Annual Report

2018 About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 1 SISTEMA Contents

ABOUT THE COMPANY 2 CORPORATE GOVERNANCE 82

Profile of Sistema 4 Sistema’s Corporate Governance Principles 84

Investment Portfolio 6 Sistema’s Corporate Governance Structure 85

CEO’s Statement 8 General Meeting of Shareholders 86

Key Events of 2018 10 Board of Directors 88 ONE OF THE LARGEST Mission and Strategy 14 Committees of the Board of Directors 92 FINANCIAL PERFORMANCE 16 President 94

Financial Performance in 2018 18 Management Board 95 PRIVATE INVESTORS Shareholders’ Equity 22 Committees Reporting to the President 96 and the Management Board Report on Dividends 24 Specific Characteristics of Risk Management, Sistema’s Credit Ratings 25 Internal Control and Internal Audit Systems 98

INTO RUSSIA’S KEY ASSET RESULTS 26 Development of the Corporate Governance System in 2018 100 MTS 28 Remuneration Policy 102 Detsky Mir 32 CONTEMPORARY Risks 104 Segezha Group 36 SOCIAL RESPONSIBILITY 110 Medsi 42 ESG and Corporate Responsibility Principles 112 ECONOMY Agroholding “STEPPE” 49 Contribution to Socio-Economic Development 113 Real Estate Assets 54 Social Investment in Technology and Human Capital 113 RTI 60 External Assessment of Sustainable Development 115 8 BPGC 63 For more information about Sistema Hospitality Assets 66 visit our website: Binnopharm 69

https://sistema.com Other Portfolio Companies 72

Funds 74

Ozon 80 2 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 3

PROFILE OF SISTEMA 4 ABOUT INVESTMENT PORTFOLIO 6 CEO’S STATEMENT 8 THE COMPANY KEY EVENTS OF 2018 10 MISSION AND STRATEGY 14 4 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 5

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

Sistema is one of the largest private investors in the real INVESTMENTS KEY HIGHLIGHTS 20181 UNIQUE PORTFOLIO OF ASSETS sector of the Russian economy. Sistema’s investment AND COMPETENCES IN HIGH-POTENTIAL SECTORS portfolio comprises in sectors including OF THE RUSSIAN ECONOMY Russian companies REVENUE telecommunications, consumer retail, paper and packaging, >150 000 000 agriculture, high-tech, real estate, healthcare and hospitality. Sistema holds controlling interests in most of its portfolio CONSUMERS companies. 777.4 Public RUB billion2 assets:

ASSETS MTS, DETSKY MIR, ETALON GROUP3 >15

SECTORS Sistema’s strategic goal is to create RUSSIA’S BIGGEST PRIVATE NON-RESOURCES CORPORATION 1,465.4 long-term growth of shareholder value by boosting returns on ONE OF RUSSIA’S RUB billion investments in existing assets and INVESTS MORE THAN ONE OF RUSSIA’S reinvesting available cash in new investment projects to diversify its 20 portfolio and increase overall returns RUB 100 billion CREDIT RATINGS 50 on investment. LARGEST PRIVATE COMPANIES FROM INTERNATIONAL IN THE FORBES GLOBAL 2000 IN THE RUSSIAN ECONOMY AND RUSSIAN RATING MOST VALUABLE Sistema focuses on improving the EVERY YEAR AGENCIES BRANDS operational efficiency of the assets it acquires by restructuring and by working with relevant partners to enhance expertise and mitigate Top-15 S&P financial risks. RUSSIA’S LARGEST COMPANIES The Corporation’s shares trade on BY REVENUE FITCH B+ Moscow Exchange (ticker: AFKS) and on the London Stock Exchange in the RAEX form of global depositary receipts BB- (ticker: SSA). One GDR represents 20 ordinary shares. RuA-

GDRS ON LSE MOSCOW EXCHANGE TICKER SSA AFKS 6 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 7

Leading One of Russia’s Russian leading developers multicategory and manufacturers of Investment online retailer high-tech products 1

Binnopharm OBL Pharm Portfolio One of Russia’s One of leading Cosmos Group largest full-cycle One of Russia’s leading production companies biopharmaceutical hotel management 36.0% 96.0% in the Russian companies companies pharmaceutical market

BY PRODUCTION OF HIGH-QUALITY UNBLEACHED SACK PAPER 74.0% No.1 IN RUSSIA 2 3 100% OZON KRONSTADT GROUP No.3 IN THE WORLD LEADING 12.8% RUSSIAN TELECOMS OPERATOR BY PAPER SACK HOSPITALITY by subscriber base, PRODUCTION ASSETS PHARMACEU- Leading revenue and OIBDA Leading Russian TICALS vertically integrated telecommunications IN RUSSIA No.1 forest holding operator and digital services provider No.2 IN EUROPE in Russia Over 105 million 99.9% 50.01% MOBILE SUBSCRIBERS SEGEZHA GROUP MTS

RUSSIAN MARKET

482 million chips stores 748 No.1 Leading DETSKY IN RUSSIAN CITIES, player in the children’s RTI Russian high-tech KAZAKHSTAN AND 52.1% MIR 87.0% 4 company BELARUS goods market in Russia MICROCHIPS

1,381 million

AGRO­ HOLDING BPGC STEPPE AMONG RUSSIA’S 92.8%5 91.0% 6 largest Major agriculture Bashkirian Power Grid LAND OWNERS holding Company — One of Russia’s biggest and one of the Russia’s TOTAL LENGTH OF POWER largest land owners CONCEPT MEDSI power grid companies GRIDS AMONG RUSSIA’S GROUP Over 88,500 sqm 6 largest GRAIN EXPORTERS INVESTMENT 43.0% FUNDS REAL ESTATE 98.5%

1 As at December 31st 2018, Sistema’s direct stake in MTS bank was 43.24%. One of the In February 2019, after the sale of MTS Bank shares to Mobile TeleSystems B.V., largest players No.1 100% subsidiary of MTS, Sistema’s direct stake in MTS bank decreased to 5.0%. Russian in lingerie wholesale private 2 Hereinafter Sistema’s stake refers to effective stake for MTS, BPGC and to total and childrenswear healthcare company ownership for other assets. The stake in Ozon.Ru includes all shares controlled Leader Invest, by revenue in 2018 by Sistema Group. monobrand stores Private equity and asset Business-Nedvizhimost, 3 Sistema acquired 18.7% in Ozon Holdings Limited in March 2019. management funds 6 PATIENT VISITS 4 As of 31 March 2019. As of 31 December 2018 Detsky Mir Group included Etalon Group 743 stores in Russia and Kazakhstan. 6 Sistema acquired 25% of Etalon million per year 5 84.63% as of December 31, 2018. Group in February 2019. 8,5 8 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 9 CEO’s Statement

DEAR SHAREHOLDERS, Detsky Mir continues to open new stores Steppe’s OIBDA was up 22% in 2018 due In pharma, Sistema partnered with VTB Looking ahead, we will continue to deliver in new regions of Russia and Kazakhstan. to improved efficiency in the grain segment to acquire a 95% stake in OBL Pharm, which against the strategy adopted in 2018 that Sistema delivered impressive growth of both It has also launched operations in Belarus and the development of agrotrading. we plan to merge with our pharmaceutical centres on three strategic goals: revenue (up 12%) and OIBDA (up 34%) and in the promising pet supplies segment. business, Binnopharm, in the coming in the full year 2018, as our portfolio And online sales almost doubled during Medsi’s revenue for the year (+52%) affirmed months. The two companies possess ZZ maximising shareholder returns and companies continued to consolidate their the year, reaching almost 8% of sales. its position as Russia’s leading private complementary assets and we have set reducing the discount between market respective markets and expand into new healthcare provider. Adjusted OIBDA rose 83% a medium-term goal of building out a top- capitalisation and NAV; business segments. Our key non-public assets, both exporters in the full year 2018, primarily driven by higher five Russian player in the fast-growing ZZ attracting third-party capital to enhance and domestic players, strengthened their utilisation rates and an increase in revenue commercial segment of the pharma our investment resources. Our publicly traded assets delivered market positions. per square metre of medical facilities. industry. In April 2019, the Russian Direct sustained growth in revenue and OIBDA Investment Fund, the Russia-China Our strategic focus is on building out four as both MTS and Detsky Mir continue to lead At Segezha Group, where the top line grew Over recent months, Sistema has completed Investment Fund and the largest Middle businesses — Steppe, Segezha Group, their respective sectors. In both the retail by 32% for the full year, growth was driven transactions that crystallise the value of our Eastern funds agreed to join the project, Medsi and Ozon — with a target and telecoms sectors, the operating by the paper and packaging segment, which assets in real estate and the pharmaceuticals which is a solid confirmation of the project’s enterprise value per business environment presents its own challenges. accounted for 70% of total revenue. Adjusted sector. investment appeal and its importance of USD 1–2bn. Our ambition However, both management teams have OIBDA was up 83% for 2018. Growth was for the development of the industry. is to eventually take them shown the ability to successfully monetise driven by: In February 2019, we sold a 51% stake in our to the public markets, opening their customer bases. Moscow real estate development business, Additionally, we have made a strategic bet up whole new sectors ZZ increased prices for key Segezha’s Leader Invest, to London-listed development on Russian e-commerce, increasing our of the Russian economy MTS posted full year revenue growth products; and construction company Etalon Group. holding in market leader Ozon by buying to equity investors through of 8% year-on-year, despite a 0.4% year-on- ZZ greater capacity due to a new Subsequently, Sistema acquired 25% of Etalon out MTS’s stake and acquiring stakes fast-growing companies year decrease in subscribers. Detsky Mir, papermaking machine; from the company’s founder and his family. of some minority shareholders. As of April that become leaders in their meanwhile, saw revenue increase by 14% ZZ currency factors. As a result, Sistema has become the largest 2019, Sistema directly holds 21.9% of Ozon, respective sectors. in the full year on the back of the strong shareholder in a significantly strengthened, and another 16.3% stake via venture capital like-for-like sales. During the year Detsky Mir Our agriculture business, Steppe, publicly-traded real estate business. fund Sistema_VC. The potential in Russian also managed to improve profitability continues to grow both organically The combined company, a top-three player e-commerce is huge. The market is forecast as a result of economies of scale and cost and through the launch of new business in Russia’s largest markets — Moscow to grow from RUB 1tn to RUB 3.5tn in 2023 discipline. lines. Steppe’s revenue increased by 137% and St. Petersburg — boasts an excellent with CAGR of 24%. And Ozon, with its in the full year as a result of: portfolio of projects. And it has an opportunity aggressive strategy to conquer the market Both companies have successfully ventured to take advantage of significant synergies with a focus on technological development, into new markets and developed new ZZ strong growth of the field crop division; through optimisation of construction costs a strong team, a wide range of products, its revenue streams. At MTS, the contribution ZZ acceleration of the grain trading and administrative expenses. Etalon’s in- own logistics infrastructure, a recognisable from IT and systems integration business business as Steppe become one of house construction capacities and design brand and a developing marketplace, is growing steadily. The company is also Russia’s top six grain exporters; bureau will accelerate the development is well positioned to consolidate this highly scaling up in the data centre/cloud business, ZZ solid operating results in the dairy of Leader Invest’s projects. As the market fragmented industry and benefit from its ANDREY DUBOVSKOV and saw revenue from cloud services triple segment; undergoes transformation with new regulation growth. President of Sistema in 2018. ZZ the launch of sales of sugar and produce and changing consumer preferences, under the Steppe brand. we believe consolidation is the key trend. And we are eager to embrace it and benefit REVENUE OIBDA from it. GROWTH GROWTH

12% 34% 10 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 11 Key Events of 2018

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

MTS: DETSKY MIR: NEW PRESIDENT SETTLEMENT AGREEMENT AND VICE PRESIDENT FOR FINANCE WITH ROSNEFT AND BASHNEFT UNLOCKING SYNERGIES CHAIN EXPANSION AND INVESTMENTS APPOINTED WITH THE BANKING BUSINESS AND NEW MARKETS In 2018 Sistema fulfilled in full all of its AND DEVELOPING NEW REVENUE In March 2018, Sistema’s Board of Directors financial obligations under the Settlement STREAMS In 2018, Detsky Mir entered a new approved the appointment as President Agreement that settled all litigation involving market — pet products — in accordance of Sistema of Andrey Dubovskov, the former Sistema and Sistema-Invest relating In February 2018, MTS acquired with its expansion strategy. ANDREY president of MTS. Andrey Dubovskov took to the ownership and or management Ticketland.ru and Ponominalu.ru, two The management estimates the size DUBOVSKOV office on 13 March 2018. of Bashneft and or its affiliated entities major Russian e-ticketing operators. of the pet products segment in Russia President by Sistema and Sistema-Invest. at RUB 200bn. In December 2018, In April 2018, Vladimir Travkov was In April 2018, MTS partnered up the company opened four pilot pet stores appointed as Vice-President, Chief ACTIVE PRESENCE IN DEBT MARKETS with Ericsson to open a research centre under the Zoozavr brand. of Financial and Investment Department in Tatarstan that will develop innovative (CFO). Since 2003 he has held management In February and March 2018, Sistema products and solutions based on 5G, IoT positions in MTS Group, including as director successfully placed exchange-traded bonds and Big Data. of the Functional Control Department of series 001P-07 and 001P-08 with the total THE TOTAL SELLING SPACE 11.6% since 2016. nominal value of RUB 10bn and RUB 15bn, In May 2018, MTS placed Russia’s first OF ALL THE STORES OF THE GROUP IS respectively. The rates for coupons 1-2 were commercial bonds using smart contracts VLADIMIR set at 9.80% p.a. for series 001P-07 bonds based on blockchain. The total nominal TRAVKOV and at 9.25% for series 001P-08 bonds. value of the issue was RUB 750m. 768 sq m Vice-President, The bonds mature in 10 years with put Chief of Financial options exercisable 1 year and 1.5 years after In July 2018, MTS increased its equity and Investment the dates of placement, respectively. holding in MTS Bank to 55.2%, which will Department (CFO) help unlock further synergies between Detsky Mir intends to enter a new INCREASED SCALE AND CRYSTALIZED the telecom and banking businesses, geography — Belarus — and become a key VALUE OF PHARMACEUTICALS simplify management and reduce player there in the medium term. The first BUSINESS the time-to-market of new fintech store in Belarus was opened in Minsk products. In February 2019, Sistema’s (Evroopt shopping mall) in February 2019. In December 2018, Sistema acquired direct ownership interest in MTS Bank Its total area is 1,690 sq m. Detsky Mir STRENGTHENED POSITION a stake in a leading pharmaceutical was reduced to 5.0%, while MTS’s stake will develop in Belarus under the DetMir IN THE FTSE4GOOD INDEX company, OBL Pharm, for RUB 1.83 billion. increased from 55.2% to 94.7%. brand. Sistema made the acquisition as a member Sistema received a high score of a consortium of investors that also In August 2018, MTS used the expertise for its environmental activities and social included VTB Bank and members of the OBL of its subsidiary, system integrator responsibility practices. FTSE Russell, Pharm management team. The strategic NVision Group, and its 5,000+ IT THE TOTAL AREA OF THE FIRST STORE an analytical agency of the London Stock aim of the transaction is the merger of OBL specialists across the country to enter IN BELARUS Exchange, upgraded Sistema’s sustainable Pharm with Sistema’s pharmaceutical holding, the outsourced IT services market. development rating and confirmed its status Binnopharm, and utilisation of synergies of a participant of the FTSE4Good1 index in marketing and sales, combining R&D 1,690 sq m following a revision in June 2018. The high functions and reducing administrative costs. rating and participation in the index confirm The medium-term goal of the combined the Corporation’s commitment to responsible company is to become one of Russia’s five investment and asset management. largest pharmaceuticals producer in the non- state segment, the fastest-growing segment in the Russian pharma market. 1 The FTSE4Good indices were created by FTSE Russell to assess companies’ effectiveness in environmental, social and governance practices (ESG). 12 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 13

EVENTS AT PORTFOLIO COMPANIES AND SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD NEW FUNDS’ INVESTMENTS AND EXITS STRATEGIC TRANSACTIONS

MEDSI: SEGEZHA GROUP: SISTEMA ASIA FUND OZON TELEMEDICINE INCREASING OUTPUT AND PATIENT CARE CENTRE AND ENHANCING EFFICIENCY In May 2018, Sistema’s venture fund Sistema In February 2019, Sistema acquired Asia Fund added HealthifyMe, an Indian 18.7% of Russia’s leading multi-category In April 2018, Medsi and MTS launched In March 2018, Mikhail Shamolin, former mobile health and fitness application, to their online retailer, Ozon Holdings, from MTS a telemedicine platform, SmartMed, president of Sistema, was appointed portfolio. for RUB 7.9 billion. The decision to increase which will be used for developing digital president of Segezha Group. the stake is based on Sistema’s strategic healthcare products and services. In March 2019, Sistema Asia Fund, a Sistema bet on growth prospects for e-commerce In July 2018, the company launched venture capital fund, sold its holding and market consolidation through the second line at the Vyatka Plywood of Qwikcilver, an Indian technology company investments in the market leader. Mill, which will enable it to increase its specialising in gift cards and stored-value plywood output to 192,000 cu m and expand solutions. The transaction is the first exit OZON.RU GMV GROWTH IN 2018 the range of high-margin products, for the Sistema Asia Fund. Sistema Asia including large-size long-grain plywood. Fund invested in Qwikcilver in 2016 and after three years exited, having achieved a high 73% y-o-y In December 2018, a pellet plant return on invested capital. In July 2018, the company established with an annual capacity of 70,000 t ETALON a patient care centre, the main mission of pellets was opened at the Lesosibirsk SISTEMA VENTURE CAPITAL of which is to study customers’ Woodworking Plant. Pellets are produced In February 2019, Sistema sold 51% satisfaction and preferences with regard from waste (sawdust) generated In May 2018, Sistema’s venture fund Sistema of JSC Leader Invest to Etalon Group, while to healthcare and other services provided at the woodworking facility. Venture Capital invested in TraceAir, a start- retaining a 49% stake in the company. at Medsi, implement best global practices up developing a platform for monitoring Following this transaction, Sistema acquired of patient-centric medicine, and develop In the fourth quarter of 2018, Segezha Pulp construction sites using unmanned aerial 25% of Etalon Group for USD 226.6 million. internal processes and culture aimed and Paper Mill commissioned a multi-fuel vehicles, in Connecterra, a start-up which The transactions create a top-three at meeting customers’ needs. boiler that runs on bark waste, which will deploys AI solutions for dairy farming, player in the Moscow and St Petersburg increase heat generation at the mill by 25% and in SQream, a company that enables markets, bring together complementary and reduce use of expensive fuel oil. enterprises to maximize and leverage their development portfolios, allow Leader big data analytics by using GPU. Invest’s projects to leverage Etalon’s general contracting capacity and regional sales network to accelerate construction and sales, and realise significant synergies STEPPE AGROHOLDING: RTI: in construction as well as reduction CAPACITY INCREASE CREATION OF A COMBINED of administrative expenses. MICROELECTRONICS COMPONENTS Steppe AgroHolding is actively COMPANY SISTEMA ACQUIRED increasing its capacity in the dairy farming segment. In March 2018, In February 2019, RTI Microelectronics, the company commissioned its fifth an RTI Group company, signed a legally 25% dairy farm for 1,800 cows. The new binding agreement with State Corporation of Etalon Group farm is expected to reach its design Rostec and JSC Roselectronica to create capacity of 20,000 t of milk per year a combined microelectronics components in 2021. At the end of 2018, Agroholding company. The parties will combine announced its plans to build another under the new company controlling dairy farm in the Rostov region. Together stakes in 19 microelectronics component with the farm launched in March 2018 development, production and design in the Krasnodar region and another companies. new enterprise under construction there, it will more than triple production, from 40,000 tonnes in 2017 to over 120,000 tonnes in 2023, making Steppe THE PARTIES WILL COMBINE UNDER THE NEW Agroholding one of the top three players COMPANY CONTROLLING STAKES IN in the Russian market. 19 microelectronics component development, production and design companies 14 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 15 Mission and Strategy

MISSION PARTNERSHIP MANAGEMENT ASSET MANAGEMENT PRINCIPLES BASIC PRINCIPLES OF THE INVESTMENT STRATEGY MODEL Sistema’s mission is to build Russia’s leading Investing in the development of existing CURRENT INVESTMENTS NEW INVESTMENTS investment company, with diversified The Corporation has adopted a partnership portfolio assets to increase their value is one expertise and a strong track record, management model that allows key of the key stages of Sistema’s value creation Focus: INVESTMENTS IN SISTEMA’S HIGH- Focus: DIRECT INVESTMENTS BY SISTEMA’S Focus: INVESTMENTS IN FUTURE which will become an investment platform executives of the Corporation (Managing model. Value creation includes a number POTENTIAL PORTFOLIO COMPANIES that CORPORATE CENTRE IN UNIQUE TECHNOLOGIES for managing both Sistema’s and third-party Partners) to share the risks and returns of mandatory steps, starting from active can develop be grown into businesses worth OPPORTUNITIES IN TRADITIONAL SECTORS capital while providing access to unique from investment activities with shareholders: management of a newly acquired asset. over USD 1 billion in the medium term IN RUSSIA Investments in large technology investment opportunities in the most and require investments from Sistema. companies attractive sectors of the Russian economy 1. MANAGING PARTNERS ARE VALUE CREATION AT ASSETS: Mature undervalued assets and high-potential technologies, and oriented RESPONSIBLE FOR IMPLEMENTATION Investment strategy: Investment strategy: towards long-term growth of equity value. OF PORTFOLIO COMPANIES’ A Board of Directors is formed at companies Investments in portfolio companies Investment strategy: direct investment by Sistema’s Corporate INVESTMENT STRATEGIES. This means controlled by Sistema, and must have to increase their market share and or enter investments in significant and controlling Centre in big stakes in technology companies SISTEMA’S STRATEGIC GOALS they: independent members with recognised adjacent/synergetic business segments stakes of large assets in attractive markets that do not meet the investment criteria industry and/or functional expertise. in Russia. Acquisition at a significant discount of Sistema’s funds, with an opportunity 1. Maximising total shareholder return ZZ organise asset management (mostly Geography of investments: in accordance to the market value and with the possibility to build businesses worth over USD 1 billion (TSR) and reducing the discount of via the Board of Directors) and take full The boards supervise, coordinate with the approved strategy for portfolio of quickly reducing the discount and selling and monetisation prospects in 5-7 years market capitalisation to net asset value responsibility for the asset’s KPIs and and support the activities of portfolio companies within 2-3 years (NAV); financial performance; companies’ management in decision-making Venture projects 2. Raising and managing outside capital to ZZ in most cases, the chair of the asset’s in key functional areas: strategy and key Industries: companies’ industries Growing assets expand available investment resources; Board of Directors, bear responsibility transactions, budget planning, HR policy, and adjacent/synergetic industries Investment strategy: for its composition and work, and internal audit; Investment strategy: investments within existing and new venture STRATEGIC FOCUS recruit and appoint the CEO and senior ZZ effective managers are recruited; an Discounted payback period (DPBP) buy and consolidate players. Generating funds under Sistema’s management, (COMPONENTS OF management. incentive system is established that is of 3–10 years value by ousting competitors, consolidating monetisation of investments via closing THE STRATEGY) aimed at creating shareholder value; the industry, using economies of scale of funds. Mandatory participation of outside 2. INCENTIVES OF THE MANAGING ZZ strategic and financial planning and market growth. Exit in 4-5 years through investors as financial partners (share ZZ Growing existing assets in high- PARTNERS ARE AIMED AT: cycles are introduced based on best sale to a strategic investor/IPO of outside partners: at least 20%) potential segments (private healthcare, international practices of corporate agriculture, pulp & paper) into ZZ increasing Sistema’s capitalisation; governance; Geography of investments: predominantly Geography of investments: no restrictions businesses with a valuation between h ZZ maximising the value of assets under ZZ new technologies are identified, with Russia USD 1–2 billion management and monetising this value; testing and adoption to increase Sectors: Software development, e-commerce, ZZ Taking advantage of unique investment ZZ raising outside capital for management. efficiency, streamline processes, develop Sectors: sectors with large markets (at least e-businesses, IoT, virtual assistants, machine opportunities in traditional sectors in Managing Partners co-invest in assets innovative products and services for USD 1 billion), high growth rates, import learning and neural networks, cybersecurity, Russia; under their management. customers, and expand current markets substitution potential and export prospects medtech, AR/VR and others. ZZ Focusing on investments in the high- of portfolio companies. potential technology sector; ZZ Ongoing generation of value in existing assets, including through adoption of advanced technologies and digital solutions; ZZ Ongoing improvement of management structures and corporate governance. 16 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 17

FINANCIAL PERFORMANCE IN 2018 18 FINANCIAL SHAREHOLDERS’ EQUITY 22 REPORT ON DIVIDENDS 24 PERFORMANCE SISTEMA’S CREDIT RATINGS 25 18 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 19 Financial Performance in 2018

REVENUE, ADJUSTED OIBDA, GROWTH OF ADJUSTED 1 Excluding impact of new IFRS standards RUB BN RUB BN OIBDA (RUB million) 2018 2017 Изм. 2018 Change Revenue 777,405 693,424 12.1% 770,196 11.1% Adj. OIBDA 265,273 197,558 34.3% 219,829 11.3% 777.4 265.3 11.3%

Operating income 128,600 90,290 42.4% 114,003 26.3% 693,4693.4 77777.47,4 693,4693.4 770,2770.2 19197.67,6 265,3265.3 19197.67,6 219,8219.8 Loss attributable to Sistema (45,898) (94,602) — (46,952) — 12,1% 11,1% 34,3% 11,3% Adjusted profit/ attributable to Sistema 1,114 4,119 (73.0%) 60 (98.5%) 12.1% 11.1% 34.3% 11.3%

PERCENTAGE OF BPGC’S SMART MTS’S NEW DIVIDEND POLICY GRID PROJECT COMPLETED AT LEAST ADJUSTED 5.6 p.p. OIBDA MARGIN

2017 2018 2017 2018 20172017 20182018 20172017 20182018 78% 28.0 RUB/share Old New Old Old New Old Старые Новые Старые Старые Новые Старые IFRS IFRS IFRS IFRS IFRS IFRS МСФО МСФО МСФО МСФО МСФО МСФО 34.1%

MEDSI BECAME THE LEADER GROWTH IN ADJUSTED OIBDA In 2018, Sistema’s consolidated and increased milk production; Medsi, of a new papermaking machine in late BY REVENUE AMONG PRIVATE AT SEGEZHA IN 2018, Y-O-Y revenue increased by 12.1% year-on- due to increased capacity utilisation 2017; Agroholding Steppe, due to increased HEALTHCARE COMPANIES IN RUSSIA year as a result of increased revenue and as a result in-patient revenue, higher operational efficiency in the field crop from key assets: MTS, as the core revenue from the CDC at Krasnaya Presnya segment and increased contributions 83.4% telecoms business benefitted substantially and expansion of the chain of clinics; from the agrotrading segment; Medsi, 1 st from a better pricing environment and real estate assets, driven by sales as capacity utilisation of key assets ramped in Russia, data usage increased, revenue growth and earlier revenue recognition due up and revenue per square metre of medical from new business lines accelerated rapidly to the adoption of the IFRS 15 standard. facilities rose. Excluding the effect of the new AGROHOLDING STEPPE BECAME ADJUSTED OIBDA MARGIN and smartphone sales were strong; Detsky accounting standards, Group adjusted OIBDA ONE OF RUSSIA’S TOP-6 GRAIN AT DETSKY MIR IN 2018 Mir, on the back of new store openings, Group adjusted OIBDA increased by 34.3% increased by 11.3% versus 2017 primarily EXPORTERS growth in like-for-like sales, growth on the year, reflecting strong results as a result of growth at MTS, Detsky Mir, in the e-commerce segment and increased at MTS, primarily due to the new accounting Segezha, Agroholding Steppe and Medsi. 19.0% traffic at previously opened stores; standards, increased revenue and strong The adjusted OIBDA margin increased Top-6 Segezha Group, as a result of increased performance of the Ukrainian business; Detsky by 5.6 p.p. to 34.1%, principally as a result sales volumes of paper and packaging, Mir as a result of the new IFRS standards, of the new accounting standards. Without higher prices for paper and sawn timber, optimisation of buying prices, efficient taking into account the new standards, GROWTH IN ETALON’S REVENUE AVERAGE OCCUPANCY RATE and weakening of the rouble; Agroholding management of the product assortment the adjusted OIBDA margin was unchanged IN 2018 AT COSMOS GROUP IN 2018 Steppe, due to growth of the field crop and increased operational efficiency; Segezha at 28.5%. segment as wheat prices have increased, Group, as a result of increased prices on most strong growth of the agrotrading division key products as well as the commissioning 100.9% 62.5%

1 Here and hereinafter, new standards refer to IFRS 9, 15 and 16. 20 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 21

Group selling, general and GROUP SG&A EXPENSES, SG&A at the Corporate Centre GROUP CAPEX, administrative expenses IFRS, RUB BILLION declined year-on-year by 10.3% to IFRS, RUB BN (SG&A) for the full year 2018 RUB 9.0 billion as a result of cuts decreased by 7.5% versus 2017 in headcount, lower compensation to RUB 141.6 billion, mainly due to 141.6 expense and reduced administrative 124.0 the new IFRS standards. Without expenses. this effect, Group SG&A increased 153.2 141.6 163.5 104.4 124.0 by 6.8% to RUB 163.5 billion. Group capital expenditures The SG&A/revenue ratio declined increased by 18.8% year-on- year-on-year from 22.1% to 18.2%; year to RUB 124.0 billion in 2018, excluding the impact of new IFRS mainly in connection with increased standards the SG&A/revenue ratio capex at MTS as a consequence declined to 21.2%, reflecting Sistema’s of increased investments in network continued success in improving development in Russia and a focus operational efficiency. on providing the best LTE coverage in line with the company’s strategy; and Detsky Mir, as the company executed on its expansion strategy.

