COMMUNICATION OF THE FUTURE Contents CONTENTS 1. Message from the Chairman of the Board of Directors 6 11. Unaudited consolidated balance sheet of Svyazinvest Group, IFRS, draft 52 2. Message from Director General 7 12. Unaudited consolidated P&L statement of Svyazinvest Group, IFRS, draft 57 3. Company Profile 10 13. Unaudited consolidated statement of changes in eguity of Svyazinvest Group, IFRS, draft 61 4. Reporting Procedure 14 14. Notes to unaudited consolidated financial statements of Svyazinvest Group 64 5. 2006 Major Results 15 15. Accounting policy and standards of Svyazinvest Group 79 6. Managerial Bodies 18 6.1 Board of Directors 18 16. Information for shareholders and investors 98 6.2 Management Board 19 16.1 Share Capital 98 16.2 Share Capital Structure 98 7. Profiles of Svyazinvest Group’s Largest Companies 22 16.3 Company appointed as registrar for the securities of Svyazinvest and its associates 98 7.1 Rostelecom 22 16.4 Auditor 98 7.2 CenterTelecom 23 16.5 Auditing Committee 98 7.3 North-West Telecom 24 16.6 Annual General Shareholders Meeting 99 7.4 VolgaTelecom 25 16.7 Contact Persons 99 7.5 Southern Telecommunications Company 26 16.8 Postal Addresses 99 7.6 Uralsvyazinform 27 16.9 Internet Addresses 100 7.7 Sibirtelecom 28 7.8 Dalsvyaz 29 7.9 The Group's Other Major Assets 30 8. Changes in the Telecommunications Industry 34 8.1 Liberalization of LD telephony market 34 8.2 New interconnect rules 35 8.3 Introduction of "Calling Party Pays" principle 35 8.4 Switch to tariff plan system 35 9. Business and Financial Performance of Svyazinvest Group’s Largest Companies 38 9.1 Market positioning 38 Market shares in key segments 38 Development of unregulated services 38 9.2 Investment Activity 38 Investment trends and structure 38 Rollout of telephony infrastructure 39 9.3 Financial Policy 40 9.4 Key facts and figures of financial and business performance and efficiency 41 9.5 Social responsibility 42 Universal service 42 National "Education" project 42 10. The Group’s Core Securities Business 46 10.1 Shares, ADR 46 10.2 Dividend history 47 10.3 Bonds 48 MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS Annual report 2006 MESSAGE FROM DIRECTOR GENERAL 1. MESSAGE FROM THE CHAIRMAN OF THE BOARD 2. MESSAGE FROM DIRECTOR GENERAL OF DIRECTORS I take pride in presenting the annual 2006 report on the financial and business performance of Russia’s largest telecommunications group of companies Svyazinvest. It is no exaggeration to say that 2006 was a year of great changes in the telecommunications indus- try. Telecommunications today is one of the leading sectors in the Russian economy, having dem- The market landscape is changing rapidly as the fixed-line telephony segment, which for many years onstrated a rapid pace of growth and development potential in recent years. The enactment of new generated the main cash flow for the Group, is nowadays close to saturation. In the new environment legislation placed all market players on an equal footing and stimulated a great deal of competition in much depends upon how quickly we can meet the challenge and focus our efforts on other most the industry, thereby sharpening its long-term investment appeal and enhancing the legal framework promising advanced services and technology. in accordance with global market standards. Our performance in 2006 was impressive: all regional telecom operators achieved great success When last year long-distance telephony market liberalization started, new interconnect rules took in rolling out broadband Internet access services (xDSL), the total subscriber base of the Group effect, and new interconnect tariffs were set. A major step was made in advancing the telecommuni- increased 2.7 times in 12 months and numbered 690,000 connections. This segment of the telecom cations industry by implementing Federal Law “On Telecommunications” in accordance with which all market is developing at a fast clip, and according to experts it is currently one of the most dynamic market players are to be treated on a non-discriminative equal footing and receive equal access to and lucrative market segments. public access networks. As a result, the number of alternative operators rose considerably. It is very encouraging that Svyazinvest Group holds leadership in the broadband Internet access All these changes have definitely had a substantial impact on Svyazinvest Group. The company’s services market and has been expanding aggressively into all regions of Russia. Nevertheless, we do business and financial performance indicators in 2006 suggest that being the largest player in the tele- realize that xDSL solutions are but the next step in a new technological revolution, a sort of halfway communications market it continues to expand at a fast pace; it is constantly phasing in new services house for the present market demand and the capability of Russia’s public access network. and technology and partnering with a growing number of market participants. Svyazinvest Group companies’ goal is to modernize and upgrade the infrastructure of fixed-line tele- It is also important to emphasize