Annual Report 2011

Home , CenterTelecom, Dalsvyaz, Kuvandyk, Rostelecom, Sibirtelecom, Sky Link (Russia)

possibilities ANNUAL REPORT 2011

CONTENTS

About the company ...... 2 Key financial & operational highlights...... 12 Key events of 2011 & early 2012 ...... 14 Bright upside potential from the reorganization ...... 18 Strong market position ...... 20 Up in the “Clouds” ...... 22 Chairman’s statement ...... 24 Letter from the President ...... 26 Strategy ...... 28 M&A activity ...... 31 Corporate governance ...... 34 Board of Directors & committees...... 34 Management Board & committees ...... 37 Internal Audit Commission ...... 40 Remuneration of members of the Board of Directors and the Management Board...... 40 Dividend policy...... 41 Shareholders & share capital ...... 43 Corporate social responsibility ...... 46 Risk management ...... 49 Risk factors ...... 49 Risk management system ...... 51 Operating & financial review...... 52 Consolidated financial statements ...... 56 Glossary ...... 143 Contacts...... 146 ROSTELECOM ANNUAL REPORT 2011

ABOUT THE COMPANY

We (“the Group” or “the Company”) are a major Russian telecommunications provider, with points of presence (“PoPs”) in every region in Russia. On the basis of our advanced telecommunications network consisting of approximately 500,000 km of backbone infrastructure plus last mile connection and a fibre to the building or fibre to the home (“FTTx”) network we are providing access to 43 million subscribers.

We organize our business by two primary customer groups – residential customers (i.e., individuals) and corporate customers (i.e., legal entities, Russian Government agencies and entities under direct and indirect control of the Russian Government, telecommunications carriers and resellers that purchase our interconnection services), which represented 54% and 46% of our revenue, respectively, for the year ended December 31, 2011.

Our business is centred on providing integrated telecom solutions including local and intra-zone telephone services, international long-distance (“ILD”) and domestic long-distance (“DLD”) services, mobile voice, data services, broadband Internet access services and Pay-TV services to our broad base of customers in all regions of Russia.

Rostelecom had 28.5 million local fixed-line voice subscribers, 12.5 million mobile voice subscribers, 8.2 million fixed-line broadband subscribers and 5.9 million Pay-TV subscribers at the end of 2011. The Group generated RUB 296.0 billion of consolidated revenues, RUB 117.7 billion of OIBDA (39.8% of revenues) and RUB 46.1 billion of net income for the twelve months ended December 31, 2011.

Company’s ordinary shares were included in the Large Cap Seg- ment of the MSCI Global Standard Indices and MSCI Russia Index with 3.43% weight, effective from September 1, 2011.

2 www.rostelecom.ru 1 ROSTELECOM ANNUAL REPORT 2011 Key state interest in telecom industry

Rostelecom networks and services cover all Federal districts of Russia, including Moscow

www.rostelecom.ru 3 ROSTELECOM ANNUAL REPORT 2011 2 Unique infrastructure

~ 500,000 km of national backbone and strong “last-mile” infrastructure with ~43.4 million households passed

4 www.rostelecom.ru 3 ROSTELECOM ANNUAL REPORT 2011 Unique Strong infrastructure subscriber base

~ 28.5 million fixed-line subs, ~ 8.2 million fixed broadband subs, ~ 5.9 million Pay-TV subs and ~ 12.5 million mobile voice subs

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~28.5 million ~8.2 million Fixed-voice subs BB subs ~5.9 million ~12.5 million Pay-TV subs Mobile subs

St. Petersburg

Yekaterinburg Kaliningrad Novosibirsk Nizhny Novgorod

Moscow

Vladivostok Backbone Krasnodar Existing digital RRL Satellite

Sochi Data centers

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~43.4 million 8 Households passed Commercial data ~500,000 km centers of 1,223 m2 Backbone

St. Petersburg

Yekaterinburg Kaliningrad Novosibirsk Nizhny Novgorod

Moscow

Vladivostok Backbone Krasnodar Existing digital RRL Satellite

Sochi Data centers

www.rostelecom.ru 7 ROSTELECOM ANNUAL REPORT 2011 4 Positive Financial Results

Revenue 2011: RUB 296.0 billion OIBDA 2011: RUB 117.7 billion OIBDA margin 2011: 39.8% Net Income 2011: RUB 46.1 billion Cash CAPEX 2011: RUB 82.8 billion Net debt 2011: RUB 152.4 billion

8 www.rostelecom.ru 5 ROSTELECOM ANNUAL REPORT 2011 Positive Strategic Financial Goals Results Revenue: High Single Digit OIBDA margin: Enhancement CAPEX: Average 20% of revenues for the period 2011–2015 50% of fixed broadband market share

22% of wireless broadband market share

30% of Pay-TV market share

www.rostelecom.ru 9 ROSTELECOM ANNUAL REPORT 2011 6 Clear Ownership Structure

Government controls > 53% of ordinary shares

Treasury shares¹ ~ 7% of ordinary shares and ~13% of preferred shares

Minority shareholders < 40% of ordinary shares and > 70% of preferred shares

1 Shares held by Rostelecom subsidiary MOBITEL

10 www.rostelecom.ru 7 ROSTELECOM ANNUAL REPORT 2011 Clear Blue chip Ownership Structure Traded on MICEX-RTS

On September 01, 2011 Rostelecom was included in MSCI Large Cap with weight in MSCI Russia of 3.43%

Free Float < 40% of ordinary shares > 70% of preferred shares

Market capitalisation is US$ 14.4 billion1

1 As of April 30, 2012

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KEY FINANCIAL AND OPERATIONAL HIGHLIGHTS1

Revenue, RUB billion OIBDA, RUB billion CAPEX, RUB billion

Change OIBDA margin CAPEX/Revenue 39.8% +7% 28.0% 38.4% 38.5% 18.8% +4% 296.0 117.7 17.1% 275.7 82.8 264.6 106.0

51.8 45.4 101.6

2009 2010 2011 2009 2010 2011 2009 2010 2011

Net debt, RUB billion Net income, RUB billion

Net debt/OIBDA Change ×1.3 ×1.1 1 ×0.8 152.4 2 +47%4 46.1 119.8 +19% 31.3 82.0 26.3

2009 2010 2011 2009 2010 2011

1 Consolidated results of the merged companies and Rostelecom according to IFRS

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KEY FINANCIAL AND OPERATIONAL HIGHLIGHTS1

Local voice subscribers, million Broadband subscribers, million

Change Change +24% -0.9% -3.0% 8.2 29.6 29.4 28.5 +26% 6.7

5.3

2009 2010 2011 2009 2010 2011

Pay-TV subscribers, million Revenue breakdown by services, 2011 Change +540%

5.9 9% Others 30% Local Telephone services 6 7

6% Data services 2% Pay-TV

16% Broadband internet +19% 3% Rent of channels 0.8 0.9 7% Intra-Zonal

8% DLD/ILD 12% Mobile communication services 7% Interconnect and traffic transit 2009 2010 2011

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KEY EVENTS OF 2011 & EARLY 2012

2011

February 2011

On February 04, 2011, the Group completed the transaction to acquire 71.8% stake in OJSC National Telecommunications (“NTK”), largest independent cable TV operator and information provider in Russia.

The acquisition of NTK enabled Rostelecom to enter Moscow market and to attain a leading position in the Russian Pay-TV segment.

March 2011

Rostelecom and each of the Inter- regional Companies of Svyazin- vest (IRCs) contributed their respective repurchased shares to the share capital of MOBITEL, which became a 99.9% owned subsidiary of new Rostelecom when the merger was completed. MOBITEL therefore received 2.7% of Rostele- com’s outstanding ordinary shares and 28.8% of Rostelecom preferred shares.

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April 2011 June 2011 August 2011

On April 1, 2011, the IRCs and On June 2, 2011, Rostelecom On August 10, 2011, Rostelecom OJSC Dagsvyazinform were exclud- acquired 39.87% of the ordinary ordinary shares of the unified ised from the Unified State Register shares of OJSC Bashinformsvyaz, sue commenced trading on MICEX of Legal Entities, following their the largest telecoms operator in under the ticker RTKM in line with merger with OJSC Rostelecom. The the Republic of Bashkortostan. This the approval of the cancellation of ordinary and preferred shares and acquisition enabled Rostelecom to the individual numbers (codes) of bonds of the merged companies enter the market of Bashkortostan. the 16 additional issues of ordinary were exchanged for newly issued Rostelecom shares by the Rus- Rostelecom ordinary shares and On June 9, 2011, the Company’s sian Federal Service for Financial bonds. This completed the legal Board of Directors approved Markets (“FSFM”). Since Au- process of creating an integrated changes to the employee long-term gust 10, 2011 one issue of Rostele- Group based on Rostelecom. incentive programme by launching com ordinary shares (RTKM) an additional stock option pro- and one issue of preferred May 2011 gramme, amounting to 16.3% of shares (RTKMP) are traded on the total preferred shares or 1.2% MICEX. On May 12, 2011, Rostelecom’s of the total number of Rostelecom newly issued shares commenced shares. On August 31, 2011, Rostelecom trading on the CJSC Moscow Inter- acquired a 50% stake in CJSC Vol- bank Currency Exchange (“MICEX”) On June 27, 2011, Rostelecom AGM gograd-GSM from SMARTS Group. as 16 separate issues. approved the payments of an an- As a result, Rostelecom now holds nual dividend of RUB 105.5 mil- a 100% stake in Volgograd-GSM. On May 13, 2011, the Board of lion for the full year 2010, to be The company had 855,000 mobile Directors of Rostelecom approved paid to holders of Rostelecom subscribers as at the end of the its development strategy for preferred shares as at the record first quarter of 2011. 2011–2015. date of May 10, 2011. The dividend, amounted to a payment of On May 13, 2011, Standard & Poor’s RUB 0.4344 per preferred “class A” upgraded Rostelecom to “BB+” share. The AGM also approved with a “Stable” outlook. that no annual dividends be paid to holders of ordinary shares for the full year 2010.

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2012

September 2011 December 2011 February 2012

The MSCI included the Company’s On December 26, 2011, Board of On February 2, 2012, Rostelecom ordinary shares in the Large Cap Directors approved a revision of acquired 75% minus one share Segment of the MSCI Global Stand- the Company’s dividend policy. control over GNC ALFA, one of the ard Indices and MSCI Russia Index According to the new policy, the largest independent backbone with 3.43% weight, effective from Company will pay not less than operators in Armenia. September 1, 2011. 20% of its net profit, as determined in accordance with International On February 09, 2012 MOBITEL On September 2, 2011, Rostelecom Financial Reporting Standards completed the acquisition of 3.86% acquired a 49% stake in CJSC Oren- (“IFRS”), as a dividend on ordinary of Rostelecom shares for a total burg-GSM from SMARTS Group. shares. The dividend per one pre- cash consideration of RUB 19 bil- As a result, Rostelecom now holds ferred share was set at 10% of net lion through the over-the-counter a 100% stake in Orenburg-GSM. profit according to RAS, divided by market. As a result, MOBITEL’s The company had 185,000 subscrib- the total number of shares, which ordinary share stake in Rostelecom ers at the end of the first quarter comprise 25% of the Company’s increased to 6.55%. of 2011. share capital. On February 09, 2012, Rostele- October 2011 com signed an agreement with Svyaznoy, the owner of Russia’s On October 31,2011, Rostelecom largest mobile communications and announced that its Board of Direc- equipment retail network, which tors has authorized a buyback of establishes the terms of coopera- Rostelecom’s ordinary and pre- tion between the companies to sell ferred shares up to a total value of mobile equipment and services in US$ 500 million. 45 Russian regions.

On February 17, 2012, Rostelecom signed an agreement with Euroset, Russia’s largest mobile communications retailer, to establish unified conditions for cooperation between the companies to sell mobile equipment and services. Euroset’s shops will provide a full range of services for mobile voice subscribers of Ros- telecom, its subsidiaries and also SkyLink in the 44 regions, in which they operate.

1 According to the exchange rate of the Central Bank of Russia as at 01/02/2012

16 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

March 2012 April 2012

On February 24, 2012, Rostelecom Rostelecom successfully set up a Rostelecom signed an agreement signed a strategic cooperation video surveillance system to monitor with Yota, the Russian mobile memorandum with Mobile TeleSys- the voting process during the Rus- broadband provider, that gives tems to jointly develop fixed and sian Presidential elections as part Company access to Yota’s LTE mobile networks. According to the of contracts awarded by the Minis- network infrastructure. Rostelecom memorandum, the companies in- try of Communications of Russia. will utilise a feature-driven devel- tend to share each other’s existing Under the agreed scope of work, the opment (FDD) range of frequencies infrastructures, such as fibre optic Company collected and stored live of between 2500–2530 MHz and network resources, technological video records, provided access to a 2620–2650 MHz to provide telecom- equipment sites, power supply sta- data-communication network, and munications services as a Mobile tions, antenna towers and antenna also organised the Internet trans- Virtual Network Operator (MVNO). feeder stations. As part of the mission of live voting station videos Rostelecom intends to start provid- signed agreement, Rostelecom and during the Presidential elections on ing commercial services using an MTS will also jointly develop and March 4, 2012. The video surveillance LTE network in the Moscow region maintain the transport network and operation was solely executed by from September 1, 2012 and the base station infrastructure, and Rostelecom and over 90,000 polling provision of these services across also develop network monitoring stations were equipped with video other Russian regions will be rolled software systems. surveillance systems. The value of the out at a later stage. contract amounted to RUB 13 billion. On February 29, 2012, Rostelecom completed the acquisition of a On March 6, 2012, Rostelecom 100% stake in Enter LLC a broad- completed the acquisition of a band Internet services provider to 28.2% stake in NTK. As a result, individual subscribers in Barnaul, Rostelecom now holds a 100% Novokuznetsk and Tyumen. The deal stake in NTK. The transaction with serves as an alternative to capital NTK is expected to result in the expenditure in Enter’s regions. realisation of approximately RUB 2 billion in synergies by 2015.

On March 24, Decree № 340 on the reorganisation of OJSC Rostelecom was signed by the President of Rus- sia. It states that a unified company will be created by merging Svyazin- vest OJSC (“Svyazinvest”) and its total assets with Rostelecom. The Russian Federation’s stake in Rostelecom will amount to over 50% of ordinary shares when coupled with a stake belonging to the State Corporation Bank for Development and Foreign Economic Affairs (“Vnesheconom- bank”, “VEB”). At the same time, the Decree excludes Svyazinvest from the list of strategic joint stock companies.

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BRIGHT UPSIDE POTENTIAL FROM THE REORGANIZATION

On April 1, 2011, we completed the upon completion of the merger of additional issue and the respective merger of the seven IRCs and Dags- the IRCs and Dagsvyazinform into tickers were merged with the main vyazinform into the Company. The the Company. Shares of the IRCs and issue of the ordinary shares (RTKM). purpose of the Reorganisation is to Dagsvyazinform acquired by MOBITEL These changes were reflected on establish an integrated telecommu- were exchanged for our newly issued each owner’s account in line with nications operator, a market leader ordinary shares in the same manner each nominal holder’s and stock in each segment of the Russian tel- as shares of the IRCs and Dagsvy- exchange’s individual operating ecommunications market, eliminate azinform owned by their respective procedures. The total number of internal conflicts of interest, expand shareholders. MOBITEL currently the ordinary shares corresponded into new market segments and opti- holds 6.6% of the Ordinary Shares and exactly to the number of ordinary mize costs and capital expenditures. 12.6% of the Preferred Shares. shares prior to the Reorganisation.

