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... Route to Victory ...09

Annual Report 2009 Approved Annual General Shareholders Meeting OJSC “MegaFon” Minutes dated 02.06.2010

Preliminarily Approved Board of Directors OJSC “MegaFon” Minutes № 127 (191) dated 28.04.2010 MEGAFON ANNUAL REPORT

...... Route to Victory ...09 Contents

01. Company Overview 4

02. Network Coverage Area 5

03. Address by the Chairman of The Board 6 06. Key Events of 2009

04. Address by the Chief Executive Officer 12 8

05. Highlights of 2009 13. Consolidated Financial Statements 09. Risk Management 65 35 10. Corporate Governance 39

08. Review of Financial 11. Sustainable Results Development 49 52

15 12. Annexes 07. Report by the Board of Directors 4 COMPANY OVERVIEW

01: Company Overview

MegaFon has firmly established itself as over 50 million people in 83 Russian frastructure in the country, and is also the a leading name in Russia’s telecommu- regions, as well as Tajikistan, Abkhazia leader in terms of revenue from mobile nications industry, having become one and South Ossetia. data transfer services. of the “Big Three” mobile communications operators in the country. It was the MegaFon was also the first Russian opera- In 2009, MegaFon was named a General first, and remains the only, player in the tor to commercially launch a third-gener- Partner of the XXII Winter Olympic Games sector to offer a full spectrum of mobile ation network, based on the IMT-2000/ and XI Winter Paralympic Games in Sochi communication services nationwide. The UMTS (3G) standard. It offers the widest in 2014. Company’s subscriber base comprises coverage and the most developed 3G in-

Mission ......

In expanding the possibilities for communication, MegaFon is creating an information space that unites Russia as a whole. By removing the barriers to social interaction, it is brings people closer together. Ultimately, MegaFon hopes to be the telecommunications company of choice for everyone.

Our Priorities ......

• Client care MegaFon strives to make mobile communications available to and affordable for all subscribers • Full license coverage MegaFon intends to capitalize effectively on its nationwide coverage by unifying its tariff policies, product range and service standards on a single technological platform • Reliability and comfort MegaFon maintains the highest standards of service and is developing the technology needed to provide the maximum amount of services • Dynamism and innovation We want our subscribers always to be one step ahead, knowing that they have access to the broadest, most advanced and most straightforward range of mobile communication services 5 MegaFon. Annual Report 2009

02: Network Coverage Area

MegaFon — Moscow MegaFon — Far East 7.4 mln 3.7 mln MegaFon — North-West 9.9 mln MegaFon — Center 3.1 mln

MegaFon — Ural 4.5 mln MegaFon — MegaFon — Siberia Volga 2.7 mln 11.2 mln

MegaFon — Kavkaz 7.7 mln 6 ADDRESS BY THE CHAIRMAN OF THE BOARD

03: Address by the Chairman Of The Board

Dear Shareholders, the situation on the foreign exchange Last year showed that further growth market. Moreover, we were able to man- in the cellular communications sector Last year was challenging for all of age our costs quite efficiently and cut will be driven by data transmission. The us. For the first time in its history, the costs substantially in a short period of increasing popularity of mobile internet Russian mobile telecommunications time without harming our business or and 3G services has led to a three- sector faced an economic crisis that had employees. In 2009, MegaFon dem- fold rise in data traffic on MegaFon’s a significant impact on our customers onstrated its ability to adapt to a new networks. Third-generation technology and made it more difficult to carry out reality quickly, and once again demon- is starting to play a key role, both in certain tasks. However, it also created strated the level of professionalism and terms of technological development of new opportunities that had previously maturity of its management team. the sector and monetizing consumer been unavailable to us. I am pleased to demand. According to most experts, the say that MegaFon endured this trying The difficult economic situation crystal- use of mobile services will gradually time bravely and emerged from it even lized the trend of slowing growth in tra- shift towards 3G. stronger than before. ditional service segments of the mobile market. In 2009, voice traffic growth MegaFon has always been on the cut- The Company came through the crisis slowed, dispelling any doubts regarding ting edge of new trends. It was ahead of more successfully than its key com- the industry’s future course of develop- its time in understanding the potential petitors in the Russian marketplace. In ment: it became evident that the future of the 3G market and became the first contrast to most players, we were not lies in new technologies and innovative operator in Russia to offer this innova- encumbered with high debt and were services. Today, MegaFon is ready to tive service to its subscribers. In 2009, therefore quite comfortable, despite drive and lead the new market trend. the Company concentrated its efforts 7 MegaFon. Annual Report 2009

on the accelerated development of its network operator whose assets have Last year taught us a lot. It demon- 3G network in Russia and the expan- the potential to bring synergies and strated that the Company was up to the sion of its range of services based on increase MegaFon’s value significantly. challenge, able to respond quickly to third-generation technology. As a result, In February 2010, the Board gave its external factors, and stable in the face by the end of the year, we became the support and voted unanimously in favor of the crisis. The experience of 2009 has absolute leader of the 3G market in of acquiring Synterra. given us the confidence that MegaFon terms of both revenues and subscriber is moving in the right direction and has numbers. In 2010, the Company intends Altough a private company, MegaFon everything needed to ensure long-term to strengthen its lead. nonetheless continues to improve the growth in shareholder value. quality of its corporate governance. The I would like to highlight the harmonious Financial Committee was established to work of the Board and MegaFon’s man- improve the Board’s efficiency in ana- agement during a challenging 2009. The lyzing and controlling the Company’s Board members unanimously supported operational and investment activities. the management’s proposal to allocate Following the merger of all operating additional funds for developing 3G subsidiaries into MegaFon, the Board networks and the concept of developing of Directors undertook additional the Company’s own retail network. Dur- measures to improve the management ing the year, the management carried control over new branches and made out active negotiations for the potential all the necessary updates in regulatory Aimo Eloholma acquisition of Synterra, a backbone documents. Chairman of the Board 8 ADDRESS BY THE CHIEF EXECUTIVE OFFICER

04: Address by the Chief Executive Officer

Dear shareholders, colleagues and mobile internet services, which is now the Company changed its approach to partners, a key area for future growth in Russia’s marketing communication and sales. mobile communications market. Now, the focus is on offering products To say that 2009 marked a turning point and services to specific groups of for the whole of Russia’s telecommuni- Last year, slowing growth in voice traffic clients, which are fully tailored to their cations industry is not an exaggeration. meant that the data transfer segment needs. Particular attention is being paid On one hand, the year served as the became one of the sector’s main driv- to developing customer service in the real test of strength for all operators; ers. This further confirmed the effective- MegaFon style. Key to the success of and on the other, it was crucial in terms ness of MegaFon’s long-term strategy to this will be the accelerated roll-out of of finding new ways to develop in a actively develop its 3G network and pro- MegaFon’s own retail network, which saturated market. mote mobile internet services. In 2007, was approved in 2009. the Company became the first in Russia MegaFon progressed through 2009 to commercially launch a 3G network. The crisis clearly demonstrated all the confidently, overtaking competitors on Today, in many respects, it is shaping advantages of MegaFon’s conservative many fronts, including development, the future of this segment. In 2009, approach to external financing. While brand awareness, and innovation. This MegaFon became Russia’s leading 3G many Russian companies found them- created a good reserve of strength that operator in terms of network coverage selves in a difficult financial situation, enabled the Company to overcome all and number of users. MegaFon had no major debt burden, the market challenges and strengthen which provided additional stability in its positions in the sector. Last year, The saturated market and growing the economic crisis. As a result, the MegaFon reported the most net sub- competition are making MegaFon focus Company became the first in the sec- scriber additions in the industry. It was on increasing subscriber loyalty and tor to be awarded investment-grade also the leader in terms of revenue from attracting new customers. Last year, credit ratings by the leading interna- 9 MegaFon. Annual Report 2009

tional rating agencies. In September, Last year, MegaFon completed a question that this partnership will take Standard & Poor’s raised MegaFon’s corporate reorganization that involved our brand to a new level of quality. long-term foreign-currency credit merging info it all of its operating the rating to “BBB-” and its long-term subsidiaries. This is of strategic impor- MegaFon is setting itself ambitious local-currency rating to “ruAAA”. In tance for future growth, as it creates goals, as that is the only way to lead in December, Moody’s Investors Service new possibilities for streamlining busi- a competitive market, and it is confi- raised the Company’s international ness processes and saving on transac- dent of its success. I would like to thank corporate rating and default prob- tion costs. In addition, the creation of all employees and partners for their ability rating to “Ba1” with the outlook a single operating company enables enthusiasm, effort and commitment in “stable”. These are the highest grade MegaFon to unlock the full potential of achieving these goals, as well as the ever awarded to a Russian telecommu- the license portfolio, particularly in a Board of Directors and shareholders for nications company. priority segment like 3G. their support.

In 2009, MegaFon managed to not only One major event for MegaFon’s image maintain its investment program, but last year was being named General actually increase it substantially in Telecommunications Partner for the XXII actual terms by controlling costs effec- Winter Olympic Games and the XI Winter tively. In terms of investment in organic Paralympic Games in Sochi in 2014. growth, the Company outstripped all of It will be good to see the Company’s its main competitors, having accumu- brand values – development, reliabil- lated major reserves for rapid develop- ity, partnership, cooperation, modern ment as the market recovers from the Russia – play a key role in a national Sergey Soldatenkov crisis in 2010. project of state importance. There is no Chief Executive Officer 10 2009 HIGHLIGHTS

05: Highlights of 2009

REVENUE 181,883 OIBDA1 88,192 RUR mln RUR mln

REVENUE (RUR mln) OIBDA (RUR mln)

2009 181,883 2009 88,192

2008 175,451 2008 88,246

2007 140,450 2007 71,858

OIBDA margin2 (%) NET PROFIT (RUR mln)

2009 48.5 2009 45,289

2008 50.3 2008 44,319

2007 51.2 2007 33,966

1 OIBDA is defined as operating profit before deduction of amortization and non-material assets. OIBDA is not a standard US GAAP term. 2 OIBA margin is defined as OIBDA as a percentage of revenue. 11 MegaFon. Annual Report 2009

ARPU1 320 MOU2 276 RUR minutes

ACTIVE SUBSCRIBERS (‘000) ARPU (Russia) (RUR)

2009 50,222 2009 320

2008 43,289 2008 368

2007 35,517 2007 361

MOU (Russia) (minutes) BREAKDOWN OF REVENUES FROM VAS (%)

2009 276 36 Message exchange Data transfer 2008 289 12 RBT Other

2007 244

1 ARPU is calculated by dividing the total revenues for the period less the proceeds from the sale of phones, accessories and other revenues by the average number of subscribers for the period and then the number of months. 2 MOU is calculated by dividing the total number of minutes of telecommunications use for the period by the average number of subscribers for the period and then the number of months.

10 12 KEY EVENTS OF 2009

06: Key Events of 2009

The Company The number of MegaFon became MegaFon launched MegaFon became completed active subscribers the first company the “FOCL Large a General Partner its corporate reached over in Russia to offer Ring”, which spans of the XXII Winter reorganization 50 million people, unlimited mobile 5,000 kilometers Olympic Games by merging up 16.3% year-on- internet use and the XI Winter its regional year nationwide Paralympic Games subsidiaries into in Sochi in 2014 itself 13 MegaFon. Annual Report 2009

MegaFon Moody’s Investors Standard & Poor’s In December, 2009 In December and Russian Service raised raised MegaFon’s MegaFon repaid 2009, MegaFon Post signed a the Company’s long-term foreign- its first Eurobond established its partnership international currency credit issue in full US$1.5 billion agreement corporate rating rating from “BB+” European Medium- according to which and default to “BBB–”, the Term Notes the Company will probability rating outlook “stable”, Program set up points of from “Ba2” to and its long-term sale in all post “Ba1” with the local-currency offices outlook “stable” rating from “ruAA+” for the first time to “ruAAA” in the telecom industry in Russia 14 CHAPTER

Ski Racing Part of the Olympic Games Program since 1924 15 MegaFon. Annual Report 2009

07: Report by the Board of Directors

Mobile Communications Market the Urals (Uralsvyazinform under the Utel market shares of VimpelCom and MTS fell brand), Volga (Volga Telecom) and Siberia to 24.5% and 33.4%, respectively, while The Russian mobile communications (Sibir Telecom). that of other operators grew insignificant- market is characterized by a high rate of ly, from 17.2% to 17.9%. penetration and competition. AC&M Con- In 2009, Megafon was the only operator sulting estimates that the total number among the Big Three that increased its The trend of slowing growth in voice traffic of mobile subscribers in 2009 increased market share, from 23.0% to 24.2%. The on mobile telecommunications networks by 10.6% to 207.9 million, as calculated by the number of SIM cards. Based on population figures from Rosstat, pen- Number of subscribers and level of penetration in Russia etration of mobile telecommunications reached 143.2%.

Three large operators – VimpelCom, MTS and MegaFon (known as the “Big 143.2 207,910,000 Three”) – dominate the Russian market, 31.12.2009 with a combined share of over 80%. The other participants are niche opera- 31.12.2008 129.4 187,830,000 tors, such as Skylink, discount operators (Tele2) and regional operators (SMARTS). Also present are inter-regional operators (IRCs) that are part of the Svyazinvest holding. The IRCs’ share amounted to Total number of mobile subscribers in Russia 7.3%, which is insignificant on the Russian national scale, but their market positions Penetration Russia, % are rather strong in certain regions, mainly

0 500 1000 1500 2000 2500 3000 16 REPORT BY THE BOARD OF DIRECTORS

continued in 2009. During the reporting period, voice traffic rose by 12%, com- Market share of cellular operators in Russia (%) pared with 43% a year earlier. Amid the credit crisis and a reduction in household incomes, operators were forced to make 17.9 additional efforts to preserve growth in 24.5 the “voice” business, primarily through market segmentation and simplifying VimpelCom tariffs, as well as increasing customer МТS loyalty. Despite slowing growth, voice MegaFon telecommunications services remain the 24.2 Others main source of revenues for the overall market. 33.4 The key driver in the industry in 2009 was the mobile internet market. Dur- ing the year, the data transfer business expanded more than three-fold, slightly exceeding the growth of other additional services and the voice-services seg- Growth in MegaFon’s subscriber base by region in 2009 ment. The main section of the consumer audience consists of people aged under 35 (68%) with average and high income levels (95%). A significant part of the audience consists of students (22%). 8% Growth, mln people The audience is characterized by its use 0.46 Siberia Growth, % of all types of cellular communications 10 services. People in Russia have wide 6% social circles, call often, talk for longer Center 0.67 periods, use SMS and MMS actively, and participate in the MegaFon Bonus loyalty 16% North 0.74 program. Caucasus

9% Over the last few years, along with mar- Far East 0.82 ket saturation and increasing competition, mobile operators are evolving into 18% universal operators that provide both Moscow 0.96 mobile and fixed-line telecommunica- & Region tions services, primarily for internet 13% access. In Russia, this trend has been North West 1.02 followed by VimpelCom (acquisition of Golden Telecom) and MTS (acquisition of 13% Comstar UTS). MegaFon has an impres- Urals 1.08 sive fixed-line telecommunications infrastructure and continues to invest in 17% its development. The Company is also Volga 1.19 looking into acquiring assets in the segment, whose integration would increase value for shareholders. 17 MegaFon. Annual Report 2009

Another trend that emerged in 2009 was a major change in the mobile retail SAC (RUR per subscriber) sector. Increased competition for new subscribers and a fall in revenues and profitability have led operators to focus on creating their own sales networks. 2009 505 MegaFon has concentrated on developing its own branded retail network, focusing on quality and a high level of 2008 579 customer service. Other operators have chosen to acquire existing retailers, which to the Company’s opinion entails large expenditure and risk: VimpelCom has acquired 49% of Euroset, the largest cellular retailer in Russia, and MTS has bought Telefon.ru. MegaFon Subscriber churn rate in 2009 (%)

Subscriber Base

MegaFon is one of the three largest cellular Jan-09 3.1 operators in Russia. In 2009, its subscriber base consisted of 50.2 million people, up Feb-09 3.6 by 15.9% year-on-year, or by 6.9 million subscribers. Meanwhile, the number of active users of MegaFon’s network increased Mar-09 3.7 by 8% to 39.7 million people. The Com- pany holds licenses for the provision of Apr-09 3.2 cellular services in every Russian region and its network covers around 63% of the country. Some 80% of the population lives May-09 3.3 within MegaFon’s area of service.

Jun-09 3.5 Expanding the subscriber base in a saturated marketplace is a very challenging task. Nonetheless, the Company Jul-09 3.5 has continued to work towards this aim in virtually all parts of Russia. The main Aug-09 3.9 thrust to attract customers has been through developing the Company’s own retail network and managing the dealer Sep-09 4.2 network efficiently. In a difficult economic environment, MegaFon sought to maintain a high quality sales that en- Oct-09 4.1 sured clients were offered the most complete and reliable information regarding Nov-09 4.3 products and services. In addition, the Company has launched a range of unique tariff offerings for data transfer and voice Dec-09 4.9 services, as well as product and image- based advertising campaigns. 18 REPORT BY THE BOARD OF DIRECTORS

As a result, in 2009, MegaFon became Subscriber turnover (churn rate) was somewhat lower than the RUR368 in the absolute leader in terms of subscrib- 45.3% in 2009, compared with 38.0% in 2008. The drop in ARPU was experienced er growth. Its share of net subscriber 2008. The increase was due to the rise in by all operators and stemmed mainly from growth was 38%, compared with 36% for new connections and intensifying com- the significant decline in high-revenue VimpelCom and 24% for MTS. The largest petition in the marketplace. All of the Big services (roaming and domestic and inter- increase in the subscriber base was in Three operators saw greater subscriber national telecommunications) due to a fall the Volga, North West and Urals regions, turnover and a fall in the share of loyal in business and private travel by subscrib- as well as in Moscow and the sur- subscribers during the year. The Compa- ers. ARPU and minutes of use (MOU) were rounding region. In terms of percentage ny made specific efforts to reduce client impacted negatively by a reduction in de- growth, the most significant subscriber turnover, including marketing campaigns mand from corporate users and working growth was in Greater Moscow (Moscow and programs aimed at increasing sub- migrants, who use telephones primarily and the Moscow region) and the Volga scriber loyalty. for calls to CIS countries. This was espe- and North Caucasus regions. cially evident in the Greater Moscow area, ARPU and MOU where MOU fell by 17%. In 2009, the subscriber acquisition cost (SAC) decreased to RUR 505 per sub- The Company’s revenues from telecom- Voice Telecommunications scriber. This was due to a reduction in munications services in 2009 grew by advertising expenses and an increase in 2.3% to RUR150 billion. The average Voice telecommunications are the main new connections year-on-year. monthly revenue per subscriber (average source of revenues for MegaFon. In 2009, revenue per user – ARPU) was RUR320, voice traffic increased by 12%, in line with the market average. To compensate for slowing growth in the market for voice transmission, MegaFon is actively pro- ARPU and MOU, Russia moting new high value-added services, optimizing its range of tariffs, and focusing its marketing policy towards increasing the time that subscribers spend on the network.

ARPU, RUR During the crisis, MegaFon resolved to 276 MOU, min support clients and, in contrast to the 2009 320 main competitors, did not increase its tariffs for services in the first half of 285 2009. Moreover, to stimulate demand 4Q09 316 for its services, the Company launched “lighter” tariff plans, “Simply to Talk” 275 and “Fairy Tale”, and reduced tariffs for 3Q09 326 international roaming in several areas. This tactic in a declining market proved 280 prudent: MegaFon has increased sub- 2Q09 322 scriber loyalty and retained leadership in terms of net connections. In the second 264 quarter, demand for voice services began 1Q09 316 to return and by the end of the year, MOU was 285 minutes, almost the same as in 2008. Thanks to its new tariffs and pricing policy, MegaFon has succeeded in remaining the leader in terms of MOU among the Big Three operators. 19 MegaFon. Annual Report 2009

In 2010, MegaFon plans to expand ag- gressively in the corporate segment by Structure of Revenue from Value-Added Services (%) offering not low-cost voice tariffs, but integrated and convergent products that meet the requirements of both small 19 businesses and large organizations. For private subscribers, the Company intends to simplify tariff plans while 36 Message exchange continuing to offer ways of saving on tel- Data transfer 12 ecommunications through tariff options. RBT Other VAS Services

Against the background of slowing growth in the market for voice services, 33 the segment for value-added services (VAS) increased impressively. Last year, the Company implemented a strategy Last year, the Company actively encour- actively developing its 3G networks and aimed at actively promoting VAS services aged demand for new services through increasing the capacity of its backbone on the basis of leading business models, both tariff and non-tariff mechanisms. network. As a result, virtually the entire such as mobile internet access (GPRS, In particular, unlimited offers for mobile increase in traffic in 2009 was from 3G internet), RBT, and TVMS, as well as internet were launched, and demand networks. Today, around 60% of the offering new services for consumers for RBT services (“Change Your Tone”) Company’s traffic goes through its 3G (Subscriptions, Video Portal, Musical continued through the use of “Hard network. Expert, and Chat). Try&Buy”. Sales of USB modems, which have In 2009, MegaFon’s revenue from ad- Data Transfer and Mobile Internet become the main driver of data transfer10 ditional services increased by 18% to Data transfer and internet access was the volumes, grew seven-fold during the RUR32.4 billion. Meanwhile, the ARPU for key market driver and the main source year, from 26,000 per month to 207,000 VAS was RUR59, compared with RUR52 of revenues from additional services in per month. In total, during the reporting in 2008. For commercial subscribers, the 2009. At the end of the reporting period, period, more than one million modems VAS ARPU was even higher, at RUR65, up the share of data transfer in revenues were sold. To promote and popularize 20% year-on-year. from VAS increased, displacing tradi- mobile internet, MegaFon also used vari- tional SMS services. User interest in and ous unique innovative devices, including During the reporting period, the structure demand for data transfer services rose netbooks and photo frames that use of revenues of VAS services continued significantly during the year: the volume SIM cards, as well as cameras for mobile to change, reflecting trends seen in of data transfer increased more than monitoring. previous years. The key indicator for the five-fold, from 254.4 terabytes in January segment for additional services is the to 1,318.1 terabytes in December. The MegaFon was the first of the main play- redistribution of revenues from well- average monthly traffic per subscriber ers to commercially launch services for established services (SMS and others) to during the same period increased from 7 unlimited mobile internet access. This new types based on innovative tech- megabytes to 34 megabytes. initiative allowed the Company to com- nologies. This is clearly illustrated by pete effectively, not only among the MegaFon’s share of revenues from SMS, The demand for data transfer services Big Three operators, but also in terms which fell from 47% to 35%, while the stemmed mainly from rapid growth in of traditional wire-line internet access. share of revenues from data transfer rose broadband internet access and greater The launch of an unlimited offering 1.3 times to 33%, up from 28% in 2008. use of USB modems, as well as the was the first step towards fundamental The share of revenue from RBT in overall introduction of unlimited offers. In addi- changes in approaches to pricing data VAS climbed from 8% to 12%. tion, MegaFon supported the market by exchange. 20 REPORT BY THE BOARD OF DIRECTORS

In 2009, revenues from data transfer Volume of Data Transfer Traffic and Revenue from Data Transfer grew by 50% year-on-year to RUR10.8 billion, which equals 33% of total revenues from VAS services.

