Pre-approved by the Approved by the Annual General Board of Directors, Meeting of shareholders, Sistema JSFC Sistema JSFC 21 May 2011 25 June 2011 Minutes No 06-11 Minutes No 2-11 On 25 May 2011 On 29 June 2011 ANNUAL REPORT of Open Joint-Stock Company Sistema Joint-Stock Financial Corporation for 2010 This report was compiled pursuant to the requirements of the Federal Law "On the stock market". Financial information set out in this Annual Report is based on the accounting data compiled pursuant to the Russian laws, and contains elements of consolidated financial reports compiled under international standards. Moscow 2011 1 CONTENTS 1. Company's position in the sector 4 1.1. Sistema JSFC business profile 4 1.2. Equity capital structure of Sistema JSFC 4 1.3. Portfolio of Sistema JSFC 6 2. Priority business areas and development strategy 9 2.1. Mission and strategy of Sistema JSFC 9 2.2. Strategy and principles for asset portfolio management 9 3. Report from the Board of Directors on the results of the Company's 11 development in the priority areas 3.1. Key Events in 2010 11 3.2. Russian Accounting Standards (RAS) financial results of Sistema JSFC 12 3.3. US GAAP consolidated financial results of Sistema JSFC 14 3.4. Credit ratings of Sistema JSFC 21 3.5. Report on the payment of announced (paid out) dividends on the shares of 22 Sistema JSFC 4. Outlook and development strategy of the Sistema Group 23 4.1. Core Assets 23 MTS 23 Bashneft 26 Bashkirenergo 28 4.2. Developing Assets 30 RussNeft 31 Sistema Shyam TeleServices Ltd. (MTS India) 32 SITRONICS 33 RTI-Systems Concern 35 Moscow Bank for Reconstruction and Development 37 Detsky Mir Group 39 Sistema Mass-Media 40 VAO Intourist 42 Medsi Group 43 Binnopharm 44 NIS 46 5. Description of core risk factors 48 5.1. External risks 48 2 5.2 . Risks relating to the core activities of Sistema JSFC 50 5.3. Sector risks 51 6. Corporate governance system 53 6.1. General Meeting of shareholders 53 6.2. Board of Directors 56 6.3. President 61 6.4. Management Board 62 6.5. Specifics of the risk management, internal control and audit system 63 6.6. Specifics of the corporate governance system development in 2010 64 7. Social responsibility 65 8. Criteria and amounts of remuneration for the members of the Board 68 of Directors and top executives of the Company 9. Annex 69 9.1. Summary biographies of the members of the Board of Directors and their 69 shareholdings in Sistema JSFC 9.2. Information on transactions performed by the members of the Board of Directors 75 of Sistema JSFC with the shares they hold in the Company over the period of 1 January - 31 December 2009 9.3. Summary biography of the President of Sistema JSFC and the members of the 76 Management Board 9.4. Information on the number of shares of Sistema JSFC held by the President and 81 the members of the Management Board 9.5. List of transactions performed by the Company in the reporting year that are 82 recognized as major transactions under the Federal Law "On joint-stock companies", and other transactions covered by the major transactions approval procedure pursuant to the Company's Charter 9.6 List of transactions performed by the Company in the reporting year that are 82 recognized as related party transactions under the Federal Law "On joint-stock companies" 9.7 Information on the Company's compliance with the requirements of the Corporate 90 Conduct Code from the Federal Service for Financial Markets 9.8. Information on the Company's compliance with the requirements of the UK 97 Corporate Governance Code 3 1. COMPANY'S POSITION IN THE SECTOR 1.1. Sistema JSFC business profile Sistema JSFC is the largest public diversified financial corporation in Russia and the CIS, a majority shareholder of leader companies serving over 100 million customers in the sectors of telecommunications, high technologies, oil and energy, petrochemicals, radio and aerospace, banking, retail, mass-media, tourism and healthcare services. Subsidiaries of Sistema JSFC operate in the markets of Russia, the CIS, Central and Eastern Europe, and in India. The subsidiaries of the Corporation focus on implementing advanced technologies that ensure faster development of the sectors in which they operate, as well as growth of the standard of living. Sistema JSFC has no counterparts among Russian public companies, and provides investors with unique investment opportunities. The Corporation's investment activities support the growth of its shareholder value and provide for the maximum