Annual Report Centertelecom OJSC Worldreginfo - B3f15fb4-Cd51-422F-8506-19C091b96d1e Contents

2008 Annual Report CenterTelecom OJSC WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Contents

Key Performance Figures...... 4 Company Profile...... 8 Mission and Strategy...... 10 Address to Shareholders...... 12 Key 2008 – 2009 Events...... 16 Event of the Year: Implementation of Universal Service Mechanism...... 22 Key Results of 2008 and Objectives for 2009-2013...... 24 Key Business Directions of the Company...... 25 › Short Summary of Telecommunications Industry Development in Russia...... 26 › The Company's Position in the Telecommunications Services Market of the Central Federal District of Russia...... 27 › Core Development Trends of the Company...... 29 › Prospects for Development ...... 30 Results of the Company's Operations in 2008...... 33 › Key Economic Figures...... 34 › Revenues Structure from Telecommunications Services for 2008...... 39 › Financial Activities...... 44 › Investment Activities...... 45 › Tariff Policy...... 46 Equity Capital and Securities...... 47 › Charter Capital...... 48 › Shares...... 50 › Market Capitalization...... 53 › American Depository Receipts...... 53 › Corporate Bonds...... 56 Social Responsibility...... 57 › Personnel and HR Policy...... 58 › Personnel Development...... 60 › Social Responsibility and Charity...... 62 WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Corporate Governance...... 63 › Board of Directors...... 64 › Management Board...... 64 › Audit Commission...... 65 › Corporate Governance System...... 65 › Dividend Policy...... 66 › Subsidiaries and Affiliates...... 67 › Public and Investor Relations...... 68 › Ratings...... 69 › Improvement of Corporate Governance Practices...... 70 Information for Shareholders...... 72 Risk Management...... 75 Glossary...... 77 Forward-Looking Statements...... 79 Information about the Company...... 80 WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Key Performance Figures WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 4

Key Performance Figures

Key Economic Figures 2008 2007 Change, % Revenues from core operations, RUR million 33,715 32,409 +4.03 Expenses on core operations 26,351 23,974 +9.91 EBITDA* 12,207 11,704 +4.29 CAPEX 6,807 5,266 +29.26 Depreciation 4,278 3,834 +11.58 Sales profit 7,364 8,435 -12.70 Net profit 2,585 3,635 -28.89 Basic earnings per share, RUR 1.475 2.073 -28.85 EBITDA margin 36.21% 36.11% - Profitability on sales profit 21.84% 26.04% - Profitability on net profit 7.37% 11.22% - Net debt/EBITDA 2.04 1.96 - Share price at year end, USD 0.13 0.87 -85.06%

* EBITDA is calculated as earnings before taxes plus interest payable plus depreciation plus leasing payment minus interest receivable

Revenues, RUR Billion

2008 33.72

2007 32.41

2006 28.4

2005 27.59

2004 24.96

0 5101520253035 WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 5

EBITDA, RUR Billion

2008 12.21

2007 11.7

2006 9.78

2005 7.19

2004 5.38

036912 15

Net Proﬁt, RUR Billion

2008 2,585

2007 3,635

2006 2,047.9

2005 654.9

2004 397.7

0 5001,000 1,500 2,000 2,500 3,000 3,500 4,000

Key Operating Indicators 2008 2007 Change, % Number of employees 31,517 46,637 -32.40 Number of lines 6,842,992 6,739,610 +1.53 Number of lines per employee** 185 132 +39.90 Installed capacity of telephone network including 7,233,510 7,102,574 +1.84 city telephone network, numbers 6,198,059 6,080,502 +1.93 rural telephone network, numbers 1,035,451 1,022,072 +1.31 Activated capacity of local telephone network including 6,763,530 6,711,392 +0.87 city telephone network, numbers 5,866,901 5,807,488 +1.02 rural telephone network, numbers 896,629 903,904 -0.81 Level of digitalization of local telephone network including 66.0% 57.7% - city telephone network 70.2% 62.4% - rural telephone network 40.6% 29.7% - Number of automatic telephone exchanges 8,358 8,400 -0.5 Number of ADSL Internet users 705,075 304,000 +131.93 Length of fiber optic intra-zone telecommunications lines, km 19,009.5 16,613.7 +14.41

** The indicator is calculated using the figure «average number of employees» which reached 37,026 and 51,019 people for 2008 and 2007 respectively WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 6

Average Personnel Number, thousand people

2008 31.5

2007 46.6

2006 56.3

2005 65.2

2004 67.4

01020304050607080

Number of Lines per Employee

2008 185

2007 132

2006 111

2005 100

2004 91

050100 150 200

Dividend per Common Share, RUR

2008 0.2457683

2007 0.3547131

2006 0.1999622

2005 0.0674191

2004 0.0630084

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Company Profile WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 8

Company Profile

O pen Joint Stock Company Central Telecommunication Company (CenterTelecom OJSC) is the largest fixed line communications operator in the Russian Federation supplying a wide range of communications services and providing access to global information resources to private individuals, corporate clients and governmental bodies in Russia's Central Federal District.

The Company’s history dates from 1890. CenterTele- Investors’ confidence and efficiency of investment com has 15 branches formed as a result of the Com- policy have allowed the Company to attract financial pany’s reorganization merging 17 leading regional resources in the domestic debt markets. CenterTele- operators on the basis of the Moscow region telecom has “B+” long term credit rating (Stable outlook) communications operator. The Company’s biggest and “ruA+” long term credit rating according to the shareholder is Svyazinvest OJSC. Russian credit rating scale of Standard & Poor’s. Fitch Ratings international rating agency has assigned CenterTelecom successfully operates in all segments CenterTelecom a “B+” priority uncovered rating in for- of the telecommunications market providing local eign currency (Stable outlook), “B” short term credit and intra-zone telephone communications services, rating in foreign currency, and “A (rus)” national rating data transmission services, intellectual services, ISDN, (Stable outlook). dial up and dedicated internet access, cable TV, wired and over-the-air broadcasting and communications The Company’s management pays special attention channel leasing. to the improvement of its corporate governance system. An important assessment of positive changes The improvement and promotion of services based in this sphere is a “7+” corporate governance rating on multiservice networks, creation of service packag- (signifying a company with a high level of corporate es and rates for various categories of users, develop- governance) assigned by the Expert RA rating agency ment of interregional and telecommunications trans- in 2009. port networks are among the Company’s strategic development directions. The integrated interregional Company employs more than 31,000 people. The Company’s HR policy is fo- Emphasizing investors’ and partners’ confidence to cused on the creation of a highly professional team, the Company, CenterTelecom management is con- improved professionalism among employees, har- tinuously improving corporate standards of informa- monious professional development of personnel and tion disclosure and is working on increasing the Com- improvement of the incentive system. pany’s business transparency. Currently the Company reports in accordance with both Russian Accounting The united corporate policy, implementation of the Standards (RAS) and International Accounting Stan- latest technologies, and modern forms of business dards (IAS). The Company’s auditor for 2008 was development have allowed the Company to retain its KPMG. leading position in the Russian telecommunications market. CenterTelecom is a public company. Its stock is traded on the Russian Trading System (RTS), Moscow Inter- bank Currency Exchange (MICEX) and is traded on international stock exchanges through its ADR program. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Mission and Strategy WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 10

Mission and Strategy

A s the biggest telecommunications operator in Russia’s Central Federal District (CFD), CenterTelecom sees its mission as the provision of newest high quality telecommunications solutions and world class services within the district.

The Company seeks to: Among CenterTelecom’s key strategic lines are: › meet customer demand for telecommunications › maintenance of its leadership and maximum in- products and services and create a single informa- crease of revenues in the traditional telephony seg- tion and communications field in Central Federal ment in Central Federal District’s market; District’s regions; › advanced development of broadband Internet ac- › take part in the creation of new markets imple- cess services; menting new information and telecommunications › product range expansion; services in the Central Federal District; › technical modernization of the network; › secure increased revenues for the Company’s share- › increased efficiency of investment activities; holders and contribute to the development of the debt reduction. society in which the Company operates; › › develop long term mutually beneficial relations with partners on the basis of mutual trust, fairness and transparency; › provide all necessary conditions for harmonious development of each employee.

CenterTelecom’s activities are aimed at: › development of the Russian Federation’s economy through the formation of information infrastructure in the Central Federal District; › development of the latest telecommunications infrastructure in the Central Federal District in con- junction with the rate of development of business and people; › increase the well-being and level of information and communications development of the population by providing high quality telecommunications services and access to information technologies; › increase the Company’s profitability to make it more attractive for investors. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Address to Shareholders WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 12

Address to Shareholders

Vaagn Martirosyan Sergei Kuznetsov General Director Chairman of the Board of Directors

Dear shareholders,

You have in your hands the Company’s annual report pand the subscriber base for broadband Internet ac- for 2008. This year was quite difficult but also success- cess service to 1.138 million users. This will be made ful for the Company. On the one hand the complex possible primarily through active implementation of economic situation dictated a number of limitations new technological solutions (in particular FTTx tech- for CenterTelecom. On the other hand it has long nology) and through the promotion of a number of been known that a crisis is a crucial point which of- interactive services such as IPTV, VoD, PVR, network fers new opportunities. The Company’s annual report games etc. reflects key events of the last year and describes Cen- terTelecom’s priorities in development. Moreover it Implementation of the mechanism for universal ser- includes the management’s assessment of core oper- vice provision was one of the most important pro- ating indicators which had a considerable impact on grams conducted by CenterTelecom OJSC in 2008. In the Company’s operations. the course of this program the Company has built a wide public pay telephone network in 17 regions of Among the most important business directions of Russia’s Central Federal District on a tight schedule the Company in 2008 was an expansion of the sub- and installed 54,778 universal public pay telephones scriber base for ADSL Internet access service under in 51,965 localities. A full 21,140 of these localities the DOMOLINK brand. For 2008 the number of new have been provided with telephone connections for DOMOLINK users reached 401,075. This allowed the the first time. The program was implemented in line number of subscribers to CenterTelecom’s xDSL ac- with CenterTelecom’s functions as a state telecom- cess service to double to 705,075 as of December munications operator in these regions. 31, 2008. In 2009 CenterTelecom plans to further ex- WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 13

In accomplishing of the task of telecommunications the aim of profit maximization some CenterTelecom network development, CenterTelecom paid much at- branches have conducted tenders for the sale of tention to the improvement of infrastructure in Rus- property. Aggregate proceeds from the program in sia’s Central Federal District. Technical modernization 2008 exceeded RUR283 million. The profit was spent of telecommunications networks undertaken in 2008 on renovation and bringing of sales and maintenance allowed the Company to create extensive capabilities centers into line with CenterTelecom’s corporate style for further development of the DOMOLINK project, and the reconstruction of buildings. the attraction of new major corporate customers, and also to reduce by 61% the waiting list of individuals’ In 2008 the Company paid serious attention to imple- applications for installation of fixed line telephone mentation of a Model of Reorganization for subsid- lines in the Central Federal District. Moreover using iaries and affiliates, to increase their efficiency and the inter-regional data transmission network in 2008 strengthen the market positions of CenterTelecom’s CenterTelecom launched a client oriented project companies. Among the key directions in this area aimed at the provision of IP-TV services to the Central were formation of an optimal structure for subsidiary Federal District’s inhabitants. Currently these services businesses’ administration and the organization of a are offered by the Moscow, Lipetsk, Vladimir, Vorone- corporate governance system in related companies. zh and Tula branches of the Company. In 2009 Center- Telecom plans to expand the project’s geography. As part of the Company’s implementation of the latest information technologies in day-to-day practice CenterTelecom has also been implementing FTTx of the Company’s business administration, the Com- technology on the basis of its inter-regional data pany completed its implementation of the Oracle transmission network since 2008. Successful imple- E-Business Suite automated management system in mentation of the technology will allow the Company the Company’s General Directorate and its 15 branch- to strengthen its position in Central Russia’s telecom- es. A unified billing system, Start Automated Billing munications market, to improve the quality of servic- System, was also deployed in the Company’s branches provided and to offer a flexible tariff policy. FTTx’s es in 2008. Moreover, CenterTelecom began creating broader technical capabilities (in comparison with centralized information systems based on major in- the xDSL solution) will allow the Company to expand ternational IT companies’ solutions. Further develop- its popular telecommunications services range. ment of these IT projects will contribute to increased efficiency in the Company’s administration. Under CenterTelecom’s HR policy in 2008 the Compa- ny’s management continued implementation of the In general, given Russia’s economic situation, the personnel optimization program. This allowed the Company’s management regards 2008 operating re- Company to reorganize its business system, to switch sults as successful. The dynamics of CenterTelecom’s to the process management method, and to central- indicators reflect the effectiveness of Company man- ize the administration of various resources. As a re- agement’s efforts in the restructuring of business sult of this work there were a number of qualitative systems, personnel optimization and raising oper- changes in personnel structure. The switch to a two- ating efficiency. Excluding the impact of a number level process management system led to the creation of negative factors which are explained below, the of new requirements for employee qualification. Now Company’s net profit reached RUR4.11 billion, and the Company is able to employ young highly quali- profitability based on net profit was 12.19%. The in- fied specialists. dicator “Basic Profit per Share” was RUR2,345; this was 13.12% more than for 2007. In the course of implementing a Program for Im- provement of Efficiency of Property Management in The Company’s management sees two basic causes 2008, CenterTelecom reduced the 44,002 square me- behind the decrease in CenterTelecom’s net profit ters of leased property. This led to cost reduction of and dividend payment for 2008. First of all there was RUR37.2 million. Significant revenues have been re- an impact from the global financial crisis. Devalua- ceived from property leasing, and furthermore with tion of the national currency caused a considerable WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 14

rise in the cost of foreign currency debt servicing (up continue its reorganization of the sales and mainte- to RUR955 million). The second cause of decreased nance system. Further work on raising revenues from net profit was the creation of a provision for the de- traditional telephony by means of efficient manage- creased value of software used by the Company. Tak- ment of tariff plans and service packages will be of a ing these factors into consideration CenterTelecom’s great importance for the Company too, as will mod- management has made significant corrections in its ernization of CenterTelecom’s existing technical base development program. for the development of priority businesses from a commercial point of view. CenterTelecom’s priority for 2009-2013 will include an increase of the share of the latest highly profitable In conclusion we would like to thank all employees telecommunications services in the Company’s total of CenterTelecom who have been working hard in a revenues up to 38.6%. This will be possible as a result complicated crisis situation. They have remained loy- of further development of Internet access and other al to the Company, improved their professional skills services, and of strengthening of CenterTelecom’s po- and trained new specialists. The well coordinated sition in the corporate clients segment. Active work work of CenterTelecom’s large team and the support with corporate clients with wide regional structures of its shareholders allow the Company to maintain its and headquartered in Moscow will be very important leadership in the telecommunications market of the for the Company too. Moreover CenterTelecom will Central Federal District of the Russian Federation.

Sergei Kuznetsov Chairman of the Board of Directors

Vaagn Martirosyan General Director

Moscow, April 30, 2009 WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Key 2008 — 2009 events WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 16

Key 2008 — 2009 events

January and the basic recommendations of Russia’s Corporate Starting January 1, 2008, the compensation adjust- Conduct Code. ment for local and zone call initiation services was canceled. CenterTelecom won additional tenders by the Federal Agency for Telecommunications for rights to provide Starting January 1, 2008, the tariffs for local connec- universal telecommunications services through pub- tion through a shared telephone line were decreased lic pay telephones in the Ivanovo, Kaluga, Kostroma, for individual customers in accordance with changes Lipetsk, Moscow, Ryazan, Smolensk, Tambov, Tver, in the Procedure of Local Telephone Communications Tula and Yaroslavl regions. Tariffs and Tariffs Plans Calculation set by the Federal Tariff Service (FTS) (Order #140-s/1 by FTS dated Au- Based on the results of an open tender CenterTelecom gust 3, 2007). concluded an agreement for insurance of electronic equipment with ROSNO OJSC with 0.149% annual in- Starting January 1, 2008, in accordance with Order surance tariff and RUR2.6 billion insurance cover. #178-s/2 by the Federal Tariff Service dated August 28, 2007, a subscriber based tariff plan for corporate cus- CenterTelecom OJSC effected the payment of tomers for local telephone connections (where time RUR389,027,348.05 under the seventh coupon of its based billing is technically possible) was approved. series 4 interest-bearing documentary non-convert- Tariffs for the provision of a telephone line and local ible bearer bonds. telephone connections through a shared telephone line amounted to 50% of tariffs for these types of ser- March vices through a dedicated telephone line. Starting March 1, 2008 in accordance with Decree #776 by the Government of the Russian Federation Starting January 1, 2008 in accordance with Order dated November 14, 2007 a payment for mainte- #529-s/1 by the Federal Tariff Service dated December nance of point of interconnect was canceled. 25, 2007 new tariffs for All-Russia TV program broadcasting were introduced. The tariffs rose by 15%. CenterTelecom OJSC exited the authorized capital of Teleservis OJSC by selling its stake in the company. CenterTelecom OJSC has sold stakes in the authorized capital of Optimum-Svyaz CJSC and Oskoltele- CenterTelecom OJSC approved its Strategy for Client com CJSC. Servicing for 2008 which established core directions of the Company’s development in the sphere of post- February sale service. Starting February 1, 2008 in accordance with Order #356-s/1 by the Federal Tariff Service dated Novem- CenterTelecom OJSC and Sky Link CJSC signed a Gen- ber 23, 2007 a new tariff plan based on combined eral Cooperation Agreement aimed at development payment system for corporate customers (where time and implementation of joint programs in Russia’s based billing is technically possible) was approved. Central Federal District.

