possibilities ANNUAL REPORT 2011 CONTENTS About the company ............................................................................... 2 Key financial & operational highlights ............................................. 12 Key events of 2011 & early 2012 ...................................................... 14 Bright upside potential from the reorganization ............................. 18 Strong market position ................................................................... 20 Up in the “Clouds” ........................................................................... 22 Chairman’s statement ........................................................................ 24 Letter from the President ................................................................... 26 Strategy .............................................................................................. 28 M&A activity ........................................................................................ 31 Corporate governance ........................................................................ 34 Board of Directors & committees .................................................... 34 Management Board & committees ................................................. 37 Internal Audit Commission ............................................................. 40 Remuneration of members of the Board of Directors and the Management Board ............................................................. 40 Dividend policy ................................................................................. 41 Shareholders & share capital ......................................................... 43 Corporate social responsibility .......................................................... 46 Risk management .............................................................................. 49 Risk factors ..................................................................................... 49 Risk management system ............................................................... 51 Operating & financial review ............................................................... 52 Consolidated financial statements ..................................................... 56 Glossary ............................................................................................ 143 Contacts ............................................................................................ 146 ROSTELECOM ANNUAL REPORT 2011 ABOUT THE COMPANY We (“the Group” or “the Company”) are a major Russian telecom- munications provider, with points of presence (“PoPs”) in every region in Russia. On the basis of our advanced telecommunica- tions network consisting of approximately 500,000 km of back- bone infrastructure plus last mile connection and a fibre to the building or fibre to the home (“FTTx”) network we are providing access to 43 million subscribers. We organize our business by two primary customer groups – residential customers (i.e., individuals) and corporate customers (i.e., legal entities, Russian Government agencies and entities under direct and indirect control of the Russian Government, telecommunications carriers and resellers that purchase our interconnection services), which represented 54% and 46% of our revenue, respectively, for the year ended December 31, 2011. Our business is centred on providing integrated telecom solu- tions including local and intra-zone telephone services, interna- tional long-distance (“ILD”) and domestic long-distance (“DLD”) services, mobile voice, data services, broadband Internet access services and Pay-TV services to our broad base of customers in all regions of Russia. Rostelecom had 28.5 million local fixed-line voice subscrib- ers, 12.5 million mobile voice subscribers, 8.2 million fixed-line broadband subscribers and 5.9 million Pay-TV subscribers at the end of 2011. The Group generated RUB 296.0 billion of con- solidated revenues, RUB 117.7 billion of OIBDA (39.8% of rev- enues) and RUB 46.1 billion of net income for the twelve months ended December 31, 2011. Company’s ordinary shares were included in the Large Cap Seg- ment of the MSCI Global Standard Indices and MSCI Russia Index with 3.43% weight, effective from September 1, 2011. 