Annual Report Table of Contents

GENERAL DIRECTOR’S ADDRESS TO SHAREHOLDERS 3 THE COMPANY PROFILE 4 I. KEY MILESTONES OF 2004 7 II. GOVERNING BODIES 2.1 Board of Directors 11 2.2 Management Board 12 2.3 Audit Commission 13 2.4 Board of Directors Report 14 III. PRINCIPAL BUSINESS LINES OF THE COMPANY 3.1 Company’s Position in Communication Industry 17 3.2 Principial Business Lines of the Company 17 3.3 Structure of Profits from Telecommunication Services 18 3.4 Local Telecommunications 19 3.5 Long-distance Telecommunications 20 3.6 New Services 21 IV. RESULTS OF THE COMPANY’S ACTIVITIES IN 2004 4.1 Key Financial and Perfomance Indicators 25 4.2 Marketing Strategies 29 4.3 VIP Clients 30 4.4 Tariff Policy 30 4.5 Investment Policy 32 4.6 Dividend Policy 33 4.7 Daughter and Affiliated Companies 34 V. THE COMPANY ON CAPITAL MARKETS 5.1 The Company on Capital Markets 39 5.2 Trading Floors 40 5.3 Company Capitalization 42 5.4 Level 1 ADR Program 42 5.5 Corporate Bonds 43 5.6 Ratings 44 VI. CORPORATE GOVERNANCE 6.1 Corporate Governance 47 6.2 Investors Relations 48 6.3 Public Relations 49 6.4 Charity Activities 50 6.5 Staff Policy 51 6.6 Development Perspectives 53 6.7 Information for Shareholders 55

General Director’s Address to Shareholders

Dear shareholders!

OJSC «CenterTelecom» is a successful and steadily developing company, which takes one of the leading positions on the telecommunication services market of the Russian Federation. Our mission is the development and upgrading of the telecommunication infrastructure on the territory of Russia's Central Federal District. We offer millions of people services based on up-to- date technological solutions. Innovation for us is not only new technological developments and upgrades, it is the key factor of competitiveness and perpetuum mobile of progress which creates new quality of life.

Year 2004 turned out to be not very easy for the Company. Tariffs adjustment for the local telecommunication services wasn't implemented within schedule time, so that didn't allow CenterTelecom to compensate increased expenditures, which, first of all, were connected with the significant capital investments into the communication infrastructure of the Central Federal District. Nevertheless, the Company managed to finish the year 2004 with profit.

In 2004 the Company implemented the most amplitudinous investment program in its history. Investments into the communication systems development increased by 34% comparing with 2003 and reached 9.764 bn rubles. New electronic automatic telephone exchanges were put into operation and 2.4 thousand km of fiber-optic intraareal transmission links were installed with the use of SDH equipment produced by Siemens, Alcatel, ECI Telecom and Huawei.

I would like to thank all shareholders, managers, employees, part- ners and friends of CenterTelecom for keeping on the joint activities aimed at the Company's business indexes improvement and its efficiency increase. I am sure that our cooperation will allow to strengthen the CenterTelecom positions and will result in capitalization increase and our shareholders welfare growth.

Annual report 2004 3 The Company Profile

Location 23 Proletarskays Street, Khimki, Moscow region, 141400, Russia Mailing address: 6 Degtyarny Pereulok, building 2, GSP-3, Moscow, 125993, Russia Telephone: +7 (095) 209-34-34, Fax: +7 (095) 209-30-07 E-mail: [email protected] Internet site: www.centertelecom.ru

State registration The Company was registered according to administrative ordinance of the Head of the Moscow region №567-r of June 9, 1994, certificate of state registration №127 of June 20, 1994.

According to the Federal Law «On state registration of legal entities» the Company was registered in the unified register of legal entities on November 1, 2002 №1025006174710.

Auditor Name: Closed Joint-Stock Company «Ernst and Young Vneshaudit». License number: 003246 Date of issue: January 17, 2003 Term of validity: till January 17, 2008 Registration body: Ministry of Finance of the Russian Federation Agreement term of validity: till complete fulfillment of the obligations (auditor obligation is to check the Financial statements of CenterTelecom for the period starting with January 1, 2004 to December 31, 2004).

Registrar Name: Closed Joint-Stock Company «Registrator-Svyaz» Location: 15A Kalanchevskaya Street, Moscow, 107078 Mailing address: 15A Kalanchevskaya Street, mail box 45, Moscow, 107078 Telephone: +7 (095) 933-42-21, Fax: +7 (095) 933-42-21 E-mail: [email protected] License number: 10-000-1-00258 Date of issue: October 1, 2002 Term of validity: with no validity limits Registration body: Federal Commission on Securities Market

4 Annual report 2004 I Key Milestones of 2004

Key Milestones of 2004

CenterTelecom acquired 100% share holding of telecommunication operator "Russian Telecommunication Network", operating on the Russian telecommunication market under ROSNET trademark.

The Company's Board of Directors approved the Corporate Governance Code of OJSC «CenterTelecom».

The Company's Board of Directors made decision on placement of interest-bearing documentary non-convertible bonds of OJSC «CenterTelecom» 04 series with the face value of 1 000 rubles each and total nominal value of 7 000 000 000 rubles.

The Company's Board of Directors made decision on expediency of the Charter Capital increase by means of the shares face value increase from 0.3 rubles to 3.0 rubles each. Mode of shares placement - conversion of the earlier placed shares of the same category (type) into shares with higher face value.

«Russian Institute of Directors - Rating Agency «Expert-RA» consortium assigned «A» class National Corporate Governance Rating to the Company, which excludes any events related to the OJSC «CenterTelecom» shareholders rights violation, executive bodies unfair activities and provision of low-quality information to the shareholders and investors.

The Company's Board of Directors approved the regulations on the OJSC «CenterTelecom» Dividends Policy.

The General Annual Meeting of the OJSC «CenterTelecom» shareholders in the form of joint presence took place on June 11, 2004.

Standard&Poor's Governance Services upgraded Corporate Governance Score (CGS) of OJSC "CenterTelecom" from CGS-5.3 to CGS-5.8 due to the number of positive changes in the Company's corporate governance.

Annual report 2004 7 The Company's Board of Directors in order to improve its corporate governance and bodies and officials compliance with the procedure requirements, which guarantee implementation of the Company's shareholders rights and legal interests, decided to approve the Regulations on Corporate Secretary and Corporate Secretary Staff of OJSC "CenterTelecom".

Ruben Amaryan, General Director of OJSC "CenterTelecom", held the Ceremony of the 6-millionth subscriber memorable certificate presentation.

During August 17-31, 2004 series of 4 documentary interest- bearing non-convertible bonds, the total amount - 5 622 595 000 rubles, were placed.

According to the public irrevocable offer, CenterTelecom redeemed 1 284 820 bonds of series 03 at the 101.5% of the face value, the total amount - 1 304 092 300 rubles, which had been fully sold at the same price during the period starting with September 17 to October 12 of 2004.

According to the results of Standard&Poor's "Russian Companies Information Transparency Research 2004", OJSC «CenterTelecom» took place among top ten companies.

According to the “Expert-RA” rating agency, CenterTelecom took the fifth place in the services sales amount among the largest telecommunication companies.

International rating agency Fitch Ratings assigned to OJSC «CenterTelecom» International Long-term Unsecured Credit Score in foreign currency «B-», forecast «Negative» and Short-term Credit Score in foreign currency «B».

Federal Financial Markets Service of Russia conducted state registration of the issues of ordinary and preference shares A type with the face value of 3.0 rubles each, placed through conversion of the earlier floated shares of the same category (type) with the face value of 0.3 rubles each.

