To the Consideration of the Annual General Shareholders’ Meeting of Megafon PJSC (Hereinafter – the Company)

To the consideration of the Annual General Shareholders’ Meeting of MegaFon PJSC (hereinafter – the Company)

29.06.2018 Item 1 of the Agenda

Approval of the Annual Report of the Company for 2017

Proposed decision

To approve the Annual Report of the Company for 2017.

______Responsible department: IR & M&A, MegaFon PJSC

Annual Report MegaFon — Contents is a pan-Russian provider of digital opportunities and a leader in the Russian and global telecommunications market. ... About MegaFon 4

1. Strategic Report 16

Chairman’s Statement 18 Chief Executive’s Review 22 Market Overview 28 Strategy 38 Business Model 46 Operational Results 48 Financial Performance 104 Risk Management 112 Sustainable Development 128

2. Corporate Governance and Securities 162

3. Appendix 202

ABOUT THIS REPORT

Preliminarily approved by the Board of This Annual Report has been prepared Directors of PJSC MegaFon on 27 Ap- in accordance with the Global Report- ril 2018. ing Initiative (GRI) Guidelines for reporting on sustainable development. This Annual Report presents data on For more information see Appendix the operations of Public Joint-Stock Material Topics and Materiality Matrix. Company MegaFon (PJSC MegaFon or the Company) and its subsidiaries Immaterial discrepancies in totals and from 1 January through 31 December subtotals in the charts and tables of 2017, net of Mail.Ru Group, the opera- the Annual Report are due to rounding. tions of which are described in its own annual report. 4 About MegaFon About MegaFon 5

Аbout Consolidated Revenue Breakdown, The MegaFon RUB bn fastest

Mobile data Fixed-line mobile data services services services in Russia 1 Mobile revenue, Equipment net of the Internet and accessories

1. As determined by Russian users using Ookla’s Speedtest app in Q2–Q3 2017.

We aspire to stay ahead of an ever 313.4 316.3 321.8 As one of the key players in the changing world, opening up new op- 1.7 % industry, we are helping to create the new digital world to portunities to be the number one choice make life better for each sub- 28.7 scriber. for all our customers. 19.9 27.0 6.3 %

We provide services across all telecoms market segments, including 23.4 28.8 25.7 voice, mobile data, fixed-line telecommunications services, digital Headcount 12.1 % TV, IP telephony, and innovative services, including mobile TV and OTT video-content, financial and mobile advertising services, M2M, Big Data, convergent services, and cloud solutions. 39,126 MegaFon’s shares are traded on the Moscow Exchange and the employees London Stock Exchange under the ticker ‘MFON’. The percentage of MegaFon’s outstanding shares represented by the free float is 20.8 %. 190.1 179.2 174.6 2.6 %

79.9 84.4 89.7 >77.1 million 6.3 % subscribers

2015 2016 2017 About MegaFon 7 We were the first in Russia:

among mobile operators to provide subscribers with the fastest network to introduce the LTE-Advanced standards mobile Internet up to

3G / 4G / MegaFon’s LTE Advanced 450 Mbit/s Mission — 2017 to provide our customers with to make a rouble bond SMS, MMS, and Mobile-TV offering and a payment providing services to make communication using accessible both above blockchain opportunities and under the ground 8 Performance Highlights Performance Highlights 9

Operating Financial 1 Highlights 6,524 Highlights 316.3 321.8 4,286 313.4 3,286

DATA TRAFFIC (DSU), REVENUE, MB PER MONTH RUB BN

2015 2016 2017 2015 2016 2017

75.6 Adjusted OIBDA 1, RUB bn Adjusted Net profit 2, RUB bn 74.8 75.4 Adjusted OIBDA margin, % Net profit margin adjusted, % SUBSCRIBERS, MILLION

132.4 121.9 2015 2016 2017 121.1 RUB bn

41.8 % 39.0 28.9 20.5 41.0 % 42.2 % 38.3 % 37.9 % 39.2 % RUB bn 31.5 31.0 12.5 % 9.1 % 29.3 6.4 %

41.8 % 2015 2016 2017 2015 2016 2017 Share of mobile data users CAPEX, RUB bn Free cash flow, RUB bn 2015 2016 2017 CAPEX/Revenue, % Free cash flow / Revenue, % Users of mobile Share of mobile data services, million data users, % 56.0 70.2 65.6 RUB bn 35.2 ARPDU, 3G AND 4G BASE 39.2 RUB bn RUB PER MONTH STATIONS, ’000 88.6 27.7 22.4 % 20.7 % 17.4 % 17.2 % 8.8 % 10.9 % 237 75.9 233 230 65.5 2015 2016 2017 2015 2016 2017

2015 2016 2017 2015 2016 2017 1. Adjusted OIBDA and adjusted OIBDA margin is shown for 2016. Adjusted OIBDA for 2016 is OIBDA net of impairment charge in the amount of RUB 3.4bn related to the goodwill allocated to the Broadband Internet business segment. 1. All figures disclosed under operating highlights refer to our Russian operations. Some of the operating KPIs presented 2. Net profit and net profit margin do not include non-cash impairment of the investment in the Euroset joint venture in the here vary from those reported earlier due to the adjusted guidelines for counting data service users. A data service user amount of RUB 15.9bn in Q2 2017 and non-cash impairment of goodwill in Q4 2016 in the amount of RUB 3.4bn related is defined as a subscriber who has consumed any amount of data traffic within the preceding month. to the Broadband Internet business segment. 10 Our Assets and Resources Our Assets and Resources 11

Our Assets and Resources

TECHNOLOGY DIGITAL ECOSYSTEM BASED BALANCED RECOGNISED BRAND LEADERSHIP ON MAIL.RU GROUP SERVICES DISTRIBUTION NETWORK AND LOYAL CUSTOMERS

MegaFon reinforces its technology leadership by Creating a digital ecosystem is one of MegaFon’s MegaFon owns an extensive and well-balanced MegaFon has a strong brand with high levels of developing our infrastructure in line with the most priorities, with the 2017 deal with Mail.Ru Group retail network comprising 3,615 monobrand points recognition. In September 2017, MegaFon pre- advanced global trends. We offer fast and stable having strongly contributed to the creation of its of sale, including 1,894 MegaFon Retail stores and sented its new brand positioning showcasing connectivity with the highest quality. MegaFon’s core. By combining our communication function- 1,721 MegaFon-branded franchised stores, as well the Company’s transformation from a telecoms existing technological edge allows us to further ality with the resources of the largest Russian in- as its 50 % interest in 3,470 nationwide multibrand operator to a provider of new digital opportunities. consolidate our leadership in areas such as digital ternet company, we work with Mail.Ru Group to Euroset stores. We seek to make MegaFon an even more open, services. provide mould-breaking digital services for our dynamic and reliable brand. customers. Our retail network is a key customer relations tool, adding value and enhancing our brand through the speedy resolution of issues and our high stan- ACCUMULATING AGGREGATED CUS- dards of customer service. TOMER DATA (BIG DATA)

157,732 Through analysing BigData we will be able to number of base better understand the needs of every single customer and offer them the services that they 2G/3G/4G stations EXPERIENCED TEAM OF EXPERTS 1 want. We aggregate publicly available informa- 3,470 tion on customer values, needs and behaviour A 50 % interest in Euroset from various sources. By analysing such data we develop the best products for both new and 199,761 km 39,126 people stores existing customers. FOCL Headcount DEVELOPING BRAND PORTFOLIO Our highly professional employee team is key to 1,894 the successful achievement of MegaFon’s strate- MegaFon continues to promote its Yota and Wi- 4G coverage gic goals. Consistent employee development ef- MegaFon Retail stores Fire brands. Yota is positioned as an ‘innovative forts ensure their consistent progress, their high ef- operator, the operator of the future’ and targets Russian ficiency across all our business segments and the active users of the mobile Internet. Wireless high- regions confidence of our customers. In 2017, RUB 143.4m 83 speed Internet, voice and SMS services are pro- were allocated to employee training. moted under this brand. of the Russian 1,721 % population 74 Under the WiFire brand, the Company develops Franchised stores and promotes communications services and prod- LTE-Advanced coverage ucts, such as WiFire Mobile (unlimited mobile In-

ternet), WiFire TV (wireless digital TV), and WiFire Russian 143.4 mln RUB 1. 50 % interest as of year-end. As a result of the agree- Home (residential broadband). 38 regions ment ending MegaFon and VEON’s joint business Training costs operations at Euroset, as of February 2018 MegaFon owned a 100 % interest in approximately 1,700 Euroset in 2017 stores.

12 geography geography 13

Geography Key transit trunk lines Russia / Murmansk Transit trunk line (via TransBaltic Gateway) MegaFon Transit trunk line (Mongolia) Transit trunk line (SWAN) Petrozavodsk Belomorsk Market share MegaFon Backbone Yakutsk Magadan Saint- Petersburg Arkhangelsk % The Company and its sub- 29.5 sidiaries operate across Ukhta all Russian regions and in Mirnyy Salekhard Customer base, the republics of Abkhazia, Moscow million people Orel Lensk 75.4 South Ossetia and Tajik- Kostroma Syktyvkar istan. Noyabrsk Tula Users of mobile Nizhniy Tagil Nizhniy Novgorod data services, Voronezh million people 31.5 Belgorod Surgut Yekaterinburg Kazan Komsomolsk-na- 4G devices Amure Saratov on the network, Rostov- Ufa na-Donu Tyumen million units 18.4 Krasnodar Yuzhno- Bratsk Sakhalinsk Volgograd Chelyabinsk Khabarovsk Tomsk Revenue, Sochi Omsk Kansk RUB bn 321.8 Astrakhan Novosibirsk CAPEX in 2017, RUB bn 56.0 Makhachkala Barnaul Vladivostok Kyzyl

20.7

17.8

15.4 15.3

ABKHAZIA / SOUTH OSSETIA / TAJIKISTAN / AQUAFON-GSM OSTELECOM TT MOBILE

Market share Market share Market share 8.1 8.0 7.7 58.8 % 100 % 29.7 % 7.0 Customer base, Customer base, Customer base, million people 0.1 million people 0.1 million people 1.5

Users of mobile data Users of mobile data Users of mobile data services, million people 0.06 services, million people 0.03 services, million people 0.7

Revenue, Revenue, Revenue, rals Regionrals U Moscow Region Moscow RegionNorth-West Far East Region Siberia Region Caucasus Volga Region Volga RUB bn 1.0 RUB bn 0.37 RUB bn 3.01 Central Region

CAPEX in 2017, CAPEX in 2017, CAPEX in 2017, RUB bn 0.35 RUB bn 0.07 RUB bn 0.45 Subscribers, % 14 Key events Key events 15

Key Events

05 July 25 May 26 September MegaFon and VEON agree MegaFon presents its new MegaFon and other Rus- to end their Euroset joint business strategy at its sian high-tech companies venture. Investor Day in London. establish ANO Digital Economy. 24–28 May 28 November 03 February 26 – 27 October The 12th annual The Future ANO Digital Economy is MegaFon and Rostelecom MegaFon becomes a pro- Depends on You open 10 July set up to provide services Russia stages the first The sign a cooperation agree- vider of telecommunica- nationwide football tour- Pavel Korchagin is ap- enabling the development Future Depends on You in- ment to jointly develop 5G tions infrastructure for the nament for teams from pointed Chief Technology of the digital economy in ternational football tourna- networks. 2017 FIFA Confederations Russian orphanages and Officer of MegaFon. the Russian Federation, ment among orphans from Cup and the 2018 FIFA foster homes. including through both around the world. World Cup 1. 12 September supporting relevant so- 01 June 09 February MegaFon presents its new cially significant projects MegaFon and Russian and initiatives and coor- MegaFon closes the trans- brand positioning ‘Mega- Railways sign a coopera- dinating joint efforts of action to acquire a stake Fon. Starts with you’ to 5G tion agreement to develop showcase the Company’s the business community, in Mail.Ru Group. 30 November mobile services across the transformation from a research and educational entire rail network and telecoms operator to a institutions, other commu- Gevork Vermishyan is ap- to provide enhanced IoT provider of new digital nities and governmental pointed Executive Director September November October May – June September – July February capabilities. opportunities. authorities. of MegaFon.

2017 2018

24 May 01 June 19 September 29 September 31 October 27 December May MegaFon and Innopo- June MegaFon demonstrates Standard & Poor’s (S&P) MegaFon, National MegaFon announces MegaFon acquires a lis announce enhanced the operation of a 5G net- upgrades MegaFon’s Settlement Depository changes in its sharehold- cooperation in developing foreign currency rating (NSD) and Raiffeisenbank October ing structure: Telia Com-

work at 35 Gbit/s, setting December mobile services and IoT. a new record in Russia for September to BBB–, outlook ‘Stable’. complete the first rouble pany sells its remaining 12.5 % bond placement using mobile data speed 21 September stake in Forpost LLC, blockchain. the holding company for Analytical Credit Rating 09 October 19 % Talmer LLC — a systems Agency rates MegaFon September October – integrator and complex 35 Gbit/s AA(RU), outlook ‘Stable’. MegaFon places bonds at stake in MegaFon IT solutions provider in 30 June a record low rate of to Gazprombank Russia. RUB 20bn dividend payout. 7.85 % per annum 1. Hereinafter, when references are made to MegaFon’s involvement in the projects related to the 2018 FIFA World Cup and 2017 FIFA Confederations Cup in Russia, it should be borne in mind that Rostec State Corporation is the sole contractor for the project to provide communications and IT infrastructure for the 2018 FIFA World Cup and 2017 FIFA Confederations Cup in Russia. The project is being implemented by the National Centre of Informatisation (NCI), Rostec’s subsidiary. MegaFon was selected as the NCI’s service provider through a tender for the provision of telecommunications infrastructure for mobile and fixed-line services. Strategic Report

Chairman’s Statement 18

Chief Executive’s Review 22

Market Overview 28

Strategy 38

Business Model 46

Operational Results 48

Financial Performance 104

Risk Management 112

Sustainable Development 128 Chairman’s Statement 19

Chairman’s Statement

Dear colleagues,

2017 was a turning point for the entire Russian telecommunications industry and for MegaFon as a leading market player. Serious efforts were taken to stabilise the market and the positive results are already evident. The telecommunications industry successfully reversed the negative trend towards falling revenues that had been observed over several years and moved back into growth.

As part of this market stabilisation, MegaFon was the first operator to abandon unlimited tariff plans. The Company switched to smart pricing, which is based on analysing patterns of behaviour among contemporary consumers of mobile services. Instead of efforts to simply boost our subscriber base, the Company focused on improved quality in customer service, higher value offerings and development of a digital ecosystem.

Digital Strategy

In May 2017, MegaFon launched a new strategy for 2017–2020, ‘Driving Digital World’, aimed at transforming the Company from a traditional telecoms operator to a provider of digital opportunities. 2017 was a turning point MegaFon’s strategic priorities include the development of digital for the entire Russian products and services to meet each customer’s individual needs based on big data analysis and expanding further our infrastructure telecommunications and our sales and support network. industry and for MegaFon MegaFon’s objective is to lead the digital economy by 2020 and Vladimir Streshinsky, as a leading market player. become a key partner for government, business and society in the Chairman of the Board Serious efforts were taken to stabilise the market introduction of digital technology both in core processes and in and the positive results are already evident. The people’s daily lives. We are focused on creating new products and telecommunications industry successfully reversed solutions to digitise the Russian regions and traditional industries, the negative trend towards falling revenues that had such as power generation, transport and metallurgy. Particular been observed over several years and moved back emphasis will be placed on developing innovative products, which into growth. increasingly will become a new driver for revenue. 20 Chairman’s Statement Chairman’s Statement 21

Going forward, MegaFon intends to participate in digital initiatives and approved the Antimonopoly Policy and the Policy on Managing in areas such as healthcare, education, agriculture, power genera- Conflicts of Interest. tion, public administration systems, financial services and e-commerce. Building in-house digital capabilities will help us become the As digital technology and the Internet of Things become more prom- first company to bring high-tech solutions to the market. inent, greater emphasis is being placed on ensuring information security and personal data protection, as part of the compliance Implementation of these strategic goals will require serious efforts system. In pursuing its digital and significant investments. The Company plans to increase its strategy, MegaFon strives to capital expenditure from RUB 56bn spent in 2017 to RUB 75-80bn ensure the highest level of in- Operating in one of the most dyna- in 2018. Among the priorities of the capital expenditure programme formation security for all its are investments in the implementation of the new digital strategy, subscribers. In mid-2017, the mic markets, we not only respond primarily in improving quality of services, as well as in enhancing Committee for Information to change, but also anticipate it. the sustainability of the network. A significant part of the capital Security was established to expenditure will be used to ensure the accelerated development implement our information se- of LTE networks, and to implement projects which are part of the curity strategy effectively, to identify cyber threats and improve Digital Economy agenda of Russia, approved by the government data handling procedures for data which are required to be kept of Russia in late 2017. A significant part of the CAPEX increase will secure under our communication laws. be spent to fulfil the Company’s obligations under Russian anti-terrorism legislation. In light of the foregoing, the Board of Directors Over the years, MegaFon has repeatedly demonstrated its oper- decided to recommend to shareholders that dividends should not ational flexibility and strategic stability. Operating in one of the be paid in 2018. most dynamic markets, we not only respond to change, but also anticipate it – setting new trends and often defining the future of the industry. 2018 will undoubtedly bring its share of challenges, although we have already responded to many of them by launch- Corporate Governance ing our new digital strategy and implementing numerous landmark Development projects in product, service and infrastructure development. I would like to thank all members of the Board of Directors, MegaFon’s man- Our new digital strategy calls for significant additional management agement and every member of our close-knit employee team, com- efforts, as it aims to develop major infrastructure projects, bolster prising thousands of people, for their effective and productive work interaction with both the government and large corporate customers, throughout the past year. and participate in key projects which are part of the country’s digital agenda. To further improve effective governance in these As digital technology and the Internet endeavours by a resolution of MegaFon’s extraordinary Gen- of Things become more prominent, eral Meeting of Shareholders on 30 November 2017, Gevork greater emphasis is being placed on Vladimir Streshinsky, Vermishyan was elected the Chairman of the Board 1 ensuring information security and per- Company’s Executive Director. This will allow the CEO to focus sonal data protection, as part of the on strategic issues, as well as compliance system. In pursuing its on interaction with the government regarding its ‘digital digital strategy, MegaFon strives to economy’ project.

ensure the highest level of information MegaFon is also building an security for all its subscribers. effective compliance system in accordance with the industry’s best practices and standards, as well as regulatory recommendations. The Compliance Commit- 1. Vladimir Streshinsky was the Chairman of the Board of Directors as of tee was established in early 2017 and during the year reviewed a 31 December 2017. By the decision of the Board of Directors of 22 Janu- number of important matters related to corporate ethics, anti-cor- ary 2018 Protocol of the Board of Directors No. 273 (337) Evgeny Bystrykh ruption and antimonopoly compliance, and other internal processes was elected as the Chairman of the Board of Directors. Chief Executive’s Review 23

Chief Executive’s Review

Dear colleagues,

MegaFon demonstrated strong operating and financial performance in 2017, returning to growth in respect of several key indicators and achieving the goals set at the start of the year. We operate in a highly competitive market which has been stagnating for a long time due to oversupply and ongoing price reductions driven by over- zealous competition.

In the reporting period, the market demonstrated a positive trend for the first time in several years, largely as a result of reduced price competition.

MegaFon’s development throughout the year was underpinned by its new strategy which seeks to transform the Company into a digital market leader and the first-choice data provider for customers through offering best-in-class products and services and opening up new opportunities for subscribers.

SERVICE REVENUE OIBDA САРЕХ

Guidance flat to single digit 1 growth 118 55-60 ˜ RUB bn RUB bn

Metric 293.1 121.9 56.0 In line with our new strategy, RUB bn RUB bn RUB bn

in 2017 we focused on improv- 1.3 % 0.6 % 14.6 % ing our network, developing y-o-y y-o-y 2 y-o-y 3 digital services and delivering = in line with guidance ↑ above guidance = in line with guidance Sergey Soldatenkov, a better subscriber experience. Chief Executive Officer We put our top priority on increasing the quality and 1. All changes are shown on a y-o-y basis – FY 2017 vs FY 2016. Y-o-y (or year over year) means the same periods in the current and previous year on either a quarterly or yearly basis. long-term potential of our existing customer base, rath- 2. For 2016, OIBDA was adjusted and represented OIBDA net of impairment charge relating to the goodwill allocated to the er than focusing simply on the gross number of new Broadband Internet cash generating unit, and amounted to RUB 121.1bn. subscribers. 3. Organic CAPEX for 2016. 24 Chief Executive’s Review Chief Executive’s Review 25

Our new positioning and slogan, ‘MegaFon. Starts with You’, reflect MegaFon’s subscriber base held steady in 2017, while the percent- this evolution of our business philosophy. MegaFon does not sell age of data users increased. At the end of 2017, MegaFon had Revenue The average annual mobile minutes and gigabytes any longer; instead, we provide opportu- 77.1 million subscribers, including 75.4 million in Russia. Today, traffic per user nities – digital services, content, video, audio and communication over 41.8 % of our subscribers use mobile internet and we expect that 321.8 via social networks and messenger services. We are building an percentage to grow going forward. At the same time, the average ecosystem of digital solutions and are applying smart pricing initi- annual mobile traffic per user increased by 52.2 % to over 6.5 GB GB atives based on big data analysis to constantly improve the appeal and the average monthly revenue per data services user (ARPDU) 6.5 billion RUB of MegaFon’s services. grew by 3 % to RUB 237. 52.2 % % 1.8 The successful closing of the transaction to divide Euroset’s as- We recognise that the digital economy relies on a comprehensive sets, completed in February 2018, was an important milestone for advanced infrastructure. In the reporting period, we continued up- Meg‌aFon. We hope it will stabilise the mobile retail market in general grading our network and completed all our construction projects and enable both MegaFon and VEON to successfully implement planned for 2017, while optimising costs and maintaining CAPEX at LTV (Lifetime Value) their respective strategies for sales network development. Under RUB 56bn. The main part of 2017 CAPEX was spent on LTE and LTE The average monthly revenue this agreement, VEON acquired approximately 1,700 points of sale, Advanced network development through both coverage expansion per data services user (ARPDU) 20 % transferred its 50 % interest in Euroset to MegaFon and paid a cash and network capacity increases and we continued to invest in up- consideration of RUB 1.2bn as its share of Euroset’s outstanding grading our 2G and 3G networks. liabilities. As a result, MegaFon now owns 100 % of Euroset, which 237 RUB / month continues to own approximately 1,700 points of sale. We are current- In July 2017, JSC First Tower Company was set up to improve mana- OIBDA ly considering various options for Euroset’s strategic development to gement of MegaFon’s tower infrastructure and monetise it through 3 % support and strengthen our presence in the monobrand store space. leasing out its assets. Over 15,500 towers and other related assets worth a total of over RUB 17.2bn were transferred to the new com- 121.9 pany. Operating and Financial Results billion RUB In line with our new strategy, in 2017 we focused on improving our Digital Value for Subscribers 0.6 % network, developing digital services and delivering a better subscriber experience. We put our top priority on increasing the quality Products that create ‘digital value’ for subscribers became our key and long-term potential of our existing customer base, rather than revenue drivers in 2017. We launched a new tariff line ‘Vklyuchaisya!’ focusing simply on the gross number of new subscribers. (‘Connect!’), which was developed using big data analysis. Within this new line, we offer flexible plans customised to each subscriber’s The steps we took helped us improve our key performance indicators. personal preferences. MegaFon’s financial and content services, Revenue grew by 1.8 % to RUB 321.8bn. At the same time, customer such as MegaFon.TV, the MegaFon bank card, and other financial lifetime value, or LTV 1, increased by 20 %. The negative trend in services, as well as smart services based on IoT technologies, are OIBDA, which had persisted over several years, finally ended and also gaining in popularity. During the year, we launched a num- returned to growth: OIBDA for the full year 2017 was up 0.6 % to ber of new services with high potential – such as MegaFon.Music, RUB 121.9bn. The revenue and OIBDA growth were driven by an MegaFon.Health, and the #Spetsii cashback and special offers increase in revenue from our commercial initiatives, including the service which in the future will become part of an ever-growing launch of our new ‘Vklyuchaisya!’ (‘Connect!’) tariff line, reductions ecosystem of digital services. in communications services costs due to lower line lease rates and a shift from satellite to less costly terrestrial communication channels. For corporate and government Products that create ‘digital value’ for OIBDA growth was also supported by optimisation of our own retail clients, MegaFon acts as an in- network and lower tax expenses on operations. tegrator, offering comprehen- subscribers became our key revenue sive turnkey solutions. Mega- MegaFon maintains a comfortable Net Debt/OIBDA ratio of 1.92х, Fon’s corporate client base drivers in 2017. We launched a new continues to effectively manage its debt portfolio and is focused grew by 3.8 % to 309,000 com- tariff line ‘Vklyuchaisya!’ (‘Connect!’), on further optimisation of its funding structure. panies in 2017, moving the Com- pany into the leading position which was developed using big data in the B2X market for the first time, with a 33.5 % share of the analysis. Within this new line, we offer 1. Lifetime Value (LTV) is an internal estimated assessment of the current value mobile segment. We increased flexible plans customised to each sub- of the future cash flow per subscriber throughout the entire period of his or our revenue from this segment her relationship with MegaFon. by 16.1 % as a result of growing scriber’s personal preferences. 26 Chief Executive’s Review Chief Executive’s Review 27

mobile and M2M services consumption, as well as the implementation to deploy the first trial 5G clusters on these operating frequen- of comprehensive integration projects, such as developing a solution cies during the World Cup. for monitoring and accounting for utility resources and creating a telecommunications infrastructure for the 2017 FIFA Confederations MegaFon also became the first company in Russia to complete Cup and the 2018 FIFA World Cup. a bond placement using blockchain technology and was one of the first to do so globally. Following the placement, MegaFon We strive to contribute to the development of digital infrastructure used blockchain to complete the transaction. Our blockchain at both the national and the regional levels. MegaFon leads the technology has the potential to become a new standard in trans- Information Infrastructure team for the Government’s ANO Digital action data sharing. Economy project and has already started implementing the Gov- ernment’s digital agenda. We expect our strategy to help further We are also implementing infrastructure projects as part of the ‘Digi- tal Region’ platform, including the introduction of smart solutions for strengthen MegaFon’s market posi- transport, community services, utilities, government administration and security. Digital Region’s pilot projects include putting up smart tion in both the mid- and long-term. road signs in Chelyabinsk and introducing smart public lighting in Bryansk. We have also launched a project to digitise several Russian regions under agreements with the regional administrations of the We plan to continue implementing our digital strategy throughout Udmurt Republic and the Ulyanovsk and Pskov Regions. 2018 with a focus on further sharpening our competitive edge. So far, the objectives for our strategy have already been met and we expect our strategy to help further strengthen MegaFon’s market Technology Leadership position in both the mid- and long-term. We will focus on improving the quality of our subscriber base while We understand that we must keep our focus on advancing solu- striving to be the first-choice operator by delivering the best tariff tions and offering innovations to further enhance our leadership in plans, digital innovations and fast mobile data. We work hard to technology. We offer the fastest mobile data services and have the retain our retail and corporate customers for life. highest number of 4G base stations in Russia. To conclude, I would like to thank all MegaFon employees for their In 2017, MegaFon’s network grew by 10 %, comprising 157,732 strong teamwork and expertise in 2017, and our partners for their base stations at year end. FOCL length grew by 4 % to trust and support. Over 25 years of development, MegaFon has 199,761 km. A Speed test by Ookla showed an industry-lea- accomplished a great deal in many areas, shaping the telecom- ding peak data download speed of 25.04 Mbit/s over MegaFon’s munications industry along with the communications and digital network. We are continuing our investments in the rapid expan- environment in which we live today. I am confident that new and sion of the LTE network and at even more exciting and eventful developments await MegaFon as the end of 2017 LTE Advanced we innovate for the digital future. MegaFon also became the first compa- networks were operating in 38 ny in Russia to complete a bond place- Russian regions. MegaFon is also actively invol- ment using blockchain technology and ved in developing 5G net- was one of the first to do so globally. works, having signed a cooperative agreement with Rostelecom for a joint roll out. In 2017, MegaFon and Huawei set a new mobile data speed Sergey Soldatenkov, record for Russia, demonstrating a 5G base station in opera- Chief Executive Officer tion and hitting 35 Gbit/s during a trial. In 2017, we also tested Massive MIMO technology, during the demonstration the speed of mobile Internet in the sector reached 851 Mbit/s. MegaFon has been authorised by the Russian State commission on radio frequencies to use 3.4 GHz–3.8 GHz and 25.25 GHz–29.5 GHz frequencies for 5G trials during the 2018 FIFA World Cup. We plan Market Overview 29

Market Global Market: Overview A Digital Future

In 2017, the global mobile subscriber base exceeded 5 billion users, up 4 % y-o-y, including over 3.3 billion mobile data users.

Mobile penetration reached 66 %, with mobile internet penetration at 43 %. This growth is expected to slow down going forward as the global market gets saturated, mainly in developed economies. GSMA, the leading worldwide mobile operators’ association, expects mobile data to show the highest growth rates.

With some of the world’s highest mobile penetration rates, Rus- sia ranks first by this metric among the top ten most populated countries. In 2017, the mobile penetration rate in Russia was as high as 89 %.

Mobile Penetration in the Top Ten Most Populated Countries in 2017, %

Source: GSMA

89 % 84 % 82 % 73 % 68 % 63 % 53 % % 51 49 % 39 %

In 2017,2017, the the global global mobile mobile subscriber subscriber base base excee- ex-

ceededded 5 billion 5 billion users, users, up 4 % up y-o-y,4 % y-o-y, including including over SA U Nigeria Russia Brazil Mexico Bangladesh Pakistan Indonesia India 3.3over billion 3.3 billion mobile mobile data datausers. users. China 30 Market Overview Market Overview 31

GSMA estimates that in 2017 the aggregate for 14 % of total SIM cards. Between 2017 and global revenue of mobile operators totalled 2025, the number of IoT connections will increase Russian US$ 1.05tn. The revenue growth is constrained by more than threefold worldwide to 25 billion. slowing subscriber growth, tougher competition Total mobile CAPEX between 2018 and 2020 is Telecommunications and regulatory changes in the industry across projected at US$ 0.5tn. various markets. Global major telecoms operators are moving Market In 2017, mobile technologies and services away from the industry’s traditional business contributed 4.5 % to global GDP, or US$ 3.6tn. model, i.e. purely mobile and fixed-line services, Mobile communications have become more and adding a wide range of media, IoT, and socially important, with as many as 29 million digital ecosystem solutions to their offerings. people already involved in the industry and For example, in the USA, AT&T is consolidating related sectors. In the coming years, the share of its position in the media and entertainment mobile services in the global GDP and their impact market. Verizon made a number of acquisitions on social and economic growth are expected to in digital media, advertisement, Internet of Things, rise as new mobile, M2M, and IoT solutions will be and fibre. Many European operators, including increasingly driving productivity and efficiency Telefonica, Orange, and Vodafone, are enhancing across various global economic sectors. their IoT offerings. Globally, multiple operators, including Turkcell in Turkey, and SK Telecom, According to Ericsson, in 2017 aggregate global Singtel, and NTT DoCoMo in Asia, are also mobile data traffic grew by 59 % to 14 EB/month targeting the digital consumer space by offering and is expected to increase to 110 EB/month by a range of e-commerce, fintech, and security 2023. GSMA estimates that approximately 57 % solutions. While telecoms services remain the of mobile subscribers use smartphones. Experts principal source of revenue for operators, new distinguish between connected consumers digital solutions are increasingly seen as future Russian telecoms is a rapidly growing market Average ARPU of Russian Mobile and digital consumers: while the former simply revenue streams. according to GSMA. According to AC&M Operators, RUB have access to the service and use it now Consulting, at the end of 2017, mobile connections and then, the latter take full advantage of the totalled 255.4 million, with SIM card penetration at Source: TMT Consulting broad functionality of the Internet, including 179 %. Major Russian telecoms operators include entertainment content, e-commerce, financial MegaFon, MTS, VEON, and Tele2. 312 and educational services, and government 311 services. Operators derive most of their revenue from mobile services, but, with the market approaching 300 299 The share of digital consumers among users saturation, new growth areas become is higher in developed and technologically increasingly important, including above all digital advanced markets and is expected to grow across services such as mobile TV, Internet of Things, 290 the globe in the coming years. Those markets system integration, and e-commerce. where the share of digital consumers is already high will see a rising demand for augmented and 2017 marked the beginning of structural changes virtual reality services, as well as technology in the Russian telecoms market. After several solutions for smart homes, buildings and cities. years of strong subscriber base growth that Demand for AI, IoT and big data solutions will also resulted in a high level of market saturation, increase. and an aggressive pricing policy, the industry recognised the need to look for alternative In 2017, 29 % of all global connections were ways of growing its subscriber base. The market attributable to 4G networks and 31 % to 3G. 4G was actually stalling in 2015–2016: with the is expected to become the mainstream mobile penetration rate at approximately 180 % and technology as early as in 2019, with the number of subscriber churn at about 50 %, the market had connections exceeding 3 billion and 5G adoption virtually exhausted its opportunities for extensive also gradually growing. GSMA experts forecast growth. Only in 2017, the industry overcame that by 2025 two thirds of mobile connections stagnation and gained positive momentum. Still, across the world will operate on high-speed the number of subscribers dropped in Russia over networks, with 4G accounting for 53 %, and 5G 2017 – for the first time in many years. 2013 2014 2015 2016 2017 32 Market Overview Market Overview 33

MegaFon was the first operator to abandon Subscriber Bases in Russia in 2017 Mobile Services unlimited data plans, while the market in general Source: AC&M saw a trend towards softer price competition Mobile services remain the principal source of revenue for the during the year. According to TMT Consulting, in Russian telecoms industry and account for more than half of the Number of mobile 2017, Russian operators shifted their focus away MegaFon Beeline Other market. TMT Consulting estimates this segment’s share at 55 % in subscribers in Russia in 2017 from growing subscriber bases towards improving MTS Tele2 the total revenue for 2017. the quality of services for the customers. As a result, the average revenue per user (ARPU) grew In 2017, the Russian mobile market recovered after a two-year for the first time over the past five years. 1 % decline. According to TMT Consulting, the aggregate revenue from this segment grew by 1.5 % to RUB 891bn as compared to a 0.3 % 255.4 2.9 More intense price competition is a key potential decline in 2016. % million % million risk that can have an adverse impact on the 16 29 industry’s outlook. With the large-scale expansion 40.6 75.4 This recovery of the mobile market is mainly due to weaker price of telecommunications networks and adoption of million million competition among Russian major telecoms operators, operators next generation standards, the industry remains phasing out unlimited plans, and strong performance of value added capital intensive. services in the B2B segment. The aggregate revenue from According to TMT Consulting, in 2017 the size of Subscriber Bases Despite a steady decline in the recent years, traditional mobile Mobile Services segment the Russian telecoms market grew by 1.3 % to in Russia services (voice and texting) still generate the bulk of the segment’s RUB 1.6tn. This increase was mainly driven by revenue. Voice traffic volumes, however, have remained almost growing mobile services, and higher Internet flat. According to the Russian Ministry of Telecom and Mass penetration (up 3.8 % y-o-y). 23 % 31 % Communications, the aggregate voice traffic of Russian mobile 891 operators was 455.8 billion minutes in 2017, just a 1 % increase over billion RUB 58.2 78.3 the last’s year 452.1 billion minutes. million million 1.5 % The traffic growth was mainly due to the increasing demand for such mobile services as WhatsApp, Telegram, and Facebook Messenger. It was also driven by an increase in the share of stream video content viewed via YouTube and social networks. Own digital TV offerings The aggregate voice traffic 255.6 255.4 from major telecoms operators and streaming music services of Russian mobile operators million million are fast gaining popularity. For example, in 2017, MegaFon.TV’s subscribers subscribers subscriber base almost doubled, growing from 1.7 to 3.2 million users. total total Telecom Daily estimates that at the end of 2017 over half of all 455.8 mobile data traffic in Russia was attributable to 4G/LTE networks 78.3 and generated by about 25 % of all mobile subscribers. According billion 80.0 2.1 % 75.4 to TMT Consulting, LTE network users count 33 million subscribers, minutes 75.6 or 28 % of the total mobile subscriber base in Russia. According to 0.2 % GSMA, 55 % of all subscribers use 3G and 4G networks. 1 % 58.2 58.3 0.3 % Apart from 4G expansion and new tariff promotions, the increase in 40.6 mobile data traffic is also driven by growing numbers of subscribers with LTE-enabled and widescreen smartphones. These factors prompt 39.0 4.1 % users to view and send more HD images and videos, boosting the traffic considerably. The traffic growth was also facilitated by new tariff lines, such as ‘Vklyuchaisya!’ (‘Connect!’).

2.9 2.7 8.9 %

2016 2017 34 Market Overview Market Overview 35

M2M and IoT Fixed-Line Services

The Russian market for Machine-to-Machine According to AC&M Consulting, such services (M2M) and the Internet of Things (IoT) solutions currently account for just 19 % in the aggregate continues to show strong growth. In 2017, the mar- revenue of Russia’s mobile operators, which is Data and telephony services remain ket size exceeded RUB 60bn as suggested by data generally in line with the global trend. Still, all the largest segments of the B2B mar- from J’son & Partners Consulting. major telecoms players increasingly focus on developing new platforms and services, and di- ket, accounting for more than 75 % of AC&M Consulting estimates that mobile networks versifying their IoT offerings. currently employ a total of over 13 million M2M the total product range. modules, or slightly over 5 % of the total number MegaFon is a leader of the Russian M2M and IoT of active SIM cards across the country. The num- market, offering a wide range of B2B, B2C, and In 2017, the Russian fixed-line services market saw a continuing ber of M2M SIM cards grew by almost 40 % in 2017 B2G solutions, and actively engaging in the gov- decline in sales. Data and telephony services remain the largest Total volume of the market and will keep growing by at least 25 %–30 % per ernment-sponsored initiative to develop the dig- segments of the B2B market, accounting for more than 75 % of the of B2B fixed-line services year in the coming years. The industry composi- ital economy across Russian regions. According total product range. According to TMT Consulting, the corporate in Russia in 2017 tion of the M2M market is dominated by transport, to AC&M Consulting, in Q3 2017, MegaFon was segment declined by a total of 1.4 % y-o-y , primarily due to lower utilities and energy, security services, finance, for the first time ranked first by market share in sales in the telephony segment (down 6.1 %). The decline was some- and retail. terms of mobile revenue from M2M services. The what mitigated by a 1 % growth in the fixed-line Internet segment Company’s share was 34.2 %, outstripping MTS, and the growing demand for converged services (8-800 and Virtual J’son & Partners Consulting forecasts that by the previously unrivalled market leader. PBX). At the end of the year, the total fixed-line B2B market was 139 2022 the number of connected M2M/IoT devices estimated at RUB 139bn. billion RUB will total 43 million, with the market size reaching RUB 90bn. Cloud services will be the fastest According to TMT Consulting, the fixed-line services market in the growing segment, gradually squeezing out propri- B2G segment declined by 1 % to RUB 38bn, the main reasons for etary combined hardware/software solutions and the decline being (just as for B2B) the migration of traffic to mobile MegaFon’s revenue creating new markets such as cloud-based intelli- networks and the growing demand for IP telephony, including Vir- from services fixed gence for Smart Home systems and cloud-based tual PBX services. communication in 2017 analytics for data from connected cash registers. The shift towards cloud is driven by the growing The outlook for 2018 and the medium term anticipates a further de- consumer demand for more cost-efficient, flexi- cline in the demand for fixed-line telephony services as companies ble, and functional solutions to implement various save more communication costs and connect to office and cloud 28.8 distributed infrastructure monitoring scenarios PBXs, and as mobile communications and Internet voice services that are not supported by existing specialist inte- become even more popular. This will be the main reason for the billion RUB grated solutions. AC&M Consulting forecasts that market to shrink further since the fixed-line Internet segment has expertise in robust system integration of solutions remained flat. 12 % offered to a customer will soon be critical for the success of operators seeking to expand into new Niche services, such as VPN, 8-800, and Virtual PBX, may become IoT markets. promising growth areas for operators, with the growing demand driven by an increase in bandwidth, low cost of solutions, and the Such expertise requires a tailored approach to overall popularity of the business model which migrates from CAPEX every customer, which prevents market players to operating expenses. from using mass marketing and service tools already perfected by major operators. To address In 2017, MegaFon continued to actively enhance its fixed-line offerings this challenge, global players employ two main by providing a broad range of services for small, medium-sized, and approaches: either set up dedicated operating large businesses, as well as for retail customers. The fixed-line reve- units, or acquire assets that already have the nue grew 12 %, from RUB 25.7bn in 2016 to RUB 28.8bn in 2017. At the required expertise, thus increasing the share of end of the year, the Company’s revenue from converged services non-operator services in their portfolios. was up 47 %, having reached RUB 1.1bn. 36 Market Overview Market Overview 37

Broadband Internet Access Mobile Retail Number of retail broadband Internet subscrib- TMT Consulting’s preliminary estimates suggest that by the end of ers in Russia in 2017 2017 the number of retail broadband subscribers in Russia increased by 4.1 % to 32.6 million. The broadband penetration rate grew Overall demand for smartphones and 2 p.p., from 56 % to 58 %, while the market size was RUB 130.1bn vs RUB 125.6bn in 2016. ARPU for 2017 was RUB 339. handsets is expected to continue growing 32.6 in the next few years, while tablet sales million In 2017, there were no substantial y-o-y changes in the Russian broadband Internet access market structure. The TOP 5 players – will fall. 4.1 % Rostelecom, ER-Telecom, MTS, VEON, and TransTeleCom – service 69 % of the subscriber base. According to J’son & Partners Consulting, a total tors’ retail networks in the total sales of handsets In 2017, Rostelecom became the absolute leader in terms of the of 27.2 million devices were sold in the Russian and smartphones grew from 16 % in 2010 to 31 % subscriber base growth rate: by the end of the year, the number of smartphone and handset market in the 9M 2017, in 2016. The total volume of the paid its broadband subscribers was up 3.4 %, or almost 400 thousand up 1.5 % y-o-y. Smartphone sales were the key TV market in Russia in 2017 users. Following a number of successful M&A transactions, ER-Tele- growth driver, offsetting a significant decline in The role of monobrand retail networks in the mar- com also demonstrated a significant subscriber base growth by 386 tablet sales. ket is expected to strengthen in the next three thousand users, or 12.4 %. years since they allow operators not only to sell The tablet market sales have demonstrated a devices and accessories for traditional mobile 84.0 negative trend for 11 consecutive quarters, and, communications, but also to offer own inno- Pay-TV according to J’son & Partners Consulting, they vative digital products and boost sales of their billion RUB declined by 25 % y-o-y in the 9M 2017. tariff plans and subscriptions. This trend is con- firmed by VEON’s intention to rebrand 50 % of Unlike other fixed-line services, Pay-TV services demonstrated robust 10.5 % Overall, although the market is approaching sat- Euroset stores acquired as a result of a deal with growth in 2017. According to TMT Consulting, in 2017, the total size uration, demand for smartphones and handsets MegaFon and operate them under its own brand. of this market in Russia increased by 10.5 % to RUB 84bn, while the is expected to continue growing in the next few subscriber base grew by 3.1 % to 42.6 million users, compared to years, while tablet sales will fall. Nevertheless, in the coming years, major multi- 41.3 million in 2016. IPTV accounted for a significant share of the sub- brand retail networkswill retain a significant role Subscriber base scriber base growth (about 900 thousand users), while the number The slowing mobile market growth prompts key in the market as they traditionally offer custom- in Russia in 2017 of cable TV subscribers declined by 150 thousand. operators to actively develop new service offer- ers a wider range of equipment and accessories, ings, including via own retail networks. According including those not related to mobile communi- Overall, subscribers tend to churn from small providers to larger op- to J’son & Partners Consulting, the share of opera- cations. erators. In 2017, the aggregate number of Pay-TV users serviced by 42.6 market leaders, Rostelecom, Tricolor TV, ER-Telecom, MTS, and Ori- million on-Express, grew by 1.5 million, while the other operators lost a total of 130 thousand subscribers. 3.1 % In the reporting year, MegaFon’s Pay-TV subscriber base almost doubled, from 1.7 million to 3.2 million users, following the launch of the new ‘Vklyuchaisya!’ (‘Connect!’) tariff line. Key Competitors

The Pay-TV and content market is expected to grow further in 2018, although the growth will gradually slow down. At the same time, given the Russian market specifics, the traditionally strong position of over- MegaFon’s key the-air TV, and tough pricing competition among key players, service МТS VEON Tele2 providers will not be able to boost their ARPU by raising subscription competitors founded in 1993, (formerly Vimpel- founded in 2003, fees. Revenue growth in the segment will be achieved through pro- include: the largest mobile Com), founded the fourth largest motion of paid subscription model and focus on ARPU improvements operator in Russia in 1992, the third mobile operator through growing the range of value added services and their sales. largest mobile in Russia operator in Russia Strategy 39

Strategy Leveraging the new Digital World

We see our mission as building a prosperous digital world offering

Against the backdrop of rap- opportunities that improve the life- id technological development style of each customer. and changing forms of communication, we have carefully re-assessed our approach to our business. In 2017, we adopted a new strategy aimed at creating seamless communication experiences for our digital customer.

We define ‘digital customers’ as subscribers who rely on their smartphones to consume content and communicate, driving the usage of mobile data services. They are consuming large amounts of mobile traffic on a monthly basis as they message, watch high-definition videos, stream music, MegaFon’s Vision and pay for goods and services. With the Internet fast becoming an integral tool for everyday life, we expect that digital customers will soon comprise the majority of our subscribers. And our digital customers also include private and 1st public entities interested in corporate services, comprehensive information and communication Choice and the Best technology solutions. Partner for Modern Life

In 2017, MegaFon unveiled its new development We believe that the telecommunications market MegaFon’s key objective: Becoming can only grow if the participants consistently strategy for 2017 to 2020. The Company’s objec- focus on increasing the value of their offerings, a digital market leader and first- tive for this new strategic cycle will be to focus rather than relying on the price competition for- choice data provider by building merly typical of the industry. We endeavour to strong relationships with customers on fulfilling the needs of digital customers and make sure our offerings exceed the expectations and offering top-of-the-line digital 1 of our digital customers so that they come to products and services driving their LTV to spur further growth. value the benefits offered by the products and services marketed by MegaFon and its partners, which paves the way towards fostering a strong 1. Lifetime Value (LTV) is an internal estimated assessment of the current value of the future cash flow and loyal relationship with each customer and per client throughout the entire period of its relationship with MegaFon. increased usage of our solutions. Strategy 41 We Are Driving the Digital World We know how to drive growth

WE WILL LEAD the development of the Russian telecoms market

WE LEVERAGE UNIQUE ASSETS to acquire new and retain existing customers through non-price competition

WE ARE BEST POSITIONED to drive LTV growth in the new digital world

WE HAVE STARTED THE DIGITAL TRANSFORMATION process, which has already delivered first results

WE ARE FOCUSED ON DRIVING SUSTAINABLE GROWTH in line with our long-term development strategy

2018–2020 targets 1

Our Driving the Digital World strategy has already 2-5 % 3-6 % ≤2.0х delivered first results Service revenue OIBDA Net debt / We are confident that we are on the right track, as OIBDA we plan to continue the efforts to achieve our goal – Alexander Sobolev, become a digital market leader and first-choice data 1. Average growth rate. Target values do not reflect possible negative implications of regulatory Director for Strategy provider for our customers. changes and one-off transactions. Strategy 43

Key elements

Products Sales and sup- of strategy and services port network

Creating value without Prime access to high-value competing on price. New tariff digital customers at a mini- lines are created on the analy- mal cost. sis of customer needs.

Products and Sales and support services network

We will continue launching products that create We aim to attract and retain high-value digital real value for our digital customers. Our new tariff customers but not at any cost. We promote our line ‘Vklyuchaisya!’ (‘Connect!’) has been devel- services in our own stores and through our online oped following a thorough analysis of digital cus- channels, while in multi-brand stores we are pri- tomer needs and is supported by our ancillary ser- marily focused on growing our base of high-value vices as well as services and special offers from our customers by providing better products and ser- Digital partners, including MegaFon.TV, MegaFon bank vices rather than competing on price. We are also card, LifeControl smart home solution, #Spetsii continuing our efforts to improve retail efficiency client cashback and special offers, and many others. through POS optimisation and the introduction of new tools and models aimed at capturing higher quality sales.

Big Data ICT and IoT

We aim to make more focused and relevant offers We have built up a significant corporate following which are tailored more closely to individual cus- in these two areas, posting above market growth tomer needs. To provide a better customer experi- rates in both the fixed and mobile business seg- ence and more targeted offers for both new and ments. Further growth will be supported by the existing customers, MegaFon has made detailed launch and promotion of valuable, integrated analyses of its extensive customer base. offerings and the implementation of ICT projects. Big Data ICT and IoT It has also used customer analytics and insights We are also actively involved in national efforts 360° client view Big data Developing valuable corpo- relating to users of Mail.Ru Group’s products. In to drive the digital transformation of the Russian allow us to understand how rate services for B2X segment each case, it has employed a wide range of cut- economy by developing integrated communica- to better adjust our proposals. and business. ting-edge technology such as big data mining, tions solutions for government and business. In machine learning, conjoint analysis, and other partnership with other companies in various sec- research and analytical tools. tors of the economy, we will provide our diverse corporate clients with access to comprehensive sector-based solutions such as Smart Meters for utilities, a Digital Regional, Transport and Indus- trial Facility Monitoring System, and a Fiscal Data Operator Service, among many others. 44 Strategy Strategy 45

02. Infrastructure

MegaFon is building upon its existing technological advantages and infrastructure to further 01. consolidate its leadership in digital services for clients. Digital ecosystem Our objective is to be the data provider of choice for digital 03. MegaFon is in prime clients based on the Continuous position to create customer-perceived 04. Russia’s largest digi- quality of service efficiency Management tal ecosystem for our by 2020. improvements model digital customers. We will continue to pioneer Our milestone deal with innovative technology, devel- Mail.ru Group in 2016 gave us oping our infrastructure in line MegaFon continues As of 01 January 2018, access to the Group’s capa- with the most advanced glob- its efforts to boost we switched to a new bilities in digital service devel- al trends, utilising our network operational efficien- opment and monetisation, as of base stations, which is Rus- cluster management Our well as to a subscriber base sia’s largest, and leveraging cy by launching model. comprising the majority of our fourfold bandwidth ad- large-scale trans- Russian internet users. A part- vantage in the 2,600 MHz fre- This transition will improve op- nership of this scale between quency range. formational projects erational flexibility and speed competi- a telecommunications com- such as up local decision-making. pany and an internet company is unique for the Russian Fourfold bandwidth the creation of the First Tow- To implement the strategy, market, and we will, therefore, advantage in the frequency er Company to manage its we are rolling out new skills use this highly advantageous range tower infrastructure (with the and capabilities, develop- tive ad- opportunity to create a core possibility of its sale in the fu- ing our Customer Value Man- network to attract local part- ture), uniting its support func- agement strategies, using big ners and actively participate 2,600 tions in the PIKTA Shared Ser- data in process management in global digital partner eco- vices Centre and rolling out and boosting the effective- vantages: systems. MHz its Unified Billing platform. ness of project teams.

46 Business Model Business Model 47

Business Model PRODUCTS AND SERVICES RESULTS

RESOURCES AND ASSETS Shareholders and investors: 321.8 REVENUE, RUB BN TECHNOLOGY Mobile LEADERSHIP 199,761 157,732 km of FOCL back- base stations network bone network 121.9 OIBDA, RUB BN 20 DIVIDENDS, SERVICEBASED RUB BN Mail.Ru Group DIGITAL ECOSYSTEM Our team: Digital services RECOGNISED BRAND 1 143.4 AND LOYAL CUSTOMERS 83.9 % Brand awareness TRAINING COSTS, RUB M 961.7 SOCIAL BENEFITS, RUB M BALANCED DISTRIBUTION Fixed-line services NETWORK MONO 1,894 1,721 50 % Customers: AND MULTIBRAND MegaFon franchised interest in Retail stores stores 3,470 Euroset 77.1 stores CUSTOMER BASE, ACCUMULATED Sales MILLION AGGREGATED Big Data of handsets 50% CUSTOMER DATA and accessories CUSTOMER SATISFAC Society: TION INDEX CSI

EXPERIENCED 74% TEAM OF EXPERTS 39,126 OF POPULATION employees Focus: drive the client COVERED LTV of digital customers BY G NETWORK

STRATEGIC PRIORITY 217.6 BRAND PORTFOLIO DIGITAL CUSTOMER SHARE CHARITY, RUB M AND REVENUE

1. As of the end of 2017. 48 Operational Results Operational Results 49

MegaFon set a record for mobile data speed Reinforcing in a 5G network at Internet user coverage Our Infra- 35 in Russia is structure Gbit/s 95 % Leadership

MegaFon is the leading Russian operator by the number of base stations with 157,732 stations MegaFon is the absolute leader in Russia by bandwidth in the MegaFon is a leader in adoption of latest communications technologies in Russia

MegaFon provides its During the St. Petersburg International Economic Forum customers with the in 2017, MegaFon and Huawei demonstrated a data 2,600 fastest mobile network MHz band in Russia, as proven by transmission speed of 35 Gbit/s over a 5G network, setting an absolute record in Russia for mobile internet speed.

MegaFon is a leader in adoption of latest communications 7.5 technologies in the Russian Federation. We tested Massive million MIMO technology, during the demonstration the speed of mobile Internet in the sector reached 851 Mbit/s. The unique advantage speedtests run of this technology will enable us to offer our customers the fastest on the networks mobile internet in Russia using available radio frequencies. of all operators Operational Results 51 To Lead the Digital Economy

Be recognised as a key Boost MegaFon’s profile 01. partner for the govern- 04. as a national digital ment in the development champion among our and implementation of customers and partners digital policy

Create new products Establish a world-class 02. and solutions for the 05. centre of digitalisation digitalisation of Russian competence within regions, and evolve them MegaFon In 2017, with active support into a national standard from MegaFon, the Information Infrastructure team prepared an action plan for information Anna Serebryanikova, infrastructure development Pioneer the digitalisation Generate a significant Chief Operating Officer, 03. of Russia’s traditional 06. portion of MegaFon’s Head of Information in Russia. industries such as revenue from innovative Infrastructure working group at ANO Digital In particular, we proposed that next generation 5G energy, transport, products launched in the Economy networks be deployed beyond the cities of over one metals and mining market million people, and a single platform be developed for Wi-Fi user authorisation. We are confident that this document will serve as a starting point for a digital transformation of the Russian economy, which will deliver its first results in the coming years. 52 Operational Results Operational Results 53

Pskov Region Agreement on implementing the Digital Region project Smart utilities Social sphere in Innopolis MOSCOW Government administration MegaFon leads KAZAN Udmurt BRYANSK the Information Republic Infrastructure Saratov Transport, team at ANO and Ulyanovsk Safety and security Regions roads, tourism Digital Economy. CHELYABINSC K Smart public lighting Utilities Smart road signs

MegaFon is actively involved in the implementation Building of the Digital Economy of the Russian Federation - programme sponsored by the Russian Government.

We are confident that our advanced technologies, well- a Digital developed infrastructure, and experience in implementing major IoT and ICT projects will help us make a significant Russia contribution to digitalisation of key Russian industries. In 2017 we:

developed guidelines for a team responsible for drafting the Infocommunications Code; MegaFon is driving the digital economy proposed economic and regulatory measures through the implementation of infrastructure to stimulate operators’ investment activity; projects on the Digital Region platform. reached an agreement with Rostelecom on providing joint reports on 5G trials. Operational Results 55

Operational Infrastructure Results Development

Network Expansion MegaFon is the unrivalled Committed to maximising the speed and stability leader in Russia by number of base of connections, maintaining the excellent quality stations of communications and providing high-speed data services for its customers, MegaFon has consistently expanded its infrastructure to become the unrivalled leader by number of base stations in 157,732 Russia – it now has a total of 157,732, of which 26 % are 4G base stations. base stations

2G 1990s 3G 2000s 4G 2010s 5G 2016

Voice Mobile data Mobile broadband Ultrafast mobile Internet, and SMS and high-quality and full-scale AII-IP full-scale support of IoT eco- voice services systems, and ultra-reliability

MegaFon was the first in Russia to

provide 2G services roll out a full-scale launch a 4G network in demonstrate 1 Gbit/s speed in all Russian regions commercial 3G network 2012 and a commercial in May 2016 and 35 Gbit/s Throughout its history, MegaFon has placed par- VoLTE network in 2016 speed in June 2017 ticular emphasis on achieving and maintaining technology and infrastructure leadership in the Russian telecommunications industry. 56 Operational Results Operational Results 57

MegaFon’s Base Stations, Frequency competitive advantage ’000 of MegaFon, MHz

40.6 34 % 48 5 % 69.1 2 % 2017 157.7 10 % Bands below 800 MHz are only Potential spectrum available on a limited basis in Russia to deploy 5G

2016 30.2 45.7 6 7. 8 143.7 450 2,100 FDD 2,600

800 1,800 TDD 2,600 1

2015 23.0 42.5 65.8 900 131.3 33 %

4G / LTE 3G 2G 1. Enhanced data capacity spectrum. Source: MegaFon. 102

Furthermore, MegaFon’s strong portfolio of unique In 2017, MegaFon focused its infrastructure ex- 8 high-frequency spectrum assets is another im- pansion efforts on: 77 portant competitive advantage. While all major Russian players have comparable bandwidth posi- •• expanding the coverage and capacity of its tions in bands below 2,100 MHz, in the 2,600 MHz data network, and developing IoT-based net- band MegaFon enjoys a fourfold bandwidth ad- works; vantage over its key rivals.1 This edge enables •• improving service quality monitoring tools; MegaFon to: 63 40 •• increasing infrastructure reliability; 15 •• deploy 5G network at much lower cost than 60 •• implementing the Unified Billing system. its competitors; 6 •• save up to 15 % on CAPEX in 4G. 10 10 10 4G/LTE coverage, % Population covered by 4G network 15 74 15 15 15 65.4 74 % 59.2 19 18 19 16

2 8 10 6 10 10 10 10 5 1. Comparisons made for the FDD 2,600 MHz band (or Band 7 under 3GPP). 2015 2016 2017 Competitor 1 Competitor 2 Competitor 3 MegaFon 58 Operational Results Operational Results 59

Economic Development of Komsomolsk-on-Amur 2017 also saw a number of important approved by a Decree of the Russian Government. milestones. MegaFon launched the Additionally, in 2017, MegaFon and MTS have first commercial LTE network in Mos- reached an agreement for joint development and operation of communications networks to cow with data rates of up to 1 Gbit/s, reduce the costs of installing base stations so as to address the issue of the cost of covering smaller localities. and in June the Company, supported by Hua- total population of over 10 million people). In 2018, wei, set an all-time mobile data speed record for the Company is planning the further large-scale In 2018, the Company is planning a targeted ex- 5G networks Russia, hitting 35 Gbit/s in one radio channel expansion of its LTE networks. pansion of its 2G network to provide extra cove- will enable the pro- during the St. Petersburg International Econom- rage and aims subsequently to make its 2G fre- ic Forum. As part of its Smart Utilities project the In 2017, MegaFon, together with VimpelCom, quencies available for LTE services. vision of services first portion of an NB-IoT-based network was built continued their RAN Sharing project which pro- in Innopolis, Russia’s high-tech hub in Tatarstan. vides for joint development and operation of an that can provide a LTE 1800 network in ten Russian regions, which DEVELOPMENT OF THE NEXT GENERATION competitive edge to Additionally, to increase overall reliability and re- harmoniously complements MegaFon’s existing COMMUNICATION STANDARD the entire national duce maintenance costs, MegaFon launched a infrastructure while resulting in lower CAPEX re- economy, helping dozens series of projects to upgrade and retrofit its core quirements. At the end of 2017, 1,400 base sta- MegaFon is actively engaging in the de- of industries to achieve network, including upgrading outdated mobile tions were installed in the regions served jointly velopment of the 5G standard, togeth- significant cost cuts, switches, migrating to a new virtual platform for with VimpelCom, with supplementary carrier fre- er with Huawei and Nokia, two leading its packet switching core network and deploy- quencies added at some base stations to improve boost labour productivity ing IMS infrastructure for a federal rollout of new network capacity and bandwidth. global producers of telecommunications and extract higher value VoLTE/VoWi-fi services. equipment. and more creativity from their human resources, 3G NETWORKS As part of its partnership with Nokia, MegaFon 4G/LTE NETWORKS is planning several pilot 5G projects in Russia in all of which will increase the As at the end of 2017, the number of 3G 2018. Major projects include superfast mobile in- overall efficiency of the econ- In 2017, the LTE network’s retail coverage base stations grew by 5 % y-o-y to over ternet and telecoms services for national teams omy and considerably improve grew from 65 % to 74 %, providing resi- and visitors at the 2018 FIFA World Cup in Mos- the quality of life for many peo- 48,000. cow and St Petersburg. To support this initiative, dents in 83 Russian regions with access ple. MegaFon is already invest- in July 2017, MegaFon was the first telecom oper- ing significant resources in to the high-speed mobile Internet. The In 2017, MegaFon completed several projects re- ator to be authorised by the Russian State Com- lating to its networks, designed to improve sub- exploring and introducing cut- number of 4G base stations grew by 34 % mission on Radio Frequencies to use frequencies ting-edge technologies and y-o-y to 40,581. scriber experience. Further development of 3G for 5G trials. networks will focus on maintaining the current ideas, in many cases ahead of service levels. Data services will be mainly sup- major telecom operators from MegaFon also expanded LTE coverage principally In 2017, MegaFon, jointly with Huawei, set a land- ported through LTE rollouts. other developed economies. within the 1,800 MHz band to improve penetration mark mobile internet speed record, achieving a into residential and office buildings. Coverage speed of 35 Gbit/s in a 5G radio channel, which for other bands was also increased, driven by marked another important step towards our tech- 2G NETWORKS demand from the Company’s subscribers for ad- nology leadership in this area. ditional network capacity. In 2017, the number of 2G base stations MegaFon is also strongly committed to the Digi- MegaFon also maintained its focus on expand- grew by 2 % y-o-y to 69,100. tal Economy Transformation programme, which ing the coverage of its LTE Advanced network relies on 5G as a significant enabler offering vast which enables data transmission speeds of up to MegaFon continued its participation in na- automation opportunities across the Russian 300 Mbit/s. In 2017, LTE Advanced became avail- tion-wide projects designed to extend 2G mo- economy. MegaFon is planning to use this plat- able to subscribers in 38 Russian cities and re- bile coverage to remote regions of Russia and form to drive its next generation telecom projects. gions, up 40 % y-o-y. Another important milestone along federal highways. In 2017, the Company achieved by the Company was the launch of LTE took part in a project to provide coverage for the Advanced network in all nine regions served by Komsomolsk – Khabarovsk highway under the the Company’s Siberian Branch (which covers a Long-Term Plan for the Comprehensive Social and 60 Operational Results Operational Results 61

First Tower Company Backbone and Backhaul Networks

Expansion of its fibre-optic (FOCL) network allows MegaFon to On 3 July 2017, MegaFon was reorganised, with provide a better subscriber experience, including improved mobile MegaFon’s backbone network capacity and increased data transmission speeds. the assets related to its tower infrastructure being networks as of the end of 2017 totalled spun off into a new subsidiary, First Tower Com- As of the end of 2017, MegaFon’s backbone networks totalled 134,100km, up 2.7 % y-o-y as a result of its own construction pro- pany, to improve management of MegaFon’s jects, its network-sharing programmes with MTS and VimpelCom, tower infrastructure. and purchases of fibre-optic cable capacity from third-parties. The percentage of all urban base stations interconnected through FOCL 134.1 was 66 % at the end of 2017. thousand km JSC First Tower Company (FTC) is MegaFon’s sub- the majority of existing regional clients agreed to sidiary set up in 2017 to effectively manage the convert their contracts to market pricing. Backbone and Backhaul FOCL Networks 2.7 % Company’s tower infrastructure, increase its return on CAPEX invested, and expand into the In 2018, FTC is planning to continue to transform fast-growing tower lease market. the tower lease market by introducing consistent Backbone, ‘000 km Backhaul, ‘000 km rental rules and favourable conditions for fast Over 15,500 towers and other related assets worth network rollouts. a total of over RUB 17.2bn were transferred to FTC. In addition, in the second half of 2017, RUB 332.7m FTC has established a new 205-person organi- 2017 134.1 199.8 were allocated for new towers construction. sation covering 7 functions across 18 offices to provide effective asset management. This organ- After FTC’s formation a thorough review of all as- isation consists of professionals with critical skills sets was conducted, a company-wide database in telecoms, property management, integrated 2016 130.6 192.7 was created, and a dedicated IT platform was IT solutions and infrastructure construction and designed to manage the company-wide database expansion. and the installed equipment. And, to improve the service experience for both 2015 126.0 184.4 The launch of FTC’s operations also marked the external and internal customers, the company start of a transformation process in the Russian created a back-office centre in Samara, and four tower lease market FTC has developed a sales and competence centres in Novosibirsk, Samara, Kras- marketing strategy to address both the existing nodar, and Moscow to handle contracts for the and future tower lease markets. Since July 2017, lease of land for tower construction. The Company also continued to expand its satellite network in 2017 all new tower lease contracts with telecom opera- by completing a project to transfer its 239.5 MHz spectrum from sat- tors have introduced market pricing. Additionally, ellites of the Russian Satellite Communications Company (RSCC) to satellites operated by JSC Gazprom Space Systems, which helped reduce channel frequency bands while maintaining their throughput capacity. This move resulted in savings of RUB 64m in 2017. FTC’s Plans for 2018: FTC’s Ongoing Plans: In 2018, MegaFon is planning to further expand its FOCL, focusing mostly on the country’s northern regions and Siberia, with project- •• Capitalise on the advantages of owning the •• Define the requirements for future infrastruc- ed network additions of 2,100km. The Company will also continue largest portfolio of tower infrastructure assets ture ahead of the industry’s adoption of 5G. expanding its 100G DWDM network across key backhaul destina- by leveraging the existing customer base and •• Build the framework for strategic partnerships tions to reduce latency rates for traffic users in the Urals, Siberia, attracting new customers. with infrastructure companies, vendors, and and the Far East. •• Put in place initiatives to improve efficiency mobile operators to reduce the costs indus- initiatives. try-wide for the deployment and operation of In 2018, MegaFon is also planning to launch an ambitious project next generation networks. to construct a Metro DWDM network in six cities with a population •• Increase return on CAPEX by focusing on the of over one million people. This project will not only improve cus- most attractive projects, reducing the con- tomer experience but also prepare our backhaul infrastructure for struction cycle time, and co-locating tenants. 5G deployment. 62 Operational Results

Network Quality

MegaFon boasts an advanced, extensive infrastructure, and a significant edge in the spectrum. These allow us to provide a high-quality voice experience for our subscribers, as well as the fastest mobile data services in Russia.