CORPORATE CENTRE SG&A EXPENSES, RUB BILLION 9.0

1.8% 12.6 1.4% 10.0 1.2% 9.0

GROUP SG&A EXPENSES 2017 2018 2018 2016 2017 2018 2017 2018 IN 2018 Old IFRS New IFRS Old IFRS

GROUP SG&A EXPENSES, 2017 2018 2018 Corporate centre SG&A GROUP CAPEX, 2017 2018 RUB BILLION Old IFRS New IFRS Old IFRS IFRS, RUB BN 7.5% y-o-y Corporate centre SG&A/Group revenue MTS 91.3 83.9 96.7 MTS 76.4 92.0 Detsky mir 22.1 15.7 24.1 Detsky mir 2.5 3.8 Segezha Group 6.7 11.4 11.6 Other 25.5 28.2 Corporate centre 10.0 9.0 9.0 Total 104.4 124.0 GROUP SG&A/GROUP REVENUE STEPPE Agroholding 2.2 3.5 3.5 Other 20.9 18.1 18.6 18.2% y-o-y Total 153.2 141.6 163.5 Group SG&A/Group revenue 22.1% 18.2% 21.2% 22 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 23 Shareholders’ Equity

SHAREHOLDERS’ Shares of Detsky Mir, a Sistema subsidiary, SISTEMA’S SHAREHOLDING CHANGES IN SISTEMA’S GDR On the first trading day of 2018, the closing The closing price of GDRs reached a record EQUITY began trading on Moscow Exchange STRUCTURE3 AND ORDINARY SHARE PRICES5 price of one GDR on the London Stock high of USD 4.5 on 26 February 2018, in February 2017 under the ticker DSKY Exchange was USD 4.4, for a total market and the ordinary shares peaked at RUB 12.8 Sistema has 9,650,000,000 ordinary in the first listing level. 15.9% 8.4% In 2018, Sistema’s share price fell by 35.2% capitalisation of USD 2,145.2 mn. On the last on 15 January 2018. The lowest closing GDR shares outstanding with a nominal value and the price of its GDRs by 47.8%. Despite trading day of the year, the closing price and ordinary share prices were recorded of RUB 0.09 each. Its authorised capital In February 2019, Sistema acquired 25% the strong operational and financial was USD 2.3, with Sistema’s total market on 27 December 2018 at USD 2.2 and on 26 is RUB 868,500,000. of Etalon Group. Etalon’s GDRs listed performance of Sistema’s portfolio capitalisation standing at USD 1,119.4 mn. October 2018 at RUB 7.7, respectively. on London Stock Exchange under the ticker companies, its share price was under Average daily trading volume on the London Sistema held an initial public offering ETLN since 2011. pressure due to the absence of substantial On the first trading day of 2018, the closing Stock Exchange in 2018 was 327,489 GDRs, in 2005. Its shares trade on the London Stock monetisations. price of one ordinary share on the Moscow and on Moscow Exchange 15,646,315 Exchange in the form of global depositary Sistema’s principal shareholder is its 100% Exchange was RUB 12.4, for a total market ordinary shares. receipts (GDRs) under the ticker SSA. Chairman Vladimir Evtushenkov, who owns capitalisation of RUB 119.2 bn. On the last One GDR represents 20 ordinary shares. 59.2% of the Corporation’s equity. trading day of the year, the closing price The Corporation’s ordinary shares are also was RUB 8.0, with Sistema’s total market listed on Moscow Exchange in the first listing capitalisation standing at RUB 77.2 bn. level under the ticker AFKS. The GDRs traded on the London Stock Exchange 16.5% 59.2% represent about 15.9% of Sistema’s equity, while the shares traded on Moscow ORDINARY SHARES 1 Vladimir Evtushenkov Exchange represent 16.5% . OUTSTANDING 30% Free-float (shares)

Sistema’s shares are included in Moscow Free-float (GDRs) 20% Exchange’s two key indices, the MOEX Russia 9,650 million Other4 Index (formerly MICEX) and RTS, as well 10% as its Broad Market Indices2. 0%

Shares of MTS, a Sistema subsidiary, trade –10% on Moscow Exchange under the ticker MTSS and on the New York Stock Exchange (NYSE) –20% in the form of ADRs under the ticker MBT. SISTEMA TICKER SISTEMA GDRS TICKER ON MOSCOW EXCHANGE ON LSE –30% AFKS SSA –40% –50% 01.01.2018 01.03.18 01.05.18 01.07.18 01.09.18 01.11.18

MTS TICKER DETSKY MIR TICKER ON MOSCOW EXCHANGE ON MOSCOW EXCHANGE Sistema’sАкции АФК ordinary «Система» shares Sistema’sГДР АФК «СиGDR’sстема» MTSS DSKY RTSI$Индек Indexс РТС IMOEXИндек сIndex МосБиржи

1 As of December 31, 2018. 2 Broad Market Indices of the Moscow Exchange include top 100 securities selected based on the criteria of liquidity, capitalisation and the number of shares in free float and form the bases for calculation of the Moscow Exchange’s other indices. The calculation bases include the shares whose free float coefficient is at least 5%. 3 As of December 31, 2018. 4 Ordinary shares and GDRs owned by Sistema Group companies, members of the Board of Directors and the management of Sistema. 5 Source: Bloomberg. 24 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 25 Report on dividends declared (accrued) on Sistema shares1

DIVIDEND POLICY To maintain a balance between As of 31 December 2017, dividends payable UNPAID DIVIDENDS ¡¡ RUB 4,213,003,658.88 not paid in TOTAL AMOUNT OF DECLARED the rights and interests of all shareholders to persons included in the shareholders accordance with a written request from DIVIDENDS IN 2018 In April 2017, Sistema’s Board of Directors and the Corporation’s ability to pay register, with the exception of nominee As of 31 December 2018, the total a shareholder; approved a revised dividend policy. dividends, the Board of Directors, when shareholders and custodians who are amount of unpaid dividends equalled ¡¡ RUB 718,724.64 not paid due to absence In accordance with the new policy, determining the amount of dividends, professional participants of the securities RUB 4,213,722,383.52, including: of information about dividend recipients 1,061.5 RUB mn the amount of dividends recommended will take into account the acceptable market, were not due for payment. These necessary to transfer the due amounts. by the Board for each reporting year rate of Sistema’s debt reduction dividends were paid in 2018. will be the higher of either an amount and the proportionality of dividends equivalent to a dividend yield of at least to the current cash flow of the Corporation. As of 31 December 2018, the total amount 6% or RUB 1.19 per ordinary share. Sistema plans to continue to pay dividends of dividends distributed for 9 months of 2017 The Corporation determines the final amount in accordance with the current dividend equalled RUB 2,348,863,483.40. Withholding Total amount of declared Dividend per share, RUB Declaration date Payment date dividends, RUB of dividends payable with due regard policy after achieving the goal of debt tax on dividends distributed to foreign to its financial results, current cash flow reduction. shareholders totalled RUB 2,798,048.00. 2013 (for the full year 2012) 9,264,000,000 0.96 29/06/2013 26/08/2013 and investment needs. 2014 (for the full year 2013) 19,879,000,000 2.06 28/06/2014 31/07/2014 DIVIDENDS DISTRIBUTED DIVIDENDS DISTRIBUTED 2015 (for the full year 2014) 4,535,500,000 0.47 27/06/2015 29/07/2015 FOR THE FIRST NINE MONTHS FOR THE FULL YEAR 2017 When determining dividends for 2017, 2016 (for the full year 2015) 6,465,500,000 0.67 25/06/2016 27/07/2016 the Board of Directors took into account OF 2017 2016 (for H1 2016) 3,667,000,000 0.38 23/09/2016 20/10/2016 the priority of the strategic goal to reduce On 30 June 2018, the Extraordinary the Corporation’s debt and recommended On 03 November 2017, an Extraordinary General Meeting of Sistema’s shareholders 2017 (for the full year 2016) 7,816,500,000 0.81 24/06/2017 28/11/2017 2 3 paying dividends for 2017 in the amount General Meeting of shareholders (Minutes (Minutes No 1-18) approved the distribution 2017 (for 9M 2017) 6,562,000,000 0.68 28/11/2017 22/12/2017 — 19/01/2018 of RUB 0.11 per share, supporting No 2-17) approved the distribution of RUB 1,061,500,000.00, or RUB 0.11 per 2018 (for the full year 2017) 1,061,500,000 0.11 30/06/2018 31.07.2018 the Corporation’s deviation from the current of RUB 6,562,000,000.00, or RUB 0.68 per ordinary share in Sistema, as dividends. dividend policy. ordinary share in Sistema, as dividends. As of 31 December 2018, the total As of 31 December 2017, the total amount of dividends distributed equalled amount of dividends distributed equalled RUB 1,061,461,415.52. Withholding RUB 2,121,721,383.40 (the total amount tax on dividends distributed to foreign Sistema’s Credit Ratings of dividends to nominee shareholders shareholders totalled RUB 429,305.00. and custodians who are professional participants of the securities market and who Rating agency Date of most recent rating update Long-term credit rating Outlook are included in the shareholders register).

Standard & Poor’s 30 July 2018 B+ Positive Fitch 19 January 2018 BB- Negative Expert RA 08 October 2018 ruA- Stable

2 Date of payment of dividends to nominee shareholders and custodians who are professional participants of the securities market and who are included in the shareholders register. 1 As of December 31, 2018. 3 Date of payment of dividends to other persons included in the shareholders register. 26 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 27

MTS 28 KEY DETSKY MIR 32 SEGEZHA GROUP 36 ASSET MEDSI 42 AGROHOLDING “STEPPE” 49 RESULTS REAL ESTATE ASSETS 54 RTI 60

BPGC 63

HOSPITALITY ASSETS 66

BINNOPHARM 69

OTHER PORTFOLIO COMPANIES 72

FUNDS 74

OZON 80 28 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 29

PJSC Mobile TeleSystems PJSC Mobile TeleSystems (“MTS”) MTS is a leader in the Russian telecom market in terms of key mobile business is a leading Russian company indicators: subscriber base, revenue MTS GROUP HAS offering mobile and fixed-line services, Internet access, cable and satellite TV, digital and OIBDA. services and mobile apps, financial and e-commerce services, and convergent IT solutions in system integration, Internet of things, monitoring, data processing ~105 million and cloud computing. mobile subscribers in Russia, Armenia, Ukraine and Belarus

to introduce a single tariff for all domestic In 2019, operators will face a number tasks; and launched the Smart University LTE-ADVANCED FIBER-OPTIC LINES calls. The federal law will come into force of challenges related to the saturation educational platform and the MTS Marketing AND LTE ADVANCED PRO LENGTH on 1 June 2019. of some market segments. However, 2017- Expert digital platform. NETWORKS WITH PEAK DATA 2018 showed that, despite the unfavourable SPEEDS UP TO On 1 October 2018, a new law on storage environment, the market may be expected MTS and Medsi Group started strategic >220 thsd km of the information transmitted via communica- to grow at 2-3% p.a. in the medium term. cooperation in the area of digital healthcare tion networks took effect. According to the law, with the launch of the SmartMed ALEXEY KORNYA 1 Gbit/s Russian mobile operators have to store BUSINESS DEVELOPMENT IN 2018 telemedicine platform. On the basis of this President, user Internet traffic for 30 days and increase platform the companies will develop a range Chairman of the Management Board storage capacity by 15% annually for the next In 2018, MTS achieved strong operating of digital healthcare products and services. five years. and financial results on the back of healthy At the end of 2018, MTS started selling NUMBER OF GPON USERS PENETRATION OF SMARTPHONES market growth in Russia and increasing SmartMed services to retail customers IN MTS NETWORK The 5G standard is expected to be penetration of digital services in all in Moscow and the Moscow region. introduced in Russia in 2022 and is currently the regions where the company operates. 1.95 mn being actively discussed by the Ministry Growth of revenue in the mobile business In Q3 2018, MTS acquired LLC Avantage, >70% of Communications, the Federal Anti-Monopoly enabled the company to post record OIBDA one of the largest data processing centres Service and mobile operators. The Union in 2018. The main events of 2018 are related in Russia, which will significantly bolster of LTE Operators, which comprises MTS, to entering new markets and business the operator’s position in the fast-growing Megafon, Vimpelcom and Tele2, is against segments. For example, MTS acquired market for cloud services. This is the tenth RON SOMMER SUBSCRIBERS OF CABLE, ONLINE SALES market monopolisation and the creation Russia’s two leading ticket distributors, data centre in MTS’s federal network. Chairman of the Board of Directors SATELLITE AND IP TV VOLUME of a single infrastructure operator. However, Ticketland.ru and Ponominalu.ru; bought the Union supports setting up a consortium a stake in YouDo, Russia’s biggest online In July 2018, MTS acquired a 28.63% stake for joint use of 5G frequencies in the 3.4– service connecting customers with service in PJSC MTS Bank for RUB 8.27 billion 3 mn ~7 RUB bn 3.8GHz spectrum. providers for household and business from Sistema. As a result of the transaction, MTS’s shareholding in the bank increased from 26.61% to 55.24% . The acquisition enabled MTS to consolidate its fintech SISTEMA’S EFFECTIVE STAKE1: MTS RETAIL OUTLETS EMPLOYEES business in Russia and to simplify RUSSIA TELECOM MARKET DYNAMICS2, operational management, making it possible RUB TRILLION to launch new products faster and to utilise 5.88 thsd >65 thsd MTS’s retail network more effectively 1.7% 1.57 0.8% 1.59 0.6% 1.60 2.8% 1.64 3.4% 1.70 in order to expand the bank’s footprint. In Q3 % 2018, MTS started consolidating the results 50.01 2 INDUSTRY OVERVIEW FOR 2018 The mobile telecommunications market of MTS Bank, which had a positive impact benefited from an initiative launched by mobile on revenue. In 2018, the telecommunications market was operators in 2017 to «stabilise the market». worth RUB 1.7 trillion. Revenue growth rate The initiative provided for scrapping price MTS continued active development of digital reached a five-year high of 3.4%. Growth competition and unlimited tariff plans, products in the retail and corporate markets was mostly driven by revenue from fixed and expanding the offer of core and extra and launched a number of strategic telephony, with broadband and pay TV services. Revision of tariff plans was caused initiatives in the area of digital businesses. networks also enjoying stable growth. by changes in legislation, in particular, In March 2018, MTS launched an in-house The fixed telephony and inter-operator amendments to the Law on Communications accelerator, StartUp Hub, that enables services segments continued to shrink, that provided for abolition of roaming charges technology startups to integrate their 8 https://mts.ru though at a slower pace. within Russia and required mobile operators solutions and products with the company’s 2014 2015 2016 2017 2018E business.

1 MTS’s stake in MTS Bank was increased to 94.72% in February 2019. Income, RUB trillion According to TMT Consulting report “Russian telecommunications market in 2018-2023”. 2 Rates of growth, % 30 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 31

PJSC MTS’s strategy also envisages the development of new business segments such as fintech, entertainment and B2B/ MTS was granted permission to use 900 MHz IN 2018, MTS COMMISSIONED NB-IOT MTS IoT, both organically and through M&A. frequencies and announced that it was ready NETWORKS IN for commercial operation of the Narrowband Internet of Things (NB-IoT) network. 50 cities of Russia

DIGITAL BUSINESS MTS continued implementing its 2. Digital Adjusted OIBDA grew by 22.7% in 2018, due strategy of ensuring attractive returns ZZ New digital businesses: IoT, system to the effect of new accounting standards, In order to increase the profitability to shareholders. In April 2018, the Board integration, е-commerce, fintech, revenue growth, the consolidation of MTS and efficiency of its core business, MTS — of Directors of MTS approved dividends applications, Big Data, e-ticketing, etc.; Bank and strong performance of the Ukrainian in addition to operations in the mobile BIG DATA payable for 2017 in the total amount ZZ Internal transformations: emphasis on business. The abolition of roaming charges and fixed telephony markets — is developing of RUB 46.762 billion, or RUB 23.4 per share. interaction with customers, innovations in within Russia and increased payments convergent products, promoting its own In October 2018, the Board of Directors corporate culture, atomisation of product for frequency spectrum in Russia had mobile apps, and improving and expanding of MTS approved dividends for the first half and business management; a negative impact on OIBDA. Excluding its portfolio of projects in the Big Data >300 specialists of 2018 in the total amount of RUB 5.196 the effect of the new standards, adjusted OIBDA segment. It is also implementing a project billion, or RUB 2.6 per share. The total increased by 5.9% in 2018. The adjusted OIBDA Total economic effect from 3. Dividends for internal digitalisation of business big data analysis in 3 years amount of MTS’s dividends in 2018 reached ZZ High shareholder returns; margin strengthened by 5.3 p.p. to 45.6%. processes. RUB 51.958 billion, which is in line ZZ Investment and operational efficiency; since Big Data department SMART STARTUP HUB launch EDUCATION with the payments made in the previous ZZ Maintaning optimal amount of debt . In 3Q 2018 MTS recorded a provision year. of RUB 55.8 billion as the potential liability > RUB 3.5 billion MTS’s investment programme includes in respect of an investigation by the US BUSINESS DEVELOPMENT nationwide projects aimed at improving Securities and Exchange Commission (SEC) Held Smart STRATEGY the quality of communications, expanding and the US Department of Justice (DOJ). 2 accelerator enrollment University coverage and rolling out the LTE network, On 7 March 2019 MTS announced a settlement programs in 2018 for distance learning Since 2016 MTS has been implementing its increasing the capacity of intra-areal with the SEC and DOJ under which MTS agreed 3D strategy (Data, Digital and Dividends). and trunk networks to enable data traffic to pay USD 850 million. RUB 30 mn invested Entertainment #CloudМТS In 2018, the board of directors of MTS growth, developing new priority business approved an updated strategy for 2019-2021, segments (Big Data, Cloud, IoT, OTT, financial Including the provision, MTS’s net profit according to which the company will offer technologies) and B2B projects for customers, attributable to Sistema for FY 2018 was its subscribers services united into one and preparing communication networks RUB 3.4 billion. Excluding the effect of this Cloud services based Ticketland.ru and ecosystem. The new 3D strategy is focused for the commercial operation of 5G in Russia. one-time factor, adjusted profit for FY 2018 was on MTS’s Ponominalu.ru on digital transformation and development RUB 33.0 billion. 2 leading ticketing 10 data processing of new business segments: 2018 FINANCIAL PERFORMANCE operators MTS centres During calendar year 2018 MTS paid dividends Home FINTECH operator 1. Data In 2018 revenue at MTS rose by 8.4% year-on- totalling RUB 52 billion, or RUB 26.0 per Cybersport DIGITAL BUSINESSES ZZ Retention of core mobile revenue via year, driven by robust performance of Russian ordinary share, in line with the company’s Gambin Esports increased penetration of services, data operations as the core telecoms business dividend policy for 2016-2018. transfer and V&D tariffs, competitive benefitted substantially from a better pricing Approximately 5.4 million users development of 4G networks, optimal use environment in Russia, and as data usage 13.7% of MTS Money of the spectrum and a competitive 5G increased, revenue from new business lines share in Youdo.com Total debt portfolio spectrum; accelerated rapidly, smartphone sales were ZZ Growth of revenue from fixed telephony strong, and as a result of the consolidation Apps E-HEALTH RUB 21.6 billion through expansion of the BB and TV of MTS Bank. The new IFRS standards had subscriber base in Moscow and Russia’s a non-material negative effect on revenue. regions, increasing ARPU by selling SmartMed additional services and developing B2B 14.1 million products and IT as a service; monthly users telemedicine jointly with Medsi of My MTS app FINANCIAL Excluding impact of INDICATORS new IFRS standards IоT/М2М (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 480,292 442,910 8.4% 482,469 8.9% Operating income 114,245 94,671 20.7% 106,817 12.8% Adj. OIBDA 218,833 178,358 22.7% 188,795 5.9% Segment leader Profit attributable to Sistema 3,424 28,038 (87.8%) 4,591 (83,6%) with market share of Adj. profit attributable to Sistema 32,951 29,926 10.1% 34,118 14.0% 42% 1 V&D — Voice and Data. 32 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 33

Detsky Mir Detsky Mir Group1 is a multi-format retail operator and a leader in the children’s goods segment in Russia AT THE END OF 2018, DETSKY MIR ELC AND ABC and Kazakhstan. It comprises the nation-wide retail chain DETSKY MIR GROUP HAD STORES STORES Detsky Mir, the ELC and ABC stores, and the Zoozavr chain of pet stores. 743 stores 673 stores 66 stores in 252 cities and towns across Russia and Kazakhstan

DETSKY MIR’S BUSINESS MODEL The highest growth rate was registered ANNUAL VOLUME OF CHILDREN’S GOODS MARKET IN RUSSIA BY CATEGORY3, in the baby products category, which reached RUB BILLION Detsky Mir’s retail concept combines five key components: RUB 162 billion in money terms in 2018, 1% 0.1% 0.1% 0.5% 1.5% up from RUB 158 billion in 2017. The CAGR of this category over the last 4 years was 515.7 521.1 521.5 522.1 524.6 532.2 5. 1. 9.5%. Smart visual A multi-category VLADIMIR CHIRAKHOV merchandising children’s goods In 2018, some specialised retailers CEO designed to appeal store with left the market or shut down most specifically the broadest of their stores, and the remaining national to children and most unique and regional chains lost traffic and closed and parents product mix stores following a significant decrease in like-for-like sales. Nevertheless, specialised retailers remain the main sales channel for children’s goods, along 4. 2. with hypermarkets and supermarkets Building long- Affordable prices (39.1% and 38.9% market share, respectively, 2015 2016 2017 2018 2019E 2020E term customer with a focus in 2018). relationships on the medium/ 2015 2016 2017 2018 2019E 2020E ALEXEY KATKOV through the loyalty and below medium- The share of e-commerce in the children’s Baby Products 123 153 157 162 163 165 Chairman of the Board of Directors programme price segments goods market is growing steadily, reaching Clothing 165 147 151 154 157 163 3. 12.6% in 2018 compared to 10.1% in 2017. Convenient The CAGR of e-commerce channels Toys 110 104 96 93 93 94 stores in modern in 2010–2018 was 27%. In money terms, Stationery 65 66 66 66 66 66 shopping malls and sales of children’s goods through specialised Footwear 52 51 51 47 45 45 densely populated stores increased from RUB 119 billion residential areas in 2010 to RUB 204 billion in 2018. Online CHILDREN’S GOODS MARKET STRUCTURE BY SALES CHANNEL3, % sales of children’s goods in 2018 amounted to RUB 66 billion. 100% 2 SISTEMA’S EFFECTIVE STAKE: ОINDUSTRY OVERVIEW FOR 2018 90% THE TOTAL SELLING SPACE IS The Company’s share of the children’s 80% Detsky Mir Group operates mainly in Russia goods market among specialised retailers 70% and Kazakhstan, and since February increased from 14% in 2011 to 59% 60% 2019 also in Belarus. At the end of 2018, 768,000 sq m in 2018, driven by the opening of a large 52.1% the Company had a 23% share of the Russian number of stores during this period 50% market of children’s goods by revenue and the attraction of consumer traffic 40% and a 15% share of the e-commerce segment. from competing retail chains. Toys and baby 30% goods were the key drivers of the Company’s 20% The Russian children’s goods market grew Analysts project that it will grow market share growth in 2018; Detsky Mir’s 10% by 0.1% YoY in 2018 to RUB 522.1 billion. by an average of about 2% per year and will market share in these categories increased 0% The market’s CAGR over the last actual four reach RUB 570 billion by 2023. from 38.9% to 45.6% and from 24.3% 2010 2011 2012 2013 2014 2015 2016 2017 2018 years was 0.4%. to 26.8%, respectively. The Company’s Clothing and footwear traditionally account market share increased in all categories 8 2010 2011 2012 2013 2014 2015 2016 2017 2018 https://detmir.ru for a substantial part of the children’s of children’s goods in 2018. Specialised stores 34.3 45.2 45.6 46.0 41.3 40.8 38.6 39.8 39.1 goods market, and in 2018 accounted 1 As of 31 December 2018, the Group included PJSC Grocery retail chains 30.7 26.9 27.8 29.0 36.3 40.0 39.1 39.7 38.9 Detsky Mir, LLC Kub-Market (ELC and ABC), LLP Detsky Mir for 38.5% of the total (29.6% and 9.0%, Kazakhstan, JSC Detsky Mir Orel, LLC DM NORTH-WEST, Online channel 2.9 3.6 4.3 5.0 7.6 8.1 8.9 10.1 12.6 LLC Detmir BEL and LLC DM Capital. respectively). Baby products and toys 2 According to the research agency Ipsos Comcon. account for 31.0% and 17.9%, respectively. Other 32.2 24.3 22.4 20.0 14.8 11.1 13.5 10.4 9.4 3 Source: Ipsos Comcon. 34 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 35

DETSKY MIR ONLINE BUSINESS AS A SHARE OF ONLINE ONLINE STORE Group DETSKY MIR’S TOTAL REVENUE ORDERS VISITS

7.9% 5.1 m+ 178m+

DETSKY MIR AWARDS DETSKY MIR’S BUSINESS One of the key drivers of revenue growth OPERATING AND INVESTMENT KEY INITIATIVES IN 2019: 2018 FINANCIAL PERFORMANCE AND RANKINGS DEVELOPMENT IN 2018 in 2018 was the promotion and expansion BUSINESS DEVELOPMENT of the In-Store Pickup service. Now STRATEGIES 1. Become a number one player in the In FY 2018 Detsky Mir’s revenue grew In 2018, Detsky Mir achieved impressive customers can pick up orders at a Detsky Mir Kazakh market by the end of 2019, with by 14.3% year-on-year. Growth was driven results in terms of business growth. store within 60 minutes of placing the order. The key strategic goal of Detsky Mir 35 stores of the Detsky Mir chain. by new store openings, an increase in like- FORBES’ RANKING OF RUSSIA’S 12 Group revenue increased 14.3% in 2018 is consolidation of the children’s goods for-like1 (LFL) sales and online sales, as well TOP 200 LARGEST PRIVATE to RUB 110.9 billion, from RUB 97.0 billion The development of logistics infrastructure market in Russia and Kazakhstan. This 2. Enter Belarus — a market of more than as the continued ramp-up of stores opened SECTOR COMPANIES in 2017. One hundred new stores were is a key element of the Company’s strategy. will be achieved by expanding the chain, RUB 40 billion — and open at least in 2017. LFL sales in Russia increased opened. In addition, Detsky Mir continued In 2018, the Company launched a second developing omni-channel sales and offering 10 stores in 2019. by 4.3% for FY 2018. Growth of LFL sales active regional and international expansion. distribution centre (DC) in the class A+ affordable and diverse products, including in Kazakhstan increased by 30% year-on- 2 88th place In 2018, 33 debut stores opened in cities industrial park PNK Bekasovo in the Naro- private labels. 3. Enter the pet products market — worth year in KZT terms. The online segment of Russia and Kazakhstan that are new Fominsk district of the Moscow region. approximately RUB 212 billion — remained the fastest-growing channel, for the Company. Detsky Mir entered The Company now owns the Bekasovo-1 STRATEGIC DEVELOPMENT AREAS and open up to 10 pilot Zoozavr stores with revenue almost doubling for FY a new region — the Far East — with stores and Bekasovo-2 DCs, with a total area OF DETSKY MIR GROUP by the end of 2019. 2018 to RUB 8.8 billion. The online store INFOLINE RETAIL RUSSIA 3 opened in Blagoveshchensk, Vladivostok of 132,500 sq m, and leases the Krekshino accounted for 7.9% of total sales in FY 2018, TOP-100 RANKING and Khabarovsk. DC with an area of 20,000 sq m. 1. Expansion across Russia 4. Retain the number one position compared to 4.8% in 2017. OF LARGEST RETAIL CHAINS and internationally in the online children’s goods market, Kazakhstan remains a promising market The Company seeks to optimise purchase 2. Development of omni-channel sales and increase the share of Group revenue Adjusted OIBDA increased by 98.0% year- for the international expansion of the Detsky prices, maintain an efficient product mix 3. Development of private labels from the online segment to double on-year to RUB 21.1 billion. Excluding 13th place Mir retail chain. In 2018, the Company and improve quality assurance by signing 4. Enhancement of operational efficiency digits in 2019 by improving service the impact of new accounting standards, expanded its retail chain in Kazakhstan direct contracts with major specialist quality (“Ideal In-Store” and “Last Mile” Adjusted OIBDA increased by 18.8% by eight supermarkets and almost doubled manufacturers or their representatives There are opportunities in the markets projects). to RUB 12.7 billion, due in large part revenue, while growth of like-for-like in Russia, and by reducing the share of Russia and Kazakhstan to open at least 265 to optimisation of purchasing costs, sales in tenge was 30%. Detsky Mir has of distributors. This helps Detsky Mir get new stores in the next 3-4 years, including 5. Increase the share of private labels effective management of the assortment RANKING OF RUSSIA’S TOP 100 a total of 30 stores in 15 biggest cities attractive prices and minimise currency at least 80 stores in 2019. and direct imports in toys to 25% and increased operational efficiency. MOST VALUABLE PUBLICLY TRADED of the Republic of Kazakhstan. risks, and also provides direct access and in diapers to 15% in 2019. COMPANIES (BY RIA RATING) to goods. As part of its geographical expansion Adjusted profit attributable to Sistema In addition to retail stores, Detsky Mir strategy, Detsky Mir made a decision to enter increased substantially in FY 2018 Group offers the full range of its products At the end of 2018, the Company opened the Belarusian market. The Company’s goal due to increased operational efficiency 61st place for purchase online. The e-commerce four pilot stores of the Zoozavr chain — in the medium term is to open at least 35 and a reduction in SG&A to RUB 15.7 billion. business segment was launched in 2011 a new business line for Detsky Mir. stores in Belarus, including at least 10 stores Excluding the effect of the new accounting and still remains the fastest growing The market of pet products is promising in 2019. standards, profit increased by 31.1% in 2018. sales channel. The online store had more because of its volumes, expected growth RBC’S LIST OF RUSSIA’S 50 than 178m visits and fulfilled over 5.1m rates and high level of fragmentation, Detsky Mir’s growth potential, including FASTEST GROWING COMPANIES online orders in 2018. The online channel’s as well as the opportunities it offers regional and international expansion, is thus revenue doubled in 2018 and amounted for the management to leverage their 300 stores over the next 3-4 years. to RUB 8.8 billion. experience gained in the children’s goods 37th place market. The Company expects to open six FINANCIAL Excluding impact of more stores by the end of 2019. The decision INDICATORS new IFRS standards regarding further development of this chain (RUB million) FY 2018 FY 2017 Change FY 2018 Change will be based on the results of the pilot Revenue 110,874 97,003 14.3% 110,874 14.3% stores. Operating income 11,232 8,024 40.0% 9,770 21.8% LIST OF RUSSIA’S TOP 100 LARGEST Adj. OIBDA 21,115 10,664 98.0% 12,666 18.8% COMPANIES BY MARKET CAP Adj. profit attributable to Sistema 3,292 2,871 14.6% 3,765 31.1%

59th place 1 Like-for-life sales (LFL) growth was calculated based on the results of the Detsky Mir retail chain in Russia, which were in operation for at least 12 full calendar months preceding the reporting date. 2 The segment includes online orders on the site www.detmir.ru including orders for collection at Detsky Mir stores. 36 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 37

Segezha Group is a leading vertically Segezha Group comprises forest, wood integrated processing and pulp and paper assets in Russian forest products holding Russia and Europe. The main production REPRESENTATIVE SEGEZHA GROUP’S with a full cycle of logging and advanced facilities are located in the European part of OFFICES IN ENTERPRISES EMPLOY OVER wood processing. Russia and EU nations. 12 countries 13,000 people

paper are Southeast Asia, Africa, and Central OUTPUT OF BROWN OUTPUT OF HIGH- New products of Segezha Group and South America. The anti-dumping duties SACK PAPER QUALITY LARGE-SIZE introduced by China for most producers BIRCH PLYWOOD Ironbirch plywood from Europe, North America and Japan have Ironbirch plywood has unique anti-slip properties. The product was created advantages for sack paper producers No 1 in Russia designed for flooring in high-capacity trailer trucks. Special particles from Russia and Canada. No 5 globally in the coating ensure high wear resistance and anti-slip properties. MIKHAIL SHAMOLIN The key event in 2018 was the completion President No 3 globally of a three-year programme of upgrades at Segezha PPM. At the end of the year, OUTPUT OF Honeycomb coating a new multi-fuel boiler was installed SAWN TIMBER Plywood with Honeycomb coating is used for flooring in light with a capacity of 120 t of steam per hour. OUTPUT OF commercial vehicles, warehouses, children’s and sports grounds, To reduce the environmental footprint, it was PAPER SACKS boats and yachts. This type of plywood has an attractive appearance, equipped with an electrostatic precipitator No 1 in Russia high wear resistance and anti-slip properties. with purification efficiency of 99.7%. No 1 in Russia In 2018, Segezha Group increased paper output by 18% to 375,400 t. The growth was BY OUTPUT OF Coloured plywood mainly due to the launch and full ramp- ALI UZDENOV No 2 in Europe PREFAB GLULAM HOUSES Laminated plywood of various colours (white, yellow, green, blue up of the new paper-making machine. Chairman of the Board of Directors and red) is used for indoor and outdoor works, including creation Sack paper sales increased by 20%, of decorative elements for furniture, interior design, interior to 244,000 t, mainly due to increased No 1 in Russia decoration of commercial vehicles, and construction of children’s shipment volumes under current contracts and sports grounds. and expansion of the client portfolio.

