agreement for non-residential dated 26.11.2009 “Expansion of broadband Internet Svyazinvest premises rental access network on GPON technology in Kaliningrad” 18 North-West Koresh V.I. – member of No. 19-01/22(09) Additional agreement to RUR 46,172.89 Telecom, the Board of Directors of dated 07.09.2009 agreement for deployment of No. 19-01/28(09) Fulfillment of design for the title RUR JSC North-West Telecom and equipment dated 26.11.2009 “Construction of fiber optic tele- 4,218,715.70 COMSTAR- member of the communications line Lychkovo – Unitied Management Board of – Morevo – Kholm" TeleSystems JSC COMSTAR-Unitied TeleSystems No. 19-01/28(09) Fulfillment of design for the title RUR dated 26.11.2009 “Construction of fiber optic 1,068,408.00 19 North-West Shareholder of North- No. 19-01/03(09) Fulfillment of engineering and RUR telecommunications line Telecom, West Telecom (JSC dated 24.02.2009 design for the objects of 168,470,000.00 Totma – Verkhovazhye” JSC Svyazinvest), holding North-West Telecom plan and Giprosvyaz over 20 percent of voting organization of project No. 19-01/30(09) Fulfillment of design for the object RUR 346,895.27 shares of the Company, documentation expert opinion dated 08.12.2009 “Construction of fiber optic holds over 20 percent of telecommunications line for the voting shares of the broadband Internet access network” second party of the transaction (JSC No. 19-01/30(09) Fulfillment of design for the object RUR 896,798.88 Giprosvyaz) dated 08.12.2009 “Construction of fiber optic Provotorov A.Y, Leshenko No. 19-01/27(09) Organization of unified RUR 1,304,661.14 telecommunications line for М.А., Umnova E.V. – dated 12.11.2009 network for management of transport network” members of the Board of interregional transport DWDM Directors of North-West network of North-West Telecom No. 19-01/30(09) Fulfillment of design for the title RUR Telecom and members of dated 08.12.2009 “Expansion of broadband Internet 4,125,284.91 the Board of Directors of access network based on ADSL JSC Giprosvyaz technology”

Shareholder of North- No. 19-01/27(09) Expansion of broadband RUR 1,025,907.49 20 North-West Chernyak G. B. – No. 19-01/32(09) Acquiring of trip vouchers RUR West Telecom (JSC dated 12.11.2009 Internet access network based Telecom, member of the dated 25.12.2009 67,506,900.00 Svyazinvest), holding on DSL technology CJSC RPK Management Board of over 20 percent of voting Svyazist North-West Telecom shares of the Company, and Chairman of the holds over 20 percent of Board of Directors of the voting shares of the CJSC RPK Svyazist second party of the transaction (JSC North-West Telecom is Giprosvyaz) the sole participant of the second party of the transaction (share of participation is 100 percent)

ANNUAL REPORT 2009 APPENDIX 102 103 List of transactions which in accordance with the Company’s Charter were approved by the Board of Directors RAS financial statements

№ Parties of agreement Minutes No., date Type of Subject of Price of agreement transaction transaction Balance sheet as of 31.12.2009

1 North-West Telecom, No. 19-01/11(09) Over 1% of the Additional – Sberbank of Russia dated 14.05.2009 balance value of agreement on the Code of Code of As of the beginning of As of the end of the assets change of subject ASSET of a pledge list indicator line the reporting period reporting period 122а34

I. NON-CURRENT ASSETS 2 North-West Telecom, JSC No. 19-01/19(09) Over 1% of the Agreement and RUR 600,000,000.00 ORGRESBANK dated 10.08.2009 balance value of additional Intangible assets 110 110 2,055 1,470 assets agreement of issuance of Property, plant and equipment 120 120 38,405,355 40,706,902 ordinary promissory notes Capital investments 130 130 2,120,152 1,247,748 Income-bearing investments into material 3 North-West Telecom, CJSC CIT No. 19-01/19(09) Over 1% of the Agreement and RUR 800,000,000.00 valuables 135 135 684 608 Finance Investment bank dated 10.08.2009 balance value of additional assets agreement on Long-term financial investments 140 140 3,559,497 4,165,642 issuance and payments upon iIncluding: promissory notes investments in subsidiaries 141 3,533,212 960,981

investments in dependent companies 142 11,343 11,343 4 North-West Telecom, CJSC No. 19-01/19(09) Over 1% of the Agreement and RUR 600,000,000.00 . Bank Societe Generale Vostok dated 10.08.2009 balance value of additional investments in other organizations 143 14,942 14,942 assets agreement on purchase of other long-term financial investments 144 0 3,178,376 ordinary promissory notes Deferred tax assets 145 145 147,249 176,689