RBT Services Jan-09 7 Average usage, Mb The RBT (Ring-Back Tone) service was one of the fastest growing types of VAS Feb-09 7 service in 2009. It is offered to MegaFon subscribers under the “Change Your Tone” brand. Last year, the number of Mar-09 7 users of the service doubled, from 8.1 million to more than 16 million, while Apr-09 8 revenues from RBT more than doubled, from RUR1.8 billion to RUR3.787 billion. At the end of 2009, revenues from RBT May-09 8 accounted for 2.3% of the Company’s overall revenues. Jun-09 7 MegaFon’s RBT business model is one of the most efficient in the marketplace. Jul-09 8 In providing the service, 90% of revenue stays with the Company in the form of Aug-09 10 subscriber payments and only 10% goes to the content provider in payment for the ringtones downloaded. MegaFon Sep-09 13 leads competitors in terms of revenues from this service and strengthened its leadership last year. Oct-09 17 Mobile TV Nov-09 26 A key event in the development of VAS services at MegaFon in 2009 was the launch of the mobile Video Portal. The Dec-09 34 Company was the first operator to commercially launch mobile video services. Today, Video Portal subscribers have access to over 20 channels and support for video on iPhone. Users do not pay Q4 3,251.4 2,934.8 for traffic: only a fixed subscriber fee is charged. This payment model has made Video Portal very popular: by the end Q3 1,143.1 2,672.5 of 2009, 140,000 MegaFon subscribers were using the service. Q2 805.2 2,386.1 SIP-Telephony with Access to Voice Traffic,Тb Telecommunications via the Internet Q1 747.1 2,511.2 Revenue, RUR mln In 2009, MegaFon’s Moscow Branch launched the innovative MultiFon service, which is similar to popular IM/ VoIP offerings like ICQ, Skype, and

0 500 1000 1500 2000 2500 3000 21 MegaFon. Annual Report 2009

of personal electronic devices and the Revenue from RBT (mln RUR) increase in the development of technologies that are driving the market for mobile commerce. In the medium term, MegaFon expects the demand for Mobile Payments to rise and intends to become the leader in the segment. 2009 3,787

Roaming 2008 1,780 MegaFon subscribers have access to services for national and intra-network 2007 560 roaming, as well as international roaming. For international roaming, all countries are divided into four tariff zones, 2006 17 with common tariffs in each and a single list of call types for the entire world. The company has signed GSM roaming agreements with 485 operators from 213 countries. GPRS roaming is available for MegaFon subscribers in 135 countries on the networks of 249 operators. Google Talk. To use the new service, Mobile Payments Service people need to download and install the Last year, MegaFon introduced its new Last year, volumes of roaming traffic rose client program on their computer, after “Mobile Payments” service, which by 7.5% to 858 minutes, up from 798 which they are assigned an IP telephone enables subscribers to use their mobile minutes in 2008. number. MegaFon is the first Russian phone as a payment terminal. Payment mobile operator to offer subscribers this can be made for communal services, In the first half of 2009, a program was means of communication. telecommunications services, television, adopted for concluding bilateral roaming internet access, and more, using funds agreements with operators that aims to The service allows users to accept and from personal accounts. reduce tariffs and boost joint traffic. make voice calls on their computers, as well as make video calls, exchange chat The launch of the service was the Com- During the summer, MegaFon conducted messages, manage their status messag- pany’s response to the widespread use a marketing campaign to stimulate roam- es, and send SMS and MMS messages to mobile phone users. A key advantage of the service is that calls can be made from a computer to any telephone at Roaming Traffic (mln min) a low rate. For example, calls to the fixed-line network in New Zealand cost RUR0.94 a minute, and calls to a mobile phone subscriber in Chile cost RUR1.34 a minute. All calls from computer to com- 2009 858 puter (IP-to-IP) are free.

MegaFon expects this service to grow 2008 798 rapidly. In 2009 alone, the number of MultiFon users amounted to 15,000. 22 REPORT BY THE BOARD OF DIRECTORS

ing use by subscribers in popular tourist To increase the level of service for sub- At the end of the year, 1,470 owned and destinations where it has agreements scribers in 2009, the Company launched franchised stores operating under the with local operators. the information and service line “Mega- MegaFon brand were open. The Com- Fon Personal Assistance”. pany believes that the high standards of Marketing, Sales, and Service customer service in its branded shops Systematic work aimed at increasing enables it to increase the loyalty of new In 2009, amid the saturation of the cel- client loyalty and service quality has and existing subscribers and their use lular communications market, slowing helped expand MegaFon’s subscriber of additional services, and as well as growth and increased cost of connecting base. In 2009, the share of uncondition- increase the time they spend on the net- new subscribers, MegaFon focused its ally loyal subscribers amounted to 29%, work. The ARPU of subscribers who have marketing efforts on supporting the loy- compared with 25% for MTS and 21% for bought SIM cards in MegaFon stores is alty of existing subscribers and increas- VimpelCom. In addition, MegaFon’s cli- RUR400, compared with an average of ing their profitability, as well as attract- ent base is characterized by a tradition- RUR320 for the Company in Russia. ing subscribers from competitors. ally high level of satisfaction of subscribers: last year, 49% of clients were fully By the end of 2010, MegaFon intends to Subscriber Loyalty and Brand satisfied with the Company’s services, have 2,100 stores in operation. Unlike MegaFon is very focused on support- compared with 43% for VimpelCom and competitors, who have acquired various ing strong subscriber loyalty, which it 41% for MTS (based on the results ot the indebted players in the cellular retail considers a key factor in preserving its marketing research “Big Three Brand market, the Company is oriented solely client base and boosting profitability. Health” by Business Analitica). toward organic growth. The most important element of the Com- pany’s marketing activity is the reward During the reporting period, the Com- Along with its own sales network, the program, MegaFon-Bonus, aimed at the pany continued to support the MegaFon Company has contracts with the Euroset mass market. Today, the program re- brand actively, using a targeted market- and Svyaznoi retail networks. In addi- mains one of the most recognized in the ing approach for each consumer seg- tion, in 2009, MegaFon signed a stra- telecommunications market: in 2009, ment. In addition, it made more use of tegic distribution contract with Russian the level of knowledge about MegaFon internet advertising, a way of interacting Post, which enables subscriber agree- Bonus among all telecommunications with consumers that has become even ments to be signed in more than 40,000 subscribers rose from 29% to 43%, the more important, enabling services to post offices. The advantage of the highest in the industry (according to be promoted in a targeted and effective postal infrastructure as a sales channel Business Analitica Agency). manner. is its full coverage of the population and presence in virtually all population cent- Last year, MegaFon implemented several At the end of 2009, awareness of the ers, including those in remote regions. initiatives to develop the program further. MegaFon brand stood at 91% (according In 18,000 post offices, MegaFon will The main emphasis was on increasing the to Business Analitica Agency). open its own points of sale. number of special offerings from part- Sales Channels ners, which rose to 86. In addition, the Investment, Infrastructure, and Company entered into a strategic alliance MegaFon became the leader in terms of Technology with the largest and longest established new subscriber connections among the reward program in Russia, Aeroflot Bonus. Big Three operators last year. However, Despite the economic crisis, the Com- As a result, MegaFon subscribers can it has not set itself the goal of “growth pany conducted a large-scale investment convert bonus points into miles and use at any price”, relying primarily on quality program in 2009. The volume of capital them for flights. To increase client activity and a high level of customer service. Si- investment was not merely maintained, in Greater Moscow, the conditions for multaneously achieving these two aims but was actually increased to RUR52.5 participating in the program were relaxed, is possible through the active develop- billion, compared with RUR50.1 billion helping to increase the share of active ment of its own retail network. in 2008. Moreover, due to effective work participants in MegaFon Bonus from 36% with suppliers and vendors aimed at to 60%. optimizing the cost of equipment, the 23 MegaFon. Annual Report 2009

size of the investment program also increased in physical terms, which was Structure of MegaFon’s investment program (%) one of the Company’s most important accomplishments in the year.

9 During the reporting period, the struc- 20 ture of the investment program changed significantly. In 2008, MegaFon com- 20 pleted the deployment of its second 2G, other generation network, while in 2009, 80% FOCL of investment went on installing a third 45 generation network and its accompany- 3G ing infrastructure. 71 35 As a result, in 2009, the network’s capacity and coverage area increased sig- 2008 2009 nificantly. During the year, the number of new base stations increased by 46% from 5,100 built in 2008 to 7,500 in 2009. The number of new base stations Company announced the launch of the been installed along the entire extent of supporting 3G technology grew almost “FOCL Big Ring”, uniting six of Russia’s the lines. The maximum speed for data four-fold, from 1,304 to 4,981. At the end federal districts into a single backbone exchange on this type of equipment can of the year, the 3G network had been de- network. The total length of the Ring – reach 400 gigabits a second. Another ployed in most Russian regions. Today, which covers the European part of the important feature is the use of the latest the Company has the largest and most country from Murmansk to Makhachkala techniques of laying fiber-optic cable, modern third generation network in the via Moscow, Nizhny Novgorod, Samara, including the horizontal drilling method, country, and is the undisputed leader in Saratov, Volgograd, Rostov-on-Don, which has positive environmental impli- terms of coverage, data transfer speed, Voronezh, and Oryol – is around 5,000 cations. and the number of consumers with ac- kilometers. cess to the most innovative services. In creating own networks for fiber-optic By the end of 2009, the Company had telecommunications and using cutting- The main priority of the investment 22,200 kilometers of fiber-optic lines, edge technology, MegaFon aims to program is developing network infra- compared with 12,200 kilometers a significantly reduce the cost of providing structure as the necessary technical base year earlier. Megafon has plans to build services and thus costs for subscribers for providing the full range of telecom- backbone networks in Krasnodar Re- and internet users. munications services across Russia. In gion, Eastern Siberia and the Far East, planning its investment program, the and create back-up networks in the Data Processing Centers Company also focuses on making the Urals and Siberia. By the end of 2010, In 2009, MegaFon completed the con- business more efficient by unifying and the Company intends to extend the struction of two new Data Processing applying the most promising technologi- total length of its backbone networks to Centers (DPC) in Siberia and the Volga cal solutions. 30,000 kilometers. A strategic area for region. DPC are specialized facilities for the construction of FOCL network is the housing server and telecommunications Deployment of the Backbone Network Black Sea coast of Russia, including fa- equipment and connecting to internet An important area for investment is the cilities for the Olympic Games in Sochi. channels. The centers play an important construction of MegaFon’s own back- infrastructure role in providing telecom- bone network. This has acquired par- Cutting-edge data transfer technol- munications services and also can ticular significance given the explosive ogy was used in the construction of provide paid services for virtual and VPS growth in traffic volumes transmitted on backbone lines. Equipment for DWDM hosting, server leasing and housing cli- third generation networks. In 2009, the wavelength division multiplexing has ent servers in the DPC. 24 REPORT BY THE BOARD OF DIRECTORS

In December 2009, the Siberian branch to clients, obtain prompt feedback and branches. Thus, together with the North- of MegaFon in Novosibirsk launched one orient its development work to client West Branch, which had been operating of the most modern and productive cent- needs. since 2002, the total number of the Com- ers for data processing in Russia. It will pany’s branches increased to eight. The support the technical development of The Center is expected to facilitate the general directors of the former subsidiar- the business in Siberia through 2014 and development of services and minimize ies were appointed Branch Directors and enables new and high-quality services the time it takes from their development Deputy CEOs of MegaFon for the corre- for subscribers. The capacity of the new to their introduction. sponding regions, and were also elected DPC is 1.6 MW and its total area is 2,000 to the Company’s Management Board. square meters. Several independent Reorganization fiber-optic cables have been linked to As part of the reorganization, regional the center and this maintains the capac- In July 2009, MegaFon completed the divisions were created within MegaFon’s ity of the transport network at over 400 process of reorganizing its business by branches, which carry out activity in one gigabits a second. There are plans to merging its subsidiaries info itself. The or more Russian regions (there are 54 di- house a node for a backbone multiserv- transition to a unified corporate struc- visions overall). The divisions are headed ice network using DWDM equipment. ture was necessary to eliminate legal by directors who manage the Company’s complications in using licenses and to operational activities in each of Russia’s In 2009, work was conducted on a Data streamline management decision-mak- regions. Processing Center in Samara. It covers an ing. It also created new opportunities to area of 7,200 square meters, making it optimize business processes and reduce MegaFon’s reorganization and unifica- the largest data center in Russia. A back- costs. tion of previously separate business up climate and electrical power system processes have not affected the scope allows the center to work autonomously The decision to conduct the reorganiza- of the branches’ authority. From the very for up to 48 hours. Today, the DPC fiber- tion was made by MegaFon’s Extraordi- beginning of the corporate transforma- optic network channel permits a stream nary General Meeting of Shareholders on tion, a balanced system for allocating of 20 gigabits a second, but this can be December 29, 2008. The Company had authority between the Head Office and increased several times over. The Volga carried out substantial work to unify its branches and regional divisions was data center was built in accordance with policies and regulations in the areas of established. Using this system, MegaFon the US standard EIA/TIA-492. Its com- corporate and technical development, maintained and improved its manage- mercial launch is planned in 2010. commerce, finance, IT, new technologies, ment decision-making. and human resources management. An Federal Center for Research and important component of the prepara- Immediately following the completion Development tory work was standardizing conditions of the reorganization, MegaFon applied During the reporting period, MegaFon for the provision of telecommunications to the Federal Agency for Oversight in began work at its unified Federal Center services as well as contractual relation- the Sphere of Telecommunications, for Research and Development in St ships with business partners. In addi- Information Technology and Mass Com- Petersburg. The innovative laboratory tion, the Company complied with all of munications (Roscomnadzor) to have its was built using solutions provided by the required procedures for notifying telecommunications licenses re-issued. Huawei, a global leader in telecommuni- creditors and state regulatory bodies. By the end of the year 37 new licenses cations solutions. for the provision of telecommunications The reorganization was carried out services across Russia had been issued The center was created with the aim of within the planned deadlines and in full the Company, as had been relevant legal managing the full lifecycle of new mobile accordance with Russian legislation. documents for the use of the radio-fre- telecommunications solutions, includ- On July 1, 2009, CJSC Sonic Duo, CJSC quency spectrum previously allocated to ing their development, testing, launch Mobicom-Kavkaz, CJSC Mobicom-Center, the reorganized subsidiaries. and promotion. Its capabilities allow the OJSC MSC-Povolzhie, CJSC Ural GSM, Company to not only create innovative CJSC Mobicom-Novosibirsk, and CJSC The merger of the subsidiaries allowed services and evaluate their potential, but Mobicom-Khabarovsk were merged into MegaFon to accelerate the project of also offer new services and technology OJSC MegaFon, and became its regional developing its 3G network and domestic/ 25 MegaFon. Annual Report 2009

MegaFon corporate structure

OJSC MegaFon

Moscow Kavkaz Center Volga Urals Siberia Far East North West

Division Division Division Division Division Division Division Division

international long-distance services and its TT mobile subsidiary (operating under ditional services is growing very rapidly, also created additional opportunities the MLT brand) expanded by almost 80% and the monthly volume of data transfer to provide telecommunications services to around 320,000 commercial clients. grew 90-fold during the year. to large federal clients with extensive By the end of 2009, TT mobile’s market branch networks. Today, the Company share was 8% (against 5% a year earlier). South Ossetia is working hard to make the most of the During the reporting period, combined Last year, MegaFon, acquired Debton benefits resulting from the reorganiza- revenue grew by 50% to around RUR21.2 Investments Limited owning 51% of tion. million, while the OIBDA margin came Ostelecom. At the end of 2009, it in- to around 17% (operating profit was creased its stake to 75%. During the year, International Projects negative in 2008). In addition, the Ostelecom restored telecommunica- Company implemented an investment tions infrastructure destroyed during the Alongside its operations in Russia, Mega- program of over US$21 million, which is military conflict with Georgia in August Fon provides mobile telecommunications unprecedented for the country. Mean- 2008. From March 2010, the Company services in Tajikistan, Abkhazia and while, around 135 new base stations is to begin commercial sales of mobile South Ossetia through its subsidiaries. were put into operation, a new exchange telecommunications services in South was launched in Khudzhand, and the Ossetia under the MegaFon brand. Tajikistan transportation network was expanded MegaFon entered the Tajik market in significantly. MegaFon’s primary focus Abkhazia 2002, making it the first Russian operator has been on developing its 3G network. In March 2009, MegaFon completed the to do so. Last year, the subscriber base of Demand in Tajikistan for high-tech ad- purchase of AQUAFON-GSM, a telecom- 26 REPORT BY THE BOARD OF DIRECTORS

munications operator in Abkhazia, According to the partnership contract l Heightening the reputation of and through Debton Investments Limited. signed with the ANO Organizing Com- loyalty to the MegaFon brand in Russia Today, the company is the leader in the mittee for Sochi 2014 on April 2, 2009, and overseas local telecommunications business, MegaFon received the official status l Positioning and perception of the with a market share of 68%. AQUAFON- of General Partner of the XXII Winter brand at international level in associa- GSM’s network covers more than 90% Olympic Games and XI Winter Paralympic tion with the Olympic Games, Russian of the republic’s population. At the end Games in 2014, General Partner of the Olympic Committee, and International of 2009, the subscriber base reached Russian Olympic Committee, and General Olympic Committee 116,000 people, up 11% from a year Partner of the Russian Olympic teams in l Cooperation with national Olympic earlier. In 2009, combined revenue rose 2010, 2012, 2014 and 2016. committees of other countries and by 35% to RUR770 million. The share of with large corporate partners of the revenues from VAS in overall revenues Creating mobile telecommunications in- Olympic Committee, the Russian gov- increased from 11% to 20%, mainly due frastructure is one of the most important ernment and other state agencies to an increase in data transfer services. areas of work as part of the preparations l Additional information support from At the end of 2008, AQUAFON-GSM for Sochi 2014, for it is a key element in the Sochi 2014 Organizing Committee commercially launched a 3G network achieving the ambitious goal of holding and other partners of the XXII Winter in the republic. In 2009, the number of the most technological and innovative Olympic Games in Sochi third generation base stations increased Olympic Games in history. The goals and l Revenue from attracting additional at- from 16 to 40 and mobile internet access approaches to conducting this project tention from corporate and residential became the most rapidly developing are set out in Russian legislation: Federal subscribers telecommunications segment. Starting in Law 310-FZ of November 16, 2007, “On July 2009, all MegaFon subscribers had Organizing and Implementing the XXII In 2009, in support of the construction of access to GPRS and 3 GSM PS roaming Winter Olympic Games and XI Winter Olympic facilities, MegaFon tested a 3G services on AQUAFON-GSM’s network. Paralympic Games in 2014 in the City network covering all of greater Sochi. In of Sochi, and Developing Sochi as a February 2009, it was launched com- Sochi 2014 Mountain Resort”, and the government mercially. The new network covers the decree of December 29, 2007, “On the main ski slopes of Krasnaya Polyana Russia fought long and hard for the right Program for Building Olympic facilities and greater Sochi, including the Central, to hold its first Winter Olympic Games and Developing the City of Sochi as a Adler, Khostin, and Lazerev districts. and, together with the entire country, Mountain Resort”. The data-transfer speed of the network MegaFon cheered for this victory. The allows users to make video calls, watch Company’s appointment as General According to the ambitious plans for the programs on mobile television, and use Partner in the “Telecommunications” cat- Winter Olympic and Paralympic Games in mobile internet services. egory for the XXII Winter Olympic Games 2014, a telecommunications infrastruc- in Sochi in 2014 was a great honor and a ture is needed, that can guarantee the MegaFon’s plans for the coming year are sign of great trust. MegaFon sees its goal highest level of service and reliability for to provide telecommunications for over as helping the country to demonstrate its media, television and radio broadcasters 15 Olympic facilities at two remote sites: abilities to the entire world, and it takes and guests during the events. Imeretin Valley, in the coastal cluster, pride in contributing to achieving the aim and Krasnaya Polyana, in the mountain of holding the most high-tech games in The status of General Partner of the XXII zone. MegaFon will link the central history. Winter Olympic Games and XI Winter stadium for 40,000 spectators to the Paralympic Games in 2014 provides network, along with all ice rinks where The award of General Partner status for MegaFon with new competitive advan- competitions will be held for figure the XXII Winter Olympic Games and XI tages and opportunities for positioning skating, hockey, curling and other types Winter Paralympic Games in 2014 was itself. The key ones are: of Olympic sport. Skiing complexes, bob- one of the most important events in l An increase in brand value sledding and biathlon tracks will also be 2009 as regards positioning MegaFon l A demonstration of technological connected. After the conclusion of work and strengthening its brand. superiority on this stage, MegaFon will link all of the main roads, transport centers, hotels, 27 MegaFon. Annual Report 2009

and entertainment areas to the network. New facilities will be added to the network as the program is completed.

In terms of strengthening the MegaFon brand, obtaining the status of General Partner of the Olympic Games was one of the most important events of 2009. Partnership with largest and one of the most watched sporting events in the world allows the Company to raise brand value significantly, to demonstrate technical superiority, and to increase the reputation of and loyalty to its trademark in the Russian market and internationally. 28 CHAPTER

Figure Skating Part of the Olympic Games Program since 1908 29 MegaFon. Annual Report 2009

08: Review of Financial Results

This review was prepared on the basis Consolidated OIBDA came to RUR88.2 Cash flow from operating activities rose of MegaFon’s audited US GAAP financial billion, down 0.1% year-on-year, while 8.0% to RUR79.4 billion, while net cash statements for the twelve months ending the margin shrank to 48.5%, compared flow almost tripled to RUR6.1 billion. December 31, 2009. with 50.3% for 2008. Strict cost control Cash and short-term financial invest- has enabled the Company to maintain its ments of the Company exceeded its debt Summary OIBDA margin at the market average. during 2009 – thus, throughout the year, net debt was negative. MegaFon’s key financial indicators rose Consolidated net profit climbed 2.2% to in 2009. Consolidated revenue increased RUR45.3 billion, thanks to an effective by 3.7% year-on-year to RUR181.9 billion, tax policy and stronger revenues. The driven by the growing subscriber base net profit margin fell to 24.9%, compared and new services offered. with 25.3% for 2008.

MegaFon’s key financial indicators, RUR mln 2009 2008 Change Revenue 181,883 175,451 3.7% OIBDA 88,192 88,246 –0.1% OIBDA margin 48.5% 50.3% –0.8 p.p. Net profits 45,289 44,319 2.2% Net margin 24.9% 25.3% –0.4 p.p. 30 REVIEW OF FINANCIAL RESULTS

Key Financial Indicators MegaFon’s revenue and OIBDA in 2009 (RUR bln) The Company's business is characterized by clear seasonality. As a rule, the first quarter is always weak for Russian mobile communications providers because of lower demand due to the extended vacation period and the shorter month of February. In the second quarter, demand 23.1 increases, although income in the first 4Q09 47.7% 48.4 half of the year is still lower than that in the second half. The strongest growth is 23.5 in the third quarter, due to greater use of mobile communications by subscribers 3Q09 who move from the towns and cities to 49.6% 47.4 the suburbs or country houses in summer. As Russia’s suburban and rural re- 20.7 gions have less fixed-line infrastructure, 2Q09 mobile services are more essential there. 47.1% 43.9 The Company is trying to smooth out the seasonality using a wide variety of approaches, including marketing drives. 20.9 88.2 1Q09 2009 49.6% 42.2 For Q1, revenue was RUR42.2 billion, 50.3% 181.9 down 13% quarter-on-quarter, while 23,1 OIBDA came to RUR20.9 billion, down 4Q09 15% quarter-on-quarter. Net profit 88.2 47,7% 48,4 2008 totaled RUR11.1 billion, 48.5%with a net margin 175.5 23,5 of 26.4%.

