Sistema Annual Report 2007

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Annual Report / 2007

Contents

PART 1

About Sistema

Financial Highlights

Letter from the Chairman of the Board of Directors

Letter from the President

Strategy

Calendar of Events 2007

Financial Overview

Shareholder Capital

Corporate Governance

Social Responsibility

PART 2

Riding the Consumer Wave

Telecommunications

Technology

Real Estate Development

Retail

Financial Services

Media

Travel

Radar and Space

Healthcare

Other Businesses

Pharmaceuticals

Convergent Services

Innovation & Venture Capital

Petrochemicals

Entertainment

#0002

Contacts

100

102

Annual Report / 2007 / About Sistema

About Sistema

Sistema is the largest diversified consumer services cor(cid:1)
poration in Russia and the CIS. Since its founding in 1993,
Sistema has been growing a portfolio of market(cid:1)leading
businesses in the consumer and high technology areas.
Companies controlled by Sistema serve more than 80 mil(cid:1)
lion consumers in Russia, the CIS, and across Europe.

The Corporation focuses on the development of advanced
technologies both to maximize long(cid:1)term returns for its
shareholders and to make a significant contribution to
the economic development of Russia and the other mar(cid:1)
kets where it operates.

Following Sistema’s IPO in February 2005, 19% of its
shares are now traded on the London Stock Exchange in
the form of global depository receipts (GDRs) under the
ticker ‘SSA’. Sistema is also listed on the Moscow Stock
Exchange under the ticker ‘SIST’, on the Moscow Inter(cid:1)
bank Currency Exchange (MICEX) under the ticker ‘AFKC’,
and on the Russian Trading System under the ticker
‘AFKS’.

Sistema’s businesses are divided into two key areas: its
core businesses, in which the companies are established
market leaders, and high(cid:1)potential businesses, in which
the subsidiaries are seeking to establish the long(cid:1)term
market leadership in emerging consumer market seg(cid:1)
ments. Sistema’s core businesses are Telecommunications,
High Technology, and Real Estate Development. Its high(cid:1)
potential businesses are Retail, Finance, Media, Travel and
Healthcare.

KEY BUSINESSES

TELECOMMUNICATIONS
MTS, COMSTAR UTS, MTT, SKYLINK

TECHNOLOGY
SITRONICS

REAL ESTATE DEVELOPMENT
SISTEMA(cid:1)HALS

RETAIL
DETSKY MIR

FINANCIAL SERVICES
MBRD

MEDIA
SISTEMA MASS MEDIA

TRAVEL
INTOURIST

RADAR and SPACE
RTI SYSTEMS

HEALTHCARE
MEDSI

OTHER BUSINESSES

Sistema also maintains a portfolio of other businesses,
including Radar and Space and Pharmaceuticals, as well
as financial investments in the Petrochemicals area.

PHARMACEUTICALS
BINNOFARM

CONVERGENT SERVICES
TS(cid:1)RETAIL

PETROCHEMICALS
BASHNEFT, NOVOIL, UFANEFTEKHIM,
UFIMSKIY NPZ, BASHKIRNEFTEPRODUKT,
UFAORGSINTEZ

ENTERTAINMENT
RWS

#0003

Annual Report / 2007

Financial Highlights

Revenue
($, mln)

OIBDA1
($, mln)

OIBDA
margin

Net income
($, mln)

2007

2006

2005

13,701.0 5,050.4
3,977.1
10,266.6
2,982.0
7,593.5

36.9% 1,571.9
813.0
38.7%
534.4
38.9%

Assets
($, mln)

Shareholders’ equity
($, mln)

Earnings per share
($)

2007

2006

2005

28,396.7
20,191.2
13,090.9

6,658.8
4,505.1
3,233.0

16.88
8.50
5.64

#0004

1 OIBDA is defined as operating income before depreciation and amortization.

Annual Report / 2007 / Financial Highlights

Revenue by Business

Telecommunications

69.7%

Technology

11.5%

Real Estate Development

3.2%

Retail

4.2%

Financial Services

3.5%

Media

1.0%

Travel

2.6%

Radar and Space

2.7%

Other businesses

1.6%

Assets by Business ($, mln)2

Telecommunications

16,243.2

Technology

1,887.4

Real Estate Development

1,770.3

Retail

497.0

Financial Services

5,622.5

Media

508.9

Travel

554.3

Radar and Space

294.2

Other businesses

3,878.9

2 Before intersegment eliminations

#0005

Annual Report / 2007

#0006

Vladimir Evtushenkov

The Chairman of the Board of Directors, Sistema

Letter from the Chairman of the
Board of Directors

Annual Report / 2007 / Letter from the Chairman of the Board of Directors

drive to integrate services for our consumers, that will in
the future remove the line between telecommunications
and multimedia services.

Our development prospects also depend on one other key
"shoot of growth": partnership with the state. Our mutu(cid:1)
al interests have become virtually inseparable and this
level of cooperation is necessary in order to create legiti(cid:1)
mate highly(cid:1)competitive pioneering branches of the
Russian economy. Sistema already participates in a whole
series of promising projects together with the state.
Russia was introduced to the global hi(cid:1)tech market with
the opening of our production facility in Zelenograd that
produces 0.13(cid:1)0.18(cid:1)micron microchips, and is now one of
a family of countries that possesses that technology. The
decision made last year to build a nanotechnology com(cid:1)
pany together with the government will also allow us to
develop new and unique products and market niches.

It is our belief that promising, fast(cid:1)growing economic sec(cid:1)
tors can only emerge from a base of innovation. And it is
these sectors that can become the foundation of techno(cid:1)
logical leadership in Russia.

We are grateful to everyone who worked together with us
to create the "new shoots of growth" in 2007, including
our employees, partners, investors, and shareholders. We
are confident that the strategy that we have chosen will
validate itself in the future. And we look forward to shar(cid:1)
ing the results of this work with you.

One year ago, when delivering the results and the opera(cid:1)
tional goals of our Corporation’s development, we out(cid:1)
lined our strategy of "new shoots of growth" as the pri(cid:1)
mary factor for the future growth in capitalization. Today
we proudly note that this strategy was justified and is
already showing results.

We emphasized entrance into promising new territories
and markets as one of our most important "shoots of
growth." In 2007 Sistema was the first private Russian
company to open a representative office in India. We have
taken the first steps in integrating the Company into
India’s fast(cid:1)growing and investment(cid:1)friendly economy,
including the purchase of a controlling stake in a nation(cid:1)
al telecommunications company Shyam Telelink, receiv(cid:1)
ing the necessary licenses and beginning construction of
a pan(cid:1)Indian network for a universal operator. In the near
term, we plan on developing our Real Estate, Financial
Services and Technology businesses in India, where we
anticipate profitable and effective cooperation with our
Indian colleagues.

Our partnership with Chinese business is no less impor(cid:1)
tant. This year, we have already started to implement a
partnership agreement between the Russian concern
Sitronics and the Chinese company ZTE, signed in the
presence of both states’ leaders, and this is opening new
conceptual possibilities for our Corporation.

The Russian, Indian, and Chinese markets have many fac(cid:1)
tors in common, including the unprecedented growth in
the population’s prosperity, the rapid assimilation of
innovative financial tools and the high priority placed on
a large(cid:1)scale infrastructure transformation. These factors
give our countries the extraordinary chance to imple(cid:1)
ment modern, highly(cid:1)effective developments that benefit
all participants of this process. And we are simply obli(cid:1)
gated to take advantage of this.

These same factors allow us to implement the "new
shoots of growth" strategy in another direction that we
announced last year: gaining a leadership position in
fast(cid:1)growing consumer markets. Throughout last year, we
actively invested in the development of our Retail,
Pharmaceutical, Travel and Financial Services businesses.
We have achieved significant success in each of these.

The consumer boom that will, according to experts, last
for a minimum of five more years provides the optimal
scenario to further develop our already mature telecom(cid:1)
munications divisions. Our near(cid:1)term goal is to create a
single multi(cid:1)profile telecommunications group on a unit(cid:1)
ed technological and management platform in order to
provide our customers with the most modern, user(cid:1)
friendly, and cost(cid:1)effective services. We will continue our

#0007

Annual Report / 2007

#0008

Alexander Goncharuk

President and Chief Executive Officer, Sistema

Letter from the President

We took particular effort last year to concentrate on the
development of our non(cid:1)public assets that we expect to
become our leading "shoots of growth."

Our Financial Services business witnessed a 114%
increase in earnings last year. The Russian financial
industry on the whole grew by one(cid:1)third over the same
period. By the end of 2007, the bank's retail chain had
166 branches in 34 Russian regions.

The Detsky Mir group, which is the largest children's
goods retailer in Russia, grew nearly four times faster
than the market. In spite of stiffening competition, this
division’s OIBDA nearly doubled last year, and the chain
of stores went national, growing to 100 outlets in 48
cities by May of 2008.

Nearly 900,000 clients chose to use our travel business
Intourist last year, compared to 600,000 clients in 2006.
Furthermore, earnings increased by a third.

But, of all our businesses, our healthcare business enjoyed
the highest growth rates in 2007, with its earnings grow(cid:1)
ing by a factor of nearly three and its OIBDA doubling.
Thanks to successful M&A activities, the total number of
medical centers in Moscow and other Russian regions
reached 26.

We are confident that the strategy of "new shoots of
growth," which we successfully began in 2007, will con(cid:1)
tinue into the future. Sistema's management will do
everything possible to ensure that the Corporation's
shareholders and investors will not be disappointed.

Annual Report / 2007 / Letter from the President

For Sistema, last year was the beginning of a new step in
our business development. On one hand, the series of suc(cid:1)
cessful IPOs was a singular result of our long(cid:1)term effort
to create value at the Corporation. On the other hand, it
created the need to search for new paths that will lead to
future increases in capitalization without lowering our
rate of growth. We chose the "new shoots of growth"
strategy to utilize the structure of our portfolio, which
consists of primarily service assets, the positive econom(cid:1)
ic environment, and growing consumer activity.
Nonetheless, a large, ambitious task was placed before
Sistema's management: we wanted to not just harness
the energy of the consumer wave, but to move forward at
a rate that outstripped the market.

We were able to do this in the majority of the branches
where we operate. Active investment and increased man(cid:1)
agement effectiveness allowed us to develop confidently
and consistently.

The Corporation's consolidated revenues grew by 33.5% in
2007 from the year before and reached $13.7 billion.

Net profit nearly doubled to $1.6 billion.

The value of our assets grew by 40.6% to $28.4 billion.

In spite of extremely conservative estimates, good growth
rates protected our main telecommunications asset,
Mobile TeleSystems. By the end of 2007, the number of
MTS subscribers reached 82 million. However, even more
telling was the steady growth in two key consumer indi(cid:1)
cators: ARPU (average revenue per user) reached $10 and
MOU (minutes of use) grew to 187 minutes a month. This
led to a 30.8% growth in OIBDA in 2007, to $4,223.4 mil(cid:1)
lion.

Our new strategy led to positive results and the rapid
development of our telecommunications company
Comstar UTS. In Moscow, our subscriber base grew by 81%
on the year, and the number of pay(cid:1)TV subscribers grew
by 47%. This tendency was clearly visible in the compa(cid:1)
ny's financial indicators, and OIBDA grew by 80.9% to
$662.8 million.

The growth in the Russian microelectronics market, which
grew at twice the rate of world markets last year, posi(cid:1)
tively affected the financial results of our high(cid:1)tech busi(cid:1)
ness Sitronics. Even though the company's earnings
stayed at the same level as the year before, the new man(cid:1)
agement team signed a series of new contracts that will
create opportunities for a future growth spurt.

Sistema(cid:1)Hals earnings grew by more than 50%, to $452.2
million.

#0009

Adding Value

Sistema's management believes that growing businesses
within a diversified holding creates numerous opportuni(cid:1)
ties to add value to the portfolio of the Corporation.

The holding structure in the relatively immature Russian
economy helps raise financing at a corporate level on
more attractive terms, launch joint projects of businesses
and make the best use of cross(cid:1)selling opportunities, and
create and maintain a valuable corporate pool of top man(cid:1)
agers. Furthermore, as one of the leading Russian compa(cid:1)
nies, Sistema can more effectively represent the interests
of its businesses on national and international levels.

In 2007 Sistema raised $500 million in debt financing to
develop its Indian project and placed a 6(cid:1)billion(cid:1)ruble
bond issue in March 2008 on very favorable terms, given
the current market environment. We launched the
Tochka project, a chain of all(cid:1)in(cid:1)one retail stores that
offer goods and services from across the Corporation's
areas of operations, including mobile and fixed(cid:1)line com(cid:1)
munications, banking, travel services, and multimedia.

At the same time, Sistema made a series of senior level
appointments in its businesses that included not only
managers taken from the pool of internal candidates, but
also those hired from other companies.

Annual Report / 2007

Strategy

Investing in Growth

In 2007 the Board of Directors approved the principles of
the portfolio strategy proposed by the management.
These principles call for an increase of the share of pri(cid:1)
vately(cid:1)held businesses in the portfolio. Following this
decision of the Board, Sistema initiated several invest(cid:1)
ment projects and M&A transactions in its fast(cid:1)growing
businesses of Financial Services, Retail, Media, Healthcare,
and Travel.

Sistema was active in sourcing and taking advantage of
new investment opportunities. We acquired control in
Indian mobile and fixed(cid:1)line operator Shyam Telelink
with the goal of entering the rapidly growing Indian
telecommunications market. Sistema will bring its
Russian and CIS telecommunications expertise to trans(cid:1)
form Shyam Telelink into a leading pan(cid:1)Indian communi(cid:1)
cations provider.

The Corporation is developing its business relationships
with the Russian state and is now seen as a reliable pri(cid:1)
vate(cid:1)sector partner capable of providing competitive
products and services. The new National Center for Crisis
Management that Sistema's subsidiaries had built for the
Russian Ministry of Emergency Situations in 2007 is one
example of this partnership's potential.

Active Management

Sistema is a strategic investor and the controlling share(cid:1)
holder of its core businesses. The Corporation sets targets
for them, contributes to the development of their strate(cid:1)
gies, and monitors the strategy's implementation.

In 2007 the boards of Sistema's subsidiaries fixed an
updated set of KPIs, the so(cid:1)called Criteria Base. These
KPIs steer the management towards shareholder value,
creating growth, and at the same time target mid(cid:1)term
operational indicators, aiming to outperform the compe(cid:1)
tition.

To complement the ambitious goals set before the man(cid:1)
agement, we initiated a review of incentive and remuner(cid:1)
ation systems. In 2007 the boards of most companies
introduced annual bonus programs linked to KPIs, as well
as long(cid:1)term stock option plans.

#0010

Annual Report / 2007 / Calendar of Events 2007

Calendar of Events 2007

January

Comstar UTS obtained licenses to provide IP voice and
data traffic, including WiMAX services, in 20 Russian
regions. The license gave the company an opportunity to
develop a market for new(cid:1)generation services, targeting
both corporate clients and individuals.

Sistema(cid:1)Hals announced that it signed a credit agree(cid:1)
ment with the bank Eurohypo AG to borrow $187 million.

February

Sistema announced that it acquired 0.48% of its own
shares for $347.3 million. The acquired shares will be used
to create an options program for the Company’s senior
management, and may also be used for upcoming mergers
and acquisitions.

Sitronics held its IPO on the London Stock Exchange, issu(cid:1)
ing global depository receipts.

Sistema sold a 46.19% stake in ROSNO to the German
company Allianz. Sistema’s stake in ROSNO was reduced
to 3%, while Allianz’s stake grew to 97%.

March

Sistema(cid:1)Hals was included in the Russian Industrial
Leaders Index (RUXX), which foreign investors use as an
indicator of the state of the Russian economy.

Comstar UTS announced that it obtained licenses to pro(cid:1)
vide data transfer services in 8 Russian regions. In April
the company obtained licenses for another 10 regions.

Sitronics and ZTE Corporation, China, signed a Memo(cid:1)
randum of Understanding concerning the development of
their partnership on the Russian, Chinese, and interna(cid:1)
tional telecommunications markets.

April

Sistema acquired a 9.75% stake in Sitronics, increasing its
share in the company to 60%. The deal was conducted
under the framework of the current restructuring and
planned consolidation of the Holding’s assets, and was
intended to optimize the structure of its company owner(cid:1)
ship.

May

MBRD signed an agreement with Dresdner Bank that pro(cid:1)
vided access to $50 million over 2 years in the form of
untied loans.

Sistema acquired 100% of American Hospital Group from
ROSNO insurance group and 20% of Medexpress from
ROSNO(cid:1)MS insurance company. This strengthened the
Company’s position in the rapidly developing market for
private healthcare services.

June

The Medsi group of companies acquired 80% of
Medexpress, one of the largest private chains of medical
clinics in Russia.

MTS acquired 26% of its subsidiary Uzdunrobita, increas(cid:1)
ing its stake in the company to 100%.

Sergei Pridantsev was named President of Comstar UTS.
He had previously been the General Director of Center
Telecom, one of Svyazinvest holding’s largest sub(cid:1)
sidiaries.

July

Sistema Telecom was incorporated into Sistema as a new
business unit to manage the Company’s telecommunica(cid:1)
tions assets.

Sistema(cid:1)Hals signed a credit agreement with VTB bank for
financing worth $500 million.

Sitronics founded Sitronics Nanotechnology to develop
semiconductor nanotechnology.

Eldar Razroev was named General Director of Sistema
Mass Media. Formerly, he was the General Director of
Euroset, the largest mobile retailer in Russia.

August

Sistema acquired 20% of Dalcombank, the largest bank in
Russia’s Far East. In October 2007 Sistema increased its
stake in the bank to 48.16%.

Comstar UTS completed a deal to acquire 100% of the
share capital of Sochitelecomservice, an alternative carri(cid:1)
er in Sochi.

September

Sistema’s common shares began trading on the MICEX. On
September 13, the shares were placed on the exchange’s
‘B’ quotation list under the ticker ‘AFKC’.

#0011

Annual Report / 2007

Sistema acquired 10% of Shyam Telelink Ltd, an Indian
mobile and fixed(cid:1)line operator, and signed an agreement
for the option to purchase an additional 40%.

Sitronics placed its first ruble(cid:1)denominated bonded loan.
The placement was worth 3 billion rubles.

Sistema’s shareholders approved common shares split.
The share capital was divided into 9,650,000,000 common
shares with a nominal value of 0.09 rubles each.

MTS acquired 80% of the share capital of International
Cell Holding Ltd., the owner of K(cid:1)Telecom, the largest
mobile operator in Armenia.

October

Sistema created a Healthcare business, ratifying the
strategy of uniting all core assets into the Medsi group
and opening a chain of 100 modern clinics by 2011.

Events after the Reporting Period

January 2008

Shyam Telelink Ltd. received letters of guarantee that it
would receive universal telecommunications licenses in
21 Indian states. The licenses give the operator the right
to build a network and provide both fixed(cid:1)line and mobile
communications.

Sistema raised its stake in Shyam Telelink Ltd. to 51%.

Sistema acquired 50.5% of Dalkombank, raising its stake
in the company to 98.85%.

Comstar UTS initiated construction of a network in
Armenia for wireless broadband access based on WiMAX
technology.

February 2008

Sergei Aslanian was named President of Sitronics. He had
formerly served as Vice(cid:1)President of Technology and IT at
MTS.

Detsky Mir Center and UniCredit Bank signed an agree(cid:1)
ment for $20 million in credit with a three(cid:1)year term. The
funds will be used to finance the company’s liquid assets.

November

Sistema opened an office in New Delhi. The office will
represent all of the Corporation’s businesses.

Nokia Siemens Networks and Sitronics signed an agree(cid:1)
ment for a strategic partnership in high technology.

March 2008

Comstar UTS acquired a 87.5% stake in Regional Technical
Center, an alternative fixed(cid:1)line operator in the Khanti(cid:1)
Mansisk Autonomous District, Orenburg, and the Oren(cid:1)
burg Oblast.

Sistema(cid:1)Hals received $200 million in credit from VTB
bank to finance its current investment program.

December

Comstar UTS and Intel signed an agreement for a strate(cid:1)
gic partnership to develop WiMAX technology in Russia.

Sistema launched a program of long(cid:1)term bonuses for its
employees. Up to 110 top and mid(cid:1)level managers at the
Corporation will participate.

Sitronics opened a production facility that produces 0.18
micron microchips. The total investment in the plant was
$200 million.

Sistema and Russian World Studios (RWS) signed a deal
that created the largest film(cid:1)making company in Russia
on the base of RWS, with studios in Moscow, St. Peters(cid:1)
burg and on Russia’s Black Sea coast in Anapa. The new
company represents a promising business unit for the
Corporation.

Sistema placed a 6(cid:1)billion(cid:1)ruble bonded issue. The capital
will be used in part to refinance the Company’s existing
debts and in part to realize the Company’s investment
program.

RTI Systems has completed the sale of 100% in CJSC
Sahles to CJSC Saturn. CJSC Sahles owns a 71.63% stake
in OJSC Perm Motors Plant, as well as controlling stakes in
other entities which constitute the Perm Motors Group.

Comstar UTS launched a long(cid:1)term incentive program for
its management. 151 managers in the company and its
subsidiaries are participating in the program, which cov(cid:1)
ers 2008 to 2010.

#0012

Annual Report / 2007 / Financial Overview

Financial Overview

acquired or divested since the end of the fourth quarter
of 2006.

The following section presents a brief overview of the
company’s financial results, according to US GAAP, for the
year 2007 . The operational and financial performance of
each business is discussed in Part 2 of this annual report.

• Consolidated revenues up 33.5% year on year to

$13.7 billion

• OIBDA up 27.0% year on year to $5.1 billion and

OIBDA margin of 36.9%

• Operating income up 21.7% year on year to $3.3 bil(cid:1)

lion and operating margin of 23.9%

• Net income nearly doubled year on year to $1.6 billion

• Total assets up 40.6% year on year to $28.4 billion

($ millions)

FY 2007

FY 2006

Year(cid:1)
on(cid:1)year
change

Revenues

13,701.0

10,266.6

33.5%

OIBDA

5,050.4

3,977.1

27.0%

Operating income

3,274.7

2,691.2

21.7%

Net income

1,571.9

813.01

93.3%

Basic and diluted
earnings per share
(US cent)

16.9

8.5

98.7%

Sistema’s consolidated revenues increased by 27.0% year
on year in the fourth quarter, and by 33.5% year on year
in 2007. Sistema’s full year results reflected high levels of
revenue growth in the Group’s Financial Services, Retail,
Real Estate Development, and Travel businesses, and
strong performance of the Telecommunications area.
Non(cid:1)telecommunications businesses accounted for 32.2%
of the Group consolidated revenues in the fourth quarter
and 28.2% for the full year 2007, compared to 34.9% and
27.2% for the corresponding periods of 2006. The organ(cid:1)
ic year(cid:1)on(cid:1)year and like(cid:1)for(cid:1)like growth was 29.9% for
2007, and amounted to $3.1 billion, excluding businesses

Group OIBDA increased by 48.5% year on year in the
fourth quarter, and by 27.0% year on year for the full
year 2007. The Group’s OIBDA margin increased from
30.8% to 36.1% in the fourth quarter, as a result of the
robust performance of MTS and the completion of certain
projects in Sistema Hals. The Group’s OIBDA margin
slightly decreased from 38.7% to 36.9% for the full year
2007, primarily as a result of a $155.7 million non(cid:1)cash
stock compensation expense to the employees of the
Group in 2007. MTS demonstrated a sustained growth of
30.8% year on year in OIBDA in 2007 with an OIBDA mar(cid:1)
gin of 51.2% as a result of the continued increase in usage
and ARPU levels in its Russian operations. Comstar UTS’s
OIBDA increased by 80.9% for the full year 2007 with an
OIBDA margin of 42.4% as a result of high consumer
demand for MGTS’s unlimited tariff plan for regulated res(cid:1)
idential voice services introduced in February 2007, as
well as the revenue boost from fixed(cid:1)to(cid:1)mobile calls.
Group OIBDA in 2007 was, however, adversely impacted by
the operating losses in the Telecommunications Solutions
and Consumer Services and Products division of Sitronics.

Group operating income was up 42.5% year on year in the
fourth quarter, and by 21.7% year on year in 2007. The
Group’s operating margin was 22.1% in the fourth quar(cid:1)
ter, compared to 19.7% a year ago. The Group’s operating
margin amounted to 23.9% in 2007, compared to 26.2% in
2006.

Depreciation and amortization expense was up 59.0%
year on year to $570.3 million in the fourth quarter, and
increased by 38.1% year on year to $1,775.7 million for
the full year 2007, following the 40.0% growth in the
depreciable and amortizable assets of the Group.

Selling, general, and administrative expenses increased
by 34.9% year on year to $775.0 million in the fourth
quarter and rose by 34.5% year on year to $2,426.3 mil(cid:1)
lion for the full year 2007.

The effective tax rate was 29.4% for the full year 2007,
compared to 29.0% for the year of 2006.

The net income nearly doubled year on year in 2007 as a
result of the Group’s strong operating performance and a
$521.9 million gain on the sale of ROSNO. The Group
reported a 98.7% year on year increase in basic and dilut(cid:1)
ed earnings per share from US cent 8.5 to US cent 16.9 for
the full year 2007.

Net cash provided by operating activities decreased by
28.2% year on year million in the fourth quarter to

1 Includes US$ 170 million Bitel write(cid:1)off by MTS in the fourth quarter of 2006, net of minority interests of US$ 150 million.

#0013

Annual Report / 2007

$538.3 mainly due to an increase in working capital. For
the full year 2007 net cash provided by operating activi(cid:1)
ties increased by 35.1% year on year to $2,857.7 million
as a result of the growth in the Group’s operating profits.

Net cash used in investing activities totalled $2,698.6
million in the fourth quarter and $5,753.9 million for the
full year 2007, and included $1,578.0 million and $3,110.9
million of capital expenditure, respectively, compared to
$673.6 million and $2,386.4 million for the corresponding
periods of 2006. The Group spent $1,459.1 million on the
acquisition of businesses during 2007, compared to
$631.4 million in 2006.

Cash flows from financing activities amounted to
$2,039.1 million in the fourth quarter and $3,243.7 mil(cid:1)
lion in 2007, compared to $1,085.4 million and $3,289.4
million, respectively, for the corresponding periods of
2006. Major sources of financing in the fourth quarter
included $125.0 million loan signed by Sitronics with
Dresdner Bank, $345.0 million additional syndicated loan
facilities obtained by MTS, $158.4 million drawn down by
Comstar UTS from the existing credit facility with
Sberbank, $155.5 million of commercial paper issued by
Sistema(cid:1)Hals, and $200.0 million 5(cid:1)year credit line
obtained by Sistema(cid:1)Hals from VTB.

The Group’s cash balances increased to $1,061.7 million as
at December 31, 2007, compared to a balance of $501.7
million as at December 31, 2006. The Group’s net debt
(short(cid:1)term and long(cid:1)term debt minus cash and cash
equivalents) increased to $7,423.0 million as at December
31, 2007, compared to $6,370.6 million as at December 31,
2006.

In December 2007 Sistema launched a put option program
on Sistema(cid:1)Hals global depository receipts. According to
the program, the options may be exercised in six months
from the options purchase date. The total amount of the
program is up to $50 million.

In December 2007 Sistema announced the launch of the
long(cid:1)term incentive program for its employees. The pro(cid:1)
gram will encompass up to 110 top and mid(cid:1)level man(cid:1)
agers of Sistema. Participants will be entitled to exercise
the rights granted under all plans during the year follow(cid:1)
ing the expiration of a three(cid:1)year period from the execu(cid:1)
tion date of the agreement.

Credit Ratings

Independent rating agencies consider a number of key
factors in determining the financial stability of the
Corporation and its subsidiaries, including total debt, cur(cid:1)
rent obligations, existing and future liquidity needs, and
cash flow. Ratings can also be seen as an outside evalua(cid:1)
tion of the Corporation’s overall strategy and its position
versus its rivals in core businesses. Ratings take into
account the corporate governance structures in place and
protection for minority shareholders. In addition, ratings
reflect overall market conditions, in particular the ratings
assigned to Russia’s sovereign borrowing, may be seen as
a benchmark of overall country risk.

Date assigned

Rating

Outlook

Sistema
S&P
Fitch
Moody’s

MTS
S&P
Moody’s
Fitch

01/02/2007
19/07/2007
24/10/2007

01/02/2007
09/10/2007
07/04/2008

Comstar UTS
S&P
Moody’s

01/02/2007
10/05/2007

MGTS
Moody’s
S&P

Sitronics
Fitch
Moody’s

MBRD
Fitch
Moody’s

19/01/2006
01/02/2007

14/02/2006
16/02/2006

20/07/2007
24/01/2008

BB(cid:1)
BB(cid:1)
Ba3

BB(cid:1)
Ba2
BB+

BB(cid:1)
Ba3

Ba3
BB(cid:1)

B(cid:1)
B3

B+
B1

Positive
Stable
Positive

Positive
Positive
Stable

Positive
Stable

Stable
Positive

Stable
Stable

In October 2007 Moody’s Investor Services upgraded the
corporate ratings of Sistema from ‘B1’ to ‘Ba3’ with a pos(cid:1)
itive outlook.