SISTEMA’S EFFECTIVE STAKE: SEGEZHA GROUP’S SEGEZHA GROUP’S BUSINESS BUSINESS MODEL DEVELOPMENT IN 2018

Segezha Group’s business model BIRCH PLYWOOD SACK PAPER is based on maximum vertical integration, 99.9 % with the aim of creating added value In 2018, Segezha Group was the world’s fifth In 2018, Segezha Group retained its position and ensuring business sustainability biggest producer of large-size birch plywood. as the number one producer of unbleached by diversifying risks amid a changing macro Segezha Group’s key strategic markets are sack paper in Russia and climbed to number environment. Germany, the UK, US, Benelux and South three globally (from number four in 2017). Asia. PLYWOOD SALES, 36% Segezha Group’s main sack paper plant — SACK PAPER SALES, 20% High levels of operational efficiency THOUSAND CU M Segezha Pulp and Paper Mill (PPM) — THOUSAND T and a presence in all key stages of value In 2018, plywood output increased by 36% reached its design capacity in 2018 after creation — from in-house logging at leased year-on-year to 135,700 cu m. Production the launch of the new paper-making machine forest plots to selling high-margin products growth was driven by the launch of a new 120 at the end of 2017 and produced 355,000 t 244 to consumers — allow Segezha Group plywood production line in the Kirov region of high-quality paper. 95 204 to maintain market leadership in terms in July 2018, which doubled the capacity 120 244 of cost of finished products in all business of Vyatka Plywood Mill to 192,000 cu m Segezha Group exports 95% of marketable 8 https://segezha-group.com segments. and allowed the company to enter new sack paper (37% of produced paper goes markets with a new product — long-grained to the company’s converting facilities plywood. The share of plywood exports rose to produce paper packaging). The key from 78% to 80% in 2018. export markets for Segezha Group’s sack

2017 2018 2017 2018 38 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 39

In 2018, Segezha Group, in cooperation with the Ministry of Industry and Trade, actively participated in the development of the Russian Forest Sector Development Strategy Until 2030, SEGEZHA GROUP THE GROUP EXPORTS which was approved in September 2018. The strategy of Russia’s timber industry is aimed at improving the long-term competitiveness of the sector and increasing its contribution to the country’s socio-economic development, as well as at effective use, protection and reproduction 99% of forests through sustainable forest management. of its sawn timber to more than 30 countries

PAPER SACKS The company exceeded this target SAWN TIMBER LAMINATED BEAMS AND PREFAB OUTPUT AND SALES OF PREFAB HOUSES AND LAMINATED BEAMS and produced a record number of sacks HOUSES IN 2016-2018, THOUSAND CU M In 2018, Segezha Group’s paper packaging (590 million), mainly due to increased Segezha Group exports 99% of its PREFAB HOUSES LAMINATED BEAMS output increased by 6% to 1,286m planning efficiency regarding utilisation sawn timber to more than 30 countries, In 2018, Segezha Group increased sales 44% 45% 14% 19% bags. Growth was driven by the launch of converting capacities, as well as expansion with more than 95% exported to China, Egypt of prefab houses by 45% through working of the second bag-making line (Triumph 5 QT of the client portfolio. and the EU. The Group’s products are mainly closely with construction dealers, product 18.3 26.3 19.2 27.9 44.4 50.6 43.1 51.1 SK) in Salsk, Rostov region, with a capacity consumed by construction and furniture promotion, the launch of a new premium of 25 million bags per year. The year-on-year manufacturing industries. product (prefab glulam houses with a height increase was also driven by improvements Launch of the second production of 280 mm or more) and improved product to the order planning system line for consumer paper packaging In 2018, Segezha Group’s enterprises quality. Sokol WP, the leader in its segment, and a consequent increase in productivity. at LLC Segezha Packaging’s plant increased output of sawn timber by 3% year- supplies prefab houses mainly to the Russian in Salsk on-year, to 924,000 cu m, due to increased market. In 2018, Segezha Packaging accounted production efficiency at Lesosibirsk for 64% of sales in the Russian market. Woodworking Plant (WP). Sales increased Sales of laminated beams in 2018 grew Output Sales Output Sales Products for the construction industry by 4% following the increase in output, 26% year-on-year. Growth was driven account for more than 82% of this. During as well as due to debottlenecking by increased productivity due to optimisation 2017 the year, the company continued to work in shipment of products by rail and launching of the production process. A significant 2018 on increasing the share of high-margin of new shipment channels. contribution to the increase in sales products in its sales portfolio. was Sokol WP’s entry to new markets In 2018, Segezha Group took a number such as Spain, Turkey and Israel. Most SEGEZHA GROUP’S STRATEGIC PRIORITIES In 2018, Segezha Packaging implemented One of the key events in 2018 was of steps to ensure that its specifications of laminated beams are exported. priority plans to retain market share the launch of the new Triumph 5 QT SK and internal requirements for sawn in the key European countries such as Italy, bag-making line supplied by Germany’s timber quality meet market requirements. BUSINESS DEVELOPMENT France, Germany and Spain. GARANT Maschinenhandel. The new high- The company worked closely with customers STRATEGY tech equipment can produce single-layer and expanded its product range during In 2018 the group planned to increase paper bags and bags with twisted handles the year. Segezha Group’s development Wood Manufacturing the output of its Russian enterprises with a capacity of 25 million items per strategy was updated in 2018, taking resources assets to 560 million sacks. year. Products are certified in accordance In October 2018, Lesosibirsk WP launched into account the Russian Forest with FSC®C-100540, EAC, ISO 9001, ISO a pellet production line with a capacity Sector Development Strategy Until 14001 and OHSAS 18001. of 70,000 t of finished products, which will 2030, and is aimed at creating ZZ Increasing the share of own wood supply ZZ Modernisation of existing production provide additional income from waste an industry leader in terms at all of the Group’s enterprises by facilities Segezha Packaging’s plants in the Republic processing. of operational efficiency using expanding allowable cut and increasing ZZ Construction of new energy efficient of Karelia and the Rostov Region have a vertically integrated and diversified utilisation of existing allowable cut facilities to meet growing demand for a capacity of 800 million sacks per year, business model. ZZ High-quality reproduction of forests forest products in global markets while the total capacity including Western PAPER SACK SALES, 8% converting assets is 1.6 billion bags per year. SAWN TIMBER SALES, 4% MILLION ITEMS THOUSAND CU M 1,284 931

1,191 1,284 894 931 Sustainable Innovation development

ZZ Employee safety and health ZZ R&D within the Company ZZ Reduction of environmental impact ZZ Creation of new products, manufacturing ZZ Striving for zero waste production processes and future solutions ZZ Development of the regions of operations 2017 2018 2017 2018 40 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 41

SEGEZHA GROUP REVENUE 32.4% OPERATING 161.1% INCOME

57,889 RUB million 8,178 RUB million

INDUSTRY OVERVIEW FOR 20181 Russian market SAWN TIMBER LAMINATED BEAMS 2018 FINANCIAL PERFORMANCE AND PREFAB HOUSES PAPER SACKS Consumption of paper sacks The global market of sawn softwood Segezha Group’s revenue grew by 32.4% in the Russian market in 2018 remained timber reached 350 million cu m Laminated beams Prefab houses in 2018. The main growth driver was revenue Products made by Segezha Packaging’s at the same level as 2017 – 766 million in 2018. Over the past five years, global from the Paper and Packaging division, seven enterprises located in Europe are sold units – amid a slowdown in construction, sawn timber consumption has grown which accounted for 70% of total revenue. mainly in the European market, while its which as in the previous year accounted by an average of 2.5% per year due to growth Revenue growth was driven by increased enterprises in the Karelia and Rostov regions for the bulk of demand (88% in 2018). in the construction and furniture markets sales volumes and higher prices for paper. sell to Russia and other CIS markets. Prices for paper packaging grew about in the US and China, which are the largest Revenue for the year was also positively 4% year-on-year, which was driven mainly consumers of sawn timber in the world. affected by growth of prices for sawn timber European market by an increase in global kraft paper prices. Russia is the fourth largest producer of sawn through the first nine months of the year Russia maintains a balance of production softwood timber in the world after Europe, and the depreciation of the rouble. In 2018 The European paper sacks market is highly and consumption of industrial paper sacks, the US and Canada, with a market share Segezha Group’s production of laminated Segezha Group supplies prefab houses the average rouble rate decreased by 7.5% consolidated. About 50% of demand comes and this is expected to continue until 2023. of 11%. beams at Sokol WP is export-oriented, mainly (~98%) to the Russian market against the dollar and by 12.2% against from Germany, Italy, France and Spain. primarily for the European market. and is the market leader with a share of 18% the euro. SACK PAPER Russia’s output of sawn softwood In 2018, Italy, Germany, Austria and Spain in 2018. The Russian market for prefab The European paper packaging market timber in 2018 grew 3.6% year-on-year accounted for 92% of the Group’s sales. glulam houses in 2018 was estimated Adjusted OIBDA increased year-on-year in 2018 remained at the same volume Segezha Group produces more than 60% to 39 million cu m, while exports increased Europe and Japan remain the main global at 155,000 cu m. Key regions for prefab by 83.4% for 2018. Growth was driven as 2017 – about 5.4 billion items. Prices of all sack paper in Russia. The Company 7% to 30 million cu m, mainly due to high consumers of laminated beams, which are houses in Russia are the Central, North-West by increased prices for most of Segezha’s for paper packaging grew about 5% year- uses 37% of produced paper to make sacks demand in China, which is the largest mainly used in the construction industry. and Volga federal districts. key products, as well as the commissioning on-year, following a sharp increase in paper at its own enterprises in Russia and Europe. consumer of Russian sawn softwood timber. of a new paper-making machine prices during the year. Experts expect that The remaining 63% of products are sold In 2018, global consumption of laminated at the end of 2017, which added the main drivers of market growth until 2021 in international markets (approximately PLYWOOD beams did not change significantly RUB 2.6 billion at the OIBDA level. will be the food industry and the animal 60 countries in 2018). Key export markets and remained at about 4.1 million cu m. The adjusted OIBDA margin increased feed and chemicals segments. In 2018, are the Middle East and Southeast Asia. Exports accounted for 88% of Segezha In 2019, demand for laminated beams by 6.2 p.p. for 2018 to 22.4%, due to price the construction industry remained the main Significant volumes are also exported Group’s plywood sales in 2018. The main is expected at the same level amid increasing increases. The introduction of the new IFRS consumer of paper sacks with a share to the EU, Africa, and Central and South importers are European countries, primarily competition. 16 standard had a positive effect on adjusted of about 60%. America. Germany, the Netherlands, Belgium, France, OIBDA of RUB 894 million in FY 2018. Italy, Norway, Finland and Czechia. In 2018, the global market for sack paper SEGEZHA GROUP SHARE GLOBAL CONSUMPTION was estimated at 7.2 million t (vs 6.9 million t Global consumption of birch plywood has IN PREFAB GLULAM HOUSES OF PREFAB GLULAM HOUSES in 2017). In 2018, there was a huge shortage been steadily growing in recent years MARKET IN RUSSIA of paper in the global market, caused by high at an average rate of 2.0%-2.7% per demand and limited supply. The demand year. In 2018, the global market for birch 4.1 mn cu m was driven mostly by a construction boom plywood was estimated at 4.9 million cu 18% in Asia, the Middle East and Africa. m, with Russian birch plywood accounting for 75%-80% of the total. In 2018, Russia’s FINANCIAL Excluding impact of plywood exports grew by 8.7% to 2.68 INDICATORS new IFRS standards IN 2018, SEGEZHA GROUP’S million cu m, or 67% of total output. The bulk TOTAL VOLUME OF 2018 (RUB million) FY 2018 FY 2017 Change FY 2018 Change SHARE IN OUTPUT OF PAPER of demand comes from the construction, PREFAB GLULAM HOUSES Revenue 57,889 43,725 32.4% 57,889 32.4% SACKS IN EUROPE WAS furniture manufacturing, transport, MARKET IN RUSSIA Operating income 8,178 3,132 161.1% 7,703 145.9% shipbuilding and packaging industries. Adj. OIBDA 12,984 7,081 83.4% 12,090 70.8% Consumption growth in 2019 is projected (Loss)/Profit attributable to Sistema (77) (591) - 193 132.6% 12% at 3% in Russia and 2%-4% globally. 155 thsd cu m Adj. profit attributable to Sistema 54 81 (33.9%) 323 297.2%

1 Sources: Eurosac, Rosstat, Federal Customs Service, Trade Map, RISI, Poyry, ChinaBulletin, Random Lengths, WoodMarkets, EUWID, GWMI, FAOstat, Indufor. 42 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 43

MEDSI Medsi Group is Russia’s largest national healthcare chain, offering a full range of preventive, diagnostic, treatment, and NUMBER OF FACILITIES1 NUMBER OF DOCTORS rehabilitation services for children and adults. 42 3.3 thsd

NUMBER OF FACILITIES BUSINESS MODEL

A VERTICALLY INTEGRATED An innovative medical platform with a vertically integrated system of patient CLINICAL DIAGNOSTIC REGIONAL HUB-BASED BUSINESS MODEL service built on the principles of P4 medicine with exceptional scalability CENTRES (CDCS) CLINICS potential and unique market position with no direct competition.

ELENA BRUSILOVA 4 Moscow 3 11 Perm 6 President CDC Krasnaya Presnya Barnaul 1 CDC Belorusskaya Bryansk 1 CDC Grokholsky Volgograd 1 1. St. Petersburg 1 Nizhnevartovsk 1 ZZ Comprehensive range of patient-centric healthcare services with Nyagan 1 cutting-edge medical equipment and care: ¡¡ Diagnostics ¡¡ Diagnosis PRIMARY CARE CLINICS WELLNESS CENTRES ¡¡ Prescription AND SANATORIUMS ¡¡ Rehabilitation 1. ¡¡ Health support & monitoring 360° full cycle of services 19 for the patients… ARTYOM SIRAZUTDINOV 4 Chairman of the Board of Directors

CHILDREN’S CLINICS HOSPITALS 2. …based on P4 medicine principles and western 2 2 treatment protocols… 2. ZZ Developing a patient-centric model based on a personalized approach to each patient: SISTEMA’S REVENUE 2018 ¡¡ Predictive: targeted screenings, vaccination, etc. EFFECTIVE STAKE: 3. ¡¡ Preventive: extended diagnostics and centers of excellence 29% 5% 2% 27% 6% 38% … delivered via a system ¡¡ Personalized: targeted treatment and high-tech medicine of vertically integrated ¡¡ Participatory: active participation of the patient at every stage regional hubs ZZ Adoption and use of the international treatment protocols for strategic 99% therapeutic areas

BY CLIENTS BY ASSETS 3. ZZ Centers of excellence in Moscow for priority specialties ZZ Full cycle of care in regional hubs based on clinical diagnostic centers ZZ Routing of patients within and between hubs: from primary screening to high-tech treatment 8 https://medsi.ru ZZ Single HR pool allowing personnel rotation and dissemination of 64% 30% the best practices Insurance Clinics ZZ Integrated IT system supporting medical and business processes Individuals Hospitals Corporate CDC Other Other 1 As of 31 December 2018. 44 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 45

In January 2018, Medsi first launched its telemedicine platform developed in conjunction with MTS. In 2019, the company plans to further evolve MEDSI PATIENT VISITS1 SERVICES PROVIDED1 Group the solution through new services and a special mobile app. In addition to telemedicine, Medsi is looking to start a «third opinion» project that would 8.5 mn 17.9 mn rely on neural decision support systems.

MEDSI’S BUSINESS DEVELOPMENT IN 2018 EXISTING ASSETS Moreover, Medsi became Russia’s first In Q3 2018 Medsi became the sole owner private medical company to launch patient of LLC Medlife Health Clinics (the initial 60% FLOOR SPACE, THSD SQ M 1.7% AVERAGE CHEQUE, RUB THSD 43.4% THE AVERAGE CHEQUE increased New high-precision diagnostic equipment experience centres, family support centres stake was acquired in 2017), the largest by 43.4% to RUB 2.1 thsd, primarily due and modern surgical technology brought and a fundraising centre. The centres are multi-specialty medical chain in the city to the increased proportion of complex about a significant increase in the quantity, expected to boost patient participation of Perm (comprising seven specialised clinics 235.7 2.1 procedures in the in-patient segment quality and volumes of medical services, and loyalty, and serve as an important and a customer service centre). and the diagnostic segment, and also with a 6% rise in visits and an almost component of the new «P4 medicine» 231.8 235.7 1.5 2.1 due to the effect of higher prices in line 18% increase in the volume of services. strategy. In the next few years, Medsi is planning with market trends. Continuing the trend started in 2017, to further strengthen its role in the private the company drove up MMI revenues (+269% Flagship assets healthcare markets of both St. Petersburg from 2017) and became a stronger player Medsi’s largest clinical & diagnostic and Perm by actively developing its local in the market of specialised and hi-tech centre – CDC Krasnaya Presnya, assets. hospital care, notably in cardiovascular with a floorspace of over 20,000 square surgery, oncology, injury treatment metres and a successful track record since PLANS FOR 2019 and rehabilitation of patients after surgical its opening in late 2015 — is steadily evolving 2017 2018 2017 2018 operations, injuries and strokes. in terms of both occupancy rates (9% Medsi’s priorities in 2019 are expanding increase on 2017) and financials (revenue the capacity and spectrum of services offered In 2018 Medsi became the absolute more than doubled from 2017). New centres at CDC Krasnaya Presnya and launching UTILISATION, 28 p.p. UTILISATION, 3p.p. CLINIC UTILISATION is presented leader among private clinics across of excellence launched here in 2018 use the final construction stage at MSMC HOSPITALS, % CLINICS, % on a LFL basis. Including new clinic the Moscow region in terms of volume state-of-the-art equipment and best-in-class Michurinsky. In parallel, the company openings and M&A, clinic utilisation was of services provided to patients with cancer, experts. Starting from Q1 2018, CDC Krasnaya is renovating two family clinics in residential 48% in 2018, and 51% in 2017. The decrease servicing more than 11 thousand people. Presnya has been using the trail-blazing neighbourhoods of Moscow and the Moscow 71 48 was the result of refurbishment of part The Botkinsky Proezd clinical hospital hi-tech robotic da Vinci surgical system region (to be opened by the end of the year) of the CDC at Belorusskaya. in Moscow became the seat of a specialised to operate on patients with gynaecological, and planning to launch new facilities 42% 71% 51% 48% cancer centre, attracting a vast flow urological and endocrine pathologies. in another two regions of Russia (also of patients and driving up the hospital’s by the end of 2019). occupancy rates, with more than 8,000 NEW ASSETS patients treated in 2018 alone. Another priority item on the company’s Organic growth agenda is inclusion in the Ministry of Health’s With a view to building strong partnerships In 2018 Medsi embarked on the construction Hi-Tech Healthcare Providers List, which with leading global vendors of diagnostic of a flagship CDC for children and adults would open up access to federal financing and surgical equipment, in 2018 Medsi on Michurinsky Prospekt in Moscow. and so bring hi-tech care to Medsi’s hospitals 2017 2018 2017 2018 signed new memorandums of cooperation The new multi-specialty medical centre from 2020 onwards. At the moment, Medsi with Siemens and Olympus. (MSMC) with a floor area of over 28,000 sq m only provides hi-tech services to residents is scheduled to open in 2020. of the Moscow region, financed by OMI funds SERVICES 17.6% PATIENT 6.0% In 2018 Medsi started preparing in Moscow and the Moscow region. PROVIDED, MN VISITS, MN for international JCI accreditation Inorganic growth as attestation of the high standards of quality In January 2018, Medsi first launched and safety of healthcare services provided The large medical centre in St. Petersburg its telemedicine platform developed 14.5 8.5 across the chain. acquired in 2017 (formerly Medem) combines in conjunction with MTS. In 2019, the company 28 departments, a first-rate diagnostic centre, plans to further evolve the solution through 12.4 14.5 7.7 8.5 and a hi-tech surgery block, occupying a total new services and a special mobile app. area of 6,800 sq m. The asset is by now fully In addition to telemedicine, Medsi is looking integrated in Medsi’s business processes. to start a «third opinion» project that would rely on neural decision support systems. 1 Metrics are for 2018, where capacity is calculated as the number of possible out-patient visits by patients at Medsi facilities, and visits as the actual number of patient visits for the period, all including new clinic openings and M&A. LFL out-patient capacity in 2018 was 2017 2018 2017 2018 14.7 mn. Visits were 7.4 mn, Utilisation was 50%. 46 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 47

MEDSI RUSSIAN PRIVATE 7.6% MEDSI’S 2018 REVENUE GROWTH Group HEALTHCARE MARKET IN PRIVATE SECTOR, MOSCOW REGION

594 RUB bn 20.6%

BUSINESS DEVELOPMENT STRATEGY: OPERATIONS AND INVESTMENT INDUSTRY OVERVIEW FOR 20181 RUSSIAN PRIVATE HEALTHCARE MARKET3, RUB BILLION ACTUAL PERFORMANCE CAGR6% PROJECTED CAGR8% Medsi’s strategy aims to build Russia’s first multi-functional national-scale In 2018, the Russian private healthcare medical operator, providing a full spectrum of services. market reached RUB 5942 billion 272 202 295 219 317 235 344 250 376 268 414 291 460 318 515 352 (+7.6% from 2017). The market growth of recent years is fuelled by rising demand from individuals for quality healthcare, which THIS LONG-TERM GOAL REQUIRES SPECIFIC STEPS: benefits private operators.

The trend is expected to grow even stronger in the next few years, as the general socio- 1. 2. 3. economic situation in Russia stabilizes 2015 2016 2017 2018 2019 2020 2021 2022 Expansion of the company’s geographical Evolving existing large local facilities into Increasing market shares in Moscow and household earnings go up and more footprint across the country. regional vertically integrated hubs (to cover and the Moscow region through new foreigners seek medical care in Russia. Regions the full spectrum of services, from outpatient outpatient and diagnostic clinics in Moscow and Moscow region to hospital care) while referring the most residential neighbourhoods. Medsi has also made visible progress challenging medical cases to the flagship in the voluntary medical insurance market assets in Moscow. (VMI), with revenue growth in the segment MEDSI’S MARKET SHARE DYNAMICS (VMI SEGMENT) that is 4-5 times greater than the average RUSSIA MOSCOW AND MOSCOW REGION market rate, both in Moscow and in Russia more broadly. 4.35% 4.96% 7.56% 7.83% 5.79% 6.76% 18.56% 19.95% 4. 5. 6. Launching a third flagship hospital on As a matter of medical strategy, establishing Developing and implementing unified quality The company’s 2018 revenue growth Michurinsky Prospekt in Moscow to widen a Chief Specialists Department charged with and safety standards to guarantee high in the private sector of the market (self-pay the range of services (including a children’s implementation of unified quality & safety quality of treatment in compliance with JCI patients) in Moscow and the Moscow region hospital). standards across all specialties and of the standards. outpaced the market by almost 4 times (7.7% new patient routing strategy, preparation in Moscow and 20.6% in the Moscow region). and introduction of innovative treatment This strong growth enabled Medsi to boost

methods, and education of medical staff. its share of the Moscow region market Revenue Patient visits Revenue Patient visits to 2.92% (from 2.6% in 2017). 2017 Medsi has also become a stronger player 2018 7. 8. 9. in the mandatory medical insurance space Enhancing on-the-job education and training Transferring auxiliary back functions from To progress the IT strategy, enhancing (MMI), with market share in Moscow programmes provided by the Medical the management company to a single service existing online solutions for patients (e.g., and the Moscow region increasing by over MEDSI’S AND MARKET’S GROWTH RATES (VMI SEGMENT) Academy, and launching international centre, while automating and/or partly by introducing new options in personal 2.6 times (to 1.8% from 0.5% in 2017). 2018 2017 education programmes. outsourcing routine day-to-day functions accounts and upgrading the telemedicine This dynamic growth is in large part a result 20.26% 5.49% 2.55% – 0.98% 21.58% 4.08% 4.98% – 2.32% in order to optimise the management app) and for staff (e.g., by providing reliable of Medsi becoming a provider of some company’s costs. decision support systems, case conferences, of the most sought-after and attractively etc.) and upgrading the ERP system to priced hospital services. MMI has become ensure effective management and prompt one of the main sources of customers decision-making. for Medsi’s in-patient assets.

Revenue Patient visits Revenue Patient visits

1 Source: BusinesStat. 2 Total revenue received from both insured and self-pay patients. Medsi 3 Voluntary medical insurance (VMI) market and paid services at the expense of individuals. Market 48 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 49

Medsi remains the private market’s largest player in terms of geographical Steppe AgroHolding JSC Steppe AgroHolding (“Steppe”) is one of the biggest MEDSI footprint and an undisputed leader in the VMI segment, which benefits both agricultural companies in southern Russia with a diversified asset Group occupancy figures and revenue at specific assets. In the first half of 2018, Medsi had already outperformed the 2017 national leader by revenue, portfolio including crop farming (TOP-6 of land owners in Russia), Mother and Child, by more than 7%. dairy farming, grain trading and logistics, sugar and cereals trading, and fruit and vegetable growing.

MEDSI’S MARKET SHARE DYNAMICS (MMI SEGMENT) STEPPE’S BUSINESS MODEL Global grain consumption grew faster than RUSSIA MOSCOW AND MOSCOW REGION production, which combined with an expected The company’s business model is designed decrease in carry-over grain supported 0.11% 0.39% 0.01% 0.01% 0.51% 1.77% 0.05% 0.10% to build a vertically integrated diversified a recovery in global grain prices. The average agricultural player with a focus on crop export price of Steppe AgroHolding’s farming, grain trading and logistics, sugar wheat in 2018 grew by 15% year-on-year; and cereals trading and dairy farming, together with the high share of quality grain ANDREY NEDUZHKO and having leading positions in each and increased export amounts, this made up CEO segment of operations. for a slight decrease in the gross harvest.

