VolgaTelecom CONTENTS INFORMATION ABOUT THE COMPANY ............................ 4 GENERAL DIRECTOR’S ADDRESS ...................................... 8 MAJOR CORPORATE EVENTS IN 2007 ............................ 10 COMPANY POSITION IN THE INDUSTRY .......................... 16 COMPANY BUSINESS PRIORITIES ...................................... 20 COMPANY FUTURE DEVELOPMENT PROSPECTS ...... 22 THE RESULTS OF COMPANY DEVELOPMENT IN PRIORITY TRENDS .................................................................... 24 RISK MANAGEMENT ............................................................ 38 HR MANAGEMENT POLICY ................................................ 40 CORPORATE GOVERNANCE .............................................. 46 SOCIAL RESPONSIBILITY.................................................... 54 SECURITIES .............................................................................. 58 INFORMATION ABOUT COMPANY EQUITY PARTICIPATION IN OTHER ENTITIES PROVIDING TELECOMMUNICATIONS SERVICES (COMPANY EQUITY STAKE IN THEIR AUTHORIZED CAPITAL IS AT LEAST 25%).............................................. 64 ACCOUNTING BALANCE-SHEET .................................... 68 AUDIT OPINION ...................................................................... 80 CONTACT INFORMATION .................................................... 82 INFORMATION ABOUT THE COMPANY Full brand name: Open Joint Stock Company VolgaTelecom. Location: Dom Svyazi, M.Gorky square, Nizhny Novgorod city, 603000, the Russian Federation. The date of Company state registration and the registration number: The certificate of legal entity state registration - series НРП-НН No.203362, the date of registration – December 15, 1993; state registration number 448 was issued on June 28, 2002. OJSC VolgaTelecom was registered in the Uniform State Register of Legal Entities by the Inspection of Russian Ministry of Taxation for Nizhegorodskyi district of Nizhny Novgorod city on August 1, 2002 under the basic state registration number 1025203014781. The Company was registered by Order of the head of the administration of Nizhny Novgorod city No.1605-р of December 15, 1993 as Open Joint Stock Company “Svyazinform” of Nizhny Novgorod oblast (OJSC “Nizhegorodsvyazinform”) as a result of privatization of state enterprise of communications and IT “Rossvyazinform” and is the successor of all its rights and obligations. By virtue of the resolution of general meeting of shareholders of OJSC “Nizhegorodsvyazinform” of November 9, 2001 the Company was reorganized by way of affiliation to it of OJSC “Kirovelectrosvyaz”, OJSC “Martelcom”, OJSC "Svyazinform” of the Republic of Mordovia, OJSC “Electrosvyaz of Orenburg oblast”, OJSC “Svyazinform” of Penza oblast, OJSC “Svyazinform” of Samara oblast, OJSC “Saratovelectrosvyaz”, OJSC “Telecommunications network of Udmurtia Republic”, OJSC “Ulyanovskelectrosvyaz”, and OJSC “Svyazinform” of Chuvashia Republic. On June 28, 2002 general meeting of shareholders of OJSC “Nizhegorodsvyazinform” passed the resolution to rename the Company into OJSC VolgaTelecom. 4 3 Kirov branch Nizhny Novgorod branch The Republic of Mariy-El branch Udmurtia Republic branch Mordovia Republic branch Chuvashia Republic branch Ulyanovsk branch Penza branch Samara branch Saratov branch Orenburg branch 6 OJSC VolgaTelecom comprises: • Kirov branch; • Samara branch; • The Republic of Mariy-El branch; • Saratov branch; • Mordovia Republic branch; • Udmurtia Republic branch; • Nizhny Novgorod branch; • Ulyanovsk branch; • Orenburg branch; • Chuvashia Republic branch. • Penza branch; MISSION: OJSC VolgaTelecom mission is to encourage the creation of modern society, the growth of regional economy and improvement of the quality of life of Volga region residents through implementing advanced information technologies in day-to-day life. We aim at offering the people new challenges, at making their life easier and livelier. Meeting the demand for telecommunications services and developing advanced communications infrastructure at priority rates we are achieving the growth of operating efficiency thus increasing the equity value and creating jobs for the residents of Volga Federal district. Ensuring sustained growth of business OJSC VolgaTelecom takes care of the employees’ welfare, their professional development and social security system. Relying on the principle of customer focus we are implementing new technologies, improving quality of services and subscribers’ servicing level by applying innovation methods of marketing and sales in our activity. GLOBAL OBJECTIVES: 1.Integration of new technologies in day-to-day life; 2.Leadership position in telecommunications market of Volga region; 3.Improvement of quality of rendered services through the development