Sistema(cid:1)Hals
Fitch
Moody’s

23/07/2007
23/07/2007

#0014

Annual Report / 2007 / Shareholder Capital

Shareholder Capital

General Information on Shareholder Capital

Sistema Joint Stock Financial Corporation was registered
at the Moscow Registration Chamber on July 16, 1993.
The Corporation is registered at 17/8/9 Prechistenka
Street, Building 1, Moscow, 119034, Russian Federation.

A share issue was announced on November 6, 2007 that
split the nominal value of the Company’s ordinary shares
by 1,000 times. After the share split on November 13, the
number of outstanding shares increased to 9,650,000,000
ordinary shares, with a par value of RUR 0.09 per share.
Sistema’s share capital remained 868,500,000 rubles.

Sistema’s shares are listed on the London Stock Exchange
in the form of global depositary receipts (GDRs) under the
symbol ‘SSA’. One GDR represents 20 ordinary shares.
Sistema’s ordinary shares are traded on the Russian
Trading System under the symbol ‘AFKS’, on the Moscow
Interbank Currency Exchange (MICEX) under the ticker
‘AFKC’, and the Moscow Stock Exchange under the ticker
‘SIST’.

Shareholding Structure

As of December 31, 2007, Sistema had 22 entities and 12
individual shareholders, including 8 nominees. While the
identities of its GDR holders are not generally reported to
the Corporation, Sistema undertakes regular research to
discover the identity of its GDR holders. Such research
allows Sistema to provide as much information as possible
to the largest number of shareholders and is aimed at
increasing the Corporation’s transparency and providing
greater liquidity for its shares on Russian and inter(cid:1)
national exchanges.

Between March 2006 and February 2007 Sistema pur(cid:1)
chased 284,243 of its own shares, equivalent to 2.95% of
its outstanding shares, for approximately $347.3 million
dollars. This share buyback was conducted as part of a
previously announced plan to establish a share option
program for the Corporation’s top management. These
shares may also be used in future merger and acquisition
activities.

Sistema Shareholders as of December 31, 2007

V. Evtushenkov

62.10%

GDR Holders

19.00%

Other shareholders

12.15%

A. Leiviman
Zelnick
Holdings Limited
A. Goncharuk

2.70%

2.05%

2.00%

#0015

Annual Report / 2007

Share Price Performance

Dividend Policy

Sistema’s Board of Directors uses the Corporation’s cur(cid:1)
rent dividend policy as established in April 2008 to make
its dividend recommendation to the Annual General
Meeting. Dividends are determined according to the pre(cid:1)
vious year’s financial performance, and the payout level
can be up to 40% of the Corporation’s consolidated net
income under US GAAP. This policy aims to both provide
for a predictable sizeable dividend flow and maintain a
dividend history while simultaneously giving the oppor(cid:1)
tunity to reinvest profits to meet Sistema’s capital
requirements in order to maintain sustainable growth.

At the Annual General Meeting on June 30, 2007, the share(cid:1)
holders approved a cash dividend of RUR 463,200,000, or
RUR 48.0 per share. The total size of the dividend paid
out as of December 31, 2007 was RUR 461,761,296, includ(cid:1)
ing RUR 14,437,012.80 that was taken as a tax on divi(cid:1)
dend income for foreign legal entities. The remaining
RUR 1,438,704 had not been paid due to issues such as a
lack of information about the banking information of the
shareholders or the residential status of individuals.

Since February 2005, when Sistema completed an initial
public offering on the London Stock Exchange (LSE), 19%
of the Corporation’s outstanding shares have been in free(cid:1)
float in the form of global depositary receipts (GDRs).
Sistema’s GDRs are listed on the LSE under the ticker
‘SSA’. After the November 2007 share split was completed,
one GDR represents 20 ordinary shares.

Sistema’s ordinary shares are traded on the Russian
Trading System (RTS) under the ticker ‘AFKS’, the Moscow
Stock Exchange (MSE) under the ticker ‘SIST’, and the
Moscow Interbank Currency Exchange (MICEX) under the
ticker ‘AFKC’. Sistema’s ordinary shares are a component
of the MSE’s technical index. On September 15, 2007,
Sistema’s ordinary shares were included in the list of
stocks used to calculate the RTS Index.

For the year 2007 as a whole, Sistema’s GDR price on the
LSE rose 29.7%, from $32.20 on January 2, 2007 to $41.75
on December 29, 2007 the last trading day of the year.
The 12(cid:1)month share price high ($42.10) was hit on
November 12. The yearly low ($25.37) came on March 5.
Price momentum was driven by positive news about the
Company’s activities, particularly the interim financial
results. The growth in share price was also influenced by
broader trends in the Russian economy such as GDP
growth, the strengthening ruble and investor strategies
linked to the desire to diversify into emerging markets.

Sistema encourages current and potential investors to
seek independent expert financial advice when making
decisions regarding the purchase and sale of shares.
Sistema’s equity shares, as well as its outstanding bond
issues, are covered by analysts from a number of Rus(cid:1)
sian and international brokerage houses. A list of these
analysts, including contact details, is published on
www.sistema.com and is regularly updated.

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#0016

Annual Report / 2007 / Shareholder Capital

Share Structure and Performance
of Subsidiaries

MTS

Comstar UTS

Mobile TeleSystems placed a Level III ADR issue through
an IPO on the New York Stock Exchange (NYSE) on June
30, 2000. The current ADR to ordinary share ratio is 1:5,
following a 1:4 ADR split in January 2005. MTS’s major
trading volumes are on the NYSE and trade under the
symbol ‘MBT’. MTS’s shares are also traded on the RTS
under the ticker ‘MTSS’ and as of March 17, 2008 had a rel(cid:1)
ative weight of 0.67% on the RTS Index. Ordinary shares
of MTS are included on the MICEX under the ticker ‘MTSI’.

In February 2006, Comstar UTS completed an IPO of
146,500,000 common shares. These shares included
139,000,000 newly issued shares and 7,500,000 shares sold
by shareholders. The shares were admitted to trade on
the London Stock Exchange in the form of GDRs at the
value of 1 GDR per ordinary share. Approximately 34% of
Comstar’s shares are in free(cid:1)float, traded as GDRs on the
LSE under the ticker ‘CMST’. Ordinary shares are traded on
the RTS and the MSE under the ticker ‘CMST’.

Currently the company has 1,993,326,138 ordinary shares
with a nominal value of RUR 0.1 per share. As of Decem(cid:1)
ber 31, 2007, Sistema owned 53% of MTS’s shares and 46%
of shares were in free(cid:1)float.

Currently, Comstar UTS has 417,940,860 outstanding
shares with a nominal value of RUR 1 per share. As of
December 31, 2007, Sistema directly or indirectly owned
51% of Comstar’s common shares.

MTS’s ADR price closed at $50.96 at the end of the first
day of trading of 2007. The share price reached a high of
$102.12 on December 28, 2007, before closing at $101.79
on the last day of trading of the year. As of December 31,
2007, the company’s market capitalization was $40.6 bil(cid:1)
lion.

Comstar’s GDRs closed at $8.55 after their first day of
trading of 2007. The year’s peak share price of $13.71 was
reached on October 3, 2007 and it closed at $12.59 on the
last day of trading of 2007. The company’s market capi(cid:1)
talization as of December 31, 2007 was $5.3 billion.

115
105
95
85
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65
55
45
35
25
15

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#0017

Annual Report / 2007

Sistema(cid:1)Hals

Sistema(cid:1)Hals’s shares were admitted to trading in the
form of GDRs on the London Stock Exchange on
November 8, 2006. The company offered 1,738,650 newly
issued shares and 112,171 shares from selling sharehold(cid:1)
ers. In addition, the underwriters exercised an option to
purchase 168,256 ordinary shares in the form of GDRs to
cover over(cid:1)allotments in the offering. The shares were
offered at $10.7 per GDR and $214.00 per ordinary share,
representing a ratio of 20 GDRs per ordinary share.
Sistema(cid:1)Hals’ shares in the form of GDRs are traded on the
LSE under the symbol ‘Hals’, while its ordinary shares
have been included on the MICEX and MSE since 2006.

Currently, Sistema(cid:1)Hals has 11,217,094 ordinary shares.
As of December 31, 2007, Sistema owned 71% of the ordi(cid:1)
nary shares of Sistema(cid:1)Hals and 20% were in free(cid:1)float.

After the first day of trading in 2007, the company’s
shares closed at $13.73 per GDR, and they reached a high
of $15.05 on April 30, 2007. As of December 31, 2007, the
company’s market capitalization was $1.9 billion, and the
shares were priced at $9.75 per GDR.

Sitronics

On February 6, 2007, Sitronics completed an IPO in the
form of GDRs on the London Stock Exchange, offering
1.675 billion ordinary shares under the ticker ‘SITR’. This
IPO confirmed its position as the leading high(cid:1)tech firm
in Russia, the CIS, and Central and Eastern Europe. The
current GDR to ordinary share ratio is 1:50. Sitronics’s
shares are also traded on the RTS and MSE under the tick(cid:1)
er ‘SITR’.

Currently Sitronics has 9,547,087,190 ordinary shares with
a nominal value of RUR 1 per share. As of December 31,
2007, Sistema owned 71% of Sitronics’ shares and 17.5%
of its shares were in free(cid:1)float.

After the first day of trading, Sitronics’ GDRs were valued
at $12.00 and the company’s market capitalization was
$1.9 billion.

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#0018

Annual Report / 2007 / Corporate Governance

Corporate Governance

between management and the members of the Board of
Directors between the Board’s meetings.

Principles of Corporate Governance

Sistema was among the first Russian companies to recog(cid:1)
nize the value of strong corporate governance and
remains a leader in informational openness and trans(cid:1)
parency. Its system of corporate governance is based on
several core principles: transparency in all business
processes for our investors and partners, maintaining an
engaged and professional board of directors and main(cid:1)
taining a consistent approach to all issues concerning the
Corporation’s management. Sistema applies these princi(cid:1)
ples to all company processes and procedures, including
strategic management, financial accounting and report(cid:1)
ing, audit, risk management, HR policy, corporate gover(cid:1)
nance, and corporate social policy.

Sistema’s processes and procedures are codified in the
Company’s Charter, which determines the structure and
competencies of its governing bodies. The Company’s
Corporate Code and Code of Ethics contain additional
commitments that Sistema has made in terms of promot(cid:1)
ing openness, collective decision(cid:1)making, social responsi(cid:1)
bility, and ethical principles in its relationship with part(cid:1)
ners, governments, employees, and shareholders.

Sistema’s main governing bodies are the General Meeting
of Shareholders, Board of Directors, President, and
Management Board. Board committees are operational at
the Board level, special committees are operational at the
the President level to make policy recommendations. The
Company’s organizational structure is built on the basis
of operational management, identifying key issues and
establishing bodies with the necessary competencies to
resolve them.

Throughout 2007 the Company made several strides to
further the development of its corporate governance
structures. A new set of procedures was adopted by the
Board of Directors in October 2007 to increase the effec(cid:1)
tiveness of the Board’s meetings. The changes call for a
slight reduction in the number of planned meetings per
year and improving preparation and organization process(cid:1)
es. This will entail preparing more thorough materials in
the run(cid:1)up to the Board’s meetings and limiting the num(cid:1)
ber of invitees to the Board’s meetings. Board materials
will be first reviewed by the Management Board and
Board committees before being distributed. The new rules
also institutionalise a constant flow of information

Sistema launched an internal corporate governance rat(cid:1)
ing system in June 2007 to measure the effectiveness of
corporate governance at its subsidiaries. The methodology
relies on concepts used by ratings agencies such as
Standard & Poors, Moody’s, and Expert RA. The results
have been used to create action plans to further the
development of its subsidiaries’ corporate governance
systems.

The Company published its first Social Report in 2007 to
detail its social and charitable activities. The report’s goal
was to promote dialogue about Sistema’s social undertak(cid:1)
ings and the principles that guide them. Sistema is cur(cid:1)
rently in the process of formulating a comprehensive
strategy for the Company’s social responsibility with the
goal of improving the management of its social activities.

Sistema is one of the leading Russian companies to invest
in long(cid:1)term projects which demand large sums raised on
Russian and international financial markets. The ability
to succeed at this requires a high level of transparency
and faith in the Company’s efficiency and corporate gov(cid:1)
ernance bodies. Sistema’s continued success is a testa(cid:1)
ment to the strength of the Company’s corporate govern(cid:1)
ance.

#0019

Annual Report / 2007

Organizational Structure

Secretariat of the
Board of Directors

Corporate Secretary

Shareholders

General Meeting
of Shareholders

Strategy Committee

Coprorate Governance
Committee

Chairman of the
Board of Directors

Nominations and Compensation
Committee

President

Audit Committee

Executive Board

Investor Relations
Committee

Strategy and Development
Complex

Finance Complex

Property Complex

External Communications
Complex

Finance and Investments
Committee

Economic and Information
Security Complex

Budget Commission

#0020

Innovation and Venture
Projects Complex

Telecom Development
Complex:
Sistema(cid:1)Telecom

Non(cid:1)public Businesses
Development Complex

Legal Complex

Department for Internal
Control and Audit

Administrative Department

Annual Report / 2007 / Corporate Governance

General Meeting of Shareholders

Sistema’s primary governance body is the General Meet(cid:1)
ing of Shareholders. The General Meeting of Shareholders
functions on the basis of Russian federal law on joint(cid:1)
stock companies, the Сompany’s Charter and the
Company’s internal documents.

There were two general meetings of shareholders in 2007.
The annual General Meeting of Shareholders took place
on June 30, 2007 and an extraordinary General Meeting of
Shareholders was held on September 17, 2007 in the form
of a letter ballot on the question of splitting the Com(cid:1)
pany’s shares.

Sistema’s 2007 General Meeting of Shareholders discussed
the following issues: approving the annual report and
annual accounts, distributing profits and determining
dividends, electing members of the Board of Directors,
approving the Company’s auditors, approving the new
Company’s Charter.

The procedure for holding General Meetings of Share(cid:1)
holders fully corresponds to the requirements to provide
fundamental safeguards of shareholders’ rights. Infor(cid:1)
mation and material about the meeting is provided to
shareholders in Russian and English 30 days before the
meeting is scheduled, and published on Sistema’s website
(www.sistema.com). Together with the announcement of
the upcoming shareholders’ meeting, the shareholders
also receive ballot papers; absentee voting is permitted
on all meetings of shareholders. Sistema always strives to
hold general meetings of shareholders in an easily acces(cid:1)
sible area near the Company’s central office, as well as to
provide a space that can accommodate all its sharehold(cid:1)
ers or their representatives.

#0021

Vladimir Evtushenkov
Chairman of the Board
of Directors

Alexander Goncharuk
President and Chief
Executive Officer

Annual Report / 2007

#0022

Dmitry Zubov
Deputy Chairman of the Board
of Directors

Vyacheslav Kopiev
Deputy Chairman of the Board
of Directors

Evgeny Novitsky
Director

Alexander Gorbatovsky
Independent Director

Sergey Drozdov
Director,
Senior Vice(cid:1)President,
Head of the Property Group

Alexander Leiviman
Director

Ron Sommer
Independent Director

Stephan Newhouse
Independent Director

Annual Report / 2007

Board of Directors

Vladimir Evtushenkov
Chairman of the Board

Vladimir Evtushenkov, together with several partners,
founded Sistema in 1993. He served as President from
the Company’s formation until 1995, and as Chairman of
the Board from January 1994 to January 2005. He once
again was appointed President in the run(cid:1)up to Sistema’s
IPO on the LSE, and has served as Chairman of the Board
since February 2006. He is the majority shareholder of
Sistema.

Mr. Evtushenkov has been a member of the Board of
Directors of the Russian Union of Industrialists and
Entrepreneurs since 2000 and has also sat on the Board
of Directors of the Russian Chamber of Commerce and
Industry since 2002. He is active in several public(cid:1)private
partnerships, and is a member of the Government Com(cid:1)
mission on Science and Innovation Policy, the Russian
President’s Council on Science and High Technology,
and the National Council on Corporate Governance.
Since 2004 he has served as Chairman of the Council of
Trustees of the Development Fund for the State Russian
Museum.

Before starting Sistema, Mr. Evtushenkov chaired the
Moscow City Committee on Science and Engineering.
From 1987 to 1990 he served the Moscow City Executive
Committee in various capacities. From 1982 until 1987
he was Chief Engineer and subsequently First Deputy
General Director of the Polymerbyt Scientific and
Production Association. Mr. Evtushenkov worked as
Deputy Director and Chief Engineer at the Karacharovo
Plastics Works from 1975 to 1982.

Mr. Evtushenkov was born in 1948 in the Smolensk
region. He graduated from the D. Mendeleev Moscow
Chemical Engineering Institute in 1973 and from the
School of Economics of the Moscow State University in
1980, where he earned a Doctorate in Economics.

Alexander Goncharuk
President and Chief Executive Officer

Alexander Goncharuk has been on the Board of Directors
since 1996. He first joined the Company as a Vice(cid:1)
President of Sistema in 1995 and served in this position
until 1998. His many positions in the group include
Chairman of the Board of MTS, President of Sistema
Telecom from 1998 to 2003, and General Director of

Concern Sitronics. Currently, Mr. Goncharuk serves on
the boards of Sistema(cid:1)Hals, Sitronics, and Ecu Gest
Holding S.A.. He also holds the position of Chairman of
the Board of Sistema Mass Media. Mr. Goncharuk became
President of Sistema in February 2006.

Mr. Goncharuk was General Director of the company ACO
Leader before arriving at Sistema. From 1987 to 1991, he
was a senior officer at the Main Headquarters of the
Russian Navy.

Mr. Goncharuk was born in 1956 in Sebastopol. He grad(cid:1)
uated with honors from the Sebastopol Naval Engin(cid:1)
eering Academy in 1978 and again with honors from the
A. Grechko Naval Academy in 1987.

Dmitry Zubov
Deputy Chairman of the Board

Dmitry Zubov joined Sistema in 1999 and became Deputy
Chairman of the Board of Directors in 2000. He holds a
number of senior positions in the Group, including
Chairman of the Board of Sistema(cid:1)Hals and head of the
Project Construction Union Sistema(cid:1)Hals.

In 1996 Mr. Zubov was appointed Deputy Chairman of the
Board of Moseximbank. Before that, he was the General
Director of AOZT Alon from 1992 to 1996. Mr. Zubov has
also held various positions in the Komsomol organiza(cid:1)
tion, including Secretary of the Komsomol Committee,
the head of the All(cid:1)Union School for training team lead(cid:1)
ers of Komsomol Youth brigades and in the Central
Committee of the Leninist Youth Communist League of
the Soviet Union. In 1978 and 1979 Mr. Zubov worked as
a foreman at the Lukhovitsky Engineering Plant.

Mr. Zubov was born in 1954 in the Gorky region. He grad(cid:1)
uated from the S. Ordzhonikidze Moscow Aircraft Insti(cid:1)
tute in 1977 and holds a doctorate in economics.

Vyacheslav Kopiev
Deputy Chairman of the Board

Vyacheslav Kopiev joined Sistema as a Vice(cid:1)President in
1997. He served as Senior Vice(cid:1)President and Chief of the
External Business Relations Group from 2000 to 2003,
and has been a Director since 2001. He was elected
Deputy Chairman of the Board in 2003. He serves as
Chairman of the Board оf Intourist.

From 1989 till arriving at Sistema, Mr. Kopiev occupied
leading positions at the Administrative Board of the
Union of Engineering Societies, including Director for
International Relations and Innovation from 1992 to

#0026

Annual Report / 2007 / Corporate Governance / Board of Directors

1997. He also served as Chairman of the Board of Directors
of JSC Sputnik from 1990 to 1997. In 1989 he was elected
First Secretary of the Moscow City Committee of
Komsomol and later became Second Secretary of the
Komsomol Central Committee. From 1980 to 1989 he was
Deputy Chairman of the Moscow City Council of Young
Scientists and Specialists as well as the Moscow City
Council for the Development of the Scientific and
Technical Abilities of Youth.

Mr. Kopiev was born in 1954 in Moscow. He graduated
from the Cybernetics Department of the Moscow Institute
of Engineering and Physics in 1977 and from the Law
Department of the Russian Academy of Management in
1993. Mr. Kopiev also graduated with honors from the
Economy Department of the International Marketing and
Management Academy in 1994. He holds degrees in
Engineering and Law and is the author of over 70 scien(cid:1)
tific works.

Evgeny Novitsky
Director

Evgeny Novitsky joined Sistema in 1995 as Director and
President and continued in these roles until January
2005. He then became Chairman of the Board, where he
remained until February 2006. From there, he remained
on the Board as a non(cid:1)executive director.

Mr. Novitsky headed the development and production of
computers as well as assembly of IBM computers at the
Kvant plant in Zelenograd from 1991 to 1995. He also
served as Chairman of the Board of IVK, a Russian infor(cid:1)
mation technology company.

Mr. Novitsky was born in 1957 in the Tomsk region. He
received a degree in Engineering from the C. Bauman
Moscow School of Engineering in 1985 and continued his
studies there as an engineer(cid:1)mathematician until 1990.
He is now a member of that school’s Board of Trustees.
From 1989 to 1990 he also studied management at the
Moscow State Institute of International Relations and at
Manchester Business School, University of Manchester
(UK). He is the author of a number of publications and a
monograph.

Alexander Gorbatovsky
Independent Director

Alexander Gorbatovsky has been a Director since August
2004, and is currently also Chairman of the Board of MMZ
No.3. Before joining the Board, he was the President of
Sistema(cid:1)Neft from 1997 to 2002 and, prior to that, General
Director of Kedr(cid:1)M.

Sergey Drozdov
Senior Vice(cid:1)President, Head of Property Group

Sergei Drozdov has been working at Sistema since 1995.
He began managing the Department of Development and
Investments from 1995 to 1998 and served as Vice(cid:1)
President, Acting President, and First Vice(cid:1)President of
Sistema(cid:1)Invest from 1998 and 2002. In May 2002
Mr. Drozdov became Acting First Vice(cid:1)President and head
of the Department for Corporate Property, and later that
year was appointed Director and First Vice(cid:1)President of
Sistema and Chief of the Property Complex.

Currently, Mr. Drozdov serves on the boards of MTS, Sky
Link, Detsky Mir Center, Sistema(cid:1)Hals, Intourist, Ecu Gest
Holding S.A., and Medexpress Company. He also holds
positions of the Chairman of the boards of Reestr, Medsi
Group, and Sistema(cid:1)International.

Before coming to Sistema Mr. Drozdov headed the
Administration for Financial Innovation and Marketing at
the Moscow Property Fund from 1994 to 1995.

Mr. Drozdov was born in 1970 in Archangelsk. He gradu(cid:1)
ated in 1993 from the S. Ordzhonikidze State Academy of
Management in Economics.

Alexander Leiviman
Director

Alexander Leiviman has been working at Sistema since
1993. His corporate roles include President of Sistema(cid:1)
Invest (1996–1997), President of Intourist (1997–1999)
and First Vice(cid:1)President and Chief of the Finance and
Investment Group (1999–2002). Mr. Leiviman has been
General Director of Sistema Mass Media from 2003 to
2006.

Mr. Leiviman was Deputy General Director of the
Innovation Fund of the Moscow Mayor’s Office from 1992
to 1993. Before that, he occupied a number of leading
positions at the chemicals plant in Chernovtsy from 1978
to 1992. In the 1970s, Mr. Leiviman worked as deputy
shop foreman at MosBytKhim and senior staff scientist at
the Institute NIPIOTSTROM in Novorossiisk.

Mr. Leiviman was born in 1949 in Chernovtsy.

#0027

Annual Report / 2007

Ron Sommer
Independent Director

Ron Sommer has been serving as Chairman of the
International Advisory Council of Sistema since May
2003. Mr. Sommer was elected as a non(cid:1)executive inde(cid:1)
pendent member of the Board of Directors of Sistema in
June 2005.

Mr. Sommer began his professional career with the
Nixdorf Group in New York, Paderborn, and Paris. In 1980
he was appointed Managing Director of the German sub(cid:1)
sidiary of the Sony Group. In 1986 he became Chairman of
the Management Board of Sony Deutschland, and was
subsequently appointed President and Chief Operating
Officer of Sony Corporation of America in 1990. In 1993
Mr. Sommer served at Sony Europe in the same function.
From May 1995 to July 2002 he served as Chairman of the
Management Board of Deutsche Telekom AG.

Mr. Sommer was born in 1949 in Israel. He studied mathe(cid:1)
matics at the University of Vienna, where he earned his
doctorate in 1971.

Stephan Newhouse
Independent Director

Stephan Newhouse joined Morgan Stanley in 1979 and
served as a Managing Director, Vice(cid:1)Chairman, and
Chairman of Morgan Stanley International, and as
President of Morgan Stanley from 2003 until 2005. He was
also appointed to the Management Committee of Morgan
Stanley, the parent company, in 1998. Prior to joining
Morgan Stanley, Mr. Newhouse worked in the investment
banking division of the First Boston Corporation. Mr.
Newhouse was elected as a non(cid:1)executive independent
member of the Board of Directors of Sistema in June 2006.

Mr. Newhouse was born in 1947. He received a Bachelor of
Arts degree cum laude at Yale University in 1969. After
graduation, he served as an officer in the United States
Navy and then attended the Harvard Business School,
where he earned his MBA with Distinction in 1975.

Functions of the Board of Directors

The Board of Directors is responsible for the strategic
management of Sistema. The Board defines the Com(cid:1)
pany’s development strategy, establishes strategic and
financial development plans, determines the Company’s
approach to investments, evaluates the effectiveness of
the Company’s management, assesses risks that Sistema
faces, determines corporate governance structures and
approves deals and oversees the Company’s internal con(cid:1)
trols.

Review of the Board’s Sessions

The Board of Directors met 11 times in 2007 and held one
meeting by letter ballot to resolve an issue that required
immediate action. In total, Sistema’s Board held 12 meet(cid:1)
ings, averaging one meeting a month.

On average, each meeting’s agenda consisted of three to
five matters relating to the Board’s key competencies,
including Sistema’s development strategy, issues con(cid:1)
cerning development of businesses, financial results, cor(cid:1)
porate governance issues, and HR policy. Other issues
about the Corporation’s business processes, including
issues concerning an additional float of Sistema shares,
participating in equity swaps with daughter companies,
and approving interested party transactions and deals to
acquire capital shares of other companies, were also con(cid:1)
sidered by the Board.

In 2007 the Board of Directors’ main focus was on ques(cid:1)
tions of strategic development, corporate governance,
and HR policy (with the exception of issues relating to
approving related party transactions and transactions to
acquire shares in other companies, the approval of which
is prescribed by Russian corporate law).

The most frequently discussed matter in 2007 Board
meetings related to Sistema’s strategy, investments, and
new areas of operations. These matter occupied 24 per(cid:1)
cent of the Board’s agenda. Other key issues involved
approving related party transactions (16 percent), parti(cid:1)
cipating in subsidiary companies (15 percent), corporate
governance (14 percent), appointments and HR policy (13
percent), financial accounting, planning, and audits (12
percent), stock issues and charter capital (4 percent), and
approving of internal documents and policies (2 percent).

#0028

Annual Report / 2007 / Corporate Governance / Board of Directors

Committees of the Board of Directors

Sistema has five committees of the Board of Directors: the
Audit Committee, the Nominations and Compensations
Committee, the Corporate Governance Committee, the
Investor Relations Committee, and the Strategy
Committee. These committees play an important role in
advising the Board of Directors about the issues within
their competency. The committees report to the Board of
Directors.

The main tasks of this committee include development of
corporate governance practices at Sistema and institut(cid:1)
ing improved corporate governance policies at Sistema’s
subsidiaries and affiliate companies. It also monitors the
Company and its affiliates’ observance of existing legisla(cid:1)
tion, the Company Charter and internal normative docu(cid:1)
ments on corporate governance. The Corporate Govern(cid:1)
ance Committee is responsible for preventing and resolv(cid:1)
ing corporate and ethical conflicts. The committee held
10 meetings in 2007.

Audit Committee

Investor Relations Committee

The Audit Committee consisted of three members as of
December 31, 2007. It was chaired by A.I. Gorbatovsky
and
included A.L. Leiviman and S. Newhouse.
L.V. Gorbatova was committee secretary.

The Investor Relations Committee consisted of 5 members
as of December 31, 2007. It was chaired by R. Sommer and
included A.V. Abugov, A.N. Buyanov, S. Newhouse and
S.E. Cheremin. P.V. Kim served as committee secretary.

The primary function of this committee is to formulate
corporate policy towards investor relations in Russia and
abroad and to present its recommendations to the Board
of Directors. The Investor Relations Committee met 10
times in 2007.

Strategy Committee

The Strategy Committee consisted of 16 members as of
December 31, 2007. It was chaired by V.P. Evtushenkov
and included A.V. Abugov, R.F. Almakaev, S.G. Aslanian,
S.F. Boev, A.N. Buyanov, A.Y. Goncharuk, S.A. Drozdov,
F.V. Evtushenkov, D.L. Zubov, V.V. Kopev, D.G. Muratov,
E.V. Utkin, S.E. Cheremin, V.G. Savelev, and D. Khidasheli.
E.L. Madorsky was committee secretary.

This committee’s main function is to consider and ana(cid:1)
lyze questions of strategic development that concern
Sistema and its businesses. It met nine times in 2007.