8 Annual report 2004 II Governing Bodies

2.1 Board of Directors

The Annual General Meeting of the CenterTelecom shareholders, held on June 11, 2004, elected the Board of Directors consisting of the following members: Valery N. Yashin General Director of OJSC «Svyazinvest» Stanislav P. Avdiyants Executive Director - Director of Economic and Tariff Policies Department of OJSC «Svyazinvest» Boris D. Antonyuk Deputy Minister of Information Technologies and Communication of the RF Ruben A. Amaryan General Director of OJSC «CenterTelecom» Vadim Y. Belov Deputy General Director of OJSC «Svyazinvest» Alexander P. Gribov Deputy Head of Department - Head of Division of the Russian Federal Property Fund Alexander V. Ikonnikov Chairman of the Independent Directors Association Managing Board Oksana V.Petrova Deputy Head of Methodology and Information Division under the Corporate Governance Department of OJSC «Svyazinvest» Elena V. Umnova Director of Finance Department of OJSC «Svyazinvest» Gregory M. Finger Executive Director of the Moscow Representative Office of «NCH Advisors Inc» Yevgeny V. Yurchenko Deputy General Director of OJSC «Svyazinvest»

Board of Directors Committees Staff and Remunerations Committee Corporate Governance Committee Audit Committee Strategic Development Committee

Annual report 2004 11 2.2 Management Board

Membership of the Management Board consisting of eleven persons was approved by the CenterTelecom Board of Directors on July 13, 2004. Ruben A. Amaryan General Director of OJSC "CenterTelecom" Arevshad A. Vartanyan Deputy General Director on Information Technologies Ella M. Zhuravleva Deputy General Director - Director for Personnel of OJSC "CenterTelecom" Raisa P. Konstantinova Chief Accountant of OJSC "CenterTelecom" Aleksey A. Lokotkov First Deputy General Director - Financial Director of OJSC "CenterTelecom" Nikolai V. Mezhuev Deputy General Director - Director of Moscow subsidiary of OJSC "CenterTelecom" Maxim A. Pegasov Deputy General Director - Technical Director of OJSC "CenterTelecom" Alexander I. Polnikov Executive Director - Director of Capital Investments Department of OJSC "Svyazinvest" Sergei V. Pridantsev Deputy General Director - Commercial Director of OJSC "CenterTelecom" Tatyana N. Sotskova Director of Legal Department of OJSC "CenterTelecom" Valery P. Sychev Deputy General Director for Security and Confidentiality Enforcement of OJSC "CenterTelecom"

12 Annual report 2004 2.3 Audit Commission

The Annual General Meeting of the CenterTelecom shareholders, held on June 11, 2004, elected the Audit Commission consisting of the following members:

Irina V. Prokofyeva Chairman of the Audit Commission Director of Internal Audit Department of OJSC «Svyazinvest»

Konstantin V. Belyaev Chief Accountant of OJSC «Svyazinvest»

Lyudmila V. Buryanova First Deputy Chief Accountant - Director of Fiscal and Corporate Accounting Department of OJSC «CenterTelecom»

Natalya V. Yermolaeva Head of Statistics Division of Economic Tariff Policy of OJSC «Svyazinvest»

Alexander V. Kachurin Head of Statistics Division of Economic Tariff Policy of OJSC «Svyazinvest»

Kirill V. Frolov Deputy Director - Head of Svyazinvest's Subsidiaries Internal Audit Division - Internal Audit Department of OJSC «Svyazinvest»

Alexei Y. Kopyev Senior Expert of Subsidiaries Internal Audit Division - Internal Audit Department of OJSC «Svyazinvest»

Annual report 2004 13 2.4 Board of Directors Report

There were 37 meetings of the CenterTelecom Board of Directors held in 2004, including 25 absent meetings and 12 in the form of joint presence.

The decisions on the Company's activities key issues were made at the meetings, including:

The investment priorities for 2005 were approved on April 28, 2004. On May 11, 2004 the decision on the Company's Charter Capital provision by means of the early placed A type ordinary and preference shares face value increase was made. The Regulations on the CenterTelecom Dividend Policy were approved on June 10, 2004. On July 13, 2004 the Board of Directors Committees were initiated and their memberships were determined. The Model for the CenterTelecom daughter business and affiliated companies reorganization was approved on September 28, 2004.

The most important issues were preliminary discussed and the recommedations to the Board of directors on decision-making were worked out at the meetings of the permanent Board of Directors Committees. Staff and Remuneration Committee helped to get qualified special- ists to take part in the Company's management, worked out the recommendations on labor motivation system etc. Corporate Governance Committee worked out offers on the Corporate Governance Code introduction, prepared recommendations on the changes of the Company's organizational structure and worked out recommendations in the framework of the Regulations on the Company's Dividend Policy consideration etc. Strategic Development Committee prepared recommendations on budgeting system introduction, perspective plans of development draw- ing up etc. Audit Committee under the Board of Directors discussed a number of issues related to the interaction between CenterTelecom and the Company's Auditor, internal control procedures and organization of the Internal Audit Department activities.

14 Annual report 2004 III Principal Business Lines of the Company

3.1 Company's Position in Communication Industry

In 2004 the volume of the Central Federal District telecommunication market, Moscow excluded, increased by 142% year-on-year and amounted to 46 bn rubles. According to the forecasts of analysts, this figure is to reach 63 bn rubles in 2005.

CenterTelecom's share in the Central Federal District telecommunication services market amounted to 62% in 2004. Besides that, the Company takes 91% of the local telecommunication services market, 85% of the long-distance telecommunication services market (IP-telephony operators share included) and 57% of Internet access services market.

3.2 Principial Business Lines of the Company

During the last few years information technologies have been increasingly used in different spheres of the state and social life. Nowadays one can hardly imagine the day-to-day life and activities of the state authorities, business, social sector and the Russian citizens without the IT-solutions. All these determine the initiation of the qualita- tively new requirements for processing speed and data transmission and as a result the requirements for telecommunication networks. Solving the problem of upgrading and development of the Central Federal District telecommunication infrastructure, CenterTelecom is aimed at the provision of the Russian Central region population with ultra-modern telecommunication services. Among the priority directions of the Company's activities development are the following:

digitalization of the public switched telephone network through construction of the new digital switched stations and nodes, replace- ment of analog equipment , utilization of new technologies on access lines, introduction of dynamic traffic flows control; maximum usage of the free installed capacity; digitalization of primary public switched networks by means of construction of the new digital transmission lines with the use of syn- chronous digital hierarchy (SDH) technology and organization of SDH systems circular-type structure, transmitting powerful high-speed digital flows;

Annual report 2004 17 construction of the new and development of the existing telecommunication companies multiservice networks with the use of IP/MPLS technology for provision of different broadband services; rendering of the standard service packages with the use of multiservice networks features, focused at the different categories of users, first of all, population, representatives of large and middle businesses (xDSL, VPN, IP-telephony); establishment of the corporate data transmission network (CDTN) in the framework of OJSC «CenterTelecom». 3.3 Structure of Profits from Telecommunication Services

1,3% 3,9% 3,8% 0,1% Wireless broadcasting Profits from 2,6% New Russian service Other operators Wireline 0,2% broadcasting Radio, television 5,4% Rural telephony 32,0% Long- distance communication

Interna- Urban tional telephony communication 7,1% Profits 37,7% from Document OJSC “Rostelecom” electric communication 4,7% 1,2%

18 Annual report 2004 3.4 Local Telecommunications

Local communications share in the Company's earnings structure takes one of the leading places - more than 42%. Developing local communication services, the Company is consistent with the following priorities: local communication network digitalization level increase through the old analog equipment modernization; local communication services profitability increase by means of: adjustment of the tariffs on the variable local communication services to the level of prime cost with the implementation of the profitability standard and compliance with competitiveness where it is necessary; forming of the flexible tariff policy on non-adjustable local communication services in order to enhance their efficiency; introduction of call centers, service packages development, focused on both the population and the business; development of the services provision on the base of radio access technologies for solvent clients. Total installed capacity of the local telephone network as of January 1, 2005 amounted to 6 798 128 subscriber lines, including:

5 798 598 lines on urban networks (85.3% of the total installed capacity); 999 530 lines on rural networks (14.7% of the total installed network).

Revenues from local communications (RUR in millions)

Description 2003 2004 2005 (forecast)

Urban telephone networks 7 643.7 9 256.8 10 959.6 including: monthly rentals 5 310.9 6 736.4 8 965.8 telephone set installation and re-installation 1 600.6 1 841.5 801.8 other 732.2 678.9 1 192.0 Rural telephone networks 1 054.3 1 316.3 1 593.6 including: monthly rentals 859.4 1 112.3 1 487.4 telephone set installation and re-installation 162.1 171.5 70.7 other 32.8 32.5 35.5 Total 8 698.0 10 573.1 12 553.2

Annual report 2004 19 Breakdown of CenterTelecom customer base January 1, 2005

non-goverment funded 8,5% Goverment organizations 4,7% funded organizations

86,8%

Residental subscribers (house- holds)

3.5 Long-distance Telecommunications

Long-distance services are traditionally in steady demand by both, private and corporate customers of the Company, that determines their significant contribution in the OJSC «CenterTelecom» revenues structure. Taking into consideration the intensity of the long-distance and international services usage, the Company's management gives special attention to the following priority directions of this sector development:

extension of intraareal channels in order to reduce the number of network faults; development of the universal telephone card with roaming option on the territory of the telecommunication company; new technologies utilization, which allows to reduce the service provision prime cost; development of the new services which will stimulate the demand for long-distance services (videoconference, TV-medicine etc.).

