Sistema Annual Report 2003

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FY2003 Annual Report · Sistema

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ANNUAL REPORT
2003

Contents

1 Message from the Executive Chairman | p. 5

2 Message from the President | p. 7

3 Corporate Structure | p. 9

4 Strategy | p. 15

5 Corporate Governance | p. 19

6 Corporate Social Responsibility | p. 25

7 2003 Results | р. 33

8 Independent Auditor's report

& consolidated financial statements | р. 91

9 Management Discussion and Analysis | р. 143

10 Contact Information | р. 180

In the present Annual Report, except when the context implies a different interpretation, terms "Sistema", "Sistema,
Group of Companies", "we", "us", "our" and other similar terms apply to consolidated business of Sistema and its sub(cid:1)
sidiaries.
Some statements made in this Annual Report may be related to forecasts and projections concerning forthcoming
events, based on assumptions and estimates of Sistema's Executive Directors. Such words, as "expected", "believed",
"estimated", "intended", "will be", "could be" or any other similar ones reflect those estimates and forecasts. Those state(cid:1)
ments reflect a true position taken by the Company. Considering possible risks and unforeseeable circumstances,
including changes in the overall business environment, changes in the currency and stock markets, and so on, we wish

Message
from the Executive
Chairman

Message from the Executive Chairman SISTEMA ANNUAL REPORT 2003

Dear Colleagues,

past ten years. We grew together with the market. We tried to grow and

S istema, just as the rest of the Russian business, has come a long way in the

learning to understand and meet demands of the global market. As I look back at

technologically complex industries, building relations with partners, and

outpace the market. All these years, we have been developing business in

2003, an anniversary year for the Company, I could probably say I am satisfied with

what we have achieved. However, business never stops and always moves forward.

We are operating in a market which is looking increasingly attractive today to

investors from around the world, who are keen to get local exposure. Compared to

foreign investors, we have a big advantage, since we are already here and have good

knowledge of this part of the globe. Our Corporation is one of a very few busi(cid:1)

nesses in Russia that have grown by developing intellectual products and services,

rather than by exporting natural resources. Now, in order to take advantage of our

strengths, we should make ourselves equally at home in the global market; we

should learn and apply its rules and standards, effectively becoming a world(cid:1)league

player. This is particularly important to those who do not intend to keep their

business restricted by its present boundaries, nor who can afford to do so for fear

of losing to competition.

Ideas(cid:1)driven industry is still in its infancy. I am certain that this decade will see

a booming growth for service industries in Russia, and they of all industries will

become guidelines for investors. Growing competition calls for innovations. One

needs them to stay in the race and beat the competition. Our nation needs a

knowledge(cid:1)based economy and a society open to innovations. Acting on this con(cid:1)

viction, we are building our strategy and setting our priorities, and developing

business in the interests of society has always been our top priority. We are work(cid:1)

ing for the future, investing in innovation infrastructure, technological leadership,

and building intellectual elite for the nation.

The world is changing at a tremendously fast and ever accelerating pace. We

know it too well that, having come a certain way, we are approaching a new begin(cid:1)

ning. Every step forward broadens our horizons, enables us to assess the situation

and our capabilities, and to do something no one else has ever done before. This is

our destiny and our hope for the future.

I would like to extend my gratitude to all shareholders, managers, employees,

partners, and friends of Sistema for their understanding and contribution to our

common success and for staying this course with us. This road has never been

straight, not has it been a smooth one, but it is carrying us forward, and it is our

conscious choice. We are doing what needs to be done for the nation and millions

of our customers, for whom and together with whom we are discovering a world

full of new opportunities and ideas.

VLADIMIR YEVTUSHENKOV,
Executive Chairman, Sistema

Message
from the President

Message from the President

SISTEMA ANNUAL REPORT 2003

Dear Shareholders, Partners and Colleagues,

the main challenges Sistema is facing today. Among them are, above

W e worked energetically and consistently throughout 2003 to address

ance for the year demonstrate that the Company has made a major breakthrough

all, improving our business efficiency and building a balanced port(cid:1)

folio of operating companies. Our financial and operating perform(cid:1)

and reached a qualitatively new level in its development. This applies both to busi(cid:1)

ness operations and portfolio management per se and to our activities in the cap(cid:1)

ital markets.

We have further bolstered our position in the key service industries. We have

achieved this by closing several successful M&A deals, selling our oil assets, active(cid:1)

ly restructuring our business units and reshuffling our top management.

Revitalization of management teams at CSC, MGTS, Sistema Telecom, MTS, and

Sistema Mass(cid:1)Media has provided a strong boost for a more dynamic development

in those companies, every one of which has now come to a critical and decisive

point in its history.

The sale of oil production assets has enabled Sistema to focus fully on non(cid:1)

resource industries, provided another example of successful implementation of

project exit strategy, and given the Company an opportunity to raise additional

funds for developing its core businesses.

Although our key performance indicators are still dominated by telecommuni(cid:1)

cations, the year 2003 also saw the beginning of a strong growth in other segments,

particularly, in electronics and insurance, that have shown strong dynamics.

This year of our 10th anniversary was also a milestone year for Sistema in terms

of its presence in capital markets, where we took a number of significant new

steps. In February, we issued Credit Line Notes (CLN) in the amount of $100mn, in

April we became the first Russian holding company to trespass our national bor(cid:1)

ders and tap into the global capital markets by placing a $350mn Eurobond issue.

In January 2004, we placed another successful Eurobond issue in the amount of

$350mn, which allowed us to restructure much of our short(cid:1)term debt. In so doing,

we have employed almost the entire inventory of debt instruments, while contin(cid:1)

uing to improve our corporate governance and information disclosure practices,

getting a credit rating upgrade, and becoming recognized by Euromoney magazine

as the “Best Corporate Borrower in Eastern Europe.”

Thanks to steady organic growth across all business units, new acquisitions

and MTS consolidation, in 2003 Sistema’s revenues grew by 323%, EBITDA rose

by 387%, while aggregate consolidated assets and equity grew by 192%, and 66%,

respectively. Looking at these figures, we believe that in 2003 we built a solid foun(cid:1)

dation for further growth.

YEVGENY NOVITSKY,
President, Sistema

CORPORATE
STRUCTURE

OTHER PROJECTS
& COMPANIES

Helicopter manufacturing

■■

Kamov Holding

Pharmaceutical industry
■■ Medical Technologies Holding Company

(MTH)

Innovation venture
project management
Sistema Venture

■■

Sports facilities management
■■ Olympic System

Medical services
■■ Medsi Holding

Truck assembly

■■

VTS(cid:1)Zelenograd

Securities trading,
real estate investments

■■

Ecu(cid:1)Gest & subsidiaries

Managing company

■■

Sistema Investments

Leasing

■■

Invest(cid:1)Svyaz(cid:1)Holding

Pension fund

■■

Sistema Non(cid:1)State Pension Fund

Charity

■■

Sistema Charity Fund

TOURISM
& FOREIGN
ASSETS

SISTEMA INTERNATIONAL
INVESTMENT GROUP

■■

Travel services
Intourist
& subsidiaries

Intourist Saint(cid:1)Petersburg
Intourist Samara
Intourist Nakhodka
Intouravtoservice
Intourist Vladivostok
Intourist Petrozavodsk
Intourist Omsk
Intourist Sakhalin

46 companies in Russia & abroad,
including:
–
–
–
–
–
–
–
–
Ten Viaggi (Italy)
Intourist Japan (Japan)
Intourist Warsaw (Poland)
Intours Corporation (Canada)
Fram Resource (Sweden)

■■

Hotel services

■■

Intourist Hotel Group

RADIO ENGINEERING

RTI(cid:1)SISTEMY CONCERN

Radio Engineering

■■

RTI

■■ NIIDAR Research

& Production Complex
RTI(cid:1)Radio

■■

Instrument Building
STZ (Saransk)
Radio Tesla Sistema

■■

Infotelecommunication systems

■■

Vimpel(cid:1)S

■■ Okta(cid:1)Systems (Republic of Belarus)

MASS(cid:1)MEDIA

SISTEMA MASS MEDIA
Printed & Electronic Mass(cid:1)Media

■■

Literaturnaya Gazeta

■■ Metro Newpaper

■■

Rossiya Public Newspaper
Rosbalt News Agency
Radio Centre Concern
Kosmos TV

Advertising

■■

Maxima Communications Group
TV Project
Metroreklama Group

Press Distribution
■■ Nasha Pressa Group

Multimedia Services

■■

Sistema Multimedia

Obligatory medical insurance

■■

SK Rosno(cid:1)MS

Reinsurance

■■

PK Rosno(cid:1)Center

Medical services

■■

American Hospital Group

REAL ESTATE

SISTEMA HALS

Construction
& Real Estate Management

■■

City Hals

■■ Hals(cid:1)Management
■■ MosDachTrest

■■

Sistema(cid:1)Hals North(cid:1)West

■■ Organizator

Project Management

■■

Kuntsevo(cid:1)Invest
Landschaft
Sistema(cid:1)Temp
Beijing(cid:1)Invest
Corona Intourist Hotel

RETAIL TRADE

DETSKY MIR GROUP OF COMPANIES

Retail trade
■■ Detsky Mir Center

Branches:
– Detsky Mir(cid:1)Golyanovo
– Detsky Mir(cid:1)MEGA
– Detsky Mir(cid:1)Tambov
Bauland

■■

Retail trade,
retail property management
■■ Detsky Mir
■■ Detsky Mir(cid:1)Orel
■■ Dom Igrushki

Warehousing
■■ DM(cid:1)Baza

Wholesale trade

■■ Noekoeln

FINANCE
■■ Moscow Bank

for Reconstruction
& Development (MBRD)
East(cid:1)West United Bank

■■

TELECOMMUNICATIONS

SISTEMA TELECOM

Wireless telecommunication
GSM 900/1800 Standard
■■ MTS and subsidiaries
CDMA 2000 Standard

■■

SKY LINK
–
– MCC

P(cid:1)Com

Fixed(cid:1)line telecommunications
Incumbent operators
■■ MGTS
CLEC operators under Comstar United
TeleSystems Brand(cid:2)Name
–
Comstar
– MTU(cid:1)Inform
Telmos
–

Telematics
■■ MTS(cid:1)P

Internet & Data Transfer
■■ MTU(cid:1)Intel

■■

Golden Line

Trunking

■■

Center(cid:1)Telco
AMT

Traffic transit
■■ MTT

Infrastructure
■■ Metro(cid:1)Telecom

Engineering
■■ NTP Intellect(cid:1)Telecom

ELECTRONICS

CSC

Info(cid:1)communication systems

■■

STROM telecom Group of Companies
–
–
–

Iskratel (Novosibirsk)
Tesla Tech (Prague)
BS Telecom (Sarajevo)

■■ Mediatel

Microelectronics
■■ NIIME and Mikron
VZPP(cid:1)Mikron

■■

Industrial &
Consumer Electronics

■■

Sitronics
Elaks
Elion
NIITM
Kontsel

INSURANCE
All Insurance Products

■■

ROSNO
Subsidiaries & offices
in all regions
of the Russian Federation

Board of Directors

Vladimir YEVTUSHENKOV,

Executive Chairman of SISTEMA

Dmitry ZUBOV

Deputy Executive Chairman of SISTEMA

Vyacheslav KOPIEV,

Deputy Executive Chairman of SISTEMA

Yevgeny NOVITSKY,

President of SISTEMA

Arkady VOLSKY,

President of the Russian Union of Industrialists
and Entrepreneurs (Employers)

Alexander GONCHARUK,

General Director of CSC

Sergei DROZDOV,

First Vice(cid:2)President of SISTEMA,
Head of Property Affairs

Stanislav YEMELYANOV,

Full Member of the Russian Academy Of Sciences, Scientific
Director of the Institute of System Analysis of the Russian
Academy of Sciences, Deputy Academic Secretary
of the Department of Information Technologies
and Computer Systems of the Russian Academy of Sciences

Mechislav KLIMOVICH,

Member of the Board of Directors of SISTEMA

Yevgeny KURGIN,

Member of the Board of Directors of SISTEMA

Vladimir LAGUTIN,

General Director of SISTEMA TELECOM

Alexander LEIVIMAN,

General Director of SISTEMА MASS(cid:2)MEDIA

Nikolay MIKHAILOV,

Member of the Board of Directors of SISTEMA

Executives

Yevgeny NOVITSKY,

President of SISTEMA

Alexey BUYANOV,

First Vice(cid:2)President of SISTEMA,
Head of Finance and Investments

Levan VASADZE,

First Vice(cid:2)President of SISTEMA,
Head of Strategy and Development

Sergei DROZDOV,

First Vice(cid:2)President of SISTEMA,
Head of Property Affairs

Andrei LAPSHOV,

Acting Senior Vice(cid:2)President of SISTEMA,
Head of External Communications

Vyacheslav INOZEMTSEV,

Head of Internal Audit
and Compliance, SISTEMA

Vasily PLATOSHIN,

Chief Accountant of SISTEMA

STRATEGY

Strategy

SISTEMA ANNUAL REPORT 2003

leaders, achieve long(cid:1)term growth of shareholder’s equity, and develop

S istema’s strategy is designed to create companies and turn them into market

its business responsibly in the interests of society. The Corporation sets

for itself strategic qualitative and quantitative objectives.

QUALITATIVE OBJECTIVES:

— Business portfolio diversification;

— Ensuring steady cash flow from business operations;

— Financial stability;

— Capturing leading positions in key markets; and

— Achieving high level of corporate governance and culture.

CRITERIA BASE

In order to achieve diversification and determine a long(cid:1)term composition

of its business portfolio, in 2002 the Corporation adopted a Criteria Base for

business units aimed at their broad(cid:1)based consolidation. Criteria Base comprises

a set of criteria to be met by Sistema’s business units in the short(cid:1)term (2004)

and in the medium(cid:1)term perspective (till the end of 2006).

STRATEGIC BUSINESS AREAS

The year 2003 was for Sistema’s companies the last year before the first “refe(cid:1)

rence point” of the criteria base. Following a comprehensive analysis of its per(cid:1)

formance results in 2003, the Corporation identified four strategic business areas–

telecommunications, insurance, electronics and real estate – and areas with a high

growth potential, namely retail trade in children’s goods and finance. Sistema

is focusing its financial and managerial resources on developing these business

areas to make sure they meet the following strategic objectives:

Telecommunications

— Mobile communications: Insuring the best possible conditions for the growth

of MTS’ market capitalization;

— Incumbent fixed(cid:1)line operators: Conducting an IPO for MGTS to raise funds
for the company’s development, network upgrade and the introduction of new
services.

— Alternative (CLEC) fixed(cid:1)line operators: Consolidation of the assets under

the single Comstar United Telesystems’ brand name;

— Internet and digital services: Expanding operations in the country’s regions

and conducting an IPO in the Russian market;

— Geographic reach: Moscow and the Central Region with selective expansion into

Russia’s regions and other CIS and East European countries.

Insurance

Securing position of a leading insurance company in all insurance classes in Russia
and conducting an IPO for ROSNO before 2007 in cooperation with Allianz AG.

Strategy

SISTEMA ANNUAL REPORT 2003

Telecommunications

— Mobile communications: Insuring the best possible conditions for the growth

of MTS’ market capitalization;

— Incumbent fixed(cid:1)line operators: Conducting an IPO for MGTS to raise funds
for the company’s development, network upgrade and the introduction of new
services.

— Alternative (CLEC) fixed(cid:1)line operators: Consolidation of the assets under

the single Comstar United Telesystems’ brand name;

— Internet and digital services: Expanding operations in the country’s regions

and conducting an IPO in the Russian market;

— Geographic reach: Moscow and the Central Region with selective expansion into

Russia’s regions and other CIS and East European countries.

