Annual report 2019

Providing opportunities Annual report 2019 Contents

4 Chairman’s Statement 8 Chief Executive’s Review 36 82 110 Strategic Report Sustainability Corporate

38 Market Overview 84 Our approach Governance, Securities, 14 to sustainability 42 Disital Strategy in Action and Risk Management About MegaFon 86 Stakeholder engagement 46 Business Model 112 Corporate Governance 20 Performance Highlights 97 Occupational health 48 Operational Results and safety 133 Securities 22 Providing Opportunities 78 Financial Performance 98 Social responsibility 137 Risk Management and Internal Control 26 Assets and resources and charity

32 Geography 106 Procurement

34 History 107 Ethics and human rights 35 Key Events 108 Anti-corruption 148 108 Our approach to environmental protection Financial Statements and Appendix

150 Consolidated Financial Statements

218 Material Topics and Materiality Matrix

220 GRI tables

223 Glossary

225 Contacts

About this Report

Preliminarily approved by the Board of Directors In this Report “MegaFon” or the “Company” of PJSC MegaFon on 6 May 2020. refer to PJSC MegaFon and its controlled entities, For more PJSC “MegaFon” refers to Public Joint-Stock information Read This Annual Report presents data from 1 January through Company “MegaFon”. please visit: Online Report at: 31 December 2019 and information about certain events https://corp.megafon.com ar2019.megafon.eng occurring in 2020. Immaterial discrepancies in totals and subtotals in the charts and tables of the Annual Report are This Annual Report has been prepared in accordance due to rounding. with the Global Reporting Initiative (GRI) Guidelines for reporting on sustainable development. For more information see Appendix: Material Topics and Materiality Matrix.

2 3 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Chairman’s Statement

In 2019, MegaFon continued its active transformation from a mobile operator to a provider of digital opportunities by maintaining its customer focus and driving towards a single digital ecosystem. This approach has already proved effective, as evidenced by our strong financial and operational performance in 2019.

Tell us about the 2019 trends What was MegaFon’s performance in the Russian telecoms market. in 2019?

In 2019, the Russian telecoms market grew by 2.1% to RUB In 2019, the Company posted an increase in revenue 1.73tn, decelerating from the elevated rates of the previous and robust growth in profitability. This strong performance two years. The market dynamics continue to be impacted was largely due to the continued implementation by two countervailing factors – increased competition of our Strategy, the launch of new initiatives, and further and the development of new digital services. During 2019, gains in operational efficiency. We expanded our portfolio Evgeny Bystrykh operators were faced with pricing pressures resulting of products for private consumers and corporate customers RUB tn from increased market concentration, higher penetration and continued to develop our infrastructure – base stations Chairman 1.73 of discounted converged products, the emergence of MVNO and backbone networks – while at the same preparing of the Board Russian telecoms players, and the reduced costs of providing data services. for 5G rollout. of Directors market in 2019 + 2.1% On the other hand, it became clear in 2019 that telecoms Building effective partnerships in online retail, y-o-y operators have completely ceased to be traditional the digital economy, the development of infrastructure, providers of communications services, as MegaFon the IoT and the roll-out of 5G has remained an important and other players are building their strategies around ingredient of MegaFon’s continued success. digital customers and their needs. In the race to develop On the e-commerce front, MegaFon in partnership digital ecosystems, operators are launching solutions with the Russian Direct Investment Fund (RDIF), Alibaba in fintech, OTT/VOD, the IoT and other areas to target Group and Mail.ru Group completed the establishment B2C clients, as well as offering integrated out-of-the box of the largest social commerce joint venture in Russia solutions for government and business digitalisation. and the CIS, integrating Russia’s key consumer internet and e-commerce platforms. Also in 2019, MegaFon and Cinia Oy, a Finnish infrastructure operator, agreed to construct a submarine fibre cable connecting Europe and Asia across the Arctic Ocean.

We continued to improve the quality of communications and our network resilience, expanded our 4G coverage, and gradually prepared to launch 5G networks. Among other projects, we launched 5G pilot zones in Moscow and Saint Petersburg to showcase the capabilities of the new-generation networks. I would also like to note our enhanced cooperation with the Russian regions in building a digital future, with a number of key agreements being signed in 2019.

4 5 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

In 2019, MegaFon completed the buy-out of the remaining And finally, our third priority is ‘Government What does MegaFon expect from 2020? minority shareholders and has been fully delisted and Industry Digitalisation’. Our positive cooperation What are MegaFon’s future plans? from the Moscow Exchange since June. This allowed with the government and the Russian regions enables us to fully focus on our strategic goals and step up MegaFon to develop and deploy its future-proof digital The year ahead promises to be a challenging one the implementation of the Company’s digital strategy. solutions such as our ‘smart city’ offering, capable for the entire Russian economy, due primarily to the new This involves, among other things, fast-tracking of improving the life of people and the country’s economic coronavirus pandemic, as well as volatile energy prices experimental partnerships and agreements and channelling well-being. which have a major impact on the exchange rate our profits towards the development of digital technologies for the national currency. However, even in times of crisis, or the implementation of strategic projects, all of which As MegaFon went fully private last year, It is not telecommunications not only remains a critical industry may involve higher levels of risk. for the economy but also provides new opportunities did it affect your corporate governance an overstatement for growth as hundreds of thousands of people start in any way? to work from home and self-isolate. Tell us about MegaFon’s strategic to say we strive priorities. Despite been delisted from the London Stock Exchange to meet the needs Therefore, we expect the telecoms industry to continue and the Moscow Exchange, we seek to adhere to best its steady growth and development into 2020 as well. MegaFon’s current ‘Driving the Digital World’ strategy practices in corporate governance and transparency. of every single We in turn will continue to focus on meeting customer for 2017–2020 is aimed at transforming the Company We made no changes to our disclosure practices, individual customer, needs, developing infrastructure and rolling out new from a traditional telecoms operator to a provider of digital and continue publishing consolidated financial statements digital solutions. We will continue to develop digital opportunities and maintaining our industry leadership. including interim reports in accordance with IFRS, as well which has now projects in respect of the IoT, 5G networks, and artificial These ambitions fuel our drive to offer the best digital as announcing publicly our operating and financial results, intelligence through cooperative efforts with our partners solutions to our customers, develop infrastructure, upcoming General Meetings of Shareholders and other become possible from the public and commercial sectors. and effectively engage with businesses, the government, important information. due to advances society and educational institutions. To conclude, I would like to express my sincere After MegaFon’s transition from a public to a private in Big Data gratitude to all members of the Board of Directors, MegaFon’s key strategic priority during 2019 was its company the Board of Directors ceased to include technologies. Management Board and all employees of the Company ‘Happiest Customer’ vision, as we continued to develop the independent directors who were part of the Board for their engagement, loyalty and professionalism. our portfolio of products and services tailored to customer previously. Each of our current directors has extensive Each member of the MegaFon team makes a personal needs, improved our customer service and launched telecoms expertise, which enables us to effectively achieve contribution to our common goal of building a digital innovative retail store formats. It is not an overstatement the strategic goals we set ourselves. In 2019, we invited future, and I am confident that we have many more exciting to say we strive to meet the needs of every single individual Igor Ivanov and Anton Rybalkin from USM Group to join endeavours, achievements and successes ahead of us. customer, which has now become possible due to advances the Board. Their involvement with USM Group means in Big Data technologies. they have an excellent knowledge of MegaFon’s business and can immediately make a significant contribution The second priority is for us to be the ‘fastest player’ to the implementation of our Strategy. in the market. By this we mean both providing our customers with the fastest mobile and internet services, and improving the efficiency of MegaFon’s internal processes by leveraging our ‘agile development’ opportunities, big data analytics, and our cluster management model.

6 7 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Chief Executive’s Review

In 2019, MegaFon continued to implement its ‘Driving the Digital World’ strategy focused on the interests and needs of our customers. While addressing the consumer needs of our customers, we continued to grow our business and expand our product and service portfolio – both on our own and in partnership with others.

We are focused on maintaining high levels of customer satisfaction while endeavouring to meet the needs of the individual subscriber by leveraging state-of-the-art technology, including big data and artificial intelligence. MegaFon’s strategic goal is to build a single digital ecosystem that comprises a full range of digital products to meet the specific needs of customers.

Can you give us the highlights How does MegaFon deliver high levels of MegaFon’s performance in 2019? of customer satisfaction? Gevork In 2019, MegaFon maintained the steady growth of its In its product offerings, MegaFon is primarily focused Vermishyan business, as evidenced by the results reported in respect on customer needs, and our main objective is to keep Chief Executive of the Company’s key financial and operational metrics. customers as satisfiedand happy as possible, so Officer Delivering a strong performance in 2019 was an even that they stay with us as long as possible. To achieve more impressive feat given the high base set in 2018, this, we are enhancing our product and service portfolio, when we significantly increased our revenue through expanding our retail network, and continuously improving the contracts MegaFon signed to provide services the reliability of our network and the experience for the 2018 FIFA World Cup. of our customers.

In 2019 MegaFon’s total revenue grew by 4% to RUB 349bn, In 2019, we started opening new generation stores RUB bn while service revenue was up 1.2% to RUB 310.8bn, driven offering increased levels of customer service and a special 151.6 largely by continued strength in mobile data services. approach to the customer experience. We also launched OIBDA OIBDA increased by 22.2% 1 to RUB 151.6bn primarily our first ‘Store of the Future’ experience store in Moscow, + 22.2% as a result of the growth in total revenue, as well as cuts comprising five themed spaces where customers can try y-o-y in general and administrative expenses achieved through out, choose, and buy any mobile device all by themselves operational efficiency initiatives. A further impressive if they want to, as well as learn the latest in smart home achievement was the growth in revenue from sales technology, TV services and gaming. of equipment and accessories, which increased by 33.7% to RUB 38.2bn. We believe that transparency is a key driver of customer loyalty. Accordingly, in early 2020 we relaunched We maintained our subscriber base at 76.9 million people our mobile app, revamping the way we provide information in 2019, while the number of our mobile data users grew to users and making it more convenient and functional. by 6.7% to 35.9 million. We also continue to enhance our portfolio of products and services for retail customers and businesses. In 2019, we offered our customers ‘Obyedinyai!’ (‘Combine!’),

1 Including the effect of IFRS 16.

8 9 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

a new converged bundle plan that combines mobile, For many years, we have remained Russia’s unrivalled The Company is also creating partnerships in infrastructure residential broadband and TV services. We have leveraged leader by number of base stations, at 181,400 in 2019. development, signing an agreement in June 2019 with Cinia our customer insights to refresh our ‘Vklyuchaisya!’ During the reporting year, we focused on expanding Oy, a Finnish infrastructure operator, to establish (‘Connect!’) tariff line and continued to build a robust the 4G/LTE network coverage, adding a record 11,100 an international consortium to construct the first submarine system of tariffs and discounts. We were the first 4G/LTE base stations to take the total to 60,700 fibre cable connecting Asiaand Europe across the Arctic in the market to introduce cashback on subscription and bring the 4G/LTE standard to 82% of the country’s Ocean. charges, which can be used to purchase our products. population. In 2019, we changed our approach to network development. In line with the new approach, To support high-tech startups, in 2019 we launched As part of building our digital ecosystem, we implemented a number of Smart Capex solutions Providing reliable, a ‘technology sandbox’, a platform for the rapid testing we are continuously expanding the range of our services in 2019: when planning the placement of base stations, of ideas. The project was implemented through a joint and seeking to improve the quality of existing products, we used quality metrics derived from customer geospatial high-speed, venture with Phystech.Start – the business accelerator such as the MegaFon digital bank card and MegaFon TV. data. of the Moscow Institute of Physics and Technology Our new, high-potential services include the MegaFon high-quality (Startech.vc), IIDF and other partners. At year end, Education platform, a means for offering online courses. In paving the way for a 5G rollout, in 2019 we continued connectivity over 1,000 applications from venture entrepreneurs were to deploy mWDM networks in Moscow, Saint Petersburg, submitted to the platform, with some of the ideas being MegaFon’s B2B product portfolio has been expanded Nizhny Novgorod, Yekaterinburg, Samara, Ufa to our customers approved and implemented. We have also established to over 60 services which provide solutions for the majority and Volgograd. is our top priority. strategic partnerships with other major players, such of our customers’ business tasks. During 2019, 16 new as Visa, Blizzard Entertainment and G-Core Labs. products were added to our B2B portfolio, including We launched the first 5G pilot zones in millimetre wave For years the Smart Call Processing automated voice solution, bands in Moscow and Saint Petersburg with early tangible the Smart Index tool to analyse outdoor advertising, results: a record connection speed and the first 5G we have delivered One of the key priority areas the MegaFon Cargo online platform allowing customers international call. An important milestone in developing the fastest mobile for MegaFon is partnering to generate freight transportation requests, an automated new generation networks was the opening of a Digital data speeds with the state, including in driving recruitment system, and many other solutions. Laboratory on the campus of the Graduate School the development of the digital economy of Management at Saint Petersburg State University in the country, MegaFon has also launched B2B platform solutions – to research 5G networks. in the Russian regions. Could you detail a brand new product line comprising cloud services, way ahead your progress on this front in 2019? network products and cyber security solutions. We have Implementing joint initiatives with major players also updated our B2B website and simplified access to online contributed to strengthening MegaFon’s position of the nearest MegaFon partners with the state in drafting services, revamped the B2X Client Account, and introduced in the telecommunications market. Such projects competitors. and implementing the ‘Digital Economy’ national program. ‘Update’, a new media portal for corporate customers. enable industry leaders to pool resources and expertise We have already established cooperative relations in achieving a common goal, and hence achieve success with many Russian regions and in 2019 signed agreements more effectively. to implement digital projects with the administrations How does MegaFon maintain its of Sochi, the Republic of Kalmykia, and the Novosibirsk, industry leadership? Tula and Ryazan Regions. What partnerships did MegaFon Providing reliable, high-speed, high-quality connectivity develop in 2019? MegaFon develops and deploys solutions to support to our customers is our top priority. For years, we have regional digitalisation, covering urban infrastructure, delivered the fastest mobile data speeds in the country 1, In 2019, MegaFon, the RDIF, Alibaba Group, and Mail. utilities, security and transport. Our products leverage way ahead of the nearest competitors, and were the first ru Group completed the setting up of the largest social the latest technologies such as the IoT, unique object in Russia to demonstrate a data rate of 1,6 Gbit/s commerce joint venture in Russia and the CIS recognition, cloud data storage and processing, Big Data on a commercial smartphone in 2019. Of course, achieving aimed at integrating Russia’s key consumer internet services, and many others. this success requires ongoing investment in infrastructure and e-commerce platforms. Also, in November 2019, development and innovations to both further enhance our subscribers received the first benefits of our partnership customer experience and increase network resilience. with AliExpress Russia as MegaFon became the first operator to launch its online store on the Tmall marketplace.

1 Speedtests by Ookla.

10 11 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

In 2019, we unveiled a digital NB IoT-based utility Another area of corporate social responsibility What are MegaFon’s future plans? management platform, and the MegaFon Environment we are focused on is improving the quality of life solution has already been piloted across a number for people by creating high-skilled jobs with competitive In 2020, we plan to continue focusing on our strategic of private and state-owned enterprises. Other newly pay. Our responsible approach to empowering our people priorities – maintaining our focus on customers, developed solutions include an online platform was recognised in 2019 by our receipt of the Best contributing to government and industry digitalisation, for automating freight logistics and an online water Company Award 2019: MegaFon was rated the best and building a single digital ecosystem. We will also monitoring solution. The breakthrough of the year telecom company at which to start a career. continue our efforts to remain the best telecoms provider was our presentation of a digital twin of Kronstadt, for our customers and the best employer in our industry. an interactive geoanalytics platform opening up new Despite the limited environmental impact of our business We are committed To achieve this, we will further improve our tariff line opportunities in urban development. activities, we seek to maximise our contribution for subscribers based on qualitative and quantitative to environmental well-being. In 2019, we launched to making insights into their needs, and expand our portfolio a project to make the Company’s document flow fully of digital services for private and corporate customers. How does MegaFon contribute paperless, which will significantly reduce the amount a positive And as a responsible telecoms operator, MegaFon will to the sustainable development of paper we use. contribution continue to pay due attention to the fair use of data of society? and data protection. to society In everything we do, we try to balance commercial, How is MegaFon responding to the 2020 and embrace We will further develop our 4G networks and step up social and economic interests rather than just coronavirus pandemic challenge? efforts to upgrade our infrastructure to accelerate 5G focusing on delivering strong financial and operational national rollout. The development of the 5G standard may provide performance. We are committed to making a positive In 2020, our society is faced with an unprecedented an impetus for the growth of the entire national economy, contribution to society and embrace national challenge – the coronavirus (COVID-19) pandemic, and international including in areas like the IoT, smart cities, self-driving and international initiatives, including the UN’s with the telecoms industry finding itselfat the epicentre initiatives, vehicles, and telemedicine, all of which will make life better Sustainable Development Goals and the Social Charter of the Russian government’s and business’ anti-crisis for every citizen. of Russian Business. programmes. This situation has required MegaFon including to stay continuously ‘on the front line’ of the coronavirus the UN’s Sustainable To conclude, I would like to thank every member MegaFon seeks to maximise its social impact response. We have maintained uninterrupted services of the MegaFon team for their high expertise by leveraging the Company’s existing technological in an environment of network overload, and have done Development Goals and commitment which have allowed us to reach new capabilities. In our corporate philanthropy efforts, our best to support our customers in this challenging heights and look into the future with optimism. I hope that we are guided by our commitment to ‘Providing situation. We have provided free calling to helplines and the Social 2020 will be another year of dynamic growth and new Opportunities’, which is reflected in the focus of our social to deal with restrictions imposed on air traffic with other Charter of Russian opportunities for the Company, despite the challenging projects which include a banknote reader for the visually countries and have increased the limits for roaming calls. situation in the Russian and global economy. MegaFon’s impaired, support for the activities of the ‘Liza Alert’ We have offered all subscribers free access to educational Business. unique digital capabilities and technologies make us well- volunteer search groups, various programmes to develop and entertainment services, and free solutions for webinars positioned to capture these growth opportunities. IT skills among talented young people, a corporate and videoconferencing to SMEs. We are ready to introduce mentoring programme for orphaned children, and many new anti-crisis measures not only as guided by government more. A total of over 25,000 people across the country directions but also in response to the actual needs benefitted from MegaFon’s charitable initiatives in 2019. of our customers.

12 13 About MegaFon

Performance Highlights 20–21 Providing Opportunities 22–25 Assets and resources 26–31 Geography 32–33 History 34 Key Events 34–35 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 About MegaFon

We provide IT and telecommunications services across all key areas, including mobile and fixed-line services, mobile and broadband internet, digital TV and OTT services, innovative digital products and services across Information MegaFon and Communication Technologies today (ICT), the Internet of Things (IoT), Big Data analytics and processing, MissionProviding cloud solutions, cyber security, Spanning the entire Russian financial services, digital opportunities Federation, MegaFon advertising and marketing, is a provider of digital e-commerce, and converged IT solutions in systems integration. opportunities and a leader in the Russian and global Through the development of cutting-edge technologies, telecommunications markets we are creating a digital ecosystem and opening up new opportunities for our customers, GoalBecome a digital market leader partners and society at large. and first-choice data provider for individuals and businesses by offering top-of-the-line digital products and services

MegaFon Group

MegaFon combines all areas of the IT and telecommunications industry:

PJSC MegaFon MegaLabs NETBYNET Yota GARS Telecom First Tower Company MegaFon Retail MF Technologies

telecoms operator develops innovative provides broadband federal operator of high- universal telecoms management of the Group’s responsible provides comprehensive covering all segments products and services and fixed-line services speed internet, voice, operator for the B2B tower infrastructure for retail business, sales innovative projects, digital of the telecommunications and SMS services market and commercial of communications solutions, and platforms market across Russia real estate facilities equipment and services, for implementing Digital and customer service Economy initiatives

16 17 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

76.9 million > 40,000 26 years > 181,000 mobile subscribers employees in the industry 2G/3G/4G base stations + 0.1% + 7% y-o-y y-o-y

The fastest mobile data services million % million 35.9 46.7 33 in Russia 1 mobile data users share of mobile 4G devices + 7% data users on the network y-o-y + 17% y-o-y

As the leader in the Russian telecommunications industry, MegaFon is able to contribute significantly to achieving the UN’s Sustainable • Supporting talented youth and technological • Providing affordable retail communications services • Creating high-skill jobs in areas such as Big Data, Development Goals, innovations and a telecommunications infrastructure for industrial ICT, and IoT particularly the following customers • Developing technical skills through educational • Driving economic growth and helping improve three: programmes and training involving MegaFon experts • Developing innovative mobile and digital services the quality of life

1 According to Ookla®, MegaFon provides the fastest mobile internet in Russia: the average download speed exceeded 27.31 Mbit/s and the average upload speed was 11.88 Mbit/s. Ookla® runs its independent survey globally on an annual basis: the results in Russia are based on over 8.438 million speed tests run in the first half of 2019 via the Speedtest app on 1.64 million unique mobile devices owned by Russian users.

18 19 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Performance Highlights

Operational Subscribers, million Mobile data users, million 3G and 4G base stations, ’000 1 highlights 2019 75.2 2019 46.4 +3.0 p.p. 34.9 +6.7% 2019 111.4 +12.5%

2018 75.2 2018 43.4 32.7 2018 99.0

2017 75.4 2017 41.8 31.5 2017 88.6

2016 75.6 2016 41.0 31.0 2016 75.9

2015 74.8 2015 39.2 29.3 2015 65.3

Share of mobile data users, %

Financial Revenue, RUB bn OIBDA 3, RUB bn Net profit, RUB bn 2 highlights 2019 349.0 +4.0% 2019 43.4 +6.4 p.p. 151.6 +22.2% 2019 3.0 –3.3 p.p. 10.34 –50.9%

2018 335.5 2018 37.0 124.0 2018 6.3 21.1

2017 321.8 2017 37.9 121.9 2017 6.4 20.5

2016 316.3 2016 38.3 121.1 2016 9.1 28.9

2015 313.4 2015 42.2 132.4 2015 12.5 39.0

OIBDA margin, % Net profit margin, %

CAPEX, RUB bn Free cash flow, RUB bn

2019 19.3 –5.0-51,2% p.p. 67.3 –17.4% 2019 4.0 +2.5 p.p. 13.9 +185.7%

2018 24.3 81.5 2018 1.5 4.9

2017 17.4 56.0 2017 10.9 35.2

2016 65.6 20.7 2016 8.8 27.7 1 All figures disclosed under operational highlights refer 2 Including the effect of IFRS 16 adoption. to our Russian operations. Some of the operational metrics 3 Adjusted OIBDA is shown for 2016. Adjusted OIBDA is OIBDA net presented here vary from those reported earlier due to adjusted of impairment charge in the amount of RUB 3.4bn related to the goodwill 2015 22.4 70.2 2015 12.5 39.2 guidelines for counting data service users. A data service user allocated to the Broadband Internet business segment. is defined as a subscriber who has consumed any amount of data 4 Exclusive of negative impact of non-cash impairment of Svyaznoy group CAPEX/Revenue, % Free cash flow/Revenue, % traffic within the preceding month. investment.

20 21 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Providing opportunities

FOR CUSTOMERS FOR PARTNERS MegaFon provides advanced digital opportunities for all its customers – individuals, The continuous development of our digital ecosystem allows MegaFon to provide businesses, operators, and the state – and works together with them to improve a wide range of opportunities for partners from various industries. We are thankful their quality of life. As a leader in infrastructure and technology, we continue to provide to market leaders with whom we successfully signed strategic agreements in 2019: the fastest mobile data services with the widest coverage in Russia. In 2019, we focused Alibaba Group, Mail.ru Group, RDIF, Visa, Blizzard Entertainment, G-Core Labs, on our subscribers’ needs, further expanding our digital ecosystem, and launching and many others. Leveraging its extensive experience and capacity for rapid new products and services. We deliver best-in-class, market leading solutions through transformation, MegaFon was able, in cooperation with its partners, to launch our ongoing cooperation with customers. We rolled out a new converged bundle large-scale innovative projects in the areas of highest potential. We place particular plan – ‘Obyedinyai!’ (‘Combine!’), built a new digital platform – MegaFon.Cargo, emphasis on supporting technology startups: in 2019, we continued to develop created a cloud service – Platform for Business, opened innovative Stores of the Future, MegaFon Sandbox, a platform for quick testing of ideas, in cooperation with MIPT’s and launched many other products and services. business accelerator Phystech.Start (Startech.vc), IIDF, and other partners. Since its launch, over 1,000 applications from venture entrepreneurs were submitted New B2C New B2X Sales Brand Customer to the platform, with some of the ideas already being approved and implemented. products products of products and marketing satisfaction and services and services and services For more For more New partnerships Strategy Operational New B2X products For more For more For more information see information see For more information For more information performance and services page 72 page 74 information see information see information see see page 30 see page 42 For more information For more information page 60 page 64 page 70 see page 48 see page 64

22 23 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

FOR WIDER SOCIETY MegaFon’s advanced digital solutions contribute to developing various areas of public life. In 2019, we continued to partner with the government in building the digital economy, supporting sports, actively contributing to charities, developing educational programmes, and launching socially significant products. In particular, we launched a system that facilitates finding missing children – MegaFon.Search, worked on Big Data based solutions for tourism and urban infrastructure management, opened the first 5G-lab for students – 5G_Dream_Lab – in cooperation with Saint Petersburg State University, and implemented many other projects. We are confident that by developing our digital ecosystem we are improving the quality of life for many people.

Sustainability New B2C products Strategy For more information and services For more information see page 83 For more information see see page 42 page 60

FOR EMPLOYEES MegaFon offers development and career advancement opportunities for all its employees. In 2019, we continued to improve our HR policy, introduce ‘Agile’ development methods, develop internal training programmes, hold skills competitions, and launch new projects empowering our employees. We pay special attention to opportunities for young talent: in 2019, MegaFon was named the best telecoms company at which to launch a career and received the Best Company Award ranking.

HR policy Social support Educational programmes For more information For more information For more information see page 86 see page 96 see page 92

FOR THE INVESTMENT MegaFon is committed to openness and transparency, disclosing information about its activities and performance in line with best practice. Although MegaFon is a private COMMUNITY company, in 2019 we continued to publish our operating and financial results, take part in investment conferences, and communicate our development strategy and the status of its implementation to analysts, investors and the industry.

Strategy Operational Financial Corporate For more information Performance Performance governance see page 42 For more information For more information and securities see page 48 see page 78 For more information see page 110

24 25 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Assets and resources

Strong brand and loyal customers Our infrastructure

MegaFon is one of the most recognised Russian brands, effective telecoms brand in Russia, and the third most We operate the largest and most advanced infrastructure we continuously develop our telecoms infrastructure positioning the Company as a principal provider of digital effective overall. MegaFon received five Effie awards in the Russian telecoms industry, which enables us to achieve by building new base stations and expanding network opportunities. We strive to be the best partner for life in 2019: one gold, one silver, and three bronze trophies. our ambitious strategic goals. To keep up with global coverage, primarily 4G and LTE Advanced services. Today, for our customers and a natural choice for those who In addition, MegaFon made it into the top ten strongest trends and meet the growing demands of our customers, our 4G services are available across all our operating regions. actively use mobile data services, and want to make Russian brands for two years in a row, was the second their life and the world around them easy and exciting. by value among Russian telecoms brands, and № 14 Effie Awards Russia 2019 recognised MegaFon as the most by value among all Russian brands 1.

Ranking among the 4G coverage LTE Advanced coverage

45% 86% TOP-10 83 82% 49 Customer Satisfaction Brand recognition strongest Russian brands Russian of the Russian Russian Index (CSI) regions population regions + 3 p.p. y-o-y

No. 1 No. 2 No. 14 210,900 km > 181,400 by efficiency among by value among Russian by value among all Russian FOCL stations Russian telecoms telecoms brands brands 2 + 3% The largest number of 2G/3G/4G base stations brands y-o-y + 7% y-o-y

1 According to Brand Finance, the world’s leading brand valuation and strategy consultancy. 2 According to Effie Russia 2019.

26 27 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Brand portfolio Professional team

MegaFon also continues to promote its subsidiary brands, Our highly professional team is the key to MegaFon’s Yota and WiFire. success and is vital to achieving the Company’s vision. Our ongoing employee training programs Yota is a nation-wide wireless high-speed data and performance assessments ensure the continuous and communications service provider aspiring to be ‘the development of our people. MegaFon runs a unique operator of the future’ and targeting active mobile data employee development programme across Russia – users. called MegaAcademy. We place particular emphasis on recruiting and developing digital talent by holding Under the WiFire brand, the Company promotes services regular conferences, hackathons, meetups, and other and products such as WiFire Mobile (unlimited mobile data), events covering artificial intelligence, Big Data, robotics, WiFire TV (wireless digital TV), and WiFire Home (residential IT, infrastructure, and more. These are attended by both broadband). aspiring and seasoned professionals from among MegaFon’s current or future employees.

Digital ecosystem RUB 110.6m Training costs in 2019 We are actively developing digital projects, partnerships, and services to create a fully-fledged digital ecosystem for our customers. To that end, MegaFon has partnered with Mail.Ru Group, Russia’s largest internet company, allowing us to combine our communications capabilities and infrastructure with cutting edge internet technology. We are also developing partnerships with ICS Holding, Intel, oneFactor, OFD.ru, and other companies to develop B2X solutions.

Big Data

We aggregate publicly available information on customer values, needs and behaviours and use Big Data analysis to better understand the needs of every single customer, and to develop the best products and offer unique solutions.

28 29 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Partnerships with market leaders Modern retail network We see partnerships with market leaders as a critical resource for enhancing and growing MegaFon’s Innovative infrastructure products business. In 2019, MegaFon signed more new agreements with leading players from various industries, MegaFon’s retail network is a key customer channel enabling the Company to expand its digital ecosystem and offer even more opportunities to its MegaFon, YADRO and Intel established a technology comprised of 4,081 points of sale, including customers, entire industries, the state and society at large. partnership to develop innovative infrastructure products 2,011 MegaFon Retail stores and 2,070 MegaFon- for the Company’s digital platform. branded franchised stores.

Driving the digital transformation A leading social commerce joint Driving the digital transformation In 2019, MegaFon started to roll out its new, of coal companies venture in Russia and the CIS of the Siberian power sector innovative Stores of the Future format where customers can test and choose smartphones, MegaFon and SDS-Coal signed a cooperative agreement In 2019, MegaFon, Alibaba Group, Mail.ru Group, MegaFon and IDGC 1 of Siberia signed a long-term tablets, and other gadgets and services to build a modern communications infrastructure at coal- and the RDIF completed the investment stage for a joint cooperation agreement to implement joint digital without consulting a sales assistant and pay mining facilities and digitise operations management venture to integrate Russia’s key consumer internet innovation, IT, and telecoms projects in the power sector. for their purchases at a self-checkout. At the end to drive labour productivity, and improve environmental and e-commerce platforms and launch a leading social of 2019, MegaFon’s retail network included and occupational safety. commerce joint venture in Russia and the CIS. A new submarine fibre 93 new format stores, and 1 Experience store. Free roaming in 130 countries E-gaming cable link between Since 2018, MegaFon has owned 25% + 1 across the globe Europe and Asia share in the Svyaznoy retail chain, which has MegaFon was the first telecoms operator in Russia to sign over 4,000 stores. MegaFon and Booking.com, the world’s largest travel an agreement with Blizzard Entertainment, a major player MegaFon and Cinia Oy, a Finnish infrastructure operator, platform, entered into a unique partnership to offer in the global video game industry. MegaFon subscribers concluded an agreement to establish an international their customers free roaming services in 130 countries can now use their mobile account balance to pay for Battle. consortium to construct a new submarine high-speed fibre around the world. MegaFon subscribers will now be able net services and purchase Blizzard games through the new cable connecting Helsinki and Tokyo across the Arctic to communicate and access the internet for free when MegaFon.Games portal. Ocean. travelling. Content delivery Mobile financial marketplace A joint venture to develop 5G spectrum MegaFon launched a refreshed CDN service which combines MegaFon and MasterCard international payment system its own infrastructure capabilities with the content delivery signed a memorandum of understanding for a partnership MegaFon, Rostelecom, VimpelCom and MTS signed a letter network of G-Core Labs, an international provider of cloud and cooperation in mobile financial services, launching of intent to work together to build and maximise utilization and edge solutions. The partnership enables both companies the ‘Loan to Mobile’ service, a financial marketplace of 5G mobile networks (5G/IMT-2020) in Russia. to significantly speed up their websites and the delivery for our customers. of large media files over the Russian internet and worldwide. 4,081 Investing in innovation Technology projects for utilities points of sale MegaFon and Fort Ross Ventures, a managing company MegaFon together with Cometrica and NetByNet partnered which is part of Sberbank’s ecosystem, signed with City Innovative Technologies, a diversified holding an agreement for a strategic partnership and cooperation company, to team up on nationwide utility technology in innovations, technology sharing and joint identification projects. of attractive investment opportunities. 2,070 franchised stores 93 new format stores

1 IDGC stands for Interregional Distribution Grid Company.

30 31 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Geography

The Company and its subsidiaries operate across all Russian regions Far East Region and in the republics of Abkhazia, South Ossetia, and Tajikistan. 6.1% Siberia Region 7.6 % Anadyr Central Region 8.2%

Urals Region 8.7%

Stockholm SWEDEN

Kirovsk Murmansk Amsterdam North-West Region 13.4 % NETHERLANDS London UNITED KINGDOM Kaliningrad Saint Petersburg Priozersk Belomorsk Magadan Kybartai Archangelsk Petropavlovsk-Kamchatsky Frankfurt GERMANY LATVIA Kolpino Rezekne Pskov PetrozavodskПетрозаводск Subscribers Veliky Novgorod Minsk Cherepovets Norilsk Vyshny Volochyok Caucasus Tver Salekhard Vologda Shangaly Kotlas 16.1% Smolensk Ukhta Yaroslavl Nadym Munich KalugaКалуга ЯкутскYakutsk BELARUS Bryansk MoscowМосква Kostroma Syktyvkar Novy Urengoy Vitebsk Ivanovo Maya Vladimir Long-Ugan Warsaw TulaТула Kirov Orel Nizhny Kholmogorskaya Kursk Novgorod Noyabrsk Mirny Bratislava Lipetsk Ryazan Nyagan UKRAINE Saransk Yoshkar-Ola Perm Izhevsk SLOVAKIA Tambov Cheboksary Kiev Belgorod Voronezh Tsivilsk Kungur Nizhny Tagil Surgut Nizhnevartovsk Lviv Penza Ulyanovskulyanovsk Kazan Naberezhnye Ekaterinburg Komsomolsk-on-Amur Rostov-on-Don Chelny Chelny Ozhogino Moscow Tolyatti Tynda Samara Kamensk- Region % Aksay Saratov Tumen 19.9 Peschano- Uralsky Belogorsk UfaYfa Yuzhno-Sakhalinsk Krasnodar kopskoye Volgograd Khvoynaya Khabarovsk Bolshaya Tomsk Novorossiysk Kurgan Ozinki ChernigovkaChernigovka ЧелябинскChelyabinsk Krasnoyarsk Omsk Bikin Maykop Blagoveshchensk Birobidzhan Sochi Magnitogorsk Novosibirsk Ugra Elista Orenburg Glebovo Uralsk Novobureysky Mineralnye Vody Stavropol OrsOrskk Petropavlovsk Kemerovo Kansk Luchegorsk Nalchik Astrakhan Novokuznetsk Nazran Abakan Chita Yashkul Irkutsk Vladikavkaz KAZAKHSTAN Barnaul Ussuriysk Volga Kochubey KuzdeevoKuzdeevo Nakhodka Region Grozny Makhachkala Biysk Babushkin 20.0% Ulan-Ude Derbent Kyzyl Vladivostok Tbilisi Gorno-Altaysk

Baku Ulaanbaatar Hong Kong MegaFon Backbone MONGOLIA Transit trunk line CHINA Russia Tajikistan Abkhazia South Ossetia 29.7 % 30.0% 58.3% 100% market share MegaFon market share 1 TT MOBILE market share AQUAFON-GSM market share OSTELECOM

Customer base, million 75.2 1.5 0.1 0.06

Users of mobile data services, million 34.9 0.9 0.06 0.02

Revenue, RUB bn 343.4 4.32 0.9 0.34

CAPEX in 2018, RUB bn 66.3 0.81 0.18 0.02

1 Company estimate. 32 33 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 History Key Events

MegaFon has come a long way FEBRUARY MARCH APRIL MAY JUNE since its entry into the Russian 7 26 13 21 5 20 5 telecoms market over 26 years MegaFon became MegaFon and Mastercard MegaFon and Search MegaFon became MegaFon won MegaFon won the Effie ago. These years have seen a member of FinTech presented a new mobile Center for Missing People a strategic partner the Best Company Award Awards Russia 2019 MegaFon, Rostelecom, and Nokia made the first a fundamental change in the mobile Association. financial marketplace. signed a memorandum supporting football as the best telecoms as the most effective international video call on a Russian 5G network. telecommunications industry, on cooperation. in Russia. operator at which to launch telecoms brand. both in technology development a career. and in customer needs. Throughout its history, MegaFon JUNE JULY has followed a path of smart growth and innovative technology 6 7 10 19 3 deployment not only in technological MegaFon and Cinia Oy, MegaFon MegaFon LLC MegaFon Finance MegaFon and Fort Ross MegaFon was Roskomnadzor once For the third year running, a Finnish infrastructure and the governments and IDGC of Siberia completed a mandatory Ventures, a managing the first in Russia again named MegaFon Ookla, an international solutions, but also in marketing, operator, announced of the Nizhny Novgorod signed agreements tender offer for MegaFon company which is part to achieve 1.6 Gbit/s as Russia’s unrivalled research agency, named internal processes, and subscriber an international consortium and Kaluga Regions on new technology ordinary shares to become of Sberbank’s ecosystem, speed on a smartphone leader by number of base MegaFon the fastest relations. to construct a submarine agreed to jointly develop and infrastructure the owner of 100% signed an agreement on a commercial LTE stations, significantly mobile data operator fibre cable connecting the digital economy projects. of the Company shares on strategic partnership network, with support outperforming its peers. in Russia. Europe and Asia across in those Regions. jointly with USM Group. and cooperation from Qualcomm the Arctic Ocean. in innovations, technology Technologies Inc. sharing and joint and Nokia. 1993–2001 identification of attractive Establishment of the first pan-Russian investment opportunities. federal telecommunications operator. AUGUST SEPTEMBER 2002–2006 8 20 23 30 9 13 19 23 Period of active growth and development. MegaFon’s Client In an independent MegaFon held the first Supported by Qualcomm MegaFon MegaFon achieved MegaFon MegaFon Account mobile app survey by iPhones.ru, 5G eSports tournament Technologies and Nokia, and the Administration a record-high speed and the Government and Saint Petersburg State for iOS and Android MegaFon was named in Russia. MegaFon successfully of the Vladimir Region of 2.46 Gbit/s on a 5G of the Novosibirsk Region University opened the first ranked the best among the fastest mobile data tested the mmWave agreed to jointly develop smartphone. signed an agreement 5G laboratory for students similar services offered operator, significantly 5G readiness of its the local digital economy. on cooperation to build in Russia. 2007–2013 by Russian operators, outperforming its peers. infrastructure and mobile a digital environment Innovative technology development according to a survey platform. in the Region, with MegaFon and investment in reinforcing by Roskachestvo (Russian committing to invest quality assurance over RUB 4.5bn. leadership. agency).

2014–2017 OCTOBER NOVEMBER DECEMBER Focus on a balanced approach 9 13 28 6 11 23 to investment in business development MegaFon, Russian Direct MegaFon rolled out Jointly with Mail. MegaFon opened its MegaFon, Rostelecom, MegaFon and Booking.com entered into a unique and efficient growth. Investment Fund, Alibaba the next-generation NB IoT ru Group, MegaFon first Experience store VimpelCom, and MTS partnership to offer their customers roaming services Group, and Mail.Ru Group CatNB2 technology across launched MegaFon. in Moscow. signed a letter of intent for free in 130 countries around the world. launched the largest 59 Russian regions, offering Cargo, an automated to set up a joint venture In May 2017, MegaFon presented its social commerce a fivefold increase in speed freight shipping service. with the aim to free up 5G new ‘Driving the Digital World’ strategy joint venture in Russia compared to the current IoT spectrum in Russia. for 2017–2020. and the CIS. generation.

Events after 2019 year end 2017–2019 21 January 26 February 3 March 25 March 27 March MegaFon transforms from a traditional MegaFon launched an FVNO 1 MegaFon was the first Russian MegaFon commercially launched MegaFon was the first operator in Russia MegaFon started producing its own content telecoms operator into a national project with local internet providers operator to announce the launch the MegaFon Cloud platform, which to provide support for the advanced for the MegaFon Education marketplace 2 provider of digital opportunities enabling them to monetise their built of international 5G roaming services. is fully certified in accordance Enhanced Voice Service (EVS) codec and posted an online course on 5G. but unused port capacity with 30% with the requirements of government for iPhone, which is used to support superior and a leader both in the Russian to 50% greater efficiency. regulators and can be used by commercial quality voice services in 4G networks. and global telecoms market. and government customers.

34 1 FVNO stands for Fixed Virtual Network Operator. 2 Also known as Enhanced HD Voice. 35 Strategic report

Market Overview 38–41 Digital Strategy in Action 42–45 Business Model 46–47 Operational Results 48–77 Financial Performance 78–81 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Market Overview

In 2019, the global mobile subscriber base reached 5.2 billion Russia and the CIS countries are among the regions Global mobile data traffic per subscriber, GSMA estimates that the monthly mobile data traffic users, or 67% of the global population, while the number with the highest mobile penetration rates (81.1% in 2019), GB per month per subscriber will increase more than threefold by 2025 of mobile data users grew to 3.8 billion. Mobile penetration slightly behind Europe, North America and China. from 7.5 GB per month to 24 GB per month. This growth reached 67%, with mobile internet penetration at 49%. will be primarily driven by the expanding digital subscriber 35 By 2025, the number of mobile users is expected to grow GSMA estimates that in 2019, total global mobile Europe, Russia and CIS 7.6 base and the increased accessibility of high bandwidth by 600 million to 5.8 billion (or 70% of the global population). revenue remained flat y-o-y at US$ 1.03tn. The revenue mobile networks, and in developed and technologically 50 growth was constrained by price stabilisation in Europe North America 10 advanced economies, by new services (augmented and India, but supported by an increase in data services and virtual reality, as well as technology for smart homes, 24 Global mobile communications and mobile data 1 in the emerging markets. Global revenue is expected Latin America 4.7 buildings and cities). to increase to US$ 1.1tn by 2025, at an average annual 29 Mobile communications growth rate of 1%. Asia-Pacific (excl. China) 8.3 5G is expected to boom by 2025, especially in the developed and technologically advanced economies 28 2025F 70 5.8 In 2019, the mobile segment posted US$ 4.1tn in revenue, China 9.8 such as Europe, North America and certain Asian countries. or 4.7% of global GDP. This figure is forecast to reach US$ GSMA forecasts that 5G will reach 20% of the total number 28 2019 67 5.2 5tn, or 4.9% of global GDP, by 2024. The industry remains MENA 5.3 of connections. important to society as a whole, with 30 million people 6.8 employed in the telecommunications and related sectors Sub-Saharan Africa 0.8 Mobile data in 2019. In 2019, 5G was in commercial operation 2025F 2025F 60 5.0 The share of mobile services in global GDP and their impact 2019 on social and economic growth are expected to rise as 5G 2019 49 3.8 networks, M2M, IoT and other solutions play an increasingly Source: GSMA, The Mobile Economy 2020. in 24 countries important role in the global economy. The expansion of 5G Unique subscribers, bn alone is forecast to contribute US$ 2.2tn to global GDP % of the population by 2034.

4G became the most popular mobile format in 2019 Key mobile data growth drivers by 20251 Global mobile penetration 2, % (over 4 billion connections or 52% of all connections, excluding IoT). 4G penetration is expected to grow for another few years to reach its peak (at about 60% 87 Europe 86 of all connections) in 2023. Digital subscriber base growth IoT growth Smartphone user base

85 growth North America 83 In 2019 82 Russia and CIS 81 73 over half % Latin America 68 5.8 24.6 80 of all mobile devices 65 billion people billion connections Asia-Pacific (excl. China) 60 were connected to 4G. + 1.9% + 205% + 15 p.p. 85 China 82 CAGR

68 MENA 64

50 Sub-Saharan Africa 45 CAPEX 4G and 5G growth

2025F 2019 USD tn % % Source: Global System for Mobile Communications (GSMA), 1.1 56 20 The Mobile Economy 2020. in 2020–2025 4G 5G + 4 p.p. + 4 p.p.