Other non-current assets 150 150 4,113,468 4,653,270 5 North-West Telecom, CJSC No. 19-01/19(09) Over 1% of the Agreement on RUR Absolut Bank dated 10.08.2009 balance value of issuance of banking 1,000,000,000.00 Total for Section I 190 190 48,348,460 50,952,329 assets promissory notes II. CURRENT ASSETS

Inventory 210 210 675,685 594,615

including: raw materials, materials and other similar valuables 211 211 583,394 526,051

cost of production in process 213 213 0 0

finished goods and goods for re-sale 214 214 25,368 17,048

goods loaded out 215 215 204 116

expenditures in future periods 216 216 66,719 51,400

other inventory and expenditures 217 217 0 0

Value Added Tax on purchased valuables 220 220 60,135 71,154

During the reporting period the Company concluded no including: transactions recognized as major in accordance with Article 78 of for repayment for more than 12 months the Federal Law “On joint-stock companies” (as amended on after the reporting date 221 0 0 27.12.2009).

ANNUAL REPORT 2009 APPENDIX 104 105 Code of Code of As of the beginning of As of the end of the Code of Code of As of the beginning of the As of the end of the ASSET LIABILITIES indicator line the reporting period reporting period indicator line reporting period reporting period for repayment within 12 months after the 122а34 reporting date 222 60,135 71,154 Accounts receivable (payments that are Other long-term liabilities 520 520 131,400 146,162 scheduled for more than 12 months after Total for Section IV 590 590 14,512,470 9,818,903 the reporting date) 230 230 72,722 68,181 including: V. SHORT-TERM LAIBILITIES buyers and customers 231 231 11,691 9,122 Loans and credits 610 610 2,686,195 8,643 ,127 advance payments made 232 30,276 29,989 other debtors 233 30,755 29,070 including: credits 611 2,066,286 3,175,926 Accounts receivable (payments that are scheduled for within 12 months of the Loans 612 619,909 5,467,201 reporting date) 240 240 3,092,462 3,567,252 Accounts payable 620 620 3,927,207 3,335,396 including: buyers and customers 241 241 1,386,552 1,539,671 including: suppliers and contractors 621 621 2,329,705 1,496,589 advance payments made 242 92,775 120,637 other debtors 243 1,613,135 1,906,944 advance payments made 625 622 482,797 398,599

Short-term financial investments 250 250 0 740,118 amounts owed to employees 622 623 251,521 198,503

Cash funds 260 260 863,732 531,345 accounts payable to state non-budgetary Other current assets 270 270 4,814 3,141 funds 623 624 100,075 84,183

Total for Section II 290 290 4,769,550 5,575,806 taxes and fees payable 624 625 272,297 628,488

BALANCE (lines 190+290) 300 300 53,118,010 56,528,135 other creditors 625 626 490,812 529,034

Amounts owed to partners (founders) as dividends 630 630 68,686 66,435 Code of Code of As of the beginning of As of the end of the LIABILITIES indicator line the reporting period reporting period Future earnings income 640 640 50,035 49,854

122а34 Reserves for costs to be incurred 650 650 699,611 832,979

III. CAPITAL AND RESERVES Other short-term liabilities 660 660 7,367 6,044

Charter capital 410 410 1,131,415 1,131,415 Total for Section V 690 690 7,439,101 12,933,835

Additional capital 420 420 7,676,723 7,583,915 BALANCE (lines 490+590+690) 700 700 53,118,010 56,528,135 Reserve capital 430 430 56,571 56,571 STATEMENT 411 440 (0) (0) Own shares re-acquired from shareholders OF AVAILABLE ASSETS THAT ARE ACCOUNTED FOR AS OFF-BALANCE SHEET ACCOUNTS Un-distributed profit (uncovered loss) from previous years 470 460 22,301,730 21,530,027 Code of Code of As of the beginning of the As of the end of the Indicator indicator line reporting period reporting period Un-distributed profit (uncovered loss) of the reporting year 470 470 Х 3,473,469 122а34