3Q09 In Q2, revenue rose 4.0% quarter-on- 47,4 Revenues OIBDA OIBDA margin 49,6% quarter to RUR43.9 billion, thanks to an increase in the subscriber base and outgoing traffic volumes. OIBDA dropped 20,7 2Q09 slightly quarter-on-quarter to RUR20.7 47,1% 43,9 billion, bringing down the margin from 49.6% to 47.1%. The main factors weighing on the OBIDA margin were a 20,9 88.2 re-evaluation of subscriber equipment 1Q09 2009 49,6% 42,2 48.5% 181.9 on the balance sheet and a rise in marketing expenses as business improved. Net profit slipped from RUR11.0 billion 88.2 to RUR9.0 billion, pushing down the 2008 net margin from 26.4% to 20.5%. This 50.3% 175.5 decline stemmed mainly from ruble ap- preciation, which affects the Company’s foreign-currency investments. Revenues OIBDA OIBDA margin In Q3, consolidated revenue climbed 8.1% quarter-on-quarter to RUR47.4 billion, thanks to a substantial increase in 31 MegaFon. Annual Report 2009

revenues from roaming fees, additional services, data-transfer charges, and MegaFon’s Revenue and Net Profit in 2009 (RUR bln) equipment sales. Q2 2009 OIBDA was up 13.5% quarter-on-quarter, and the OIBDA margin rose by 2.5 percentage points to 49.6%. The main factors driving this increase were higher consolidated revenues and lower operating expenses. Net profit increased by 26.5% to RUR11.4 13.8 billion, giving a net margin of 24.0%. 4Q09 This rise was due to the increase in 28.5% 48.4 OIBDA and also stronger income from interest from financial resources and 11.4 short-term investments. 3Q09 24.0% 47.4 For Q4, consolidated revenue rose by 1.9% quarter-on-quarter to RUR48.4 billion, thanks mainly to greater use of ad- 9.0 ditional services, primarily data transfer. 2Q09 20.5% 43.9 Other factors driving the rise were stronger equipment sales from expanding the 45.3 Company’s own retail network and the 11.1 Company’s withdrawal from the market 1Q09 2009 42.2 181.9 for new equipment. OIBDA dipped slight- 26.4% 24.9% ly quarter-on-quarter to RUR23.1 billion, 13.8 bringing down the margin from 49.6% 4Q09 44.3 to 47.7%.28.5% The main reasons48.4 for this were 2008 a rise in dealer commissions, sales of 25.3% 175.5 11.4 lower-margin equipment, and expenses related to incentivizing employees. 3Q09 Net profit increased by 21%, from 24.0% 47.4 Revenues Net profit Net margin RUR11.4 billion to RUR13.8 billion, driving the margin to 28.5%. The stronger net 9.0 profit was due mainly to the higher rev- 2Q09 enue, an effective tax policy, and a lower 20.5% rate of profit tax. 43.9

45.3 11.1 Revenue Structure and Trends 1Q09 2009 In 26.4%2009, MegaFon42.2 generated revenue of 24.9% 181.9 RUR181.9 billion, up 3.7% year-on-year. The bulk of this – over RUR150 billion, or 82.5% of the total – came from the Com- 44.3 2008 pany’s main activity: providing services 25.3% 175.5 to subscribers. Another RUR25.818 billion (14.2%) came from payments for connecting and transferring traffic along Revenues Net profit the network.Net Themargin share of revenues from other activities was insignificant. Sales of telephones and accessories brought in RUR2.385 billion (1.3%), while roaming 32 REVIEW OF FINANCIAL RESULTS

payments from other operators amounted to just RUR1.811 billion (1.0%). Breakdown of MegaFon’s revenue in 2009 (%)

The largest increase in revenues last 1.3 1.0 year came from sales of telephones, 1.0 accessories and equipment, which Telecommunication services nearly doubled to RUR2.385 billion due 14.2 to MegaFon’s efforts to drive sales of Connection and data trafic fees 3G equipment. Revenues from provid- Roaming charges to other operators ing services were up 2.3% in 2009, as 82.5 Telephone and equipment sales additional services were developed Other more quickly, primarily those for mobile internet. Roaming payments from other operators dropped, as demand for the service declined due to the economic MegaFon’s Primary Revenue Streams, RUR mln crisis. Product/service 2008 2009 Change Subscriber services 146,689 150,023 2.3% VAS Services Payments for connecting and transferring traffic 24,631 25,818 4.8% In 2009, VAS services became one of the Roaming payments from other providers 2,120 1,811 –14.6% fastest growing revenue streams from Sales of telephones and accessories 1,252 2,385 90.5% services. Revenue from them totaled Other income 759 1,846 143.2% RUR32.4 billion, or 21.6% of total rev- Total 175,451 181,883 3.7% enue from services.

Revenues from VAS services rose stead- (RUR bln) ily over 2009, apart from a slight sea- MegaFon’s Revenue from vas Services in 2009 10 sonal slowdown in Q2. In Q4, revenues from additional services increased by 24.2% quarter-on-quarter to RUR9.4 billion, and the share of revenues from 23.7% VAS services also rose quarter-on-quar- 4Q09 9.4 ter to 23.7%. 21.2% 3Q09 8.3 The implementation of the Company's strategy to promote mobile internet ac- 19.7% tively and develop the 3G infrastructure 2Q09 7.1 caused major changes in the structure Revenues from VAS services of revenue from VAS services in 2009. 21.7% 1Q09 7.6 SMS revenue fell by 2.6% in 2009, with Share of VAS in total revenues RUR3.083 million in Q1 and RUR3.002 from services million in Q4. In the fourth quarter, revenue from data transfer exceeded revenues from SMS for the first time in history: their share of revenue from VAS Revenue from VAS services, RUR mln services grew from 30.6% to 33.3% over Q1 Q2 Q3 Q4 2009 the year, while the share of revenue from SMS shrank from 40.7% to 31.9%. SMS 3,083 2,702 2,712 3,002 11,499 Data transfer 2,484 2,365 2,674 3,307 10,830 RBT 775 852 1,022 1,138 3,787 Other 1,225 1,212 1,910 1,950 6,297 Total 7,567 7,131 8,318 9,397 32,413 33 MegaFon. Annual Report 2009

Liquidity and Financial Stability Liquidity and Financial Stability in 2009 (RUR bln) Throughout 2009, MegaFon’s financial state remained solid, and the cash flows are currently sufficient to service the Company’s debt in full. Last year, the gross debt to OIBDA ratio (LTM1 OIBDA) 30.8% 27.1 remained conservative, a good indicator 4Q09 88.2 of financial stability.

Capital expenses in 2009 were 40.0 RUR52.5 billion, up 4.7% year-on-year. 3Q09 Cash flow from the main operating activi- 44.4% 90.0 ties has fully funded a complete financial investment program. 38.2 2Q09 MegaFon’s debt stood at RUR27.1 billion 42.3% 90.3 at the end of 2009, down 23.8% year-on- year. Free cash flow and equivalents, as well as short-term financial investments, 42.5 totaled RUR67.1 billion. As such, net debt 1Q09 47.2% 90.1 remained negative.

The Company's debt is denominated mainly in US dollars and euros. The dollar-denominated obligations equal RUR15.0 billion, or 55% of MegaFon’s debt LTM OIBDA Debt Debt/LTM OIBDA portfolio, and the euro-denominated obligations are RUR12.0 billion, or 44%. Ruble debt is insignificant at just RUR127 million, or 1% of the total debt portfolio. MegaFon’s capital expenses in 2009

Most of the debt is to be repaid by 2014. Some 29% of this, RUR7.8 billion, is short- term debt and is due in 2010. Another 25%, 57.0% 156.0% or RUR6.8 billion, is due in 2011. 4Q09 27.6

22.2% 3Q09 10.5 39.8%

18.0% 48.8% 2Q09 7.9

15.4% 34.0% 1Q09 6.5

LTM Capex/Operating Cash Flow CAPEX, RUR bln 1 LTM – Last Twelve Months. LTM Capex/Revenue 34 REVIEW OF FINANCIAL RESULTS

Credit Ratings MegaFon’s Debt Repayment Schedule (RUR mln) The high quality of MegaFon's loan portfolio has been confirmed by international rating agencies. In September 2009, Standard & Poor's raised the Company’s international long-term credit rating from “BB+” After 2014 903 to “BBB-”, with a “stable” outlook, and the long-term rating on the national scale from “ruAAA” to “ruAA+”. 2014 3,078 In December 2009, Moody's Investor 2013 3,871 Service raised MegaFon's international corporate rating and default probability rating from “Ba2” to “Ba1”, the outlook “stable”. 2012 4,689 These are the highest ratings ever given to a Russian telecommunications company. 2011 6,794 MegaFon expects the rating upgrades to allow it to borrow at even lower rates. The 2010 7,811 Company’s average interest rate is 4.01% at present.

In December 2009, the Company repaid its first Eurobond issue, of US$375 million, in full.

In December 2009, MegaFon established (RUR mln) MegaFon’s Debt Obligations by Currency at the End of 2009 its US$ 1.5 billion European Medium Term Notes Program.

44% US dollar 14,988 Еuro 12,031 55% Ruble 127

10 35 MegaFon. Annual Report 2009

09: Risk Managemenт

Successfully achieving the Company’s try, and these affected the operations of dition, MegaFon’s approach to retaining goals and strategic aims would not be all players. subscribers is proving effective, and possible without the accurate and timely today its client base is the most loyal in identification and effective management Despite the unstable market environ- the Russian marketplace. Together, these of existing and potential risks. A Risk ment in 2009, however, the mobile factors are reducing the impact of the Management Division has been set up to telecommunications industry can be risks that rising competition poses to the develop and coordinate the risk manage- objectively judged to have kept its status Company’s business. ment system at the Company. as one of the domestic economy’s most dynamically developing segments. In addition, in numerous regions, inten- Among the key groups of risks that sive competition has led to a situation MegaFon encounters in its business are The high level of penetration of cel- where operators, in an attempt to gain or industry, financial, and regulatory risks, lular telecommunications has led to an retain subscribers, have slashed tariffs merger and acquisition risks, and fraud. increase in competition to retain and to stimulate demand for their services. Below is a brief description of each of attract new subscribers. Today, competi- A fall in profitability due to this poses these groups. tion is one of the most important factors a significant risk for the Company and that will influence the state of the indus- would impact its financial results. With Industry Risks try over the longer term. the aim of minimizing these risks, Mega- Fon constantly monitors the competitive In 2009, against a background of nega- MegaFon is one of the three largest environment and is using available mar- tive trends in the Russian economy, the cellular operators in Russia, and it keting and pricing instruments flexibly. purchasing power of the population fell, continues to increase its market share and with it demand for voice telecom- steadily. Amid growing competition, the Meanwhile, as the Company operates in munications and mobile data exchange Company is increasing its subscriber an environment characterized by rapid services. Risks related to the economic base by expanding its networks at the technological development and evolu- decline became more significant for the right time, developing infrastructure, and tion of telecommunications standards, it entire mobile telecommunications indus- introducing new types of services. In ad- understands that its success depends on 36 RISK MANAGEMENТ

its ability to identify and adopt the most Financial Risks Regulatory Risks promising technologies quickly. MegaFon is committed to constantly expanding The development of MegaFon’s telecom- The Company’s main activity is providing and using prospective technologies munications infrastructure is subject to telecommunications services which is in its business effectively, introducing risks and uncertainty that could delay the only possible on the basis of a special best practices wherever possible, and provision of services in certain regions permit (license), in accordance with adapting to technological changes and and increase construction costs. This Russian legislation. Changes in licensing innovation in good time. could happen for several reasons, includ- requirements could create significant ing a rise in inflation or Ruble deprecia- uncertainty and risks that could make Today, MegaFon remains the leader for tion, which are important factors influ- the Company’s activity more complex third generation (3G) telecommunica- encing revenues. A rise in inflation could and involve major expenditure. tions services, the most technologically drive up the cost of construction and advanced segment in the Russian market installation work to develop networks, as The Company’s operations are also for mobile telecommunications and an well as maintenance work. Ruble depre- subject to regulation by state agencies, acknowledged growth area over the long ciation could push up the Ruble cost of in the form of obtaining and renewing term. Based on the UMTS standard, 3G equipment bought overseas and the cost approvals and permits, as well as checks telecommunications exceed second- of servicing and repaying loans in foreign to determine compliance with legisla- generation standards, including GSM. currencies. If these risks increase, given tion, regulatory rules, and standards. In MegaFon is the only operator in Russia to the increasing competition, MegaFon may its operations, MegaFon uses facilities have deployed a 3G network in all of the not be able to raise prices sufficiently to whose availability is limited, including county’s regions. maintain operating profits. In addition, the radio-frequency spectrum and num- Ruble depreciation would reduce the bering resources. Progress in this area continues. As value of the Company’s assets denomi- part of the preparations for the 2014 nated in local currency (for example, Russia’s mobile telecommunications Olympics, the Company is developing a funds deposited in Russian banks). industry is regulated by various agencies project to create an innovative mobile on the basis of the Law “On Telecommu- telecommunications infrastructure in To reduce exposure to the risk of Ruble nications”, and numerous subordinate the Krasnodar region based on the devaluation, the Company monitors and legal acts. The work of regulatory bodies fourth generation (4G) telecommu- forecasts its foreign currency require- in Russia is not always transparent or nications standard. The introduction ments. It places cash in foreign curren- predictable, and this entails certain risks of this technology and the receipt of cies and has various agreements with for market participants. The Company’s radio frequencies for the use of 4G will foreign financial institutions that allow licenses for mobile radio-telecommunica- become a significant additional factor part of its long-term borrowings through tions may be suspended or revoked, and enabling MegaFon to reduce risks linked foreign-currency loans to be hedged. this could have a significant negative im- to competition from other technologies These contracts were used in 2009. pact on its business. The distribution of for wireless data exchange. These latter the radio frequency spectrum, as well as factors include data exchange using Another important risk faced is interest- various resources, is beyond MegaFon’s IP telephony and new technologies for rate risk: to finance its requirements in control. Many frequencies in the GSM wireless telecommunications, including full and on time, the Company may need and 3G ranges are not accessible for civil WiMAX. to raise debt or share financing on the communication, as they are reserved for international capital markets. Although military and government needs. To maintain its leadership in technology MegaFon has never encountered any and innovation, MegaFon is implement- difficulties in attracting the necessary In addition, MegaFon, as an owner of ing a wide-ranging investment program financial resources, unfavorable market telecommunications licenses, is required aimed at expanding its own network conditions could cause the environment to fulfill certain conditions stipulated by capacity (both GSM and 3G), and devel- to deteriorate and a subsequent rise in the telecommunications legislation. oping broadband access and other new the cost of borrowing. products and services. If the Company was unable to organ- ize its operations in accordance with 37 MegaFon. Annual Report 2009

telecommunications legislation or with Fraud Risks the conditions of the licenses for GSM and 3G (IMT-2000/UMTS), as well as In its operations, MegaFon may incur those for other technology, or if it was losses caused by unintended events unable to obtain permits for the use of (such as equipment faults, mistakes equipment or frequencies, this could in the installation of network compo- have a substantial negative impact on its nents, etc.) as well as intentional acts business. by unscrupulous counterparties. To minimize such losses, the Company has So far, MegaFon has not faced difficul- created and operates a special division ties obtaining or renewing any licenses for guaranteeing revenues and managing or necessary permits. The Company fraud. Its purpose is to prevent fraud and endeavors to work constructively with unsanctioned access to telecommunica- the regulator and meet all conditions set tions services. out in its license agreements. The department operates according to Should there be any changes in the MegaFon’s “Fraud Management Strategy industry that mean these risks increase, for 2008-10”, which provides for defend- the Company will act in accordance with ing against known and newly emerging the prevailing conditions in the economy forms of fraud. In 2009, the Company and telecommunications industry, and in implemented a specialized system for strict compliance with the law. fraud management, “HP FMS”, which allows for real-time detection and preven- Merger and Acquisition Risks tion of attempts to cause damage. In addition, MegaFon has begun analyzing Because of the likelihood that MegaFon subscribers’ international roaming activ- will acquire telecommunications as- ity (using the Near Real-Time Roaming sets, which will help development and Data Exchange, or NRTRDE), which is a increase market share, the Company is requirement for mobile communications exposed to risks regarding mergers and operators under a resolution of the Inter- acquisitions. These could arise from national GSM Association. existing antimonopoly legislation and the conditions under which acquisitions Due the division’s successful work in are permitted, as well as MegaFon’s own 2009, losses from fraud amounted to ability to integrate assets successfully. If just 0.01% of revenues, which is signifi- the Company is unable to find attractive cantly lower than industry standards1. acquisition opportunities or efficiently During the year, the Company recovered integrate and manage assets acquired, losses of more than RUR200 million, this could limit additional revenue sourc- and the damage prevented amounted es and have negative consequences for to more than RUR2.4 billion. The total the business. economic effect of the fraud management efforts totaled 0.38% of revenues in 2009.

1 5% of revenue, according to the Communications Frand Control Association (CFCA). 38 CHAPTER

Ice Hockey Part of the Olympic Games Program since 1920 39 MegaFon. Annual Report 2009

10: Corporate Governance

Charter Capital Structure of MegaFon’s charter capital MegaFon has a charter capital of as of December 31, 2009* 6,200,002 common registered uncertified shares, each with a par value of RUR10. It has no preferred shares. All common registered uncertified shares AF Telecom TeliaSonera Altimo have been combined into one issue, with Holding state number 1-02-00822-J. 100% The government does not hold shares in MegaFon, nor do members of the Board 73.9% 26.1% of Directors, the Management Board, or Telecom Invest Allaction Limited the CEO.

Overview of the Corporate 8.0% 31.3% 35.6% 25.1% Governance System

MegaFon places great importance on its corporate governance system, as it con- MegaFon siders the transparency of management processes and access to information about its business crucial to ensuring efficient growth and stable development. MegaFon’s corporate governance * This scheme reflects the effective ownership structure; please note that this scheme may differ from structure pledges to treat all sharehold- actual legal ownership structure. 40 CORPORATE GOVERNANCE

ers equally and gives them full oppor- corporate governance standards and to l Internal Audit Department tunity to take part in its management. incorporate best international practice. l External auditor MegaFon’s corporate governance system When developing its corporate govern- is based on the Russian legislation ance system, the Company drew upon to To ensure that the corporate governance governing joint-stock companies and the the OECD’s2 Code of Corporate Govern- system works effectively, MegaFon has securities market. The Company adheres ance; the most complete and authorita- established the position of the Corporate to the principle of unconditional compli- tive body of corporate conduct principles Secretary to monitor the compliance of ance with all legislation and observes that exists internationally. all management bodies with the rules the guidelines set out in the Federal and procedures that serve to protect Financial Markets Service’s Code of Cor- The main bodies responsible for corpo- shareholders’ rights and interests. porate Conduct. A report on compliance rate governance at MegaFon are the: 1 with the code is published annually . l General Meeting of Shareholders General Meeting of Shareholders l Board of Directors MegaFon not only ensures uncompro- l Management Board The highest management body at Mega- mising compliance with legislation, but l CEO Fon is the General Meeting of Sharehold- also strives to meet all modern world l Revision Commission ers. By voting at general meetings, share-

MegaFon’s corporate governance structure

General Meeting External Auditor Revision Commission of Shareholders

Board of Directors Audit Committee

Remuneration and CEO HR Development Committee

Elects

Appoints Management Board Financial Committee

Reports

Recommendations Internal Audit Department Appoints based on Audit Committee recommendation

1 Information about compliance with the code can be found in Appendix 2. 2 Organization for Economic Cooperation and Development. 41 MegaFon. Annual Report 2009

holders exercise their right to participate Board of Directors Board’s work, convening and heading in managing the Company. The General Board meetings, and chairing General Meeting of Shareholders takes place The Board of Directors determines the Meetings of Shareholders. once a year, no earlier than two months Company’s development strategy and before and no later than six months is responsible for general management Composition of the Board of Directors after the end of the financial year. The issues between General Meetings of The Board of Directors was elected twice procedure for the meeting is regulated by Shareholders, apart from those consid- in 2009: at an Extraordinary General the Resolution on the General Meeting of ered the sole prerogative of the General Meeting of Shareholders on January 30, Shareholders. In addition to the annual Meeting, according to the federal law due to resignation of one of the Direc- meeting, shareholders have the right to “On Joint-Stock Companies”. More tors, and at the Annual General Meeting hold extraordinary general meetings. details about the powers of the Board of of Shareholders on June 2. Directors can be found in the Company Last year’s Annual General Meeting Charter. As per the Company Charter, the Board of Shareholders took place on June 2, of Directors consists of seven members, 2009. Among the decisions made were Directors are elected by the General currently including two independent those approving MegaFon’s financial Meeting of Shareholders for the period directors (Dmitry Vozianov and Teijo reports, distributing profits, and electing until the next meeting, and they can be Pankko). All members are non-executive members of management bodies. re-elected any number of times. Share- directors. holders with a combined holding of at Several Extraordinary General Meetings least 2% of voting stock may propose a More information on members elected at of Shareholders also took place last candidate to the Board. the Annual General Meeting of Share- year. On January 30, the shareholders holders on June 2, 2009, is given below. re-elected the Board of Directors due to A meeting of the Board of Directors can resignation of one of the Directors. On be called by the Chairman or members, May 10, shareholders approved a part- the Revision Commission, the Manage- nership agreement between MegaFon, ment Board, the auditor, the CEO, or Rostelecom, and the Organizing Com- shareholders owning at least 5% of mittee of the XXII Olympic Winter Games voting stock. The quorum needed to hold and the XI Paralympic Winter Games in a meeting is four Board members. Board 2014 in Sochi, an autonomous non-com- decisions are made by simple majority mercial organization. In June, amend- voting, apart from cases stipulated in the ments to the Company Charter relating to Company Charter. When making deci- documents involving state secrets were sions, each Board member has one vote. approved. And in October, shareholders reviewed issues regarding liability Chairman of the Board of Directors insurance for the Board of Directors and The Chairman is elected by Board mem- top management, and remuneration for bers using simple majority voting. He independent directors. or she is responsible for organizing the 42 CORPORATE GOVERNANCE

Aimo Eloholma Tero Kivisaari Teijo Pankko Esko Rytkonen Chairman of the Board of Member of the Board of Independent Member of the Member of the Board of Directors Directors Board of Directors Directors Aimo Eloholma has been Tero Kivisaari has been a Board Teijo Pankko has been a Esko Rytkonen has been a Chairman of the Board of member since April 2008. He Board member since June Board member since June Directors since June 2003. He is also President of TeliaSonera 2008. Between 2006 and 2005. He is also the Senior is also Operations Director Eurasia, where he was previ- 2009, he was the Finance Di- Vice President of TeliaSonera at TeliaSonera International. ously Finance Director and Vice rector at Altimo, which owns Oyj. Previously, he was a Before this, Mr Eloholma was President. Mr Kivisaari has Allaction Limited, a MegaFon member of several manage- Deputy CEO and an Executive degrees from the Helsinki Uni- shareholder. His previous ment bodies of various com- Director at Sonera Corpora- versity of Technology and the positions include Deputy panies within the TeliaSonera tion, President at TeliaSonera Helsinki School of Economics Chairman of the Management Group. He holds a Masters in International, and Executive and Business Administration. Board and Finance Director at Economics from the Helsinki Vice President of the Fixed UralSib and Finance Director Business School of Econom- Line business at Sonera and Head of Treasury at Alfa ics. Corporation. He graduated Bank. In 2003, he graduated from the Helsinki University from Moscow State Social Mr Rytkonen is the Chairman of Technology and holds a de- University with a Masters in of Board of Directors’ Audit gree in electrical engineering. Finance. Committee and a member of the Financial Committee. Mr Eloholma is the Chairman Mr Pankko is a member of of the Board of Directors’ the Board of Directors’ Audit Remuneration Committee. Committee. 43 MegaFon. Annual Report 2009

Vladimir Streshinskiy Dmitry Vozianov Vladimir Zhelonkin Member of the Board of Direc- Independent member of the Member of the Board of Direc- tors Board of Directors tors Vladimir Streshinskiy has Dmitry Vozianov has been Vladimir Zhelonkin has been a Board member since a Board member since April been a Board member since June 2008. He is also the 2009. His previous posts January 2009. He is former CEO of Telecominvest, CEO include CEO of CT Mobile, one CEO of AF Telecom Holding. of COALCO, and a member of MegaFon’s shareholders. Previously, he was Deputy of the Board of Directors at He is a graduate of the Lenin- CEO of Svyazinvest, Manag- the Metalloinvest holding, grad Institute of Shipbuilding. ing Director of International the Kommersant publishing Industrial Bank, CEO of Mosk- house, and the MUZ TV and Mr Vozianov is a member ovia, and CEO of the Informa- 7 TV channels. Previously, Mr of the Board of Directors’ tion Agency of the Russian Streshinskiy helped set up Remuneration Committee and Orthodox Church. He holds Metalloinvest, held manage- Financial Committee. a degree in Economics and rial positions at COALCO, and Production Management from was CEO of Gazmetall. He is a the University of Knowledge graduate of the Moscow Insti- Methodology. tute of Physics and Technol- ogy (MFTI). Mr Zhelonkin is a member of the Board of Directors’ Remu- Mr Streshinskiy is a member neration Committee. of the Board of Directors’ Audit Committee and the Chairman of the Financial Committee. 44 CORPORATE GOVERNANCE