On February 14, 2008 Expert RA Rating Agency as- On March 26, 2008 Moscow Arbitration Court ruled as signed CenterTelecom the national corporate gov- groundless a tax claim based on the results of a sched- ernance rating of 7+ which is assessed as very high uled field tax audit of CenterTelecom’s operations for level. CenterTelecom follows Russian legislative re- the years 2004-2006 conducted by Interregional Of- quirements in the field of the corporate governance fice #7 of the Russian Federation Tax Administration. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 17

CenterTelecom OJSC effected payment of complex for the provision of universal telecommu- RUR121,020,000 under the third coupon of its series nications services and broadband internet access 5 interest-bearing documentary non-convertible services. The contract conclusion became possible bearer bonds. after an open tender by CenterTelecom. According to the signed contract the lessor’s total expendi- April tures for acquisition of the property was RUR3.213 CenterTelecom’s management approved the reten- billion including VAT, and the gross leasing inter- tion of a subscriber payment for unlimited telephone est rate was 12.985% (exclusive of insurance costs connections of a subscriber based tariff in the amount and property tax). The term of the contract is 54 of RUR290 for individual subscribers in the Moscow months. region and RUR250 for individual subscribers of other Central Federal District’s regions. June On June 6, 2008 the Ninth Arbitration Appeals Court CenterTelecom approved the concept for develop- considered a petition by the Interregional Office #7 ment of its sales and maintenance network which of the Russian Federation Tax Administration regard- establishes a model for creation of a network, basic ing the Moscow Arbitration Court’s decision holding directions of existing maintenance centers’ system CenterTelecom unaccountable for a tax offence pur- and principles of deployment, external and internal suant to a scheduled field tax audit of CenterTelecom’s brand style of the Company’s sales and maintenance operations for 2004-2006. The court affirmed the centers. Moscow Arbitration Court’s decision and dismissed the Tax Administration petition. CenterTelecom OJSC and SU-155 CJSC, one of the biggest construction companies in Russia, signed The number of subscribers to CenterTelecom’s a cooperation agreement aimed at the provision of broadband xDSL access promoted under the DO- telecommunications services in SU-155 projects un- MOLINK brand reached over 440,000 users. der construction. The annual general meeting of CenterTelecom On April 17, 2008 Moscow Region’s Federal Arbitra- OJSC’s shareholders took place on June 25, 2008. tion Court considered a cassation petition by the Interregional Office #7 of the Russian Federation Tax As part of the implementation of CenterTelecom’s Administration regarding Moscow Arbitration Court’s program for improvement of customer relations decision and the Ninth Arbitration Appeals Court’s the Company began receiving of payments for tele- ruling on a claim holding CenterTelecom account- communications services in the territory of Moscow able for a tax offence pursuant to a scheduled field region through the E-port payment system and its tax audit of CenterTelecom’s operations for 2002- partners. 2003. The Moscow Region’s Federal Arbitration Court affirmed the Moscow Arbitration Court’s decision and According to the Financial Times’ ranking Center- the Ninth Arbitration Appeals Court’s ruling, and dis- Telecom was numbered among East Europe’s big- missed the cassation petition. gest companies.

Standard&Poor’s rating agency confirmed Center- July Telecom’s long term credit rating at B+, reviewed the As part of its implementation of the universal service Outlook from Positive to Stable, and confirmed the mechanism in Russia’s Central Federal Region, the Company’s long term rating according to the Russian Company completed the next stage of installation credit rating scale at ruA+. of universal public pay telephones, in the Bryansk, Belgorod, Vladimir, Voronezh, Ivanovo, Kaluga, Ko- May stroma, Kursk, Lipetsk, Moscow, Orel, Ryazan, Smo- CenterTelecom concluded a contract with RTK- lensk, Tambov, Tver, Tula and Yaroslavl regions. Leasing OJSC for financial leasing of a property WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 18

August September Starting August 1, 2008 the Company changed the CenterTelecom OJSC effected payment in full of ratio between ADRs and common shares from 1 ADR RUR121,020,000 under the fourth coupon of its series per 100 common shares to one ADR per 25 common 5 interest-bearing documentary non-convertible bear- shares. Thus each CenterTelecom American Deposi- er bonds. tory Receipt will represent 25 common shares of the Company. On September 4, 2008 CenterTelecom fulfilled its obligations on the purchase of its series 5 bonds. 95.8% of On August 2, 2008 a Management Board for Center- the issue was submitted by holders for purchase. The Telecom OJSC was formed. value of the bonds including the coupon income was RUR2,875,340,676.25. All liabilities provided by Center- On August 18, 2008 the Board of Directors of Cen- Telecom’s offer were fulfilled in full and on time. terTelecom OJSC approved the procedure for establishing the amounts of the fifth, sixth, seventh, ninth CenterTelecom completed the implementation of uni- and tenth coupons of its interest bearing documen- versal service mechanism in Russia’s Central Federal tary non-convertible bearer series 5 bonds subject- Region. The Company installed 54,778 universal pub- ed to mandatory centralized custody. Income per lic pay telephones in 51,965 localities; 21,140 of these share was set at RUR46.37. localities were equipped with the telephones for the first time. CenterTelecom OJSC effected payment under the eighth coupon of its series 4 interest-bearing documentary non-convertible bearer bonds in full in the October sum of RUR389,027,348.05. The number of subscribers to CenterTelecom’s broadband xDSL access promoted under the DOMOLINK In August 2008 the Company concluded contracts brand reached over 500,000 users. for the provision of revolving loan facilities for 36 months with ORGRESBANK OJSC (loan facilities for On October 7, 2008 the Federal Arbitration Court of the total sum of US$42,000,000 based on the fol- the Moscow Region completed its review of a cas- lowing rate: margin – 3.2% per annum + 1 month LI- sation petition filed by Interregional Office #7 of the BOR; flat fee – 0.5%) and with Bank Société Générale Russian Federation’s Tax Administration. The petition Vostok CJSC (the first loan facility for US$21,000,000 concerned the Moscow Arbitration Court’s decision based on the following rate: margin – 2.75% per and Ninth Arbitration Appeals Court’s ruling on a annum + 1 month LIBOR, flat fee – 0.25%; and the claim holding CenterTelecom accountable for a tax second loan facility for US$21,000,000 with the fol- offence pursuant to a scheduled field tax audit of lowing rate: margin – 2.95% per annum + 1 month CenterTelecom’s operations for the years 2004-2006. LIBOR). The Federal Arbitration Court of Moscow region affirmed the Moscow Arbitration Court’s decision and CenterTelecom OJSC and ZyXEL began implementa- the Ninth Arbitration Appeals Court’s ruling, and dis- tion of a joint program aimed at maintenance ser- missed the cassation petition. vices provided to subscribers of ADSL DOMOLINK broadband Internet services offered by CenterTele- CenterTelecom OJSC took part in InfoCom 2008. Dur- com OJSC in Central Russia. ing the four-day forum, the Company presented to guests at its stand a broad range of information and CenterTelecom OJSC effected payment of the divi- telecommunications services. Visitors to the exhibi- dend on nominal non-documentary preferred shares tion could assess new opportunities provided by use for 2007 in the amount of RUR0.6910119 per share. of telecommunications solutions in various spheres: Total amount of the payment was RUR342,507,270. from the confectionery sector to the administration of Russia’s regions. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 19

CenterTelecom OJSC sold its stake in COMSET OJSC December through the sale of shares. CenterTelecom OJSC effected payment of dividends on nominal non-documentary common November shares for 2007 in the amount of RUR0.3547131 per CenterTelecom OJSC approved its Development Pro- share. Total amount of the payments amounted to gram for 2009-2013. The program established the RUR555,125,150.04. Company’s strategic priorities and directions for its development in the telecommunications market of The number of subscribers to CenterTelecom’s broad- the Central Federal District for the next five years. band xDSL access promoted under the DOMOLINK brand exceeded 705,000 users.

Developments Occurring after the Reporting Date

January 2009 economic conditions given that the Company had Starting January 1, 2009 in accordance with Order a strong basis for this, an optimized system for the #398-s/1 by the Federal Tariff Service dated December Company’s operations. 24, 2008 new tariffs for All-Russia TV program broadcasting were introduced. The tariffs rose by 18%. CenterTelecom OJSC effected the payment of RUR389,027,348.05 under the ninth coupon of its se- CenterTelecom OJSC received a new certificate for ries 4 interest-bearing documentary non-convertible conformance of its quality management system with bearer bonds. GOST R ISO 9001-2001 state standard, an analogue to international ISO 9001:2000. March 2009 CenterTelecom OJSC terminated its participation in In accordance with Order #297-с/2 by Russia’s Fed- Svyaz-Service-Irga LLC. eral Tariff Service (FTS) dated November 28, 2008, starting March 1, 2009 CenterTelecom increased February 2009 tariffs for local telecommunications services for resi- Starting February 1, 2009 in accordance with the dential and corporate subscribers, amended tariffs Federal Tariff Service’s Order #298-s/3 dated October for intra-zone telecommunications services and in- 28, 2008 the Company established new tariffs for the troduced new tariff plans based on the combined transmission of a local telegram. The average change payment scheme. in tariffs was 22%. Standard & Poor’s Ratings Services affirmed Center- CenterTelecom OJSC took part in the International Telecom’s long-term corporate credit rating at “В+”, Conference “Telecommunications Industry in the outlook Stable. Course of the Global Financial Crisis” held February 10-11, 2009 in Moscow. The conference’s initiator On March 12, 2009 Expert RA Rating Agency con- was the Ministry of Telecommunications and Mass firmed the National Corporate Governance Rating for Communications of the Russian Federation. Vaagn CenterTelecom OJSC at 7+. Martirosyan, CenterTelecom’s General Director, presented to conference participants the Company’s CenterTelecom OJSC effected payment in full of key results for 2006-2008. He also stressed that Cen- RUR5,848,416.25 under the fifth coupon of its series terTelecom’s management had decided to focus 5 interest-bearing documentary non-convertible on improvement of service quality in the current bearer bonds. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 20

CenterTelecom redeemed in full its debt on an agree- CenterTelecom OJSC, working jointly with Rostele- ment concluded with Sberbank of Russia on a RUR3 com, completed the construction of telecommunica- billion revolving loan ahead of schedule. tions infrastructure for Volkswagen Group Rus LLC in the Kaluga region. The work was conducted as part of CenterTelecom OJSC put into operation a multi-ser- a connection project by Deutsche Telekom for Volk- vice telecommunications NGN network as a part of a swagen’s branch in Kaluga to its corporate network program of reconstruction of its Moscow branch’s lo- through the Russian division of T-Systems CIS. The cal telephone network. completion of the project allowed Volkswagen’s Rus- sian branch to conduct its operations in accordance On March 13, 2009 the Board of Directors of Center- with unified information standards on the basis of T- Telecom OJSC approved the termination of powers Systems BS IntraSelect MPLS (FlexSolution), an inter- of its Chairman Alexander Kiselev and elected Sergei national network platform. Kuznetsov the new Chairman of the Board of Direc- tors. On April 10, 2009 Fitch Ratings, an international rating agency, upgraded CenterTelecom’s ratings of Long- On March 19, 2009 the Federal Anti-Monopoly Ser- term Issuer Default (IDR) from “B” to “B+”, and National vice (FAS) recognized that CenterTelecom OJSC had Long-term from “BBB(rus)” to “A(rus)”, outlook Stable. breached Item 1 of the Clause 10 of the Federal Law Short-term IDR was affirmed at “B”. “On Protection of Competition”. This decision was made by FAS in connection with a petition by Sovin- CenterTelecom OJSC successfully completed the tel STsS LLC claiming breach of anti-monopoly legis- implementation of its Oracle E-Business Suite (OEBS). lation by CenterTelecom OJSC. After consideration of Currently OEBS successfully functions at all regional the case FAS made the decision to issue an order for branches of the Company as part of its day-to-day CenterTelecom aimed at termination of the breach operations. The Company completed implementa- and prevention of revealed limitations. CenterTele- tion of the functional units of ERP-system (including com does not agree with FAS’s opinion. The Company Finance, Logistics, Personnel, Wages) and creation has filed a petition demanding to recognize the deci- of united guides of the Company and conversion of sion and the order invalid. CenterTelecom’s historical data. With the aim of providing complete support for the accounting system in accordance with Russian Accounting Standards April 2009 the ERP system implemented a sub-system for cor- CenterTelecom’s services can now be paid by means respondent accounts. Moreover OEBS is integrated of QIWI payment service (United System of Immedi- with Start Automated Billing System and IBM Cognos ate Payments CJSC). CenterTelecom’s subscribers in Budget Planning System which are used widely in the the Ivanovo, Kaluga, Kostroma, Kursk, Lipetsk, Mos- Company. cow, Tula and Yaroslavl regions can now pay for telecommunications services supplied by the Company through the QIWI payment service. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Event of the Year: Implementation of Universal Service Mechanism WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 22

Event of the Year: Implementation of Universal Service Mechanism

The definition of “Universal Telecommunications ries where the Company operates. Implementation Services” is established by Federal Law #126-FZ “On of the universal telecommunications service pro- Telecommunications” dated July 7, 2006 according to gram in the Central Federal District regions was one which it includes telephone communications servic- of the key tasks for CenterTelecom in 2007-2008. es provided through public pay telephones, and data transmission and Internet access services through In 2007 the Company fulfilled the terms of the con- collective access points. In accordance with Clause tracts concluded with the Federal Agency for Tele- 57 of the Law “On Telecommunications”, provision of communications and began rendering universal universal telecommunications services is guaranteed telecommunications service in Central Russia. In to all users in the Russian Federation. the first half of 2008 the Company won additional tenders by the Federal Agency for Telecommunica- Basic principles of the universal telecommunications tions for rights to provide universal telecommunica- services provided are also established by the Federal tions services through public pay telephones in the Law “On Telecommunications” including the following: Ivanovo, Kaluga, Kostroma, Lipetsk, Moscow, Ryazan, › time period within which a user can reach a public Smolensk, Tambov, Tver, Tula and Yaroslavl regions. pay telephone without use of a vehicle shall not exceed one hour; By July 14, 2008 CenterTelecom, in fulfilling the › every locality shall be equipped with not less than terms of tenders for provision of universal telecom- one public pay telephone providing free access to munications services in the Central Federal District, emergency services; has completed implementation of universal service mechanism in the Belgorod, Vladimir, Voronezh, Li- minimum one point of collective Internet access › petsk, Ryazan, Smolensk, Tambov and Tula regions. shall be arranged in localities with populations of In September 2008 the Company completed the not less than 500 people. implementation of the universal service mecha- Provision of universal telecommunications services in nism in all regions of the District with the instal- the Russian Federation is undertaken by universal ser- lation of 54,778 public pay telephones in 51,965 vice operators selected on the basis of open tenders localities. Of these localities, 21,140 have been pro- for operating in established areas. Contracts with the vided with telephone connections for the first time. winners of the tenders are concluded for five years. Thus CenterTelecom built an expanded universal As of the beginning of implementation of the uni- public pay telephones network in 17 regions of Rus- versal service project in late 2005 there were over sia’s Central Federal District and contributed to the 40,000 localities without telephone communica- solution to the “digital inequality” problem in the tions access - 30% of all localities in the country. country. Implementation of the universal service The first open tenders for the right to supply uni- mechanism became a logical continuation of the versal services through public pay telephones state telecommunications operator’s functions in and collective Internet access points were held in the regions where the Company operates. Center- 2005-2006. Companies which promised to build an Telecom employees’ efforts in 2007-2008 provided appropriate infrastructure for minimal compensa- for access to the latest telecommunications services tion from universal service fund won the tenders. for every inhabitant of the Central Federal District either in a major city or in a distant rural locality. In 2006-2007 CenterTelecom won tenders for the provision of universal telecommunications services through public pay telephones in the territo- WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Key Results of 2008 and Objectives for 2009-2013 WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 24

Key Results of 2008 and Objectives for 2009-2013

Results of 2008 Objectives for 2009-2013 Maintenance of leadership in Central Federal District telecommunications market › Growth of the Company’s revenues up to › Increase of latest and most highly profitable telecommunications services’ contri- RUR33.72 billion given that total volume of bution to the Company’s total income up to 38.6%; the Central Federal District telecommunica- Strengthening of the Company’s positions in the corporate segment and provision tions market was RUR48.55 billion (excluding › for a share of income from corporate customers of not less than 33.5% by 2013; Moscow city market and mobile operators income); › Reorganization of sales and maintenance system in mass market segment, strengthening of the role of indirect and distance sales; › The Company’s share in the Central Federal District market was 70% (excluding mobile op- › Maximum possible increase in income from traditional telecommunications ser- erators); vices by means of efficient management of tariff plans and deployment of service packages; › Number of traditional telephony subscribers exceeded 6.76 million people; › Active operations in the state sector which is fast developing as a solvent market segment; › The number of subscribers of CenterTelecom’s xDSL broadband Internet access service exceed- › Provision of solutions developed jointly with other mega regional companies of ed 705,000 people. Svyazinvest and CenterTelecom’s subsidiaries (RTS OJSC and CenterTelecom Ser- vice CJSC). Development of telecommunications infrastructure using the latest telecommunications technologies › Large scale growth of the Company’s public › Modernization of existing technical infrastructure with the purpose of develop- pay telephone park in line with implementa- ment of priority commercial business directions; development of united flexible tion of universal service mechanism in Russia’s multiservice network infrastructure based on NGN technologies in 90% of the Central Federal District’s regions; Central Federal District; › Expansion and modernization of telecommu- › Organization of centralized monitoring of the Company’s network resources; nications network infrastructure through the Building of a unified centralized automated technical information system and an construction of fiber optic telecommunications › automated centralized repair bureau; lines and implementation of FTTx technologies as a part of DOMOLINK program; › Development of norms and regulations on operating maintenance, use and monitoring of the functioning of NGN networks, line cable facilities, broadband access Development of CDMA-450 mobile telecom- › and public pay telephones; munications in three Central Federal District regions as part of a mobile communications proj- › Certification and development of requirements for IP/MPLS with regard to trans- ect implemented jointly with Sky Link CJSC. mission of voice traffic in an NGN environment. Implementation of latest information systems at CenterTelecom OJSC › Implementation of Oracle E-Business Suite › Development of centralized client oriented portal of CenterTelecom customers’ automated management system by the Com- settings management as part of the service quality improvement program; pany’s General Directorate and 15 regional Formation of a corporate Call Center; branches; › › Implementation of CRM; › Implementation of Start Automated Billing Sys- tem within the framework of a service quality › Implementation of a unified prebilling platform; improvement program; › Implementation of a system of inter-operator settlements; Creation of centralized corporate information › › Implementation of Start-IP centralized module in the Start Automated Billing systems based on IT solutions from the leading System with the purpose of unification of settlements with customers for new international companies to increase the Com- services. pany’s efficiency. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Key Business Directions of the Company