The Audit Committee’s primary function is to supervise
the preparation of financial reporting, oversee internal
audits of Sistema and its subsidiaries and coordinate the
work of the Company’s internal control and audit depart(cid:1)
ments. It also supervises the work of all external auditors
and advises on their appointment and compensation,
including mediating any disputes between Sistema’s
management and external auditors. Furthermore, the
Audit Committee conducts an initial review of all issues
that will be presented to the Board of Directors. It met
seven times in 2007.

Nominations and Compensations Committee

The Nominations and Compensations Committee consist(cid:1)
ed of four members as of December 31, 2007. It was
chaired by V.P. Evtushenkov and
included A.Y.
Goncharuk, D.L. Zubov and V.V. Kopev. A.N. Buyanov was
committee secretary.

This committee sets the Company’s HR policy, providing
the Board of Directors with recommendations for
appointments to the Corporation’s top management and
recommending candidates for the boards of directors of
subsidiaries and affiliate companies. It also formulates
incentive programs and salary recommendations for the
Company’s top management. The Appointments and
Awards Committee met two times in 2007.

Corporate Governance Committee

The Corporate Governance Committee consisted of seven
members as of December 31, 2007. It was chaired by
V.V. Kopev and included I.V. Belikov, S.A. Drozdov,
I.O. Petrov, A.S. Semenov and
G.V. Ermakov,
S.E. Cheremin. E.G. Tulupov was committee secretary.

#0029

Annual Report / 2007

Alexander Goncharuk

Anton Abugov

Vitaliy Savelyev

Alexey Buyanov

Sergey Drozdov

President and Chief
Executive Officer

First Vice(cid:1)President,
head of Strategy and
Development

First Vice(cid:1)President,
head of Telecommunications
Asset Management Division

Senior Vice(cid:1)President,
head of Financial Group

Senior Vice(cid:1)President,
head of Property Group

Corporate

governance

#0030

Annual Report / 2007 / Corporate Governance / Key Management

Sergey Cheremin

Vice(cid:1)President,
head of External Relations

Anna Goldin

Vice(cid:1)President,
General Council

Ruslan Almakaev

Vice(cid:1)President,
head of Economic and
Information Security Group

Denis Muratov

Vice(cid:1)President,
head of Innovations
and Science

Sergey Boev

Vice(cid:1) President for
Development of State
Programmes and
Non(cid:1)Public Assets

Key

management

#0031

Annual Report / 2007

Key Management

Alexander Goncharuk
President and Chief Executive Officer

Alexander Goncharuk has been on the Board of Directors
since 1996. He first joined the company as a Vice(cid:1)
President of Sistema in 1995 and served in this position
until 1998. His many positions in the Group include
Chairman of the Board of MTS, President of Sistema
Telecom from 1998 to 2003 and General Director of
Concern Sitronics. Currently, Mr. Goncharuk serves on the
boards of Sistema(cid:1)Hals, Sitronics, and Ecu Gest Holding
S.A. He also holds the position of Chairman of the Board
of Sistema Mass Media. Mr. Goncharuk became President
of Sistema in February 2006.

Mr. Goncharuk was General Director of the company ACO
Leader before arriving at Sistema. From 1987 to 1991 he
was a senior officer at the Main Headquarters of the
Russian Navy.

Mr. Goncharuk was born in 1956 in Sebastopol. He gradu(cid:1)
ated with honors from the Sebastopol Naval Engineering
Academy in 1978 and again with honors from the
A. Grechko Naval Academy in 1987.

Anton Abugov
First Vice(cid:1)President,
Head of Strategy and Development

Anton Abugov has served in his current position since
2006. Prior to joining Sistema, Mr. Abugov was a
Managing Director of AKB Rosbank responsible for its
Corporate Finance Department. Before that, he was a
partner in Eurasia Capital Partners, overseeing invest(cid:1)
ment projects in Eastern(cid:1)European telecoms and Russian
petrochemical businesses. From 1997 to 2006 he also
served as a strategic adviser to the TAIF Group of Com(cid:1)
panies, one of the biggest finance and industrial groups
in Russia. Between 1995 and 2002 Mr. Abugov was head
of Corporate Finance at UFG. He has also served as an
advisor to RAO UES and was involved in developing the
infrastructure and regulatory framework for the securi(cid:1)
ties market in Russia.

Currently, Mr. Abugov serves on the boards of Sitronics,
Svyazinvest, and Sistema(cid:1)Invest. He also holds positions
of the Chairman of the boards of Sky Link and Detsky Mir
Center.

Mr. Abugov was born in 1976. He graduated from the
National Economics Academy of the Russian Federation.

#0032

Vitaliy Savelyev
First Vice(cid:1)President, Head of Telecommunications
Asset Management Division

Vitaliy Savelyev arrived at Sistema in 2007. Previously,
from 2004 to 2007, he served as a Deputy Minister of
Economic Development and Trade in the RF. Before that,
he held senior positions at several companies, including
Vice(cid:1)President of Gros, an advisor to the General Director
of Syazinvest, Deputy Chairman at Gazprom, and
Chairman at Menatep SPB. In 1988 he founded Dialog, the
first joint Soviet(cid:1)American company that dealt with com(cid:1)
puter equipment and software promotion.

Mr. Savelyev currently holds the position of the Chairman
of the Board of Comstar UTS.

Mr. Savelyev was born in 1954. He graduated from the
mechanics(cid:1)engineering faculty of Polytechnic Institute
in St. Petersburg and received a second degree from the
Engineering(cid:1)Economic Institute.

Alexey Buyanov
Senior Vice(cid:1)President, Head of Financial Group

Mr. Buyanov joined Sistema in 1994 and occupied various
posts at the Property Group until 1995 when he was
appointed head of Administration at Sistema(cid:1)Invest, later
becoming Vice(cid:1)President in 1996 and First Vice(cid:1)President in
1997. He also served as Vice(cid:1)President of MTS from 1998 to
2002. Also in 2002, he was appointed Vice(cid:1)President of
Sistema and Head of the Financial Restructuring Depart(cid:1)
ment. Later that year, Mr. Buyanov became First Vice(cid:1)
President and Head of the Finance and Investment Group.

Currently, Mr. Buyanov holds a number of senior positions
in the Group, including Chairman of the boards of MTS,
Director of Sistema Finance S.A., Sistema Holding Ltd.,
Financial Fleurus Holding S.A., and Sistema Pension
Fund. He also serves on the boards of MBRD, Sistema(cid:1)Hals,
Sistemny Project, East(cid:1)West United Bank S.A. (Luxem(cid:1)
bourg), and Ecu Gest Holding S.A.

He graduated in 1992 from the Moscow Physics and
Engineering Institute (MPEI) specializing in applied
mathematics and physics, and was an intern researcher at
the Institute of Mechanics Problems (IMP) of the Russian
Academy of Sciences from 1992 to 1994.

Alexey Buyanov was born in 1969 in Moscow.

Annual Report / 2007 / Corporate Governance / Key Management

Sergey Drozdov
Senior Vice(cid:1)President, Head of Property Group

Anna Goldin
Vice(cid:1)President, General Council

Anna Goldin joined Sistema’s legal team in 2007. Prior to
joining Sistema, she worked at Latham&Watkins,
where she started as an associate in Los Angeles in
1990 and eventually worked her way up to become an
Office Managing Partner in their Moscow office. At
Latham&Watkins, Ms. Goldin specialized in corporate
finance, capital markets and M&A, and provided legal
services to leading Russian and international companies
in telecommunications, high(cid:1)technology, oil and gas,
finance, and other fields.

Ms. Goldin serves on the Board of Thema Production S.A.

Ms. Goldin was born in St. Petersburg. She received her BA
and law degree from the University of California, Berkley.

Ruslan Almakaev
Vice(cid:1)President, Head of Economic
and Information Security Group

Ruslan Almakaev came to Sistema as Head of Non(cid:1)
Corporate Restructurings in 2002. Prior to joining
Sistema, he worked as a Deputy General Director at AOZT
Commercial and Industrial Company Eurasia from 1993 to
2002. At the same time, he served as an assistant to a
State Duma deputy and a Deputy General Director of the
Russian Aviation Fund, a public fund to support members
of the Russian Air Force.

Mr. Almakaev holds the position of Chairman of the Board
of NTR Region. He also serves on the boards of Sistema
Mass Media, Sistema Invest, and Sistemny Project.

Mr. Almakaev was born in 1963 in Kharkov and graduat(cid:1)
ed from Kharkov State University in 1994. In 2003 he fin(cid:1)
ished graduate work at Krasnodar State University spe(cid:1)
cializing in methods and systems of macroeconomic
processes.

Sergei Drozdov has been working at Sistema since 1995.
He managed the Department of Development and
Investments from 1995 to 1998, and served as Vice(cid:1)
President, Acting President, and First Vice(cid:1)President of
Sistema(cid:1)Invest from 1998 and 2002. In May 2002 Mr.
Drozdov became Acting First Vice(cid:1)President and Head of
the Department for Corporate Property, and later that
year was appointed Director and First Vice(cid:1)President of
Sistema and Chief of the Property Complex.

Currently, Mr. Drozdov serves on the boards of MTS, Sky
Link, Detsky Mir Center, Sistema(cid:1)Hals, Intourist, Sistema(cid:1)
Invest, Sistemny Project, Sistema(cid:1)Inventure, Ecu Gest
Holding S.A., and Medexpress Company. He also holds
positions of the Chairman of the boards of Sistema(cid:1)
Telecom, Reestr, Medsi Group, and Sistema(cid:1)International.

Before coming to Sistema, Mr. Drozdov headed the
Administration for Financial Innovation and Marketing at
the Moscow Property Fund from 1994 to 1995.

Mr. Drozdov was born in 1970 in Archangelsk. He gradu(cid:1)
ated in 1993 from the S. Ordzhonikidze State Academy of
Management in Economics.

Sergey Cheremin
Vice(cid:1)President, Head of External Relations

Sergey Cheremin first joined the Sistema group of compa(cid:1)
nies in 2004 as CEO of MBRD Bank, and became the bank’s
Chairman of the Board in April 2005. He also became
Sistema’s Head of External Relations at that time.

Mr. Cheremin has an extensive background in banking,
and has held several senior positions at major Russian
banks, including Deputy CEO of Print Bank from 1991 to
1992, CEO of Moscow Export(cid:1)Import Bank from 1992 to
1998, and Vice(cid:1)President of Ural Trust Bank from 1998 to
2000. From 2000 until joining MBRD, Mr. Cheremin was
an advisor to the President of Severo(cid:1)Voctochny
Alliance Bank.

Currently, Mr. Cheremin holds a number of senior posi(cid:1)
tions in the Group, including Chairman of the Board of
MBRD and Dalcombank. He also serves on the boards of
Intourist, NIS, and Sistema Pension Fund.

Mr. Cheremin graduated with honors in 1989 from the
Moscow State Institute of International Relations with a
specialization in international journalism. He completed
a postgraduate course in global economic issues at
Moscow State University. In 1992 he interned at the New
York Institute under the Investments and International
Accounts Program and enrolled in a course for banking
specialists at Fairfield University (USA) in 1993.

#0033

Annual Report / 2007

Denis Muratov
Vice(cid:1)President, Head of Innovations and Science

Denis Muratov joined Sistema in his current position in
2006. Prior to that, he served as the General Director of
the Idea Innovation and Industrial Technopark in Kazan
and served as an economic advisor to Tararstan’s First Vice
Prime Minister. Between 1992 and 2004 Mr. Muratov lived
and worked in Sweden, where he managed several compa(cid:1)
nies, including Anton Invest AB, Nordic Industrial
Development AB, Scantat AB, and Media Resources
International Scandinavia AB.

Currently, Mr. Muratov serves on the boards of Sistema
Mass Media, RTI Systems, Dubna(cid:1)Sistema, NIS, and the
Coral/Sistema Strategic Fund. He also holds some other
positions in the Group, including the Chairman of the
boards of Sitronics, Intellect Telecom, Binnofarm, and
Sistema(cid:1)Venture.

Mr. Muratov was born in Ekaterinburg (Sverdlovsk). He
holds degrees from the Sverdlovsk Institute of Archi(cid:1)
tecture and the Chalmers University of Technology in
..
Go
teborg, Sweden.

Sergey Boev
Vice(cid:1) President for Development of State
Programmes and Non(cid:1)Public Assets

From 1971 until 1999, Sergey Boev worked at the A.L.
Mints Radio(cid:1)Technology Institute. In this time, he start(cid:1)
ed as an assistant mechanic and worked his way up to
become the institute's General Director. In 2000, he
became General Director and a member of the Board of
Directors at Radio(cid:1)Technology and Information Systems
Concern. Starting in February 2008, he became Sistema's
Vice(cid:1)President for Development of Focused Programs and
Non(cid:1)public Assets.

He is the Сhairman of the Board of Directors of RTI
Systems.

Mr. Boev was born on September 17, 1953 in Moscow. He
received a diploma from the All(cid:1) Union Correspondence
Legal Institute in 1978, graduated from the Moscow
Ordzhonikidze Institute of Management in 1984, and
completed coursework in the State Plan of the USSR in
1988.

#0034

Annual Report / 2007 / Corporate Governance / Asset Structure

Asset Structure

The table below outlines Sistema’s beneficial ownership
and voting interests in subsidiary and associate compa(cid:1)
nies where the Corporation’s ownership exceeds 20% of
total ordinary shares. This list reflects shareholdings as of
January 31, 2008.

Since the end of the reporting period, in February 2007,
Sistema sold 17.5% of its shares in Sitronics through an
initial public offering on the London Stock Exchange and
listings on the Moscow Stock Exchange and Russian
Trading System.

On February 21, 2007 Sistema announced that it would
sell 46.19% of ROSNO shares to Allianz as part of a share
purchase agreement. Following the agreement, Sistema’s
shareholding in ROSNO was reduced to 3%.

In April 2007 Sistema acquired 9.75% of the issued share
capital of Sitronics from Ecu Gest Holding S.A., a Sistema
subsidiary, as part of the Corporation’s strategy of
restructuring and optimizing the structure of its share(cid:1)
holding companies.

On August 15, 2007 Sistema announced the acquisition of
a 20% stake in Dalcombank, a commercial bank based in
the Far East of Russia. In October Sistema increased its
ownership in Dalcombank to 48.16%. In January 2008
Sistema acquired 50.5% of Dalkombank, raising its stake
in the company to 98.85%.

In September 2007 Sistema acquired a 10% stake in
Shyam Telelink Ltd., an Indian telecommunications oper(cid:1)
ator. In October Sistema signed a share purchase agree(cid:1)
ment for the acquisition of an additional 41% stake in
Shyam Telelink Ltd., and a call option agreement which
gives Sistema the right to increase its stake up to a max(cid:1)
imum of 74%. In January 2008 Sistema increased its own(cid:1)
ership in Shyam Telelink Ltd to 51%.

Company

% of total ordinary shares
owned by Sistema

Telecommunications Business

Mobile TeleSystems
Comstar UTS
MGTS
Sky Link
MTT
Svyazinvest
Shyam Telelink

Technology Business

Sitronics

Real Estate Development Business

Sistema(cid:1)Hals

Detsky Mir Center
Detsky Mir

Retail Business

Financial Services Business

MBRD
East(cid:1)West United Bank S.A.
Dalcombank

Sistema Mass Media

Intourist

Media Business

Travel Business

Radar and Space Technology Business

Concern RTI Systems

Healthcare Business

Medsi
Medsi(cid:1)2

Binnofarm

TS(cid:1)Retail

Pharmaceuticals Business

Convergent Services

Entertainment Business

Russian World Studios

Petrochemicals Business

ANK Bashneft
Ufimsky NPZ
Novoil
Uralneftehim
Ufaorgsintez
Bashnefteproduct

53%
53%
33%
50%
43%
25%
51%

85%

80%

100%
75%

95%
100%
98,85%

100%

66%

100%

67%
74%

100%

51 %

21%
24%
27%
23%
23%
25%

#0035

Annual Report / 2007

Risk Management

The favorable economic environment of the last several
years, the positive dynamic of macroeconomic indicators,
and steady growth of real wages all promote further
growth in consumer demand in our markets. The con(cid:1)
sumer sectors of Russia and the CIS are the basis of
Sistema’s businesses and continue to play a decisive role
supporting overall economic growth. Nonetheless, there
are significant risks that could negatively affect the pace
of development of the Company’s subsidiaries.

There are numerous risks that Sistema’s businesses could
face. They represent processes and factors that the com(cid:1)
pany has little or no influence over. Therefore, effective
evaluation and management of these risks is an impor(cid:1)
tant component of Sistema’s strategy.

Risk management is conducted in a centralized manner
within the framework of the laws and statutes confirmed
on a Sistema(cid:1)wide level, as well as on a business level.
This process touches on all corporate activities and is
intended to expose and reduce the likeliness and scale of
the impact of any events that could negatively influence
the Company’s operations. The corresponding measures
are a reasonable guarantee that the strategic goals of the
Company’s activities will be realized.

Political Climate

The political situation in Russia over the last year was
characterized by a reasonably high degree of stability. At
the same time, there has been increasing political insta(cid:1)
bility in several neighboring CIS member states. This
allows various political forces to influence these coun(cid:1)
tries’ economies and especially the private companies.

Economic Situation

The economic growth rate remained high in 2007. GDP
growth in 2007 reached 8.1% after having grown 7.4% in
2006. The economic situation in Russia enabled further
growth of the investment market and consumer demand.
However, amidst this backdrop the rate of inflation grew
and the consumer inflation indicator hit 11.9%, well
above the 8.5% rate that had been forecast in the budget.
This was the highest level in the last three years.

Rising inflation in 2007 was caused by the significant
growth in the price of oil and food staples on world mar(cid:1)
kets. The Ministry of Finance and the Central Bank have
taken a measured approach to fiscal and monetary policy,
as demonstrated by the considerable increase in Russia’s
gold and currency reserves and the Stability Fund.
However, the positive effect on the economy has been
limited by growing budget expenditures and the growth
of regulated tariffs.

Another significant factor is the credit crisis that hit
world financial markets in August 2007 on the back of
the subprime mortgage crisis in the USA. In connection
with this, the goal of supporting the stability of the bank(cid:1)
ing system and ensuring that it maintains adequate liq(cid:1)
uidity may become a barrier in achieving price stability.
As such, inflation on the whole and rising prices in the
consumer sector are the main macroeconomic risks.
Another significant risk is the exceptional dependence of
the Russian economy and the economies of the CIS on the
price of fossil fuels. Some CIS countries are also at risk
that positive economic tendencies could be weakened by
political instability or attempts to strengthen the state’s
role in the economy.

Exchange Rate

Sistema faces exchange rate risks linked to changes in
the value of the ruble, the euro, and the hryvna to the US
dollar. Given a backdrop of the steady decline of the dol(cid:1)
lar’s value, several of the Corporation’s companies have
moved to switch the pricing of their services into rubles.
This step meant an increase in earnings in dollar terms
and created an advantage with the cheapening of dollar(cid:1)
denominated financing, as a significant part of the com(cid:1)
pany’s borrowed capital was denominated in US dollars.
However, there is a risk that the Russian Central Bank will
refuse a strong(cid:1)ruble policy as a way to fight inflation and
instead favor its weakening in order to protect domestic
companies from losing competitiveness and to slow the
growth of imports.

Capital Markets

There is the risk that Russian equities will underperform
their counterparts on other developing markets. The two
principle reasons for this possible weakness are the meth(cid:1)
ods used to establish their fair value and the current level
of liquidity in the Russian market. There is also a risk that
capital inflows will shrink on the back of tighter global
liquidity, political risks and high market valuations.

Interest Rates and Other Credit Risks

Changes in interest rates on the Russian and international
markets caused by the global credit crisis and tighter liq(cid:1)
uidity in the banking system could significantly affect
the cost of borrowing and of raising additional capital.
Sistema operates a number of capital(cid:1)intensive business(cid:1)
es and therefore any changes in borrowing costs could
have a negative impact on the Company. Furthermore, if
Russia’s sovereign debt rating were lowered, the corporate
debt ratings of Sistema could be affected, making borrow(cid:1)
ing in international debt markets more costly.

#0036

Annual Report / 2007 / Social Responsibility

Social Responsibility

At the core of Sistema’s corporate outlook is the belief
that the Company’s businesses make vital contributions
to improving the quality of life in the markets they serve.
Sistema focuses on growing service(cid:1)oriented high(cid:1)tech(cid:1)
nology businesses that foster the creation of an innova(cid:1)
tion economy in Russia and help diversify the economy to
compete on the global marketplace. Sistema’s business
strategy dovetails with the Russian government’s belief
that promoting high technology is a national priority and
crucial for the country’s development.

Sistema’s products and services provide customers with
access to world(cid:1)class communications, credit, and modern
homes, offices, and infrastructure. As a responsible em(cid:1)
ployer and corporate citizen, Sistema has always been on
the forefront of adapting international best practice to
the Russian landscape. Sistema has also played an impor(cid:1)
tant role in the growth of Russian capital markets and cre(cid:1)
ating a positive investment environment in the country.

At the same time, Sistema recognizes that it has a moral
obligation as a leading Russian company to contribute to
the development of a better society in ways not limited to
its businesses. Sistema is an important patron of the arts,
promotes sports, helps preserve cultural treasures, con(cid:1)
tributes to the development of science and education,
and reaches out to vulnerable layers of society. In 2007 it
published its first ever Social Report, which highlighted
the range of programs and charities it sponsors in the
communities where it operates.

Sistema is an important patron of the arts in Russia and
sponsors several national museums, including the
Pushkin Museum, the State Tretyakov Gallery, the
Kremlin museums, and many others. The Company is a
key partner of the Russian Museum and is in the midst of
a 10(cid:1)year, $10 million partnership agreement signed in
2003 to provide the museum with support for its publica(cid:1)
tions, restoration work, security and community out(cid:1)
reach, as well as items to expand its collection. Sistema
has also created a series of educational centers across
Russia called the Virtual World of the Russian Museum,
which allows visitors in the regions to take a virtual tour
of the St. Petersburg museum. It plans on opening similar
exhibits in London and Istanbul to help popularize the
Russian culture abroad.

Sistema also supports Russian music and dance, and is a
sponsor of the world(cid:1)renowned White Nights Festival, the
Mariinsky Theater, the Musical Kremlin international fes(cid:1)
tival, the Earlymusic festival, and the Benois de la Danse
award, which has developed into the premier ballet award
in the world since its inception 15 years ago. Modern art
and culture are not ignored, and Sistema sponsors con(cid:1)
certs, art exhibitions, and the annual Smolensk film festi(cid:1)
val. Under Sistema’s patronage, the Petr Fomenko Studio
opened a new theater building on Taras Shevchenko Em(cid:1)
bankment in Moscow. The theater, which won an award
for innovative architecture in 2006, gave the renowned
troupe its first permanent home.

By financing important restoration projects, Sistema is
helping preserve Russian culture for future generations.
In 2007 it funded numerous projects across Russia,
including the 19th century Ivangorod Holy Trinity
church, Moscow’s 16th century Donskoi Monastery, and
the Marfo(cid:1)Mariinsky cloister.

In education, Sistema provides financial support to stu(cid:1)
dents who excel in math and science, engineering and
computer science. At the same time, Sistema has part(cid:1)
nered with Moscow State University to develop its own
corporate university, the Higher School of Management
and Innovation. Sistema supports summer programs,
competitions and a lecture series intended to engage tal(cid:1)
ented youth.

Sistema funds sports to both promote physical fitness and
support members of Russian national teams. The Com(cid:1)
pany is an active partner of the Russian Olympic and
Paralympics teams. It also sponsors the Russian Rugby
Union and participates in international youth tourna(cid:1)
ments, the Tretyak International Athletic Academy fund,
and a sports league for Russian law enforcement officers.

Charity is an important dimension in Sistema’s social pol(cid:1)
icy, and children’s wellbeing is particularly important to
the company. It assists several orphanages around Russia
to help integrate their charges into society. It also pro(cid:1)
vides material support for schools that cater towards
children with disabilities and supports charities such as
the Independence fund, which assists disabled children
and World War II veterans, and the St. Petersburg(cid:1)based
Salvation fund, which provides medical care to young
burn victims. At the same time, Sistema provides medical
equipment to the Red Cross in Moscow and has frequent(cid:1)
ly partnered with the Russian Ministry of Emergency
Situations to provide humanitarian aid in the aftermath
of disasters.

In its philanthropic and charitable activities, Sistema
applies the same strict criteria as it does for any other

#0037

Annual Report / 2007

aspect of its business: its social programs should provide
tangible and verifiable results that improve society.
Company social policy is guided by internationally recog(cid:1)
nized principles of sustainable development and corpo(cid:1)
rate social responsibility. Sistema became one of the first
companies in Russia to sign the Global Compact of the
United Nations (UNGC) in 2002 and it joined the World
Business Council for Sustainable Development (WBCSD)
the following year. Sistema is one of Russia’s most gener(cid:1)
ous companies and continues to support projects in its
markets that create new, exciting opportunities and
make it a richer and more textured world.

#0038

Annual Report / 2007 / Riding the Consumer Wave

Riding the
Consumer Wave

#0039

Annual Report / 2007

Riding the
Consumer Wave

Economic Indicators

Russia is enjoying a consumer boom. Several factors,
including growth in the population’s real income, the
rapid development of consumer credit, and the tradition(cid:1)
al skepticism with which Russians treat savings, have cre(cid:1)
ated a stable foundation for future dynamic growth in the
consumer sector. According to analysts, the current
Russian boom will continue for a minimum of five years.

The current dynamic growth in consumer demand is the
result of nearly eight years of economic growth (with an
average annual rate of 6.6%) and is partially related to
the record oil and gas prices that followed the 1998
default and financial crisis. The population’s real wages
and consumer spending are now growing at nearly twice
the rate of the GDP.

Today, the Russian economy ranks seventh in the world in
terms of GDP calculated according to purchasing power
parity, making its economy larger than those of devel(cid:1)
oped countries like France and Italy. It is also bigger than
Brazil’s economy, which has rapidly developed in recent
years. Growth in 2007 was higher than at any point over
the last ten years. According to the Federal Service of
State Statistics (Rosstat), GDP growth in Russia hit 8.1%.
The most important factors in achieving this result were
the condition of the world energy market, the influx of
foreign capital into Russia and growing domestic indus(cid:1)
trial production and demand.

Creating a Consumer Society

The high inflation rates of the last three years (inflation
hit 11.9% in 2007) are a typical indicator of a consumer
boom. Inflation rises in a large part due to increasing con(cid:1)
sumer prices, which would be impossible to sustain with(cid:1)
out the continuing growth of the population’s income.
According to Rosstat, the average monthly salary last
year was 13,518 rubles, representing a 26.7% growth from
2006.1 Real wages grew over this same period by 10.4%.

According to the Ministry of Economic Development and
Trade, the total volume of Russians’ income in 2007 was
over 21.1 trillion rubles, a 22.4% increase over 2006. Over
the same period, spending on goods and services grew by
23.5%.

It should be noted that the population’s spending habits
are changing relatively slowly. Consumer spending
equaled approximately 70% of income and spending on
purchases was around 54%. In Russia’s earnings profile,
approximately 65% was attributed to salaries, with the
remainder coming from pensions, scholarships, income
from properties, and income from business activities.

The Independent Institute for Social Policy, in analyzing
indicators such as salary levels, savings, and real estate
holdings, determined that consumers of deluxe(cid:1)class
products and services represent about 1% of the popula(cid:1)
tion. Less than 10% of the population lives below the
poverty line. About 70% make up the lower middle class,
or people who have not quite reached the middle class,
but have already crossed the threshold of a ‘consumer
society’ and buy more than just life necessities. There(cid:1)
fore, more than 90% of the population, representing tens
of millions of people, consists of potential consumers in
the market for goods and services.

Both upper and lower middle classes have radically
changed their attitudes over the last ten years. On the
whole, the population’s welfare has increased and many
representatives of the middle class work in dynamically
growing sectors (such as raw materials, banking and retail
services), where income has outstripped growth rates.

Another factor that stimulates consumerism in Russia is
the relatively low prices for utilities and housing costs.
Even though these fees are growing, they remain below
the cost of production. This allows Russians to spend a
significant part of their salaries on consumer desires.

Furthermore, Russia does not have a tradition of saving,
and the population is much more willing to spend money
than put it aside. One of the reasons for this preference is
fallout from the limited consumer optians available dur(cid:1)
ing the Soviet period. Many Russians still remember the
era of deficit and when salaries were not paid in full, and
therefore are trying to compensate for those lost oppor(cid:1)
tunities.

All of these factors explain why the population’s savings
are only growing at a modest rate. In the first half of
2007, savings grew by 1.1 trillion rubles, just a 1.7%
increase over the same period in 2006.

1 According to the Ministry of Economic Development and Trade (MEDT)

#0040

The Russian consumer market’s potential is clearly
attracting serious interest from international companies.
However, while latecomers are weighing the pros and
cons of entering Russia, local players are actively pursu(cid:1)
ing growth. Russian business has an indisputable advan(cid:1)
tage in that it understands local realities and consumers,
which in turn supports its access to market capital. They
have compensated for their insufficient international
experience by attracting Western managers to their com(cid:1)
panies. This has helped level the field when competing
with international players.