Results of the Board of Directors’ various aspects of working with the in- of remuneration based on the results for activities ternal control system; and the evaluation the year. If the composition of the board The Board of Directors held 21 meet- of processes relating to the internal and changes during a year, the remuneration ings last year, 13 of which were held by external audits and the accounts. for members is calculated on a pro rata absentee ballot voting. Many significant basis. Independent members are paid a documents and key decisions were ap- The members of the Committee are: fixed remuneration. proved, including: l Esko Rytkonen (Chairman) l MegaFon acting as General Partner in l Teijo Pankko In 2009, the overall remuneration the telecommunications category for l Vladimir Streshinskiy paid to the Board of Directors was the XXII Olympic Winter Games and RUR19,113,000. the XI Paralympic Winter Games in Remuneration and HR Development Committee 2014 in Sochi Management Board l The investment strategy for devel- The Remuneration and HR Development oping its own sales network and a Committee makes recommendations The Management Board is the colle- marketing cooperation agreement with to the Board of Directors about the giate executive body at MegaFon and Evroset amount of remuneration for the CEO and oversees the Company’s activities. It l The program to issue medium-term top managers. It also helps to set and is responsible for all aspects of opera- Eurobonds measure KPIs for top managers and other tional management, apart from those l Allocating additional investment to employees and encourages them to fulfill that fall under the scope of the General develop the 3G network their objectives. In addition, the Com- Meeting of Shareholders, the Board of mittee is responsible for analyzing HR Directors, and the CEO. The Manage- In addition, last year, the Board of management processes at the Company. ment Board also ensures that decisions Directors analyzed the synergies and made by senior bodies at the Company opportunities for new business lines that The members of the Committee are: are carried out and that it receivs re- would result from the proposed acquisi- l Aimo Eloholma (Chairman) ports from to them in this respect. The tion of the Synterra group. The Board l Dmitry Vozianov Management Board’s size and com- unanimously approved the transaction in l Vladimir Zhelonkin position is announced annually at the February 2010. General Meeting of Shareholders follow- Financial Committee ing recommendations from the CEO. The Committees of the Board of Directors The Financial Committee makes recom- Management Board meets regularly. mendations to the Board of Directors To ensure the highest standards of cor- about preparing business plans, draw- The Management Board is chaired by the porate governance when managing the ing up budgets, and acquiring assets, CEO. Company and when considering complex as well as facilitating constructive issues that require extensive analysis, exchanges of opinions about the top Last year, following the completion of the MegaFon’s Board of Directors has estab- management and the Board of Directors reorganization process at the Company, lished several committees. in regard to financial planning. the CEOs of the regional subsidiaries that were merged with the Company In May 2009, the Financial Committee The members of the Committee are: joined the Management Board as deputy was set up, bringing the total number of l Vladimir Streshinksiy (Chairman) CEOs and directors of the corresponding committees to three. They are: l Esko Rytkonen regional divisions. l Audit Committee l Dmitry Vozianov l Remuneration and HR Development Information about the Management Committee Remuneration of the Board of Board’s current members, elected at the l Financial Committee Directors Annual General Meeting of Shareholders on June 2, 2009, is given below. Audit Committee For carrying out their duties, members of The Audit Committee makes recommen- the Board of Directors are paid remu- Sergey Soldatenkov dations about and helps the Board of neration and reimbursed for expenses Chairman of the Management Board Directors with the analysis of financial relating to their work. The Annual Sergey Soldatenkov has been the CEO accounts and other related documents; General Meetings approves the amount of MegaFon since 2003. Before this, 45 MegaFon. Annual Report 2009

from 2002, he was the Vice President Ulyanovsk and the Military Communica- Georgy Getmanets of United Company GROS. From 2000, tions Academy, where he obtained a Member of the Management Board he worked at Petersburg Telephone degree in Military Communications. Georgy Getmanets has been a member of Networks (reorganized as North West Tel- the Management Board since June 2009 ecom), where he was the Deputy CEO for Larisa Tkachuk and Director of the North West Branch Commercial Affairs, acting CEO, and then Member of the Management Board since February 2008. He joined MegaFon CEO. From 1999, he was the Deputy CEO Larisa Tkachuk has been a member of in 1996, serving as Administration Direc- of Telecominvest; from 1994, he headed the Management Board since January tor, Deputy CEO and First Deputy CEO Delta Telecom. Mr Soldatenkov holds a 2005 and Chief Commercial Officer since of North-Western GSM. Mr Getmanets degree in radio engineering from the Len- October 2002, when she joined the Com- is a graduate of the Dzerzhinsky Higher ingrad Institute of Aviation Instruments. pany. Before this, she was the Marketing Military and Naval Institute, the Bonch- Manager at RTDC, a Russian-American Bruevich University of Communications Valery Ermakov telecommunications holding, and Head in St Petersburg, and the State Academy Member of the Management Board of Business Analysis and Marketing of National Economics. Valery Ermakov has been a member of at Ukrainian Mobile Communications. the Management Board since June 2009 Larisa Tkachuk holds a degree in Indus- Igor Parfenov and COO since April 2009. Before joining trial Marketing from the Ukraine National Member of the Management Board the Company, from 2001 to 2009, he was University of Technology. Igor Parfenov has been a member of the the CEO of MSS-Povolzhie, a MegaFon Management Board since June 2009 subsidiary in the Volga region. He has Anna Goriainova and is Director of the Moscow Branch. also worked at Tambov Telecommunica- Member of the Management Board He joined MegaFon in 2000 and worked tions. Mr Ermakov holds a degree in Ra- Anna Goriainova has been a mem- his way from Technical Director to CEO dio Engineering, Design, and Production ber of the Management Board since of Sonic Duo, a subsidiary in the Mos- from the Tambov Institute of Chemical January 2009 and Chief Legal Officer cow region. Mr Parfenov is a graduate Machinery. and Corporate Secretary since August of the Moscow Institute of Aviation and 2008. She joined MegaFon in 2006 and studied communications systems in the Kai-Uwe Mehlhorn became Advisor to the CEO on inter- US (Institute of Telecommunications, Member of the Management Board national legal affairs. Before this, she New York – Los Angeles) and South Kai-Uwe Mehlhorn has been a member of was a lawyer at J P Galmond & Co and Korea. the Management Board since June 2009 senior legal consultant and head of de- and is the CFO. Before joining MegaFon, partment at the Non-Profit Foundation Andrei Krainik he was CFO at TELE2 Russia and worked for Restructuring Enterprises, under Member of the Management Board in various business divisions at Siemens the Finance Ministry. Anna Goriainova Andrei Krainik has been a member of for 15 years. Mr Mehlhorn is a graduate graduated with honors from the Law the Management Board since June 2009 of the Moscow State University of Inter- faculty of Moscow State University and and is Director of the Kavkaz Branch. national Relations (MGIMO) and Martin holds a Masters of Law degree from Previously, he was the CEO of Mobicom- Luther University (Halle, Germany). Manchester University. Kavkaz, a MegaFon subsidiary in the Caucasus, which he headed from 2000. Edward Ostrovsky Irina Likhova Mr Krainik holds a degree in Economics Member of the Management Board Member of the Management Board from the Kiev University of Trade and Edward Ostrovsky has been a member Irina Likhova has been a member of the Economics and a degree in Finance from of the Management Board since August Management Board since January 2009 the Moscow Institute of Finance and 2002 and Deputy CEO for Special Pro- and HR Director since 2003. Before join- Economics. grams and Interaction with Government ing MegaFon, she worked in HR develop- Authorities since June 2006. From 1993 to ment at Unilever. Irina Likhova holds Andrei Kurdanov 2002, he served as Deputy Communica- a degree in Applied Mathematics for Member of the Management Board tions Minister, Deputy Chairman of the Management Processes from Leningrad Andrei Kurdanov has been a member of State Telecommunications Committee, State University, is a graduate of the the Management Board since June 2009 and Deputy Communications and Informa- Leti-Lovanium International School of and is Director of the Volga Branch. Previ- tion Minister. Mr Ostrovsky is a graduate Management, and holds an MBA from ously, he was the CEO of MSS-Povolzhie, of the Ordzhonikidze Military Institute in Leuven University (Belgium). a MegaFon subsidiary in the Volga 46 CORPORATE GOVERNANCE

region. Mr Kurdanov has a degree in and in Economic and Social Planning Breakdown of remuneration of members of the Management Board Multichannel Electrical Communications from the Samara Institute of Economics. from the Moscow Technical Institute of Type of remuneration Amount, RUR Communications and Information. Yury Zhuravel Salary 108,292,000 Member of the Management Board Annual bonus 196,014,000 Denis Malyshev Yury Zhuravel has been a member of Paid leave 19,760,000 Member of the Management Board the Management Board since June 2009 Additional payments 4,751,000 Denis Malyshev has been a member and is Director of the Far East Branch. relating to leave of the Management Board since June He joined MegaFon in 2003 and then Additional compensation as 1,405,000 2009 and is Director of the Urals Branch. became Director of the Primorsk Branch per employment contracts Before this, from 2006, he was the CEO and Deputy CEO and CEO of Mobicom Material aid 773,000 of GSM Ural, a MegaFon subsidiary in Khabarovsk, a subsidiary in the Far East. Food expenses 229,000 the Urals region; and from 2005 to 2006, Mr Zhuravel is a graduate of the Red Ban- Extraordinary business 1,244,000 CEO of Mobicom Tsentr. He also headed ner Military Institute and holds an MBA travel expenses the Regional Development division from Salve Regina University (Rhode Medical services 964,000 at Delta Telecom (under the Sky Link Island, US). Gifts 17,000 trademark). Mr Malyshev has a degree Rental expenses 5,050,000 in Radio Engineering from the Bonch- CEO Gym membership 205,000 Bruevich University of Communications Other 2,376,000 in St Petersburg. The CEO is the sole executive management body in his or her own right and is In 2008, the Company launched an Andrei Eremkin responsible for overseeing the Com- incentive scheme for top managers Member of the Management Board pany’s activities along with the Manage- to meets the requirements of today’s Andrei Eremkin has been a member of ment Board. The CEO is elected by the competitive labor market. It covers the Management Board since June 2009 Annual General Meeting of Shareholders around 200 key managers, including the and is Director of the Center Branch. and is accountable to it and the Board of CEO and members of the Management Previously, he was the CEO of Mobicom Directors. Board. The scheme is a long-term phan- Center, a MegaFon subsidiary in Central tom share option program with deferred Russia, where he managed regional The position of CEO has been held by payment. The phantom shares are a way development. Mr Eremkin is a graduate Sergey Soldatenkov since April 2003. The of receiving a bonus as the Company of the Kuibyshev Institute of Engineering Annual General Meeting of Shareholders grows, although unlike real shares, they and Construction and the Volga Academy on June 2, 2009, elected him for another cannot be bought or sold. The value of of Government Service. three years. each option changes in proportion to the value of the Company. Two years Alexei Tyutin Remuneration to the Management after the start of the program, 50% of Member of the Management Board Board and CEO any increase in an option’s value is Alexei Tyutin has been a member of the paid to the holder as a cash bonus, on Management Board since June 2009 For carrying out their duties, members of the condition that he or she continues and is Director of the Siberia Branch. the Management Board are paid remu- working at the Company at the time of He joined MegaFon in 2001 as Head of neration (salary, bonus, paid leave, etc) payment. The remaining increase in Finance and then became CEO in charge and reimbursed for expenses relating value is retained in the form of addi- of commercial issues at Mobicom to their work. The remuneration and com- tional phantom shares and is paid out Novosibirsk, a subsidiary in Siberia. Mr pensation is paid from Company profits. two years later. Tyutin holds degrees in Industrial and In 2009, members of the Management Civil Construction from the Kuibyshev In- Board were paid RUR347,903,000 in The first payments under the program stitute of Engineering and Construction total. are expected in 2010. 47 MegaFon. Annual Report 2009

Revision Commission their own internal audit divisions, which with vested interests; and to a failure to report to the Internal Audit department. disclose or untimely, incorrect disclosure The General Meeting of Shareholders In the subsidiaries, internal auditing is of significant facts, incorrect assess- elects a Revision Commission to monitor carried out using resources from Head ments of investments and transactions, the Company’s financial and economic Office and the branches. use of unfair competition methods, activities. Members of the Commission improper supervision over responsible may not simultaneously serve on the The Internal Audit department bases its employees and branches when they con- Board of Directors or other executive work on the International Standards for duct business, and illegal dismissal of or bodies. The Commission can have up to the Professional Practice of Internal Au- discrimination against employees, etc. three members. diting, and its main task is to streamline management processes at the Company. To protect against managerial risk, The Revision Commission carries out In 2009, its main projects focused on MegaFon has liability insurance for its regular revisions of the Company's streamlining the internal control system top managers. The policy covers the civil financial and economic activities, includ- for financial accounting and the pur- liability of all directors and officers aris- ing revision of the Company’s financial chasing systems, as well as evaluating ing from the obligation to compensate documents, evaluation of the company’s the efficiency of various technological for damage incurred by third parties as a accounting and bookkeeping procedures processes, including IT and sales and result of mistakes or omissions made by and financial statements preparation, service. the management. In 2009, the amount of verification of the computation of taxes insurance coverage was US$150 million. and duties due under the Russian legis- In 2010, the focus will be on IT security The policy is provided by Ingosstrakh lation, analysis of MegaFon’s perform- risks, traffic management and communi- Insurance Company. ance in accordance with the approved cation network development. plans, budgets and other resolutions of the Company’s governance bodies, External Audit and evaluation of MegaFon’s operations in relation to the previously approved To carry out an audit and ensure the plans. accuracy of the financial accounts, MegaFon uses an independent external The Annual General Meeting of Share- auditor. In 2009, the Annual General holders on June 2, 2009, elected the Meeting of Shareholders appointed Ernst following people to the Commission: and Young for this purpose. l Yury Zheimo (Chairman) – Director of the Internal Audit department Liability Insurance for Directors and l Mikhail Dubin – Deputy CEO of Tel- Officers ecominvest l Olli Ranta – Finance Director of Telia- MegaFon’s business depends largely on Sonera Eurasia the effectiveness of its management. Mistakes by managers can cause opera- Internal Audit tional and financial indicators to decline.

The Internal Audit department carries Failures may relate to inaccuracies or out internal auditing at MegaFon. It incomplete disclosure of information in is accountable to the Board of Direc- financial statements, investment decla- tors’ Audit Committee, which approves rations and offering circulars; to non- the plan for its work and oversees its compliance with the procedures relating activity. The Company’s branches have to major transactions or transactions 48 CHAPTER

Snowboard Part of the Olympic Games Program since 1998 49 MegaFon. Annual Report 2009

11: Sustainable Development

Human Resources of the company, no matter what part of MegaFon’s management teams was at- Russia he or she works in. tended by 336 people. MegaFon does everything to ensure that working for the Company becomes an in- MegaFon takes advantage of every MegaAcademy, which brings together the tegral part of life for every employee. An opportunity to develop the potential very best programs and ideas, was pre- environment has been created that pro- of each employee. As a result of open pared for launch. It opens vast opportu- vides the opportunity for each employee, internal competitions in 2009, 14 senior nities for current and future employees, regardless of position, to work to his or managers in branches and the Head partners, and clients of the Company, to her maximum potential and contribute Office were selected from the existing invest in its own development and the to the Company’s success. This becomes employees. In all, Company-wide, some development of business and society. possible when people are happy and 72 such competitions were held for man- like their work and their company. All of agement positions. In 2009, a unified system was introduced the projects undertaken by the Human for awarding bonuses based on targets: Resources Department are aimed at Despite the impact of the economic crisis employees set individual goals in the fostering such an environment. The most in 2009, MegaFon did not reduce invest- “MegaFon style” that will allow them to recent research into the organizational ment in human resources. The Company maximize their contribution to the Com- climate at the Company reveals that 98% continues to dedicate particular atten- pany’s success in business. of employees are proud that they work tion to developing employees, particu- for MegaFon. larly in the areas of leadership potential For employees working directly with cli- and understanding of business. ents, a new approach called “The Seven The Company has 20,237 employees. A Master Steps” was implemented, which unified information space – including Some 140 employees took part in the provides the opportunity for professional the MegaNet corporate portal and SAP program “Breakthrough in Results”, development, as well as corresponding HR system – gives every employee an which aims to foster leadership in one’s compensation. opportunity to feel like an integral part approach to life. A Mini MBA course for 50 SUSTAINABLE DEVELOPMENT

The program for corporate social re- to take into account the interests of all the “Russian House” project in Vancou- sponsibility has become a part of life at parties involved and at the same time ver, the location of the official represent- MegaFon. promotes social wellbeing. The key part ative office for the XXII Winter Olympic of MegaFon’s social responsibility is sup- Games and XI Paralympic Games in 2014 All events related to team building were porting athletic, cultural, environmental in Sochi, as well as the Krasnodar region directed toward the development of and humanitarian activities. and nationwide. social welfare and improving the life of society. In 2009, employees car- Sport Yet another international sporting project ried out conservation work at the Blue The MegaFon brand has been associated supported by MegaFon is the XXVII World Lake nature reserve on the outskirts of with important sporting events for many Summer Universiade in 2013 in Kazan. Kazan, restored the N.V. Tsitsin Botanical years. During the reporting period, the The Universiade is an import interna- Gardens, raised funds for the Zoologi- Company’s support for sports continued tional sporting event in global sporting cal Center of the Far East division of the to develop. life. The agreement, which was signed by Biological and Soil Institute of the Rus- MegaFon and the Organizing Committee sian Academy of Sciences in the town In 2009, MegaFon became General of the World Universiade in January 2010, of Gaivoron, repaired orphanages in Partner of the Organizing Committee for conferred to the Company the status Nalchik and Voronezh, and carried out the XXII Winter Olympic Games in 2014. of general partner and official mobile improvement work at the Istra children’s According to the conditions of the agree- operator of the event. municipal camp. ment, along with the creation of mobile telecommunications infrastructure at the In addition, as an official sponsor in The kind of people who work at Mega- sporting facilities being built in Sochi, 2009, MegaFon continued to support to Fon can not remain indifferent to those the Company will also support Russia’s the Russian national football team. The who need assistance. Since fall 2008, Olympic teams over 2010-16. Company will remain a partner of the Rus- employees have been regularly collect- sian team during 2010-12. ing funds for children from the state As General Telecommunications Partner boarding school in the city of Mikhailov for the Olympic Games in Sochi, in 2009, During the reporting period, MegaFon (Ryazan Region) and help people who MegaFon took part in working meeting of signed a sponsorship contract with the need blood transplants by participating the Organizing Committee with experts Russian Hockey Federation for 2009-10, in the “Become a Donor” campaign. from the International Organizing Com- according to which it became an official mittee, as well as in various exhibitions, sponsor of the Russian national, youth MegaFon does everything to be the com- roundtables and conferences covering and women’s teams. The Company is pany of choice. This is clear from popular the preparation of the Olympic facilities also a partner of the Russian stage of the voting, in which MegaFon received the in Sochi. In 2009, as part of its support Four National Tournament of women’s majority of votes and became the leading for the Olympic movement in Russia, the teams. Other notable projects include: employer of 2009, receiving the award Company acted as sponsor for numer- the mini-football tournament among “Job of the Year – 2009”. The Company’s ous sports and entertainment events, pupils of orphanages and state boarding long-term success is possible only including the “Sochi 2014, Yes!” festival, schools for the “The Future Depends on through the creation of something of which featured stars of the Russian stage You” trophy; sponsorship of the Mega- value for society, employees and clients. and top athletes, and the International Fon Motorsport professional auto-racing It is this idea that unites everyone at Olympics Day in Moscow. team (Russian champion of 2008); the MegaFon. organization of the MegaFon Sochi Rac- At the end of 2009, MegaFon also ing road show (racing Renault F-1 cars); Social Responsibility became General Partner of the XI Winter and the Grazia All-Russian Tournament Paralympic Games in 2014 in Sochi, Gen- for Artistic Gymnastics. MegaFon is a progressive company with eral Partner of the Russian Paralympic a pro-active approach to life and a bright Committee, and General Partner of the MegaFon not only participates in brand. MegaFon has ambitious busi- Russian Paralympic teams in 2010, 2012, high-profile sporting projects, but also ness goals and believes it necessary to 2014 and 2016. supports regional sporting events, and coordinate them with the interests and first and foremost children’s sport. The expectations of society. In conducting An important project for the Company in Company believes that it is as important its business, the Company endeavors 2009 was participating in the creation of 51 MegaFon. Annual Report 2009

to invest in the health of the nation as it monuments. Over 2009, 14 of Russia’s region the unique “Social Telephone” is in great sporting achievements. most noteworthy historical and cultural cell phone, which has been designed for properties in 12 regions were captured such subscribers. Culture on film. Along with the support of sports, the On Victory Day (May 9, 2009), Mega- Company dedicates much effort to the Also during the reporting period, Mega- Fon conducted the “Call to the Brother development of culture in Russia. Fon took part in the 90th anniversary Soldier” event, which has covers become celebrations of the Tovstonogov Bolshoi tradition. The Company organized spe- In 2009, MegaFon continued to par- Dramatic Theater in St Petersburg; the cial telecommunications points where ticipate in the exhibition project, “The MegaKino social project in Samara; and veterans of the Great Patriotic War (World Future Depends on You – New Rules”. It the international documentary festival War II) and local conflicts can make free covers seven Russian cities – Moscow, “Saratov Suffering”. calls to their military comrades anywhere Krasnoyarsk, Novosibirsk, Yekaterinburg, in Russia or worldwide. Samara, Krasnodar and Vladivostok – Environment and aims to acquaint regional residents Each spring, MegaFon conducts an envi- Among other notable humanitarian with the finest examples of contempo- ronmental event, “Green Saturday”, with projects is the Company’s participation rary Russian art. The exhibition features the participation of employees and sub- in the national charitable program “A Bil- around 80 works by famous Russian art- scribers. The event is held across Russia lion in Change”. For the second year in a ists whose works are exhibited in many and aims to draw people’s attention to row, MegaFon carried out an SMS appeal of the world’s most respected museums environmental issues, such as improv- to collect funds for essential operations, worldwide. Lectures, master classes, ing the appearance of cities and concern medicines, and medical assistance for cinema festivals, and competitions for about nature. Across Russia, participants children suffering from cancer. In ad- regional artists were organized as part of in the event plant trees and flowers, and dition, in 2009, the Company initiated the project. clean and beautify their cities. the social project “MegaFon Gives a Legend”, thanks to which new works of During the reporting period, MegaFon Humanitarian Activity sculpture have appeared in four cities in took part in launching the large-scale As part of its social responsibility the Volga region. cultural project “A Bird’s Eye View of the program, MegaFon endeavors to make Wonders of Russia”. Its aim is to draw using a mobile phone as comfortable as attention to issues relating to the resto- possible for the elderly and people with ration and preservation of our country’s poor eyesight. Since August 2009, Mega- unique historical, cultural, and natural Fon has been selling in Moscow and the 52 ANNEXES

12: Annexes

Annex 1. Information on Transactions with Vested Interest

Subject of the agreement Management body that approved the Interested parties transaction

Partnership agreement between MegaFon, Rostelecom Extraordinary General Meeting of Share- V. Zhelonkin and the Organizing Committee of the XXII Winter Olympic holders (April 22, 2009) Games and XI Winter Paralympic Games in Sochi in 2014

D&O insurance policy for MegaFon directors and manag- Extraordinary General Meeting of Share- S. Soldatenkov, V. Ermakov, K. Mehlhorn, ers, provided by Ingosstrakh holders (October 9, 2009) E. Ostrovsky, L. Tkachuk, A. Goriainova, I. Likhova, G. Getmanets, I. Parfenov, A. Krainik, A. Kurdanov, D. Malyshev, A. Eremkin, A. Tyutin, Y. Zhuravel, A. Eloholma, T. Kivisaari, E. Rytkonen, T. Pankko, D. Vozianov, V. Streshinskiy, V. Zhelonkin, Telecominvest

Agreement between MegaFon and MegaFon International Board of Directors Minutes no. 106 (170), S. Soldatenkov, A. Nichiporenko, on carrying out international projects of March 17, 2009 A. Volkov, L. Tkachuk

Loan agreement between MegaFon and TT mobile Board of Directors Minutes no. 110 (174), S. Soldatenkov, A. Nichiporenko of April 27, 2009

Agreement between MegaFon and Telecominvest on MegaFon, S. Soldatenkov, Telecominvest, providing services V. Streshinskiy, A. Eloholma, E. Rytkonen, V. Zhelonkin

Agreement between MegaFon and Altimo on providing MegaFon, S. Soldatenkov, Altimo, services V. Bragina, T. Pankko

Agreement between MegaFon and TeliaSonera AB on MegaFon, S. Soldatenkov, TeliaSonera AB, providing services L. Nyberg, A. Eloholma, E. Rytkonen, T. Kivisaari

Agreement between MegaFon and Peter-Servis on installa- Board of Directors Minutes no. 113 (177), Telecominvest, V. Streshinskiy, tion, use and technical support of software of June 10, 2009 V. Zhelonkin, S. Soldatenkov

Agreement between MegaFon and Peter-Servis on techni- Telecominvest, V. Streshinskiy, cal support for software V. Zhelonkin, S. Soldatenkov 53 MegaFon. Annual Report 2009

Agreement between MegaFon and Peter-Servis on granting Board of Directors Minutes no. 115 (179), Telecominvest, V. Streshinskiy, non-exclusive rights to use and provide technical support of July 13, 2009 V. Zhelonkin, S. Soldatenkov for software

Framework agreement between MegaFon (Stolichny Contact-S, Sonera Holding BV, Telia Inter- Branch) and Telia Sonera Ltd on exchanging MMS with national Management AB, Telia Interna- international operators tional AB

Framework agreement between MegaFon and Kazakh A. Eloholma, E. Rytkonen, T. Kivisaari, Telecom (Kazakhstan) on providing international roaming Contact-S, Sonera Holding BV, Telia Inter- services national Management AB, Telia Interna- tional AB

