Hals-2008-Eng.Pdf

Annual Report, 2008 Creating foundation for further development Table of contents

Disclaimer 4 Part 4 Corporate overview 6 Portfolio and status of the projects, Key events in 2008 8 OVERVIEW OF BUSINESS PERFORMANCE 56 Portfolio and status of the projects 58 Overview of business performance 78 Part 1 Letters from the CHAIRMAN OF THE BOARD OF DIRECTORS AND THE President – Part 5 Chairman of the Management Board 10 Information for shareholders, REPORTS ON CORPORATE GOVERNANCE AND SOCIAL Letter from the Chairman of the Board of Directors 12 RESPONSIBILITY 80 Letter from the President – Chairman of the Management Board 14 Information for shareholders 82 Corporate governance report 88 Corporate social responsibility 102 Part 2 Mission and strategy, RESULTS AND MAjor OBJECTIVES 18 Part 6 Consolidated Financial Statements FOR 2008 108 Mission and strategy 20 Review of results and major objectives 22 Part 7 AppendixES 156 Part 3 Review of financial results Report on compliance with the Corporate Governance Code AND REAL ESTATE MARKET 24 of the FCSM 158 Review of financial results for 2008 26 Information on major and interested party transactions 168 Overview of real estate market 40 Event calendar 171 Glossary 172 Contact information 176 Feedback 177

 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Disclaimer

This annual report has been prepared based on the in- The Company neither confirms nor guarantees that the formation available to the Open Joint Stock Company results indicated in these projection statements will be Sistema-Hals (hereinafter, Sistema-Hals or the Company) achieved. Sistema-Hals accepts no responsibility for any and its subsidiaries (hereinafter, Sistema-Hals Group or losses that may be incurred by any individual or legal en- the Group) as at the issue date. tity by their reliance on the projection statements. Each particular projection statement represents one of the nu- This annual report includes certain projection statements merous developments scenarios and should not be treat- with respect to the Group’s operations, economic indica- ed as the most probable one. tors, financial position, results of operating and development activities, its plans, projects and expected results, In particular, other factors that may affect the Company’s as well as the trends related to real estate prices, costs, activity include the possibility of deriving profit from proj- estimated expenses, development prospects, and other ects sale, the effect of exchange rate changes, activities similar factors and economic projections with respect to of the government authorities in the Russian Federation, the industry and markets, starting and completion dates including changes in tax, and other laws and regulations. of certain projects, preservation of certain projects or dis- This list of significant factors is not exhaustive. When con- posal of certain projects or their shares. sidering projection statements, the above factors should be carefully considered and taken into account, in par- Words such as «intends», «strives», «projects», «ex- ticular, the economic, social and legal obligations of the pects», «estimates», «plans», «considers», «assumes», Group’s activities. «may», «should», «will», «continues» and other words with similar meanings usually indicate the projection na- Except for cases directly provided for by the applicable ture of the statement. laws, the Company does not assume any obligations to publish updates and amendments to the projection state- These projection statements, due to their specific nature, ments, based on either new information or subsequent involve inherent risks and uncertainty, and there is a risk events. that the assumptions, expectations, intentions and other projection statements may never come to life. In the light of the above risks, uncertainties and assumptions, the Company notifies that the actual results may differ significantly from the indicated, directly or indirectly, in the said projection statements that are effective only at the date of this annual report.

 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Corporate overview

Sistema-Hals Group is one of Russia’s largest develop- Since 1994, Sistema-Hals Group has completed about 40 Since 2006 the shares of Sistema-Hals OJSC are traded on The Company’s Global Depository Receipts are traded ment companies. The company was established in 1994 projects with a gross building area of about 340,000 sq. m, the Moscow Interbank Currency Exchange (ticker HALS) on the Main market of the London Stock Exchange since to consolidate and manage the assets of Joint-Stock including a Class A office building at Mokhovaya Street, and Moscow Stock Exchange (HALS), and from 2007 – November 2006 (HALS). Financial Corporation Sistema in the area of real estate a headquarters of the DaimlerChrysler automaker, the on the Russian Trading System stock exchange (HALS). and construction. Hals Tower office building, headquarters of the Pipe Metallurgical Company, MaMaison (Orco Property Group) Pursuing its development projects, Sistema-Hals over- international chain hotel, the Detsky Mir store in Kazan, STRUCTURE OF SISTEMA-HALS GROUP1 sees all phases of the property lifecycle starting from con- and a number of residential buildings in the Kuntsevo dis- cept development to management of finished projects. trict in Moscow. The main business areas of the Group include development, asset management (management and lease of real The Company’s clients include major Western and Russian estate facilities) and facility management (building main- corporations, among them Japan Airlines, Raiffeisenbank, tenance). Prior to December 2008, the Group also includ- Scandinavian Airlines, Western Union, AFK Sistema, ed Project and Construction Management business seg- Rosno, MGTS, Nafta-Moskva, Leasing Company Uralsib, ment.. Tchibo CIS, Worly Parsone International, Stealth Telecom, Trubond, Oscar Service, and others. Sistema-Hals has a diversified portfolio compring 104 projects and properties. The planned gross building area To obtain the industry expert assistance in 2007, the of projects amounts to about 4.5 million sq. m and about Group signed partnership agreements with the French 500 ha of underlying land plots. The gross building area of firm Apsys and the Saraya company in the Middle East, properties of the Company totals approximately190,000 which are among the largest companies engaged respec- sq. m and over 260 ha of land plots. tively in development and asset management in retail and in resort real estate. The Company’s portfolio includes Class A and B offices, shopping centers, elite residential, business class Currently, Sistema-Hals together with its partners is residential, cottages, mixed-use complexes and hotels. building the Leto Mall in St. Petersburg, the Leningradsky The Company’s portfolio is well diversified not only in Towers office complex in Moscow, the Kamelia resort com- terms of market segments, but also geographically. The plex in Sochi, and is also redeveloping MGTS properties. Group’s projects and properties are located in major cities In addition to that, the Company is in sole charge of the of Russia and Ukraine, such as Moscow, St. Petersburg, renovaion of the Central Detsky Mir store at Lubyanka, Kazan, Krasnoyarsk, Nizhny Novgorod, Sochi, Kiev, and Moscow. Yalta. Sistema-Hals is a socially responsible company and con- According to Cushman & Wakefield Stiles & Riabokobylko, ducts its business in accordance with principle industry an independent appraiser, the value of Sistema-Hals guidelines in the area of health promotion, environmental Group stakes in projects and properties stood at USD 2.05 protection, and occupational safety. billion as of January 1, 2009.

Organizator OOO and PSO Sistema-Hals, which formed the fourth business segment of the Group («Project and Construction Management»), were sold in December 2008.

 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Key events in 2008

February May July November Appointment of Andrey Solovyev as Financial Director of Sistema-Hals signed a deal with the leading Italian archi- Sistema-Hals Group closed Central Detsky Mir at Lubyanka Sistema-Hals sold its stakes in PSO Sistema-Hals (51%) the Company. tectural bureau Giugiaro Architettura to design the interior for renovation and restoration. and Organizator OOO (51%). decorations of the apartment hotel on Milyutinsky Lane.

Sistema-Hals completed the construction and opened a new athletic complex for the CSKA (Central Army Sport Club).

Sistema-Hals completed construction of the first phase of the RWS – St. Petersburg Film Studio.

March June August December Sistema-Hals Group had the Kuntsevo-based Museum of Board of Directors at JSC Sistema-Hals elected Felix Sistema-Hals Group expanded its asset management Sistema-Hals announced changes in short-term strategic Military Glory renovated. Yevtushenkov as the Chairman of the Board and Sergey portfolio and aquired the Danilovsky Fort business center plans and crisis management program. Shmakov as President. (10, Novodanilovskaya Embarkment). Sistema-Hals sold complex of buildings on 8 March Street in Moscow. Sistema-Hals Group provided apartments for 29 families living in a dormitory on Lva Tolstogo Street, Khamovniki, Sistema-Hals sold 100% of the 22, Rochdelskaya Street Moscow. project.

 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board World culture, just like our business, rests on a classical foundation

The Erechtheum is a masterpiece of Ancient Greek architecture (421-406 BC), a temple of Athena and Poseidon Erechtheus on the Acropolis in Athens. It is noteworthy for its pronounced asymmetrical composition and the re- fined beauty of the two Ionic porticos and the Porch of the Caryatids.

During the years of the Erechtheum’s construction, Athens lived through difficult times. A war with Sparta was raging. A plague broke out in the city besieged by the Spartans. Many of its citizens, including Pericles, died during the ep- idemic.

The Erechtheum’s location was chosen for a reason. It had been determined beforehand. They believed that it was here that Poseidon had struck the ground with his trident and thus started a stream, and where Athena had planted an olive tree. The architect was confronted with the difficult task of erecting a building on a steep slope. There was no time for detailed planning or for leveling the Erechtheum’s site because of the heavy burden of the Peloponnesian War. Consequently, the rooms of the Erechtheum occupy different levels.

Part 1 Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board

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 Seven projects within the MGTS program in Moscow (5, To restructure its debt, in April 2009 the Company be- the Company’s ordinary shares and received an option to Vsevolozhsky Lane; 19, Dayev Lane; 3, Zorge Street; gan the placement of ruble-denominated first- and sec- redeem additional 31.5% of the shares. The option can be 5/1, Milyutinsky Lane; 34, Nagatinskaya Street; 11, ond-series bond loans via open subscription with the to- exercised beginning the date of issuing the permit by reg- Rogozhsky Val; 5, Stolyarny Lane). tal par value of RUR 5 billion reaching maturity in 2014. ulatory authorities. If the option is exercised, VTB Bank The issues were organized by Raiffeisenbank CJSC and OJSC will own 51% of Sistema-Hals. AFK Sistema will con- In addition, the Company will continue to develop the fol- Renaissance Capital – Financial Consultant OOO. tinue to participate in the management of the Company via lowing projects which are at the completion stages and do the remaining 19.5% of equity in Sistema-Hals. not require significant amounts of additional financing: Therefore, notwithstanding the adverse market condi-  Diplomat residential complex; tions, the Company achieved positive results in attracting On behalf of the Company, I am glad to welcome our new Dear Shareholders,  Residential complex at 25, Dnepropetrovskaya Street; financing and restructuring the loans received earlier. shareholder. I am sure that with such majority sharehold- The reporting year was by far the toughest one for Sistema-  Primavera residential complex; ers as VTB Bank OJSC and AFK Sistema the Company will Hals. The year 2008 showed how swift the economy can  Aurora community; Reduction of Expenses be able to improve the efficiency of corporate governance, change during the crisis, when the seemingly unlikely pes-  Gorki-8 community, 1st phase. In order to streamline its expenses, the Company start- implement the updated production program, and over- simistic scenarios become a reality. ed a program to cut its business and administrative ex- come the crisis. The fact that VTB Bank OJSC is now pres- Other Sistema-Hals projects are of a more long-term na- penses by 50% in 2009. Due to adjustments to its produc- ent in the Company’s capital structure and preservation of Given the global liquidity crisis and aggravated situation ture and/or are at an early stage of implementation. They tion program, Sistema-Hals is streamlining the structure a significant equity interest by AFK Sistema underscores on the real estate market, Sistema-Hals was among the are preserved and, I am sure, they will create a foundation and number of its headcounts by way of cutting about the fundamental promise of the real estate market and will first developer companies in Russia to take timely mea- for further growth of the Company in the mid-term out- 40% of its employees across Sistema-Hals Group. In ad- be a recipe for future growth of the Company’s sharehold- sures to face the current market situation. look, when the market recovers. dition to that, beginning in 2009, the Group cut its oper- er value. ating expenses and rental payments by moving its subsid- In the fourth quarter of 2008, the management of Sistema- Debt Restructuring iaries into the headquarters at 35/4, Bolshaya Tatarskaya To conclude, I would like to thank all shareholders of Hals adjusted the Company’s business strategy and ad- At the end of 2008, the Sistema-Hals Group gross debt Street, Moscow owned by Sistema-Hals Group. Sistema-Hals OJSC who lent their trust and support to the opted a crisis program for 2009. I am confident that the amounted to USD 1.47 billion. The Company has taken the Company during the hard times. I would also like to assure crisis program will help us not only to overcome the crisis following important steps in order to restructure its debt. Improvement of Corporate Governance you that the Board of Directors of Sistema-Hals will contin- situation, but also to build a solid foundation for further Sistema-Hals traditionally pays great attention to improve- ue to work for the benefit of the Company and all its share- growth of the Company in the mid- to long-term perspec- In December 2008, the Company converted its debt to VTB ment of its corporate governance. The Company’s man- holders and employees. tive, when the situation in the global and Russian econo- Bank OJSC into rubles in the amount of USD 700 million. agement continually studies and adapts the best Russian mies gets better. They have removed the provisions about margin calls on and international corporate governance practices. the Sistema-Hals shares, whereas the requirements on Adjusted Production Program compliance with the financial covenants were postponed In order to build in the Company a system that would Felix Evtushenkov, Working within the framework of the adjusted business from 2008 to 2009. maintain efficient relations with the financial communi- Chairman, Board of Directors strategy, the Company focused on implementation of 12 ty and improve the investment appeal of the Company’s projects with already available or anticipated financing ar- Already in the midst of the liquidity crisis, we managed securities, a new Committee for Investor Relations at the May 21, 2009 rangements together with co-investors, which are either to agree on a new credit facility with VTB Bank OJSC in Board of Directors have been established. The Committee at or ready to move into construction stage: the amount of RUR 7 billion for two years. In December is called to promote protection of rights and interests of  Leningradsky Towers business center; 2008, the Company extended the bridge credit from the Company’s shareholders and help to increase the  Central Detsky Mir store; Raiffeisenbank CJSC in the amount of RUR 1 billion until Company’s capitalization.  Leto Mall; the end of 2009. In February 2009, Sistema-Hals extend-  Kamelia resort; ed the loan from Alfa-Bank OJSC with partial payback of Changes in the Structure of Share Capital  Emerald Valley residential complex; the debt and an option for its extension till April 2010. In April 2009, AFK Sistema signed an agreement with VTB Bank OJSC for selling an equity interest in Sistema-Hals OJSC. The transaction will be completed in two phases. During the first phase VTB Bank OJSC acquired 19.5% of

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 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board Letter from the President – Chairman of the Management Board

Today, the liquidity crisis makes itself felt in almost all in 2007. In 2008, the operating income decreased by USD In order to streamline its business structure, the Company segments of the real estate market. Prices moved up sig- 157 million from USD 33 million, which resulted in a loss decided to retire from the non-core Infrastructural and nificantly in the first half of 2008, and at the end of the of USD 124 million. The net loss of the Company for 2008 Construction Management segment and focus on the pri- year under review prices for residential real estate were up amounted to USD 381 million as opposed to the net reve- ority segment – Development. about 19%. However, prices started to decline in the forth nue of USD 35 million in 2007. quarter across all market segments. The office market We believe that given the current situation on the real es- also slowed down in the third quarter of 2008: new high- The book value of the Company’s assets was up 8% at tate market the key priorities of Sistema-Hals should in- quality supply was down, as was the quantity of new proj- USD 1.8 billion as of December 31, 2008. clude overcoming the current crisis in the industry and ects, lease rates and sales prices for offices stabilized. building a solid foundation for the Company’s mid- and Business Activities long-term development with a diversified portfolio of Nevertheless, we believe that the long-term outlook for In 2008, the sale of residential on Simferopolsky Lane, high-quality real estate capable of generating a steady Dear Shareholders, the real estate market is positive. The Russian real estate Michurinsky Avenue, Dnepropetrovskaya Street, and cash flow. In 2008, we made a great effort in building up the com- market is fundamentally robust, and we believe that com- Rublevskoye Highway accounted for the bulk of retail petitive advantages of the Company by way of enhancing panies that can manage through this recessionary period sales at Sistema-Hals Group. Portfolio Value internal business processes, streamlining expenses and will be well placed to take advantage of the opportunities The value of Sistema-Hals’ share in properties and proj- strengthening the Company’s management team. for growth in the mid- to long-term outlook, when the situ- As a part of the effort to streamline its project portfolio, ects decreased by 45.6% in the period from July 1, 2008 ation in the global and Russian economies gets better. in 2008 Sistema-Hals Group sold the project of construc- to January 1, 2009 according to an independent appraisal In particular, working on our long-term strategy provid- tion of an administrative building in downtown Moscow carried out by Cushman & Wakefield Stiles & Riabokobylko ing for transition from the process of building a project Financial Results located at 22, Rochdelskaya Street and several buildings (C & WS & R). C & WS & R determined that the total market portfolio to scheduled implementation of the production In 2008, the consolidated earnings of Sistema-Hals Group on 8 Marta Street. value of 100% ownership in 104 projects and properties program, in the first half of 2008 we streamlined the or- amounted to USD 362 million, down from USD 424 million amounted to USD 2,576 million on January 1, 2009 of which ganizational structure of our Company and significant- in 2007. The earnings slumped in the Development seg- In 2008, the main revenue of the Group in its Asset Sistema-Hals’ share (after minority interests) amounted to ly simplified the structure of our subsidiaries and depen- ment: the revenue from selling properties, projects, and Management business segment was generated by lease of USD 2,049 million. dent companies. stakes in projects decreased, which was partially offset the first cottages from the second phase of construction by an increase in retail sales. Lower earnings are mostly in the Serebryany Bor community. In 2008, the Company Operating Activity However, we adjusted the current Company’s strategy and due to the reduced demand for projects or properties in began to lease the first cottages from the second phase of As the Chairman of the Company’s Board of Directors has took measures to minimize the aftermath of the crisis for the deteriorated market situation construction in the Serebryany Bor community. already mentioned, we have changed the production pro- our business in the second half of 2008, when the liquidi- gram pursuant to the adjusted business strategy and fo- ty crisis had already hit the global economy. Nevertheless, The operating expenses of the Group during the period In August 2008, Sistema-Hals expanded its Asset cused our efforts on implementation of 12 projects. the global financial crisis significantly affected our oper- under review increased to USD 486 million from USD 391 Management portfolio with the view to build a portfolio of ating and financial results in 2008. million in the previous year. The increase in operating ex- rental assets and acquired the Danilovsky Fort business In 2008, the Company completed construction of a con- penses was in a great part due to higher expenses in the center on the Novodanilovskaya Embankment. crete frame of both towers at the Leningradsky Towers Market Development segment. This growth is primarily due to business center (39, Leningradsky Avenue). The global financial crisis did not have any significant im- declaration of loss in the Siemens Tower project; declara- In 2008, the Company’s portfolio of Facility management pact on the Russian economy during the first six months of tion of loss caused by devaluation of the non-current as- included properties with a gross building area of more In July 2008, the Company began reconstruction and res- 2008. Good macroeconomic fundamentals in Russia par- sets and accrual of reserves on doubtful receivables. than 1.1 million sq. m located in six Russia’s regions. The toration work at the Central Detsky Mir building (5/1, tially protected the Russian economy. However, the eco- Company’s clients include major Western and Russian Teatralny Lane). The interior space rearrangement will in- nomic situation began to change drastically beginning in OIBDA for 2008 stood at a negative value of USD 101 mil- corporations. crease the gross building area from 57,500 sq. m to 74,000 September, and the economy began to slow down. lion as compared with the positive value of USD 47 million sq. m, and almost double the retail areas, which stood at

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about 19,000 sq. m prior to the renovation. The external Management Team Strengthening To conclude, we would like to express our gratitude for tasks of overcoming the aftermath of the current finan- look of the building, its size, individual elevations, and To improve the internal business processes, we have reor- successful cooperation to the shareholders of Sistema- cial and economic crisis and laying the groundwork for the outline of the building will be kept within the borders of ganized the Company’s development and sales units, es- Hals OJSC, employees and business partners - everyone long-term progressive development of the Group! visual integrity. tablished Complex for Corporate Communications, as well who help the Company move steadily to the achievement as Complex for External Relations with the Government of its strategic goals! In 2008, the Company developed project documentation Authorities. Sergey Shmakov and began preliminary work on seven projects of the pro- We are confident that the adjusted business strategy of President–Chairman gram for reconstruction of the MGTS projects. A number of changes have taken place in the Company’s the Company, the experience of the management team, of the Management Board management. In February 2008, Andrey Solovyev was ap- and the appearance of a new major shareholder – VTB Currently, Sistema-Hals continues to actively cooperate pointed the Financial Director and Vice President in charge Bank OJSC – will help the Company to solve its priority May 21, 2009 with its strategic partners, Apsys и Saraya, with which of Complex for Finance and Investment. Mr. Solovyov it entered into agreements in December 2007. The inter- has a working experience in such leading companies as nationally recognized experience of both partners in the Surgutneftegaz, YUKOS, ECN Group, etc. area of development, retail property and resort management will make it possible to not only strengthen the Igor Kascheyev, who has been Vice-President in charge of Sistema-Hals’ leading stance on the Russian real estate Complex for Asset Management with the Company since market, but also receive additional financial resources for 2006, became First Vice-President. Teimuraz Shengelia, project development. who used to be the Head of our subsidiary Sistema-Hals Center OJSC, is now Vice-President in charge of Complex During the year under review, Sistema-Hals together with for Commercial Real Estate. its French partner Apsys adapted Leto Mall (St.Petersburg) to the European standards and started leasing the retail. By October 2008, we have finalized strengthening our As of today, we have already signed agreements with management team, and several new highly skilled top many tenants. managers joined our Company:  Elena Vitchak, previously Head of the personnel de- Sistema-Hals and the Arab Saraya Company together are partment at the Capital Insurance Group, was ap- redeveloping the hotel and resort complex located in place pointed the Director for Human Resources, Head of of the former Kamelia vacation hotel in Sochi, Russia. The Administrative Complex; construction of a world-level resort will include a five-star  Tatyana Gvilava, who has been an Advisor to the hotel, club-apartments, own beach, and internal infra- Chairman of the Board of Directors at AFK Sistema for structure facilities. a number of years and a Director at the Russian-Arab Business Council, was appointed Vice President in In 2008, the Company completed the cast-in-place charge of the Complex for External Relations; and roof jobs at the following residential complexes in  Dmitry Zikanov, who was earlier in charge of the real Moscow: Emerald Valley (111A, Rublevskoye Highway); estate projects in a number of Russian developer com- Diplomat (39A, Michurinsky Avenue), Primavera (18, 18/1, panies, was appointed Vice President in charge of the Simferopolsky Lane), and the residential building at 25A, Complex for Residential Real Estate; Dnepropetrovskaya Street. These properties are sched-  Gennady Frolov, previously Head of corporate commu- uled for commissioning in the third quarter of 2009. nications at AFK Sistema, was appointed Vice President in charge of Complex for Corporate Communications.

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Notre Dame de Paris, the geographical and spiritual heart of Paris, is located in the eastern part of the Île de la Cité on the site of Saint Stephen’s Basilica, the first Christian church in Paris, which was in its turn built on the site of a Gallic-Roman temple dedicated to Jupiter.

Like many other early Christian churches, it was erected on the site of a pagan shrine. Jupiter used to be worshipped where now the towers of the Cathedral of the Holy Virgin rise up to the sky. With the advent of the Christian era, the pagan temple was transformed into a church of the new faith. This took place in the beginning of our millennium, shortly after the Franks were baptized by St. Dionysius. However, the foundation of the famous cathedral was laid only in the middle of the 12th century by a decree of the bishop of Paris. It became one of the first churches built in a new French style, later dubbed «the Gothic style.» It took almost 200 years to erect this miracle in stone.

Part 2 Mission and strategy, results and major tasks

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 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Part 2. Mission and strategy, results and main objectives Part 2. Mission and strategy, results and main objectives Mission and strategy

Mission This segment will also become the basis for building Program Key Goals up the Company’s rental portfolio. Adjusted production program  Focus on the realization of the most promising projects with existing financing arrangements Sistema-Hals – Russian Real Estate Developer in the  Business class residential real estate, which is one of as well as projects, whose financing cannot be suspended due to obligations to the part- Projects preservation program ners. Premium Market Segments the main sources of funds used in implementing long-  Minimizing costs involved in other projects term commercial real estate projects and in financing  Building a foundation for further development and attracting additional financing We aim to create and continually increase value for our current operations of the Company remains one of the Sales program  Securing that the funds generated by sale of projects/their stakes go to budget financing as well as current interest and loan repayments shareholders, investors and partners through the selec- key segments of Sistema-Hals. Cost-cutting program  Cutting commercial and administrative costs in 2009 by 50% tive development of the most lucrative commercial and Additional financing program  Attracting external financing for implementation of the production program and financing the residential real estate projects. We provide access for a Development of existing and establishment of new stra- Company’s current operations wide range of investors to exceptional real estate facili- tegic partnerships with the leading international market ties in Russia and other countries’ markets. We contrib- players possessing significant expertise in various mar- ute to changing the appearance of cities and create com- ket segments is one of the key elements of Sistema-Hals’ fortable environment for our clients’ life, recreation and strategy. Sistema-Hals actively cooperates with such com- The above-mentioned crisis management work. panies as Apsys (one of Europe’s largest retail real estate programs are urged to meet the challenges management companies) and Saraya (an Arab developer currently facing the Company as well as build Sistema-Hals company, specializing in resort real estate development up a foundation for future development. Long-Term Strategy and management). Operating through such partnerships, the Company obtains financing sources for the construc- Our strategic goal is to attain leading positions among tion (often at a lower cost than in Russia), enhances the Russian real estate companies by way of achieving sus- quality of the facilities for sale, and also gets access to the tainable financial condition, developing a number of industry expertise of the leading global market players. unique projects, possessing strong internal competencies and competitive advantages, as well as a diverse Development of the diversified project portfolio accumu- pipeline of projects for future development and boosting lated over the past few years will become the main strate- the shareholder value. gic objective for the Company in the long haul. A great deal of attention will be given to increasing operational effi- The Company’s strategy provides for the development of ciency, developing internal competencies and implement- a diversified portfolio of real estate projects intended for ing production program. Over the past years, Sistema- rental or sale in the key market segments, including: of- Hals has built a solid foundation for further development fice buildings, shopping and entertainment malls, hotels, and plans to effectively develop the announced projects and business class residential buildings: in the near future.  The Company intends to focus on the development of current projects in office segment. We plan to increase Sistema-Hals Crisis Management the share of assets retained for rental income within Strategy this segment by keeping unique and most lucrative facilities in our portfolio. Given the complex market situation caused by the glob-  Through its partnership with the French company al financial and economic crisis, Sistema-Hals’ manage- Apsys, Sistema-Hals has a number of unique compet- ment has undertaken a number of measures to adjust the itive advantages in developing projects within retail Company’s short-term strategy. In particular, we have de- real estate segment. We plan to develop this partner- veloped a series of crisis management programs for 2008- ship and increase the number of projects in progress. 2009.

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Main 2008 Objectives 2008 Results Main 2009 Objectives Main 2008 Objectives 2008 Results Main 2009 Objectives

1. Fulfillment of the Production Program 4. Adjustment of Strategy in Changing Circumstances

 Commissioning of the following  Commissioned:  Focusing on the development of the  Updating the Company’s strate-  The current strategy of the Company  Updating the Company’s strategy due to properties – Serebryany Bor elite community, Company’s priority projects (Leningradsky gy due to external environment providing for implementation of crisis changes in external environment – Serebryany Bor elite commu- 2nd phase; Towers, Leto Mall, Kamelia resort, Central changes management programs was updated  Promoting relations with strategic partners, nity, 2nd phase; – CSKA properties with gross build- Detsky Mir store, and seven MGTS facilities)  Restructuring the Group’s com- in order to overcome challenging mar- building new partnerships with the view to – Aurora community ing area of 12,860 sq. m  Completion of the following properties: panies (withdrawal from non- ket conditions gaining access to expertise and joint imple-  Permits for commissioning of engineer- – Primavera residential complex (18; 18/1 core businesses)  The Company withdrew from busi- mentation of the projects ing systems were obtained at Aurora Simferopolsky Lane); ness segment Infrastructure and  Intense development of the Facility community – Diplomat residential complex (39A, Construction Management (sold Management business segment (City-Hals Michurinsky Avenue); Organizator OOO and PSO Sistema- CJSC) that would create synergy with the – Residential (25A, Dnepropetrovskaya Hals) mostly because of lack of syner- Company’s core business Street); gy with the Company’s core business  Cutting 50% of selling, general and admin- – Emerald Valley residential complex istrative expenses of the Company as com- (111A, Rublevskoye Highway); pared with 2008 – Leto Mall, St. Petersburg  Increasing the efficiency of fi-  An efficient cost control system track-  Carrying on with implementation of actions  Beginning of construction work  Preliminary work at the Central Detsky  Beginning of construction work at the follow- nancial and economic activity of ing changes in the Company’s selling, aimed at improving efficiency of financial at the following projects: Mir began in accordance with the is- ing projects: the Company general and administrative expenses and economic activity of the Company – Central Detsky Mir; sued order – Apart-hotel at 5, Vsevolozhsky Lane; on a monthly basis was introduced as – Residential at 28, Elninskaya – Apart-hotel at 5/1, Milyutinsky Lane a part of the crisis management pro- Street  Completion of design of the Kamelia com- gram plex and beginning of the seasonal beach ar- 5. Improvement of Corporate Governance rangements  Minimizing costs and bringing other proj-  Streamlining of managerial and  Organization structure of Sistema-Hals  Further improvement and optimization of the ects, which failed to make it into the organizational structure of the Group was changed due to the market Company’s legal and managerial structure Production program to the capitalization Company conditions point in order to preserve the foundation for  Strengthening  The Company’s team of managers was further development of the Company in the the managerial team renewed and strengthened during the mid- to long-term perspective year, leading top managers appeared 2. Restructuring Project Portfolio in the Company  Implementation of the best in-  Committee for Investor Relations at the  Improvement of corporate management in  Sale of projects that are not  The following projects were sold:  Further sales of the projects which are ternational practice of corporate Board of Directors was established keeping with the best international practice consistent with the Company’s – Project for construction of an not consistent with the Company’s strate- governance strategy administrative building at 22, gy. Securing proceeds for sale of projects/ 6. Corporate Social Responsibility Rochdelskaya Street; stakes in financing the Production program, – Several office buildings in 8 Marta as well as repayment of current interests  Participation in socially impor-  Renovation of historical downtown  Further participation in socially important Street; and loans tant projects in Yalta was conducted projects and charity – Office building at 14,  Residential were provided to 29 fam- Botanicheskaya Street ilies living in a dormitory in Lva  Building the portfolio  The Danilovsky Fort business center  Keeping promising projects in the Tolstogo Street, Khamovniki, Moscow of rental assets (10, Novodanilovskaya Embankment) Company’s portfolio for future development under the investment contract was acquired in 2008 in order to build  A gym, a kasarne with a canteen, and a rental assets portfolio a surface/underground parking facility 3. Operating Activities were built and commissioned for CSKA  Production facilities of the R&D Center  Sale of residential and park-  Residential and parking spaces were  Sale of the remaining residential and land for Remote Radio Communications ing spaces in the residential sold in accordance with the sched- plots in Aurora community (NIIDAR) were removed from Moscow complexes under construction, ule. In all, over 90% of the residential  Receiving revenue from lease of premises at  Participation in charity activities  The Company transferred about RUR such as Diplomat, Primavera, were sold the Danilovsky Fort business center 22 million for charity Emerald Valley, and 25A,  About 80% of land plots in Aurora  Lease of 80% of premises at Leto Mall by the Dnepropetrovskaya Street community were sold as of the end of year end  Sale of land plots without con- 2008  Bringing in strategic partners for implemen- tract for construction work in  The Company began leasing the first tation of major projects Aurora community cottages of the Serebryany Bor project  Lease of cottages in the 2nd phase: 20 cottages totaling about Serebryany Bor project, 2nd 4,774 sq. m phase

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 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board Like the walls of great ancient buildings, a solid business can weather a million storms and still continue to provoke wonder and admiration

The Colosseum, the largest amphitheatre of Ancient Rome, is one of the most famous Roman monuments and one of the most remarkable buildings in the world. It is located in the hollow between the Esquiline, Palatine and Caelian Hills in Rome, where there used to be a pond be- longing to Nero’s Golden House. The Colosseum’s original name was the Flavian Amphitheatre after the imperial dy- nasty (Amphitheatrum Flavium in Latin). The current name (Colosseum or Colosaeus in Latin and Coliseo in Italian) is of a later origin, dating back to the 8th century AD. It was derived either from its colossal size or from the gigantic statue that Nero had erected nearby in his own honour.

For a long time, the Colosseum was the centre of entertainment for the inhabitants of and for visitors to Rome. They could watch gladiator fights, animal hunts and sea battles (naumachiae) there. Contrary to the popular opinion that Christians were executed in the Colosseum, recent studies show that this was a myth invented by the Catholic Church in later years. The structure suffered from a major fire in the reign of Emperor Macrinus and was restored by a decree of Alexander Severus. In 248, Emperor Philip celebrated with great pomp a thousand years of Rome in the Colosseum.

Part 3 Review of financial results and real estate market

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 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Part 3. Review of financial results and real estate market Part 3. Review of financial results and real estate market Review of financial results for 2008

The overview of the Company’s financial condition and results following below should be looked at together with the Revenues consolidated financial reports based on US GAAP and notes thereto. This section contains forecasts including ele- The 2008 revenue was down USD 61.7 million, or 14.6%, from USD 423.6 million to USD 362.0 million. The table below ments of risk and uncertainty. The actual results of the Company’s operations may vary significantly from forecasted shows our revenues by segments, including as a percentage of the total revenue. results due to a number of factors. The revenue was down in the Development segment. The revenue from sales of properties, projects and shares in proj- In November 2008, Sistema-Hals sold its interest in PSO Sistema-Hals (51%) and Organizator OOO (51%). In this con- ects decreased, which was partly offset by an increase in sales of residential space. Primarily, lower revenue is due to nection, the comparable information was adjusted in order to account for discontinued operations, as if the enterpris- reduced demand for projects or properties during the liquidity crisis. For more information please see section entitled es were retired as of the beginning of the earliest fiscal years mentioned in the reports. «Analysis by segments».

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER Years ended December 31 31, 2008 AND 2007 2008 % of total 2007 % of total Change (‘000 USD) (%) (‘000 USD) (%) (%) Years ended December 31 Real estate development 274,314 75.8 356,045 84.0 (23.0) 2008 2007 Change Asset management 54,525 15.1 44,830 10.6 21.6 (‘000 USD) (%) Facility management 33,118 9.1 22,770 5.4 45.4 Revenues 361,957 423,645 (14.6) Total 361,957 100.0 423,645 100.0 (14.6) Operating expenses (486,429) (391,040) 24.4

Operating (loss)/income (124,472) 32,605 -

Other expenses, net (10,419) (1,597) 552.4 Operating Expenses Interest income 12,026 14,162 (15.1) Operating expenses were up USD 95.4 million, or 24.4%, in 2008. The table below shows our operating expenses by seg- Interest expense, net of amounts capitalized (82,722) (12,695) 551.6 ments, including as a percentage of the total operating expenses. (Loss)/gain on foreign currency transactions (138,410) 15,158 -

(Loss)/income from affiliates (11,446) 214 -

Gain on sale of a subsidiary 1,012 113 795.6 Years ended December 31

(Loss)/income from continuing operations before income tax and (354,432) 47,960 - 2008 % of total 2007 % of total Change minority interests (‘000 USD) (%) (‘000 USD) (%) (%) Income tax expense (15,257) (11,449) 33.3 Real estate development 422,841 86.9 348,359 89.1 21.4 (Loss)/income from continuing operations (376,174) 30,353 - Asset management 28,798 5.9 19,637 5.0 46.7 Income from discontinued operations, net of income tax effect 1,803 4,328 (58.3) and minority interest Facility management 34,790 7.2 23,044 5.9 51.0 Net (loss)/income (381,097) 34,681 - Total 486,429 100.0 391,040 100.0 24.4

The operating expenses increased mostly due to greater expenses in the Development segment of USD 74.5 million, a 21.4% growth. This is due to recognition of a loss on the Siemens Tower project, recognition of a loss from impairment of real estate investments, and the accrual of a provision for doubtful accounts.

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The table below shows operating expenses by type of expenditure. OIBDA

Years ended December 31 Years ended December 31 2008 % of total 2007 % of total Change 2008 2007 Change (‘000 USD) (%) (‘000 USD) (%) (%) (‘000 USD) (%)

Cost of sales 254,647 52.4 222,509 56.9 14.4 Operating (loss)/income (124,472) 32,605 -

Selling, general and administrative 84,339 17.3 153,980 39.4 (45.2) Deprecation and amortization 23,980 14,551 64.8 expenses OIBDA (100,492) 47,156 - Provision for losses on construction 25,389 5.2 - - - contract “Siemens Tower” OIBDA margin (27.8)% 11.1% - Impairment of real estate investments 51,124 10.5 - - -

Provision for doubtful debts 42,831 8.8 - - - OIBDA declined and amounted to a negative value of USD 100.5 million in 2008 as compared with positive OIBDA of Deprecation and amortization 23,980 4.9 14,551 3.7 64.8 $47.2 million in 2007. Other operating expenses, net 4,119 0.8 - - -

Total 486,429 100.0 391,040 100.0 24.4 Operating (loss)/income Operating income declined by USD 157.1 million compared with USD 32.6 million in 2007, which resulted in a loss of USD 124.5 million. Cost of Sales In 2008, the cost of sales grew from USD 222.5 million to USD 254.6 million, or 14.4%, as compared with 2007, which is The table below shows our operating (loss)/profit by segments, including as a percentage of the total operating outcome. due to differences in the make-up of sales during the reporting periods.

Selling, General and Administrative Expenses Years ended December 31 Selling, general and administrative expenses went down 45.2% in 2008 and amounted to USD 84.3 million. In the 3rd 2008 % of total 2007 % of total Change quarter of 2007 we incurred expenses on the approved compensation program for the management and the Board mem- (‘000 USD) (%) (‘000 USD) (%) (%)

bers of the Company totaling USD 99.8 million. The decrease in administrative expenses was partly offset by increased Real estate development (148,527) 119.3 7,686 23.6 - labor costs, which climbed by USD 14.5 million, including an accrued provision for severance payments in the amount Asset management 25,727 (20.7) 25,193 77.3 2.1 of USD 9.2 million. Facility management (1,672) 1.3 (274) (0.8) 510.2

Total operating (loss)/income (124,472) 100.0 32,605 100.0 -

This report includes financial information prepared in accordance with the US GAAP, as well as other financial numbers, which are mentioned as not related to US GAAP. The indicators, which are not US GAAP-based financial numbers, should be considered in addition to the indicators prepared in accordance with US GAAP, not as alternative to them.

