... Route to Victory ...09 Annual Report 2009 Approved Annual General Shareholders Meeting OJSC “MegaFon” Minutes dated 02.06.2010 Preliminarily Approved Board of Directors OJSC “MegaFon” Minutes № 127 (191) dated 28.04.2010 MEGAFON ANNUAL REPORT ...................... Route to Victory ...09 Contents 01. Company Overview 4 02. Network Coverage Area 5 03. Address by the Chairman of The Board 6 06. Key Events of 2009 04. Address by the Chief Executive Officer 12 8 10 05. Highlights of 2009 13. Consolidated Financial Statements 09. Risk Management 65 35 10. Corporate Governance 39 29 08. Review of Financial 11. Sustainable Results Development 49 52 15 12. Annexes 07. Report by the Board of Directors 4 COMPANY OVERVIEW 01: Company Overview MegaFon has firmly established itself as over 50 million people in 83 Russian frastructure in the country, and is also the a leading name in Russia’s telecommu- regions, as well as Tajikistan, Abkhazia leader in terms of revenue from mobile nications industry, having become one and South Ossetia. data transfer services. of the “Big Three” mobile communica- tions operators in the country. It was the MegaFon was also the first Russian opera- In 2009, MegaFon was named a General first, and remains the only, player in the tor to commercially launch a third-gener- Partner of the XXII Winter Olympic Games sector to offer a full spectrum of mobile ation network, based on the IMT-2000/ and XI Winter Paralympic Games in Sochi communication services nationwide. The UMTS (3G) standard. It offers the widest in 2014. Company’s subscriber base comprises coverage and the most developed 3G in- Mission ...................................................... In expanding the possibilities for communication, MegaFon is creating an information space that unites Russia as a whole. By removing the barriers to social interaction, it is brings people closer together. Ultimately, MegaFon hopes to be the telecommunications company of choice for everyone. Our Priorities ............................................. • Client care MegaFon strives to make mobile communications available to and affordable for all subscribers • Full license coverage MegaFon intends to capitalize effectively on its nationwide coverage by unifying its tariff policies, product range and service standards on a single technological platform • Reliability and comfort MegaFon maintains the highest standards of service and is developing the technology needed to provide the maximum amount of services • Dynamism and innovation We want our subscribers always to be one step ahead, knowing that they have access to the broadest, most advanced and most straightforward range of mobile communication services 5 MegaFon. Annual Report 2009 02: Network Coverage Area MegaFon — Moscow MegaFon — Far East 7.4 mln 3.7 mln MegaFon — North-West 9.9 mln MegaFon — Center 3.1 mln MegaFon — Ural 4.5 mln MegaFon — MegaFon — Siberia Volga 2.7 mln 11.2 mln MegaFon — Kavkaz 7.7 mln 6 ADDRESS BY THE CHAIRMAN OF THE BOARD 03: Address by the Chairman Of The Board Dear Shareholders, the situation on the foreign exchange Last year showed that further growth market. Moreover, we were able to man- in the cellular communications sector Last year was challenging for all of age our costs quite efficiently and cut will be driven by data transmission. The us. For the first time in its history, the costs substantially in a short period of increasing popularity of mobile internet Russian mobile telecommunications time without harming our business or and 3G services has led to a three- sector faced an economic crisis that had employees. In 2009, MegaFon dem- fold rise in data traffic on MegaFon’s a significant impact on our customers onstrated its ability to adapt to a new networks. Third-generation technology and made it more difficult to carry out reality quickly, and once again demon- is starting to play a key role, both in certain tasks. However, it also created strated the level of professionalism and terms of technological development of new opportunities that had previously maturity of its management team. the sector and monetizing consumer been unavailable to us. I am pleased to demand. According to most experts, the say that MegaFon endured this trying The difficult economic situation crystal- use of mobile services will gradually time bravely and emerged from it even lized the trend of slowing growth in tra- shift towards 3G. stronger than before. ditional service segments of the mobile market. In 2009, voice traffic growth MegaFon has always been on the cut- The Company came through the crisis slowed, dispelling any doubts regarding ting edge of new trends. It was ahead of more successfully than its key com- the industry’s future course of develop- its time in understanding the potential petitors in the Russian marketplace. In ment: it became evident that the future of the 3G market and became the first contrast to most players, we were not lies in new technologies and innovative operator in