› Short Summary of Telecommunications Industry Development in Russia

› The Company’s Position in the Telecommuni- cations Services Market of the Central Federal District in Russia

› Core Development Trends of the Company

› Prospects for Development WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 26

Short Summary of Telecommunications Industry Development in Russia

In 2008 the Russian fixed telecommunications mar- At the same time operators point out that the inflow ket grew by 16% in rubles; its volume reached almost of new subscribers exceeds the outflow. According to US$22 billion. Among the key drivers of growth were many market participants’ forecasts in 2009 the num- the inter-operator services segment (21% increase ber of corporate users in Russia will rise by 5-10%. against 2007) and the documentary services seg- This will be followed by a decrease in ARPU, so ruble ment (34% growth against 2007) basically formed income from corporate users in 2009 will be more by broadband Internet access and data transmission likely at the level of 2008. services. The crisis’s impact on the fixed voice telecommunica- The broadband Internet access market was develop- tions market was insignificant. Prior to the crisis this ing faster than other telecommunications markets. market was growing quite slowly because of market The individual subscriber base in Russia in general saturation and competition with IP-telephony and increased 70%; however the trend was lower than ex- mobile communications. Given the current market pected. Given the dynamics of previous periods and development trend it is expected that in 2009 the lo- the operators’ investment plans it was expected that cal fixed voice telecommunications services segment in 2008 the number of individual subscribers in the will grow by 5% in rubles due to increased tariffs and market would double. However two consequences of retention of the subscriber base; the long distance the crisis which came to Russia in the fourth quarter telecommunications segment will remain at the 2008 of 2008 had a negative impact on achievement of the level. expected indicators: decreased consumer demand and suspension of programs for the construction of Thus it is expected that the ruble income of most regional FTTx networks by a number of major opera- fixed telecommunications services operators will not tors. change significantly, and income from other segments such as home broadband Internet access will The crisis revealed itself even more in the corporate even increase by 25%-30% (including income from users segment. A number of corporate customers users connected to the Internet in 2008). Limited has not changed significantly in the fourth quarter of investment opportunities of the operators will give 2008, however the operators point out a lowering of some advantage to the traditional telecommunica- payment discipline. Thus the corporate clients’ ARPU tions operators within next two years in strengthen- decreased given that the subscriber base remained ing their positions as they have expanded networks the same. Some operators working with medium and for the provision voice and IP telephony services. small sized companies have registered a decrease in income from corporate users in 4Q 2008. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 27

The Company’s Position in the Telecommunications Services Market of the Central Federal District in Russia

In 2008 the Company maintained a leading position in the telecommunications market in the 17 regions of the Central Federal District of Russia. The Company provided 70% of all telecommunications services in the District (excluding the Moscow city market and mobile operators’ share). The Company’s position with regard to separate types of telecommunications services was as follows: › local telecommunications – 81.4%; › intra-zone telecommunications – 91.7%; › Internet access, data transmission – 45.0%.

CenterTelecom's share in the telecommunications CenterTelecom's share in the local telecommunications services market of the Central Federal District * services market of the Central Federal District*

454 50 555 454 50 555 404 600 404 600 353 655 353 655

303 700 303 700

252 757 252 757

202 800 202 800

151 855 151 855 101 900 101 900 5 101000 955 5 101000 955

CenterTelecom–70% CenterTelecom–81.4% Other operators–30% Other operators–18.6%

CenterTelecom's share in the intra-zone CenterTelecom's share in the data transmission and Internet telecommunications services market of the access services market of the Central Federal District* Central Federal District*

454 50 555 454 50 555 404 600 404 600 353 655 353 655

303 700 303 700

252 757 252 757

202 800 202 800

151 855 151 855 101 900 101 900 5 101000 955 5 101000 955

CenterTelecom–91.7% CenterTelecom–45% Other operators–8.3% Other operators–55%

* In 2008 excluding Moscow city market WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 28

The following trends had impacts on the develop- and partnerships, takeovers of local operators by ment of CenterTelecom, growth of its revenues and national operators, active expansion of Moscow its market position in 2008: operators into regional markets and their entry › considerable state influence on the business of into the national market, as well as in alternative core operators (including state regulation of lo- operators’ construction of their own last mile main- cal and zonal telecommunications, and cost of ly based on FTTH technology. At the same time interconnection and traffic transfer); all core market players are implementing various investment programs aimed at the development new operators’ entry into the long distance tele- › of new technologies. It is worth pointing out that communications market; mobile operators are becoming more active in the › completion of distribution of the subscriber Internet access market and traditional telecommu- base in accordance with tariff plans based on the nications services segment. subscriber fee/combined/time-based payment scheme; All these factors contribute to aggravation of the › decreased cost of technical solutions for local competition in the Central Federal District’s tele- telecommunications operators and consequent communications market. Among CenterTelecom’s removal of obstacles to entry into the market; core competitors for 2008 are the following com- › expansion of technical opportunities of alterna- panies: tive arrangement of the last mile/last inch allow- › leading national operators working throughout ing further development of alternative operators; the Central Federal District (MTS OJSC, Megafon › replacement of local and intra-zone telephony OJSC, VimpelCom Group which includes Golden with mobile communications and convergent Telecom and Corbina Telecom, and TransTeleCom technologies (voice information transmission Company CJSC); through IP protocol); › multiregional operators functioning in the ter- › emergence of new major corporate clients in the ritory of several regions of the Central Federal Central Federal district, including an increase District and actively forming their own regional in the number of companies with a distributed network (COMSTAR-United Telesystems OJSC, structure (creation of demand for VPN, increased Multiregion CJSC, Electro-Com Holding Compa- requirements for high quality complex services); ny etc); › saturation of the traditional services segment, re- › regional operators (Central Telegraph OJSC, Ko- distribution of sector’s revenue structure towards stroma City Telephone Network OJSC, Sever- new services; TransCom OJSC (LancTelecom), Oskolnet CJSC, Belrogodskiye Tsifrovye Magistrali CJSC etc). › development of the content services market, creation of demand for these services and applications, as well as for convergent services of fixed and mobile telecommunications; › strengthening of competition in new and content services segments especially from intercon- nected and mobile operators, and also Moscow operators, service and content providers.

The influence of the trends described is mainly reflected in active integration of telecommunications operators including organization of alliances WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 29

Core Development Trends of the Company

In 2008 the Company’s activities were conducted › provision of broadband Internet access services in conformity with CenterTelecom’s Development through existing networks on the basis of xDSL Program for 2008-2012 approved by the Company’s technologies with a focus on Ethernet and FTTB Board of Directors in 2007. The Program was aimed technologies; at the creation of a unified multifunctional and user › efficient combination of accomplishment of tasks friendly information and communications space and of state importance and modernization of network also at use of the potential of the Company’s subsid- infrastructure based on NGN technologies; iary business. › increased in operating efficiency and reduction of costs by means of business process optimization, In 2008 the Board of Directors of CenterTelecom ap- centralization of functions, outsourcing of auxiliary proved a Program of CenterTelecom OJSC’s Develop- functions, switch to new network technologies and ment for 2009-2013. The Program’s large scale plan implementation of information systems. established the main strategic priorities and business directions of CenterTelecom for the medium term. For the accomplishment of priority tasks, Center- Key target indicators of the Program demonstrate dy- Telecom sees several basic directions in the techni- namic development of the Company in the telecom- cal development sphere which will be a basis for the munications market of the Central Federal District. achievement of planned economic results. They include: In 2009-2013 CenterTelecom anticipates the fol- switch of construction of networks to ADSL, VDSL, lowing directions in order to maintain the leading › FTTx and GPON technologies with a reduction in positions in the telecommunications market of the the length of copper distributing sections; District given current trends of telecommunications development: › switch to NGN/IMS technology through replacement of analogue exchanges and modernization of › qualitative change in the revenue base: increased digital exchanges; share of latest highly profitable telecommunica- development of basic infrastructure through con- tions services in all volumes of services provided by › sistent completion of the construction of intra-zone the Company; optic fiber lines to each district’s center; › strengthening of positions in the corporate sector › digitalization of the network through use of univer- and increased revenue share from the corporate sal access which brings a quick return to the Com- segment; pany; › reorganization of the sales and maintenance sys- › expansion of transmission capacity of the inter re- tem in the mass market segment, strengthening of gional data transmission network and provision of the role of indirect and distance sales; competitive and attractive services on basis of it; › maximum increase in revenues from traditional › provision for a central role for unified NGN network telecommunications services by means of efficient in the Company’s telecommunications infrastruc- management of tariff plans and packages of- ser ture by 2013; vices; › development of new system solutions, change in › modernization of existing telecommunications in- approach to network administration, use of wide frastructure of the Central Federal District with a range of equipment with varying transmission ca- view to development of priority commercial busi- pacity; ness directions, and formation of unified flexible › development of mobile telephone communications multi-service telecommunications infrastructure based on WiMax, CDMA; based on NGN technologies; WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 30

› use of new methods of management, control, implementation of the latest information technolo- monitoring and diagnostics of telecommunications gies in the Company’s day to day practices. Among means, increased mobility and qualification of per- core directions of CenterTelecom’s information sys- sonnel; tems development are the following: › development of means to control telephone and › use of ERP system based on Oracle E-Business Suite data transmission network traffic; (OEBS) put into operation in 2008; › centralization of technical records. › provision of automated settlements and interactions with clients; At the same time CenterTelecom’s management con- › development of the technical architecture of cen- siders further increase in the efficiency of the Compa- tralized IT systems; ny’s business and extension of network infrastructure › automation of business processes for the corporate administration impossible without raising the rate of information processing.

Prospects for Development

In current economic situation the Company’s core porate users through the use of core subsidiary task is the optimization of the investment program resources and formation of own resources for the and increased efficiency of the Company’s opera- provision of sales and maintenance services to tions. In 2009 the investment program is focused on corporate clients; the development of the latest telecommunications › reorganization of the sales and maintenance sys- services based on the FTTx network being built cur- tem in mass market client segment, strengthen- rently, and also on highly efficient client programs ing of the role of indirect and distance sales; with an ROI term of less than three years. › active operations in the state sector which is a fast developing and solvent market segment; Development of CenterTelecom’s priority commer- increased operating efficiency and reduced costs cial directions will be followed by the use of new › through optimization of business processes, cen- innovative technologies, increased operating ef- tralization of functions, outsourcing of auxiliary ficiency and cost reductions. The Company’s basic functions, the adoption of new network tech- goals include maintaining and further strengthen- nologies and implementation of information sys- ing of its leading positions in the telecommunica- tems; tions market of the Central Federal District, and also regional expansion through entry into the › one-stop-shopping: provision of solutions devel- Moscow corporate market for Internet access and oped jointly with other mega regional Svyazin- data transmission. vest companies, Central Telegraph OJSC, Rostele- com OJSC, and the Company’s subsidiaries (RTS Target indicators of CenterTelecom’s efficiency are OJSC and CenterTelecom Service CJSC). as follows: In the field of products and services management increase of the newest highly profitable telecom- › CenterTelecom has set a number of strategic tasks munications services’ contribution to aggregate providing for correspondence of the corporate income up to 38.6%; product portfolio with client requirements and for › strengthening of the Company’s positions in the the development of specialized product packages corporate sector and provision for a not less than focused on target user segments. The most impor- 33.5% share in total revenues by 2013, including tant part of CenterTelecom’s successful activities is revenues from Moscow and Moscow region cor- WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 31

the development of new services for the mass mar- two neighboring centers by 10GE channels for the ket client segment. Currently the most promising transmission of inter-regional traffic. sector is the development of broadband Internet access. In future CenterTelecom plans to provide Currently CenterTelecom’s optical fiber telecom- content services on the basis of broadband net- munications lines represent 60.4% of all length of works including multimedia and Internet content intra-zone telecommunications lines. In 2009 new services. intra-zone optic fiber lines will be built in seven CenterTelecom’s branches: Moscow, Tver, Kursk, Ka- The Company’s technical development will be luga, Bryansk, Ryazan and Upper Volga branches. based on existing technologies with the use of Total length of the lines will be 1,174 kilometers. new system solutions and changed approaches to By 2013 the Company plans to switch to optic fiber the construction of local networks (replacement of intra-zone lines in full. main copper lines with optical fiber lines and reduced length of copper distribution sections), as For the development of data transmission and In- well as expansion of the range of equipment with ternet access services in major cities of the Cen- varying transmission capacities, and also on provi- tral Federal District with dense population the sion of the broadest possible service range to the Company plans to develop an Internet access in- clients. frastructure based on FTTx allowing provision to subscribers of an access channel with up to 100 In 2009 CenterTelecom will continue the construc- Mbps speed in both directions and NGN services. tion of the telecommunications network on the This technological solution’s progress is related to basis of Dense Wavelength Division Multiplexing a possible increase in regional expansion in the (DWDM). After completion of installation of DWDM course of demand growth given low costs and use equipment in the Kursk-Orel section all capitals of of existing infrastructure. As distinct from xDSL the regions in the Central Federal District, other technologies FTTx has great potential from the than Ivanovo and Kostroma, will have dedicated point of view of growth in the subscriber base. It channels each with 10 Gbps transmission capacity. is possible to increase several-fold the volume of Moreover the Company plans to complete the con- provided broadband Internet access services on struction of regional data transmission networks in the basis of existing optic fiber lines and replace- the Tver and Kursk branches. Tver branch will use a ment of outdated switching equipment with the new line of DWDM OSN6800/3800 transport equip- latest ones (equipment providing 1Gbps speed can ment, highly efficient S93XX switchboards and be replaced with the equipment providing 10Gbps CX600 routers by Huawei Technologies. speed). The Company will be able to release DSL facilities by switching the Company’s standing cus- In future modernization of inter-regional data trans- tomers to FTTx. It will allow the provision of new mission will be conducted on the basis of the need services, to improve the attractiveness of the ser- to switch to double star topology. The trunk net- vices and to increase the subscriber base. work will have not less than 20 Gbps transmission capacity in each region with possible increased ca- CenterTelecom plans to switch to the NGN network pacity up to 40 Gbps. Equipment for a typical transit in several stages depending on the level of infra- node will support 3-6 10GE ports for interconnec- structure development in each branch’s network. tion with Autonomous System Boundary Router Softswitches will be built in the capitals of the re- (ASBR) regional networks nodes. All capitals of the gions where the branches operate. The softswitch- Central Federal District regions will be connected es will function as trunk exchanges, providing IP with each other by two independent 10GE chan- and TDM connections management and VoIP traffic nels with traffic exchange nodes in the Moscow routing. In the capitals of the regions and in local International Telephone Exchange-9 and Moscow networks of city and rural telephone networks this International Telephone Exchange-10. Moreover is intended to replace trunk media gateways and each capital of the region will be connected with MSANs. Replacement of analogue exchanges with WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 32

MSAN access nodes equipment installed in sepa- In 2009 the Company also plans to maintain imple- rate boxes will allow access nodes to be brought mentation of centralized IT programs including closer to subscribers (at a distance of 500-700 me- implementation of CRM system, unified prebilling ters) and to release engineering and utility service platform, inter-operators settlement system, for- areas. This technical solution will be used in each mation of a unified Call Center, implementation of CenterTelecom branch. a Start-IP module of Start Automated Billing System for unification of the settlements with subscribers for new services. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Results of the Company’s Operations in 2008

› Key Economic Figures

› Revenues Structure from Telecommu- nications Services for 2008

› Financial Activities

› Investment Activities

› Tariff Policy WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 34

Key Economic Figures

In April 2009 CenterTelecom reported its audited financial results for 2008 in accordance with Russian Account- ing Standards (RAS). The Company’s results were as follows: › 4.03% increase in CenterTelecom revenue from core operations to RUR33.715 billion for 2008 against RUR32.409 billion for 2007; › 9.91% increase in expenditures on core operations, to RUR26.351 billion; › EBITDA growth to RUR12.207 billion or a 4.29% increase against 2007; profitability based on EBITDA reached 36.21%; › Net profit 28.89% decreased from RUR3.635 billion in 2007 to RUR2.585 billion in 2008; › Production cost per ruble of revenues increased by RUR0.0419 and reached RUR0.7816 (against RUR0.7397 in 2007); › 40.2% rise in number of lines per employee, to 185 lines (compared with 132 for 2007).