Securing position of a leading insurance company in all insurance classes in Russia
and conducting an IPO for ROSNO before 2007 in cooperation with Allianz AG.

Bolstering CSC’s positions as a leading Russian integrated circuit manufacturer, develo(cid:1)
ping Sitronics, an umbrella brand name for consumer electronics, and reinforcing
its leading positions in the Russian telecommunications equipment market; launching
an IPO on the Russian stock exchange.

Building up a development company to be a leader in the Russian market by putting
together and managing a diversified and balanced portfolio of assets consisting both
of short(cid:1)term speculative projects and long(cid:1)term lease projects

Insurance

Electronics

Real Estate

Retail Trade

Bolstering its leading position in the retail market for children’s goods.

Finance

Increasing market capitalization by building a strategic and financial partnership.

All remaining business units are left to do their own financing, cost(cid:1)cutting, and

search for strategic investors. Depending on their results, the best performers

could be given the status of strategic business units.

In compliance with its strategy, Sistema is continuing an active search for oppor(cid:1)

tunities in entirely new industries, mulling participation in large high(cid:1)return

businesses, developing promising venture projects, mostly in high(cid:1)tech industries

and innovations, and making short(cid:1)term highly profitable investments as well.

FINANCIAL STRATEGY

The Corporation’s financial strategy is based on the following key principles:

— Transparency

Sistema has been preparing consolidated audited US GAAP reports on an annu(cid:1)

al basis since 1997. In 2003, the Company switched to the semi(cid:1)annual reporting

format with auditors’ opinions, and makes public disclosure of information to the

investors’ community. Sistema’s other companies, including MTS and ROSNO, pre(cid:1)

pare IFRS financials as well.

— Best Use of Capital Markets

Sistema actively taps into international capital markets to finance its opera(cid:1)

tions, enabling it to optimize its finance structure. The Company steadily broadens

Strategy

SISTEMA ANNUAL REPORT 2003

the geographic diversity of its international investor base and actively cooperates

with major rating agencies to maintain and improve its credit ratings.

— Consolidated Debt Management

Sistema pays much attention to its debt portfolio and its management, focusing,

in particular, on the size and currency of its borrowings, as well as on maturity

and security. The Company tightly monitors its consolidated debt level. Its sub(cid:1)

sidiaries’ own general borrowing plans have to be approved by the Budget

Commission, while each individual borrowing must be endorsed by the Finance

and Investment Committee.

— Multipurpose Approach to Budgeting

Sistema applies a “bottom(cid:1)up” corporate budgeting approach. Each busi(cid:1)

ness unit prepares its annual budget which is then submitted for endorsement

by the Budget Commission. Besides, all investments to be made in accordance

with business plans have to be approved by the Finance and Investment

Committee. The Company keeps close track of its business units’ performance

to gauge their compliance with the strategic objectives set by the Company.

In 2004(cid:1)2005, the Company plans to introduce an automated budgeting sys(cid:1)

tem for all business units.

— Investment Project Financing Priorities

In drafting its investment plan, Sistema gives priority to strategic business units’

projects that can insure that the Criteria Base objectives are met in the fastest way

possible. As regards other business units, they are encouraged to self(cid:1)finance their

operations and search for strategic and financial investors.

CORPORATE
GOVERNANCE

Corporate governance

SISTEMA ANNUAL REPORT 2003

and international business partners and holds interest in publicly traded

S istema actively raises funds in capital markets, cooperates with Russian

business and successful cooperation with investors and counterparties. The Cor(cid:1)

governance principles as a key factor for improving the efficiency of our

companies. We regard transparency and compliance with corporate

poration follows quite closely both international recommendations of “best cor(cid:1)

porate governance” and rules of the Russian Code of Corporate Governance.

In 2003, Sistema continued efforts to improve its corporate governance and

information disclosure practice. In particular, it adopted a semiannual US GAAP

reporting format. International Advisory Council (IAC) was set up under its Board

of Directors. The Company established a Corporate Governance Committee, Investor

Relations Department, and an office of Corporate Secretary. We consistently inte(cid:1)

grate international and Russian standards into our business practice, and develop

corporate standards and procedures to improve corporate governance, and strive

to promote good corporate governance practice in our subsidiaries. According

to Standard & Poor’s, MTS (NYSE MBT), where we hold a controlling stake, has

the highest corporate governance rating among Russian companies (Corporate

Governance Rating 7+, July 2004).

We regard transparency and compliance with corporate

governance principles as a key factor for improving

the efficiency of our business and successful cooperation

with investors and counterparties.

MANAGEMENT STRUCTURE

The quality of corporate governance in a company depends, above all, on the

effective functioning of its Board of Directors. Sistema’s Board of Directors is

empowered to approve development strategies for the Corporation and its busi(cid:1)

ness units, endorse financial and business plans, the Corporation’s budget and

organizational structure, terms of a contract with the President, appointment of

top managers. It decides on the sale or purchase of securities, develops manage(cid:1)

ment techniques and deals with other vital issues. The Board of Directors plays a

key role in enforcing the rights and safeguarding the interests of the Corporation’s

shareholders, investors, counterparties and other interested parties, and in ensur(cid:1)

ing disclosure of information about the Corporation’s operations. The Board of

Directors’ jurisdiction is set out in the Corporation’s Articles of Association.

Decision(cid:1)making process, rights, duties and responsibilities of the Board of

Directors’ members are defined in the Provision on Board of Directors and Rules.

The Board of Directors’ activities are carried out on a pre(cid:1)planned basis, with

meetings being held twice a month. Committees set up by the Board of Directors

Corporate governance

SISTEMA ANNUAL REPORT 2003

conduct preliminary review of more important issues. At the moment, the

Company has three up and running committees, namely Development Strategy

Committee, Rewards and Appointments Committee and Corporate Governance

Committee. Audit Committee is planned to be established in 2004. By applying

advanced organizational techniques and methods in its work, the Board of

Directors can insure that its resolutions are drafted and adopted in the most effi(cid:1)

cient way. Presence of independent directors on the Board contributes to a greater

validity and credibility of the decisions taken by the Board of Directors.

In 2003, the Board of Directors established International Advisory Council

(IAC), comprising independent experts, including representatives of the Russian

and international business community. Independent examinations and consulta(cid:1)

tions on key strategic issues provided by the IAC also help make decisions more

well(cid:1)grounded and efficient and go a long way in promoting international corpo(cid:1)

rate governance experience in the Company’s business practice.

Independent examinations and consultations on key strategic

issues help make decisions more well(cid:1)grounded and efficient

and go a long way in promoting international corporate

governance experience in the Company's business practice.

Russian and international standards place a lot of emphasis on the develop(cid:1)

ment of decision(cid:1)making and internal control procedures. Sistema’s Board of

Directors drafted and approved documents establishing a methodological, regu(cid:1)

latory and legal basis for management decision(cid:1)making. Among more significant

documents are rules for long(cid:1)term and annual budgeting, financial planning and

financial accounting; incentivization arrangements for employees and manage(cid:1)

ment; risk management provisions; and a set of corporate rules and methods

of audit procedures for the Internal Audit and Compliance Department.

Enforcement of strict compliance with corporate behavior rules and procedures

established by law and adopted by the Company falls under the corporate secre(cid:1)

tary’s responsibility.

President of Sistema is in charge of the Corporation’s day(cid:1)to(cid:1)day operations,

acting as its sole executive body. The President is appointed to, and dismissed from

his office, by the Corporation’s Board of Directors, to which he reports. Among

other responsibilities, the President submits to the Board of Directors quarterly

and annual reports on the Corporation’s performance accompanied by his own

comments and corresponding financial documents.

Annual Report for Sistema’s shareholders is prepared in strict conformity with

the requirements of Directive No. 17/ps issued by the Federal Securities Market

Commission of the Russian Federation. Apart from that, shareholders receive addi(cid:1)

tional information, as required by law.

Corporate governance

SISTEMA ANNUAL REPORT 2003

Sistema’s Internal Audit and Compliance Department (IACD) oversees the

Corporation’s financial and business activities, compliance with rules and regula(cid:1)

tions, as required by law, Articles of Association and internal documents. IACD’s

Head is appointed and dismissed by the President’s order on the basis of a decision

taken by Sistema’s Board of Directors.

INFORMATION DISCLOSURE

As regards the level of information disclosure, Sistema is ranked as one of the

most transparent companies in the Russian Federation. The Corporation publish(cid:1)

es a vast amount of information about itself and its operations, announces most

important facts and events, develops communications with the investment com(cid:1)

munity and mass(cid:1)media and seeks to provide prompt and equal access to infor(cid:1)

mation which is subject to disclosure to all interested audiences. In 2002, Sistema

was one of Russia’s first companies to disclose the structure of its shareholders’

equity, even though the Corporation’s shares are not listed on the stock market,

since the controlling stake in Sistema is held by one individual and most of its 11

shareholders are the Company’s managers.

Sistema seeks to provide prompt and equal access to information

which is subject to disclosure to all interested audiences.

The Corporation employs all available channels to disclose information

about its business, with the corporate Web site (www.sistema.ru) serving as

the main channel of information disclosure. In 2003, the Corporation created

a new corporate Web(cid:1)page that offers more advanced functional and interac(cid:1)

tive features. The site contains information about the Corporation’s history

and development strategy, members of its Board of Directors and managers,

asset structure and key companies. It regularly posts financial results and

business news on both Sistema and its subsidiaries, key appointment

announcements, the Corporation’s involvement in high(cid:1)profile public events

and projects and other information. The Corporation places a lot of empha(cid:1)

sis on continued site development and strives to make sure that it takes into

consideration interests of all parties concerned in terms of content and user(cid:1)

friendliness. In 2003, the number of Sistema’s site visitors grew by more than

50%, with more than 1,000 Web users from many countries of the world visiting

the site every day.

Sistema attaches great importance to developing effective communications

with the investment community. In 2003, it created Investor Relations

Department, which was charged with providing essential information about the

Corporation’s financial and business operations to investors, creditors, analysts,

financial media, and other interested parties.

Corporate governance

SISTEMA ANNUAL REPORT 2003

Press conferences for Russian and foreign mass(cid:1)media, teleconferences for

investors and analysts, and presentations for investors at major international

financial centers are all considered important information disclosure channels.

In 2003, the Corporation adopted the semiannual US GAAP reporting format.

Sistema has been preparing consolidated US GAAP financial accounts for six years,

and it has been regularly disclosing them to the investment community since 2003.

Consolidated statements are audited by an internationally recognized auditor.

At present, the Corporation is preparing a White Book for publication, con(cid:1)

taining basic information about Sistema. The White Book, to be published every

year from now onwards, will provide information about the Corporation’s opera(cid:1)

tional goals and objectives, its structure and governing bodies, functions of its core

units, information about its core businesses and major companies, its mission and

development strategy, as well as main internal documents.

OBJECTIVES

Improving corporate governance is a key strategic task which Sistema sets for

itself. We consider that our duty is not only to improve corporate governance in

our own Corporation, but also to promote it among Russian businesses. In 2003,

Vladimir Yevtushenkov, Executive Chairman of Sistema, joined the National

Corporate Governance Council (NCGC). In 2004, Sistema joined and is now active(cid:1)

ly supporting initiatives by the Russian Institute of Directors (RID), a nonprofit

partnership. The Corporation’s spokespeople participate in public debates and ini(cid:1)

tiatives related to corporate governance.

At the beginning of 2004, Sistema’s Board of Directors approved an action

plan, stipulating the creation of an internal Code of Corporate Behavior, which

is being drafted at the present moment. The Code is scheduled to be approved in

summer 2004, and the Corporation’s Articles of Association and internal docu(cid:1)

ments are to be brought in line with the approved Code by year’s end.

Improving corporate governance is a key strategic task

which Sistema sets itself.

The Code will contain obligations in the area of corporate relations, to be

assumed voluntarily in addition to those required by law. The Code is designed to

insure that rights and legitimate interests of shareholders and other interested

parties are met in the Corporation’s business activities; insure transparency of

information; create an environment of openness, trust and cooperation in rela(cid:1)

tionships between the Corporation and its shareholders, managers, investors,

employees, counterparties and other concerned parties.

The Code’s text will be posted on the corporate Web(cid:1)page, published as a brochure

and will be made available to all interested parties.

Corporate governance

SISTEMA ANNUAL REPORT 2003

CORPORATE
SOCIAL
RESPONSIBILITY

Corporate social responsibility

SISTEMA ANNUAL REPORT 2003

ciple to which Sistema has always been anxious to adhere most fully.

R esponsible business development in society’s interests is a key prin(cid:1)

its activities, including the quality of its products and management decisions, ful(cid:1)

important role today requires a company to be responsible all aspects of

Development of society in which business is playing an increasingly

fillment of obligations to its customers, partners, and employees, socially active

position and involvement in socially significant projects.

Our understanding of corporate citizenship and our main social programs are

based on technological leadership and aimed at creating a new quality of life.

Our main objective, as we see it, is to contribute to moving the Russian econo(cid:1)

my from a resource(cid:1)based to a service(cid:1)based model. Being aware that the strategic

competitive advantage of the Russian economy at the global level lies in services,

we recognize our responsibility for developing service industries and innovation

projects. We put all possible resources into such development programs, invest in

science and education, innovation infrastructure, promotion of new technologies

and personnel training.

Sistema shares international principles of sustainable development and

corporate social responsibility (CSR) and integrates them into its business

practices. We reaffirmed our adherence to these principles and conscious

desire to meet society’s expectations in 2002, when we became one of the first

companies in Russia to sign the Global Compact of the United Nations (UN(cid:1)GC).

In 2003, Sistema, a pioneer in the Russian market, joined the World Business

Council for Sustainable Development (WBCSD). As other WBCSD members, we

are keen to maintain a high level of transparency and responsibility of our

business, because each civilized corporation must measure its interests against

those of society.

We understand the Corporation’s social responsibility as the primacy of social,

legal, ethical, and civil norms. We accept these principles and strive to follow them

in our business practices by developing, introducing and promoting correspon(cid:1)

ding procedures, structures and processes. When we make decisions on key issues,

we take into account recommendations of our International Advisory Council

(IAC), which comprises many renowned members of the business community. We

seek to improve our business practice and to give more consideration to socially

significant aspects of our activities and the Company’s responsibility toward all

interested parties. IAC expertise and support is vital to us, not least from the stand(cid:1)

point of corporate social responsibility standards.

Sistema is also guided by the principles of social responsibility in developing

its human resources policy, making investments in social projects and initiating

and supporting various humanitarian initiatives.

HUMAN RESOURCE POLICY

Sistema pursues an effective HR policy based on recognition of its responsibili(cid:1)

ty with regard to personnel development and its obligation to harmonize interests

of the Corporation and those of its employees.

Corporate social responsibility

SISTEMA ANNUAL REPORT 2003

Sistema’s companies employ over 70,000 people. The Corporation’s HR poli(cid:1)

cy is aimed at insuring the highest degree of conformity between employees’ per(cid:1)

sonal qualities and competences and their job responsibilities, creating favor(cid:1)

able working conditions and offering equitable remuneration, providing oppor(cid:1)

tunities for career growth and giving employees an essential sense of confidence

about their future. Personnel development programs comprise training and skill

improvement, incentive pay arrangements, medical insurance, non(cid:1)government

pension policies, catering and recreational programs, corporate communica(cid:1)

tions and events.

Every year, the Corporation’s companies organize evaluation interviews to

improve employee incentivization, identify existing problems and professional

growth opportunities. Based on interviews’ results, employees receive bonuses or

recommendations regarding their performance. They can be advised to attend

advanced training courses or placed in reserve for perspective promotion or rota(cid:1)

tion. Every year, Sistema recognizes its best workers with gold and silver badges. In

2003, the Corporation awarded such badges to 66 employees.