Total for Section III 490 490 31,166,439 33,775,397 Property, plant and equipment rented 910 901 3,135,258 3,162,626 IV. LONG-TERM LIABILITIES including on leasing 911 911 8,057 59,801 Loans and credits 510 510 13,450,626 8,121,371 Commodities and materials accepted for including: safe custody 920 902 35,036 36,154 credits 511 5,838,951 2,855,750 Goods accepted for processing 930 903 8,337 8,363 Loans 512 7,611,675 5,265,621 Written-off debts from insolvent debtors 940 904 490,840 458,305 Deferred tax liabilities 515 515 930,444 1,551,370 Security for liabilities and payments received 950 905 236,578 3,293,412

ANNUAL REPORT 2009 APPENDIX 106 107 Code of Code of As of the beginning of the As of the end of the Indicator Indicator Code of Code of line For the reporting For the same indicator line reporting period reporting period indicator period period in the previous year 122а34 1 22а 3 4 Security for liabilities and payments 142 151 (643,704) (230,600) issued 960 906 1,257,506 4,765,700 deferred tax liabilities 141 152 31,559 (72,839) Depreciation of housing facilities 970 907 5,233 4,728 deferred tax assets

Depreciation on landscape design current profit tax 150 153 (468 ,298) (905,023) improvement facilities and other similar facilities 980 908 1,962 1,961 extra payments of profit tax for the previous fiscal (reporting) periods 151 154 148,208 55,517 STATEMENT ON NET ASSETS VALUE Net profit (loss) of the reporting period 190 190 3,473,469 3,622,178

Net assets 200 1000 31,216,474 33,825,251 REFERENCE

Conditional expense/revenue on profit tax 201 (823,000) (1,087,996) 2009 Profit and loss statement Constant tax liabilities 200 202 (130,474) (236,791)

Indicator Code of Code of line For the reporting For the same Constant tax assets 200 203 21,239 171,842 indicator period period in the previous year Base profit (loss) per share 301 0.00359 0.00375

1 22а 3 4 Diluted profit (loss) per share 302 0.00000 0.00000 I. OPERATING INCOME AND LOSS

Net income from the sale of goods, products and services (minus VAT, Interpretation of specific profit and loss excise duties and other similar mandatory payments) 010 010 26,295,041 24,521,487 Indicator Code of line For the reporting period For the same period in the previous year including from sales of telecommunications services 011 24,103,611 22,732,309 profit loss profit loss

Production costs for goods, products, works 123456 and services sold 020 020 (23,986,724) (20,637,994) Penalties, fines and forfeits admitted including: telecommunications services 021 (23,217,822) (20,076,480) to or payable under (arbitration) court decisions 401 3,809 (1,127) 14,537 (1,518) Gross profit (lines 010-020) 050 050 2,308,317 3,883,493 Profit (loss) from previous years 402 96,865 (95,528) 41,952 (160,859) II. OTHER INCOMES AND EXPENSES Indemnity for losses due to the non- Interest receivable 060 060 234,514 266,068 fulfillment or improperly fulfillment of obligations 403 60,935 (2,523) 33,249 (3,187) Interest payable 070 070 (1,186,309) (869,187) Exchange rate differences for operations Income from participating in other conducted in foreign currencies 404 262,063 (489,865) 136,257 (906,352) organizations 080 080 68,319 756,161 Deductions for assessed reserves 405 (59,954) 57,680 Other income 090 090 4,981,848 3,365,023 Cancellation of accounts payable and including reimbursement of losses due to receivable 406 27,714 (3,023) 6,153 (5,352) provision of universal telecommunications services 091 4,282,489 2,382,209

Other expenses 100 100 (2,000,985) (2,626,435)

Profit (loss) before tax (lines 050+060- 070+080+090-100) 140 140 4,405,704 4,775,123

Profit tax expenses (lines -151+/-152+/-153), including: 150 (932,235) (1,152,945)

ANNUAL REPORT 2009 APPENDIX 108 109 Consolidated financial statements for the year ended Consolidated Balance Sheet at December 31, 2009 December 31, 2009, prepared in accordance with (in millions of Russian Roubles) international financial reporting standards Note December 31, 2009 December 31, 2008 (IFRS) and independent auditor’s report ASSETS Non-current assets