OIBDA is defined as operating profit before deduction of depreciated fixed assets and depreciation of intangible assets. We disclose OIBDA, because we see it as an informative tool for the investor, which shows our ability to service the debt in the future, provide requisite amount of capital investment and working capital, as well as efficiency of our business activities. OIBDA does not show US GAAP- compliant financial results and is not an alternative to net revenue as a yardstick for measuring the outcome of operating activities or money generated by operating activities as a measuring stick of liquidity. Whereas the depreciation of fixed assets and amortization of non-tangible assets are viewed by the US GAAP standards as operating expenses, these expenses are, for the most part, noncash distribution of the cost of noncurrent assets acquired or created during previous periods for current expenses. OIBDA is widely used by investors in shares and debt securities and by analysts for assessment of operating indicators. OIBDA calculations may differ from calculations used by other companies; therefore, the ability to compare the numbers may be limited. OIBDA is calculated on the basis of unaudited consolidated reporting by the Company.

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The Company declared an operating loss in 2008 in the amount of USD 124.5 million. The greatest loss occurred in Revenue the Development segment and was caused by an increase in operating expenses. For more information please refer to The table below shows revenue by the Development segment broken down by the property category. «Analysis by segments» section. Years ended December 31 Change (Loss)/gain on Foreign Currency Transactions 2008 % of total 2007 % of total Loss on foreign currency transactions amounted to USD 138.4 million as of December 31, 2008 as compared with gains (‘000 USD) (%) (‘000 USD) (%) (%) in the amount of USD 15.2 million as of December 31, 2007. The loss recognized in 2008 is attributable mainly to the re- Residential 132,359 48.3 63,578 17.9 108.2 alization of the foreign currency exchange loss from the conversion of the USD denominated loan from VTB into rubles and revaluation of other USD-denominated loans outstanding as of December 31, 2008 as a result of the significant ap- Class B office 55,021 20.1 51,063 14.3 7.8 preciation of the US dollar against the ruble during the year. Sales of projects 29,791 10.9 64,052 18.0 (53.5)

Class A office 25,399 9.3 1,700 0.5 1,394.1 Income Tax Expense Land&Communications 22,215 8.1 23,191 6.5 (4.2) Income tax expense grew by USD 3.8 million, or by 33.3%, from USD 11.4 in 2007 to USD 15.3 million in 2008. Other 9,529 3.5 6,070 1.7 57.0

Net (loss)/income from continuing operations Retail&Entertainment Complex - - 86,391 24.3 - Due to the above-listed reasons, the net loss from continuing operations amounted to USD 376.2 million in 2008 as com- Hotel - - 60,000 16.9 -

pared with a net profit from continuing operations in the amount of USD 30.4 million in 2007. Total revenues 274,314 100.0 356,045 100.0 (23.0)

Net (loss)/income Taking into account the sale of the subsidiaries (PSO Sistema-Hals and Organizator OOO), the Company declared a net loss The revenue generated by the Development segment in 2008 was down USD 81.7 million, or 23.0%, to USD 274.3 mil- of USD 381.1 million for 2008 as compared with a net profit of USD 34.7 million in 2007. lion as compared with $356.0 million in 2007.

Analysis The revenue from construction of residential property increased by USD 68.8 million from USD 63.6 million in 2007 to by Segments USD 132.4 million in 2008:  In 2008 and 2007, the revenue for the 111a, Rublevskoye Hwy project was declared at USD 51.8 million and USD 12.1 Real Estate Development million, respectively. The construction completion level was estimated at 95.5% as of the end of 2008. Activities of the real estate development segment include identification of investment opportunities, performance of fea-  In 2008 and 2007, the revenue for the Nakhimovsky and Dnepropetrovskaya projects was declared at USD 40.1 mil- sibility studies, obtaining necessary construction permits, project financing and marketing activities. Revenues of the lion and USD 12.2 million, respectively. The construction was 100% complete as of the end of 2008. segment primarily consist of revenues generated from the sale of completed projects, as well as revenues from develop-  In 2008 and 2007, the revenue for the 39, Michurinsky project was declared at USD 30.8 million and USD 12.0 million, ment and construction contracts. respectively. The construction was 82.4% complete as of the end of 2008.  In 2008 and 2007, the revenue for the 27B, Yartsevskaya St. was declared at USD 6.6 million and USD 27.3 million, re- The table below shows an excerpt from the profit and loss statement of the Development segment. spectively. The construction was 95.7% complete as of the end of 2008.

Years ended December 31 Change Revenue from construction of Class B office buildings increased by USD 4.0 million from USD 51.1 million in 2007 to 2008 2007 USD 55.0 million in 2008. In 2008, the revenue came from the sale of buildings in 8 Marta St. In 2007, the revenue was (‘000 USD) (%) declared from leasing out a building located at 75, Sadovnicheskaya St. and subsequent sale of this building.

Revenues 274,314 356,045 (23.0)

Operating expenses (422,841) (348,359) 21.4

Operating (loss)/income (148,527) 7,686 -

30 31

Revenue from projects dropped by USD 34.3 million from USD 64.1 million in 2007 to USD 29.8 million in 2008. The rev- Operating (loss)/income enue was recognized on the following projects: As compared with operating income in the amount of USD 7.7 million in 2007, losses from core business in 2008 amount-  in 2007 – from selling the 13, Kostyansky project (USD 50.0 million) and 50% of interest in the Kamenny Ostrov proj- ed to USD 148.5 million. Given the above factors, the Company’s income in the Development segment fell by USD 156.2 ect (USD 14.1 million); million in 2008.  in 2008 – from selling the Rochdelskaya project (USD 29.8 million). Asset Revenue from construction of Class A office buildings increased by USD 23.7 million to USD 25.4 million in 2008 from Management USD 1.7 million in 2007. The revenue in 2008 for the Siemens Tower project was declared in the amount equal to construction costs incurred in 2008. As of the end of 2008, the construction was completed at 44.1%. For more information Activities of the real estate asset management segment primarily include renting of residential and commercial proper- please see section entitled «Operating expenses» below. ties that we have developed or acquired. Revenues of the segment include rental revenues and revenues from sale or assignment of rights to land plots and residential units. Rental revenues are recognized over the lease term on a straight- Revenue from selling land plots was down USD 1.0 million from USD 23.2 million in 2007 to USD 22.2 million in 2008. line basis. Revenues from sale or assignment of rights to real estate are recognized generally upon completion of the This revenue came from selling plots of land in Avrora residential complex, Moscow region, and plots of land in Gorki-8 sale transaction. project, of the Rublevo-Uspenskoye Highway. In 2008, the sales of land plots located in Avrora residential complex were down to USD 16.6 million as compared with USD 23.2 million in 2007. Also during the year under review, the Group start- The table below shows an excerpt from the profit and loss statement of the Asset management segment. ed selling properties in Gorky-8, with the revenue amounting to USD 5.6 million. Years ended December 31 Revenue from other sales increased through the lease of townhouses located in Gorky-8. Revenue from leases amount- 2008 2007 Change ed to USD 3.4 million in 2008. (‘000 USD) (%)

Revenues 54,525 44,830 21.6 Operating Expenses Operating expenses of the Development segment grew by USD 74.5 million, or 21.4%, from USD 348.4 million in 2007 to Operating expenses (28,798) (19,637) 46.7 $422.8 million in 2008. First and foremost, this growth is due to the following factors: Operating (loss)/income 25,727 25,193 2.1

 a provision for loss on the Siemens Tower project in the amount of USD 25.4 million; Operating margin 47.2% 56.2% (16.0)  accrual of a provision for loss on impairment of noncurrent assets in the amount of USD 51.1 million;  accrual of an allowance for doubtful debts and receivables of USD 42.8 million. Revenue In 2003, the Group entered into a fixed price contract with Siemens to develop an office building in Moscow. During 2006 Revenue of the Asset management segment grew by USD 9.7 million, or 21.6%, from USD 44.8 million in 2007 to USD to 2008, there was significant growth in the prices of materials, labor and other construction costs. As a result of this, 54.5 million in 2008. the Group is unable to complete the project within the original budget cost estimates. In 2007, the Group initiated negotiations with Siemens to revise the contract price to recover the increased costs. No agreement has been reached though The table below shows revenue generated by the Asset management segment broken down by real estate categories. the negotiations are continuing. In April 2009, the Board of Directors decided to recognize in the financial statements for 2008 a prudent provision for the estimated loss on the contract in the amount of USD 25.4 million.

Fixed assets depreciation charge in the Development segment grew by USD 7.8 million, or 85.6%, from USD 9.1 million in 2007 to USD 16.9 million in 2008. The key contribution to the increase was made by:  USD 3.5 million of annual depreciation for apartments and residential buildings in Gorky-8, which was commissioned in the 3rd quarter of 2007;  USD 2.3 million of depreciation for the building located at 10, Novodanilovskaya Embankment, commissioned in the 3rd quarter of 2008.

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Operating Income Years ended December 31 Operating income of the Asset management segment increased by USD 0.5 million, or 2.1%, from USD 25.2 million in 2008 % of total 2007 % of total Change 2007 to USD 25.7 million in 2008. The operating income margin slumped from 56.2% in 2007 down to 47.2% in 2008, (‘000 USD) (%) (‘000 USD) (%) (%) which is due to more significant increase in expenses versus increase in revenue.

Sales of rental residential properties 34,156 62.6 24,726 55.2 38.1 Rentals of residential properties, Facility including: 16,427 30.1 11,924 26.6 37.8 Management Serebryany Bor 12,017 - 8,555 - 40.5

Other 4,410 - 3,369 - 30.9 Activities of the facility management segment include the provision of site management services, including security, cleaning, staffing, technical support, repair and renovation, as well as general building maintenance. These services are Utilities 3,700 6.8 1,502 3.4 146.3 generally provided on a contractual basis for a specific period of time. Revenues are recognized as the services are pro- Offices (rentals) 242 0.4 499 1.1 (51.5) vided to the customer. Land sales - - 6,179 13.8 (100)

Total revenues 54,525 100.0 44,830 100.0 21.6 The table below shows an excerpt from the profit and loss statement for Facility management segment.

Revenue from sales of rental residential properties increased by USD 9.4 million, or 38.1%, from USD 24.7 in 2007 to USD 34.2 Years ended December 31 million in 2008. The bulk of the revenue from sales of rental residential properties comes from selling land plots in Kuchino 2008 2007 Change (USD 9.9 million), Serebryany Bor (USD 6.2 million), Udelnaya (USD 5.7 million), Zdravnitsa (USD 5.0 million), and Zavety (‘000 USD) (%) Ilyicha (USD 3.5 million). Revenues 33,118 22,770 45.4

Revenue from rentals of residential properties owned by Mosdachtrest OAO, subsidiary of the Group, was up USD 4.5 million, Operating expenses (34,790) (23,044) 51.0 or 37.8%, from USD 11.9 million in 2007 to USD 16.4 million in 2008. The main source of revenue from leasing out premises Operating (loss)/income (1,672) (274) 510.2

includes cottages located in Serebryany Bor. Revenue from cottage leases in Serebryany Bor grew in 2008 by 40.5% through Operating margin (5.0)% (1.2)% 319.6 partial commissioning of the second-phase cottages.

Revenue from utility services grew by USD 2.2 million, or 146.3%, from USD 1.5 million in 2007 to USD 3.7 million in 2008. Revenue This revenue comes from Landshaft ZAO, subsidiary of the Group, which engages in landscaping services and provides utili- Revenue from the Facility management segment grew by USD 10.3 million, or 45.4%, from USD 22.8 million in 2007 to ty and other services in Zhukovka residential complex, Moscow region. The revenue got a boost primarily through payments USD 33.1 million in 2008. The revenue was up due to greater proceeds from, mainly, repairs and maintenance of the of- received from homeowners in Zhukovka for monthly landscape services provided to them and for improvements in electrical fices of AFK Sistema, MTS, and Detsky Mir. power supply facilities. Operating Expenses Revenue from leasing offices in 2008 was down from USD 0.5 million to USD 0.2 million on reductions in the size of ar- Operating expenses of the Facility management segment increased by USD 11.7 million, or 51.0%, from USD 23.0 mil- eas leased out to external tenants. lion in 2007 to USD 34.8 million in 2008. Primarily, this growth is due to expenses related to an increased number of ser- viced facilities in 2008. Revenue from selling land plots in Landshaft ZAO ceased in 2008. Operating Loss Operating Expenses Operating loss of the Facility management segment grew by USD 1.4 million, or 510.2%, from USD 0.3 million in 2007 to Operating expenses of the Asset management segment climbed by USD 9.2 million, or 46.7%, from USD 19.6 million in USD 1.7 million in 2008. 2007 to USD 28.8 million in 2008. The increase in operating expenses corresponds with the increase in revenue, as well as due to an increase in the cost of services provided by suppliers of the Sistema-Hals Group.

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December % of total December 31, % of CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND DECEMBER 31, 2007 31, 2008 assets 2007 total assets Change (‘000 USD) (%) (‘000 USD) (%) (%) December % of total December 31, % of 31, 2008 assets 2007 total Additional paid-in capital 527,280 27.8 529,910 30.2 (0.5) assets Change (‘000 USD) (%) (‘000 USD) (%) (%) Accumulated other comprehensive loss (12,446) (0.7) - - - (Accumulated deficit)/Retained earnings (375,798) (19.8) 121 0.0 - ASSETS TOTAL SHAREHOLDERS’ EQUITY 157,928 8.3 548,947 31.3 (71.2) Cash and cash equivalents 58,328 3.1 37,538 2.1 55.4 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 1,895,742 100.0 1,755,090 100.0 8.0 Trade receivables, net 127,123 6.7 207,073 11.8 (38.6)

Other receivables, net 32,106 1.7 31,740 1.8 1.2

Deposits, loans receivable and investments in debt and 62,787 3.3 129,021 7.4 (51.3) Cash and Cash Equivalents equity securities As of December 31, 2008, cash and cash equivalents were up USD 20.8 million, or 55.4%, and amounted to USD 58.3 Assets of discontinued operations - - 22,534 1.3 (100) million as compared with USD 37.5 million as at December 31, 2007. This increase is due in part to the receipt of bor- Taxes receivable 75,986 4.0 55,672 3.2 36.5 rowed funds from VTB Bank as part of a new credit line in the amount of 7 billion rubles made available to the Company Costs and estimated earnings in excess of billings on 192,824 10.2 119,040 6.8 62.0 uncompleted contracts in December 2008. REAL ESTATE INVESTMENTS, NET

Real estate developed for sale 866,131 45.7 856,883 48.8 1.1 Real Estate Investments, net The real estate investments, net increased by 19.6% and amounted to USD 1,211.3 million as of December 31, 2008 as Income producing properties, net 345,179 18.2 155,736 8.9 121.6 compared with USD 1,012.6 million as of December 31, 2007. This increase is mainly due to acquisition of a premium Total 1,211,310 63.9 1,012,619 57.7 19.6 land plot on the Rublevo-Uspenskoye Hwy (Gorky-8 project), acquisition of a business center on Novodanilovskaya em- Buildings used for administrative purposes, plant and 11,185 0.6 9,828 0.6 13.8 equipment, net bankment, and expenses involved in reconstruction of the Detsky Mir building in Lubyanka. Development rights and other intangible assets, net 29,674 1.6 33,191 1.9 (10.6)

Investments in associates and joint ventures 78,119 4.1 48,955 2.8 59.6 Loans and Notes Payable

Investments in associates and joint ventures 1,680 0.1 36,866 2.1 (95.4) Loans and notes payable grew by USD 488.6 million, or 50.0%, and amounted to USD 1,466.4 million as of December 31, 2008 as compared with USD 977.8 million as of December 31, 2007. Deferred tax assets 14,620 0.8 11,014 0.6 32.7

TOTAL ASSETS 1,895,742 100.0 1,755,090 100.0 8.0 As of the end of 2008, the short-term debt of the Group stood at USD 414.2 million, whereas the long-term debt was USD LIABILITIES AND SHAREHOLDERS’ EQUITY 1,052.2 million. LIABILITIES

Payables to suppliers and subcontractors 84,960 4.5 57,546 3.3 47.6 The table below shows our debt by type of currency as of December 31, 2008. Billings in excess of costs and estimated earnings on 14,387 0.8 31,664 1.8 (54.6) uncompleted contracts Currency Amount % of Total Accrued expenses and other liabilities 83,537 4.4 62,551 3.6 33.6 (‘000 USD) Taxes payable 16,263 0.9 10,824 0.6 50.2 Russian rubles 1,145,282 78.1

Loans and notes payable 1,466,387 77.4 977,837 55.7 50.0 US Dollars 321,105 21.9 Deferred tax liabilities 38,256 2.0 32,324 1.8 18.4 Total 1,466,387 100.0 Liabilities of discontinued operations - - 6,337 0.4 (100)

TOTAL LIABILITIES 1,703,790 89.9 1,179,083 67.2 44.5

MINORITY INTERESTS 34,024 1.8 27,060 1.5 25.7

SHAREHOLDERS’ EQUITY

Share capital 20,492 1.1 20,492 1.2 0.0

Treasury stock (1,600) (0.1) (1,576) (0.1) 1.5

36 37

Consolidated statements of cash flows for the years ended December 31, Net Cash Used in Operating Activities 2008 and 2007 Net cash used in operating activities amounted to USD 167.6 million over the 12 months in 2008 as compared with USD 161.3 million over the 12 months in 2007. The increase in the negative cash flow for operations is 3.9% due to increased Year ended December 31 payments to suppliers and subcontractors.

2008 2007 Change Net Cash Used in Investing Activities (‘000 USD) (%) Net cash used in investing activities amounted to USD 364.8 million over the 12 months of 2008 as compared with USD Net cash used in operating activities (167,647) (161,342) 3.9 606.0 million over the 12 months in 2007. The cash invested in real estate slumped by USD 195.0 million in 2008 to USD INVESTING ACTIVITIES: 518.5 million as compared with USD 713.4 million in 2007. The issuance of loans and notes receivable was down 95.0% Payments for real estate investments (518,459) (713,416) (27.3) in 2008, or USD 180.2 million. Proceeds from sale of real estate investments 123,645 68,254 81.2

Proceeds from disposal of property, plant and equipment 1,537 - 100.0 Net Cash Provided by Financing Activities Net cash provided by financing activities amounted to USD 552.7 million over the 12 months of 2008 as compared with Payments for plant and equipment and intangible assets (6,191) (8,672) (28.6) USD 549.7 million over the 12 months of 2007. The proceeds from long-term borrowings fell by USD 342.6 million in Issuance of loans and notes receivable (9,450) (189,628) (95.0) 2008. Payments for short-term borrowings were down USD 371.3 million due to the significant pay outs in 2007. Repayment of loans and notes receivable issued 49,308 143,597 (65.7)

Short-term deposits (11,238) (50,000) (77.5)

Repayments of short-term deposits 21,874 146,896 (85.1)

Long-term deposits (11,229) - -

Payments for shares in associates (1,338) (2,737) (51.1)

Proceeds from sale of subsidiary, net of cash disposed (6,746) (362) 1,763.5

Proceeds from sale of shares in associate 3,490 25 13,860.0

Net cash used in investing activities (364,797) (606,043) (39.8)

FINANCING ACTIVITIES:

Purchase of treasure stock (2,232) (2,781) (19.7)

Principal payments on long-term borrowings (138,651) (10,226) 1,255.9

Proceeds from long-term borrowings 386,621 729,201 (47.0)

Debt issuance costs - (40,000) -

Principal payments on short-term borrowings (67,305) (438,609) (84.7)

Proceeds from short-term borrowings 370,083 294,884 25.5

Cash transfers from Sistema 5,177 27,500 (81.2)

Cash transfers to Sistema - (5,658) -

Dividends paid to minority shareholders of subsidiaries (986) (4,655) (78.8)

Net cash provided by financing activities 552,707 549,656 0.6

Effects of foreign currency translation on cash and cash equivalents (7,333) 1,175 -

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 12,930 (216,554) -

CASH AND CASH EQUIVALENTS, beginning of the year 45,3982 261,952 (82.7)

CASH AND CASH EQUIVALENTS, end of the year 58 328 45,398 28.5

Including cash and cash equivalents of PSO Sistema-Hals and Organizator, two entities making up the project and construction management segment disposed in 2008. As of December 31, 2007 the cash and cash equivalents of these two entities was USD 7,860.

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Macroeconomic According to the data released by the Russian Statistical Committee, inflation in Russia stood at 13.3% in 2008. Situation

The developed and even to a greater extent the developing nations showed in 2008 how swiftly the economic situation Inflation in Russia, 2004-2008 can change from good to bad during crisis, when the most unlikely scenarios suddenly become a reality. 16 The global crisis didn’t make any significant impact on the Russian economy in the first half of 2008. Solid fundamental 14 macroeconomics in Russia, balanced fiscal policy and immunity to the US subprime mortgage calamity have somewhat 12 protected the Russian economy and mitigated the aftermath of the global financial crisis. Given the negligible amount of 10 the external debt, huge double surplus (budget surplus and current account surplus), availability of one of the world’s 8 largest gold reserves and favorable ratings by rating agencies, foreign investors believed, up until mid-2008, that Russia 6 was a safe haven, which was well protected against deteriorating global financial conditions. However, despite the fact 4 that Russia was well-prepared for the global financial crisis, a drastic change in the economic situation became obvious 2 in September, when the growth rates started losing momentum. 0

The global crisis hit Russia in the form of four inter-related shocks: 2004 2005 2006 2007 2008  The unwinding of the global crisis resulted in outflow of the investment capital;  The global credit crisis affected the banking system in Russia, which started having problems with the short-term li- (% vs. last December) quidity;  Abrupt fall of oil prices cut the fiscal and current account surpluses in Russia, and also reduced Russia’s gold and The international reserves held by the Central Bank of Russia set record high in 2007 at USD 470 billion over entire his- currency reserves; tory of the USSR and Russia. The drop in reserves in the latter half of 2008 was among the key reasons why Standard &  The Russian stock market went into a major downward spiral. Poor`s lowered Russia’s sovereign rating from BBB+ to BBB.

According to the Federal State Statistical Service, the real GDP growth in Russia in 2008 made 6% in yearly comparison (8.5% in Q1; 7.5% in Q2; 6.2% n Q3; and 1.1% in Q4). International Reserves Level of the Central Bank of the Russian Federation, 2004-2008

600 Gross Domestic Product in Russia, 2004-2008 500

40,000 400 35,000 300 30,000 200 25,000 100 20,000 15,000 0 10,000 5,000 2004 2005 2006 2007 2008 0 (USD bln)

2004 2005 2006 2007 2008 The number of unemployed shot up on mass layoffs. According to the Ministry for Economic Development, the unem- (RUR, bln) ployed accounted for 7.7% of the total able-bodied Russian people. The main sources used in preparing the market overview include reports by the Central Bank, Ministry for Economic Development and Trade, Ministry of Finance, Federal State Statistical Service, Jones Lang LaSalle, Cushman & Wakefield Stiles & Riabokobylko, Colliers International, CB Richard Ellis, Blackwood, GVA Sawyer, DTZ, Praedium, Hotel Consulting & Development Group, Becar, as well as statistical data from www.irn.ru and www.mosrealbase.ru

40 41

Number of Unemployed Moscow Office Real Estate Market

10 Main Trends 8 The positive trends that have taken shape on the Moscow market of office real estate over the past years continued un- abated during the first six months of 2008. The demand for office premises remained well above the supply despite the 6 fact that the supply of high-quality offices in Moscow grew by 25-35% annually since 2005. 4 The projects continued to increase in size (over 100,000 sq. m); complex development was on the rise, which is char- 2 acterized by development of large areas, combination of several formats in one project, and development of associat- 0 ed infrastructure.

The decentralization process was gaining momentum, including projects implemented outside of the Moscow Ring Road. 2004 2005 2006 2007 2008 Financing of new business districts went on uninterrupted, and the number of rehabilitated industrial zones and busi- (% of the able-bodied people) ness park construction projects was increasing. These trends were related with the overall business development, shortage of vacant premises, heavy traffic on Moscow’s thoroughfares, as well as with Resolution #999-PP by the Moscow The current economic situation substantially impairs the real estate supply dynamics: Ruble devaluation with ensuing Government dated October 28, 2008 On Regulating Location of Office Facilities and Major Retail Outlets in the Central growth of interest rates, limited opportunity for financing and refinancing resulted in suspension of the sale/purchase of administrative district of Moscow, which prohibits construction of administrative and office buildings in the downtown the facilities and freezing of a significant number of housing construction projects in progress, which caused a slump in areas of Moscow. the new housing supply growth rates in early 2009. The office market growth rates slowed down in the third quarter of 2008: New high-quality supply and the number of new housing construction projects dwindled, the lease rates and sales prices for office facilities stabilized. Ruble/Dollar Exchange Rate, 2004-2008 In early fourth quarter, when the impact of the global financial crisis on Russia’s economy became evident, certain de- 30 veloper companies announced mothballing of their projects and delaying of the commissioning and sales of their facil- 29 ities. A number of prospective tenants of the newly built office properties revised their plans of expansion and signing 28 of agreements for preliminary lease in the short-term perspective. The sublease market began to take shape. The lease 27 rates went through an adjustment at certain facilities, and the average decline in lease rates varied within 5% to 15% in 26 2008. The lease rates further fell by 30-50% in early 2009. 25 24 Supply 23 Despite the liquidity crisis, which made itself felt in Russia back in late 2007, the year 2008 and two years before showed 22 high rates of new construction. During the fall of 2008, almost all major Moscow investors mothballed their construction projects. They actually continue to build only the facilities, which are nearing completion.

2004 2005 2006 2007 2008 In the course of the year, they have built 231 new office buildings in Moscow with the gross building area of 2.15 million sq. m. The new construction volume changed in favor of reducing the quality of the construction: there are fewer Class A offices now. As little as 16% of new office premises built in 2008 were consistent with Class A requirements, while in 2007 this number grew to about 30%.

The supply on the secondary market increased significantly. In 2008, the secondary market offered 895,000 sq. m of finished office premises. During the period under report, the total number of premises offered for sublease increased five- fold to 100,000 sq. m in more than 60 buildings.

42 43

As of early 2009, the area of quality office premises in Moscow reached about 7.8-8 million sq. m. Supposedly, out Deregulation of the market helped to shift the focus on office facilities located outside of the downtown to the areas be- of 1.5 million sq. m planned for commissioning in 2009, only 0.9 million sq. m will be actually commissioned. tween the Garden Ring and the Third Transportation Ring, which amounted to 51% of the total demand in 2008. Overall, the volume of office lease transactions exceeded the volume of purchase deals over the period under review. At the same Dynamics of Total Supply and Vacant Rate, 2006-2008 time, the trend for buying high-quality office buildings for own needs by the companies was on the rise. From January to September 2008, the demand for buying office real estate in Moscow on behalf of the Western investment funds was quite steady. 10 16% 9 14% Over the past years, the bulk of the office market deals on the Moscow market were signed during the fourth quarters. 8 12% The situation changed drastically in 2008. Many prospective tenants and buyers have either revised their plans to ex- 7 pand or move to a new office, or adopted a wait-and-see policy in the hopes of getting a better deal. 6 10%

5 8% Lease Rates, Sale Prices 4 6% The lease rates for high-quality office premises continued to grow during the first 7-8 months of 2008, as they did during 3 the previous years. However, the situation changed at the end of September. First, the owners began to offer discounts 4% 2 to interested customers without officially reducing the lease rates, and some time later they began cutting lease rates 1 2% across the board. The greatest discounts were as large as 40-50% as compared with pre-crisis level, but in most cases the lease rates were cut by 20% to 30%. 0 0%

2006 2007 2008 Eventually, at the year end, a Class A office within the Third Transportation Ring could be leased for USD 700-USD 900 (mln sq. m, %) per 1 sq. m per year, not including VAT and operating expenses. In addition to that, the market was flooded with a large Demand number of offers to sublease finished premises at a rate of USD 850/sq. m (Class A), which became a substantial compe- The share of vacant rate of office real estate market during the first six months of 2008 remained low: 3-4% for Class A offic- tition to the newly built facilities. Therefore, the market was back to 2006-2007 level in terms of prices. es, and 4-5% for Class B offices. The number of lease and sale transactions was down by more than half as compared with the same period last year to the level of 2005. The vacant rate in the fourth quarter grew both for Class A offices (13.8%) and Class The sales market also showed a reduction in demanded prices. Class A facilities were available for USD 7,000-USD B offices (13.6%), and were up at 13.7% across Moscow. On average, the level of the office space underuse was up 10% both 10,000 per 1 sq. m, and Class B facilities for USD 4,500-USD 7,500 per 1 sq. m. for Class A and Class B offices, which is three times as high as in 2007. In 2009, the tenants show interest in revising the current lease agreements and reducing the leased space.

Overall Demand for Offices in Moscow, 2004-2008

2004 2005 2006 2007 2008

Class A Class B

44 45

Average Demanded Lease Rates, 2004-2008 During the course of the first six months they have announced the news about launching ambitious developer projects and major Russian and international companies accessing the market. The retail business development lagged behind the market supply of high-quality retail premises, and the lease rates were gradually climbing up. 16

14 In the fall of 2008, the retail real estate market responded to the crisis by lower rates of new construction and lower demand on behalf of potential tenants at the shopping centers. A number of retail chains announced closeouts and suspen- 12 sion of their plans to expand into other cities. The developers focused on the construction of facilities, which were almost 10 completed, mothballed a number projects and put off to a later date the commissioning of the facilities whose construc- 8 tion had not yet begun in connection with financing problems. Some say that there will be a period of mergers and acqui-

6 sitions in the sphere of retail real estate during the crisis.

4 Notwithstanding the crisis and mass layoffs across the companies, the consumer demand remained high and steady up 2 until the end of the year, which was due to the seasonal New Year rush. However, in 2009 they expect the buyer’s activi- 0 ty to drop; the consumer demand will shift toward cheaper goods, and the hypermarkets and discounter stores will show the steadiest growth rates. 2004 2005 2006 2007 2008

(USD/sq. m) Supply Class A Class B In 2008, 16 professional retail centers entered the market as part of the shopping centers and all-purpose complexes with the gross building area of over 1 million sq. m and the aggregate retail centes of 470,000 sq. m. This number is twice Comparative Table of Office Lease Terms in 2008-2009 as high as that in 2007, which is accounted for by the fact that construction completion dates scheduled for 2007 were put off to 2008. The area of retail premises commissioned in 2008 is 50% below the target number. As of January 1, 2009,

2008 2009 the gross building area of high-quality retail centers in Moscow amounted to about 2.7 million sq. m.

Base lease Up Down to 30% GBA of Shopping Centers (SC), Moscow, 2004-2008 Security deposit 3 months and more 1-3 months

Payments Quarterly Monthly

Duration 5-7 years 3 years with an option to terminate 6,000 45% Finishing 3 months of vacationscompensation USD Vacations up to 12 monthsFully finished 40% 100-250/sq. m 5,000 Payment currency USD, euro Fixed in rubles 35%

Parking USD 250-500 p/space/mo. USD 200-free of charge 4,000 30%

Maintenance costs USD 100-150/sq. m/year USD 40-80/sq. m/year 25% 3,000 20% Retail Real 2,000 15% Estate Market 10% 1,000 5% ain rends M T 0 0% The development of retail real estate market in 2008 was divided into two periods: rapid growth in the first half of the 2004 2005 2006 2007 2008 year and sharp drop in growth rates during the third and fourth quarters. A great deal of new quality retail premises hit the market at the beginning of the year, and most of them have already been leased due to high demand on behalf of (thou. sq. m, %) Russian and Western retailers. New development areas have sprung up. Notably, they have announced the beginning of Total SC area Vacant rates active development of the subsurface space, and new formats of retail centers, such as outlet malls and lifestyle centers, appeared on the market.

46 47

Structure of Retail Real Estate by GBA in Moscow board drop in lease rates on the market of real estate in late 2008. This could have been related either to positive evalu- % ation of the consumer solvent demand, or to the market inertia.

Cash & Carry Specialized Dynamics of Average Lease Rates for High-Quality Retail Real Estate in Moscow, 6% furniture stores 2004-2008 6%

Specialized shopping 2500 centers 10%

2000

Hypermarkets Shopping centers 1500 9% 69%

1000

500

2004 2005 2006 2007 2008

(USD/sq. m/year)

In 2008, the cost of maintenance varied within USD 100-150 per 1 sq. m; this number stands lower than the average numbers for anchor tenants, but higher for the food court operators. Demand A large number of Russian and foreign retailers have entered the market since early 2008, which, combined with acute Lease Terms at Shopping Centers in 2007-2009 shortage of high-quality retail centers, explained steady and high demand for high-quality retail premises. The demand

was significantly higher than the supply. The vacant rate was below 1%. The space in high-quality shopping centers was 2007-2008 2009 leased out and removed from the market during the construction phase, on average three to five months before the com- Duration of lease 3 to 5 years Unchanged. missioning date. May reach 10-15 years for anchor tenants May reach 20-25 years for anchor tenants Lease rate Flat lease rate with rate adjustment Flat lease rate with rate adjustment +% of the turnover; only % of the turnover It transpired in the fourth quarter that the crisis also hit the retail operators, most of whom engage in their businesses Payment terms Monthly payments in rubles at current rate At current exchange rate; at fixed rate using borrowed funds. As a result, the development programs of a number of nationwide chains were suspended or even Down payment 2-3-month lease payment (bank guarantees normally Unchanged curtailed. Given the crisis, the activity of the potential tenants has subsided, and the demand has shifted toward small used for anchor tenants) retail units with an area of 50–100 sq. m. However, the share of vacant retail premises is continually low and amounts Deposit In the amount of 2-3-month lease annually. The deposit Unchanged to about 1%. is not returned, but included against the last payments Interior finishing Tenant Provision of lease holidays, partial compensation of finishing to anchor tenants Lease Rates Exterior finishing and Developer Developer In the late fall of 2008, certain retail operators began asking the developers to revise and lower the lease rates saying finishing of public areas that the sales were down. However, only an insignificant number of retailers have actually experienced a drop in sales during late fall. The sales were up around the traditional New Year shopping spree, failing however to reach the earlier forecasted numbers. In addition to that, some tenants tried to cut the lease rates at the existing shopping centers in an attempt to take the advantage of uncertain situation and unclear prospects for getting out of it. There was no across-the-

48 49

Hotel Real Estate Hotel Rooms in Moscow by Category Market in Moscow

Main Trends

One of the key trends on the Moscow hotel real estate market lately has been the retirement of the guest rooms of differ- 2 * ent classes, which are not replaced by an adequate new supply. Almost all of the not so numerous projects belong to the 28% upper market segment. Given the great profitability and shorter payback periods of such projects, the shift in existing 4 * priorities can only be expected upon achievement of a certain level of saturation of this segment and, accordingly, exac- 17% erbation of competition. The growth number of the new average category hotels is at its lowest.

Just like in any other real estate segment in Moscow, the hotel market is plagued by sharp shortages of available construction land. The majority of parcels allocated to the potential investors for construction of the hotels have various encumbrances (relocation of old utilities lines, compensation planting of greenery, hardships in organizing the construction due to highly dense surrounding development and the need for fortifying the neighboring buildings, etc., which extend the project payback period and significantly increase their cost. 5 * 8%

The developers’ focus on reducing the investment risks and payback period to the minimum brings up a situation when 3 * instead of the classical hotel projects they build all-purpose complexes, including, in addition to hotels, retail and of- 47% fice space, which prevents an increase in the number of hotel rooms as compared with implementation of purely hotel projects.

Supply According to the General Layout for Building Hotels in Moscow until 2010 (in the version of Resolution by the Moscow Government #557-PP of July 3, 2007) 348 hotels with 75,000 rooms must be built in Moscow. If all the plans were to be implemented, the total number of guest rooms at Moscow hotels should have gone up by almost 2.5 times in 2011 and Demand reach 114,000 rooms. However, out of 25 facilities scheduled for commissioning in 2008, only 8 three-to-five-star ho- As of the end of 2008, the experts didn’t note any significant changes in the volume of tourist or business flow as com- tels have been built, and a number of hotels under construction will become available on the market much later than pared with the previous year. In 2008, the average yearly fill rate in the average segment amounted to 77% and 66% in planned, which used to be normal practice before the crisis, too. Therefore, the total number of the hotel rooms in the the upper segment. city was up by 953 rooms, which is 45% less than similar number for 2007. The demand structure for hotel accommodation in Moscow: Foreign guests account for 38% and Russians account for the By the end of the year, the total number of the Moscow hotels stood at 227 with about 37,000 rooms. Of this number, remaining 62%. The share of foreign guests stands at 60-70% in the upper segment, whereas individual deluxe facilities 2,934 rooms were in five-star hotels, 7,529 rooms in four-star hotels, 16,136 rooms in three-star hotels, and 9,843 may have up to 90% of foreign guests. However, over the past seven years the share of Russian guests at the high-end rooms in two-star ones. Just like before, the greatest number of the hotels can be found in the Central, Eastern, and hotels has been steadily growing, mostly at the expense of the guests travelling for business. Northeastern districts, with the 4 to 5-star hotels mostly located in the Central district, and 2-3-star ones in other districts of Moscow. Room Rates Moscow leads the world in terms of hotel accommodation costs. In mid-2008, the average charge for staying at a hotel in Moscow reached USD 355, edging up almost 2% as compared with 2007. Compare this with the international rates, where the average charge for staying at a hotel dropped 3% instead.

50 51

Prices of Hotel Accommodation, 2004-2008 been an attractive asset and, taking into account the fact that the market of premium residential real estate is not that large, one can confidently say that the existing supply can find the buyer at any time.

900 Growing land prices and stringent administrative barriers made many developers continue to engage in the neighboring 800 business. The interests switched from the segment of elite residential housing to projects related to commercial real es- 700 tate. The new format of elite housing – large-scale complexes built as a result of the ban on pinpoint development - con- 600 tinued to develop actively. 500

400 Supply Over the reporting period the market of elite real estate showed a rather limited supply both on the primary and second- 300 ary market, where the latter had a much more positive dynamics. On the secondary market it was related mainly to with- 200 drawal of a number of elite residential from the market in the face of the fall price run-up, whereas on the primary market 100 this factor was further aggravated by «freezing» of a number of facilities in connection with financial crisis.