2 www.rostelecom.ru 1 ROSTELECOM ANNUAL REPORT 2011 Key state interest in telecom industry Rostelecom networks and services cover all Federal districts of Russia, including Moscow www.rostelecom.ru 3 ROSTELECOM ANNUAL REPORT 2011 2 Unique infrastructure ~ 500,000 km of national backbone and strong “last-mile” infrastructure with ~43.4 million households passed 4 www.rostelecom.ru 3 ROSTELECOM ANNUAL REPORT 2011 Unique Strong infrastructure subscriber base ~ 28.5 million fixed-line subs, ~ 8.2 million fixed broadband subs, ~ 5.9 million Pay-TV subs and ~ 12.5 million mobile voice subs www.rostelecom.ru 5 ROSTELECOM ANNUAL REPORT 2011 ~28.5 million ~8.2 million Fixed-voice subs BB subs ~5.9 million ~12.5 million Pay-TV subs Mobile subs St. Petersburg Yekaterinburg Kaliningrad Novosibirsk Nizhny Novgorod Moscow Vladivostok Backbone Krasnodar Existing digital RRL Satellite Sochi Data centers 6 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011 ~43.4 million 8 Households passed Commercial data ~500,000 km centers of 1,223 m2 Backbone St. Petersburg Yekaterinburg Kaliningrad Novosibirsk Nizhny Novgorod Moscow Vladivostok Backbone Krasnodar Existing digital RRL Satellite Sochi Data centers www.rostelecom.ru 7 ROSTELECOM ANNUAL REPORT 2011 4 Positive Financial Results Revenue 2011: RUB 296.0 billion OIBDA 2011: RUB 117.7 billion OIBDA margin 2011: 39.8% Net Income 2011: RUB 46.1 billion Cash CAPEX 2011: RUB 82.8 billion Net debt 2011: RUB 152.4 billion 8 www.rostelecom.ru 5 ROSTELECOM ANNUAL REPORT 2011 Positive Strategic Financial Goals Results Revenue: High Single Digit OIBDA margin: Enhancement CAPEX: Average 20% of revenues for the period 2011–2015 50% of fixed broadband market share 22% of wireless broadband market share 30% of Pay-TV market share www.rostelecom.ru 9 ROSTELECOM ANNUAL REPORT 2011 6 Clear Ownership Structure Government controls > 53% of ordinary shares Treasury shares¹ ~ 7% of ordinary shares and ~13% of preferred shares Minority shareholders < 40% of ordinary shares and > 70% of preferred shares 1 Shares held by Rostelecom subsidiary MOBITEL 10 www.rostelecom.ru 7 ROSTELECOM ANNUAL REPORT 2011 Clear Blue chip Ownership Structure Traded on MICEX-RTS On September 01, 2011 Rostelecom was included in MSCI Large Cap with weight in MSCI Russia of 3.43% Free Float < 40% of ordinary shares > 70% of preferred shares Market capitalisation is US$ 14.4 billion1 1 As of April 30, 2012 www.rostelecom.ru 11 ROSTELECOM ANNUAL REPORT 2011 KEY FINANCIAL AND OPERATIONAL HIGHLIGHTS1 Revenue, RUB billion OIBDA, RUB billion CAPEX, RUB billion Change OIBDA margin CAPEX/Revenue 39.8% +7% 28.0% 38.4% 38.5% 18.8% +4% 296.0 117.7 17.1% 275.7 82.8 264.6 106.0 51.8 45.4 101.6 2009 2010 2011 2009 2010 2011 2009 2010 2011 Net debt, RUB billion Net income, RUB billion Net debt/OIBDA Change ×1.3 ×1.1 1 ×0.8 152.4 2 +47%4 46.1 119.8 +19% 31.3 82.0 26.3 2009 2010 2011 2009 2010 2011 1 Consolidated results of the merged companies and Rostelecom according to IFRS 12 www.rostelecom.ru 3 5 ROSTELECOM ANNUAL REPORT 2011 KEY FINANCIAL AND OPERATIONAL HIGHLIGHTS1 Local voice subscribers, million Broadband subscribers, million Change Change +24% -0.9% -3.0% 8.2 29.6 29.4 28.5 +26% 6.7 5.3 2009 2010 2011 2009 2010 2011 Pay-TV subscribers, million Revenue breakdown by services, 2011 Change +540% 5.9 9% Others 30% Local Telephone services 6 7 6% Data services 2% Pay-TV 16% Broadband internet +19% 3% Rent of channels 0.8 0.9 7% Intra-Zonal 8% DLD/ILD 12% Mobile communication services 7% Interconnect and traffic transit 2009 2010 2011 www.rostelecom.ru 13 8 ROSTELECOM ANNUAL REPORT 2011 KEY EVENTS OF 2011 & EARLY 2012 2011 February 2011 On February 04, 2011, the Group completed the transaction to ac- quire 71.8% stake in OJSC National Telecommunications (“NTK”), larg- est independent cable TV operator and information provider in Russia. The acquisition of NTK enabled Rostelecom to enter Moscow mar- ket and to attain a leading position in the Russian Pay-TV segment. March 2011 Rostelecom and each of the Inter- regional Companies of Svyazin- vest (IRCs) contributed their re- spective repurchased shares to the share capital of MOBITEL, which became a 99.9% owned subsidi- ary of new Rostelecom when the merger was completed. MOBITEL therefore received 2.7% of Rostele- com’s outstanding ordinary shares and 28.8% of Rostelecom preferred shares. 14 www.rostelecom.ru ROSTELECOM ANNUAL REPORT 2011 April 2011 June 2011 August 2011 On April 1, 2011, the IRCs and On June 2, 2011, Rostelecom On August 10, 2011, Rostelecom OJSC Dagsvyazinform were exclud- acquired 39.87% of the ordinary ordinary shares of the unified is- ed from the Unified State Register shares of OJSC Bashinformsvyaz, sue commenced trading on MICEX of Legal Entities, following their the largest telecoms operator in under the ticker RTKM in line with merger with OJSC Rostelecom. The the Republic of Bashkortostan. This the approval of the cancellation of ordinary and preferred shares and acquisition enabled Rostelecom to the individual numbers (codes) of bonds of the merged companies enter the market of Bashkortostan. the 16 additional issues of ordinary were exchanged for newly issued Rostelecom shares by the Rus- Rostelecom ordinary shares and On June 9, 2011, the Company’s sian Federal Service