As part of the Reorganisation, On April 1, 2011, the IRCs and On August 10, 2011, the unified issue ordinary and preferred shares of Dagsvyazinform were excluded from of the ordinary shares commenced the IRCs and Dagsvyazinform were the Unified State Register of Legal trading on MICEX. Since August exchanged for our newly issued or- Entities following their merger with 10, 2011, one issue of the ordinary dinary shares pursuant to exchange the Company, which assumed all shares (ticker: RTKM) and one issue ratios approved by the shareholders rights and obligations of the merged of preferred shares (ticker: RTKMP) of the Company and each of the IRCs companies. have been traded on MICEX. and Dagsvyazinform on the basis of reports of an independent ap- In accordance with Russian legis- The merger of the separate deposi- praiser LLC Ernst & Young. Prior to lation, the ordinary and preferred tary receipt issues, representing both the Reorganisation, the Company’s shares and bonds of the IRCs and newly issued ordinary shares and issued share capital comprised of Dagsvyazinform were exchanged those relating to the previous issue, 728.7 million ordinary shares and for newly issued ordinary shares was also finalized under the ticker 242.8 million preferred shares. To and bonds. Trading in the respective ROSYY. effect the Reorganisation, the annual shares and exchange-traded bonds of general meeting of the Company’s the merged companies was discontin- MSCI included the ordinary shares shareholders approved an increase ued with effect from March 28, 2011. in the Large Cap Segment of the of the Company’s authorized share MSCI Global Standard Indices, ef- capital to 5.9 billion ordinary shares On April 28, 2011, the FSFM regis- fective from September 1, 2011, to and our Board of Directors approved tered reports on the results of ordi- coincide with the effective date of the an increase in the Company’s share nary shares issuance. These newly August 2011 Quarterly Index Review. capital through the issue of an ad- issued shares commenced trading The preferred shares were not added ditional 2.2 billion ordinary shares. on MICEX on May 12, 2011. The newly to the MSCI indices. issued securities traded indepen- The Company, the IRCs and Dags- dently on MICEX for a three month The Decree № 340 on the reor- vyazinform repurchased shares period starting April 28, 2011 as ganisation of OJSC Rostelecom was representing, in aggregate, 2.7% of 17 separate issues of ordinary shares signed by the President of Russia the ordinary shares and 28.8% of the and one issue of preferred shares. on March 24, 2012. The Decree preferred shares post-Reorganisation states that a unified company will for approximately RUB 14 billion On August 3, 2011, the FSFM ap- be created by merging Svyazinvest from the Company’s, the IRCs’ and proved the cancellation of the and its total assets with Rostelecom. Dagsvyazinform’s shareholders who individual numbers (codes) of the The Russian Federation’s stake in voted against or did not vote on the 16 additional issues of ordinary Rostelecom will amount to over Reorganisation, respectively. Each of shares (RTKM-002D to RTKM-017D). 50% of ordinary shares when coupled the Company, the IRCs and Dagsvy- Following the receipt of the notifi- with a stake belonging to the VEB. It azinform contributed their respective cation of the cancellation of these will enhance Rostelecom’s invest- repurchased shares to the share codes, it was passed to the registrar ment case by simplifying its share- capital of MOBITEL, which became and to nominee holders. The indi- holder structure and eliminate the a 99.9% subsidiary of the Company vidual numbers of each registered cross ownership of Rostelecom.

18 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

Before April 1, 2011 Current structure

State stake State stake

State Property Agency

100% 1 1 40%1 51% 53.2% Other telecom assets

100%

25%+1 Other telecom 25%+1 assets Operational management

51%1 49%1 7 IRCs 2.7% Stock option plan 1 1 1 51% Dagsvyaz 49% 37.5% 1 Inform 9% 6.6%2 Treasury shares

Minority Shareholders Minority Shareholders

Target structure

State stake

State Property Agency

>50%1

3 ~X% 1 (treasury shares) >40% 100% Minority Shareholders MOBITEL 99.99%

Central Telegraph4, BashInformsvyaz4 Giprosvyaz ChukotkasvyazInform4, Ingushelectrosvyaz4, MMTS-94, Other 80% 68.1% 74,99% 100% 100% 99,8% Assets

1 Percentage of voting shares 2 These shares are held by Rostelecom 99.9% subsidiary MOBITEL. Rostelecom also controls 28.8% of preferred shares of which 16.3% are under 2011–2013 stock option program 3 X will depend on the valuation of Svyazinvest assets 4 Only after State Property agency contributes the assets into Svyazinvest. Additionally the Company considers the possibility to merge some of its subsidiaries into Rostelecom at the time of merger with Svyazinvest

www.rostelecom.ru 19 ROSTELECOM ANNUAL REPORT 2011

STRONG MARKET POSITION

As of December 31, 2011 Rostelecom was by far the biggest fixed-line operator by subscribers and backbone network and second best in terms of revenues.

Future growth will be supported by: • strong fundamentals; • leading positions in most segments of the Russian telecommunications market; • largest network infrastructure in Russia; • strong brand awareness and marketing expertise; • solid financial platform for further development; • experienced management team.

Fixed-line leader

Market size in 2011 US$ 4.6 billion

Penetration 2011 75%

Total lines 2011 40.7 million

12% Others

18% MTS

70% ROSTELECOM

Source: iKs-Consulting, Companies’ data, 2011, by number of lines, all data including corporate clients

20 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

Pay-TV (cable and IPTV) leader IPTV Market size 2011 US$ 1.2 billion Market size 2011 US$ 65 million Penetration 2011 35% Penetration 2011 3% Total customers 2011 17.6 million Total customers 2011 1.5 million

8% Others 30% Others 34% ROSTELECOM 47% ROSTELECOM

7% MTS

3% Vimpelcom 17% MTS 6% Akado 38% Vimpelcom 10% Er-Telecom

Source: iKs-Consulting, Companies’ data, 2011 Source: iKs-Consulting, Companies’ data, 2011

Broadband leader Challenger in mobile voice

Market size 2011 US$ 2.4 billion Market size 2011 US$ 26.2 billion

Penetration 2011 37% Penetration 2011 157%

Total subscribers 2011 19.2 million Total customers 2011 227.6 million

2% Others 9% Tele2 31% MTS 25% Others 40% ROSTELECOM

25% Vimpelcom

4% Akado

10% Er-Telecom 6% ROSTELECOM

11% Vimpelcom 11% MTS 27% Megafone

Source: AC&M-Consulting, 2011, by residential subs Source: AC&M – Consulting, 2011, Rostelecom share includes SkyLink subs

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Up in the “Clouds”

Market overview: Background and goals Key segments of of National Cloud National Cloud services: • in 2010 global market for cloud computing platform: computing was estimated at • electronic government – full US$ 58.6 billion with forecasted • boost reliability and operation spectrum of e-services in a cloud growth of up to US$ 178.6 billion in security of scalable infrastruc- with over 70 federal governments 2015 (CAGR 20%)1; ture; already subscribed. All services are provided via www.gosuslugi.ru; • in 2012 around 80% of companies • cost reduction of creation, mod- from Fortune 1000 list will be ernization and maintenance of • cloud document management cloud users, around 20% of them infrastructure solutions and hard- system for federal and regional will be fully transferred to cloud ware due to dynamically provided governments; computing; Platform resources; • electronic Medicine – over • in Russia the market was around • elimination of services develop- 14,000 clinics across Russia US$ 35 million in 2010 compared ment duplication due to typical with electronic card, on-line to US$ 700 million in Germany. services on SaaS model; registrar, etc. (Federal budget – The forecast for 2015 – to reach RUB 240 billion); US$ 1.2 billion (103% CAGR)2. • ensuring of IT costs transparency of executive authorities of differ- • electronic Education – “School of ent levels due to standardized the Future” Project on-line journals services with fixed price; and school books, distant education, Market for web-cameras security for schools • reduction of solutions deployment (Federal budget – RUB 60 billion); Cloud computing and implementation time; • housing services and Utilities – in Russia (US$ million) • large-scale informatization of unified information and billing municipalities’ activities on the system for over 100,000 local CAGR basis of available services and dy- management companies; 2010–2015 namically provided infrastructure; +103% • virtual Office – cloud solution for 1,200 • development of cloud services small and mid-size enterprises; engineering market and IT-services provision market. • safe city – № 112 emergency ser- 700 vice, ecological monitoring.

Germany Russia Russia 2010 2010 2015

1 1 Gartner Technology research 2 IDC research

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B2C B2B B2G

Integrated solutions

IaaS PaaS SaaS

APPLIED SERVICES

Content Content, multimedia, Interactive services М2М platform

Convergent Core services package solutions

INFORMATION TECHNOLOGIES

Information systems NSS/OSS BSS ERP SDP VSP and platforms

Cloud computing infrastructure

Data centre

NETWORK INFRASTRUCTURE Satellite networks

Wireless networks

Backbone

Regional networks

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CHAIRMAN’S STATEMENT

Minority shareholders benefit from higher trading liquidity, due to the increase in Rostelecom’s outstanding shares, and the inclusion of Rostelecom’s shares into the MSCI Index means that shareholders now have a blue chip investment in their portfolio.

Dear Shareholders and Stake- the business has become far more Minority shareholders benefit holders, stable and its investment appeal from higher trading liquidity, due has significantly increased. It also to the increase in Rostelecom’s Rostelecom embarked on a major means we have the largest tele outstanding shares, and the inclu- new chapter of its history in 2011. communications infrastructure sion of Rostelecom’s shares into The reorganisation of our Com- in Russia, our ability to promote the MSCI Index means that share- pany and the consolidation of its innovative telecommunications holders now have a blue chip regional telecom operators mean solutions has been enhanced and investment in their portfolio. The that as well as becoming a giant our competitive positioning is additional fundamental value cre- of the domestic telecommunica- superior to anything else in the ated by the consolidation has at- tions market, Rostelecom is also marketplace. tracted interest from a wide range one of the world’s largest telecom of investors and this has strength- companies in terms of scale. This The consolidation brings a range ened our position when negotiat- brings with it a wide range of of additional benefits, particularly ing strategic M&A transactions. benefits as it expands our share of to consumers and end users. The New partners are increasingly the telecommunications market as quality and variety of services pro- requesting the use of Rostelecom well as our presence in the capital vided by Rostelecom to the public, to shares as currency in transac- markets. businesses and to the government tions due to their high investment will improve and the introduction of potential. This is why the Board The decision to reorganise a fourth major federal-level player of Directors has approved a share Rostelecom was driven by our de- to the industry will intensify compe- buyback, in which the Company sire to take the Company to a new tition. A larger, universal operator accumulated a 3.86% stake of its and exciting stage of its develop- also strengthens the State’s ability ordinary shares. Some of these ment. As a result of its restructur- to modernise Russia’s network in- shares, which were acquired from ing, Rostelecom is a larger entity, frastructure, of which Rostelecom’s minority shareholders in over- the value of its assets has grown, networks form a major part. the-counter transactions to limit

24 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

The strategy, which been designed to improve opera- equals 32.48% of 2011 net profit tional performance and modernize as determined in accordance with sets out clear and diversify the Company’s offer- International Financial Reporting medium-term ing. The new, united Rostelecom Standards (“IFRS”), including: is fast on the way to becoming a • a 2011 cash dividend of objectives, has modern service company with a RUB 4.6959 per share on the range of quality services, sup- Company’s Class A preferred been designed to plied by highly skilled and talented shares, which represents 3.5% ensure high levels personnel. of 2011 net profit under RAS or 2.48% of 2011 net profit under of success, stability Rostelecom’s Corporate Govern- IFRS on all Class A preferred ance policies are being reviewed shares; and sustainability for as part of our restructuring, as • a 2011 cash dividend of Rostelecom. is the approval of a new united RUB 4.6959 per share on the Rostelecom dividend policy. Company’s ordinary shares, Changes to the Company’s divi- which is equivalent to 42.45% of dend policy are of benefit both to 2011 net profit under RAS or 30% existing shareholders and to po- of 2011 net profit under IFRS on tential investors, as the threshold all ordinary shares. any dilution of the Company’s free for minimum dividend payout for float and to prevent stock price ordinary shares has been revised. I am confident that the reorgani- fluctuations caused by an open The Company also now uses sation is just the beginning of bet- market buyback, may be sold International Financial Reporting ter changes. We are proving that during the Company’s SPO. The Standards to determine united Rostelecom is able to promote buyback presents obvious benefits Rostelecom’s net profit for the change within itself and the com- and when Rostelecom’s growth purpose of calculating total divi- petitive landscape that surrounds potential is taken into considera- dend payments. This corresponds it. This creates unique advantages tion, we consider the deal do be to best international practices for the Company, sets the course highly accretive to all our share- and enables more objectivity in for the market and creates bigger holders. evaluating the Company’s per- opportunities for its customers, formance, as contributions from partners, employees and share- Looking further ahead, the Board’s Rostelecom’s subsidiaries and holders. approval of the united Rostelecom’s affiliates are taken into account. strategy up until 2015 is an additional significant landmark. The Board of Directors recom- The strategy, which sets out clear mended that the AGM approves Sincerely, medium-term objectives, has been to pay a dividend for 2011 that designed to ensure high levels of amounts to RUB 14,961.559 mil- Ivan Rodionov success, stability and sustainability lion or 45.95% of 2011 net profit Chairman of the Board of Directors for Rostelecom. A clear plan has in accordance with RAS, which of Rostelecom

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LETTER FROM THE PRESIDENT

Our current infrastructure places us in a position of unprecedented strength across Russia, and major steps have been taken to unlock significant potential in other parts of our business, primarily in fixed and mobile data, and the Pay-TV segment.

Dear Shareholders and Stake- In May, we announced a 5-year 500,000 new subscribers signing- holders, strategy designed to make Rostele up. We have also launched a unique com the top Russian telecoms federal broadband offering, capa- A great deal has been achieved operator both in terms of revenue ble of reaching customers across in 2011 and it has become clear and the number of subscribers. the whole of Russia, which offers that the foundations we have The new strategy is Rostelecom’s customers the freedom to choose been laying to create a national response to significant market which services they require to bet- telecommunications champion changes and once the strategy is ter control their spending. are bearing fruit. We successfully fully implemented, Rostelecom will completed the legal reorganisa- become a universal operator with Our current infrastructure places tion of the Group by finalising the a particular focus on wireless and us in a position of unprecedented merger of seven inter-regional wireline broadband services. Our strength across Russia, and major telecoms companies, and Dagsvy- new strategy brings together all steps have been taken to unlock azinform, with Rostelecom and the of our businesses into one and all significant potential in other parts united Company started trading our businesses will operate under of our business, primarily in fixed under a single share on MICEX in a single new brand identity that we and mobile data, and the Pay-TV August 2011. Our ordinary shares launched in September. segment. We are looking to develop have now also been included in the our data services, we are modern- Large Cap Segment of the MSCI A number of successful new tariffs ising our last mile technology, we Global Standard Indices and the and offerings have been launched are constructing a multi-standard MSCI Russia Index in September, as part of this strategy. Among mobile network and we are looking carrying a 3.43% weighting. This them is a bundle service which to invest in a ten-fold increase of is a major development for us and combines all of Rostelecom’s our backbone capacity. Our mobile reflects Rostelecom’s standing as united services in a single offer- segment now has all the approv- a blue chip investment. ing, which has led to more than als it needs to use our licensed

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We carried out a great Russian operators to strengthen rior shareholder returns regardless our market positions and we also of the global economic outlook. deal of work for the bought an operator in the Republic Government, including of Armenia in line with our strategy Apart from tremendous potential to acquire operators in the CIS in our fundamental business we the E-Government region with a high concentration of see 3 areas of further unlocking traffic. currently hidden value in: programme and • proposed decreasing in the num- video surveillance All of this strengthens our position ber of shares outstanding after to do more work for the Russian the planned merge with Svayz- system to monitor Government. We carried out a invest and subsequent change in great deal of work for the Govern- multiples; the voting process ment, including the E-Government • capitalizing on revision of real during the Russian programme and video surveillance estate portfolio; and system to monitor the voting pro- • increasing the share of IT and Presidential elections, cess during the Russian Presiden- clouding projects using the exper- tial elections, and the quality and tize from E-Government project and the quality and efficiency with which the projects diversifying us from being a pure efficiency with which have been completed demonstrates telecom company. why we have become a preferred the projects have partner. We are therefore well po- We look forward to keeping you up sitioned to participate competitively to date with our progress over the been completed in Government tenders as they look coming year. demonstrates why to invest over RUB 300 billion in the modernisation of education and we have become a public health systems in 2012. preferred partner. Finally, we worked closely on the merger of Svyazinvest into Alexander Provotorov Rostelecom. This process was President and Chief Executive started, following the signing of Officer Decree on the reorganisation of frequencies and we plan to build OJSC Rostelecom by the President 3G networks in 27 Russian regions of Russia. The Decree states that a in 2012. We are also ahead of the unified company will be created by curve in terms of providing 4G net- merging Svyazinvest and its total works, having been one of the first assets with Rostelecom. The Rus- players to sign an agreement with sian Federation’s stake in Rost- Scartel (Yota), the Russian mobile elecom will amount to over 50% of broadband provider, to jointly de- ordinary shares when coupled with velop and utilise fourth generation a stake belonging to Vnesheconom- networks across Russia. We always bank. We hope that this deal will be look at ways of sharing costs and finalized within the time stated by if teaming up with other provid- the President of Russia. ers helps us achieve this, then we will share infrastructure, as, for We are therefore well on the way to example, our strategic cooperation achieving our objective of becoming memorandum with Mobile TeleSys- the number one Russian telecoms tems suggests. operator both in terms of revenue and the number of subscribers. We 2011 was an extremely busy year operate in markets with tremen- on the M&A front too. As well as dous growth potential and we fully acquiring NTK, the largest inde- intend to capitalize on this. Pos- pendent cable TV operator and sessing a leading position in such information provider in Russia, to a dynamic market will only serve to strengthen our triple services, we strengthen our economic value as also acquired a series of regional well as our ability to deliver supe-

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STRATEGY

Key directions for Rostelecom development are focused on creating the Our key strategic objective is to en- integrated telecom leader in all the segments1 of the Russian market sure our sustainable growth and to both in terms of revenues and subscribers continue to deliver significant economic value to our shareholders. To achieve this goal, we plan to under- The structure of the Russian telecommu- take a set of strategic initiatives in nications market is currently undergoing order to strengthen our market po- significant changes and Rostelecom shall sition in the most promising growth therefore focus on the development of Revenue segments of the Russian telecom- wireline and wireless broadband services and margins munications market, improve over- for private clients and the corporate servi all operational efficiency, and boost growth ces segment, in order to further strengthen overall profitability by optimizing the Company’s market positions. key business processes, upgrading Stable revenue growth, OIBDA margin infrastructure and improving labour enhancement productivity.