0 From the viewpoint of time distribution of the supply during the period under review, it is notable that the supply dwin- 2004 2005 2006 2007 2008 dled early in the year, since a number of elite residential were withdrawn from the market just before the spring spike in (USD/person/night) demand. By the end of the second quarter the negative dynamics have re-appeared on the market producing impact on 5 * 4 * 3 * all areas of the Central administrative district, which could also be explained by seasonal fluctuations in demand. The greatest fall in supply occurred in August, which was triggered by artificial withdrawal of residential from the market With due account taken of the land prices in Moscow and costs of building the engineering lines, the payback period for right before the fall price run-up. However, the anticipated scenario calling for an increase in demand or in supply failed a hotel may be up to 10-15 years. According to GVA Sawyer, the average value of hotel real estate in Moscow amounts to to materialize, which was entirely due to the financial crisis. USD 100,000 for a guest room at a three-star hotel, USD 150,000 for a guest room at a four-star hotel, and USD 200,000 for the high-end hotels. In early third quarter, the bulk of the residential offered for sale were located on the upper floors, but the situation has changed at the end of the period under the review, when the lower priced residential located at the bottom floors over- As compared with the European markets, the Moscow hotels have certain advantages in streamlining their expenses due took the market. to cheaper labor and lower utility bills. The gross building area of the elite residential real estate under construction stood at over 380,000 sq. m as of the Residential Real Estate end of 2008. The Central administrative district, with increasing presence of the Western administrative district, ac- Market in Moscow counts for the greatest portion of supply both on the primary and secondary elite housing market. The following areas of Moscow have traditionally large number of facilities: Ostozhenka, Khamovniki, Zamosvorechye, Tverskoy, Presnensky, Main Trends Plyuschikha, and Yakimanka. Speaking about the 2008 results, it is worth noting the following key market trends:  Limited supply; Demand  Slump in buyer’s activity; Overall, the demand increased during the first six months of 2008 and outpaced supply, as it did during the previous re-  Diversification of activities of major market players. porting years. The demand peaked out during March and April, but things quieted down in early summer. The number of transactions in the fourth quarter of 2008 fell by more than 45% as compared with the first quarter of 2008. The bulk of The market became more active during the first six months of 2008. The first quarter of 2008 was overall marked by transactions made in the fourth quarter ranged within USD 2-3 million and included mostly purchases of personal resi- an increased buyer’s activity, which peaked out in March and April of the period under review. The prices continued dences. to move up.

The residential real estate market has kept its previous vector of development at the end of Q3 and Q4 of 2008. Although the financial crisis has certainly affected it, the impact was less significant than in other real estate sectors. First of all, this factor is due to specific nature of the demand on the residential real estate market. Exclusive facilities have always

52 53

In terms of geography of the demand, the Central and Western districts remain the most popular ones, as they have al- Price Dynamics of Moscow Residential, 2008 ways been. Ostozhenka, Khamovniki, Zamoskvorechye, and Arbat are the most popular areas in the Central district. The interest in the Presnensky district is on the rise, primarily, due to its newly acquired flair of a new business area in town. 27,000

The quality dynamics of the demand are also noteworthy. Today, when people buy homes, they tend to focus on the qual- 26,000

ity of the place and its environmental characteristics, including location, more than on anything else. The demand for 25,000 homes in the Western and Southwestern districts is on the rise, because these areas have good environmental stan- 24,000 dards and decent infrastructural facilities. 23,000

The analysis of the needs of the buyers of elite residential in terms of floor area shows that the bulk of the demand re- 22,000 mains focused on the residential with the gross building area of 120–150 sq. m. As a rule, these are three-room residen- 21,000 tial providing comfortable living for all family members. Clubhouses are gaining in popularity, but many buyers still show 20,000 preference for large-scale residential complexes with well-developed infrastructure.

Price Dynamics (USD/sq. m) Primary market Secondary market During the first half of 2008, the market was characterized by more humble price growth rates as compared with 2007, but has however gone through a rather long cycle of changes primarily due to seasonal changes in the demand. Accelerated price growth rates earlier in the year began to subside by March. The market turned around in May, when the residential started showing slower price growth rates, and certain signs of stabilization began to transpire.

Generally, the elite real estate market under construction had positive price dynamics, even despite the fact that prices at many apartment complexes went down. It grew by 9% since the beginning of the year, with the average cost of elite residential housing facilities on the primary market standing at around USD 22,400/sq. m (lowest at USD 8,340/sq. m, highest at USD 48,670/sq. m). Traditionally the secondary real estate market had higher value frames – about USD 24,900/ sq. m (lowest at USD 15,000, highest at USD 62,000), and prices grew by 15% on average.

The cost was primarily affected by the following:  Large number of announced projects, which contained further price growth in the elite housing segment. In particular, announcing new apartment complexes, where the price of one square meter was relatively low, put a lid on the prices for elite new housing;  Fluctuations of the global stock market.

54 55

 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board To develop a business in such a way that its results are beautiful in any weather

The Taj Mahal is a mausoleum and a mosque on the banks of the Yamuna River in Agra, India, (Ustad-Isa and others were probably its architects). It was erected by decree of the Mughal Emperor Shah Jahan in memory of his wife Mumtaz Mahal who had died in childbirth.

Its walls of polished translucent marble (which was trans- ported from 300 km away) are inlaid with semiprecious stones. Turquoise, agate, malachite, carnelian and other stones were used. The marble is remarkable for its changing colour – it looks white in daylight, pink at dusk and sil- very in moonlight.

To build this complex, over 20,000 craftsmen were invited from all the corners of the Empire, as well as from Central Asia, Persia and the Middle East.

There are numerous symbols hidden in the mausoleum’s architecture and layout. For instance, a quote from the Quran addressing the righteous is engraved on the gates through which visitors enter the park area around the mausoleum, and it ends with the words «enter my paradise.»

Part 4 Portfolio and status of the projects, overview of business performance

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 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Part 4. Portfolio and status of the projects, Overview of business performance Part 4. Portfolio and status of the projects, Overview of business performance Portfolio and status of the projects

Valuation of Sistema-Hals’ Share the Company in the intermediate and long-term outlook, In Real Estate Property and when the situation on the international and Russian mar- Development Projects kets improves.

01.01.2009 01.07.2008 Change (%) Projects in portfolio 104 108 (3.7)

Value of the Company’s share in projects (USD million) 2,049 3,768 (45.6) PROJECTS AND PROPERTIES PORTFOLIO OF SISTEMA-HALS GROUP

The value of Sistema-Hals’ share in properties and projects sis management program for 2009 in connection with the decreased by 45.6% in the period from July 1, 2008 to January global crisis of liquidity and deteriorated situation on the 1, 2009 according to an independent appraisal carried out by real estate market. Cushman & Wakefield Stiles & Riabokobylko (C & WS & R). Acting within the framework of adjusted business strate- C & WS & R determined that the total market value of 100% gy, the Company focused on implementation of a group of ownership in 104 projects and properties amounted to USD projects with already existing financing arrangements or 2,576 million on January 1, 2009 of which Sistema-Hals’ share with anticipated financing, which were being implement-

(after minority interests) amounted to USD 2,049 million. ed together with co-investors and were at the phase of  Barvikha  Gorki-8  35, Bolshaya  38, 40, 56,  Hals-Park  Kamelia, Sochi  1A, Narvskaya construction and assembly stage or ready to be taken to  Gorki-8  Tolstopaltsevo Tatarskaya Street Akademika  Detsky Mir  7 MGTS properties Street  Zhavoronki  Aurora  4, Bobrov Lane Pavlova Street Lubyanka In its previous report, C & WS & R valued 100% of Sistema- the construction site:  Zhukovka  Odintsovsky  39, Leningradsky  Gorki-8  Detsky Mir Kazan  Zaveti Ilyicha Region Avenue  28, Elninskaya  Detsky Mir Hals’ portfolio of properties and projects at USD 4,651 mil-  Leningradsky Towers business centre (Moscow);  Zagoryanka  Plots in  10, Street Krasnoyarsk  Zdravnitsa Solnechnogorsky Novodanilovskaya  23, Lva Tolstovo  Detsky Mir lion as of July 1, 2008, with the share directly owned by the  Central Detsky Mir store (Moscow);  Zdravnitsa Life Region Embankment Street Novokosino  Klyazma  7, 4-th  39A, Michurinsky  Detsky Mir Company valued at USD 3,768 million.  Leto Mall (St. Petersburg);  Kraskovo Magistralnaya Avenue Strogino  Kamelia resort (Sochi);  Krasnaya Pakhra Street  36B, Molodogvar  Leto Mall, St  Kuchino  33 MGTS prop- deyskaya Street Petersburg The changed environment affected the valuation of the  Emerald Valley residential complex (Moscow);  Opalikha erties  18, 18/1,  NIIDAR  Serebryany Bor Simferopolsky  Peking Company’s portfolio. The decrease in the number of projects  Seven projects within the Moscow City Phone Network  Serebryany Bor-2 Lane  8, Povarskaya  Serebryany Bor-3  111A, Street in the valuation is due to the sale of several assets. program in Moscow (5, Vsevolozhsky Lane; 19, Dayev  Shodnya Rublevskoye  Trudovaya Highway Lane; 3, Zorge Street; 5/1, Milyutinsky Lane; 34,  Udelnoye  31, 34, Yartsevskaya Sistema-Hals’ key business segments are Real Estate De Nagatinskaya Street; 11, Rogozhsky Val Street; 5, Street velopment, Asset Management and Facility Management. Stolyarny Lane).  Project in Nizhny Novgorod C & WS & R appraises only properties and projects that are  Vrubelevsky Spusk, Kiev part of Sistema-Hals’ Development and Asset Management In addition, the Company will continue to develop the fol-  15, Moskovskaya Street, Yalta business segments. lowing projects which are at the completion stages and do  3 MGTS properties not require significant amounts of additional financing: The above appraisal represents the aggregate current value of  Diplomat residential complex (Moscow); various properties and projects in the real estate sector and  Residential complex at 25, Dnepropetrovskaya Street cannot be seen as an appraisal of the project portfolio within (Moscow); the context of its sale as a whole.  Primavera residential complex (Moscow);  Aurora community (Moscow Region); Production  Gorki-8 community, 1st phase (Moscow Region). Program Other projects by Sistema-Hals are of a more long-term In the forth quarter, Sistema-Hals management adjust- nature and/or are at an early stage of costruction and, ac- As of January 1, 2009. ed the Company’s business strategy and adopted a cri- cordingly, form a serious foundation for further growth of In February 2009, the Group sold the property on 1A, Narvskaya Street.

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Development of Projects with Financing Either in Place or Expected to Come, that can be Carried out with Co-investors and are Either at or Ready to Move into Construction Stage

Commercial the beginning of the Moscow-St. Petersburg highway, i.e. Office center – 19, Dayev Lane Property represents the «northern gates to the capital of Russia». Class A Address: 19, Dayev Lane, Moscow Leningradsky Towers The architectural concept takes into account the latest Business Center achievements and trends in designing high-class projects Land plot area: 0.29 ha Class A for the development of megalopolises. The ground floor GBA: 13,085 sq. m Address: 39, Leningradsky Avenue, Moscow will accommodate the entrance, lobbies with two-lev- Number of floors: 7 el spaces, a vast recreation area, and retail outlets (cor- Parking facility: 120 parking spaces Land plot area: 0.55 ha responding to the functions of the offices). The five-floor GBA: 110,070 sq. m stylobata will provide location for atriums, cafeterias for Project participants Number of floors: two 27-floor buildings the employees, and administrative rooms for use by main- Investor: MGTS OJSC Parking: 739 parking spaces tenance organizations. The building has an underground Co-Investor: Project Dayev OOO five-level parking facility. Developer: Sistema-Hals OJSC Project participants Designer: ITC Moskomarkhitektury GUP Investor: Sistema-Hals OJSC In 2008, the Company conducted the following types Developer: CSKA FGU of work at the Leningradsky Towers business center: The facility is located in the first line of development in Technical Customer: GELION OOO  Completion of the surface cast-in-place concrete frame Dayev Lane, Krasnoselsky district, Central administrative General Planner: Buro AB OOO of both towers (floors +1-+27); district of Moscow, in a prestigious business area that is General Contractor: HK Topfloor – Invest OOO  Began work to develop the exterior heat supply, sew- the historical downtown of Moscow featuring well-devel- age, and water supply lines; oped social infrastructure and excellent transportation The property is located in the Khoroshevsky District,  Renewed requisite papers (permit for construction of access. Northern administrative district of Moscow, in the first a multi-use complex, order for property construction) line of the Leningradsky Avenue. The latter has always and received a certificate of compliance with the pow- The project provides for re-building of the telephone ex- been among the most prestigious areas in the north of er supply engineering specifications. change building and making it a Class A office center. Moscow, and is currently one of the most dynamically developing business districts in the city. The market an- Working within this project, the Company has fulfilled the In 2008, they have completed the following works: alysts have noted an increased interest in office real es- following terms of the investment contract: Built and com-  Obtained specifications for connection to the engi- tate located in the direction of the Sheremetyevo airport missioned a gym, a kasarne with a canteen, and a com- neering utilities; close to the Belorusskaya, Dynamo, Aeroport, and Sokol bined surface/underground parking facility. Sistema-  Developed project documentation; metro stations, and Leningradskoye Highway. Many major Hals transferred residential with an approximate total  Submitted the project to Moscow State Expert Review Russian and foreign companies have plans to build their area of 15,500 sq. towards the ownership of the Russian Authority. offices exactly off the Leningradsky Avenue, which lies at Federation in this multi-use office building.

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Office center – 3, Zorge Street The project provides for overall re-building of the tele- Office center – 34, Nagatinskaya Street Class B+ phone exchange and construction of an office center Class B+ Address: 3, Zorge Street, Moscow with varying number of floors next to the existing build- Address: 34/1, Nagatinskaya Street, Moscow ing, while the telephone exchange itself will have ten more Land plot area: 0.5 ha floors built on top of it. Land plot area: 0.37 ha GBA: 30,160 sq. m GBA: 30,630 sq. m Parking facility: 242 parking spaces The architectural design is laconic and austere, which un- Parking facility: 340 parking spaces derscores the businesslike atmosphere inside the build- Project participants ing. The composition of the building is based on contrast- Project participants Investor: MGTS OJSC ing combination of alternating solid and partially glazed Investor: MGTS OJSC Co-Investor: Project Zorge OOO façade plates. The engineering utilities and structural fea- Co-Investor: Project Nagatinskaya OOO Developer: Sistema-Hals OJSC tures of the building, such as free floor planning, location Developer: Sistema-Hals OJSC Designer: Monolit OOO of elevators, floor depth, sufficient natural lighting, and Designer: Firma Uniros OOO rational location of windows, break rooms for employees, The property is located in the Northern administrative conference and negotiations rooms, etc. take into account The property is located in Southern administrative dis- district of Moscow, in Khoroshevo-Mnevniki District, in the current requirements for high-class offices. trict of Moscow in a dynamically evolving new business close proximity to Polezhayevskaya metro station and area, 170 meters west of the intersection of Nagatinskaya Zvenigorodskoye Highway, in one of the Moscow business In 2008, the Company received the Act of Permitted Use, Street with Prospekt Andropova, a city thoroughfare, and districts with well-developed social infrastructure. conducted project work and an engineering geological 150 meters away from southern exit of the Kolomenskaya analysis. metro station.

The project provides for overall re-building of the telephone exchange and construction of a 15-floor office building next to the existing one, and the telephone exchange itself will have one more floor built on top of it.

In 2008, the Company drafted project documentation, began preliminary work and built external utility lines.

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Office center – 11, Rogozhsky Val Street The project provides for overall re-building of the tele- Office center – 5, Stolyarny Lane nicipal importance, such as the House of Government Class A phone exchange building and construction of an office Class A of the Russian Federation, International Trade Center, Address: 11, Rogozhsky Val Street, Moscow building with varying number of floors replete with a three- Address: 5, Stolyarny Lane, Moscow Moscow Zoo, Cinema Center, ITAR-TASS news agency, level parking facility in place of the existing exchange. and Expocenter. High level of concentration of cultural Land plot area: 0.59 ha Land plot area: 0.38 ha facilities, architectural landmarks and historical and ar- GBA: 50,579 sq m The facades will be designed according to the latest GBA: 22,240 sq. m chitectural landmarks is another feature of the Krasnaya Parking facility: 544 parking spaces styles. In order to give the building a monolithic and at the Parking facility: 185 parking spaces Presnya district. same time airy look, they have opted for glass as unifying Project participants material. They will use durable high-end materials in fa- Project participants The project provides for construction of two administra- Investor: MGTS OJSC çade finishing, such as stained-glass glazing, metal façade Investor: MGTS OJSC tive buildings connected with a two-level underground Co-investor: Project Rogozhsky OOO panels and sandwich panels with atmosphere-resistant Co-Investor: Project Stolyarny OOO area, and for construction of a new telephone exchange. Developer: Sistema-Hals OJSC coating. In order to secure the required energy efficiency Developer: Sistema-Hals OJSC Designer: ABD OOO level of the enclosing structures, the glazing provides for Designer: Architectural Bureau Ostozhenka OOO The property will have a modern architectural style, large the use of energy-saving glass with low-emission coating. glazed surfaces, ventilated façade faced with natural The property is located in the first line of development of The project provides for high-end landscaping design and The property is located in the first line of development of stone and metal. The engineering systems and structur- Rogozhsky Val Street, Tagansky district, Central adminis- interior gardens in the public areas of the building, includ- Stolyarny Lane, in Presnensky district, Central adminis- al features of the building are compliant with current re- trative district of Moscow. Tagansky is a dynamically de- ing lobbies, retail outlets, cafes, and recreation areas. trative district of Moscow. Currently, the areas adjacent quirements for high-class office facilities. They will use veloping business district of Moscow. Its proximity to the to Krasnaya Presnya Street are among the most presti- high-grade materials for façade and public area finishing. downtown and developed infrastructure lures the devel- In 2008, the Company drafted pre-project documenta- gious business areas in the city contiguous with the outer The project provides for wide garage passage and reason- opers, as well as prospective tenants and buyers of the tion. side of the Garden Ring, with well-developed social infra- ably ample parking spaces in the underground facilities. commercial property. structure, including a great variety of stores and shopping centers, cafes, restaurants, and entertainment clubs. The In 2008, the Company drafted pre-project documentation district accommodates the facilities of federal and mu- and has it approved.

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Central Detsky Mir Store In 2008, the Company completed the following works Leto Mall In 2008, Sistema-Hals together with its partner Apsys Address: 5/1, Teatralny Lane, Moscow in this project: Address: 7, Pulkovskoye Highway, St. Petersburg adapted the mall to the European standards and complet-  Building reconstruction design; ed 85% of the project, developed a new marketing con-  Receiving positive findings by Moscow State Expert Land plot area: 12.6 ha cept, built external engineering communications, put in Land plot area: 0.99 ha Analysis Authority; GBA: 113,892 sq. m the stained glass and metal structures, and conducted GBA: 74,117 sq. m  Preparatory work in accordance with the received or- Number of floors: 2 work to close the building contour. Parking facility: 190 parking spaces der; Parking facility: 2,930 parking spaces  Publishing working documentation for foundation In 2008, Sistema-Hals Group together with its partner Project participants work and architectural part of the project. Project participants Apsys started to actively lease out retail space at the Investor: Detsky Mir OJSC Investor: Hals-Invest Development OOO (a company of Leto Mall. Over the period under review, they have signed Co-Investor: Hals-Architectura OOO (Sistema-Hals Group) Sistema-Hals Group and French retail property developer agreements with such tenants as Media Markt, Russkiy Developer: Sistema-Hals Center OOO (Sistema-Hals Apsys) Lyod, MONEX Trading (Mothercare, Claire’s, Next, body Group) General Customer: Sistema-Hals Severo-Zapad CJSC shop, Starbucks), Lady and Gentleman, KFC, L’Etoile, General Contractor: HK Topfloor-Invest OOO (Sistema-Hals Group) Sephora, as well as with almost 30 other tenants. General Designer: Mosproekt-2 GUP with the participation General Contractor: Hals-Stroy Severo-Zapad CJSC of SETEC Batiment (France) (Sistema-Hals Group) Concept Architect: RTKL (United Kingdom) Concept Designer: SUD Architects (France) and Virgil and Stone (United Kingdom) The property is located in the heart of Moscow next to the General Designer: Torgproekt GUP Kremlin. Consultant: EC Harris (United Kingdom)

Following the reconstruction, the gross building area of The objective of the project is to build a mall of regional im- the store will expand from 57,500 sq. m to 74,117 sq. m, portance that would comply with the European standards. and the retail space currently standing at 19,000 sq. m, The anchor tenants at Leto will include international food will double through rational use of the internal space. and electronics operators (in a hypermarket format), ma- Detsky Mir will become one of Moscow’s largest shop- jor Russian entertainment operators, sports supermarket, ping malls in terms of retail space. The project provides a large gallery of stores representing the best internation- for leasing retail space to about 130 tenants, including al and Russian brands, and service operators. The most Detsky Mir department store, a supermarket representing important component of Leto includes a vast entertain- a renowned brand, a full-range department store, a multi- ment area of 20,000 sq. m with an ice skating rink, multi- brand sports store, a movie theater, and a food court to in- screen movie theater, several children’s playgrounds, and clude fast food services, theme restaurants and cafes. a food court.

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Kamelia Five-Star Hotel and Resort Complex plans ranging from 65 sq. m (efficiencies) to 215 sq. m Residential The Emerald Valley residential area is located in the Address: 89, Kurortny Avenue, Sochi (penthouses). The facades and lobbies will have elite fin- Property western part of Moscow in one of Moscow’s most pictur- ishing. There will be an option to use the hotel infrastruc- esque districts, Kuntsevo. The area is contiguous with Land plot area: 6.32 ha ture, including management of the apartments, athletic Yartsevskaya, Orshanskaya, Akademika Pavlova streets GBA: 115,284 sq. m and entertainment facilities at the hotel. Emerald Valley Residential Complex and Rublevskoye Highway, as well as with Rublevsky for- Number of hotel rooms: 200 Business Class est and Serebryany Bor forestry. Large park and forest ar- Number of apartments: 469 The five-star hotel includes comfortable rooms with floor Address: 111A, Rublevskoye Highway, Moscow eas, environmentally friendly wind rose, convenient lo- Area of apartments: 54,526 sq. m spaces starting at 55 sq. m complying with the highest in- cation and developed infrastructure made Kuntsevo one Parking facility: 330 parking spaces ternational standards. The guest rooms are equipped with Land plot area: 0.73 ha of the most prestigious Moscow districts. The woodland satellite television, radio communication, mini bar, and GBA: 25,935 sq. m comes right up to the Emerald Valley residential buidings, Project participants the Internet access. The hotel offers restaurants, bars, fit- Living area: 12,935 sq. m which is a very rare occasion in a megalopolis. The areas Investor: PL Kamelia OJSC (a company of Sistema-Hals ness center, beauty parlor, SPA, and a congress hall. Number of units: 108 adjacent to the complex are very well suited for walking Group, and Saraya Holdings Ltd.) Number of floors: 23 and athletic activities: Kuntsevo has an equestrian facil- Technical Developer: Sistema-Hals Yug CJSC (Sistema- In 2008, the partners completed the following works: Parking facility: 134 parking spaces ity, and the contiguous areas will be used for building a Hals Group)  Developed a pre-project proposal to design a two-level children’s playground and an athletic field. Managing Company: Saraya Development Group transportation junction adjacent to Kurortny Avenue; Project participants Designers:AEDAS, Ginzburg Architects OOO  Built a full-size tunnel under the railway; Developer and Investor: Kuntsevo-Invest CJSC (Sistema- In 2008, the Company completed the cast-in-place and  Developed a project to renovate beach facilities; Hals Group) roof work. As of early 2009, they are finishing the stairway The project provides for the construction of a multi-use  Involved the AEDAS international architectural bureau General Designer: Kapstroyproekt CJSC flights, connecting utilities, and area improvement. residential complex to include elite housing, business for project concept support; General Contractor: Hals-Story CJSC (Sistema-Hals class apartments and a five-star hotel. The residential  Wrecked the Intourist and Kamelia hotels; Group) part of the building will have apartments with free floor  Built a new transformer substation. Sales management and sale of residential: Sistema-Hals OJSC City quota: 40% of built-in and attached non-residential space, 10% of parking spaces

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Diplomat Residential Complex ed as the academic hub of Moscow with the most pres- Residential Complex The cast-in-place residential building has a pre-school fa- Business Class tigious Russia’s higher education facilities located here, Business Class cility and an underground garage attached to it. Address: 39A, Michurinsky Avenue, Moscow such as M.V. Lomonosov State University and Moscow Address: 25A, Dnepropetrovskaya Street, State Institute of Foreign Relations. There is the 50-Letiya Moscow In 2008, the Group completed construction of the house Land plot area: 1.5 ha Oktyabrya park located in this area between Vernadskogo and began the interior finishing work and improving the GBA: 43,029 sq. m Avenue, Michurinsky Avenue and Udaltsova Street. It was Land plot area: 1.15 ha contiguous areas. Living area: 24,010 sq. m founded in 1967 and stretches across 80 ha. It is often GBA: 31,369 sq. m Number of units: 236 used to conduct festivities for local residents during hol- Living area: 15,870 sq. m Parking facility: 250 parking spaces idays. Number of units: 306 Number of floors: 23 Project participants In addition to the residential building, the project pro- Parking facility: 153 parking spaces Developer-Investor: Hals-Stroy CJSC (Sistema-Hals vides for construction of auxiliary premises and under- Group) ground parking lot. Project participants Co-investors: Ferro-Stroy CJSC, FerroZhilStroy Developer-Investor: Sistema-Hals OJSC Technical Customer: Veststroymet OOO In 2008, the Group finished the construction of the house Co-investors: Ferro-Stroy CJSC, FerroZhilStroy OOO General Contractor: Mosfundamentstroy-6 CJSC and started finishing the interior and improving the con- Technical Customer: Veststroymet OOO Architects: Kiselev A.V., Proektnoye Resheniye tiguous areas. General Contractor: New Construction Technologies OOO Sales management: Ferro-Stroy CJSC Architects: ARSS OOO Sale of residential: FerroZhilStroy OOO Sales management: Ferro-Stroy CJSC City quota: 30% of inside and outside non-residential Sale of units: FerroZhilStroy OOO space1, 20% of parking spaces City quota: 73.5% of living space, 52% of non-residential areas This business class residential property was built in a very prestigious and environmentally friendly area in the The residential complex is located in the south of Moscow, southwestern part of Moscow. This place is also regard- in Central Chertanovo, which is an environmentally safe district with an established infrastructure, including The quotated spaces were changed by the Investor to residen- tials in other buildings swimming pools, fitness centers, and sports schools. The Bitsa equestrian complex is by far the most known facility in the area. The area has a well-developed retail network, including supermarkets, discount stores, shops and shopping centers carrying various consumer goods.

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Primavera Residential Complex forest, Birylevo arboretum, Lenino, and others, as well as Apart-hotel – Vsevolozhsky Lane necting the Ostozhenka and Prechistenka streets, which Business Class the popular Borisovo and Tsaritsino ponds. Address: 5, Vsevolozhsky Lane, Moscow creates a private and secluded atmosphere. Address: 18, 18/1, Simferopolsky Lane1, Moscow This cast-in-place apartment building with auxiliary prem- Land plot area: 0.23 ha The concept of the project provides for building a deluxe ises and underground parking lots was built according to GBA: 7,368 sq. m apartment complex managed by a professional manage- Land plot area: 1.58 ha the custom design. Living area: 2,835 sq. m ment company. The complex has nice floor planning solu- GBA: 42,218 sq. m Number of units: 34 tions, small-size apartments, which are in great demand, Living area: 23,046 sq. m In 2008, the Group completed construction of the house Parking facility: 35 parking spaces versatile floor planning, solutions, which allow to merge Number of floors: two 14-floor buildings and began the interior finishing and improving the contig- the apartments and penthouses overlooking the opera- Number of units: 260 uous areas. Project participants tional roof offering spectacular views of the Cathedral of Underground parking facility: 266 parking spaces Investor: MGTS OJSC Christ the Savior and architectural masterpieces of the Co-investor: Project Vsevolozhsky OOO historical downtown. The apartments are sold unfinished. Construction address: bldg 4, Nakhimovsky Avenue Project participants Developer: Sistema-Hals OJSC The finishing of the public areas, stair flights and elevator Developer-Investor: Sistema-Hals OJSC Designer: ITC Moskomarkhitektury GUP halls will be based on the design project developed by a Co-investors: Ferro-Stroy CJSC, FerroZhilStroy OOO leading designer bureau. Comfort and convenience of liv- Technical Customer: Veststroymet OOO Vsevolozhsky Lane is part of the so-called Golden Mile ing are ensured through various services and boutiques General Contractor: Minskaya-2 OOO (Ostozhenka), which is an area mostly developed with located on the second floor of the building. Architects: Chernikhov A.A., elite residential properties and renovated old buildings Architecture and Society OOO occupied by well-established companies and foreign em- In 2008, the Company finished the project work, and ex- Sales management: Ferro-Stroy CJSC bassies. The proposed project blends in perfectly with pects to receive the Certificate of approval of the architec- Sale of apartments: FerroZhilStroy OOO the surrounding area and developmental concept of the tural and construction solution from Moscow Architectural City quota: no encumbrance Khamovniki district. It’s nicely located in a quiet lane con- Committee in the near future. Sistema-Hals Group plans to start sales in 2009. The property is located in the southern administrative district of Moscow, Nagorny district, within two-minute walking distance from the Nakhimovsky Prospect metro station in the middle of a residential area. The district has the following historical, cultural, and architectural landmarks: Donskoy and Danilov monasteries, Tsaritsino and Lenino estates, Kolomenskoye reserve, and 11 churches. In addition to that, there are 40 parks and gardens, including Tsaritsino and Bitsa parks, Vidnoye park, Bitsa

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Apart-hotel – Milyutinsky Lane ovated (or scheduled for renovation) and transformed into Cottage also part of Moscow with urban transportation (trolley bus Address: 5/1, Milyutinsky Lane, Moscow modern business centers and elite residential complexes. Communities and shuttles), small cafes and restaurants, as well as an The property itself is considered to be the first automat- athletic club, a hotel, and stores located nearby. Land plot area: 0.21 ha ed telephone exchange in Moscow and is an architectur- GBA: 11,247 sq. m al landmark of early 20th century: before that the building Serebryany Bor Community, Second Phase The project provides for building three-level standalone Living area: 7,813 sq. m was the Moscow telephone station owned by Swedish- Address: Serebryany Bor, Moscow houses in this community. The planning solutions take Number of apartments: 40 Danish-Russian telephone joint stock company (architect into account the features of unique landscape available A.E. Erichson, engineer architect O.V. Von-Dessin). Total area of land plots: 5.65 ha at Serebryany Bor. Elegant, rationally planned houses de- Project participants Number of land plots: 7 signed in modern European style offer a great choice of Investor: MGTS OJSC During the course of reconstruction, the existing building Number of cottages: 59 the interior and exterior solutions, while preserving the Co-investor: Project Milyutinsky OOO will become a deluxe apartment hotel and keep its his- Average floor area of one cottage: 250 sq. m overall layout structure. The landscaping plan provides Developer: Sistema-Hals OJSC torical facades. The design of apartments, entrance and Number of floors: 2 + 1 attic floor for building lawns, quarry stone trails, open-air parking Designer: Gerus OOO public areas was developed by Giugiarro Architettura, Parking facility: 2 parking spaces per each parcel lots, benches, and original lighting of the facades. Plans Designer: Giugiaro Architettura (Italy) the leading Italian design bureau. Overall, there will be are in place to plant trees and shrubs on the land parcels. 15 types of apartments available in three styles, includ- Project participants The property is located in Central administrative district ing art nouveau, art deco, and Giugiarro style, during the Developer and Investor: OJSC (Sistema-Hals Group) In 2008, the following works were performed at the con- of Moscow, Krasnoselsky district. The surrounding area project design development effort. The apartments will General Designer: Ecsodesign OOO struction sites of the second phase: includes old residential and administrative buildings be sold unfinished with project design available as an op- General Contractor: SpetsStroyServis OOO  Building exterior engineering networks; (built before 1930s) and newly built houses (new con- tional service.  Laying interior engineering lines; struction in place of demolished decrepit houses). Many The Serebryany Bor Island located at the bend of the  Interior finishing works; buildings located in Milyutinsky Lane are architectural In 2008 Sistema-Hals began preparatory (dismantle) work. Moskva River is one of the few forests remaining in  Façade finishing; landmarks (for example, former rental houses at 3, 11/4, The Company plans to start apartment sales in 2009. Moscow and is one of thirteen protected areas in Moscow.  Landscaping and planting of greenery. 13, 16, 20, Milyutinsky Lane), which have of late been ren- Today, Serebryany Bor is a unique natural complex located in Moscow, offering picturesque and varying landscape The Group has built the interior gas lines in the second- and rich flora and fauna. Nevertheless, Serebryany Bor is phase cottages in the 3rd quarter of 2008.

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Aurora Community ers collection outlet, three athletic grounds and two chil- Gorki-8 Community, First Phase Address: 18th km off Dmitrovskoye Highway, dren’s playgrounds. Address: 17 km off Moscow Beltway, Moscow Region Rublevo-Uspenskoye Highway In 2008, they have obtained the following permits: permit Total area of the community: 93 ha for commissioning the water-intake plant, permit for sew- Total land plot area: 70 ha Number of land plots: 132 age network, water supply network, and a permit for storm Number of townhouses: 77 Land plots size: from 2,500 to 8,000 sq. m (with an option water sewer network. The land plots were being sold. Average townhouse floor area: 324 sq. m to expand using the adjacent woodland) Project participants Project participants Developer and Investor: Gorki-8 OOO Investor: Avrora non-profit partnership General Contractor: Lesnoy Komfort OOO Investor: Landshaft-2 OOO Technical Developer: Sistema-Hals OJSC There is a health center, 36.6 pharmacy, Perekrestok su- General Designer: UK Bolshoy Gorod OOO permarket, bakery, Sberbank branch, maintenance ser- Designers: Fortex OOO, Spetsmontazh-M OOO, vice, dry cleaners, and developed engineering infrastruc- Tekhnostroy OOO, etc. ture within the area of the already existing community. Contractors: Firma Trest CJSC, Industrial Mining and Geological Alliance OOO, Tekhnos OOO, Remdor In 2008, the finishing work was underway in the town- OOO, KOSMA OOO, Bioklinstroy OOO, Tekhstroy OOO, houses. Tekhnostroy OOO, Tekhnos OOO, Digital Service OOO, Energostroy OOO, etc.

Aurora community is located on the bank of the Moscow Canal, Dmitrovsky district with quick access to transportation thoroughfares and surrounded by pristine wood- lands. The key advantage of the Aurora community lies in its access to the big water and availability of its own yacht club. The yacht port of the Aurora community exists in the form of mooring facilities for 40 boats of varying length, a slip for hoisting small boats and a fully functional beach. The yacht club has recreation areas, a gym, a restaurant, and a SPA salon. There will also be a proprietary maintenance and security service, a store, a pharmacy, dry clean-

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Retail  All residential at 25A, Dnepropetrovskaya Street; Markt, Russky Lyod, MONEX Trading (Mothercare, Claire’s, Infrastructure and Construction Sales  72% of residential in the Diplomat building at 39A, Next, The body shop, Starbucks), Lady and Gentleman, Management In 2008, sales in residential complexes on Simferopolsky Michurinsky Avenue; KFC, L’Etoile, Sephora, and 30 other tenants. Lane, Michurinsky Avenue, Dnepropetrovskaya Street  91% of residential in Emerald Valley building (111A, To intensify the focus on the main business segment – and Rublevskoye Highway accounted for the bulk of retail Rublevskoye Highway); In August 2008, in order to build a portfolio of its rent- development of residential and office buildings, the sales at Sistema-Hals Group.  Standalone parking facility at 9, Aviatorov Street; al assets, Sistema-Hals expanded its Asset Management Company decided to withdraw from the Infrastructure  80% of land plots at Aurora community (Stepankovo portfolio by including the Danilovsky Fort business center and Construction Management business segment. In As of the end of 2008, the Group sold the following: village, Moscow region). (10, Novodanilovskaya Embankment). November 2008, the Company sold the subsidiaries as  77 % of residential in Primavera complex (18, 18/1, part of this process: 51% of interest in Organizator OOO Simferopolsky Lane); Facility Management and 51% of interest in PSO Sistema-Hals. (building maintenance) Average Apartment Prices Sold by Sistema-Hals Group in 2008. This area of the Company’s business includes services to

Residential premises Non-residential premises Parking spaces the clients related to property maintenance and manage- (RUR/sq. m) (RUR./sq. m) (RUR/space) ment. Residential at 108,827 107,400 730,000 Dnepropetrovskaya Street Emerald Valley residential 140,000 188,000 1,400,000 In 2008, the Company’s Facility Management portfolio included properties with a gross building area of more than Primavera residential 145,000 132,000 1,400,000 1,100 sq. m located in six Russian regions. Diplomat residential 172,000 163,000 1,722,000

The Company’s clients include major Western and Russian corporations, such as Japan Airlines, Metromedia The average price of a standalone parking facility located Asset International Group, Raiffeisenbank, Scandinavian at 9, Aviatorov Street amounted to about RUR 340,000 per Management Airlines, Western Union, AFK Sistema, MTS OJSC, Detsky parking space in 2008. Mir OJSC, Intourist, IC ROSNO OJSC, Mosdachtrest The main sources of revenue of Sistema-Hals Group from OJSC, MGTS OJSC (Moscow Urban Telephone Network), The Company sold about 98,000 sq. m of land plots in Asset Management in 2008 were the proceeds from leas- Nafta-Moskva, Mobile Drilling Systems OJSC, Uralsib Aurora community at an average price of RUR 450,000 for ing out cottages in the Serebryany Bor community. In Leasing Company OOO, Tchibo CIS OOO, WorlyParsons 100 sq. m. The Group also started sale in Gorki-8 commu- 2008, the Company began to lease its first cottages of the International OOO, Stealth Telecom CJSC, Trabond Ltd., nity at Rublevo-Uspenskoye Highway. 2nd phase of the Serebryany Bor project comprised of 20 and Oscar Service OOO. cottages with the gross building area of 4,774 sq. m. In all, Sales the Group leased out 99 cottages during the period under of Development Projects review (including decrepit facilities) with the total area of 26,536 sq. m. During the year under review, Sistema-Hals Sistema-Hals Group sold the following assets in 2008 as leased out the new cottages at an average rate of USD part of the effort to streamline its project portfolio: 1,000 per 1 sq. m.  Project for construction of an administrative building located in downtown Moscow at 22, Rochdelskaya In 2008, Sistema-Hals Group in conjunction with its part- Street on a 0.29 ha land plot; ner Apsys began to be actively engaged in leasing out the  Several office buildings on 8 Marta Street, which used retail space at the Leto Mall. Over the reporting period, to be leased. they have signed agreements with such tenants as Media

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 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board Balance is a complicated science but that’s what it takes to make a perfect building

The Tower of Pisa is part of the architectural ensemble of the Santa Maria Maggiore Cathedral in Pisa. It was nick- named «the Leaning Tower» and has won universal re- nown because it is significantly tilted and looks like it is about to topple.