RUR Million 2008 2007 Change, % Revenue from core operations 33,715 32,409 +4.03 Including revenue from telecommunications services 31,872 30,821 +3.41 Expenditure on core operations 26,351 23,974 +9.91 Including depreciation 4,278 3,834 +11.58 EBITDA* 12,207 11,704 +4.29 EBITDA margin** 36.21% 36.11% - Sales profit 7,364 8,435 -12.70 Net profit*** 2,585 3,635 -28.89 Profitability on sales profit 21.84% 26.03% - Profitability on net profit 7.67% 11.22% -

* EBITDA is calculated as earnings before taxes plus interest payable plus depreciation plus leasing payment minus interest receivable. ** EBITDA margin is calculated as EBITDA/revenues *** Decrease in net profit for 2008 was mainly due to revaluation of CenterTelecom debt denominated in foreign currency in the amount of RUR955 million and the creation of provisions for decrease in Oracle E-Business Suite cost in the amount of RUR570 million. In December 2008 CenterTelecom’s management acknowledged a decrease in Oracle E-Business Suite cost on the basis of estimation of the number of actual users registered in the course of implementation of the software system. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 35

CenterTelecom Income Structure for 2008, RUR million Indicator 2008 2007 Change, % Intra-zone telephone communications* 6,250 5,853 +6.78 City and rural telephone communications 16,012 16,005 +0.04 Data transmission and Internet access services 4,588 3,082 +48.86 Including Internet access services 3,843 2,488 +54.46 Interconnection and traffic transfer services 3,793 4,685 -19.04 Cooperation and agency services 1,055 1,148 -8.10 Other telecommunications services (core operations) 1,229 1,170 +5.04 Income from other sales (non-core operations) 788 466 +69.10 Including income from assets lease 572 304 +88.15 Total 33,715 32,409 +4.03

* Income from intra-zone telecommunications services including income from intra-zone communications through public pay phones and from the provision of intra-zone telecommunications channels

CenterTelecom’s Income Structure in 2007 – 2008, RUR Million 466 788 Income from other sales 1,170 1,229 (non-core operations) 1,148 1,055 Other telecommunications services 4,685 3,793 (core operations) Cooperation and agency services 3,082 4,588 Interconnection and traﬃc transmission services Data transmission and Internet access services City and rural telephone communications Intra-zone telephone communications

16,005 16,012 In comparison with 2007 in 2008 revenue growth reached RUR1.306 billion mainly owing to local telephone communications, intra-zone communications, data transmission and Internet access services, interconnection and traffic transfer services.

5,853 6,250 In 2008 revenues from local telephone communications services rendered to individual subscribers amounted to 2007 2008 RUR11.393 billion (against RUR11.35 billion in 2007). Rev- enues from the provision of local telephone connections and provision of telecommunications lines to corporate users were RUR2.5 billion (against RUR2.841 billion in 2007). WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 36

Structure of revenues from local telephone communications services provision to CenterTelecom's individual subscribers, RUR million

Revenues from provision

454 50 555 of telecommunications lines 404 600 Revenues from local 353 655

303 700 telephone connections 4,994 4,560 252 757 202 800 Tariff plan with subscriber 151 855 based payment system 101 900 5 100 955 Tariff plan with time based payment system Tariff plan with combined 86% 11% 3% payment system

454 5500 555 404 600 6,356 6,833 353 655

303 700

252 757

202 800

151 855 101 900 5 100100 955

2007 2008 84% 13% 3%

Structure of revenues from local telephone communications services provision to CenterTelecom's corporate subscribers, RUR million

Revenues from provision of

454 50 555 telecommunications lines 404 600 Revenues from local 353 655

303 700 telecommunications connections

252 757 1,322 1,467 202 800 Tariff plan with subscriber 151 855 based payment system 101 900 5 100 955 Tariff plan with time based payment system Tariff plan with combined 55% 45% payment system

454 5050 555 404 600 353 655

303 700

1,148 1,033 252 757

202 800

151 855 101 900 5 100100 955

2007 2008 3.32% 27% 41% WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 37

CenterTelecom’s revenues from the provision of inter- The Company’s revenues from cooperation and agen- connection services in 2008 amounted to RUR71 mil- cy services provided in accordance with an agree- lion (RUR289 million in 2007) including RUR17 million ment concluded with Rostelecom OJSC amounted to from payments for installation of points of intercon- RUR1.047 billion (RUR1.14 billion in 2007), and reve- nect (POI) (the same number as in 2007) and RUR54 nues from these types of services in accordance with million for POI maintenance (against RUR273 million an agreement concluded with MTT OJSC amounted for 2007). The decrease in revenues from POI mainte- to RUR7 million (as well as in 2007). nance was caused by exclusion of this service from the list of services related to interconnection starting CenterTelecom’s revenues from telegraph commu- March 1, 2008 in accordance with a Decree #666 “On nications services, data transmission and telem- Amendments to Several Decrees on Telecommunica- atic communications services for 2008 amounted to tions Issues of the Government of the Russian Federa- RUR4.817 billion (against RUR3.266 billion for 2007). tion” issued by the Government of the Russian Fed- Out of this amount data transmission and Internet eration on October 12, 2007. access services brought RUR4.588 billion revenues (RUR3.082 billion for 2007), and revenue from tele- The Company’s revenues from traffic transfer services graph communications were RUR229 million (against in 2008 reached RUR3.721 billion (against RUR4.395 RUR184 million for 2007). The rise in revenues from billion for 2007). The reduction in revenues from traf- data transmission and Internet access services was fic transmission is explained by a cancellation from mainly due to a dynamic increase in the subscriber January 1, 2008 of a compensation adjustment for lo- base for broadband Internet access under the DO- cal and zonal call initiation which had been in effect MOLINK brand in 2008. since 2006.

CenterTelecom Expenses Structure for 2008, RUR million Indicator 2008 2007 Change, % Depreciation 4,278 3,834 +11.58 Wages 7,334 8,352 -12.19 Social insurance 1,691 1,895 -10.77 Material costs 1,791 1,925 -6.96 Expenses on telecommunications operators' services 2,796 3,285 -14.89 Provisions for universal telecommunications service 328 314 +4.46 Payments to non-state pension fund 419 251 +66.93 Rent payment 2,952 1,364 +116.42 Including lease payments 2,311 757 +205.28 Other expenses 4,762 2,754 +72.91 Total 26,351 23,974 +9.91 WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 38

CenterTelecom Expenses Structure for 2007 – 2008, RUR Million 2,754 4,762 Other expenses

Rent payment 1,364 251 314 2,952 Payments to non-state pension fund 3,258 419 328 Provisions for universal 1,925 2,796 telecommunications service Expenses on telecoms operators services 1,895 1,791 1,691 Material costs Social insurance Wages 8,352 7,334 Depreciation

3,834 4,278

2007 2008

The increase in expenses on core operations in 2008 In 2008 on the basis of calculations losses from the in comparison with 2007 reached RUR2.377 billion. provision of universal services subjected to reim- bursement are reflected in CenterTelecom’s other The decrease in expenses on wages is caused by re- expenses. The correctness of the calculation of these duced personnel numbers was in line with the imple- losses is to be confirmed by RSM Top-Audit LLC, an in- mented personnel optimization program. Decreased dependent audit company (license #Е 004827 dated material costs were caused by cost optimization and August 1, 2003). In 2008 the Company received the business process restructuring programs conducted following reimbursements for losses from the Univer- by CenterTelecom. sal Service Fund: › For services rendered in the current year – RUR885 Increased expenses on third party services was main- million (RUR37 million for 2007); ly caused by an increase in expenses for maintenance › For services rendered in the previous year – RUR36 of public pay telephones in line with the Company’s million (RUR0.172 million in 2007). program of implementation of the universal service mechanism in the Central Federal District and the Increases in other expenses in 2008 in comparison Company’s business process optimization. with 2007 for RUR1.567 billion were due to revaluation of debt on loan agreements denominated in for- Increased expenses on rent payment were caused by eign currencies and to the creation of provisions for a a rise in lease payments related to implementation decrease in Oracle E-Business Suite cost. of universal service mechanism in the Central Fed- eral District. According to current Russian legislation these expenses will be reimbursed from the Universal Service Fund. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 39

Revenues Structure from Telecommunications Services for 2008

Analysis of CenterTelecom’s activities in 2008 reflects a CenterTelecom's Installed Capacity significant increase in share of revenues from new non- in 2008, numbers regulated telecommunications services. The Com- pany’s management is undertaking significant work aimed at decreasing CenterTelecom’s dependence on 454 50 555 the tariffs for local and intra-zone telecommunications 404 600 regulated by the state. However according to market 353 655 analysts’ opinions regulated traditional services will 303 700 maintain their significant role in the revenue struc- 252 757 ture of Svyazinvest’s companies in the medium term. 202 800 151 855 101 900 Local telecommunications 5 101000 955 As of the end of 2008 CenterTelecom’s local telephone network consists of 8,358 automated telephone exchanges with 7,233,510 numbers total CTE–6,198,059 installed capacity including 1,613 City Telephone Ex- RTE–1,035,451 changes (CTEs) with installed capacity for 6,198,059 numbers and 6,745 Rural Telephone Exchanges (RTEs) with installed capacity for 1,035,451 numbers. During 2008 the installed capacity of local telephone networks increased by 130,936 numbers. Dynamics of CenterTelecom Network's Installed Capacity, numbers

2008 7,233,510

2007 7,102,574

2006 6,983,115

2005 6,950,668

2004 6,798,128

0 1,000,0002,000,0003,000,0004,000,0005,000,0006,000,0007,000,0008,000,000

The level of digitalization of the local telephone net- exchanges increased by 675,446 numbers, including work as of December 31, 2008 reached 66% (57.7% 559,280 CTE numbers and 116,166 RTE numbers. for 2007), including 70.2% in CTEs and 40.6% in RTEs (62.4% and 29.7% in 2007 accordingly). The number Usage of installed capacity at local telephone net- of electronic telephone exchanges increased by 765 works was 93.5% as of December 31, 2008 (94.5% for 2008, including 145 city electronic telephone as of December 31, 2007) including 94.7% at CTEs exchanges and 620 rural electronic telephone ex- (95.5% as of December 31, 2007) and 88.6% at RTEs changes. Installed capacity of electronic telephone (88.4% as of December 31, 2007). WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 40

Dynamics in Increase of CenterTelecom's Activated Capacity for 2008, units

2008 6,763,530

2007 6,711,392

2006 6,609,951

2005 6,483,569

2004 6,298,611

0 1,000,0002,000,0003,000,0004,000,0005,000,0006,000,0007,000,0008,000,000

CenterTelecom's Activated Capacity, Distribution of Traditional Telecommunications for 2008, numbers Services Subscribers of CenterTelecom in 2008

454 50 555 454 50 555 404 600 404 600 353 655 353 655

303 700 303 700

252 757 252 757

202 800 202 800

151 855 151 855 101 900 101 900 5 100 955 5 100 955

CTE–5,866,901 Individuals – 86.50% RTE–896,629 Corporate Subscribers – 8.90% State Funded Organizations – 4.60%

The number of the Company’s main telephone sets The structure of CenterTelecom’s subscriber catego- as of December 31, 2008 reached 6,700,251 items, ries did not change significantly in 2008. Individual including 5,738,599 CTE main telephone sets and subscribers represent 86.5% of all users, 8.9% are 961,652 RTE main telephone sets. The number of corporate customers, and 4.6% of the Company’s main telephone sets for 2008 rose by 47,266 items subscribers are state financed organizations, as of including growth of CTE main telephone sets by 31 December 2008. 54,289 items and reduction of RTE main telephone sets by 7,023 items. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 41

Capacity of telephone exchanges which have ac- › Siemens softswitches were installed in Belgorod cess to automated long distance exchanges reached and Kaluga branches in 2007. In 2008 they were 7,228,203 numbers as of December 31, 2008 includ- expanded. Half of the Kaluga regional zonal tele- ing 6,193,132 CTE numbers and 1,035,071 RTE num- phone network was switched from SDH transport bers. The ratio of capacity of telephone exchanges zone to the regional data transmission network. which have access to automated long distance ex- › The Company put into operation Huawei SoftX3000 changes to total installed capacity of the Company’s softswitches in the Bryansk and Tambov branches. telephone exchanges reached 99.87% as of Decem- Magellan NGN exchanges were installed in the Tver ber 31, 2008 (99.87% as of December 31, 2007). › and Ryazan branches. Installed capacity of telephone exchanges with › CenterTelecom is conducting stage-by-stage migra- the technical capability for time-based local billing tions to NGN networks in Voronezh, Tambov and Tula reached 5,960,853 numbers as of December 31, 2008 branches. In the first stages of the migration a 10 GE including 5,428,977 CTE numbers and 531,876 RTE IP/MPLS transportation network based on Huawei numbers. The ratio of capacity of telephone exchang- softswitches was built. Currently the replacement of es with the technical capability for time-based local central exchanges with media gates and subscriber billing to total installed capacity of the Company’s access nodes based on SI2000 MSAN equipment by telephone exchanges reached 82.4% as of December Iskratel is occurring in the capitals of the regions. 31, 2008 (77.6% as of December 31, 2007). › In connection with the switch to the 498 code in the Moscow region a distributed network of Hua- In 2008 CenterTelecom undertook the moderniza- wei SoftX3000 softswitches was built as a base net- tion and expansion of transport networks on the work; at the access level an Iskratel SI2000 MSAN basis of DWDM technologies in the Moscow branch and Huawei UA5000 equipment were installed. and in the corporate inter-regional data transmission › SI-2000 v.6 softswitches and SI2000 MSAN subscrib- network. The core of the network with 18 nodes and er access nodes were installed in Belgorod, Bryansk 100GE transmission capacity with DWDM DTN equip- and Orel regions. ment with flexible commutation of optic channels by Infinera Corporation was built in Moscow region. In 2008 the Company was building optic fiber telecommunications lines in its local networks. Length Within the framework of the corporate inter-regional of the optic fiber telecommunications lines reached data transmission network the Company built ten 8,226 kilometers. Total number of carrier channels new centers and modernized six DWDM XDM centers reached 1,726,654 channels as of December 31, 2008, by ECI Telecom in Ryazan, Vladimir, Smolensk, Bry- and digital channels represent 99.4% of all channels. ansk, Tver and Verhnevolzhskiy branches. It allowed the arrangement for regional branches of geographi- CenterTelecom, striving to improve the quality and re- cally spaced 10GE channels. Moreover for the zonal liability of its telecommunications network, has been network of the Ryazan branch the Company created laying cable telecommunications lines in place of three additional 1GE channels in the inter-regional overhead circuits, and has transitioned interconnect- network. The Company also installed reconfigurable ing lines from low traffic to multichannel systems, in- optical add-drop multiplexers (ROADMs) in Smolensk cluding to digital systems, increasing the number of and Ryazan branches which will be later used for re- telecommunications channels. In 2008, 2,403 kilome- construction of the network according to double star ters of overhead wire were taken out of operation. topology. Intra-Zone Telecommunications Construction of new exchanges and reconstruction of existing ones was undertaken in 2008 only with In 2008 года 28 zonal telephone centers with 267,579 equipment corresponding to the NGN concept. The data ports are operating in CenterTelecom’s network. technical means supporting TDM technology were Digital zone transit centers of EWSD, S-12, AXE-10, used only for the expansion of existing exchanges. SoftX3000 types are installed in all regions where the Company operates. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 42

In 2008 in the field of development of intra-zone New Telecommunications Services circuits CenterTelecom focused on further increasing the automation and digitalization levels of long In 2008 CenterTelecom significantly strengthened its distance communications and further improvement positions in the broadband xDSL Internet access mar- of the telecommunications means’ operating quality. ket. As part of the DOMOLINK project launched in 2006 The length of intra-zone cable circuits as of December an Internet access service based on xDSL technology 31, 2008 was 30,195.7 kilometers including 19,009.5 is available now for the inhabitants of all regions in kilometers represented by optic fiber lines. Russia’s Central Federal District. The volume of Inter- net traffic through dedicated lines in 2008 grew sev- Generally a significant increase in the length of intra- en fold against 2007 and reached 17,039,959.5 GB. At zone long distance circuits occurred owing to con- the same time for 2008 the volume of Internet traffic struction and putting into operation of intra-zone op- transferred through dial up lines decreased by 23.3% tic fiber telecommunications lines and to upgrading of against 2007 and reached 2.117 million minutes. the equipment up to the higher STM level. The total increase in length of CenterTelecom’s intra-zone long distance circuits for 2008 was 4,437,400 kilometers.