1 GSMA report, The Mobile Economy 2020. 2 Excluding mobile IoT. 1 GSMA report, The Mobile Economy 2019.

38 39 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Russian telecommunications market

TMT Consulting estimates that the telecoms market Mobile services Fixed-line services in Russia grew to RUB 1.73tn 1 in 2019. Income growth was Pay-TV 2.1%, lower than during the two prior years. Mobile services remain the principal source of revenue In 2019, the fixed-line market declined by 8.9% y-o-y for the Russian telecommunications industry: to RUB 130.6bn, according to TMT Consulting’s estimates. According to TMT Consulting, the Russian Pay-TV The slowdown was primarily caused by weaker growth TMT Consulting estimates this segment’s share at 57% Over the year, 2.2 million subscribers abandoned fixed-line market grew by 10.1% to RUB 103.9bn in 2019, exceeding rates in the mobile market, aggravated by lower demand of the total revenue for 2019. services, causing penetration for these services to decline the RUB 100bn threshold for the first time. The revenue in the Pay-TV market, subscriber churn in relation by 3 p.p. to 30%. Operators’ fixed-line revenue was down growth was driven largely by the customary annual price to fixed-line and B2O services, and businesses reducing In 2019, the growth rates in the Russian mobile market 9.7% to RUB 82bn. increase which was successfully implemented during their telephony expenses. slowed to 3.3% compared to 5.0% in 2018. At the end the year, and also by an increase in the number of high of 2019, the market size was RUB 994bn. The slowdown was The decline was caused by an increase in data and mobile value customers in the subscriber base (monthly ARPU Traditional mobile services still account for the bulk due to a surge in competition, including price competition services and the growth of independent online messengers increased by RUB 13 to RUB 193, net of VAT). of the telecoms market (57% in 2019), but digital services, between major operators, the re-emergence of unlimited such as Telegram and WhatsApp, as well as social media such as IoT, mobile TV, M2M, e-commerce and Big Data, plans and active promotion by new MVNOs. (VK, Instagram, and Facebook), Skype and IP telephony. At the same time, the Pay-TV subscriber base growth rate are increasingly gaining traction. The Russian mobile in Russia dropped from 3.3% to 2.3%. There was a total market has four major operators: MegaFon, MTS, VEON Mobile data remains one of the largest segments The decline in fixed-line revenue is expected to slow gradually of 45.3 million subscribers at the end of the year, the 2.3% and Tele2. in the Russian telecoms market and the industry’s key between 2020 and 2024, to an average of 4.8% for that subscriber growth was driven by IPTV subscriptions being driver. In 2019, the segment grew by RUB 31bn while period 1. included in bundled offerings and subscribers migrating As at the end of 2019, the mobile subscriber base (number the telecoms market in total grew by only RUB 36bn. from analogue cable TV to digital cable TV and IPTV. of active SIM cards) grew by 1.7% to 260 million subscribers, TMT Consulting estimates that mobile data revenue rose with Russia’s mobile penetration at 177%. Drivers that by 10% to RUB 326bn, with this segment accounting for 33% Broadband internet access As a result, the segment’s revenue growth outpaced the rate affected the subscriber base growth include an increase of the mobile market and 19% of the total Russian telecoms of growth in the subscriber base, similarly to prior years. in the number of mobile M2M connections. In a saturated market. In 2019, the Russian broadband market continued market, operators primarily focus on improving to grow, albeit at lower rates. According to TMT Out of all the Pay-TV technologies, only IPTV showed the customer experience for their existing customer bases The number of active mobile data users in Russia reached Consulting, the subscriber base grew by 1.4% (compared noticeable growth. The satellite TV market slowed down, rather than boosting subscriber growth. 138 million people in 2019, increasing by 11% in just one to a 1.8% growth in 2018), primarily driven by new builds, while the cable TV subscriber base decreased by 210,000 year. This growth was primarily driven by an increase with broadband penetration reaching 60%. In 2019, subscribers with user churn affecting both nationwide Fixed-line services, as well as their share in the industry's in the number of widescreen smartphone owners. broadband revenue grew by 3.1% to RUB 197.2bn. and local operators. total revenue, continued to decline due to subscribers The growth came mainly from the private segment abandoning fixed-line services in favour of mobile services. due to a price increase early in the year, as well The gap between the respective revenue shares of satellite M2M and IoT as from subscribers migrating to more expensive high- and IPTV widened to 9 p.p. compared to 7 p.p. in 2018. In 2020, telecoms operators are expected to focus speed data plans. Growth in the B2B segment slowed during The share of cable TV in total revenues declined from 43% mainly on boosting their revenues from other services Both the Russian and international M2M and IoT markets the year. to 41%, although it will continue to be the largest segment as well as on expanding into IT, media and other related continue to grow. However, according to preliminary over the medium term. markets. In many respects, the market trends will be driven estimates of the Russian Internet of Things Association, The trend of higher broadband data consumption by pricing policies. in 2019 the market only grew by approximately 9% instead is continuing. The Russian Ministry of Digital Development, TMT Consulting forecasts that in 2020 the subscriber base of the expected 14%–15%. This weaker growth was mainly Communications and Mass Media estimates that fixed will continue to grow, albeit marginally (at about 0.4%–0.6%). due to market volatility. According to preliminary analyst data usage in Russia grew by more than 14% y-o-y in 2019. The increase will be largely driven by the inclusion of IPTV data, IoT-enabled devices in Russia used 19.5 million SIM The increase in data usage was primarily driven by higher subscriptions in bundled offers. The subscriber base growth cards at the end of 2019. consumption of heavy content and subscribers actively is expected to stagnate thereafter, while revenue growth RUB tn using data via multiple devices at home. rates could decline to 5%–7% per year. 1.73 IDC 2 estimates that by 2023 the Russian market will grow Russian telecoms market at an average annual rate of 19.7%, or 1.7% faster than At present, data providers are focusing on improving service forecast a year before and much faster than the global quality and value added services. Operators are also market. As at the end of 2019, over half of Russian expanding their converged offerings combining mobile companies had deployed, or were planning to deploy, and fixed-line services. IoT-enabled solutions over the following 12 months. In 2019, the list of the top players in the Russian broadband IDC estimates global investment in IoT in 2019 at US$ market remained virtually unchanged compared to 2018, 726bn. Investment in IoT is expected to reach US$ 1tn with 59% of the subscriber base in the market being shared in 2022 and top US$ 1.1tn in 2023. between the top four players: Rostelecom, MTS, VimpelCom and ER-Telecom. PricewaterhouseCoopers estimates that the overall beneficial effect for the Russian economy from deploying IoT in the power, healthcare, agriculture, and logistics sectors and under the Smart City programme could reach 1 Preliminary estimate by TMT Consulting. close to RUB 2.8tn by 2025. 2 International Data Corporation, the global provider of market intelligence, advisory services, and events for the information technology, telecommunications, and consumer technology markets. 1 Forecast by TMT Consulting.

40 41 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Digital Strategy In 2019, MegaFon fully completed the buyout of the remaining minority in Action shareholders to become a private company, allowing us to fully focus on the strategic tasks In 2019, MegaFon continued to implement its Strategy for 2017–2020, ‘Driving the Digital World’, we face. The successful implementation of our Strategy resulted maintaining its focus on meeting the needs of digital customers and driving their LTV 1 to spur further in an increase in MegaFon’s key financial metrics: sustainable growth.

During the year, RUB bn RUB bn we maintained 349.0 310.8 MegaFon’s MegaFon’s MegaFon’s our focus on our strategic overall revenue service revenue Mission Vision Aspiration priorities: + 4.0% + 1.2% y-o-y y-o-y Providing To be subscribers’ Remain a digital 1 ‘Happiest opportunities first choice market leader Customer’ ‘Fastest Service and best partner 2 Provider’ for life ‘Government RUB 151.6bn RUB 13.9bn 3 and Industry OIBDA1 and free cash flow We see our mission as building To become the first-choice data Digitalisation’ for shareholders a digital world offering opportunities provider for our subscribers + 22.2% that improve the life of each by offering top-of-the-line digital y-o-y + 9.0 RUB bn customer. products and services. y-o-y

1 Happiest Customer 2 Fastest Service Provider

A happy customer is a loyal customer. To drive customer We have remained Russia’s fastest mobile network We seek to become the industry’s fastest and most launched a microservice factory to further reduce our time satisfaction, we are continuously improving the customer (according to Ookla), having also reached the highest video efficient company, attractive to our customers, to partners to market, helping to drive increased customer satisfaction experience by relying on our BigData analysis download speeds in 2019. that we want to team up with in building an ecosystem and enabling us to engage with our partners even of subscribers’ needs to offer them the best value for money. of digital products, and to our own employees. In line faster. Our ‘technology sandbox’ continued to develop, We are developing our portfolio of products and services Increased focus on customer needs also contributes with this approach, we implemented a number of Smart with multiple pilot projects being launched and some by creating our own products and engaging with partners to consistent delivery on our business goals, ensuring high Capex basic use cases in 2019. For example, when planning already scaled up in partnership with a number of startups. from other industries. Over the last year, we have LTV growth rates over the last two years. the placement of base stations, we used quality metrics substantially increased our focus on customer satisfaction derived from customer geospatial data. We have also with transparency being our top priority, including relaunching our mobile app offering an array of tailored products to our subscribers in the beginning of 2020. 3 Government and Industry Digitalisation

MegaFon’s involvement in government and industry highlight of the year was the successful completion digitalisation efforts helps us to identify new sources of the nationwide Digital Breakthrough competition of growth and to bring added value to other players for digital economy projects, which became the world’s in the Russian market. Specific projects include MegaFon’s largest hackathon according to Guinness World Records. participation in the construction of a subsea fibre cable along the Northern Sea Route. In 2019, we also created For more information see HR Management section a digital twin of Kronstadt as a means to visualise the city’s on page 86. future social and transport infrastructure. A major 1 Lifetime Value (LTV) is an internal estimate of the present value of the future cash flow per subscriber throughout the entire period of his or her relationship with MegaFon. 1 Including the effect of IFRS 16.

42 43 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Key Strategy Our competitive 2018–2020 elements advantages targets and progress 2

Products and services Digital ecosystem Infrastructure Creating value without competing on price. New tariff lines are based on insights We continue to build our capabilities to create MegaFon is building upon into customer needs Russia’s largest digital ecosystem through its existing technological Stated 2018–2020 We develop and launch products tailored to the needs of our digital customers. In 2019, partnering with the industry’s major players. advantages to achieve targets we launched ‘Obyedinyai!’ (‘Combine!’), a converged bundle plan that combines mobile, In 2019, MegaFon, the RDIF, Alibaba Group, leadership in digital 2019 actual results 3 residential broadband and TV services. and Mail.Ru Group together set up the largest services for customers. social commerce joint venture in Russia Our objective is to be and the CIS, aimed at integrating Russia’s key the data provider of choice consumer internet and e-commerce platforms. for digital customers During the year, we also signed an agreement based on their recognition Big Data with Saint Petersburg State University of the quality of our service. to establish the 5G Dream Lab, equipped We are developing 360° customer view. Big Data allow us to understand how to better adjust with everything required to train students our infrastructure 2–5% our offerings in 5G-related skills. in line with major global We rely on analysis of the needs of individual customers, including users of Mail.Ru trends, capitalising Group’s products, gained through leveraging Big Data, machine learning, and conjoint We are engaging external partners no on our leadership analysis, to tailor our offerings of products and services. matter what size or state of development – in numbers of base stations, 1.2% from startups (through our ‘technology and leveraging our fourfold Service revenue sandbox’) to more mature vendors – bandwidth advantage to incorporate their solutions into our product in the 2,600 MHz 1 mix on mutually beneficial arm’s length terms frequency range. Sales and support network or to use such solutions to speed up our internal Digital digital transformation. customers Prime access to high-value digital customers at minimal cost 3–6% We aim to secure access to high-value digital customers at minimal cost with a focus on increasing customers’ LTV rather than pursuing gross adds. To this end, we promote our services in MegaFon’s owned stores and online channels, primarily focusing on capturing higher quality sales and pushing new retail formats to gain the most traction with our customers. For example, in 2019 we launched our first Store of the Future 5.3% Continuous efficiency improvements experience store where customers can try out, choose, and buy any device all OIBDA by themselves. We have in place a process to manage initiatives consistently throughout their lifecycle, from development to execution. In addition to maximising financial returns, we aim to accelerate and simplify our internal processes while increasing employee satisfaction and productivity. To achieve this, in 2019, MegaFon operated a special intranet portal, ‘Digital Idea’, where all employees have ICT and IoT access to details of every project and the actions being taken at the different ≤ 2.0x stages of execution, as well the opportunity to suggest ideas or join any Developing value-added corporate services for the public and business sectors of our ‘Agile’ project teams. Our business relies on our solid position and successful growth in mobile and fixed-line. Further growth will be supported by the launch of high value added, integrated offerings 2.45x and ICT projects. We are actively involved in the national efforts to drive digitalisation of the Russian economy by continuously developing and launching new integrated IoT Net debt/OIBDA solutions for retail, business and government customers. Our latest solutions include an environmental monitoring platform, an online platform for automating freight logistics, among others. 2 Target values are based on average growth rates and do not reflect possible negative implications 1 Comparisons made for the FDD of regulatory changes and 2,600 MHz band (or Band 7 one-off transactions. under 3GPP). 3 Excluding the effect of IFRS 16.

44 45 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Business Model

Resources Products Results and assets and services

Technology leadership Balanced (offline and online) Shareholders distribution system Mobile 210,900 km services RUB 349bn FOCL network, including: 2,011 total revenue MegaFon Retail stores 140,400 km Experience Store 80.3% backbone network a new store format mobile revenue, including data revenue 2,070 181,400 11.0% base stations franchised stores Digital products revenue from sales and services of equipment and accessories in 36 regions of Russia online stores with offices 8.7% fixed-line revenue

RUB 151.6bn OIBDA Recognised brand Highly skilled Accumulated and loyal customers team aggregated Fixed-line customer data services 86% 40,334 Big Data Employees brand recognition employees Personalised offers 1 7,7 9 7 employees have completed training programmes

RUB 839.5m social benefits Service- and partnership-based digital ecosystem Sales of handsets MF Technologies Fort Ross Mastercard 5G Dream Lab and accessories an e-commerce Ventures Mobile financial launched in partnership Customers joint venture with Strategic partnership marketplace with Saint Petersburg million the RDIF, Alibaba Group, for innovation for subscribers, State University 76.9 customer base and Mail.Ru Group launched in partnership 45% CSI

Brand portfolio Focus Society on digital customer LTV growth 82% of population covered by 4G/LTE network

Strategic focus RUB 175.1m on the digital customer share and revenue charity expenses Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Operational Results Infrastructure

Network expansion MegaFon is the unrivalled leader in Russia 1 MegaFon’s base stations, ‘000 4G/LTE coverage, % by number of base stations, with ​ We are committed to maximising the speed and reliability of communications services for our subscribers, 2019 70.0 50.7 60.7 181.4 2019 82 and are continuously investing in infrastructure and innovative technology. > 181,400 2018 70.5 49.4 49.6 169.5 2018 79 stations 2017 69.1 48.0 40.6 157.7 2017 74

2G 3G 4G/LTE 2G 3G 4G 5G 1990s 2000s 2010s 2016–2019 MegaFon’s strong portfolio of unique high-speed data 4G/LTE networks Voice and SMS Mobile data and high- Mobile broadband and full- Ultrafast mobile internet, spectrum assets is an important competitive advantage. quality voice services scale IP network full-scale support While major Russian players have comparable bandwidth In 2019, we continued expanding our 4G/LTE coverage, of IoT ecosystems, positions in bands below 2,100 MHz, MegaFon enjoys increased the number of 4G base stations by 22% and ultra-reliability a fourfold advantage over its key rivals in the 2,600 MHz to 60,700, and carried on with our programme to upgrade band 1. This competitive edge enables MegaFon to: existing base stations. At the year end, 4G/LTE was • deploy 5G networks at a much lower cost than its available to 82% of Russia’s population, while data MegaFon was the first in Russia to competitors in the 1–6 GHz spectrum; transmission speeds increased due to upgraded bandwidth • save up to 15% on CAPEX for 4G; at base stations. • deliver much faster peak data speeds with 4G versus its • provide 2G services in all • roll out a full-scale • launch the first 4G • demonstrate a record competitors. We also continued to invest in the development Russian regions commercial 3G network network (2012); connection speed of LTE Advanced, a technology that supports data rates • launch a commercial of 2.46 Gbit/s In 2019, MegaFon focused its infrastructure expansion of up to 300 Mbit/s, which is now available in 49 Russian VoLTE network (2016); on a smartphone efforts on: regions. We were the first in Russia to demonstrate a data • demonstrate a data on a 5G network (2019); • increasing 4G coverage in low and medium frequency rate of over 1.6 Gbit/s on a commercial smartphone rate in excess of 1 Gbit/s • launch a 5G ranges, improving network capacity; in Moscow. on a commercial lab – in collaboration • upgrading its network and expanding capacity smartphone (2018) with Saint Petersburg at existing sites to maximise operational savings; We also expanded our VoLTE footprint and improved its State University’s • developing new NB IoT technologies, including improved coverage. To improve voice quality on VoLTE networks, Graduate School indoor coverage; we introduced EVS, an advanced codec able to cover of Management (2019) • improving VoLTE voice service quality and coverage. the full dynamic range of the human voice, making phone calls seem as though the callers are standing right next Additionally, MegaFon replaced outdated equipment to each other. to enhance network reliability, reduce power consumption, and prepare base stations for LTE rollout at no additional cost.

1 According to Roscomnadzor as of 19 March 2020. 1 Comparisons made for the FDD 2,600 MHz band (or Band 7 under 3GPP).

48 49 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

3G networks 5G DreamLab FTC’s strategic goals for 2020: In 2019, MegaFon completed the first phase • prepare its tower portfolio for 5G deployment; of the deployment of ASON 2 security technology, which The number of our 3G base stations grew by 3% to 50,700 In September 2019, MegaFon launched its Digital • continue development in cities with high traffic density; will ensure high network reliability and lower upgrade at end 2019. In the future, MegaFon plans to migrate traffic Laboratory on the campus of the Graduate School • engage in federal and municipal projects, including costs associated with traffic growth. ASON was launched and bands from 3G to 4G, as well as to prepare for 3G of Management at Saint Petersburg State University Smart City projects; on the Moscow–Samara, Moscow–Volgograd and Moscow– phase-out in the longer term. Further development of 3G to research 5G networks. Fitted out with a trial zone, • partner with state-owned facilities to install Nizhny Novgorod routes. Plans are in place for ASON scaling will be focused on the UMTS2100 spectrum being refarmed the laboratory has become a platform for developing the company’s infrastructure; in the North-West, Caucasus and Ural branches. to LTE 2100 networks, as necessary, to maintain the current new 5G services. • continue dual-use pole construction. service level and network capacity. MegaFon began shifting the IPBB 3 interregional network For more information see the HR Management section of the Caucasus branch to a IP/MPLS 4 backbone network on page 88. Backbone and backhaul networks via direct gateways in the regions. This will optimise 2G Networks traffic routes and DWDM backbone network utilisation. Continuous expansion of its fibre-optic (FOCL) network The project will be completed in 2020, and a similar project In 2019, the number of 2G base stations stood at 70,000. allows MegaFon to provide a better subscriber experience, will be implemented for the IPBB network of the North-West Key plans for 2020 include GSM spectrum being refarmed including improved mobile network capacity and increased Branch. to LTE 900 networks in order to improve network coverage mobile data speeds. in rural areas and urban buildings and deploying a bearer In 2019, MegaFon continued the construction of mWDM layer for VoLTE calls. By the end of 2019, the total length of MegaFon’s backbone networks in Moscow, Saint Petersburg, Nizhny Novgorod, networks reached 140,400 km, up 3.2% y-o-y. Yekaterinburg, Samara, Ufa and Volgograd, which improved the quality of the services provided in these cities. Developing 5G networks Tower infrastructure Backbone and backhaul FOCL networks, ‘000 km The first 5G pilot zones in millimetre wave bands Network quality were launched in Moscow and Saint Petersburg JSC First Tower Company (FTC) is a MegaFon subsidiary 210.9 with the following early practical results: set up in 2017 to provide effective management 2019 140.4 MegaFon boasts an advanced, extensive infrastructure, • a record connection speed of 2.46 Gbit/s achieved for the Company’s tower infrastructure, increase its return and a significant edge in spectrum availability, which 204.4 on a smartphone on a 5G network; on CAPEX invested, and expand into the fast growing tower 2018 136.1 allows us to provide a high-quality voice experience • first international call made over a 5G network; lease market. and record-high mobile data speeds. 199.8 • first of MegaFon’s permanent 5G pilot zones deployed 2017 134.1 in Moscow near Moscow State University; The company employs professionals with the necessary • first unmanned control of coal mine transport skills in telecoms, property management, IT solutions, Backhaul FOCL, including: MegaFon is deployed (Listvyazhnaya mine, Kemerovo) and infrastructure construction and expansion. FTC’s Backbone in the Russian Federation. resources include a shared back office hub in Samara, regional competence centres managing land lease the unrivalled In 2020, we plan to launch the first real segments contracts for towers, and a call centre handling enquiries In 2019, MegaFon continued shifting its backbone fibre- of the future 5G networks (although this is dependent from external counterparties, suppliers, and customers. optic network from non-coherent systems to DWDM 1 leader on the outcome of spectrum auctions in the Russian Strong collaboration between all units of the company has coherent systems which accelerate data speeds, reduce by average data transfer rate in Russia 5. Federation), and to continue 5G spectrum clearing through made for significant efficiencies in customer service. latency and cut the costs of further upgrades. DWDM a joint venture already established between all operators, coherent system equipment was installed on the Moscow– as well as developing and enabling new use cases for 5G. To maintain a high level of service, FTC maintains Samara, Moscow–Volgograd, Yekaterinburg–Novosibirsk, a company-wide database of assets and installed Saint Petersburg–Smolensk, and Kazan–Ufa routes. MegaFon’s involvement in the national Digital Economy equipment which are managed by a dedicated IT platform. programme is of particular importance for the Company in this regard as the programme is expected to be a key By the end of 2019, a total of approximately 16,700 driver of telecommunications industry development towers had been built, of which 503 towers were built according to decisions taken by the SCFR 1 5G network in the reporting year. development is a key part of the programme.

1 DWDM (Dense Wavelength Division Multiplexing) – modern technology 4 MPLS (Multiprotocol Label Switching) – a routing technique for carrying a large number of channels on the same fibre. in telecommunications networks that directs data from one node to the next 1 State Commission on Radio Frequencies: an inter-agency coordinating 2 ASON (Automatic Switched Optical Network) – technology for automatic based on short path labels. body at the Ministry of Digital Development, Communications and Mass switching of optic lines in DWDM networks. 5 Speedtest by Ookla. Media of the Russian Federation. 3 IPBB (IP Backbone) – an IP-based backbone network.

50 51 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Connectivity metrics in 2019, % Service delivery and infrastructure Major automation facilities were also deployed, such operation as CTS 4 which has automated and accelerated mobile and fixed-line customer complaint diagnostics. Corporate Network 4G 3G 2G customer notifications were simplified and made more Call set-up success rate 99.85 99.85 99.42 The network operation function was transformed in 2019. accurate and reliable by automation of scheduled Over the year, our previously introduced Global Network maintenance notification. Drop call rate 0.08 0.14 0.27 Operational Centre (GNOC) continued to evolve in two key areas: The following major projects were completed in 2019: • Network management – management, maintenance, • replacement of obsolete switches in 36 regions In 2019, our quality improvement efforts focused on local insights into the quality of our services based on feedback upgrade, and reliable operation of network infrastructure and relocation of controllers, with significant reduction network and service optimisation, resulting in improved from our customers which will lead to improvements in both equipment including the network’s mobile and fixed-line of technical support costs; overall voice call and mobile data metrics. network quality and customer services. The new system segments; • customer migration to a new UDR 5 solution increased the speed of our handling of communication • General Service Operational Center (GSOC) – with a 99.9999% reliability. MegaFon also continues to enhance its Business Continuity quality complaints by using automatic algorithms comprehensive monitoring of all services provided Management (BCM) system with an emphasis on creating for service quality detection for each individual customer by the Company to various customer segments, Key plans for 2020 include: a single approach to business continuity planning, and automatic generation of recommended solutions. We IT infrastructure, billing services, VAS, IT services • continued VoLTE rollout in all Russian regions; reviewing existing service criticality and reliability plan to continue the CEM rollout to high-priority geographic for internal users, and services for external customers. • preparations for the 5G launch; standards, and ensuring service backup to ensure locations in 2020. GSOC focuses on service metrics for end users • upgrades to STP/DRA 6 signal routing equipment across implementation of the Company’s strategy and minimise and the quality of delivered services, immediately all branches of the Company. reputational or financial loss in crisis situations. In 2019, we completed a two-year project to deploy assessing the impact of incidents on the customer base. the SON solution within MegaFon’s networks. In 2019, MegaFon’s CEM 1 system was launched across In 2019, MegaFon continued to stream the routing of fault IT infrastructure development the entire Moscow region network, providing us with new alerts through enhancement of correlation, filtering, and other intelligent tools used in umbrella OSSs 1. The range of fault alerts was expanded to cover events The IT infrastructure development function that impact the service quality or may potentially impact is responsible for the operation and development SON solution a service in future. of technology platforms used to run services. Platform operability is maintained round the clock, enabling SON (Self-Optimisation Network) – a solution that The system uses various Big Data sets covering the network: A process to generate and register incident alerts by impact timely responses to potential threats and prevention automates most routine operations so that engineers can • network configuration (cell and base station profiles on quality was also launched in the reporting year. of service degradation. focus on more complex tasks. A two-year project to deploy and links between them, etc.); We also developed and launched a process to prioritise SON was completed in 2019 when the system algorithms • statistics on network operation (dropped calls, traffic, base station faults by potential/direct losses, potential were adapted for MegaFon’s wireless network, and then cell loads, etc.); number of affected customers, and lost coverage. tested and rolled out to cover the entire Russian market. • geodata (base station coordinates, cell azimuths, antenna elevations, etc.). The resource-as-a-service model was implemented Over SON sends the network between 800,000 and 1 million for the OSS in 2019. A tailored SID 2 model (by TM Forum) 1,300 commands per day and monitors changes in KPIs. was approved for use within the Company. This project information systems are deployed across is part of the new catalogue-based approach and the initial the IT infrastructure resources phase of SCM 3 implementation.

1 OSS – an umbrella operation support system. 2 SID (Shared Information and Data Model) – a reference data model developed by TM Forum to standardise ontologies and concepts used 4 CTS – customer trouble shooting. in the industry and align relations between entities and data flows. 5 UDR – user data repository. 3 SCM (Service Centric Model) – a lifecycle-driven, RaaS-based service 6 STD/DRA (Spanning tree protocol/Diameter routing agent) – routing 1 CEM – customer experience management. management model. protocols.

52 53 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Key projects completed in 2019: In 2019, MegaFon continued to upgrade its data centres Microservice Factory • Rollout of MegaFon’s single cloud solution and improve their operational efficiency through new for telecom and IT service launches. The new cloud architecture, while optimising the existing data centre The establishment of the Microservice Factory focused modern digital communication channels. Driving infrastructure enables faster time to market for new network to stay relevant in the medium and longer on the development and rollout of technical solutions the continued acceleration of time to market and digital services, improves infrastructure reliability, increases term. The Company is pursuing a number of objectives within MegaFon’s digital ecosystem and was an important ecosystem development are the Factory’s key objectives. resource management flexibility, and optimises through these efforts, including standardising technical milestone in the ecosystem’s evolution. infrastructure utilisation. and organisational solutions used in data centres, reducing In 2019, the Microservice Factory implemented more • Launch of own B2X-platform, MegaFon Cloud (Virtual data centre construction times, providing faster access The open digital ecosystem and the Microservice Factory than ten unique partnerships, including integration Data Centre). The platform uses state-of-the-art to data centre resources, and automating business enabled faster time to market for new products and better with Booking.com to provide international roaming services equipment with ultrafast solid-state storage systems processes. integration with partner products, significantly accelerated for the duration of the booked hotel stay and access to VIP enabling implementation of corporate-class IT systems information system integration, reduced duplication, lounges for premium bank card holders (in partnership of any complexity, including hybrid and mixed solutions. and improved the reliability of technology services with MasterCard). The Microservice Factory solutions • Development and deployment of new tools for Information technologies for the Company and, going forward, for the Group. are used in the Company’s key projects, including services the CI/CD platform 1. These new tools permit access driving real time product offer personalisation (real-time to a secure centralised code repository with geographic MegaFon deploys state-of-the-art information technologies The Microservice Factory implements business initiatives marketing), telesales (Teleport), fast-track development redundancy, to automate the process of continuous across all areas of its activities to successfully achieve its leveraging the most advanced stack of technologies of features for the new Mobile Client Account (MCA 2.0), integration and delivery to production and more. strategic goals and leverage its competitive advantages. in microservice architecture, drives the Company’s OMNI 1 and many others. • Big Data project development. The Big Data strategy to improve customer experience, and develops infrastructure services and data are used to generate In 2019, MegaFon continued to develop its digital ecosystem insights into and reports on the Company’s key projects based on modern databases and open-source platforms, which, among other things, enables tailored tariff microservice architecture and dynamic infrastructure and service offers to our customers. MegaFon also employing cloud solutions. completed a number of tasks to optimise infrastructure and improve its reliability. MegaFon drives the development of its digital ecosystem by leveraging in-house resources and actively engaging Data centres with partners, with a particular focus on joint developments with the Group’s subsidiaries and the reuse of business Data centres are an integral part of the GNOC. At the end solutions, services, code and the ecosystem infrastructure of 2019, MegaFon’s distributed data centre network itself. Also in 2019, MegaFon launched joint projects has enabled early identification of trends and potential included 120 facilities across Russia. with various subsidiaries, including the ‘Vklyuchaisya! fault predictors, and fault prevention. The availability Obyedinyai’ (‘Connect! Combine’) converged tariff line of business systems can be markedly improved without Our data centres currently have the necessary capabilities launched together with NetByNet. Yota’s data transfer increasing headcount through the use of automatic to ensure the smooth operation of telecommunications policy management system was replaced, enabling analyses, employment of multiple mathematical models, servers and other equipment, including data warehouses. the development of a shared data transfer service model and correlation of huge arrays of data on most diverse However, the demand for data centre services is steadily for MegaFon and Yota which will monitor for track base events within the billing system in real time. growing given the outlook for 5G, dramatic data station overload, dynamically manage traffic transfer band traffic growth, and the explosive expansion of cloud allocation for different customers and support multiple As part of MegaFon’s digital strategy, a robotic process and virtualisation technology, including the use of cloud other tasks. automation (RPA) platform vendor was selected in 2019. servers instead of proprietary telecommunications MegaFon established a centre of excellence and the first equipment, while the growing per unit capacity Further development of the unified billing system competence centre within the RPA function and provided of equipment sets new requirements for data centre and automatic quality setting and control, as well training in RPA development stages from the identification infrastructure. as better alignment between Nexign 2 and MegaFon, have of an RPA opportunity to robot configuration, testing significantly accelerated initiative deployment even when and deployment. MegaFon also launched a programme the core components of the billing system are updated. to explore function-specific RPA potential and set up The commercial launch of a predictive analytics platform a cross-functional team to identify end-to-end processes.

1 CTS (англ. Customer Trouble Shooting) – ​система траблшутинга клиентского сервиса. 1 OMNI or Omnichannel stands for a cross-channel content strategy used 2 UDR (англ. User Data Repository) – ​база данных по абонентам. by companies to improve their user experience and drive better relationships 3 STD/DRA (англ. Spanning tree protocol / Diameter routing agent) – with their audience across points of contact. протоколы маршрутизации. 1 CI/CD – continuous integration & continuous delivery. 2 MegaFon’s billing system vendor.

54 55 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Products and services

Mobile Services Refreshed ‘Vklyuchaisya!’ (‘Connect!’) tariff line Developing VoLTE Roaming services

Mobile data remains a strategic priority for MegaFon, In March 2019, MegaFon refreshed its ‘Vklyuchaisya!’ In 2019, we continued to expand our VoLTE coverage, which As at the end of 2019, MegaFon provided international with efforts in this segment focused on delivering better (‘Connect!’) tariff line to better cater to the needs at the time of the preparation of this Report had been roaming in 596 partner networks across 220 countries, customer experience to heavy users of mobile data. of its digital subscribers. We have retained the benefits rolled out to 17 Russian regions. In addition, VoLTE had with our global roaming footprint increasing over the year of the previous version in the refreshed tariff line while been tested in 10 regions and the service was available by 7 countries for GPRS roaming, 5 countries for CAMEL building upon our ecosystem of partnerships and partner for selected groups of subscribers. roaming, and 14 countries for LTE roaming. Mobile data users and their share in the subscriber base discounts. For example, we were the first in the market to introduce cashback on subscription charges, which From April 2019, all subscribers can opt out of special can be used to purchase our products. Additionally, To improve the quality of VoLTE, MegaFon continued options and bundles while in any of the 140 countries 2019 46.4 34.9 the ‘Vklyuchaisya! Razvlekaisya» (‘Connect! Have to introduce covered by our roaming services. Telecommunication Fun’) tariff from our low-price segment offers a six- 1 services (calls to Russia, incoming calls, data, etc.) in these 2018 43.4 32.7 month subscription to ‘Amediateka’ TV series packages, advanced EVS countries are now offered ‘for the price of a cup of coffee’ as well as other services such as ‘Start’ and more.tv, or on the terms available under domestic plans. 2017 41.8 31.5 while our heavy tariff ‘Vklyuchaisya! Smotri+’ (‘Connect! Watch+’) offers an unlimited subscription to products codec Under our domestic plans, MegaFon’s subscribers get Mobile data users, million and services. which captures the full dynamic range of the human 60 free minutes per 24 hours for any incoming calls Share of mobile data users in the subscriber base, % voice and makes it sound as though callers and calls within Russia as well as 1 GB of data. As such, are standing next to each other. the same terms (60 minutes of free incoming calls and 1 GB In May 2019, MegaFon and NETBYNET launched of data) now apply when the subscriber is roaming. After In 2019, the number of MegaFon’s mobile data users that, roaming fees are applied, but are charged only rose by 6.7% y-o-y to 34.9 million, supported by higher ‘Obyedinyai!’ Developing services for data-enabled devices for the days when the subscriber actually uses the mobile penetration of smartphones and bundled plans, services, while the amount depends on the country of stay. including both voice (voice services are rarely offered In 2019, MegaFon continued to develop its services on a standalone basis but are bundled into integrated (‘Combine!’), for data-enabled devices, making data services a priority. The list of countries where roaming on the terms solutions for customers) and data. The increase in mobile a new converged product that combines mobile, The relevant tariff line currently comprises three tariffs: of our domestic plans will be available is expected to be data usage was also driven by the general market trends residential broadband, and TV services. ‘MegaFon Online’, with charges on a per MB basis, extended in 2020. We are planning to develop our roaming of consumer digitalisation. and the two ‘Tvoi Bezlimit’ (‘Your Unlimited Data’) offerings footprint based on the ‘double partner’ principle, meaning For more information see the Fixed-Line Services section which are available for 6 or 12 months and provide a range that there must be at least two p artner networks offering In 2019, MegaFon continued to refresh its tariff lines, on page 59. of options for unlimited data. All tariffs and products the terms of our domestic plans to MegaFon subscribers including converged services, to meet subscriber needs within this tariff line are intuitive and attractively designed in any given country within our roaming footprint. We while offering its customers the fastest mobile data and priced. are also exploring 5G roaming opportunities for the future. services in Russia. Two new tariffs were launched in 2019 as part of the refresh of ‘Vklyuchaisya!’ (’Connect!’): In 2019, we launched the Create Wi-Fi project in Moscow MegaFon will allow its subscribers to carry over their unused ‘Vklyuchaisya! Vibirai’ (‘Connect! Choose’) and Saint Petersburg, as well as in the Leningrad Region, voice and data allowances to the following day and share In 2019, MegaFon won and ‘Vklyuchaisya! Razvlekaisya’ (‘Connect! Have Fun’). enabling subscribers to lease or buy a router, which can use their voice and data allowances with family members while the Ookla Speedtest Awards as Russia’s ‘Vklyuchaisya! Vibirai’ is a ‘build your own’ tariff designed a MegaFon SIM card to provide access to unlimited mobile travelling. We also plan to make attractive exclusive offers for subscribers who value the ability to flexibly manage data instead of using residential broadband. available for new roaming users. their tariff plan. ‘Vklyuchaisya! Razvlekaisya’ targets fastest mobile data our younger subscribers and includes a reduced minutes In 2020, MegaFon is planning to refresh its data product 1 plan but unlimited data for multiple services such mix to better cater to different user segments based Fixed-Line Services operator as YouTube, social media, and messengers. on their consumption patterns. for the third year in a row MegaFon provides its fixed-line services for the mass The ‘Vklyuchaisya! Obshchaisya’ (‘Connect! market through its subsidiary NETBYNET (under the WiFire Communicate’) tariff has proved to be the greatest brand). Our customers are offered high-speed broadband, success due to its balanced bundle available digital TV and local telephony, as well as virtual private for a moderate subscription, including unlimited mobile network (VPN) connectivity and line leases. In 2019, data in line with the industry’s trend. NETBYNET’s efforts in fixed-line services were focused on expanding its networks in the cities in which it operates In 2020, we are planning to streamline tariff plans and in the adjacent suburban areas, as well as increasing for all segments of subscribers, drawing on qualitative the number of homes reached. and quantitative insights into subscriber needs.

1 Based on over 8.4 million speed tests on Russian mobile devices via SpeedTest® app in Q1–Q2 2018. 1 Enhanced Voice Services.

56 57 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

WiFire Fixed-line communications for the mass market ‘Obyedinyai!’ (‘Combine!’) converged bundle plan

In May 2019, MegaFon and NETBYNET launched The project includes access to MegaFon's unlimited B2C base, ‘000 ‘Obyedinyai!’ (‘Combine!’), a new converged product that services and various bundles of options from other B2C‑services: combines mobile, residential broadband, and TV services. operators, as well as Russia’s fastest mobile data, 38 The plan is available to 3.9 million Russian households residential broadband at speeds of up to 300 Mbit/s, • Residential broadband (WiFire Home) 2019 462 242 50 791 within the coverage of the NETBYNET fixed network. a bundle of TV channels, series and movies, a dual band • Residential digital TV (WiFire TV) and cable TV 31 Wi-Fi router with LTE backup, and a MegaFon TV OTT set • 4G mobile data (WiFire Mobile) 32.7 2018 484 229 60 804 To expand the footprint of ‘Obyedinyai!’ (‘Combine!’), top box. Users can subscribe to a range of extra options • Residential telephony 18 NETBYNET has launched its FVNO (Fixed Virtual offered by MegaFon, including its #Spetsii cashback • Anti-virus and parental control 2017 506 202 70 796 Network Operator) project which is available to national service, the MegaFon bank card, and the ‘Children’s • Computer repairs and support and regional broadband operators. REAL, a major operator Internet’ service. • Static IP address Residential broadband active in the Astrakhan region, has become the first FVNO TV partner. 4G mobile data B2B-services: Residential telephony • Broadband In 2019, we continued developing our flagship product, • Line leases WiFire TV. The service’s interface has been fully refreshed • VPN to include an app store with games now available to users, • Telephony and a set top box with a new exclusive form factor being • Digital and cable TV introduced to the market. New HD and UltraHD TV channels • Virtual PBX were added, including foreign language channels (Italian, • Cloud video surveillance Japanese, Kazakh, Kyrgyz and Armenian). The TV line-up Fixed-line communications for business In 2019, NETBYNET continued to expand its portfolio • Wi-Fi with authorisation now features precise timestamps enabling users to start of services for corporate customers, launching products viewing any programme from its beginning. To enhance such as Business TV, which can be used by a diverse customer experience, we continued to improve Client NETBYNET B2X base, ‘000 range of organisations, from hotels and stadiums Accounts by adding new services and streamlining to bars and restaurants, hairdressers and beauty B2G‑services: the interface. 1.1 0.5 parlours; and Wi-Fi Radar, a tool for targeted advertising 2019 15.3 6.9 23.8 and assessment and reporting of conversion rates. • Wi-Fi on public transport 0.8 0.5 We have also refreshed certain cloud-based services • Video surveillance systems WiFire has won the digital 2018 15.9 7.5 1 24.7 (through expanded functionality and updated tariff plans) • Traffic enforcement systems multi-channel TV award for 0.6 0.5 such as Virtual PBX and Wi-Fi with Authorisation. 2017 16.0 5.2 22.3

the Best Set Internet access In 2019, NETBYNET was involved B2O‑services: Top Box Telephony Data transmission as a technical • IP transit for OTT and Hybrid Receiving TV • VPN from Bolshaya Tsifra. partner • Line leases MegaFon B2X base, ‘000 in setting up Wi-Fi networks at major events WiFire is available in seven Russian federal districts, Building a smart home ecosystem is among NETBYNET’s such as the Russian Internet Week, namely, the Central, Northwestern, North Caucasian, top development priorities. Its new solutions include 1.3 Russian Internet Forum and the Atlases Southern, Volga, Ural, and Far Eastern Federal Districts. the Entryphone project which involves installing 2019 29.0 23.0 95.4 148.8 Business Forum In 2019, its coverage grew by 3%, with 1% attributable an entryphone with enhanced functionality (taking 1.5 to an increase in organic coverage and 2% driven entryphone’s video calls on a smartphone from anywhere 2018 26.5 20.9 103.7 152.6 by acquisitions and partnerships. and handling a barrier gate or building entrance lock). 1,5 In 2020, NETBYNET is planning to expand its FVNO (Fixed The service is currently available in Belgorod and Stary 2017 21.8 22.2 97.4 142.8 Virtual Network Operator) partnerships to increase During the year, WiFire was successfully rebranded, Oskol and will be rolled out to all regions covered coverage of the ‘Obyedinyai!’ (‘Combine!’) product, as well now positioning itself as: ‘WiFire: Making Life Easier’. by the WiFire fixed network, based on the initial results. VPN as further developing converged services from MegaFon The rebranding is expected to facilitate WiFire’s integration Internet access and improving the subscription process and customers’ into the MegaFon brand. Communication channels product experience. Telephony

1 Data include Pskov GTS assets.

58 59 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Innovative Products and VAS AntiSpam services MegaFon seeks to lead the telecoms industry on digital transformation and build an ecosystem of customisable, versatile and user-friendly digital products. To this end, we are focused on expanding our service offering and continuously improving existing products such as digital bank cards, nationwide SMS Filter 2.0 MegaFon StopAd MegaFon Protection I Know Who’s Calling TV accessibility and online courses, as well as video and media content. Connect *174# Try for free *963#

Blocking unsolicited text messages, calls and solicitations, as well as intrusive web advertising on Megafon’s network. B2C-services The number of AntiSpam services subscribers increased from 0.1 to 1.5 million compared to 2018.

NEW Financial services Partnerships E-commerce

Bank Card Mobile Direct Carrier Billing Digital Shelf #Spetsii MegaFon Commerce (DCB) Mobile Commerce NEW Travel Choose your card Blizzard wallet Tinder Litres Cashback up to 30% Details

Card transaction volumes over RUB 24bn (+35%); 10% increase in payment Payment for GooglePlay A set of unique offers for MegaFon subscribers 3x growth in the number A new mobile app for volumes; and AppStore using in partnership with Blizzard, Tinder and Litres; of orders and service iOS and Android; 2x growth in the number of active users of the MegaFon a phone account; customer base; Bank app; 12% increase in average Over 200% increase in the number of users; Promo codes check. 39% increase in payments Direct integration and exclusive offers. + 3 new tariff plansadded for the card, offering 51% increase in the number of active users using DCB; with major partner cashback of up to 1.5% in roubles for retail payments of Yandex.Music, BOOM and Zvooq. stores. and interest of up to 10% p.a. on the account balance; 22% increase in the subscriber base. Lending real money to subscribers based on Big Data insights; 46% Bank Card NPS in 2019.

NEW Cloud services Media Education Identification

MegaDisk MegaFon TV MegaFon Education Mobile ID NEW Details Watch Online courses Order

Free unlimited 100 GB + free mobile data uploads/ 1.6 million active users (+27% y-o-y); The service was launched in September 2019; Secure sign-up procedure using a single PIN; downloads; Market share in terms of payment revenue at 2019-end 170,000 unique users. 97% conversion to identification by MegaFon TV; 1 TB free while subscribed to the ‘Obyedinyai!’ was 3% according to Telecom Daily; 19,000 monthly active users. (‘Combine!’) tariff; Direct revenue increased by 35% y-o-y; Paid bundles with extra large data plans (500 GB A new converged product launched (residential and 1 TB) at prices 30% below the market rate; broadband, mobile services and TV), including MegaFon 50% increase in the number of users compared to 2018. TV’s proprietary set top box.

60 61 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Key B2C development plans for 2020

#Spetsii MegaDisk Mobile ID

In 2020, the #Spetsii team We plan to triple file download In 2020, we plan to extend the service to all key mobile operators and expand the functionality to enable will focus on growing a quality speeds and increase personal data use cases: customer base and increasing the share of mobile users the number of purchases per from 60% to 80%. We • Launch the B2C Mobile Customer Profile • Launch new options for websites, covering user. Products and tailored also have plans to make (WEB) with an option to manage personal auto-fill form, one-button customer validation product offerings will be added the service accessible not only data, enter delivery data and payment and identification using Mobile ID, as well to the service, which combined to MegaFon subscribers, but also details, as well as view website registration as a fully functional B2B client account with the MegaFon Target solution to other users. statistics using the Mobile ID; with an option to view logon statistics enable relevant offers at the right and conversion rates. time. We plan to launch customer profile analytics based on the Mobile ID interface for our B2X customers and integrate this service with advertising tools to support further customer contacts.

I Know Targeted Who’s Calling advertising MegaFon TV

In 2020, we plan to launch As part of the MegaFon Key development priorities the zkz.megafon.ru portal, Target service, we plan for the MegaFon TV service will which will provide to expand targeting to cover include improving usability, search customers with an option online site visits and launch engine optimisation and home page to manage the list of inbound look-a-like targeting, as well personalisation, as well as developing bulk call numbers and access as actively engage the existing an own recommendation engine. to user data. MegaFon will focus customer base with a focus on significantly expanding on a tailored approach the database of phone to information and advertising numbers used by the service mailings. to improve caller ID performance and launch a bundle of the I Know Who’s Calling and the MegaFon.Protection services.