BUSINESS DEVELOPMENT IN 2018 GRAIN TRADING & LOGISTICS Revenue Patient visits Revenue Patient visits The main focus areas for Steppe In 2018, Steppe AgroHolding began actively 2017 AgroHolding’s development in 2018 were developing the grain trading segment crop farming, dairy farming, and grain and established a full-fledged trading 2018 trading and logistics. In 2018, the company structure. Grain exports by the trading improved its operating and financial business exceeded 1.1 million tonnes in 2018 performance through both its organic growth (up more than four-fold year-on-year), making 2018 FINANCIAL PERFORMANCE strategy and M&A deals. Steppe AgroHolding one of Russia’s top six ALI UZDENOV grain exporters in the first half of the crop Medsi’s revenue for 2018 increased Adjusted OIBDA increased by 82.9% Chairman of the Board of Directors CROP FARMING year 2018. by 52.1% to RUB 17.7 billion due in 2018, due to the continued ramp-up REVENUE 52.1% to increased capacity utilisation and, of facilities and increase in revenue per sq m Steppe AgroHolding’s land assets as a result, an increase in revenue from in- of medical space. The new IFRS standards as of the end of 2018 totalled 401,000 patient services of 27.7% to RUB 5.4 billion, had an impact of RUB 449 million in 2018. 17,747 RUB mn hectares (after an acquisition of land GRAIN EXPORTS, 314% higher revenue from the CDC at Krasnaya in the Rostov region in the second half THOUSAND TONNES Presnya in Moscow as well as the expansion The adjusted OIBDA margin grew of the year). of the clinic network following acquisitions by 3.4 p.p. to 20.3% thanks to growth 269 1,115 of clinics in St Petersburg and Perm in capacity utilisation and an increase SISTEMA’S EFFECTIVE STAKE1: Yields of the main crops remained high and the opening of three new clinics in efficiency per sq m. in 2018, exceeding average regional yields in Moscow. ADJUSTED 82.9% despite a drought in Russia’s grain- Adjusted profit attributable to Sistema OIBDA producing regions. increased by 26.7% in 2018. Excluding the effect of new accounting standards, 92.8% adjusted profit increased by 42.1%. 3,600 RUB mn

2017 2018 FINANCIAL Excluding impact of INDICATORS new IFRS standards STEPPE AGROHOLDING’S GROSS HARVEST (INCL. RZ AGRO), (RUB million) FY 2018 FY 2017 Change FY 2018 Change THOUSAND TONNES Revenue 17,747 11,670 52.1% 17,747 52.1% ADJUSTED 26.7% 2018 2017 Change, % 693 NET PROFIT Operating income 1,142 (39.3%) 557 (51.2%) Beetroot 251,811 347,900 -28% 3,600 Adj. OIBDA 1,968 82.9% 3,151 60.1% 8 Wheat 685,943 723,600 -5% Adj. profit attributable https://ahstep.ru Corn 40,113 68,900 -42% to Sistema 1,061 837 26.7% 1,189 42.1% 1,061 RUB mn Winter barley 24,982 19,200 30% Sunflower 49,362 42,700 16% Other 102,374 153,000 -33% Total 1,154,585 1,355,300 -15%

1 84.63% as of December 31,2018. 50 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 51

Steppe’s assets are located in the most favourable regions of Southern Russia in terms of climate, crop STEPPE IN 2018, STEPPE COMMISSIONED AgroHolding yields and logistics. Steppe also owns 50% of RZ Agro, a major producer of grain and oil crops jointly controlled A NEW DAIRY FARM by Sistema and the Louis-Dreyfus family. FOR 1,800 cows

DAIRY FARMING BUSINESS DEVELOPMENT INDUSTRY OVERVIEW FOR 2018 The expected reduction in global carry- DAIRY FARMING In the region where Steppe operates, STRATEGY over grain crops in the 2018/2019 season raw milk processing capacity is gradually In 2018, Steppe AgroHolding commissioned CROP FARMING and grain consumption outpacing production Russia’s milk output demonstrated positive growing, which has a positive effect a new dairy farm for 1,800 cows. Today, Steppe AgroHolding is a big player had a positive effect on global grain trends in 2018: total milk yield grew by 1.5% on producers of high-quality raw milk able The total number of milk cows as of the end in the Russian agricultural industry The output of grain and leguminous crops prices, which enabled Russian agricultural vs 2017 to 30.6 million tonnes, while milk to supply it in large batches. of 2018 was 4,800. In the second half with substantial land assets (401,000 hectares, in Russia in 2018 totalled 113.3 million producers to make up for the slight decrease yield per cow in the private sector exceeded of 2018, the company started construction ,making it the sixth-largest in Russia). The key tonnes (vs 135.5 million tonnes in 2017, in the gross harvest. 6,000 l (+4% vs 2017), which compensated The milk output of Steppe’s dairy farms of two dairy farms: one for 3,000 cows goal of further development is to create down 16% year-on-year), with wheat for a gradual decrease in livestock numbers. has grown due to the increase both in the Krasnodar region and one a major agricultural company in Russia, output equalling 72.1 million tonnes Today, Russia remains one of the world’s in the number of milk cows and milk yield for 3,100 cows in the Rostov region. a leader in all its key segments in terms (vs 86.0 million tonnes in 2017, down 16% leading grain exporters, having exported In Russia, raw milk competes with dairy per cow. of both business size and operating efficiency, year-on-year). some 29.0 million tonnes of grain products made of milk fat substitutes, Steppe AgroHolding is the leading dairy with favourable conditions for an IPO in July-December 2018, an increase of 4% but the government is taking steps farmer in Russia in terms of milk yield per or attracting a strategic investor. The 16% decrease in gross grain harvest from the same period of 2017 (27.8 million to reduce the share of counterfeit products cow. High milk yields are achieved through compared to the unprecedented harvest tonnes). in the market, including the introduction having highly productive cattle and using Steppe AgroHolding’s development strategy of 2017 was due to a reduction in the crop of the Mercury programme, which makes state-of-the-art agricultural technologies. envisages further increase of its land assets, area and lower crop yields in some regions In the medium term, prices for land assets it possible to control movement of dairy intensive development of grain trading of Russia caused by unfavourable weather in Russia are expected to continue rising, products and their history from the field The operating performance of the dairy and logistics, achieving a leading position conditions. since land is a limited natural resource to the store counter. farming segment demonstrated a steady in sugar and cereals trading, construction and global grain consumption is on the rise. growth: gross milk yield in 2018 exceeded of new dairy farms, and organic growth 46,500 tonnes, and milk yield per cow was in the fruit and vegetable growing segments. over 10,500 litres per year.

FRUIT AND VEGETABLE GROWING GROSS GRAIN AND GRAIN LEGUME HARVEST IN RUSSIA, M T MILK YIELD PER COW,1 TOTAL MILK YIELD, KG M T Vegetable output in 2018 amounted to 46,300 tonnes (up 3% year-on-year), which 113.3 is an all-time high for Steppe AgroHolding. 6,094 30.6

94.2 70.9 92.4 105.3 104.8 120.7 135.3 5,542 5,871 In 2018, the company optimised its vegetable 113.3 6,094 30,5 30,8 30,8 30,8 30,2 30,6 14.0 16.5 14.4 16.4 14.7 16.1 15.1 15.7 15.7 14.5 16.2 14.4 and fruit sales, developing a single brand, Steppe AgroHolding, for all produce sold to retail chains. Sales of produce under a single brand increases brand recognition, enables the company to get a price premium due to a broader product range, and strengthens its investment case as its products are carried by retail chains.

2011 2012 2013 2014 2015 2016 2017 2018 2016 2017 2018 2013 2014 2015 2016 2017 2018

Agro enterprises

1 Milk yield per cow at agro enterprises. Farmsteads of all categories 52 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 53

STEPPE AgroHolding

FRUIT GROWING VEGETABLE GROWING OPERATIONAL RESULTS 2018 FINANCIAL PERFORMANCE OUTPUT 31% The fruit growing segment in Russia has In 2018, production of protected-ground POMACEOUS FRUIT CROPS STEPPE AGROHOLDING Agroholding Steppe delivered significant been demonstrating a gradual increase vegetables continued to rise due revenue growth of 136.6% year-on-year % of the output: gross pomaceous fruit harvest to commissioning of new greenhouses. (thsd tonnes) 2018 2017 Change, in 2018, to RUB 24.2 billion. The revenue Gross harvest, total (crop farming) 814.1 973.2 –16% in 2018 amounted to 1.9 million tonnes, The total area of greenhouses now stands 1.9 m t increase was driven by growth in the field Milk production 46.7 39.4 18% according to preliminary estimates at 2,500 ha, an increase of 8% from 2017. crop segment, the intensive development Vegetable harvest 46.3 44.9 3% (up 31% vs 2017). Growth drivers included of agrotrading and entering the sugar Tomatoes 25.1 23.2 8% the planting of new orchards: the area under Total output of protected-ground vegetables and groceries trading segments, as well Cucumbers 21.2 21.8 –3% pomaceous fruit crops reached 229,000 ha in 2018 exceeded 1 million tonnes AREA UNDER POMACEOUS as increased production volumes in the Dairy Gross apple harvest 18.5 21.8 –15% in 2018 (+3,800 ha vs 2017). (+17% vs 2017), while imports of tomatoes FRUIT CROPS segment. and cucumbers reached 701,000 tonnes Despite the increase of domestic production, (+7% vs 2017). OUTPUT OF STEPPE AGROHOLDING (WITH RZ AGRO) OIBDA grew by 22.2% year-on-year imports of pomaceous fruits remained high, 229 thsd ha to RUB 4.9 billion for FY 2018 as a result % totalling 843,000 tonnes in 2018 (+18.7% (thsd tonnes) 2018 2017 Change, of higher operational efficiency in the field Beetroot 251.8 347.9 −28% vs 2017). crop segment and the impact of growth Wheat 685.9 723.6 −5% in the Agrotrading segment. Corn 40.1 68.9 −42% POMACEOUS FRUIT 18.7% Winter barley 25.0 19.2 30% CROPS IMPORTS Capex increased by 18.8% to RUB 1.9 billion Sunflower 49.4 42.7 16% for 2018 due to the launch of new projects Other 102.4 153.0 −33% in the Dairy segment and logistics to support Total 1,154.6 1,355.3 −15% GROSS HARVEST OF POMACEOUS FRUIT CROPS AND APPLES 843 thsd t increased production and vertical integration IMPORT IN RUSSIA, M T of the business. STEPPE AGROHOLDING: CROP YIELDS (t/hа) 2018 2017 Change, % The increase in net debt was due 2.84 TOTAL 8% Beetroot 45.1 54.2 –17% to purchases of grain from third parties GREENHOUSE AREA Wheat 4.2 4.9 –14% as part of Steppe’s agrotrading activities, 1.53 1.35 1.60 1.05 1.50 0.89 1.73 0.68 1.52 0.71 2.00 0.84 Corn 3.7 5.3 –30% as well as the start of financing of new Barley 6.4 6.1 5% investment projects in line with the capex 2.5 thsd ha Sunflower 1.5 2.6 –43% programme.

FINANCIAL Excluding impact of OUTPUT OF PROTECTED- 17% INDICATORS new IFRS standards GROUND VEGETABLES (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 24,161 10,210 136.6% 24,161 136.6% OIBDA 4,909 4,019 22.1% 4,617 14.9% >1 m t Operating profit 3,261 2,647 23.2% 3,147 18.9% Net profit attributable to Sistema 1,095 1,130 (3.1%) 1,243 10.0%

2013 2014 2015 2016 2017 2018 IMPORTS OF TOMATOES 7% AND CUCUMBERS Production of seed crops Import of apples 701 thsd t 54 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 55

Real estate assets: JSC Leader Invest ( “Leader Invest”) The company both builds is a carrying residential complexes in a range development company of classes from Comfort+ PORTFOLIO COMPRISES PORTFOLIO VOLUME out housing and commercial real to Premium and carries out large- estate projects in Moscow. scale housing estate projects. >40 projects ~3.0 million sq m in developed areas with good ecological conditions

MARKET SEGMENTS WHERE LEADER INVEST’S BUSINESS The team worked hard throughout 2018 Today, Leader Invest is among Moscow’s CONSTRUCTION IN PROGRESS LEADER INVEST OPERATES DEVELOPMENT IN 2018 to finalise ZIL-Yug’s marketing concept, three highest-rated developers, and it shares phasing and cash inflow calendar; to speed the top position with a major mass-segment 42% 2% In 2018, Leader Invest focused primarily up the launch of sales for the Wings after operator. The high international expert 19 projects on streamlining of business processes an expansive redesigning (with an upgraded rating is primarily due to an exceptional and improving efficiency, specifically master plan and optimised apartment new management team, a broad optimising project solutions, introducing layouts and façade solutions); and to start portfolio of projects, and healthy liquidity 1 MAXIM BERLOVICH new cost-effective procurement procedures, active construction of Central Park, a unique and leverage ratios. In April 2019, S&P President NOW SELLING strengthening project management business-class housing estate occupying over upgraded the outlook to Positive, reflecting 100% and increasing salesforce efficiency. 450,000 square metres and using a concept expert consensus that the ongoing prepared by British architecture firm AHR. integration with Etalon Group will improve 23 projects Leader Invest’s portfolio comprises over The Phase 1 construction permit for Wings the company’s operating and financial 40 projects at various stages, the most was granted in 2018. performance, strengthen its market standing on the “old Moscow” market. In 2018, it and fuel revenue growth in 2019-2020. launched the Happiness brand to sell Leader Invest welcomes digitalisation as yet BUSINESS MODEL small-footprint infill properties in residential another avenue to leadership and uses it in its 56% neighbourhoods while heavily developing day-to-day operations. The recently adopted Leader Invest is growing in the segments its landmark Wings project at 120 BIM system significantly enhances the quality Comfort of the Moscow real estate market that Lobachevskogo Street and the large-scale of designing and makes cost control much 2 Business GENNADY SHCHERBINA are most stable and attractive in terms Central Park housing estate in Moscow’s easier. Chairman of the Board of Directors of investment. The company’s development Premium gentrified Nagatino district. The company MOSCOW DEVELOPERS model is based on the following pillars: also made progress on the development In November 2018, S&P Global Ratings BASED ON RATING of its other housing estate, ZIL-Yug, affirmed Leader Invest’s long-term the company acts in the interests of the city all properties are in the Comfort, and commissioned a residential building and short-term user credit ratings and its residents, supports new initiatives in Business or Premium class and are at 15 Demyana Bednogo St. at B/B and revised its outlook to Stable. Тop-3 Moscow’s construction industry, creates located in residential areas of “old” new points of growth (residential, social Moscow with excellent public and infrastructure facilities) and jobs, transport accessibility and and looks at construction projects developed social infrastructure 3 SISTEMA’S EFFECTIVE STAKE : as a chance to enrich urban areas Strong through comprehensive and marketability and sustainable development quality of assets

% Social A unique LARGEST PROJECTS 49 responsibility niche product competitive COMMISSIONED IN 2018 prices, fast construction, focus on modern architectural trends latest technologies and solutions in design Innovations Schastye Mnevniki and construction 13 Demyana Bednogo St. 8 A strong http://l-invest.ru professional team

AREA

1 As of 31 December 2018 – Oleg Mamayev. 2 As of 31 December 2018 – Oleg Mubarakshin. 13.5 thsd sq m 3 По состоянию на 31 декабря 2018 года: 100%. 56 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 57

Real estate assets: The combined assets and THE NUMBER OF OFF-PLAN SALES CONTRACTS 47% expertise of Etalon Group COMBINED PORTFOLIO LEADER INVEST SIGNED IN MOSCOW IN 2018 and Leader Invest will create WITH A TOTAL AREA OF a leader on the residential 80,000 market. 4 million sq m

INDUSTRY OVERVIEW FOR 2018 SUPPLY OF NEW HOUSING IN MOSCOW IN 2015-20181, BUSINESS DEVELOPMENT Etalon Group is among Russia’s largest 2018 FINANCIAL PERFORMANCE THSD APARTMENTS STRATEGY and oldest residential developers, a solid 2018 was a year of unprecedented buoyancy leader in St Petersburg and a growing Leader Invest’s revenue grew by 100.9% in the Moscow market for business-class 8.5 8.2 10.8 12.0 12.1 11.0 11.9 12.1 12.5 15.2 16.5 15.8 17.1 15.2 14.9 14.6 In February 2019, Sistema sold a 51% presence in the Moscow metropolitan area. year-on-year to RUB 12.7 billion in 2018. 6.3 6.5 9.7 14.0 15.1 15.1 17.2 17.8 19.1 21.6 20.7 19.1 17.8 14.8 14.6 15.0 residential properties. As in the mass stake in Leader Invest to Etalon Group Etalon Group’s shares have been listed The main sources of revenue recognition were segment, the spending spike here was for RUB 15.2 billion, and in a separate on the London Stock Exchange since 2011, the Vsevolozhsky, Pokrovsky, Chertanovskaya primarily driven by a reduction in mortgage transaction purchased 25% in Etalon Group under the ticker “ETLN”. and Michurinsky developments, as well rates. 40% of all of sales in the segment from its founder and largest shareholder as Daev, Demyana Bednogo, Kavkazky Plyus, in 2018 involved mortgage contracts, which Viacheslav Zarenkov (and his family) The company’s portfolio is represented Yana Rainisa and Fabritsiusa. is quite untypical for the business class space for USD 226.6 million. by 39 projects at various stages, mostly (cf. 50+% in the mass segment) . To put it in the high-margin Comfort and Business As of the end of 2018 the sales portfolio in perspective, in 2017 mortgage penetration Two Sistema representatives received seats class segments. The total net sellable area including commercial real-estate and parking in the segment was 30%, and in 2016 just on Etalon’s board of directors. Sistema is 2.73 million square metres, with a total spaces totalled 209.3 thousand square metres. 27%. The recent trend, in turn, is driven 2015 2016 2017 2018 signed an agreement supporting its portfolio value (according to Knight Frank) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 by two factors: all-time low mortgage commitment to high standards of information exceeding RUB 132 billion as of 30 June Revenue in 2018 was driven primarily rates and an abundance of new, highly disclosure and transparency and confirming 2018. In 2018 alone, Etalon Group sold by an increased level of completion of projects attractively priced properties. By the end AVERAGE PRICES IN BUSINESS- AND COMFORT-CLASS RESIDENTIAL that any and all transactions (if any) between 628,000 square metres of floorspace under construction and higher volumes of the year, the average Moscow home price SEGMENTS1, RUB Sistema and Leader Invest in the future for RUB 68.7 billion. In 2017, the company’s of NSA available for sale, primarily due to 120

in the primary mass-segment residential 252 242 234 230 229 235 238 242 232 227 223 223 226 226 225 229 should be carried out on an arm’s length revenue was RUB 70.6 billion, with EBITDA Lobachevsky, as well as previously recognised market peaked at RUB 162,090 per square 158 161 153 148 145 142 147 147 148 148 150 151 152 155 158 162 basis, including a guarantee that Sistema’s of RUB 13.2 billion. revenue due to the introduction of the IFRS 15 metre. representatives will abstain from voting standard. on any such matters. By the end of the year, the primary business- Excluding the effect of new accounting class market was represented by 94 standards, revenue decreased in 2018 residential complexes with some 14,550 due to the decrease in deliveries of new apartments (or 1.07 million square metres BUILDING VALUE THROUGH SYNERGIES developments – in 2017 the premium class in total), with six projects entering the sales Daev and Serpukhovsky projects were phase in Q4. The average price in the segment delivered, while in 2018 one business class

at the year-end was RUB 228,525 per square 2015 2016 2017 2018 project was delivered, Schastye v Mnevnikakh metre, 2.3% up from 2017. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Focus residential complex at 15 Ul. Demyana on the same Bednogo. Like the mass market, the residential Comfort regions (Moscow business class segment in 2019 will be Business & St. Petersburg) Complementary project Attractive profits Positive trends in OIBDA and the OIBDA affected by a number of factors, primarily and segments portfolios: no overlap and impressive returns margin in 2018 were due to higher sales recent legislative changes (amendments NUMBER OF HOUSING TRANSACTIONS IN MOSCOW, 2015-2018, (predominantly in projects in Moscow on investment volumes and supply dynamics, as well to Federal Law 214-FZ governing off-plan THSD business, comfort, as the impact of new IFRS standards. Factors and premium property development projects) that come driving the net loss for FY 2018 excluding class) into effect on 11 July 2019 and require that Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 the effect of new standards were the decrease 4.3 5.1 4.5 5.8 6.6 7.7 9.2 11.0 10.5 13.4 12.8 17.6 15.9 18.0 20.0 25.8 buyers’ money be held in escrow accounts in revenue due to a lower number of project until commissioning, which means that deliveries, and also increased advertising project financing will become the only source spend. of funding available to developers. According to experts, the move will toughen competition FINANCIAL Excluding impact of and put smaller developers out of business, INDICATORS new IFRS standards while larger professional players with broad REVENUE 100.9% (RUB million) FY 2018 FY 2017 Change FY 2018 Change expertise will consolidate their market Revenue 12,676 6,308 100.9% 2,978 (52.8%) shares. OIBDA 3,129 415 654.6% (1,038) — 2015 2016 2017 2018 12,676 RUB million Operating income 2,990 221 1,253.3% (1,178) — 1 All statistics provided in this market review are according to Metrium. Profit attributable to Sistema 772 164 372.2% (2,104) — 2 Source: Federal Service for State Registration. 58 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 59

Real estate assets: Business Nedvizhimost Group is one of the largest property Business Nedvizhimost’s owners in Moscow. The company’s main assets are operating results in 2018 PROPERTIES GENERATING TOTAL JSC Business Nedvizhimost (lease and sale of commercial RENTAL INCOME PROPERTY PORTFOLIO real estate) and JSC Mosdachtrest (lease of cottages/sale of land plots). 50 units 246.7 thsd sq m

INDUSTRY OVERVIEW FOR 2018 BUSINESS DEVELOPMENT IN 2018 MOSDACHTREST is a subsidiary of Business COMMERCIAL REAL ESTATE SALES ASSETS OF BUSINESS NEDVIZHIMOST Nedvizhimost whose operations are mostly THSD SQ M AS OF 31 DECEMBER 2018, SQ M A total of 114,000 sq m of new office space Business Nedvizhimost has a unique pool related to the lease of cottages and office 54,667 36,626 was commissioned in Moscow in 2018. of properties: mansions in the centre buildings in Moscow. Mosdachtrest’s The Moscow quality office space market of Moscow, office and commercial buildings, key assets are land plots in Serebryany 69.3 reached 20.5m sq m, with class A offices manufacturing and storage facilities, Bor and the Moscow region. In 2018, accounting for 4.94m sq m, class B+ offices high-end cottages and land plots. In 2018, Mosdachtrest completed the renovation 22.3 69.3 VYACHESLAV KHVAN 7.43m sq m, and class B- offices 8.43m sq m. the company continued to implement its of 50 properties in Serebryany Bor. CEO strategy in two core areas: 246,670 Companies operating in the consumer sector accounted for about 17% of real estate 1. effective management of property market demand. Demand from the IT sector portfolio under ownership, also increased, reaching 15% of the total. 2. providing professional and effective Trading companies continue to generate management services and operation of steady demand and account for 14% commercial real estate, including third- MOSDACHTREST 155,377 of the total number of bids. party properties. TOTAL PROPERTY PORTFOLIO For rent For sale outside Sistema Group At the end of 2018, average rental rates In terms of designated use Business grew across all property classes. Class Nedvizhimost’s assets are divided into 52.3 thsd sq m 2017 2018 For renovation SERGEY SHISHKIN A properties saw the highest growth. Overall, three key groups: leasing, development Chairman of the Board of Directors the average rental rate for class A space monetisation as part of the M&A programme. rose by 9%, reaching 26,160 RUB/sq m per The objectives of the company BUSINESS DEVELOPMENT 2018 OPERATING RESULTS2 annum (excluding VAT) by the end of 2018. for 2019 include creation of an IT platform STRATEGY The average weighted rental rate in class for commercial real estate management, Indicator UoM 2018 2017 % 2 B+/B properties also increased and reached renovation of own properties jointly The development strategy of Business Area of commercial real estate in Moscow, thsd m 248.7 302.9 – 18% 2 15,180 RUB/sq m per annum (excluding with partners and launching a programme Nedvizhimost includes three key areas: of which for sale thsd m 54.7 84.3 – 35% VAT). In class C the rental rate amounted for replacing existing assets, redevelopment Land area (Serebryany Bor) ha 19.3 19.3 х to 11,160 RUB/sq m per annum, having of own high-potential properties 1. Maximising the value of assets through Land area (Moscow region) ha 82.7 87.2 – 5% SISTEMA’S STAKE: increased by 1.1% year-on-year. and acquisition of investment-grade assets renovation; Cottages for rent, (Serebryany Bor, Barvikha and Trudovaya) thsd m2 46.7 48.3 – 3% from the market. 2. Rotation of tenants to maintain rental income at a minimum of 10% per annum; 3. Replacement of assets at their peak value by assets from the market with 100% potential for improvements and value growth of at least 30%. 2018 FINANCIAL PERFORMANCE OFFICE PROPERTY MARKET1 CHANGES IN VACANT SPACE1 AS OF THE END OF Q4 2018, AS OF THE END OF Q4 2018, % According to its strategy for 2019–22, In 2018 revenue from Sistema’s rental OIBDA increased by 59.3% year-on-year THOUSAND SQ M Business Nedvizhimost will conduct rotation assets (Business Nedvizhimost and its to RUB 4.6 billion, in line with revenue of its commercial property portfolio in order Mosdachtrest subsidiary) increased by 31.0% and due to optimisation of a number of costs. to replace assets that have reached their year-on-year to RUB 7.9 billion, primarily 4,963 7,433 8,430 1,227 14.5% 11.9% 6.6% 10.3% peak value by investment-grade assets due to sales of real estate. In FY 2018 with growth potential, and expand the area 69.3 thousand sq m was sold. of residential rental real estate in ownership 8 http://sistema-bn.ru by building new residential properties. FINANCIAL Excluding impact of INDICATORS new IFRS standards (RUB million) FY 2018 FY 2017 Change FY 2018 Change Revenue 7,887 6,019 31.0% 7,887 31.0% Operating income 4,184 2,629 60.9% 4,229 59.1% OIBDA 4,598 2,887 59.3% 4,553 57.7% 1 Source: ILM, Becar. Profit attributable to Sistema 3,147 1,655 90.1% 3,163 91.1% Class А Class B + Class B - Class C Class А Class B + Class B - Average 2 As of 31 December 18. 60 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 61

JSC RTI JSC RTI (“RTI”) is a major research and production company RTI’s products ensure border that develops, produces and supplies radars, comprehensive protection, security of air and maritime traffic, and safety 1,381 million 892 million automated control systems, command centres, communications in all areas of life. microchips export chips equipment, electronic devices and microelectronics. 7 million 482 million chip modules chips for the Russian market

BUSINESS DEVELOPMENT IN 2018 The company actively worked on its In 2018, Mikron began supplies GLOBAL 12% RUSSIAN MICROELECTRONICS quality management system in 2018 of microcontrollers protecting transmitted MICROELECTRONICS MARKET1 MARKET2 RTI is a major research and production to increase the level of process stability data of IoT devices for municipal services. USD BILLION RUB BILLION holding company for more than 10 and the traceability of order execution. It is expected that after pilot applications enterprises spanning segments in 2018, supplies will grow 5x-7x in 2019. from microelectronics to radars Yaroslavl Radio Factory and JSC Russian 463 134 and communications. JSC Mintz Radio Space Systems also signed an agreement CJSC RTI Microelectronics, a member of RTI MAXIM KUZYUK Technology Institute, one of RTI Group’s on cooperation in the development Group, signed a legally binding agreement 336 335 339 412 463 126 128 129 131 134 CEO leading research and production enterprises, and production of on-board space equipment. with Rostec and JSC Ruselectronics (part was commissioned by Roscosmos Yaroslavl Radio Factory will become a centre of Rostec) in February 2019 to establish to develop prototypes of on-board radars of excellence in navigation and space a joint venture in microelectronic and fulfilled export orders for on-board communications. components. The parties will contribute broadband communication systems in 2018. controlling stakes in 19 enterprises The company has developed a new method ADVANCES IN MICROELECTRONICS that develop, produce and design of real-time functional control of complex microelectronics components to the JV. radio systems, including early warning radar For more than 30 years, Mikron has been systems. Its algorithms can reduce the time the undisputed leader of the Russian INDUSTRY OVERVIEW FOR 20181 2 required to identify and resolve problems microelectronics market. In 2018, 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 and prevent the risk of incorrect operations the company continued to capitalise 2018 was marked by diverse trends in RTI’s OLEG MUBARAKSHIN of radar systems. on growth opportunities in new markets, areas of operations. In the surveillance Chairman of the Board of Directors consistently updating its product portfolio and reporting systems market, total PJSC Yaroslavl Radio Factory, a leading and developing its customer base. Projects spending on armaments declined in 2018 Demand was driven by industrial electronics, RUSSIAN MICROELECTRONICS Russian manufacturer of professional radio implemented include expansion of the client by 6.3% year-on-year. Spending in 2019- automotive electronics and the Internet MARKET communications equipment, conducted and distribution network, with 54 new clients 2021 is expected to remain at the same of things. technical upgrades and launched and 38 distributors, dealers and integrators. level as 2018. In the Russian market 13% 5% 3% 2% 43% an advanced assembly shop for spacecraft for automated control systems, high The Russian microelectronics market payload and drastically increased the volume Automotive electronics and IoT components growth rates (10%-15%) in 2019 are in 2018 grew by 3% to RUB 135 billion. of work on space programmes (including are among new segments that the company expected in the segment of service The largest segment is still production SISTEMA’S EFFECTIVE STAKE: GLONASS). Following the commissioning plans to enter in the future. In 2018, Mikron solutions (geoinformation platforms; of microcircuits for the defence industry of this production facility Yaroslavl Radio produced chip samples for automotive business intelligence) and control systems and aerospace equipment, including Factory became one of the key links electronics and received a letter for executive authorities. Global trends for the medical and industrial sectors. in the production chain for new spacecraft. of conformance with the international IATF include an increasing role for automation Increasing digitalisation of business BY SECTOR The enterprise will increase its competitive standard for its quality management system, and smartification (including artificial processes and automation of production 87% advantages by obtaining a certificate which is necessary to enter the exports intelligence) in control and security systems. facilities and infrastructure generate of compliance from its foreign partner, market. demand for microcontrollers, representing Thales Alenia Space, which will allow it The global microelectronics market in 2018 an additional driver of demand for Mikron’s to export products for foreign satellites. grew by 12% year-on-year to USD 462 billion. products. Production of 200 mm wafers (the segment in which Mikron operates) grew by 14%. 32%

Defense industry and aerospace Industrial, energy and medical electronics 8 http://aorti.ru Consumer electronics ID, RFID, smart cards IoT Automotive 1 Source: company data; World Semiconductor Trade Statistics. Telecom 2 Source: company data. 62 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 63

JSC JSC Bashkir Power Grid JSC Bashkir Power Grid Company (“BPGC”) Company is one of Russia’s largest regional energy RTI companies.