20 Annual report 2004 Revenues from long-distance services

Growth rate Description 2002 2003 2004 2004/2003, %

Revenues from: 6118.6 7 069.1 7 713.9 109.1 long-distance services, RUR in millions international services, RUR in millions 1401.2 1 484.4 1 694.8 114.2

Outgoing traffic volume

Description 2002 2003 2004 Growth rate 2004/2003, %

Outgoing long-distance traffic, (thousand minutes) 2 435 006 2 731 983 2 840 714 103.97

Outgoing international traffic, (thousand minutes) 161 665 186 475 198 490 106.4

3.6 New Services

CenterTelecom is one of the largest providers of the «new» telecommunication services on the territory of the Central Federal District. At the current moment the Company renders wide range of services based on the up-to-date technologies, including:

Internet access (over dial-up and dedicated channels, the use of ISDN and xDSL technologies included); IP-telephony; VPN (virtual private networks) and data transmission networks services; cable TV services on the base of multiservice networks.

In 2004 information capacity transmitted by CenterTelecom over the dedicated Internet channels increased twice, over dial-up channels - in1.5 times, IP-telephone traffic increased by more than 4.1 times.

Annual report 2004 21 Transinformation content

Description 2002 2003 2004 Growth rate 2004/2003, %

Transinformation content over dedi- 22 098 944 cated Internet lines, MB 39 061 237 76 719 523 196.4

Dial-up access traffic, thousand minutes 708 982 1 149 732 1 748 539 152.1

IP-telephony traffic, thousand minutes 381 1 005 4 150 412.7

Revenues from up-to-date telecommunication services (RUR in millions)

Description 2003 2004 2005 (forecast)

Revenues from up-to-date telecommunication services 560.3 925.0 1 111.2 including:

Internet 492 727.3 901.0

other 68.3 197.7 210.2

Percentage of the total revenues of the Company 2.7 3.8 4.2

22 Annual report 2004 IV Results of the Company’s Activities in 2004

4.1 Key Financial and Perfomance Indicators

The Company revenues in 2004 amounted to 24 963 mln rubles, expenditures - 19 702.1 mln rubles. Sales profit reached 5 261 mln rubles, EBITDA - 5 377.3 mln rubles, EBITDA margin in 2004 amounted to 27.3%, net profit - 397.7 mln rubles, sales profit margin - 26.7%, net profit margin - 2%.

Key performance indicators of the Company

Description Unit 2003 2004 YoY growth rates, %

Revenues (VAT excluded) thousand rubles 20 890 007 24 963 116 119.5

Costs and expenses thousand rubles 15 587 379 19 702 108 126.4

Pre-tax profit thousand rubles 2 303 398 970 902 42.2

Pre-tax profit margin % 14.8 4.9 -9.8

Costs of 100RUR of revenues rubles 74.6 78.9 105.8

Revenues per telecommunication rubles line 3 526 3 979 112.8

Pre-tax profit per telecommunication rubles 395 157 39.8 line

Number of telecommunication lines line per employee 84 92 109.4

Extension growth of long-distance (intraareal) telephone channels, total, thousand 16 552.5 13 185.0 –

including: chanel-km 16 764.1 13 257.0 – formed by digital transmission system

Growth of outgoing automatic channel of automatic trunk chanel 5 147.0 8 245.0 – exchange (ATE), total, including regional area communica- chanel 3 293.0 3 875.5 – tion

Annual report 2004 25 Installed and used switching capacity of network (units)

8 000 000

6 798 128 7 000 000 6 108 486 6 437 246 6 000 000 5 954 186 6 298 611 5 645 676 5 000 000

4 000 000

3 000 000

2 000 000

1 000 000

0 2002 2003 2004

Installed switching capacity of network Used switching capacity of network

Revenues and expenses, RUR, thous.

30 000 000

24 963 116 25 000 000 20 890 007 16 389 267 20 000 000

19 702 108 15 000 000 15 587 379 12 131 919 10 000 000

5 000 000

0 2002 2003 2004

expenses revenues

26 Annual report 2004 Profit from sales (RUR, thous.)

6 000 000 5 302 628 5 261 008

5 000 000 4 257 348

4 000 000

3 000 000

2 000 000

1 000 000

0 2002 2003 2004

Fixed assets investments (RUR, mln.)

10 000 9 764,0 9 000 7 562,2 8 000

7 000 4 791,3 6 000

5 000

4 000

3 000

2 000

1 000

0 2002 2003 2004

Annual report 2004 27 Revenues from telecommunication services

2005 (forecast)

2004

2003

2002

0 2 000 4 000 6 000 8 000 10 000 12 000 14 000

Revenues from local services Revenues from international services

Revenues from long-distance services Revenues from new telecomunication services

28 Annual report 2004 4.2 Marketing Strategies

The main aim of the Company's marketing strategy is to maintain its leading position in the Central Federal District telecommunication market. Among the key factors to achieve success in the Company's marketing strategy are the following:

leading position in the market; extensive coverage zone; favorable situation with «last mile»; stable and vast client base; safety margin; valuable experience of work under different conditions; high-quality service and extensive sales network; positive image of stable company.

According to the marketing policy provisions, the main directions for the Company's telecommunication services promotion are the following:

expanding range of services based on state-of-art technologies; forming services in packages differentiated by various customers groups, service convergence; priority promotion of non-regulated services which are in growing demand (data transmission, Internet access, xDSL inclusive); development and promotion of services based on multiservice network features; development of flexible pricing and tariff policies; upgrading of sales scheme and follow-up service; creation of round-the-clock customer support services; expan- sion of communication channels with customers, utilization of the data bases marketing methods (Call-centers inclusive); upgrading of associated operators cooperation system.

Annual report 2004 29 4.3 VIP Clients

Satisfaction of the customers demand for telecommunication services is one of the primary tasks of OJSC «CenterTelecom». At the same time different categories of users make different requirements for both, the quality and the range of provided services. And the cooperation of CenterTelecom with VIP clients, including regional branches of the Russian Saving Bank and the Central Bank of Russia, regional divisions of the Federal Taxation Service, Pension fund, OJSC "Lebedinsky ore mining and processing enterprise", OJSC Holding company "Mebel Chernozemya", OJSC "Lipetsk metallurgical plant "Svobodny sokol", OJSC "Tver wagon works", State Unitary Enterprise "Instrument Design Bureau" and many others, is not only the appreciation of the services quality provided by the Company, but the pledge of CenterTelecom successful development in the future. That is why, the Company's management pays special attention to improvement of the current VIP clients cooperation practice.

Among the most significant projects for the Company are unified State Contract with the Russian Defense Ministry, which determines the common terms for cooperation of our organizations on the territory of the Central Federal District, and the General Agreement signed with the Central Black-Soil Bank of the Russian Saving Bank on initiation of the corporate data transmission network on the territory of Voronezh, Belgorod, Tambov, Kursk, Lipetsk and Orel branches of OJSC «CenterTelecom».

4.4 Tariff Policy

Upgrading of the OJSC «CenterTelecom» tariff policy is one of the primary activities of the Company.

Tariffs for the main telecommunication services are state regulated. Effective from October 1, 2004 uniform tariffs for local telecommunication services was set by the Determination of the Federal Tariff Service: for residents of the Central Federal District regions, Moscow region exclusive, subscriber charge is 150 rubles, for Moscow region residents - 170 rubles; for organizations - 200 rubles. At the same time the tariffs for long-distance telecommunication services were decreased by 10% during the peak of traffic (from 8-00 to 20-00 o'clock) in the first three zones.

30 Annual report 2004 On December 1, 2004 CenterTelecom introduced unified tariffs on provision of local telephone services (telephone conversa- tions) with time-based billing for telecommunication services. So for the subscribers of Vladimir, Voronezh, Ivanovo and Yaroslavl regions user charge for subscriber line provided for permanent utilization amounted to 90 rubles and 140 rubles for residents and organizations relatively, variable component is 0.14 rubles per minute. For Moscow region subscribers switched to time-based billing, constant component is 102 rubles for residents and 140 rubles for organizations, variable component is 0.14 and 0.16 rubles respectively.