62 63 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

B2X-services 1

Voice and smart services Analytical and advertising services

Consultation

Smart Call 8 800 Virtual PBX Webinars Hotline Smart Index Digital Tourism Social Scoring Lead Generation MegaFon Target Processing NEW NEW NEW The Hourly Triggers MegaBanner NEW Select a number Details Connect Short dial codes A Big Data service In partnership scenario added Details Updated service An AI-based Refreshed Client The service has analysing key with CJSC United to identify leads Video conferences Quick dial codes interface; cloud call Account design; been tailored An AI- and machine- travel industry Credit Bureau; on an hourly basis automation solution (FMC) metrics and features and increase ad-to- Added new to the requirements Assemble a team learning-based service A service using for both incoming Added a setup for municipalities purchase conversion advertising of our major Order to analyse outdoor segmentation and outgoing calls; wizard feature or regions; rates; channels: e-mail customers as regards Updated advertising; algorithms to accelerate bulk messaging Helps optimise Client Accounts, the platform, Applications: support to determine Developed and tested and simplify Analyses about 80% and online banners man-hours customisable setup, improved video FMC Partner for decision making an applicant’s lead generation the forwarding of advertising space enabling desired and improve routine and data import; quality. on the development creditworthiness; models for high- wizard setup; across Russia, audience targeting task management. MultiFon Business of tourism price and premium Updated integration regardless of its Identifies and reducing go-live Added extra and infrastructure, segments (real estate, with Bitrix24 Connect format or location; the applicant’s time for advertising minutes or travel product cars, windows). and amoCRM, household/group campaigns; to the data plan Data sources promotion. the CRM market’s and provides offered by the Easy include mobile Added new targets leaders; MultiFon SIP Trunk their profiles; Start tariff line. network load, (Call Categories, Added an Online information from web A number Online Interests, Callback Widget partners and mobile of projects piloted and Sender Names); option as a new app data. with the Top 10 Text messages communication banks in the B2C and e-mails are only channel lending market. available directly sent and banners on the website are only shown for any customer. to subscribers who have expressed their consent. RUB 330m revenue (+30%); 6,900 clients.

Mobile ID Video Analytics Geo-analytics Customer Smart Machine Insurer Analytics and Bank Order Scoring

1 The B2X MegaFon service line includes B2B (business-to-business), B2G (business-to-government) and B2O (business-to-operators) services.

64 65 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

IoT and ICT Online and partner services Details

Digital Lawyer An automated MegaFon Rekrutika Update media portal MegaFon Cargo Digital Utility Operator Online Water Monitoring (enterprise) recruitment NEW NEW NEW system Smart Utilities A solution for water utilities and water Demonstration NEW Details Read About the service Innopolis filtering and treatment facilities New products presented A skills-based enterprise Expanded the service’s Media content focused An online platform for automating to automate energy monitoring as part of a comprehensive HR automation solution functionality: on how technology freight logistics and streamlining A decision made to reintegrate processes and assess water quality Legal Tech solution: customised for LA/NA/TOP is transforming the engagement process for all and infrastructure operation online. • Automated text 58 facilities into the Smart Utilities customers. A unified system business. Key topics: stakeholders. system; • Document Designer bringing together business messaging to candidates operating as a neural customers, recruiters, selected for the next • The role of technology The solution allows the customer Refreshed Client Account; network chatbot collecting and security services: recruitment stage; in business explained to generate any freight transportation information from user in simple words; request and immediately engage Embedded tools for utility • Expanded dialogues; • Automated carriers and insurers. services and analysts; communication with job the functionality • Digital enablers Simplified emergency tracking. • Legal Platform applicants; of MegaFon’s Client of business growth; The service sales to MegaFon processing standard Account interface – customers were launched incoming documents • Embedded smart incoming and outgoing • MegaFon’s experience in December 2019. such as enquiries systems for preliminary calls, vacancy posting in doing business. from government interviews and tests; on hh.ru and automated authorities, complaints • Automated interview posting on vk.com Client Account B2X 2.0 or legal suits, stages. with a lead form to collect and automatically responses; Login generating replies; The solution reduces • Automated hiring time and costs Redesign of Client M2M Monitoring IoT Last Mile MegaFon Environment • A system recognising collection of responses and accelerates the work Account B2X to align NEW NEW primary documents from the corporate Launched a new interface of all units involved with MegaFon’s corporate to quickly feed data portal activated for the React application adding extra A refreshed tariff line enabling An automated environmental in the recruitment process. website style. from certificates, when connecting options for customers and improving B2O customers to set up last mile monitoring solution featuring bills and invoices into to the platform; service quality. and/or backup channel services using a set of sensors connected via a local accounting systems a dedicated mobile APN network network to management servers, • Expanded functionality (e.g. into 1C or SAP). for data security. specialist workstations and monitoring of digital funnels, sites of related services. customisable to match a particular process.

Single Corporate Digital Line Mobile Electronic MegaAcademy: Safe Access IoT Solutions Employee Car Fleet Freight MegaFon Website (MegaFon Personnel eSignature Document Education for Business Monitoring Monitoring Monitoring Trunking Business) Recruitment Management for Business for B2X

Browse Details Details General information Information

66 67 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Platform and digital solutions

Platform for Business CDN 2.0 Wi-Fi with authorisation MegaFon Mobile Device NEW Management NEW Details Free trial Activate the service Details A marketplace of Mail.ru partner services for corporate The newly launched version of CDN 2.0, providing Updated client account interface, with new features communications, data storage and marketing. the following key benefits: added: A platform to manage a customer’s mobile • Customer’s domain e-mail service with an address • A more robust and reliable server and network • Customisable initial login page; Key B2X devices remotely, [email protected], offering a list of services infrastructure by Hewlett Packard Enterprise and Cisco development plans • Hotspot management; setting requirements and integration with corporate services; for 2020 • State-of-the-art software by G-Core Labs, a leading and restrictions • Tracking the number of visitors, with statistics views • Cloud file server for data storage, file sharing, team technology vendor for devices, apps, content available; In 2020, we will document collaboration and co-authoring. and communications, • New features: static content delivery, video streaming. continue to simplify • Collecting feedback from Wi-Fi users; and ensuring reliable and enhance corporate data protection our products • Voucher-based Wi-Fi access system for hotels; of mobile devices. and services • Accelerated service activation; for corporate customers, • Priced 1.5 times lower. with a particular focus on SMEs. We plan to further Business TV Anti-Hack Business develop smart NEW NEW and digital products Details Free trial and platform and network solutions, High-quality, legal TV content for business: A security protection solution for company mobile as well as IoT and ICT devices in large organisations, with employee device apps solutions for digital • Licence agreements with all content owners for public connected to a single console to monitor for threats in real transformation. viewing at commercial premises; time. The service is offered on a corporate-mobile-service- MegaFon Data Leak Prevention Database protection • Smartly tailored channel packages (HD, for children, provider-agnostic basis. (MegaFon DLP) NEW educational, sports, business, in foreign languages). NEW

Details Details

New solutions to prevent corporate data from leaking when in transit via any channel: • The DLP solution monitors outbound data channels including e-mails, messengers, or USB sticks for critical data (personal data, trade secrets, confidential information); • The Database Protection solution prevents unauthorised attempts to copy, delete or change data and protects critical business apps. Data centre Private LTE Anti-Hack DDoS Data Confidential The solutions comply with regulatory requirements for personal, financial and critical network protection encryption Mobile infrastructure data. Services

Internet Business Cloud Virtual Data Portable base Turnkey Online OutSORMing Under Control Centre station Cash Register

68 69 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Developing our brand and marketing communications

A strong, highly recognisable brand is Megaton’s key We created ‘Tryasi Smartfon’ (‘Shake Up Your Sponsorships and partnerships Digital development differentiator. Our brand’s key message is ‘MegaFon. Smartphone’), a unique solution that combines products Starts with You’. MegaFon’s products inspire our customers and a communications campaign, which engaged millions We follow a consistent policy of promoting engagement MegaFon maintains its high visibility in the digital space and enable them to unlock their full potential and use each of users across Russia. This enabled MegaFon to achieve in our sponsorships and partnerships, so that our brand and continues to develop successfully in this segment. and every opportunity that life presents them with. performance that far exceeded expectations (the service’s always comes across vibrant and high-tech. In 2019, we created a uniform programme for supporting revenue for the first six months was five times higher than our sponsorship events that includes engaging celebrities Inspired by modern-day customers and in line with its forecast) and stand out from its competitors. In 2019, we achieved record high audience engagement and bloggers, promotional activities before and during ‘Starts with You’ message, throughout 2019 MegaFon through sponsorship integration, an indirect advertising the event, live streaming, and post-event sharing. sought to find tailored approaches to different channel. In 2019, we held a number of events which were To support our advertising campaigns, we reproduce customer groups. We offered music fans opportunities attended by over 1.5 million people and watched online unique content posted by celebrities on their social media to collaborate with celebrities, supported popular music by over 151 million viewers. accounts for free. shows and festivals, held promotions for sports fans 50 % at sports events including football and ice hockey games, We supported several major festivals which are popular In 2019, we implemented over 150 projects that reached and offered gamers opportunities to join eSports projects MegaFon’s advertising awareness among our target audience, such as Live Fest Summer over 100 million people in total. and experience our unique gamification mechanics. (Sochi), VK Fest (Saint Petersburg), the Afisha Picnic (Moscow), Usadba Jazz Festival, Wild Mint, and many Our brand continued to have a highly visible presence MegaFon is active in both online and offline events that MegaFon more. During these events, we worked hard at promoting in eSports and gaming. In 2019, we made a unique in-game can gather new and prospective customers, engage the perception that ‘MegaFon subscribers are offered product placement in PUBG Lite – our subscribers can many of our employees and enable us to achieve high is the most special treatment’, by offering our customers backstage now use a MegaFon-branded parachute when playing brand recognition. By delivering individually tailored passes and access to live streams of the music shows. the game. The ‘Superstomp from above’ was a landmark communications and being aware of our customers’ effective event in 2019, an open broadcast of The International needs, MegaFon is able to evoke a positive response The Company is the telecoms operator and official sponsor 2019 (Dota 2 World Championship) arranged for eSports 2 from our digital subscribers. Russian telecoms brand . of Russia's national football team, seeking to reinforce fans by MegaFon jointly with ESforce. At the event, the public perception that ‘MegaFon supports our national we also demonstrated the capabilities of 5G networks In 2019, MegaFon was ranked second most valuable brand football team’ and that ‘MegaFon is the provider of unique for the gaming industry by having a team of MegaFon among all Russian telecoms and fourteenth among Russian opportunities for me’. employees play a Dota 2 game against a professional brands overall. For the second year running MegaFon team. One of the teams used professional gaming was ranked among the Top 10 strongest Russian brands, MegaFon has been a partner of the Kontinental Hockey hardware, while the other used ordinary laptops connected with our ranking improving from 2018 1. League (KHL) for 11 years. In the 2019/2020 season, we held to the cloud gaming service over a 5G network. over 30 promotional events at KHL clubs’ ice arenas in ten cities of Russia. Integrated marketing communications

In 2019, MegaFon launched over 20 successful integrated advertising campaigns involving full-scale support across all our key communication channels, and over 30 campaigns with smaller scale and coverage. For the first time since 2017, an image-boosting campaign was launched to promote the brand and the ‘MegaFon. Starts with You’ slogan.

Specific advertising about different product offerings enabled us to achieve high total spontaneous brand awareness.

1 Source: Brand Finance, Russia 50 2019 Report https://brandfinance.com/ images/upload/russia_50_free.pdf. 2 According to Effie Awards Russia, the country’s main award for achievements in advertising and marketing.

70 71 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Sale of products and services

In 2019, MegaFon made further progress on improving The total number of MegaFon Retail stores increased Stores of the Future the efficiency of its retail network managed by MegaFon to 2,011 by the end of 2019, with per store revenue up Retail. 11% y-o-y. In 2019, MegaFon Retail started actively upgrading its improve customer experience and made stores more retail network by opening 89 new generation stores attractive to customers while boosting revenue from sales with improved external store design. The new stores offer of equipment and accessories, as well as the number In 2019, MegaFon Retail stores: In 2019, MegaFon Retail continued to develop an expanded range of products and are focused on digital of contracts signed. In 2020, MegaFon Retail will continue its value-added services: solutions and products, with an updated employee role its programme for scaling up its new generation stores facilitating increased service mobility and speed through by opening another 300 stores. sold Sales (transaction volume) growth a greater use of tablets. All these measures have helped over 9 million Insurance + 28% Experience Store mobile phones, smartphones, In November 2019, we piloted a new ‘Experience Store’ self-service area. The project is expected to enhance tablets, and accessories format at our store at the Metropolis Shopping Centre customer experience while promoting new types of digital in Moscow, where customers can try out, choose, and buy services and products. In 2020, we will take a final Device set-up % any device all by themselves. The new format has a much decision on scaling up the Experience Store format based added + 53 bigger area enabling store zoning, including a dedicated on the results of the pilot project.

Terminal over million 7.2 payments + 8% subscribers

Money transfers + 36% Online sales In 2020, MegaFon is planning to continue to improve MegaFon’s digital development strategy continues Smartphones remained the device of choice – their share In 2019, MegaFon continued to develop its online sales, the online shopping experience and customer retention to prioritise the expansion of the range of products of total mobile device sales in value terms increased by 1.5 with the number of online orders increasing by 8.1% throughout its retail sales arm. We will also continue and services available to customers instead of simply p.p. to 95.6% in 2019, and 4G smartphone sales grew to 293,000, and the number of visitors by 5% to 18.9 million our efforts to develop a Big Data driven vehicle for providing focussing on signing up new subscribers. As part by 3 p.p to 93% of total units sold. Samsung, Huawei/ users. recommendations to customers. of this, MegaFon’s stores launched a number of new Honor, Xiaomi, Vertex and Apple brands were the leaders services in 2019, including: by the number of smartphones sold. In 2019, MegaFon’s online store continued to expand its • MegaFon Press and paid MegaFon TV subscriptions; fast delivery service by opening physical stores in five 2019 234 293 3.2 • insurance; During the year, MegaFon Retail launched six nationwide more regions, bringing their total count to 36 by the year- • payment services, such as identification of Qiwi e-wallet advertising campaigns across TV, radio, online, end. We have improved our systems and interaction 2018 163 271 2.7 users, payments to UniCreditBank, AlfaStrakhovanie and outdoors together with some of our suppliers, including with partners’ delivery systems to offer our customers and SOGAZ INSURANCE; Samsung, Huawei, Honor, and Xiaomi. The campaigns were the best order delivery times and costs across the entire 2017 153 255 1.9 • tourism services (together with OZON.travel, Biblio supported by a range of promotions targeting subscribers, Russian market. Globus, CORAL TRAVEL, PEGAS Touristik, ART-TOUR, including free mobile subscriptions, gifts, top-ups, trade-ins and Geografiya). and attractive POS loans. MegaFon was the first mobile operator to launch its Online store sales, RUB bn, including VAT TMall marketplace on AliExpress in 2019. To expand its B2B and B2C connections, ‘000 subscriptions In 2019, MegaFon Retail expanded its product range, In 2019, MegaFon launched a programme offering product range, the online store has started offering Online orders, ‘000 with the average price of smartphones remaining cashback on telecoms spending – the accumulated partner products on its website, introducing a new pattern at the 2018 level but rising by 9% for accessories. cashback amount can be exchanged for a discount of up for engagement with suppliers. to 99% for purchases (smartphones, tablets, accessories, and portable devices) at MegaFon stores.

72 73 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Telemarketing campaigns. Our initiatives to improve platform efficiency Call centres and other subscriber ELENA virtual assistant have increased the call-to-sale conversion rate to 25%. services In 2019, we maintained our total monthly telemarketing We have also completed the integration of our telemarketing The ELENA virtual assistant has played a key role capacity at 4.5 million subscribers. During the year, and segment marketing systems while also designing in MegaFon’s customer support service. ELENA can be we enlarged the line up of products that can be promoted and introducing a new motivation system for call handlers. In 2019, MegaFon’s call centres received 115 million contacted by calling or sending a text message to 0500, via this channel by adding financial instruments, converged voice calls, of which 63% were handled automatically. or via an online chat or one’s Client Account. In 2019, products, and B2B offers to the existing options and tariff In 2020, MegaFon will continue to develop its product We received a total of 129 million calls across all ELENA’s agile team trained the assistant to use various plans. offerings for telemarketing campaigns. We are also our communication channels. MegaFon’s call centre techniques including predictive modelling to anticipate planning to maintain our focus on building employee operators handled 48 million queries (down 24% y-o-y), customer queries. Through such algorithms, it can identify In 2019, MegaFon kept its completed sales level at 9 million skills through user-friendly training sessions, and improve while the total number of customer complaints decreased the reason for a customer call even before the customer despite a reduction in the sales of ‘light’ products which our existing monitoring systems and interfaces. by 32%. gives it, enabling us to provide more personalised customer usually have high conversion rates in telemarketing experience. Our virtual assistant has recently learned This performance was driven by better product a vital skill: a customer can now interrupt her or ask transparency, simplified processes, and by user-friendly her to repeat information, which makes the conversation and stable operation of the MegaFon application. flow more naturally. 2019 highlights: Our call centre development plan for 2020 includes: ELENA also assists our team at MegaFon’s Shared Services • deployment of speech analytics to better understand Centre to handle routine business processes automatically and respond faster to customer needs; around the clock. • development of predictive analytics embedded 53 million 37 million 9 million in our ELENA virtual assistant which will anticipate ELENA handles about 350,000 customer queries per day, a customer’s query and immediately propose a solution; and customers no longer need to wait for a human agent calls subscribers subscribers • automation of our B2B segment processes to enable as the virtual assistant responds within a few seconds. reached said YES fast and smooth delivery of requested services + 9% + 5% to our offers to our corporate customers; ELENA can currently handle 250 different topics, y-o-y y-o-y flat y-o-y • deployment of more empowered experts as the second- with their prompts and cues improving daily. It is expected line customer support and introduction of service that in 2020, ELENA’s capacity in certain areas will exceed differentiation for VIP B2B/B2C/Sales to improve that of a human customer support agent. customer service performance and quality in voice channels. Customer satisfaction The MegaFon app

IVR telemarketing sales In 2019, the MegaFon app became the key element MegaFon’s strategy is to provide our customers In 2019, we switched from a customer satisfaction metric of our digital ecosystem, with its functionality greatly with the highest level of satisfaction. To achieve to measuring a Net Promoter Score (NPS) across most In 2019, our key objectives in telemarketing development enhanced and the app itself becoming much more user- this, we are continuously developing our processes of our customer service channels and, as a result, achieved included automation, as well as exploring the potential friendly and easy to use. and services to make them more transparent, convenient significant increases in positive customer comments: of interactive voice response (IVR) technology, such and consistent. We are deploying new technologies up to 18 p.p. by call centres and up to 25 p.p. by customer as artificial intelligence-enabled systems capable We focused on developing the app sections that are most and expanding our online presence. complaints management. of handling customer calls without human assistance. popular and important from the customer’s perspective: remaining allowances and spend. The app’s spend This technology is able to maintain a dialogue, pause visualisation capability enables the user to easily analyse as required, give relevant responses and handle objections. spend and decide whether the existing tariff is appropriate Key customer service development priorities An IVR assistant includes a dialogue generation system for their requirements or if additional services need and is able to learn through neural networks. to be added to their bundle. The charges and top- ups section provides itemised call data, including call Automation and development Development of convenient Channel customisation In 2019, MegaFon piloted, tested and analysed IVR sales, number and contact name. Remaining data allowances of digital channels, including and simple service processes and development of user-friendly improving their quality. This will enable rapid scaling of IVR are aggregated across all services to provide the user messengers, chat bots and virtual interfaces and algorithms sales and increase our IVR sales revenue significantly with complete and transparent information about gigabytes assistants in 2020. used and remaining.

A special financial services section was also added to the app, enabling users to manage any financial transactions from the app. It now only takes a couple Faster response and resolution Maintaining the quality Improving customer retention of clicks to get a digital card issued, pay for third-party times for customer queries of connections and products and maintaining a strong quality services, or make a money transfer. to further reduce the number focus of inbound calls and achieve faster conversions

74 75 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Another new feature is the ‘Dlya Menya’ (‘For Me’) Social media Subscriber protection to Federal Law No. 126-FZ On Communications dated section which aggregates Big Data-driven personalised from unsolicited messages and fraud 7 July 2003, which enable operators to block any unwanted recommendations and partner offers. The app’s interface Social media remains a key tool in serving our customers bulk messaging. was further improved and is now easier to navigate and promoting MegaFon’s products and services, and more graphic and intuitive. A new ‘Stories’ section (a as customers are more comfortable contacting us through MegaFon pays close attention to the security of its Subscribers can report suspected fraud on MegaFon’s format borrowed from social media) was also added, where the apps and platforms they are used to. We aim to ensure customers and aims to protect them from unsolicited Safe Communication portal. This includes information users can find special deals, special partner offers, useful query response times of approximately one hour. and suspicious messages. MegaFon uses a nationwide Anti- about fraudulent schemes and ways to guard against them, tips, and other popular information. Spam system and follows its corporate bulk messaging and an option to download anti-virus software. The key platforms used by MegaFon to engage with its requirements, and is also guided by the 2014 amendments The new app design will be used as a platform to scale up subscribers include VK, Facebook, Twitter, OK, Mail.ru, the Client Account to take advantage of new opportunities. and Instagram. In 2019, this list was expanded to include We intend to drive the number of our Client Account users our official YouTube and Pikabu channels. In 2019, MegaFon: to 20 million. blocked handled In-store service quality million MegaFon’s retail network is a key customer service channel. 1.5 In 2019, we continued to optimise our customer service customers were served online more than 451 million more than 20,000 procedures: and through social media accounts spam text messages subscriber complaints about third-party fraud • procedure interfaces were simplified to speed up including the service and reduce errors; • cross-branch SIM card replacement was launched; identified and flagged blocked • cross-branch mobile number portability was launched in a number of MegaFon Retail offices; , • our Mobile Client Account was actively promoted 189000 unique customers and customers were educated on how to use its features. over 33,000 745,000 To ensure more effective customer resolutions without websites containing mobile malware and phishing phone numbers suspected to have been used escalations to the second-line customer support, websites to commit fraud, including numbers used to register the authority of MegaFon’s store directors was expanded. multiple accounts on social media This increased empowerment enabled close to an additional % 9,000 successful customer resolutions. 98 CSI handled cancelled The Company performs remote online assessment of employee compliance with sales and service standards in real life customer service situations to drive sales, Our efforts to expand MegaFon’s online and social media improve service quality and build customer loyalty. presence also include: more than about In 2019, this project was rolled out to our entire • using the Brand Analytics system to track relevant 9,000 2,400 retail network, with 90% of our stores being covered content across internet websites and blogs; subscriber complaints about malware fraudulent phone links to social media accounts by this remote assessment capability. • setting up the monitoring of mentions and tracking the tone of postings and comments; In 2019, we also launched fast-track service for VIP • launching MegaFon’s social media service in App Store sent alerted customers visiting our stores. and Play Market; • monitoring of, and responding to, customer reviews found in Yandex.Maps and Yandex’s review aggregators. more than over In 2020, we will increase our focus on assessing 519,000 183,000 the customer service quality in the social media channels. text messages alerting subscribers subscribers to the need for end user identity For example, we will incorporate NPS in employees’ to potential viruses on their mobile devices confirmation. KPI targets to enable comprehensive measurement and monitoring of service levels.

76 77 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Financial Performance

Revenue in 2018–2019, RUB bn 1 MegaFon continued to deliver steady growth value for our customers across all business segments, in Samara and Yakutia, the launch of the emergency call and a robust financial performance in 2019. Consistent we are ensuring strong operational and financial system through a single number ‘112’ in the Pskov Region, Service revenue: +1.2% focus on our strategy was the key factor in enabling performance and the Company’s clear digital leadership the setting up of an information technology system (ITS) our revenue growth. By continuing to develop our portfolio in the market. in Komi and many others. Mobile revenue: +1.6% of digital products and services that create genuine Service revenue in 2018 included a one-time upsurge +6.6% –1.4% –1.6% +33.7% in demand for the Company’s services during the 2018 Consolidated financial results, 2017–2019 1 FIFA World Cup and the positive effect of the abolition 2019 107.6 172.8 30.4 38.2 349.0 of intra-network roaming in Russia in Q3 2018. +4% 2018 100.9 175.1 30.9 28.5 335.5 Indicator 2017 2018 2019 2019/2018 As a result, our mobile revenue growth rate slowed in 2019 and our fixed-line revenue declined by 1.6% y-o-y. Revenue, RUB bn 321.8 335.5 349.0 4.0% Mobile data OIBDA, RUB bn 121.9 124.0 151.6 22.2% In 2019, we saw excellent growth in revenue from sales Other mobile revenue of equipment and accessories, which grew by 33.7% y-o-y Fixed-line services OIBDA margin, % 37.9% 37.0% 43.4% 6.4 p.p. to RUB 38.2bn. The increase was largely driven by higher Sales of equipment and accessories Net profit, RUB bn 20.5 21.1 10.3 2 –50.9% smartphone sales, including high-end models, such as Samsung and the latest iPhone, and by our campaigns Net profit margin 6.4% 6.3% 3.0% –3.3 p.p. promoting Xiaomi, Honor and Huawei smartphones. CAPEX, RUB bn 56.0 81.5 67.3 –17.4% Smartphone sales were also boosted by the introduction CAPEX/Revenue 17.4% 24.3% 19.3% –5.0 p.p. of a new generation of stores, emphasising top quality client service and a unique customer experience. Free cash flow to shareholders, RUB bn 35.2 4.9 13.9 185.7% Net debt, RUB bn 234.5 294.3 320.4 8.9% Net debt/OIBDA, x 1.92x 2.37x 2.11x –0.26x OIBDA

in the amount of RUB 21bn, as well as several cost reduction In 2019, OIBDA was up 22.2% y-o-y to RUB 151.6bn, while initiatives. In addition, MegaFon’s spectrum fees decreased Revenue OIBDA margin increased by 6.4 p.p. to 43.4%. OIBDA in 2019 due to fee changes. The higher cost of revenue and OIBDA margin were driven by higher revenues resulting from increased sales of equipment and accessories and lower general and administrative expenses due (that have lower margins versus services) had an adverse In 2019, MegaFon’s revenue grew by 4.0% to RUB 349.0bn. which stimulate data usage through expansion of our digital to the positive impact of the transition to IFRS 16, impact on OIBDA. Service revenue grew by 1.2% to RUB 310.8bn, largely ecosystem and partnerships with other digital players. driven by a 6.6.% increase in mobile data revenue. Mobile By leveraging insights gained through Big Data analytics, revenue increased by 1.6% to RUB 280.4bn. Russian MegaFon became Russia’s first telecoms operator Key factors influencing OIBDA in 2019, RUB bn revenue is a major component of MegaFon’s total revenue to introduce a flexible bonus system with ever-increasing and accounts for over 98.4% of total revenue. rates of cashback on subscription charges. The cashback 2 43.4% +6.4 p.p. points can be used to purchase our products. The Company OIBDA 2019 151.6 OIBDA margin

Mobile data revenue growth was largely driven by upgrades also introduced a cross-product discount system for its –25.4% +7.7 p.p. General and administrative 23.2 of the ‘Vklyuchaisya!’ (’Connect!’) tariff line. In 2019, having subscribers. In the second half of 2019, MegaFon launched expenses y-o-y as % of revenue invested much effort in identifying our customers’ decision- ‘Obyedinyai!’ (‘Combine!’), a converged bundle plan that +2.7% –0.07 p.p. Commercial expenses (0.5) making patterns and logic, we were able to release several combines mobile, residential broadband and TV services. y-o-y Growth as % of revenue Key successive versions of the bestselling ‘Vklyuchaisya!’ Our revenue in the fixed-line segment was driven by higher +8.4% 22.2% factors (’Connect!’) tariff line incorporating the latest technological ICT services revenue from B2G customers. B2G projects Cost of revenue y-o-y (8.5) Gross –1.3 p.p. profit gross margin change solutions. We also launched new products and services included photo and video recording of criminal activity +4.0% +2.1% Revenue y-o-y 13.4

37.0% OIBDA 2018 124.0 OIBDA margin

1 Based on the IFRS consolidated financial statements for 12M 2019 audited by JSC KPMG. Due to manual rounding, financial and operating results may differ from those presented here. All changes are shown for the same periods in the current and previous year on a quarterly basis, unless otherwise indicated. Indicators for 2018–2019 include IFRS 16 impact. 1 Changes are shown for values stated in RUB m and, due to rounding, may slightly differ from those based on the data presented in infographics. 2 Excluding revaluation of investment in an associate (non-monetary item). 2 Including the effect of IFRS 16.

78 79 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Net profit Liquidity and financial stability

In 2019, MegaFon’s net profit decreased by 50.9% y-o-y shareholders completed in Q2 2019. Other significant to RUB 10.3bn. The decrease was primarily driven by higher negative impacts were higher amortisation expenses As at the end of 2019, MegaFon had sufficient liquidity Debt portfolio as at 31 December 2018 and 2019, % finance costs due to borrowings made for the buyback related to our billing system, the upgrade of which and a comfortable leverage position. Net debt grew of shares and GDRs completed in September 2018, continued into early 2020, and from the RUB 3.3bn negative by 8.9%, from RUB 294.3bn in 2018 to RUB 320.4bn in 2019. By instrument the mandatory tender offer completed in Q1 2019, effect of the transition to IFRS 16. This increase was primarily due to borrowings made and the buyback of shares from the remaining minority to finance the buybacks of ordinary shares and GDRs 2019 23 73 4 in 2018–2019. 2018 17 71 12 The Company’s leverage was at its peak at the end Capital expenditures of Q1 2019, upon completion of the buyback of MegaFon’s Bonds ordinary shares, including those represented by GDRs, Bank loans and free cash flow pursuant to the mandatory tender offer mentioned above. Equipment financing Thus, at the end of Q1 2019, MegaFon’s net debt amounted to RUB 363.3bn. Throughout the year, the Company By currency In 2019, CAPEX decreased to RUB 67.3bn, down 17.4% y-o-y. Capital expenditures in 2017–2019, RUB bn regularly used part of its operating profit to pay off 0 0 Capital expenditures were mainly allocated to the further its debt. As a result of this, coupled with a substantial 2019 96 4 rollout of our network, improving its resilience, increasing OIBDA increase in 2019, the net debt/OIBDA ratio 0 the quality of our services and enhancing customer 2019 19.3 67.3 as at 31 December 2019 was 2.11x (down 0.26x y-o-y). 2018 87 8 5 experience. In 2019, approximately 11,100 new LTE and LTE Advanced base stations were launched. Some CAPEX was 2018 24.3 81.5 At the end of 2019, 98% of available cash and cash RUB also allocated to the preparations for the new 5G standard equivalents were denominated in Russian roubles (including EUR in Russia. 2017 17.4 56.0 through hedging arrangements) and 2% were denominated USD in US dollars and other currencies to mitigate the risks FX hedging instruments In 2019, MegaFon continued to make sizeable investments CAPEX, RUB bn of adverse movements in our liabilities in foreign currencies. in data storage hardware and software required to ensure As % of revenue In addition, 39% of the debt portfolio has a 4-year or longer By maturity compliance with the Yarovaya law. maturity. 2019 6 25 30 21 18 Free cash flow to shareholders in 2019 increased by 185.7% MegaFon enjoys excellent access to funding and support y-o-y to RUB 13.9bn due to the significant decrease from our financing counterparties. We monitor all 2018 12 13 27 21 27 in CAPEX and higher cash flows from operating activities. developments in the financial markets and take timely On the other hand, higher finance costs resulting steps to mitigate any negative impacts. 1 year from the additional borrowings obtained to finance 2 years the buyback of ordinary shares and GDRs in 2018–2019 3 years continued to have a negative impact on FCF. Debt portfolio 4 years 5 years and longer In May 2019, MegaFon redeemed its then outstanding rouble-denominated exchange bonds totalling RUB 10bn at par. During 1H 2019, MegaFon issued three rouble- New accounting standards denominated exchange bonds totalling RUB 40bn at par value, with three- to seven-year maturities. The coupon From 1 January 2019, MegaFon has been applying a new rates ranged between 8.55%–8.9% p.a., payable accounting standard, IFRS 16 Leases, and its financial semiannually. results are presented including the IFRS 16 impact. OIBDA without taking into account the positive effect of IFRS 16 in the amount of RUB 20,990m amounted to RUB 130,628m, and OIBDA margin was 37.4%. Adjusted net profit excluding the negative effect of IFRS 16 in the amount of RUB 3,282m amounted to RUB 13,630m.

80 81 Sustainability

Our approach to sustainability 84–85 Stakeholder engagement 86–96 Occupational health and safety 97 Social responsibility and charity 98–105 Procurement 106 Ethics and human rights 107 Anti-corruption 108 Our approach to environmental protection 108–109 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Our approach to sustainability

MegaFon aims to achieve excellence in business while contributing as much as it can towards Stakeholder engagement the social and economic development of society. Reconciling commercial, social and environmental interests is an important element of our Strategy. Implementing our sustainability strategy requires building For this purpose, the Company runs regular stakeholder effective relationships with all stakeholders based surveys to determine the key topics of importance to them. on partnership, equality, and respect. Our sustainable development is underpinned MegaFon sees sustainable development as growth from its by our commitment to the principles of integrity in business operations that results in a positive impact on people’s operations and responsible practices in relationships quality of life. MegaFon’s stakeholders Stakeholder expectations with all stakeholders. We adhere to generally accepted moral and ethical standards, promote business Our sustainability activities are guided by best practices, Customers • High-quality services transparency, respect human rights, and support and international regulations and standards, including • Compliance with the highest international standards for consumer relations environmental initiatives. MegaFon’s Chief Executive the United Nations Global Compact and the Social Charter • Ensuring confidentiality and security Officer, its Management Board, and its Board of Directors of Russian Business. • Prompt response to queries collectively provide and shape the strategic direction • Responsible marketing behind our approach to sustainability. Investment community • Adherence to best practices in corporate governance • Equal access to information about the Company Employees • Respect and trust MegaFon is committed to contributing to the delivery • Encouraging employees to realise their personal potential MegaFon’s of the UN’s Sustainable Development Goals, • Fair remuneration particularly the following: • Equal rights social mission ​ • Health and safety • Enhanced engagement is to create opportunities that facilitate communication, social adaptation, fostering, Industry community • Engaging in the development of the telecoms industry guardianship and adoption, employment, • Building best practices and standards and education. We seek to inspire people to find Business partners • Performance of obligations to all counterparties and explore all opportunities to the fullest. • Transparency • Fair competition • Adherence to Anti-corruption standards • Focus on long-term business relationships

Our reporting on sustainability is part of the Company’s Government • Contributing to the development of the digital economy annual report and is guided by international standards • Involvement in the modernisation of Russia’s telecommunications such as the Guidance on Social Responsibility (ISO 26000) infrastructure and the Global Reporting Initiative (GRI) Sustainability • Contributing to public safety, including support in emergencies Reporting Guidelines. • Involvement in the development of regulatory norms for the telecoms industry • Charity and sponsorship initiatives Local communities • Support for principles of corporate citizenship • Enabling better access to new technologies • Improving the quality of life through social investments

For more information see the Appendix: Material Topics and Materiality Matrix on page 218.

84 85 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

HR management

MegaFon’s HR policy aims to attract the most talented people and support their professional growth. SFera project The Company has built a framework of relationships supporting the achievement of MegaFon’s strategic goals. In 2019, MegaFon continued automating its HR function their account to prepare individual training plans, register and developing its SFera system to accelerate internal for programmes and recommend them to their colleagues, HR processes and make them even more convenient and assess the quality of training and provide feedback. and transparent. A performance-based goal-setting and bonus calculation Our team at a glance The entire training planning and organisation process process was launched within SFera in 2019. went online in 2019. Now every employee can use

As at 31 December 2019, MegaFon’s headcount was 40,334 MegaFon provides equal opportunities for both people. We have a very age-diverse talent pool, with close men and women. Our key selection criteria in hiring to 50% of our employees aged 26 to 35. Due to our focus and promotion decisions include professionalism, on technology and innovation, most of our employees have leadership skills, commitment to achieving results, higher education qualifications. and the ability to work in a team. Women account for 55.3% of MegaFon’s total headcount. Analytics Onboarding

Career planning, capability Training and developing employees Headcount by gender in 2017–2019, people assessment, individual (planning, delivering, and tracking development plans learning) 40,334 people 2019 22,324 18,010 40,334 MegaFon’s headcount 2018 23,171 17,358 40,529

2017 22,826 16,300 39,126

Women Men SFera Project

Headcount by age in 2017–2019, people Headcount by education level in 2017–2019, people

1,877 555 783 2019 11,498 19,152 7,252 2019 24,074 14,675 1,669 507 730 2018 11,341 20,235 6,722 2018 25,561 14,237 1,540 484 842 Managing compensation Corporate knowledge base, social 2017 10,831 20,083 6,188 2017 24,876 13,408 (performance-driven compensation, networking (project collaboration, review of the fixed part) internal corporate communications) 18–25 years 46–55 years University degree 26–35 years Over 55 years Incomplete higher education 36–45 years Secondary and vocational education Performance assessment (monitoring performance against targets, Goal-setting and KPIs (cascading assessing performance quality) and evaluating targets)

86 87 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Talent acquisition

MegaFon’s highly professional team is our key asset In the Universum rankings, IT professionals Digital Breakthrough and main competitive advantage. We are focused and young talents selected MegaFon on attracting and retaining the best talent by creating A nationwide competition for IT experts, designers and digital economy managers unique opportunities for career advancement and personal conducted in autumn 2019 became the world’s largest hackathon according development while identifying resources and capabilities as the second to the Guinness World Records. MegaFon was the project’s digital partner, the Company will need in the future. most attractive employer in the Russian while its experts provided mentoring support to participants from 40 Russian telecommunications industry in 2019. cities. The finals held in Kazan brought together over 3,000 regional winners. The assignment offered by MegaFon for the finals was selected by 29 teams – more than any other assignment. The best talents identified among the winners Digital talent were offered internships at MegaFon.

MegaFon is extensively involved in building a national In 2019, MegaFon continued implementing its pool of technology talent. MegaFon’s digital talent comprehensive programme to promote IT careers in Russia development strategy aims to seek out and promote high- by providing support to leading technical universities, potential candidates, develop their digital skills, and create running joint digital excellence projects, and opening up an environment for continuous improvement in coding, new opportunities for young talent. machine learning, development, and design. BigDataCamp

Key educational projects in 2019: In 2019, we launched a five-day classroom training programme on the use of Big Data technology, inviting all young people willing to enrol to enter our competition. Almost 1,710 young applicants from across Russia took part in the competition, with 20 winners being offered training opportunities 5GDreamLab at MegaFon. The best students were later employed by the Company. The entire training programme was designed by MegaFon’s experts. In September 2019, MegaFon launched its Digital Laboratory located on the campus of the Graduate School of Management of Saint Petersburg State In 2019, the Best Company Award University. Fitted out with a 5G trial zone, the laboratory has become a platform by Changellenge named MegaFon for developing new 5G services. Its training course has two focus areas: designing digital solutions and managing their integration. Developers learn the key features of 5G technology while working with actual developmental frameworks, as the best environments and tools, as well as acquiring knowledge and skills in user interface Telecommunications Company (UI), automated quality control and other aspects of sophisticated software with the Highest Potential. solutions. Managers learn to develop and launch high-tech products, manage the development process and communicate integration solutions to customers. Over 150 students completed online training at the laboratory, including 60 students who, following the tests, were invited to start the second module MF QA DAY of classroom training in project teams. The first minimum viable products (MVPs) According to the Universum rankings, MegaFon’s are expected to be presented in mid-2020. in Nizhny Novgorod attractiveness as an employer for students of industry-related universities majoring in Applied MegaFon’s experts and faculty at Saint Petersburg State University have In 2019, Nizhny Novgorod hosted the first educational crash Mathematics and Software Development designed educational programmes and set up a dedicated, branded digital course offered by MegaFon’s experts on IT community workspace inside the university’s building, fitted out with all necessary development for quick immersion in the job of being classroom training and distance learning tools, as well as a social and project a tester responsible for the quality of software development increased collaboration space. The total investment in the project stands at RUB 20m. and deployment. The project involved over 100 participants, with the best talents among them being offered significantly an internship at MegaFon. in 2019.

88 89 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Career website Talent retention and motivation for recruitment MegaFon seeks to create an environment which Recognition In 2019, MegaFon launched a corporate career website During the year, the number of applications increased encourages the professional and personal development at https://job.megafon.ru/ to promote its employer brand eightfold, with the share of positions filled online tripling. of its employees. We provide fair pay and ensure We value our employees and do our best to recognise and source new talent. that every employee has all the support they need their success so as to inspire them to new achievements. to find the opportunities that best utilise their knowledge Since 2018, the Company has operated a one-stop website, and talents. Pro PRIZnaniye, where every employee can learn about all current competitions and awards, ratings, and the eventual MegaFon’s motivation system includes both monetary winners. and non-monetary rewards, ranging from bonuses and social benefit payments, to development programmes, Key elements of the recognition framework include: as well as awards and rewards to recognise professional • Rewards during the year. Every manager is authorised excellence. to reward his or her employees for excellent project results, producing attractive proposals, and the implementation of interesting ideas which Engaging school students Remuneration are beneficial for the business • Awards from the Ministry of Digital Development, In 2019, MegaFon continued its educational projects that During the year, MegaFon held Our approach to remuneration is guided by our commitment Communications and Mass Media of the Russian introduce high-school students to a number of topics to offer competitive salaries based on market and internal Federation for employees who have worked for more such as IT technology, design, and the IoT, to help them benchmarks. In addition to regular remuneration, than ten years in the telecommunications industry make choices for personal development. In 2019, MegaFon our employees work on significant corporate projects and made a valuable contribution to the Company partnered with Russia’s best additional education providers over 150 and receive bonuses based on achievement of project goals. • Annual competitions for employees, including to offer its offices as a platform for children’s educational MegaConsultant for sales assistants and MegaFon- events for high-school and university students as well projects. The educational programme also involved In 2019, new motivation systems were piloted in a number Styled Life for employees who most clearly embody MegaFon’s experts, who offered students assignments as for professionals in Moscow, Saint Petersburg, of MegaFon’s units which focused on near-term the Company’s values in their work. Other awards that are as close as possible to the actual business Yekaterinburg, Novosibirsk, Nizhny Novgorod performance and stretching targets. This practice has include the Project of the Year award, which aims challenges faced by the Company in order to introduce and other cities in various formats, including: proved successful, and MegaFon is planning to continue to select the best project across the Company’s them to the universe of IT professions. In 2019, MegaFon 49 hackathons, 30 career forums, 21 meetups, rolling the systems out to other units. key functions, and the Best Business Idea award hosted training sessions for more than 200 school students for employees who propose the best digital ideas to drive on coding, design, website creation, game development 15 tours, and 7 case competitions in partnership In 2019, MegaFon updated the eligibility criteria for its business growth. and many other topics. with Changellenge. We also partnered with Mail.Ru long-term incentive plan. In addition to top management, Group to hold joint courses, online hackathons on Big the programme now covers digital talents who can Data analytics, and an IT Knowledge Day for high- become involved in new business initiatives which focus on consumer needs and create new markets. school students.

The programme reached a total of 17,000 digital talents across the country. A total of 113 university students completed apprenticeship and internships programmes at the Company, with 43% of them later being employed by MegaFon. Over one-quarter of the interns came from one of the Top 10 IT universities.

90 91 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Training and professional development

During 2019, employee training and development Employee training by focus area in 2019 Developing flexible approaches In 2019, we continued rolling out our specialist training at MegaFon, including MegaAcademy, focused on building to management and personal programmes. During the year, 296 employees shared digital capabilities and embedding a concept of continuous their expertise in areas such as information security, improvement which enables every employee to create 19 3,648 and professional efficiency communications technology, digital innovation, finance, his or her own individual training plan, have it reviewed legal, HR management, and many other topics. Specialist and then initiate the actual training. Employee training 21 4,015 In 2019, our efforts to develop national and regional team training programmes have been successfully integrated costs in 2019 amounted to RUB 110.6m. leaders focused on enhancing their knowledge of digital into general educational formats for both our employees 75 14,211 technology, improving their team management skills, and external customers (for example, our 5G Dream Lab Training was focused on building four key skill groups: emphasing Big Data-driven management and incorporating programme includes both theory and specialist training • Digital skills – coding, developing digital solutions, 68 12,832 digital tools into leadership practices. Assessment tools courses on technology offered by the Company’s technical online marketing, and Big Data such as 360° feedback and individual development plans specialists). • Technical skills – engineering skills, development Digital skills were also included in the regular leadership training and maintenance of networks and equipment Technical skills activities. • Commercial skills – knowledge of corporate products Commercial skills and services, promotion, customer relations Personal and professional e ciency The rollout of a national digital onboarding system • Personal and professional efficiency – general skills % of total headcount was another important highlight in 2019. SFera will now such as communication, public presentation, time automatically assign an onboarding programme to every management, and stress management skills, as well new employee of the Company while their supervisor will as targeted upskilling programmes Number of man-courses and employees trained in 2019 set targets and objectives for the employee’s probationary period. During their first month of employment, new hires are requested to take an onboarding course to learn 25,025 7,478 more about the Company, and its culture, values, and Development Strategy. 17,674 122,806

3,056 2,298 Key management development programmes , Specialist training in 2019: 17797 Internal training programmes employees trained in one External training programmes or more focus areas Unique employees trained Digital Director Big Data ABC

Part of the Digital Economy project – upgrading Building skills in data-driven decision making MegaAcademy knowledge of and skills on sophisticated and using Big Data in management reporting % integration communications solutions 94 is MegaFon’s corporate university offering training people of total headcount trained and development opportunities for the Company’s employees and partners. It operates seven nationwide The Path of the Chosen. centres of excellence for employee training. MegaAcademy Unlocking Opportunities. designs and runs proprietary programmes, organises Leader as a Coach Mission Possible training by external providers, and develops specialist training and mentoring systems. MegaAcademy is also Developing relationships between leaders An online programme to build basic management 150,887 responsible for managing online development and training and their teams (about 50 new directors and cross-functional collaboration skills. total number of man-courses systems such as SFera.Training and MegaFon.Drive. trained in 2019)

92 93 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Projects to build commercial skills Corporate culture and internal In 2019, the rollout of SFera enabled us to automate communications the onboarding and training management process for call centre staff and digitise entry-level training. As a result, we were able to deploy the latest training approaches Our internal communications system is a key part At MegaFon, we have created a ‘barrier-free’, two- (flipped learning, interactive digital learning, experience of MegaFon’s development. It is important for us to provide way communication environment shared by managers labs, etc.) and customise training even for large-scale every member of our team across all regions of operation and employees: our CEO now regularly visits an online recruitment campaigns. These advances have led to higher with a clear view of all key projects being undertaken chatroom where he communicates with employees satisfaction with training and a threefold reduction by MegaFon. We use tools that demonstrate MegaFon’s and answers their questions; our team leaders maintain in student churn rates. digital capabilities and help our employees to develop. blogs, play interactive learning games with other employees and appear in our internal talk show where they Seeking to establish MegaFon as a vibrant and dynamic have to answer hard questions and talk about their lives. company for both customers and employees, MegaFon.Drive we have dramatically changed the style, tone, and speed In November 2019, we surveyed a focus group of our communications by making them more innovative of 650 employees, asking them to evaluate our new portal In 2019, we launched MegaFon.Drive, a training, motivation over 22,000 and bold. for content quality, functionality, and user-friendliness, and business communication platform for employees active users of MegaFon.Drive as well as their interest in using the portal. The survey from our own and our partners’ retail businesses. at the end of 2019 The launch of MegaFon’s new internal digital ecosystem revealed a total average score of 5 out of 7, with MegaFon’s Serving as a convenient one-stop HR management tool, comprising the SFera and Jam corporate portals marked news releases most often receiving the maximum score this platform helped us migrate many business processes a major milestone for our internal communications for their content quality, functionality, and interest to users. to smartphones: in 2019. Deployment of these new tools enabled MegaFon • Training: to create a more open and friendly corporate culture. This first-ever internal customer satisfaction survey also courses, tests, surveys, events, skills; The tone of our communications has also been changed – showed a score of 4.8 out of 5, well above the target of 4.5. • Gamification: over 379,000 now we speak a language that engages and resonates rankings, awards, a privilege club; training sessions completed by users with our digital audience: we address that audience In 2020, we will continue to improve our procedures • Awareness: by using the informal singular ‘you’; we employ expressive for enhancing employee loyalty and driving further knowledge base, video library, news; and popular images, smileys, and memes; and we are more digitisation of our communication environment. We • Communication: willing to laugh at ourselves and take advantage are committed to further promoting a culture of innovation newsfeed, comments, feedback; of the hype caused by global events. and teamwork that combines a flat organisation • Analytics: with strong leadership, tolerance for failure and intolerance business metrics, KPIs, reporting, statistics. over 60 for incompetence, as well as collaboration and frankness, events organised via the platform willingness to experiment, and rigorous discipline in delivering on commitments.