BUSINESS DEVELOPMENT FINANCIAL RESULTS IN 2018 BUSINESS MODEL STRATEGY REVENUE 25.7% In 2018 RTI’s revenue decreased year-on- RTI’s strategy is aimed at strengthening its year due to the high-base effect: In 2017 Electricity ELECTRICITY TRANSMISSION Supply Consumption market position, pursuing organic growth a large volume of work was done as part 22,886 RUB mn generation AND DISTRIBUTION in segments in which the company operates, of long-term contracts under government entering adjacent market segments contracts. and civilian markets, boosting exports DMITRY SHAROVATOV Conditions and technological parameters by SO UPS (Independent System Operator) in all segments and increasing operating For the full year adjusted OIBDA increased ADJ. OIBDA 168.1% CEO efficiency. by 168.1% as SG&A expenses declined Renewable by 31.5% year-on-year to RUB 3.7 billion. energy sources BGC Bashkirenergo Bashkortostan In the government contracts segment, RTI 4,919 RUB mn Power Sale is focused on maintaining leading positions In 2018 the OIBDA margin rose by 15.5 p.p. Transmission Distribution Company in radio, surveillance and communication to 21.5% due to a decrease in SG&A expenses grids grids systems, as well as information systems and the increased share of work done in- for managing and supporting decision- house in the cost of sales structure. SG&A 31.5% BGC LLC making. In addition to its traditional segment (Inter RAO Group) 1 of very long-range radars, RTI is planning As of 31 December 2018 net debt HPP to develop sales in adjacent segments, was RUB 29.0 billion.1 RTI also has 3.7 RUB bn increase exports and enter civilian markets. on its accounts additional funds earmarked OLEG MUBARAKSHIN for government contracts amounting Chairman of the Board of Directors The company’s plans in the microelectronics to RUB 8.6 billion that are not included segment include consolidation of production in the net debt calculation. and customer bases, development of export sales through expansion TPP1 of the product offering to meet the needs of the digital economy, and partnerships FINANCIAL Excluding impact of new IFRS standards BPGC Engineering with manufacturers of electronic equipment INDICATORS and systems integrators. The industry’s key (RUB million) FY 2018 FY 2017 Change FY 2018 Change growth drivers in the near future will be Revenue 22,886 30,793 (25.7%) 22,886 (25.7%) SISTEMA’S EFFECTIVE STAKE: BPGC’s subsidiaries include IoT and AI, which require a huge number Adj. OIBDA 4,919 1,835 168.1% 4,611 151.3% LLC Bashkir Grid Company of various microchips, most of which are Operating income / (loss) 921 (5,772) — 825 — (“BGC”) (transmission grids), produced using technologies available Adjusted loss attributable LLC Bashkirenergo (distribution at Mikron’s facilities. to Sistema (531) (4,178) — (546) — grids) and LLC BPGC 91% Engineering (engineering).

BPGC’s activities are aimed at ensuring Most of the company’s revenue is generated reliable, high-quality and affordable power by its transmission business, which supply to consumers. In addition to its core is a natural monopoly and therefore has its operating activities, the company pays prices closely regulated by the government. close attention to its role in driving local Other businesses of the group include 8 https://bashes.ru economic growth, sustainable development utility hookup services, engineering and cooperation. and construction of power lines and electrical substations, as well as lease, IT and communication services.

1 Hydro Power Plant, Thermal Power Plant. 1 Net debt includes financial leasing. 64 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 65

JSC BPGC runs a chain of holding companies that transmit electricity between central Russia and the Urals, distribute power to end users in Bashkortostan (a constituent region of ELECTRIC METERS GRID LENGTH BPGC Russia and home of the company), and perform engineering, construction and refurbishment works at power lines and electrical substations. 220 thsd >88.5 thsd km

INDUSTRY OVERVIEW FOR 2018 BUSINESS DEVELOPMENT IN 2018 DISTRIBUTION GRIDS The new facility will improve the DEVELOPMENT STRATEGY reliability of power transmission, Power generation in Russia in 2018 With a view to enhancing operating efficiency, In 2018, LLC Bashkirenergo installed reduce power outages, speed up BPGC’s key long-term goals include: increased by 1.7%, to 1,091.6 billion kWh, BPGC continued its long-term programmes: more than 50,000 meters designed connections of new users, and provide while new connections grew to 4.5 GW, specifically for state-of-the-art automated employment to Bashkortostan’s with more than 400,000 new users hooked 1. energy conservation and improvement power control and metering systems. people. 1. 2. up to power grids. Total consumption of energy efficiency; As a result, the company now operates Maintaining leadership in operational Generating stable cash flows of electrical power in Russia in the reporting 2. overhaul of distribution grids some 220,000 meters and 286,000 metering efficiency among Russian power grid assets for shareholders and maintaining dividends year rose 1.6%, to 1,076.1 billion kWh.1 in Ufa (Bashkortostan’s capital) channels across the region. Power at the current level, while maximising and implementation of Smart Grid losses in distribution grids decreased shareholder value both organically According to a recent forecast by the Ministry solutions; from 8.36% to 8.23% year-on-year and through M&A of Economic Development, by 2020 power 3. automation of business processes as a result of a comprehensive programme generation volumes in Russia will have through the use of information of technological solutions. grown by 2.2%, and power consumption technology and ERP systems; by 2.4%. To phase out cross-subsidisation, 4. migration to a two-tier system To improve the reliability and quality the government has scheduled 5% p.a. of operational and technological of power supply to Ufa’s consumers, BPGC OPERATING RESULTS growth of electricity rates for residential management at LLC Bashkirenergo refurbished over a hundred distribution 2018 2017 % customers and 3% p.a. growth for all other as an optimisation move. and transformer substations across Parameter Units Bashkirenergo BGC Bashkirenergo BGC Bashkirenergo BGC users throughout 2018-2020. the city and laid 15 kilometres of cable Power in m kWh 22,512 27,327 22,152 26,138 1.6% 4.5% as part of a long-term project aimed Power losses m kWh 1,854 326 1,853 333 0.04% – 2.3% The electric grid services market is naturally at comprehensive renovation of Ufa’s % 8.2 1.2 8.4 1.3 – 0.13 p.p. – 0.09 p.p. monopolistic. All regional distribution grid distribution grids. In 2019, the company will New connections connections 19,321 1 19,547 1 – 1.16% 0% companies operate under similar market refurbish another 87 distribution substations, Connected capacity MW 380.2 4 334 2.4 13.8% 69.5% conditions and abide by the same tariff lay another 8 kilometres of cable, and install policy. A leader in operational efficiency another 17,000 meters. among Russia’s power grid companies, Bashkirenergo achieves high profit margins At the end of 2018, BPGC opened despite below-average prices. In 2018, a new subdivision near Ufa (“Novoufimsky the average straight-line “common pot” Distribution Zone”) to meet growing FINANCIAL PERFORMANCE IN 2018 The OIBDA margin for 2018 increased electricity rate in Bashkortostan reached LOSSES ON GRIDS, % demand for electrical power connections POWER IN INCREASE by 3.5 p.p. versus 2017 to 33.3% as a result RUB 1 per kilowatt hour, up 7.5% from 2017. in the suburbs around the city. A product In Q4 2018 BPGC’s revenue grew of the new IFRS standards. Excluding The indexation of straight-line electricity 1.3% 8.4% 1.2% 8.2% of a long multi-stage process, the facility by 8.3% to RUB 19.1 billion. Revenue growth the effect of the new accounting standards, rates effective from July 2018 averaged includes a 110 kV substation (“Zubovo”) 1.6% in 2018 was also driven by tariff indexation the OIBDA margin for 2018 decreased 9.4% for all voltages, while the electrical and a standalone distribution grid and an increase in electricity consumption by 0.3 p.p. as a result of an increase in costs grid maintenance rate grew by an average with a staff of 72 people. and capacity as consumers switched to two- for services provided by PJSC Federal Grid of 5.7% and the power loss coverage part tariffs. Company of Unified Energy System due rate by 19.0%. Relatively high growth to an increase in paid-for capacity. The net of the latest electricity rates was driven POWER OUT INCREASE OIBDA growth of 21.1% for 2018 followed profit increased following OIBDA. by a number of nationwide factors: growth revenue and was also due to reduced expenses of wholesale electricity prices in the past on network losses and the introduction of new In 2018 BPGC paid RUB 2 billion in dividends. few years, statutory adoption of cost 1.8% accounting standards. standards for default suppliers of electrical power, and a 20x growth of prices charged FINANCIAL Excluding impact of by PJSC FGC UES (Russia’s largest INDICATORS new IFRS standards transmission-grid company, serving about 2017 2018 (RUB million) FY 2018 FY 2017 Change FY 2018 Change half of the country’s energy consumption). Revenue 19,130 17,671 8.3% 19,569 10.7% OIBDA 6,369 5,259 21.1% 5,741 9.2% Transmission grids Operating income 3,872 2,926 32.3% 3,273 11.8% Distribution grids 1 Source: AK&M Information Agency. Profit attributable to Sistema 2,930 2,369 23.7% 2,492 5.2% 66 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 67

Hospitality assets Cosmos Group is one of Russia’s leading hotel management Cosmos Group has more than companies, providing a full range of hotel development 4,000 rooms under management in 3-5 star hotels in tourist and business COSMOS GROUP MANAGES services from project consulting and preparing hotels for centres: city business hotels and opening to cost cutting and increasing asset capitalisation. luxury resorts in Russia, Italy, Namibia and the Czech Republic. 4 thsd rooms in hotels of various price segments

BUSINESS MODEL In 2019, Cosmos Group aims to actively INDUSTRY OVERVIEW FOR 20183 higher than in 2017. At the beginning of 2019, Following a slump in demand for hotel increase its presence in the key region for the first time in many years occupancy services in 2014-2015, the Moscow hotel Cosmos Group provides a broad range (Russia) by taking new hotels under In 2018, seven hotels operating under of Moscow hotels during the New Year market is now highly competitive. Hotels of services, from hotel concept development management. international brands were opened in Moscow holidays reached 90%,4 which is comparable mostly compete for low-budget tourist and design and construction support (including the airports of the Moscow with occupancy during the FIFA World Cup groups. In these conditions Sistema’s to brand selection and hotel management. aviation hub) with total accommodation in 2018. hotel assets are diversifying their services, capacity of 1,728 rooms, leading to an 8.9% expanding sales channels and improving ALEXANDER SHWEIN Cosmos Group specialises in managing increase in the hotel room supply in Moscow. Hotel accommodation prices increased internal business processes. President existing hotels, including implementation In 2018, the supply of quality hotel by 34% year-on-year on average in all Parameter, RUB mn 2018 2017 % of service standards, introduction of quality HOTELS rooms grew at the same rate as in 2017. segments, mostly due to the Football World Cosmos Group’s market share assurance systems, recruitment, training RevPAR, incl. 2,415 1,849 31% It is expected that 19 new hotels will be Cup. The fastest growth of 50.3% was in terms of accommodation capacity and regular assessment of personnel, Russia 2,019 1,516 33% built in Moscow in 2019, including five recorded at the luxury Moscow hotels. in the medium price category is more administrative and business operations, hotels abroad 12,640 9,734 30% hotels operating under international brands, than 5%. This is one of the key drivers adoption of security standards, Occupancy rate, incl. 65% 56% 9 p.p. with the total of 1,105 rooms. Steady growth of demand resulted not of the company’s competitiveness, improvement of sales, income management Russia 65% 56% 9 p.p. only in increased occupancy rates but also enabling it to regulate prices in accordance and centralised procurement systems. hotels abroad 60% 53% 8 p.p. The average occupancy rate of Moscow enabled hotels to increase revenue per room with supply. Rooms 4,049 4,049 0% hotels in 2018 was 75%, which is 1.8 p.p. after the FIFA World Cup. BUSINESS DEVELOPMENT IN 2018

ARTYOM SIRAZUTDINOV The main event of 2018 was the FIFA World Chairman of the Board of Directors Cup, which attracted more than 2.7 million REVPAR2 2018 RESULTS: NEW BRAND HOTELS tourists to 11 Russian cities. Sistema’s hotels RUB THSD BY SCALE SEGMENT located in host cities showed substantial 1 growth of operating indicators. 1.3 1.8 1.5 2.1 9.7 12.6 0% 8% 0% 5% 56% 9% 14% 18% 9% 52% 21% 6%

In 2018, to increase business efficiency Cosmos Group separated its hotel ownership and management functions: Cosmos Group is in charge of operational management, while Sistema Hotel Management SISTEMA’S is responsible for ownership. EFFECTIVE STAKE: As part of its strategy for its hotel assets Sistema will conduct a rebranding of Russian hotels. The Group’s hotels will start operating under the Cosmos Hotels & 100% More brand, with the exception of Holiday Inn Express and Park Inn hotels, which will continue operating under international brands. The chain will comprise four brands: Cosmos Hotel Russia Abroad Luxury Upper Upscale Upscale Upper Midscale Midscale Budget My Cosmos for economy-class city hotels, Cosmos for classical business hotels, 2017 Moscow and Moscow region Russian regions Cosmos Collection for premium hotels 8 2018 Upscale 56% Luxury 8% http://cosmosgroup.ru and CosmosStay for serviced apartments. Upper Midscale 14% Upper Upscale 5% Midscale 9% Upscale 9%

1 Cosmos, HIEX Paveletskaya and Courtyard by Marriott Budget 21% Upper Midscale 18% in Moscow, Park Inn Sochi City Centre, Park Inn Volgograd, Midscale 52% Park Inn Kazan, and Intourist Kolomenskoye in Moscow, which is owned by a third party and managed by Cosmos Group. 3 Source: JLL Hotels. Budget 6% 2 Revenue per available room per day. 4 Source: the Tourism Committee of Moscow. 68 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 69

Hospitality assets JSC Binnopharm ( “Binnopharm”) is one of the largest Russian full-cycle COSMOS GROUP biopharmaceutical complexes with an in-house R&D division.

BUSINESS DEVELOPMENT 2018 FINANCIAL PERFORMANCE BUSINESS MODEL INDUSTRY OVERVIEW FOR 2018 STRATEGY Revenue growth from hospital assets Binnopharm is a full-cycle company The Russian pharmaceuticals market Sistema’s development strategy of 22.8% year-on-year was driven REVENUE 22.8% from development and registration in 2018 grew by 6.1% to RUB 1,329 in the hospitality business envisages by higher occupancy rates and an increase of drugs and production of finished products billion.2 The share of the commercial growing the “asset light” business segment in the average daily rate (ADR), as well to marketing and promotion of drugs segment – the core of Binnopharm’s (a model based on hotel management as by the World Cup. 5,301 RUB mn and sales to distributors and pharmacy chains. business – increased to 73%. At the same 1 as opposed to hotel ownership) through ANDREY MLADENTSEV time, the commercial segment’s CAGR expansion of the portfolio of assets under CEO The company is focused on expansion (8%) is faster than the market as a whole management by adding hotels owned Revenue from hotels outside Russia in the commercial segment of the market, (7%). The growth forecast for 2019 is 1.8% by third parties. Cosmos Group’s expertise accounted for 20.7% of the total in 2018, SHARE OF HOTELS 2.1 p.p. while maintaining limited sales of hospital for the pharmaceutical market and 3.5% enables the management company to win down by 2.1 p.p., due to the faster pace OUTSIDE RUSSIA products. An in-house sales service has for the commercial segment. contracts for managing both independent of revenue growth at Russian assets. been established to promote commercial and international branded hotels. prescription (Rx) and over-the-counter (OTC) The continuing trend in the market 20.7% drugs. is growing demand for cheaper generic drugs3 preferred by consumers over The company intends to focus primarily The target segments of Binnopharm’s portfolio more expensive original drugs. The share on developing the segment of 3-4 star OIBDA in the hospitality segment in 2018 are pulmonology, neurology, and antiviral of generics in total commercial market business hotels. Hotels in this segment enjoy increased by 54.7% compared to 2017 OIBDA 54.7% and immunomodulating drugs. Modern volumes increased by 1 p.p. in 2018 the highest demand in Russia, which makes on the back of revenue growth and due DMITRY ZUBOV production facilities allow the company compared with 2017 and amounted to 62% it possible to increase the speed of business to effective cost control. The OIBDA margin Chairman of the Board of Directors to produce a wide range of dosage forms, in monetary terms and 84% in physical expansion and its further capitalisation. for the year increased by 5.1 p.p. to 24.8%. 1,314 RUB mn including tablets, capsules, ampoules, terms4. The hospitality assets achieved profitability suppositories, syringes and solutions. at the OIBDA level in 2018 compared In money terms, imported drugs continue with a loss in 2017. to lose market share, and account for less than 70% of the total. The average occupancy rate in 2018 was 62.5%, an increase of 6.3 p.p. INCREASE IN AVERAGE 69.8% on the previous year. The leader in terms OCCUPANCY RATE of growth was the Cosmos hotel, where AT COSMOS HOTEL SISTEMA’S EFFECTIVE STAKE: RUSSIAN PHARMACEUTICALS MARKET DEVELOPMENT, 6.1% the rate increased by 11.1 p.p to 69.8%. RUB BILLION The main strategy for developing the 5-star Altay Resort and Izumrudny Les recreational 11.1 p.p. 1,022 1,123 1,207 1,252 1,329 1,354 715 307 786 337 855 352 907 345 964 365 998 356 hotels aims to improve their operating results. These hotels have been rebranded 74% as Cosmos Collection (a premium brand of the Cosmos Hotels and More brand line). The overall social and economic situation in Russia is expected to have a favourable effect on implementation of this strategy. FINANCIAL Excluding impact of INDICATORS new IFRS standards 2014 2015 2016 2017 2018 2019П (RUB million) FY 2018 FY 2017 Change FY 2018 Change Commercial segment Revenue 5,301 4,318 22.8% 5,301 22.8% 8 Hospitals segment OIBDA 1,314 849 54.7% 1,272 49.7% https://binnopharm.ru/ Operating profit 555 198 180.3% 530 167.7% Loss attributable to Sistema (532) (517) — (524) — 1 Since 5 February 2019. As of 31 December 2018 – Alexey Chupin. 2 According to the analytical agency AlphaRM. 3 Generic drugs are drugs that are equivalent to brand-name products in composition and effect. Generic drugs may differ from brand-name products in presentation and trade name, and they generally have a lower price. 4 According to the analytical agency DSM Group. 70 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 71

JSC The company produces biotechnological drugs, including a hepatitis B vaccine, a line BINNOPHARM MANAGES BINNOPHARM of pulmonology and neurology drugs, infusion solutions, and anti-viral and immunomodulating modern pharmaceuticals facilities in Moscow region drugs. 2

Legislative initiatives aim to further clear BUSINESS DEVELOPMENT IN 2018 The company continued to develop direct BUSINESS DEVELOPMENT OBL Pharm acquisition OBL Pharm and Binnopharm the market of poor-quality and illegal partnerships with pharmacy chains, as this STRATEGY development strategy products and to simplify and speed up In 2018, Binnopharm continued promotion channel has the highest efficiency. In December 2018, Sistema, in partnership procedures for registering new drugs. to implement the strategy of strengthening Several low-margin projects in commercial At the end of 2018, Sistema announced with VTB Bank and the management of OBL Complementary business models, assets: For example, the Ministry of Education its positions in the commercial segment distribution of third-party products were a deal that significantly strengthens its Pharm, acquired a stake in the leading and Science has developed a bill and diversifying its proprietary drug terminated. position in the Russian pharmaceutical pharmaceuticals company, OBL Pharm allowing the federal government to make portfolio. The company set its own record market with the acquisition of a stake though Ristango Holding Limited. decisions on issuing compulsory licences by completing the registration of 14 new The merger with OBL Pharm under in JSC Obolenskoye Pharmaceutical PHARMA FACILITIES IN MOSCOW for the release of generics while patents drugs, including Hydroxyethyl Starch, an agreement reached at the end of 2018 will Enterprise (“OBL Pharm”), one of the leading AND MOSCOW REGION on original drugs are still valid. When the bill Moxifloxacin, Levofloxacin, Inspirax in two be a logical step in implementing the strategy Russian pharmaceutical companies. is passed, it will be easier for Russian dosage forms and a combination of Lidocaine to increase capacity utilisation and business companies to bring generics to the market, and Tolperisone. A total of over 30 drugs profitability. The transaction aims to create a leading JOINT INTEREST IN OBL PHARM 4 facilities while the level of localisation of foreign are in development and are expected to be pharmaceutical group and a top-10 player drugs may decrease. released in 2019-2021, further strengthening in the Russian market by merging OBL Pharm the company’s market presence. and Binnopharm. The combined diversified 95.14% product portfolio currently includes about PRODUCT PORTFOLIOS 200 drugs. Leaders in their segments are Venarus (venotonic drugs), Maxilac (probiotic supplements) and Urdoxa (hepatoprotective ~200 items drugs). The combined company’s production SISTEMA INVESTMENT NEW DRUGS UNDER DEVELOPMENT facilities will include four pharmaceutical Effective utilisation of Binnopharm’s plants in Moscow and the Moscow region. capacities for production of OBL Pharm The establishment of the combined company 1.83 RUB bn drugs. 14 items >30 items is expected to be completed in 2019. Sistema and VTB signed an agreement Substantial synergies in sales and whereby Sistema will acquire VTB’s stake marketing, combined R&D competencies, in Ristango Holding Limited within three cost saving. years of the initial transaction. BINNOPHARM’S REVENUE STRUCTURE IN 2018

7.8% 2.8% 34.0% 2018 FINANCIAL PERFORMANCE

Revenue in 2018 declined by 10.2% year-on- FINANCIAL year to RUB 2.1 billion, after Binnopharm INDICATORS ceased commercial distribution of some (RUB million) FY 2018 FY 2017 Change low-margin third-party products. Sales Revenue 2,122 2,363 (10.2%) of Binnopharm’s own products grew OIBDA 508 482 5.3% BY PRODUCTS BY SEGMENT by 18.5% in 2018. Binnopharm is continuing Operating income 342 323 5.8% to pursue its strategy to reduce the share Profit/(loss) attributable to Sistema (10) 14 — of the hospital segment in revenue.

OIBDA growth in 2018 of 5.3% was driven by the launch of sales of new products, OIBDA 5.3% OPERATING INCOME 5.8% as well as savings on commercial expenses. 89.4% 66.0% This was reflected in OIBDA margin growth of 3.5 p.p. to 23.9%. 508 RUB million 342 RUB million Own products Commercial segment Commercial distribution Hospital segment Other 72 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 73

Other assets LLC Concept Group is one of the leaders Other assets LLC Kronstadt Group is a Russian high-tech company that in the Russian market for children’s engineers and manufactures knowledge-intensive products and women’s clothes and underwear. and solutions for the production, deployment and safe use of sophisticated air-, sea-, and land-based systems.

The company has successfully developed In 2018, the company signed The Group’s substantial intellectual automated hydrographic trawling system. retail chains under the Acoola and Concept an agreement with key lenders and engineering potential, its portfolio of key Moreover, the company carried out work Club brands with an aggregate of over 380 on restructuring the Group’s loan technologies and competences and state-of- on implementation of hardware and software stores, many of which are franchised. portfolio. The shareholding structure the-art manufacturing resources enable it designed to generate and update digital improved after Sberbank became one to create high-tech products and solutions terrain data, and supplied four sets Concept Group’s portfolio includes such of its shareholders. In 2018, the company that are in demand in Russia and are also of interactive shooting ranges. brands as Acoola (clothes for children aged appointed Elena Bogomolova, who has able to successfully compete on international ELENA BOGOMOLOVA 0-14), Concept Club (clothes for women, men strong expertise in the clothing retail SERGEY BOGATIKOV markets. Kronstadt Group continued CEO and children, home textiles1) and Infinity segment, as its new CEO. CEO making a substantial contribution Lingerie (underwear). Concept Group’s In 2018, Kronstadt Group continued to fulfil to the development of culture and provision business is based on a multi-brand The key objectives of Concept Group a government contract for development of cutting-edge equipment to museums. and multi-channel model that allows for 2019 include active development of an unmanned aerial vehicle (UAV) – In 2018, the company supplied an interactive the company to diversify its revenue. of online sales and enhancement the Orion project. The company also started 5D unit for the Memorial Museum of Space A significant portion of revenues is generated of the company’s operational efficiency. developing a new business segment: (Moscow), equipment for the Space by the nationwide retail chain. Another important goal is development provision of commercial services using and Aviation Pavilion at VDNKh (Moscow), of a new strategy that will enable drones. It also conducted active operations and started providing high-tech equipment The company operates in Russia (in more Concept Group to become one of the top in the maritime solutions segment for the largest car museum in Russia than 130 cities), Belarus, Kazakhstan, five market players by opening new- and provision of modern equipment (Yekaterinburg). Armenia, Azerbaijan and India both through format retail outlets, strengthening for museums. its own retail chain and in partnership its design expertise and changing Kronstadt continued pursuing its CSR with franchise and wholesale partners. the marketing policy for its brands. In 2018, Kronstadt created and updated policy by participating in national Donor’s electronic navigation maps for 10,000 Days, enhancing cooperation with cancer kilometres of internal water routes in Russia, charitable foundations, and organising signed three contracts with the government volunteer work. for supplying state-of-the-art hydrographic on-board equipment for Rosmorrechflot The priority area of the company’s business (the Russian Federal Agency for Maritime is development of high-tech services using and River Transport), supplied seven UAV systems as a platform for additional SISTEMA’S EFFECTIVE STAKE: SISTEMA’S EFFECTIVE STAKE: sets of equipment for correcting stations monetisation of existing technological ordered by Rosmorrechflot, and obtained competences. a patent for the development of a unique 43% 96%

8 8 https://conceptgroup.ru http://kronshtadt.ru

1 All lines except for women’s clothing were introduced in 2018. 74 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 75

Sistema’s investment funds Sistema continues to develop a range of funds specialising in venture and NEW INVESTMENTS MADE IN 2018 SISTEMA PE investments. Sistema’s funds and investment companies offer investors exposure to a unique portfolio of hi-tech assets, as well as assets in real estate, VENTURE manufacturing and healthcare. CAPITAL

Sistema Venture Capital (Sistema_VС) focuses on investments in tech companies.

SISTEMA’S STAKE INVESTMENT TARGETS Pentech and US fund Propel Venture AND FOCUS Partners (in Datasine), as well as Alibaba Group (in SQream). TraceAir (USA) is a startup that helps SQReam (Israel) is a developer of a leading Connecterra (Netherlands), founded 80% Sistema VC invests in fast-growing Internet construction companies reduce errors GPU-accelerated database for massive by the former Microsoft executive Yasir projects with potential to become industry Some of the transactions closed through automation. It uses data collected data. The company’s core product Khokhar, specialises in AI solutions TARGET SIZE leaders, as well as in early-stage deep tech in the reporting year (YouDo, Gosu.ai, with drones and other sensors (including is a data warehouse that relies on machine for the food industry and agriculture. projects. TraceAir) were among the top venture capital GPS receivers) to create accurate cloud learning algorithms and makes it possible The technology uses artificial intelligence deals of 2018 in a ranking published by Inc. copies of actual construction sites. to process terabytes of data 100 times to increase the productivity of dairy farms, 10 RUB billion Priority investment areas include: Russia. The platform greatly speeds up design faster and 10 times cheaper than CPU- and relies on wearable tracking devices work and reduces contracting costs. based solutions. The product is already that monitor cow health. The company’s ¡¡ Projects leveraging AI and machine Sistema_VC also organised a number The product has already attracted some used by some major companies in telecom, core product is the Connecterra IDA YEAR ESTABLISHED learning technologies; of events involving both large corporations large development companies in the USA, advertising, media, and other industries platform, which analyses and predicts and startups from the fund’s own portfolio, such as ENGEO (geotechnical engineering) (Orange, Cellcom, Amdocs, PubMatic). behavioural patterns based on data collected 2016 ¡¡ Computer vision; such as a big data conference dubbed Big and Independent Construction (construction), The company received the prestigious Big from neck sensors. IDA informs farmers Data, Meet Big Brother!, the international which are now co-investors in TraceAir along Data Excellence Award 2018 for providing about behavioural changes, provides GEOGRAPHY ¡¡ Next-generation infrastructure solutions computer vision and machine learning with some business angels. the technology for a large-scale cancer early diagnosis, gives recommendations (SDN, NFV); summit Machines Can See (co-hosted research programme. about optimising fertility cycles Russia, US, with VisionLabs), and #public_tech, a series of cattle, etc. The solution is already used Europe, Israel ¡¡ Software as a Service (SaaS), Platform of open discussions of modern technology’s by Danone and ZLTO (a large farm chain as a Service (PaaS) and marketplace role in various industries. in the Netherlands). solutions, including advertising technologies, fintech and e-commerce.

