Pre-approved by the
Board of Directors,
Sistema JSFC
21 May 2011
Minutes No 06-11
On 25 May 2011
Approved by the Annual General
Meeting of shareholders,
Sistema JSFC
25 June 2011
Minutes No 2-11
On 29 June 2011
ANNUAL REPORT
of Open Joint-Stock Company
Sistema Joint-Stock Financial Corporation
for 2010
This report was compiled pursuant to the requirements of the Federal
Law "On the stock market". Financial information set out in this
Annual Report is based on the accounting data compiled pursuant to
the Russian laws, and contains elements of consolidated financial
reports compiled under international standards.
Moscow 2011
1
CONTENTS
1. Company's position in the sector
1.1. Sistema JSFC business profile
1.2. Equity capital structure of Sistema JSFC
1.3. Portfolio of Sistema JSFC
2. Priority business areas and development strategy
2.1. Mission and strategy of Sistema JSFC
2.2. Strategy and principles for asset portfolio management
4
4
4
6
9
9
9
3. Report from the Board of Directors on the results of the Company's
11
development in the priority areas
3.1. Key Events in 2010
3.2. Russian Accounting Standards (RAS) financial results of Sistema JSFC
3.3. US GAAP consolidated financial results of Sistema JSFC
3.4. Credit ratings of Sistema JSFC
3.5. Report on the payment of announced (paid out) dividends on the shares of
Sistema JSFC
11
12
14
21
22
4. Outlook and development strategy of the Sistema Group
23
4.1. Core Assets
MTS
Bashneft
Bashkirenergo
4.2. Developing Assets
RussNeft
Sistema Shyam TeleServices Ltd. (MTS India)
SITRONICS
RTI-Systems Concern
Moscow Bank for Reconstruction and Development
Detsky Mir Group
Sistema Mass-Media
VAO Intourist
Medsi Group
Binnopharm
NIS
5. Description of core risk factors
5.1. External risks
23
23
26
28
30
31
32
33
35
37
39
40
42
43
44
46
48
48
2
5.2 . Risks relating to the core activities of Sistema JSFC
5.3. Sector risks
6. Corporate governance system
6.1. General Meeting of shareholders
6.2. Board of Directors
6.3. President
6.4. Management Board
6.5. Specifics of the risk management, internal control and audit system
6.6. Specifics of the corporate governance system development in 2010
7. Social responsibility
8. Criteria and amounts of remuneration for the members of the Board
of Directors and top executives of the Company
9. Annex
9.1. Summary biographies of the members of the Board of Directors and their
shareholdings in Sistema JSFC
9.2. Information on transactions performed by the members of the Board of Directors
of Sistema JSFC with the shares they hold in the Company over the period of 1
January - 31 December 2009
9.3. Summary biography of the President of Sistema JSFC and the members of the
Management Board
9.4. Information on the number of shares of Sistema JSFC held by the President and
the members of the Management Board
9.5. List of transactions performed by the Company in the reporting year that are
recognized as major transactions under the Federal Law "On joint-stock
companies", and other transactions covered by the major transactions approval
procedure pursuant to the Company's Charter
9.6 List of transactions performed by the Company in the reporting year that are
recognized as related party transactions under the Federal Law "On joint-stock
companies"
9.7 Information on the Company's compliance with the requirements of the Corporate
Conduct Code from the Federal Service for Financial Markets
9.8. Information on the Company's compliance with the requirements of the UK
Corporate Governance Code
50
51
53
53
56
61
62
63
64
65
68
69
69
75
76
81
82
82
90
97
3
1. COMPANY'S POSITION IN THE SECTOR
1.1. Sistema JSFC business profile
Sistema JSFC is the largest public diversified financial corporation in Russia and the CIS, a majority shareholder of
leader companies serving over 100 million customers in the sectors of telecommunications, high technologies, oil
and energy, petrochemicals, radio and aerospace, banking, retail, mass-media, tourism and healthcare services.
Subsidiaries of Sistema JSFC operate in the markets of Russia, the CIS, Central and Eastern Europe, and in India.
The subsidiaries of the Corporation focus on implementing advanced technologies that ensure faster development
of the sectors in which they operate, as well as growth of the standard of living.