Annual Report / 2007 / Riding the Consumer Wave

Another powerful source of growth in the consumer sec(cid:1)
tor is the explosion in the availability of retail credit. In
2007 the size of this market grew to $100 billion. Credit
available for specific purchases at retail outlets is largely
responsible for the market’s rapid growth. At the same
time, the market for credit cards and express credit is also
growing.

Changes in Consumer Habits

The population’s growing income — in June 2007 the
average salary crossed the psychological barrier of
$500 — is responsible for the convergence of consumer
habits with those of more developed countries. In more
developed countries, the share of spending on foodstuffs
is significantly less than in Russia, and cafe’s and restau(cid:1)
rants are much more popular.

In recent years, there has been a tendency for the volume
of non(cid:1)food goods and catering to outstrip growth rates.
Car sales are growing particularly quickly. According to
the Association of European Business, in 2007 the number
of foreign cars sold in Russia grew by 61%, reaching 1.6
million. This was the first year that more foreign cars
were sold than domestic cars. By 2010, according to some
forecasts, the Russian automotive market could become
the biggest in the world.

Advantages of Russian Business

Even though Russia is primarily perceived as an energy
exporter overseas, transnational corporations ranging
from automobile giants to perfume companies already
consider it, together with China and India, as one of the
most dynamic markets for consumer goods.

Russian businesses have also recognized that the con(cid:1)
sumer market offers excellent opportunities for growth
with minimal political risk and state interference. The
same cannot be said about the energy sector. Sectors like
retail, mobile communications, automotive and food
products are particularly interesting.

By 2010 the total turnover of retail sales is projected to
double from $245 billion to $526 billion. At the same
time, Russia’s retail market is expected to rise from 12th
to 9th place by volume. Currently, chain retailers and
large stores only represent 15–20% of the market, with
basic markets, street kiosks and Soviet(cid:1)style stores
accounting for the rest, meaning that vast development
opportunities are available.

#0041

Annual Report / 2007 / Riding the Consumer Wave / Telecommunications

Telec mmunications

#0043

Annual Report / 2007

Telecommunications

The Russian mobile communications
market is entering a new phase of
growth. Its key driver has become the
growing popularity of additional serv(cid:1)
ices (content, mobile internet, etc.)
and experts predict that this will allow
mobile communications operators to
double ARPU in the next 10 years.

Leonid Melamed

President and CEO, MTS

#0044

Broadband internet access in Moscow
and, to an even greater degree, Russia's
regions has huge growth potential. In
2007, market penetration was only
49% in the capital and just 4% in the
regions. By 2011, broadband access is
expected to reach 84% of Moscow
households while its market penetra(cid:1)
tion outside of the capital will triple.

Sergey Pridantsev

President, Comstar UTS

Annual Report / 2007 / Riding the Consumer Wave / Telecommunications

The deregulation of long distance
and international communications
has opened exciting possibilities for
the market’s alternative operators.
In just 2 years, alternative operators
have already taken over approximately
20% of the long distance market,
due to more flexible pricing,
high quality service and effective
marketing. The market’s volume in
2007 was $3 billion.

Igor Zabolotniy

Acting CEO, MTT

Mobile data transfer is a
relatively new segment of the
mobile communications market,
and one of its fastest growing.
Its growth rate has outstripped growth
in the voice services market by nearly
2.5 times. In the next 3 to 4 years, the
high speed data transfer segment
could represent 10% of Russia's mobile
communications market.

#0045

Gulnara Hasyanova

CEO, Sky Link

Annual Report / 2007

Overview

Telecommunications represents a core, long(cid:1)term busi(cid:1)
ness for Sistema. Sistema Telecom manages the compa(cid:1)
nies in the Telecommunications business, including MTS,
Comstar, MTT, and SkyLink. Sistema Telecom is develop(cid:1)
ing businesses along two main lines: wireless and fixed(cid:1)
line communications. At the same time, it is building con(cid:1)
vergent services across wireless and fixed(cid:1)line and deliv(cid:1)
ering value(cid:1)added services such as Internet banking that
employ synergies with Sistema’s other businesses.

Wireless Communications

Operating in the wireless communications market, Mobile
TeleSystems (MTS) is Sistema’s largest asset and the lead(cid:1)
ing cellular operator in Eastern Europe. MTS is one of the
top(cid:1)10 mobile companies in the world in terms of sub(cid:1)
scriber numbers1. The company is the leader in Russia’s
highly competitive mobile telephony market, with a mar(cid:1)
ket share of 33.2% in 20072. MTS is also a leading player
in the emerging mobile markets of Belarus, Turkmenistan,
Ukraine, Uzbekistan, and Armenia. As of December 31,
2007, MTS had 81.97 million consolidated subscribers in
Russia and the CIS, or 85.77 million total including
unconsolidated subscribers in Belarus.

SkyLink provides high(cid:1)speed mobile Internet, data, and
voice services using third(cid:1)generation CDMA 2000 1X EV(cid:1)DO
technology in Russia and it is present in 31 regions. The
target market segment for CDMA 2000 services includes
selected corporate and heavy(cid:1)use private subscribers
requiring wireless transfer of multimedia data, high(cid:1)
speed Internet access and significant volumes of high(cid:1)
quality voice traffic.

Fixed(cid:1)line Communications

Comstar(cid:1)United Telesystems (Comstar) is a multi(cid:1)service,
fixed(cid:1)line telecommunications operator based in Moscow.
Through incumbent operator MGTS, Comstar owns the
‘last(cid:1)mile’ access to around 3.6 million households in
Moscow, representing 97,3% of total households in Russia’s
capital. In the alternative fixed(cid:1)line segment, Comstar is
the number(cid:1)one provider of broadband Internet access to
residential users in Moscow with 34.3% market share, and
is a leading provider of complete service packages for cor(cid:1)
porate clients, which incorporate local and long(cid:1)distance
voice calling, virtual private networking, and other solu(cid:1)

tions. In addition, Comstar holds a 25% plus one blocking
stake in Svyazinvest, the holding company for Russia’s
incumbent regional operating companies.

Multiregional TransitTelecom (MTT) is a Russian domestic
long(cid:1)distance and international telecommunications
operator. In an inter(cid:1)carrier segment, MTT provides ser(cid:1)
vices for domestic long(cid:1)distance, international, and inter(cid:1)
zone (in Moscow) traffic transmission to Russian and for(cid:1)
eign telecom operators. In a subscriber segment, MTT pro(cid:1)
vides domestic long(cid:1)distance and international services
to Russian fixed(cid:1)line network subscribers.

Marketplace

The market for telecommunications services continues to
be one of the most dynamic and competitive sectors in
Russia and the CIS today. The sector’s significant growth
potential is apparent in all key segments of the telecom(cid:1)
munications business. According to data from the Russian
Ministry of Information Technologies and Telecom(cid:1)
munications, the total volume of the Russian telecommu(cid:1)
nications market grew by 15% to over $32 billion in 2007.

Wireless Communications

The total size of the Russian mobile telecommunications
market reached $18 billion3 in 2007, up 28.6% year on
year. Total mobile penetration passed 100% during the
course of 2006 and reached 119% at the end of 2007. MTS
remained the clear market leader in terms of market
share, with the top three mobile operators accounting for
84% of subscribers4.

The Russian mobile market reached an important turning
point in 2007. Previously, revenue growth was primarily
driven by gaining new subscribers. As the market has
developed, large numbers of new subscribers diluted aver(cid:1)
age revenue per user (ARPU) numbers. In 2007, however,
there was a clear shift towards increased usage and take
up of value(cid:1)added services, driven both by new services
offered by mobile operators and increased consumer
spending power. With nationwide penetration, mobile
operators are able to stabilize or reduce capital expendi(cid:1)
ture and focus on deriving revenue growth from existing
subscribers, even as average price per minute has declined
in recent years. Adding new subscribers remains impor(cid:1)
tant, but is no longer the driving force in the marketplace.

1 According to Informa Telecoms & Media's World Cellular Information Service, by proportionate subscriptions in Q4 2007 (proportionate sub(cid:1)

scriptions relate to equity stakes in company's operations).

2 Source: AC&M Consulting, 31 Dec 2007
3 Source: Uralsib
4 Source: AC&M Consulting

#0046

Annual Report / 2007 / Riding the Consumer Wave / Telecommunications

Other important trends in the mobile market include the
introduction and development of 3G (third(cid:1)generation)
services in Russia. The Federal Communications Agency
completed a tender for licenses for IMT(cid:1)2000/UMTS stan(cid:1)
dard technology in April 2007, with MTS and two other
leading mobile operators being awarded licenses. 3G cov(cid:1)
erage will allow operators to deploy new services, includ(cid:1)
ing wireless broadband, aimed at increasing ARPU and
encouraging customer loyalty.

Russia’s regional markets remain a key priority for mobile
operators, as penetration is lower than in Moscow and the
largest regional cities, and less(cid:1)developed fixed(cid:1)line infra(cid:1)
structure drives further demand. At the same time, Russian
mobile operators are also fighting to build market share in
CIS countries, where lower rates of penetration, generally
poor fixed(cid:1)line service, and rapid rates of economic growth
allow companies to derive both organic revenue increases
and gain market share through acquisitions and tie(cid:1)ups
with local operators. Going forward, the markets of devel(cid:1)
oping countries outside of the former Soviet Union repre(cid:1)
sent a further long(cid:1)term growth opportunity.

In 2008 the total value of the mobile telecommunications
market is forecast to grow by 27.8% to $23 billion. Growth
is expected to moderate to a sustainable level of $2 billion
to $3 billion per annum after 2009, with a forecast value of
$35 billion by 2012.5 Lehman Brothers has forecast a value
of $41 billion by 2017. Analysts predict growth in penetra(cid:1)
tion will level off by 2011, with penetration of around
136%. Nonetheless, given the expected fall in the Russian
population over the period and stability in the subscriber
base, penetration rates could rise beyond this level, in par(cid:1)
ticular if subscribers use additional cards for additional
services such as Internet and mobile broadband. ARPU pre(cid:1)
dictions vary significantly, with long(cid:1)term (8–10 years)
forecasts of between $15 to $30 per month or higher,
depending on broader macroeconomic conditions.

Fixed(cid:1)line Communications

Fixed(cid:1)line services for both residential and corporate sub(cid:1)
scribers, including voice, data(cid:1)exchange, Internet broad(cid:1)
band and related ‘double(cid:1)play’ and ‘triple(cid:1)play’ services,
including IPTV, are developing dynamically, although there
is still considerable unmet demand for services. The mar(cid:1)
ket remains at a far earlier stage of development than the
mobile market, presenting major opportunities for devel(cid:1)
opment, particularly for operators able to combine the full

range of fixed(cid:1)line services, including voice, broadband,
data and local and long(cid:1)distance voice services.

The combined value of the fixed(cid:1)line telecommunications
market in Moscow, including traditional and alternative
services, was estimated by independent research group
Direct Info at $5.46 billion in 2007. The Moscow market is
developing rapidly. Internet penetration reached an esti(cid:1)
mated 53% at the end of the year, with broadband
Internet penetration of 49% and pay(cid:1)television penetra(cid:1)
tion of 17%.7 The near(cid:1)total penetration of voice services
and the rapid decline in the use of dial(cid:1)up services has
meant that broadband has emerged as the primary mar(cid:1)
ket driver in Moscow. By 2011 total Internet penetration
in the city is forecast to reach 84%, broadband Internet
penetration 83%, and pay(cid:1)television 38%.8

Moscow Oblast (which surrounds but does not include the
city of Moscow) was the fastest(cid:1)growing telecommunica(cid:1)
tions market in the country during 2007 and there is a
clear overlap in existing and potential client base.
Moscow Oblast is the third largest region in Russia after
Moscow City and St. Petersburg, with a population of 6.7
million and 2.2 million private households. The level of
penetration of telephony remains low at 26%, and broad(cid:1)
band stands at 6%, although it is growing quickly.

Internet and broadband penetration outside of Moscow
are low but increasing rapidly, underlining the long(cid:1)term
attractiveness of the regional marketplace. Internet pene(cid:1)
tration at the end of 2007 was estimated at 15%, up from
9% in 2006. It is forecast to grow by a compound annual
growth rate of 25% through 2011, reaching a level of 28%.
Broadband penetration was estimated to have roughly
doubled between 2006 and 2007, reaching 4% and is
expected to reach 12% of households by 2011.9 Inde(cid:1)
pendent consultancy iKS estimates that 75% of Internet
access in Russia as a whole will be through wire(cid:1)line
broadband in 2010, with a further 10% through wireless
broadband. The share of dial(cid:1)up will fall from 28% at the
end of 2007 to 15% by 2010.10

Results

Consolidated revenues in the Telecommunications seg(cid:1)
ment grew 31.7% to $9.84 billion in 2007, compared to
$7.48 billion in 2006. Revenue growth outpaced the over(cid:1)
all rate of the telecommunications market for the sev(cid:1)

5 Source: Uralsib
6 Preliminary 2007 estimate by Direct Info research group includes fixed(cid:1)line, data exchange and Internet.
7 Penetration is calculated as % of households; 2007 data is forecast/estimate. Source: Company data, Pyramid Research, J'son & Partners
8 Source: Company data, Pyramid Research, J'son & Partners
9 Penetration is calculated as % of households; 2007 data is forecast/estimate. Source: Company data, Pyramid Research, J'son & Partners
10 Company data, Pyramid Research, J'son & Partners

#0047

Annual Report / 2007

enth year in a row. OIBDA increased 37.5% during the
year, reaching $4.98 billion.

Wireless Communications

In 2007 MTS retained and strengthened its market lead(cid:1)
ership in the Russian mobile market, with a market share
of 33.2%. Also during the year, MTS increased its sub(cid:1)
scriber base by 12.5% to 81.97 million consolidated sub(cid:1)
scribers (total base including subscribers Belarus grew up
by 13% to 85.77 million subscribers), and its subscriber
base in Russia increased by 12.1% to 57.43 million users.

In April 2007 MTS received a license to provide wireless
communications services using the IMT(cid:1)2000/UMTS tech(cid:1)
nical standard (3G) for all of Russia. During 2007 and
entering 2008, the Company has been equipping and test(cid:1)
ing networks in a number of Russian regions. Before the
end of 2008, MTS plans to launch 3G networks in a num(cid:1)
ber of large cities, pending final agreements with regula(cid:1)
tors regarding frequency allocation. These 3G networks
will allow MTS to substantially expand its ability to deliv(cid:1)
er additional services, including broadband Internet
access through mobile devices.

One of the most significant events for MTS during 2007
was its entry into the fast(cid:1)growing Armenian market with
the September acquisition of an 80% stake in K(cid:1)Telecom,
operating under the VivaCell brand. In June MTS acquired
the remaining 26% stake in its subsidiary in Uzbekistan,
bringing its share in the company to 100%. Also during
2007, MTS began rebranding of its Ukrainian subsidiary
UMC under the MTS brand, a move underlining the
strength and quality perceptions of the MTS brand in the
wider CIS region.

In addition, during the year, MTS received a license to
provide 3G services in Uzbekistan as well as frequencies
for providing WiMAX wireless broadband services in the
country. The Company also received frequencies for pro(cid:1)
viding 3G services in Armenia.

During 2007 MTS launched a range of new tariff plans and
services for its subscribers, in line with MTS’s strategy of
continually developing the quality and range of its
mobile services and extending its coverage area to retain
existing customers, attract new subscribers and increase
ARPU and MOU.

Beginning in May 2007, the Company launched a new
credit(cid:1)based billing system. New nationwide tariff plans
‘Red_text’ and ‘SMS(cid:1)extra’ were introduced to provide
better value(cid:1)for(cid:1)money for frequent users of SMS and
MMS messaging. The ‘Svobodniy’ tariff plan was launched
to allow subscribers to talk for longer with minimal addi(cid:1)
tional expenditure. Also during 2007, MTS launched the
‘Regionalniy’ tariff plan, developed for residents of
Moscow Oblast with special tariff conditions during the
‘dacha season’ in the summer, when many city residents
go to their country houses for weeks at a time.

Other tariff plans launched or expanded in 2007 include
‘Rodnye Goroda’ and ‘Super Perviy’, which provide unique
pricing propositions for calls to local numbers, and a cor(cid:1)
porate tariff aimed at small businesses, which also offers
attractive rates for calling within the subscriber’s home
region. ‘Red Zone’ was also launched, and provides sub(cid:1)
scribers under the ‘Red’ and ‘Red_text’ plans located in
certain areas to call other MTS subscribers with a 50% dis(cid:1)
count.

In a unique product for the Russian market, MTS launched
the ‘Classniy’ tariff plan developed specifically for chil(cid:1)
dren, which allows children and parents to always stay in
touch and includes access to a special WAP portal devel(cid:1)
oped for schoolchildren. Another first during 2007 was
the launch of Livejournal, an online diary service on the
MTS WAP(cid:1)portal, and social networking services, includ(cid:1)
ing blogs and other user(cid:1)generated content.

In Ukraine, the Company launched BlackBerry services
jointly with R.I.M, allowing encrypted mobile access to cor(cid:1)
porate email and attachments. For subscribers traveling in
Europe, a new ‘Europeyskiy’ tariff plan now allows sub(cid:1)
scribers to take incoming calls without charge while roam(cid:1)
ing. Also during the year, MTS began testing MMS(cid:1)based
advertising with volunteer subscribers, and this format rep(cid:1)
resents a potentially important future revenue generator.

The Business WAP portal allows users to get the latest
information on stock markets and financial news and a
new MTS(cid:1)News section on the WAP portal brings sub(cid:1)
scribers breaking news from RIA(cid:1)Novosti agency. A joint
project with a range of leading Russian email(cid:1)hosting
companies alerts subscribers to incoming emails and is
developing a WAP version of these email services to allow
users to check their mail on their phones.

11 Source: Direct Info
12 Source: Direct Info

#0048

Annual Report / 2007 / Riding the Consumer Wave / Telecommunications

In 2007 SkyLink continued to launch innovative new ser(cid:1)
vices, many among the first of their kind in the Russian
marketplace, to attract new subscribers and retain exist(cid:1)
ing ones. In this area, SkyLink continued to be a trailblaz(cid:1)
er in the Russian communications market.

Sky Link delivers both mobile data (which is a priority
segment for Sky Link) and voice services to subscribers.
The company’s profit in high(cid:1)speed data services grew up
to 30 percent. According to the company’s forecast, it will
increase up to 50 percent in 2008. Sky Link’s network is
based on the CDMA2000 1X EV(cid:1)DO. Technological advan(cid:1)
tages of this digital standard give Sky Link’s subscribers
the high(cid:1)speed mobile Internet and data transfer (up to
2.4 Mbs), high(cid:1)quality voice communications, and the
ability to access solid volumes of information and multi(cid:1)
media services.

In all segments (Voice and Data, Voice Only, and Data
Only), new product launches included ‘Platinum Number’
and ‘Choice of Diamond Number’ in Moscow and ‘Beautiful
Number’ in St. Petersburg, which allow subscribers to
choose numbers with paired digits or two repeating pairs.
New services in Moscow and St. Petersburg allow for
changing tariff plans through the Sky Point application.
Payment on credit was launched in Ulyanovsk and ‘Single
Balance’ was launched in Omsk, allowing customers to
monitor accounts linked to several different numbers.

Entering 2008, Sky Link had developed a new loyalty pro(cid:1)
gram for its subscribers, including participation in the
Malina loyalty scheme, due to begin in June 2008, which
includes a number of leading Russian retailers and con(cid:1)
sumer providers, and working to develop co(cid:1)branded
cards with banks, among other projects.

In the Voice and Data segment, the company launched
Mobile(cid:1)Television and Videotech services in Moscow and St.
Petersburg in 2007, and commercialized its remote Video
Observation service. Other services launched include Mobile
MSN and Mobile Livejournal (as part of the SkyMobile Web
portal). In early 2008 ‘Mobile Media Broadcasting’ based on
RSS channels was put into commercial use in Moscow, and
‘Mobile TV’, developed with Sistema Mass Media was
launched with five original Stream channels. ‘Mobile Ru(cid:1)
tube’ was launched in Moscow and St. Petersburg, allowing
users to post and share video content.

In the Voice Only segment, a new service allowing for free
incoming calls for subscribers with negative or zero bal(cid:1)
ances was launched. A new tariff option allowing for dis(cid:1)
counted domestic and international long(cid:1)distance calls
was introduced with the goal of raising to 10% the share
of long(cid:1)distance traffic in outgoing voice calls on the net(cid:1)
work. The service was launched in Moscow, Voronezh,

Omsk, and Novosibirsk in 2007, and covered six regions by
early 2008.

Also during the year, a new mobile banking service was
introduced in Moscow in cooperation with SmartCardLink
CJSC, while in early 2008, the SMS Banking service, allow(cid:1)
ing subscribers to check bank balances by text, was
expanded to 24 Russian regions. During the Presidential
Elections in March 2008 Sky Link provided a nationwide
text update service on the results of the polls.

Plans in the Voice Only segment for 2008 include further
development of domestic and international long(cid:1)distance
voice services through the expansion of new tariff options
to a further four regions during the first half of the year.
In Moscow, Sky Link plans to launch the ‘Overseas
Telephone Number’ service, providing subscribers with the
option of an additional overseas telephone number that
can be paid through a single Sky Link bill and offered in
conjunction with partner company Traveltele.com.

In 2007, in the Data Only segment, Sky Link tested a speed
quota system for data exchange using unlimited Internet
access tariff plans necessary for the future launch of
unlimited Internet content(cid:1)oriented tariff plans. It also
launched a new luxury product, SkyVIP, and the series
Black Tie and Black(cid:1)Tie Business in Moscow, while carry(cid:1)
ing out a major promotion jointly with Videoport Ltd by
offering a month of unlimited video communications. An
Internet(cid:1)based VideoCalls service was launched in coopera(cid:1)
tion with Videoport in early 2008. In 2007 the Company
also set up a test zone for Session Initiation Protocol (SIP(cid:1)
based) telephony in Moscow.

In St. Petersburg, subscribers were offered access to the
gaming portal Nienshants(cid:1)Home and multiplayer gaming
servers. Preparations were made for the launch of a test
zone for a new ‘Dacha Guard’ product allowing for remote
video monitoring of holiday homes, using Goal systems
developed by All Systems Limited and Tral by SMP Ltd. The
‘File Express’ service offered in Ulyanovsk and Rostov
allows users to increase file(cid:1)download speeds by 50%.
Other local services launched in 2007 included ‘Local Data
Exchange,’ providing free data transfers within the Sky
Link network for users in Ulyanovsk, and e(cid:1)mail services on
the Sky Link servers for users in Tver.

In 2008 Sky Link plans to launch a ‘Data Only’ version of
its box product with blocked voice services and a simpli(cid:1)
fied sales and connection procedures. Other expected
product launches include push e(cid:1)mail services in Moscow
and St. Petersburg from May 2008.

In early 2008, after the reporting period, Sky Link signed
a deal with Qualcomm Inc. expanding the territory for

#0049

Annual Report / 2007

BREW hosting to all of Russia, the CIS, the Baltic States,
and Eastern Europe without additional expenditure for
technical support from Qualcomm.

Fixed(cid:1)line Communications

Comstar accounted for an 8% revenue share of the total
fixed(cid:1)line market in Moscow. Including MGTS, Comstar’s
total share of the Moscow fixed(cid:1)line market stood at 29%,
making it the clear market leader. At the end of 2007
MGTS had 4.8 million installed lines in the city. MGTS
accounted for 20.5% of the Moscow fixed(cid:1)line market in
terms of revenue in 2007. In 2007 Comstar had a 2.5% rev(cid:1)
enue share of the combined traditional and alternative
fixedline market in Moscow Oblast, which was valued by
the Group at $378 million. Comstar has targeted a market
share of 16.4% by 2011. Comstar’s broadband strategy
extends to the regional markets. At the end of 2007, it had
some 48,000 broadband users outside Moscow. Its pay(cid:1)TV
subscriber base in the Russian regions reached 102,200
subscribers. In the CIS, Comstar’s Ukrainian subsidiary has
a base of 3,000 subscribers and a number capacity of
22,800. In Armenia, Comstar’s subsidiary has been limited
to Internet access provision until deregulation at the end
of 2007, and it accounted for around 20% of the Armenian
Internet and data exchange market in late 2007.

During 2007 a new management team was put into place
at Comstar to guide the Company during the next phase
of its development. In June Sergey Pridantsev joined
Comstar as President. A five(cid:1)year Strategic Plan for the
integration of Comstar’s assets, the introduction of
process management, and aggressive plans for existing
and new markets was adopted during the second half of
2007. A new Management Board was created to lead the
operator, and substantial efforts were focused on redu(cid:1)
cing intermediate management levels, cutting costs and
simplifying the legal structure, with the long(cid:1)term plan
to create a fully(cid:1)integrated operator at Comstar, with
MGTS remaining a separate legal entity as Moscow’s regu(cid:1)
lated incumbent operator.

In 2007 Comstar’s number(cid:1)one commercial priority was
increasing broadband penetration both in Moscow and in
Russia’s regional markets, as broadband represents the
key growth area in the fixed(cid:1)line market and the key
technology for delivering additional services.

As part of its broadband strategy, Comstar started to use
the MGTS brand for mass(cid:1)market tariffs for speeds up to
2 megabits per second, which are available on credit(cid:1)based
payment plans. The Stream brand continues to be used for

premium tariff plans (from 1 to 6 megabits per second).
During 2007 Comstar increased the number of Moscow
broadband subscribers by 81% to 695,000, including
651,000 residential subscribers.

Also during 2007, Comstar began preparation for the
deployment of a Mobile WiMAX network to provide wire(cid:1)
line broadband subscribers with a new seamless service
outside the home. Comstar signed a strategic cooperation
agreement with leading global technology group Intel for
the wide(cid:1)scale development of Mobile WiMAX technology
in Russia. With Intel’s technical support, Comstar plans to
deploy an IEEE 802.16e Mobile WiMAX network covering
the entire area of Moscow and the surrounding Moscow
Oblast by the end of 2008. Going forward, Comstar and
Intel will work together on future launches of Mobile
WiMAX networks in other Russian cities and regions.

In the third quarter of 2007 Comstar launched an integrat(cid:1)
ed program to modernize its network in Moscow in order to
reduce investment and operational costs associated with
servicing the infrastructure, as well as to increase its capac(cid:1)
ity. During 2007 the Group completed the upgrade of
MGTS’s backbone network to 40 Gbps, enabling Comstar to
offer its customers a high(cid:1)quality service and to reduce the
connection time for new subscribers. Comstar has also
upgraded Comstar Direct’s backbone network, resulting in
the increase of its capacity from 20 Gbps to 40 Gbps.

Alongside the development of existing regions, Comstar is
also focused on expansion into selected target markets
through acquisitions of competitive local exchange carri(cid:1)
ers (CLECs) that are ranked number one or two after the
incumbent operator in their local markets. In late 2007
Comstar bought Digital Telephone Networks South (DTN)
for approximately $167.4 million. DTN is the largest alter(cid:1)
native operator in southern Russia. In a second major
deal, Comstar acquired 87.5% of Regional Technical
Center (RTC) for $21 million. RTC is an alternative fixed(cid:1)
line operator in the Khanty(cid:1)Mansiisk Autonomous
District and in Orenburg Oblast. In addition, the operator
also has branches in Saratov, Ryazan, and Moscow.

Over the past five years MGTS has increased the level of dig(cid:1)
italization of its network from 13% to 54%, having built a
digital transport network and putting into use a data(cid:1)
exchange network for general use. At the same time MGTS
is conducting a selective modernization of its ‘last(cid:1)mile’
infrastructure to allow itself and Comstar to further exploit
technical and marketing synergies and deliver broad(cid:1)
band Internet access at a higher speed, while also providing

#0050

Annual Report / 2007 / Riding the Consumer Wave / Telecommunications

additional value(cid:1)added services such as High(cid:1)Definition
Television, gaming, home monitoring, and much more.

The main driver of revenue growth for MGTS as the regu(cid:1)
lated monopoly operator is growth in tariffs, which are
regulated by the Federal Tariff Service. In February 2007,
following regulatory changes affecting residential tele(cid:1)
phone tariffs, MGTS offered its residential subscribers the
choice of three calling plans aimed at best meeting their
budgets and calling habits. MGTS was able to accomplish
this transition smoothly, technically allowing all sub(cid:1)
scribers to make their choice, unlike other regulated
Russian companies. At the end of 2007 more than 50%
were still on unlimited, 28% on ‘per minute’ and 21% on
combined plans. From February 2008 the cost of unlimit(cid:1)
ed monthly tariff plans was reduced by 10% under tariff
rates agreed with the Federal Tariffs Service in November
2007.

After the reporting period, in February 2008 Comstar com(cid:1)
pleted the construction of its own domestic and interna(cid:1)
tional long(cid:1)distance network. The company installed
seven inter(cid:1)city transit nodes, accounting for each of the
seven federal districts in Russia, and four international
nodes. In addition, Comstar concluded agreements with
all Russian operators of zone telecommunications, as well
as with international operators. The investment of
around $14 million will allow Comstar to further
strengthen its client service offering with its own long(cid:1)
distance services.

Comstar’s 25% plus one blocking stake in Svyazinvest
puts it in a strong position in the event of a future priva(cid:1)
tization of the holding, and continues to represent a
sound financial investment.