Currently, the system offers 221 courses, 17 training programmes, 140 tests, 23 surveys, and 811 training The Jam project materials, with more than 200 events created on the platform. Jam is MegaFon’s internal social media for employees; The new social media portal has increased the amount in 2019, it became a single access point for 22,000 people. of our multimedia content (such as videos, photos, Jam can be accessed via a mobile phone, which enables and online event streams) and provided us with a choice Projects to build digital users to stay in touch with their geographically distributed of digital channels to engage various target audiences. team virtually around the clock. and technical skills The Jam social media portal is visited by 92% By promoting imaginative user content, such as personal of our connected users, with each post generating During the year, our digital skills building focused blogs, and enabling every employee to express themselves, an average of 1,000 views, which is triple the number on Big Data and IT security. In 2019, we established Jam has simplified access to useful information generated by our previous web portal in 2018. Extensive partnerships with the Coursera and Otus platforms, which and the sharing of ideas. In addition, function-wide discussion threads testify to the levels of employee offer a wide range of online IT courses. We also offer and private groups, as well as sharing news about various engagement with the Company and their willingness multiple training courses on major programming languages business units, have enhanced cross-functional to engage in an open sharing of ideas, including expressing (Python, JAVA, etc.). collaboration within MegaFon. frank opinions.

To build technical skills, we engage with the world’s best training centres, with a particular focus on the use of equipment and software from Nokia, Huawei, Cisco, Oracle, Juniper, Red Hat, and PostgreSQL.

94 95 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Social support Occupational health MegaFon not only guarantees all legally required social Expenses on social programmes and benefits, RUB m support to employees but always goes the extra mile to provide a wide range of additional programmes focused and safety 27 19 on providing the best work environment and professional 44 VHI and accident growth opportunities for its employees. insurance 112 Reimbursement for mobile Occupational health and safety (OHS) is a top priority Key occupational safety initiatives in 2019: Key benefits and guarantees offered by MegaFon phone expenses on MegaFon’s social responsibility agenda. ‘Occupational • Drafting and updating MegaFon’s local OHS regulations to its employees: 839 Reimbursement for expenses Health Management System at PJSC MegaFon’ is the main • Occupational safety training and tests for employees • Voluntary health insurance (VHI) for employees; on fitness programmes document regulating MegaFon’s OHS efforts. It was drafted • Provision of training and retraining at specialised employee family members are offered health insurance Additional sick pay in line with Russia’s GOST 12.0.230.1–2015, ‘Occupational training centres for employees whose job involves extra at a discounted price 203 434 Financial aid Safety Standards System. Occupational Safety and Health hazards • Employees’ accident insurance Reimbursement Management Systems. Guidelines for the Application • Special assessments of working conditions • Partial reimbursement for employees’ expenses for relocation of GOST 12.0.230-2007’, and GOST 12.0.230-2007, and operational control on fitness programmes ‘Occupational Safety Standards System. Occupational • Mandatory medical examination of employees • Temporary disability pay above the statutory minimum Safety Management Systems. General Requirements’. at the start of employment; regular health checks • Lump sum allowances to employees and their family and mandatory medical examinations of current members in difficult life situations MegaFon provides instructions on the precautions employees • Compensation for employees’ mobile phone expenses to be taken in the workplace and safety rules, as well • Provision of protective clothing, footwear, and other within established monthly limits as emergency procedures. At MegaFon, all new hires must personal protective equipment to employees • Reimbursement for relocation expenses when moving study these instructions, take an induction training course • Scheduled and unscheduled OHS compliance audits to a new place of work in a different region, and a fixed and pass tests to show their awareness of occupational across MegaFon lump sum to help employees settle in at their new place safety before they start working. Employees whose job • Efforts to ensure a safe working environment and reduce of residence. duties involve extra hazards are required to study safety work-related injuries rules and take special workplace occupational safety • Attendance by representatives of MegaFon’s business training. units at the All-Russian OHS Week

RUB 57.8m MegaFon’s expenses on occupational safety in 2019

96 97 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Social responsibility and charity

Our approach to charity

Charitable activities are an integral part of our corporate 2019 highlights: MegaFon’s charitable activities aim to: Charity expenses in 2019, by focus area, % culture and social responsibility. In line with the sustainability • Contribute to addressing social problems in local principles set out in the Social Charter of Russian Business, communities throughout MegaFon’s footprint by using we are committed to contributing to social well-being, our own resources 11 Helping talented including in local communities across our footprint. • Promote the creation of a competent donor community 5 young people RUB . m in Russia, including building capabilities among NGOs 35 develop digital 1751 6 In 2019, our charitable activities focused primarily charity expenses in 2019 to engage with the business community and IT skills on creating an accessible digital environment and helping • Facilitate the creation of a digital educational Helping orphans talented young people to develop digital skills. As part environment that improves the quality of life for everyone Creating of these efforts, we support projects closely linked in Russia. 17 an accessible digital to our business capabilities by creating and developing environment innovative online services to improve the quality of life Objectives of MegaFon’s charitable activities: Supporting employees and provide people with opportunities to develop IT skills 16 • Identify and systematically address the problems 26 Supporting people and competencies. charitable programmes faced by various social groups falling within the ambit with disabilities of MegaFon’s prioritised charitable activities Other (support for Our Charity Policy is the key document governing • Bring about the best outcomes and social impact the Polytechnic Museum MegaFon’s charitable activities. The Charity Policy sets for the charitable programmes we run or support Development Foundation) out the goals and objectives of MegaFon’s charitable • Promote networking and stronger ties within the donor activities and the principles and procedure for charitable 78 and NGO communities to facilitate best practice sharing project selection, and outlines the stakeholder engagement regions covered and enhance support for charitable activities in Russia. process. Key charitable priorities: In line with its Charity Policy, MegaFon provides support • Creating an accessible digital environment to charities only. It does not support individuals, • Helping talented young people develop digital businesses, religious organisations, public authorities and IT skills or officials, political organisations, parties or movements, 25,000 • Helping orphans and other children deprived of parental or candidates running for national, regional or local individual beneficiaries care elected offices. • Supporting people with disabilities • Supporting employees in difficult life situations. 1,000 volunteers

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Charity performance and value assessment Creating an accessible digital environment

Established in 2013, MegaFon’s Charity Committee Quantitative performance metrics applied by MegaFon is responsible for making decisions on which charitable to charitable projects: Universal Mobile Assistant projects to support. The Charity Committee also • Nature and level of expenses coordinates our social initiatives, monitors their progress, • Number of participants in charity programmes This project expands the range of opportunities In 2019, over 4,000 visually impaired people across 24 and assesses their social impact. The Charity Committee (beneficiaries, experts, specialists, volunteers) for integrating visually impaired people into society regions of Russia learned how to use mobile devices is comprised of PR, HR, legal, and security experts. • Number of cities and institutions involved in the project and empowering them through non-visual use without assistance, with more than 1,000 consultations • Number of events held as part of the project of smartphones with touchscreen interfaces. The relevant and over 500 classes being held. Our Charity Policy is the key document governing • Number of employees engaged in corporate volunteering training programme covers both general and special MegaFon’s charitable activities and other charity programmes. features such as talking books, object recognition Programme partner: and tagging, satellite navigation, live video call assistance, The Camerata Nizhny Novgorod Regional Rehabilitation As the Charity Committee reviews proposed social projects The qualitative performance metrics applied by MegaFon and audio description, with a particular focus on visually Centre for the Visually Impaired. and decides which ones to endorse, it gives preference to charitable projects include the actual tangible impaired school children. The project also operates to long-term and scalable initiatives able to deliver benefits from the initiatives, such as improvements a hotline manned by visually impaired people, who have actual tangible benefits. In doing so, MegaFon consults in the beneficiaries’ lives, consistent approaches first-hand experience of non-visual use of gadgets. with stakeholders, including our employees and the expert to problem-solving, and the contribution to an improved community. social fabric. over 53 % Eligibility criteria applied by MegaFon to proposed MegaFon conducts online and offline surveys among of our total charity budget was allocated in 2019 charitable projects: stakeholders to assess their satisfaction with completed to programmes facilitating the development • Systematic approach with lasting benefits charity programmes. The survey findings shape of an accessible digital and educational environment, • Efficiency and sustainability our decisions on whether to continue or adjust with a total of six digital products being developed • Potential for development in the medium term a programme, or whether the programme partners should through this initiative • Potential for scaling-up across Russia be replaced. • Potential for addressing multiple problems through efforts in a given area • Potential for leveraging MegaFon’s capabilities and engaging its employees across the regions covered Connect by the proposed project • Guaranteed credibility of the beneficiary or the partner and Be Successful! • Transparency of the funding scheme. Connect and Be Successful! is a corporate mentoring programme aimed To deliver maximum value, each project is assessed at providing motivational career guidance to orphaned children, assisting against a number of quantitative and qualitative metrics them in making informed career choices, finding jobs, organising internships, developed together with experts. In this process, MegaFon and helping them access part-time employment opportunities so they can thrive closely collaborates with Russian and international expert in the digital economy. communities and federal and regional authorities to share best practices and maximise synergies. Children can visit a dedicated online portal to learn more about digital careers available to them, try these careers, communicate online with their mentors, and create a video profile. In 2019, 838 teenagers from 16 regions of Russia were covered by the project, with 100 teens gaining their first work experience through summer jobs and 87 experts from various companies providing mentorship. The programme won the 12th People Investor corporate projects contest in the Development of Local Communities category.

Programme partner: Childhood Keepers Foundation for Support of Family and Children.

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Supporting the activities of volunteer search Helping orphans and other children deprived and rescue crews of parental care

MegaFon’s programmes for orphans and other children Supporting Liza Alert volunteer deprived of parental care are aimed at: • supporting social integration search groups • promoting guardianship and adoption • raising education levels MegaFon supports the activities of volunteer search and rescue crews across • providing career guidance and assistance in finding a job. Russia: the Company provides volunteers from Liza Alert volunteer search groups with access to mobile and online communications during their search for missing people, which greatly simplifies information collection and analysis. The Future Depends on You A dedicated MegaFon.Search Big Data analytics platform is used in the search for missing persons. It harnesses Big Data not only to speed up the search football tournament process but also to increase the chances of finding eyewitnesses who may have seen the missing person. At the request of Liza Alert, MegaFon deploys a special The Future Depends on You nationwide football tournament for teams platform to send out text messages with information about a missing person from orphanages and boarding schools is MegaFon’s major project supporting to a target audience within the relevant coverage area and social group. orphans, aimed at benefiting their physical development, facilitating their social adaptation, and promoting their guardianship and adoption. This annual The project has already proved successful: over the past six months it was used tournament is supported by the Ministry of Sports of the Russian Federation, in over 350 search and rescue missions in 38 regions of Russia, and in one-third the Ministry of Education of the Russian Federation, and the Football Union of the cases someone called back and provided information about the missing of Russia. person. In 2019, 289 football teams comprising 2,307 players aged 10 to 15 took In total, Liza Alert found over 23,000 missing people in 2019, including those part in the tournament, representing 140 cities and towns across Russia found with MegaFon’s support. MegaFon provided access to mobile and online and Tajikistan. In partnership with Change One Life Charitable Foundation, communications to 150 volunteers while on search and rescue missions to locate 4,270 video profiles of tournament participants have been produced, missing persons. with 885 kids already finding a new family.

MegaFon is highly focused on prevention and awareness raising. In particular, Programme partners: in December 2019, a film promoting kids’ outdoor safety premiered, while EDINSTVO Foundation, Change One Life Charitable Foundation. the production of another film promoting kids’ countryside safety was completed. These films will help kids memorise basic safety rules, potentially saving hundreds of children’s lives. In three regions of Russia, safety-themed quests were held involving a total 300 children of MegaFon’s employees. A lecture on countryside safety was organised for employees of MegaFon’s Head Office, with 16 of them taking part in a real search and rescue mission to locate a missing person.

Programme partners: Search Center for Missing People, Liza Alert volunteer search group.

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Supporting people Raising charity competence with disabilities within industries

MegaFon is committed to helping people with disabilities MegaFon holds regular educational and learning events overcome barriers to their integration in society, gain aimed at promoting smart charity practices and creating access to cultural and artistic events, receive additional an informed donor community in Russia. education or find a job.

Promoting boccia The DOBRO conference

Known as ‘athletics for all’, boccia is the only sport from the national team players. In 2019, three camp Since 2015, MegaFon, Dobro Mail.ru, and Metalloinvest have been holding that permits athletes with the most severe cerebral sessions were organised. the DOBRO (Business Discussion of Philanthropy for Societal Development) palsy conditions to reach their full potential. In 2019, annual educational conference for foundations and not-for-profit organisations. our nationwide boccia promotion project was rolled Athletes participating in the programme won the 2019 The goal of the conference is to foster dialogue between not-for-profit out to another four regions and now covers 43 regions European Cup and earned tickets to the 2020 Paralympics organisations, businesses, and society, and to enhance the impact of social of Russia, reaching over 3,000 people with disabilities. in Tokyo. A Path to Success documentary telling projects in Russia. During the year, over ten regional and five national the story of boccia athletes won the 5th Fathers and Sons competitions were held, along with 15 training events international film festival’s award in the Professional In 2019, over 100 not-for-profit organisations from 26 Russian cities and towns and master classes. In addition, we organised sports Documentaries category. gathered to discuss various fund-raising options, including creative advertising and training camps, using this new format to provide campaigns, social entrepreneurship, and engaging the business community. athletes and coaches with the opportunity to be trained Programme partners: In addition, mentors and smart volunteers from various businesses walked by the national team coaches and receive advice New Life Charitable Foundation the charities through the fund-raising process.

Supporting MegaFon employees in difficult life situations

MegaFon helps its employees and their family members who find themselves in difficult life situations, including by paying for critical illness treatment (in addition to the VHI programmes and financial support). In 2019, 387 employees received MegaFon’s support for a total amount of RUB 19m.

104 105 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Procurement Ethics and human

MegaFon’s procurement management system fully covers In order to improve the procurement and professional rights every phase of the Company’s procurement process, skills of its employees, our Procurement and Logistics from planning to fulfilment, to meet our needs for goods, function was transformed into a federal-level organisation, works and services, and is based on a competitive with three competence centres set up within the function approach to selecting suppliers, collective decision-making to provide procurement services for all MegaFon branches: Ethical business conduct with suppliers, and transparent supplier relations. • East Competence Centre (Novosibirsk), responsible for managing inventories across the country and local MegaFon’s procurement focuses on achieving the best sourcing for the Siberian, Far East, and Ural branches We are committed to the highest standards of business We have in place a 24/7 Direct Line through which value for money and time. We are striving to maximise • West Competence Centre (Saint Petersburg), responsible ethics and adhere to the principles of integrity, openness our employees and other stakeholders can receive guidance the automation and transparency of our procurement for local sourcing for the remaining (i.e. excluding and transparency in everything we do. on compliance with the Code of Ethics and Corporate processes. Procurement at MegaFon is done Siberian, Far East, and Ural) branches and managing Conduct (such as, on whether a particular action through a competitive tendering process, including warehouses across Russia MegaFon and its subsidiaries are governed by its Code is considered suspect) or can discreetly (and, if required, an e-marketplace that ensures the transparency • Competence Centre for Transport Logistics of Ethics and Corporate Conduct, articulating the key anonymously) report any suspected breaches. of the process and enables us to negotiate the best value (Yekaterinburg), responsible for managing all transport principles and rules of business conduct for our employees for money. processes and members of the Board of Directors. The Code outlines Contacts of MegaFon’s the Company’s position on corruption, discrimination, Direct Line channels The Company’s procurement procedure is outlined in its The Competence Centre for Transport Logistics has conflicts of interest, and inappropriate behaviour, internal documents detailing all phases of the procurement developed a proprietary logistical platform, MegaFon- and specifies the requirements to promote legal process, areas of responsibility and controls. Our CARGO, to fully automate the submission and processing compliance, integrity, equal rights and informational Procurement and Logistics function is responsible of cargo transport requests. The solution was commercially transparency. for organising and monitoring procurement procedures, launched in the market in late 2019. procurement methodology, contracting, warehouse Our Code of Ethics and transport logistics, and inventory management. The Company’s Head Office continued enhancing its and Corporate Conduct category procurement management approach, with four category strategies developed in 2019. Respect for human rights In 2019, MegaFon won another Competitive MegaFon is committed to respecting human rights in line race, age, skin colour, ethnicity, language, origin, material, with both Russian and international law. MegaFon and its marital, social, or official status, place of residence, subsidiaries have a zero tolerance policy towards any forms religious views, beliefs, membership in (or failure to join) Procurement Leader of discrimination or harassment. According to its Code particular public associations or social groups, or any other industry award for the Best Procurement of Ethics and Corporate Conduct, the Company strictly circumstances unrelated to the employee’s professional Process Upgrade Project. adheres to the principle of non-discrimination against performance. employees on grounds of gender, sexual preferences,

Customer privacy

We respect our customers’ right to privacy and strive Processing govern all aspects of personal data protection. to ensure proper protection of their personal data Employees who have access to personal data are required in our possession. We provide communication secrecy, to rigorously comply with these Regulations. guaranteeing the privacy of telephone conversations and messages for our subscribers, as well as the privacy Our Regulations on Personal of data transmitted over MegaFon’s communications Data Processing networks. MegaFon’s Regulations on Personal Data

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Resource conservation outside business hours. To reduce power consumption, our offices use ventilation, heating, and air conditioning Anti-corruption MegaFon encourages its employees to use resources systems with recuperative heat-exchange and self- responsibly. Energy-efficient fluorescent and LED lamps cooling features. The Company also promotes switching have been installed in MegaFon’s offices and stores, to electronic document management and has introduced and lights and electrical appliances are switched off comprehensive waste disposal programmes and equipment. MegaFon views its anti-corruption commitment The anti-corruption programme includes: as a core principle of its responsible corporate practices • Ensuring ‘Tone on the Top’ by management and operates in strict compliance with Russian anti- • Anti-corruption training corruption laws. The Company highly values its reputation, • Assessing corruption risks and adopting anti-corruption Paperless-2020 has zero tolerance to any form of corruption or bribery controls and expects the same attitude from its business partners. • Ensuring the availability of confidential (including In 2019, we launched a project that will make MegaFon’s The project is being implemented through a cooperative anonymous) reporting on cases of corruption document flow completely paperless by the end effort with the Ministry of Labour and Social Protection MegaFon’s Anti-Corruption Policy is a framework document • Appropriate investigation of each case and no retaliation of 2020. Our HR function will adopt paperless processes of the Russian Federation under the project of Federal Law regulating its anti-corruption efforts and providing anti- against employees making a report in good faith for employment contracts, inventory movement, On Conducting an Experiment on Maintaining Employment corruption guidance for all employees of the Company and expense claims forms, and will also introduce Documents under the Labour Legislation in Electronic Form and third parties engaged by the Company. All employees MegaFon raises anti-corruption awareness among all eSignature. for Certain Employers. are required to undergo mandatory anti-corruption training of its suppliers by incorporating anti-corruption clauses and take an online anti-corruption course. in contracts, sending out anti-corruption guides to bidders and posting the Direct Line contact details on its official website. Our approach Energy efficiency • Balanced ventilation systems instead of air conditioning at base stations MegaFon also runs an energy efficiency programme across • Optimisation of power supply systems to environmental its communications facilities, comprising the following • Replacing incandescent light bulbs with LED lights technologies: • Prioritising energy-saving features in radio equipment • Automated electricity metering system used in mobile networks protection • Advanced, high-performance energy equipment • Using equipment with wider operating temperature ranges.

Caring about the environment Use of fuel and energy

Item 2019 MegaFon is not engaged in an industry that has Use of alternative energy sources a significant negative impact on the environment. Fuel and industrial fluids Nevertheless, we take our commitment to the environment MegaFon endeavours to employ alternative energy Boiler fuel, including: very seriously, seeking to minimise our environmental systems, such as wind turbines and solar panels, when Diesel fuel, ‘000 litres 103 footprint wherever possible. constructing base stations. These technologies both minimise negative environmental impacts and enable Gas (including condensate), ‘000 m3 1,110 Complying with the applicable Russian laws, adhering us to bring mobile connectivity even to the most remote Technical equipment, including: to precautionary principles, and implementing initiatives communities. Alternative energy systems currently supply to encourage all employees to care about the environment, power to several base stations operated by MegaFon Fuel, ‘000 litres 1,832 remain MegaFon’s top environmental priorities. in the Murmansk Region and in Dagestan. Oils and industrial fluids, litres 3,962 Motor transport/motor fuel: By leveraging advanced technologies, MegaFon is able to develop and deploy solutions which encourage Fuel, ‘000 litres 3,147 responsible production (by reducing greenhouse gas Diesel fuel, ‘000 litres 764 emissions, the amount of waste and the use of resources) and have an overall positive impact on society. Utilities Electricity, ‘000 kWh 12,616,475 Heat, Gcal 14,265

108 109 Corporate Governance, Securities, and Risk Management

Corporate governance 112–132 Securities 133–136 Risk management and Internal Control 137–147 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Corporate Governance

Corporate Governance Framework MegaFon’s corporate governance principles

MegaFon’s corporate governance framework is based on Russian Enable shareholders to fully exercise Strategic governance and effective and international best practice. their rights supervision of executive bodies by the Board of Directors, as well 1 2 as accountability to the General Meeting Committed to maintaining high standards of corporate Since June 2019, following a buyback of minority shares, of Shareholders governance, the Company is fully compliant with Russian MegaFon’s shareholders are USM Group companies law on joint stock companies including the Federal Law No. (70.32% interest) and LLC MegaFon Finance 1 (29.68% 208-FZ on Joint Stock Companies dated 26 December 1995 interest), holding in aggregate 100% of MegaFon’s charter (‘the Federal Law on Joint Stock Companies’) and is guided capital 2. Appropriate management of MegaFon’s Timely disclosure by recommendations set out by the Corporate Governance day-to-day operations by its executive of complete and accurate information Code, the Bank of Russia and the Moscow Exchange. Please see more at «Securities» section bodies and their accountability about the Company, such as its financial on page 133 3 to the Board of Directors 4 position, performance, ownership, A structured corporate governance framework is vital and shareholders and governance structure for the successful development of MegaFon’s business. Important governance decisions in 2019 included: The framework helps the Company to implement • Resolution of the General Meeting of Shareholders our strategy, set and achieve goals, and manage dated 26 August 2019 on approval of a new version the Company’s risks effectively. MegaFon’s well-developed of the Charter, which reduced the number of members Effective control of the Company’s Ensure protection of the interests corporate governance framework also enables it to build of the Board of Directors from nine to seven financial and business operations and statutory rights of shareholders, and maintain trust-based relationships with the Company’s • Resolution of the General Meeting of Shareholders dated creditors, and other stakeholders counterparties, shareholders, employees, and other 23 September 2019 on a new composition of the Board 5 6 stakeholders. of Directors without independent directors.

The Company’s operations are governed by MegaFon’s Charter and other internal documents Commitment to high standards 7 of social responsibility

1 LLC MegaFon Finance is a wholly-owned subsidiary of PJSC MegaFon. 2 In March 2020, USM Telecom LLC acquired a 29.68% stake in MegaFon PJSC from MegaFon Finance LLC, thereby becoming the owner of 43.68% of MegaFon’s charter capital. USM Telecom LLC is the sole shareholder of AF Telecom Holding LLC, which, in turn, is the controlling shareholder of MegaFon with a share of 56.32%, which, together with the shares of USMTelecom LLC, makes up 100% of MegaFon charter capital.

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Compliance with the Corporate All interested party transactions are subject to a preliminary Corporate governance Governance Code review by the Finance and Strategy Committee of the Board structure of Directors. The number of such transactions significantly decreased after a single group of shareholders came MegaFon’s operations are conducted in accordance to own 100% of MegaFon. In 2019, the Board of Directors MegaFon’s principal corporate governance bodies with the principles set forth in the Corporate Governance approved three interested party transactions. are the General Meeting of Shareholders, the Board Code approved by the Bank of Russia’s Board of Directors of Directors, the Management Board (collective executive on 21 March 2014. The interested party transactions effected by MegaFon body), and both the Chief Executive Officer and Executive in 2019 are listed in the Appendix to this Annual Report Director (individual executive bodies). In 2019, there were no The Corporate Governance Code Compliance Report changes to the corporate governance structure. is presented in the Appendix to this Annual Report Major transactions

Interested party transactions In 2019, the Board of Directors approved one major General Meeting of Shareholders transaction with a value of more than 25% but less than Interested party transactions are regulated by Article 11 50% of the book value of MegaFon’s assets determined of the Federal Law on Joint-Stock Companies. Under its as at the last reporting date prior to the transaction. provisions, transactions in which the Company’s controlling Revision Commission parties, Board members, or members of the Company’s The major transactions effected by MegaFon in 2019 are listed executive bodies are interested parties may be approved in the Appendix to this Annual Report by either the Board of Directors or the General Meeting of Shareholders. Interested parties do not vote on any Board of Directors resolution relating to the interested party transaction.

MegaFon pays close attention to identifying and controlling interested party transactions. All counterparties are regularly checked for possible relationships with major Committees of the Board of Directors shareholders and members of MegaFon’s Board of Directors Remuneration Finance and Strategy or executive bodies. Audit Committee and Nominations Committee Committee

Individual Executive Bodies

Chief Executive Officer Executive Director

Internal Audit

Management Board

Elects Reports to Recommends Appoints based on Board resolutions

114 115 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Governing Bodies

General Meeting of Shareholders Board of Directors Composition of the Board of Directors over the course of 2019

The General Meeting of Shareholders is MegaFon’s supreme The Board of Directors is MegaFon’s collective Board member From 1 January From 28 June From 23 September governing body. executive body exercising general control to 28 June to 23 September to 31 December over its activities. The Board’s main duties include Activities of the General Meeting of Shareholders enhancing the effectiveness and transparency Evgeny A. Bystrykh are governed by the Regulations on the General Meeting of MegaFon’s risk management and internal controls, of Shareholder and improving the framework for monitoring and ensuring Chairman of the Board of Directors the accountability of its governing bodies while protecting In 2019, the annual General Meeting of Shareholders was and promoting the rights of all shareholders. Maksim N. Anipkin held in person on 28 June 2019. The total number of votes exercisable by the meeting participants was 620,000,000 The powers of the Board are set out in the Charter Aleksey V. Antonyuk (100% of the total number of available votes). and the Regulations on the Board of Directors Jarkko Armas Veijalainen The resolutions passed at the 2019 annual General Meeting The composition of the Board of Directors reflects the scope of Shareholders were as follows: and scale of MegaFon’s business. Nominees to the Board • Approval of MegaFon’s 2018 Annual Report of Directors are elected based on their expertise, Aleksandr Yu. Esikov • Approval of MegaFon’s accounting (financial) statements experience, business reputation and personal skills. for 2018 Board members have extensive experience in the Russian Igor S. Ivanov • Determination not to distribute 2018 profits telecommunications industry, excellent managerial skills • Election to MegaFon’s Board of Directors and expertise in finance, strategic planning, technologies • Approval of the size of MegaFon’s Management Board and risk management. Harri Eerik Koponen and election of its members • Approval of MegaFon’s auditor At the annual General Meeting of Shareholders Anton M. Rybalkin • Election to MegaFon’s Revision Commission on 28 June 2019, Aleksey Antonyuk and Aleksandr Ushkov • Changes to MegaFon’s Charter stepped down from the Board of Directors, while Igor Ivanov and Anton Rybalkin joined the Board. Anna A. Serebryanikova Detailed information on the annual General Meeting of Shareholders and items on its agenda The extraordinary General Meeting of Shareholders Aleksandr A. Ushkov on 23 September 2019 determined a new composition In 2019, MegaFon held three extraordinary General of the Board of Directors without independent directors Natalya V. Chumachenko Meetings of Shareholders (26 August, 23 September Jarkko Veijalainen and Harri Koponen. There were no other and 15 October). changes in the composition of the Board of Directors.

The three extraordinary General Meetings approved new versions of the Charter and the Regulations on the Board of Directors, determined a new composition of the Board of Directors and agreed the extra remuneration payable to independent members of the Board of Directors for their contribution.

Detailed information on the extraordinary General Meetings of Shareholders held in 2019 and items on their agenda

116 117 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Evgeny Maksim Aleksandr A. Bystrykh N. Anipkin Yu. Esikov Igor Anton Anna S. Ivanov M. Rybalkin A. Serebryanikova Member of the Board Member of the Board of Directors Member of the Board of Directors of Directors since 19 January since 19 January 2018 since 19 January 2018 Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors 2018 and Chairman of the Board Non-Executive Director Non-Executive Director since 28 June 2019 since 28 June 2019 since 21 December 2018 of Directors since 22 January 2018 Member of the Audit Committee Member of the Audit Committee Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director from 22 January 2018 since 22 January 2018 Member of the Finance Member of the Remuneration Member of the Audit Committee Member of the Finance to 21 December 2018 and Strategy Committee since and Nominations Committee since since 21 December 2018 and Strategy Committee since 12 July 2019 7 October 2019 Member of the Remuneration Born in 1963. 22 January 2018 and Nominations Committee since Graduated from Moscow Engineering Born in 1974. Member of the Remuneration 21 December 2018 Born in 1967. Born in 1976. and Nominations Committee Physics Institute. Graduated from Lomonosov Moscow Chairman of the Audit Graduated from the Moscow Institute Graduated from the Moscow State State University and Manchester from 22 January 2018 to 23 Committee since 7 October 2019 Principal place of employment: September 2019 LLC USM Management – Director of Physics and Technology. Institute of International Relations. University (Great Britain). Chairman of the Remuneration for Telecommunications Infrastructure Principal place of employment: Principal place of employment: Principal place of employment: Born in 1981. Projects 3. LLC USM Management – Adviser LLC USM Management – Head LLC USM Management – Deputy CEO and Nominations Committee since 4 7 October 2019 Graduated from the Plekhanov He is also a Board member to the Executive Director . of the Corporate Management for Digital Projects and Government Russian University of Economics. at LLC Forpost. He is also a Board member Directorate. Relations. Principal place of employment: at PJSC Gornozavodskcement Anna is also Head Born in 1976. LLC USM Management – Managing and LLC Yuzhno-Uralskaya GPK. of the Information Infrastructure Percentage ownership Percentage ownership Graduated from the Financial Director, Head of the Investment in the Company: nil. working group at the independent University under the Government and Analytics Directorate 2. in the Company: nil. non-profit organisation Digital of the Russian Federation. Percentage of the Company’s Percentage ownership Percentage of the Company’s Economy, the President He is also Chairman of the Revision in the Company: nil. ordinary shares held: nil. Principal place of employment 1: Commission of LLC CRPT. ordinary shares held: nil. of the Big Data Association, a member LLC USM Management – Deputy CEO Percentage of the Company’s of the Coordinating Council on Digital for Economics and Finance. ordinary shares held: nil. Transformation of the Russian Union Percentage ownership of Industrialists and Entrepreneurs in the Company: nil. (RSPP) and Board Chair and Director Percentage ownership Percentage of the Company’s at LLC Forpost. in the Company: nil. ordinary shares held: nil. Percentage of the Company’s Percentage ownership ordinary shares held: nil. in the Company: nil. Percentage of the Company’s ordinary shares held: nil.

1 As at 31 December 2019. Since 1 January 2 As at 31 December 2019. Since 1 January 2020, 3 As at 31 December 2019. Since 1 January 4 As at 31 December 2019. Since 1 January 2020, 2020, Evgeny has served as Deputy CEO Maksim has served as Managing Director 2020, Aleksandr has served as Director Igor has served as Deputy Executive Director for Economics and Finance at LLC USM Holding and Head of Telecommunications Projects for Telecommunications Infrastructure Projects at LLC USM Holding Company. Company. Directorate at LLC USM Holding Company. at LLC USM Holding Company.

118 119 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

In 2019, the Board of Directors also included the following members:

Natalya Aleksey Aleksandr Jarkko Harri V. Chumachenko V. Antonyuk A. Ushkov Armas Veijalainen Eerik Koponen

Member of the Board of Directors Member of the Board Member of the Board Member of the Board of Directors Member of the Board since 19 January 2018 of Directors from 19 January 2018 of Directors from 19 January 2018 from 19 January 2018 of Directors from 19 January 2018 Non-Executive Director to 28 June 2019 to 28 June 2019 to 23 September 2019 to 23 September 2019 Chair of the Finance and Strategy Non-Executive Director Non-Executive Director Independent Director Independent Director Committee since 22 January 2018 Member of the Finance and Strategy Chairman of the Audit Committee Chairman of the Remuneration Committee from 22 January 2018 Born in 1974. from 22 January 2018 to 23 and Nominations Committee to 28 June 2019 September 2019 from 22 January 2018 Born in 1972. Graduated from Moscow Aviation to 23 September 2019 Graduated from Voronezh State Institute. University. Born in 1980. Principal place of employment: Born in 1966. Born in 1962. Principal place of employment: Graduated JSC Gazprombank – Executive Vice Graduated from Aalto University LLC USM Management – Adviser from the National University President. (Finland). Graduated from the University to the CEO. of Oil and Gas (Gubkin University) Aleksandr is also a Board member Principal place of employment: 3 Step of Jyväskylä (Finland). and from the Academy of National at Basola Investments Limited IT Group Oy – Chairman of the Board Principal place of employment: Economy under the Government (Cyprus), Acheronius Holdings Limited of Directors. Nortal Oy – CEO. Percentage ownership of the Russian Federation. (Cyprus), Kigalia Holdings Limited, in the Company: nil. Harri also holds the positions of Chief Principal place of employment: LLC RosEuroDevelopment Ufa, Commercial Officer at Nortal AS, Percentage of the Company’s JSC Gazprombank – Asset LLC RosEuroDevelopment Percentage ownership in the Company: nil. CEO of Osaka Oy Ltd, Board ordinary shares held: nil. Management (GPB–AM) – CEO. Krasnoyarsk, LLC Stroi-Profit, Chairman at Osaka Oy Ltd, Tecnotree Aleksey is also First Vice President Aviapark Shopping Centre, and Percentage of the Company’s OyJ, Kaslink Oy, and the Finnish at JSC Bank GPB and a Board JSC Gazprombank Leasing. ordinary shares held: nil. Cycling Federation, and a Board member at JSC GPB–AM and member at Soprano OyJ, Telinekataja LLC Art Finance. Percentage ownership Oy, Namida Diamond Factory Ltd, in the Company: nil. FISK (Finnish Information Security Cluster), and the Institute of Finland. Percentage ownership Percentage of the Company’s in the Company: nil. ordinary shares held: nil. Percentage of the Company’s Percentage ownership ordinary shares held: nil. in the Company: nil. Percentage of the Company’s ordinary shares held: nil.

120 121 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Summary of the Board’s activities in 2019 In addition, the following internal documents were Remuneration of the Board of Directors The total amount paid to Board members 1 in 2019 was submitted for approval at the meetings: Compliance Policy, RUB 80 million. The Board of Directors was fully involved in MegaFon’s Risk Management and Internal Control Policy, Insider Members of the Board of Directors are remunerated key activities in the reporting year. The Board held 28 Information Regulations, Corporate Secretary Regulations. for the performance of their duties. Remuneration meetings in 2019, including five meetings in person is approved by the General Meeting of Shareholders Aggregate remuneration to members of the Board and 23 meetings held by absentee voting. The Board Management reports which provide an overview and depends on the actual hours worked during of Directors in 2017–2019, RUB m considered a wide range of items at its meetings, including on the quarterly business performance of the Company the reporting period. There were no changes MegaFon’s participation in major international projects, were presented at the meetings of the Board of Directors. in the remuneration system in 2019. the impact on MegaFon’s business from changes to Russian 2019 80 legislation, determining the value of assets (services), Pursuant to a resolution of the extraordinary General approving interested party transactions and transactions Meetings of the Board of Directors in 2017–2019 Meeting of Shareholders dated 15 October 2019, extra 2018 131 with a cumulative value in excess of US$ 50 million and HR bonuses in the amount of EUR 250,000 each were paid decisions. to Jarkko Veijalainen and Harri Koponen for their service 2017 92 5 2019 23 as independent members of the Board of Directors The Board reviewed a mandatory tender offer to acquire in 2018–2019. 6 MegaFon shares and a buyback request, and presented 2018 21 relevant recommendations. 7 2017 11 Remuneration to members of the Board of Directors in 2019, RUB m

Meetings in person Remuneration, RUB m Meetings held by absentee voting Chairman of the Board Independent members Non-independent members of Directors of the Board of Directors of the Board of Directors Board members’ attendance at Board and Committee meetings in 2019 Remuneration for service on a governing body 4 61 15 Board member Tenure in 2019 Board Committee meetings Salary 0 0 0 meetings Audit Committee Finance Remuneration Benefits 0 0 0 and Strategy and Nominations Committee Committee Reimbursement of expenses 0 0 0 Evgeny Bystrykh 01/01/2019–31/12/2019 28/28 0/6 16/17 11/12 Bonuses and long-term incentives 0 0 0 Maksim Anipkin 01/01/2019–31/12/2019 28/28 4/6 5/17 12/12 Pension plan contributions 0 0 0 Aleksey Antonyuk 01/01/2019–28/06/2019 13/28 0/6 7/17 0/12 Total remuneration 4 61 15 Jarkko Veijalainen 01/01/2019–23/09/2019 20/28 5/6 3/17 3/12

Aleksandr Esikov 01/01/2019–31/12/2019 28/28 6/6 5/17 4/12 Committees of the Board of Directors Activities of the Board Committees are regulated by internal Igor Ivanov 28/06/2019–31/12/2019 15/28 1/6 10/17 2/12 documents. Three committees of MegaFon’s Board of Directors provide Harri Koponen 01/01/2019–23/09/2019 20/28 3/6 3/17 9/12 oversight and strategic planning on matters related Anton Rybalkin 28/06/2019–31/12/2019 15/28 0/6 2/17 3/12 to the Board’s areas of responsibility: Audit Committee • Audit Committee Anna Serebryanikova 01/01/2019–31/12/2019 28/28 6/6 5/17 2/12 • Finance and Strategy Committee The Board’s Audit Committee is responsible for all matters Aleksandr Ushkov 01/01/2019–28/06/2019 13/28 0/6 2/17 0/12 • Remuneration and Nominations Committee relating to internal and external audits of MegaFon’s financial and business operations and, in particular, Natalya Chumachenko 01/01/2019–31/12/2019 28/28 0/6 17/17 1/12 Committee members are selected following each for making recommendations as to the appointment election of a new Board of Directors. In 2019, members of external auditors, resolving issues that arise during of the committees were approved: audits, analysing the effectiveness of internal controls No independent performance assessment of the Board for collaboration with management were identified, • at the meeting of the Board of Directors on 12 July 2019, and assessing risk management performance. of Directors was carried out in 2019. including MegaFon’s strategic development and elaboration following the annual General Meeting of Shareholders of an approach to long-term incentive programmes held on 28 June 2019 and Pursuant to a resolution of the Remuneration for MegaFon’s management. • at the meeting of the Board of Directors on 7 October and Nominations Committee, a performance self- 2019, following the re-election of the Board of Directors assessment of the Board of Directors was carried In addition, recommendations were made to management at the extraordinary General Meeting of Shareholders out for the first time in 2019. Based on its results, regarding the improvement of internal processes held on 23 September 2019. the Board of Directors identified certain priority for organising the meetings of the Board of Directors. areas for improvement. In addition, priority areas

1 No remuneration or non-standard benefits (social benefits, reimbursement of expenses, pension benefits, corporate cars, corporate accommodations, etc.) were provided to persons related to them (spouses, children, or other family members).

122 123 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

In 2019, the Audit Committee held six meetings, including Remuneration and Nominations Committee Management Board four meetings in person and two meetings held by absentee voting, and covered a wide range of issues, including: The Remuneration and Nominations Committee The Management Board is MegaFon’s collective • reviews of regular financial statements is responsible for the development and regular review executive body managing the Company’s day-to-day and press releases which disclose MegaFon’s financial of the remuneration policy, including reviewing operations together with the individual executive bodies. and business operations, and determining base salaries, bonuses and other It is responsible for all operational management matters, • risk management and internal controls enhancement, compensation, as well as setting target KPIs for top apart from those which fall within the remit of the General • approval of the internal audit plan and internal audit management, making recommendations to the Board Meeting of Shareholders, the Board of Directors reports, regarding candidates for key management positions and MegaFon’s individual executive bodies. • review of litigation reports and and carrying out a formalised annual performance • compliance related issues. evaluation of the Board, its members, and its committees. The size and composition of the Management Board are approved by the General Meeting of Shareholders Gevork In 2019, the Audit Committee recommended that In 2019, the Remuneration and Nominations Committee held based on the CEO’s recommendation. The CEO A. Vermishyan the Board of Directors approve the updated versions 12 meetings, including five meetings in person and seven is the Chairman of the Management Board. of the Compliance Policy and the Risk Management meetings held by absentee voting. In these meetings, and Internal Control System (RMICS) Policy. the Committee covered a number of issues, including: The Management Board members as at 31 December 2019 Chairman of the Management • approval of key HR projects for 2019 and review were: Board, CEO The Committee members as at 31 December 2019 were: of the status of their implementation, • Gevork A. Vermishyan (Chairman) • Maksim N. Anipkin (Chairman) • recommendations to the Board of Directors regarding • Frederic Gilbert Vanoosthuyze • Aleksandr Yu. Esikov approval of branch director appointments at MegaFon, • Valentina I. Vatrak Born in 1978. • Anna A. Serebryanikova and • Vlad Wolfson Graduated from the Financial • the design of MegaFon’s incentive system, including • Nikita R. Orlov University under the Government the review of short-term and long-term incentive • Elena A. Martynova of the Russian Federation. Finance and Strategy Committee programmes. • Aleksandr A. Sobolev Principal place of employment: PJSC MegaFon – CEO. The Finance and Strategy Committee exercises control In an annual private session with the Committee Chairman, Changes to the composition of the Management Board over MegaFon’s strategic development, business planning, the results of the performance assessment of MegaFon’s during 2019 were as follows: Gevork is also Board Chairman budgeting and investment processes. The Committee’s CEO and top management were discussed. • Nikita R. Orlov joined the Management Board for CJSC Aquafon-GSM, principal responsibilities include determining MegaFon’s • Aleksandr A. Barunin and Dmitry L. Kononov stepped CJSC Ostelecom and CJSC TT strategic direction, approving its annual budgets, reviewing In addition, a performance self-assessment of the Board down from the Management Board Mobile; he serves on the Supervisory and approving proposed M&A and general business of Directors was carried out for the first time in 2019 Board at DTS Retail, is a Board transactions, and reviewing the terms of borrowing pursuant to a resolution of the Committee. Following member at LLC Alibaba.com (RU) and other financing options. a review of the self-assessment results at the Committee and a Director at AliExpress Russia meeting (held in person in August 2019), the Committee Holding Pte. Ltd. In 2019, the Finance and Strategy Committee held 17 provided its recommendations regarding further meetings, including five meetings in person and 12 meetings improvement of the Board’s performance. Percentage ownership held by absentee voting, and covered a wide range in the Company: nil. of issues, including: The Remuneration and Nominations Committee members • the approval of MegaFon’s budget and business plan as at 31 December 2019 were: Percentage of the Company’s for 2020, • Evgeny A. Bystrykh (Chairman) ordinary shares held: nil. • reviews of interested party transactions and transactions • Maksim N. Anipkin with a cumulative value exceeding US$ 50 million, and • Anton M. Rybalkin • reviews of MegaFon’s M&A activities.

The Finance and Strategy Committee regularly reviewed reports on the progress of MegaFon’s key strategic projects and provided relevant comments and recommendations.