Employee training, skill improvement and retraining plan takes into

account the Corporation’s strategic and current objectives and the needs of

its structural units. The plan is updated and approved by Sistema’s President

every half(cid:1)year. As required by the plan, specialized workshops on financial,

economic, legal, human resources, and other issues are held every month for

managers and professionals of the Corporation’s central office and sub(cid:1)

sidiaries. Every year, field training sessions are arranged for top managers. All

in all, 84 mid(cid:1)level managers received training, as part of the presidential

management training program, and 25 of them completed internships in

other countries (US, Germany, Japan, the Netherlands and others). 7 employ(cid:1)

ees started their training in 2003, while 12 people finished their continued

education program in the academic year 2002(cid:1)2003. In Spring 2004, 21 more

employees joined the program. Sistema’s Methodology and Training Center

and training centers at MGTS, MTS, ROSNO, and NIIME & Mikron all play a

major role in skill improvement and professional growth of the Corporation’s

employees. Those centers provide education and advanced training courses to

over 14,000 employees every year.

In 2003, the Company set up a database of prospective replacements and a

database of high(cid:1)performing professionals with MBA Degrees in order to improve

its staff recruitment activities. Every candidate goes through an interview, a set of

meetings and tests conducted with the use of expert systems. In 2003, Sistema

entered into a cooperation agreement with the British Council‘s Alumni Club.

Young would(cid:1)be professionals are sent to receive special education at leading uni(cid:1)

versities and colleges in Moscow. These targeted programs help meet all needs in

trained staff experienced by the Corporation’s companies.

Internal communications play a key role in developing corporate culture. They

include corporate publications, social, holiday(cid:1)related and sports events, such as

regularly held summer and winter games and various sports competitions.

Corporate social responsibility

SISTEMA ANNUAL REPORT 2003

SOCIAL INVESTMENT.

EDUCATION AND INNOVATION INFRASTRUCTURE

Education and innovation programs are important areas of Sistema’s social

activities. We regard support for education, science, and innovations as a task

of national significance and our top priority in the social field. For us it means

making social investments with the purpose of creating innovation(cid:1)friendly

environment which is vital for the progress of business and society.

In 1998, Sistema launched its scholarship program for post(cid:1) and undergraduate

students of leading Russian universities and colleges. In the academic year

2002/2003, the amount of a monthly scholarship was 1,500 rubles. In addition,

the Corporation undertakes to provide Sistema scholars with jobs in its compa(cid:1)

nies. In the second half of the academic year 2002/2003, the Corporation’s schol(cid:1)

arships were granted to 37 students, while another 31 students became Sistema

scholars in the first semester of the academic year2003/2004. Since the inception

of the Scholarship Program, Sistema’s grants have been received by a total of 84

under(cid:1) and postgraduate students of the Moscow State University, Moscow State

Institute of International Relations, Moscow Institute of Physics and Technology,

Bauman Moscow State Technological University, Financial Academy, Higher School

of Economics, Moscow Technical University of Communications and Informatics,

Moscow State Institute of Electronic Technology in Zelenograd, State University

for Humanities, Plekhanov Russian Academy of Economics and several other insti(cid:1)

tutions. At the moment, 56 former scholarship students are working in the

Holding’s Companies.

All of Sistema’s core companies use various ways of cooperating with universi(cid:1)

ties. Executives and professionals from Sistema’s companies give lectures at corre(cid:1)

sponding universities and institutes and actively participate in the work of their

citizen boards. Sistema President Yevgeny Novitsky, for example, is the Chairman

of the Board of Trustees at Bauman Moscow State Technological University.

In 2004, Sistema served as a general partner at the 250th(cid:1)anniversary celebra(cid:1)

tions of the Moscow State University. The Corporation will contribute to research,

scientific and educative programs, as well as to renovation and restoration of the

Moscow State University’s facilities. By supporting the Moscow State University in

implementing its grandiose anniversary plans, we hope that it will become a new

milestone in the partnership we have cultivated for many years.

We are successfully developing cooperation with other leading Russian research

and education centers. In 2004, Sistema entered into a three(cid:1)party agreement with

the Bauman Moscow State Technological University and the Russian Academy of

Sciences’ Institute of Radio Engineering and Electronics, and signed an agreement

with the Moscow Institute of Physics and Technology. Both agreements are

designed to develop innovation infrastructure and implement promising knowl(cid:1)

edge(cid:1)intensive projects.

Another milestone event of the last year was Sistema’s participation, as a Ge(cid:1)

neral Partner, in the third annual Russian Innovations Competition arranged

with the assistance of the Ministry of Education and Science and the Ministry of

Nuclear Energy of the Russian Federation, with mass(cid:1)media coverage provided

Corporate social responsibility

SISTEMA ANNUAL REPORT 2003

by Expert magazine. During its three(cid:1)year history, the competition has attracted

over 1,300 projects and become a significant event for the academic and busi(cid:1)

ness communities and a unique venue for innovation policy promotion in Russia.

In 2004, Sistema signed an agreement to build Sistema(cid:1)Sarov technopark to be

managed jointly with federal state unitary enterprise FGUP Russian Federal

Nuclear Center(cid:1)Russian Research Institute of Experimental Physics. It has become

a major event in implementing the Corporation’s aggressive innovation policy.

Another decision was made recently to create a corporate technopark within the

next few years, based on RTI(cid:1)Sistema Concern (NIIDAR).

By investing in the ideas(cid:1)driven industry today, we lay the foundation for high(cid:1)

tech business which forms the core of our long(cid:1)term strategy. In so doing, we act

in the interests of the entire society which cannot develop in a well(cid:1)balanced and

well(cid:1)rounded way without innovation environment and infrastructure.

HUMANITARIAN PROJECTS. CHARITY

Charity is one of the most visible and widely used aspects of social responsibil(cid:1)

ity. Support for national culture and aid to vulnerable segments of the population

are our top priorities in this area.

CCuullttuurree aanndd AArrttss.. In 2003, Sistema launched its biggest ever culture project,

a 10(cid:1)year program of cooperation with the State Russian Museum in St. Petersburg,

which involves MTS, Intourist, ROSNO, and several other companies.

Under this cooperation program, Sistema’s companies will, in the years 2004

to 2014, support the Russian Museum by providing direct financing and services,

$10mn in total, to enable the Museum to complete several long(cid:1)term projects

in Russia and abroad. Specifically, Sistema became General Sponsor of Virtual

World of Art Museums Program. In 2003 and early 2004, the Corporation’s compa(cid:1)

nies helped the Museum to set up its virtual branches in Nizhny Novgorod, Saratov

and Samara. In March 2004, Vladimir Yevtushenkov, Executive Chairman of Sistema,

was elected Chairman of the Board of Trustees of the Russian Museum’s Develop(cid:1)

ment Foundation.

In addition, the Corporation supports other museums and runs programs in

music culture, rejuvenation of classical music and projects related to restoration

of cultural and architectural monuments. For several years, Sistema has been sup(cid:1)

porting the Mariinsky Theater in St. Petersburg and cooperating with Nikolai

Petrov’s International Charity Foundation and the Meyerhold Charity Foundation.

We sponsor annual mainstream festivals and Earlymusic baroque music concerts,

Benois de la Danse international ballet competition and several other cultural

events. Sistema marked its 10th(cid:1)anniversary in business by arranging a charity

event called “Day of Open Museums” in partnership with Moscow’s best museums.

In 2003, Sistema became an official partner of the 300th anniversary celebrations

of the city of St. Petersburg. With the Corporation’s participation and support,

XII Easter Festival was held in St. Petersburg, along with the Mariinsky Theater’s

opera, ballet, and concert programs, and concerts by leading solo performers and

Corporate social responsibility

SISTEMA ANNUAL REPORT 2003

symphony orchestras in the Philharmonic’s Grand Hall. Sistema lent its support to

more than 70 charity concerts of choral church music in St. Petersburg’s museum

cathedrals, such as St.Isaac’s Cathedral, Peter and Paul Cathedral, Peter and Paul

Fortress, Smolny and Samsonievsky Cathedrals, and to several other cultural events

intended to preserve the traditions of Russian choral singing and church music.

At the end of the Best International Project competition arranged in 2003 on

St. Petersburg City Hall’s initiative, Sistema was distinguished with Highest Award

and a special prize in two nominations, “Best Renovation and Construction

Project,” for renovation and restoration of a unique architectural specimen of

palace architecture (Italian Street, 8), and “Best Cultural Project,” for arranging

and hosting a music festival called “300 Years of Church Music Tradition in St.

Petersburg,” held within the framework of the XII Easter Festival.

Restoration of masterpieces of Russian Orthodox architecture has always been

high on the Corporation’s priority list. In its assistance to the Russian Orthodox

Church, the Corporation tries to support small, remote churches and cloisters, as

well as large and famous cathedrals. In Yekaterinburg, Sistema is involved in the

construction of Memorial Cathedral on the Blood Consecrated to All the Saints

Who Shone Forth in the Russian Land, and in restoration of the Church of Holy

Trinity in Ivangorod. The Corporation provides assistance to “Dawn” Orthodox

orphanage for girls, maintained by the Vladimir diocese, and provides education

grants to students of the Moscow Theological Academy.

SSoocciiaall SSeeccuurriittyy. Similarly, Sistema uses every opportunity to give support and

assistance to vulnerable segments of the population, primarily, orphans. For many

years, we have been helping Sanatorium(cid:1)Orphanage #39 in Pushkino, which has

100 orphaned children in its permanent custody. In 2003, Sistema donated 1mn

rubles to the orphanage, which helped build a sports ground for children of differ(cid:1)

ent age groups. It also provides regular support to a private family boarding house,

which turned five years old in late 2003. We also support an Orthodox orphanage

in Raduzhny Township, Vladimir Region, which looks after 40 children left without

parental care. The Corporation is helping to build classrooms and workshops

for painting, knitting, embroidery, and other traditional folk handicrafts.

The Corporation is a general partner of the international Philanthropist

Award, a unique award for excellence in culture and arts that is given to physical(cid:1)

ly handicapped but artistically gifted people. The Award was instituted in 1997 by

the All(cid:1)Russian Society of the Disabled and the Philanthropist Foundation, which

has many years of experience in creative rehabilitation of disabled people. In the

past four years, nationals of 25 countries were nominated for the Award. This

project gives governmental and public organizations in many countries another

chance to bring disability problems into focus, and to step up and coordinate

their efforts in resolving them. The project has gained support from UNESCO, the

European Commission, the Russian Federation Presidential Administration,

Federal Government of the Russian Federation, Ministry of Culture and Mass

Communications, Moscow City Government, the Prefecture of Moscow’s Central

Administrative District, and the All(cid:1)Russian Society of the Disabled.

Corporate social responsibility

SISTEMA ANNUAL REPORT 2003

Sistema and its companies also help people affected by emergencies, veterans,

and other socially vulnerable segments of the population by supporting relevant

initiatives and projects.

SISTEMA CHARITY FOUNDATION

In 2003, Sistema and its companies carried out enormous groundwork which

led to the establishment by Sistema and its Group Companies of a single Charity

Foundation in 2004. Foundation’s strategic priorities in charity activities are

endorsed and reviewed by the Foundation’s Council headed by Vladimir

Yevtushenkov, Executive Chairman of Sistema. By pooling their efforts and resources,

the Corporation’s companies will be able to act with greater coordination and effi(cid:1)

ciency within the framework of a common strategy. Foundation’s experts will review

requests and projects and provide their expert opinion. We are confident that

transparent, sensible, well(cid:1)thought out and well(cid:1)structured projects under

Sistema’s brand name will win trust and attract interest, not least on the part of

our international partners.

We take a responsible approach to business development

and have a vested interest in setting high social responsibility

standards in the Russian business community, since we hold

social responsibility to be one of the highest priorities

of today's business world.

Sistema’s representatives take an active part in studies and public debates on

the issue of corporate social responsibility. It allows us to be aware of public expec(cid:1)

tations and take them into consideration in our operations. In 2004, Sistema

joined the Presidium of the Committee on Human Resources and Committee

on Corporate Social Responsibility of the Russian Managers Association (RMA),

along with other companies that are most active in implementing their personnel

strategies, social policies, and corporate social responsibility practices on a large(cid:1)

scale basis. RMA is behind extensive studies, which are being currently conducted

for the Report on Social Investments in Russia. We, too, are involved in those studies,

since we want principles of corporate social responsibility to be embraced by mar(cid:1)

ket participants and integrated into their daily practices.

We take a responsible approach to business development and have a vested

interest in setting high social responsibility standards in the Russian business

community, since we hold social responsibility to be one of the highest priori(cid:1)

ties of today’s business world, that considers itself an active and responsible

member of society.

Corporate social responsibility

SISTEMA ANNUAL REPORT 2003

2003 RESULTS

2003 Results

SISTEMA ANNUAL REPORT 2003

Key Financial Results

Sistema is Russia’s biggest private non(cid:1)resource corpora(cid:1)
tion established in 1993. Today, the Corporation owns and
actively manages a diversified portfolio of investments in
various sectors of the country’s economy, such as telecom(cid:1)
munications (MTS, MGTS, Comstar United Telesystems,
etc.), electronics (NIIME & Mikron Plant, STROM Telecom,
Sitronics, etc.), insurance (ROSNO), real estate (Sistema(cid:1)
Hals), retail trade (Detsky Mir), tourism (Intourist), finance
(MBRR Commercial Bank), and so on.
For more details, visit Sistema’s site at: www.sistema.ru

In 2003, Sistema reinforced its positions in all key business

segments and achieved significant growth in all main

financial indicators.

achieved significant growth in all main financial indicators. Having

I n 2003, Sistema reinforced its positions in all key business segments and

completed several M&A transactions and having made our entry into

capital markets, we have further bolstered our position in key service

industries. Today, we are in the lead in mobile and fixed(cid:1)line telecommunica(cid:1)

tions, insurance, electronics and real estate. We have operating control over

major companies in these fast(cid:1)growing sectors and consolidate them in our

balance sheet.

Robust organic growth across all business units in 2003, new acquisitions and

consolidation of MTS contributed to 323% growth in revenues to $3.76bn. Adjusted

EBITDA1 rose by 387%, reaching $1.8bn, earnings shot up by 133% to $387mn.

Sistema’s total consolidated assets grew by 192% in 2003 to $6.84bn, while its equi(cid:1)

ty increased by 66% to $989mn.

(in USD mn)

Revenues

Net profit

Margin

Adjusted EBITDA

Margin

Total assets

Total liabilities

Minority shareholders' interest

Equity

2003

3,759.9

387.0

10.3%

1,799.4

47.9%

6,839.8

2,722.4

1,356.6

989.3

2002

889.5

166.0

18.7%

369.6

41.6%

2,343.2

602.9

388.1

594.8

Growth

323%

133%

–

387%

–

192%

352%

250%

66%

1 Note: Adjusted EBITDA includes the minority shareholders' interest.

2003 Results

SISTEMA ANNUAL REPORT 2003

Sistema’s operating segments comprise such segments as Telecommunications,

Technologies, Insurance, Finance and Securities,2 and others. 2003 data for each

segment is shown against similar data included in the 2002 consolidated Financial

Statements, as follows:

For the year ended December 31, 2003

Telecommu(cid:1)
nications

Technology

Insurance

Finance
and Securities

Corporate
and Other

Total

3,246,813

57,609

169,569

28,333

18,360

47,192

10,321

238,732

3,759,915

10,926

68,695

Net sales to external
customers

Intersegment sales

Income/(loss)
from equity affiliates

Interest income

Interest expense

755

439

22,834

–

(509)

490

6,634

465

29,468

(41,719)

(206,402)

–

(161,911)

(2,772)

–

Net interest revenue

–

2,697

–

2,697

Depreciation
and amortization

(506,644)

(2,862)

(3,115)

(620)

(7,735)

(520,976)

Goodwill impairment

(19,251)

–

(19,251)

Operating income/(loss)

1,103,282

(3,348)

17,111

2,567

(16,131)

1,103,481

Income tax expense

(293,983)

1,571

(3,858)

(3,116)

8,453

(290,933)

Income/(loss)
from continuing operations
before minority interests and
cumulative effect of a change
in accounting principle

Investments in affiliated
companies

671,833

(3,446)

9,079

7,570

(52,437)

632,599

56,298

666

–

3,875

21,665

82,504

Segment assets

5,252,191

103,568

239,273

595,516

651,718

6,842,266

Capital expenditures

1,152,216

9,209

7,310

2,994

41,160

1,212,889

323% growth in revenues in 2003 is largely attributed to the MTS consolidation,

whose share in total growth amounted to $2,638.2mn. Other growth factors included

acquisition of Comstar and consolidation of RTI(cid:1)Sistemy Concern ($66.5mn and

$29.1mn, respectively). Organic revenue growth was fueled by an increase in revenues

from Telecommunications (aside from MTS and Comstar) by $122.3mn, Insurance by

$47.2mn, Electronics by $14.6mn, Finance and Securities by $20.9mn and the other

business units (aside from RTI(cid:1)Sistemy Concern) by $39.4mn.