MTT reported strong operational results in 2007, including
a sharp increase in revenues year on year. In an inter(cid:1)car(cid:1)
rier segment the MTT market share has increased substan(cid:1)
tially, from 27%–28% to 37%–38%. MTT has also gained in
market share equal to 11% in a segment of traffic trans(cid:1)
mission to foreign operators. In a subscriber segment, MTT
succeeded in increasing its market share from 4% to 7%.

The MTT’s chief source of revenue in an inter(cid:1)carrier seg(cid:1)
ment in both 2006 and 2007 stayed on domestic long(cid:1)dis(cid:1)
tance and international traffic transmission of mobile
network operators, amounting to $419 million for the
year 2007. The traffic transmission services market is
reaching saturation with average annual growth rate
between 2005 and 2007 of some 110%. After the liberal(cid:1)

ization of the a long(cid:1)distance market in 2006, provision
of traffic transmission services to foreign telecom opera(cid:1)
tors became a new area of an inter(cid:1)carrier market for MTT.
This part of the market accounted for $46 million of MTT’s
revenues in 2007.

In 2007 the market for services of termination and tran(cid:1)
sit of incoming traffic to Russia from foreign operators
grew by 102%. This became possible due to the continu(cid:1)
ous development of international telecommunications
and the expanded presence of foreign companies and
enterprises in the RF.

Following the 2006 liberalization of the long(cid:1)distance
market, MTT has entered the subscriber segment for
mobile telecommunications company subscribers. Reve(cid:1)
nues from provision of services to mobile customers
amounted to $206 million, which corresponds to 6.8%
MTT market share. During 2007 MTT focused considerable
efforts on the regions, in order to develop sales of
telecommunications services and other services to end(cid:1)
users through the active development of a representative
network.

This paid off through faster(cid:1)than(cid:1)expected growth in rev(cid:1)
enues in the regions, with sales 15% above expectations.
More than 55% of revenues from long(cid:1)distance telecom(cid:1)
munications services were gained from private users. The
average growth rate in this segment was 110%, with the
average growth rate in the market for business users
growing by 105%

Also in 2007, MTT launched a new ‘Subscriber Portal’ to
manage subscriber accounts online and provide better
feedback communication. The portal allows to manage
the service and monitor its usage, providing more accu(cid:1)
rate statistics, improving feedback, answering frequently
asked customers’ questions. To improve customer loyalty,
MTT has signed contracts with leading Russian payment
systems to provide another convenient way of payment of
domestic and international telecom services.

New services launched by MTT include ‘Universal Access
Number,’ a fixed(cid:1)to(cid:1)mobile convergence service providing
a subscriber with the service of a single virtual 804 code
telephone number. ‘International Free Transit Calls’ ser(cid:1)
vice allows an outside provider to organize International
Free Calls (IFS/UIFN) from a country such as Russia, where
that provider does not have an IFS/UIFN service agree(cid:1)
ment. In addition, MTT has launched Home(cid:1)Country
Direct (HCD), enabling to call a special number in a home

#0051

Annual Report / 2007

country toll(cid:1)free and complete the call with an operator
in a home country. Moreover, within the previous year
MTT has launched a ‘Virtual Calling Card’ aimed at indi(cid:1)
vidual users.

One of the key areas of strategic development for MTT
during 2007 was a further development of intelligent
data network services, including services aimed at corpo(cid:1)
rate users and development of projects such as ‘tele(cid:1)
voting’ and traffic transmission for content providers. In
addition, MTT focused on an intensive development of
services for traffic transmission to outside intelligent
data network operators and content providers.

Revenues ($, mln.)

OIBDA ($, mln.)

Assets ($, mln.)

Revenues, $

9,842.6 mln

10000

OIBDA, $

4,983.5 mln

Assets, $

16,302.1 mln

5000

7,475.9

5,892.9

9,842.6

5000

4,983.5

20000

3,576.3

2,922.5

2500

9,268.7

10000

16,302.1

12,656.3

#0052

2005

2006

2007

2005

2006

2007

2005

2006

2007

Annual Report / 2007 / Riding the Consumer Wave / Technology

Techn logy

#0053

Annual Report / 2007

Technology

The Russian market for
microelectronics is growing at
twice the world average. The main
factor behind its momentum is the
active growth in domestic demand for
microelectronics solutions in trans(cid:1)
port, finance and other economic sec(cid:1)
tors. In the Moscow Metro alone, 8 mil(cid:1)
lion passengers a day use smart cards.

Sergey Aslanian

President, Sitronics

Overview

Sistema’s Technology business is represented by Sitronics,
a leading provider of innovative and complete telecom(cid:1)
munications and technology solutions, including soft(cid:1)
ware, equipment, systems integration, microelectronics
solutions, IT solutions, as well as production of consumer
electronics
in Russia and the Commonwealth of
Independent States, along with a strong presence in
Central and Eastern Europe and a growing business in the
Middle East, Africa, and Asia. Sitronics has offices in 32
countries and exports products and services to more than
60 countries, serving over 3,500 clients.

Sitronics is a truly multinational group, with its Telecoms
Solutions operations based in Zelenograd, Russia,
Prague, Czech Republic and Athens, Greece. The
Company’s IT Solutions division is based in Kiev, Ukraine,
and the Microelectronics Solutions is based in Zelenograd,
Russia. Sitronics has over 10,000 employees. In 2007 it
established a Sitronics(cid:1)Nanotechnologies in cooperation
with the Russian government to drive development of
this fast(cid:1)emerging technology sector.

#0054

Annual Report / 2007 / Riding the Consumer Wave / Technology

Marketplace

Telecommunications Solutions

Today, the global telecommunications marketplace is
being driven by growth in demand for next(cid:1)generation
data and convergent services as opposed to traditional
voice services, and this trend is observed in both devel(cid:1)
oped and emerging markets, where enormous potential in
this area is becoming unlocked. In particular, there is
growth in Internet usage and access to a variety of ser(cid:1)
vices and offerings, such as online gaming and streaming
video, as well as the rapid development of VoIP (Internet
telephony), IPTV and ‘triple(cid:1)play’ services (voice + data +
video). A new generation of technology and tough com(cid:1)
petition are pushing both fixed and mobile operators to
invest in new equipment and acquire end(cid:1)to(cid:1)end network
solutions to preserve and enhance market share and
increase average revenue per user (ARPU).

According to data from ACM Consulting, in 2007 the level
of broadband Internet penetration in Russia was just
under 10%, representing a near doubling of the market
compared to
just one year earlier. Analysts at
Renaissance Capital investment bank have estimated that
Russian broadband penetration may reach 50% by 2013.

These growth dynamics are driving the market for data(cid:1)
exchange equipment, broadband access, routers, and
other related products in the target areas. According to
IDC, the market for broadband telecommunications
equipment in Eastern Europe, the Middle(cid:1)East and Africa
(EEMEA) grew by 6.5% year on year in 2007. The market
for WiMAX equipment grew by 31%.

In order to deliver convergent services, telecommunica(cid:1)
tions operators across the world are moving away from
Time Division Multiplexing (TDM) technology and
towards the convergence of mobile and fixed(cid:1)line com(cid:1)
munications and consequent shift to the next generation
of networks based on IP protocols and IP Multimedia
Subsystem (IMS) networks.

Telecommunications markets across the globe are in the
process of shifting to combined NGNs with the use of
‘Softswitch’ (software switching equipment) that simul(cid:1)
taneously support wire(cid:1)line and wireless access to a full
range of services for voice, data, and video. Regional
telecommunications operators in particular are expected
to increase capital expenditure in 2008, increasing digi(cid:1)
talization and delivering DSL services. As a result of con(cid:1)
vergence, the market for TDM equipment in Europe, the
Middle East and Africa (EMEA) declined by 18.6% in 2007
compared to 2006, while the market for NGN solutions

grew by 29.5%, and Media Gateway technology grew by
37.6% over the same period (according to IDC).

Deregulation and a tough competitive environment for
mobile operators will drive future investment in network
technology in large markets such as India. There, moves
towards de(cid:1)regulation mean that operators will need to
invest more in new technology in coming years to deliver
value(cid:1)added services and maintain customer loyalty,
while boosting average revenue per user. In the Middle
East, the growing young populations, expatriates, and
cross(cid:1)border expansion by telecommunications operators
also contribute to the need to invest in new technology
platforms in these markets.

Microelectronics Solutions

According to data from company iSuppli, the global mar(cid:1)
ket for semiconductors in 2007 showed modest growth of
3.3% compared to 2006, reaching a value of $268.9 bil(cid:1)
lion. The Russian market grew by 9.3% in 2006, and rela(cid:1)
tively slow growth globally of microelectronics produc(cid:1)
tion over the past two years is linked to strong competi(cid:1)
tion and better management of inventories (and hence
clearance of stocks), along with increased production
capacities and greater flexibility in the production of chip
memory.

In addition, the demand for microchips for computers and
a range of consumer electronics was significantly lower
than expected in 2007, and this had an impact on con(cid:1)
tract chip makers (foundries). The low ebb in this cycle is
estimated to have been crossed in the beginning of 2008,
and the situation is expected to improve. Against this
background, chip producers have been engaged in
improving production technology and preparing for the
next(cid:1)wave growth to hit the marketplace. This growth
will include the development and production of the
newest types of chips for the new generation of electron(cid:1)
ic devices, such as mobile telephones and gaming devices.

According to iSuppli data, the fastest growth segments
globally of the microelectronics market will be the data
processing, fixed(cid:1)line, optical semiconductors, sensors and
actuators, automotive and consumer electronics. Looking
forward, iSuppli forecast rates of market growth of 7.5% in
2008 and 4.1% in 2009 before the market is forecast to
pick up momentum with up to 10% growth in 2010.

The relatively high growth was posted by Asia(cid:1)Pacific
region, expanded by 6.6 percent in 2007. Given the serious
potential for growth, we view Asian markets, mainly China
and Taiwan, as our major export bases. Lower production
costs and proximity to the buyers led to the strategic deci(cid:1)
sion to place export assembly capacity there.

#0055

Annual Report / 2007

IT Solutions

IT market research company IDC estimated the total value
of the Russian IT market (IT services, hardware, and soft(cid:1)
ware) at $16.7 billion in 2007, and forecasts it will reach a
value of $27.5 billion in 2010. The share and growth of the
hardware segment of the market is declining as the mar(cid:1)
ket matures, with the share of IT services and software
increasing to around 33% of the total market in 2007.

The structure of IT demand has a mid(cid:1)term tendency to
shift from horizontal IT solutions, such as ERP systems
and infrastructure solutions, towards integrated vertical
solutions for key business processes. Expenditure from
the federal and increasingly regional government bud(cid:1)
gets and by state agencies are also key contributors. Sales
of legal software in the Russian market reached $600 mil(cid:1)
lion during 2007, according to the Russian Ministry of
Communications. Continued efforts to combat software
piracy and Russia’s strengthened intellectual property
(IP) commitments as a part of its WTO membership bid are
helping to drive software sales.

In other CIS markets, the share of IT services and software
in total IT sales remains substantially lower, averaging
less than 15%, with hardware sales remaining key growth
driver. These markets are still in the early stages of devel(cid:1)
oping strong domestic markets for IT services and retain
strong long(cid:1)term growth potential. Spending on IT infra(cid:1)
structure by governments and state agencies is con(cid:1)
tributing to rapid development in these markets. IDC is
currently forecasting that the Central and Eastern(cid:1)
European markets for IT services will grow by a CAGR of
17% between 2007 and 2010, from a value of $9.9 billion
in 2007.

Results

The Technology continues to represent a major, long(cid:1)term
growth opportunity for Sistema. The performance in 2007
was affected by the postponement of two large projects in
the Telecom Solutions business segment, the 3G network
deployment for MobileTelesystems (MTS) and the NGN
project for Comstar, until 2008.

Revenues amounted to $1,619.6 million in 2007, com(cid:1)
pared to $1,610.7 million in 2006.

Sitronics conducted an IPO on the London Stock
Exchange in mid(cid:1)February, 2007 selling 17.5% of its
shares in the first(cid:1)ever international listing by a Russian
technology company and the second largest technology
IPO on the LSE. The transaction raised a net $356.4 mil(cid:1)
lion for the future development of the company.

During 2007 Sitronics launched a restructuring strategy
to more tightly integrate its group of leading technology
assets (in Russia, Greece, Ukraine, and in the Czech
Republic) to make the company more efficient and
exploit as yet unrealized synergies between business divi(cid:1)
sions. The management of major projects will be overseen
by headquarters to better coordinate cooperation across
business units and best manage large(cid:1)scale and highly
complex projects.

As part of the ongoing restructuring program in 2007, the
Consumer Electronics and Electronics Manufacturing
Services segments were merged into the Consumer
Services and Products segment. The new segment manu(cid:1)
factures and contracts production of consumer electron(cid:1)
ics for third(cid:1)party clients, as well as markets consumer
electronics under the Sitronics brand, sold by retailers
throughout Russia.

A number of senior management changes were made dur(cid:1)
ing the year as Sitronics embarked on this new stage of
development following its IPO. Sergey Aslanian was named
President of Sitronics in October, 2007. A new Management
Board was also approved, with a number of new key man(cid:1)
agers appointed during late 2007 and early 2008 to devel(cid:1)
op and implement the company’s long(cid:1)term strategy.

New product strategies were adopted in 2007 in each of
the business units within Sitronics (Telecom Solutions, IT
Solutions, Microelectronics Solutions, and Consumer
Services and Products) to optimize existing product range
and target fast(cid:1)growing product segments where Sitro(cid:1)
nics can achieve long(cid:1)term profitable growth and benefit
from emerging technologies and burgeoning consumer
spending in both Russia and emerging markets world(cid:1)
wide.

During 2007 Sitronics launched a major restructuring and
cost optimization program in the Telecoms Solutions
business unit. New management appointments were
made, and unified business processes applied throughout
the business divisions. A new strategy was put in place
for making the most effective use of alliances and part(cid:1)
nerships with other global technology companies. Under
this strategy, priority is assigned to the most productive
partnerships and a new system of incentives has been
developed for partners.

A full audit of the product portfolio of the business was
also conducted in order to identify the products and ser(cid:1)
vices with the highest growth potential. This led to the
launch of a new product strategy at the Mobile World
Congress in Barcelona in February 2008, aimed at sup(cid:1)
porting the development of product areas with the maxi(cid:1)
mum potential to deliver high(cid:1)margin growth, such as

#0056

Annual Report / 2007 / Riding the Consumer Wave / Technology

NGN technology, while preparing to exit segments that
are loss(cid:1)making or offer limited longer(cid:1)term returns, such
as TDM technology.

In 2007 a number of major international technology com(cid:1)
panies became partners of Sitronics, while existing
alliances were expanded, underlying the continued
potential of strategic agreements to strengthen product
offerings in existing markets and enter new product and
geographic markets.

In March 2007 at a ceremony attended by Russian
President Vladimir Putin and Chinese President Hu Jintao,
a Memorandum of Understanding was signed between
Sitronics and China’s ZTE Corporation envisioning cooper(cid:1)
ation in the Russian, Chinese, and international telecom(cid:1)
munications markets. The companies agreed to concen(cid:1)
trate their efforts in a joint enterprise for the production
of telecommunications equipment. Chinese production
represents a major opportunity for Sitronics not just to
develop a new low(cid:1)cost production base, but to position
itself in proximity to fast(cid:1)growing markets in South and
Southeast Asia.

Also during the year, Sitronics signed a framework pur(cid:1)
chase agreement with Nokia Siemens Networks for the
development of high technology products and solutions.
In addition, jointly with Ericsson, Sitronics is supplying
operator MTS with equipment and services for the devel(cid:1)
opment of its 3G telecommunications and service net(cid:1)
works in Russia and the countries of the CIS. As part of
the project, Ericsson and Sitronics will provide UMTS
technology for the MTS network.

A newly(cid:1)formed alliance between Sitronics and Microsoft
in March provided operators an end(cid:1)to(cid:1)end billing solu(cid:1)
tion. The first customer to benefit from this collaboration
was Vodafone Czech Republic, which is today using the
integrated solution to enhance its billing, customer care,
and ordering processes in order to more rapidly deliver
new, more sophisticated packaged services to the market.

The Telecom Solutions segment generated 35% (2006:
44%) of total company revenues in 2007.

The Telecom Solutions business unit made major progress
in expanding its client base in the global marketplace. It
was able to win new clients in 2007 in areas such as the
supply of broadband access services, the construction of
WiMAX networks, and the supply of Content(cid:1)Delivery
Networks, such as IPTV and triple play services.

Large(cid:1)scale contracts were signed with a leading Greek
Internet provider Hellas Online to supply an NGN network
on a turn(cid:1)key basis, as well as a contract with Zain

Bahrain for the deployment of a WiMAX network. In addi(cid:1)
tion, Sitronics signed a partnership agreement with
Jordan Telecom Group to supply IPTV equipment and
services for the JTG Orange ADSL network. Contracts were
signed with Wateen Telecom in Pakistan and Telecom
Srbija in Serbia for the supply of billing systems. A con(cid:1)
tract was signed to supply a WiMAX network for newly(cid:1)
created Montenegrin mobile operator MTEL. In addition,
new contracts were signed for the development and
installation of telecommunications infrastructure for BTC
Mobile in Bulgaria. At the same time primary attention
was paid to the Telecom Solutions business division’s tra(cid:1)
ditional client base in Russia, the CIS, Greece, Czech
Republic, Germany, and the Middle East.

Kvazar(cid:1)Micro, representing the IT business division of
Sitronics, continued to demonstrate its status as the lead(cid:1)
ing systems integrator in the CIS. In 2007 it successfully
installed information systems in the largest banks in
Ukraine, Russia, and Kazakhstan, and carried out IT proj(cid:1)
ects for ministries, departments and regional administra(cid:1)
tions. Today it is entering new industry and geographic
markets, providing its clients with an even wider array of
services and integration opportunities.

The Information Technology Solutions segment’s reve(cid:1)
nues were up 36.6% year on year for the full year 2007, as
the business continued to demonstrate a strong perform(cid:1)
ance in the fourth quarter, both in the system integration
and distribution businesses.

Major complex projects include the construction of a
CDMA(cid:1)2000 network for MTS(cid:1)Ukraine in cooperation with
Alcatel Lucent. A budgeting system was implemented for
telecommunications group BITE in Latvia. Other projects
were delivered for Delta Bank in Ukraine, Nurbank, and
Bank Turan Alem in Kazakhstan, and supermarket group
O’Kay in Ukraine, among others. In addition, a Microsoft
licensing program was carried out for a range of clients
within the wider Sistema Corporation, including Comstar,
the Moscow Bank for Reconstruction and Development,
MTS, Intourist, and Medsi.

The Microelectronic Solutions segment was Sitronics’s
best(cid:1)performing business during 2007, with year on year
revenue growth of 77.1%. The strong sales growth was
fueled by robust demand in the Russian microelectronics
market, which grew at approximately double the pace of
the global market. A doubling in Russian government
orders for research and development projects was made
possible by Sitronics’s continued technological leadership
in the industry in 2007, including the launch of 0.18(cid:1)
micron EEPROM technology at Mikron’s facility in
Zelenograd.

#0057

Together with the government of the city of Moscow,
Sitronics is playing a leading role in creating the Moscow
Economic Cluster in Zelenograd, the center of which will
become the new 65–45 nanometer microchip production
facility. A unique ‘innovation ecosystem’ is being devel(cid:1)
oped around this plant which will attract smaller research
companies. With this project, Russia is reviving its scien(cid:1)
tific and technical school and it will define the future
direction for the development of microelectronics in the
coming decades.

In September 2007 Sitronics conducted its first ruble
bond issue. The 3(cid:1)year RUR 3 billion issue was priced at
100% with an annual coupon of 10% and a put option
after 1.5 years, at which time the coupon rate could be
reset. The issue allows Sitronics to re(cid:1)finance existing US(cid:1)
dollar(cid:1)denominated debt into local currency and makes
the company’s cash flows more transparent.

International agencies Moody’s Investors Service and
Fitch confirmed their ratings for Sitronics during mid(cid:1)
2007. Moody’s confirms the long(cid:1)term foreign(cid:1)currency
credit rating of the Company at the level of ‘B3,’ with sta(cid:1)
ble forecast moving forward. Fitch Ratings confirms a
Long(cid:1)term Issuer Default rating (IDR) of ‘B(cid:1)’ with a stable
outlook. The ratings underlined the continued strength
of the operating activities and financial position of
Sitronics and its ability to raise finance on attractive
terms in the international debt markets.

Annual Report / 2007

In early 2007 Sitronics began supplying smart cards for
the Moscow Metropolitan underground rail system, one of
the largest metro systems in the world used by over 8 mil(cid:1)
lion passengers each day. The contactless tickets are
more efficient than older magnetic(cid:1)strip ones, making
the system both more efficient and flexible for passen(cid:1)
gers. The expansion of RFID card production during the
year saw the establishment of a value(cid:1)added chain from
the chip to the finished card. Sitronics received a new
contract from the Moscow Metro for 2008, and the com(cid:1)
pany is targeting opportunities for smart(cid:1)card solutions
for federal, regional, and municipal clients in Russia and
the CIS.

The active and successful partnership of Sitronics and the
Russian government continues to drive a renaissance in
the Russian microelectronics industry, which only a few
years ago was seen as all but moribund. Sitronics built a
new microelectronic production line based on 0.18(cid:1)micron
EEPROM technology at its Mikron facility in Zelenograd in
December 2007, having obtained state(cid:1)of(cid:1)the(cid:1)art produc(cid:1)
tion technology and personnel training from a long(cid:1)term
strategic partnership with France’s STMicroelectronics.
More than 100 engineers from Micron underwent re(cid:1)train(cid:1)
ing at factories in France, Germany, and Japan.

The Russian state became a 10% shareholder in NIIME and
Mikron OJSC. In late 2007 and early 2008 the Russian
Ministry for Economic Development and Trade, the Mini(cid:1)
stry of Regional Development of the Russian Federation,
and a Government commission approved the investment
project ‘Organization of microchip production based on
12’’ wafers for 65–45 nm design rules’. It is envisioned
that Sistema and Sitronics would jointly own 53.92% of a
new nanotechnology venture. Sitronics plans to begin
implementing a project to build a factory for making
microchips based on 65–45 nanometer technology.
Construction of the new facility is planned to take place
in 2009 and 2010.

Revenues ($, mln.)

OIBDA ($, mln.)

Assets ($, mln.)

Revenues, $

1,619.6 mln

2000

1,610.7

1,619.6

OIBDA, $

(cid:1)102.5 mln

Assets, $

1,887.4 mln

1000

961.1

2005

2006

2007

200

100

(cid:1)100

172.5

155.6

1,887.4

1,638.7

2000

1000

553.2

2005

2006

2007

2005

2006

2007

(cid:1)102.5

#0058

Annual Report / 2007 / Riding the Consumer Wave / Real Estate Development

R al Estate Development

#0059

Annual Report / 2007

Real Estate
Development

Against a background of general
economic growth, the real estate
market is experiencing exceptional
growth rates. In 2007, about 1.5 mil(cid:1)
lion square meters of class A and B
office space were brought on line,
representing twice the level of the
year before. According to experts,
this indicator will reach 2.65 million
square meters in 2009.

Felix Evtushenkov

President, Sistema(cid:1)Hals

Overview

Sistema(cid:1)Hals is Sistema’s main operating subsidiary in
the Real Estate Development business and is a leading
Russian real estate developer with unique exposure to
premium segments of the marketplace. The company pro(cid:1)
vides integrated services in four strategic areas that
cover the entire lifecycle of a property: real estate devel(cid:1)
opment, project and construction management, real
estate asset management, and facility management.

Sistema(cid:1)Hals has unique exposure to all segments of the
construction industry, including residential, commercial,
retail, and infrastructure projects. It also has proven
expertise and resources to deliver on complex ventures,
with a track record of successfully completing more than
30 major projects with a total area of approximately
300,000 square meters. Sistema(cid:1)Hals has been the devel(cid:1)
oper of choice in Russia for blue(cid:1)chip companies, includ(cid:1)
ing DaimlerChrysler, Dresdner Bank, Raiffeisenbank, and
Siemens.

#0060

Annual Report / 2007 / Riding the Consumer Wave / Real Estate Development

Marketplace

The Russian real estate market is in the midst of an
unprecedented boom, fuelled by the country’s macro(cid:1)
economic growth and continued demand for modern,
high quality office, retail, and residential space, as well as
major, long(cid:1)term infrastructure improvement projects
being carried out by the Russian government and local
authorities to meet the needs of the 21st century econo(cid:1)
my and society.

Russian and international companies have expanded
their presence in the country and require world(cid:1)class
office space. An emerging middle class is investing money
in modern housing with modern infrastructure, and the
rapid recent expansion of the mortgage market is fuelling
further demand for new housing and accompanying
infrastructure.

Total construction increased by 18.2% in 2007, according
to real estate consultancy Blackwood. In the commercial
market, the total volume of office space put into the
Moscow market stood at around 1.5 million square
meters, two times the level in 2006, and exceeding vol(cid:1)
umes seen in the largest cities in Western Europe and
North America, according to consultancy CB Richard Ellis.
At the same time, high costs and limited space in the cap(cid:1)
ital have pushed many companies to seek high(cid:1)quality
office space outside of the city limits, in the neighboring
Moscow Oblast beyond the MKAD circular highway.

In St. Petersburg, the total volume of class A and class B
office space at the end of 2007 stood at around 590,000
square meters, according to Colliers International.
Around 170,000 square meters of office space was put
into market in 2007, with a further 330,000 square meters
planned.

Looking forward, Colliers International forecasts that new
construction and reconstruction will see 2 million square
meters of quality office space added in the Moscow mar(cid:1)
ket in 2008, 30% of this in the class A category. In 2009
the total figure is forecast at 2.65 million square meters,
with class A accounting for 40% of the market for quality
office space. In Russia’s regions, the market is being driv(cid:1)
en by continued demand for quality office space and con(cid:1)
sequent recent sharp rises in leasing costs.

Similar dynamics were seen in the retail property market
in 2007. In Moscow, the amount of new retail space
offered grew by 18% to 545,000 square meters, including
280,000 square meters of trading space. By the beginning
of 2008 the total floor space of Moscow retail centers
stood at more than 3.43 million square meters, with
1,800,000 square meters of trading space, according to
Colliers International. Colliers forecasts that 24 retail

centers will open over the course of 2008, representing an
additional 1,700,000 square meters, including trading
space of 800,000 square meters. Similarly dynamic devel(cid:1)
opment was seen in Russia’s regional markets.

The pace of residential construction in Russia continued
to accelerate in 2007, with more than 60 million square
meters of new residential housing built during the year,
around 20% greater than the residential space added in
2006, according to Blackwood. The fastest rate of deve(cid:1)
lopment was seen in Moscow Oblast, in the suburbs of the
capital. The city of Moscow saw around 4.8 million square
meters of residential space built during the year. In the
premium residential segment, Moscow saw sales on the
primary market at 57 residential complexes at various
stages of construction, a 46% increase on 2006 levels,
according to Knight Frank. Average prices for elite, new(cid:1)
build housing jumped 22.9% during the year. Prices in
St. Petersburg increased by an average of 40%, reflecting
a continued shortfall in capacity to meet demand and
similar trends are visible in other large regional cities.

Results

The Real Estate Development business consolidated rev(cid:1)
enues for 2007 increased by 59.8% year on year to $452.2
million, compared to $282.9 million for the full year 2006,
driven by the strong performance of Sistema’s operating
subsidiaries in the area. In 2007 consolidated OIBDA
amounted to $56.7 million; OIBDA, excluding the non(cid:1)
recurring expense of the stock compensation bonus plan,
increased by 85.0% to $156.6 million compared to 2006.
In 2007 the OIBDA margin, excluding the non(cid:1)recurring
expense of the stock compensation bonus plan, was
34.6%.

According to an independent analysis conducted by
Cushman & Wakefield Stiles & Riabokobylko (C&WS&R),
the value of Sistema(cid:1)Hals’s holding in properties and
development projects rose by 30% during the period from
July 1, 2007 to January 1, 2008.

C&WS&R determined that as of January 1, 2008, the total
market value of 100% ownership of 103 projects and
properties amounted to $4,645.3 million. Of this amount,
$3,745.9 million was attributable to Sistema(cid:1)Hals after
deducting minority interests.

The growth in the value of the company’s share in prop(cid:1)
erties and development projects is largely the result of
acquisitions of new projects, progress in the execution of
ongoing projects and an increase in the gross building
area (GBA) of development projects and properties in the
premium segments.

#0061

Annual Report / 2007

According C&WS&R, Sistema(cid:1)Hals had 103 properties,
including 24 held as investments, 33 in course of devel(cid:1)
opment, and 46 held for future development. These pro(cid:1)
perties accounted GBA of 8.928 million square meters and
an open(cid:1)market value of $14.954 billion.

New projects under development include Khamovniki,
23/7 and 23/6 Lev Tolstoy Street in Moscow at the former
site of the Khamovniki Experimental Drinks Factory.
Sistema(cid:1)Hals plans to build an elite residential complex
with a total area of approximately 70,000 square meters,
including luxury apartments, three detached mansions,
office space, ground(cid:1)level and underground parking, and
associated infrastructure.