The height of the tower is 55.86 m on the lowest side and 56.7 m on the highest side. The width of the walls at the base is 4.09 m and at the top 2.48 m. Its weight is estimated at 14,453 tons. The current tilt is about 3.97 degrees. The tower has 294 steps.

The tower was built in three stages. Construction began on August 9, 1173, and continued with two extended in- terruptions for almost 200 years until 1360. The identity of its architect remains unknown. The tower is undoubted- ly one of the most extraordinary bell towers in Europe.

Part 5 Information for shareholders, reports on corporate governance and social responsibility

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 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Part 5. Information for shareholders, Reports on corporate governance and social responsibility Part 5. Information for shareholders, Reports on corporate governance and social responsibility Information for shareholders

Ordinary Price Dynamics and Trade Volume at MICEX in 2008 Shares

5,000 6,000 As of December 31, 2008, the authorized capital of Sistema-Hals OJSC comprised 11,217,094 ordinary shares with a par 4,500 5,000 value of RUR 50 each. 4,000 3,500 4,000 On October 9, 2006, ordinary shares of Sistema-Hals OJSC were included in list B of the Moscow Interbank Currency 3,530 Exchange, and on April 25, 2007 they were transferred to Quotation list B. Also on October 17, 2006, the shares of Sistema- 2,500 3,000 Hals OJSC were included in The list of securities authorized for trading on the Moscow Stock Exchange, Quotation list B, and 2,000 2,000 on April 17, 2007 transferred to The list of securities authorized for trading on the Moscow Stock Exchange without inclu- 1,500 1,000 sion in the Quotation lists. On November 16, 2007, the shares of Sistema-Hals OJSC were included in The list of tradable se- 1,000 curities without inclusion in the Quotation lists with the RTS stock exchange. 500 0 0 In Russia, the stocks of Sistema-Hals OJSC are traded at MICEX, Moscow Stock Exchange (MSE), and RTS under the single state registration number 1-01-01017-H dated May 27, 2005. Share price Trade volume (RUR, mln shares) Source: MICEX Ticker Global Exchange Ticker Depository Receipts

MICEX – Moscow, Russia HALS On November 8, 2006, the Company signed a depositary agreement with The Bank of New York Mellon, whereby they MSM – Moscow, Russia HALS started issuing global depository receipts (GDRs) on the Sistema-Hals shares. Since December 8, 2008, the Depositary RTS – Moscow, Russia of the VTB Bank OJSC has been providing custodial services with regard to transactions with the Company’s GDRs. ING Classical market HALS Stock market HALSG BANK (EURASIA) ZAO used to be the custodian bank since registration of the GDR program.

International Securities Identification Codes On November 8, 2006, the shares of Sistema-Hals OJSC were admitted to trading on the London Stock Exchange as GDRs (ticker HALS). The GDRs were issued in accordance with Rule 144 A and Regulation S. The conversion ratio stands at

Name Code 20 GDRs to 1 ordinary share. As of December 31, 2008, the total number of GDRs issued against the Company’s shares ISIN RU000A0JNP96 amounted to 32,370,780 under the Reg.S program and 4,557,480 under the Rule 144 A program, or about 20% of au- SEDOL B1FRPG3 thorized capital.

International GDR Classification Codes

Name Code under Rule 144 A Code under Reg. S

ISIN US82977M1080 US82977M2070

CUSIP 82977M108 82977M207

SEDOL B1FRPC9 B1FRP85

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Dynamics of Trade Volume and GDR Prices at LSE in 2008 Dividend Policy

4 12 Sistema-Hals understands the importance of dividends as a component of aggregate income derived from investment in the Company’s shares and strives to build a transparent and clear mechanism for deciding on the size and payment 10 3 date of the dividends. 8 Sistema-Hals has Regulations on Dividend Policy, whereby the dividends are paid from the Company’s income before in- 2 6 come tax (net income) in accordance with accounting under Russian accounting standards.

4 1 Calculating the recommended dividend amount, the Board of Directors also takes into account a net income from consol- 2 idated financial statements of Sistema-Hals Group prepared in accordance with US GAAP. The recommended amount of dividends is determined by the Board of Directors based on financial results and normally amounts to about 2% of con- 0 0 solidated net income under US GAAP.

Share price Trade volume (mln GDRs, USD) On June 30, 2008, the Annual General Meeting of Shareholders of Sistema-Hals OJSC decided not to pay dividends for Source: Bloomberg 2007, but use the 2007 net profits to finance the core production and investment activities in order to increase the Company’s capitalization.

Major Shareholders of Sistema-Hals OJSC(1) The decision to pay dividends for 2008 will be made by the shareholders at the Annual General Meeting of Shareholders (as of May 12, 2009) of Sistema-Hals OJSC scheduled for June 29, 2009.

Company Name Number of Shares (mln) Stake in Authorized Capital(%) Annual General Meeting of Shareholders Hals-Finance CJSC 4,447,344 39.6

Depository-Clearing Company CJSC(2) 2,367,800 21.1 The Annual General Meeting of Shareholders of Sistema-Hals OJSC that took place on June 30, 2008 approved the annual AFK Sistema OJSC 2,181,959 19.5 report, annual accounts, and addressed issues related to profit allocation, including payment of the dividends, and loss- Bank VTB OJSC(3) 1,673,913 14.9 es of Sistema-Hals as of the end of 2007, and also to the payment of remuneration to members of the Board of Directors

Other shareholders 546,078 4.9 at Sistema-Hals OJSC.

TOTAL 11,217,094 100.0 The General Meeting of Shareholders approved amendments to the Company’s Charter, approved the internal documents in the new version, such as Regulations on the Board of Directors at Sistema-Hals OJSC and Regulations of the (1) The register maintenance system has: 6 legal entities (including 4 nominal shareholders) and 3 physical persons. Management Board of Sistema-Hals OJSC. The Annual General Meeting of Shareholders of Sistema-Hals OJSC elected the (2) Nominal shareholder, Russia’s settlement depository for equities. Board of Directors comprised of 10 members and the Audit Commission that comprised three members. (3) Nominal shareholder, bank castodian servicing the Company’s GDR system. The next General Meeting of Shareholders will take place in Moscow on June 29, 2009 at 11 a.m. (Moscow time) at the following location: 13, Mokhovaya Street, Moscow. Registration of the participants in the Annual General Meeting of Shareholders of Sistema-Hals OJSC begins on June 29, 2009 at 10.00 a.m. (Moscow time). The Board of Directors of the Company established May 12, 2009 as a register closing date for the purposes of drawing up a list of shareholders eligible to participate in the Annual General Meeting of Shareholders of the Company.

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Voting at the General Meeting of Shareholders shall be based on the «one share – one vote» principle, unless otherwise  Introduction of changes and additions into the Company’s Charter or approval of the Company’s Charter in new ver- provided by the Federal Law. Elections to the Company’s Board of Directors shall take place using the cumulative voting, sion, which would limit their rights, if they voted against adoption of a corresponding decision or didn’t participate where the number of votes held by each shareholder is multiplied by the number of persons to be elected to the Board in the voting. of Directors. The person planning to acquire more than 30% of the total number of the Company’s ordinary shares granting voting Rights rights in accordance with para. 5, Art. 32 of the Federal Law including the shares owned by this person and its affiliated of the Shareholders persons, shall be entitled to send a public offer to the Company addressed to the shareholders owners of the Company’s shares, about purchasing the Company’s shares owned by them. Based on provisions of Art. 31 of the Federal Law #208-FZ On Joint Stock Companies dated December 26, 1995 («Federal Law»), each ordinary share of the Company provides its owner with equal amount of rights.

Pursuant to the Russian law and the Company’s Charter, the shareholders of JSC Sistema-Hals shall be entitled to the following:  Take part in the General Meeting with the right to vote on all issues within its competence;  Receive dividends;  Receive part of the assets in case of liquidation of the Company;  Freely alienate their shares;  Exercise the preferential right to acquire additional shares and securities convertible into shares issued through open subscription in the number that is proportionate to the number of shares of this category owned by them;  Receive information about the Company’s activities pursuant to the Federal Law and other regulatory acts of the Russian Federation, as well as the Charter of the Company;  Have access to the agenda of the General Meeting prior to actual holding of such meeting;  Exercise other rights provided by Federal Law, other regulatory acts of the Russian Federation, Charter of the Company, and decisions of the meeting made in accordance with its competence.

The shareholders included on the list of individuals eligible to participate at the General Meeting of Shareholders with at least 1% of the votes, shall have the right to see this list pursuant to paragraph 4, Article 51 of the Federal Law.

Under paragraph 6.3 of the Company’s Charter, the shareholder(s) who own at least 2% of the Company’s voting shares shall have the right to propose items to be included on the agenda of the Annual and Extraordinary General Meetings of Shareholders and put up candidates to the Company’s Board of Directors, collegial executive body, Audit Commission, and Accounting Commission whose number cannot exceed the membership of a corresponding body, as well as the candidate to the position of a sole executive body.

A shareholder owning no less than 10% of the Company’s voting shares shall have the right to call the Extraordinary General Meeting of Shareholders.

Shareholders owners of voting shares shall be entitled to request redemption by the Company of all or part of the shares owned by them in the following instances:  Re-organization of the Company or a major transaction, which is to be approved by the General Meeting of Shareholders in accordance with para. 3, Art. 79 of the Federal Law, if they hadn’t voted against the decision to re-or- ganize it or approve the above transaction, or didn’t participate in the voting on these issues;

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Sistema-Hals has traditionally focused on improvement they have set up a new Investor Relations Committee at Corporate structure of Sistema-Hals OJSC of its corporate governance. The Company’s management the Board of Directors. The Committee is designed to im- continually studies and adapts the best Russian and in- prove the Company’s capitalization and protect the rights ternational corporate governance practices. The Company and interests of its shareholders. maintains the following corporate governance principles in its work: Code  Enforce the shareholders’ rights relating to ownership of Corporate Conduct of the shares;  Guarantee fair and unbiased relations with the share- The Code of Corporate Conduct adopted by the Board of holders owning shares of the same class, and provide Directors in August 2006 incorporates key rules and reg- adequate protection, if their rights get violated; ulations of corporate conduct, which are due to enhance  Provide prompt, full, and reliable access to information future successful development, increase the total market about the Company’s business, including financial and value of outstanding shares and protect legitimate inter- economic performance numbers, share distribution and ests and rights of all shareholders. management structure, as well as support during decision-making by the shareholders and investors; The Code is based on the latest corporate governance  Safeguard legal rights of the stakeholders, including methods and standards used by foreign and Russian com- the employees; panies with due account taken of the Rules for Corporate  Promote the development of dynamic cooperation be- Governance recommended by the Russian Federal Service tween the Company and the shareholders with the view for Financial Markets (FSFM). Principles and rules of the to maximize value for the shareholders; internal Code of Corporate Governance at Sistema-Hals  Provide efficient control over the financial and econom- provide for a higher level of corporate governance, busi- ic activities with the view to protect rights and legal in- ness culture and ethics than the one required by existing terests of the shareholders; Russian legislation. The Sistema-Hals management has  Comply with existing legislation; adopted the Code of Corporate Governance based on the  Actively promote integration of ethical standards and principles of bona fide business operations, and uses its rules in the Company’s operations. best efforts to comply with them in daily work.

Corporate Governance External Enhancements in 2008 Audit

The Annual Meeting of Shareholders held in 2008 ap- The resolution of Sistema-Hals General Meeting of proved new versions of Regulations on the Board of Shareholders held on June 30, 2008 adopted the follow- Directors and the Management Board, which included sec- ing auditors for the Company: tions regulating the procedure for preparation and holding  Deloitte & Touche CIS (for conducting audit of financial of the meetings of the above governance bodies. To sup- reporting based on US GAAP); port effective relations with the financial community and  АОRА CJSC (for conducting audit of financial reporting enhance the investor appeal of the Company’s securities, based on Russian accounting standards).

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General Meeting of Shareholders Felix Evtushenkov John Gummer Douglas Daft (Chairman) (Independent Director) (Independent Director) According to the Federal Law On Joint-Stock Companies Vice President, Head of Consumer Assets business Chairman of Sancroft International Ltd.; Chairman of Veolia Member of the Board of Directors at McGraw-Hill Group, Wal- and the Charter of Sistema-Hals OJSC, the General unit at AFK Sistema UK Ltd. (former Vivendi UK); Chairman of Association of Mart Stores Inс.; Member of the European Advisory Committee Meeting of Shareholders constitutes the highest manage- Independent Financial Advisers (trade office); Chairman of at N.M. Rothschild & Sons Ltd; Member of the Advisory ment body of the Company. The procedure for conducting Birth Year: 1978 Valpak Ltd.; non-executive director of Sovereign Reversions Committee at Longreach Group and Thomas H. Lee Partners, the Meeting is established by the Regulations on General Education: Moscow University of International Law Ltd; non-executive director of Catholic Herald Ltd. L.P.; Observer with the Executive Board at Brandeis University, Meeting of Shareholders of the Company. and Economics USA, Member of the Board of Governors at Thunderbird School Birth Year: 1939 of Global Management, USA, Chairman of Advisory Board at The Board Selwyn College, Cambridge graduated cum laude major- the Churchill Archives Center, Churchill College at Cambridge, of Directors ing in history; Kings School, Rochester Head of the American Australian Association

The Board of Directors carries out overall management Birth Year: 1943 of the Company’s activities, except for decisions on is- University of New England, B.S. in Mathematics; University sues classified by the Federal Law and the Charter of the of New South Wales, post graduate degree in business ad- Company as falling within the competence of the General ministration Meeting of Shareholders.

The sessions of the Board of Directors shall be held on as- needed basis, but at least once every six weeks. The procedure for calling and conducting sessions of the Board of Directors shall be determined by Regulations on the Board of Directors.

Members of the Board of Directors shall be selected during the Annual General Meeting of Shareholders in the order specified by the Federal Law On Joint-Stock Companies, for the term up until the next annual meeting.

The membership of the Board of Directors effective during the period from July 2007 through June 2008 was elected by decision of the Annual General Meeting of Shareholders dated June 25, 2007 and consisted of 9 members: Dmitry Yakubovsky Robert Tsenin Anton Abugov  Dmitry Zubov (Chairman); (Deputy Chairman) (Independent Director)  Valery Abramson (Deputy Chairman); Chairman of the panel at non-profit organization Director of Australian Infrastructure Fund Ltd., Metrix First Vice President at AFK Sistema, Head of Strategy and  Douglas Daft (independent director); named First Moscow Bar Association, Chairman of the Capital Partners Pty Ltd. and Matrix European Real Estate Development Complex  John Gummer (independent director); Board of Directors at Gorki-8 OOO Investment Trust plc  Robert Tsenin (independent director); Birth Year: 1976  Alexey Buyanov; Birth Year: 1963 Birth Year: 1949 Education: Academy of National Economy under the  Alexander Goncharuk; Education: All-Soviet Union Law University Education: University of Sydney, University of London, Government of the Russian Federation  Sergey Drozdov; London Business School  Felix Evtushenkov (Company’s President). Mr. Felix Evtushenkov was the President of the Company until June 30, 2008. He was elected the Chairman of the Board of Directors on June 30, 2008 and dicharged as the President. 90 91

On June 30, 2008 the General Meeting of Shareholders at The following Board committees were operative in 2008: Alexey Buyanov Alexander Goncharuk Sistema-Hals OJSC elected a new Board of Directors for  Audit Committee; the period from July 2008 through June 2009 comprised  Committee for Personnel and Remunerations; Senior Vice President, Head of Finance Complex at AFK First Deputy Chairman of the Board of Directors of AFK of ten members. Dmitry Yakubovsky and Anton Abugov  Strategy Committee; Sistema Sistema were elected to the Board of Directors instead of Valery  Corporate Governance Committee; Abramson, whereas other Board members were re-elect-  Tender and Procurement Committee; Birth Year: 1969 Birth Year:1956 ed for another term.  Investor Relations Committee. Education: Moscow University of Physics and Technology Education: Grechko Naval Academy; Sevastopol Naval Engineering Academy, graduated cum laude In accordance with the international practice of corpo- Audit Committee rate governance and recommendations by the Federal The Audit Committee at the Company’s Board of Directors Commission for the Securities Market (FCSM)/FSFM Code was set up on July 25, 2006. According to Regulations on of Corporate Conduct, the independent directors shall be the Audit Committee developed on the basis of the best elected to the Board of Directors of Sistema-Hals OJSC. Russian and international practice of corporate gover- The Company uses the most conservative criteria to deter- nance, the primary goal of this subsidiary body is assis- mine the level of independence of the Company’s Board tance to the Company’s Board of Directors in exercising of Directors. control over financial and economic activities by means of preliminary examination and drafting of recommenda- There were three independent directors (John Gummer, tions on such issues as: Douglas Daft, and Robert Tsenin) on the Board of Directors  Company’s interaction with the auditors; during the year under report. Independent directors at  Study of the Company’s financial reporting; Sistema-Hals have unique international experience and  Appraisal of efficiency of the Company’s internal con- are recognized professionals in the industry. trol procedures;  Promotion of efficient work of the Company’s internal Felix Evtushenkov was elected the Chairman of the controls; Board of Directors instead of Dmitry Zubov, and Dmitry  Interaction between the Company’s external and inter- Yakubovsky was elected Deputy Chairman of the Board nal audit. of Directors during the first session of the newly elected Board of Directors, which took place on June 30, 2008. According to the international practice of corporate governance, only the independent and non-executive directors They held 12 meetings of the Company’s Board of Directors who are members of the Board of Directors can be appoint- in 2008: ed to the Audit Committee at the Board of Directors, and  9 meetings in presentia; only an independent director can be the chairman. During  3 meetings in absentia. election of the Committee members they take into account Sergey Drozdov Dmitry Zubov their education, professional training, work experience in Committees the Committee’s area of business, skills with the financial Senior Vice President, Head of Corporate Property Complex Deputy Chairman of the Board of Directors at AFK Sistema of the Board of Directors and economic documentation and other special knowledge at AFK Sistema required for the Committee members in exercising their Birth Year: 1954 The Charter of Sistema-Hals provides for the possibility of powers. Birth Year: 1970 Education: Moscow Aviation University, doctorate degree establishing committees, commissions, and other inter- Education: The State Academy of Management, a degree in economics nal structural bodies at the Board of Directors. The following Committee members were elected during in economics the first meeting of the newly elected Board of Directors of the Company, which took place after the Annual General Meeting of Shareholders held on June 30, 2008:

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 Robert Tsenin (Board member, independent director,  Douglas Daft (Board member, independent director, of the Company’s corporate governance with regard to the with the established bidding principles, standards for Chairman of the Committee); Chairman of the Committee); key issues relating to: securing transparency of procurements, adopting ec-  Andrey Buyanov (Board member, Senior Vice President,  Dmitry Zubov (Board member, Deputy Chairman of the  Compliance of documents and Company’s activities onomically viable and advantageous for the Company Head of the Finance Complex at AFK Sistema). Board of Directors at AFK Sistema). with existing legislation; decisions regarding the choice of counteragents,  Douglas Daft (Board member, independent director);  Robert Tsenin (Board member, independent director);  Introduction of changes and additions to the Articles works, and services; of Association and other internal documents of  Developing recommendations for the Board of Directors They held seven Committee meetings in presentia during There were three meetings of the Committee in presen- the Company approved by the General Meeting of regarding efficiency of using the economic, financial, 2008, where they have discussed various issues relating tia held during the course of 2008, where they discussed Shareholders and the Company’s Board of Directors; or other resources of the Company during procurement to the Committee’s competence. various issues relating to the Committee’s frame of refer-  Introduction of provisions of the Code of Corporate activities; ence. Conduct into the Company’s work;  Analyzing information about fulfilling their contractual Committee for Personnel and Remunerations  Assistance in prevention of corporate conflicts and par- obligations by suppliers; The Committee for Personnel and Remunerations at the Strategy Committee ticipation in their resolution;  Examining claims filed by the Company to suppliers for Board of Directors of the JSC Sistema-Hals was estab- The Strategy Committee at the Board of Directors of  Disclosure of information about the Company; failure to comply with their obligations and contractu- lished on August 30, 2006. Pursuant to the Regulations Sistema-Hals was set up on August 30, 2006. Pursuant  Convocation, preparation, and holding annual and ex- al terms. on the Committee for Personnel and Remunerations, the to Regulations on the Strategy Committee, the key objec- traordinary General Meetings of Shareholders; Committee has the following goals: tives of the Committee include drafting and submitting  Preliminary study of the materials prepared for hold- During the first meeting of the newly elected Board of  Providing advisory assistance to the Board of Directors recommendations to the Board of Directors in charge of ing meetings with the shareholders, including the Directors of the Company held after the Annual General in order to develop strategy and shape up the Company’s the strategic development of the Company, which is part Company’s reporting to the shareholders and inves- Meeting of Shareholders on June 30, 2008, the following policy and standards aimed at hiring skilled experts for of the frame of reference of the Board of Directors, or are tors; members were elected to the Committee: Company management; under study by the Board of Directors as part of the pro-  Combining their offices by President and members of  Sergey Drozdov (Board member, Senior Vice President,  Securing actual participation of the members of the cedure to control the activities of the Company’s execu- the Management Board in the management bodies of Head of Property Complex at AFK Sistema, Chairman of Board of Directors in exercising control and establishing tive bodies. other organizations; the Committee); their personal awareness with regard to the personnel  Appointing the Company’s Corporate Secretary and re-  Andrey Buyanov (Board member, Senior Vice President, and remuneration of the members of management bod- During the first meeting of the newly elected Board of moving him from office. Head of the Finance Complex at AFK Sistema); ies and of the Company’s Audit Commission; Directors of the Company held after the Annual General  Felix Evtushenkov (Chairman of the Board of Directors,  Conducting joint work with the Company’s executive Meeting of Shareholders held on June 30, 2008, they have During the first meeting of the newly elected Board of Vice President, Head of the Consumer Assets business bodies with regard to personnel issues and remunera- elected the following members to the Committee: Directors of the Company held after the annual General unit at AFK Sistema). tion paid to the members of management bodies and of  Felix Evtushenkov (Chairman of the Board of Directors, Meeting of Shareholders held on June 30, 2008, the fol- the Company’s Audit Commission; Vice President, Head of the Consumer Assets business lowing members were elected to the Committee: They have held one meeting of the Committee in presentia  Exercising control over implementation of the decisions unit at AFK Sistema, Chairman of the Committee);  John Gummer (Board member, independent director, in 2008, where they discussed various issues relating to adopted by the Board of Directors with regard to the per-  Anton Abugov (Board member, First Vice President, Chairman of the Committee); the Committee’s frame of reference. sonnel and remuneration of the members of manage- Head of the Strategy and Development Complex at AFK  Sergey Drozdov (Board member, Senior Vice President, ment bodies and of the Company’s Audit Commission, Sistema); Head of the Corporate Property Complex at AFK Committee for Investor Relations as well as decisions in the area of social policy;  Dmitry Zubov (Board member, Deputy Chairman of the Sistema); Investor Relations Committee at Sistema-Hals Board of  Providing advisory assistance that the Board of Directors Board of Directors at AFK Sistema);  Dmitry Yakubovsky (Deputy Chairman of the Board). Directors was established on December 9, 2008. The main needs to develop the strategy for the corporate social  Douglas Daft (Board member, independent director); functions of the Committee are as follows: responsibility.  Dmitry Yakubovsky (Deputy Chairman of the Board). Tender and Procurement Committee  Supervision over development and implementation of Tender and Procurement Committee at Sistema-Hals has the strategy for investor relations (IR strategy) of the During the first meeting of the newly elected Board of Corporate Governance Committee been active since October 18, 2007. The Committee’s Company; Directors of the Company held after the Annual General Corporate Governance Committee of the Board of Directors terms of reference include the following issues:  Issuing recommendations for improving IR strategy Meeting of Shareholders held on June 30, 2008, the fol- at Sistema-Hals has been active since August 4, 2006. The  Developing recommendations for the Board of and organization of the Company’s IR unit work; lowing members were elected to the Committee: Committee’s tasks include application of the best practice Directors of the Company regarding procurement poli-  Coordination of the information disclosure processes, cies, enhancing efficiency and control over compliance which might affect the Company’s capitalization;

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 Supervision over organization of work of the Company’s the competence of the General Meeting of Shareholders, IR unit. Board of Directors, or the Management Board. Sergey Shmakov Elena Vitchak Tatyana Gvilava (Chairman) The following persons were elected to the Committee: Felix Evtushenkov headed the Company from 2003 Birth Year: 1971 Birth Year: 1960  Robert Tsenin (Board member, independent director, through June 30, 2008, after which he was elected the Birth Year: 1950 Education: Rostov State University, Education: Moscow University of Chairman of the Committee); Chairman of the Board of Directors of the Sistema-Hals. Education: Moscow State University majoring in Russian language and National Economy, majoring in eco-  Anton Abugov (Board member, First Vice President, Head Sergey Shmakov was appointed the President of the of International Relations, major- literature, graduated cum laude; nomics and merchandizing of Strategy and Development Complex at AFK Sistema); Company from July 1, 2008. ing in economics; a degree in eco- The State Academy for Professional Professional Experience:  Douglas Daft (Board member, independent director); nomics Retraining and Career Enhancement 1991 – 1994: Deputy Director at  Andrey Solovyov (Vice President, Head of Finance and Management Professional Experience: of Executives and Investment Construction Cooperative Company Investment Complex at Sistema-Hals). Board 1972 – 1991: various positions Experts majoring in personnel man- 1994 – 1996: Commercial Director at  Gennady Frolov (Vice President, Head of Corporate with the Institute of World Economy agement GMV Co Ltd. Communications Complex at Sistema-Hals); The Management Board manages the Company’s op- and International Relations with Professional Experience: 2002 – 2005: Advisor of the erations within its terms of reference determined by the USSR Academy of Sciences un- 1998 – 1999: Mikeny OOO, HR Chairman of the Board of Directors at Executive the Company’s Charter, and also enforces implemen- der the Ministry of Foreign Economic Director AFK Sistema Bodies tation of the decisions adopted by General Meetings of Relations 2000 – 2002: Big Price Invest OOO, Since 2003: Director of Russian- Shareholders and the Board of Directors. 1991 – 1994: Head of foreign eco- HR Director Arabic Business Council Еhe Company’s current operations are managed by the nomic relations units at the Russian 2002 – 2008: Kapital Insurance Since 2005: Advisor of the President Company’s President (sole executive body) and the As of the end of May 2009, there were 11 members in the Commodity Exchange JSC and City Group, HR Director of the Russian Chamber of Commerce Management Board (collegial executive body). Company’s Management Board. The President of Sistema- OJSC Since June 2008: Director of the and Industry Hals acts as the Chairman of the Management Board. 1994 – 1996: Head of real proper- HR department at Sistema-Hals, Since 1996: member of the FCEM, The rights and duties of the Company’s President and ty department at the European Trade since October 2008 – Head of the since 2006 – President of Business members of the Management Board relating to manage- Bank Administrative Complex Women All-Russian public organi- ment of the Company’s current activities shall be deter- 1996 – 2004: General Director at Member of the Management Board zation mined by the Federal Law, other legislative acts of the Capital Group of Sistema-Hals since July 2008 Since June 2008: Vice President, Russian Federation, Charter of the Company, internal doc- 2004 – 2006: managed own real es- Head of the External Relations and uments of the Company and the agreement stipulating tate projects Government Relations Complex at their rights and duties signed by each of them with the 2007 – 2008: First Vice President, Sistema-Hals Company. Head of the Development Complex Member of the Management Board at Sistema-Hals of Sistema-Hals since July 2008 The President of the Company and members of the Since June 2008: President at Management Board shall be elected for an indefinite term. Sistema-Hals The Board of Directors shall be entitled to terminate the Member of the Management Board authority and the agreement with the President or any at Sistema-Hals since February member of the Management Board. 2008

President

The President of the Company shall act on behalf of the Company without proxy and shall adopt decisions on all issues of the Company’s current operations, which are not referred by the Company’s Articles of Association to

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Dmitry Zikanov Igor Kascheev Yevgeny Kolodkin Konstantin Makovsky Andrey Solovyov Vladimir Uzhondin

Birth Year: 1971 Birth Year: 1978 Birth Year: 1975 Birth Year: 1962 Birth Year: 1976 Birth Year: 1953 Education: Moscow State University, Education: Moscow State Law Education: Arnhem Business School Education: Academy of Management Education: The State Academy of Education: Kaliningrad Technical majoring in mechanics and ap- Academy, majoring in jurisprudence (Netherlands), major in marketing; under the Russian Ministry of the Oil and Gas, majoring in economics; University for the Fishery Industry plied mathematics; International Professional Experience: Russian Academy of Economics, ma- Interior, majoring in management le- Certified Management Accountant and Economy; Moscow Financial University, majoring in management 2000 – 2001: Dorosh Grishayev joring in credit and finance gal organization by IMA University; Finance Academy under Professional Experience: Malyarenko Law Office (specializ- Professional Experience: Professional Experience: Professional Experience: the Russian Government 2003 – 2004: Prospective ing in corporate law and real estate 1996 – 2000: Bain & Company, con- 1993 – 2004: service with law en- 1998 – 2005: various positions with Professional Experience: Development Authority GUP, Deputy transactions) sultant in Moscow, Sydney, and forcement authorities oil and gas companies, including 1994 – 1998: Department of Federal General Director, General Director 2001 – 2002: Sistema-Hals OJSC, ex- London Since January 2005: Head of econom- RITEK, Surgutneftegaz, YUKOS Tax Police Service for Moscow 2003 – 2007: ISK Realtex OOO, pert with the land and property unit, 2000 – 2001: investment analyst ic security service at Sistema-Hals 2005 – 2006: Financial direc- 1998 – 2000: Senior accountant at project manager, Deputy General senior expert with the organization with investment department at AFK Member of the Management Board of tor at Kachkanar Vanadium Mining Tema CJSC Director, General Director and analytical unit Sistema Sistema-Hals since April 2006 and Beneficiation Complex 2000 – 2001: Senior accountant at 2007 – 2008: Vedis Group CJSC, 2002 – 2003: Capital Group OOO, 2001 – 2005: senior expert with in- (EvrazHolding OOO) Ingeocom KRK CJSC Vice President lawyer vestment department at Sistema- 2006 – 2007: Financial director at Since August 2001: Senior accoun- Since October 2008: Vice President, 2003 – 2005: Sistema-Hals CJSC, Telecom CJSC ECN Group tant at Sistema-Hals Head of Residential Real Estate project manager 2005 – 2006: acting Head of Since February 2008: Financial Member of the Management Board of Complex at Sistema-Hals 2005 – 2006: Head of the land and Corporate Development at AFK director at Sistema-Hals, Vice Sistema-Hals since April 2006 Member of the Management Board property relations department at Sistema President, Head of Finance and of Sistema-Hals since December Sistema-Hals Since October 2006: Vice President, Investment Complex 2008 2006 – 2008: Vice President, Head Head of Strategy and Development Member of the Management Board of Asset Management Complex Complex at Sistema-Hals of Sistema-Hals since February Since October 2008: First Member of the Management Board 2008. Vice President, Head of Asset of Sistema-Hals since October 2006 Management Complex Member of the Management Board of Sistema-Hals OJSC since April 2006

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In 2008, they have held 24 meetings of the Company’s Stock Options Gennady Frolov Teimuraz Shengeliya Management Board in presentia. Program

Birth Year: 1963 Birth Year: 1975 Compensation of the Members In 2007, Sistema-Hals adopted an options program for Education: Moscow State Education: Moscow State Law Acade of the Board of Directors and the paying its employees in the form of the Company’s shares. Pedagogical Institute for Foreign my, majoring in jurisprudence; de- Management Board This program is comprised of two parts: Languages gree in economics  Option for share purchase (giving the option holders Professional Experience: Professional Experience: The amount and procedure for paying remunerations and the right to buy Company’s shares at a fixed price pro- Prior to 2006 headed PR services 1997 – 1999: ALM Eversheds Law compensations to the members of the Board of Directors vided that the program participant complies with the at Istok Group, Video International Office, Lawyer for corporate law and shall be determined in accordance with Regulations on terms within the established period); Group, TNT Express, The Rowland real estate transactions Remunerations and Compensations paid to the members  Providing shares as compensation for services (free Company, etc., worked as Deputy 1999 – 2000: 100th Anniversary of of the Board of Directors of Sistema-Hals adopted by the transfer of the Company’s shares to the individuals General Director in charge of in- the World Cinema Fund, Senior law- General Meeting of Shareholders on June 25, 2007. who had made a significant contribution into Sistema- vestor and public relations with yer Hals development). Cherkizovo and Amtel Vredestein 2000 – 2003: Lawyer, Moscow Bar, The Annual General Meeting of Shareholders held on June groups bankruptcies and real estate trans- 30, 2008 decided to pay remuneration to the members The options for shares entitle program participants to ac- 2006 – 2007: Director in charge of actions of the Board of Directors of Sistema-Hals as of the end of quire a certain number of the Company’s shares during the corporate communications at X5 2003 – 2006: Project manager at 2007 in the amount of USD 1.25 million. next four years in equal installments at the earlier estab- Retail Group Sistema-Hals lished and agreed price. 2007 – 2008: Head of the Corporate 2006 – 2007: Project executive di- Communications Department at AFK rector, Head of Project Office There were no shares transferred for the benefit of the op- Sistema Since October 2007: General Director tion program in 2008. Overall, as of May 12, 2009, the Since September 2008: Vice at Hals-Center OOO participants in the options program owned 381,381 ordi- President, Head of the Corporate Since October 2008: Vice President, nary shares of the Company. Communications Complex at Head of Commercial Real Estate Sistema-Hals Complex Ownership of Sistema-Hals Shares by Members of the Company’s Bodies (1) Member of the Management Board Member of the Management Board of

of Sistema-Hals since December Sistema-Hals since June 2007 Name/Position Number of Shares Interest in share capital, % 2008 Felix Evtushenkov 246,776 2.2 (Chairman of the Board of Directors) Dmitry Zubov 123,388 1.1 (Board member) Igor Kascheev (First Vice President, Head of the Asset Management Complex, 11,217 0.1 Board member) Total members of the Board 381,381 3.4 of Directors and the Management Board

(1) As of May 12, 2009

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The introduction of and compliance with the Code of The Company provides additional discounts for the ser- toring of salaries across the corresponding groups of posi- vation system in December 2008 by switching from year- Corporate Social Responsibility (CSR) is the underlying vices and goods by subsidiaries of AFK Sistema, as well as tions on the labor market and provides the minimum base ly bonuses to quarterly/yearly payments. The main reason principle of all business endeavors conducted by Sistema- easy-term bank loans. salary for successful employees no lower than the average behind such a change is the need for switching to a short- Hals. All areas of business pursued by the Company have market level for a corresponding group of positions using term system of planning and encouragement for work great social importance. The Company’s social initiatives The Company pays a great deal of attention to athletic ac- the annual salary adjustment system. achievements. are aimed at charity, environmental protection and moni- tivities among its employees. The Sistema-Hals’ employ- toring of the quality of construction, enhancing the quality ees take part in various athletic competitions defending The Company matches up the size of the target bonus of Certainly, the crisis made certain adjustments to the con- of life of its employees, development of special programs the honor of the Company, and hold intra-Company ath- an employee with the grade of his/her position. In order to tents of social programs, but the Company does its best for the employees, etc. letic events. correlate the size of the target bonus of employees of dif- to provide the best social protection to its employees dur- ferent categories and functional blocks with the market ing the crisis. The Company has the following priority CSR areas: AFK Sistema regularly conducts a Spartakiade with the offers, the Company also conducts regular monitoring of  Compliance with all construction rules and require- participation of employees from 20 major organizations salaries across corresponding reference groups. Sistema- The Company uses the following methods of non-material ments relating to environmental protection; across 16 athletic activities, including futsal, volleyball, Hals pays bonuses to its employees only for the results of motivation of its employees:  Provision of high level of security and quality of life; streetball, floorball, kettlebell tournaments, tug of war, their performance that can be quantified and qualified.  Letters of appreciation and honorary mentions signed  Development of socially important cultural and histor- chess, carting, mini-golf, tennis, field-and-track events by the President; ical landmarks; (running), as well as the family, special, and relay races. The Company has a three-year stock option program for  Badges of honor issued within AFK Sistema (Golden  Development of special programs for the Company’s They also hold separate competitions in swimming, moun- the top managers, which is called to stimulate them in at- Badge, Silver Badge); employees; tain skiing, bowling, billiards, etc. on a monthly basis. tainment of the shareholders’ objectives. The level of par-  Publication in a corporate magazine.  Participation in public projects and charity events. ticipation of each particular employee is determined by Sistema-Hals provides special support to its soccer team: their job level and functions. Corporate Social Programs three times a year the Sistema-Hals team participates in Culture for Employees the championships and at least ten times a year in various In addition to that, the Company provides its employees cup tournaments, including industry-wide contests. with a certain number of fringe benefits, such as volun- Key principles underlying the formation of corporate cul- The employees of Sistema-Hals constitute its intellectu- tary health insurance, pre-paid cell phones, paid on-the- ture: al value. The Company’s personnel policy is aimed at at- Employee job training, etc. The Company determines the volume and  Formation and translation of corporate values; traction, development and retention of highly skilled and Motivation contents of such benefits at its own discretion. The social  Regular and open communications with the personnel. efficient professionals capable of enhancing the value of package is revised on a yearly basis. business through high quality of asset management. The employee motivation used at Sistema-Hals is aimed The management of Sistema-Hals forms and translates at the following: The Company continually develops its non-material moti- corporate values, which underlie the culture of the organi- The Company’s employees are covered by health insur-  Making sure that the personnel stays focused on high vation system in order to show its appreciation of the most zation using various channels of communication with the ance, including outpatient services and dental plan, performance results helping the Company to reach its successful employees and units for the corresponding pe- personnel (corporate site, corporate publication, regula- house call doctor services, coverage of medical expenses business goals; riod under review. The line executives make active use of tory documents, employee’s guidebook, and adaptation and health-related transportation services outside of the  Building conditions for long-term mutually beneficial such non-material motivation techniques as delegation of training). CIS countries. The employees have up to five days of ful- cooperation between the Company and its personnel. authority, involvement of employees in making manage- ly paid sick leave based on average salary. Annually, the rial decisions, and informal communication with the sub- The Company’s management strives to maintain regular employees get vaccinated at the expense of the employ- The Company provides both material and non-material ordinates. and open communications with the personnel. The Group er, and the employees also receive a one-time financial al- motivation techniques. develops a system of internal communications, which is lowance for the delivery of a child or death in the family. Acting on the basis of actual external conditions, Sistema- designed to inform all employees about the current and The Company has developed and introduced a grade sys- Hals approved changes and additions to personnel moti- future tasks, results achieved and expectations of the tem for all positions. Sistema-Hals conducts regular moni-