Dynamics of CenterTelecom's Internet Access Services' Subscriber Base, people

2008 705,075

2007 304,000

2006 115,052

2005 16,619

2004 6,232

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000

Revenues from New Services, RUR billion

2008 4.6

2007 3.1

2006 1.9

2005 1.4

2004 0.9

0 1 2 3 4 5 WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 43

Currently CenterTelecom’s broadband networks became possible after expansion of CenterTele- are mainly based on xDSL technology. This solu- com’s coverage zone and implementation of the tion allows the rendering of services requiring a EV-DO regime. high speed digital transmission circuit through existing cable telephone networks based on cop- In 2008 CenterTelecom continued work on the per twisted pair. xDSL installed capacity in 2008 support of the competitiveness of its GSM mobile reached 953,584 ports. network in Tambov region in order to retain Cen- terTelecom’s share of the mobile communications In September 2008 CenterTelecom began im- market in this region. For this purpose 15 new plementation of the Program “Construction of base stations were built in 2008. This allowed the Broadband Access Networks on Basis of FTTx.” As achievement of almost full coverage of the Tam- of December 31, 2008 the Company built 18,744 bov region with the GSM network (96%). FTTx ports in 365 resident houses in the territory of Voronezh, Verhnevolzhskiy, Lipetsk and Tula branches. Implementation of Information In late 2008 the first stage of the IP TV program Technologies into Business Administration was put into operation in the Vladimir, Voronezh, In 2008 the Company implemented a number of Lipetsk, Moscow and Tula branches. Under the centralized IT programs in order to provide for program BCC-SDP-MM-070407 equipment sets the automation of management processes, their necessary for the provision of access to multime- transparency and efficiency. dia information have been installed. The sets include the BCC-SDP-MM multimedia service provi- Among them was completion of implementation sion platform and BCC-CN-MM digital TV and voice of the functional units of ERP system based on broadcasting system made by Business Computer Oracle E-Business Suite (OEBS) (Finance, Logistics, Center CJSC. Personnel, Wages). For provision of full support of the Company’s accounting records maintenance In 2008 a powerful impulse to development was in accordance with Russian Accounting Standards given to CDMA-450 mobile network in the terri- (RAS) a sub-system of accounts correlation was tory of Ivanovo, Kostroma and Yaroslavl regions. implemented in OEBS ERP system. Moreover OEBS During 2008 102 new basic stations were built was integrated with Start Automated Billing Sys- and put into operation. This allowed expansion of tem and IBM Budget Planning System Cognos. the coverage zone which as of December 31, 2008 covered 85% of Kostroma region, 90% of Ivanovo Within the framework of a Project for Equation region and 95% of Yaroslavl region. The resources of Business Processes of the Settlement Services of CDMA-450 networks in Verhnevolzhskiy branch Provision and Automated Billing System in line and GSM network in Tambov region were used for with Unified Program for Provision of the Settle- implementation of the universal service program ments and Client Relations in all branches of Cen- for interconnection of public pay telephones terTelecom a centralized Start Automated Billing System has been implemented. The Company also through radio channels. launched Interconnect Inter-Operator Settlement System in Moscow, Vladimir, Smolensk, Kaluga In 2008 the Company established partner rela- and Ryazan branches. Moreover in 2008 Center- tions with SkyLink, a mobile operator, which in- Telecom also was working on implementation of cluded roaming agreements, use of an SMS center CRM system. and the SkyLink brand. Service under the SkyLink brand was launched in the mobile telecommuni- With the purpose of development of CenterTele- cations market of Kostroma, Ivanovo and Yaroslavl com IT systems’ technical architecture the Com- regions in September 2008. Establishing the part- pany significantly modernized its corporate Data nership with SkyLink including use of its brand Processing Center. It allowed to create a multi- WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 44

functional engineering and hardware & software systems based on HP Service Desk (management system which provided constant availability and by incidents, problems, changes and releases), safety of information services important for the distant education system allowing to train the Company’s business, its application systems and employees to work with OEBS’s ERP system. Cen- computer resources including servers and appli- terTelecom also put EDI systems into operation cations, data storage, general system and network in Voronezh, Moscow and Tula branches with re- resources. gard to work with incoming, outgoing and internal documents. Switch to putting of IBM Cognos During 2008 the Company implemented an auto- Budget Planning System into operation was one mated system of client support of centralized IT of the important steps for CenterTelecom.

Financial Activities

In 2008 CenterTelecom continued implementation Implementation of the Company’s measures aimed of the financial strategy approved in 2006 strategic at decrease in debt burden and increase of duration tasks of which include improvement of debt struc- of debt portfolio allowed to achieve the following in- ture, reduction of debt costs, decreased debt burden dicators* for 2008 against 2007: and increased operational efficiency. › debt under loans and borrowings decreased by RUR2.086 billion; For financing of its universal services provision pro- charged expenses for debt and borrowing costs re- gram the Company used off balance leasing. After › an open tender CenterTelecom concluded a contract duced by RUR85 million; with RTK-Leasing OJSC. The lessor’s total expendi- › Net Debt/EBITDA ratio decreased to 1.51 for 2008 tures for acquisition of the property were RUR3.213 (1.87 for 2007) owing to the decrease in debt for billion including VAT, and the gross leasing interest 2008 and increase of EBITDA by RUR1.374 billion. rate was 12.985% for 54 months. In 2009 – 2010 CenterTelecom plans to continue de- In September 2008 the Company repaid RUR2.874 creasing its debt burden and optimizing its credit billion debt on fourth bond issue put under offer. For portfolio. financing of this repayment the Company attracted *excluding lease contracts on universal three revolving credit lines from ORGRESBANK OJSC telecommunications service and Bank Société Générale Vostok CJSC for three years for total sum of US$84 million according to the following rate: margin – 2.75%-3.2% per annum + 1 month LIBOR. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 45

Investment Activities

In 2008 CenterTelecom secured RUR6.807 billion for its investment program. This is 29.3% more than for 2007. Capital assets reached RUR6.998 billion for 2008 or 21.7% more than in 2007.

Indicator Measurement Unit 2008 2007 Change, % investments into the Company’s equity capital in total RUR million 6,807.4 5,265.6 +29.3 including: -investment into traditional telephony RUR million 2,879.2 1,832.3 +57.1 - investments in new services and IT RUR million 1,896.5 1,325.9 +43.0 - investments into transmission lines and telecom- RUR million 1,575.9 1,841.9 -14.4 munications network infrastructure - other investments RUR million 455.8 265.5 +71.1 Share of equity funds for financing of investments % 98.7 98.6 - Share of attracted funds for financing of investments % 1.3 1.4 - Fixed assets put into operation RUR million 6,997.5 5,749.5 +21.7 Production facilities put into operation Numbering capacity numbers 824,638 250,638 +229.0 Automatic trunk exchange channels 209,640 480 +336.8 Optic fiber and radio relay links km 2,311 930 +148.5

One of CenterTelecom’s priorities in its investment this sphere were construction of new digital exchang- activities was implementation of programs with high es, as well as the reconstruction and replacement of levels of profitability and short terms for returns on existing analogue exchanges. In 2008 the amount of investment. Among them are the programs focused investment into construction of telecommunications on development of the Company’s broadband Inter- lines decreased by 14.4% in comparison with 2007. net access services for the corporate clients, provision of broadband Internet access in existing networks via Among other important CenterTelecom investment xDSL and FTTx technologies, and also IP TV services. directions were the programs focused on meeting Implementation of these programs allowed the Com- the requirements of Russia’s telecommunications in- pany to apply new technologies, to expand consid- dustry legislation with regard to: erably the range of services rendered through digital › implementation of universal service mechanism; networks and to strengthen its competitive position › reconstruction of telecommunications lines on the in the telecommunications services market. Total val- basis of the NGN technologies; ue of investments in this sphere for 2008 rose by 43% provision of the points of interconnect for local and against 2007 and reached RUR1.897 billion. › intra-zone telecommunications; Financing of traditional telephony services program › release of 1 Index and creation of unified emergen- was raised by 57.1% in 2008. Among the priorities in cy services’ number 112. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 46

Tariff Policy

CenterTelecom’s tariff policy is conducted in - accor In accordance with an Order #529-s/1 by the Feder- dance with legislation of the Russian Federation and al Tariff Service dated December 25, 2007 new tar- is aimed at increase of profitability and investment at- iffs for All-Russia’s TV programs broadcasting were tractiveness of the Company and also at raise of com- introduced. The tariffs grew by 15%. petitiveness of CenterTelecom in the telecommunications market. CenterTelecom’s tariff policy for 2008 › Starting February 1, 2008 in accordance with an was focused on provision of a full range of services to Order #356-s/1 by the Federal Tariff Service dated its customers, maintenance of leadership in the Cen- November 23, 2007 a new tariff plan based on com- tral Federal District telecommunications market and bined payment system for corporate customers increased profitability and investment attractiveness. (where time based billing is technically possible) was approved. Formation of the Company’s tariff policy is influenced › For fixed telecommunications services’ users select- by market and off-market factors including state reg- ed tariff plan based on subscriber payment system ulators’ activities. (where time based billing is technically possible) a tariff for provision of local telephone connections With regard to regulated services the following was established at the limit tariff level approved by changes occurred in 2008: the Federal Tariff Service’s Order #356-s/1 dated No- › In accordance with the Russian Federation’s Gov- vember 23, 2007. Moreover since August 25, 2008 ernment’s Decree #637 “On State Regulating of the amount of tariff for provision of an access to city Tariffs for Public Telecommunications and Postal telephone communications was changed. Communications” dated October 24, 2005 a compensation adjustment for local and zonal call initi- With regard to unregulated services the core working ating has been canceled starting January 1, 2008. directions in 2008 were: On March 1, 2008 tariffs for maintenance of points › further unification of unregulated tariffs for tele- of interconnect have been canceled in accordance communications services; with a Decree #776 dated November 14, 2007. An › consideration of regional specifics and competitive opportunity of collection of a guaranteed payment situation by means of flexible discount system; by customers for traffic transfer has been also pro- › development and introduction of unlimited tariff vided. plans for DOMOLINK services; › Starting January 1, 2008, in accordance with an › formation of service packages. Order #178-s/2 by the Federal Tariff Service dated August 28, 2007 a subscriber based tariff plan for corporate customers for local telephone connections (where time based billing is technically possible) was approved. › Starting January 1, 2008, the tariffs for local connection through a shared telephone line were decreased for individual customers in accordance with changes in a Procedure of Local Telephone Communications Tariffs and Tariffs Plans Calcula- tion made by the Federal Tariff Service (FTS) (Order #140-s/1 by FTS dated August 3, 2007). WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Equity Capital and Securities

› Equity Capital

› Shares

› Market Capitalization

› American Depository Receipts

› Corporate Bonds WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 48

Equity Capital

CenterTelecom’s charter capital and its securities as of December 31, 2008: › Charter capital was RUR6,311,998,965 › outstanding and declared shares: Categories (types) of shares Number, items Par value, RUR I. Outstanding shares: › Common shares 1,578,006,833 3.0 › Type A preferred shares 525,992,822 3.0 II. Declared shares: › Common shares 76,166,167 3.0 › Type A preferred shares 25,405,178 3.0

Equity Capital Structure as of December 31, 2008 Registered shareholders Number of Number of Number of type A % in charter % of common shareholders common shares preferred shares capital shares Russian corporate owners 116 809,811,963 1,418,506 38.5566 51.3187 Foreign corporate owners 17 314,332 655,553 0.0461 0.0199 Individuals 23,718 84,660,723 69,127,711 7.3093 5.3650 Nominee holders 21 683,219,815 454,791,052 54.0880 43.2964 Total 23,872 1,578,006,833 525,992,822 100.0000 100.0000

Distribution of Charter Capital Distribution of Common Shares

454 50 555 454 50 555 404 600 404 600 353 655 353 655

303 700 303 700

252 757 252 757

202 800 202 800

151 855 151 855 101 900 101 900 5 101000 955 5 101000 955

Russian corporate owners – 39% Russian corporate owners – 51% Foreign corporate owners – 0.05% Foreign corporate owners – 0.02% Individuals – 7% Individuals – 5% Hominee holders – 54% Hominee holders – 43% WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 49

Information about the Owners of Major Stakes as of December 31, 2008 Registered shareholders Number of Number of type A % in charter % of common common shares preferred shares capital shares Telecommunication Investment 799,867,813 0 38.0165 50.6885 Joint-Stock Company (owner) Depository Clearing Company CJSC 142,684,706 109,352,782 11.9790 9.0421 (nominee holder) National Depository Center Not-for-Profit 241,006,421 56,579,398 14.1438 15.2728 Partnership (nominee holder) ING BANK (Eurasia) CJSC (nominee holder) 178,086,614 61,408,098 11.3828 11.2855 Citibank Commercial Bank CJSC 38,673,286 123,647,277 7.7149 2.4508 (nominee holder) UBS Nominees CJSC (nominee holder) 61,950,858 99,003,245 7.6499 3.9259 Other corporate shareholders 31,076,412 6,874,311 1.8037 1.9693 Individuals (CenterTelecom employees) 19,911,018 19,952,105 1.8946 1.2618 Other individuals 64,749,705 49,175,606 5.4147 4.1033 Total 1,578,006,833 525,992,822 100 100

Distribution of Charter Capital among Distribution of Common Shares among Registered Shareholders Registered Shareholders

454 50 555 454 50 555 404 600 404 600 353 655 353 655

303 700 303 700

252 757 252 757

202 800 202 800

151 855 151 855 101 900 101 900 5 101000 955 5 101000 955

Svyazinvest OJSC – 38% Svyazinvest OJSC – 51% DCC CJSC – 12% DCC CJSC – 9% NDC NP – 14% NDC NP – 15% ING BANK (Eurasia) CJSC – 11% ING BANK (Eurasia) CJSC – 11% Citibank CB CJSC – 8% Citibank CB CJSC – 2% UBS Nominees CJSC – 8% UBS Nominees CJSC – 4% Other corporate shareholders – 2% Other corporate shareholders – 2% CenterTelecom employees – 2% CenterTelecom employees – 1% Other individuals – 5% Other individuals – 4% WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 50

The Company’s shares are traded in exchange and OTC markets. CenterTelecom shares were traded on MICEX Stock Exchange CJSC (CTLK, CTLKP are listed in Quotation list B) and on RTS OJSC (common shares were traded on the Classic and Order-Driven markets and were listed in the second level of Quotation list A, and preferred shares were traded on the Classic and Order-Driven markets and were listed in the Quotation list B).

The Company’s shares are included in the following indices: › common shares: › RTS; › RTS-2; › RTS –Telecom; › MICEXC TLC › preferred shares - RTS-2

The aggregate trading volume of CenterTelecom’s shares for 2008 was RUR1,447,678,700 including RUR1,210,132,600 representing the value of common shares and RUR237,546,100 representing the value of preferred shares. Trading volumes for CenterTelecom Trading volumes for CenterTelecom common shares for 2008 preferred shares for 2008

454 50 555 454 50 555 404 600 404 600 353 655 353 655

303 700 303 700

252 757 252 757

202 800 202 800

151 855 151 855 101 900 101 900 5 101000 955 5 101000 955

MICEX CJSC – 84.76% MICEX CJSC – 86.22% RTS OJSC – 15.19% RTS OJSC – 13.57% RTS NP – 0.05% RTS NP – 0.21% Source: RTS OJSC, SKRIN Source: RTS OJSC, SKRIN WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 51

Price and Trading Volume Trends for CenterTelecom common Shares in 2008 at RTS OJSC

Price, RUR Volume, RUR million 26 32

28 22 24 18 20

14 16

12 10 8 6 4

2 0 09.01.08 07.02.08 17.03.0817.04.0816.05.0816.06.08 29.07.08 28.08.08 26.12.08

Price, RUR Trading volumes, RUR million

Source: RTS OJSC

Price and Trading Volume Trends for CenterTelecom Preferred Shares in 2008 at RTS OJSC

Price, RUR Volume, RUR million 18 8 15

12 6

9 4 6 2 3

0 0 15.01.08 22.02.08 25.06.08 26.08.08 23.09.08 24.12.08

Price, RUR Trading volumes, RUR million

Source: RTS OJSC WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 52

MICEX was the main stock exchange trading in CenterTelecom’s shares for 2008. However the number of transactions in CenterTelecom common shares dropped by 1100%, while the number of transactions in the Com- pany’s preferred shares reduced two fold against 2007.

Price and Trading Volume Trends for CenterTelecom Common Shares in 2008 at MICEX CJSC

Price, RUR Volume, RUR million 40 22 35

18 30 25 14 20 10 15 10 6 5 2 0

08 08 08 08 08 08 08 08 08 08 08 08 08 08 08 08 08 08

2. 2. 0. 1. 9. 0. 7. 8. 6. 7. 5. 5. 3. 4. 2. 3. 1. 1.

.1 .1 .1 .1 .0 .1 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0

10 30 29 20 09 03 31 20 23 11 12 30 31 18 18 11 09 29

Price, RUR Trading volumes, RUR Million

Source: SKRIN

Price and Trading Volume Trends for CenterTelecom Preferred Shares in 2008 at MICEX CJSC

Price, RUR Volume, RUR Million 16 10

14 8 12

10 6

8 4 6 2 4

2 0

08 08

08 08 08 08 08 08 08 08 08 08

3. 1.

4. 2.

5. 3.

7. 7. 8. 8. 9. 0. 0. 1. 2. 2.

.0 .0

.0 .0 .0 .0 .0 .1 .1 .1 .1 .1

28 28

17 15

07 11

17 04 23 11 28 16 13 31 21 10 29

Price, RUR Trading volumes, RUR Million

Source: SKRIN WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 53

Market Capitalization

CenterTelecom’s market capitalization was decreasing during 2008 owing to impact of the situation in global stock market. As of December 31, 2008 RTS index dropped by 71.6% against January 1, 2008. CenterTelecom’s capitalization decreased by 82.7% for 2008 and reached RUR7,666,611,000 as of December 31, 2008 (11.1% less than decrease of RTS index). Capitalization of the Company in MICEX reduced by 83.7% amounting to RUR7,059,977,000 (15.7% less than decreased MICEX index).

Dynamics of CenterTelecom's Capitalization for 2008

140

120

100

31.12.08

10.12.08 19.11.08 29.10.08 08.10.08 17.09.08 27.08.08 06.08.08 16.07.08 25.06.08 04.06.08 14.05.08 23.04.08 02.04.08 12.03.08 20.02.08 30.01.08 09.01.08

RTS index, % CenterTelecom’s capitalization, % Source: RTS OJSC

American Depository Receipts

On August 22, 2001, the US Securities and Exchange pository agreement concluded by CenterTelecom, Commission registered CenterTelecom’s Level 1 JPMorgan Chase Bank and holders of ADRs on Sep- American Depository Receipts (ADR) Program. The tember 4, 2001, reviewed and amended on December number of common shares permitted to circulate 10, 2001, one ADR represented 100 common shares. outside the Russian Federation was 623,312,699. Currently each CenterTelecom’s ADR represents 25 common shares of the Company in accordance with JPMorgan Chase Bank, N.A. is depository for Center- amendment to the depository agreement of June 3, Telecom’s ADR Program. In accordance with the de- 2008. Review of the coefficient of conversion of the WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 54

Company’s shares into ADRs has been held with the companies CenterTelecom is ranked 40th among 90 purpose of increase of ADR market price’s attractive- participants of the research with liquid shares listed ness for investors. in MICEX Stock Exchange. In the course of the analysis the level of disclosure of the information containing Disclosure of information in accordance with 12g3-2(b) in the reports submitted to the regulators, in annual Rule is being held by CenterTelecom in its web page reports and web sites, was estimated. http://www.centertelecom.ru/eng/investor/12g3-2(b). htm. In 2008 the Company prepared and translated Level 1 ADRs are traded on the OTC market of the in English over 100 corporate documents for ADR US (CRMUY), Berlin Stock Exchange (CRMUy.BE) and holders. These documents included annual and in- Frankfurt Stock Exchange (CRMUy.F). As of January terim financial statements, quarterly reports by the 1, 2008 the number of ADRs in circulation was 454,600 securities issuer, information of significant facts and or 2.88% of the total number of the Company’s com- events which could make a considerable impact on mon shares. As of December 31, 2008 the number of securities value, press releases, the Company’s annu- ADRs in circulation was 843,848 or 1.34% of Center- al report on its financial and economic activities for Telecom’s common shares. Increase in ADRs number 2007, and materials for the annual general meeting in 2008 was connected with change in coefficient of of the shareholders. conversion of the Company’s shares into ADRs from 1:100 to 1:25. However owing to the crisis the per- In accordance with results of Standard&Poor’s annual centage ratio of ADR number to the Company’s com- research of information transparency of Russia’s major mon shares decreased by 1.54%.

