About this Report Contents Preliminarily approved by the Board of Directors Chairman’s Statement 02 of PJSC MegaFon on 24 May MegaFon 2019. Chief Executive’s Review 05

is a pan-Russian provider of digital This Annual Report presents 1. About MegaFon 10 data from 1 January through Performance Highlights 16 opportunities and a leader in the Russian 31 December 2018. Creating a Digital Future 18 and global market This Annual Report has been Assets and Resources 28 prepared in accordance with the Global Reporting Geography 32 Initiative (GRI) Guidelines Key Events 34 for reporting on sustainable development. 2. Strategic Report 38 Market Overview 40 Digital Strategy in Action 54 For more information see Appendix: Material Topics and Materiality Matrix. Business Model 62 In this Report ‘MegaFon’ Operational Results 66 or the ‘Company’ refer to PJSC MegaFon Financial Performance 122 Mission Vision and its controlled entities, PJSC ‘MegaFon’ refers Risk Management 128 to Public Joint-Stock Company Sustainability 138 Providing opportunities Becoming a digital market ‘MegaFon’. leader and first-choice 3. Corporate Governance 168 data provider by building Immaterial discrepancies in totals strong relationships with and subtotals in the charts Corporate Governance Framework 170 and tables of the Annual Report Governing Bodies 174 individuals and businesses are due to rounding. while offering top-of-the- Control over Financial and Business Operations 196 line digital products and External Audit 198 Information Disclosure 199 services Protecting the Confidentiality of Insider Information 199

4. Securities 200

Shareholders’ Equity 202 Presence on Stock Exchanges 204 Dividends 206 Bonds 207 Credit Ratings 209 Investor Relations 210 Information Disclosure 211

5. Financial Statements 212 Read Online Report at: For more information please visit: and Appendix ar2018.megafon.ru corp.megafon.com 2 Statements Chairman’s Statement 3

How was 2018 for the Russian of Big Data and developing our service network Chairman’s telecommunications industry? to meet the needs of each user, thereby making them happier. In 2018, the growth of the Russian telecoms market hit a five-year high. To a large extent, The next priority is ‘Fastest Service Provider’. Statement this is the result of efforts made by leading We are working hard to quickly and efficiently operators to stabilise the market – helping to curb transform internal processes by launching initiatives excessive price competition, abandoning unlimited to accelerate the review process for proposals plans, and placing a much stronger emphasis for technology innovation and switching to what we on developing service quality. However, we did see refer to as ‘agile’ methods of working, among other a return of price competition in late 2018, in certain changes. segments, and new ‘unlimited plans’ re-entering the market. Finally, the third priority is ‘Government and Industry Digitalisation’. We are continuing How would you summarise MegaFon’s to build our in-house competencies and develop 2018 results? innovative products that can be used to digitalise various sectors of the economy. MegaFon delivered a strong set of results in 2018 as the Company’s digital leadership strategy How is MegaFon contributing generated service revenue growth which outstripped to building a digital economy in ? market growth overall. What are the key achievements 2018 was a year in this area? Overall, it has been a significant year for MegaFon, of transformation marked by several milestones and achievements. We Our ambition is to become a key partner and achievement established key strategic agreements with leaders for the Government in this area. Currently, in other industries for the development of ambitious MegaFon is contributing towards the preparation for MegaFon. We ended joint projects in digital ecosystems, mobile retail, and running of ANO Digital Economy programmes the year with strong financial e-commerce, and m commerce; we launched new that have been approved by the President of Russia. products for individual consumers and businesses; and operating results, and continued to improve our network quality As noted previously, we are progressing and reliability, while expanding our coverage. the development of Digital Region Management demonstrating that our Furthermore, we began trials of 5G networks and Smart City, new solutions which will manage digital leadership strategy through a series of pilot projects, and strengthened urban infrastructure, security, and transport. our cooperation with the Government in building MegaFon is well-positioned to deliver these adopted in 2017 has placed a digital economy, including the signing of key projects owing to our extensive in-house expertise partnership agreements with Russian regional in expanding communications networks, MegaFon on a positive authorities for the deployment of solutions, such deploying M2M/IoT, and other related capabilities. trajectory, as the Company as Digital Region Management and Smart City. MegaFon is also making a significant contribution to the development and testing of 5G networks moves away from the more What is the latest update on MegaFon’s and their future applications, which are key traditional approach strategy? Were any modifications to building a digital economy. made in 2018? to telecommunications MegaFon’s Board of Directors went MegaFon continues to pursue its ‘2017–2020 through a number of changes in 2018, to pursue new digital Driving the Digital World’ strategy, aimed including its complete renewal opportunities. The Company at transforming the Company from a traditional at the start of the year. What was telecoms operator to a provider of digital the reason? remains committed to its aim opportunities. Our strategic goal is to be a leader in the digital economy by 2020. To achieve this, As a result of ’s acquisition of a 19% of positioning itself as a pan- we are offering high-quality products and services stake in MegaFon from in late Russian provider of digital to our customers, we are becoming an effective 2017, the Bank was permitted to nominate two partner for the Government, the business representatives for appointment to the Board. opportunities and one community and society as a whole, and we are Additionally, the controlling shareholder wished seek to introduce the latest digital technologies to refresh the Board by appointing several of the industry leaders, into everyday life. USM Group candidates who were very familiar both in Russia and globally. with MegaFon’s business and could build In 2018, we added three new priorities a management team that would effectively execute to our strategy. The first of these priorities our strategy. The Company remains committed is called ‘Happiest Customer’, whereby we intend to its policy of having independent directors to tailor our digital products and services to each on the Board, with Jarkko Armas Veijalainen subscriber’s individual needs through the use and Harri Eerik Koponen taking these positions on the new Board. 4 Statements Chief Executive’s Review 5

At the end of 2018, we invited Anna Serebryanikova, Following the completion of this mandatory MegaFon’s Chief Operating Officer and a Member tender offer in March 2019, MegaFon’s free float Chief Executive’s of the Management Board, to join the Board is around 0.8%. of Directors. Anna has extensive industry experience and expertise which makes her well-placed The buyback opportunity was offered review to contribute to the Company’s development to shareholders at a substantial premium and engagement with the Government in building to the trading prices that prevailed prior a digital economy. to the announcement of the buyback, resulting in a successful buyback and enabling minority Furthermore, Gevork Vermishyan was appointed holders to make profitable exits. as MegaFon CEO in 2018. He previously served as our Executive Director and has worked Despite the fact that we are now effectively with the Company for over 7 years. Gevork brings a private company following our delisting and share a proactive nature and a fresh perspective which, repurchases, we intend to endeavour to comply combined with his contemporary management with best practices in both corporate governance methods and in-depth knowledge of trends and disclosure. in the transformation and digitisation of core business processes in the telecommunications What is to be expected from 2019? industry, will, I am certain, be just right In 2018, we continued for the achievement of our strategic objectives. Despite increased levels of competition, I am hugely positive about the outlook to deliver on our strategy, Why did MegaFon decide to delist for the telecommunications sector and its Driving the Digital World, from the London Stock Exchange? technological development. In 2018, we witnessed Please describe the procedure and give the arrival of the digital future as the world’s first while improving our customer us your opinion on the results? commercial 5G networks were launched in the USA and the Republic of Korea. In 2019, we expect experience. We made progress Following the announcement of MegaFon’s 5G networks to be launched across a further towards achieving our key goal – new strategy, remaining a public company 16 nations1 and expect to see the rapid development is no longer a strategic priority for the Company. of the Internet of Things, video content, AR, VR, to become a digital market Delisting means we no longer require our minority and other technologies. MegaFon is planning to be shareholders’ consent for significant decisions we among the leaders introducing these technologies leader and the first choice data intend to make in the future, thereby enabling us in Russia. provider, through advanced Big to enter into experimental, high-tech partnerships, expand our cooperation with the Government, take To conclude, I would like to take this opportunity Data tools and by taking an potentially higher risk transactions, and prioritize to thank all our Board members, our management individually tailored approach investment in major infrastructure projects and all MegaFon employees for their unwavering over dividend distributions when allocating commitment, performance and contribution to our to each subscriber. We leveraged our resources. A public company going private common goal of building a digital future. I wish is a common practice around the world as a means them all even greater success in 2019. cutting edge technology to build to help achieve specific strategic objectives. a full-scale digital ecosystem, Since the buyback of GDRs and ordinary offering a range of new shares from minority shareholders in 2018, and the delisting of MegaFon from the London Stock capabilities in IoT, finance, video Exchange in October, we undertook a mandatory and audio content, and many tender offer to the remaining MegaFon minority Evgeny Bystrykh shareholders in January 2019. Chairman of the Board of Directors other segments.

1. GSMA data. 6 Statements Chief Executive’s Review 7

What were MegaFon’s key highlights We continued to expand our 4G coverage in 2018 Which new products did MegaFon in 2018? and increased the number of 4G base stations launch in 2018? by 7% to 169,500, while 4G/LTE networks are We achieved the critical goals on our agenda now available to 79% of the population. We also Committed to catering for the needs of each of our Our achievements and produced strong financial and operational increased the length of our fibre networks by 2% customers, we launched and updated many digital include constructing performance for the year by vigorously pursuing our to 204,400 km. products and services for people and businesses the telecommunications digital strategy. Our strong performance was also alike in 2018. I will briefly describe some of our new infrastructure for the 2018 FIFA assisted by a more positive competitive environment We continued to upgrade our networks and invest creations. in the Russian telecommunications market in 2018, in LTE Advanced, a technology that supports World Cup, involving around which generated a five-year-high growth rate bandwidths of up to 300 Mbit/s. In , we In 2018, we conducted customer satisfaction 25,000 km of fibre lines and over of 3.4%, according to TMT Consulting. became the first in Russia to achieve speeds over studies and as a result updated our ‘Vklyuchaisya!’ 1,300 base stations. We also 1 Gbit/s on a commercial smartphone. (‘Connect!’) tariff line, launched in 2017, by adding delivered seamless network MegaFon’s service revenue grew at an above-market an unlimited data plan for messaging and building rate of 4.7%, to RUB 307bn, with OIBDA up 1.8% We also expanded our VoLTE coverage, which a system of partnerships and partner discounts. operation with a record high 2 to RUB 124bn.1 launched in , Samara, and Tolyatti The updated product line was a great success SLA level of 99.99%. in 2018. To improve the quality of voice over VoLTE, with our customers, with more than 20 million In 2018, our subscriber base in Russia was we introduced an advanced EVS codec carrying subscribing by year-end. 75.2 million, with the percentage share of mobile the full dynamic range of the human voice, making data users increasing to 43.4% from 41.8% in 2017. phone calls seem as though the callers are standing We launched a smart service enabling customers service, a mobile financial marketplace that Our average data services per user (DSU) increased right next to each other. to select a customised range of discounts, rewards provides access to banking services from Russia’s by 42% to over 9.2 GB, while average revenue per and extra packages of minutes or data via a single major financial organisations and enables data services user (ARPDU) grew by 9.7% to RUB 260 In May 2018, MegaFon and signed click, as well as to access films, music, books customers to subscribe to an easy-to-use credit per month, driven by an increase in mobile traffic. a memorandum of understanding for the joint and media publications. We also launched MegaFon product in several clicks, with money being sent development of 5G networks and digital technology Travel, a flight booking service, which was being to their mobile account almost instantly. In 2018, our CAPEX reached a record high deployment. We successfully tested Nokia’s optical used by 55,000 subscribers by the end of 2018. of RUB 81.5bn. Most of our investments were made equipment as an element of the future 5G backhaul In 2018, we launched the new ‘Upravlyai!’ to improve network quality and stability, expanding network in Moscow. I am proud to note that in early 2019, we were (‘Manage!’) tariff line for our corporate customers. LTE and LTE Advanced coverage, developing the first among Russian operators to offer our It is the first ‘build your own’ tariff in the corporate our billing platform and purchasing equipment We are continuing our focus on performance customers the option to use their mobile account market, designed using Big Data analysis to comply with the ‘Yarovaya law’. improvements. During the year, MegaFon adopted to pay for products and services using a single and insights into specific business needs. a new cluster management model in commerce click via Apple Pay, Google Pay, or Samsung Pay How does MegaFon achieve technology to enhance operational flexibility and speed up local using Mastercard tokens. MegaFon and Mastercard We also presented our MegaFon.Business product, leadership? decision-making in line with our Strategy. We have also signed a memorandum on partnership a unique online solution leveraging partner offers also deployed a technology sandbox to speed up and cooperation in the mobile finance market and MegaFon’s capabilities for SMEs to select We are committed to offering our subscribers the review process for proposed innovative solutions and offered our customers the Loan to Mobile and manage value added services with one click. the fastest and most stable communications being piloted within the Company. Last year, Other new solutions include Business Cloud, services, and continued to invest in infrastructure we also introduced our ‘Agile’ ways of working enabling prompt access to virtual platforms and Big and innovative technology. MegaFon retained to improve quality and speed in everything we do, Data warehouses with analytical support. its leadership in the Russian telecommunications with an ‘Agile’ pilot being run by our Customer Value industry measured by total number of base stations. Management team. We launched Mobile Connect, a service that Our fourfold advantage over our competitors enables one-click online identity verification in the 2,600 MHz spectrum will generate significant by phone number, which we believe will increase savings when we start deploying 5G networks. conversion rates for e-commerce and online retail. I should also mention Rekrutika, an online Time and again, we have been automated recruitment platform, and Digital Utility recognised as having the fastest Operator, a one-stop utility management B2B mobile data in Russia3. and B2C platform.

2. SLA stands for Service Level Agreement between the Company and its subscribers. 1. Including the positive impact from the adoption of new international reporting standards. Excluding this impact, OIBDA was RUB 122.1bn, up 0.2% y-o-y. 3. According to Ookla’s Speedtest by average mobile data speed across Russia. 8 Statements Chief Executive’s Review 9

A number of new partnerships involving You often mention MegaFon’s What is MegaFon’s approach MegaFon is a forward-looking company — to lead MegaFon were announced during involvement in driving the Russian to sustainability? the industry, we will focus on generating ‘smart 2018. How do these endeavours line up digital economy. What are the specifics growth’ by continuously integrating innovative with MegaFon’s goals? of this involvement? We aim to achieve excellence in business, but technology. also to contribute as much as we can towards We are always searching for and engaging with new We are heavily involved in the national government the social and economic development of society. To conclude, I would like to thank the Board partners to develop digital products and services digitalisation programme, which includes Reconciling commercial, social and environmental of Directors and our shareholders for their trust across various industries with strong potential. the support of the ANO Digital Economy, with Anna interests is an important element of our in me since my appointment to the position In order to enter the e-commerce market, MegaFon Serebryanikova, a MegaFon Director, chairing strategy. Our sustainability activities are guided of MegaFon’s CEO last year. Specifically, I would created a strategic partnership with RDIF, Mail.Ru the Information Infrastructure working group. by best practices and international regulations like to express my gratitude to my predecessor, Group, and the market’s global leader, Alibaba The group oversees the development and approval and standards, including the United Nations Sergey Soldatenkov, for his great contribution Group, with this joint project poised to become of concepts related to the expansion of IoT, 5G, Global Compact and the Social Charter of Russian to the development of MegaFon. I am committed the largest e-commerce business in Russia and NB networks in transport infrastructure. Business. to consolidating MegaFon’s position as a leading and the CIS. player and employer in the digital innovation Smart solutions launched by MegaFon will add We support gifted youngsters and technology market, and as the best lifelong partner for our Another important highlight was the launch of MF a new dimension to transport, utility, security, innovators through multiple premium educational customers. We have unique technology, knowledge Technologies, a joint venture with Gazprombank, education, and healthcare services. During programmes and training courses. We create new and expertise that we will further improve Rostec, and USM Holdings to develop digital services the year, we launched pilot projects in traffic highly skilled jobs, contribute to economic growth and develop upon. and implement digital economy projects. The new management, security, and administrative building and help deliver a better quality of life. MegaFon solutions will incorporate digital, communications, management across a number of Russian cities. provides affordable retail communication services I would also like to thank all of our employees financial services, and high-tech elements. and a communication infrastructure for industrial at MegaFon for their valuable contribution during MegaFon currently offers its customers industry- customers. Philanthropy is also a key priority 2018. I am confident that exciting times are ahead In 2018, MegaFon and SLV Group signed specific solutions such as Smart Meters for utility for us — in 2018 alone, we provided support for all of us as we all continue to build the digital an agreement to merge Euroset and Svyaznoy into operators and Digital Region Management to around 23,000 people. future. the world’s largest high-tech retail chain, consisting for transport and industrial site monitoring, of 8,000 stores1 with daily traffic of over two million and many other products. What are MegaFon’s plans for 2019? visitors. The merger will result in the launch of new products and services and major growth in our In 2018, we signed agreements for cooperation MegaFon will continue to pursue its digital strategy online sales platform, while at the same time helping on digital projects with the Novgorod, Pskov, in 2019. We will retain our focus on expanding us deliver on our omnichannel growth strategy. Saratov, Tyumen, and Ulyanovsk Regions, infrastructure, designing new end-to-end solutions and the Governments of Moscow and Saint for our customers and building a full-scale digital Petersburg. ecosystem. In 2019, we will continue to deploy technologies for digitalising the Russian regions. During the FIFA World Cup in summer 2018, we ran We are planning to fully roll out and scale up a number of projects testing 5G technologies — our successful pilots, expand our pool of partner we were the first in Russia to broadcast a live regions and launch a number of new projects. We football game in VR as well as demonstrating will actively expand our 4G coverage while focusing the capabilities of 5G at the Moscow Urban on next generation technology, particularly Forum in Zaryadye Park. After the World Cup, we by identifying and promoting 5G business Gevork Vermishyan presented a pilot case on remote ultrasonography, cases, including partnerships with other players. Chief Executive Officer with the data transmitted via 5G.

1. Including the stores of Svyaznoy, Euroset, MegaFon Retail, and franchised stores. 1About MegaFon

1.1 Performance Highlights 1.2 Creating a Digital Future 1.3 Assets and Resources 1.4 Geography 1.5 Key Events

12 1. About MegaFon About MegaFon 13

About MegaFon Since its inception, MegaFon has been at the edge of innovation. We have been researching, testing, and pioneering technology as well as taking risks, and often outperforming our peers while setting new MegaFon has come a long way since trends. We never look back – only ever ahead. The share of digital subscribers is expected to grow exponentially across the world its entry into the Russian market in the coming years, making smart subscriber devices and both over 25 years ago. These years saw city-wide and industry-wide digital platforms increasingly valued. a fundamental change in the mobile Telecoms operators have a key role in the future digital economy, forming the basis of the overall IT infrastructure. telecommunications industry, both in technology development and Today, we are focused not only on building reliable and robust infrastructure, but also designing integrated end-to-end solutions that in customer needs. Throughout its history, meet the needs of our customers and the entire country. We provide our MegaFon has followed a path of smart customers with cutting-edge technology to build a new digital world growth and innovative technology which aims to improve people’s quality of life. deployment not only in technological Sergey Soldatenkov solutions, but also in marketing, internal Chief Executive Officer at PJSC MegaFon processes, and subscriber relations. from 2003 to 2012 and from 2016 to 2018

MegaFon Today

Spanning the entire Russian Federation, MegaFon is a provider 1993-2001 2002-2006 2007-2013 2014-2017 of digital opportunities and a leader in the Russian and global telecommunications markets. Establishment Period of active Innovative Focus on a balanced of the first pan- growth and technology approach We combine all IT and telecommunications areas: mobile and fixed- Russian federal development. development to investment line services, mobile and broadband Internet, digital TV and OTT telecommunications and investment in business services, innovative digital products and services across Information operator. in reinforcing development and and Communication Technologies (ICT), the Internet of Things, leadership. efficient growth. Big Data analytics and processing, cloud solutions, cyber security, financial services, digital advertising and marketing, e-commerce, In May 2017, and converged IT solutions in system integration. MegaFon presented its new Driving Through the development of cutting-edge technologies, we create the Digital World a digital ecosystem and open up new opportunities to improve our strategy customers’ quality of life and make their businesses more efficient. for 2017–2020. We believe this approach positions MegaFon to become the first-choice data provider and best partner for our customers. 14 1. About MegaFon About MegaFon 15

MegaFon Group

MegaFon combines all areas of the IT and telecommunications industry:

. The fastest 76 9 PJSC MegaFon MegaLabs NetByNet million telecoms operator develops innovative products provides broadband mobile data services covering all segments and services. and fixed-line services. 1 of the telecommunications market subscribers in Russia across Russia.

Yota GARS Telecom First Tower Company federal operator of high-speed universal telecoms operator management of the Group’s internet, voice, and SMS services. for the B2B market tower infrastructure. and commercial real estate facilities.

,000 years >40 >25 MegaFon Retail MF Technologies responsible for retail business, provides comprehensive employees in the industry sales of communication innovative projects, digital equipment and services, customer solutions, and platforms service. for implementing Digital Economy initiatives.

QUALITY QUALITY As the leader in the Russian telecommunications industry, EDUCATIONMegaFon EDUCATION is able to contribute significantly to achieving the UN’s Sustainable >169,000 43% Development Goals //4G share of mobile QUALITY DECENT WORK INDUSTRY,DECENT WORK INDUSTRY, EDUCATION AND ECONOMIC INNOVATION,AND ECONOMIC AND INNOVATION, AND base stations data users GROWTH INFRASTRUCTUREGROWTH INFRASTRUCTURE

DECENT WORK INDUSTRY, AND ECONOMIC INNOVATION, AND GROWTH INFRASTRUCTURESupporting talented youth Creating high-skill jobs Providing affordable retail and technological innovations in areas such as Big Data, ICT, communication services and the Internet of Things and a communication infrastructure for industrial Developing technical Driving economic growth customers skills through educational and helping improve the quality RUB MB programmes and training of life Developing innovative mobile 260 9,256 involving MegaFon experts and digital services ARPDU DSU

1. MegaFon won the Ookla Speedtest Awards for the fastest mobile data services in Russia in 2018, based on over 7.9 million speed tests carried out by Russian users in Q1 and Q2 2018. 16 1. About MegaFon Performance Highlights 17

Operating Financial Highlights1 Highlights2

Data traffic Revenue, (DSU), 2018 9,256 RUB bn 2018 335.5 MB per month 2017 6,524 2017 321.8

2016 4,286 2016 316.3

Subscribers, Users of mobile data OIBDA3, Net profit, million services, million RUB bn RUB bn 75.2 32.7 75.6 75.4 31.0 31.5 121.1 121.9 124.0 28.9 21.1 38.3 20.5 43.4 37.9 37.0 41.0 41.8

9.1 6.4 6.3

2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 Share of mobile data users, % OIBDA margin, % Net profit margin, %

3G and 4G base ARPDU, CAPEX, Free cash flow, stations, ’000 RUB per month RUB bn RUB bn 99.0 260 81.5 88.6 230 237 75.9 65.6 56.0 35.2 27.7 24.3 20.7 17.4 8.8 10.9 4.9

1.5

2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 CAPEX / Revenue, % Free cash flow / Revenue, %

2. Starting from 1 January 2018, MegaFon has adopted new IFRS standards: IFRS 9 ‘Financial instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’. The adoption of IFRS 9 did not have a material impact on the Company’s financial statements. The key impact of the adoption of IFRS 15 was the capitalisation of costs incurred to acquire new customer contracts, which increased our Net Profit for 1. All figures disclosed under operating highlights refer to our Russian operations. Some of the operating KPIs presented here vary from the full year 2018 by the amount of RUB 1,540 million, net of tax benefit of RUB 385 million. those reported earlier due to adjusted guidelines for counting data service users. A data service user is defined as a subscriber who has 3. Adjusted OIBDA and adjusted OIBDA margin is shown for 2016. Adjusted OIBDA for 2016 is OIBDA net of impairment charge in the amount consumed any amount of data traffic within the preceding month. of RUB 3.4bn related to the goodwill allocated to the Broadband Internet business segment. 18 1. About MegaFon Creating a Digital Future 19

Dynamically Our digital ecosystem Developing innovative products and services is a strategic priority for MegaFon. We provide a seamless digital environment for both individuals and businesses through reliable transforming the business and advanced high-tech solutions designed to make MegaFon the best choice for our customers.

For more information see page 86 MegaFon has been dynamically transforming its business in response to existing trends while often setting SFera its own. We are no longer a traditional During 2018, MegaFon worked on creating SFera (Success Factors), a new, unique digital solution helping staff and management operate with more speed, ease, and transparency. mobile operator, but a provider SFera integrates resources, processes, knowledge, and capabilities within an advanced of digital opportunities building a full- system designed for training, development, onboarding, performance assessment, and career fledged ecosystem of digital products planning. and services by employing the best talent For more information see page 141 available. At the same time, we have been continuously improving performance while transforming our internal business Business technology processes and adopting what we refer to as ‘Agile’ best practices. sandbox

In 2018, MegaFon set up a technology sandbox – a new tool for engaging innovators and startups that speeds up the review process for new technology to be piloted within the Company. Approximately 300 solutions were reviewed in 2018, with 16 different pilots subsequently being launched. If successful, they will be rolled out across MegaFon.

Agile pilot

MegaFon has been actively adopting new ‘Agile’-based ways of working to both improve processes and embed new solutions and initiatives with more speed and higher quality.

For more information see page 57 Digital talent

MegaFon is extensively involved in building the national pool of technology talent. The Company supports the best talents while building developer skills and organising additional user interface programming and design courses. MegaFon held over 150 events in 2018, offering positions at the Company to 87 specialists as a result.

For more information see page 143 20 1. About MegaFon Creating a Digital Future 21

Successfully pursuing B2C Services our digital strategy ‘Vklyuchaisya!’ A key trend in the telecommunications (‘Connect!’) tariff line >20.7 industry is the digitalisation MegaFon has reviewed the first year performance of its new, million subscribers of everyday life with smartphones unique ‘Vklyuchaisya!’ tariff line. We have enhanced the tariff managing hundreds of tasks at once. line by expanding the list of mobile apps with free access We are creating a digital environment and adding free subscriptions to popular services to meet the growing consumer demand for data. At the end of 2018, around core aspects of human life: ‘Vklyuchaisya!’ tariffs had over 20.7 million subscribers. family, communication, health, finance, safety, and entertainment. For more information see page 83 MegaFon TV

The service provides non-stop access to a large content library including 200 TV channels (60 HD channels), over 2,500 films and more than 500 TV and cartoon series from leading Russian 200 and international content owners. The service can be accessed from smartphones, tablets, PCs, and Smart TVs. TV channels 60 HD channels For more information see page 88 >2,500 >500 films TV and cartoon series

MegaFon bank card Счет телефона

MegaFon issues branded bank cards which can be used for transactions such as money transfers and both online and offline purchases. The card balance is linked to the user’s account. When a purchase is made, the funds are debited from the user’s mobile account and vice versa, when the mobile balance is topped-up, the funds can be spent using the bank card.

For more information see page 89 22 1. About MegaFon Creating a Digital Future 23

Successfully pursuing B2X Services our digital strategy ‘Upravlyai!’ (‘Manage!’) We also provide easy-to-use IT business tariff line solutions for end-to-end digitalisation MegaFon launched its new ‘Upravlyai!’ business tariff line and outsourcing of operational in 2018. This is the first ‘build your own’ tariff in the market, processes. MegaFon consistently designed using Big Data and insights into specific business expands its product offering and updates needs. With the new tariff line, corporate customers are able to choose voice, text and data plans to suit their employees’ existing services, bringing the quality routine tasks. of the customer experience to the next level. ‘MegaFon.Business’ platform

In 2018, we launched the ‘MegaFon.Business’ platform – an online solution for SMEs unrivalled in the Russian market. The platform enables corporate customers to easily manage and activate value-added services (VAS) through a single click, as well as take advantage of special partner offers. The launch reflected MegaFon’s strategy to help drive the success of businesses and open new opportunities for growth and enhanced performance.

For more information see page 101

Internet of Things

MegaFon is focused on actively expanding its Internet of Things (IoT) portfolio. In 2018, we launched a dedicated IoT platform to build out-of-the-box and customised solutions for corporate customers. The new platform will integrate the following products: Employee Monitoring 2.0, Freight Monitoring, Car Fleet Monitoring, Smart Utilities, MegaFon Trunking, and others.

For more information see page 95 24 1. About MegaFon Creating a Digital Future 25

Spearheading 5G deployment and retaining the lead in infrastructure and mobile data

MegaFon is currently leading the Russian market by number of base stations1 while Cooperative 5G retaining its advantage in 4G mobile deployment data speeds2. We also strive to keep MegaFon and Rostelecom have signed 5G ahead of the innovation curve as we a cooperative agreement to jointly develop 5G develop 5G infrastructure, which enables networks. The companies expect to cut construction at 2018 FIFA costs for the new standard’s networks by joining the deployment of such forward-looking forces in expanding radio frequency spectrum used technologies as virtual and augmented for 5G deployment. World Cup reality, the Internet of Things, self-driving Russia vehicles, telemedicine, and many others. MegaFon has been pioneering the deployment Russia’s fastest of 5G in Russia, as demonstrated by the 5G mobile data solutions used at the 2018 FIFA World Cup in Moscow, MegaFon won the Ookla Speedtest Awards for Russia’s Saint Petersburg, fastest data download and transfer operator, based on 7.9 million speed tests on Russian mobile devices via and . SpeedTest®. In June 2018, we were the first in Russia to broadcast a football game live in VR and support mobile radio connectivity for self-driving vehicles on our platform. Telemedicine

Jointly with Moscow’s Department of Information Technology and Huawei, MegaFon presented innovative solutions for the interface between 1. According to Roscomnadzor telecommunications and medicine, such as remote as of 1 February 2019. sonography and DNA sequencing in 5G networks. 2. According to Ookla’s The use of telecommunications technology Speedtest by average mobile data speed in healthcare will make medical care significantly across Russia. more convenient and accessible for patients. 26 1. About MegaFon Creating a Digital Future 27

Building Jointly developing a digital economy digital technology

USM In 2018, MegaFon set up MF Technologies, The telecommunications industry is Rostec Holdings a joint venture with subsidiaries of Rostec, the foundation of digitalisation, which Gazprombank, and USM Holdings. is a priority for Russian economic development. MegaFon is investing The JV will focus on promoting digital services and running digital economy projects, including blockchain and IoT-based heavily in regional digitalisation initiatives. initiatives, implementing digital projects through partnerships with local government authorities. We particularly focus on digitalising urban infrastructure, healthcare, education, power and other Gazprombank utilities, transport, and security. Saint Petersburg Smart City

MegaFon operates Safe City projects in Samara Moscow and and has entered into agreements on digitalisation and IT infrastructure development with the administrations of Moscow, Saint Petersburg, and other cities. The new technologies will help in building Samara a holistic digitally-enabled ecosystem, which will fundamentally improve the quality of life for people. Sochi Accessible healthcare

MegaFon supports the development of telemedicine to make healthcare accessible to residents in even the most remote localities across Russia.

In 2018, MegaFon collaborated with the Pskov Region administration to install special portable hardware and software packages for remote healthcare in several rural primary care centres and district hospitals around the region. 28 1. About MegaFon Assets and Resources 29

Assets Our infrastructure Digital ecosystem MegaFon achieves its strategic goals by operating We are actively developing digital projects, the largest and most advanced infrastructure partnerships, and services to create a full-fledged in the industry. To keep up with global trends digital ecosystem for our customers. To that end, and resources and higher customer demand, we continue MegaFon has partnered with Mail.Ru Group, to focus on infrastructure development by growing Russia’s largest internet company, allowing us our base station network and expanding 4G to combine our communications capabilities and LTE Advanced coverage. Today, 4G services and infrastructure with cutting-edge internet are available across all our operating regions. technology. We are also actively collaborating In 2018, MegaFon refarmed a part of the GSM and developing partnerships with IT holding spectrum to LTE 1,800 to increase its mobile network Forpost, oneFactor, OFD.ru, and other companies capacity in the Moscow region by approximately to develop B2X solutions. 30%. The increased spectrum also improves network coverage in rural areas and inside urban buildings due to the higher penetration level of the LTE 1,800 spectrum.

Recognised brand and Ranking among the Brand portfolio loyal customers MegaFon also promotes its and WiFire brands.

MegaFon is a highly recognised brand as a provider of digital opportunities. We strive ths to be the best partner for life for our customers top 169.5 and a natural choice for those who actively use Number of base mobile data services, and want to make their life and world around them easy and exciting. In 2018, 2G/3G/4G stations Yota is a nation-wide wireless high-speed data the MegaFon brand was among the top three and communications service provider positioned strongest Russian brands and the value of its brand three as ‘the operator of the future’ which targets active increased 30%, meaning that it rose from 15th mobile data users. to 11th place among all Russian companies1. strongest Russian brands

Under the WiFire brand, the Company promotes ths services and products, such as WiFire Mobile 204.4 (unlimited mobile data), WiFire TV (wireless digital FOCL, km TV), and WiFire Home (residential broadband). 2nd most valuable 4G coverage Customer Satisfaction Index (CSI) Russian telecoms brand 83 Big Data Russian regions We aggregate publicly available information 50% on customer values and behaviours and use Big 79% Data analysis to better understand the needs of every single customer, and to develop the best of the Russian population Brand awareness products and offer unique solutions. 11th 86% most valuable LTE Advanced coverage Russian brand 46 Russian regions

1. According to Brand Finance, the world’s leading brand valuation and strategy consultancy. 30 1. About MegaFon Assets and Resources 31

Our team Partnerships with market Our retail network leaders One way in which we access our For MegaFon, 2018 was a landmark year for developing partnerships with leaders in high- customers is through MegaFon’s retail tech, telecommunications, finance, e-commerce, IT, and internet as part of our ambitious strategic goals network, comprising 3,734 points of sale, of becoming a digital leader. including 2,003 MegaFon Retail stores Our people are critical to MegaFon’s success. and 1,731 MegaFon-branded franchised MegaFon’s highly skilled team is a major driver MF Technologies of our strategy. Employee training programs In June, MegaFon established JSC MF Technologies stores and assessments are run continuosly to maintain (MFT), a joint venture with Gazprombank, Rostec, the highly productive and professional nature and USM Holdings. The new company will develop of MegaFon’s team and maintain a strong level digital services and implement digital economy of trust from our customers. MegaFon runs projects. The joint venture participants’ leading a unique employee development programme positions in the key sectors of the digital economy’s across Russia – MegaAcademy. We place infrastructure will help each partner implement In 2018, we effected a transformation in our strategy for our particular emphasis on recruiting and developing comprehensive innovative projects where their distribution channels by signing an agreement with SLV Group digital talent by holding regular conferences, industries coincide and introduce blockchain in spring 2018 to merge our Evroset and their Svyaznoy retail chains. hackathons, meetups, and other events on artificial and IoT-based solutions with maximum efficiency. This resulted in creating the largest1 retail chain worldwide in the high- intelligence, Big Data, robotics, IT, infrastructure, In particular, the JV will focus on the development tech sector. It comprises over 8,000 stores which attract over 2 million and more. These are attended by both aspiring of solutions for financial digital platforms actively customers daily. The consolidation is expected to result in new product and accomplished professionals from among using Gazprombank’s capabilities and financial and service launches, as well as active development of an online sales MegaFon’s current or future employees. resources. platform and implementation of an omnichannel strategy.

The largest e-commerce initiative in Russia and the CIS In September, we announced a crucial strategic agreement with the Russian Direct Investment Fund Headcount (RDIF), Alibaba Group, and Mail.Ru Group, aimed MegaFon’s retail network Retail chain at creating the largest e-commerce joint venture across Russia and the CIS. We are planning to pool relevant resources to create an unmatched value proposition for merchants, consumers, and internet users, as well as accelerating the development 40,529 of Russia’s digital economy. 3,734 >8,000 employees The Big Data Association initiative points of sale stores Jointly with Mail.Ru Group, oneFactor, Tinkoff Bank, and Yandex, MegaFon created the Association of Big Data Market Participants in October, aimed at Big Data product and technology development in Russia. We see great potential in Big Data usage and understand that the market’s further 2,003 >2 million development requires a set of basic rules to regulate MegaFon Retail stores customers daily relations between Big Data owners, which is why we have created this dedicated association with other key players. 142.8 1,731 RUB m MegaFon-branded Training costs in 2018 franchised stores

1. By the number of owned stores in the network. 32 Geography services, million services, Users of mobiledata RUB bn Revenue, RUB bn CAPEX in2018 1. million Customer base, Market share South Ossetia, andTajikistan. and in the republics of Abkhazia, operate across Russian all regions The Companyandits subsidiaries 1.MegaFon About AQUAFON-GSM Abkhazia /

Company estimation. London Frankfurt Munich Amsterdam Stockholm 58.6 Bratislava Warsaw

0.06 0.97 0.31

0.1 BELARUS Novorossiysk % Lviv Krasnodar Kiev Sochi Vitebsk Vladikavkaz Minsk services, million services, Users of mobiledata RUB bn Revenue, OSTELECOM / Ossetia South RUB bn CAPEX in2018 million Customer base, Market share Kibartay Aksay na-Donu Rostov- Nalchik LATVIA Maykop Kaliningrad Bryansk Tbilisi Smolensk Grozny Belgorod Rezekne Kursk Min. Vody Nazran Stavropol kopskoe Peschano- Orel V. Volochyok Baku Kaluga Voronezh Derbent Petersburg Saint- Makhachkala Tula Elista Pskov Kolpino Kochubey Tver Yashkil Lipetsk

Volgograd Saratov V. Novgorod Ryazan Penza Astrakhan Tambov Moscow Ulyanovsk Ozinki Saransk Vologda Tolyatti Uralsk Priozersk Vladimir Petrozavodsk 100 Ivanovo Novgorod Nizhny Yaroslavl Cherepovets

0.38 0.08 0.02 Kostroma

Orenburg B. Chernigovka 0.1 Samara Cheboksary Shangaly Kazan Tsivilsk % Yoshkar-Ola Vizinga Kirovsk Belomorsk Nab. Kirov Arkhangelsk Kotlas TT MOBILE TT / services, million services, Users of mobiledata RUB bn CAPEX in2018 million Customer base, Market share RUB bn Revenue, Izhevsk Kungur Orsk Murmansk Ufa

Chelny Magnitogorsk Syktyvkar Chelyabinsk Perm Uralsky Kamensk- Ukhta Nizhny Tagil Serov Nyagan Petropavlovsk 1 Kurgan Ozhogino Kholmogorskaya Tyumen Long-Yugan Salekhard 30.0 Surgut Omsk Nadym

3.72 0.76

Novosibirsk 0.8 1.5 Noyabrsk Barnaul % Nizhnevartovsk Novy Urengoy Biysk CHINA Tomsk Norilsk Novokuznetsk Gorno-Altaysk Yugra Kuzedeyevo Kemerovo Krasnoyarsk MONGOLIA Abakan Kansk Kyzyl Ulaanbaatar Babushkin 19.9 Key transit trunklines Irkutsk Volga Region Mirny Ulan-Ude Chita 19.5 Transit trunkline Backbone MegaFon Moscow Region Yakutsk 15.6 Maya Blagoveshchensk

Caucasus Tynda Belogorsk CHINA Novobureysky 14.0 Hong Kong North-West- Region Birobidzhan Khvoyny Magadan Vladivostok 9.0 Central Region Khabarovsk Bikin Luchegorsk Anadyr na-Amure Komsomolsk- Ussuriysk Glebovo Nakhodka Petropavlovsk- 8.4 Kamchatsky

Urals Region 2018 Report |Annual MegaFon Sakhalinsk Yuzhno- MegaFon MegaFon Russia / services, million services, Users of mobiledata million Customer base, Market share million units on the network, 4G devices RUB bn CAPEX in2018, RUB bn Revenue, 7.4 Siberia Region 6.2 Subscribers, Subscribers,

Far East Region 29.4

330.5

80.3 28.2 75.2 32.7 % % 33 34 1. About MegaFon MegaFon | Annual Report 2018 35

Key Events 25 years in the future

In 2018 MegaFon turned 25. Throughout its existence, MegaFon has grown and developed as part of an ever-changing telecommunications industry and has been at the forefront of many significant developments. We pioneered MMS, mobile television, 3G, 4G, and 4G+ services, and corporate bond placement using blockchain not only in Russia, but also in and beyond. 5G, IoT, and Big Data are the areas on which we are currently focused. Today, we are continuing to look to the future through the creation of digital platform solutions and transforming whole industries and cities by making them ‘smart’. Our goal is to lead the digital economy by 2020, becoming a key partner for the government and a ‘digitalisation champion’ for businesses and society. We are making new digital services more accessible and reliable, while ensuring they meet all of our subscribers’ needs. 36 1. About MegaFon Key Events 37

22 January 24 May 12 June 11 September 31 October 30 December MegaFon and Nokia signed Jointly with KAMAZ, MegaFon MegaFon, Mail.Ru Group, MegaFon connected the a memorandum on the strategic demonstrated a practical the Russian Direct Investment joint development of 5G application of 5G technology Fund (RDIF), and Alibaba northernmost networks and digital technology in self-driving transport Group announced a strategic oil field in Russia to its deployment, including through for the first time in Russia. partnership to launch the largest high-speed Evgeny Bystrykh was appointed the Internet of Things, cloud social commerce joint venture Chairman of the Board telecommunications, artificial in Russia and the CIS, aimed of Directors of MegaFon. intelligence, and augmented and at integrating Russia’s key virtual reality technologies. 5 July consumer internet and MegaFon launched a high-speed e-commerce platforms. For the first time in Russia, route stretching LTE MegaFon launched the network Enhanced Voice Service km technology to develop VoLTE. 26 February 25-26 May 3,200 5 October 13 November MegaFon and VEON completed MegaFon entered into between Moscow and Frankfurt, MegaFon completed the delisting MegaFon became the first the division of Euroset1. an agreement with the Moscow Germany, with an initial and cancellation of trading operator to open a Centre and Saint Petersburg throughput capacity of of its GDRs on the London Stock of Business Opportunities, where Governments for the joint Exchange. corporate clients can test its implementation of projects newest digital innovations. to develop new digital 1.7 Tbit/s, technologies and services, enabling a 15%–25% increase including augmented and virtual in the data transfer rate Events after reality, the Internet of Things, for virtually all of MegaFon’s ‘smart city’ solutions, and 5G/ services. 2018 year end IMT-2020 technologies. 2018 2019

27 April 5 June 6 September 8 October 13 November 28 January MegaFon completed For the first time in Russia, MegaFon successfully bought MegaFon successfully placed the acquisition of a MegaFon broadcast a live back its ordinary shares and football match in VR (virtual Global Depositary Receipts reality) using (GDRs), giving its shareholders 20 100% the opportunity to sell their RUB bn stake in Neosprint LLC, shares at a premium to their Gevork Vermishyan was worth of its BO-001P-05 series an operator that owns a 24 MHz market value. Earlier, in July appointed Chief Executive exchange bonds for a three-year frequency band in the 3.4– 2018, the Board of Directors Officer of MegaFon. term with a coupon of 8.55 % per 3.6 GHz spectrum in Moscow, determined that maintaining annum. which will significantly help 5G a listing on the London Stock MegaFon in its 5G development. technology. Exchange was no longer For the second year in a row, a strategic priority for MegaFon. MegaFon won the Ookla 4 December 7 February Speedtest Awards for Russia’s MegaFon, National Research MegaFon became a member of fastest mobile data operator. University MPEI, and Entels FinTech Association. Jointly with 28 April 9 June signed a memorandum other industry-leading members MegaFon and SLV Group, MegaFon launched JSC MF of partnership, under which of the Association, MegaFon will the controlling shareholder Technologies, a joint venture the companies will jointly develop take part in technological project of Svyaznoy Group, signed with Gazprombank, Rostec, IoT solutions for the energy, implementation. an agreement to merge the and USM Holdings, to develop 17 October industry, and utilities sectors. Svyaznoy and Euroset retail digital services and implement MegaFon became one of chains, resulting in the largest2 digital economy projects. the founders of the Association 20 March retail chain worldwide in the of Big Data Market Participants, As a result of a Mandatory high-tech sector. aimed at creating opportunities Tender Offer, LLC MegaFon for Big Data technology and 4 December Finance acquired a further product development in Russia. The independent information and 20.36% of the total outstanding analysis agency Telecom Daily shares. This resulted in affirmed MegaFon’s unrivalled LLC MegaFon Finance and its 1. Following a series of transactions, MegaFon acquired a 50% interest in Euroset, including all its assets and liabilities, from PJSC VimpelCom Big Data leadership in average and affiliates jointly owning (the Russian subsidiary of VEON), resulting in MegaFon owning 100% of Euroset. In turn, PJSC VimpelCom acquired half of Euroset’s maximum data speeds in LTE 99.2% of ordinary shares 3,600 retail stores. and LTE Advanced networks in in PJSC MegaFon. 2. By the number of owned stores in the network. Moscow and the Moscow Region. Strategic 2Report

2.1 Market Overview 2.2 Digital Strategy in Action 2.3 Business Model 2.4 Operational Results 2.5 Financial Performance 2.6 Risk Management 2.7 Sustainability 40 2. Strategic Report Market Overview 41

In the coming years, capturing these opportunities operators under significant financial pressure Market Overview will help innovative mobile operators beef up from both the investment requirements to roll their revenues, which have been under pressure out new infrastructure and the associated taxes from stricter regulations, tougher competition, and charges. The telecommunications industry and the slowdown in unique subscriber growth. has therefore been urging governments across A number of technologically advanced economies the world to adopt a stimulative policy expanding have already seen some signs of this upturn next-generation networks and reform the outdated and revenue growth in the market – which resumed regulatory frameworks that no longer have a place after a challenging year in 2017 – primarily in today’s digital economy. a result of operators consistently seeking out new opportunities to capture additional revenue streams Russia is among the countries that place in high-potential segments. The Russian telecoms a strong focus on building a digital economy market has even demonstrated a five-year high with government support – the country’s special growth rate of 3.4%.1 MegaFon succeeded in posting governmental programmes and private working higher revenue growth by delivering on its digital groups assist in growing the digital economy. strategy during the year. The government and key market players have set up ANO Digital Economy, an autonomous not-for-profit A global digital future Adoption rates for new technology largely organisation which supports socially significant depend on technology policies and industry digital projects and initiatives while coordinating regulation. Over time, countries that adopt new digital economy engagements between the business technology and encourage innovation will be better and academic communities, other communities, positioned and build a more sustainable economy, and governmental authorities. MegaFon is among Converging mobile services into a wider having created a stronger digital infrastructure the founders of the organisation and is actively and a robust talent pipeline. involved in its activities: since 2017, a member of our digital ecosystem has been a key trend Board of Directors has been leading the working in the telecommunications industry amid Advanced mobile networks are key group on telecommunications infrastructure. to the digital future. However, the evolution of 5G an increasingly technology-enabled world. and the continuing 4G expansion are putting For more information see page 64 Abandoning the conventional approach to the telecommunications business, major operators are capturing new opportunities in a fast-paced and highly competitive environment.

The industry’s growth outlooks are primarily Artificial intelligence is becoming a key to building associated with the expansion of 4G networks businesses of the future and delivering digital and particularly the development of new transformation. AI will drive the evolution 5G networks, which will boost mobile traffic of autonomous and intelligent networks while and support growth in technology markets improving the customer experience through such as IoT, M2M, AI, content (primarily video), advanced behaviour analytics. Telecoms operators and augmented and virtual reality. are planning to use AI in developing applications, chat bots and digital assistants, managing GSMA expects the Internet of Things market to grow and planning network operation, providing customer rapidly, tripling global IoT connections to 25 billion service, advertising, and other services across by 2025 while total operator revenue in this segment various industries. will increase fourfold to USD 1.1tn. As this segment is becoming increasingly commercialised, mobile The market for video and audio content will continue operators are seeking to expand their role at all to transform in response to changes in consumer stages of the value chain – from providing partners behaviours, the emergence of innovative new with access to their core tools and capabilities, entrants, and fundamentally new production to designing integrated proprietary IoT solutions. and distribution models. As the content market continues to grow, an increasing number of telecoms operators are becoming active players in this market, creating their own content or building partnerships with OTT service providers. 1. According to TMT Consulting.

42 2. Strategic Report Market Overview 43

Global market overview Global market in numbers2

The global mobile subscriber base reached In the coming years, the share of mobile services 5.1 billion unique users in 2018, up approximately in global GDP and their impact on social 2% y-o-y, while the mobile data user base grew and economic growth are expected to rise as 5G to 3.6 billion, up 9%. Mobile penetration reached networks, M2M, IoT, and other solutions play 67%, with mobile internet penetration at 47%. an increasingly important role in various global economic sectors. The expansion of 5G alone Russia and CIS countries are among the regions is forecasted to contribute US$ 2.2tn to global GDP with the highest mobile penetration rates (80%1 by 2034. Mobile services Mobile data in 2018), slightly behind Europe and North America. GSMA estimates that the monthly mobile data GSMA estimates that in 2018, total global mobile traffic per subscriber will increase almost fivefold In 2018 revenue was US$ 1.03tn against US$ 1.05tn in 2017. by 2024 from 5.3 GB per month to 24 GB per month. The revenue growth was constrained by slowing This growth will be primarily driven by the expanding subscriber growth, stiffer competition, and tougher digital subscriber base and accessibility of high- regulation of the industry. Revenue is expected bandwidth mobile networks. to increase to US$ 1.14tn by 2025. billion billion Developed and technologically advanced economies 5.1 3.6 In 2018, mobile technology and services with a high number of digital customers will focus contributed 4.6% to global GDP, or US$ 3.9tn. on services such as augmented and virtual reality unique subscribers unique subscribers Mobile communications have become more socially as well as technology for smart homes, buildings, significant, with as many as 32 million people and cities. +2% +9% already involved in the industry and related sectors, exceeding 2017 levels by three million people. 67% 47% penetration rate penetration rate +1 p.p. +4 p.p.

Global mobile penetration1, %

88 In 2025 85 83 85 82 80 74 72 69 67 66 64 51 billion billion 45 5.8 5.0 unique subscribers unique subscribers +1.9% CAGR +4.8% CAGR

Europe North Russia Latin Asia-Pacific MENA Sub-Saharan 71% 61% America and CIS America Africa penetration rate penetration rate

2018 2025F Source: GSMA report, The Mobile Economy 2019. +4 p.p. +14 p.p.

1. Excluding mobile IoT. 2. GSMA report, The Mobile Economy 2019. 44 2. Strategic Report Market Overview 45

Global mobile data traffic per subscriber, GB per month Russian 56 telecommunications market

32 26 According to TMT Consulting research, the Russian telecommunications 22 2 19 market grew by 3.4% to RUB 1.70tn in 2018 , marking a five-year high growth rate. 10 8.5 5.8 3.3 5.8 3.7 1.1 The market growth was primarily driven by spiking mobile revenue 1.7 on the back of steady growth in broadband internet and Pay-TV. The market also benefitted from operators’ 2017 decision to abandon RUB tn price competition, cancel unlimited plans, and expand their core North Europe, Asia-Pacific Latin MENA Sub-Saharan and value-added service offerings. America Russia, and CIS America Africa +3.4% The positive impact from these initiatives was felt throughout 2018, 2018 2024F Source: GSMA report, The Mobile Economy 2019. off-setting a surge in competition in many Russian regions resulting In 2018, the growth from the re-introduction of unlimited plans. Additionally, the B2B segment rate in the Russian showed strong growth, mainly due to increased revenue from SMS mass messaging, M2M, and other value-added services. telecoms market hit a five-year high. Traditional mobile services remain the largest contributor to operator revenue in the market. However, digital services such as IoT, mobile TV, Key mobile data growth drivers by 20251: M2M, e-commerce, Big Data, and others are gaining more importance in the industry, just as they are in the global market.

Major Russian operators posted continued ARPU growth for the year. Overall, ARPU in the Russian mobile market was up 5.3% to RUB 314 in 2018.

Digital IoT Smartphone 4G 5G subscriber growth user expansion development base growth base growth 5.0 25.2 79% 59% 15% Average ARPU of Russian mobile operators, RUB 314 billion billion +19 p.p. +16 p.p. 311 people connections 300 290 299 +39% +277%

In 2018, 4G overtook 2G by number In 2019, 5G will be of connected devices, becoming the most commercially 2014 2015 2016 2017 2018 popular communications technology globally. launched in Over half of all devices are expected to be Source: TMT Consulting. connected to 4G by 2019. 16 countries

1. GSMA report, The Mobile Economy 2019. 2. Preliminary estimate by TMT Consulting.

46 2. Strategic Report Market Overview 47

Subscriber bases of top operators, The Russian Russian market million subscriptions mobile market has in numbers MegaFon 4 2018 75.2 major operators: 2017 75.4 MegaFon, MTS, VEON, and Tele2 254 969 MTS

2018 78.0 The mobile subscriber base million RUB bn decreased very slightly to 254 million users, mobile subscriber Russian mobile with a further decline in the user base market 2017 78.3 base expected in the near term. SIM card penetration stood at 179%. In a saturated VEON market, operators primarily focus on improving the customer experience for their existing 2018 55.3 customer bases rather than boosting subscriber growth.