MegaFon Connectivity Metrics in 2017

is the NETWORK 4G 3G 2G

unrivalled Call Set-Up Success Rate, % 99.46 99.63 99.02 leader by Drop Call Rate, % 0.39 0.27 0.49 average In 2017, the Company further improved its 2G dropped call rate, data with its performance in 3G staying flat y-o-y. These results were attributable to the completion in 2017 of network optimisation pro- transfer jects and rollouts of SON 4 tools in 30 major Russian cities. Our call set-up and drop call rates in 4G packet data are within a normal rate in range, considering the 130 % y-o-y increase in 4G traffic in 2017. 1 Development of our LTE network in 1,800 MHz and 2,600 MHz fre- Russia quency bands helped us improve the perceived quality of the services provided to our customers.

In 2017, to improve network quality, MegaFon started collecting new service metrics to address subscriber experience. Among other things, the new metrics are used in network investment programme (which MegaFon’s network offers includes benchmarking and analysis of competitors’ activities), and extremely attractive voice also to set targets for infrastructure projects. Additionally, specific and data services 2 billing KQIs 5 were designed and adopted based on the research findings.

In 2018, MegaFon is planning to continue SON rollouts across all Russian regions covered by its network. The Company also has plans to deploy an E2E (end-to-end) service quality management MegaFon leads the market system to further improve network quality. Implementation of this with the best scores on system allows MegaFon to move from network fault management subscriber satisfaction and performance management to service quality monitoring and among the ‘Big Three’ analysis per service, per subscriber, per device. operators 3 Digital economy relies

1. Speedtest by Ookla. on a comprehensive 2. As shown by federal drive tests. 3. In-house research as at December 2017. advanced infrastructure. 4. SON (Self-Optimising Network) is a smart network capable of independently evaluating the performance of each of its constituent elements and optimising Our primary focus is preparing infrastructures for 5G own operation. Pavel Korchagin, 5. KQI (Key Quality Indicator) – a system of metrics for quality of billing oper- deployment, with plans to showcase the benefits of 5G Chief Technology ations. networks in 2018 during the FIFA World Cup in Russia. Officer 64 Operational Results Operational Results 65

Network Operation / Information Technologies

Global Network Operational Centre MegaFon deploys state-of-the-art information •• Oracle Big Data SQL; In 2017, the GNOC handled 404,000 requests technologies across all areas of its activities.The •• Oracle Business Intelligence; The Global Network Operational Centre use of cutting-edge solutions drives the imple- (GNOC) provides round-the-clock from mobile subscribers, and 109,000 requests •• Oracle Data Vizualisation. from fixed-line customers. To improve customer mentation of the Company’s Strategy, and its monitoring of the status of MegaFon’s Implementation of these solutions in 2018 will experience, Yota-related requests started to be competitive advantages. enable the Company to cut data storage costs, network across Russia and manages processed by the GNOC in 2017. over 350,000 active network elements, During 2017, MegaFon was involved in the devel- reduce development times, speed up analytics delivery, including through the use of machine In the reporting year, MegaFon made extensive opment of Mail.Ru Group’s product, the TaranTool including voice and packet-switching learning to develop new and review existing prod- efforts to improve the GNOC’s performance, in- next generation database management system equipment, backhaul network equipment, ucts, as well as to improve the overall quality of cluding making over 60 major improvements in (DBMS). This cooperative effort aims to elaborate, and service platforms. business decision-making. Trouble Ticketing 3, GPM 4, and MegaGis systems in close contact with the database’s developers, to enhance the performance of processes relat- a concept of a CRM’s transactional cache to en- The Centre’s functions are located at two sites, In December 2017, MegaFon acquired a 12.5 % ed to scheduled network repairs and upgrades, able service scaling to 1 billion subscribers, offer in St. Petersburg and in Samara. In case of stake in Forpost LLC, the holding company for troubleshooting, and the handling of customer an entirely new service, and ensure resilience an emergency, network operation can be ful- Talmer LLC – a systems integrator and complex requests. By overhauling its intrusion detection through in-memory data storage and advanced ly consolidated at one site within 15 minutes. data replication tools. IT solutions provider in Russia. In 2017, the GNOC processed an average of 14 mil- tools at base stations, the Company was able to cut system response times to 45 seconds. lion network notifications and messages per day A search cache for address details search in The deal will help MegaFon make an important and continued streamlining the routing of fault step towards implementing its digital strategy The Company also significantly streamlined its MegaFon’s unified catalogue was implemented alerts through enhancement of correlation, fil- in the corporate and public sectors by strength- maintenance costs for the systems covered by the as a pilot, delivering a 200 times faster response tering, and other intelligent tools used in umbrel- time for address search and demonstrating the ening its ICT capabilities and speeding up the 1 network operation function to achieve savings of la OSSs . In 2017, the Company resolved a total implementation of customised, comprehensive RUB 370m in 2017. Another important action taken speed of address search equal to that of Goo- of over 1.4 million incidents and performed turnkey ICT projects for customers. was the launch of the Integrated TCS (Technical gle and Yandex maps. Mail.Ru Group started 245,200 scheduled network repairs. The number developing the TaranTool Enterprise commercial 2 Customer Support) Workstation that automates of incidents resolved within SLA timelines grew The Company is also focused on improving its request processing. product, which offers functionality matching from 87.9 % in 2016 to 91.6 % in 2017, while the similar international solutions, and a high level operational efficiency, and intends, through a percentage of emergencies remotely resolved by of technical support for critical business systems. joint effort with Forpost, to make its procurement the duty shift unassisted grew from 6 % to 7.1 %. Building on this experience of successful cooper- more competitive and effective through econo- ation, MegaFon proceeded to implement a range mies of scale. of transactional caches and microservices based on TaranTool to further develop the commercial 1 This year, MegaFon will version of the DBMS. NUM Automation Handled and processed MegaFon applies advanced technologies to consolidate IT infrastructure across its branches, in service and support the by the GNOC’s staff in 2017 During 2017, MegaFon continued to automate its particular, to build a company-wide data ware- NUM, a system for target planning of infrastruc- 2018 FIFA World Cup house (CDW). In 2017, the Company continued ture expansion expenses which factors in current to run a comprehensive programme to improve network utilisation rates and growth plans. The 404 the CDW’s performance and set up a distributed NUM system covers all segments of the network – In 2017 more than 500 MegaFon network operation specialists pro- warehouse using the Oracle Exadata Database thousand radio network, core, and backhaul networks. It vided technical support services for such major events as: Machine platform and Hadoop cluster, provide uses big data analysis, which enables highly ac- requests from mobile universal access to data, and enhance analytical curate calculations of key metrics. •• 2017 FIFA •• 2018 FIFA World Cup subscribers data marts and predictive models based on ma- Confederations Cup Final Draw chine learning for CVM projects, Smart CAPEX / The NUM automatically allocates expenses and Smart Maintenance, and corporate reporting for creates tasks to optimise the existing network. business units. The Company continuously develops the system, 109 applying advanced technologies to expand its 1. OSS means an umbrella Operation Support System. At the end of 2017, the following functionality and improve algorithms. 2. SLA means a Service Level Agreement between the Company and subscribers. thousand technologies were purchased: 3. Trouble Ticketing is a system managing orders and incidents. requests from fixed-line 4. GPM (Global Performance Management) is a system used to monitor equipment performance parameters. subscribers •• Oracle Data Integrator; 1. Network utilisation model. Operational Results 67

Brand and Marketing

In September 2017, MegaFon unveiled a new approach to its branding with the introduction of slogan ‘MegaFon. Starts with You’ to match its new digital strategy and showcase the Company’s transformation from a telecoms operator to a provider of new digital opportunities.

A strong The campaign to promote the new branding In a few months, awareness of the new slogan involved musical commercials, which resulted in a exceeded awareness of slogans of key peers multiple percentage point increase in ‘top of mind’ who had introduced them several years before, and other spontaneous awareness measures, demonstrating the effectiveness of the way that brand which were impressive for the Russian telecoms the new slogan had been communicated. market. In fact, the commercials were among the is one of MegaFon’s key top ten most effective commercials recorded in the history of MegaFon’s marketing research on competitive advantages. this subject. 68 Operational Results Operational Results 69

Launch of ‘Vklyuchaisya!’ MegaFon. (‘Connect!’) Tariff Line ‘Vklyuchaisya!’ is the first tariff line in the The official launch was supported by a large-scale Russian telecoms market individualised to integrated advertising campaign across all target audience channels, including online videos, pre- specific customer needs. This unique pro- Starts rolls, digital activations, integrations with popular duct was most driven by an eye-catching digital platforms, social media, TV and outdoor name and engaging communication. To advertising. emphasise the key role of customers we with You named the new tariff line ‘Vklyuchaisya!’. Following the tariff line launch campaign, we were able to improve the average ARPU and achieve a record high in tariff awareness compared with peers in a very short time. The line achieved huge success and gained even more approval during the year from both MegaFon and its peer audience, with 18 % spontaneous awareness at the launch – a significant result compared with new products offered by peers.

SMM Channels

Due to shifting trends in mobile content consumption with faster mobile data services, MegaFon is actively developing new SMM-promotion tools with a focus on video content.

An advertising campaign to promote We produce videos featuring employees who describe the latest key tariffs to our customers in its new ‘MegaFon. Starts with You’ slo- a simple and clear language, thus significantly Since the official launch of the gan was launched with the famous growing the share of video content in our pro- campaign MegaFon has ex- motion toolbox. plored all formats combining Russian singer Yolka acting as its pri- an opportunity to show brand mary spokesperson. values and the new style which is based on the new positioning, including TV, radio, outdoor, indoor, ambient content preferences whether it be sports, music advertising and digital channels. This strategy, or humour, and integrate the slogan using this including the music platform, helped us strongly knowledge. In addition, popular VKontakte com- and vividly communicate the key brand attributes munities updated their cover images to match the such as the new slogan, new logo, and sound to new campaign slogan so that each community the target audience. We actively leveraged digital member would feel engaged, with their photos channels, including unconventional formats such being integrated into the cover image of a com- as YouTube-Vagon allowing us to identify customer munity. 70 Operational Results Operational Results 71

Mobile Services ‘Vklyuchaisya!’ (‘Connect!’) Tariff Line Big data analytics helped us develop different offerings for In May 2017, MegaFon introduced its groups of customers who use their smartphones in different new ‘Vklyuchaisya!’ tariff line to meet ways, e.g. for voice communication, messaging, listening the needs of today’s digital subscri- to music, social networking, or bers. watching video content. The MegaFon’s new strategy is focused on servicing tariffs are given different names to correspond to the ser- digital subscribers who are heavy consumers of MegaFon vices being purchased, and, by providing special packages traffic, which in turn means that mobile data is a and free traffic for popular services, we are able to give strategic priority segment for the Company. won Ookla’s consumers the benefit of these tariffs without limitations on the amount of traffic consumed. Speedtest In 2017, the number of mobile data users increased by 1.6 % y-o-y to 31.5 million users, with All Android smartphone or tablet users subscribing to the DSU up by 52.2 % y-o-y to 6,524 MB per month. Award for ‘Vklyuchaisya!’ tariffs have access to ESET NOD32 mobile anti-virus protection which has an anti-theft feature which Mobile data revenue increased by 6.3 % y-o-y to helps find stolen or lost devices, track their location, re- Fastest Mobile RUB 89.7bn, principally as a result of the Com- motely restrict access, activate a loud warning signal, or 1 pany discontinuing unlimited data plans and the delete all confidential information. Network . transition to ‘app-based billing’ for its new ‘Vkly- uchaisya!’ tariff line. The launch of the new tariff line has stimulated subscriptions for tariffs with bigger service bundles and has im- Another key revenue driver was the expansion proved the overall subscription rate and resulted in higher of our 4G/LTE networks — their share of overall levels of customer engagement. traffic almost doubled in 2017 to reach 54 %. Also, the 4G/LTE mobile data user base was up by 61 % Since 01 December 2017, ‘Vklyuchaisya!’ tariff line sub- y-o-y to 13 million customers. Increasing traffic scribers using international roaming services have been of- Mobile data users and their share and related revenue in the future will require a fered unlimited traffic for WhatsApp, Viber, Telegram, and in the subscriber base well-developed infrastructure of high-speed data eMotion for RUB 99 per day. In addition, they are offered transmission networks. 10 MB of traffic for other online services at RUB 99 per day. Mobile data users, Share of mobile data million users of the subscrib- MegaFon is committed to meeting the growing customer er base, % demand for data services. We have studied customer pref- DSU2, MB per month erences to add new services and apps popular with digital 41.8 % customers and are offering bigger data plans in our tariff 41.0 % line in 2018. 39.2 % 31.0 31.5 6,524 29.3 4,286 3,286 >10 76 % 8 GB million 1 new per 2015 2016 2017 2015 2016 2017 subscribers subscribers month

signed up to in the ‘Vklyuchaisya!’ used on average 1. As determined by Russian users using Ookla’s Speedtest app in Q2–Q3 2017. ‘Vklyuchaisya!’ tariffs chose tariffs with heavy by ‘Vklyuchaisya!’ 2. DSU (monthly average data services usage per user) is calculated by dividing the total number of megabytes transferred by our network during a given period by the average number of data service users during such period and dividing the traffic and multi-service subscribers bundles result by the number of months in that period. 1. As of March 2018. 72 Operational Results ‘Vklyuchaisya!’ (‘Connect!’) Tariff Line LISTEN Now every MegaFon customer can connect to a world of endless digital opportunities.

PREMIUM SPEAK

WRITE

WATCH

INTERACT

‘Vklyuchaisya!’ (‘Connect!’) benefits Сustomers on In 2017, we launched ‘Vklyuchaisya!’ MegaFon: •• Covers all customer segments (‘Connect!’) tariff an innovative ‘Vklyuchaisya!’ •• Integrates with new digital services plans are (‘Connect!’) tariff line, •• Boosts key indicators: ARPU, DSU, LTV which was developed through leveraging big data and Customers: •• A simple choice of tariff plan based on the Vlad Wolfson, analysis of mobile data user preferences. We were able to >10 Chief Commercial create a product that best meets each customer’s individual individual customer needs and preferences Officer million needs. The launch of ‘Vklyuchaisya!’ (‘Connect!’) marked •• The selected tariff plan can be fine-tuned MegaFon’s transition to a new, digital strategy, which already by purchasing additional unlimited data for boosted customer LTV by 20 % in 2017. preferred apps We hope that further enhancement of ‘Vklyuchaisya!’ (‘Con- nect!’) service offering will help MegaFon to become first- •• Attractive offers and discounts on other choice operator by building strong relationships with cus- MegaFon services tomers. 74 Operational Results — M e g a F o n .T V — M — eg V — — a ID M P Fo E o ay B n O bi m a .M le f en nk c u S in t t s E Building a e ar ic R n r V c m d I ial s in C — e al E # rv s S Sp ic et es sii s FI M p NA ED ec N I ial o C A ff IA er L an Ecosystem s SE RV IC — ES Me ga EC Fon O .He MM — S alth E mart H RC of Digital ome ( E s Life C on trol) e HE c ALT — H i Voicem ail ser v vice fo r iPhon r es IO Services T SE — RVIC eMotion ES e S COMM UNICA TION S OLUTIO NS C

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naly e ED al A vic G B anci r ser VER — Fin nde N mme ice CO S To achieve this, we intend to create Reco erv X N eo- ion s l PB TIO — G erat tua U en Vir 00 OL MegaFon’s ad G — 8-8 Y S a wide range of products for our — Le — s IT nes UR S objective – usi C N n.B SE IO digital customers. iFo N T ult IO LU is to become a digital market M AT O — M S OR M S leader and first-choice data F R R IN FO O provider ion T T ect LA A rot P ER t P on P We offer advanced digital solutions to our corpo- ea cti O S hr e N r T rot s S e ce M IO yb oS P vi O T rate clients, introducing smart solutions for au- C D er U — /D S) EC L oS D s e L E D ile I M E O tomated data collection and transmission, which — ob re ( T S IC s M u R D e ) at V ic — n O U R v C s ig n F E r S e enables them to monitor all changes in the status S o S LO S e c e e ti E - i il a C C e (S t ob ris k I A d S r c № 1 o r V - e t a M th o R e S r n r of construction projects, utilities, and transport — u tw E tr A a e e S n - h l P for our customers th A e u S C a i ry N .R S i w e il k A S g infrastructure facilities, and achieve their business F liv ta C a s E T i- e a i - C K r D a I K Le t D e l D a M a - O . — W en n a fr g s s R objectives more efficiently. t rt u e a n e P .O n a X t In - o P h T o ir M e ti S T . C n I V — r u O — C P o — tu l S . M F — c o E — P F ga u N — e tr e s I M s ic S — ra rv U — f e B In S — 76 Operational Results Operational Results 77

Innovative Products and B2C Services Video services

Value Added • MegaFon.TV Services (VAS) The number SERVICE DESCRIPTION of MegaFon.TV subscribers: The service provides anytime access to a large content library including 165 TV channels (39 HD channels), 30 TV programs, 2,227 films, and 397 TV series and 156 cartoon series from leading Russian and international content owners. The service can be accessed via a 3.2 mobile app on iOS and Android mobile devices, PCs, Smart TVs, and Samsung and LG TV sets. MegaFon has made the development of inno- million Subscribers pay for the content from their personal accounts with vative products and value added services (VAS) the operator. Special terms of use are offered to subscribers on the its strategic priority. We are focused on offer- ‘Vse Vklyucheno’ (‘Everything Included’) tariff plans and options that have access to 50 TV channels and up to four films per month at Average monthly ing state-of-the-art reliable technological solu- no extra charge. tions as we create seamless communication ex- active users: periences for our digital consumers. 600 DEVELOPMENT IN 2017 The number of registered MegaFon.TV subscribers almost doubled thousand during 2017, growing from 1.7 million to 3.2 million users. Subscribers on the ‘Vse Vklyucheno’ and ‘Vklyuchaisya!’ tariff plans and options make up 89 % of the service users. • MegaFon continued to build IaaS (Infrastructure-as-a-Service) The key growth drivers for the MegaFon.TV service included exciting its product portfolio in 2017, solutions; special offers, continuous content updates and the launch of a expanding its range of digital • BPaaS (Business Process as-a-Ser- special section, featuring children’s TV channels, animated series services by introducing the fol- and films. vice) solutions; 68 % lowing new offerings: of service • platform solutions and information In October 2017, MegaFon.TV partnered with START* video service. security solutions; subscribers This partnership will provide MegaFon.TV subscribers with an opportunity to watch popular Russian films and TV series at the same watch MegaFon.TV time as they are aired and some selected new TV series produced • mobile ID services; via mobile devices by START* and other studios are delivered even before their first • services for telecoms operators official airing on TV. MegaFon.TV included Molodyezhka (‘The Junior (B2O). Team’), Otel Eleon (‘Eleon Hotel’), Ivanovy-Ivanovy (‘The Ivanovs – The Ivanovs’), Vy Vse Menya Besite (‘You All Infuriate Me’) and Pauk (‘Spider’) before their official airing.

MegaFon is focused on continuously improving the customer experience in using the service. In 2017, we simplified the login procedure in MegaFon.TV for mobile users, which immediately increased the number of mobile logins and introduced an option enabling users to pay for films using a bank card. 78 Operational Results Operational Results 79

B2C Services Financial services services and be used to pay for the services of more mobile service providers and banks.

• Bank card Within the efforts to develop its mobile financial services offering, • Payment terminals MegaFon in 2017: • Mobile financial services •• increased the volume of payments through the Direct Carrier Billing platform (mobile payments for purchases in the Apple SERVICE DESCRIPTION App Store and Google Play Store) by 73 % y-o-y; •• launched an online microcredit function, with an average lead- >900 MegaFon’s mobile financial services and products enable our sub- to-loan conversion rate of 8 %; scribers to conduct a wide range of banking and payment trans- thousand actions using mobile phones and tablets. •• added a payment option accessible from the MegaFon.Money MegaFon bank online platform; MegaFon bank card is a unique debit card which can be used to cards •• provided special offers covering mobile payments for make purchases and free money transfers with the funds on the user’s were issued during 2017 purchases from popular online services and stores such as mobile phone account linked to the card. The card is easy to obtain LitRes, Warface, Burger King, Google Play, and others. and top up and card holders can receive up to 50 % cashback (depending on the purchase amount) from MegaFon’s partners. 8 % p.a. The total number interest is paid on the account balance, if certain conditions are met. B2C Services IoT services of MegaFon card holders: MegaFon’s network of payment terminals allows our customers to pay for a wide range of services at the Company’s stores and • Smart Home (Life Control) improves the use of human resources by freeing up the time of store 1.3 staff for other tasks. In July 2017, Life Con- SERVICE DESCRIPTION million MegaFon’s mobile financial services turn a phone into an e-wallet, enabling its customers to pay Internet, utility, TV, and telephone trol solutions were for Smart Home (Life Control) is a remote home control and safety bills, traffic fines and make loan repayments to banks and money the first time in Russia service. At present, the Life Control family includes a smart socket, transfers directly from a mobile phone account. used to provide security leak detector, motion sensor, smart lamp, open/close sensor, smoke services for communi- The number detector, plant sensor, Wi-Fi camera, fitness tracker and GPS tracker. of payment terminals in cations facilities at the The system is controlled via the Lifecontrol.ru web portal or a mobile app on the user’s smartphone or tablet. Alerts are sent to the owner operation in 2017: DEVELOPMENT IN 2017 stadiums hosting the 2017 FIFA Confedera- as push messages or emails. Around 900,000 MegaFon bank cards were issued during 2017, al- tions Cup matches. most twice as many as in 2016. The number of active users of this 1,700 DEVELOPMENT IN 2017 service totalled 120,000 people, with the average monthly transaction volume per card being RUB 13,700. 320,000 customers used Our Life Control-branded smart home services were commercially the service during 2017. Terminals’ payment launched in April 2017. In addition, in July 2017, Life Control solutions volumes in 2017: were for the first time in Russia used to provide security services We developed a number of new functions and offers for MegaFon for communications facilities at the stadiums hosting the 2017 FIFA card holders in 2017. Now users can add their cards to NFC-en- Confederations Cup matches. To achieve this, 53 equipment sets abled mobile wallet apps such as Apple Pay, Samsung Pay, and were used, including motion sensors, video cameras, and open/ 15.1 Google Pay, and make money transfers via the Unistream payment close sensors. system. We also launched a new programme, ‘Bonus Megabytes’, billion RUB which awards subscribers a bonus of 10 MB of extra traffic for every RUB 100 spent on purchases of goods and services with MegaFon bank card.

Revenue from mobile During 2017, MegaFon implemented an extensive relocation project, financial services for moving its payment terminals to sites where they can serve more 2017 totalled RUB 1bn. customers. In addition, terminals can now offer more transaction 80 Operational Results Operational Results 81

New Offerings Media DEVELOPMENT IN 2017 of B2C Services The #Spetsii service was launched in the middle of December 2017. • MegaFon.Music The launch was accompanied by promotions in digital channels to introduce users to the new service.

SERVICE DESCRIPTION •• 10 % of users registered with the service at the special.megafon.ru website have made purchases; MegaFon.Music is a music platform combining some of the more •• the top 3 partners by total amount of orders were: MegaFon’s popular music streaming services: online store, M.video, and AliExpress;

•• Yandex.Music; •• total cashback is capped at RUB 20 thousand per month. •• BOOM; MEGAFON’S PLANS FOR 2018 INCLUDE: •• Zvooq. Users signing up for the service with MegaFon get an unlimited •• launch of a ‘Maximum Cashback’ subscription service offering data plan for streaming music through their app, with special offers 60 % higher cashback rates for RUB 15 per day; available for those on the ‘Vklyuchaisya! Slushai’ (‘Connect! Listen •• expanding the list of participating online retailers and provide to the Music’) tariff. customers with an option of getting rewards for purchases from offline partner stores; •• further aggressive service promotions in own and third-party DEVELOPMENT IN 2017 communication channels. The service was launched in November 2017. A digital promotion campaign was presented in December 2017 to expose users to the New Offerings Communication solutions new service, followed by a special ‘free for 3 months’ offer for those of B2C Services taking up the ‘Vklyuchaisya! Slushai’ (‘Connect! Listen to the Music’) plan and signing up for the service. • Voicemail service for iPhones • eMotion At the end of 2017, 25,000 customers were using the service.

For 2018, the Company plans to develop new subscription options SERVICE DESCRIPTION for the service. Voicemail service is a pre-installed app for iPhones allowing users to easily manage their voicemail messages. New Offerings E-commerce of B2C Services eMotion – the messenger, which allows you to call and send messages using the Internet to a subscriber of any operator, • #Spetsii special offers while the interlocutor does not need to have an installed eMotion application, he can communicate via standard mobile voice and SERVICE DESCRIPTION SMS services on his smartphone. #Spetsii is a cashback and special offers service offering real cashback money on purchases made with over 300 partners including Lamoda, M.video, Booking.com, Aviasales, myToys.ru, OBI, DEVELOPMENT IN 2017 Delivery Club, and others. Cashback rewards can be used to pay not only for telecom services but for any other purchases, as well iPhone voicemail service was launched in September 2017 and was as be withdrawn as cash at any ATM using a MegaFon card. the first digital service offered by MegaFon to manage calls. In 2018, MegaFon plans to further enhance its offering of digital services to help its digital customers manage calls and text messages. 82 Operational Results Operational Results 83

New Offerings Family solutions In December 2017, promotional campaigns were launched to intro- of B2C Services duce users to the product.

• Parental control service • Radar service DEVELOPMENT PLANS FOR 2018 INCLUDE:

•• nation-wide app launch; SERVICE DESCRIPTION •• expanding the list of clinics involved and the number of clini- In 2017 the Radar service app Parental Control is a service to track a child, and manage the cal specialties available; was installed on child’s phone settings and access to websites. •• expanding the app’s functionality and the number of op- 200 Radar is a geolocation service to track a mobile device. tions to pay for consultations.

DEVELOPMENT IN 2017 1 M2M and IoT B2G and B2B services thousand B2X Services devices The Parental Control service was launched in December 2017. • M2M monitoring • Smart Substations • Employee Monitoring • Smart Utilities PLANS FOR 2018 INCLUDE: • Car Fleet Monitoring Users made a total of •• offering more options to control a child’s phone; SERVICE DESCRIPTION >100 •• digital promotions to introduce users to the service. MegaFon has a leading share in the Russian M2M telecoms market, In December 2017, MegaFon changed the pricing policy and deli- million estimated by AC&M at 36 %. The Company is planning to continue very model for the Radar service. Now all service users can look up consolidating its position in this segment and promoting digitisation location detailed tracking data for their close ones on a map and get notifi- of key Russian industries. We offer our customers a broad range of cations when they enter/leave a specified geographical area. requests smart services, including:

M2M Monitoring, a platform for remote control and online New Offerings Health management of a pool of SIM cards for corporate customers with of B2C Services large headcounts. M2M Monitoring permits the tracking of the location of SIM cards, checking their activity and network connection, monitoring changes of device IMEI numbers and setting up spending • MegaFon.Health and traffic limits. The platform provides a user-friendly interface and flexible functionality that would fit any industry’s requirements. At the end of 2017, the service SERVICE DESCRIPTION provided access to Employee Monitoring, a service that allows MegaFon’s customers MegaFon.Health is a mobile app for online medical consultations. to locate their employees, track their movements, and monitor when Users can use the app to discuss health issues with a doctor, arrange they visit particular areas on the map. The service also locates the >1,000 an appointment with a medical specialist and add doctors’ opinions nearest employees to given locations on the map, sends notifications or medical test results to their Electronic Health Records. when they are located within a given area, and tracks progress on doctors the tasks related to on-site visits to customers.

DEVELOPMENT IN 2017

In November 2017, MegaFon was the first operator to launch a tele- health service in Moscow and the Moscow region.

At the end of 2017, the service provided access to over 1,000 doctors 1. MegaFon’s B2X services include business-to-business (B2B), busi- from 39 clinical specialties based in 14 Moscow clinics. ness-to-government (B2G), and business-to-operator (B2O) services. 84 Operational Results Operational Results 85

Car Fleet Monitoring, a service that enables MegaFon’s corporate B2X Services Big Data solutions customers to track their vehicle fleets in real time, and monitor mileage, idle time and fuel consumption. The service enables our customers to significantly optimise their activities and cut costs by • Financial Analytics services up to 30 % by reducing the probability of vehicle misuse. • Geo-Recommender service • Lead Generation service Smart Substations, an IoT-based project designed by MegaFon for PJSC ROSSETI to install sensors and video surveillance cameras at substations to report equipment faults or intrusions online to the SERVICE DESCRIPTION customer’s analytical centre. MegaFon extensively uses Big Data solutions both to improve its own Smart Utilities, a new NB IoT-based solution designed by MegaFon business performance, and to drive its B2B and B2G offerings for in 2017 for Innopolis, Russia’s high-tech hub in Tatarstan. The solution handling sizeable customer streams. The Company takes advantage enables utility operators to collect data from communal water, power, of all leading-edge advances in big data storage, processing and and heat meters and analyse them in real time to improve their application. Key big data services offered by MegaFon to corporate services. customers comprise of:

Financial Analytics services, a suite of solutions to help financial DEVELOPMENT IN 2017 organisations assess the default risk of their potential borrowers. Experts estimate that by using MegaFon’s analytics in their existing MegaFon’s product strategy is focused on achieving leadership in scoring models banks can improve their overall credit risk manage- all key M2M and IoT segments. ment by 7–8 %.

In 2017, MegaFon was In 2017, the number of users benefiting from MegaFon’s M2M, IoT and Geo-Recommender service, a user-friendly tool for analysing named the most influ- geolocation service offerings grew from 3.9 million to 5.2 million (in big data to get a snapshot of life in a district, a city, or across the ential company in the terms of SIM cards). Revenue from these segments increased by 12 %. country in general. The service is designed to help authorities and IoT market in Russia and businesses alike make informed real-time decisions on allocating By enhancing its IoT services, MegaFon also contributes to the im- investments, optimising sales networks and advertising campaigns, the Eurasian Economic plementation of the Digital Economy programme of the Russian and engaging in other local planning activities. Union (EAEU), according Federation sponsored by the Russian Government. In 2017, we de- to a ranking compiled signed and implemented the first Smart Utilities project for Innopolis. Lead Generation, a service that facilitates customer acquisition by Russia’s Tekhnouklad The project in Innopolis included the installation of modules to col- through big data mining which helps identify a target audience IoT intelligence agency. lect data from power, water, and heat meters and from communal against a set of specific criteria chosen by the customer. MegaFon meters. Data from sensors is fed to a dedicated software platform offers a turnkey solution, which makes it different from competitors: that allows access by Innopolis’ residents through their personal we use our intelligence platform to profile subscriber samples against accounts and offers tools for the city’s utility management company customer-defined criteria and then do all communication with the to analyse the collected data. audience by using bulk text messaging or our smart voice services.

The number of M2M In 2017, the Company also speed up database performance, en- users in 2017: hanced the platform’s productivity and improved the API for its DEVELOPMENT IN 2017 Employee Monitoring service. In 2017, sales revenue from Big Data doubled to RUB 543.8m. 5.2 Improvements to the M2M Monitoring service included enhanced functionality for managing services and service bundles activated million for SIM cards, and new response options.

In 2017, MegaFon and Russian Railways signed a cooperative agreement for the development of communications services and the In- ternet of Things. Among other things, the joint project provides for introducing smart automated collection and transmission of data on the condition of infrastructure facilities operated by Russian Railways. 86 Operational Results Operational Results 87

B2X Services Cloud solutions Revenue from the DEVELOPMENT IN 2017 Mobile Advertising segment 2017 became a year of rapid growth for MegaFon’s Mobile Advertis- • MegaDisk ing segment. Revenue from the segment grew by 40 % to RUB 8.2bn. SERVICE DESCRIPTION 8.2 In 2017, the Company launched a new product, MegaBanner, to complement its range of B2B services and expand its advertising MegaDisk is a secure and easy-to-use data storage that supports billion RUB presence in the mobile data segment. The targeting process is based data syncing on PCs, Macs, and Android and iOS smartphones. on big data mining, including search users’ web browsing histories. 40 % We made a number of technical improvements to the Mobile Noti- DEVELOPMENT IN 2017 fication and MegaFon.Target services, including an update of the MegaFon.Target Client Account interface in MegaFon.Target, and increasing the In 2017, the Company continued to expand its MegaDisk service by is now available total number of targets for targeted advertising bulk messaging to building up its user base, which reached y-o-y 33,000 users. to B2C customers. eleven. We also added targeting by call history, browsing history and interest group.

B2X Services Mobile Advertising

B2X Services Converged services • MegaFon.Target • Mobile Notification • MegaBanner • Virtual PBX • 8-800 • MultiFon.Business SERVICE DESCRIPTION

The monthly reach MegaFon.Target is an innovative service designed to provide smart SERVICE DESCRIPTION of the MegaBanner advertising and bulk messaging campaigns to those MegaFon’s sub- service is scribers who have consented to receive third-party advertisements. Our corporate customers use MegaFon’s converged services to improve their corporate communications with solutions such as The service offered by MegaFon is unique in that we are the only voice call management, hotlines, call forwarding, quick dial codes >10 % operator in the market to offer a service with a user-friendly online and videoconferencing. Client Account service, and a wide range of targeting options enab- of mobile ling a fully customisable tool for profiling a target audience. Virtual PBX is a fast-to-deploy, CAPEX-free smart telephony B2B data users solution which includes office-wide SIP telephony, short dial codes Mobile Notification is a tool for bulk messaging through client-side for seamless convergence between office phone services and mo- in Russia applications software, enabling high-performance, high-speed mes- bile devices and a customisable voice menu. The service enables saging. The service also features a range of special options such a thorough analysis of employee performance by recording calls as Status and Feedback. online via a special application.

MegaBanner is a new mobile advertising solution by MegaFon The 8-800 service is a company-wide Smart Number for corpo- that displays themed advertising banners in the mobile browsers rate customers to handle their incoming calls. Calls to 8-800 from of MegaFon’s LTE/3G subscribers. The monthly reach of the service anywhere in Russia are toll-free for fixed-line and mobile subscribers, is approximately 10 million unique users (or >10 % of all mobile data with all costs covered by the customer signing up for the service. users in Russia) 1. Incoming calls to 8-800 can be forwarded to one or more numbers specified by the customer.

MultiFon.Business is a cost-efficient, fast-to-deploy Internet telephony solution for office applications.

1. Source: Mediascope. 88 Operational Results Operational Results 89

DEVELOPMENT IN 2017 Infra Mail.ru is our new service launched in late 2017 under a partnership model to provide developers with secure and scalable The total number In 2017, as the overall demand for office telephony was growing in cloud-based computing resources offered by Mail.ru for resource- of corporate customers Russia, MegaFon improved its key performance indicators in Con- intensive operations. Its simple online interface offers fast access using our converged verged Services. Related revenue grew by 47 % to RUB 1.1bn, while to computing resources by streamlining the process of setting up services: the number of service users totalled 20,000 entities by the year-end. and launching a new server.

The 8-800 service showed a strong growth in the number of users STS TV channel is a major consumer of the service, having signed 20 among small and mid-size businesses. The strong performance of up in late 2017. the service in 2017 is evidenced by the fact that we will need to thousand purchase additional 8-800 numbering capacity, planned to be procured by MegaFon in 2019, since at the current rate of sales New B2X Offerings Business Process as-a- growth the remaining capacity will be exhausted by the end of 2018. Service (BPaaS) solutions In 2017, the Company introduced a multi-level voice menu for its Virtual PBX, updated the Client Account service and introduced new integration modules to interface with all popular CRM systems avail- • The PIKTA Shared Services Centre (SSC) able in the Russian market. Today, MegaFon’s Virtual PBX solution • P.O.T.O.K Legal Practices offers the widest range of out-of-the-box CRM integration modules in this market segment, providing unique value to our customers. SERVICE DESCRIPTION In 2017, we also further enhanced our MultiFon.Business service by introducing a secure SIP telephony option for large customers To capture opportunities in the growing market for BPaaS solutions and a SIP REC call recording function for customers with sizeable and monetise the extensive expertise of our in-house Shared Servic- voice traffic. es Centre (SSC) and MegaFon’s legal function, MegaFon decided to include these services in its B2X offering.

New B2X Offerings Infrastructure-as-a-Service The PIKTA Shared Services Centre (SSC) is a major outsourcing centre that provides services to the MegaFon Group. It is an inte- (IaaS) solutions grated multifunctional paper-free centre focused on support function processes. Key function services covered by the SSC include:

• Virtual Data Centre •• accounting and financial reporting; • Infra Mail.ru •• HR management; •• financial control; SERVICE DESCRIPTION •• internal control and audit; •• management of subscriber receivables; As part of its IaaS offering, MegaFon provides its customers with •• shared customer support centre; access to virtual computing resources and secure cloud data storage. •• procurement and logistics. Our IaaS services currently include: P.O.T.O.K Legal Practices combine a range of services enabling Virtual Data Centre is used by MegaFon to lease out virtual com- us to monetise the first-rate expertise of our legal function. puting resources to corporate customers, set up virtual corporate data storage and provide emergency data recovery and maintenance Currently, P.O.T.O.K offers corporate customers services such as services for customer systems. The service is mainly intended for Procurement Analysis in One Hour, which includes professional large corporate customers and can host sophisticated corporate advice on government procurement by MegaFon’s legal function systems, offering a high level of reliability and resilience. The service and Turnkey Startup, which involves preparation of a full set of the is delivered in partnership with IBS:DataFort on a white label basis. documents required to set up an office. The First Tower Company was the largest service consumer in 2017. 90 Operational Results Operational Results 91

New B2X Offerings Platform solutions and information New B2X Offerings Services for telecoms security solutions operators (B2O)

• Wi-Fi with Authorisation • FMC Partner • Content Delivery Network (CDN) • MegaFon IX • DoS/DDoS Protection • Mobile eSignature (MeS) SERVICE DESCRIPTION SERVICE DESCRIPTION With MegaFon’s solutions, its partner operators are able to diversify In response to the growing number of external cyber-threats, their product portfolios by bundling their smart and mobile services. MegaFon expanded its service offering to include information security services, including Wi-Fi with Authorisation, Content Delivery FMC Partner provides end customers of our partner operators Network (CDN), DDoS protection, data network encryption and with access to a shared network converging fixed-line services of secure mobile communications. the partner and MegaFon’s mobile services through short dial codes. In 2017, FMC Partner was launched in all areas covered by Mega- Wi-Fi with Authorisation enables authorisation and identification Fon’s branches. The service was used by 30 partner operators to of users in the customer’s public Wi-Fi network by establishing the connect over 170 new corporate customers to MegaFon’s network. user’s subscriber number (DEF code). This is needed to ensure com- The largest among such operators are Mango Telecom and Gravitel. pliance with legislative requirements relating to providing Internet access via public Wi-Fi networks. MegaFon IX is a service that enables our partner operators to exchange Internet traffic when connecting to MegaFon’s network. Content Delivery Network (CDN) is a service for content pro- The service is unique in that it does not use transit AS BGPs for viders which relies on distributed network infrastructure to speed interconnection between operators, which enhances connectivity up downloads for users outside metro areas and secure content and provides fast access to Internet resources. availability during peak traffic events, including: large-scale live webcasts, advertising campaigns, software updates or DDoS attacks.

DoS/DDoS Protection is a service available to those MegaFon customers who have activated Internet Access and IP Transit services to protect their information resources against attacks with fast incident response (within five minutes after an attack is launched).

Mobile eSignature (MeS) is the principal mobile ID service offered by MegaFon.

MeS is an innovative solution linking the customer’s Digital eSig- nature to his or her mobile number. Importantly, this service is fully independent, with the relevant trusted certificates being issued by MegaFon’s in-house certification centre. Although the service is currently available only to B2G customers, the Company is considering its inclusion into MegaFon’s B2B offering. 92 Operational Results Operational Results 93

New Product #SPETSII is a cashback and special offers service offering cashback on purchases made with over 300 partners including Lamoda, M.video, Booking.com, Aviasales.ru, Offerings for Digital myToys.ru, OBI, Delivery Club and others. Customers TOP-3 partners by total amount of orders: MegaFon’s online store

M.video

During 2017, MegaFon launched a range AliExpress of new services which became a part of its ecosystem of digital services.

eMOTION

MegaFon’s eMotion is the first messenger app that enables users to make calls and text with MEGAFON.HEALTH all other operators subscribers even if there is no GSM connection. is a mobile app for online doctor consultations. Users can use the app to discuss health issues In the metro, on a dacha, or in any distant with a doctor, arrange an appointment with a location where GSM signal is weak but your medical specialist, and add doctors’ opinions device is connected to the Internet via Wi-Fi, or medical test results to their Electronic you will not miss an important call. Health Records. Key eMotion advantages:

At the end of 2017: •• Single MegaFon mobile number to call and >1,000 39 14 text MEGAFON.MUSIC doctors clinical Moscow •• Single account: billed to subscriber’s mobile is a music platform combining some of the specialties clinics account more popular music streaming services: based •• Calling and texting via Wi-Fi if GSM signal Yandex.Music is lost

BOOM •• Calls to landlines

Zvooq

At the end of 2017: Since October 2017, all new eMotion >25 users get the same rates for all calls thousand when abroad as they are charged in customers were using the service their region of residence. 94 Operational Results Operational Results 95

Enhancing To support sustainable business growth, MegaFon launches innovative services and product solutions the B2X Service for the following segments:

Offering •• B2B – corporate customers

•• B2G – government customers

•• B2O – telecoms operators 2017 MegaFon included the following services in its B2X offering in 2017: We offer reliable, technology-driven •• IaaS (Infrastructure-as-a-Service) solutions services that meet the requirements •• BPaaS (Business Process as-a-Service) of customers from any segments and solutions help them effectively address their •• platform solutions and information security business objectives. solutions

•• mobile ID services

•• services for telecoms operators 309 34.2 % thousand share in Q3 B2X subscribers 11.2 % y-o-y MegaFon was for the first 16.1 % 3.8 % y-o-y time ranked first by revenue y-o-y from B2X services 1 among Russian mobile operators Mobile B2X revenue growth

1. According to its own estimates. Total B2X revenue growth 96 Operational Results Operational Results 97

Fixed-Line Communications PBX, cloud video surveillance, business TV and NETBYNET Wi-Fi with authorisation. services for the Mass Market In 2017, NETBYNET made considerable additions to its video surveillance equipment offering, making B2C SERVICES: the service more affordable. In addition, 2017 saw a new approach to its Wi-Fi with the authorisation •• Residential fibre facility. To improve the service penetration rate broadband NETBYNET added user authorisation via social MegaFon provides its fixed-line services to customers through its •• Residential digital TV media and new marketing tools to promote the subsidiary NetByNet Holding LLC (which operates under the NET- (WiFire TV) and cable TV 3.1 % service and collect feedback. BYNET brand). The NETBYNET product line comprises broadband, •• Residential telephony NETBYNET’s digital and cable TV and telephony (under the WiFire brand), as well The B2G segment saw an ongoing rollout of Wi-Fi as virtual private networks (VPNs) and lease of NETBYNET-branded •• Mobile data organic on public transport, which became a key driver of lines. NETBYNET operates in seven Russian federal districts, namely, (WiFire Mobile) NETBYNET’s revenue growth in 2017. In particular, coverage the Central, Northwestern, North Caucasian, Southern, Volga, Ural, the company supports Wi-Fi Internet access to •• Video surveillance growth and Far Eastern Federal Districts. 8,000 public transport vehicles of Moscow’s sur- (WiFire Camera) face transport system. As part of the My Street In 2017, NETBYNET focused on expanding its networks in the cities •• Anti-virus and parental programme, the passengers can also use Wi-Fi in which it operates and in the adjacent suburban areas, as well control at street-level public transport stops. In total, 19 as expanding the number of homes reached. In 2017, NETBYNET’s million people used the service during the year. organic coverage growth was 3.1 %. B2B SERVICES: NETBYNET also commercially launched Wi-Fi in •• Virtual PBX Vnukovo International Airport, with over 570,000 •• Cloud video surveillance Evolution of Services passengers using the service in 2017, as well as on Moscow river buses as a pilot project. •• Business TV In 2017, NETBYNET continued to further develop its flagship product, •• Wi-Fi with authorisation WiFire TV, offering access from any desktop or tablet via a special In 2017, NETBYNET also continued to be part of web portal. In addition, the Company updated its mobile app design projects to develop and enhance hardware and B2G SERVICES: and interface to improve the user experience, resulting in the mobile software for the Safe City video surveillance proj- user base growing by three times by the end of 2017. ects in various regions of the Russian Federation, •• Wi-Fi on public transport including: •• Video surveillance systems Additionally, 2017 saw WiFire TV subscribers obtain access to the Start partner library and to expanded VOD packages, thus being •• The Safe City Pskov project; able to enjoy over 11,500 videos and films. •• The Safe City Sochi project; In 2017, NETBYNET continued to expand WiFire Mobile, adding Kursk, •• Setting up video broadcasting services Novy Urengoy, Ekaterinburg, Voronezh, and Rostov-on-Don to the in Moscow and some Moscow Region territories where it was already available. cities and towns. In 2017, NETBYNET was a technology partner for For the demand-based segment of its subscriber base, NETBYNET In 2018, NETBYNET plans to expand its WiF- Wi-Fi Internet access at will be launching targeted tariff plans such as ‘Igrovoi’ (‘Gamer’) for ire-branded portfolio by adding new converged the gaming audience (with Mail.ru) and ‘Pod Zashchitoi’ (‘Protection’) services. NETBYNET intends to upgrade WiFire such major events as the for those who want to protect their data and money (with ESET). Mobile to make it a unique service on the market, Russian Atlantes Business upgrade its own loyalty programme and create Forum, the Electrotechni- NETBYNET makes a priority of enhancing customer loyalty. In early new partnerships and products based on its study cal Forum in Kazan, the 2018, NETBYNET launched a joint promotion campaign with Tinkoff of customer preferences. Moscow Leroy Merlin Sup- to improve their client LTV and a loyalty programme with Letyshops, pliers Fair, the Sberbank a Russian and CIS market leader, to offer buyers cashback on trans- In the B2B and B2G segments, NETBYNET will fo- actions with specified partners. cus on growing sales, scaling its successful proj- Data Science Journey in ects, launching new bundled offers and achieving Moscow, and the Golden NETBYNET also expanded the portfolio of partner cloud services operational excellence. Ring Run series. made available to SMEs on the mass B2B market, such as virtual 98 Operational Results Operational Results 99

Smartphones have remained the device of choice – their share in the Sales of Products In 2017, total sales of devices in roubles increased by 8 p.p. to 93 % in 2017, while 4G smartphone sales grew by 36 p.p. to 70 % of total units and Services MegaFon sold. After the optimisation and updating of their product ranges in 1H 2018, the Samsung, Apple, ZTE, and Vertex brands were the Retail leaders by number of smartphones sold. stores: MegaFon Retail actively developed MegaFon maintains its value added services: own sales network which sold over 1 helps attract new custom- Service: Sales (volume) growth ers and improve existing 9.8 INSURANCE 50 % customer loyalty. million DEVICE SET-UP 75 % LOAN REPAYMENTS 102 % A key event in 2017 was the agreement signed Share of gross adds in 2017 mobile phones, smartphones, tablets, between MegaFon and VEON to end their Euroset MONEY TRANSFERS 34 % joint venture. As a result of the transaction, which and accessories;

was completed in February 2018, PJSC Vimpel- MegaFon’s new digital development strategy prioritises expanding Com, the Russian subsidiary of VEON, acquired 23.6 % the range of products and services available to customers instead half of Euroset’s retail stores, or approximately 47 % installed MegaFon’s of focussing on new subscriber numbers. In 2017, MegaFon Retail 1,700 stores. In turn, MegaFon acquired VEON’s MegaFon Euroset proprietary apps on expanded its product range, with the average price tag rising by 50 % interest in Euroset, resulting in MegaFon own- Retail stores stores 26 % for smartphones and by 33 % for accessories as a result of the ing 100 % of the remaining Euroset retail stores. over introduction of higher-margin products. In addition, the Company In addition, VEON paid RUB 1.2bn as its share of upgraded its accessories procurement system and introduced Euroset’s outstanding obligations. The division of increased product and packaging quality requirements. the Euroset assets will allow VEON and MegaFon 700 to follow their own strategies in retail, resulting in Share of gross In February 2017, Samsung products were reintroduced to MegaFon overall optimisation of mobile distribution in Rus- adds in 2017 thousand Retail’s product ranges and contributed considerably to the sia. MegaFon already owns an extensive mono- Company’s total smartphone sales, which helped increase the brand retail network which includes approximately customer retail chain’s gross profit and its share of the smartphone market. 3,600 stores. Accordingly, the Company will devices In particular, MegaFon launched a Holiday Season promotion continue to pursue its retail strategy focused not offering buyers of the Samsung Galaxy S7 Edge smartphone a only on its monobrand retail network, but also on Samsung tablet as a free gift. The promotion helped achieve a ten- leveraging its continued retention of a presence 29.4 % fold increase in Samsung Galaxy S7 Edge sales. in the multi-brand retail network. We believe we Franchised will be able to benefit from using both channels stores In 2018, MegaFon plans to focus on increasing digital customer to acquire high-value digital clients and maxi- traffic at key points of sale. mise the life-time value of our subscribers through improved quality of service and offering digital Other priorities also include growing the sales of converged products products. and services offered by MegaFon and other vendors, enhancing the product ranges through the introduction of new e-devices and In 2017, amidst a slowdown in the mobile market, active use of Big Data to tailor the Company’s offerings and improve MegaFon focused on improving the performance sales performance. of own retail network operated by MegaFon Retail.

In 2017, MegaFon Retail carried out a chain optimisation initiative. The number of MegaFon Retail 1. For Insurance and Device Set-Up services growth is shown in unit terms. For Bank Loan Repayment and Money Transfer stores totalled 1,894 as at the end of 2017, with services volume growth is shown instead. per store revenue up by 17 %. 100 Operational Results Operational Results 101

Online Sales Customer Key Priorities in Developing In 2017, MegaFon continued to further develop its For 2018, MegaFon plans to improve the sales Satisfaction Customer online sales channels. The total sales of our online performance of its online store by extending its store increased by 35.7 % to RUB 1.9bn, while the customer reach, rolling out new sales promotion Service number of orders placed with the online store tools including tailored offers, and further expand- Call Centres and Other Channels: reached 255,000. ing the reach of its omnichannel service. Subscriber Services •• channel customisation In order to improve product availability, we MegaFon will continue to improve the logistics of Throughout 2017, MegaFon’s call centres retained their opened new pick-up points and increased the delivery of its online services by opening new pick- leading position 1 among the ‘Big Three’ operators on •• development of new digital number of regions covered by our own delivery up points and using automated parcel terminals all measures of the Customer Satisfaction Index. The channels including messen- service. In addition, MegaFon rolled out new sales and partner delivery services. Company maintained its high scores on the speed of gers, chat bots and speech promotion tools across various channels in 2017, response and first level resolution, while its key rivals recognition based personal including tailored offers, Bonus.Mail.ru, mailing slipped on those measures by 3 p.p. or more. These assistants; lists and promo codes. results were achieved through our consistent efforts •• improving first call resolu- to reduce repeat calls and a nationwide initiative to tion rates through enhance- develop clear and consistent call centre scripts. ment of service processes Telemarketing Scores on Key CSI Measures and the development of user-friendly interfaces and 2016 2017 algorithms; In 2017, MegaFon contin- Our total telemarketing capacity was increased Speed of response 35 % 35 % •• maintaining perceived quali- from 2.2 million to 3.6 million subscribers in 2017, ty of connections and proce- ued sales growth through in particular through expanding the Novosibirsk First level resolution 65.2 % 64.6 % dures to further reduce the nationwide telemarketing site and opening a new site in Samara. The volume number of calls and achieve of telemarketing sales increased by 21.4 % y-o-y First call resolution (FCR) 82.1 % 83 % faster issue resolution; campaigns. to 8 million, and the call-to-sales conversion rate was 26 %. •• supporting and promoting MegaFon’s call centres handled a total of 65 million product offerings – improv- customer calls in 2017, with the number being handled In 2017, MegaFon launched its FTM Restyling 1 proj- ing service processes and 2017 HIGHLIGHTS automatically reaching 60 %. ect for comprehensive performance improvement new product sales in call across its key telemarketing sites, including reduc- centres and self-service As part of the Greenfield unified billing system project, ing employee churn rates and developing training channels. all call centres were integrated in 2017 to support a and best practices sharing system for operators, distributed single customer service queue. As at De- which is expected to increase the channel ca- 33 25 8 cember 2017, Greenfield’s share of total calls handled pacity by 10 % without any additional resource reached 18 %. The process of bringing call centres into million million million requirements. a single queue is expected to be completed in 2018. Calls Subscribers Subscribers said Improving customer ser- In 2018, MegaFon plans to continue growing its reached YES to our offers In 2017, particular focus was placed on the development vice and customer experi- telemarketing capacity and sales through imple- of digital customer service channels. Customer calls ence is a key component menting telemarketing site performance initia- 46 % 46 % 25 % via Client Accounts were handled by live chat agents, tives, hiring additional operators, launching new of MegaFon’s development y-o-y y-o-y y-o-y which improved the channel’s popularity – the share projects to migrate subscribers to the Greenfield strategy. We seek to ad- of such calls as a percentage of the total number of unified billing system and targeting clusters. dress the needs of all our calls handled by call centres rose from 29 % in 2016 to 55 % in 2017. At the end of 2017, MegaFon started customers and help them handling calls in a dedicated Telegram channel. In 2018, achieve their objectives the Company plans to continue developing messenger through our flexible offer- service channels and other channels preferred by ings of smart products. subscribers.

1. FTM – nationwide telemarketing. 1. According to CSI monitoring data. 102 Operational Results Operational Results 103

ELENA Virtual Social Media In 2017, Assistant Social media are an essential image-building MegaFon: tool for customer service and promotion of the Company’s products and services. In 2017, In 2017, MegaFon continued develo- MegaFon retained its leading position in social •• blocked more than 796 mil- media in terms of audience and its engagement. lion spam text messages; ping its ‘virtual assistant’ ELENA pro- As at the end of 2017, MegaFon’s communities on social media had more than 2.4 million registered •• identified more than 38,000 vided by a speech recognition sys- users. Over the year, the Company serviced malicious software on mo- tem. 150,000 customers, focusing on faster response bile devices and notification times and better service quality. of the insecurity of transition to them was installed; Since 2017, ELENA has been handling customer In 2018, ELENA is expected to handle all B2C voice MegaFon is represented in social media by the calls to the call centre operated by the Central calls to call centres across all of our branches. •• processed more than 8,000 official VK, Facebook, Twitter, and OK.ru com- Office, as well as text messages sent to the 0500 There are also plans to integrate the ‘virtual as- subscriber malware communities. In addition, official channels were number across all branches using both billing sistant’ with all key web channels, i.e., the Client plaints; launched in 2017 in Mail.ru Instagram, and systems. Automated responses constituted 50 % Account, the website, the messenger services and Banki.ru (in the Telecom and Credit Cards •• sent more than 235,000 text of all customer responses made over the voice social media. ELENA will not only handle customer sections). In accordance with the updated stra- messages alerting subscri- channel and over 10 % of all responses using the calls but also make customised offers and guide tegy of MegaFon in 2017, the corporate style was bers to potential viruses on text message channel. customers through payment and other proce- developed, which helps to emphasize a unique mobile devices; dures. approach to customer service in social networks. •• handled more than 16,000 complaints from subscribers relating to third-party fraud; Client Account •• blocked almost 9,000 pho- Subscribers’ Protection ne numbers on suspicion of In 2017, MegaFon’s Client Account from Unsolicited fraud; Messages and Fraud •• cancelled more than 13,000 was ranked the best among the simi- fraudulent phone links to solar services offered by the ‘Big Three’ MegaFon pays special attention to customer cial media accounts. 1 security and protection of customers from peers . unsolicited and suspicious messages. MegaFon is guided by its corporate SMS mass messaging MegaFon’s online Client Account service is avail- A new online display of the popular ‘Vklyuchaisya!’ requirements and the 2014 amendments to the able for customers in every Russian region. The (‘Connect!’) tariff line was launched in 2017, with Federal Law On Communications which enable Client Account service has over 7 million active details also available in the Client Account. The operators to block any unwanted mass messaging. monthly users among MegaFon customers. minutes, texts, and data allowance remaining MegaFon also uses the Anti-Spam nationwide under a subscriber plan are now displayed on the system. In 2017, new functionality was added to the ser- Client Account’s home page. In 2018, MegaFon vice to improve the user experience, including an plans to implement new Client Account features, Subscribers can report suspected fraud on the option to top-up the account via Apple Pay and including the highly anticipated ‘Multi-Account’ dedicated ‘Safe Communication’ portal (stop- an automatic top-up option. Touch ID login func- feature to manage several contracts in one ac- fraud.megafon.ru), where they can also find out tionality was also implemented for mobile Client count. about fraudulent schemes and ways to protect Account users. themselves against them, as well as download anti-virus software.

1. According to the data on the number of subscribers 1. Based on a CSI survey of the Big Four. in social media. Financial Performance 105

Financial Consolidated Financial Results, 2015–2017 1 ITEM 2015 2016 2017 2017 / 2016, %

Revenue, RUB bn 313.4 316.3 321.8 1.8 %

Performance Adjusted OIBDA2, RUB bn 132.4 121.1 121.9 0.6 %

Adjusted OIBDA margin, % 42.2 % 38.3 % 37.9 % -0.4 p.p.

Adjusted net profit 3, RUB bn 39.0 28.9 20.5 -29.0 %

Adjusted net profit margin, % 12.5 % 9.1 % 6.4 % -2.7 p.p.

CAPEX, RUB bn 70.2 65.6 56.0 -14.6 %

CAPEX / Revenue, % 22.4 % 20.7 % 17.4 % -3.3 p.p.

Free cash flow to shareholders, RUB bn 39.2 27.7 35.2 27.0 %

Net debt, RUB bn 180.8 196.9 234.5 19.1 %

Net debt / Adjusted LTM OIBDA, x 1.37x 1.63x 1.92x 17.8 %

2017 was a turning point for MegaFon. The Com- The new ‘Vklyuchaisya!’ (‘Connect!’) tariff line, pany was the first Russian operator to withdraw developed using Big Data analytics, has enabled unlimited data plans, move to smart pricing and us to design responsive tariffs taking into account focus on the quality of customer service, which customer behavioural patterns and was a major helped revenue and OIBDA to recover and meet revenue growth driver in 2017. their targets. In 2017, we continued upgrading our network The key event of the reporting year was the and fulfilled all of our construction plans, while launch of MegaFon’s new digital strategy. We at the same time streamlining our costs and re- have started transforming our company from a ducing CAPEX to RUB 56bn vs RUB 65.6bn in traditional telecoms operator into a provider of 2016. In 2018, we intend to increase our CAPEX to new digital opportunities and have set ourselves RUB 75−80bn to implement a number of new a new subscriber target – a digital customer who CAPEX programmes and fund our obligations in sees us as his/her number one choice for a great respect of compliance with the Yarovaya (data lifetime partnership. We can already see the re- storage) law. sults of our strategic initiatives.