possible returns on its portfolio of assets. Sistema JSFC is managed by a highly professional management team, in line with the generally recognized corporate governance standards. The experience of the Board members and the management, as well as the opportunities they have, make it possible for them to gain access to unique investment objects and funding, create businesses that take leading positions in their sectors, rely on many years of their success and on a high level of profits for the shareholders. In March 2011, in line with the new approach to the management of the Corporation, the Board of Directors of Sistema JSFC took the decision on the migration to the Financial and Investment Holding model in place of the previous Operating Holding model, and to the new organizational structure. 1.2. Equity capital structure of Sistema JSFC* Sistema JSFC has 9,650,000,000 ordinary shares outstanding with the par value of RUB 0.09 each. Its shareholder capital amounts to RUB 868,500,000.00. Sistema JSFC went public in February 2005, its shares were listed under the SSA ticker at the London Stock Exchange. The Company's shares are traded at the London Stock Exchange (LSE) in the form of global depositary receipts (GDRs). The receipts are included in the LSE quotation list under the SSA ticker. One GDR stands for 20 ordinary shares. The shares of the company are also traded under the AFKS ticker at the RTS Stock Exchange, under the AFKC ticker at the MICEX Stock Exchange, and under the SIST ticker at the Moscow Stock Exchange. As of December 31, 2010, the Sistema JSFC Group included three public companies whose shares are traded at international stock exchanges: the shares of MTS are traded at the New York Stock Exchange in the form of American depositary receipts (ADRs), the shares of SITRONICS and COMSTAR-UTS - as GDRs at the London Stock Exchange. On March 21, 2011 COMSTAR-UTS announced the de-listing of its shares in the form of GDRs in the UK due to the program of merging COMSTAR-UTS and MTS. The shares of Bashneft and its subsidiaries are traded at the RTS and the MICEX stock exchanges. * as of 31 December 2010. 4 Comparative performance of the RTS Index and the GDRs of Sistema JSFC at the LSE Closing price of Sistema‘s GDRs on the London Stock Exchange on the first trading day of 2010 was $21.0, on the last trading day it reached $24.93. The Corporation's GDRs reached their high of $30.99 on April 14, 2010 and their low of $21.0 on January 4, 2010 and May 25, 2010. Comparative performance of the RTS Index and the Sistema JSFC share price at MICEX and RTS 50% 40% 30% 20% AFKS RU 10% AFKC RX RTSI 0% -10% -20% 22.01.10 12.11.10 01.01.10 12.02.10 05.03.10 26.03.10 16.04.10 07.05.10 28.05.10 18.06.10 09.07.10 30.07.10 20.08.10 10.09.10 01.10.10 22.10.10 03.12.10 24.12.10 Closing price of Sistema's shares on the first trading day of 2010 was $0.88 at MICEX and $0.88 on the RTS stock exchange, on the last trading day of 2010 it was $0.89 on MICEX and $1.00 on RTS respectively. The Corporation's shares reached their high of $1.12 on MICEX on April 15, 2010, and $1.06 on RTS on April 14, 5 2010. The Corporation's shares reached their low of $0.78 on MICEX on May 25, 2010, and $0.81 on RTS on February 08, 2010. Equity structure of Sistema JSFC About 19% of Sistema‘s shares are traded as GDRs Vladimir Evtushenkov on the London stock exchange, and 5.2% of shares are in circulation on the MICEX and RTS.* DEUTSCHE BANK TRUST COMPANY 2,57% AMERICAS 10,43% Sistema Finance Investments OJSC 3,81% As of December 31, 2010, Sistema‘s shareholder Depositary Clearing Company register had 25 individuals and 10 legal entities, including eight nominal holders, registered as other shareholders shareholders. 19,01% 64,18% *as of 31 December 2010 Sistema JSFC GDR holders structure SKAGEN Fondene J.P. Morgan Asset Management (U.K.) The Chairman of the Board of Directors of Robeco Asset Management B.V. 12,50% Sistema JSFC Vladimir Evtushenkov, with 5,90% Fidelity Management & Research 64.18% of shares, is the principal Company The Vanguard Group shareholder of Sistema JSFC. 4,20% BlackRock Investment Management 4,10% (U.K.) Baring Asset Management, LTD (U.K.) About 19% of shares are traded as GDRs at 56,60% 3,40% the London Stock Exchange, and 5.2% of Fidelity International Limited - FIL 3,10% Investment Services (U.K.) shares are in circulation at MICEX and RTS. East Capital Asset Management AB 2,70% 2,60% Van Eck Associates Corporation 2,60% 2,30% Other * ** as of 10 March 2011 1.3.