Framework agreement between MegaFon and Azercell A. Eloholma, E. Rytkonen, T. Kivisaari, Telekom B.N (Azerbaijan) on providing international roam- Contact-S, Sonera Holding BV, Telia Inter- ing services national Management AB, Telia Interna- tional AB

Appraisal of market price and approval of the related-party A. Eloholma, E. Rytkonen, T. Kivisaari, transaction: framework agreement between MegaFon and Contact-S, Sonera Holding BV, Telia Inter- Geocell Ltd (Georgia) on providing international roaming national Management AB, Telia Interna- services tional AB

Framework agreement between MegaFon and Moldcell SA A. Eloholma, E. Rytkonen, T. Kivisaari, (Moldova) on providing international roaming services Contact-S, Sonera Holding BV, Telia Inter- national Management AB, Telia Interna- tional AB

Framework agreement between MegaFon and TT mobile V. Ermakov, K. Mehlhorn (Tajikistan) on providing international roaming services

Amendments to the loan agreement between MegaFon Board of Directors Minutes no. 116 (180), V. Ermakov, K. Mehlhorn (Lender) and TT mobile (Borrower) of September 3, 2009

Approval of mutual related-party transactions: cession TT mobile, V. Ermakov, K. Mehlhorn agreement between MegaFon and Huawei Tech. Invest- ment Co, Ltd; agreement on repaying the debt between MegaFon and TT mobile in instalments

Non-disclosure agreement between MegaFon and the Sonera Holding BV, Telia International FreeMove alliance AB, Telia International Management AB, Contact-S 54 ANNEXES

Annex 2. Compliance With the Code of Corporate Governance

1. Shareholders shall be informed of the General Sharehold- Partly in effect Article 11.15 of the Charter of OJSC “MegaFon” (here- ers Meeting at least 30 days before the Date of the General after “The Company”): “The Company is obligated Shareholders Meeting, irrespective of issues on its agenda to forward the notice on convocation of the General unless the Law provides for a longer period Meeting of Shareholders not later than 20 days before holding of such meeting. Notice on convocation of the General Meeting of Shareholders with the agenda containing the issue on the Company’s reorganization shall be forwarded no later than 30 days before holding such meeting, unless other deadline is provided by the Law. (hereafter “The Law”)”

2. Shareholders shall have a possibility to study the list of In effect Article 11.12 of the Charter: “ The Company shall be persons entitled to participate in the General Sharehold- obligated to provide such list for review upon the ers Meeting starting from the date of the Notice on holding demand of a person included in the list of persons the General Shareholders Meeting till closing the General authorized to participate in the General Shareholders Shareholders Meeting that is held in joint presence, or till Meeting and vested with not less than one percent the deadline for submitting of the voting ballots if the Gen- of votes” eral Shareholders Meeting is held in the form of absentee voting

3. Shareholders shall have a possibility to study the informa- In effect The Company has an established practice of sending tion (materials) that must be provided during prepara- information (materials) that must be provided during tion for the General Shareholders Meeting by means of preparation for the General Shareholders Meeting electronic communication, including Internet via E-mail to each shareholder, before the General Shareholders Meeting is sent

4. Shareholder shall have a possibility to include an item In effect Article 11.19 of the Charter: “ A proposal on including in the agenda of the General Shareholders Meeting or an item on the agenda of the General Meeting of demand the General Shareholders Meeting’s convoca- Shareholders and the proposal of candidates shall tion without submitting an extract from the Shareholders be submitted in writing with indication of the name Register when its rights for the shares are recorded in the (company name) of the proposing Shareholder(s), Shareholders Register system. When the shareholder’s the number and category (type) of shares owned rights for the shares are recorded in a depository account, by him and that proposals shall be signed by such a statement from such depository account shall be suf- Shareholder(s)” ficient for execution of the above rights

5. The Charter or other internal corporate documents of joint- Not in effect The specified persons are usually present at the stock company shall include a provision for mandatory General Shareholders Meetings of the Company; presence of the Chief Executive Officer, members of the however there are no provisions in the Charter or Management Board, members of the Board of Directors, other internal corporate documents that ensure their members of the Revision Commission and the Auditor mandatory presence at the General Shareholder of the joint-stock company at the General Shareholders Meetings Meeting 55 MegaFon. Annual Report 2009

6. Candidates for election shall be by all means present at Not in effect The specified persons are invited to the Company’s the General Shareholders Meeting during consideration General Shareholders Meeting that elects the Board of issues related to election of members of the Board of of Directors, Chief Executive Officer, members of the Directors, the Chief Executive Officer, members of the Management Board, members of the Revision Com- Management Board, members of the Revision Commission mission and approves the Auditor on the agenda and approval of the Auditor of the joint-stock company

7. Procedure for registration of General Shareholders Meet- In effect Article 7.4. of the Regulations on General Share- ing participants shall be included in internal corporate holders Meeting of MegaFon: “The Chairman of the documents of a joint-stock company General Shareholders Meeting shall register the shareholders according to the list of persons entitled to participate in the General Shareholders Meeting. Registration must be completed within one hour”

8. Board of Directors shall be authorized by the Charter for In effect Item 8, Article 12.2. of the Charter authorizes the annual approval of a joint-stock company’s business-plan Board of Directors to approve the budget and the business-plan as well as significant modifications and/or amendments thereto that are in its compe- tence

9. Joint-stock company shall have a risk management proce- Applied in practice The Company has established Controlling and Risk dure approved by the Board of directors Management Department

10. Joint-stock company’s charter shall provide for the right Not in effect of the Board of Directors to suspend powers of the CEO appointed by the General Shareholders Meeting

11. Charter should provide for the right of the Board of Direc- Partly in effect Partly in effect in relation to the level of remuneration tors in a joint-stock company to establish requirements for to CEO and members of the Management Board. qualification and level of remuneration for the joint-stock Item 8, Article 12.2. of the Charter authorizes the company’s Chief Executive Officer, members of the Man- Board of Directors to establish a level of remunera- agement Board, and heads of main structural units tion and compensations to be paid to the Chief Executive Officer of the Company and members of the Management Board

12. Charter should provide for the right of the Board of Direc- In effect Article 13.3 of the Company’s Charter provides for tors to approve Terms and Conditions of a Contract with the right of the Board of Directors or another person Chief Executive Officer and members of the Management authorized by the Company’s Board of Directors to Board make a contract with the Chief Executive Officer. According to Article 13.2, the composition of the Management Board, meetings, voting procedures, powers of the Management Board members and other issues related to the Management Board’s activity are defined by the Regulations for the Manage- ment Board, which are approved by the Company’s General shareholders Meeting. According to Article 8.1. of the Regulations for the Management Board, the Management Board members while performing their official duties receive remuneration and (or) compensations for costs incurred in discharge of their functions as Members of the Management Board upon the Board of Direc- tors’ resolution 56 ANNEXES

13. Joint-stock company’s Charter or internal corporate docu- Not applicable The Company’s Chief Executive Officer and Man- ments shall include a provision that the votes of the Board agement Board Members are not members of the members, that are Chief Executive Officer and Manage- Company’s Board of Directors ment Board members, shall not be counted for approval of Terms and Conditions of contracts with CEO (managing company, manager) and Management Board members

14. There shall be minimum 3 independent directors who Not in effect The Company’s Board of Directors has 2 independent meet the requirements of the Corporate Code on the Board directors in its current composition of joint-stock company

15. Joint-stock company’s Board of Directors shall not include In effect persons who were found guilty of committing crimes in the sphere of business or crimes against the state, interests of government and local authorities or who were subjected to civil penalty for offences in the sphere of business or in the field of finance, taxes and charges, or stock market

16. Joint-stock company’s Board of Directors shall not include In effect persons, that are a participant, Chief Executive Officer (manager), member of a governance body or employee of a legal entity that is in competition with the joint-stock company

17. Joint-stock company’s Charter shall have a requirement In effect Article 11.41. of the Charter: “Election of the Board regarding election of the Board of Directors by cumulative of Directors shall be made by General Shareholders voting Meeting with cumulative voting”

18. Internal documents of joint-stock company must include In effect Article 5.2. of the Regulations for the Board of Direc- the duty of the Board of Directors to abstain from actions tors sets forth the following responsibilities of the that will or may result in conflict between their interests Board Directors: and the interests of the joint-stock company, and if such be loyal to the Company, that is to abstain from using conflict arises, the duty to disclose information on such his position in the Company in the interests of other conflict to the Board of Directors persons; inform the Company of its affiliation and changes thereof in due time; inform the Board of Directors of any planned transactions in which it may be considered as an interested party”

19. Joint-stock company’s internal documents shall include Not in effect Applied in practice the duty of the Board Members to notify the Board in The Board Members disclose information on related writing of any intention to make transactions with securi- parties and related-party transactions for the pur- ties of the joint-stock company where they are the Board poses of the Audit Opinion preparation Members, or of its subsidiaries (affiliates), as well as the duty to disclose information on the transactions with such securities that have been carried out by them

20. Joint-stock company’s internal documents shall include Not in effect Applied in practice the requirement to hold meetings of the Board of Directors Article. 7.2. of the Regulations for the Board of Direc- minimum once every six weeks tors: “Meetings of the Board of Directors shall be held on a regular basis in accordance with the operation plan approved by the Board of Directors” 57 MegaFon. Annual Report 2009

21. Board Meetings of joint-stock company shall be held at In effect least once every six weeks during the year, for which the annual report is prepared

22. Joint-stock company’s internal documents shall include In effect Article 9 of the Regulations for the Board of Directors the procedures of holding Board Meetings provides guidance on the procedures of holding the Board Meetings

23. Joint-stock company’s internal documents shall include In effect A resolution of the Company’s Board of Directors the provision that the Board of Directors shall approve (Minutes No 113 (177) of the Board of Directors as the company’s transactions for the amount exceeding 10 of 17.06.2009) provides that the Board of Directors percent of the company’s assets total value except for the shall approve the Company’s transactions for the transactions made in the ordinary course of business amount exceeding US$25 million (that is approximately 0.003% of the value of the Company’s assets) except for the transactions made in the ordinary course of business. This limitation is included in the Chief Executive Officer’s contract

24. Joint-stock company’s internal documents shall include Partly in effect Partly in effect in as far as provision of information is the right of the Board Members to receive information concerned. required for performance of their duties from the executive Article 5.1. of the Regulations for the Board of Direc- bodies and heads of main structural units of the joint- tors: stock company, and include responsibility for non-provi- “The Board Member shall be entitled to request any sion of such information information on the Company’s operations as well as any documents specified by Article 89 of the Law, from its officers according to the procedure therein”. Article 5.4. of the Regulations for the Board of Direc- tors: “The Company shall be obligated to provide access to information and documents specified by Article 5.1 of the Regulations for the Board of Directors to the Board Member upon his/her written or verbal request”

25. Joint-stock company’s Board of Directors shall have Not in effect Strategic Planning Committee or delegate its functions to another committee (except for Audit Committee and Personnel & Remuneration Committee)

26. Joint-stock company’s Board of Directors shall have a In effect The Board of Directors’ Audit Committee has been committee (Audit Committee) that recommends an auditor established and is operating in the Company. of the joint-stock company to the Board of Directors and However the Audit Committee doesn’t have the right interacts with the auditor and the Revision Commission of to recommend an external auditor the joint-stock company

27. Audit Committee shall include only independent and non- Not in effect All the three members of the current Audit Committee executive directors are non-executive, but only one of them is independent

28. Audit Committee shall be chaired by an independent Not in effect Board Director 58 ANNEXES

29. Joint-stock company’s internal documents shall entitle all Not in effect Applied in practice. Audit Committee members for access to any documents The Audit Committee members have full access to and information of the joint-stock company provided that any documents and information of the Company they do not disclose any confidential information

30. Establishment of a committee of the Board (Personnel & Not in effect Partly in effect as far as the Company’s remuneration Remuneration Committee) that shall identify criteria for policy is concerned. selecting candidates to the Board of Directors and prepare The Company has established Personnel Develop- remuneration policy of the joint-stock company ment and Remuneration Committee of the Board of Directors

31. Personnel & Remuneration Committee shall be chaired by Not in effect an independent Board Director

32. Personnel & Remuneration Committee shall not include In effect The Board’s Personnel Development & Remuneration officers of the joint-stock company Committee does not include officers of the Company

33. Joint-stock company’s Board of Directors shall have Not in effect Risk Management Committee or delegate its functions to another committee (except for Audit Committee and Personnel & Remuneration Committee)

34. Joint-stock company’s Board of Directors shall have Not in effect Corporate Conflicts Settlement Committee or delegate its functions to another committee (except for Audit Commit- tee and Personnel & Remuneration Committee)

35. Corporate Conflicts Settlement Committee shall not Not in effect include officers of the joint-stock company

36. Corporate Conflicts Settlement Committee shall be chaired Not in effect by an independent Board Director

37. Joint-stock company shall have internal corporate docu- In effect The Board of Directors has approved the Charters ments approved by the Board of Directors that set forth regulating activities of the Board committees the procedure of the Board committees establishment and functioning

38. Joint-stock company’s Charter shall have a counting Not in effect Partly in effect as far as the issues requiring qualified procedure for the Board of Directors’ quorum that allows majority are concerned ensuring participation of independent directors at the Board meetings

39. Joint-stock company shall have a collegiate executive body In effect Article 13.1. of the Charter: “The Management Board (management board) shall be the collegial executive body of the Com- pany” 59 MegaFon. Annual Report 2009

40. Charter or internal documents of a joint-stock company Not in effect shall include the provision that sets forth the requirement for the Management Board to approve transactions with real property and loans received by the joint-stock company, if such transactions are not major transactions and they are not part of day-to-day business activities of the joint-stock company

41. Joint-stock company’s internal documents shall include In effect Amendments to the approved budget of the Com- procedures for approval of transactions that are not part of pany shall be accepted by a separate resolution of the joint-stock company’s business plan the Board of Directors

42. Executive bodies shall not include persons, that are par- In effect ticipants, Chief Executive Officers (manager), members of a governance body or employees of a legal entity that is in competition with the joint-stock company

43. Executive bodies of a joint-stock company shall not In effect include persons who were found guilty of committing crimes in the sphere of business or crimes against the state, interests of government and local authorities or who were subjected to civil penalty for offences in the sphere of business or in the field of finance, taxes and charges or stock market. If functions of a sole executive body are per- formed by a managing company or by a manager, the Chief Executive Officer and members of the management board of the managing company or the manager shall meet the criteria of the Chief Executive Officer and members of management board of a joint-stock company

44. Joint-stock company’s Charter or internal documents shall Not in effect Chief Executive Officer is the Company’s sole execu- provide that a managing company (manager) should not tive body perform similar functions in a company that is in competition with the joint-stock company and should not have any other property relationship with the joint-stock company save as providing services of a managing company (manager)

45. Internal documents of a joint-stock company must include Not in effect the duty of the executive bodies to abstain from actions that will or may result in conflict between their interests and the interests of the joint-stock company, and if such conflict arises, the duty to disclose information on such conflict to the Board of Directors 60 ANNEXES

46. Joint-stock company’s charter or internal documents must Not applicable Chief Executive Officer performs the functions of the contain criteria for selection of a management organiza- sole executive body of the Company tion (manager)

47. Executive bodies of joint-stock company must present In effect Report on the Company’s performance is presented monthly reports on their performance to the Board at every Board meeting

48. Contracts between a joint-stock company and its chief In effect Contracts of the Company’s top-managers contain executive officer (managing company, manager) and obligations to keep commercial secrets. members of management board shall establish responsi- According to item 19.3 of the Charter, all the Compa- bility for violation of provisions on use of confidential and ny’s employees who have access to the Company’s service information confidential information shall be obliged to keep confidentiality

49. Joint-stock company must have a special officer (Corpo- In effect rate Secretary) who ensures that governance bodies and officers of the joint-stock company comply with mandatory procedures securing execution of rights and legal interests of the company’s shareholders

50. Charter or internal documents of a joint-stock company In effect Item 3.1. of the Corporate Secretary Regulations must include the procedures for appointing (electing) provides that “The Corporate Secretary shall be the Corporate Secretary and the duties of the Corporate elected by the decision of a simple majority of the Secretary Board of Directors of the Company. The Board of Directors shall determine the term of engagement of the Corporate Secretary. Candidates for the position of the Corporate Secretary shall be nominated by the members of the Board of Directors and/or the General Director of the Company”

51. Charter of a joint-stock company must have the require- Applied practice Item 4.1 of the Corporate Secretary Regulations ments for a candidate Corporate Secretary states that “The Corporate Secretary shall have the expertise required to perform the assigned functions of the position and shall enjoy the trust of shareholders and members of the Board of Directors of the Company”

52. Joint-stock company’s charter or internal documents shall In effect In the form of Board decision. have a requirement to approve a major transaction before The Board of Directors (Minutes of Board meeting closing it No. 113 (177) as of 17.06.2009) approved a provision on getting prior Board’s approval for transactions with the value of over 25 million USD (which is about 0.003% of the value of the Company’s assets). This limitation is included in the CEO’s contract 61 MegaFon. Annual Report 2009

53. Mandatory engagement of an independent appraiser for Not applicable The Company’s Charter and internal documents do valuation of market value of assets being the subject of a not have a mandatory requirement to engage an major transaction independent appraiser. In practice no major transactions have been approved since 2005

54. Joint-stock company’s charter bans to take during acquisi- Not in effect tion of major shareholdings in the joint-stock company any actions that would be aimed at protecting interests of executive bodies (members of these bodies) and Board members of the joint-stock company, as well as actions that would impair shareholders’ position as compared to the existing one (in particular, ban on the Board’s decision to issue additional shares, to issue securities convertible to shares or securities giving the right to acquire the company’s shares that will be effective till the expected date of the shares acquisition, even if the charter provides for the right of taking such a decision)

55. Joint-stock company’s charter shall have a mandatory Not in effect requirement to engage an independent appraiser for valuation of current market value of shares and potential changes in their market value after acquisition

56. Joint-stock company’s charter shall not provide a waiver In effect to an acquirer from the obligation to propose that the shareholders sell the company’s common shares (issued securities convertible to common shares) owned by them during acquisition

57. Joint-stock company’s charter or internal documents shall Applied in practice have a mandatory requirement to engage an independent appraiser for determining share conversion ratio during reorganization

58. The Board shall approve an internal document that de- Not in effect fines rules and approaches of the joint-stock company to disclosure of information (Information Disclosure Policy)

59. Joint-stock company’s internal documents shall have a Not applicable The Company has not placed any additional shares requirement to disclose information about purpose of shares placement, about persons who plan to acquire the placed shares, including large shareholdings, as well as whether senior officers of the joint-stock company participate in acquisition of the placed shares of the company 62 ANNEXES

60. Joint-stock company’s internal documents shall provide In effect Items 4.3 – 4.7 of the Regulations for General Share- for a list of information, documents and materials to be holder Meeting govern the procedures for submit- submitted to shareholders for taking decisions on the ting information and materials to shareholders in issues that are presented to the general shareholders the course of preparation of a General Shareholder meeting Meeting

61. Joint-stock company shall have a web-site in the Internet In effect and make regular disclosures of information about the joint-stock company on that web-site

62. Joint-stock company’s internal documents shall have a Not in effect Senior officers and their related persons did not requirement to disclose information on transactions of have any transactions with the Company in the the joint-stock company with persons who are senior of- reported year ficers of the company according to the charter, as well as transactions of the joint-stock company with organizations where the senior officers of the joint-stock company have directly or indirectly the interest of 20 plus percent in the charter capital or organizations where such persons may otherwise have significant influence

63. Joint-stock company’s internal documents shall have a Not in effect requirement to disclose information on any transactions that may have impact on market value of the joint-stock company’s shares

64. The Board shall approve an internal document on using Not in effect All significant information on the Company’s significant information on the joint-stock company’ perfor- performance is available to the Board members and mance, shares and other securities as well as transactions shareholder representatives with them, which is not public and its disclosure may have significant impact of market value of the joint0stock company’s shares and other securities

65. Joint-stock company shall have internal control procedures In effect for its finance and business that are approved by the Board

66. Joint-stock company shall have a special unit that provides In effect The Company has active Internal Audit Department for compliance with internal control procedures (control & that is in charge of assessing compliance with inter- revision service) nal control procedures

67. Joint-stock company’s internal documents shall contain a Partly in effect Item 3.2 of the Regulations for Internal Audit Depart- requirement that structure and composition of control & ment provides that Director of the Department shall revision service must be defined by the Board of the joint- be appointed according the recommendation of the stock company Audit Committee. Item 3.3 of the Regulations for Internal Audit Depart- ment provides that organization structure and personnel of the Internal Audit Department shall be approved according to recommendation of the Department Director 63 MegaFon. Annual Report 2009

68. Control & revision service must not include persons who In effect There are no such persons in the Internal Audit were found guilty of committing crimes in the sphere of Department business or crimes against the state, interests of government and local authorities or who were subjected to civil penalty for offences in the sphere of business or in the field of finance, taxes and charges, or stock market

69. Control & revision service shall not include any persons In effect There are no such persons in the Internal Audit who are members of executive bodies of the joint-stock Department company, as well as any persons who are participants, Chief Executive Officer (manager), member of a governance body or employee of a legal entity that is in competition with the joint-stock company

70. Joint-stock company’s internal documents shall specify a In effect Chapter 4 of the Regulations for Internal Audit deadline for submitting documents and materials to con- Department trol & revision service for review of financial and business transactions, besides they shall provide for responsibility of officers and employees of the joint-stock company for such documents and materials not being submitted by the specified deadline

71. Joint-stock company’s internal documents provide for In effect Items 3.11, 3.13 of the Regulations for Internal Audit the duty of control & revision service to inform the Audit Department Committee of any discovered violations, or if there is no such committee, than inform the Board of the joint-stock company

72. Joint-stock company’s charter shall have a requirement Not in effect that feasibility of any transaction that is not included in the company’s business-plan (non-standard transactions) shall be preliminarily assessed by control & revision service

73. Joint-stock company’s internal documents specify the In effect Changes in the Company’s approved budget are procedure of getting approval from the Board for non- made by the Company’s Board in a separate deci- standard transaction sion

74. The Board shall approve an internal document that speci- In effect Procedures of reviews by Revision Commission are fies the procedures for review of the company’s finance governed by the Regulations for the Company’s Revi- and business by Revision Commission sion Commission

75. The Audit Committee shall review the audit opinion prior In effect to presenting it to the shareholders on the general shareholder meeting

76. The Board shall approve an internal document that is fol- Not in effect lowed by the Board when recommendations are given on dividend amount (Dividend Policy) 64 ANNEXES

77. Dividend Policy shall have a procedure for definition of Not in effect the minimum share of the company’s net profit to be used for dividend payment as well as the conditions when dividend is not paid or paid in part for preferred shares, if dividend for them is defined in the company’s equity

78. Information on dividend policy of a joint-stock company Not applicable General shareholder meeting did not make decision and any amendments made shall be disclosed in a about dividend payments periodical that is specified by the company’s charter for publication of notices on general shareholder meetings, besides the above information shall be posted on the corporate web-site in the Internet

79. Information on dividend policy of a joint-stock company Not applicable General Shareholder meeting did not make any and any amendments made shall be disclosed in a decision about dividend payments periodical that is specified by the company’s charter for publication of notices on general shareholder meetings, besides the above information shall be posted on the corporate web-site in the Internet 65 MegaFon. Annual Report 2009

13: Consolidated Financial Statements

Report of Independent Auditors

The Board of Directors and Shareholders OJSC MegaFon —

We have audited the accompanying consolidated balance sheets of OJSC MegaFon and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of OJSC MegaFon and subsidiaries at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

March 9, 2010 /s/ Ernst and Young LLC 66 CONSOLIDATED FINANCIAL STATEMENTS

Contents

Consolidated Balance Sheets...... 67

Consolidated Statements of Operations...... 69

Consolidated Statements of Cash Flows...... 70

Consolidated Statements of Shareholders’ Equity...... 72

Notes to Consolidated Financial Statements...... 74 67 MegaFon. Annual Report 2009

Consolidated Balance Sheets (In millions of Rubles)

As of December 31 2008 2009 Assets Current assets: Cash and cash equivalents 6,465 12,550 Short-term investments 33,738 49,114 Accounts receivable, net of allowance for doubtful accounts 5,617 4,050 of 511 and 861 at December 31, 2008 and December 31, 2009, respectively (Note 15) Accounts receivable, related parties (Note 16) 81 35 Inventory 2,352 1,219 VAT receivable 2,640 2,037 Deferred tax assets (Note 14) 1,167 772 Prepaid expenses (Note 17) 4,942 8,589 Other current assets 1,227 1,784 Total current assets 58,229 80,150