2017 was a turning point for MegaFon. The Com- pany was the first Russian operator to withdraw 1. Based on the IFRS consolidated financial statements audited by JSC KPMG. Data includes the telecom segment net of unlimited data plans, move to smart pricing and Mail.Ru Group. 2. Adjusted OIBDA is OIBDA net of the impairment charge relating to the broadband business in the amount of RUB 3.4bn focus on the quality of customer service, which in Q4 2016. helped revenue and OIBDA to recover and meet 3. Adjusted net profit is net profit for the period attributable to the Group shareholders’ net of loss from the impaired investment in the Euroset joint-venture in the amount of RUB 15.9bn in Q2 2017 and the non-cash goodwill impairment relating their targets. to the broadband business in the amount of RUB 3.4bn in Q4 2016. 106 Financial Performance Financial Performance 107

Consolidated Financial Mobile Revenue Results

In 2017, MegaFon’s consolidated revenue increa- Adjusted OIBDA margin decreased by 0.4 % to Consolidated mobile revenue in 2017 increased by 0.3 % y-o-y to sed by 1.8 % y-o-y to RUB 321.8bn, primarily driv- 37.9 %. The decrease was driven by the growing RUB 264.4bn due to growth in mobile data revenue (by 6.3 % to en by the growth in mobile data revenue due to sales of low-margin equipment and accessories RUB 89.7bn) as a result of the successful launch of the new ‘Vkly- the successful launch of our ‘Vklyuchaisya!’ tariff and recognition of revenue and expenses related uchaisya!’ tariff line, which compensated for the continuing de- line and a better fixed-line revenue performance. to a low-margin contract for network construction crease in revenue from traditional voice services. At the same time, 2017 revenue in Russia was up for one of our B2X clients, along with a higher pro- 1.9 % to RUB 317.4bn, accounting for 98.6 % of the vision for employee bonuses linked to improved total revenue. The total mobile revenue grew only financial results. Key Factors Influencing Adjusted OIBDA in 2017, RUB bn by 0.4 % due to decrease in traditional voice revenue, which continues to account for the largest Adjusted net profit for 2017 decreased by 29 % to part of the Company’s mobile revenue. RUB 20.5bn vs RUB 28.9bn in 2016. This decrease Key factors was primarily due to an increase in financing 0.4 p.p. In 2017, adjusted OIBDA grew by 0.6 % y-o-y to costs as a result of higher net debt and higher FX RUB 121.9bn, which exceeded the Company’s losses and depreciation due to network upgrades. 38.3 % 0.2 p.p. 0.5 p.p. 0.3 p.p. 37.9 % guidance. This growth was driven by the initia- OIBDA Gross profit as % of as % of OIBDA tives mentioned above which grew mobile data Net debt increased by 19.1 % from RUB 196.9bn margin margin revenue revenue margin and fixed-line revenues, as well as higher reve- in 2016 to RUB 234.5bn in 2017. In 2017, our Net nue from sales of equipment and accessories. The debt / Adjusted ОBITDA ratio increased to 1.92x Growth 0.6 % growth in adjusted OIBDA was also supported by vs 1.63x in 2016, but remains comfortable for us. cost savings resulting from migration from high- As before, we pay significant attention to our er cost satellite communication channels to low- leverage ratio and work to maintain an optimal 121.1 5.5 121.9 er-cost terrestrial facilities, and continued optimi- capital structure. sation of our retail business resulting in savings (1.1) (0.7) (3.0) on rental costs, with the number of points of sale Free cash flow to shareholders grew by 27.0 %, being reduced by approximately 10 %. Another from RUB 27.7bn in 2016 to RUB 35.2bn in 2017, positive impact came from lower operating taxes mainly due to a higher cash flow from operating vs 2016, when tax issues relating to MegaFon’s activities than in the previous year. subsidiary TT Mobile resulted in our booking higher than usual tax provisions.

Consolidated Revenue in 2016–2017

Mobile data Other mobile Fixed-line Sales of equipment services services and accessories

0.3 % Gross profit 2.0 % 6.3 % 2.6 % 12.1 % 6.3 %

2017 89.7 174.6 28.8 28.7 1.8 1.2 % 3.8 % 3.7 % 321.8 y-o-y y-o-y y-o-y y-o-y

OIBDA Sales & General & OIBDA 2016 84.4 179.2 25.7 27.0 316.3 Revenue Cost of revenue 2016 Marketing Administrative 2017 108 Financial Performance Financial Performance 109

Debt Portfolio as Fixed-Line Revenue Liquidity and at 31 December 2017, % Financial Fixed-line revenue increased by 12.1 %, from provided during the Final Draw for the 2018 FIFA 21 % 61 % RUB 25.7bn in 2016 to RUB 28.8bn in 2017. This World Cup. Even without these one-offs, fixed- Bank loans growth was associated with one-off boosts in line revenue demonstrated organic growth on Stability Bonds revenue resulting from the completion of a stage the back of our expanding portfolio of products under a long-term construction contract with a and services. B2X client and from additional telecoms services At the end of 2017, MegaFon had sufficient liquidity and a comfortable leverage position. Net debt grew by 19.1 %, from RUB 196.9bn in 2016 to RUB 234.5bn in 2017. The Net Debt / Adjusted By instrument OIBDA ratio was 1.92x vs 1.63x in 2016.

Revenue from Sales of In September 2017, S&P Global raised MegaFon’s foreign currency rating to BBB-, outlook ‘Stable’, Handsets and Accessories which is one notch higher than Russia’s sovereign 18 % rating and is among the highest ratings assigned Equipment to Russian corporate borrowers. This strong rating financing is an endorsement of MegaFon’s financial sta- Revenue from sales of equipment and accessories increased by bility. 6.4 % from RUB 27.0bn in 2016 to RUB 28.7bn in 2017 as a result of the continued increase in strong demand for high-end devices. MegaFon enjoys excellent access to funding and support from our financing counterparties. We 5 % monitor all developments which could affect, and US$ Capital Expenditures take necessary steps to mitigate any negative im- Hedged 2 in 2015–2017 pacts on, our ability to raise financing as needed. By currency 1 Capital Expendi- MegaFon continues to keep a major portion of CAPEX, RUB bn its debt portfolio in roubles. As at 31 December 2017, 82 % of all debt was denominated in rou- 9 % tures and Free As % of revenue bles and rouble equivalents as a result of taking US$ out conventional loans and equipment financ- 82 % Cash Flow 22.4 % ing denominated in Russian roubles, as well as 3 % implementing hedging programmes. In addition, RUB 20.7 % EUR 54 % of the debt portfolio has a 5-year or longer to Shareholders maturity. 17.4 % 5 % 19 % In February 2017, MegaFon and Sberbank signed 2 years 1 year Total capital expenditure declined by 14.6 %, from RUB 65.6bn in 65.6 a Credit Facility Agreement for the total amount 2016 to RUB 56.0bn in 2017, in line with the Company’s guidance. 70.2 of RUB 35bn maturing in 2024. This credit was 8 % In 2017, the Company’s key CAPEX projects were the further rollout 56.0 used to finance the acquisition of a 15.2 % stake of LTE and LTE-Advanced high-speed mobile data networks over (63.8 % of voting shares) in the Mail.Ru Group. the existing network, and ongoing 2G and 3G upgrades. Because 3 years of data traffic growth, the Company continues to heavily invest in its telecoms network. By maturity 14 % The OIBDA-CAPEX indicator increased by 18.5 %, from RUB 55.6bn in 2016 to RUB 65.9bn in 2017, primarily due to lower CAPEX. In 4 years 2017, free cash flow to shareholders increased by 27.0 % y-o-y to 54 % RUB 35.2bn, driven largely by an 11.7 % increase in cash flow from 1. On nominal basis 5 years operating activities to RUB 115bn vs RUB 103.0bn in 2016. 2015 2016 2017 2. Including structured and plain vanilla FX hedges and longer 110 Financial Performance

Adopting Blockchain Technology

MegaFon was the first company to complete We were the first in Russia blockchain bond placement in Russia in October to make a blockchain bond 2017, and one of the first to do so globally, with placement and a blockchain Raiffeisenbank purchasing the entire RUB 500m payment transaction in 2017. issue. Gevork Vermishyan, Executive Director These transactions support our drive to be a champion of digital economy in Russia. We believe that blockchain In November 2017, MegaFon, AlfaBank and Sberbank made the technology offers significant opportunities and has potential Russian market’s first ever blockchain payment transaction, to become a new standard in transaction data sharing. We are excited to spearhead the digital transformation of the with MegaFon transferring RUB 1m to MegaLabs under the financial market. I would like to thank the joint project teams existing revolving credit facility agreement. that made this breakthrough possible. Risk Management 113

Risk Approach to Risk Management Management

The risk management We continuously improve our risk management system in line with international and national strategy standards to facilitate implementation of the involves: Company’s strategy and enable management to assess fully the risks involved in proposed actions and thus improve our business performance, •• continuous and timely ad- providing a foundation for sustainable and un- justment of risk manage- interrupted business operation. This is a focus ment to business changes; area of the Company’s overall risk management culture, which is based on employees’ awareness •• development of risk assess- of risk-taking in decision-making and ensuring risk ment methods and models assessment in respect of all business processes to improve the quality, ac- and projects. Important factors shaping this cul- curacy, and completeness ture are senior management providing a ‘tone of data available to inform from the top’ on the importance of risk manage- decision-making; ment, and comprehensive employee training. •• articulating the Company’s risk appetite; The Company’s management assisted by the Board of Directors and the risk management team •• continuous search for busi- is responsible for the design, implementation and ness opportunities and, in performance of the risk management framework. particular, options for turn- The purpose of this framework is to provide assur- ing threats into opportuni- ance that both the external and internal factors ties; influencing the achievement of strategic goals •• improving risk classification; and operating targets are analysed and considered during the decision-making process. The Au- •• improving communication in MegaFon continuously improves its risk mana- dit Committee of the Board of Directors reviews risk management process; reports on risks and opportunities, and risk man- •• staff training; gement system in line with international and na- agement performance and improvement, as well tional standards to facilitate implementation of as evaluates the overall effectiveness of the risk •• improving ex post risk anal- management framework and makes recommen- ysis and risk treatment plans the Company’s strategy. dations for its further development. performance. 114 Risk Management Risk Management 115

Risk Management Function

Responsible for:

•• organisation and coordina- tion with employees and function leaders of pro- Employees cesses for risk identifica- The Risk tion, assessment, and Committee and Function updates; Internal Leaders Audit •• monitoring of risk treatment plans; The Risk Committee is a permanent collegial advisory Risk Responsible for performing •• improvement of the risk and consultative body, which The Internal Audit function is risk management in respect management process; includes various top manag- responsible for the independ- of functions, processes or ers and is chaired by the ent and unbiased review of projects within their area of •• reporting to the Board of Chief Executive Officer. The the sufficiency and maturity Manage- responsibility, including the Directors on key risks and Committee is responsible for of risk management elements, identification, evaluation and opportunities, and the key decision making on risk the completeness of risk development of mitigation status of the risk manage- management and is gov- identification and correctness actions, monitoring of risks ment framework; erned by the Regulations on of risk assessment by man- and the status of the imple- the Risk Committee. In 2017, agement and the effective- ment mentation of risk treatment •• development and imple- the Risk Committee held two ness of control procedures plans, submitting regular mentation of activities to meetings, taking important and other risk management reports and streamlining improve the risk manage- strategic and operational measures, including the business processes to miti- ment culture and risk decisions on the manage- effective use of resources Structure gate risks. assessment awareness. ment of key risks. allocated for these purposes. 116 Risk Management Risk Management 117

Risk Management Development of the Risk Structure Management System in 2017

Board of Directors

REPORTING, INTERNAL MONITORING Audit Committee AUDIT In 2017, MegaFon continued to automate its risk management system based on the Oracle Hyperion Risk- By the end of 2017, all branches and Com solution. subsidiaries within the scope of the Company’s risk management system had fully migrated to the RiskCom system, thus making risk Risk Committee and other committees management more convenient and better structured.

Also, in early 2017 the Company’s Compliance Committee was established to ensure operation of an effective compliance system and implementation of ISO19600:2014. Agenda items considered by the Compliance Committee during 2017 included corporate ethics, anti-corruption compliance, antimonopoly compliance, technical RISK regulatory compliance, occupational safety, fire safety and other MANAGEMENT Risk Management Function matters.

Ensuring information security and protection of subscribers’ personal data are among MegaFon’s top priorities as the Company acts to uphold the rights of its subscribers and to comply with regulatory requirements. To this end, the Company’s Committee for Project Steering Function Risk Committee Risk Committee Information Security was established in mid-2017 to provide man- Committee leader (Branch) (Subsidiaries) agement of information security risks. Agenda items considered by this Committee during 2017 included implementation of an information security strategy, identification of cyber threats and improving data handling procedures for data protected by the secrecy of Project Risk Function Risk Branch Risk Subsidiary Risk communication laws. Coordinator Coordinator Coordinator Coordinator During the year, we continued to improve our risk culture, including through a greater focus on fostering risk-based thinking among our employees. For this purpose, we developed and launched a Project Risks Function Risks Branch Risks Subsidiary Risks risk management training course available to all employees and mandatory for managers. 118 Risk Management Risk Management 119

Within our efforts to promote 01. TONE AT THE TOP RISKS RISK DESCRIPTION RISK MANAGEMENT and develop a risk-based The senior managers of the Com- Macroeconomic Risks culture, the Company places pany act as role models in the particular emphasis on the discussion, identification, and assessment of risks and are actively Risk Falling oil prices and the depreciation of the The wireless market is more resilient in an eco- following key aspects: involved in risk management. of a macroeconomic national currency may negatively impact the nomic slowdown as consumers tend to be de- slowdown Russian economy. A macroeconomic decline pendent on mobile and Internet services and, might also lead to the withdrawal of invest- as a result, may not consider spending less on ment in Russian projects, which could slow these services. CORPORATE down MegaFon’s network roll-out. 02. GOVERNANCE MegaFon has long-term contracts with major global vendors, which should ensure the continued construction and modernisation of its Risk ownership and responsibilities network. are included in employees’ job descriptions and targets. Timely communication about risks is encour- Sanctions As a company registered in the Russian Fed- None of the Company’s managers or directors aged and all risks are regarded as eration, MegaFon is exposed to economic and is subject to the existing sanctions programmes geopolitical risks specific to Russia in general, and the Company’s operations are conducted opportunities to further improve including the risks related to the sanctions re- outside the EU, the United States and Ukraine, and develop the Company. gime imposed by the United States, European and are focused on telecommunications, which Union (EU), and other countries against certain are usually excluded from sanctions regimes; Russian companies. There is a risk that new therefore, these risks are currently unlikely to sanctions may be imposed or the list of des- cause any disruption to MegaFon’s operations. COMPETENCY ignated entities subject to existing sanctions However, possible imposition of additional 03. may be expanded. sanctions may have an adverse impact on the Company’s operations. The Company’s management Further sanctions might also be imposed on supports the Risk Management supplies of equipment, software or services While one of the Company’s principal share- from the EU and the US. holders is subject to so-called ‘sectoral sanc- function in providing continuous tions’ imposed by the United States and the EU, training in risk management it is not anticipated that this will impact the to key employees. Company’s operations.

However, possible imposition of additional sanctions, particularly against the Company’s principal shareholders, may have an adverse Principal Risks impact on the Company’s operations. The Company has undertaken a thorough analysis of all counterparties that might be at and Mitigation risk, evaluated the possible impacts, explored alternatives and developed a list of potential substitutes and other measures to mitigate the possible impacts of such sanctions.

MegaFon conducts its business taking into ac- the Russian national segment of the Internet and count a wide range of risks which may have an regulation of critical IT infrastructure. adverse impact on the Company’s performance unless properly mitigated. The Company’s operations are impacted by growing competition and changing customer behav- MegaFon takes into consideration geopolitical, iours in the Russian telecoms market, which, on macroeconomic, strategic, operational, regulato- the one hand, could have an adverse impact on ry (including international compliance risk), and our revenue growth, and on the other hand, may financial risks. In 2017, new risks emerged related require additional investment in customer service to the regulation of the telecoms industry, includ- and network excellence. ing risks associated with regulation of relations in 120 Risk Management Risk Management 121

RISKS RISK DESCRIPTION RISK MANAGEMENT RISKS RISK DESCRIPTION RISK MANAGEMENT

Operational Risks Telecommunications The Company may incur losses as a result of MegaFon has a dedicated unit responsible for fraud risks the wilful misconduct of unscrupulous counter- the prevention of fraud. To support fraud pre- parties or subscribers. It is also exposed to the vention, the Company uses a number of special- risk of losing subscribers who become victims ists, automated anti-fraud solutions. Monitor- Risk The mobile market in Russia is characterised In implementing its new strategy, MegaFon of fraud and also reputational damage as a ing for the more critical fraud threats is carried of increased by high penetration rates and slowing sub- takes a wide range of measures to sharpen result of such fraud. out 24/7. In 2017, further efforts were made to competition scriber base growth, which intensifies com- its competitive advantages, including the de- prevent fraud-related losses by improving the petition as operators try to retain existing ployment of cutting-edge technologies and the existing and developing new business processes, subscribers and attract new customers. Ac- development of new and innovative products systems and services. cording to the Company’s analysis, as of now, and services, creating new partnerships and this very competitive landscape is one of the innovative infrastructure. most important factors that may continue to impact the mobile telecommunications indus- Information security Certain vulnerabilities may lead to a failure in In accordance with the Information Security try. MegaFon’s key direct competitors include risks the appropriate levels of our software security, Strategy the Company takes all necessary MTS, VimpelCom and Tele2. Evolving business equipment, network, and subscribers’ personal measures to ensure the appropriate levels of models in the market may lead to changes in data, potentially leaving them compromised security for its IT systems, software, technol- market structure and dynamics. and subject to unauthorised access and use, ogies and equipment, including continuous such as the application of subscriber data or monitoring for potential threats and the use of confidential information in fraudulent transac- security intelligence platforms across its IT and tions, or spreading malware. telecommunications infrastructures. Risk of not keeping As MegaFon further deploys its telecommuni- MegaFon successfully manages the risk of not pace with technological cations network, it is exposed to the risk that keeping pace with technological advances in In addition, MegaFon has in place a strong in- advances it may not keep pace with technological ad- the telecommunications market through fur- formation security policy and local regulations vances, which in turn may affect the quality of ther developing high-tech infrastructure and governing personal data protection as well as its advanced services and increase the costs improving its supply chain. developing monitoring system for cyber threats. of constructing the necessary infrastructure.

Regulatory Risks Risks of lower quality Although the Company ensures that its tech- The Company takes all necessary measures to of provided services nological infrastructure has high levels of re- ensure high quality of its services. To improve (business continuity risks) liability and resilience, there is a risk of acci- resilience and performance of its technologi- Transfer pricing Since the practice of enforcement of transfer MegaFon has implemented a number of meas- dents that may affect the quality of provided cal infrastructure, the Company has business pricing legislation is still in its early stages, it is ures to monitor the compliance of its pricing services. continuity regulations in place, builds its tech- possible that the approaches used to establish practices with the transfer pricing rules. nological architecture in line with the highest arm’s length prices under controlled transac- global standards and ensures redundancy of tions will be challenged by the tax authorities, In particular, MegaFon has in place and contin- the most critical infrastructure elements. To en- which may lead to additional tax liabilities uously improves internal procedures to ensure hance business continuity management, the being imposed. compliance with transfer pricing legislation re- Company implements a number of relevant quirements. In addition, a consolidated group of initiatives. taxpayers was formed within the the MegaFon Group, so that transactions among members are not subject to transfer pricing control.

Risk of new business There is the possibility that business expansion, Any asset acquisition is always preceded by We believe that the Company’s transfer pricing acquisitions or strategic acquisitions or strategic alliances may require the extensive due diligence of the asset, evalu- policy and practices comply with the require- alliances having an extra management attention, diverting it away ation of the transaction’s viability, verification ments of transfer pricing legislation. adverse impact on our from other business concerns. In addition, any of ownership and other legal due diligence and business potential acquisition could negatively affect a thorough financial analysis of the proposed the Company’s financial position or credit rat- transaction. MegaFon has a successful track ings or dilute the value of its shares. record of acquisitions and post-transaction integration; its management consists of experienced professionals who have the necessary expertise and qualifications for effective decision making. 122 Risk Management Risk Management 123

RISKS RISK DESCRIPTION RISK MANAGEMENT RISKS RISK DESCRIPTION RISK MANAGEMENT

Controlled foreign In 2014, Federal Law No. 376-FZ On Amend- MegaFon has developed internal procedures Risk of the introduction The regulator’s current philosophy is that the The chances that compliance with minimum companies ments to Parts 1 and 2 of the Tax Code of the to identify companies that may be treated as of minimum communi- quality of communications services will be as- parameters for service quality will be required Russian Federation (with Regard to Taxation of controlled foreign companies. A step-by-step cations service quality sured as long as subscribers have the right to in the medium term are not significant. Howev- Profits of Controlled Foreign Companies and action plan was also developed in relation parameters (in addition select their communications operator, based er, even if the regulators change their current Income of Foreign Organisations) (the ‘CFC to such companies and a schedule was set to stable operation on operators’ mandatory provision of informa- approach, the Company believes it will be able Rules’) was enacted to provide tax incentives up for preparation and filing of the required requirements for public tion about service quality to subscribers. This to ensure its services comply with any such min- for de-offshorisation of the Russian economy. documents with the tax authorities. MegaFon communications network) may mean that in addition to the requirements imum parameters. The law introduced new rules, with effect from continues to improve its internal procedures in of administrative and technical support for 01 January 2015, according to which undistrib- accordance with official directives and instruc- stable operation of a public communications uted profits of foreign companies controlled tions provided by the competent authorities. network, in the future the law will provide for by Russian tax residents may be subject to some minimum quality requirements for ser- taxation in Russia. The law makes Russian tax vices provided to subscribers. residents who control foreign companies lia- ble for payment of relevant tax amounts and submission of relevant CFC notifications. To date, there has been limited relevant court Risk of new regulations At present, Russian law does not require a mo- Although we consider the risk of sudden chang- practice relating to the CFC Rules and few requiring mobile bile network operator to grant virtual operators es in the regulator’s approach to the regulation clarifications by competent authorities on the operators to sign access to its infrastructure. of MVNO arrangements in the Russian Feder- application of these rules. MVNO agreements ation to be insignificant, the Company cannot entirely exclude the possibility of changes that could adversely affect the business of MegaFon and its subsidiaries. Risk of revocation, Revocation, suspension or non-renewal of The Company holds GSM, 3G, and 4G/LTE li- suspension our licences could have a significant adverse cences with different expiry dates. The Compa- or non-renewal impact on our business. The Company also ny pays close attention to compliance with the of our licences uses resources which are considered finite, requirements imposed on it as on a licensee, to Net neutrality In 2015–2016, a working group within the Fed- If a strict approach to net neutrality is adopted including frequency spectrum and number- tracking licence expiry dates and to ensuring regulation risks eral Antimonopoly Service discussed the prin- through legislation, operators will not be able ing capacity, and their unavailability for any that all steps are taken as required to ensure ciples of net neutrality, which is defined as a to differentiate between Internet traffic in any reason could adversely affect its operations. timely renewal of licences with the Federal framework for interaction between end users way, which may lead to networks being over- Service for Supervision of Communications, and content, application and service providers loaded at times of heavy content transfer. Information Technology, and Mass Media of with telecom operators that ensures open and the Russian Federation (‘Roskomnadzor’). non-discriminatory use of the Internet to dis- Since late 2017, based on the changes in glob- tribute and access information and services. al practices, various market players have proposed individual initiatives for partial revision of the approach set out in the principles artic- Risk of changes in The implementation of new government-spon- The Company is in the process of developing a ulated by the Federal Antimonopoly Service of interconnection sored initiatives in traffic transfer procedures set of measures to mitigate the potential neg- Russia. regulation and interconnection regulations may affect ative consequences of this risk. the pricing policy and, in particular, decrease revenues from communications services. Risks related to possible A number of state agencies are discussing an MegaFon’s proposal is that the existing block- restrictions on website initiative to impose mandatory requirements ing tools be used instead to restrict webpage for the reduction of traffic speeds for online access, which would not entail any additional Risk of changes On 24 November 2014, the Russian Govern- The Company is carefully monitoring possi- speeds on the Internet resources that are non-compliant with Russian costs for telecom operators. in the set-up of data ment amended the procedure for setting up ble changes to its procedures and developing regulations. communications data communications networks for federal measures to minimise possible market share networks of federal government bodies. Such bodies may now con- losses. The implementation of lower traffic speed re- government bodies nect to data communications networks that quirements will be the responsibility of telecom are part of the infrastructure of government operators, which would require the deploy- services administered by one of the communi- ment of additional equipment and software cations operators. In 2015, the Russian Ministry and, accordingly, entail additional costs for of Telecom and Mass Communications issued telecom operators. a decree to support the implementation of this initiative and guidelines were developed for the design of data communications networks for federal government bodies. The implementation of this regulatory initiative could result in the Company losing a share of the B2G segment of the data transfer and telematics services market. 124 Risk Management Risk Management 125

RISKS RISK DESCRIPTION RISK MANAGEMENT RISKS RISK DESCRIPTION RISK MANAGEMENT

Risks associated On 06 July 2016, Federal Law No. 374-FZ On In December 2017, the Russian Government re- Risks related Recent legislative initiatives require all organ- MegaFon is in discussions over the least costly with the implementation Amendments to Federal Law on Countering viewed the socio-economic implications of the to the introduction isations carrying out settlements to provide implementation model for the new require- of additional requirements Terrorism and Individual Legislative Acts of the solutions included in the draft resolution on the of mandatory use a buyer with a fiscal cash receipt or a strict ments. The Company has also developed a for telecom operators Russian Federation with regard to Establishing data storage procedure, timelines and volume. of cash register reporting form in the form of a paper docu- technical plan for commercial launch of IT pay- and Internet service Additional Measures to Counter Terrorism and The Ministry of Telecom and Mass Communi- equipment ment, and also send an electronic fiscal doc- ment systems functionality. providers introduced Ensure Public Safety (the so-called ‘Yarovaya cations has finalised storage requirements to in settlements ument containing fiscal data presented in the as part of counter- Law’) was passed. Compliance with this law prevent negative socio-economic implications established format as a fiscal cash receipt or terrorism amendments and ensuring high levels of security and priva- of the solutions included in the draft resolution. a strict reporting form. Organisations also to legislation cy protection for the proposed data storage in- Currently, the project is a compromise and have to transmit fiscal data on completed frastructure are an enormous challenge which prescribes storage of voice traffic for up to 6 transactions digitally to tax authorities via a cannot be fully addressed by telecom opera- months and of data traffic for up to one month. fiscal data operator. The Company is obliged tors without support from the Government. According to estimates of MegaFon, the costs of to use cash register equipment starting from implementation the requirements of the law will 01 July 2018 and may incur substantial costs amount to RUB 35-40bn over 5 years. to ensure compliance with the new regulatory requirements.

Regulation of critical IT On 01 January 2018, the Federal Law On Se- MegaFon is closely monitoring the discussion of Infrastructure curity of Critical Information Infrastructure of these initiatives, has implemented preparatory Increased spectrum The recently passed Federal Law On the The Company will closely monitor the initiative the Russian Federation came into force. The measures within the Company, and believes charges 2018 Federal Budget and the 2019–2020 Budget and discuss the most favourable scenario for legislation seeks to establish a state-run sys- that it will be able to ensure full compliance Plan aims to increase federal budget reve- the industry with government authorities. tem to detect cyber-attacks, trace them back with the law. nue through an annual increase of charges to their sources and mitigate their effects for the radio frequency spectrum users from at critical IT infrastructure facilities. The law RUB 19,785bn to RUB 24,732bn. requires operators of critical IT infrastructure to deploy and maintain technical tools In the current circumstances, such increases designed to detect signs of cyber-attacks in in spectrum charges are likely to have nega- their telecommunications networks, report tive implications for the telecommunications cyber incidents to the competent authorities industry. and take steps to mitigate the effects of such cyber-attacks. In particular, a National Co- ordination Centre for Cyber Incidents will be established. Sixteen more regulations are en- Risk of failure to protect As a public company, MegaFon is obliged to The Company is consistently implementing and visaged to complement the law, most of which inside information ensure the security of inside information. improving safeguards to protect inside infor- have been posted for public discussion and mation. Employees are regularly trained and have not been adopted yet. In these circum- tested to increase their awareness of inside stances, their absence makes compliance with information protection. the law an uncertain prospect, which leads to increased risks for business. To comply with Regulation (EU) No. 596/2014 on Market Abuse (MAR), the Company approved a new version of MegaFon’s Share Listing Policy and promptly deployed additional compliance Regulation of relations The Russian Ministry of Telecom and Mass MegaFon will closely monitor developments re- procedures to monitor all of the Company’s in the Russian national Communications has posted for public discus- lating to the proposed legislation and actively significant transactions and projects requir- segment of the Internet sion the Draft Federal Law On Amendments participate in its discussion. ing disclosure in the UK. In addition, to ensure to Federal Law On Communications, which compliance with the Regulation, we amended aims to regulate relations in the Russian na- our standard confidentiality agreements and tional segment of the Internet. The draft law established a procedure for automated collec- has been submitted to the Government of the tion of personal data from insiders (which may Russian Federation for consideration and pos- include outside advisers and contractors, as sible further submission to the State Duma of well as managers and employees) in response the Russian Federation. At the same time, the to regulator requests (principally, the UK Finan- Russian Ministry of Telecom and Mass Commu- cial Conduct Authority, or FCA). The Company nications continues to insist on amendments to also introduced internal procedures restricting the draft federal law that place additional re- and controlling access to inside information, quirements to restrict foreign ownership of In- including a number of technical tools for the ternet exchange points, the definition of which protection of inside information on Company has been clarified and no longer overlaps with insiders’ mobile devices. the terms ‘telecommunications operator’ and ‘point of interconnect’. 126 Risk Management Risk Management 127

RISKS RISK DESCRIPTION RISK MANAGEMENT RISKS RISK DESCRIPTION RISK MANAGEMENT

Risks related to improper As a public company, MegaFon is exposed to MegaFon has implemented best disclosure Risk of credit rating MegaFon’s credit ratings are constrained by As at the date of this Annual Report, MegaFon or inaccurate disclosure the risk of claims against our Directors and Of- practices. To limit the extent of potential loss- downgrade Russia’s sovereign credit rating, as the Com- has a stable outlook on local currency debt and and other securities- ficers from regulatory authorities, sharehold- es or costs as a result of legal claims related to or unacceptable pany’s business is concentrated almost entire- a stable rating outlook on its foreign currency related risks ers and investors for improper and/or untimely improper or inaccurate disclosure, MegaFon credit ratings ly within Russia. Therefore, MegaFon’s ratings debt. disclosure of information, or for disclosure of has obtained and maintains a Directors’ and may be downgraded following a downgrade The Company’s ratings remain among the incomplete, confusing or contradictory infor- Officers’ Liability Policy. of Russia’s sovereign credit rating. highest among Russian corporates, which mation. Downgrades in Russia’s sovereign credit rat- along with the Company’s financial strength ing in the past have caused a downward re- ensures that MegaFon has adequate access vision of MegaFon’s corporate ratings, with to funding. an adverse effect on the borrowing costs of Financial Risks MegaFon. The Company believes that it has the necessary resources in place to ensure uninterrupt- ed access to finance to support its economic Interest rate risk Rising interest rates could increase the cost to Currently, the Company enjoys a high credit activities. MegaFon of raising funds to finance its oper- rating, which makes it well-positioned to raise ations and CAPEX programmes. funds at the most attractive terms available in the market. A major portion of the Company’s Bank accounts Pursuant to Federal Law No. 213-FZ On the The Company is closely monitoring the situa- In addition, where the Company’s existing debt portfolio is long-term and carries attrac- of systemically Opening of Bank Accounts and Letters of tion and is prepared to take appropriate meas- debt carries a floating rate, the Company is tive interest rates. Around 84 % of the Compa- important companies Credit, certain strategic companies are re- ures should this risk materialise. exposed to the risk of higher costs of servicing ny’s debt portfolio has fixed rates. The Compa- quired to open and close accounts and deposit such debt. ny has no rouble-denominated facilities with accounts only at, or purchase securities only interest rates tied to the key lending rate of the from, the Russian banks specified by the Cen- Central Bank of Russia. The Company’s floating tral Bank of Russia and/or the Russian Govern- rate debt comprises credit facilities taken out ment. Currently, Law No. 213-FZ applies main- to finance equipment purchases. At the same ly to entities in the national defence-industrial time, the Company can make transactions with complex, but it may be extended to cover sys- derivatives to hedge the risk of adverse move- temically important companies in other sectors ments in interest rates. as well, including MegaFon. This could have an adverse effect on the Company’s results and prospects. Risk of adverse changes Due to the direct correlation between the costs To mitigate FX risks, the Company holds a part in FX rates of imported equipment and FX rates, the Com- of its cash assets in foreign currency deposit pany’s financial position and liquidity, as well as accounts in order to pay its liabilities in foreign Liquidity risk Deterioration of Russian corporates’ access to To date, a large portion of the Company’s de- its performance, are highly exposed to changes currencies. It also diversifies its foreign curren- Western capital markets and the increased key posits has been denominated in foreign curren- in FX rates. cy deposits and works with counterparties to rate in Russia may limit our access to capital cies, which mitigates the Company’s liquidity increase the share of operating and capital and affect our borrowing costs. revaluation risk arising from adverse changes expenses which are denominated in roubles in FX rates. rather than other currencies, to cover such ex- Further sanctions could lead to restrictions on penses using rouble revenues. The Company certain transactions. Moreover, MegaFon has access to adequate also hedges foreign exchange risks. funding through the credit facilities it has opened with both Russian and foreign banks. This reduces the liquidity risk in the short and Credit risk Credit risk is the risk of a financial loss result- To mitigate credit risk with respect to its banks, medium term. ing from a counterparty’s failure to meet its the Company invests its surplus funds on a contractual obligations. Financial instruments diversified basis both with Russian branches The Company is carefully monitoring its ex- that may potentially lead to a higher credit risk of international banks and a limited number of posure to Russian financial institutions which include short-term investments, receivables, selected Russian banks. The majority of such could become subject to new or increased and long-term deposits. Russian banks are either owned or controlled sanctions, to ensure that it always has access by the state. Preventive measures to mitigate to adequate funding even if dealing with such credit risk with respect to other counterparties institutions and accessing funds held by such include the use of prepayments, bank guaran- institutions becomes more difficult. The Com- tees and other collateral, and building relations pany is also considering the possibility of hold- with counterparties whose solvency is contin- ing funds in different currencies and providing uously monitored based on their credit history for payment of obligations in different curren- and assigned credit ratings. The Company also cies, to mitigate any possibility of restrictions annually monitors possible impairment with re- being imposed on the currencies in which it spect to loans and other financial investments normally deals. made by the Company. Sustainable development 129

Sustainable Our Approach to Sustaina- development bility

Big Data for Social Good Since September 2017, MegaFon has been actively involved in the GSMA’s Big Data for Social Good Initiative. MegaFon sees sustainable development as growth that provides a positive impact from its operations The Initiative aims to leverage on the quality of life for people. mobile operators’ big data and analytical capabilities to sup- MegaFon’s sustainable development is under- port social projects such as pinned by our commitment to the principles of forecasting large-scale migra- integrity in business operations and responsible tion flows, analysing the spread behaviour in relationships with all stakeholders. of epidemics, monitoring environmental pollution, preventing We adhere to generally accepted moral and ethical disasters, etc. The Initiative standards, endorse business transparency, respect brings together major interna- human rights, and support environmental initiatives. tional social organisations, who shape the agenda, and mobile MegaFon acknowledges the supremacy of law operators, who act on it. and complies with all of the Russian and applicable foreign legal requirements at the same time. In 2017, MegaFon developed a MegaFon’s Chief Executive Officer, its Board of smart missing kids search pro- Directors, and its Management Board collectively ject, scheduled for pilot imple- provide and shape the strategic direction behind mentation in 2018. our approach to sustainability.

Our sustainability activities are guided by best practices, and international regulations and stand- Currently members ards, including the United Nations Global Compact of the Initiative include 20 and the Social Charter of Russian Business. Our mobile operators covering Sustainable development is an integral part of reporting on sustainability is part of the Company’s a total Annual Report and takes into account international MegaFon’s strategy. We seek to make a meaning- standards such as the Guidelines on Social Respon- sibility (ISO 26000) and the Global Reporting Initi- 124 ful contribution to the social and economic develop- ative (GRI) Guidelines for sustainability reporting. ment of society while reconciling commercial, so- markets For more information see Application Material Top- around the world cial, and environmental interests. ics and Materiality Matrix 130 Sustainable development Sustainable development 131

Stakeholder Engagement HR Management

Provision of high- quality services Effective stakeholder interaction is a prerequisite MegaFon’s HR policy is aimed at at- Headcount with a breakdown male for the implementation of MegaFon’s successful Compliance with tracting the best talent and promoting by gender, people sustainability strategy. Our stakeholder relations the highest international their professional development. The female are based on the principles of partnership, equali- standards for consumer Company has built and is constant- relations ty and respect. ly improving an employee relations Ensuring confidentiality framework that ensures the achieve- 36,499 36,989 39,126 and security ment of MegaFon’s strategic objec- Prompt response tives. 22,826 21,379 21,638 to requests 16,300 15,120 15,351 Responsible marketing Involvement Our Team CUSTOMERS in the development Principles of the telecoms at a Glance of corporate industry 2015 2016 2017 citizenship LOCAL COMMUNITIES As of 31 December 2017, MegaFon’s Enabling better Elaboration headcount stood at 39,126 people, an INDUSTRY of best practices Headcount with a breakdown by age group, access to new increase of 5.8 % compared to the pre- technologies COMMUNITY and standards people vious year. The Company employs spe- Improving the quality cialists across all age groups, with over AGE 2015 2016 2017 of life through 50 % of our employees aged 26–35. social Due to our focus on technology and in- investments 18-25 10,611 10,088 10,831 novation, most of our employees have BUSINESS higher education qualifications. PARTNERS 26-35 19,241 19,560 20,083 THE STATE MegaFon provides equal opportunities 36-45 5,019 5,567 6,188 Performance for both male and female employees, of all obligations and makes no gender distinctions in 46-55 1,247 1,372 1,540 to counterparties Contribution terms of career development and pro- Over 55 381 402 484 Transparency to the development motion. Female employees account for EMPLOYEES SHARE of the digital economy 58 % of MegaFon’ total headcount. Fair competition HOLDERS Involvement in the The key factors that determine an em- Anti-corruption modernisation of Russia’s Headcount with a breakdown by education issues telecommunications ployee’s progression are a high level level, people infrastructure of professionalism, the ability to work Focus on Respect and trust in a team, leadership skills, and the 24,876 establishing Contribution to the 22,785 23,294 Adherence protection of public achievement of results. 13,408 long-term Encouraging 12,807 to best practices safety including support 12,801 business employees to realise in corporate in emergencies relationships their potential governance Participation in the Fair remuneration Equal access development of 842 to information approaches to regulation 912 888 Equal rights Higher education about the Company of the industry Secondary and vocational education Health and safety Ensuring equality Charity and of shareholder rights sponsorship Incomplete higher education Enhanced initiatives 2015 2016 2017 engagement 132 Sustainable development Sustainable development 133

Talent acquisition Employer Brand

Strategic capacity planning is a key ele- MegaFon is strongly focused on building an attractive employer brand. ment of MegaFon’s HR policy. 02. In 2017, responsibility for ‘brand development as an employer’ was made part of the recruitment function to create an attractive environment for young talent and professionals with competencies critical to our business. MegaFon seeks to attract and retain the best and most talented people. The Company is constantly working to analyse future business needs in As part of this project, over 30 major MegaFon employer branding events resources and competencies to make sure we meet the demand at the were held across Russia, reaching target audiences in relevant higher right time. We carry out a wide range of initiatives first, to enhance the educational institutions and professional communities. Company’s attractiveness as a leading employer in the market and then to develop channels to source new talent. These events included: •• masterclasses hosted by the Company’s managers during Career The Company is increasingly creating new positions in areas such as Days for students and graduates of technical higher educational Big Data, IoT, and ICT, as well as positions that require experience and institutions; expertise in IT product development. To enhance our ability to attract IT specialists, in 2017 MegaFon started using the AmazingHiring service. We •• a learning platform established to attract young talent; also actively used tools for talent recruitment through social networks, in •• industry conferences organised for the Company employees and particular professional networks, accessing particular professional com- outside guests; munities. We use a system that enables applicants for certain positions to be interviewed remotely via a video link and launched a special chat •• hackathons held by the Company; bot to enhance communication with potential recruits. •• partnerships established with major Russian and international case competitions.

At the end of 2017, MegaFon launched an internship programme targeting students in Russia’s leading higher educational institutions to offer young talent an opportunity to gain practical experience of working for a major company and put their ideas into practice.

HR Project office HR Processes Automation

HR processes automation and re-engineering were one of the Company’s In 2017, we created a project office, which is responsible for launching of key objectives in 2017. All HR processes were reviewed carefully, specific innovative HR products. The key task of HR project office is to formulate 03. 01. IT platforms were analysed and selected, and the automation roadmap a strategic agenda in working with people, launch innovative products for HR Management in 2018 was created. HR processes automation will and proactively formulate proposals on priority objectives. significantly improve the effectiveness of employee data collection and storage, and will enable more granular performance assessment. The first results of the HR project office: •• launch of the ‘Expert Track’ project; Also in 2017 MegaFon continued to focus on automation of the talent recruitment process. In particular, improvements were made to the SAP HR •• launch of a project to introduce brand values; system and its recruitment module. For mass recruitment the Company’s Skillaz platform has started to deploy a fully automatic pre-screening •• carrying out preparatory work within the framework process for mass recruitment needs which will reduce recruitment time of the Digital HR project. and costs in the future. 134 Sustainable development Sustainable development 135

Talent Retention and Motivation

MegaFon seeks to create an environment which REMUNERATION encourages the professional and personal devel- We value our employees and do our opment of its employees. We provide fair remu- The remuneration scheme at MegaFon is com- best to recognise their success and in- neration and ensure that all of our personnel have prised of a number of components, takes into ac- all the support they need to find the opportunities count functional directions, with an overall focus spire them to new achievements. With that best utilise their skills, knowledge and talents. on business needs. Our approach to remuneration is guided by our commitment to offer com- this in mind, we are actively developing petitive salaries based on market and internal our employee recognition scheme in a MegaFon’s motivation system includes both mon- benchmarks. In 2017, salaries at MegaFon were etary and non-monetary rewards, ranging from carefully reviewed against peers. number of areas. bonuses and social benefit payments, to development programmes, professional skill competitions, In particular, the Company continued to em- and awards and rewards to recognise profession- phasise its project-based bonus policy, which al excellence. has been shown to be effective in enabling us to retain employees holding key positions and pos- Rewards during the year sessing valuable experience. Every manager is authorised to reward his/her employees for excel- 2017 also saw the re-introduction of the three- lent project results, attractive proposals, and the implementation of Using our system year long-term incentive plan for the Company’s interesting ideas beneficial for the business. Throughout the year, the leaders encouraged executive and senior level employees which is over 4,000 employees were rewarded in this way. based on grants of ‘phantom’ MegaFon shares which vest and pay out based on the Company’s Awards of the Russian Ministry performance over a three year period. >4,000 of Telecom and Mass Communications employees MegaFon’s employees who have worked for more than 10 years in the telecommunications industry and contributed to the Company’s development may receive industry awards from the Ministry of Telecom and Mass Communications. In 2017, such awards were presented to Ministry of Telecom and Mass Expert Track over 170 people, with 40 of them being recognised as Honorary Radio Communications gave Operators and two as Communications Professionals. In 2017, MegaFon launched the Expert Track project aimed at developing Function-level recognition schemes 170 its unique scientific expertise and strengthening the Company’s technology leadership. The Company’s units also have their own traditions regarding awards non-monetary incentives, with managers being empowered to pro- Expert Track is a full-fledged alternative to the traditional management- vide special recognition for the work of their teams within a branch oriented career path from specialist to manager. The project incorporates or a regional unit. international best practices and is also fully in line with our core principle, ‘MegaFon. Starts with you’. It allows technical experts to initiate and Motivating competitions implement projects to monetise the Company’s opportunities, encourages them to develop and share their expertise, and constantly looks for and We also organise annual competitions for employees, including proposes new effective technical solutions. MegaConsultant for sales assistants and MegaFon-Styled Life for motivating employees who most clearly embody the values of the Additionally, an expert club was set up, bringing together employees that Company in their work. have unique expertise and position of authority among their colleagues and are capable of taking on challenging and exciting projects. Federal projects motivation

We continue the practice of project bonuses, which allows us to retain emploees who occupy key positions and possessing valuable experience. 136 Sustainable development Sustainable development 137

Training and Professional Number of employees who completed Development external training, people

Employee development is primarily focused on 8,365 digital skills enhancement, development of the ability to create new products and solutions using advanced information technologies, commercial 4,559 competencies development and individual performance improvement. 2,241

In 2017, the Company continued to train its employees in its MegaAcademy corporate university. MegaAcademy’s priorities for 2017 included the development of mentoring and expert training. 2015 2016 2017

To implement this, a mentoring scheme was rolled out across MegaFon’s customer-facing units. The role of mentors is to train new hires for customer 2,006 6,359 interaction by providing daily hands-on guidance on basic relevant skills. In 2017, a cadre comprising a total of 622 mentors was formed in the Compa- Professional training Business training ny and provided successful training for 4,023 new employees. For 2018, the Company plans dynamic development of the mentoring scheme. Employee training costs, In 2017, we also focused on promoting a culture of RUB m knowledge sharing within the Company. Expert webinars and classroom programmes covered 141 7,955 employees across various business lines, a 131 143.4 2.5-fold increase in participation y-o-y. An expert training scheme was launched for Commerce employees, a new framework for interaction between trainees was implemented and the range of training programmes was expanded. Development 2015 2016 2017

Number of internal trainings held by 28 of MegaFon MegaAcademy, ‘000 1

Distance training 42 389 employees Webinars Classroom training 459 MegaFon is continuously improving its approach to employee training and development to reflect 1. Including trainings took by employees of franchising changes in its corporate strategy. stores. 138 Sustainable development Sustainable development 139

Corporate Culture Internal Communications

In 2017, following the adoption of its new mission Festive events organised by MegaFon for its Our Internal communications system is a key part event and to give expert feedback. We have intro- and development strategy, MegaFon undertook a employees throughout the year helped shape of our Company’s development. It is important duced a new special Open Microphone platform, major review of its corporate values. Throughout our corporate culture and enhance team spirit. for us to provide every member of our big team also used to address employee concerns. the year, a large number of interviews and focus Their purpose is team building and creation of a across MegaFon’s area of operations with a clear groups involving Company employees across all single information space incorporating our val- view of all the key projects being undertaken by Online broadcasts accessible by employees of levels were undertaken, and based on the find- ues. In 2017, all Moscow-based MegaFon offic- the Company, and its corporate objectives and the Company’s branches and subsidiaries were ings of this survey MegaFon’s corporate values es moved into a new office building, and a big goals, in order to give them a sense of belonging extensively used in 2017. Employees now have di- were updated. corporate party was held to celebrate the event. to a larger team and the opportunity to see and rect access to management information sessions This new building allows us to celebrate all ma- measure their personal contribution to the com- from specially equipped areas, using their desk- At the end of 2017, large-scale sessions were jor events with our entire Moscow team, which mon cause. tops, mobile phones, or from any meeting room. launched across all branches to introduce em- helps strengthen friendly contacts among our The online audience for MegaFon’s traditional top ployees to the new values, and help them under- employees. Regular upgrade of communication channels management video conferences has doubled. stand their significance to the Company and to functionality is a key priority. All our programmes, each of them personally. In another important In 2017, MegaFon continued promoting the cul- activities and events enable tools that demon- We seek to offer our employees as much access outcome of these sessions, employees were en- ture of sports and the achievement of ambitious strate MegaFon’s digital capabilities and support to information as possible: to make our news couraged to develop their own personal projects sports targets. Over 100 Company employees the development of our employees. available anywhere 24/7, we have launched our to incorporate these values into their everyday participated in more than 20 professional cor- corporate Telegram channels ‘Be the First to work. To monitor the implementation of these porate football, basketball, ice hockey, volley- In 2017, we continued to further develop our in- Know’ and ‘The Office of Opportunities’, which projects, we set up a dedicated online resource. ball, and table tennis tournaments. ternal communications system, providing support now have more than 2,500 subscribers. We expect that the implementation of every such for MegaFon’s major federal-level projects, large- employee project will contribute to fostering a scale transformation processes, and nationwide The launch of the ‘Vklyuchaisya!’ tariff line and unique internal environment that will become a campaigns. the new digital strategy were supported by a key driver of MegaFon’s future development. large-scale internal advertising campaign, office For instance, we regularly shared information meetings, and engagement flash mobs. All corpo- with all employees about the two major initiatives rate media platforms and formats were updated announced in 2017, changes in our digital strate- to conform to the new branding and the latest gy and migration to a cluster-based management issue of the corporate web-magazine was pub- model. This included using the Company’s new lished in an updated digital format. online publication, Transformation.Live digest, which is published regularly on our MegaNet in- The maximum digitisation of all media platforms, tranet portal. improvement of horizontal communications, development of social communications, and engag- Today, our news feed on the MegaNet web portal ing employees in content creation are our prior- allows employees to rate and comment on any ities for 2018. MegaFon’s Corporate Values:

‘Unified Billing’

Our internal communications have helped us raise awareness of our key business driver – Unified Billing. We have launched regular posts about this initiative and have increased viewership among our employees. A key driver behind this success was the multi-format approach to content creation, which covered videos, TV shows, HAPPY CUSTOMER LEADERSHIP THE TEAM games, animation, battles, and a pool of our own bloggers. STARTS WITH YOU STARTS WITH YOU STARTS WITH YOU 140 Sustainable development Sustainable development 141

New Approaches Social Support Expenses on social programmes/benefits to the Manage- in 2015–2017, RUB ’000 ment Model and MegaFon guarantees all legally-required social support to employees and goes beyond that by Organisation offering a wide range of additional programmes Reimbursement Reimbursement Reimbursement for mobile focused on providing the most comfortable en- Under this model, Mega- for relocation for sport activities phone expenses vironment for employees’ work and their profes- Fon will focus on develop- sional growth. Material Temporary disability VHI and accident ing federal-level virtual aid payment insurance teams competencies with- In particular, MegaFon offers out special consideration its employees the following for geographic location. benefits and guarantees: 2017 To that end Commerce and Op- •• voluntary health insurance (VHI) for employ- 961,708 erations underwent a complete ees; employee family members are offered organisational overhaul and health insurance at a discounted price; 7,292 76,102 targets for numbers of person- 21,504 42,768 215,696 598,340 nel have been set. To support •• employees’ accident insurance; the new structure, the Compa- ny set up the first HR business •• partial reimbursement for employees’ ex- 2016 partnership for Infrastructure penses on sports classes; 909,596 and Commerce to provide the business side with continuous •• temporary disability payment above the 5,427 79,104 HR support to achieve its goals statutory minimum; 24,372 36,874 206,632 557,187 relating to digital strategy implementation. The Company •• lump sum allowances to employees and also continues to develop fed- their family members in difficult life situa- 2015 eral competence centres. tions; 900,992

•• reimbursement for mobile phone expenses 6,146 71,879 up to certain established monthly limits; 23,574 33,388 213,826 552,179

•• reimbursement for their relocation expenses when moving to a new place of work in a different region, together with payment of a fixed lump sum to help them settle in at their new place of residence. 142 Sustainable development Sustainable development 143

Occupational Health Social and Safety Responsibility

Occupational safety and health is a key element Key occupational safety initiatives Approach to Charity Our social mission of the Company’s social responsibility. To imple- in 2017: ment its health and safety policy the Company Today, corporate charitable activities are a key element of corporate Our social mission is has adopted an internal regulation on MegaFon’s social responsibility, essential for the continued successful growth to create opportunities •• internal training and development of em- Occupational Safety Management System, draf- of any major global corporation. that facilitate communi- ployees’ knowledge of occupational and ted in line with GOST 12.0.230.1-2015, ‘Occupatio- fire safety; cation, social adaptation, nal Safety Management Systems. Use Guidance MegaFon actively contributes to the well-being of society, focusing fostering, guardianship for GOST 12.0.230-2007’, GOST 12.0.230-2007, on helping those most in need. We see charity not as a cost item •• training for employees whose job duties and adoption, and en- ‘Occupational Safety Standards System. Occu- but rather as a long-term investment in creating a favourable en- involve extra hazards (work at height, elec- pational Safety Management Systems. General vironment for the Company and stakeholders. gagement through cul- trical equipment operation, safe operation Requirements’. ture, sport and educa- of lifting equipment, etc.) at specialised MegaFon’s social investments are a conscious commitment deliv- tion. We inspire people training centres; The Company provides instructions on workplace ered through a well thought-out policy covering the Company’s to seek and explore precautions and safety rules concerning, in par- entire business, its mission and its values. In 2017, MegaFon made •• scheduled and unscheduled occupational all opportunities to the ticular, the use of PCs and office appliances, as adjustments to its approach to social investments to reflect its new safety status checks across the Company; fullest. well as emergency procedures. All MegaFon em- corporate positioning campaign. ployees must study these instructions and under- •• special assessment of working conditions go an induction training course to raise awareness for compliance with occupational safety of occupational safety before they start working. MegaFon’s ‘smart’ approach to charity involves: MegaFon’s charitable ac- standards; Employees whose job duties involve extra haz- tivities aim to: •• having a consistent approach to projects; ards are required to study safety rules and have •• mandatory medical examination of employ- occupational safety training at their workplace. •• always assessing the long-term impact; •• provide consistent and ees both at the start of employment and effective support for the on a regular basis for jobs involving extra •• regular performance assessment; efforts to address pressing hazards; •• maximising project benefits; social problems in Russia based on our professional MegaFon’s expenses •• mandatory medical examination of drivers •• alignment with its core business; knowledge and experience; before each trip; on occupational safety in 2017 •• leveraging employee skills and corporate capabilities; •• promote smart charita- •• purchasing, distributing, and accounting •• close collaboration with related Russian and international ble activities across the for workwear and other personal protective expert communities, as well as federal and regional authorities, Company’s geographic 50.8 equipment for employees; to share best practices and maximise synergies. footprint by helping charities and NGOs effectively million RUB •• recording and investigating occupational engage with the business accidents. community. 144 Sustainable development Sustainable development 145

2017 Highlights

One out of every four projects covers two charitable or more regions 40 projects One out of two projects is sup- 500 217.6 ported by MegaFon for a year сities expenses or more and towns million RUB

BENEFICIARIES:

27,000 > 100 3,000 1,100 2,000 200 individuals partner charities volunteers orphanages and experts and educational insti- and NGOs foster homes professionals tutions (schools, universities, colleges) 17,000 16,400 300 300 events regular classes and major festivals, educational workshops training sessions conferences, and forums and webinars

Charity Expenses in 2015–2017, Charity Expenses in 2017, by Focus RUB ’000 Areas, %

Key Charitable 217,600 27 % % Priorities: 36 180,000 179,500 Other projects Helping orphans •• helping orphans and children deprived Set up in 2013, the Company’s Charity Committee of parental care; coordinates all of its social initiatives, reviews and approves projects, monitors their progress and Focus Area •• supporting people with disabilities; assesses their social impacts. The Company’s •• creating an accessible digital environ- Charity Committee comprises personnel from ment; its public relations, human resources, legal and security departments. The Charity Committee •• supporting employees in difficult life holds quarterly meetings. 12 % situations; 25 % In 2017, MegaFon updated its Charity Policy Supporting •• aiding disaster victims. employees Supporting people with disabilities 2015 2016 2017 146 Sustainable development Sustainable development 147

Charity Performance and Value Assessment The Future Depends on You Football Tournament Project

TOTAL NUMBER PROJECT SCALE Charitable initiatives are assessed for effective- 2005 OF BENEFICIARIES Nationwide International ness and value both in-house and through the Start Date coverage coverage engagement of external experts and stakeholders. 4,250 34,000 140 4,000 10 MegaFon has developed a proprietary scoring children’s teams individual cities children countries from orphanages beneficiaries and towns in 2017 system to measure performance in terms of both and foster homes quantity and quality. PARTNERS MEDIA PARTNERS

• Football Union of Russia • Russia-24 Channel • Vesti.ru Quantity: ACCESS TO SPORTS • Ministry of Sport of the Russian • Match TV Channel • BigPicture FOR PEOPLE WITH DISABILITIES •• number of individual benefi- Federation • R-Sport News Agency • Federation of Sport Jour- ciaries; • RUDN University nalists of Russia When measuring quality, MegaFon assesses the actual benefit, and • Championat.com •• number of cities and institu- quality of life changes for project beneficiaries. • Ministry of Education and Science • SportFM Radio of the Russian Federation tions involved; • Kommersant Publishing In addition to its in-house assessment, the Company invites the • Ministry of Foreign Affairs of the House •• number of engaged contrib- industry community to discuss the results of its charitable activities Russian Federation utors, including experts, at dedicated forums and conferences and also conducts online teachers, and volunteers; and offline surveys. The feedback received helps MegaFon make •• number of events organised; decisions as to whether to proceed with or adjust its charity programmes and projects. The Future Depends on You open Russian nationwide football tour- •• financial impact 1. Won the Sustainable nament for teams from orphanages and foster homes is the largest Business Journal’s Best nationwide project for orphans and children deprived of parental in CSR award in Philant- care. Over 4,000 children took part in the 2017 competition. ropy Programmes. Char- In October 2017, teams from ten countries competed in the first ity and Sponsorship. ever international staging of the tournament. The winners in the Helping Orphans and Children Deprived Senior and the Junior groups were the national teams of Pakistan of Parental Care and Mauritius, respectively. In December, MegaFon organised The Future Depends on You nationwide qualifying tournament for teams of girls aged 14–17, which the Tver Region team won. Together with MEGAFON’S •• supporting social integration; Galaktika, the champions of the nationwide stage from the Smolensk CHARITY Region, the winners will defend the colours of their country in Russia’s PROGRAMMES 79.6 very first Street Child World Cup which will welcome 24 teams from •• promoting guardianship and FOR ORPHANS adoption; 22 countries in Moscow in May 2018, ahead of the 2018 FIFA World ARE TARGETED million RUB Cup. This tournament will be organised jointly with the Street Child AT: United charity from the UK whose mission is to give children from •• raising the level of education; different countries who are deprived of parental care a chance for 6,200 success and an opportunity to create a future for themselves by •• providing vocational guidance realising their dreams of gaining recognition in one of the world’s and assistance in finding a job. individual most popular sports, football. beneficiaries Since 2014, MegaFon has been working with the Change One Life 1 oundation to film video interviews with the young footballers in 1. Detailed information is an effort to find a way through which these children can find new available at changeonelife.ru/ homes. We have made over 2,100 such videos, and 472 children megafon. 1. The ratio of donation to quantity (numbers). have already found new families 2. 2. As at 15 February 2018. 148 Sustainable development Sustainable development 149

We Live a Real Life Programme ACCESS TO SPORTS FOR PEOPLE WITH DISABILITIES Enjoy Sports Together. Truly 2015 BENEFICIARIES IN 2015–2017 PROJECT SCALE Start Date 440 54 14 PARTICIPANTS PROJECT 2016 IN 2017 SCALE orphans and children social federal deprived of parental care institutions regions Start Date 1,412 35 35 82 300 13

PARTNERS children schools physical expert volunteers Russian cities education mentors and towns • New Development Technologies Non-Profit Organisation teachers • Civic Chamber of the Russian Federation • Regional ministries for social development, departments of social PARTNERS protection, departments of education and science, departments of family and children services and departments of education • Perspektiva Regional Public Organisation of Disabled People

Won second place in the The We Live a Real Life project helps orphans successfully adapt The project is aimed at building an inclusive socie- For one year children play together during their Board of Russian Union of to living alone and changes the negative image of an orphanage ty in Russia through the ‘athletics for all’ concept. physical education lessons, learn about Paralym- Industrialists and Entre- leaver through involving children in tackling important social issues. As part of the project, MegaFon organises sports pic sports, participate in para sports festivals and events for children with disabilities who play with para athletics days, go to summer camps and preneurs’ Best Programme The project provides an opportunity for high-school students to feel needed and useful for society, to learn how to communicate with their peers without disabilities. find new friends. Promoting Corporate their peers and adults as equals and to set goals and achieve them Charity Policy and Social through joint efforts with a like-minded team. IN 2017, WE ORGANISED: Investment Concepts cat- In 2017, programme participants from the Kaluga, Kurgan, Orel, egory of the 10th all-Rus- > 2,300 88 7 56 14 7 sian Corporate Charity Rostov, Ryazan and Chelyabinsk Regions launched 32 projects on extra classes para athletics para sports para athletics meetings with inclusive sports Leaders contest community enhancement, education and development, environment and sports and helping senior citizens. workshops festivals days star Paralympic camps athletes The value of this project was endorsed by the research performed Placed on the short list of by the Moscow State University of Psychology and Education and the People Investor cor- by the Practice Social Unified State Exam contest, where experts Promoting Ice Sledge Hockey porate projects contest in observed the development of social and independent life skills in nine out of ten participants. Over 60 % of the children expressed the Development of Local a desire to receive higher education and showed interest in 26 dif- Communities and Volun- ferent majors – well above the average for other social institutions. 2016 In partnership with the Federation of Physical Culture and Sport teering category. for Persons with Physical Disabilities of Russia and Children’s Ice Start Date Sledge Hockey League Non-Profit Organisation, we are committed to promoting ice sledge hockey in Russia. As a result, the new Rus- sian national team has become a global leader in only a few years.

Supporting People with Disabilities Since 2016, MegaFon has supported international children’s sledge hockey camps where promising young athletes are assessed and MegaFon is committed to helping trained. In 2017, twenty young athletes from across Russia became people with disabilities overcome part of the project. barriers to their integration in society, 55.5 19,300 gain access to cultural and artistic MegaFon also supported the Coach School within the Hockey With- events and receive additional edu- million RUB individual out Barriers project, which helped 16 coaches from eight cities across cation or find a job. beneficiaries the country receive specialised training in 2017. 150 Sustainable development Sustainable development 151

Promoting Boccia The MegaFon Dream Cup is an annual international wheelchair Prize pool tennis tournament, Russia’s only ITF Wheelchair Tennis Tour event. The tournament helps people with disabilities overcome social barri- PARTICIPANTS IN 2017 PROJECT SCALE ers, experience equal opportunities for following their dreams despite 14 2011 their physical condition, promotes sports and provides inspiration Start Date to participants to develop and achieve new heights. 31 athletes thousand > 5,500 > 300 > 50 from six countries took part in the 2017 tournament; the prize pool US$ children, teenagers, partners cities totalled US$ 14,000. Ten Russian juniors from St. Petersburg, the and adults and towns Moscow Region, the Perm Territory, and Tolyatti competed in different categories.