The Committee members as at 31 December 2019 were: • Natalya V. Chumachenko (Chair) • Evgeny A. Bystrykh • Igor S. Ivanov

124 125 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Frederic Valentina Vlad Nikita Elena Aleksandr Gilbert Vanoosthuyze I. Vatrak Wolfson R. Orlov A. Martynova A. Sobolev

Chief Technology Corporate Development Chief Commercial Officer Chief Financial Officer Director for Strategic Director for Strategy and IT Officer (CTIO) and Human Resources Director Communications and Business Development and Brand Development

Born in 1973. Born in 1974. Born in 1977. Born in 1969. Born in 1978. Born in 1987. Graduated from the High School Graduated from Voronezh State Graduated from the Kyiv National Graduated from Lomonosov Moscow Graduated from Lomonosov Moscow Graduated from Lomonosov Moscow of Liege, the University of Mons University, Moscow Open Social University of Trade and Economics State University. State University and Stanford State University. and the Solvay Business School University and the Diplomatic and the University of Haifa (Israel). Principal place of employment: Graduate School of Business (USA). Principal place of employment: (Belgium). Academy of the Russian Foreign Principal place of employment: PJSC MegaFon – Chief Financial Principal place of employment: PJSC MegaFon – Director for Strategy Principal place of employment: Ministry. PJSC MegaFon – Chief Commercial Officer. PJSC MegaFon – Director for Strategic and Business Development. PJSC MegaFon – Chief Technology Principal place of employment: Officer. Nikita also serves as the CEO Communications and Brand Aleksandr also serves as a member and IT Officer (CTIO). Corporate Development and Human Vlad also serves on the Supervisory of LLC MegaFon Finance and JSC Development. of the Management Board Resources Director at PJSC MegaFon. Board at DTS Retail. MegaFon International and is a Board Elena also serves as Deputy CEO at the Big Data Association, Percentage ownership member at CJSC Aquafon-GSM, at LLC USM Management. Director at AliExpress Russia Holding in the Company: nil. Percentage ownership CJSC Ostelecom, and CJSC TT Pte. Ltd., and is a Board member Percentage ownership Mobile. at LLC Alibaba.com (RU). Percentage of the Company’s in the Company: nil. in the Company: nil. Percentage ownership ordinary shares held: nil. Percentage of the Company’s Percentage of the Company’s in the Company: nil. ordinary shares held: nil. ordinary shares held: nil. Percentage ownership Percentage of the Company’s Percentage ownership in the Company: nil. ordinary shares held: nil. in the Company: nil. Percentage of the Company’s Percentage of the Company’s ordinary shares held: nil. ordinary shares held: nil.

126 127 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Chief Executive Officer and Executive Director Remuneration of the Management Board, the Chief Executive Officer and the Executive Director The Chief Executive Officer and the Executive Director manage MegaFon’s day-to-day operations alongside MegaFon’s senior executives are remunerated the Management Board in all matters excluding for their services to the Company. The Board of Directors those reserved to the Company’s General Meeting determines the structure and amount of such remuneration. The Management Board of Shareholders or the Board of Directors. According also had the following members to MegaFon’s Charter, their responsibilities include: Since 2017, MegaFon has operated a long-term incentive in 2019: • managing MegaFon’s day-to-day operations, acting programme for its top management, designed to: on behalf of the Company without power of attorney, • align shareholder and management interests, representing MegaFon in its relations with all government • incentivise MegaFon’s management to support Aleksandr Dmitry authorities, legal entities, and individuals, and granting the Company’s share price growth (while the Company A. Barunin L. Kononov powers of attorney; and was still listed), • making decisions and issuing orders, instructions, • ensure focus on MegaFon’s strategic long-term and other documents on matters consistent objectives, and Member of the Management Board Member of the Management Board with their responsibilities and approving MegaFon’s • make management remuneration packages more until 30 May 2019 until 28 June 2019 internal documents with the exception of certain matters. competitive.

The CEO’s responsibilities also include: The incentive programme provides for a number of senior Born in 1972. Born in 1964. • opening settlement accounts and other bank accounts, executives to receive a target number of MegaFon shares Graduated from Admiral Makarov Graduated from the University effecting civil transactions on behalf of MegaFon, at the end of a three-year period. Shares become vested Leningrad Higher Maritime of Colorado at Denver, USA. with exceptions set out in his employment contract and/ based on the achievement of a target objective set Engineering School and Duke Dmitry served as Director for Investor or applicable Russian laws; at the start of a three-year period. University (USA). Relations and M&A at PJSC MegaFon. • organising the operations of MegaFon’s business Aleksandr served as Operational units, signing employment contracts with MegaFon In 2019, total payments to members of the Management 1 Finance Director at PJSC MegaFon. employees, and making decisions on bonuses, benefits, Board , including remuneration and reimbursement Percentage ownership and compensation; and of expenses, amounted to RUB 536 million. He also acted as the CEO in the Company: nil. • preparing and presenting information and documents of LLC MegaFon Finance and Percentage of the Company’s on MegaFon’s operations to the Board of Directors, JSC MegaFon International and was including the approval of certain documents. a Board member at CJSC Aquafon- ordinary shares held: nil. GSM, CJSC Ostelecom and CJSC TT The Executive Director’s responsibilities also include: Mobile. • effecting any civil transactions on behalf of MegaFon and managing MegaFon’s property within the limits Percentage ownership established in his employment contract and/or in the Company: nil. applicable Russian laws; and • developing and implementing measures to ensure Percentage of the Company’s the security and protection of information containing ordinary shares held: nil. state secrets.

The Executive Director’s position is currently vacant.

Remuneration to members of the Management Board in 2017–2019, RUB m

Type 2017 2018 2019 Salary 215 256 209 Benefits 0 0 0 Bonuses and long-term incentives 280 319 326 Reimbursement of expenses 1 1 1 Pension plan contributions 0 0 0 Total remuneration 496 576 536

1 No remuneration or non-standard benefits (social benefits, reimbursement of expenses, pension benefits, corporate cars, corporate accommodations, etc.) were provided to persons related to them (spouses, children, or other family members).

128 129 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Corporate Secretary Internal Control System

To ensure the effectiveness of corporate governance, MegaFon has established the position Effectiveness and accountability underpin MegaFon’s corporate governance principles. of Corporate Secretary, with the person holding The Company’s internal control system relies on the Board of Directors, the bodies responsible this position being responsible for ensuring compliance for internal and external audit and the Revision Commission. with rules and procedures which protect the rights and interests of shareholders. The Corporate Secretary is also responsible for shareholder relations, corporate communications, and ensuring the proper performance Revision Commission External Audit by the Board of Directors and its Committees of their functions. The Corporate Secretary is also Daria The Revision Commission is elected annually by the General MegaFon engages independent external auditors to audit the Secretary of the Management Board. A. Lizunova Meeting of Shareholders to control MegaFon’s financial its annual financial statements and review its quarterly and business operations. The Commission members may financial statements. The Audit Committee assesses The Corporate Secretary is elected by, and reports not serve on the Board of Directors or any other governing prospective auditors and makes recommendations to, the Board of Directors. Corporate bodies of the Company. The Revision Commission has three to the Board of Directors regarding their appointment Secretary members. and fees. The independent auditor recommended In 2019, Daria A. Lizunova was MegaFon’s Corporate by the Board must be approved by the General Meeting Born in 1986. Secretary. As at 1 January 2019, MegaFon’s Revision Commission of Shareholders. Graduated from Moscow Pedagogical comprised: The full list of the Corporate Secretary’s functions is set out State University and Russian Foreign • Yuri A. Zheimo The annual General Meeting of Shareholders held in the Corporate Secretary Regulations Trade Academy. • Sergey A. Krasin on 28 June 2019 approved JSC KPMG as the Company’s Principal place of employment: • Radik S. Nasibullin external auditor. PJSC MegaFon – Corporate Secretary. At MegaFon’s annual General Meeting of Shareholders The total fees paid to JSC KPMG for its audit services Daria combines the duties on 28 June 2019, the following members were elected provided during 2019 amounted to RUB 71.5 million while of Corporate Secretary to the Revision Commission: RUB 72 million was paid for non-audit services. and the Company’s Controller • Yuri A. Zheimo responsible for insider information • Radik S. Nasibullin control and security. • Denis A. Filatov Information Disclosure On 9 December 2019, Denis A. Filatov stepped down MegaFon ensures that its operations are fully transparent, Percentage ownership from the Commission after tendering his resignation. both in compliance with all applicable laws and regulations in the Company: nil. and in line with international best practice for disclosure. Percentage of the Company’s The Revision Commission’s operating procedures and full list For each fiscal year ending 31 December, the Company ordinary shares held: nil. of functions are outlined in the Regulations on the Revision publishes audited consolidated financial statements Commission prepared in accordance with International Financial Reporting Standards (‘IFRS’). MegaFon also provides unaudited consolidated financial statements at the end Internal Audit of the first, second, and third fiscal quarters.

MegaFon’s Internal Audit team reports to the Board MegaFon’s financial results and notices of upcoming of Directors. Internal Audit operations are guided General Meetings of Shareholders, as well as other by MegaFon’s Regulations on the Internal Audit, as well important information, are announced through as by the International Standards for the Professional the authorised Russian information agency Interfax. Practice of Internal Auditing. Press releases are published on MegaFon’s The Internal Audit team assesses the RMICS, corporate website as well as the corporate governance framework against performance targets approved by the Board of Directors.

Internal Audit operations are governed by MegaFon’s Regulations on the Internal Audit

130 131 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Protecting the Confidentiality In 2019, MegaFon automated the process of notifying its of Insider Information employees of their inclusion in, or exclusion from, the list Securities of insiders: an employee receives an electronic notification and acknowledges it with an e-signature sign-off. On 27 December 2019, the Board of Directors approved a revised version of MegaFon’s Regulations In 2020, MegaFon intends to approve its Internal Control Shareholders’ Equity on the Procedure for Access to Insider Information. The new Rules for Preventing, Detecting and Stopping the Unlawful version was prepared in line with the recent amendments Use of Insider Information and/or Market Manipulation, to Federal Law No. 224-FZ On Counteracting the Unlawful which have been developed in line with the requirements PJSC MegaFon’s charter capital amounts to RUB 62 million, PJSC MegaFon shareholders as at 31 December 2019, % Use of Insider Information and Market Manipulation of the Bank of Russia and will take effect on 20 April 2020. consisting of 620 million ordinary registered shares dated 27 July 2010. In particular, the Regulations outline with a par value of RUB 0.1 each. The Company the conditions for transactions with MegaFon securities The Regulations on the Procedure is authorised to issue 100 billion additional ordinary shares. 29.68 involving corporate insiders and their related parties. for Access to Insider Information All issues of ordinary registered shares have been combined into a single issue with the state number 1-03-00822-J. MegaFon has no preferred shares. The Government does not hold any stake in MegaFon’s charter capital. 70.32 In 2012, MegaFon completed an initial public offering (IPO) USM Group of ordinary shares on the Moscow Exchange and global LLC MegaFon Finance1 depository receipts (GDRs) on the London Stock Exchange. Between July 2018 and June 2019, MegaFon initiated a share and GDR buy-back programme via its subsidiaries, In March 2020, USM Telecom LLC acquired a 29.68% stake successfully buying back all PJSC MegaFon ordinary shares in MegaFon PJSC from MegaFon Finance LLC, thereby and GDRs held in free float and converting all issued GDRs becoming the owner of 43.68% of MegaFon’s charter to ordinary shares. capital. USM Telecom LLC is the sole shareholder of AF Telecom Holding LLC which, in turn, is the controlling For more information see the Investor shareholder of MegaFon with a share of 56.32%. Together Relations section on page 136 with the shares of USM Telecom LLC, this makes up 100% of MegaFon charter capital. As at 31 December 2019, PJSC MegaFon’s shareholders were USM Group (70.32% interest) and LLC MegaFon Finance1 (29.68% interest) holding in aggregate 100% of the Company’s charter capital.

Dividends

Any payment of dividends (and the value of dividends Dividend Policy summary: payable) must be approved by the General Meeting • Dividends are paid from the Company’s net profit of Shareholders based upon the recommendation and retained earnings of past years. The issue of the Board of Directors. of whether to pay a dividend is first considered by the Board Finance and Strategy Committee based PJSC MegaFon’s Dividend Policy was approved in May on the Company’s financial performance and the CEO’s 2017. The Dividend Policy sets out the principles to be proposals regarding profit distribution. The Board followed by the Board of Directors when making decisions of Directors makes a recommendation to the General on recommended dividend amounts to be approved Meeting of Shareholders as to the dividend amount. by the General Meeting of Shareholders.

1 LLC MegaFon Finance is a wholly-owned subsidiary of PJSC MegaFon.

132 133 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

• The declaration of dividends, including the amount, • Dividends are paid as and when stipulated Credit Ratings payment form and procedure for payment, as well by the applicable Russian laws. The Company gives no as the record date, are decided by the General Meeting preferential treatment to any shareholder regarding of Shareholders. The dividend amount may not exceed the timing of dividend payments. the amount recommended by the Board of Directors. • Dividends are paid in cash, unless resolved otherwise Credit rating Value Outlook Review/affirmation date • When determining the recommended dividend amount, by the General Meeting of Shareholders. the Board of Directors proceeds on the assumption that S&P Global Ratings as a general rule the total amount to be distributed The specific terms of PJSC MegaFon’s Long-term foreign currency rating BB+ Stable 18/12/2019 as dividend should be at least 70% of the free cash flow Dividend Policy to shareholders for the financial year. Additionally, Long-term local currency rating BB+ Stable 18/12/2019 the Board aims to maintain the ratio of net debt On 28 June 2019, the General Meeting of Shareholders Moody’s to dividend OIBDA below 2.0x. The terms ‘free cash resolved not to distribute a dividend for FY 2018. Long-term credit rating Ba1 Stable 11/09/2018 flow to shareholders’, ‘net debt’, and ‘dividend OIBDA’ are defined in the Company’s Dividend Policy. ACRA Issuer: PJSC MegaFon AA(RU) Stable 24/07/2019 Dividend payments in 2014–2019 PJSC MegaFon bond issues, series BO-001R-03, AA(RU) – 24/07/2019 BO-001R-04, BO-001R-05, BO-001R-06, BO-002R-01, BO-002R-02 Reporting period 2014 2015 2016 2017 2018 2019 Total dividends paid in the calendar year, RUB bn 40.0 50.0 50.0 20.0 0.0 0.0 On 18 December 2019, S&P Global Ratings affirmed issued by MegaFon. The agency noted MegaFon’s medium DPS, RUB 64.51 80.64 80.63 32.25 0.0 0.0 MegaFon’s foreign and local currency ratings at BB+, leverage, broad scope of operations and high profitability, and revised its outlook to stable from negative based along with its strong business profile and strong liquidity on expectations of the agency’s analysts that MegaFon position, as well as a very high level of corporate will maintain its adjusted debt to EBITDA ratio at 2.5x, governance and moderate cash flow. and the free operating cash flow (FOCF) to debt ratio Bonds between 7% and 9%. It was noted that MegaFon’s ratings In September 2019, Moody’s affirmed PJSC MegaFon’s were unlikely to be downgraded in the next year given long-term credit rating at Ba1, with a stable outlook. its sound financial policy, but further ratings upside was The agency noted the Company’s strong competitive Four issues of PJSC MegaFon bonds (series BO-001R-01, In March 2019, the Company issued two 5-year 8.90% possible, should the Company’s performance improve position in the Russian telecommunications market, robust BO-001R-02, BO-001R-03, and BO-001R-04) were RUB 5 billion exchange bonds (series BO-001R-06 significantly. operational and financial performance, as well as its outstanding at the beginning of 2019. and BO-002R-01). healthy liquidity and adequate currency risk management. On 24 July 2019, the Analytical Credit Rating Agency In May 2019, PJSC MegaFon completed the previously In April 2019, the Company issued a 7-year 8.90% (ACRA) affirmed its AA(RU) credit rating on PJSC MegaFon, scheduled redemption of its RUB 10 billion exchange bond RUB 10 billion exchange bond (series BO-002R-02). with a stable outlook, and an AA(RU) rating on bonds (series BO-001R-01). The bond proceeds were used to finance MegaFon’s general In February 2019, PJSC MegaFon issued a 3-year 8.55% corporate purposes. RUB 20 billion exchange bond (series BO-001R-05).

RUB 85bn Total volume of PJSC MegaFon outstanding bonds as at end-2019

134 135 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Investor Relations Risk Management In July 2018, the Board of Directors determined that Despite the buyback of shares and GDRs, MegaFon remaining a public company was not a strategic priority maintains its commitment to openness and transparency, for MegaFon, and subsequently approved a programme and providing stakeholders with up-to-date information and Internal Control to buy back the Company’s ordinary shares and GDRs in a timely manner remains a major priority. MegaFon has and to cancel MegaFon’s GDR listing on the London Stock made no changes to its disclosure practices, and continues Exchange. Under the buyback programme, which was to make quarterly announcements of the Company’s successfully completed in August 2018, the Company operating and financial results, as well as publishing annual Smart risk-taking offered shareholders the opportunity to sell their ordinary reports. MegaFon is in regular contact with stakeholders shares and GDRs at a premium to the market. The buyback and other interested parties and participates in various price per GDR and ordinary share was US$ 9.75 (RUB Russian and international investment and industry Timely identification and management of risks is essential MegaFon also continuously fosters a risk-based culture 659.26 at the Bank of Russia’s exchange rate as at the date conferences. to maintaining sustainable growth and achieving at all levels of management, providing regular training the tender offer results were announced). The tender the Company’s strategic and operational objectives. to employees in risk management theory and practice. offer became one of the most successful in the market, MegaFon publishes its Corporate Action Notices: with 18.6% of the total outstanding ordinary shares being • on the website of Interfax, an authorised Russian MegaFon’s approach to risk management is based The risks faced by MegaFon in its operations are driven bought back. As a result, MegaFon’s free float decreased disclosure agency, at https://www.e-disclosure.ru/; and on international and national best practice and standards. by macroeconomic, market, technological and industry- from 20.8% to 2.2%. As of 5 October 2018, MegaFon’s GDRs • on the official corporate website in the For Investors specific factors, including rapidly changing regulation. ceased to be listed on the London Stock Exchange. section at https://corp.megafon.com/investors/ The Company is focused on continuously improving its RMICS to ensure that it successfully delivers on MegaFon’s MegaFon makes a constant effort to identify, assess Between December 2018 and March 2019, MegaFon Investor materials, including presentations corporate strategy while providing a robust platform and mitigate risks, and aims to minimise the negative conducted a mandatory tender offer to purchase and reports for stable and continuous business operations. impacts of risks beyond its control. the shares of the remaining minority shareholders. Following its completion, MegaFon’s free float decreased to 0.8%. The risk management strategy involves:

From April to June 2019, MegaFon carried out a compulsory purchase of the remaining shares of the minority continuously aligning developing risk improving risk shareholders in accordance with Russian laws, acting risk management assessment identification, through its wholly-owned subsidiaries MegaFon and internal controls models to improve Investments (Cyprus) Limited and LLC MegaFon Finance. 1 to business changes, 2 the accuracy of data 3 available to drive decision-making,

formalising continuously improving risk and updating risk seeking out business management appetite metrics opportunities and internal control 4 and aligning 5 and options 6 communications and risk appetite for transforming with the Company’s threats into development opportunities, as well strategy, as finding the best ways to respond to risks, regular employee 7 training

136 137 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

The corporate Risk Management and Internal The RMICS Policy The risk management function drives the development Risk coordinators have been designated with respect Control System (RMICS) Policy is the key document of risk management across the Company, implementing to the Company’s key functions, driving collaboration governing MegaFon’s risk management activities. the RMICS Policy, ensuring risk updates, overseeing on risk management. The policy, developed in line with applicable Russian laws the implementation of risk management measures, and international risk management standards, establishes coordinating the efforts of business units to identify MegaFon uses the Oracle Hyperion RiskCom automated general approaches to risk management and internal and assess risks, and developing appropriate risk solution to maintain its risk inventory and conduct risk control. management measures. The risk management analysis, ensuring that risk data are collated in a user- team ensures the preparation of risk management friendly way. materials for the Management Board, Risk Committee, Risk management structure and Audit Committee, and implements measures to foster a risk-based culture, including training and support for employees.

Board of Directors MegaFon is focused on building a risk-based culture, the key aspects of which include: Risk Management Function Audit Committee CEO/Management Board 1 2 3 Risk Committee and other committees

Business units Tone at the Top Corporate Skills governance and capabilities Business-processes risks Project risks Subsidiary risks MegaFon’s senior managers act Risk ownership The Company’s key employees as role models in the discussion, and responsibilities are included are continuously trained identification, and assessment in employees’ job descriptions in risk management with support of risks, and are actively involved and targets. Timely from management. BU Risk Coordinator Project Risk Coordinator Subsidiary Risk Coordinator in risk management. communication about risks is encouraged and all risks are regarded as opportunities to improve the Company’s Management Coordination, development performance.

Risk management and internal controls are embedded The BU heads ensure that the RMICS is incorporated Risk management training for employees is a top priority Principal risks and mitigation across all operations and at all levels throughout into business processes and projects, including for MegaFon. The Company’s managers take a mandatory the organisation. risk identification and assessment, and also ensure online risk management course based on ISO 31000, which MegaFon’s analysis considers various types of risks, the development and implementation of risk management reflects the Company’s specific business profile. This course while setting out the measures that the Company The Board of Directors through the Audit Committee measures, including operation of control procedures. is also made available to all MegaFon employees. takes to minimise them. This analysis covers strategic, determines the RMICS principles and approaches geopolitical, technological, regulatory, operational and evaluates the system’s effectiveness. MegaFon’s Risk Committee is a permanent collegial (including compliance) and financial risks. advisory and consultative body, which includes various The CEO and the Management Board ensure the: setting top managers and is chaired by the Chief Executive up and maintenance of a robust RMICS, allocation Officer. The Committee reviews the status of and changes the roles, responsibilities and accountability for specific to MegaFon’s principal risks, and is responsible for decision risk management and internal control procedures among making on principal risks, approving risk management business unit (BU) heads, including through the Risk measures and reviewing their implementation status Committee and other committees, approval of reporting and promoting a unified approach to compliance risk format requirements, review and agreement on principal management. risks and promotion of a risk management and internal control culture.

138 139 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

# Risks Risk Description Risk Management Strategic/external risks 1 Geopolitical As a company registered in the Russian Federation, MegaFon is exposed to economic MegaFon’s business is conducted outside the EU and the United States and is focused on telecommunications, and geopolitical risks specific to Russia in general, including those related to the current which are usually excluded from sanctions regimes. Besides, although trade sanctions do not directly apply sanctions regime imposed by the United States, European Union (EU) and other to the Company, MegaFon cannot guarantee that actions aimed to mitigate negative changes will lead countries against certain Russian companies. There is a risk that new sanctions may be to a significant change in the situation, since the vast majority of the above risks are beyond MegaFon’s control. imposed or the list of entities subject to existing sanctions may be expanded. Additional sanctions may also be imposed on supplies of equipment, software and services MegaFon closely monitors on an ongoing basis the economic and political situation affecting key suppliers. from the EU and the United States. MegaFon works with experts and suppliers to keep up-to-date on current affairs so as to be able to prepare an appropriate action plan as necessary. The Company also works closely with its key suppliers to ensure continuity MegaFon relies on multiple international suppliers to conduct its business and develop of key equipment supply. its complex infrastructure. If the Company is are unable to deliver its development plans due to supply disruption, MegaFon may face delays in infrastructure development and/ or increased costs. 2 Risk of an economic Falling oil prices and a weaker rouble may negatively impact the Russian economy. The wireless market is quite resilient during an economic downturn, as customers are unwilling to reduce slowdown their minutes and mobile data usage and therefore spending on these services is less exposed to the risk The coronavirus pandemic in 2020 may also lead to an economic downturn of an economic downturn. and a slowdown in business activity, which could potentially result in lower revenues for the Company, delays in equipment deliveries, and adjustments to MegaFon’s CAPEX The long-term contracts MegaFon holds with major global vendors should ensure the continued construction programme. and modernisation of its network. 3 Technological and digital The telecommunications and digital industries are rapidly changing amid MegaFon continues to implement its strategy aimed at the digital transformation of its business. transformation an accelerating pace of innovation, while new players are entering non-core markets, such as banks establishing telecoms operators and telecoms operators creating The Company continues to transform its internal processes, accelerating the review process for technology New business models, banking products. At the same time, customers are becoming more demanding innovations, and enhancing ‘Agile’ development practices. MegaFon is focused on developing artificial intelligence new entrants and expecting superior digital customer service and a seamless online and offline solutions which will drive the evolution of autonomous and intelligent networks while improving the customer experience. Failure to provide such high-level service and experience can reduce experience through more advanced behaviour analytics. customer loyalty, and lead to increased churn and possible loss of market share. To meet the high customer expectations, MegaFon needs to be fast and agile, and have To speed up the implementation of business initiatives, MegaFon has launched a microservice factory and continues strong digital capabilities. to develop API management.

MegaFon continues to develop and improve its technology sandbox, a tool that, by using simplified procedures, enables a faster review process for new technology to be piloted within the Company.

The Company continues to build its digital capabilities in agile development practices, cloud technology and data virtualisation, as well as in building high-performance IT teams, Big Data and machine learning. 4 Market disruption The mobile market is one of the most developed segments of the Russian MegaFon has undertaken a wide range of initiatives to bolster its competitive advantage, including deploying telecommunications industry. It is characterised by high penetration rates, which has cutting-edge technology, developing new and innovative products and services, creating new partnerships led to increased competition as operators strive to retain existing and attract new with other companies and building innovative infrastructure. customers. This competitive landscape is one of the most influential factors continuing to impact the mobile market. MegaFon’s key direct competitors include MTS, VEON, and Tele2. Further, evolving business models in the market may lead to changes in the structure and dynamics of the current market, the impact of which may not currently be foreseeable.

140 141 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

# Risks Risk Description Risk Management Operational risks 5 Risk of new business MegaFon will likely continue to grow its business through acquisitions and participation Any asset acquisition is always preceded by extensive due diligence on the target business, an evaluation acquisitions/mergers in strategic alliances and partnerships. Should the Company be unsuccessful of the transaction’s viability, and legal due diligence to verify ownership of the asset and validity of the proposed or strategic alliances in integrating or managing any acquired company or taking full advantage transaction. having an adverse of a strategic alliance, this may result in remediation efforts which divert management’s impact on MegaFon’s attention away from other business concerns. In addition, any potential acquisition MegaFon has a good track record of successful acquisitions and post-transaction integration and its Management business could negatively impact MegaFon’s financial position or credit ratings, dilute share Board and the Board of Directors consists of experienced professionals who have the necessary expertise capital value subject to the acquisition deal structure, possible deferred payments, and qualifications for effective decision-making regarding acquisitions. When entering into transactions, FX exposure in the transaction price, and the successful delivery of targeted synergies MegaFon also endeavours to include provisions in the relevant agreements, whereby payment of the consideration and integration processes. is tied to the target meeting set objectives and KPIs, and MegaFon’s exposure to tax, legal and commercial risks is minimised. 6 Transfer pricing The practice of enforcing transfer pricing legislation is still in its early stages, To minimise tax risks related to transfer pricing, MegaFon has introduced and continues to improve internal and the approaches used to establish arm’s length prices under controlled transactions procedures ensuring compliance with the transfer pricing legislation, while monitoring prices used in related may be challenged by tax authorities, which could lead to additional tax liabilities being party transactions to ensure they are in line with the market and identifying controlled transactions as defined imposed. by the Russian Tax Code.

MegaFon also formed a consolidated group of taxpayers among the members of the MegaFon Group so that transactions among members are not subject to transfer pricing control. 7 Controlled foreign In accordance with the Tax Code of the Russian Federation, undistributed profits MegaFon has developed internal procedures to identify entities that may be treated as controlled foreign companies of foreign companies controlled by Russian tax residents may be subject to taxation companies, and to ensure the timely filing of required reports with the tax authorities. The Company also in Russia. The law makes Russian tax residents in control of foreign companies liable participates in discussions of legislative initiatives, make timely assessments of the impact of potential changes, for tax payments and submission of relevant CFC notifications. At the same time, monitor guidance on relevant topics by competent authorities, take timely measures to mitigate the negative impact there are risks associated with the lack of court practice relating to the CFC Rules of changes in tax laws or their interpretation, and continues to improve its internal procedures in accordance and of guidance by competent authorities on their application. with the official directives and instructions provided by competent authorities. 8 Risk of revocation, Changes in licensing legislation requirements applying to the Company’s core business MegaFon holds GSM, 3G and 4G/LTE licences with varying expiry dates. The Company pays close attention suspension, or non- (provision of communications services) could adversely affect MegaFon’s operations to tracking licence expiry dates and keeping licence data up to date, taking all necessary steps to ensure timely renewal of licences if such changes affect the process of obtaining or renewing the Company’s existing renewal of licences with the Federal Service for Supervision of Communications, Information Technology, and Mass licences for the provision of communications services required for the Company Media of the Russian Federation (Roskomnadzor). To date, MegaFon has not experienced any refusals to renew, to continue its business. or even delays in renewal. Technology risks 9 Technology resilience Although MegaFon ensures that its technological infrastructure has a high level MegaFon takes all necessary measures to ensure the high quality of its services. In particular, to improve the overall of reliability and resilience, an accident may affect the speed and quality of provided resilience and performance of the Company’s technological infrastructure, MegaFon has put in place business services. continuity regulations and is focused on building its technological architecture in line with the highest global standards, ensuring redundancy of the most critical elements of its infrastructure. MegaFon also implements a number of relevant initiatives to enhance business continuity. 10 Telecommunications MegaFon may incur losses resulting from wilful misconduct by unscrupulous MegaFon has a dedicated unit responsible for preventing fraud and associated financial or reputational losses fraud risks counterparties or subscribers. The Company is also exposed to the risk of losing while safeguarding customers against fraud. MegaFon uses a number of dedicated automated anti-fraud solutions subscribers who become victims of fraud, as well as reputational damage. to support fraud prevention. Monitoring for the more critical fraud threats is carried out 24/7. 11 Cyber risks Certain vulnerabilities may lead to a failure to maintain appropriate security levels MegaFon takes all necessary measures in line with its information security strategy to ensure an appropriate level for software, equipment, network and subscribers’ personal data, potentially leaving of security for its IT systems, software, technology, and equipment. This includes continuous monitoring for potential them compromised and subject to unauthorised access and use, such as the use threats and the use of security intelligence platforms across its IT and telecommunications infrastructures. of subscriber data or confidential information in fraudulent transactions or the spread of malware. In addition, MegaFon has in place a strong information security policy supplementing internal regulations governing personal data protection, and has developed a robust monitoring system for cyber threats.

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# Risks Risk Description Risk Management Regulatory risks 12 Data exchange A large number of draft regulations on data exchange are currently in development. MegaFon believes that these draft laws and regulations require thorough elaboration and discussion Of particular note are some controversial draft laws regulating information exchange with the industry players, as flawed regulation would put pressure on revenue growth from technology products. between telecoms operators and banks (customer data), Big Data (user-generated Big The Company participates actively in the discussions relating to all legislative initiatives on data exchange. Data), and public data exchange (available online to the public). 13 Changes Federal Law No. 90-FZ on Amendments to the Federal Law on Communications MegaFon closely monitors draft legislative enactments under this law. in regulations and the Federal Law on Information, Information Technology and Information on restricting access Protection, dated 1 May 2019, provides for the implementation of a range to blocked webpages; of organisational, administrative and technical measures to improve the information cross-border traffic security, integrity and resilience of the internet information and communication network routing within the Russian Federation. MegaFon will need to ensure it remains compliant with all amendments. 14 Risk Legislation in the Russian Federation currently does not contain provisions specifically MegaFon believes it is unlikely that minimum parameters for service quality will be required in the medium term. of the introduction requiring compliance by communications service providers with minimum quality However, even if the regulators change their current approach, the Company believes it will be able to ensure its of minimum parameters. services comply with any such minimum parameters. communications service quality The regulator’s philosophy to date has been that the quality of communications services parameters will be assured as long as subscribers have the right to select their communications operator, based on the requirement that operators provide information about service quality to subscribers.

At the same time, government authorities have recently reconsidered their position in considering the introduction of minimum communications service quality parameters. 15 Risks related to 5G The Government and industry participants are developing various 5G development MegaFon is closely monitoring all initiatives related to the development of communications technologies, above all scenarios. The commercial 5G launch will require a wide range of regulations to be 5G, and actively participates in discussions relating to such initiatives. introduced.

However, there remains considerable uncertainty as to the development scenario which will be chosen, as well as the nature and scope of the implementing regulations. Financial risks 16 Interest rate risk Rising interest rates could increase MegaFon’s cost of raising funds to finance its Currently, MegaFon enjoys a high credit rating, which makes it well-positioned to raise funds at the most attractive operations and CAPEX programmes. In addition, where MegaFon’s existing debt carries terms available in the market. a floating rate, the Company is exposed to the risk of higher costs of servicing such debt. A major portion of the Company’s debt portfolio is long-term and carries attractive interest rates. Over 85% of the Company’s debt portfolio has fixed rates. Furthermore, MegaFon has headroom to manage its floating rate debt. 17 Risk of adverse The Company’s exposure to FX risks is mostly linked to its financial and investing To mitigate FX risks, MegaFon uses cross-currency interest rate swaps and other derivative financial instruments changes in FX rates activities. to hedge the euro-denominated portion of its debt portfolio, and seeks to increase the share of rouble-denominated operating expenses and capital expenditures to cover such expenses using rouble revenues. A significant portion of MegaFon’s capital expenditure, expenses and liabilities are denominated in foreign currencies, mostly in US dollars or euros. The rouble’s depreciation against the US dollar and/or euro may make it difficult for the Company to repay or refinance its foreign currency denominated debt and maintain an adequate level of capital investment. Therefore, a weaker rouble may increase MegaFon’s investment and financial costs in roubles, leading to lower net profit.

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# Risks Risk Description Risk Management 18 Credit risk Credit risk refers to the risk of financial loss resulting from a counterparty’s failure To mitigate credit risk, MegaFon invests its surplus funds on a diversified basis both with Russian branches to meet its contractual obligations. Financial instruments that may potentially lead of international banks and a limited number of selected Russian banks. The majority of Russian banks engaged to a higher credit risk include short-term investments, receivables, and long-term with MegaFon are either owned or controlled by the state. deposits. Preventive measures to mitigate credit risk with respect to other counterparties include the use of prepayments, bank guarantees and other collateral, and building relations with counterparties whose solvency is continuously monitored based on their credit history and assigned credit ratings.

MegaFon also annually monitors possible impairment with respect to loans and other financial investments made. 19 Risk of credit rating The Company’s credit rating has an impact on the availability and cost of raising funds, As at the date of this Annual Report, MegaFon had a high credit rating level: downgrade therefore a rating downgrade can lead to higher costs of funding and debt servicing. • A Ba1 long-term credit rating with a stable outlook from Moody’s • BB+ foreign and local currency ratings with a stable outlook from S&P Global Ratings • AA(RU) credit rating with a stable outlook from ACRA – the highest rating for companies with no government shareholding. Thus, MegaFon remains one of Russia’s highest-rated companies, which combined with consistent financial performance allows the Company to raise funds on the best terms available in the market and serves as a guarantee of its creditworthiness. MegaFon has the necessary resources to ensure uninterrupted access to finance to support its economic activities. 20 Liquidity risk The availability of funding in capital markets and the key rate level have an impact MegaFon has access to adequate funding through its existing credit facilities, thereby reducing liquidity risk on MegaFon’s liquidity and borrowing costs. in the short and medium term.

Further sanctions in the banking sector could lead to restrictions on certain The Company carefully monitors MegaFon’s exposure to Russian financial institutions, which could become subject transactions. to new or increased sanctions, to ensure that the Company always has access to adequate funding even if dealing with, and accessing funds held by, such institutions become more difficult.

MegaFon also holds funds in different currencies and is endeavouring to provide where possible for payment of obligations in different currencies to mitigate any possibility of restrictions being imposed on the currencies in which it normally deals.

Compliance

Compliance framework The Company’s Compliance Policy sets out the guidelines 2019 Highlights In 2019, an updated ethics and compliance training for building a compliance framework, describes its course and test for employees was rolled out, and efforts MegaFon defines compliance as employees’ acting mandatory elements, and defines its scope. Management In 2019, the Board of Directors decided to transfer continued to refine the compliance framework across in accordance with the Company’s principles of key compliance risk areas and identification the Compliance Committee’s authority and responsibilities MegaFon subsidiaries. MegaFon also refreshed its Gifts and standards of business ethics and integrity to protect of compliance requirements is an ongoing process to the Risk Committee, including ensuring observance and Hospitality Policy in 2019. the interests of the Company and all parties affected by its at MegaFon, along with efforts to ensure these of applicable Russian and foreign laws, the Code of Ethics activities or decisions. Compliance requires observance requirements are met. and Corporate Conduct, and other internal regulations. In 2020, MegaFon intends to continue enhancing its of applicable Russian and foreign laws, as well as the Code compliance framework, including improvements to existing of Ethics and Corporate Conduct, and other internal MegaFon’s compliance function management During the year, the Committee considered processes and rollout of new compliance programmes, regulations. and Compliance Policy implementation are driven and approved several key areas relating to compliance, as well as promoting employee awareness and overall at several levels of the organisation, including the Board as well as a number of cross-functional initiatives compliance with ISO 19600:2014. MegaFon is focused on building an effective compliance of Directors, Audit Committee, Chief Executive Officer, aimed at improving the existing compliance framework: framework in line with ISO 19600:2014 – Compliance Management Board, and Risk Committee. The Risk enhancing technical and regulatory compliance, further management systems, while incorporating best practice, Committee defines the strategy and provides senior level automation of procedures under the AML/CFT programme standards, and regulators’ guidelines. support for the development of MegaFon’s compliance and protecting the confidentiality of insider information. framework. Compliance is also addressed at the BU level, with dedicated employees assigned responsibilities for the implementation of specific compliance programmes.

146 147 Financial statements and appendix

Consolidated financial statements 150–248 Material Topics and Materiality Matrix 218–219 GRI Tables 220–222 Glossary 223–224 Contacts 226 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Consolidated Independent financial statements Auditors’ For the year ended 31 December 2019 Report

Independent Auditors’ Report 151 Consolidated income statement 158 To the Board of Directors and Shareholders Consolidated statement of other comprehensive income 159 of PJSC MegaFon Consolidated statement of financial position 160 Consolidated statement of changes in equity 162 Opinion Basis for Opinion

Consolidated statement of cash flows 164 We have audited the consolidated financial statements We conducted our audit in accordance with International Notes to the consolidated financial statements 166 of PJSC MegaFon (the “Company”) and its subsidiaries Standards on Auditing (ISAs). Our responsibilities (the “Group”), which comprise the consolidated under those standards are further described in the Auditors’ 1. General 166 statement of financial position as at 31 December 2019, Responsibilities for the Audit of the Consolidated Financial 1.1. About the Company 166 the consolidated income statement, and the statements Statements section of our report. We are independent 1.2. Basis of preparation 166 of other comprehensive income, changes in equity and cash of the Group in accordance with the independence 1.3. Basis of consolidation 167 flows for the year then ended, and notes, comprising requirements that are relevant to our audit 1.4. Significant accounting judgments, significant accounting policies and other explanatory of the consolidated financial statements in the Russian estimates and assumptions 167 information. Federation and with the International Code of Ethics 1.5. Significant accounting policies 167 for Professional Accountants (including International 1.6. Standards issued but not yet effective 168 In our opinion, the accompanying consolidated financial Independence Standards), and we have fulfilled our other 2. Income statement 169 statements present fairly, in all material respects, ethical responsibilities in accordance with the requirements 2.1. Revenue 169 the consolidated financial position of the Group in the Russian Federation and the International Code 2.2 Sales and marketing expenses 171 as at 31 December 2019, and its consolidated financial of Ethics. We believe that the audit evidence we have 2.3. General and administrative expenses 171 performance and its consolidated cash flows for the year obtained is sufficient and appropriate to provide a basis 2.4. Income taxes 171 then ended in accordance with International Financial for our opinion. Reporting Standards (IFRS). 3. Assets and liabilities 174 3.1. Property and equipment 174 Key Audit Matters 3.2. Leases 178 3.3. Intangible assets 179 Key audit matters are those matters that, in our professional 3.4. Investments in associates and joint ventures 183 judgment, were of most significance in our audit 3.5. Financial assets and liabilities 193 of the consolidated financial statements of the current 3.6. Trade and other receivables 204 period. These matters were addressed in the context 3.7. Inventory 205 of our audit of the consolidated financial statements 3.8. Non-financial assets and liabilities 205 as a whole, and in forming our opinion thereon, and 3.9. Assets held for sale 206 we do not provide a separate opinion on these matters. 3.10. Provisions 206 4. Equity 207 5. Additional notes 209 5.1. Discontinued operations 209 5.2. Share-based compensation 210 Audited entity: PJSC MegaFon Independent auditor: JSC “KPMG”, a company incorporated 5.3. Related parties 211 Registration No. in the Unified State Register of Legal Entities: under the Laws of the Russian Federation, a member firm 5.4. Business combinations 213 1027809169585. of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), 5.5. Financial risk management 213 Moscow, Russia a Swiss entity. 5.6. Group information 217 Registration No. in the Unified State Register of Legal Entities 5.7. Segment information 218 1027700125628. 5.8. Commitments, contingencies and uncertainties 219 Member of the Self-regulatory Organization of Auditors 5.9. Events after the reporting date 220 Association “Sodruzhestvo” (SRO AAS). The Principal Registration Number of the Entry in the Register of Auditors and Audit Organisations: No.12006020351.

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The key audit matter How the matter was addressed in our audit The key audit matter How the matter was addressed in our audit Revenue recognition-technical complexity Revaluation of property and equipment Please refer to the Note 2.1 in the consolidated financial statements. Please refer to the Note 3.1 in the consolidated financial statements. Revenue is a material amount Our audit procedures included an assessment of the Group’s policies In 2019 the Group decided Our audit procedures included the following: consisting of a high volume and controls in place over the IT system environment to determine to transit from the historical cost of individually low value transactions. their effectiveness in preventing and/or detecting revenue-related data model of accounting for certain We assessed professional competence of the qualified independent appraiser, The Group uses billing systems distortion or loss. groups of property and equipment which was engaged by the Group by considering the appraiser’s reputation to process revenue related data to revaluation model. and experience based on publicly available sources. and relies on the results of these We performed the following key audit procedures: systems. • we tested backup and replication frequency, and inspected the server rooms In accordance with IAS 16 Property, We involved KPMG valuation specialists to assist us in testing to ensure appropriate physical safeguards were in place; Plant and Equipment, the Group the appropriateness of the Group’s methodology and key assumptions applied The most significant risks of revenue • we tested the incident management procedure for timely resolution; recognized certain groups of property to determine the fair value of items of property and equipment being revalued. misstatement arise due to: • we tested that only authorised access can be made to the billing systems and equipment at fair value at the date • registration, processing by inspecting approved access requests for compliance with the internal of revaluation. We assessed reasonableness of approaches used by independent appraiser and transfer of data on services policy; for calculation of fair values of items of property and equipment being revalued parameters between billing systems • we tested that system program changes, including changes to tariff plans, We considered this matter to be based on our understanding of generally accepted valuation methods used and the accounting system; and were authorized in accordance with internal rules; a key matter due to significant part for similar assets on the market. • correct application of tariffs, • we tested that authority to change tariff plans in billing systems is granted of the Group’s total assets that as these change throughout to authorized persons in accordance with internal rules; are being revalued and significance We evaluated the key assumptions used by the Group in its revaluation the year. • we reconciled information on new tariff plans entered into billing systems of judgments and estimates made as follows: with approved orders and testing protocols; by management in determining • we compared on a sample basis the specific cost of an individual item • we tested processing of data on parameters of provided services at the stage the approach and key assumptions of property and equipment with average market prices, using the Group’s of initial registration of data by the server equipment and subsequent for calculation of fair value of property tender documents obtained from independent suppliers; transfer to the billing system, having examined processing of individual and equipment being revalued. • we compared useful lives used to calculate physical depreciation entries on connections, and then entries in the accounting system, including with the periods given in the generally accepted in evaluation practices by checking significant manual adjustments made during transfer of data and recommended by specialized reference books for similar assets; from billing systems to the accounting system; • we compared the price change indices used in calculation with those • we recalculated the amounts accrued to subscribers on a sample basis, published by the Russian Ministry of Construction, the Russian statistical multiplying the parameters of the services provided by the corresponding agency, and the U.S. Bureau of Labor Statistics. tariffs. We assessed whether the related disclosures in the consolidated financial The above procedures were performed with involvement of our IT specialists. statements are appropriate. IFRS 16 Leases (First time adoption) We also performed analytical tests and tests of details: Please refer to the Note 3.2 in the consolidated financial statements. • we reconciled the revenue recognized in the accounting system adjusted for the amount of settlements with subscribers at the beginning and end The Group applied IFRS 16 Leases Our audit procedures included the following: of the reporting period, with the amount of payments in accordance starting from 1 January 2019. • we assessed the appropriateness of defining a contract as a lease with the accounting system; by analyzing, on a sample basis, the terms and conditions of contracts that • we reconciled the subscribers’ payments recognized in the accounting system We considered this matter to be a key could potentially contain lease components; with confirmations from paying agents and banks on a sample basis; matter as application of the standard • we assessed the reasonableness of determining the lease term, including • we performed other analytical procedures to ensure that the overall by the Group required significant management’s judgments regarding the lease term, based on our experience, trend and dynamics of revenue by type of service are consistent judgment and estimates to be made and discount rate by forming our own range of estimates for lease liabilities, with our understanding of the Group and the industry in general. by management, including when including with the involvement of KPMG valuation specialists and comparing determining that a contract contains the data obtained with the estimates made by management. a lease, and estimating a lease term and discount rate that significantly We assessed whether the related disclosures in the consolidated financial affect the amount of recognized statements are appropriate. assets and liabilities.