We plan to offer our services Market position 50% – fixed broadband market share², 22% – wireless broadband market share², throughout Russia, including enhancement 30% – Pay-TV market share² Moscow and St. Petersburg, as well as regions that are not currently covered by our licenses. We plan to Net debt / OIBDA ratio of up to 2x during Healthy debt accomplish our strategic initiatives the implementation period of the develop- by developing both organically and to OIBDA ratio ment strategy through M&A activity. We expect 20% average CAPEX to reve Balanced Our strategic initiatives include: nues ratio for the 5-year period, mainly in investment policy 2011–2013 Utilising our existing backbone network to provide mobile voice and wireless broadband Inter- net services across Russia. We intend to develop our mobile voice Goal: increase in revenue along with margins enhancement and broadband Internet business across Russia, and increase our wireless broadband internet access market share. In order to achieve this, we plan to develop a 1 Excl. mobile voice segment nationwide multi-standard voice 2 All market shares are calculated by number of subscribers and data transmission network

We aim to become a truly integrated operator and to increase our overall market share to 26% by 2015 from current 22%.

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based on CDMA (450 MHz), Strengthening leadership in the offerings with our broadband In- GSM (900/1800 MHz), Univer- fixed-line broadband Internet ternet access services. We intend sal Mobile Telecommunications access segment. We intend to to develop an integrated platform Services (“UMTS”) (2100 MHz) and develop our fixed-line broadband to deliver content to the end-cus- LTE (2300–2400 MHz) standards. Internet access services by ensur- tomers; build a centralised content We plan to utilize all mobile coming the availability of broadband portfolio, including through lever- munications licenses and frequen- Internet access services based aging our own content production, cies currently available to us, on our multi-standard network as well as enhancing the quality of including GSM licenses in 40 re- throughout Russia. We plan on de- the content portfolio by concluding gions of Russia and LTE licenses veloping our nationwide broadband exclusive contracts with leading in 39 regions of Russia. We plan to Internet network in accordance content providers; launch and participate in frequency allocation with the following principles: develop “over-the-top” TV services auctions announced by regulatory • in large Russian cities (i.e., those (i.e., providing video/TV content authorities and will seek to have with a population of more than via wireline or wireless broadband allocated frequency bands real- 750,000), we intend to develop network to our subscribers TV sets located for use in third generation a fibre optic network infra- over the top of other operators’ wireless (“3G”) and 4G networks. structure, primarily through the cable networks); offer IPTV ser- acquisition of alternative telecom vices to other operators’ subscrib- We believe wireless broadband operators, and also through ers; and retain and develop our Internet access is the key mo- organic development; cable TV business, while ensuring bile service offered to custom- • in the administrative and eco- gradual migration of our exist- ers. Our mobile coverage plans nomic centres of the Russian ing subscribers to IPTV services provide for high levels of quality regions (i.e., those cities with a as we modernise and upgrade and availability of wireless data population between 350,000 and our networks based on fibre optic services to users of all types of 750,000), we plan to organically technology. connection devices and across develop our fibre optic network all transmission standards. In infrastructure; Enhancing leadership positions in order to achieve this, we intend • in other urban areas (i.e., those the business to business (“B2B”) to reorganise our mobile com- cities with a population of less and business to government munications business to create than 350,000), we plan to utilise (“B2G”) segment. We intend to an integrated wireless operator, the potential of existing copper establish a separate organisational centralise technical and techno- wire infrastructure providing and functional business line to logical policies, ensure cross- broadband Internet access based serve B2B customers. We plan to usage of backbone network on digital subscriber line tech- increase our service offerings to all infrastructure and integrate busi- nology (“xDSL”) and to build fibre types of corporate customers, in- ness processes in our mobile and optic network infrastructure; cluding national corporations, large fixed-line businesses. We plan on • in rural areas, we plan to provide businesses and SMEs. We intend developing our nationwide multi- Internet access based on the to accomplish this by utilising our standard voice and data transmis- existing copper wire network highly qualified sales managers, sion network in accordance with through xDSL technology and able to efficiently conduct direct the following principles: potentially through the use of sales; improving our IT infrastruc- • in large Russian cities (i.e., those Sky Link’s wireless CDMA net- ture, including centralising our with a population of more than work; and billing system and implementing 750,000), we intend to provide • across our entire network, in- a customer relationship manage- services based on LTE and UMTS cluding both trunk and last mile ment, or CRM, system; unifying and standards; segments, we intend to deploy centralising all business processes, • in the administrative and eco- high-performance transmission including sales and marketing nomic centres of the Russian equipment and maintain a high and provision of services; and regions (i.e., those cities with a level of data transmission capac- establishing an integrated product population between 350,000 and ity to ensure connection reliability portfolio for corporate customers, 750,000), we intend to provide and high quality of service. including IP VPN services, satellite services based on UMTS stand- communication services and infra- ard; and Attaining sizeable market posi- structure services including data • in other urban areas (i.e., those tions in the Pay-TV segment. We centres. We also plan on leveraging cities with a population of less plan to increase marketing of our our unique nationwide infrastruc- than 350,000) and in rural areas, Pay-TV, including internet protocol ture to become the unparalleled we intend to provide services TV (“IPTV”), services to our exist- leader in the provision of a full based on CDMA 450 standard. ing subscriber base via bundled range of services to large corporate

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clients with operations throughout tive to different segments of our • large government-sponsored Russia. customer base. We also plan on projects involving the use of our centralising our fixed-line churn telecommunications infrastruc- As part of this strategy, we plan on management business processes ture, such as Electronic Educa- establishing commercial relation- and applying international and tion and Electronic Medicine; ships with B2G clients, providing Russian best practices to protect • remote applications; them with telecommunication and fixed-line traffic and subscribers • web portal providing paid access IT infrastructure, which will enable churn, including the introduction to third party content provid- them to provide public services of session initiation protocol, or ers and solutions for social online. As part of our B2G busi- SIP, telephony, bundling fixed-line networks, niche web-sites and ness, we plan on implementing the telephony services with broadband search engines; and “Electronic Government” project, Internet access and Pay-TV, or • outsourcing services and IT func- launched and supported by the triple-play, as well as with mobile tions, managing clients’ networks Russian Government. We intend telephony as part of our fixed to and equipment maintenance. to leverage our expertise gained mobile convergence package, or from implementing the “Electronic quadruple-play. Re-branding. We intend to gradu- Government”, including the Soft- ally introduce the “Rostelecom” ware as a Service (“SaaS”) model, Realizing the potential operational brand across the entire Group while to provide a broader range of ser- efficiencies resulting from the terminating use of the brands the vices to our corporate customers. completion of the Reorganisation. IRCs used prior to the Reorgani- We also plan to partner with third Following the Reorganisation we sation. We launched a promotion parties to enable provision of their plan to reengineer our key business campaign of the new brand at both services through the public servic- processes, which account for a ma- the national and regional levels. es portal, developed as part of the jor part of our operational expenses, “Electronic Government” project. and optimize our management structure. In particular, we intend to Enhancing leadership positions achieve multiple operating syner- in and further developing our gies by removing network overlaps operator business. We intend to and ensuring the centralised devel- establish a separate organizational opment of our network and IT re- and functional business line and sources based on unified standards; leverage our nationwide telecom- reorganising our sales network and munications infrastructure to serve reengineering our marketing pro- telecommunications network car- cesses; unifying remote marketing riers. We also intend to aggregate and customer support by launching the most popular Internet content an integrated call centre; launching in Russia at our data centres to a single portal to market services enhance the quality of our IP traf- and customer support; centralising fic transit services. We plan on procurement functions, including increasing network connectivity network equipment purchases; by expanding peering agreements transitioning a significant portion of with the largest network infra- our fixed-line telephony subscribers structure operators in Russia while in remote towns to wireless access increasing traffic exchange with technology; removing duplicative international carriers. administrative and support functions and optimising our personnel Maintaining leading positions in structure; and eliminating internal the traditional fixed-line telepho- competition between the Company ny business. We intend to limit the and the IRCs in the wholesale (op- impact of the trend of fixed-line erator) market. traffic and subscribers shifting to mobile networks in order to Development of innovative preserve our fixed-line telephony services. We intend to develop revenues. We plan to increase the and launch a variety of innovative scope of our tariff plans with re- services, including: spect to local, intra-zone and DLD/ • cloud computing; ILD services through the introduc- • content delivery networks tion of new tariff offers attrac- (“CDN”);

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M&A ACTIVITY

Acquisition of NTK network covers 85%, 80% and respectively. The federally owned 85% households, respectively. interest of 29.3% ordinary shares On February 4, 2011, we, together in OJSC Bashinformsvyaz is ex- with two IRCs, OJSC Uralsvyaz On March 6, 2012, Rostelecom pected to be contributed into the inform and OJSC North-West completed the acquisition of charter capital of OJSC Svyazin- Telecom, acquired 71.8% of the a 28.2% stake in NTK for a vest in accordance with the edicts share capital of NTK for a com- total cash consideration of of the Russian President № 1005 bined cash consideration of RUB 13.8 billion. As a result, “On the development of the open RUB 27.9 billion. The shares were Rostelecom acquired 100% shares joint stock company Svyazinvest”, acquired from CJSC National Me- in NTK for RUB 41.7 billion, after dated August 12, 2010, and dia Group, OJSC Surgutneftegaz taking into account a 71.8% stake № 1418 “On the further develop- and Raybrook Limited. In addi- purchased in February 2011. The ment of the OJSC Svyazinvest”, tion, we acquired NTK promissory transaction with NTK is expected dated November 15, 2010. notes previously issued by it to to result in the realisation of one of the sellers of NTK shares approximately RUB 2 billion in Acquisition of stake in with the aggregate face value of synergies by 2015. Volgograd-GSM RUB 3.9 billion for a cash consideration of RUB 3.7 billion. The Acquisition of stake in In August 2011, we acquired a interest rate under these notes Bashinformsvyaz 50% interest in CJSC Volgograd- varies from 6.0% to 9.5% per GSM from SMARTS Group for annum and the notes mature in In June 2011, we acquired a total cash consideration of June 2012 and 2013. 39.9% of the ordinary shares RUB 2,322 million, increasing in OJSC Bashinformsvyaz from our aggregate shareholding in NTK is a major cable TV operator Bashtelekominvest LLC for a CJSC Volgograd-GSM to 100%. in Russia and also has a signifi- combined cash consideration of cant presence in the broadband RUB 3,640 million. CJSC Volgograd-GSM provides Internet access market. NTK GSM mobile services in the Vol- provides Pay-TV services, both OJSC Bashinformsvyaz is a major gograd region covering 33 of the social and extended packages, as telecoms operator in the Republic region’s districts, or 90% of the well as broadband Internet ac- of Bashkortostan which provides region’s 2.6 million inhabitants. cess for corporate and residential fixed-line telephony, broadband CJSC Volgograd-GSM had 857,000 customers. NTK also provides Internet services and Pay-TV ser- mobile subscribers as at the end distribution services to 93 Pay-TV vices to residential and corporate of the second quarter of 2011, channels, operates 7 TV channels clients. It also leases channels to and a 20% share of the region’s of its own production and pro- other telecoms operators. OJSC GSM market as at the end of vides telephony and line leasing Bashinformsvyaz owns and oper- 2010. In 2010, CJSC Volgograd- services. ates modern network infrastruc- GSM reported RAS revenues of ture in Ufa, Salavat, Oktyabrsky, RUB 1,748 million and EBITDA of NTK owns and operates mod- Sterlitamak and other major RUB 708 million. ern network infrastructure in cities of the Republic of Bashkor- seven Russian cities – Moscow, tostan. Acquisition of stake in St. Petersburg, Ekaterinburg, Orenburg-GSM Novosibirsk, Kurgan, Elektrostal In 2010, OJSC Bashinformsvyaz and Sredneuralsk. In Moscow generated RAS revenues of In September 2011, we and Ekaterinburg, NTK utilizes RUB 5,676 million and EBITDA of acquired a 49% interest in FTTx technology, while in St. Pe- RUB 1,722 million. CJSC Orenburg-GSM from tersburg, Novоsibirsk, Kurgan, SMARTS Group for a total cash Elektrostal and Sredneuralsk, The FASPM and the Ministry for consideration of US$ 4 million, NTK uses hybrid fibre coaxial Property Relations of the Republic increasing our aggregate share- (“HFC”) technology. As of Decem- of Bashkortostan currently own holding in CJSC Orenburg-GSM ber 31, 2011 in Moscow, St. Pe- 29.3% and 18.5% of the voting to 100%. tersburg and Ekaterinburg NTK shares in OJSC Bashinformsvyaz,

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CJSC Orenburg-GSM provides the territory of the Republic of Enter’s network infrastructure GSM mobile services in the Oren- Armenia. GNC-ALFA’s network is was built in 2010 and it is among burg region and its major cities interconnected with the region’s the most modern networks in Orenburg, Orsk, Novotroitsk, major backbone networks and the three cities it serves. The Mednogorsk, Buzuluk, Bugu- major MMR (“meet-me-room”) network is built using Metro ruslan, Kuvandyk, Sol-Iletsk and centres, as well as with certain Ethernet technology and has other towns. CJSC Orenburg-GSM international gateways. GNC-Alfa fibre-optic communications lines had 185,000 subscribers at the is a majort independent aggrega- that exceed 480 km in length. The end of the second quarter of 2011, tor of national IP-traffic, and its network’s technical scope covers and an 8% share of the region’s subsequent transit, in Armenia. In around 2,600 multi-storey build- GSM market as at the end of 2011, GNC-Alfa reported revenues ings passed, or around 80% of all 2010. In 2010, CJSC Orenburg- of approximately US$ 12 million. multi-storey buildings in Barnaul GSM reported RAS revenues of and over 50% of the multi-storey RUB 194 million and EBITDA of Acquisition of Enter buildings in Novokuznetsk. RUB 32.6 million. In February 2012 Rostelecom Buyback of 3.86% shares EXPECTED Acquisition of completed the acquisition of a Sky Link 100% stake in Enter LLC (“En- In February 2012 MOBITEL LLC ter”), a broadband Internet servic- has completed the acquisition In November 2011, the FAS grant- es provider to individual subscrib- of 3.86% of Rostelecom shares ed clearance to LLC MOBITEL ers in Barnaul, Novokuznetsk and for a total cash consideration (“MOBITEL”), our 99.9% owned Tyumen, for a total cash consid- of RUB 19 billion with the help subsidiary, to acquire 50% of eration of RUB 305 million. of debt financing. As a result, voting shares in CJSC Sky Link Motel’s ordinary share stake in (“Sky Link”), a leading Russian The acquisition of Enter reflects Rostelecom increases to 6.55%. 3G operator and a wholly owned Rostelecom’s strategy to increase subsidiary of Svyazinvest. its subscriber base and modern- To limit the dilution of the Com- ise its network infrastructure. The pany’s free float, as well as any Acquisition of GNC-Alfa deal also serves as an alternative stock price fluctuations caused by to capital expenditure in Enter’s an open market share buyback, In February 2012, our wholly regions, as it provides Rostelecom the 3.86% stake in Rostelecom’s owned subsidiary Teleset Net- with access to Enter’s modern ordinary shares has been accu- works Ltd acquired a 75% minus network and it provides the Com- mulated by VTB Capital Plc and one share stake in GNC-Alfa, one pany with the technical ability to Renaissance Securities (Cypus) of the largest independent back- offer a broader range of services, Limited on behalf of MOBITEL. bone operators in Armenia, for including IPTV services to Enter’s The shares were acquired from US$ 22.5 million. existing subscribers and more minority shareholders through modern and high-speed commu- the over-the-counter (OTC) mar- GNC-Alfa operates a modern nications services to Rostelecom ket. fiber-optic network spanning customers. approximately 1,500 km, which This additional stake is expected covers approximately 70% of to be used to facilitate strate-

The acquisitions we made in 2011 added 6 million subscribers to our subscriber base, made us a leader of the Russian Pay-TV market and strengthened our positions on mobile market.