Property, plant and equipment, net of accumulated depreciation 128,691 147,231 of 75,515 and 99,993 at December 31, 2008 and December 31, 2009, respectively (Note 4) Goodwill and intangible assets: Goodwill (Note 3) 363 498 Intangible assets, net of accumulated amortization 13,149 16,869 of 14,411 and 17,101 at December 31, 2008 and December 31, 2009, respectively (Note 5) Other non-current assets 2,317 1,893 Total assets 202,749 246,641

The accompanying notes are an integral part of these consolidated financial statements. 68 CONSOLIDATED FINANCIAL STATEMENTS

Consolidated BALANCE SHEETS (In millions of Rubles)

As of December 31 2008 2009 Liabilities Current liabilities: Accounts payable 5,713 4,530 Accounts payable to equipment suppliers 5,633 6,864 Accounts payable, related parties (Note 16) 365 502 Current portion of liability for marketing related licenses (Note 5) — 287 Accrued compensation and social contributions 2,031 3,435 Subscribers’ prepayments 6,462 7,083 Taxes payable (Note 14) 1,012 1,880 VAT payable 2,187 1,240 Deferred revenue 247 358 Loans from shareholders (Note 7) 97 — Current portion of long-term debt (Note 6) 15,660 7,811 Other current liabilities 516 645 Total current liabilities 39,923 34,635

Debt, less current portion (Note 6) 16,223 19,335 Loans from shareholders, less current portion (Note 7) 3,647 — Deferred tax liabilities, less current portion (Note 14) 2,159 2,531 Asset retirement obligations (Note 4) 2,349 3,303 Liability for marketing related licenses, less current portion (Note 5) — 1,054 Deferred revenue, less current portion (Note 5) 64 1,568 Other non-current liabilities 258 301 Total liabilities 64,623 62,727

Equity MegaFon shareholders’ equity: Common stock (par value of 10 Rubles, 6,200,002 shares authorized, issued and outstanding) 581 581 Reserve fund 17 17 Additional paid-in capital 13,875 13,870 Retained earnings 123,910 169,199 Accumulated other comprehensive loss (257) (255) Total MegaFon shareholders’ equity 138,126 183,412 Noncontrolling interests — 502 Total equity 138,126 183,914 Total liabilities and equity 202,749 246,641

The accompanying notes are an integral part of these consolidated financial statements. 69 MegaFon. Annual Report 2009

Consolidated Statements of Operations (In millions of Rubles)

Years ended December 31 2008 2009 Revenue (including related party amounts) (Notes 10, 16) 175,451 181,883 Cost of services (excluding depreciation and amortization and including related party amounts) 35,427 36,865 (Notes 11, 16) Gross margin 140,024 145,018

Sales and marketing expenses (excluding depreciation and amortization and including related party 16,455 17,361 amounts) (Note 12, 16) Operating expenses (excluding depreciation and amortization and including related party amounts) 35,323 39,465 (Notes 13, 16) Depreciation and amortization (Notes 4, 5) 28,125 31,344 Operating income 60,121 56,848

Other income/(expense): Interest expense (1,831) (1,657) Interest income 2,840 3,255 Other gain/(loss), net 18 (89) Gain/(loss) on derivatives, net (Note 8) 2,322 (300) Foreign currency exchange loss (3,700) (2,192) Total other income/(expense), net (351) (983) Income before income taxes and noncontrolling interest 59,770 55,865 Provision for income taxes (Note 14) 15,474 10,565 Net income 44,296 45,300 Net loss/(income) attributable to noncontrolling interests 23 (11) Net income attributable to MegaFon 44,319 45,289

The accompanying notes are an integral part of these consolidated financial statements. 70 CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows (In millions of Rubles)

Years ended December 31 2008 2009 Cash flows from operating activities: Net income attributable to MegaFon 44,319 45,289 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 28,125 31,344 (Gain)/loss on derivatives (2,322) 300 Net foreign exchange loss 3,700 2,192 Net income/(loss) attributable to noncontrolling interests (23) 11 Bad debt expense 321 1,122 Provision for deferred income taxes 144 10 Amortization of deferred finance charges 649 617 Changes in assets and liabilities: Accounts receivable 290 484 Inventory (1,837) 1,156 Prepayments and other current assets (1,570) (4,770) Accounts payable and accrued expenses (267) 1,331 Subscribers’ prepayments 658 609 VAT, net 1,313 (345) Net cash provided by operating activities 73,500 79,350

The accompanying notes are an integral part of these consolidated financial statements. 71 MegaFon. Annual Report 2009

Consolidated Statements of Cash Flows (continued) (In millions of Rubles)

Years ended December 31 2008 2009 Cash flows from investing activities: Purchases of property, plant and equipment and intangible assets (50,200) (46,443) Proceeds from sale of property, plant and equipment 351 639 Acquisitions of subsidiaries, net of cash acquired (1,169) (833) Increase in short-term investments (10,304) (14,073) Other investing activities (16) — Net cash used in investing activities (61,338) (60,710)

Cash flows from financing activities: Proceeds from long-term debt 2,570 9,856 Repayments of long-term debt (12,798) (19,640) Deferred finance charges paid (13) (333) Other financing activities — (59) Net cash used in financing activities (10,241) (10,176)

Effect of exchange rate changes on cash and cash equivalents 285 (2,379) Net increase in cash and cash equivalents 2,206 6,085 Cash and cash equivalents at the beginning of the period 4,259 6,465 Cash and cash equivalents at the end of the period 6,465 12,550 Supplemental cash flow information: Cash paid during the year for income taxes 15,388 10,897 Cash paid during the year for interest 2,071 2,636 Non-cash activities: Revenue from in-kind services (Note 5) — 18

The accompanying notes are an integral part of these consolidated financial statements. 72 CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Shareholders’ Equity (In millions of Rubles, except share amounts)

MegaFon’s shareholders’ equity MegaFon’s shareholders’ equity Common Stock Reserve fund Additional Retained earnings Accumulated Total attributable Non-controlling Total paid-in capital other comprehensive loss to MegaFon interest Shares Amount Balances as of December 31, 2007 6,200,002 581 17 13,875 79,591 (264) 93,800 35 93,835 Comprehensive income: Net income — — — — 44,319 — 44,319 (23) 44,296 Foreign currency translation adjustment — — — — — (6) (6) (12) (18) Pensions costs (net of tax effect of zero) — — — — — 13 13 — 13 Total comprehensive income 44,326 (35) 44,291 Balances as of December 31, 2008 6,200,002 581 17 13,875 123,910 (257) 138,126 — 138,126 Comprehensive income: Net income — — — — 45,289 — 45,289 11 45,300 Foreign currency translation adjustment — — — — — (25) (25) (8) (33) Pensions costs (net of tax effect of zero) — — — — — 27 27 — 27 Total comprehensive income 45,291 3 45,294 Acquisitions (Note 3) — — — — — — — 583 583 Purchase of noncontrolling interest (Note 3) — — — (5) — — (5) (25) (30) Dividends paid to noncontrolling interest — — — — — — — (59) (59) Balances as of December 31, 2009 6,200,002 581 17 13,870 169,199 (255) 183,412 502 183,914

The accompanying notes are an integral part of these consolidated financial statements. 73 MegaFon. Annual Report 2009

Consolidated Statements of Shareholders’ Equity (In millions of Rubles, except share amounts)

The accompanying notes are an integral part of these consolidated financial statements. 74 CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (In millions of Rubles, unless otherwise indicated)

1. Description of Business Open Joint Stock Company (“OJSC”) MegaFon (the “Company” or “MegaFon”) was formed in the Russian Federation (“Russia”) on May 22, 2002 as a result of the renaming and reorganizing of OJSC North-West GSM and its integration under one brand with Closed Joint Stock Company (“CJSC”) Sonic Duo, CJSC Mobicom-Kavkaz, CJSC Mobicom-Centre, CJSC Mobicom-Novosibirsk, CJSC Mobicom- Khabarovsk, CJSC Mobicom-Kirov, OJSC MSS-Povolzhie, CJSC Volzhsky GSM and CJSC Uralsky GSM. On July 1, 2009, the Company merged all of its wholly-owned major operating Russian subsidiaries with and into the Company, so that its principal telecommunications operations are now conducted through a single legal entity throughout Russia.

MegaFon is a leading mobile operator in Russia and provides a broad range of voice, data and other telecommunication services to businesses, other telecommunications service providers and retail subscribers, with licenses to operate in all regions of Russia, covering a population of approximately 142 million. The Company intends, wherever possible, to offer its integrated telecommunication services under the “MegaFon” brand, although some services still carry local brand names because of recent acquisitions. In addition to its operations in Russia, the Company provides mobile services through its subsidiaries in Republic of Tajikistan (“Tajiki- stan”), Republic of Abkhazia (“Abkhazia”) and Republic of South Ossetia (“South Ossetia”).

In Russia, MegaFon has constructed and continues to expand a nationwide mobile communications network that operates on the dual band GSM 900/1800 standard. In May 2007, the Company was awa rded a license that expires on May 21, 2017, for the provision of 3G mobile telephony services based on IMT-2000/UMTS standards throughout the entire territory of Russia. As of December 31, 2009 the Company is providing 3G services in almost all of its regions throughout Russia.

The following table sets forth operating subsidiaries and branches of the Company as of December 31, 2009:

Subsidiary/Branch Area of Operation Ownership Interest Date Operations Commenced/Acquired OJSC MegaFon: Russia 100% North-West branch North-West Region December 1994 Povolzhye branch Povolzhsky Region August 1999 Caucasus branch Southern Region January 2001 Stolichny branch Moscow and Moscow Region November 2001 Ural branch Ural Region June 2002 Central branch Central Region December 2002 Siberian branch Siberian Region December 2003 Far East branch Far East Region March 2004 TT mobile Tajikistan 75% October 2001 CJSC In-Tone (Note 3) Russia 100% August 2008 OJSC VideoFon (Note 3) Russia 100% September 2008 LLC T-Pay (Note 3) Russia 100% September 2008 CJSC CC Absolut (Note 3) Moscow 100% December 2008 CJSC AquaFon GSM (Note 3) Abkhazia 51% March 2009 CJSC Ostelecom (Note 3) South Ossetia 75% March 2009 75 MegaFon. Annual Report 2009

2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements Basis of Presentation The statutory accounting records of the Company and its subsidiaries, except TT mobile, are maintained in Russian Rubles (“RUR”) and except TT mobile, AquaFon and Ostelecom are prepared in accordance with the accounting requirements provided for under Russian accounting and tax legislation. Foreign subsidiaries of the Company maintain their accounting records in accordance with their local accounting and tax legislation. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The accompanying consolidated financial statements differ from statutory financial statements used in Russia, Tajikistan, Abkhazia and Ossetia as they reflect certain adjustments, recorded in the entities’ accounts, which are necessary to present the financial position, results of operations and cash flows in accordance with US GAAP. The principal adjustments are related to (1) revenue recognition; (2) recognition of interest expense and other operating expenses; (3) deferred income taxes; (4) valuation and depreciation of property, plant and equipment and intangible assets; (5) business combinations; (6) consolidation and accounting for subsidiaries; (7) accounting for derivatives; (8) foreign currency translation; and (9) valuation allowances for unrecoverable assets.

The Company evaluated subsequent events up to March 9, 2010, the date these financial statements were issued.

The accompanying consolidated financial statements are presented in millions of Rubles, except for share amounts or unless otherwise indicated.

Use of Estimates in Preparation of Financial Statements The preparation of consolidated financial statements, in conformity with US GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reported period. Significant estimates, among others, include the allocation of purchase price to the fair value of net assets acquired in connection with business combinations, useful lives related to tangible and intangible assets, impairment tests of long-lived assets, deferred revenue, asset retirement obligations, fair value of derivative financial instruments, recoverability of deferred tax assets, income tax provision and allowance for doubtful accounts. Actual results could differ from these estimates.

Principles of Consolidation Wholly-owned and majority-owned subsidiaries where the Company has operating and financial control are consolidated. Consoli- dation is also required when the Company is subject to a majority of the risk of loss or is entitled to receive a majority of the residual returns or both from a variable interest entity’s activities.

All significant inter-company accounts and transactions are eliminated upon consolidation and net earnings/(losses) are reduced or increased by the portion of the net earnings/(losses) of subsidiaries applicable to any noncontrolling interests. Results of subsidiaries acquired and accounted for by the aquisition method have been included in operations from the relevant date of acquisition.

Business Combinations The Company applies the acquisition method of accounting and recognizes the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, license and other asset lives and market multiples, among other items.

Foreign Currency Translation The functional currency of the Company’s subsidiaries domiciled in Russia, Abkhazia and South Ossetia is the RUR as a majority of their revenues, costs, property and equipment purchased, debt and trade liabilities is either priced, incurred, payable or otherwise measured in RUR.

The functional currency of TT mobile, the Company’s 75% owned subsidiary in Tajikistan, is the US dollar as a majority of its revenues, costs, property and equipment purchased, debt and trade liabilities is either priced, incurred, payable or otherwise measured in US dollars. 76 CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements (continued) Cash and Cash Equivalents From time to time, the Company may hold cash on hand and deposits in banks with an original maturity of three months or less which are classified as cash and cash equivalents. Cash equivalents are carried at cost, which approximates fair value.

Short-Term Investments The Company classifies investments and time deposits with an original maturity of more than three months but less than twelve months from the date of purchase, that the Company may hold from time to time, as short-term investments. Short-term investments are shown at cost which approximates fair value. The carrying amount of short-term investments is reduced to recognize any decline in value which is other than temporary.

Accounts Receivable Accounts receivable are shown at their net realizable value which approximates fair value. The Company makes judgments as to the collectability of accounts receivable based on historical trends and future expectations. To determine the allowance for doubtful accounts, management reviews specific customer risks and the Company’s accounts receivable aging.

Inventories Inventories, which primarily consist of telephone handsets, accessories for resale, SIM-cards and prepaid phone cards, are stated at the lower of cost or market. Cost is determined using the first in, first-out method.

Value-Added Tax Value Added Tax (“VAT”) related to revenues is generally payable to the tax authorities on an accrual basis when invoices are issued to customers or cash received. VAT incurred on purchases may be offset, subject to certain restrictions, against VAT related to revenues, or can be reclaimed in cash from the tax authorities under certain circumstances.

Management periodically reviews the recoverability of VAT receivable and believes the amount reflected in the consolidated financial statements is fully recoverable within one year except for 33 and 60, which is classified as part of other non current assets as of December 31, 2009 and 2008, respectively.

Deferred Finance Charges Commissions, arrangement and commitment fees and related legal fees paid to secure a firm commitment from lenders, premiums paid to secure vendor financing, and other direct debt issuance costs incurred in connection with new borrowings are deferred and amortized over the terms of the related loans, using the effective-interest method. Costs capitalized in connection with revolving credit facilities are amortized on a straight-line basis over the period the revolving line of credit is active.

Property, Plant and Equipment Property, plant and equipment are carried at cost, less accumulated depreciation and impairments, if any. Cost includes all costs directly attributable to bringing the asset to working condition for its intended use. Interest expense incurred during the construction phase of a project is capitalized as part of property, plant and equipment until the project is completed and the asset is placed into service. Depreciation is recorded on a straight-line basis over the estimated useful life of the asset.

The estimated useful lives are as follows:

Buildings and structures 7 to 45 years Switching equipment, including billing systems 3 to 7 years Base stations, including software 7 years Fiber-optic equipment 20 years Other network equipment 5 to 7 years Vehicles and office equipment 3 to 5 years 77 MegaFon. Annual Report 2009

Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful lives of the assets. The lease term includes renewals when such renewals are reasonably assured.

Repair and maintenance costs are expensed as incurred, while updates and improvements are capitalized.

At the time of retirement or other disposition of property, plant, and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain and loss is recorded in the consolidated statement of operations.

Asset Retirement Obligations The Company has certain legal obligations related to rented sites for base stations and masts, which include requirements to re- store the real estate upon which the base stations and masts are located.

The Company records the fair value of a legal liability for an asset retirement obligation in the period it is incurred. This cost is initial- ly capitalized and amortized over the estimated retirement period of 25 years. Once the obligation is ultimately settled, any difference between the final cost and the recorded liability is recognized as a gain or loss on disposition. The Company annually evalu- ates whether there are any indicators which suggest that the estimated cash flows underlying the liability have changed materially. If such indicators exist the Company re-estimates the timing and amount of the cash flows and accounts for the effect of such.

Goodwill Goodwill represents the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired and is not amortized.

Intangible Assets Intangible assets, which are stated at cost, consist principally of operating licenses, frequencies, numbering capacity, customer base and marketing related licenses. These assets are generally amortized on a straight-line basis, except for marketing related licenses (see Note 5), over their estimated useful lives, generally four to seventeen years.

Operating licenses and frequencies provide the Company with the exclusive right to utilize certain radio frequency spectrum to provide mobile communications services. These licenses and frequencies are amortized on a straight-line basis within the estimated useful lives determined based on the management estimation of future economic benefits from these assets. The Company capital- izes payments made to third party suppliers to acquire access to and for use of telephone numbering capacity. Customer base is amortized reflecting the pattern in which the economic benefits are consumed or otherwise used up. Other intangible assets, such as software and trademarks are amortized on a straight-line basis over their estimated useful lives.

The Company continues to evaluate the amortization period to determine whether events or circumstances warrant revised amortization periods. Additionally, the Company considers whether the carrying value of such assets should be impaired based on the expected future benefits.

Long-lived Assets Impairment Long-lived assets to be held and used by the Company are reviewed to determine whether an event or change in circumstances indi- cates that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, the Company determines whether impairment has occurred through the use of an undiscounted cash flows analysis of assets at the lowest level for which identifiable cash flows exist. If impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the fair value of the asset. No such losses were recognized in the years ended December 31, 2009 and 2008.

Goodwill Impairment Assessment Goodwill is reviewed annually, as of the beginning of the fourth quarter, for impairment or whenever it is determined that impairment indicators exist. The Company determines whether impairment has occurred by assigning goodwill to the reporting units identified and comparing the carrying amount of the reporting unit to the fair value of the reporting unit. If goodwill impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the implied fair value of goodwill. No such losses were recognized during the years ended December 31, 2009 and 2008. 78 CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements (continued) Interest Free Loans from Shareholders Interest free loans from noncontrolling shareholders are recorded at their estimated present values based on the Company’s incremental borrowing rate. The related imputed interest is recorded as additional paid-in capital in the consolidated statements of shareholders’ equity.

The accretion of imputed interest is included as interest expense in the accompanying consolidated statements of operations.

Revenue Recognition The Company earns service revenues for usage of its cellular system, which include airtime charges from contract and prepaid subscribers, monthly contract fees, interconnect fees from other mobile and fixed-line operators, roaming charges and charges for Value Added Services (“VAS”). Interconnect revenue includes revenues from mobile and fixed-line operators that was earned from the services rendered for traffic termination from other operators. Roaming revenues include revenues from customers who roam outside their selected home coverage area and revenues from other mobile carriers for roaming by their customers in the network of the Company. VAS include SMS, MMS, GPRS, WAP, Ring Back Tone (”RBT”) and other services. The cost of content revenue relating to VAS is presented net of related costs when the Company acts as an agent of the content providers. Generally, these services generate additional revenues through monthly subscription fees or increased mobile usage. Service revenue is generally recognized when the services (including value added services and roaming revenue) are rendered. Prepaid cards, used as a method of cash collection, are accounted as customer advances for future services. Prepaid cards do not have expiration dates but are subject to statutory expiration periods, and unused balances are recognized as revenue when cards expire. Payments from customers for equipment are not recognized as revenue until installation and testing are completed and accepted by the customer. Revenues are stated net of value-added tax and sales tax charged to customers.

The Company defers revenue resulting from fees paid by customers upon initial connection. Deferred revenues are subsequently recognized over the estimated average customer lives under tariff plans, which are periodically reassessed by management and such reassessment may impact future operating results of the Company.

The Company enters into multiple element revenue arrangements in which a customer may purchase a combination of handset, airtime traffic and other services. The consideration received from a subscriber is allocated to the separate units of accounting inher- ent in the contract based on their relative fair values. The allocated revenue is recognized in accordance with the type of element, limited to up-front cash received.

Advertising Costs Advertising costs are expensed as incurred (Note 12).

Government Pension Funds The Company contributes to the local state Pension Funds and Social Funds On Behalf of its employees. The contributions are expensed as incurred. Contributions for the years ended December 31, 2009 and 2008 were 1,084 and 1,161, respectively.

Income Taxes Provisions are recorded in the consolidated financial statements for taxation of profits in accordance with Russian and other local legislations currently in force. The Company accounts for income taxes under the liability method. Deferred income taxes reflect the future tax consequences of temporary differences between the tax and financial statement bases of assets and liabilities and are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that some or all of the deferred tax assets will not be realized in the future.

The Company accounts for uncertain tax positions and reflects liabilities for unrecognized income tax benefits together with corresponding interest and penalties in the consolidated statement of operations as income tax expense.

Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company deposits available cash with various banks in Russia. Deposit insurance is either not offered or only offered in de minimis amounts in respect of bank deposits within Russia. To manage the concentration of credit risk, the Company allocates available cash to domestic branches of international banks and a limited number of 79 MegaFon. Annual Report 2009

Russian banks. A majority of these Russian banks are either owned or controlled by the Russian Government. Management periodically reviews the credit worthiness of the banks in which it deposits cash, cash equivalents and short-term investments.

The Company extends credit to certain counterparties, principally international and national telecommunications operators, for roaming services, and to certain dealers. Management periodically reviews the history of payments and credit worthiness of the dealers. The Company generally requires its subscribers to prepay for services, except for corporate subscribers that it deems reliable. The Company generally does not require collateral to extend credit to its customers.

Fair Value Measurement US GAAP standards establish a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. These levels include:

Level 1: Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are non-active; inputs other than quoted prices that are observable and derived from or corroborated by observable market data.

Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

The Company, using available market information, appropriate valuation methodologies and management’s estimates determines the approximate fair values of financial instruments.

Derivative Instruments and Hedging Activities The Company records all derivative instruments on the balance sheet at their respective fair values. On the date a derivative contract is executed, and depending on the specific facts and circumstances, the derivative may be designated as a fair value hedge, cash flow hedge or foreign currency hedge of net investment in a foreign operation. For derivative instruments that are not designated as hedges or do not qualify as hedged transactions, the changes in the fair value are reported in the consolidated statement of operations. The Company does not hold or issue derivatives for trading purposes.

Stock-Based Compensation As the stock-based awards granted by the Company to its employees are settled in cash they are accounted for as liability awards. The measurement of the liability and compensation cost of outstanding stock-based awards is based on the intrinsic value of the awards and is remeasured each period through the date of settlement. Compensation cost is recognized over the requisite service period of each separately vesting portion of the award based on the proportionate amount of the requisite service that has been rendered to date.

Comparative Information Certain prior year amounts have been reclassified to conform to the presentation adopted in the current year.

Recent Accounting Pronouncements Accounting Standards Codification. In June 2009, the Financial Accounting Standards Board (“FASB”) issued a standard that established the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with US GAAP. New accounting standards issued subsequent to June 30, 2009 are communicated by the FASB through Accounting Standards Updates (“ASU”). The ASC is effective for interim and annual periods ending after September 15, 2009.

Business Combinations. In December 2007, the FASB issued new guidance on business combinations (ASC 805), which significantly changed the accounting for business combinations and added new disclosure requirements. It requires the acquiring entity in a business combination to recognize all the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition-date fair value. The guidance also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition. This guidance became effective for the Company as of January 1, 2009, and was applied for the 2009 acquisitions (Note 3). The adoption of this guidance did not have a material impact on the Company’s financial statements. 80 CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements (continued) In April 2009, the FASB issued guidance on accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies (ASC 805). It provides guidance on initial recognition and subsequent measurement, accounting for and disclosure of such assets and liabilities. This guidance became effective for the Company as of January 1, 2009. The adoption of this guidance did not have a material impact on the Company’s financial statements.

Noncontrolling Interests. In December 2007, the FASB issued guidance that establishes new accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary (ASC 810). This guidance became effective for the Company on January 1, 2009. From the date of adoption the Company is required to report its noncontrolling interests as a separate component of shareholders’ equity. Among other requirements, this guidance requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. The guidance requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements are to be applied prospectively. The Company has adopted the guidance and the required reclassifications and disclosures have been made in its financial statements.