152 153 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

The key audit matter How the matter was addressed in our audit The key audit matter How the matter was addressed in our audit Valuation of investment in AliExpress Russia Holding PTE.LTD («AER») Impairment testing of investment in the associate DTSRetail Limited («Svyaznoy Group») and net fair value of the investee’s identifiable assets and liabilities Please refer to the Note 3.4 in the consolidated financial statements. Please refer to the Note 3.4 in the consolidated financial statements. During the reporting period indicators Our audit procedures included the following: In October 2019, the Group completed Our audit procedures included the following: of impairment of the investment a transaction to exchange 9.97% in DTSRetail Limited were identified, We assessed professional competence of the qualified independent appraiser, of shares in Mail.Ru Group Limited We assessed professional competence of the qualified independent appraiser, which requires investment impairment which was engaged by the Group by considering the appraiser’s reputation for 24.3% of shares in AER. which was engaged by the Group by considering the appraiser’s reputation testing. and experience based on publicly available sources. and experience based on publicly available sources. The Company recognized Impairment testing is a complex We involved KPMG valuation specialists to assist us in testing the appropriateness the investment in AER at fair value. We involved KPMG valuation specialists to assist us in testing the appropriateness process involving a number of the Group’s methodology and key assumptions applied to determine of the Group’s methodology and key assumptions applied to determine the fair of judgments and assumptions the recoverable amount of investment in DTS Retail Limited. In accordance with the requirements value of investment in AER and net fair value of the investee’s identifiable assets in relation to input data. Estimation of IAS 28 Investments in Associates and liabilities. of a recoverable amount is based We evaluated the key assumptions used by the Group in the discounted cash and Joint Ventures, the Group on a discounted cash flow model that flow model as follows: determined the net fair value We assessed reasonableness of approaches used by independent appraiser mainly uses assumptions from internal • we compared the historical information used in the calculations of the investee’s identifiable assets for calculation of fair values based on our understanding of generally accepted sources. with the financial statements of Euroset and Svyaznoy Logistica (DTS Retail and liabilities, including intangible valuation methods. Limited operating companies until integration in 2019) for the previous assets representing trademarks reporting periods; mostly. We evaluated the key assumptions used by the Group as follows: • we compared the forecast revenue growth rate with the average annual historical sales level and population growth rate in the forecast period Fair value measurement is a complex With regard to measuring the fair value of the investment: obtained from external sources; process involving a number • we compared the historical information used in the calculations • we performed our own sensitivity analysis and assessed the impact of judgments and assumptions with the financial statements of AER for previous periods; of changes in key assumptions which we consider reasonably possible based in relation to input data. • we compared cross-border and local market shares and the required amount on our industry knowledge. of additional investments in marketing with external market data; • we performed our own sensitivity analysis and assessed the impact We assessed whether the related disclosures in the consolidated financial of changes in key assumptions which we consider reasonably possible based statements are appropriate. on our industry knowledge.

With regard to measuring the fair value of the trademarks: • we reconciled the royalty rate for trademarks, useful lives and market growth rates used in the models with external market data.

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

154 155 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Other Information Auditors’ Responsibilities • Obtain sufficient appropriate audit evidence From the matters communicated with those charged for the Audit of the Consolidated regarding the financial information of the entities with governance, we determine those matters that were Management is responsible for the other information. or business activities within the Group to express of most significance in the audit of the consolidated The other information comprises the information included Financial Statements an opinion on the consolidated financial statements. financial statements of the current period and are therefore in the Annual Report but does not include the consolidated We are responsible for the direction, supervision the key audit matters. We describe these matters financial statements and our auditors’ report thereon. Our objectives are to obtain reasonable assurance and performance of the group audit. We remain solely in our auditors’ report unless law or regulation precludes about whether the consolidated financial statements responsible for our audit opinion. public disclosure about the matter or when, in extremely The Annual Report is expected to be made available as a whole are free from material misstatement, whether rare circumstances, we determine that a matter should to us after the date of this auditors’ report. due to fraud or error, and to issue an auditors’ report that We communicate with those charged with governance not be communicated in our report because the adverse includes our opinion. Reasonable assurance is a high regarding, among other matters, the planned scope consequences of doing so would reasonably be Our opinion on the consolidated financial statements does level of assurance, but is not a guarantee that an audit and timing of the audit and significant audit findings, expected to outweigh the public interest benefits of such not cover the other information and we will not express any conducted in accordance with ISAs will always detect including any significant deficiencies in internal control communication. form of assurance conclusion thereon. a material misstatement when it exists. Misstatements can that we identify during our audit. arise from fraud or error and are considered material if, The engagement partner on the audit resulting In connection with our audit of the consolidated financial individually or in the aggregate, they could reasonably be We also provide those charged with governance in this independent auditors’ report is: statements, our responsibility is to read the other expected to influence the economic decisions of users taken with a statement that we have complied with relevant information identified above when it becomes available on the basis of these consolidated financial statements. ethical requirements regarding independence, and, in doing so, consider whether the other information and communicate with them all relationships and other is materially inconsistent with the consolidated financial As part of an audit in accordance with ISAs, we exercise matters that may reasonably be thought to bear statements or our knowledge obtained in the audit, professional judgment and maintain professional scepticism on our independence, and where applicable, related or otherwise appears to be materially misstated throughout the audit. We also: safeguards. • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due Responsibilities to fraud or error, design and perform audit procedures Yerkozha Akylbek of Management and Those responsive to those risks, and obtain audit evidence JSC “KPMG” that is sufficient and appropriate to provide a basis Moscow, Russia Charged with Governance for our opinion. The risk of not detecting a material 24 March 2020 for the Consolidated Financial misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, Statements forgery, intentional omissions, misrepresentations, or the override of internal control. Management is responsible for the preparation and fair • Evaluate the appropriateness of accounting policies presentation of the consolidated financial statements used and the reasonableness of accounting estimates in accordance with IFRS, and for such internal control and related disclosures made by management. as management determines is necessary to enable • Conclude on the appropriateness of management’s use the preparation of consolidated financial statements that of the going concern basis of accounting and, based are free from material misstatement, whether due to fraud on the audit evidence obtained, whether a material or error. uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability In preparing the consolidated financial statements, to continue as a going concern. If we conclude that management is responsible for assessing the Group’s a material uncertainty exists, we are required to draw ability to continue as a going concern, disclosing, attention in our auditors’ report to the related disclosures as applicable, matters related to going concern and using in the consolidated financial statements or, if such the going concern basis of accounting unless management disclosures are inadequate, to modify our opinion. either intends to liquidate the Group or to cease operations, Our conclusions are based on the audit evidence or has no realistic alternative but to do so. obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group Those charged with governance are responsible to cease to continue as a going concern. for overseeing the Group’s financial reporting process. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

156 157 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Consolidated Consolidated income statement of other statement comprehensive income

(In millions of Rubles) (In millions of Rubles)

Note Years ended 31 December Note Years ended 31 December 2019 2018 2019 2018 Continuing operations Profit for the year 8,179 32,854 Revenue 2.1 348,961 335,541 Other comprehensive income that may be reclassified to profit or loss in subsequent periods: Operating expenses Foreign currency translation difference, net of tax 269 (777) Cost of revenue 109,158 100,696 Net movement on cash flow hedges, net of tax 3.5.4 — 1,567 Sales and marketing expenses 2.2 20,193 19,574 Net other comprehensive income that may be reclassified General and administrative expenses 2.3 67,992 91,114 to profit or loss in subsequent periods 269 790 Depreciation 3.1, 3.2 68,050 49,254 Other comprehensive income not to be reclassified Amortisation 3.3.1 20,340 16,116 to profit or loss in subsequent periods: Loss on disposal of non-current assets 623 337 Revaluation of guided media telecom channels, net of tax 57,610 — Total operating expenses 286,356 277,091 Net other comprehensive income not to be reclassified to profit or loss in subsequent periods 57,610 — Operating profit 62,605 58,450 Finance costs (45,195) (25,927) Total comprehensive income for the year 66,058 33,644 Finance income 2,097 1,634 Attributable to equity holders of the Company 66,116 36,171 Share of loss of associates and joint ventures Attributable to non-controlling interest (58) (2,527) and investment impairment loss 3.4 (5,277) (2,829) 66,058 33,644 Other non-operating expenses 5.3 (2,087) (1,677) (Loss)/gain on financial instruments, net 3.5.4 (1,982) 713 Foreign exchange gain/(loss), net 2,084 (1,271)

Profit before tax from continuing operations 12,245 29,093 Income tax expense 2.4 4,066 7,823

Profit from continuing operations 8,179 21,270 Discontinued operations Profit from discontinued operations, net of tax 5.1 — 11,584

Profit for the year 8,179 32,854 Attributable to equity holders of the Company 8,087 35,170 Attributable to non-controlling interest 92 (2,316) 8,179 32,854

158 159 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Consolidated statement of financial position

(In millions of Rubles)

Note As of 31 December Note As of 31 December 2019 2018 2019 2018 Assets Equity and liabilities Non-current assets Property and equipment 3.1 288,408 224,666 Equity Right-of-use assets 3.2 85,485 — Equity attributable to equity holders of the Company 4 104,956 70,667 Intangible assets, other than goodwill 3.3.1 80,845 81,026 Non-controlling interests 5.1 (307) (264) Goodwill 3.3.2 30,549 30,549 Total equity 104,649 70,403 Investments in associates and joint ventures 3.4,5.1 68,385 73,265 Non-current liabilities Non-current financial assets 3.5 15,239 3,829 Loans and borrowings 3.5 350,066 288,262 Non-current non-financial assets 3.8 9,092 7,531 Other non-current financial liabilities 3.5 2,552 509 Deferred tax assets 2.4 848 2,064 Non-current non-financial liabilities 3.8 4,000 3,895 Total non-current assets 578,851 422,930 Non-current lease liabilities 3.5 77,315 4,204

Current assets Provisions 3.10 6,380 5,117 Inventory 3.7 10,257 9,885 Deferred tax liabilities 2.4 34,601 26,016 Current non-financial assets 3.8 7,432 7,766 Total non-current liabilities 474,914 328,003 Prepaid income taxes 2.4 3,908 4,275 Current liabilities Trade and other receivables 3.6 37,104 29,137 Trade and other payables 3.5 54,607 53,235 Other current financial assets 3.5 2,898 7,955 Loans and borrowings 3.5 25,692 39,232 Cash and cash equivalents 3.5.1 52,706 27,214 Other current financial liabilities 3.5 251 84 Assets held for sale 3.9 — 847 Current non-financial liabilities 3.8 18,264 17,661 Total current assets 114,305 87,079 Current lease liabilities 3.5 13,584 61

Total assets 693,156 510,009 Income taxes payable 2.4 1,195 1,330 Total current liabilities 113,593 111,603

Total equity and liabilities 693,156 510,009

160 161 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Consolidated statement of changes in equity

(In millions of Rubles)

Note Attributable to equity holders of the Company Attributable to equity holders of the Company Non-controlling Total equity interests Ordinary shares Treasury shares Capital surplus Retained Other capital Total earnings reserves Number Amount Number Amount (Note 4) of shares of shares As of 1 January 2018 620,000,000 526 24,299,033 (17,387) 12,567 116,596 (1,163) 111,139 55,536 166,675 Profit/(loss) for the year — — — — — 35,170 — 35,170 (2,316) 32,854 Other comprehensive income/(loss) — — — — — — 1,001 1,001 (211) 790

Total comprehensive income/(loss) — — — — — 35,170 1,001 36,171 (2,527) 33,644 Sale of share in MGL 5.1 — — — — — — 57 57 (55,580) (55,523) Purchase of outstanding shares 4 — — 115,317,504 (76,700) — — — (76,700) — (76,700) Dividends to non-controlling interests — — — — — — — — (247) (247) Equity-settled share-based compensation 5.2 — — — — — — — — 2,239 2,239 Acquisition of subsdiaries — — — — — — — — 315 315

As of 31 December 2018 620,000,000 526 139,616,537 (94,087) 12,567 151,766 (105) 70,667 (264) 70,403 Profit for the year — — — — — 8,087 — 8,087 92 8,179 Other comprehensive income/(loss) — — — — — — 58,029 58,029 (150) 57,879

Total comprehensive income/(loss) — — — — — 8,087 58,029 66,116 (58) 66,058 Purchase of outstanding shares 4 — — 131,212,843 (86,574) — — — (86,574) — (86,574) Sale of own shares 4 — — (86,800,000) 58,958 — (3,232) — 55,726 — 55,726 Discount on related party loan 3.5 — — — — — (979) — (979) — (979) Acquisition of subsidiaries — — — — — — — — 15 15

As of 31 December 2019 620,000,000 526 184,029,380 (121,703) 12,567 155,642 57,924 104,956 (307) 104,649

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

162 163 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Consolidated statement of cash flows

(In millions of Rubles)

Note Years ended 31 December Note Years ended 31 December 2019 2018 2019 2018 Operating activities Investing activities Profit before tax from continuing operations 12,245 29,093 Purchase of property, equipment and intangible assets 3.1,3.3 (71,127) (79,454) Profit before tax from discontinued operations 5.1 — 15,768 Proceeds from sale of property and equipment 3.1 253 727 Profit before tax 12,245 44,861 Acquisition of subsidiaries, net of cash acquired 5.1,5.4 27 (8,029) Adjustments to reconcile profit before tax to net operating cash flows: Proceeds from sale of subsidiaries, net of cash disposed 5.1 — 6,945 Depreciation 3.1,3.2 68,050 50,553 Purchase of interest in associates and joint ventures 3.4,5.1 (1,307) (2,414) Amortisation 3.3.1 20,340 20,869 Sale of associates and joint venture 3.4 1,230 — Loss on disposal of non-current assets 623 353 Net change in short-term deposits 4,141 4,810 Loss/(gain) on financial instruments, net 3.5.4 1,982 (1,108) Loans granted 3.5 (15,360) (71) Foreign exchange (gain)/loss, net (2,084) 965 Repayments of loans granted 3,100 — Share of loss of associates and joint ventures and investment impairment Interest received 1,545 1,74 loss 3.4 5,277 2,962 Dividends received from equity-accounted investments — 19 Gain on disposal of discontinued operations 5.1 — (18,208) Net cash flows used in investing activities (77,498) (75,720) Change in impairment allowance for receivables and other non-financial assets 2,566 3,602 Financing activities Finance costs 45,195 25,942 Proceeds from loans and borrowings, net of fees paid 265,524 124,987 Finance income (2,097) (1,899) Repayment of loans and borrowings (214,204) (70,370) Equity-settled share-based compensation 5.2 — 2,239 Interest paid (43,525) (25,989) Other non-cash items — 3 Purchase of outstanding shares 4 (86,574) (76,700) Working capital adjustments: Dividends paid to non-controlling interests — (247) (Increase)/decrease in inventory (372) 63 Sale ofown shares 4 55,726 — Increase in trade and other receivables (10,610) (13,137) Lease payments (11,864) (8) Increase in current non-financial assets (1,791) (3,554) Net cash flows used infinancing activities (34,917) (48,327) Increase in trade and other payables 5,438 4,027 Net increase/(decrease)in cash and cash equivalents 26,165 (14,019) (Decrease)/increase in current non-financial liabilities (603) 4,478 Net foreign exchange difference (673) 5,086 Change in VAT, net 2,702 (4,133) Cash and cash equivalents at beginning of year 27,214 36,147 Income tax paid (8,281) (8,850) Cash and cash equivalents at end of year 3.5.1 52,706 27,214 Net cash flows received from operating activities 138,580 110,028

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

164 165 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Profit or loss and each component of OCI are attributed 1.5. Significant accounting policies Notes to the equity holders of the Company and to the non- controlling interests (“NCI”), even if this results in the NCI The significant accounting policies have been discussed having a deficit balance. in the individual notes for the related financial statement line items. to the consolidated All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full Changes in accounting policies and disclosures financial statements on consolidation. On 31 December 2019 the Group changed its accounting policy for measuring the guided media telecom channels 1.4. Significant accounting and similar assets from cost model to revaluation model 1. General judgments, estimates (Note 3.1). and assumptions During 2019 the Group applied the following amendments 1.1. About the Company Foreign currency translation to accounting standards for the first time (a number of other The preparation of these consolidated financial new standards are effective from 1 January 2019 but they Public Joint Stock Company MegaFon (“MegaFon”, The Group’s consolidated financial statements statements required management to make judgments, do not have an effect on the Group’s consolidated financial the “Company” and, together with its consolidated are presented in Rubles, which is also the functional estimates and assumptions that affect the amounts statements): subsidiaries, the “Group”) is a company incorporated under currency of MegaFon and its principal subsidiaries. reported in the consolidated statement of financial the laws of the Russian Federation and registered position, the consolidated income statement, in the Unified State Register of Legal Entities under number The functional currency of CJSC “TT mobile”, the consolidatedstatement of other comprehensive IFRS 16 Leases 1027809169585. Its registered office is at 41 Oruzheyniylane, the Company’s 75% owned subsidiary in Tajikistan, income and theaccompanying disclosures. Subsequent Moscow, 127006, Russian Federation. is the US dollar as a majority of its revenues, costs, revisions orcorrections made tothese judgments, estimates In January 2016, the IASB issued IFRS 16, Leases, which property and equipment purchases, debt and trade and assumptions hereafter could result in outcomes that sets out the principles for the recognition, measurement, MegaFon is a leading pan-Russian operator of digital liabilities is either priced, incurred, payable or otherwise require a material adjustment to the carrying amount presentation and disclosure of leases and replaces opportunitiesand offers a broad range of telecommunication measured in US dollars. of affected assets or liabilities in future periods. previous guidance on leases. The standard requires lessees and digital services to retail customers, businesses, to present right-of-use assets (“ROU assets”) and lease government clients and telecommunication services Foreign currency transactions are translated into In the process of applying the Group’s accounting policies, liabilities on the balance sheet for all leases (with limited providers. the functional currency using the exchange rates prevailing management has made various judgments. Those which exceptions). at the dates of the transactions or fair value measurement management has assessed to have the most significant As of 31 December 2019, the majority shareholder where items are re-measured to their fair value. Foreign effect on the amounts recognised in the consolidated The Group has applied IFRS 16 using the modified of the Company is AF Telecom Holding LLC, a company exchange gains and losses resulting from the settlement financial statements have been discussed in the individual retrospective transition method without restating incorporated inthe Russian Federation. The ultimate of such transactions and from the translation at year- notes for the related financial statement line items: revenue, comparative amounts. The cumulative effect of the initial controlling party is USM Holding Company LLC, a company end exchange rates of monetary assets and liabilities income taxes, property and equipment, intangible assets, application of IFRS 16 on the Group’s retained earnings incorporated inthe Russian Federation, which is controlled denominated in foreign currencies are recognised investments in associates and joint ventures, leases, at 1 January 2019 is nil. On transition to IFRS 16 the Group by a group of individuals, none of whom acting alone has in the ‘Foreign exchange gain/(loss), net’ line in profit financial assets and liabilities, provisions, and business recognised 88,651 of ROU assets and lease liabilities the power to direct the activities of the Group at his own or loss. combinations. at 1 January 2019. New accounting policies and more discretion and for his own benefit. details on the impact of the adoption of IFRS 16 have been The assets and liabilities of foreign operations The key assumptions concerning the future and other disclosed in Note 3.2. are translated into Rubles at the rate of exchange prevailing key estimates made at the reporting date that, 1.2. Basis of preparation on the reporting date and the income and expenses if not substantiated, have a significant risk of causing are translated at the exchange rates prevailing on the dates a material adjustment to the carrying amounts of assets 1.6. Standards issued but not yet These consolidated financial statements have been of the transactions. The exchange differences arising and liabilities within the next financial year are also prepared in accordance with International Financial on the translation are recognised in other comprehensive described in the individual notes for the related financial effective Reporting Standards (“IFRS”) as issued by the International income (“OCI”). statement line items below. The Group based its Accounting Standards Board (“IASB”). assumptions and estimates on the information available The standards and interpretations that are issued to it when the consolidated financial statements were and applicable to the Group, but not yet effective The consolidated financial statements have been prepared 1.3. Basis of consolidation prepared. Existing circumstances and assumptions as of the date of issuance of the Group’sconsolidated on a historical cost basis, unless disclosed otherwise. about future developments, however, may change financial statements, are disclosed below. The Group The consolidated financial statements are presented The consolidated financial statements comprise due to market changes or circumstances arising that intends to adopt these standards when they become in millions of Rubles. the financial statements of the Company and its are beyond the control of the Group. Such changes effective. subsidiaries as of 31 December 2019. are reflected in the assumptions when they occur. The consolidated financial statements were authorised for issue by the Company’s Chief Executive Officer (“CEO”) Subsidiaries are consolidated from the date of acquisition, and Chief Accountant on 24 March 2020. being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

166 167 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

IFRS 17 “Insurance Contracts” Definition of a Business (Amendments to IFRS 3) VAS include SMS, provision of content and media The Group takes into account the terms of the various and commissions for mobile payments. roaming discount agreements in order to determine In May 2017 the IASB issued IFRS 17, Insurance Contracts, In October 2018 the IASB issued Amendments to IFRS 3, the appropriate presentation of the amounts receivable which establishes principles for the recognition, Business combinations, clarifying the current definition from and payable to its roaming partners in its measurement, presentation and disclosure of insurance of a business to enable entities to determine whether (a) Loyalty programme consolidated statement of financial position. Amounts contracts issued. The new standard will replace IFRS 4 a transaction is a business combination or an asset of rebates earned from and given to roaming partners and is effective for annual periods beginning on or after acquisition. The Group operates a loyalty programme which allows are included in trade and other receivables and payables, 1 January 2021. The Group does not expect the standard customers to accumulate cashback awards for usage respectively, in the accompanying consolidated statement to have a material impact on the Group’s consolidated The Amendments are effective for annual periods of the Group’s cellular network. The awards can then of financial position. financial statements. beginning on or after 1 January 2020. The Group does be redeemed by applying the accumulated cashback not expect these amendments to have a material impact to payments for services, goods or partner products. Management has to make estimates relating to revenue on the Group’s consolidated financial statements. The portion of consideration received is allocated recognition, relying to some extent on information Conceptual Framework for Financial Reporting to the awards based on their relative standalone from other operators on the values of services delivered. selling price which is the cash value and deferred until Management also makes estimates of the final outcome In March 2018 the IASB issued a comprehensive set Definition of Material (Amendments to IAS 1 and IAS 8) the award credits are redeemed or expire. The Group in instances where the other parties dispute the amounts of concepts for financial reporting replacing the previous estimates the standalone selling price of awards charged. version of the Conceptual Framework. The revised In October 2018 the IASB issued a clarified definition by making assumptions about expected redemption rates Conceptual Framework will be effective from of “material” in the amendments to IAS 1, Presentation and customer preferences. 1 January 2020 – with earlier application permitted – of Financial Statements, and IAS 8, Accounting Policies, Wireline revenue for companies that use it to develop accounting policies Changes in Accounting Estimates and Errors, and issued when no IFRS Standard applies to a particular transaction. practical guidance on applying the concept of materiality. (b) Multiple element arrangements The Group earns wireline revenues for usage of its fixed- The Group will apply the revised Conceptual Framework The Amendments will be effective for annual periods line network, which include payments from individual, from the effective date and does not expect it to have beginning on or after 1 January 2020 with earlier The Group enters into multiple element arrangements corporate and government subscribers for local and long- a material impact on the Group’s consolidated financial implementation permitted. The Group will apply these in which a customer may purchase a combination distance telecommunications and data transfer services. statements. Amendments from the effective date and does not expect of equipment (e.g. handsets) and telecommunication Charges are based upon usage (e.g., minutes of traffic them to have a material impact on the Group’s services (e.g. airtime, data, and other services). processed), period of time (e.g., monthly service fees) consolidated financial statements. The Group allocates consideration received from subscribers or other established fee schedules. Wireline revenues also to the separate performance obligations based on their include interconnection charges from wireless and wireline standalone selling prices. Revenue allocated to the delivered operators for terminating calls on the Group’s wireline equipment and related costs are recognised networks. Revenue from service contracts is recognised 2. Income statement in the accompanying consolidated income statement when the services are rendered. Billings received in advance at the time of sale provided that other conditions of service being rendered are deferred and recognised for revenue recognition are met. Amounts allocated as revenue as the service is rendered. 2.1. Revenue The revenue from provision of content and other services to telecommunication services are deferred and recognised is presented net of related costs when the Group as revenue over the period of rendering the services. acts as an agent of the service providers while gross Allocation of each separable component of a bundled offer Construction contracts revenue Accounting policies revenues and related costs are recorded when the Group based on the individual components’ standalone selling is the primary obligor in the arrangement. The reporting prices involves estimates and management’s judgment. The Group has contracts with customers for installation Revenue is measured based on the consideration specified of revenue on a net versus gross basis, depending of network equipment for a fixed fee, which cannot in a contract with a customer and represents amounts on an analysis of the Group’s involvement as either exceed the costs incurred plus a certain margin. Revenue receivable for the sale of goods or services in the ordinary principal or agent, involves management judgment. (c) Roaming rebates under the contracts is recognised over time, for example course of the Group’s activities, net of value added taxes, by reference to the stage of completion as defined returns and discounts. The Group enters into roaming discount agreements in the contract and accepted by the customer, when Wireless revenue with a number of wireless operators. According any of the criteria for transferring control of a good Revenue is recognised when (or as) the Group satisfies to the agreements the Group is committed to provide or service over time are met, including the Group’s a performance obligation by transferring a promised The Group earns wireless revenues for usage of its cellular and entitled to receive a discount that is generally having an enforceable right to payment for performance good or service to a customer (which is when the customer system, which include airtime charges from contract dependent on the volume of roaming traffic generated completed to date. Otherwise, revenue is recognised obtains control of that good or service). Upfront payments and prepaid subscribers, monthly contract fees, by the respective subscribers. The Group uses actual traffic at a point in time when control of the good or service received for connection of new customers and installation interconnect fees from other wireless and wirelineoperators, data to estimate the amounts of rebates to be received has been transferred to the customer. An expected loss of infrastructure connection services are deferred roaming charges, data transfer charges, and charges or granted. Such estimates are adjusted and updated on a contract is recognised immediately in profit or loss. and recognised over the estimated average customer for value added services (“VAS”). on a regular basis. The Group accounts for discounts contract life. received as a reduction of roaming expenses and rebates Interconnect revenue includes revenues from wireless granted as a reduction of roaming revenue. Sales of equipment and accessories and wireline operators that was earned from terminating Service revenue traffic from other operators. Roaming revenues include Revenue from the sale of equipment and accessories revenues from customers who roam outside their selected is recognised when the customer obtains control Service revenue is generally recognised when the services home coverage area and revenues from other mobile of the goods, usually on their delivery. are rendered. carriers for roaming by their customers using the network of the Group.

168 169 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Disclosures State pension funds Significant estimates Disclosures

As at 31 December 2019, the Group had 19,865 The Group contributes to local state pension funds and social The Group assesses the recoverability of deferred tax The following presents the significant components (2018: 20,846) of receivables and nil contract assets funds on behalf of its employees. The contributions assets based on estimates of future earnings. of the Group’s income tax expense for the years ended from contracts with customers included in trade and are expensed as incurred. Contributions for the years 31 December: other receivables. ended 31 December 2019 and 2018 were 7,059 and 6,559 Actual Group income tax receipts and payments could respectively. differ from the estimates made by the Group as a result As at 31 December 2019, the Group had 12,786 (2018: of changes in tax legislation or unforeseen transactions 13,847) of contract liabilities from contracts with customers that could affect tax balances. The expected resolution included in current non-financial liabilities and 3,915 2.4. Income taxes of uncertain tax positions is based upon management’s (2018: 3,777) of contract liabilities included in non-current judgment of the likelihood of sustaining a position non-financial liabilities. The contract liabilities decreased taken through tax audits, tax courts and/or arbitration, since last year mainly as a result of the Group’s increasing Accounting policies if necessary. Circumstances and interpretations the share of post-paid products in 2019. The contract of the amount due or likelihood of a position being liabilities included in non-current financial liabilities sustained may change during the settlement process. as at 31 December 2019 primarily relate to deferred upfront Current income tax fees for infrastructure services. These are expected to be 2019 2018 recognised as revenue over a term of ten years which The tax expense for the year comprises current and deferred is the average contract term. tax. Tax is recognised in profit or loss, except to the extent Current income tax: that it relates to items recognised in OCI or directly Current income tax charge 8,197 5,762 The amount of 13,847 recognised in contract liabilities in equity. In this case, the tax is recognised in OCI at the beginning of the year has been recognised or directly in equity, respectively. Adjustments recognised for current tax of prior periods 429 631 as revenue for the year ended 31 December 2019. Deferred tax (4,560) 1,430 The current income tax is calculated on the basis of the tax Income tax expense 4,066 7,823 The Group used the practical expedient in IFRS 15 laws enacted or substantively enacted at the reporting date and did not disclose the information about its unsatisfied in the countries in which the Company and its subsidiaries performance obligations for contracts that have an original operate and generate taxable income. Management The reconciliation between the average effective income expected duration of one year or less. periodically evaluates positions taken in tax returns tax rate and tax expense calculated at domestic statutory with respect to situations in which the applicable tax rates applicable to individual Group entities is as follows: regulation is subject to interpretation. If the applicable 2.2. Sales and marketing expenses tax regulation is subject to interpretation, the Company 2019 2018 establishes a provision where appropriate on the basis Dealer commissions for connection of new subscribers of amounts expected to be paid to the tax authorities. Statutory income tax rate 20.0% 20.0% which represent incremental costs of obtaining Non-deductible expenses 12.1% 6.9% a customer contract are deferred and recognised in sales Svyaznoy group impairment 3.7% — and marketing expenses over the expected contract term. Deferred income tax Other dealer commissions are expensed as incurred. Effect of intra-group transactions — 0.5% Deferred income tax is recognised using the liability Effect of income tax preferences (0.9%) (0.3%) As at 31 December 2019, the Group had 5,848 (2018: method, on temporary differences arising between the tax 4,617) of deferred customer acquisition costs included bases of assets and liabilities and their carrying amounts Sale of ownshares (2.1%) — in non-current non-financial assets. The amount of costs in the financial statements. However, deferred income Other 0.4% (0.2%) amortised into sales and marketing expenses for the year tax is not accounted for if it arises from initial recognition Effective income tax rate 33.2% 26.9% ended 31 December 2019 is 6,359 (2018: 5,552). of an asset or liability in a transaction other than a business combination that at the time of the transaction affects Advertising costs are expensed as incurred. neither accounting nor taxable profit or loss. Deferred The effect of intragroup transactions, in the table above, income tax is determined using tax rates and laws that have represents taxable intra-group income. been enacted or substantively enacted at the reporting 2.3. General and administrative date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax expenses liability is settled.

Included in general and administrative expenses Deferred income tax assets are recognised only for the years ended 31 December are: to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided 2019 2018 on temporary differences arising on investments Employee benefits and related in subsidiaries and associates, except for deferred social charges 34,347 34,125 income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

170 171 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Deferred tax relates to the following: Reconciliation of net deferred tax liabilities for the years ended 31 December is as follows: Statement of financial position Income statement as of 31 December for the years 2019 2018 2019 2018 2019 2018 Balance at beginning of year 23,952 24,963 Property and equipment (24,286) (10,718) (793) (5,380) Tax (benefit)/expenseduring the year (4,560) 1,430 Intangible assets (14,867) (14,892) (25) (4,072) Revaluation(Note 3.1) 14,403 — Derivative financial instruments 316 (59) (375) 829 Translation adjustment of foreign operations (42) 48 Investments in associates and subsidiaries 461 (3,067) (3,528) 5,751 Discontinued operations — (3,222) Tax loss carry-forwards 1,368 2,605 1,237 1,404 Change of accounting policy — 341 Revenue recognition 1,772 2,059 287 734 Deferred tax on cash flow hedges in OCI (Note 3.5) — 392 Accrued employee benefits 383 846 463 433 Balance at end of year 33,753 23,952 Accrued expenses 1,168 1,181 13 323 Dealers’ commissions (1,181) (929) 252 588 Leases 1,083 — (1,083) — 3. Assets and liabilities Other movements and temporary differences 30 (978) (1,008) 820 Deferred tax (income)/expense (4,560) 1,430 3.1. Property and equipment Repair and maintenance costs are expensed as incurred. Net deferred tax liabilities (33,753) (23,952) The cost of major renovations and other subsequent expenditure is included in the carrying amount of the asset Reflected in the consolidated statement Accounting policies or recognised as a separate asset, as appropriate, of financial position as follows: only when it is probable that future economic benefits Deferred tax assets 848 2,064 Property and equipment is stated at cost, less accumulated associated with the item will flow to the Group and the cost depreciation and impairment, if any, except for the guided of the item can be measured reliably. Deferred tax liabilities (34,601) (26,016) media telecom channels and similar assets which are stated at revalued amounts starting from 31 December 2019. The present value of the expected cost for the decommis­ The Group recognises deferred tax assets in respect of tax In order to utilise tax losses the Group is able to implement Cost includes all costs directly attributable to bringing sioning of an asset after its use is included in the cost loss carry-forwards to the extent that realisation of tax appropriate tax planning strategies depending the asset to the location and condition for itsintended of the respective asset. Please refer to Note 3.10 for further losses against future taxable profit is probable. Deferred on the results of these subsidiaries in subsequent periods. use. Depreciation is recorded on a straight-line basis information about the provision for decommissioning tax assets related to tax losses of the Group’s subsidiaries The tax planning strategies may include, among others, over the estimated useful life of the asset. liabilities. are recognised based on the tax planning opportunities merging of the respective subsidiaries with MegaFon which that would be implemented, if necessary, to prevent tax is expected to have sufficient pretax income to utilise Depreciation expenses are based on management’s At the time of retirement or other disposition of property losses from not being used. the accumulated tax losses of these subsidiaries. estimates of residual value, the depreciation method or equipment, the cost and accumulated depreciation used and the useful lives of property and equipment. are removed from the accounts and any resulting gain Deferred tax assets in respect of the tax losses Unrecognised deferred tax assets in the consolidated Estimates may change due to technological developments, or loss is recorded in consolidated income statement. are attributable to the following subsidiaries: statement of financial position amounted to 3,859 competition, changes in market conditions and other as of 31 December 2019 (2018: 3,983). Unrecognised factors, and may result in changes in estimated useful The Group plans, develops and uses telecommunication deferred tax assets arose on the acquisition of subsidiaries lives and depreciation charges. The actual economic lives networks, jointly with other operators. These activities 2019 2018 and associates due to the difference between of long-lived assets may be different from the estimated are accounted for as joint operations. Accordingly, Scartel 283 1,299 the accounting and tax bases of the subsidiaries useful lives. A change in estimated useful lives is accounted the Group records its share of the jointly held assets MegaFon Retail 912 1,181 and associates acquired and are not expected to be for prospectively as a change in accounting estimate. and its share of the jointly incurred expenses. realised due to lack of appropriate taxable profits. Other 173 125 The estimated useful lives are as follows: Starting from 31 December 2019 the Group decided Balance at end of year 1,368 2,605 to change its accounting policy so as to measure guided media telecom channels and similar assets at revalued Telecommunications network 3 to 20 years amounts, because they more faithfully depict the value Guided media telecom channels 20 to 33 years of this group of assets which were found to be significantly Buildings and structures 7 to 50 years undervalued considering the nature of the assets, their resilience to technological changes and their long- Vehicles, office and other equipment 3 to 7 years term economic lives. The valuation of the assets was carried out as of 31 December 2019 by an independent valuer. The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. The useful lives of certain assets were revised with effect from 1 January 2020, see Note 5.9.

172 173 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

The guided media telecom channels and similar The key assumptions used are the useful lives of the assets For assets other than goodwill, an assessment is made Assets held for sale assets are initially measured at cost and subsequently ranging from 20 to 30 years, cost of one kilometer at each reporting date to determine whether there carried at their revalued amount, being the fair value of fiber-optic lines construction based on the Group’s is an indication that previously recognised impairment Non-current assets are classified as assets held for sale at the date of the revaluation less subsequent accumulated tender offers ranging from 335 to 880 thousand losses no longer exist or have decreased. If such indication (“AHFS”) and stated at the lower of carrying amount depreciation and impairment losses, if any. Revaluation Rubles,construction prices and real estate prices published exists, the Group estimates the asset’s recoverable amount. and fair value less costs to sell if their carrying amount is to be performed every 3–5 years or more often by Rosstat – the Russian statistical agency, construction A previously recognised impairment loss is reversed only is to be recovered principally through a sale transaction if necessary to ensure that the carrying amount does prices for fiber optic cables published by the U.S. Bureau if there has been a change in the assumptions used rather than through continuing use and the sale not differ significantly from fair value. of Labor Statistics, and the Ruble/US dollar exchange rate to determine the asset’s recoverable amount since the last is considered highly probable. published by the Central Bank of Russia. impairment loss was recognised. The reversal is limited The revaluation surplus in the amount of 57,610, net of tax, so that the carrying amount of the asset does not exceed was recognised in OCI, and a revaluation decrease its recoverable amount, nor exceed the carrying amount Disclosures in the amount of 165 was recognised in the consolidated Sensitivity to changes in key assumptions that would have been determined, net of depreciation, income statement within ‘Depreciation’. had no impairment loss been recognised for the asset Property and equipment is as follows: The following reasonably possible changes in the key in prior years. Such reversal is recognised in profit or loss. The revaluation surplus included in equity will be transferred assumptions made independently, with all other directly to retained earnings when the respective asset assumptions constant, would result in the following Estimating recoverable amounts of assets is based is disposed of. changes in the revalued amount: on management’s evaluations, including estimates of applicable market rates, if the market approach is used, As there is no active market for the guided media telecom or future cash flows, discount rates, terminal growth rates, channels and similar assets, the Group derived the fair and assumptions about future market conditions, value of the assets using a cost approach. The cost if the income approach is used. approach uses data from internal information sources and the results of analytical reviews of the Russian market Telecom- Buildings Vehicles, Guided media Construction Total for similar assets. Market data was obtained from various munications and office telecom in-progress published sources, such as catalogues, statistical reports, network structures and other channels etc., as well as from suppliers of similar assets in Russia. equipment Cost as of Key assumption Change Change 1 January 2018 384,505 68,433 26,614 78,216 19,731 57 7,499 in key in the revalued assumption amount Additions — — — — 59,702 59,702 Change in useful life by, years +1/-1 +3,200/(3,500) Acquisitions (Note 5.4) — — 5 — 694 699 Change in fiber optic cable construction cost per 1 km by +1%/-1% +0.77%/(0.77%) Disposals (11,981) (394) (1,458) (291) (14) (14,138) Change in construction prices by +1%/-1% +0.38%/(0.38%) Put into use 39,321 2,353 2,667 1,956 (46,297) — Change in real estate prices by +1%/-1% +0.26%/(0.26%) Discontinued operations Change in fiber optic cable construction prices by +1%/-1% +0.26%/(0.26%) (Note 5.1) (6,145) (1,400) (433) — (1,140) (9,118) Change in Ruble/US dollar exchange rate by +1%/-1% +0.26%/(0.26%) Reclassified to AHFS — — (16) — — (16) Translation 1,656 532 779 — 65 3,032 31 December 2018 407,356 69,524 28,158 79,881 32,741 617,660 Capitalised borrowing costs Impairment Additions — — — — 46,962 46,962 Borrowing costs directly attributable to the acquisition, The Group tests long-lived assets, other than goodwill, Disposals (16,516) (398) (1,855) (234) (21) (19,024) construction or production of a qualifying asset during for impairment when circumstances indicate there may be Put into use 47,231 1,495 2,647 2,047 (53,420) — the construction phase that necessarily takes a substantial a potential impairment. period of time are capitalised as part of property Reclassifications (3) (3) (342) 330 18 — and equipment until the asset is ready for use. All other An impairment loss is recognisedin the amount by which Reclassified to ROUA borrowing costs are expensed in the period in which they the asset’s carrying amount exceeds its recoverable (Note 3.2) — (4,017) — — — (4,017) occur. Borrowing costs consist of interest, related foreign amount. The recoverable amount is the higher of exchange differences, and other costs that the Group (1) an asset’s fair value less costs to sell and (2) value in use. Revaluation — — — 105,608 — 105,608 incurs in connection with the borrowing of funds. The recoverable amount is determined for each individual Revision of estimated provision asset, unless the asset does not generate cash inflows (Note 3.10) — 927 — — — 927 that are largely independent of those from other assets or groups of assets.Impairment losses relating to continuing Translation (912) (255) (345) — (104) (1,616) operations are recognised in profit or loss in the expense 31 December 2019 437,156 67,273 28,263 187,632 26,176 746,500 categories which are consistent with the function of the impaired asset.

174 175 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Telecom- Buildings Vehicles, Guided media Construction Total The Group has applied judgment to determine the lease • excluding initial direct costs from the measurement munications and office telecom in-progress term for the contracts that contain renewal or termination of the ROU assets at the date of initial application; and network structures and other channels options. The assessment of whether the contract contains • using hindsight, for example, in determining the lease equipment such an option and whether the Group is reasonably term if the contract contains options to extend Depreciation as of certain to exercise such an option takes into account or terminate the lease. various factors, including technology development 1 January 2018 (268,928) (35,003) (23,133) (29,730) — (356,794) expectations, costs to terminate the lease, economic Charge for the year (39,405) (4,454) (2,225) (4,469) — (50,553) factors, and also the Group’s historical experience. Disclosures Disposals 11,855 263 1,411 149 — 13,678 The nature of expenses related to those leases has changed Discontinued operations because the Group is now recognising a depreciation IFRS 16 impacts (Note 5.1) 2,601 248 150 — — 2,999 charge for ROU assets and interest expense on lease Reclassified to AHFS — — 3 — — 3 liabilities recorded in the ‘Depreciation’ and ‘Finance costs’ The adoption of IFRS 16 did not have a significant impact lines of the consolidated income statement, respectively. on the Group’s accounting for leases which were previously Translation (1,416) (312) (599) — — (2,327) classified as finance leases, neither did it have a significant 31 December 2018 (295,293) (39,258) (24,393) (34,050) — (392,994) The Group used the following practical expedients when impact on those leases where the Group acts as a lessor. applying IFRS 16 to leases previously classified as operating As at 1 January 2019 the Group reclassified 3,162 of assets Charge for the year (41,149) (3,762) (2,543) (4,217) — (51,671) leases where the Group acts as a lessee: relating to its former finance leases from property Disposals 16,112 283 1,808 133 — 18,336 • applying a single discount rate to a portfolio of leases and equipment to ROU assets. with reasonably similar characteristics; Reclassifications (21) 1 355 (335) — — • relying on the assessment of whether leases are onerous The reconciliation between operating lease commitments Reclassified to ROUA by applying IAS 37, Provisions, contingent liabilities disclosed at the end of the 2018 financial year and lease (Note 3.2) — 855 — — — 855 and contingent assets, immediately before the date liabilities recognised in the statement of financial positionat Revaluation — — — (33,760) — (33,760) of the initial application as an alternative to performing the date of initial application is as follows: an impairment review; Translation 683 157 302 — — 1,142 31 December 2019 (319,668) (41,724) (24,471) (72,229) — (458,092) 1 January 2019 Operating lease commitments at 31 December 2018 as reported 29,286 Net book value: Operating lease commitments discounted at 1 January 2019 23,544 31 December 2018 112,063 30,266 3,765 45,831 32,741 224,666 Finance lease liabilities recognised as at 31 December 2018 4,265 31 December 2019 117,488 25,549 3,792 115,403 26,176 288,408 Extension options reasonably certain to be exercised 65,107 Lease liabilities recognised at 1 January 2019 92,916 Included in construction in-progress are advances On transition to IFRS 16, for leases which were previously to suppliers of network equipment of 978 and 1,607 classified as operating leases and which have now as at 31 December 2019 and 2018, respectively. been identified as leases under IFRS 16 (because they The Group, where it acts as a lessee, has recognised convey a right to control the use of an identified asset the following assetsand their depreciation expense for a period of time in exchange for consideration), for its leases: Capitalised borrowing costs the Group calculated lease liabilities as at 1 January 2019, and then as at the commencement of each new lease, Lease term, ROU assets as of 31 ROU depreciation expense Capitalised borrowing costs were 1,201 and 1,889 using the present value of the remaining lease payments years December 2019 for the year ended for the years ended 31 December 2019 and 2018, for the remaining lease term, discounted at the Group’s 31 December 2019 respectively. The rate used to determine the amount incremental borrowing rate. Telecommunication infrastructure 2-14 67,133 10,116 of borrowing costs eligible for capitalisation was 8.9% and 9.3% for the years ended 31 December 2019 and The weighted-average discount rate at 1 January 2019 Retail outlets 2-5 8,756 4,342 2018, respectively. is 10.5%. The discount rates were estimated based Administrative premises 2-7 9,596 1,921 on incremental borrowing rates, i.e. the rates of the Group’s borrowings with similar terms as the leases. Total 85,485 16,379 3.2. Leases Simultaneously, the Group recognised the ROU assets For the year ended 31 December 2018 finance lease assets in the amount of the lease liabilities increased by any lease depreciation expense amounted to 268. During the year Accounting policies prepayments and, in case of new leases which commenced ended 31 December 2019 the Group recognised 9,664 after 1 January 2019, also increased by initial direct costs. (2018: 477) of interest costs from leases. Total additions Previously, the Group recognised operating lease to ROU assets and total cash outflow for leases for the year expense on a straight-line basis over the term of the lease, ended 31 December 2019 amounted to 13,405 and 21,506, and recognised assets and liabilities only to the extent respectively. that there was a timing difference between actual lease payments and the expense recognised.