PARTNERS

• Federation of Boccia for Persons with Physical Disabilities ACCESS TO EDUCATION AND CULTURE • Novaya Zhizn Charitable Foundation FOR PEOPLE WITH DISABILITIES • BLAGO Udmurt Republican Non-Governmental Organisation of Disabled People Apart from sports projects, MegaFon is focused on helping children • Eto Chudo Charitable Foundation and adults with disabilities receive education, vocational training • Obyknovennoe Chudo Charitable Foundation for Children and enjoy works of art. • Khabarovsk Territorial Club of Disabled People for Physical Culture and Sports Non-Governmental Organisation Resource Classrooms • Preodolenie Kalmyk Regional Social and Sports Non-Governmental Organisation Since 2015, MegaFon has implemented the Resource Classrooms project that gives children with autistic spectrum disorders an opportunity to study in Moscow public schools under the supervision Boccia is one of the few sports which permits ath- Since 2014, MegaFon has supported the efforts of a tutor. letes with the most severe cerebral palsy condi- to promote boccia in Russia. Major achievements tions to reach their full potential; therefore, it is of our national team in 2017 include the first prize Multicentre called ‘athletics for all’. In 2017, MegaFon sup- at the 2017 Boccia European Regional Open in ported boccia promotion projects in 50 cities and Spain, two bronzes at Sevilla Boccia World Open The Multicentre project helps young people with disabilities receive towns of Russia. Over 100 competitions, as well 2017 and first prizes in all four sports classes at vocational training at a dedicated social and labour integration cen- as 145 educational events for 70 coaches, were the European Youth Games in the Czech Republic. tre, which helps improve their competitiveness in the labour market. organised. Russian athletes participated in three major international tournaments. Cinema for Blind and Deaf People

Since 2014, MegaFon has been supporting the Cinema for Blind and MegaFon Dream Cup Deaf People project in releasing Russian films with audio descriptions and special subtitles which help thousands of visually and hearing impaired people experience them.

BENEFICIARIES PROJECT PARTNERS 2006 IN 2015–2017 SCALE Books for Gift

Start Date 31 • St. Petersburg Tennis Foundation As part of the Books for Gift project, MegaFon partners with the Illustrated Books for Small Blind Children Foundation to publish athletes from International • Sport-Express Newspaper special books for children from orphanages and foster homes. 6 countries tournament • Russian Tennis Federation • St. Petersburg Committee for Physical Culture and Sports 152 Sustainable development Sustainable development 153

Support for Education, Culture and Arts Raising Charity Competence within Industries

Since 2008, MegaFon has been helping the In 2017, MegaFon organised a number of educa- Polytechnic Museum in Moscow in the reno- tional and learning projects aimed at promoting vation and restoration of its historical build- smart charitable giving and creating a thriving ing, as well as supporting educational pro- donor community in Russia. grammes and youth projects.

MegaFon Helps Visited the Polytech Festival of Science 01. Since 2016, MegaFon and Planeta.ru, one of the first and most popular crowdfunding platforms in Russia, have been implementing 350,000 Polytech Festival of the MegaFon Helps programme, which provides that if charitable Science, Art, and Tech- foundations can raise 25 % of the amount required for the implemen- nology people tation of a social project on Planeta.ru MegaFon will then contribute the remaining 75 %. The project seeks to improve the sustainability 150,000 of charitable giving and reduce reliance on a single or several major corporate sponsors. In 2017, over 1,500 people funded 20 MegaFon Helps projects, which helped raise RUB 2.6m. 02. DOBRO (Kindness) 2017 In May, MegaFon, Metalloinvest, and Dobro Mail.Ru organised the Polytech third annual DOBRO (Kindness) 2017 Business Discussion of Philan- Open Storage thropy for the Development of Society educational conference for 7,000 foundations and NGOs. The goal of the conference was to foster dialogue between NGOs, business, and society and to promote effective charitable giving. The 2017 conference hosted 150 repre- о 360 Science & Tech- sentatives of charitable foundations and organisations from across nology Film Festival 10,000 Russia, and over 30 charity experts.

Social journalism digital workshop Polytech Science Labs Polytech partner exhi- 03. 14,000 bitions and projects In November, MegaFon partnered with the CSR School of Journalism 100,000 to organise the first ever social journalism digital workshop for mass media, bloggers, students, foundations and NGOs, with experts Rossiya Delaet Sama exhibition at VDNH from Channel One Russia, Russkiy Reporter, Business and Society magazine and by popular bloggers. The workshop was attended by 62,000 70 people and had over 500 online viewers on Facebook. 154 Sustainable development Sustainable development 155

Kindness Starts with You Belgorod 04. 03. as a Cultural Region In order to raise industry awareness of charitable activities, MegaFon held the second consecutive all-Russian writing competition en- In 2017, MegaFon supported a major IT project titled Cultural Re- titled Kindness Starts with You and invited journalists and blog- gion, organised in partnership with the Belgorod Regional Devel- gers to highlight our charitable project Kindness Starts with You. opment Foundation and also supported by the Belgorod Region The Company received essays from over 140 authors representing administration. The project aims to unite all theatres, libraries, mu- 35 cities and towns of Russia. The materials published were viewed seums and other cultural entertainment facilities in the Belgorod by thousands and received hundreds of comments on media web- Region into a single information network. The project’s website sites and in social networks. belgorod.cultreg.ru and a dedicated mobile app help users with any kind of mobile device to plan a trip or a weekend break online in any part of the Belgorod Region, learn what’s going on and buy theatre, exhibition or concert tickets.

In 2018, cultural institutions will be offering interactive sites where Creating Accessible Digital visitors will be able to use their smartphones as guides. The digital Environment system will immediately synchronise with the devices and make the cultural presentations come to life. MegaFon heavily relies on IT to address social challenges.

In 2017, the Company started developing a strategy to create an accessible digital environment in Russia. MegaFon and its partners Online fundraising marathon plan to invest in developing specialised services for targeted beneficiary groups, supporting volunteer organisations by enabling Company employees make full use of digital tools, helping people access to communications and technology and implementing digital in need to be more effective while saving time. fundraising solutions. We have started with research on key groups of beneficiaries and digital solutions to improve their quality of life. In December 2017, as part of the Stan Dedom Morozom (Become a Santa) New Year campaign, we replaced collecting presents for Guide to Life orphans with an online fundraising marathon on the Our Children Charity Fund website. This gave employees an opportunity to do- 01. nate money for organising clubs in orphanages, so that children The Company partnered with the Our Children Charity Fund to de- could learn useful skills and receive career guidance instead of just velop a dedicated Guide to Life app which helps orphanage leavers getting another toy. better adapt to adult life and integration into society.

Universal Mobile Assistant 02. Supporting MegaFon The Universal Mobile Assistant project helps social rehabilitation of people with eyesight disabilities and enhances their independence Employees in Difficult Life through utilising the capacity of modern mobile devices to compen- Situations sate for their disabilities. The Company organised classes for visually impaired and blind people in 12 Russian regions to teach them how MegaFon also helps its employees and members of their families to operate touchscreen smartphones by hand. The classes focused who find themselves in difficult life situations, including payment on mastering both general and special features such as audiobooks, for critical illness treatment (in addition to the VHI programmes and object recognition and tagging, satellite navigation, live video call financial support). In 2017, over 20 employees received MegaFon’s assistance, audio description, etc. support for the total amount of RUB 23m. 156 Sustainable development Sustainable development 157

Ethics and Human Rights Compliance

Ethical Business Conduct Compliance Framework

We are committed to the highest standards of We have in place a 24/7 ‘Direct Line’ through MegaFon defines compliance as employees’ ac- The Company’s Compliance Committee is a key business ethics and adhere to the principles of in- which MegaFon’s employees and other stakehold- ting in accordance with the Company’s principles compliance management body that ensures the tegrity, openness, and transparency in everything ers can receive guidance on compliance with the and standards of business ethics and integrity implementation of the Compliance Policy and we do. Code of Business Conduct and Ethics (in particu- to protect the interests of the Company and all sets the framework development strategy. It also lar, as to whether a particular action is deemed parties impacted by its activities or decisions. involves top management and governing bodies MegaFon and its subsidiaries are governed by its corrupt) or can discreetly (and, if required, anon- Compliance requires observance of applicable in building the compliance management system. Code of Business Conduct and Ethics, articulating ymously) report violations. The ‘Direct Line’ usage Russian and foreign laws, the Code of Business The Company’s Chief Executive Officer, Executive the key principles and rules of business conduct statistics and information on the most important Conduct and Ethics, and other internal regulations. Director, and other key members of management for our employees and members of the Board of issues which have arisen are communicated to comprise the membership of the Committee. We Directors. The Code determines the Company’s the Audit Committee. MegaFon is focused on building an effective com- also created the position of Compliance Coor- position in countering corruption, discrimination pliance framework in line with ISO 19600:2014 – dinator to coordinate compliance activities and and improper behaviour, and sets forth the re- Compliance management systems, and based oversee the implementation of the Committee’s quirements for ensuring legal compliance, integ- on best practices, standards, and regulators’ decisions. rity, equal rights, and informational transparency. 24/7 recommendations. MegaFon’s Compliance Poli- cy sets out guidelines for building a compliance Compliance is also ensured at the business unit Our Code of Business Conduct ‘Direct Line’ through which framework, describes its mandatory elements, level, with dedicated employees assigned re- and Ethics MegaFon’s employees and and defines its scope. sponsibilities for the implementation of specific other stakeholders can re- compliance programmes. ceive guidance 2017 Highlights Respect for Human Rights The Company manages all areas of compliance In addition, to support the implementation of its MegaFon is committed to respecting human ternal regulations. The Company adheres strictly risk, identifies compliance requirements and risks, ‘Tone from the Top’ initiative, we created videos rights in line with both Russian and international to the principle of non-discrimination against em- and regularly updates its risk register. In 2017, the on compliance featuring the CEO and the COO, law. MegaFon and its subsidiaries have a zero ployees on grounds of race, religion, or physical compliance risk register was further detailed to along with videos featuring those responsible for tolerance policy on any manifestations of dis- or other differences. MegaFon does not and has cover areas such as construction and infrastruc- specific compliance programmes. A number of crimination or harassment in any form, with anti- never used child or forced labour. No incidents ture, labour law, communications, intellectual articles on the subject were also posted on our discrimination clauses incorporated in the Code of discrimination or human rights breaches have property, corporate law, competition law and intranet portal. We also added a dedicated con- of Business Conduct and Ethics and other key in- been identified during the year. others. flicts of interest section to the portal, providing examples of conflicts of interest explained in sim- MegaFon ranks and prioritises compliance-related ple terms and accompanied with animated illus- Customer Privacy programmes and approves the relevant action trations, and posted specific information on the plans. During 2017, a number of existing compli- channels available to report suspected conflicts We respect our customers’ right to privacy and the smallest detail. Employees who have access ance areas were structured, a new compliance of interest. ensure proper protection of their personal data in to personal data are required to rigorously comply programme (technical regulations compliance) our possession. We also provide communication with these regulations. No personal data leaks was launched, and road maps were approved In 2018, MegaFon intends to further improve its secrecy, safeguarding the privacy of telephone have been identified during the year. for active compliance programmes. As of the end compliance framework, in particular by enhancing conversations and messages for our subscribers, of 2017, there were ten compliance programmes the existing compliance programmes and laun- as well as the privacy of data transmitted over Our Regulations on Personal comprising our integrated compliance framework. ching new programmes, and by raising employee MegaFon’s communications networks. MegaFon’s Data Processing awareness of, and overall compliance with, ISO Regulations on Personal Data Processing govern In 2017, the Compliance Committee approved the 19600:2014. all aspects of personal data protection down to Company’s competition policy and its conflict of interest management policy. 158 Sustainable development Sustainable development 159

Anti-Corruption Efforts Procurement

MegaFon views its anti-corruption commitment as a core principle of its Procurement Management System responsible corporate practices. The Company highly values its reputation, does not tolerate any form of corruption or bribery, and expects the MegaFon’s procurement management system is Dedicated divisions for sourcing products in cer- same attitude from its business partners. designed to fully meet the Company’s needs in tain categories were established in 2017 in order a timely manner while ensuring that we achieve to improve procurement efficiency. The current MegaFon operates in strict the best value for money in all our procurement organisational structure allows for tailored ap- In 2014, MegaFon became the first compliance with anti-corrup- activity. MegaFon’s procurement is based on the proaches to organising and running procurement among all Russian mobile operators tion laws, including Russian principles of minimising tendering costs, collegial procedures for certain types of products, detailed regulations and the United decision-making, and maintaining procurement development of procurement documents, and a to join the Russian Anti-Corruption Kingdom Bribery Act. transparency. broader base of potential suppliers. In order to further improve the quality of the ways we or- Charter for Business. MegaFon’s framework docu- We are committed to continuously improving our ganise and implement procurement procedures, ment regulating its anti-cor- systems for procurement across the MegaFon we are constantly monitoring internal customer ruption efforts is its Anti-Corruption Policy, which guides the Compa- corporate group in line with Russian and inter- satisfaction levels through score-based assess- ny’s strategy on combatting corruption. It provides the guidance to be national best practices. ments of every completed procurement exercise. followed by all the Company’s employees and third parties engaged by The Anti-Corruption the Company. The Company provides mandatory employee training in Also, making MegaFon’s purchasing terms and MegaFon’s purchasing terms and conditions Policy the form of an anti-corruption online training course. Each employee conditions publicly available on the Company’s (in Russian) for whom training is mandatory takes an anti-corruption online training website has made the procurement procedures course. In 2018, MegaFon intends to conduct regular online training ses- clearer and more transparent for all participants. sions and re-run a personal anti-corruption course for the Company’s top management. 2017 Highlights Anti-corruption initiatives in 2017: Procurement is done through a competitive tendering process, including Competitive •• ensuring ‘Tone at the Top’ from top management; using an e-marketplace. The e-marketplace ensures the transparency of Procurement the tendering process, equal access for all potential bidders, and strong •• anti-corruption training; competition. Approximately 300 high-value tenders were conducted during Leader •• assessing corruption risks and using anti-corruption controls (e.g. 2017, of which over 70 % were run on the e-marketplace. auditing counterparties and screening candidates prior to signing For several years contracts and hiring); in a row, MegaFon has been named the •• encouraging confidential (including anonymous) reporting on cor- Expanding Cooperation rupt activities; winner of the Com- with Suppliers petitive Procurement •• investigating such reports and ensuring absence of adverse conse- Leader competition quences for those reporting on suspected corrupt activities. MegaFon seeks long-term mutually beneficial relations with its suppliers, and launched a corporate supplier feedback system to ensure this. In June in the Cost Efficien- MegaFon raises anti-corruption awareness among all of its business 2017, the Company’s procurement and logistics functions held an open cy of Procurement partners through introducing anti-corruption contract clauses, sending meeting with key suppliers to discuss priorities in counterparty relations Operations category. out anti-corruption guides to bidders and posting the Direct Line contact and the specifics of procurement procedures. The best suppliers received details in the Procurement section on its official website www.megafon.‌ru. awards in the Best Result, Reliability, Breakthrough of the Year, Proactive Furthermore, during the 2017 Vendor Day attended by the Company’s Supplier of the Year, and Communications categories. largest suppliers MegaFon dedicated a session to presenting its anti- corruption programme. MegaFon strives to support domestic suppliers and is focused on expanding cooperation with suppliers across Russia through participating In the reporting period, MegaFon did not identify any instances of in trade shows and industry fora. In addition, the Company supports corruption or bribery. There are no corruption-related legal actions brought SMEs by providing them with free bidding coupons to access its tenders against MegaFon or its employees. run on the e-marketplace. 160 Sustainable development Sustainable development 161

Our Approach Resource Conservation and Energy Efficiency In 2017, MegaFon continued its efforts to ensure MegaFon also runs an energy efficiency programme to Environmental more sustainable use of resources across its offices across its communications facilities, comprising the and stores, and to improve energy efficiency at its following initiatives: communications facilities. Protection •• an automated electricity metering system; MegaFon consistently pursues a policy of reducing our water and paper consumption. The Company •• use of advanced, high-performance energy promotes the day-to-day use of electronic-based equipment; communications instead of paper, including the Uniform Library module and the storage and main- •• installation of balanced ventilation systems tenance of documents in electronic form. instead of air conditioning at base stations;

To reduce power consumption, our offices use •• optimisation of power supply systems; MegaFon takes its commitment to the environment initiatives to encourage all employees to care about heating, ventilation and air conditioning systems seriously, seeking to make meaningful contributions the environment. with recuperative heat-exchange and self-cooling •• replacement of incandescent light bulbs to maintaining environmental balance across its functions. The Company seeks to optimise power with LED lights; footprint. The Company’s operations do not cause With all the resources of a high-tech telecom opera- consumption by all employees: lights and electrical damage to the environment and we are not engaged tor, MegaFon develops products and services which appliances are switched off outside office hours •• prioritising energy-saving features in the ra- in an industry that poses a potential threat to the help achieve better energy efficiency, cut greenhouse and incandescent lamps have been replaced with dio equipment used in the mobile networks; environment. MegaFon complies with all applica- gas emissions and reduce consumption of resources more energy-efficient fluorescent and LED lamps. ble environmental laws, is guided by the principle through optimisation of key processes. •• use of equipment with wider operating tem- of anticipation of problems and has in place various The Company has also introduced comprehensive perature ranges. waste disposal programmes and equipment.

Use of Alternative Use of Fuel and Energy in 2015 – 2017 Earth Hour Energy Sources 2015 2016 2017

MegaFon endeavours to employ alternative ener- Fuel and industrial fluids Since 2013, MegaFon has annual- gy systems when constructing base stations. As an example, the Company uses solar/wind power Boiler fuel, including: ly participated in the Earth Hour, generators at several base stations in the Mur- diesel fuel, ’000 litres 64 95 87 a global environmental initiative mansk Region and in Dagestan, which enable it to launched by the World Wide Fund make mobile communication services accessible gas (including condensate), ’000 m3 586 889 797 for Nature (WWF) to raise aware- to people even in the most remote settlements, Technical equipment, including: ness of humanity’s wasteful con- while, at the same time, using alternative power sumption of resources and global sources which offer significant environmental fuel, ’000 litres 3,400 1,816 1,797 benefits and help minimise the Company’s overall Motor transport / motor fuel: climate change. environmental impact. fuel, ’000 litres 3,740 3,024 3,785 diesel fuel, ’000 litres 1,034 2,029 3,191 oils and technical liquids, litres 175 3 0

Utilities services

Electricity, ’000 kWh 843,441 891,632 931,412

Heat, Gcals 17,147 44,927 8,095 Corporate Governance and Securities

Corporate Governance 164

Securities 188 Corporate Governance 165 Corporate Corporate Governance Governance Framework

The corporate governance frame-

The Company is fully compli- work helps MegaFon build and main- ant with Russian laws on joint- tain trust-based relationships with its stock companies such as the Federal Law No. 208-FZ of counterparties, investors, employees 26 December 1995 On Joint- Stock Companies (the Federal and other stakeholders. Law On Joint-Stock Compa- nies) and is guided by recommendations of the Corporate Governance Code, The Company’s operations are also governed by and the requirements of the Moscow Exchange. MegaFon’s Charter and other internal documents As an issuer listed on the London Stock Exchange (LSE), MegaFon also complies with the Disclosure and Transparency Rules of the UK Financial Con- duct Authority for ‘standard’ companies, and the LSE Listing Rules.

MegaFon’s Corporate Governance Principles:

•• Enabling shareholders to fully exercise their •• Timely disclosure of complete and accurate rights. information about the Company such as its financial position, performance, ownership •• Strategic governance and effective super- and governance structure. vision of executive bodies by the Board of Directors, as well as its accountability to the •• Effective control of the Company’s financial General Meeting of Shareholders. and business operations.

•• Appropriate management of MegaFon’s •• Ensuring the protection of the interests and day-to-day operations by its executive statutory rights of shareholders, investors, MegaFon’s corporate governance frame- bodies and their accountability to the Board creditors, other stakeholders. work is based on the best Russian and of Directors and shareholders. •• Commitment to high standards of social international practices. responsibility. 166 Corporate Governance Corporate Governance 167

Important decisions regarding MegaFon pays close attention to identifying governance in 2017 included: and controlling related-party transactions. All General Meeting of Shareholders counterparties are regularly checked for possi- •• the decision to increase the size of the Board ble relationships with the main shareholders and of Directors from seven to nine directors. To members of MegaFon’s Board of Directors or of this end, the powers of the Board elected its executive bodies. at the annual General Meeting of Share- holders on 30 June 2017 were terminated All related-party transactions are subject to pre- and the new Board of nine directors was liminary review by specific committees of Mega- REVISION elected. Relevant decisions were made by Fon’s Board of Directors, based on their subject Board of Directors COMMISSION MegaFon’s shareholders at the extraordi- matter. In 2017, the Board of Directors approved nary General Meeting of Shareholders held 11 related-party transactions based on recom- on 07 August 2017; mendations of the Audit Committee and 16 such transactions based on recommendations of the •• the decision to appoint Gevork A. Vermishy- Finance and Strategy Committee. an as Executive Director of the Company which was made at the extraordinary Gen- The list of related-party transactions effected by eral Meeting of Shareholders held on 30 No- MegaFon in 2017 is presented in an Appendix to Board Committees vember 2017. For more information see page this Annual Report. 181. Remuneration Finance and Audit Major Transactions and Nominations Strategy Committee Compliance with the Cor- Committee Committee porate Governance Code In 2017, in line with recommendations of the Fi- nance and Strategy Committee, the Board of Di- rectors approved two major related transactions MegaFon’s operations are governed by the re- with a value of more than 25 % but less than 50 % quirements of the Corporate Governance Code of the book value of MegaFon’s assets as at the approved by the Board of Directors of the Bank last reporting date before the transaction date. of Russia on 21 March 2014. Individual Executive Bodies The list of major transactions effected by Mega- The Corporate Governance Code Compliance Fon in 2017 is presented in an Appendix to this Report is presented in an Appendix to this Annual Annual Report. Report. Chief Executive Executive Officer Director

Related-Party Corporate Governance Transactions Structure INTERNAL MegaFon’s principal corporate governance bod- Related-party transactions are regulated by Artic- AUDIT ies are the General Meeting of Shareholders, the le 11 of the Federal Law On Joint-Stock Companies. Board of Directors, the Management Board (col- Under these provisions, transactions in which the lective executive body), and the Chief Executive Company’s controlling parties, members of the Officer and the Executive Director (individual exe- Board of Directors, or members of the Company’s cutive bodies). executive bodies are interested parties may be Management Board approved by either the Board of Directors or the General Meeting of Shareholders. The interested member(s) of the Board of Directors or the interested shareholder(s) does (do) not vote on the relevant resolution. Reports to Recommends Elects Appoints based on a resolution of the Board of Directors 168 Corporate Governance Corporate Governance 169

Governing Board Composition of the Board of Directors as at 31 December 2017 Non-Executive Directors Bodies The Board of Directors is MegaFon’s collective executive body exercising general control over Independent Directors its activities. Among the Board’s main purposes is to enhance the efficiency and transparency of the Company’s internal controls, and improve the framework for monitoring and ensuring the ac- 6 countability of its governing bodies, while protecting and promoting the rights of all shareholders. 3 The composition of the Board of Directors is General Meeting of Shareholders well-balanced and adequately reflects the scale personal and business skills as well as compli- of the Company’s operations and all applicable ance with the independence criteria set out in the shareholder requirements, as well as meeting Listing Rules of the Moscow Exchange. In 2017, applicable Russian regulations and the Moscow there were several changes in the composition Exchange Listing Rules. Nominees to the Board of MegaFon’s Board of Directors, initiated by the The General Meeting of Shareholders is Mega- In 2017, MegaFon held four extraordinary General of Directors are elected taking into account their Company’s shareholders. Fon’s supreme governing body. Meetings of Shareholders: on 20 January, 03 July, 07 August, and 30 November, respectively. In 2017, the annual General Meeting of Sharehold- The powers of the Board are set out in the Charter Length of tenure on the Board ers was held on 30 June in the form of a face-to- These extraordinary General Meetings and the Regulations on the Board of Directors face meeting of shareholders. The total number of Shareholders: of votes held by persons entitled to take part in the annual General Meeting was 577,896,201, or < 1 1-3 > 3 •• approved a number of related-party year years years 93.21 % of the total number of votes. transactions;

•• approved amendments to the Charter; 2 persons 3 persons The annual General Meeting of Share- 4 persons •• re-elected the Board of Directors; holders in 2017: COMPOSITION OF THE BOARD •• elected the Executive Director. OF DIRECTORS OVER THE COURSE OF 2017 •• approved MegaFon’s 2016 Annual Report; Ivan V. Tavrin •• approved MegaFon’s Accounting (Financial) Ardavan Moshiri Statements for 2016; From 01 January to 30 June From 30 June to 31 December •• distributed the 2016 profits and losses, including dividend payout (declaration); Alexander V. Galitsky •• elected MegaFon’s Board of Directors; Ingrid Maria Stenmark Henriette Ohland Wendt Per Emil Nilsson •• approved the size of MegaFon’s Manage- From 01 January to 07 August ment Board, and elected its members; Its activities are governed by the Regulations on the General Meeting of Shareholders (Version 2) From 07 August to 31 December •• approved MegaFon’s auditor; Robert Wilhelm Andersson •• elected MegaFon’s Revision Commission; Detailed information on the annual General Lord Paul Myners •• approved MegaFon’s membership in the Meeting of Shareholders and items on its agenda Nikolay B. Krylov Big Data Association; Jan Erik Rudberg Vladimir Ya. Streshinsky Chairman •• approved MegaFon’s membership in the Detailed information on the extraordinary General Internet of Things Association. Meetings of Shareholders and items on their agenda From 01 January to 31 December

jan feb mar apr may jun jul aug sep oct nov dec

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ordinary shares held: nil. held: shares ordinary ordinary shares held: nil. held: shares ordinary

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ordinary shares held: nil. held: shares ordinary Percentage of the Company’s Company’s the of Percentage Percentage of the Company’s Company’s the of Percentage

Percentage of the Company’s Company’s the of Percentage

in the Company: Company: the in 0,012 % in the Company: nil. Company: the in ordinary shares held: nil. held: shares ordinary

in the Company: nil. Company: the in ownership share Percentage ownership share Percentage ordinary shares held: nil. held: shares ordinary ordinary shares held: nil. held: shares ordinary Percentage of the Company’s Company’s the of Percentage

ownership share Percentage Percentage of the Company’s Company’s the of Percentage Percentage of the Company’s Company’s the of Percentage

in the Company: Company: the in 0,000484 %

January 2018 2018 January 19 January 2018 2018 January 19

in the Company: nil. Company: the in in the Company: nil. Company: the in ownership share Percentage

Committee until 19 January 2018 2018 19 January until Committee

- -

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ownership share Percentage ownership share Percentage

Member of the Finance and Strategy Strategy and Finance the of Member

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19 January 2018 2018 January 19 01 October 2017 to 19 January 2018 2018 January 19 to 2017 October 01

Non-Executive Director Director Non-Executive until Committee Nomination and - Committee until 19 January 2018 19 January until Committee - gy Committee until 19 January 2018 2018 19 January until Committee gy Committee until 07 August 2018 2018 07 August until Committee from Director Non-Executive

- -

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from November 2016 to 19 January 19 January to 2016 November from - - - - Independent Director Director Independent - - - Independent Director Independent - - - Chairman of the Board of Directors Directors of Board the of Chairman Non-Executive Director Director Non-Executive Independent Director until until Director Independent

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from March 2013 to 19 January 2018 2018 19 January to 2013 March from

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- -

- - Member of the Board of Directors Directors of Board the of Member - - - Non-Executive Director from from Director Non-Executive - - - Member of the Board of Directors Directors of Board the of Member Directors of Board the of Member Member of the Board of Directors Directors of Board the of Member Andersson Andersson

V. Galitsky Wilhelm Moshiri Moshiri B. Krylov B. Myners Streshinsky

Alexander Robert Ardavan Nikolay Paul Lord Ya. Vladimir

orporate C overnance G 171 orporate C overnance G 170 172 Corporate Governance Corporate Governance 173

In 2017, the Board of Directors also had the following members:

Per Emil Henriette Jan Erik Ivan V. Ingrid Maria Nilsson Ohland Wendt Rudberg Tavrin Stenmark

-- Member of the Board of Directors -- Member of the Board of Directors -- Member of the Board of Directors -- Member of the Board of Directors -- Member of the Board of Directors from August 2017 to 19 January 2018 from August 2017 to 19 January 2018 from June 2010 to 19 January 2018 from August 2016 to 30 June 2017 from June 2015 to 07 August 2017 -- Non-Executive Director -- Non-Executive Director -- Independent Director -- Non-Executive Director -- Non-Executive Director -- Member of the Audit Committee from -- Chairman of the Audit Committee -- Member of the Finance and Strategy -- Member of the Audit Committee until Percentage share ownership 17 August 2017 to 19 January 2018 until 19 January 2018 Committee until 30 June 2017 07 August 2017 in the Company: nil. -- Member of the Remuneration and Percentage of the Company’s Percentage share ownership Nominations Committee until Percentage share ownership Percentage share ownership ordinary shares held: nil. in the Company: nil. 19 January 2018 in the Company: nil. in the Company: nil. Percentage of the Company’s Percentage of the Company’s Percentage of the Company’s ordinary shares held: nil. Percentage share ownership ordinary shares held: nil. ordinary shares held: nil. Born in 1971. in the Company: nil. He graduated from Stockholm Percentage of the Company’s University with a degree in business Born in 1969. Born in 1976. Born in 1966. ordinary shares held: nil. administration, economics and Graduated from Copenhagen Ivan Tavrin graduated from the Mos- She holds an MSc in law from Stock- finance. Business School majoring in business cow State Institute of International holm University. Principal place of employment: administration. Born in 1945. Relations with a degree in law. Principal place of employment: senior vice president and head of Principal place of employment: He graduated from the Gothenburg Principal place of employment: head of CEO office at Telia Compa- region Eurasia at Telia Company AB. senior vice president and head of School of Business Administration. none. ny AB. corporate development at Telia Principal place of employment: He is a member of boards of direc- Ms Stenmark also acts as a member Company AB. corporate advisor to, and the tors of MO-TV Holdings Limited, LLC of boards of directors of: TeliaSonera chairman of the board of directors 7TV Media Holding, LLC CTC Media, Asia Holding B.V., TeliaSonera UTA of, Hogia AB. LLC Vyberi Radio holding company, Holding B.V., Turkcell Holding A.S., and JSC Kommersant. Kcell JSC, Sonera Holding B.V., Fintur Jan Erik Rudberg is also the Holdings B.V, Telia Netherland Hold- chairman of the boards of directors ing AB, and Telia Resurs AB. of Kcell JSC and Belarusian Telecommunications Network (BeST) CJSC and serves on the board of Turkcell Iletsisim Hizmetleri A.S.

174 Corporate Governance Corporate Governance 175

Independent Directors Other agenda items discussed at the meetings included approval of the Company’s key internal In 2017, the Board documents (Dividend Policy, Insider Information of Directors held Regulations), and the placement of its exchange bonds. The Board of Directors also received and dis- 18 cussed management reports reviewing the quar- Independent directors help make deci- terly business performance of MegaFon and its meetings sions for the benefit of various stake- competitors, and individual reports by Directors on the state of affairs of MegaFon’s branches and holder groups and enhance the quality subsidiaries. of managerial decisions. 7 in person by absentee 11 voting Independent directors provide independent per- In 2017, the Board of Directors had four 1 inde- Board Meeting Statistics in 2015–2017 spective and judgement to the Board of Directors, pendent directors: Jan Erik Rudberg, Lord Paul based on their expertise, experience and quali- Myners, Alexander V. Galitsky, and Nikolay B. fications. Independent directors help make deci- Krylov. Independent directors were members of In person sions for the benefit of various stakeholder groups all of the Committees, facilitating unbiased de- and enhance the quality of managerial decisions. cision-making. By absentee voting

Independent directors meet the criteria stipulat- Strategic session ed by relevant Russian regulations and internal documents of Russian securities trading centres, which include the criteria set out in the Listing Rules of the Moscow Exchange. 203 145 162 Agenda Items Agenda Items Agenda Items Discussed Discussed Discussed

16 11 Report on the Activities of the Board of Directors 7 7 5 5 The Board of Directors was actively involved in the as approving the strategy and budget, review- 1 1 business processes essential to the Company’s ing the impact of changes in Russian laws on operations. In 2017, the Board of Directors held the Company’s business, determining the value 18 meetings, of which seven were held in person of assets (services) in approving related-party and 11 were held by absentee voting. The Board transactions, and approving transactions with a 0 considered 162 agenda items at its meetings, such cumulative value in excess of US$ 50m.

1. In accordance with amendments to the Listing Rules of the Moscow Exchange (Appendix No. 4), as of 01 October 2017, Nikolay B. Krylov no longer met the independence criteria. 2015 2016 2017 176 Corporate Governance Corporate Governance 177

Directors’ Attendance at Board and Committee Meetings Remuneration of the Board of Directors

BOARD DIRECTORS COMMITTEE MEETINGS Our Board Members are remunerated for the performance of their MEETINGS duties. The amount of remuneration is approved by the General Meeting of Shareholders and depends on the actual hours worked

Finance and Remuneration in the reporting period. Audit Strategy and Nominations Committee Committee Committee The total amount paid to Board Members 1 in 2017 was RUB 92m. Alexander V. Galitsky 8 of 18 0 of 9 4 of 11 0 of 5 (Board member since 07 August 2017)

Ardavan Moshiri Board of Directors Remuneration in 2017, RUB m 11 of 18 0 of 9 1 of 11 0 of 5 (Board member since 30 June 2017)

Vladimir Ya. Streshinsky 18 of 18 0 of 9 11 of 11 5 of 5 TYPE AMOUNT

Ivan V. Tavrin 7 of 18 0 of 9 5 of 11 0 of 5 Independent Non-Independent (Board member until 30 June 2017) Chairman Directors Directors Ingrid Maria Stenmark 10 of 18 5 of 9 4 of 11 0 of 5 (Board member until 07 August 2017) Remuneration for service on a governing body 4 78 9

Lord Paul Myners 18 of 18 1 of 9 4 of 11 5 of 5 Salary 0 0 0 Benefits 0 0 0 Nikolay B. Krylov 18 of 18 9 of 9 4 of 11 0 of 5 Bonuses and long-term incentives 0 0 0

Per Emil Nilsson Reimbursement of expenses 0 1 0 4 of 18 0 of 9 0 of 11 0 of 5 (Board member since 07 August 2017) Pension plan contributions 0 0 0 Robert Wilhelm 18 of 18 6 of 9 10 of 11 1 of 5 Andersson Total 4 79 9

Henriette Ohland Wendt 4 of 18 2 of 9 2 of 11 0 of 5 (Board member since 07 August 2017)

Jan Erik Rudberg 18 of 18 9 of 9 6 of 11 5 of 5

Remuneration Paid to the Board 95 92 of Directors in 2015–2017, 79 No independent performance assessment of the •• The Company’s strategic development: Board of Directors was carried out in 2017. Based a review of the management’s RUB m on the results of its 2016 internal performance approach to strategic development and assessment, the Board of Directors identified the identification of new growth drivers. following priority areas for improvement: •• The Company’s succession planning framework: individual performance assessment by the CEO for top 1. No related persons (spouses, children, and other fam- management. ily members) had remunerated employment with, or other benefits (social packages, reimbursement of ex- •• A new approach to designing short-term/ penses, pension plan contributions, company vehicles, long-term incentive programmes for the company housing, etc.) from, the Company. 2015 2016 2017 Company’s management. 178 Corporate Governance Corporate Governance 179

Board Committees

FINANCE AND STRATEGY COMMITTEE

The Finance and Strategy Committee exercises control over the Company’s strategic development, business planning, budgeting, meetings and investment processes. The Committee’s principal responsibilities in 2017 include determining the Company’s strategic direction, approving 11 the Company’s annual budgets, reviewing and approving proposed M&A transactions, and reviewing the terms of borrowings and other MegaFon’s three principal Board Committees provide oversight and financing options. As at 31 December 2017, strategic planning in the areas of concern to the Board of Direc- the following Directors were tors: members of the Finance and In 2017, the Finance and Strategy Committee held 11 meetings. Strategy Committee: Audit Committee In 2017, the Finance and Strategy Committee covered a wide range Finance and Strategy Committee of issues, including the approval of the Company’s budget and •• Vladimir Ya. Streshinsky Remuneration and Nominations Committee business plan for 2018; placement of exchange bonds; review and (Chairman) recommendation for the Board’s approval of the updated Dividend Committee members are selected upon the election of a new Board Activities of the Board Commit- Policy (Version 2); review of related-party transactions; review of •• Alexander V. Galitsky of Directors. In 2017, the composition of the Board Committees was tees are regulated by internal transactions with a cumulative value exceeding US$ 50m; and review approved by the Board of Directors at its meeting on 05 July 2017, fol- Terms of Reference of the Company’s M&A activities. •• Robert Wilhelm Andersson lowing the annual General Meeting of Shareholders on 30 June 2017. Upon the re-election of the Board of Directors at the extraordinary General Meeting of Shareholders on 07 August 2017, the membership of the Board Committees was approved by the Board of Directors REMUNERATION AND NOMINATIONS COMMITTEE at its meeting on 17 August 2017. The Remuneration and Nominations Committee is responsible for the development and regular review of the Company’s remuneration policy, including review and determination of base salaries, bonuses meetings AUDIT COMMITTEE and other compensation, as well as setting target KPIs for top 5 in 2017 management, making recommendations to the Board of Directors The Board’s Audit Committee is responsible for all matters relating regarding candidates for key management positions, and carrying to internal and external audits of the Company’s financial and meetings out a formalised annual performance assessment of the Board of business operations, in particular: making recommendations on in 2017 Directors, its Members and Committees. the appointment of external auditors, resolving issues that arise 9 As at the end of 2017, during audits, analysing the effectiveness of internal controls, and the following Directors were In 2017, the Remuneration and Nominations Committee held five assessing risk management performance. members of the Remunera- As at 31 December 2017, meetings. the following Directors were tion and Nominations Com- In 2017, the Audit Committee held nine meetings. mittee: members of the Audit Com- During the year, the Committee considered and recommended for mittee: the Board’s approval short- and long-term incentive programmes In 2017, the Audit Committee covered a wide range of issues, for the Company’s management. The Committee also reviewed •• Lord Paul Myners including the review of quarterly and annual financial statements •• Jan Erik Rudberg (Chairman) the results of MegaFon’s CEO and top management performance (Chairman) and press releases disclosing the Company’s financial and business assessment, key HR projects, and the CEO’s proposals for new operations; enhancement of internal control, risk management and director appointments at some of the Company’s branches. In •• Vladimir Ya. Streshinsky compliance systems; approval of the internal audit plan; review of •• Nikolay B. Krylov October 2017, the Committee recommended that Gevork A. internal audit reports; review of litigation reports; review of key Vermishyan be appointed as MegaFon’s Executive Director. project progress reports; and review of related-party transactions. •• Henriette Ohland Wendt •• Jan Erik Rudberg 180 Corporate Governance Corporate Governance 181

Management Chief Executive Officer Board and Executive Director

The Chief Executive Officer and the Executive Director, along with the Management Board, manage the Compa- ny’s day-to-day operations, except for matters reserved The Management Board is MegaFon’s collective executive body Changes to the membership for the Company’s General managing the Company’s day-to-day operations together with of the Management Board Meeting of Shareholders or the individual executive bodies. It is responsible for all aspects of during 2017 were as follows: the Board of Directors. operational management, apart from those which fall within the The CEO’s activity is focused remit of the General Meeting of Shareholders, the Board of Directors, joined the Management on large-scale infrastructure and the Company’s individual executive bodies. Board: projects, the dialogue with the The size and composition of the Management Board are approved by •• Natalia V. Chumachenko Sergey V. Gevork A. Government and the much larger pool of major corpo- the General Meeting of Shareholders based on the recommendation Soldatenkov Vermishyan of the CEO. The CEO is the Chairman of the Management Board. stepped down from the Man- rate clients, as well as on key agement Board: high-priority projects within Chairman of the Management Executive Director the digital agenda of Russia. •• Alexander V. Bashmakov Board AS AT THE END OF 2017, THE MANAGEMENT BOARD Percentage share ownership in the The Executive Director is re- Company: 0,000968 % sponsible for the Company’s HAD THE FOLLOWING MEMBERS: •• Valery L. Velichko Chief Executive Officer Percentage of the Company’s operations, monitoring the im- Percentage share ownership in the ordinary shares held: 0,000968 % plementation of the Compa- •• Vladimir V. Karpushkin Company: 0,0412 % ny’s strategy, organising the Percentage of the Company’s activities of its collective exe- 1 Anna A. Serebryanikova •• Pavel V. Korchagin ordinary shares held: nil. Born in 1978. cutive bodies, and managing He graduated from the International its subsidiaries and affiliates. •• Yan I. Kukhalsky Born in 1963. 2 Vlad Wolfson Economic Relations Department He graduated from the Leningrad of the Financial University under •• Andrey B. Levykin Institute of Aviation Instrument the Government of the Russian Engineering with a degree in radio Federation. 3 Gevork A. Vermishyan •• Mikhail I. Molotkov engineering. Principal place of employment: PJSC MegaFon – Executive Principal place of employment: Director. From 01 January 2017 •• Alexey B. Semenov PJSC MegaFon – Chief Executive to 30 November 2017, he was the 4 Dmitry L. Kononov Officer. Company’s Chief Financial Officer. •• Alexander A. Sobolev He is also a member of the board of He is also the chairman of the board directors of Mail.Ru Group Limited. 5 Irina B. Likhova of directors of CJSC Aquafon-GSM, •• Alexey L. Tyutin CJSC OSTELECOM, and CJSC TT Mobile. •• Andrey Yu. Shishkovsky 6 Natalia V. Chumachenko At the annual General Meeting of Share- holders on 30 June 2016, Sergey V. Sol- datenkov was elected MegaFon’s By resolution of MegaFon’s extraordi- Chief Executive Officer, to serve until nary General Meeting of Shareholders 7 Sergey V. Soldatenkov the date of the annual General Meet- dated 30 November 2017, Gevork A. ing of Shareholders in 2019. Vermishyan was elected the Compa- ny’s Executive Director, to serve until the date of the annual General Meet- ing of Shareholders in 2020. 182 Corporate Governance Corporate Governance 183

Management Board Backgrounds

Remuneration of the Manage- ment Board, the Chief Executive Officer, and the Executive Di- rector

Starting from 2017, MegaFon has introduced a long-term incentive programme for top Anna A. Vlad Natalia V. Dmitry L. Irina B. management, designed to: Serebryanikova Wolfson Chumachenko Kononov Likhova Align shareholder and Chief Operating Officer Chief Commercial Officer Director for Strategic and Director for Investor Relations Corporate Development and management interests; Organisational Development and M&A Human Resources Director Percentage share ownership in the Percentage share ownership in the Incentivise the Company’s management to support its Company: nil. Company: nil. Percentage share ownership in the Percentage share ownership in the Percentage share ownership in the Percentage of the Company’s Percentage of the Company’s Company: nil. Company: nil. Company: nil. share price growth; ordinary shares held: nil. ordinary shares held: nil. Percentage of the Company’s Percentage of the Company’s Percentage of the Company’s ordinary shares held: nil. ordinary shares held: nil. ordinary shares held: nil. Ensure focus on the Company’s strategic long- Born in 1974. Born in 1977. term objectives; Born in 1972. Born in 1964. Born in 1957. She graduated from Moscow State He graduated from Kyiv National University Law School and holds a University of Trade and Economics in Natalya graduated from the Voro- He graduated from the University Ms Likhova graduated from Lenin- Make management Master of Law degree from Manches- Ukraine, and the University of Haifa nezh State Academy of Civil Engi- of Colorado, Denver, USA, with a grad State University. compensation packages ter University. in Israel. neering with a degree in engineering degree in financial accounting. more competitive. systems and structures, as well as Principal place of employment as Voronezh State University with a de- Principal place of employment: Principal place of employment: Principal place of employment: at the end of 2017: PJSC MegaFon – gree in management. She also holds PJSC MegaFon – Chief Operating PJSC MegaFon – Chief Commercial PJSC MegaFon – Director for Inves- Corporate Development and Human The incentive programme provi- an advanced training diploma from Officer. Officer. tor Relations and M&A. Resources Director. the Door International training and des for vesting of a target num- coaching centre. ber of MegaFon shares to a She is also a member of the Partner- Vlad Wolfson is also a member of the ship Council of Non-commercial Part- supervisory board of Euroset Holding number of key executives at nership for Development and Use of N.V. and a member of the board of Principal place of employment as the end of a three-year period. Navigation Technologies, a member directors of Mail.Ru Group Limited. at the end of 2017: PJSC MegaFon – The vesting of shares will be of the supervisory board of Euroset Director for Strategic and Organisa- implemented based on the re- tional Development. Holding N.V., and a member of the sults of delivery on a target boards of directors of JSC Peter-Ser- vice and Mail.Ru Group Limited. objective set at the start of the three-year period. 184 Corporate Governance Corporate Governance 185

In 2017, the aggregate payments to members of the Ma- Management Board Remuneration Internal Control System nagement Board 1, including remuneration and reimbur- in 2015–2017, RUB m sement of expenses, totalled RUB 496m.

TYPE 2015 2016 2017

Salary 240 290 215

Benefits 0 0 0 Effectiveness and accountability underpin MegaFon’s corporate Bonuses and long-term incentives 580 268 280 governance principles. The Company’s internal control system rests on such pillars as its Board of Directors, the bodies responsible for Reimbursement of expenses 2 2 1 internal and external audit and the Revision Commission. Pension plan contributions 0 0 0 Total 822 560 496 The Revision Commission The total amount of remuneration paid to MegaFon’s key executives 1 (directors of branches and subsidiaries) The Revision Commission is elected annually by the General Meet- The operating procedures and in 2017 was RUB 244m. ing of Shareholders to control MegaFon’s financial and business the full list of functions of the operations. The Commission members may not serve on the Board Revision Commission are set out in the Regulations on the of Directors or on any other governing bodies of the Company. The Revision Commission Corporate Secretary size of the Revision Commission is limited to three members.

To ensure the efficiency of the corporate governance As at 31 December 2017 1, the Revision Commission comprised Pavel framework, MegaFon created the position of Corporate Kaplun (Chairman), Managing Director, head of the investment and Secretary, to be responsible for compliance with rules analytical department at LLC USM Management, and Yuri Zheimo, and procedures protecting the rights and interests of Internal Audit Director at MegaFon. shareholders. The Corporate Secretary is responsible for shareholder relations, corporate communications and for maintaining high performance of the Board of Directors and its Committees. Internal Audit

The Company’s Internal Audit function reports to and is controlled Internal Audit operations are The Corporate Secretary is elected by and reports to by the Board of Directors. Internal Audit operations are governed based on the Regulations on the Board of Directors. Since 2013, Elena L. Breeva has by the Company’s Regulations on Internal Audit, as well as by the the Internal Audit been the Company’s Corporate Secretary. Elena L. Breeva International Standards for the Professional Practice of Internal Auditing. Percentage share ownership in the The full list of the Corporate Secretary’s functions is set Company: nil. out in the Corporate Secretary Regulations The Internal Audit team assesses the performance of the internal Percentage of the Company’s control, risk management and corporate governance systems. The ordinary shares held: nil. Internal Audit function also provides assurance to and advises on the Company’s operational processes such as procurement, investment, Born in 1979. construction, customer service, external and internal reporting, IT She graduated from Kutafin Mos- and information security systems. It is also involved in the develop- cow State Law University and the ment of various internal procedures. State University of Management. Principal place of employment: PJSC MegaFon – Corporate Sec- 1. In accordance with the Regulations on the Revision Commission, any member retary. may step down at any time on his/her own initiative, provided that the Board of Directors is notified in writing one month before the effective date of ter- Ms Breeva combines the duties mination. On 23 November 2017, Sami Haavisto, senior business controller at of Corporate Secretary and the 1. No related persons (spouses, children, and other family mem- TeliaSonera Eurasia, notified the Board of his decision to leave the Revision Company’s Controller, responsible bers) had remunerated employment with, or other benefits Commission, which became effective on 23 December 2017. On 18 December for insider information control and (social packages, reimbursement of expenses, pension plan 2017, Pavel Kaplun, Managing Director, head of the investment and analytical security. contributions, company vehicles, company housing, etc.) from, department at LLC USM Management, notified the Board of his decision to the Company. leave the Revision Commission, to be effective on 18 January 2018. 186 Corporate Governance Corporate Governance 187

Internal Control over Financial Information Disclosure Reporting

The internal control system (ICS) in place at All internal controls are established in compliance MegaFon is a set of organisational measures, with Russian laws, as well as relevant guidelines policies, instructions, and control procedures of the Ministry of Finance of the Russian Feder- designed to ensure the preparation of reliable fi- ation set forth in its letter dated 25 December nancial statements in compliance with applicable 2013 No. 07-04-15/57289 and the internal control MegaFon ensures transparency of its operations The Company places announcements of its fi- laws and regulations. methodology delineated in COSO Internal Cont- in compliance with all applicable laws and regula- nancial results, as well as notices of upcoming rol – Integrated Framework. tions, and in line with best international disclosure General Meetings of Shareholders and other im- practices. For each fiscal year ending 31 Decem- portant and price-sensitive information, on the ber, we publish audited consolidated financial LSE website via its Regulatory News Service (RNS), statements prepared in accordance with IFRS. and in Russia via an authorised information agen- The ICS effectiveness MegaFon also provides unaudited consolidated cy, Interfax. Press releases are also published on is maintained through the following actions: financial statements under IFRS at the end of the the corporate website at ir.megafon.com. first, second, and third fiscal quarters. •• updating ICS codes and standards •• annual testing of key control procedures and ensuring compliance therewith; on a sample basis. Information disclosed under Russian and UK In 2017, MegaFon continued to strengthen its ICS regulations is published via authorised agencies •• regular monitoring of the quality of imple- by incorporating further corporate and organisa- in Russia and the UK mentation of the control procedures applied; tional changes.

•• regular surveys of key process participants on the effectiveness of internal controls;

Protecting Confidentiality External Audit of Insider Information

MegaFon engages independent external auditors The annual General Meeting of Shareholders held On 05 December 2017, MegaFon’s Board of Direc- The new version of the Regulations was prepared to audit its annual financial statements and review on 30 June 2017 approved JSC KPMG as the Com- tors approved a new version of the Regulations on in accordance with changes in relevant Russian its quarterly financial statements. The Audit Com- pany’s external auditors. the procedure for access to MegaFon’s insider in- laws, and in MegaFon’s organisation. The new mittee assesses prospective auditors and makes formation, as well as rules for protection of confi- version of the Regulations also provides for a new recommendations regarding their appointment The total fees paid to JSC KPMG for its audit ser- dentiality of such information and for compliance way of notifying the Company’s employees as to to the Board of Directors, including recommen- vices provided during 2017 amounted to RUB 58.7m, with statutory requirements for counteracting the whether they were included in, or excluded from, dations regarding the auditors’ fees. The selected and RUB 19.5m were paid for non-audit services. unlawful use of insider information and market the List of MegaFon’s Insiders. independent auditors are then approved by the manipulation. General Meeting of Shareholders based on the recommendation of the Board of Directors. The Regulations on the procedure for access to MegaFon’s insider information Securities 189

Securities Shareholders’ Equity

MegaFon’s charter capital amounts to RUB 62m consisting of 620 million ordinary registered shares with a par value of RUB 0.1 each.

The Company is authorised to issue an addition- In the final quarter of 2017, Telia Company, which al 100 billion ordinary shares with a par value of until then had owned a 25.17 % blocking stake RUB 0.1 each. All issues of ordinary registered in the Company’s charter capital, divested ap- shares have been combined into a single issue proximately 6.2 % of its shares in MegaFon via with the state number 1-03-00822-J. MegaFon an accelerated book building process, followed has no preferred shares. The Government does by the sale of its remaining 18.96 % interest to the not hold any stake in the Company’s charter cap- Gazprombank Group, thus completely ceasing to ital. be a shareholder of MegaFon.

In connection with its initial public offering (IPO) As at 31 December 2017, MegaFon’s major share- in 2012, the Company established a Global De- holders were the USM Group of companies positary Receipt (GDR) programme, with each (56.32 % interest) and the Gazprombank Group GDR representing one ordinary share and with (18.96 % interest). MegaFon Investments (Cyprus Bank of New York Mellon acting as Depositary. Limited), a wholly-owned subsidiary of MegaFon, Holders of GDRs have essentially the same rights owned a 3.92 % interest in the Company’s char- as holders of ordinary shares in terms of attend- ter capital. At the end of 2017, the percentage of ing and voting at General Meetings of Sharehold- MegaFon’s shares in free float was 20.80 %, up ers and receiving dividends in accordance with 6.2 p.p. from the end of 2016. the applicable laws of the Russian Federation. 190 Securities Securities 191

MegaFon Shareholders as at 31 December 2017 Presence on Stock Exchanges

USM Group Gazprombank MegaFon Investments Free float Group (Cyprus Limited) MegaFon’s GDRs are listed on the London Stock its ordinary shares are included in the Moscow Exchange. MegaFon’s ordinary shares are listed Exchange Index (known until December 2017 as on the Moscow Exchange and are included in its the MICEX Index), the Moscow Exchange Broad highest (Level I) Quotation List. MegaFon’s GDRs Market Index, and the Moscow Exchange Tele- are included in the FTSE Russia IOB Index and coms Index.

56.32 % 18.96 % 3.92 % 100 % 20.80 % Summary of MegaFon GDR listing information

EXCHANGE LONDON STOCK EXCHANGE (LSE)

Market Main Market

Listing category Standard GDRs

Admission to trading / listing date 03 December 2012

Stock ticker symbol MFON

Conversion ratio 1 GDR represents 1 ordinary share

Index inclusion FTSE Russia IOB Holdings in MegaFon as at 31 December 2017

Performance of MegaFon’s GDRs MegaFon, MSCI Russia Index, rebased SHAREHOLDER HOLDING, TOTAL, % ORDINARY SHARES, % GDRs, % in 2017, US$ GDRs to the price of GDRs

USM Group 56.32 56.32 0.0

Gazprombank Group 18.96 18.96 0.0 12 MegaFon Investments (Cyprus Limited) 3.92 0.0 3.92

Free float 20.80 8.58 12.22 11 % Total 100.00 83.86 16.14 0.3 10

9 2.1 % 8

7 jan feb mar apr may jun jul aug sep oct nov dec

Source: Bloomberg. 192 Securities Securities 193

Trading Statistics for MegaFon’s GDRs on the London Stock Exchange Trading Statistics for MegaFon’s Ordinary Shares in 2017 on the Moscow Exchange in 2017

Average daily trading volume, US$ m 7.6 Average daily trading volume, RUB m 1 180.1 Average daily trading volume, GDRs traded 723,235 Average daily trading volume, shares traded 309,070 52-week high, US$ 12.1 Average number of trades per day 3,255 52-week low, US$ 9.16 52-week high, RUB 673.5 Period-end price, US$ 9.25 52-week low, RUB 512.9 Period-end market capitalisation, US$ m 5,735 Period-end price, RUB 512.9

Source: Bloomberg Period-end market capitalisation, RUB bn 318.0

Summary of MegaFon’s ordinary shares listing on the Moscow Exchange Source: Bloomberg

EXCHANGE MOSCOW EXCHANGE

Performance of MegaFon GDRs, ordi- MegaFon, ordinary MegaFon, US$ / Listing level First Level Quotation List nary shares and US$/RUB exchange shares GDRs RUB Security type/category Ordinary share rate in 2017, rebased to BoP, % Trading start date 28 November 2012

Stock ticker symbol MFON Par value, RUB 0.10 25% 6.7p. p. Moscow Exchange Index (until December 2017 the MICEX Index), 20% Index inclusion Moscow Exchange Broad Market Index, Moscow Exchange 15% Telecoms Index 2.1 p. p. 10%

5% Performance of MegaFon’s ordinary MegaFon, ordinary Moscow Exchange Index, 0 shares in 2017, RUB shares rebased to an ordinary share price -5%

700 -10%

-15% 11.5 p. p. 650 -20%

-25% jan feb mar apr may jun jul aug sep oct nov dec 600 5.5 %

550 Source: Bloomberg

500 11.5 % 450 1. Excluding the trading session on 03 October 2017 following the placement by Telia Company of approximately 6.2 % of jan feb mar apr may jun jul aug sep oct nov dec its shares in MegaFon via an accelerated book building process on the Moscow Exchange. The trading volume exceeded RUB 6.0bn that day. Including the 03 October 2017 average daily trading volume reached RUB 203.5m or 348,014 Source: Bloomberg shares traded, and the average number of trades per day constituted 3,622. 194 Securities Securities 195

Dividends Bonds

At the end of 2017, three issues of MegaFon’s First Russian bond exchange-traded bonds (series BО-001R-01, issuer to use block- BО-001R-02 and BО-001R-03) and two bond issues of MegaFon Finance LLC, a 100 % subsidiary chain of MegaFon (series 06 and 07), were outstanding.

In April 2017, MegaFon Finance LLC redeemed On 29 September 2017, at par value the 67 series 05 bonds that re- MegaFon, National Settle- mained outstanding. Previously, in 2014 and 2016, ment Depository and Raif- MegaFon Finance LLC had purchased a total of feisenbank completed the 9,999,933 series 05 bonds at par value pursuant to mandatory put options exercised by the holders. first Russian and one of The payment of dividends is approved the first global bond place- by the General Meeting of Shareholders In October 2017, MegaFon redeemed in full and ments using blockchain. prior to maturity its series BO-05 bonds for the The RUB 500m issue was A Dividend Policy intend- based upon recommendations made by aggregate amount of RUB 15bn as permitted pur- purchased by Raiffeisen- ed to set parameters for suant to the bond documentation. bank and was repaid in the recommendations to the Board of Directors. be made by the Board of Also in October 2017, MegaFon placed a princi- full on 22 December 2017. Directors to the General Meeting of Shareholders regarding the MegaFon’s 2017 Dividend Policy pal amount of RUB 15bn of its series BО-001R-03 payment of dividends was adopted in connection with the 2012 IPO bonds at a coupon rate of 7.85 % p.a. – at the time The deal was structured to give and was revised in May 2017. the lowest rate ever for MegaFon’s public debt the issuer, central depository instruments and the lowest rate for the Russian and investors access to a de- In 2017 the annual General Meeting of Shareholders, at its meeting corporate bond market since 2014. The bonds centralised platform where set- held on 30 June 2017, resolved to distribute dividends based on the mature on 03 October 2022. The bonds were is- tlements are made. Company’s results for FY 2016 in the amount of RUB 19,995,000,000 sued under MegaFon’s exchange-traded bonds (or RUB 32.25 per ordinary share or GDR), and payment of such programme which authorises the issue of bonds This project proved the value dividends was completed in August 2017. with a total par value of up to RUB 80bn and was of the new technology to the registered by the Moscow Exchange in April 2016. bond market by providing high- The proceeds from the bonds were used to refi- er speed, safety, and reliabil- History of dividend payment nance the Company’s existing liabilities and for ity in executing transactions general corporate purposes. relating to bonds, as well as lower costs. The project also suc- REPORTING PERIOD 2013 2014 2015 2016 2017 During 2017, in line with general trends in the Rus- cessfully resolved the issues of sian bond market, the yield of MegaFon’s bonds maintaining the confidentiality Total dividends paid out in fell. These changes reflected the lower cost of debt of records regarding securities 40.0 40.0 50.0 50.0 20.0 the calendar year, RUB bn financing after the key rate of the Central Bank and of ensuring compliance with the requirements of Rus- Dividends per share, RUB 64.51 64.51 80.64 80.63 32.25 of the Russian Federation was cut several times in 2017, as well as higher liquidity in the market. sian regulations for the securities market.

In March 2018, the Board of Directors determined that it would not be recommending the declaration of dividends to the General Meeting of Shareholders in 2018. 196 Securities Securities 197

Rouble-Denominated Bond Issues Outstanding in 2017 Credit Ratings

MEGAFON MEGAFON MEGAFON PJSC PJSC PJSC PJSC ISSUER FINANCE LLC FINANCE LLC FINANCE LLC MEGAFON MEGAFON MEGAFON MEGAFON

Series Series BО- Series BО- Series BО- BO-05 001R-01 001R-02 001R-03 Issue number Series 05 1 Series 06 2 Series 07 3 exchange- exchange- exchange- exchange- traded traded traded traded bonds bonds 4 bonds bonds

Coupons 1–4: 8.05 % Coupon, % per Coupons Coupons Coupons Coupons 9.95 % 9.90 % 7.85 % CREDIT RATING VALUE OUTLOOK REVIEW DATE annum 5–7: 9.85 % 1–10: 8.00 % 1–10: 8.00 % 1–4: 11.40 % Coupons 8–9: 0.10 % S&P Global Ratings Long-term foreign currency rating BBB- Stable 19/09/2017 Coupon period 182 days 182 days 182 days 182 days 182 days 91 days 182 days Long-term local currency rating BBB- Stable 20/09/2016

Issue size, RUB 10 bn 10 bn 10 bn 15 bn 10 bn 10 bn 10 bn Moody’s

Long-term credit rating Ba1 Positive 29/01/2018 Placement date 11/10/2012 13/03/2013 13/03/2013 23/10/2015 12/05/2016 10/06/2016 09/10/2017 ACRA Maturity / put 06/04/2017 07/03/2018 07/03/2018 20/10/2017 09/05/2019 29/05/2026 03/10/2022 Issuer: MegaFon AA(RU) Stable 21/09/2017 option date Bond issue by MegaFon, Series BO-001R-03 AA(RU) — 09/10/2017 June 2021 Call option date — — — — — — June 2023

4В02-01- 4В02-02- 4B02-03- State registration 4-05- 4-06- 4-07- 4B02-05- 00822-J- 00822-J- 00822-J- number 36027-R 36027-R 36027-R 00822-J MegaFon enjoys credit ratings equivalent to the In September 2017, ACRA, a Russian rating agency, 001Р 001Р 001P sovereign credit rating of Russia, which enables assigned MegaFon its AA (RU) rating with a ‘Stable’ it to borrow under the best conditions available outlook, one of the highest rankings for companies RU000A0J RU000A0J RU000A0J RU000A0J RU000A0J RU000A0J RU000A0Z on the market. with no government shareholding. ACRA’s decision ISIN code T4G6 TR98 TRA9 VVB5 WGG3 WKA8 YC98 was driven by its recognition of such factors as In September 2017, S&P Global upgraded its for- the scale of the Company’s operations, high mar- eign currency rating to BBB–, outlook ‘Stable’, gins, strong market position, ample liquidity and which is among the highest ratings assigned to high corporate governance standards. Under the Russian corporate borrowers. This upgrade was applicable Russian legislation, this rating allows a recognition of the Company’s ability to meet MegaFon to maintain relations with the widest its foreign currency obligations even in a difficult investor base available in Russia. macro-economic environment. 1. On 14 October 2014, 12 April 2016, and 11 October 2016, MegaFon Finance LLC purchased a total of 9,999,993 bonds In January 2018, Moody’s affirmed its long-term under mandatory put options for a total amount of RUB 9,999,933,000 in aggregate. On 06 April 2017, the entire series At the same time, S&P Global affirmed the Com- credit rating assigned to MegaFon at Ba1, upgrad- 05 issue was redeemed prior to maturity. pany’s rating for obligations denominated in the ing its outlook from ‘Stable’ to ‘Positive’ following 2. On 07 March 2018, the end date of coupon period ten and pursuant to the bond documentation, MegaFon Finance LLC national currency at BBB–, outlook ‘Stable’, to re- a similar upgrade of the outlook for Russia’s sov- redeemed the entire series 06 issue prior to maturity for a total payment of RUB 10bn. flect MegaFon’s steadily improving competitive ereign rating. 3. On 07 March 2018, the end date of coupon period ten and pursuant to the bond documentation, MegaFon Finance LLC position in mobile data, driven by the premium redeemed the entire series 07 issue prior to maturity for a total payment of RUB 10bn. quality of its 3G network, its competitive edge in 4. On 20 October 2017, the end date of coupon period four, MegaFon redeemed the entire series BO-05 issue prior to ma- bandwidth and 4G, its improved operational pro- turity for a total payment of RUB 15bn. file, and a conservative financial policy. 198 Securities Securities 199

We follow a practice of issuing press releases Investor Day Investor covering our financial results and other matters in London of importance and making the Company’s top Relations managers available through conference calls and meetings. On 25 May, we held a To gain better insight into investor sentiment to- MegaFon Investor Day in wards the Company, MegaFon organises regular London where MegaFon’s independent investor perception studies and ap- executives shared their vi- plies their results to enhance its interaction with sion on the telecoms mar- investors. We also undertake regular research to ket trends in Russia and identify our shareholder base, using the results to improve relationships with our current share- unveiled the new devel- holders as well as investor targeting. opment strategy of the Company.