Sistema JSFC has no counterparts among Russian public companies, and provides investors with unique
investment opportunities. The Corporation's investment activities support the growth of its shareholder value and
provide for the maximum possible returns on its portfolio of assets.
Sistema JSFC is managed by a highly professional management team, in line with the generally recognized
corporate governance standards. The experience of the Board members and the management, as well as the
opportunities they have, make it possible for them to gain access to unique investment objects and funding, create
businesses that take leading positions in their sectors, rely on many years of their success and on a high level of
profits for the shareholders.
In March 2011, in line with the new approach to the management of the Corporation, the Board of Directors of
Sistema JSFC took the decision on the migration to the Financial and Investment Holding model in place of the
previous Operating Holding model, and to the new organizational structure.
1.2. Equity capital structure of Sistema JSFC*
Sistema JSFC has 9,650,000,000 ordinary shares outstanding with the par value of RUB 0.09 each. Its shareholder
capital amounts to RUB 868,500,000.00.
Sistema JSFC went public in February 2005, its shares were listed under the SSA ticker at the London Stock
Exchange. The Company's shares are traded at the London Stock Exchange (LSE) in the form of global depositary
receipts (GDRs). The receipts are included in the LSE quotation list under the SSA ticker. One GDR stands for 20
ordinary shares. The shares of the company are also traded under the AFKS ticker at the RTS Stock Exchange,
under the AFKC ticker at the MICEX Stock Exchange, and under the SIST ticker at the Moscow Stock Exchange.
As of December 31, 2010, the Sistema JSFC Group included three public companies whose shares are traded at
international stock exchanges: the shares of MTS are traded at the New York Stock Exchange in the form of
American depositary receipts (ADRs), the shares of SITRONICS and COMSTAR-UTS - as GDRs at the London
Stock Exchange. On March 21, 2011 COMSTAR-UTS announced the de-listing of its shares in the form of GDRs
in the UK due to the program of merging COMSTAR-UTS and MTS. The shares of Bashneft and its subsidiaries
are traded at the RTS and the MICEX stock exchanges.
* as of 31 December 2010.
4
Comparative performance of the RTS Index and the GDRs of Sistema JSFC at the LSE
Closing price of Sistema‘s GDRs on the London Stock Exchange on the first trading day of 2010 was $21.0, on the
last trading day it reached $24.93. The Corporation's GDRs reached their high of $30.99 on April 14, 2010 and
their low of $21.0 on January 4, 2010 and May 25, 2010.
Comparative performance of the RTS Index and the Sistema JSFC share price at MICEX and RTS
50%
40%
30%
20%
10%
0%
-10%
-20%
AFKS RU
AFKC RX
RTSI
.
0
1
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0
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.
Closing price of Sistema's shares on the first trading day of 2010 was $0.88 at MICEX and $0.88 on the RTS stock
exchange, on the last trading day of 2010 it was $0.89 on MICEX and $1.00 on RTS respectively. The
Corporation's shares reached their high of $1.12 on MICEX on April 15, 2010, and $1.06 on RTS on April 14,
5
2010. The Corporation's shares reached their low of $0.78 on MICEX on May 25, 2010, and $0.81 on RTS on
February 08, 2010.
Vladimir Evtushenkov
DEUTSCHE BANK TRUST COMPANY
AMERICAS
Sistema Finance Investments OJSC
Depositary Clearing Company
other shareholders
About 19% of Sistema‘s shares are traded as GDRs
on the London stock exchange, and 5.2% of shares
are in circulation on the MICEX and RTS.*
As of December 31, 2010, Sistema‘s shareholder
register had 25 individuals and 10 legal entities,
including eight nominal holders, registered as
shareholders.
Equity structure of Sistema JSFC
2,57%
3,81%
10,43%
19,01%
64,18%
*as of 31 December 2010
Sistema JSFC GDR holders structure
The Chairman of the Board of Directors of
Sistema JSFC Vladimir Evtushenkov, with
64.18% of
the principal
shareholder of Sistema JSFC.
shares,
is
About 19% of shares are traded as GDRs at
the London Stock Exchange, and 5.2% of
shares are in circulation at MICEX and RTS.