2017 58.2 Fixed-line and B2O services as well as their share in the industry’s total revenue ths continued to decline, but 223 3.67 Tele2 at somewhat lower rates. 4G base stations This steady decline in the fixed- USD bn 2018 42.3 line market is due to subscribers abandoning fixed-line size of the Russian in favour of mobile services, 2017 40.6 while the decline in the B2O IoT market market is due to low demand and lower prices across a number of international segments. Others

2018 3.2

Russian broadband Russian Pay-TV 2017 2.9 market market 33.2 44.2 Source: AC&M, company reports. million million

subscribers subscribers 1. Excluding MVNO subscriptions of Tele2. 48 2. Strategic Report Market Overview 49

Mobile services Tower infrastructure Mobile services remain the principal source of revenue for the Russian According to AC&M, in 2018, Russia remained the world’s sixth market Number of 4G base stations telecommunications industry: TMT Consulting estimates this segment’s by number of towers used for mobile network base stations, totalling in 2018 share at 57% in the total revenue for 2018. approximately 73,000,1 including posts, masts, and towers. In recent years, average annual growth was 3%–5%, increasing at double-digit In 2018, the Russian mobile market achieved an acceleration in growth rates for independent infrastructure companies. rate of 5%, totalling RUB 969bn, as compared with 3.8% in 2017. The market also benefited from operators’ 2017 initiatives to abandon The number of 4G base stations is growing at the fastest rate, rising price competition, cancel unlimited plans, and expand their core to 223,000 in 2018 according to AC&M (+ 39% y-o-y), against 226,000 223 and value-added service offerings. The impact from these initiatives 3G stations (+ 4.1%) and 229,000 2G stations (+ 0.4%). Although ths lcontinued throughout 2018 despite a new surge in competition the number of base stations grew at slower rates, the total tower in many Russian regions and the re-emergence of unlimited plans. infrastructure continued to expand. +39%

Mobile data remains one of the fastest growing segments in mobile The next phase in tower infrastructure development could include and is a key revenue driver for Russian telecoms operators. According the launch of 5G network construction between 2020 and 2021, to the Russian Ministry of Digital Development, Communications which will require a significant increase in coverage density in large and Mass Media, mobile data traffic for 9M 2018 was up 57% In 2018, the Russian cities. 5G will also require moving antennas, feeder devices, to 7.1 billion GB. mobile market achieved and communications equipment from roofs of high-rise buildings to alternative sites such as poles, towers, or posts. The traffic growth was mainly due to increasing demand for messengers such as WhatsApp, Telegram, and Facebook The top three independent passive infrastructure operators in Russia Messenger, as well as an increase in streamed video content operate 85% of all sites (towers, masts, poles, and posts), which are not on YouTube and social networks. Digital TV and music service offerings owned by the four federal mobile operators. The share of independent from major telecoms operators are also gaining popularity. 969 companies will gradually increase as operators install more base RUB bn stations at leased sites. Independent operators expanding across Cisco forecasts that by 2022, the average annual growth rate Russian regions will become a key trend in the industry’s development of the Russian mobile data market will reach 43%, or 2.2 times higher +5% within the next two or three years. than the growth rate in fixed-line. By 2022, DSU in Russia will reach 29 GB per month as compared with 5 GB in 2017. Mobile data traffic in Russia will grow to 43.9 EB by 2022, a sixfold increase from a 2017 baseline (7.3 EB). In just three years, every Russian citizen will consume Mobile data traffic almost six times more mobile data on average than in 2017. for 9M 2018 was

The expansion of 4G networks (and 5G going forward) will also contribute to the traffic growth. According to GSMA, 19% of all connections in Russia and CIS are attributable to 4G networks, 45% to 3G, and 36% to 2G. GSMA expects that 4G and 5G will account for 80% of all connections by 2025. 7.1 The increase in mobile data traffic is also driven by growing numbers billion GB of subscribers with LTE-enabled and widescreen smartphones, which M2M and IoT prompt users to view and send more HD images and videos. +57% Both the Russian and international M2M and IoT markets continue to show Size of the Russian IoT market strong growth. IDC estimates that the size of the Russian IoT market was in 2018 US$ 3.67bn in 2018. From 2018 to 2022 inclusive, investment in hardware, software, services, and communications enabling IoT solutions will grow at an average annual rate of 18%. In 2022, Russian end users will spend US$ 7.61bn on IoT. Software AG forecasts that between 2019 and 2021 the industrial 3.67 IoT market will grow at an annual rate of 18% to 25% from RUB 93bn to RUB 270bn. Between 2020 and 2021, the impact from adopting USD bn the Internet of Things in the real economy sector could total RUB 0.8tn– RUB 1.4tn. IoT growth is primarily constrained by the need to harmonise equipment and disparate IoT systems into a single standard, as well as by the apparent lack of immediate economic benefits from IoT.

1. As at 1 July 2018. AC&M’s estimate for 2018 year-end is 73,600 towers. 50 2. Strategic Report Market Overview 51

IT functions of IoT manufacturers will need to speed up their processes Industrial IoT market by 2021 In 2018, the B2B segment saw a large-scale expansion of converged in 2019 to enable agile responses to business needs and deliver digital will grow to services. According to a survey by AC&M, 20% of corporate transformation for enterprises. The key to success will be in using subscribers indicated that they had a single account for fixed-line, a methodology ensuring engagement and integration between developers mobile, and all other services such as virtual PBX. and IT support functions and leveraging digital media channels, 20% technology, and practices. Players who successfully address this VPN, 8-800, virtual PBX and other cloud-based services remain high- challenge will be able to redesign their ways of working and maximise potential niches in the B2B segment, with the growing demand driven corporate performance. As API management will play a key role in sponsoring 270 by an increase in bandwidth and low cost of solutions. subscribers business initiatives, IT functions will focus on rapid and effective RUB bn development, integration and management of complex APIs. In 2018, MegaFon continued building up its B2B service portfolio, indicated that they had a single +25% annually launching bundles comprising a basic broadband service and some account for fixed-line and mobile AC&M estimates that the number of wireless modules across mobile cloud services for SMEs. services networks exceeded 17.5 million by the end of 2018 as compared to 13 million in 2017. Connecting modules to mobile networks brought Russian operators about RUB 6bn, with 70% of this amount shared almost equally between MegaFon and MTS, whose average monthly cost of service per wireless device is around RUB 25.

AC&M experts note that the IoT network growth in Russia has been hindered by delayed development of a regulatory framework for launching NB IoT networks, actively built by operators. The new NB IoT Broadband internet access technology, which considerably reduces the cost of wireless connection and the autonomous operational life of a wireless sensor, unlocks wide In 2018, the Russian broadband market showed strong growth. opportunities for embedding IoT in all manufacturing and logistics According to TMT Consulting, revenues in the mass broadband processes. segment were up 3.2%, outpacing the growth in the subscriber base, which increased by 2.1% to 33.2 million subscribers. ARPU reached Cloud-based services are expected to be the fastest growing segment Number of wireless modules across RUB 344 as compared to RUB 343 in 2017. 33.2 in the M2M/IoT market, including such services as cloud-based mobile networks by the end of 2018 intelligence for Smart Home systems and cloud-based data analytics TMT Consulting attributes the market growth to a trend that million for connected cash registers, which will gradually squeeze out proprietary started to emerge in 2017 and 2018 with subscribers migrating combined hardware/software solutions and create new markets. to more expensive high-speed data plans. This trend was supported subscribers by the updates made to tariff lines by internet providers, which MegaFon is a leader of the Russian M2M and IoT market, offering included offering higher bandwidth for higher prices. Operators a wide range of B2B, B2C, and B2G solutions, and actively engaging >17 were also abandoning low-speed low-price plans while a number in the government-sponsored initiative to develop the digital economy million of operators resorted to price indexation in 2018. across the Russian regions. In 2018, MegaFon also introduced the new practice of time-based task prioritisation, enabling agility in a fast +35% A number of operators in certain regions, including Rostelecom, changing digital world and rapid responses to changes in IT agenda. the largest operator by subscriber base, announced a 5% to 10% increase in tariffs for home internet services as of December 2018 or January 2019. These initiatives are expected to further drive ARPU 344 in 2019. RUB ARPU According to TMT Consulting, operators the price increases to the costs of compliance with the Yarovaya law and to the VAT increase as of 1 January 2019. Additionally, players indicate that broadband prices had been kept in check for quite a time, while the cost of equipment and service delivery were growing on the back of rouble depreciation.

In 2018, the list of top players in the Russian broadband market remained virtually the same as compared to 2017, with 70% Fixed-line services of the subscriber base in the market shared between the top five players: Rostelecom, ER-Telecom, MTS, VEON, and TransTeleCom. In 2018, the fixed-line segment continued to decline, as seen from TMT Consulting data, although this trend has somewhat decelerated as compared to 2017. Last year, the number of fixed-line subscribers decreased by 2.1 million to 26.3 million, with penetration down 3 p.p. to 34.5%. Operators’ fixed-line revenue was down 8.4% to RUB 119bn. The declining trend is due to subscribers continuing to abandon fixed line for mobile services. The amount of B2O services in 2018 also declined by 5.8% on the back of low demand and falling prices in some international segments. 52 2. Strategic Report Market Overview 53

M-commerce Pay-TV A mobile application has become a universal shopping tool which In 2019, global mobile contactless According to TMT Consulting, the Russian Pay-TV market grew Russian Pay-TV market combines both offline loyalty programmes and mobile sales. payments will exceed to RUB 93.3bn in 2018, up 10.8%, while the number of subscribers was The young of today have never owned and will never own a laptop, up by just 3.2% to 44.2 million. The disparity is due to tariff increases with their entire lives focused around their mobile phones. by a number of operators, changes in the approach to revenue recognition by some players, and a rise in consumption of value-added Mobile online shopping through applications or mobile versions services. As a result, the monthly ARPU was up 6.6% to RUB 178. of websites has become increasingly widespread globally. According 93.3 to projections by 451 Research, the number of m-commerce 1 Similarly to 2017, IPTV demonstrated the highest growth in subscribers, transactions will eclipse the number of e-commerce transactions having increased by 10% y-o-y in 2018, primarily due to broadband RUB bn globally by 2019. Online commerce will grow at more than six times USD tn subscribers migrating to bundles. The satellite TV subscriber base was the rate of in-store sales and will reach US$ 5.8tn by 2022. In 2019, up 2%, while the cable TV base was down 0.7%. +10.8% global mobile contactless payments will exceed US$ 1tn. Churn by cable TV subscribers only really occurred in the analogue TV Russia has been keeping pace with these global trends. According segment: more than 400,000 households stopped watching analogue to a survey by OMNI Solutions, mobile traffic is already generating TV during the year. As a result, the share of digital subscribers over 40% of sales for most Russian companies and accounts for 50% For most Russian companies in the entire Pay-TV subscriber base rose to 73%. in sales of at least half of Russian retailers. Mobile sales are expected mobile traffic is already to catch up with e-commerce as early as in 2019 or 2020. generating over The gap between the respective revenue share of satellite and IPTV has widened significantly – 7 p.p. in 2018 as compared to 3 p.p. in 2017. 44.2 According to the survey, 84% of Russian online buyers use The percentage share of total revenues of cable TV declined from 49% smartphones for shopping, and 36% shop online at least every week. to 43%. These results were due to considerable differences in ARPU million growth rates between respective technologies – while the cable TV Retailer.ru estimates, citing Mastercard data, that most online ARPU only changed insignificantly, ARPU grew by RUB 8 for satellite subscribers purchases in Russia are made from smartphones. 84% of Russian 40% TV, and by RUB 47 for IPTV. online buyers use smartphones for shopping, and 36% shop online at least every week. of sales TMT Consulting forecasts that in 2019 the subscriber base will continue to grow, albeit insignificantly – at about 1.5%–1.7%. The increase will A distinctive feature of m-commerce, which enables deeper insights be largely driven by IPTV subscriptions within bundled offers. Revenue into customer behaviours, includes the ability to track location during growth rates will also decline marginally to about 8%. contact with a customer. Applications can locate users using GPS Wi-Fi while content personalisation and recommendation tools capture location when generating an individually tailored delivery offer.

Given the trends in m-commerce, MegaFon and Mastercard have joined forces to make financial services even more accessible, easy to use, and native for smartphone users. The partners have signed a memorandum on cooperation in mobile financial services offered to subscribers and launched the Loan to Mobile service. As a part of this project, payment security is ensured through Mastercard’s tokenisation technology. 54 2. Strategic Report MegaFon | Annual Report 2018 55

Digital Strategy in Action

Mission Providing opportunities

Vision To be subscribers’ First Choice and Best Partner for Life Aspiration Become a digital market leader In 2018, MegaFon continued to implement its Strategy for 2017–2020, ‘Driving the Digital Target World’, maintaining the focus on fulfilling LTV growth the needs of digital customers and driving 1 their LTV to spur further growth. Commercial strategy

Product Big Data Retail ICT and IoT Creating value without 360° customer view Prime access to high- Develop value-added competing on price value digital customers corporate services at minimal cost

MegaFon’s MegaFon’s Tools and capabilities

Mission Vision Digital ecosystem Best infrastructure Continuous Effective management and spectrum operational efficiency model Providing To be subscribers’ improvements opportunities First Choice and Best Partner for Life

We see our mission as building MegaFon’s key objective: On being implemented, the Strategy resulted in an a digital world offering to become a digital market leader increase in MegaFon’s key financial metrics in 2018. opportunities that improve the life and first-choice data provider by offering top-of-the-line digital Service revenue grew by 4.7% y-o-y to RUB 307.0bn, of each customer. 2 products and services. with OIBDA up by 1.8% y-o-y reaching RUB 124.0bn.

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 2. Including the positive impact from the adoption of new international reporting standards. Excluding this impact, OIBDA was RUB 122.1bn, her relationship with MegaFon. up 0.2% y-o-y. 56 2. Strategic Report Digital Strategy in Action 57

During the year, we added three strategic priorities for our overall ‘Agile’ pilot project aspiration of Becoming a Digital Market Leader – Happiest Customer, Fastest Service Provider, and Government and Industry Digitalisation. MegaFon has been actively adopting new Happiest Customer so-called ‘Agile’-based ways of working We believe that the telecommunications market can only grow both to improve processes and to embed by improving the value proposition while reducing price competition. new solutions and initiatives with more We are continuously adding value to our products while expanding our digital offerings for our customers, to make ensure they remain happy speed and higher quality. Between and ready to stay with us throughout their lives. In a modern world, however, we need to go further and enter new markets to engage October and December 2018, our customers by both developing our own products and expanding unique Customer Value Management team ran service offerings through cross-industry partnerships. We are adopting new operational metrics to measure customer perceptions more an ‘Agile’ pilot. accurately.

Fastest Service Provider The project launched four The teams were set ambitious performance targets which covered We understand that, to be the first in offering the best services cross-functional teams two or three business objectives (e.g., mobile revenue growth) to customers in the market, we need to transform our internal focusing on process and one or two performance improvement objectives (e.g., shorter processes with speed and efficiency. We want to become the fastest optimisation across four time-to-market). Throughout the duration of the three-month pilot, and most efficient company, attractive both to external partners that areas: the participants were extensively supported and coached by our in- we want to partner with in building an ecosystem of digital products house scrum masters and external ‘Agile’ coaches. and services, and to our own employees. In line with this approach, we • Developing loan launched a technology sandbox in 2018, a tool that, by using simplified and payment product All participants in the pilot project teams first underwent an integrated procedures, allows to speed up the review process for new technology offerings training course on applying ‘Agile’ practices in day-to-day work. to be piloted within the Company. • Promoting devices Team skill sets were aligned with business objectives to enable and mobile equipment ‘Agile’ squads to work autonomously and have a direct impact • Attracting B2B subscribers on the outcome of the project. A special workspace was provided Government and Industry Digitalisation through dedicated products for daily meetings, sprint planning and reviews, bringing together all and tailored offers functions involved in the project. MegaFon’s involvement in Industry Digitalisation efforts helps us Maximum data speed at • Increasing the number to identify new sources of growth and to bring added value to other the 2018 FIFA World Cup of active mobile On completion of the project, all project participants noted that players in the Russian market. The construction of unique infrastructure Client Account users the meetings, self-analysis and access to regular feedback had for the FIFA World Cup was the most striking example of this in 2018. in the customer base had a positive impact on their productivity and management Apart from achieving a record high SLA1 level of 99.99% and providing of expectations for the project. a maximum data speed of 293 Mbit/s, MegaFon also deployed trial 5G clusters to broadcast selected football matches during the tournament. 293 Mbit/s

99.99% a record high SLA level

1. SLA stands for Service Level Agreement between the Company and its subscribers.

58 2. Strategic Report Digital Strategy in Action 59

Key Strategy Products and services We continue to launch products that create real value for our digital customers. In 2018, we launched the new ‘Upravlyai!’ business tariff elements line. This is the first ‘build your own’ tariff in the market, designed using Big Data and insights into specific business needs.

Big Data

We aim to make our digital proposition more relevant and tailored more closely to individual customer needs. To provide a better customer experience and more targeted offers for both new and existing customers, MegaFon relies on insights into its extensive customer base Products and users of Mail.Ru Group’s products, gained through leveraging and services advanced technologies such as Big Data, machine learning, conjoint analysis and other analytics. Creating value while avoiding price competition. New tariff lines are Sales and support network based on insights into customer needs. We aim to secure prime access to high-value digital customers at minimal cost.

To this end, we promote our services in our own stores and through our online channels, while in multi-brand stores we are primarily focused on growing our base of high-value customers by providing better products and services rather than competing on price.

We focus on increasing customers’ LTV rather than increasing gross Sales Big Data adds. We will also continue our efforts to improve retail efficiency and support by optimising our points-of-sale without impact on revenue network 360° customer view. and by introducing new tools and models while focusing on capturing Big Data allow us higher quality sales. Prime access to high- to understand how value digital customers Digital to better adjust our at minimal cost. customers offerings. ICT and IoT

We have built up a significant corporate following in ICT and IoT, posting above-market growth rates in both fixed and mobile. Further growth will be supported by the launch of high value-added, integrated offerings and ICT projects.

We are also actively involved in the national efforts to drive the digitalisation of the Russian economy by developing integrated communications solutions for government and business customers. ICT and IoT Through building an ecosystem of partnerships, we offer our corporate customers integrated industry-specific solutions, including ‘Digital Developing value- Region’, ‘Smart Utilities’, transport and industrial site monitoring added corporate solution, the ‘Internet of Things’ tariff plan, and many others. services for the public and business sectors.

60 2. Strategic Report Digital Strategy in Action 61

Our competitive advantages 2018–2020 targets and progress1

Stated 2018–2020 targets

Digital ecosystem Continuous efficiency improvements We are building up our capabilities to create Russia’s largest digital ecosystem. We continue In 2018, MegaFon continued its efforts to maintain a strong focus on fostering partnerships: to boost efficiency. A process was designed in 2018, MegaFon launched JSC MF Technologies, to manage initiatives consistently throughout 2–5% 3–6% ≤2.0х a joint venture with Gazprombank, Rostec, and USM their lifecycle, from development to execution. Holdings, to develop digital services and implement In addition to maximising financial returns, we Service OIBDA Net debt / digital economy projects. Also, during the year, aim at accelerating and simplifying our internal revenue OIBDA MegaFon, the Russian Direct Investment Fund processes while increasing employee satisfaction (RDIF), Alibaba Group, and Mail.Ru Group and productivity. A special intranet portal, Digital announced a strategic partnership to launch Idea, was set up to engage the entire Company the largest e-commerce joint venture in Russia in the process. Via the portal, all employees and the CIS. We are developing relationships can now have access to details of every project with external partners no matter what size or state and a full list of corporate initiatives at different of development — from startups (through our stages of execution, as well the opportunity technology sandbox) to more mature vendors — to suggest ideas or to join any of our ‘Agile’ project to incorporate their solutions into our product mix teams. on mutually beneficial arm’s length terms or to use such solutions to speed up our internal digital transformation. 2018 actual results2

Infrastructure Management model 4.7% 0.2% 2.4х MegaFon is building upon its existing technological As of 1 January 2018, we switched to a new Service OIBDA Net debt / advantages to further consolidate its leadership cluster management model to improve operational revenue OIBDA in digital services for customers. Our objective flexibility and speed up decision-making across is to be the data provider of choice for digital the board. customers based on their recognition of the quality of our service, by 2020. We will continue to pioneer Also, to implement the Strategy, we have created innovative technology, developing our infrastructure new skills and capabilities by developing our in line with major global trends, capitalising Customer Value Management, using Big Data on our leadership in number of base stations, in process management, and boosting 1. Target values are based on average growth rates and do not reflect possible negative implications of regulatory changes and one-off and leveraging our fourfold bandwidth advantage the performance of project teams. transactions. in the 2,600 MHz frequency range. 2. Excluding the IFRS 15 effect. 62 2. Strategic Report Business Model 63

Business Model Products Results and services — Shareholders Resources and assets 335.5 Revenue, RUB bn

Technology leadership 204.4 ths 169.5 ths Mobile network FOCL backbone network, km base stations 124.0 OIBDA, RUB bn

An e-commerce Service- and partnership- Digital products and MF Technologies joint venture based digital ecosystem with the RDIF, Alibaba Group, services — Our team and Mail.Ru Group 142.8 Training costs, RUB m 899.2 Recognised brand 1 Fixed-line services Social benefits, 86% RUB m and loyal customers Brand awareness

— Customers Balanced distribution 2,003 1,731 4,668 Sales of handsets & accessories 76.9 network (mono- MegaFon franchised Euroset and and multibrand) customer base, Retail stores stores Svyaznoy stores million people 50% Customer satisfaction index (CSI) Accumulated aggregated customer data Big Data — Society

Focus on digital customer LTV growth Experienced 40,529 team of experts employees 79% of population covered by 4G network 1 7 7.6 Strategic focus on the digital Charity expenses, Brand portfolio Yota WiFire customer share and revenue RUB m

1. At the end of 2018. 64 2. Strategic Report Building a Digital Economy 65

Building a Digital Economy

National project and In 2018, the group prepared a roadmap for its MegaFon’s contribution We are currently the leader at the federal activities, which included over 300 initiatives level in developing a number of key platforms working group which aimed to: to the Digital Economy outlined in the Information Infrastructure federal project such as: The Digital Economy is a national project approved • bring broadband services to small communities, MegaFon aims to become a leader of the Digital by the Russian President in 2018 and intended to be educational and healthcare institutions, Economy by 2020. • an industrial IoT data collection platform, implemented in the period up until the end of 2024. and governmental authorities; together with tools for analysing objective data • create a modern communications network Our key objectives within the national project from monitored facilities based on approved ANO Digital Economy, an autonomous not-for-profit across all federal highways; are to: ministerial data models used for dynamic risk organisation, was established by leading Russian • roll out 5G in cities with a population of over assessment in governmental and municipal high-tech companies together with the government one million; • be recognised as a key partner control (supervision) frameworks; to maintain a positive dialogue between • build digital platforms, and for the government in the development • a universal digital stocktaking, metering, business and the government in implementing • develop technologies for collecting and using and implementation of digital policy; and control platform for providers of utility the national project. The organisation is supported personal data, Big Data, and spatial data. • create new products and solutions services, and for all types of energy resources by the Russian Presidential Executive Office for the digitalisation of the Russian regions, and properties, including government and the Russian Government. The group also drafted a list of additional measures and develop them into a national standard; and municipal property; to encourage operators’ investment in advanced • pioneer the digitalisation of Russia’s traditional • cloud-based online conference platforms MegaFon is actively involved in the organisation’s telecommunications networks. industries such as energy, transport, metals for remote participation by individuals activities, with Anna Serebryanikova, a director and mining; and organisations in court and non-court of MegaFon, chairing the Information Infrastructure Going forward, MegaFon intends to develop • become a national digital champion; proceedings. working group. The group is focused on expanding proposals for introducing a digital agenda • establish a world-class centre of digital telecommunications networks and the network for sectors such as healthcare, education, excellence within MegaFon, and The Company’s plans for the near future include of Russian data centres as well as on adopting agriculture, power generation, public • generate a significant portion of MegaFon’s involvement in the federal project ‘Digital digital data platforms to cater for the needs administration systems, financial services, revenue from selling innovative products. Technology’, including bidding for tenders to design of the government, business, and retail customers. and e-commerce. In Q1 2019, the Company will roadmaps for the project. consider a blueprint for developing data storage Among other areas of focus, the working group and processing infrastructure, which integrates is overseeing the development and approval the development plans for the power generation of a number of industry-related concepts: creating and telecommunications infrastructures, and factors In 2018, MegaFon signed agreements and expanding 5G/IMT-2020 networks in Russia; in data storage demand, and available computing building and expanding narrowband-IoT networks capacities. with various Russian regions for cooperation in Russia; and expanding narrowband LPWAN in digital projects and development networks for collecting telemetric data across In 2019, we will launch a major nationwide of the telecommunications infrastructure, transport infrastructures. project to connect social infrastructure facilities including with the Novgorod, Pskov, to the internet. The project will be implemented on an arm’s length basis through tender procedures, Saratov, Tyumen, and Ulyanovsk regions, focusing on the delivery of standard digital services and the Governments of Moscow under an as-a-service model. and Saint Petersburg. 66 2. Strategic Report Operational Results 67

MegaFon’s base stations, Operational Results ’000

2018 49.6 49.4 70.5 169.5

2017 40.6 48.0 69.1 157.7

2016 30.2 45.7 67.8 143.7 Infrastructure development 4G/LTE 3G 2G

Network expansion

Committed to maximising the speed and stability of connections, maintaining the excellent quality of communications and providing high- 2G 3G 4G 5G speed data services for its customers, MegaFon has consistently expanded its infrastructure, becoming the unrivalled leader by number of base stations 1990s 2000s 2010s 2016–2018 in Russia – at the end 2018 they totalled over 169,500, of which 29.3% were 4G base stations. Voice and SMS Mobile data and high- Mobile broadband Ultrafast mobile internet, quality voice services and full-scale AII-IP full-scale support of IoT ecosystems, and ultra- reliability 4G/LTE coverage, %

79.0 MegaFon 74.0 MegaFon was the first in Russia to 65.4 is the unrivalled leader in Russia by number 1 provide 2G services roll out a full-scale launch 4G in 2012 demonstrate 1 Gbit/s of base stations with in all Russian regions commercial 3G network and a commercial speed in May 2016 VoLTE network in 2016 and 35 Gbit/s speed in June 2017

demonstrate speeds in excess of 1 Gbit/s broadcast a football 169.5 ths on a commercial match live in VR (virtual smartphone in 2018 reality) using 5G base stations technology in 2018

2016 2017 2018

1. According to Roscomnadzor as of 1 February 2019. 68 2. Strategic Report Operational Results 69

MegaFon’s strong portfolio of unique high-speed In 2018, MegaFon focused its infrastructure The 2018 FIFA World Cup data spectrum assets is an important competitive expansion efforts on: advantage. While all major Russian players have comparable bandwidth positions in bands below • expanding network coverage and capacity 2,200 MHz, in the 2,600 MHz band MegaFon enjoys in 4G; a fourfold advantage over its key rivals1. • upgrading its network and expanding capacity at existing sites to maximise operational This edge enables MegaFon to: savings; • leveraging its spectrum advantage During the time of the 2018 FIFA World • deploy 5G networks at a much lower cost than and launching 20/20 MHz 4G 2,600; Cup, MegaFon provided mobile services its competitors in the 1-6 GHz spectrum; • developing new NB IoT and WTTx technologies; • save up to 15% on CAPEX in 4G; • improving indoor coverage. to the tournament’s organisers, players, • deliver much faster peak data speeds with 4G versus its competitors. Additionally, in 2018, MegaFon successfully and guests. implemented its plans to replace outdated equipment to enhance network reliability, reduce power consumption, and prepare base stations The seamless customer experience at all World Cup Continuous monitoring of network performance for LTE rollout at no additional cost. venues was the result of backbone with unlimited and regular maintenance were carried out to ensure bandwidth, data services, internet access, ISDN, that MegaFon’s infrastructure performed flawlessly, DoS/DDoS protection, and LAN maintenance enabling uninterrupted connectivity. MegaFon’s edge in spectrum, bandwidth, MHz to ensure stable operation of all communications technologies – fixed, mobile, and telematics. A new tariff plan #Hello was designed for foreign football fans who were able to use messengers MegaFon has integrated new technologies into and social media as usual with no worries about Bands below 800 MHz are only Potential spectrum available on a limited basis in Russia to deploy 5G existing telecommunications infrastructure and has charges. Customers on the tariff plan could built new infrastructure, to ensure high speed data get support in English on the Company’s Facebook and communications services and required capacity page and by calling the contact centre. 10 10 19 15 40 8 102 +33% for data traffic.

Competitor 1 10 8 19 151015 77 The project involved: Highlights:

Competitor 2 10 6 16 15 10 6 63 Over 25,000 km of FOCL Competitor 3 5 10 2 18 1015 60 160 key facilities 450 800 900 1,800 2,100 FDD 2,600 TDD 2,600 Over 1,300 covered by MegaFon’s network Source: MegaFon. base stations

SLA level of Over 5,000 antennas 99.99%

Record-high data speed of Over 2,000 engineers and specialists 293 Mbit/s

Up to 60% 900 pieces of fans at the games used 1. Comparisons made for the FDD 2,600 MHz band (or Band 7 under 3GPP). of telecommunications equipment MegaFon’s services 2. Enhanced data capacity spectrum. 70 2. Strategic Report Operational Results 71

4G/LTE networks 3G networks Developing 5G networks

In 2018, MegaFon expanded the area of its 4G/LTE At the end of 2018, the number of 3G base stations MegaFon was authorised by the Russian State coverage by building new and retrofitting existing grew by 2.9% to 49,400. Further development Commission on Radio Frequencies to use 5G allows telecoms operators base stations. The total number of 4G/LTE base of 3G will be focused on maintaining the current the 3.4 GHz–3.8 GHz and 25.25 GHz–29.5 GHz stations reached 49,600 while data transmission service levels. In the future, MegaFon plans frequencies for 5G trials across the host cities to introduce advanced services speeds increased several times over due to upgraded to migrate traffic and bands from 3G to 4G, as well of the 2018 FIFA World Cup. for dozens of industries, including bandwidth at base stations. as prepare for 3G phase-out in the longer term. healthcare, transport, utilities, MegaFon showcased 5G’s capabilities and emergency services providers. In 2018, MegaFon continued expanding its LTE in the summer of 2018, including through: 5G helps boost productivity, cut network coverage with a focus on low-frequency 2G networks bands of 1,800 MHz and 800 MHz, achieving • broadcasting a football game live in VR costs, and extract higher value improvements in indoor coverage and traffic. In 2018, the number of 2G base stations grew for the first time in Russia; and more creativity from human Another priority for MegaFon in 2018 was by 24% y-o-y to 70,500. The expanded 2G network • setting up a pilot 5G zone where MegaFon used resources. This technology upgrading the LTE 1,800 band to 10 MHz bandwidth provides extra coverage and frees up 2G Huawei equipment to demonstrate the use of 5G can provide a competitive and 20 MHz bandwidth in some regions. frequencies for LTE services going forward. services for KAMAZ self-driving electric buses; • demonstrating 5G services at Moscow Urban edge to the national economy MegaFon also maintained its focus on expanding Forum at the Zaryadye Park, including remote and improve the quality the coverage of its LTE Advanced network sonography, telecom solutions for emergency of life for consumers. MegaFon which enables data transmission speeds of up services providers, and the Shared Environmental is actively engaged in testing 5G to 300 Mbit/s. VoLTE coverage was also expanded Monitoring Platform; with the service being launched in Saint Petersburg, • setting up a 5G trial zone at the Morozov equipment, as well as promotion Samara, and Tolyatti. To improve its network Children’s Hospital in Moscow to demonstrate of new 5G applications, including throughput, MegaFon has been piloting new various technologies, including remote through joint efforts with Huawei technologies, including MIMO across Russia sonography and DNA sequencing. and Nokia, two leading global and Massive MIMO in Moscow and Saint Petersburg. In the summer of 2018, MegaFon successfully tested producers of telecommunications the Nokia Fronthaul 1,830 VWM optical equipment equipment. to build a 5G backhaul network in Moscow. The equipment will increase the capacity of MegaFon’s fibre network by combining multiple wavelengths over a single fibre, as well as achieving cost savings when connecting base stations to a backhaul network.

MegaFon places great emphasis on its involvement 49,600 in the Digital Economy programme, which has 49,400 4G/LTE base stations 3G base stations the development of 5G networks as one of its key goals. The programme will become a key driver In May 2018, MegaFon for 5G telecom projects. and Nokia signed a memorandum on the joint development of 5G networks and digital up to 300 Mbit/s 70,500 technology deployment, including LTE Advanced speed 2G base stations the testing of services enabled by the Internet of Things, cloud telecommunications, artificial intelligence, and augmented and virtual reality technologies. 72 2. Strategic Report Operational Results 73

Tower infrastructure Backbone and backhaul networks

JSC First Tower Company (FTC) is a MegaFon FTC’s strategic goals: Expansion of its fibre-optic (FOCL) network allows Backbone and backhaul subsidiary set up in 2017 to provide effective MegaFon to provide a better subscriber experience, FOCL networks, ’000 km management for the Company’s tower • Improve its position in cities with high traffic including improved mobile network capacity infrastructure, increase its return on CAPEX invested, density and increased data transmission speeds. and expand into the fast-growing tower lease • Prepare its tower portfolio for 5G deployment market. • Engage in nationwide and municipal projects, By the end of 2018, MegaFon’s backbone networks 2018 204.4 136.1 including Smart City projects totalled 136,100 km, up 1.5% y-o-y. This organisation consists of professionals • Partner with state platforms to lease with the necessary skills in telecoms, property infrastructure In 2018, MegaFon launched a high-speed route 2017 199.8 134.1 management, integrated IT solutions, • Increase dual-use pole construction between Moscow and Frankfurt, Germany, which and infrastructure construction and expansion. helped reduce latency rates for communication To improve the customer service experience, FTC with Europe for the majority of our subscribers. consists of a shared back-office centre in Samara The route stretches 3,200 km and has an initial 2016 192.7 130.6 and several regional competence centres which throughput capacity of 1.7 Tbit/s. We also launched handle contracts for the lease of land for tower our backbone node in Warsaw, which helped reduce Backhaul FOCL construction, as well as processing call centre FTC’s 2018 highlights: latency rates for communication with Facebook’s inquiries from external counterparties, suppliers, servers. MegaFon plans on increasing traffic Backbone and customers. from the node in 2019.

To maintain a high quality of service, there In 2018, MegaFon continued to expand its FOCL, In 2018, MegaFon launched the construction is a company-wide database of assets and installed focusing mostly on Russia’s northern regions of mWDM4 networks in Ufa, Samara, Kazan, equipment managed by a dedicated IT platform. and Siberia. We launched a Saint Petersburg – Volgograd, and Yekaterinburg, which will both 398 1 Kirov – Yekaterinburg DWDM line to improve improve the quality of the services being provided By the end of 2018, FTC managed about towers built the routing of traffic to popular Russian and prepare the infrastructure for 5G deployment. 16,200 towers, of which 398 towers were built and European webpages and reduce latency rates in the reporting year. Tower maintenance for traffic users in the Urals, Siberia, and the Far To enhance the reliability of the backbone capacity increased East. network, we implemented the first stage of a project to eliminate the double fault risk within Within MegaFon’s Siberian Branch network, the European ring: a third line with a throughput 2018 portfolio quality improvements: the interregional IPBB2 network was connected of 800 Gbit/s was launched between Moscow to the IP/MPLS3 backbone network via direct and Samara. For this area, in 2019, we are planning • Granularity increased for financial statements gateways in the regions, which helped optimise to launch a coherent line and switch to the ASON • Document flow centralised and automated the routing of traffic and utilise the DWDM security system which will provide for high network • Customer base improved backbone network. In 2019, we are planning reliability and lower upgrade costs associated • Economically unviable poles dismantled to implement a similar project in the IPBB network with traffic growth. or moved of our North-West Branch. • Tower safety and security enhanced

1. DWDM (Dense Wavelength-Division Multiplexing) – an optical multiplexing technology used to increase bandwidth over existing fiber networks. 2. IPBB (IP Backbone) – an IP based backbone network. 3. MPLS (Multiprotocol Label Switching) – a routing technique in telecommunications networks that directs data from one node to the next based on short path labels. 4. mWDM (Metro Wavelength Division Multiplexing) – a WDM technology used in metro networks. 74 2. Strategic Report Operational Results 75

Network quality Network operation / Global Network Operational Centre

MegaFon boasts an advanced, extensive By the end of 2018, CEM was available In 2018, the GNOC processed an average In 2018, the Company resolved close to 1.5 million infrastructure, and a significant edge in availability for MegaFon’s roaming subscribers. In 2019, of 16 million network reports per day and continued incidents (1.4 million in 2017) and performed of spectrum, which allows us to provide a high- MegaFon will continue to deploy the platform streamlining the routing of fault alerts 254,500 network repairs. The number of incidents quality voice experience, as well as record-high for its domestic subscribers. through enhancement of correlation, filtering, resolved within SLA4 timelines grew from 91.6% speeds for mobile data services. and other intelligent tools used in umbrella OSSs4. in 2017 to 94.4% in 2018 while the total resolution In 2018, we completed SON rollouts across As a result, the automation level of fault registration time for major incidents decreased from 2,575 hours In 2018, we maintained consistently high quality all Russian regions covered by our network, and localisation grew by 10 p.p. to 45%. in 2017 to 830 hours in 2018. of voice in our 2G and 3G networks as we refarmed and added new automated operations. In 2019, we spectrum from 2G to LTE and expanded the LTE are planning to add to the routine operations which bandwidth. are to be processed by SON tools.

We focus our efforts on delivering high quality During the year, we launched a project to integrate customer experience when using our services a BCM1 system to increase resilience of services, and continuously monitor end user perceptions. their support systems and business processes, The Centre’s functions are distributed We made research to get more insights as well as to minimise the impact of emergencies The Global Network Operational into customer needs and based on findings on service quality through predefined response Centre (GNOC) provides round- between Saint Petersburg and Samara, prioritised quality-related areas to improve our plans for employees. The project aims to identify the-clock monitoring of the status with a separate office in Moscow. voice and mobile data (browser, online video, resilience risks, forecast emergency scenarios, of MegaFon’s network across The sites in Saint Petersburg messengers, etc.). In 2018, we started to deploy and outline recovery plans for important and Samara are interchangeable: our Customer Experience Management (CEM) operational processes and information systems Russia, promptly responding integrated platform for leveraging quality that support critical services. The BCM system to reports on communications in case of an emergency, network measurement data collected for individual integration will continue in 2019. failure or deterioration operation can be fully consolidated subscribers to improve service quality, achieve and providing technical support at one site within 15 minutes. the required customer service level, and enhance to all our customers. network operation and development efficiency. The Centre monitors and manages all infrastructure domains, including mobile and fixed networks and services, IT infrastructure, billing systems, value added services (VAS), and corporate systems, as well as innovative digital MegaFon is the unrivalled leader MegaFon’s network offers services going forward. by average data transfer rate extremely attractive voice in Russia2. and data services3.

In 2018, the GNOC employees Connectivity metrics in 2018, % handled and processed: 89,000 Network 4G 3G 2G requests 384,000 from fixed-line subscribers Call set-up success rate 99.69 99.74 99.14 Drop call rate 0.19 0.22 0.27 requests 29,000 from mobile subscribers requests from VAS users

1. Business Continuity Management. 2. Speedtest by Ookla. 4. OSS means an umbrella Operation Support System. 3. As shown by federal drive tests. 5. SLA means a Service Level Agreement between the Company and subscribers. 76 2. Strategic Report Operational Results 77

In 2018, we adopted the federal Performance In 2018, MegaFon actively focused on improving Information technologies Management sSsystem to collect and process the GNOC’s performance. In particular, a number network and service performance data. The System of platforms were virtualized to increase service conducts about 3 billion daily calculations reliability and reduce the costs of technical processing more than 1,200 parameters, support for equipment. The technical function MegaFon deploys state-of-the-art information We have adopted a new way of working called and enables us to conduct centralised nationwide was transformed while system operation units technologies across all areas of its activities multispeed IT enabling, if necessary, frequent network analysis, optimisation, and development were disbanded across the branches, with their to successfully achieve its strategic goals and agile transformation in a fast-changing and will help us phase out within a year similar functions and resources being moved to federal level and leverage its competitive advantages. digital world considering the growing needs of our separate systems being used at our branches. functions. During 2018, we dramatically accelerated customers. We were able to considerably increase the share the pace of rolling out new business systems of faults automatically identified by the GNOC We have also slashed the costs of vendor-based through transition from a release-based model By enhancing, jointly with Mail.Ru Group, in 2018 by expanding OSS systems and adopting technical support for the systems owned to independent installation of each individual the functionality of TaranTool Enterprise, elements of machine analysis and machine learning. by the network operation function. The GNOC system. a next-generation DBMS, and employing is planning to adopt a resource-as-a-service (RaaS) the tool in commercial applications in combination model and deploy SCM1 in 2019 and 2020. During the year, MegaFon made the first steps with a microservice layer, we will be able to build towards creating a digital ecosystem by deploying an advanced digital ecosystem and build new a new platform for accelerated implementation partnerships. Over of microservices and by selecting the technology stack required to design the microservice 1,500 550 infrastructure and CI/CD processes. network operation specialists deployed on sites 24/7 specialists provided technical support for 2018 FIFA World Cup Russia Gagarin Project Unified Billing The project was launched During the year, we completed in September 2016 to re-engineer the migration of mass market Data centres end-to-end processes based subscribers from eight local billing on the advanced SAP S4/HANA systems to a unified billing system. platform. The distributed network of MegaFon’s data centres To stay relevant in the medium and longer term, includes six core centres located in Moscow, MegaFon started to upgrade its data centres The project aims to enhance the efficiency As a result, we will be able to optimise the resources the Moscow Region, Samara, and Novosibirsk, and improve their operational efficiency through of business processes at the Company through directed towards commercial initiatives, and launch as well as 165 facilities across Russia. new architecture. The Company aims to reduce lead their standardisation in line with SAP best practices new and modify the existing products faster, as well times for data centre construction and accelerate and the use of an advanced, user-friendly Fiori- as improve customer experience. Our data centres currently provide delivery of data centre services through scalable based UI. The deployment of SAP S4/HANA will help everything required for smooth operation technical solutions and automated business us improve system performance, reduce the amount The project is unique in that subscribers were able of telecommunications, server, and other processes. To this end, MegaFon is planning of customisation efforts, and cut system support to use telecommunications services (telephony, equipment, including data warehouses. to standardise its data centre architecture while and improvement costs. data) throughout the migration process without using advanced architectural, energy, and cooling service interruption. However, the demand for data centre services solutions such as fast-to-construct modular The functionality within the project scope includes is rapidly growing given the outlook for 5G, structures, standardised equipment, and energy eight end-to-end processes. dramatic data traffic growth, and explosive efficient power supply and cooling systems. expansion of cloud-based and virtualisation The project will be implemented in waves. technology, including the use of standard servers The conceptual design and system testing phases instead of proprietary telecommunications were completed in summer 2017. The system was 52 equipment. launched at Yota and MegaLabs in early 2018, and rolled out across all MegaFon branches million subscribers of MegaFon in summer 2018. served by the Unified Billing platform

1. SCM means Service Centric Model, a service lifecycle-driven, RaaS-based service management model, including service delivery monitoring and proactive customer support.

78 2. Strategic Report Operational Results 79

Throughout 2018, we followed our mission In August 2018, MegaFon was ranked Developing our brand of providing opportunities across all business areas, as one of the top three strongest Russian brands delivering on the brand promise to inspire, and be and became the fastest growing brand in terms inspired by, our digital customers by creating of value with a 33% growth in value. We were and communications ready-to-use, pragmatic solutions for modern also ranked second among all Russian telecoms life, and remaining a reliable, open, and dynamic and eleventh most valuable Russian brand overall. first-choice partner, as well as the most empathetic telecoms operator. We started 2019 with a new record in spontaneous advertising awareness, achieving parity with, A record-high year for the MegaFon brand As a result, the MegaFon brand was the only one and even slightly outperforming, the ‘Big Four’ in the telecommunications industry to grow steadily leader. In January 2019, our awareness metric A strong brand is MegaFon’s key differentiator. in 2018, rising to the top of the list for the first time was up 4 p.p. to an all-time high of 53% following Since its rollout in 2017, MegaFon’s new slogan – in December – and achieving parity with its ‘Big the launch of the ‘Potryasi’ (‘Shake’) advertising ‘MegaFon. Starts with You’ – has been an ongoing Three’ rivals in terms of key brand metrics (including campaign in December 2018. success, bringing even more vivid experiences to our statistical significance). digital customers.

MegaFon. Second +33% Ranking among Starts the top three most valuable year-on-year strongest with You brand value Russian telecoms growth Russian brands, brand leaving MTS behind

MegaFon’s rebranding project has brought international awards for innovative products, initiatives, and design to our German partner Interbrand. The project has been awarded: Source: Brand Finance, Russia 2018 report.

First-ever number Achieved Ranked one parity first at German Design Award: Corporate Design Award: parity • Excellent Communications • Corporate Design Redesign position with the peers at parity with the peers with MTS Design in terms of advertising 53% spontaneous satisfaction1 in brand consideration, • Сorporate Identity advertising awareness outperforming other players

Source: Ipsos Comcon.

1. Advertising satisfaction is measured using the CSI (Customer Satisfaction Index) metric. Ipsos Comcon data for MegaFon’s HQ, December 2018, January 2019. 80 2. Strategic Report Operational Results 81

These outstanding results were achieved due to our most memorable commercials over the entire period Sponsorship and support for events powerful creative narrative conveyed in a new of marketing research on this subject. musical format, as well as a new econometric MegaFon is perceived as the leading sports sponsor among telecoms We have succeeded model-driven approach to media strategy, focused According to the CSI survey, the new creative operators. In both sponsorships and partnerships. Our brand always looks in building a stable on spontaneous advertising awareness in response approach helped improve the Company’s vibrant, visible, and high-tech due to our consistent, engaging approach. positive brand to changes in the competitive environment. advertising visibility by 9 p.p. between June 2017 and December 2018. MegaFon’s advertising appeal In 2018, we sponsored over 80 events across Russia, reaching over perception: ‘MegaFon As part of the new approach, we recorded 18 TV among its subscribers increased by 8 p.p. to 46%. 61 million people and holding seven live broadcasts online. subscribers are commercials, collaborated with 17 celebrities, Advertising awareness among MegaFon subscribers offered special and composed more than 20 songs in 2018. Seven hit 70%, an all-time high and up 27 p.p. y-o-y. In 2018, the MegaFon brand came ahead of the other ‘Big Three’ treatment’. commercials were included in MegaFon’s top ten operators on associations with the descriptions Inspiring Operator and the Fastest Mobile Data Services.

In 2018, MegaFon actively supported the 2018 FIFA World Cup. MegaFon Advertising Advertising Advertising awareness not only provided high-quality communications services at all the host visibility1 appeal1 among MegaFon stadiums but also launched a major FC MegaFon art-project to refresh subscribers1 old street football pitches across all 11 host cities. The new visual style was developed by designers supervised by famous artists. The campaign was MegaFon became aimed at promoting amateur sports and creating comfortable and high- tech football pitches, appealing both to players and spectators. the second most mentioned brand during the 2018 FIFA 81% 46% 70% eSports World Cup despite not eSports has become increasingly popular in Russia in recent years, being an official FIFA +9 p.p. +8 p.p. all-time high with millions of people playing games and following the news. In 2018, sponsor2. +27 p.p. MegaFon, a leading player in the country’s digital market, partnered with ESforce Holding Ltd, one of the world’s largest esports organisations and a leader in cyber sports in Russia, the CIS, and Eastern Europe. Spontaneous advertising awareness among The partnership is the first multi-channel sponsorship in the history telecoms operators’ subscribers, of Russian cyber sports, allowing us to reach more than 70% of the target January 2018 – January 2019 audience and become the undisputed leader in terms of sponsorship visibility in Russian eSports industry, being recognised by 24% 100 of the audience, compared to just 5% for the next closest telecoms 84% 82% 82% operator3. 79% 80 75% The deal made it to the top ten non-endemic sponsorships of 2018 69% according to Esports Observer, one of the world’s top sources for eSports 70 69% 76% 68% business news and insights. 63% 62% 58% 60% 63% 60 54% 56% 54% 63% 59% 56% Digital development 50 47% 53% 42% 51% 48% 40% Visible and creative presence in the digital space becomes a natural 47% 38% 40 45% part of any major modern brand’s marketing communications. This is especially true for the leaders setting the pace in the market 30 and shaping the digital future. In 2018, MegaFon made huge progress in its digital development, gaining remarkable visibility in the market. We supported all our major offline events and sponsorship projects 20 24% 22% with live broadcasts hitting millions of views in our communities.

10 These achievements were recognised by the market. In 2018, we received several Tagline Awards for our digital and SMM projects, and were 0 among the winners of the Red Apple International Advertising Festival Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 Nov 18 Dec 18 Jan 19 for the Every Second Counts! project.

Yota Tele2 MegaFon MTS

Source: CSI survey. 2. According to SCAN-Interfax. 1. According to the CSI survey, December 2018 vs June 2017. 3. According to Ipsos Comcon. 82 2. Strategic Report Operational Results 83

Mobile Services Refreshed ‘Vklyuchaisya!’ tariff line In May 2018, MegaFon introduced its refreshed ‘Vklyuchaisya!’ tariff line to better serve the needs of digital subscribers.

When designing the line, we used surveys to measure customer We are strongly focused on servicing digital These performance improvements were driven satisfaction with existing plan bundles. Since messengers and social 12.7 subscribers who are heavy consumers of traffic, by our efforts to boost mobile data usage, primarily media have become the default channels for communication, we which in turn means that mobile data is a strategic by introducing new products, such as the refreshed offer unlimited data for messenger apps across all tariff plans million priority for the Company. ‘Vklyuchaisya!’ tariff line, the new ‘Upravlyai!’ in the refreshed line, as well as for social media and video services subscribers tariff plan, roaming offers for mobile data users, in the heavy tariffs. In 2018, the number of mobile data users increased and other products. The increased mobile data signed up to ‘Vklyuchaisya!’ by 3.6% y-o-y to 32.7 million users, with DSU up usage was also attributable to the overall market We kept all the initial benefits in the refreshed tariff line as well tariffs during 2018 by 41.9% y-o-y to 9,256 MB per month. ARDPU was trend of growing digital services consumption, as developing a partner and cross-promotion ecosystem to boost up 9.7% y-o-y in 2018 at RUB 260 due to higher as well as one-off usage during the 2018 FIFA the appeal of ‘Vklyuchaisya!’ tariffs. In particular, we introduced mobile data usage. World Cup. the ‘Vklyuchaisya! Slushai’ tariff offering music fans a free subscription to BOOM music streaming service and unlimited data for the most popular music platforms. In addition to a wide range of basic services, our most comprehensive Gb tariffs offer unlimited access to the Amediateka movie and TV series 8.9 streaming service as part of the plan. per month Data-heavy online services are highly popular among our subscribers, consumed on average Mobile data users, million so we have offered them an unlimited mobile data option. by ‘Vklyuchaisya!’ subscribers

32.7 31.0 31.5 In 2018, MegaFon won yet another Ookla’s Speedtest

43.4 Award for Russia’s Fastest 41.0 41.8 Mobile Network1.

2016 2017 2018 Share of mobile data users, %

ARPDU, DSU, RUB per month MB per month

2018 260 2018 9,256

2017 237 2017 6,524

2016 230 2016 4,286

1. Based on over 7.9 million speed tests on Russian mobile devices via SpeedTest® app in Q1 – Q2 2018. 84 2. Strategic Report Operational Results 85

New Internet S – XL data options Roaming services

In March 2018, MegaFon refreshed its Internet S, Internet M, Internet L, In 2018, we expanded our GRPS, CAMEL, and LTE international and Internet XL data option range. Users with tablets, modems, roaming coverage by four, five, and fourteen countries, respectively, and routers now have unlimited access to popular services and apps. offering the service in 216 countries via 596 roaming partners Internet S – XL data at the end of 2018. We analysed the needs of subscribers based on device ownership and tailored plans to offer maximum value depending on the type options are available In 2018, we also launched a ‘Roaming, Goodbye’ option allowing of device used. For example, the Internet M option for tablet throughout Russia subscribers travelling abroad to benefit from their home region owners offers unlimited data for: with no surcharge. terms and rates. Currently, the option covers 41 countries, with plans to further expand the list. • YouTube; • social media (VKontakte, Odnoklassniki, Facebook, Instagram); • music streaming services (BOOM, Yandex.Music, Zvooq, VK Music); • cloud storage services (iCloud, Cloud Mail.ru, Yandex.Disc, Dropbox); • navigation services and maps (Yandex.Navigator, Yandex.Transport, Google Maps, Apple Maps, and 2GIS). We closely follow trends and evolving customer needs, evaluate the performance of our options and tariff plan bundles, and offer updates to meet customer expectations. In 2019, we will refresh the tariff line based on the insights we have accumulated Innovative Products and analysed, as well as leveraging subscriber feedback.

Developing VoLTE and VoWiFi To improve and VAS the quality of VoLTE, In 2018, we continued expanding our VoLTE coverage, previously MegaFon introduced available in Moscow only, launching VoLTE in Saint Petersburg, advanced EVS1 codec Developing innovative digital products and the Leningrad Region, and Samara. which captures services is a strategic priority for MegaFon. In 2019, we plan to significantly increase the number of regions the full dynamic range covered by VoLTE. We also have plans to launch VoWiFi in Moscow of the human voice We offer reliable state-of-the-art, and the Moscow Region, enabling customers to use Wi-Fi instead and makes it sound technology-enabled solutions as we create of mobile for voice calls. The service will be rolled out to other regions if commercially successful. as though callers are seamless communication experiences standing next to each other. for our digital consumers.