ADR price and trading volumes in OTC market for 2008

ADR price, US$ Trading volume, US$ thousand 120 450 400 100 350 80 300 250 60 200 40 150 100 20 50 0 0 01.01.08 17.01.08 04.02.08 20.02.08 07.03.08 25.03.08 10.04.08 28.04.08 14.05.08 02.06.08 18.06.08 04.07.08 22.07.08 07.08.08 25.08.08 10.09.08 26.09.08 14.10.08 30.10.08 17.11.08

Recent transaction price, US$ Volumes, US$ thousand Source: www.adr.com

Trading volume of CenterTelecom’s ADRs on the US OTC market for 2008 reached US$577,530 or 450% increased against 2007 (US$128,220). WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 55

ADR price in Frankfurt and Berlin Stock Exchanges in 2008

ADR price, Euro 18 16 14 12 10 8 6 4 2 0 01.01.08 01.02.08 01.03.08 01.04.08 01.05.08 01.06.08 01.07.08 01.08.08 01.09.08 01.10.08 01.11.08 01.12.08

ADR price in Frankfurt Stock Exchange ADR price in Berlin Stock Exchange Source: http://global.factiva.com

Trading volume of CenterTelecom’s ADRs on Frankfurt Stock Exchange for 2008 reached €47,000. There were no transactions with CenterTelecom’s ADRs at Berlin Stock Exchange in 2008.

Key Institutional Investors – ADR Holders as of December 31, 2008 Share of the total number Name City Country Number of ADRs of common shares Alfred Berg 1 Stockholm Sweden 57,644 0.09% Kapitalförvaltning AB Caisse de Depot et 2 Montreal Canada 45,704 0.07% Placement du Quebec INVESCO Asset United 3 Henley-on-Thames 24,000 0.04% Management Limited Kingdom Artio Global United 4 New York 4,976 0.01% Management LLC States Total 132,324 0.21%

Source: www.adr.com WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 56

Corporate Bonds

In 2008 two CenterTelecom bond issues (series 4 Board of Directors on August 25, 2006 (Minutes and 5) for the total sum of RUR8.6 billion were in cir- #4 of August 28, 2006). Total number of the bonds culation. purchased by CenterTelecom was 2,873,875 items, total nominal value of the bonds purchased was In accordance with requirements of the Resolution RUR2,873,875,000. on the Issue and Prospectus interest rates on fifth, sixth, seventh, eighth, ninth and tenth coupons on CenterTelecom’s series 4 and 5 bonds were included CenterTelecom series 5 bonds were established in into Quotation List B of MICEX Stock Exchange CJSC August 2008. The amount of the coupons was 9.3% and into the section of the List “Securities Admitted to per annum. Circulation but not Included into Quotation Lists” of RTS OJSC. CenterTelecom’s series 4 and 5 bonds were On September 4, 2008 CenterTelecom has fulfilled included into a Lombard List of the Central Bank of its obligations on purchase of its series 5 bonds on the Russian Federation and are accepted as collateral conditions of an offer approved by the Company’s on the Central Bank of the Russian Federation’s loans.

CenterTelecom Bond Issues in Circulation in 2008 Key parameters of bond issue Series 4 Series 5 Issue's amount RUR5,622,595,000 RUR3,000,000,000 Issue's start/close date 17.08.2004/31.08.2004 05.09.2006/05.09.2006 02.03.2010 / 1274 days -10% of nominal value; 31.08.2010 / 1456 days -20% of nominal value; Maturity date/circulation period 21.08.2009/1830 days 01.03.2011 / 1638 days -30% of nominal value; 30.08.2011 / 1820 days -40% of nominal value. 16.02.05, 18.08.05, 17.02.06, 19.08.06, 06.03.07, 04.09.07, 04.03.08, 02.09.08 – 8.09% Repayment date and coupon rate 18.02.07, 20.08.07, 19.02.08, 20.08.08, per annum, 03.03.09, 01.09.09, 02.03.10, 31.08.10, 19.02.09, 21.08.09 - 13.8% per annum 01.03.11, 30.08.11 – 9.3% per annum Organizer and underwriter: ROSBANK Bank of Moscow Co-organizers and co-underwriters: Co-organizers: Svyaz-Bank, Troika Dialog, Promsvyazbank, Bank Deutsche Bank, Promsvyazbank SOYUZ, Guta-Bank, Svyaz-Bank Underwriters: Drezdner Bank, International Moscow Members of syndicate Co-underwriters: Bank ZENIT, Web- Bank, Nomos-Bank, BK Region, IG Renaissance Capital Invest Bank, International Moscow Co-underwriters: Agropromcredit, IC Veles Capital, Bank, Gazprombank MDM-Bank, IFG RIGroup-Finance, Sudostroitelny Bank Paying agent: ROSBANK Paying agent: Svyaz-Bank Offer: 04.09.08 – 100% of par value plus accumulated Offer: 16.11.06 – 100% of par value coupon income on date of offer. As of date of offer plus accumulated coupon income CenterTelecom repurchased 2,873,875 bonds with on date of offer. As of date of offer no RUR2,873,875,000 aggregate nominal value and Additional information bond was submitted to the repurchase paid accumulated coupon income in the sum of by the owners of the bonds. RUR1,465,676.25. Guarantor: Telecom-Terminal LLC Guarantor: CenterFinance LLC MICEX CJSC/ RU000A0DBR52 MICEX CJSC/ RU000A0JNK18 Trading sites/trading codes RTS OJSC/ ESMO04 RTS OJSC/ ESMO05

MICEX was the main stock exchange trading in CenterTelecom’s series 4 and 5 bonds. There were no transactions with CenterTelecom’s series 4 bonds in RTS OJSC in 2008. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Social Responsibility

› Personnel and HR Policy

› Personnel Development

› Social Responsibility and Charity WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 58

Personnel and HR Policy

In 2008 the Company’s operations in the HR sphere 2008 decreased by RUR1.026 billion or 12.7%, reach- were aimed at improving remuneration, optimization ing RUR7.071 billion. The decrease in labor costs was of headcount, creation of incentives for the Compa- mainly caused by implementation of the Company’s ny’s efficient operations. personnel optimization program for 2008-2012. The reduced headcount provided a 27.6% rise of aver- CenterTelecom’s aggregated expenses for person- age wages (from RUR13,079 in 2007 to RUR16,699 nel for 2008 were RUR9.489 billion. This is 10% or in 2008). RUR1.054 billion less than in 2007. Labor costs for

CenterTelecom's Average Salary Trends, RUR

2008 16,699 2007 13,079 2006 10,725 2005 9,458 2004 8,472 2003 6,589 2002 4,949

05,000 10,00015,00020,000

In 2008 expenses for unified social tax and contri- tributable to the Company’s program of cost optimi- butions related to employees’ accident insurance zation and increases in efficiency. reached RUR1.691 billion. This is RUR203.5 million or 10.7% less than for 2007. Expenses for personnel training for 2008 reached RUR27.194 million. The reduction of expenses in com- Expenses for voluntary medical insurance for 2008 parison with 2007 reached 31.2% or RUR12.357 mil- were RUR44.7 million. This is 0.7% or RUR334,000 less lion. Business trip expenses for 2008 were RUR29.112 than for 2007. million. It was RUR3.576 million or 10.9% less than for 2007. Voluntary payments to trade unions for 2008 Social benefits and guarantees in 2008 amounted to reached RUR24.405 million. This is RUR1.854 million or RUR358.73 million. Decrease in this type of expenses 8.2% more than for 2007 owing to increase of amount amounted to RUR37.348 million or 9.4%. An amount of payments. The average number of the Company’s of average monthly social package per employee in employees in 2008 was reduced by 14,084 people or 2008 was RUR807. This is 24.7% more than in 2007. 27.5% reaching 37,120 employees. The average number of enrolled personnel for 2008 reached 37,026 A reduction in costs for other items of expenditure for people, a decrease of 13,993 or 27.4% against 2007. personnel (trainings, travel expenses) was mainly at- WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 59

CenterTelecom's Employee Number Trends

as of 01.01.2009 31,517 as of 01.01.2008 46,637 as of 01.01.2007 56,317 as of 01.01.2006 65,208 as of 01.01.2005 67,432 as of 01.01.2004 71,829

010,00020,00030,00040,00050,00060,00070,00080,000

In 2008 among the key directions of CenterTelecom’s In 2008 CenterTelecom held considerable struc- personnel number optimization program were: tural reforms of its branches. Among the purposes › implementation of centralized systems, new tech- of the reforms were formation of a vertically or- nologies, replacement of outdated equipment; ganized two level management structure and op- › optimization of organizational structure, review of timization of the Company’s executive personnel. labor standards. CenterTelecom branches’ organizational structures were brought to correspondence with a model or- The Company used work-time standards for the pro- ganizational structure of a branch approved by the vision of telecommunications services developed Company’s Management Board. It allowed to in- earlier, and also estimated employee workloads with- crease the efficiency of the managing activities, to in the framework of the personnel number optimiza- reduce the number of the management levels and tion program. the managerial personnel. After these changes organizational and controlling functions were passed To improve efficiency, CenterTelecom developed and to the divisions reporting directly to the deputy di- implemented the following documents: rectors of the branches, and executive functions were consolidated in the Company’s Centers ac- amendments to Provisions for Bonus Payments to › cording to the business directions (operations, CenterTelecom Employees aimed at stimulation of sales maintenance, settlements, IT, logistics). As a activities on increase of the revenues; result a branch is regarded as a whole system with- › amendments to Provisions for Bonus Payments to out division of it into a directorate and structural CenterTelecom Branch Managers; divisions. › revision of CenterTelecom’s Provisions for Industrial Competition starting January 1, 2008. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 60

Personnel Development

In 2008 the Company took measures aimed at stra- With the purpose of formation of the managerial re- tegic development of its human resources, their pro- serve for 2009 CenterTelecom held assessment of the fessional compliance with newest business require- candidates to managerial positions. In 2008-2009 a ments, implementation of modern technologies, project of assessment and development of middle increase of the personnel’s work and social support level managers aimed at revealing of perspective satisfaction. personnel reserve and development of managerial skills was being implemented. 1,981 managers from The Company’s core directions of activities in 2008 15 CenterTelecom’s branches took part in this project. are as follows: › improvement of the Company’s structure and opti- In 2008 the Company took measures aimed at mization of the personnel headcount; improvement of the Company’s organizational › optimization of the personnel costs; structure and optimization of the number of per- › correction of compensation and incentives system sonnel in compliance with the Company’s stra- by means of focusing on sales; tegic goals and tasks. The number of the Com- › improvement of objective definition system and pany’s personnel as of December 31, 2008 32.4% work planning; decreased and reached 31,517 employees (against 46,637 employees as of December 31, 2007). › personnel assessment and development; development of the corporate culture and commu- › An importance of the educational level of the per- nications; sonnel is growing in line with constant growth of › standardization of business processes and quality demand for highly qualified employees. In 2008 management. 37.2% of CenterTelecom’s employees had higher education (this is 6.9% more than in 2007), 33% In 2008 CenterTelecom was working on improve- of employees had secondary vocational educa- ment of the social situation in the collective ac- tion. Three employees had doctoral degree, and cording to the Plan of Ideological Work with 51 employees had master of sciences degree. Personnel aimed at increase of employees’ aware- ness of the positive changes in the Company. The number of managers with higher education was 8% of all employees amounting to 2,516. In 2008 In the course of interactions with trade unions in 84% CenterTelecom’s top managers have higher 2008 CenterTelecom achieved mutual agreements education (7.9% more against 2007), and 13% man- on issues related to headcount optimization, in- agers had secondary vocational education. All Cen- crease of salaries and the Company’s efficiency and terTelecom’s senior managers have higher educa- achievement of financial and efficiency indicators set tion, and 32 managers have advanced degrees. by the Company’s development strategy up to 2013. CenterTelecom’s Personnel Structure Category of Number of Number of According to education According to age employees personnel as personnel as Professional under 25 - 35 35 - 40 40-50 50 years of 01.01.08 of 01.01.09 Higher secondary 25 years years years years and older Senior managers 3,429 2,516 2,110 334 9 324 356 833 994 Specialists 20,714 17,150 8,833 6,461 678 3,313 2,374 5,845 4,940 Departmental 185 93 25 35 5 29 8 25 26 officers Workers 22,309 11,758 749 3,527 457 2,128 1,863 4,015 3,295 Total 46,637 31,517 11,717 10,357 1,149 5,794 4,601 10,718 9,255 WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 61

As a consequence of the recruitment of highly profes- upgrading qualifications reached RUR27.193 million sional specialists, the pool of specialists with second- or 0.3% of all costs related to personnel development ary vocational and higher education grew to 72% for (RUR39.026 million or 0.4% in 2007). engineering positions and to 78.7% for technical positions (including specialists with higher education). In 2008 the Company’s specialists developed and Share of employees with profile education reached implemented a Model of Competence for General 33.7% in 2008 (28.3% in 2007) of all employees of Directorate and Branches’ Directorates’ Positions as CenterTelecom. well as standardized documents related to the personnel assessment and education. CenterTelecom In line with the personnel number optimization pro- held planned assessment of the competence of 2,985 gram the Company worked on young specialists’ employees. Based on the assessment results a plan recruitment. As of December 31, 2008 the share of of qualification upgrade and educational budget of employees aged up to 40 years was 36.6%, share of CenterTelecom for 2009 have been developed. employees aged over 50 years was around 30%. The average age of the Company’s employees was 42 The Company also created and launched a unified years in 2008 (against 43 years in 2007). system of distant education of the personnel. 14 distant courses related to various business directions The number of the pensioners working for the Com- were developed and launched. 2,488 employees took pany decreased from 2,158 employees in 2007 (4.6% distant educational courses in 2008. of all personnel) to 1,206 employees in 2008 (3.8% of all personnel). In 2008 CenterTelecom paid special attention to education of its sales personnel: The collective of CenterTelecom is quite stable. Only › Centralized distant trainings for sales personnel 3% of employees have less than 1 year length of ser- were held in March-December 2008. Assessment vice in the Company; over 20% employees work for and test sessions were conducted on quarterly ba- the Company for 10-15 years, and 45% of personnel sis. 3,359 employees of CenterTelecom’s branches work for CenterTelecom for more than 15 years. involved in sales activities upgraded their qualifications. In 2008 personnel turnover in the Company reached › In order to get practical experience and skills 638 10.9% (8.5% in 2007). Increase in the personnel turn- CenterTelecom’s employees took sales and main- over was mainly caused by dismissal of privileged tenance skills trainings held by in-house business categories of employees who received state and non- coaches. state pensions ahead of schedule. In 2008 the Compa- ny arranged non-state pensions for 1,873 dismissed The Company’s in-house business coaches devel- employees (against 1,051 employees in 2007). 17,353 oped and held the following trainings: Target Man- people were dismissed for the reporting period, in- agement, Time Management, Stress Management, cluding 10,559 employees dismissed in connection Client Relations Management, Conflict Management, with personnel reduction (60.8% of all employees dis- Business Communications, Delegation, and Situation missed). A coefficient of general personnel turnover Management. 1,315 CenterTelecom’s employees took in 2008 was 0.53. the training courses.