The Gorky 8 project envisions the building of more than
70 townhouses and a retail mall of approximately 35,000
square meters on a land plot of nine hectares on the
Rublevo(cid:1)Uspensky Highway in Moscow Oblast. The Gorky 8
Second Phase includes plans to construct a mega villa
community situated between two Sistema(cid:1)Hals develop(cid:1)
ments, Landschaft and Gorky 8, and totals 61 hectares.

Also during 2007, Sistema(cid:1)Hals established Sistema(cid:1)Hals
Ukraine to manage the development of the company’s
projects in Ukraine and search for new sites. In Ukraine,
the Company is developing a multi(cid:1)functional residential
complex in Yalta with a total space of 140,000 square
meters. The complex includes three 22(cid:1)storey two(cid:1)sec(cid:1)
tioned apartment buildings. Office spaces are planned for
the non(cid:1)residential part of the development, along with
two restaurants, a store, a fitness center, spa, and a heli(cid:1)
copter pad on the roof.

As part of the company strategy to enter the Kiev proper(cid:1)
ty market, Sistema(cid:1)Hals acquired a controlling share in a
construction project of a residential complex on a plot
located in the Shevchenko district of the Ukrainian capi(cid:1)
tal. The project plans envision more than 100,000 square
meters of space, with business(cid:1)class residential housing
as well as office space, a retail center, and underground
parking. In addition, Sistema(cid:1)Hals is building a super(cid:1)
regional 2(cid:1)storey retail and entertainment center Leto
located on a 17.7 hectare site on Pulkovskoye Highway
south of St. Petersburg, a mixed(cid:1)use complex in Krasno(cid:1)
yarsk and the Kamelia resort in Sochi, site of the 2014
Winter Olympics.

In September 2007 Sistema(cid:1)Hals and the administration
of Astrakhan announced an intention to develop the
‘New City Center’ project for the construction of 2.8 mil(cid:1)
lion square meters of mixed(cid:1)use property in the center of
the city in line with the historic architectural style of

Astrakhan. The project will include 1.5 to 1.8 million
square meters used for residential construction.

Another major new project in Nizhny Novgorod is in the
planning stage and envisions the building of 2.3 million
square meters, including 1.85 million square meters of
residential housing and 330,000 square meters of other
housing, and represents the construction of a wholly new
residential district for the city with accompanying infra(cid:1)
structure, including transport, entertainment, adminis(cid:1)
trative, social, and other services. This ambitious project
will be realized from 2009 to 2018.

In order to further develop the Company’s competitive
advantage and strategy, Sistema(cid:1)Hals has also entered
into a number of key strategic agreements with reco(cid:1)
gnised international companies in key areas of project
development and commercial real estate management.

First, a joint enterprise was created with global retailer
Apsys, which will engage in development and manage(cid:1)
ment of projects in the retail property segment. The first
investment project for the new joint venture was the
acquisition from Sistema(cid:1)Hals of the Leto shopping and
entertainment complex on Pulkovskoye Highway in
St. Petersburg. In another deal, Sistema(cid:1)Hals attracted a
strategic investor, the Saudi Arabian company Saraya, for
the construction of the world(cid:1)class Kamelia resort com(cid:1)
plex in Sochi. These deals underline the synergies inher(cid:1)
ent in combining the unmatched local project expertise
of Sistema(cid:1)Hals and industry knowledge of companies
such as Apsys in retail and Saraya in tourism.

Sistema(cid:1)Hals continues to seek additional opportunities
to make project implementation more efficient and reduce
delays. In early December Sistema(cid:1)Hals signed a coopera(cid:1)
tion agreement with Hebei Construction Group, one of the
largest state(cid:1)owned construction companies in China.
This company combines both highly professional special(cid:1)
ists and world(cid:1)class technology, and can perform the
widest range of finishing work using high(cid:1)quality materi(cid:1)
als. Under the terms of the agreement, Hebei will act as
general contractor on a number of our key projects at
prices which are fixed for the entire duration of work.

In the long term Sistema(cid:1)Hals is focused on premium seg(cid:1)
ments of the market, including commercial property such
as offices and class(cid:1)A retail property, as well as premium(cid:1)
class residential developments, and plans to gradually re(cid:1)
balance its portfolio in this direction. In particular, the
market for office properties remains very attractive and
Sistema(cid:1)Hals plans to increase its presence in the class(cid:1)A
office segment.

#0062

1 Assumes built and fully let, attributable to share of Sistema(cid:1)Hals

Annual Report / 2007 / Riding the Consumer Wave / Real Estate Development

Commercial Building magazine ranked a Sistema(cid:1)Hal(cid:1)led
project, the DaimlerChrysler headquarters building in
Moscow as one of the Top(cid:1)10 most beautiful business cen(cid:1)
ters in Moscow.

At the CRE Moscow Awards 2007, Sistema(cid:1)Hals won an
award in the nomination ‘Multi(cid:1)functional property’ for
the office and hotel complex Pokrovskie Gates in Moscow,
and its November 2006 IPO on the London Stock Ex(cid:1)
change was awarded ‘Deal of the Year’. Sistema(cid:1)Hals was
also recognized at Building Awards 2007 in the category
‘Investment Attractiveness’.

In the retail segment of the market, the company plans
to concentrate on high(cid:1)quality projects with strong retail
partners. At the same time, the market for residential
property is growing and revenues from the sale of these
properties represent an additional source of profit, requir(cid:1)
ing relatively small amounts of investment, and Sistema(cid:1)
Hals plans to significantly increase the share of premium
residential properties while reducing the share of mass(cid:1)
market sales.

In July 2007 rating agencies Moody’s Investor Service and
Fitch Ratings assigned their first ratings for Sistema(cid:1)
Hals. Moody’s assigned the company a long(cid:1)term foreign(cid:1)
currency rating of ‘B1,’ while Fitch assigned it a rating of
‘B+’ and a short(cid:1)term rating of ‘B.’ All ratings had a stable
outlook. At the same time, Moody’s Interfax Ratings
Agency assigned Sistema(cid:1)Hals a top long(cid:1)term credit rat(cid:1)
ing of ‘A1.ru’ on the national scale and Fitch Ratings
assigned it a national credit rating of ‘A–(rus)’.

In January 2007 the Russian agency RBC ranked Sistema(cid:1)
Hals 51st in its rating of the 100 most valuable public
companies in Russia. In March the magazine Commercial
Real Estate ranked CEO Felix Evtushenkov sixth in its
rating of the 100 Best Top Managers in the Market.

Revenues ($, mln.)

OIBDA ($, mln.)

Assets ($, mln.)

Revenues, $

452.2 mln

OIBDA, $

56.7 mln

Assets, $

1,770.3 mln

500

250

78.4

2005

2006

2007

452.2

100

93.1

282.9

56.7

2000

1000

1,770.3

943.3

12.5

331.8

2005

2006

2007

2005

2006

2007

#0063

Annual Report / 2007

#0064

Annual Report / 2007 / Riding the Consumer Wave / Retail

R tail

#0065

Annual Report / 2007

Retail

The birthrate in Russia grew in 2007
by 8.7%, the highest rate in 15 years.
This led to, among other factors, rapid
development in the children's product
retail sector. This sector's annual
average growth rate for the 2006(cid:1)2010
period is forecast at approximately
20%, with the share of modern retail
formats doubling.

Maxim Entyakov

CEO, Detsky Mir Center

Overview

Sistema’s retail business is operated through the Detsky
Mir group, the leading retailer of children’s goods in
Russia. Detsky Mir, which literally means ‘Children’s
World’, is one of Russia’s oldest, most recognized and most
trusted retail brands with a 50(cid:1)year history.

Sistema has been a shareholder in Detsky Mir since 1996.
Since acquiring control of the group, Sistema has spear(cid:1)
headed an aggressive expansion of the chain while secur(cid:1)
ing stable revenue and earnings growth. In an environ(cid:1)
ment of increasing competition in the retail sector for
children’s goods, Detsky Mir’s key competitive advantages
include the largest chain of outlets in Russia, encompass(cid:1)
ing 46 cities and 38 regions, a strong and long(cid:1)established
brand, a wide range of quality products including top
Russian and international brands, attractive store loca(cid:1)
tions and shopping environments.

Marketplace

The retail market for children’s goods in Russia represents
a key long(cid:1)term growth opportunity for Sistema. Russia’s

#0066

Annual Report / 2007 / Riding the Consumer Wave / Retail

continued economic growth and stability have driven
increases in real disposable incomes. Increased prosperity
and government incentives are encouraging Russians to
have more children after more than a decade of falling
birthrates, with the number of births in 2007 the highest
in 15 years, up 8.7% year on year, and this trend was seen
across Russia.

In 2007 the Russian market for children’s goods grew by
20%1 year on year to $8.4 billion, and is forecast to grow
to $14.5 billion by 2010, representing a compound annual
growth rate of 20% for the period of 2006 to 2010.
Russia’s ongoing retail revolution is changing the way
Russians shop. Modern chain shopping formats, primarily
food retailers, accounted for around 15% of all retail sales
in 2007 for Russia as a whole, with a far higher share in
Moscow (around 40%) and large cities (around 20%) and
the penetration of chain stores is growing rapidly.2

Modern retail formats accounted for approximately $2
billion or 24% of all sales of children’s goods in 2007 and
this ratio is expected to rise to 39% by 2010, according to
company estimates. The retail market for children’s prod(cid:1)
ucts remains relatively unstructured, however, with the
presence of competitors from different market segments,
many with narrow product ranges. Grocery chains in(cid:1)
creasingly offer non(cid:1)food products for children, but most
consumers still do not see grocery stores and hypermar(cid:1)
kets as places to buy products for children. Clothing and
shoe retailers are playing a growing role as are small(cid:1)for(cid:1)
mat stores offering products for newborns and very young
children in the middle and premium segments.

Demand for non(cid:1)food products remains concentrated in
cities with populations of 100,000 and above, which
account for two(cid:1)thirds of retail turnover and 54% of
Russia’s population. The spending power and, conse(cid:1)
quently, consumption patterns continue to vary widely,
with large regional cities presently seeing the highest
growth rates in non(cid:1)food retail, which accounted for 56%
of the total $392 billion retail market in 2007, according
to Rosstat. In the more mature Moscow market, the aver(cid:1)
age annual expenditure on products for one child stood at
around $1,300 in 2007 and in St. Petersburg the amount
was around $900, with average levels nationwide at
between $350 and $400.

The opportunities in the Russian retail market remain
immense, with consumer disposable income forecast to
grow by 8% per year through 2010, compared to overall
GDP growth of 5% per annum. As Russia’s consumer boom
continues, spending on consumer goods is forecast at
between 10% and 13.5% for the period of 2005 to 2010,
while the share of foodstuffs in household spending has
fallen from 49.5% in 2001 to 33.2% in 2005, reflecting
increasing affluence. At the same time, the retail market
outside of Moscow, measured in terms of expenditure per
capita, continues to trail levels in peer countries in
Central and Eastern Europe, with spending in the regions
of around $1,800 per capita compared to $3,900 in Poland
and $4,300 in Czech Republic in 2006.3 Russia ranked sec(cid:1)
ond, after India and ahead of China, in AT Kearney’s 2007
Global Retail Development Index (GRDI), a measure of the
potential of emerging retail markets worldwide.

Today children under the age of 14 account for around
15% of the Russian population, representing a market of
20.9 million people. Patterns of purchasing children’s
products are dictated by income levels, with an emerging
middle class leading consumption and children them(cid:1)
selves playing an ever(cid:1)increasing role in influencing pur(cid:1)
chasing decisions and possessing greater amounts of
pocket money. For wealthier parents, representing 20% to
25% of the population, time is at a particular premium.
Parents seek a one(cid:1)stop shopping experience offering
high levels of service, comfort, and the availability of a
wide choice of products from well(cid:1)known companies.
Consumers on more limited incomes represent 45% to
60% of the population. They are price(cid:1)sensitive and their
demand is limited to a narrower range of necessary goods.

Results

The Retail business delivered another strong performance
in 2007, through a mix of organic growth in sales in exist(cid:1)
ing stores and expansion as well as tight cost controls.
Detsky Mir increased its revenues by 78% year on year in
2007 to $597.2 million, compared to $335.3 million in
2006. OIBDA increased 73% to $36.1 million. Total retail
space reached 174 thousand square meters. Same(cid:1)store
sales4 at Detsky Mir increased by 36%.

Detsky Mir opened a net 305 stores during 2007, adding
another 65 thousand square meters of retail space and

1 Source: ROMIR, company data
2 Source: retail.ru, Renaissance Capital
3 Sources: Rosstat, Factiva, Deutsche(cid:1)UFG, EIU, Renaissance Capital, AT Kearney
4 Defined as stores opened before December 31, 2005
5 32 stores were opened during the year; two in St .Petersburg were closed due to the opening of new outlets in more attractive trade centres

in same locations

#0067

Annual Report / 2007

entering 13 new cities in 11 new regions for the Company.
This represented 90% of the planned openings, with the
shortfall due to delays in the opening of new shopping
centers being built by third(cid:1)party developers. As of
December 31, 2007, it operated 95 stores in Russia and
remained the clear leader among modern(cid:1)format retailers
of children’s products, with a 30% market share, twice the
level of its nearest competitor.6 As of January 1, 2008,
Detsky Mir was present in 46 cities in 38 Russian regions,
covering more than 70% of the country’s population and
representing 85% of total retail turnover.

At the same time, the Russian market is becoming ever
more competitive, with mass grocery retailers offering an
ever(cid:1)growing number of non(cid:1)food products for children,
growing numbers of chain shoe and clothing retailers tar(cid:1)
geting the children’s market, and small(cid:1)format specialist
retailers. In view of these fundamental shifts in the mar(cid:1)
ketplace, Detsky Mir moved to reduce prices while expan(cid:1)
ding its product offering to customers and further im(cid:1)
proving its market(cid:1)leading customer service experience.
In 2007 the company continued to execute its strategy to
enhance its leadership in the children’s goods segment of
the Russian retail market, while strengthening cost con(cid:1)
trols to compete in an ever(cid:1)tougher pricing environment
and reduce the impact of the rapid growth in a number of
external cost factors, such as labor, transportation, and
advertising.

Detsky Mir plans to continue expanding its total store
numbers and geographic presence to benefit from rapid
income growth in Russia’s regional markets as well as
promising markets in Ukraine and Kazakhstan, the two
most attractive markets for children’s products in the CIS
after Russia. Detsky Mir’s strategy includes enhancing its
existing leadership in Moscow and Russia’s other largest
cities, and targets cities with populations of 100,000 and
above, in particular many regional cities with populations
between 100,000 and 300,000 with markets capable of
supporting large(cid:1)format stores for children’s products and
where competition is limited.

In 2008 the company plans to open 80 thousand square
meters of retail space and enter 12 new Russian regions,
amounting to an investment of around $110 million. By
the end of 2008, Detsky Mir plans to be present in all of
Russia’s largest cities. In addition, the company has pre(cid:1)
pared to enter the Ukrainian market with the opening of
its first store in the city of Dnepropetrovsk in 2008.

Detsky Mir continued to develop new formats aimed at
increasing margins, enhancing customer experience and
facilitating entry into new geographic markets and new
locations within existing markets. A pilot project for pre(cid:1)
mium(cid:1)segment stores is being prepared for a launch in
July 2008.

During 2007 Detsky Mir took a number of steps to further
strengthen its market(cid:1)leading brand. A project was car(cid:1)
ried out with the international branding agency Fitch to
develop a new retail concept for Detsky Mir stores and is
due to be launched in June 2008 at the Detsky Mir outlet
in Nagatino in Moscow. A new brand communication plat(cid:1)
form was created, and sales of private(cid:1)label products were
launched in 2007 in order to strengthen margins and
leverage the strength and qualities of trust contained in
the Detsky Mir brand.

During 2007 the company optimized the scheduling of
work in its stores, allowing a 7% reduction in total head(cid:1)
count while simultaneously increasing the number of
assistants available to customers during peak shopping
hours. A single internal logistics complex is being deve(cid:1)
loped and is due to be launched by the end of 2008.

During the year, a major organizational restructuring was
completed, with establishment of a three(cid:1)level manage(cid:1)
ment system consisting of a corporate center, regional
trading representative offices, and primary business
units. A project for organizational development was
launched to introduce a single set of business procedures
at every level of Detsky Mir, further optimizing the orga(cid:1)
nizational structure, including the concentration of head
office functions at a single location.

#0068

6 Sources: company estimates, Renaissance Capital, Deutsche(cid:1)UFG, RBC

Annual Report / 2007 / Riding the Consumer Wave / Retail

In 2008 the company plans to complete the first stage of
the implementation of ERP (Enterprise Resource Plan(cid:1)
ning) systems for the more efficient management of
functions such as sales auditing, pricing, supply manage(cid:1)
ment and financial management. CRM (Customer
Relations Management) systems and a modernized cus(cid:1)
tomer loyalty program are also in the process of being
developed. In addition, Detsky Mir is completing the sec(cid:1)
ond stage of its asset restructuring, with the conversion
of existing shares into a single share in early 2008.

The Company’s debt portfolio was restructured, reducing
the average interest rate by 2.5%, increasing the average
maturity by two years and eliminating a number of con(cid:1)
tract limitations contained in debt agreements. A single
accounting policy was developed and introduced for all
levels of the company. A single structured set of proce(cid:1)
dures for taking investment decisions was established.
The company also restructured a major part of its working
capital by launching letter of credit and factoring facili(cid:1)
ties with its key suppliers. At the end of 2007 a $55 mil(cid:1)
lion trade finance line was opened with HSBC.

Going forward, the key target for Detsky Mir over the next
three years is to fuel growth with the further expansion
of its network in Russia and the CIS to sustain and
enhance its leading position as the number(cid:1)one retailer
in the market for children’s products.

Revenues ($, mln.)

OIBDA ($, mln.)

Assets ($, mln.)

Revenues, $

597.2 mln

OIBDA, $

36.1 mln

Assets, $

497.0 mln

600

300

597.2

335.3

208.0

2005

2006

2007

36.1

500

497.0

20.8

12.1

2005

2006

2007

250

238.1

146.3

2005

2006

2007

#0069

Annual Report / 2007

#0070

Annual Report / 2007 / Riding the Consumer Wave / Financial Services

Fin ncial Services

#0071

Annual Report / 2007

Financial Services

The financial sector is becoming
one of the key drivers of the Russian
economy. In 2007, the volume of loans
issued to individuals and businesses
grew by more than 50% and, as a
percent of the country's GDP, it
grew from 52.2% to 61.4%.

Sergey Zaytsev

Chairman of the Management Board, MBRD

Overview

Sistema’s banking business, the Moscow Bank for Re(cid:1)
construction and Development (MBRD), has evolved rap(cid:1)
idly into one of Russia’s leading retail banking networks,
having entered the sector in 2004. In the past, MBRD pri(cid:1)
marily carried out treasury functions for companies in
the Sistema group. Today MBRD is a fully(cid:1)fledged univer(cid:1)
sal bank, offering a full range of services to corporate and
retail clients. MBRD has focused on retail banking as its
main avenue of development since 2004.

Marketplace

Russia’s banking sector benefited from a strongly positive
macroeconomic situation in 2007, with GDP growth of
8.1%, and growth in demand for banking services from
both companies and individuals. The continued imple(cid:1)
mentation of new banking legislation and regulations,
including the introduction of a voluntary deposit(cid:1)insur(cid:1)
ance scheme, has increased the stability of the banking
sector and encouraged the development of consumer
credit and mortgage lending, which in turn has helped

#0072

Annual Report / 2007 / Riding the Consumer Wave / Financial Services

fuel Russia’s continued consumer boom and the rapid
development of areas such as real estate and car sales.

Results

During the year, bank assets grew by 44% and their share
of Russia’s GDP jumped from 52.2% to 61.4%. The volume
of credit issued to the real sector of the economy and to
individuals grew sharply, with credits to enterprises and
organizations increasing by 51% and credits to individu(cid:1)
als by 57% during the year. In an important shift reflect(cid:1)
ing the development of the small and medium(cid:1)sized
enterprise (SME) sector, which had previously been
deterred from obtaining credits by unfavorable terms, the
amount of credit issued to SMEs by banks increased, while
the average interest rates on ruble(cid:1)denominated loans
fell to a level of 14% to 16%.

Funds from companies and organizations continued to
represent the main source of growth in the resource base
of Russian banks and accounted for 31% of the growth in
liabilities of Russian banks. The Russian banking system
remains to a significant degree dependant on inflows of
foreign funds, leaving the Russian market exposed to
problems in the international banking system. The crisis
in the international financial markets, precipitated by
problems in the US mortgage market, led to a fall in vol(cid:1)
umes of foreign financing for Russian banks and growth
in interest rates on loans, as well as all but eliminated the
opportunity to securitize consumer credit through the
first half of 2008.

However, the timely intervention of the Bank of Russia,
which lowered interest rates despite the inflation risk,
provided the opportunity for banks to get credit from it
under the guarantee of the largest and most reliable cred(cid:1)
it organizations. Interest rates on credit rose and the
issuance of credit to individual and corporate customers
slowed as stock prices fell. Nonetheless, the financial
results for the fourth quarter of 2007 were positive for
the majority of Russian banks. For 2007 as a whole,
Russian banks generated revenues of RUR 508 billion,
48% higher than the 2006 figure.

The same broad tendencies seen in the development of
the Russian banking system in recent years are expected
to continue through 2008, including the expansion of
lending and services to SMEs, the active expansion of
large banks into regional markets, and the ongoing con(cid:1)
solidation of the banking sector. The price of banking
assets is expected to fall in the current environment and
fuel merger and acquisition activity.

Despite challenging conditions in the banking sector in
2007, MBRD delivered strong revenue growth of 114.2%
year on year in 2007 to $488.8 million, compared to
$228.2 million in 2006. OIBDA increased 70.4% to $63.4
million in 2007. This strong performance was driven by
the rapid development of MBRD’s retail business, in par(cid:1)
ticular the consumer credit and mortgage lending, where
the bank is among the Russian market leaders, and a
strong increase in corporate lending.

In 2007 MBRD continued to focus on the development of
its retail business as a core element of its long(cid:1)term stra(cid:1)
tegy and building upon Russia’s current consumer boom.
The balance on accounts held by individuals grew by
61.4% in 2007, and share of individual balances in the
total assets of the bank stood at 14.3% as of January 1,
2008. The credit portfolio of individual customers
increased by 109.1% and the MBRD improved its positions
in ratings in all segments of the retail credit market. The
share of loans to individual clients accounted for 16.6%
of the Bank’s assets at the beginning of 2008.

During 2007 the bank pursued the active expansion of its
retail and corporate business in Russia’s regional markets.
At the end of the year MBRD had 92 branches and offices
in 55 Russian cities, with 40 offices added during the
year. Entering 2008, MBRD was present in six of Russia’s
seven federal districts, having entered 11 new regions
and 17 new cities during 2007 alone. Going forward,
regional markets remain a central strategic focus, with
MBRD targeting large regional cities and increasing
branch numbers in existing markets to expand the num(cid:1)
ber of retail clients.

In 2007 MBRD focused on attracting individual deposi(cid:1)
tors, and balances on individual accounts grew to $575.9
million compared to $347 million in 2006. Balances on
demand and current accounts grew to $22.2 million com(cid:1)
pared to $8.4 million a year earlier. The number of term
accounts more than doubled from 3,112 to 8,602. The
bank has been successful in increasing the number of
individual depositors by offering a wide variety of
account types and conditions, including classic accounts,
accounts with overdraft facilities, accounts for employees
of corporate customers and others to meet both the needs
and means of the customer.

During the year, MBRD’s consumer loans portfolio
increased by 72.7%. The total volume of express loans
issued to customers exceeded $37 million. The primary
competitive advantage of MBRD in the consumer credit
market is its ability to offer low(cid:1)interest rates, minimal
documentation requirements, and a fast approval process.

#0073

Annual Report / 2007

For the convenience of borrowers, when a credit is
approved, the customer is issued a special card allowing
them to make payments on the loan via the bank’s net(cid:1)
work of automated teller machines. The volume of
MBRD’s targeted consumer credit business made it a mem(cid:1)
ber of the Top(cid:1)10 Russian banks rating published by
Finans magazine in 2007.

MBRD also continued to develop its mortgage(cid:1)lending
business during 2007 as a key component of its retail
business. At the end of 2007, MBRD had put into place 13
mortgage credit programs designed to meet the needs of
every type of client. Along with providing credits for pur(cid:1)
chasing apartments in the secondary property market,
the bank offers mortgages for buying homes in develop(cid:1)
ment, being built by accredited builders. One of the most
popular options in all of the regions where the bank is
operating is the Federal Mortgage Program. This program
is being implemented within the framework of agree(cid:1)
ments signed with the Russian Federal Agency for
Housing Credit as well as regional operators.

One of the most significant new mortgage products intro(cid:1)
duced in 2007 was the new ‘For Any Purpose’ program,
allowing borrowers to obtain credit on their existing
home. This allows customers to raise money to meet their
family’s requirements for building, renovation, interior
decoration, tuition for education, and other purposes.

In recognition of MBRD’s innovation as a mortgage
lender, it received a prize in the category ‘Best Mortgage
Bank of the Year’ at the Financial Elite of Russia 2007
awards. In March 2008 RBC Ratings placed MBRD in the
Top(cid:1)10 list of the largest mortgage banks in Russia, based
on the number of mortgages issued in 2007, a jump of 12
places compared to the 2006 ratings.

Car loans remained another priority area for the develop(cid:1)
ment of the Bank’s retail business in 2007. A significant
increase in sales was achieved through intensive develop(cid:1)
ment of the Bank’s partnership network of auto dealers
and through entry into new regional markets. Over the
course of 2007 13,636 automobile loans were issued for a
total sum of $254.2 million, a 48% increase year on year.

Credit and other bank cards were another important area
of growth for the retail business in 2007, with the total
number of Visa and MasterCards issued reaching 322.6
thousand at the end of the year, and the credit portfolio
reaching $60.3 million. A new program to sell credit cards
to non(cid:1)payroll clients led to a six(cid:1)fold increase in the
number of individual clients at the bank’s branches dur(cid:1)
ing the year. For wealthier clients, MBRD launched the
MasterCard Platinum card with a unique set of services.
Cross promotions with such partners as Detsky Mir, MTS,

and car dealer Armand both increased the volume of cards
issued and raised the profile of the MBRD brand. At the
same time, the bank demonstrated both its technological
capabilities and reliability as a financial partner: its EMV
Processing Center completed the process of obtaining cer(cid:1)
tification in MasterCard WorldWide, and a contract was
also signed with insurance company ROSNO to insure
against credit card risks.

Internet and mobile banking represent other examples of
combining technological innovation and reliability to
deliver services that are the most convenient for a client.
In 2006 MBRD launched its Internet(cid:1)banking service,
allowing customers to manage their accounts online. The
bank has continued to enhance this service, and today
customers can carry out more than 30 different banking
operations online, including money transfers, paying
bills, and seeking online consultations from MBRD spe(cid:1)
cialists. The bank also continued to develop its mobile
banking services, which allow customers to check bank
balances and purchase services directly from their mobile
phones.

In its corporate business, MBRD continued to focus on
expanding the corporate credit portfolio, paying particu(cid:1)
lar attention to the regional markets and SMEs, and the
ongoing diversification of the bank’s client base into dif(cid:1)
ferent sectors of the economy. In 2007 the volume of the
consolidated credit portfolio of corporate borrowers stood
at $1,457.9 million, a 44.1% increase on 2007.

In its investment business, MBRD increased its presence
in the Russian and international money and capital mar(cid:1)
kets. This was closely linked to the implementation of
the bank’s strategy to expand its volume of retail services
and the development of its regional network, as well as
growth in client requirements to attract resources in the
financial markets and an increase in the volume of trans(cid:1)
actions carried out by the bank on behalf of its corporate
clients.

During 2007 MBRD placed three issues of promissory
notes for a total sum of RUR 4 billion with maturities of
one year and 18 months, and the average annual interest
rate obtained was less than 8.5%. In May 2007 MBRD
raised $50 million in mid(cid:1)term funds through a two(cid:1)year
loan from Dresdner Bank. In July and December 2007,
despite extremely difficult market conditions, MBRD syn(cid:1)
dicated two three(cid:1)year facilities for the total amount of
$85 million from a consortium of banks led by VTB Bank
Europe.

The bank’s brokerage business continued to grow rapidly
in 2007, with the number of client transactions brokered
by MBRD increased by more than 50% year on year. In

#0074

In December 2007, MBRD acquired the remaining 49%
stake in East(cid:1)West United Bank, Luxemburg (EWUB) for a
total cash consideration of Euro 31.0 million (approxi(cid:1)
mately US$ 44.6 million). East(cid:1)West United Bank, in addi(cid:1)
tion to its current portfolio of services, is looking to
develop Private banking together with MBRD.

From August 2007 to February 2008 Sistema acquired
98.85% of Dalcombank, the largest bank in Russia's Far
East. Dalcombank will be integrated into Sistema's
Financial Services business, which will facilitate the
expansion of its geographic coverage as well as financial
indicators.