MegaFon continued to build up its product portfolio in 2018, expanding its ranges of digital services by introducing the following new offerings:

E-commerce M2M and IoT B2G and B2B services Big Data solutions Digital solutions for business Computing resources and Infrastructure-as-a-Service (IaaS) Business Process as-a-Service (BPaaS) Cyber security services

1. Enhanced Voice Services. 86 2. Strategic Report Operational Results 87

M2M and IoT New services launched in 2018 B2G and B2B services B2С M2M Employee Car Fleet Smart Freight MegaFon Monitoring Monitoring Monitoring Utilities Monitoring Trunking

B2Х

Big Data solutions Financial Geo-Recommender Lead Insurance Retail analytics Generation analytics analytics

Digital Video advertising services and MegaFon TV marketing MegaFon.Target Mobile MegaBanner Notification

Financial Converged services services Mobile financial Payment Bank Virtual 8-800 MultiFon.Business services terminals card PBX

B2X Infrastructure- as-a-Service Health (IaaS) Virtual Business Data Centre Cloud MegaFon Health

Business Process-as- a-Service (BPaaS) Digital Digital Line MegaFon Lawyer Personnel Rekrutika Media Recruitment MegaFon B2С Music Platform services Wi-Fi with Content Delivery authorisation Network (CDN)

E-commerce Cyber MegaFon #Spetsii Travel security services DDoS MegaFon. protection Anti-Hack

Services for Communication telecoms solutions eMotion Voicemail service operators for iPhone (B2O) FMC Partner MegaFon IX

Digital Family business solutions support Radar Parental MegaDisk Mobile Mobile ID MegaFon.Business Centre of Online Cash Control eSignature Business Registers Opportunities 88 2. Strategic Report Operational Results 89

B2C services Financial services Bank card Service description

The MegaFon bank card is a which can be used to make Video services purchases and free money transfers with the funds from the user’s mobile phone account linked to the card. The card is easy to obtain MegaFon TV Service description Over and top up, and card holders can receive up to 50% cashback 1 on certain purchases from MegaFon’s partners. In addition, 8% p.a. MegaFon TV subscriber base MegaFon TV provides anytime access to a video content library which interest is paid on the account balance, if certain conditions are met. includes 200 TV channels (including 60 HD channels), over 2,500 films, million MegaFon In 2018, we also introduced digital cards, which can be obtained via and over 500 TV and cartoon series from leading global and Russian the Client Account or remotely through MegaFon Bank. content owners. bank cards were issued in 2018 The service can be accessed via a mobile app from iOS and Android Development in 2018 5.3 mobile devices, PCs, Smart TVs, and TV sets from major manufacturers, million including Apple TV-based access as of 2018. Over 1 million MegaFon bank cards were issued in 2018. Average monthly active users of the service grew by more 48% to 126,000 Subscribers can pay for the content from their personal accounts in 2018, with an average monthly transaction volume per card running with their operator. 2.3 at RUB 12,000. A total of 416,000 people used the service during 1 million the year (up 30% y-o-y). At the end of 2018, the total number of cards the total number issued was 2.3 million, with more than 650,000 digital cards being million Development in 2018 of MegaFon issued during the year. Average monthly active users card issued The number of MegaFon TV subscribers increased during 2018, A range of new features and offers were developed for MegaFon bank from 3.2 million to 5.3 million users. card holders in 2018. We updated our MegaFon Bank application and launched the Increased Cashback service that can be used Subscribers on the ‘Vse Vklyucheno’ and ‘Vklyuchaisya!’ tariff plans to select a customisable set of categories (supermarkets, filling and options make up 87% of the service users. stations, restaurants, etc.) with higher cashback. Cash withdrawals from any ATM worldwide are now free for the card users, once certain The 2018 FIFA World Cup was a key highlight of the year for MegaFon: conditions are met. In December 2018, we tested real cash loans based during the tournament service traffic grew fivefold while daily gross on a scoring system leveraging our Big Data capabilities. adds more than tripled.

MegaFon is focused on improving the customer experience in using the service. Since 2018, we have provided customers of all other Payment terminals Service description operators with the opportunity to subscribe to our service bundles using a bank card. We also introduced individually tailored offers Our customers can use MegaFon’s network of payment terminals and discounts on films. to pay for a wide range of services at our stores, releasing store Terminals’ payment salesforce for other tasks and contributing to a more efficient use The ‘Vklyuchaisya! Smotri+’ (‘Connect! Watch+’) and ‘Vklyuchaisya! volumes in 2018: of human resources. Premium’ (‘Connect! Premium’) data plans were launched in March 2018, and includes access to the ‘Amediateka’ package which is part of MegaFon.TV. In August 2018, we also added ‘Vklyuchaisya! Development in 2018 Smotri+ Maksimalny’ (‘Connect! Watch+ Maximum’) to these data plans. More than 70,000 users have subscribed to the service In 2018, MegaFon implemented new terminal functionality in December 2018. 10.3 and technical solutions such as terminals automatically switching between GPRS and LAN, CVM installation, and the terminal status We are planning to embed voice content management into RUB bn history feature. We also added over 100 new services to the terminal’s the service in 2019. Content is also planned to be expanded: along third-party billing menu, launched sales of insurance products, with ‘Amediateka’, subscribers will have free access to over 2,000 films and redesigned the interface in line with the brand book. within the ‘Kino po podpiske’ (‘Subscription to Films’) package, The number of payment and to Russian TV series within the ‘Start’ and ‘Morye TV’ (‘TV Sea’) terminals in operation in 2018: In 2019, we are planning to commercially launch and scale up our packages. credit product, launch new bank card plans, and further enhance 1,700 digital services and customer service. 90 2. Strategic Report Operational Results 91

Financial services Health

Mobile financial Service description MegaFon Health Service description services MegaFon’s mobile financial services enable banking MegaFon Health is a mobile application for online medical and payments through mobile devices. consultations. Users can use the app to discuss health issues with a doctor, arrange an appointment with a medical specialist, Transaction volume in 2018: and add doctors’ opinions or medical test results to their Electronic Development in 2018 Health Records.

In 2018, our active user base grew by 16%, with the transaction volume Development in 2018 up by 39%. Payments from accounts linked to a mobile phone number 20 in App Store, Apple Music, iTunes, and Google Play remained the key In 2018, we tested customer demand for MegaFon Health. Based growth driver. on the test results, we developed a new design and functionality: RUB bn users are now able to make an appointment for a face-to-face Starting in 2018, our subscribers can use their Client Accounts to transfer visit to a doctor; the service is available to customers of all Russian money from their mobile account to the mobile account of another operators; and users can pay for the consultation through their subscriber or to a bank card. This integration was the first step bank card or mobile account. The service now offers three options in building a marketplace for financial services in the Client Account for contacting a specialist: a video call, an audio call, or an online and has attracted new digital customers. The transaction turnover in all chat. payment marketplaces increases every month by 3% after integrating the service into the Client Account. We are planning to re-launch the application in a new format with extended functionality in 2019. The agreement between MegaFon and MTS to cancel fees for cross- network money transfers was a unique initiative for the Russian market. The initiative was mainly aimed at demonstrating to the financial services market that a mobile account is a full-fledged financial tool and an integral part of the digital ecosystem. Media

The cross-network customer transaction volume between the two operators doubled within a month after the campaign’s launch. MegaFon Music Service description Average transaction size for the service has been growing at a monthly Number of active users in 2018: rate of 10%, with the user base increasing by 3% per month. MegaFon Music is a music marketplace combining the most popular music streaming services such as:

388,000 • Yandex.Music IoT services • BOOM • Zvooq

Smart Home Service description Users signing up for the service with MegaFon get an unlimited (Life Control) Revenue in 2018: data plan for streaming music through their app, with special offers Smart Home (Life Control) is a remote home control and safety available for those on the ‘Vklyuchaisya! Slushai’ (‘Connect! Listen service. The Life Control family includes a smart socket, leak detector, to the Music’) tariff. motion sensor, smart lamp, open/close sensor, smoke detector, plant 16 sensor, Wi-Fi camera, fitness tracker, GPS tracker, and other solutions. RUB m Development in 2018 MegaFon was the first to offer a music service as part of a tariff Development in 2018 plan. Launched in November 2017, MegaFon.Music has been showing an impressive growth ever since. In 2018, the number of its active users In October 2018, MegaFon presented Russia’s first NB IoT tariff grew to 388,000, making MegaFon Music one of the best commercial applicable not only for controlling NB IoT devices, but also for use on 2G, projects of the year. 3G, and 4G networks. The tariff also covers a dedicated APN network to ensure the integrity and security of data transmitted from devices. We are planning to double the service revenue in 2019.

As of 2019, Life Control will be provided by Mobilny Teleport, a technology leader in the market for smart home devices. MegaFon in turn will focus on further enhancing its tariffs for smart devices. 92 2. Strategic Report Operational Results 93

E-commerce Communication solutions

#Spetsii Service description Voicemail service Service description for iPhone #Spetsii is a cashback service offering cash back on purchases made The Voicemail service is a pre-installed app for iPhones allowing with over 500 partners, including M.video, Booking.com, Perekrestok, users to easily manage their voicemail messages. Sportmaster, Delivery Club, and others. Cashback rewards can be used to pay not only for telecom services, but for any other purchases, 2018 highlights: Development in 2018 as well as allowing cash to be withdrawn at any ATM. The Voicemail service for iPhone is MegaFon’s first digital service Development in 2018 18,000 to manage phone calls. In 2018, we adapted the product to suit the target audience and improved the quality of voice transmission The #Spetsii service was launched in December 2017, with the number and call stability. A notification service was piloted on Android of its authorised users reaching 320,000 by the end of 2018. users in the Stories format. The service can be used for running customisable surveys directly via the app. • Top 3 partners by total amount of orders: MegaFon online store, Revenue M.video, and AliExpress • Active subscribers to the service made more than four purchases each in 2018 6.8 • The average transaction size for the service exceeded RUB 4,000 in 2018 RUB m

In 2019, MegaFon is planning to introduce the cashback feature for offline purchases and expand the number of interfaces available for the service users.

MegaFon Travel Service description eMotion Service description

MegaFon Travel is a service for online booking of air, rail, and bus eMotion is a messenger enabling users to make calls and text tickets, hotels, travel and sightseeing tours, travel insurance cover, with subscribers of any operator while using standard services of their and transfers. MegaFon’s customers receive cashback in real smartphones without having to install the eMotion app. money that can be used to pay for communications services, online 50,000 purchases, or for any purchases through the MegaFon bank card, Development in 2018 Apple Pay, Samsung Pay, or Google Pay at any merchant accepting active users 55,000 contactless payments. The key initiatives in 2018 included product adaptation to suit at the end of 2018 the target audience, and improvements to the quality of voice transmission and call stability. A separate notification service was customers Development in 2018 piloted for the app on Android. The service can be used for running service client base customised surveys, informing customers about new products, at the end of 2018 MegaFon Travel was launched in July 2018. We are planning to expand and communicating other information. the number of destinations available through the service and build a mobile application for the service in 2019. In 2019, we will concentrate mostly on increasing the product’s active user base by improving loyalty and keeping a focus on growing target audiences. RUB 14,000 the average transaction size for the service The most poplular services are air and rail tickets as well as package tours

New B2С service in 2018 94 2. Strategic Report Operational Results 95

Family solutions B2X1 services

Parental Control Service description

Parental Control is an interface that allows subscribers to track M2M and IoT B2G and B2B services the location of their children and monitor their phones. The service enables parents to remotely track the balance in the child’s mobile 39,000 account, control the device’s sound volume, monitor the battery charge Number of IoT/M2M Description level, and control access to the internet. connections in 2018: active users MegaFon is the leader of the Russian M2M market2. in December 2018 Development in 2018 We are planning to continue consolidating our position in this segment and promoting the digital transformation Fully launched in 2018, Parental Control has shown strong growth both of key Russian industries. in user base and revenue: 7.4 • Revenue – RUB 9m in 2018 million Development in 2018 • 39,000 active users in December 2018 • In December 2018, subscribers used the service 173,000 times MegaFon’s product strategy is focused on achieving leadership in all to track the location of their children key M2M and IoT segments.

In 2018, MegaFon increased its user base in the M2M and IoT segments, including geolocation services, from 5.4 million to 7.4 million. Revenue from these segments grew by 52%.

Radar Service description In 2018, MegaFon updated its core tariff offering by launching a new ‘Internet of Things’ data plan which offers customers more flexible pricing Radar is a geolocation service to track a mobile device. terms – an unlimited data plan for IoT devices, including NB IoT-enabled products, and an extended offering of packages comprising both traffic (MB, SMS, CSD) and access to the M2M Monitoring platform. Development in 2018

The service had 300,000 active users as at the end of 2018. M2M Monitoring Service description

M2M Monitoring is a platform for remote control and online management of a pool of SIM cards for corporate customers with large headcounts. M2M Monitoring enables location tracking of SIM cards, checking their activity and network connection, monitoring changes of device IMEI numbers, and setting up spending and traffic limits. The platform provides a user-friendly interface and flexible functionality that would fit any industry’s requirements.

Development in 2018

As part of developing the service, we deployed a single M2M- Monitoring platform for Unified Billing subscribers (instead of eight branch-based platforms), and made a number of systemic adjustments and major improvements to suit the requirements of large corporate customers. The total revenue from the product increased by 58%.

1. MegaFon’s B2X services include business-to-business (B2B), business-to-government (B2G), and business-to-operator (B2O) services. 2. AC&M’s 2018 estimates. 96 2. Strategic Report Operational Results 97

M2M and IoT B2G and B2B services Freight Monitoring Service description

Freight Monitoring is a new solution for customers to precisely Employee Monitoring Service description locate their freight, adjust the timetable for subsequent deliveries, and streamline logistics. Employee Monitoring is a service that allows customers to locate their employees, track their movements, and monitor when they visit Development in 2018 particular areas on the map. The service also identifies the nearest employees to given locations on the map, sends notifications when The service was launched at the end of December 2018. Cargoes can they are located within a given area, and tracks progress on the tasks now be tracked through autonomous trackers and beacons using related to on-site visits to customers. GLONASS/GPS and LBS satellite geolocation systems. Trackers are used only once – they are inserted directly into the freight package Development in 2018 exclusively to track its location and do not require recharging.

MegaFon made improvements to its Employee Monitoring service A beacon is a device with extended functionality, which can not only during 2018, with the annual revenue from the service up 15%. identify the cargo’s arrival at the destination, its current location, The service was also upgraded by optimizing its database operation or route deviation, but also measure the temperature, register cargo and making a number of individual improvements requested by major falls, and report poor transportation conditions. corporate customers. Tracking data are sent via GSM channels to a server and then on to dispatchers. Employees responsible for logistics at a company are timely informed about emergency situations such as accidents, Car Fleet Monitoring Service description unauthorised openings, or changes in the position of the cargo.

Car Fleet Monitoring is a service that enables MegaFon’s corporate customers to track their vehicle fleets in real time, and monitor mileage, idle time, and fuel consumption. The service enables our customers MegaFon Trunking Service description to cut costs by up to 30% by reducing the probability of vehicle misuse. MegaFon Trunking is a new solution enabling operational control Development in 2018 and personnel management through reliable radio coverage of a customer’s site. In 2018, we completed a tender for selecting a second partner, a leader in the market for transport monitoring solutions, to support the delivery Development in 2018 of the Car Fleet Monitoring service. As a result, we launched an updated version of the service, Car Fleet Monitoring 2.0, enhanced The solution provides trunking over MegaFon’s LTE network. with additional features such as traffic security analysis, accident The package includes: LTE radio coverage, a dispatcher, specialised reconstruction, integration with fuel cards, a cloud-based service data terminal equipment, and all required licenses for voice and video model (no software installation needed), and a mobile application. calls (including push-to-talk and group calls).

Smart Utilities Service description

Smart Utilities is a NB IoT-based solution designed by MegaFon for Innopolis, Russia’s high-tech hub in Tatarstan. The solution enables utility operators to collect data from communal water, power, and heat meters and analyse them in real time to improve their services. Development in 2018

In 2018, MegaFon continued to develop Smart Utilities and launched a new product, Digital Utility Operator, which displays metering data and enables our customers to manage relations between apartment block residents and their utility operators, including a payment and collection system, a central control desk, a security service, and a tool for entering metering data.

New B2Х service in 2018 98 2. Strategic Report Operational Results 99

Big Data solutions Lead Generation Service description

Lead Generation is a service that facilitates customer acquisition Description through Big Data mining, which helps identify a target audience against a set of specific criteria chosen by the customer. MegaFon MegaFon extensively uses Big Data solutions both to improve offers a turnkey solution, which makes it different from competitors: its own business performance, and to drive its B2B and we use our intelligence platform to profile subscriber samples against B2G offerings for handling sizeable customer streams. customer-defined criteria and then do all communication with The Company takes advantage of all leading-edge advances the audience by using bulk text messaging or our smart voice services. in Big Data storage, processing, and application.

Development in 2018 Insurance analytics Service description

In 2018, we continued to expand our line of analytical services Insurance analytics services are solutions that provide insights and recommended engines for leveraging Big Data. We also into insurance risks. MegaFon’s solution is unique in that the service implemented new industry-specific analytical services for insurers leverages Big Data gathered from different sources. and retailers through a technology partnership with 1Factor. Development in 2018

The service is currently used by the Top 10 car insurance companies Financial analytics Service description to predict the probability of a loss occurrence under compulsory motor third party liability and motor hull insurance. Financial analytics services are a suite of solutions to help financial organisations assess the default risk of their potential borrowers. 1Factor estimates that by using MegaFon’s analytics in their existing scoring models banks can improve their overall credit risk management Retail analytics Service description by 7% to 8%. Retail analytics services focus on providing insights related to the optimal placement of stores, building customer profiles, segmenting customer bases, and generating leads. Geo-Recommender Service description

Geo-Recommender is a tool for analysing Big Data to get a snapshot of life in a neighbourhood, a city, or across the country in general. The service is designed to help authorities and businesses alike make informed real-time decisions on allocating investments, optimising sales networks and advertising campaigns, and engaging in other local planning activities.

New B2Х service in 2018 100 2. Strategic Report Operational Results 101

Digital business support MegaFon.Business Service description

MegaFon.Business is a single platform combining all value added MegaDisk Service description services (VAS) in one place where MegaFon’s both new and existing In 2018: corporate customers can manage and activate VAS in one click as well MegaDisk is a secure and easy-to-use data storage system as use special partner offers. that supports data syncing on PCs, Macs, and Android and iOS smartphones. 9,500 The solution is unique in that it enables individually tailored offers profiles created for every customer: services offered to new customers will reflect their Development in 2018 headcount and business needs, while for authorised users the platform will make a selection based on their business segment, access level, In 2018, MegaFon updated MegaDisk’s UI and migrated the data and activated services. to a company-owned geographically distributed storage system, cutting storage costs by more than half. 35,500 Development in 2018 log-ins through SSO MegaFon.Business was launched in May 2018 and immediately showed a significant increase in its user base. The platform features the web

Mobile eSignature Service description Single Sign-On (webSSO) technology embedded through our MegaFon. 16,900 Business Profile, which spares users the need to manage several logins Mobile eSignature is an e-signature linked to a customer’s mobile SSO leads and passwords for different service accounts. number. It can be used to sign legally binding documents directly from a mobile device from anywhere in the world with mobile Today, MegaFon.Business serves as a single workspace where phone coverage. Importantly, this service is fully independent, Conversion up our corporate customers can manage their services and receive with the relevant trusted certificates being issued by MegaFon’s in- individually tailored offers from MegaFon and its partners. house certification centre. 41% Development in 2018

Although Mobile eSignature is currently available only to B2G Centre of Business Service description customers, we are considering its inclusion into MegaFon’s B2B Opportunities offering. Centre of Business Opportunities is an ecosystem of out-of-the- box digital solutions for different business tasks consolidated in one place – our Head Office in Moscow. Mobile ID Service description Development in 2018

Mobile ID is a web sign-on solution for logging in to websites Corporate customers can use the Centre of Business Opportunities and applications using a mobile phone number based on a unique to test our latest solutions: from document flow management identification technology leveraging the operator’s subscriber data. to specialised corporate communications. A quick and seamless sign-up procedure encourages online visitors to make more purchases and transactions while also keeping customer data up to date and reducing fraud risks in transactions that require identification. Online Cash Registers Service description Development in 2018 Online Cash Registers is MegaFon’s solution comprising an online The project is implemented at the B2O level involving all key cash register for SMEs, fiscal memory, prepaid transfer of fiscal data Russian telecommunications operators and the GSM Association from a fiscal data operator to a tax inspectorate, and a SIM card (GSMA). Our solution is based on Mobile Connect, an international with a special M2M tariff. mobile identification technology. This product targets corporate customers engaged in e-commerce or retail. Users can easily log Development in 2018 in to a website in one click by entering their mobile phone number, to which the operator will send a push notification confirming that The solution provides all necessary services on a one-stop shop the log-in or sign-up has been successful. basis, delivering considerable time savings: a customer does not need to separately purchase a physical cash register, connect it to the network, and set up data transmission. The service is compliant with Russia’s Law No. 54-FZ which was effective as of 1 July 2018.

New B2Х service in 2018 102 2. Strategic Report Operational Results 103

Digital advertising and marketing Mobile Notification Service description

Mobile Notification is a tool for bulk messaging through client- MegaFon.Target Service description side application software, enabling high-performance, high-speed messaging. The service also features a range of special options such MegaFon.Target is an innovative service designed to provide smart as Status and Feedback. advertising and bulk messaging campaigns to those MegaFon’s subscribers who have consented to receive third-party advertisements. Development in 2018 MegaFon is the only operator in the market to offer a service with a user-friendly online Client Account service, and a wide range Starting from 2018, SMEs can subscribe to Mobile Notification services of targeting options enabling a fully customisable tool for profiling using a SIM card of any operator and pay for the service by a bank a target audience. card. Development in 2018

Starting in 2018, SMEs can subscribe to MegaFon.Target services using MegaBanner Service description a SIM card of any operator and pay for the service by a bank card. MegaBanner is a mobile advertising solution by MegaFon that We launched the Targeting.Income service, which provides information displays themed advertising banners in the mobile browsers on the real level of income. of MegaFon’s LTE/3G subscribers. The monthly reach of the service is approximately 10 million unique users, or over 10% of all mobile data We also implemented a new API that allows launching partner Revenue users in Russia. programmes and interacting with internal customers (Lead Generation and Rekrutika). Development in 2018

In 2018, MegaFon introduced new advertising formats within its MegaBanner online channel, including lead ads prompting users to fill >40 in their contacts via an instant form. Starting from 2018, businesses RUB m can subscribe to MegaFon’s own services in one click.

104 2. Strategic Report Operational Results 105

Converged services 8-800 Service description

The 8-800 service is a company-wide Smart Number for corporate Description customers to handle their incoming calls. Calls to 8-800 40,000 from anywhere in Russia are toll-free for fixed-line and mobile Our corporate customers use MegaFon’s converged services subscribers, with all costs covered by the customer signing up corporate to improve their corporate communications with solutions for the service. Incoming calls to 8-800 can be forwarded to one customers such as voice call management, hotlines, call forwarding, or more numbers specified by the customer. quick dial codes, and videoconferencing. used our converged Development in 2018 services in 2018 Development in 2018 During the year, we significantly improved the service’s resilience, updated the Client Account, and included an option for installing In 2018, the penetration rates for MegaFon’s IP telephony services a new type of routing through an IVR menu. The service’s numbering in the B2C segment continued to grow, driven by our highly competitive capacity was increased by 800 numbers. offerings in Converged Services. Revenue from the segment grew by 38% to RUB 0.6bn while its total user base reached 40,000 entities by the year-end. MultiFon.Business Service description

MultiFon.Business is an Internet telephony solution for office Virtual PBX Service description applications.

Virtual PBX is a fast-to-deploy, CAPEX-free smart telephony B2B Development in 2018 solution, which includes office-wide SIP telephony, short dial codes for seamless convergence between office phone services and mobile During the year, we updated the solution’s tariffs and options. devices, and a customisable voice menu. The service enables thorough We expanded the service’s audience reach and, accordingly, potential analysis of employee performance by recording calls online via customer base by providing access to MultiFon.Business for all a special application. MegaFon subscribers regardless of their tariff. A backup node was commissioned in Novosibirsk to improve the availability and quality Development in 2018 of the MultiFon.Business SIP Trunk service.

In 2018, the Virtual PBX subscriber base almost doubled. New CRM integration modules were added to the service, and customers can now also record outgoing mobile calls or automatically forward calls to additional landlines. 106 2. Strategic Report Operational Results 107

Computing resources Business Process-as-a-Service (BPaaS) and Infrastructure-as-a-Service (IaaS)

Virtual Data Centre Service description Digital Lawyer Service description

Virtual Data Centre is used by MegaFon to lease out virtual Digital Lawyer is a service that combines solutions from legal computing resources to corporate customers, set up a virtual corporate practices to monetise premium expertise of MegaFon’s legal team. data storage and provide emergency data recovery and maintenance services for customer systems. The service is mainly intended for large Development in 2018 corporate customers and can host sophisticated corporate systems, offering a high level of reliability and resilience. The service is delivered Currently, Digital Lawyer offers corporate customers services such through a partnership with IBS:DataFort on a white label basis. as Procurement Analysis in One Hour, which includes professional advice on government procurement by MegaFon’s legal function Development in 2018 and Turnkey Startup, which involves preparation of a full set of the documents required to set up an office. In 2018, we continued to expand the portfolio of services available to the solution users. Apart from leasing out computing resources and providing data storage, the updated version of the solution offers additional capabilities for corporate customers, including data Digital Line Personnel Service description back-ups, cyber security, and turnkey IT support. The architecture Recruitment of the Virtual Data Centre is designed for large businesses – retail Digital Line Personnel Recruitment is a service for recruiting chains, insurers, financial organisations, as well as for customers rank and file employees. The service is based on a platform of Skillaz, for whom continuous infrastructure availability is a critical factor. MegaFon’s technology partner, and delivered by specialists of MegaFon’s PIKTA Shared Services Centre. MegaFon can leverage its automation capabilities and infrastructure to recruit employees for the customer’s vacant positions in any region of Russia within Business Cloud Service description a short timeframe starting from three days. Customers can monitor the process via a user-friendly Client Account. Business Cloud includes a suite of services such as virtual platforms, cloud-based storage, databases, graphics cards, and Big Data Development in 2018 services. Its flexible and scalable cloud-based infrastructure is built on an open-source technology platform. The solution can be used The service was launched in July 2018. to enhance processes related to software development and testing, data storage, and new product launches, as well as to reduce IT infrastructure support costs. MegaFon Rekrutika Service description Development in 2018 MegaFon Rekrutika is a virtual platform for managing the full In 2018, we re-launched our suite of services under the new name cycle of personnel recruitment. The platform automatically collects Business Cloud. MegaFon also offered its corporate Infrastructure- and processes applications for vacant positions to widen as-a-Service (IaaS) and Platform-as-a-Service (PaaS) solutions the recruitment funnel and save time for the HR team. MegaFon with the technical support from Mail.ru Cloud Solutions. Rekrutika simplifies communication with applicants by providing a single marketplace for interaction with applicants, to track their Business Cloud users can select the services and configuration they status, and to flexibly set up online scoring scripts, including remote need via their Client Account – from the number of processors involved testing and video interviews with applicants. to the amount of gigabytes required for storage. The solution enables the making of highly complex computations and the handling of Big Development in 2018 Data, as well as managing websites, games, and other data-heavy applications. The service was launched in December 2018.

New B2Х service in 2018 108 2. Strategic Report Operational Results 109

Platform solutions Cyber security services

Description DDoS protection Service description

In response to the growing number of external cyber threats, DoS/DDoS Protection is a service available to those MegaFon MegaFon expanded its service offering to include information customers who have activated Internet Access and IP Transit services security services, including Wi-Fi with Authorisation, Content to protect their information resources against attacks with fast incident Delivery Network (CDN), DDoS protection, data network response (within five minutes after an attack is launched). encryption, and secure mobile communications. Development in 2018

In early August 2018, MegaFon updated its DDoS protection solution Wi-Fi with Service description for B2B and B2G customers. The service was re-launched based authorisation on a solution from Arbor, our new vendor. Integrated with the cloud- Wi-Fi with Authorisation enables authorisation and identification based Arbor Networks ATLAS knowledge base, the service promptly of users in a customer’s public Wi-Fi network by establishing the user’s receives reports on attacks worldwide and on new types of threats. subscriber number (DEF code). This is needed to ensure compliance As a result, the system is continuously learning new protection methods with legal requirements relating to providing Internet access via public and is able to counter similar threats in Russia. Wi-Fi networks. Perimeter, the Russian DDoS protection solution previously used Development in 2018 by MegaFon, has been fully upgraded to speed up the solution’s cleaning rate and improve its functionality. In 2018, we made improvements to the service by embedding a turnkey solution developed jointly with NetByNet for MegaFon’s customers. MegaFon.Anti-Hack Service description

Content Delivery Service description MegaFon.Anti-Hack is a mobile security application with a wider Network (CDN) than standard anti-virus functionality. Apart from protecting software Content Delivery Network (CDN) is a service for content from viruses and infected files, Anti-Hack prevents data interception providers, which relies on distributed network infrastructure to speed within the network, provides protection against attacks via Wi-Fi up downloads for users outside metro areas and secure content networks, phishing messages, and harmful websites that can be used availability during peak traffic events, including major live webcasts, by fraudsters to steal user logins and passwords. The solution also advertising campaigns, software updates or DDoS attacks. prevents devices from being locked by encryption viruses and similar malware. Development in 2018 Development in 2018 In 2018, we upgraded our Moscow server node and completed a tender to select a new software provider for the solution. These initiatives will The service was launched in July 2018. Check Point was our help scale up the service’s sales in 2019. technology partner for the project.

New B2Х service in 2018 110 2. Strategic Report Operational Results 111

Services for telecoms operators (B2O) Fixed-Line Services FMC Partner Service description

FMC Partner provides end customers of our partner operators with access to a shared network converging the fixed-line services of the partner and MegaFon’s mobile services through short dial codes. MegaFon provides its fixed-line services network (VPN) and line leases under the NETBYNET Development in 2018 to customers through its subsidiary LLC NetByNet brand. In 2018, NetByNet focused on expanding Holding (which operates under the NETBYNET its networks in the cities in which it operates In 2018, operators continued to link their users to the FMC Partner and WiFire brands). The services comprise high- and in the adjacent suburban areas, as well service in all areas covered by MegaFon’s branches. Six out speed broadband, digital TV, and local telephony as increasing the number of homes reached. of MegaFon’s eight branches signed their first commercial contracts under the WiFire brand, as well as virtual private and generated their first revenue from the service in 2018.

MegaFon IX Service description NETBYNET (WiFire) services

MegaFon IX is a service that enables our partner operators to exchange Internet traffic when connecting to MegaFon’s network. B2C services B2B services The service is unique in that it does not use transit AS BGPs for interconnection between operators, which enhances connectivity • Residential broadband (WiFire Internet) • Broadband and provides faster access to Internet resources. • Residential digital TV (WiFire TV) and cable TV • Line leases • Residential telephony • Virtual private network (VPN) • 4G mobile data (WiFire Mobile) • Telephony • Anti-virus and parental control • Digital and cable TV • Computer repairs and support • Virtual PBX • IP address • Cloud video surveillance • Wi-Fi with authorisation

B2O services B2G services

• IP transit • Wi-Fi on public transport • Virtual private network (VPN) • Video surveillance systems • Line leases • Traffic enforcement systems

NetByNet operates in seven Russian federal NetByNet’s organic districts, namely, the Central, Northwestern, coverage growth in 2018 North Caucasian, Southern, Volga, Ural, and Far Eastern Federal Districts. In 2018, NetByNet’s organic coverage growth was 5.7%, driven mostly by the Moscow Region, as well as the Southern and Northwestern federal districts. 5.7% 112 2. Strategic Report Operational Results 113

Fixed-line communications Fixed-line communications for the mass market for business

B2C customer base by key service, ’000 B2X customer base, ’000

Service 2016 2017 2018 Service 2016 2017 2018

Wifire Internet 551 506 484 Internet access 14.3 16.0 15.9 TV 195 202 229 Data transmission 0.2 0.6 0.8 Wifire LTE 18 18 31 TV 0.4 0.5 0.5 Residential telephony 79 70 60 Telephony 4.8 5.2 7.5 1 Total 844 796 804 Total 19.7 22.3 24.7

In 2018, NetByNet continued to develop its NetByNet made a priority of enhancing customer In 2018, NetByNet continued building its B2B In 2019, NetByNet will focus on improving the B2B flagship product, WiFire TV, increasing the number loyalty, running a number of major marketing service portfolio, launching bundles comprising customer experience in using Client Accounts, of channels available through the service from 199 initiatives during 2018. The initiatives included a basic broadband service and some cloud services growing revenue from enhanced offerings of cloud to 238 and launching an Ultra HD (4K) channel. a ‘Nadolgo’ (‘Stay with Us’) bundle offering for SMEs. services and bundles, launching an online sales The service now offers new easy-to-use payment customers a discount that gets bigger the more channel, and improving operational efficiency options, such as mobile account, bank card, times they use the service. A number of major regional contracts were by deploying and fine-tuning information systems and Apple Pay. Towards the end of 2018, NetByNet signed with B2G customers in the Moscow launched WiFire TV Lite service offering its In 2018, NetByNet designed and commercially Region and the Northwestern Federal District. customers 50 TV channels at no extra charge. launched several Big Data models, resulting Service and billing functions were centralised in improved target marketing promotions. in shared services centre in Cheboksary, In addition, a new WiFire TV user interface Customers can now fully manage the ‘100 Mbit/s significantly reducing operating costs while and software for new customer devices were na ves god’ (‘100 Mbit/s all year round’) service, improving the quality of service and customer under development in 2018, with the new offering while WiFire Mobile users can now see data usage satisfaction. Other performance improvement scheduled for commercial launch in 2019. and purchase data in bundles they require. initiatives included introducing new tools to monitor key business metrics. NetByNet continued expanding its WiFire Mobile In 2019, NetByNet plans to expand its product product portfolio in 2018, including with a new portfolio by adding new converged services. mobile data rollover plan. The ecosystem of smart home services is also planned for expansion by launching new solutions, NetByNet also further developed converged built upon existing and new products and services. services: in Q4 2018 NetByNet and MegaFon launched a new ‘Vklyuchaisya s WiFire!’ (‘Connect with WiFire!’) promotion offering shared subscribers of NetByNet and MegaFon a discount on the bundle During 2018, NetByNet was they purchase. a technology partner for Wi-Fi internet access for such major events as the Russian Internet Week, and the Point of View Business Debate Forum, as well as the Atlantes and Intelligent Transport Systems of Russia business forums.

1. Data include Pskov GTS assets. 114 2. Strategic Report Operational Results 115

The total number of MegaFon Retail stores increased During the year, six nationwide advertising Sale of products and services by 109 to 2,003 stores by the end of 2018, with per campaigns were launched on TV, radio, online, store revenue up 16% y-o-y. and outdoors together with some of our suppliers (Samsung, Honor, and Xiaomi). The campaigns Smartphones have remained the device of choice — were supported by a range of promotions targeting their share in the total sales of devices in roubles subscribers, including free mobile subscriptions, MegaFon maintains its own sales network which A key highlight of 2018 was increased by 1 p.p. to 94% in 2018, and 4G gifts, top-ups, trade-ins, and attractive POS loans — helps attract new customers and improve the loyalty the transformation of strategically smartphone sales grew by 20 p.p to 90% of total all designed to engage digital customers. of existing customers. In 2018, we renewed our focus units sold. Samsung, Apple, Huawei/Honor, Xiaomi, on improving efficiency and achieved a strong set important distribution channel: and Vertex brands were the leaders by the number In 2018, MegaFon Retail continued to develop its of results. MegaFon and SLV Group, of smartphones sold. partner ecosystem. The key completed projects the controlling shareholders included: of Euroset and Svyaznoy, signed an agreement to merge the two MegaFon Retail actively developed • launch of the Spasibo (Thank You) partnership In 2018, value added services: programme with Sberbank, resulting in stronger MegaFon Retail stores: businesses into the world’s largest customer loyalty; high-tech retail chain1, boasting • start of the relationship with KoronaPay, over 8,000 stores2 with daily Service Sales growth, % an international money transfer service; Sold over traffic of over two million people. • agreements on acceptance of pay-by- instalment cards (Khalva, Sovest, Tinkoff, The consolidation will result ALFA-BANK, etc.); in the launch of new products Insurance 31 • launch of mobile (MegaFon card) account and services and in extensive Device set-up 76 insurance together with VTB Insurance. million growth of our online sales platform Loan repayments 78 8 In 2019, MegaFon continues to focus on driving while helping us deliver on our Money transfers 151 mobile phones, digital customer traffic to key points of sale. omnichannel growth strategy. Other priorities also include growing the sales smartphones, tablets, MegaFon’s new digital development strategy of converged products and services offered prioritises expanding the range of products by MegaFon and its partners, enhancing and accessories and services available to customers instead the product ranges, and active use of Big Data of focussing on new subscriber numbers. to tailor the Company’s offers and improve sales In 2018, MegaFon Retail expanded its product performance. range, with the average price tag rising by 24% Added over for smartphones and by 41% for accessories. The Company continued to upgrade its accessories procurement system and introduced tighter requirements on product and packaging quality. 7.5 million subscribers

1. Expert estimates of the Company. 2. Including the stores of Svyaznoy, Euroset, MegaFon Retail, and franchised stores. 116 2. Strategic Report Operational Results 117

Online sales Customer satisfaction In 2018, MegaFon continued to develop its online sales channels. The total sales of our online store increased by 42% to RUB 2.7bn while the number of orders placed with the online store reached 271,000 per year and the number of visitors reached 18 million users. 18 One of the main areas of focus of MegaFon’s In 2018, we launched messenger-based customer In order to improve product availability and increase the number strategy is providing our customers with the highest service and introduced a new automated customer of regions covered by our fast delivery service, we opened new physical million visitors level of satisfaction in order to retain them for life. support to handle calls across communication offices of our online store in four cities in 2018. We also ran a number To ensure the highest service quality, we are channels, which has helped increase the efficiency of campaigns to better leverage our customer base with Big Data consistently developing our customer service of our multi-channel experts and improve the level solutions and to develop our omnichannel approach. using state-of-the-art technology and offering our of our overall customer service performance. subscribers customised smart solutions according For 2019, MegaFon plans to continue promoting its omnichannel to their needs and interests. customer proposition and increase online sales. We are also planning to roll out new tools for improved cross-selling. We will expand the range of delivery options for online orders, expand the product mix through partner propositions, and enhance value added services for our customers. Key customer service development priorities in 2018:

Telemarketing

In 2018, MegaFon continued growing sales through nationwide telemarketing campaigns.

Our total telemarketing capacity was increased from 3.6 million 2018 highlights: Automation and development Development of convenient Channel customisation to 4.5 million subscribers as of December 2018, in particular of digital channels including and simple service processes and development of user-friendly through expanding our capacities in Novosibirsk, Rostov, and Tula. messengers, chat bots, interfaces and algorithms The volume of telemarketing sales increased by 13% y-o-y to 9 million, and virtual assistants while the call-to-sale conversion rate was 27%. In 2018, MegaFon successfully implemented its FTM Restyling 49 project for comprehensive performance improvement across its million calls key telemarketing sites, including improving employee motivation, enhancing training, and adopting best practices. As a result, +48% the channel’s capacity grew by 10% per month.

In 2019, MegaFon is planning to launch new initiatives to improve High responsiveness and faster Maintaining the perceived quality Supporting and promoting our the performance of its telemarketing sites, a project to integrate resolution times for customer of connections and products product offerings – improving telemarketing and segment marketing, and the roll out of a new 35 queries to further reduce the number service processes and new motivation system for mentors. million subscribers of inbound calls and achieve product sales in our call centres reached faster resolutions and self-service channels +40% 9 million subscribers said YES to our offers +13% 118 2. Strategic Report Operational Results 119

ELENA was integrated with the Alice service by Yandex in 2018. Alice can now inform MegaFon subscribers as to their account balance, 50,000 available tariffs, and other information, following a one-time password text messages per day authorisation. Call centres and other subscriber services ELENA currently receives up to 350,000 calls and 50,000 text messages In 2018, MegaFon’s call centres received 136 million voice calls, per day, with the automation level reaching 63% in the voice channel 63% with 62% handled automatically. We received a total of 151 million calls and 53% in the text message channel. automation level across all our communication channels. In 2019, ELENA is planned to begin handling B2X subscriber requests, in the voice channel We also witnessed the growing popularity of our Client Account – 151 speed up the process of providing requested information, and gather the share of these calls in the total number of calls handled by our call feedback on own performance. centres rose from 55% in 2017 to 65% in 2018. million calls

As part of the Greenfield unified billing system project, all branch call centres were integrated into the Unified Call Centre in 2018, with a single customer service queue. End-to-end call prioritisation was set up for Greenfield and Legacy customers.

Our call centre development plan for 2019 includes:

• developing a virtual assistant for call centre operators to increase the automation level and reduce service time; Client Account • integrating our social media and messenger channels into automated customer support for digital channels to optimise both MegaFon’s online Client Account service can be accessed resource use and customer service; from smartphones and PCs. Over 11.4 million MegaFon customers • increasing sales for inbound calls; actively use the service every month, up 4 million y-o-y. • creating an automated operator and manager account consolidating all results and helping to improve service quality; In 2018, new features became available to Client Account In 2018, MegaFon’s • updating our basic training programme and integrating users: Client Account the SuccessFactors (SFera) system into call centre employee was ranked training. • Individually tailored offers the best among • Apple Wallet, Samsung pay, or Google pay virtual card issuance • Money transfers to mobile phone accounts and bank cards similar services • Carrying forward remaining traffic bundles to the next month offered by its ‘Big • Online access to a granular view of a customer’s communications Three’ peers1. spend over the previous months • The ‘Multi-Account’ feature, managing several contracts (up to 50 from any region) in one account without additional authorisation ELENA virtual assistant MegaFon plans to launch a new mobile application in 2019 In 2018, MegaFon continued developing its speech recognition - based ELENA currently receives up to with expanded features and an improved user experience. virtual assistant, ELENA. ELENA now handles customer calls across all MegaFon branches, covering the call centre, the Support section of the Client Account and the MegaFon application, and text messages. 350,000

In 2018, the range of queries handled by ELENA expanded significantly, calls per day and topics for a number of queries were further clarified. The ELENA service was personalised and is now able to call customers by name and can provide full details about their tariff, traffic, and subscription charges. ELENA has also learned to make tailored offers and guide customers through payment and other procedures.

1. Based on a CSI survey of the Big Four. 120 2. Strategic Report Operational Results 121

In-store service quality Subscriber protection from

MegaFon’s retail network remains a key customer service channel. unsolicited messages and fraud In 2018, we upgraded our customer service system to both increase automation and speed up our service and sales processes. MegaFon protects its customers from unsolicited and suspicious messages which may also compromise security. We are guided To ensure more efficient customer service resolutions without In 2018, MegaFon by our corporate SMS mass messaging requirements and the 2014 escalations to second-line support, the authority of MegaFon store stores were ranked amendments to the Federal Law On Communications, which enable directors was expanded, helping to reduce the number of equipment operators to block any unwanted mass messaging. MegaFon also uses quality complaints by 27% y-o-y. the best among a nationwide Anti-Spam system. the ‘Big Three’ peers As of 2018, new customers can be signed up through a sales assistant’s based on three key Subscribers can report suspected fraud on MegaFon’s Safe tablet and registration forms can be autocompleted by scanning Communication portal, where information is available about fraudulent >10,000 metrics: in-store the customer’s passport, thereby notably accelerating the registration experience, employee schemes and ways to guard oneself against them, as well as an anti- subscriber complaints process. virus software download. about malware handled skills, and waiting In 2018, MegaFon also established a nationwide centre for handling time1. customer queries through a standardised process for reviewing and preparing responses to complaints, which provided uniform quality and response times for all branches. In 2018, MegaFon: blocked more than identified and flagged up over

Social media 578 11,000 Social media is an important tool in boosting MegaFon’s profile MegaFon handled million spam text websites and promoting its products, as well as a popular service channel. messages containing mobile malware MegaFon is represented in social media by official communities on VK, Instagram, Facebook, Twitter, YouTube, and OK.ru. MegaFon 171,000 also has official channels on Mail.ru and Banki.ru. By the end of 2018, MegaFon’s combined communities on social media had more than customer calls 2.4 million registered users. handled more than sent more than through social media during the year MegaFon handled 171,000 customer calls through social media during the year, 90% of which were handled within one hour. The level of satisfaction with MegaFon’s service on social media amounted to 96.7%. 90% 20,000 248,000 customer calls complaints text messages were handled within one hour from subscribers relating to third-party fraud alerting subscribers to potential viruses on their mobile devices

96.7% blocked cancelled about The level of satisfaction with MegaFon’s service on social media 126,000 8,500 phone numbers fraudulent phone links on suspicion of fraud to social media accounts 1. Based on a CSI survey. 122 2. Strategic Report Financial Performance 123

Financial Revenue

Performance In 2018, MegaFon’s revenue grew by 4.3% Revenue in 2017–2018, RUB bn4 to RUB 335.5bn. Service revenue grew across all segments and increased by 4.7% to RUB 307bn. The 12.5% annual growth of mobile data revenue 2018 was the most successful was the main contributor and accounted for 81.4% of the Company’s total revenue 335.5 +4.3% year for MegaFon and Russia’s in 2018. Russian revenue is the major component telecommunications industry in the last of MegaFon’s total revenue and accounts for over 321.8 98.5%. 28.5 -0.6% five years measured by revenue growth 28.7 rates. Consistent implementation of its In 2018, mobile revenue increased by 4.4% 30.9 +7.6% and amounted to RUB 276.1bn, with the revenue 28.8 digital strategy enabled MegaFon from mobile data accounting for 36.6%. Mobile 175.1 +0.3% to outpace the market which grew mainly revenue growth was mainly driven by consistent 174.6 implementation of our Strategy and above all – due to operators’ 2017 initiatives aimed by successful promotion of the ‘Vklyuchaisya!’ at reducing excessive price competition, tariff line which had been improved based Service on Big Data analysis through the introduction revenue: as well as the steady growth of mobile data of the new ‘Vklyuchaisya! Smotri+’ data plan +4.7% usage in Russia. and the ‘Upravlyai!’ B2X tariff line. Marketing Mobile initiatives had a positive impact on the mobile revenue: data traffic growth backed by the growing +4.4% number of subscriptions to the ‘Vklyuchaisya!’ tariffs. A positive impact on the revenue also came Consolidated financial results, 2016–20181 100.9 +12.5% from a one-time surge in mobile service – mainly 89.7 mobile traffic – consumption during the 2018 FIFA Indicator 2016 2017 2018 2018 / 2017 World Cup which was the most ‘mobile’ event in the history of mass sports. During the Cup, fans at stadiums and fan-zones in all of the host cities spent 34 million minutes talking, which Revenue, RUB bn 316.3 321.8 335.5 4.3% is the equivalent of one subscriber talking non- 2017 2018 OIBDA2, RUB bn 121.1 121.92 124.02 1.8% stop for over 65 years. Total internet traffic OIBDA margin2, % 38.3% 37.9% 37.0% -0.9 p.p. exceeded 500 Tb. Mobile data Fixed-line services Net profit3, RUB bn 28.9 20.53 21.13 2.7% Net profit margin, % 9.1% 6.4% 6.3% -0.1 p.p. VAS (value-added services) revenue, including Other mobile revenue Sales of equipment and accessories CAPEX, RUB bn 65.6 56.0 81.5 45.5% revenue from digital products and services, such CAPEX / Revenue 20.7% 17.4% 24.3% 6.9 p.p. as mobile finance services and MegaFon.TV, showed excellent results during the year, also driving mobile Free cash flow to shareholders, RUB bn 27.7 35.2 4.9 -86.2% data revenue up. In 2018, VAS revenue increased Net debt, RUB bn 196.9 234.5 294.3 25.5% by 9.1% y-o-y as a result of a pricing policy revision Share of revenue from Net debt / OIBDA, x 1.63x 1.92x 2.37x 0.45 p.p. following a multiple factor analysis of the market mobile data transmission and our service portfolio values. in mobile revenue

% 1. Based on the IFRS consolidated financial statements for 2018 audited by JSC KPMG. Following the successful closure of the deal 36.6 to create a joint venture with JSC Gazprombank, LLC Financial Investments, and LLC RT-Business Development (subsidiary of Rostec State Corporation) on 9 June 2018, the Group stopped consolidating the financial statements of Mail.Ru Group Limited. All financial information in this Annual Report reflects the Group’s performance excluding Mail.Ru. This data was previously reported as the results of the telecom segment, and now corresponds to the results of the Group’s continuing operations. 2. OIBDA and OIBDA margin are presented in accordance with consolidated financial statements taking into account the effect of IFRS 15. Excluding the effect of IFRS 15, OIBDA and OIBDA margin totalled RUB 122,117m and 36.4% respectively. 2016 OIBDA does not include the non-cash goodwill impairment relating to the broadband business in the amount of RUB 3.4bn. 3. In accordance with the consolidated financial statements and the effect of IFRS 15, net profit is presented as profit from continuing operations. Excluding the effect of IFRS 15, net profit amounted to RUB 19,528m. Net profit for 2017 is adjusted to exclude the non-cash impairment relating to the investment in the Euroset joint venture in the amount of RUB 15.9bn. 2016 net profit is adjusted to exclude 4. Revenue is specified in RUB m and, due to rounding, may slightly the non-cash goodwill impairment relating to the broadband business in the amount of RUB 3.4bn. differ from the data in infographics. 124 2. Strategic Report Financial Performance 125

In 2018, fixed-line revenue increased by 7.6% The growth resulted from equipment being bundled Net profit to RUB 30.9bn. The key contributors to the fixed- with sales of services under such end-of-the-year line revenue growth were the telecommunications marketing initiatives as Back to School, Gigateka, infrastructure development as part of FIFA World and Buy One Samsung Smartphone – Get Another Cup, implementation of projects to develop One Free, as well as from a boost in revenue driven In 2018, net profit grew by 2.7% y-o-y1 In 2018, net profit grew to the digital economy in Russia such as the Safe City by the sales of the new Honor smartphone as well to RUB 21.1bn. Excluding the impact of IFRS 15, net project, and other information and communication as the recently launched models of Samsung, profit decreased by 4.8% to RUB 19.5bn, whereas technology (ICT) contracts with B2G clients. Xiaomi, and Apple smartphones. The surge in sales, net profit margin was 6.3% and 5.8%, respectively. however, was insufficient to offset the impact The net profit figures were adversely affected Revenue from sales of equipment and accessories of closures of multiple stores in line with our by a decrease in OIBDA and higher amortisation reduced slightly to RUB 28.5bn, down 0.6% y-o-y. Strategy, although their number did increase of intangible assets (mainly radio frequencies 21.1 By the end of 2018 growth resumed producing slightly by the end of the year. and software purchased in 2018), as well as growing excellent results – in Q4 2018, sales increased financial expenses resulting from the increase RUB bn by 14.3% y-o-y. in corporate debt. The decrease was partially offset by foreign exchange gains due to timely FX risk +2.7% management.

Capital expenditures and OIBDA free cash flow

In 2018, OIBDA was up 1.8% y-o-y to RUB 124.0bn Key factors influencing OIBDA In 2018, CAPEX increased significantly and reached Capital expenditures in line with our outlook, whereas OIBDA margin in 2018, RUB bn RUB 81.5bn, up 45.5% y-o-y. Capital expenditures in 2016–2018 decreased by 0.9 p.p. to 37.0%. This result includes were mainly allocated to further upgrades the positive impact of the new IFRS 15 accounting of our network and improvement of its resilience, Key factors standard. Excluding the impact of IFRS 15, OIBDA rollout of LTE and LTE Advanced networks, increased by 0.2% to RUB 122.1bn while OIBDA -0.9 p.p. development of the Unified billing platform, 24.3% margin decreased by 1.5 p.p. to 36.4%. and the implementation of initiatives aimed 37.9% -0.1 p.p. -0.4 p.p. + 1.1 p.p. 37.0% 20.7% OIBDA Gross profit as % of as % of OIBDA at improving the quality of services and enhancing OIBDA growth was offset by an 8.9% increase margin margin revenue revenue margin customer experience. Apart from the above- 17.4% in general and administrative expenses in 2018 Growth 1.8% mentioned CAPEX programmes, CAPEX growth was mainly due to the increase in annual spectrum also driven by the procurement of data storage 81.5 expenses following the revision of charges equipment and software required to comply 65.6 by the regulator in the second half of 2018, as well with the Yarovaya law which came into force 56.0 13.7 as higher personnel expenses resulting from a larger 0.3 on 1 July 2018. 121.9 124.0 number of highly skilled professionals engaged (4.4) to implement our Strategy, as well as to salary (7.4) Free cash flow to shareholders in 2018 decreased indexation. In 2018, OIBDA growth was also by 86.2% y-o-y to RUB 4.9bn due to a significant constrained by advertising expenses and expenses increase in CAPEX and a decrease in cash flows on new marketing initiatives, which grew by 24.3%. from operating activities.