Telecommunications segment was the biggest contributor to the total per(cid:1)

formance results, with its share in the aggregate revenues having grown to 86.4%

in 2003 from 53.4% in 2002, largely on the back of MTS’ consolidation. MGTS post(cid:1)

ed the highest organic growth in this segment, with its top line going up by $80mn,

or 26.6% y(cid:1)o(cid:1)y, mostly because of tariff hikes for residential users and public insti(cid:1)

tutions which took place in November, 2002 and June, 2003.

2 "Real Estate" figures appear under the "Other" category in the 2003 Financial Statements.

2003 Results

SISTEMA ANNUAL REPORT 2003

2003 Revenues Structure

Other activities
8.1%

5.0%
2.3%

Insurance
Technologies

17.5%
Fixed
Communications

Consolidated Revenues – $3,760 mn

68.9%
Wireless
Communications

Sistema’s Insurance business continues to move ahead in cooperation with

Allianz AG, a global leader in the insurance market. Revenues generated by the

Insurance business rose by 33.5% y(cid:1)o(cid:1)y in response to the introduction of new

insurance products (for example, third(cid:1)party motor insurance) and expansion

of its customer base. Finance and Securities registered a 57.1% growth in volu(cid:1)

me of operations, which reached $57.5mn.

Adjusted EBITDA margin grew to 47.9% of revenues in 2003 from 41.6% in 2002.

Adjusted EBITDA shot up by 387%, to $1,799.4mn, from $369.6mn in 2002.

Similarly, net profit margin shrank from 18.7% to 10.3% in the reporting

period. The drop was largely caused by changes in the accounting policy for

MTS, which resulted in growth in the minority interest, interest payable and

effective tax rate.

In June 2004, Sistema’s AGM approved dividend payout for 2003 in the amount

of RUR 18.5 ($0.64) per share. Total dividend payouts will amount to RUR

149.85mn ($5.17mn), which accounts for nearly 1.3% of Sistema’s US GAAP con(cid:1)

solidated net profit.

FY03 AND 1H04 OPERATING RESULTS

From the operating standpoint, the reporting year was dominated by

mergers and acquisitions, and transactions in capital markets. In April,

Sistema became the first Russian Holding Company to enter the Eurobond

market. The Company successfully placed a five(cid:1)year $350mn Eurobond issue

with a 10.25% coupon. Proceeds from the issue enabled Sistema to exercise

its call option with T(cid:1)Mobile to purchase additional 10% of MTS shares for a

total of $371mn (including transaction costs). This purchase allowed us to

bring our stake to a controlling level and consolidate MTS’ results in

Sistema’s financial reports. This transaction was a success from the financial

viewpoint as well.

2003 Results

SISTEMA ANNUAL REPORT 2003

In December 2002 and February 2003, Sistema sold 100% of its voting shares in

Kedr(cid:1)M financial industrial company, a chain of 30 gas stations in Moscow, to a

third party for a total of $45mn. In December 2003, we sold all our assets in oil

companies to a third party for $308.4mn. The sale of oil production assets allowed

Sistema to raise additional funds for its core businesses.

In November, we purchased 50% of Comstar shares and 50% of Kosmos(cid:1)TV

in a $35mn transaction, which allowed Sistema to bring the size of its voting stake

in Comstar to 100% and consolidate Comstar’s financial results in its consoli(cid:1)

dated reports. The purchase was aimed at consolidating the Corporation’s assets

and eliminating competition within the segment, thus becoming an important

step towards unification of CLEC operators. In May 2004, Sistema announced that

CLEC fixed operators Comstar, MTU(cid:1)Inform and Telmos will be merged into a sing(cid:1)

le operator under a new brand name, Comstar United Telesystems.

In January 2004, Sistema succeeded in repeating its past success in interna(cid:1)

tional debt markets by issuing seven(cid:1)year $350mn bonds with a three(cid:1)year offer

and 8.875% yield. As a result, Sistema could restructure a significant portion of its

short(cid:1)term debt, including credit line notes (CLN) in the amount of 100mn, matur(cid:1)

ing in February 2004.

RATINGS

On November 19, Moody’s rating agency awarded a B1 long(cid:1)term credit rating to

Sistema, citing such positive factors as the Company’s large assets, positive operating

experience, strong growth prospects and strong consolidated cash flows. On March

9, 2004, Standard & Poor’s upgraded Sistema’s rating from B(cid:1) to B against the back(cid:1)

ground of improving liquidity and large asset portfolio in telecommunications.

At the date of this Report, Sistema and its subsidiaries had the following credit

ratings:

Issuer

Sistema

MTS

MGTS

MBRR

Rating agency

Rating date

Long(cid:1)term debt rating

Forecast

Standard & Poor’s

March 9, 2004

Fitch

Moody’s

January 15, 2004

November 19, 2003

Standard & Poor’s

April 28, 2004

Moody’s

December 10, 2001

Standard & Poor’s

March 9, 2004

Fitch

February 16, 2004

BB(cid:1)

Ba3

B(cid:1)

Stable

In June 2004, Euromoney journal recognized Sistema’s achievements in its efforts

toward greater transparency and openness in relations with existing and poten(cid:1)

tial investors and named it Best Corporate Borrower in Eastern Europe based on its

2H03/1H04 performance.

2003 Results

SISTEMA ANNUAL REPORT 2003

GROWTH SOURCES AND NEW OPPORTUNITIES

Russian Federation is our main business area. Accordingly, our performance

is influenced significantly by macroeconomic trends and risks specific to Russia

today. Over the last few years, Russia has succeeded in overcoming the conse(cid:1)

quences of the financial crisis in 1998 and moving ahead toward economic

liberalization and stabilization. Below are Russian Federation’s key macroeco(cid:1)

nomic indicators that had a strong impact on our operations:

GDP growth

Consumer Price Index

Unemployment Rate

Nominal exchange rate (Ruble/USD) (1)

Real appreciation of Ruble against USD (2)

2002

4.3%

15.1%

7.1%

31.4

9.2%

2003

7.3%

12.0%

8.9%

30.6

20.9%

Sources: Central Bank of the Russian Federation, State Statistics Committee of the Russian Federation, Economist Intelligence Unit

(EIU), Ministry of Economic Development and Trade of the Russian Federation.

(1) Simple average of exchange rates on the last business day of each full month during the respective period.

(2) Real appreciation of Ruble against US dollar is calculated on the basis of the Consumer Price Index adjusted for changes

in the nominal exchange rate for the same period.

Russia’s GDP continues to grow at a relatively high rate in comparison with that

of North America and Europe. The Russian economy has been largely unaffected by

the economic slow down, seen today around the world, due to high proportion of

oil and petroleum products in its export income and persistently strong world oil

prices. Since the financial crisis in August 1998, real income of the population has

grown significantly. Growth in real net income in Russia spurs demand for servic(cid:1)

es offered by the Corporation’s core businesses, in particular, telecommunications,

insurance, banking and retail trade.

We take a positive view of the prospects of service industries in Russia and see

good growth opportunities for key markets where Sistema’s companies operate. We

regard stability of the business environment, our immunity to fluctuations of com(cid:1)

modity prices, our strategy of building companies up from scratch, balanced finan(cid:1)

cial strategy and high standards of corporate governance and transparency in our

relations with market participants, as key factors contributing to our steady growth.

Continued cooperation with Russian and foreign partners was a key growth fac(cid:1)

tor and a vital fact of life for the Company in 2003. To date, we have accumulated

experience in building successful alliances with strategic partners holding leading

positions in their respective industries, such as Deutsche Telecom, Allianz AG,

Siemens, and several other global companies, with whom we maintain and devel(cid:1)

op strong business ties.

A significant contribution to the Corporation’s effective business growth in

2003 came from successful corporate restructuring and revamping of manage(cid:1)

2003 Results

SISTEMA ANNUAL REPORT 2003

ment teams in CSC, MGTS, Sistema(cid:1)Telecom, MTS, and Sistema Mass(cid:1)Media,

which since then have already achieved good results and laid a good foundation

for future growth.

We hold leading positions in fast(cid:1)growing industries, have a unique experience

in building and developing business in Russia, a successful experience in business

restructuring; we also boast a broad network of business contacts and one of

Russia’s strongest teams of managers. When reviewing our 2003 results, we believe

that stability of our core business, continued successful partnership and our drive

for leadership open to Sistema’s companies broad opportunities for steady growth

in the future.

Reputation

— Member of the World Business Council for Sustainable Development (WBCSD) since 2003.

— Party to the Global Compact of the United Nations (UN(cid:1)GC) since 2002.

— Best Corporate Borrower in Eastern Europe, named by Euromoney in its survey covering

the second half of 2003 and first half of 2004.

— Second in revenue growth rate and twelfth in revenue volume, according to RBC’s

“300 Largest Russian Companies” rating in 2003.

— Official partner of the 300th anniversary celebrations of the city of St. Petersburg.

Best International Project in 2003 Award from the Government of the City of St. Petersburg.

— Partner of the State Russian Museum

— General partner of the 3rd Annual Russian Innovations Competition arranged with the assistance

of the RF Ministry of Education and Science and the RF Nuclear Power Ministry.

— General partner of the celebrations of the Moscow State University’s 250th anniversary.

— Member of several Russian and international public organizations comprising representatives

of the business community, including:

Russian Union of Industrialists and Entrepreneurs (Employers)

Chamber of Commerce and Industry of the Russian Federation

Russian Managers Association (RMA)

Russian Institute of Directors nonprofit partnership (RID)

Russo(cid:1)British Chamber of Commerce

European Business Club

National Committee for Economic Cooperation with Latin American Countries

Russian(cid:1)Arab Business Council (RABC)

2003 Results

SISTEMA ANNUAL REPORT 2003

Adjusted EBITDA/Interest Expenses (1)

9,9x

11,4x

7,1x

4,7x

BB(cid:1)(2)Ba3

B+/Ba3

B(2)B1

B(cid:1)/NR

2003

2002

2001

2000

1999

— EBITDA/Interest
— MTS
— Sistema

Total Debt/Adjusted EBITDA (1)

3,7x

1,5x

1,9x

1,6x

1,8x

BB(cid:1)(2)Ba3

B+/Ba3

B(2)B1

B(cid:1)/NR

2003

2002

2001

2000

1999

— Total Debt/ EBITDA
— MTS
— Sistema

(1) – Adjusted EBITDA calculated as operating income plus taxes, net interest expenses,
depreciation and minority interests.

(2) – Current long(cid:2)term foreign currency rating

(3) – Rating of senior unsecured debt of Sistema Capital SA

2003 Results

SISTEMA ANNUAL REPORT 2003

ROTA (1)

ROE (2)

38,8%

17,1%

9,6%

2003

2002

2001

2000

48,9%

39,1%

32,9%

25,4%

2003

2002

2001

2000

(1) – Calculated as a ratio of adjusted EBITDA to average total assets

(2) – Calculated as a ratio of net profit to average equity capital

2003 Results

SISTEMA ANNUAL REPORT 2003

Telecommunications

Sistema Telecom Group of Companies is the biggest
non(cid:1)state telecommunications holding company. This
private limited company was incorporated on July 1,
1998 as a subsidiary of Sistema, to insure effective man(cid:1)
agement of the Corporation’s telecommunications assets.
These include this country’s leading mobile and fixed(cid:1)line
operators and Internet access providers, and companies
providing GPS(cid:1)based services and broadband commu(cid:1)
nication services. Sistema Telecom Group includes
Mobile Telesystems (MTS), Moscow City Telephone
Network (MGTS), Comstar United Telesystems, MTU(cid:1)
Intel, Sky Link, and Golden Line, among other compa(cid:1)
nies. Sistema Telecom’s companies have operations in
more than 60 Russian regions and in other CIS count(cid:1)
ries (Ukraine and Belarus). The Group provides services
to more than 25 million subscribers.
For more information, visit Sistema Telecom at: www.sistel.ru

Vladimir Lagutin,
General Director of Sistema Telecom:

“Sistema Telecom's chief strategic objective is to strengthen

its leading position in the Russian telecommunica(cid:1)

tions market across its all key segments, such as mobile

and fixed(cid:1)line telephony, Internet access and data trans(cid:1)

mission. To meet this objective today, we would need

to take active steps toward consolidation of the assets we

acquired earlier.”

in several leading operators and is the biggest non(cid:1)state market partici(cid:1)

S istema, a strategic investor in the communications industry, holds shares

ly expand their mix of products and services, investing in future(cid:1)oriented tech(cid:1)

in this segment. In 2003, the Group’s Companies continued to aggressive(cid:1)

pant. Sistema Telecom is a designated manager of the Corporation’s assets

nologies and developing the most advanced communication services.

Telecommunications is one of the fastest(cid:1)growing markets in Russia. Its rev(cid:1)

enues are rising rapidly, its growth potential remains high. Russian and foreign

investors consider telecommunications as one of the most attractive industries for

strategic investment.

Sistema Telecom’s main objectives in 2003 were asset consolidation and busi(cid:1)

ness streamlining in the Companies of the Group. The Company made a few strate(cid:1)

gic investments. In April 2003, it exercised its option to purchase 10% of MTS

shares from Deutsche Telekom, which gave us the controlling stake in MTS. In

November 2003, we finalized a deal to purchase 50% of Comstar’s shares from

2003 Results

SISTEMA ANNUAL REPORT 2003

Income generated by the Russian
Telecommunications Industry, in USD bn.

Average a n n u al gro wth rate in 1999(cid:2)2003 – 32 %

13,56

8,7

6,7

5,2

6,7

4,1

2003Е

2002

2001

2000

1999

1998

— Incumbent Operators
— Alternative Operators

Source: RF Ministry of Information Technologies
and Communications and Sistema Telecom's estimates

Metromedia International Group, which gave us control over 100% of Comstar’s

shares. Following that, the Group’s CLEC operators were consolidated on the basis

of Comstar which thus became a single digital operator named Comstar United

Telesystems. In December, Carmarthen Trading Ltd. sold us 50% of common shares

of Sky Link, which was set up in July 2003 with the express purpose of imple(cid:1)

menting a project for a federal IMT(cid:1)MC(cid:1)450 (CDMA 2000) mobile communica(cid:1)

tions operator.

Since January 1, 2003, MTS and Comstar consolidation has resulted in our

FY03 consolidated revenues going up by $2,704.7mn. Overall, this segment’s rev(cid:1)

enues rose by 572.8%, or $2,764.9mn in 2003, to $3,247.6mn, compared to

$482.7mn in 2002.