and modernization of communications infrastructure, implementation of digital technologies, improvement of client servicing system; 4.Development and efficient use of OJSC VolgaTelecom personnel potential to ensure priority trends of business development; 5.Achievement and maintaining high profitability through the enhancement of business efficiency and optimization of costs; 6.Arrangement of favorable conditions for attraction of investments through capitalization growth and maintaining established business reputation; 7.Improvement of corporate governance system in accordance with the best world practices. GENERAL DIRECTOR’S ADDRESS Dear shareholders, Presenting this report I am happy to note that year 2007 was marked for VolgaTelecom by sustainable growth and in accordance with its strategy the Company continued to strengthen its leadership in communications industry of Volga Federal district. The reporting year was anniversary for us – VolgaTelecom has reached the age of five, and we appraise these five years as the period of Company development under the conditions of transition to client-oriented business principles in competitive environment. Under the conditions of progressive advance of Russian telecommunications industry we have achieved meaningful results in strengthening positions in value-added services market, and also in implementation of projects intended to develop and modernize Company telecommunications infrastructure, enhance business efficiency. In 2007 VolgaTelecom market capitalization amounted to US$1.8 billion, which is 5 times higher than the initial level when the shares of consolidated company were traded early in 2003. In 2007 we have achieved positive results in all trends of activities which ensured favorable perspective of Company development. The most important factor of VolgaTelecom growth is the expansion of high-tech services range and their share increase in Company revenues. So, the number of Internet broadband users has grown more than threefold and at 2007 year-end it accounted for more than 370 000. According to estimates of telecom market analysts VolgaTelecom having achieved such results was ranked the first among regional providers in Russia in amount of Internet broadband users. In 2007 the Company continued to solve successfully the tasks of communications infrastructure development. In five branches transport network was upgraded on the basis of NGN technology within the first phase of the project of transport network modernization. This project opens up additional opportunities of business development in terms of providing actually unlimited volume of services, working out more flexible approaches to generation of service packages and tariff schedule. 8 VolgaTelecom actively participated in implementation of priority national project “Education” and the program of providing universal communications service. The efforts of Company employees ensured Internet access to 8 323 educational institutions of Volga Federal district. For these activities the collective was awarded the Certificate of honor of the Russian Federation Ministry of IT and Communications. In 2007 the Company has installed more than 17 000 payphones providing reliable communications to remote rural settlements of Volga Federal district. An essential condition of realizing Company current and long-range plans is improvement of corporate governance based on strategic initiatives of management and shareholders. These efforts were positively appraised by corporate community. “Expert RA” rating agency basing on the results of its monitoring confirmed Company earlier assigned rating of A level (at 7+ in digital scale). Furthermore, VolgaTelecom achievements and its established business reputation were confirmed by the ratings of international rating agencies. In 2007 international rating agency Standard & Poor’s raised VolgaTelecom corporate governance score to 5.2 and confirmed Company long-term corporate foreign currency credit rating at “ВВ-” and national rating at “ruAA-”, outlook – “Stable”. We traditionally give higher priority to social policy, to the development of vocational competence of personnel and implementation of modern approaches to its motivation; we are aware of significance and value of our employees, of their role in enhancement of Company operations efficiency. In 2007 the Company has realized a number of HR projects which were appraised not only by Company employees but also by professional community. At 2007 year-end competent experts recognized VolgaTelecom as the Company having “The best HR department” – “For active implementation of innovation methods in HR activities”. Appraisal of high professionalism and creative approach to HR management was the winning in VII All-Russia