The decrease in OIBDA margin resulted from lower OIBDA growth compared to revenue growth due to the expenses mentioned above. Gross profit +4.1% 2016 2017 2018

+4.3% +4.6% -1.6% +8.9% КапитальныеCAPEX, RUB затраты, bn As Процент% of revenue y-o-y y-o-y y-o-y y-o-y млрд руб. от выручки, % Revenue General OIBDA 2017 OIBDA 2018 1. Net profit for 2017 is adjusted to exclude non-cash impairment

Cost of revenue relating to the investment in the Euroset joint venture & administrative

Sales & marketing in the amount of RUB 15.9bn. 126 2. Strategic Report Financial Performance 127

Liquidity and MegaFon continues to keep a major portion In October 2018, MegaFon signed a new 8.5-year of its debt portfolio in roubles. As at 31 December Facility Agreement for EUR 150m with ING financial stability 2018, 87% of all debt was denominated in roubles Group covered by the guarantee of Finnvera, and rouble equivalents as a result of prioritising the Finnish export credit agency. The new facility conventional loans and equipment financing will be used to finance the purchase of fixed- denominated in Russian roubles, as well line and mobile telecommunications equipment, By the end of 2018, MegaFon had sufficient Debt portfolio as implementing hedging programmes. In addition, software and related services from Nokia Solutions liquidity and a comfortable leverage position. as at 31 December 2018 48% of the debt portfolio has a 4-year or longer and Networks Oy (NSN), one of the world’s leading Net debt grew by 25.5%, from RUB 234.5bn maturity. providers of solutions for mobile networks. in 2017 to RUB 294.3bn in 2018. The growth resulted from the need to finance the buyback By instrument, % In February 2018, MegaFon issued a 3-year 7.2% of ordinary shares and GDRs in connection RUB 20bn exchange bond (series BO-001R-04) with the tender offer which was announced in July with interest being payable every six months. New accounting standards 2018 and completed in August 2018, as well 17 71 12 as from the funding of operating and capital 2018 In March 2018, the Company redeemed its series Since 2018, MegaFon has been applying expenses at the end of the year. The net debt/OIBDA 06 and 07 rouble-denominated exchange-traded the new accounting standards IFRS 15, Revenue ratio as at 31 December 2018 was 2.37x vs 1.92x 21 61 18 bonds in full for a total of RUB 20bn. Those bonds from Contracts with Customers, and IFRS 9, at the end of 2017 but remained comfortable were initially issued in March 2013 for a 10-year Financial Instruments. The adoption of IFRS 9 for us. MegaFon enjoys excellent access to funding 2017 tenor and at an 8% coupon rate subject to revision did not have a material impact on our financial and support from our financing counterparties. Bonds Bank loans Equipment financing in 5 years. MegaFon had a right to redeem statements. The key impact of the adoption of IFRS the bonds on the last day of the period before 15 for MegaFon was the capitalisation of costs At the same time, MegaFon pays close attention the specified coupon rate was to be revised incurred to acquire new customer contracts, which to FX risk control. By the end of 2018, 54% and duly exercised this right. increased our 2018 net profit by RUB 1.5bn, net of available cash and cash equivalents were By currency, % of tax effect of RUB 385m. We adopted IFRS 15 denominated in US dollars, 20% in Euro, 14% in HK 50 In August 2018, MegaFon raised rouble- using the modified retrospective method, which dollars, and only 13% in Russian roubles to mitigate denominated loans in the amount of RUB 66bn increased our deferred costs by RUB 1.7bn and our 87 8 the risks of adverse movements in our liabilities at a fixed rate and with 1-year to 5-year maturities opening retained earnings by RUB 1.4bn, net of tax in foreign currencies. We monitor all currency 2018 to finance corporate needs and implement the July effect. developments closely and take the necessary steps 3 5 2018 programme to purchase ordinary shares to mitigate any negative impacts. 82 9 and GDRs from minority shareholders. 2017

RUB EUR US$ FX hedging instruments

By maturity, %

12 13 27 21 27 2018 19 5 8 14 54 2017 1 year 2 years 3 years 4 years 5 years and longer

128 2. Strategic Report Risk Management 129

Risk Management

Smart risk-taking

Risk management at MegaFon is based on national The risk management strategy As part of its efforts to promote and develop and international standards and best practices involves: a risk-based culture, MegaFon places particular to ensure the successful implementation of our corporate strategy. MegaFon continuously fosters • continuously aligning risk management emphasis on the following key aspects: a risk management culture based on: employees’ to business changes; risk-based thinking in decision-making; ensuring • developing risk assessment models to improve risk assessment in business processes and projects; the accuracy of data available to drive decision- raining; and ‘Tone at the Top’ leadership from senior making; managers on the importance of risk management. • improving risk identification; Tone at the Top • adjusting MegaFon’s risk appetite to support MegaFon’s sustainable growth and profitable its corporate strategy and balance risk MegaFon’s senior managers act as role models operations rely on the acknowledgement and opportunity; and effective management of the risks inherent • continuously seeking out business opportunities in the discussion, identification, and assessment of risks, in its business operations. Risks can be related and options for transforming threats into and are actively involved in risk management. to the market, industry or macroeconomic opportunities; environments, as well as factors specific to MegaFon • improving communication in the risk which are capable of impacting its strategy management process; and vision. • regular employee training; • improving internal reporting on risks. MegaFon makes a constant effort to identify, Corporate governance assess, and mitigate risks as far as possible, and aims to minimise the negative impacts of risks MegaFon’s managers take Risk management is a part of employees’ responsibilities. beyond its control. a mandatory risk management Timely communication about risks is encouraged and all risks are regarded as opportunities to improve the Company’s Assisted by the Board of Directors and the risk training course which is also management team, MegaFon’s management available to all other employees. performance. is responsible for the design, implementation, and performance of the risk management framework. The Audit Committee of the Board of Directors regularly reviews reports on risks, opportunities, and risk management improvement, and makes recommendations for its further Skills development. MegaFon’s management supports the Company’s Risk Management Function in providing risk management training to key employees. 130 2. Strategic Report Risk Management 131

Risk Management Structure Development of the risk management system in 2018

Board of Directors We updated our risk management regulations MegaFon places particular focus on cyber in 2018, including making amendments to the risk risks. In 2018, the Committee for Information assessment and review approach in the Risk Security specifically addressed matters relating Management Methodology. The basic elements to the information security strategy, identification of the risk management framework (goals, of cyber threats, regulatory compliance, principles, participants, and strategy) were and improving data handling procedures. integrated into the Risk Management Policy to streamline communications. We also appointed MegaFon also continues to enhance its risk coordinators responsible for proactive Business Continuity Management (BCM) system Reporting, monitoring Audit Committee Internal Audit cooperation across key functions. with an emphasis on creating a single approach to business continuity planning, reviewing existing MegaFon continued using the Oracle Hyperion service criticality and reliability standards, RiskCom automated solution to manage risks and ensuring service redundancy to ensure and drive further improvements in the transparency, implementation of the Company’s strategy convenience-of-use, and performance of its and minimise reputational or financial loss in crisis processes. situations. Risk Committee and other committees

Risk management Principal risks and mitigation

In the conducts of its business MegaFon takes into account a wide range of risks which may have an adverse impact on its performance unless properly Risk Management Function mitigated, including geopolitical, macroeconomic, strategic, operational, regulatory (including international compliance), and financial risks.

Project Steering Committee Function leader Risk Committee (Subsidiaries)

Project Risk Coordinator Function Risk Coordinator Subsidiary Risk Coordinator

Project Risks Function Risks Subsidiary Risks 132 2. Strategic Report Risk Management 133

Risk Risk description Risk management Risk Risk description Risk management

Macroeconomic risks Operational risks

Falling oil prices and weaker rouble may The wireless market is relatively more resilient The mobile market is one of the most developed MegaFon takes a wide range of initiatives negatively impact the Russian economy. during an economic downturn, as consumers tend segments of the Russian telecommunications to bolster its competitive advantage, including An economic downturn may also lead to be dependent on mobile and data services industry. It is characterised by high penetration by deploying cutting-edge technology, developing to investment withdrawals from certain capex- and are less likely to consider reducing their rates, which has led to increased competition new and innovative products and services, Risk of an economic heavy Russian projects, which could consequently spending on these services. as operators strive to retain existing and attract creating new partnerships with other companies slowdown slow down MegaFon’s network rollout. new customers. This competitive landscape and building innovative infrastructure. The long-term contracts MegaFon holds Risk of increased is one of the most influential factors continuing with major global vendors should ensure competition the continued construction and modernisation to impact the mobile market. MegaFon’s key of its network. direct competitors include MTS, VEON, and Tele2. Further, evolving business models in the market may lead to changes in structure and dynamics As a company registered in the Russian MegaFon’s business is conducted outside the EU, of the current market, the impact of which may not Federation, MegaFon is exposed to economic the United States, and Ukraine, and is focused currently be foreseeable. and geopolitical risks specific to Russia in general, on telecommunications, which are usually including those related to the current sanctions excluded from sanctions regimes. Therefore, these regime imposed by the United States, European risks are currently unlikely to cause any disruption Although MegaFon ensures that its technological We take all necessary measures to ensure Union (EU), and other countries against certain to MegaFon’s operations. infrastructure has a high level of reliability the high quality of our services. In particular, and resilience, an accident may affect the quality to improve the overall resilience and performance Sanctions Russian companies. There is a risk that new However, a possible imposition of additional of provided services. of our technological infrastructure, MegaFon sanctions may be imposed or the list of entities sanctions, particularly against MegaFon’s subject to existing sanctions may be expanded. has put in place business continuity regulations principal shareholders, or expansion of existing and is focused on building its technological Additional sanctions may also be imposed sanctions, may have an adverse impact Service quality risk architecture in line with the highest global on supplies of equipment, software, and services on operations. standards, ensuring redundancy of the most from the EU and the United States. critical elements of its infrastructure. MegaFon also implements a number of relevant initiatives to enhance business continuity.

Strategic risks MegaFon may incur losses resulting from wilful We have a dedicated unit responsible misconduct by unscrupulous counterparties for preventing fraud and associated financial The telecommunications and digital industries By offering advanced digital solutions, MegaFon or subscribers. The Company is also exposed or reputational losses while safeguarding are rapidly evolving amid an accelerating pace continues to pursue its strategy of transforming Telecommunications fraud to the risk of losing subscribers who become our customers against fraud. MegaFon uses of innovation, while new players are entering into an integrated digital communications risks victims of fraud, as well as reputational damage. a number of dedicated automated anti-fraud non-core markets, such as banks establishing company. MegaFon is rolling out new technology, solutions to support fraud prevention. Monitoring telecoms operators and telecoms operators developing partnerships with other companies, for the more critical fraud threats is carried out creating banking products. Consumption and transforming its internal processes to speed 24/7. patterns in the telecommunications market are up innovation and the launch of new products changing. General trends at present include and solutions. We are constantly investing Threat to MegaFon’s the ongoing evolution of subscribers into digital in innovation to strengthen our leadership Certain vulnerabilities may lead to a failure MegaFon takes all necessary measures in line business from new entrants customers, an upsurge in demand for mobile and sharpen our competitive edge in each to maintain appropriate security levels for our with its information security strategy to ensure and business models data and OTT services, and growing smartphone operating segment and market. software, equipment, network, and subscribers’ an appropriate level of security for its IT penetration. Failure to predict and promptly adapt personal data, potentially leaving them systems, software, technology, and equipment. to technological innovation and evolving customer compromised and subject to unauthorised This includes continuous monitoring for potential preferences, as well as inability to offer innovative access and use, such as the use of subscriber threats and the use of security intelligence and high-tech products and implement advanced Cyber risks data or confidential information in fraudulent platforms across its IT and telecommunications business models, may erode the Company’s transactions or the spread of malware. infrastructures. competitiveness and undermine efforts aimed In addition, MegaFon has in place a strong at retaining existing and attracting new customers. information security policy alongside local regulations governing personal data protection and develops a robust monitoring system for cyber Business expansion, acquisitions, Any asset acquisition is always preceded threats. or strategic alliances can require extra attention by an extensive due diligence on the target from management, diverting focus away business, evaluation of the transaction’s viability, from other business concerns. In addition, any verification of ownership and other legal due potential acquisition could negatively impact our diligence, and a thorough financial analysis Risk of new business financial position, credit ratings, or dilute the value of the proposed transaction. MegaFon has acquisitions or strategic of our shares. a successful track record of acquisitions and post- alliances having an adverse transaction integration – and its management impact on our business consists of experienced professionals who have the necessary expertise and qualifications for effective decision-making regarding acquisitions. 134 2. Strategic Report Risk Management 135

Risk Risk description Risk management Risk Risk description Risk management

Regulatory risks Regulatory risks

As the practice of enforcing transfer To minimise tax risks related to transfer pricing, Government authorities are proposing changes MegaFon will closely monitor developments pricing legislation is still in its early stages, MegaFon has introduced and continues to the regulations restricting access to blocked relating to the proposed legislation and actively the approaches used to establish arm’s length to improve internal procedures ensuring webpages obliging operators to install third- participate in discussions relating to it. Changes in regulations prices under controlled transactions may be compliance with the transfer pricing legislation party hardware and software on their networks on restricting access challenged by tax authorities, which could lead while monitoring prices used in related to prevent cyber threats. Should the proposed to blocked webpages; cross- to additional tax liabilities being imposed. party transactions to ensure they are in line legislation be enacted, it will restrict access border traffic routing with the market and identifying controlled to blocked webpages and authorise the regulator Transfer pricing transactions as defined by the Russian Tax Code. to introduce rules on routing all Russian web MegaFon also formed a consolidated group traffic. of taxpayers among the members of the MegaFon Group, so that transactions among members are not subject to transfer pricing control. Recently, government authorities have The chances that compliance with minimum reconsidered their position on the introduction service quality requirements will be necessary We believe that MegaFon’s transfer pricing of minimum communications service quality in the medium term have significantly increased. policy and practices comply with transfer pricing parameters in the medium term. However, MegaFon is confident that it will be able legislation requirements. The regulator’s current philosophy is that to meet any such minimum requirements applied the quality of communications services will be to its services. Federal Law No. 376-FZ On Amendments to Parts MegaFon has developed internal procedures assured if subscribers have the right to select their Risk of the introduction 1 and 2 of the Tax Code of the Russian Federation to identify entities that may be treated communications operator based on mandatory of minimum communications (with Regard to Taxation of Profits of Controlled as controlled foreign companies. A step-by-step provision of information on the quality of service service quality parameters Foreign Companies and Income of Foreign action plan was also developed in relation to these being provided to subscribers. Organisations) introduced new regulations companies and a schedule was established This may mean that, in addition effective from 1 January 2015 stipulating that for preparing and filing the required documents to the administrative and technical support the undistributed profits of foreign companies with tax authorities. MegaFon continues Controlled foreign requirements aimed at the stable operation controlled by Russian tax residents may be subject to improve its internal procedures in accordance companies of a public communications network, the law to taxation in Russia. The law makes Russian tax with the official directives and instructions will further set minimum requirements regarding residents in control of foreign companies liable provided by competent authorities. the quality of services provided to customers. for tax payments and submission of relevant CFC notifications. To date, there has been limited court practice relating to the CFC Rules and few The Government and industry participants are The 5G standard will allow MegaFon to achieve clarifications by competent authorities on their developing various 5G development scenarios. cost savings while offering customers an entirely application. The commercial 5G launch will require a wide new service range. range of regulations to be introduced. Risks related to 5G Accordingly, MegaFon is actively engaged in 5G Revocation, suspension, or non-renewal of licences MegaFon holds GSM, 3G, and 4G/LTE licences However, there remains considerable uncertainty development discussions and will participate could have a significant adverse impact on our with varying expiry dates. We pay close as to the development scenario which will in drafting the new regulations. business. Additionally, MegaFon uses resources attention to complying with the established be chosen, and as to the nature and scope We are also monitoring all 5G initiatives. which are considered finite, including frequency requirements for licensees, tracking licence expiry of the implementing regulations. Risk of revocation, spectrum and numbering capacity, and their dates, and ensuring that all necessary steps suspension, or non-renewal unavailability for any reason could adversely are taken to ensure timely renewal of licences of licences As a public company, MegaFon is obliged We are consistently implementing and improving affect operations. with the Federal Service for Supervision to ensure the security of inside information safeguards to protect inside information. Our of Communications, Information Technology, providing protection for its shareholders, partners employees are regularly trained and tested and Mass Media of the Russian Federation and counterparties. to increase their awareness of inside information (‘Roskomnadzor’). protection. Risk of failure to protect inside information We also introduced internal procedures A large number of draft regulations on data We are monitoring the proposed legislation. restricting and controlling access to inside exchange are currently in development. Recently, MegaFon believes that these draft laws information, including a number of technical several controversial draft laws regulating and regulations require thorough elaboration tools protecting inside information on the mobile information exchange between telecoms operators and discussions with the industry players, whose devices of employees that have access to such and banks (customer data), Big Data (user- opinion must be considered when introducing new information. Data exchange generated Big Data) and public data exchange laws. (available online to the public) have been introduced. MegaFon’s representatives are involved As a public company, MegaFon is exposed MegaFon has implemented best disclosure in the effort to coordinate the responses to the risk of claims against our Directors practices. To limit the extent of potential losses Risks related to improper These new laws and regulations, if enacted, of industry to these proposals for industry and officers by regulatory authorities, or costs as a result of legal claims related or inaccurate disclosure are likely to put pressure on revenue growth regulation. shareholders, and investors for improper to improper or inaccurate disclosure, MegaFon has and other securities-related from technology products. and/or untimely information disclosure, obtained and maintains a Directors’ and Officers’ risks or for disclosure of incomplete, confusing, Liability Policy. or contradictory information. 136 2. Strategic Report Risk Management 137

Risk Risk description Risk management Risk Risk description Risk management

Financial risks Financial risks

Rising interest rates could increase MegaFon’s Currently, MegaFon enjoys a high credit MegaFon’s credit ratings are constrained As at the date of this Annual Report, MegaFon costs of raising funds to finance its operations rating, which makes it well-positioned to raise by Russia’s sovereign credit rating, has a stable outlook on local currency debt and CAPEX programmes. funds at the most attractive terms available as the Company’s business is concentrated almost and a stable rating outlook on its foreign in the market. entirely in Russia. Therefore, MegaFon’s ratings currency debt. MegaFon’s ratings remain among In addition, where MegaFon’s existing debt carries Risk of credit rating may be downgraded following a downgrade the highest among Russian corporates, which, a floating rate, the Company is exposed to the risk A major portion of the Company’s debt portfolio downgrade or unacceptable in Russia’s sovereign credit rating. Downgrades along with its financial strength, ensures adequate of higher costs of servicing such debt. is long-term and carries attractive interest rates, credit ratings and around 90% of its debt portfolio has fixed in Russia’s sovereign credit rating in the past access to funding. We believe that MegaFon has Interest rate risk rates. MegaFon has no rouble-denominated have caused a downward revision of MegaFon’s the necessary resources to ensure uninterrupted facilities with interest rates tied to the key lending corporate ratings, with an adverse effect access to finance to support its economic rate of the . The Company’s on MegaFon’s borrowing costs. activities. floating rate debt comprises credit facilities taken out to finance equipment purchases. At the same Deterioration of Russian corporates’ access To date, a large portion of MegaFon’s deposits has time, the Company can make transactions to Western capital markets and any increase been denominated in foreign currencies, which with derivatives to hedge against the risk in the key rate announced by the Central mitigates the Company’s liquidity revaluation of adverse movements in interest rates. Bank of Russia may limit our access to capital risk arising from adverse changes in FX rates. and affect our borrowing costs. Moreover, MegaFon has access to adequate Due to the direct correlation between the cost To mitigate FX risks, MegaFon holds a part Further sanctions could lead to restrictions funding through the credit facilities it has opened of imported equipment and FX rates, MegaFon’s of its cash assets in foreign currency deposit on certain transactions. with both Russian and foreign banks, thereby financial position, liquidity, and performance are accounts in order to pay its liabilities using reducing liquidity risk in the short and medium highly exposed to changes in FX rates. those foreign currencies. The Company also term. Risk of adverse changes diversifies its foreign currency deposits and works We are carefully monitoring MegaFon’s exposure in FX rates with counterparties to increase the share Liquidity risk to Russian financial institutions which could of operating and capital expenses which are become subject to new or increased sanctions denominated in roubles in order to cover such to ensure that the Company always has access expenses using rouble revenues. The Company to adequate funding even if dealing with, also hedges against foreign exchange risks. and accessing funds held by, such institutions becomes more difficult. MegaFon also holds funds in different currencies and is endeavouring Credit risk refers to the risk of financial loss To mitigate credit risk, MegaFon invests its to provide where possible for payment resulting from a counterparty’s failure to meet its surplus funds on a diversified basis both of obligations in different currencies to mitigate contractual obligations. Financial instruments that with Russian branches of international banks any possibility of restrictions being imposed may potentially lead to a higher credit risk include and a limited number of selected Russian on the currencies in which it normally deals. short-term investments, receivables, and long-term banks. The majority of Russian banks engaged deposits. with MegaFon are either owned or controlled by the state. Preventive measures to mitigate credit risk with respect to other counterparties Credit risk 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. 138 2. Strategic Report Sustainability 139

Sustainability Stakeholder engagement

Implementing our sustainability • High-quality services • Contributing to the development of the digital economy strategy requires building • Compliance with the highest effective stakeholder relations international standards for consumer • Involvement in the modernisation based on partnership, equality, relations of Russia’s telecommunications infrastructure and respect. • Ensuring confidentiality and security • Contributing to public safety, • Prompt response to requests For this purpose, the Company including support in emergencies runs regular stakeholder surveys • Responsible marketing • Involvement in the development to determine the key topics of regulatory approaches Our approach to sustainability of importance to them. to the telecoms industry • Charity and sponsorship initiatives

MegaFon sees sustainable development as growth Our sustainability activities are guided by best that results in a positive impact from its operations practices, international regulations and standards, Customers on the quality of life for people. including the United Nations Global Compact and the Social Charter of Russian Business. We aim to achieve excellence in business, but also to contribute as much as we can towards the social Our reporting on sustainability as part • Principles of corporate Local citizenship Government and economic development of society. Reconciling of the Company’s Annual Report is guided communities commercial, social, and environmental interests by international standards such as the Guidance • Enabling better access is an important element of our Strategy. on Social Responsibility (ISO 26000) and the Global to new technologies Reporting Initiative (GRI) Sustainability Reporting • Improving the quality Our sustainable development is underpinned Guidelines. of life through social by our commitment to the principles of integrity investments in business operations and responsible practices in relationships with all stakeholders. We adhere to generally accepted moral and ethical standards, endorse business transparency, respect human Shareholders Employees rights, and support environmental initiatives. MegaFon’s Chief Executive Officer, its Management Board, and its Board of Directors collectively provide and shape the strategic direction behind our For more information see the Appendix: Material Topics approach to sustainability. and Materiality Matrix.

Business Industry • Adherence to best • Respect and trust practices in corporate partners community governance • Encouraging employees to realise their potential • Equal access QUALITY QUALITY • Fair remuneration EDUCATION EDUCATION to information about MegaFon is committed to contributing to the delivery of the UN’s the Company • Equal rights Sustainable Development Goals: • Ensuring equality • Health and safety of shareholder rights • Performance • Engaging • Enhanced engagement of all obligations in the development to counterparties of the telecoms industry QUALITY DECENT WORK INDUSTRY,DECENT WORK INDUSTRY, • Transparency • Building best practices EDUCATION AND ECONOMIC INNOVATION,AND ECONOMIC AND INNOVATION, AND and standards GROWTH INFRASTRUCTUREGROWTH INFRASTRUCTURE • Fair competition • Anti-corruption commitment • Focus on long-term business relationships

DECENT WORK INDUSTRY, AND ECONOMIC INNOVATION, AND GROWTH INFRASTRUCTURE 140 2. Strategic Report Sustainability 141

HR management HR process automation

MegaFon’s HR policy aims to attract the best talent Headcount by gender, people and support their professional growth. The Company has built a framework of relationships supporting the achievement of MegaFon’s strategic goals. 2018 23,171 17,358 40,529 MegaFon continued to automate its HR management function in 2018, with highlights including the launch Our team at a glance 2017 22,826 16,300 39,126 As at 31 December 2018, MegaFon’s headcount was of SFera, a system which combines 40,529 people, up 3.6% y-o-y. We have a very age- resources, processes, knowledge, diverse talent pool, with close to 50% of our employees 2016 21,638 15,351 36,989 aged 26 to 35. Due to our focus on technology and capabilities, and can speed and innovation, most of our employees have higher up internal HR processes within education qualifications. Women the Company while making them MegaFon provides equal opportunities for both Men men and women. Our key selection criteria in hiring seamless and transparent. SFera will and promotion decisions include professionalism, become a single entry point system leadership skills, commitment to achieving results, and the ability to work in a team. Women account and an indispensable enabling tool for 57.2% of MegaFon’s total headcount. covering development, training, goal- setting, and other HR management aspects.

Analytics Onboarding Headcount by age, people Headcount by education level, people Age 2016 2017 2018 25,561 Career Planning, 24,876 Capability Assessment, Training and developing 23,294 Individual Development Plans employees (planning, delivering, and tracking 18 to 25 10,088 10,831 11,341 learning) 26 to 35 19,560 20,083 20,235 36 to 45 5,567 6,188 6,722 14,237 46 to 55 1,372 1,540 1,669 13,408 12,807 Over 55 402 484 507 SFera

Managing compensation Corporate knowledge (performance-driven base, social media (project compensation, review collaboration, internal 888 842 730 of the fixed part) corporate communications)

2016 2017 2018

40,529 University degree people Performance assessment Secondary and vocational education (monitoring performance against targets; Goal-setting and KPIs assessing performance quality) (cascading and evaluating targets) MegaFon’s headcount Incomplete higher education 142 2. Strategic Report Sustainability 143

Talent acquisition Digital talent

MegaFon’s highly professional team MegaFon is extensively involved in building a national pool In 2018, MegaFon designed of technology talent. MegaFon’s digital talent development strategy and implemented an integrated is our key asset and main competitive aims to seek out and support high potential candidates, develop their programme to attract and develop digital skills, and provide additional training on programming, machine digital talents advantage. We are focused on attracting learning, and UI/UX design. and retaining the best talent by creating In 2018, MegaFon designed and implemented an integrated unique opportunities for career programme to attract and develop digital talents from across advancement and personal development Russia, from gifted high-school and university students to seasoned professionals, covering more than five million participants. >5 while continuously identifying resources million and capabilities the Company will need Educational projects in 2018: participants in future to ensure their availability • Big Data case championships, master classes, and workshops at the Sirius Educational Centre. at the right time. • A digital campus on IoT and new product development at the Orlyonok Children’s Centre. • Machine learning courses together with Mail.Ru Group, and Skolkovo and Innopolis technoparks. • Winter and summer camps for university students to develop analytical skills, in partnership with Changellenge. • Megastar school in Khabarovsk.

In the Universum ranking, IT students have selected MegaFon as the most In 2018, we continued In October 2018, In January 2018, In 2018, the Moscow attractive employer our internship MegaFon launched the Company launched office of MegaFon hosted in the telecommunications and training program a MegaDataHack Meetings with Meaning, a forum for professional industry in 2018. for young talents hackathon – a project to develop communities of data across Russia, which a series of offline existing and attract scientists, developers, provides an opportunity and online contests potential employees. designers, and doctors. for the best students hosted by Russian 14 meetings were held 17 professional meetups from leading regional centres with renowned experts were held during universities to handle for the development across different areas, 2018, involving a total real-life business of new digital services, with attendees totalling of 2,700 participants. cases and implement with a total prize approximately 12,000. their ideas in areas fund exceeding such as Big Data, RUB 3m. The event development, analytics, brought together digital services, 2,600 participants, and UX/UI design. with a total 140 students from major coverage of close Russian universities to 650,000 developers underwent internships and IT experts. at the Company, with 33 out of them being offered a position at MegaFon as a result.

Understanding the importance of building a national pool of technical talents, we are consistent in our efforts to support the leading technical Over 150 universities while offering internship opportunities at the Company events across Russia for talented students and helping IT employees to develop. MegaFon held over 150 events in 2018 across Russia, offering positions at the Company to 87 specialists as a result. 144 2. Strategic Report Sustainability 145

Talent retention and motivation Corporate culture

MegaFon seeks to create an environment which Key elements of the recognition framework: In 2018, MegaFon celebrated its 25th anniversary. During the year, MegaFon maintained its focus encourages the professional and personal The anniversary was celebrated through a summer on promoting a culture of fitness and outstanding development of its employees. We provide fair Rewards during the year corporate event in Moscow, together with a number athletic achievements. Over 200 employees remuneration and ensure that all our personnel have Every manager is authorised to reward his or her of ‘team engagement’ activities, including a Come of the Company took part in more than all the support they need to find the opportunities that employees for excellent project results, attractive in Green flashmob, with all employees across 20 professional corporate football, basketball, ice best utilise their skills, knowledge, and talents. proposals, and the implementation of interesting ideas the country wearing green at work. hockey, volleyball, and table tennis tournaments. beneficial for the business. During the year, managers MegaFon’s football team won the Business Champions MegaFon’s motivation system includes both monetary rewarded over 4,000 employees. League among corporate teams. and non-monetary rewards, ranging from bonuses and social benefit payments, to development Awards of the Russian Ministry of Telecom programmes and professional skill competitions, and Mass Communications We also updated our corporate as well as awards and rewards to recognise Employees who have worked for more than anthem ahead of the 25th anniversary, professional excellence. ten years in the telecommunications industry with an extensive search conducted and made a valuable contribution to the Company’s Remuneration development may receive industry awards among all employees of MegaFon from the Ministry. In 2018, such awards were to select performers for recording Our approach to remuneration is guided by our presented to over 240 people, with 50 of them the anthem and shooting a video clip. commitment to offer competitive salaries based recognised as Honorary Radio Operators and ten The winners came to Moscow to record on market and internal benchmarks. as Communications Professionals. the video of the anthem performance. In 2018, MegaFon proceeded its long-term incentive Motivating competitions plan for top management based on remuneration paid New award categories were added in 2018 out depending on the Company’s performance over to established awards such as the MegaConsultant a three-year period. The plan is designed to focus award for sales assistants and the MegaFon-Styled the management team on the Company’s longer-term Life for employees who most clearly embody Internal communications strategic goals. the Company’s values in their work. The new categories include the Project of the Year award which aims to select the best project across the Company’s key functions and the Best Business Idea award Our Internal communications system is a key part We aim to involve all our employees in communications, for employees who propose the best digital ideas of our Company’s development. It is important for us including our top managers, creating an environment to drive business growth. to provide every member of our team across all that encourages open and informal contacts regardless MegaFon’s team organisation regions of operation with a clear view of all the key of their position in the Company. and employee incentive plan were Federal projects motivation projects being undertaken by the Company. We make key drivers behind the successful We have continued our practice of paying project extensive use of tools that demonstrate MegaFon’s During 2018, we continued to further develop our bonuses to retain key employees with valuable digital capabilities and help our employees to develop. internal communications system, providing support implementation of its project experience. for MegaFon’s major federal-level projects, large-scale to provide telecommunications Seeking to establish MegaFon as a vibrant transformation processes, and nationwide campaigns. support for 2018 FIFA World Cup. and dynamic company for both customers During the year, managers rewarded over and employees, we have dramatically changed Today, our news feed on the MegaNet web portal the style, tone, and speed of our communications allows employees to rate and comment on any event, Recognition through focus on more innovative and bold solutions. and receive expert feedback. And through our special portal, Open Microphone, we are able to promptly We value our employees and do our best to recognise In 2018, we continued to use online broadcasts address employee concerns. their success and inspire them to new achievements. on a regular basis to connect employees In 2018, we modified the existing recognition 4,000 in our branches and subsidiaries. Our employees Our priorities for 2019 include maximum digitisation framework by setting up a new one-stop website, employees can now enjoy direct access to meetings of all media platforms, strengthening horizontal Pro PRIZnaniye, where every employee can learn with managers near specially equipped areas, communications, developing social communications, about all existing awards, ratings, and winners. by using their PCs or handsets, or from any and further engaging employees in content creation. conference room. Online broadcasts are also used as part of the Meetings with Meaning project which >240 provides employees based in any Russian region awards with an opportunity to listen to guest speakers sharing of the Russian Ministry of Telecom their thoughts on the digital industry’s hottest trends. and Mass Communications in 2018 146 2. Strategic Report Sustainability 147

Training and professional Onboarding and mentoring We continue to develop our mentoring programme programmes across MegaFon’s units. Alongside the procedures already existing in federal-level customer-facing development functions, in 2018 we introduced a Mentoring In 2018, the Company designed a new onboarding in Business Systems programme and established process for new hires. The Company conducts a mentor selection, training, and motivation system. regular welcome courses with the involvement of top Internal training Employee training costs, RUB m managers, and employees from different functions sharing their work experiences in one-hour meetings. External training In 2018, MegaFon continued to improve its approach We have automated the regular feedback loop to employee training and development. In our between the HR team and new hires to cover the entire 3,275 employees underwent external professional employee training, we focused primarily on developing 143.4 142.8 onboarding period and enable flexible modifications training in 2018, mostly in new digital technology new business processes, encouraging competence- or enhancements to relevant processes. and project management. As part of our partnership 131.0 based managerial skills in leaders, launching new with Innopolis University, professional training technology-enabled products, and advanced We also designed and introduced a new format programmes on our ‘Agile’ project were delivered, approaches to development and training. which offers tailored onboarding programmes including in ‘Agile’ software development, cloud for new directors and managers. The new format technology and data virtualisation, as well Our corporate university, MegaAcademy, helps them gain familiarity with the Company and its as on building high performance IT teams, Big Data, is MegaFon’s largest educational initiative, comprising internal processes, integrate into their new roles, and machine learning. centres of excellence where employees and managers and deliver better results faster. A special presentation are trained by skilled trainers. All products offered was prepared for managers, highlighting their role During the year, 1,134 employees underwent external by MegaAcademy are certified by the head in the onboarding process with specific guidance business trainings. The key programmes included of methodology and new research, and all trainers on engaging new hires. the Digital-and-I programme for managers co- undergo intense, supervised sessions before they are developed with Innopolis University, as well as the Idea allowed to provide training under MegaAcademy’s MegaFon operates a corporate-wide intranet to Launch programme for members of our key project programmes. 2016 2017 2018 portal, MegaNet, which consolidates all important responsible for launching digital products in the market, information about the Company in a structured a strategy session on interaction with startups held way. The portal is accessible to every employee together with IIDF, and the first Digital Conference from anywhere in Russia, helping staff quickly learn for MegaFon’s employees involving experts from other everything they need to know about MegaFon high-tech companies. in general or about the activities of other units.

The number of courses completed Number of programmes held in 2018 Number of externally trained Externally trained employees by employees as part of internal employees, people in 2018 training in 2018, ‘000 Type 23.4

Webinars 1,145 8,365 58.4 Trainings and master classes 2,251 1,134 Coachings 27 Moderations, retrospectives, and strategy 176 sessions Total Total: 3,599 4,409 552.5 4,559 4,409 people

470.7 3,275

Remote courses Professional training Trainings 3,599 Business training Webinars programmes 2016 2017 2018 148 2. Strategic Report Sustainability 149

Social support Occupational health and safety

MegaFon not only guarantees all legally-required • Partial reimbursement for employees’ expenses social support to employees but also goes beyond on fitness programmes Occupational health and safety (OHS) is a top Key occupational safety initiatives in 2018: that by providing a wide range of additional • Temporary disability payment above priority on MegaFon’s social responsibility agenda. programmes focused on providing the best work the statutory minimum MegaFon’s ‘Occupational Health Management • Internal training and testing of employees’ experience and professional growth opportunities • Lump allowances to employees and their System’ is the main document regulating knowledge on occupational safety for its employees. family members in difficult life situations the Company’s OHS efforts. It was drafted in line • Training and retraining for employees whose • Compensation for employees’ mobile phone with Russia’s GOST 12.0.230.1-2015, ‘Occupational job duties involve extra hazards (work at height, Key benefits and guarantees offered expenses within set monthly limits Safety Standards System. Occupational Safety electrical equipment operation, safe operation by MegaFon to its employees: • Reimbursement for relocation expenses when and Health Management Systems. Guidance for Use of lifting equipment, etc.) at specialised training moving to a new place of work in a different of GOST 12.0.230-2007’, and GOST 12.0.230- centres • Voluntary health insurance (VHI) for employees; region, and a fixed lump sum to help employees 2007, ‘Occupational Safety Standards System. • Scheduled and unscheduled occupational health employee family members are offered health settle in at their new place of residence Occupational Safety Management Systems. and safety audits across the Company insurance at a discounted price General Requirements’. • Special assessment of working conditions • Employees’ accident insurance • Mandatory medical examination of employees The Company provides instructions on precautions both at the start of employment and on a regular to be taken in the workplace and safety rules, as well basis for jobs involving extra hazards as emergency procedures. All MegaFon employees • Provision of special clothes and footwear, must study these instructions and undergo and other personal protective equipment, an induction training course and examinations to employees to raise their awareness of occupational safety • Provision of workwear to employees involved before they start working. Employees whose job in supporting the 2018 FIFA World Cup Expenses on social programmes and benefits in 2016–2018, RUB m duties involve extra hazards are required to study as required by the Organising Committee safety rules and take workplace occupational safety • Recording and investigating occupational training. accidents Participation of MegaFon’s employees 46.6 24.8 18.6 • in the International Forum on Occupational 2018 517.6 174.8 116.7 899.2 Health and Safety, including certification

42.8 21.5 7.3 2017 598.3 215.7 76.1 961.7

36.9 24.4 5.4

557.2 206.6 79.1 2016 909.6 MegaFon’s expenses on occupational safety in 2018:

Reimbursement for mobile phone VHI and accident insurance Additional sick pay expenses 48.9 Reimbursement for expenses on Financial aid Reimbursement for relocation fitness programmes RUB m 150 2. Strategic Report Sustainability 151

Social responsibility 2018 highlights Participants: Approach to charity 25 23,000 charitable projects individual beneficiaries

Corporate charitable activities are a key element MegaFon’s ‘smart’ approach to charity of our corporate social responsibility. Our charitable involves: activities reflect the Company’s business profile and aim to remove communication barriers • a consistent approach to, and maximum benefit 3,000 2,300 and strengthen social ties. from, projects; events experts and consultants • consideration of long-term impact; Our goal and social mission is to create opportunities • regular performance assessment; that facilitate communication, social adaptation, • alignment with its core business; fostering, guardianship, adoption and employment • leveraging employee skills and corporate through culture, sports, and education. We seek capabilities; to inspire people to find and explore all opportunities • close collaboration with the Russian 1,600 to the fullest. and international expert communities, as well volunteers as federal and regional authorities, to share best 1 7 7. 6 Digital charity enabled by cutting-edge technology practices and maximise synergies. RUB m and applied to social contexts is a key element in corporate social responsibility today. In 2018, Set up in 2013, the Company’s Charity Committee the charitable activities of MegaFon as a provider coordinates all of its social initiatives, reviews of digital opportunities focused on creating and approves projects, monitors their progress, an accessible digital environment. Accordingly, we and assesses their social impacts. Members 64 21 supported projects closely linked to our business of the Charity Committee include PR, HR, legal, regions covered countries capabilities by creating and developing innovative and security experts. online services, as an example, to improve the quality of life for orphans and people with disabilities. Charity expenses Charity expenses in 2018, MegaFon’s charitable activities aim to: Key charitable priorities: in 2016–2018, RUB m by focus area • provide consistent and effective support • Helping orphans and other children deprived in solving pressing social problems of parental care 4% in Russia using our professional knowledge • Supporting people with disabilities and experience; • Creating an accessible digital environment promote ‘smart’ charitable activities across Supporting employees in difficult life situations 12% • • 217.6 the Company’s geographic footprint by helping • Aiding disaster victims charities and not-for-profit organisations 13% to effectively engage with the business 179.5 177.6 community. 57%

14%

Helping orphans Special education, cultural, and sports projects Supporting employees Supporting people with disabilities The Charity Policy is a key document governing MegaFon’s Creating an accessible digital environment charitable activities 2016 2017 2018 152 2. Strategic Report Sustainability 153

Charity performance Helping orphans and other and value assessment children deprived of parental care

MegaFon selects, develops, and implements When measuring the quality of its programmes, MegaFon’s charity The Future Depends on You its charitable programmes in consultation MegaFon assesses the actual benefits, such programmes for orphans are football tournament with stakeholders, including the Company’s as the quality of life changes for project beneficiaries targeted at: employees and the expert community. To deliver and contribution to strengthening social ties. The Future Depends on You open Russian nationwide football tournament maximum value, each project is assessed against • supporting social integration; for teams from orphanages and boarding schools is our flagship project a number of quantitative and qualitative metrics MegaFon conducts online and offline surveys • promoting guardianship in supporting orphans and children deprived of parental care, as well as our developed together with the experts. among stakeholders to assess their satisfaction and adoption; largest project aimed to benefit their physical development, facilitate their with completed charity programmes. Their feedback • raising the level of education; social adaptation, and promote fostering, guardianship and adoption Quantitative metrics: helps MegaFon decide whether to proceed • providing vocational for them. Over 4,000 children from all over Russia took part in the 2018 with a specific charity programme or to adjust its guidance and assistance competition. • Charity expenses agenda and the approach to beneficiaries. in finding a job. • Economic benefit1 In advance of 2018 FIFA World Cup, the Company held the first • Number of participants in charity programmes ‘The Future Depends on You’ international football tournament among (beneficiaries, experts, specialists, volunteers) orphans in Moscow in 2018. The tournament was organised by MegaFon • Number of cities and institutions involved and the Street Child United charity with the support from Save the Children, in the project the Football Union of Russia, the Ministry of Sports, the Ministry of Foreign • Number of events held as part of the project Affairs, and the Ministry of Education of the Russian Federation. The event • Number of employees engaged in corporate brought together 24 teams from 21 countries, 12 teams of boys and 12 teams volunteering and other charity programmes of girls, all aged between 14 and 17. The winners were the Brazilian girl team and the boy team.

First prize First prize at the RuPor PR Award at the Golden for the Best Charitable Puzzle event award Project for the Best Sports 102 Event RUB m

PRuzhina Obshestva award for the Best 6,900 Non-Commercial PR Project among Far Eastern individual press services for a project implemented beneficiaries in the Primorye Territory

1. The ratio of donation to quantity (numbers). 154 2. Strategic Report Sustainability 155

Change One Life Mentoring programmes

Since 2014, MegaFon has been working with the Change One Life1 In 2018 For Those Who Wait foundation to film video interviews with young footballers to help initiative raised: children find new homes. We have made over 3,044 such videos, Connect and Be Successful! and as a result 609 children have already found new families. In 2018, MegaFon also ran the For Those Who Wait initiative: any MegaFon Connect and Be Successful! is a corporate mentoring programme In 2018 the project involved subscriber who called the contact centre and waited for an answer implemented jointly with the Childhood Keepers Foundation for Support for more than 15 seconds automatically took part in a charitable of Family and Children, aimed to provide motivational career guidance project — for each second of his or her waiting time the Company 1.5 to orphaned children, assist them in making an informed choice of donated money to the Change One Life foundation for video profile a career path and finding a job, organise internships, and provide production. More than 12,500 subscribers participated in this initiative RUB m temporary employment using information technologies. Children can and raised RUB 1,500,000. The money was used to produce and publish visit a dedicated online portal to learn more about careers in the digital 338 591 video profiles for 708 children as a result of which 55 children were future, try them, communicate online with their mentors, and create teeneagers able to find foster parents. a video profile. In 2018, the project involved 338 teenagers from >12,500 10 Russian regions. subscribers 10 regions

We Live a Real Life Mentoring Regions

The We Live a Real Life programme, implemented since 2015, together In 2018 the project involved MegaFon has been supporting the Mentoring Regions project In 2018 the project involved with the New Development Technologies Non-Profit Organisation of the Solnechny Gorod foundation since 2017 to help residents and the Civic Chamber of the Russian Federation, helps orphans of orphanages in Irkutsk, Krasnoyarsk, Novosibirsk, Nizhny Novgorod, successfully adapt to living on their own and improves the image Tomsk, and Perm find adult mentors who will provide psychological support of orphanage leavers through involving children in tackling important and share their life experience with the children. In 2018, the project involved social issues. The participants develop and implement their own projects, 242 residents and former residents of child support centres, orphanages, which helps them feel needed and useful for the society, learn how 150 and boarding schools, as well as 242 volunteer mentors. 242 to communicate with their peers and adults as equals, and set goals teenagers and achieve them through committed teamwork. children

About 150 teenagers took part in the project in 2018, and, in 27 teams, developed ideas for projects to help elderly and lonely people, orphanage residents, and people with disabilities. Over four years, the project involved 27 242 more than 600 high-school students from 79 social institutions. teams volunteer mentors

Supporting people with disabilities The Union of Words The Hearts of Goodwill and Kindness award award for contribution to the upbringing MegaFon is committed to helping people with disabilities overcome barriers to their integration into society, gain access to cultural of the younger and artistic events, and receive additional education or find a job. generation 20.8 RUB m 11,000 1. Refer to find more information. individual beneficiaries 156 2. Strategic Report Sustainability 157

Access to sports for people with disabilities

Promoting boccia MegaFon DreamCup

Known as ‘athletics for all’, boccia is one of the few sports which permits Partners MegaFon DreamCup is an annual international wheelchair Partners athletes with the most severe cerebral palsy conditions to reach their tennis tournament, Russia’s only ITF Wheelchair Tennis Tour event. full potential. In 2018, our boccia project expanded its geographic • New Life Charitable The tournament helps people with disabilities overcome social barriers • Tennis Foundation of Saint reach as part of a federal programme for boccia promotion, which Foundation and experience equal opportunities for following their dreams despite Petersburg included creating environments for regular practice, organising regional • Regional Charitable their physical condition, promotes sports, and provides inspiration • Sport-Express newspaper and interregional tournaments, and building partnerships with relevant Foundation Samara Region for participants to develop and achieve new heights. 36 athletes • Russian Tennis Federation not-for-profit organisations, educational institutions and authorities. • Mir Dobra Charitable from five countries took part in the 2018 tournament. Russia’s first series • Committee for Physical The New Life Charitable Foundation coordinated the programme Foundation of public wheelchair tennis practices took place across different regions Culture and Sport of Saint at the federal level. During the year, MegaFon supported boccia • Shipulin Charitable of the country from July to September 2018, involving 44 (including Petersburg promotion projects in 50 cities and towns in Russia. Over 1,000 practice Foundation for Support 35 junior) Russian athletes. sessions and tournaments, as well as 35 training events and master of Sports in the Sverdlovsk classes, were organised. Region • Blago, Public Organisation of Disabled People in the Udmurtian Republic Start Coverage in 2018 Start Participants in 2018 • Eto Chudo Charitable Foundation 2011 • Ordinary Miracle Charitable 2006 Foundation • Khabarovsk Territory Fitness Over 3,000 and Sports Club for Disabled 36 People children and teenagers • Preodoleniye, Kalmykian Project athletes Regional Social and Sports scale Project scale Public Organisation from Over 70 Over 1,000 International 5 cities and training sessions tournament countries towns

Bring up a Champion

The Bring Up a Champion project has been held since 2014 together with the Foundation of Rima Batalova, Youth of the Nation, and helps children with disabilities engaged in sports in the Republic of Bashkortostan to support their physical development and health. In 2018, the project involved over 2,000 children and teenagers with disabilities. 158 2. Strategic Report Sustainability 159

Access to education and culture Creating an accessible for people with disabilities digital environment

Alongside with sports projects, MegaFon helps children and adults In 2018 the Connect innovative MegaFon heavily relies on IT to address social issues. In 2018, with disabilities receive education and vocational training, and enjoy educational project involved the Company started development of its Strategy to Create works of art. an Accessible Digital Environment in Russia, as a result of which MegaFon and its partners are investing in developing specialised A series of workshops was held as part of the From A Special Craft 1,500 services (platforms, applications, devices) for targeted beneficiary Workshop to Social Entrepreneurship project at the Irkutsk participants groups, as well as in implementing digital fundraising solutions. Abilitation Centre, where people with special needs and their family members learn everyday life and basic occupational skills on a regular basis. Currently, 80 children and young people with multiple Banknote Reader severe developmental disabilities (MSDD) visit the workshop classes on a regular basis, and 40 parents with MSDD children have been for the Vision-Impaired advised on correction, upbringing, and skill development issues. In 2018, Sensor-Tech Laboratory designed and launched the Banknote In 2018 the application had The Connect innovative educational project supports the organisation Reader for the Vision-Impaired app for Android and iOS. This fast, of resource classrooms for children with autistic spectrum disorders reliable, and user-friendly mobile application can identify the note’s in Rostov-on-Don and Sochi (together with the Pomogi Detiam denomination by voice or a pattern of vibrations to help visually >1,600 Charitable Foundation). In 2018, the project involved 1,500 participants. impaired users handle their currency. Last year, there were more than downloads a thousand downloads of the application for Android and more The Multicentre 2.0 project focuses on training and providing than 600 downloads for iOS. employment opportunities for young people with disabilities. During the year, the programme covered 17 young people who were trained on special equipment to learn the trade of pottery and increase Universal Mobile Assistant their ability to compete in the labour market. The Universal Mobile Assistant project aims to expand the range In 2018, the way to use mobile MegaFon organises arts lessons for children and young people of opportunities for integrating vision-impaired people into devices without assistance was with disabilities in Vladivostok as part of the Arts. Unlimited society and empowering them through advanced mobile solutions learned by Abilities project. In 2018, the project involved 48 classes for 180 to compensate for their disabilities. The training focuses on mastering children and young people with multiple severe physical and/ both general and special features such as talking books, object or mental disturbances. All project participants are successfully recognition and tagging, satellite navigation, live video call assistance, mastering the basic skills in applied arts and developing qualities such audio description, and so on. In 2018, 140 people in 24 Russian as attentiveness and ability to focus. regions learned how to use mobile devices without assistance, while more than 1,000 consultations and over 500 classes were held 140 for 700 vision-impaired people. people

in 24 regions 160 2. Strategic Report Sustainability 161

My Mobile Mentor Supporting MegaFon employees

The My Mobile Mentor programme helps prepare residents In 2018 the project involved of orphanages and boarding schools in the Kirov Region for adulthood in difficult life situations through mobile devices. As part of the programme, personal tutors – experts and celebrities – tell children about mobile security, financial literacy, safeguards against fraud and online traps, and about the capabilities of My Documents centres. The Social Technology MegaFon helps its employees In 2018 total amount of support was Development Fund supports the project as a partner. In 2018, 554 and their family members who the project involved 554 residents of orphanages and boarding schools residents find themselves in difficult aged 10 to 18, with 82 relevant interactive classes held for the children. life situations, including payment for critical illness treatment (in addition to the VHI programmes and financial ~23 23 82 support). RUB m MegaFon relevant interactive employees classes

DOBRO educational conference Supporting the search Since 2015, MegaFon, Dobro Mail.ru, and Metalloinvest have been In 2018 during the conference holding the DOBRO annual educational conference for foundations shortlisted organisations for missing children and not-for-profit organisations. The goal of the conference is to foster prepared dialogue between not-for-profit organisations, businesses, and society, and to enhance the experience of working in Russia. In 2018, for the first time, the conference was held in the form of a hackathon: 25 shortlisted 20 MegaFon supports the activities of volunteer search and rescue crews organisations together with experts from partner companies prepared prototype across Russia: the Company provides volunteers from the Extremum 20 prototype IT solutions for the most pressing social issues. IT-solutions and Liza Alert volunteer search groups with access to mobile and online communications during their search for missing people.

In 2018, MegaFon presented a special Big Data platform that can be used by the police to find missing children. The use of Big Data databases accelerates the resolution of matters being reviewed by search and increases the chances of finding witnesses who could have seen a missing child. At the request of police, MegaFon deploys its special platform to distribute text messages with information about missing children to a target audience within the relevant coverage area and social group.

MegaFon does not need any special data privacy permission to use this service, which can be applied to subscribers of all telecoms operators while enabling engagement of volunteer organisations. 162 2. Strategic Report Sustainability 163

Ethics and human rights Compliance

Ethical business conduct Respect for human rights Compliance framework 2018 highlights MegaFon defines compliance as employees’ The Company manages all areas of compliance We are committed to the highest standards MegaFon is committed to respecting human rights acting in accordance with the Company’s risk while identifying, and taking measures to meet, of business ethics and adhere to the principles in line with both Russian and international law. principles and standards of business ethics compliance requirements on an ongoing basis. of integrity, openness, and transparency MegaFon and its subsidiaries have a zero tolerance and integrity to protect the interests of the Company in everything we do. policy towards any forms of discrimination and all parties impacted by its activities or decisions. In 2018, the Compliance Committee examined or harassment. According to its Code of Ethics Compliance requires observance of applicable and approved a number of cross-functional MegaFon and its subsidiaries are governed by its and Corporate Conduct, the Company strictly Russian and foreign laws, the Code of Ethics projects aimed at improving the existing Code of Ethics and Corporate Conduct, articulating adheres to the principle of non-discrimination and Corporate Conduct, and other internal compliance framework, including employee the key principles and rules of business conduct against employees on grounds of gender, sexual regulations. access to the Company’s local internal regulations for our employees and members of the Board preferences, race, age, skin colour, ethnicity, in electronic form, further automation of a number of Directors. The Code outlines the Company’s language, origin, material, marital, social, or official MegaFon is focused on building an effective of procedures under the AML/CFT programme, position towards corruption, discrimination, status, place of residence, religious views, belief, compliance framework in line with ISO 19600:2014 – etc. In 2018, we also updated our Code of Ethics conflicts of interest, and inappropriate behaviour, membership in (or failure to join) particular Compliance management systems, and based and Corporate Conduct, Anti-Corruption Policy, and specifies the requirements to promote public associations or social groups, or any on best practices, standards, and regulators’ and Gifts and Hospitality Policy. legal compliance, integrity, equal rights, other circumstances unrelated to the employee’s guidelines. Our Compliance Policy sets out and informational transparency. The Code was professional performance. MegaFon has never used the guidelines for building a compliance framework, In addition, we updated our distance learning updated in 2018. child or forced labour. No incidents of discrimination describes its mandatory elements, and defines its framework and launched an integrated ethics or human rights breaches were identified in 2018. scope. and compliance training course and test for employees. The Company also produced a series Our Code of Ethics and Corporate Conduct Governing bodies responsible for the development of video clips about the Direct Line to raise employee Customer privacy and efficient operation of the compliance framework, awareness. During the year, we continued to refine We have in place a 24/7 Direct Line through which and for the execution of the Compliance Policy, our compliance framework across subsidiaries. our employees and other stakeholders can receive We respect our customers’ right to privacy and strive include the Board of Directors, the Audit Committee, guidance on compliance with the Code of Ethics to ensure proper protection of their personal data the Chief Executive Officer and other top managers, In 2019, MegaFon intends to further improve its and Corporate Conduct (such as, on whether in our possession. We provide communication as well as the Risk Committee and Compliance compliance framework, in particular by enhancing a particular action is considered suspect) or can secrecy, guaranteeing the privacy of telephone Committee1. In the reporting year Compliance the existing compliance programmes, and by raising discreetly (and, if required, anonymously) report conversations and messages for our subscribers, Committee defined the strategy for, and provided employee awareness and improving overall violations. The Direct Line usage statistics as well as the privacy of data transmitted over senior level support for the development of, compliance with ISO 19600:2014. and information on the most important issues are MegaFon’s communications networks. MegaFon’s MegaFon’s compliance framework. communicated to the Audit Committee. Regulations on Personal Data Processing govern all aspects of personal data protection. Employees Compliance is also addressed at the business who have access to personal data are required unit level, with dedicated employees assigned to rigorously comply with these Regulations. responsibilities for the implementation of specific No personal data leaks were identified during compliance programmes. the year.