Discounting the new business acquisition effect, growth was mostly fueled by

MGTS, whose top line increased by $80mn. MTU(cid:1)Intel’s revenues rose by $16.7mn.

Disregarding MTS and Comstar consolidation, revenues in the telecommunications

segment grew by 23.1% y(cid:1)o(cid:1)y. Operating rate of return in the Telecommunications

segment was 34% in 2003, down from 58% in 2002.

2003 Results

SISTEMA ANNUAL REPORT 2003

Operations in the financial markets:

— October 2003: Mobile TeleSystems placed a $400mn Eurobond issue maturing in 2010

(listed on the Luxembourg Stock Exchange).

— February 2003: The Moscow City Telephone Network places its third RUR 1bn issue

of two(cid:1)year coupon paper bonds (listed on MICEX).

WIRELESS COMMUNICATIONS

Vasily Sidorov,
President of Mobile TeleSystems

Mobile TeleSystems, the largest cellular telecom operator in Eastern and

Central Europe, is our key asset in this segment. MTS has teamed up with Deutsche

Тelekom as its partner.

In 2003, Mobile TeleSystems expanded geographically, increased the number of

its subscribers significantly and achieved impressive financial results.

Through 2003 and early 2004, we received licenses to provide GSM mobile com(cid:1)

munication services in over 30 Russian regions. By February 2004, the operator’s

license area had been expanded to 87 regions. The Company plans to obtain

licenses for two more regions, namely Penza Region and the Chechen Republic,

sometime in the future.

In 2003, Mobile TeleSystems started providing additional commercial GSM –

GPRS and MMS (multimedia messages) services in all its license areas.

As of June 30, 2004, the consolidated number of MTS subscribers stood at 22.78mn.

MTS shares have been traded on the New York Stock Exchange (NYSE: MBT)

since June 30, 2000, and on the Moscow Interbank Currency Exchange (MICEX)

since December 8, 2003. MTS has a free float of 22.5%. In the past four years, MTS’

market capitalization has grown by 490%.

Since the current mobile penetration level in Russia is 32%, we believe that the

Company has a significant growth potential.

MTS contributed $954mn to the total amount of operating profit from wireless

telecommunications services in 2003.

In 2003, MTS embarked on a corporate restructuring program designed to im(cid:1)

prove manageability of its regional businesses and separate strategic and day(cid:1)to(cid:1)day

management. A new management tier, macro(cid:1)region, is being created under this

2003 Results

SISTEMA ANNUAL REPORT 2003

MTS Market Capitalization

Market Cap $2.1bn

Market Cap $12.4bn

o w t

0 % g

MTS'
Share
Price, $

140

120

100

30.06.00 06.12.00 16.05.01 26.10.01 08.04.02 12.09.02 20.02.03 29.07.03 05.01.04 14.06.04

restructuring program. Regional subsidiaries are to be merged into 10 macro(cid:1)

regions, with some managerial functions delegated to them. Strategic issues and

corporate standard setting will be reserved for the Head office in Moscow, while

regional offices will be charged with running their business on the day(cid:1)to(cid:1)day basis.

Sistema Telecom’s strategic priorities in the mobile communications sector are

insuring the best possible conditions for MTS’ market capitalization growth and

continued increase in cash inflows.

2004 saw the first step in the development of a single federal IMT(cid:1)MC(cid:1)450

(CDMA 2000) network, to be operated by Sky Link. According to the operator’s

plans, the network is to be developed based on the geography of enlarged regions

in line with Russian administrative boundaries.

At the initial stage of the project, Delta Telecom, Moscow Cellular

Communications, and Personal Communication are to be merged under the brand

name of SKYLINK. Later on, the new trademark will also cover regional NMT(cid:1)450

subsidiary operators.

2003 Results

SISTEMA ANNUAL REPORT 2003

INCUMBENT FIXED OPERATORS

Mikhail Smirnov,
General Director of the Moscow City Telephone Network

Sistema holds leading positions in the fixed(cid:1)line communications market,

thanks to its controlling stake in MGTS, a Moscow telecom operator. Today, MGTS

is one of Europe’s largest local fixed operators. In 2003, the Company started

implementing a new corporate strategy, pursuing such key goals as stepping up

telephone network development, timely completion of the last stage of general

modernization plan and creation of a new customer service system.

The number of MGTS’ access lines in use rose by 1.1% in 2003, to 4.1mn. In

2003, MGTS’ revenues were up 26.6% y(cid:1)o(cid:1)y. Revenues from subscription fees

climbed 32.6% y(cid:1)o(cid:1)y, to $198.8mn. Rapid growth was brought about largely by con(cid:1)

tinuing changes in tariff structure. Revenues from local telephony services, sub(cid:1)

scriber connection fees and line leasing rose by 20.7% y(cid:1)o(cid:1)y, to $103.5mn.

In 2003, MGTS achieved the highest organic growth in the telecommunications

segment. Further growth can be achieved through, in the first place, network mod(cid:1)

ernization, expanded number capacity and introduction of added(cid:1)value services.

Early 2004, MGTS launched the last stage of its telephone network general

upgrade program, started back in 1998. At this upgrade stage, analog automatic

exchanges are to be replaced with digital ones. By completing this stage, the

Company will be able to bring digitization level of its fixed(cid:1)line telephone network

in the Russian capital in line with the standards of the world’s largest cities. Its

capex to revenues ratio was 16%. in 2003.

Every year, beginning in 2005, MGTS plans to upgrade from 300,000 to 500,000

access lines and simultaneously increase its number capacity to meet all phone(cid:1)

line installation requests. The Company plans to replace all analog automatic

exchanges with digital exchanges within seven to eight years.

A major breakthrough in the Company’s technological development enables

MGTS to offer new, modern communication services, reinforce its position in

Moscow’s telecommunications market, which will open up new growth opportu(cid:1)

nities for the Company.

Network modernization is the main challenge facing MGTS today. Sistema

Telecom’s strategic priorities in the market of incumbent fixed operators are

acquisition of Svyazinvest’s stake in MGTS and grooming the Company for an

IPO, as well as sustainable growth in value(cid:1)added, broadband and data trans(cid:1)

mission services.

2003 Results

SISTEMA ANNUAL REPORT 2003

ALTERNATIVE FIXED OPERATORS

Semyon Rabovsky,
General Director of Comstar

Purchase of another 50% of Comstar shares in November 2003 gave Sistema an

opportunity to merge three biggest CLEC operators, namely, Comstar, MTU(cid:1)Inform

and Telmos, and create on their basis in 2004 a new digital operator under the

brand name of Comstar United Telesystems. Legal aspects of the merger are

expected to be finalized before the end of 2004.

Judging by the 2003 results, the merging operators provided services to over

26,000 corporate customers and nearly 500,000 individual users. Comstar United

Telesystems is now the largest fixed(cid:1)line digital telecom operator in the Moscow

Region, both in terms of number capacity in use and the number of corporate

subscribers.

The new operator owns a fiber optic network in Moscow, provides such servic(cid:1)

es as telephony, Internet access (through dial(cid:1)up, dedicated networks and based

on ADSL technology), hosting, channel leasing, virtual private networks (VPN),

videoconferencing, access to banking, financial, and information resources and

also issues telephone cards. The Company is geared to servicing corporate sub(cid:1)

scribers and private users alike, providing a full range of cutting(cid:1)edge telecommu(cid:1)

nication services.

Comstar contributed $4.8mn to the total amount of profit derived from tradi(cid:1)

tional telephony services in 2003, with cost of sales reaching $31.1mn, or 46.7% of

revenues, and operating rate of return standing at 7.3% for the same period.

MTU(cid:1)Inform’s revenues grew to $101.3mn in 2003, from $92.3mn in 2002, due

to an increase in the number of access lines in use. The number of access lines in

use was up 8.3% and revenues rose by 9.6% which pushed the Company’s operating

rate of return up to 48.3% in 2003, compared to 41.1% in 2002.

Despite a temporary break in service provision which lasted from February till

April 2003, Telmos’ revenues grew by 2.2% in 2003 to $37.5mn. As of December 31,

2003, the number of the Company’s lines in use increased to 57,609 from 51,690

in December 31, 2002.

Comstar United Telesystems’ main task is to complete consolidation of its oper(cid:1)

ators and become a leading CLEC fixed operator, by drawing on the experience and

technological resources of MTU(cid:1)Inform, Comstar, and Telmos.

The unified operator plans to raise the market’s awareness about its business by

providing IFRS financials.

2003 Results

SISTEMA ANNUAL REPORT 2003

Market Share
of Comstar United Technologies

Others,
40%

Combelga,
4%

Source: Cominfo Consulting

Comstar
United
Telesystems,
35%

Golden
Telecom,
21%

INTERNET ACCESS AND DATA TRANSMISSION

MTU(cid:1)Intel, Russia’s flagship Internet provider, consolidated its leading position

in the market in 2003 by offering high(cid:1)quality services at reasonable prices and

making its products as user(cid:1)friendly as possible.

MTU(cid:1)Intel specializes in providing a full(cid:1)range of Internet services, including

Internet access, IP telephony, service and application hosting, private corporate

networking, and so on.

In 2003, MTU(cid:1)Intel’s revenues rose on the back of steady growth in the number

of active subscribers, using ADSL technology(cid:1)based Internet access service (up

95.4% y(cid:1)o(cid:1)y). This growth was partly offset by falling tariffs for corporate and indi(cid:1)

vidual users, which pushed the Company’s revenues up by 56.8% to $46.1mn in

2003 from $29.4mn in 2002. Cost of goods sold was $34.4mn, or 74.7% of revenues

in 2003, compared to $22.8mn, or 77.6% of revenues in 2002.

In February 2004, MTU(cid:1)Intel, a leading Internet provider in Moscow, launched

broadband ADSL Internet access services for residential customers. It introduced a

new set of tariffs, called Stream, to attract this customer group. The new tariffs

geared to private users offer affordable access prices and data transmission speed

of 1 to 7 MB/sec. New high(cid:1)speed home Internet channel is a logical step in the

development of Russia’s biggest broadband Internet access project, Tochka Ru, run

jointly by MGTS and MTU(cid:1)Intel.

Sistema Telecom’s objective now is to insure efficient management of the

Corporation’s telecommunications assets and consolidate its leading position

across all key segments of the telecommunications market.

Sustainable growth in the telecom industry opens up new growth opportunities

for the Group’s Companies. While still in the lead in the Moscow telecommunica(cid:1)

tions market, Sistema Telecom is poised to branch out to other Russian regions and

2003 Results

SISTEMA ANNUAL REPORT 2003

FSU countries, which the Group considers strategic, and to emerging countries

with promising telecommunications markets.

The telecommunications market is developing vigorously, creating a new social

environment and setting new standards of living. It also calls for ever more com(cid:1)

plex, high(cid:1)tech, innovative and large(cid:1)scale approaches. Sistema Telecom responds

to challenges of the future by charting a new strategic course and insuring a bet(cid:1)

ter coordination of its Group Companies’ efforts.

Reputation

Mobile TeleSystems

— Highest corporate governance standard among Russian companies. Standard & Poor's rating

agency ranks MTS among leaders in corporate governance standards in Russia. In July 2004, following

its annual rating review, Standard & Poor's upgraded Mobile TeleSystems' rating to CGR7+, the highest

rating it had ever awarded a Russian company.

— Company of the Year 2003 Russia based on the survey conducted by The Banker magazine.

— 15th in the 2003 annual Info Tech 100 rating conducted by Business Week journal among 10,000 public

companies.

Moscow City Telephone Network

— Winner of the Company of the Year 2003 Award in the Telecommunications sector instituted

by Kompaniya journal.

— Winner of the Russian National Olympus Award in the Construction, Transport

and Communications nomination.

— Gold Medal awarded at the Archimedes(cid:1)2003 International Industrial Property Show.

MTU(cid:1)Inform

— Brand Name of the Year/EFFIE 2003 in the Services to Business nomination. The Award was given

to the Logic Line intellectual services package. It was the Company's second award, the first one being

awarded to MTU(cid:1)Inform in 2001 in the High(cid:1)Tech Goods and Services Category. In 2000, it was nominated

in the Computer Elite 2000 Category.

— Winner of the Company of the Year 2000 Award instituted by Kompaniya journal, in the special Internet

Provider of the Year nomination.

Comstar

— Comstar's Dial(cid:1)Public Internet cards won First Prize at the 13th Moscow International Advertising

Festival in the Packaging and Labeling nomination.

— Comstar's web payphones were recognized the best product in the Original Advertising Media nomination

at the Russian national PROFI(cid:1)2003 competition of promotional opportunities.

TELMOS

— Patron of the Year 2003. The award is presented as part of the annual Idol Award for performing artists

instituted by the Russian business community, for support to the performing artists' community

and significant contribution to the revival of the traditions of Russian patronage.

2003 Results

SISTEMA ANNUAL REPORT 2003

MTU(cid:1)Intel

— Reader's Digest Trusted Brand Award in the Internet nomination based on surveys in 14 countries.

— Winner of the Company of the Year 2001 Award instituted by Kompaniya journal in the Internet Provider

of the Year nomination.

— Tochka Ru Trademark: Brand Name of the Year /EFFIE 2002 in the High(cid:1)Tech Services nomination.

Personal Communications (Sonet Cellular Network trademark)

— Brand Name of the Year/EFFIE 2003 in the High(cid:1)Tech Services nomination.

— Award of the Moscow Consumer Rights Foundation for "Contribution to the creation of a civilized

consumer market" in 2003.

Moscow Cellular Communications

— Certificate of the Public Council of Experts of the Russian and Moscow Consumer Rights Foundations

for Contribution to the creation of a civilized market in Russia in 2003.

2003 Results

SISTEMA ANNUAL REPORT 2003

Electronics

CSC (Science Center Concern), one of the largest
diversified associations of electronics enterprises in the
Russian Federation, was established in May, 1997 to pool
the member companies’ resources in carrying out large(cid:1)
scale projects in the electronics industry. The Concern’s
major shareholders are Sistema (77.5%) and NED
Electronic Gmbh (10%), while individual minority share(cid:1)
holders own a total of 12.5%. The Concern’s enterprises
are located in Zelenograd (suburban Moscow), Prague,
Voronezh and several other cities in Eastern Europe. The
CSC enterprises’ products are exported to Western and
Eastern Europe, Russia and other CIS countries, North
America, the Middle East, and Southeast Asia. The
Concern’s enterprises employ over 5,000 highly(cid:1)skilled
professionals. The Concern’s Board of Trustees is headed
by Nobel Prize winner Zhores Alferov, vice president of the
Russian Academy of Sciences.
For more details, visit CSC at: www.koncern.ru

Alexander Goncharuk,
General Director of CSC:

"We develop a knowledge(cid:1)intensive business and see a great

promise in it, because intellectual potential and innova(cid:1)

tions are among our chief competitive advantages in the

world market. Today, we have a strong team working hard

to improve the Concern's efficiency, increase its market

capitalization, develop successfully in the new science and

engineering paradigm, and put electronics to the forefront

of Sistema's business."

try. It makes long(cid:1)term investments and is currently one of the largest

S istema holds shares in several leading enterprises in the electronics indus(cid:1)

and software (information and communication systems), microelectronics (devel(cid:1)

non(cid:1)state market players in this segment. Concern’s companies focused

on three key areas in 2003: production of telecommunications hardware

opment and production of semiconductors), and production of electronic prod(cid:1)

ucts (consumer and industrial electronics).

Development of the electronics business is a strategic priority for the

Corporation. In 2003, Sistema went ahead with restructuring its assets in this sec(cid:1)

tor. Management of CSC was put in the hands of Alexander Goncharuk (previous(cid:1)

ly CEO of Sistema Telecom), one of the Corporation’s most competent executives.