56,60%
SKAGEN Fondene
J.P. Morgan Asset Management (U.K.)
Robeco Asset Management B.V.
Fidelity Management & Research
Company
The Vanguard Group
BlackRock Investment Management
(U.K.)
Baring Asset Management, LTD (U.K.)
Fidelity International Limited - FIL
Investment Services (U.K.)
East Capital Asset Management AB
12,50%
5,90%
4,20%
4,10%
3,40%
3,10%
2,70%
2,60%
2,30%
*
** as of 10 March 2011
2,60%
Van Eck Associates Corporation
Other
1.3. Portfolio of Sistema JSFC
Throughout the reporting period from January 1 through December 31, 2010 the organizational structure of Sistema
JSFC had four industry-based Business Units:
- Telecommunication Assets;
- Oil and Energy;
- High Technologies and Industry;
- Consumer Assets.
The 2010 restructuring resulted in a complete exit from our real estate business, Sistema-Hals, as the remaining
28% stake was sold to the state bank VTB. Also, implementation of the project for the Corporation to exit VAO
Intourist which, as agreed, will be performed via a sale of the majority stake to Thomas Cook, a global tour
operator, started in 2010. We remain a partner in the company and will get additional payments as the company
achieves its agreed parameters.
6
In early 2011 the Board of Directors of Sistema JSFC took the decision on the in principle need to transform the
organizational structure of the Corporation and to group its assets on the basis of their maturity, so that to provide
for the target portfolio structure where 80% of the NAV comes from mature assets (hereinafter "Core Assets") that
generate a stable dividend flow, and 20% comes from developing businesses (hereinafter "Developing Assets").1
The structure of the portfolio that reflects the transformation of Sistema JSFC from an operating holding into an
investment holding is shown in the portfolio restructuring chart.
Description of major assets
Core Assets
Telecommunications
MTS
Oil
Bashneft
Power
Bashkirenergo
Largest cellular and fixed line telecom operator in
Russia and the CIS.
Head company of the Bashkir oil and energy group,
Russia‘s Top 10 company in oil production and
Top 5 company in oil refining. The company's
business portfolio includes crude oil production, oil
refining, petrochemicals, and sales of oil products.
Head company of
the division consolidating
Bashkir energy assets. No 5 by installed electric
capacity and No. 7 by installed heat capacity
among territorial generating companies of Russia.
1 NAV - Net Asset Value
7
Developing Assets
Oil
RussNeft
Telecommunications
Banking
Sistema Shyam
TeleServices Ltd.
(SSTL)
MBRD
Retail
Detsky Mir Center
Media
Sistema Mass-media
Tourism
Intourist
Private Healthcare
Medsi Group
High technologies and
radar equipment
RTI
SITRONICS
RTI Systems Concern
RussNeft is No 10 Russian oil company by the
volume of oil production, No. 7 by the volume of oil
refining. The holding is a large supplier of crude oil
and oil products to the FSU and other foreign
countries, and to the domestic market of the RF.
A joint venture of the Russian Sistema JSFC and the
Indian Shyam Group.
Universal commercial bank, a Top 30 bank of
Russia. MBRD also owns Dalcombank at
Khabarovsk and East-West United Bank
in
Luxembourg.
Leading retail network in the children's goods
market, one of the oldest and the best recognized
Russian brandnames.
One of the largest media holdings in Russia,
managing assets in pay TV, premium content, and
advertising.
the
investment, organizational
Leading universal operator in the Russian tourism
market that renders its services to both Russian and
foreign tourists.
Leading national network company
rendering
medical and healthcare services in Moscow and
other regions of Russia.
Recently formed company that has the goal of
forming
and
technological basis for implementing large-scale
public projects done in the form of public-private
partnerships, such as programs in the area of geo-
information systems (GIS) and GLONASS, control
and monitoring systems, systems for identifying and
responding to threats to the state, the business and
the person.
Largest high-tech company in Eastern Europe, one
solutions
of
in
vendors
telecommunications,
technologies,
system integration, consulting and microelectronics.