In January 2010, the FASB issued guidance that amends accounting and disclosure requirements for a decrease in ownership in a business under existing US GAAP standards for consolidations. It also clarifies the types of businesses that are in the scope of these consolidations. As required by this guidance, The Company applied the amendments starting with its annual consolidated financial statements as of and for the year ended December 31, 2009 retrospectively to January 1, 2009. The adoption of this guidance did not have a material impact on the Company’s financial statements.

Fair Value Measurement and Disclosures. In April 2009, the FASB issued guidance that requires enhanced disclosures, including interim disclosures, on financial instruments, determination of fair value in turbulent markets, and recognition and presentation of other-than-temporary impairments (ASC 820). This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and its adoption did not have a material impact on the Company’s financial statements (Note 8).

In August 2009, the FASB issued ASU 2009-05, “Measuring Liabilities at Fair Value”, which provides additional guidance on fair value measurement of liabilities. The new guidance provides clarification on the measurement and reporting of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. This guidance is effective for the interim and annual reporting periods beginning after August 2009, and its adoption did not have a material impact on the Company’s financial statements.

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” that requires separate disclosure of significant transfers between Level 1 and Level 2 fair value measurement inputs and a description of the reasons for the transfers and amends existing disclosure requirements in regards of level of disaggregation and inputs and valuation techniques. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. The Company will adopt this guidance from January 1, 2010. The Company does not expect ASU 2010-06 to have a material impact on its financial statements.

Derivatives and Hedging. In March 2008, the FASB issued new guidance that changes disclosure requirements for derivative instruments and hedging activities (ASC 815), which requires additional disclosures about an entity’s strategies and objectives for using derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance is effective for the Company from January 1, 2009. The adoption of the guidance did not have a material impact on the Company’s financial statements.

Intangible assets. In April 2008, the FASB issued guidance on determining the useful life of intangible assets (ASC 350). This guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. Under this guidance, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. The guidance is effective for the Company from January 1, 2009. The adoption of this guidance did not have a material impact on the Company’s financial statements. 81 MegaFon. Annual Report 2009

Subsequent events. In May 2009, the FASB issued an accounting standard (ASC 855) which establishes general standards of accounting for and disclosing events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The standard is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009. The adoption of the standard did not have a material impact on the Company’s financial statements.

Variable Interest Entities (“VIE”). In June 2009, the FASB issued an accounting standard that amends the consolidation guidance for variable-interest entities (ASC 810). The amendments will significantly affect the overall consolidation analysis under the existing guidance. Accordingly, an enterprise will need to reconsider its previous conclusions, including (1) whether an entity is a VIE, (2) whether the enterprise is the VIE’s primary beneficiary, and (3) what type of financial statements disclosures are required. For the Company, this standard becomes effective January 1, 2010. The Company is currently evaluating the impact of this standard on its financial statements.

Revenue Arrangements with Multiple Deliverables. In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements”, which addresses how revenues should be allocated among all products and services included in the Company’s multiple element sales arrangements. It establishes a selling price hierarchy for determining the selling price of each product or service included in a sale arrangement. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor- specific objective evidence nor third-party evidence is available. It replaces “fair value” with “selling price” in revenue allocation guidance. ASU 2009-13 will be effective prospectively for sales entered into or materially modified in fiscal years beginning on or after June 15, 2010. The FASB permits early adoption of ASU 2009-13, applied retrospectively, to the beginning of the year of adoption. The Company is currently evaluating the impact of this standard on its financial statements.

3. Business Combinations and Asset Purchase Acquisitions in 2008 InCore In August 2008, the Company completed the acquisition of 100% ownership interest in CJSC InCore (“InCore”), a provider of ring back tone services, for approximately 1,025 cash consideration, including 2 of direct transaction costs. The primary reason for the acquisition was to provide RBT service directly to the Company’s customers. The Company has consolidated the financial position and results of operations of InCore from the date of acquisition. In 2009 InCore was renamed into CJSC In-Tone.

VideoFon In September 2008, the Company completed the acquisition of 100% ownership interest in OJSC VideoFon (“VideoFon”), an exclusive retailer of the Company operating in St. Petersburg and the Leningrad region, for approximately 155 cash consideration, including 0.5 of direct transaction costs. The primary reason for the acquisition was to develop the Company’s own retail network. The Company has consolidated the financial position and results of operations of VideoFon from the date of acquisition.

T-Pay In September 2008, the Company completed the acquisition of 100% ownership interest in LLC T-Pay (“T-Pay”), a producer and dis- tributor of prepaid phone cards, for approximately 103 in cash consideration, including 0.5 of direct transaction costs. The primary reason for the acquisition was to utilize T-Pay’s large regional storage network and to reduce internal logistical and distribution costs. The Company has consolidated the financial position and the results of operations of T-Pay from the date of acquisition.

Absolut In December 2008, the Company completed the acquisition of 100% ownership interest in CJSC CC Absolut (“Absolut”) for approximately 2,347 cash consideration, including 4 of direct transaction costs. Absolut owns the building which houses the Company’s corporate office in the center of Moscow.

The table below represents the allocation of the purchase price to the net assets of the entities acquired in 2008, based on their estimated fair values and the associated estimated useful lives. 82 CONSOLIDATED FINANCIAL STATEMENTS

3. Business Combinations and Asset Purchase (continued)

InCore VideoFon T-Pay Absolut Total Weighted average amounts useful life, years Tangible assets: Buildings — — — 3,131 3,131 45 Telecommunications equipment 239 — — — 239 12 Other tangible assets 63 14 34 — 111 7 Identifiable intangible assets: Customer base 531 — — — 531 3 Software 27 — 17 — 44 7 Other — — — 30 30 N/A Net working capital 107 2 (26) (235) (152) N/A Deferred tax asset/(liabilities) (110) 3 19 (579) (667) N/A Goodwill 168 136 59 — 363 N/A Total purchase price allocation 1,025 155 103 2,347 3,630

Acquisitions in 2009 AquaFon and Ostelecom In March 2009, the Company completed the acquisition of 100% ownership interest in Debton Investment Limited (“Debton”) for approximately 932 cash consideration. As of the acquisition date, Debton owned 51% of CJSC AquaFon GSM (“AquaFon”), a mobile operator in Abkhazia, which owns GSM 900/1800 and UMTS licenses, frequencies and numbering capacity, and 51% of CJSC Oste lecom (“Ostelecom”), a company holding a mobile license and frequencies in South Ossetia. The Company has consolidated the financial position and the results of operations of Debton, including AquaFon and Ostelecom, from the date of acquisition.

The primary reason for this acquisition was to facilitate the Company’s entry into the mobile telephony market in Abkhazia and South Ossetia, where the Company did not previously have a license to conduct mobile services.

The table below represents the allocation of the purchase price to the acquired net assets of AquaFon and Ostelecom based on their estimated fair values and the associated estimated useful lives.

AquaFon Ostelecom Total amounts Weighted average useful life, years Tangible assets: Buildings and structures 136 — 136 14 Telecommunications network 435 51 486 5 Identifiable intangible assets: Customer base 151 — 151 4 Telecommunication licenses 481 72 553 14 Trademark 67 — 67 10 Software 24 — 24 9 Net working capital 152 (29) 123 N/A Deferred tax liabilities (145) (15) (160) N/A Goodwill 100 35 135 N/A Noncontrolling interest (522) (61) (583) N/A Total estimated purchase price allocation 932 83 MegaFon. Annual Report 2009

In December 2009, the Company through Debton acquired additional 24% shares of Ostelecom for cash consideration of $1 million (30 at the exchange rate as of the date of payment). The Company’s overall indirect share stake in Ostelecom increased from 51% to 75%.

4. Property, Plant and Equipment Property, plant and equipment as of December 31 are as follows:

2008 2009 Cost: Buildings, structures and leasehold improvements 26,327 33,746 Telecommunications network 146,762 176,318 Vehicles, computers, office and other equipment 12,084 14,126 185,173 224,190 Accumulated depreciation (75,515) (99,993) Construction in-progress 19,033 23,034 Property, plant and equipment, net 128,691 147,231

Depreciation expense for the years ended December 31, 2009 and 2008 was 27,946 and 25,224, respectively.

Included in construction in-progress are advances to suppliers of network equipment of 4,174 and 3,729 as of December 31, 2009 and 2008, respectively.

Software and licenses for base stations and billing systems are included in the balances of telecommunications network assets. The net book value of such software was 6,124 and 4,357 as of December 31, 2009 and 2008, respectively.

Interest capitalized was 843 (out of the total interest expense of 2,500) and 830 (out of the total interest expense of 2,661) for the years ended December 31, 2009 and 2008, respectively.

Asset Retirement Obligations The following table describes the changes to the Company’s asset retirement obligations liability:

2008 2009 Asset retirement obligations at the beginning of the year: 2,235 2,349 Revision in estimated cash flows (506) 404 Net increase in liability during the year 334 227 Accretion expense 286 323 Asset retirement obligations at the end of the year 2,349 3,303

The accretion expense was included in depreciation and amortization in the consolidated statements of operations. 84 CONSOLIDATED FINANCIAL STATEMENTS

5. Intangible Assets Intangible assets as of December 31 are as follows:

Weighted average Cost Accumulated amortization amortization period, years 2008 2009 2008 2009 Operating licenses 12 19,129 19,470 (10,887) (12,319) Frequencies 17 3,053 3,861 (706) (926) Numbering capacity 10 1,503 1,685 (1,384) (1,417) Customer base 3 576 727 (24) (283) Marketing related i 5 — 3,317 — (16) ntangible assets Other intangible assets 4 3,299 4,910 (1 410) (2,140) Total 10 27,560 33,970 (14,411) (17,101)

Amortization expense for the years ended December 31, 2009 and 2008 was 3,075 and 2,615, respectively.

Amortization expense for the succeeding five years is expected to be as follows: 2010 — 3,328; 2011 — 3,143; 2012 — 2,883; 2013 — 2,790 and 2014 — 2,616.

Operating licenses Operating licenses, primarily consist of GSM 900/1800 standard licenses, are integral to operations of the Company and any in- ability to extend existing licenses on the same or comparable terms could materially affect the Company’s business. While operating licenses are issued for a fixed period, renewals of these licenses previously had occurred routinely and at nominal cost. The Company determines that there are currently no legal, regulatory, contractual, competitive, economic or other factors that could result in delays in license renewal, or even an outright refusal to renew. The weighted average period until the next renewal date is approximately 3 years.

The terms of the 3G license require the Company to meet certain conditions, including capital commitments and coverage requirements and is amortized over the period contemplated by the license term (Note 17).

Marketing Related Intangible Assets In April 2009, the Company and OJSC Rostelecom (“Rostelecom”) entered into an agreement with the Organizational Committee of the 2014 XXII Olympic Winter Games and XI Paralympic Winter Games in Sochi, to acquire rights and licenses to use the Olympic mascot, logos and other Olympic symbols and, in the case of the Company, to be referred to as “the General Mobile Partner of the 2014 XXII Olympic Winter Games”. Under the agreement the Company committed to a payment of $65 million (1,966 at the exchange rate as of December 31, 2009) in cash to be made in several installments from 2009 through 2014. In addition, the Company and Rostelecom are jointly responsible to provide equal amounts of services in-kind of up to a combined total of $130 million (3,932 at the exchange rate as of December 31, 2009) from 2009 through 2014. The management of the Company believes that the risk of non-performance by Rostelecom of its responsibilities under the agreement is remote.

The Company did not obtain the rights and licenses until the third quarter of 2009, at which time the Company assumed a liability at the net present value of future cash installments of 1,334 and deferred revenue at fair value of 1,516. The recognition of the intangible asset is treated as a non-cash item to the extent of the amount of the liability and deferred revenue recorded. The intangible asset is amortized using the reverse sum-of-the-years’-digits method for approximately 5 years.

The fair value of deferred revenue recognized by the Company was estimated using the Discounted Cash Flow (“DCF”) analysis (Level 3). The basis for the Company’s cash flow assumptions includes forecasted amounts and timing of services to be provided under the agreement. The Company used 7% as a discount rate. 85 MegaFon. Annual Report 2009

6. Long-Term Loans Long-term loans as of December 31 are as follows:

2008 2009 Eurobonds (1) 8,403 — Sberbank loans (2) 495 127 Citibank International Plc., ING BHF-Bank Aktiengesellschaft, and ING Bank N.V. loans (3) 1,665 701 Bayerische Landesbank, Bayerische Landesbank Filiale Di Milano, Commerzbank Aktiengesellschaft, 10,242 7,355 Citibank N.A. London branch, and ING Bank N.V. loans (4) Citibank N.A. London branch and ING Bank N.V. loan (5) 5,622 3,924 China Development Bank and Bayerische Landesbank (6) 2,497 4,732 Japan Bank for International Cooperation, Citibank N.A. Tokyo branch and Calyon Tokyo branch loan (7) 1,028 756 Nordic Investment Bank loan (8) 441 1,680 BNP Paribas London branch & Nordea Bank Finland PLC (9) 71 6,472 Other loans (10) 1,419 1,399 Total long-term loans 31,883 27,146 Less current portion 15,660 7,811 Non-current portion 16,223 19,335

Loan repayments over the five year period beginning on January 1, 2010 are as follows:

2010 7,811 2011 6,794 2012 4,689 2013 3,871 2014 3,078 Thereafter 903 Total 27,146

At December 31, 2009, the Company’s debt was denominated in the following currencies:

Borrowing currency Millions of Rubles Rubles 127 127 US Dollars (in millions) 496 14,988 Euros (in millions) 277 12,031 Total long-term loans 27,146 86 CONSOLIDATED FINANCIAL STATEMENTS

6. Long-Term Loans (continued) (1) Eurobonds In December 2004, an orphan special purpose vehicle, MegaFon S.A., issued $375 million (10,406 at the exchange rate as of December 31, 2004) of loan participation notes (the “Eurobonds”) at face value. The Eurobonds carried interest at a rate of 8% per annum, payable semi-annually. The proceeds from the Eurobonds were used to finance a loan from MegaFon S.A. to the Company on substantially the same terms and conditions as the Eurobonds. Deferred financing costs of 178 were capitalized in connection with this loan.

During 2007 and 2008, the Company repurchased and cancelled $89 million face value of the Eurobonds. The Eurobonds matured on December 10, 2009 and were paid in full on that date.

(2) Sberbank

The Company has entered into several credit facilities with Sberbank at various interest rates and maturities. In August 2007, the interest rate on all loans was re-set to 7.5% per annum. The credit facilities matured at dates varying from 2006 through 2010. In January 2010, the Company repaid the aggregate principal amount and related interest in respect to all outstanding credit facilities with Sberbank.

(3) Citibank International Plc., ING BHF-Bank Aktiengesellschaft and ING Bank N.V. Citibank International Plc. and ING BHF-Bank Aktiengesellschaft and Siemens AG (“Hermes Credit Facility”); Citibank International plc. and ING Bank N.V. and Ericsson AB (“EKN Credit Facility”); Citibank International Plc. and ING Bank N.V. and Nokia Corporation (“Finnvera Credit Facility”).

In October 2003, the Company entered into the Hermes Credit Facility for up to 75.4 million Euros (2,629 at the exchange rate as of October 31, 2003). The Hermes Credit Facility can only be used to purchase Siemens AG equipment. The Hermes Credit Facility carries interest at a rate of approximately 4% per annum. The Hermes Credit Facility requires the Company to make semi-annual payments, plus accrued interest, from 2004 through 2011. The Hermes Credit Facility is guaranteed by Hermes, a German export credit agency. A payment of 4.8 million Euros (167 at the exchange rate as of the date of payment) was required to obtain the guarantee and was capitalized as deferred finance charges.

In May 2004, the Company entered into the EKN Credit Facility for up to $54 million (1,549 at the exchange rate as of May 31, 2004). The EKN Credit Facility could only be used to purchase Ericsson equipment. The EKN Credit Facility carried interest at a rate of approximately 4% per annum. The EKN Credit Facility required the Company to make semi-annual payments, plus accrued interest, from 2004 through 2009. The EKN Credit Facility was guaranteed by EKN, a Swedish export credit agency. In May 2009, the Com- pany fully repaid the EKN Credit Facility.

In May 2004, the Company entered into the Finnvera Credit Facility for up to $135 million (3,913 at the exchange rate as of May 31, 2004). The Finnvera Credit Facility could only be used to purchase Nokia Corporation equipment. The Finnvera Credit Facility carried interest at a rate of approximately 4% per annum. The Finnvera Credit Facility required the Company to make semi-annual payments, plus accrued interest, from 2004 through 2009. The Finnvera Credit Facility was guaranteed by Finnvera, a Finnish export credit agency. In May 2009, the Company fully repaid the Finnvera Credit Facility.

A payment of $14 million (406 at the exchange rate as of the date of payment) was required to obtain the guarantees for the EKN Credit Facility and the Finnvera Credit Facility and was capitalized as deferred finance charges.

(4) Bayerische Landesbank, Bayerische Landesbank Filiale Di Milano, Commerzbank Aktiengesellschaft, Citibank N.A. London branch, and ING Bank N.V. Bayerische Landesbank, Commerzbank Aktiengesellschaft and Siemens AG (“Hermes II Credit Facility”); Bayerische Landesbank, Commerzbank Aktiengesellschaft and Bayerische Landesbank Filiale Di Milano and Siemens Mobile Communications Spa (“SACE Credit Facility”); Citibank N.A. London branch, ING Bank N.V. and several other financial institutions and Nokia Corporation (“Finn- vera II Credit Facility”).

In June 2005, the Company entered into the Hermes II Credit Facility for up to 185 million Euros (6,387 at the exchange rate as of June 30, 2005). The Hermes II Credit Facility can only be used to purchase Siemens AG equipment. The Hermes II Credit Facility carries interest at a rate of Euribor plus 0.35% per annum. The Hermes II Credit Facility requires the Company to make semi-annual payments, plus accrued interest, from 2006 through 2014. The Hermes II Credit Facility is guaranteed by Hermes, a German export credit agency. 87 MegaFon. Annual Report 2009

In June 2005, the Company entered into the SACE Credit Facility for up to 74.5 million Euros (2,572 at the exchange rate as of June 30, 2005). The SACE Credit Facility can only be used to purchase Siemens Mobile Communications SpA equipment. The SACE Credit Facility carries interest at a rate of approximately 4% per annum. The SACE Credit Facility requires the Company to make semi-annual payments, plus accrued interest, from 2006 through 2015. The SACE Credit Facility is guaranteed by SACE, an Italian export credit agency.

In June 2005, the Company entered into the Finnvera II Credit Facility for up to $321.5 million (9,217 at the exchange rate as of June 30, 2005). The Finnvera II Credit Facility can only be used to purchase Nokia Corporation equipment. The Finnvera II Credit Facility carries interest at a rate of approximately 4% per annum. The Finnvera II Credit Facility requires the Company to make semi-annual payments, plus accrued interest, from 2005 through 2010. The Finnvera II Credit Facility is guaranteed by Finnvera, a Finnish export credit agency.

A payment of $45.2 million (1,288 at the exchange rate as of date of payment), in the aggregate, was required to obtain guarantees for these credit facilities and was capitalized as a deferred finance charge.

(5) Citibank N.A. London branch and ING Bank N.V. In June 2006, the Company entered into the Finnvera III Credit Facility for up to 218 million Euros (7,407 at the exchange rate as of June 30, 2006). The Finnvera III Credit Facility can only be used to purchase Nokia Corporation equipment. The Finnvera III Credit Facility carries interest at a rate of approximately 4.3% per annum. The Finnvera III Credit Facility requires the Company to make semi-annual payments, plus accrued interest, from 2007 through 2011. The Finnvera III Credit Facility is guaranteed by Finnvera, a Finnish export credit agency. Several payments aggregating 6.5 million Euros (225 at the exchange rate as of the dates of payment) were required to obtain the guarantee. These payments were capitalized as deferred finance charges as of each payment date.

(6) China Development Bank and Bayerische Landesbank (“China Development Bank II Credit Facility”); China Development Bank (“China Development Bank III Credit Facility”) In October 2007, the Company entered into the China Development Bank II Credit Facility for up to $85 million (2,102 at the exchange rate as of October 31, 2007). The China Development Bank II Credit Facility can only be used to purchase Huawei equipment. The China Development Bank II Credit Facility carries interest at a rate of LIBOR plus 1.1% per annum. The China Development Bank II Credit Facility requires the Company to make semi-annual payments, plus accrued interest, from 2009 through 2014.

In June 2009, the Company entered into the China Development Bank III Credit Facility for up to $300 million (9,387 at the exchange rate as of June 30, 2009). The China Development Bank III Credit Facility can only be used to purchase Huawei equipment. The China Development Bank III Credit Facility carries interest at a rate of LIBOR plus 2.7% per annum. The China Development Bank III Credit Facility requires the Company to make semi-annual payments, plus accrued interest, from 2011 through 2016.

As of December 31, 2009, the Company has an amount due to Huawei of $8.3 million (251 at the exchange rate as of December 31, 2009). The Company intends to pay this amount using the proceeds from the China Development Bank III Credit Facility. In the accompanying consolidated balance sheet the Company has classified the amount due to Huawei as long-term debt according to the China Development Bank III Credit Facility repayment schedule.

(7) Japan Bank for International Cooperation, Citibank Japan Ltd. (formerly Citibank N.A. Tokyo branch) and Calyon Tokyo branch (“JBIC Credit Facility”) In January 2006, the Company entered into the JBIC Credit Facility for up to $50 million (1,406 at the exchange rate as of January 31, 2006). The JBIC Credit Facility can only be used to purchase NEC Corporation equipment and limited local content. Tranche A of the JBIC Credit Facility in the amount of $30 million carries interest at a rate of 6.87% per annum. Tranche B of the JBIC Credit Facility in the amount of $20 million carries interest at a rate of LIBOR plus 0.45% per annum. The JBIC Credit Facility requires the Company to make semi-annual payments, plus accrued interest, from 2008 through 2012.

(8) Nordic Investment Bank (“NIB Credit Facility”) In October 2004, the Company entered into the NIB Credit Facility for up to $30 million (863 at the exchange rate as of October 31, 2004). In June 2006, the NIB Credit Facility was amended to increase the amount of the facility from $30 million to $50 million (1,354 at the exchange rate as of June 30, 2006). The NIB Credit Facility carries interest at a rate of LIBOR plus 0.85 — 2.20% per annum depending on the international corporate ratings received by the Company from Fitch, S&P and Moody’s. The NIB Credit Facility requires the Company to make semi-annual payments, plus accrued interest, from 2007 through 2012.

In April 2007, the NIB Credit Facility was amended to increase the amount of the facility from $50 million to $100 million (2,569 at the exchange rate as of April 30, 2007). In addition, the NIB Credit Facility was converted to a revolving loan facility, and Nordea and Bayerische Landesbank were added to the lending group. 88 CONSOLIDATED FINANCIAL STATEMENTS

6. Long-Term Loans (continued) (9) BNP Paribas London branch, Nordea Bank Finland PLC, Calyon Bank Helsinki branch and KFW Impex Bank (“Finnvera IV Credit Facility”) In November 2008, the Company entered into the Finnvera IV Credit Facility for up to the US dollar equivalent of 177.7 million Euros (6,322 at the exchange rate as of November 30, 2008). The Finnvera IV Credit Facility can only be used to purchase Nokia Siemens Networks (“NSN”) equipment. The Finnvera IV Credit Facility carries interest at a rate of 4.54% per annum. The Finnvera IV Credit Facility requires the Company to make semi-annual payments, plus accrued interest, from 2010 through 2014. The Finnvera IV Credit Facility is guaranteed by Finnvera, a Finnish export credit agency. The Company is required to make payments aggregating $10.7 million (324 at the exchange rate as of December 31, 2009) in order to obtain this Finnvera guarantee, and these payments will be made in proportion to the amount of the draw down of the Credit Facility. These payments will be capitalized as deferred finance charges as they are made.

As of December 31, 2009, the Company drew down $180 million under the Finnvera IV Credit Facility.

As of December 31, 2009, the Company has an amount due to NSN of 23.6 million Euros (1,024 at the exchange rate as of December 31, 2009). The Company intends to pay this amount using the proceeds from Finnvera IV Credit Facility. In accompanying consolidated balance sheet as of December 31, 2009 the Company has classified the amount due to NSN as short-term and long-term debt according to the Finnvera IV repayment schedule.

(10) Other In addition to the above, the Company has entered into various other credit facilities with maturities from 2006 through 2012 as follows:

Svyazbank — three credit facilities with an aggregate principal amount of 321. As of December 31, 2009, these credit facilities were fully drawn. These credit facilities carry interest at rates between 11% and 12% per annum.