One of the main tasks of the tariff policy in 2004 was the unification of telecommunication services nomenclature and leveling of tariffs applied in the Company's branches.

Effective from April 16, 2004 the unified schedule of prices for wireline broadcasting services is used by CenterTelecom, while the average growth of subscriber fee amounted to 130%.

Further activities related to improvement of the nomenclature and telecommunication services tariffs will be conducted in corre- spondence with the statutory acts and changes of the legislation base, regulating telecommunication services rendering on the territory of the Russian Federation, and will be aimed at the increase of the Company's investment attractiveness.

Annual report 2004 31 4.5 Investment Policy

The Company implements development, modernization and upgrading of telecommunication infrastructure in the Central Federal District of the RF using ultramodern technological solutions.

In 2004 all-in-all CenterTelecom accumulated 9 764 mln rubles of investments, which is 134 % against the figures of 2003. There were 8 774 mln rubles of fixed assets put into operation, which is 136% against the figures of 2003. The total amount of investments was dis- tributed as follows:

Investments allocation

Rate of indexes Description Unit 2003 2004 changes in 2004/2003 (%)

Investments in fixed assets - total, million 7 562 9 764 134% rubles

Own funds used for financing of investments made into the fixed assets (construction in progress and million 2 174 3 576 164% used objects inclusive) rubles

Borrowed funds used for financing g investments into the fixed assets million 5 388 6 188 115% (construction in progress and used objects inclusive) rubles

Fixed assets put into operation million 6 474 8 774 136% rubles

Production facilities put into operation (according to the million figures of annual report, model C1, C2) rubles 532 636 0%

Numbering capacity numbers 532 636 615 320 116%

Automatic trunk exchange channels 9 840 30 060 305%

Fiber-optic communication and microwave lines put km 2 834 2 510 89% into operation

Numbering capacity put into operation in 2004 amounted to 615 302 numbers, which is 116% against the figures of 2003. Automatic trunk exchanges (ATE) put into operation amounted to 30 060 channels, which is 305% against the figures of 2003.

32 Annual report 2004 4.6 Dividend Policy

Dividend policy as an integral part of the general financial strategies of the Company shall ensure optimal balance between consumed and capitalized parts of the derived profit and provide for market price of the shares. The dividend policy significantly affects the Company's position on capital market and its share price performance in particular. In order to set transparent and comprehensible for the shareholders mechanism of dividends rate determination, manner of payment and requirements to the shareholders, the Company developed and approved the Regulations on the Dividend Policy of OJSC «CenterTelecom».

Dynamics of declared (accrued) dividends on the Company's shares (per share)

2002 2003 2004 Type of security amount (RUR) % on face value *amount (RUR)

Ordinary shares 0.096052 0.124867 0.0630084

'A' type preference shares 0.206143 0.285662 0.0756115

* - amount of the net profit used for payment of dividends on ordinary shares amounts to 139.2 mln rubles (35% of net profit), that is significantly exceeds the figures of the previous year.

Decision to pay the dividends according to the results of 2003 was made by the General Shareholders Meeting held on June 11, 2004. The amount of dividends paid per share is: 0.285662 rubles per one 'A' type preference share; 0.124867 rubles per ordinary share Decision to pay the dividends according to the results of 2003 was made by the General Shareholders Meeting held on June 11, 2004. The amount of dividends paid per share is: 195 548 957.68 rubles per ordinary share. 146 955 046.07 rubles per preference share. The share of paid dividends to the total amount of the dividends to be paid is 98.62%. The main reasons for not receiving the dividends were the absence of the corresponding shareholders and proper bank details for money transfer.

Annual report 2004 33 4.7 Daughter and Affiliated Companies

At the beginning of 2004 OJSC «CenterTelecom» participated in charter capitals of 48 companies and held membership in 25 nonprofit organizations due to succesion resulted from the affiliation of the regional operators to the Company. The investment structure was found inefficient as the Company suffered differential costs.

As a result of analysis of the OJSC «CenterTelecom» daughter and affiliated companies activities, the Daughter Business Reorganization Model was developed and adopted by the Board of Directors on September 28, 2004.

According to the Reorganization Model,the process of selling the stocks (shares) of the companies, participation in which had been found as hopeless, and non-core assets represented by portfolio investments has been started. In the course of the year the shares of five mobile phone operators operating in NMT-450 standart were sold. Earned revenue amounted to 8.5 mln US dollars. The shares of eleven non-core companies were also sold. The total revenue amounted to 725 thousand US dollars.

As a result of cellular business assets sale, the activities on collection of these companies recievables payable to the OJSC «CenterTelecom» branches are conducted.

In 2004 the activities on affiliation of core business companies to OJSC ROSNET have been started. In order to achieve this goal the share of participation in the chapter capital of CJSC «Vladimir-Teleservice» was increased up to 100% and suc- cesful OJSC «AEROCOM» was acquired. The reorganization will result in managing ability and daughter business efficiency increase.

The cooperation with ancillary daughter companies is implemented on the outsourcing basis. The non-core business processes are switched from all branches to Telecom-Stroy, which is 100% daughter company of OJSC«CenterTelecom».

The Company’s membership in three nonprofit organizations was quit.

34 Annual report 2004 Interest in daughter and affiliated companies of CenterTelecom

Organization name Core business interest (%) Daughter companies

OJSC RTS Telphony, data transmission, telematics services, commu- 100 nication channels lease, system integration service

Trade in communication equipment, data transmission Teleport Ivanovo LLC network services, commission and contract of agency 100 services (cellular communication NMT-450, Bee Line GSM, Ivtelecom paging) CJSC Vladimir-Teleservice Internet services, IP-telephony 100

Mobilcom LLC Mobile communication - standard MRT-1327, ST-II 100

Engineering networks maintanance, boiler-room activi- Telecom-Stroy LLC 100 ties, construction activities, cleaning

100 Telecom-Terminal LLC Terminal equipment trading and maintanance

OJSC Aerocom Telephony, data transmission, telematics services, com- 99.619 munication channels lease, system integration service

Local and intraareal telecommunication services, data transmission, telematics services, local, long-distance Tver Telecom LLC 85 and international telecommunication services provision via dedicated line

Personal paging service VladPage LLC 75

Local, long-distance and international telecommunication services, data transmission, channel lease CJSC CenterTelecomService 74.9

design and installation of telecommunication lines, installation of technological communication equipment; com- Svyaz-Service-Irga missioning of communication equipment, trade and purchase, agent and sale activities. 70 Equipment maintanance

Annual report 2004 35 Interest in daughter and affiliated companies of CenterTelecom (continuation)

Organization name Core business inter (%)

Deployment of universal card payphones to offer local, Vladimirsky Payphone LLC long-distance and international communication services 51

CJSC CenterTelecomService of Data transmission services, Internet access by means of Moscow region pre-paid cards, dedicated Internet access, integral proj- 51 ects implementation

Deployment of universal card payphones to offer local, CJSC Telecom of Ryazan region 50.9 long-distance and international communication services

CJSC TeleRossVoronezh Agent of Sovintel LLC for telecommunication services 50

Affiliated companies

CJSC Smolenskaya Cellular AMPS-800, GSM-1800 cellular communications 40 Communications

CJSC Belgorodskaya Cellular DAMPS-800, GSM-1800 cellular communications 30 Communications

CJSC SK KOSTARS Life insurance of communication enterprises employees 28

OJSC Telecommunication Services of data transmission via X25, X28, Frame 26 Company Rinfotels Relay, TCP/IP protocols, Internet, telephony

Trunksvyaz LLC Trunking communications services 25

36 Annual report 2004 V The Company on Capital Markets

5.1 The Company on Capital Markets

Charter capital and securities as of January1, 2005:

the Charter capital of the Company is 631 199 896.5 rubles; placed and declared shares of the Company:

Placed shares of OJCS «CenterTelecom» Category (type) of shares Number (units) Face value (rubles)

Placed shares: ordinary shares 1578006833 0.3 preference class A shares 525992822 0.3

Ownership structure as of January 1, 2005 Number of Number of Number of prefer- % in the shareholders ordinary ence A type shares Charter shares, pieces capital Russian legal entities - owners 177 964 754 693 4 842 801 46.08

Russian legal entities - nominee share- 39.88 holder 38 440 375 015 398 593 561 Foreign legal entities 25 61 839 955 29 240 024 4.33

Natural persons 28 801 111 037 170 93 316 436 9.71

Shareholders owning more than 1% of the Charter capital as of January 1, 2005 Name of organization registered ordi- registered pref- % in the nary shares, erence shares, Charter pieces pieces capital OPEN JOINT-STOCK COMPANY 'TELECOM- MUNICATION INVESTMENT COMPANY' resident 799 867 813 0 38.02 (SVYAZINVEST) CLOSED JOINT-STOCK COMPANY 'DEPOSI- # resident 174 971 027 108 773 423 13.49 TORY AND CLEARING COMPANY' 111 129 797 CLOSED JOINT-STOCK COMPANY # resident 101 463 213 10.10 "BRUNSWICK UBS WARBURG NOMINEES" resident 54 957 928 133 205 846 8.94 CLOSED JOINT-STOCK COMPANY "ABN # AMRO BANK A.O."