Free Float in 2017 1 The executives also discussed MegaFon tries consistently to make its opera- matters such as the competitive tions more transparent and maintains strong re- environment, MegaFon’s mar- Events held for analysts lations with its shareholders, investors and other ket position, and various oper- and investors as part of our 7.3 % 0.8% stakeholders. In our operations, we adhere to the ational issues, including mobile regular financial disclosures principles of transparency and accessibility of Other Russia network expansion and develop- information, as required by the applicable Rus- 24.9 % 27.0 % ment of the digital products portfolio. The Q1 results were sian, UK and EU legislation regarding mandatory UK and Continen- disclosure of information by public companies. At >15 Ireland tal Europe also presented at the meeting. the same time, we endeavour to learn from the The Investor Day was well sup- experience of leading-edge international compa- events ported and participants expres- By geography nies and strive to consistently implement the best sed their appreciation for the practices applicable to disclosure and external event and the information pro- communications. vided. Meetings 1 held with analysts and investors 40.0 % In 2017, we continued to maintain an active dia- The Investor Day proceedings North were also shared with our em- logue with existing and prospective investors and America analysts through both regular financial disclo- ployees across Russia by video sures and direct communication at various ven- >100 conference links and several thousand were able to watch ues, including investment conferences and forums. MegaFon’s Investor Relations Department is run the presentation broadcast In late May, we held an Investor Day in London meetings by professionals with extensive experience in In- live on large screens installed followed by a roadshow. Last year, we also held vestor Relations and an in-depth knowledge of in various conference rooms. multiple group and one-on-one investor meetings finance and communications. According to a per- both at conferences and at the Company’s Mos- ception study conducted by an independent pro- cow office and arranged for visits to MegaFon’s vider in 2017 the international investor community retail stores. was highly appreciative of for the efforts of the The Investor Day materials Company’s IR team, highlighting their skills and Matters of interest to investors in 2017 included: Investor Day commitment to open communication, high availa- the Company’s revenue and OIBDA growth out- in London bility and responsiveness, thorough knowledge of looks, CAPEX guidance for 2018, future dividend MegaFon’s business and ability to put across the payouts, 5G expansion, synergy with Mail.Ru, the Company’s positions and viewpoints clearly. The new tariff line ‘Vklyuchaisya!’ (‘Connect!’), pro- 25 May team’s rating from the survey was considerably gress on the Company’s new strategy, and the above the average score for Russian companies competitive environment and many others. 2017 and is close to the best international ratings.

1. Including group meetings, one-on-one meetings, conference calls, and on-site visits to MegaFon. 1. Data as at 31 December 2017. 200 Securities

Information Disclosure

The Company publishes its Corporate Action No- Key legal and regulatory requirements governing tices: the Company’s disclosure obligations include:

•• on the website of the London Stock •• Federal Law No. 208-FZ On Joint-Stock Exchange via its RNS communication Companies. channel; •• Federal Law No. 39-FZ On Securities •• through Morningstar’s services; markets. •• on the website of Interfax, an authorised •• Disclosure and Transparency Rules of the Russian disclosure agency, Financial Conduct Authority (UK). at e-disclosure.ru; •• Listing Rules of Moscow Exchange. •• on the official corporate website •• Listing Rules of the London Stock Exchange. in the For Investors section at corp.megafon.ru/investoram. •• EU’s Market Abuse Regulation (MAR).

Corporate Action Notices and materials for For each fiscal year ending 31 December, we pub- general meetings of shareholders are upload- lish audited consolidated financial statements ed to the UK’s National Storage Mechanism at prepared in accordance with IFRS. MegaFon also morning-star.co.uk/uk/NSM. provides unaudited consolidated financial statements under IFRS at the end of the first, second and third fiscal quarters.

Investor materials, including presentations and reports Analyst Coverage 2017 was a very eventful year both for MegaFon and the entire telecommunications industry.

MegaFon is covered by analysts at leading inter- Information on the analysts covering the Com- Our new digital growth strategy, changes in our ownership Dmitry Kononov, national and Russian banks. As at the end of 2017, pany’s ordinary shares and GDRs and publishing structure, new trends emerging in the industry, and other Director for Investor developments have generated heightened interest among ordinary shares and GDRs of MegaFon were regu- reports on the Company’s business is available on Relations and M&A larly covered by analysts at 21 investment banks. the Company’s website in the Analyst Coverage investors and required highly proactive investor communi- section (megafon.com/investors/stock_and_cap- cations. ital/analyst_coverage). A corporate highlight of 2017 was an Investor Day, held for the first time since the Company’s IPO in 2012, with our management and IR presenting MegaFon’s new development strategy to both shareholders and analysts. The Investor Day was held in London and attended by over 90 investors. Appendix

Directors’ Responsibility Statement 204

Consolidated Financial Statements 206

Material Topics and Materiality Matrix 278

Glossary 286

Disclaimer 288

Contacts 289 Directors’ Responsibility Statement 205 Directors’ Responsibility

Statement The Directors are responsible for preparing annual accounts for each of the financial years of the Company, and to ensure that they present fairly, in all material respects, the assets, liabilities, financial position and profit or loss of the Company.

The Board of MegaFon confirms that to the best of its knowledge:

1. The consolidated financial statements, prepared in accordance with International Financial Reporting Standards as of 31 December 2017 and 2016, and also for the years ended on those dates, including the consolidated statements of financial position, consolidated statements of comprehensive income, cash flows, changes in equity and notes to the consolidated financial statements, present fairly, in all material respects, the state of affairs of MegaFon in accordance with International Financial Reporting Standards.

2. The Business Review contained in MegaFon’s Annual Report for 2017 gives a fair view of the performance of the business, and specifically the operational results of MegaFon, of its efforts to meet its strategic objectives, and of the risks and uncertainties faced by the business, as well as other events which in the near future may have an impact on the operations of the Company.

On behalf of the Board

Vladimir Streshinsky, Chairman of the Board Consolidated financial statements 207 Consolidated Contents financial statements Independent auditors’ report 208 2.5 Earnings per share 233

Consolidated income statement 216 3 ASSETS AND LIABILITIES 234

Consolidated statement of other 3.1 Property and equipment 234 comprehensive income 217 3.2 Intangible assets 237 Consolidated statement of financial position 218 3.3 Investments in associates and joint ventures 242 Consolidated statement of changes in equity 220 3.4 Financial assets and liabilities 246

Consolidated statement of cash flows 222 3.5 Trade and other receivables 256

Notes to the consolidated financial 3.6 Inventory 257 statements 224 3.7 Non-financial assets and liabilities 257 1 GENERAL 224 3.8 Provisions 258 1.1 About the Company 224 4 EQUITY 259 1.2 Basis of preparation 224 5 ADDITIONAL NOTES 260 1.3 Basis of consolidation 225 5.1 Share-based compensation 260 1.4 Significant accounting judgments, estimates and assumptions 225 5.2 Related parties 262

1.5 Significant accounting policies 226 5.3 Business combinations 264

1.6 Standards issued but not yet 5.4 Financial risk management 266 effective 226 5.5 Group information 270 2 INCOME STATEMENT 228 5.6 Segment information 271 2.1 Revenue 228 5.7 Non-controlling interest 273 2.2 Sales and marketing expenses 230 5.8 Commitments, contingencies 2.3 General and administrative expenses 230 and uncertainties 274

For the year ended 31 December 2017 2.4 Income taxes 230 5.9 Events after the reporting date 277 208 Consolidated financial statements Consolidated financial statements 209

Independent THE KEY AUDIT MATTER HOW THE MATTER WAS ADDRESSED IN OUR AUDIT Auditors’ Report Revenue recognition — technical complexity Please refer to the Note 2.1 in the consolidated financial statements.

Revenue is a material amount Our audit procedures included an assessment of the Group’s policies consisting of a high volume of and controls in place over the IT system environment to determine To the Board of Directors individually low value trans- their effectiveness in preventing and/or detecting revenue-related and Shareholders of PJSC MegaFon actions. There are a number data distortion or loss. of complex IT systems used to process revenue-related We performed the following key audit procedures: data and the Group relies on the output of these IT sys- • we tested how often back-ups were taken and inspected the OPINION BASIS FOR OPINION KEY AUDIT MATTERS tems. server rooms to ensure appropriate physical safeguards were in place; We have audited the consoli- We conducted our audit in ac- Key audit matters are those The major risks of distortion • we tested that only authorised access can be made to the sys- dated financial statements of cordance with International matters that, in our profes- of revenue arise from: tems by inspecting approved access requests for compliance PJSC MegaFon (the ‘Compa- Standards on Auditing (ISAs). sional judgment, were of most with the internal policy; ny’) and its subsidiaries (the Our responsibilities under tho- significance in our audit of the • the capture, processing ‘Group’), which comprise the se standards are further descri- consolidated financial state- and transfer of data on • we tested that only authorised system program changes can be consolidated statement of fi- bed in the Auditors’ Responsi- ments of the current period. the parameters of services made, and that these authorised changes were appropriately nancial position as at 31 De- bilities for the Audit of the Con- These matters were addressed between the switching made, by inspecting documentation relating to the testing of cember 2017, the consolidated solidated Financial Statements in the context of our audit of equipment, billing system these changes before implementation; income statement, and the re- section of our report. We are the consolidated financial and accounting system; • for new tariffs introduced in the year we inspected documenta- lated statement of other com- independent of the Group in statements as a whole, and in and tion relating to the application of the new tariffs in ‘test’ mode prehensive income, changes in accordance with the indepen- forming our opinion thereon, before going ‘live’ in the commercial operation; equity and cash flows for the dence requirements that are and we do not provide a sepa- • the correct application year then ended, and notes, relevant to our audit of the con- rate opinion on these matters. of the tariffs, as these con- • we inspected the data processing on parameters of services from comprising significant account- solidated financial statements tinuously change during initial capture of data by the switching equipment and further ing policies and other explana- in the Russian Federation and the year. transfer of data to the billing system by tracing a number of tory information. with the International Ethics connection entries. Further, we inspected the Group’s end-to-end Standards Board for Accoun- revenue reconciliations between the data in the billing system In our opinion, the accompa- tants’ Code of Ethics for Pro- Audited entity: PJSC MegaFon and the accounting system; nying consolidated financial fessional Accountants (IESBA Registration No. in the Unified State Register of Legal Entities • we tested that valid metrology certificates were issued by ap- statements present fairly, in all Code), and we have fulfilled our 1027809169585, Moscow. Russia propriately specialized organisations for the switching equipment material respects, the consoli- other ethical responsibilities in Independent auditor: JSC ‘KPMG’, and billing system; dated financial position of the accordance with the require- a company incorporated under the • we recalculated the amounts billed to subscribers on a sample Group as at 31 December 2017, ments in the Russian Federation Laws of the Russian Federation, and its consolidated financial and the IESBA Code. We believe a member firm of the KPMG network basis by multiplying the parameters of services rendered and performance and its consoli- that the audit evidence we have of independent member firms the appropriate tariffs; dated cash flows for the year obtained is sufficient and ap- affiliated with KPMG International Cooperative (‘KPMG International’), • we reconciled the data on subscribers’ payments taken from then ended in accordance with propriate to provide a basis for a Swiss entity. the payment agents’ confirmations with the relevant amounts International Financial Report- our opinion. Registration No. in the Unified in the billing system. ing Standards (IFRS). State Register of Legal Entities 1027700125628. In all of the procedures listed above we involved our own IT spe- Member of the Self-regulated orga- cialists. nization of auditors ‘Russian Union of auditors’ (Association). The Principal We also performed other analytical procedures to check that Registration Number of the Entry in the trends in revenue by type of service were in line with our un- the Register of Auditors and Audit derstanding of the Group’s business and the wider industry. Organisations: No. 11603053203. 210 Consolidated financial statements Consolidated financial statements 211

THE KEY AUDIT MATTER HOW THE MATTER WAS ADDRESSED IN OUR AUDIT THE KEY AUDIT MATTER HOW THE MATTER WAS ADDRESSED IN OUR AUDIT

Goodwill impairment testing — cash generating unit ‘Broadband internet’ Impairment testing of investment in joint venture Euroset Please refer to the Note 3.2.3 in the consolidated financial statements. Please refer to the Note 3.3 in the consolidated financial statements.

Part of the Group’s goodwill We tested two of the methods applied by the Group to determine During 2017, the Group sepa- We involved KPMG valuation specialists to assist us in testing is allocated to the ‘Broad- the CGU’s recoverable amount: value in use based on discounted rated Euroset from CGUs ‘In- the appropriateness of the Group’s methodology and key assump- band internet’ cash generat- cash flow projections and fair value based on market quotes for tegrated telecommunications tions applied to determine the recoverable amount of the investment ing unit (CGU). peer companies’ shares. services’ as a result of forth- in Euroset. coming disposal of this In addition to an annual We tested the recoverable amount under the market approach investment and has deter- We evaluated the key assumptions used by the Group in its dis- goodwill impairment test based on our own procedures — using recent actual deals over mined that there is objective counted cash flow model as follows: required by International Fi- similar companies in the industry. evidence that the investment nancial Reporting Standards, in Euroset is impaired due • we compared the historical information used in the calculations We tested the appropriateness of the Group’s methodology and key the Group identified impair- to overall margin decrease with the financial statements of Euroset for the previous reporting assumptions applied to determine the recoverable amount of the ment indications in respect of in the Russian mobile retail periods; CGU based on the discounted cash flow model. the ‘Broadband internet’ CGU market, which has adversely • we compared the forecast data on the rate of revenue growth at 31 December 2017. impacted the profitability We evaluated the key assumptions used by the Group in the model with the average annual historical sales level and the growth rate of Euroset. The Group uses a number as follows: of the population in the forecast period, obtained from external of methods to determine sources; • we assessed the historical forecasting accuracy for average rev- Thus, separate impairment the recoverable amount testing of investment was enue per user (ARPU), market share, and operating and capital • we estimated the reasonableness of the market rate of the com- of the CGU. performed by management. expenditures (capex); mission for connection by comparing the rate used in the model Impairment testing is complex Impairment testing is complex with average rates on the market, based on the Group’s con- and based on highly judg- • we compared forecasted ARPU, and capex to revenue and OIBDA tracts with independent dealers. margin ratios to external market data and consensus forecasts; and based on highly judg- mental assumptions. mental assumptions. we assessed the appropriateness of the market share forecast We performed our own sensitivity analysis and assessed the impact based on analysts’ expectations of the subscribers’ growth rate; of changes in key assumptions which we consider reasonably possible based on our industry knowledge. • we compared the first forecast year in the model to the Group’s approved budget for 2018. We assessed whether the related disclosures in the consolidated financial statements are appropriate. We performed our own sensitivity analysis and assessed the impact of changes in key assumptions which we consider reasonably possible based on our industry knowledge.

In all of the procedures listed above we involved KPMG valuation specialists.

We assessed whether the related disclosures in the consolidated financial statements are appropriate. 212 Consolidated financial statements Consolidated financial statements 213

THE KEY AUDIT MATTER HOW THE MATTER WAS ADDRESSED IN OUR AUDIT OTHER AUDITORS’ INFORMATION RESPONSIBILITIES FOR THE AUDIT OF THE Business combination — purchase price allocation Management is responsible for the other infor- CONSOLIDATED FINANCIAL mation. The other information comprises the in- STATEMENTS Please refer to the Note 5.3 in the consolidated financial statements. formation included in the Annual Report other than the consolidated financial statements and Our objectives are to obtain reasonable assur- our auditors’ report thereon. ance about whether the consolidated financial On 9 February 2017 the Group Our audit procedures included the following: statements as a whole are free from material mis- completed the acquisition The Annual Report is expected to be made avail- statement, whether due to fraud or error, and to of the shares in Mail.ru Group We assessed professional competence of the qualified independent able to us after the date of this auditors’ report. issue an auditors’ report that includes our opinion. Limited. The transaction had appraiser, which was engaged by the Group. Our opinion on the consolidated financial state- Reasonable assurance is a high level of assurance, a material impact on consoli- ments does not cover the other information and but is not a guarantee that an audit conducted in dated financial statements. We inspected the purchase agreement and compared the consid- we will not express any form of assurance con- accordance with ISAs will always detect a material eration due and payment terms to the management’s calculations. clusion thereon. misstatement when it exists. The Group accounted for the We involved KPMG valuation specialists to assist us in testing acquisition in accordance In connection with our audit of the consolidated Misstatements can arise from fraud or error and the appropriateness of the Group’s methodology and key assump- with IFRS 3 Business Com- financial statements, our responsibility is to read are considered material if, individually or in the tions applied to determine the fair value of assets: binations and performed the other information identified above when it aggregate, they could reasonably be expected a purchase price allocation. • we assessed reasonableness of approaches used by indepen- becomes available and, in doing so, consider to influence the economic decisions of users tak- Determining the fair value of dent appraiser for calculation of fair values of assets acquired whether the other information is materially in- en on the basis of these consolidated financial certain assets involves signif- based on our understanding of generally accepted valuation consistent with the consolidated financial state- statements. icant inherent uncertainties methods used for similar assets on the market; ments or our knowledge obtained in the audit, or and thus requires significant otherwise appears to be materially misstated. As part of an audit in accordance with ISAs, we degree of management judg- • we compared royalty rate for brands and useful lives and churn exercise professional judgment and maintain pro- ment. The goodwill arising rates for brands and user bases applied in models to external fessional scepticism throughout the audit. We also: from the acquisition is also market data; RESPONSIBILITIES highly dependent on the fair OF MANAGEMENT AND THOSE • Identify and assess the risks of material mis- value of the identifiable as- • we compared advertising industry growth rate forecast used CHARGED WITH GOVERNANCE statement of the consolidated financial state- sets acquired. in the model to consensus forecasts; FOR THE CONSOLIDATED ments, whether due to fraud or error, design FINANCIAL STATEMENTS and perform audit procedures responsive to Therefore, testing of fair value • we compared market shares and operating expenses used those risks, and obtain audit evidence that is of assets, particularly, brands, in models to historical financial data and market growth rates Management is responsible for the preparation sufficient and appropriate to provide a basis user bases and MMO games, to external sources; and fair presentation of the consolidated finan- for our opinion. The risk of not detecting a is a key area that we concen- cial statements in accordance with IFRS, and material misstatement resulting from fraud trated on. • we assessed the reasonableness of revenue forecasts for unique for such internal control as management deter- is higher than for one resulting from error, as MMO games through corroborative discussions with manage- mines is necessary to enable the preparation fraud may involve collusion, forgery, inten- ment and specialists of the Group and through evaluation of of consolidated financial statements that are tional omissions, misrepresentations, or the projected life-cycles of MMO games for consistency; free from material misstatement, whether due override of internal control. to fraud or error. • we performed our own sensitivity analysis and assessed the • Obtain an understanding of internal control impact of changes in key assumptions which we consider rea- In preparing the consolidated financial state- relevant to the audit in order to design audit sonably possible based on our industry knowledge. ments, management is responsible for assessing procedures that are appropriate in the cir- We assessed whwether the related disclosures in the consolidated the Group’s ability to continue as a going con- cumstances, but not for the purpose of ex- financial statements are appropriate. cern, disclosing, as applicable, matters related to pressing an opinion on the effectiveness of going concern and using the going concern basis the Group’s internal control. of accounting unless management either intends to liquidate the Group or to cease operations, or • Evaluate the appropriateness of accounting has no realistic alternative but to do so. policies used and the reasonableness of accounting estimates and related disclosures Those charged with governance are responsible made by management. for overseeing the Group’s financial reporting process. • Conclude on the appropriateness of man- 214 Consolidated financial statements Consolidated financial statements 215

agement’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclo- We communicate with those charged with governance regarding, sures are inadequate, to modify our opinion. among other matters, the planned scope and timing of the audit Our conclusions are based on the audit evi- and significant audit findings, including any significant deficiencies dence obtained up to the date of our auditors’ in internal control that we identify during our audit. report. However, future events or conditions may cause the Group to cease to continue as We also provide those charged with governance with a statement a going concern. that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and • Evaluate the overall presentation, structure other matters that may reasonably be thought to bear on our inde- and content of the consolidated financial pendence, and where applicable, related safeguards. statements, including the disclosures, and From the matters communicated with those charged with gover- whether the consolidated financial statements represent the underlying transactions nance, we determine those matters that were of most significance and events in a manner that achieves fair pre- in the audit of the consolidated financial statements of the current sentation. period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes • Obtain sufficient appropriate audit evidence public disclosure about the matter or when, in extremely rare circum- regarding the financial information of the en- stances, we determine that a matter should not be communicated tities or business activities within the Group in our report because the adverse consequences of doing so would to express an opinion on the consolidated fi- reasonably be expected to outweigh the public interest benefits of nancial statements. We are responsible for the such communication. direction, supervision and performance of the group audit. We remain solely responsible for The engagement partner on the audit resulting in this independent our audit opinion. auditors’ report is:

Yerkozha Akylbek JSC ‘KPMG’ Moscow, Russia

14 March 2018 216 Consolidated financial statements Consolidated financial statements 217

Consolidated Consolidated income statement of other statement comprehensive income (In millions of Roubles, except (In millions of Roubles) per share amounts) YEARS ENDED 31 DECEMBER YEARS ENDED 31 DECEMBER

NOTE 2017 2016 NOTE 2017 2016

Revenue 2.1 373,297 316,275 Profit for the year 5,325 25,589

Operating expenses Other comprehensive income/(loss) items that may be reclassified to profit or loss in subsequent Cost of revenue 109,196 95,157 periods: Sales and marketing expenses 2.2 28,561 19,254 Foreign currency translation difference, net of tax (121) 875 General and administrative expenses 2.3 100,298 80,725 Depreciation 3.1, 3.8 57,341 51,925 Net movement on cash flow hedges, net of tax 3.4.4 152 (1,889)

Amortisation 3.2.1 17,642 7,881 Net other comprehensive income/(loss) that may be reclassified to profit or loss 31 (1,014) Goodwill impairment 3.2.3 — 3,400 in subsequent periods Loss on disposal of non-current assets 491 849 Total comprehensive income for the year, net of tax 5,356 24,575 Total operating expenses 313,529 259,191 Total comprehensive income for the year Operating profit 59,768 57,084

Finance costs (24,321) (19,094) Attributable to equity holders of the Company 4,818 24,299

Finance income 2,235 1,810 Attributable to non-controlling interest 538 276

Share of loss of associates and joint ventures 3.3 (2,205) (2,651) 5,356 24,575

Impairment loss from Euroset 3.3 (15,917) — Other non-operating expenses 5.2 (1,639) (2,906) Loss on financial instruments, net 3.4.4 (30) (235)

Foreign exchange (loss)/gain, net (3,722) 1,822

Profit before tax 14,169 35,830

Income tax expense 2.4 8,844 10,241

Profit for the year 5,325 25,589

Profit for the year

Attributable to equity holders of the Company 4,551 25,496 Attributable to non-controlling interest 774 93 5,325 25,589

Earnings per share, Roubles

Basic and diluted, profit for the year attributable 2.5 8 43 to equity holders of the Company

The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 218 Consolidated financial statements Consolidated financial statements 219

Consolidated statement of financial position (In millions of Roubles) AS OF 31 DECEMBER AS OF 31 DECEMBER

NOTE 2017 2016 NOTE 2017 2016

Assets Equity and liabilities

Non-current assets Equity

Property and equipment 3.1 220,705 237,155 Equity attributable to equity holders of the Company 4 109,773 124,166

Intangible assets, other than goodwill 3.2.1 128,140 61,295 Non-controlling interests 5.7 55,536 (43)

Goodwill 3.2.2 73,218 30,549 Total equity 165,309 124,123

Investments in associates and joint ventures 3.3 28,567 45,234 Non-current liabilities

Non-current financial assets 3.4 3,585 4,799 Loans and borrowings 3.4 212,097 195,724

Non-current non-financial assets 3.7 4,558 3,039 Other non-current financial liabilities 3.4 4,540 6,653

Deferred tax assets 2.4 3,829 1,199 Non-current non-financial liabilities 3.7 10,181 2,605

Total non-current assets 462,602 383,270 Provisions 3.8 4,378 3,888 Deferred tax liabilities 2.4 28,792 20,812 Current assets Total non-current liabilities 259,988 229,682 Inventory 3.6 10,045 9,354

Current non-financial assets 3.7 7,446 5,051 Current liabilities

Prepaid income taxes 2.4 2,586 1,992 Trade and other payables 3.4 50,535 43,581

Trade and other receivables 3.5 26,520 19,352 Loans and borrowings 3.4 52,013 39,389

Other current financial assets 3.4 16,097 10,842 Dividends payable 4 — 2,839

Cash and cash equivalents 3.4.1 36,147 31,922 Other current financial liabilities 3.4 3,853 3,538

Assets held for sale 3.1 284 — Current non-financial liabilities 3.7 29,186 18,186

Total current assets 99,125 78,513 Income taxes payable 2.4 843 445

Total assets 561,727 461,783 Total current liabilities 136,430 107,978 Total equity and liabilities 561,727 461,783

The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 220 Consolidated financial statements Consolidated financial statements 221

Consolidated statement of changes in equity (In millions of Roubles) ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

ORDINARY SHARES TREASURY SHARES

NUMBER OF NUMBER OF RETAINED OTHER CAPITAL NON-CONTROLLING NOTE AMOUNT AMOUNT CAPITAL SURPLUS TOTAL TOTAL EQUITY SHARES SHARES EARNINGS RESERVES (NOTE 4) INTERESTS

As of 01 January 2016 — 620,000,000 526 24,299,033 (17,387) 12,567 152,425 (233) 147,898 (147) 147,751

Profit for the year — — — — — — 25,496 — 25,496 93 25,589

Other comprehensive loss — — — — — — (1,197) (1,197) 183 (1,014)

Total comprehensive 25,496 (1,197) 24,299 276 24,575 income/(loss)

Dividends — — — — — (48,031) — (48,031) — (48,031)

Dividends to non-controlling interests — — — — — — — — (172) (172)

As of 31 December 2016 620,000,000 526 24,299,033 (17,387) 12,567 129,890 (1,430) 124,166 (43) 124,123

Profit for the year — — — — — 4,551 — 4,551 774 5,325

Other comprehensive income/(loss) — — — — — — 267 267 (236) 31

Total comprehensive income — — — — — 4,551 267 4,818 538 5,356

Dividends 4 — — — — — (19,211) — (19,211) — (19,211)

Dividends to non-controlling interests — — — — — — — — (172) (172)

Equity-settled share-based 5.7 — — — — — — — — 1,743 1,743 compensation

Acquisition of MGL 5.3 — — — — — — — — 54,900 54,900

Acquisition of MGL treasury shares 5.7 — — — — — — — — (1,430) (1,430)

As of 31 December 2017 620,000,000 526 24,299,033 (17,387) 12,567 115,230 (1,163) 109,773 55,536 165,309

The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 222 Consolidated financial statements Consolidated financial statements 223

Consolidated statement YEARS ENDED 31 DECEMBER of cash flows NOTE 2017 2016 Income tax paid (11,353) (8,791) (In millions of Roubles) YEARS ENDED 31 DECEMBER Net cash flows from operating activities 133,862 102,958

Investing activities NOTE 2017 2016 Purchase of property, equipment and intangible (61,748) (57,892) assets Operating activities Proceeds from sale of property and equipment 465 709 Profit before tax 14,169 35,830 Acquisition of subsidiaries, net of cash acquired 5.3 (40,136) (62) Adjustments to reconcile profit before tax to net cash flows: Proceeds from disposal of subsidiaries, net of cash (43) — disposed Depreciation 3.1, 3.8 57,341 51,925 Payment of deferred and contingent consideration (1,444) (2,421) Amortisation 3.2.1 17,642 7,881 Purchase of interests in associates (823) — Goodwill impairment 3.2.3 — 3,400 Net change in short-term deposits (2,743) 12,461 Loss on disposal of non-current assets 491 849 Net change in other deposits 247 401

Loss on financial instruments, net 3.4.4 30 235 Loans granted (56) (3,388)

Foreign exchange loss/(gain), net 3,722 (1,822) Repayments of loans granted 890 —

Share of loss of associates and joint ventures 3.3 2,205 2,651 Interest received 2,152 1,152

Impairment loss from Euroset 3.3 15,917 — Dividends received from associates 18 —

Change in impairment allowance for receivables and Net cash flows used in investing activities (103,221) (49,040) 2,680 2,528 other non-financial assets Financing activities Finance costs 24,321 19,094 Proceeds from borrowings, net of fees paid 127,626 125,581

Finance income (2,235) (1,810) Repayment of borrowings (104,134) (97,077)

Equity-settled share-based compensation 5.1 1,743 — Interest paid, net of interest capitalised (24,588) (19,219)

Other non-cash items 58 — Dividends paid to equity holders of the Company 4 (22,050) (45,192)

Working capital adjustments: Dividends paid to non-controlling interests (172) (172)

Increase in inventory (665) (669) Acquisition of MGL treasury shares (1,430) —

Increase in trade and other receivables (4,687) (2,288) Finance lease payments (33) (27)

Decrease in current non-financial assets 186 2,055 Net cash flows used in financing activities (24,781) (36,106)

Increase/(decrease) in trade and other payables 4,774 (6,315) Net increase in cash and cash equivalents 5,860 17,812

Increase/(decrease) in current non-financial liabilities 6,617 (812) Net foreign exchange difference (1,635) (3,339)

Change in VAT, net 880 (1,002) Cash and cash equivalents at beginning of year 31,922 17,449

Income tax refunded 26 19 Cash and cash equivalents at end of year 3.4.1 36,147 31,922

The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 224 Consolidated financial statements Consolidated financial statements 225

The functional currency of CJSC ‘TT mobile’, the actions between members of the Group are elim- Notes to the consolidated Company’s 75 % owned subsidiary in Tajikistan, is inated in full on consolidation. the US dollar as a majority of its revenues, costs, property and equipment purchases, debt and financial statements trade liabilities is either priced, incurred, payable 1.4 SIGNIFICANT ACCOUNTING JUDG- or otherwise measured in US dollars. MENTS, ESTIMATES AND ASSUMP- TIONS Foreign currency transactions are translated into the functional currency using the exchange rates The preparation of these consolidated financial prevailing at the dates of the transactions or fair statements required management to make judg- value measurement where items are re-mea- ments, estimates and assumptions that affect the sured to their fair value. Foreign exchange gains amounts reported in the consolidated statement and losses resulting from the settlement of such of financial position, the consolidated income transactions and from the translation at year-end statement, the consolidated statement of other exchange rates of monetary assets and liabilities comprehensive income and the accompanying denominated in foreign currencies are recognised disclosures. Subsequent revisions or corrections 1 General owned by USM group, which is an indirect con- in the ‘Foreign exchange gain/(loss), net’ line in made to these assumptions and estimates hereaf- trolling shareholder. In October and November profit or loss. ter could result in outcomes that require a materi- 2017 Telia Company, a publicly owned Swedish al adjustment to the carrying amount of affected 1.1 ABOUT THE COMPANY company, disposed of its entire stake in the Com- The assets and liabilities of foreign operations are assets or liabilities in future periods. pany by selling an approximately 19 % interest in translated into Roubles at the rate of exchange Public Joint Stock Company MegaFon (‘MegaFon’, the Company to JSC Gazprombank, which is a prevailing on the reporting date and the state- In the process of applying the Group’s accounting the ‘Company’ and, together with its consolidated major banking institution in the Russian Federa- ments of comprehensive income are translated at policies, management has made various judg- subsidiaries, the ‘Group’) is a company incorpo- tion, and an approximately 6 % interest to various the exchange rates prevailing on the dates of the ments. Those which management has assessed to rated under the laws of the Russian Federation institutional investors. transactions. The exchange differences arising on have the most significant effect on the amounts (‘Russia’) and registered in the Unified State Regis- the translation are recognised in other compre- recognised in the consolidated financial state- ter of Legal Entities under number 1027809169585. hensive income (‘OCI’). ments have been discussed in the individual notes Its registered office is at 41 Oruzheyniy lane, Mos- 1.2 BASIS OF PREPARATION for the related financial statement line items: cow, 127006, Russian Federation. revenue, income taxes, property and equipment, These consolidated financial statements have 1.3 BASIS OF CONSOLIDATION intangible assets, investments in associates and MegaFon is a leading provider of integrated di- been prepared in accordance with International joint ventures, financial assets and liabilities, pro- gital communications in Russia and offers a broad Financial Reporting Standards (‘IFRS’) as issued The consolidated financial statements comprise visions, share-based compensation, and business range of voice, data and other telecommunication by the International Accounting Standards Board the financial statements of the Company and its combinations. services to retail customers, businesses, govern- (‘IASB’). subsidiaries as of 31 December 2017. ment clients and other telecommunication ser- The key assumptions concerning the future and vices providers. The consolidated financial statements have been Subsidiaries are consolidated from the date of other key sources of estimation uncertainty at prepared on a historical cost basis, unless dis- acquisition, being the date on which the Group the reporting date, that have a significant risk MegaFon lists its ordinary shares on the Moscow closed otherwise. The consolidated financial obtains control, and continue to be consolidat- of causing a material adjustment to the carrying Exchange and its ordinary shares represented statements are presented in millions of Roubles, ed until the date when such control ceases. The amounts of assets and liabilities within the next by Global Depositary Receipts, or GDRs, on the except for per share amounts which are in Rou- financial statements of the subsidiaries are pre- financial year, are also described in the individual London Stock Exchange, in each case under the bles, unless otherwise indicated. pared for the same reporting period as the parent notes for the related financial statement line items symbol ‘MFON’. company, using consistent accounting policies. below. The Group based its assumptions and esti- The consolidated financial statements were au- mates on the information available to it when the On 09 February 2017 MegaFon completed the thorised for issue by the Company’s Chief Exe- consolidated financial statements were prepared. acquisition of 15.2 % of the shares, represent- cutive Officer (‘CEO’) and Chief Accountant on Existing circumstances and assumptions about ing 63.8 % of the voting rights, of Mail.Ru Group 14 March 2018. Profit or loss and each component of OCI are future developments, however, may change due Limited (‘MGL’), which is a leading company in attributed to the equity holders of the Company to market changes or circumstances arising that the Russian-speaking internet market. The Group —— Foreign currency translation and to the non-controlling interests, even if this are beyond the control of the Group. Such chang- consolidated MGL starting from the beginning of results in the non-controlling interests having a es are reflected in the assumptions when they 2017 (Note 5.3). The Group’s consolidated financial statements are deficit balance. occur. presented in Roubles, which is also the functional As of 31 December 2017, the Group is primarily currency of MegaFon and its principal subsidiaries. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to trans- 226 Consolidated financial statements Consolidated financial statements 227

1.5 SIGNIFICANT ACCOUNTING POLI- dards: International Accounting Standards (‘IAS’) The Group will adopt IFRS 9 from 01 January The amendments are effective for annual periods CIES 18, Revenue, IAS 11, Construction Contracts, In- 2018. The Group does not expect a significant beginning on or after 1 January 2018. The Group ternational Financial Reporting Interpretations impact on its consolidated financial statements will adopt them from that date. The amendments The significant accounting policies have been Committee (‘IFRIC’) Interpretation 13, Customer from implementation of the Standard. are not expected to have any impact on the discussed in the individual notes for the related Loyalty Programmes, IFRIC 15, Agreements Group’s consolidated financial statements. financial statement line items. for the Construction of Real Estate, IFRIC 18, During 2017 the IASB issued an amendment to Transfers of Assets from Customers, and SIC- IFRS 9, Prepayment Features with Negative —— Transfers of Investment Proper- —— Changes in accounting policies 31, Revenue – Barter Transactions Involving Compensation. The amendment introduces ty – Amendments to IAS 40 and disclosures Advertising Services. some narrow-scope changes to measurement of particular prepayable financial assets with In December 2016 the IASB issued Transfers of During 2017 the Group applied the following The core principle of the Standard is that an enti- so-called negative compensation. It is effective Investment Property – Amendments to IAS amendments to accounting standards for the ty should recognise revenue to depict the transfer from 01 January 2019, with early application 40, which clarifies that an entity shall transfer a first time: of promised goods or services to customers in an permitted. The amendments do not impact the property to, or from, investment property when, amount that reflects the consideration to which the Group’s consolidated financial statements. and only when, there is an observable evidence —— Recognition of Deferred Tax entity expects to be entitled in exchange for those of the change in use. The amendments give ex- Assets for Unrealised Loss- goods or services. —— IFRS 16 Leases amples of the relevant evidence. In isolation, a es – Amendments to IAS 12 change in management’s intentions for the use of The Group will adopt IFRS 15 from 01 January In January 2016 the IASB issued IFRS 16, Leases, a property does not provide evidence of a change The amendments clarify how to account for de- 2018, its effective date. The Group will apply the which sets out the principles for the recognition, in use. The amendments are effective for annual ferred tax assets related to debt instruments Standard using the modified retrospective method measurement, presentation and disclosure of periods beginning on or after 01 January 2018. measured at fair value. The amendments did not which will have the cumulative effect of initially leases and replaces previous guidance on leases. The Group will adopt them from that date. The impact the Group’s consolidated financial state- applying the Standard to contracts that are not The Standard requires lessees to present right-of- amendments are not expected to have any impact ments. completed at the date of initial application (1 Janu- use assets and lease liabilities on the balance sheet on the Group’s consolidated financial statements. ary 2018) and will be recognized as an adjustment for all leases (with limited exceptions). —— Disclosure Initiative – Amend- to the opening balance of retained earnings at —— IFRIC 22 Foreign Currency Transac- ments to IAS 7 01 January 2018. The Standard is effective for annual reporting peri- tions and Advance Consideration ods beginning on or after 01 January 2019. Earlier The amendments help investors to evaluate chang- Based on the Group’s preliminary evaluation the application is permitted for entities that apply IFRS In December 2016 the IASB issued IFRIC Interpre- es in liabilities arising from financing activities, in- key impact of the transitioning to IFRS 15 will be an 15, Revenue from Contracts with Customers, at tation 22, Foreign Currency Transactions and cluding changes from cash flows and non-cash increase in customer acquisition costs assets and or before the date of initial application of IFRS 16. Advance Consideration, which clarifies IAS 21, changes. The amendments affected presentation a corresponding increase in the opening retained The Effects of Changes in Foreign Exchange and disclosure only and did not impact the Group’s earnings at 01 January 2018 of 1 to 3 billion Rou- A lessee should apply IFRS 16 to its leases either: Rates, specifying that on payment or receipt of financial position or performance. bles. With regards to internet segment the Group (a) retrospectively to each prior reporting period advance consideration, the respective asset, ex- does not expect a significant effect on profit or presented applying IAS 8; or (b) retrospectively with pense or income to which this consideration re- equity, but as a result of changes to principal ver- the cumulative effect of initially applying IFRS 16 lates should subsequently be recorded using the 1.6 STANDARDS ISSUED BUT sus agent evaluation in terms of IFRS 15, the Group recognised at the date of initial application. exchange rate as of the date the advance consid- NOT YET EFFECTIVE expects a decrease in revenue from online advertis- eration was paid or received. The Interpretation is ing, community IVAS and agent/partner fees and a The Group will adopt IFRS 16 from 01 January 2019. effective for annual periods beginning on or after The standards and interpretations that are issued corresponding decrease in costs of revenue. The Group is evaluating the possible effect of the 01 January 2018. The Interpretation has no impact and applicable to the Group, but not yet effective Standard on its consolidated financial statements. on the Group’s financial position or performance as of the date of issuance of the Group’s consol- —— IFRS 9 Financial Instruments It is planning to use the modified retrospective tran- as it does not change the way the Group has idated financial statements, are disclosed below. sition method with the cumulative effect recognised been accounting for advance consideration paid The Group intends to adopt these standards when In July 2014 the IASB completed its process to at the initial application. or received in foreign currencies. they become effective unless otherwise stated replace IAS 39, Financial Instruments: Recog- below. nition and Measurement, with the issuance —— Classification and Measurement —— IFRIC 23 Uncertainty over In- of the final amendments to IFRS 9. IFRS 9 (July of Share-based Payment Transac- come Tax Treatments —— IFRS 15 Revenue from Con- 2014) is effective for annual periods beginning tions – Amendments to IFRS 2 tracts with Customers on or after 01 January 2018. Earlier application is In June 2017, the IASB issued IFRIC 23, Uncertain- permitted. IFRS 9 is to be applied retrospectively In June 2016 the IASB issued, Classification and ty over Income Tax Treatments, which clarifies In May 2014 the IASB issued IFRS 15, Revenue in accordance with IAS 8, Accounting Policies, Measurement of Share-based Payment Trans- requirements in IAS 12 by specifying how to re- from Contracts with Customers, a comprehen- Changes in Accounting Estimates and Errors. actions – Amendments to IFRS 2, which clarifies flect the effects of uncertainty in accounting for sive revenue recognition guidance that replaces IFRS 9 is not to be applied to items that have been how to account for certain types of share-based income taxes. The Interpretation is effective for the following previous revenue recognition stan- derecognised at the date of initial application. payment transactions. annual periods beginning on or after 01 January 228 Consolidated financial statements Consolidated financial statements 229

2019. The Group does not expect the Interpre- amounts receivable for the sale of goods and of the Group’s cellular network. The awards can to determine the appropriate presentation of tation to have a material impact on the Group’s services in the ordinary course of the Group’s then be redeemed for free services, subject to a the amounts receivable from and payable to its consolidated financial statements. activities, net of value added taxes, returns and minimum number of awards being obtained. The roaming partners in its consolidated statement discounts. portion of consideration received is allocated to of financial position. Amounts of rebates earned —— Improvements to IFRSs (December 2016) the awards based on their fair value and deferred from and given to roaming partners are includ- The Group recognises revenue when the amount until the award credits are redeemed or expire. ed in trade and other receivables and payables, The amendments issued as a result of the An- of revenue can be reliably measured, when it is The Group estimates the fair value of awards to a respectively, in the accompanying consolidated nual Improvements to IFRSs 2014-2016 Cycle probable that future economic benefits will flow customer by applying a statistical analysis. Inputs statement of financial position. introduced relatively minor changes to clarify to the applicable entity and when specific criteria to the models include making assumptions about guidance in existing standards. The amendments have been met for each of the Group’s activities expected redemption rates, the mix of services Management has to make estimates relating to are effective for annual periods beginning on or as described below. The Group bases its estimate that will be available for redemption in the future revenue recognition, relying to some extent on after 01 January 2018. The Group does not expect of return on historical results, taking into consid- and customer preferences. information from other operators on the values of these amendments to have a material impact on eration the type of customer, the type of transac- services delivered. Management also makes es- the Group’s consolidated financial statements. tion and the specifics of each arrangement. b. Multiple element arrangements timates of the final outcome in instances where the other parties dispute the amounts charged. —— Long-Term Interests in Associates and —— Service revenue The Group enters into multiple element arrange- Joint Ventures - Amendments to IAS 28 ments in which a customer may purchase a com- Wireline revenue Service revenue is generally recognised when the bination of equipment (e.g. handsets) and tele- In October 2017 the IASB issued Amendments to services are rendered. communication services (e.g. airtime, data, and The Group earns wireline revenues for usage of IAS 28 clarifying that companies should account other services). The Group allocates consideration its fixed-line network, which include payments for long-term interests in an associate or joint ven- The revenue from provision of content is presented received from subscribers to the separate units from individual, corporate and government sub- ture to which the equity method is not applied, net of related costs when the Group acts as an of accounting based on their relative fair values scribers for local and long-distance telecommu- using IFRS 9. The Amendments will be effective for agent of the content providers while gross rev- but not exceeding the contractual consideration. nications and data transfer services. Charges annual periods beginning on or after 1 January enues and related costs are recorded when the Revenues allocated to the delivered equipment are based upon usage (e.g., minutes of traffic 2019. The Group does not expect these amend- Group is the primary obligor in the arrangement. and related costs are recognised in the accom- processed), period of time (e.g., monthly service ments to have a material impact on the Group’s The reporting of revenue on a net versus gross panying consolidated income statement at the fees) or other established fee schedules. Wireline consolidated financial statements. basis, depending on an analysis of the Group’s time of sale provided that other conditions for revenues also include interconnection charges involvement as either principal or agent, involves revenue recognition are met. Amounts allocated from wireless and wireline operators for termi- —— Improvements to IFRSs (Decem- management judgment. to telecommunication services are deferred and nating calls on the Group’s wireline networks. ber 2017)-Amendments to IFRS 3, recognised as revenue over the period of render- Revenue from service contracts is recognised IFRS 11, IAS 12 and IAS 23 Wireless revenue ing the services. Allocation of each separable when the services are rendered. Billings received component of a bundled offer based on the in- in advance of service being rendered are de- The amendments issued as a result of the An- The Group earns wireless revenues for usage of dividual components’ relative fair values involves ferred and recognised as revenue as the service nual Improvements to IFRSs 2015-2017 Cycle its cellular system, which include airtime charges estimates and management’s judgment. is rendered. introduced relatively minor changes to clarify from contract and prepaid subscribers, monthly guidance in existing standards. The amendments contract fees, interconnect fees from other wire- c. Roaming rebates —— Construction contracts revenue are effective for annual periods beginning on or less and wireline operators, roaming charges, after 01 January 2019. The Group does not expect data transfer charges, and charges for value add- The Group enters into roaming discount agree- The Group has contracts with customers for in- these amendments to have a material impact on ed services (‘VAS’). Interconnect revenue includes ments with a number of wireless operators. Ac- stallation of network equipment for a fixed fee, the Group’s consolidated financial statements. revenues from wireless and wireline operators that cording to the agreements the Group is commit- which cannot exceed the costs incurred plus a was earned from terminating traffic from other ted to provide and entitled to receive a discount certain margin. Revenue under the contracts is operators. Roaming revenues include revenues that is generally dependent on the volume of recognised by reference to the stage of com- from customers who roam outside their select- roaming traffic generated by the respective sub- pletion as defined in the contract and accepted 2 Income statement ed home coverage area and revenues from other scribers. The Group uses actual traffic data to by the customer. mobile carriers for roaming by their customers estimate the amounts of rebates to be received using the network of the Group. VAS include SMS, or granted. Such estimates are adjusted and up- If the outcome of the contract cannot be esti- provision of content and media and commissions dated on a regular basis. The Group accounts mated reliably, contract revenue is recognised 2.1 REVENUE for mobile payments. for discounts received as a reduction of roaming only to the extent of contract costs incurred that expenses and rebates granted as reduction of are likely to be recoverable. Contract costs are —— Accounting policies a. Loyalty programme roaming revenue. recognised as incurred unless they create an asset related to future contract activity. An expect- Revenue is measured at the fair value of the con- The Group operates a loyalty programme which The Group takes into account the terms of the ed loss on a contract is recognised immediately sideration received or receivable, and represents allows customers to accumulate awards for usage various roaming discount agreements in order in profit or loss. 230 Consolidated financial statements Consolidated financial statements 231

Revenue recognised under construction con- 2.2 SALES AND MARKETING EXPENSES The current income tax is calculated on the basis cept for deferred income tax liability where the tracts for the year ended 31 December 2017 is of the tax laws enacted or substantively enacted timing of the reversal of the temporary difference 2,143 (2016: 370). For contracts in progress at —— Accounting policies at the reporting date in the countries in which is controlled by the Group and it is probable that 31 December 2017 the aggregate amount of costs the Company and its subsidiaries operate and the temporary difference will not reverse in the incurred and recognised profits to date is 2,606 Dealer commissions for connection of new sub- generate taxable income. Management periodi- foreseeable future. (2016: 370); the amount of advances received as scribers are expensed as incurred. The Group’s cally evaluates positions taken in tax returns with at 31 December 2017 is 3,987 (2016: 2,350). third party dealer arrangements call for provi- respect to situations in which the applicable tax —— Significant estimates sion of post-sales services and revenue sharing. regulation is subject to interpretation. If the ap- —— Revenue from context advertising As a result, dealer commissions are recognised plicable tax regulation is subject to interpretation, The Group assesses the recoverability of deferred as the services are performed, generally during the Company establishes a provision where ap- tax assets based on estimates of future earnings. The Internet segment (Note 5.6) earns revenue for a twelve-month period from the date a new sub- propriate on the basis of amounts expected to be search context advertising through partnerships scriber is activated. paid to the tax authorities. Actual Group income tax receipts and payments with third parties. Context advertising revenue is could differ from the estimates made by the recognised as the services are provided (i.e. when Advertising costs are expensed as incurred. —— Deferred income tax Group as a result of changes in tax legislation or a user clicks on an advertiser’s listing) on a net unforeseen transactions that could affect tax bal- basis. Deferred income tax is recognised using the lia- ances. The expected resolution of uncertain tax 2.3 GENERAL AND ADMINISTRATIVE EX- bility method, on temporary differences arising positions is based upon management’s judgment The revenue from advertising in applications, on PENSES between the tax bases of assets and liabilities and of the likelihood of sustaining a position taken the web pages of communities and via networks is their carrying amounts in the financial statements. through tax audits, tax courts and/or arbitration, recognised on a gross basis with costs and com- Included in general and administrative expenses However, deferred income tax is not accounted if necessary. Circumstances and interpretations missions paid to third party owners and admin- for the years ended 31 December are: ↓ for if it arises from initial recognition of an asset of the amount due or likelihood of a position be- istrators of websites, applications, platforms and or liability in a transaction other than a business ing sustained may change during the settlement communities recognised in sales and marketing combination that at the time of the transaction process. expenses. 2017 2016 affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax —— Disclosures —— Revenue from MMO games Employee benefits and related 43,332 27,556 rates and laws that have been enacted or sub- social charges stantively enacted at the reporting date and are The operations of the telecom segment are subject The Internet segment (Note 5.6) earns online Operating lease expense 19,706 18,291 expected to apply when the related deferred in- to taxation in the Russian Federation and Tajiki- games revenue from in-game virtual items pur- come tax asset is realised or the deferred income stan. The operations of the internet segment are chased by players. Under the item-based revenue tax liability is settled. subject to taxation in multiple jurisdictions, includ- model, the revenue is recognised over the life of ing the Russian Federation, Cyprus, British Virgin the in-game virtual items as they are purchased Deferred income tax assets are recognised only to Islands, the United Kingdom, the United States of and consumed. Deferred revenue is reduced as —— State pension funds the extent that it is probable that future taxable America, Estonia, the Netherlands. revenues are recognised. The estimated life span profit will be available against which the tempo- of in-game items is determined based on histori- The Group contributes to local state pension funds rary differences can be utilised. Deferred income The following presents the significant components cal player usage patterns and playing behaviour. and social funds on behalf of its employees. The tax is provided on temporary differences arising of the Group’s income tax expense for the years contributions are expensed as incurred. Contri- on investments in subsidiaries and associates, ex- ended 31 December: ↓ Revenue earned from licensing games to over- butions for the years ended 31 December 2017 seas parties consists of a non-refundable initial and 2016 were 6,996 and 5,564, respectively. payment for the licence and usage-based royal- 2017 2016 ty fees. The upfront fee is recognised as revenue immediately once the games are launched into 2.4 INCOME TAXES Current income tax: commercial use by the licensees. Ongoing usage-based royalties are recognised as earned, —— Accounting policies Current income tax charge 10,892 9,026 provided the collection is probable. Adjustments recognised for current tax of prior periods (225) 581 —— Current income tax —— Sales of equipment Deferred tax (1,823) 634 and accessories The tax expense for the year comprises current Income tax expense 8,844 10,241 and deferred tax. Tax is recognised in profit or Revenue from the sale of equipment and acces- loss, except to the extent that it relates to items sories is recognised when the significant risks and recognised in OCI or directly in equity. In this rewards of ownership of the goods have passed to case, the tax is recognised in OCI or directly in the buyer, usually on delivery of the goods. equity, respectively. 232 Consolidated financial statements Consolidated financial statements 233

The reconciliation between the average effective domestic statutory rates applicable to individual The Group recognises deferred tax assets in re- depending on the results of these subsidiaries in income tax rate and tax expense calculated at Group entities is as follows: ↓ spect of tax loss carry-forwards to the extent that subsequent periods. The tax planning strategies realisation of tax losses against future taxable may include, among others, merging of the re- 2017 2016 profit is probable. Deferred tax assets related spective subsidiaries with MegaFon which is ex- to tax losses of the Group’s subsidiaries are rec- pected to have sufficient pretax income to utilise Statutory income tax rate 18.0 % 20.0 % ognised based on the tax planning opportunities the accumulated tax losses of these subsidiaries. that would be implemented, if necessary, to pre- Non-deductible expenses 12.1 % 6.6 % vent tax losses from not being used. Unrecognised deferred tax assets in the consoli- Effect of intra-group transactions 1.6 % 0.9 % dated statement of financial position amounted Deferred tax assets in respect of the tax losses are to 3,859 as of 31 December 2017 (2016: 2,757). Deferred tax assets write-off 3.1 % 0.1 % attributable to the following subsidiaries: ↓ Unrecognised deferred tax assets arose on the Effect of income tax preferences (2.7 %) (1.3 %) acquisition of subsidiaries and joint ventures due to the difference between the accounting and tax 2017 2016 Goodwill impairment (Note 3.2.3) — 1.9 % bases of the subsidiaries and joint ventures ac- Euroset impairment (Note 3.3) 22.5 % — Scartel 1,837 2,583 quired and are not expected to be realised due to lack of appropriate taxable profits. Effect of changes in tax rates 5.8 % — MegaFon Retail 1,375 1,021

Other 2.0 % 0.4 % Other 797 23 The temporary differences associated with investments in subsidiaries for which a deferred Effective income tax rate 62.4 % 28.6 % Balance at end of year 4,009 3,627 tax liability has not been recognised amounted to 75,984 as of 31 December 2017 (2016: nil).

The effect of intragroup transactions, in the table Deferred tax relates to the following: ↓ In order to utilise tax losses the Group is able to Reconciliation of net deferred tax liabilities for the above, represents taxable intra-group income. implement appropriate tax planning strategies years ended 31 December is as follows: ↓

STATEMENT OF 2017 2016 INCOME STATEMENT FINANCIAL POSITION AS OF FOR THE YEARS 31 DECEMBER Balance at beginning of year 19,613 19,526 2017 2016 2017 2016 Tax (benefit)/expense during the year (1,823) 634

Property and equipment (16,050) (16,844) (721) 1,832 Translation adjustment of foreign operations (73) (75)

Intangible assets (18,964) (9,316) 2,439 325 Acquisition of subsidiaries (Note 5.3) 7,209 —

Derivative financial instruments 770 993 186 (1,180) Deferred tax on cash flow hedges in OCI (Note 3.4.4) 37 (472)

Investments in joint ventures and subsidiaries (146) (153) (7) 59 Balance at end of year 24,963 19,613

Tax loss carry-forwards 4,009 3,627 (382) (848)

Revenue recognition 2,793 519 (2,274) 122

Accrued employee benefits 1,279 193 (1,086) 268

Accrued expenses 1,504 1,011 (493) (190) 2.5 EARNINGS PER SHARE Other movements and temporary differences (158) 357 515 246 —— Accounting policies Deferred tax expense (1,823) 634

Net deferred tax liabilities (24,963) (19,613) Basic earnings per share (‘EPS’) are computed by ers by the weighted-average number of ordinary dividing net profit available to shareholders of the shares outstanding during the period increased to Reflected in the consolidated statement of financial position as follows: Company by the weighted-average number of include the number of additional ordinary shares ordinary shares outstanding for the period. that would be issued on the conversion of all the Deferred tax assets 3,829 1,199 potentially dilutive securities into ordinary shares. Deferred tax liabilities (28,792) (20,812) Diluted earnings per share are computed by di- Potentially dilutive securities include outstanding viding adjusted net profit available to sharehold- stock options and convertible debt instruments. 234 Consolidated financial statements Consolidated financial statements 235

—— Disclosures The estimated useful lives are as follows: ↓ at the fair value of the leased property or, if low- An impairment loss is recognised for the amount er, at the present value of the minimum lease by which the asset’s carrying amount exceeds its The following table sets forth the computation of payments. Lease payments are apportioned recoverable amount. The recoverable amount is Telecommunications network 3 to 20 years basic and diluted EPS for the years ended 31 De- between finance charges and reduction of the the higher of (1) an asset’s fair value less costs to cember: ↓ Buildings and structures 7 to 50 years lease liability so as to achieve a constant rate of sell and (2) value in use. The recoverable amount interest on the remaining balance of the liability. is determined for each individual asset, unless 2017 2016 Vehicles, office and other equipment 3 to 7 years Finance charges are recognised in finance costs the asset does not generate cash inflows that are Numerator: in profit or loss. largely independent of those from other assets or groups of assets. Profit attributable 4,551 25,496 to equity holders Leasehold improvements are depreciated over A leased asset is depreciated over the lesser of of the Company the shorter of the lease term or the estimated the lease term or the useful life of the asset. Impairment losses relating to continuing operations useful lives of the assets. The lease term includes are recognised in profit or loss in the expense cat- Denominator: renewals when such renewals are reasonably The Group has entered into long-term leases of egories which are consistent with the function of Weighted-average 595,700,967 595,700,967 certain. telecommunication assets. The Group has deter- the impaired asset. ordinary shares mined that, based on an evaluation of the terms outstanding The assets’ residual values, useful lives and de- and conditions of the arrangements, such as the For assets other than goodwill, an assessment is EPS – basic and preciation methods are reviewed, and adjusted lease term constituting a major part of the eco- made at each reporting date to determine whether 8 43 diluted, Roubles if appropriate, at each reporting date. nomic life of the asset, it obtains all the signif- there is an indication that previously recognised icant risks and rewards of ownership of these impairment losses no longer exist or have de- Repair and maintenance costs are expensed assets. Accordingly, it accounts for the contracts creased. If such indication exists, the Group esti- There were no potentially dilutive securities out- as incurred. The cost of major renovations and as finance leases. mates the asset’s recoverable amount. A previously standing at 31 December 2017 or 2016. other subsequent expenditure is included in the recognised impairment loss is reversed only if there carrying amount of the asset or recognised as At the commencement of the lease term the has been a change in the assumptions used to de- a separate asset, as appropriate, only when it Group recognises finance leases as assets and termine the asset’s recoverable amount since the is probable that future economic benefits asso- liabilities at the present value of the minimum last impairment loss was recognised. The reversal ciated with the item will flow to the Group and lease payments. In determining the present value is limited so that the carrying amount of the asset 3 ASSETS AND LIABILITIES the cost of the item can be measured reliably. of the minimum lease payments, assumptions does not exceed its recoverable amount, nor ex- and estimates are made in relation to discount ceed the carrying amount that would have been The present value of the expected cost for the de- rates, the expected costs for services and taxes determined, net of depreciation, had no impair- 3.1 PROPERTY AND EQUIPMENT commissioning of an asset after its use is includ- to be paid by and reimbursed to the lessor, and ment loss been recognised for the asset in prior ed in the cost of the respective asset. Please re- long-term inflation forecasts where the lease years. Such reversal is recognised in profit or loss. —— Accounting policies fer to Note 3.8 for further information about the agreements include provisions to adjust the provision for decommissioning liabilities. lease payments for inflation. Estimating recoverable amounts of assets is based Property and equipment is stated at cost, less on management’s evaluations, including estimates accumulated depreciation and impairment, if At the time of retirement or other disposition of —— Capitalised borrowing costs of applicable market rates, if the market approach any. Cost includes all costs directly attributable property or equipment, the cost and accumulat- is used, or future cash flows, discount rates, ter- to bringing the asset to the location and condition ed depreciation are removed from the accounts Borrowing costs directly attributable to the ac- minal growth rates, and assumptions about future for its intended use. Depreciation is recorded on and any resulting gain or loss is recorded in quisition, construction or production of a qual- market conditions, if the income approach is used. a straight-line basis over the estimated useful life profit or loss. ifying asset during the construction phase that of the asset. necessarily takes a substantial period of time are —— Non-current assets held for sale The Group, jointly with other operators, plans, capitalised as part of property and equipment Depreciation expenses are based on manage- develops and uses telecommunication networks. until the asset is ready for use. All other borrow- Non-current assets are classified as assets held for ment’s estimates of residual value, the deprecia- The activities are accounted for as joint opera- ing costs are expensed in the period in which sale (‘AHFS’) and stated at the lower of carrying tion method used and the useful lives of property tions. Accordingly, the Group records its share of they occur. Borrowing costs consist of interest, amount and fair value less costs to sell if their car- and equipment. Estimates may change due to the jointly held assets and its share of the jointly related foreign exchange differences, and other rying amount is to be recovered principally through technological developments, competition, chang- incurred expenses. costs that the Group incurs in connection with a sale transaction rather than through continuing es in market conditions and other factors, and the borrowing of funds. use and the sale is considered highly probable. may result in changes in estimated useful lives —— Finance leases and depreciation charges. The actual economic —— Impairment —— Disclosures lives of long-lived assets may be different from Finance leases, that is, leases that transfer sub- the estimated useful lives. A change in estimated stantially all the risks and benefits incidental to The Group tests long-lived assets, other than Property and equipment is as follows: useful lives is accounted for prospectively as a ownership of the leased item to the Group, are goodwill, for impairment when circumstances change in accounting estimate. capitalised at the commencement of the lease indicate there may be a potential impairment. 236 Consolidated financial statements Consolidated financial statements 237

TELECOM- VEHICLES, OFFICE During the year ended 31 December 2017 the Expenditure on research activities, undertaken MUNICATIONS BUILDINGS AND AND OTHER CONSTRUCTION NETWORK STRUCTURES EQUIPMENT IN-PROGRESS TOTAL Group has reclassified its billing system and sim- with the prospect of gaining new scientific or ilar software from property and equipment to technical knowledge and understanding, is rec- Cost as of intangible assets as a result of the technological ognised in the statement of comprehensive in- changes in the system and software (Note 3.2.1). come when incurred. 01 January 2016 425,162 74,866 28,509 22,539 551,076

Additions — — — 58,104 58,104 Included in construction in-progress are advanc- Software development activities involve a plan or es to suppliers of network equipment of 857 and design for the production of new or substantially Acquisitions (Note 5.3) 3 — — — 3 1,659 as at 31 December 2017 and 2016, respec- improved products and processes. Development Disposals (16,649) (205) (1,702) (643) (19,199) tively. expenditure is capitalised only if development costs can be measured reliably, the product or Put into use 56,980 2,215 2,059 (61,254) — Assets purchased under certain contracts with process is technically and commercially feasible, Translation (1,783) (542) (687) (106) (3,118) deferred payment terms in the amount of 332 future economic benefits are probable, and the (2016: 736) are pledged as security for the re- Group intends to and has sufficient resources to 31 December 2016 463,713 76,334 28,179 18,640 586,866 lated liabilities. complete development and to use or sell the asset. Additions — — — 52,414 52,414 —— Finance leases Research and development costs recognised as Acquisitions (Note 5.3) 2,451 636 215 538 3,840 an expense in the consolidated income statement The carrying value of buildings and structures during 2017 amounted to 393 (2016: nil). Disposals (24,932) (318) (3,034) (398) (28,682) held under finance leases at 31 December 2017 Put into use 44,308 3,469 2,198 (49,975) — was 3,432 (2016: 3,701). Leased assets are The useful lives of intangible assets are assessed Reclassified to AHFS — (634) — — (634) pledged as security for the related finance lease as either finite or indefinite. The Group does liabilities. not have intangible assets with indefinite useful Reclassified to intangible (33,349) — (809) (1,384) (35,542) lives, other than goodwill. All intangible assets assets (Note 3.2.1) —— Capitalised borrowing costs are amortised on a straight-line basis over the Translation (393) (135) (131) (104) (763) following estimated useful lives: ↓ Capitalised borrowing costs were 1,752 and 31 December 2017 451,798 79,352 26,618 19,731 577,499 1,875 for the years ended 31 December 2017 and 2016, respectively. The rate used to deter- Depreciation as of mine the amount of borrowing costs eligible for Operating licences and frequencies 10 to 20 years 01 January 2016 (263,278) (29,923) (23,458) — (316,659) capitalisation was 9.5 % and 8.8 % for the years Customer base 3 to 19 years Charge for the year (44,941) (4,958) (2,984) — (52,883) ended 31 December 2017 and 2016, respectively. Trademarks and patents 7 to 20 years Disposals 16,122 178 1,656 — 17,956 Games 3 to 9 years Translation 1,152 245 478 — 1,875 3.2 INTANGIBLE ASSETS Other software 1 to 5 years 31 December 2016 (290,945) (34,458) (24,308) — (349,711) 3.2.1 Intangible assets, other than Other intangible assets 1 to 10 years Charge for the year (49,980) (4,774) (2,587) — (57,341) goodwill

Disposals 24,668 231 2,964 — 27,863 —— Accounting policies Reclassified to AHFS — 350 — — 350 Amortisation expenses are based on manage- Intangible assets acquired separately are mea- ment’s judgment as to the amortisation method Reclassified to intangible 20,908 — 705 — 21,613 sured on initial recognition at cost. The cost of to be used and its estimates of the useful lives assets (Note 3.2.1) intangible assets acquired in a business combina- of the intangible assets. Estimates may change Translation 277 63 92 — 432 tion is their fair value as of the date of acquisition. due to technological developments, competition, 31 December 2017 (295,072) (38,588) (23,134) — (356,794) Following initial recognition, intangible assets are changes in market conditions and other factors, carried at cost less accumulated amortisation and may result in changes in estimated useful Net book value: and impairment, if any. Intangible assets con- lives and amortisation charges. Critical estimates sist principally of operating licences, frequencies, of useful lives of intangible assets are impact- 31 December 2016 172,768 41,876 3,871 18,640 237,155 customer base, trademarks, game software and ed by estimates of average customer relation- 31 December 2017 156,726 40,764 3,484 19,731 220,705 software development costs, other software and ship based on churn, remaining licence periods licences. and expected developments in technology and 238 Consolidated financial statements Consolidated financial statements 239

OPERATING markets. The actual economic lives of the assets in circumstances indicate that the carrying LICENCES TRADE- OTHER may be different from the estimated useful lives. amount may not be recoverable. See Note 3.1 for AND FRE- CUSTOMER MARKS & OTHER INTANGIBLE QUENCIES BASE PATENTS GAMES SOFTWARE ASSETS TOTAL A change in estimated useful lives is accounted for further description of the accounting policies for prospectively as a change in accounting estimate. impairment testing of nonfinancial assets. Net book value:

—— Impairment —— Disclosures 31 December 2016 50,882 1,379 122 — 4,732 4,180 61,295 31 December 2017 48,269 20,022 20,365 11,186 21,286 7,012 128,140 Assets that are subject to amortisation are revie- Intangible assets, other than goodwill, are as fol- wed for impairment whenever events or changes lows: ↓ Weighted-average 11 5 9 5 6 6 7 remaining amortisation period, years

OPERATING LICENCES TRADE- OTHER AND FRE- CUSTOMER MARKS & OTHER INTANGIBLE QUENCIES BASE PATENTS GAMES SOFTWARE ASSETS TOTAL

Cost as of Operating licences and frequencies provide the 3.2.2 Goodwill Group with the exclusive right to utilise certain radio frequency spectrum to provide wireless —— Accounting policies 01 January 2016 76,904 4,192 726 — 14,322 7,823 103,967 communication services. Additions 3,417 2 6 — 3,234 814 7,473 Goodwill represents the excess of the con- Disposals (550) — (13) — (1,759) (1,333) (3,655) Operating licences primarily consist of: sideration transferred plus the fair value of any non-controlling interest in the acquired compa- Translation (78) — — — — — (78) • several 2G licences, ny at the acquisition date over the fair values of the identifiable net assets acquired. Goodwill is 31 December 2016 79,693 4,194 719 — 15,797 7,304 107,707 • a nationwide 3G licence, not amortised, but tested for impairment at least Additions 1,808 105 50 1,016 3,239 1,223 7,441 • a nationwide 4G licence to use 2.5–2.7 GHz annually (Note 3.2.3). Acquisitions (Note 5.3) — 22,295 22,493 12,151 4,586 1,456 62,981 spectrum (10x10 MHz band), and After initial recognition, goodwill is measured at • a nationwide 4G licence to use 2.5–2.7 GHz Disposals (539) (105) (54) — (2,481) (534) (3,713) cost less any accumulated impairment losses. spectrum (30x30 MHz band). Reclassified from property and equipment — — — — 34,158 1,384 35,542 These licences are integral to the wireless oper- —— Disclosures (Note 3.1) ations of the Group and any inability to extend existing licences on the same or comparable The changes in the carrying value of goodwill, net Translation (19) — — 340 — 27 348 terms could materially affect the Group’s busi- of accumulated impairment losses of 3,400, for 31 December 2017 80,943 26,489 23,208 13,507 55,299 10,860 210,306 ness. While operating licences are issued for a the years ended 31 December 2017 and 2016 are fixed period, renewals of these licences previously as follows: ↓ Amortisation as of had occurred routinely and at nominal cost. The 2017 2016 01 January 2016 (25,158) (2,341) (547) — (10,396) (3,725) (42,167) Group believes that there are currently no legal, regulatory, contractual, competitive, economic or Charge for the year (4,226) (474) (63) — (2,395) (723) (7,881) Balance at beginning 30,549 33,909 other factors that could result in delays in licence of year Disposals 496 — 13 — 1,726 1,324 3,559 renewal, or even an outright refusal to renew. Acquisitions (Note 5.3) 42,669 40 Translation 77 — — — — — 77 Nationwide 3G and 4G (10x10 MHz band) licences 31 December 2016 (28,811) (2,815) (597) — (11,065) (3,124) (46,412) were obtained by MegaFon at nominal cost in 2007 Goodwill impairment — (3,400) and 2012, respectively, but require the Company (Note 3.2.3) Charge for the year (4,392) (3,757) (2,300) (2,197) (3,807) (1,189) (17,642) to meet certain conditions, including capital com- Balance at end of year 73,218 30,549 Disposals 510 105 54 — 2,472 485 3,626 mitments and coverage requirements (Note 5.8).