Our Regulations on Personal Data Processing

24/7 Direct Line through which

employees and other stakeholders 1. The Compliance Committee was eliminated by resolution of the Board of Directors in March 2019. can receive guidance The competencies of the Compliance Committee were transferred to the Risk Committee. 164 2. Strategic Report Sustainability 165

Anti-corruption efforts Procurement

MegaFon views its anti-corruption commitment Anti-corruption program includes: Procurement MegaFon is continuously improving its procurement as a core principle of its responsible corporate management system and guidelines, including practices. The Company highly values its • Ensuring ‘Tone on the Top’ by management management system by adopting innovative technology. In 2018, reputation, has zero tolerance to any form • Anti-corruption trainings the Company launched an SAP S/4HANA-based of corruption or bribery and expects the same • Assessing corruption risks and adopting anti- MegaFon’s procurement management system Procurement and Logistics module to deliver an end- attitude from its business partners. corruption controls is designed to fully and promptly meet to-end procurement lifecycle. The new approach • Ensuring the possibility of confidential (including the Company’s procurement needs while ensuring combined with the existing Warehouse Management MegaFon operates in strict compliance anonymous) reporting on cases of corruption that we achieve the best value for money and time. System (WMS) will reduce procurement lead time with the Russian anti-corruption laws. • Appropriate investigation of each case. MegaFon’s procurement is aligned with Russian and increase stock turnover. Employee making a report in good faith shall and international practices and based on fair MegaFon’s Anti-Corruption Policy is a framework suffer no detriment for doing so and transparent supplier relations, collective document regulating its anti-corruption efforts decision making, and continuous improvement Supplier relations and providing guidance for all employees MegaFon raises anti-corruption awareness among of procurement methods and tools. of the Company and third parties engaged all of its business partners by introducing anti- In selecting its suppliers, MegaFon seeks to build by the Company. All employees required to undergo corruption contract clauses, sending out anti- The Procurement and Logistics function trust and establish mutually beneficial long-term mandatory anti-corruption training take an online corruption guides to bidders and posting the Direct is responsible for all procurement at MegaFon. relationships with suppliers. We hold annual anti-corruption course. Line contact details in the Procurement section During the year, we set about transforming meetings with our suppliers to discuss the specifics on its official website www.megafon.ru. During Procurement and Logistics into a federal function and requirements of our procurement procedures the annual Vendor Day attended by the Company’s by consolidating eight local procurement units into as well as the key provisions of our Anti-Corruption largest suppliers, MegaFon dedicates a session three specialised centres of excellence to provide Policy, and our plans for the future. In 2018, to present its anti-corruption programme. procurement services for all MegaFon’s branches. we awarded our best suppliers with certificates of appreciation for efficient collaboration. MegaFon did not identify any instances Procurement at MegaFon is done through MegaFon focuses on expanding cooperation of corruption in 2018. Also, there were no a competitive tendering process, including with domestic suppliers across Russia and supports corruption-related legal actions brought against using a B2B Centre. This e marketplace ensures SMEs by providing them with free bidding coupons MegaFon or its employees. the transparency of the tendering process, to access its tenders run on the e-marketplace. equal access for all potential bidders, strong competition, and the ability to negotiate the best value for money. The sourcing decision is made by a special commission through a voting procedure after a comprehensive comparative analysis of all bids received. In 2018, special E-Marketplace Procurement Rules were drafted for the B2B Centre.

In 2018, the amount of the Company’s procurement procedures totalled about

In 2018, our Director for In 2014, MegaFon became the first Procurement and Logistics was among all Russian mobile operators ranked by AK&M Rating Agency to join the Russian Anti-Corruption among top 20 procurement 60 Charter for Business. Our Anti-Corruption Policy directors in Russia. RUB bn 166 2. Strategic Report Sustainability 167

Our approach Resource conservation Energy efficiency MegaFon implements a series of comprehensive MegaFon also runs an energy efficiency programme measures aimed at encouraging responsible across its communications facilities, comprising to environmental protection consumption and use of resources. the following technologies:

The Company seeks to optimise power consumption • Automated electricity metering system by all employees, e.g.: energy-efficient fluorescent • Advanced, high-performance energy equipment MegaFon takes its commitment to the environment and LED lamps have been installed in MegaFon’s • Balanced ventilation systems instead of air very seriously, seeking to minimise its environmental offices and stores, and lights and electrical conditioning at base stations footprint wherever possible. We are not engaged appliances are switched off outside business hours. • Optimisation of power supply systems in an industry that poses a potential threat Since 2013, MegaFon has annually To reduce power consumption, our offices use • Replacing incandescent light bulbs with LED to the environment, and our operations do not cause ventilation, heating, and air conditioning systems lights significant damage to the environment. Complying participated in the Earth Hour, with recuperative heat-exchange and self-cooling • Prioritising energy-saving features in the radio with the applicable Russian laws, adhering a global environmental initiative functions. equipment used in the mobile networks to precautionary principles, and having in place launched by the World Wide • Equipment with wider operating temperature various initiatives to encourage all employees Fund for Nature (WWF) to raise MegaFon consistently pursues a policy of reducing ranges to care about the environment, remain MegaFon’s our water and paper consumption. The Company top priorities. awareness of humanity’s wasteful promotes the day-to-day use of electronic-based consumption of resources communications instead of paper, including With access to high technology, MegaFon develops and global climate change. the Uniform Library module and the storage and launches solutions which encourage responsible and maintenance of documents in electronic form. production (by reducing waste, greenhouse gas emissions, and consumption of resources) and have The Company has also introduced comprehensive a positive impact on society. waste disposal programmes and equipment.

The Shared Environmental Monitoring Platform Use of alternative is intended for the observation of environmental energy sources situation in, and to draw up an environmental map for, Moscow, to improve the quality of life for millions To minimise negative environmental impact, of its residents, screen potentially hazardous MegaFon endeavours to employ alternative Use of fuel and Energy in 2018 facilities, and prevent emergencies. energy systems, such as wind turbines and solar panels, when constructing base stations. These The platform will integrate all local environmental technologies have been applied at several base Indicator 2018 monitoring systems across various levels stations in the Murmansk Region and in Dagestan, and consolidate the data obtained from the systems making mobile communication services accessible in a single mapping environment on the platform. to people even in the most remote settlements. Fuel and industrial fluids Boiler fuel, including: Diesel fuel, ’000 litres 3 Gas (including condensate), ’000 m3 1,176 Technical equipment, including: Fuel, ’000 litres 4,430 Motor transport/motor fuel: Fuel, ’000 litres 3,342 Diesel fuel, ’000 litres 927 Oils and technical liquids, litres 0 Utilities services Electricity, ’000 kWh 1,682,738 Heat, Gcals 21,816 168 3. Corporate Governance 169

Corporate 3Governance

3.1 Corporate Governance Framework 3.2 Governing Bodies 3.3 Control over Financial and Business Operations 3.4 External Audit 3.5 Information Disclosure 3.6 Protecting the Confidentiality of Insider Information 170 3. Corporate Governance Corporate Governance Framework 171

Corporate Governance Framework

MegaFon’s corporate governance MegaFon’s corporate governance principles: framework is based on Russian and international best practices.

The Company is fully compliant with Russian Important governance decisions in 2018 Enabling shareholders to fully Strategic governance Appropriate management laws on joint-stock companies such as Federal included: exercise their rights and effective supervision of MegaFon’s day-to-day Law No. 208-FZ of 26 December 1995 On Joint- of executive bodies operations by its executive Stock Companies (the Federal Law On Joint-Stock • a resolution to delist MegaFon’s GDRs by the Board of Directors, as well bodies and their accountability Companies) and is guided by recommendations from the LSE and approve a programme to buy as accountability to the General to the Board of Directors of the Corporate Governance Code back the Company’s ordinary shares and GDRs Meeting of Shareholders and shareholders and the requirements of the Moscow Exchange. from minority shareholders was adopted by the Board of Directors on 15 July 2018; Until October 2018, MegaFon’s GDRs were listed • a resolution to elect Gevork A. Vermishyan on the London Stock Exchange (LSE), which meant as MegaFon’s Chief Executive Officer that the Company complied with the Disclosure was adopted by the General Meeting and Transparency Rules of the UK Financial of Shareholders on 13 November 2018. Conduct Authority for ‘standard’ companies in addition to the LSE Listing Rules. The obligation to comply with these requirements ceased upon Timely disclosure of complete Effective control Ensuring protection the delisting of MegaFon’s GDRs from the LSE. and accurate information of the Company’s financial of the interests and statutory about the Company, such as its and business operations rights of shareholders, creditors, financial position, performance, and other stakeholders MegaFon’s corporate governance framework ownership, and governance helps build and maintain trust-based relationships structure with the Company’s counterparties, investors, MegaFon’s operations are also governed by its Charter and other employees, and other stakeholders. internal documents

Commitment to high standards of social responsibility 172 3. Corporate Governance Corporate Governance Framework 173

Compliance Major transactions General Meeting of Shareholders with the Corporate In 2018, the Company made four major transactions Governance Code with a value of more than 25% but less than 50% of the book value of MegaFon’s assets as at the last MegaFon’s operations are governed reporting date prior to the transaction. by the requirements of the Corporate Governance Code approved by the Bank of Russia’s Board of Directors on 21 March 2014. The Corporate Revision Commission Governance Code Compliance Report is presented The major transactions effected by MegaFon in 2018 are listed in the Appendix to this Annual Report. in the Appendix to this Annual Report.

Interested party transactions Corporate governance structure Board of Directors Interested party transactions are regulated by Article 11 of the Federal Law On Joint-Stock MegaFon’s principal corporate governance bodies Companies. Under these provisions, transactions are the General Meeting of Shareholders, the Board in which the Company’s controlling parties, Board of Directors, the Management Board (collective members, or members of the Company’s executive executive body), and both the Chief Executive Committees of the Board bodies are interested parties may be approved Officer and Executive Director (individual executive by either the Board of Directors or the General bodies). of Directors Meeting of Shareholders. Interested parties do not vote on any resolution relating to the interested party transaction. Remuneration and Nominations Finance and Strategy Audit MegaFon pays close attention to identifying Committee Committee Committee and controlling interested party transactions. All counterparties are regularly checked for possible relationships with major shareholders and members of MegaFon’s Board of Directors or executive bodies.

All interested party transactions are subject Individual Executive Bodies to preliminary review by specific committees of MegaFon’s Board of Directors, based on their subject matter. In 2018, the Company made 22 interested party transactions (including the groups of interested party transactions). Chief Executive Officer Executive Director

The interested party transactions effected by MegaFon in 2018 are listed in the Appendix to this Annual Report.

Internal Audit

Management Board

Reports to Recommends Elects Appoints based on Board resolutions 174 3. Corporate Governance Governing Bodies 175

Governing Bodies Board of Directors

The Board of Directors is MegaFon’s collective Board composition executive body exercising general control over as at 31 December 2018 its activities. The Board’s main duties include enhancing the effectiveness and transparency of MegaFon’s internal controls and improving the framework for monitoring and ensuring the accountability of its governing bodies 7 while protecting and promoting the rights of all shareholders. 2

The composition of the Board of Directors Non-Executive Directors reflects the scope and scale of MegaFon’s General Meeting of Shareholders business and during 2018 met applicable Russian Independent Directors regulations and the Moscow Exchange Listing Rules for companies in the Second Level Quotation List1. Nominees to the Board of Directors are elected based on their personal and business skills, and, The General Meeting of Shareholders is MegaFon’s Major resolutions passed at these meetings if independent directors, based on their general supreme governing body. included: compliance with the independence criteria set out in the Listing Rules of the Moscow Exchange. In 2018, the annual General Meeting • election to MegaFon’s Board of Directors; of Shareholders was held on 29 June • approval of the size of MegaFon’s Management Several changes initiated by shareholders were in the form of an in-person shareholder meeting. Board and election of its members; made to the composition of MegaFon’s Board The total number of votes held by persons entitled • elections to MegaFon’s Revision Commission; of Directors in 2018. As at 31 December 2018, all The powers of the Board are set out in the Charter to take part in the annual General Meeting was • election of MegaFon’s Chief Executive Officer; Board members had served for less than one year. and the Regulations on the Board of Directors 508,442,909 or 82.0% of the total number of votes. • amendment to the amount of, and the payment procedure for, remuneration payable Resolutions passed at the 2018 annual to members of MegaFon’s Board of Directors; Composition of the Board of Directors over the course of 2018 General Meeting of Shareholders: • resolution approving MegaFon’s membership in the National Association of Industrial Internet • Approval of MegaFon’s 2017 Annual Report Market Participants and FinTech Association; From 1 January to 19 January • Approval of MegaFon’s accounting (financial) • approval of a number of interested party Robert Wilhelm Andersson statements for 2017 transactions related to the programme to buy From 19 January to 31 December • Distribution of the 2017 profits and losses, back MegaFon’s ordinary shares and GDRs. Henriette Ohland Wendt including dividend payout (declaration) Aleksandr V. Galitsky Maksim N. Anipkin • Election to MegaFon’s Board of Directors Nikolay B. Krylov Aleksey V. Antonyuk • Approval of the size of MegaFon’s Management Lord Paul Myners Evgeny A. Bystrykh Board and election of its members Ardavan Moshiri Chairman of the Board of Directors • Approval of MegaFon’s auditor Its activities are governed by the Regulations on the General Per Emil Nilsson Jarkko Armas Veijalainen Meeting of Shareholders. • Election to MegaFon’s Revision Commission Jan Erik Rudberg Aleksandr Yu. Esikov Vladimir Ya. Streshinsky Harri Eerik Koponen Detailed information on the annual General Meeting Aleksandr A. Ushkov In 2018, MegaFon held seven extraordinary General of Shareholders and items on its agenda Chairman of the Board of Directors Meetings of Shareholders: on 19 January, 12 March, Natalya V. Chumachenko 17 August, 19 September, 13 November, 6 December, Detailed information on the extraordinary General Meetings and 21 December. of Shareholders and items on their agenda

From 21 December to 31 December From 19 January to 21 December Anna A. Serebryanikova Pavel S. Kaplun

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1. As of 31 December 2018, MegaFon shares were included in the Second Level Quotation List of the Moscow Exchange. 176 3. Corporate Governance Governing Bodies 177

Evgeny A. Maksim N. Aleksey V. Jarkko Armas Aleksandr Yu. Harri Eerik Bystrykh Anipkin Antonyuk Veijalainen Esikov Koponen

Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors since 19 January 2018 and Chairman since 19 January 2018 since 19 January 2018 since 19 January 2018 since 19 January 2018 since 19 January 2018 of the Board of Directors since 22 January 2018 Non-Executive Director Non-Executive Director Independent Director Non-Executive Director Independent Director Member of the Finance and Strategy Member of the Audit Committee Member of the Finance and Strategy Chairman of the Audit Committee Member of the Audit Committee Chairman of the Remuneration Committee since 22 January 2018 from 22 January 2018 to Committee since 22 January 2018 since 22 January 2018 since 22 January 2018 and Nominations Committee 21 December 2018 since 22 January 2018 Member of the Remuneration Percentage ownership Percentage ownership Percentage ownership and Nominations Committee Member of the Remuneration and in the Company: nil. in the Company: nil. in the Company: nil. Percentage ownership since 22 January 2018 Nominations Committee since in the Company: nil. 21 December 2018 Percentage of the Company’s Percentage of the Company’s Percentage of the Company’s Percentage ownership ordinary shares held: nil. ordinary shares held: nil. ordinary shares held: nil. Percentage of the Company’s in the Company: nil. Percentage ownership ordinary shares held: nil. in the Company: nil. Percentage of the Company’s Born in 1980. Born in 1966. Born in 1963. ordinary shares held: nil. Percentage of the Company’s Born in 1962. ordinary shares held: nil. Graduated from the Gubkin Russian Graduated from Aalto University Graduated from Moscow Engineering State University of Oil and Gas in 2002 (). Physics Institute. Graduated from the University and from the Academy of National of Jyväskylä (Finland). Born in 1976. Principal place of employment: Principal place of employment: Born in 1981. Economy under the Government Chairman of the board of directors Director for telecommunications Principal place of employment: Graduated from the Financial University of the Russian Federation in 2006. at 3 Step IT Group Oy. infrastructure projects at LLC USM CEO at Nortal Oy. under the Government of the Russian Graduated from the Plekhanov Russian Principal place of employment: Management. Federation. University of Economics. He also holds the positions of Chief CEO at CJSC Gazprombank – Asset He is also a board member at JSC Peter- Commercial Officer at Nortal AS Principal place of employment: 1 Principal place of employment: Management . Service and LLC Forpost. and CEO at Osaka Oy Ltd. He serves Deputy CEO for Economics and Finance Managing Director, Head He also serves as Executive Vice President as Chairman of Osaka Oy Ltd, Tecnotree at LLC USM Management. of the Investment and Investment and Analytics Directorate at LLC USM at JSC Gazprombank and is a board OyJ, Kaslink Oy, and the Finnish Management. member at both CJSC Gazprombank – Cycling Federation, and is a board Asset Management and LLC Art Finance. member at Soprano OyJ, Telinekataja Oy, Namida Diamond Factory Ltd, FISK (Finnish Information Security Cluster), and the Institute of Finland.

Chairman of the Board of Directors Non-Executive Director Independent Director

1. On 1 February 2019, CJSC Gazprombank – Asset Management changed its name to Joint Stock Company Gazprombank – Asset Management (abbreviated as GPB – AM). 178 3. Corporate Governance Governing Bodies 179

In 2018, the Board of Directors also included the following members1:

Anna A. Aleksandr A. Natalya V. Robert Wilhelm Henriette Ohland Serebryanikova Ushkov Chumachenko Andersson Wendt

Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors since 21 December 2018 since 19 January 2018 since 19 January 2018 from November 2016 to 19 January from August 2017 to 19 January 2018 2018 Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Member of the Audit Committee Percentage ownership Member of the Audit Committee until since 21 December 2018 in the Company: nil. Chairman of the Finance Member of the Finance and Strategy 19 January 2018 and Strategy Committee Committee until 19 January 2018 Percentage ownership Percentage of the Company’s since 22 January 2018 Percentage ownership in the Company: nil. ordinary shares held: nil. Percentage ownership in the Company: nil. Percentage ownership in the Company: nil. Percentage of the Company’s in the Company: nil. Percentage of the Company’s ordinary shares held: nil. Born in 1974. Percentage of the Company’s ordinary shares held: nil. Percentage of the Company’s ordinary shares held: nil. Graduated from Moscow Aviation ordinary shares held: nil. Born in 1974. Institute. Born in 1969. Principal place of employment: Born in 1960. Graduated from Lomonosov Moscow Born in 1972. Graduated from Copenhagen State University and Manchester Vice President, Head of Project Graduated from the Swedish Business School majoring in business University (Great Britain). and Structured Financing at JSC Graduated from Voronezh State School of Economics and Business administration. Gazprombank. University. Administration and holds an MBA from Principal place of employment: Principal place of employment: George Washington University. Deputy CEO at LLC USM Management. He is also a board member at the Principal place of employment: Senior Vice President and Head following companies: Basola Investments Adviser to the CEO at LLC USM Principal place of employment: of Corporate Development at Telia She also serves as Head of the Limited (), Acheronius Holdings Management. Executive Vice President and Head Company AB. Information Infrastructure working Limited (Cyprus), Kigalia Holdings Limited of region Europe at Telia Company AB. group at ANO Digital Economy, (Cyprus), LLC RosEuroDevelopment Ufa, the President of the Association of Big LLC RosEuroDevelopment Krasnoyarsk, Data Market Participants, a member LLC Stroi-Profit, and Aviapark Shopping of the Coordinating Council on Digital Centre. Transformation of the Russian Union of Industrialists and Entrepreneurs (RSPP), the Chairman of LLC Forpost, and a board member at JSC Peter-Service.

1. Members of MegaFon’s Board of Directors from 1 January to 19 January 2018 as at 19 January 2018. 180 3. Corporate Governance Governing Bodies 181

Aleksandr V. Nikolay B. Lord Paul Ardavan Per Emil Jan Erik Galitsky Krylov Myners Moshiri Nilsson Rudberg

Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors from August 2017 to 19 January 2018 from July 2016 to 19 January 2018 from March 2013 to 19 January 2018 from 30 June 2017 to 19 January from August 2017 to 19 January 2018 from June 2010 to 19 January 2018 2018 Independent Director Independent Director Independent Director Non-Executive Director Independent Director until 1 October 2017 Non-Executive Director Member of the Finance and Strategy Chairman of the Remuneration Percentage ownership Chairman of the Audit Committee Committee until 19 January 2018 Non-Executive Director from and Nominations Committee until Member of the Finance and Strategy in the Company: nil. until 19 January 2018 1 October 2017 to 19 January 2018 19 January 2018 Committee until 7 August 2017 Percentage ownership Percentage of the Company’s Member of the Remuneration in the Company: nil. Member of the Audit Committee until Percentage ownership Percentage ownership ordinary shares held: nil. and Nominations Committee until 19 January 2018 in the Company: nil. in the Company: nil. 19 January 2018 Percentage of the Company’s ordinary shares held: nil. Percentage ownership Percentage of the Company’s Percentage of the Company’s Born in 1971. Percentage ownership in the Company: nil. ordinary shares held: nil. ordinary shares held: nil. in the Company: nil. Graduated from Stockholm University Born in 1955. Percentage of the Company’s with a degree in business administration, Percentage of the Company’s ordinary shares held: nil. economics, and finance. ordinary shares held: nil. Graduated from the Moscow Institute Born in 1948. Born in 1955. of Electronic Technology and holds a Graduated from the University of London. Graduated from the University of London Principal place of employment: Senior Vice President and Head of Region postgraduate degree from JSC Scientific Born in 1958. with a BSc in economics and statistics. Born in 1945. Production Association ELAS. Principal place of employment: Eurasia at Telia Company AB. Graduated from Yale Law School. Chairman of the Board of Directors and Principal place of employment: none. Graduated from the Gothenburg School Principal place of employment: none. partner at Cevian Capital LLP. of Business Administration. Principal place of employment: Chairman of the Board of Directors Since 2008, he has served as Managing Moscow office managing partner at He is also a non-executive director at RIT at USM Holdings Limited. Principal place of employment: Partner of Almaz Capital Partners and Winston & Strawn LLP. Capital Partners PLC, Ecofin Water & corporate advisor and chairman President of JSC Elvis-. Power Opportunities PLC, and is chairman of the board of directors at Hogia AB. He is a board member at JSC He is a board member at LLC S-Terra, LLC of the board of directors and managing Kommersant and sector head partner at Autonomous Research LLP. He is He also serves as chairman of the board Technokad, Parallels International GmbH, at the Institute of State and Law at Kcell JSC and Belarusian Jelastic, Starwind, B612Foundation, chairman of the board at Nomad Holdings of the Russian Academy of Sciences. Limited, the London School of Economics Telecommunications Network (BeST) Petcube, Carprice, Acronis, and LLC CJSC and serves on the board at Turkcell Skolkovo Ventures. and Political Science, Edelman UK, Landscape Acquisitions Holdings Limited, Iletsisim Hizmetleri A.S. He is also a board of trustees and J2 Acquisition Limited, and is member at the Skolkovo Foundation a member of the Global Advisory Board and the Skolkovo Institute of Science and the Audit Committee of CQS Capital. and Technology. He is a member of JSC RVC’s Venture Market Council, the Expert Council for the State Duma Committee on information policy, information technologies and telecommunications, the Strategic Council at the Ministry of Industry and Trade, the Expert Council on IT Development at the Ministry of Telecom and Mass Communications, and the Council at the Ukrainian Venture Capital and Private Equity Association. 182 3. Corporate Governance Governing Bodies 183

Independent Directors

Independent directors provide independent From 1 January 2018 to 19 January 2018, Aleksandr perspective and judgement to the Board based V. Galitsky, Lord Paul Myners, and Jan Erik Rudberg on their expertise, experience, and qualifications. were MegaFon’s Independent Directors. They help make decisions for the benefit of various stakeholder groups and enhance the quality Since 19 January 2018, Jarkko Armas Veijalainen of managerial decisions. and Harri Eerik Koponen have been MegaFon’s Independent Directors. The independent directors at MegaFon meet the criteria stipulated by relevant Russian regulations and internal documents of Russian securities trading centres, which include the criteria set out in the Listing Rules of the Moscow Exchange. Vladimir Ya. Pavel S. Streshinsky Kaplun Member of the Board of Directors Member of the Board of Directors from June 2008 to 19 January 2018 from 19 January 2018 to 21 December 2018 Chairman of the Board of Directors Meetings of the Board of Directors Non-Executive Director Summary of the Board’s Chairman of the Finance and in 2016–2018 Strategy Committee until Member of the Remuneration and activities in 2018 19 January 2018 Nominations Committee from 22 January 2018 to 21 December The Board of Directors was fully involved 187 Member of the Remuneration and 2018 Nominations Committee until in MegaFon’s key operational business processes. 19 January 2018 Percentage ownership The Board held 27 meetings in 2018, including six in- 162 in the Company: nil. person meetings and 21 meetings held by absentee 145 21 Percentage ownership voting. The Board considered a total of 187 in the Company: nil. Percentage of the Company’s ordinary shares held: nil. agenda items at its meetings, including approving Percentage of the Company’s the budget, reviewing the impact on MegaFon’s 16 ordinary shares held: nil. business from changes to Russian legislation, Born in 1981. determining the value of assets (services) involved 11 Born in 1969. Graduated from the Financial University in interested party transactions and approving under the Government of the Russian such transactions, and also approving transactions 7 Graduated from Moscow Institute Federation. with a cumulative value in excess of US$ 50m. 6 of Physics and Technology. 5 Principal place of employment: 4 Principal place of employment: Director for Investment and M&A at LLC One of the key decisions made by the Board Operator-CRPT. 1 Chief Executive Officer of LLC USM of Directors in 2018 was the resolution to delist Management. He is also a board member at JSC Peter- MegaFon from the London Stock Exchange. 0 Vladimir is a board member at JSC Service and LLC Trekmark. Kommersant, USM Holdings Limited, 2016 2017 2018 USM Monaco Limited, and OJSC CITY. He is also chairman of the board Meetings held by absentee voting at METALLOINVEST MC LLC. Meetings in person Strategic session Agenda items discussed 184 3. Corporate Governance Governing Bodies 185

During its meetings, the Board of Directors MegaFon’s management reports reviewing Remuneration of the Board of Directors also examined the issuance of exchange bonds quarterly business performance of the Company and updates to the Company’s key internal and its competitors were presented at the meetings documents such as the Anti-Corruption Policy, Code of the Board of Directors. Members of the Board of Directors are remunerated • Payments to non-independent directors are now of Ethics and Corporate Conduct, and Regulations for the performance of their duties. The amount paid twice in each calendar year, for the periods on the Internal Audit. In December 2018, the Board No independent evaluation of the Board of Directors’ of remuneration is approved by the General Meeting before and after the annual General Meeting resolved to terminate the Share Listing Policy due performance was conducted in 2018, as the Board of Shareholders and depends on the actual hours of Shareholders. Previously, payments were to the Company’s delisting from the London Stock membership changed substantially over the year worked during the reporting period. made once per year Exchange. and each current director had served for less than • Instead of British pounds sterling, payments a year as at 31 December 2018. On 12 March 2018, an extraordinary General Meeting to non-Russian residents are now in euros of Shareholders resolved to adjust the amount of remuneration payable to independent directors On 12 March 2018, the General Meeting and the frequency of remuneration payment to all of Shareholders resolved to approve an additional members of the Board of Directors2. bonus for each of the retiring independent directors, Jan Erik Rudberg and Lord Paul Myners, for their • The remuneration payable to independent long service on the Board and contributions Directors’ attendance at Board and Committee meetings in 2018 directors is currently equal to EUR 250 thousand to MegaFon’s business. (including taxes) per calendar year as compared Members of Meeting of Meeting of the to GBP 200 thousand (net of taxes) The total amount paid to Board members3 in 2018 the Board of the Finance Remuneration Directors in • In line with the procedure applicable to non- was RUB 131m. Meeting of the and Strategy and Nominations independent directors, remuneration is now paid 20181 Tenure Board meeting Audit Committee Committee Committee to independent directors proportionate to their actual tenure as such at MegaFon

Maksim Since 19/01/2018 27 out of 27 7 out of 7 6 out of 8 6 out of 11 Anipkin Aleksey Since 19/01/2018 27 out of 27 0 out of 7 8 out of 8 0 out of 11 Antonyuk Evgeny Since 19/01/2018 27 out of 27 3 out of 7 8 out of 8 11 out of 11 Bystrykh Remuneration to members of the Board of Directors in 2018, RUB m Jarkko Since 19/01/2018 26 out of 27 7 out of 7 4 out of 8 3 out of 11 Veijalainen Chairman of the Independent Non-independent Aleksandr Board of Directors directors directors Since 19/01/2018 27 out of 27 7 out of 7 5 out of 8 2 out of 11 Esikov Pavel 19/01/2018 – 23 out of 27 0 out of 7 3 out of 8 8 out of 11 Kaplun 21/12/2018 Remuneration for service on a governing body 4 111 16 Harri Since 19/01/2018 27 out of 27 4 out of 7 6 out of 8 11 out of 11 Koponen Salary 0 0 0 Anna Benefits 0 0 0 Since 21/12/2018 2 out of 27 0 out of 7 0 out of 8 0 out of 11 Serebryanikova Reimbursement of expenses 0 0 0 Aleksandr Since 19/01/2018 27 out of 27 2 out of 7 6 out of 8 0 out of 11 Bonuses and long-term incentives 0 0 0 Ushkov Pension plan contributions 0 0 0 Natalya Since 19/01/2018 27 out of 27 0 out of 7 8 out of 8 0 out of 11 Chumachenko Total remuneration 4 111 16

Payment of remuneration to members of the Board of Directors in 2016–2018, RUB m

131

95 92 2. Changes in the amount of remuneration payable to Members of the Board of Directors are fully detailed in the minutes of the extraordinary General Meeting of Shareholders held on 12 March 2018. 3. No remuneration or non-standard benefits (social benefits, reimbursement of expenses, pension benefits, corporate cars, corporate accommodations, etc.) were provided to persons 1. The Board members did not participate in meetings of the Board of Directors and its Committees between 1 and 19 January. 2016 2017 2018 related to them (spouses, children, or other family members). 186 3. Corporate Governance Governing Bodies 187

Committees of the Board of Directors

Three principal committees of MegaFon’s Board Audit Finance and Strategy Remuneration and Nominations of Directors provide oversight and strategic Committee Committee Committee planning on matters related to the Board’s areas of responsibility: The Board’s Audit Committee is responsible for all The Finance and Strategy Committee exercises The Remuneration and Nominations Committee matters relating to internal and external audits control over MegaFon’s strategic development, is responsible for the development and regular • Audit Committee of MegaFon’s financial and business operations, business planning, budgeting, and investment review of the remuneration policy, including • Finance and Strategy Committee and in particular, for making recommendations processes. The Committee’s principal responsibilities reviewing and determining base salaries, • Remuneration and Nominations Committee on the appointment of external auditors, resolving include determining MegaFon’s strategic direction bonuses, and other compensation, as well issues that arise during audits, analysing and approving its annual budgets, reviewing as setting target KPIs for top management, Committee members are selected upon the election the effectiveness of internal controls, and assessing and approving proposed M&A transactions, making recommendations to the Board regarding of a new Board of Directors. In 2018, members risk management performance. and reviewing the terms of borrowings and other candidates for key management positions, of the committees were approved: financing options. and carrying out a formalised annual performance In 2018, the Audit Committee covered a wide range evaluation of the Board, its members, and its • at the meeting of the Board of Directors of issues, including reviewing quarterly and annual In 2018, the Finance and Strategy Committee committees. on 22 January 2018, following the extraordinary financial statements and press releases disclosing covered a wide range of issues, including General Meeting of Shareholders held MegaFon’s financial and business operations; approval of the Company’s budget and business During the year, the Committee considered on 19 January 2018; enhancing internal controls, risk management, plan for 2019; placement of exchange bonds; and recommended short-term and long-term • at the meeting of the Board of Directors and compliance; approving the internal audit plan; review of interested party transactions; review management incentive programmes for the Board’s on 13 July 2018, following the extraordinary reviewing internal audit reports; reviewing litigation of transactions with a cumulative value exceeding approval. The Committee also reviewed General Meeting of Shareholders held reports; reviewing key project progress reports; US$ 50m; review of key strategic project the performance of MegaFon’s CEO, top on 29 June 2018; and reviewing interested party transactions. progress reports; and review of the Company’s management, and key HR projects, as well • at the meeting of the Board of Directors M&A activities. as approving and monitoring the implementation on 21 December 2018, upon re-election of the Company’s HR strategy. In October 2018, of the Board of Directors at the extraordinary the Committee recommended that Gevork A. General Meeting of Shareholders held Vermishyan be appointed MegaFon’s Chief on the same day. Executive Officer.

7 8 11 3 meetings in 2018 meetings in 2018 meetings in 2018 committees Audit Committee members as at 31 December 2018: Finance and Strategy Committee members Remuneration and Nominations Committee members as at 31 December 2018: as at 31 December 2018: • Jarkko Armas Veijalainen (Chairman) Activities of the Board Committees are regulated by internal • Aleksandr Yu. Esikov • Natalya V. Chumachenko (Chairwoman) • Harri Eerik Koponen (Chairman) documents • Anna A. Serebryanikova • Aleksey V. Antonyuk • Maksim N. Anipkin • Evgeny A. Bystrykh • Evgeny A. Bystrykh 188 3. Corporate Governance Governing Bodies 189

Management Board Chief Executive Officer and Executive Director

The Chief Executive Officer and the Executive The Executive Director’s responsibilities also Director manage MegaFon’s day-to-day operations include: The Management Board is MegaFon’s collective Management Board members alongside the Management Board in all matters executive body managing the Company’s day- as at 31 December 2018: excluding those reserved for the Company’s General • effecting any civil transactions on behalf to-day operations together with the individual Meeting of Shareholders or the Board of Directors. of MegaFon and managing MegaFon’s property executive bodies. It is responsible for all operational within the limits established in his employment Gevork A. Vermishyan management matters, apart from those which (Chairman) According to MegaFon’s Charter, their contract and/or applicable Russian laws; fall within the remit of the General Meeting responsibilities include: • developing and implementing measures of Shareholders, the Board of Directors, to ensure the security and protection and MegaFon’s individual executive bodies. Aleksandr A. Barunin • managing MegaFon’s day-to-day operations, of information containing state secrets. acting on behalf of the Company without The size and composition of the Management power of attorney, representing MegaFon in its The Executive Director’s position is currently vacant. Board are approved by the General Meeting Frederic Gilbert Vanoosthuyze relations with all government authorities, legal of Shareholders based on the CEO’s entities, and individuals, and granting powers recommendation. The CEO is the Chairman of attorney; of the Management Board. Valentina I. Vatrak • making decisions and issuing orders, instructions, and other documents on matters consistent with their responsibility, Vlad Wolfson and approving MegaFon’s internal documents Changes to the composition with the exception of certain matters. of the Management Board during 2018: Dmitry L. Kononov The CEO’s responsibilities also include: joined the Management Board • opening settlement accounts and other bank • Aleksandr A. Barunin Elena A. Martynova accounts, effecting civil transactions on behalf • Valentina I. Vatrak of MegaFon, with exceptions set out in his • Frederic Gilbert Vanoosthuyze employment contract and/or applicable Russian • Elena A. Martynova Aleksandr A. Sobolev laws; • organising the operations of MegaFon’s stepped down from the Management Board business units, signing employment contracts with MegaFon’s employees, making decisions • Sergey V. Soldatenkov on bonuses, benefits, and compensations; • Pavel V. Korchagin • preparing and presenting information • Anna A. Serebryanikova and documents on MegaFon’s operations to the Board of Directors, including for approval of certain documents. 190 3. Corporate Governance Governing Bodies 191

Gevork A. Aleksandr A. Frederic Gilbert Valentina I. Vlad Dmitry Vermishyan Barunin Vanoosthuyze Vatrak Wolfson Kononov

Chairman Operational Finance Chief Technology Corporate Development Chief Commercial Director for Investor Relations of the Management Board Director and IT Officer and Human Resources Director Officer and M&A

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

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

As part of the programme to buy back MegaFon’s ordinary shares Born in 1972. Born in 1973. Born in 1974. Born in 1977. Born in 1964. and GDRs, Gevork Vermishyan sold his 6,000 ordinary shares Graduated from Makarov Leningrad Graduated from the High School Graduated from Voronezh State Graduated from the Kyiv National Graduated from the University to MegaFon Investments (Cyprus) Higher Maritime Engineering School of Liege, the University of Mons, University, Moscow Open Social University of Trade and Economics of Colorado (USA). Limited on 27 August 2018. and Duke University (USA). and the Solvay Business School University, and the Diplomatic (Ukraine), and the University of Haifa (Belgium). Academy of the Russian Foreign (Israel). Principal place of employment: Principal place of employment: Ministry. PJSC MegaFon – Director Born in 1978. PJSC MegaFon – Operational Principal place of employment: Principal place of employment: for Investor Relations and M&A. Finance Director. PJSC MegaFon – Chief Technology Principal place of employment: PJSC MegaFon – Chief Commercial Graduated from the Financial and IT Officer. PJSC MegaFon – Corporate Officer. University under the Government He also acts as the CEO at LLC Development and Human Resources of the Russian Federation. MegaFon Finance and JSC Director. Vlad is also a Board member MegaFon-International, and is at JSC MF Technologies and serves Principal place of employment: a board member at CJSC Aquafon- on the Supervisory Board at DTS PJSC MegaFon – Chief Executive GSM, CJSC OSTELECOM, CJSC TT Retail. Officer. Mobile, and JSC Sadovoye Koltso.

He also serves as chairman of the board at CJSC Aquafon-GSM, CJSC OSTELECOM, and CJSC TT Mobile, is a board member at JSC MF Technologies, and serves on the Supervisory Board at DTS Retail.

Chairman of the Management Board 192 3. Corporate Governance Governing Bodies 193

The Management Board also had the following members in 2018:

Elena A. Aleksandr A. Sergey V. Pavel V. Anna A. Martynova Sobolev Soldatenkov Korchagin Serebryanikova

Director for Strategic Director Chairman of the Management Board Member of the Management Board Member of the Management Board Communications and Brand for Strategy until 13 November 2018 until 21 December 2018 until 21 December 2018 Development

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

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

On 24 August 2018, as part Born in 1978. Born in 1987. of the programme to buy back Born in 1960. Born in 1974. MegaFon’s ordinary shares Graduated from Lomonosov Moscow Graduated from Lomonosov Moscow and GDRs, Sergey Soldatenkov Graduated from Bauman Moscow Graduated from Lomonosov Moscow State University and the Stanford State University. sold his 255,506 GDRs representing State Technical University. State University in 1998 and from University Graduate School MegaFon’s ordinary shares Manchester University (UK) in 2009. of Business (USA). Principal place of employment: to MegaFon Investments (Cyprus) Principal place of employment: PJSC MegaFon – Director Limited. PJSC MegaFon – Chief Technology Principal place of employment: Principal place of employment: for Strategy. Officer until 21 December 2018 Deputy CEO at LLC USM PJSC MegaFon – Director Management. for Strategic Communications Born in 1963. and Brand Development. Chief Operating Officer at PJSC Graduated from the Leningrad MegaFon until 21 December 2018. She also serves as Deputy CEO Institute of Aviation Instrument at LLC USM Management. Engineering.

Principal place of employment: PJSC MegaFon – CEO until 13 November 2018. 194 3. Corporate Governance Governing Bodies 195

Remuneration of the Management Board, Corporate Secretary

the Chief Executive Officer, To ensure the effectiveness and the Executive Director of corporate governance, MegaFon has established MegaFon’s key executives are remunerated for their The incentive programme provides the position of Corporate services to the Company. The Board of Directors for the remuneration to a number of key executives Secretary, with the person determines the structure and amount of such at the end of a three-year period. The amount holding this position being remuneration. of remuneration based on the achievement responsible for ensuring of a target objective set at the start of a three-year compliance with rules Since 2017, MegaFon has run a long-term incentive period. and procedures protecting programme for its top management, designed: the rights and interests of shareholders. The Corporate • align shareholder and management interests; Secretary is also responsible • incentivise MegaFon’s management to support for shareholder relations, the Company’s share price growth; corporate communications, • ensure focus on MegaFon’s strategic long-term and ensuring the proper objectives; performance by the Board • make its management compensation packages of Directors and its Committees more competitive. of their functions. Daria A. Elena L. Lizunova Breeva The Corporate Secretary is elected by, and reports to, the Board of Directors. Corporate Secretary Corporate Secretary

Remuneration to members of the Management Board in 2016–2018, RUB m As at 31 December 2018, Percentage ownership Percentage ownership Daria A. Lizunova, appointed in the Company: nil. in the Company: nil. on 14 November 2018, was Type 2016 2017 2018 MegaFon’s Corporate Secretary. Percentage of the Company’s Percentage of the Company’s ordinary shares held: nil. ordinary shares held: nil. From 1 January to 8 October Salary 290 215 256 2018, Elena L. Breeva was MegaFon’s Corporate Secretary. Born in 1986. Born in 1979. Benefits 0 0 0 Bonuses and long-term incentives 268 280 319 Graduated from Moscow Graduated from Kutafin Moscow Reimbursement of expenses 2 1 1 Pedagogical State University State Law University and the State Pension plan contributions 0 0 0 and from Russian Foreign Trade University of Management. Academy. Total 560 496 576 Principal place of employment: Principal place of employment: PJSC MegaFon – Corporate PJSC MegaFon – Corporate Secretary from 1 January Secretary from 14 November 2018. to 8 October 2018. In 2018, the combined payments made to members 1 She combines the duties of She combined the duties of of the Management Board , including remuneration Corporate Secretary and the Corporate Secretary and the and reimbursement of expenses, totalled The full list of the Corporate Secretary’s Company’s Controller, responsible Company’s Controller, responsible functions is set out in the Corporate for insider information control and for insider information control and 576 Secretary Regulations security. security. RUB m

1. No remuneration or non-standard benefits (social benefits, reimbursement of expenses, pension benefits, corporate cars, corporate accommodations, etc.) were provided to their related persons (spouses, children, or other family members). 196 3. Corporate Governance Control over Financial and Business Operations 197

Internal audit Internal control over financial and Control over tax reporting The Company’s Internal Audit team reports to the Board of Directors. Internal Audit operations MegaFon’s internal control system (ICS) Financial are guided by the Company’s Regulations comprises a set of organisational measures, on Internal Audit, as well as by the International policies, instructions, and controls designed Standards for the Professional Practice of Internal to prepare reliable financial statements and tax Auditing. reports in compliance with the applicable laws and Business and regulations.

All internal controls are established in compliance Internal Audit operations are governed by MegaFon’s Regulations with Russian laws, as well as the relevant guidelines Operations on the Internal Audit of the Ministry of Finance of the Russian Federation outlined in its letter No. 07-04-15/57289 dated The Internal Audit team assesses the risk 25 December 2013 and COSO’s Internal Control – management and internal control system, Integrated Framework. as well as corporate governance system pursuant Effectiveness and accountability underpin to performance plan approved by the Board The ICS is managed by an Internal Control unit MegaFon’s corporate governance of Directors. within the Accounting and Reporting Function. principles. The Company’s control system Its effectiveness is maintained through is based upon its Board of Directors, the following activities: • Updating and ensuring compliance with ICS the bodies responsible for internal codes and standards and external audit, and the Revision • Regular monitoring of controls performance. • Regular surveys of key process owners Commission. on the effectiveness of internal controls • Analyses on business processes and related risks to verify the performance of applied internal controls Revision Commission On 12 March 2018, the following persons were • Annual testing of key controls on a sample basis elected to the Revision Commission at MegaFon’s In March 2018, MegaFon’s Internal The Revision Commission is elected annually Extraordinary General Meeting of Shareholders: Audit Director, Yuri Zheimo, was Throughout the year, MegaFon continued by the General Meeting of Shareholders to control declared the winner of the national developing and updating its internal control system MegaFon’s financial and business operations. • Yuri Zheimo, to reflect corporate and organisational changes, The Commission members may not serve Internal Audit Director at MegaFon award of the Institute of Internal such as embedding Segregation of Duties (SoD) on the Board of Directors or any other governing • Gagik Grigoryan, Auditors in the category ‘Head to better identify and mitigate conflicts of roles bodies of the Company. The Revision Commission Head of IFRS, Accounting, Reporting of the Internal Audit of the Year’ and powers. is limited to three members. and Compliance at MegaFon • Dmitry Miklush, As at 1 January 2018, the Revision Commission Head of M&A at MegaFon comprised Pavel Kaplun (Chairman), Managing Director and Head of Investment and Analytics On 29 June 2018, the following members were Directorate at LLC USM Management, and Yuri elected to the Revision Commission at MegaFon’s Zheimo, Internal Audit Director at MegaFon. Annual General Meeting of Shareholders: On 18 January 2018, Pavel Kaplun stepped down from the Commission. • Yuri Zheimo, Internal Audit Director at MegaFon • Sergey Krasin, Head of Subsidiaries Audit, Internal Audit The Revision Commission’s operating procedures and full list Department at JSC Bank GPB of functions are outlined in the Regulations on the Revision • Radik Nasibullin, Commission CFO at LLC USM Management 198 3. Corporate Governance External Audit | Information Disclosure | Protecting the Confidentiality of Insider Information 199

External Information Audit Disclosure

MegaFon engages independent external The Annual General Meeting of Shareholders MegaFon ensures transparency of its operations, Our financial results and notices of upcoming auditors to audit its annual financial statements held on 29 June 2018 approved JSC KPMG both in compliance with all applicable laws General Meetings of Shareholders, as well as other and review its quarterly financial statements. as the Company’s external auditors. and regulations and in line with international best important information, are announced through The Audit Committee assesses prospective practices for disclosure. For each fiscal year ending the authorised Russian information agency auditors and makes recommendations The total fees paid to JSC KPMG for its audit 31 December, we publish audited consolidated Interfax — Centre for Corporate Information to the Board of Directors regarding their services provided during 2018 amounted financial statements prepared in accordance Disclosure. Prior to October 2018, MegaFon also appointment and associated fees. The selected to RUB 62.4m while RUB 30m were paid for non- with IFRS. MegaFon also provides unaudited published relevant information on the London independent auditors are approved by the General audit services. consolidated financial statements under IFRS Stock Exchange website via its Regulatory News Meeting of Shareholders, based on the Board’s at the end of the first, second, and third fiscal Service (RNS). recommendation. quarters.

Press releases are published on the corporate website

62.4 30.0 Protecting RUB m RUB m The total fees paid to JSC KPMG for its audit The total fees paid to JSC KPMG for its non-audit the Confidentiality of services provided during 2018 services provided during 2018 Insider Information

In 2018, MegaFon used previously-adopted The new version of the Regulations improves mechanisms to prevent insider trading. It also the procedure for notification to employees about began applying a new version of the Regulations their inclusion in, or exclusion from, MegaFon’s list on the Procedure for Access to PJSC MegaFon’s of insiders. Insider Information, Rules for Protection of Confidentiality of Such Information and Control of Compliance with Statutory Requirements for Counteracting the Unlawful Use of Insider Information and Market Manipulation which had been approved by the Board of Directors on 5 December 2017. The Insider Information Regulations

4Securities

4.1 Shareholders’ Equity 4.2 Presence on Stock Exchanges 4.3 Dividends 4.4 Bonds 4.5 Credit Ratings 4.6 Investor Relations 4.7 Information Disclosure 202 4. Securities Shareholders’ Equity 203

MegaFon shareholders Shareholders’ as at 31 December 20182 Equity USM Group LLC MegaFon Finance Gazprombank Group 56.32% 22.52% 18.96%

MegaFon’s charter capital amounts to RUB 62m, As a result, the percentage of MegaFon’s shares The Bank of Russia cleared the making of the mandatory tender consisting of 620 million ordinary registered shares in free float decreased from 20.8% to 2.2%. offer and, in January 2019 the mandatory tender offer was 2.2% with a par value of RUB 0.1 each. The Company approved by the MegaFon Board of Directors. Upon the expiration Free float is authorised to issue 100 billion additional ordinary On 16 October 2018, LLC MegaFon Finance, another of the mandatory tender offer on 7 March 2019, LLC MegaFon shares. All issues of ordinary registered shares have wholly-owned subsidiary of MegaFon, acquired Finance acquired a total of 126,246,094 MegaFon ordinary shares, been combined into a single issue with the state from MegaFon Investments (Cyprus) Limited a total representing approximately 20.36% of the total outstanding shares. number 1-03-00822-J. MegaFon has no preferred of 109,629,380 ordinary shares and 29,987,157 This resulted in LLC MegaFon Finance and its affiliates together shares. The Government does not hold any stake GDRs, which included GDRs previously held owning 99.2% of the MegaFon share capital, leaving the free float in MegaFon’s charter capital. by MegaFon Investments (Cyprus) Limited at 0.8%. and ordinary shares and GDRs acquired under In connection with its initial public offering (IPO) the programme, and constituted 17.68% and 4.84% As at 31 December 2018, MegaFon’s major shareholders were the USM in 2012, MegaFon established a Global Depositary of MegaFon’s charter capital, respectively. Group of companies (56.32% interest) and the Gazprombank Group Receipt (GDR) programme, with each GDR (18.96% interest). LLC MegaFon Finance, a wholly-owned subsidiary representing one ordinary share and with Bank On 10 December 2018, LLC MegaFon Finance of MegaFon, owned a 22.52% interest in MegaFon’s charter capital. of New York Mellon acting as the depositary bank. cancelled all the GDRs which it held and received The percentage of MegaFon’s shares in free float was 2.2%. GDR holders have essentially the same rights a corresponding number of MegaFon’s ordinary as holders of ordinary shares in terms of attending shares. Upon the cancellation of the GDRs, and voting at General Meetings of Shareholders LLC MegaFon Finance became the owner 2 and receiving dividends in accordance of 139,616,537 ordinary shares of MegaFon, Holdings in MegaFon as at 31 December 2018 with the applicable laws of the Russian Federation. which, when combined with the shares held by its affiliates, constituted 78.84% of MegaFon’s share Shareholder Holding, total, % Ordinary shares, % GDRs, % In July 2018, MegaFon’s wholly-owned subsidiary capital. Because the combined holding exceeded MegaFon Investments (Cyprus) Limited announced 75%1 of MegaFon’s share capital, LLC MegaFon a programme to purchase MegaFon’s ordinary Finance became required to make a mandatory shares and GDRs from shareholders other than tender offer to all non-affiliated shareholders. USM Group 56.32 56.32 0.0 its principal shareholders. The results were Accordingly, LLC MegaFon Finance sent notification Gazprombank Group 18.96 18.96 0.0 announced on 23 August 2018. The aggregate to the Bank of Russia of its intention to make LLC MegaFon Finance 22.52 22.52 0.0 ordinary shares and GDRs purchased from minority a mandatory tender offer to MegaFon’s non- Free float 2.2 1.94 0.26 shareholders under the programme constituted affiliated shareholders to acquire up to 131,212,843 18.6% of MegaFon’s total outstanding shares. of MegaFon’s ordinary shares. Total 100 99.74 0.26

1. As defined by provisions of Federal Law No. 208-FZ On Joint-Stock Companies dated 26 December 1995 as amended and 2. Following the expiration of the Mandatory Tender Offer on 7 March 2019, LLC MegaFon Finance’s stake in PJSC MegaFon was 42.88%, supplemented. while the free float decreased to 0.8%. 204 4. Securities Presence on Stock Exchanges 205

Summary of MegaFon’s ordinary shares listing on the Moscow Exchange Presence as of 31 December 2018

on Stock Exchanges Exchange Moscow Exchange Listing level Second Level4 Security type/category Ordinary share Trading start date 28 November 2012 Stock ticker symbol MFON Par value, RUB 0.10 Index inclusion None5

Until 4 October 2018, MegaFon’s GDRs were Performance of MegaFon’s GDRs Performance of MegaFon’s Performance of MegaFon GDRs, listed on the London Stock Exchange; however, in 2018, US$ ordinary shares in 2018, RUB ordinary shares, and RUB/US$ exchange on 5 October 2018, the listing was cancelled. rate in 2018, rebased to BoP, % MegaFon’s ordinary shares are traded on the Moscow Exchange and are currently included Source: Bloomberg. Source: Bloomberg. Source: Bloomberg. in its Third Level Quotation List. 11.5 700 35% 11.0 +24.7 p.p. 650 +24.7% 25% 10.5 10.0 -5.5% 600 15% 9.5 550 5% 9.0 +12.3% 8.5 500 -5% -6.1 p.p.