Annual Report / 2007 / Riding the Consumer Wave / Financial Services

investment banking, MBRD was actively engaged in
underwriting corporate bonds for the domestic Russian
market during the first half of 2007, although it left this
segment of the market in the second half of the year due
to the broader market conditions. Nonetheless, MBRD was
ranked among the Top(cid:1)50 Russian investment banks in
2007, having participated in 25 placements as arranger
and underwriter, as well as co(cid:1)arranger and co(cid:1)under(cid:1)
writer, for a total sum of RUR 70 billion.

Also during 2007, MBRD strengthened its positions in the
market for export and trade finance by offering highly
competitive terms and conditions for its services. The
portfolio of such deals grew three(cid:1)fold in 2007, reaching
a value of $180 million. The bank continued to attract
tied credit from foreign banks under guarantees provid(cid:1)
ed by such export credit agencies as Euler Hermes
(Germany), SACE (Italy), EKN (Sweden), SERV (Switzer(cid:1)
land), Atradius (the Netherlands), and EDC (Canada). As a
result, MBRD’s clients were able to take advantage of the
opportunity to gain financing on highly attractive terms,
with maturities of five to 10 years at low interest rates for
investment goods and services. Short(cid:1)term financing
support for importers was provided primarily through
blank trade finance limits, the total sum of which grew in
2007 from $130 million to $270 million. The total number
of bank(cid:1)counterparties grew from 22 to 30. The cost of
attracting trade financing from foreign banks was re(cid:1)
duced on average by 0.8% at an annualized rate, with
tenors extended to between two and three years, under(cid:1)
lining MBRD’s growing reputation as a reliable inter(cid:1)
national partner.

Revenues ($, mln.)

OIBDA ($, mln.)

Assets ($, mln.)

Revenues, $

488.8 mln

OIBDA, $

63.4 mln

Assets, $

5,624.6 mln

600

300

488.8

228.2

106.8

2005

2006

2007

63.4

37.2

14.3

2005

2006

2007

6000

3000

5,624.6

2,513.5

1,135.0

2005

2006

2007

#0075

Annual Report / 2007

#0076

Annual Report / 2007 / Riding the Consumer Wave / Media

M dia

#0077

Annual Report / 2007

Media

The pay TV market in Russia is still in
its early stages of development and
therefore has high growth potential.
By 2010, experts predict that pay TV
services market penetration will reach
25.8%, while the market volume will
double to $1.2 billion.

Eldar Razroev

CEO, Sistema Mass Media

Overview

Sistema Mass Media (SMM) is the Corporation’s vertically(cid:1)
integrated company operating in the media business.
SMM is focused on the development of the pay(cid:1)TV busi(cid:1)
ness, including network operation, media content pro(cid:1)
duction, and advertising. These segments represent key
technology(cid:1)driven businesses in the Russian media mar(cid:1)
ket as the Corporation not only adapts to, but also drives
the development of new media platforms and technolo(cid:1)
gies. SMM operates Stream TV, one of the leading compa(cid:1)
nies in the Moscow and Russian pay(cid:1)TV market, in tandem
with Comstar.

Previously, SMM was active in advertising and print dis(cid:1)
tribution, publishing, terrestrial TV broadcasting and
news services. However, following a major restructuring
conducted in 2004–2006, the company exited a number
of these businesses to focus on high(cid:1)revenue, high(cid:1)tech(cid:1)
nology segments of the media market. Today, its core
business segments are being combined and deployed over
new technology platforms, including DVB(cid:1)H and IPTV, and
its strategy is focused on deriving synergies within its
media assets and exploiting emerging technologies such
as mobile and Internet content.

#0078

Annual Report / 2007 / Riding the Consumer Wave / Media

Marketplace

The Russian pay(cid:1)TV market has developed rapidly in
recent years, lately posting annual growth rates exceed(cid:1)
ing 30%. At the same time, the market is still at an early
stage of development, in particular when compared with
the mobile communications market. In 2007, according to
data from market research group J’son & Partners, pay(cid:1)TV
penetration reached 17.8% of Russian households, with
average revenue per user (ARPU) of $6.7 to $7.4. Pene(cid:1)
tration is forecast to reach 25.8% of households by 2010,
representing a compound annual growth rate of 13.17%.
The volume of the pay(cid:1)TV market exceeded $686 million
in 2007 and is expected to grow to $1.2 billion in 2010.

Outside of Moscow, Internet broadband penetration
remains low in absolute terms, at 6.2% in 2007, according
to J’son & Partners, but this market is developing rapidly,
with penetration forecast to reach 28.2% by 2010, repre(cid:1)
senting a striking 66% CAGR for the period of 2007 to
2010. In Moscow, wire(cid:1)line and wireless broadband access
have all but eliminated dial(cid:1)up in just the last few years,
and this trend is expected to arrive to large regional cities
and the country at large in the coming years, as fixed(cid:1)line
operators such as Comstar create the necessary technical
infrastructure and offer affordable services to household
users.

The Russian pay(cid:1)TV market is undergoing a period of con(cid:1)
solidation. Smaller local operators are being acquired by
larger regional operators, then in turn by federal(cid:1)level
players, which are also developing content as well as
deploying technical capacity. Hybrid operators, such as
SMM, which provide cable TV, IPTV, broadband and con(cid:1)
tent, are leading the consolidation process, given their
ability to provide a superior product offering at a low
price and deploy a single brand on an increasingly feder(cid:1)
al scale.

Results

In 2007 the Media business reported a 28.4% year on year
increase in revenues to $137.0 million compared to
$106.7 million in 2006. OIBDA amounted to $23.2 mil(cid:1)
lion. The results reflect strong growth in the Stream TV
business, where revenues grew 49% year on year, as well
as continued cost savings and synergies gained from the
restructuring carried out in 2005 and 2006.

SMM made substantial progress on its strategic goal of
creating a vertically(cid:1)integrated media group including
pay(cid:1)TV, multimedia services, content, and other business(cid:1)
es. Stream TV added 300 thousand pay(cid:1)TV subscribers
during 2007, reaching 1.8 million subscribers at the end

of the year. Stream TV added 60 thousand broadband
Internet subscribers during the year, reaching a total of
130 thousand. In 2007 the market share of Stream TV
reached 17% of the total Russian pay(cid:1)TV market in terms
of subscribers, placing it first, and 14% of the total
Russian pay(cid:1)TV market in revenue terms, placing it sec(cid:1)
ond overall, and just 1% behind the market leader in a
still fragmented marketplace. At the beginning of 2008,
Stream was present in 40 Russian cities in 22 regions. The
network covered 3.5 million households, representing 15
million people.

SMM is establishing nation(cid:1)wide coverage for its pay(cid:1)TV
network in Russia under the Stream TV brand. Beginning
in December 2007, all cable TV, broadband, and IPTV ser(cid:1)
vices operated by SMM are now being offered under the
single ‘Stream TV’ umbrella brand, which had previously
been used only in the Moscow market. Along with the
single brand, SMM is developing unified basic services
packages to provide all of its regional subscribers with the
same levels of choice and flexibility as in the Moscow
market, while taking into account lower consumer spend(cid:1)
ing power in the regions.

In 2005 and 2006 the company acquired regional cable
television operators Regional Cable Networks (RCN) and
United Cable Networks (UCN) and became the leading
cable television operator in Russia’s regions. During 2007
SMM began the process of turning them into affiliates and
buying out minority shareholders, a reorganization being
extended to all of SMM’s regional operators. In addition,
in December 2007, pay(cid:1)TV operators were acquired in
Kursk, Oryol, and Tambov, adding an additional 116,000
television subscribers and 11,000 broadband Internet
subscribers.

SMM also continued the modernization of its regional
cable operators with new technology (such as FTTB/
HFC/Metro Ethernet) to provide double(cid:1) and triple(cid:1)play
services for subscribers and expand the number of chan(cid:1)
nels available. At the end of 2007 SMM operators in 38
cities were providing Internet and pay(cid:1)TV services, and
were in the process of rebranding under the Stream TV
and Stream Internet brands. Going forward, new services
will be launched in the regions that are already available
in Moscow, including IPTV and mobile TV in the DVB(cid:1)H
format. IPTV allows subscribers to flexibly choose which
channels and content they want and deploy such services
as video(cid:1)on(cid:1)demand and HDTV, leading to sustained
increases in ARPU.

SMM’s Stream Content subsidiary manages and aggre(cid:1)
gates advertising and rights for content and five of its
own cable channels: Drive, ‘Zdorovoye TV’ (Health TV),
‘Okhota i rybalka’ (Hunting and Fishing), Retro(cid:1)TV, and

#0079

Annual Report / 2007

‘Usadba’ (Country Residence). These channels added 1.6
million viewers to their combined audience in 2007,
reaching 3.8 million households and approximately 12
million viewers.

SMM’s Digital Television subsidiary is developing the
technology and content to deploy mobile TV (based on
the DVB(cid:1)H format) for mobile telephones and automobile
receivers, including thematic, targeted television chan(cid:1)
nels, such as news, sports, music, fashion, and others.
During 2007 Digital Television continued to develop its
business plan, test its services, and prepare the technical
infrastructure for the commercial launch of its first serv(cid:1)
ices in Moscow and other Russian cities over the course of
2008, with testing of the DVB(cid:1)H format services outside of
Moscow beginning in the first quarter of the year. The
business plan envisions broadcasting frequencies in the
17 biggest Russian cities, including the 14 cities with a
population of one million or higher, covering a total of 34
million people.

Maxima, SMM’s integrated communications group special(cid:1)
izing in advertising, is one of Russia’s largest media buy(cid:1)
ing agencies and is present in Russia, Ukraine, Belarus,
and Kazakhstan, giving it access to fast(cid:1)growing advertis(cid:1)
ing markets with long(cid:1)term potential. The agency pro(cid:1)
vides SMM and Sistema with a strong and established
media buying platform.

#0080

Revenues ($, mln.)

OIBDA ($, mln.)

Assets ($, mln.)

Revenues, $

137.0 mln

150

137.0

OIBDA, $

23.2 mln

Assets, $

508.9 mln

106.7

52.4

2005

2006

2007

26.6

23.2

11.6

2005

2006

2007

600

300

508.9

355.5

81.9

2005

2006

2007

Annual Report / 2007 / Riding the Consumer Wave / Travel

Tr vel

#0081

Annual Report / 2007

Travel

The most dynamic segments of
Russia's travel services market are
outbound travel and domestic tourism.
In 2007, the volume of these segments
grew by 30% and 10% respectively,
and the market's overall volume
reached $12.3 billion. By 2011,
it will grow to $25.9 billion.

Alexander Arutyunov

President, Intourist

Overview

Intourist represents Sistema’s assets in the Travel business
and is Russia’s leading universal operator in the travel
market, providing comprehensive services for Russian
tourists traveling domestically and overseas as well as for
international visitors to Russia. A primary competitive
advantage for the company is its unrivalled international
and domestic network. Currently, the company has 18
affiliate companies overseas with 7,000 partners in 168
countries. This allows it to provide comprehensive travel
services worldwide. In addition, Intourist has a sales net(cid:1)
work of 232 of its own sales points as well as 154 fran(cid:1)
chised outlets present in 80 of Russia’s regions.

Intourist was founded in 1929. In Soviet times, Intourist
was the monopoly provider of travel services. In 1992 the
assets of Intourist were restructured; as a result, the com(cid:1)
pany was left with only international and domestic tour
operators. All of the other assets, including hotels and
tour buses, were put under the control of the Russian gov(cid:1)
ernment. In 1994 Intourist was acquired by Sistema.
Following a significant restructuring in 2005, the compa(cid:1)

#0082

Annual Report / 2007 / Riding the Consumer Wave / Travel

ny was positioned as the leading universal operator in the
travel market.

licensing and client guarantees being enforced by
Russia’s Federal Agency for Tourism.

At the end of 2007, Sistema and its affiliated companies
controlled over 65.10% of Intourist. The second and third
principal shareholders are Moscow City Government and
GAO Moskva. Owned by the Moscow City Government, GAO
Moskva is focused on developing the city’s potential as a
tourist destination.

Marketplace

The total value of the Russian market grew by 11.4% in
2007, reaching a value of $12.36 billion. The market is
expected to reach a value of $25.98 billion by 2011, rep(cid:1)
resenting an annual growth rate of nearly 22% for the
period of 2006 to 2011. Both the inbound and outbound
markets grew in 2007, driven by Russia’s continued eco(cid:1)
nomic growth and a growing perception among both
domestic and foreign visitors that Russia is an exciting
and safe touristic destination offering high(cid:1)quality serv(cid:1)
ices and accommodation.

The outbound market continues to see the highest rate of
growth, driven by increased consumer spending power.
The number of outbound tourists grew by 30% in 2007,
reaching 7.16 million, due both to the number of first(cid:1)
time travelers, especially from the Russian regions, and
the increased frequency of travel. The number of domes(cid:1)
tic tourists rose more than 10% to 9.08 million.

For Russians traveling abroad, the choice of destination,
particularly for repeat travelers, is shifting over the
longer term in favor of such sub(cid:1)mass destinations as
Spain, Italy, Greece, and Thailand. At the same time, due
to the fall in the exchange(cid:1)rate value of the US dollar, the
popularity of destinations where the US dollar is widely
used (such as Thailand, Egypt, and Turkey) is growing, in
particular among tourists travelling abroad for the first
time. The main negative tendency going forward is the
potential threat of reduced flights to Egypt and Turkey
due to the possible introduction of bans on certain
Russian airliner makes used by a number of Russian char(cid:1)
ter operators and airlines, as well as a lack of aircraft to
meet record demand.

Russian tourists are increasingly demanding branded
products and reliable and high(cid:1)quality tourism products
and services. Larger operators, such as Intourist, can offer
better prices and have better access to scarce services,
such as flights and hotel rooms. The competitive environ(cid:1)
ment is becoming tougher with diminishing margins as
many operators resort to slashing prices in order to secure
positions in new geographic markets. The market leaders
remain focused on mass and sub(cid:1)mass destinations in
order to deliver high passenger volumes and take advan(cid:1)
tages of economies of scale.

In the inbound market, the number of foreign tourists vis(cid:1)
iting Russia increased by almost 4% in 2007 to 1.64 mil(cid:1)
lion and is forecast to reach 1.92 million by 2011. The con(cid:1)
tinued political stability in Russia and an increase in
international business activity are the primary drivers of
stable growth in the inbound market, with the Russian
government actively promoting the attractions of the
country’s historical patrimony. Looking ahead, the rapid
development of Russia’s tourism infrastructure will offer
more choice and better prices, in particular as a number of
hotel(cid:1)building projects in Moscow are expected to elimi(cid:1)
nate the deficit of hotel rooms in the capital caused by the
closure of older facilities in recent years.

Packaged group tours accounted for around a half of all
inbound tourism in 2007, although the lack of three(cid:1) and
four(cid:1)star hotel facilities has kept the price of tour pack(cid:1)
ages relatively high compared to other destinations. The
market entry of foreign tour operators represents a threat
to domestic operators catering to foreign visitors, as well
as, to a reduced degree, to Russian tourists traveling
abroad. Visitors from Germany remain the largest single
source of foreign tourists and their numbers grew by more
than 18,000 in 2007, with similarly strong growth in visitor
numbers from other Western European countries as well as
from Turkey and Asia. A weak dollar and concerns about a
domestic economic slowdown saw a fall in US visitors in
2007, a trend that is likely to continue in the medium term.

Results

Among Russian tourism operators, the long(cid:1)fragmented
market is undergoing a wave of consolidation, with the
exit of many small and mid(cid:1)sized operators due to com(cid:1)
petition and the application of stricter standards for

The Travel business delivered strong performance in 2007,
as Intourist continued to implement its strategy of
exploiting synergies between its key businesses in
tourism, retail chain, hotels, and transport to deliver the

#0083

Annual Report / 2007

full range of services as a truly universal travel operator.
Revenue rise was driven by organic growth in sales of
travel packages, primarily in the outbound market.
Revenues increased by 38.4% in 2007, reaching $374.0
million, compared to $270.2 million in 2006.

The strategy of Intourist is to become a truly universal
operator in the tourist market, offering its clients a full
range of tourist services. During 2007 the company com(cid:1)
pleted the creation of a vertically(cid:1)integrated structure
including four subsidiary business units: Tour Operating,
Retail Sales, Hotel Business, and Transport Services.
Intourist has strengthened its ability to provide complete,
higher(cid:1)margin tour packages to such mass(cid:1)market desti(cid:1)
nations as Turkey and Egypt, as well as sub(cid:1)mass(cid:1)market
destinations like Thailand, Spain, Italy, Greece, and
Tunisia. At the same time, the company increased its range
of travel solutions for corporate and government clients.

In 2007 Intourist consolidated its leading position in the
Russian marketplace, with strong organic growth in the
outbound market, where the total number of travelers
served increased by 36% to 225,000. This made Intourist
one of the top(cid:1)five outbound operators, with a strong and
established position in the market for travelers to Egypt,
as well as a rapidly developing business for travelers to
Thailand, which has emerged as one of the top(cid:1)10 desti(cid:1)
nations for Russian travelers for the first time in 2007.
The share of Intourist in the outbound market stood at
3.1% in 2007 and at 10.8% in the inbound market.
Intourist’s strategy aims to establish a 15% market share
in the outbound market through leadership in a consoli(cid:1)
dating marketplace.

New tour products launched in 2007 included a Trans(cid:1)
Siberian railroad package for inbound tourists. For out(cid:1)
bound tourists, Intourist continued to expand the geo(cid:1)
graphy of flight programs, with departures available in
nine Russian cities: Moscow, St. Petersburg, Yekaterin(cid:1)
burg, Chelyabinsk, Novosibirsk, Rostov, Perm, Samara, and
Krasnodar. In addition, Intourist launched a new sub(cid:1)
sidiary, Intourist(cid:1)Ukraine, to develop its presence in this
fast(cid:1)growing market for tourism services.

As part of its strategy to create a vertically(cid:1)integrated
holding company, Intourist consolidated 100% of the

shares of tour operators Riviera and Skyway, controlling
shares of which were acquired in 2006. The acquisition of
St. Petersburg(cid:1)based Riviera substantially strengthened
the position of Intourist in the key St. Petersburg market,
with Moscow(cid:1)based Skyway providing leadership in
Egypt(cid:1)bound tours. These operators have now been fully
integrated into Intourist under its single well(cid:1)known
brand. Future acquisitions will focus on adding new desti(cid:1)
nations and markets to strengthen the company’s market(cid:1)
leading offering.

Intourist continued to implement its retail strategy in
2007, with the restructuring of its regional subsidiary
networks and the opening of new sales points. At the end
of 2007 it had 232 company(cid:1)owned sales points, as well
as franchise partners running a further 154 sales points.
This retail presence provides Intourist with one of the
largest networks in Russia and provides exposure to fast(cid:1)
growing regional tourism markets.

The hotel business has been a primary growth area for
Intourist. The Intourist Hotel Group subsidiary operates
both company(cid:1)owned and third(cid:1)party hotels. Intourist was
the leading domestic hotel operator and management
company, with the largest number of hotel rooms among
any Russian chains during 2007. The present strategy is
focused on developing three(cid:1) and four(cid:1)star hotels in the
main cities in Russia’s Central Federal District.

The goal of the hotel business is to operate hotels in order
to maximize the sales and earnings potential of each
facility, through the introduction of rigorous accounting
and management systems and application of the corpora(cid:1)
tion’s wider experience in areas such as human resources
and IT. In addition, the hotel business benefits from syn(cid:1)
ergies within the company, such as access to the retail
sales network and inclusion in tour packages. The share
of Intourist in the three(cid:1) and four(cid:1)star hotel category
stood at 3.9% at the end of 2007.

Intourist continued to expand its Hotel Group during
2007. In spring 2007 Intourist Hotel Group received into
management two new three(cid:1)star hotels in historic cities
in Russia’s Golden Ring, the Moskva Hotel in Uglich and
the Moskovskiy Trakt in Rostov Veliky. These hotels were
built as part of the inter(cid:1)regional program in the con(cid:1)

#0084

Annual Report / 2007 / Riding the Consumer Wave / Travel

struction field of the Government of the City of Moscow.
In addition, in 2007 Intourist acquired a further 50% of
the five(cid:1)star Savoy Westend Hotel in Karlovy Vary in the
Czech Republic, bringing the ownership level to 100%.
A five(cid:1)star hotel was also acquired in Forte dei Marmi,
Italy. After a reconstruction project, which is due to be
completed in 2009, the hotel will be positioned as a ‘five(cid:1)
star plus’ boutique hotel. In December 2007 Intourist
received a €2.3 million credit from HSBC Bank (Turkey)
for leasing hotels in Turkey.

Also in December 2007, Intourist announced the comple(cid:1)
tion of the first phase of its tourism and spa complex
Altai in the Russian Republic of Altai, representing an
investment of $5.4 million. The complex is designed to
cater primarily to Russian domestic tourists seeking an
ecologically clean vacation destination and the second
phase envisions ski(cid:1)lifts and an artificial lake. The project
is due to be completed in 2009.

Intourist also saw growth in its Transport Services unit.
The company is Russia’s largest broker for charter flights,
a fast(cid:1)growing business strengthened with the 2007
acquisition of a leading consolidator, Megapolis(cid:1)Avia(cid:1)
charter. In addition, the company runs tourist bus servi(cid:1)
ces, a market that has seen rapid growth due to an
increase in the numbers of international and domestic
tourists in the country.

In April 2007 Intourist became the first Russian travel
operator to issue bonds, with a debut issue of RUR 1 bil(cid:1)
lion for a period of three years with half(cid:1)yearly coupons
at an annual interest rate of 9.00%. The offer underlined
investor interest in Intourist and the broader Russian
tourism sector, with the offer 2.5 times oversubscribed.

Revenues ($, mln.)

OIBDA ($, mln.)

Assets ($, mln.)

Revenues, $

374.0 mln

OIBDA, $

28.0 mln

Assets, $

554.3 mln

400

200

374.0

28.0

600

554.3

270.2

21.1

385.7

98.0

2005

2006

2007

2.7

2005

300

88.4

2005

2006

2007

2006

2007

#0085

Annual Report / 2007

#0086

Annual Report / 2007 / Riding the Consumer Wave / Radar and Space

R dar and Space

#0087

Annual Report / 2007

Radar and Space

The Russian defense technology
industry is entering a new stage
of development as it commercializes
itself for mass consumption. Experts
estimated that until 2010 Russia
would need about 20 million of
such devices, with market size
about 2.7 billion dollars.

Sergey Tischenko

CEO, RTI Systems

Overview

Sistema’s Radar and Space business includes the Concern
RTI Systems holding (RTI Systems) and its subsidiaries.
RTI Systems specializes in the development and imple(cid:1)
mentation of major science(cid:1)intensive system projects in
such fields as radar/radio technology construction as
well as air, space, and ground control systems and power
machinery. RTI Systems is today the recognized leader in
the Russian marketplace for the construction of radar
technology facilities and has a leading position in air(cid:1)
borne communications systems and information trans(cid:1)
mission.

Its largest clients include the Russian Ministry of
Defense, the Ministry of Atomic Energy, the Emergency
Situations Ministry, as well as private(cid:1)sector clients. RTI
Systems provides leading Russian enterprises with proven
cutting(cid:1)edge research and production expertise and the
ability to successfully implement extremely complex,
high(cid:1)technology projects. The priority growth areas for
the business are radio technology, aerospace, and ground
control systems, mechanotronics and robotics.

#0088

Annual Report / 2007 / Riding the Consumer Wave / Radar and Space

Marketplace

The combined value of the market for military technology
in Russia amounted to $8.97 billion in 2007. The market is
developing dynamically due to major ongoing investments
by the Russian government in upgrading its military capa(cid:1)
bilities to ensure the country’s security in a complex and
rapidly changing global security environment. The ongoing
implementation of the Russian State Armaments Program
for the period of 2006 to 2015 includes a number of large(cid:1)
scale complex projects in which RTI Systems is playing a
leading role, given its proven track(cid:1)record for delivering
innovative and comprehensive defense solutions.

In addition, in May 2006, the Russian President approved
the list of critical technologies for the development of a
diversified and innovation(cid:1)driven economy. Since then,
the key technology sectors have seen inflows of both
research and development and production funding via
federal target programs (FTPs). Partnerships between the
private and state sector play a leading role in implement(cid:1)
ing the FTPs. The Radar and Space business of Sistema is
developing a number of these projects.

The radio(cid:1)technology and information systems segment of
the Russian defense sector was worth $865 million in 2007.
The market for aerospace equipment and avionics devices
amounted to $221 million, and in the market for mechano(cid:1)
tronics and robotics, asynchronous electric motors
accounted for $254 million and actuators for $73.7 million,
according to RTI Systems data. The Radar and Space busi(cid:1)
ness derives the largest portion of its revenues from the
market for radio(cid:1)technology equipment and systems, and
the market is growing at an average annual rate of 15%.
The market for aviation products is growing at a rate of
32% annually, and is increasing for space products at a rate
of 20% per year, according to company estimates.

RTI Systems is a key contractor of the Ministry of Defense
of the Russian Federation for developing radar and infor(cid:1)
mation equipment and systems for missile early(cid:1)warning,
anti(cid:1)missile defense and aerospace monitoring facilities.
In 2007 the Russian market for ground(cid:1)based missile
defense systems was valued at an estimated $150 million
with forecast annual growth of around $30 to $40 million
over the next five years. In addition, the market for other
key long(cid:1)range radar systems, including anti(cid:1)aircraft and
air(cid:1)traffic control facilities, is worth $80 to $120 million
per year with an estimated annual growth rate of 20% to
25%. Demand for short(cid:1)range radar equipment and sys(cid:1)
tems is similarly dynamic, valued at around $200 million
to $300 million per year over the next five years.

The market for on(cid:1)board radar equipment and avionics in
the next five to seven years is expected to undergo a
major boom due to the active development of drone and

control systems. The volume of the market for avionics
systems under development is expected to be worth
between $6 billion and $7 billion through 2010.

The demand for integrated management center solutions
for both the military and civil sectors is likely to grow
20% to 25% per year over the coming decade. A substan(cid:1)
tial part of this market includes navigation and telemat(cid:1)
ics(cid:1)related solutions, which are also predicted to see
growth rates in the range of 20% to 25% per annum.

In addition, the market for information communications
systems and devices, primarily destined for various corpo(cid:1)
rate users in Russia and the CIS, as well as opportunities in
other developing markets are also growing rapidly. The
potential market for Russian companies in this segment is
estimated at around $1.5 billion over the course of the
next five years. One area with enormous potential is
Russia’s GLONASS satellite navigation system, where RTI
Systems has already implemented a range of major mili(cid:1)
tary and civilian projects for the Russian state. Sistema is
working closely with the Russian government to develop a
corresponding legislative framework for developing navi(cid:1)
gation and monitoring devices based on GLONASS tech(cid:1)
nology for the corporate and consumer markets.

In 2006 RTI Systems has launched its Mechanotronics and
Robotics division, which develops and manufactures prod(cid:1)
ucts including electric motors and low(cid:1)voltage devices.
Since 2006, the Russian market for electric motors has
grown by 25% per year, representing a substantial jump
from earlier observed growth rates of around 10% annual(cid:1)
ly. According to RTI Systems data, the market for low(cid:1)volt(cid:1)
age apparatus is growing by 15% per year.

Continued strong growth in the Russian economy is driv(cid:1)
ing demand for measurement and diagnostic equipment,
with the market worth an estimated $350 million over
the next five years.

The power engine building industry is a part of the indus(cid:1)
try for electronics technical equipment. Today this market
is developing dynamically, including demand from raw(cid:1)
material industries (such as oil, gas, and mining). The over(cid:1)
all dynamics of growth is from $1.5 billion to $2 billion per
year. The market is dependent on overall dynamics in the
economy and is growing by around 20%–25% per year.

Results

The Radar and Space business delivered impressive
growth in revenue and OIBDA during 2007. Revenues
grew by 50.6% in 2007 to $375.0 million, compared to
$248.9 million in 2006. OIBDA grew 93.5% to $45.9 mil(cid:1)
lion, compared to $23.7 million in 2006.

#0089

Annual Report / 2007

The market share of the Radar and Space business in the
market for ground(cid:1)based information systems for arms and
military technology was 28.7% in 2007. This includes a
92% market share for ground(cid:1)based early(cid:1)warning sys(cid:1)
tems, 23% for information and communications equipment
for the Russian Ministry of Defense, and 55% of the market
for information systems for missile and space defense.

In 2006 RTI Systems entered the broader market for elec(cid:1)
tronics equipment, including induction motors and
switches, where it secured 12% in terms of sales. The
medium(cid:1)term goal for the business of Sistema is to
increase its share in the Russian market for electric
motors to 34% by 2010. Over the longer term, the goal of
RTI Systems is to become the leading systems integrator
with effective engineering solutions in the field of pro(cid:1)
duction and implementation automation. According to
research by RTI Systems, the Russian market for project
solutions was worth $650 million in 2007 and is experi(cid:1)
encing compound annual growth rates of 30%.

Major new products and solutions implemented in the
Radar and Space business in 2007 include an automated
system for the National Center for Crisis Management for
the Russian Ministry of Emergency Situations, BRIZ(cid:1)M
multi(cid:1)band infocommunication radio system development,
and the completion of a new decimeter(cid:1)band open(cid:1)archi(cid:1)
tecture radar system for early(cid:1)warning facilities.