In 2018, the fund continued to pursue its dynamic strategy by investing in three new companies: INDUSTRY FOCUS KEY INVESTMENTS MADE ZZ ТraceAir (Russia/USA) IN 2016-2017 Growth-stage Internet projects ZZ Connecterra (Netherlands) and technology ZZ SQream (Israel)

LIFE It also supported new financing rounds by existing portfolio companies including AS AT THE END OF 2018, No fixed term Ozon, VisionLabs, YouDo, Web Technologies, THE FUND WAS MEL Science, DataSine and GOSU, bringing VisionLabs, YouDo, is an online MEL Science, Luden.io, is a developer Segmento, is a platform in new partners including French fund is a developer marketplace for personal is an international of educational games; that uses machine TARGET RETURNS Ventech (a co-investor in GOSU), UK fund 85% INVESTED of computer vision services; company offering learning technologies and machine learning scientific and educational for target advertising. solutions; products based on VR/ 25–30% (in RUB) AR technologies; 76 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 77

Sistema’s investment funds Sistema Asia Fund is a venture capital fund, and an active NEW INVESTMENTS MADE IN 2018 SISTEMA and recognisable player in the Indian VC market that has become integrated into the country’s entrepreneurial ASIA ecosystem. FUND

The fund’s goal is to efficiently place investors’ money in promising projects in the fast-growing Indian tech market.

SISTEMA’S STAKE INVESTMENT TARGETS The new Sistema Business Scalerator, AND INVESTMENT FOCUS a product of cooperation between Sistema Asia Fund and MTS India, is a business scale- HealtifyMe is India’s biggest digital fitness Faasos — is India’s biggest “food on demand” Kissht — is an online consumer lending 100% Sistema Asia Fund invests in tech startups up platform solution designed for organising platform (4 milion users and over 200 sports company, using cloud kitchen technology. platform based on a proprietary algorithm in India (predominantly) and Southeast Asia sales for retail and B2B companies instructors and nutritionists) that allows It is also the world’s biggest company for assessing creditworthiness with AI TARGET SIZE (in exceptional cases) that meet the following and streamlining operations in marketing, users to monitor calorie consumption, operating in this format. It currently elements. criteria: brand management and customer service. set personal fitness goals and monitor manages five brands and aims to further In March 2018, the platform joined forces their progress. What makes it really diversify its products. USD 120 million 1. a proven business model and/or loyal with LendingKart Finance, a non-bank effective is access to online consultations with potential increase to USD 150 million audience; finance arm of LendingKart. with nutritionists and instructors. At the end 2. solutions specific for the Indian market; of 2017, the company launched a new 3. startup founders heavily involved in FIRST EXIT service, Ria, which is the world’s first virtual business management; AI-based nutritionist. The company’s biggest YEAR ESTABLISHED 4. co-investors.. corporate customers include P&G, Unilever, Accenture, Cognizant, Shell, and Philips. 2015 In 2018, Sistema Asia Fund team reviewed In March 2019, SAF completed its first over 150 projects, thoroughly studied monetisation by selling a stake in Qwikcilver, GEOGRAPHY over 70 companies, made three new an Indian end-to-end service provider successful investments, and participated of gift card and prepaid solutions. Sistema India, Southeast Asia in follow-on investments in portfolio Asia Fund invested in Qwikcilver in 2016 companies. The investment rounds were and exited three years after with solid INVESTMENTS MADE IN 2016-2017 done at valuations exceeding the pre-money returns on the invested capital. With the first valuation, which testifies to the strong quality exit in the bag, Sistema Asia Fund remains of the fund’s investments. an investor in nine businesses. INDUSTRY FOCUS LendingKart, one of the fund’s earliest Consumer tech (e-commerce, healthcare, projects, maintains a presence in the Fintech Wooplr — Licious — Lendingkart — Mobikon — Netmeds.com — Seclore — transport, media, finance and education) 100 – a collaboration between fintech is a web platform is a brand operating is a fintech lender is a marketing is India’s biggest is a developer and enterprise tech (IoT, VR/AR, platform investment firm H2 Ventures and KPMG for online in the meat- that has created its platform online pharmacy, of an EDRM solutions, big data, AI and machine learning) Fintech – for a third consecutive year, communication selling business very own data-based for restaurants present all over (Enterprise Digital and is the only Indian lender in the list. and sales of women’s and leveraging lending algorithm to attract customers the country Rights Management) clothes a full value chain, to provide loans system that enables LIFE from sourcing to SMEs corporations suppliers to processing to control the usage 8 years mandatory to delivering of electronic to customers files both within + 2 years optional, and outside with an investment stage of 4 years the company

TARGET RETURNS

3х cash-on-cash 78 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 79

Investment platform LLC Sistema Finance S.A. (SF) is an investment platform focusing Sistema Capital is a leading Russian asset manager, with more than 17 years SCP/ on Europe and the United States. SISTEMA of experience in asset management on global financial markets for individual and corporate customers. SISTEMA Sistema Capital Partners (SCP) is an arm of SF that invests Russian institutional CAPITAL MC FINANCE capital in developed real estate markets in Europe and the United States.

In 2018 SCP and SF were restructured to improve the efficiency The company offers investment products At the same time, Sistema Capital remains AUM,1 6.4Х of both businesses. Starting in 2019, the funds operate under in both Russian and foreign markets. an active player in the personal wealth RUB BN a single brand, The SCP Group. SCP’s strategic goal is to build These include bonds of Russian management market. In cooperation and foreign issuers in various segments with MTS, the company has already launched an integrated and diversified investment company focusing and geographies, shares of companies MTS Investments, a “mass-market” app, 68.3 on scalable investments in capital-intensive assets in mature from various countries, and derivatives. with another collaborative B2C project — SISTEMA’S STAKE integration of an option to purchase markets. 10.7 22.3 23.7 51.7 68.3 As of the end of 2018, the company’s investment fund units in the widely popular assets under management (AUM) stood MTS Money Wallet app – also underway. 100% at RUB 68.3 billion, 1.3 times higher than in 2017 and an increase of 6.4 times In 2019, Sistema Capital expects to see INVESTMENT TARGETS on 2014. The company ranks ninth in Russia growth in its assets under management, GEOGRAPHY AND FOCUS 29 assets by the net asset value (NAV) of its mutual driven by a general trend for investors investment funds (MIFs), with an aggregate to favour managed investments over bank Mature economies ¡¡ Industries that benefit from restructuring ACQUIRED BY BVK IN GERMANY NAV of RUB 11 billion as of the end of 2018. deposits with ever-decreasing interest rates. or rapid growth Sistema Capital’s MIFs were among The strategic goal of Sistema Capital 2014 2015 2016 2017 2018 INDUSTRY FOCUS ¡¡ Assets that acutely need capital ASSET AREA the highest yielding in the Investfunds 2018 is to develop as a leading asset management but are often beyond the scope of ranking of open-end mutual bond funds company oriented towards private Residential, retail and hotel interest of institutional investors due with NAVs of over RUB 50 million. and institutional investors (retail online, SISTEMA’S EFFECTIVE STAKE: rental properties, etc. to the relatively investment required >120 thsd sq m HNWI, non-government pension funds) while (typical transaction amount from In 2018, ratings agency RAEX (Expert RA) continuing as a manager of Sistema Group’s EUR 10 million to EUR 100 million) confirmed Sistema Capital’s rating at A+, liquidity and the vehicle for investment 70% IRR IRR with a Stable outlook. The agency praised of Sistema’s funds in marketable securities Since 2015, SCP has created a strong the company’s high-quality IT system, with varied risk levels. track record both in Europe and in Russia. strong investment process, reliability RATED >15% It completed a full round of deals involving 28–36% in EUR of counterparties and sound quality of AUM. German properties — Highstreet IV and HS Prime I, comprising a total of 29 assets The company acts as a trust manager А+ in various towns in Germany with a total for three non-government pension funds, «Very high level of reliability»2 area of 120,000 sq m — which were sold including Sberbank’s Pension Fund. to the Bayerische Versorgungskammer (BVK), Germany’s largest pension fund, bringing an IRR of 28-36% in EUR. Top-10

RUSSIA’S LARGEST ASSET MANAGERS

YIELDS OF MUTUAL INVESTMENT FUNDS

Currency Yield/year, in specified currency 2015 2016 2017 2018 SC Rezervny. Foreign currencies (Eurobonds) USD +20.4% +7.2% +5.2% +2.0% SC Mobile. Bonds. Foreign currencies (Eurobonds) USD n/a n/a +5.8% +0.8% SC Rezervny (bonds) RUB +17.3% +12.1% +14.3% +7.4% SC Mobile. Bonds (bonds) RUB n/a n/a +15.1% +7.5% SC Mobile. Equity (equity shares) RUB +56.3% +23.4% +4.2% +13.9%

1 AUM means Assets Under Management. 2 By the RAEX (Expert RA) rating agency. 80 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 81

Online retailer Ozon is a leading Russian multi-category online sales platform, ranked fourth by revenue RECORD NUMBER in the E-Commerce Index Top 100 for 2018 and among OF PROCESSED ORDERS the top five most valuable Russian Internet companies according to Forbes. 138 thsd per day

SISTEMA’S DIRECT STAKE:1 In March 2019, Sistema acquired 18.7% In addition, Sistema_VC, a venture capital E-commerce is among Russia’s most Russia’s e-commerce market is heavily As of the end of 2018, the company operated of equity shares in Ozon Holdings Limited fund that is part of Sistema Group and invests promising markets. Even though online fragmented, there is clear potential eight fulfilment centres with a total floor area from PJSC MTS for RUB 7.9 billion, bringing in growth-stage tech companies, also holds orders in Russia have more than doubled for achieving leadership through of around 100,000 sq m, enabling next-day Sistema’s total stake in Ozon’s equity 16.3% in Ozon. in the last 5 years3, the market has yet consolidation, which Sistema believes Ozon deliveries to 40% of the Russia’s population. to 19.3%. In April 2019, Sistema further to reach its full potential. The world’s seventh has every chance of doing. In December 2018, Ozon hit an all-time 21.9% increased its stake in Ozon to 21.9% following largest country by number of Internet users, high by number of processed orders the acquisition of shares from a number Russia still lags far behind leading economies In 2018, the company grew at a faster pace (138,000 per day). of Ozon minority shareholders. in terms of e-commerce penetration, at just than at any point during the past 10 years. Its 5% of total retail revenue in Russia, compared GMV4 growth in the reporting year reached to 10-15% in mature economies and more 73% YoY, with GMV totalling 42.5 billion than 20% in China and South Korea. By 2023, roubles including VAT. In some categories, e-commerce penetration in Russia is expected such as clothing and groceries, the growth to reach 10%, with the market growing rate exceeded 100%. 4 player 1.5 m from RUB 1.1tn in 2018 to RUB 3.5tn, which corresponds to a CAGR of 24% p.a4. IN THE RUSSIAN E-COMMERCE UNIQUE CUSTOMERS MARKET BY SALES TURNOVER DAILY

8 fulfilment centres 1.6 m 15.5 m orders

SKUS OFFERED, IN 2018 In 2019, the company plans to stick to its ACROSS 24 CATEGORIES (29 ORDERS PER MINUTE) aggressive strategy, aiming to conquer the wider market. Immediate initiatives include large-scale investments in logistics infrastructure, the expansion of a distribution centre in Tver, 1 st 40% and the launch of a new fulfilment centre near Moscow with a total floorspace of over E-COMMERCE BRAND OF RUSSIA’S POPULATION 100,000 sq m. BY AWARENESS HAVE ACCESS TO NEXT-DAY DELIVERY

73% 115%

OZON.RU GMV2 GROWTH GROWTH OF WAREHOUSE AREAS NEW FULFILLMENT CENTRE AREA IN 2018 Y-O-Y EXPECTED IN 2019 (new fulfilment centre in the Moscow region 8 https://ozon.ru and in Tver) >100 thsd sq m

1 Since April of 2019. 3 Source: Russian Association for Electronic Communications (RAEC) 2 Gross Merchandise Value, or total revenue (including marketplace) net of loyalty programme effects. 4 Source: Morgan Stanley 82 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 83

SISTEMA’S CORPORATE GOVERNANCE PRINCIPLES 84

CORPORATE SISTEMA’S CORPORATE GOVERNANCE STRUCTURE 85 GOVERNANCE GENERAL MEETING OF SHAREHOLDERS 86 BOARD OF DIRECTORS 88

COMMITTEES OF THE BOARD SYSTEM OF DIRECTORS 92 PRESIDENT 94

MANAGEMENT BOARD 95

COMMITTEES REPORTING TO THE PRESIDENT AND THE MANAGEMENT BOARD 96

SPECIFIC CHARACTERISTICS OF RISK MANAGEMENT, INTERNAL CONTROL AND INTERNAL AUDIT SYSTEMS 98

DEVELOPMENT OF THE CORPORATE GOVERNANCE SYSTEM IN 2018 100

REMUNERATION POLICY 102

RISKS 104 84 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 85

Corporate SISTEMA’S CORPORATE GOVERNANCE STRUCTURE AS OF 31 DECEMBER 2018 Governance System Sistema’s corporate governance bodies: ¡¡ General Meeting of shareholders; GENERAL MEETING ¡ ¡ Board of Directors; OF SHAREHOLDERS ¡¡ President; ¡¡ Management Board. Sistema believes that high-quality corporate Sistema aims to meet best international standards governance and information transparency of corporate governance and transparency, and improve its corporate governance practices on an ongoing basis are important elements of the Corporation’s through timely implementation of required changes strategy as an investment company. and high efficiency of managerial decision-making. Committees Corporate Secretary BOARD OF DIRECTORS of the Board of Directors

SISTEMA’S CORPORATE GOVERNANCE PRINCIPLES

CLEAR AND EFFECTIVE A DIVIDEND POLICY SPECIAL FOCUS PROCEDURES that takes due account of both of the Board of Directors on related-party PRESIDENT, CHAIRMAN for taking investment decisions the reasonable expectations of investors transactions and potential conflicts of interest Internal Control OF THE MANAGEMENT and Audit Department and Sistema’s financial resources BOARD

MANAGEMENT BOARD

PROFESSIONALISM REASONABLE TRANSPARENCY of the Board of Directors and its active of management processes for investors involvement in strategic planning, management and partners and oversight of business processes Finance and investment External Relations Managing Partner Department Department

Sistema is guided by these principles In its corporate governance practices In accordance with Russian legislation and Corporate Governance and legal Security in all of its activities, including strategic Sistema abides by applicable legislation, best international practice, the Corporation’s Managing Partner Department and financial management, HR and social the Listing Rules of Moscow Exchange, the Charter and internal regulations define Department policy, preparation of financial statements, recommendations of the Russian Corporate its corporate governance principles 1 control and audit, and risk management. Governance Code and the guidelines set out and procedures, as well as the composition, Strategy 2 3 Managing Partner GR Department These principles form the foundation in the UK Corporate Governance Code . procedures and powers of its governance Department for strengthening the Corporation’s and control bodies. investment case. The Corporate Governance and Ethics Managing Partner HR Department Code of Sistema sets out the additional commitments of the Corporation, its top 1 The text of the Corporate Governance Code recommended by the letter of the Bank of Russia No 06-52/2463 dated 10 April 2014 management and employees in terms is available at: http://www.cbr.ru/Queries/XsltBlock/File/48285?fileId=-1&scope=1518 (in Russian). Managing Partner 2 The conformity of Sistema’s corporate governance practices with the standards set out in the Corporate Governance Code of of social responsibility, transparency Russia and the UK Corporate Governance Code is analysed in Annexes 5 and 6 to this report. If Sistema’s corporate governance and ethical business principles. practices diverge from the standards recommended in the above documents, the Corporation provides an explanation of how it ensures that the balance of interests envisaged in applicable corporate governance standards is observed. 3 The text of the UK Corporate Governance Code is available at: https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0- Managing Partner d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf. 86 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 87

GENERAL MEETING OBSERVANCE OF SHAREHOLDERS’ Each shareholder is entitled to take part Votes of GDR holders about whom After the end of the reporting period, Shareholders’ access OF SHAREHOLDERS RIGHTS in General Meetings of shareholders information has been disclosed the Board of Directors, taking into to the Corporation’s documentation and to vote on agenda items either in person to the depositary are collected account the need to maintain a balance The General Meeting of shareholders Proposing agenda items or through a representative (if the General by the depositary bank via clearing systems between reducing debt, continuing An important guarantee of the right is the supreme governing body for the General Meeting Meeting is held as an in-person meeting and are included in the general ballot along investment activities and ensuring returns of shareholders to participate in managing of the Corporation. The activities of shareholders and nominating of shareholders). with all votes cast for and against proposed for shareholders, recommended that the company is the right to access and powers of the General Meeting candidates to the Corporation’s draft resolutions, as well as abstentions. the General Meeting of shareholders approve documents that the Corporation is obliged of shareholders are governed governance bodies Shareholders may complete ballot dividends for 2018 in the amount of RUB 0.11 to provide to shareholders in accordance by Russian legislation, the provisions papers and send them to Sistema The results of voting on agenda items per share. with article 91 of the Federal Law on Joint- of Sistema’s Charter and the Terms Shareholders who own at least 2% ahead of the General Meeting. Sistema’s of General Meetings of shareholders held Stock Companies. To exercise this right, of Reference of the General Meeting of the Corporation’s voting shares shareholders may also use as in-person meetings are announced before To maintain a balance between shareholders should send a written request of shareholders. The Corporation are entitled to propose items the e-voting system available on the website the close of the meeting. After the minutes the rights and interests of all shareholders for access to the relevant documents seeks to create the most favourable for the agenda of the Annual General of the Corporation’s registrar, JSC Reestr. of the meeting are drafted, shareholders and the Corporation’s ability to pay to Sistema’s Corporate Secretary. After conditions for shareholders Meeting of shareholders (AGM) and nominate To use this service, shareholders should may also view the voting results dividends, the Board of Directors, when the time for providing the documents to participate in the General Meeting. candidates to the Corporation’s governance apply for access to a personal shareholder on the Corporation’s website. determining the amount of dividends, is agreed upon, the requested documents and control bodies. Such proposals should account on the website of JSC Reyestr. will take into account the acceptable rate will be provided to the shareholder. be submitted to the Corporation no later than If a shareholder has a personal account Dividend policy of debt reduction and the proportionality When shareholders are granted access 100 days after the end of the reporting year, on the e-government portal, they may get of dividends to the Corporation’s current to confidential documents, they sign in accordance with the Terms of Reference access to the service without applying The Corporation announces the amount cash flows. After achieving the goal a written non-disclosure obligation, of the General Meeting of shareholders to the registrar. of dividends recommended by the Board of reducing the debt burden, the Board thereby guaranteeing the rights and other internal regulations of Directors and the record date in advance. of Directors plans to return to consideration of all the Corporation’s shareholders are of the Corporation.1 Candidates nominated 8 Shareholders are thus able to take informed of dividend payments as a means protected. If shareholders require any by shareholders to the governance More detailed information on the procedure decisions with respect to disposing of their of strengthening Sistema’s equity investment copies of documents, the shareholders and control bodies of the Corporation are for connecting to the e-voting service shares. case. bear the costs incurred by the Corporation provisionally reviewed by the Nomination, is available on the website (RUB 10 per page). Remuneration and Corporate Governance of the Corporation’s registrar http://www. In determining the recommended Committee of the Board of Directors. aoreestr.ru/shareholders/e-voting. amount of dividends for 2017, the Board of Directors took due account Participation in General Meetings Holders of Sistema’s global depositary of the priority of the strategic goal of shareholders and voting receipts (GDRs) may vote on General of reducing the Corporation’s debt, on agenda items Meeting agenda items by a proxy vote and recommended that the General Meeting in line with the established procedure via of shareholders approve dividends totalling Sistema aims to ensure maximum protection a depositary bank servicing Sistema’s GDR RUB 1,061,500,000, or RUB 0.11 per share, of the right of shareholders to take part programme. In 2018, Sistema’s depositary thus supporting the Corporation’s deviation in the governance of the Corporation bank was Citibank, N.A. from the current dividend policy2. by participating in the General Meetings of shareholders, voting on agenda 8 items and receiving income in the form For more information of dividends. on the depositary bank and voting 8 procedures please visit the bank’s website All materials relating to the General To ensure shareholders have the right www.citiadr.idmanagedsolutions.com. Meeting’s agenda items are published to take part in the General Meeting, all INFORMATION ABOUT GENERAL MEETINGS OF SHAREHOLDERS IN 2018 ANNUAL GENERAL MEETING OF SHAREHOLDERS on the Corporation’s website in Russian materials relating to the General and in English (www.sistema.ru Meeting’s agenda items are published Date and venue 30 June 2018, Moscow, 13/1 Mokhovaya St and www.sistema.com, respectively) on the Corporation’s website in Russian Form of the meeting Meeting (in-person) and in English (www.sistema.ru and www. sistema.com, respectively) at least 30 days Items reviewed and decisions taken ¡¡ Annual report and financial statements for 2017 were approved; before the date of the meeting. The notice ¡¡ Dividend for 2017 of RUB 1,061,500,000, or RUB 0.11 per ordinary share (RUB 2.2 per GDR), of the General Meeting of shareholders, was approved; ballots and all other materials are also ¡¡ The Board of Directors and the Audit Review Commission were elected; sent by mail to shareholders whose rights ¡¡ Auditors were appointed for RAS and IFRS audits for 2018. to the shares of the Corporation are recorded Attended Shareholders holding a combined 78.5% of votes in the shareholder register, and to nominee shareholders in electronic form. Date and reference number of the minutes 4 July 2018, No 1-18

1 If an Extraordinary General Meeting of shareholders is conducted and its agenda contains an item on election of the Board of Directors, shareholders who own a sufficient number of shares are entitled to nominate candidates to the Board of Directors. Proposals to this effect must be received by the Company no later than 30 days before the date of such a meeting. 2 The current version of the Dividend Policy was adopted in April 2017. 88 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 89

BOARD OF DIRECTORS Composition of the Board of Directors of Sistema PJSFC in 2018 MEETINGS OF THE BOARD THE BOARD OF DIRECTORS HELD 4. Managing and creating value for (re-elected on 30 June 2018)1 OF DIRECTORS Sistema’s investments in the following The Board of Directors areas: is a collective governance body Sistema’s Board meetings are held 12 meetings ZZ Telecom assets; in charge of oversight and strategic on a regular basis in accordance ZZ Consumer (retail) assets, including management of the Corporation. with the approved annual work plan e-commerce assets; of the Board of Directors, which is made Over the reporting period the Board ZZ Agricultural assets; Under Sistema’s Charter the responsibilities based on Sistema’s strategic planning of Directors considered the following key ZZ Timber processing and pulp and paper of the Board of Directors include: and reporting cycle. items: assets; ZZ Banking assets; ¡¡ Supervising the operations In 2018, the Board of Directors held 1. Sistema’s development strategy; ZZ Assets in financial services and VLADIMIR ANNA SERGEY of the Corporation in general; 12 meetings: eight scheduled in-person 2. Sistema Group’s strategic planning cycle; investment management in capital EVTUSHENKOV BELOVA3 BOEV ¡¡ Formulating strategic and financial 2 meetings and four unscheduled meetings 3. Investment policy, strategy of Sistema’s markets; Board Chairman Deputy Chairman of the Board development plans; of Directors until 31 March 2018 with absentee voting. The Board of Directors investment funds and priority areas for ZZ High-tech assets; ¡¡ Determining investment principles reviewed a total of 74 agenda items in 2018. investment in 2018-2019; ZZ Real estate assets; and criteria; ZZ Healthcare assets; ¡¡ Assessing management’s performance; ZZ Power grid assets; ¡¡ Defining corporate governance ZZ Hotel assets. principles; 5. Sistema’s results and performance ¡¡ Approving transactions and strategic against budget; projects in accordance with applicable 6. Budget planning, approval of the legislation and the Corporation’s internal consolidated budget of Sistema PJSFC regulations. ANDREY FELIX RON NUMBER OF IN-PERSON NUMBER OF ABSENTEE and management’s KPIs for 2018-2019; DUBOVSKOV EVTUSHENKOV SOMMER MEETINGS VOTES 7. Functional strategies (for financial THE COMPOSITION OF THE BOARD Deputy Chairman of the Board of Directors until 12 October 2018 management and financial planning, human resources management, The Board of Directors effective 8 4 corporate security, etc); as of 31 December 2018 was elected 8. Management of the Corporation’s risks; at the AGM held on 30 June 2018. 8 8 7 4 9. Report of the Internal Control and Audit Independent directors account for 45% Department; of the Board of Directors. 10. HR matters and employee incentive systems; 11. Assessment of corporate governance including the results of assessment of ROBERT JEANNOT ROGER 3 the Board of Directors and Committees KOCHARYAN4 KRECKÉ MUNNINGS5 of the Board of Directors of Sistema 2017 2018 2017 2018 PJSFC; 12. Corporate Social Responsibility; 13. Mandatory corporate procedures, 9% 45.5% NUMBER OF ITEMS IN ACCORDANCE ACTUAL NUMBER OF ITEMS including calling the AGM and developing WITH THE BOARD’S WORK PLAN REVIEWED BY THE BOARD the work plan of the Board of Directors; 14. Composition of Board Committees and determining the status of Board 48 74 members; 15. Approval of internal regulations; 46 48 81 74 MIKHAIL DAVID 16. Approval of transactions, including 6 11 MEMBERS SHAMOLIN IAKOBACHVILI acquisition of equity stakes.