A new strategy was adopted to transform the Concern into the biggest high(cid:1)tech

company in Eastern Europe. Under this strategy, the Concern changed its owner(cid:1)

2003 Results

SISTEMA ANNUAL REPORT 2003

ship structure, reinforced management teams at its enterprises and completed

financial restructuring.

In 2003, CSC companies registered a healthy growth in all key indicators, both

on the back of organic growth of its enterprises and new acquisitions.

The electronics segment’s revenues rose to $85.9mn in 2003, up 12.8% y(cid:1)o(cid:1)y.

Organic revenue growth amounted to $14.6mn in 2003. The bulk of revenues in

this segment in 2003 came from Mikron plant and STROM telecom.

Microelectronics and telecommunications equipment accounted for 89% of rev(cid:1)

enues in 2003.

Revenue in USD mn.

76.2

29.9

29.3

2003

2002

2001

2000

We believe that CSC enterprises have a considerable growth potential. Strong

growth and further improvement in the financial and economic state of the

Concern’s enterprises in 2004 driven by the outpacing organic growth in turnover,

is expected to more than double their financial numbers. As an additional fund(cid:1)

raising alternative, we are mulling the possibility of taking CSC to the public mar(cid:1)

ket through an initial public offering.

INFORMATION AND COMMUNICATION EQUIPMENT

Following the integration of STROM telecom’s Group of Companies into CSC in

2003, production of telecommunications equipment and information systems

became its key business area.

Aggregate annual volume of the Russian telecommunications equipment market

today is estimated at between $2.5bn(cid:1)$3.5bn, growing by 10%(cid:1)15% annually. Russian

companies account for about 20% (cid:1)30% of the market, with CSC holding 2%.

STROM telecom manufactures a broad spectrum of modern communication

equipment, products based on information systems and technologies, including

switches for intellectual network (IN) services, call centers, transit telephone

2003 Results

SISTEMA ANNUAL REPORT 2003

exchanges, analog(cid:1)to(cid:1)digital converters, billing systems, customer support sys(cid:1)

tems, unauthorized access protection systems, next generation network (NGN)

solutions and so on. All products are manufactured in compliance with interna(cid:1)

tional ISO 9001 quality standards. STROM telecom takes orders from operators of

all communication types (fixed(cid:1)line, mobile and IP telephony) in Russia, other CIS

countries, Western and Central Europe and the Middle East.

Following a decision to start equipment production in Russia, a surface mount(cid:1)

ing line was installed at the Elaks plant in 2004 and production of modern

telecommunications equipment was launched under the STROM telecom trade(cid:1)

mark. In 2003, STROM telecom’s order book more than doubled y(cid:1)o(cid:1)y. The

Company expanded its geographic reach as well. In 2004, STROM telecom started

exporting MEDIO communication equipment to the US. The first MEDIO digital

switching system was installed in New York, to be followed by other major US

cities. Services based on MEDIO platforms are provided to telecom operators in

Russia, Germany, the Czech Republic, Ukraine, and several other countries.

STROM telecom and its subsidiaries generated revenue of $37.3mn in 2003, or

up 34.1% y(cid:1)o(cid:1)y.

Now, CSC’s strategic objective is to solidify its leading position in the equip(cid:1)

ment production for small and medium(cid:1)sized companies and broaden operations

in information and communication technologies.

MICROELECTRONICS

One of the Concern’s companies, Molecular Electronics Research Institute and

Mikron Plant (NIIME & Mikron), an undisputed leader in the Russian microelec(cid:1)

tronics industry, is the biggest manufacturer of integrated circuits in Russia and

other CIS countries. The Company manufactures over 450 kinds of integrated cir(cid:1)

cuits and semiconductor products. Microelectronics products are also manufac(cid:1)

tured by VZPP(cid:1)Mikron (based on the Voronezh Semiconductor Instruments Plant).

In 2003, the global semiconductor market topped $150 billion, registering a 7%

growth. The Semiconductor Industry Association estimates that the market will

continue to grow by 9%(cid:1)10% per annum in 2003(cid:1)2006. The integrated circuit mar(cid:1)

ket in Russia stood at around $0.8bn in 2003, and is currently posting an annual

growth of 10%(cid:1)15%. Mikron has the largest share (around 4%) of the market

among Russian manufacturers and is the biggest Russian exporter of microelec(cid:1)

tronics products. It sends more than 70% of its output to Southeast Asia, Europe,

and America. Mikron opened a representative office in China in 2003.

In 2003, Mikron continued to implement its strategic development program,

under which the Company positions itself as a supplier of made(cid:1)to(cid:1)order micro(cid:1)

circuits and reorganizes its marketing system to sell its products directly to equip(cid:1)

ment manufacturers. In the meantime, it keeps up expanding its traditional client

base in the domestic market, including state contractors.

In 2003, NIIME & Mikron became the first Russian high(cid:1)tech company to enter

the stock market, when it placed a RUR 300mn bond issue on the Moscow Stock

Exchange.

2003 Results

SISTEMA ANNUAL REPORT 2003

Mikron generated $35mn in revenues in 2003, or 40.7% of total revenues

in this segment.

The Company intends to finalize setting up a business that would develop

and promote specialized analog and analog(cid:1)digital information systems (ASIC

Vendor), relying on its R&D and marketing expertise.

Maintaining further efficient growth in microelectronics, which is a complex

knowledge(cid:1)intensive industry, is among top priorities for CSC. Developing new

products and technologies is a basic principle for growing CSC enterprises. NIIME

& Mikron is a leading participant in the National Technological Program run by

the Russian Management Systems Agency. Some of the Concern’s companies are

involved, together with their foreign counterparts, in the European Union’s fun(cid:1)

damental program to develop new technologies (FP(cid:1)6).

Financial markets:

— July 2003: NIIME & Mikron placed a RUR 300mn bond issue (Moscow Stock Exchange).

INDUSTRIAL AND CONSUMER ELECTRONICS

Elaks, Elion and Kvant plants, Precision Engineering Research Institute, and

several other enterprises and R&D centers of the Concern are in charge of devel(cid:1)

oping and manufacturing consumer and industrial electronic products.

Concern’s chief objective in this segment in 2003 was implementing a program

to create Russia’s first consumer electronics umbrella brand(cid:1)name Sitronics.

Russia’s consumer electronics market volume exceeded $6bn in 2003, or 20% up

from 2002 (according to GfK). Russian manufacturers’ market share is around 40%

and growing, mostly in the low(cid:1)end segment.

The year 2003 was a watershed for the Sitronics project and for CSC, as a whole.

Sitronics, a company created in 2002 to manufacture consumer electronics under

Sitronics trademark, has expanded its product line from 3 to 26 products. In 2004,

Sitronics’ product line comprised over 40 product items, from television sets to

computers (including notebooks), LCD displays, telephones, DVD players, MP3(cid:1)

Flash audio players, digital recorders, and so on. Next in line are car radio(cid:1)tape

recorders and new types of audiovisual, consumer and computer products.

In 2003, revenues generated by sales of electronic devices and home appliances

(mostly sales of Sitronics products) amounted to $7.4mn, or 8.6% of the segment’s

revenue, from $4.9mn, or 6.9% in 2002.

The Company’s strategy is aimed at developing a leading national brand name

in world(cid:1)class consumer electronics in the mid(cid:1)price segment.

2003 Results

SISTEMA ANNUAL REPORT 2003

Reputation

NIIME & Mikron

— ISO 9001:2000 Quality Management System Certificate

— Recipient of the Russian Government's Quality Award in 2001

— Russian Quality Leader 2002 Certificate from the Russian Quality Organization

— Certificate from the Military Register system

— Member of the European Foundation of Quality Management (EFQM)

— "Quality and Safety Guarantee" Certificate and Award at the WQO's National Security 2002.

Elion and NIITM

— Twelve products were distinguished with gold medals at international industry fairs.

STROM telecom

— ISO 9000 Quality Certificate

— Product line comprises more than 20 systems and products certified in compliance with the standards

of countries of operation (Russia and other CIS countries, Germany, US, and Europe).

Sitronics

— Certificate of the Association of Trading Companies and Manufacturers of Electrical Home Appliances

and Computer Products

— Certificate of the International CEM(cid:1)2003 Exhibition

— Certificate of the International 21st Century High Technologies Forum

— Certificate issued by the Uniscan Association

— Certificate issued by the Uniscan Association (electronic data exchange)

— Certificate of Potrebitel (Consumer) magazine (SB 2135 model)

— Certificate of Potrebitel (Consumer) magazine (SB 2107 model)

— Certificate of Potrebitel (Consumer) magazine (SB 2136 model)

2003 Results

SISTEMA ANNUAL REPORT 2003

Insurance

ROSNO insurance company was established in 1991.
Today, Sistema has a 47% stake in the Company, with
another 45.27% held by Allianz AG. ROSNO is a general
insurer licensed to provide 95 types of coverage. It oper(cid:1)
ates a regional network of 100 branches managed by ten
regional offices and 185 agencies in all constituent territo(cid:1)
ries of the Russian Federation, a representative office in
Kazakhstan, and a subsidiary in Kyrgyzstan. ROSNO’s key
product classes include voluntary medical insurance poli(cid:1)
cies, property insurance, motor vehicle insurance, and
reinsurance. ROSNO’s corporate customers are mostly
engaged in telecommunications, oil and gas, banking,
manufacturing, wholesale and retail trade.
For more details, visit ROSNO at: www.rosno.ru

Leonid Melamed,
General Director of ROSNO:

"We continue to improve the Company's operations, above

all, its business management strategy, incentivization

arrangements, accounting system and product quality

monitoring, i.e. all those areas that will ultimately help us

improve the quality of services we offer to our numerous

customers. We have very ambitious goals aimed at high

annual growth of ROSNO's business in the next five years.

To be able to meet such huge challenges, the Company

needs matching resources. We have strong shareholders,

such as Sistema and Allianz. They have accumulated enor(cid:1)

mous experience in their respective fields and are willing

to share it with us."

tion with Allianz AG. ROSNO is the biggest general insurance company and

I n 2003, Sistema continued developing its insurance business in collabora(cid:1)

one of leading insurers at the national level. Throughout 2003, ROSNO con(cid:1)

tinued to meet the objective set by its shareholders, namely to provide

brand(cid:1)new insurance products at affordable prices.

In 2003, ROSNO’s shareholders made a crucial decision to more than double

the insurer’s charter capital, to RUR 960mn. The same year, the number of volun(cid:1)

tary and mandatory insurance products offered to individuals and corporate

clients, reached 95. In 2003, the Company sold 1.25mn policies, up 10% y(cid:1)o(cid:1)y.

ROSNO and its subsidiaries sell medical, property, motor vehicle, life, accident,

and reinsurance policies. Last year, the Company’s top management adopted a new

regional development strategy to improve performance of its regional network and

2003 Results

SISTEMA ANNUAL REPORT 2003

streamline business management of its structural units. In accordance with this

strategy, the Company completed reorganization of its regional structure, setting up

ten offices put in control of ROSNO’s 100 branches grouped by the geographic prin(cid:1)

ciple. Reorganization is expected to facilitate delegation of the head office’s respon(cid:1)

sibilities to regional offices, accelerate management decision making, improve

indemnity and benefit payment, and cut the Company’s admi(cid:1)nistrative costs.

ROSNO’s business experience of many years, as well as its stable financial situ(cid:1)

ation are reflected in the dynamics of its key financial indicators in 2003.

In 2003, the insurance segment’s revenues rose by $47.2mn, or up 33.5% y(cid:1)o(cid:1)y,

mostly on the back of to the development and promotion of new insurance prod(cid:1)

ucts and customer base expansion.

Voluntary medical insurance, motor vehicle insurance, and property insurance

contributed $121.2mn altogether, or 55.5% of total premiums. In general, the total

amount of premiums went up by 38.1% in 2003, to $218.2mn, from $158mn in 2002.

Premiums by Insurance Class, in USD '000

Voluntary medical insurance

Third(cid:1)party motor insurance

Insurance against motorist damage

Property insurance

Personal liability insurance

Marine, aviation and transport insurance

Accident insurance

Insurance against other losses

Life insurance

Mandatory third(cid:1)party motor insurance

Risk reinsurance

Year ended on December 31

2002

2003

(thousands)

53,537

5,231

24,029

18,388

2,823

7,968

4,140

1,867

1,968

–

38,062

62,223

3,168

33,503

25,462

3,201

7,838

7,044

2,988

1,710

14,993

56,117

Total amount of insurance premiums

$158,013

$218,247

The Company’s operating profit shot up to $17.1mn in 2003, from $2.6mn in

2002, while operating rate of return rose to 9.1% vs.1.8% in 2002.

To confirm and guarantee fulfillment of its contractual obligations, ROSNO sets

aside insurance provisions, as approved by the Insurance Supervision Department

of the RF Finance Ministry, and invests such funds in highly liquid and profitable

assets. In particular, ROSNO has created unearned premium fund, life insurance

fund, provision for outstanding claims and prevention fund. A steady growth in

amount of assets kept in these funds insures the Company’s ability to settle its

policy(cid:1)holders’ claims.

2003 Results

SISTEMA ANNUAL REPORT 2003

Net Premiums, in USD mn

163.312

126

79.8

57.2

2003

2002

2001

2000

Growth in the Company’s equity enables it to increase its own retention in

major risk insurance, makes it more stable financially and creates a springboard

for further expansion.

Solvency is one of the most critical factors to gauge an insurance business’s per(cid:1)

formance. Russian laws require domestic insurers to maintain a certain solvency

margin ratio in insurance operations. As of December 31, 2003, ROSNO’s actual

solvency margin exceeded the required level 1.5(cid:1)fold, as a result of its successful

operations in the insurance market and correct assessment of its obligations.

For six years now, PricewaterhouseCoopers has been auditing ROSNO’s

accounts in accordance with the International Financial Reporting Standards

(IFRS). In 2002, ROSNO hired another auditor, Russian company called Marillion.

ROSNO follows a policy of transparency and information disclosure in its dealings

with customers, counterparties and shareholders. The Company has already final(cid:1)

ized its transition to IFRS.

ROSNO has a high(cid:1)quality obligatory reinsurance coverage for assumed risks.

Among its reinsurance partners are Allianz AG, Partner Re, Hannover Re, SCOR,

Munich Re, Swiss Re, and major Russian insurance companies. It also cooperates

with Lloyd’s brokerage agencies.

ROSNO has joined 17 insurance pools and is a member of numerous profes(cid:1)

sional and industry associations, and the International, Russo(cid:1)British, Russo(cid:1)

American, Russian, and Moscow Chambers of Commerce.

One of ROSNO’s strategic objectives is increasing its market capitalization and

improving its solvency standards and, through that, its financial reliability and sta(cid:1)

bility. In addition, the efficiency of investments, business openness and a high level

of corporate culture are all vital aspects of the Company’s strategy.

Among all Russian insurance companies, ROSNO is best prepared to face its

competition after Russia’s accession to the WTO, thanks to its IT infrastructure,

IFRS audit and accounting practice and Allianz AG ‘s experience.

2003 Results

SISTEMA ANNUAL REPORT 2003

Looking into 2004, the Company plans to increase its insurance market share

by 1.5%, attract 40% more premiums on traditional policies, and expand its agency

network. Besides, ROSNO considers setting up two subsidiaries, namely a life assur(cid:1)

ance company and an asset management company.

In the longer term, the Company intends to grow its share in target segments

of the Russian insurance market to 20% by 2007.

Reputation

— The highest rating, А++, “High Reliability with Positive Outlook” in the national rating

of Russian insurance companies compiled by Expert RA rating agency in 2003, 2002, and 2001.

— Gold Award for Business Reputation Excellence from the Russian Financial Press Club in 2003.

Previously, the FPC named ROSNO the most transparent Russian insurance company for three years

in succession.