176 177 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

3.3. Intangible assets Amortisation expenses are based on management’s Disclosures judgment as to the amortisation method to be used and its estimates of the useful lives of the intangible assets. Intangible assets, other than goodwill, are as follows: 3.3.1. Intangible assets, other than goodwill Estimates may change due to technological developments, competition, changes in market conditions and other Operating Customer Trademarks Games Other Other Total factors, and may result in changes in estimated useful lives licences and base and patents software intangible Accounting policies and amortisation charges. Critical estimates of useful lives frequencies assets of intangible assets are impacted by estimates of average Cost as of Intangible assets acquired separately are measured customer relationship based on churn, remaining licence on initial recognition at cost. The cost of intangible assets periods and expected developments in technology 1 January 2018 80,943 26,489 23,208 13,507 55,299 10,860 210,306 acquired in a business combination is their fair value and markets. The actual economic lives of the assets may Additions 1,407 118 725 1,413 20,604 74 24,341 as of the date of acquisition. Following initial recognition, be different from the estimated useful lives. A change intangible assets are carried at cost less accumulated in estimated useful lives is accounted for prospectively Acquisitions (Note 5.4) — — — 416 2,073 2,489 amortisation and impairment, if any. Intangible assets as a change in accounting estimate. Disposals (535) (162) (35) (36) (4,334) (259) (5,361) consist principally of operating licences, frequencies, Discontinued operations (Note 5.1) — (22,402) (23,178) (15,171) (4,586) (2,061) (67,398) customer base and software. Impairment Reclassified to AHFS (Note 3.9) — — — — (462) — (462) Software development activities involve a plan or design Translation 75 — — 287 — 101 463 for the production of new or substantially improved Assets that are subject to amortisation are reviewed products and processes. Development expenditure for impairment whenever events or changes in circumstances 31 December 2018 81,890 4,043 720 — 66,937 10,788 164,378 is capitalised only if development costs can be indicate that the carrying amount may not be recoverable. Additions 1,222 — 473 — 17,006 1,935 20,636 measured reliably, the product or process is technically See Note 3.1 for further description of the accounting Disposals (369) — (100) — (5,869) (2,130) (8,468) and commercially feasible, future economic benefits policies for impairment testing of non-financial assets. are probable, and the Group intends to and has sufficient Translation (32) — — — — 12 (20) resources to complete development and to use or sell 31 December 2019 82,711 4,043 1,093 — 78,074 10,605 176,526 the asset. Amortisation as of The useful lives of intangible assets are assessed as either 1 January 2018 (32,674) (6,467) (2,843) (2,321) (34,013) (3,848) (82,166) finite or indefinite. The Group does not have intangible Charge for the year (4,414) (1,919) (1,196) (1,062) (11,502) (776) (20,869) assets with indefinite useful lives, other than goodwill. Disposals 467 162 35 27 4,318 259 5,268 All intangible assetsare amortised on a straight-line basis Discontinued operations (Note 5.1) — 4,971 3,350 3,479 2,130 628 14,558 over the following estimated useful lives: Reclassified to AHFS (Note 3.9) — — — — 83 — 83 Translation (11) — — (123) — (92) (226) Operating licences and frequencies 10 to 20 years 31 December 2018 (36,632) (3,253) (654) — (38,984) (3,829) (83,352) Customer base 3 to 19 years Charge for the year (4,339) (222) (270) — (14,427) (1,082) (20,340) Trademarks and patents 7 to 20 years Disposals 244 — 86 — 5,851 1,810 7,99 1 Other software 1 to 5 years Translation 32 — — — — (12) 20 Other intangible assets 1 to 10 years 31 December 2019 (40,695) (3,475) (838) — (47,560) (3,113) (95,681) Net book value: 31 December 2018 45,258 790 66 — 27,953 6,959 81,026 31 December 2019 42,016 568 255 — 30,514 7,492 80,845 Weighted-average remaining amortisation period, years 10 3 1 — 2 7 4

Operating licences and frequencies provide the Group These licences are integral to the wireless operations with the exclusive right to utilise certain radio frequency of the Group and any inability to extend existing licences spectrum to provide wireless communication services. on the same or comparable terms could materially affect the Group’s business. While operating licences are issued Operating licences primarily consist of: for a fixed period, renewals of these licences previously had • several 2G licences, occurred routinely and at nominal cost. The Groupbelieves • a nationwide 3G licence, that there are currently no legal, regulatory, contractual, • a nationwide 4G licence to use 2.5–2.7 GHz spectrum competitive, economic or other factors that could result (10x10 MHz band), and in delays in licence renewal, or even an outright refusal • a nationwide 4G licence to use 2.5–2.7 GHz spectrum to renew. (30x30 MHz band).

178 179 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Nationwide 3G and 4Glicencesrequire the Company 3.3.3. Goodwill impairment Integrated telecommunication services Accordingly, at 31 December 2019 the net assets to meet certain conditions, including capital commitments of the GARS business have been allocated to the integrated and coverage requirements (Note 5.8). Over the last few years the business of GARS Holding telecommunication services CGU. Management has Accounting policies Limited (“GARS”) blended significantly with the integrated determined that the cash flows of the GARS business should telecommunication services business in terms of mutual not be considered independent of those from the integrated Neosprint Goodwill is not subject to amortisation and is tested management, costs, and inputs and outputs convergence. telecommunication services CGU, because of the extent annually for impairment as of 1 October or more frequently This process has become particularly evident of their integration with the Company’s other operations. In April 2019 the Group acquired spectrum in the 3.4GHz – whenever events or changes in circumstances indicate that by 31 December 2019 as the management structure 3.6GHz band for St. Petersburg through the purchase the carrying amount may not be recoverable. has been revised and integration has risen significantly The recoverable amount of the integrated telecommunication of a 100% interest in LLC NeosprintSpb (“NeosprintSpb”). over the year. services CGU has been determined based on its value The Group’s management concluded that the assets For the purpose of impairment testing, goodwill acquired in use (Level 3). The value in use has been determined based and activities of the acquired company are not capable in a business combination is allocated from the acquisition on the discounted cash flows (“DCF”). of being conducted and managed as a business, date to each of the cash-generating units (“CGUs”) accordingly the acquisition of NeosprintSpb was accounted that are expected to benefit from the synergies The calculation of value in use is based on the following key for as an acquisition of assets. The purchase price totaled of the combination. The Group has allocated goodwill assumptions: 300, consisting of cash consideration. to one CGU: integrated telecommunication services. ARPU stable during the forecast period, growth rate 0% In April 2018 the Group acquired spectrum in the 3.4GHz – An impairment loss of associated goodwill is recognised 3.6GHz band for Moscow through the purchase for the amount by which the CGU’s carrying amount Pre-tax discount rate 11.6% of a 100% interest in LLC Neosprint (“Neosprint”). exceeds its recoverable amount. The recoverable amount Terminal growth rate 2.5% The Group’s management concluded that the assets is the higher of (1) a CGU’s fair value less costs to sell and activities of the acquired company are not capable and (2) value in use. The recognised impairment loss Market share in Russia (in terms of retail customer base) 29.3%-29.4% of being conducted and managed as a business, is not subsequently reversed. EBITDA margin during the forecast period 38.1%-34.5% accordingly the acquisition of Neosprint was accounted CAPEX/Revenue ratio 19.1%-19.9% for as an acquisition of assets. The purchase price totaled Estimating recoverable amounts of assets and CGUs 720, consisting of cash consideration of 504 and a deferred is based on management’s evaluations, including payment of 216 which was fully settled in June 2018. determining the appropriate CGUs and estimates of applicable multiples, if the market approach is used, Management believes that any change in any of these Unrealised gains on transactions between the Group or future cash flows, discount rates, terminal growth key assumptions which can currently be reasonably and its associates or joint ventures are eliminated only 3.3.2. Goodwill rates, and assumptions about future market conditions, anticipated would not cause the aggregate carrying to the extent of the Group’s interest in the associates if the income approach is used. Allocation of the carrying amount of the integrated telecommunication services CGU or joint ventures. Unrealised losses are also eliminated value of the assets being tested between individual CGUs to exceed its aggregate recoverable amount. to the extent of the Group’s interest unless a transaction Accounting policies also requires management’s judgment. provides evidence of an impairment of the asset transferred. Accounting policies of associates or joint Goodwill represents the excess of the consideration 3.4. Investments in associates ventures have been changed where necessary to ensure transferred plus the fair value of any NCI in the acquired Goodwill impairment test consistency with the policies adopted by the Group. company at the acquisition date over the fair values and joint ventures of the identifiable net assets acquired. Goodwill Goodwill acquired through business combinations has been is not amortised, but tested for impairment at least allocated to related CGUs as follows: Accounting policies Impairment annually (Note 3.3.3). 31 December Investments in associates and joint ventures which For associates and joint ventures accounted for using After initial recognition, goodwill is measured at cost less are jointly controlled entities are accounted for using the equity method, at each reporting date the Group any accumulated impairment losses. 2019 2018 the equity method of accounting and are initially determines whether there is objective evidence that Integrated recognised at costor, in case of non-monetary purchases, the investment in the associate or joint venture is impaired. telecommunication services 30,549 28,951 at fair value of assets received or given, whichever is more If there is such evidence, the Group calculates the amount Disclosures GARS — 1,598 appropriate. The Group’s share of the profits and losses of impairment as the difference between the recoverable of these companies is included in the ‘Share of loss amount of the Group’s investment in the associate The changes in the carrying value of goodwill, net Total goodwill 30,549 30,549 of associates and joint ventureand investment impairment or joint venture and its carrying value, thenrecognises of accumulated impairment losses of 3,400, for the years loss’ line in the accompanying consolidated income the loss as ‘Share of loss of associates and joint ventures ended 31 December 2019 and 2018 are as follows: In assessing whether goodwill has been impaired, statement with a corresponding adjustment to the carrying and investment impairment loss’ in the consolidated income the carrying value of the CGU (including goodwill) was amount of the investment. statement. 2019 2018 compared with its estimated recoverable amount. Balance at beginning of year 30,549 73,218 As a result of the annual test, no impairment of goodwill Acquisitions (Note 5.4) — 7,725 was identified in 2019. Discontinued operations (Note 5.1) — (50,394) Balance at end of year 30,549 30,549

180 181 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Disclosures Intangible assets mainly consist of trademarks. The discount rate represents the current market assessment of the risks specific to AER, taking into consideration the time Investments in associates and joint ventures are as follows: The disposal of MGL shares resulted in a 602 loss, presented value of money and individual risks to the underlying assets in the consolidated income statement line “Share of loss that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific Investee % equity 31 December of associates and joint ventures and investment impairment interest loss”. circumstances of AERand is derived from its weighted 2019 2018 average cost of capital (“WACC”). The WACC takes AER Holding PTE.LTD (“AER”), associate 24.300 35,054 — The fair value of AER as at the date of acquisition has been into account both debt and equity. The cost of equity determined using the cash flow projections for a seven- is derived from the expected return on investment by AER’s JSC SadovoeKoltso (“Garden Ring”), joint venture 49.999 12,637 12,866 year period, Gordon growth model and exit multiples investors. The cost of debt is based on the interest-bearing DTSRetail Limited (“Svyaznoy group”), associate 25.000 10,268 15,096 for terminal period.The projections are based on AER’s borrowings AER is obliged to service. Investee-specific management business plan with profitability adjusted risk is incorporated by applying individual beta factors. JSC MF Technologies (“MFT group”)/ 45.000/ 8,789 45,295 to market levels. AER runs cross-border marketplace The beta factors are evaluated based on publicly available Mail.Ru Group Limited (“MGL”), associate 12.340 business and local business which is currently at the early market data. Other 1,637 8 stage of development. The additional investments (mostly in the form of marketing expenses) can be required Cross-border and local market shares were derived Total 68,385 73,265 for AER to gain its target share of the local e commerce from various sources, including Euromonitor and Russian market with strong competition. association of internet trade companies. AER The fair value of the Group’s holding in AER was estimated in the amount of 35,942. The calculation of the fair value of the Group’s holding EBITDA margin is projected using results of peer On 5 June 2019 the Company, Alibaba.com Singapore in AER is particularly sensitive to the following assumptions: e-commerce companies in developed and developing e-commerce private Limited (“Alibaba”), LLC ‘RDIF The provisional fair values of identified assets and liabilities markets. Investment Management-19’ (“RDIF”), LLC Mail.Ru, of AERreconciled to the Group’s investment in AER Pre-tax discount rate 14.8% and AliExpress Russia Holding PTE.LTD signed as at the date of acquisition are as follows: The amount of the life-long additional investments was an agreement to establish a joint venture onthe basis Cross-border market share 25.0% calculated based on public companies’ benchmarks. Local ofthe existing e commerce businesses of AER and MGL. players in other countries invested about 25–50% of gross Local market share 10.0% On 8 October 2019 MegaFontransferreda 9.97% economic merchandise value to achieve 10% of market share, thus share in MGL to Alibaba inexchange for a 24.3% share EBITDA margin by 2026 13.4% AER may need additional investments of 33,500–77,500 inthe AER. The purpose of the transaction is to create to remain competitive locally. Life-long additional investments a unique e commerce jointventure toprovide best-in-class in marketing and other 33,500-77,500 financial services, media, and other consumer offerings to the Russian consumer base. Sensitivity to changes in key assumptions

The following reasonably possible changes in the key Assets assumptions made independently, with all other Property and equipment 1,037 assumptions constant, would result in the following Intangible assets, other than goodwill 19,534 changes to the fair value of AER: Inventory 1,073 Key assumption Change inkey Change Trade and other receivables 5,633 assumption in fair value Other assets 632 Changeinpre-taxdiscountrateby +1p.p./-1 p.p. ( 7.4%)/+8.6% Cash and cash equivalents 19,647 Change in cross-border market share by +1 p.p./-1 p.p. +4.4%/(4.4%) 47,556 Change in local market share by +1 p.p./-1 p.p. (3.1%)/+3.1% Liabilities Change in EBITDA margin by 2026 by +2p.p./-2 p.p. +6.4%/(6.4%) Trade and other payables (920) Change in life-long investments in marketing and other by +10%/-10% (3.9%)/+3.9% Other liabilities (358) (1,278) Total identifiable net assets at fair value 46,278 The Group’s share in the investment 24.3% The Group’s share of identifiable net assets 11,246 Excess of the consideration transferred over the Group’s share in the fair value of identifiable net assets 24,696 Purchase consideration transferred 35,942

182 183 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

The reconciliation of summarised financial information The reconciliation of the summarised financial information of AERto the carrying amount of the Group’s interest of Garden Ring to the carrying amount of the Group’s in AERis presented below: interest in the joint venture is presented below:

31 December 2019 31 December Assets 2019 2018 Non-current assets 19,919 Assets Cash and cash equivalents 16,206 Non-current assets 46,604 47,430 Other current assets 12,319 Cash and cash equivalents 329 755 48,444 Other current assets 76 45 Liabilities 47,009 48,230 Current financial liabilities (6,784) Liabilities Other liabilities (1,700) Non-current financial liabilities (22,161) (22,774) (8,484) Other non-current liabilities (5,570) (5,685) Total identifiable net assets 39,960 Current financial liabilities (1,859) (1,897) The Group’s share in AER 24.3% Other current liabilities (8) (6) The Group’s share of identifiable net assets of AER 9,710 (29,598) (30,362) Excess of the carrying value of the investment over the Group’s share Total identifiable net assets 17,411 17,868 in the fair value of identifiable net assets 25,344 The Group’s share in Garden Ring 49.999% 49.999% Carrying amount of the Group’s interest in AER 35,054 The Group’s share of identifiable net assets of Garden Ring 8,705 8,934 Excess of the carrying value of the investment over the Group’s share The composition of the Group’s share of loss of AER in the fair value of identifiable net assets 3,932 3,932 accounted for using the equity method is as follows: Carrying amount of the Group’s interest in Garden Ring 12,637 12,866

8 Oct 2019 – 31 Dec 2019 The composition of the Group’s share of the loss of the joint Revenue 6,185 venture accounted for using the equity method is as follows: Expenses (9,239) Depreciation and amortisation (699) Year ended 31 December Income tax 100 2019 2018 Lossand total comprehensive lossof AER (3,653) Loss and total comprehensive loss of Garden Ring (459) (909) The Group’s share in AER 24.3% The Group’s share in the joint venture 49.999% 49.999% The Group’s share of lossand total comprehensive loss of AER (888) The Group’s share of loss and total comprehensive loss of Garden Ring (229) (454)

Garden Ring The Garden Ring joint venture is accounted for using Svyaznoy group The financial results of Euroset after the acquisition the equity method in the consolidated financial of the remaining 50% interest from VEON and before Garden Ring, which owns and operates an office statements. In May 2018 the Group acquired an interest in DTS Retail the disposal to the Svyaznoy group were presented building in the center of Moscow,is the Group’s joint Limited (“Svyaznoy group”), which will amount to 25% in the consolidated income statement line “Share of loss venture with Sberbank. The Group has a ten-year lease of the outstanding shares plus one share after satisfaction of associates and joint ventures” in the amount of 679 (loss). agreement with Garden Ring for a part of the building. of certain conditions, in exchange for contributing This building is the corporate headquarters of the Group, to the Svyaznoy group 100% of the shares of Euroset The fair value of the Group’s holding in the Svyaznoy group which consolidates the Group’s operations in Moscow and the Lonestar Enterprises Ltd loan with the ascribed was estimated in the amount of 15,440. It approximated into the single location. The remaining part of the building value of 1,730, including accrued interest. the fair value of the consideration transferred by the Group is mostly leased by Sberbank. (the shares of Euroset and Lonestar loan receivable). The primary reason for the transaction was to enable MegaFon to acquire an interest in the largest retail chain in the technology sector in the Russian Federation to take part in future development of omnichannel networks.

184 185 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

The fair values of identified assets and liabilities The reconciliation of the summarised financial information of the Svyaznoy group reconciled to the Group’s investment of the Svyaznoy group to the carrying amount in the Svyaznoy group as at the date of acquisition of the Group’s interest in the Svyaznoy groupis presented are as follows: below:

Assets 31 December Property and equipment 1,896 2019 2018 Intangible assets, other than goodwill 48,947 Assets Inventory 25,307 Non-current assets 72,541 52,986 Trade and other receivables 9,612 Cash and cash equivalents 4,199 9,859 Other assets 2,132 Other current assets 28,436 43,232 Cash and cash equivalents 9,210 105,176 106,077 97,104 Liabilities Liabilities Non-current financial liabilities (21,730) (2,442) Loans and borrowings (19,567) Other non-current liabilities (9,217) (10,255) Deferred tax liabilities (9,919) Current financial liabilities (60,926) (69,216) Trade and other payables (44,099) Other current liabilities (2,840) (3,434) Other liabilities (1,410) (94,713) (85,347) (74,995) Total identifiable net assets 10,463 20,730 Total identifiable net assets at fair value 22,109 The Group’s share in the Svyaznoy group 25% 25% The Group’s share of identifiable net assets of the Svyaznoy group 2,616 5,183 The Group’s share in the investment 25% Excess of the carrying value of the investment over the Group’s share The Group’s share of identifiable net assets 5,527 in the fair value of identifiable net assets 7,652 9,913 Excess of the consideration transferred over the Group’s share Carrying amount of the Group’s interest in the Svyaznoy group 10,268 15,096 in the fair value of identifiable net assets 9,913 Purchase consideration transferred 15,440 The composition of the Group’s share of the loss of the Svyaznoy group accounted for using the equity The disposal of Euroset resulted in a 651 gain, presented method is as follows: in the consolidated income statement line “Share of loss of associates and joint ventures”. Year to Seven months ended 31 December 31 December Loss and total comprehensive loss of the Svyaznoy group (10,268) (1,375) The Group’s share in the Svyaznoy group 25% 25% The Group’s share of loss and total comprehensive loss of the Svyaznoy group (2,567) (344) Investment impairment (2,261) — The Group’s share of loss and total comprehensive loss of the Svyaznoy group and investment impairment loss (4,828) (344)

186 187 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Total summarised profit and loss information of Garden The reconciliation of the summarised financial information Ring and Svyaznoy group is as follows: of MFT group to the carrying amount of the Group’s interest in MFT group is presented below: Year ended 31 December 31 December 2019 2019 2018 Assets Revenue 118,025 107,056 Depreciation and amortisation (5,555) (3,745) Non-current assets 111,491 Interest expense (8,902) (4,450) Cash and cash equivalents 9,789 Income tax 1,177 (1,095) Other current assets 17,713 138,993 Liabilities Svyaznoy groupinvestment impairment The changes in the carrying value of the investment Non-current financial liabilities (19,474) in Svyaznoy group for the year ended 31 December 2019 At 31 December 2019 the Group determined that are as follows: Other non-current liabilities (10,642) the investment in the Svyaznoy group is impaired as a result Current financial liabilities (30,408) of the Svyaznoy group’s not meeting its original budget At 1 January 2019 15,096 for 2019 due to one-off costs associated with the merger Other current liabilities (13,890) of the Euroset and Svyaznoy retail networks, as well as Investment impairment loss (2,261) (74,414) due to the slowdown in the Russian mobile retail market Share of loss of associates which have impacted the profitability of the Svyaznoy Total identifiable net assets 64,579 and joint ventures (2,567) group. The Group has calculated the amount of impairment NCI (62,313) as the difference between the recoverable amount At 31 December 2019 (Level 3) 10,268 of the Group’s investment and its carrying value Total identifiable net assets net of NCI 2,266 and recognisedan impairment loss in consolidated income The Group’s share in MFT group 45% statement in the amount of 2,261. MFT group/MGL The Group’s share of identifiable net assets of MFT group 1,020 The estimated recoverable amount of investment is based MGL is a leading internet services company in Russia. Excess of the carrying value of the investment over the Group’s share on its value in use.The value in use was estimated The Group lost control of MGL in June 2018 (Note 5.1), in the fair value of identifiable net assets 7,769 using the cash flow projections for a six-year period. but maintaineda significant influence over the affairs Carrying amount of the Group’s interest in MFT group 8,789 The calculation of the recoverable amount of the investment of MGL as at 31 December 2018 as it held approximately is particularly sensitive to the following assumptions: 12% of the total issued shares of MGL, or approximately 31% of the voting rights. The composition of the Group’s share of the profit of MFT group accounted for using the equity method 31 December 2019 After contributing a 9.97% economic share in MGL is as follows: Pre-tax discount rate 13.3% to Alibaba in October 2019 (as described above), the Group is now holding its remaining approximately 2% indirect Average annual goods sales revenue Year to economic interest in MGL (with approximately 26.7% voting 31 December 2019 growth rate during the forecast period 7.7% rights) via its 45%-owned associate JSC MF Technologies Revenue 96,231 Terminal growth rate 2.4% (“MFT group”). Expenses (68,066) EBITDA margin during The financial results of the direct investment in MGL Depreciation and amortisation (16,769) the forecast period 3.5% (ordinary shares) from 1 January 2019 to the date of the shares’ disposal in October 2019 are presented Interest income 585 in the consolidated income statement line “Share of loss Interest expense (1,459) of associates and joint venturesand investment impairment loss” in the amount of 382 (loss). Other income and expenses, net 7,738 Income tax expense (2,635) Profit 15,625 Profit attributable to NCI (14,856) OCI 17 Profit and total comprehensive income of MFT group 786 The Group’s share in MFT group 45% The Group’s share of profit and total comprehensive income of MFT group 354

188 189 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

The reconciliation of summarised financial information Sale of City-Mobil De-recognition of financial assets of MGL to the carrying amount of the Group’s interest in the associate is presented below: In November 2019 the Group sold approximately 5.87% A financial asset is de-recognised when the rights out of approximately 12% interest in LLC City-Mobil to receive cash flows from the asset have expired (“City-Mobil”), a taxi aggregator, for a cash consideration or the Group has transferred its rights to receive cash 31 December 2018 in the amount of 962. flows from the asset or has assumed an obligation to pay Assets the received cash flows in full without material delay Non-current assets 67,857 Then, after subsequent changes in the holdings to a third party under a ‘pass-through’ arrangement; of the other shareholdersfollowing additional contributions and either (a) the Group has transferred substantially all Cash and cash equivalents 11,723 by them, MegaFon’s interest in City-Mobil was diluted the risks and rewards of the asset, or (b) the Group has Other current assets 13,469 to approximately 2.63%. The sale resulted in a gain neither transferred nor retained substantially all the risks of approximately 1,281 recognised in the consolidated and rewards of the asset, but has transferred control 93,049 income statement line ‘Share of loss of associates and joint of the asset. Liabilities ventures and investment impairment loss’. Other non-current liabilities (20,756) Impairment of financial assets Current financial liabilities (13,903) 3.5. Financial assets and liabilities Other current liabilities (11,101) The Group recognises loss allowances for expected credit losses (“ECLs”) on financial assets measured at amortised (45,760) Accounting policies cost and contract assets. These loss allowances Total identifiable net assets 47,289 are measured at an amount equal to lifetime ECLs. ECLs are a probability-weighted estimate of credit losses. NCI of MGL (261) Initial recognition and measurement For majority of receivables loss allowance is estimated Total identifiable net assets net of NCI 47,028 using the provision matrix which specifies fixed provision The Group’s share in MGL 12.34% Financial assets and financial liabilities are recognised rates depending on the number of days that a receivable initially at fair value plus transaction costs that are directly is past due. The provision rates are based on the Group’s The Group’s share of identifiable net assets of MGL 5,803 attributable to the acquisition or issue of the financial asset historical experience and current expectations of future Excess of the carrying value of the investment over the Group’s share or financial liability, except for a financial asset or financial cash flows. Credit losses are measured at present in the fair value of identifiable net assets 39,492 liability accounted for at fair value through profit or loss, value of all cash shortfalls, that is the difference in which case transaction costs are expensed. between the cash flows due to the entity in accordance Carrying amount of the Group’s interest in MGL 45,295 with the contract and the cash flows that the Group expects to receive. ECLs are discounted at the effective The composition of the Group’s share of loss of MGL Subsequent measurement of financial assets interest rate of the financial asset. accounted for using the equity method is as follows: and liabilities The carrying amount of the asset is reduced through Year ended The subsequent measurement of financial assets the use of an allowance account and the amount of the loss 31 December 2018 and liabilities depends on their classification as described is recognised in profit or loss. Financial assets together below: with the associated allowance are written off when there Revenue 35,946 • Fair value through profit or loss. Derivatives is no realistic prospect of future recovery and all collateral Expenses (35,290) are accounted for at fair value through profit or loss has been realised or has been transferred to the Group. unless they are designated as effective hedging If, in a subsequent year, the amount of the estimated Depreciation and amortisation (6,059) instruments. Financial assets and liabilities accounted impairment loss increases or decreases because Interest income 280 for at fair value through profit or loss are carried of an event occurring after the impairment was recognised, Interest expense (2) in the consolidated statement of financial position the previously recognised impairment loss is increased at fair value with changes in fair value being recognised or reduced by adjusting the allowance account. If a write- Other income and expenses, net (758) in profit or loss, in the ‘Net gain/(loss) on financial off is later recovered, the recovery is credited to the relevant Income tax expense (101) instruments’ line. costs in profit or loss. • Amortised cost. Non-derivative financial assets Loss (5,984) with fixed or determinable payments that are not quoted OCI (228) in an active market such as trade and other receivables, De-recognition of financial liabilities loans receivable, and loans and borrowings are classified Loss attributable to NCI 83 as financial instruments at amortised cost. After initial A financial liability is de-recognised when the obligation Loss and total comprehensive loss of MGL (6,129) measurement, such instruments are subsequently under the liability is discharged, cancelled or expires. The Group’s share in MGL 12.34% measured at amortised cost using the effective interest When an existing financial liability is replaced by another rate (“EIR”) method. Amortised cost is calculated by taking from the same lender on substantially different terms, The Group’s share of loss and total comprehensive loss of MGL (756) into account any discount or premium on acquisition or the terms of an existing liability are substantially and fees or costs that are an integral part of the EIR. modified, such an exchange or modification is treated The amortisation based on EIR is included in profit or loss. as the de-recognition of the original liability • Fair value through OCI. Derivative financial and the recognition of a new liability. The difference instruments designated as effective hedging instruments in the respective carrying amounts is recognised within are accounted for at fair value through OCI. profit or loss.

190 191 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Disclosures Financial liabilities are as follows:

Financial assets are as follows: 31 December 2019 2018 31 December Trade and other payables at amortised cost 54,607 53,235 2019 2018 Financial liabilities at amortised cost: Trade and other receivables at amortised cost (Note 3.6) 37,104 29,137 Loans and borrowings: Other financial assets: Loans and borrowings 288,755 271,487 Financial assets at fair value through profit or loss: Ruble bonds 87,003 56,007 Investments in City-Mobil(Note 3.4) 431 — Total loans and borrowings 375,758 327,494 Cross-currency swap not designated as hedge — 697 Total current loans and borrowings (25,692) (39,232) Other 125 — Total non-current loans and borrowings 350,066 288,262 Total financial assets at fair value through profit or loss 556 697 Lease liabilities (Note 3.2) 90,899 4,265 Financial assets at amortised cost: Current lease liabilities (13,584) (61) Short-term bank deposits in HK dollars — 4,352 Non-current lease liabilities 77,315 4,204 Loans receivable from related parties (Note 5.3) 16,814 5,067 Other financial liabilities at amortised cost: Other deposits 407 1,307 Deferred and contingent consideration 568 — Other 360 361 Other liabilities 665 509 Total financial assets at amortised cost 17,581 11,087 Total financial liabilities at amortised cost 467,890 332,268 Total other financial assets 18,137 11,784 Other current financial assets (2,898) (7,955) Financial liabilities at fair value through profit and loss: Other non-current financial assets 15,239 3,829 Cross-currency swaps not designated as hedges 1,570 84 Total financial assets 55,241 40,921 Total financial liabilities at fair value through profit and loss 1,570 84 Total current financial assets (40,002) (37,092) Total other financial liabilities 2,803 593 Total non-current financial assets 15,239 3,829 Other current financial liabilities (251) (84) Other non-current financial liabilities 2,552 509 Total financial liabilities 524,067 385,587 Loans receivable from related parties Other loansgranted Total current financial liabilities (94,134) (92,612) In December 2019 the Group made a 12,560 loan During the year ended 31 December 2019 the Group Total non-current financial liabilities 429,933 292,975 to USM Telecom LLC (Note 5.3), a related party. The Group made some loans to its associates in the total amount recognised the loan at fair value which was estimated of 2,800 which were repaid in the same reporting period. by discounting the expected cash flows using the prevailing market rate of interest for a similar instrument. The difference between the fair value of the loan and cash received of 979, net of tax,has been recognised directly in retained earnings in equity as the loan is treated as a transaction with the shareholder.

192 193 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

3.5.1. Cash and cash equivalents Disclosures Loans and borrowings Ruble bonds

Cash and cash equivalents are as follows: In January-December 2019 the Group drew down In February 2019 the Group placed its BO-001P-05 Accounting policies from different banks and financial institutions 170,663 series bonds in the amount of 20,000 for a term of three under fixed-rate and floating-rate Ruble-denominated years at an interest rate of 8.55% per annum to be paid Cash and cash equivalents comprise cash on hand facilities for terms of between one and five years to finance semi-annually. and deposits in banks with original maturities of three general corporate needs and repaid Ruble-denominated months or less. fixed-rate loans in the amount of 126,180. In March 2019 the Group placed its BO-001P-06 and BO-002P-01 series bonds in the total amount of 10,000 31 December In 2019 the Group early repaid approximately $356 million for a term of five years at an interest rate of 8.90% per (23,093 at the exchange rate as of payment date) annum to be paid semi-annually. 2019 2018 of US dollar-denominated fixed and floating-rate loans, Cash at bank and on hand in which were due at the end of 2021 and of 2022. In April 2019 the Group placed its BO-002P-02 series bonds in the amount of 10,000 for a term of seven Rubles 2,572 3,749 In October 2019 the Group received a loan in the amount years at an interest rate of 8.90% per annum to be paid US dollars 607 553 of 1,921 for a term of up to 3 years from its associate semi-annually. AER (Note 5.3). The Group recognised the loan at fair Euros 68 216 value which was estimated by discounting the expected In May 2019 the Group redeemed in full at par its Other 12 2 cash flows using the prevailing market rate of interest BO-001P-01 bonds in an aggregate principal amount for a similar instrument. The difference between the fair of 10,000. The Group initially issued these bonds in May Short-term bank deposits in value of the loan and cash received in the amount of 343 2016 with a maturity of three years at an interest rate Rubles 49,292 232 has been apportioned between the share of 24.3% relating of 9.95% per annum. US dollars 155 16,423 to the Group’s investment in AER and the remaining amount which was recognised in the consolidated income Euros — 6,039 statement, in the ‘Net gain/(loss) on financial instruments’ Covenant requirements Total cash and cash equivalents 52,706 27,214 line. The majority of the Company’s financing facilities contain restrictive covenants with certain permitted exceptions. 3.5.2. Loans and borrowings

Principal amounts outstanding under loans and borrowings are as follows:

Interest Rate Maturity 31 December 2019 2018 Loans and borrowings: Ruble loans – fixed rates 0%-11.13% 2020-2024 236,850 230,855 Ruble loans – floating rates 6.9%-7.32% 2021-2023 38,000 — US dollar loans – fixed rate 0% 2020 71 6,340 US dollar loans – floating rates — 20,598 Euro loans – floating rates EURIBOR + 0.56% 2024-2027 14,684 15,575 Total loans and borrowings 289,605 273,368 Ruble bonds 2021-2026 with put option in 2021 7.2%-9.9% and 2023 85,000 55,000 Total 374,605 328,368 Total current (23,703) (37,909) Total non-current 350,902 290,459

194 195 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

3.5.3. Reconciliation of movements of liabilities to cash used in financing activities

Liabilities Liabilities Equity Total Loans and borrowings Derivatives Lease liabilities Retained Earning Treasury shares Balance as of 31 December 2018 327,494 (613) 4,265 151,766 (94,087) 388,825 ROUA recognised at 1 January 2019 — — 88,651 — — 88,651 Balance as of 1 January 2019 327,494 (613) 92,916 151,766 (94,087) 477,476 Proceeds from loans and borrowings, net of fees paid 265,524 — — — — 265,524 Repayment of loans and borrowings (213,934) (270) — — — (214,204) Interest paid (32,962) (899) (9,664) — — (43,525) Purchase of outstanding shares — — — — (86,574) (86,574) Sale of own shares — — — (3,232) 58,958 55,726 Lease payments — — (11,864) — — (11,864) Total cash flows used in financing activities 18,628 (1,169) (21,528) (3,232) (27,616) (34,917) Loss on disposal of non-current assets — — 187 — — 187 Finance costs 35,027 1,110 9,536 — — 45,673 Foreign exchange gain, net (3,704) — — — — (3,704) (Gain)/loss on financial instruments, net (260) 2,242 — — — 1,982 Assets-related other changes (1,427) — 9,788 — — 8,361 Equity-related other changes — — — 7,108 — 7,108 Balance as of 31 December 2019 375,758 1,570 90,899 155,642 (121,703) 502,166 Liabilities Liabilities Equity Total Loans and borrowings Derivatives Finance lease liabilities NCI Treasury shares Balance as of1 January 2018 264,110 3,842 4,222 55,536 (17,387) 310,323 Proceeds from loans and borrowings, net of fees paid 124,987 — — — — 124,987 Repayment of loans and borrowings (67,409) (2,961) — — — (70,370) Interest paid (25,109) (403) (477) — — (25,989) Dividends paid to NCI — — — (247) — (247) Purchase of outstanding shares — — — — (76,700) (76,700) Finance lease payments — — (8) — — (8) Total cash flows used in financing activities 32,469 (3,364) (485) (247) (76,700) (48,327) Finance costs 26,125 485 493 — — 27,103 Foreign exchange loss, net 7,447 1,096 — — — 8,543 Gain on financial instruments, net — (713) — — — (713) Changes through OCI — (1,959) — — — (1,959) Acquisition of subsidiariesand discontinued operations (Notes 5.1,5.4) 13 — — (55,265) — (55,252) Assets-related other changes (2,670) — 35 — — (2,635) Equity-related other changes — — — (288) — (288) Balance as of 31 December 2018 327,494 (613) 4,265 (264) (94,087) 236,795

196 197 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

3.5.4. Derivative financial instruments When the Group enters into derivative instruments which Foreign currency forwards designated as cash flow 3.5.5. Fair values and hedging activities it designates as cash flow hedges, at the inception hedges of a hedge relationship, the Group formally designates and documents the hedge relationship to which During the year ended 31 December 2016 the Group Accounting policies Accounting policies the Group wishes to apply hedge accounting and the risk entered into a number of US dollar forward purchase management objective and strategy for undertaking agreements that limited the exposure from changes The fair value of financial instruments recorded Derivative financial instruments, which include foreign the hedge. At inception such hedges are expected to be in US dollar exchange rates on certain long-term debts. in the consolidated statement of financial position and/ currency forwards and cross-currency swaps, are initially highly effective in achieving offsetting changes in cash The forwards were designated and qualified as cash flow or disclosed in the notes that are traded in active markets recognised in the consolidated statement of financial flows and are assessed on an ongoing basis to determine hedges of foreign currency risk. Forwards were fully settled at each reporting date is determined by reference to quoted position at fair value on the date a derivative contract that they actually have been highly effective throughout in 2018 and earlier and affected consolidated income market prices or dealer price quotations, without any is entered into and are subsequently re-measured the financial reporting periods for which they were statement in those periods. deduction for transaction costs. For financial instruments at their fair value. Fair values are obtained from quoted designated.The effective portion of changes in the fair value not traded in an active market, the fair value is determined market prices and DCF models as appropriate. Derivatives of derivatives that are designated and qualify as cash flow The table below presents the effect of the Group’s using appropriate valuation techniques, which include are included within financial assets at fair value through hedges are recognised in OCI. The gain or loss relating derivative financial instruments designated as cash using recent arm’s length market transactions, reference profit or loss when fair value is positive and within financial to the ineffective portion is recognised immediately in profit flow hedges on the consolidated income statement to the current fair value of another instrument that liabilities at fair value through profit or loss when fair value or loss. and consolidated statement of other comprehensive is substantially the same, a DCF analysis, or other valuation is negative. Certain derivatives embedded in other financial income for the year ended 31 December 2018: models. instruments are treated as separate derivatives when The Group uses derivatives to manage interest rate their economic risks and characteristics are not closely and foreign currency risk exposures. The Group does 2018 The inputs to these models are taken from observable related to those of the host contract and the combined not hold or issue derivatives for trading purposes. markets where possible, but where this is not feasible, instrument is not measured at fair value, with changes Foreign currency forwards: a degree of judgment is required in establishing fair in fair value being recognised in profit or loss. Amount of gainrecognised in OCI 863 values. The judgments include considerations of inputs Disclosures such as liquidity risk, credit risk and volatility. Changes The Group has derivatives which it did not designate Amount of loss reclassified from OCI in assumptions about these factors could affect as hedges. The changes in the fair value of such derivative The Group had the following outstanding cross-currency into foreign exchange loss, net 1,096 the reported fair value of financial instruments. instruments are reported in the profit or loss. swaps stated at their notional amounts: Deferred tax on movements in OCI (392) The Group uses the following hierarchy for determining Total in OCI 1,567 and disclosing the fair value of financial instruments Original 31 December 2019 31 December 2019 currency by valuation technique: Millions, Millions, Millions, Millions, • Level 1: original currency Rubles original currency Rubles Loss on financial instruments quoted (unadjusted) prices in active markets Cross-currency swaps: for identical assets or liabilities; Net loss on financial instruments recognised in profit • Level 2: not designated as hedges Euro 209 14,492 97 7,708 or loss for the year ended 31 December 2019 consisted other techniques for which all inputs which have not designated as hedges US dollar — — 118 8,198 mainly of 2,242loss from change in fair value of cross- a significant effect on the recorded fair value currency swaps not designated as hedges (31 December are observable, either directly or indirectly; Total cross-currency swaps 14,492 15,906 2018: 713 gain). • Level 3: techniques which use inputs that have a significant effect on the recorded fairvalue that are not based Derivatives not designated as hedging instruments In August 2018, the Company entered into cross-currency on observable market data. swap agreements with a notional amount of $129 million In February, March and June 2019 the Company entered (8,962 at the exchange rate as of 31 December 2018) into cross-currency swap agreements with a combined and Euro 106 million (8,423 at the exchange rate notional amount of Euro 143 million (9,916 at the exchange as of 31 December 2018) that limit the exposure from changes rate as of 31 December 2019) that limit the exposure in US dollar and Euro exchange and interest rates on certain from changes in the Euro exchange and interest rates long-term debt. on certain long-term debt. The terms of the swap agreements did not meet In June 2019 the Group early settled cross-currency swap the requirements for hedge accounting, therefore agreements with a combined notional amount of $129 the Group reported all gains and losses from the change million (7,986 at the exchange rate as of 31 December 2019) in fair value of these derivative financial instruments following the early repayment of US dollar-denominated directly in the consolidated income statement. loans to which the cross-currency swaps related.

198 199 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Disclosures The Group, in connection with its current activities, Disclosures is exposed to various financial risks, such as foreign Set out below is a comparison by class of the carrying currency risks, interest rate risks and credit risks. The following tables summarise the valuation of financial amounts and fair values of the Group’s financial The Group manages these risks and monitors their assets and liabilities measured at fair value on a recurring instruments that are carried in the consolidated financial exposure on a regular basis. basis by the fair value hierarchy: statements: The fair values of cross-currency swaps are based on a forward yield curve and represent the estimated Carrying amount Fair value amount the Group would receive or pay to terminate these 31 December 31 December agreements at the end of the reporting period, taking 2019 2018 2019 2018 into account current interest rates, foreign exchange spot and forward rates, creditworthiness, nonperformance Financial assets: risk, and liquidity risks associated with current market Financial assets at fair value conditions. through profit or loss: Investments in City-Mobil Level 3 431 — 431 — Cross-currency Investments Total financial Cross-currency Total financial swaps and other in City-Mobil assets swaps liabilities Cross-currency swaps not designated as hedges Level 2 — 697 — 697 31 December 2019 Other Level 3 125 — 125 — Level 1 — — — — — Financial assets at amortised cost: Level 2 — — — (1,570) (1,570) Short-term bank deposits Level 2 — 4,352 — 4,352 Level 3 125 431 556 — — Loans receivable from related parties Level 2 16,814 5,067 16,814 5,067 Total as of 31 December 2019 125 431 556 (1,570) (1,570) Other deposits Level 2 407 1,307 407 1,307 31 December 2018 Other Level 3 360 361 360 361 Level 1 — — — — — Total financial assets 18,137 11,784 18,137 11,784 Level 2 697 — 697 (84) (84) Financial liabilities: Level 3 — — — — — Financial liabilities at amortised cost: Total as of 31 December 2018 697 — 697 (84) (84) Loans and borrowings Level 2 288,755 271,487 305,689 283,473 Ruble bonds Level 1 87,003 56,007 86,263 54,568 During the years ended 31 December 2019 and 31 December 2018 there were no transfers between levels of the fair value Deferred and contingent hierarchy. consideration Level 2 568 — 568 — Other liabilities Level 3 665 509 665 538 Financial liabilities at fair value through profit or loss: Cross-currency swaps not designated as hedges Level 2 1,570 84 1,570 84 Total financial liabilities 378,561 328,087 394,755 338,663

Valuation techniques and assumptions Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group Management has determined that cash, short-term could realise in a current market exchange. deposits, other financial assets, trade receivables, trade payables, bank overdrafts and other current The fair value of loans receivable from related parties liabilities approximate their carrying amounts largely due approximates their carrying values. to the short-term maturities of these instruments. The fair values of the Group’s loans and borrowings The Group, using available market information and other liabilities carried at amortised cost, except and appropriate valuation methodologies, where they exist, for market quoted bonds, are determined by using a DCF has determined the estimated fair values of its financial method using a discount rate that reflects the issuer’s instruments. However, judgment is necessarily required borrowing rate as at the end of the reporting period. to interpret market data to determine the estimated fair The own nonperformance risk as at 31 December 2019 value. and 2018 was assessed to be insignificant.

200 201 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

3.6. Trade and other receivables Disclosures

The ageing analysis of trade and other receivables that Current non-financial assets are as follows: are not impaired is as follows: 31 December 31 December 2019 2018 2019 2018 Prepayments for services 2,530 3,791 Neither past due nor impaired 27,081 20,004 VAT receivable 4,065 3,051 Past due but not impaired: Deferred costs 380 419 Less than 30 days 3,362 2,949 Prepaid taxes, other than income tax 456 502 30–90 days 2,476 4,364 Prepayments for inventory 1 3 More than 90 days 4,185 1,820 Total current non-financial assets 7,432 7,766 Total trade and other receivables 37,104 29,137 Non-current non-financial assets are as follows: The following table summarises the changes in the impairment allowance for trade and other receivables 31 December for the years ended 31 December: 2019 2018 2019 2018 Deferred costs, non-current 8,587 7,033 Balance at beginning of year 3,540 3,191 Long-term advances 505 498 Change in the impairment allowance 2,169 3,866 Total non-current non-financial assets 9,092 7,531 Discontinued operations (Note 5.1) — (288) Accounts receivable written off (2,773) (3,229) Current non-financial liabilities are as follows: Balance at end of year 2,936 3,540 31 December 2019 2018 3.7. Inventory 3.8. Non-financial assets Advances from customers 10,029 10,620 and liabilities VAT payable 4,146 2,003 Accounting policies Current portion of deferred revenue 2,757 3,227 Accounting policies Inventory, which primarily consists of telephone handsets, Taxes payable, other than income tax 1,085 1,589 portable electronic devices, accessories and USB modems, Other current liabilities 247 222 is stated at the lower of cost and net realisable value. Value-added tax Cost is determined using the weighted-average cost Total current non-financial liabilities 18,264 17,661 method. Net realisable value is the estimated selling price Value added tax (“VAT”) related to revenues is generally in the ordinary course of business less the estimated costs payable to the tax authorities on an accrual basis when Non-current non-financial liabilities are as follows: necessary to make the sale. invoices are issued to customers. VAT incurred on purchases may be offset, subject to certain restrictions, against 31 December VAT related to revenues, or can be reclaimed in cash Disclosures from the tax authorities under certain circumstances. 2019 2018 Deferred revenue 3,957 3,789 In 2019, inventories in the amount of 35,987 (2018: 25,863) Management periodically reviews the recoverability were recognized as an expense during the year and included of VAT receivables and believes the amount reflected Other non-current liabilities 43 106 in ‘Cost of revenue’. The amount of inventory write-down in the consolidated financial statements is fully recoverable Total non-current non-financial liabilities 4,000 3,895 to net realisable value and other inventory losses recognised within one year. in ‘Cost of revenue’ line in the consolidated income statement for the year ended 31 December 2019 is 775 (2018: 1,108).