SPECIAL PUBLIC INSTITUTION UNDER THE resident 151 356 274 0 7.19 GOVERNMENT OF THE RF 'RUSSIAN FEDER- AL PROPERTY FUND'

“Ing bank (Euroasia)” # resident 64 645 057 15 981 770 3.83 non- 17 579 372 Lindsell enterprises Limited resident 32 733 878 2.39 non- 1.15 Pruett enterprises limited resident 24 209 238 0

# - nominal holder

Annual report 2004 39 5.2 Trading Floors

In 2004 OJSC «CenterTelecom» signed agreements on inclusion and support of the securities in the Quotation lists with CJSC «MICEX Stock Exchange» and agreements on listing services with OJSC «RTS Stock Exchange»

CenterTelecom's shares are traded on the Classic Market of Non- profit Partnership «RTS Stock Exchange» (ESMO,ESMOP), OJSC «RTS Stock Exchange» (ESMOG, ESMOPG), CJSC «MICEX Stock Exchange» (CTLK,CTLKP) and on the US OTC (CRMUY) in the form of American Depositary Receipts for the Company's ordinary shares (Level 1 ADR Program).

The Company's shares are on the B-level Quotation lists on the all above mentioned Russian stock exchanges.

CenterTelecom shares trading on Classic Market (NP «RTS Stock Exchange») from January 1, 2004 to December 31, 2004 showed positive dynamics:

Shares trading dynamics from January 1, 2004 to December 31, 2004

Number of deals in 2004: on ordinary shares – 450 on preference shares – 190

Trading volume in 2004: ordinary shares – 17 073 485$ preference shares – 4 948 324$

Number of deals in 2003: on ordinary shares – 371 on preference shares – 152

Trading volume in 2003: ordinary shares – 9 465 766$ preference shares – 2 546 683$

40 Annual report 2004 Dynamics of deals and trading volume of ordinary shares Trading volume, in 2003-2004 Numbers of thous. USD deals 3 500 80

3 000 70

60 2 500 50 2 000 40 1 500 30 1 000 20

500 10

0 0

Jan. 03 Jul. 03 Jan. 04 Jul. 04 Mar. 03 May. 03 Sep. 03 Nov. 03 Mar. 04 May. 04 Sep. 04 Nov. 04

Trading volume, thous. USD Numbers of deals

Dynamics of deals and trading volume of preference shares in 2003-2004 Trading volume, Numbers of thous. USD deals 1 200 45 40 1 000 35 800 30 25 600 20 400 15 10 200 5 0 0

Jan. 03 Jul. 03 Jan. 04 Jul. 04 Mar. 03 May. 03 Sep. 03 Nov. 03 Mar. 04 May. 04 Sep. 04 Nov. 04

Trading volume, thous. USD Numbers of deals

Annual report 2004 41 5.3 Company Capitalization

Total capitalization of the Company at the end of 2004 amounted to $ 567 423 035.

Changes in capitalization of OJSC «CenterTelecom» in 2004 900 900 800 800 700 700 600 600 500 500

400 400 index RTS CenterTelecom, mln $ CenterTelecom, 300 300 200 200 100 100 0 0

Jan. 04 Jun. 04 Jan. 05 Feb. 04 Mar. 04 May. 04 Aug. 04 Sep. 04 Nov. 04 Dec. 04

CenterTelecom, mln. $ RTS index

5.4 Level 1 ADR Program

Level 1 American Depositary Receipts (ADRs) program for ordinary shares of OJSC «CenterTelecom» was registered by the US Securities and Exchange Commission on August 22, 2001.

J.P. Morgan Chase Bank is the depositary bank for Level 1 ADR program of the Company. Depositary agreement between CenterTelecom, J.P. Morgan Chase Bank and ADR holders was exe- cuted on September 4, 2001, and revised on December 10, 2001.

One ADR is issued for 100 ordinary shares of the Company.

At the end of the reporting year there were 23 192 800 ordinary shares of the Company provided for ADRs, or about 1.5 % of the total number of the Comany's ordinary shares.

42 Annual report 2004 5.5 Corporate Bonds

In 2004 CenterTelecom kept extensively using the Russian bond market as a means of debt fund raising and placed the fourth bond issue, worth 5.6 bn rubles with maturity period of five years. All-in- all in 2004 14 issues of telephone bonds valued at 26 892 350 rubles and three issues of series 02, 03, 04 bonds valued at 8 249 487 350 rubles were in circulation.

Bonds issuing became one of the most liquid debt instrument.

OJSC «CenterTelecom» proved itself to be a trustworthy debtor, promptly and in full measure fulfilling its obligation before the Company's bondholders.

Total amount of payments made in 2004 on the Company's bonds series 02 and 03 amounted to 349 662 000 (Three hundred forty nine million and six hundred sixty two thousand) rubles 00 kopeks.

Summary of CenterTelecom bond issues Number of Series placed Face Worth, rubles Placement Maturity % coupon Coupon peri- date of per- securities, value, date rate od, months formance pieces rubles

1-2 coupons 1 coupon - - 20%; 3 months, April 24, 3-4 coupons 2-6 coupons 2003 02 600 000 1 000 600 000 000 July 23, April 21, - 18%; - 2002 2005 5-6 coupons 6 months - 16%

03 2 000 000 1 000 2 000 000 000 16.09.2003 15.09.2006 12,35% 6 months 16.09.2004 -17.09.2003 19.09.2005

04 5 622 595 1 000 5 622 595 000 17.08.2004 21.08.2009 13,80% 6 months 16.11.2006 -31.08.2004

Annual report 2004 43 5.6 Ratings

In April 2004 International rating agency Standard&Poor's revised the international scores of OJSC «CenterTelecom» and left them at the same level: international credit score - «CCC+» Forecast Stable, long-term credit score on the Russian scale - «ruBB+». In August 2004 CenterTelecom finished placement of the bond issue series 04, to which Standard&Poor's assigned credit score on the Russian scale at the «ruBB+» level, like to the previous three series of the Company. For the credit portfolio diversification the Company examines different instru- ments of funds attraction, one of which is eurobonds. As it is necessary to have two international credit ratings to enter the eurobonds market, it was decided to receive the second international credit score from Fitch Ratings. On December 8, 2004 Fitch Ratings assigned to OJSC “CenterTelecom” long-term unsecured credit score in foreign currency at the «B-», level, forecast «Negative» and short-term credit rating in foreign currency at the «B» level.

In the course of the year the Company conducted activities aimed at the improvement of the corporate governance system. As a result of the CenterTelecom Corporate Governance Score revision made by Standart&Poor`s agency the Company received CGS - 5 (CGS - 5.8 on the National Scale) against CGS - 5.3 assigned to the Company on March 21, 2003.

According to the results of the coporate governance system research conducted by «Russian Institute of Directors» and CJSC «Rating Agency «Expert-RA» consortium, OJSC «CenterTelecom» was defined as the only Russian enterprise that had received the highest Corporate Governance Score - «A». This level of the Company's corporate governance excludes any shareholders rights violation risks, executive bodies unfair activities and provision of low-quality information to the shareholders and investors. On December 23, 2004 Standart&Poor`s Committee revised ahead of the schedule the score received by CenterTelecom and reduced it to CGS -4 (CGS -4.8 on the National Scale) on «Structure and efficiency of the Board of Directors» component, because of the problems related to the procedure of decision making by the principal shareholder and the absence of dialogue with the representatives of minority shareholders.