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management regarding the employees. The employees  A new printed corporate publication entitled «THE Health Promotion, Environmental  Enhance the prestige of the organization as the lead- can have their opinion heard by the senior management ESSENTIALS» was issued; Protection and Occupational Safety ing construction company, which successfully imple- and put their questions directly to them.  The annual Summer and Winter Spartakiades were ments the environmentally safe developer projects in held in the form of an athletic event; All employees of the Company from senior management every possible way. The Company has taken the following actions in 2008 in  Athletic teams were established and the following to rank-and-file workers see the goals in the area of health order to strengthen its corporate culture: tournaments conducted: soccer, futsal, bowling, cart- promotion, environmental protection, and occupation- The following measures and initiatives were implemented  The corporate website was regularly updated with ing, and swimming. al safety as a priority. In construction industry, they have in 2008 as part of compliance with legal requirements and fresh news and Company-related publications in the more stringent requirements regarding the establishment with the view to improve prevention of occupational inju- mass media; During the last 5 years till the end of the III quarter 2008 and maintenance of healthy and safe labor conditions due ries and morbidity and to secure safe labor conditions:  A forum was opened on the corporate website; the Group’s headcounts increased due to business ex- to specifics of the production:  The Sistema-Hals Policy for Health Promotion,  Corporate celebrations of the New Year, Women’s Day pansion. After implementation of the cost reduction pro-  Sparse location of the construction facilities, which Environmental Protection, and Occupational Safety on March 8, and the Company’s Birthday were orga- gram and retirement of some subsidiaries and retirement are often remotely located from places with developed was developed and adopted; nized and conducted; of some subsidiaries in IV quarter 2008 the headcounts infrastructure;  Scheduled control over compliance with the govern- decreased by 25% and amounted to 1,194 employees as  Variety of machines, mechanisms, and devices, most ment standards for labor safety, safety regulations and of the end of 2008. of which are outfitted with electric drives; production standards at the Company’s construction  Open-air operations in adverse weather conditions of- facilities was maintained; The Group’s Headcounts as of the End of the Period, 2004-2008 ten: snow, rain, mud, etc.  A labor safety, safety regulations and production standards training was conducted; The Company focuses its efforts on solving the following  The list of legislative and other regulatory legal acts 2,000 tasks of health promotion, environmental protection, and containing government regulatory labor safety stan- 1,800 occupational safety: dards (on the Company’s website) was developed and 1,600 1,600  Manage construction work in accordance with the in- continually updated; 1,400 ternational standards in the construction business us-  The first phase of certification of 135 workplaces for 1,200 1,100 1,194 ing cutting-edge safe labor technologies for reducing their working conditions was completed, which was 1,000 891 928 environmental impact; used as a basis to develop and approve the program 800 733  Strictly comply with the environmental law and legal for improving working conditions and labor safety;

600 regulations regarding labor and health protection, as  On-the-job Labor Safety training for the Company’s well as other requirements related to the Company’s workers was organized and conducted, corresponding 400 activities and products; certificates were issued, and persons in charge of la- 200  Prevent environmental contamination; bor safety from executives and employees of structur- 0  Reduce risks of causing harm to the health of employ- al units at Sistema-Hals were appointed. 2004 2005 2006 2007 III Quarter 2008 2008 ees and other individuals;

(employees)  Make rational use of the natural resources, which are In 2009, they plan to establish an expert Commission at involved in production or located in the areas adjacent Sistema-Hals, which would analyze the Company’s proj- to the facilities under construction; ects for compliance with the requirements for labor safe-  Enhance the industrial and environmental safety of the ty, safety regulations and production standards. construction sites and construction/assembly work through supervision over the equipment reliability and There was not a single injury during the construction securing its safe and accident-free operation; and assembly work across all the construction facilities  Continually improve professional skills of each em- of the Company during the period under review. ployee in the area of health promotion, environmental protection, and occupational safety; The Company pays a great attention to environmental issues and preservation of greenery around the newly

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built structures and facilities, while sticking to the prin- age channels in the areas of water catchment. The foot- completed before August 1, 2009, which is the Day of ments: «For decades our families, including large, had to ciple of identifying and preventing potential adverse worn trails have been fixed. They have restored the road the City. In 2009, Sistema-Hals OAO will allocate addi- live cooped up in a building, which was not suitable for hu- consequences for the environment. surface and curbs. The trees and shrubs are recycled ac- tional RUR 6 million for this purpose; mans. Only the concerted effort of the municipal author- cording to sanitary rules established by applicable leg-  Over RUR 1 million were allocated in August for cele- ities and big business helped us to improve our housing The improvement of the environmental monitoring sys- islation. bration of the Day of the City; conditions». tems helps to improve the environment and directly af-  In 2008, they provided RUR 700,000 for the overhaul fects each human being, and is also one of the tools On May 11, 2008, in conjunction with the Federal of the Yalta School No.9. Working within the Leningradsky Towers project, the that help to reduce the risks of penalties and preserve Environmental Control Authority, prefecture of the Company has performed under the investment agreement the Company’s revenue. The environmentally friend- Northwestern District of Moscow, Serebryany Bor GUP, In addition to that, in 2008 the Company financed the ac- as follows: built and commissioned a new gym, a kasarne ly production techniques and on-going quality control and Sistema-Hals Group they have organized and held a quisition of special motorized firefighting equipment. with a canteen, a surface/underground parking facility, mitigate the risks of occupational diseases among the festive event to landscape the area of the Khoroshevsky Requisite motorized equipment and containers for trans- and provided apartments to the servicemen and athletes employees. The improvement of the labor safety man- Serebryany Bor on occasion of the Victory Day. In the portation of solid household waste were also purchased from the Club. agement system, introduction and certification of the course of the event, they have planted three-to-five year- and the work to repair premises at the municipal sol- labor and health safety management system greatly re- old coniferous valuable trees. Deputy Administrator of id waste landfill was financed. The events within the duce the risks of occupational injuries and enhance the the Federal Environmental Control Authority Oleg Mitvol, Complex Program for Crime Prevention and Consolidation Charity quality of the facilities under construction. All of the as well as the Russian pop stars Lev Leschenko and Oleg of Legality conducted by the Yalta Municipal Council for construction works done by the Company’s subcontrac- Gazmanov, took active part in this event. 2006-2010 were also financed. In 2008, the Company remitted almost RUR 22 million for tors are performed in compliance with the most strin- charity purposes. In 2008, acting as a co-founder of the gent technical requirements and labor safety rules. Quality In 2008, the Group completed the resettlement of 29 fam- Sistema Charity Fund, the Company remitted voluntary Control ilies from the dormitory located on Lva Tolstogo Street, contributions for treatment of kids with extremely brittle For instance, the projects provide for building treatment Khamovniki, Moscow. The families which have resided bones («crystal kids») in the amount of RUR 250,000, to facilities and catching and diverting the surface run-off Work is under way to certify the Company in accordance in the dormitory of the closed Khamovniki plant of ex- the Foundation for Support and Development of Combat into a storm water drain in the Khoroshevsky Serebryany with the ISO 14000 (environmental management stan- perimental beverages since 1980s were given individual Sports (RUR 12 million), construction of the street volley- Bor in order to preserve the environment and improve dards) and OHSAS 18000 «Personnel Health and Safety apartments in accordance with the municipal standards. ball playgrounds in the Central administrative district of the ecology of the buildings undergoing renovation, Management Systems. Requirements». During the course of resettlement, the Group supported Moscow, as well as to the Regional Public Organization which are located in the Serebryany Bor specially pro- functioning of the engineering systems in the building, in- «Sport Vokrug» Athletic Club (RUR 9 million) as spon- tected area. Honeycomb lawn panels were used, flow- Socially cluding water supply, sewage, and heating. sor funds for the A.A. Kharlampiev Memorial Sambo er beds were built, garden benches and place trash Important Projects Tournament. cans were installed in order to preserve the grass lay- In the letter sent to F.V. Yevtushenkov, the Chairman of the er. Areas were assigned for placing garbage containers. The Company pays great attention to culture supporting Board of Directors at Sistema-Hals, S.L. Baydakov, the pre- During the period under review, the Company actively The waste is removed for further recycling (disposal) to in Russia and the CIS countries by way of participating fect of the Central administrative district, and V.G. Azarov, participated in restoration of the unique cultural and his- industrial landfills. All surfaces are built with curbs. The in such socially important projects as financing renova- head of the Khamovniki municipal council, the former dor- torical landmark – Marfa-Mariinsky Convent of Mercy in parking lots are designed in accordance with the sani- tion of the historical downtown in Yalta, Ukraine. The ren- mitory residents expressed their thanks for the new apart- Zamoskvorechye, Moscow. tary rules and regulations and approved in accordance ovation work began in 2008 pursuant to the agreement with the established procedure. signed with the Yalta Municipal Council:  Pushkinsky Boulevard was officially opened after re- Special openings along the entire length of the fenc- construction on June 1. The reconstruction cost ran ing for unobstructed migration of hedgehogs and oth- into RUR 111 million; er small animals were made. Feeding spots for bird and  The reconstruction of the Yalta-based stadium owned squirrel were made. More soil is added to exposed tree by the Children’s Athletic School received financing in roots on as needed basis. The fertile soil damaged by the amount of RUR 14 million in 2008. A soccer field the water has been restored. They have installed drain- with artificial covering was built. The work will be fully

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 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board Part 1. Letters from the Chairman of the Board of Directors and the President – Chairman of the Management Board Traditions and new ideas create symbols of an epoch

Milan Cathedral is the cathedral church of Milan. It was built in white marble in a Rayonnant Gothic style. Its construction began in 1386, to be completed only in the beginning of the 19th century when Napoleon ordered the facade to be finished. However, some details were completed later – until 1965.

It is one of the largest cathedrals in the world and the second largest Gothic cathedral in terms of capacity (after Seville Cathedral) and the second largest cathedral in terms of capacity in Italy (after Saint Peter’s Cathedral in Rome). The total length of the church is 158 m, the width of the transverse nave is 92 m, and the height of the stee- ple is 106.5 m. The Cathedral can receive up to 40,000 people. Another couple of figures may be added to these statistics witnessing its grandeur: in total the Cathedral is decorated with 3,000 statues and its construction took almost 600 years.

Part 6 Consolidated financial statements for 2008

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 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Chapter 6. Consolidated Financial Statements Chapter 6. Consolidated Financial Statements

JSC SISTEMA-HALS AND SUBSIDIARIES Consolidated Financial Statements Years Ended December 31, 2008 and 2007

Independent assessing the accounting principles used and significant Auditors’ Report estimates made by management, as well as evaluating the overall financial statement presentation. We believe that TABLE OF CONTENTS To the Shareholders of JSC Sistema-Hals: our audits provide a reasonable basis for our opinion. We have audited the accompanying consolidated balance Independent auditors’ report 111 sheets of JSC Sistema-Hals («Sistema-Hals») and sub- In our opinion, such consolidated financial statements sidiaries (collectively – the «Group») as of December 31, present fairly, in all material respects, the financial posi- CONSOLIDATED FINANCIAL STATEMENTS 2008 and 2007, and the related consolidated statements tion of the Group as of December 31, 2008 and 2007, and FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 of operations, changes in shareholders’ equity, and cash the results of their operations and their cash flows for the flows for the years then ended. These financial state- years then ended, in conformity with accounting princi- Consolidated balance sheets 112 ments are the responsibility of the Group’s management. ples generally accepted in the United States of America. Our responsibility is to express an opinion on these finan- Consolidated statements of operations 113 cial statements based on our audits. The accompanying financial statements have been prepared assuming that the Company will continue as a go- Consolidated statements of cash flows 114 We conducted our audits in accordance with auditing stan- ing concern. As discussed in Note 1 to the financial state- dards generally accepted in the United States of America. ments, the Company’s recurring losses from operations Consolidated statements of changes in shareholders’ equity 117 Those standards require that we plan and perform the au- and other factors raise substantial doubt about its ability dit to obtain reasonable assurance about whether the fi- to continue as a going concern. Management’s plans con- Notes to the consolidated financial statements 118 nancial statements are free of material misstatement. An cerning these matters are also discussed in Note 1 to the audit includes consideration of internal control over finan- financial statements. The financial statements do not in- cial reporting as a basis for designing audit procedures clude any adjustments that might result from the outcome that are appropriate in the circumstances, but not for the of this uncertainty. purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting April 30, 2009 the amounts and disclosures in the financial statements, Moscow, Russia

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 to table of contents Sistema-Hals Annual Report 2008 Sistema-Hals Annual Report 2008 Chapter 6. Consolidated Financial Statements Chapter 6. Consolidated Financial Statements

December December Notes CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND DECEMBER 31, 2007 31, 2008 31, 2007 (Amounts in thousands of U.S. dollars) Treasury stock (1,600) (1,576)

Additional paid-in capital 527,280 529,910 December December Notes 31, 2008 31, 2007 Accumulated other comprehensive loss (12,446) -

ASSETS (Accumulated deficit)/Retained earnings (375,798) 121

Cash and cash equivalents 4 58,328 37,538 TOTAL SHAREHOLDERS’ EQUITY 18 157,928 548,947

Trade receivables, net 5 127,123 207,073 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 1,895,742 1,755,090 Other receivables, net 7 32,106 31,740

Deposits, loans receivable and investments in debt and equity securities 8 62,787 129,021 * The comparative information for the year ended December 31, 2007 reflects adjustments related to presentation of discontinued operations (Note 3). Assets of discontinued operations 3 - 22,533

Taxes receivable 6 75,986 55,672 See notes to consolidated financial statements. Costs and estimated earnings in excess of billings on uncompleted contracts 9 192,824 119,040

REAL ESTATE INVESTMENTS, NET CONSOLIDATED STATEMENTS OF OPERATIONS Real estate developed for sale 10 866,131 856,883 for the years ended december 31, 2008 and 2007 Income producing properties, net 10 345,179 155,736 (Amounts in thousands of U.S. dollars, except for share and per share amounts) Total 1,211,310 1,012,619

Buildings used for administrative purposes, plant and equipment, net 11 11,185 9,828 Notes 2008 2007*

Development rights and other intangible assets, net 12 29,674 33,191 REVENUES 361,957 423,645

Investments in associates and joint ventures 13 78,119 48,955 OPERATING EXPENSES 21 (486,429) (391,040)

Debt issuance costs, net of accumulated amortization 17 1,680 36,866 OPERATING (LOSS)/INCOME (124,472) 32,605 Deferred tax assets 22 14,620 11,014 OTHER INCOME/(EXPENSES):

TOTAL ASSETS 1,895,742 1,755,090 Other expenses, net (10,421) (1,597)

LIABILITIES AND SHAREHOLDERS’ EQUITY Interest income 12,026 14,162

LIABILITIES Interest expense (82,722) (12,695)

Payables to suppliers and subcontractors 14 84,960 57,546 (Loss)/gain on foreign currency transactions (138,410) 15,158

Billings in excess of costs and estimated earnings on uncompleted contracts 15 14,387 31,664 (Loss)/income from associates and joint ventures (11,446) 214

Accrued expenses and other liabilities 16 83,537 62,551 Gain on sale of a subsidiary 1,012 113 Taxes payable 16,263 10,824 (LOSS)/INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX AND MINORITY INTERESTS (354,433) 47,960 Loans and notes payable 17 1,466,387 977,837 Income tax expense 22 (15,257) (11,449) Deferred tax liabilities 22 38,256 32,324 (LOSS)/INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS (369,690) 36,511 Liabilities of discontinued operations 3 - 6,337 Minority interests (6,485) (6,158) TOTAL LIABILITIES 1,703,790 1,179,083 (LOSS)/INCOME FROM CONTINUING OPERATIONS (376,175) 30,353 COMMITMENTS AND CONTINGENCIES 25 - - Income from discontinued operations, net of income tax effect of USD 1,382 and USD MINORITY INTERESTS 34,024 27,060 4,767 respectively and minority interest of USD 1,741 and USD 7,634 respectively 3 1,803 4,328 Loss from disposal of discontinued operations, net of income tax effect of USD 513 SHAREHOLDERS’ EQUITY 3 (6,725) - NET (LOSS)/INCOME Share capital 20,492 20,492 (381,097) 34,681

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Notes 2008 2007* 2008 2007

Weighted average number of common shares outstanding: Loss from affiliates 11,446 (214)

Basic and diluted 10,377,318 10,200,006 Changes in operating assets and liabilities:

(Loss)/earnings per share, basic and diluted, U.S. dollars: Increase in trade receivables 5,607 (52,980)

(Loss)/income from continuing operations (36.25) 2.98 Increase in other receivables (16,098) (23,499)

(Loss)/income from discontinued operations (0.47) 0.42 Increase in taxes receivable (37,280) (18,026) Net (loss)/income Increase in costs and estimated earnings in excess of billings/decrease in billings in excess of (36.72) 3.40 (151,921) (113,733) costs and estimated earnings on uncompleted contracts

* The comparative information for the year ended December 31, 2007 reflects adjustments related to presentation of discontinued op- Increase in payables to suppliers and subcontractors 69,182 11,088 erations (Note 3). Increase in accrued expenses and other liabilities 14,005 31,082

See notes to consolidated financial statements. Increase in taxes payable 7,585 9,506 Net cash used in operating activities (167,648) (161,342)

CONSOLIDATED STATEMENTS OF CASH FLOWS INVESTING ACTIVITIES: for the years ended december 31, 2008 and 2007 Payments for real estate investments (518,459) (713,416) (Amounts in thousands of USD) Proceeds from sale of real estate investments 123,645 68,254

Proceeds from disposal of property, plant and equipment 1,537 - 2008 2007 Payments for plant and equipment and intangible assets (6,191) (8,672) OPERATING ACTIVITIES:

Net (loss)/income (381,097) 34,681 Payments for loans and notes receivable (9,450) (189,628)

Adjustments to reconcile net income to net cash used in operations: Proceeds from loans and notes receivable issued 49,308 143,597

Depreciation and amortization 23,980 14,873 Short-term deposits (11,238) (50,000)

(Gain)/loss on disposal of plant and equipment (219) 47 Repayments of short-term deposits 21,874 146,896

Minority interests 6,485 13,793 Long-term deposits (11,229) -

Loss from disposal of discontinued operations 6,725 - Payments for shares in associates (1,338) (2,737)

Gain from discontinued operations (1,803) - Proceeds from sale of subsidiary, net of cash disposed (6,746) (362)

Gain on disposal of interest in subsidiaries and affiliates (1,012) (113) Proceeds from sale of shares in associate 3,490 25

Gain on sale of real estate investments (20,530) (157,989) Net cash used in investing activities (364,797) (606,043)

Stock-based compensation (422) 99,807

Deferred tax expense/(benefit) (2,318) (194)

Bad debt expense 42,832 -

Provision for losses on construction contracts 25,389 -

Foreign currency transactions loss/(gain) on loans and notes payable 147,810 (7,796)

Gain on sale of short-term investments - (4,809)

Amortization of debt issuance costs 32,882 3,134

Impairment of real estate investment 41,838 -

Impairment of investments in associates and joint ventures 4,878 -

Impairment of costs and estimated earnings in excess of billings on uncompleted contracts 4,408 -

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CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY for the years ended december 31, 2008 and 2007 for the years ended december 31, 2008 and 2007 (Amounts in thousands of U.S. dollars) (Amounts in thousands of U.S. dollars)

Share capital Treasury stock Accumulated Retained 2008 2007 Additional other com- earnings/ paid-in Total prehensive (Accumulated FINANCING ACTIVITIES: Shares Amount Shares Amount capital income deficit) Purchase of treasury stock (2,232) (2,781) Balances at January 1, 2007 11,217,094 20,492 (1,222,663) (2,322) 430,126 - (54,550) 393,746 Principal payments on long-term borrowings (138,651) (10,226) Effect of FIN 48 adoption ------(2,171) (2,171) Stock-based compensation (Note Proceeds from long-term borrowings 386,621 729,201 - - 403,815 767 99,040 - - 99,807 27) Debt issuance costs - (40,000) Acquisition of treasury stock - - (11,217) (21) (2,760) - - (2,781) Reimbursement of initial public Principal payments on short-term borrowings (67,305) (438,609) - - - - 3,504 - - 3,504 offering costs, net of tax Proceeds from short-term borrowings 370,083 294,884 Transfers from Sistema (Note 19) ------22,161 22,161 Capital contributions from Sistema 5,177 27,500 Net income ------34,681 34,681

Distribution to Sistema - (5,658) Balances at December 31, 2007 11,217,094 20,492 (830,065) (1,576) 529,910 - 121 548,947 Reversal of stock-based - - - - (422) - - (422) Dividends paid to minority shareholders of subsidiaries (986) (4,655) compensation (Note 27) Acquisition of treasury stock Net cash provided by financing activities 552,707 549,656 - - (11,217) (24) (2,208) - - (2,232) (Note 18) Effects of foreign currency translation on cash and cash equivalents (7,333) 1,175 Effect from change in functional currency, net of income tax NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 12,930 (216,554) - - - - - 59,730 - 59,730 effect of USD 2,023 and minority CASH AND CASH EQUIVALENTS, beginning of the year 45,398 (1) 261,952 interest of USD 6,067 Foreign currency translation (1) CASH AND CASH EQUIVALENTS, end of the year 58,328 45,398 adjustment, net of income tax - - - - - (72,176) - (72,176) effect of nil SUPPLEMENTAL INFORMATION: Transfers from Sistema (Note 19) ------5,178 5,178 Income taxes paid 16,604 13,423 Net loss ------(381,097) (381,097) Interest paid, net of amount capitalized 89,764 38,109 Balances at December 31, 2008 11,217,094 20,492 (841,282) (1,600) 527,280 (12,446) (375,798) 157,928

NON-CASH INVESTING AND FINANCING ACTIVITIES:

Amounts owed for capital expenditures 4,448 14,811 See notes to consolidated financial statements.

Payable related to acquisition of investments 12,368 15,267

(1) Including cash and cash equivalents of PSO Sistema-Hals and Organizator, entities within the project and construction management segment disposed in the current year. As of December 31, 2007 the cash and cash equivalents of these two entities was USD 7,860.

In addition, non-cash investing and financing activities for the years ended December 31, 2008 and 2007 included the stock option and stock bonus program, as described in Note 27.

See notes to consolidated financial statements.

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NOTES TO THE CONSOLIDATED crease in the market value of properties and decreased  In December 2008, the Board of Directors of the 2. Summary of Significant FINANCIAL STATEMENTS FOR THE YEARS demand for property, increase in unemployment and a re- Sistema Hals approved an expenditure reduction pro- Accounting Policies ENDED DECEMBER 31, 2008 AND 2007 duction in available credit. In addition, in late 2008 the gram. This program has an objective of reducing the (Amounts in thousands of U.S. dollars Rouble devaluated significantly against the USD, the cur- selling, general and administrative expenses by ap- Basis of presentation – The accompanying financial state- unless otherwise stated) rency in which the Group has significant borrowings. The proximately 50%. The program includes a reduction in ments have been prepared in conformity with the account- devaluation of the Rouble resulted in the group recogniz- the levels of support personnel, rationalization of the ing principles generally accepted in the United States of 1. Description ing a foreign currency loss of USD 138,410 in the year end- Group’s office accommodation requirements, and sus- America («U.S. GAAP»). The Group’s entities maintain ac- of the Business ed December 31, 2008. pension expenditure on of IT projects and office reno- counting records and prepare their statutory financial vation, as well as other initiatives; statements in Russian rubles («RUB»), U.S. dollars, Euros JSC Sistema-Hals («Sistema-Hals») and subsidiaries (to- At December 31, 2008, the Group has an accumulated def-  During November 2008, the Group modified its debt and in Ukrainian hryvna in accordance with the require- gether – «the Group») are engaged in real estate develop- icit of USD 375,798 and recognized a loss of USD 381,097 agreement with VTB resulting in a conversion of USD ments of accounting and tax legislation in their respec- ment, real estate asset management and facility manage- for the year ended December 31, 2008. In addition, the 700,000 of borrowings into Rouble denominated debt, tive countries of domicile. The accompanying financial ment, primarily focused on the «Class A» and «Class B» Group has negative operating cash flows and has invest- which reduced the Group’s exposure to fluctuations in statements differ from the financial statements prepared segments of the Moscow office market, shopping centers, ed significantly in real estate investements. This has re- the RUB/USD; for statutory purposes in that they reflect certain adjust- high-end housing, single family houses, apartment build- sulted in an increase in the Group’s indebtedness by USD  Subsequent to year-end, in conjunction with the sale ments, not recorded in the statutory accounting books of ings and land development. The Group’s revenues are de- 488,550 during the year ended December 31, 2008. by Sistema of part of its interest in the Company to the Group’s entities, which are appropriate to present the rived principally from the following activities: VTB, the Group’s borrowings from VTB are to be re- financial position, results of operations and cash flows in During the next year the Group is due to repay debt in the structured; and accordance with U.S. GAAP. 1. Sale of completed development projects, both commer- amount of USD 414,179 a significant portion of which re-  Subsequent to year end, the Group issued 5 million cial and residential, as well as the sale of rights for land; lates to loans received from Alfabank, Raiffeisenbank and bond securities with a par value of Rubles 1,000 each. Principles of consolidation – The consolidated financial 2. Rental income from completed development projects held Sistema subsidiaries in the amounts of USD 90,001, USD The bonds Series 1 bear a coupon rate of 15%, and the satements include the accounts of Sistema and the enti- as investments; and 34,036 and USD 301,585, respectively. bonds Series 2 bear a coupon rate of 12%. Both Series ties that it controls or where it is determined to be the pri- 3. Facility management services. mature in 2014. The cash received as a result of the mary beneficiary. Control is determined primarily based The factors listed above, and the Group’s ability to com- bonds issue was used to repay the current debt of the on voting powers. The primary beneficiary for variable in- The Group’s operations of the Group are conducted in the plete projects currently under development and to fund Group. terest entities is determined based on when the Group ab- Russian Federation (hereinafter referred to as «the RF») its contractual commitments/co-investment contracts, sorbs a majority of the entity’s losses, receives a majority and the Commonwealth of Independent States («the CIS»), requires a significant amount of capital and liquidity, and Management believes the based on the actions complet- of the entity’s expected residual returns, or both. primarily in Moscow, the Moscow Region, the Nizhniy this has been addressed by management as discussed ed, the cost reduction initiative, and its current projec- Novgorod region, Sochi, Kiev and Saint-Petersburg. The below. tions described above, that it will have adequate liquidity The ownership interest of Sistema-Hals and the propor- majority of the Group entities are incorporated in the RF. to continue fund its liabilities and operations and contin- tion of its voting power in its major subsidiaries as of The management of the Group has assessed its current ue as a going concern for the next year. December 31, 2008 and 2007 were as follows: The Group’s operations were significantly impacted in strategic and operations intentions, the future profitabil- 2008 by the worldwide economic slowdown. In late 2008, ity of its operations based on current market conditions, These consolidated financial statements have been pre- a number of major economies around the world, includ- its cash requirements and its ability to access to financ- pared based on the assumption that the Group is able to ing Russia, experienced volatile capital and credit mar- ing and the associated cost of such financing. Based on continue its business as a going concern. The consolidat- kets. These volatile markets resulted in a number of major this assessment management has taken the following ac- ed financial statements do not include any adjustments global financial institutions being placed into bankrupt- tions: relating to the recoverability and classification of record- cy, taken over by other financial institutions and/or sup-  Management has assessed it current portfolio of proj- ed asset amounts or to the amounts and classification of ported by government funding. In the countries where ects and has prioritized those that it believes are more liabilities that may be necessary should the Group be un- the Group operates this impacts of the economic slow- strategic to the Group and suspended the other activi- able to continue as a going concern. down is evidenced in reduced consumer spending, a de- ties in order to reduce its cash requirements;

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rules often contain requirements that are impossible to Beginning 2008, the subsidiaries of the Group domiciled in Ownership interest and voting power comply with in practice. As a result, the risk exists that Russia introduced a policy to contract sales in Russian ru- Operating entities December 31, 2008 December 31, 2007 the Group’s ownership of and/or lease rights for land and bles or where this was not the case to contract at a fixed ex- Kuntsevo-Invest 100% 100% buildings might be challenged by government authorities change rate for residential and commercial real estate sale Sistema-Hals Nord-West 76% 76% or third parties. contracts which are denominated in U.S. dollars or unit

IRT 100% 100% equivalents and undertook certain other measures to en-

TRK Kazan 100% 100% The construction industry in general is subject to risks in sure business is transacted in Russian rubles. As a result of

Mosdachtrest 58% 57% respect to the means of financing, the legal and political this change in policy, there was a significant shift in the cur- risks and the financial risks associated with construction rency in which sales were denominated from U.S. dollars Landshaft-2 100% 100% projects which transpire over a prolonged period of time. to rubles. Further, during the year, the Group refinanced Organizator - 51% The Group is also reliant on a limited number of general its U.S. dollar borrowings with VTB to rubles (refer to Note PSO Sistema-Hals - 51% contractors and subcontractors to undertake its commit- 17). Accordingly, the Group’s subsidiaries in the Russian Hals-Stroy 100% 100% ments for construction in the timeframe required to avoid Federation changed their functional currency from U.S. dol- City-Hals 100% 100% penalties and other associated costs. lars to Russian rubles beginning January 1, 2008. Pursuant Bolshoy City 100% 100% to the provisions of U.S. Statement of Financial Accounting Yalta Fish Plant 98% 98% Credit risk – The Group is exposed to credit risk which is Standards («SFAS») No. 52, Foreign Currency Translation, RTI-Estate - 51% the risk that the other party to a financial instrument will the effect of this change in functional currency has been ac- Sapidus 100% 100% fail to discharge its obligation and cause a financial loss counted for prospectively.

Gorki-8 75% 75% for the Group. The main credit risk exposure is associat-

Istochnik 75% 75% ed with trade accounts receivable and loans and notes re- All non-monetary assets and liabilities were retranslated at ceivable. The Group has a relatively small number of sig- the date of the change, resulting in approximately $59,730 nificant value receivables. As of December 31, 2008 the million net of income taxes of $2,023, of the translation ad- In addition, at December 31, 2008 the consolidated finan- ment to make estimates and assumptions that affect the allowance for doubtful trade accounts receivable and justment recorded in the statement of changes in share- cial statements include to investments where the Group reported amounts of assets and liabilities, revenues and loans and notes receivable amounted to USD 33,965 and holder’s equity as part of other comprehensive income at has been determined to be the primary benificiary. These expenses and disclosure of contingent assets and liabili- USD 6,673 respectively. the date of the change. include the following: ties at the date of the financial statements. Actual results  The Group granted guarantees for the credit facili- could differ from those estimates. Liquidity risk – The Group is exposed to liquidity risk which The Group has retained the U.S. dollar as its reporting cur- ties obtained from Merrill Lynch International and is the risk that the Group will not be able to meet its finan- rency, which is consistent with the presentation currency GazPromBank by Remstroytrest-701 (see Note 17). Examples of significant estimates include the cost to com- cial obligations as they fall due. The Group’s approach to of Sistema. Therefore, the financial statements, after the The loans were obtained by Remstroytrest-701 to plete projects, the recoverability of real estate invest- managing liquidity is to ensure, as far as possible, that it change of the functional currency, were translated into the acquire the building located at Novodanilovskaya ments, the allowance for doubtful receivables and valua- will always have sufficient liquidity to meet its liabilities reporting currency in accordance with SFAS No. 52 using Naberezhnaya in Moscow. Upon this transaction the tion allowances on deferred tax assets. when due. In order to meet its financial obligation and to the current rate method. Group determined it is now the primary beneficiary of finance operating activity in the fourth quarter 2008 the Remstroytrest-701 and this entity was consolidated Concentration of business risk – The Group’s principal Group obtained financing from Sistema. Under the current rate method, assets and liabilities are under the provisions of FIN 46(R). business activities are within the RF. Laws and regula- translated into U.S. dollars at exchange rates prevailing  The Group also consolidated Triada Invest under the tions affecting businesses operating in the RF are subject Foreign Currency Translation – Through December 31, on the balance sheet date. Revenues, expenses, gains and provisions of FIN 46(R) as Triada Invest has an insignif- to rapid changes. Russian land and property legislation 2007 the functional currency of the substantial majority losses are translated into U.S. dollars at exchange rates icant amount of equity and the main part of its borrow- is complexed, often ambiguous and contradictory at the of the Group’s operations was the US dollar because the prevailing at the time those elements are recognized or ings were obtained from the Group, which is consid- federal and regional levels. In particular, it is not always majority of revenues, costs and real estate investments, using close approximations of such rates. Shareholders’ ered the primary beneficiary of Triada Invest. clear which state bodies are authorized to enter into land debt and trade liabilities were either priced, incurred, pay- equity is translated at the applicable historical rates. The leases with respect to particular land plots, construction able or otherwise measured in U.S. dollars. resulting translation gain/(loss) is recorded as a separate Use of estimates – The preparation of the financial state- approval procedures are complicated and prone to chal- component of other comprehensive income. ments in conformity with U.S. GAAP requires manage- lenge or reversal, and construction and environmental

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Revenue recognition – The Group’s revenues are principally ognized when they are incurred. Change orders are includ- bound by the terms of a contract; (b) all consideration has the property and receiving rental revenues. Such proper- derived from i) the provision of property construction ser- ed in total estimated contract revenues when it is proba- been exchanged; (c) any permanent financing for which ties primarily consist of residential and commercial build- vices (ii) the sale of completed development projects, both ble that the change order will result in a bona fide addition the Group is responsible has been arranged; and (d) all ings and land which is, or will be, leased on either a short- commercial and residential, as well as the sale of rights for to the relevant contract value and can be reliably estimat- conditions precedent to closing have been performed. term or long-term basis. land iii) rental income from completed development proj- ed. Claims are included in total estimated contract reve- ects held as investments; and iv) facility management ser- nue only to the extent that contract costs related to the Revenues from development of office buildings, apartments, Rental revenues are recognized over the lease term on a vices. The Group records revenues as follows: claim have been incurred and when it is probable that the condominiums, shopping centers and similar structures are straight-line basis. claim will result in a bona fide addition to contract value recognized, in accordance with SFAS 66, prior to consum- (i) Property construction services and can be reliably estimated. mation of sale by the percentage-of-completion method if (iv) Facility management The Group provides project construction services to mid- (a) construction is beyond a preliminary stage; (b) the buy- Revenues from service contracts for facility management size and large corporates. Prior to the sale of its construc- The Group provides for estimated losses on uncompleted er is committed to the extent of being unable to require a re- are recognized on the accrual basis over the periods when tion management division (Note 3), the Group also pro- contracts in the periods in which such losses are identi- fund except for nondelivery of the property; (c) sales prices services are provided. vided project construction and management services to fied. The cumulative effects of revisions to contract rev- are collectible; (d) aggregate sales proceeds and costs can municipal governments on certain socially important in- enue and estimated completion costs are recorded in the be reasonably estimated. The application of the percent- Fair Value Measurements – Effective January 1, 2008, the frastructure projects. accounting period in which the amounts become evident age-of-completion method with regards to these develop- Group adopted SFAS No. 157, «Fair Value Measurements» and can be reasonably estimated. These revisions may ment properties is consistent with the method applied for («SFAS 157»). SFAS 157 requires a new framework for When the Group acts as a contractor under construc- include such items as the effects of change orders and property construction services as described above. measuring fair value of financial and non-financial instru- tion contracts, the Group recognizes contract revenue claims, warranty claims, other contractual penalties and ments and expands related disclosures. in accordance with American Institute of Certified Public contract closeout settlements. The Group also sells completed commercial buildings Accountants Statement of Position («SOP») No. 81-1, through the sale of the Group’s equity interest in the com- Fair value is determined based on the exchange price that Accounting for Performance of Construction-Type and Costs related to the Group’s performance under construc- panies which holds such property. Revenue from the sale would be received for an asset or paid to transfer a liability Certain Production-Type Contracts («SOP 81-1»). tion contracts (including estimated earnings from un- of equity interests in the properties developed by the (an exit price) in the principal or most advantageous mar- completed contracts) is recorded net of billings on those Group are recognized when (a) the buyer is independent ket for the asset or liability in an orderly transaction be- In accordance with SOP 81-1, the Group recognizes rev- contracts. Billings when in excess of costs and estimat- of the Group, (b) collection of the sales price is reasonably tween market participants. enue on fixed-price contracts using the percentage-of- ed earnings on uncompleted contracts are recorded as li- assured, (c) the Group will not be required to support the completion method. Under this method for revenue rec- abilities. operations of the property or its related obligations to an The valuation techniques are based upon observable ognition, the Group estimates the progress towards extent greater than its proportionate interest. and unobservable inputs. Observable inputs reflect mar- completion to determine the amount of revenue and prof- (ii) Sale of completed real estate development ket data obtained from independent sources, whilst unit to recognize on all significant contracts. The Group gen- The Group derives revenue through the sale of completed Other investments in real estate developed for sale where observable inputs reflect our market assumptions. erally utilizes an efforts-expended, cost-to-cost approach commercial and residential properties. Revenues from the the sale is not consummated are accounted for under the Observable inputs are used as the preferred source of in- in applying the percentage-of-completion method under sale of completed real estate development activities are deposit method in accordance with SFAS 66. puts. Unobservable inputs are only used in the absence which revenue is earned in proportion to total costs in- recognized in accordance with the provisions of SFAS 66 of market inputs. curred divided by total costs expected to be incurred. «Accounting for Sales of Real Estate». (iii) Rental income from properties held as investments The inputs are categorized into the following fair value hi- Once contract performance is underway, the Group may When the Group undertakes real estate development proj- The Group has a number of developments where it gen- erarchy: experience changes in the conditions, client requirements, ects, it recognizes revenues from sales of real estate when erates income through retaining title to or lease rights for specifications, designs, materials and/or work schedule a) a sale is consummated; b) the buyer’s initial and con- («change orders»). Generally a change order will be nego- tinuing investments are adequate to demonstrate a com- tiated with the customer to modify the original contract mitment to pay; c) the Group’s receivable is not subject to Level 1 Quoted prices for identical instruments in active markets.

to approve both the scope and the pricing of the change. future subordination; d) the Group has transferred to the Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets When a change order becomes a point of dispute between buyer the usual risks and rewards of ownership and does that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. the Group and its customer, the Group then considers it as not have a substantial continuing involvement with the Level 3 Significant inputs to the valuation model are unobservable. a claim. Costs related to change orders and claims are rec- project. Revenue is recognized when (a) the parties are