Personnel assessment and training was held in 2008 in accordance with CenterTelecom’s strategic development plan. Provision for the necessary level of the employee competence was achieved owing to the continuous upgrade of their qualifications. For 2008, 19,150 employees upgraded their qualifications (against 16,845 employees for 2007). This is 61% of all personnel (36.1% in 2007). Expenses for WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 62

Social Responsibility and Charity

CenterTelecom emphasizes implementation of so- nizations located in the Central Federal District’s cial projects, providing for improvements in Russian regions, related to issues of financial assistance for citizens’ living standards through the support of medical rehabilitation, support of victims of acci- disadvantaged groups and executing a number of dents and natural disasters, and the sale of CenterT- long-term programs in the fields of culture, educa- elecom housing property to employees, etc. In 2008, tion, sport. nine meetings of the Committee considered 37 applications for aid. RUR968,000 was spent on aid to In 2008 the Company participated in implementa- CenterTelecom employees. tion of various state programs aimed at the development of the country’s educational system, elimi- It is worth mentioning that social policies of Center- nation of “digital inequality” among Russian citizens, Telecom aimed at its employees are among the core and also at improvement of the population’s living directions of the Company’s general social policy. standard through increased accessibility of telecom- They are regulated by the collective contract for munications services. These programs included the 2007-2009. implementation of universal telecommunications service through public pay telephones in Central The contract is aimed at the creation of a social part- Russia. nership system in the field of labor relations, at increasing the Company’s efficiency, incentive related CenterTelecom not only participates in federal pro- activities, strengthening of employee and employer grams but also strives to actively take part in the social responsibility for the Company’s production Central Federal District’s regional life by granting results, and provision for growth of employees’ well sponsorships and charitable aid to organizations being and social protection level. The collective con- and individuals. The main principles of CenterTele- tract established mutual obligations for employees com’s philanthropic work are included in the Com- and the employer, provides a social benefits system pany’s Concept for Charitable Activities. A Chari- for both employees and pensioners and World War ties and Sponsorship Committee of the Company Two veterans. formed in April 2006 coordinates the Company’s philanthropic activities. In 2008, 9 meetings of the On April 21, 2009 the participants of the extended Committee considered over 120 applications for aid. meeting of a bilateral commission for summing up In 2008, among CenterTelecom’s key philanthropic of the results of the collective contract implementa- and sponsorship programs were support of Russia’s tion pointed out that the contract fully reflects all Helicopter Sport Association, Russian Telecommu- existing possibilities for solutions of problems re- nications History Foundation, Telecom-Soyuz Non- lated to labor remuneration, implementation of em- State Pension Fund, Non-State Educational Organi- ployee social requests, and has also become a ma- zation “Resonans Telecommunications Educational jor example of equal social partnership. According Center”, Children Hockey Development Charitable to CenterTelecom management’s and trade union’s Fund and Hockey Club Khimik-Voskresensk. Cen- assessments, mutual obligations allow the creation terTelecom also financed reconstruction of the Holy of favorable conditions for the Company’s dynamic Trinity-St. Alexander Nevsky Convent as a part of its development and improvement of the Company’s charitable program. employees’ well being.

A Committee for Compensation and Social Issues was also active simultaneously with the Charities and Sponsorship Committee. It considers applications from individuals and non-commercial orga- WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Corporate Governance

› Board of Directors

› Management Board

› Audit Commission

› Corporate Governance System

› Dividend Policy

› Subsidiaries and Affiliates

› Public and Investor Relations

› Ratings

› Improvement of Corporate Governance Practices WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 64

Board of Directors

At the annual general meeting held June 25, 2008, CenterTelecom’s shareholders elected the following members of the Board of Directors*:

1. Sergei Kuznetsov Chairman of the Board, CenterTelecom OJSC (Deputy Chairman of the Board until March, 2009) 2. Mikhail Alexeyev Member of the Board, CenterTelecom OJSC Member of the Board, CenterTelecom OJSC 3. Boris Antonyuk (Deputy Minister of Information Technologies and Communications of the RF until December,2008) Member of the Board, CenterTelecom OJSC 4. Nikolai Arutyunov Director of Research Department, Moscow representative office of NCH Advisors, Inc. Member of the Board, CenterTelecom OJSC 5. Igor Danilenko Director of Prosperity Capital Management (UK) Ltd. Member of the Board, CenterTelecom OJSC 6. Dmitry Yerokhin (Deputy General Director, Svyazinvest OJSC until February, 2009) Member of the Board, CenterTelecom OJSC General Director, Russian Post Federal State Unitary Enterprise 7. Alexander Kiselev (General Director, Svyazinvest OJSC until February 2009, the Chairman of the Board of Directors of the Company until March, 2009) Member of the Board, CenterTelecom OJSC 8. Viktor Polischyuk Advisor to the General Director, Russian Telecommunications Network OJSC Member of the Board, CenterTelecom OJSC 9. Viktor Savchenko Deputy General Director, Svyazinvest OJSC (Executive Director, Head of Corporate Governance and Law Directorate, Svyazinvest OJSC until February 2009) Member of the Board, CenterTelecom OJSC 10. Elena Selvich Deputy General Director, Russian Post Federal State Unitary Enterprise (Deputy General Director, Svyazinvest OJSC until February, 2009) Member of the Board, CenterTelecom OJSC 11. Maxim Tsyganov General Director, KIT Finance IB LLC (Managing Director, KIT Finance IB OJSC until January 2009) *an updated information of the members of the Board of Directors of the Company as of the date of CenterTelecom annual Report preparation

Management Board

On July 31, 2008, CenterTelecom’s Board of Directors defined the quantitative structure of the Company’s Managing Board. The Managing Board included the following 11 members: › Vaagn Martirosyan, › Vadim Kondratov Chairman of the Management Board › Alexander Lutsky** › Alexander Gribov › Dmitry Parkhomenko › Konstantin Zverev › Viktoria Polikarpova › Alexander Kazakov › Pavel Repin** › Andrei Kartashov › Evgeny Stepanov

**On August 20, 2008 Pavel Repin was appointed the member of the Management Board of CenterTelecom. On November 29, 2008 the powers of Alexander Lutsky, the member of the Management Board of CenterTelecom, were terminated ahead the schedule. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 65

Audit Commission

At the annual general meeting held June 25, 2008, CenterTelecom’s shareholders elected the following members of the Audit Commission:

# Name Job title Chairman of the Audit Commission, CenterTelecom OJSC; 1. Olga Koroleva Chief Accountant, Svyazinvest OJSC Chief Specialist of Internal Audit Directorate, 2. Elena Konkova Svyazinvest OJSC Chief of Department in the Corporate Governance and 3. Lyudmila Kormilitsyna Law Directorate, Svyazinvest OJSC Deputy Chief of Methodology Department, 4. Alexei Kravchenko Svyazinvest OJSC Chief of Telecommunications Tariff Group in 5. Olga Lunina the Strategic Development Department, Svyazinvest OJSC Deputy Chief of Methodology & Information Department 6. Ekaterina Punina in the Corporate Governance and Law Directorate, Svyazinvest OJSC Deputy Chief of the Department in the Directorate 7. Natalia Uzlova for Accounting, Taxation and Statistics, Svyazinvest OJSC

Corporate Governance System

Striving to maintain its investment attractiveness The Corporate Secretary’s office had the task of CenterTelecom pays major attention to the devel- preparing provisions to fulfill the procedures pro- opment of its corporate governance system and im- vided by joint stock legislation and internal corpo- plementation of the highest standards in this field rate documents. An appreciation of the Company’s as part of the Company’s practices. Given certain business culture reveals no breaches or limitations changes in Russian legislation related to joint stock on shareholders’ rights, and also confirms that Cen- companies, CenterTelecom’s annual general meet- terTelecom fully meets Russian legislative require- ing of the shareholders approved a new version ments and follows the best international standards of Provisions for the Board of Directors and new in corporate governance. wording of the Company’s Charter in June 2008. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 66

Dividend Policy

In accordance with changes in the legal acts of the In accordance with a decision by CenterTelecom’s Russian Federation, internal CenterTelecom’s docu- annual general meeting of shareholders of June 25, ments and a practice of dividend payment a second 2008, a dividend payment for 2007 was to be made version of the Regulations on Dividend Policy was de- beginning from August 2008. veloped. The Regulations now incorporates provision for possible payment of dividends not only annually As of March 31, 2009 the amount of dividend paid but also quarterly during the reporting year. was as follows: › dividend on common shares was In accordance with new version of the Regulations RUR556,722,563.87 expenses for dividend payment including postal ex- › dividend on type A preferred shares was penses and expenses related to bank transfer of divi- RUR356,847,857.48. dend to an account of a shareholder or his/her representative are charged to CenterTelecom in full. The This represents 99% of all dividends payable. Regulations includes detailed description of a proce- Key reasons for non-payment are the following: dure of dividend calculation and payment explaining › failure by a shareholder to appear at the Company’s necessary actions of the shareholders if their bank office to pick up dividends; details changed after compilation of a list of persons › failure by a shareholder to supply correct bank- who have right for income on securities. The Regula- ing details for the transfer of dividend payouts. tions also includes recommended application forms and describes a procedure of write off of unclaimed The Company’s Board of Directors established the dividend and tax payments. amount of dividend for 2008 on the basis that the amount of dividend should be not less than 25% of On April 6, 2009 the Board of Directors of CenterTele- net profit indicated in the Company’s consolidated com OJSC has approved a new version of the Regula- financial statements (10% of net profit sum is to be tions on Dividend Policy. used for dividends on preferred shares, and 15% for common shares).

Trends in Declared (Accrued) Dividend on CenterTelecom Trends in Amounts of Declared (Accrued) Dividend shares (per share) on CenterTelecom shares

RUR 0 RUR thousand 00 0. 80 00,

0.6919119 0 6 559,739.70 0. 70 00 0, 50

0. 60 387,824.06

0.4915455 000 00, 0. 50 0.3893300 4 315,541.56 000

0. 40 363,467.30 00, 0.3547131 3 258,549.40 0. 30 000 0.2457683 106,387.80 204,784.79 200, 0. 20 0.1270937 0.1999621 000 0. 1 0 0.0674191 00, 66,850.37 0 1 0. 00 2005 2006 2007 2008 2005 2006 2007 2008

Common shares Common shares Preferred shares Preferred shares Amount of dividend for 2008 corresponds with the amount of dividend proposed by the Company’s Board of Directors for approval by the Company’s AGM WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 67

Subsidiaries and Affiliates

A Model for Reorganization of Subsidiary and Affili- core operations. In order to avoid competition of the ated Companies of CenterTelecom provides the fol- subsidiary companies with CenterTelecom’s branches lowing guidelines for management of subsidiary in 2008 the Company prepared new scheme of inter- businesses: actions with its key subsidiaries including Vladimir › monitoring of financial and economic activities of Teleservis CJSC, Teleport Ivanovo CJSC, RTS OJSC, the Company’s subsidiaries and affiliates; CenterTelecom Service CJSC and Operatorsky Tsentr › acquisition of core-business companies; CJSC. › sale of inefficient and non-core business companies; The Company focuses on the following directions › diversification of subsidiary business; with regard to the corporate governance: › formation of an optimal corporate structure for a › development and implementation of an optimal subsidiary business. managerial structure for subsidiaries; › development and implementation of unified cor- As a part of optimization of the Company’s invest- porate standards; ment portfolio in 2008 the Company sold stakes in › building of a good corporate governance system in Oskoltelecom CJSC (12.41%), Optimum-Svyaz CJSC the Company’s subsidiaries and affiliates; (10%) in connection with the companies’ inefficiency. › formation of managing bodies in the Company’s Stakes in Teleservis OJSC (6.6%) and COMSET OJSC subsidiaries and affiliates; (5.17%) were sold because the sizes of the stakes did › development of key managerial solutions in the not allow to take an active part in the management Company’s subsidiaries and affiliates. by the companies. Moreover in 2008 the Company made decisions on its withdrawal from Svyaz-Servis- CenterTelecom regards increased economic efficiency Irga PVP LLC and on liquidation of Telecom-Stroi LLC. of its subsidiaries, and strengthening of its branches and subsidiaries’ market positions as strategic goals A main task of the reorganization of CenterTelecom’s of its subsidiary business. subsidiary business is a synergy in CenterTelecom’s

CenterTelecom’s share # Name of the company Key type of operations in the Company, % telephony services, data services, telematic services, 1 RTS OJSC 100 channels of communications leasing, system integration 2 Operatorsky Tsentr CJSC data transmission and telematic services 100 3 Teleport Ivanovo CJSC data transmission and telematic services 100 4 Mobilcom LLC mobile telecommunications 100 5 Vladimir Teleservis CJSC data transmission and telematic services 100 6 Tver Telecom LLC data transmission and telematic services 85 local telecommunications services, data transmission, 7 CenterTelecom Service CJSC 74.9 rent of channels, telematic services local communications services through 8 Vladimirsky Taksofon LLC 51 universal public pay telephones 9 TELECOM CJSC traffic transfer 50.9 10 TK Rinfotels OJSC data transmission and telematic services 26 WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 68

Public and Investor Relations

CenterTelecom’s management pays considerable at- The Company was actively disclosing information in tention to the building of efficient communications 2008. Compulsory information disclosure was con- with the Russian and international business com- ducted in full compliance with requirements set out munities, various social groups and the mass media. in federal laws and standards regulating procedures The Company continually provides a significant vol- of disclosure by securities issuers. CenterTelecom ume of reliable up-to-date information about Cen- published four quarterly reports and 37 factual no- terTelecom’s programs in the financial, economic, tices concerning the Company’s financial and eco- investment and social spheres. In 2008, the Com- nomic activities. This information was addressed to pany continued to improve its corporate web site the Federal Financial Markets Service of the Russian www.centertelecom.ru to provide efficient publica- Federation (FFMS), to Russian and foreign stock ex- tion and distribution of information about the Com- changes, and was published by information agen- pany’s and its branches’ operations in the Central cies charter by FFMS as well as in print media and on Federal District’s market and CenterTelecom’s brand the corporate web site. promotion. During 2008, CenterTelecom disclosed information With regard to public relations activities in 2008 the to the investment community. The Company held Company was focused on strengthening of its top meetings with the analysts of Standard & Poor’s managers’ reputations, promotion of the Company’s and Fitch Ratings, and with representatives of Rus- services, and raising customer loyalty. sian and foreign investment funds and banks. Dur- ing 2008, CenterTelecom conducted monitoring In 2008 in the course of implementation of its com- and analysis of main performance estimates of the munications activities CenterTelecom used integrat- Company which represented the target audience’s ed marketing communications for the first time. Syn- feedback regarding the Company’s activities and ergy from conducting of integrated advertising and financial results, and also allowed the Company to PR campaigns with unified key messages focused on get the analysts’ forecasts on CenterTelecom’s future special target audiences allowed the Company to in- development. crease rate of growth of DOMOLINK subscriber base. Moreover the Company’s image was corrected; it allowed to increase individual subscribers’ loyalty to the Company in condition of compulsory optimization of the individual subscribers’ expenses for telecommunications services due to global financial crisis impact. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 69

Ratings

In April 2008 Standard & Poor’s Ratings Services (S&P) Among strong sides of CenterTelecom’s corporate has affirmed its long-term corporate credit rating governance practice Expert RA National Rating on the Company at В+, changing the outlook from Agency sees independency of the audit, organiza- Positive to Stable. S&P has also affirmed CenterTele- tion of tenders for suppliers of products and services com’s ruA+ rating on the Russia national scale. The which costs exceed an established limit, preliminary Company’s ratings are supported by its position as approval by the Board of Directors of the deals for the a core telecommunications operator with expanded sum exceeding 0.4% of assets’ book value, and also network in Central Russia and last mile access to 6.7 existence of the approved Corporate Governance million customers. Improvement of CenterTelecom’s Code and the Regulations on Dividend Policy. The operating activities with regard to expenses and agency’s experts positively estimate the activities of increase of share of income with high added value CenterTelecom’s Board of Directors, full disclosure of also contributed to its ratings. the Company’s financial statements prepared in accordance with RAS and IFRS, implementation of the In 2008 Fitch Ratings, an international rating agen- corporate social projects a few other significant fac- cy, left CenterTelecom’s ratings unchanged as they tors. Expert RA National Rating Agency paid special had been appointed in August 2007: Long-term Is- attention to the high level of disclosure of Center- suer Default (IDR) at B, and National Long-term at Telecom’s financial and non-financial information BBB(rus); Outlook Positive, Short-term IDR at B. of the Company’s operations which was regularly placed on the Company’s web site and was disclosed Expert RA National Rating Agency is monitoring Cen- in its annual and quarterly reports and other forms terTelecom’s corporate governance practice within of reports. few years. According to the results of the monitoring the Company retains its corporate governance system’s ranking at A (or at 7+ according to new digital scale) since 2004. According to the method of assignment of the National Corporate Governance Rating, the 7+ level corresponds with good corporate governance practice. There were no breaches or limitations of the rights of the shareholders, inefficient work of the managing bodies, thus the Com- pany’s corporate governance risks recognized as insignificant. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 70

Improvement of Corporate Governance Practices

Throughout the year the Company worked on the Board of Directors, Regulations on Audit Committee improvement of its corporate governance practices and Regulations on General Meeting of Shareholders including on improvement of CenterTelecom’s divi- were prepared and approved at the annual general dend policy aimed at further protection of CenterT- meeting of shareholders of CenterTelecom as well as elecom shareholders’ rights and interests, at use of new (eighth) version of the CenterTelecom’s Charter. best international experience, compliance with the requirements of legislation regulating joint stock In 2008 the Company for the first time used a proce- company operations, FFMS and other expert organi- dure of insurance of liabilities of the members of the zations recommendations on corporate governance. Board of Directors, Management Board and General Director of CenterTelecom and also the persons who The Company constantly monitored the compliance took or will take the mentioned posts in CenterTele- of the Charter, Corporate Governance Code, and in- com’s management bodies. The procedure was held ternal Regulations with the current legislation of the with the purpose of protection of property interests Russian Federation, FFMS recommendations and of the Company’s managers in case of filing of suits rules of listing of stock exchanges. In the course of by third parties (shareholders, employees, state orga- these activities new versions of Regulations of the nizations, customers). WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e Information for Shareholders WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 72

Information for Shareholders

C enterTelecom’s Annual Report for 2008 is available in the Russian and English languages; a Russian electronic version is placed on the web site www.centertelecom.ru, and the English electronic version is available at www.centertelecom.ru/eng.

You can also request additional information about the Company from CenterTelecom’s General Directorate.