Full IFRS accounts are available on the Property, plant and equipment 8 41,787 43,207 Company website – http://www.nwtelecom.ru Intangible assets 9 5,326 5,207 Independent auditor’s report Long-term receivables 6 6 To the shareholders and Board of directors of OJSC North-West Telecom: Other long-term assets 10 715 393 We have audited the accompanying consolidated financial statements of OJSC North-West Telecom and its subsidiaries Investment property 11 96 – (hereinafter – “the Group”) which comprise the consolidated balance sheet as of 31 December 2009 and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended and a summary of Investment in associates 12 88 84 significant accounting policies and other explanatory notes. Non-current financial assets 13 3,200 44 Management’s responsibility for the financial statements Total non-current assets 51,218 48,941 Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance Current assets with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material Inventories 14 431 460 misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Trade and other receivables 15 2,928 2,596 Prepaid income tax 415 315

Auditor’s responsibility Other current assets 16 270 384 Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical Current financial assets 13 756 327 requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are Cash and cash equivalents 17 574 1,001 free from material misstatement. Assets held for sale 7 9 162 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated Total current assets 5,383 5,245 financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, Total assets 56,601 54,186 the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing EQUITY AND LIABILITIES an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of Equity attributable to OJCS NWT shareholders accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Share capital 19 2,855 2,855

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Treasury shares 19 (67) (67) Retained earnings 28,658 26,931 Opinion Total equity attributable to OJSC NWT shareholders 31,446 29,719 In our opinion, the accompanying consolidated financial statements present fairly, in all material respects the financial position of the Group as of 31 December 2009, and its financial performance and its cash flows for the year then ended in accordance Non-controlling interest 1 – with International Financial Reporting Standards. Total equity 31,447 29,719

1 June 2010 Non-current liabilities St. Petersburg, Russian Federation Non-current borrowings 20 8,108 13,366

Pension liabilities and long-term social liabilities 21 2,258 2,108

Long-term payables 34 22

Other long-tem liabilities 22 333 358

Deferred income tax liability 35 1,061 1,079

ANNUAL REPORT 2009 APPENDIX 110 111 Note December 31, 2009 December 31, 2008 Consolidated Statement of Comprehensive Income for the year ended (in millions of Russian Roubles, except for earnings per share) Total non-current liabilities 11,794 16,933 December 31, 2009

Current liabilities Note 2009 2008 Current borrowings 20 9,058 2,726 Profit for the year 2,592 2,561 Trade and other payables 24 3,853 4,281 Changes in fair value of financial assets held for sale 13 – (152) Other current liabilities 25 443 520 Total other comprehensive loss, net o income tax – (152) Current provision 23 6 7 Total comprehensive income for the year 2,592 2409 Total current liabilities 13,360 7 ,534 Comprehensive income for the year attributable to: Total liabilities 25,154 24,467 OJSC NWT shareholders 2,591 2,409 Total equity and liabilities 56,601 54,186 Non-controlling shareholders of subsidiaries 6 1 –

General Director Chief Accountant June 1, 2010 Total comprehensive income for the year 2,592 2,409 V.A. Akulich M.M. Semchenko

General Director Chief Accountant June 1, 2010 V.A. Akulich M.M. Semchenko Consolidated Income Statement for the year ended December 31, 2009 (in millions of Russian Roubles, except for earnings per share) Consolidated Cash Flow Statement for the year ended December 31, 2009 Note 2009 2008 (in millions of Russian Roubles) REVENUES 28 26,566 25,176 Personnel costs 29 (8,403) (8,221) Note 2009 2008 Depreciation and amortization 8,9,11 (6,859) (5,514) Interconnection charges (1,924) (1,904) Cash flows from operating activities

Materials, repairs and maintenance, utilies 30 (4,762) (3,299) Profit before income tax 2,932 3,348 Other operating income 31 4,440 2,587 Adjustments for Other operating expenses 32 (4,340) (4,229) Operating income 4,718 4,596 Depreciation and amortization 6,859 5,514 Profit from investments in associates 12 4 13 Profit (loss) on disposals of property, plant and equipment and other assets 31, 32 50 (35)

Finance costs 33 (1,472) (1,066) Provision for impairment of property, plant and equipment, construction in 826– Other investing and financing gains and losses 34 373 559 progress and intangible assets Exchange loss from foreign currency restatement (691) (754) Provision for impairment of inventories and other assets 1 –