Reclassified from property — — — — (21,613) — (21,613) and equipment (Note 3.1)

Translation 19 — — (124) — (20) (125)

31 December 2017 (32,674) (6,467) (2,843) (2,321) (34,013) (3,848) (82,166) 240 Consolidated financial statements Consolidated financial statements 241

31 DECEMBER 3.2.3 Goodwill impairment served in the market for acquisitions of similar Revenue growth is projected based on market 2017 2016 businesses. The fair value was then reduced by share dynamics, ARPU growth and other factors. —— Accounting policies 5 % as an estimate of costs to sell the business. Integrated The discount rate represents the current market Goodwill is not subject to amortisation and is test- telecommunication services 25,384 25,384 Management believes that any change in any of assessment of the risks specific to the CGU, tak- ed annually for impairment as of 01 October or (group of CGUs) these key assumptions which can currently be ing into consideration the time value of money more frequently whenever events or changes in reasonably anticipated would not cause the ag- and individual risks to the underlying assets that Broadband internet CGU 3,567 3,567 circumstances indicate that the carrying amount gregate carrying amount of the integrated tele- have not been incorporated in the cash flow es- may not be recoverable. GARS CGU 1,598 1,598 communication services group of CGUs to exceed timates. The discount rate calculation is based the aggregate recoverable amount of this unit. on the specific circumstances of the Group and Total allocated goodwill 30,549 30,549 For the purpose of impairment testing, goodwill its operating segments and is derived from its acquired in a business combination is allocated Unallocated: —— Broadband internet CGU weighted average cost of capital (‘WACC’). The from the acquisition date to each of the cash-gen- WACC takes into account both debt and equity. erating units (‘CGUs’), or groups of CGUs, that MGL (Note 5.3) 42,669 — The recoverable amount of the broadband internet The cost of equity is derived from the expected are expected to benefit from the synergies of the Total goodwill 73,218 30,549 CGU, 10,900 as at 31 December 2017, has been return on investment by the Group’s investors. combination. The Group has allocated goodwill to determined by taking the mid-point between the The cost of debt is based on the interest-bear- the following CGUs: 1) integrated telecommuni- lowest and highest estimates for value arrived at ing borrowings the Group is obliged to service. cation services group of CGUs, 2) broadband in- In assessing whether goodwill has been impaired, using the different valuation methods, such as re- Segment-specific risk is incorporated by apply- ternet CGU and 3) GARS Holding Limited (‘GARS’) the carrying values of the CGUs (including good- cent transactions, discounted cash flows (‘DCF’) ing individual beta factors. The beta factors are CGU. will) were compared with their estimated recov- and quotes for peer companies’ shares. evaluated annually based on publicly available erable amounts. market data. An impairment loss of associated goodwill is The adjustment upwards of the DCF valuation is recognised for the amount by which the CGU’s As a result of the annual test, no impairment of intended to reflect implementation of the Group’s Annual salary growth is projected based on in- carrying amount exceeds its recoverable amount. goodwill was identified in 2017; a 3,400 impair- strategies in respect of the broadband business flation estimates and management’s forecasted The recoverable amount is the higher of (1) a ment loss was recognised in 2016 in respect of and its further integration with the telecommu- employment strategies. CGU’s fair value less costs to sell and (2) value in goodwill allocated to Broadband internet CGU. nication services group of CGUs which are not use. The recognised impairment loss is not sub- reflected in the DCF projections. Recent transactions were based on mergers and sequently reversed. Unallocated goodwill, resulting from the acquisi- acquisitions of broadband companies in Russia tion of MGL, together with assets acquired, does The calculation of value in use is particularly which closed during 2015-2017. Estimating recoverable amounts of assets and not exceed its market capitalisation as at 31 De- sensitive to the following assumptions: average CGUs is based on management’s evaluations, in- cember 2017. monthly revenue per user (‘ARPU’), discount rates, —— Sensitivity to chang- cluding determining the appropriate CGUs and market share in Moscow, salary growth index, the es in key assumptions estimates of applicable multiples, if the market —— Integrated telecommunication ratio of capital expenditures (‘CAPEX’) to reve- approach is used, or future cash flows, discount services (group of CGUs) nues and recent transactions selection. The key The estimated recoverable amount of the broad- rates, terminal growth rates, and assumptions assumptions used in the forecast are as follows: ↓ band internet unit exceeds its carrying value by about future market conditions, if the income ap- The net assets of the Company’s own retail net- 452. The following changes in the key assump- proach is used. Allocation of the carrying value of work have been allocated to the integrated tele- 31 DECEMBER tions made independently, with all other assump- the assets being tested between individual CGUs communication services group of CGUs. Man- tions constant, would result in impairment for the also requires management’s judgment. agement has determined that the cash flows of 2017 2016 broadband internet unit: ↓ the Company’s own retail network should not be —— Goodwill impairment test considered to be independent of those from the Range of decrease of ARPU integrated telecommunication services group of for retail customers during (4.0 %) (1.0 %)-0.0 % Decrease of ARPU for retail customers in The Group considers the relationship between CGUs, because of the level of the Company’s the forecast period by each region during the forecast period (7.7 %) market capitalisation and its book value, among increasing to control over those assets and the extent of their Pre-tax discount rate 10.7 % 12.8 % other factors, when reviewing for indicators of integration with the Company’s other operations. impairment. As of 31 December 2017, the market Market share in Moscow Pre-tax discount rate increasing to 12.0 % capitalisation of the Group was not below the (in terms of retail customer 4.9-5.1 % 6.4 %-6.7 % The recoverable amount of the integrated tele- base) Market share in Moscow reducing to 0.8 % book value of its equity. communication services group of CGUs has been Annual salary growth rate Annual salary growth rate during the determined based on its fair value less costs to 2.5-2.7 % 4.8 %-5.6 % 4.2 % Goodwill acquired through business combina- sell (Level 3). The fair value was estimated at 4 during the forecast period forecast period increasing to tions has been allocated to related CGUs and times operating income before depreciation and CAPEX/Revenue ratio CAPEX/Revenue ratio from 2020 10.0 % 10.5 % 12.6 % groups of CGUs as follows: → amortisation (‘OIBDA’), a multiple which is at the target in the long-term increasing to lower end of the range of OIBDA multiples ob- 242 Consolidated financial statements Consolidated financial statements 243

31 DECEMBER There are no reasonably possible changes in other Group’s interest unless the transaction provides assumptions that could result in impairment for evidence of an impairment of the asset trans- 2017 2016 the broadband internet unit. ferred. Accounting policies of associates or joint ventures have been changed where necessary Assets to ensure consistency with the policies adopted 3.3 INVESTMENTS IN ASSOCIATES AND by the Group. Non-current assets 48,269 49,231 JOINT VENTURES Cash and cash equivalents 1,003 1,227 —— Impairment —— Accounting policies Other current assets 280 98 For associates and joint ventures accounted for Investments in associates and joint ventures which using the equity method, at each reporting date 49,552 50,556 are jointly controlled entities are accounted for the Group determines whether there is objective using the equity method of accounting and are evidence that the investment in the associate or Liabilities initially recognised at cost. The Group’s share of joint venture is impaired. If there is such evidence, Non-current financial liabilities (21,572) (24,761) the profits and losses of these companies is in- the Group calculates the amount of impairment cluded in the ‘Share of loss of associates and joint as the difference between the recoverable amount Other non-current liabilities (5,712) (5,882) ventures’ line in the accompanying consolidated of the Group’s investment in the associate or joint Current financial liabilities (3,492) (737) income statement with a corresponding adjust- venture and its carrying value, then recognises (30,776) (31,380) ment to the carrying amount of the investment. the loss as ‘Share of loss of associates and joint ventures’ in profit or loss. Total identifiable net assets 18,776 19,176 Unrealised gains on transactions between the Group and its associates or joint ventures are —— Disclosures The Group’s share in the joint venture 49.999 % 49.999 % eliminated only to the extent of the Group’s in- The Group’s share of identifiable net assets 9,388 9,588 terest in the associates or joint ventures. Unreal- Investments in associates and joint ventures are ised losses are also eliminated to the extent of the as follows: ↓ Excess of the consideration transferred over the Group’s share in the fair value 3,932 of identifiable net assets 3,932

31 DECEMBER Carrying amount of the Group’s interest 13,320 13,520 % EQUITY INVESTEE INTEREST 2017 2016

LLC Euroset-Retail (‘Euroset’), joint venture 50,000 14,041 31,705 The composition of the Group’s share of profit/ (loss) of the joint venture accounted for using the JSC Sadovoe Koltso (‘Garden Ring’), joint venture 49,999 13,320 13,520 equity method is as follows: Other investments - associates 1,206 9 YEAR ENDED 31 DECEMBER Total 28,567 45,234 2017 2016

Profit and total comprehensive income of Garden Ring 275 353

Garden Ring Amortisation of the Group’s purchase price allocation adjustments and (675) (372) application of the Group’s accounting policies Garden Ring, which owns and operates an office The Garden Ring joint venture is accounted for building in the center of Moscow, is the Group’s using the equity method in the consolidated fi- Loss and total comprehensive loss of the joint venture (400) (19) joint venture with Sberbank. The Group has a ten- nancial statements. The Group’s share in the joint venture 49.999 % 49.999 % year lease agreement with Garden Ring for a part The Group’s share of the loss and total comprehensive of the building. This building has become the new The reconciliation of summarised financial infor- (200) (9) corporate headquarters of the Group, permitting mation of Garden Ring to the carrying amount loss of Garden Ring the consolidation of the Group’s operations in of the Group’s interest in the joint venture is pre- Moscow into a single location. See Note 5.8 for sented below: the applicable lease commitments. The remaining part of the building is mostly leased by Sberbank. 244 Consolidated financial statements Consolidated financial statements 245

—— Euroset The composition of the Group’s share of the loss of the joint venture accounted for using the equity Euroset is a retail chain, whose primary activities Euroset joint venture. This transaction closed in method is as follows: ↓ YEAR ENDED 31 DECEMBER are sales of mobile phones, audio devices, other February 2018 (Note 5.9). portable gadgets and accessories, and provision 2017 2016 of customer subscription and payment collection The Euroset joint venture is accounted for using services for major telecommunication operators the equity method in the consolidated financial Loss of Euroset (917) (1,663) in Russia. statements. Amortisation of the Group’s purchase price allocation adjustments and (2,571) (3,272) application of the Group’s accounting policies Euroset is the Group’s joint venture with PJSC Vi- The reconciliation of the summarised financial mpelCom (‘VimpelCom’). information of Euroset to the carrying amount Loss of the joint venture (3,488) (4,935) of the Group’s interest in the joint venture is pre- Other comprehensive loss of Euroset (6) (3) In July 2017 MegaFon and VEON Ltd, the parent sented below: ↓ company of VimpelCom, agreed to terminate the Total comprehensive loss of the joint venture (3,494) (4,938) The Group’s share in the joint venture 50 % 50 % 31 DECEMBER The Group’s share of the loss and total comprehensive loss of Euroset (1,747) (2,469) 2017 2016

Assets Total summarised profit and loss information of The estimated recoverable amount of investment is Non-current assets 26,692 30,874 Garden Ring and Euroset is as follows: ↓ based on its value in use and includes savings to the YEAR ENDED Group from lower than market Euroset commission Cash and cash equivalents 12,739 10,999 31 DECEMBER costs alongside the standalone Euroset results.

Other current assets 19,841 16,818 2017 2016 The value in use was estimated using the cash flow 59,272 58,691 Revenue 68,029 63,060 projections for a six-year period. The calculation of the recoverable amount of the investment is parti- Liabilities Depreciation and (5,216) (5,953) cularly sensitive to the following assumptions: ↓ amortisation Non-current financial liabilities (3,930) (5,470) Interest income 194 387 30 JUNE 2017 Other non-current liabilities (3,902) (4,549) Interest expense (3,685) (3,311) Current financial liabilities (5,487) (3,951) Pre-tax discount rate 13.8 % Income tax 716 822 Average annual revenue growth rate Other current liabilities (26,065) (21,340) 7.0 % during the forecast period (39,384) (35,310) —— Euroset investment impairment Terminal growth rate 2.6 % Total identifiable net assets 19,888 23,381 OIBDA margin during the forecast period 0.8 % During the year the Group determined that The Group’s share in the joint venture 50 % 50 % there is objective evidence that the investment The Group’s share of identifiable net assets 9,944 11,691 in Euroset is impaired due to the recent deve- There was no change in estimation of the value in lopments in the Russian mobile retail market, use as of 31 December 2017. Excess of the consideration transferred over the Group’s share in the fair value 4,097 20,014 which have adversely impacted the profitability of identifiable net assets of Euroset. In anticipation of the termination of The changes in the carrying value of the investment its Euroset joint venture, the Group reconsidered Carrying amount of the Group’s interest 14,041 31,705 in Euroset for the year ended 31 December 2017 the composition of its CGUs for the purposes are as follows: ↓ of asset impairment testing and removed the investment in Euroset from the integrated At 1 January 2017 31,705 telecommunication services group of CGUs. The Group has calculated the amount of impairment Impairment loss from Euroset (15,917) as the difference between the recoverable Share of loss of associates and (1,747) amount of the Group’s investment and its joint ventures carrying value and recognised an impairment At 31 December 2017 (Level 3) 14,041 loss in profit or loss in the amount of 15,917. 246 Consolidated financial statements Consolidated financial statements 247

3.4 FINANCIAL ASSETS AND LIABILITIES —— De-recognition of financial assets exchange or modification is treated as the de-rec- —— Disclosures ognition of the original liability and the recognition —— Accounting policies A financial asset is de-recognised when the of a new liability. The difference in the respective Financial assets are as follows: ↓ rights to receive cash flows from the asset have carrying amounts is recognised within profit or loss. —— Initial recognition and measurement expired or the Group has transferred its rights to 31 DECEMBER receive cash flows from the asset or has assumed Financial assets and financial liabilities within an obligation to pay the received cash flows in 2017 2016 the scope of IAS 39 are recognised initially at full without material delay to a third party under fair value plus transaction costs that are direct- a ‘pass-through’ arrangement; and either (a) the Trade and other receivables (Note 3.5) 26,520 19,352 ly attributable to the acquisition or issue of the Group has transferred substantially all the risks Other financial assets: financial asset or financial liability, except for a and rewards of the asset, or (b) the Group has financial asset or financial liability accounted for neither transferred nor retained substantially Financial assets at fair value through profit or loss: at fair value through profit or loss, in which case all the risks and rewards of the asset, but has Financial investments in associates 264 — transaction costs are expensed. transferred control of the asset. Financial derivatives under lease and hosting contracts 150 — —— Subsequent measurement of fi- —— Impairment of financial assets Derivative financial assets over the equity of investee 122 — nancial assets and liabilities A financial asset or a group of financial assets is Total financial assets at fair value through profit or loss 536 — The subsequent measurement of financial assets impaired and impairment losses are incurred if Financial assets at fair value through OCI: and liabilities depends on their classification as there is objective evidence of impairment as a re- described below: sult of an event that occurred subsequent to the Cross-currency swap designated as cash flow hedge — 435 initial recognition of the asset. The Group assesses Total financial assets at fair value through OCI — 435 • Fair value through profit or loss. Derivatives, at each reporting date whether there is objective including separated embedded derivatives, are evidence that a financial asset or group of assets Loans and receivables at amortised cost: classified as held for trading and accounted for may be impaired. For assets carried at amortised Short-term bank deposits in Roubles 560 — at fair value through profit or loss unless they cost, the impairment loss is the difference between are designated as effective hedging instruments. the asset’s carrying amount and the present value Short-term bank deposits in US dollars 7,096 5,095 of estimated future cash flows at the original EIR Loans receivable from Garden Ring and Strafor 6,357 7,340 Financial assets and liabilities accounted for at (excluding future expected credit losses that have fair value through profit or loss are carried in not yet been incurred). The carrying amount of the Other deposits 4,976 2,771 the consolidated statement of financial posi- asset is reduced through the use of an allowance Other 157 — tion at fair value with changes in fair value be- account and the amount of the loss is recognised Total loans and receivables at amortised cost 19,146 15,206 ing recognised in profit or loss, in the ‘foreign in profit or loss. Financial assets together with the exchange gain/(loss)’, ‘finance costs’ or ‘gain/ associated allowance are written off when there is Total other financial assets 19,682 15,641 (loss) on financial instruments’ lines, depending no realistic prospect of future recovery and all col- Other current financial assets (16,097) (10,842) on the nature of the changes. lateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount Other non-current financial assets 3,585 4,799 Loans and receivables (assets) and loans • of the estimated impairment loss increases or de- Total financial assets 46,202 34,993 and borrowings (liabilities). Loans and re- creases because of an event occurring after the ceivables are non-derivative financial assets impairment was recognised, the previously rec- Total current financial assets (42,617) (30,194) with fixed or determinable payments that are ognised impairment loss is increased or reduced Total non-current financial assets 3,585 4,799 not quoted in an active market. After initial by adjusting the allowance account. If a write-off measurement, loans and receivables and is later recovered, the recovery is credited to the loans and borrowings are subsequently mea- relevant costs in profit or loss. sured at amortised cost using the effective —— Loan receivable interest rate (‘EIR’) method. Amortised cost —— De-recognition of financial liabilities is calculated by taking into account any dis- In February 2016 the Group granted Strafor Com- financing risks. The loan is secured by a pledge count or premium on acquisition and fees or A financial liability is de-recognised when the obli- mercial Ltd (‘Strafor’) a loan in the amount of of 50 % of the shares of Strafor and 50 % of the costs that are an integral part of the EIR. The gation under the liability is discharged, cancelled US$ 43.8m (2,523 at the exchange rate as of 31 De- shares of North Financial Overseas Corp., both amortisation based on EIR is included in profit or expires. When an existing financial liability is cember 2017). The loan is repayable in February companies being related to the Svyaznoy group, or loss. replaced by another from the same lender on 2018 with interest at 7 % paid annually. The loan a telecommunications retailer in Russia, and substantially different terms, or the terms of an was granted after performance of all necessary existing liability are substantially modified, such an credit checks and satisfactory assessment of re- 248 Consolidated financial statements Consolidated financial statements 249

was granted in the context of the Group’s long —— Other deposits —— Disclosures term relations with the retailer. In February 2017 Strafor made an early repayment of US$15 m Other deposits consist of cash advances received Cash and cash equivalents are as follows: ↓ 31 DECEMBER (890 at the exchange rate as of the payment under certain contracts with customers and held date) out of the loan due in February 2018, to- in Company bank accounts. 2017 2016 gether with interest. In February 2018 the loan was modified (Note 5.9). Financial liabilities are as follows: ↓ Cash at bank and on hand in Roubles 7,023 1,948 31 DECEMBER US dollars 865 247 2017 2016 Euros 1,384 74

Trade and other payables 50,535 43,581 Other 50 1 Short-term bank deposits in Financial liabilities at amortised cost: Roubles 7,878 860 Loans and borrowings: US dollars 18,947 28,792 Bank loans and borrowings 208,143 179,115 Total cash and cash equivalents 36,147 31,922 Rouble bonds 55,967 55,998

Total loans and borrowings 264,110 235,113 3.4.2 Loans and borrowings Total current loans and borrowings (52,013) (39,389)

Total non-current loans and borrowings 212,097 195,724 Principal amounts outstanding under loans and borrowings are as follows: ↓ Other financial liabilities at amortised cost: 31 DECEMBER Finance lease obligations (Notes 3.1, 5.8) 4,222 4,173 INTEREST RATE MATURITY 2017 2016 Deferred and contingent consideration — 284 Bank loans and borrowings: Other liabilities 329 335 Rouble loans – fixed rates 7.36 %-11.82 % 2018-2024 161,928 127,203 Total financial liabilities at amortised cost 268,661 239,905 LIBOR+0.955 % - US dollar loans – floating rates 2018-2022 34,153 38,661 Financial liabilities at fair value through OCI: LIBOR+2.9 % US dollar loans – fixed rates 2.29 % 2018-2024 5,082 7,347 Foreign currency forwards and cross-currency swap designated 3,842 5,399 as cash flow hedges EURIBOR+0.56 % - Euro loans – floating rates 2019-2024 9,171 8,103 EURIBOR+2.05 % Total financial liabilities at fair value through OCI 3,842 5,399 Total bank loans and 210,334 181,314 Total other financial liabilities 8,393 10,191 borrowings

Other current financial liabilities (3,853) (3,538) 2019-2026 with Rouble bonds 7.85 %-9.95 % a put option 55,000 55,000 Other non-current financial liabilities 4,540 6,653 in 2018 Total financial liabilities 323,038 288,885 Total 265,334 236,314

Total current financial liabilities (106,401) (86,508) Total current (52,013) (39,385)

Total non-current financial liabilities 216,637 202,377 Total non-current 213,321 196,929

—— GARS earn-out settlement 3.4.1 Cash and cash equivalents —— Bank loans —— Rouble bonds

In September 2017 MegaFon paid US$ 4.3m —— Accounting policies In February 2017 the Group signed a new credit In April 2017 the Group redeemed in full Series (247 at the exchange rate as of payment date) facility agreement for the total amount of up to 05 Rouble denominated bonds at their nominal in full settlement of the deferred consideration Cash and cash equivalents comprise cash 35,000 maturing in 2024, which has subsequently value of RUB 1,000. Early redemption is permit- for GARS. on hand and deposits in banks with original been fully drawn. ted under the terms of the bonds issue documen- maturities of three months or less. tation. The Group initially issued 10,000,000 250 Consolidated financial statements Consolidated financial statements 251

Series 05 bonds in October 2012 with a maturity issued its Series BO-05 Rouble bonds in October LIABILITIES EQUITY of 10 years at a coupon rate of 8.05 % per an- 2015 with a maturity of 10 years at a coupon rate ACQUI- num with embedded mandatory put options fol- of 11.4 % per annum. SITION lowing coupon rate resets. In 2014 and 2016 the LOANS DIVI- DIVI- OF MGL AND BOR- DERIVA- LEASE LIA- DENDS DIVI- DENDS TO TREASURY Group purchased a total of 99,999,933 bonds —— Covenant requirements ROWINGS TIVES BILITIES PAYABLE DENDS NCI SHARES TOTAL under mandatory put options. Totally, 67 Series Foreign exchange (gain)/ 05 bonds was remained outstanding by April 2017. The majority of the Company’s financing facili- (1,411) 3,794 — — — — — 2,383 ties contain restrictive covenants, which, among loss, net On 09 October 2017 the Group placed its Se- other things, with certain permitted exceptions, Changes through OCI — (189) — — — — — (189) ries BO-001P-03 Rouble denominated exchange limit the Group’s ability to incur debt, encumber bonds in an aggregate principal amount of 15,000 or dispose of assets, undertake mergers and ac- Acquisition of subsidiaries 268 — — — — — — 268 at a coupon rate of 7.85 % per annum paid semi- quisitions, lend to unrelated parties and make ma- annually. The new bonds have a term of 5 years terial changes in the nature of the business without Other 1,447 — — — — — — 1,447 with no embedded put options. prior consent from the required majority of lenders. Balance as of In addition, these financing facilities require the 264,110 3,842 4,222 — (19,211) (172) (1,430) 251,361 On 20 October 2017, the Group redeemed its Group to meet various financial covenants. 31 December 2017 Series BO-05 Rouble denominated bonds in an aggregate principal amount of 15,000. Early 3.4.3 Reconciliation of movements of redemption is permitted under the terms of the liabilities to cash used in financing bonds issue documentation. The Group initially activities 3.4.4 Derivative financial instruments and hedging activities

LIABILITIES EQUITY —— Accounting policies

ACQUI- SITION Derivative financial instruments, which include changes in cash flows and are assessed on an on- LOANS DIVI- DIVI- OF MGL foreign currency forwards, cross-currency swaps going basis to determine that they actually have AND BOR- DERIVA- LEASE LIA- DENDS DIVI- DENDS TO TREASURY ROWINGS TIVES BILITIES PAYABLE DENDS NCI SHARES TOTAL and interest rate swaps, are initially recognised in been highly effective throughout the financial the consolidated statement of financial position reporting periods for which they were designated. Balance 235,113 4,964 4,173 2,839 — — — 247,089 at fair value on the date a derivative contract is as of 01 January 2017 entered into and are subsequently re-measured The effective portion of changes in the fair value at their fair value. Fair values are obtained from of derivatives that are designated and qualify Proceeds from borrowings, 127,626 — — — — — — 127,626 net of fees paid quoted market prices and DCF models as appro- as cash flow hedges are recognised in OCI. The priate. Derivatives are included within financial gain or loss relating to the ineffective portion is Repayment of borrowings (99,416) (4,718) — — — — — (104,134) assets at fair value through profit or loss when recognised immediately in profit or loss. For de- fair value is positive and within financial liabili- rivative instruments that are not designated as Interest paid, net of interest ties at fair value through profit or loss when fair hedges or do not qualify as hedged transactions, (24,142) (9) (437) — — — — (24,588) capitalised value is negative. Certain derivatives embedded the changes in the fair value are reported in the in other financial instruments are treated as sep- profit or loss. Dividends paid to equity arate derivatives when their economic risks and — — — (2,839) (19,211) — — (22,050) holders of the Company characteristics are not closely related to those of The Group uses derivatives to manage interest the host contract and the combined instrument is rate and foreign currency risk exposures. The Dividends paid to non- — — — — — (172) — (172) not measured at fair value, with changes in fair Group does not hold or issue derivatives for trad- controlling interests value being recognised in profit or loss. ing purposes. Acquisition of MGL treasury — — — — — — (1,430) (1,430) shares The Group has derivatives which it designated as —— Disclosures cash flow hedges and derivatives which it did not Finance lease payments — — (33) — — — — (33) designate as hedges. At the inception of a hedge The Group had the following outstanding relationship, the Group formally designates and cross-currency swaps and foreign currency for- Total cash flows used in 4,068 (4,727) (470) (2,839) (19,211) (172) (1,430) (24,781) documents the hedge relationship to which the wards stated at their notional amounts: financing activities Group wishes to apply hedge accounting and Finance costs 24,625 — 519 — — — — 25,144 the risk management objective and strategy for undertaking the hedge. Such hedges are expected to be highly effective in achieving offsetting 252 Consolidated financial statements Consolidated financial statements 253

31 DECEMBER 2017 31 DECEMBER 2016 2017 2016

Cross-currency swap: MILLIONS, MILLIONS, ORIGINAL ORIGINAL MILLIONS, ORIGINAL MILLIONS, Amount of loss recognised in cash flow hedge reserve (47) (316) CURRENCY CURRENCY ROUBLES CURRENCY ROUBLES Amount of loss reclassified from accumulated cash flow hedge reserve into 44 245 Foreign currency forwards: foreign exchange loss, net

designated as cash flow Amount of loss reclassified from accumulated cash flow hedge reserve into US Dollar 208 11,981 466 28,266 — 28 hedges finance costs Total foreign currency 11,981 28,266 Deferred tax on movements in OCI 1 9 forwards (2) (34) Cross-currency swaps: Interest rate swaps:

designated as cash flow hedge US Dollar — — 15 910 Amount of gain recognised in cash flow hedge reserve — 3

Amount of gain reclassified from accumulated cash flow hedge reserve into Total cross-currency swaps — 910 — (170) finance costs

Deferred tax on movements in OCI — 33

— (134) —— Foreign currency forwards des- —— Cross-currency swap designated ignated as cash flow hedges as a cash flow hedge Total in OCI 152 (1,889)

During the year ended 31 December 2016 the At 31 December 2016 the Group had a fixed-to- Group entered into a number of US dollar forward fixed rate cross-currency swap agreement in purchase agreements that limit the exposure from place that limited the exposure from changes in changes in US dollar exchange rates on certain US dollar exchange rates on certain long-term — long-term debts. The forwards have been desig- debt. The swap was designated and qualified as — Derivatives not designated a number of foreign currency forwards that had nated and qualified as cash flow hedges of for- a cash flow hedge of foreign currency risk. There as hedging instruments not been designated as hedging instruments. eign currency risk. There has been no ineffective has been no ineffective portion in the reporting —— Gain/(loss) on financial instru- portion in the reporting period. Forwards were period. The hedge was settled and affected con- During 2017 the Group’s internet segment had ments partly settled in 2017 and affected consolidated solidated income statement in February 2017. some derivative financial instruments not desig- income statement and will affect it within the next nated as hedges. During the year ended 31 De- Gains and losses on other financial instruments six months from 31 December 2017. The table below presents the effect of the Group’s cember 2016 the Group settled two cross-cur- derivative financial instruments designated as cash rency swaps as well as entered into and settled are recognised in profit or loss as follows: ↓ flow hedges on the consolidated income statement and consolidated statement of other comprehensive income for the years ended 31 December: ↓ 2017 2016

Change in fair value of financial instruments measured through profit or loss: 2017 2016 Cross-currency swaps not designated as hedges — (159)

Foreign currency forwards: Foreign-currency forwards not designated as hedges — (76) Amount of loss recognised in cash flow hedge reserve (3,560) (5,887) Derivative financial instruments over the equity of investee 44 — Amount of loss reclassified from accumulated cash flow hedge reserve into 3,752 3,736 Financial derivatives under lease and hosting contracts (14) — foreign exchange loss, net Derivative financial assets over other agreements (60) — Deferred tax on movements in OCI (38) 430 Total loss on financial instruments, net (30) (235) 154 (1,721) 254 Consolidated financial statements Consolidated financial statements 255

3.4.5 Fair values The Group uses the following hierarchy for deter- CARRYING AMOUNT FAIR VALUE mining and disclosing the fair value of financial —— Accounting policies instruments by valuation technique: 31 DECEMBER 31 DECEMBER

The fair value of financial instruments recorded in • Level 1: quoted (unadjusted) prices in active 2017 2016 2017 2016 the consolidated statement of financial position markets for identical assets or liabilities; and/or disclosed in the notes that are traded in Loans receivable from Garden Ring and Level 2 6,357 7,340 6,436 7,340 active markets at each reporting date is deter- • Level 2: other techniques for which all inputs Strafor mined by reference to quoted market prices or which have a significant effect on the record- Other deposits Level 2 4,976 2,771 4,706 2,534 dealer price quotations, without any deduction ed fair value are observable, either directly or for transaction costs. For financial instruments indirectly; Other Level 3 157 — 157 — not traded in an active market, the fair value is de- Total financial assets 19,682 15,641 19,491 15,404 termined using appropriate valuation techniques, • Level 3: techniques which use inputs that have which include using recent arm’s length market a significant effect on the recorded fair value Financial liabilities: transactions, reference to the current fair value of that are not based on observable market data. another instrument that is substantially the same, Financial liabilities at amortised cost: a DCF analysis, or other valuation models. —— Disclosures Loans and borrowings Level 2 208,143 179,115 234,969 186,775

The inputs to these models are taken from observ- Set out below is a comparison by class of the Rouble bonds Level 1 55,967 55,998 56,299 55,411 able markets where possible, but where this is not carrying amounts and fair values of the Group’s Deferred and contingent consideration Level 3 — 284 — 284 feasible, a degree of judgment is required in es- financial instruments that are carried in the con- Finance lease obligations Level 3 4,222 4,173 4,222 4,173 tablishing fair values. The judgments include consolidated financial statements: ↓ siderations of inputs such as liquidity risk, credit Other liabilities Level 3 329 335 343 384 risk and volatility. Changes in assumptions about Financial liabilities at fair value through OCI: these factors could affect the reported fair value of financial instruments. Foreign currency forwards and cross-currency Level 2 3,842 5,399 3,842 5,399 swap designated as cash flow hedges

CARRYING AMOUNT FAIR VALUE Total financial liabilities 272,503 245,304 299,675 252,426

31 DECEMBER 31 DECEMBER

2017 2016 2017 2016 —— Valuation techniques The fair value of the Group’s other deposits relat- and assumptions ing to cash received under certain contracts with Financial assets: customers is determined by using a DCF method Management has determined that cash, short- using a discount rate that reflects the bank deposit Financial assets at fair value through profit or loss: term deposits, other loans, trade receivables, rates the Group would get in the market as at the trade payables, bank overdrafts and other cur- end of the reporting period. Financial investments in associates Level 3 264 — 264 — rent liabilities approximate their carrying amounts Financial derivatives under lease and hosting largely due to the short-term maturities of these The fair values of the Group’s loans and borrow- Level 3 150 — 150 — contracts instruments. ings and other liabilities carried at amortised cost, except for market quoted bonds, are determined Derivative financial assets over the equity of Level 3 122 — 122 — investee The Group, using available market information and by using a DCF method using a discount rate that appropriate valuation methodologies, where they reflects the issuer’s borrowing rate as at the end of Financial assets at fair value through OCI: exist, has determined the estimated fair values the reporting period. The own nonperformance risk Cross-currency swap designated as cash flow of its financial instruments. However, judgment is as at 31 December 2017 and 2016 was assessed Level 2 — 435 — 435 hedge necessarily required to interpret market data to to be insignificant. determine the estimated fair value. Accordingly, Loans and receivables at amortised cost: the estimates presented herein are not necessarily The Group, in connection with its current activities, Short-term bank deposits Level 2 7,656 5,095 7,656 5,095 indicative of the amounts the Group could realise is exposed to various financial risks, such as for- in a current market exchange. eign currency risks, interest rate risks and credit risks. The Group manages these risks and monitors The fair value of loans receivable from Garden their exposure on a regular basis (Note 5.4). Ring and Strafor approximates their carrying value. 256 Consolidated financial statements Consolidated financial statements 257

The fair values of foreign currency forwards and —— Disclosures The following table summarises the changes in cross-currency swaps are based on a forward the impairment allowance for trade and other yield curve and represent the estimated amount The following tables summarise the valuation of receivables for the years ended 31 December: ↓ the Group would receive or pay to terminate these financial assets and liabilities measured at fair 31 DECEMBER agreements at the reporting date, taking into ac- value on a recurring basis by the fair value hier- 2017 2016 count foreign exchange spot and forward rates, archy: ↓ current interest rates, creditworthiness, nonper- Balance at beginning of year 2,778 2,217 formance risk, and liquidity risks associated with current market conditions. Acquisitions (Note 5.3) 398 —

Change in the impairment allowance 2,681 2,038 DERIVATIVES UNDER LEASES FINANCIAL AND OVER THE TOTAL FOREIGN TOTAL Accounts receivable written off (2,666) (1,477) CROSS- INVEST MENTS IN EQUITY OF FINANCIAL CURRENCY CROSS- FINANCIAL CURRENCY SWAPS ASSOCIATES INVESTEE ASSETS FORWARDS CURRENCY SWAPS LIABILITIES Balance at end of year 3,191 2,778

31 December 2017 3.6 INVENTORY Level 1 — — — — — — — —— Accounting policies Management periodically reviews the recover- Level 2 — — — — (3,842) — (3,842) ability of VAT receivables and believes the amount Level 3 — 264 272 536 — — — Inventory, which primarily consists of telephone reflected in the consolidated financial statements handsets, portable electronic devices, accesso- is fully recoverable within one year. Total ries and USB modems, is stated at the lower of as of 31 — 264 272 536 (3,842) — (3,842) December cost and net realisable value. Cost is determined —— Disclosures 2017 using the weighted-average cost method. Net realisable value is the estimated selling price in Current non-financial assets are as follows: ↓ 31 the ordinary course of business less the estimat- December 31 DECEMBER 2016 ed costs necessary to make the sale. 2017 2016 Level 1 — — — — — — — —— Disclosures Level 2 435 — — 435 (5,393) (6) (5,399) Prepayments for services 4,605 2,373 The amount of inventory write-down to net realis- VAT receivable 1,160 1,252 Level 3 — — — — — — — able value and other inventory losses recognised in ‘Cost of revenue’ line in the consolidated income Deferred costs 1,176 1,033 Total statement for the year ended 31 December 2017 is as of 31 Prepaid taxes, other than 435 — — 435 (5,393) (6) (5,399) 289 172 December 550 (2016: 1,652). income tax 2016 Prepayments for inventory 216 221 3.7 NON-FINANCIAL ASSETS Total current non- 31 DECEMBER 7,446 5,051 During the years ended 31 December 2017 and AND LIABILITIES financial assets 31 December 2016 there were no transfers bet- 2017 2016 ween levels of the fair value hierarchy. —— Accounting policies Neither past due nor 20,114 16,539 Non-current non-financial assets are as follows: impaired —— Value-added tax 31 DECEMBER Past due but not impaired: 3.5 TRADE AND OTHER RECEIVABLES Value added tax (‘VAT’) related to revenues is gen- 2017 2016 Less than 30 days 2,152 1,093 erally payable to the tax authorities on an accrual The ageing analysis of trade and other receivables basis when invoices are issued to customers. VAT 30 - 90 days 3,382 1,217 Deferred costs, non-current 2,744 2,560 that are not impaired is as follows: → incurred on purchases may be offset, subject to More than 90 days 872 503 certain restrictions, against VAT related to reve- Long-term advances 1,814 479 nues, or can be reclaimed in cash from the tax Total trade and other Total non-current non- 26,520 19,352 4,558 3,039 receivables authorities under certain circumstances. financial assets 258 Consolidated financial statements Consolidated financial statements 259

Current non-financial liabilities are as follows: ↓ —— Decommissioning provision As of 31 December 2017 and 2016, the Company

4 EQUITY had 100,000,000,000 authorised ordinary shares 31 DECEMBER The Group has certain legal obligations related to with a par value of RUB 0.1, of which 595,700,967 2017 2016 rented sites for base stations and masts, which in- were issued and outstanding and 24,299,033 clude requirements to restore the real estate upon —— Accounting policies were classified as treasury shares (held through Advances from customers 15,044 12,044 which the base stations and masts are located its wholly owned subsidiary, MegaFon Invest- upon their being decommissioned. Decommis- ments (Cyprus) Limited). VAT payable 4,987 3,206 Ordinary shares are classified as equity. Incre- sioning costs are determined by calculating the mental costs directly attributable to the issue of Current portion of deferred present value of the expected costs to settle the —— Annual General Meeting 7,579 1,425 new shares are shown in equity as a deduction, revenue obligation using estimated cash flows, and are net of tax, from the proceeds. Taxes payable, other than recognised as part of the cost of the particular On 30 June 2017 the annual General Meeting of 1,544 1,475 income tax asset. The cash flows are discounted at the cur- The Company’s own issued equity instruments Shareholders of the Company approved the pay- rent pre-tax rate that reflects the risks specific that are reacquired (treasury shares) are rec- ment of a final dividend for the 2016 financial year Other current liabilities 32 36 to the decommissioning liability. The unwinding ognised at cost and deducted from equity. No in the amount of 19,211, or RUB 32.25 per ordinary Total current non- of the discount is expensed in profit or loss as share (or GDR). Such dividends were paid in full 29,186 18,186 gain or loss is recognised in profit or loss on financial liabilities finance costs. The estimated future costs of de- the purchase, sale, issue or cancellation of the in August 2017. Together with the interim dividend commissioning are reviewed annually and adjust- Group’s own equity instruments. Any difference approved and paid in 2016, total dividends for 2016 ed as appropriate. Changes in estimated liability between the carrying amount and the consider- amounted to 38,423, or RUB 64.50 per ordinary Non-current non-financial liabilities are as fol- resulting from revisions of the estimated future ation received upon any subsequent sale is rec- share (or GDR). lows: ↓ costs or in the discount rate applied are added ognised in equity. 31 DECEMBER to or deducted from the cost of the asset, except —— Other capital reserves where a reduction in the provision is greater than 2017 2016 —— Disclosures the unamortised capitalised cost, in which case The disaggregation of other capital reserves and Deferred revenue 9,672 2,514 the capitalised cost is reduced to nil and the re- —— Share capital changes of other comprehensive income by each maining adjustment is recognised in the consoli- type of reserve in equity is shown below: ↓ Other non-current liabilities 509 91 dated income statement. Total non-current 10,181 2,605 non-financial liabilities In determining the best estimate of the provision, assumptions and estimates are made in relation to discount rates, the expected cost to disman- TRANSAC- tle and remove the asset from the site, including FOREIGN SHARE-BASED TIONS WITH CURRENCY CASH FLOW COMPEN- NON-CON- TOTAL OTHER long-term inflation forecasts, and the expected TRANSLATION HEDGE SATION TROLLING RESERVE CAPITAL timing of those costs. RESERVE RESERVE RESERVE INTERESTS FUND RESERVES 3.8 PROVISIONS As of 1 January —— Disclosures (1,883) 170 1,488 (23) 15 (233) —— Accounting policies 2016 The following table describes the changes to the Foreign currency 692 — — — — 692 Provisions are recognised when the Group has a decommissioning provision for the years ended translation present legal or constructive obligation as a result 31 December: ↓ Change in fair value of past events, it is probable that an outflow of of cash flow hedges — (1,889) — — — (1,889) resources will be required to settle the obligation, (Note 3.4.4) and the amount can be reliably estimated. Pro- 2017 2016 As of 31 visions are not recognised for future operating (1,191) (1,719) 1,488 (23) 15 (1,430) Balance at beginning of December 2016 losses. 3,888 4,603 year Foreign currency 115 — — — — 115 Revisions in estimated cash translation Provisions are measured at the present value of 64 (1,288) flows the expenditures expected to be required to settle Change in fair value the obligation using a pre-tax rate that reflects Net additions 51 90 of cash flow hedges — 152 — — — 152 current market assessments of the time value of (Note 3.4.4) Unwinding of discount 375 483 money and the risks specific to the obligation. Any As of 31 (1,076) (1,567) 1,488 (23) 15 (1,163) increase in the provision due to passage of time is Balance at end of year 4,378 3,888 December 2017 recognised as finance costs. 260 Consolidated financial statements Consolidated financial statements 261

The foreign currency translation reserve is used The cost of equity-settled transactions is deter- 2010 OPTION PLAN 2015 RSU PLAN 2017 RSU PLAN to record exchange differences arising from the mined by the fair value at the date when the grant translation of the financial statements of foreign is made using an appropriate valuation model. That Adoption date November 2010 February 2015 November 2017 operations. cost is recognised over the period in which the ser- Type of shares Ordinary shares Ordinary shares Ordinary shares vice conditions are fulfilled in employee benefits The cash flow hedge reserve is used to record the and related social charges expense (Note 2.3). For Number of options 10,706,403 5,795,500 5,182,471 accumulated impact of derivatives designated as MegaFon equity-settled transactions the corre- or RSU reserved cash flow hedges (Note 3.4.4). sponding amount is recorded as an increase in other reserves in equity, while for MGL awards non-con- Exercise price Granted prior to nil nil 31 December 2011 - The share-based compensation reserve is used to trolling interest (‘NCI’) is increased (Note 5.7). US$ 19.60 recognise the value of equity-settled share-based —— Cash-settled transactions Granted since payment transactions provided to employees, in- 31 December 2011 - cluding key management personnel, as part of US$ 17.50 their remuneration (Note 5.1). The cost of cash-settled transactions is measured initially at fair value at the grant date using an Exercise basis Prior to November 2011 – net Shares or cash at the Shares or cash at the Group’s share basis only Group’s discretion discretion The reserve on transactions with non-controlling appropriate valuation model. This fair value is ex- interests is used to record differences arising as a pensed over the period until the vesting date with Since November 2011 – net recognition of a corresponding liability. The liabil- result of transactions with non-controlling interests share basis or cash at the ity is re-measured to fair value at each reporting Group’s discretion that do not result in a loss of control. date up to, and including the settlement date, with Expiration date December 2022 December 2022 December 2022 changes in fair value recognised in employee ben- The reserve fund has been established according to efits and related social charges expense (Note 2.3). Vesting period Generally 4 years Generally 4 years Generally 4 years the requirements of Russian law and is used to cover the Company’s losses, redemption of its bonds Estimating fair value for share-based payment and re-purchase of its own shares in the absence transactions requires a determination of the most The 2017 RSU Plan vesting terms include perfor- The following table summarises the weighted-av- of other capital resources. appropriate valuation model, which is dependent mance conditions. Under all the plans the options erage exercise prices and number of share options on the terms and conditions of the grant. This are not transferrable. and RSUs: ↓ estimate also requires determination of the most appropriate inputs to the valuation model includ- NUMBER WEIGHTED-AVERAGE EXERCISE PRICES PER 5 ADDITIONAL NOTES ing the expected life of the share option or share- OF OPTIONS OPTION based transaction, volatility and dividend yield Equivalent in Roubles and making assumptions about them. at exchange rate as Number of options US Dollars of 31 December 2017 5.1 SHARE-BASED COMPENSATION —— Disclosures Outstanding 10,563,127 10.08 581 —— Accounting policies as of 01 January 2017 —— Former CEO long-term incentive plan Exercisable as of 1 January 2017 7,730,377 13.60 783 —— Equity-settled transactions During his time as the CEO of the Company, Mr. Ivan Tavrin, among other options, was granted Available for grant as of 1 January 6,384,864 2.12 122 2017 Employees (including senior executives) of the options to buy up to 5 % of the total issued shares Group and its associates, may receive remunera- of the Company at the December 2012 IPO price Granted 4,029,000 0.56 32 tion in the form of share-based payment transac- (US$ 20 per share). In December 2014 Mr. Tavrin Exercised 7,350,613 10.79 622 tions, whereby share-based payment recipients exchanged the interest in the Company which render services as consideration for equity instru- he had acquired to that date and all remaining Cancelled — n/a n/a ments (‘equity-settled transactions’) or a cash unexercised options for an interest in USM Hold- Forfeited 38,000 5.93 342 equivalent thereof (‘cash-settled share-based ings Limited (‘USMHL’) (Note 5.2). The unexercised payments’). options expired in May 2017. Outstanding 7,203,514 4,05 233 as of 31 December 2017 If the Group has a choice to settle share-based —— MGL share-based payment arrange- Exercisable as of 31 December 2017 2,464,597 10.50 605 payments in cash or in equity, the entire trans- ments Available for grant action is treated either as cash-settled or as eq- 2,393,864 4.79 276 uity-settled, depending on whether or not the During 2017 and 2016, the Company had the fol- as of 31 December 2017 Group has a present obligation to settle in cash. lowing outstanding option plans: → 262 Consolidated financial statements Consolidated financial statements 263

FOR THE YEARS ENDED 31 DECEMBER The weighted-average share price was US$ 27.30 The valuations of all equity-settled options and for options and RSUs exercised in 2017. RSUs granted during 2017 are summarised in the 2017 2016 table below: ↓ Services from USM group 968 1,144

Services from Telia group 710 983 NUMBER OF DIVIDEND YIELD, RISK-FREE INTER- SHARE PRICE FAIR VALUE, FAIR VALUE PER OPTION PLAN OPTIONS % VOLATILITY, % EST RATE, % (US$) TOTAL OPTION (RUB) Services from Euroset 1,646 1,226

2010 Option 130,000 0 % 49.4 % 1.98 % 26.35 106 812 Services from Garden Ring 1,771 1,567 Plan Services from MGL’s equity accounted associates 15 — 2015 RSU 464,000 0 % 40.9-52.3 % 1.81-2.28 % 21.24-33.00 684 1,474 Plan 5,110 4,920

2017 RSU Plan 3,435,000 0 % 41.1 % 2.17 % 29.30 5,907 1,720 Other non-operating expenses from USM group — 1,293

31 DECEMBER The valuations of all cash-settled options as of 31 December 2017 are summarised in the table 2017 2016 below: ↓ Due from USM group 1 4

Due from Telia group — 253 NUMBER OF DIVIDEND RISK-FREE IN- SHARE PRICE FAIR VALUE, FAIR VALUE PER OPTIONS YIELD, % VOLATILITY, % TEREST RATE, % (US$) TOTAL OPTION (RUB) Due from Euroset 1,473 333

590,064 0 % 41 % 2.22 % 28.90 482 816 Due from Garden Ring 4,777 4,509

Due from MGL’s equity accounted associates 77 — All valuations are made using Binominal valuation 5.2 RELATED PARTIES 6,328 5,099 models. The forfeiture rate used in all valuation Due to USM group 1,271 1,468 models in 2017 is 0.5-3.3 %. It is based on his- The following tables provide the total amount of torical data and current expectations and is not transactions that have been entered into with re- Due to Telia group — 322 necessarily indicative of forfeiture patterns that lated parties and balances of accounts with them Due to Euroset 92 27 may occur. for the relevant financial years: ↓ Due to Garden Ring 142 — The expected volatility reflects the assumption Due to MGL’s equity accounted associates 2 — that the historical volatility over a period similar to the life of the options/RSUs is indicative of future 1,507 1,817 trends, which may not necessarily be the actual outcome. —— Terms and conditions of transactions —— USM group FOR THE YEARS ENDED 31 DECEMBER with related parties 2017 2016 The outstanding balances and transactions with Outstanding balances at the years ended 31 De- USM group relate to operations with USM Hold- Revenues from USM group 1 16 cember 2017 and 2016 are unsecured. There have ings Limited and its consolidated subsidiaries. been no guarantees provided or received for Revenues from Telia group 350 557 any related party receivables or payables. As of The Group purchased billing system and related 31 December 2017 and 2016, the Group has not support services from PeterService, another mem- Revenues from Euroset 3,450 401 recorded any impairment of receivables relating to ber of the USM group, in the amount of 6,019 and Revenue from MGL’s equity accounted associates 121 — amounts owed by related parties. This assessment 7,254 during 2017 and 2016, respectively. is undertaken each financial year by examining 3,922 974 the financial position of the related party and the In February 2017 MegaFon acquired MGL market in which the related party operates. (Note 5.3). Before that date, MGL was a related party of the Group as both MegaFon and MGL were indirect subsidiaries of USM group. 264 Consolidated financial statements Consolidated financial statements 265

The Group is a member of the Not-for-profit Part- as employee benefits expense to key manage- accordance with the appropriate IFRS. Contin- the acquisition method. The Group has elected nership ‘Development, Innovations, Technologies’ ment personnel of the Group for the years ended gent consideration that is classified as equity is to measure the NCI in the acquiree at its propor- (the ‘Partnership’) which was established by 31 December are as follows: ↓ not re-measured and subsequent settlement is tionate interest in the identifiable net assets of companies in the USM group. The Partnership is 2017 2016 accounted for within equity. the acquiree. required to incur education, science and other Short-term employee social costs as well as to maintain certain social 580 505 Acquisition-related costs are expensed as in- The table below includes the allocation of the pur- infrastructure assets in Skolkovo Innovation Cen- benefits curred and included in general and administra- chase price to the acquired net assets of MGL tre which are not owned by MegaFon and not Share-based compensation tive expenses. based on their estimated fair values. ↓ — 81 recorded in the consolidated statement of finan- (Note 5.1) cial position. The Group’s accrued contributions —— 2017 acquisitions Long-term incentive 89 158 to the Partnership of nil during the year ended programme 31 December 2017 (2016: 1,293) are included into —— Mail.Ru ASSETS other non-operating expenses in the consolidated Total 669 744 income statement. On 09 February 2017 the Group completed the Property and equipment 3,840 acquisition of 15.2 % of the shares, representing Intangible assets 62,568 —— Telia group 63.8 % of the voting rights of MGL, from three Investments in associates and joint 649 entities owned by USM group for a total considera- ventures The outstanding balances and transactions with 5.3 BUSINESS COMBINATIONS tion of US$ 740m (44,040 at the exchange rate as Telia group relate to operations with various com- of the date of acquisition), consisting of cash con- Other financial assets 539 panies in that group. Revenues and cost of services —— Accounting policies sideration of US$ 640m (38,088 at the exchange Other non-financial assets 4,550 are principally related to roaming agreements be- rate as of the date of acquisition) and deferred tween MegaFon and members of the Telia group The Group applies the acquisition method of ac- consideration of US$ 100m (5,952 at the exchange Deferred tax assets 2,600 located outside Russia and a wireline interconnec- counting and recognises the assets acquired, the rate as of the date of acquisition) plus interest tion agreement with Telia Carrier Russia. liabilities assumed and any non-controlling inter- payable on or prior to the first anniversary of the Trade and other receivables 5,135 est in the acquired company at the acquisition acquisition date. The deferred consideration of Cash and cash equivalents 5,513 In October and November 2017 Telia Compa- date, measured at their fair values as of that date. US$ 100m (5,773 at the exchange rate as of the ny sold its entire interest in MegaFon (Note 1.1). payment date) was paid in December 2017. 85,394 Consequently, Telia group ceased to be a related The identification of assets acquired and liabil- party. ities assumed as a result of those acquisitions, The primary reason for the acquisition was to determining the fair value of assets acquired and achieve significant synergies for both companies, LIABILITIES —— Euroset liabilities assumed as well as any contingent con- including enhancement of MegaFon’s digital of- sideration and quantification of resulting good- ferings and their distribution, launch of a special Loans and borrowings 123 Euroset is the Group’s joint venture with Vimpel- will requires management’s judgment and often VKmobile offering for users of the VK social net- Other financial liabilities 943 Com (Note 3.3). The Group has a dealership and involves the use of significant estimates and as- work, and other potential initiatives. equipment sales agreement with Euroset which sumptions, including assumptions with respect to Other non-financial liabilities 9,844 qualifies as a related party transaction. future cash inflows and outflows, discount rates, Based on the current set-up of the Board of Direc- Deferred tax liabilities 9,945 terminal growth rates, licence and other asset use- tors of MGL, the Company concluded that it has —— Garden Ring ful lives and market multiples, among other items. the ability to direct relevant activities of MGL and Trade and other payables 7,049 therefore has control over that company. Income taxes payable 389 Garden Ring is the Group’s joint venture with Results of subsidiaries acquired and accounted Sberbank (Note 3.3). The Group has a lease agree- for by the acquisition method have been included Accordingly, the Group has consolidated MGL 28,293 ment with Garden Ring which qualifies as a relat- in operations from the relevant date of acquisition. from the beginning of 2017. Total identifiable net assets at fair 57,101 ed party transaction. The Group also has a loan value receivable from Garden Ring. The balance due Any contingent consideration to be transferred The acquisition-date fair values of each major class from Garden Ring at 31 December 2016 and 2017 by the Group is recognised at fair value at the of consideration transferred are as follows: ↓ Goodwill arising on acquisition 41,839 mainly consists of the loan receivable. acquisition date. Subsequent changes in the fair Non-controlling interest (54,900) value of the contingent consideration classified as The acquisition of MGL was accounted for using —— Compensation to key management an asset or liability that is a financial instrument Purchase consideration transferred 44,040 Cash 38,088 personnel within the scope of IAS 39, Financial Instruments: Recognition and Measurement, are recognised Deferred consideration 5,952 Members of the Board of Directors and the Man- in accordance with IAS 39 in the consolidated in- agement Board of the Company are the key come statement. If the contingent consideration Total consideration transferred 44,040 NCI includes the value of the outstanding equi- management personnel. The amounts recognised is not within the scope of IAS 39, it is measured in ty-settled share-based awards of MGL measured 266 Consolidated financial statements Consolidated financial statements 267

at market as of the date of acquisition. 5.4 FINANCIAL RISK MANAGEMENT derivatives and the proportion of financial instru- difference between fixed and variable rate in- ments in foreign currencies are all constant and terest amounts calculated by reference to an From the date of the acquisition, MGL has con- The Group’s principal financial liabilities, other on the basis of the hedge designations in place agreed-upon notional principal amount. These tributed 51,744 of revenue and 2,811 to the profit than derivatives, comprise loans and borrow- at 31 December 2017 and 2016. swaps are designated to hedge underlying debt before tax of the Group (Note 5.7). ings, and trade and other payables. The main obligations. purpose of these financial liabilities is to finance —— Interest rate risk The goodwill recognised is attributable primarily the Group’s operations. The Group has trade At 31 December 2017 approximately 84 % of the to expected synergies from the acquisition and and other receivables, and cash and short-term Interest rate risk is the risk that the fair value or fu- Group’s borrowings are at a fixed rate of interest the value to be attributed to the workforce of MGL. deposits that derive directly from its operations. ture cash flows of a financial instrument will (2016: 80 %). It is not expected to be deductible for income tax The Group also enters into derivative transactions. fluctuate because of changes in market interest purposes. Management is still assessing the allo- rates. The Group’s exposure to the risk of changes —— Interest rate sensitivity cation of goodwill among cash generating units The Group is exposed to market risk, credit risk in market interest rates relates primarily to the (‘CGUs’). and liquidity risk. The Group’s senior manage- Group’s long-term debt obligations with float- The following table demonstrates the sensitivity ment oversees the management of these risks. ing interest rates. The Group manages its inter- to a reasonably possible change in interest rates The Group recognised MGL acquisition-related The Group’s senior management is supported by est rate risk by having a balanced portfolio of on loans and borrowings, after the impact of costs as general and administrative expenses in the Finance and Strategy Committee of the Board fixed and variable rate loans and borrowings. To hedge accounting. With all other variables held the amount of 251 for the year ended 31 December of Directors that advises on financial risks and the manage this, the Group, when necessary, enters constant, the Group’s profit before tax is affected 2017 in the consolidated income statement. appropriate financial risk governance framework into interest rate swaps, under which the Group through the impact on floating rate borrowings for the Group. The Finance and Strategy Com- agrees to exchange, at specified intervals, the as follows: ↓ —— ZakaZaka mittee provides assurance to the Group’s senior management that the Group’s financial risk-tak- In May 2017, MGL, and thereby the Group, ac- ing activities are governed by appropriate poli- INCREASE/DECREASE EFFECT ON PROFIT quired the remaining 90.09 % of ZakaZaka, a food cies and procedures and that financial risks are IN BASIS POINTS BEFORE TAX delivery company, for cash consideration of 1,042. identified, measured and managed in accordance The main purpose of the acquisition was to further with the Group’s policies. All derivative activities Year ended 31 December 2017 expand the MGL’s food delivery business. The pro- for risk management purposes are carried out by US Dollar +17 (58) visional fair values of total identified assets and specialist teams that have the appropriate skills, liabilities at the date of acquisition were insignifi- experience and supervision. It is the Group’s pol- US Dollar -17 58 cant. Goodwill in the amount of 780 is mainly at- icy that no trading in derivatives for speculative Year ended 31 December 2016 tributable to expected synergies and cost savings purposes shall be undertaken. with the MGL’s food delivery business. US Dollar +20 (79) The Company’s Board of Directors reviews and US Dollar -20 79 —— Am.ru agrees policies for managing each of these risks, which are summarised below. In May 2017, MGL, and thereby the Group, acquired exclusive rights for Am.ru, one of the larg- —— Market risk est Russian auto classifieds websites, for cash The analysis is prepared assuming the amount of A significant portion of the Group’s liabilities is consideration of 542. The primary purpose of Market risk is the risk that the fair value of future variable rate liability outstanding at the balance denominated in US dollars or Euro. If the Rouble the acquisition was to establish the Group’s solid cash flows of a financial instrument will fluctu- sheet date was outstanding for the whole year. continued to fluctuate against the US dollar or presence in the auto classifieds. ate because of changes in market prices. Market Euro, this could negatively impact the Group’s price risks that mostly impact the Group comprise —— Foreign currency risk earnings. —— 2016 acquisition two types of risk: interest rate risk and currency risk. Financial instruments affected by market Foreign currency risk is the risk that the fair value To the extent permitted by Russian law, the Group In 2016 the Group acquired a 100 % interest in risk include: loans and borrowings, deposits and or future cash flows of a financial instrument will keeps part of its cash and cash equivalents in LLC Atlant Telecom, an alternative wireline and derivative financial instruments. fluctuate because of changes in foreign exchange US dollar and Euro interest bearing accounts to broadband internet service provider in Moscow rates. The Group’s exposure to the risk of changes manage against the risk of Rouble decline or de- and Moscow region, for cash consideration of 62. The sensitivity analyses in the following sections in foreign exchange rates relates primarily to the valuation, and also to match its foreign currency The resulting goodwill is 40. relate to the position as of 31 December 2017 and Group’s financing activities (when cash deposits liabilities. 2016. The sensitivity analyses have been prepared and loans and borrowings are denominated in a on the basis that the amount of net debt, the ratio different currency from the Group’s functional of fixed-to-floating interest rates of the debt and currency). 268 Consolidated financial statements Consolidated financial statements 269