UniCredit Bank (formerly International Moscow Bank) — $25 million (756 at the exchange rate as of December 31, 2009) credit facility. As of December 31, 2009, this credit facility was fully drawn. This credit facility carries interest at a rate of LIBOR plus 3.5% per annum.

Transcontinental Mobile Investment Ltd. — $2 million (61 at the exchange rate as of December 31, 2009) credit facility. As of Decem- ber 31, 2009, this credit facility was fully drawn. This credit facility carries interest at a rate of 6% per annum.

Huawei Technologies — $8.6 million (261 at the exchange rate as of December 31, 2009), of which approximately $7.4 million is non- interest bearing and the remaining amount carries interest rates between 5% and 8% per annum.

Covenant Requirements The Hermes, EKN, Finnvera, Hermes II, Finnvera II, SACE, Finnvera III, China Development Bank II, China Development Bank III, JBIC, NIB and Finnvera IV Credit Facilities (Notes 6 (3), (4), (5), (6), (7), (8) and (9) above) place various restrictions on the Company related to incurrence of debt, negative pledges, mergers and acquisitions, and material changes in the business without prior consent from the lenders. The Credit Facilities also require the Company to meet various financial and non-financial covenants, including several restrictions related to financial condition.

Undrawn Credit Facilities In August 2006, the Company entered into a revolving credit facility with UniCredit Bank (“UniCredit Facility”) for up to 4 billion Rubles. As of December 31, 2009, the Company has not borrowed under the UniCredit Facility. The UniCredit Facility carries a rate of interest that depends on the tenor of the loan selected on each drawdown. However, the interest rate cannot exceed 8.25%. The amounts drawn under the UniCredit Facility are to be repaid no later than two years from the date the amounts are drawn. The final maturity is August 2011.

In December 2009, the Company entered into the Credit Facility with BNP Paribas London branch, Calyon Bank Helsinki branch and Nordea Bank Finland plc guaranteed by Finnvera, Finish export credit agency, (“Finnvera V Credit Facility”) for the dollar equivalent of 105 million Euros (4,556 at the exchange rate as of December 31, 2009) at fixed interest rate of 2.91%. The loan proceeds are to be utilized to finance purchases of NSN equipment only. The Finnvera V Credit Facility is to be repaid by 10 equal semi-annual installments over the period from 2011 through 2015. As of December 31, 2009, the full amount of the Finnvera V Credit Facility was unutilized. 89 MegaFon. Annual Report 2009

7. Loans from Shareholders In September 2009, the shareholders requested the Company to make early repayment of all outstanding shareholders’ loans. Where required, the relevant consents from lenders were obtained and the shareholders’ loans were fully repaid in December 2009.

Telecominvest During 2001 to 2003, the Company entered into several loan agreements with Telecominvest aggregating $28.2 million (829 at the exchange rate as of the date of repayment at December 28, 2009). The loans carried interest at rates between 6% and 10% per annum. The original maturities of the loans were from 2004 through 2009. In November 2004, the loans were extended and amended. The loans were fully repaid in December 2009.

TeliaSonera During 2001 to 2003, the Company entered into several loan agreements with affiliates of TeliaSonera aggregating $45 million (1,324 at the exchange rate as of the date of repayment at December 28, 2009). The loans carried interest at rates between 0% and 10% per annum. The original maturities of the loans were from 2004 through 2009. In November 2004, the loans were extended and amended. The loans were fully repaid in December 2009.

IPOC and Amikitia Investments Limited In 2003, the Company entered into several loan agreements with IPOC aggregating $16 million (489 at the exchange rate as of the date of repayment at December 22, 2009). The loans carried interest at a rate of 6% per annum. The original maturity of the loans was July 2004. In November 2004, the loans were extended and amended. In December 2008, the Company received notice from IPOC that, in conjunction with its liquidation, all of its rights in respect of the loans have been assigned to Amikitia Investments Limited, an affiliate of Telecominvest. In December 2009 the rights to the loans were transferred to AF Telecom Holding Limited. The loans were fully repaid in December 2009.

CT Mobile In 2001, Sonic Duo, a wholly-owned subsidiary of the Company, entered into three Ruble denominated interest-free loan agreements with CT Mobile aggregating 624. The loans had no stated maturity. The first two loans with an aggregate principal of 527 were callable by CT Mobile not earlier than December 31, 2008 and the third loan was callable by CT Mobile not earlier than December 31, 2030. In December 2008, Sonic Duo paid the first two loans in the amount of 527 and in February 2009, Sonic Duo paid the third loan in the amount of 97.

8. Derivative Financial Instruments In 2009, the Company entered into a number of dual-currency deposits with various banks. The dual-currency deposits are financial instruments which combine features of a time deposit and a sold foreign currency put option. The dual-currency deposits are settled either in the original deposit currency (Euro or US Dollar) or in another pre-agreed currency (Ruble, US Dollar or Euro) depending on which currency has depreciated relative to the other currency since the date of entering into the dual-currency deposit. All dual- currency deposits bear over-the-market interest rates which include a put option premium payable upon settlement. The purpose of entering into these financial instruments is for yield enhancement on the Company’s foreign currency cash investments.

As of December 31, 2009, the Company held 25 million Euros (1,084 million Rubles at the exchange rate as of December 31, 2009) and $30 million (907 million Rubles at the exchange rate as of December 31, 2009) of deposits which are classified as cash and cash equivalents in the consolidated balance sheets.

The respective embedded derivative financial instrument, which is the put option, is bifurcated and measured at fair value using the Black-Scholes model (Level 2). For accounting purposes, the Company reports all gains and losses from the change in fair value of these derivative financial instruments directly in the consolidated statements of operations.

In the third quarter of 2006 and the second quarter of 2007, the Company entered into several long-term fixed-to-fixed rate cross- currency swaps. These derivative financial instruments are used to limit exposure to changes in foreign currency exchange rates on certain long-term debt denominated in foreign currencies. 90 CONSOLIDATED FINANCIAL STATEMENTS

8. Derivative Financial Instruments (continued) The swaps effectively converted, using the then-effective foreign currency exchange rates, some of the Company’s outstanding fixed-to-fixed rate long-term US Dollar and Euro denominated loans (specifically the EKN, Finnvera, Finnvera II and Finnvera III Credit Facilities) into synthetically equivalent Ruble long-term loans with fixed rates ranging from 3.95% to 6.65%. The carrying amount of such long-term loans was 7,006 as of December 31, 2008 and 3,501 as of December 31, 2009. For accounting purposes, the Company has chosen not to designate these derivatives as hedging instruments and, therefore reports all gains and losses from the change in fair value (Level 2) of these derivative financial instruments directly in the consolidated statements of operations.

Gains/(losses) on derivatives for the years ended December 31 are as follows:

2008 2009 Put options sold — 655 Foreign currency swaps 2,322 (955) Total gain/(loss) on derivatives, net 2,322 (300)

The derivatives are valued using standard valuation techniques as no quoted market prices exist for the instruments. The principal technique used to value these instruments is through comparing the foreign currency exchange rates at the time that the derivatives were acquired to the forward exchange rates quoted in the existing market which is inactive as of the valuation date. The key inputs include interest rate yield curves, foreign exchange spot and forward rates. The fair value of these derivatives includes the effects of the counterparty’s non-performance risk, including credit risk.

Fair values of these derivative financial instruments in the consolidated balance sheets as of December 31 are presented below:

Derivative instruments Balance sheet location 2008 2009 Put options sold Other current assets — 6 Foreign currency swaps Other current assets 888 406 Other non-current assets 1,342 328 Total derivatives 2,230 740

The fair value of financial instruments, including cash, cash equivalents and derivative financial instruments, which are included in current assets and liabilities, accounts receivable and accounts payable approximates the carrying value of these items due to the short-term nature of these amounts.

As of December 31, 2009, the fair value of fixed and variable rate debt approximated its carrying value. As of December 31, 2008, the fair value of fixed and variable rate long-term loans (based on future cash flows discounted at current market rates) was 35,387.

The Company, using available market information and appropriate valuation methodologies, where they exist, has determined the estimated fair values of financial instruments. However, judgment is necessarily required to interpret market data to determine the estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. While management has used available market information in estimating the fair value of financial instruments, the market information may not be fully reflective of the value that could be realized in the current circumstances.

The Company, in connection with its current activities, is exposed to various financial risks, such as foreign currency risks, interest rate risks and credit risks. The Company manages these risks and monitors their exposure on a regular basis.

9. Long-Term Incentive Program In April 2008, the Company’s Board of Directors approved a long-term motivation and retention program. The program provides that certain key executive and senior level employees will be eligible for awards of phantom share options. The phantom share options can be awarded under the 2008 Grant and 2009 Grant. Under both grants, the value ascribed to the full package of phantom share options for which options may be awarded is 1.1% of the value of the Company, which in turn is calculated as six times operating 91 MegaFon. Annual Report 2009

income before depreciation and amortization (OIBDA) reduced by debt, net of cash and cash equivalents and short-term investments (net debt). The awarded phantom share options will vest every two years over a four-year period and are contingent upon the recipient’s continuing employment with the Company and increase in the value of the Company. The in-the-money phantom share options will be settled in cash upon vesting.

The following table summarizes information as of December 31, 2009 regarding outstanding phantom share options exercisable upon maturity.

Number of phantom Total Compensation expense, inclusive of all related taxes share options unrecognized of the year ended December 31, granted compensation cost 2008 2009 2008 Grant 4,156 656 53 719 2009 Grant 4,503 343 — 15 Total 8,659 999 53 734

10. Revenues Revenues for the years ended December 31 are as follows:

2008 2009 Revenues from local subscribers 146,689 150,023 Roaming charges to other wireless operators 2,120 1,811 Revenues from interconnection charges 24,383 25,732 Connection fees 248 86 Sales of handsets and accessories 1,252 2,385 Other revenues 759 1,846 Total revenues 175,451 181,883

11. Cost of Services Cost of services for the years ended December 31 are as follows:

2008 2009 Interconnection charges 30,625 31,314 Cost of SIM-cards 1,232 1,350 Roaming expenses 2,207 1,793 Cost of handsets and accessories sold 1,363 2,387 Other costs — 21 Total cost of services 35,427 36,865 92 CONSOLIDATED FINANCIAL STATEMENTS

12. Sales and Marketing Expenses Sales and marketing expenses for the years ended December 31 are as follows:

2008 2009 Advertising 7,471 6,200 Commissions to dealers for connection of new subscribers 5,573 7,763 Commissions to dealers for distribution of prepaid cards and cash collection from subscribers 3,411 3,398 Total sales and marketing expenses 16,455 17,361

13. Operating Expenses Operating expenses for the years ended December 31 are as follows:

2008 2009 Salaries and social charges 11,365 13,514 Rent 7,182 8,919 Operating taxes 4,035 4,388 Network repairs and maintenance 3,784 3,502 Radio frequency fees 2,270 2,651 Bad debt expense (Note 15) 321 1,122 Office maintenance 1,504 1,324 Professional services 953 697 Materials and supplies 378 234 Inventory write-down (Note 17) — 339 Insurance 257 152 Other expenses 3,274 2,623 Total operating expenses 35,323 39,465

Rent represents expenses related to the operating lease of premises for offices, base stations and switches.

14. Income Taxes The following presents the significant components of the Company’s provision for income taxes for the years ended December 31:

2008 2009 Current income taxes 15,330 10,555 Deferred income tax expense 144 10 Total income taxes 15,474 10,565

Income taxes represent the Company’s provision for profit tax. Profit tax is calculated at 20% and 24% of taxable profit for the years ended December 31, 2009 and 2008, respectively, since, in accordance with the laws of the Russian Federation, effective January 1, 2009 the corporate income tax rate decreased by 4%. 93 MegaFon. Annual Report 2009

The reconciliation between the provision for income taxes reported in the consolidated financial statements versus the provision for income taxes computed by applying the Russian enacted statutory tax rate to income before income taxes and minority interest is as follows:

2008 2009 Income before income taxes and noncontrolling interest 59,770 55,865 Statutory income tax rate 24% 20% Theoretical provision for income taxes 14,345 11,173 Non-deductible expenses 1,197 596 Effect of income tax preferences — (628) Recognized tax benefits — (340) Other differences 117 (236) Effect of change in income tax rate (185) — Provision for income taxes reported in the consolidated financial statements 15,474 10,565

The effect of income tax preferences, in the table above, represents the impact of lower income tax rates for the Company under applicable regional laws of the Russian Federation. These laws provide that income tax exemptions up to 6.5% are granted to entities which make capital investments, agreed with regional administrations, within the respective region and participate in various social projects. These exemptions are granted on an annual basis.

As of December 31, 2009, the tax years ended December 31, 2007, 2008 and 2009 remained subject to examination by the tax authorities.

The amounts reported in the accompanying consolidated financial statements at December 31 consisted of the following:

2008 2009 Deferred tax assets: Revenue recognition 367 426 Loss carry-forwards 553 135 Accrued compensation and social contributions 256 608 Other assets 415 668 Total deferred tax assets 1,591 1,837 Deferred tax liabilities: Intangible assets 1,599 1,453 Property, plant and equipment 436 1,074 Derivative financial instruments 446 148 Other liabilities 8 230 Total deferred tax liabilities 2,489 2,905 Net deferred tax liabilities 898 1,068 Add non-current deferred tax assets 94 691 Add current deferred tax assets 1,167 772 Total long-term deferred tax liabilities 2,159 2,531 94 CONSOLIDATED FINANCIAL STATEMENTS

14. Income Taxes (continued) For income tax purposes of the Russian Federation and Tajikistan, certain of the Company’s subsidiaries have net operating loss carry-forwards (“NOLs”) incurred from 2001 through 2009, which may be carried forward ten years to offset future taxable income. The use of these NOLs is not restricted in 2009 or in future years. As of December 31, 2009, these subsidiaries had NOLs available for carry-forward aggregating approximately 608 with a related tax benefit of 135 which expires in 2014.

As of December 31, 2009 the Company analyzed its tax positions for uncertainties affecting recognition and measurement thereof. Following the analysis, the Company believes that it is more likely than not that the majority of all deductible tax positions stated in the income tax return would be sustained upon the examination by the tax authorities.

15. Valuation and Qualifying Accounts The following summarizes the changes in the allowance for doubtful accounts for the years ended December 31:

2008 2009 Balance at the beginning of the year 222 511 Bad debt expense 321 1,122 Accounts receivable written off (32) (772) Allowance for doubtful accounts at the end of the year 511 861

16. Related Party Transactions The Company has entered into certain transactions with its shareholders and their affiliates. The outstanding receivable and payable balances and the annual revenues and costs are as follows:

As of December 31 2008 2009 Accounts receivable, related parties TeliaSonera (1) 31 15 Turkcell Iletisim (4) 12 2 Azercell Telekom B.M (5) 14 5 Peterservice (7) 13 4 Other 11 9 Total accounts receivable, related parties 81 35 Accounts payable, related parties TeliaSonera (1) 10 147 Telecominvest (3) — 2 Turkcell Iletisim (4) 12 2 Peterservice (7) 323 300 Yugosetinsvyazinvest (10) — 29 Other 20 22 Total accounts payable, related parties 365 502 95 MegaFon. Annual Report 2009

For the years ended December 31 2008 2009 Revenues TeliaSonera (1) 151 130 Turkcell Iletisim (4) 84 45 Azercell Telekom B.M (5) 34 38 Latvijas Mobilais SIA (6) 42 20 Other 102 66 Total revenues, related parties 413 299 Cost of services TeliaSonera (1) 44 720 Turkcell Iletisim (4) 122 63 Other 70 80 Total cost of services, related parties 236 863 Sales, Marketing and Operating expenses Altimo (2) — 17 Telecominvest (3) 125 80 Peterservice (7) 506 616 Sportivny Kanal 7TV (8) — 116 Kelly Services (9) 26 — Other 12 23 Total operating expenses, related parties 669 852

(1) TeliaSonera — settlements on roaming and interconnect services.

(2) Altimo — provision of legal and personnel services under the agreement with Altimo, a member of the Alfa Group, effective from April 2009.

(3) Telecominvest — provision of legal and personnel services under the agreement effective from April 2009. In 2008 and 2009 Telecominvest provided invoice delivery services to customers of the Company.

(4) Turkcell Iletisim — primarily settlements on roaming services. Turkcell Ilitisim is an affiliate of TeliaSonera.

(5) Azercell Telekom B.M — primarily settlements on roaming services. Azercell Telekom B.M is an affiliate of TeliaSonera.

(6) Latvijas Mobilais SIA — primarily settlements on roaming services. Latvijas Mobilais SIA is an affiliate of TeliaSonera.

(7) Peterservice — the Company purchased billing system and related support services from Peterservice, an affiliate of Telecom- invest, in the amount of 1,127 during 2008 and 1,465 during 2009.

(8) Sportivny Kanal 7TV — purchases of advertising space from the Sportivny Kanal 7TV, an affiliate of Telecominvest.

(9) Kelly Services — payments for outsourcing of personnel. This company was an affiliate of one of the members of the Board of Directors. In April 2008, Kelly Services ceased to be a related party to the Company.

(10) Yugosetinsvyazinvest — loan and interest payable to noncontrolling shareholder of Ostelecom, a subsidiary of the Company (Note 3). 96 CONSOLIDATED FINANCIAL STATEMENTS

16. Related Party Transactions (continued) Bank deposits The Company maintains bank deposit accounts with Alfa Bank, a member of the Alfa Group. The amounts on deposits as of Decem- ber 31, 2009 and 2008 were 3,202 and 2,206, respectively.

17. Commitments, Contingencies and Uncertainties Leases The Company has various cancelable and non-cancelable operating lease agreements for land, equipment and office. Future minimum lease payments under non-cancelable operating leases with terms of one year or more, as of December 31, 2009, are as follows:

2010 115 2011 115 2012 111 2013 66 2014 and thereafter 45 Total 452

Russian Environment and Current Economic Situation Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the Russian government.

The Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. The global financial crisis has resulted in a decline in the gross domestic product, capital markets instability, significant deterioration of liquidity in the banking sector, and tighter credit conditions within Russia. While the Russian government has introduced a range of stabilization measures aimed at providing liquidity to Russian banks and companies, there continues to be uncertainty regarding the access to capital and cost of capital for the Company and its counterparties, which could affect the Company’s financial position, results of operations and business prospects.

While management believes it is taking appropriate measures to support the sustainability of the Company’s business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Company’s results and financial position in a manner not currently determinable.

Telecom licenses capital commitments In May 2007, MegaFon was awarded a license that expires on May 21, 2017, for the provision of 3G mobile radiotelephony communications services for the entire territory of the Russian Federation. The 3G license was granted subject to certain capital and other commitments. The three major conditions are that the Company will have to build a certain number of base stations that support 3G standards, will have to start commercial exploitation of the 3G technology in each region of the Russian Federation over the period from May 2008 through May 2010, and also will have to build a certain number of base stations by the end of the third, fourth and fifth years from the date of granting of the license. As of March 9, 2010, the Company is in full compliance with these license conditions, including constructing the required number of base stations required at this time. 97 MegaFon. Annual Report 2009

Taxation Russian tax, currency and customs legislation are subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to transactions and activities of the Company may be challenged by the relevant regional and federal authorities. Recent events within Russia suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of the legislation and assessments and as a result, it is possible that transactions and activities that have not been challenged in the past may now be challenged. Therefore, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for the three calendar years preceding the current year. Under certain circumstances reviews may cover longer periods.

Based on tax examinations of other telecommunications companies operating in Russia, the tax authorities are currently focusing on a number of specific areas, which include, but are not limited to revenues from interconnection charges and marketing initiatives. As a result of such examinations, the tax authorities are claiming additional taxes which are currently being disputed in the courts by these Russian telecommunications companies.

Management believes that the Company and its subsidiaries are in compliance with the tax laws affecting its operations; however, the risk remains that governmental authorities could take differing positions with regard to interpretative issues.

Litigation The Company is not a party to any material litigation, although in the ordinary course of business, some of the Company’s subsidiaries may be party to various legal and tax proceedings, and subject to claims, certain of which relate to the developing markets and evolving fiscal and regulatory environments in which they operate. In the opinion of management, the Company’s and its subsidiaries liability, if any, in all pending litigation, other legal proceedings or other matters, will not have a material effect on the financial condition, results of operations or liquidity of the Company.

Commitments In August 2008, the Company entered into a two-year fixed commitment with Apple Sales International (“Apple”), an Irish affiliate of Apple Computer Inc., to purchase a total of one million unlocked iPhone handsets over a two-year period for further resale in Rus- sia. The Company fulfilled this requirement with respect to the fourth quarter of 2008, but due to the significantly reduced handset demand brought about by the economic crisis in Russia, the Company experienced difficulty re-selling these iPhones. As a result, the Company did not purchase the additional quarterly minimum quantities of iPhones as per the contract.

The Company has had several discussions with Apple, and believes that Apple is interested in continuing business relationship with the Company. There can be no assurance, however, that Apple will not bring a claim against the Company in respect of the contract. In light of the uncertainty as to whether a claim will be made and, if made, as to the amount which Apple may be able to claim, the Company is not able to estimate the amount of loss, if any, that the Company may sustain.

In June 2009, the Company recorded an inventory write-down to lower-of-cost-or-market value of 242 related to its iPhones stock. The write-down was recorded as operating expense in the consolidated statements of operations.

In March 2009, the Company entered into an eighteen-month distribution contract with Euroset, one of the largest Russian mobile retailers, to connect approximately 7.2 million subscribers. The total cash consideration for this deal was approximately $146 million, of which approximately $97 million (3,292 as of April 9, 2009, the date of the payment) has been prepaid and a promissory note has been issued for the remaining amount. Management believes that as of March 9, 2010, the Euroset is in full compliance with these contract conditions. 98 CONSOLIDATED FINANCIAL STATEMENTS

18. Subsequent Events In February 2010 the Federal Anti-Monopoly Service (“FAS”) announced that it is considering launching a formal investigation into the roaming charges levied by the Company and the other two major mobile operators, MTS and Vimpelcom, under Part 1 of Article 10 of the Federal law on competition. As alleged by the mass-media, in making this announcement, the FAS asserted that the charges were “unreasonably overpriced”, on the basis that an analysis carried out by the Interstate Council for Anti-Monopoly Policy showed that the roaming charges levied by the three operators were 2 to 2.5 times higher than comparable tariffs charged by other international operators and also 3 to 6 times higher than the European Commission would permit on the territory of the European Union. The Company does not believe that it is in violation of the competition law but, if its roaming charges and practices are found to be anti-competitive, the Company could face certain fines (under Article 14.31 of the Russian Federation Admin- istrative Code, the maximum amount of such fine is 15% of overall roaming revenues). As of March 9, 2010, the Company has not received any official documents from the FAS, and, therefore, cannot evaluate the probability of such fines.

In February 2010, the Board of Directors of the Company provided their approval for the Company to enter into a Share Purchase Agreement (“SPA”) with Synterra Cyprus Limited and Burnham Advisors Limited to acquire 100% of the ownership interest in CJSC Synterra (Synterra), an alternative telecommunications operator in Russia. While negotiations regarding the transaction are continuing, the purchase price is anticipated to be approximately $700 million including the assumption of Synterra’s external debt. The consummation of the transaction is conditioned upon, among other things, agreeing the terms of and executing the SPA, the receipt of all necessary regulatory approvals in Russia and satisfaction of all conditions precedent which will be defined in the SPA. CONTACT INFORMATION

Full name: Open Joint-Stock Company MegaFon Short name: MegaFon

Head Office: Address: Russia, 115035, Moscow, Kadashevskaya Naberezhnaya, 30 Tel: +7 (495) 980 1970 Fax: +7 (495) 980 1949 E-mail: info@megafon.ru Web: http://www.megafon.ru/

Information for investors: Corporate Secretary: Anna Goriainova Tel: +7 (495) 980 1970 Fax: +7 (495) 980 1930 E-mail: [email protected] Web: http://www.megafon.ru/about/invest/

Auditor: Ernst and Young Address: 115035, Moscow, Sadovnicheskaya Naberezhnaya, 77, Bldg 1, Avrora Business Center Tel: +7 (495) 705 9700, 755 9700 Fax: +7 (495) 755 9701 Web: http://www.ey.com/global/content.nsf/Russia/Home

Company registrar: National Registry Company FFMS license no. 10-000-1-000252 (indefinite) Address: 121357, Moscow, Ulitsa Beresayeva, 6 Tel: +7 (495) 440 7918, 440 7920, 440 7929, 440 7930, 440 6325 Fax: +7 (495) 440 6355 Web: http://www.nrcreg.ru/ www.megafon.ru