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gic acquisitions, or it may be ing commercial services using sold during the Company’s SPO, an LTE network in the Moscow depending on the status of the region from September 1, 2012 securities market. and the provision of these services across other Russian regions will Agreement with be rolled out at a later stage. The Skartel (YOTA) Company also plans to offer subscribers its branded telecommu- Rostelecom signed an agree- nication equipment. MVNO-model ment with Yota, the Russian will enable Rostelecom to optimise mobile broadband provider, its costs and resources when that gives Rostelecom access to starting to provide 4G network ser- Yota’s LTE network infrastruc- vices in the near future. It will also ture. Rostelecom will utilise help to expand Rostelecom’s range a feature-driven development of services in Moscow. (FDD) range of frequencies of between 2500 – 2530 MHz and 2620–2650 MHz to provide telecommunications services as a Mobile Virtual Network Operator (MVNO). Under the terms of the contract test services are expected to commence July 1, 2012. Ros- telecom intends to start provid-

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СORPORATE GOVERNANCE

We are governed by the General All of the Directors were elected or re- served as the managing director of Meeting, the Board of Directors elected on June 27, 2011 by the Com- AIG-Interros RCF Advisor. Mr. Rodio and our management board (the pany’s annual general shareholders’ nov graduated from the Lomonosov “Management Board”). The Board meeting. The terms of appointment Moscow State University in 1978 with of Directors is responsible for our for each Director expire on the date of a degree in economics. strategic development, while the the next annual general shareholders’ Management Board is responsible meeting of the Company. Vladimir N. Bondarik has been a for implementing such strategies member of our Board of Directors and our overall management. There The qualifications and certain other since May 2009 and served as its are no service contracts between information for each Director are set Chairman in 2010. He also serves as us and the Directors. There are no forth below: the general director of OJSC Gypro family relationships between any of svyaz, deputy general director of the Directors and the members of Ivan I. Rodionov has been a mem- Svyazinvest and advisor to the Min- the Management Board. ber of our Board of Directors since ister at the Ministry of Communica- May 2009 and its Chairman since tions and Mass Media of the Russian BOARD OF DIRECTORS & June 2011. Mr. Rodionov also serves Federation. Mr. Bondarik also serves COMMITTEES as a member of the board of direc- as the chairman of the board of tors and a member of the audit directors of OJSC Vitanet since 2010. Board of Directors committee of Svyazinvest. He also From 2005 to 2008, Mr. Bondarik serves as a member of the boards of held various management positions, Pursuant to the Joint Stock Compa- directors of OJSC FosAgro, Svyaz including the general director, the nies Law and our charter, members invest, OJSC IBS Group Holding, managing director and the deputy of the Board of Directors are elected OJSC EnergoMashinostroitelny general director, at LLC Roilcom. In annually by a general meeting of Alliance, OJSC Rusinvest, and addition, he served as the general shareholders. A person elected as OJSC Amofos. Mr. Rodionov has also director of LLC Sensor Systems from a member of the Board of Direc- served as a member of the board of 2004 to 2005. Mr. Bondarik gradu- tors may be re-elected an unlim- directors of OJSC MGTS from 2005 ated from the Moscow Institute of ited number of times. The business to 2007. In addition, he is a profes- Physics and Technology in 1980 with address for each of our Directors is sor at the Russian State University a degree in radio-electronic devices. 14, 1-st Tverskaya-Yamskaya Street, for the Humanities and a professor Moscow 125047, Russian Federa- at the National Research Univer- Yury A. Kudimov has been a mem- tion.The membership of the Board of sity – Higher School of Economics. ber of our Board of Directors since Directors is set out below: From 2004 to 2006, Mr. Rodionov June 2010. He also serves as the Members of the Board of Directors

Name Date of Birth Position Since Ivan I. Rodionov November 30, 1953 Chairman of the Board of Directors May 2009 Vladimir N. Bondarik November 7, 1957 Director May 2009 Yury A. Kudimov April 19, 1953 Director June 2010 Sergey I. Kuznetsov December 25, 1953 Director June 2011 Anatoly A. Milyukov April 15, 1972 Director June 2011 Alexander N. Pertsovsky September 2, 1968 Director June 2011 Alexander Y. Provotorov November 7, 1974 Director May 2009 Igor O. Shchegolev1 November 10, 1965 Director June 2011 Vadim V. Semenov August 21, 1965 Director January 2011 Anatoly V. Tikhonov June 13, 1969 Director June 2010 Anton A. Zlatopolsky September 12, 1966 Director June 2011

1 As per Mr. Shchegolev’s request, Rostelecom does not notify him of the Board of Directors’ meetings and/or absentee voting, and does not submit to him meeting materials

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general director of LLC Investment sity with a degree in economics. In eration. Mr. Shchegolev graduated Company of Vnesheconombank 2001, Mr. Milyukov graduated from from the M. Tores Moscow State (VEB Capital). Mr. Kudimov serves Harvard Business School (MBA). Institute of Foreign Languages, as the chairman of the boards of and from Leipzig University. As per directors of VEB-Invest LLC and Alexander N. Pertsovsky has been Mr. Shchegolev’s request, Roste‑ Globeks-Capital LLC, and a member a member of our Board of Directors lecom does not notify him of the of the boards of directors of Svyazin- since June 2011. Mr. Pertsovsky Board of Directors’ meetings and/ vest, OJSC First Freight Company, also serves as the chairman of the or absentee voting, and does not and OJSC Terminal. From 2005 to management board of Renaissance submit to him meeting materials. 2009, Mr. Kudimov held various Group and Renaissance Capital management positions at OJSC Na- and as the chairman of the board Vadim V. Semenov has been a tional Reserve Bank, including the of directors of Bank Renaissance member of our Board of Directors President and the chairman of the Finance LLC. Mr. Pertsovsky is a since January 2011. Mr. Semenov management board. Mr. Kudimov member of the boards of direc- also serves as the general director graduated from the Lomonosov tors of OJSC Svyazinvest, and and the chairman of the manage- Moscow State University in 1979 CJSC Moscow Interbank Currency ment board of Svyazinvest. He with a degree in journalism and Exchange. Mr. Pertsovsky gradu- also serves as the chairman of the from the Dowling College in 1998 ated from the Moscow Institute of boards of directors of OJSC Mos- with a master’s degree in banking Radio Engineering, Electronics and cow Inter-city Telephone Exchange and international financial systems. Automatics, and from Columbia № 9, Sky Link, OJSC Gyprosvyaz, Business School (MBA). CJSC Delta Telecom, OJSC Mos- Sergey I. Kuznetsov has been a cow Cellular Communications, and member of our Board of Directors Alexander Y. Provotorov has been OJSC Central Telegraph. Mr. Se- since June 2011. Mr. Kuznetsov also a member of our Board of Direc- menov has also been a member of serves as a member of the Inde- tors since May 2009. Mr. Provotorov the boards of directors of Svyazin- pendent Directors’ National Register also serves as our President and the vest and Telecom-Soyuz Pension of the Russian Union of Industrialists Chairman of the Management Board Fund since 2011 and 2010, respec- and Entrepreneurs. From 2004 to and a member of the management tively. From 2009 to 2010, he served 2009, he served as chairman of the board of Svyazinvest. He is also the as an advisor to our general direc- Board of Directors of Rostelecom, chairman of the board of directors of tor, our vice President for corporate OJSC Central Telegraph, OJSC Tel- OJSC Giprosvyaz, and a member of development and a member of the ecominvest and several IRCs. From the boards of directors of Svyazinvest, Management Board. From 2003 to 2004 to 2006, he served as deputy OJSC Central Telegraph, OJSC Ros- 2009, Mr. Semenov held various general director and member of the infocominvest, and Telecom-Soyuz management positions at MegaFon, management board of OJSC Svyazin- Pension Fund. He also served as including the head of legal depart- vest. Mr. Kuznetsov graduated from a member of the boards of direc- ment, the director for legal affairs North-Western Polytechnics Institute tors of CJSC PTT and OJSC MGTS. and the deputy director for legal af- where he specialized in computer From 2009 to 2010, he served as fairs. Mr. Semenov graduated from technologies. He also trained at the first deputy general director at the Saint Petersburg State Univer- Columbia University and studied Svyazinvest. In 2009, he served as the sity in 1997 with a degree in law. business administration at the Fuqua senior managing director of MarCap Business School at Duke University. Advisors Limited. From 2006 to 2008, Anatoly V. Tikhonov has been a he served as the general director of member of our Board of Directors Anatoly A. Milyukov has been a Marshall Capital. In 2005, Mr. Provo- since June 2010. He also serves as member of our Board of Directors torov served as the deputy general a management board member – since June 2011. Mr. Milyukov has director of Marshall Capital Partners. the first deputy chairman at VEB. also served as the managing vice Mr. Provotorov graduated from the Mr. Tikhonov is also the chairman president of OJSC Gazprombank Lomonosov Moscow State University of the board of directors at the and a member of the board of in 1996 with a degree in law. Interregional Bank for Settlements directors of CJSC Gazprombank – of the Telecommunications and Asset Management, GBP Asset Igor O. Shchegolev has been a Postal Services, and a member of the Management S.A. and CJSC New member of our Board of Directors boards of directors of CJSC Alrosa, Instrumental Solutions since 2008. since June 2011. Mr. Shchegolev United Company RUSAL Limited, From 2001 to 2006, he also served also serves as Minister of Commu- OJSC International Airport Sherem- as the Chief Managing Director of nication and Mass Media of the Rus- etyevo, VEB Engineering LLC, and Alfa-Capital Management Company. sian Federation. From 2002 to 2008, OJSC Corporation of North Caucus Mr. Milyukov graduated from the he served as the head of protocol of Development. He has also served as Lomonosov Moscow State Univer- the President of the Russian Fed- a member of the boards of direc-

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tors of OJSC Corporation of Samara • monitor the activities of our inter- Directors and performs its functions Oblast Development and OJSC Cor- nal auditor; and in accordance with regulations ap- poration of Krarsnoyarsk Krai Devel- • our compliance with legal and proved by the Board of Directors. It is opment from 2006 to 2009. In 2008, regulatory requirements. currently comprised of the following Mr. Tikhonov served as a deputy Gov- seven members: ernor – the deputy chairman of Kras- Nominations and Remuneration • Vadim Semenov (Chairman) – non- noyarsk Region Government. From Committee executive director; 2003 to 2008, he served as a deputy The Nominations and Remunera- • Yuri Kudimov – independent direc- Governor – the head of foreign relation Committee of the Board of tor; tions and investment department of Directors was established in • Sergey Kuznetsov – independent Krasnoyarsk Region Administration. September 2003 by the Board of Di- director; Mr. Tikhonov graduated from the rectors and performs its functions • Anatoly Milyukov – independent Lomonosov Moscow State University in accordance with regulations director; in 1995 with a degree in law. approved by the Board of Directors. • Alexander Provotorov – President It is currently comprised of the fol- of Rostelecom; Anton A. Zlatopolsky has been a lowing four members: • Ivan Rodionov – independent direc- member of our Board of Directors • Alexander Pertsovsky (Chair- tor; and since June 2011. He also serves as man) – independent director; • Anatoly Tikhonov – independent the Director of Russia State Television • Vladimir Bondarik - non-execu- director. and Deputy General Director of FGUP tive director; VGTRK and has held these positions • Anton Zlatopolsky – independent The goals and objectives of the Strat- since 2006. Mr. Zlatopolsky graduated director; and egy Committee, as set forth in its from the Lomonosov Moscow State • Anatoly Milyukov – independent regulations, are to assist the Board University with a degree in law. director. of Directors in carrying out its oversight responsibilities in the areas of: Committees The goals and objectives of the • preliminary consideration of and Nominations and Remuneration preparation of recommendations Audit Committee Committee, as set forth in its regu- for our strategic development plan; The Audit Committee of the Board lations, are to assist the Board of Di- • oversight of implementation of the of Directors was established in rectors in carrying out its oversight strategic development plan; December 2004 by the Board of Di- responsibilities in the areas of: • preliminary consideration and rectors and performs its functions • development of our policy in re- preparation of recommendations in accordance with the regulations spect of appointment of members and policy in respect to participa- approved by the Board of Directors. of the Management Board; tion in other organizations; It is currently comprised of the fol- • preparation of recommendations • preparation of recommendations lowing four members: on appointment of the General for our dividend policy; • Yuri Kudimov (Chairman) – inde- Director; • preliminary consideration and pendent director; • determination of qualifications for preparation of recommendations in • Alexander Pertsovsky – inde- candidates for the Board of Direc- respect to alteration of our charter pendent director; tors; capital; • Vadim Semenov - non-executive • development of our policy defining • preliminary consideration and director; and principles and criteria to determine preparation of recommendations • Ivan Rodionov – independent compensation of members of the for approval of major transactions director. Board of Directors, the Internal and interested-party transactions; Audit Commission, the President • preliminary consideration and The goals and objectives of the and members of the Management preparation of recommendations Audit Committee of the Board of Board, as well as criteria for the in respect to reorganization and Directors, as set forth in its regula- appraisal of their activity; liquidation; tions, are to assist the Board of Di- • preparation of recommendations • preparation of recommendations rectors in carrying out its oversight on our personnel policy, including for the implementation of our in- responsibilities in the areas of: the employee incentive system; and vestment planning and monitoring • he quality and integrity of our • appraisal of activities of our man- procedure; financial statements; agement. • preparation of recommendations • the qualifications and independ- for adjusting our current strategy; ence of our independent auditor; Strategy Committee and • the performance of functions and The Strategy Committee of the • preparation of recommendations responsibilities of our independ- Board of Directors was established for improving our procedures for ent auditor; in September 2003 by the Board of

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interaction with our affiliated and • convocation, preparation and hold- as well as ensuring compliance with subsidiary companies. ing of annual and extraordinary our Corporate Governance Code; general meetings of shareholders • resolution of various corporate Corporate Governance Committee with due consideration for the best conflict; The Corporate Governance Com- corporate governance practices; • oversight of compliance with mittee of the Board of Directors was • approval of and amendments to ethical norms reflecting our social established in March 2008 by the our internal document(s), setting responsibility; Board of Directors and performs forth internal rules for disclosure, • review of our compliance with the its functions in accordance with as well as establishing procedures requirements of applicable laws; regulations approved by the Board of for using non-public information and Directors. It is currently comprised of about our operations, our securi- • preparation of recommendations the following four members: ties and transactions relating to for appointment of our registrar. • Sergey Kuznetsov (Chairman) – such securities; independent director; • submission for voting by the gener- MANAGEMENT BOARD & • Vladimir Bondarik – non-executive al meetings of shareholders of the COMMITTEES director; proposals on approval of or making • Anton Zlatopolsky – independent amendments to our charter and Management Board director; other internal documents govern- and President • Alexander Provotorov – President ing operations of our management of Rostelecom OJSC. bodies; The Company has a collective • approval of and amendments to our executive body, i.e. the Manage- The goals and objectives of the Corporate Governance Code, annual ment Board, and a sole executive Corporate Governance Committee, evaluation of and recommendations body, i.e. the President. The busi- as set forth in its regulations, are to to the Board of Directors concern- ness address for each of members assist the Board of Directors in car- ing inclusion in the annual report of the Management Board is 15, rying out its oversight responsibilities information about our compliance Dostoevskogo Street, St. Peters- in the areas of: with the Corporate Governance bourg, 191002, Russian Federation. • issues related to our Corporate Code recommended by the FSFM, The business address for our sole Secretary; executive body is 14, 1st Tverskaya-

Members of the Management Board

Name Date of Birth Position Since Alexander Y. Provotorov1 November 7, 1974 President July 2010 Roman A. Frolov August 7, 1976 Chief Accountant February 2006 Viktor V. Iudin February 17, 1967 Senior Vice President August 2010 Anton A. Khozyainov October 14, 1974 Senior Vice President August 2010 Sergey A. Lukash May 9, 1957 Vice President September 2010 Vaagn A. Martirosyan December 8, 1951 Senior Vice President August 2011 Vladimir K. Mironov July 29, 1956 Vice President August 2011 Alexey S. Nashchokin October 1, 1976 Vice President for Innovative Development November 2011 Alexander M. Rogovoy July 18, 1979 Vice President for Legal Issues and October 2010 Corporate Development Olga N. Rumyantseva June 29, 1973 Executive Director – Director of Corporate November 2011 Clients Sales Department Galina V. Rysakova May 9, 1967 Executive Director – Director for July 2006 Organisational Development and Human Resources Viktor V. Strelkov June 1, 1968 Executive Director – Director for October 2009 Information Technologies Pavel A. Zaytsev December 14, 1977 Vice President – Sales Director October 2010 Ivan I. Zima August 27, 1971 Vice President – CTO January 2012