8.0 -6.1% Trading end date 4 October 2018 450 -15% 7.5 Price per GDR: US$ 8.69 -16.7 p.p. 7.0 400 -25% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MegaFon, GDRs MegaFon, ordinary shares MegaFon, ordinary shares MSCI Russia Index, rebased to the price per GDR Moscow Exchange Index, MegaFon, GDRs rebased to an ordinary share price RUB/US$

Trading statistics for MegaFon’s GDRs on the London Stock Exchange Trading statistics for MegaFon’s ordinary shares on the Moscow Exchange in 2018 in 2018

Indicator Indicator

Average1 daily trading volume, US$ m 2.7 Average6 daily trading volume, RUB m 134.4 Average1 daily trading volume, GDRs traded 298,850 Average6 daily trading volume, shares traded 245,845 Average1 number of trades per day 478.5 Average6 number of trades per day 2,422 2018 high2, US$ 11.3 52-week high, RUB 674.0 2018 low2, US$ 7.25 52-week low, RUB 440.9 Last close price3, US$ 8.69 Period-end price, RUB 639.7 Market capitalisation as at the date of delisting3, US$ m 5,388 Period-end market capitalisation, RUB bn 396.6

Source: Bloomberg. Source: Bloomberg.

4. Until 3 August 2018, the shares were included in the First Level Quotation List of the Moscow Exchange, when they were moved to the Second Level Quotation List. On 7 March 2019, MegaFon shares were moved from the Second Level to the Third Level Quotation List of the Moscow Exchange as the Company no longer satisfied the free float requirements of the Moscow Exchange. 1. The median was taken as an average value to compensate for the effect of abnormal trading volumes due to the programme to purchase 5. Until 30 August 2018, the shares were included in the Moscow Exchange Index, Moscow Exchange Broad Market Index, and Moscow Exchange ordinary shares and GDRs of MegaFon, completed on 22 August 2018. Telecoms Index. 2. From 1 January through 4 October 2018, prior to the delisting of MegaFon’s GDRs from the London Stock Exchange. 6. The median was taken as an average value to compensate for the effect of abnormal trading volumes due to the programme to purchase 3. As at 4 October 2018. MegaFon’s GDRs were delisted from the London Stock Exchange on 5 October 2018. ordinary shares and GDRs of MegaFon, completed on 22 August 2018. 206 4. Securities Dividends | Bonds 207

Dividends Bonds

Any payment of dividends (and the amount On 29 June 2018, the General Meeting Three issues of MegaFon bonds (series BO-001R-01, In March 2018, MegaFon Finance LLC redeemed its of dividends payable) must be approved of Shareholders resolved not to distribute dividends BO-001R-02, and BO-001R-03) and two issues series 06 and 07 bonds in full and prior to maturity by the General Meeting of Shareholders. The Board for FY2017. This decision was driven principally of bonds of its subsidiary, MegaFon Finance for a total of RUB 20bn. As at year-end 2018, four of Directors makes non-binding recommendations by MegaFon’s desire to focus on delivering the new LLC (series 06 and 07), were outstanding exchange bonds of MegaFon worth RUB 55bn to the General Meeting of Shareholders regarding strategy adopted in May 2017, aimed at the digital at the beginning of 2018. in total were outstanding (series BO-001R-01, the timing and amount of any dividend payments. transformation of its business. BO-001R-02, BO-001R-03, and BO-001R-04). In February 2018, MegaFon issued a 3-year 7.20% MegaFon approved a Dividend Policy RUB 20bn exchange bond (series BO-001R-04). Upon coupon re-sets in 2018, the MegaFon bonds in 2012 as part of the Company’s IPO process At the time of the offering, the bond’s coupon rate yield increased slightly, in line with the overall and the Dividend Policy was revised in May 2017. was the lowest among Russian corporate bonds trends in the Russian debt market. Overall rates The Dividend Policy outlines the parameters since 2014 and at a record low level in the history in the market were affected by a series of key upon which the Board of Directors provides of MegaFon’s debt instruments. The series rate increases by the Central Bank of the Russian recommendations to the General Meeting was placed under MegaFon’s Exchange Bond Federation in the second half of 2018, and reduced of Shareholders on dividend payments. PJSC MegaFon’s Dividend Policy Programme registered on the Moscow Exchange liquidity in the market. in April 2016. The bond proceeds were used by MegaFon to finance general corporate purposes Dividend payments and refinance its debt. in 2014–2018

Reporting period 2014 2015 2016 2017 2018

Total dividends paid 55 in the calendar year, RUB 40.0 50.0 50.0 20.0 0.0 bn RUB bn total volume of outstanding exchange bonds of DPS, RUB 64.51 80.64 80.63 32.25 0.0 MegaFon as at year-end 2018 208 4. Securities Bonds | Credit Ratings 209

Credit Ratings

Rouble bonds outstanding as at 31 December 2018

Review/ Issuer PJSC MegaFon PJSC MegaFon PJSC MegaFon PJSC MegaFon Credit rating Value Outlook affirmation date

Exchange bonds, Exchange bonds, Exchange bonds, Exchange bonds, Issue series BO-001R-01 series BO-001R-02 series BO-001R-03 series BO-001R-04 S&P Global Ratings

Coupon, % per annum 9.95% 9.90% 7.85% 7.20% Long-term foreign currency rating BB+ Stable 29/08/2018

Coupon period 182 days 91 days 182 days 182 days Long-term local currency rating BB+ Stable 29/08/2018

Issue size, RUB 10,000,000,000 10,000,000,000 15,000,000,000 20,000,000,000 Moody’s

Placement date 12/05/2016 10/06/2016 09/10/2017 19/02/2018 Long-term credit rating Ba1 Stable 11/09/2018

Maturity / put option date 09/05/2019 29/05/2026 03/10/2022 15/02/2021 ACRA

Issuer: MegaFon AA(RU) Stable 07/08/2018 June 2021 Call option date — — — June 2023 Bond issue by MegaFon, Series BO-001R-03 AA(RU) — 07/08/2018

State registration 4В02-01-00822-J-001Р 4В02-02-00822-J-001Р 4B02-03-00822-J-001P 4B02-04-00822-J-001P number Bond issue by MegaFon, Series BO-001R-04 AA(RU) — 07/08/2018

ISIN RU000A0JWGG3 RU000A0JWKA8 RU000A0ZYC98 RU000A0ZYTM6

In Q3 2018, rating agencies reviewed MegaFon’s Following a review on 29 August 2018, S&P credit ratings following the announcement of its Global Ratings downgraded the Company’s programme to buy back shares and GDRs and delist long-term foreign and local currency ratings its GDRs from the London Stock Exchange. from ВВВ– to ВВ+, with a stable outlook. The reason for the ratings downgrade was the use of borrowed On 7 August 2018, the Russian rating agency ACRA funds to finance the buyback of ordinary affirmed MegaFon’s credit rating at AA(RU) due shares and GDRs, as well as an increased to the moderate impact of the buyback of ordinary need for investment to meet the Yarovaya law shares and GDRs on the Company’s leverage, requirements. which ACRA estimated as medium. The agency also noted MegaFon’s high profitability, strong liquidity In September 2018, Moody’s affirmed MegaFon’s position, and strong corporate governance. long-term credit rating at Ba1, with a stable outlook. The agency noted the Company’s strong competitive position in the Russian telecommunications market, robust operational and financial performance, as well as its healthy liquidity and adequate currency risk management. 210 4. Securities Investor relations | Information disclosure 211

Investor Information Relations Disclosure

In July 2018, the Board of Directors determined In January 2019, the Company’s Board of Directors MegaFon publishes its Corporate Action Notices: For each fiscal year ending 31 December, we publish that remaining a public company is no longer approved a further buyback of the Company’s audited consolidated financial statements prepared a strategic priority for MegaFon, and subsequently shares from minority shareholders, which • on the website of Interfax, an authorized Russian in accordance with IFRS. MegaFon also provides approved a programme to buy back the Company’s was completed in March 2019. Following this disclosure agency; unaudited consolidated financial statements under ordinary shares and GDRs and to cancel buyback, MegaFon’s free float decreased • on the official corporate website IFRS at the end of the first, second, and third fiscal MegaFon’s GDR listing on the London Stock to 0.8%. However, as at the date of this Annual in the For Investors section. quarters. Exchange. Under the buyback programme which Report, MegaFon remains a company with public was successfully completed in August 2018, shareholders listed on the Moscow Exchange Key legal and regulatory requirements governing we provided our shareholders the opportunity (MOEX: MFON). the Company’s disclosure obligations include: to sell their ordinary shares and GDRs at a premium to the market. The buyback MegaFon maintains its commitment to openness • Federal Law No. 208-FZ On Joint-Stock price per GDR or ordinary share was US$ 9.75 and transparency, and providing stakeholders Companies (RUB 659.26 at the Bank of Russia’s exchange with up-to-date information in a timely manner • Federal Law No. 39-FZ On Securities Market rate as at the date the tender offer results remains a major priority. We are continuing • Listing Rules of Moscow Exchange Investor materials, including presentations and reports were announced). This tender offer became to issue press releases covering our quarterly one of the most successful in the market, financial results and other significant matters with 89.4% of the MegaFon shareholders while ensuring the presence of MegaFon’s top to whom the tender offer was directed selling managers at conference calls and press briefings. their shares. Following the buyback, MegaFon’s MegaFon is in regular contact with stakeholders free float decreased from 20.8% to 2.2%. and participates in Russian and international As of 5 October 2018, MegaFon’s GDRs are no investment and industry conferences. longer listed on the London Stock Exchange. Financial 5Statements and Appendix

5.1 Independent Auditors’ Report 5.2 Consolidated Income Statement 5.3 Consolidated Statement of other Comprehensive Income 5.4 Consolidated Statement of Financial Position 5.5 Consolidated Statement of Changes in Equity 5.6 Consolidated Statement of Cash flows 5.7 Notes to the Consolidated Financial Statements 5.8 Additional Information 214 5. Financial Statements and Appendix Independent Auditors’ Report 215

Consolidated Financial Independent Statements Auditors’ Report For the year ended 31 December 2018

Contents

Independent Auditors’ Report 215 Consolidated Income Statement 220 Consolidated Statement of other Comprehensive Income 221 Consolidated Statement of Financial Position 222 Consolidated Statement of Changes in equity 224 Consolidated Statement of Cash Flows 226 To the Board of Directors and Notes to the Consolidated Financial Statements 228

1. GENERAL 228 Shareholders of PJSC MegaFon 1.1. About the Company 228 1.2. Basis of preparation 228 1.3. Basis of consolidation 229 1.4. Significant accounting judgments, estimates and assumptions 229 Opinion Basis for Opinion 1.5. Significant accounting policies 229 We have audited the consolidated financial We conducted our audit in accordance with 1.6. Standards issued but not yet effective 230 statements of PJSC MegaFon (the ‘Company’) International Standards on Auditing (ISAs). 2. INCOME STATEMENT 232 and its subsidiaries (the ‘Group’), which comprise Our responsibilities under those standards are the consolidated statement of financial position further described in the Auditors’ Responsibilities for 2.1. Revenue 232 as at 31 December 2018, the consolidated income the Audit of the Consolidated Financial Statements 2.2. Sales and marketing expenses 235 statement, and the statements of other comprehensive section of our report. We are independent of the 2.3. General and administrative expenses 235 income, changes in equity and cash flows for the Group in accordance with the independence 2.4. Income taxes 235 year then ended, and notes, comprising significant requirements that are relevant to our audit of the 2.5. Earnings per share 238 accounting policies and other explanatory consolidated financial statements in the Russian information. Federation and with the International Ethics 3. ASSETS AND LIABILITIES 239 Standards Board for Accountants’ Code of Ethics 3.1. Property and equipment 239 In our opinion, the accompanying consolidated for Professional Accountants (IESBA Code), and we 3.2. Intangible assets 242 financial statements present fairly, in all material have fulfilled our other ethical responsibilities in 3.3. Investments in associates and joint ventures 245 respects, the consolidated financial position of the accordance with the requirements in the Russian 3.4. Financial assets and liabilities 250 Group as at 31 December 2018, and its consolidated Federation and the IESBA Code. We believe that the 3.5. Trade and other receivables 260 financial performance and its consolidated cash audit evidence we have obtained is sufficient and 3.6. Inventory 260 flows for the year then ended in accordance with appropriate to provide a basis for our opinion. 3.7. Non-financial assets and liabilities 260 International Financial Reporting Standards (IFRS). 3.8. Assets held for sale 261 3.9. Provisions 261

4. EQUITY 262

5. ADDITIONAL NOTES 263 Audited entity: PJSC MegaFon Independent auditor: JSC ‘KPMG’, a company incorporated 5.1. Discontinued operations 263 Registration No. in the Unified State Register of Legal Entities under the Laws of the Russian Federation, a member firm of the KPMG network of independent member firms affiliated with 5.2. Share-based compensation 265 1027809169585. KPMG International Cooperative (‘KPMG International’), a Swiss Moscow, Russia 5.3. Related parties 265 entity. 5.4. Business combinations 267 Registration No. in the Unified State Register of Legal Entities 5.5. Financial risk management 270 1027700125628. 5.6. Group information 273 Member of the Self-regulated organization of auditors ‘Russian 5.7. Segment information 274 Union of auditors’ (Association). The Principal Registration 5.8. Commitments, contingencies and uncertainties 275 Number of the Entry in the Register of Auditors and Audit 5.9. EEventsvents after the reporting date 277 Organisations: No. 11603053203. 216 5. Financial Statements and Appendix Independent Auditors’ Report 217

Key Audit Matters The key audit matter How the matter was addressed in our audit Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements Valuation of investment in DTSRetail Limited (Svyaznoy Group) as a whole, and in forming our opinion thereon, and we do not provide Please refer to the Note 3.3 in the consolidated financial statements. a separate opinion on these matters. In May 2018, the Group completed exchange Our audit procedures included the following: of 100% stake in Euroset and the Lonestar loan (the former Strafor loan) for 25% + 1 We assessed professional competence of the qualified independent appraiser, which share in DTSRetail (Svyaznoy Group, non- was engaged by the Group by considering the appraiser’s reputation and experience based on publicly available sources. The key audit matter How the matter was addressed in our audit cash transaction). In accordance with IFRS 10 Consolidated We involved KPMG valuation specialists to assist us in testing the appropriateness of Financial Statements the Company the Group’s methodology and key assumptions applied to determine the fair value of derecognized the assets and liabilities of the investment in DTSRetail. Euroset and recognized an investment in We evaluated the key assumptions used by the Group in its discounted cash flow Revenue recognition - technical complexity DTSRetail at its fair value. model as follows: Please refer to the Note 2.1 in the consolidated financial statements. Estimating the fair value is a complex • we compared the historical information used in the calculations with the financial process involving a number of judgements statements of Euroset and Svyaznoy Logistica for the previous reporting periods; and estimates regarding various inputs. The Revenue is a material amount consisting Our audit procedures included an assessment of the Group’s policies and controls in valuation is based on a discontinued cash • we compared the forecast data on the rate of revenue growth with the average of a high volume of individually low value place over the IT system environment to determine their effectiveness in preventing flow model that uses primarily inputs from annual historical sales level and the growth rate of the population in the forecast transactions. There are a number of complex and/or detecting revenue-related data distortion or loss. internal sources. period, obtained from external sources; IT systems used to process revenue-related We performed the following key audit procedures: • we performed our own sensitivity analysis and assessed the impact of changes data and the Group relies on the output of in key assumptions which we consider reasonably possible based on our industry these IT systems. • we tested how often back-ups were taken and inspected the server rooms to knowledge. ensure appropriate physical safeguards were in place; The major risks of distortion of revenue arise We assessed whether the related disclosures in the consolidated financial statements from: • we tested that only authorised access can be made to the systems by inspecting are appropriate. • the capture, processing and transfer approved access requests for compliance with the internal policy; of data on the parameters of services • we tested that only authorised system program changes can be made, and that between the switching equipment, these authorised changes were appropriately made, by inspecting documentation billing system and accounting system; relating to the testing of these changes before implementation; and • for new tariffs introduced in the year we inspected documentation relating to the Other Information • the correct application of the tariffs, as application of the new tariffs in ‘test’ mode before going ‘live’ in the commercial these continuously change during the operation; year. Management is responsible for the other • we inspected the data processing on parameters of services from initial capture of information. The other information comprises the data by the switching equipment and further transfer of data to the billing system information included in the Annual Report other by tracing a number of connection entries. Further, we inspected the Group’s end-to-end revenue reconciliations between the data in the billing system and the than the consolidated financial statements and our accounting system; auditors’ report thereon. • we tested that valid metrology certificates were issued by appropriately specialized organizations for the switching equipment and billing system; The Annual Report is expected to be made available to us after the date of this auditors’ report. Our • we recalculated the amounts billed to subscribers on a sample basis by multiplying the parameters of services rendered and the appropriate tariffs; opinion on the consolidated financial statements does not cover the other information and we will not • we reconciled the data on subscribers’ payments taken from the payment agents’ confirmations with the relevant amounts in the billing system. express any form of assurance conclusion thereon. In all of the procedures listed above we involved our own IT specialists. In connection with our audit of the consolidated We also performed other analytical procedures to assess whether the trends in financial statements, our responsibility is to read revenue by type of service were in line with our understanding of the Group’s business the other information identified above when it and the wider industry. becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. 218 5. Financial Statements and Appendix Independent Auditors’ Report 219

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

• Obtain an understanding of internal control Yerkozha Akylbek relevant to the audit in order to design audit JSC ‘KPMG’ procedures that are appropriate in the Moscow, Russia circumstances, but not for the purpose of expressing an opinion on the effectiveness of 20 March 2019 the Group’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. 220 5. Financial Statements and Appendix Consolidated Statement of other Comprehensive Income 221

Consolidated Consolidated Statement Income of other Comprehensive Statement Income

Years ended Years ended 31 (In millions of Rubles, 31 December December except per share amounts) Note 2018 2017 (In millions of Rubles) Note 2018 2017

Continuing operations Profit for the year 32,854 5,325

Revenue 2.1 335,541 321,797 Other comprehensive income/(loss) items that may be reclassified to profit or loss in subsequent periods: Operating expenses Foreign currency translation difference, net of tax (777) (121) Cost of revenue 100,696 96,283 Net movement on cash flow hedges, net of tax 3.4.4 1,567 152 Sales and marketing expenses 2.2 19,574 19,911 Net other comprehensive income that may be reclassified to profit or loss in subsequent periods 790 31 General and administrative expenses 2.3 91,114 83,697 Total comprehensive income for the year, net of tax 33,644 5,356 Depreciation 3.1, 3.8 49,254 55,282 Amortisation 3.2.1 16,116 8,071 Total comprehensive income for the year Loss on disposal of non-current assets 337 484 Attributable to equity holders of the Company 36,171 4,818 Total operating expenses 277,091 263,728 Attributable to non-controlling interest (2,527) 538

Operating profit 58,450 58,069 33,644 5,356 Finance costs (25,927 ) (24,306) Finance income 1,634 1,724 Share of loss of associates and joint ventures 3.3 (2,829) (1,947) Impairment loss from Euroset 3.3 — (15,917) Other non-operating expenses 5.3 (1,677) (1,583) Gain on financial instruments, net 3.4.4 713 — Foreign exchange loss, net (1,271) (4,451)

Profit before tax from continuing operations 29,093 11,589 Income tax expense 2.4 7,823 6,706 Profit from continuing operations 21,270 4,883

Discontinued operations Profit from discontinued operations, net of tax 5.1 11,584 442 Profit for the year 32,854 5,325 Attributable to equity holders of the Company 35,170 4,551 Attributable to non-controlling interest (2,316) 774 32,854 5,325

Earnings per share, Rubles Basic and diluted, profit for the year attributable to equity holders of the Company 63 8

Earnings per share, Rubles —continuing operations Basic and diluted, profit for the year attributable to equity holders of the Company 38 8

The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 222 5. Financial Statements and Appendix Consolidated Statement of Financial Position 223

Consolidated Statement Consolidated Statement

of Financial Position of Financial Position (continued)

Years ended 31 Years ended 31 December December (In millions of Rubles) Note 2018 2017 (In millions of Rubles) Note 2018 2017

Assets Non-current assets Non-current liabilities Property and equipment 3.1 224,666 220,705 Loans and borrowings 3.4 288,262 212,097 Intangible assets, other than goodwill 3.2.1 81,026 128,140 Other non-current financial liabilities 3.4 4,713 4,540 Goodwill 3.2.2 30,549 73,218 Non-current non-financial liabilities 3.7 3,895 10,181 Investments in associates and joint ventures 3.3,5.1 73,265 28,567 Provisions 3.9 5,117 4,378 Non-current financial assets 3.4 3,829 3,585 Deferred tax liabilities 2.4 26,016 28,792 Non-current non-financial assets 3.7 7,531 4,558 Total non-current liabilities 328,003 259,988 Deferred tax assets 2.4 2,064 3,829 Total non-current assets 422,930 462,602 Current liabilities Trade and other payables 3.4 53,235 50,535 Current assets Loans and borrowings 3.4 39,232 52,013 Inventory 3.6 9,885 10,045 Other current financial liabilities 3.4 145 3,853 Current non-financial assets 3.7 7,766 7,446 Current non-financial liabilities 3.7 17,661 29,186 Prepaid income taxes 2.4 4,275 2,586 Income taxes payable 2.4 1,330 843 Trade and other receivables 3.5 29,137 26,520 Total current liabilities 111,603 136,430 Other current financial assets 3.4 7,955 16,097 Cash and cash equivalents 3.4.1 27,214 36,147 Total equity and liabilities 510,009 561,727 Assets held for sale 3.8 847 284 Total current assets 8 7,07 9 99,125

Total assets 510,009 561,727 Chief Executive Officer Gevork Vermishyan

Equity and liabilities Equity Chief Accountant Lyubov Strelkina Equity attributable to equity holders of the Company 4 70,667 109,773 Non-controlling interests 5.1 (264) 55,536 Total equity 70,403 165,309 20 March 2019

The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 224 5. Financial Statements and Appendix Consolidated Statement of Changes in Equity 225

Consolidated Statement of Changes in Equity

Attributable to equity holders of the Company Ordinary shares Treasury shares Other capital Non- Number of Number of Capital Retained reserves controlling (In millions of Rubles) Note shares Amount shares Amount surplus earnings (Note 4) Total interests Total equity

As of 1 January 2017 620,000,000 526 24,299,033 (17,387) 12,567 129,890 (1,430) 124,166 (43) 124,123 Profit for the year — — — — — 4,551 — 4,551 774 5,325 Other comprehensive income/(loss) — — — — — — 267 267 (236) 31 Total comprehensive income — — — — — 4,551 267 4,818 538 5,356 Dividends 4 — — — — — (19,211) — (19,211) — (19,211) Dividends to non-controlling interests — — — — — — — — (172) (172) Equity-settled share-based compensation 5.2 — — — — — — — — 1,743 1,743 Acquisition of MGL 5.4 — — — — — — — — 54,900 54,900 Acquisition of MGL treasury shares — — — — — — — — (1,430) (1,430) As of 31 December 2017 620,000,000 526 24,299,033 (17,387) 12,567 115,230 (1,163) 109,773 55,536 165,309 Adjustment on initial application of IFRS 15, net of tax 1.5 — — — — — 1,366 — 1,366 — 1,366 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 subsidiaries 5.4 — — — — — — — — 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

The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 226 5. Financial Statements and Appendix Consolidated Statement of Cash Flows 227

Consolidated Statement Consolidated Statement

of Cash Flows of Cash Flows (continued)

Years ended 31 Years ended 31 December December (In millions of Rubles) Note 2018 2017 (In millions of Rubles) Note 2018 2017

Operating activities Investing activities Profit before tax from continuing operations 29,093 11,589 Purchase of property, equipment and intangible assets 3.1 (79,454) (61,748) Profit before tax from discontinued operations 5.1 15,768 2,580 Proceeds from sale of property and equipment 3.1 727 465 Profit before tax 44,861 14,169 Acquisition of subsidiaries, net of cash acquired 5.1,5.4 (8,029) (40,136) Adjustments to reconcile profit before tax to net operating cash flows: Proceeds from sale of subsidiaries, net of cash disposed 5.1 6,945 (43) Depreciation 3.1,3.8 50,553 57,341 Payment of deferred and contingent consideration — (1,444) Amortisation 3.2.1 20,869 17,642 Purchase of interest in associates and joint ventures 3.3,5.1 (2,414) (823) Loss on disposal of non-current assets 353 491 Net change in short-term deposits 4,810 (2,743) (Gain)/loss on financial instruments, net (1,108) 30 Net change in other deposits — 247 Foreign exchange loss, net 3.4.4 965 3,722 Loans granted 3.4 (71) (56) Share of loss of associates and joint ventures 3.3 2,962 2,205 Repayments of loans granted — 890 Impairment loss from Euroset 3.3 — 15,917 Interest received 1,747 2,152 Gain on disposal of discontinued operations 5.1 (18,208) — Dividends received from equity-accounted investments 19 18 Change in impairment allowance for receivables and other non-financial Net cash flows used in investing activities (75,720) (103,221) assets 3,602 2,680

Finance costs 25,942 24,321 Financing activities Finance income (1,899) (2,235) Proceeds from borrowings, net of fees paid 124,987 127,626 Equity-settled share-based compensation 5.2 2,239 1,743 Repayment of borrowings (70,370) (104,134) Other non-cash items 3 58 Interest paid (25,989) (24,588) Working capital adjustments: Purchase of outstanding shares 4 (76,700) — Decrease/(increase) in inventory 63 (665) Dividends paid to equity holders of the Company — (22,050) Increase in trade and other receivables (13,137) (4,687) Dividends paid to non-controlling interests (247) (172) (Increase)/decrease in current non-financial assets (3,554) 186 Purchase of MGL treasury shares — (1,430) Increase in trade and other payables 4,027 4,774 Finance lease payments (8) (33) Increase in current non-financial liabilities 4,478 6,617 Net cash flows used in financing activities (48,327) (24,781) Change in VAT, net (4,133) 880 Income tax refunded — 26 Net (decrease)/increase in cash and cash equivalents (14,019) 5,860 Income tax paid (8,850) (11,353) Net foreign exchange difference 5,086 (1,635) Net cash flows received from operating activities 110,028 133,862 Cash and cash equivalents at beginning of year 36,147 31,922 Cash and cash equivalents at end of year 3.4.1 27,214 36,147

The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 228 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 229

Foreign currency transactions are translated into could result in outcomes that require a material Notes to the Consolidated the functional currency using the exchange rates adjustment to the carrying amount of affected prevailing at the dates of the transactions or fair assets or liabilities in future periods. value measurement where items are re-measured Financial Statements to their fair value. Foreign exchange gains and In the process of applying the Group’s accounting losses resulting from the settlement of such policies, management has made various judgments. transactions and from the translation at year-end Those which management has assessed to have the exchange rates of monetary assets and liabilities most significant effect on the amounts recognised denominated in foreign currencies are recognised in in the consolidated financial statements have been the ‘Foreign exchange gain/(loss), net’ line in profit discussed in the individual notes for the related or loss. financial statement line items: revenue, income taxes, property and equipment, intangible assets, The assets and liabilities of foreign operations investments in associates and joint ventures, are translated into Rubles at the rate of exchange financial assets and liabilities, provisions, and prevailing on the reporting date and the statements business combinations. of comprehensive income are translated at the exchange rates prevailing on the dates of the The key assumptions concerning the future and 1. GENERAL 1.2. Basis of preparation transactions. The exchange differences arising other key sources of estimation uncertainty at the on the translation are recognised in other reporting date that have a significant risk These consolidated financial statements have been comprehensive income (‘OCI’). of causing a material adjustment to the carrying 1.1. About the Company prepared in accordance with International Financial amounts of assets and liabilities within the next Reporting Standards (‘IFRS’) as issued by the financial year are also described in the individual Public Joint Stock Company MegaFon (‘MegaFon’, International Accounting Standards Board (‘IASB’). 1.3. Basis of consolidation notes for the related financial statement line items the ‘Company’ and, together with its consolidated below. The Group based its assumptions and subsidiaries, the ‘Group’) is a company incorporated The consolidated financial statements have been The consolidated financial statements comprise estimates on the information available to it when under the laws of the Russian Federation and prepared on a historical cost basis, unless disclosed the financial statements of the Company and its the consolidated financial statements were registered in the Unified State Register of Legal otherwise. The consolidated financial statements subsidiaries as of 31 December 2018. prepared. Existing circumstances and assumptions Entities under number 1027809169585. Its registered are presented in millions of Rubles, except for per about future developments, however, may change office is at 41 Oruzheyniy lane, Moscow, 127006, share amounts which are in Rubles, unless otherwise Subsidiaries are consolidated from the date of due to market changes or circumstances arising Russian Federation. indicated. acquisition, being the date on which the Group that are beyond the control of the Group. Such obtains control, and continue to be consolidated changes are reflected in the assumptions when they MegaFon is a leading pan-Russian operator of The consolidated income statement for the year until the date when such control ceases. The occur. digital opportunities and offers a broad range of ended 31 December 2017 has been changed to financial statements of the subsidiaries are and digital services to retail present the discontinued operations separately prepared for the same reporting period as the customers, businesses, government clients and from continuing operations (Note 5.1). parent company, using consistent accounting 1.5. Significant accounting telecommunication services providers. policies. The consolidated financial statements were policies MegaFon lists its ordinary shares on the Moscow authorised for issue by the Company’s Chief Profit or loss and each component of OCI are Exchange under the symbol ‘MFON’. MegaFon Executive Officer (‘CEO’) and Chief Accountant attributed to the equity holders of the Company The significant accounting policies have been listed its ordinary shares represented by Global on 20 March 2019. and to the non-controlling interests (‘NCI’), even discussed in the individual notes for the related Depositary Receipts, or GDRs, on the London Stock if this results in the NCI having a deficit balance. financial statement line items. Exchange (‘LSE’) until 5 October 2018 when the listing was cancelled after the Group completed Foreign currency translation All intra-group assets and liabilities, equity, income, its purchase of 115,317,504 of the ordinary shares expenses and cash flows relating to transactions Changes in accounting policies and and GDRs (Note 4), representing 18.6% of the The Group’s consolidated financial statements are between members of the Group are eliminated in disclosures Company’s issued shares. The purchase price for presented in Rubles, which is also the functional full on consolidation. securities tendered was $9.75 for each ordinary currency of MegaFon and its principal subsidiaries. share and for each GDR. During 2018 the Group applied the following The functional currency of CJSC ‘TT mobile’, 1.4. Significant accounting amendments to accounting standards for the first As of 31 December 2018, the majority shareholder the Company’s 75% owned subsidiary in Tajikistan, time (a number of other new standards are effective of the Company is AF Telecom Holding LLC, is the US dollar as a majority of its revenues, costs, judgments, estimates and from 1 January 2018 but they do not have an effect a company incorporated in the Russian Federation. property and equipment purchases, debt and trade assumptions on the Group’s consolidated financial statements): The ultimate controlling party is USM Holding liabilities is either priced, incurred, payable Company LLC, a company incorporated in the or otherwise measured in US dollars. The preparation of these consolidated financial Russian Federation, which is controlled by a group statements required management to make of individuals, none of whom acting alone has the judgments, estimates and assumptions that affect power to direct the activities of the Group at his own the amounts reported in the consolidated statement discretion and for his own benefit. of financial position, the consolidated income statement, the consolidated statement of other comprehensive income and the accompanying disclosures. Subsequent revisions or corrections made to these assumptions and estimates hereafter 230 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 231

1.5. Significant accounting policies The Group, where it acts as a lessee, will recognise Improvements to IFRSs - Amendments to IFRS (continued) new assets and liabilities for its operating leases 3, IFRS 11, IAS 12 and IAS 23 of telecommunication infrastructure sites, retail outlets, administrative facilities and other identifiable The amendments issued as a result of the Annual assets. The nature of expenses related to those Improvements to IFRSs 2015-2017 Cycle introduced IFRS 15 Revenue from Contracts with The expected contract term is estimated based on leases will change because the Group will recognise relatively minor changes to clarify guidance in Customers historical information adjusted for any significant a depreciation charge for right-of-use assets and existing standards. The amendments are effective for trends observed in the market and the Group’s interest expense on lease liabilities. annual periods beginning on or after 1 January 2019. IFRS 15 is a comprehensive revenue recognition marketing strategies. The Group does not expect these amendments to guidance that replaces the following previous Previously, the Group recognised operating lease have a material impact on the Group’s consolidated revenue recognition standards: International IFRS 9 Financial Instruments expense on a straight-line basis over the term of the financial statements. Accounting Standards (‘IAS’) 18, Revenue, IAS 11, lease, and recognised assets and liabilities only to Construction Contracts, International Financial IFRS 9 sets out requirements for recognising and the extent that there was a timing difference between Conceptual Framework for Financial Reporting Reporting Interpretations Committee (‘IFRIC’) measuring financial assets, financial liabilities and actual lease payments and the expense recognised. Interpretation 13, Customer Loyalty Programmes, some contracts to buy or sell non-financial items. In March 2018 the IASB issued a comprehensive set IFRIC 15, Agreements for the Construction of This standard replaces IAS 39, Financial Instruments: No significant impact is expected for the Group’s of concepts for financial reporting replacing the Real Estate, IFRIC 18, Transfers of Assets from Recognition and Measurement. finance leases (Note 5.8). previous version of the Conceptual Framework. Customers, and Standard Interpretations Committee The revised Conceptual Framework will be effective interpretation SIC-31, Revenue – Barter Transactions IFRS 9 introduced a number of changes to The Group does not expect a significant impact from from 1 January 2020 – with earlier application Involving Advertising Services. accounting for financial instruments, including applying IFRS 16 to those leases where it acts as a permitted – for companies that use it to develop changes to the classification and measurement lessor. accounting policies when no IFRS Standard applies The core principle of IFRS 15 is that an entity should of financial assets, to financial assets impairment to a particular transaction. The Group will apply recognise revenue in respect of the transfer of methodology involving expected credit loss models, The Group does not expect a significant impact on the revised Conceptual Framework from the effective promised goods or services to customers in an and to hedge accounting. the opening retained earnings. The Group concluded date and does not expect it to have a material impact amount that reflects the consideration to which the that it is not practicable to provide an estimate of on the Group’s consolidated financial statements. entity expects to be entitled in exchange for those The adoption of IFRS 9 did not have a material the impact that IFRS 16 will have on its assets and goods or services. impact on the Group’s consolidated financial liabilities as the Group has not finalised the testing Definition of a Business (Amendments statements. and assessment of controls over its new IT solutions to IFRS 3) The Group has applied IFRS 15 using the modified for accounting for leases. retrospective method with respect to contracts that In October 2018 the IASB issued Amendments are not completed at the date of initial application 1.6. Standards issued but IFRIC 23 Uncertainty over Income Tax to IFRS 3, Business combinations, clarifying the (1 January 2018) which permits it, instead of Treatments current definition of a business to enable entities recasting revenues and expenses for all prior periods, not yet effective to determine whether a transaction is a business to simply recognise an adjustment to the opening In June 2017 the IASB issued IFRIC 23, Uncertainty combination or an asset acquisition. amount of retained earnings at 1 January 2018. The standards and interpretations that are issued over Income Tax Treatments, which clarifies and applicable to the Group, but not yet effective as requirements in IAS 12 by specifying how to reflect The Amendments are effective for annual periods The key impact of the transition to IFRS 15 is an of the date of issuance of the Group’s consolidated the effects of uncertainty in accounting for income beginning on or after 1 January 2020. The Group increase in customer acquisition costs assets of financial statements, are disclosed below. The Group taxes. The Interpretation is effective for annual does not expect these amendments to have a 1,707, an increase in deferred tax liabilities of 341 and intends to adopt these standards when they become periods beginning on or after 1 January 2019. material impact on the Group’s consolidated a corresponding increase in the opening retained effective. The Group does not expect the Interpretation to financial statements. earnings of 1,366 at 1 January 2018. See Note 2.1 for have a material impact on the Group’s consolidated more details on the impact from the implementation IFRS 16 Leases financial statements. Definition of Material (Amendments of IFRS 15 and additional disclosures. to IAS 1 and IAS 8) In January 2016 the IASB issued IFRS 16, Leases, Long-Term Interests in Associates and Joint The details of the new significant accounting which sets out the principles for the recognition, Ventures - Amendments to IAS 28 In October 2018 the IASB issued a clarified definition policies and the nature of the changes to previous measurement, presentation and disclosure of leases of ‘material’ in the amendments to IAS 1, Presentation accounting policies are presented below. and replaces previous guidance on leases. The In October 2017 the IASB issued Amendments to IAS of Financial Statements, and IAS 8, Accounting standard requires lessees to present right-of-use 28, Investments in Associates and Joint Ventures, Policies, Changes in Accounting Estimates and The Group pays its dealers commissions for assets and lease liabilities on the balance sheet for clarifying that companies should account for long- Errors, and issued practical guidance on applying the connecting new customers. all leases (with limited exceptions). term interests in an associate or joint venture to concept of materiality. which the equity method is not applied, using IFRS 9. The Amendments will be effective for annual periods Before the adoption of IFRS 15, revenue sharing The Group will adopt IFRS 16 from 1 January 2019, The Amendments will be effective for annual periods beginning on or after 1 January 2020 with earlier commissions were recognised evenly during the the date when the Standard becomes effective. beginning on or after 1 January 2019. implementation permitted. The Group will apply services rendering period, generally a twelve-month The Group will apply the Standard using the The Group does not expect these amendments to these Amendments from the effective date and does period from the date a new subscriber is activated. modified retrospective transition method without have a material impact on the Group’s consolidated not expect them to have a material impact on the With the implementation of IFRS 15, the Group restating comparative amounts and recognising the financial statements. Group’s consolidated financial statements. treated certain dealer commissions as representing cumulative effect at the initial application, if any, incremental costs of obtaining a customer contract, as an adjustment to the opening balance of retained and deferred such costs so as to be recognised over earnings at 1 January 2019. the expected contract term. 232 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 233

2. INCOME STATEMENT number of awards being obtained. The portion of Wireline revenue criteria for transferring control of a good or service consideration received is allocated to the awards over time are met, including the Group’s having based on their relative standalone selling price and The Group earns wireline revenues for usage of its an enforceable right to payment for performance 2.1. Revenue deferred until the award credits are redeemed or fixed-line network, which include payments from completed to date. Otherwise, revenue is recognised expire. The Group estimates the standalone selling individual, corporate and government subscribers at a point in time when it is entitled to payment and price of awards by applying a statistical analysis. for local and long-distance telecommunications control of the good or service has been transferred Accounting policies Inputs to the models include making assumptions and data transfer services. Charges are based upon to the customer. An expected loss on a contract is about expected redemption rates, the mix of services usage (e.g., minutes of traffic processed), period of recognised immediately in profit or loss. Revenue is measured based on the consideration that will be available for redemption in the future and time (e.g., monthly service fees) or other established specified in a contract with a customer and represents customer preferences. fee schedules. Wireline revenues also include Sales of equipment and accessories amounts receivable for the sale of goods or services interconnection charges from wireless and wireline in the ordinary course of the Group’s activities, net (b) Multiple element arrangements operators for terminating calls on the Group’s Revenue from the sale of equipment and accessories of value added taxes, returns and discounts. wireline networks. Revenue from service contracts is recognised when the customer obtains control of The Group enters into multiple element arrangements is recognised when the services are rendered. Billings the goods, usually on their delivery. Revenue is recognised when (or as) the Group satisfies in which a customer may purchase a combination received in advance of service being rendered are a performance obligation by transferring a promised of equipment (e.g. handsets) and telecommunication deferred and recognised as revenue as the service good or service to a customer (which is when the services (e.g. airtime, data, and other services). is rendered. IFRS 15 customer obtains control of that good or service). The Group allocates consideration received from Upfront payments received for connection of new subscribers to the separate performance obligations Construction contracts revenue The following tables summarise the impacts of customers, installation of infrastructure connection based on their standalone selling prices. Revenue adopting IFRS 15 on the Group’s consolidated services are deferred and recognised over the allocated to the delivered equipment and related costs The Group has contracts with customers statement of financial position as of 31 December estimated average customer contract life. are recognised in the accompanying consolidated for installation of network equipment for a fixed 2018 and its consolidated income statement for the income statement at the time of sale provided that fee, which cannot exceed the costs incurred plus year ended 31 December 2018 for each of the line other conditions for revenue recognition are met. a certain margin. Revenue under the contracts is items affected. There was no material impact Service revenue Amounts allocated to telecommunication services are recognised over time, for example by reference on the Group’s consolidated statement of cash flows deferred and recognised as revenue over the period to the stage of completion as defined in the contract for the year ended 31 December 2018. Service revenue is generally recognised when the of rendering the services. Allocation of each separable and accepted by the customer, when any of the services are rendered. component of a bundled offer based on the individual The impact on the consolidated income statement components’ standalone selling prices involves is presented below: The revenue from provision of content is presented net estimates and management’s judgment. of related costs when the Group acts as an agent of the content providers while gross revenues and related (c) Roaming rebates As of 31 December 2018 costs are recorded when the Group is the primary obligor in the arrangement. The reporting of revenue The Group enters into roaming discount agreements Amounts on a net versus gross basis, depending on an analysis with a number of wireless operators. According to without adoption of the Group’s involvement as either principal or agent, the agreements the Group is committed to provide As reported Adjustments of IFRS 15 involves management judgment. and entitled to receive a discount that is generally dependent on the volume of roaming traffic generated Wireless revenue by the respective subscribers. The Group uses actual Assets traffic data to estimate the amounts of rebates to be Non-current non-financial assets 7,531 (4,617) 2,914 The Group earns wireless revenues for usage of its received or granted. Such estimates are adjusted and Current non-financial assets 7,766 404 8,170 cellular system, which include airtime charges from updated on a regular basis. The Group accounts for contract and prepaid subscribers, monthly contract discounts received as a reduction of roaming expenses Total assets 510,009 (4,213) 505,796 fees, interconnect fees from other wireless and and rebates granted as a reduction of roaming wireline operators, roaming charges, data transfer revenue. Equity and liabilities charges, and charges for value added services Equity (‘VAS’). Interconnect revenue includes revenues from The Group takes into account the terms of the various wireless and wireline operators that was earned from roaming discount agreements in order to determine Equity attributable to equity holders of the Company 70,667 (2,906) 67,761 terminating traffic from other operators. Roaming the appropriate presentation of the amounts NCI (264) — (264) revenues include revenues from customers who roam receivable from and payable to its roaming partners Total equity 70,403 (2,906) 6 7,4 9 7 outside their selected home coverage area and in its consolidated statement of financial position. revenues from other mobile carriers for roaming by Amounts of rebates earned from and given to roaming Non-current liabilities their customers using the network of the Group. VAS partners are included in trade and other receivables include SMS, provision of content and media and and payables, respectively, in the accompanying Deferred tax liabilities 26,016 (727) 25,289 commissions for mobile payments. consolidated statement of financial position. Total non-current liabilities 328,003 (727) 327,276

(a) Loyalty programme Management has to make estimates relating to Current liabilities revenue recognition, relying to some extent on The Group operates a loyalty programme which information from other operators on the values of Trade and other payables 53,235 (580) 52,655 allows customers to accumulate awards for usage services delivered. Management also makes estimates Total current liabilities 111,603 (580) 111,023 of the Group’s cellular network. The awards can then of the final outcome in instances where the other Total equity and liabilities 510,009 (4,213) 505,796 be redeemed for free services, subject to a minimum parties dispute the amounts charged. 234 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 235

2.1. Revenue (continued) 2.2. Sales and marketing 2.4. Income taxes expenses Accounting policies

Current income tax The impact on the consolidated income statement is presented below: Accounting policies The tax expense for the year comprises current Dealer commissions for connection of new and deferred tax. Tax is recognised in profit or For the year ended 2018 subscribers which represent incremental costs of loss, except to the extent that it relates to items Amounts obtaining a customer contract are deferred and recognised in OCI or directly in equity. In this case, without recognised in sales and marketing expenses over the the tax is recognised in OCI or directly in equity, adoption of expected contract term. Other dealer commissions respectively. As reported Adjustments IFRS 15 are expensed as incurred. The current income tax is calculated on the basis of the tax laws enacted or substantively enacted Operating expenses 2.3. General and admini­ at the reporting date in the countries in which the Company and its subsidiaries operate and Sales and marketing expenses 19,574 1,925 21,499 strative expenses generate taxable income. Management periodically Total operating expenses 2 7 7,0 9 1 1,925 279,016 evaluates positions taken in tax returns with respect Advertising costs are expensed as incurred. to situations in which the applicable tax regulation Operating profit 58,450 (1,925) 56,525 is subject to interpretation. If the applicable tax Included in general and administrative expenses for regulation is subject to interpretation, the Company the years ended 31 December are: establishes a provision where appropriate on the Profit before tax from continuing operations 29,093 (1,925) 27,168 basis of amounts expected to be paid to the tax Income tax expense 7,823 (385) 7,438 2018 2017 authorities. Profit for the year from continuing operations 21,270 (1,540) 19,730 Profit for the year 32,854 (1,540) 31,314 Deferred income tax Employee benefits and related social charges 34,125 30,807 Deferred income tax is recognised using the liability Operating lease expense 17,740 17,717 method, on temporary differences arising between The impact from adopting IFRS 15 on the Group’s As at 31 December 2018, the Group had 13,847 the tax bases of assets and liabilities and their basic and diluted EPS is an increase of 3 Rubles per (2017: 16,309) of contract liabilities from contracts carrying amounts in the financial statements. share. with customers included in current non-financial State pension funds However, deferred income tax is not accounted liabilities and 3,777 (2017: 2,942) of contract for if it arises from initial recognition of an asset As at 31 December 2018, the Group had 4,617 of liabilities included in non-current non-financial The Group contributes to local state pension or liability in a transaction other than a business deferred customer acquisition costs included in non- liabilities. The contract liabilities decreased funds and social funds on behalf of its employees. combination that at the time of the transaction current non-financial assets. The amount of costs since last year mainly as a result of completion The contributions are expensed as incurred. affects neither accounting nor taxable profit or loss. amortised into sales and marketing expenses for of a significant construction contract in 2018; Contributions for the years ended 31 December Deferred income tax is determined using tax rates the year ended 31 December 2018 is 5,552. accordingly, the respective upfront fees were 2018 and 2017 were 5,811 and 5,671, respectively. and laws that have been enacted or substantively recognised in revenue during 2018. The contract enacted at the reporting date and are expected to As at 31 December 2018, the Group had 20,846 liabilities included in non-current financial liabilities apply when the related deferred income tax asset of receivables (2017: 13,870) and nil contract assets as at 31 December 2018 primarily relate to deferred is realised or the deferred income tax liability is from contracts with customers included in trade and upfront fees for infrastructure services. These are settled. other receivables. expected to be recognised as revenue over a term of ten years which is the average contract term. Deferred income tax assets are recognised only to the extent that it is probable that future taxable The amount of 16,309 recognised in contract profit will be available against which the temporary liabilities at the beginning of the year has been differences can be utilised. Deferred income tax recognised as revenue for the year ended 31 is provided on temporary differences arising on December 2018. investments in subsidiaries and associates, except for deferred income tax liability where the timing of The Group used the practical expedient in IFRS the reversal of the temporary difference is controlled 15 and did not disclose the information about its by the Group and it is probable that the temporary unsatisfied performance obligations for contracts difference will not reverse in the foreseeable future. that have an original expected duration of one year or less. 236 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 237

2.4. Income taxes (continued) Deferred tax relates to the following:

Statement of financial position as of Income statement 31 December for the years Significant estimates or unforeseen transactions that could affect tax balances. The expected resolution of uncertain tax 2018 2017 2018 2017 The Group assesses the recoverability of deferred positions is based upon management’s judgment tax assets based on estimates of future earnings. of the likelihood of sustaining a position taken through tax audits, tax courts and/or arbitration, Property and equipment (10,718) (16,050) (5,380) (721) Actual Group income tax receipts and payments if necessary. Circumstances and interpretations Intangible assets (14,892) (18,964) (4,072) 3,311 could differ from the estimates made by the of the amount due or likelihood of a position being Derivative financial instruments (59) 770 829 186 Group as a result of changes in tax legislation sustained may change during the settlement process. Investments in associates and subsidiaries (3,067) (146) 5,751 (7) Tax loss carry-forwards 2,605 4,009 1,404 (382) Revenue recognition 2,059 2,793 734 (2,274) Disclosures Accrued employee benefits 846 1,279 433 (1,086) Accrued expenses 1,181 1,504 323 (493) The following presents the significant components of the Group’s income tax expense for the years ended 31 Dealers’ commissions (929) — 588 — December: Other movements and temporary differences (978) (158) 820 515 2018 2017 Deferred tax expense 1,430 (951) Net deferred tax liabilities (23,952) (24,963)

Current income tax: Reflected in the consolidated statement of financial position as follows: Current income tax charge 5,762 7,774 Deferred tax assets 2,064 3,829 Adjustments recognised for current tax of prior periods 631 (117) Deferred tax liabilities (26,016) (28,792) Deferred tax 1,430 (951) Income tax expense 7, 8 2 3 6,706 The Group recognises deferred tax assets in In order to utilise tax losses the Group is able to respect of tax loss carry-forwards to the extent implement appropriate tax planning strategies The reconciliation between the average effective income tax rate and tax expense calculated at domestic that realisation of tax losses against future taxable depending on the results of these subsidiaries in statutory rates applicable to individual Group entities is as follows: profit is probable. Deferred tax assets related to tax subsequent periods. The tax planning strategies losses of the Group’s subsidiaries are recognised may include, among others, merging of the 2018 2017 based on the tax planning opportunities that would respective subsidiaries with MegaFon which is be implemented, if necessary, to prevent tax losses expected to have sufficient pretax income to utilise from not being used. the accumulated tax losses of these subsidiaries. Statutory income tax rate 20.0% 20.0% Non-deductible expenses 6.9% 11.9% Deferred tax assets in respect of the tax losses are Unrecognised deferred tax assets in the attributable to the following subsidiaries: consolidated statement of financial position Effect of intra-group transactions 0.5% 2.0% amounted to 3,983 as of 31 December 2018 Effect of income tax preferences (0.3%) (3.3%) 2018 2017 (2017: 3,859). Unrecognised deferred tax assets Euroset impairment (Note 3.3) — 27.5% arose on the acquisition of subsidiaries and Other (0.2%) (0.2%) associates due to the difference between the Scartel 1,299 1,837 accounting and tax bases of the subsidiaries and Effective income tax rate 26.9% 5 7.9 % MegaFon Retail 1,181 1,375 joint ventures acquired and are not expected to be realised due to lack of appropriate taxable profits. The effect of intragroup transactions, in the table above, represents taxable intra-group income. Other 125 797 Balance at end of year 2,605 4,009 The temporary differences associated with investments in subsidiaries for which a deferred tax liability has not been recognised amounted to nil as of 31 December 2018 (2017: 75,984). 238 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 239

2.4. Income taxes (continued) 3. ASSETS AND LIABILITIES At the time of retirement or other disposition of property or equipment, the cost and accumulated depreciation are removed from the accounts and any 3.1. Property and resulting gain or loss is recorded in profit or loss.