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Fair value of financial instruments – The Group’s finan- fluence over their operating and financial policies («affili- eliminated from the balance sheet along with the corre- annually or whenever events or changes in circumstances cial instruments primarily comprise cash and cash equiv- ates») and the entities, in which the Group shares in joint sponding accumulated depreciation. Any gain or loss re- indicate that the carrying value may not be recoverable. alents, deposits, loans receivable, investments in debt and control («joint ventures»), are accounted for using the eq- sulting from such retirement or disposal is included in the In accordance with SFAS No. 142 “Goodwill and Other equity securities, receivables, payables and debt. The es- uity method of accounting. Under the equity method of determination of net income. Intangible Assets” («SFAS No. 142»), goodwill is reviewed timated fair value of short-term financial instruments as of accounting, the Company records its investments in eq- for impairment by comparing the carrying value of each December 31, 2008 approximated their carrying value as uity-method investees in the consolidated balance sheet Plant and equipment is depreciated on the straight-line reporting unit’s net assets (including allocated goodwill) reflected in the balance sheet due to the short maturity of under Investments in associates and joint ventures and basis over 3 to 5 years. Buildings used for administrative to the fair value of those net assets. If the reporting unit’s those instruments. The fair value of long-term loans and records its share of the investees’ earnings or losses to- purposes are depreciated on the straight-line basis over carrying amount is greater than its fair value, then a sec- notes payable which have variable interest rates based on gether with other-than-temporary impairments in value 20 to 40 years. ond step is performed whereby the portion of the fair val- market rates approximate the carrying amount of those fi- as a component of operating income. In the years ended ue that relates to the reporting unit’s goodwill is com- nancial instruments. The fair value of long-term loans and December 31, 2008 and 2007, the Group’s share in the net Development rights and other intangible assets – pared to the carrying value of that goodwill. The Company notes payable with a fixed interest nature does not approxi- income/(loss) of these entities amounted to USD 11,446 Development rights acquired by the Group are stated at recognizes a goodwill impairment charge for the amount mate the carrying amount of those financial instruments as loss and USD 214 income, respectively. acquisition cost. The costs of development rights are am- by which the carrying value of goodwill exceeds the fair of December 31, 2008. The fair value of significant invest- ortized on a straight-line basis from the date when the value. The Company has determined that there are no im- ments in associates and joint ventures is presented in Note Accounts receivable – Accounts receivable are stated net project starts generating revenues until the development pairment losses in respect of goodwill for any of the re- 13 to these consolidated financial statements. of an allowance for doubtful accounts. Such allowance re- period expires. Development rights as of December 31, porting periods covered by these consolidated financial flects either specific cases or estimates based on histor- 2008 and 2007, comprise rights to develop residential statements. Cash and cash equivalents – Cash and cash equivalents ical experience of the Group on collectibility of these re- property in the Western Kuntsevo district of Moscow. The include cash on hand, amounts on deposit in banks and ceivables adjusted for changes in expectations. development period for this project is expected to be com- Construction obligations – Construction obligations rep- cash invested temporarily in various instruments with ma- pleted in 2012. Amortization of other finite-life intangible resent obligations to construct apartments assumed as turities of three months or less at the time of purchase. Value-added taxes – Value-added taxes («VAT») related to assets is computed on a straight-line basis over a period a result of the acquisition of rights to develop residential sales are payable to the tax authorities on an accrual ba- of four years. property in the Western Kuntsevo district of Moscow. Deposits, loans receivable and investments in debt and sis based upon invoices issued to the customer. VAT in- equity securities – Deposits and loans receivable with curred for purchases may be reclaimed, subject to certain Impairment of long-lived assets other than goodwill and Income taxes – Income taxes have been computed in ac- original maturities in excess of three months are being ac- restrictions, against VAT related to sales. VAT related to investments – The Group periodically evaluates the recov- cordance with the laws of the countries of domicile of the counted for at amortized cost. Management regularly as- purchase transactions that are reclaimable after the bal- erability of the carrying amount of its long-lived assets Group entities. The standard income tax rate in the RF for sesses the realizability of the carrying values of deposits ance sheet date is recorded in taxes receivable. other than goodwill and investments in accordance with the years ended December 31, 2008 and 2007 was 24%. and loans receivable and, if necessary, records impair- SFAS No. 144, «Accounting for the Impairment or Disposal From January 1, 2009 the RF government has approved an ment losses to write these assets down to fair value. Non-reclaimable VAT on real estate investments is capital- of Long-Lived Assets». Whenever events or changes in cir- income tax rate of 20%. ized as it is a cost necessarily incurred in the completion cumstances indicate that the carrying amounts of those Investments in marketable debt and equity securities are of the relevant project. assets may not be recoverable, the Group compares un- The Group provides for income taxes in accordance with classified as available-for-sale and are stated at fair value discounted net cash flows estimated to be generated by Statement of Financial Accounting Standards («SFAS») based on market quotes. Unrealized gains/(losses), net of Buildings used for administrative purposes, plant and those assets to the carrying amount of those assets. When No.109, «Accounting for Income Taxes» («SFAS No. 109») income taxes, are recognized in other comprehensive in- equipment – Buildings used for administrative purposes, these undiscounted cash flows are less than the carrying and Financial Accounting Standards Board («FASB») come. Interest income on debt securities is recognized in plant and equipment with a useful life of more than one amounts of the assets, the Group records impairment loss- Interpretation No. 48, «Accounting for Uncertainty in the statement of operations. year are capitalized at historical cost. Cost includes major es to write the asset down to fair value, measured by the Income Taxes – an interpretation of FASB Statement No. expenditures for improvements and replacements which estimated discounted net future cash flows expected to 109» («FIN 48»). Investments in private companies are carried at cost, less extend useful lives of the assets or increase their reve- be generated from the use of the assets. In the year ended provisions for other than temporary impairment in value. nue generating capacity. Repairs and maintenance are December 31, 2008 the Group recognized an impairment Uncertain tax positions are recognized in the consolidat- charged to the statements of operations as incurred. charge relating to such assets of USD 41,838. ed financial statements for positions which are consid- Investments in associates and joint ventures – The Group’s ered more likely than not of being sustained based on investments in entities in which it holds 20-50% of the Buildings used for administrative purposes, plant and Impairment of Goodwill – Goodwill is not amortized to op- the technical merits of the position on audit by the tax au- voting shares and has the ability to exercise significant in- equipment that are retired or otherwise disposed of are erations, but instead is reviewed for impairment, at least thorities. The measurement of the tax benefit recognized

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in the consolidated financial statements is based upon Borrowing costs – The Group capitalizes interest on bor- Recent accounting pronouncements – In May 2008, the In April 2008, the FASB issued FASB Staff Position (FSP) the largest amount of tax benefit that, in management’s rowings during the active construction period of its de- FASB issued SFAS No. 162, «The Hierarchy of Generally FAS 142-3, Determination of the Useful Life of Intangible judgement, is greater than 50% likely of being realized velopment projects. Capitalized interest is added to the Accepted Accounting Principles» («SFAS No. 162»). SFAS Assets. FSP FAS 142-3 amends the factors that should be based on a cumulative probability assessment of the pos- cost of the underlying assets and is amortized over the No. 162 identifies the sources of accounting principles considered in developing renewal or extension assump- sible outcomes. useful lives of the assets. For the years ended December and the framework for selecting the principles to be used tions used to determine the useful life of a recognized in- 31, 2008 and 2007, capitalized borrowing costs were in the preparation of financial statements of nongovern- tangible asset under FASB Statement No. 142, Goodwill Deferred tax assets and liabilities are recognized for dif- USD 59,520 and USD 25,837, respectively. Other borrow- mental entities that are presented in conformity with U.S. and Other Intangible Assets. FSP FAS 142-3 is effective for ferences between the carrying amounts of assets and li- ing costs were recognized as an expense in the period in GAAP (the GAAP hierarchy). This statement will be effec- fiscal years beginning after December 15, 2008 and early abilities in the consolidated financial statements and the which they were incurred. tive 60 days following the SEC’s approval of the Public adoption is prohibited. Management are currently evalu- tax bases of assets and liabilities that will result in future Company Accounting Oversight Board amendments to AU ating the impact of the pending adoption of FSP FAS 142-3 taxable or deductible amounts. The deferred tax assets Advertising costs – The Group expenses the cost of adver- Section 411, «The Meaning of Present Fairly in Conformity on the Group’s consolidated financial statements. and liabilities are measured using the enacted tax laws tising in the period in which it is incurred. With Generally Accepted Accounting Principles». The and rates applicable to the periods in which the differenc- Group does not believe that the adoption of SFAS No. 162 In September 2006, the FASB issued Statement No. 157, es are expected to affect taxable income. Minority interests – Minority interests represent the will have an impact on its consolidation financial position, Fair Value Measurements. Statement 157 defines fair val- share in the book value of the net assets of the Group’s results of operations or cash flows. ue, establishes a framework for measuring fair value and Deferred tax assets are reduced by a valuation allowance entities proportional to equity interests in those entities expands fair value measurement disclosures. In February when, in the opinion of management, it is more likely than owned, directly or indirectly, by shareholders outside of In June, the FASB issued FASB Staff Position («FSP») 2008, the FASB issued FASB Staff Position No. FAS 157-1, not that some portion or all of the deferred tax assets will the Group. on Emerging Issues Task Force («EITF») No. 03-6-1, Application of FASB Statement No. 157 to FASB Statement not be realized. «Determining Whether Instruments Granted in Share- No. 13 and Other Accounting Pronouncements That Dividends and distributions – Dividends and distributions Based Payment Transactions Are Participating Securities» Address Fair Value Measurements for Purposes of Lease The Company recognizes interest relating to unrecognized to shareholders are recognized at the date they are de- («FSP-EITF No. 03-6-1»). Under FSP-EITF No. 03-6-1, un- Classification or Measurement under Statement 13 and tax benefits and penalties within income taxes. clared. The dividends are distributed in accordance with vested share-based payments awards that contain rights FASB Staff Position No. FAS 157-2, Effective Date of FASB statutory legislation that allows distribution of dividends to receive nonfortfeitable dividends (where paid or un- Statement No. 157. Collectively, the Staff Positions de- Retirement benefit and social security costs – The Group up to the amount of distributable retained earnings based paid) are participating securities, and should be included fer the effective date of Statement 157 to fiscal years be- contributes to the RF state pension fund, social insurance on the statutory financial statements of Sistema-Hals. As in the two-class method of computing earnings per share. ginning after November 15, 2008 for nonfinancial assets fund and medical insurance fund on behalf of all of its cur- of December 31, 2008 Sistema-Hals recognized an ac- FSP-EITF No. 03-6-1 is effective for fiscal years begin- and nonfinancial liabilities except for items that are rec- rent employees in the RF. In accordance with the current RF cumulated deficit of USD 89.8 million (unaudited) in it’s ning after December 15, 2008, and interim periods with- ognized or disclosed at fair value on a recurring basis at legislation, all social contributions are calculated by the statutory financial statements which would preclude the in those years. The Group does not expect the adoption of least annually, and amend the scope of Statement 157. We application of a regressive rate from 26% to 2% to the an- payment of dividends by Sistema-Hals. The accumulated FSP-EITF No. 03-6-1 to have a material impact on the de- have adopted Statement 157 except for those items spe- nual gross remuneration of each employee. deficit recognized in the statutory financial statements termination of its earnings per share. cifically deferred under FSP No. FAS 157-2. Management differs from the amount of accumulated deficit calculated is currently evaluating the impact of the full adoption of Stock-based compensation – The Group accounts for stock- on the basis of U.S. GAAP. In March 2008, the FASB issued FASB Statement No. Statement 157 on our consolidated financial statements. based compensation in accordance with the provisions of 161 («SFAS No. 161»), «Disclosures about Derivative SFAS No. 157 also established a hierarchy that classifies SFAS No. 123R, «Share-Based Payment». Under SFAS No. Earnings per share – Basic earnings per share of common Instruments and Hedging Activities». The new standard the inputs used to measure fair value. This hierarchy pri- 123R, companies must calculate and record the cost of eq- stock are computed by dividing net income by the weight- requires enhanced disclosures about derivative instru- oritizes the use of inputs used in valuation techniques uity instruments, such as stock options or restricted stock, ed average number of common shares outstanding for the ments and hedging activities to enable investors to bet- into three levels based on observable and unobservable awarded to employees for services received in the state- year. Diluted earnings per share of common stock reflects ter understand their effects on an entity’s financial state- inputs. Observable inputs are inputs that market partici- ment of operations. The cost of the equity instruments is the maximum potential dilution that could occur if secu- ments. SFAS No. 161 becomes effective for financial pants would use in pricing the asset or liability developed measured based on the fair value of the instruments on the rities or other contracts to issue common stock were ex- statements issued for fiscal years and interim periods be- based on market data obtained from sources independent date they are granted and is recognized over the period dur- ercised or converted into common stock and would then ginning after November 15, 2008. Management is current- of the Group. Unobservable inputs, which require more ing which the employees are required to provide services in share in the net income of the Group.Earnings per share is ly evaluating the potential impact, if any, of the adoption judgment, are those inputs described above that reflect exchange for the equity instruments. disclosed separately for continuing and discontinued op- of SFAS No. 161 on the Group’s financial statements. management’s views on the assumptions market partici- erations. pants would use in pricing the asset or liability developed

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based on the best information available in the circum- measure certain financial assets and financial liabilities Securities» («Topic D-98»), was revised to include the SEC No. 08-7»). EITF Issue No. 08-7 applies to all acquired instances. The hierarchy is broken down into three levels at fair value. SFAS No. 159 offers an irrevocable option to Staff’s views regarding the interaction between Topic D-98 tangible assets in situations in which an entity does not based on the reliability of inputs. carry the vast majority of financial assets and liabilities at and SFAS No. 160. The revised Topic D-98 indicates that intend to actively use the asset but intends to hold (lock fair value, with changes in fair value recorded in earnings the classification, measurement, and earnings-per-share up) the asset to prevent others from obtaining access to In June 2008, the FASB issued FASB Staff Position (FSP) (the fair value option, or FVO). Effective January 1, 2008, guidance required by Topic D-98 applies to noncontrolling the asset (a defensive intangible asset), except for intan- EITF 03-6-1, «Determining Whether Instruments Granted the Group adopted SFAS No. 159. On adoption and as of interests (e.g., when the noncontrolling interest is redeem- gible assets that are used in research and development in Share-Based Payment Transactions Are Participating December 31, 2008, the Group did not elect to measure able at a fixed price or fair value by the holder or upon the activities. The EITF reached a consensus that a defen- Securities.» Under the provisions of this standard, unvest- any financial instruments and liabilities at fair value oth- occurrence of an event that is not solely within the control sive intangible asset should be accounted for as a sep- ed awards of share-based payments with rights to receive er than those required to be accounted for at fair value un- of the issuer). The revisions to Topic D-98 that are specif- arate unit of accounting and should be assigned a useful dividends or dividend equivalents, such as our restricted der other accounting standards. Therefore, the adoption ic to accounting for noncontrolling interests should be ap- life that reflects the entity’s consumption of the expected stock units (RSUs), are considered participating securities of SFAS No. 159 did not have any impact on the Group’s fi- plied no later than the effective date of SFAS No. 160. benefits related to the asset, noting that it would be rare for purposes of calculating earnings per share. As a result, nancial position, results of operations or cash flows. for a defensive intangible asset to have an indefinite life. these participating securities will be included in the weight- In November 2008, the FASB issued EITF Issue No. 08-6, This EITF Issue No. 08-7 is effective for intangible assets ed average number of shares outstanding as disclosed on In December 2007, the FASB issued FASB Statement No. «Equity Method Investment Accounting Considerations» acquired on or after the beginning of the first annual re- the face of the income statement. This FSP is effective for 141R, «Business Combinations» («SFAS No. 141R»), and («EITF Issue No. 08-6»). EITF Issue No. 08-6 considers the porting period beginning on or after December 15, 2008. fiscal years beginning after December 15, 2008, and inter- FASB Statement No. 160, «Noncontrolling Interests in effects of the issuances of SFAS No. 141R and SFAS No. The Group expects EITF Issue No. 08-7 will have an impact im periods within those years. All prior period earnings per Consolidated Financial Statements – an amendment of 160 on an entity’s application of the equity method un- on its accounting for future acquisitions of intangible as- share data presented in financial reports after the effec- ARB No. 51» («SFAS No. 160»). These statements change der Opinion 18, «The Equity Method of Accounting for sets once adopted, but the effect is dependent upon the tive date shall be adjusted retrospectively to conform to the the way companies account for business combinations Investments in Common Stock,» i.e. determination of the acquisitions that are made in the future. provisions of this FSP. Early application is not permitted. and noncontrolling interests (minority interests in cur- initial carrying value of an equity-method investment, im- The Group has evaluated the potential impact of this stan- rent GAAP). SFAS No. 141R and SFAS No. 160 will require, pairment assessment of an underlying indefinite-lived in- 3. Discontinued dard and anticipates it will have no material impact on our among other changes: (a) more assets acquired and lia- tangible asset of an equity-method investment, accounting Operations previously reported earnings per share amounts. bilities assumed to be measured at fair value as of the ac- for issuance of shares by an equity investee, and account- quisition date; (b) liabilities related to contingent consid- ing for a change in an investment from the equity method to PSO Sistema-Hals and Organizator In October 10, 2008, the FASB issued FSP FAS 157-3, eration to be remeasured at fair value in each subsequent the cost method. EITF No. 08-6 is effective for transactions In November 2008 the Group sold its stake in two enti- «Determining the Fair Value of a Financial Asset When reporting period; (c) an acquirer to expense acquisition- occurring in fiscal years beginning on or after December 15, ties, PSO Sistema-Hals and Organizator, which represent- the Market for That Asset Is Not Active,» which clarifies related costs; and (d) noncontrolling interests in subsid- 2008 and interim periods within those fiscal years. Early ed the Project and construction management segment of how companies should apply the fair value measurement iaries initially to be measured at fair value and classi- adoption is not permitted. The Group does not expect the the Group. The transaction resulted in a loss from dispos- methodologies of SFAS 157 to financial assets when mar- fied as a separate component of equity. Both Statements adoption of EITF No. 08-6 to have a significant impact on its al of USD 6,725, net of income tax of USD 513. kets they are traded in are illiquid or inactive. Under the are to be applied prospectively (with one exception relat- financial position, results of operations and cash flows. provisions of this FSP, companies may use their own as- ed to income taxes) for fiscal years beginning on or after The summarized, combined statements of operations for sumptions about future cash flows and appropriately risk- December 15, 2008. However, SFAS No.160 requires en- In November 2008, the FASB issued EITF Issue No. 08-7, discontinued operations were as follows: adjusted discount rates when relevant observable inputs tities to apply the presentation and disclosure require- «Accounting for Defensive Intangible Assets» («EITF Issue are either not available or are based solely on transaction ments retrospectively (e.g., by reclassifying noncontrol- prices that reflect forced liquidations or distressed sales. ling interests to appear in equity) to comparative financial December 31, 2008 December 31, 2007

This FSP is effective as of September 30, 2008. There was statements, if presented. Both standards prohibit early Revenues 15,688 28,551 no impact to our financial position or results of operations adoption. The Group expects SFAS No.141R will have an Operating expenses (10,139) (12,491) from the adoption of this FSP. impact on its accounting for future business combinations Operating income 5,549 16,060 once adopted, but the effect is dependent upon the acqui- In February 2007, the FASB issued FASB Statement No. 159, sitions that are made in the future. Other (loss)/income (623) 669 «The Fair Value Option for Financial Assets and Financial Income tax expense (1,382) (4,767)

Liabilities – including an amendment of FASB Statement In connection with the issuance of SFAS No. 160, EITF Topic Minority interest (1,741) (7,634) No. 115» («SFAS No. 159»), which permits an entity to D-98, «Classification and Measurement of Redeemable Income from discontinued operations 1,803 4,328

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The assets and liabilities of discontinued operations as of December 31, 2007 consisted of the following: 5. Trade Receivables, Net December 31, 2007 Trade receivables, net of allowance for doubtful debts, as of December 31, 2008 and 2007 consisted of the following: Cash and cash equivalents 7,860

Trade receivables, net 8,951 December 31,2008 December 31, 2007 Other receivables, net 1,720 Saraya Russia 20,000 60,000 Investments in associates and joint ventures 2,400 Mirax Group 18,965 30,182 Other assets 1,602 Brysongate 15,000 - Total assets of discontinued operations 22,533 Trade receivables from other third parties 6,678 4,924 Payables to suppliers and subcontractors 683 Total trade receivables from third parties 60,643 95,106 Accrued expenses and other liabilities 4,541 Apsys, a joint venture (refer Note 13) 50,391 86,391 Taxes payable 1,113 RTI-Radio, a Sistema subsidiary 46,598 - Total liabilities of discontinued operations 6,337 Other trade receivables from Sistema subsidiaries 2,675 1,949 4. Cash Trade receivables from related parties other than Sistema subsidaries 626 144 and Cash Equivalents Manezh 13, a Sistema subsidiary 155 7,868

Sistema K-Invest, a Sistema subsidiary - 15,615 Cash and cash equivalents as of December 31, 2008 and 2007 consisted of the following: Total trade receivables from related parties 100,445 111,967

Less: allowance for doubtful debts (33,965) - December 31, 2008 December 31, 2007 Total 127,123 207,073 Cash and cash equivalents on deposit with:

Third parties 43,270 7,883 In the year ended December 31, 2008 the Group recognized an allowance for bad debt expense in relation to the ac- Moscow Bank of Reconstruction and Development («MBRD»), a subsidiary 15,058 29,655 of Sistema counts receivable from Mirax Group and Brysongate in the total amount of USD 33,965.

Total 58,328 37,538 6. Taxes The Group had USD 11,089 and USD 18,693 of deposits maturing within three months from origination (purchase) Receivable that were classified as cash equivalents as of December 31, 2008 and December 31, 2007, respectively. The weighted average interest rate on demand deposits as of December 31, 2008 and December 31, 2007 was 8% and 7.3%, re- Taxes receivable as of December 31, 2008 and 2007 consisted of the following: spectively. December 31, 2008 December 31, 2007

VAT receivable 47,613 43,439

Other taxes receivable 28,373 12,233

Total 75,986 55,672

Other taxes receivable represent mainly advances paid for income tax.

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7. Other As of December 31, 2007 funds under trust management were represented by the portfolio of investments managed by Renais Receivables, Net sance Capital in the amount of USD 22,149. In the year ended December 31, 2008, the trust management account was closed.

Other receivables, net of allowance for doubtful debts, as of December 31, 2008 and 2007 consisted of the following: As of December 31, 2007 the Group’s time deposits were represented by time deposits in MBRD in the amount of USD 505. As of December 31, 2008 there were no time deposits.

December 31, 2008 December 31, 2007 In the year ended December 31, 2008 the Group recognized an allowance for bad debt expense relating to loans and Prepaid expenses 3,573 4,564 notes receivable from third parties in the amount of USD 6,673. Advances to and other receivables from third parties 11,781 20,228 Other receivables from Sistema subsidiaries 8,937 753 9. Costs and Estimated Earnings in Excess Interest receivable from related parties 7,169 3,422 of Billings on Uncompleted Contracts Interest receivable from third parties 1,382 2,546

Interest receivable from Sistema subsidiaries 883 344 Costs and estimated earnings in excess of billings on uncompleted contracts as of December 31, 2008 and 2007 consisted of the following: Less: allowance for doubtful debts (1,619) (117)

Total 32,106 31,740 December 31, 2008 December 31, 2007

Accumulated costs and earnings 295,048 312,017 In the year ended December 31, 2008 the Group recognized an allowance for bad debt expense relating to interest receiv- Less: amounts billed (97,816) (192,977) able from third parties in the amount of USD 1,502. Less: impairment (4,408) - 8. Deposits, Loans Receivable Total 192,824 119,040 and Investments In the year ended December 31, 2008 the Group recognized an impairment charge relating to accumulated costs and earn- Deposits, loans receivable and investments in debt and equity securities as of December 31, 2008 and 2007 consist- ings in the amount of USD 4,408. This was a result of the write-off in relation to a project as management has assessed the ed of the following: amount to be non-recoverable from the customer.

December 31, 2008 December 31, 2007 10. Real Estate

Loans and notes receivable from: Investments, Net

 third parties 30,925 54,853 Real estate investments, net of accumulated depreciation as of December 31, 2008 and 2007 consisted of the following:  subsidiaries of Sistema 30,445 25,288

 related parties 8,090 26,226 December 31,2008 December 31, 2007

Funds under trust management - 22,149 Real estate developed for sale 903,305 856,883

Time deposits in MBRD - 505 Less: impairment (37,174) -

Total 69,460 129,021 866,131 856,883

Less: allowance for doubtful debts from third parties (6,673) - Income producing properties

Total 62,787 129,021 Buildings and cottages 367,759 166,964

Less: impairment (4,664) - The weighted average interest rates on loans and notes receivable from Sistema subsidiaries, related parties and third Less: accumulated depreciation (17,916) (11,228) parties as of December 31, 2008 were 1.74%, 10.55% and 1.83%, respectively. Substantially all loans and notes receivable held by the Group as of December 31, 2008 mature within one year from that date. 345,179 155,736 Total 1,211,310 1,012,619

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The depreciation charge for the years ended December 31, 2008 and 2007 amounted to USD 12,163 and USD 6,192, re- 11. Buildings Used for Administrative Purposes, spectively. Plant and Equipment, Net

In the years ended December 31, 2008 the Group recognized an impairment charge relating to its investments in real es- Buildings used for administrative purposes, plant and equipment, net of accumulated depreciation, as of December 31, tate developed for sale and income producing property in the amount of USD 37,174 and USD 4,664 respectively. This 2008 and 2007 consisted of the following: impairment was mainly related to the NIIDAR project in the amount of USD 16,706, the Khamovniki project in the amount

of USD 6,842, and the Vrubelevskii Spusk project in the amount of USD 4,358, and resulted from recognition of the de- December 31, 2008 December 31, 2007 crease of the market value of such properties as determined by the latest independent valuation. The Group has estimat- Buildings used for administrative purposes 3,389 4,120 ed the fair value of the properties based on the valuation report as of January 1, 2009. The assets that were impaired are Plant and equipment 5,436 5,545 included in the Real Estate Development segment. Other assets 7,720 4,834

The Group made additional investments in Real Estate to be developed for sale during the year. These investments pri- 16,545 14,499 marily consisted of the following: Less: accumulated depreciation

 for buildings used for administrative purposes (662) (659) Project Share USD  for plant and equipment (2,059) (1,844) Land plot (Odintsovsky Region, Soloslovo) 100% 74,294  for other assets (2,639) (2,168) Building at Novodanilovskaya Naberezhnaya in Moscow 100% 108,737 (5,360) (4,671)

Net balance value:

The land plot in Odintsovsky Region was acquired for future development. The building was acquired as income produc- Buildings used for administrative purposes 2,727 3,461 ing property. Plant and equipment 3,377 3,701

Other assets 5,081 2,666 Real estate investments disposed during 2008 mainly consisted of the following: Total 11,185 9,828

Project Share Sale price,USD The depreciation charge for the years ended December 31, 2008 and 2007 amounted to USD 2,723 and USD 1,716 re- Rochdelskaya 100% 29,791 spectively. 8 Marta Street (Complex of buildings) 51% 53,967

During the year ended December 31, 2008 there was a disposal of fixed assets with the gross book value of USD 1,270 and the accumulated depreciation of USD 559.

12. Development Rights and Other Intangible Assets, Net

Development rights and other intangible assets, net of accumulated amortization as of December 31, 2008 and 2007 consisted of the following:

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December 31, 2008 December 31, 2007 2009 7,419

Development rights – Kuntsevo properties 46,065 43,156 2010 7,419

Other intangible assets 1,513 135 2011 7,418

47,578 43,291 2012 7,418

Less: accumulated amortization: 2013 and after -

 development rights – Kuntsevo properties (17,805) (10,097) Total 29,674  other intangible assets (99) (3)

(17,904) (10,100) Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intan- Net balance value: gible assets acquisitions, changes in useful lives and other relevant factors.

Development rights – Kuntsevo properties 28,260 33,059

Other intangible assets 1,414 132 13. Investments in Associates and Joint Ventures Total 29,674 33,191

Investments in associates and joint ventures as of December 31, 2008 and 2007 consisted of the following: The amortization charge for the years ended December 31, 2008 and 2007 amounted to USD 8,473 and USD 6,642 re-

spectively. December 31,2008 December 31, 2007

Joint venture with Apsys 51,158 27,371 The development rights were granted to Kuntsevo-Invest in connection with a government program for reconstruction Joint venture with Saraya 19,518 5,824 of residential property in the Western Kuntsevo district of Moscow. In exchange for the development rights, Kuntsevo- Invest agreed to develop properties for the Government in proproption to the properties it developed for sale or as in- Soyuzkomint 10,600 12,604 come producing properties, and to then transfer the ownership in the properties developed for the government to them Other 1,721 1,799 for no additional compensation. Detsky Mir - 1,357

82,997 48,955 Kuntsevo-Invest entered into an investment agreement with CJSC Inteko, pursuant to which Kuntsevo-Invest and CJSC Less impairment: Inteko were jointly (50/50) responsible for the program and its risks and rewards each. During the year ended December 31, 2007, CJSC Inteko transferred its risks and rewards for the program to PIK Group.  For joint venture with Apsys (4,278) -  For Soyuzkomint (600) -

Under the current program related to these development rights, the Group remains committed to complete construction (4,878) -

of 162.9 thousand square meters of residential living space to be sold in the market («commercial buildings») and an Total 78,119 48,955 additional 50.01 thousand square meters of residential living space to be transferred to the Moscow City Government («municipal buildings»). The Group’s commitment to develop the municipal buildings arises upon the completion of the commercial buildings. However, the Group’s commitments are also connected with the fulfillment by the Government of In June 2007, the Group purchased from a related entity, whose primary beneficiary is Sistema, 5% of the common shares its obligations to relocate citizens and for registration of rent agreements on land for construction. As of December 31, of Detsky Mir for USD 7,014. Detskiy Mir is a subsidiary of Sistema. In November 2008, the Group sold the shares back to 2008 the project is suspended. However management considers that the suspension is temporary, and that this will re- Sistema for USD 6,868 (See also Note 19). sume in due course. During completion of the project, the Company will recognize its commitment to the Moscow City Government in relation to the municipal buildings. No liability exists at December 31, 2008. In September 2007, the Group purchased 50% of Soyuzkomint shares for USD 12,453. Soyuzkomint owns warehouses in the Moscow Region. The investment is accounted for under equity method. Management estimates that on the basis of the amortization policy referred to in Note 2, the estimated amortization expense is as follows: In the year ended December 31, 2008 the Group recognized an impairment charge relating to its investment in Joint venture with Apsys and investment in Soyuzkomint in the amount of USD 4,278 and USD 600 respectively. Resulting from an impairment of the underlying project as per the latest valuation.

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The fair value of the Group’s share in investments in associates and in joint ventures as of December 31, 2008 and 2007 16. Accrued Expenses is estimated as follows: and Other Liabilities

December 31,2008 December 31,2007 Accrued expenses and other liabilities as of December 31, 2008 and 2007 consisted of the following:

Joint venture with Apsys 46,880 36,000 December 31, 2008 December 31, 2007 Joint venture with Saraya 13,185 60,000 Accrued interest expense 19,185 4,421 Soyuzkomint 10,000 12,604 Advances received for sale of Aviacionny and Lomonosovsky projects 17,164 -

The Joint venture with Apsys is for development of a retail and entertainment complex TRK Leto in Saint-Petersburg. Payable for 50% interest in Soyuzkomint 10,755 12,453 Provision for termination payments to employees 8,653 -

The Joint venture with Saraya is for development of hotel and recreation services complex Kameliya in Sochi. Advances received for sale and rent of summer houses in the Moscow Region 3,218 10,600

Payables to municipal authorities for development project in Yalta 396 6,742 14. Payables to Suppliers and Subcontractors Other accrued expenses and other liabilities to third parties 16,134 23,156 Other liabilities to Sistema and its subsidiaries 8,032 5,179

Payables to suppliers and subcontractors as of December 31, 2008 and 2007 consisted of the following: Total 83,537 62,551

December 31,2008 December 31,2007 17. Loans and Notes

Nakhimovskiy 4 and Dnepropetrovskaya 25 27,458 875 Payable

Leningradsky 39 11,267 3,872 The Group’s loans and notes payable as of December 31, 2008 and 2007 consisted of the following: Yartcevskaya 27B 6,665 12,821

Rublevskoe 111 3,645 1,938 December 31, 2008 December 31, 2007

Building at Lva Tolstogo Street in Moscow 103 12,963 Loans and notes payable to third parties

Other third parties 34,674 23,353 Vneshtorgbank (VTB) 801,849 700,000

Sistema subsidiaries 1,148 1,724 Alfabank 90,001 12,075

Total 84,960 57,546 Merrill Lynch International 70,000 -

Vnesheconombank 56,000 56,000

15.Billings in Excess of Costs and Estimated Earnings Raiffeisenbank 34,036 - on Uncompleted Contracts GazPromBank 26,000 -

Billings in excess of costs and estimated earnings on uncompleted contracts as of December 31, 2008 InvestTorgBank 22,819 - and 2007 consisted of the following: Other 36,269 24,194 1,136,974 792,269

December 31,2008 December 31,2007 Loans and notes payable to Sistema subsidiaries and other related parties

Amounts billed 92,372 105,904 East-West United Bank 140,417 96,000

Less: accumulated costs and earnings (77,985) (74,240) Finekskort M 106,016 -

Total 14,387 31,664 MBRD 38,464 4,827

Elvistorg 20,422 -

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December 31, 2008 December 31, 2007 VTB Bank Alfabank MGTS 16,688 19,975 In August and November 2007, the Group signed two In August 2007, the Group signed a loan agreement with

Davia - 61,603 agreements with VTB for loan facilities of USD 500,000 Alfabank for a loan facility of USD 20,000. The loan is re- and USD 200,000, respectively, to provide financing to repayable within 12 months from the date of issuance. The Other 7,406 3,163 pay loans from Deutsche Bank AG, Nomura International floating interest rate varies from LIBOR + 5.5% to LIBOR + 329,413 185,568 plc and UBS AG, as well as to finance the Group’s invest- 6.0%. As of December 31, 2008, the outstanding amount Total loans and notes payable 1,466,387 977,837 ment program and operational activities. The loan facili- under the loan facility is USD 13,501. The facilities are ex- Short-term portion of loans and notes payable 414,179 103,321 ties are payable in 60 months. tended for construction of the buildings in the Western

Long-term portion of loans and notes payable 1,052,208 874,516 Kuntsevo district of Moscow. In November 2008, the Group modified the terms of these Total loans and notes payable 1,466,387 977,837 agreements as follows: In April and in February 2008, the Group obtained two  The USD 500,000 and USD 200,000 were convert- tranches in the amounts of USD 35,000 and USD 41,500, Loans and notes payable as of December 31, 2008 and 2007 consisted of the following: ed into roubles borrowings at the rate of the Russian respectively, under a loan facility from Alfabank. The maxi- Central Bank as of December 2, 2008 (RUB 27.94 for mum amount of the loan facility is USD 88,800. The loan fa- Interest rate December 31, December 31, 1 US dollar). cility is repayable within 12 months and bears a fixed inter- Currency Maturity (Actual at December 31, 2008) 2008 2007  Interest rate on the rouble borrowings was set at est rate of 13%. For information about pledges under the VTB RUB 2012 15.0% 665,704 700,000 15% compared to the previous rate of 6.22% (effec- loan facilities refer to Note 24 «Guarantees and pledges». VTB RUB 2010 17.5% 136,145 - tive rate was 8.5%) for the USD 500 million loan and

Finekskort M RUB 2009 0% 106,016 - LIBOR+5.43% per annum for the USD 200 million loan. Merrill Lynch International  Covenants on these borrowings were modified to waive In June and September 2008, the Group through East-West United Bank RUB 2009 11.5% 69,917 - all financial covenants (financial ratios and indicators) Remstroytrest-701(see Note 2) obtained of USD 57,500 and East-West United Bank USD 2011 12.6% 70,500 96,000 for FY2008. The future covenants are being negotiated USD 32,500, respectively, under a loan facility from Merrill Alfa bank USD 2009 13.0% 76,500 - with VTB and will go into effect in FY 2009. Lynch International. The maximum amount of the credit facil- Alfa bank USD 2009 From LIBOR + 5.5% to LIBOR + 6% 13,501 12,075 ity is USD 90,000, and is extended for the financing of the ac-

Merrill Lynch International USD 2011 LIBOR + 11.4% 70,000 - This modification has been treated as a debt extinguish- quisition of the building at Novodanilovskaya Naberezhnaya ment and new loan for accounting purposes, and as a re- in Moscow. The loan is repayable in 36 months. The Group Vnesheconombank USD 2014 9.0% 56,000 56,000 sult the Group wrote off the remaining unamortized debt paid USD 1,350 as commission under the credit facility. The Raiffeisenbank RUB 2009 MOSPRIME + 5.5% 34,036 - issuance costs associated with this loan of US 25,428. Group obtained a bank guarantee from Gazprombank for MBRD RUB 2009 13% and 15% 33,358 - This is included in interest expense in the consolidated the credit facility and is obliged to pay USD 4,532 annually MBRD USD 2009-2010 LIBOR+2% and 15% 5,106 4,827 statement of operations. for it. The effective interest rate of the credit facility is LIBOR

GazPromBank USD 2011 12.5% 26,000 - + 11.4%. For information about pledges under the loan facil- In November 2008, a credit facility agreement was signed ities refer to Note 24 «Guarantees and pledges». Elvistorg RUB 2009 10.5% 20,422 - with VTB Bank for the amount of RUB 7.0 billion (approxi- InvestTorgBank RUB 2011 18.5% 19,319 - mately USD 238 million) repayable in 2 years. The interest GazPromBank MGTS RUB 2009 11.0% 16,688 19,975 rate is 17.5%. In December 2008 the Group utilised RUB In June 2008, the Group through Remstroytrest-701(see InvestTorgBank USD 2011 17.0% 3,500 - 4.0 billion (USD 136,145 at the USD exchange rate as of Note 2) signed a loan agreement with GazPromBank for a

Davia RUB - - - 61,603 December 31, 2008) under the facility. The loan was par- loan facility of USD 26,000 for the financing of the acqui- tially used to refinance loans from Sistema and partially sition of the building at Novodanilovskaya Naberezhnaya Other RUB; USD Various Various 43,675 27,357 to finance the construction of townhouses in Odintsovsky in Moscow and refinancing of the loans from MBRD. The Total 1,466,387 977,837 Region (project Gorki-8). For information about pledges interest rate under the loan facility is 12.5%, and the loan under the loan facilities refer to Note 24 «Guarantees and is repayable in 36 months. For information about pledg- pledges». es under the loan facilities refer to Note 24 «Guarantees and pledges».