To minimise its foreign exchange exposure to fluc- cross-currency swaps) amounted to 87 % as of The movement in the pre-tax effect is a result of The Group monitors its credit risk with regards tuations in foreign currency exchange rates, the 31 December 2017 (89 % at 31 December 2016). monetary assets and liabilities denominated in to loans extended to Garden Ring and Strafor Group is migrating most of its foreign currency currencies other than the functional currency of (Note 3.4). This assessment is undertaken each linked costs to Rouble based costs to balance In accordance with the Group’s policies, the the Company. financial year by examining the financial position assets and liabilities and revenues and expenses Group does not enter into any treasury manage- of the debtor and the market in which the debtor denominated in Roubles. In order to manage the ment transactions of a speculative nature. —— Credit risk operates. As at 31 December 2017 and 2016, no foreign currency risk the Group is also focused on impairment losses were identified. increasing the proportion of Rouble loans through —— Foreign currency sensitivity Credit risk is the risk that a counterparty will not refinancing and hedging activities. meet its obligations under a financial instrument —— Liquidity risk The following table demonstrates the sensitivi- or customer contract, leading to a financial loss. Before 2015 the Group entered into а long-term ty to a reasonably possible change in the US The Group is exposed to credit risk from its oper- The Group monitors its risk relating to a shortage of cross-currency swap and in 2016 it entered into dollar and Euro exchange rates, with all other ating activities (primarily for trade receivables) funds using a recurring liquidity planning tool. The a number of foreign currency forward purchase variables held constant, of the Group’s prof- and from its financing activities, including depos- Group’s objective is to maintain a balance between agreements. These derivative financial instru- it before tax (due to changes in the fair val- its with banks and financial institutions and other continuity of funding and flexibility through the use ments were used to limit exposure to changes in ue and future cash flows of monetary assets financial instruments. of bank loans. Approximately 20 % of the Group’s foreign currency exchange rates on certain of the and liabilities) after the impact of hedge account- loans and borrowings will mature in less than one Group’s long-term debts denominated in foreign ing. The Group’s exposure to foreign currency The Group deposits available cash with various year at 31 December 2017 (2016: 17 %) based on currencies (Note 3.4.4). changes for all other currencies is not material. ↓ banks in the Russian Federation. Deposit insur- the carrying value of borrowings reflected in the ance is either not offered or only offered in de mi- consolidated financial statements. The Group as- Overall, the share of Rouble loans (including nimis amounts in respect of bank deposits within sessed the concentration of risk with respect to the effect of foreign currency forwards and the Russian Federation. To manage the concen- refinancing its debt and concluded it to be low. tration of credit risk, the Group allocates available cash to domestic branches of international As of 31 December 2017 and 2016, the Group has banks and a limited number of Russian banks. A net current liability position. The Group believes CHANGE IN FOREIGN EFFECT ON PROFIT EXCHANGE RATES BEFORE TAX majority of these Russian banks are either owned it will continue to be able to generate significant or controlled by the Russian government. operating cash flows and that adequate access Year ended 31 December 2017 to sources of funding and significant amount of The Group extends credit to certain counterpar- available credit lines are sufficient to meet the US Dollar +20 % (1,886) ties, principally international and national tele- Group’s requirements. Additionally, the Group US Dollar -20 % 1,886 communications operators, for roaming services, can defer capital expenditures if necessary in to certain dealers and to customers on post-paid order to meet short-term liquidity requirements. Euro +20 % 302 tariff plans. The Group minimises its exposure Accordingly, Group management believes that Euro -20 % (302) to the risk by ensuring that credit risk is spread cash flows from operating and financing activ- across a number of counterparties, and by con- ities will be sufficient for the Group to meet its Year ended 31 December 2016 tinuously monitoring the credit standing of coun- obligations as they become due. US Dollar +20 % 3,935 terparties based on their credit history and credit ratings reviews. Other preventative measures to The table below summarises the maturity profile US Dollar -20 % (3,935) minimise credit risk include obtaining advance of the Group’s financial liabilities based on con- Euro +20 % (1,606) payments, bank guarantees and other security. tractual undiscounted payments. Euro -20 % 1,606 The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in Note 3.4. The Group considers the concentration of risk with respect to trade receivables to be low, as its customers are located in several jurisdictions and industries and operate in largely independent markets. Concen- trations of credit risk with respect to trade receivables are limited given that the Group’s customer base is large and unrelated. Due to this management believes there is no further credit risk provision required in excess of the normal impairment allowance for trade and other receivables. 270 Consolidated financial statements Consolidated financial statements 271

% EQUITY INTERES LESS THAN MORE THAN 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS TOTAL СCOUNTRY OF LEGAL ENTITY PRINCIPAL ACTIVITIES INCOR- 2017 2016 31 December 2017 PORATION

Loans and borrowings 74,557 72,935 119,367 100,658 367,517 Mail.Ru Group Limited subsidiary Internet services BVI 15.2 — Trade and other payables 50,535 — — — 50,535

Finance lease obligations 485 1,125 1,125 6,158 8,893 JSC MegaFon Retail subsidiary Retail Russia 100 100

Derivative financial liabilities 3,842 — — — 3,842 LLC NetByNet Holding subsidiary Broadband internet Russia 100 100 Long-term accounts payable — 96 — — 96 LLC Scartel subsidiary Wireless services Russia 100 100 Total 31 December 2017 129,419 74,156 120,492 106,816 430,883 LLC MegaFon Finance subsidiary Financing Russia 100 100 31 December 2016 MegaFon Investments Transactions with subsidiary Cyprus 100 100 Loans and borrowings 61,614 105,147 70,427 83,730 320,918 (Cyprus) Limited treasury shares

Trade and other payables 43,581 — — — 43,581 New telecom services JSC MegaLabs subsidiary Russia 100 100 development Finance lease obligations 464 827 827 7,214 9,332

Derivative financial liabilities 3,248 2,151 — — 5,399 CJSC TT mobile subsidiary Integrated telecom Tajikistan 75 75 LLC Euroset-Retail Long-term accounts payable — 335 — — 335 joint venture Retail Russia 50 50 (Note 3.3) Deferred consideration 284 — — — 284 JSC Sadovoe Koltso joint venture Corporate office Russia 49,999 49,999 Total 31 December 2016 109,191 108,460 71,254 90,944 379,849 (Note 3.3)

—— Capital management —— Collateral The Company holds interests in material subsid- not allocated to operating segments and are not iaries through a number of intermediary holding analysed by the CODM. Capital includes equity attributable to the The Group did not pledge collateral as security for companies. Group’s shareholders. The primary objective of its financial liabilities at 31 December 2017 or 2016, Operating segments with similar economic char- the Group’s capital management is to ensure that except certain assets purchased under finance acteristics, such as forecasted OIBDA, have been it maintains a healthy credit rating and healthy leases or on deferred payment terms (Note 3.1 5.6 SEGMENT INFORMATION aggregated into a telecom segment, which was the capital ratios in order to secure access to debt and 3.4). only reportable segment before MGL was acquired. and capital markets at all times and maximise Operating segments are reported in a manner shareholder value. The Group manages its capital 100 % of the shares of Garden Ring (Note 3.3) consistent with the internal reporting provided With the acquisition of MGL (Note 5.3) the Group structure and makes adjustments to it in light of have been pledged as security for loans received to the chief operating decision-maker (‘CODM’). acquired a whole new business which it did not changes in economic conditions. by Garden Ring from Sberbank, which are due to The CODM is responsible for allocating resources have before. Accordingly, a new internet operat- be repaid in 2026. and assessing performance of the operating seg- ing and reportable segment has been added to The Net Debt to OIBDA ratio is an important mea- ments. The Company’s CEO has been designated the Group structure. Currently the Group’s CODM sure to assess the capital structure in light of the as the CODM. does not review the operating results of MGL on need to maintain a strong credit rating. Net Debt any level lower than the level of the consolidat- represents the carrying amount of interest-bear- 5.5 GROUP INFORMATION The Group manages its telecommunication busi- ed financial statements of MGL, accordingly, no ing loans and borrowings less cash and cash ness primarily based on eight geographical op- further operating segments have been identified equivalents and current and non-current bank The consolidated financial statements of the erating segments within Russia, which provide following this acquisition. deposits. As of 31 December 2017 the Net Debt Group include the following significant subsid- a broad range of voice, data and other tele- to OIBDA ratio was 1.62 (2016: 1.62). iaries and joint ventures of MegaFon: communication services, including wireless and The financial results of MGL are included in the wireline services, interconnection services, data segment disclosure starting from the date of ac- Some loan agreements also have covenants transmission services and value added services quisition. based on Net Debt to OIBDA ratios. The Group (‘VAS’). The CODM evaluates the performance of believes it has complied with all the capital re- the Group’s operating segments based on rev- Around 1.4 % of the Group’s telecom revenue quirements imposed by external parties. enue and OIBDA. Total assets and liabilities are and results are generated by segments outside 272 Consolidated financial statements Consolidated financial statements 273

of Russia. The information about the breakdown No single customer represents 10 % or more of the 5.7 NON-CONTROLLING INTEREST equity-settled share-based compensation of of revenue from customers of the internet seg- consolidated revenue. 1,743, and acquisition of treasury shares of 1,430. ment by the customers’ country of residence is One subsidiary of the Group that has a material not available to the management of the Group, The income statement items for each segment, as NCI is MGL, based in Cyprus and acquired in the The summarised financial information of MGL and it considers that the cost to develop such presented to the CODM, are presented below: ↓ beginning of 2017, with a NCI of 84.8 % (Note 5.3), is provided below. information would be excessive. The balance of the NCI of MGL at 31 December 2017 is 55,484. The amounts allocated to the NCI Summarised income statement for the year ended YEAR ENDED TELECOM INTERNET for the year ended 31 December 2017 include 31 December 2017: ↓ 31 DECEMBER 2017 (MEGAFON) (MGL) ELIMINATIONS GROUP profit of 550, other comprehensive loss of 279,

MGL Revenue

External customers 321,797 51,500 — 373,297 Revenue 51,744

Inter-segment 13 244 (257) — Operating expenses (38,177)

Total revenue 321,810 51,744 (257) 373,297 Amortisation and depreciation (11,637)

OIBDA Finance costs (15)

External customers 121,906 13,336 — 135,242 Finance income 511

Inter-segment (56) 231 (175) — Share of loss of associates and joint ventures (258)

Total OIBDA 121,850 13,567 (175) (175) Foreign exchange gain 729

Loss on financial instruments, net (30)

Other non-operating loss (56) Management has presented the performance be comparable with similarly titled performance measure OIBDA because it believes that this measures and disclosures by other entities. Profit before tax 2,811 measure is relevant to an understanding of the Income tax (2,138) Group’s financial performance. Reconciliation of consolidated OIBDA to consolidated profit before tax for the years ended Profit for the year 673 OIBDA is not a defined performance measure in 31 December: ↓ OCI (327) IFRS. The Group’s definition of OIBDA may not Total comprehensive income 346 2017 2016

OIBDA 135,242 121,139

Depreciation (57,341) (51,925) Profit for the year ended 31 December 2017 in- Summarised statement of financial position as at cludes amounts relating to the acquisition-date 31 December 2017: ↓ Amortisation (17,642) (7,881) fair value adjustments. Goodwill impairment — (3,400) MGL Loss on disposal of non-current assets (491) (849)

Finance costs (24,321) (19,094) Non-current assets 65,555

Finance income 2,235 1,810 Current assets 23,789

Share of loss of associates and joint ventures (2,205) (2,651) Non-current liabilities (15,621)

Impairment loss from Euroset (15,917) — Current liabilities (15,960)

Other non-operating loss (1,639) (2,906) Total equity 57,763

Loss on financial instruments, net (30) (235) Attributable to:

Foreign exchange (loss)/gain, net (3,722) 1,822 Equity holders of the Company 2,279

Profit before tax 14,169 35,830 NCI 55,484 274 Consolidated financial statements Consolidated financial statements 275

Summarised cash flow information for the year which are not owned by the Group and not re- years preceding the current year. Under certain ended 31 December 2017: ↓ corded in the consolidated financial statements circumstances reviews may cover longer periods. as well as to incur education, science and other social costs. Such activities may be conducted The Group’s management believes that its interpre- MGL in collaboration with non-governmental organ- tation of the relevant legislation is appropriate and isations. These expenses are presented in other is in accordance with the current industry practice, Operating activities 18,815 non-operating loss in the consolidated income and that the Group’s tax, currency and customs Investing activities (7,351) statement (Note 5.2). positions will be sustained. However, the interpretations of the relevant authorities could differ. Financing activities (1,565) —— Taxation Net increase in cash and cash equivalents 9,899 As of 31 December 2017 the Group’s management Russian and Tajik tax, currency and customs estimated the possible effect of additional taxes, legislation, including transfer pricing legislation, before fines and interest, if any, on these consoli- are subject to varying interpretations and chang- dated financial statements, if the authorities were es, which can occur frequently. Management’s successful in enforcing different interpretations interpretation of such legislation as applied to being taken by them, to be in the amount of ap- 5.8 COMMITMENTS, CONTINGENCIES transactions and activities of the Group may be proximately 856. AND UNCERTAINTIES challenged by the relevant regional and federal authorities. Recent events within Russia and Tajik- —— Finance lease commitments —— Russian operating environment Under the 4G/LTE licences acquired at frequency istan suggest that the tax authorities are taking a distribution auctions and from other operators via more assertive position in their interpretation and The Group has finance lease contracts for various During 2016 and 2017, the Russian economy acquisition of other entities the Company is obli- enforcement of the legislation and as a result, it items of telecommunications assets. Under these was negatively impacted by significant declines gated to provide 4G/LTE services in each popula- is possible that transactions and activities that leases the lessor retains title to the leased assets in crude oil prices and the value of the Russian tion center with over 10,000 inhabitants in Russia have not been challenged in the past may now as security for the Group’s obligations thereunder. Rouble, as well as sanctions imposed on Russia by the end of the seven-year period starting from be challenged. Therefore, significant additional Future minimum lease payments under finance by several countries. Rouble interest rates con- the date of obtaining the licence, i.e. by 2023. taxes, penalties and interest may be assessed. leases together with the present value of the net tinued to fluctuate and as at 31 December 2017 minimum lease payments as of 31 December are the key rate of the Central Bank of Russia was at As of the date these consolidated financial state- Fiscal periods remain open to review by the au- as follows: ↓ 7.75 %. The combination of the above resulted in ments were authorised for issue the Group was thorities in respect of taxes for the three calendar reduced access to capital, a higher cost of capi- fully compliant with these capital expenditure tal, increased inflation and uncertainty regarding commitments. economic growth, which could negatively affect the Group’s future financial position, results of —— Equipment purchases agreements 2017 2016 operations and business prospects. Management believes it is taking appropriate measures to sup- In 2014 the Group entered into two separate MINIMUM PRESENT VALUE MINIMUM PRESENT VALUE PAYMENTS OF PAYMENTS PAYMENTS OF PAYMENTS port the sustainability of the Group’s business in 7-year agreements with two suppliers to purchase the current circumstances. equipment and software for 2G/3G/4G network Within one year 485 456 464 428 construction and modernisation. The software —— 4G/LTE licence capital commitments usage agreements contain various termination After one year but not more than five years 2,250 1,581 1,654 1,157 options, however the Group is specifically com- More than five years 6,158 2,185 7,214 2,588 In July 2012, the Federal Service for Supervision in mitted under the agreements to pay at least an Communications, Information Technologies and amount equal to 50 % of the fees due for years Total minimum lease payments 8,893 4,222 9,332 4,173 Mass Media granted MegaFon a licence and al- four through seven of the agreements for each Less amounts representing finance charges (4,671) — (5,159) — located frequencies to provide services under the base station in use as at the date of termina- 4G/LTE standard in Russia. Under the terms and tion while receiving a credit against these com- Present value of minimum lease payments 4,222 4,222 4,173 4,173 conditions of this licence, the Company is obligat- mitments for fees already paid. The amount of ed to provide 4G/LTE services in each population the commitments at 31 December 2017 is 8,675 center with over 50,000 inhabitants in Russia by (31 December 2016: 7,459). 2019. The Company is also obligated to make capital expenditures of at least 15,000 annually —— Social infrastructure expenses toward the 4G/LTE roll-out until the network is fully deployed. From time to time, the Group may determine to maintain certain social infrastructure assets 276 Consolidated financial statements Consolidated financial statements 277

—— Operating lease commitments The Group normally enters into operating leases 5.9 EVENTS AFTER with a term not exceeding one year. According- THE REPORTING DATE Leases in which a significant portion of the risks ly, the Group’s operating lease commitments at and rewards of ownership are retained by the 31 December 2017 and 2016 approximate the an- —— Rouble bonds —— Strafor loan lessor are classified as operating leases. Pay- nual lease expense (Note 2.3). ments made under operating leases (net of any On 19 February 2018 the Group placed its Se- In February 2018 the loan due from Strafor incentives received from the lessor) are charged MegaFon has a ten-year lease agreement with ries BO-001P-04 Rouble denominated exchange (Note 3.4), was extended to April 2018 and was to profit or loss on a straight-line basis over the Garden Ring for a part of the building (Note 3.3). bonds, in an aggregate principal amount of converted into Roubles so that the amount due period of the lease. Future minimum rentals payable under this 20,000. The bonds have a term of 3 years fol- including interest as of the conversion date was non-cancellable operating lease as at 31 Decem- lowing placement. The coupon rate was set at 1,724. The Strafor loan was also assigned to and ber are, as follows: ↓ 7.2 % per annum, payable semiannually. assumed by Lonestar Enterprises Ltd, another company related to the Svyaznoy group. On 07 March 2018 the Group redeemed in full at par its Series 06 and 07 Rouble denominat- —— ESForce Holding Limited 2017 2016 ed bonds in an aggregate principal amount of 20,000. The Group initially issued these bonds In January 2018 MGL, and thereby the Group, Within one year 1,538 1,508 in March 2013 with a maturity of 10 years at a signed an agreement for acquisition of a 100 % coupon rate of 8 % per annum. The coupon rate interest in ESForce Holding Limited, one of the After one year but not more than five years 6,465 6,338 was to be re-set after five years and the Group world’s largest esports organisations, for a cash More than five years 5,196 6,861 had the right to redeem the bonds on the last consideration of US$ 100m (5,760 at the exchange day of the coupon period for which the coupon rate as of 31 December 2017) less any outstand- 13,199 14,707 rate was defined. The redemption of the bonds ing debt, and contingent consideration based on was effected pursuant to the Group’s exercise of performance indicators, at the end of 2018. The this right. contingent consideration is expected in the amount of US$ 20m (1,152 at the exchange rate as of 31 —— Euroset December 2017).

In February 2018 MegaFon acquired a 50 % in- —— Litigation terest from VEON, resulting in MegaFon’s owning

100 % of Euroset which will remain an operating The Group is not a party to any material litigation, for certain time periods, effective from 01 July company. In addition, VEON made a cash pay- although in the ordinary course of business, the 2018. This would require the Group to establish ment of approximately 1,200 in respect of its Company and some of the Group’s subsidiaries additional data centers and invest in data-pro- share of Euroset’s liabilities and obligations. Also, may be party to various legal and tax proceed- cessing technologies. The potentially significant by the date of acquisition, VEON had acquired the ings, and subject to claims, certain of which relate capital expenditures required to do this would rights to Euroset’s lease agreements for appro- to the developing markets and evolving fiscal and negatively impact the Group’s cash flow gen- ximately 1,700 outlets. regulatory environments in which they operate. In eration, diverting resources from investment in the opinion of management, the Group’s and its growth, which could potentially impact future subsidiaries’ liabilities, if any, in all pending liti- revenues and OIBDA. gation, other legal proceedings or other matters, will not have a material effect on the financial Based on the current understanding of the law’s condition, financial performance or liquidity of requirements, the Group expects that the imple- the Group. mentation of the changes may cost it approximately 35,000-40,000 over the next five years. —— Anti-terror laws The details of the package are being finalised currently and may undergo changes. The Group On 07 July 2016 the President of the Russian Fed- will update its estimate of the potential effect of eration signed a package of anti-terror laws. The the laws on its capital commitments when more package requires telecommunications operators information about the final form of the anti-terror to store all data, including that from phone calls, package is received. messages, and data transmitted by customers Material Topics and Materiality Matrix 279 Material Topics and Materiality Matrix PJSC MegaFon publishes its performance reports on an annual basis. This Annual Report of the PJSC MegaFon was prepared in compliance with the Sustainability Reporting Guidelines (GRI Standards) of the Global Reporting Initiative (GRI). The Annual Report also incorporates the Social Charter of the Russian Fed- eration, the Guidelines on Social Responsibility (ISO 26000), the Focus of the Sustainability Index and the performance indicators developed by the Union of Industrialists and Entrepreneurs.

PJSC MegaFon’s 2016 Annual Report was published in April 2017. MegaFon’s annual reports Unless specified otherwise, performance figures pertain to PJSC MegaFon and its subsidiaries. The scope and wording of performance indicators in this Report do not have any material difference from previous reports.

Material Topics

When preparing its 2017 Annual Report, the Company assessed the disclosed topics for materiality, in line with the Sustainability Reporting Guidelines.

Materiality assessment stages:

•• Stage 1. Determine the list of material topics Stage. The list of 19 most frequent disclosures was made, informed by benchmarks of global and Russian companies.

•• Stage 2. Determine the materiality of the Company’s impact (top management) and the materiality of topics (stakeholders). A questionnaire survey was conducted among top managers and stakeholders.

•• Stage 3. Build the materiality matrix. The survey was followed by building the materiality matrix.

The horizontal axis shows the materiality of MegaFon’s impact on material topics, and the vertical axis shows the materiality of topics for stakeholders, with the topics in the upper part of the matrix deemed to have priority and be mandatory disclosures in the Annu- al Report. 280 Material Topics and Materiality Matrix Material Topics and Materiality Matrix 281

Materiality Matrix In addition, stakeholders were interested in the following topics:

TOPIC SECTION

Infrastructure Development 1. access to telecoms services 5 Social Responsibility

topic 2. compliance with law All key sections 1 4.5 3. innovative services development Innovative Products and Value Added Services (VAS) 4. customer privacy Ethics and Human Rights

topic 5. human rights, including freedom of speech Ethics and Human Rights 4 3 topic topic 10 13 6. customer-centricity Customer Satisfaction

Importance to stakeholders to Importance 7. international regulations, standards, and recommendations All key sections topic 3.5 topic 18 topic 8. charity programs in regions of operation Social Responsibility topic topic 2 topic topic 9 topic 14 16 9. degree, forms, and nature of local community impacts, It is planned to be covered in the 2018 Annual 19 7 15 topic topic 3 topic action groups, and NGOs Report topic 17 topic 12 5 It is planned to be covered in the 2018 Annual topic topic 4 11 10. support of volunteer and charity initiatives 8 6 of employees and their families Report 2.5

2 GRI Content Index 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 GRI STANDARD INDICATOR PAGE NUMBER Significance of impact 102-1 3

102-2 54

Material topics: 102-3 138

102-4 12

1. Financial 9. Environmental 15. Non-discrimination 102-5 3 performance assessment of 16. 102-6 12 suppliers Freedom of association 2. and collective Regional 102-7 8, 10 coverage 10. Employment rates bargaining GRI 102 (2016) 102-8 131 3. Indirect economic 11. Occupational health 17. Child labour impacts and safety 102-10 12, 189 18. Forced or compulsory 4. Procurement practices 12. Employee training and labour 102-12 129 education 102-14 19 5. Anti-corruption efforts 19. Involvement in state 13. Diversity and equal policy-making 102-16 156 6. Power consumption opportunities for all 102-18 167 7. GHG emissions employees 102-40 130 8. Wastewater discharge 14. Assessment of supplier and waste disposal employment practices 282 Material Topics and Materiality Matrix Material Topics and Materiality Matrix 283

GRI STANDARD INDICATOR PAGE NUMBER GRI STANDARD INDICATOR PAGE NUMBER

No collective bargaining 103-1 55 102-41 agreements are in place. 103-2 55 Stakeholder groups with which to engage 203 (2016) 103-3 55 102-42 were determined by the team in charge of preparing the report. 203-1 55

102-43 130 103-1 158

102-44 281 103-2 158

102-45 206 205 (2016) 103-3 158

102-46 279 205-2 158

102-47 280 205-3 158 GRI 102 (2016) 102-48 3 103-1 131

102-49 280 103-2 131

102-50 3 401 (2016) 103-3 131

102-51 279 401-1 283

102-52 3 401-2 140

102-53 289 103-1 137

102-54 3 103-2 137 404 (2016) 102-55 281 103-3 137

102-56 186 404-1 137

103-1 206 103-1 171-173, 182-183

103-2 206 103-2 171-173, 182-183 201 (2016) 405 (2016) 103-3 206 103-3 171-173, 182-183

201-1 206 405-1 171-173, 182-183 284 Material Topics and Materiality Matrix Material Topics and Materiality Matrix 285

TABLES FEATURING HEADCOUNT STATISTICS

Headcount with a breakdown Overall personnel turnover by employment contract, people in the reporting period, %

2015 2016 2017 2015 2016 2017

Permanent 34,852 35,058 37,401 Women 13 15 15

Fixed-term 1,599 1,884 1,678 Men 19 21 24

Total 36,451 36,942 39,079 Total 16 18 20

Headcount with a breakdown Total number of employees hired by type of employment, people in the reporting period, people

2015 2016 2017 2015 2016 2017

Full-time 34,179 34,700 36,590 Women 6,967 7,053 9,137

Part-time 280 282 451 Men 6,222 6,197 7,386

Total 34,459 34,982 37,041 Total 13,189 13,250 16,523

PJSC MegaFon’s headcount with a breakdown by region, people

2015 2016 2017

Moscow and the Moscow Region 6,461 6,348 7,569

Volga Region 6,208 6,746 7,611

Caucasus 4,643 4,653 4,516

North-West Region 5,346 5,311 5,608

Central Region 3,591 3,663 3,555

Urals Region 3,818 3,793 3,624

Siberia Region 2,971 2,991 3,242

Far East Region 2,774 2,771 2,675

Total 35,812 36,276 38,400 286 Glossary Glossary 287

tive to the information provid- scriber throughout the entire or constructed in prior peri- Glossary ed in the Company’s financial period of his or her relation- ods. OIBDA is widely used by statements. This metric mea- ship with MegaFon. investors, analysts and rat- sures the Company’s ability ing agencies as a measure to to generate cash after accru- Machine-to-Machine evaluate and compare cur- 4G/LTE fourth generation of BPaaS means Business Pro- DBMS means database man- als required to maintain and (M2M) refers to technologies rent and future operating per- wireless technology which cess as-a-Service. agement system. expand the Company’s as- that allow both wireless and formance and to determine provides greater access to sets. wired systems to communi- the value of companies with- data and services through en- Capital Expenditures DDoS means Distributed De- cate with other devices of the in the telecommunications in- hanced download and upload (CAPEX) comprises the cost nial of Service. FTC means JSC First Tower same type. dustry. speeds and enhanced use of of purchases of new equip- Company. spectrum. ment, new construction, ac- Digital customer is a sub- MAR means EU’s Market OSS means an umbrella quisition of new or upgrades scriber who relies on his or her FTM means nationwide Abuse Regulation. Operation Support System. Adjusted OIBDA is OIBDA to software, acquisition of smartphone to consume con- telemarketing. net of impairment charge. spectrum and other intangi- tent and communicate, driv- MeS means Mobile PBX means Private Business ble assets, and purchases of ing the usage of mobile data GDR means Global eSignature. eXchange. ARPDU (Average Monthly other long-term assets, to- services. Depositary Receipt. Revenue Per Data Ser- gether with related costs in- NSD means National RNS means Regulatory vices User) is calculated for curred prior to the intended DSU (Monthly Average Global Performance Man- Settlement Depository. News Service. a given period by dividing the use of the applicable as- Data Services Usage per agement (GPM) is a system Company’s data services rev- sets, all accounted for as of User) is calculated by divid- used to monitor equipment NUM means Network Self-Optimising Network enues for a given period by the earliest time of payment ing the total number of mega- performance parameters. utilisation model. (SON) is a smart network ca- the average number of its or delivery. Long-term assets bytes transferred by our net- pable of independently eval- data services users during obtained through business work during a given period by GNOC means Global OIBDA (Operating Income uating the performance of that period, and further divid- combinations are not includ- the average number of data Network Operational Centre. Before Depreciation and each of its constituent ele- ing the result by the number ed in the calculation of capi- services users during such pe- Amortisation) is a finan- ments and optimising own op- of months in that period. tal expenditures. riod and dividing the result by GRI cial measure which should be eration. the number of months in such considered as supplementa- ARPU means average CDW means company-wide period. means Global Reporting ry, but not as an alternative SLA means a Service Level revenue per user. data warehouse. Initiative. to the information provided Agreement between the E2E means end-to-end. in the financial statements of Company and subscribers. B2B means Content Delivery Network IaaS means Infrastructure- the Company. OIBDA margin Business-to-Business. (CDN) is a service for content EAEU means Eurasian as-a-Service. means OIBDA as a percent- SSC means Shared Services providers which relies on dis- Economic Union. age of revenue. The Compa- Centre. B2C means tributed network infrastruc- IoT (Internet of Things) ny believes that OIBDA pro- Business-to-Consumer. ture to speed up downloads FCR means first call refers to interconnection via vides a better measure of the TCS means Technical for users outside metro areas resolution. the Internet of computing de- Company’s actual operation- Customer Support. B2G means and secure content availabil- vices embedded in every- al results including our abili- Business-to-Government. ity during peak traffic events, FOCL means fibre-optic day objects, enabling them to ty to finance capital expendi- Trouble Ticketing is a sys- including: large-scale live network. send and receive data. tures, acquisitions and other tem managing orders B2O means webcasts, advertising cam- investments and our abili- and incidents. Business-to-Operators. paigns, software updates or Free Cash Flow (FCF) IPO means initial public of- ty to incur and service debt. DDoS attacks. means cash from operating fering. While it does not take into ac- VAS means Value-Added Ser- B2X means Business-To-X, activities, less cash paid for count depreciation of prop- vices. including B2B, B2C, B2G. CSI means Customer purchases of property, plant Key Quality Indicator erty and equipment, amor- Satisfaction Index. and equipment and intangi- (KQI) is a system of metrics tisation of intangible assets VHI means voluntary Big Data represents the in- ble assets, increased by pro- for quality of billing opera- and gain/(loss) from disposal health insurance. formation assets character- Data Services User is de- ceeds from sales of proper- tions. of non-current assets, which ized by such a high volume, fined as a subscriber who ty, plant and equipment and are considered as operating velocity and variety to require has consumed any amount of interest paid. It is a finan- Lifetime Value (LTV) is an expenses in IFRS, these ex- specific technology and ana- data traffic within preceding cial measure which should internal estimated assess- penses primarily represent lytical methods for its trans- month. be considered as supplemen- ment of the current value of noncash charges related to formation into value. tary but not as an alterna- the future cash flow per sub- long-lived assets acquired 288 Disclaimer Contacts 289

Disclaimer Contacts

Certain statements and/or other information included in this docu- Full name: COMPANY’S ment may not be historical facts and may constitute ‘forward look- Public Joint-Stock AUDITOR: ing statements’ within the meaning of Section 27A of the U.S. Secu- Company MegaFon JSC KPMG rities Act of 1933 and Section 2(1) (e) of the U.S. Securities Exchange 10 Presnenskaya Naberezhnaya, Act of 1934, as amended. The words ‘believe’, ‘expect’, ‘anticipate’, Short name: Moscow 123317, Russia ‘intend’, ‘estimate’, ‘plans’, ‘forecast’, ‘project’, ‘will’, ‘may’, ‘should’ PJSC MegaFon and similar expressions may identify forward looking statements Tel.: +7 (495) 937-4477 but are not the exclusive means of identifying such statements. For- Fax: +7 (495) 937-4400/99 ward looking statements include statements concerning our plans, HEAD OFFICE: Web: www.kpmg.ru expectations, projections, objectives, targets, goals, strategies, fu- 41 Oruzheyniy lane, ture events, future revenues, operations or performance, capital Moscow 127006, Russia expenditures, financing needs, our plans or intentions relating to the COMPANY expansion or contraction of our business as well as specific acqui- Tel.: +7 (499) 755-2155 REGISTRAR: sitions and dispositions, our competitive strengths and weaknesses, Fax: +7 (499) 755-2175 CJSC Computershare Registrar the risks we face in our business and our response to them, our E-mail: [email protected] FCSM licence of Russia plans or goals relating to forecasted production, reserves, financial Web: www.megafon.com No. 10–000–1–000252 (indefinite) position and future operations and development, our business strat- Kutuzoff Tower Business Centre egy and the trends we anticipate in the industry and the political, 8 Ivana Franko, Moscow 121108 Russia economic, social and legal environment in which we operate, and INFORMATION other information that is not historical information, together with FOR SHAREHOLDERS: Tel.: +7 (495) 926-8160 the assumptions underlying these forward looking statements. Fax: +7 (495) 926-8178 Elena Breeva Web: www.nrcreg.ru Corporate Secretary By their very nature, forward looking statements involve inherent risks, uncertainties and other important factors that could cause Tel.: +7 (499) 755-2155 our actual results, performance or achievements to be materially Fax: +7 (499) 755-2100 GDR DEPOSITARY: different from results, performance or achievements expressed or E-mail: [email protected] Bank of New York Mellon implied by such forward-looking statements. Such forward-look- 101 Barclays Street, 22nd Floor West ing statements are based on numerous assumptions regarding our New York, NY 10286, USA present and future business strategies and the political, economic, INFORMATION social and legal environment in which we will operate in the future. FOR INVESTORS: Web: www.bnymellon.com We do not make any representation, warranty or prediction that Fax: +1 (212) 571 3050 Dmitry Kononov the results anticipated by such forward-looking statements will be Dividends +1 (212) 815 2135/2734/2269 Director, Investor Relations and M&A achieved, and such forwardlooking statements represent, in each Holders +1 (212) 815 4888/2723 case, only one of many possible scenarios and should not be viewed Tel.: + 7 (926) 200-6490 Shareowner Services 888 BNY ADRS as the most likely or standard scenario. We expressly disclaim any E-mail: [email protected] obligation or undertaking to update any forward-looking statements Web: www.corp.megafon.ru to reflect actual results, changes in assumptions or in any other factors affecting such statements. Appendix 2 Related-Party Transactions Major and Related-Party Transactions Related-Party Transactions 3

Major Transactions of PJSC MegaFon in 2017

GOVERNING BODY THAT SUBJECT MATTER AND MATERIAL APPROVED THE TRANSACTION TERMS OF THE TRANSACTION

Board of Directors Addendums to the Interrelated Non-Revolving Credit Facility Agreements between PJSC MegaFon (Borrower) and PJSC Sberbank (Lender) No. 5541 dated 19 April 2012 (Credit Minutes: Facility 1) and No. 5542 dated 19 April 2012 (Credit Facility 2). • No. 165(229) In 2012, PJSC MegaFon (Borrower) signed the Interrelated Non-Revolving Credit Facility dated 10 April 2012; Agreements with PJSC Sberbank (Lender/Bank) No. 5541 dated 19 April 2012 and No. 5542 dated 19 April 2012. • No. 200(264) dated 12 November 2013; In 2017, Addendums were signed changing material terms of the Credit Facilities: Credit Facility 1 – revised early repayment fee, lower interest rate; Credit Facility 2 – revised • No. 232(296) early repayment fee, lower interest rate. dated 26 November 2015; Sum of interrelated transactions: RUB 145,406,000,000 • No. 241(305) dated 21 July 2016;

• No. 255(319) dated 06 February 2017.

General Meeting of Shareholders Lease and/or Use Agreements for communications installations (parts thereof), means of communication (parts thereof), and other property (parts thereof) between PJSC • Minutes w/n dated MegaFon (Customer) and JSC FTC (Contractor). 19 September 2016 Under the Lease and/or Use Agreements for communications installations (parts thereof), means of communication (parts thereof), and other property (parts thereof) PJSC MegaFon uses communications installations (parts thereof), means of communication (parts thereof), and other property (parts thereof) owned or otherwise lawfully held by JSC FTC.

JSC FTC compensates PJSC MegaFon for electricity costs incurred by PJSC MegaFon in relation to the property transferred to JSC FTC, as well as for property insurance and JSC FTC’s civil liability to third parties insurance costs incurred by PJSC MegaFon in relation to the property transferred to JSC FTC.

Total price of the property (services) under the Interrelated Lease and/or Use Agreements for communications installations (parts thereof), means of communication (parts thereof), and other property (parts thereof) between PJSC MegaFon and JSC FTC does not exceed RUB 418,500,000,000. 4 Related-Party Transactions

Related-Party Transactions of PJSC MegaFon in 2017

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Transactions (groups of interrelated transactions) worth less than two percent of the book value of MegaFon's assets

Board of Directors Interrelated Surety Agreements imposing liability on PJSC Mega- USM HOLDINGS LIMITED, Fon (Surety) for the obligations of PJSC MegaFon’s subsidiaries USM TELECOM HOLDINGS • Minutes: № 253(317) dat- (Debtors) to banks and partner companies. LIMITED, Garsdale Services ed 23 December 2016 Investments Limited, Subject matter of the Surety Agreements: AF Telecom Holding Limited, LLC AF Telecom Holding; 1. PJSC MegaFon’s guarantee of performance of obligations Ya.I.Kukhalsky. to banks undertaken by PJSC MegaFon’s subsidiaries under bank guarantee agreements (including guarantees issued to secure fulfilment of subsidiaries’ obligations under public contracts);

2. PJSC MegaFon’s guarantee of performance of obligations to partner companies undertaken by PJSC MegaFon’s subsidiaries under distribution agreements and supply agreements;

3. PJSC MegaFon’s guarantee of performance of obligations undertaken by PJSC MegaFon’s subsidiaries under bank financing and factoring agreements.

Total price of property (services) under the Interrelated Sure- ty Agreements providing for PJSC MegaFon’s liability for performance by PJSC MegaFon’s subsidiaries of their obligations to banks and partner companies shall not exceed RUB 5,000,000,000.

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon USM HOLDINGS LIMITED, (Borrower) and JSC MegaLabs (Lender). USM TELECOM HOLDINGS Minutes: LIMITED, Garsdale Services • № 203(267) Facility amount: RUB 3,000,000,000. Investments Limited, dated 24 December 2013; AF Telecom Holding Limited, Facility maturity date: until 23 May 2020 (inclusive). • № 214(278) LLC AF Telecom Holding; dated 30 July 2014; Interest rate: up to eight (8) percent per annum. Ya.I. Kukhalsky. • № 253 (317) dated 23 December 2016. Related-Party Transactions 5

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon USM HOLDINGS LIMITED, (Lender) and NetByNet Holding LLC (Borrower). USM TELECOM HOLDINGS Minutes: LIMITED, Garsdale Services Facility amount: RUB 2,902,000,000. • No. 149(213) Investments Limited, AF Telecom Holding Limited, dated 11 July 2011; Facility maturity date: until 19 July 2020 (inclusive). • No. 200(264) LLC AF Telecom Holding. dated 12 November 2013; Interest rate: up to eight (8) percent per annum. • No. 203(267) dated 24 December 2013; • No. 214(278) dated 30 July 2014; • No. 253(317) dated 23 December 2016.

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon USM HOLDINGS LIMITED, (Borrower) and Metrocom CJSC (Lender). USM TELECOM HOLDINGS Minutes: LIMITED, Garsdale Services Facility amount: RUB 1,140,000,000. • № 138(203) Investments Limited, AF Telecom Holding Limited, dated 30 December 2010; Facility maturity date: until 16 May 2020 (inclusive). • № 186(250) LLC AF Telecom Holding. dated 31 December 2012; Interest rate: up to eight (8) percent per annum. • № 219(283) dated 25 December 2014; • № 233(297) dated 25 December 2015; • № 253(317) dated 23 December 2016.

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon USM HOLDINGS LIMITED, (Lender) and Debton Investments Limited (Borrower). USM TELECOM HOLDINGS Minutes: LIMITED, Garsdale Services Facility amount: RUB 200,000,000. • No. 149(213) Investments Limited, AF Telecom Holding Limited, dated 11 July 2011; Facility maturity date: until 27 October 2020 (inclusive). • No. 203(267) LLC AF Telecom Holding. dated 24 December 2013 Interest rate: up to eight (8) percent per annum. • No. 253(317) dated 23 December 2016.

Board of Directors Loan Agreement between PJSC MegaFon (Lender) and CJSC USM HOLDINGS LIMITED, TT Mobile (Borrower). USM TELECOM HOLDINGS Minutes: LIMITED, Garsdale Services • No. 160(224) Facility amount: US$ 5,000,000. Investments Limited, dated 10 January 2012; AF Telecom Holding Limited, Facility maturity date: until 09 May 2020 (inclusive). • No. 253(317) LLC AF Telecom Holding; dated 23 December 2016. Interest rate: up to nine (9) percent per annum. G.A. Vermishyan; A.Yu. Shishkovsky. 6 Related-Party Transactions

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors : Mutual Information Services Agreement between PJSC MegaFon USM HOLDINGS LIMITED, and Mail.Ru LLC. USM TELECOM HOLDINGS • Minutes № 255 (319) LIMITED, Garsdale Services dated 06 February 2017 Pursuant to the Agreement, the parties provide each other with Investments Limited, information services. AF Telecom Holding Limited, LLC AF Telecom Holding. Total price of property (services) disposed of (acquired) by PJSC MegaFon under the Mutual Information Services Agreement between PJSC MegaFon and Mail.Ru LLC does not exceed RUB 720,000,000.

Board of Directors MVNO Agreement between PJSC MegaFon and VKontakte LLC. USM HOLDINGS LIMITED, USM TELECOM HOLDINGS • Minutes № 255 (319) Pursuant to the Agreement, the parties cooperate to create and LIMITED, Garsdale Services dated 06 February 2017 promote the branded VKmobile product. Investments Limited, AF Telecom Holding Limited, Total price of property (services) disposed of (acquired) by PJSC LLC AF Telecom Holding. MegaFon under the MVNO Agreement between PJSC MegaFon and VKontakte LLC does not exceed RUB 1,700,000,000.

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon USM HOLDINGS LIMITED, (Lender) and JSC Mobicom Volga (Borrower). USM TELECOM HOLDINGS • Minutes № 258(322) LIMITED, Garsdale Services dated 28 February 2017 Facility amount: RUB 780,000,000. Investments Limited, AF Telecom Holding Limited, Facility maturity date: until 31 December 2017 (inclusive). LLC AF Telecom Holding.

Interest rate: up to eight (8) percent per annum.

Board of Directors Master Agreement between PJSC MegaFon and JSC SMARTS- USM HOLDINGS LIMITED, Penza. USM TELECOM HOLD- • Minutes № 258(322) INGS LIMITED, Garsdale dated 15 March 2017 Under the Master Agreement, PJSC MegaFon provides to JSC Services Investments Lim- SMARTS-Penza services, performs work, and transfers property/ ited, AF Telecom Holding rights/obligations as follows: Limited, LLC AF Telecom Holding. •• provision of radio access network infrastructure to enable communications services based on MVNO business model;

•• enabling shared use of means of communication and/or communications lines, including, without limitation, communications nodes (equipment comprising communications nodes), including maintenance, operation and repair of equipment comprising communications nodes, as well as other equipment), equipment of base stations and repeaters of LTE mobile networks, and communications channels;

•• enabling a technical capability for JSC SMARTS-Penza subscribers to sign agreements with an electronic signature, as well as a technical capability for JSC SMARTS-Penza employees and other persons engaged by JSC SMARTS-Penza to sign documents with an electronic signature; Related-Party Transactions 7

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors •• technical support for international roaming, and billing sup- USM HOLDINGS LIMITED, port; USM TELECOM HOLD- • Minutes № 258(322) INGS LIMITED, Garsdale dated 15 March 2017 •• services related to processing personal data of JSC SMARTS- Services Investments Lim- Penza employees (collection, collation, accumulation, stor- ited, AF Telecom Holding age, clarification (update, modification), use, anonymisation, Limited, LLC AF Telecom blocking and destruction) and other personal data transferred Holding. by JSC SMARTS-Penza;

•• enabling the use (including shared use) of PJSC MegaFon’s software (SAP, Microsoft, MS SQL software and software for help desk set-up and support), including, without limitation, execution of licence (sub-licence), agency, technical support and other services agreements (including those related to software), tripartite agreements with software owners, as well as services related to equipment and software maintenance and support;

•• lease of telecommunications equipment (SORM system, switches, servers, and other technical equipment);

•• spectrum sharing;

•• arrangements for access from a connection point to PJSC MegaFon’s information centre and traffic generation;

•• agency services to arrange for interconnection between JSC SMARTS-Penza communications networks and communications networks of other operators, and other agency services;

•• information, consulting, and legal services;

•• accounting, tax, financial control, treasury, HR management services;

as well as provides other services, performs work and transfers property/rights/obligations.

JSC SMARTS-Penza provides to PJSC MegaFon services, performs work, and transfers property/rights/obligations as follows:

•• provision of radio access network infrastructure to enable communications services based on MVNO business model;

•• spectrum sharing;

•• information and analytical services related to collection and processing of aggregated data used for PJSC MegaFon’s internal and external analytical services.

as well as provides other services, performs work and transfers property/rights/obligations;

Total price of property (services) disposed of (acquired) by PJSC MegaFon under the Master Agreement between PJSC MegaFon and JSC SMARTS-Penza does not exceed RUB 400,700,000. 8 Related-Party Transactions

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Master Agreement between PJSC MegaFon and JSC SMARTS- USM HOLDINGS LIMITED, Saransk. USM TELECOM HOLDINGS • Minutes № 258(322) LIMITED, Garsdale Services dated 15 March 2017 Under the Master Agreement, PJSC MegaFon provides to JSC Investments Limited, SMARTS-Saransk services, performs work and transfers property/ AF Telecom Holding Limited, rights/obligations as follows: LLC AF Telecom Holding. •• provision of radio access network infrastructure to enable communications services based on MVNO business model;

•• enabling a technical capability for JSC SMARTS-Saransk subscribers to sign agreements with an electronic signature, as well as a technical capability for JSC SMARTS-Saransk employees and other persons engaged by JSC SMARTS-Saransk to sign documents with an electronic signature;

•• technical support for international roaming, and billing support;

•• services related to processing personal data of JSC SMARTS-Saransk employees (collection, collation, accumulation, storage, clarification (update, modification), use, anonymisation, blocking and destruction) and other personal data transferred by JSC SMARTS-Saransk;

•• lease of telecommunications equipment (SORM system, switches, servers, and other technical equipment);

•• spectrum sharing;

•• arrangements for access from a connection point to PJSC MegaFon’s information centre and traffic generation;

•• agency services to arrange for interconnection between JSC SMARTS-Saransk communications networks and communications networks of other operators, and other agency services;

•• information, consulting, and legal services;

•• accounting, tax, financial control, treasury, HR management services; Related-Party Transactions 9

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

as well as provides other services, performs work and transfers property/rights/obligations.

JSC SMARTS-Saransk provides to PJSC MegaFon services, performs work, and transfers property/rights/obligations as follows:

•• provision of radio access network infrastructure to enable communications services based on MVNO business model;

•• spectrum sharing;

•• information and analytical services related to collection and processing of aggregated data used for PJSC MegaFon’s internal and external analytical services.

as well as provides other services, performs work and transfers property/rights/obligations.

Total price of property (services) disposed of (acquired) by PJSC MegaFon under the Master Agreement between PJSC MegaFon and JSC SMARTS-Saransk does not exceed RUB 403,200,000.

Board of Directors Master Agreement between PJSC MegaFon and JSC USM HOLDINGS LIMITED, SMARTS-Ulyanovsk. USM TELECOM HOLDINGS • Minutes № 258(322) LIMITED, Garsdale Services dated 15 March 2017 Under the Master Agreement, PJSC MegaFon provides to JSC Investments Limited, SMARTS-Ulyanovsk services, performs work and transfers prop- AF Telecom Holding Limited, erty/rights/obligations as follows: LLC AF Telecom Holding. •• provision of radio access network infrastructure to enable communications services based on MVNO business model;

•• enabling a technical capability for JSC SMARTS-Ulyanovsk subscribers to sign agreements with an electronic signature, as well as a technical capability for JSC SMARTS-Ulyanovsk employees and other persons engaged by JSC SMARTS-Uly- anovsk to sign documents with an electronic signature;

•• technical support for international roaming, and billing support;

•• services related to processing personal data of JSC SMARTS-Ulyanovsk employees (collection, collation, accumulation, storage, clarification (update, modification), use, anonymisation, blocking and destruction) and other personal data transferred by JSC SMARTS-Ulyanovsk; 10 Related-Party Transactions

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

•• lease of telecommunications equipment (SORM system, switches, servers, and other technical equipment);

•• spectrum sharing;

•• arrangements for access from a connection point to PJSC MegaFon’s information centre and traffic generation;

•• agency services to arrange for interconnection between JSC SMARTS-Ulyanovsk communications networks and communications networks of other operators, and other agency services;

•• information, consulting, and legal services;

•• accounting, tax, financial control, treasury, HR management services;

as well as provides other services, performs work and transfers property/rights/obligations.

JSC SMARTS-Ulyanovsk provides to PJSC MegaFon services, performs work and transfers property/rights/obligations as follows:

•• provision of radio access network infrastructure to enable communications services based on MVNO business model;

•• spectrum sharing;

•• information and analytical services related to collection and processing of aggregated data used for PJSC MegaFon’s internal and external analytical services.

as well as provides other services, performs work and transfers property/rights/obligations.

Total price of property (services) acquired (disposed) by PJSC MegaFon under the Master Agreement between PJSC MegaFon and JSC SMARTS-Ulyanovsk does not exceed RUB 404,000,000 Related-Party Transactions 11

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Interrelated Agreements (multilateral agreement) on special ac- USM HOLDINGS LIMITED, counts (Pool of Accounts) between PJSC MegaFon, JSC CB CITI- USM TELECOM HOLDINGS Minutes: BANK, CITIBANK N.A. DUBLIN and PJSC MegaFon’s subsidiaries. LIMITED, Garsdale Services • No. 138(203) Investments Limited, Total price of property (services) disposed of (acquired) by PJSC dated 30 December 2010; AF Telecom Holding Limited, MegaFon under the Interrelated Agreements (multilateral agree- • No. 161(225) LLC AF Telecom Holding; ment) on special accounts (Pool of Accounts) between PJSC dated 31 January 2012; Ya.I. Kukhalsky. MegaFon, JSC CB CITIBANK, CITIBANK N.A. DUBLIN and PJSC • No. 166(230) MegaFon’s subsidiaries does not exceed US$ 79,800. dated 18 April 2012; • No. 184(248) dated 30 November 2012; • No. 200(264) dated 12 November 2013; • No. 231(295) dated 28 October 2015; • No. 259(323) dated 26 April 2017.

Board of Directors Interrelated Surety Agreements (multilateral agreement) between USM HOLDINGS LIMITED, PJSC MegaFon (Surety), JSC CB CITIBANK (Lender) and PJSC USM TELECOM HOLDINGS Minutes: MegaFon’s subsidiaries (Debtors). LIMITED, Garsdale Services • No. 147(211) Investments Limited, Interrelated Surety Agreements provide for PJSC MegaFon’s lia- dated 29 April 2011; AF Telecom Holding Limited, bility for performance by PJSC MegaFon’s subsidiaries located • No. 154(218) LLC AF Telecom Holding; in the territory of the Russian Federation of their obligations to dated 29 September 2011; Ya.I. Kukhalsky. JSC CB CITIBANK under the Interrelated Agreements on special • No. 166(230) accounts (Pool of Accounts) with a right of overdraft. dated 18 April 2012; • No. 184(248) Total price of property (services) to be disposed of under the dated 30 November 2012; Interrelated Surety Agreements (multilateral agreement) due to • No. 192(256) execution of a transaction shall not exceed RUB 2,420,000,000. dated 14 May 2013; • No. 200(264) dated 12 November 2013; • No. 231(295) dated 28 October 2015; • No. 233(297) dated 25 December 2015; • No. 248(312) dated 26 October 2016; • No. 259(323) dated 26 April 2017.

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon USM HOLDINGS LIMITED, and JSC FTC. USM TELECOM HOLDINGS • Minutes № 259(323) LIMITED, Garsdale Services dated 26 April 2017 Facility amount: RUB 2,500,000,000. Investments Limited, AF Telecom Holding Limited, Facility maturity date: 5 years from the date of the Agreement. LLC AF Telecom Holding Interest rate: zero (0) percent per annum. 12 Related-Party Transactions

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon USM HOLDINGS LIMITED, (Borrower) and LLC FTC (Lender). USM TELECOM HOLDINGS • Minutes № 259(323) LIMITED, Garsdale Services dated 26 April 2017 Facility amount: Five million roubles (RUB 5,000,000). Investments Limited, AF Telecom Holding Limited, Facility maturity date: 5 years from the date of the Agreement. LLC AF Telecom Holding. Interest rate: zero (0) percent per annum.

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon USM HOLDINGS LIMITED, (Lender) and Combell LLC (Borrower). USM TELECOM HOLDINGS Minutes: LIMITED, Garsdale Services Facility amount: Seven hundred sixty five million roubles • No. 248(312) Investments Limited, (RUB 765,000,000 ). dated 26 October 2016; AF Telecom Holding Limited, LLC AF Telecom Holding. • No. 264(328) Facility maturity date: until 19 January 2022 (inclusive). dated 26 July 2017. Interest rate: up to ten (10) percent per annum.

Board of Directors Surety Agreement between PJSC MegaFon (Surety) and JSC Uni- AF Telecom Holding LLC, Credit Bank (Lender) to secure performance of CJSC TT Mobile’s Telecominvest Holdings • Minutes № 266(330) obligations (Borrower, Beneficiary). Limited, MegaFon Invest- dated 28 August 2017 ments (Cyprus) Limited, The Surety Agreement provides for PJSC MegaFon’s joint liability G.A. Vermishyan. for performance of CJSC TT Mobile’s obligations to JSC Uni- Credit Bank under the General Credit Facility Agreement signed between CJSC TT Mobile and JSC UniCredit Bank for a maximum amount of US$ 20,000,000 for up to 24 months.

The term of the Surety Agreement: 36 months from the date of the Surety Agreement.

Total price of the property (services) disposed of (acquired) by PJSC MegaFon under the Surety Agreement between PJSC MegaFon and JSC UniCredit Bank to secure performance of CJSC TT Mobile’s obligations does not exceed twenty two million US dollars (US$ 22,000,000).

Board of Directors Trademark Licence Agreement between PJSC MegaFon (Licensor) USM HOLDINGS LIMITED, and LLC AF Telecom Holding (Licensee). USM TELECOM HOLDINGS Minutes: LIMITED, Garsdale Services • № 253(317) Under the Agreement, PJSC MegaFon uses the MegaFon trade- Investments Limited, dated 23 December 2016; mark. AF Telecom Holding Limited, • No. 267(331) LLC AF Telecom Holding. PJSC MegaFon uses the MegaFon trademark while communi- dated 25 October 2017. cating with international operators and providing services to foreign subscribers (including representative offices of foreign companies), and places it on customised subscriber devices.

Total price of property (services) disposed of (acquired) by PJSC MegaFon under the Trademark Licence Agreement between PJSC MegaFon and LLC AF Telecom Holding does not exceed RUB 218,400,000 in 2017 and shall not exceed RUB 792,000,000 in 2018–2020. Related-Party Transactions 13

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Master Agreement between PJSC MegaFon and JSC FTC. USM HOLDINGS LIMITED, USM TELECOM HOLDINGS Minutes: Under the Master Agreement, PJSC MegaFon provides to JSC LIMITED, Garsdale Services FTC services, performs work and transfers property/rights/ob- • № 259(323) Investments Limited, ligations as follows: dated 26 April 2017; AF Telecom Holding Limited, LLC AF Telecom Holding. • No. 271(335) •• transfer of rights and obligations pursuant to agreements dated 22 December 2017. aimed at granting the right to use land plots that are necessary to maintain and operate communications facilities and other property of JSC FTC;

•• works/services related to the maintenance and operation of communications facilities and other property of JSC FTC;

•• lease of property;

•• sale/purchase of property, contribution to the property of JSC FTC;

•• services/works related to the maintenance and support of equipment, including, without limitation, the equipment used by JSC FTC pursuant to agreements with PJSC MegaFon;

•• use (including shared use) of PJSC MegaFon’s available software, including, without limitation, execution of licence (sub-licence), agency, technical support and other services agreements (including those related to software), and tripartite agreements with software owners;

•• agreement maintenance services in the context of JSC FTC property siting on land plots;

•• services related to the collection of the input data necessary in searching for sites for JSC FTC communication facilities (services related to the search of sites, designing, building and operating JSC FTC communication facilities), searching for land plots and other real estate subject to use in the context of designing, building, siting and operating JSC FTC communications facilities;

•• title documents preparation services for the use of land plots and other real estate in the context of designing, building, siting and operating JSC FTC communications facilities;

•• agreement maintenance and performance services in the context of JSC FTC communications facilities siting;

•• services related to designing, building and upgrading JSC FTC communications facilities;

•• marketing support and advertising services;

•• services related to goods/works/services purchasing organisation to provide for the business operations of JSC FTC;

•• services related to provision of technical specifications for siting at JSC FTC communications facilities;

•• archive and documentation storage organisation; 14 Related-Party Transactions

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

•• services related support of JSC FTC administrative activities;

•• agreement maintenance and performance services in the context of JSC FTC communications facilities siting;

•• information, advisory, and legal services;

•• accounting, tax, financial control, treasury, HR management services;

•• services related to processing personal data of JSC FTC employees (collection, collation, accumulation, storage, clarification (update, modification), use, anonymisation, blocking and destruction) and other personal data transferred by JSC FTC;

•• full range of agency services;

•• services related to implementing and ensuring financial and information security in JSC FTC;

•• preparation and handling services in respect of documentation related to JSC FTC property.

as well as provides other services, performs work and transfers property/rights/obligations.

JSC FTC provides to PJSC MegaFon services, performs work and transfers property/rights/obligations as follows:

•• sale/purchase of property owned by JSC FTC;

•• full range of agency services, including legal and other actions related to the purchase of, and payment for, electricity.

as well as provides other services, performs work and transfers property/rights/obligations.

Total price of property (services) disposed of (acquired) by PJSC MegaFon under the Master Agreement between PJSC MegaFon and JSC FTC does not exceed RUB 1,011,500,000.

Board of Directors Accounting, tax accounting, financial control and treasury, and USM HOLDINGS LIMITED, HR accounting and management services addenda to Master USM TELECOM HOLDINGS Minutes: Agreements with PJSC MegaFon’s subsidiaries. LIMITED, Garsdale Services • № 253 (317) Investments Limited, dated 23 December 2016; Under the addenda to Master Agreements with subsidiaries, PJSC AF Telecom Holding Limited, • № 271(335) MegaFon provides to its subsidiaries a range of accounting and LLC AF Telecom Holding; dated 22 December 2017. tax accounting, financial control and treasury, as well as HR G.A. Vermishyan. accounting and management services.