1 Chairman of the Management Board

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Yamskaya Street, Moscow 125047, (Technical University) in 1997 with a Vladimir K. Mironov has served Russian Federation. The following degree in applied mathematics with as our vice President since August senior managers play a significant the qualification of an engineer- 2010. From 2004 to 2010, he served role in our management: mathematician. In 2002, he became as our deputy general director and a member of the Association of from 2002 to 2004 he served as the The qualifications and certain other Chartered Certified Accountants. deputy general director on person- information for each member of the nel provision and security. From Management Board are set out below: Sergey A. Lukash has served as 2001 to 2002, Mr. Mironov was the our vice President since Septem- head of the security department at Alexander Y. Provotorov. See ber 2010. Since 2010 he has held CJSC PeterStar. Mr. Mironov has “Board of Directors” above. the position of the general director previously served in the military and the chairman of the manage- and graduated from the Obraztsov Roman A. Frolov has served as ment board at OJSC Uralsvyazin- Leningrad Rail Transport Institute our chief accountant since Febru- form. Mr. Lukash is also currently with a degree in electrification of ary 2006. Since 2002, he has held a member of the board of directors rail transport. several senior positions with us, of Svyazinvest. From 2009 to 2010, including the tax manager, the he served as the deputy general Alexey S. Nashchokin has served head of the tax department and director of Svyazinvest. From 2008 as our vice President for Innovative the deputy chief accountant prior to 2009, Mr. Lukash was acting Development since March 2011. He to serving as our chief account- the general director of Federal also served as our vice President ant. Mr. Frolov graduated from the Unitary Enterprise Svyaz-Bezo- for Federal Programs and advi- Plekhanov Russian Academy of pasnost. In 2006, he also served sor to our general director since Economics in 1997 with a degree in as the senior assistant to the Chief April 2010. From 2007 to 2010 finance and credit. State Prosecutor of the Russian Mr. Nashchokin held various posi- Federation. From 2005 to 2006, tions including general director in Victor V. Iudin served as our senior Mr. Lukash served as the deputy CJSC Envision Group. From 1999 vice President from August 2010 to Minister of Justice of the Russian to 2007 he served in atomic power February 2012. From 2009 to 2010, Federation. In 2005, he served as sector. Mr. Nashchokin graduated he served as our first vice Presi- the first deputy general director of from Ivanovo State Energy Univer- dent. From 2005 to 2009, Mr. Iudin Non-Commercial Organization Na- sity with a degree in atomic power was our deputy general director – tional Scientific Fund. Mr. Lukash stations. He holds a Ph.D. in techics director of the Company’s Central graduated from the Almaty School and graduated from extension Branch. Mr. Iudin graduated from of Communications in 1976, from curses in finance and credit. the Moscow Institute of Railroad the All-Union Extra-Mural Electric Transport Engineers in 1988 with and Technical Institute of Com- Alexander M. Rogovoy has served a degree in railroad telemechanics munications in 1986 with a de- as our vice President for Legal and telecommunications. gree in radiocommunications and Issues and Corporate Governance radiobroadcasting and from the since October 2010. In 2010, he Anton A. Khozyainov has served as Russian Academy of State Service served as our deputy head of legal our vice President for economics at the President of the Russian department. From 2003 to 2009, and finance since August 2010. He Federation in 1997 with a degree in Mr. Rogovoy held various manage- has also served as a member of the state and municipal management. ment positions, including the legal board of directors of OJSC Moscow Mr. Lukash holds a doctorate in counsel and the head of the legal Inter-city Telephone Exchange № 9 economics and a Ph.D. in law. department at MegaFon. Mr. Ro- since 2009. From 2009 to 2010, Mr. govoy graduated from the Moscow Khozyainov served as our deputy Vaagn A. Martirosyan has served State Legal Academy in 2001 with a general director – the finance as our senior vice President since degree in law. director. In 2009 Mr. Khozyainov August 2011. From 2007 to 2011, served as our deputy finance direc- he served as the general direc- Olga N. Rumyantseva has served tor. Mr. Khozyainov was an advisor tor of OJSC CenterTelecom. From as our executive director – direc- to the general director of CJSC MTs 1993 to 2007, Mr. Martirosyan tor of corporate clients sales NTT in 2009. From 2006 to 2008, served as the general director department since November 2010. he served as the finance director of OJSC Central Telegraph. In 2010 she served as a deputy of Marshall Capital, and in 2005 Mr. Martirosyan graduated from general director – sales director of as the finance director of Marshall the K. Marks Erevan Polytechnic OJSC Svyazdorinvest. From 2004 Capital Partners. Mr. Khozyainov Institute with a degree in automat- to 2010 Mrs. Rumyantseva held graduated from the Moscow Elec- ics and telemechanics. various positions in the Company, tronics and Mathematics Institute including sales director and head

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of mass market department. From ment positions with us, including as well as with our development 1994 to 2004 she served in varios the executive director – director strategy. The main functions of the telecommunicational companies in of planning and development of Information Disclosure Committee sales, client service and market- networks department and the include maintaining consistency ing. Mrs. Rumyantseva graduated deputy general director – director between our information policy from Moscow State Engineering of the Company’s Far-East Branch. and our strategy and development University Stankin with a degree in Mr. Zima graduated from Irkutsk goals, enhancing the accuracy computer-aided design systems. State Technical University in 1994 and timeliness of our disclosure with a degree in radio engineering, of information in accordance with Galina V. Rysakova has served from Siberia State University of applicable legal requirements and as director of our organisational Telecommunications in 2002 with our internal regulations, as well development and human resources a degree in management and from as enhancing the conformity and Department since July 2006. From Moscow Technical University of consistency of information publicly 2003 to 2006, she served as our the Communications in 2006 (MBA). disclosed by us. deputy general director – the director of organisational development Committees Tender Committee and human resources. Ms. Rysako- The main purpose of the Tender va graduated from the Lomonosov Our Management Board currently Committee is to ensure that our Moscow State University in 1999 has the following committees: Management Board makes ef- with a degree in law. fective decisions when selecting Budget and Investment Committee suppliers and contractors for goods Viktor V. Strelkov has served The main purpose of the Budget and services on a tender basis. The as the director of our Informa- and Investment Committee is to en- main functions of the Tender Com- tion Technologies Department hance our effectiveness in making mittee include defining the terms of since October 2009. From 2007 budget and investment decisions tenders, reviewing commercial bids to 2009, Mr. Strelkov held various required for the implementation from tender participants, select- management positions, including of our business plans, strategies ing the winning bid and providing the director of marketing depart- and development programs, and overall control, coordination and ment and the chief architect, at our financial, business and tariff supervision in the preparation and OJSC Sitronics. In 2006, he was the policies. The main functions of the conduct of tenders. general director of LLC Intelotek Budget and Investment Committee Group. Mr. Strelkov graduated from include maintaining a correlation Internal Control Committee the Moscow Aviation Institute of and consistency between the budg- The main purpose of the Internal Sergo Ordzhonikidze in 1991 with a eting and investment processes, Control Committee is to design, degree in applied mathematics. control over compliance with those implement and maintain effective processes and preparation of pro- internal controls, as well as risk Pavel A. Zaytsev has served as posals for our Management Board management procedures. The main our Vice President – Sales direc- on the foregoing matters. functions of the Internal Control tor since October 2010. He also Committee include ensuring ef- serves as a member of the boards Compensation Committee fective control and an effective risk of directors of CJSC Wireless The purpose of the Compensation management environment, further Informational Technologies and Committee is to create an effective enhancement of risk management OJSC Moscow Inter-city Telephone compensation system designed to and control procedures, as well as Exchange No.9. From 2009 to manage human resources so as to ensuring effective management 2010, he was the deputy general enhance our competitiveness. The control over financial reporting. director – the sales director of main function of the Compensation OJSC Uralsvyazinform. From 2005 Committee is to maintain a correla- Information Security Committee to 2009, Mr. Zaytsev served as the tion between the overall strategy of The main purpose of the Infor- general director of CJSC Uraltele- our development and our policies mation Security Committee is to comservice. Mr. Zaytsev gradu- related to the payment of salaries ensure compliance of our infor- ated from the Ural State Technical and bonuses to our employees. mation security requirements University in 2000 with a degree in with all applicable laws, rules and information systems in economy. Information Disclosure Committee regulations, as well as our goals The main purpose of the Informa- and objectives. The main functions Ivan I. Zima has served as our vice tion Disclosure Committee is to of the Information Security Com- President – Chief Technical Officer establish and implement a uniform mittee include promptly reviewing since January, 2012. Since 1998, information policy consistent with and making decisions on issues Mr. Zima has held various manage- applicable legal requirements, relating to ensuring the security

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of our information and information payments to the budget, calcula- Regulation, we shall reimburse resources. tion and payments of dividends and the Directors’ expenses incurred in redemption of other obligations connection with their functions as Charity Committee are made accurately and in due directors. The main purpose of the Char- course; audits our balance sheets ity Committee is to consider our and our profit and loss statements The Company’s service contracts participation in various charity and performs other functions with members of the Manage- initiatives and socially important related to financial issues. In the ment Board do not provide spe- projects. performance of its duties, the cial benefits upon termination of Internal Audit Commission has the employment, other than common INTERNAL AUDIT right to request, and officers of compensation prescribed by the COMMISSION our governing bodies must pro- Russian Labour Code which varies vide, documents on our financial from two to three monthly sala- The Internal Audit Commission and business operation, including ries. The Company does not cur- verifies the accuracy of our finan- confidential documents. rently have service contracts with cial reporting under Russian law, the Directors. generally supervises our finan- REMUNERATION OF cial activity and performs certain MEMBERS OF THE BOARD Management Incentives internal control functions. Our OF DIRECTORS AND THE current Internal Audit Commis- MANAGEMENT BOARD The Group is committed to re- sion was elected on June 27, 2011, cruiting and retaining highly and is comprised of five mem- The contractual salaries of the skilled personnel. To this end, the bers. Pursuant to our charter, the members of the Management Company offers members of the Audit Commission is elected by Board of the Company consist of a Management Board and other the annual general shareholders’ fixed amount payable on a monthly selected employees performance meeting (or, as applicable, an ex- basis, as well as quarterly and linked and other incentives. These traordinary general shareholders’ yearly performance bonuses. incentives are designed to moti- meeting) for a term expiring on the vate and award the Company’s key date of the next annual sharehold- The Directors receive compensa- personnel for achieving long-term ers’ meeting. Any shareholder or tion for service as directors in corporate financial and operational any other person nominated by accordance with the Regulation performance goals and maximiz- a shareholder may be a member on the Board of Directors ap- ing shareholder value. Long-term of the Internal Audit Commission proved by the general sharehold- incentives also serve to encourage provided that a member of the In- ers meeting on June 26, 2011. retention of the Company’s key ternal Audit Commission may not According to this regulation, the personnel. simultaneously be the President, a Directors receive quarterly and member of the Board of Directors, annual compensation. Quarterly Bonus a member of the Management compensation for each Director is In July 2009, we adopted an in- Board or a member of the liquida- equal to RUB 1.5 million and can ternal regulation on cash bonus tion commission (elected in case of be decreased by 10% (in case of award which replaced the similar our liquidation). The Internal Audit non-participation in up to 25% of regulation that came into effect in Commission elects its Chairman meetings), 30% (in case of non- December 2008. The current cash and Secretary. participation in more than 25% but bonus award program is designed fewer than 50% of meetings) and for all our employees and provides The Internal Audit Commission 100% (in case of non-participation for quarterly and annual individual reviews our financial and busi- in more than 50% of meetings). An- performance-based compensations ness operations and, in particular: nual compensation of all Directors depending on the relevant perfor- audits our financial and business is approved by the general share- mance targets. documents; reviews the legal holders meeting as a percentage of impact of agreements executed the Company’s OIBDA determined Share Options on our behalf, transactions and on the basis of RAS accounts for On May 28, 2010, the Board of Direc- settlements with counterparties; the next reporting financial year, tors approved a long-term employee analyses the accounting state- and in any case shall not exceed incentive share option program gov- ments and statistical records for 0.13%. Annual compensation can erned by Russian law (the “Incentive compliance with applicable regula- be decreased by 50% if the Direc- Program”). The Incentive Program tions; checks whether payments tor participated in less than 50% regulates the general procedures to suppliers of goods and services, of meetings. Also according to the and sets forth the key incentive

40 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

principles for the employees of the CJSC Gazprombank Asset Manage- Asset Management. When partici- Company to facilitate the realization ment and the participants of the pants enter the Phase II Program, of the Company’s strategy to create Incentive Program enter into sale CJSC Gazprombank Asset Manage- an integrated telecom operator and purchase agreements with re- ment and the participants of the rendering a full range of services spect to the ordinary shares which, Phase II Program enter into sale to individuals, corporate clients, among others, provide for the pay- and purchase agreements with government agencies and network ment for the ordinary shares by the respect to the Preferred Shares carriers in Russia and further to participants on a deferred basis at which, among others, provide for accomplish business objectives the price of RUB 96.80 per ordinary the payment for the Preferred on a regular basis in the long run. share. Each participant must make Shares by the participants on The effective date of the Incentive an advance payment of RUB 30,000 a deferred basis at the price of Program is May 28, 2010. to the operator of the Incentive RUB 87.6 per Preferred Share. Program. Each participant must make an The Incentive Program is aimed advance payment of RUB 30,000 at attracting and retaining the key The term of the Incentive Program to the operator of the Phase II employees, encouraging sustained is 2.5 years and the share options Program. development of the Group and also shall be exercised as follows: targets certain long-term objec- •60% shall be exercised by the The term of the Phase II Program tives. participant in 1.5 years from the is 2 years and the share options effective date of the Incentive shall be exercised as follows: The Incentive Program seeks to Program; and •50% shall be exercised by the accomplish the following tasks: •40% shall be exercised by the participant in 1 year from the •to ensure competitive conditions participant in 2.5 years from the effective date of the Phase II to retain key employees; effective date of the Incentive Program; and •to increase the loyalty of and Program. •50% shall be exercised by the par- provide incentives for the key ticipant in 2 years from the effec- employees for long-term and As of December 31, 2011, tive date of the Phase II Program. efficient work during both the 80,904,349 ordinary shares have Reorganisation period and the been allocated to the Incentive Other benefits Company’s operations thereafter; Program, which constitute 2.7% of •to combine the interests of the all ordinary shares and 2.5% of all Members of the Management Company’s shareholders and our Shares. Board have the benefit of the medi- key employees; cal insurance the cost of which is •to draw the attention of our key On June 9, 2011, the Board of reimbursed by the Company. In ad- employees to increasing the Directors approved an amendment dition, the Directors and members value of the Shares; and to the Incentive Program, which of our Management Board have the •to encourage our key employees adds the Phase II RUB 3.5 billion benefit of the D&O insurance pro- to increase the performance of employee share option program vided by LLC Insurance Company the Company and the value of the (the “Phase II Program”) to the Soglasie. Shares. Incentive Program. For purposes of the Phase II Program, the Company DIVIDEND POLICY The following of the key employees will allocate 39,554,794 preferred of the Company are participants of shares, which constitute 16.3% of Pursuant to the Joint Stock Com- the Incentive Program: our Presi- all preferred shares and 1.2% of panies Law, our charter and the dent, members of the Management all shares. The effective date of the dividend policy, dividends on shares Board, deputy presidents, heads Phase II Program is June 9, 2011. may be paid based on the results of of the Company’s branches and our first three, six or nine months other key managers of the Com- The participants of the Phase of our fiscal year and/or based on pany (specialists who have shown II Program are members of the our annual results. Declaring and remarkable results and who are Board of Directors and key manag- paying dividends on the ordinary invited into the Phase II Program at ers (specialists who have shown shares is our right, but not an obli- the discretion of the President). remarkable results and who are gation, while declaring and paying invited into the Phase II Program at dividends in respect of the pre- The operator of the Incentive the discretion of the President). ferred shares is our obligation, and Program is CJSC Gazprombank the amount of and procedure for Asset Management. When partici- The operator of the Phase II paying dividends on the preferred pants enter the Incentive Program, Program is CJSC Gazprombank shares are set forth in our charter.

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Annual dividends are proposed by net profit under IFRS on all Class vote on all matters considered by the Board of Directors, based on A preferred shares; our general shareholders’ meet- the year-end statutory account- • a 2011 cash dividend of ing until the date when dividends ing reports prepared in accord- RUB 4.6959 per share on the on preferred shares are paid in ance with IFRS (in case of ordinary Company’s ordinary shares, full. The total amount of dividends shares) and RAS (in case of Pre- which is equivalent to 42.45% of paid by us on the preferred shares ferred Shares), and are approved by 2011 net profit under RAS or 30% for the years ended December 31, our annual shareholders’ meeting, of 2011 net profit under IFRS on 2011, 2010 and 2009 represented which is usually convened by the all ordinary shares. approximately 3.5%, 12.6% and ap- Board of Directors during the sec- proximately 10.0% of our annual net ond quarter of each year. The right In addition, for the years ended De- profits under RAS, respectively. to receive dividends is attributable cember 31, 2010 and 2009, the IRCs only to shareholders included in the also paid dividends in the aggregate Under our dividend policy approved list of persons entitled to receive amounts of RUB 4,036 million and by the Board of Directors adopted dividends, which is compiled as of RUB 3,484 million on their ordinary in September 2010, dividends the record date for shareholders shares, respectively, and in the ag- payable on ordinary shares had eligible to participate in our general gregate amounts of RUB 2,344 mil- to amount to at least 20% of our shareholders’ meeting at which the lion and RUB 2,275 million on their net profit for the past fiscal year, decision on the relevant dividend preferred shares, respectively. based on the year-end RAS statu- payment is to be made. tory accounting report, divided by Under Russian law, dividends the total number of outstanding The following table sets forth, on payable to shareholders may not ordinary shares. The total amount the per share basis, dividends exceed the amount proposed by of dividends paid by us on the which we paid on our ordinary the board of directors. The decision ordinary shares for the years ended shares and preferred shares for on the payment of dividends, as December 31, 2011, 2010 and 2009 the years ended December 31, well as the amount and form of the represented approximately 42.5%, 2011, 2010 and 2009, and the nine dividend payable, is adopted by the 23.4% and approximately 20.0% of months ended September 30, 2010, shareholders’ meeting. our annual net profits under RAS, as discussed in note 16 to the respectively. In December 2011, Audited and Consolidated Financial Dividends payable on the preferred this policy was revised to require Statements. shares are fixed by our charter in that dividends payable on ordinary the amount of 10% of our net profits, shares must be equal to at least The Board of Directors recom- based on the year-end RAS statu- 20% of our net profit for the past mended that the AGM approves tory accounting report, divided by fiscal year based on the year-end to pay a dividend for 2011 that the number of shares representing IFRS financial statements. amounts to RUB 14,961.559 mil- 25% of our outstanding shares. We lion or 45.95% of 2011 net profit may not pay dividends on ordinary Our annual dividend, if declared, in accordance with RAS, which shares unless dividends on pre- must be paid within sixty days equals 32.48% of 2011 net profit ferred shares are paid in full. In following the date the decision on as determined in accordance with addition, if the dividend per ordinary dividend payments was made at our International Financial Reporting share exceeds the dividend payable general shareholders’ meeting. Standards (“IFRS”), including: per preferred share, our meet- • a 2011 cash dividend of ing must increase the dividend per We anticipate that any dividends we RUB 4.6959 per share on the Com- preferred share to that per ordinary may pay in the future with respect pany’s Class A preferred shares, share. Failure to pay a dividend on to the shares represented by the which represents 3.5% of 2011 net preferred shares in full authorises DRs will be declared and paid to profit under RAS or 2.48% of 2011 holders of the preferred shares to the Depositary in roubles and will