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Vnesheconombank at the USD exchange rate as of December 31, 2008) to Year ended December 31, In September 2007, the Group acquired Gorki-8, which had Finekskort M with zero discount and zero interest rate a loan agreement with Vnesheconombank in the amount and a maturity in the fourth quarter of 2009. The loan was 2009 414,179 of USD 56,000 extended for the acquisition of 79 cottages used to finance the return of an advance from Siemens in 2010 141,144

with corresponding land plots in the Moscow Region. The the amount of EUR 64 million (also see Note 20) as well as 2011 189,317 interest rate is 9%, and the loan is repayable in July 2014. to finance the operating activities of the Group. 2012 665,703 For the information about pledges under the loan refer to 2013 - Note 24 «Guarantees and pledges». Davia In November 2007, the Group issued promissory notes Thereafter 56,044 Raiffeisenbank in the amount of USD 162,031 to Davia, which in turn re- Total 1,466,387 In August 2008 the Group obtained a loan from ceived a loan in an equivalent amount from MBRD. As of Raiffeisenbank in the amount of RUB 1.0 billion (USD December 31, 2007, the outstanding balance amounted to 34,036 at the USD exchange rate as of December 31, USD 61,603. In May 2008, the Group refinanced the above 18. Capital In July 2007, Sistema-Hals acquired from parties under 2008) to finance operating activities. The variable interest notes by promissory notes in the amount of RUB 900 million Transactions common control a 5% stake in Detsky Mir. The excess of rate under the loan is one month MOSPRIME rate + 5.5%. (USD 38,497) and RUB 680 milion (USD 28,831) issued to the purchase price over the historical value of the assets The loan is repayable in May 2009. Infokom and Elvistorg, respectively. The promissory notes At January 1, 2007, Sistema Hals had 11,217,094 common in Sistema books in the amount of USD 5,658 was record- bear an interest rate of 10.5%. The promissory notes for RUB shares issued and 10,387,029 shares outstanding. ed as a transfer to Sistema. In November 2008, the Group InvestTorgBank 900 million and RUB 80 million were repaid in October 2008 sold the shares back to Sistema and recorded the excess In April and in June 2008, the Group obtained several and in the fourth quarter 2008, respectively. The promis- In the year ended December 31, 2007, the amount of out- of the sales price over the historical value of the assets in tranches in the total amount of USD 22,819 under a loan sory notes for RUB 600 million (USD 20,422 at the USD ex- standing common shares increased by 403,815 as stock the amount of USD 5,178 as transfers from Sistema (see facility from InvestTorgBank. The loan facility is extend- change rate as of December 31, 2008) which are repayable based compensation was granted (Note 27) and subse- Notes 13). ed for construction of residential apartments in Soloslovo in June 2009 were outstanding as of December 31, 2008. quently decreased by 11,217 shares. The payment was (Odintsovsky region). The loan facility is repayable with- made at market value. In the year ended December 31, 20. Siemens in 36 months and bears a fixed interest rate of 17% and MBRD 2008, the amount of outstanding common shares de- Project 18.5%. For information about pledges under the loan fa- In the year ended December 31, 2008 the Group partially re- creased by 11,217 shares as shares were repurchased from cilities refer to Note 24 «Guarantees and pledges». paid loans from MBRD which were outstanding from 2007. In a former employee for USD 2,232. The payment was made In 2003, the Group entered into a fixed price contract with December 2008, the Group issued promissory notes in the at market value. Siemens to develop an office building in Moscow. Due to East-West United Bank S.A amount of USD 885 million (USD 30,138 at the USD exchange a significant growth in the prices of materials, labor and In December 2007, the Group obtained a loan from East- rate as of December 31, 2008) to MBRD. The loan is granted 19. Transfers other construction costs starting in 2006, the Group costs West United Bank S.A. in the amount of USD 96,000 to fi- for general corporate purposes. The promissory notes ma- to and from Sistema were projected to be in excess of its original budget. nance the acquisition of Istochnik shares. The effective in- ture in July 2009 and bear a fixed interest rate of 13%. terest rate under the loan agreement is 13.5%. The loan is In the year ended December 31, 2007, Sistema-Hals sold In 2007 the Group initiated negotiations with Siemens to repayable in 3 years. In December 2008 the group repaid the MGTS its 100% stake in Nostro, which owns a building locat- reach an agreement that would allow it to recover the in- loan and obtained a new loan in the amount of USD 70,500 In November 2007, the Group obtained a loan from MGTS ed at 75, Sadovnicheskaya st., Moscow, for USD 50,000 creased costs. Based on those negotiations, the Group did with an interest rate of 12.6% and a repayment date in three in the amount of USD 16,688. The loan is repayable on to MBRD (see Note 23). The excess of the sale price over not record any estimated loss on the contract at December years. Also in the December 2008 the Group issued promis- December 31, 2009. The fixed interest rate is 11%. The fa- the carrying value of the investment in the amount of USD 31, 2007. sory notes in the amount of RUB 2,054 million (USD 69,917 cilities are extended for reconstruction of MGTS buildings. 27,500 represented a return of a cash transfer to Sistema, at the USD exchange rate as of December 31, 2008) with an recorded at the acquisition of the Nostro shares by the In 2008 the negotiations on the contract price continued. interest rate of 11,5% and maturity in December 2009. The weighted average interest rate on loans and notes pay- Group in 2006. This amount was recorded in the state- The parties discussed the possibility of increasing the con- able outstanding as of December 31, 2008 and December ment of changes in equity for the year ended December tract price by an amount sufficient to cover the estimated Finekskort M 31, 2007 was 12.73% and 9.3%, respectively. 31, 2007 as a transfer from Sistema. cost overruns. No agreement was reached, partially due In the fourth quarter of 2008 the group issued promisso- to the worsening economic environment and turmoil in the ry notes in the amount of RUB 3,115 million (USD 106,016 The schedule of repayment of debt is as follows: financial and real estate markets. At the commencement

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of the project, Siemens paid a construction advance of EUR 64 million to the Group, which was backed by the Group with The provision for income taxes reflected in continuing operations is different from that which would be obtained by ap- a performance gurantee from Deutsche Bank. In October 2008, Siemens drew on the guarantee from Deutsche Bank in plying the statutory income tax rate of 24% to income before income tax and minority interests. The items causing this the amount of the construction advance received by Sistema-Hals from Siemens and the amount was repaid using fi- difference are as follows: nancing from Sistema (see Note 17). In November 2008, the Group suspended construction ofthe building. The Group is

continuing discussions with Siemens, and we have accounted for our best estimate of the loss to be incurred based on 2008 2007 the most probable outcome of the negotiations and our assessment of the future of the contract, which amounted to USD Income tax benefit/(provision) computed on income before taxes at statutory rate 85,064 (11,508) 25.4 million. The cost has been reflected in operating expenses on the consolidated statements of operations. Adjustments due to: 21. Operating Stock-based compensation (101) (23,954) Expenses Other non-deductible items (6,809) (1,981) Effect of non-standard income tax rates 5,103 26,565

Operating expenses for the years ended December 31, 2008 and 2007 comprised the following: Other non-taxable items 2,863 2,922

Change in valuation allowance for deferred tax asset (86,068) (1,089) 2008 2007 Prior period losses used in the current period - 1,089 Cost of sales 254,130 222,509 Impairment of long-lived assets (Note 2) 51,124 - Change in unrecognized tax benefits (2,844) (3,641)

Payroll and other employee-related costs 40,265 34,340 Currency exchange and translation differences (6,877) 148 Allowance for doubtful accounts 42,831 - Effect from change in income tax rate (5,588) - Provision for losses on construction contracts (Note 20) 25,389 - Total (15,257) (11,449) Depreciation and amortization 23,980 14,551 Provision for payments to the employees 9,170 - Consulting services 5,557 2,398 Temporary differences between the Russian statutory tax accounts and these financial statements give rise to the fol- Taxes other than income taxes 4,820 3,652 lowing deferred tax assets and liabilities as of December 31, 2008 and 2007. Banking services 4,498 - Repairs and maintenance 4,418 1,867 December 31, 2008 December 31, 2007 Nostro contract price reduction 4,119 - Deferred tax assets Rent of premises and land 2,226 976 Advertising and marketing 1,589 3,261 Provisions 21,015 4,706 Security expenses 733 2,151 Tax losses carried forward 45,780 2,465

Stock-based compensation (benefit)/expense (Note 27) (422) 99,807 Depreciation 1,649 939 Other 12,002 5,528 Other 12,742 2,904 Total 486,429 391,040 Less: valuation allowance (66,566) - 22. Income Total deferred tax assets 14,620 11,014 Taxes Deferred tax liabilities Borrowing costs capitalized (14,768) (17,474)

The Group’s provision for income taxes related to continuing operations for the years ended December 31, 2008 and Revenue recognition (12,154) (6,903)

2007 was as follows: Development rights (5,652) (7,934)

Other (5,682) (13) 2008 2007 Total deferred tax liabilities (38,256) (32,324) Current tax expense (12,939) (11,686) Deferred tax (expense)/benefit (2,318) 237 Income tax expense (15,257) (11,449)

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Effective January 1, 2009 the RF government changed the income tax rate from 24% to 20% which resulted in a USD 23. Related Party 4,727 decrease in deferred income tax expense (decrease in deferred tax assets and liabilities by USD 2,924 and USD Transactions 7,651, respectively). In the years ended December 31, 2008 and 2007, the Group entered into the following transactions with Sistema and its Substantially all assets relating to tax losses carried forward will expire in 2018 in accordance with statutory tax legis- subsidiaries: lation.

2008 2007 As of January 1, 2007, the Group implemented Interpretation No. 48, «Accounting for Uncertainty in Income Taxes», («FIN Revenues from development projects 53,967 50,000 48»), which clarifies the accounting for uncertain tax positions stated in SFAS No. 109, «Accounting for Income Tax». FIN Services provided 32,228 19,952 48 applies to all tax positions that are within the scope of FAS No. 109 and requires a two-step approach for recognizing and measuring tax benefits. FIN 48 establishes a «more-likely-than-not» recognition threshold that must be met before Services purchased and other expenses (14,549) (1,857) a tax benefit can be recognized in the financial statements. To meet this threshold, the enterprise must determine that Interest income 4,218 10,251 upon examination by the taxing authority, the tax position is more likely to be sustained than not, based on the techni- Interest costs (18,517) (1,960) cal merits of the position. Once the recognition threshold has been met, enterprises are required to recognize the largest amount of tax benefit that is greater that fifty percent likely of being realized upon ultimate settlement with the taxing Revenues from development projects – In the year ended December 31, 2008, the Group sold a complex of buildings at authority. In both steps, enterprises must presume that the taxing authority has full knowledge of all relevant informa- 8 Marta Street and its 51% share in JSC «RTI-Estate», which owns a building at 8 Marta Street (building 10, construction tion. 12) to JSC «RTI-Radio», a subsidiary of Sistema, for USD 53,967.

The adoption of FIN 48 resulted in a cumulative effect adjustment to the opening balance of retained earnings as of In the year ended December 31, 2007, the Group sold its 100% stake in Nostro, which owns a building located at 75, January 1, 2007, of USD 2,171 (of which approximately USD 361 related to penalties and USD 6 related to fines). As of Sadovnicheskaya st., Moscow, for USD 50,000 to MBRD. December 31, 2008, the Group included accruals for unrecognized income tax benefits totaling USD 7,470 as a component of accrued liabilities (of which approximately USD 1,643 relates to penalties and USD 269 relates to fines). Site management services provided – Revenues from site management services provided to Sistema and its subsidiaries in the years ended December 31, 2008 and 2007 were USD 28,835 and USD 18,527, respectively. The Group recognizes accrued interest related to unrecognized tax benefits and penalties in income tax expenses. Agreements to act as a developer – In the years ended December 31, 2008 and 2007, the Group had agreements with The changes in unrecognized tax benefits for the year ended December 31, 2008 were as follows: Detsky Mir, Sistema Mass Media, MGTS and NIIDAR, subsidiaries of Sistema, to act as a developer for projects to rede- velop properties owned by these entities. The revenues from such services for the years ended December 31, 2008 and

Balance at January 1, 2008 4,052 2007 amounted to USD 1,648 and USD 625, respectively.

Additions based on tax positions related to the current year 5,537 Services purchased and other expenses – In the year ended December 31, 2008, Rensonbay Corp. and Sistema grant- Reversal of tax positions from prior years due to expiration of statute of limitations (2,848) ed guarantees for the investment obtained by the Group from SIMOS. Costs to the Group for Rensonbay Corp.’s and Translation adjustment (1,183) Sistema’s guarantees amounted to USD 4,071 and USD 665, respectively. Balance at December 31, 2008 5,558 Services purchased by the Group also include connection services from MTS, MGTS and Comstar as well as bank com- The Group considers it reasonably possible that approximately USD 806 of unrecognized tax benefit (including interest mission paid to MBRD. and penalties) will be reversed within the next year, due to the expiration of the statute of limitations. Other expenses are represented mainly by a USD 4,119 contract price reduction relating to the sale of the 100% stake As of the date of these financial statements, the tax years ended December 31, 2006, 2007 and 2008 remained subject in Nostro, which owned a building located at 75, Sadovnicheskaya st., Moscow, for USD 50,000 to MBRD in 2007. In the to examination by the Russian tax authorities. year ended December 31, 2008 the price was reduced down to the amount of USD 45,881 due to the failure by Sistema- Hals to fulfill certain contract terms.

Interest costs – In the years ended December 31, 2008 and 2007, interest costs of the Group’s borrowings included interest paid or payable to the following related parties:

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The Group pledged land plots in the Odintsovsky Region (Soloslovo) with a pledge value of USD 109,691 as security un- 2008 2007 der the credit line from VTB in the amount of USD 238,254 (RUB 7.0 billion). As of December 31, 2008, the credit line used EWUB 13,855 - by the Group amounted to USD 136,145 (4.0 billion). MBRD 1,612 422

MGTS 2,451 147 As of December 31, 2008, the Group has pledged 40 cottages (13,184.9 sq. m) and land plots (10,695 sq. m) in the Moscow Region as security under the loan from Vnesheconombank in the amount of USD 56,000. Finekskort-M 403 -

As of December 31, 2008, the Group has also pledged title to apartments with a value of USD 3,756 under obligations Interest income – In the years ended December 31, 2008 and 2007 interest income from a deposit in MBRD amounted to of Triada-Invest to MBRD. USD 2,840 and 5,921, respectively. The Group has granted guarantees for the credit line obtained from MBRD by Ferro-Stroy, the co-developer, in the In the year ended December 31, 2008 and 2007 income from a trust managed by MBRD amounted to nil and USD 3,726, amount of USD 9,055 and pledged title to apartments in the amount of USD 15,916 under the Nakhimovsky project. As respectively. of December 31, 2008, the credit line used by Ferro-Story amounted to USD 23,101.

24. Guarantees The Group has granted guarantees for the credit obtained from Eurohypo by Gals-Invest-Development in the amount of and Pledges USD 187,500 and pledged an intra-group loan in the amount of USD 51,054. As of December 31, 2008, the credit used by Gals-Invest-Development amounted to USD 44,152. Warranties and guarantees of work performed – The Group is contractually responsible for the quality of construction works performed subsequent to the date at which the relevant object was handed over, generally for a period up to 2 years subse- As of December 31, 2008, the Group pledged land plots and summer houses in the Odintsovsky Region with a pledge val- quent to handover. Based upon prior experience with warranty claims, which have not been significant, no contingent liabili- ue of USD 60,460 as a security under a loan facility from Alfa Bank. ties have been recorded in the Group’s financial statements in relation to warranties and guarantees for work performed. As of December 31, 2008, the Group pledged land plots and result of development activities in the Odintsovsky Region Pledges – As of December 31, 2008, common shares of the Group’s entities have been pledged as follows: (Soloslovo) with a pledge value of USD 13,516 and USD 30,613 respectively as a security under a loan facility from InvestTorgBank. Number of shares pledged Number of shares pledged as a percentage of total shares As of December 31, 2008, the Group granted guarantees for the credit obtained from Westernmost Investments Limited Landshaft II 100 100% by Telekom-Development in the amount of USD 9,154. Landshaft 15 15%

Remstroytrest 100 100% 25. Commitments

Promresurs 100 100% and Contingencies

Telekom-Development 50 50% a) Taxation environment Mosdachtrest 187 1% Russia currently has a number of laws related to various taxes imposed by both federal and regional governmental authorities. Applicable taxes include value added tax («VAT»), corporate income tax and payroll (social) taxes, together As of December 31, 2008, Sistema and Gals-Finance pledged 1,610,484 and 669,040 shares of JSC Sistema-Hals respec- with others. Laws related to these taxes have not been in force for significant periods, in contrast to more developed mar- tively as security under the loan facility from VTB in the amount of USD 190,201. ket economies; therefore, the government’s implementation of these regulations is often inconsistent or nonexistent. Accordingly, few precedents with regard to tax rulings have been established. Tax declarations, together with other le- As of December 31, 2008, Sistema, Gals-Finance and Investitsionnaya Pensionnaya Kompaniya pledged 5,749,023 gal compliance areas (for example, customs and currency control matters), are subject to review and investigation by a shares, 261,744 shares and 137,560 shares of JSC Sistema-Hals respectively as security under the loan facility from VTB number of authorities, which are enabled by law to impose extremely severe fines, penalties and interest charges. These in the amount of USD 475,502. facts create tax risks in Russia that are more significant than typically found in countries with more developed tax systems. Management believes that the Group is in compliance with the tax laws affecting its operations; however, the risk remains that governmental authorities could take differing positions with regard to interpretative issues.

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During the years ended December 31, 2008 and 2007, the Group entered into a number of investing activities in anoth- Mosdachtrest properties – The Group has contracted for construction works related to Mosdachtrest properties. er tax jurisdiction, their tax effect is described as «effect of non-standard income tax rates» in Note 22 «Income taxes». Commitments under these contracts amounted to USD 2,677 as of December 31, 2008. While management believes that it has adequately provided for tax liabilities based on its interpretation of current and previous legislation, it is possible that the tax authorities in the Russian Federation could take a differing position with Aurora project – The Group has contracted for construction works, including construction of the roads, gas and electric- regard to certain interpretive tax issues relating to the aforementioned tax savings. This uncertainty may expose the ity networks. Commitments under these contracts amounted to USD 4,242 as of December 31, 2008. Group to additional taxation, fines and penalties that could be significant. Western Kuntsevo properties – The Group hired a contractor to perform general construction works. Commitments under b) Industry regulation these contracts amounted to USD 68,555, including USD 68,086 in relation to the Elninskaya 28A Project and USD 469 Construction and development of real estate in Russia is primarily governed by the Civil Code, the Federal Land Code, in relation to the Rublevskoe Shosse 111A Project as of December 31, 2008. the City Construction Code, the Federal Law on the State Registration of Rights to Immovable Property and Transactions Therewith, construction norms and regulations approved by the Ministry of Industry and Energy, and others. Construction Zdravnitza Novaya (Rozhnovka) – The Group entered contractual agreements for a technological connection to transmis- and development involves compliance with burdensome regulatory requirements, and authorizations from a large num- sion links. Commitments under the contract amounted to USD 4,705 as of December 31, 2008. ber of authorities at the federal, regional and local levels. In particular, the Federal Agency on Construction, Housing and the Communal Sector, or Rosstroi, the Federal Service for Supervision in the Sphere of Use of Natural Resources, the Povarskaya 8 – The Group entered contractual agreements for construction of office premises. Commitments under Federal Service on Ecological, Technologic and Nuclear Supervision and regional bodies of the state architectural and these contracts amounted to USD 16,646 as of December 31, 2008. construction supervision are involved in the process of authorizing and supervising real estate development. Pekin – The Group entered contractual agreements for construction of a Hotel and Office Centre. Commitments under In addition, construction is subject to applicable environmental, fire safety and sanitary norms and regulations. these contracts amounted to USD 9,432 as of December 31, 2008.

The Group is constructing a number of cottages without obtaining the necessary construction permits. However, man- Buchvostova 12/11 – The Group entered contractual agreements for initial construction works of the project. Commitments agement is in the process of addressing this issue and does not foresee that this will adversely affect the Group’s finan- under these contracts amounted to USD 3,062 as of December 31, 2008. cial position or results of operations. TRK Leto – The Group entered contractual agreements for construction of a retail and entertainment complex in Saint- c) Legal proceedings Petersburg. Commitments under these contracts amounted to USD 34,760 as of December 31, 2008. In the ordinary course of business, the Group may be a party to various legal and tax proceedings, and be subject to claims. In the opinion of management, the Group’s liability, if any, in all current and pending litigations or other legal pro- Detsky Mir Lubyanka – The Group entered contractual agreements for reconstruction works under the project. ceedings will not have a material effect upon the financial condition, results of operations or liquidity of the Group, oth- Commitments under the contract amounted to USD 315,798 as of December 31, 2008. er than as is already reflected in these financial statements. Kinostudia ( Gen. Chruleva st.) – The Group entered contractual agreements for renovation and decoration works under d) Commitments under construction contracts the project. Commitments under the contract amounted to USD 1,561 as of December 31, 2008. The Group has entered into agreements with third parties for construction of objects which will require capital outlays subsequent to December 31, 2008. A summary of significant commitments under construction contracts as of December Moscow City Government – The Group has obligations to manage a number of construction projects which will be com- 31, 2008 is provided below: pleted subsequent to the balance sheet date. The Moscow City Government has the obligation to finance these construction projects, with the Group generating commissions based on the agreed upon Leningradsky 39 – The Group has contracted for construction works, including foundations, shell budget cost of the project. and core, utilities and other general construction expenditures. Commitments under these contracts amounted to USD 181,460 as of December 31, 2008. In addition, in connection with this project, the Group undertook obligations to pro- e) Operating leases vide the Central Army Sports Club («CSCA») with residential housing with approximate market value of USD 34,810 as With a few exceptions, land in Moscow is owned by the Moscow Government. The lease of land in Moscow is subject to a of December 31, 2008. separate regulatory regime administered by the Government. As a general rule, such land lease rights are granted by the Government on the basis of an auction or tender, typically in exchange for either an upfront payment or ongoing consid- MGTS properties – The Group entered contractual agreements for the reconstruction of certain MGTS buildings. eration in the form of periodic lease payments. Commitments under these contracts amounted to USD 57,427 as of December 31, 2008.

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f) Environmental regulations Real estate Real estate asset Facility As of and for the year ended December 31, 2007 Total Environmental laws and regulations impose certain restrictions and encumbrances on the properties that the Group development management management holds or develops. Some of the land plots under development are located in areas that have special environmental pro- Net sales to external customers 356,044 44,828 22,773 423,645 tection. In addition, the development of a project may be subject to certain obligations, including planting of greenery Intersegment sales 373 537 2,524 3,434 and clean-up measures. These requirements may result in delays in the development of projects, or additional costs. Interest income 13,737 425 - 14,162 Interest expense, net of amounts capitalized (12,323) (372) - (12,695) 26. Segment Intersegment interest expense - (2,998) - (2,998) Information Depreciation and amortization (9,068) (5,431) (53) (14,552) Operating income 7,185 23,939 2,203 33,327 SFAS No. 131, «Disclosures about Segments of an Enterprise and Related Information», established standards for re- Income before income tax and minority interests 37,746 15,692 2,137 55,575 porting information about operating segments in financial statements. Operating segments are defined as components Income tax expense (7,016) (3,917) (516) (11,449) of an enterprise engaging in business activities about which separate financial information is available that is evaluat- Segment assets 1,720,308 147,856 8,422 1,876,586 ed regularly by the chief operating decision maker or group in deciding how to allocate resources and in assessing per- Capital expenditures 766,049 24,782 192 791,023 formance. The reconciliation of segment operating income to the income before income tax and minority interests and reconcilia- The Group’s operating segments are: Real estate development, Real estate asset management and Facility management. tion of segment assets to the total assets of the Group are as follows: Activities of the Group’s Real estate development segment include identification of investment opportunities, perfor-

mance of feasibility studies, obtaining necessary construction permits, project financing and marketing activities. The 2008 2007 Real estate asset management segment is involved in renting of residential and commercial properties that the Group Total segment operating (loss)/income (124,101) 33,327 has developed or acquired. The Facility management segment provides site management services, including security, Intersegment eliminations (371) (722) cleaning, staffing, technical support, repair and renovation, as well as general building maintenance. The Group’s man- Other loss, net (10,421) (1,383) agement evaluates performance of the segments based on both operating income and income before income taxes and Interest income 12,026 14,162 minority interests. General and administrative expenses of the managing company of the Group (Sistema-Hals) are allo- Interest expense, net of amounts capitalized (82,722) (12,695) cated to the Real estate development segment. (Loss)/gain on foreign currency transactions (138,410) 15,158 Equity in net income of investees (11,446) - The intersegment eliminations presented below consist primarily of intersegment sales transactions, elimination of in- Gain on sale of equity investee 1,012 - terest on intersegment borrowings and other intersegment transactions conducted under the normal course of opera- Loss on sale of interests in a subsidiary - 113 tions. Income before income tax and minority interests (354,433) 47,960 Total segment assets 1,997,852 1,876,586 Real estate Real estate asset As of and for the year ended December 31, 2008 Facility management Total Intersegment eliminations (102,110) (144,030) development management Assets of discontinued operations - 22,534 Net sales to external customers 274,314 54,525 33,118 361,957 Total assets 1,895,742 1,755,090 Intersegment sales 194 751 3,141 4,086 Interest income 11,968 58 - 12,026 27. Stock-based Interest expense, net of amounts capitalized (82,697) (2,308) 2,283 (82,722) Compensation Intersegment interest expense - (259) (2,306) (2,565) Depreciation and amortization (16,829) (7,082) (69) (23,980) On May 22, 2007, the Board of Directors of Sistema-Hals approved a stock option and stock bonus program («the Operating (loss)/income (149,795) 24,262 1,432 (124,101) Program») for senior management of Sistema-Hals. On June 25, 2007, the General Meeting of shareholders approved the (Loss)/income before income tax and minority (369,327) 21,252 1,333 (346,742) interests stock bonus program («the Program») for the Board of Directors of Sistema-Hals. Income tax expense (8,964) (5,982) (312) (15,257) Segment assets 1,827,076 159,408 11,368 1,997,852 Within the framework of the Program on June 25, 2007 Sistema-Hals granted ordinary stock bonuses of 403,815 com- Capital expenditures 466,543 38,321 210 505,074 mon shares (3.6% of total issued shares) to the Group’s top managers (280,427 shares – 2.5% of total issued shares),

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and directors (123,388 shares – 1.1% of total issued shares). The fair value of the awards as of the grant date approxi- The total fair value of shares vested during the years ended December 31, 2008 and 2007, was USD 28.7 million and USD mated USD 68,032 and USD 29,934, respectively, (valued at USD 12.13 per GDR where 1 share represents 20 GDRs ) and 0.2 million, respectively. was included in operating expenses for the year ended December 31, 2007 (see Note 21). As of December 31, 2008, there is USD 709 of total unrecognized compensation cost related to non-vested stock-based Within the framework of the Program, in July 2007, Sistema-Hals granted stock options of 235,556 shares (2.1% of to- compensation awards under the stock option plan. This amount is expected to be recognized over a period of 30 months. tal issued shares) to certain members of the top management. The options are contingent on the continued employment The weighed average contractual term of the options is one year. The vesting period is distributed as follows: of the grantees with the Group. According to the terms of the plan, the grantees are entitled to buy option in four installments at a price determined and agreed in advance. The exercise price for these options is 201 US Dollars (calculated Year of vesting Number of options as 10.05 US Dollars for 1 GDR, where 1 share represents 20 GDRs). The stock price as of the grant date amounted to 236 2009 11,217 US Dollars. 2010 11,217 2011 11,217 The Group recognizes expense for stock-based compensation on a straight-line basis over the vesting period. The stock option plan is out-of-the-money as of December 31, 2008. The following table summarizes information about non-vested common stock options in the years ended December 31, 2008 and 2007: 28. Subsequent Events Number of Exercise price Grant date fair value of options shares (per share),USD (per share), USD In February 2009 the Group sold it’s 50% share in Soyuzkomint LLC for USD 10,000. Outstanding as of January 1, 2007 - - -

Granted 235,556 201 47.43 In February 2009 the Group increased its share in Sib-Brok LLC (a project company for elite apartments in Yalta) from Exercised - - - 75% to 100%. The purchase price amounted to USD 7,756.

Forfeited (89,736) 201 47.43 During the first quarter of 2009 the Group issued notes payable to Sistema subsidiaries for the approximate amount of Outstanding as of December 31, 2007 145,820 201 47.43 USD 96 million. The notes mature in 2009–2011 and bear interest rates from 0% to 20.5%. Granted - - -

Exercised - - - In April – March 2009 the Group repaid part of the loan from Alfabank in the amount of USD 68,000. The repayment date Forfeited (112,169) 201 47.43 for the outstanding loan amount of USD 22,000 was extended till the end of May.

Outstanding as of December 31, 2008 33,651 201 47.43 In April 2009 the Group issued 5 million bond securities with a par value RUB 1,000 each. The bonds bear a coupon rate The fair value of options granted was estimated using the Black-Scholes pricing model using the following assump- of 15% and mature in 2014. The bonds were issued at par value. The cash received as a result of the bonds issue was tions: used to refinance the current debt of the Group.

Risk-free rate 4.97% In April 2009, AFK Sistema signed an agreement to sell the shares of Sistema-Hals to VTB. According to the agreement, in April 2009 VTB acquired 19.5% share in Sistema-Hals for RUB 30 and received a call option to acquire additional Expected dividend yield 0% 31.5% share for RUB 30. As a result of this deal the share of AFK Sistema in Sistema-Hals’ capital decreased from 69.4% Expected volatility 26.2% to 19.5%, while the share of VTB comprised 19.5% and the treasury stock increased from 9.7% to 39.6%. In case the op- Expected option life (years) 4 tranches of 1 year each (2007-2010) tion is executed by VTB this will increase its share in Sistema-Hals up to 51%. Debt restructuring will be done subject to Grant date fair value of options (per share) USD 47.43 corporate approvals.

The compensation benefit under the stock option plan of USD 422 was recognized in the consolidated statement of operations during the year ended December 31, 2008 (see Note 21).

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The Parthenon is the best known architectural monu- ment of Antiquity, located on the Athenian Acropolis. It was the main temple in Ancient Athens and was dedicated to Athena Virgin, the patron of the city and of all Attica. It was erected in 447-438 BC by architect Kallikrates in a project of Iktinos and decorated in 438-431 BC under the supervision of Phidias.

Its inner room (59 m long and 21.7 m wide) has two additional steps (total height is 0.7 m) and constitutes an amphiprostyle. The facades have porticos with columns which are slightly lower than the columns of the peristyle. The east portico was a pronaous, the west one was a pos- ticum.

Part 7 Appendixes

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N Provision of the Code of Corporate Complied / Notes (2) N Provision of the Code of Corporate Complied / Notes Governance Not complied Governance Not complied(2) 4. Possibility for a shareholder to put an issue Complied Pursuant to para. 1.5 of the Regulations governing the General Meeting of the Shareholders on the agenda of the General Meeting or General Meeting of Shareholders, all meetings conducted require a General Meeting to be called in addition to the Annual General Meeting of Shareholders 1. Notice given to shareholders not less than Complied Pursuant to item 14.9 of the Charter: without presenting an extract from the shall be the extraordinary ones. An Extraordinary General 30 days prior to the General Meeting “The notice of the General Meeting of Shareholders shall be shareholder register if title to shares is Meeting of Shareholders shall be conducted upon the regardless of the issues on the agenda, given to the shareholders no later than 30 days prior to the recorded in the shareholder register system, decision of the Company’s Board of Directors based on unless legislation provides for a longer date of such meeting, unless the law stipulates otherwise. and by presenting only a statement from the request of the shareholder(s), who own at least 10% of the period of notice. Pursuant to para. 5, item 3.2 of the Regulations governing depot account if title to shares is recorded in voting shares on the date of submission of such request. the General Meeting of Shareholders at Sistema-Hals a depot account. Pursuant to para. 2.1 of the Regulations, the shareholder(s) OJSC, the notice of holding such a General Meeting of who collectively own at least 2% of the Company’s voting Shareholders shall be given to the individuals included stock shall be entitled to introduce items on the agenda in the list of people entitled to participate in the General and put up their candidates to the Company’s Board of Meeting of Shareholders by registered mail, or handed over Directors, Audit Commission of the Company, and the to them in person and signed by them not later than: Company’s auditor.  40 days prior to the meeting, if the agenda of such The share of voting stock owned by the shareholder(s) General Meeting has an item about the Company’s re-or- who submit a proposal to the agenda of the General ganization; Meeting of Shareholders and/or putting up candidates to  50 days prior to its holding, if the agenda of such the Company’s bodies, elected by the General Meeting of Extraordinary General Meeting has an item about elec- Shareholders, shall be determined on the date of submitting tion of members of the Board of Directors; such a proposal.  30 days in advance in all other cases. The share of voting stock owned by the shareholder(s) Information about the upcoming General Meeting of requesting an Extraordinary General Meeting of Shareholders shall be posted on the Company’s website. Shareholders shall be determined on the day of submitting such a request. 2. Access of the shareholders to the list of Complied In accordance with item 4.6 of the Regulations governing persons entitled to attend the General the General Meeting of Shareholders at Sistema-Hals OJSC, 5. The Charter or internal By-laws of the Partially Pursuant to item 8.5. of the Regulations governing the Meeting, starting from the date of beginning the date of drawing up the list of individuals company contain a requirement on the complied General Meeting of Shareholders, the Company shall announcement of the General Meeting until authorized to participate in the General Meeting of obligatory presence of the President, strive to secure attendance at the General Meeting held in the closing of the General Meeting held in Shareholders through the date of actual holding of the members of the Management Board, the form of joint personal presence of the shareholders, person, and in the case of meeting, the shareholder owning 1% or more of the members of the Board of Directors, members members and candidates to members of the Board of a General Meeting held by correspondence Company’s voting shares shall be entitled to familiarize of the audit commission and the external Directors, Audit Commission, Company’s Auditor, and other – until the deadline for the collection of himself with such list (except addresses and passport auditor of the company at the General senior executives of the Company. However, the Charter voting ballots. details of the shareholders). Any interested person can Meeting. and internal documents of the Company lack provisions receive an excerpt from the above list with information requiring their mandatory presence during the General about such person, or a paper certifying that he was not Meetings of the Shareholders (item 2.3.2 of the Regulations included in the list. governing the Board of Directors dated June 30, 2008). 3. Access of the shareholders to information Complied The shareholders shall have an opportunity to familiarize 6. Obligatory presence of the nominees for Complied Pursuant to item 8.5. of the Regulations governing the (materials) to be provided during the themselves with the documents and information about the the positions of members of the Board of General Meeting of Shareholders, the Company shall preparation for the General Meeting through agenda of the General Meeting of Shareholders right during Directors, the President, members of the strive to secure attendance at the general meeting held in electronic media, including the Internet. the meeting, and also not later than 20 days before holding Management Board, members of the audit the form of joint personal presence of the shareholders, the General Meeting of Shareholders (if the agenda of the commission and external auditor during members and candidates to members of the Board of General Meeting of Shareholders contains an item about consideration by the General Meeting of their Directors, Audit Commission, Company’s Auditor, and other re-organization of the Company, not later than 30 days prior election and appointment. senior executives of the Company. However, the Charter to such General Meeting of Shareholders) every business and internal documents of the Company lack provisions day from 9 am to 6 pm at: 35/4, Bolshaya Tatarskaya Street, requiring their mandatory presence during the general Moscow. meetings of the shareholders. The shareholders may request the Company to provide Pursuant to items 18.2.9-18.2.10 of the Company’s Charter, the above information via an email sent to the electronic nomination of the Company’s President, establishment mailbox of the Corporate Secretary indicated on the of a collegial executive body – Management Board of the Company’s website (item 3.6 of the Regulations governing Company, as well as early termination of their authority shall the General Meeting of Shareholders). be within the frame of reference of the Board of Directors. 7. The By-laws of the company establish Complied According to item 5.4. of the Regulations governing the a registration procedure for the participants General Meeting of Shareholders, the registration of the in the General Meeting. participants in the General Meeting of Shareholders held in the form of a meeting shall be conducted by the Company’s Audit Commission, According to item 3.1 of the Regulations, the beginning time for registration of the participants in the General Meeting shall be determined by the Board of Directors. Board of Directors

8. The company’s Charter provides for the Complied Company’s Charter, item 18.2.1. authority of the Board of Directors to approve annual financial and operating plans.