1 Short bios and information on Members’ stakes in Sistema’s authorized capital is available in Appendix 1. 45.5% 2 Chairman of the Board and the Deputies were elected at the first Meeting of the Board on June 30th 2018. 2017 2018 2017 2018 3 A. Belova was elected to the Board of Directors based on the proposal of minority shareholders. 4 In line with Moscow Exchange listing rules, R. Kocharyan was deemed independent by Sistema. Information pertaining Independent directors to the decision is available on Sistema’s website. 5 In line with Moscow Exchange listing rules, R. Munnings was deemed independent by Sistema. Information pertaining Non-Executive directors to the decision is available on Sistema’s website. In line with Moscow Exchange listing rules, D. Iakobachvili was deemed independent by Sistema. Information pertaining Executive directors 6 to the decision is available on Sistema’s website. 90 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 91

SUBJECTS OF THE ITEMS Most of the items considered by the PREPARATION FOR MEETINGS ASSESSMENT OF THE WORK ¡¡ Organisation of the work of the Board CONSIDERED BY THE BOARD OF DIRECTORS IN 2018 Board of Directors in 2018 related to AND QUORUM OF THE BOARD OF THE BOARD OF DIRECTORS of Directors: content of agendas of the Corporation’s business strategy, OF DIRECTORS AND ITS COMMITTEES the meetings, quality and timeliness of value creation by its investments submission of materials, and quality of 10% 8% 5% 3% 32% in various industries, HR policy and Current preparation procedures for Board Assessment of the Board of Directors’ discussion at the meetings. approval of transactions (including meetings are designed to ensure best use performance is an important tool that helps shareholdings in companies). In light of the experience and expertise of Board identify areas where the work of the Board ¡¡ Functional areas of the Board’s work, of the goals of the Corporation for members. Materials on the agenda items of Directors may be improved. including strategic management, finance strategic and structural optimisation, are published on the Board’s electronic and internal control, HR policy and a substantial proportion of items portal at least 10 days before the meeting, In 2018, Sistema continued the practice corporate governance. regarding business strategy and which gives members sufficient time of an annual comprehensive assessment HR policy also focused on corporate to form an informed opinion on all agenda of the work of the Board of Directors and all As a result of the analysis of the Board’s governance at Sistema Group. items. Most agenda items (including its Committees. The assessment was carried performance the total score on a 5-point approval of transactions) undergo out in the form of a survey of members scale was 4.33 an improvement compared a mandatory preliminary review at meetings of the Board covering the following areas: to 4.16 score in 20161). Further increase of the Board’s Committees. in the quality of work with proposals ¡¡ Composition and structure of the Board and initiatives from the executive 11% 15% 16% The Corporation has introduced a procedure of Directors: number of Board members management team was indicated as an area of challenging speakers on key items and balance of their knowledge, skills for improvement. THE BOARD OF DIRECTORS of the Board’s agenda to enable Board and industry experience; Business strategies, investments and new business segments REVIEWED A TOTAL OF members (as a rule, independent members) Approval of transactions to conduct an in-depth review of materials Appointments and HR policy and hold discussions with management. Financial reporting, planning and audit 74 agenda items This makes it possible to increase the involvement of Board members Corporative governance and securities in the development of the Corporation’s Shareholding in portfolio companies, groups, JVs; branches strategy. Functional strategies THE AVERAGE QUORUM Approval of internal documents Meetings of Sistema’s Board of Directors OF MEETINGS usually have a high attendance rate: the average quorum of meetings in 2018 was 95.5%. 95.5%

30 24 11 12 4 11 7 8 14 7 8 6 5 4 2 2

PARTICIPATION OF BOARD MEMBERS IN MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES IN 2018

Board of Directors Strategy Committee Audit, Finance and Nomination, Ethics and Control Investor Relations Risk Committee Remuneration and Committee and Dividend Policy Corporate Governance Committee Committee Attendance 2 V. Evtushenkov 12/12 12/12 A. Belova 12/12 13/14 7/8 5/5 S. Boev 11/12 8/12 10/10 8/8 A. Dubovskov 12/12 10/12 F. Evtushenkov 9/12 9/12 6/8 R. Sommer 12/12 5/12 14/14 10/10 R. Kocharyan 11/12 6/12 9/10 7/8 J. Krecké 12/12 14/14 5/5 Shareholding Business strategies, Corporative R. Munnings 12/12 14/14 10/10 8/8 5/5 Approval of Appointments Financial reporting, in portfolio Functional Approval of internal investments and new governance transactions and HR policy planning and audit companies, groups, strategies documents M. Shamolin 11/12 10/12 business segments and securities JVs; branches D. Iakobachvili 12/12 5/12 13/14 8/10 5/5

1 In 2016 and 2018, the Board of Directors was assessed according to the same methodology, which makes it possible to compare the results of analysis. 2 The first number shows the number of meetings attended by the Board member, the second number is the total number of meetings. 92 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 93

COMMITTEES Strategy Audit, Finance Nomination, Remuneration Ethics and Control Investor Relations OF THE BOARD OF DIRECTORS Committee and Risk Committee and Corporate Governance Committee and Dividend Policy Committee Committee3 SISTEMA HAS Functions Functions ZZ Analysis of strategic management issues ZZ Facilitating and supervising the processes ZZ Facilitating the development of an efficient ZZ Forming an efficient system of economic and ZZ Strengthening the Corporation’s of Sistema Group; of preparing and auditing the Company’s corporate governance system meeting corporate security; investment case; 5 committees ZZ Reviewing the strategy planning financial statements; international standards at the Corporation ZZ Monitoring compliance with the ZZ Supporting effective relations with the methodology; ZZ Assessing the quality of audit services and its portfolio companies; requirements of the Ethics Code of the financial community; of the Board of Directors: ZZ Reviewing M&A transactions with a value based on the audit of Sistema’s financial ZZ Preliminary review of candidates: Corporation; ZZ Developing Sistema’s dividend policy, exceeding USD 100m; statements and making preliminary ¡¡ for the Board of Directors of Sistema ZZ Introducing a system for preventing including recommendations for the ¡¡ Strategy Committee; ZZ Reviewing Sistema Group’s investment recommendations to the Board of PJSFC; corruption and fraud and other misconduct Corporation’s Board of Directors with ¡¡ Audit, Finance and Risk Committee; projects related to entry into new Directors with respect to the selection of ¡¡ for the boards of directors of portfolio related to violations of applicable legislation respect to the amount of payable ¡¡ Nomination, Remuneration and geographies or industries and projects RAS and IFRS auditors; companies; at Sistema Group companies. dividends; Corporate Governance Committee; with significant state ownership. ZZ Assessing the risk management system ¡¡ for senior management positions at the ZZ Protection of the rights and interests of ¡¡ Ethics and Control Committee; and ensuring compliance with applicable Corporation and its portfolio companies; Sistema’s shareholders. ¡ ¡¡ Investor Relations and Dividend Policy legal requirements in financial reporting, ¡ for the position of the Corporation’s audit and planning; Corporate Secretary; Committee. ZZ Provisional appraisal of transactions ZZ Development of the Corporation’s submitted to the Board of Directors; incentive and remuneration policies; The main role of the Committees is to assist ZZ Budgeting and financial modelling. ZZ Organising the assessment of the the Board in preparation and adoption performance of the Board of Directors. of decisions in specific functional areas, as well as to ensure prior in-depth scrutiny of matters put forward for consideration Composition Composition by the Board of Directors. V. Evtushenkov (Committee Chairman) R. Munnings (Committee Chairman)1 R. Kocharyan (Committee Chairman) F. Evtushenkov (Committee Chairman) A. Belova (Committee Chairwoman) S. Boev A. Belova S. Boev A. Belova J. Krecké A. Dubovskov R. Sommer R. Sommer S. Boev R. Munnings F. Evtushenkov J. Krecké1 R. Munnings R. Kocharyan D. Iakobachvili 8 R. Sommer D. Iakobachvili D. Iakobachvili R. Munnings The status, procedures for nominating R. Kocharyan members, responsibilities and decision- M. Shamolin making processes of the Board’s D. Iakobachvili Committees are regulated by the Terms Director participation2 Director participation2 of Reference of the relevant committees as approved by the Board of Directors and published on the Corporation’s website in the Corporate Documents section http:// 25% 62% 13% 80% 20% 60% 40% 60% 40% 100% www.sistema.ru/o-kompanii/korporativnoe- upravlenie/korporativnye-dokumenty/. Number of meetings in 2018 Number of meetings in 2018 12 14 10 8 5 Topics discussed Topics discussed ZZ Value creation by the Corporation’s ZZ Assessment of the quality of audit ZZ Development of corporate governance at ZZ Performance of the Internal Control and ZZ Communications and interaction with investments in various industries; services, results of the tender Sistema Group, including the structural Audit Department in 2017 and work plan for minority shareholders; ZZ Investment projects; for provision of audit services, transformation of the Corporate Centre; 2019; ZZ Amount of dividends and dividend policy ZZ Strategic management and planning recommendations for the Board of ZZ Incentive system and key parameters, ZZ Results of ethics assessment of the of the Corporation; system. Directors on appointing an external performance assessment and bonuses Corporation’s employees; ZZ The Corporation’s charity strategy auditor; for the key managers and employees of ZZ Compliance system at Sistema; ZZ Market analysis and monitoring, ZZ Review and approval of the Corporation’s Sistema; ZZ System for preventing fraud and corruption perception of Sistema by the investment quarterly and annual financial reports, the ZZ HR process and preview of candidates to at Sistema. community. annual report, annual budget and report top management positions at Sistema and on performance against the Corporation’s nominees to the boards of directors of the budget; key portfolio companies. ZZ Review of management’s reports on risk management at Sistema, risk maps and 1 R. Munnings and J. Krecke, both part of the Committee, are experts in finance and audit with many years of experience mitigation plans; in the sector. ZZ Preliminary review and evaluation of 2 transactions to be submitted to the Board Independent of Directors. Non-Executive Executive 3 The President of Sistema PJSFC attends Committee meetings in the capacity of a permanent invitee and does not vote on the matters submitted for consideration of the Committee. 94 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 95

PRESIDENT MANAGEMENT BOARD MEMBERS OF THE MANAGEMENT BOARD OF SISTEMA PJSFC AS OF 31 DECEMBER 2018 The President is a permanent chief The Management Board of Sistema PJSFC executive officer whose main tasks determines methods for implementation 1. Andrey Dubovskov President, Chairman of the Management Board include managing the current of the Corporation’s development strategy, 2. Igor Alyoshin Vice President for Security operations of the Corporation formulates development plans, determines 3. Alexey Guryev Vice President for HR 4. Artyom Zasursky Vice President for Strategy and dealing with matters outside and monitors investment processes 5. Alexey Katkov Managing Partner the remit of the General Meeting of and previews most matters subsequently 6. Oleg Mubarakshin Managing Partner submitted to the Corporation’s Board shareholders, the Board of Directors Andrey Dubovskov 7. Andrey Pilipenko Vice President for Government Relations and the Management Board, with the of Directors. Born in Alma-Ata (now Almaty) in 1966. 8. Vsevolod Rozanov Managing Partner aim of ensuring the Corporation’s 9. Artyom Sirazutdinov Managing Partner In 1993, graduated from the Gerasimov Institute of Cinematography. profitability and safeguarding 10. Joshua Tulgan Vice President for External Relations the rights and legitimate interests Has extensive experience in telecoms companies: since 1993, held MANAGEMENT BOARD CONSISTED OF 11. Vladimir Travkov Vice President for Finance and Investment of its shareholders. The President multiple managerial positions at Millicom International Cellular S.A., 12. Ali Uzdenov Managing Partner reports to the Board of Directors Millicom International Cellular B.V., LLC Regional Cellular 13. Sergey Shishkin Vice President for Corporate Governance and Legal Matters and General Meeting of shareholders Telecommunications, CJSC 800, and other companies in Moscow, 14 members 14. Maxim Yanpolsky Managing Partner of Sistema PJSFC. The President Alma-Ata, Nizhny Novgorod, Yekaterinburg, Perm and Kiev. performs the functions of chairman of the collective executive body 2002–2004 – CEO, Tele2 (Nizhny Novgorod). In 2018, the Management Board held 5. Sistema’s functional strategies; (Management Board). 11 meetings and reviewed 43 agenda items 6. Budget execution, budget planning and In 2004, joined OJSC MTS as head of the company’s Nizhny in the following key areas: key performance indicators; On 13 March 2018, the Board Novgorod branch. 7. Debt and liquidity management; of Directors approved Andrey Dubovskov’s 1. Sistema’s development strategy; 8. Sistema’s corporate social responsibility; appointment as President and Chairman 2006–2007 — Director of the MTS Ural Macroregion. 2. Management strategy and structure of 9. Review of specific transactions. THE MANAGEMENT BOARD HELD of the Management Board of Sistema PJSFC Sistema’s investment funds; for a three-year term. In 2007, became First Deputy CEO of CJSC UMS (MTS Ukraine); 3. Sistema Group’s strategic planning cycle; In April 2018, the powers of the previously in 2008, appointed head of the MTS Ukraine business unit. 4. Development strategy, value creation elected Management Board were terminated, 11 meetings and monetisation of Sistema’s and the Board of Directors approved a new 2011–2018 — President of PJSC MTS. investments in various industries; Management Board for a three-year term. and reviewed 43 agenda items

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

Member of the Board of Directors of Sistema PJSFC and the Board of Trustees of Sistema Charitable Foundation. CHANGES TO SISTEMA’S MANAGEMENT BOARD IN 2018

12 March 13 March M. Shamolin A. Dubovskov terminated appointed 01.01 01.02 01.03 01.04 01.05 01.06 01.07 01.08 01.09 01.10 01.11

President, Chairman of the Board

01 April 02 April 24 July 07 September 24 September A. Gorbunov I. Alyoshin J. Tulgan A. Pilipenko M. Yanpolsky F. Evtushenkov A. Katkov appointed appointed appointed L. Monosov V. Travkov M. Cherny appointed E. Chuikov V. Shukshin terminated 01.01 01.02 01.03 01.04 01.05 01.06 01.07 01.08 01.09 01.10 01.11

Members of the Board 96 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 97

COMMITTEES REPORTING TO THE PRESIDENT AND THE MANAGEMENT BOARD FINANCE AND INVESTMENT RISK TENDER COMMITTEE COMMITTEE COMMITTEE To improve management decision- making, Sistema has committees The responsibilities of the Finance and Investment Committee include: Expert Council The Risk Committee’s responsibilities The responsibilities of the Tender Committee that report to the President include: include: and the Management Board, ZZ Review of the Corporation’s investment ZZ Recommendations regarding feasibility An Expert Council reports to the Finance namely the Finance and Investment projects at different stages from of projects, exit scenarios and sources of and Investment Committee and considers ZZ Assessment of risks facing the ZZ Organising tenders for goods, works, Committee, the Risk Committee conception to completion; financing; all of the Corporation’s new investment Corporation and its portfolio companies; and services; and the Tender Committee. ZZ Approval of financial models, business ZZ Review of external financing terms. ideas and projects for acquisitions of assets ZZ Ensuring preparation of a risk register ZZ Ensuring acquisition of goods, plans and key performance indicators of in new and related industries, as well and a generalised risk map of Sistema; works, and services and sale of the These committees are permanent investment projects; as in industries where Sistema already has ZZ Preparation of proposals regarding Corporation’s property on the best terms consultative collective bodies tasked a presence. acceptable risk level for Sistema available; with detailed analysis of current (Sistema’s risk appetite); ZZ Ensuring transparency of purchasing affairs and processes within their ZZ Coordination of risk management procedures; remit and with assisting the President action plans and monitoring of their ZZ Facilitating prevention of corruption and the Management Board implementation. and other wrongdoing in purchasing. in decision-making.

THE COMMITTEE CONSISTS OF THE EXPERT COUNCIL CONSISTS OF THE COMMITTEE CONSISTS OF THE COMMITTEE CONSISTS OF

10 members 13 members 10 members 7 members

As of 31 December 2018, the Chairman The Deputy Chairman was As of 31 December 2018, As of 31 December 2018, As of 31 December 2018, of the Committee was the Corporation’s VLADIMIR TRAVKOV, the Chairman of the Expert Council was the Chairman of the Committee was the Chairman of the Committee was chaired President ANDREY DUBOVSKOV Vice President for Finance and Investment ARTYOM ZASURSKY, VLADIMIR TRAVKOV, by VLADIMIR TRAVKOV, Vice President for Strategy. Vice President for Finance and Investment. Vice President for Finance and Investment.

IN 2018, IN 2018, IN 2018, IN 2018, THE COMMITTEE HELD THE EXPERT COUNCIL HELD THE COMMITTEE HELD THE COMMITTEE HELD

30 meetings 12 meetings 5 meetings 24 meetings 98 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 99

SPECIFIC CHARACTERISTICS OF INTERNAL CONTROL SYSTEM ¡¡ The Finance and Investment Committee 3. Enhancing awareness among the In 2018, the Internal Control and Audit Ethics assessment makes it possible RISK MANAGEMENT, INTERNAL of the Corporation approves and Corporation’s management team about Department conducted 49 audits to assess to identify and manage conflicts of interests CONTROL AND INTERNAL AUDIT The Internal Control Policy was approved monitors the implementation of the performance of Sistema Group the effectiveness of the Corporation’s in a timely manner, thus preventing SYSTEMS by the Corporation’s Board of Directors investment projects; companies; internal control, risk management shareholders’ interests from being and is an internal top level document ¡¡ The Discipline Committee reviews 4. Monitoring achievement of the goals and corporate governance systems. Audits compromised. RISK MANAGEMENT describing the key principles of internal matters related to breaches of the Ethics of shareholders of the Corporation and performed by the Internal Control and Audit control as a continuous and integrated Code and disciplinary offences; Sistema Group companies. Department did not uncover any weaknesses EXTERNAL AUDIT Sistema’s risk management system employs process that involves all units ¡¡ The Security Department is responsible or risks that could affect the sustainability a two-level approach, under which the risks and governance bodies of the Corporation. inter alia for economic security, To meet these objectives, the Internal of the Corporation’s business as a whole. In compliance with the decision identified at Sistema and its portfolio prevention of corruption, and information Control and Audit Department carries out of the Audit, Finance and Risk Committee, companies are consolidated to assess their The key objectives of the internal control security. the following functions: Regular reports on the results of the work the Corporation uses the following impact on Sistema Group as a whole. system are: of the Internal Control and Audit Department procedures to appoint the independent ZZ Level 3: ZZ Performing independent audits of are reviewed by the Audit, Finance auditors of Sistema’s financial statements. The enterprise risk management system 1. Creating control mechanisms that will The Internal Control and Audit Department individual operations, processes and and Risk Committee and Ethics and Control The Committee performs an annual (ERM) used in the Corporation addresses ensure efficient business processes and conducts independent assessments units; Committee of the Board of Directors, assessment of the quality of audit the following tasks: the implementation of the Corporation’s of the efficiency of the internal control ZZ Assessing the effectiveness of the and are also submitted for consideration services received. If the quality of services investment projects; system, as well as risk management internal control system; by the Board of Directors at the end provided by the current auditor is deemed ZZ Identification of risks at all levels of 2. Ensuring the safety of the Corporation’s and the corporate governance procedures. ZZ Assessing the effectiveness of the risk of the year. insufficient, the Audit Committee organises the management (from the top to line assets and efficient use of its resources; management system; a tender to hire a new auditor. If the quality management), which includes identifying 3. Protecting the interests of the All of the Corporation’s employees ZZ Assessing the effectiveness of the RESOLUTION OF CONFLICTS is deemed sufficient, Sistema negotiates risk owners and making risk passports; Corporation’s shareholders and in charge of various control procedures corporate governance system, OF INTEREST the price of services with the current ZZ Primary assessment of the materiality of preventing and resolving conflicts of bear responsibility for the efficiency of such preventing violations of legislation auditor for the following period. According identified risks and their analysis (VaR interest; controls and risk management activities and the Corporation’s regulations, Matters related to conflicts of interest to the decision of the Audit, Finance and Risk methodology); 4. Creating conditions for timely as prescribed in their job descriptions ensuring observance of professional are governed by the Corporation’s Code Committee, a tender for external audit ZZ Ranging risks by management levels; preparation and submission of reliable and internal regulations. and ethical standards and preparing of Ethics. The Corporation has an ethics services should be held at least every five ZZ Assessment of the aggregate influence reports and other information that is recommendations for improving them; assessment procedure: all top managers years to ensure the auditor’s impartiality of material risks on the Corporation’s legally required to be publicly disclosed; INTERNAL AUDIT ZZ Developing recommendations to remedy of the Corporation annually (or as conflicts and objectivity. key financial indicators (Monte Carlo 5. Ensuring the Corporation’s compliance deficiencies identified and monitoring of interest arise) fill out Ethics and Conflict modelling); with applicable laws and requirements The body in charge of internal control execution of remedial actions; of Interest Declarations. All new employees ZZ Development of plans to mitigate of regulators. at the Corporation and the companies ZZ Monitoring compliance with procurement must complete the training course and learn identified risks at all management levels; of Sistema Group is the Internal Control procedures; the requirements of the Code of Ethics ZZ Regular monitoring of performance In accordance with the «three lines and Audit Department, which reports ZZ Administering the Hotline and ethics and the procedure to fill out the Declaration. against mitigation plans and assessment of defence» principle, the efficiency to the Board of Directors (functionally) assessment. of their effectiveness; of the Corporation’s internal control and Sistema’s President (administratively). In 2018, the Corporation held its ZZ Risk monitoring, quarterly reports on system is ensured at three levels The head of the Department is appointed The Internal Control and Audit Department ethics assessment for the third time. risks facing the Corporation. (in addition to the Board of Directors and dismissed by the President based has all the resources and powers required The results were reviewed by the President and the Corporation’s senior management): on resolutions passed by the Corporation’s to perform the above functions. and the Ethics and Control Committee Sistema’s risk management procedures are Board of Directors following preliminary of Sistema’s Board of Directors. In most carried out by a dedicated risk management ZZ Level 1: approval by the Board’s Ethics and Control The Internal Control and Audit Department cases, declared conflicts of interest were not unit. Heads of subdivisions and employees Committee. works closely with independent confirmed and did not require any resolution of the Corporation are responsible auditors, coordinates audits and offers measures. However, action plans on conflict The Corporation’s risks are monitored for assessing and managing risks The main objectives of the Internal Control consultations in the course of preparing resolution were implemented with respect on a quarterly basis by Sistema’s and building an efficient internal control and Audit Department are: the Department’s annual audit plans to several declarants in accordance with best Management Board and Risk Subcommittee, system within their remit; with regard to assessment of the efficiency corporate governance practice. which review the effects of mitigation 1. Helping shareholders and management of internal controls applied to financial and response measures taken and reassess ZZ Level 2: improve the internal control system statements, as well as during discussions persisting and/or new risks. At this level, the function is performed by performing regular audits of the and assessment of identified risks. by several subdivisions and Committees efficiency of the Corporation’s internal Sistema’s senior executives make of the Corporation. For example: control, risk management and corporate regular reports on risk management ¡¡ The risk management function and the governance systems; at the Corporation to the Audit, Finance Risk Subcommittee are responsible 2. Supplying management and and Risk Committee. The annual report for developing and monitoring the shareholders with objective information is submitted to the Board of Directors implementation of an effective risk on existing internal risks and their of Sistema PJSFC. management practice; probability; 100 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 101

CORPORATE GOVERNANCE DEVELOPMENT OF MANAGING PARTNERS INCENTIVE SYSTEM PLANS FOR DEVELOPMENT ACROSS SISTEMA GROUP THE CORPORATE GOVERNANCE OF CORPORATE GOVERNANCE SYSTEM IN 2018 In 2018, Sistema adopted a partnership In 2018, a new long-term incentive The quality of strategic planning management model that allows key programme (over one year) The Nomination, Remuneration and investment appeal of Sistema’s portfolio INDEPENDENT DIRECTORS executives (Managing Partners) to share for the Corporation’s employees was and Corporate Governance Committee companies depends, inter alia, on the quality ON THE CORPORATION’S BOARD the risks and returns from investment developed and approved — the Option of Sistema’s Board of Directors each of the corporate governance procedures. OF DIRECTORS activities with shareholders. Managing Plan. The main focus of the Option Plan year develops and approves an action To increase the value of its investments Partners are fully responsible is increasing the Corporation’s market plan for improving corporate governance Sistema pays special attention to improving In 2018, 11 members were elected for implementation of the investment capitalisation, and the remuneration of key at Sistema in the following year. The plan the quality of corporate governance at its to the Corporation’s Board of Directors. Five strategies of their portfolio companies, employees is linked to this. for 2019 envisages the following activities: portfolio companies. of them qualify as independent directors including the creation and maintenance or are recognised as independent according of effective corporate governance systems. Participants in the Option Plan are granted 1. Introducing changes to the system of The Corporation aims to carry out to Moscow Exchange’s Listing Rules In most cases, Sistema’s Managing Partners the right to receive a certain share remuneration payable to members strategic management of its key portfolio and the Russian Corporate Governance Code. chair the boards of directors of their of the amount of any increase in market of the Board of Directors in order to companies through their boards of directors respective portfolio companies. capitalisation. The programme is designed harmonise it with the incentive system by including professional independent The current Board includes the following for four years and represents a mechanism for senior management (in the first half members with expertise in the companies’ independent directors: Incentives offered to Managing Partners that directly links the goals of Sistema’s of 2019); industries, as well as in strategy, are linked to increasing Sistema’s market shareholders and managers. 2. Introducing changes to the Corporation’s finance, audit and corporate governance. ¡¡ Anna Belova; capitalisation, maximising the value of assets internal documents regulating the Independent directors account for about ¡¡ Robert Kocharyan; under management and monetisation, A new version of the Policy on Remuneration activities of its governing bodies in order one-third of members of the boards of key ¡¡ Jeannot Krecké; and raising outside capital under and Compensations for Members to integrate new provisions of corporate portfolio companies (depending on the level ¡¡ Roger Munnings; management. Managing Partners co-invest of the Board of Directors will be submitted law (in the first half of 2019); of the company’s organisational maturity). ¡¡ David Iakobachvili. in their portfolio assets, thereby sharing for consideration by the General Meeting 3. Improving the management structure of risks with the Corporation. of shareholders in 2019, and will link the Corporation’s investment funds and The Corporation continuously improves All of the Corporation’s independent the amount of additional remuneration determining the remuneration policy for its corporate governance system directors have extensive experience RELATIONS WITH MINORITY of members of the Board of Directors to any the funds’ management (during 2019); in order to increase efficiency and remain in managing large organisations and strong SHAREHOLDERS increase in Sistema’s market capitalisation 4. Formalising a succession plan for key in line with best practice. Improving professional reputations. They are therefore in the reporting year. managers of the Corporation (during the quality of corporate governance able to exercise independence in their A page for shareholders’ questions has 2019). processes at portfolio companies judgements and freedom from the influence been created on the Corporation’s website and attracting competent professionals of the Corporation’s management in the Investors & Shareholders section. Any to their boards of directors is designed and shareholders when making decisions. shareholder or potential investor interested to increase the quality of decision-making in information about the Corporation can and the shareholder value of Sistema’s Roger Munnings and Jeannot Krecké, submit questions using the electronic form portfolio assets. as members of the Audit, Finance and Risk and get answers. That page also provides Committee, are experts in finance and audit answers to frequently asked questions. Boards of directors of portfolio companies with extensive relevant experience. ensure control and coordination, and support management in decision-making Independent directors are directly involved in the following functional areas: in discussing and formulating the strategy of the Corporation. For this purpose, working ZZ Strategy and key transactions; groups headed by independent members ZZ Budget planning; of the Board and including representatives ZZ HR policy; of the Strategy Function and the Finance ZZ Internal audit. and Investment Function are established to formulate substantiated positions of the Board of Directors on strategic issues related to development of the Corporation. 102 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 103

REMUNERATION POLICY For the purpose of calculating the number COMPENSATIONS AND OTHER LONG-TERM INCENTIVE SYSTEM of the Corporation’s shareholders Other terms and conditions APPLIED TO BOARD MEMBERS of shares to be transferred to members CONDITIONS and senior executives in terms of long-term OF SISTEMA PJSFC of the Board of Directors, the amount In 2018, a new long-term (more than management and development of portfolio No extra compensation above the level of remuneration in monetary terms is equal Members of the Board of Directors are 1 year) incentive programme for Sistema’s companies by granting rights to acquire stipulated by Russian labour legislation is paid Remuneration for the work of members to the amount of basic remuneration less reimbursed for expenses incurred during employees was developed and approved – participation interests in the Corporation’s to the President or other senior executives of the Board of Directors is calculated applicable taxes, and the weighted average performance of their duties, including the Option Plan. The main focus of the Option privately held portfolio companies in case of termination of employment. and paid in accordance with the Policy price of one share is calculated based participation in meetings of the Board Plan is increasing the Corporation’s market with growth prospects. on Remuneration and Compensations on the price of the Corporation’s global of Directors and Board Committees. capitalisation. Participants of the Option Sistema does not pay remuneration Payable to Members of the Board depositary receipts during the month Plan are granted the right to receive The Co-Investment Programme is designed to executive management for serving of Directors of Sistema PJSFC1. preceding the date of the Annual General Sistema PJSFC insures the liability a share of the amount of increase in market for the President, heads of departments, on the Management Board. Meeting of shareholders. of members of the Board of Directors. capitalisation. The programme is designed as well as employees of the Corporation BASIC REMUNERATION OF MEMBERS for four years and represents a mechanism who hold positions not lower than Executive The Corporation does not provide loans OF THE BOARD OF DIRECTORS In 2019, the General Meeting of shareholders Sistema PJSFC does not provide loans that directly links the goals of Sistema’s Director or Senior/Chief Investment Director. to senior executives. of the Corporation will be asked to approve to members of the Board of Directors. shareholders and managers. Basic remuneration of members a new version of the Policy on Remuneration Participants of the Co-Investment Programme of the Board of Directors amounts and Compensations Payable to Members REMUNERATION POLICY APPLIED Co-investment programme use their own funds to acquire: to RUB 13.7m or RUB 17.8m per year of the Board of Directors of Sistema TO SENIOR MANAGEMENT OF depending on whether a director is a tax PJSFC in which the terms of payment SISTEMA PJSFC In 2016, the Board of Directors approved ¡¡ Shares/interests in Sistema’s portfolio resident of Russia. Basic remuneration and the amount of additional remuneration a programme enabling Sistema’s senior companies; and/or is paid to Board members in cash in equal are harmonised with the long-term SHORT-TERM INCENTIVE SYSTEM managers to co-invest in the Corporation ¡¡ Ordinary shares in Sistema PJSFC. quarterly instalments. management incentive scheme. Additional and/or its portfolio companies (“the Co- remuneration will be payable only The short-term (up to 1 year) incentive scheme Investment Programme”). The Co Investment The amount of co-investment is limited by one SUPPLEMENTARY REMUNERATION subject to growth of Sistema’s market for the top managers of Sistema PJSFC Programme is designed to align the interests average annual income of a participant. OF MEMBERS OF THE BOARD capitalisation in the relevant financial year. in 2018 consisted of: OF DIRECTORS The amount of additional remuneration is set as a variable amount equal to 0.1% or 0.125% ¡¡ A fixed monthly salary determined in line In accordance with the Policy (depending on tax residency) of the increase with the internal system of job categories on Remuneration and Compensations in capitalisation for the financial year, but (grades); REMUNERATIONS PAID TO SISTEMA’S BOARD MEMBERS AND SENIOR MANAGEMENT IN 20183 Payable to Members of the Board in any case not higher than the amount ¡¡ Bonuses paid for project implementation Members of Sistema’s Board of Directors received the following remuneration in 2018: of Directors of Sistema PJSFC effective of basic remuneration less applicable taxes. and generating cash income. in 2018, additional remuneration of members Remuneration is paid based on employees’ 2018 2017 REMUNERATION FOR PERFORMANCE of the Board of Directors is paid once individual performance and positive cash Cash remuneration OF ADDITIONAL DUTIES a year in the form of ordinary shares flow generated by projects implemented Remuneration for work on the Board of Directors and fulfillment of additional duties, as well as salary of Sistema PJSFC subject to achievement by the teams of Managing Partners and and bonus following the results of 2018 for those members of the Board of Directors who were also of the Corporation’s investment targets Board members who perform additional Departments of Sistema. Payments may Sistema employees in 2018.4 RUB 432,497,258 RUB 320,193,625 in the reporting year: (i) the arithmetic mean duties, i.e., the Chairman of the Board, amount to up to 20% of cash income. Remuneration in the form of ordinary shares of Sistema PJSFC 2 of TSR and iTSR exceeds or equals CoE , Deputy Chairman of the Board and Chairmen Remuneration to members of the Board of Directors based on the results of work in the 2017-2018 or (ii) TSR exceeds or equals the amount of the Board Committees, receive For the purpose of calculating bonuses, cash corporate year, as well as remuneration under the long-term incentive program for those members 4 5 of change of the MSCI index (ΔMSCI), remuneration on a quarterly basis income means the increase in the value of the Board of Directors who were also Sistema employees in 2018. — RUB 218,287,983 provided that iTSR exceeds or equals in the amount stipulated by the Policy of an asset (in case of an asset sale or an IPO) CoE. The number of ordinary shares on remuneration and compensations payable or the amount of dividends (in case of dividend Reimbursement of expenses incurred by Board members in connection with their duties RUB 1,191,028 RUB 2,477,710 to be provided to members of the Board to members of the Board of Directors payment), net of the following amounts: Members of Sistema’s Management Board6 received the following remuneration in 2018: of Directors is calculated using the following of Sistema PJSFC. formula: ¡¡ A hurdle rate determined by the Finance 2018 2017 and Investment Committee of the Cash remuneration 7 Amount of remuneration in monetary terms Corporation prior to the commencement of The amount includes fixed salaries and bonuses. RUB 1,705,947,9278 RUB 1,768,437,846 a project or the acquisition of an asset; Remuneration in the form of ordinary shares of Sistema PJSFC Weighted average price of one share ¡¡ Investment in an asset and project costs. 9 The shares transferred under the long-term incentive programme. — RUB 245,821,873