44 Annual report 2004 VI Corporate Governance

6.1 Corporate Governance

During the reporting period the Company carried out activities on implementation of the actions set by the Plan on Improvement of the Company's Corporate Governance Practice for 2004.

On February 20, 2004 the Board of Directors developed and approved the Code of Corporate Governance of OJSC «CenterTelecom» (handbook of instructions) based on the Corporate Conduct Code approved by the RF Government and recommended by FFMS of Russia. This document is developed in accordance with the recommendations of the Corporate Governance Committee, suggestions of the expert organizations - Russian Institute of Directors, Independent Directors Association, International Finance Corporation, and received appreciation of the investors community.

According to the research conducted by the rating agency «Expert» and Russian Institute of Directors, the Code of CenterTelecom was declared as the best among the corporate conduct codes of more than 60 Russian companies in respect to its quality and the most corresponding to the provisions of the Code recommended by FFMS of the RF.

Institute of the Company's Corporate Secretary was introduced in CenterTelecom in 2004. On July 13, 2004 the Board of Directors appointed Corporate Secretary, approved the Regulations on Corporate Secretary and Corporate Secretary Staff.

The main activities of the Corporate Secretary in the reporting period was the efficiency increase of cooperation between the shareholders, Board of Directors, Committees of the Board of Directors and executive bodies and the Company's management.

Annual report 2004 47 6.2 Investors Relations

In 2004 CenterTelecom carried out the policy focused on provision of the maximum and equal access for the shareholders, Russian and foreign investors and analysts of the telecommunication market to the information about the Company's activities.

In reporting year a number of Internet and telephone confer- ences devoted to the discussion of the Company's activities results in 2003 and perspectives for 2004, consolidated financial statements of CenterTelecom for 2003 according to the IAS and the results for the first nine months of 2004 according to the Russian Accounting Standards were held.

The Company continued to publish its Consolidated Financial statements in accordance with the IAS and audited by CJSC «Ernst & Young Vneshaudit».

In April 2004 in London in the framework of the road show a number of meetings of the CenterTelecom management with the representatives of the largest international investment funds and management companies were held. The meetings with investors showed increased interest paid by the international community to the Company's activities. Series of presentation reflecting the Company's activities and development strategy were carried out.

In order to introduce market analysts and representatives of investors community to the activities of the Company's subsidiaries, the meeting of the CenterTelecom management and lead managers with the analysts and representatives of the business mass media was held in Kaluga subsidiary in March 2004. On the meeting the issues of Kaluga region investment attractiveness, main activities of the subsidiary, quantitative business indicators, financial and economic condition of the Company etc. were discussed. Management of CenterTelecom plans to continue the practice of such meeting in the future.

In 2004 the representatives of CenterTelecom participated in the International Congress "Eurasian Economic Union", "Topical problems of the Russian business" Conference, "Infocommunications of Russia - XXI century" Forum, III National Congress of Corporate Directors with the report “Corporate governance - primary direction of the company's investment attractiveness increase”.

48 Annual report 2004 6.3 Public Relations

Management of CenterTelecom pays great attention to the forming of effective relations with the representatives of the Russian and foreign business communities, different social groups and mass media. The Company constantly gives topical and trustworthy information about its financial, economic, investment and social projects. In 2004 CenterTelecom joined the top ten companies according to the results of Standard&Poor's "Research of information transparency of the Russian companies 2004". In the last year the total level of the Company's information disclosure according to the influential rating agency reached 62%, while the average level for the Russian companies is 47%.

The task of conducting the common corporate information policy took on special significance in 2004. The main directions of the work in this sphere were the forming of the Company's top managers image, special activities focused on the services promotion and fidelity increase of different customer groups to CenterTelecom.

Among the most significant events in the life of the Company was its participation in the Russian and International exhibitions, including «Infocom - 2004», the Company's management attendance at the events held in the framework of the VIII Saint-Petersburg International Economic Forum, accessing of the 6 millionth subscriber etc.

Besides that, CenterTelecom continues actively participating in the work of a number of public and professional organizations, including Center of Telecommunications Development Problems Research, Russian Association for Networks and Services, Russian Foundation for the History of Telecommunication, Association of Payphones Operators, telecommunication equipment producers, research and development, planning and design engineering organizations in the telecommunication field, Non-governmental Pension Fund "Telecom- Soyuz" and others.

Annual report 2004 49 6.4 Charity Activities

CenterTelecom pays special attention to implementation of projects in the social sphere, assisting to increase the quality of life of the Russian population by supporting socially vulnerable citizens and conducting a number of long-term programs related to the culture, education and sports. The main principals of the charity activities are formulated in the «Conception of the CenterTelecom Charity Activities». Primary tasks of the social activities are the following:

social support of the citizens, including disabilities and other persons who can't without assistance realize their rights and legal interests because of some physical, intellectual or any other circumstances; support of organization participating in regional social programs, including installation of telephones in the rural communitie support of organizations in the spheres of education, culture, art, enlightenment and religion; support of the physical culture and mass sports development.

Organization, coordination of charity activities and control over the funds provided in the Company's budget for charity are carried out by the Commission on Charity Activities.

50 Annual report 2004 6.5 Staff Policy

Priorities of the CenterTelecom staff policy are the following: administration; planning of the staff management; staff recruitment and rotation; assessment, training and education of the staff; remuneration and motivation of the staff; corporate culture management.

Personnel costs breakdown in CenterTelecom in 2004

0.7%

5.7% Voluntary health insurance Social benefits and guarantees 22.3%

United social tax

69.7% Payroll costs

Annual report 2004 51 The average workforce in 2004 was 67 263 employees, a reduction of 3.7% (2 584 employees) compared to 2003. The reduction of workforce is noted in operational activities and collateral industrial process.

Payroll costs accounts for the most part of the personnel expenses - 69.7%, Unified Social Tax - 22.3%, social programs costs - 5.7%.

Generally the payroll costs in 2004 were 6 387 313.0 thousand rubles and grew by 23.6% year-on-year. Payroll accounts for 25.6% of the earnings.

The increase of payroll costs and average workforce reduction of the Company provided for the averagy salary rate growth. The average salary amounted to 8 472.6 rubles (28.6% up year-on-year) in 2004.

2001 3 793

2002 4 946

2003 6 589

2004 8 472

0 2 000 4 000 6 000 8 000 10 000

52 Annual report 2004 6.6 Development Perspectives

According to the results of 2004 the total installed switching capacity of the Company amounted to more than 6 798 thousand subscriber lines. At the current moment it is the most extensive public switched network in Russia.

The independent development of the local telephone networks of the Central Federal District regions before the initiation of the unified interregional company OJSC «CenterTelecom», resulted in the different switching equipment and software utilization on the networks. At the current moment digital systems of more than 20 types, including foreign - EWSD, S-12, Si-2000, NEAX-61E, 5EES, AXE-10, and domestic - Evro-Kvant, TOS, Elcom etc. are used. One of the main tasks for CenterTelecom is the step-by-step unification of the used systems.

The most frequently used switching systems EWSD, S-12, Si-2000, Evro-Kvant are to be installed as basic on the networks in 2005. Increasing telecommunication networks capacity, CenterTelecom plans to install more than 116 thousand subscriber lines till the end of 2005. In order to improve the quality of the provided intraareal and long-distance communication services it is planned to conduct extension of the automatic trunk exchanges in the many subsidiaries by introduction of SSP/IP function.

Circular-type structures and radial lines based on the digital transmission system and installed by CenterTelecom now will allow to put into operation 396 digital automatic telephone exchanges by 2007, that will amount to 95.6% of the total number of automatic telephone exchanges as of the end of 2007 and 99% of the total number of the digital automatic telephone exchanges.

The main direction of the Company's activities in the field of data transmission is the further increase of the used telecommunication lines and nodes by technical development of data transmission and packing methods. Data transmission systems development will be conducted on the base of optic or digital wireless technologies. The currently used transmission systems will be adapted to packaged data transmission methods.

Annual report 2004 53 In the field of information distribution the strategically important for CenterTelecom is the introduction of the packet switching technology (SoftSwitch) for provision of the wider range of telecommunication services, at the same time:

Packet telephony is seen not like the competing with the conventional telephony but like the basic technology for telephony service rendering; The currently used on the networks telecommunication equipment will be modernized as to converge on the created multiservice network; Installing the new equipment, the switching systems supporting SoftSwitch function are the most preferred.