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N Provision of the Code of Corporate Complied / Notes N Provision of the Code of Corporate Complied / Notes Governance Not complied(2) Governance Not complied(2) 9. The company has a risk management Not complied The Company lacks a procedure to manage risks of the joint 19. The By-laws of the company provide for the Complied According to item 2.3.2. of the Regulations governing the procedure approved by the Board of stock company approved by the Board of Directors. This obligation of the members of the Board of Board of Directors, a Board of Directors’ member shall Directors. procedure was approved by the Board of Directors in 2009. Directors to notify the Board of Directors disclose information about ownership of the Company’s in writing of their intention to perform any securities and also about the sale and/or purchase of the 10. The company’s Charter provides for the right Not complied According to item 18.2.9. of the Company’s Charter, transactions and disclose information on any Company’s securities, notify the Chairman of the Board of of the Board of Directors to take a decision on «nomination of the Company’s President, …as well as early transactions performed with securities of the Directors about his intention to sign a deal involving the suspending the authorities of the President termination of the authority of the Company’s President» company or subsidiaries (associates) of the Company’s shares. appointed by the General Meeting. shall be within the terms of reference of the Board of company. The procedure for disclosure/notification is defined by Directors. Regulations governing Disclosure of Material Information 11. The Charter of the company provides for the Complied According to items 18.2.9., 18.2.10., 18.2.24. of the and Insider Transactions. right of the Board of Directors to establish Company’s Charter, the Board of Directors shall approve the 20. The By-laws of the company contain a require Complied Charter, item 19.9. (changes approved on June 30, 2008). requirements for the qualifications and terms of agreement signed with the Company’s President, ment that a meeting of the Board of Directors Regulations governing the Board of Directors, item 4.1.2. the level of compensation of the President, including the size of his remuneration, establish the key should be held at least once every six weeks. members of the Management Board and terms of the agreements signed with the Management Board managers of the key structural divisions of members, and also approve the requirements regarding the 21. Meetings of the Board of Directors of the Complied The schedule for holding the meetings of the Board of the company. skills, performance evaluation principles and motivation company were held at least once every six Directors shall be determined by the Chairman of the Board system of the Company’s senior executives. weeks in the year for which the annual report of Directors. The meetings of the Board of Directors shall is presented. be held at least once every six weeks (item 4.1.2. of the 12. The company’s Charter provides for the right Complied Charter, items 18.2.9. – 18.2.10. Regulations governing the Board of Directors). of the Board of Directors to approve the In all, they had 12 meetings in 2008. terms of the contracts with the President and members of the Management Board 22. The By-laws of the company establish Complied Regulations governing the Board of Directors, Section 4.3. a procedure for the conducting of the Procedure governing the Board of Directors’ meetings. 13. The Charter and By-laws of the company Not complied The Charter and internal documents of the Company do not meetings of the Board of Directors. contain a requirement that votes of the provide for such requirements. members of the Board of Directors who The Board of Directors, elected by resolution of the General 23. The By-laws of the company include a Complied According to item 18.2.16 of the Company’s Charter, the act as the President and members of the Meeting of Shareholders on June 30, 2008 (minutes #17), provision on the need to have approval of the Board of Directors shall make decisions on the Company’s Management Board should not be taken into does not include President and members of the Company’s Board of Directors for company transactions transactions related to alienation or possible alienation of account when the terms of the contracts with Management Board. amounting to 10% or more of the company’s real estate whose value exceeds 10% of the book value of the President (managing entity, manager) asset value, other than transactions the assets. and members of the Management Board are performed in the ordinary course of business. approved. 24. The By-laws of the company provide for the Complied Regulations governing the Board of Directors, item 2.2.2.: 14. The Board of Directors includes at least Complied The Company’s Board of Directors includes three right of the members of the Board of Directors member of the Board of Directors shall have the right 3 independent directors meeting the independent directors. The Company’s Board of Directors to receive information necessary for the to… request that the Company’s officials and employees requirements of the Code of Corporate uses the most conservative criteria to determine their level performance of their functions from the provide any information (documents and materials) and Conduct. of independence. executive bodies and managers of the key explanations regarding the Company’s activities. structural divisions, and liability of the latter 15. There are no persons on the Board of Complied According to item 6.8. of the Company’s Charter, the for non-provision of such information. Directors recognized as guilty of committing proposals by the shareholders regarding candidates to the offences in the sphere of economic activity; Board of Directors include, among others, the following 25. There is a strategic planning committee of Complied The Company’s Charter (item 18.2.29.) and Regulations against the government or against the information about the candidates: the Board of Directors or functions of such governing the Board of Directors (section 3.4) provide interests of the federal, regional and local  criminal record for economic crimes or crimes against committee are assigned to some other for possible establishment of the Board of Directors’ government service; or that have been government authorities. committee (other than the Audit Committee Committees. subjected to administrative penalties for or the Nomination and Compensation A Strategy Committee has been established. offences in the sphere of entrepreneurial Committee). activities or in the sphere of finance, taxes and levies and the securities market. 26. There is a committee (Audit Committee) of Complied An Audit Committee has been established. the Board of Directors that recommends an Pursuant to the provision on the Audit Committee approved 16. There are no persons on the Board of Complied According to requirements with regard to candidates to external auditor to the Board of Directors by decision of the Board of Directors dated July 25, 2006, Directors who serve as members, the members of the Board of Directors of Sistema-Hals, the and communicates with the external auditor the Audit Committee’s competencies include preparation of President (manager), members of the candidate must not be part of the control or supervision and the internal audit commission of the recommendations regarding the candidacies to the position management body or employees of any bodies of the companies providing similar services, or be company. of the Company’s Auditor and other auditors for submission competitor to the company. an affiliated person of such companies (Appendix 2 to the to the Board of Directors and provision of the appraisal Board of Directors). results to the Board of Directors; study of written reports, memos, accounts by the Audit Commission; request for any 17. The company’s Charter contains a Complied According to item 13.5.4. of the Company’s Charter, «…the kind of information from members of the Audit Commission. requirement that the Board of Directors be decision to elect members of the Board of Directors shall be elected by cumulative vote. adopted by cumulative voting…». 27. The Audit Committee includes only Complied According to item 4.1 of the Regulations governing the independent and non-executive directors. Audit Committee, the latter shall be comprised of three 18. The By-laws of the company include the Complied According to item 2.4.2. of the Regulations governing the members elected from among non-executive directors of the obligation of the members of the Board of Board of Directors dated June 30, 2008, members of the Company, of which at least one Committee member should Directors to refrain from any actions that Board of Directors shall withhold from actions, which will be an independent director, in case one gets elected to the will or may potentially lead to a conflict of or might result in a conflict between their interests and Company’s Board of Directors. interests with the company, and in the case interests of the Company, and, in case of such a conflict, of such conflict - their obligation to disclose shall disclose information about it to the Board of Directors. 28. The Audit Committee is chaired by an Complied According to item 5.2 of the Regulations governing the Audit information on such conflict to the Board of independent director. Committee, the Chairman of the Audit Committee shall be Directors elected from independent directors. Currently, Robert Tsenin, an independent director, is the Chairman of the Audit Committee.

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N Provision of the Code of Corporate Complied / Notes N Provision of the Code of Corporate Complied / Notes Governance Not complied(2) Governance Not complied(2) 29. The By-laws of a joint stock company provide Complied Item 2.2.2 of the Regulations governing the Board of 37. The company has internal By-laws approved Complied The procedure for forming and operation of the committees for access by all members of the Audit Directors establishes the right of the members of the by the Board of Directors providing for the at the Board of Directors is regulated by provisions on Committee to any company documents Board of Directors to request that the Company’s officers procedure of formation and operation of the respective committees. and information company subject to non- and employees provide any information (documents or committees of the Board of Directors. disclosure of confidential information. materials) and explanations regarding the Company’s activities, whereas item 2.3.2 of the Regulations sets forth 38. The company’s Charter provides for a Not complied According to item 17.6 of the Charter, the quorum for the obligation to comply with the provision On Insider procedure to determine the quorum of holding the meetings of the Board of Directors shall Information approved by the Company. the Board of Directors that would ensure amount to Ѕ (one-half) of elected members of the Board of According to item 3.2.3 of the Regulations governing the obligatory participation of independent Directors. Nothing is said about mandatory participation of Board of Directors’ Audit Committee item 6.2, the Audit directors at the Board meetings. independent directors. Committee shall be entitled to request and receive any Executive bodies information it needs for conducting its activities from the Company’ President, members of the Audit Commission, 39. The company has a collective executive body Complied Company’s Charter, section 7 «Company’s executive financial and economic service and the Company’s Auditor, (Management Board). bodies». heads of structural units of the Company, as well as other employees of the Company. 40. The Charter or By-laws of the company Partially Item 21.6.12 of the Charter contains a provision about contain provisions on the need to have complied approval of transactions related to alienation or possible 30. There is a committee (Committee for Complied The Charter of the Company (item 18.2.29) and Regulations approval of the Management Board for real alienation by the Company of the real estate, whose value Personnel and Remunerations) of the Board governing the Board of Directors (section 3.4) provide for estate transactions and loans received by the is at or below 10% of the book value of the Company’s of Directors that is responsible for the a possibility to establish the Committees at the Board of company unless such transactions are major assets, and preliminary study of transactions related to determination of the criteria for the selection Directors. deals or are performed in the ordinary course alienation or possible alienation by the Company of the real of candidates to the Board of Directors and Pursuant to the Regulations governing the Committee for of business. estate, whose value exceeds 10% of the book value of the development of the company’s compensation Personnel and Remunerations, the Committee shall be Company’s assets. policies. entitled to conduct preliminary assessment of candidacies to positions of members of the Company’s management 41. The By-laws of the company establish Complied Transactions that are beyond the Company’s financial bodies and issue respective recommendations to the procedures for the approval of transactions and economic plan shall be considered and agreed by Company’s Board of Directors. which are outside the scope of the company’s the Company’s Board of Directors in accordance with the financial and operational plan. approved regulations on material events (approved by the 31. The Committee for Personnel and Complied According to item 5.2 of the Regulations governing the Board of Directors on August 30, 2006, Minutes #28). Remunerations is headed by an independent Committee for Personnel and Remunerations, the Chairman director. of the Committee shall be elected from among the 42. There are no persons in the executive bodies Complied The recommendation is complied with, but the Charter independent directors. who serve as members, the President and internal documents of the Company do not contain Currently, Douglas Daft, independent director, is (manager), members of the management provisions that would establish the restrictions listed in the the Chairman of the Committee for Personnel and body or employees of any competitor of the recommendation for the individuals who are members of the Remunerations. company. Company’s executive bodies. 32. There are no executives of the company in the Complied According to item 4.1 of the Regulations governing 43. There are no persons in the management bod- Complied The recommendation is complied with, but the Charter Committee for Personnel and Remunerations. the Committee for Personnel and Remunerations, the ies recognized guilty of committing offences and internal documents of the Company do not contain Committee shall be comprised of three members elected in the sphere of economic activity; against the provisions that would establish the restrictions listed in the from among the nonexecutive directors. government, against interests of the federal, recommendation for the individuals who are members of the regional and local government service; or that Company’s executive bodies. 33. There is a risk committee of the Board of Not complied Charter of the Company (item 18.2.29) and Regulations have been subjected to administrative penal- Directors or functions of such committee are governing the Board of Directors (section 3.4) provide ties for offences in the sphere of entrepre- assigned to some other committee (other for a possibility to establish Committees at the Board of neurial activities or in the sphere of finance, than the Audit Committee or the Committee Directors. taxes and levies and the securities market. If for Personnel and Remunerations). Currently, the Company doesn’t have a Board of Directors’ the functions of the sole executive body are Risk Committee. performed by a managing entity or a man- 34. There is a committee for the settlement of Complied Charter of the Company (item 18.2.29) and Regulations ager – whether the President and members of corporate conflicts of the Board of Directors governing the Board of Directors (section 3.4) provide the Management Board of the managing entity or functions of such committee are assigned for a possibility to establish Committees at the Board of or manager meet the requirements estab- to some other committee (other than the Directors. lished for the President and members of the Audit Committee or the Committee for According to item 2.2.12 of the Regulations governing the Management Board of the company. Personnel and Remunerations). Corporate Governance Committee, the objectives of the 44. The Charter or By-laws of the company Not complied The Charter provide for the possibility of involving a Committee include cooperation in prevention of corporate contain a prohibition for the managing entity managing company, however there are no internal conflicts and, if needed, participation in solving them. (manager) to perform similar functions for documents that would bar the managing organization 35. There are no executives of the company in Complied Currently, the Corporate Governance Committee includes a competitor or have any other property (manager) from performing similar functions in a competing the committee for the settlement of corporate the following members: relations with the company other than the company, or have any other property relations with the conflicts.  John Gummer (independent director); provision of management services. joint stock company other than provision of services to the  Sergey Drozdov; managing organization (manager).  Dmitry Yakubovsky. The above persons are not employed by the Company. 36. The committee for the settlement of Complied Currently, John Gummer, independent director, is the corporate conflicts is headed by an Chairman of the Corporate Governance Committee. independent director.

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N Provision of the Code of Corporate Complied / Notes N Provision of the Code of Corporate Complied / Notes Governance Not complied(2) Governance Not complied(2) 45. The By-laws of the company include the Complied Item 2.4.2 of the Regulations governing the Board of 54. In the event of acquisition of any large stakes Not complied These requirements are not defined in the Charter. obligation of the members of the executive Directors: Members of the Board of Directors members of in the company (takeover), the Charter of bodies to refrain from any actions that will or the Board of Directors shall withhold from actions, which the company prohibits to take any actions may potentially lead to a conflict of interests will or might result in a conflict between their interests and aimed at the protection of interests of the with the company and in the case of such interests of the Company, and, in case of such a conflict, executive bodies (members of such bodies) conflict – their obligation to inform the Board shall disclose information about it to the Board of Directors. and members of the Board of Directors, and of Directors on such conflict. The internal documents of the Company don’t have these also such actions that make the position of duties formulated. At the same time, pursuant to provisions shareholders worse than their current position on the Management Board and the President, the President (in particular, prohibition of a decision by the of the Company and members of the Management Board Board of Directors to issue additional shares, shall act in the interests of the Company, exercise their securities convertible into shares or securities rights and perform their duties with regard to the Company granting the right to acquire shares in the in a bona fide and reasonable manner. company before the end of the expected time of the acquisition of shares, even if the right to 46. The Charter or By-laws of the company Partially Charter provide for a possibility to attract a managing take such decision is granted by the Charter). contain criteria for the selection of the complied organization. The managing organization (manager) shall managing entity (manager). be selected by a duly authorized management body of the 55. The company’s Charter contains a Not complied These requirements are not defined in the Charter. Company during adoption of a corresponding decision requirement on obligatory engagement of about transfer of authority. an independent appraiser to determine the current market value of shares and potential 47. Executive bodies provide monthly reports on Complied The reports about the Company’s performance shall be changes in their market value as a result of their activities to the Board of Directors. submitted to the Board of Directors on a quarterly basis. takeover. 48. The contracts made by the company with the Complied According to item 2.5 of the Regulations on the President, 56. The company’s charter contains no exemp- Complied The Charter do not provide for relieving the buyer from the President (managing entity, manager) and the labor agreement signed with the President shall define tion of the acquirer from the obligation to of- obligation to offer the shareholders to sell the ordinary members of the Management Board stipulate and contain, among other things, provisions about full fer buyout of the company’s ordinary shares shares of the Company owned by them (equity securities liability for violation of the provisions on the material liability for violation of the non-disclosure clause (other securities convertible into ordinary convertible into ordinary shares) during mergers. use of confidential and insider information. regarding official or trade secrets. shares) to the shareholders upon takeover. Pursuant to section 4 of the Regulations governing disclosure of material information and insider transactions, 57. The Charter or By-laws of the company Not complied These requirements are not defined in the Charter. the liability for violating the Regulations shall be contain a requirement on the obligatory determined according to the procedure established by the engagement of an independent appraiser to law of the Russian Federation and Great Britain, the Charter determine the proportion for the conversion and internal documents of the Company, as well as the labor of shares upon reorganization. agreements signed with the employees. Disclosure Secretary of the Company 58. There is an internal document approved by Complied Regulations governing Disclosure of Material Information 49. There is a special official in the company Complied According to item 1.3 of the Regulations on the Corporate the Board of Directors determining policies and Insider Transactions were approved by the Board of (company secretary) whose function is Secretary, the latter shall enforce compliance of the and procedures used by the company for Directors on July 24, 2008. The Regulations Governing to ensure that the company’s bodies Company’s bodies and officials with the rules and the disclosure of information (Regulation on Information Policy were approved by the Board of Directors and officials comply with procedural procedures of corporate conduct, established by applicable Information Policies). on June 1, 2006. requirements guaranteeing the exercise legislation and internal documents of the Company, 59. The By-laws of the company contain a Not complied The list of disclosed information and the disclosure of the legal rights and interests of the which guarantee exercise of the rights and interests of the requirement to disclose purposes of procedure shall be set forth in the Regulations governing company’s shareholders. Company’s shareholders. placement of shares, persons that intend to Disclosure of Material Information and Insider Transactions 50. The Charter or By-laws of the company Complied Regulations on the Corporate Secretary. acquire shares placed, including large stakes, and Regulations Governing Information Policy. However, prescribe a procedure for the appointment and participation of officials of the company in the above requirement failed to find their way into these (election) of the company secretary and the acquisition of the shares placed. documents. responsibilities of the company secretary. 60. The By-laws of the company contain a list Complied Regulations governing the General Meeting of Shareholders, 51. The company’s Сharter contains Complied These requirements are not defined in the Charter, of information, documents and materials item 3.5. requirements to the candidate for the however, the requirements with regard to the candidacy of that should be provided to shareholders position of the company secretary. a Secretary are set forth in the internal document entitled for the decision on the issues put for the Regulations on the Corporate Secretary of the Company consideration of the General Meeting. approved by the minutes of the Board of Directors #27 61. The company has a web site and regularly Complied www.sistema-hals.ru dated August 4, 2006. discloses information about the company on Major corporate actions the web site.

52. The Charter or By-laws of the company Not complied These requirements are not defined in the Charter or in 62. The By-laws of the company contain a Partially The list of disclosed information and the disclosure contain a requirement on approval of any other internal documents. requirement to disclose information on complied procedure are set forth in the Regulations governing major deal before it is concluded. the deals of the company with persons Disclosure of Material Information and Insider Transactions that are senior executives of the company and Regulations governing Information Policy. However, 53. Obligatory engagement of an independent Not complied These requirements are not defined in the Charter. in accordance with the Charter, and deals the above requirement didn’t find their way into these appraiser to determine the market value of the company with entities where senior documents. of any property that is subject to major executives of the company directly or transactions. indirectly hold 20% or more of the share capital or on which such persons may otherwise exercise significant influence.

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N Provision of the Code of Corporate Complied / Notes N Provision of the Code of Corporate Complied / Notes Governance Not complied(2) Governance Not complied(2) 63. The By-laws of the company contain a Complied Regulations governing Information Policy, item 2.1. 73. The By-laws of the company establish a Complied All unconventional transactions shall be reviewed and requirement to disclose information on all procedure for the agreement of any unusual agreed by the Company’s Board of Directors in accordance transactions that may affect the market value transactions with the Board of Directors. with the approved Regulations governing Material Events of the company’s shares. (approved by the Board of Directors on August 30, 2006, Minutes # 28). 64. There is an internal document approved Complied The Regulations governing Insider Information are by the Board of Directors on the use of effectively enforced in the Company. 74. There is an internal document determining Complied Regulations governing the Audit Commission, Section 5 significant information on the activity, shares the procedure of audits of the financial «Procedure governing Inspections (audits)». and other securities of the company and and operating activities by the internal transactions with such shares and other audit commission approved by the Board of securities, which is not publicly available and Directors. the disclosure of which may have material 75. The Audit Committee performs an Complied ITEM 3.1.6. Regulations governing the Audit Committee. impact on the market value of shares and assessment of the auditor’s report before it is other securities of the company. presented to the shareholders in the General Control of financial and economic operations Meeting.

65. There are internal control procedures over Complied The decision by the Company’s Board of Directors dated Dividends the financial and operational activities of the December 11, 2006 approved the Regulations governing 76. There is an internal document approved by Complied Regulation governing Dividend Policy was approved company approved by the Board of Directors. the procedures of internal control over the financial and the Board of Directors used as guidance by Resolution of the Extraordinary General Meeting of economic activities. by the Board of Directors in developing Shareholders on July 14, 2006. 66. There is a special division in the company Complied The Company has a unit responsible for monitoring recommendations on the size of dividends ensuring compliance with internal control compliance with the internal control procedures named the (Regulation on Dividend Polices). procedures (internal control service). Department of Internal Control and Audit. 77. The Regulation on Dividend Policies contains Complied Section 3 of the Regulation governing Dividend Policy. 67. The By-laws of the company contain Not complied The structure and membership of the Department of Internal a procedure for the determination of the Recommendations regarding the terms for paying dividends a requirement that the structure and Control and Audit shall be determined by the staff list minimum share of the net profit of the on preferential stock shall not be applicable to the Company members of the internal control service approved by the Company’s President. company used for the payment of dividends, for lack of such category of stocks. should be determined by the Board of and conditions under which dividends are not Directors. paid or are not paid in full on preferred shares for which the size of dividends is determined 68. There are no persons in the internal control ser- Complied The recommendation is complied with, however the internal in the company’s Charter. vice recognized as guilty of committing offences documents of the Company do not contain provisions in the sphere of economic activity; against the that would establish restrictions for the employees 78. The publication of information on dividend Complied The information about the Dividend Policy shall be placed in government, against interests of the federal, of the Department of Internal Control listed in the policies of the company and any amendments the annual reports, social reports, and quarterly reports. regional and local government service; or that recommendation. thereto in a periodical stipulated in the have been subjected to administrative penal- company’s charter for the publication of ties for offences in the sphere of entrepreneur- announcements on General Meetings, and on ial activities or in the sphere of finance, taxes the web site of the company in the Internet. and levies and the securities market. (1) This report on compliance with the Corporate Governance Code was prepared in accordance with the Methodical recommendations 69. There are no persons in the internal control Complied The recommendation is complied with, however the internal approved by the Directive of the FCSM of Russia No. 03-849/р dated 30 April 2003. service who serve as members of the documents of the Company do not contain provisions (2) For the purposes of this report, «complied»/«not complied» answers in respect of a specific provision of the Corporate Governance executive bodies of the company, as well as that would establish restrictions for the employees Code should be interpreted as compliance/noncompliance by the Company with the principal (material) part of the provision in members, the President (manager), members of the Department of Internal Control listed in the accordance with the Company’s Charter or by-laws effective at the time of preparation of this annual report and/or based on the existing of the management bodies or employees of recommendation. corporate governance practices at the Company. any competitor of the company. 70. The By-laws of the company establish Complied Based on item 10.1.2. of the Regulations governing the dates for the submission of documents and Department of Internal Control and Audit, the Company’s materials to the internal control service for structural units shall, within the deadlines indicated in the the assessment of financial and operational requests by the Department of Internal Control and Audit, transactions performed, and liability of submit documents and materials (with written explana- officials and employees of the company for tions) in order to evaluate the completed financial and failure to provide them in time. economic transactions. The responsibility for compliance with the requirements of internal regulatory acts is set forth in the labor agreements signed with each employee. 71. The By-laws of the company provide for the Complied Pursuant to item 5.2.4. of the Regulations governing the obligation of the internal control service to Procedures of Internal Control Over Financial and Economic communicate any violations detected to the Activities of the Company, the Department of Internal Audit Committee, and where there is no such Control and Audit shall supervise compliance with the committee to the Board of Directors. procedures of internal control in the Company and report all violations to the Audit Committee. 72. The company’s Charter contains a requirement Not complied This requirement is not provided in the Company’s Charter. on preliminary assessment of the practicality of transactions not envisaged in the company’s financial and operational plan (unusual transactions) by the internal control service.

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Information on major transactions (approved by the Company’s Board of Directors)

Date Material terms of transaction Amount of Stakeholders Date of transaction Material terms of transaction Transaction amount of transaction transaction 27.11.2008 Supplementary Agreement #2 to Credit Agreement USD 500,000,000 19.09.2008 Supplementary Agreement w/# to Security USD Shareholder: AFK Sistema #1831 dated 03.08.2007 with VTB Bank OJSC Agreement #2372-4/07 dated 10.08.2007 3,650,000 with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov Information on interested party transactions Agreement #2372-4/07 dated 10.08.2007 (approved by the Company’s Board of Directors) 19.09.2008 Supplementary Agreement w/# to Security USD Shareholder: AFK Sistema Agreement #2311-4/07 dated 22.06.2007 2,640,000 with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov Date Material terms of transaction Amount of Stakeholders Agreement #2311-4/07 dated 22.06.2007 of transaction transaction 19.09.2008 Supplementary Agreement w/# to Security USD Shareholder: AFK Sistema 15.04.2008 Security Agreement with Saraya Russia to RUR Shareholder: AFK Sistema Agreement #2314-4/07 dated 22.06.2007 6,060,000 secure fulfillment of obligations by SAPIDUS 925,398,779 with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, HOLDINGS LIMITED to Saraya Russia under the Board of Directors’ Member: Felix obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov Agreement for Purchasing Stock of ASTANDA Evtushenkov Agreement #2314-4/07 dated 22.06.2007 INVESTMENTS LIMITED dated 31.12.2007 19.09.2008 Supplementary Agreement w/# to Security USD Shareholder: AFK Sistema 19.05.2008 Supplementary Agreement #7 with ALFA-BANK USD Shareholder: AFK Sistema Agreement #2349-4/07 dated 31.07.2007 4,000,000 OJSC to Contract of Guarantee #103622/п 5,963,956 with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, dated 06.08.2007 under agreement #103622 Management Board Members: Igor Kascheev, obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov for issuing credits in foreign currency, signed Yevgeny Kolodkin Agreement #2349-4/07 dated 23.07.2007 on 06.08.2007 by and between Kuntsevo- Invest CJSC (Debtor) and ALFA-BANK OJSC 19.09.2008 Supplementary Agreement w/# to Security USD Shareholder: AFK Sistema (Creditor). Agreement #2373-4/07 dated 10.08.2007 4,730,000 with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, 29.05.2008 Contract of Guarantee #2580-4/08 dated USD Shareholder: AFK Sistema obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov 29.05.2008 signed with JCB MBRD OJSC in 4,000,000 Agreement #2373-4/07 dated 10.08.2007 order to secure fulfillment of obligations by Board of Directors Members: Alexey Buyanov, Triada Invest CJSC (Debtor) to JCB MBRD OJSC Felix Evtushenkov 30.09.2008 Supplementary Agreement #1 to Contract USD Shareholder: AFK Sistema (Creditor) under Credit Agreement # 2580- of Guarantee #2422-4/07 dated 30.10.2007 6,237,000 4/08 dated 29.05.2008 with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov 30.06.2008 Purchase agreement for shares of RUR Shareholder: AFK Sistema Agreement #2422-4/07 dated 30.10.2007 Mosdachtrest OJSC #012-MDT dated 488,000,000 30.06.2008, signed with Mosdachtrest OJSC Board of Directors Member: 30.09.2008 Supplementary Agreement #1 to Contract USD Shareholder: AFK Sistema Felix Evtushenkov of Guarantee #2448-4/07 dated 13.12.2007 2,210,000 with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, Management Board Members: obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov Igor Kascheev, Yevgeny Kolodkin Agreement #2448-4/07 dated 13.12.2007 24.07.2008 Contract of Guarantee #2649-1/08 dated RUR Shareholder: AFK Sistema 30.09.2008 Supplementary Agreement #1 to Contract USD 473,000 Shareholder: AFK Sistema 24.07.2008 signed with JCB MBRD OJSC in 100,000,000 of Guarantee #2443-4/07 dated 13.11.2007 order to secure fulfillment of obligations by Board of Directors Members: Alexey Buyanov, with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, Triada Invest CJSC (Debtor) to JCB MBRD OJSC Felix Evtushenkov obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov (Creditor) under Credit Agreement #2649-1/08 Agreement #2443-4/07 dated 13.11.2007 dated 24.07.2008 30.09.2008 Supplementary Agreement w/# to Security USD Shareholder: AFK Sistema 08.08.2008 Supplementary Agreement #1 to Contract USD Shareholder: AFK Sistema Agreement #2422-4/07-1 dated 30.10.2007 6,237,000 of Guarantee #2372-4/07 dated 10.08.2007 3,650,000 with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov Agreement #2422-4/07 dated 30.10.2007 Agreement #2372-4/07 dated 10.08.2007 30.09.2008 Supplementary Agreement w/# to Security USD Shareholder: AFK Sistema 08.08.2008 Supplementary Agreement #1 to Contract of USD Shareholder: AFK Sistema Agreement #2422-4/07-2 dated 30.10.2007 6,237,000 Guarantee #2373-4/07 dated 10.08.2007 4,730,000 with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov Agreement #2422-4/07 dated 30.10.2007 Agreement #2373-4/07 dated 10.08.2007

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Date Material terms of transaction Amount of Stakeholders of transaction transaction 30.09.2008 Supplementary Agreement w/# to Security USD Shareholder: AFK Sistema Date Event Agreement #2448-4/07 dated 13.12.2007 2,210,000 with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, January obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov Agreement #2448-4/07 dated 13.12.2007 1 January Beginning of the fiscal year 30.09.2008 Supplementary Agreement w/# to Security USD Shareholder: AFK Sistema Agreement #2443-4/07 dated 30.11.2007 473,000 April with JCB MBRD OJSC to secure fulfillment of Board of Directors Members: Alexey Buyanov, obligations by Ferro-Stroy CJSC under Loan Felix Evtushenkov Results of the audited consolidated US GAAP financial statements for the previous year Agreement #2443-4/07 dated 30.11.2007 Results of independent valuation of the project portfolio by Cushman & Wakefield Stiles & Riabokobylko 30.12.2008 Supplementary Agreement #2/13924�ИО��2 to - Shareholder: AFK Sistema (C & WS & R) Agreement #13924 dated 01.12.2004 for acting in the capacity of a customer with Moscow City May Telephone Network OJSC Results of the consolidated US GAAP financial statements for the first quarter of the current year

29 May Annual Report

June

29 June Annual General Meeting of Shareholders

September

Results of the consolidated US GAAP financial statements for the first half of the current year

Results of independent valuation of the project portfolio by Cushman & Wakefield Stiles & Riabokobylko (C & WS & R)

December

Results of the consolidated US GAAP financial statements for the 9 months of the current year

31 December End of the fiscal year

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ALTERATIONS OF PREMISES CONSTRUCTION PERMIT DEVELOPMENT INVESTMENT PROJECT Conducting construction work in separate premises of the A set of documents certifying the right of the owner, pro- An area of business, real estate, or construction manage- An aggregate of organizational and technical actions building while keeping intact the functional purpose of a prietor, or user of a real estate facility to develop a plot of ment called to increase the value of the facilities and rev- aimed at reconstruction of a facility using attracted cap- facility subject to alteration, providing one of the follow- land, construction, reconstruction, restoration, overhaul enue generated by them through monitoring the ever- ital (investments) from various sources in the form of con- ing types of work (or a package of such works): replace- of the building; repairs, painting of the façade; installation changing situation, risk assessment, taking advantage of ducting pre-project, preliminary, project, construction ment (partial or complete) of non-bearing partitions, mak- of non-stationary facilities; alterations, improvement of the development opportunities and smart capital invest- and assembly work, building a facility and commissioning ing openings in non-bearing partitions, replacement of premises; reconstruction of the facility, construction re- ment. of new building (completed construction), attraction of fu- the engineering and sanitary equipment in the premises lated to the use and improvement of the territory. ture project users and issuing the title. (not involving renovation of entire building). FACILITY MANAGEMENT (BUILDING CONSTRUCTION SITE MAINTENANCE) INVESTOR AREA IMPROVEMENT Production area allocated according to the established Provision of services related to upkeep of the facilities, Organization providing financing for the construction. A set of measures conducted in an area, which are aimed procedure for placing construction facilities, as well as property management, and supervision over construc- Normally, the investor stays away from the construction at improving the operational and aesthetic features of equipment, materials, production, amenities, and com- tion. issues, and all issues related to the use of money within land and providing for one or several of the following jobs: munications used during construction of buildings and fa- the construction project are transferred to the customer. architectural planning of the area; planting of greenery; cilities. GENERAL CONTRACTOR installation of architectural lighting, sprinkling system; Main agent performing construction work, who assigns INVESTOR placing small architectural forms, objects of urban design, DEPOSITARY work to contractors of a lower hierarchical level, name- Owner of a plot of land scheduled for construction. The advertising, visual communications and information, as Professional securities market participant providing secu- ly, subcontractors, settles money issues with them, and term «developer» is not accepted generally, and some well as objects of monumental and decorative art. rities safeguarding services and/or accounting and trans- accepts completed jobs from them. More often than not, specialists understand it as a term of free use, i.e. some- fer of title to securities. that would be a large construction and assembly organi- times they use the term «developer» to denote a custom- ASSET MANAGEMENT (REAL ESTATE) zation. er, an investor, or the owner of a plot of land. Management and lease of real estate facilities owned by DESIGN DOCUMENTATION a company. Documents containing architectural and town-planning GENERAL DESIGNER LAND PLOT solutions, including social, economic, functional, engi- Main agent performing design jobs, who does the bulk of Part of a territory with boundaries, location, legal status CAPITAL CONSTRUCTION neering, technical, firefighting, sanitary, environmental, the work using its own resources, and has the rest done and other features shown in the land cadastre. Construction of any facilities, regardless of size or pur- architectural, artistic and other requirements with regard by subcontracting designer organizations. Normally, the pose, which require excavation and construction and as- to the facility in the amount needed for drafting working General Designer chooses the subcontractors (designers), LISTING sembly work to build deep foundation, bearing and en- documentation, which also includes the estimated cost of settles money issues with them, and accepts jobs done Entering the shares of a company into the list of shares closing structures, and engineering utilities lines. construction. by them similar to the General Contractor in the area of quoted on an exchange. The listing is needed for admit- construction. More often than not, that would be a large ting to exchange trading only of the shares, which have COMPLETED CONSTRUCTION DEVELOPER design organization specializing in a particular type of been approved by the experts. A new building (real estate facility) obtained from reno- Organization, which selects general contractors, settles construction, such as industrial, hydrotechnical, hy- vation/construction consistent with the design specifica- money issues with them, conducts general supervision of dromeliorative, etc.). MAJOR REPAIRS tions and estimated budget, accepted for operation by the construction, and organizes acceptance of finished facil- A package of construction work and organization and duly approved permit for commissioning of the Completed ities. GLOBAL DEPOSITARY RECEIPT, GDR technical measures to liquidate physical and moral wear Construction pursuant to regulatory acts applicable in the A security representing a stake in deposited securities of and tear that are not related to changes in key technical Russian Federation. a foreign company, confirmed by receipts issued by a de- and economic features of the building or its functional positary bank. purpose and provide for restoration of its resource with partial replacement of structural elements and engineering systems, if needed, as well as for enhancement of its operational indicators.

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MASTER PLAN RECONSTRUCTION OF THE PROPERTY SUBCONTRACTORS WORKING DOCUMENTATION The urban planning documentation specifying the archi- Construction work conducted with the view to change the Construction organizations brought in by the general con- Documents developed on the basis of approved design tectural and spatial developmental design, use of the existing specifications of the facility and enhance the ef- tractor for performance of special types of work, such as ex- documents to be used during construction work. plots of land, parameters of the transportation and engi- ficiency of its use providing for one of the following types cavation, electrical engineering, plumbing, finishing, etc. neering infrastructural facilities, solutions related to land- of work (or a package of works): changes in primary func- WORK PERMIT (ORDER) scaping and planting of greenery, and lines of the devel- tional purpose with replacement of technical equipment US GAAP (GENERAL ACCEPTED A document, which is part of the construction permit is- opment regulation. (reorganization of facility); changes in the size and tech- ACCOUNTING PRINCIPLES) sued by duly authorized bodies of control and supervision nical features; capital construction of additions; disman- These are the generally accepted accounting principles authorizing certain types of construction work in accor- PERMITS tling and reinforcement of bearing structures of the facili- used in the United States of America and some other coun- dance with the permit to conduct urban planning activi- A set of documents laying out the results of pre-project ty (with the exception of immovable historical and cultural tries. GAAP is different from, for instance, International ties that is agreed and approved by project documenta- work, which serves as a basis for issuing a permit to con- landmarks); reconstruction of the attic (building cladding Accounting Standards, in that GAAP provides detailed pro- tion according to the established procedure. duct urban construction work. structures using light, heat-insulated elements in the form cedures for taking account of various practical situations. of pitched roof with an angle of or under 45 degrees); con- PORTFOLIO struction and reconstruction of the engineering systems A collective concept describing a sum total of forms and and utilities (with the exception of immovable historical types of economic and financial activities, corresponding and cultural landmarks). The renovation work provides for documents, facilities, cash resources, and orders. complete or partial vacation of the premises (relocation of residents and organizations, etc.). PRE-PROJECT PREPARATIONS FOR THE CONSTRUCTION SHARES Work package conducted in order to substantiate the ur- Securities issued by joint-stock companies, entitle its ban construction within the area and obtaining the right to owners (shareholders) to receive a part of the Issuer’s actually perform it. profit in the form of dividends, to participate in management of the Issuer and to receive a part of the properties PROJECT after the Issuer’s liquidation. See more about the share- A totality of documents validating the economic and/or so- holders’ rights in Information for Shareholders. cial viability of activities aimed at achieving certain goals and objectives during a certain period of time and using SITE PLANNING an established amount of resources. The urban planning documentation, specifying the planning structure of the area, proposals regarding further de- PROJECT PREPARATION OF CONSTRUCTION velopment, cultural, service and transportation facilities, A package of works conducted in order to prepare the per- engineering support and setting forth the procedure for mit and an order for construction works, including draft- land use planning and main indicators of its urban devel- ing, coordination and approval of project documentation opment. and drafting working documentation.

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Sistema-Hals, OJSC US GAAP Auditor Sistema-Hals is seeking to maximize compliance with shareholder and investor requirements and, therefore, the 35/4, Bolshaya Tatarskaya Street, Moscow, Deloitte & Touche CIS Company would appreciate your assistance in improving the quality of its Annual Report and consolidated financial 115184, Russia Mokhovaya Business Center, statements by answering the questions below. Tel.: +7 (495) 785-7742 4/7 Vozdvizhenka Street, Bld. 2, Fax: +7 (495) 785-7743 Moscow, 125009, Russia Please fax the completed form to +7 (495) 785-77-43 or send it by mail to: E-mail: [email protected] Tel.: +7 (495) 787-0600 Investor Relations Department www.sistema-hals.ru/eng Fax: +7 (495) 787-0601 Sistema-Hals E-mail: [email protected] 35/4 Bolshaya Tatarskaya Street, Corporate Communications www.deloitte.com Moscow, 115184, Russia Gennady Frolov License #E002417 valid till 06.11.2012 Vice-President, Head of the Complex 1. Please provide your assessment of the 2008 Annual Report of Sistema-Hals in terms of: Tel.: +7 (495) 785-7758 Regisrar E-mail: [email protected] Reestr, OJSC Levels of disclosure 5 4 3 2 29/2, Gagarinsky Lane, Moscow, 119034, Russia Data search convenience 5 4 3 2 Investor Relations Department License #10-000-1-00254 dd. 13.09.2002 for an indefi- Content and structure 5 4 3 2 Ulyana Denga nite term Design and style 5 4 3 2 Director for IR Wording 5 4 3 2 Tel.: +7 (495) 785-7742 (ext. 1275) Shareholders assistance office: (5 – excellent, 4 – good, 3 – satisfactory, 2—unsatisfactory) Cell: +7 (903) 2626-529 20, Bolshoi Balkansky Lane, Moscow, 129090, Russia E-mail: [email protected] Tel.: +7 (495) 617-0101 2. What part of the Annual Report was the most interesting for you? E-mail: [email protected] Public Relations Department Anna Zavialova Depository for GDRs 3. What additional information would you like to find in the next Annual Report of Sistema-Hals? Director for PR Depositary Receipts Division Tel.: +7 (495) 785-7764 101 Barclay Street, 22nd Floor West, Cell: +7 (910) 444-6880 New York, NY 10286 4. Your comments E-mail: [email protected] NY 10286 Tel.: +1 (212) 815-2293 RAS Auditor Fax: +1 (212) 571-3050/1/2 5. Which category do you fall under? AORA Auditors, CJSC www.bnymellon.com 22/14, Smolensky Blvd., Moscow, 119034, Russia Shareholder / investor Tel.: +7 (495) 979-2321, 979-9858 Company employee Fax: +7 (495) 912-1657 Analyst E-mail: [email protected] State body / public organization representative License #Е004511 valid till 27.06.2013 Mass media representative Academic / student Other

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