Dividend History

Year ended December 31 Nine months ended September 30 2011¹ 2010 2009 2010 (RUB) (RUB) (RUB) (RUB) Dividend per Preferred Share 4.6959 0.4344 2.1005 1.6667 Dividend per Ordinary Share 4.6959 — 1.4002 1.1113

1 Subject to AGM approval on June 14, 2012

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be converted into US dollars by The Company is indirectly con- ested parties and the sharehold- the Depositary and distributed trolled by the Russian Govern- ers owning not less than 1% of to holders of the DRs, net of the ment, which holds 53.2% of the company’s stock may bring an Depositary’s fees and expenses. the Company’s ordinary shares action for damages caused by the Accordingly, the value of dividends through Svyazinvest, VEB and company’s managers or directors. received by holders of the DRs will Federal Agency for State Property Furthermore, since our Shares are be subject to fluctuations in the Management (FASPM). There are listed on MICEX-RTS, we are and exchange rate between the rouble no measures in place to ensure expect to continue to be required and the US dollar. In addition, divi- that such control is not abused. to comply with a number of corpo- dends that we may distribute to the rate governance standards which Depositary will be subject to appli- Russian law, including the Joint provide additional protection to its cable Russian withholding taxes. Stock Companies Law and cor- shareholders, including minority porate governance requirements shareholders. However, no assur- SHAREHOLDERS & SHARE applicable to companies listed on ance can be given that the applica- CAPITAL Russian stock exchanges, provide ble Russian laws and the corpo- certain protections to minority rate governance standards with Principal shareholders shareholders. For instance, there which we have to comply will be are supermajority shareholder able to fully protect the interests of The Company’s share capital is approval requirements for cer- our minority shareholders if such RUB 7,965,224.3450, consisting of tain corporate actions, pursuant interests are in conflict with the 2,943,258,269 ordinary shares and to which a shareholder is able to interests of its other shareholders. 242,831,469 preferred shares. We demand that the company pur- neither have convertible securities, chase the shares held by that None of the Company’s share- nor exchangeable securities, nor shareholder if the shareholder holders have voting rights differ- securities with warrants. voted against or did not partici- ent from any other holders of the pate in voting on certain types of Shares. The following table sets out certain actions. In addition, companies information with respect to the are required to obtain the approval Each shareholder of the Company ownership of our ordinary shares of disinterested shareholders for has an obligation under Russian by each shareholder. certain transactions with inter- law to notify in writing the Company

Ownership of ordinary shares by each shareholder as at April 30, 2012

Shareholder Ordinary Shares Number % Svyazinvest1, 2 1,276,624,469 43.37 FASPM1, 2 218,620,597 7.43 LLC MOBITEL3 192,719,452 6.55 VEB1 72,013,105 2.45 Other minorities4 1,183,301,243 40.20 Total 2,943,258,269 100.00

Ownership of preferred shares by each shareholder as at April 30, 2012

Shareholder Preferred Shares Number % LLC MOBITEL 30,487,109 12.55 Other minorities 212,344,360 87.45 Total 242,831,469 100.00

1 Controlled by the Russian Government 2 Holds an interest in the share capital in the Company notifiable to the Company and the FSFM, as described below 3 The Company owns 99.9% of the share capital of LLC Mobitel 4 Including stock option program

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and the FSFM about (i) an acquisi- sued and outstanding shares. As of had occurred prior to the publica- tion of 5% or more of the ordinary December 31, 2011, 80,904,349 of tion, would then have the right to shares, and (ii) any circumstances the ordinary shares and 34,477,106 accelerate our indebtedness and which result in a change in the of the preferred shares are sub- to demand reimbursement of ap- number of such shares above/be- ject to the Incentive Programme plicable damages. low the 5%, 10%, 15%, 20%, 25%, providing for our employee’s op- 30%, 50%, 75% or 95% threshold. tions in respect of these shares. Our ordinary shares are listed on Pursuant to the FSFM regulation MOBITEL held 6.6% of the ordinary quotation list “A1” of MICEX-RTS such notice shall be given within ten shares and 12.6% of our preferred under the ticker “RTKM”. Our Pre- days after the shareholder became shares acquired by us, the IRCs and ferred Shares are listed on quota- or should have become aware of (i) Dagsvyazinform as a result of the tion list “A1” of MICEX-RTS under the acquisition or disposal of such statutory share buy-out procedures the ticker “RTKMP”. Our ADRs are shares, or (ii) if such acquisition during Reorganisation and then also traded over-the-counter in the or change results from additional contributed to MOBITEL. The Joint United States on the OTCQX under share issuance, after the date the Stock Companies Law requires us the ticker “ROSYY”. shareholder became or should have to dispose of any of our shares that become aware of the state registra- we acquire within one year of our Rights of shareholders tion of the report on the results of acquisition or, failing that, reduce Shares of each category (ordinary such additional share issuance. our charter capital. shares and preferred shares) grant equal rights to holders of shares of Description of share capital In accordance with the Joint each respective category. Stock Companies Law and our General charter, a decision on any is- Ordinary shares Pursuant to our charter, we have suance of shares or securities As required by the Joint Stock the right to issue ordinary shares, convertible into shares by closed Companies Law and the Com- preferred shares and other securi- subscription, or an issuance by pany’s charter, all ordinary shares ties provided for by the legislation open subscription of ordinary grant identical rights to each of the Russian Federation with shares or securities convertible holder. Each fully paid ordinary respect to securities. into ordinary shares constituting share, except for certain circum- more than 25% of the number of stances expressly provided for by Our charter capital is currently issued ordinary shares, requires a law (e.g. when a shareholder ac- RUB 7,965,224.3450 and consists of three quarters majority vote of a quires shares in excess of certain 2,943,258,269 ordinary shares and shareholders’ meeting. The Board threshold and is required to make 242,831,469 preferred shares, all of Directors is authorized to issue a mandatory offer to purchase of which are fully paid, issued and additional ordinary shares up shares of other shareholders), outstanding and have a nominal to 25% of the previously issued gives its holder the right to: value of RUB 0.0025 each. All of shares through open subscription • transfer such ordinary share our shares have been issued and without obtaining further share- freely without the consent of registered in accordance with holder approval. other shareholders; procedures set out in the Federal • participate in the Company’s Law № 39-FZ “On the Securities The amount of our charter capital management as provided by the Markets” of April 22, 1996 (the significantly exceeds the minimum Joint Stock Companies Law and “Securities Market Law”), and requirement established by the the Company’s charter; other applicable securities regula- laws of the Russian Federation • participate in the general share- tions. The ordinary shares and the for open joint stock companies. If holders’ meeting with the right Preferred Shares are in regis- we adopt a decision to decrease to vote on all matters within the tered, book-entry form. The entity our charter capital in accordance shareholders’ competence, in- responsible for keeping book-entry with the Joint Stock Companies cluding through a representative records is OJSC United Registra- Law, we must notify the authority acting on the basis of a power of tion Company (Leninskaya Sloboda which carries out state registra- attorney; Street 19, Moscow, Russia). We are tion of legal entities of the decision • receive dividends in accordance also authorized to issue additional the decision to reduce our charter with the Joint Stock Companies 3,685,438,051 ordinary shares and capital within three business days Law and the Company’s char- 531 preferred shares, all such and we must publish this decision ter if the general shareholders’ shares having a nominal value of twice with a monthly interval be- meeting resolves to pay such RUB 0.0025. Under Russian legisla- tween publications. Within 30 days dividends (always subject to the tion, charter capital refers to the of the last of such publications, Board of Directors’ recommen- aggregate nominal value of the is- our creditors, whose claim rights dation);

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• upon the Company’s liquidation, • if holding, solely or jointly with • our reorganization or liquidation. receive a proportionate amount other shareholders, not less than of the Company’s property after 10% of the Company’s voting They may also vote at shareholders’ the Company’s liabilities are shares, demand that the Board meetings following the sharehold- discharged; of Directors call an extraordinary ers’ meeting at which a decision • demand repurchase of all or general meeting of shareholders was adopted not to pay dividends some of the shares owned by or an unscheduled audit of the on preferred shares or to pay them such holder if the holder votes Company by the Audit Commis- only in part. Such right to vote con- against or does not participate sion or an independent auditor; tinues until the dividends to which in voting on the decision of the and the holders of preferred shares are shareholders meeting approving • exercise other rights of a share- entitled are paid in full. any of the following: holder provided by the Company’s – any reorganisation; charter, under Russian law or by Holders of ordinary shares and – entering into a major transac- decisions of a general sharehold- preferred shares may: tion, as defined by the Joint er’s meeting. • freely transfer the shares with- Stock Companies Law; and out the consent of other share- – amendment of the Com- Preferred Shares (or type “A” pre- holders; pany’s charter or approval ferred shares) • participate in the distribution of of a new addition to the Our preferred shares generally our net profits (as reported un- Company’s charter that limit confer on their holders the follow- der RAS) in the form of dividends shareholder’s rights; ing principal rights: (see “Dividend Policy”) and in the • exercise statutory pre-emption • to receive a fixed dividend, except distribution of our assets in the rights to acquire our ordinary in certain cases envisaged by the event of liquidation; shares in accordance with ap- Joint Stock Companies Law and • enjoy the right of first refusal in plicable Russian law; our charter; and respect of additional shares be- • have access to certain of the • to enjoy preference over ordi- ing placed by us through an open Company’s documents, receive nary shares in any distribution of subscription and, in certain cir- copies for a reasonable fee and, profits and any proceeds from our cumstances, by way of a closed if holding alone or with other liquidation. subscription; and shareholders 25% or more of the • have access to certain company voting shares, have free access While there are no limits on ad- documents, receive copies for to accounting documents; mission of shareholders to share- a reasonable fee and, if holding • if holding, solely or with other holders’ meetings, in accordance alone or with other holders, 25% holders, 1% or more of the vot- with our charter and the Joint or more of the voting stock, have ing shares, file a lawsuit against Stock Companies Law, only hold- access to accounting documents a Director or member of any of ers of our ordinary shares have the and minutes of the management our executive bodies (including right to vote on any matter within board meetings. the chief executive officer) to the competence of the meeting. reimburse damages suffered by The preferred shares confer no Our shareholders may also exer- us due to their fault; voting rights unless our charter cise other rights provided by Rus- • if holding, solely or jointly with and the Joint Stock Companies sian law and our charter. other shareholders, not less Law provide otherwise. Holders than 1% of the Company’s voting of preferred shares are entitled to shares, obtain a list of persons vote on: entitled to participate in the gen- • the adoption of amendments to eral shareholders’ meeting; the charter that would adversely • if holding, solely or jointly with affect their rights as preferred other shareholders, not less shareholders, including the issu- than 2% of the Company’s voting ance of any other type of pre- shares, may, not later than 60 ferred shares that would enjoy days after the end of the relevant a priority in right of payment of financial year, propose matters dividend, a preference in respect for the agenda of the annual of liquidation value over the shareholders’ meeting and nom- preferred shares, amendments inate candidates to the Board of to the formula for calculating Directors, the Audit commission, dividends and/or the liquidation the ballot committee and a can- value attached to the Preferred didate for the President; Shares; or

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Corporate Social Responsibility

Management of facilities and equipment within ed- projects. It is an extensive pro- charitable and socially ucational establishments, providing gramme to improve the computer responsible activities support for students’ projects and literacy of elderly people in Russia. clubs, offering scholarships and In 2011, Rostelecom developed a setting up internship programmes Participants in the programme’s unified external social policy and for students within Rostelecom. learn the basics of personal com- a number of other documents that puters, obtain the skills to search govern the charitable activities of New technologies in for information on the Internet the united Company. The policy was education and children’s art and learn to use personal emails. approved by the Board of Directors centres They also learn how to use popular and implemented by Rostelecom applications for communicating on- itself and by our subsidiaries. In February 2011, as part of the IV line, such as ICQ and Skype, social International Winter Arts Festival networking and much more. The external social policy defines in Sochi, Rostelecom organised a the Company’s principles, pri- unique workshop for young musi- In 2011 Rostelecom added an ad- orities and main activities in the cians with Yuri Bashmet, People’s ditional module to the programme, field of social projects and pro- Artist of Russia and a world-famous which includes teaching elderly grammes. It is not only a tool for viola player and a conductor. This people how to use the government managing Rostelecom’s reputa- took place in four Russian cities - portal www.gosuslugi.ru in order tion, but also the means whereby Sochi, Yaroslavl, Perm and Novo- to obtain the government services we deal with social factors that kuibyshevsk in the Samara region. they need via the Internet. affect the sustainable development of the Company and address The Company also organised a multi- Youth Olympic Games and important social issues. channel video conference to connect competitions Sochi Organ and Chamber Music As part of the implementation of its Hall with concert halls in the four cit- As well as providing support to external social policy, Rostelecom ies by setting up modern video con- a number of educational estab- manages programmes focusing on ferencing systems. As a result, young lishments, Rostelecom supports education, sport, care in the commu- musicians and their teachers had a various competitions in the re- nity, ecology and spiritual heritage. unique opportunity to attend a lesson gions which aim to develop pupils’ given by the great maestro and to ask and students’ interest in creative Our Education him questions in real time about the aspects of computer science, and Programme secrets of his viola technique. also to involve them in using internet technologies and computer Supporting professional In May 2011, Rostelecom organ- graphics. education ised a webcast of the “Art, Youth and Talent” Competition at the An example of this was Rostele- In 2011, Rostelecom supported 10th Youth Delphic Games in Rus- com’s support for the “Volga IT – various universities and profession- sia. For the first time in the history 2011” students’ IT competition, al colleges, such as the Moscow of the Games, all Internet users which was held in the Volga region. Technical University of Communi- were able to take part, not only cations and Informatics, the Bonch- the spectators and guests who Our Sport Programme Burevich Saint-Petersburg State attended. On its website, Rostele- University of Telecommunications, com organised the live broadcast Social initiatives in the Siberian State University of of various events from 12 different partnership with the Sochi Telecommunications and Informa- sites during the entire period of 2014 Organising Committee tion Sciences (SIBSUTIS) and the the Games. SIBSUTIS College of Telecommuni- cations and Information Sciences. Generation On-line Rostelecom has been the General Partner of the XXII Olympics Professional education support Generation On-line remains one of Winter Games in Sochi since the mainly encompasses improving the Rostelecom’s most ambitious social beginning of 2009, participating on