It is planned for 2005 to install about 840 km of fiber- optic transmission lines and more than 5 600 thousand channel-km of digital transmission lines. It is planned to use SDH equipment as the transmission systems on the intraareal primary networks.

The main direction of the local primary networks development on urban networks is the switch for circular-type structure, which increases the reliability of the telecommunication networks. Developing the local primary networks, the Company uses the combining of fiber-optic and metal cables. Development of the interchange urban primary cable networks is to be conducted on the base of fiber-optic transmission lines with the use of up-to-date transmission systems.

In order to increase transportation efficiency of all types of traffic a part of SDH resources of the transport public switched networks will be used for creation of the higher level transport networks, using IP/MPLS and other technologies based on packet switching.

Today CenterTelecom conducts works on installation of access nodes in every region of the Central Federal District, which allow to provide a wide range of services on the integral technological base throughout the territory of the Central Federal District.

54 Annual report 2004 The strategic task of the public switched networks development is their transformation into multiservice networks with variable services packages. At the same time the main func- tions of the networks are still the transmission and distribution of data.

In the near future the Company is to install and develop the multiservice networks which will allow to strengthen CenterTelecom positions on the new services market (Internet access, video on demand, packet telephony, data transmission) and meet the private customers, business and state structures demand for these services.

6.7 Information for Shareholders

An Annual General Meeting of the CenterTelecom shareholders was held in Moscow on June 30, 2005.

According to the agenda, shareholders approved the annual report, balance sheet, including profit and loss statement (profit-and-loss accounts) of the Company and profit allocation according to the results of the reporting fiscal year (2004).

The shareholders meeting decided to pay annual dividends for 2004:

on preference shares: RUR 0.0756115 per share to be paid before August 29, 2005; on ordinary shares: RUR 0.0630084 per share to be paid before December 31, 2005.

The total amount of dividends payment is 139.2 mln rubles or 35% of the Company's net profit for 2004 ( 347.3 mln rubles or 23% of net profit in 2003). So, despite the general decrease of the sum provided for the dividends payment, the share of the funds allocated for dividends payment showed growth in more than 1.5 times year-on-year.

According to the election results, the Board of Directors of the Company consists of the following persons:

Annual report 2004 55 1.Ruben A. Amaryan - General Director of OJSC “CenterTelecom” Boris D. Antonyuk - Deputy Minister of Information Technologies and Communication of the RF Anrdei V. Bescorovayny - Deputy Yead of the Federal Communication Agency Alexander P. Gribov - Deputy Head of Department - Head of Division of the Russian Federal Property Fund Valery V. Degtyarev - General Director of CJSC «Professional Telecommunications» Alexander N. Kiselev - Aide to the of Information Technologies and Communication of the RF Sergei Iv. Kuznetsov - First Deputy General Director OJSC «Svyazinvest» Ivan N. Mazalov - Director of «Prosperity Capital Management» Dmitry A. Milovantsev - Deputy Minister of Information Technologies and Communication of the RF Gregory M. Finger - Executive Director of the Moscow Representative Office of «NCH Advisors Inc» Valery N. Yashin - General Director of OJSC «Svyazinvest»

Audit Committee is elected consisting of the following persons:

Konstantin V. Belyaev - Deputy General Director of OJSC «Svyazinvest» Svetlana N. Bocharova - Head of Division under Accounting Department of OJSC «Svyazinvest» Valentina F. Veremyanina - Head of Division under Legal Department of OJSC «Svyazinvest» Yaroslav Yu. Murashkin - Senior expert of Economic Planning and Budgeting Department of OJSC «Svyazinvest» Oksana V. Petrova - Deputy Head of Division under Corporate Governance Department of OJSC «Svyazinvest» Ilya V. Ponomarev - Head of Division under Economic Planning and Budgeting Department of OJSC «Svyazinvest» Svetlana P. Sinadskaya - Head of Division under Economic

56 Annual report 2004 and Tariff Policy Department of OJSC «Svyazinvest»

Audit company Ernst&Young was approved as the Company's auditor for 2005.

The shareholders meeting approved the new edition of the Company's Charter, made amendments and additions into the Regulations on the Board of Directors, Regulations on the Management Board, Regulations on the General Meeting of shareholders, Regulations on Audit Committee, approved standards of allocations (percentage) to calculate annual remunerations payable to the members of the Board of Directors elected at the completed General Annual Meeting of shareholders. Meeting of the shareholders also decided to quit the Company's participation in a number of non-profit organizations.

At the first meeting of the new Board of Directors Valery Yashin was appointed as Chairman of the Board and Gregory Finger - as Deputy Chairman of the Board.

Besides that, by the decisions of the Board was initiated: Staff and Remuneration Committee under the Board of Directors Audit Committee under the Board of Directors

Annual report 2004 57 OJSC «CenterTelecom» Subsidiaries

Full corporate Location address name of subsidiary

Belgorod subsidiary 3 Sobornaya Square, Belgorod, 308000, Russia

Bryansk subsidiary 9 Karl Marx Square, Bryansk, 241050, Russia

Vladimir subsidiary 42 Gorkogo Street, Vladimir, 600000, Russia

Voronezh subsidiary 35 Prospekt Revolutsy, Voronezh, 394000, Russia

Ivanov subsidiary 1 10Avgusta Street, Ivanovo, 153000, Russia

Kaluga subsidiary 38 Teatralnaya Street, Kaluga, 248600, Russia

Kostroma subsidiary 1 Podlipaeva Street, Kostroma, 156961, Russia

Kursk subsidiary 8 Krasnaya Square, Kursk, 305000, Russia

Lipetsk subsidiary 35-a Tereshkovoy Street, Lipetsk, 398000, Russia

Moscow subsidiary 29/2 Narodnogo opolcheniya Street, Moscow, 123154, Russia

Orel subsidiary 43 Lenina Street, Orel, 302000, Russia

Ryazan subsidiary 43 Shchedrina Street, Ryazan, 390006, Russia

Smolensk subsidiary 6 Oktyabrskoy Revolutsy Street, Smolensk, 214000, Russia

Tambov subsidiary 2-v Astrakhanskaya Street, Tambov, 392002, Russia

Tver subsidiary 24 Novotorzhskaya Street, Tver, 170000, Russia

Tula subsidiary 33-a Prospekt Lenina, Tula, 300000, Russia

Yaroslavl subsidiary 22 Komsomolskaya Street, Yaroslavl, 150000, Russia

58 Annual report 2004

Independent Auditors' Report To the shareholders and board of Directors of JSC CenterTelecom

1. We have audited the accompanying consolidated balance sheet of JSC CenterTelecom (a Russian open jointstock company hereinafter "the Company"), as at December 31, 2004 and the related consolidated statements of operations, cash flows and changes in shareholders' equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of JSC Russian Telecommunications Network (a Russian open jointstock com pany hereinafter "RTS" ), a whollyowned subsidiary, which statements reflect total con solidated assets of 968,843 thousand Rubles as at December 31, 2004, total consoli dated revenues of 699,172 thousand Rubles and consolidated pretax income of 70,599 thousand Rubles for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for RTS, is based solely on the report of other auditors.

2. Except as discussed in paragraph 3, we conducted our audit in accordance with International Standards on Auditing issued by International Federation of Accountants. Those standards require that we plan and perform the audit to obtain reasonable assur ance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall finan cial statement presentation. We believe that our audit and the report of other auditors pro vide a reasonable basis for our opinion.

3. As described in note 2 "Basis of Presentation of the Financial Statements" and Note 5 "Property, Plant and Equipment", the Company has transitioned to International Financial Reporting Standards (IFRS) at January 1, 2003 and applied an exemption in IFRS 1, Firsttime Adoption of International Financial Reporting Standards, which permits an entity to measure property, plant and equipment at the date of transition to IFRS at fair value and use that fair value as deemed cost. However, we were not able to satisfy ourselves as to (i) whether the carrying amounts of property, plant and equipment as at January 1, 2003 are representative of fair value; (ii) resulting depreciation expense for the years presented and (iii) the respective deferred tax balances as at reporting dates and

2 Financial statements for 2004 1. We have audited the accompanying consolidated balance sheet of JSC CenterTelecom (a Russian open jointstock company hereinafter "the Company"), as at December 31, 2004 and the related consolidated statements of operations, cash flows and changes in sharehold ers' equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial state ments based on our audit. We did not audit the financial statements of JSC Russian Telecommunications Network (a Russian open jointstock company hereinafter "RTS" ), a whollyowned subsidiary, which statements reflect total consolidated assets of 968,843 thou sand Rubles as at December 31, 2004, total consolidated revenues of 699,172 thousand Rubles and consolidated pretax income of 70,599 thousand Rubles for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for RTS, is based solely on the report of other auditors.