Reconciliation of net deferred tax liabilities for the years ended 31 December is as follows: equipment The Group, jointly with other operators, plans, develops and uses telecommunication networks. 2018 2017 Accounting policies The activities are accounted for as joint operations. Accordingly, the Group records its share of the Property and equipment is stated at cost, less jointly held assets and its share of the jointly incurred Balance at beginning of year 24,963 19,613 accumulated depreciation and impairment, expenses. Tax expense/(benefit) during the year 1,430 (951) if any. Cost includes all costs directly attributable to bringing the asset to the location and condition Finance leases Translation adjustment of foreign operations 48 (73) for its intended use. Depreciation is recorded Discontinued operations (3,222) 6,337 on a straight-line basis over the estimated useful life Finance leases, that is, leases that transfer Change of accounting policy (IFRS 15) 341 — of the asset. substantially all the risks and benefits incidental Deferred tax on cash flow hedges in OCI (Note 3.4) 392 37 to ownership of the leased item to the Group, are Depreciation expenses are based on management’s capitalised at the commencement of the lease at the Balance at end of year 23,952 24,963 estimates of residual value, the depreciation method fair value of the leased property or, if lower, at the used and the useful lives of property and equipment. present value of the minimum lease payments. Lease Estimates may change due to technological payments are apportioned between finance charges developments, competition, changes in market and reduction of the lease liability so as to achieve 2.5. Earnings per share Diluted earnings per share are computed by dividing conditions and other factors, and may result in a constant rate of interest on the remaining balance adjusted net profit available to shareholders by changes in estimated useful lives and depreciation of the liability. Finance charges are recognised in the weighted-average number of ordinary shares charges. The actual economic lives of long-lived finance costs in profit or loss. Accounting policies outstanding during the period increased to include assets may be different from the estimated useful the number of additional ordinary shares that would lives. A change in estimated useful lives is accounted A leased asset is depreciated over the lesser Basic earnings per share (‘EPS’) are computed be issued on the conversion of all the potentially for prospectively as a change in accounting estimate. of the lease term or the useful life of the asset. by dividing net profit available to shareholders dilutive securities into ordinary shares. Potentially of the Company by the weighted-average number dilutive securities include outstanding stock options The estimated useful lives are as follows: The Group has entered into long-term leases of ordinary shares outstanding for the period. and convertible debt instruments. of telecommunication assets. The Group has determined that, based on an evaluation of the terms and conditions of the arrangements, such as the lease term constituting a major part of the economic Disclosures Telecommunications network 3 to 20 years life of the asset, it obtains all the significant risks and Buildings and structures 7 to 50 years rewards of ownership of these assets. Accordingly, The following table sets forth the computation of basic and diluted EPS for the years ended 31 December: it accounts for the contracts as finance leases. Vehicles, office and other equipment 3 to 7 years 2018 2017 At the commencement of the lease term the Group Leasehold improvements are depreciated over the recognises finance leases as assets and liabilities shorter of the lease term or the estimated useful lives at the present value of the minimum lease payments. Numerator: of the assets. The lease term includes renewals when In determining the present value of the minimum Profit attributable to equity holders of the Company 35,170 4,551 such renewals are reasonably certain. lease payments, assumptions and estimates are made in relation to discount rates, the expected costs Denominator: The assets’ residual values, useful lives and for services and taxes to be paid by and reimbursed depreciation methods are reviewed, and adjusted to the lessor, and long-term inflation forecasts where Weighted-average ordinary shares outstanding 555,386,284 595,700,967 if appropriate, at each reporting date. the lease agreements include provisions to adjust the EPS – basic and diluted, Rubles 63 8 lease payments for inflation. Repair and maintenance costs are expensed as There were no potentially dilutive securities outstanding at 31 December 2018 or 2017. incurred. The cost of major renovations and other Capitalised borrowing costs subsequent expenditure is included in the carrying amount of the asset or recognised as a separate Borrowing costs directly attributable to the asset, as appropriate, only when it is probable that acquisition, construction or production of a future economic benefits associated with the item will qualifying asset during the construction phase that flow to the Group and the cost of the item can necessarily takes a substantial period of time are be measured reliably. capitalised as part of property and equipment until the asset is ready for use. All other borrowing costs The present value of the expected cost for the are expensed in the period in which they occur. decommissioning of an asset after its use is included Borrowing costs consist of interest, related foreign in the cost of the respective asset. Please refer to exchange differences, and other costs that the Group Note 3.9 for further information about the provision incurs in connection with the borrowing of funds. for decommissioning liabilities. 240 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 241

Vehicles, 3.1. Property and equipment Telecom- Buildings office (continued) munications and and other Construction network structures equipment in-progress Total

Impairment impairment loss is reversed only if there has been a change in the assumptions used to determine the The Group tests long-lived assets, other than goodwill, asset’s recoverable amount since the last impairment Additions — — — 59,702 59,702 for impairment when circumstances indicate there loss was recognised. The reversal is limited so that Acquisitions (Note 5.4) — — 5 694 699 may be a potential impairment. the carrying amount of the asset does not exceed its Disposals (12,175) (494) (1,455) (14) (14,138) recoverable amount, nor exceed the carrying amount Put into use 41,315 2,318 2,664 (46,297) — An impairment loss is recognised for the amount that would have been determined, net of depreciation, by which the asset’s carrying amount exceeds its had no impairment loss been recognised for the asset Discontinued operations (Note 5.1) (6,145) (1,400) (433) (1,140) (9,118) recoverable amount. The recoverable amount is the in prior years. Such reversal is recognised in profit or higher of (1) an asset’s fair value less costs to sell and loss. Reclassified to AHFS (Note 3.8) — — (16) — (16) (2) value in use. The recoverable amount is determined Translation 1,656 532 779 65 3,032 for each individual asset, unless the asset does not Estimating recoverable amounts of assets is based on 31 December 2018 476,449 80,308 28,162 32,741 617,660 generate cash inflows that are largely independent management’s evaluations, including estimates of those from other assets or groups of assets. of applicable market rates, if the market approach is used, or future cash flows, discount rates, terminal Depreciation as of 1 January 2017 (290,945) (34,458) (24,308) — (349,711) Impairment losses relating to continuing operations growth rates, and assumptions about future market are recognised in profit or loss in the expense conditions, if the income approach is used. Charge for the year (49,980) (4,774) (2,587) — (57,341) categories which are consistent with the function Disposals 24,668 231 2,964 — 27,863 of the impaired asset. Non-current assets held for sale Reclassified to AHFS — 350 — — 350 Reclassified to intangible For assets other than goodwill, an assessment is Non-current assets are classified as assets held for assets (Note 3.2.1) 20 908 — 705 — 21 613 made at each reporting date to determine whether sale (‘AHFS’) and stated at the lower of carrying Translation 277 63 92 — 432 there is an indication that previously recognised amount and fair value less costs to sell if their carrying impairment losses no longer exist or have decreased. amount is to be recovered principally through a sale 31 December 2017 (295,072) (38,588) (23,134) — (356,794) If such indication exists, the Group estimates the transaction rather than through continuing use and Charge for the year (43,381) (4,947 ) (2,225) — (50,553) asset’s recoverable amount. A previously recognised the sale is considered highly probable. Disposals 11,944 323 1,411 — 13,678 Discontinued operations (Note 5.1) 2,601 248 150 — 2,999 Disclosures Reclassified to AHFS (Note 3.8) — — 3 — 3 Translation (1,416) (312) (599) — (2,327) Property and equipment is as follows: 31 December 2018 (325,324) (43,276) (24,394) — (392,994) Vehicles, Telecom- Buildings office Net book value: munications and and other Construction 31 December 2017 156,726 40,764 3,484 19,731 220,705 network structures equipment in-progress Total 31 December 2018 151,125 37,032 3,768 32,741 224,666

During the year ended 31 December 2017 the Group Cost as of 1 January 2017 463,713 76,334 28,179 18,640 586,866 reclassified its billing system and similar software Additions — — — 52,414 52,414 from property and equipment to intangible assets Finance leases as a result of the technological changes in the Acquisitions (Note 5.4) 2,451 636 215 538 3,840 system and software (Note 3.2.1). The carrying value of buildings and structures held Disposals (24,932) (318) (3,034) (398) (28,682) under finance leases at 31 December 2018 was 3,162 Put into use 44,308 3,469 2,198 (49,975) — Included in construction in-progress are advances (2017: 3,432). Leased assets are pledged as security Reclassified to AHFS — (634) — — (634) to suppliers of network equipment of 1,607 and 857 for the related finance lease liabilities. Reclassified to intangible as at 31 December 2018 and 2017, respectively. assets (Note 3.2.1) (33,349) — (809) (1,384) (35,542) Capitalised borrowing costs Assets purchased under certain contracts with Translation (393) (135) (131) (104) (763) deferred payment terms in the amount of 129 Capitalised borrowing costs were 1,889 and 1,752 31 December 2017 451,798 79,352 26,618 19,731 577,499 (2017: 332) are pledged as security for the related for the years ended 31 December 2018 and 2017, liabilities. respectively. The rate used to determine the amount of borrowing costs eligible for capitalisation was 9.3% and 9.5% for the years ended 31 December 2018 and 2017, respectively. 242 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 243

Operating Trade- 3.2. Intangible assets All intangible assets are amortised on a straight-line licences marks Other in- basis over the following estimated useful lives: and fre- Custom- and Other tangible quencies er base patents Games software assets Total 3.2.1. Intangible assets, other than goodwill Operating licences and frequencies 10 to 20 years Additions 1,407 118 725 1,413 20,604 74 24,341 Accounting policies Customer base 3 to 19 years Acquisitions (Note 5.4) — — — — 416 2,073 2,489 Trademarks and patents 7 to 20 years Disposals (535) (162) (35) (36) (4,334) (259) (5,361) Intangible assets acquired separately are measured Other software 1 to 5 years Discontinued operations on initial recognition at cost. The cost of intangible Other intangible assets 1 to 10 years (Note 5.1) — (22,402) (23,178) (15,171) (4,586) (2,061) (67,398) assets acquired in a business combination is their fair Reclassified to AHFS (Note 3.8) — — — — (462) — (462) value as of the date of acquisition. Following initial recognition, intangible assets are carried at cost less Amortisation expenses are based on management’s Translation 75 — — 287 — 101 463 accumulated amortisation and impairment, if any. judgment as to the amortisation method to be used 31 December 2018 81,890 4,043 720 — 66,937 10,788 164,378 Intangible assets consist principally of operating and its estimates of the useful lives of the intangible licences, frequencies, customer base and software. assets. Estimates may change due to technological Amortisation developments, competition, changes in market as of 1 January 2017 (28,811) (2,815) (597) — (11,065) (3,124) (46,412) Software development activities involve a plan or conditions and other factors, and may result in Charge for the year (4,392) (3,757) (2,300) (2,197) (3,807) (1,189) (17,642) design for the production of new or substantially changes in estimated useful lives and amortisation Disposals 510 105 54 — 2,472 485 3,626 improved products and processes. Development charges. Critical estimates of useful lives of intangible Reclassified from property expenditure is capitalised only if development costs assets are impacted by estimates of average customer and equipment (Note 3.1) — — — — (21,613) — (21,613) can be measured reliably, the product or process relationship based on churn, remaining licence is technically and commercially feasible, future periods and expected developments in technology and Translation 19 — — (124) — (20) (125) economic benefits are probable, and the Group markets. The actual economic lives of the assets may 31 December 2017 (32,674) (6,467) (2,843) (2,321) (34,013) (3,848) (82,166) intends to and has sufficient resources to complete be different from the estimated useful lives. A change development and to use or sell the asset. in estimated useful lives is accounted for prospectively Charge for the year (4,414) (1,919) (1,196) (1,062) (11,502) (776) (20,869) as a change in accounting estimate. Disposals 467 162 35 27 4,318 259 5,268 The useful lives of intangible assets are assessed as either finite or indefinite. The Group does not have Impairment Discontinued operations (Note 5.1) — 4,971 3,350 3,479 2,130 628 14,558 intangible assets with indefinite useful lives, other than goodwill. Assets that are subject to amortisation are reviewed Reclassified to AHFS (Note 3.8) — — — — 83 — 83 for impairment whenever events or changes in Translation (11) — — (123) — (92) (226) circumstances indicate that the carrying amount may 31 December 2018 (36,632) (3,253) (654) — (38,984) (3,829) (83,352) not be recoverable. See Note 3.1 for further description of the accounting policies for impairment testing of non-financial assets. Net book value: 31 December 2017 48,269 20,022 20,365 11,186 21,286 7,012 128,140 Disclosures 31 December 2018 45,258 790 66 — 27,953 6,959 81,026

Intangible assets, other than goodwill, are as follows: Weighted-average remaining amortisation period, years 10 — — — 2 9 4 Operating Trade- licences marks Other in- and fre- Custom- and Other tangible quencies er base patents Games software assets Total Operating licences and frequencies provide the These licences are integral to the wireless Group with the exclusive right to utilise certain operations of the Group and any inability to extend radio frequency spectrum to provide wireless existing licences on the same or comparable terms communication services. could materially affect the Group’s business. While Cost as of 1 January 2017 79,693 4,194 719 — 15,797 7,304 107,707 operating licences are issued for a fixed period, Operating licences primarily consist of renewals of these licences previously had occurred Additions 1,808 105 50 1,016 3,239 1,223 7,441 • several 2G licences, routinely and at nominal cost. The Group believes Acquisitions (Note 5.4) — 22,295 22,493 12,151 4,586 1,456 62,981 • a nationwide 3G licence, that there are currently no legal, regulatory, Reclassified from property • a nationwide 4G licence to use 2.5–2.7 GHz contractual, competitive, economic or other factors and equipment (Note 3.1) — — — — 34,158 1,384 35,542 spectrum (10x10 MHz band), and that could result in delays in licence renewal, Disposals (539) (105) (54) — (2,481) (534) (3,713) • a nationwide 4G licence to use 2.5–2.7 GHz or even an outright refusal to renew. Translation (19) — — 340 — 27 348 spectrum (30x30 MHz band). Nationwide 3G and 4G licences require the 31 December 2017 80,943 26,489 23,208 13,507 55,299 10,860 210,306 Company to meet certain conditions, including capital commitments and coverage requirements (Note 5.8). 244 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 245

3.2. Intangible assets (continued) 3.2.3. Goodwill impairment In assessing whether goodwill has been impaired, the 3.3. Investments in carrying values of the CGUs (including goodwill) were Accounting policies compared with their estimated recoverable amounts. associates and joint ventures Goodwill is not subject to amortisation and is tested As a result of the annual test, no impairment of goodwill Neosprint annually for impairment as of 1 October or more was identified in 2018. Accounting policies frequently whenever events or changes in In April 2018 the Group acquired spectrum in circumstances indicate that the carrying amount may Integrated telecommunication services Investments in associates and joint ventures which the 3.4GHz-3.6GHz band for Moscow through not be recoverable. are jointly controlled entities are accounted for using the purchase of a 100% interest in LLC Neosprint Over the last few years the Broadband business the equity method of accounting and are initially (‘Neosprint’). The Group’s management concluded For the purpose of impairment testing, goodwill blended significantly with the integrated recognised at cost. The Group’s share of the profits that the assets and activities of the acquired company acquired in a business combination is allocated from telecommunication services business in terms of mutual and losses of these companies is included in the ‘Share are not capable of being conducted and managed as the acquisition date to each of the cash-generating projects, costs, inputs and outputs convergence. of loss of associates and joint ventures’ line in the a business, accordingly the acquisition of Neosprint units (‘CGUs’) that are expected to benefit from This process has become particularly evident accompanying consolidated income statement with was accounted for as an acquisition of assets. the synergies of the combination. The Group has by 31 December 2018 as the volume of mutual projects a corresponding adjustment to the carrying amount The purchase price totaled 720, consisting of cash allocated goodwill to the following CGUs: 1) integrated and integration has risen significantly over the year. of the investment. consideration of 504 and a deferred payment of 216 telecommunication services and 2) GARS Holding Accordingly, at 31 December 2018 the net assets of the which was fully settled in June 2018. Limited (‘GARS’). Broadband business, as well as the net assets of the Unrealised gains on transactions between the Group Company’s own retail network have been allocated to and its associates or joint ventures are eliminated only An impairment loss of associated goodwill is recognised the integrated telecommunication services group of to the extent of the Group’s interest in the associates or 3.2.2. Goodwill for the amount by which the CGU’s carrying amount CGUs. joint ventures. Unrealised losses are also eliminated to exceeds its recoverable amount. The recoverable the extent of the Group’s interest unless a transaction Accounting policies amount is the higher of (1) a CGU’s fair value less costs Management has determined that the cash flows of provides evidence of an impairment of the asset to sell and (2) value in use. The recognised impairment the Broadband business and the Company’s own retail transferred. Accounting policies of associates or joint Goodwill represents the excess of the consideration loss is not subsequently reversed. network should not be considered independent of ventures have been changed where necessary to ensure transferred plus the fair value of any NCI in the those from the integrated telecommunication services consistency with the policies adopted by the Group. acquired company at the acquisition date over the fair Estimating recoverable amounts of assets and CGUs CGU, because of the extent of their integration with the values of the identifiable net assets acquired. Goodwill is based on management’s evaluations, including Company’s other operations. Impairment is not amortised, but tested for impairment at least determining the appropriate CGUs and estimates of annually (Note 3.2.3). applicable multiples, if the market approach is used, The recoverable amount of the integrated For associates and joint ventures accounted for using or future cash flows, discount rates, terminal growth telecommunication services CGU has been determined the equity method, at each reporting date the Group After initial recognition, goodwill is measured at cost rates, and assumptions about future market conditions, based on its fair value less costs to sell (Level 3). The fair determines whether there is objective evidence that the less any accumulated impairment losses. if the income approach is used. Allocation of the value was estimated at four times operating income investment in the associate or joint venture is impaired. carrying value of the assets being tested between before depreciation and amortisation (‘OIBDA’), If there is such evidence, the Group calculates the Disclosures individual CGUs also requires management’s judgment. a multiple which is at the lower end of the range of amount of impairment as the difference between the OIBDA multiples observed in the market for acquisitions recoverable amount of the Group’s investment in the The changes in the carrying value of goodwill, net of Goodwill impairment test of similar businesses. The fair value was then reduced associate or joint venture and its carrying value, then accumulated impairment losses of 3,400, for the years by 5% as an estimate of costs to sell the business. recognises the loss as ‘Share of loss of associates and ended 31 December 2018 and 2017 are as follows: The Group considers the relationship between market joint ventures’ in profit or loss. capitalisation and its book value, among other factors, Management believes that any change in any of these 2018 2017 when reviewing for indicators of impairment. As of key assumptions which can currently be reasonably 31 December 2018, the market capitalisation of the anticipated would not cause the aggregate carrying Disclosures Group was not below the book value of its equity. amount of the integrated telecommunication services CGU to exceed the aggregate recoverable amount of Balance at beginning of year 73,218 30,549 Investments in associates and joint ventures are as Goodwill acquired through business combinations this unit. Acquisitions (Note 5.4) 7,725 42,669 follows: has been allocated to related CGUs as follows: Discontinued operations (Note 5.1) (50,394) — Balance at end of year 30,549 73,218 31 December 2018 2017 31 December Investee % equity interest 2018 2017 Integrated telecommunication services 28,951 25,384 Broadband internet — 3,567 Mail.Ru Group Limited (‘MGL’), associate 12.340 45,295 — GARS 1,598 1,598 DTSRetail Limited (‘Svyaznoy group’), associate 25.000 15,096 — Total goodwill 30,549 30,549 LLC Euroset-Retail (‘Euroset’), joint venture — — 14,041

Unallocated: JSC Sadovoe Koltso (‘Garden Ring’), joint venture 49.999 12,866 13,320 MGL (Note 5.1,5.4) — 42,669 Other investments - associates 8 1,206 Total goodwill 30,549 73,218 Total 73,265 28,567 246 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 247

3.3. Investments in associates and The composition of the Group’s share of loss of MGL The primary reason for the transaction was to The disposal of Euroset resulted in a 651 gain, joint ventures (continued) accounted for using the equity method is as follows: enable MegaFon to acquire an interest in the largest presented in the consolidated income statement line retail chain in the technology sector in the Russian ‘Share of loss of associates and joint ventures’. Year ended Federation to take part in future development 31 December of omnichannel networks. The fair value of the Svyaznoy group as at the date MGL 2018 of acquisition has been determined using the cash The financial results of Euroset after the acquisition flow projections for a six-year period. MGL is a leading internet services company in of the remaining 50% interest from VEON and before Russia. The Group lost control of MGL in June 2018 the disposal to the Svyaznoy group are presented The calculation of the fair value of the Group’s (Note 5.1), but maintains significant influence over Revenue 35,946 in the consolidated income statement line ‘Share of holding in the Svyaznoy group is particularly the affairs of MGL as at 31 December 2018 as it Expenses (35,290) loss of associates and joint ventures’ in the amount sensitive to the following assumptions: holds approximately 12% of the total outstanding Depreciation and amortisation (4,911) of 679 (loss). shares of MGL, or approximately 31% of the voting Interest income 280 rights. The fair value of the Group’s holding in the Interest expense (2) Svyaznoy group was estimated in the amount Pre-tax discount rate 16.1% The reconciliation of summarised financial Other income and expenses, net (758) of 15,440. It approximated the fair value of the Average annual revenue growth rate during the information of MGL to the carrying amount of the Income tax expense (101) consideration transferred by the Group (the shares forecast period 7.6% Group’s interest in the associate is presented below: of Euroset and Lonestar loan receivable). Loss (4,836) Terminal growth rate 4.3% 31 December OCI (228) The provisional fair values of identified assets and Average OIBDA margin during the forecast period 5.3% 2018 Loss attributable to NCI 83 liabilities of the Svyaznoy group reconciled to the Amortisation of the Group’s purchase price Group’s investment in the Svyaznoy group as at the The discount rate represents the current market allocation adjustments and application date of acquisition are as follows: assessment of the risks specific to the Svyaznoy Assets of the Group’s accounting policies (1,148) group, taking into consideration the time value Non-current assets 67,857 Loss and total comprehensive loss of money and individual risks to the underlying of MGL (6,129) Cash and cash equivalents 11,723 assets that have not been incorporated in the The Group’s share in MGL 12.34% Assets cash flow estimates. The discount rate calculation Other current assets 13,469 The Group’s share of loss and total Property and equipment 1,896 is based on the specific circumstances of the 93,049 comprehensive loss of MGL (756) Intangible assets, other than goodwill 48,947 Svyaznoy group and is derived from its weighted Inventory 25,307 average cost of capital (‘WACC’). The WACC takes Liabilities into account both debt and equity. The cost of Trade and other receivables 9,612 Other non-current liabilities (20,756) Euroset and Svyaznoy group equity is derived from the expected return Other assets 2,132 on investment by the Svyaznoy group’s investors. Current financial liabilities (13,903) Euroset is a retail chain, whose primary activities Cash and cash equivalents 9,210 The cost of debt is based on the interest-bearing Other current liabilities (11,101) are sales of mobile phones, audio devices, other 97,104 borrowings the Svyaznoy group is obliged to (45,760) portable gadgets and accessories, and provision service. Investee-specific risk is incorporated by Total identifiable net assets 47,289 of customer subscription and payment collection applying individual beta factors. The beta factors services for major telecommunication operators Liabilities are evaluated based on publicly available market Loans (19,567) NCI of MGL (261) in Russia. data. Deferred tax liabilities (9,919) Total identifiable net assets net of NCI 47,028 In February 2018 MegaFon and VEON Ltd (‘VEON’) Trade and other payables (44,099) Average annual revenue growth is projected terminated their Euroset joint venture providing based on the combination of volume and pricing The Group’s share in MGL 12.34% for shared ownership and operation of Euroset. Other liabilities (1,410) assumptions regarding smartphone, accessories, The Group’s share of identifiable net assets MegaFon acquired a 50% interest in Euroset (74,995) SIM-cards, and financial services sales. of MGL 5,803 from VEON, resulting in MegaFon’s owning 100% Excess of the carrying value of the of Euroset. VEON made a cash payment of Total identifiable net assets at fair value 22,109 The terminal growth rate is assumed to equal the investment over the Group’s share approximately 1,200 in respect of its share Russian consumer price index. in the fair value of identifiable net assets 39,492 of Euroset’s liabilities and obligations. Also, Carrying amount of the Group’s as part of the termination of the joint venture, VEON The Group’s share in the investment 25% OIBDA margin is projected based on a combination interest in MGL 45,295 acquired the rights to Euroset’s lease agreements The Group’s share of identifiable net assets 5,527 of management’s forecasted revenue and operation for approximately 1,700 outlets. Excess of the consideration transferred cost strategies. over the Group’s share in the fair value In May 2018 the Group acquired an interest of identifiable net assets 9,913 in DTSRetail Limited (‘Svyaznoy group’), which will Purchase consideration transferred 15,440 amount to 25% of the outstanding shares plus one Purchase consideration transfered 15,440 share after completion of certain conditions, in exchange for contributing to the Svyaznoy group 100% of the shares of Euroset and the Lonestar Enterprises Ltd (‘Lonestar’) loan (Note 3.4) with the ascribed value of 1,730, including accrued interest. 248 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 249

3.3. Investments in associates and The reconciliation of summarised financial information of Garden Ring to the carrying amount of the Group’s joint ventures (continued) interest in the joint venture is presented below: 31 December 2018 2017 Sensitivity to changes in key assumptions

The following reasonably possible changes in the key assumptions made independently, with all other assumptions constant, would result in the following changes to the fair value of the Svyaznoy group: Assets Non-current assets 47,430 48,269 Key assumption Change in assumption Change in fair value Cash and cash equivalents 755 1,003 Other current assets 45 280

Increase by 2 p.p. Decrease by 19% 48,230 49,552 Pre-tax discount rate Decrease by 2 p.p. Increase by 28% Liabilities Average annual revenue growth rate during Increase by 1 p.p. Increase by 80% Non-current financial liabilities (22,774) (21,572) the forecast period Decrease by 1 p.p. Decrease by 77% Other non-current liabilities (5,685) (5,712) Increase by 1 p.p. Increase by 8% Terminal growth rate Current financial liabilities (1,897) (3,492) Decrease by 1 p.p. Decrease by 7% Other current liabilities (6) — Increase by 2 p.p. Increase by 57% Average OIBDA margin during the forecast (30,362) (30,776) period Decrease by 2 p.p. Decrease by 56%

Total identifiable net assets 17,868 18,776

The reconciliation of summarised financial information The composition of the Group’s share of profit/(loss) The Group’s share in Garden Ring 49.999% 49.999% of the Svyaznoy group to the carrying amount of the of the Svyaznoy group accounted for using the equity The Group’s share of identifiable net assets of Garden Ring 8,934 9,388 Group’s interest in the Svyaznoy group is presented method is as follows: Excess of the carrying value of the investment over the Group’s share in the fair value below: of identifiable net assets 3,932 3,932 Seven months Carrying amount of the Group’s interest in Garden Ring 12,866 13,320 31 December ended 31 2018 December 2018 The composition of the Group’s share of loss of the joint venture accounted for using the equity method is as follows: Assets 31 December Non-current assets 52,986 Profit and total comprehensive income of the Svyaznoy group 15 2018 2017 Cash and cash equivalents 9,859 Amortisation of the Group’s purchase price Other current assets 43,232 allocation adjustments and application of the Group’s accounting policies (1,390) 106,077 (Loss)/profit and total comprehensive (loss)/income of Garden Ring (511) 275 Loss and total comprehensive loss of the Svyaznoy group (1,375) Amortisation of the Group’s purchase price allocation adjustments and application of Liabilities the Group’s accounting policies (398) (675) The Group’s share in the Svyaznoy group 25% Non-current financial liabilities (2,442) Loss and total comprehensive loss of the joint venture (909) (400) The Group’s share of loss and total Other non-current liabilities (10,255) comprehensive loss of the Svyaznoy The Group’s share in the joint venture 49.999% 49.999% group (344) Current financial liabilities (69,216) The Group’s share of loss and total comprehensive loss of Garden Ring (454) (200) Other current liabilities (3,434) (85,347) Garden Ring

Garden Ring, which owns and operates an office City-Mobil Then after subsequent changes in the number Total identifiable net assets 20,730 building in the center of Moscow, is the Group’s joint of shareholders, additional contributions by the venture with Sberbank. The Group has a ten-year In April 2018 the Group via its subsidiary JSC shareholders and MegaFon’s decreasing its interest The Group’s share in the Svyaznoy group 25% lease agreement with Garden Ring for a part of the MegaLabs acquired a 18.37% interest, and via MGL in MGL (Note 5.1), as of 31 December 2018 the The Group’s share of identifiable net building. This building is the corporate headquarters acquired a further 15.75% interest, in LLC City- Group’s share in City-Mobil amounted to 15.61%. assets of the Svyaznoy group 5,183 of the Group, which consolidates the Group’s Mobil (‘City-Mobil’), a taxi aggregator, for cash Excess of the carrying value of the operations in Moscow into the single location. consideration paid in full in the same month. The total contributions of the Group, excluding investment over the Group’s share in the fair See Note 5.8 for the applicable lease commitments. MGL, for the acquisition of the interest in City- value of identifiable net assets 9,913 The remaining part of the building is mostly leased Mobil held at 31 December 2018 amounted to Carrying amount of the Group’s by Sberbank. approximately 618. interest in the Svyaznoy group 15,096 The Garden Ring joint venture is accounted for using the equity method in the consolidated financial statements. 250 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 251

3.3. Investments in associates and • Financial assets and liabilities accounted The carrying amount of the asset is reduced through De-recognition of financial liabilities joint ventures (continued) for at fair value through profit or loss are carried the use of an allowance account and the amount in the consolidated statement of financial of the loss is recognised in profit or loss. Financial A financial liability is de-recognised when the position at fair value with changes in fair value assets together with the associated allowance are obligation under the liability is discharged, cancelled being recognised in profit or loss, in the ‘Net written off when there is no realistic prospect of or expires. When an existing financial liability is MegaFon’s voting interest in City-Mobil does not gain/(loss) on financial instruments’ line. future recovery and all collateral has been realised replaced by another from the same lender on entitle the Group to control City-Mobil. However, or has been transferred to the Group. If, in a substantially different terms, or the terms of an the holding, alongside the share held by MGL, • Amortised cost. Non-derivative financial assets subsequent year, the amount of the estimated existing liability are substantially modified, such gives the Group significant influence over City- with fixed or determinable payments that impairment loss increases or decreases because an exchange or modification is treated as the Mobil. Accordingly, the Group does not consolidate are not quoted in an active market such as of an event occurring after the impairment was de-recognition of the original liability and the City-Mobil, but accounts for it as an associate. trade and other receivables, loans receivable, recognised, the previously recognised impairment recognition of a new liability. The difference in the The primary reason for the acquisition was to contract assets, and loans and borrowings are loss is increased or reduced by adjusting the respective carrying amounts is recognised within expand the range of the Group’s digital services classified as financial instruments at amortised allowance account. If a write-off is later recovered, profit or loss. and products. As at 31 December 2018 the net book cost. Previously, under IAS 39, such financial the recovery is credited to the relevant costs in profit value of the investment is nil. assets were classified as loans and receivables. or loss. After initial measurement, such instruments Total summarised profit and loss information of are subsequently measured at amortised cost Garden Ring, Euroset and Svyaznoy group is as using the effective interest rate (‘EIR’) method. Disclosures follows: Amortised cost is calculated by taking into account any discount or premium on acquisition Financial assets are as follows: Year ended and fees or costs that are an integral part of the 31 December EIR. The amortisation based on EIR is included in 31 December 2018 2017 profit or loss. 2018 2017 • Fair value through OCI. Derivative financial instruments designated as effective hedging Trade and other receivables at amortised cost (Note 3.5) 29,137 26,520 Revenue 107,056 68,029 instruments are accounted for at fair value Depreciation and amortisation (3,745) (5,216) through OCI. Other financial assets: Interest income — 194 De-recognition of financial assets Financial assets at fair value through profit or loss: Interest expense (4,450) (3,685) Financial investments in associates — 264 Income tax (1,095) 716 A financial asset is de-recognised when the rights Financial derivatives under lease and hosting contracts — 150 to receive cash flows from the asset have expired Derivative financial assets over the equity of investee — 122 or the Group has transferred its rights to receive cash flows from the asset or has assumed an Cross-currency swap not designated as hedge 697 — 3.4. Financial assets obligation to pay the received cash flows in full Total financial assets at fair value through profit or loss 697 536 and liabilities without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Financial assets at amortised cost: Group has transferred substantially all the risks Short-term bank deposits in Rubles — 560 Accounting policies and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the Short-term bank deposits in US dollars — 7,096 Initial recognition and measurement risks and rewards of the asset, but has transferred Short-term bank deposits in HK dollars 4,352 — control of the asset. Loans receivable from Garden Ring and Lonestar 5,067 6,357 Financial assets and financial liabilities are Other deposits 1,307 4,976 recognised initially at fair value plus transaction Impairment of financial assets costs that are directly attributable to the acquisition Other 361 157 or issue of the financial asset or financial liability, The Group recognises loss allowances for expected Total financial assets at amortised cost 11,087 19,146 except for a financial asset or financial liability credit losses (‘ECLs’) on financial assets measured accounted for at fair value through profit or loss, at amortised cost and contract assets. These loss Total other financial assets 11,784 19,682 in which case transaction costs are expensed. allowances are measured at an amount equal to Other current financial assets (7,955) (16,097) lifetime ECLs. ECLs are a probability-weighted Subsequent measurement of financial assets estimate of credit losses. Credit losses are measured Other non-current financial assets 3,829 3,585 and liabilities at present value of all cash shortfalls, that is the difference between the cash flows due to the Total financial assets 40,921 46,202 The subsequent measurement of financial assets entity in accordance with the contract and the Total current financial assets (37,092) (42,617) and liabilities depends on their classification as cash flows that the Group expects to receive. ECLs described below: are discounted at an effective interest rate of the Total non-current financial assets 3,829 3,585 financial asset. • Fair value through profit or loss. Derivatives are accounted for at fair value through profit or loss unless they are designated as effective hedging instruments. 252 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 253

3.4. Financial assets 1,724. The loan was then assigned to and assumed 3.4.1. Cash and cash equivalents and liabilities (continued) by Lonestar, another company related to the Svyaznoy group, and was thereafter treated as part of the Group’s consideration for the investment in Accounting policies the Svyaznoy group (Note 3.3). Loan receivable Cash and cash equivalents comprise cash on hand and deposits in banks with original maturities of three months or less. In February 2018 the loan due from Strafor Other deposits Commercial Ltd, a company related to the Disclosures Svyaznoy group, was extended to April 2018 and Other deposits consist of cash advances received was converted into Rubles so that the amount due under certain contracts with customers and held in Cash and cash equivalents are as follows: including interest as of the conversion date was Company bank accounts. 31 December Financial liabilities are as follows: 2018 2017

31 December Cash at bank and on hand in 2018 2017 Rubles 3,749 7,023 US dollars 553 865 Euros 216 1,384 Trade and other payables at amortised cost 53,235 50,535 Other 2 50 Short-term bank deposits in Financial liabilities at amortised cost: Rubles 232 7,878 Loans and borrowings: US dollars 16,423 18,947 Bank loans and borrowings 271,487 208,143 Euros 6,039 — Ruble bonds 56,007 55,967 Total cash and cash equivalents 27,214 36,147 Total loans and borrowings 327,494 264,110 Total current loans and borrowings (39,232) (52,013) Total non-current loans and borrowings 288,262 212,097 3.4.2. Loans and borrowings

Other financial liabilities at amortised cost: Principal amounts outstanding under loans and borrowings are as follows: Finance lease obligations (Notes 3.1,5.8) 4,265 4,222 31 December Other liabilities 509 329 Interest Rate Maturity 2018 2017 Total financial liabilities at amortised cost 332,268 268,661

Financial liabilities at fair value through profit and loss: Bank loans and borrowings: Cross-currency swap not designated as hedge 84 — Ruble loans – fixed rates 7.13%-11.5% 2019-2024 230,855 161,928 Total financial liabilities at fair value through profit and loss 84 — LIBOR+0.95% - US dollar loans – floating rates LIBOR+2.15% 2021-2022 20,598 34,153 Financial liabilities at fair value through OCI: US dollar loans – fixed rates 2.29-3.65% 2019-2022 6,340 5,082 Foreign currency forwards designated as cash flow hedges — 3,842 EURIBOR+0.19% - Total financial liabilities at fair value through OCI — 3,842 Euro loans – floating rates EURIBOR+2.05% 2019-2027 15,575 9,171 Total bank loans and borrowings 273,368 210,334

Total other financial liabilities 4,858 8,393 2019-2026 with a put Other current financial liabilities (145) (3,853) Ruble bonds 7.2%-9.95% option in 2021 and 2023 55,000 55,000 Other non-current financial liabilities 4,713 4,540

Total 328,368 265,334 Total financial liabilities 385,587 323,038 Total current (37,909) (50,961) Total current financial liabilities (92,612) (106,401) Total non-current 290,459 214,373 Total non-current financial liabilities 292,975 216,637 254 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 255

3.4. Financial assets The Group initially issued these bonds in March 3.4.3. Reconciliation of movements of liabilities to cash used in financing activities (continued) and liabilities (continued) 2013 with a maturity of ten years at a coupon rate of 8% per annum. The coupon rate was to be re-set after five years and the Group had the right to Liabilities Equity redeem the bonds on the last day of the coupon Loans Finance Bank loans period for which the coupon rate was defined. and bor- Deriva- lease Dividends Retained The redemption of the bonds was effected pursuant rowings tives liabilities payable earnings NCI Total In August 2018 the Group drew down 66,000 from to the Group’s exercise of this right. different banks under fixed-rate Ruble-denominated facilities for a term of up to 1-5 years to finance New credit facility Balance as of1 January general corporate needs and the shares and GDRs 2017 235,113 4,964 4,173 2,839 129,890 (43) 376,936 purchase programme. In October 2018 the Group signed a new credit Proceeds from borrowings, facility agreement for up to Euro 150 million. net of fees paid 127,626 — — — — — 127,626 Ruble bonds The credit facility must be used to refinance Repayment of borrowings (99,416) (4,718) — — — — (104,134) purchases of equipment and related services On 19 February 2018 the Group placed its Series and requires the Group to make semi-annual Interest paid (24,142) (9) (437) — — — (24,588) BO-001P-04 Ruble denominated exchange bonds, repayments, including accrued interest, over a term Dividends paid to equity in an aggregate principal amount of 20,000. of 8.5 years. An equivalent of 6,069 of that facility holders of the Company — — — (2,839) (19,211) — (22,050) The bonds have a term of three years following has been drawn as at 31 December 2018. Dividends paid to NCI — — — — — (172) (172) placement. The coupon rate was set at 7.2% per Acquisition of MGL treasury annum, payable semiannually. Covenant requirements shares — — — — — (1,430) (1,430) Finance lease payments — — (33) — — — (33) On 7 March 2018 the Group redeemed in full The majority of the Company’s financing facilities Total cash flows used in at par its Series 06 and 07 Ruble denominated contain restrictive covenants with certain permitted financing activities 4,068 (4,727) (470) (2,839) (19,211) (1,602) (24,781) bonds in an aggregate principal amount of 20,000. exceptions.

Finance costs 24,625 — 519 — — — 25,144 Foreign exchange (gain)/ 3.4.3. Reconciliation of movements of liabilities to cash used in financing loss, net (1,411) 3,794 — — — — 2,383 Changes through OCI — (189) — — — — (189) activities Acquisition of subsidiaries 268 — — — — 54,900 55,168 Assets-related other changes 1,447 — — — — — 1,447 Liabilities Equity Equity-related other changes — — — — 4,551 2,281 6,832 Loans Finance and bor- Deriva- lease Treasury Balance as of rowings tives liabilities NCI shares Total 31 December 2017 264 110 3 842 4 222 — 115 230 55 536 442 940

Balance as of 1 January 2018 264,110 3,842 4,222 55,536 (17,387) 310,323

Proceeds from borrowings, net of fees paid 124,987 — — — — 124,987 3.4.4. Derivative financial instruments when their economic risks and characteristics are Repayment of borrowings (67,409) (2,961) — — — (70,370) and hedging activities not closely related to those of the host contract and Interest paid (25,109) (403) (477) — — (25,989) the combined instrument is not measured at fair Dividends paid to NCI — — — (247) — (247) value, with changes in fair value being recognised Accounting policies in profit or loss. Purchase of outstanding shares — — — — (76,700) (76,700) Finance lease payments — — (8) — — (8) Derivative financial instruments, which include The Group has derivatives which it designated as Total cash flows used in financing foreign currency forwards and cross-currency cash flow hedges and derivatives which it did not activities 32,469 (3,364) (485) (247) (76,700) (48,327) swaps, are initially recognised in the consolidated designate as hedges. At the inception of a hedge statement of financial position at fair value on the relationship, the Group formally designates and Finance costs 26,125 485 493 — — 27,103 date a derivative contract is entered into and are documents the hedge relationship to which the Foreign exchange loss, net 7,447 1,096 — — — 8,543 subsequently re-measured at their fair value. Fair Group wishes to apply hedge accounting and Gain on financial instruments, net — (713) — — — (713) values are obtained from quoted market prices and the risk management objective and strategy for Changes through OCI — (1,959) — — — (1,959) discounted cash flow (‘DCF’) models as appropriate. undertaking the hedge. Such hedges are expected Acquisitions of subsidiaries and Derivatives are included within financial assets at to be highly effective in achieving offsetting discontinued operations (Notes 5.1,5.4) 13 — — (55,265) — (55,252) fair value through profit or loss when fair value is changes in cash flows and are assessed on an Assets-related other changes (2,670) — 35 — — (2,635) positive and within financial liabilities at fair value ongoing basis to determine that they actually have through profit or loss when fair value is negative. been highly effective throughout the financial Equity-related other changes — — — (288) — (288) Certain derivatives embedded in other financial reporting periods for which they were designated. Balance as of 31 December 2018 327,494 (613) 4,265 (264) (94,087) 236,795 instruments are treated as separate derivatives 256 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 257

3.4. Financial assets is recognised immediately in profit or loss. The table below presents the effect of the Group’s derivative financial instruments designated as cash flow and liabilities (continued) For derivative instruments that are not designated hedges on the consolidated income statement and consolidated statement of other comprehensive income as hedges or do not qualify as hedged for the years ended 31 December: transactions, the changes in the fair value are reported in the profit or loss. 2018 2017 The effective portion of changes in the fair value of derivatives that are designated and qualify The Group uses derivatives to manage interest as cash flow hedges are recognised in OCI. rate and foreign currency risk exposures. Foreign currency forwards: The gain or loss relating to the ineffective portion The Group does not hold or issue derivatives for trading purposes. Amount of gain/(loss) recognised in OCI 863 (3,560) Amount of loss reclassified from OCI into foreign exchange loss, net 1,096 3,752 Disclosures Deferred tax on movements in OCI (392) (38) 1,567 154 The Group had the following outstanding cross-currency swaps and foreign currency forwards stated at their notional amounts: Cross-currency swap: 31 December 2018 31 December 2017 Amount of loss recognised in OCI — (47) Millions, Millions, Amount of loss reclassified from OCI into foreign exchange loss, net — 44 Original original Millions, original Millions, Deferred tax on movements in OCI — 1 currency currency Rubles currency Rubles — (2) Total in OCI 1,567 152

Foreign currency forwards: US dollar — — 208 11,981 designated as cash flow hedges Derivatives not designated as hedging instruments active market, the fair value is determined using Total foreign currency forwards — 11,981 appropriate valuation techniques, which include In August 2018, the Company entered into cross- using recent arm’s length market transactions, Cross-currency swaps: currency swap agreements with a notional amount reference to the current fair value of another not designated as hedges Euro 97 7,708 — — of $129 million (8,962 at the exchange rate as of instrument that is substantially the same, a DCF analysis, or other valuation models. not designated as hedges US dollar 118 8,198 — — 31 December 2018) and Euro 106 million (8,423 at the exchange rate as of 31 December 2018) that Total cross-currency swaps 15,906 — limit the exposure from changes in US dollar and The inputs to these models are taken from Euro exchange and interest rates on certain long- observable markets where possible, but where this term debt. is not feasible, a degree of judgment is required Foreign currency forwards designated as cash flow Cross-currency swap designated as a cash flow in establishing fair values. The judgments include hedges hedge The terms of the swap agreements did not meet considerations of inputs such as liquidity risk, credit the requirements for hedge accounting, therefore risk and volatility. Changes in assumptions about During the year ended 31 December 2016 the In February 2017 the Group settled a cross-currency the Group reported all gains and losses from the these factors could affect the reported fair value of Group entered into a number of US dollar forward swap agreement which was designated and change in fair value of these derivative financial financial instruments. purchase agreements that limited the exposure qualified as a cash flow hedge of foreign currency instruments directly in the consolidated income from changes in US dollar exchange rates on certain risk and affected consolidated income statement statement. The Group uses the following hierarchy for long-term debts. The forwards were designated in 2017. determining and disclosing the fair value of and qualified as cash flow hedges of foreign Gain on financial instruments financial instruments by valuation technique: currency risk. There was no ineffective portion in the reporting period. Forwards were settled in 2017 and Net gain on financial instruments recognised in Level 1: quoted (unadjusted) prices in active 2018 and affected consolidated income statement profit or loss for the year ended 31 December 2018 markets for identical assets or liabilities; in those periods. consisted of 713 gain from change in fair value of cross-currency swaps not designated as hedges Level 2: techniques for which all inputs which have (31 December 2017: nil). a significant effect on the recorded fair value are observable, either directly or indirectly; 3.4.5. Fair values Level 3: techniques which use inputs that have a Accounting policies significant effect on the recorded fair value that are not based on observable market The fair value of financial instruments recorded in data. the consolidated statement of financial position and/or disclosed in the notes that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations, without any deduction for transaction costs. For financial instruments not traded in an 258 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 259

3.4. Financial assets The fair values of the Group’s loans and borrowings The fair values of foreign currency forwards and and liabilities (continued) and other liabilities carried at amortised cost, cross-currency swaps are based on a forward except for market quoted bonds, are determined yield curve and represent the estimated amount by using a DCF method using a discount rate that the Group would receive or pay to terminate these reflects the issuer’s borrowing rate as at the end of agreements at the end of the reporting period, Disclosures the reporting period. The own nonperformance risk taking into account current interest rates, foreign as at 31 December 2018 and 2017 was assessed to exchange spot and forward rates, creditworthiness, Set out below is a comparison by class of the carrying amounts and fair values of the Group’s financial be insignificant. nonperformance risk, and liquidity risks associated instruments that are carried in the consolidated financial statements: with current market conditions. The Group, in connection with its current activities, Carrying amount Fair value is exposed to various financial risks, such as foreign 31 December 31 December currency risks, interest rate risks and credit risks. 2018 2017 2018 2017 The Group manages these risks and monitors their exposure on a regular basis.

Financial assets: Disclosures Financial assets at fair value through profit or loss: Cross-currency swaps not designated as hedges Level 2 697 — 697 — The following tables summarise the valuation of financial assets and liabilities measured at fair value on a Financial investments in associates Level 3 — 264 — 264 recurring basis by the fair value hierarchy: Financial derivatives under lease and hosting contracts Level 3 — 150 — 150 Derivatives un- Cross- Financial der leases and Foreign Cross- Total Derivative financial assets over the equity of investee Level 3 — 122 — 122 currency investments over the equity Total finan- currency currency financial Financial assets at amortised cost: swaps in associates of investee cialassets forwards swap liabilities Short-term bank deposits Level 2 4,352 7,656 4,352 7,656 Loans receivable from Garden Ring and Lonestar Level 2 5,067 6,357 5,067 6,436 Other deposits Level 2 1,307 4,976 1,307 4,706 31 December 2018 Other Level 3 361 157 361 157 Level 1 — — — — — — — Total financial assets 11,784 19,682 11,784 19,491 Level 2 697 — — 697 — (84) (84) Level 3 — — — — — — — Financial liabilities at amortised cost: Total as of 31 Loans and borrowings Level 2 271,487 208,143 283,473 234,969 December 2018 697 — — 697 — (84) (84) Ruble bonds Level 1 56,007 55,967 54,568 56,299 Finance lease obligations Level 3 4,265 4,222 4,265 4,222 31 December 2017 Other liabilities Level 3 509 329 538 343 Level 1 — — — — — — — Financial liabilities at fair value through profit or loss: Level 2 — — — — (3,842) — (3,842) Cross-currency swap not designated as hedge Level 2 84 — 84 — Level 3 — 264 272 536 — — — Total as of 31 Financial liabilities at fair value through OCI: December 2017 — 264 272 536 (3,842) — (3,842) Foreign currency forwards designated as cash flow hedges Level 2 — 3,842 — 3,842 Total financial liabilities 332,352 272,503 342,928 299,675 During the years ended 31 December 2018 and 31 December 2017 there were no transfers between levels of the fair value hierarchy.

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 loan receivable from Garden Ring liabilities approximate their carrying amounts largely approximates its carrying value. due to the short-term maturities of these instruments. The fair value of the Group’s other deposits relating The Group, using available market information and to cash received under certain contracts with appropriate valuation methodologies, where they customers is determined by using a DCF method exist, has determined the estimated fair values using a discount rate that reflects the bank deposit of its financial instruments. However, judgment is rates the Group would get in the market as at the end necessarily required to interpret market data to of the reporting period. determine the estimated fair value. 260 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 261

3.5. Trade and other 3 .7. Non-financial assets Current non-financial liabilities are as follows: Decommissioning provision

receivables and liabilities 31 December The Group has certain legal obligations related 2018 2017 to rented sites for base stations and masts, which The ageing analysis of trade and other receivables Accounting policies include requirements to restore the real estate upon that are not impaired is as follows: which the base stations and masts are located upon Value-added tax their being decommissioned. Decommissioning 31 December Advances from customers 10,620 15,044 costs are determined by calculating the present 2018 2017 Value added tax (‘VAT’) related to revenues is VAT payable 2,003 4,987 value of the expected costs to settle the obligation generally payable to the tax authorities on an Current portion of deferred revenue 3,227 7,579 using estimated cash flows, and are recognised as accrual basis when invoices are issued to customers. part of the cost of the particular asset. The cash VAT incurred on purchases may be offset, subject to Taxes payable, other than income tax 1,589 1,544 flows are discounted at the current pre-tax rate that Neither past due nor impaired 20,004 20,114 certain restrictions, against VAT related to revenues, Other current liabilities 222 32 reflects the risks specific to the decommissioning Past due but not impaired: or can be reclaimed in cash from the tax authorities Total current liability. The unwinding of the discount is expensed Less than 30 days 2,949 2,152 under certain circumstances. non-financial liabilities 17,661 29,186 in profit or loss as finance costs. The estimated future costs of decommissioning are reviewed 30 - 90 days 4,364 3,382 Management periodically reviews the recoverability annually and adjusted as appropriate. Changes More than 90 days 1,820 872 of VAT receivables and believes the amount reflected Non-current non-financial liabilities are as follows: in estimated liability resulting from revisions of Total trade and other receivables 29,137 26,520 in the consolidated financial statements is fully the estimated future costs or in the discount rate recoverable within one year. 31 December applied are added to or deducted from the cost of 2018 2017 the asset, except where a reduction in the provision The following table summarises the changes in is greater than the unamortised recognised cost, the impairment allowance for trade and other Disclosures in which case the recognised cost is reduced to nil receivables for the years ended 31 December: and the remaining adjustment is recognised in the Current non-financial assets are as follows: Deferred revenue 3,789 9,672 consolidated income statement. 2018 2017 Other non-current liabilities 106 509 31 December Total non-current In determining the best estimate of the provision, 2018 2017 non-financial liabilities 3,895 10,181 assumptions and estimates are made in relation to Balance at beginning of year 3,191 2,778 discount rates, the expected cost to dismantle and remove the asset from the site, including long-term Acquisitions (Note 5.4) — 398 inflation forecasts, and the expected timing of those Change in the impairment allowance 3,866 2,681 Prepayments for services 3,791 4,605 3.8. Assets held for sale costs. Discontinued operations (Note 5.1) (288) — VAT receivable 3,051 1,160 As at 31 December 2018 the Group classified its Accounts receivable written off (3,229) (2,666) Deferred costs 419 1,176 investments in Forpost (Note 5.3) and another Disclosures Balance at end of year 3,540 3,191 Prepaid taxes, other than income tax 502 289 insignificant associate and the net assets of its Prepayments for inventory 3 216 subsidiary LLC ‘CoreClass’ (Note 5.4) as assets held The following table describes the changes to the Total current non-financial assets 7,76 6 7,446 for sale. The investments have subsequently been decommissioning provision for the years ended 3.6. Inventory sold in January 2019 (Note 5.9). -31 December:

Accounting policies Non-current non-financial assets are as follows: 2018 2017 3.9. Provisions Inventory, which primarily consists of telephone 31 December handsets, portable electronic devices, accessories 2018 2017 Accounting policies Balance at beginning of year 4,378 3,888 and USB modems, is stated at the lower of cost and net realisable value. Cost is determined using the Provisions are recognised when the Group has a Revisions in estimated cash flows 319 64 weighted-average cost method. Net realisable value present legal or constructive obligation as a result Net additions 21 51 Deferred costs, non-current 7,033 2,744 is the estimated selling price in the ordinary course of past events, it is probable that an outflow of Unwinding of discount 399 375 of business less the estimated costs necessary to Long-term advances 498 1,814 resources will be required to settle the obligation, Balance at end of year 5,117 4,378 make the sale. Total non-current and the amount can be reliably estimated. non-financial assets 7,531 4,558 Provisions are not recognised for future operating losses. Disclosures Provisions are measured at the present value of the The amount of inventory write-down to net expenditures expected to be required to settle the realisable value and other inventory losses obligation using a pre-tax rate that reflects current recognised in ‘Cost of revenue’ line in the market assessments of the time value of money and consolidated income statement for the year ended the risks specific to the obligation. Any increase in 31 December 2018 is 1,108 (2017: 550). the provision due to passage of time is recognised as finance costs. 262 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 263

4. EQUITY Limited by way of a tender offer 115,317,504 of the The foreign currency translation reserve is used 5. ADDITIONAL NOTES ordinary shares and GDRs, representing 18.6% of to record exchange differences arising from the Accounting policies the Company’s issued shares, for 76,700 including translation of the financial statements of foreign transaction costs. operations. 5.1. Discontinued Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares Mandatory tender offer The cash flow hedge reserve is used to record operations are shown in equity as a deduction, net of tax, from the the accumulated impact of derivatives designated proceeds. On 10 December 2018 the Group cancelled all remaining as cash flow hedges (Note 3.4.4). Since the beginning of 2017 MegaFon had owned GDRs held by members of the Group and received the a 15.2% interest in the Class A and ordinary shares The Company’s own issued equity instruments that are corresponding number of ordinary shares. Upon this The share-based compensation reserve is used of MGL, a leading company in the Russian- reacquired (treasury shares) are recognised at cost and cancellation of the GDRs the Group, together with its to recognise the value of equity-settled share-based speaking internet market (which, because deducted from equity. No gain or loss is recognised in controlling shareholders (Note 1.1), then held more than payment transactions provided to employees, of the number of votes allocated to Class A shares, profit or loss on the purchase, sale, issue or cancellation 75% of the Company’s outstanding ordinary shares, including key management personnel, as part represented approximately 63.8% of the voting of the Group’s own equity instruments. Any difference which, according to the Federal Law ‘On Joint Stock of their remuneration. During 2018 and 2017 the shares of MGL), and had consolidated MGL’s between the carrying amount and the consideration Companies’, required that a mandatory tender offer be Group did not have any equity-settled share-based financial position and results of operations since received upon any subsequent sale is recognised in made to the other shareholders to acquire the shares held programmes. The amount of the reserve relates the beginning of 2017. equity. by them. Accordingly, the Company’s Board of Directors to previous years awards that expired unexercised. at the meeting held on 9 January 2019, approved the In January 2018 the Group established an entity making of the mandatory tender offer for the remaining The reserve on transactions with NCI is used to named JSC MF Technologies to which in May 2018 Disclosures outstanding ordinary shares at a price of 659.26 Rubles record differences arising as a result of transactions the Group contributed the 11,500,100 Class A per ordinary share, open for acceptance until 7 March with NCI that do not result in a loss of control. shares of MGL, representing approximately 5% Share capital 2019 (Note 5.9), and recommended that the shareholders of the total shares (and 59% of the voting shares) accept the mandatory tender offer. The reserve fund has been established according to of MGL, through a series of transactions. After that, As of 31 December 2018 and 2017, the Company had the requirements of Russian law and is used to cover in June 2018, the Group sold a 55% interest in 100,620,000,000 authorised ordinary shares with Annual dividend payment the Company’s losses, redemption of its bonds and JSC MF Technologies to LLC Financial Investments, a par value of 0.1 Rubles, of which 620,000,000 were re-purchase of its own shares in the absence of Gazprombank and LLC RT-Business Development fully paid issued shares, including 480,383,463 On 30 June 2017 the Annual General Meeting of other capital resources. (a subsidiary of Rostec) for an aggregate cash (2017: 595,700,967) outstanding shares and 139,616,537 Shareholders of the Company approved the payment consideration of $247.5 million (15,510 at the (2017: 24,299,033) shares classified as treasury shares of a final dividend for the 2016 financial year in the exchange rate as of the payment day). (held through its wholly owned subsidiary, MegaFon amount of 19,211, or 32.25 Rubles per ordinary share Finance LLC as at 31 December 2018, and previously (or GDR). Such dividends were paid in full in August The sale resulted in decreasing the Group’s through its wholly owned subsidiary, MegaFon 2017. Together with the interim dividend approved and interest in MGL to approximately 12% of the total Investments (Cyprus) Limited, as at 31 December 2017). paid in 2016, total dividends for the 2016 financial year shares outstanding, or 31% of the voting rights. amounted to 38,423, or 64.50 Rubles per ordinary share Accordingly, the Group determined that it had lost Purchase of outstanding shares (or GDR). control over MGL and discontinued consolidating this subsidiary starting from 9 June 2018. During August-September 2018 the Group purchased No dividends were declared in respect of the 2017 through its subsidiary MegaFon Investments (Cyprus) or 2018 financial years. The Group accounts for its remaining interest in MGL as an associate as it believes that it still has a significant influence over MGL through its Other capital reserves remaining shareholding.