Position Name Phone Fax E-mail Director of PR and Yana Lavrentyeva +7 495 793 2486 +7 495 793 2999 [email protected] IR Department Corporate Secretary Sergey Grushin +7 495 793 2358 +7 495 699 0436 [email protected] Telephone numbers for shareholder inquiries Chief of Shareholder and Registrar Relations Olga Sorokina +7 495 793 2569 +7 495 793 2654 [email protected] Department Deputy Chief of Shareholder and Tatyana +7 495 793 2654 +7 495 793 2654 [email protected] Registrar Relations Vedeneyeva Department Leading Specialist of Shareholder and Ksenia Dugina +7 495 793 2657 +7 495 793 2654 [email protected] Registrar Relations Department Telephone numbers for investor inquiries Deputy Director of PR Denis +7 495 793 2386 +7 495 793 2999 [email protected] and IR Department Muzykantov Chief of IR Department Svetlana Volkova +7 495 793 2340 +7 495 793 2606 [email protected] WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 73

CenterTelecom informs its shareholders that correct dance with paragraph 5 clause 44 of the Federal Law data must be reflected in the Company’s register for: #208-FZ “On Joint Stock Companies’ of November 24, › the compilation of accurate and complete lists of 1995. If such information is not submitted, the Com- participants for the general meeting of shareholders; pany and the registrar are not liable for losses which › the timely transmission of information about general may arise. meetings of the shareholders and voting ballots to the shareholders; The Company’s shareholders may address inquiries related to CenterTelecom’s shareholders’ rights and › orderly conveyance of dividend payments. liabilities to the Corporate Secretary office: 7, Tverska- ya str., Moscow (postal address: bldg 2, 6, Degtyarny It is necessary to inform the Company’s registrar per., 125993, Moscow). about any change in a shareholder’s details, in accor-

The Company’s shareholders may send documentation related to transactions to the following companies:

Full name of the company Contacts PO box OJSC Obyedinennaya Ent. 3, 15a, Kalanchevskaya, Moscow, 107078 Registratsionnaya Kompaniya +7 495 504-28-86, [email protected] ORK-Volgograd - OJSC Obyedinennaya Regis- 13A, Nevskaya, Volgograd, 400087 tratsionnaya Kompaniya +7 8442 37-99-19, 37-52-40, [email protected] ORK-Voronezh OJSC Obyedinennaya 39, Truda, Voronezh, 394026 Registratsionnaya Kompaniya +7 4732 46-73-72, 46-80-16, [email protected] Krasnodar Regional Branch of OJSC 143, Krasnaya, Krasnodar, 350020 Obyedinennaya Registratsionnaya Kompaniya +7 8612 51-74-39, 53-64-60, [email protected] ORK-Omsk OJSC Obyedinennaya 36, Gagarina, Omsk, 644043 Registratsionnaya Kompaniya +7 3812 23-28-89, [email protected] ORK-Penza OJSC Obyedinennaya 62, Moskovskaya, Penza, 440600 Registratsionnaya Kompaniya +7 8412 52-01-85, [email protected] ORK-Rostov-na-Donu OJSC Obyedinennaya Office 404, 14A M.Nagibina, Rostov-na-Donu, 344038 Registratsionnaya Kompaniya +7 863 243-07-77, 243-07-55, [email protected] ORK-Saratov OJSC Obyedinennaya Office 6, 61, Sovetskaya, Saratov, 410056 Registratsionnaya Kompaniya +7 8452 50-66-12, [email protected] ORK-Samara OJSC Obyedinennaya 3, Lenina, Samara, 443110 Registratsionnaya Kompaniya +7 846 263-73-75, 336-17-60, [email protected] ORK-Sankt-Peterburg OJSC Obyedinennaya 16, Bolshaya Monetnaya, St. Petersburg, 197101 Registratsionnaya Kompaniya +7 812 336-51-06, [email protected] ORK-Tambov OJSC Obyedinennaya 14 Kronshtadtskaya, Tambov, 392000 Registratsionnaya Kompaniya +7 4752 71-50-86, [email protected] ORK-Tcheboksary OJSC Obyedinennaya Office 69, 79/16, Konstantina Ivanova, Tcheboksary, 428018 Registratsionnaya Kompaniya +7 8352 58-39-38, 58-60-55, [email protected] ORK-Vladivostok OJSC Obyedinennaya 8, Ryleeva, Vladivostok, Primorye Region, 690003, Registratsionnaya Kompaniya +7 4232 41-45-60, [email protected] WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 74

7, Tverskaya, Moscow (For post: Bldg 2 6 Degtyarny pereulok GSP-3, Moscow, 125993) +7 495 793 2657, 793 2654, [email protected] 9, pl.Karla Marksa, Bryansk, 241000 +7 4832 721575, 645588, [email protected] 3, Sobornaya plotschad, Belgorod, 308000 +7 4722 350322, [email protected] 42, Gorkogo, Vladimir, 600000 +7 4922 330663, [email protected] 22, Komsomolskaya, Yaroslavl, 150000 +7 4852 732440, [email protected] 1, 10, Avgusta, Ivanovo, 153000 +7 4932 471336, [email protected] 24, Novotorzhskaya, Tver, 170000 +7 4822 323717, [email protected] Open Joint-Stock Central 2V, Astrkhanskaya, Tambov, 392002 Telecommunication Company +7 4752 750588, [email protected] Moscow Branch, bldg 2, 29, Narodnogo Opolcheniya, Moscow, 123154 +7 495 793 2201, [email protected] 43, Lenina, Orel, 302000 +7 4862 431896, [email protected] 43, Tschedrina, Ryazan, 390006 +7 4912 272205, [email protected] 38, Teatralnaya, Kaluga, 248600 +7 4842 796205, iug@eleсs.kaluga.com 6, Oktyabrskoi Revolutsii, Smolensk, 214000 +7 4812 683176, 385823, [email protected] 35, Revolutsii prosp., Voronezh, 394000 +7 4732 533473, [email protected] 33A, Lenina prosp., Tula, 300000 +7 4872 217351, [email protected] Belgorodskiy branch №2 of 69A, Pobedy, Belgorod, 308000 Specialized Registrar Rekom LLC +7 4722 336313, 270801, [email protected] Kaluzhskiy Gazovy I Energeticheskiy 4, Plekhanova, Kaluga, 248030 Bank Gazenergobank (OJSC) +7 4842 548580, 531394, [email protected] Severo-Zapadnaya Finansovaya 4A, Izmailovskiy prosp., St.Petersburg, 190005 Kompaniya LLC +7 812 333 2518, [email protected] WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 75

Risk Management

C enterTelecom’s policy aimed at lowering risks related to its operations is focused on expansion of the types of services provided by the Company, changing the structure of the services with a view to profit growth, and control over the Company’s expenses. The Company conducts regular evaluations of its internal control system and works on its improvement.

CenterTelecom’s risk management system (herein and employees with various responsibilities and li- after referred to as RMS) is being built in accordance abilities in the course of risk management process. with: › requirements by the Committee of Sponsoring Or- In order to provide objectivity of decisions in the ganizations of the Treadway Commission (COSO) course of risk management and an appropriate level (Organizations’ Risk Management: Integrated Model); of control over results of risk management and over › requirements by the Federation of European Risk coordination of the activities of all divisions and Management Associations (FERMA) (Risk Manage- employee involved in risk management a Risk Com- ment Standards). mission acting on basis of a Decree approved by the Company’s General Director is set up. With the purpose of improvement of risk management in 2008 the Company developed Risk Manage- In 2008 the Risk Commission achieved the following ment Program approved by the Board of Directors. results: The Program establishes: › a Classifier of Risks of CenterTelecom was approved; › organizational structure of CenterTelecom’s risk › an acceptable level of risk, the limits and scales а management system and its members’ powers; significance of risks for the Company were es- › a Classifier of Risks, and a risk level acceptable for tablished; the shareholders; › suggestions for risks’ owners were formed; › the current version of risk register which includes › an evaluation of risks included into CenterTelecom’s basic risks of the Company which are under con- Risks Register was held; stant surveillance of the CenterTelecom’s managers; › strategies and plans of actions related to risk man- › a list of significant risks and plans of actions related agement were approved; to significant risks management controlled by the › key indicators of the efficiency of CenterTelecom’s Board of Directors. risk management were approved; › issues of management by the separate risks in- The organizational structure of CenterTelecom’s risk cluded into CenterTelecom’s Risks Register were management system includes a number of bodies considered. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 76

Moreover the Regulations on Risk Manager has been State regulation of the telecommunications industry developed. The responsibilities of Risk Manager in- brings risks and uncertainty into CenterTelecom’s and clude organization and support of the risk manage- other interregional telecommunications companies’ ment process and also control over implementation operations. These risks are connected with changes of the functional responsibilities by all participants of in tariffs and decreased cross subsidies. Changes in the process. tariffs for telecommunications operators which are natural monopolies must be approved by Russia’s an- In accordance with the Risk Management Program timonopoly services, with the result that subsequent CenterTelecom considers risk level exceeding 0.5% tariff changes can be in arrears of the change in op- of the Company’s annual revenues as significant. In erator expenses and of the real economic situation. 2008 CenterTelecom managed nine significant risks Thus the telecommunications operators which are which were estimated as exceeding acceptable level natural monopolies face a risk of delayed change in of risk approved by the Board of Directors. Main risks tariffs. This decreases their competitiveness and can were related to market risks, regulations related risks, have a negative impact on their efficiency. In such risks associated with interactions with the clients, conditions CenterTelecom actively promotes its ser- planning and making of strategic decisions and also vices provided under unregulated tariffs. This allows with liquidity management. the Company to maintain its revenues level.

Among key industry risks taken by CenterTelecom It is worth noting that CenterTelecom takes the po- into consideration in the course of its operations are tentially negative impacts of the aforementioned the following: risks into consideration in striving to follow the new- › processes of integration of alternative telecommu- est business requirements and to successfully com- nications companies into major international hold- pete with other telecommunications companies. ing companies; The Company tends to neutralize negative market › growth of competition in telecommunications in- factors and strengthen its market position by means dustry with Russian and foreign telecommunica- of restructuring its network infrastructure, launching tions operators, expansion of operators of compet- new services, optimization and standardization of its ing formats in the telecommunications market; business processes, and increasing sales and maintenance system’s efficiency. › economic risks related to the general situation in the Russian Federation including financial and economic uncertainty of development, possible changes in the legislation and related possible increase in outflow of client base, ARPU decline, change in profitability of the services finally leading to decrease in the Company’s profit. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 77

Glossary

Asymmetric Digital Subscriber Line (ADSL) provides Time Division Multiplexing (TDM) is a technology a subscriber with an opportunity to receive large for global SDH and PDH telecommunications net- volume of data at possible speed of more than 2 working. These switchboards attach fixed share of Mbit/sec (inbound channel capacity —from 64Kbit/s the bandwidth for each voice or data channel Voice up to 50Mb/s) and to transmit from the subscriber’s channels can be multiplexed in order to save band- less data-intensive streams, basically requests and width, and the transmission capacity is closed any- commands (outbound channel capacity — from way regardless whether data are being transmitted 64Kbit/s to 1Mbit/s). It is this feature which creates or not. Moreover, transmission capacity should be the asymmetry. For this service a customer should reserved as backup in the event of channel failures. purchase an ADSL modem or make a contract for responsible stored usage of a modem (in Verhnevol- zhskiy branch). ADSL equipment does not operate Macroregion - otherwise unrelated economic re- on shared telephone lines or if the premises are gions and districts, which may be distinguished for equipped with security alarm system connected to their similar natural conditions, economic features, the telephone line. and further development trends. Basic principles of distinction include level of economic development in the area, ratio between the most important New Generation Network (NGN) is concepts of new resources and how they are used, similar social and generation networking, offering unlimited sets of economic problems. services with flexible facilities for control, person- alization and the creation of new services owing to unification of network solutions. NGN is a - univer Multiservice Communication is a universal, high- sal multipurpose network, aimed at transmitting speed, data-transfer network, built on the basis of speech, images and data, using packet switching packet switching technology, the technical condi- technology. tions of which allow the provision of triple-play services — voice, data, video. This approach is based on integration of all users in a unified network of broad- Softswitch allows to forward signals and voice traffic band access, providing various kinds of services — from one IP telephony gateway to another one or high-speed Internet access, IPTV, IP-telephony, local to proxy the data. In such a case the control signals networking and various multimedia services. can be corrected or changed by the softswitch. Thus there is an opportunity to establish connection between equipment using incompatible protocols. New telecommunications services is a set of telecommunications services which have become topi- cal within recent years. First of all, they include Inter- Optic Fiber Telecommunications Lines represent a net access, IPTV, etc. means of transmitting information through optic dielectric guides – “optic fiber.” Currently optic fiber is regarded as the ideal physical medium for infor- Mobile (cellular) telecommunications is telecommu- mation transmission and the most promising means nications between two subscribers, one or both of of transmitting of huge information flows to major which change their locations. distances. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 78

The last mile (last inch) is an area of subscriber’s Traditional telephony (traditional telecommunica- line from the client to the telecoms operator con- tions services) is a set of telecommunications servic- nection point. Usually, a copper cable or fiber optic es which telecoms operators have provided users in line is used for these purposes. The problem of the recent decades. They include, first of all, local, intra- last mile is choosing how to arrange the subscriber’s zone and international communications services. network access and choosing relevant equipment.

Triple Play services are services provided via a single Cable TV network (CTVN) is an aggregate of techno- telecommunications channel for transferring voice, logically adjoint communications facilities, used to video and data; data transfer services (high speed distribute TV and other audiovisual programs. Internet access), network backup, personal file resources on the Internet, and game servers access; voice services (in-city and intra-zone telephony, Public telephone network (PTN) is an aggregate of voice mail, broadcasting via IP); videoservices (tele- automatic telephone exchange, switch nodes, lines, casting via IP (IP-TV, HD-IP-TV), chargeable vid- telephone network channel, terminal subscriber’s eochannels PPV (Pay Per View), video on demand devices, meeting the requirements of a population, (VoD), personal videorecorder (PVR), videotelepho- establishments and corporations for telephone net- ny, videoconference telecommunications, video work services. surveillance, video playstations).

Hybrid Fiber Coax Technology (HFC) is a technol- Fixed telecommunications is telecommunications ogy of modern telecommunications networking, between two immobile (fixed-line) subscribers. providing subscribers with packages of TV and radio programs as well as a wide choice of interactive multimedia services. HFC technology application guarantees: wide range of services, offered in the net, which consists of RTV program translation, as well as modern telecommunications services (for example: data transfer, net telephony, video on demand), wide network access radius, allowing integration of remote cable networks, high quality and reliability of transmission, an opportunity to enlarge available range of transmitting by means of network segmentation, wide network capacity, available due to multiplexing technology application (DWDM), simple and inexpensive migration in the direction of the network access FTTC (Fiber To The Curb), FTTB (Fiber To The Building), FTTH (Fiber To The Home) types. WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 79

Forward-Looking Statements

Some of statements contained in this Annual Report › inflation, interest rate and currency exchange rate do not present facts, but are of a forward-looking fluctuations; character. Occasionally, we may state in writing or › influence of Russian government policy and altera- orally some forecasts in reports addressed to share- tions in it; holders, and via other channels of interaction and › influence of competition in the regions and fields of data exchange. Examples of such statements are the the Company’s activity; following: › influence of amendments to legal or other regulat- › statements concerning our plans, objectives and ing documents, taxation regulations, standards and tasks, including those connected with telecommu- order of accounting; nications services; › the Company’s opportunities to increase a share of › statements about future results of our economic telecommunications services markets and to con- activities; trol expenditures; › information on assumptions, which form the basis › purchasing and selling assets; for such statements. › changes in technologies; Forward-looking statements, issued occasionally, (but › the Company’s successes in the management of not included in the present document), may contain these risk factors. planned or expected data on receipts, profits (losses), profit (loss) per share, dividends, capital structure and This list of essential factors is not exhaustive. Using other financial performance and factors as well. Such forward-looking statements it is necessary to con- words as “considers”, “supposes”, “expects”, “estimates”, sider carefully all the above mentioned factors as “intends”, “plans” and similar expressions may indicate well as other events and uncertainty componentry, that this is a case where a forecast is presented, al- especially from the point of view of social, political, though these are not the only ways to indicate the economic and legal conditions of a company’s busi- forecasting character of statements or information ness. Forward-looking statements are effective on offered. On account of their special features forward- the date they are made only. We cannot state, guar- looking statements are connected to risk and uncer- antee or predict that the desired results, contained in tainty, either general or particular. There is always forward-looking statements, will be achieved in fact. some risk that preliminary estimations, forecasts, In each case such statements represent only one of plans and other forward-looking statements will not many possible evolutionary scenarios, which is why occur in fact. It is necessary to remember that being they are not to be considered as the most probable affected by a large number of material circumstances or typical scenario. factual results may significantly differ from performance as planned and targeted, expected results, estimations and intensions, contained in forward- looking statements. These circumstances include the following: WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 80

Information about the Company

Open Joint Stock Company “Central Telecommunication Company”

The Company’s registered office: 23 Proletarskaya str., Khimki, Moscow Region, 141400, the Russian Federation. Tel: +7 495 650 3434, fax +7 495 650 3007 Email: [email protected] Web site: www.centertelecom.ru

State registration data and registration number State registration certificate #127 of June 20, 1994; registered by an Order #567-r by the Chief of Moscow Region’s Administration dated June 9, 1994. In accordance with the Federal Law “On Legal Entities’ State Registration” the Company was registered in the Uniform State Register of Legal Entities under #1025006174710 on November 01, 2002.

Audit Company: KPMG Closed Joint Stock Company (KPMG CJSC) Office 3035, 18/1 Olimpiysky prospect, 129110, Moscow Telephone +7 495 937 4477

State Registration Data: Certificate #011.585 registered by the Moscow Registration Chamber on May 25, 1992. Audit License #Е 003330 for audit activities issued on basis of Order #9 by the Russian Ministry of Finance of January 17, 2003. The term of the license is prolonged up to January 17, 2013.

Registrar: OJSC Obyedinennaya Registratsionnaya Kompaniya Postal address: PO box 162, 15A Kalanchevskaya Moscow, 107078, Russia Phone: +7 495 504 2886, +7 495 933 4221 e-mail: [email protected] WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e 2008 Annual Report CenterTelecom OJSC WorldReginfo - b3f15fb4-cd51-422f-8506-19c091b96d1e