3 All figures in this section are given before the applicable income tax. 4 Excluding members of Sistema’s Board of Directors who were members of its Management Board. 5 Additional remuneration in the form of shares was not paid to members of the Board of Directors in 2018 due to non-compliance with the conditions for its payment established by the Policy on Remuneration and Compensations Payable to Members of the Board of Directors of Sistema PJSFC. 6 Including the President of Sistema PJSFC. 7 Bonuses for 2018 were paid to Sistema’s employees in February 2019. 1 Approved by the General Meeting of shareholders on 27 June 2015. 8 In February 2019, members of the Management Board spent part of their cash bonuses for 2018 to purchase ordinary shares of the Corporation, which is consistent with Sistema’s strategy to 2 This investment target was not achieved in 2018, since TSR was -32.9% and iTSR was -7%, while CoE was 17% and ΔMSCI was -5.5%. CoE represents the minimum level of return that a company increase the shareholding of its employees in the Corporation. Members of the Management Board and other employees of Sistema PJSFC purchased a total of 19,669,389 shares in the Corporation. must provide to its shareholders for the expectation of profit and risk. CoE is calculated as the sum of risk-free returns (such as government bonds) and the risk premium associated with investing 9 Remuneration in the form of shares was not paid to members of the Management Board in 2018 due to non-compliance with the conditions for its payment established by the Corporation internal in the stock market, taking into account the capital structure of the asset in question and country risk. regulations. 104 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 105 Risks

ENTERPRISE RISK MANAGEMENT One of the key principles of risk management ¡¡ the Group must maintain high credit GLOBAL AND COUNTRY INDUSTRY Servicing of the Corporation’s current  AND RISK APPETITE in Sistema Group is to take proper account ratings as assigned by international RISKS RISKS and future debt may require substantial of risk appetite. This approach implies rating agencies. amounts of cash. If sanctions are maintained Sistema defines risks as adverse processes identifying and monitoring the Corporation’s These are risks associated with changes These are risks related to Sistema’s over the medium term and Russian and factors over which it has little or no target risk profile in accordance Risk management reports are submitted in Russia’s political and economic involvement in various industries. The most banks and businesses continue to have influence. However, the Corporation can with its strategic goals and in the context for review to the relevant collective environment. Although most of Sistema’s material risks in this category are those restricted access to foreign debt, this take measures to reduce the negative of their integration into risk management governance bodies of the Corporation business is carried out in Russia, some associated with the telecoms business, may significantly increase the current consequences of such factors should procedures. at least once a quarter. Each risk companies are also present in other power generation, retail, hospitality, liquidity deficit in the market and result a certain risk occur. This makes management report contains a revaluation countries of the CIS, as well as the EU, healthcare, pharma, the forest products in a further increase in interest rates, efficient assessment of existing risks Sistema Group’s risk appetite determines of risks and their impact on the Corporation’s Turkey and India. Many of their products industry, agriculture and real estate. making it difficult for Sistema Group to raise and the probability of their occurrence, the level of risk that is acceptable financials, an assessment of the effectiveness are sold in other CIS markets, Southeast funding for its operations and to refinance as well as efficient risk management, for shareholders, and includes the following of risk mitigation and response plans, Asia, Eastern Europe and North Africa. SISTEMA’S the debt of the Corporation and its portfolio  an important part of Sistema’s strategy. basic provisions: and potential risk areas (areas of concern) In the event of any major political turmoil EXTERNAL RISKS companies. Should the Corporation prove identified for future periods. in these regions, the Group’s business may unable to obtain sufficient funding when Risk management is part of all ¡¡ the amount of potential losses be discontinued or put on hold, which may FINANCIAL RISKS and how required, it may face significant processes at Sistema, and is integrated under the risks accepted by Sistema The Corporation’s long-established common lead to material losses. The company’s barriers to business development as well into strategy planning and execution, Group must not reach a level leading compliance system serves to mitigate anti- businesses may also potentially suffer Sistema’s business is inextricably connected as to its operating and investment activities. the investment process, budgeting, to the termination of the Group’s corruption, anti-monopoly, stock exchange from the imposition of additional sanctions, to the global economy and financial markets, procurement and day-to-day operations. operations, including under stressed and sanctions compliance risk, as well a full freeze on imports and/or exports and is sensitive in particular to movements An unfavourable macroeconomic The enterprise risk management (ERM) conditions; as risks relating to security of personal data, in the event of political changes, and military in prices for oil, gas, and other commodities environment in many countries where system operating at Sistema was built confidential information, and prevention conflicts involving Russia. that Russia exports. Further weakening Sistema’s assets operate may make it in compliance with international standards ¡¡ the cash flows of Sistema Group of money laundering and financing of the rouble against the US dollar necessary to re-evaluate goodwill at some and recommendations, as well as best risk companies must be sufficient to of terrorism. Recent developments in Ukraine have and the euro amid a slump in the oil prices of the assets. management practices. It is designed to keep guarantee timely fulfilment of obligations caused Western countries to impose and sanctions being imposed on Russia risks at a level acceptable to Sistema’s to counterparties in the short and long Below is provided a description of key risks sanctions on several Russian individuals may result in a rise in costs and a drop Currency control and restrictions on capital shareholders and management. term; covered in Sistema’s ERM system. and companies. The potential remains in revenues or impede the achievement repatriation may adversely affect Sistema’s for the sanctions list to be extended of financial targets and repayment of debt business by posing barriers to capital As part of quarterly ERM procedures, ¡¡ in its operations, the Group aims to avoid to include more names or introduce new by Sistema Group companies. flows, and reduce the value of Sistema’s the risk managers of Sistema Group: any increased concentration of risk by categories of sanctions, which could investments in Russia. counterparty, industry and region; affect some companies of the Group An exodus of foreign investors from Russia, ¡¡ compile risk registers for subsidiaries or their management. Any further increase as well as restrictions introduced on foreign The bankruptcy of any of the Russian banks and a consolidated risk register for ¡¡ the Group must be able to support in tensions between Russia and other companies in Russia as a result of sanctions, with which Sistema routinely cooperates may the Group; sustainable growth and economic countries, as well as any escalation may have a negative impact on Sistema result in a reduction in sources of borrowing efficiency in the long term; of related conflicts, potential new sanctions, Group’s joint ventures (partnerships) for the Corporation and portfolio companies, ¡¡ prioritise risks and aggregate them into or continuing uncertainty as to the scale and new investment projects. and may lead to direct losses of funds portfolios; ¡¡ all members of the Group must comply of any such sanctions, may adversely impact deposited in the accounts of such banks. with the requirements of national Russia’s economy, the financial status A rise in inflation may result in higher ¡¡ assess the probability and materiality of regulators in countries where they of the Group’s partners and suppliers, expenses and therefore put pressure all risks; operate, as well as the standards and the Group’s ability to undertake commercial on profit margins, and also affect demand recommendations of international and financial activities and obtain funding in Russia for products and services ¡¡ study the impact that material risks authorities; on commercially reasonable terms, of Sistema Group companies. have on the financial results of specific and the volatility of Sistema’s securities. subsidiaries and Sistema Group as ¡¡ the Group must maintain an impeccable a whole, using simulation and financial reputation; modelling methods. 106 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 107

POLITICAL, SOCIAL, LEGAL RISKS international trade and investments that On 1 January 2015, new rules were RISKS RELATED Delays to the completion of investment

AND ENVIRONMENTAL RISKS may be introduced by foreign states introduced relating to the taxation of retained TO ACTIVITIES deals or failure to close them may obstruct There is a risk of unpredictable court rulings or international organisations. profits of controlled foreign companies OF SISTEMA PJSFC the achievement of Sistema’s strategic goals The influence of geopolitical risks and administrative decisions with respect and gains on indirect sales of Russian real and affect its performance, financial position on the Corporation and its portfolio to Sistema Group’s business. Such rulings Since Russian corporate law makes estate properties, along with a new concept IMPLEMENTATION OF THE BUSINESS and investment case. companies remains strong, as protectionism or decisions may have an adverse effect shareholders liable for the obligations of beneficiary owners and tax residency STRATEGY and economic sanctions are increasingly on the Group’s business as a result of a company’s affiliates, Sistema may incur for foreign companies in Russia. These rules Sistema may struggle to construct being used as a tool for achieving of numerous factors including: financial losses related to the liabilities of its have undergone a series of revisions, with all The Corporation’s strategy aims to develop an efficient system for managing geopolitical goals. portfolio companies. the amendments having retroactive effect. a balanced and diversified asset portfolio and controlling new assets. The top risks ¡¡ possible discrepancies and ambiguities As a result of the need to apply new taxation in sectors and regions where Sistema PJSFC in this area include: The imposition of sanctions against Russia in: (i) federal and other laws; (ii) bylaws Minority shareholders of Sistema’s rules, the Group’s companies may face new has expertise and competitive advantages, as a state or against individual Russian issued by executive authorities in subsidiaries may contest or vote against tax liabilities arising due to uncertainty and to attract leading international ¡¡ inability to efficiently integrate operating companies and Russian citizens may result states where Sistema Group operates; related-party or other transactions, around interpretation of tax law and a lack and Russian partners. Despite having assets and personnel of an acquired in disruptions to international payment (iii) regional and local laws, rules and which may limit Sistema’s ability of relevant precedents. a clearly formulated strategy, Sistema company; systems, which in turn may prevent requirements; to close investment deals and restructures PJSFC cannot guarantee the achievement the Corporation and its portfolio companies businesses. CAPITAL MARKET RISKS of its stated goals, efficient management ¡¡ inability to establish and integrate from properly making payments and reduce ¡¡ gaps in legislation and a lack of court of portfolio companies, or benefits from new necessary control mechanisms, Sistema’s investment appeal. and administrative guidelines regarding If the Russian Federal Anti-Monopoly Service A deterioration of the geopolitical investment opportunities. This is due including those related to logistics and the interpretation of some laws, as concludes that Sistema PJSFC or one situation, the imposition of sanctions to a variety of reasons, including a high level distribution; Decreasing living standards and a potential well as conflicts between some court of its material subsidiaries has violated on Russian companies, a worsening of debt and a constrained investment budget. rise in social unrest in the regions where guidelines and rulings; existing anti-monopoly legislation, this may of the macroeconomic environment, Sistema’s failure to achieve goals set out ¡¡ conflicts among shareholders; Sistema Group companies operate may result in serious administrative sanctions and capital and investor flight in its strategy may undermine its financial threaten the Corporation’s profits. ¡¡ influence of political, social and involving losses for the Corporation. from the Russian market led to a reduction results. ¡¡ hostility and/or unwillingness commercial factors on the judicial The Federal Anti-Monopoly Service may also in market valuations of Russian companies to cooperate on the part of the The operational activities of a number system; prevent the Corporation and its portfolio in 2014-2018. In view of these circumstances The development of Sistema Group management and staff of an acquired of Sistema’s portfolio companies involve companies from closing and/or undertaking Sistema’s access to investor funding companies depends on numerous factors, asset; potential threats to employees’ health ¡¡ potential selective or arbitrary actions of certain transactions, which may also limit through capital markets may be restricted including receipt of necessary permits and safety. government authorities. Sistema’s capacity to do investment deals further as a result of the introduction from state authorities, sufficient demand ¡¡ loss of customers by the acquired asset. and restructure businesses. of sectoral sanctions against Russian from consumers, successful development Emergencies and incidents at Sistema Gaps in Russia’s existing corporate companies in business segments where of technologies, efficient risk and cost If one or several of the above risks Group’s production sites may have and securities legislation may create barriers TAX RISKS Sistema operates and/or due to a cautious management, timely completion of R&D materialise, the relevant asset may a significant impact on the environment, such to raising funds in the future. approach among investors to Russian and the introduction of new products lose part of its value and/or experience as pollution of land and water, emissions Tax laws, regulations and practices companies in general. In particular, and services. Weaknesses in any of these in deterioration in its financial performance. above allowable limits, discharge of waste A lack of clarity about the applicability of jurisdictions where Sistema’s assets Sistema’s ability to raise funding via bond areas may have a detrimental effect waters or leaks of hazardous substances. to Sistema’s business of the Federal Act operate are intricate, opaque and prone issues may be limited, potentially leading on the development of Sistema Group When disposing of its assets the Corporation on the Procedure for Foreign Investment to frequent modifications and ambiguous to a lack of working capital and cash companies and on the Corporation’s financial may face the following risks: Irrational use of natural resources (land, in Companies of Strategic Importance interpretations. If the Corporation’s available for investment and affecting performance. forest) by Sistema’s portfolio companies may to the National Defence and State Security actions are interpreted as being in breach the Corporation’s financial performance. ¡¡ delays or failure to close the transaction deplete their raw materials/production base and the regulations of the Eurasian Customs of tax law, this may have an adverse effect ACQUISITION, INTEGRATION, due to an inability to obtain corporate or and compromise economic performance. Union (EACU) may have a negative impact on the business of Sistema Group. DISPOSAL OR RESTRUCTURING state approvals; on Sistema Group’s business, as the Group OF ASSETS In view of the increased threat of global has foreign shareholders. Russian law on transfer pricing may make it ¡¡ mistakes in asset valuation; and regional terrorist attacks, any such necessary to introduce adjustments to price- Sistema PJSFC implements its strategy via incidents at the Group’s enterprises There is a risk of legislative amendments setting practices used at Sistema Group’s acquisitions, disposals, and restructuring ¡¡ assumption of excessive obligations and infrastructure facilities may cause being adopted in countries where Sistema companies and result in additional tax of assets. New investment opportunities towards the buyer; significant economic damage and affect Group companies operate, due to potential liabilities related to some transactions. come with certain risks, including failure health and life. changes in laws and regulations governing to find relevant targets or their not being ¡¡ loss of synergies with other assets available for acquisition, inadequate due remaining in the portfolio. diligence of the target company’s operations and/or financial situation, and potential If one or several of the above risks overvaluation of assets. These risks can also materialise, the Corporation may lose affect Sistema’s financial performance. potential profit and thus see poorer financial performance. Acquisition of assets may increase pressure on the Corporation’s cash position and create a need to raise external funding. 108 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 109

MANAGEMENT AND KEY PERSONNEL LOAN COVENANTS PRIVATISED COMPANIES BRAND QUALITY AND REPUTATION

The implementation of Sistema’s strategy Loan and debt securities agreements signed Sistema’s portfolio contains several Developing and maintaining brand in many respects depends on the efforts by Sistema and its portfolio companies privatised assets. It is also probable awareness for the Group’s companies and professionalism of the management contain certain restrictive covenants. These that the Corporation will take part is crucial to shaping public opinion team. Failure to hire a sufficiently competent covenants restrict further borrowings, in privatisations in the future. Since Russia’s around their existing and future products and motivated management team can encumbrance of property with pledges, sale privatisation-related legislation remains and services. Sistema believes that company jeopardise Sistema’s business, performance, of assets, and transactions with affiliates. somewhat unclear and inconsistent, brand is becoming increasingly vital in highly financial position and development They may also restrict certain aspects and contradicts some other legal provisions, competitive markets. prospects. of Sistema’s operations, such as financing the privatisation of many companies can of capital expenses, or limit its capacity potentially be contested, however selectively, Successful development and improvement CASH FLOW FROM SISTEMA GROUP to repay debts and service other liabilities. which may have a material adverse effect of brand awareness depends in large part COMPANIES Breach of covenants, however inadvertent, on the Corporation’s business, financial on the efficiency of marketing and ability may entitle creditors of the Corporation status, performance and development to provide quality products and services The Corporation’s financial performance and/or its portfolio companies to demand prospects. at competitive prices. Effort and money spent depends on the ability of Sistema Group early repayment of loans, which represents on brand development may prove greater companies to generate the cash flows a threat to the Corporation’s financial ANTI-CORRUPTION RULES than the income yielded, which means needed to service the Corporation’s financial performance. potential financial losses for the Group’s liabilities, including repayment of debt Sistema’s operations are regulated by anti- companies. and interest, and to make other investment LICENCES AND PERMITS corruption law of relevant jurisdictions, activities in the future. This cash-generation including Russian legislation, the UK Bribery Sistema’s reputation may be damaged capacity may be restricted due to regulatory, The operations of Sistema Group’s Act and/or the US Foreign Corrupt Practices in the event of unethical business conduct, tax or any other barriers, which may have companies are regulated by different Act (FCPA). Any investigation into potential professional errors (including medical), an adverse effect on the financial position government bodies and agencies that violations of the FCPA, Bribery Act or other gross negligence, abuse of human rights, and liquidity of the Corporation. issue and renew licences, approvals anti-corruption laws of the US, UK or other leakage of inside information and corrupt and permits, and also depend on applicable jurisdictions may affect the reputation, practices at Sistema and/or its portfolio BORROWINGS laws, regulations, and standards. business, financial position and performance companies. Regulating authorities to a large extent rely of Sistema PJSFC. Cash flows from portfolio companies may be on their own judgment when interpreting insufficient to absorb all of the Corporation’s and implementing legal requirements, COMPETITION expenses scheduled for a particular time. issuing and extending licences, approvals This can make it necessary to borrow more and permits, and monitoring compliance All business segments in which Sistema funds, increasing the Corporation’s debt with such licences. There is no guarantee PJSFC operates are open to competition. burden, which in turn can compromise that the existing licences and permits, The telecom, retail, media, tourism, the credit ratings of Sistema and its portfolio including those issued to the Group’s private healthcare, pharma, property companies. A downgrading of a credit rating companies, will be extended, that new development, forestry and agricultural can lead to a rise in the cost of servicing licences and permits will be issued, or that markets in Russia and elsewhere are of existing loans, higher interest rates, the companies will be able to comply highly competitive. Any inability of Sistema barriers to borrowing, and in some cases with the terms of such licences. Any of these Group’s companies to compete efficiently even demands for early repayment circumstances can have material negative may have a material negative impact of credit facilities. The risk of downgrades consequences for the business of Sistema on the business, performance, financial or withdrawals of credit ratings correlates PJSFC. situation and development prospects with reputational and liquidity risks. of the Corporation. 110 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 111

ESG AND CORPORATE RESPONSIBILITY PRINCIPLES 112

CORPORATE CONTRIBUTION TO SOCIO-ECONOMIC DEVELOPMENT 113

SOCIAL INVESTMENT IN TECHNOLOGY SOCIAL AND HUMAN CAPITAL 113 EXTERNAL ASSESSMENT OF SUSTAINABLE RESPONSIBILITY DEVELOPMENT 115 112 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 113

Responsible CONTRIBUTION TO SOCIO- SOCIAL INVESTMENT ECONOMIC DEVELOPMENT IN TECHNOLOGY AND HUMAN CAPITAL Sistema and its portfolio companies Investment make a significant contribution In the past three years, the Corporation has to forming a competitive labour market made approximately RUB 4 billion in social and procurement market (including investments. Of this, about a third was spent purchases from small and medium-sized by Sistema Charitable Foundation ( “SCF”), businesses); modernising infrastructure, which accumulates funds from Sistema industry and agriculture; increasing Group companies for the Corporation’s Sistema’s responsibility as a strategic investor in Russia’s the affordability of housing and essential infrastructure programmes. The flagship corporate programme Lift socio-economic, innovative and technological development products, goods and services; improving to the Future, created seven years ago is in efficiently managing portfolio assets and funds with technological, social, food and drug security; to support modern engineering education developing the healthcare and education in Russia, has been transformed into a whole a view to growing their value, contributing to the sustainable systems; and ensuring regional social range of technological and educational development of industries and regions where Sistema and environmental well-being through large- initiatives. For instance, in partnership operates, and building shared value for the state, business, scale investment programmes, digitalisation with Sistema Group’s Mikron, the largest society and the environment. of businesses and support for innovative Russian microelectronics enterprise, SCF projects, as well as social, charitable, In 2018, Sistema Charitable Foundation established its own supplementary education educational and volunteer programmes that thoroughly revised its strategy of charitable programme for student teams from Russia’s contribute to building up intellectual capital, activities in accordance with the general nine leading technology universities. adapting and humanising new technologies, development strategy of the Corporation, and increasing digital literacy, social activity shifting the focus to technology-related ESG AND CORPORATE Sistema sees its primary responsibility 5. Promotion of transparency and and quality of life. projects, i.e., development and adoption RESPONSIBILITY PRINCIPLES in creating and maintaining a level implementation of uniform corporate of modern digital tools that can improve of strategic planning, corporate governance governance standards, best practices,  To learn more, please refer the efficiency of social sector practices. Sistema shares the international financial and controls conducive to a reasonable advanced digital technologies, and to the table “Contribution to Socio-Economic The foundation’s activities were aimed Publishing and literary projects in the field community’s commitment to integrating balance of the financial and non-financial certified management systems across Development” in the Annex. at achieving two global objectives of technology have become a logical step principles for responsible investment (environmental, social, technological, the entire Sistema Group; at once: development of human capital for Lift to the Future. Almost 2,000 authors in asset valuation and decision-making etc.) risks and opportunities required 6. Helping portfolio companies and funds and creation of technologies that improve from 32 countries took part in the new practices. The Corporation does business to support the sustainable development in raising funds, finding partners, quality of life. Over RUB 200 million was project Future Time, which supports talented in conformity with the UN Global Compact of the Corporation’s investment portfolio structuring deals and developing allocated for the implementation of three science fiction writers. The best sci-fi and the Social Charter of Russian Business, in terms of its impact on the economy, businesses; key programmes: Lift to the Future, stories selected in this contest with a prize taking due account of environmental, society and the environment. 7. Enhancement of operating efficiency and Culture and Arts, and Social Projects fund of RUB 1 million were published social, and governance (ESG) factors financial performance by refining critical and Volunteering. Meanwhile, Sistema as an anthology, and part of the proceeds when choosing industries and assets SISTEMA IMPLEMENTS ESG business processes (procurement, Group companies spent more than will be used towards SCF’s new literary to invest in and interacting with all AND RESPONSIBLE BUSINESS supply chain management, prevention of RUB 840 million on charity in 2018, including projects. Also in 2018, the foundation, stakeholders: shareholders, investors, PRINCIPLES THROUGH: corruption, risk management, corporate 30% as contributions to SCF and 70% in partnership with the publishing house employees, partners, suppliers, consumers, communications and CSR initiatives); to implement their own social programmes.. Delo, translated into Russian and published the government, nonprofits and local 1. Choosing industries and assets for 8. Building synergies between assets and three foreign bestsellers about the way communities. When making investments investment in accordance with the UN funds across the group via joint business technology affects our lives. Educational or carrying out social programmes, Sustainable Development Goals as well and social projects, with and without and cultural institutions can get books Sistema draws upon its versatile as national and regional priorities; outside partners; from SCF’s collection for free. expertise and synergistic partnerships 2. Fair competition, non-discrimination, 9. Consolidated management of the with the government, academia, and civic strict adherence to business ethics and social investment portfolio through the and nonprofit organisations. human rights, and compliance with corporate charitable foundation and by shareholder, antitrust, anti-corruption, means of general corporate initiatives employment, and environmental law; in CSR1; 3. A multi-level system of selection and 10. Monitoring compliance with sustainable examination of investment projects development requirements put forward IN 2018, SISTEMA GROUP SPENT NUMBER OF AUTHORS THAT TOOK based on both financial and non-financial by shareholders and investors by OVER PART IN FUTURE TIME PROJECT parameters and involving a collective regular publication of corporate non- transaction approval mechanism; financial reports. 4. Assessment of the potential effect of key RUB 1.1 billion ~2 thsd industrial, regional and other ESG risks on charitable and social programmes, including on the financial stability of certain assets social programmes of individual companies FROM 32 COUNTRIES and Sistema’s investment portfolio as and their donations to the corporate charitable a whole; foundation

1 Corporate Social Responsibility. 114 SISTEMA Annual Report 2018 sistema.com About the Company Financial Performance Key Asset Results Corporate Governance Social Responsibility 115

EXTERNAL ASSESSMENT OF In June 2018, FTSE Russell, an analytical Sistema was the only private listed SUSTAINABLE DEVELOPMENT agency of the London Stock Exchange, Russian company to be included upgraded Sistema’s ESG rating in the list of 250 best regarded and confirmed its status as a constituent international companies among the of the FTSE4GOOD Index Series, which Forbes Global 2000 for reliability, measures the ESG performance of public work ethics, socially responsible companies across more than 110 criteria, conduct, quality of products and including labour relations, adherence services, and as an employer. The list to human rights, impact on local is compiled based on assessments Information openness and a continuous communities, anti-corruption practices, of 15,000 respondents from SCF received an award from the Russian SCF has been supporting development dialogue with stakeholders are the basic responsible supply chain management, 60 countries3. national contest Good Cause Champions in the key areas of the country’s cultural principles of Sistema’s operations as a public and climate and environmental impact. for its contribution to the development life for many years. Last year, one-third company, reducing potential reputational In the Year of Volunteers in Russia, Sistema of corporate volunteering, while Medsi won of the total funds allocated for charity risks and increasing the Corporation’s Since 2016, Sistema has invariably started a project to help volunteer search in the Competence Volunteering category (or 2% of all investments in culture, attractiveness for investors and partners, been among leaders of RUIE indices and rescue teams. A lack of effective with its Volunteer Ambulance project, sports and entertainment in the country) with due consideration of sustainable related to sustainable development, technologies to search for missing people in which its doctors provided volunteer went to the Culture and Art programme, development efforts and independent ESG which became stock market indices in the natural environment prompted SCF ambulance services to the elderly, supported which includes support for the Russian assessments. in 2019. In 2018, the Corporation was one to launch a large-scale research initiative, by the Ageing Gracefully Foundation. State Museum and the new Cultural of the top five companies in the national 1 Odyssey, in the charitable sector’s first In two years of cooperation between Medsi Weekend outreach project. As part Sistema views public non-financial reporting corporate transparency ranking of private attempt to engage the tech community and the foundation, volunteers performed of the long-term partnership programme under GRI standards as an important and strategic Russian companies, in solving social problems. Contestants off-site medical examinations of over with a budget of up to RUB 500 million component of its CSR and sustainable getting maximum scores for disclosure with the best technical solutions to find 300 people and organised several corporate to be disbursed through 2023, Sistema development management system. of information on anti-corruption efforts a person lost in a forest without any means charitable events around the International assisted the museum with organising Since 2015, it has annually received and procurement and high scores of communication in less than 10 hours — Day for Older Persons, during which Medsi large-scale exhibitions, which were visited public assurance of its consolidated for corporate and strategic governance Тop-5 rain or shine, day or night — will be able employees collected over 400 kilograms by more than 220,000 people last year. reports on sustainable development and sustainable development practices. to receive funding of up to RUB 75 million. of humanitarian supplies for nursing homes. The Cultural Weekend national project, which from the Russian Union of Industrialists The AK&M rating agency included Sistema NATIONAL CORPORATE More than 120 engineering teams seeks to make museums more affordable and Entrepreneurs (RUIE). In accordance in the first-ever social efficiency ranking TRANSPARENCY RANKING1 from 40 cities of Russia are already willing and promote culture and art, gathered with the best practices of responsible asset of major Russian companies judged to offer their ideas to complete this socially an unprecedented amount of visitors, management, Sistema encourages its key to be of highest value to society per unit significant task. with 70,000 people in 10 Russian cities. portfolio companies and funds to disclose of ecosystem load. The Corporation was significant non-financial information. also ranked among the top 20 companies № 1 Support for volunteering also forms part As of 2018, reports on CSR and sustainable for information openness. In addition, of the Social Projects and Volunteering development have been issued Sistema was declared Leader in Corporate LEADERS IN CORPORATE programme. SCF launched two national by MTS, Detsky Mir, Segezha Group, BPGC Charity 20182. CHARITY RANKING, 20182 contests with a total grant pool and Sistema Charitable Foundation. of RUB 3 million: Search Trajectory for volunteer rescuers across the country and Good Cause System for corporate In 2018, SCF and Medsi continued volunteers to support the most relevant to provide high-tech medical aid to war and socially important projects initiated veterans under a programme developed by the Corporation’s volunteer movement, in conjunction with the Moscow city which has been in development for several government and the Moscow City Council years. of Veterans. Since 2015, over 2,000 WWII PARTICIPANTS OF COUNTRY-WIDE veterans and similar categories of citizens OUTREACH PROJECT CULTURAL have received free outpatient care WEEKEND and rehabilitation services. Segezha Group annually gives drugstore certificates to war and labour veterans: in 2016-2018, almost >70 thsd 1,000 people received financial support from the company to buy medicines. IN 10 CITIES

1 According to the annual survey conducted by the Russian Regional Network for Integrated Reporting. 2 According to the Russian national ranking of the Donors’ Forum, PwC and the Vedomosti newspaper. 3 Global 2000: Best Regarded Companies 2018. 116 SISTEMA Annual Report 2018 sistema.com

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Certain statements in this report may INVESTOR RELATIONS DEPARTMENT: contain assumptions or forecasts in respect +7 495 730-66-00 to forthcoming events within Sistema. +7 495 692-22-88 The words “expect”, “estimate”, “intend”, “will”, “could” and similar expressions PRESS CENTER: identify forward-looking statements. We wish +7 495 228-15-32 to caution you that these statements are only predictions and that actual events INQUIRY DESK: or results may differ materially. We do not +7 495 737-01-01 intend to update these statements to reflect events and circumstances occurring after ADDRESS: the above-mentioned date or to reflect 13, Mokhovaya Str., Moscow 125009 the occurrence of unanticipated events. Many factors could cause Sistema’s actual results to differ materially from those con- tained in our projections or forwardlooking statements, including, among others, deteri- orating economic and credit conditions, our competitive environment, risks associated with operating in Russia, rapid technological and market change in our industries, as well as many other risks specifically related to Sistema and its operations. 118 SISTEMA Annual Report 2018 sistema.com

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