Russia to offer this innova- encumbered with high debt and were services. Today, MegaFon is ready to tive service to its subscribers. In 2009, therefore quite comfortable, despite drive and lead the new market trend. the Company concentrated its efforts 7 MegaFon. Annual Report 2009 on the accelerated development of its network operator whose assets have Last year taught us a lot. It demon- 3G network in Russia and the expan- the potential to bring synergies and strated that the Company was up to the sion of its range of services based on increase MegaFon’s value significantly. challenge, able to respond quickly to third-generation technology. As a result, In February 2010, the Board gave its external factors, and stable in the face by the end of the year, we became the support and voted unanimously in favor of the crisis. The experience of 2009 has absolute leader of the 3G market in of acquiring Synterra. given us the confidence that MegaFon terms of both revenues and subscriber is moving in the right direction and has numbers. In 2010, the Company intends Altough a private company, MegaFon everything needed to ensure long-term to strengthen its lead. nonetheless continues to improve the growth in shareholder value. quality of its corporate governance. The I would like to highlight the harmonious Financial Committee was established to work of the Board and MegaFon’s man- improve the Board’s efficiency in ana- agement during a challenging 2009. The lyzing and controlling the Company’s Board members unanimously supported operational and investment activities. the management’s proposal to allocate Following the merger of all operating additional funds for developing 3G subsidiaries into MegaFon, the Board networks and the concept of developing of Directors undertook additional the Company’s own retail network. Dur- measures to improve the management ing the year, the management carried control over new branches and made out active negotiations for the potential all the necessary updates in regulatory Aimo Eloholma acquisition of Synterra, a backbone documents. Chairman of the Board 8 ADDRESS BY THE CHIEF EXECUTIVE OFFICER 04: Address by the Chief Executive Officer Dear shareholders, colleagues and mobile internet services, which is now the Company changed its approach to partners, a key area for future growth in Russia’s marketing communication and sales. mobile communications market. Now, the focus is on offering products To say that 2009 marked a turning point and services to specific groups of for the whole of Russia’s telecommuni- Last year, slowing growth in voice traffic clients, which are fully tailored to their cations industry is not an exaggeration. meant that the data transfer segment needs. Particular attention is being paid On one hand, the year served as the became one of the sector’s main driv- to developing customer service in the real test of strength for all operators; ers. This further confirmed the effective- MegaFon style. Key to the success of and on the other, it was crucial in terms ness of MegaFon’s long-term strategy to this will be the accelerated roll-out of of finding new ways to develop in a actively develop its 3G network and pro- MegaFon’s own retail network, which saturated market. mote mobile internet services. In 2007, was approved in 2009. the Company became the first in Russia MegaFon progressed through 2009 to commercially launch a 3G network. The crisis clearly demonstrated all the confidently, overtaking competitors on Today, in many respects, it is shaping advantages of MegaFon’s conservative many fronts, including development, the future of this segment. In 2009, approach to external financing. While brand awareness, and innovation. This MegaFon became Russia’s leading 3G many Russian companies found them- created a good reserve of strength that operator in terms of network coverage selves in a difficult financial situation, enabled the Company to overcome all and number of users. MegaFon had no major debt burden, the market challenges and strengthen which provided additional stability in its positions in the sector. Last year, The saturated market and growing the economic crisis. As a result, the MegaFon reported the most net sub- competition are making MegaFon focus Company became the first in the sec- scriber additions in the industry. It was on increasing subscriber loyalty and tor to be awarded investment-grade also the leader in terms of revenue from attracting new customers. Last year, credit ratings by the leading interna- 9 MegaFon. Annual Report 2009 tional rating agencies. In September, Last year, MegaFon completed a question that this partnership will take Standard & Poor’s raised MegaFon’s corporate reorganization that involved our brand to a new level of quality. long-term foreign-currency credit merging info it all of its operating the rating to “BBB-” and its long-term subsidiaries. This is of strategic impor- MegaFon is setting itself ambitious local-currency rating to “ruAAA”.