Profit before income tax 2,932 3,348 Increase (decrease) in provision for doubt debts 15 113 (23)

Income tax 35 (340) (787) Profit from investments in associates (4) (13)

Profit for the year 2,592 2,561 Financial costs 33 1,472 1,066

Profit for the year attributable to Other income from financing and investment activities 34 (373) (559) OJSC NWT shareholders 2,591 2,561 Foreign exchange loss 691 754 Non-controlling shareholders of substdiaries 1 – Profit for the year 2,592 2,561 Operating profit after adjustment for non-cash transactions 11,767 10,052 Basic and diluted earning per share 36 2.073 2.049 Decrease (increase) in inventory 28 (157) (Russian Roubles) attributable to OJSC NWT shareholders for the year Increase in trade and other receivables (534) (678) Decrease in other current assets 1,096 251 General Director Chief Accountant June 1, 2010 V.A. Akulich M.M. Semchenko Increase in pension and other long-term social liabilities (80) 245

Increase in accounts payable and accrued liabilities 837 96

ANNUAL REPORT 2009 APPENDIX 112 113 Note 2009 2008 Consolidated Statement of Changes in Equity for the year ended December 31, (in millions of Russian Roubles) Decrease in accounts payable and accured liabilities 5 1 2009 Cash flow generated from operations 13,119 9,810 Equity attributable to OJCS NWT shareholders Interest paid (1,369) (944)

Income tax paid (456) (3,304) Share capital Cash flows from operating activities 11,294 5,562 Note Prefer- Ordinary Treasury Accrued Retained Total equity Non- Total Investment activities ence shares shares provision for earnings attrib- controlling equity shares revaluation utable to interest Purchase of property, plant and equipment, construction in progress and (6,787) (14,099) of financing OJSC NWT ivestment property assets share- available for holders Proceeds from disposal of property, plant and equipment, construction in 148 407 sale progress and investment property Balance as at 622 2,233 (67) 152 25,922 28,862 – 28,862 Purchase of intangible assets (1,189) (896) December 31, 2007

Proceeds from disposal of associates and interests in joint ventures – 273 Profit for the year –– __ 2,561 2,561 – 2,561

Purchase of financial assets (4,848) (3,027) Changes in fair –– – (152) – (152) – (152) value of financial Proceeds from disposal of financial assets 1,357 9,203 assets available for sale Interest received 117 314 Total other –– – (152) – (152) – (152) Dividends received 8– comprehensive loss net of icome tax Cash flows used in investing activities (11,194) (7,825) Total –– _ (152) 2,561 2,409 – 2,409 Cash flows from financial activities comprehensive Proceeds from borrowings 5,818 4,859 income for the year

Repayment of borrowings (7,962) (3,453) Shareholder transactions Proceeds from bond issue 2,979 2,999 accounted for in equity Repayment of bonds (500) – Dividends paid to 37 – – __ (1,552) (1,552) – (1,552) Proceeds from issue of promissory notes 300 – OJSC

Repayment of promissory notes (302) (6) Balance as at 622 2,233 (67) – 26,931 29,719 – 29,719 December 31, Repayment of vendor financing – (16) 2008

(Repayment of) proceeds from other long-term liabilities (6) 54 Profit for the year –––– 2,591 2,591 1 2,592

Repayments of finance lease liabilities (31) (150) Total –––– 2,591 2,591 1 2,592 comprehensive Dividends paid to OJSC NWT shareholders (867) (1,504) income for the year Cash flows (used in) from financing activities (571) 2,783 Shareholder Effect of exchange rate changes on cash and cash equivalents 44 (22) transactions accounted for in Net (decrease) increase in cash and cash equivalents (427) 498 equity

Cash and cash equivalents at the beginning of the year 1,001 503 Dividends paid to 37 – – – – (864) (864) – (864) OJSC NWT Cash and cash equivalents at the end of the year 574 1,001 shareholders

Balance as at 622 2,233 (67) – 28,658 31,446 1 31,447 December, 31 2009 General Director Chief Accountant June 1, 2010 V.A. Akulich M.M. Semchenko General Director Chief Accountant June 1, 2010 V.A. Akulich M.M. Semchenko

ANNUAL REPORT 2009 APPENDIX 114 115 Notes

The photographs on pages 10-11, 16-17, 68-69, and 88-89 were provided by RIA Novosti agency.