— Mark of Confidence from Reader’s Digest magazine, two(cid:1)time winner in the Insurance Company Category

based on a survey conducted in 18 countries.

— Winner of numerous Company of the Year Awards.

— Placed on the Reliable Partners Register of the Federal Chamber of Commerce and Industry.

— Golden BRAND NAME OF THE YEAR/EFFIE 2002, winner of the national award

in brand development and promotion.

— Named Best Insurance Company in the annual Popular Trademark 2003 rating.

— In January 2004, Leonid Melamed, ROSNO’s General Director, was named Man of the Year 2003

in the annual People of the Year project run by Russia’s biggest Internet holding company, Rambler.

— Ranked Number One among the 50 Most Strategic Insurance Companies

(on the basis of the survey conducted by the Rating Center of the Institute of Economic Strategies (INES).

— Ranked by the Interfax CEA among Russia’s biggest insurance companies in terms of collected insurance

premiums, except for life insurance:

6th in voluntary insurance, other than life insurance;

1st in personal insurance;

10th in property insurance;

11th in liability insurance;

9th in mandatory third(cid:1)party motor insurance.

— Ranked by the Interfax CEA among Russia’s biggest insurance companies in terms of indemnities paid

in all insurances classes, except for life insurance:

3rd in voluntary insurance, other than life insurance;

4th in personal insurance;

4th in property insurance;

4th in liability insurance.

Sources: Insurance Supervision Department of the RF Finance Ministry

and the Russian Motor Insurance Association

2003 Results

SISTEMA ANNUAL REPORT 2003

2003 Results

SISTEMA ANNUAL REPORT 2003

Real Estate

Sistema(cid:1)Hals is a leading developer in the Moscow
region, managing Sistema’s assets in the construction and
real estate segment. Its core operations include land devel(cid:1)
opment, construction, and real estate management.
Sistema(cid:1)Hals comprises over 20 companies with compe(cid:1)
tencies and skills to carry through a construction project,
from concept design, feasibility study and architectural
concept development to actual construction work and
operation of a completed project. The Company’s core
focus is Class A office real estate, high(cid:1)end residential real
estate and cottages, as well as shopping and leisure cen(cid:1)
ters. Among the largest projects successfully completed
by Sistema(cid:1)Hals in the Russian real estate market are Hals
Tower office complex and Daimler Chrysler head(cid:1)office,
to name just a few.
For more details, visit Sistema(cid:1)Hals at: www.sistema(cid:1)hals.ru

Felix Yevtushenkov,
General Director, Sistema(cid:1)Hals:

"The real estate market in Russia has, without a doubt,

become more professional and, by implication, more

exciting and dynamic. 'Growth' is exactly the word which

encapsulates most precisely the developments in our

Company in 2003. The ingredients of our success are

more diverse order books, emergence of a team of top(cid:1)

notch professionals, application of innovative construc(cid:1)

tion techniques and partnership with renowned foreign

companies."

a company specializing in building high(cid:1)end office real estate and luxury

S istema’s assets in the real estate segment are managed by Sistema(cid:1)Hals,

first(cid:1)class office and residential housing and is a leading developer in Mos(cid:1)

residential properties. The Company has successful experience in building

cow’s booming market.

The Russian real estate market grew at a dramatic rate in 2003, gradually acquir(cid:1)

ing characteristics of well(cid:1)established markets in the West. There are several factors

behind the strong influx of capital into the Russian property market, including eco(cid:1)

nomic growth, government reforms, redistribution of asset types, and fewer invest(cid:1)

ment opportunities in real estate markets in Central and East European countries.

Strong capital flows into Russia’s real estate market undermined rate of return, which

was felt most acutely in 2003. Nevertheless, rate of return provided by the Russian real

estate market is higher than that in Central and Eastern Europe, making a stronger

investment case for the Russian and Moscow markets in the eyes of foreign investors.

2003 Results

SISTEMA ANNUAL REPORT 2003

Rate of return, Class A Office Space*

Moscow

Warsaw

Budapest

Prague

London (City)

Berlin

Q4'97*

18.00

15.00

11.00

10.00

6.27

8.75

Q4'01

17.00

13.00

8.75

9.00

6.55

7.00

Q4'02

16.00

10.00

8.75

8.80

6.00

5.25

Q3'03

15.00**

10.00

8.50

5.25

6.00

* According to Stiles & Riabokobylko Research

Total Vacant Modern Office Space in Moscow*

3.7

3.3

2.75

2.3

1.9

1.7

mn.
(m3)
1.4

0.20

0.25

0.15

0.40

0.50

0.40

2005Est.

2004Est.

2003Est.

2002

2001

2000

1999

— Newly built
— Total on offer (year beginning)

* Source: Colliers International

In 2003, investment funds started to aggressively invest into the Russian real estate

market. Some of these funds, which are being set up today, pool resources of Russian

and foreign investors, who jointly decide on investment strategies for their funds.

Sistema(cid:1)Hals signed a contract to construct a head office building for Siemens

in Moscow (one of the biggest real estate projects in Russia so far), which became

a striking testimony to the stability of the Russian real estate market, its invest(cid:1)

2003 Results

SISTEMA ANNUAL REPORT 2003

ment climate, and the level of trust on the part of foreign investors. Ground(cid:1)break(cid:1)

ing ceremony for Siemens’ new office building of more than 40,000 square meters

was held in September 2003, as part of the celebrations to mark 150 years of

Siemens’ presence in Russia. The project is to be carried out by Sistema(cid:1)Hals joint(cid:1)

ly with Siemens Real Estate. Thus, after many years of teamwork in telecommuni(cid:1)

cations, Sistema and Siemens have found a new area for cooperation.

To date, Sistema(cid:1)Hals order book has 40 projects with a total space of 1.782mn

square meters, including Beijing Hotel renovation project with construction of

additional properties on its premises, and renovation of Detsky Mir department

store on Lubyanka Square. At the present moment, Sistema(cid:1)Hals has developed a

program to build a chain of shopping and leisure centers in the regions, including

St. Petersburg, Novosibirsk, Yekaterinburg, Kazan and others.

In 2003, the Real Estate unit’s revenues were up $17.6mn y(cid:1)o(cid:1)y, reaching

$39.1mn, mostly from sales of newly built office buildings.

The Company’s strategy going forward rests on technological leadership, effi(cid:1)

cient management, successful experience of partnership and implementation of

large(cid:1)scale development projects.

Reputation

— Golden Arch of Europe 2003, Frankfurt. Award for quality and technologies used in the Bolshaya

Ordynka project in 2003.

— Company of the Year Award in the Contribution to Urban Development nomination in 2003 and 2002.

— Best Building Project Completed in 1990(cid:1)2000 in Moscow in the Office Space and Buildings

and Business Centers nomination for the DaimlerChrysler project.

— DaimlerChrysler’s head office building received Grand Prix of the 13th International Construction

Award (New Millennium Award) in the Best Millennium Project nomination in 2001 in Paris.

— 15th Golden Europe Award for Quality (New Millennium Award) in the Best Millennium Project

nomination for DaimlerChrysler’s head office building received in 2001 in Paris.

2003 Results

SISTEMA ANNUAL REPORT 2003

RETAIL TRADE

Detsky Mir Group of Companies, the biggest retailer
for children’s goods in the Russian market. The Detsky Mir
department store, from which the Group derives its name,
celebrated its 45th anniversary in 2002. In 1996, Sistema
became the Company’s majority shareholder (more than
70%, with another 19% held by the Moscow Government).
The Group’s major assets include Detsky Mir department
store, Europe’s biggest retailing outlet selling children’s
goods, in Lubyanka Square (a total area of 54,500 square
meters), visited by up to 60,000 shoppers every day, Toy
Palace in Bolshaya Yakimanka Street, a store on Vernadsky
Prospekt, a warehousing complex in Karacharovo, region(cid:1)
al shopping centers in Orel and Tambov, new(cid:1)format
stores in the MEGA shopping centers and in Moscow’s
Golyanovo, Bibirevo, and Maryino districts. The Group has a
work force of over 1,600. It is currently expanding its
regional operations and creating a nationwide retail chain.
For more details, visit DMC Web(cid:1)Page at: www.detmir.ru

Sergei Kushakov,
General Director, Detsky Mir(cid:1)Center

Among main challenges facing Detsky Mir Group of Companies

in 2003 were testing its new development model, consolidating

retailer's functions in DMC and laying the foundation

for a nationwide retail chain employing the most up(cid:1)to(cid:1)date

retailing techniques.

a leader in the Russian retail market for children’s goods. The Group is a sole

S istema is a majority shareholder in the Detsky Mir Group of Companies,

registered owner of the Detsky Mir trademark in Russia, one of the most rec(cid:1)

ognizable brand names in the market for children’s goods in this country.

Russian market for children’s goods, with a total annual volume of $4bn(cid:1)$5bn,

has been growing at a healthy 15% (cid:1)20% rate per annum over the past two years,

while some goods categories, for example, toys, have registered a 30% annual

growth. Volume of Moscow’s market for children’s goods is estimated at $1bn(cid:1)

$1.5bn. with DMC controlling around 2%(cid:1)3% of the market.

Among main challenges facing Detsky Mir Group of Companies in 2003 were

testing its new development model, consolidating retailer’s functions in DMC

and laying the foundation for a nationwide retail chain employing the most up(cid:1)

to(cid:1)date retailing techniques. In 2003 the Company put together a management

team, launched a new IT system, defined product lines, finalized zoning and

shop floor equipment layouts for new stores. DMC set up a single Distribution

2003 Results

SISTEMA ANNUAL REPORT 2003

Center, Russia’s first non(cid:1)food stock management center, to insure on(cid:1)time

deliveries to Detsky Mir chain stores and keep storage, handling and trans(cid:1)

portation costs to a minimum.

Detsky Mir’s store chain expanded noticeably in 2003. In Moscow, new(cid:1)format

stores were opened in the MEGA shopping center and in the Twelve Months shop(cid:1)

ping center in Golyanovo district. Expansion has continued throughout 2004, with

new Detsky Mir stores opened in the Alexander Lend shopping mall in Bibirevo

and in the BUM shopping mall in Maryino. Next in the line are Detsky Mir stores

in the PIK shopping mall on Sennaya Square and in Shopping Island center on

Vasilyevsky Island in St. Petersburg. In May 2004, the key operator of Detsky Mir(cid:1)

Center Group was running a total of eight stores for children’s goods.

Retail Trade unit posted a 15.3% growth in income, which reached $55.5mn

in 2003 against $48.2mn in 2002. Growth came largely from opening of new retail

units and expansion of floor space in shopping centers. The unit made gross prof(cid:1)

it of $24.3mn, or 30.8% of the segment’s gross profit in 2003, up from $18.6mn,

or 37.3% of the segment’s gross profit in 2002. In 2003, the unit’s operating profit

was $6.6mn, compared to $4.6mn in 2002, on the back of stronger sales.

Detsky Mir Group of Companies’ development strategy seeks to consolidate its

leading position in the retail market for children’s goods, expand its retail chain

in Moscow and across Russia, and capture a bigger share of the market for child(cid:1)

ren’s goods.

2003 Results

SISTEMA ANNUAL REPORT 2003

2003 Results

SISTEMA ANNUAL REPORT 2003

Finance

Moscow Bank for Reconstruction and Development
(a commercial bank), established in 1993, holds General
License No. 2268 from the Bank of Russia. In 2003, MBRD
celebrated its 10th anniversary of successful operations.
MBRD is a full(cid:1)service commercial bank offering a full array
of banking services, more than 140 all in all, including for(cid:1)
eign trade contracts, corporate lending in rubles and for(cid:1)
eign currencies, issue of bank guarantees; securities trading
(sovereign and corporate bonds, equities and bills); retail
banking; consumer lending and asset management servi(cid:1)
ces. The Bank’s shareholders include Sistema (54.27%),
ALROSA company, Intourist travel company, and MGTS
telephone company. The bulk of the Bank’s clientele comes
from the corporate sector. As of December 31, 2003,
the Bank operated in four regions and had three branches –
in St. Petersburg, Syktyvkar and Rostov(cid:1)on(cid:1)Don.
For more details, visit MBRD Web(cid:1)Page at: www.mbrd.ru

The Bank's main goals for 2004 include implementation

of its large(cid:1)scale retail banking project and continued growth

of its corporate client base.

operator in the financial sector. It is a full(cid:1)service commercial bank

M oscow Bank for Reconstruction and Development is Sistema’s key

services. MBRD offers a broad spectrum of banking services and also

operating in three banking areas – corporate, investment, and retail

serves as a treasurer for Sistema Companies.

The macroeconomic situation was favorable to growth of the banking sector in

2003. Stability and predictability of key factors underlying Russia’s development

encouraged high economic growth rates. Growth in personal incomes coupled

with falling interest margins and tougher competition forced banks to step up

their retail banking operations. The amount of retail deposits at credit institutions

went up by 46% in 2003. Deposit account balances (in operating banks, excluding

Sberbank) topped RUR300bn at the end of 2003 (up by more than RUR 90bn since

year beginning).

In 2003, Moscow Bank for Reconstruction and Development launched a retail

banking program drafted jointly with Deloitte and Touche CIS and approved in

November 2002. A retail banking unit was created within the Bank’s organization(cid:1)

al chart to implement its retail banking strategy. Additional retail banking offices

were opened in Moscow and St. Petersburg.

Developing technologies and products based on plastic cards is a key element

of the Bank’s retail strategy. In 2003, MBRD put into operation its own processing

center certified to operate in the MasterCard International and Visa International

payment systems. MBRD has been issuing VISA cards of its own design since

2003 Results

SISTEMA ANNUAL REPORT 2003

August, 2003, and in November 2003 it started handling VISA cards in its own pro(cid:1)

cessing center. The number of VISA International and MasterCard International

cards issued by the Bank more than quadrupled over 2003, standing at 12,800

cards at year’s end.

The Bank’s proprietary network of self(cid:1)service banking terminals expanded six(cid:1)

fold in 2003, from 12 to 70 machines of various types, including 65 ATMs and 5

cash(cid:1)in modules. Self(cid:1)service terminals have now been modified for making cash

deposits onto plastic card accounts. Work started in July 2003 to readjust self(cid:1)serv(cid:1)

ice terminals so that they can accept both plastic card and cash payments from

retail customers.

In 2003, the Bank launched its mobile banking project (remote account

management from mobile telephones). In the same year, MBRD and MTS

entered into a cooperation agreement to develop and promote joint brand

products. As a result, mobile banking information services have been intro(cid:1)

duced along with facilities to accept MTS bill payments from ATMs, cash(cid:1)in ter(cid:1)

minals, and in the Bank’s retail branches.

MBRD’s income rose by 56.9% in 2003, to $57.5mn. Its interest income

increased by 59.2%, to $46.5mn, most of coming from interest on loans made to

the Bank’s customers. Its loan portfolio grew by 68% from January 1, 2003.

The Bank’s main objectives for 2004 include implementation of its large(cid:1)scale

retail banking project and continued growth of its corporate client base. MBRD

intends to strengthen its position among top thirty full(cid:1)service banks in Russia by

the end of 2004.

The Bank plans to achieve its strategic goals in retail banking by various means,

which include expanding its client base by capitalizing on its potential synergies

with MTS, MGTS and Sistema’s other operators, modernizing its technological

infrastructure, and continuing with regional expansion.

Reputation

MBRD Commercial Bank

— MBRD is among 30 biggest banks in Russia in terms of assets. Expert and Profile magazines ranked it 27th

among Russia’s biggest banks in terms of size of assets, and 30th in terms of volume of securities in 2004.

— MBRD was 21st most reliable bank among 100 biggest Russian banks

(as of January 1, 2004, Profile magazine).

— The Bank has the status of Authorized Bank of the Moscow Government.