that Svyazinvest companies support economic and social progress communications nationwide and turn it into a next generation network using packet switching network in the community: they have taken an active part in developing national projects while assisting the technology. This is a daunting challenge, but much depends on its solution both for Svyazinvest itself government to implement a policy that hinges on equal access to telecommunications infrastructure. and the telecommunications industry, as a whole. I feel very positive about Svyazinvest future; it will meet all its targets and achieve its long-term goal To sum up, the way ahead involves rolling out and phasing in the most advanced technologies and of providing customers with world-class infocom solutions. services that enjoy the strongest demand. Leonid D. Reiman Alexander N. Kiselev Chairman of the Board of Directors of Svyazinvest Chairman of the Management Board Minister of Information Technologies and Telecommunications Director General of Svyazinvest 6 7 Annual report 2006 3. COMPANY PROFILE Company Profile 3. COMPANY PROFILE Telecommunications Investment Joint Stock Company (JSC Svyazinvest), formed by consolidating the controlling shares in 85 regional fixed-line operators nationwide, was incorporated on September Over 80% of the telecom- Coverage area: 18, 1995. munication infrastructure Svyazinvest’s key assets are composed of controlling stakes in the following companies: of the Russian Federation is controlled by Svyazinvest’s • Rostelecom; subsidiaries and affiliates. The Group's networks • CenterTelecom; provide services to more than 90% of the Russian • North-West Telecom; population. • VolgaTelecom; • Southern Telecommunications Company; • Uralsvyazinform; • Sibirtelecom; • Dalsvyaz. Svyazinvest also owns equity positions in the following companies: • Central Telegraph; • Dagsvyazinform; • Kostroma City Telephone Network (KGTS); • Moscow City Telephone Network (MGTS); • Giprosvyaz. Over 80% of the telecommunication infrastructure of the Russian Federation is controlled by Svyazinvest’s subsidiaries and affiliates. The Group's networks provide services to more than 90% of the Russian population. The Group’s companies are mainly composed of public network access operators. Svyazinvest's subsidiaries and affiliates are licensed to provide local and zonal telephony, datacom, Internet access, ISDN, wireless subscriber access and mobile services, telematic and telegraph services, wireline radio broadcasting, cable and live broadcasting telecom services. Rostelecom is the flagship national operator providing international and long-distance telecommunica- tion services to its subscribers. A majority stake in Svyazinvest enables the Russian government to exert considerable influence on the holding company's operations and management. It appoints representatives of federal executive bodies to Svyazinvest's Board of Directors, regulates ILD, DLD, zonal and local voice tariffs and imple- ments its licence policy. 10 11 REPORTING PROCEDURE Annual report 2006 2006 MAJOR RESULTS Reporting procedure 2006 Major Results 4. REPORTING PROCEDURE 5. 2006 MAJOR RESULTS In this annual report the analysis of financial and operating results of Svyazinvest's subsidiaries and The Group's revenue increased by 13% year-on-year and totaled RUR 218.3 billion. Income generated from As of December 31, 2006 affiliates (collectively, “the Group”), is made based on the Group's aggregate financial statements companies of Svyazinvest telecom services grew by 10.5% and reached RUR 208.1 billion. Net profit stood at RUR 19.6 billion, which compiled in accordance with Russian Accounting Standards, unless otherwise agreed in the text of Group participated in activi- the report. is an 8.8% rise compared to 2005. ties of 232 organisations; in 97 organisations they Russian Accounting Standards (RAS) are the balance sheets and profit and loss statements of all Based on the results of the Group's investment activity, capital investments amounted to RUR 38.1 billion, possessed the controlling Svyazinvest's subsidiaries and affiliates whose main type of activity is the provision of fixed-line tele- of which RUR 25.6 billion came from the companies' in-house funds and RUR 12.4 billion from borrowed stock, in 51 companies com services. The Group’s aggregate financial statements are made up of annual financial statements resources. Bank loans, bond issues and leasing schemes were used as tools for attracting investments. their stock included from 20% to 50% of shares. of Svyazinvest's subsidiary and affiliated companies totaled on a line-by-line basis. The total number of lines in service of local telephone networks reached 31.7 million compared to The companies whose financial statements form the Group's aggregate financial statements are listed 31.3 million lines at the beginning of the reporting period. The Group put into service 12,000 km of below: transmission lines. The capacity level of electronic exchanges to the total number of lines in service of local 1. Rostelecom telephone networks soared from 60.1% to 63.3%.