2. Except as discussed in paragraph 3, we conducted our audit in accordance with International Standards on Auditing issued by International Federation of Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examin ing, on a test basis, evidence supporting the amounts and disclosures in the financial state ments. An audit also includes assessing the accounting principles used and significant esti mates made by management, as well as evaluating the overall financial statement presenta tion. We believe that our audit and the report of other auditors provide a reasonable basis for our opinion.

Financial statements for 2004 3 JCS CenterTelecom Consolidated Balance Sheet at December 31, 2004 (in thousands of Russian Rubles)

December 31, December 31, Notes 2004 2003 ASSETS Noncurrent assets: Prorerty, plant and equipment 5 30 000 961 24 314 535 Intangible assets 6 3 328 070 1 045 017 Investments in associates and joint ventures 8 15 927 30 721 Availableforsale financial assets 13 662 8 358 Other financial assets 9 323 626 209 311 Longterm advances given 10 1 056 076 659 308 34 738 322 26 267 250

Current assets Inventories 11 577 518 543 198 Trade receivables 12 1 936 643 1 668 768 Other current assets 13 2 369 709 1 668 232 Cash and cash equivalents 14 1 417 214 1 052 589 6 301 084 4 932 787 TOTAL ASSETS 41 039 406 31 200 037

SHAREHOLDERS’ EQUITY AND LIABILITIES Shareholders’ equity Preference shares 15 304 840 304 840 Ordinary shares 15 914 526 914 526 Net unrealized gains 4 517 2 624 Retaihed earnings 11 340 893 12 606 161 12 564 776 13 828 151

Minority interest 16 23 974 358 Noncurrent liabilities Longterm borrowings 17 12 972 648 6 959 174 Finance lease obligations 18 1 775 171 1 167 947 Longterm taxes payable 24 346 25 545 Deferred revenue 617 789 628 487 Deferred income tax liabilities 26 122 849 527 176 Other noncurrent liabilities 13 254 18 098 15 526 057 9 326 427

Current liabilities Trade and other payables 19 3 176 723 1 747 874 Payables to Rostelecom 31 191 544 219 152 Taxes payable 20 1 395 882 1 024 537 Dividends payable 15 241 15 323 Shortterm borrowings 17 4 572 646 3 419 649 Current portion of longterm borrowings 17 2 900 072 1 105 797 Current portion of finance lease obligations 18 672 491 512 769 12 924 599 8 045 101 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 41 039 406 31 200 037

4 Financial statements for 2004 JCS CenterTelecom Consolidated Statement of Operations For the year ended December 31, 2004 (in thousands of Russian Rubles, except per share amounts)

Notes 2004 2003 Revenues 22 26 047 204 21 316 738 Operating expenses Wages, salaries, other employee benefits and payroll taxes (9 413 121) (7 580 068) Depreciation and amortization 5,6 (4 243 359) (3 665 988) Gain (loss) on disposal of property, plant and equipment 1 150 (94 706) Materials, repair and maintenance, utilities (2 499 688) (2 053 886) Taxes other than income tax (627 418) (446 159) Interconnection charges (4 048 930) (2 635 649) Provision for impairment of receivables 12 (831 322) (801 968) Other operating expenses 23 (3 471 798) (2 274 102) Total operating expenses (25 134 486) (19 552 526) Operating profit 912 718 1 764 212 Share in profit (loss) of associates and joint ventures 2 282 (750) Finance cost, net 24 (2 032 987) (1 279 714) (Gain) loss from investments 25 274 243 (25 097) Foreign exchange gain (loss), net 59 845 (89 082) Profit (loss) before income tax and minority interest (783 899) 369 569 Income tax expense 26 (126 069) (133 150) Profit (loss) before minority interest (909 968) 236 419 Minority interest 16 (8 003) 17 212 Net profit (loss) (917 971) 253 631 Basic and diluted earnings (loss) per share (Russian Rubles) 27 (0,44) 0,12 JCS CenterTelecom Consolidated Cash Flow Statement For the year ended December 31, 2004 (in thousands of Russian Rubles)

Notes 2004 2003 Cash flows from operating activities Profit (loss) before income tax and minority interest (783 899) 369 569 Adjustments for: Depreciation and amortization 5,6 4 243 359 3 665 988 Gain (loss) on disposal of property, plant and equipment (1 150) 94 706 Provision for impairment of receivables 12 831 322 801 968 Share in profit (loss) of associates and joint ventures (2 282) 750 (Gain) loss from investments 25 (274 243) 25 097 Finance cost, net 24 2 032 987 1 279 714 Foreign exchange (gain) loss, net (59 845) 89 082 Recovery of provision for deferred income tax assets (614) Operating profit before workinf capital changes 5 985 635 6 326 874 Increase in trade receivables (951 472) (1 240 023) Increase in other current assets (676 413) (381 491) (Increase) decrease in inventories (28 848) 8 069 Decrease in trade and other payables (93 159) (125 734) Increase in taxes payable 169 205 226 688 Cash flows generated from operations 4 404 948 4 814 383 Interest paid (1 949 908) (1 170 969) Income taxes paid (313 866) (809 924) Net cash flows from operating activities 2 141 174 2 833 490 Cash flows from investing activities Purchase of property, plant and equipment (6 996 281) (5 488 709) Purchase of intangible assets (74 459) (52 337) Purchase of Oracle EBusiness Suite software (180 235) (919 517) Proceeds from disposal of property, plant and equipment 90 060 4 484 Acquisition of subsidiaries, net of cash acquired (1 372 349)

Financial statements for 2004 5 Disposal of subsidiaries, net of cash disposed 116 731 Acquisition of associates (2 815) Proceeds from disposal of associates 125 717 Purchase and disposal of investments availableforsale and other financial assets (30 969) (2 365) Interest received 62 639 4 864 Dividends received from associates/availableforsale investments 79 4 469 Net cash flows used in investing activities (8 261 882) (6 449 111) Cash flows from financing activities Proceeds from promissory notes issued 2 389 405 535 906 Repayment of promissory notes (1 041 512) Proceeds from borrowings 7 441 833 8 954 077 Repayment of borrowings (6 327 741) (5 092 283) Proceeds from bonds issued 6 818 478 2 000 000 Repayment of bonds (1 284 820) (600 000) Repayment of finance lease obligations (650 277) (277 850) Repayment of vendor financing obligations (508 280) (882 566) Repayment of (proceeds from) other noncurrent liabilities (3 984) 730 Dividends paid (347 769) (275 753) Net cash flows from financing activities 6 485 333 4 362 261 Effects of exchange rate changes on cash and cash equivalents (1 342) Net increase in cash and cash equivalents 364 625 745 298 Cash and cash equivalents at 1 January 1 052 589 307 291 Cash and cash equivalents at 31 December 1 417 214 1 052 589 Nonmonetary transactions: Prorerty, plant and equipment acquired on credit terms 1 470 674 442 414 Prorerty, plant and equipment acquired under finance lease agreements 1 413 383 1 169 376 Amdocs software acquired through vendor financing 884 920 Prorerty, plant and equipment received freeofcharge 22 758 85 140

JCS CenterTelecom Consolidated Statement of Changes in Shareholders’ Equity For the year ended December 31, 2004 (in thousands of Russian Rubles)

Share Capital Retained Net unrealized Notes Total Preference Ordinary earnings gain shares shares At December 31, 2002 304 840 914 526 12 612 530 13 831 896 Net profit 253 631 253 631 Change in the fair value of availablefor 2 624 2624 sale financial assets Dividends 28 (260 000) (260 000) At December 31, 2003 304 840 914 526 12 606 161 2 624 13 828 151 Net loss (917 971) (917 971) Change in the fair value of availablefor 1 893 1 893 sale financial assets Dividends 28 (347 297) (347 297) At December 31, 2004 304 840 914 526 11 340 893 4 517 12 564 776

6 Financial statements for 2004