202 203 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

3.9. Assets held for sale Decommissioning provision Disclosures

As at 31 December 2018 the Group classified its investments The Group has certain legal obligations related to rented The following table describes the changes in Forpost (Note 5.3) and another insignificant associate sites for base stations and masts, which include to the decommissioning provision for the years ended and the net assets of its subsidiary LLC “CoreClass” requirements to restore the real estate upon which 31 December: (Note 5.4) as assets held for sale. In January 2019 the base stations and masts are located upon their being the Group sold its investments in Forpost and another decommissioned. Decommissioning costs are determined 2019 2018 insignificant associate for total consideration by calculating the present value of the expected costs of approximately 270. The Group also sold 100% to settle the obligation using estimated cash flows, Balance at beginning of year 5,117 4,378 of LLC “CoreClass” for a cash consideration of 640 and are recognised as part of the cost of the particular Revisions in estimated cash flows 711 319 receivable over two years from the date of acquisition. asset. The cash flows are discounted at the current pre-tax The sales resulted in an insignificant gain. rate that reflects the risks specific to the decommissioning Net additions 69 21 liability. The unwinding of the discount is expensed Unwinding of discount 483 399 in profit or loss as finance costs. The estimated future Balance at end of year 6,380 5,117 3.10. Provisions costs of decommissioning are reviewed annually and adjusted as appropriate. Changes in estimated liability resulting from revisions of the estimated future costs Revision of estimates affected the cost of property Accounting policies or in the discount rate applied are added to or deducted and equipment (Note 3.1) and 216 wasrecognised in ‘Loss from the cost of the asset, except where a reduction on disposal of non-current assets’ in consolidated income Provisions are recognised when the Group has a present in the provision is greater than the unamortisedrecognised statement for the year ended 31 December 2019. legal or constructive obligation as a result of past events, cost, in which case the recognised cost is reduced it is probable that an outflow of resources will be required to nil and the remaining adjustment is recognised to settle the obligation, and the amount can be reliably in the consolidated income statement. estimated. Provisions are not recognised for future 4. Equity operating losses. In determining the best estimate of the provision, assumptions and estimates are made in relation to discount Provisions are measured at the present value rates, the expected cost to dismantle and remove the asset Accounting policies Transactions with own shares of the expenditures expected to be required to settle from the site, including long-term inflation forecasts, the obligation using a pre-tax rate that reflects current and the expected timing of those costs. Ordinary shares are classified as equity. Incremental costs During August-September 2018 the Group purchased market assessments of the time value of money directly attributable to the issue of new shares are shown through the Company’s wholly owned subsidiary MegaFon and the risks specific to the obligation. Any increase in equity as a deduction, net of tax, from the proceeds. Investments (Cyprus) Limitedby way of a tender offer in the provision due to passage of time is recognised 115,317,504 of the ordinary shares and GDRs, representing as finance costs. The Company’s own issued equity instruments that 18.6% of the Company’s issued shares, for 76,700 including are reacquired (treasury shares) are recognised at cost transaction costs. and deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation On 10 December 2018 the Group cancelled all remaining of the Group’s own equity instruments. Any difference GDRs held by members of the Group and received between the carrying amount and the consideration the corresponding number of ordinary shares. received upon any subsequent sale is recognised in equity. Upon this cancellation of the GDRs the Group, together with its controlling shareholders (Note 1), then held more Disclosures than 75% of the Company’s issued ordinary shares, which, according to the Federal Law “On Joint Stock Companies”, required that a mandatory tender offer be Share capital made to the other shareholders to acquire the shares held by them. As of 31 December 2019 and 2018, the Company had 100,620,000,000 authorised ordinary shares with a par Accordingly, the Company’s Board of Directors, value of 0.1 Rubles, of which 620,000,000 were fully paid at a meeting held on 9 January 2019, approved the making issued shares, including 435,970,620 (2018: 480,383,463) of a mandatory tender offer for the remaining outstanding outstandingshares and 184,029,380 (2018: 139,616,537) ordinary shares (other than those held by the Group shares classified as treasury shares (held through its wholly and related companies) at a price of 659.26 Rubles per owned subsidiary, MegaFon Finance LLC). ordinary share.

204 205 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

As of 7 March 2019, the expiration date of the mandatory Accordingly, at 31 December 2019 the Group held 29.68% tender offer, a total of 126,246,094 ordinary shares of the Company’s issued ordinary shares which, together 5. Additional notes (or 20.36% of the issued ordinary shares) had been with the issued ordinary shares held by its other related tendered. companies, constituted 100% of all the issued ordinary shares of the Company. 5.1. Discontinued operations The Group accounted for its remaining interest in MGL On 28 March 2019 the Group sold 86,800,000 as an associate as it believed that it still had a significant of its ordinary shares with a total cost of 58,958 In January 2018 the Group established an entity named influence over MGL through its remaining shareholding. to USM Telecom LLC, a related party, for cash Annual dividend payment JSC MF Technologies to which in May 2018 the Group consideration of 55,726 (or 642 Rubles per share) contributed 11,500,100 Class A shares of MGL, representing The fair value of the remaining interest in MGL had been which was paid in November 2019. No dividends were declared in respect of the 2019 approximately 5% of the total shares (and approximately estimated in the amount of 46,052 at 9 June 2018. or 2018 financial years. 59% of the voting shares) of MGL, through a series The fair value of the Group’s interest in MGL’s Class On 6 June 2019 the Group completed the buy-out of transactions. After that, in June 2018, the Group sold A shares had been estimated based on the selling price of the remaining shareholders who had not tendered a 55% interest in JSC MF Technologies to LLC Financial of the shares in the above-mentioned transaction, by acquiring the remaining 4,966,749 ordinary shares, Other capital reserves Investments, Gazprombank and LLC RT-Business and the fair value of the Group’s interest in MGL’s ordinary which constituted approximately 0.8% of the issued Development (a subsidiary of Rostec) for an aggregate shares had been estimated based on the market quote ordinary shares, for cash consideration of 659.26 Rubles The disaggregation of other capital reserves and changes cash consideration of $247.5 million (15,510 at the exchange for the shares. per ordinary share. of other comprehensive income by each type of reserve rate as of the payment day). in equity is shown below: Profit/(loss) from discontinued operations for the year Total cash consideration for ordinary shares purchased The sale resulted in decreasing the Group’s interest ended 31 December 2018 is presented below: during the year ended 31 December 2019 amounted in MGL to approximately 12% of the total issued shares, to 86,574 including transaction costs. or approximately 31% of the voting rights. Accordingly, the Group determined that it had lost control over MGL Foreign Cash flow Share-based Property and Reserve Transactions­ Total other and discontinued consolidating this subsidiary starting currency hedge compen- equipment fund with non- capital from 9 June 2018. translation reserve sation revaluation con-trolling reserves reserve reserve reserve interests 2018 As of 1 January 2018 (1,076) (1,567) 1,488 — 15 (23) (1,163) Revenue 30,439 Foreign currency Expenses (32,879) translation (566) — — — — — (566) Change in fair value (Loss)/profit before tax from discontinued operations (2,440) of cash flow hedges Income tax (543) (Note 3.5.4) — 1,567 — — — — 1,567 (Loss)/profit from discontinued operations, net of tax (2,983) Discontinued operations (Note 5.1) 57 — — — — — 57 Gain on sale of discontinued operations and revaluation of the remaining investment in MGL 18,208 As of 31 December 2018 (1,585) — 1,488 — 15 (23) (105) Income tax on gain on sale of discontinued operations and the revaluation gain (3,641) Foreign currency Profit for the year from discontinued operations, net of tax 11,584 translation 425 — — — — — 425 Attributable to equity holders of the Company 13,987 Revaluation — — — 57,610 — — 57,610 Attributable to NCI (2,403) Other movements (6) — — — — — (6) 11,584 As of 31 December 2019 (1,166) — 1,488 57,610 15 (23) 57,924 Cash flows generated from the sale of a portion Cash flows generated by MGL for the years ended The foreign currency translation reserve is used to record The property and equipment revaluation reserve is used of the Group’s interest in MGL described above 31 December 2018 are presented below: exchange differences arising from the translation to record upward revaluation to fair values of assets which are presented below: of the financial statements of foreign operations. are carried in the financial statements at revalued amounts 2018 (Note 3.1). Cash received from discontinued The cash flow hedge reserve is used to record Net cash flows from operating activities 4,825 operations 15,510 the accumulated impact of derivatives designated The reserve on transactions with NCI is used to record Net cash flows used in investing activities (11,934) as cash flow hedges (Note 3.5.4). differences arising as a result of transactions with NCI that Cash disposed of with discontinued do not result in a loss of control. operations (8,565) Net cash flows used in financing activities (13) The share-based compensation reserve is used Net cash inflow from sale 6,945 Net cash flows generated by MGL ( 7,122) to recognise the value of equity-settled share-based The reserve fund has been established according payment transactions provided to employees, including to the requirements of Russian law and is used to cover key management personnel, as part of their remuneration. the Company’s losses, redemption of its bonds During 2019 and 2018 the Group did not have any and re-purchase of its own shares in the absence equity-settled share-based programmes. The amount of other capital resources. of the reserve relates to previous years awards that expired unexercised.

206 207 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

5.2. Share-based compensation 5.3. Related parties Terms and conditions of transactions with related Svyaznoy parties The following tables provide the total amount of transactions Svyaznoy group is the Group’s associate (Note 3.4) Accounting policies that have been entered into with related parties Outstanding balances as of 31 December 2019 and and before the disposal Euroset was the Group’s and balances of accounts with them for the relevant 31 December 2018 are unsecured. As of 31 December 2019 joint venture with PJSC VimpelCom. The Group had No share-based compensation arrangements were in place financial years: and 31 December 2018, the Group has not recorded a dealership and equipment sales agreement with Euroset during 2019. During 2018 the only share-based compensation any impairment of receivables relating to amounts and now has a dealership and equipment sales agreement was that relating to equity-settled transactions incurred owed by related parties. The assessment is undertaken with the Svyaznoy group which qualifies as a related party by MGL.The cost of those equity-settled transactions was each financial year by examining the financial position transaction. Dealer commissions for connection of new recognised over the period in which the service conditions of the related party and the market in which the related subscribers which represent incremental costs of obtaining were fulfilled in Profit from discontinued operations party operates. a customer contract are deferred and recognised in sales (Note 5.1) while a corresponding amount was recorded and marketing expenses over the expected contract term. as an increase in NCI. During 2019 the Group provided guarantees for obligations payable by the Svyaznoy group in the amount of up For the years ended 31 December to 12,700 (Note 5.8). Garden Ring 2019 2018 Garden Ring, which owns and operates an office building Revenues from USM group 71 12 USM group in the center of Moscow, is the Group’s joint venture with Sberbank. The Group has a lease agreement Revenues from Euroset — 127 The outstanding balances and transactions with with Garden Ring which qualifies as a related party Revenue from MGL’s equity accounted associates — 141 the USM group relate to operations with USM Telecom LLC, transaction. Following the adoption of IFRS 16 the Group USM Holding Company LLC, the Group’s ultimate recognised an asset in the amount of 6,368 and a liability Revenues from Svyaznoy group 11,400 2,394 controlling party, and companies in the USM group. of 6,761 in respect of the lease as at 31 December 2019. Revenues from MGL 168 3 Utilities expenses in the amount of 318 for the year ended 11,639 2,677 In March 2019 the Group sold its ordinary shares 31 December 2019 were recognised directly in operating to USM Telecom LLC for total consideration of 55,726 expenses in the consolidated income statement. Services from USM group 164 1,039 which was paid in November 2019 (Note 4). Services from Euroset — 228 The Group also has a loan receivable from Garden Ring. In December 2019 the Group made a 12,560 interest-free The balance due from Garden Ring at 31 December 2019 Services from Garden Ring 318 1,836 loan to USM Telecom LLC repayable on or before consists mainly of the loan receivable. Interest income Services from MGL’s equity accounted associates — 67 30 June 2021 (Note 3.5). of 2,426 was recognised in respect of the loan for the year Services from Svyaznoy group 3,168 2,230 ended 31 December 2019. The Group is a member of the Not-for-profit Partnership Services from MGL 32 730 “Development, Innovations, Technologies” (the “Partnership”) Services from AER 15 — which was established by companies in the USM group. MGL The Partnership is required to incur education, science Services from Forpost — 167 and other social costs as well as to maintain certain In 2019 MGL was the Group’s associate. During the year 3,697 6,297 social infrastructure assets in Skolkovo Innovation Centre ended 31 December 2019 the Group purchased software which are not owned by MegaFon and not recorded from MGL in the amount of approximately 278. Other non-operating expenses 221 281 in the consolidated statement of financial position. 31 December The Group’s accrued contributions to the Partnership 2019 2018 of 221 during the year ended 31 December 2019 (2018: 190) Compensation to key management personnel are included into other non-operating expenses Due from USM group 11,344 3 in the consolidated income statement. Members of the Board of Directors and the Management Due from Garden Ring 5,525 5,038 Board of the Company are the key management personnel. The amounts recognised as employee benefits expense Due from Svyaznoy group 13,305 3,591 AER loan to key management personnel of the Group for the years Due from MGL 22 7 ended 31 December are as follows: Due from Forpost — 91 AER is an associate of the Group (Note 3.4). In October 2019 the Group received an interest-free loan in the amount 2019 2018 30,196 8,730 of 1,921 for a term of up to 3 years from its associate AER Due to USM group 332 1,861 (Note 3.5). Short-term employee benefits 460 588 Due to AER 1,608 — Long-term incentive programme 233 82 Total 693 670 Due to Svyaznoy group 302 933 Due to MGL 70 780 Due to Forpost — 958 2,312 4,532

208 209 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

5.4. Business combinations 5.5. Financial risk management Interest rate risk At 31 December 2019 approximately 90% of the Group’s loans and borrowings (including the effect of cross- The Group’s principal financial liabilities, other than Interest rate risk is the risk that the fair value or future currency swaps) are at a fixed rate of interest (2018: 94%). Accounting policies derivatives and lease obligations, comprise loans cash flows of a financial instrument will fluctuate because and borrowings, and trade and other payables. of changes in market interest rates. The Group’s exposure The Group applies the acquisition method of accounting The main purpose of these financial liabilities is to finance to the risk of changes in market interest rates relates Interest rate sensitivity and recognises the assets acquired, the liabilities assumed the Group’s operations. The Group has trade and other primarily to the Group’s long-term debt obligations and any NCI in the acquired company at the acquisition receivables, and cash and cash equivalents that derive with floating interest rates. The following table demonstrates the sensitivity date, measured at their fair values as of that date. directly from its operations. The Group also enters into to a reasonably possible change in interest rates For some acquisitions the Group may elect to measure derivative transactions. The Group manages its interest rate risk by having on loans and borrowings. With all other variables held an NCI in the acquiree at its proportionate interest a balanced portfolio of fixed and variable rate loans constant, the Group’s profit before tax is affected through in the identifiable net assets of the acquiree. The Group is exposed to market risk, credit risk and liquidity and borrowings. the impact on floating rate borrowings as follows: risk. The Group’s senior management oversees The identification of assets acquired and liabilities assumed the management of these risks. Increase/decrease Effect on profit as a result of those acquisitions, determining the fair value in basis points before tax of assets acquired and liabilities assumed as well as any The Group’s senior management is supported by the Finance contingent considerationand quantification of resulting and Strategy Committee of the Board of Directors that Year ended 31 December 2019 goodwill requires management’s judgment and often advises on financial risks and the appropriate financial Rubles +25 (95) involves the use of significant estimates and assumptions, risk governance framework for the Group. The Finance Rubles -25 95 including assumptions with respect to future cash inflows and Strategy Committee provides assurance to the Group’s and outflows, discount rates, terminal growth rates, licence senior management that the Group’s financial risk- Year ended 31 December 2018 and other asset useful lives and market multiples, among taking activities are governed by appropriate policies US Dollar +7 (16) other items. and procedures and that financial risks are identified, measured and managed in accordance with the Group’s US Dollar -7 16 Results of subsidiaries acquired and accounted policies. All derivative activities for risk management for by the acquisition method have been included purposes are carried out by specialist teams that have The analysis is prepared assuming the amount of variable To minimise its foreign exchange exposure to fluctuations in operations from the relevant date of acquisition. the appropriate skills, experience and supervision. rate liability outstanding at the balance sheet date was in foreign currency exchange rates, the Group is migrating It is the Group’s policy that no trading in derivatives outstanding for the whole year. most of its foreign currency linked costs to Ruble based Any contingent consideration to be transferred for speculative purposes shall be undertaken. costs to balance assets and liabilities and revenues by the Group is recognised at fair value at the acquisition and expenses denominated in Rubles. In order to manage date. Subsequent changes in the fair value of the contingent The Company’s Board of Directors reviews and agrees Foreign currency risk the foreign currency risk the Group is also focused consideration classified as an asset or liability that policies for managing each of these risks, which on increasing the proportion of Ruble loans through is a financial instrument within the scope of IFRS 9, Financial are summarised below. Foreign currency risk is the risk that the fair value or future refinancing and hedging activities. Instruments, are recognised in accordance with IFRS 9 cash flows of a financial instrument will fluctuate because in the consolidated income statement. If the contingent of changes in foreign exchange rates. The Group’s exposure When necessary the Group enters into cross-currency consideration is not within the scope of IFRS 9, it is measured Market risk to the risk of changes in foreign exchange rates relates swap agreements. These derivative financial instruments in accordance with the appropriate IFRS. primarily to the Group’s financing activities (when cash were used to limit exposure to changes in foreign currency Market risk is the risk that the fair value of future cash deposits and loans and borrowings are denominated exchange rates on certain of the Group’s long-term debts Acquisition-related costs are expensed as incurred flows of a financial instrument will fluctuate because in a different currency from the Group’s functional denominated in foreign currencies (Note 3.5.4). and included in general and administrative expenses. of changes in market prices. Market price risks that mostly currency). impact the Group comprise two types of risk: interest Overall, the share of Ruble loans and borrowings (including rate risk and currency risk. Financial instruments affected A significant portion of the Group’s liabilities the effect of cross-currency swaps) amounted to 100% 2018 acquisitions by market risk include: loans and borrowings, cash deposits is denominated in Euro. If the Ruble continued to fluctuate as of 31 December 2019 (2018: 92%). and derivative financial instruments. against the Euro (or the US dollar), this could impact the Group’s earnings. In accordance with the Group’s policies, the Group does Safe City The sensitivity analyses in the following sections relate not enter into any treasury management transactions to the position as of 31 December 2019 and 2018. of a speculative nature. In June 2018 the Group acquired a 100% interest The sensitivity analyses have been prepared on the basis in LLC “UK TechnoInvestProject” (subsequently renamed that the amount of net debt, the ratio of fixed-to-floating into LLC “CoreClass”), a Russian systems integrator, interest rates of the debt and derivatives and the proportion for a cash consideration of 530. The primary reason of financial instruments in foreign currencies are all for the acquisition was to gain access to software constant and on the basis of the hedge designations and expertise for providing services to government in place at 31 December 2019 and 2018. sector clients under the government programme “Safe City”. The purchase consideration was mainly allocated to software in the amount of 416.

210 211 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Foreign currency sensitivity The Group monitors its credit risk with regards to loans As of 31 December 2019, the Group has a net current asset extended to Garden Ring and USM Telecom LLC position. The Group believes it will continue to be able The following table demonstrates the sensitivity (Note 3.5).This assessment is undertaken each financial to generate significant operating cash flows and that to a reasonably possible change in the US dollar and Euro year by examining the financial position of the debtor adequate access to sources of funding and significant exchange rates, with all other variables held constant, and the market in which the debtor operates. amount of available credit lines are sufficient to meet of the Group’s profit before tax (due to changes As at 31 December 2019 and 2018, the credit risk was the Group’s requirements. Additionally, the Group can in the fair value and future cash flows of monetary assets estimated as low, no impairment losses were identified. defer capital expenditures if necessary in order to meet and liabilities). The Group’s exposure to foreign currency short-term liquidity requirements. Accordingly, Group changes for all other currencies is not material. management believes that cash flows from operating Liquidity risk and financing activities will be sufficient for the Group to meet its obligations as they become due. Change in foreign Effect on profit exchange rates before tax The Group monitors its risk relating to a shortage of funds using a recurring liquidity planning tool. The Group’s The table below summarises the maturity profile Year ended 31 December 2019 objective is to maintain a balance between continuity of the Group’s financial liabilities based on contractual US dollar +15% 104 of funding and flexibility through the use of bank loans. undiscounted payments: Approximately 7% of the Group’s loans and borrowings US dollar -15% (104) will mature in less than one year as of 31 December Euro +10% (3) 2019 (2018: 11%) based on the carrying value of loans and borrowings reflected in the consolidated financial Euro -10% 3 statements. The Group assessed the concentration Year ended 31 December 2018 of risk with respect to refinancing its debt and concluded US dollar +20% (353) it to be low. US dollar -20% 353 Less than 1–3 years 4–5 years More than Total Euro +15% (242) 1 year 5 years Euro -15% 242 31 December 2019 HK dollars +20% 871 Loans and borrowings 60,623 252,902 150,495 14,267 478,287 HK dollars -20% (871) Trade and other payables 54,607 — — — 54,607 Lease liabilities 20,261 40,048 33,052 34,009 127,370 The movement in the pre-tax effect is a result of monetary The Group extends credit to certain counterparties, Deferred and contigeantconsidaration — 568 — — 568 assets and liabilities denominated in currencies other than principally international and national telecommunications the functional currency of the Company. operators, for roaming services, to certain dealers Long-term accounts payable — 260 — — 260 and to customers on post-paid tariff plans. The Group Total 31 December 2019 135,491 293,778 183,547 48,276 661,092 minimises its exposure to the risk by ensuring that Credit risk credit risk is spread across a number of counterparties, 31 December 2018 and by continuously monitoring the credit standing Loans and borrowings 69,174 177,491 140,715 41,138 428,518 Credit risk is the risk that a counterparty will not meet of counterparties based on their credit history and credit Trade and other payables 53,235 — — — 53,235 its obligations under a financial instrument or customer ratings reviews. Other preventative measures to minimise contract, leading to a financial loss. The Group is exposed credit risk include obtaining advance payments, bank Finance lease liabilities 550 1,193 1,192 5,509 8,444 to credit risk from its operating activities (primarily for trade guarantees and other security. Long-term accounts payable — 199 — — 199 receivables) and from its financing activities, including deposits with banks and financial institutions and other The maximum exposure to credit risk at the reporting Total 31 December 2018 122,959 178,883 141,907 46,647 490,396 financial instruments. date is the carrying value of each class of financial assets disclosed in Note 3.5. The Group considers the concentration The Group deposits available cash in the Russian of risk with respect to trade receivables to be low, as its Capital management The Net Debt to OIBDA ratio is an important measure Federationwith various banks which are rated BB+ to BBB- customers are located in several jurisdictions and industries to assess the capital structure in light of the need based on Standard&Poors/Fitch or Ba1 to Baa3 based and operate in largely independent markets. Concentrations Capital includes equity attributable to the Group’s to maintain a strong credit rating. Net Debt represents on Moody’s. Deposit insurance is either not offered or only of credit risk with respect to trade receivables are limited shareholders. The primary objective of the Group’s capital the carrying amount of interest-bearing loans offered in de minimise amounts in respect of bank deposits given that the Group’s customer base is large and unrelated. management is to ensure that it maintains a healthy credit and borrowings less cash and cash equivalents and current within the Russian Federation. To manage the concentration Due to this management believes there is no further credit rating and healthy capital ratios in order to secure access and non-current bank deposits. As of 31 December 2019 of credit risk, the Group allocates available cash risk provision required in excess of the normal impairment to debt and capital markets at all times and maximise the Net Debt to OIBDA ratio was 2.11 (2018: 2.37). to domestic branches of international banks and a limited allowance for trade and other receivables. shareholder value. The Group manages its capital structure number of Russian banks. A majority of these Russian banks and makes adjustments to it in light of changes in economic Some loan agreements also have covenants based are either owned or controlled by the Russian government. conditions. on Net Debt to OIBDA ratios. The Group believes it has complied with all the capital requirements imposed by external parties.

212 213 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

Collateral 5.6. Group information Reconciliation of OIBDA to profit from continuing operations for the years ended 31 December is presented below: The Group did not pledge collateral as security The consolidated financial statements of the Group for its financial liabilities at 31 December 2019 or 2018. include the following significant subsidiaries, joint ventures 2019 2018 100% of the shares of Garden Ring (Note 3.4) have been and associates of MegaFon: pledged as security for loans received by Garden Ring OIBDA 151,618 124,157 from Sberbank, which are due to be repaid in 2026. Depreciation (68,050) (49,254) Amortisation (20,340) (16,116) Legal entity Type Principal activities Country % equity interest of incorporation Loss on disposal of non-current assets (623) (337) 2019 2018 Finance costs (45,195) (25,927) JSC MegaFon Retail subsidiary Retail Russia 100 100 Finance income 2,097 1,634 LLC NetByNet Holding subsidiary Broadband internet Russia 100 100 Share of loss of associates and joint ventures and investment impairment loss (5,277) (2,829) LLC Scartel subsidiary Wireless services Russia 100 100 Other non-operating expenses (2,087) (1,677) LLC MegaFon Finance subsidiary Transactions with treasury Russia 100 100 (Loss)/gain on financial instruments, net (1,982) 713 shares Foreign exchange gain/(loss), net 2,084 (1,271) MegaFon Investments (Cyprus) subsidiary Financing Cyprus 100 100 Profit before tax from continuing operations 12,245 29,093 Limited JSC MegaLabs subsidiary New telecom services Russia 100 100 development Disaggregation of revenue

CJSC TT mobile subsidiary Integrated telecom Tajikistan 75 75 In the following table revenue is disaggregated by major AER Holding PTE.LTD (Note 3.4) associate e-commerce Singapore 24.3 — products and service lines: DTSRetail Limited (Note 3.4) associate Retail Russia 25 25 2019 2018 LLC MF Technologies (Note 3.4) associate Holding company Russia 45 45 Wireless services 280,375 276,076 JSC Sadovoe Koltso (Note 3.4) joint venture Corporate office Russia 49.999 49.999 Wireline services 30,431 30,941 The Company holds interests in material subsidiaries, Operating segments with similar economic characteristics, Sales of equipment and accessories 38,155 28,532 associates and joint ventures through a number such as forecasted OIBDA, have been aggregated into Total external revenue 348,961 335,549 of intermediary holding companies. an integrated telecommunication services segment, which is the only reportable segment as of 31 December 2019. Intra-group revenue elimination — (8) Around 1.6% of the Group’s revenues and results Total revenue 348,961 335,541 5.7. Segment information are generated by segments outside of Russia. No single customer represents 10% or more of the consolidated Operating segments are reported in a manner consistent revenues. with the internal reporting provided to the chief operating The Group’s revenue derives from contracts with customers. 5.8. Commitments, contingencies decision-maker (“CODM”). The CODM is responsible Management has presented the performance measure Revenue from sales of equipment and accessories and uncertainties for allocating resources and assessing the performance OIBDA because it believes that this measure is relevant is recognised at a point in time (generally, the time of sale), of the operating segments. The Company’s CEO has been to an understanding of the Group’s financial performance. while service revenue is recognised over time as the services designated as the CODM. OIBDA is not a defined performance measure in IFRS. are rendered to clients. Russian operating environment The Group’s definition of OIBDA may not be comparable The Group manages its telecommunication business with similarly titled performance measures and disclosures Revenue recognised under construction contracts During 2018 and 2019, the Russian economy was primarily based on eight geographical operating segments by other entities. for the year ended 31 December 2019 is nil (2018: 598). impacted by significant fluctuations in crude oil prices within Russia, which provide a broad range of voice, data and the value of the Russian Ruble, as well as sanctions and other telecommunication services, including wireless imposed on Russia by several countries. The combination and wireline services, interconnection services, data of the above resulted in a higher cost of capital, increased transmission services and value added services. The CODM inflation and uncertainty regarding economic growth, evaluates the performance of the Group’s operating which could negatively affect the Group’s future financial segments based on revenue and operating income before position, results of operations and business prospects. depreciation and amortisation (“OIBDA”). Total assets and liabilities are not allocated to operating segments In addition, the first months of 2020 have seen significant and are not analysed by the CODM. global market turmoil triggered by an outbreak of coronavirus. Together with other factors, this has resulted in a sharp decrease in the oil prices and stock market indices worldwide, as well as a depreciation of the Russian Ruble.

214 215 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

These developments are further increasing the level Social infrastructure expenses Litigation 5.9. Events after the reporting date of uncertainty in the Russian business environment. From time to time, the Group may determine to maintain The Group is not a party to any material litigation, although Management believes it is taking appropriate measures certain social infrastructure assets which are not owned in the ordinary course of business, the Company and some Changes in estimates to support the sustainability of the Group’s business by the Group and not recorded in the consolidated of the Group’s subsidiaries may be party to various legal during the current worldwide pandemic. However, further financial statements as well as to incur education, science and tax proceedings, and subject to claims, certain Starting from 1 January 2020 the Group revised useful deterioration of the economic situation may negatively and other social costs. Such activities may be conducted of which relate to the developing markets and evolving lives for its property and equipment considering the past impact the results and financial position of the Group. in collaboration with non-governmental organisations. fiscal and regulatory environments in which they operate. experience and expectations derived from the analysis Currently it is notfeasible toassess the amount These expenses are presented in other non-operating In the opinion of management, the Company’s and its of technological trends, the Group’s networks upgrade of the possible impact. expenses in the consolidated income statement (Note 5.3). subsidiaries’ liability, if any, in all pending litigation, other practices and other factors impacting useful lives. legal proceedings or other matters, will not have a material The revised useful lives are as follows: effect on the financial condition, financial performance 4G/LTE licence capital commitments Taxation or liquidity of the Group. Telecommunications network 5 to 20 years In July 2012, the Federal Service for Supervision Russian and Tajik tax, currency and customs legislation, Buildings and structures 5 to 100 years in Communications, Information Technologies and Mass including transfer pricing legislation, are subject to varying Anti-terror laws Vehicles, office and other equipment 3 to 10 years Media granted the Company licences and allocated interpretations and changes, which can occur frequently. frequencies to provide services under the 4G/LTE standard Management’s interpretation of such legislation as applied On 7 July 2016 the President of the Russian Federation in Russia. to transactions and activities of the Group may be signed a package of anti-terror laws. The package requires challenged by the relevant regional and federal authorities. telecommunications operators to store all data, including Under the terms and conditions of these licences, that from phone calls, messages, and data transmitted the Company is obligated to provide 4G/LTE services Recent events within Russia and Tajikistan suggest that by customers for certain time periods, effective from in each population center with over 50,000 inhabitants the tax authorities are taking a more assertive position 1 July 2018. in Russia by the end of December 2019. The Group is also in their interpretation and enforcement of the legislation obligated to make capital expenditures of at least 15,000 and as a result, it is possible that transactions and activities This is requiring the Group to establish additional data annually toward the 4G/LTE roll-out until the network that have not been challenged in the past may now centers and invest in data-processing technologies. is fully deployed. be challenged. Therefore, significant additional taxes, penalties and interest may be assessed. Based on its current understanding of the law’s requirements, Under the 4G/LTE licences acquired at frequency the Group expects that the implementation of the changes distribution auctions and from other operators via Fiscal periods remain open to review by the authorities may cost it approximately 25,000–30,000 over the three acquisition of licence-holding entities, the Company in respect of taxes for the three calendar years preceding years beginning from 2020. is obligated to provide 4G/LTE services in each population the current year. Under certain circumstances reviews may center with over 10,000 inhabitants in Russia by the end cover longer periods. of the seven-year period starting from the date of obtaining the licences, i.e., by mid-April 2023. The Group’s management believes that its interpretation of the relevant legislation is appropriate and is in accordance As of the date these consolidated financial statements with the current industry practice, and that the Group’s tax, were authorised for issue the Group was fully compliant currency and customs positions will be sustained. However, with these capital expenditure commitments. the interpretations of the relevant authorities could differ.

As of 31 December 2019 the Group’s management estimated Equipment purchases agreements the possible effect of additional taxes, before fines and interest, if any, on these consolidated financial In 2014 the Group entered into two separate 7-year statements, if the authorities were successful in enforcing agreements with two suppliers to purchase equipment different interpretations being taken by them, to be and software for 2G/3G/4G network construction in the amount of up to approximately 928. and modernisation. The software usage agreements contain various termination options, however the Group is specifically committed under the agreements Svyaznoy guarantees to pay at least an amount equal to 50% of the fees due over the remaining term of the agreementsfor each base During 2019 the Group provided guaranteesfor obligations station in use as at the date of termination. The amount payable by the Svyaznoy group in the amount of up of the commitments at 31 December 2019 is 5,896 to 12,700 (Note 5.3). The guarantees remain in effect (31 December 2018: 7,356). for one year after maturity of the underlying obligation. The Group assesses the likelihood of its having to incur any liability under these guarantees as remote.

216 217 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 Material Topics and Materiality Matrix

5.0 MegaFon publishes its performance reports on an annual Material topics basis. MegaFon’s 2019 Annual Report was prepared 1 4 21 in compliance with the Sustainability Reporting Guidelines Materiality assessment comprised three stages: 4.5 9 20 (GRI Standards) of the Global Reporting Initiative (GRI). • Stage 1. Determine the list of material topics – ​ 4.0 10 11 2 19 make a list of the most frequent disclosures based 8 13 This Annual Report also incorporates the Social Charter on benchmarks of global and Russian companies within 12 of Russian Business, the Guidelines on Social Responsibility the telecommunications industry. 3.5 17 (ISO 26000), the Sustainable Development Vector Index, • Stage 2. Determine the materiality of the Company’s 14 15 impact and the materiality of topics 3.0 5 16 and the reference performance indicators developed by conducting 7 by the Russian Union of Industrialists and Entrepreneurs. a questionnaire survey among top managers 18 3 and stakeholders. 2.5 Unless specified otherwise, performance figures pertain • Stage 3. Build the materiality matrix based 6 to PJSC MegaFon and its subsidiaries. The scope on the survey results. 2.0 and wording of performance indicators in this Report do not have any material difference from previous reports. The horizontal axis of the matrix shows the materiality 1.5 of MegaFon’s impact on material topics based

on the top management survey, and the vertical impact MegaFon’s of Materiality 1.0 axis shows the materiality of topics for stakeholders, with the topics in the upper part of the matrix (above 0.5 the diagonal line) deemed to have priority and be mandatory disclosures in the Annual Report. 0.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Materiality for stakeholders

Topics:

1. Economic performance 13. Non-discrimination 2. Indirect economic impacts 14. Freedom of association and collective bargaining 3. Procurement practices 15. Child labour 4. Anti-corruption 16. Forced or compulsory labour 5. Energy 17. Human rights 6. Emissions 18. Supplier social assessment 7. Supplier environmental assessment 19. Customer health and safety 8. Employment 20. Customer privacy 9. Labour/management relations 21. Socioeconomic compliance 10. Occupational health and safety 22. Local communities 11. Training and education 23. Charity initiatives among employees 12. Diversity and equal opportunity

218 219 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 GRI content index

GRI standard Indicator Page number GRI standard Indicator Page number GRI 102 102-1. Name of the organisation 2 Material topics 102-2. Activities, brands, products and services 16–17 GRI 201 103-1. Explanation of the material topic and its Boundary 78 102-3. Location of headquarters 166 Economic Performance 103-2. The management approach and its components 78 102-4. Location of operations 32 103-3. Evaluation of the management approach 78 102-5. Ownership and legal form 133 201-1. Direct economic value generated and distributed 78 102-6. Markets served 40–41 GRI 203 103-1. Explanation of the material topic and its Boundary 84 102-7. Scale of the organisation 17–19 Indirect Economic 103-2. The management approach and its components 84 Impacts 102-8. Information on employees and other workers 86 103-3. Evaluation of the management approach 84 102-10. Significant changes to the organisation and its supply chain 136 203-1. Infrastructure investments and services supported 27 102-11. Precautionary Principle or approach 108 203-2. Significant indirect economic impacts 22–25 102-13. Membership of associations 30–31 GRI 205 103-1. Explanation of the material topic and its Boundary 108 102-14. Statement from senior decision-maker 4–13 Anti-corruption 103-2. The management approach and its components 108 102-15. Key impacts, risks, and opportunities 140–147 103-3. Evaluation of the management approach 108 102-16. Values, principles, standards, and norms of behaviour 107 205-2. Communication and training about anti-corruption 108 102-18. Governance structure 115 policies and procedures 102-40. List of stakeholder groups 85 GRI 302 103-1. Explanation of the material topic and its Boundary 109 Energy 102-41. Collective bargaining agreements – 103-2. The management approach and its components 109 102-42. Identifying and selecting stakeholders 85 103-3. Evaluation of the management approach 109 102-43. Approach to stakeholder engagement 22–25 302-1. Energy consumption within the organisation 109 102-44. Key topics and concerns raised 22–25 GRI 308 103-1. Explanation of the material topic and its Boundary 108 Supplier Environmental 103-2. The management approach and its components 108 102-45. Entities included in the consolidated financial statements 167 Assessment 102-46. Defining report content and topic Boundaries 218 103-3. Evaluation of the management approach 108 102-47. List of material topics 218 GRI 401 103-1. Explanation of the material topic and its Boundary 86 Employment 102-48. Restatements of information 218 103-2. The management approach and its components 86 102-49. Changes in reporting 218 103-3. Evaluation of the management approach 86 102-50. Reporting period 2 401-2. Benefits provided to full-time employees that are not provided 96 to temporary or part-time employees 102-51. Date of most recent report – GRI 403 103-1. Explanation of the material topic and its Boundary 97 102-52. Reporting cycle 218 Occupational Health 103-2. The management approach and its components 97 102-53. Contact point for questions regarding the report 225 and Safety 103-3. Evaluation of the management approach 97 102-54. Claims of reporting in accordance with the GRI Standards 2 403-1. Occupational health and safety management system 97 102-55. GRI content index 220 GRI 404 103-1. Explanation of the material topic and its Boundary 92 102-56. External assurance 151–157 Training and Education 103-2. The management approach and its components 92 103-3. Evaluation of the management approach 92 404-2. Programmes for upgrading employee skills and transition 92 assistance programmes GRI 405 103-1. Explanation of the material topic and its Boundary 86 Diversity and Equal 103-2. The management approach and its components 86 Opportunity 103-3. Evaluation of the management approach 86 405-1. Diversity of governance bodies and employees 86

220 221 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

GRI standard Indicator Page number GRI 406 103-1. Explanation of the material topic and its Boundary 107 Glossary Non-discrimination 103-2. The management approach and its components 107 103-3. Evaluation of the management approach 107 4G/LTE is the fourth generation of wireless technology Converged services are telecommunications services 406-1. Incidents of discrimination and corrective actions taken 107 which provides greater access to data and services through provided over both mobile and fixed-line networks. GRI 412 103-1. Explanation of the material topic and its Boundary 107 enhanced download and upload speeds, and enhanced use Human Rights of spectrum. CRM stands for Customer Relation Management. 103-2. The management approach and its components 107 Assessment 103-3. Evaluation of the management approach 107 Agile is an umbrella term for several advanced iterative CSI stands for Customer Satisfaction Index. 412-1. Operations that have been subject to human rights reviews – software development approaches relying on continuous or impact assessments feedback, within self-organised cross-functional teams, CTS stands for Customer Trouble shooting. to address fast-changing requirements. GRI 416 103-1. Explanation of the material topic and its Boundary 77 Data user is a subscriber who has consumed any amount Customer Health 103-2. The management approach and its components 77 APN stands for Access Point Name. of data traffic within the preceding month. and Safety 103-3. Evaluation of the management approach 77 ASON stands for Automatic Switched Optical Network. DDoS (Distributed Denial of Service) means a hacking GRI 418 103-1. Explanation of the material topic and its Boundary 77 attack intended to disrupt a user’s system by hindering Customer Privacy B2B stands for Business-to-Business. or stopping access to system resources (servers) 103-2. The management approach and its components 77 for the user. 103-3. Evaluation of the management approach 77 B2C stands for Business-to-Consumer. Direct Carrier Billing means payment from a mobile 418-1. Substantiated complaints concerning breaches of customer privacy – B2G stands for Business-to-Government. account in Apple and Google app stores. and losses of customer data GRI 419 103-1. Explanation of the material topic and its Boundary 84 B2O stands for Business-to-Operators. DLP stands for Data Leak Prevention technology. Socioeconomic 103-2. The management approach and its components 84 Compliance B2X stands for Business-to-X, including B2B, B2G, and B2O, DWDM (Dense Wavelength Division 103-3. Evaluation of the management approach 84 but excluding B2C. Multiplexing) is a modern technology for carrying a large 419-1. Non-compliance with laws and regulations in the social 84 number of channels on the same fibre. and economic area Big data represents the information assets characterised by such a high volume, velocity and variety that it requires EVS ​stands for Enhanced Voice Services, also known GRI 413 103-1. Explanation of the material topic and its Boundary 98–100 specific technology and analytical methods for its as Enhanced HD Voice, or 3GPP coding standard/EVS codec, Local Communities 103-2. The management approach and its components 98–100 transformation into value. carrying the full audible range of the human ear (20 kHz) and supporting calls from compatible smartphones 103-3. Evaluation of the management approach 98–100 BPaaS stands for Business Process-as-a-Service. over VoLTE via MegaFon’s 4G (LTE) network. 413-1. Operations with local community engagement, impact assessments, 101–105 and development programmes CAPEX (Capital Expenditures) comprises the cost FCF (Free Cash Flow) means cash from operating Support 103-1. Explanation of the material topic and its Boundary 98–100 of purchases of new equipment, new construction, activities, less cash paid for purchases of property, of charity initiatives acquisition of new or upgrades to existing software, plant and equipment, and intangible assets, increased 103-2. The management approach and its components 98–100 of MegaFon’s employees acquisition of spectrum and other intangible assets, by proceeds from sales of property, plant and equipment, and their families 103-3. Evaluation of the management approach 98–100 and purchases of other long-term assets, together and interest paid. It is a financial measure, which should be with related costs incurred prior to the intended use considered as supplementary rather than as an alternative of the applicable assets, all accounted for as at the earliest to the information provided in the Company’s financial time of payment or delivery. Long-term assets obtained statements. This metric measures the Company’s ability through business combinations are not included to generate cash after accruals required to maintain in the calculation of capital expenditures. and expand the Company’s assets.

CDN (Content Delivery Network) is a service for content FMC stands for Fixed Mobile Convergence. providers, which relies on distributed network infrastructure to speed up downloads for users outside metro areas FOCF stands for Fibre Optic Communications Line. and secure content availability during peak traffic events, including: large-scale live webcasts, advertising FTC refers to JSC First Tower Company. campaigns, software updates, or DDoS attacks. FVNO stands for Fixed Virtual Network Operator. CEM ​stands for Customer Experience Management.

222 223 Annual report 2019 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226

GPRS (General Packet Radio Services) is an add-on OSS ​is an umbrella Operation Support System. to GSM mobile communication technology that provides Contacts packet data transmission. OTT (Over the Top) ​is a technology for online video data transmission from a content provider to a user’s device via GRI (Global Reporting Initiative) stands for Global data networks, often bypassing telecoms operators. Reporting Initiative. Full name: Company’s RDIF stands for Russian Direct Investment Fund. Public Joint-Stock Company MegaFon auditor: GSOC stands for General Service Operational Center. RMICS stands for Risk Management and Internal Control Short name: JSC KPMG IoT (Internet of things) refers to interconnection via System. PJSC MegaFon 10 Presnenskaya Naberezhnaya, the internet of computing devices embedded in everyday Moscow 123317, Russia objects, enabling them to send and receive data. SCFR (State Commission on Radio Frequencies) is an inter-agency coordinating body at the Ministry Head office: Tel.: +7 (495) 937-4477 IPBB (IP Backbone) — an IP-based backbone network. of Digital Development, Communications and Mass Media 41 Oruzheyniy lane, Fax: +7 (495) 937-4400/99 of the Russian Federation. Moscow 127006, Russia IPTV stands for Internet Protocol Television. Tel.: +7 (499) 755-2155 Web: www.kpmg.ru SCM (Service Centric Model) – a​ lifecycle-driven, RaaS- Fax: +7 (499) 755-2175 KPI (Key Performance Indicators) are performance based service management model. metrics that help an organisation achieve its strategic goals E-mail: [email protected] Company and operating targets. SID (Shared Information and Data Model) – ​ registrar: a reference data model developed by TM Forum Web: www.megafon.com LTV (Lifetime Value) is an internal estimated assessment to standardise ontologies and concepts used in the industry JSC ‘Independent Registrar Company R.O.S.T.’ of the current value of the future cash flow per subscriber and align relations between entities and data flows. FCSM licence of Russia throughout the entire period of his or her relationship Information No. 045-13976-000001 (indefinite) with MegaFon. SME stands for Small and Medium-Sized Enterprises. for shareholders: 18/13, Stromynka Street, Moscow, 107996, Russia M2M (Machine-to-Machine) refers to technologies that SON (Self-Optimizing Network) is​ a smart network Daria Lizunova allow both wireless and wired systems to communicate capable of independently evaluating the performance Corporate Secretary Tel.: +7 (495) 989-7650 with other devices of the same type. of each of its constituent elements and optimising its own Web: www.rrost.ru/ru/ operation. Tel.: +7 (499) 755-2155 MIPT stands for Moscow Institute of Physics Fax: +7 (499) 755-2100 and Technology. UDR stands for User Data Repository. E-mail: [email protected]

MPLS (Multiprotocol Label Switching) — a routing VAS stands for Value-Added Services. technique in telecommunications networks that directs data Information from one node to the next based on short path labels. VAT stands for Value-Added Tax. for analysts:

NPS stands for Net Promoter Score. VHI stands for Voluntary Health Insurance. Investor Relations Department Tel.: + 7 (495) 926-2012 OIBDA (Operating Income Before Depreciation VOD stands for Video on Demand. E-mail: [email protected] and Amortisation) is a financial measure which Web: https://corp.megafon.com/investors/ should be considered as supplementary rather than VoLTE (Voice over LTE) is a voice streaming technology as an alternative to the information provided in the financial using an LTE network. statements of the Company. OIBDA margin means OIBDA as a percentage of revenue. The Company believes that VPN stands for Virtual private network. OIBDA provides a better measure of the Company’s actual operational results including our ability to finance capital expenditures, acquisitions and other investments, and our ability to incur and service debt. While it does not take into account depreciation of property and equipment, amortisation of intangible assets and gain/(loss) from disposal of non-current assets, which are considered as operating expenses in IFRS, these expenses primarily represent noncash charges related to long-term assets acquired or constructed in prior periods. OIBDA is widely used by investors, analysts, and rating agencies as a measure to evaluate and compare current and future operating performance and to determine the value of companies within the telecommunications industry.

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