— Placed by the Federal State Customs Committee on the Register of banks and other institutions certified

by the Customs Authorities to act as guarantors.

— In March 2003, Fitch IBCA international rating agency reaffirmed its MBRD’s credit rating,

giving it stable outlook.

2003 Results

SISTEMA ANNUAL REPORT 2003

2003 Results

SISTEMA ANNUAL REPORT 2003

Tourism and Foreign Assets

Sistema International Investment Group was set up
in 2001 to manage foreign assets, with Sistema as its sole
shareholder. Its business is mostly focused on develop(cid:1)
ment and real estate projects and building travel industry
infrastructure in other countries. Sistema International
has projects in Hungary, Great Britain, Spain, Croatia,
Montenegro, the Czech Republic and several other coun(cid:1)
tries. Today, Intourist is the key operator in the travel
services segment. Victor Bolshakov is President of Sistema
International Investment Group.

Intourist, established in 1929, is a leading operator in
the tourist and leisure services market in Russia. It cur(cid:1)
rently offers a full spectrum of services to individuals and
corporations in the Russian Federation and over 60 other
countries. The Company has a broad mix of travel prod(cid:1)
ucts, including packaged tours and various services, such
as transportation, hotel accommodation, excursions, visa
arrangement, and on(cid:1)line reservation. Intourist has a
well(cid:1)developed network of 1,500 partners acting as its
agents and its own network of 20 sales offices. Intourist
sells its products and services through more than 600
companies abroad. Intourist is this nation’s oldest brand
name and one of the most experienced, reliable, and
rapid(cid:1)growing companies in the Russian travel industry.
Its major shareholders today are Sistema (90.65%) and
GAO Moskva (8.85%).
For more details, visit Intourist Web(cid:1)Page at: www.intourist.ru

Growth in Intourist's sales outpaced the average market rate

in 2003, enabling the Company to increase its share across all key

market segments.

Investment Group, which is mainly focused on managing foreign assets

S Sistema’s assets in this segment are managed by Sistema International

represented by Intourist, Russia’s largest inbound and outbound tour

and developing travel industry infrastructure. In this segment, Sistema is

operator with offices in more than 60 countries.

Inbound tourism is encouraged by growing interest toward Russia, as a rela(cid:1)

tively new and safe international tourism destination which offers an ever expand(cid:1)

ing range of attractive tourist products and has an improving infrastructure.

According to the State Statistics Committee, the number of foreign citizens visit(cid:1)

ing Russia as tourists edged up 2% to 3.2mn people in 2003. Outbound tourism has

been developing even more aggressively, primarily on the back of the growth in

real demand both in Moscow and across the Russian regions. The total number of

Russian nationals traveling abroad in 2003 rose by 13% y(cid:1)o(cid:1)y, to 5.7mn.

2003 Results

SISTEMA ANNUAL REPORT 2003

Growth in Intourist’s sales outpaced the average market rate in 2003, enabling

the Company to increase its share across all key market segments.

Intourist is a leader in the inbound tourism segment in terms of sales and

service technology. It has an average share of over 20% in cultural and business

tourism segments, while these numbers are significantly higher for some other

destinations (40% for Great Britain, 33% for the Netherlands, and 30% for Spain).

Intourist handled over 80% of all tourists coming from Hong Kong, Poland and

the Middle and Near East.

While keeping its focus on in(cid:1)coming tourism, the Company has reinforced its

position in the domestic market as well, by pursuing its strategy as a tour operator,

ticket consolidator and retailer. Intourist has considerably expanded the range of

its services to domestic consumers. Its sales in the outbound tourism segment dou(cid:1)

bled in 2003. Its has entered the Moscow market with new products for Tunisia,

Italy, Spain, Andorra, the United Arab Emirates, and Austria. The Company is now

also offering charter programs in Samara and Arkhangelsk.

Developing a retail office network was one of Intourist’s key objectives in 2003.

The Company opened new sales offices in some of Moscow’s promising districts,

developed a concept and business technology for retail tourism, and launched a

broad promotional campaign. Today, Intourist’s network comprises 20 sales offices

in Moscow, and several franchises and regional subsidiaries.

Retail distribution, transportation, and hotel management units were turned

into independent businesses in order to improve management efficiency. Much

attention was given to promotion of Internet technologies. The Company set up

Comtour system combining the features of on(cid:1)line exchange, web site, and travel

industry software.

The total number of the Company’s customers rose by 32% in 2003 to 259,000.

Its sales jumped by 19.6% the same year, from $52mn to $62.1mn.

The key components of Intourist’s strategy include boosting competitive

advantages in priority markets (incoming cultural and business tourism and for(cid:1)

eign seaside and skiing tours), expanding its market by tapping into high(cid:1)profit

segments (developing VIP services, corporate, convention and exhibition

tourism), smoothing out the seasonality of sales fluctuations by stepping up oper(cid:1)

ations in off(cid:1)seasons, consolidating its position in regional markets, and imple(cid:1)

menting vertical integration into hotel and transportation businesses.

The overriding objective facing Sistema International Investment Group, which

manages Sistema’s foreign assets, lies in developing travel industry infrastructure

and simultaneous maintaining its investment fund operations. In 2004, Sistema set

up a new company, Intourist Hotel Group, as part of its vertical integration pro(cid:1)

gram, to implement various hotel projects. Abbas Aliyev, one of the industry’s most

seasoned managers, who was head of Intourist in 1999(cid:1)2003, was put in charge

of IHG. Andrei Soluyanov was appointed as President of Intourist.

2003 Results

SISTEMA ANNUAL REPORT 2003

Reputation

Intourist

— The Company holds all necessary licenses and certificates authorizing it to provide travel services in its area

of presence. It is a member of leading international travel industry organizations: WTO, RATA, ICCA, PATA,

ASTA, JATA, UFTAA/FUAAV, IATA, COTAL, and AIT.

— Best Tourist Brand Name 2003 in the Best(cid:1)Known Brand Name in Tourism 2003,

Excellence in Professionalism in Brand Name Concept Creation nomination.

— National Tourist Olympus Award from the Travel Industry Department of the RF Ministry

of Economic Development.

— Guiding Star Award from the Travel Industry Board of the City of Moscow.

— Crystal Boat Award from GAO Moskva.

— Travel Industry Leaders Award.

— Awards and prizes at major international travel industry exhibitions – WTM, MITT, MITF and Recreation.

2003 Results

SISTEMA ANNUAL REPORT 2003

Radio Engineering

Radio Engineering and Information Systems
Concern, whose sole shareholder is Sistema, brings
together leading Russian enterprises with significant R&D
and production potential and experience in implementing
uniquely complex high(cid:1)tech projects. RTI(cid:1)Sistemy was
established in 2000 on the basis of the A.L. Mintz Institute
of Radio Technologies (RTI) and the Distant Radio
Communication Research and Development Institute
(NIIDAR R&D complex). Today, the Concern is involved in
R&D projects in radio technologies, information and com(cid:1)
munications, and instrument building. Many of RTI(cid:1)
Sistemy’ projects have no analogues in the world.
For more details, visit its Web(cid:1)Page at www.rtisystems.ru

Sergei Boyev,
General Director of RTI(cid:1)Sistemy

RTI(cid:1)Sistemy is a world leader in over(cid:1) and below(cid:1)the(cid:1)horizon radar

technologies. Experts estimate that Russian radars can capture

anywhere from 10% to15% of the global market.

which operates in three segments with a high synergy potential, namely

S istema’s radio engineering assets are managed by RTI(cid:1)Sistemy Concern,

radio engineering, information and telecommunications, and instru(cid:1)

RTI(cid:1)Sistemy is a world leader in over(cid:1) and below(cid:1)the(cid:1)horizon radar tech(cid:1)

ment building.

nologies. Today, it operates mostly in the domestic market for radar units and

complexes, radio control and positioning systems. In the global market,

demand for non(cid:1)strategic missile defense radars and control systems is just

starting to grow, while demand for air traffic control radars stands at around

50 units a year. Concern sends most of its export(cid:1)oriented products to

Southeast Asia (China). Efforts are under way to identify new export opportu(cid:1)

nities and position the Concern in the market for onboard information sets.

Experts estimate that Russian radars can capture anywhere from 10% to15% of

the global market.

In the information and telecommunications segment, the Concern’s enterpris(cid:1)

es offer services in designing and building integrated institutional and corporate

information networks based on broadband radio access technology. Besides, the

Concern develops general and detailed designs (in DWB(cid:1)RCS, LMDS, Wi(cid:1)Fi and

other standards), manufactures and markets equipment, and develops software.

Concern’s major customers are RF Defense Ministry, RF Ministry of Education and

Science, and the State Customs Committee.

2003 Results

SISTEMA ANNUAL REPORT 2003

In 2003, the Concern won a contract from the RF Ministry of Education and

Science to install and put into operation 4,221 subscriber satellite stations in

38 regions in the European part and the Siberian Federal Area of the Russian

Federation (within the framework of the federal target program “Development

of Common Education and Information Environment”).

The Concern sells its industrial equipment both to industrial customers (broad(cid:1)

cast transmitters) and consumers (Spectrum television sets manufactured by

Saransk Television Plant), including in regional markets. All in all Concern’s prod(cid:1)

ucts are sold at 473 points in 38 regions of Russia. In 2003, the Concern submitted

its bid to participate in the Defense Ministry’s tender for delivery of television

transmitters.

RTI(cid:1)Sistemy conducts research and is actively involved in shaping innovative

infrastructure and implementing federal and regional target programs. In 2003,

the Concern put into service Industrial Exhibition and Trade Center on NIIDAR’s

premises, built a laboratory jointly with the Bauman Moscow State Technological

University, and opened a class of radio information technologies in Secondary

Education School # 227 in Moscow.

Sistema has been consolidating RTI(cid:1)Sistemy Concern’s financials in its accounts

since January 1, 2003. The Concern’s revenues for the year came out at $29.1mn

(net of NIIDAR R&D’s results). Its exports grew by 14% y(cid:1)o(cid:1)y. The Concern is well

prepared to compete in the world market.

In 2003, RTI(cid:1)Sistemy restructured its assets and organizational structure, and

made several critical appointments. Its growth strategy calls for efforts to reinforce

its research and engineering basis, implement vertical value chain integration

(from R&D to commercial production), increase segment diversity (from radio

engineering to information and telecommunications technologies and industrial

instrument building), and find new markets (moving from domestic markets to

foreign ones).

Reputation

In 2003, the Concern received several new licenses, including:

— a license from the Russian Management Systems Agency to develop, manufacture, repair, and dispose of arms

and military hardware;

— a license from the Russian State Technological Commission to implement measures and/or provide services

related to protection of official secrets (to counteract foreign intelligence services);

— a license from the Russian Ministry of Construction to design and construct Class I and II buildings

and structures in accordance with federal standards.

Involvement in federal and regional target programs, including:

— Electronic Russia;

— Defense Industry Restructuring; and

— Development of education and information environment.

— Saransk Television Plant has ISO 9001(cid:1)9002 international quality certification.

2003 Results

SISTEMA ANNUAL REPORT 2003

2003 Results

SISTEMA ANNUAL REPORT 2003

Mass Media

Sistema Mass(cid:1)Media (SMM) is one of the largest media
companies in Russia. Its key business areas today are adver(cid:1)
tising (Maxima advertising agency and TV(cid:1)Project compa(cid:1)
ny); distribution of printed media (Nasha Pressa Group of
Companies) and publishing (Literaturnaya Gazeta, Metro
and Rossia). The Company’s strategy is aimed at develop(cid:1)
ing a new multimedia market.

Alexander Leiviman,
General Director of Sistema Mass(cid:1)Media

In 2003, the Company adopted a development strategy

for SMM Group of Companies, designed to develop a new market

for media services based on the most advanced information

and telecommunications technologies.

markets in Russia, expanding by over 35% y(cid:1)o(cid:1)y. As in 2002, television sector

I n 2003, the media market remained one of the most dynamically growing

outpaced the market, with cable television surging by 50% in 2003 on the

Sistema’s media assets are managed by Sistema Mass(cid:1)Media (SMM). Media busi(cid:1)

back of aggressive consolidation of major media groups.

ness underwent restructuring and cost(cid:1)cutting in 2003, which resulted in SMM’s

income climbing to $35.2mn, or up 15.5% y(cid:1)o(cid:1)y.

Restructuring has set off a process which will ultimately lead to a merger of

Nasha Pressa and ARP(cid:1)Region, thus turning Nasha Pressa into Russia’s biggest press

distributor. In turn, control over a key distribution channel will make publishing a

strategic unit with very strong investment potential.

The Group’s printed media posted dynamic growth in 2003. Literaturnaya

Gazeta broke even, showing a stable rise in circulation and advertising space sales.

Weekly circulation of Metro, Moscow’s only free information newspaper, has

topped 600,000. Now, Metro has a free companion newspaper, Medsovet, publish(cid:1)

ing articles on medical and health issues.

TV(cid:1)Project, one of the most rapidly growing companies in outdoor advertising,

won exclusive rights in 2003 and started to install LightMotionDisplays, which rep(cid:1)

resent an entirely new concept of outdoor advertising. In the same year, TV(cid:1)Project

won a tender for placing ads in Moscow’s Metro. Olympus management company

has been set up to consolidate billboard sales in the Metro.

In 2003, the Company adopted a development strategy for SMM Group of

Companies, aimed at the development of a new market for media services based

on the most advanced information and telecommunication technologies. Its mul(cid:1)

timedia project will combine a brand(cid:1)new cable television system, a package of

2003 Results

SISTEMA ANNUAL REPORT 2003

television channels, and companies producing television and Internet content. In

order to implement this project, a new core company called Sistema Multimedia is

being created, as part of SMM.

The multimedia project is to be developed in partnership with Sistema Telecom

Group’s telecommunication operators, on the basis of investments which Sistema

made earlier into MGTS’ ADSL broadband network and Comstar United

Telesystems’ fiber optic network. Kosmos(cid:1)TV, where Sistema acquired a 50%(cid:1)stake

in 2003, can be fittingly integrated into Sistema’s telecommunications and media

assets structure.

2003 Results

SISTEMA ANNUAL REPORT 2003

2003 Results

SISTEMA ANNUAL REPORT 2003

Venture Projects

industries and participated in promising venture projects, mostly in the area

I n 2003, Sistema continued its active search for opportunities in entirely new

of high(cid:1)tech and innovations.

Kamov(cid:1)Holding

Medical Technologies MTH

Sistema(cid:1)Venture

Olympic System

Kamov(cid:1)Holding is a helicopter manufacturing holding company established

in 2003 on the basis of Kamov, where Sistema has had an interest since 2001.

Kamov(cid:1)Holding places orders for Kamov helicopters, arranges marketing and sales

activities, provides maintenance on helicopters, and finances design work.

Medical Technologies MTH specializes in production of modern drugs and med(cid:1)

ical equipment, including biotechnological vaccines (against hepatitis B), CNS

analgesics, and ready(cid:1)to(cid:1)use medications in ampoules (nitroglycerin and so on).

All products are manufactured in strict compliance with international quality

standards (GMP).

Sistema(cid:1)Venture specializes in venture projects and provides consulting servic(cid:1)

es in intellectual property and business planning. Sistema(cid:1)Venture manages high(cid:1)

tech innovation projects and is involved in acquiring, restructuring, developing,

and selling small companies, operating as a direct investment fund. It is fully

owned by Sistema.

Olympic System specializes in managing sports facilities and delivering equip(cid:1)

ment and gear for sports and fitness. The Company was established by Sistema

and the Russian Olympic Committee in 1997. At present, it manages Olympic Star

fitness club, one of the biggest facilities of its kind in Europe, Wellness Club (sports

and health center), and works to expand its chain of sports and health centers.

90 2003 Results

SISTEMA ANNUAL REPORT 2003