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the basis of the “Olympic Games for In December 2011, as part of the disabled children at home and also Everyone!” principle. World Figure Skating Champion- in specialised institutions. Thus in ship in Saransk, Rostelecom and 2011, as part of this programme, The Company has taken part in a the FSFR launched a joint pro- Rostelecom provided many children number of social initiatives, organ- gramme called Rostelecom’s Star with special needs with unlimited ised by the Sochi 2014 Organising Track master classes. In 2012, as access to the Internet while also Committee, that promote Olympic part of this programme, Rostele- delivering and installing all the values in the Russian regions. com will organise events in big equipment necessary to take them cities across Russia. The project on-line. 1,000 days prior to the start of the is designed to find young talented Olympics, Rostelecom co-operated sportsmen and sportswomen in the Efforts to combat the spread with the Sochi 2014 Organising Com- Russian regions. Famous athletes of illegal drugs mittee to organise competitions for will share their professional skills young sportsmen under the slogan with young figure skaters during In 2011, Rostelecom took part in a “1,000 days before the Olympics – master classes, and young sports- number of public events to raise 1,000 days before the fun starts!”, men and sportswomen will have a awareness about drug abuse and which were held in 42 cities across unique opportunity to demonstrate illicit trafficking in Russia. Rostele- Russia. Olympic athletes, medallists their talents and skills to well- com organised a videoconference to and competition winners in various known coaches. bring together Moscow and Irkutsk sports took part in the programme, as part of the State Council Pre- and many local residents were able Our Care programme sidium meeting on combating il- to attend these competitions and legal drugs use. The Company also support the participants. Assisting child care centres held a videoconference between St. Petersburg – Vienna – Perm, as At the beginning of the new aca- Rostelecom takes an active part part of the international TV project demic year 2011–2012, the Com- in assisting a number of social “The Right to Live”, initiated by the pany held a series of educational institutions, such as hospitals United Nations to fight illegal drugs events called “Olympic Knowledge and orphanages. The Company and crime. Day”. Around 5,000 students and purchases medical equipment, pupils from schools, residential pays for urgent medical Supporting veterans schools and orphanages that are operations, allocates funds for the sponsored by Rostelecom in over 60 refurbishment of buildings and The day before Victory Day, Ros- Russian cities took part. purchase of essential supplies, telecom and its subsidiary Zebra we help organise festive events Telecom held a traditional meeting The key objective of Olympic Knowl- for children from orphanages, with the Russian Committee of War edge Day was to introduce young meetings with professional and Military Service Veterans. In people to the Olympic movement, psychologists and we provide 2011, companies presented veter- promote a healthy lifestyle, and to communications channels for ans with Zebra Telecom multi-pur- help teach children with disabilities children’s distance learning. pose cards, which allowed them to and socially disadvantaged adoles- make free long-distance calls from cents to socialise. The Company assists institutions their landline and also from mobile that have applied just once and it phones. As part of the Victory Day Cooperating with the Figure also provides help on an ongoing celebration, Rostelecom also or- Skating Federation of Russia basis. Many of these establish- ganised a multi-channel videocon- ments are supported by macro-re- ference “Generations relay race” Rostelecom has been the Gen- gional subsidiaries of Rostelecom. to connect veterans of the Great eral Partner of the Figure Skating Patriotic War, soldiers and Mos- Federation of Russia (FSFR) since New opportunities for cow cadets with their colleagues, 2009. Every year, the Company children with disabilities friends and compatriots from provides financial assistance that CIS countries, such as Belarus, enables the Federation’s competi- Rostelecom traditionally tries to Ukraine, Moldova and Kazakhstan. tions to be organised and held and help people, particularly children, Russian national team athletes to with disabilities to integrate them Rostelecom also organised a be trained for the Olympic Games, in the best way possible into soci- number of other multi-channel European Championships, World ety. Rostelecom’s corporate centre videoconferences for Great Patri- Championships and various other as well as its macro-regional sub- otic War participants to celebrate competitions, including the final sidiaries have been implementing a the 66th anniversary of the lifting stage of the ISU Grand Prix. programme of distance learning for of the siege of Leningrad, the 67th

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anniversary of the victory in the toric stage of the Bolshoi Theatre, museums, which are either funded Battle of Stalingrad and the 65th recently re-opened in 2011 after a by these subsidiaries or were anniversary of Japan’s surrender in long period of reconstruction. founded by enthusiasts at their own World War II. expense. The Company organises In 2011, Rostelecom provided sig- tours around museums, carries out Our Ecology programme nificant support to the XIV Inter- scientific research and constantly national Tchaikovsky Competition updates museums’ collections. Conserving ecosystems that was held in Moscow and St. Petersburg. During a three-week Reviving spiritual traditions Rostelecom seeks to eliminate any period, Rostelecom organised an negative impact from its operations unprecedented global webcast of Rostelecom traditionally pro- on the environment. Telecom infra- the competition and performances vides support to Russian Ortho- structure does not itself produce from seven concert venues were dox Churches across Russia and harmful emissions and industrial streamlined in real time. A Content abroad. waste but the construction of new Delivery Network and an innovative sites can have short-term damage platform were used by Rostele- On September 21, 2011, as part on the natural world. Therefore, com to distribute content to end of the project “Seven Temples in when the building of telecoms users around the world to secure Seven Cities in a Day”, Rostelecom infrastructure begins, Rostelecom high-levels of availability and high organised a live webcast to stream- institutes a number of preventative performance streaming. line the construction of wooden measures to reduce environmen- temples, which were built within tal risks, preserve soil and water Rostelecom also organised a web- one day. The webcast was held reservoirs, and carry out manda- cast for the Sochi Winter Interna- from seven large Russian cities, tory biological and technical land tional Arts Festival. Yuri Bashmet is which included Tver, Kaliningrad, reclamation. In addition, Company’s the Festival’s Artistic Director, and Ufa, Sochi, Yekaterinburg, Irkutsk volunteers take part in federal and the Company also streamed the and Yuzhno-Sakhalinsk, and was regional promotions, “ecological webcast of productions of the Mos- available on Rostelecom’s website. landings”, to boost commitment to cow theatre’s New Opera named environmental protection and the after E. Kolobov. In November 2011, Rostelecom, removal of waste. as the largest Russian high-tech Supporting industry company, provided technological Our Spiritual Heritage museums support and a wide range of multi- programme media services to organisers of the Rostelecom has been cooperating “Orthodox Rus” exhibition, which Supporting the nation’s art with the Russian Fund for the His- was opened in Moscow on the Day tory of Communications, the annual of People’s Unity and devoted to the From 2008, Rostelecom’s repre- programme of which includes 20th anniversary of the revival of sentatives have become members supporting the A. S. Popov Central the Russian Orthodox Church. of the Board of Trustees of the Museum of Communications devel- State Academic Bolshoi Theatre of opment in St. Petersburg. Russia. The Board’s priority is to attract financial means from the The museum is one of the oldest private sector, to assist the Bolshoi science and technology museums Theatre to present new produc- in the world. The museum’s unique tions, to organise tours, to recruit collection, devoted to the history stars and talented young soloists, of communications development, and likewise to provide assistance contains authentic objects relating in improving the Theatre’s man- to the history of post, telegraph and agement and finance systems telephone, radio and broadcasting, and the day-to-day running of the mobile, space communications and Theatre. all modern means of telecommunication. In 2011, Rostelecom made Now, thanks to Rostelecom, thou- donations to develop the museum’s sands of spectators in Moscow can exhibits. enjoy the talents of exceptional masters and novice dancers of the Rostelecom macro-regional sub- world famous school of Russian sidiaries also provide annual sup- ballet, who perform on the his- port to regional communications

48 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

Risk management

Risk Factors Russian tax authorities, we will • a part of our fixed-line infra- face significant losses; structure is outdated, and we An investment in our shares and • our existing arrangements with may be required to make signifi- DRs involves risks, including: trade unions may not be renew- cant investments beyond those able on terms favourable to us; that are currently planned to Risks relating to our business • insurance coverage under our modernize it; insurance agreements may be • if we are unable to maintain our • we face increasing competition insufficient to compensate us for favourable brand image, we may in all segments of the Russian losses incurred; be unable to attract new custom- telecommunications market; • transactions and/or the transac- ers and retain existing custom- • we may not be able to success- tions of members of our Group ers, leading to loss of market fully develop and/or deploy and their predecessors-in- share and revenues; fourth generation wireless ser- interest could be challenged on • social projects that we implement vices in Russia; the basis of non-compliance with may put pressure on our margins; • changes in the regulation of Rus- applicable legal requirements; • alleged medical risks of cellular sian telecommunication markets • our minority shareholders or technology may subject us to may materially adversely affect the minority shareholders of negative publicity or litigation, our business; our subsidiaries may success- decrease our access to base sta- • if the demand for certain tel- fully challenge past or future tion sites, diminish subscriber ecommunications services that interested party transactions, or usage and hinder access to ad- we offer or are developing and fail to approve interested party ditional financing; promoting does not increase, our transactions or other matters in • systems failures, delays and fail- ability to achieve further revenue the future; ure to optimise our information growth from these services will • a finding by the FAS that we have technology systems could materi- be limited; acted in contravention of Russian ally adversely affect our business, • significant delays in the col- antimonopoly legislation could financial condition, results of lection of receivables and the have a material adverse effect on operations or prospects or the inability to collect payments for our business; value of the Shares and DRs; various telecommunications ser- • we are subject to the regulation • we may be forced to repay the vices provided to our customers and control of the FST and the indebtedness of our subsidiary may result in losses and could FAS; CJSC GlobalTel owed by it to materially adversely affect our • we are subject to anti-corruption Loral Space and Communica- business; laws in the jurisdictions in which tions Corporation and we may • continuing rapid changes in we operate; not be able to recover the debt of technologies could increase • failure to renew our telecom- GlobalTel owed to us; competition and/or require us to munication licenses and radio • we could be materially adversely make substantial investments frequency permits, comply with affected if lenders accelerate our which may be ineffective; the terms thereof or receive debt due to any failure to comply • our inability to obtain equipment, renewed telecommunication with loan agreements. software and other network licenses and radio frequency components and related services permits with similar terms to Risks relating to the in a timely manner and at mar- our existing licenses and permits Reorganisation ket prices could have a material could have a material adverse adverse effect on our business; effect on our business; • the merger of the IRCs and • we depend on the reliability of • our intellectual property rights Dagsvyazinform into the Com- our networks; are costly and difficult to protect; pany may be challenged by our • if the calculation of our tax liabil- • leaks of confidential information, shareholders and the former ity and certain initiatives we have including information relating to shareholders of the IRCs as well used to reduce our tax burden our subscribers, may negatively as Russian state authorities; are successfully challenged by impact our reputation and our • we may have difficulty integrat- brand image; ing the assets of the IRCs and

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Dagsvyazinform that have been tise and our ability to recruit and risks than companies operating in acquired by us as a result of the retain qualified personnel; more developed markets; Reorganisation; • legal uncertainties relating to pri- • economic instability in Russia • we cannot be certain that the an- vatisation of our shares and assets; could have an adverse effect on ticipated positive synergy effects • failure to fulfil our obligations to our business; of the Reorganization will materi- state authorities; • the physical infrastructure in alise or reach expected levels; • our beneficial controlling share- Russia is in poor condition; • following the Reorganisation, we holder may have interests that • weaknesses in the Russian bank- may face significant tax liabilities conflict with the interests of our ing sector. as a legal successor to the IRCs; other shareholders; • a finding by the FAS that we have • failure to comply with the re- Legislative and legal risks acted in contravention of Russian quirements of Russian customs antimonopoly legislation in con- authorities; • weaknesses relating to the Rus- nection with the Reorganisation • failure to comply with existing sian legal system; could have a material adverse laws and regulations or to obtain • unlawful, selective or arbitrary effect on our business. all approvals, authorizations and government action; permits required to operate our • failure to comply with new per- Risks relating to our strategy telecommunications equipment; sonal data protection laws; • it may be difficult to ascertain the • lack of independence and inexperi- • the assumptions underlying our validity and enforceability of title ence of the judiciary, the difficulty of growth strategy may prove to be to land in Russia and the extent to enforcing court decisions and gov- incorrect; which it is encumbered. ernmental discretion in enforcing • we may acquire, invest in or claims could prevent us or holders merge with other companies to Political risks of the DRs from obtaining effective expand our operations which redress in a court proceeding; may pose risks to our business; • political and governmental insta- • russian companies can be forced • we may have difficulty integrat- bility; into liquidation on the basis of ing the assets and companies • the reversal of reform policies or formal non-compliance with cer- that we have acquired and we government policies targeted at tain requirements of Russian law; may not realize the anticipated specific individuals or companies • the law relating to Russian corpo- benefits from our acquisitions could have an adverse effect on rate governance and control may and business combinations; our business, as well as invest- be applied inconsistently and is • the failure of our geographic ments in Russia more generally; difficult to enforce; expansion strategy could hamper • deterioration of Russia’s rela- • lack of developed corporate and our continued growth and profit- tions with other countries; securities laws and regulations in ability and could have a material • political and social conflicts the Russian Federation; adverse effect on our business; or instability could create an • shareholder rights provisions • we may not be able to secure uncertain operating environment under Russian law may impose sufficient financing to fund our and adversely affect the value of additional costs on us; acquisition strategy and capital investments in Russia. • shareholder liability under Rus- expenditure plans. sian corporate law could cause us Social risks to become liable for the obliga- Risks relating to our financial tions of our subsidiaries; condition • social instability, particularly if • russian currency regulation has caused by worsening economic only recently been liberalised and • servicing and refinancing our conditions and turmoil in the may remain subject to change; indebtedness; Russian financial markets, could • russian legislation may not ad- • fluctuations in the value of the lead to labour and social unrest, equately protect against expro- rouble against the US dollar and increased support for renewed priation and nationalisation; the euro; centralised authority, nationalism • russia’s unpredictable acknowl- • inflation. or violence; edgement and enforcement of • crime, corruption and negative foreign court judgements or arbi- Additional risks relating to publicity. tral awards give rise to significant our business uncertainties; Economic risks • the lack of a central and rigorously • salary increases in Russia; regulated share registration system • dependence on our senior man- • emerging markets companies in Russia may result in improper agement’s experience and exper- are generally subject to greater record ownership of the Shares.

50 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

Risks Relating to the DRs and Deposit Agreements for the DRs Risk management system the Trading Market and relevant requirements of Russian law; In order to manage potential risks, • DR holders may have limited re- • we are not subject to the same the Company has introduced and course against us, our Directors takeover protection as a com- developed a risk-based approach to and our senior managers; pany incorporated in the United conducting business. This ensures • we may decide not to pay divi- Kingdom; that the management of Rost- dends in the future; • holders of our DRs may not be elecom takes the most effective • new Russian legislation will re- able to exercise their pre-emp- decisions when circumstances are quire the disclosure of beneficial tive rights in relation to future uncertain, and also is able to form ownership of the DRs; issues of Shares; an opinion on business opportuni- • non-russian resident DR holders • the Shares may be de-listed from ties for the Company. may not be able to benefit from MICEX-RTS, the FSFM permission double tax treaties in relation for the DR programmes may be Each year, the Board of Directors to Russian withholding taxes on revoked and the DR facilities may approves a Risk Management dividends paid via the Depositary; have to be terminated. Programme. Rostelecom regu- • resident holders of the DRs may larly updates its risk profiles and be subject to increased effective Risks Relating To Taxation develops and monitors its ac- rates of tax on dividends due to tion plans in order to reduce the the lack of clarity in the Russian • our business has a significant occurrence of risk to an accept- tax law with respect to beneficial exposure to taxation in Russia; able level. The Company always ownership; • we are subject to tax audits by assesses risks associated with • capital gains from the sale of the Russian tax authorities which the development of operational DRs may be subject to Russian may result in additional liabili- business solutions and their im- income tax; ties; plementation. This may be done • because the Depositary may be • we may be deemed to receive during discussions at meetings of considered the beneficial holder unjustified tax benefits; the Board of Directors, the BoD’s of the Shares underlying the • we may encounter difficulties in Audit Committee, the Manage- DRs, these Shares may be ar- recovery of VAT paid to vendors ment Board, the Internal Control rested or seized in legal pro- or at customs; Committee and during working ceedings in Russia against the • the Russian transfer pricing group meetings. Depositary; rules are vaguely drafted and are • voting rights with respect to subject to varying interpretations the Shares represented by DRs by Russian tax authorities and are limited by the terms of the courts.

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Operating & financial review

FULL YEAR 2011 HIGHLIGHTS • Consolidated revenues up 7% year on year to RUB 296.0 billion

• OIBDA up 11% year on year to RUB 117.7 billion with OIBDA margin of 39.8%

• Net income up 47% year on year to RUB 46.1 billion

• Capital expenditure1 of RUB 82.8 billion representing 28% of the consolidated revenues

• Net debt2 of RUB 152.4 billion (net debt / OIBDA of x1.3) as of December 31, 2011

• Total broadband subscriber base up 24% year on year to 8.2 million

• Total Pay-TV subscriber base increased by over six times year on year to 5.9 million

Financial Summary

RUB million FY 2011 FY 2010 % change, y-o-y Revenue 296,015 275,731 7% OIBDA 117,708 106,036 11% OIBDA margin, % 39.8% 38.5% Operating income 63,668 50,280 27% Operating margin, % 21.5% 18.2% Net income 46,071 31,338 47% Net margin, % 15.6% 11.4% Capital expenditures 82,776 51,845 60% % of revenue 28.0% 18.8% Net debt 152,363 119,830 27% Net debt/annualized OIBDA 1.3х 1.1х

1 Here and below, capital expenditure (“CAPEX”) comprises cash spent on purchase of property, plant and equipment and intangible assets 2 Here and below, net debt is calculated as the sum of long-term loans and short-term borrowings minus cash and cash equivalents and short-term investments

52 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

OPERATING REVIEW

Revenue structure by services1

RUB million FY 2011 FY 2010 % change, y-o-y Local telephony services 88,018 85,396 3% Intra-zone telephony services 21,447 23,358 (8%) DLD/ILD telephony services 24,070 27,939 (14%) Interconnection and traffic transit services 20,202 19,703 3% Broadband Internet 46,993 39,215 20% Pay-TV 7,011 1,102 536% Mobile communication services 35,560 33,872 5% Data services (VPN, data centres, wholesale Internet sales) 18,929 17,191 10% Rent of channels 9,756 9,149 7% Other 24,029 18,806 28% Total revenue 296,015 275,731 7%

Revenue structure by customer segments

RUB million FY 2011 FY 2010 % change, y-o-y Residential customers 160,444 154,787 4% Corporate customers 69,774 62,175 12% Governmental customers 34,484 28,445 21% Operators 31,313 30,324 3% Total revenue 296,015 275,731 7%

The Company generated a 7% year on year increase in revenue for the year to date to RUB 296.0 billion, which reflected: • a 20% year on year growth of revenues from broadband services in line with the growth in subscriber base; • a more than six times growth in revenues from Pay-TV services, primarily due to the consolidation of cable TV subscribers of newly acquired operators and development of IP TV services in line with the modernization of broadband networks; • a 28% year on year increase in other revenues, mainly as a result of increased income from lease of infrastructure as well as the Company’s contribution to the electronic government service. Key operating indicators

Number of Subscribers (million): FY 2011 FY 2010 % change, y-o-y Local telephony 28.5 29.4 (3%) Mobile telephony2 12.5 12.0 4% Broadband Internet access incl. 8.2 6.7 24% Residential 7.6 6.1 25% Corporate 0.6 0.6 9% Pay-TV 5.9 0.9 540% Traffic, generated by residential and corporate subscribers3 (billions of minutes) Intra-zone 2.7 3.0 (9%) DLD 1.3 1.6 (15%) ILD 0.1 0.2 (17%)

1 Effective from April 1, 2011, the methodological changes in the revenue structure include the following: 1) revenues from DLD/ILD traffic transit , which were previously included in the “DLD / ILD telephony services” reporting line, are now included in the “Interconnection and traffic transit services” reporting line; 2) revenues from mobile interconnection services, previously included in the “Interconnection and traffic transit services” reporting line, are now presented under “Mobile Communication Services”; 3) other methodological changes have had no significant impact on the reporting structure. 2 Excluding Skylink Group (subsidiary of Svyazinvest) 3 Excluding traffic, generated by other telecom operators www.rostelecom.ru 53 ROSTELECOM ANNUAL REPORT 2011

The broadband and Pay-TV sub- The total broadband subscriber base resulted from the consolidation of scriber bases continued to grow, was up 24% year on year to 8.2 mil- the remaining 50% in Volgograd both on an organic basis due to the lion, while the total Pay-TV subscrib- GSM in fourth quarter of 2011. Ros- increased penetration of broadband er base increased almost by seven telecom’s total subscriber base for and Pay-TV services among local times year on year to 5.9 million. local telephony services was down telephony subscribers, and as a 3% year on year. The decrease was result of the acquisition of telecom The number of mobile telephony mainly due to the ongoing change operators. subscribers increased by 4% year in customer patterns regarding the on year to 12.5 million. The increase use of traditional fixed-line services.