During the year, RTI Systems demonstrated its ability to
deliver on a key element of Sistema’s strategy of further
developing state and private(cid:1)sector partnerships to provide
innovative technology solutions for both the defense and
civilian sectors, and work on the long(cid:1)term development of
key technology areas identified by the Russian government
as vital for the further diversification and growth of the
Russian economy. At the same time, its substantial research
and development facilities are being developed in coopera(cid:1)
tion with main state R&D institutes as well as with leading
universities and other research institutions.

The project ‘Laser Technology and Atomic Energy Systems’
was a major new initiative for RTI Systems in 2007 that
underlined the potential for state and private(cid:1)sector coop(cid:1)

eration. The project has been developed as part of the
cooperation agreement between Sistema and the Russian
Ministry of Industry and Energy signed in April 2007. The
project is also an important component in a project devel(cid:1)
oped by the Russian Ministry of Atomic Energy as part of a
draft of a federal target program aimed at diversifying the
work of the ministry. The FTP envisions financing of work
as part of state and private(cid:1)sector partnership, beginning
in 2009. The planned budget for the Sistema(cid:1)Laser project
is RUR 10 billion. At present, the project is being prepared
for presentation to the government for approval.

The Radar and Space business has diversified its develop(cid:1)
ment and production capacity to target higher(cid:1)value prod(cid:1)
uct segments, exploit its proven ability to develop and
implement large and complex projects and take full advan(cid:1)
tage of synergies in technology and know(cid:1)how with other
Sistema’s businesses. Similarly, it is applying technological
innovations developed for defense clients to create new
products and services for civilian ministries and agencies
in the corporate and consumer marketplace.

Examples of such cross(cid:1)sector work include developing
device programming products and different types of services
based on the GLONASS satellite system, as well as novel dig(cid:1)
ital transmitters, originally developed for the Russian Air
Force and capable of being used for TV and radio transmis(cid:1)
sion. In late 2007 Sistema and the Russian Ministry of
Industry and Energy collaborated on the development of
proposed legal and regulatory guidelines that will allow for
the future mass(cid:1)market deployment of GLONASS(cid:1)enabled
products and services and the long(cid:1)term development of
this marketplace for both Sistema and other Russian and
international players in this potential marketplace. Also
during the year, the Navigational and Information Systems
OJSC, a joint(cid:1)venture project, was established in cooperation
with the Russian Institute for Space(cid:1)Device Engineering
(RNII(cid:1)KP) to develop GLONASS(cid:1)based navigational services.

For the first time, in 2007 RTI Systems was featured in
Russia’s top(cid:1)20 defense(cid:1)sector enterprises annual rank(cid:1)
ing, the Russian equivalent of the international ranking
of the Global Defense News Top(cid:1)100.

Revenues ($, mln.)

OIBDA ($, mln.)

Assets ($, mln.)

Revenues, $

375.0 mln

400

375.0

45.9

400

OIBDA, $

45.9 mln

Assets, $

294.2 mln

248.9

124.2

2005

2006

2007

200

23.7

10.7

2005

2006

2007

200

68.5

2005

2006

2007

343.0

294.2

#0090

Annual Report / 2007 / Riding the Consumer Wave / Healthcare

He lthcare

#0091

Annual Report / 2007

Healthcare

The market for pay medical
services in 2007 grew by 13%,
reaching $5.9 billion. Due to rapid
growth in the voluntary medical
insurance segment, the market
for pay medical services will reach
$8.3 billion in the next three years.

Vladimir Gurdus

President, Medsi Group

Overview

The Healthcare business assets are in the process of inte(cid:1)
gration into the Medsi Group holding structure, and com(cid:1)
prise the Medsi clinics (two out(cid:1)patient clinics for
adults), the Medsi(cid:1)II clinic (out(cid:1)patient clinic for chil(cid:1)
dren), the American Hospital Group (a family clinic oper(cid:1)
ating under the ‘American Medical Centres’ brand for VIP
clients and expatriates), and MedExpress (a chain of pri(cid:1)
vate healthcare facilities in Russia including 22 clinics in
Moscow and the regions, and an ambulance service in
Moscow). The Medsi Group is 100%(cid:1)owned by Sistema and
comprises 14 clinics in Moscow and 12 clinics in the
regions.

The flagship facility in Moscow is Medsi, one of the coun(cid:1)
try’s most advanced medical centers providing clinical
diagnostics, prevention and treatment for adults. A 12(cid:1)
storey extension is due to be completed in 2008, which
will house Moscow’s top private prevention and treatment
center for diabetes. The Medsi II children’s clinic opened
in May 2005 and represents state(cid:1)of(cid:1)the(cid:1)art in science
and technology in pediatrics. The center includes clinics
for non(cid:1)surgical vision correction, allergies, immunologi(cid:1)
cal and metabolic disorders, diabetes, posture correction,

#0092

Annual Report / 2007 / Riding the Consumer Wave / Healthcare

and care for children in their first year. The clinic has a
Scientific Committee composed of leading scientists and
academics from the Russian Academy of Medical Science.
The committee’s aim is to conduct pediatric research and
introduce new technologies and methods for prevention
and treatment of pediatric illnesses, and put these break(cid:1)
throughs to work at Medsi II.

Marketplace

In 2007, the Russian market for paid medical services
grew by 13% and reached approximately $5.9 billion, and
is forecast to see a compound annual growth rate of 12%
between 2007 and 2010, reaching a value of $8.3 billion.
The market for voluntary medical insurance (VMI)
reached $1.7 billion and is forecast to grow at a CAGR of
37% between 2007 and 2010.1 Moscow accounted for a
35% share of the market for paid medical services, and the
market for these services has grown at 20% per annum.

Russia’s healthcare system has endured a long crisis due
to insufficient funding and structural inefficiencies, such
as excess secondary care capacity. Public financing of
healthcare has averaged 3% of GDP in recent years, sig(cid:1)
nificantly below the 5% level recommended by the World
Health Organization (WHO). According to the WHO,
Russia ranks 75th worldwide in terms of per(cid:1)capita
healthcare expenditure, significantly trailing countries
such as Mexico, Turkey, and Poland.

The corporate market is a primary driver of the market for
paid medical services and VMI offered to employees as a
social benefit on top of existing obligatory medical insur(cid:1)
ance policies run by the state. In addition, companies are
increasingly seeking providers to run in(cid:1)house medical
service points, oversee industrial health programs and
carry out medical screenings for new employees as well as
periodic screenings for existing staff. Individuals are also
purchasing medical services in order to obtain better(cid:1)
quality treatment and avoid delays in the state(cid:1)run
healthcare system.

The market for private clinics remains highly fragmented,
with the share of the top(cid:1)five private providers less than
3%. The market is still at an early stage of development,
with a lack of large(cid:1)scale chains and considerable first(cid:1)
mover opportunities both in Moscow and in Russia’s
regional markets.

Results

The Healthcare business represents one of the fastest(cid:1)
growing directions for Sistema. In 2007 revenues
increased nearly four(cid:1)fold to $79.1 million, compared to
$16.9 million in 2006. OIBDA increased by 247% to $10.7
million.

At the end of 2007 Medsi Group had established the
largest network of clinics in Russia by number of outlets
with 14 medical centers in Moscow and 12 in Russia’s
regions, covering St. Petersburg, Nizhnevartovsk, Nizhny
Novgorod, Volgograd, Ryazan, Barnaul, Ulyanovsk, Pyati(cid:1)
gorsk, and Bryansk. In addition, Medsi had Medical Assist(cid:1)
ance Centers in Nizhnevartovsk, Nizhny Novgorod, Volgo(cid:1)
grad, Ryazan, Barnaul, and Ulyanovsk.

Key acquisitions during 2007 included the May purchase
of 100% of American Hospital Group by Sistema, which
runs clinics under the American Medical Center brand as
well as Medexpress, Russia’s largest chain of private pri(cid:1)
mary care clinics and operator of ambulance and emer(cid:1)
gency services. In October 2007 the Group acquired 100%
of Family Medicine Corporation (FMC), a leading provider
of family primary medical care at home.

During the late 2007 and early 2008 Sistema completed
the restructuring of its healthcare assets and their con(cid:1)
solidation within the Medsi Group. Under the restructur(cid:1)
ing, Medsi consolidated 100% of Medexpress, 100% of
American Hospital Group and 100% of FMC. Following the
acquisitions of Medexpress and American Hospital Group
and the consolidation of assets within the group, Medsi is
now able to offer the full range of paid services for pre(cid:1)
vention, diagnostics, and treatment of illnesses.

Medsi Group’s strategy is designed to build on the exist(cid:1)
ing competitive strengths of the group, including its well(cid:1)
known Medsi and American Medical Center brands, its
pool of highly(cid:1)qualified staff, and a highly(cid:1)experienced
and successful medical team. The high profile of Medsi II
as a leading Russian pediatrics clinic has strengthened
the brand and attracted new insurance contracts, and
Medsi is establishing relationships with the leading VMI
providers. The group is increasing the number of VMI
providers it works with, as some 50% of its business is cur(cid:1)
rently with ROSNO.

The strategy of Medsi Group through 2010 and beyond is
aimed at creating the leading provider of private health(cid:1)
care services in Russia with the largest network of clinics.

1 Sources: Russian Ministry of Healthcare and Social Development, RBC, Snegiri(cid:1)Group

#0093

Annual Report / 2007

From 2008 the Group’s clinics are being developed under
a single unified brand with common high standards of
technology, care, and client service. Over the next three
to five years, Medsi plans to increase its chain of clinics to
100 family clinics.

Sistema is planning to expand its medical portfolio
through acquisitions and organic growth in Russia. The
expansion strategy makes Sistema the top player and
consolidator on the Russian private healthcare market.

Major projects were carried out during 2007 to implement
the Group’s long(cid:1)term strategy. The construction of a
major extension of the flagship Medsi multi(cid:1)profile clinic
and diagnostic center was continued. Due to be complet(cid:1)
ed in the end of 2008, the extension will include a new
state(cid:1)of(cid:1)the(cid:1)art Diabetes Treatment Center, and will more
than double the existing floor(cid:1)space of the healthcare
center. Medsi opened a clinic at the Derbenevskaya Em(cid:1)
bankment Business Center, a new center with major
Russian and multinational businesses as leaseholders,
located in the heart of Moscow’s leading business district
and in close proximity to Paveletskaya Station, a major
rail and metro interchange. The clinic offers ‘walking(cid:1)
distance’ care in a convenient location, as well as services
such as arranging doctors’ visits to the workplace. The
clinic’s location, range of services, and the lack of com(cid:1)
petitive offerings allows Medsi to build on its existing and
potential corporate client base in the very center of
Russia’s economic boom.

Another major initiative for the group is FMC, which pro(cid:1)
vides medical consulting and services in the home. With
a central office and call center based in Moscow, this ser(cid:1)
vice is primarily aimed at individual high(cid:1)income clients,
and had an established clientele of around 7,000 adults
and children by the end of 2007. The service includes a
24(cid:1)hour dispatch center and a company(cid:1)owned as well as
leased fleet of vehicles for round(cid:1)the(cid:1)clock emergency
care, including sending doctors to visit the home and
accompanying patients to hospital. Covering Moscow and
Moscow Oblast with FMC has positioned Medsi as a leader
in the VIP client segment and provided a strong and grow(cid:1)
ing network with leading specialists, clinics, and hospi(cid:1)
tals in Russia.

Other important segments of the healthcare market
include medical tourism and wellness centers. Beginning
in December 2007, Medsi began offering clients treatment
at specialist hospitals and clinics oversees. In the Fitness
and Wellness segment, four fitness centers were acquired
from Intourist by the end of 2007 and will be rebranded
and relaunched to offer medical services during 2008.

#0094

Annual Report / 2007 / Riding the Consumer Wave / Other Businesses

Oth r Businesses

#0095

Annual Report / 2007

Pharmaceuticals

Binnopharm manages Sistema's assets
the
Pharmaceutical and Biotechnology businesses. The com(cid:1)
pany was established in 2006 following a merger of exist(cid:1)
ing and newly(cid:1)acquired assets. The Russian market for
finished pharmaceuticals has grown by an average rate of
20% per annum in recent years and reached a value of $11
billion in 2007.1 Market growth has been driven by peo(cid:1)
ple's rising disposable incomes and increased government
healthcare spending through the introduction of the
Supplementary Medicines Provision (DLO) program in
2005. The primary driver, however, is a growing consumer
strength, which fuels demand for more expensive and
sophisticated treatments.

At present, the Russian pharmaceutical market is domi(cid:1)
nated in value terms by foreign pharmaceutical compa(cid:1)
nies, which control around 75% of the market. This dom(cid:1)
inance has appeared due to the opening of the Russian
pharmaceutical market to foreign competition, the strong
research and development base of multinational players,
and the scale of production of international generics
makers. Russian producers require substantial investment
in upgrading their production facilities in order to meet
international safety and quality standards, such as Good
Manufacturing Practices (GMP). In 2007 and early 2008
the Russian government has begun discussions on the
introduction of an industrial policy aimed at fostering
domestic production and reducing the country's depend(cid:1)
ence on generally more costly foreign(cid:1)made medicines.

Binnopharm, as a Russian producer of high(cid:1)quality medi(cid:1)
cines, is working to revive the domestic production sec(cid:1)
tor. During 2007 Binnopharm was restructured into a ver(cid:1)
tically integrated pharmaceutical and biotechnology
holding. The company's strategy is focused on the devel(cid:1)
opment of three areas of its business: R&D, the production
of its own high margin drugs, and outsourcing production
of generics though the company also performs trade
operations, primarily import of pharmaceutical goods and
substances. The company has three production sites in
Moscow and is about to complete the construction of a
new GMP(cid:1)compliant production and logistics facility at
Zelenograd. The new center will produce medicines in
tablet, capsule, aerosol, and ampoule forms.

Sistema has already established a track record of innova(cid:1)
tion in pharmaceutical business. In 2005 the predecessor
of Binnopharm called MTH(cid:1)holding launched mass pro(cid:1)
duction of a vaccine for Hepatitis B, and became the first
Russian company to carry out full(cid:1)cycle production of the
vaccine from active substance to finished form. The com(cid:1)
pany has since expanded its range of immuno(cid:1)biological
medicines.

At the end of 2007 Binnopharm itself owned three inno(cid:1)
vative drugs. Besides, in 2007 its Swiss(cid:1)based subsidiary
Mapichem AG registered 15 more generic drugs, which are
being produced in China for the Russian market.

The Pharmaceuticals business saw revenues increase
17.3% in 2007, reaching $63 million, compared to $53.7
million in 2006.

1 Source: RMBC

#0096

Annual Report / 2007 / Riding the Consumer Wave / Other Businesses

Convergent Services

TS Retail is Sistema’s operating company in the
Convergent Services business. The company was founded
in January 2007 to manage a major new retail project, a
network of ideas and solutions called ‘Tochka’ (‘The
Point’), as well as a development of a chain of exclusive
showroom stores for MTS.

Developing the brand and the retail concept are primary
parts of the project to create a new player on the Russian
retail market. With the cooperation of leading global
retail consultant Fitch, TS Retail has created a totally new
retail format under the name ‘Tochka Store of Ideas and
Solutions’. The stores bring together services and prod(cid:1)
ucts that might seem incompatible at first glance.
Examples include digital photography equipment and
credit cards, tourist packages, mobile telephones, inter(cid:1)
active television and games. All of these products are
brought together by the concepts of ease, comfort, and
convenience available at Tochka.

Ultimately, Tochka is the place to visit to see the latest in
technology and test out new devices and services. Tochka
offers service contracts for MTS, Comstar, MTT, SkyLink,
telecommunications equipment and accessories, as well
as Intourist’s travel services and banking services from
MBRD. Experienced sales consultants offer customers
such products as cards for buying flights on discount air(cid:1)
liner Sky Express, tickets for spectator events from a
giant reservation system, and more. Tochka is also pio(cid:1)
neering leading merchandizing and retail technology in
its stores, including self(cid:1)service terminals for services
such as adjusting device settings, managing subscrip(cid:1)
tions, making payments, and more.

TS Retail has been set up along eight geographic affili(cid:1)
ates: Center, North(cid:1)West, Black Sea, Volga, Urals, South,
Siberia, and Far East. The first stage of openings covers
large macro(cid:1)regional and regional centers, including such
large cities as Moscow, St. Petersburg, Voronezh, Krasno(cid:1)
dar, Rostov(cid:1)on(cid:1)Don, Samara, Nizhny Novgorod, Yekaterin(cid:1)
burg, Omsk, Krasnoyarsk, Novosibirsk, Khabarovsk, and
Vladivostok.

By the end of the first quarter of 2008, TS Retail managed
a total of 245 retail points, including 222 exclusive MTS
showrooms and 23 Tochka Stores for Ideas and Solutions.
During the first quarter of 2008 85 stores were opened,
including 14 Tocka Stores in St. Petersburg, Petrozavodsk,
Stary Oskol, Krasnodar, Abakan, Barnaul, Omsk, Saratov
Syzran, Perm, Yekaterinburg, Khabarovsk, and Vladivostok.

TS Retail is another example of exploiting synergies in
the goods and services across its primary businesses. In
November 2007 the share of MTS in the charter capital of
TS Retail was reduced from 100% to 25%, with the
remaining shares divided evenly (15%) among the follow(cid:1)
ing five entities: Sistema, Comstar UTS, MBRD, Sistema
Mass Media, and Intourist.

#0097

Annual Report / 2007

Innovation &
Venture Capital

R&D Centers

As Russia’s leading consumer(cid:1)focused technology group,
Sistema requires continuous innovation to maintain and
enhance its competitive edge. As a part of its long(cid:1)term
corporate strategy, Sistema began establishing research
and development (R&D) centers in each of its main busi(cid:1)
nesses in 2006. The creation of these centers is driven by
a single scientific and technological policy oriented
towards focused, market(cid:1)driven innovation. The centers
will engage in the development and introduction of new
technologies for the operating companies in their busi(cid:1)
nesses area. R&D centers will look at the ‘bigger picture’,
not just following innovation in the global marketplace
but driving it through cooperation with global technolo(cid:1)
gy leaders and exploiting the Corporation’s own signifi(cid:1)
cant scientific potential.

In 2006 the first R&D center was created in the
Telecommunications business on the base of Intellect
Telecom, which concentrated the R&D centers of each of
the operating companies in the business (MTS, Comstar,
MGTS). The R&D center is a key resource for maintaining
and enhancing market leadership in the fast(cid:1)changing
telecommunications marketplace and for creating condi(cid:1)
tions for long(cid:1)term profit(cid:1)driven growth in each of the
operating companies.

In 2007 Intellect Telecom focused on developing R&D and
technical strategies and solutions for products and ser(cid:1)
vices for Sistema’s telecommunications companies. Recon(cid:1)
struction of Intellect Telecom’s facilities is due to be com(cid:1)
pleted in September 2008 with the new R&D center equip(cid:1)
ped according to highest global technological standards.

During the year Intellect Telecom developed and received
a positive evaluation for the construction of a domestic
and international long(cid:1)distance network for Comstar UTS
and MTS, which was successfully deployed in the first
quarter of 2008. The center developed systems projects
for the Moscow networks of Comstar and MGTS. It deve(cid:1)
loped a concept for an inter(cid:1)linked network for the com(cid:1)
panies of the Comstar group with the application of Next
Generation Network (NGN) solutions. A set of principles
were developed for the creation of a public safety system,
called Project 112, at the request of MTS. Work was also

carried out to implement energy(cid:1)conservation and ecolo(cid:1)
gy(cid:1)friendly technologies for MTS.

In addition, as part of a project for creating a nationwide
cellular network in India for Shyam Telelink, Intellect
Telecom created a financial model for the development of
the network, and conducted an evaluation of capital
expenditures and an evaluation of the effectiveness of
investment over a ten(cid:1)year period. Intellect Telecom’s
experts also played an important role in 2007 in work on
the commercialization of products and services using
GLONASS technology. Proposals were developed for a
range of unique products and services based on global
positioning technology.

Also during 2007, a concept was developed for the creation
of an R&D center for the Radar and Space business. The
new R&D center will be located at the Moscow headquar(cid:1)
ters of RTI Systems, and reconstruction of the building is
planned to house the new, high(cid:1)technology facility that
will lead research on cutting(cid:1)edge technology and plan its
subsequent commercialization. It will focus on radar, laser,
fiber(cid:1)optic, navigation, communications technologies,
robotics, and other key areas of technology. The R&D cen(cid:1)
ter will be the scientific(cid:1)research ‘core’ of the disbursed,
clustered R&D complex. Regional clusters will be estab(cid:1)
lished at enterprises in the Radar and Space business that
will be able to make full use of local scientific resources.

Another R&D center is also being created in the Techno(cid:1)
logy business with plans to create a new Sitronics NII (a
scientific research institute) jointly with the Institute for
Information Transmission Problems of the Russian
Academy of Sciences in Moscow. The center will develop
technology with future commercial potential for Sitronics
and its main business divisions, and develop prototypes
for data(cid:1)transmission systems, wireless networks and
voice(cid:1)recognition systems, among other technologies.

Technoparks and Special Economic Zones

Sistema is also playing a leading role in the development
of technical parks and special economic zones (SEZs) in
Russia. The Corporation is participating in these projects
because they create valuable infrastructure for develop(cid:1)
ing projects for different businesses in fast(cid:1)developing
regions. The parks provide a focus for developing ‘knowl(cid:1)
edge centers’ that coordinate the potential of research
institutes and other technology parks as well as a simpli(cid:1)
fied platform
for rapid development and com(cid:1)
mercialization of newly(cid:1)developed products. The parks
also provide a locus for specific state(cid:1)financed projects
through Federal Target Programs, simplifying the
Corporation’s work within these projects.

#0098

Venture Capital

In 2007 Sistema took the decision to withdraw from espe(cid:1)
cially high(cid:1)risk investments in the cities of Moscow, Perm,
and the Republic of Mordova.

Sistema continues to participate in the CORAL(cid:1)Sistema
Strategic Fund. In the CORAL/Sistema Strategic Fund 2006,
Sistema and its operating companies MTS, Comstar UTS,
and Sitronics have commited a total of $75 million. As of
the end of 2007, the fund had invested $16 million in four
portfolio companies developing technology with poten(cid:1)
tial application by Sistema’s businesses: Fon, Exanet,
Firetide, Red Bend.

Fon is a major Wi(cid:1)Fi provider. Exanet is developing techno(cid:1)
logies for the storage of large volumes of information.
Firetide is creating new(cid:1)generation wireless networks,
and Red Bend is developing programming support for
mobile devices as well as their delivery.

Corporate University

The human resources play a significant role in the develop(cid:1)
ment of every high(cid:1)tech company. That is why Sistema
has made a decision to create its own Corporate Uni(cid:1)
versity, capable of training the world(cid:1)class specialists. In
2007 the University has been launched. As of the begin(cid:1)
ning of the 2008, more than 300 on(cid:1)site education stu(cid:1)
dents and 4,450 off(cid:1)site education students took part in
the educational programs of the University.

Annual Report / 2007 / Riding the Consumer Wave / Other Businesses

In Dubna, Sistema is planning to build an Engineering
Center for RTI(cid:1)DMZ (Dubna Machine(cid:1)building Factory)
and a Nanotechnology Center for use by Sitronics,
Rosnanotech, and the United Institute for Nuclear
Research (OIYaI) as well as housing, including two
50(cid:1)storey apartment blocks. Among the main goals of the
Engineering Center at Dubna is to develop aviation and
rocket technologies and products, systems for informa(cid:1)
tion and energy interaction, heat and energy supply sys(cid:1)
tems, security systems, and so forth. The estimated
investment is $17 million.

In Zelenograd, there are plans to build a technology park
for innovation on the base of the National Research
Institute for Precise Engineering (NIITM) and a Center for
Nanoelectronics, jointly with Rosnanotech. The park will
develop Zelenograd as Russia’s ‘Silicon Valley’, with a
micro(cid:1)chip design center, a hosting center for European
design bureaus and the development of special equip(cid:1)
ment for the production of microchips. Investment is also
planned in the construction of housing, including high(cid:1)
rises and cottages. Initial investment levels and the
beginning of reconstruction of NIITM and housing will
amount to around $18.6 million.

A technology park is also being developed in Tomsk, with
Sistema and its subsidiaries contributing to the const(cid:1)
ruction and technical equipage of a 6,000 square(cid:1)meter
building as well as housing in two campuses. Sistema is
also contributing to the management of the park. The
estimated level of financing in the first stage of the pro(cid:1)
ject is estimated at $7.1 million.

In Sarov, the Sistema(cid:1)Sarov Innovation and Technology
Park is being developed, with the planned construction of
infrastructure, a scientific and technical center, a scientif(cid:1)
ic and production complex, as well as recreational facilities
for residents. The Corporation has earmarked RUR 240 mil(cid:1)
lion in spending by the end of 2008 on the project. Sistema
will have the opportunity to manage a business incubator
built with state financing. Plans are being developed for
the creation of a Scientific and Production Cluster as part
of a cooperation agreement between Sistema and Rosatom,
with RTI Systems, Sitronics, and Intellect Telecom partici(cid:1)
pating and opening affiliates in Sarov.

#0099

Annual Report / 2007

Petrochemicals

Entertainment

During the second half of 2005–2006 Sistema had
acquired minority shareholdings in six raw(cid:1)oil(cid:1)processing
and oil(cid:1)extracting companies located in the Russian
Republic of Bashkortostan. The total acquisition costs
were around $600 million. The acquisition of the share(cid:1)
holdings represented an opportunity to put shareholders’
funds into a financial investment for the short to medium
term, while awaiting opportunities to conduct future M&A
deals to boost key core businesses.

At the end of 2007 Sistema had 21% of the charter capi(cid:1)
tal of oil(cid:1)extracting company Bashneft (amounting to
26% of the voting shares). It has 27% shares of the char(cid:1)
ter capital of Novoil (30% of the voting shares), 23% of
the charter capital of Ufaneftekhim (29% of the voting
shares), and 24% of the charter capital of Ufimskiy NPZ
(28% of the voting shares), all oil(cid:1)processing companies.
In addition, Sistema had acquired 25% of the charter cap(cid:1)
ital of Bashkirnefteprodukt (27% of the voting shares), a
company involved in the retail sale of oil products, and
23% of the charter capital (26% of the voting shares) of
oil chemicals company Ufaorgsintez.

The companies occupy leading positions in the oil(cid:1)energy
market in the region and operate across the production
chain, from oil extraction to petrochemicals refining.
Sistema’s management continues to believe that equity
participation in the companies provides the Corporation
with the ability to make efficient use of shareholder
funds.

The priority area of business activity in 2007 was increas(cid:1)
ing the capitalization of the Bashkir companies, by means
of creating and maintaining growing dividend payments
from the shares in the companies to ensure a partial
return on previously invested funds, while at the same
time increasing the overall value of the assets. During
2007 the net revenue on dividends from the Bashkir
petroleum enterprises amounted to RUR 1,959 million
after taxes.

RWS manages Sistema’s assets in the film and television
production sector. Founded in December 2007, the com(cid:1)
pany is a joint venture of the former Russian World
Studios (RWS) group and Sistema. RWS’s contribution to
the venture took the form of all of the media(cid:1)assets of
the group, including a film studio facility in Moscow, cre(cid:1)
ative content library, and management. Sistema con(cid:1)
tributed a studio facility in St. Petersburg, the launch of
which is due in fall 2008, as well as the library of feature
films produced for the European and US markets, in which
the Group has invested up to €50 million over the last
four years.

The former RWS group of companies was originally found(cid:1)
ed in 1998. RWS is one of the largest independent pro(cid:1)
duction companies in Russia and the leader in the film
production services market. Since its foundation, the RWS
group of companies has carried out more than 400 tele(cid:1)
vision and film projects, including 20 international ones.
Among the studio’s partners are the leading entertain(cid:1)
ment companies, including Sony Pictures Television
International, Hallmark Entertainment, HBO Films,
Beacon Pictures, and many others.

With established leadership in film production services,
the strategy of RWS today is to develop strong positions
in other segments of the entertainment marketplace.
Constructed to match high international standards, the
company’s studio facilities have been successfully meet(cid:1)
ing the growing market needs. The number of projects
annually serviced by RWS has risen over the years, cross(cid:1)
ing the 300 mark in 2005. In 2007 RWS produced more
than 300 hours of creative content in(cid:1)house.

Having become a part of the Sistema corporation, RWS has
the ability to more actively develop the core lines of its
business: creation and efficient use of the content library
(Production division), provision of film(cid:1)production serv(cid:1)
ices (studio facilities), and distribution of content across
current and emerging media platforms (Distribution divi(cid:1)
sion). The revenues of RWS in 2007 reached $1.7 million.

The strategy of Sistema in the Entertainment business is
to create a leader in the development, production, distri(cid:1)
bution and licensing of all forms of creative content and
in related businesses.

#0100

Annual Report / 2007 / Riding the Consumer Wave / Other Businesses

#0101

Annual Report / 2007

#0042

Annual Report / 2007

Contacts

Sistema Joint(cid:1)Stock Financial Corporation

13 Mokhovaya Street
Moscow 125009, Russia
Telephone: +7 (495) 730(cid:1)0599, 737(cid:1)0101
Fax: +7 (495) 730(cid:1)0330
http://www.sistema.com

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