The disaggregation of other capital reserves and changes of other comprehensive income by each type The fair value of the remaining interest in MGL has of reserve in equity is shown below: been estimated in the amount of 46,052. The fair value of the Group’s interest in Class A shares has Foreign Share- Transactions been estimated based on the selling price of the currency Cash flow based com- with non- Total other shares in the above-mentioned transaction, and the translation hedge pensation controlling Reserve capital fair value of the Group’s interest in ordinary shares reserve reserve reserve interests fund reserves has been estimated based on the market quote for the shares.

As of 1 January 2017 (1,191) (1,719) 1,488 (23) 15 (1,430) The comparative consolidated income statement for the year ended 31 December 2017 has been Foreign currency translation 115 — — — — 115 changed to present the discontinued operations Change in fair value of cash flow separately from continuing operations. Transactions hedges (Note 3.4.4) — 152 — — — 152 between the continuing operations and the As of 31 December 2017 (1,076) (1,567) 1,488 (23) 15 (1,163) discontinued operations prior to the disposal have Foreign currency translation (566) — — — — (566) been eliminated. Change in fair value of cash flow hedges (Note 3.4.4) — 1,567 — — — 1,567 Discontinued operations (Note 5.1) 57 — — — — 57 As of 31 December 2018 (1,585) — 1,488 (23) 15 (105) 264 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 265

5.1 Discontinued operations 5.2. Share-based 5.3. Related parties (continued) compensation The following tables provide the total amount of transactions that have been entered into with Accounting policies related parties and balances of accounts with them Profit/(loss) from discontinued operations for the years ended 31 December is presented below: for the relevant financial years: Equity-settled transactions 2018 2017 For the years Employees (including senior executives) ended of the Group and, so long as it was a member 31 December Revenue 30,439 51,500 of the Group, employees of MGL, may receive 2018 2017 remuneration in the form of share-based payment Expenses (32,879) (48,920) transactions, whereby share-based payment (Loss)/profit before tax from discontinued operations (2,440) 2,580 recipients render services as consideration for Revenues from USM group 12 1 Income tax (543) (2,138) equity instruments (‘equity-settled transactions’) Revenues from Telia group — 350 (Loss)/profit from discontinued operations, net of tax (2,983) 442 or a cash equivalent thereof (‘cash-settled share- based payments’). Revenues from Euroset 127 3,450 Gain on sale of discontinued operations and revaluation of the remaining investment in MGL 18,208 — Revenue from MGL’s equity accounted If the Group has a choice to settle share-based associates 141 121 Income tax on gain on sale of discontinued operations and the revaluation gain (3,641) — payments in cash or in equity, the entire transaction Revenues from Svyaznoy group 2,394 — Profit for the year from discontinued operations, net of tax 11,584 442 is treated either as cash-settled or as equity-settled, depending on whether or not the Group has Revenues from MGL 3 — Attributable to equity holders of the Company 13,987 (107) a present obligation to settle in cash. 2,677 3,922 Attributable to NCI (2,403) 549 The cost of equity-settled transactions is Services from USM group 1,039 968 11,584 442 determined by the fair value at the date when Services from Telia group — 710 Earnings per share, Rubles — discontinued operations the grant is made using an appropriate valuation Services from Euroset 228 1,646 Basic and diluted, profit for the year attributable to equity holders of the Company 23 1 model. During 2017 and 2018 the only equity-settled transactions were those incurred by MGL. Therefore Services from Garden Ring 1,836 1,771 the cost of those equity-settled transactions was Services from MGL’s equity accounted recognised over the period in which the service associates 67 15 Cash flows generated from the sale of a portion of The effect of the disposal on the financial position conditions are fulfilled in Profit from discontinued Services from Svyaznoy group 2,230 — the Group’s interest in MGL described above are of the Group is presented below: operations (Note 5.1) while the corresponding Services from MGL 730 — presented below: amount was recorded as an increase in NCI. Services from Forpost 167 — 6,297 5,110

Assets Cash received from discontinued operations 15,510 Other non-operating expenses 281 — Property and equipment 6,119 Cash disposed of with discontinued operations (8,565) Intangible assets 52,840 Net cash inflow from sale 6,945 Goodwill 50,394 Other non-current assets 9,404 Cash flows generated by MGL for the years ended 31 Cash and cash equivalents 8,565 December are presented below: Other current assets 8,621 135,943 2018 2017 Liabilities Non-current liabilities 17,768 Net cash flows from operating activities 4,825 18,815 Current liabilities 19,298 Net cash flows used in investing 37,066 activities (11,934) (7,351) Net cash flows used in financing NCI (55,580) activities (13) (1,565) OCI 57 Net cash flows generated by MGL (7,122) 9,899 Net assets and liabilities 43,354 266 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 267

5.3. Related parties The Group purchased billing system and related Forpost 5.4. Business combinations (continued) support services from PeterService, another member of the USM group, in the amount of 11,473 and 6,019 The Group has an insignificant investment in Accounting policies during the years ended 31 December 2018 and 2017, Forpost, the holding company for LLC Talmer, respectively. The outstanding balances with the USM a systems integrator and complex IT solutions The Group applies the acquisition method of 31 December group as of 31 December 2018 mainly relate provider in the Russian Federation, which is accounting and recognises the assets acquired, 2018 2017 to these purchases. accounted for as an associate. The balances due the liabilities assumed and any NCI in the acquired from and to Forpost are prepayments and payables company at the acquisition date, measured at their The Group is a member of the Not-for-profit for IT equipment purchases and related services. fair values as of that date. For some acquisitions the Partnership ‘Development, Innovations, Technologies’ In January 2019 Forpost ceased to be a related Group may elect to measure an NCI in the acquiree Due from USM group 3 1 (the ‘Partnership’) which was established by party of the Group (Note 5.9). at its proportionate interest in the identifiable net Due from Euroset — 1,473 companies in the USM group. The Partnership i assets of the acquiree. Due from Garden Ring 5,038 4,777 s required to incur education, science and other MGL Due from MGL’s equity accounted as- social costs as well as to maintain certain social The identification of assets acquired and liabilities sociates — 77 infrastructure assets in Skolkovo Innovation Centre The Group purchased advertising services from assumed as a result of those acquisitions, which are not owned by MegaFon and not recorded MGL (Note 3.3) in the amount of 730 for the six determining the fair value of assets acquired Due from Svyaznoy group 3,591 — in the consolidated statement of financial position. months ended 31 December 2018. The Group also and liabilities assumed as well as any contingent Due from MGL 7 — The Group’s accrued contributions to the Partnership contributed to sponsoring a cybersporting event consideration and quantification of resulting Due from Forpost 91 — of 190 during the year ended 31 December 2018 of MGL; those contributions were recognised in goodwill requires management’s judgment and 8,730 6,328 (2017: nil) are included into other non-operating other non-operating expenses in the consolidated often involves the use of significant estimates and expenses in the consolidated income statement. income statement. assumptions, including assumptions with respect Due to USM group 1,861 1,271 to future cash inflows and outflows, discount rates, Telia group Compensation to key management personnel terminal growth rates, licence and other asset useful Due to Euroset — 92 lives and market multiples, among other items. Due to Garden Ring — 142 The transactions with Telia group relate to operations Members of the Board of Directors and the Due to MGL’s equity accounted with various companies in that group. Revenue and Management Board of the Company are the key Results of subsidiaries acquired and accounted for associates — 2 cost of services are principally related to roaming management personnel. The amounts recognised by the acquisition method have been included in Due to Svyaznoy group 933 — agreements between MegaFon and members of the as employee benefits expense to key management operations from the relevant date of acquisition. Due to MGL 780 — Telia group located outside Russia and a wireline personnel of the Group for the years ended 31 interconnection agreement with Telia Carrier Russia. December are as follows: Any contingent consideration to be transferred Due to Forpost 958 — by the Group is recognised at fair value at the 4,532 1,507 In October and November 2017 Telia Company sold 2018 2017 acquisition date. Subsequent changes in the fair its entire interest in MegaFon to Gazprombank and value of the contingent consideration classified other institutional investors. Consequently, Telia group as an asset or liability that is a financial instrument Terms and conditions of transactions with ceased to be a related party. Short-term employee benefits 588 580 within the scope of IFRS 9, Financial Instruments, related parties are recognised in accordance with IFRS 9 in the Euroset and Svyaznoy Long-term incentive programme 82 89 consolidated income statement. If the contingent Outstanding balances as of 31 December 2018 Total 670 669 consideration is not within the scope of IFRS 9, it is and 31 December 2017 are unsecured. There Euroset was the Group’s joint venture with PJSC measured in accordance with the appropriate IFRS. have been no guarantees provided or received for VimpelCom until February 2018 when MegaFon any related party receivables or payables. As of acquired the remaining 50% interest in Euroset from Acquisition-related costs are expensed as incurred 31 December 2018 and 31 December 2017, the Group VEON (Note 3.3). After Euroset was disposed of in and included in general and administrative has not recorded any impairment of receivables exchange for an interest in the Svyaznoy group (Note expenses. relating to amounts owed by related parties. This 3.3) the Svyaznoy group has become a related party assessment is undertaken each financial year by for the Group. examining the financial position of the related party 2018 acquisitions and the market in which the related party operates. The Group had a dealership and equipment sales agreement with Euroset and now has a dealership Safe City USM group and equipment sales agreement with the Svyaznoy group which qualifies as a related party transaction. In June 2018 the Group acquired a 100% interest The outstanding balances and transactions with USM in LLC ‘UK TechnoInvestProject’ (subsequently group relate to operations with Garsdale Services Garden Ring renamed into LLC ‘CoreClass’), a Russian systems Investment Limited (‘Garsdale’), formerly the Group’s integrator, for a cash consideration of 530. parent, USM Holdings Limited, an indirect owner Garden Ring, which owns and operates an office The primary reason for the acquisition was to gain of Garsdale, and their consolidated subsidiaries. building in the center of Moscow, is the Group’s access to software and expertise for providing As of 3 August 2018 Garsdale transferred its 100% joint venture with Sberbank. The Group has a lease services to government sector clients under the interest in the company through which it held its agreement with Garden Ring which qualifies as government programme ‘Safe City’. The purchase interest in the Group to USM Holding Company LLC a related party transaction. The Group also has consideration was mainly allocated to software and another member of the USM group. As a result a loan receivable from Garden Ring. The balance in the amount of 416. USM Holding Company LLC has become the Group’s due from Garden Ring at 31 December 2018 and parent. 31 December 2017 consists mainly of the loan receivable. 268 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 269

5.4. Business combinations BitGames, 33 Slona, InShopper 2017 acquisitions (continued) In April 2018 MGL, and thereby the Group, acquired Mail.Ru Assets control of mobile games developer PBL Bitdotgames Property and equipment 3,840 Publishing Limited (‘BitGames’), and a 100% On 9 February 2017 the Group completed the Intangible assets 62,568 ESForce Holding Limited interest in LLC ‘33 Slona’ and LLC ‘Tekhnologii acquisition of 15.2% of the shares, representing 63.8% Investments in associates and joint ventures 649 nedvizhimosti’ (collectively, ‘33 Slona’), a digital of the voting rights of MGL, from three entities owned In January 2018 MGL, and thereby the Group, real estate agency. In June 2018 the Group by USM group for a total consideration of $740 million Other financial assets 539 acquired a 100% interest in ESForce Holding Limited acquired a 100% interest in Consult Universal Corp (44,040 at the exchange rate as of the date Other non-financial assets 4,550 (‘ESForce’), one of the world’s largest e-sports (‘InShopper’), a cash-back technology provider. of acquisition), consisting of cash consideration Deferred tax assets 2,600 organisations, for a cash consideration of 5,659 of $640 million (38,088 at the exchange rate as Trade and other receivables 5,135 and contingent consideration based on Total consideration for the transactions was of the date of acquisition) and deferred consideration performance indicators determined at the end approximately 2,500 paid in cash and a contingent of $100 million (5,952 at the exchange rate as of the Cash and cash equivalents 5,513 of 2018. The contingent consideration measured consideration measured at fair value as of the date date of acquisition) plus interest payable on or prior 85,394 at fair value amounted to 1,132 as of the date of of acquisition in the amount of 93 based to the first anniversary of the acquisition date. acquisition. The primary reason for the acquisition on performance indicators for one year after Liabilities was to enhance the Group’s position in the esports the acquisition. The deferred consideration of $100 million (5,773 market. at the exchange rate as of the payment date) was Loans and borrowings 123 The primary reason for the acquisition of BitGames paid in December 2017. Other financial liabilities 943 The table below includes the allocation of the was to enhance the Group’s position in the Other non-financial liabilities 9,844 purchase price to the acquired net assets of ESForce mobile games market. The primary reason for the The primary reason for the acquisition was to achieve Deferred tax liabilities 9,945 based on their estimated fair values: acquisition of 33 Slona was to leverage the Group’s significant synergies for both companies, including expertise and resources by achieving substantial enhancement of MegaFon’s digital offerings and their Trade and other payables 7,049 synergies with Youla, the Group’s general online distribution, launch of a special VKmobile offering for Income taxes payable 389 classifieds product. The primary reason for the users of the VK social network, and other potential 28,293 Assets acquisition of InShopper was to leverage the initiatives. Property and equipment 648 Group’s expertise and resources by achieving Total identifiable net assets at fair value 57,101 substantial synergies with the Group’s payment Based on the set-up of the Board of Directors of MGL, Goodwill arising on acquisition 41,839 Intangible assets 674 technologies and solutions. the Company concluded that it had the ability to Trade and other receivables 191 direct relevant activities of MGL and therefore had NCI (54,900) Other assets 438 The table below includes the provisional allocation control over that company. Purchase consideration transferred 44,040 Cash and cash equivalents 207 of the purchase price to the acquired net assets of BitGames, 33 Slona and InShopper based on their Accordingly, the Group consolidated MGL from 2,158 estimated fair values: the beginning of 2017. NCI included the value of the outstanding equity- settled share-based awards of MGL measured Liabilities The acquisition-date fair values of each major class at market as of the date of acquisition. Deferred tax liabilities 144 of consideration transferred were as follows: Assets Trade and other payables 365 The goodwill recognised was attributable primarily Intangible assets 1,140 to expected synergies from the acquisition and the Other liabilities 208 Trade and other receivables 36 value to be attributed to the workforce of MGL. 717 Cash 38,088 Other assets 114 Deferred consideration 5,952 ZakaZaka Total identifiable net assets at fair value 1,441 Cash and cash equivalents 26 Total consideration transferred 44,040 Goodwill arising on acquisition 5,372 1,316 In May 2017, MGL, and thereby the Group, acquired NCI (22) the remaining 90.09% of ZakaZaka, a food delivery Liabilities company, for cash consideration of 1,042. The main Purchase consideration transferred 6,791 Deferred revenue and customer advances 473 The acquisition of MGL was accounted for using the purpose of the acquisition was to further expand the acquisition method. The Group elected to measure the MGL food delivery business. The provisional fair values Deferred tax liabilities 143 Goodwill is mainly attributable to the potential NCI in the acquiree at its proportionate interest in the of total identified assets and liabilities at the date of of ESForce to further enhance its leadership position Trade and other payables 90 identifiable net assets of the acquiree. acquisition were insignificant. Goodwill in the amount in the e-sports market and synergies with the Other liabilities 38 of 678 is mainly attributable to expected synergies and Group’s other operations. Goodwill is not expected 744 The table below includes the allocation of the cost savings with the MGL’s food delivery business. to be deductible for income tax purposes. purchase price to the acquired net assets of MGL Total identifiable net assets at fair value 572 based on their estimated fair values. Am.ru Intangible assets mainly include trademarks and Goodwill arising on acquisition 2,408 customer base, and are amortised over the period In May 2017, MGL, and thereby the Group, acquired of 2 to 5 years. The acquisition date fair value of the Group’s exclusive rights for Am.ru, one of the largest Russian previously held equity interest (114) auto classifieds websites, for cash consideration NCI (247) of 542. The primary purpose of the acquisition was Derivative over the equity of investee (11) to establish the Group’s solid presence in the auto Purchase consideration transferred 2,608 classifieds. 270 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 271

5.5. Financial risk Interest rate risk A significant portion of the Group’s liabilities is Change Effect denominated in US dollars or Euro. If the Ruble in foreign on profit management Interest rate risk is the risk that the fair value or continued to fluctuate against the US dollar or Euro, exchange rates before tax future cash flows of a financial instrument will this could negatively impact the Group’s earnings. The Group’s principal financial liabilities, other fluctuate because of changes in market interest than derivatives, comprise loans and borrowings, rates. The Group’s exposure to the risk of changes To the extent permitted by Russian law, the Group Year ended 31 and trade and other payables. The main purpose in market interest rates relates primarily to the keeps part of its cash and cash equivalents in December 2018 of these financial liabilities is to finance the Group’s long-term debt obligations with floating US dollar and Euro interest bearing accounts US dollar +20% (353) Group’s operations. The Group has trade and other interest rates. to manage against the risk of Ruble decline or US dollar -20% 353 receivables, and cash and short-term deposits that devaluation, and also to match its foreign currency Euro +15% (242) derive directly from its operations. The Group also The Group manages its interest rate risk by having liabilities. enters into derivative transactions. a balanced portfolio of fixed and variable rate loans Euro -15% 242 and borrowings. To minimise its foreign exchange exposure to HK dollars +20% 871 The Group is exposed to market risk, credit risk fluctuations in foreign currency exchange rates, HK dollars -20% (871) and liquidity risk. The Group’s senior management At 31 December 2018 approximately 94% of the the Group is migrating most of its foreign currency oversees the management of these risks. Group’s borrowings (including the effect of cross- linked costs to Ruble based costs to balance Year ended 31 currency swaps) are at a fixed rate of interest assets and liabilities and revenues and expenses December 2017 The Group’s senior management is supported (2017: 84%). denominated in Rubles. In order to manage the US dollar +20% (1,886) by the Finance and Strategy Committee of the foreign currency risk the Group is also focused Board of Directors that advises on financial risks Interest rate sensitivity on increasing the proportion of Ruble loans through US dollar -20% 1,886 and the appropriate financial risk governance refinancing and hedging activities. Euro +20% 302 framework for the Group. The Finance and Strategy The following table demonstrates the sensitivity Euro -20% (302) Committee provides assurance to the Group’s senior to a reasonably possible change in interest rates When necessary the Group enters into cross- management that the Group’s financial risk-taking on loans and borrowings, after the impact of hedge currency swap and foreign currency forward activities are governed by appropriate policies and accounting. With all other variables held constant, purchase agreements. These derivative financial The movement in the pre-tax effect is a result procedures and that financial risks are identified, the Group’s profit before tax is affected through instruments were used to limit exposure to changes of monetary assets and liabilities denominated measured and managed in accordance with the the impact on floating rate borrowings as follows: in foreign currency exchange rates on certain of the in currencies other than the functional currency Group’s policies. All derivative activities for risk Group’s long-term debts denominated in foreign of the Company. Increase/ Effect on management purposes are carried out by specialist currencies (Note 3.4.4). decreasein profit before teams that have the appropriate skills, experience Credit risk basis points tax and supervision. It is the Group’s policy that no Overall, the share of Ruble loans (including the trading in derivatives for speculative purposes shall effect of cross-currency swaps and forwards) Credit risk is the risk that a counterparty will not be undertaken. amounted to 92% as of 31 December 2018 meet its obligations under a financial instrument Year ended 31 (2017: 87%). or customer contract, leading to a financial loss. The Company’s Board of Directors reviews and December 2018 The Group is exposed to credit risk from its operating agrees policies for managing each of these risks, US Dollar +7 (16) In accordance with the Group’s policies, the Group activities (primarily for trade receivables) and from its which are summarised below. US Dollar -7 16 does not enter into any treasury management financing activities, including deposits with banks and transactions of a speculative nature. financial institutions and other financial instruments. Market risk Year ended 31 December 2017 The Group deposits available cash with various banks Market risk is the risk that the fair value of future US Dollar +17 (58) Foreign currency sensitivity in the Russian Federation. Deposit insurance is either cash flows of a financial instrument will fluctuate not offered or only offered in de minimis amounts because of changes in market prices. Market price US Dollar -17 58 The following table demonstrates the sensitivity in respect of bank deposits within the Russian risks that mostly impact the Group comprise two to a reasonably possible change in the US dollar, Federation. To manage the concentration of credit types of risk: interest rate risk and currency risk. The analysis is prepared assuming the amount Euro and HK dollar exchange rates, with all other risk, the Group allocates available cash to domestic Financial instruments affected by market risk include: of variable rate liability outstanding at the balance variables held constant, of the Group’s profit before branches of international banks and a limited loans and borrowings, deposits and derivative sheet date was outstanding for the whole year. tax (due to changes in the fair value and future cash number of Russian banks. A majority of these Russian financial instruments. flows of monetary assets and liabilities) after the banks are either owned or controlled by the Russian Foreign currency risk impact of hedge accounting. The Group’s exposure government. The sensitivity analyses in the following sections to foreign currency changes for all other currencies relate to the position as of 31 December 2018 and Foreign currency risk is the risk that the fair value is not material. The Group extends credit to certain counterparties, 2017. The sensitivity analyses have been prepared or future cash flows of a financial instrument will principally international and national on the basis that the amount of net debt, the fluctuate because of changes in foreign exchange telecommunications operators, for roaming services, ratio of fixed-to-floating interest rates of the debt rates. The Group’s exposure to the risk of changes to certain dealers and to customers on post-paid tariff and derivatives and the proportion of financial in foreign exchange rates relates primarily to the plans. The Group minimises its exposure to the risk by instruments in foreign currencies are all constant Group’s financing activities (when cash deposits ensuring that credit risk is spread across a number and on the basis of the hedge designations in place and loans and borrowings are denominated in of counterparties, and by continuously monitoring the at 31 December 2018 and 2017. a different currency from the Group’s functional credit standing of counterparties based on their credit currency). history and credit ratings reviews. Other preventative measures to minimise credit risk include obtaining advance payments, bank guarantees and other security. 272 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 273

5.5. Financial risk management Liquidity risk Capital management Some loan agreements also have covenants based (continued) on Net Debt to OIBDA ratios. The Group believes The Group monitors its risk relating to a shortage it has complied with all the capital requirements of funds using a recurring liquidity planning tool. Capital includes equity attributable to the Group’s imposed by external parties. The Group’s objective is to maintain a balance shareholders. The primary objective of the Group’s The maximum exposure to credit risk at the reporting between continuity of funding and flexibility through capital management is to ensure that it maintains Collateral date is the carrying value of each class of financial the use of bank loans. Approximately 11% of the a healthy credit rating and healthy capital ratios in assets disclosed in Note 3.4. The Group considers the Group’s loans and borrowings will mature in less order to secure access to debt and capital markets The Group did not pledge collateral as security concentration of risk with respect to trade receivables than one year as of 31 December 2018 (2017: 20%) at all times and maximise shareholder value. The for its financial liabilities at 31 December 2018 to be low, as its customers are located in several based on the carrying value of borrowings reflected Group manages its capital structure and makes or 2017, except certain assets purchased under jurisdictions and industries and operate in largely in the consolidated financial statements. The Group adjustments to it in light of changes in economic finance leases or on deferred payment terms independent markets. Concentrations of credit risk assessed the concentration of risk with respect conditions. (Notes 3.1, 3.4). with respect to trade receivables are limited given that to refinancing its debt and concluded it to be low. the Group’s customer base is large and unrelated. The Net Debt to OIBDA ratio is an important measure 100% of the shares of Garden Ring (Note 3.3) have Due to this management believes there is no further As of 31 December 2018 and 2017, the Group has to assess the capital structure in light of the need to been pledged as security for loans received by credit risk provision required in excess of the normal a net current liability position. The Group believes maintain a strong credit rating. Net Debt represents Garden Ring from Sberbank, which are due to be impairment allowance for trade and other receivables. it will continue to be able to generate significant the carrying amount of interest-bearing loans and repaid in 2026. operating cash flows and that adequate access borrowings less cash and cash equivalents and The Group monitors its credit risk with regards to loans to sources of funding and significant amount of current and non-current bank deposits. As of 31 extended to Garden Ring (Note 3.4). This assessment available credit lines are sufficient to meet the Group’s December 2018 the Net Debt to OIBDA ratio was 2.37 is undertaken each financial year by examining the requirements. Additionally, the Group can defer (2017: 1.92). financial position of the debtor and the market in capital expenditures if necessary in order to meet which the debtor operates. As at 31 December 2018 short-term liquidity requirements. Accordingly, Group and 2017, no impairment losses were identified. management believes that cash flows from operating 5.6. Group information and financing activities will be sufficient for the Group to meet its obligations as they become due. The consolidated financial statements of the Group include the following significant subsidiaries, joint ventures and associates of MegaFon: The table below summarises the maturity profile of the Group’s financial liabilities based on contractual % equity interest undiscounted payments. Country of Legal entity Principal activities incorporation 2017

Less than More than 1 year 1-3 years 4-5 years 5 years Total JSC MegaFon Retail subsidiary Retail Russia 100 100 LLC NetByNet Holding subsidiary Broadband internet Russia 100 100 LLC Scartel subsidiary Wireless services Russia 100 100 31 December 2018 LLC MegaFon Finance subsidiary Financing Russia 100 100 Loans and borrowings 69,174 177,491 140,715 41,138 428,518 MegaFon Investments (Cyprus) subsidiary Transactions with treasury Cyprus 100 100 Trade and other payables 53,235 — — — 53,235 Limited shares Finance lease obligations 550 1,193 1,192 5,509 8,444 JSC MegaLabs subsidiary New telecom services Russia 100 100 development Long-term accounts payable — 199 — — 199 CJSC TT mobile subsidiary Integrated telecom Tajikistan 75 75 Total 31 December 2018 122,959 178,883 141,907 46,647 490,396 DTSRetail Limited (Note 3.3) associate Retail Russia 25 — 31 December 2017 LLC Euroset-Retail (Note 3.3) joint venture Retail Russia — 50 Loans and borrowings 74,557 72,935 119,367 100,658 367,517 Mail.Ru Group Limited (Note 5.1) associate Internet services BVI 12.34 15.2 Trade and other payables 50,535 — — — 50,535 JSC Sadovoe Koltso (Note 3.3) joint venture Corporate office Russia 49.999 49.999 Finance lease obligations 485 1,125 1,125 6,158 8,893 Derivative financial liabilities 3,842 — — — 3,842 Long-term accounts payable — 96 — — 96 The Company holds interests in material subsidiaries, associates and joint ventures through a number Total 31 December 2017 129,419 74,156 120,492 106,816 430,883 of intermediary holding companies. 274 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 275

5.7. Segment information Reconciliation of OIBDA to profit from continuing 5.8. Commitments, Equipment purchases agreements operations for the years ended 31 December Operating segments are reported in a manner is presented below: contingencies and In 2014 the Group entered into two separate consistent with the internal reporting provided uncertainties 7-year agreements with two suppliers to purchase to the chief operating decision-maker (‘CODM’). 2018 2017 equipment and software for 2G/3G/4G network The CODM is responsible for allocating resources construction and modernisation. The software and assessing the performance of the operating Russian operating environment usage agreements contain various termination segments. The Company’s CEO has been OIBDA 124,157 121,906 options, however the Group is specifically designated as the CODM. Depreciation (49,254) (55,282) During 2017 and 2018, the Russian economy was committed under the agreements to pay at least negatively impacted by significant declines in an amount equal to 50% of the fees due for years Amortisation (16,116) (8,071) The Group manages its telecommunication business crude oil prices and the value of the Russian Ruble, four through seven of the agreements for each base primarily based on eight geographical operating Loss on disposal of non-current as well as sanctions imposed on Russia by several station in use as at the date of termination while assets (337) (484) segments within Russia, which provide a broad countries. Ruble interest rates continued to fluctuate receiving a credit against these commitments for range of voice, data and other telecommunication Finance costs (25,927 ) (24,306) and as at 31 December 2018 the key rate of the fees already paid. The amount of the commitments services, including wireless and wireline services, Finance income 1,634 1,724 Central Bank of Russia was 7.75%. The combination at 31 December 2018 is 7,356 (31 December 2017: interconnection services, data transmission services Share of loss of associates and joint of the above resulted in a higher cost of capital, 8,675). and value added services. The CODM evaluates ventures (2,829) (1,947) increased inflation and uncertainty regarding the performance of the Group’s operating segments Impairment loss from Euroset — (15,917) economic growth, which could negatively affect Social infrastructure expenses based on revenue and operating income before the Group’s future financial position, results of Other non-operating expenses (1,677) (1,583) depreciation and amortisation (‘OIBDA’). Total operations and business prospects. Management From time to time, the Group may determine to assets and liabilities are not allocated to operating Gain on financial instruments, net 713 — believes it is taking appropriate measures to support maintain certain social infrastructure assets which segments and are not analysed by the CODM. Foreign exchange loss, net (1,271) (4,451) the sustainability of the Group’s business in the are not owned by the Group and not recorded in the Profit before tax from continuing current circumstances. consolidated financial statements as well as to incur MGL represented an internet operating and operations 29,093 11,589 education, science and other social costs. Such reportable segment before the Group determined 4G/LTE licence capital commitments activities may be conducted in collaboration with that it had lost control of MGL in June 2018 non-governmental organisations. These expenses (Note 5.1). Accordingly, as of 31 December 2018 Disaggregation of revenue In July 2012, the Federal Service for Supervision are presented in other non-operating loss in the MGL is no longer a reportable segment of the in Communications, Information Technologies and consolidated income statement (Note 5.3). Group. In the following table revenue is disaggregated Mass Media granted the Company a licence and by major products and service lines: allocated frequencies to provide services under Taxation Operating segments with similar economic the 4G/LTE standard in Russia. characteristics, such as forecasted OIBDA, 2018 2017 Russian and Tajik tax, currency and customs have been aggregated into an integrated Under the terms and conditions of this licence, legislation, including transfer pricing legislation, telecommunication services segment, which is the the Company is obligated to provide 4G/LTE are subject to varying interpretations and changes, only reportable segment as of 31 December 2018. Wireless services 276,076 264,352 services in each population center with over 50,000 which can occur frequently. Management’s Around 1.4% of the Group’s revenues and results Wireline services 30,941 28,759 inhabitants in Russia by 2019. The Company is also interpretation of such legislation as applied to are generated by segments outside of Russia. obligated to make capital expenditures of at least transactions and activities of the Group may Sales of equipment and accessories 28,532 28,699 No single customer represents 10% or more 15,000 annually toward the 4G/LTE roll-out until be challenged by the relevant regional and federal of the consolidated revenues. Total external revenue 335,549 321,810 the network is fully deployed. authorities. Recent events within Russia and Intra-group revenue elimination (8) (13) Tajikistan suggest that the tax authorities are taking Management has presented the performance Total revenue 335,541 321,797 Under the 4G/LTE licences acquired at frequency a more assertive position in their interpretation measure OIBDA because it believes that this distribution auctions and from other operators via and enforcement of the legislation and as a result, measure is relevant to an understanding of the acquisition of licence-holding entities the Company it is possible that transactions and activities that Group’s financial performance. OIBDA is not The Group’s revenue derives from contracts with is obligated to provide 4G/LTE services in each have not been challenged in the past may now be a defined performance measure in IFRS. customers. Revenue from sales of equipment population center with over 10,000 inhabitants in challenged. Therefore, significant additional taxes, The Group’s definition of OIBDA may not be and accessories is recognised at a point in time Russia by the end of the seven-year period starting penalties and interest may be assessed. comparable with similarly titled performance (generally, the time of sale), while service revenue from the date of obtaining the licences, i.e. by 2023. measures and disclosures by other entities. is recognised over time as the services are rendered Fiscal periods remain open to review by the to clients. As of the date these consolidated financial authorities in respect of taxes for the three calendar statements were authorised for issue the Group years preceding the current year. Under certain Revenue recognised under construction contracts was fully compliant with these capital expenditure circumstances reviews may cover longer periods. for the year ended 31 December 2018 is 598 commitments. (2017: 2,143). The Group’s management believes that its interpretation of the relevant legislation is appropriate and is in accordance with the current industry practice, and that the Group’s tax, currency and customs positions will be sustained. However, the interpretations of the relevant authorities could differ. 276 5. Financial Statements and Appendix Notes to the Consolidated Financial Statements 277

5.8. Commitments, contingencies Anti-terror laws Operating lease commitments 5.9. Events after the and uncertainties (continued) On 7 July 2016 the President of the Russian Leases in which a significant portion of the risks reporting date Federation signed a package of anti-terror laws. and rewards of ownership are retained by the The package requires telecommunications operators lessor are classified as operating leases. Payments Bonds As of 31 December 2018 the Group’s management to store all data, including that from phone calls, made under operating leases (net of any incentives estimated the possible effect of additional messages, and data transmitted by customers for received from the lessor) are charged to profit In February 2019 the Group placed its BO-001P-05 taxes, before fines and interest, if any, on these certain time periods, effective from 1 July 2018. or loss on a straight-line basis over the period series bonds in the amount of 20,000 at an interest consolidated financial statements, if the authorities This would require the Group to establish additional of the lease. rate of 8.55% per annum to be paid semi-annually were successful in enforcing different interpretations data centers and invest in data-processing for a term of three years. being taken by them, to be in the amount of up technologies. The potentially significant capital The Group normally enters into operating leases to approximately 1,300. expenditures required to do this would negatively with a term not exceeding one year. Accordingly, In March 2019 the Group placed its BO-001P-06 impact the Group’s cash flow generation, diverting the Group’s operating lease commitments and BO-002P-01 series bonds in the total amount Litigation resources from investment in growth, which could at 31 December 2018 and 2017 approximate of 10,000 at an interest rate of 8.90% per annum potentially impact future revenue and OIBDA. the annual lease expense (Note 2.3). to be paid semi-annually for a term of five years. The Group is not a party to any material litigation, although in the ordinary course of business, the Based on the current understanding of the law’s MegaFon has a ten-year lease agreement with Bank loans Company and some of the Group’s subsidiaries requirements, the Group expects that the Garden Ring for a part of the building (Note 3.3). may be party to various legal and tax proceedings, implementation of the changes may cost it Future minimum rentals payable under this non- In January, February and March 2019 the Group and subject to claims, certain of which relate to approximately 30,000-35,000 over the four years cancellable operating lease as at 31 December drew down 51,814 from different banks under fixed- the developing markets and evolving fiscal and beginning from 2019. are as follows: rate Ruble-denominated facilities for a term of up regulatory environments in which they operate. to 2-5 years to finance general corporate needs. In the opinion of management, the Company’s Finance lease commitments 2018 2017 In March the Group early repaid approximately and its subsidiaries’ liability, if any, in all pending $257 million (17,854 at the exchange rate as of litigation, other legal proceedings or other matters, The Group has finance lease contracts for various 31 December 2018) of US dollar-denominated will not have a material effect on the financial items of telecommunication assets. Under these floating-rate loans, which were due at the end condition, financial performance or liquidity leases the lessor retains title to the leased assets Within one year 1,760 1,538 of 2022 and partially prepaid 7,514 of Ruble- of the Group. as security for the Group’s obligations thereunder. After one year but not more denominated fixed-rate loan. than five years 7,399 6,465 More than five years 3,925 5,196 Sales of investments Future minimum lease payments under finance leases together with the present value of the net minimum 13,084 13,199 lease payments as of 31 December are as follows: In January 2019 the Group sold its investments in Forpost (Note 3.8) and another insignificant 2018 2017 associate for total consideration of approximately Present Present 270. The Group also sold 100% of LLC ‘CoreClass’ Minimum value of Minimum value of (Note 5.4) for a cash consideration of 640 receivable payments payments payments payments over two years from the date of acquisition. The sale resulted in an insignificant gain.

Within one year 550 519 485 456 Mandatory tender offer After one year but not more than five years 2,385 1,676 2,250 1,581 As of 7 March 2019, the expiration date of the More than five years 5,509 2,070 6,158 2,185 mandatory tender offer (Note 4), a total of Total minimum lease payments 8,444 4,265 8,893 4,222 126,246,094 ordinary shares (or 20.36% of the Less amounts representing finance charges (4,179) — (4,671) — outstanding ordinary shares) had been tendered Present value of minimum lease payments 4,265 4,265 4,222 4,222 by the Сompany’s shareholders. As a result, the Group, together with AF Telecom Holding LLC, is holding a 99.2% of the outstanding ordinary shares. The Group expects to resolve the status of any remaining shares outstanding by mid-tolate summer 2019. 278 5. Financial Statements and Appendix Additional Information 279

Materiality Matrix Material Topics 5 topic topic topic 1 4 21 topic and Materiality Matrix 4.5 topic 9 20

topic topic topic topic 4 10 11 2 19 topic 8 topic topic topic 12 17 13 Materiality for stakeholders 3.5 topic topic 14 15 topic topic topic 3 5 7 16

PJSC MegaFon publishes its performance reports on Material topics topic topic an annual basis. PJSC MegaFon’s 2018 Annual Report 18 3 was prepared in compliance with the Sustainability When preparing its 2018 Annual Report, MegaFon 2.5 Reporting Guidelines (GRI Standards) of the Global assessed disclosed topics for materiality, in line with topic Reporting Initiative (GRI). the Sustainability Reporting Guidelines. 6

This Annual Report also incorporates the Social Materiality assessment comprised three 2 Charter of Russian Business, the Guidelines on stages: 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Social Responsibility (ISO 26000), the Sustainable Materiality of MegaFon’s impact Development Vector Index, and the reference • Stage 1. Determine the list of material performance indicators developed by the Russian topics – make a list of the most frequent Topics: Union of Industrialists and Entrepreneurs. disclosures based on benchmarks of global and Russian companies within the 1. Economic 9. Labour/management 16. Forced or Unless specified otherwise, performance figures telecommunications industry performance relations compulsory labour pertain to PJSC MegaFon and its subsidiaries. The • Stage 2. Determine the materiality of the scope and wording of performance indicators in this Company’s impact and the materiality of 2. Indirect economic impacts 10. Occupational health and 17. Human rights Report do not have any material difference from topics by conducting a questionnaire survey safety previous reports. among top managers and stakeholders 3. Procurement practices 18. Supplier social • Stage 3. Build the materiality matrix based 11. Training and education assessment PJSC MegaFon’s 2017 Annual Report was published in on the survey results 4. Anti-corruption April 2018. 12. Diversity and equal 19. Customer The horizontal axis of the matrix shows the 5. Energy opportunity health and safety materiality of MegaFon’s impact on material topics based on the top management survey, and the 6. Emissions 13. Non-discrimination 20. Customer vertical axis shows the materiality of topics for privacy stakeholders, with the topics in the upper part of 7. Supplier environmental 14. Freedom of association and the matrix (above the diagonal line) deemed to have assessment collective bargaining 21. Socioeconomic priority and be mandatory disclosures in the Annual compliance Report. 8. Employment 15. Child labour

In addition, during the 2017 Annual Report preparation, stakeholders were interested in the following topics which were to be considered in the 2018 Annual Report:

• Degree, forms, and nature of impacts on local communities, action groups, and NGOs • Support of charity initiatives of MegaFon’s employees and their families 280 5. Financial Statements and Appendix Additional Information 281

Headcount with a breakdown by age group, people Tables featuring 2016 2017 2018

headcount statistics 18–25 10,088 10,831 11,341 26–35 19,560 20,083 20,235 36–45 5,567 6,188 6,722 46–55 1,372 1,540 1,669 Over 55 402 484 507 Total 29,648 30,914 31,576

Overall personnel turnover in the reporting period, %

2016 2017 2018 Headcount with a breakdown by type of employment, people

2016 2017 2018 Women 15 15 21 Men 21 24 29 Total 18 20 25 Full-time 34,700 36,590 38,034 Part-time 282 451 416 Total 34,982 37,041 38,450 Total number of employees hired in the reporting period, people

2016 2017 2018

Headcount with a breakdown by region, people Women 7,053 9,137 8,179 2016 2017 2018 Men 6,197 7,386 8,271 Total 13,250 16,523 16,450

Moscow and the Moscow Region 6,348 7,569 6,913 Expenses on social programmes/benefits, RUB ’000 Volga Region 6,746 7,611 7,733 Caucasus 4,653 4,516 4,626 2016 2017 2018 North-West Region 5,311 5,608 5,718 Central Region 3,663 3,555 4,952 VHI and accident insurance 557,187 598,340 517,574 Urals Region 3,793 3,624 3,773 Reimbursement for sport activities 36,874 42,768 46,629 Siberia Region 2,991 3,242 3,372 Financial aid 24,372 21,504 24,808 Far East Region 2,771 2,675 2,681 Temporary disability payment 79,104 76,102 116,725 Total 36,276 38,400 39,768 Reimbursement for mobile phone expenses 206,632 215,696 174,841 Reimbursement for relocation 5,427 7,298 18,610 Total 909,596 961,708 899,188 Headcount with a breakdown by gender, people Other information 2016 2017 2018 2016 2017 2018

Women 21,638 22,826 23,171 Child labour (yes/no) no no no Men 15,351 16,300 17,358 Forced labour (yes/no) no no no Total 36,989 39,126 40,529 Incidents of discrimination on grounds of race, colour, sex, religion, none none none political opinion, national extraction, or social origin 282 5. Financial Statements and Appendix Additional Information 283

GRI Material topics

GRI 201 103-1. Explanation of the material topic and its Boundary 122 103-2. The management approach and its components 122 content index Economic Performance 103-3. Evaluation of the management approach 122 201-1. Direct economic value generated and distributed 122

103-1. Explanation of the material topic and its Boundary 64-65 GRI 203 103-2. The management approach and its components 64-65 Indirect Economic 103-3. Evaluation of the management approach 64-65 Impacts 203-1. Infrastructure investments and services supported 24, 27, 64-65 203-2. Significant indirect economic impacts 24, 27, 64-65

103-1. Explanation of the material topic and its Boundary 164 GRI 205 103-2. The management approach and its components 164 GRI standard Indicator Page number Anti-corruption 103-3. Evaluation of the management approach 164 205-3. Confirmed incidents of corruption and actions taken 164

102-1. Name of the organisation 1 GRI 416 103-1. Explanation of the material topic and its Boundary 117

102-2. Activities, brands, products and services 13-15 Customer 103-2. The management approach and its components 117 102-3. Location of headquarters 248 Health and Safety 103-3. Evaluation of the management approach 117 102-4. Location of operations 32-33 103-1. Explanation of the material topic and its Boundary 162

102-5. Ownership and legal form 1 GRI 418 103-2. The management approach and its components 162 102-6. Markets served 32-33 Customer 103-3. Evaluation of the management approach 162 102-7. Scale of the organisation 14 Privacy 418-1. Substantiated complaints concerning breaches of customer 102-8. Information on employees and other workers 140 162 privacy and losses of customer data 102-10. Significant changes to the organisation and its supply chain 36-37, 170

102-11. Precautionary Principle or approach 166 103-1. Explanation of the material topic and its Boundary 162 102-13. Membership of associations 30 GRI 419 103-2. The management approach and its components 162 102-14. Statement from senior decision-maker 2-9 Socioeconomic 103-3. Evaluation of the management approach 162 102-15. Key impacts, risks, and opportunities 132-137 Compliance 419-1. Non-compliance with laws and regulations in the social and 162 102-16. Values, principles, standards, and norms of behaviour 162-163 economic area 102-18. Governance structure 173 GRI 102 102-40. List of stakeholder groups 139 103-1. Explanation of the material topic and its Boundary 150-152 GRI 413 102-42. Identifying and selecting stakeholders 139 103-2. The management approach and its components 150-152 Local 103-3. Evaluation of the management approach 152 102-43. Approach to stakeholder engagement 139 Communities 413-1. Operations with local community engagement, impact 102-44. Key topics and concerns raised 139 153-161 assessments, and development programmes 102-45. Entities included in the consolidated financial statements 273 Support of charity 102-46. Defining report content and topic Boundaries 278 initiatives 103-1. Explanation of the material topic and its Boundary 150 102-47. List of material topics 279 of MegaFon’s employees 103-2. The management approach and its components 150 102-48. Restatements of information 278 and their families 103-3. Evaluation of the management approach 150 102-49. Changes in reporting 278 102-50. Reporting period 1 102-51. Date of most recent report 278 102-52. Reporting cycle 278 102-53. Contact point for questions regarding the report 289 102-54. Claims of reporting in accordance with the GRI Standards 278 102-55. GRI content index 282-284 102-56. External assurance 215-219 284 5. Financial Statements and Appendix Additional Information 285

Other topics disclosed in the Report Glossary 103-1. Explanation of the material topic and its Boundary 166 GRI 302 103-2. The management approach and its components 167 Energy 103-3. Evaluation of the management approach 167 302-1. Energy consumption within the organisation 167

103-1. Explanation of the material topic and its Boundary 140 GRI 401 103-2. The management approach and its components 144

Employment 103-3. Evaluation of the management approach 144 401-2. Benefits provided to full-time employees that are not provided to 144, 281 temporary or part-time employees

103-1. Explanation of the material topic and its Boundary 146-147 GRI 404 103-2. The management approach and its components 146-147 Training 103-3. Evaluation of the management approach 146-147 and Education 4G/LTE is the fourth generation BPaaS stands for Business 3GPP coding standard/ 404-2. Programmes for upgrading employee skills and transition 146-147 of wireless technology which Process-as-a-Service. EVS codec, carrying the full assistance programmes provides greater access to data audible range of the human and services through enhanced CDN (Content Delivery ear (20 kHz) and supporting calls 103-1. Explanation of the material topic and its Boundary 162 GRI 406 download and upload speeds, Network) is a service for from compatible smartphones 103-2. The management approach and its components 162 and enhanced use of spectrum. content providers, which relies on over VoLTE via MegaFon’s Non-discrimination 103-3. Evaluation of the management approach 162 distributed network infrastructure 4G (LTE) network. Agile is an umbrella term for to speed up downloads for users 406-1. Incidents of discrimination and corrective actions taken 281 several advanced iterative outside metro areas and secure FCR stands for First Call software development content availability during peak Resolution. approaches relying on traffic events, including: large- continuous feedback, within scale live webcasts, advertising GDR stands for Global self-organised cross-functional campaigns, software updates, or Depositary Receipt. teams, to address fast-changing DDoS attacks. requirements. GPM (Global Performance CSI stands for Customer Management) is a system ARPDU (Monthly Average Satisfaction Index. used to monitor equipment Revenue per Data User) is performance parameters. calculated for a given period by DoS/DDoS (Distributed dividing the Company’s data Denial of Service) means GRI stands for Global Reporting revenue for the period, by the a hacking attack intended Initiative. average number of its data users to disrupt a user’s system by during that period, and further hindering or stopping access to IaaS stands for Infrastructure- dividing the result by the number system resources (servers) for the as-a-Service. of months in that period. user. IMEI stands for International ARPU stands for Average Direct carrier billing means Mobile Equipment Identity. Revenue per User. payment from a mobile account in Apple and Google app stores. IoT (Internet of Things) B2B stands for Business-to- refers to interconnection via the Business. DSU (monthly average internet of computing devices mobile Data Services per embedded in everyday objects, B2C stands for Business-to- User) is calculated by dividing enabling them to send and Consumer. the total number of megabytes receive data. transferred by our network B2G stands for Business-to- during a given period, by the IPO stands for Initial Public Government. average number of data users Offering. during such period, and further B2O stands for Business-to- dividing the result by the number Operators. of months in that period.

B2X stands for Business-to-X, EVS stands for Enhanced including B2B, B2G, and B2O, Voice Services, also known but excluding B2C. as Enhanced HD Voice, or 286 5. Financial Statements and Appendix Additional Information 287

KQI (Key Quality Indicator) is means OIBDA as a percentage of exchange or telephone switching VoLTE (Voice over LTE) is a obtained through business FCF (Free Cash Flow) means a system of metrics for quality of revenue. The Company believes system that is installed at, and voice streaming technology combinations are not included cash from operating activities, billing operations. that OIBDA provides a better serves, a private organization using an LTE network. in the calculation of capital less cash paid for purchases of measure of the Company’s with a large number of internal expenditures. property, plant and equipment, LAN (Local area network) — actual operational results devices. Big Data represents the and intangible assets, increased is a computer network that including our ability to finance information assets characterised KPI (Key Performance by proceeds from sales of interconnects computers within a capital expenditures, acquisitions SLA refers to a Service Level by such a high volume, Indicators) are performance property, plant and equipment, limited area. and other investments, and Agreement between the velocity and variety that it metrics that help an organisation and interest paid. It is a financial our ability to incur and service Company and its subscribers. requires specific technology achieve its strategic goals and measure which should be Life Control is MegaFon’s Smart debt. While it does not take and analytical methods for its operating targets. considered as supplementary Home M2M product. into account depreciation SON (Self-Optimising transformation into value. rather than as an alternative to of property and equipment, Network) is a smart network Converged services are the information provided in the LSE stands for London Stock amortisation of intangible assets capable of independently FOCL stands for Fibre Optic telecommunications services Company’s financial statements. Exchange. and gain/(loss) from disposal evaluating the performance of Communications Line. provided over both mobile and This metric measures the of non-current assets, which each of its constituent elements fixed-line networks. Company’s ability to generate LTV (Lifetime Value) is an are considered as operating and optimising its own operation. VHI stands for Voluntary Health cash after accruals required internal estimated assessment expenses in IFRS, these expenses Insurance. CDW stands for Corporate Data to maintain and expand the of the current value of the primarily represent noncash SCRUM (SCRibing Unified Warehouse. Company’s assets. future cash flow per subscriber charges related to long-term Methodology, SCRapbooking EAEU stands for Eurasian throughout the entire period assets acquired or constructed Unified Methodology, or Economic Union. MES (Mobile eSignature) is an Adjusted OIBDA is OIBDA net of of his or her relationship with in prior periods. OIBDA is widely Sprint Continuous Rugby innovative digital signature linked impairment charge. MegaFon. used by investors, analysts, and Unified Methodology) GNOC stands for Global to a customer’s mobile number. rating agencies as a measure is an Agile-based project Network Operational Centre. Sprint is a fixed-length iteration M2M (Machine-to-Machine) to evaluate and compare management methodology that NUM stands for Network in SCRUM that delivers a refers to technologies that allow current and future operating assigns certain roles to process ICT stands for Information and Utilisation Model. business product increment. both wireless and wired systems performance and to determine stakeholders and enables Communications Technology. to communicate with other the value of companies within delivering solutions with the NSD stands for National DBMS stands for Database devices of the same type. the telecommunications industry. highest priority in short fixed- CAPEX (Capital Settlement Depository. Management System. length iterations (sprints). Expenditures) comprises MAR refers to EU’s Market Abuse OSS is an umbrella Operation the cost of purchases of new SSC stands for Shared Services TCS stands for Technical Regulation. Support System. Trouble ticketing is a system equipment, new construction, Centre. Customer Support. managing orders and incidents. acquisition of new or upgrades OIBDA (Operating Income OTT (Over the Top) is a to existing software, acquisition FTC refers to JSC First Tower FTM refers to nationwide Before Depreciation and technology for online video data VAS stands for Value-Added of spectrum and other intangible Company. (federal) telemarketing. Amortisation) is a financial transmission from a content Services. assets, and purchases of other measure which should be provider to a user’s device via long-term assets, together with Data user is a subscriber who Digital customer is a considered as supplementary data networks, often bypassing VoWiFi (Voice over Wi-Fi) related costs incurred prior to the has consumed any amount of subscriber who relies on his or rather than as an alternative telecoms operators. is a technology enabling voice intended use of the applicable data traffic within the preceding her smartphone to consume to the information provided calls and messaging from mobile assets, all accounted for as at month. content and communicate, in the financial statements of PBX (Private Branch devices connected to Wi-Fi. the earliest time of payment driving mobile data usage. the Company. OIBDA margin Exchange) is a telephone or delivery. Long-term assets 288 5. Financial Statements and Appendix Additional Information 289

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