Annual Report 2016 About this Report This Annual Report was pre-approved by Rostelecom’s Board of Directors on 15 May 2017, Minutes No. 19 dated 15 May 2017. This Report has been prepared by PJSC Rostelecom (“Rostelecom” or the “Company”) and its subsidiaries (jointly, the “Group”), in line with Note 9 Subsidiaries to the Company’s consolidated financial statements prepared under the International Financial Reporting Standards (“IFRS”) for the year ended 31 December 2016. DISCLAIMER This Report contains certain “forward- » plans to improve the Company’s corporate » risks associated with changes in looking statements regarding future events”, governance practices; the political, economic and social as defined by the US federal securities laws, » the Company’s future position in environment in Russia and macroeconomic which are, therefore, regulated by these the telecommunications market and changes; laws, which provide for no liability for any act the outlook for the market segments in » risks associated with Russian laws, done or omitted in good faith. Such forward- which the Company operates; legislative reforms and taxation, including looking statements regarding future events » economic outlook and industry trends; laws, regulations, decrees and resolutions include (but are not limited to) the following: » potential regulatory changes and governing the Russian telecommunications assessments of the impact any laws or industry, activities related to placement » estimates of future operational and financial regulations may have on the Company’s and public circulation of securities, and performance of the Company and projected business; foreign exchange control requirements to effects on the current value of future cash » assessment of the risks affecting Russian companies, including the statutory flows; the Company’s financial and business interpretation of such regulations by » the Company’s plans to have interest in operations, and risk minimisation plans; the regulatory bodies; charter capitals of other entities; » other Company’s plans and forecasts » risks associated with the Company’s » the Company’s plans for network regarding future events. business, including performance against construction and upgrades, as well as targets and set profitability and growth planned investments; The above forward-looking statements rates; ability to create and meet demand » changes in demand for the Company’s regarding future events are subject to risks, for the Company’s services, including their services, the Company’s plans to enhance uncertainties and other factors that may promotion; the existing and develop new services, and cause the actual results to differ from those » technology risks associated with price forecasts; discussed in the statements. These risks, the operation and development of uncertainties and other factors include: the communications infrastructure, technology-driven innovations and convergence of technologies; » other risks and uncertainties. 02 PJSC ROSTELECOM Annual report 2016 Table of Contents About this Report .................................................................................... 01 INTRODUCTION ....................................................................................02 Chairman’s Statement ..................................................................... 02 Letter from the President ................................................................ 04 Highlights ......................................................................................... 06 Key events of 2016 ............................................................................ 07 1. COMPANY PROFILE ..........................................................................08 History Milestones ........................................................................... 10 Company Overview and Structure ................................................... 12 Business Model ................................................................................ 14 Investment Hotspot .......................................................................... 16 2. STRATEGIC REVIEW .......................................................................... 18 Industry Overview ............................................................................. 20 Content and Digital Services ........................................................... 21 Traditional Services .......................................................................... 25 Competitive Analysis ........................................................................ 26 Key Regulatory Changes .................................................................. 29 Industry Outlook ............................................................................... 30 Growth Strategy................................................................................ 32 Sustainability .................................................................................... 37 Risk Management ............................................................................ 50 3. OPERATIONAL HIGHLIGHTS ............................................................ 60 Digital and Content Services ........................................................... 64 Traditional Services .......................................................................... 74 More details on these factors are available in the Company’s public disclosures. Operational Excellence .................................................................... 80 Most of the above factors are beyond Infrastructure and Investments ....................................................... 86 the Company’s control or can not be 4. FINANCIAL PERFORMANCE ............................................................. 94 predicted by the Company. In view of 5. CORPORATE GOVERNANCE ............................................................ 104 the above, the Company does not recommend Corporate Governance Practice .................................................... 107 to rely on the statements regarding future events presented in this Report without Corporate Governance Structure .................................................. 109 proper guidance. The Company assumes no Governing Bodies ........................................................................... 110 obligation to publicly revise its statements – Control Bodies ................................................................................ 126 neither to reflect events or circumstances Remuneration ................................................................................. 132 after the date of this Report, nor to report on any unanticipated events, except where Information Disclosure .................................................................. 139 required by the applicable law. Directors’ and Officers’ (D&O) Liability Insurance ........................ 140 6. INFORMATION FOR SHAREHOLDERS AND INVESTORS ............... 142 Share Capital .................................................................................. 144 Securities ........................................................................................ 146 Shareholder and Investor Relations .............................................. 148 Dividends ........................................................................................ 151 Registrar ......................................................................................... 152 Answers to Frequently Asked Questions ....................................... 153 APPENDICES ....................................................................................... 156 Consolidated Financial Statements .............................................. 158 Glossary .......................................................................................... 254 Contact information ....................................................................... 257 Annual report 2016 PJSC ROSTELECOM 01 INTRODUCTION 02 Chairman’s Statement 04 Letter from the President 06 Highlights 07 Key events of 2016 Chairman’s Statement 02 PJSC ROSTELECOM Annual report 2016 INTRODUCTION Company Strategic Operational Financial Corporate Information Appendices Profile Review Highlights Performance Governance for Shareholders and Investors Dear Shareholders and Investors, 2016 was a year of momentous transformation for Rostelecom with a number of important steps undertaken towards achieving Company’s strategic goals set by the Board of Directors. As a result, Rostelecom is steadily transforming into a digital service provider which streamlines its organisation and business processes simultaneously. Consistent improvement of the Company’s corporate governance continued to be the focal point of Rostelecom’s performance in 2016. Four members of the new Board of Directors were determined by the Board to be independent, and thus both the Audit Committee and the Nomination and Remuneration Committee now consist solely of independent directors. I am pleased to note that our efforts towards achieving excellence in corporate governance for the future sustainable development of the Company are delivering and were well recognised in 2016: the world’s leading provider of corporate governance solutions, Institutional Shareholder Services Inc. (ISS), assigned Rostelecom its highest governance rating on the QualityScore rating system, which defines low corporate governance risks. Additionally, the Company was assigned a “7++” rating by the Russian Institute of