Structure of operating expenses

RUB million FY 2011 FY 2010 % change, y-o-y Personnel costs 74,838 74,417 1% Interconnection charges 40,225 37,374 8% Materials, repairs and maintenance, utilities 27,282 25,072 9% Other operating income (14,638) (14,629) 0% Other operating expenses 50,600 47,461 7% Total 178,307 169,695 5%

Operating expenses, before depre- plans to launch CRM system based Profit before taxes increased by ciation and amortization expenses, on Amdocs and subsequent conver- 38% year on year for the year to increased by 5% year on year to sion of licenses for billing software date to RUB 57.0 billion. RUB 178.3 billion for the year to into CRM licenses. date (including expenses of “NTK” The Company’s income tax in- and Volgograd GSM, acquired in Rostelecom’s capital expenditure creased 9% year on year for the 2011). The performance primarily increased by 60% year on year for year to date to RUB 11.0 billion reflected: the year to date to RUB 82.8 billion. respectively, which reflected an • a 7% year on year increase in The Company’s capital expenditure increase in profit before taxes. other expenses due to one-off primarily comprised the launch of rebranding campaign and cost new projects to modernize broad- Rostelecom’s effective tax rate was related to the promotion of cloud band networks and IT systems; the 19% for the year to date, which computing solutions and E-Gov- launch of new services; and the was below the Russian Statutory ernment project; construction of 3G and data trans- Income tax rate of 20%, mainly due • an 8% year on year increase in in- mission networks. to certain expenses which were terconnect charges mainly due to non-taxible, primarily the income an increase in the share of transit The Company reported an operat- from the decrease in long-term to mobile operators. ing profit of RUB 63.7 billion for social obligations, as well as the the year to date, with an operating reversal on Amdocs and revaluation The Company reported a 11% margin of 21.5%. of Volgograd-GSM. increase in OIBDA to RUB 117.7 billion for the year to date, with an The year on year increase in finan- Net income for the year to date OIBDA margin of 39.8%. cial expenses reflected the pay- increased by 47% year on year ment of interest on the credit lines to RUB 46.1 billion. Net income Depreciation and amortization which were used to acquire the adjusted for the reversal of Amdocs expenses decreased by 3% year 25% stake in Svyazinvest and 71.8% reserve increased by 23% year on on year for the year to date to in NTK. The Group’s equity partici- year to RUB 42.7 billion for the year RUB 54.0 billion, primarily due pation in the earnings of Svyazin- to date. to the reversal of the reserve on vest and Bashinformsvyaz totaled Amdocs software in line with the RUB 3.4 billion for the year to date.

54 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

FINANCIAL REVIEW the acquisition of NTK and Bashin- Reconciliation of OIBDA formsvyaz. Net cash generated by operating OIBDA is a non-U.S. GAAP and activities decreased by 0.4% year The Group’s total borrowings, non-IFRS financial measure, which on year for the year to date and including current and non-current the Company defines as operating amounted to RUB 84.7 billion. obligations, were up 18% during income before depreciation and the quarter to RUB 163.5 bil- amortization. We believe that OIB- Cash used in investing activities lion, and comprised loans raised DA provides useful information to increased more by 65% year on year by the companies to acquire the investors because it is an indicator for the year to date to RUB 114.4 bil- 25% stake in Svyazinvest and the of the strength and performance of lion, mainly as a result of the 71.8% stake in NTK, as well as our business operations, including acquisition of 71.8% of NTK and RUB 8.9 billion of bonds. More our ability to finance capital ex- 39.9% of Bashinformsvyaz, as well than 97% of the Group’s total debt penditures, acquisitions and other as purchases of property, plant and was ruble denominated at the end investments and our ability to incur equipment. of the year. and service debt. OIBDA should not be considered in isolation as an Cash provided by financing activi- The Group’s net debt therefore alternative to net income, operat- ties for the year to date amounted amounted to RUB 152.4 billion. ing income or any other measure to RUB 24.3 billion, and primarily This was equivalent to 1.3x times of performance under U.S. GAAP comprised loans secured to finance OIBDA. or IFRS.

RUB million FY 2011 FY 2010 % change, y-o-y Operating income 63,668 50,280 27% Add: Depreciation and amortization 54,040 55,756 (3%) OIBDA 117,708 106,036 11% OIBDA margin, % 39.8% 38.5%

www.rostelecom.ru 55 ROSTELECOM ANNUAL REPORT 2011

OJSC ROSTELECOM CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 and 2011 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

CONTENT

Independent auditors’ report...... 57

Consolidated statements of financial position...... 58

Consolidated statements of comprehensive income...... 60

Consolidated statements of cash flows...... 62

Consolidated statements of changes in equity...... 64

Notes to consolidated financial statements...... 70

56 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

INDEPENDENT AUDITORS’ REPORT

ZAO KPMG Telephone +7 (495) 937 4477 10 Presnenskaya Naberezhnaya Fax +7 (495) 937 4400/99 Moscow, Russia 123317 Internet www.kpmg.ru

The Board of Directors and Shareholders OJSC Rostelecom

We have audited the accompanying consolidated financial statements of OJSC Rostelecom (the “Company”) and its subsidiaries (the “Group”), which comprise the consolidated statements of financial position as at Decem- ber 31, 2011, 2010 and 2009, and the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the сonsolidated financial statements

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

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the as- sessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, 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 an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at December 31, 2011, 2010 and 2009, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

ZAO KPMG April 26, 2012

ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europa LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

www.rostelecom.ru 57 ROSTELECOM ANNUAL REPORT 2011

OJSC Rostelecom CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In millions of Russian Roubles)

Notes December 31, December 31, December 31, 2011 2010 2009

ASSETS

Non-current assets Property, plant and equipment 6 327,971 301,068 293,497

Investment property 259 356 330

Goodwill and other intangible assets 7 68,187 30,209 32,623

Investments in associates 9 33,646 27,517 1,197

Other investments 10 14,616 10,589 4,074

Deferred tax assets 20 775 530 193

Other non-current assets 11 13,820 3,645 5,308

Total non-current assets 459,274 373,914 337,222

Current assets Inventories 12 4,490 4,156 3,789

Trade and other accounts receivable 13 29,377 25,611 22,243

Prepayments 2,409 2,083 2,130

Prepaid income tax 3,304 1,745 1,882

Other investments 10 3,926 5,580 20,622

Cash and cash equivalents 14 7,177 12,627 13,621

Other current assets 15 1,151 1,095 1,671

Total current assets 51,834 52,897 65,958

Total assets 511,108 426,811 403,180

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

58 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

OJSC Rostelecom CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued) (In millions of Russian Roubles)

Notes December 31, December 31, December 31, 2011 2010 2009

EQUITY AND LIABILITIES

Equity attributable to equity holders of the Group Share capital 16 106 100 100

Additional paid-in capital 33,424 33,424 33,424

Treasury shares (25,143) (25,410) (67)

Retained earnings and other reserves 251,752 204,981 184,026

Total equity attributable to equity holders of the Group 260,139 213,095 217,483 Non-controlling interests 7,787 12 (72)

Total equity 267,926 213,107 217,411

Non-current liabilities Loans and borrowings 17 84,527 87,941 67,092

Employee benefits 19 11,752 16,197 15,578

Deferred tax liabilities 20 18,662 12,281 11,124

Accounts payable, provisions and accrued expenses 18 85 202 44

Other non-current liabilities 3,675 1,574 1,766

Total non-current liabilities 118,701 118,195 95,604

Current liabilities Loans and borrowings 17 78,939 50,096 49,104

Accounts payable, provisions and accrued expenses 18 37,396 38,935 34,960

Income tax payable 242 45 292

Other current liabilities 7,904 6,433 5,809

Total current liabilities 124,481 95,509 90,165

Total liabilities 243,182 213,704 185,769

Total equity and liabilities 511,108 426,811 403,180

These consolidated financial statements were approved by management of OJSC Rostelecom on April 26, 2012 and were signed on its behalf by President:

A.Y. Provotorov

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

www.rostelecom.ru 59 ROSTELECOM ANNUAL REPORT 2011

OJSC Rostelecom CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions of Russian Roubles unless otherwise stated)

Notes Year ended December 31,

2011 2010 2009

Revenue 21 296,015 275,731 264,645

Operating expenses Wages, salaries, other benefits and payroll taxes 22 (74,838) (74,417) (66,926)

Depreciation, amortisation and impairment losses 6, 7 (54,040) (55,756) (51,344)

Interconnection charges (40,225) (37,374) (40,502)

Materials, utilities, repairs and maintenance 23 (27,282) (25,072) (24,100) Loss on disposal of property, plant and equipment and intangible assets (287) (933) (1,195)

Bad debt expense 13 (627) (682) (1,068)

Other operating income 24 14,638 14,629 14,252

Other operating expenses 25 (49,686) (45,846) (43,709)

Total operating expenses, net (232,347) (225,451) (214,592)

Operating profit 63,668 50,280 50,053 Income from associates 3,439 239 216

Finance costs 26 (12,473) (11,798) (16,452)

Other investing and financial gain 27 2,656 2,745 3,237

Foreign exchange loss, net (265) (87) (2,717)

Profit before income tax 57,025 41,379 34,337 Income tax expense 20 (10,955) (10,041) (8,074)

Profit for the year 46,070 31,338 26,263

Other comprehensive income Revaluation gain on available-for-sale investments 19 198 593 Revaluation gain on available-for-sale investments transferred to profit on sale – (1) Income tax relating to revaluation gain on available-for-sale investments (4) (41) (82)

Other comprehensive income for the year, net of tax 15 157 510

Total comprehensive income for the year 46,085 31,495 26,773

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

60 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

OJSC Rostelecom CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (continued) (In millions of Russian Roubles unless otherwise stated)

Notes Year ended December 31,

2011 2010 2009

Profit attributable to: Equity holders of the Group 46,240 31,418 26,125

Non-controlling interests (170) (80) 138

Total comprehensive income attributable to: Equity holders of the Group 46,255 31,575 26,635

Non-controlling interests (170) (80) 138

Earnings per share attributable to equity holders of the Group – basic (in RUB) 30 15.81 10.14 8.20 Earnings per share attributable to equity holders of the Group – diluted (in RUB) 30 15.56 10.06 8.20

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

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OJSC Rostelecom CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions of Russian Roubles)

Notes Year ended December 31, 2011 2010 2009

Cash flows from operating activities Profit before income tax 57,025 41,379 34,337 Adjustments to reconcile profit before tax to cash generated from operations: Depreciation, amortization and impairment losses 6, 7 54,040 55,756 51,344 Loss on sale of property, plant and equipment and intangible assets 287 933 1,195 Bad debt expense 13 627 682 1,068 Income from associates (3,439) (239) (216) Finance costs excluding finance costs on pension and other long-term social liabilities 26 11,434 10,374 14,881 Other investing and financial gain 27 (2,656) (2,745) (3,237) Foreign exchange loss, net 265 87 2,717 Share-based payment expenses 29 588 3,930 – Changes in net working capital: (Increase) /decrease in accounts receivable (2,204) (3,659) 1,345 (Decrease)/increase in employee benefits (4,445) 619 846 (Increase)/decrease in inventories (85) (367) 355 (Decrease)/increase in accounts payable, provisions and accrued expenses (5,607) (416) 2,360 (Decrease)/increase in other assets and liabilities (851) (252) 1,113 Cash generated from operations 104,979 106,082 108,108

Interest paid (11,234) (11,356) (16,412) Income tax paid (9,050) (9,704) (5,441) Net cash provided by operating activities 84,695 85,022 86,255

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

62 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011

OJSC Rostelecom CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In millions of Russian Roubles)

Notes Year ended December 31, 2011 2010 2009

Cash flows from investing activities Purchase of property, plant and equipment and intangible assets (82,776) (51,845) (45,352) Proceeds from sale of property, plant and equipment and intangible assets 1,484 1,284 1,006 Acquisition of financial assets (8,565) (10,764) (31,138) Proceeds from disposals of financial assets 9,176 20,152 18,399 Government grant received 24 1,105 – – Interest received 934 2,282 2,513 Dividends received from associates 193 188 145 Purchase of subsidiaries, net of cash acquired (32,281) (4,548) (496) Proceeds from disposals of equity accounted investees - - 2 Acquisition of equity accounted investees (3,640) (26,000) (2) Net cash used in investing activities (114,370) (69,251) (54,923) Cash flows from financing activities Sale of treasury shares 1,754 - - Purchase of treasury shares (1,487) (25,343) - Proceeds from bank and corporate loans 289,470 123,353 44,384 Repayment of bank and corporate loans (246,941) (83,215) (59,328) Proceeds from bonds - 126 13,390 Repayment of bonds (13,932) (11,077) (19,712) Proceeds from promissory notes 12,050 5,340 3,515 Repayment of promissory notes (13,068) (7,276) (5,306) Repayment of vendor financing payable (368) (890) (1,721) Proceeds from / (repayment of) other non-current financing liabilities 72 47 (29) Repayment of finance lease liabilities (2,514) (3,764) (5,097) Acquisition of non-controlling interest (366) - (1,318) Dividends paid to shareholders of the Group (116) (14,106) (6,099) Dividends paid to non-controlling shareholders of subsidiaries (303) - (50) Net cash provided by/(used in) financing activities 24,251 (16,805) (37,371) Effect of exchange rate changes on cash and cash equivalents (26) 40 33 Net decrease in cash and cash equivalents (5,450) (994) (6,006) Cash and cash equivalents at beginning of year 12,627 13,621 19,627 Cash and cash equivalents at the end of year 7,177 12,627 13,621

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

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OJSC Rostelecom CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In millions of Russian Roubles)

Attributable to equity holders of the Group Attributable to equity holders of the Group Non-control- Total ling interest equity Share Additional Unrealized gain/ (loss) Treasury Share option Retained Total equity attributable capital paid-in capital on available-for-sale shares reserve earnings to shareholders investments of the Group

Balances at January 1, 2009 100 33,424 120 (67) – 162,908 196,485 1,648 198,133

Profit for the year – – – – – 26,125 26,125 138 26,263

Other comprehensive income

Revaluation gain on available-for-sale investments – – 593 – – – 593 – 593

Revaluation gain on available-for-sale investments transferred to profit on sale – – (1) – – – (1) – (1)

Income tax in respect of other comprehensive income items – – (82) – – – (82) – (82)

Total other comprehensive income, net of tax – – 510 – – – 510 – 510

Total comprehensive income – – 510 – – 26,125 26,635 138 26,773

Transactions with shareholders, recorded directly in equity:

Dividends to equity holders of the Group – – – – – (6,135) (6,135) – (6,135)

Dividends to non-controlling shareholders of subsidiaries – – – – – – – (50) (50)

Acquisition of non-controlling interest – – – – – 525 525 (1,843) (1,318)

Other changes in equity – – – – – (27) (27) 35 8

Total transactions with shareholders – – – – – (5,637) (5,637) (1,858) (7,495)

Balances at December 31, 2009 100 33,424 630 (67) – 183,396 217,483 (72) 217,411

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

64 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011