Total price of property (services) disposed of (acquired) by PJSC MegaFon under the accounting, tax accounting, financial control and treasury, and HR accounting and management services addenda to Master Agreements with PJSC MegaFon’s subsidiaries does not exceed RUB 500,000,000. Related-Party Transactions 15

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Transactions (groups of interrelated transactions) worth two percent or more of the book value of PJSC MegaFon's assets

Extraordinary General Meet- Share Purchase Agreement between PJSC MegaFon (Buyer) and Related parties: USM ing of Shareholders New Media and Technology Investment LP, New Media Tech- HOLDINGS LIMITED, USM nologies Capital Partners Limited and Ardoe Finance Limited TELECOM HOLDINGS • Minutes w/n (Sellers). LIMITED, Garsdale Services dated 23 January 2017 Investments Limited, PJSC MegaFon purchases from New Media and Technology AF Telecom Holding Limited, Investment LP, New Media Technologies Capital Partners Lim- LLC AF Telecom Holding. ited and Ardoe Finance Limited 11,500,100 Class A shares and 21,940,148 ordinary shares representing 15.2% of the charter Grounds for recognising capital and a 63.8% voting stake in Mail.Ru Group Limited. them as related parties: сounterparties to the trans- Total price of property (services) disposed of (acquired) by PJSC action are New Media and MegaFon under the Share Purchase Agreement does not exceed Technology Investment LP, US$ 740,000,000. New Media Technologies Capital Partners Limited and Ardoe Finance Limited controlled by USM HOLD- INGS LIMITED also controlling PJSC MegaFon.

Related parties’ percentage share ownership in PJSC MegaFon:

•• USM HOLDINGS LIMIT- ED: nil;

•• USM TELECOM HOLD- INGS LIMITED: nil;

•• Garsdale Services In- vestments Limited: nil;

•• AF Telecom Holding Limited: nil;

•• LLC AF Telecom Hold- ing: 56.3178%.

Related parties’ percentage share ownership in the counterparties: nil. 16 Related-Party Transactions

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

General Meeting of Share- Lease and/or Use Agreements for communications installations Related parties: USM holders (parts thereof) and other property (parts thereof) between PJSC HOLDINGS LIMITED, USM MegaFon (Customer) and JSC FTC (Contractor). TELECOM HOLDINGS • Minutes w/n LIMITED, Garsdale Services dated 19 September 2016 Under the Lease and/or Use Agreements for communications Investments Limited, installations (parts thereof), means of communication (parts AF Telecom Holding Limited, thereof), and other property (parts thereof) PJSC MegaFon uses LLC AF Telecom Holding. communications installations (parts thereof), means of communication (parts thereof), and other property (parts thereof) owned Grounds for recognising or otherwise lawfully held by JSC FTC. them as related parties: counterparty to the JSC FTC compensates PJSC MegaFon for electricity costs in- transaction is JSC FTC curred by PJSC MegaFon in relation to the property transferred controlled by parties also to JSC FTC, as well as for property insurance and JSC FTC’s controlling PJSC Mega- civil liability to third parties insurance costs incurred by PJSC Fon. MegaFon in relation to the property transferred to JSC FTC. Related parties’ percent- Total price of the property (services) under the Interrelated Lease age share ownership and/or Use Agreements for communications installations (parts in PJSC MegaFon: thereof), means of communication (parts thereof), and other property (parts thereof) between PJSC MegaFon and JSC FTC •• USM HOLDINGS LIMIT- does not exceed RUB 418,500,000,000. ED: nil; •• USM TELECOM HOLD- INGS LIMITED: nil; •• Garsdale Services In- vestments Limited: nil; •• AF Telecom Holding Limited: nil; •• LLC AF Telecom Hold- ing: 56.3178%. Related parties’ percentage share ownership in the counterparty: nil. Related-Party Transactions 17

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon Related parties: USM (Lender) and JSC MegaFon Retail (Borrower). HOLDINGS LIMITED, USM Minutes: TELECOM HOLDINGS Facility amount: RUB 7,060,000,000. • № 160(224) LIMITED, Garsdale Services Investments Limited, dated 10 January 2012; Facility maturity date: until 06 March 2022 (inclusive). • No. 185(249) AF Telecom Holding Limited, dated 09 December 2012; Interest rate: up to eight (8) percent per annum. LLC AF Telecom Holding. • No. 191(255) Grounds for recognising dated 01 April 2013; them as related parties: • No. 192(256) counterparty to the trans- dated 14 May 2013; action is JSC MegaFon • No. 253(317) Retail controlled by parties dated 23 December 2016. also controlling PJSC MegaFon.

Related parties’ percentage share ownership in PJSC MegaFon:

•• USM HOLDINGS LIMIT- ED: nil; •• USM TELECOM HOLD- INGS LIMITED: nil; •• Garsdale Services In- vestments Limited: nil; •• AF Telecom Holding Limited: nil; •• LLC AF Telecom Hold- ing: 56.3178%. Related parties’ percentage share ownership in the counterparty: nil. 18 Related-Party Transactions

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon Related parties: USM (Lender) and CJSC TT Mobile (Borrower). HOLDINGS LIMITED, USM Minutes: TELECOM HOLDINGS Facility amount: US$ 161,900,000. • № 127(191) LIMITED, Garsdale Services Investments Limited, dated 28 April 2010; Facility maturity date: until 19 March 2019 (inclusive). • No. 140(204) AF Telecom Holding Limited, dated 31 January 2011; Interest rate: up to twenty (20) percent per annum. LLC AF Telecom Holding; • No. 149(213) G.A. Vermishyan; dated 11 July 2011; A.Yu. Shishkovsky. • No. 189(253) Grounds for recognising dated 05 March 2013; them as related parties: • No. 160(224) counterparty to the trans- dated 10 February 2012; action is CJSC TT Mobile • No. 233(297) controlled by dated 25 December 2015; G.A. Vermishyan and • No. 253(317) A.Yu. Shishkovsky also con- dated 23 December 2016. trolling PJSC MegaFon – members of the Board of Directors of CJSC TT Mobile.

Related parties’ percentage share ownership in PJSC MegaFon:

•• USM HOLDINGS LIMIT- ED: nil;

•• USM TELECOM HOLD- INGS LIMITED: nil;

•• Garsdale Services In- vestments Limited: nil;

•• AF Telecom Holding Limited: nil;

•• LLC AF Telecom Hold- ing: 56.3178%;

•• G.A. Vermishyan: 0.000968%;

•• A.Yu. Shishkovsky: nil.

Related parties’ percentage share ownership in the counterparty: nil. Related-Party Transactions 19

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon Related parties: USM (Lender) and MegaFon Investments (Cyprus) Limited (Borrower). HOLDINGS LIMITED, USM • Minutes № 267(331) TELECOM HOLDINGS dated 25 October 2017 Facility amount: up to RUB 10,000,000,000. LIMITED, Garsdale Services Investments Limited, Facility maturity date: until 19 April 2020 (inclusive). AF Telecom Holding Limited, General Meeting LLC AF Telecom Holding. of Shareholders Interest rate: seven (7) percent per annum. Grounds for recognising Minutes: them as related parties: • w/n dated 19 April 2012; counterparty to the • 15 October 2012; transaction is MegaFon In- • 22 September 2014; vestments (Cyprus) Limited • 13 April 2015. controlled by parties also controlling PJSC MegaFon.

Related parties’ percentage share ownership in PJSC MegaFon:

•• USM HOLDINGS LIMIT- ED: nil;

•• USM TELECOM HOLD- INGS LIMITED: nil;

•• Garsdale Services In- vestments Limited: nil;

•• AF Telecom Holding Limited: nil;

•• LLC AF Telecom Hold- ing: 56.3178%.

Related parties’ percentage share ownership in the counterparty: nil. 20 Related-Party Transactions

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Limited Overdraft Facility Agreement between PJSC MegaFon AF Telecom Holding LLC, (Borrower) and PJSC Sberbank (Lender). Telecominvest Holdings Minutes: Limited, MegaFon Invest- Total overdraft limit: up to RUB 7,000,000,000. • № 189(253) ments (Cyprus) Limited. dated 05 March 2013; Overdraft maturity date: until 28 December 2018. Grounds for recognising • No. 192(256) them as related parties: dated 14 May 2013; Facility purpose: payments under the settlement documents of beneficiaries of the trans- • No. 216(280) the Pool Participants in MegaFon Group and included in the Pool action are subsidiaries of dated 29 April 2014; of Accounts ‘Limited Overdraft’ if there is no or insufficient cash PJSC MegaFon controlled • No. 220(284) on accounts of these entities, using the Total overdraft limit that by parties also controlling dated 24 December 2014; is set for the account of PJSC MegaFon. PJSC MegaFon. • No. 231(295) dated 28 October 2015; Total price of property (services) disposed of (acquired) by PJSC Related parties’ percent- • No. 271(335) MegaFon under the Limited Overdraft Facility Agreement does age share ownership in dated 22 December 2017. not exceed RUB 10,150,000,000. PJSC MegaFon:

•• USM HOLDINGS LIMIT- ED: nil;

•• USM TELECOM HOLD- INGS LIMITED: nil;

•• Garsdale Services In- vestments Limited: nil;

•• AF Telecom Holding Limited: nil;

•• LLC AF Telecom Hold- ing: 56.3178%.

Related parties’ percentage share ownership in the counterparty: nil. Related-Party Transactions 21

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Revolving Credit Facility Agreement between PJSC MegaFon Related parties: USM (Borrower) and LLC Scartel (Lender). HOLDINGS LIMITED, USM Minutes: TELECOM HOLDINGS Facility amount: up to RUB 15,000,000,000 (inclusive). • № 264(328) LIMITED, Garsdale Services dated 26 July 2017; Investments Limited, Facility maturity date: three (3) years from the dateof the Agree- AF Telecom Holding Limited, • No. 271(335) ment (inclusive). dated 22 December 2017. LLC AF Telecom Holding. Interest rate: up to eight (8) percent per annum. Grounds for recognising them as related parties: counterparty to the transaction is LLC Scartel controlled by parties also controlling PJSC MegaFon.

Related parties’ percentage share ownership in PJSC MegaFon:

•• USM HOLDINGS LIMIT- ED: nil;

•• USM TELECOM HOLD- INGS LIMITED: nil;

•• Garsdale Services In- vestments Limited: nil;

•• AF Telecom Holding Limited: nil;

•• LLC AF Telecom Hold- ing: 56.3178%.

Related parties’ percentage share ownership in the counterparty: nil. 22 Related-Party Transactions

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Master Agreement between PJSC MegaFon and LLC Scartel. Related parties: USM HOLDINGS LIMITED, USM Minutes: Under the Master Agreement, PJSC MegaFon provides to LLC TELECOM HOLDINGS Scartel the following services, performs work and transfers prop- • № 253(317) LIMITED, Garsdale Services erty/rights/obligations as follows: dated 23 December 2016; Investments Limited, • No. 271(335) AF Telecom Holding Limited, •• provision of radio access network infrastructure to enable LLC AF Telecom Holding. dated 22 December 2017. communications services based on MVNO business model; Grounds for recognising •• enabling shared use of means of communication and/or com- them as related parties: munications lines, including, without limitation, communica- counterparty to the tions nodes (equipment comprising communications nodes), transaction is LLC Scartel maintenance, operation, and repair of equipment comprising controlled by parties also communications nodes, as well as other equipment), equip- controlling PJSC MegaFon. ment of base stations and repeaters of LTE mobile networks, and communications channels; Related parties’ percent- •• enabling a technical capability for LLC Scartel subscribers age share ownership in to sign agreements with an electronic signature, as well as PJSC MegaFon: a technical capability for LLC Scartel employees and other persons engaged by LLC Scartel to sign documents with an •• USM HOLDINGS LIMIT- electronic signature; ED: nil;

•• technical support for international roaming, and billing sup- •• USM TELECOM HOLD- port; INGS LIMITED: nil;

•• services related to processing personal data of LLC Scartel •• Garsdale Services In- employees (collection, collation, accumulation, storage, clar- vestments Limited: nil; ification (update, modification), use, anonymisation, blocking and destruction) and other personal data transferred by LLC •• AF Telecom Holding Scartel; Limited: nil;

•• a range of accounting, tax, financial control, treasury, HR •• LLC AF Telecom Hold- accounting and HR management services; ing: 56.3178%.

•• enabling the use (including shared use) of PJSC MegaFon’s Related parties’ percent- software (SAP, Microsoft, MS SQL software and software for age share ownership in help desk set-up and support, and other software), including, the counterparty: nil. without limitation, execution of licence (sub-licence), agency, technical support and other services agreements (including those related to software), tripartite agreements with software owners, as well as services related to equipment and software maintenance and support;

•• purchase and sale of equipment (customised CPE, including customer premises equipment by Apple or Samsung);

•• lease of telecommunications equipment (SORM system, switches, servers, and other technical equipment);

•• spectrum sharing;

•• arrangements for access from a connection point to PJSC MegaFon’s information centre and traffic generation;

•• agency services to arrange for interconnection between LLC Scartel communications networks and communications networks of other operators, and other agency services; Related-Party Transactions 23

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

as well as provides other services, performs work and transfers property/rights/obligations.

LLC Scartel provides to PJSC MegaFon services, performs work and transfers property/rights/obligations as follows:

•• spectrum sharing;

•• information and analytical services related to collection and processing of aggregated data used for PJSC MegaFon’s internal and external analytical services.

as well as provides other services, performs work and transfers property/rights/obligations.

Total price of property (services) disposed of (acquired) by PJSC MegaFon under the Master Agreement between PJSC MegaFon and LLC Scartel does not exceed RUB 11,597,700,000. 24 Related-Party Transactions

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

Board of Directors Master Agreement between PJSC MegaFon and MegaLabs JSC. Related parties: USM HOLDINGS LIMITED, USM Minutes: Under the Master Agreement, PJSC MegaFon provides to Me- TELECOM HOLDINGS gaLabs JSC the following services, performs work and transfers • No. 253(317) LIMITED, Garsdale Services property/rights/obligations as follows: dated 23 December 2016; Investments Limited, AF • No. 271(335) Telecom Holding Limited, •• equipment lease (including telecommunications and tech- LLC AF Telecom Holding. dated 22 December 2017. nical equipment (platforms) for the purpose of provision of services by PJSC MegaFon); Grounds for recognising them as related parties: •• purchase and sale of equipment (including telecommunica- counterparty to the tions and technical equipment (platforms) for the purpose of transaction is JSC FTC provision of services by PJSC MegaFon); controlled by parties also •• enabling the use (including through alienation of exclusive controlling PJSC MegaFon. right) of software, including, without limitation, software installed on equipment transferred by PJSC MegaFon, including Related parties’ percent- through tripartite agreements with software owners; age share ownership in PJSC MegaFon: •• enabling the use (including through alienation of exclusive right) of other intellectual property for the purpose of provi- •• USM HOLDINGS LIMIT- sion of services by PJSC MegaFon; ED: nil

•• services and work related to equipment and software main- •• USM TELECOM HOLD- tenance and support, software development; INGS LIMITED: nil

•• agency services for PJSC MegaFon, including for the purpose •• Garsdale Services In- of provision of services by PJSC MegaFon and promotion vestments Limited: nil (advertisement) of PJSC MegaFon’s services; •• AF Telecom Holding •• transfer of rights and obligations under the agreements con- Limited: nil cluded by MegaLabs JSC with the third parties •• LLC AF Telecom Hold- as well as provides other services, performs work and transfers ing: 56.3178%. property/rights/obligations. Related parties’ percentage share ownership in the counterparty: nil. Related-Party Transactions 25

GOVERNING BODY SUBJECT MATTER RELATED PARTIES THAT APPROVED AND MATERIAL TERMS INVOLVED THE TRANSACTION OF THE TRANSACTION IN THE TRANSACTION

MegaLabs JSC provides to PJSC MegaFon services, performs work and transfers property/rights/obligations as follows:

•• implementation and maintenance of the SAP system

•• siting and technical support of MegaLabs JSC equipment

•• equipment lease (including telecommunications and technical equipment (platforms))

•• purchase and sale of equipment (including telecommunications and technical equipment (platforms))

•• transfer of rights and obligations under the agreements concluded by PJSC MegaFon with the third parties

•• enabling the use of, alienation of exclusive right to, any intellectual production

as well as provides other services, performs work and transfers property/rights/obligations.

Total price of property (services) disposed of (acquired) by PJSC MegaFon under the Master Agreement between PJSC MegaFon and MegaLabs JSC does not exceed RUB 11,118,673,000. 26 Corporate Governance Code Compliance Report

Corporate Governance Code Compliance Report

This Corporate Governance Code (the Code) The compliance with the Code was assessed by Compliance Report was discussed by the Board the Company in accordance with the Recommen- of Directors of Public Joint-Stock Company dations on Preparation of the Report on Compli- MegaFon (the Company) at its meeting held on ance with the Principles and Recommendations 27 April 2018 (Minutes No.278(342) dated 27 April of the Corporate Governance Code (Letter of the 2018). Bank of Russia No. IN-06-52/8 dated 17 February 2016). The Board of Directors certifies that all data in this Report contain full and reliable information on compliance by the Company with the principles and recommendations of the Code for 2017.

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

The company ensures fair and equitable treatment of all shareholders in exer- 1.1 cising their corporate governance right.

1.1.1 The company ensures the 1. The company’s internal doc-  full most favourable condi- ument approved by the gen- tions for its shareholders eral meeting of shareholders  partial to participate in the governing the procedures general meeting, develop to hold general meetings  none an informed position on of shareholders is publicly agenda items of the gen- available. eral meeting, coordinate their actions, and voice 2. The company provides acces- their opinions on items sible means of communica- considered. tion with the company, such as a hotline, e-mail or online forum, to enable shareholders to express their opinion and send questions on the agenda in preparation for the general meeting. The company performed the above actions in advance of each general meeting held in the reporting period. Corporate Governance Code Compliance Report 27

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

1.1.2 The procedure for giving 1. The notice of an upcoming  full notice of, and providing general shareholders meet- relevant materials for, the ing is posted (published)  partial general meeting enables online at least 30 days prior shareholders to properly to the date of the general  none prepare for attending the meeting. general meeting. 2. The notice of an upcoming meeting indicates the location of the meeting and the documents required for admission.

3. Shareholders were given access to the information on who proposed the agenda items and who nominated candidates to the company’s board of directors and the revision committee.

1.1.3 In preparing for, and 1. In the reporting period,  full holding of, the general shareholders were given an meeting, shareholders opportunity to put questions  partial were able to receive clear to members of executive bod- and timely information on ies and members of the board  none the meeting and related of directors in advance of and materials, put questions to during the annual general the company’s executive meeting. bodies and the board of directors, and to commu- 2. The position of the board of nicate with each other. directors (including dissent- ing opinions entered in the minutes) on each item on the agenda of general meetings held in the reporting period was included in the materials for the general meeting of shareholders.

3. The company gave duly authorized shareholders access to the list of persons entitled to participate in the general meeting, as from the date when such list was received by the company, in all instances of general meetings held in the reporting period. 28 Corporate Governance Code Compliance Report

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

1.1.4 There were no unjustified 1. In the reporting period, share-  full difficulties preventing holders had an opportunity shareholders from exercis- to make proposals for the  partial ing their right to request agenda of the annual general that a general meeting meeting for at least 60 days  none be convened, to propose after the end of the respective nominees to the compa- calendar year. ny’s management bodies, and to make proposals for 2. In the reporting period, the the agenda of the general company did not reject any meeting. proposals for the agenda or nominees to the company’s management bodies due to misprints or other insignificant flaws in the shareholder’s proposal.

1.1.5 Each shareholder was 1. The internal document (inter-  full able to freely exercise their nal policy) contains provisions voting right in the simplest stipulating that every partic-  partial and most convenient ipant in the general meeting way. may, before the end of the  none respective meeting, request a copy of the ballot filled in by them and certified by the counting commission. Corporate Governance Code Compliance Report 29

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

1.1.6 The procedure for holding 1. During general meetings  full 1. Full. a general meeting set by of shareholders held in the the company provides reporting period in the form of  partial 2. Candidates to the Company’s equal opportunities for a meeting (joint presence of governing and control bodies all persons attending the shareholders), sufficient time  none are neither present nor avail- meeting to voice their was allocated for reports on able to answer shareholders’ opinions and ask ques- and discussion of the agenda questions during the GMS at tions. items. which they are put to vote.

2. Candidates to the company’s Since their tight schedules and management and control residential locations prevent bodies were available to them from attending GMSs in answer questions of share- person, the Company does holders at the meeting at not undertake to ensure their which their nominations were attendance. However, in prepa- put to vote. ration for the GMS, shareholders may exercise their right to 3. When passing resolutions on put any questions in writing to the preparation and hold- candidates to the Company’s ing of general meetings of governing and control bodies shareholders, the board of by forwarding such questions directors considered using to the Company, including to telecommunication means for the Corporate Secretary. remote access of shareholders to general meetings in the The Company believes this way reporting period. of communication to be most effective as, according to the voting statistics, shareholders prefer sending ballots to the Company to attending in person.

3. The use of filming equipment, video and/or audio recording devices during the GMS, as well as video and/or audio broadcast of the GMS is prohibited by the Company’s Regulations on the GMS to prevent unauthorised disclosure of the Com- pany’s insider and confidential information.

However, the applicable laws allow shareholders to vote by sending completed ballots to the Company or electronically through the communications channels of nominee holders. 30 Corporate Governance Code Compliance Report

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

1.2 Shareholders are given equal and fair opportunities to share profits of the company in the form of dividends.

1.2.1 The company has de- 1. The company has drafted and  full signed and put in place disclosed a dividend policy a transparent and clear approved by the board of  partial mechanism to determine directors. the dividend amount and  none payout procedure. 2. If the company’s dividend policy uses reporting figures to determine the dividend amount, then relevant provisions of the dividend policy take into account the consolidated financial statements.

1.2.2 The company does not re- 1. The company’s dividend  full solve to pay out dividends policy contains clear indica- if such payout, while tions of financial/economic  partial formally compliant with circumstances under which law, is economically unjus- the company shall not pay  none tified and may lead to a out dividends. false representation of the company’s performance.

1.2.3 The company does not 1. In the reporting period, the  full allow for dividend rights of company did not take any its existing shareholders to actions that would lead to the  partial be impaired. impairment of the dividend rights of its existing share-  none holders.

1.2.4 The company makes every 1. To prevent shareholders from  full effort to prevent its share- using other means to profit holders from using other (gain) from the company  partial means to profit (gain) from other than dividends and the company other than liquidation value, the com-  none dividends and liquidation pany’s internal documents value. provide for controls to timely identify and approve deals with affiliates (associates) of the company’s substantial shareholders (persons entitled to use votes attached to voting shares) where the law does not formally recognize such deals as related-party transactions. Corporate Governance Code Compliance Report 31

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

The corporate governance framework and practices ensure equal conditions 1.3 for all shareholders owning the same type (class) of shares, including minority and non-resident shareholders, and their equal treatment by the company.

1.3.1 The company has created 1. In the reporting period, pro-  full conditions for fair treat- cedures for management of ment of each shareholder potential conflicts of interest  partial by the company’s gover- among substantial sharehold- nance and control bodies, ers were efficient, while the  none including conditions that board of directors paid due rule out abuse by major attention to conflicts, if any, shareholders against mi- between shareholders. nority shareholders.

1.3.2 The company does not 1. No quasi-treasury shares  full The Company’s subsidiary, Mega- take any actions that lead were issued or used to vote in Fon Investments (Cyprus) Limited, or may lead to artificial the reporting period.  partial holds a stake in the Company and redistribution of corporate participates in voting on the GMS control.  none agenda.

At the same time, this company does not vote on approval of related-party transactions, including cases when the related party is the Company’s majority shareholder.

When voting at a GMS on election of the Company’s Directors, MegaFon Investments (Cyprus) Limited votes exclusively in favour of the Company’s independent directors, which is believed by the Company to reflect the interests of all its shareholders.

In line with the legal requirement to count phantom shares for the GMS quorum, the Company intends to maintain this approach, thus maximising support to all its shareholders. 32 Corporate Governance Code Compliance Report

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

1.4 Shareholders are provided with reliable and efficient means of recording their rights to shares and are able to freely dispose of their shares without any hindrance.

1.4 Shareholders are provided 1. The company’s registrar  full with reliable and efficient maintains the share register means of recording their in an efficient and reliable  partial rights to shares and are way that meets the needs of able to freely dispose of the company and its share-  none their shares without any holders. hindrance.

2.1 The board of directors provides strategic management of the company, determines key principles of, and approaches to, setting up a corporate risk management and internal control framework, monitors performance by the company’s executive bodies, and performs other key functions.

2.1.1 The board of directors is 1. The board of directors has  full 1. In accordance with the Com- responsible for appointing the authority stipulated in pany’s Charter, appointment and dismissing execu- the articles of association to  partial and removal of members of tive bodies, including for appoint and remove members executive bodies falls within improper performance of of executive bodies and to set  none the authority of the GMS. their duties. The board of out the terms and conditions directors also ensures that of their contracts. In the Company’s opinion, the company’s executive this matter is reserved solely bodies act in accordance 2. The board of directors to the Company’s supreme with the company’s reviewed the report(s) by the governing body as highly im- approved development sole executive body or mem- portant in terms of sharehold- strategy and core lines of bers of the collegial executive ers controlling the Company’s business. body on the implementation executive bodies. of the company’s strategy. The Board of Directors reviews candidates to executive bodies and offers shareholders its recommendations. The Board is also authorised to convene a GMS for election or termination of the powers of executive bodies – an effective approach formalized in the Charter for over 15 years and supported by MegaFon’s shareholders.

2. Full. Corporate Governance Code Compliance Report 33

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

2.1.2 The board of directors sets 1. At its meetings in the re-  full key long-term targets for porting period, the board of the company, assesses directors reviewed strategy  partial and approves its key implementation and updates, performance indicators approval of the company’s  none and key business goals, financial and business plan as well as the strategy (budget), and criteria and and business plans for the performance (including inter- company’s core lines of im) of the company’s strategy business. and business plans.

2.1.3 The board of directors 1. The board of directors defined  full defines the company’s the company’s principles and principles and approaches approaches to risk manage-  partial to risk management and ment and internal controls. internal controls.  none 2. The board of directors assessed the company’s risk management and internal controls in the reporting period.

2.1.4 The board of directors 1. The company developed and  full shall define the company’s put in place a remuneration policy on remuneration and reimbursement (com-  partial due to and/or reimburse- pensation) policy (policies), ment (compensation) approved by the board of  none of costs incurred by directors, for its directors, members of the board of members of executive bodies directors, executive bodies and other key executives. and other key executives of the company. 2. At its meetings in the reporting period, the board of directors discussed matters related to such policy (policies).

2.1.5 The board of directors 1. The board of directors plays  full plays a key role in pre- a key role in preventing, iden- venting, identifying and tifying and resolving internal  partial resolving internal conflicts conflicts. between the company’s  none bodies, shareholders and 2. The company set up mech- employees. anisms to identify transactions leading to a conflict of interest and to resolve such conflicts. 34 Corporate Governance Code Compliance Report

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

2.1.6 The board of directors 1. The board of directors  full plays a key role in en- approved the company’s suring that the company regulations on the informa-  partial is transparent, timely tion policy. and fully discloses its  none information, and provides 2. The company identified its shareholders with persons responsible for unhindered access to the implementing the information company’s documents. policy.

2.1.7 The board of directors 1. In the reporting period, the  full controls the company’s board of directors reviewed corporate governance the company’s corporate  partial practices and plays a key governance practices. role in material corporate  none events of the company.

2.2 The board of directors is accountable to the company’s shareholders.

2.2.1 Performance of the board 1. The company’s annual report  full of directors is disclosed for the reporting period in- and made available to the cludes the information on in-  partial shareholders. dividual attendance at board of directors and committee  none meetings.

2. The annual report discloses key performance assessment results of the board of directors in the reporting period.

2.2.2 The chairman of the board 1. The company has in place  full of directors is available a transparent procedure to communicate with the enabling shareholders to  partial company’s shareholders. forward questions and express their position on such  none questions to the chairman of the board of directors. Corporate Governance Code Compliance Report 35

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

The board of directors manages the company in an efficient and profession- 2.3 al manner and is capable of making fair and independent judgements and adopting resolutions in the best interests of the company and its shareholders.

2.3.1 Only persons of impecca- 1. The procedure for assessing  full ble business and personal the board of directors’ per- reputation who have formance established in the  partial knowledge, expertise and company includes, inter alia, experience required to assessment of professional  none make decisions within the qualifications of directors. authority of the board of directors and essential to 2. In the reporting period, the perform its functions in an board of directors (or its nom- efficient way are elected ination committee) assessed to the board of directors. nominees to the board of directors for required experience, expertise, business reputation, absence of conflicts of interest, etc.

2.3.2 The company’s directors 1. Whenever the agenda of the  full The Company has provided the are elected via a trans- general shareholders meeting personal data of nominees to the parent procedure that included election of the board  partial Board of Directors to sharehold- enables shareholders to of directors, the company ers for each General Meeting of obtain information on provided to shareholders  none Shareholders, as required by the nominees sufficient to the biographical details of applicable laws. judge on their personal all nominees to the board of and professional quali- directors, the results of their However, the Company has not ties. assessment carried out by provided its shareholders with the board of directors (or its information on whether the listed nomination committee), and nominees to the Company’s Board the information on whether of Directors meet the indepen- the nominee meets the inde- dence criteria set forth in Recom- pendence criteria set forth in mendations 102–107 of the Code. Recommendations 102–107 of the Code, as well as the The Company intends to make a nominees’ written consent full disclosure of such information to be elected to the board of to its shareholders its routine prac- directors. tice as from the 2018 GMS. 36 Corporate Governance Code Compliance Report

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

2.3.3 The board of directors 1. As part of assessment of the  full In the reporting period, the perfor- has a balanced member- board of directors’ performance of the Company’s Board of ship, including in terms of mance run in the reporting  partial Directors was not assessed due to directors’ qualifications, period, the board of directors multiple changes in its member- experience, expertise and reviewed its requirements to  none ship. The last Board of Directors business skills, and enjoys professional qualifications, was elected on 07 August 2017. its shareholders’ trust. experience and business skills. The composition of the Board of Directors was completely changed on 19 January 2018.

Due to very little time in office of the new Directors, the Board of Directors intends to conduct self-assessment by the end of the next reporting period.

However, the Company adheres to the principle of having a well-balanced membership of its Board of Directors. Despite the changes in the Board of Directors membership in the reporting year, qualifications, expertise, and experience of all Directors were in full compliance with the Company’s needs and strategic goals.

2.3.4 The company has a suffi- 1. As part of assessment of the  full The Company fully adheres to cient number of directors board of directors’ perfor- the principle of having a well-bal- to organize the board mance run in the reporting  partial anced number of Directors. of directors’ activities in period, the board of direc- Throughout 2017, the Board of the most efficient way, tors considered whether the  none Directors had three Independent including ability to set up number of directors met the Directors. From 17 August 2017 committees of the board company’s needs and share- to 01 October 2017, the Board of of directors and enable holders’ interests. Directors had four Independent the company’s substantial Directors. minority shareholders to elect a nominee to the The Company’s Board of Directors board of directors for did not assess its performance whom they vote. in 2017 for the reasons detailed above. Due to very little time in office of the new Directors, the Board of Directors intends to conduct self-assessment by the end of the next reporting period.

However, the Board of Directors continued to follow the recommendations resulting from the 2015 assessment. Corporate Governance Code Compliance Report 37

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

2.4 The board of directors includes a sufficient number of independent directors.

2.4.1 An independent director is 1. In the reporting period, all  full a person who is sufficient- independent directors met all ly professional, experi- independence criteria set out  partial enced and independent to in Recommendations 102–107 develop their own position, of the Code, or were deemed  none and capable of making independent by resolution of unbiased judgements in the board of directors. good faith, free of influence by the company’s executive bodies, individual groups of shareholders or other stakeholders. It should be noted that a nominee (elected director) who is related to the company, its substantial shareholder, substantial counterparty or competitor of the company, or is related to the government, may not be considered as independent under normal circumstances. 38 Corporate Governance Code Compliance Report

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

2.4.2 The company assesses 1. In the reporting period, the  full 1. Upon election by the Com- compliance of nominees board of directors (or its nom- pany’s General Meeting of to the board of directors ination committee) made a  partial Shareholders to the Board of and reviews compliance judgement on independence Directors, Directors undergo of independent directors of each nominee to the board  none remote assessment for com- with independence criteria of directors and provided its pliance with independence on a regular basis. In such opinion to shareholders. criteria. At the conclusion assessment, substance of this process, the Board of should prevail over form. 2. In the reporting period, the Directors considers nominees board of directors (or its nom- for independent directors and ination committee) reviewed, determines which nominees at least once, the indepen- qualify as independent dence of incumbent directors directors. listed by the company as independent directors in its In 2017, the Remuneration annual report. and Nominations Commit- tee made a judgement on 3. The company has in place independence of nominees procedures defining the ac- to the Board of Directors at tions to be taken by directors the Annual GMS; assessment if they cease to be indepen- of the nominees proposed at dent, including the obligation Extraordinary GMSs was not to timely notify the board of conducted. directors thereof. The Company intends to assess all nominees to the Board of Directors for compliance with the independence criteria as from the 2018 Annual GMS.

2. Full.

3. Full.

2.4.3 Independent directors 1. Independent directors make  full The composition of the Company’s make up at least one third up at least one third of Board of Directors fully met this of elected directors. directors.  partial requirement throughout 2017.

 none From 19 January 2018, the Board of Directors has two independent directors.

2.4.4 Independent directors 1. Independent directors (with  full play a key role in prevent- no conflicts of interest) run ing internal conflicts in the a preliminary assessment of  partial company and in ensuring material corporate actions that the company per- implying a potential conflict  none forms material corporate of interest and submit the re- actions sults to the board of directors. Corporate Governance Code Compliance Report 39

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

The chairman of the board of directors ensures that the board of directors dis- 2.5 charges its duties in the most efficient way.

2.5.1 The board of directors is 1. The board of directors is  full 1. The Company and the Board of chaired by an indepen- chaired by an independent Directors believe that, consid- dent director, or a senior director, or a senior indepen-  partial ering the BoD Chairman’s deep independent director su- dent director is appointed involvement in the Company’s pervising the activities of from among the independent  none activities, the election of the other independent direc- directors. Chairman requires thorough tors and interacting with consideration of both personal the chairman of the board 2. The role, rights and duties of and professional skills of nomi- of directors is chosen from the chairman of the board of nees. Therefore, Vladimir Ya. among the elected inde- directors (and, if applicable, Streshinsky was unanimously pendent directors. of the senior independent elected Chairman of the Board director) are duly set out of Directors for 2017. Although in the company’s internal Mr Streshinsky was not an inde- documents. pendent director, the Company believed that his vast experience in the telecoms industry, his outstanding managerial skills, and inside-out knowledge of all the Company’s business segments and specifics guaranteed high performance of the Board of Directors, a balanced approach to protecting shareholder rights and interests, and focus on the Company’s business needs.

In addition, Mr Streshinsky had unique expertise in media asset management.

Independent directors also chaired key Board of Directors’ Committees and were actively involved in discussing and reviewing all the matters of the Board in 2017.

2. Full. 40 Corporate Governance Code Compliance Report

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2.5.2 The chairman of the board 1. Performance of the chairman  full The Company is fully committed to of directors maintains a of the board of directors was the principle of the Board Chair- constructive environment assessed as part of assess-  partial man creating a constructive and at meetings, enables free ment of the board of directors’ discussion-friendly environment at discussion of agenda performance in the reporting  none the Board of Directors’ meetings. items, and supervises the period. execution of resolutions However, the performance of passed by the board of the Chairman of the Board of directors. Directors was not assessed as part of assessment of the Board of Directors’ performance in the reporting period, as the Company had not run any comprehensive assessment since 2015.

The reasons for not running such assessment in 2017 are cited above. Due to very little time in office of the new Directors, the Board of Directors intends to assess its Chairman’s performance by the end of the next reporting period.

As Chairman of the Board of Di- rectors, Mr Streshinsky was able to use his extensive industry knowledge and experience, the in-depth understanding of the Company’s business strategy and corporate governance, and professional managerial skills.

2.5.3 The chairman of the board 1. The company’s internal  full of directors takes all steps documents set out the duty necessary for the timely of the chairman of the board  partial provision to directors of of directors to take all steps information required to necessary for the timely pro-  none pass resolutions on agen- vision to directors of materials da items. for the agenda of a board meeting. Corporate Governance Code Compliance Report 41

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Directors act reasonably and in good faith in the best interests of the company 2.6 and its shareholders, on a fully informed basis and with due care and diligence.

2.6.1 Directors pass resolutions 1. The company’s internal docu-  full on a fully informed basis, ments provide that a director with no conflict of interest, should notify the board of  partial subject to equal treatment directors of any existing of the company’s share- conflict of interest as to any  none holders, and assuming agenda item of the meeting normal business risks. of the board of directors or its committee, prior to discussion of the relevant agenda item.

2. The company’s internal documents provide that a director should abstain from voting on any item in connection with which they have a conflict of interest.

3. The company has in place a procedure enabling the board of directors to get professional advice on matters within its remit at the expense of the company.

2.6.2 The rights and duties 1. The company adopted and  full of directors are clearly published an internal docu- stated and incorporated ment that clearly defines the  partial in the company’s internal rights and duties of directors. documents.  none

2.6.3 Directors have sufficient 1. Individual attendance at  full 1. The Company is fully commit- time to perform their board and committee meet- ted to this principle and pre- duties. ings, as well as time devoted  partial pares for in-person meetings to preparation for attending of the Board of Directors and meetings, was recorded as  none its Committees well in advance part of the procedure for as- (before the beginning of the sessing the board of directors relevant year) and with due in the reporting period. account of personal schedules and work commitments of each 2. Under the company’s internal Director. documents, directors notify the board of directors of However, the Company did their intentions to be elected not run any comprehensive to management bodies in assessment in the reporting other entities (apart from period for the reasons detailed the entities controlled by, or above. Due to very little time in affiliated to, the company), office of the new Directors, the and of their election to such Board of Directors intends to bodies. conduct self-assessment in the next reporting period.

2. Full. 42 Corporate Governance Code Compliance Report

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2.6.4 All directors have equal 1. Under the company’s internal  full access to the company’s documents, directors are documents and infor- entitled to access documents  partial mation. Newly elected and make requests on the directors are furnished company and its controlled  none with sufficient information entities, while executive about the company and bodies of the company should performance of the board furnish all relevant informa- of directors as soon as tion and documents. possible. 2. The company has in place a formalised induction programme for newly elected members of the board of directors.

Meetings of the board of directors, preparation for such meetings and partici- 2.7 pation of directors ensure efficient performance by the board of directors

2.7.1 Meetings of the board of 1. The board of directors held  full directors are held as need- at least six meetings in the ed, taking into account reporting year.  partial the scale of operations and goals of the company  none at a particular time.

2.7.2 Internal regulations of 1. The company has an ap-  full the company formalize a proved internal document procedure for the prepa- that describes the procedure  partial ration and holding of the for arranging and holding board meetings, enabling meetings of the board of  none members of the board of directors and sets out, in directors to properly pre- particular, that the notice of pare for such meetings. the meeting is to be given, as a rule, at least five days prior to such meeting.

2.7.3 The format of the meeting 1. The company’s articles of  full of the board of directors association or internal doc- is determined taking into ument provide for the most  partial account the importance of important matters (as per the its agenda items. The most list set out in Recommenda-  none important matters are tion 168 of the Code) to be dealt with at meetings of passed at in-person meetings the board of directors held of the board of directors. in person. Corporate Governance Code Compliance Report 43

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2.7.4 Resolutions on most im- 1. The company’s articles of  full The Company’s Charter does not portant matters relating to association provide for reso- provide for a qualified majority the company’s operations lutions on the most important  partial to pass resolutions on all matters are passed at a meeting matters set out in Recommen- set out in Recommendation 170 of of the board of directors dation 170 of the Code to be  none the Code. The simple majority of by a qualified majority or passed at a meeting of the Directors’ votes on such matters by a majority of all elected board of directors by a quali- is deemed sufficient to comply directors. fied majority of at least three with shareholder interests, as the quarters or by a majority of Company’s Charter was approved all elected directors. by the GMS. The Company has no plans for making any amendments to the Company’s Charter in this regard.

However, in the reporting year, all resolutions on such matters were in fact passed unanimously by all Directors entitled to vote on such matters or by a qualified majority. 44 Corporate Governance Code Compliance Report

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The board of directors sets up committees for preliminary consideration of the 2.8 most important matters related to the company business.

2.8.1 To preview matters related 1. The board of directors set up  full 1. The Company has in place its to controlling the compa- an audit committee com- Audit Committee. ny’s financial and business prised solely of independent  partial activities, it is recom- directors. In the reporting period, the mended to set up an audit  none Audit Committee was chaired committee comprised of 2. The company’s internal docu- by an independent director, Mr independent directors. ments set out the tasks of the Jan Erik Rudberg, who has an audit committee, including extensive experience in busi- those listed in Recommenda- ness administration and inter- tion 172 of the Code. national telecommunications, as well as deep knowledge of 3. At least one member of the preparing, analysing, assess- audit committee represented ing, and auditing accounting by an independent director (financial) statements. The has experience and knowl- Audit Committee also included edge of preparing, analysing, Nikolay B. Krylov who had been assessing and auditing ac- an independent director prior counting (financial) state- to 01 October 2017. ments. 4. In the reporting period, meet- The Committee had such com- ings of the audit committee position to ensure its operation were held at least once a in line with its Regulations. The quarter. analysis took into account the requirements of the Committee to skill sets identified by the Board of Directors assessment, as well as skills, professional expertise, and experience of each member of the Compa- ny’s Board of Directors, and their personal schedules and preferences.

Upon the re-election of the Board of Directors (at the Extraordinary General Meeting of Shareholders on 19 Janu- ary 2018), composition of the Audit Committee was changed. Jarkko Veijalainen, an independent director, was added to the Committee and also appointed its Chairman.

2. Full.

3. Full.

4. Full. Corporate Governance Code Compliance Report 45

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2.8.2 To preview matters related 1. The board of directors set up  full 1. The Company has in place its to adopting an efficient a remuneration committee Remuneration and Nominations and transparent remuner- comprised solely of indepen-  partial Committee. ation scheme, a remunera- dent directors. tion committee was set up,  none In the reporting period, the comprised of independent 2. The remuneration committee Remuneration and Nominations directors and headed by is headed by an independent Committee was chaired by an an independent director director who is not the chair- independent director, Lord Paul who is not the chairman of man of the board of directors. Myners, who has an extensive the board of directors. experience in the telecoms 3. The company’s internal industry and expertise in documents set out the tasks finance, politics, and corporate of the remuneration commit- governance. tee, including those listed in Recommendation 180 of the The Remuneration Committee Code. also included an independent director, Jan Erik Rudberg.

The Committee had such composition to ensure its operation in line with its Regulations. The analysis took into account the requirements of the Committee to skill sets identified by the Board of Directors assessment, as well as skills, professional expertise, and experience of each member of the Compa- ny’s Board of Directors, and their personal schedules and preferences.

Upon the re-election of the Board of Directors (at the Extraordinary General Meeting of Shareholders on 19 Janu- ary 2018), composition of the Remuneration and Nomina- tions Committee was changed. Harri Koponen, an independent director, was added to the Committee and also appointed its Chairman.

2. Full.

3. Full. 46 Corporate Governance Code Compliance Report

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2.8.3 To preview matters related 1. The board of directors has  full The composition of the Committee to talent management set up a nomination com- fully met this requirement through- (succession planning), mittee (or its tasks listed in  partial out 2017. professional composition Recommendation 186 of the and efficiency of the Code are fulfilled by another  none Since 22 January 2018, the board of directors, a nomi- committee) predominantly Committee has one independent nation (appointments and comprised of independent director (its Chairman). HR) committee was set up, directors. predominantly comprised of independent directors. 2. The company’s internal documents set out the tasks of the nomination committee (or the tasks of the committee with combined functions), including those listed in Recommen- dation 186 of the Code.

2.8.4 Taking into account the 1. In the reporting period, the  full company’s scope of board of directors considered business and level of risks, whether the composition of  partial the company’s board of its committees was in line directors made sure that with the board’s tasks and the  none the composition of its company’s business goals. committees is in line with Additional committees were company’s business goals. either set up or not deemed Additional committees necessary. were either set up or not deemed necessary (strategy committee, corporate governance committee, ethics committee, risk management committee, budget committee, health, safety and environment committee, etc.).

2.8.5 Committees shall be 1. Committees of the board  full composed so as to of directors are headed by enable comprehensive independent directors.  partial discussions of matters under preview, taking into 2. The company’s internal  none account the diversity of documents (policies) include opinions. provisions stipulating that persons who are not members of the audit committee, the nomination committee, and the remuneration committee may attend committee meetings only by invitation of the chairman of the respective committee. Corporate Governance Code Compliance Report 47

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2.8.6 Committee chairmen 1. In the reporting period, com-  full inform the board of direc- mittee chairmen reported to tors and its chairman on the board of directors on the  partial the performance of their performance of committees committees on a regular on a regular basis.  none basis.

The board of directors ensures performance assessment of the board of direc- 2.9 tors, its committees and members of the board of directors.

2.9.1 The board of directors’ 1. Self-assessment or external  full Self-assessment or external as- performance assessment assessment of the board sessment of the Board of Directors’ is aimed at determining of directors’ performance  partial performance were not carried out the efficiency of the board carried out in the reporting in the reporting period due to mul- of directors, its commit- period included performance  none tiple re-elections of the Company’s tees and members, con- assessment of committees, Board of Directors. sistency of their work with individual directors, and the the company’s growth board of directors in general. The latest Board of Directors for requirements, as well as the reporting period was elected at bolstering the work of 2. Results of self-assessment or on 07 August 2017 (active until 19 the board of directors external assessment of the January 2018). and identifying areas for board of directors’ perfor- improvement. mance carried out in the re- However, the Company is com- porting period were reviewed mitted to the principle of manda- at the in-person meeting of tory assessment of its Board of the board of directors. Directors’ performance. Due to very little time in office of the new Directors, the Board of Directors intends to conduct self-assessment by the end of the next reporting period.

2.9.2 Performance of the board 1. The company engaged an  full of directors, its commit- external advisor to conduct tees, and members is an independent assessment  partial assessed regularly at least of the board of directors’ once a year. An external performance at least once  none advisor is engaged at over the last three reporting least once in three years periods. to conduct an independent assessment of the board of directors’ performance. 48 Corporate Governance Code Compliance Report

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3.1 The company’s corporate secretary ensures efficient ongoing interaction with shareholders, coordinates the company’s efforts to protect shareholder rights and interests and supports efficient performance of the board of directors.

3.1.1 The corporate secretary 1. The company has adopted  full has the expertise, expe- and published an internal rience and qualifications document – regulations on  partial sufficient to perform his/ the corporate secretary. her duties, as well as an  none impeccable reputation 2. The biographical data of and the trust of share- the corporate secretary are holders. published on the corporate website and in the company’s annual report with the same level of detail as for members of the board of directors and the company’s executives.

3.1.2 The corporate secretary is 3. The board of directors  full sufficiently independent of approves the appointment, the company’s executive dismissal and additional re-  partial bodies and has the powers muneration of the corporate and resources required to secretary.  none perform his/her tasks.

4.1 Remuneration payable by the company is sufficient to attract, motivate, and retain people with competencies and qualifications required by the company. Remuneration payable to directors, executive bodies and other key executives of the company is in compliance with the approved remuneration policy of the company.

4.1.1 The amount of remunera- 1. The company has in place an  full tion paid by the company internal document (internal to directors, executive documents) – the policy  partial bodies and other key ex- (policies) on remuneration of ecutives creates sufficient members of the board of di-  none incentives for them to work rectors, executive bodies and efficiently, while enabling other key executives, which the company to engage clearly defines the approach- and retain competent and es to remuneration of the qualified specialists. At above persons. the same time, the company avoids unnecessarily high remuneration, as well as unjustifiably large gaps between remunerations of the above persons and the company’s employees. Corporate Governance Code Compliance Report 49

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4.1.2 The company’s remuner- 1. During one reporting period,  full ation policy is devised the remuneration committee by the remuneration considered the remuneration  partial committee and approved policy (policies) and its (their) by the board of directors. introduction practices to pro-  none The board of directors, vide relevant recommenda- assisted by the remuner- tions to the board of directors ation committee, ensures as required. control over the introduction and implementation of the company’s remuneration policy, revising and amending it as required.

4.1.3 The company’s remu- 1. The company’s remuneration  full neration policy includes policy (policies) includes transparent mechanisms (include) transparent mech-  partial for determining the anisms for determining the amount of remuneration amount of remuneration due  none due to directors, execu- to directors, executive bodies tive bodies and other key and other key executives of executives of the compa- the company, and regulates ny, and regulates all types (regulate) all types of expens- of expenses, benefits and es, benefits and privileges privileges provided to such provided to such persons. persons.

4.1.4 The company defines 1. The remuneration policy  full a policy on reimburse- (policies) defines (define) the ment (compensation) of rules for reimbursement of  partial expenses detailing a list expenses incurred by direc- of reimbursable expenses tors, executive bodies and  none and specifying service other key executives of the levels that directors, exec- company. utive bodies and other key executives of the company may claim. Such policy can make part of the company’s remuneration policy. 50 Corporate Governance Code Compliance Report

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4.2 Remuneration system for directors ensures alignment of financial interests of directors with long-term financial interests of the shareholders.

4.2.1 The company pays fixed 1. Fixed annual remuneration  full annual remuneration to was the only form of mone- its directors. The compa- tary remuneration payable to  partial ny does not pay remu- directors for their service on neration for attending the board of directors during  none particular meetings of the the reporting period. board of directors or its committees. The company does not apply any form of short-term motivation or additional financial incentive for its directors.

4.2.2 Long-term ownership of 1. If the company’s internal  full the company’s shares document(s) – the remu- helps align the financial neration policy (policies)  partial interests of directors stipulates (stipulate) provision with long-term interests of the company’s shares to  none of shareholders to the members of the board of utmost. At the same time, directors, clear rules for share the company does not ownership by board members link the right to dispose shall be defined and dis- of shares to performance closed, aimed at stimulating targets, and directors do long-term ownership of such not participate in stock shares. option plans.

4.2.3 The company does not 1. The company does not pro-  full The Company fully met this re- provide for any extra pay- vide for any extra payments quirement throughout 2017. ments or compensations or compensations in the event  partial in the event of early termi- of early termination of direc- On 12 March 2018, the Extraor- nation of directors’ tenure, tors’ tenure, resulting from  none dinary GMS approved an extra resulting from the change the change of control or any bonus for independent directors of control or any other other reasons whatsoever. Jan Erik Rudberg and Lord Paul reasons whatsoever. Myners for their long tenures on the Company’s Board and contributions to its activities. Corporate Governance Code Compliance Report 51

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4.3 The company considers its performance and the personal contribution of each executive to the achievement of such performance when determining the amount of a fee payable to members of the executive bodies and other key executives of the company.

4.3.1 Remuneration due to 1. In the reporting period,  full members of executive annual performance results bodies and other key approved by the board  partial executives of the company of directors were used to is determined in a manner determine the amount of the  none providing for reasonable variable part of remuneration and justified ratio of the due to members of executive fixed and variable parts of bodies and other key execu- remuneration, depending tives of the company. on the company’s results and the employee’s per- 2. During the latest assessment sonal contribution. of the system of remuneration of members of executive bodies and other key executives of the company, the board of directors (remuneration committee) made sure that the company applies efficient ratio of the fixed and variable parts of remuneration.

3. The company has in place a procedure that guarantees return to the company of bonus payments illegally received by members of executive bodies and other key executives of the company. 52 Corporate Governance Code Compliance Report

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4.3.2 The company has in place 1. The company has in place a  full a long-term incentive long-term incentive program program for members for members of executive  partial of executive bodies and bodies and other key execu- other key executives of tives of the company with the  none the company with the use use of the company’s shares of the company’s shares (financial instruments based (options and other deriva- on the company’s shares). tive instruments where the company’s shares are the 2. The long-term incentive underlying asset). program for members of executive bodies and other key executives of the company implies that the right to dispose of shares and other financial instruments used in this program takes effect at least three years after such shares or other financial instruments are granted. The right to dispose of such shares or other financial instruments is linked to the company’s performance targets.

4.3.3 The compensation (golden 1. In the reporting period, the  full parachute) payable by the compensation (golden company in case of early parachute) payable by the  partial termination of powers company in case of early of members of executive termination of the powers  none bodies or key executives of executive bodies or key at the company’s initiative, executives at the company’s provided that there have initiative, provided that there been no actions in bad have been no actions in bad faith on their part, shall faith on their part, did not not exceed the double exceed the double amount of amount of the fixed part the fixed part of their annual of their annual remuner- remuneration. ation.

5.1 The company has in place effective risk management and internal controls providing reasonable assurance in the achievement of the company’s goals.

5.1.1 The company’s board of 1. Functions of different  full directors determined the management bodies and principles of and ap- business units of the com-  partial proaches to organizing pany in risk management risk management and and internal controls are  none internal controls at the clearly defined in the com- company. pany’s internal documents / relevant policy approved by the board of directors. Corporate Governance Code Compliance Report 53

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5.1.2 The company’s executive 1. The company’s executive  full bodies ensure establish- bodies ensured the distribu- ment and continuous tion of functions and powers  partial operation of effective risk related to risk management management and internal and internal controls between  none controls at the company. the heads (managers) of business units and departments accountable to them.

5.1.3 The company’s risk man- 1. The company has in place  full agement and internal con- an approved anticorruption trols ensure an objective, policy.  partial fair and clear view of the current state and future 2. The company established an  none prospects of the company, accessible method of notify- the integrity and trans- ing the board of directors or parency of the company’s the board’s audit committee reporting, as well as rea- of breaches or any violations sonable and acceptable of the law, the company’s risk exposure. internal procedures and code of ethics.ц

5.1.4 The company’s board of 1. In the reporting period, the  full directors takes necessary board of directors or the measures to make sure board’s audit committee  partial that the company’s risk assessed the performance of management and internal the company’s risk manage-  none controls are consistent ment and internal controls. with the principles of, and Key results of this assessment approaches to, its setup are included in the company’s determined by the board annual report. of directors, and that the system is functioning efficiently.

5.2 The company performs internal audit for regular independent assessment of the reliability and performance of risk management and internal controls and the corporate governance practice.

5.2.1 The company set up a 1. To perform internal audits, the  full separate business unit or company set up a separate engaged an independent business unit – internal audit  partial external organisation division, functionally report- to carry out internal ing to the board of directors  none audits. Functional and or to the audit committee, administrative reporting or engaged an independent lines of the internal audit external organization with the department are delineat- same line of reporting. ed. The internal audit unit functionally reports to the Board of Directors. 54 Corporate Governance Code Compliance Report

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5.2.2 The internal audit division 1. In the reporting period, the  full assesses the performance performance of the internal of the internal controls, controls and risk manage-  partial risk management, and ment was assessed as part of corporate governance. the internal audit procedure.  none The company applies generally accepted standards 2. The company applies gen- of internal audit. erally accepted approaches to internal audit and risk management.

6.1 The company and its operations are transparent for its shareholders, investors, and other stakeholders.

6.1.1 The company has devel- 1. The company’s board of  full 1. The Company has no formal oped and implemented directors approved an infor- information policy document an information policy en- mation policy developed in  partial approved by the Board of suring efficient exchange accordance with the Code’s Directors. Nevertheless, the of information by the recommendations.  none methods of communicating company, its sharehold- with investors and other stake- ers, investors, and other 2. The board of directors (or one holders set out in the Corpo- stakeholders. of its committees) considered rate Governance Code have the matters related to the long been established and are company’s compliance with actively used by the Compa- its information policy at least ny. The Company believes it once in the reporting period. does not need to formalise the existing pattern of its investor and stakeholder relations any further.

2. Full.

6.1.2 The company discloses in- 1. The company discloses  full formation on its corporate information on its corporate governance and practice, governance and general  partial including detailed infor- principles of corporate gov- mation on compliance ernance, including disclosure  none with the principles and on its website. recommendations of the Code. 2. The company discloses information on the membership of its executive bodies and board of directors, independence of the directors and their membership in the board of directors’ committees (as defined by the Code).

3. If the company has a controlling person, the company publishes a memorandum of the controlling person setting out this person’s plans for the company’s corporate governance. Corporate Governance Code Compliance Report 55

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6.2 The company makes timely disclosures of complete, updated and reliable information to allow shareholders and investors to make informed decisions.

6.2.1 The company discloses 1. The company’s information  full information based on the policy sets out approaches principles of regularity, to, and criteria for, identifying  partial consistency and prompt- information that can have ness, as well as availabil- a material impact on the  none ity, reliability, complete- company’s evaluation and ness and comparability of the price of its securities, as disclosed data. well as procedures ensuring timely disclosure of such information.

2. If the company’s securities are traded on foreign orga- nized markets, the company ensured concerted and equivalent disclosure of material information in the Russian Federation and in the said markets in the reporting year.

3. If foreign shareholders hold a material portion of the company’s shares, the relevant information was disclosed both in the Russian language and one of the most widely used foreign languages in the reporting period.

6.2.2 The company avoids a 1. In the reporting period, the  full formalistic approach to company disclosed annual information disclosure and and 6M financial statements  partial discloses material infor- prepared under the IFRS. The mation on its operations, company’s annual report for  none even if disclosure of such the reporting period included information is not required annual financial statements by law. prepared under the IFRS, along with the auditor’s report.

2. The company discloses complete information on its capital structure, as stated in Recommendation 290 of the Code, in its annual report and on the corporate website. 56 Corporate Governance Code Compliance Report

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6.2.3 The company’s annual 1. The company’s annual report  full report, as one of the most contains information on the important tools of its key aspects of its operational  partial information exchange with and financial performance. shareholders and other  none stakeholders, contains 2. The company’s annual report information enabling contains information on the assessment of the compa- environmental and social ny’s annual performance aspects of the company’s results. operations.

6.3 The company provides information and documents requested by its shareholders in accordance with principles of fairness and ease of access.

6.3.1 The company provides in- 1. The company’s information  full formation and documents policy establishes the proce- requested by its share- dure for providing sharehold-  partial holders in accordance ers with easy access to infor- with principles of fairness mation, including information  none and ease of access. on legal entities controlled by the company, as requested by shareholders.

6.3.2 When providing informa- 1. In the reporting period, the  full tion to shareholders, the company did not refuse any company ensures rea- shareholder requests for  partial sonable balance between information, or such refusals the interests of particular were justified.  none shareholders and its own interests consisting in pre- 2. In cases defined by the infor- serving the confidentiality mation policy, shareholders of important commercial are warned of the confiden- information which may tial nature of the information materially affect its com- and undertake to maintain its petitive edge. confidentiality. Corporate Governance Code Compliance Report 57

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

7.1 Actions that materially affect or may affect the company’s share capital structure and its financial position and accordingly the position of its shareholders (“material corporate actions”) are taken on fair terms ensuring that the rights and interests of the shareholders and other stakeholders are observed.

7.1.1 Material corporate actions 1. The company’s articles of  full 1–2. “Material corporate actions” include reorganization of association include a list of and “major transactions” are not the company, acquisition transactions or other actions  partial defined in the Company’s Charter. of 30% or more of the deemed to be material Nevertheless, transactions and/ company’s voting shares corporate actions, and their  none or actions listed in the Corporate (takeover), execution by identification criteria. Reso- Governance Code are effectively the company of major lutions on material corporate treated by the Company as major transactions, increase or actions are referred to the transactions and material actions decrease of the compa- jurisdiction of the board of and are decided upon by supreme ny’s authorized capital, directors. When execution governing bodies: the Board of Di- listing or de-listing of the of such corporate actions is rectors (major transactions, relat- company’s shares, as well expressly referred by law to ed-party transactions, according as other actions which the jurisdiction of the general to the Federal Law On Joint-Stock may lead to material meeting of shareholders, the Companies, transactions worth changes in the rights of board of directors presents over USD 50,000,000) and the shareholders or violation relevant recommendations to General Meeting of Shareholders of their interests. The shareholders. (Company restructuring, listing company’s articles of as- and de-listing of the Company’s sociation provide for a list 2. According to the company’s shares, increase or decrease of (criteria) of transactions or articles of association, mate- the Company’s authorised capital, other actions classified as rial corporate actions include major transactions, related-party material corporate actions at least: company reorgani- transactions, according to the within the authority of zation, acquisition of 30% or Federal Law On Joint-Stock Com- the company’s board of more of the company’s voting panies). directors. shares (in case of takeover), entering in major transac- Whenever any such matter is tions, increase or decrease included as an agenda item of the of the company’s charter General Meeting of Shareholders, capital, listing or de-listing the Board of Directors presents of the company’s shares. its recommendations thereon to shareholders.

As the requirements of the Code are effectively complied with, the Company believes there is no need to formalise this process any further.

The Company has no plans for making any relevant amendments to the Company’s Charter.

7.1.2 The board of directors 1. The company has in place a  full plays a key role in passing procedure enabling indepen- resolutions or making rec- dent directors to express their  partial ommendations on material opinions on material corpo- corporate actions, relying rate actions prior to approval  none on the opinions of the thereof. company’s independent directors. 58 Corporate Governance Code Compliance Report

COM- CORPORATE GOVER- COMPLIANCE PLIANCE REASONS № NANCE PRINCIPLES CRITERIA STATUS FOR NON-COMPLIANCE

7.1.3 Actions which would 1. Due to specifics of the com-  full affect rights or legitimate pany’s operations, the com- interests of shareholders, pany’s articles of association  partial equal terms and con- contain less stringent criteria ditions are guaranteed for material corporate actions  none for all shareholders; if than required by law. the statutory procedure 2. All material corporate actions designed to protect share- in the reporting period were holders’ rights proves duly approved before they insufficient, additional were taken. measures are taken to protect their rights and legitimate interests. In doing so, the company is guided by the corporate governance principles set forth in the Code, as well as by formal statutory requirements. 7.2 The company performs material corporate actions in such a way as to ensure that shareholders timely receive complete information about such actions, allowing them to influence such actions and guaranteeing adequate protection of their rights when performing such actions.

7.2.1 Information about ma- 1. In the reporting period, the  full terial corporate actions company disclosed infor- is disclosed with expla- mation about its material  partial nations of the grounds, corporate actions in due time circumstances and conse- and in detail, including the  none quences. grounds for, and timelines of, such actions.

7.2.2 Rules and procedures 1. The company’s internal doc-  full related to material cor- uments set out a procedure porate actions taken by for engaging an independent  partial the company are set out appraiser to estimate the val- in the company’s internal ue of assets either disposed  none documents. of or acquired in a major transaction or a related-party transaction. 2. The company’s internal documents set out a procedure for engaging an independent appraiser to estimate the value of shares acquired and bought back by the company. 3. The company’s internal documents provide for an expanded list of grounds on which members of the company’s board of directors as well as other persons as per the applicable law are deemed to be related parties to the company’s transactions.