One of the largest Russian defense industry holdings
that includes the largest enterprises possessing
unique scientific and
industrial potential and
experience in high-tech projects.
of
information
leading
the
Pharmaceuticals
Binnopharm
Pharmaceutical company managing the largest in
Russia full-cycle GMP-compliant manufacturing
facility producing bio-technology drugs.
8
2. PRIORITY BUSINESS AREAS AND DEVELOPMENT STRATEGY
2.1. Mission and strategy of Sistema JSFC
Mission
Sistema JSFC is focused on the long-term growth of shareholder value achieved through high returns on invested
capital and investment diversification. Sistema‘s portfolio consists of unique businesses, including mature
companies that generate stable cash flows and developing companies that have growth potential.
Strategy
The Corporation's strategic goal is to ensure sustained growth of the shareholder value of the business. Sistema
JSFC intends to achieve this goal by means of increasing the level of return on capital invested in the current assets,
and by means of reinvesting a larger portion on non-committed cash in new investment projects so that the assets
base can be diversified and expanded.
Key investment principles:
1. Creation of additional value:
- Achievement of strong and transparent financial results;
- Diversification of risks, and proactive raising and management of capital.
2. Maintaining strict financial discipline:
- Dominance of TSR and ROIC in investment decision making;
- Transparent and balanced system of KPIs for the Corporate Center and all the portfolio companies.
3. Efficient and law-compliant corporate structure.
4. Macro-economic trends driven investment strategy and risk-assessed asset allocation.
5. Weighted application of best practices in corporate governance and IR.
2.2. Strategy and principles for asset portfolio management
Principles of asset portfolio management
Besides managing the current portfolio focused on realizing its assets growth potential, Sistema JSFC strives to
achieve high returns and smart capital allocation. Investment decisions are made on the basis of the following
principles: 80% of NAV of the target portfolio is made up by the core assets that generate a stable dividend flow,
and 20% is contributed by developing businesses.
The Corporation considers investment projects with enterprise values (shareholders‘ equity plus net debt) of at least
$300 million;
- All assets must generate return on investment above the cost of capital within the investment
horizon of 5-7 years (IRR>WACC);
- All assets (current projects and new investments) must start making a profit in the medium term
and independently service their financial liabilities;
- Sistema JSFC considers potential partnerships with financial and strategic investors and the
government.
9
Strategy implementation in 2010
In 2010, Sistema JSFC continued its evolutionary transition from the operating holding to the investment fund
model. In total 13 M&A deals were completed in the reporting period, marking the most active spell in the
Corporation‘s investment history.
The Corporation finalized reorganization of its telecom assets: Sistema-Telecom and Sky Link were sold, a series
of transactions between Svyazinvest and Comstar-UTS was completed. Sistema JSFC decided to sell the real estate
assets and agreed to a partial disposal of Intourist assets to Thomas Cook. The Corporation continued engaging new
partners - the RF Government to SSTL and Sberbank of Russia to Detsky Mir-Center. Sistema JSFC also
succeeded in utilizing new investment opportunities as it acquired 49% in RussNeft, a Top 10 upstream oil
company in Russia.
The Corporation also adopted changes to the incentive system for the employees of the Corporate Center and the
subsidiaries, and revised the processes and procedures for investment decision-making.
The key step towards the new investment model was made in 2011 when the Board of Directors approved the
reorganization of the Corporation's assets into two business units based on the maturity of the underlying assets.
These and other portfolio actions reflect the management‘s drive to effectively execute Sistema‘s development
strategy and grow its shareholder value.
10
3. REPORT FROM THE BOARD OF DIRECTORS ON THE RESULTS OF THE
COMPANY'S DEVELOPMENT IN THE PRIORITY AREAS
3.1 Key Events in 2010
April 2010
July 2010
October 2010
November 2010
December 2010
Sistema Group acquired a 49% stake in RussNeft.
Sistema acquired a 51% stake in M2M Telematics, the leader in the Russian
market of transport monitoring, navigation and telematics based on
GLONASS/GPS technologies. Sistema has a right to acquire the remaining
49% stake in the next 2-5 years in accordance with the agreement between
the companies.
Sistema Shyam TeleServices Ltd. and the Russian Federation signed an
agreement on an equity investment in Shyam TeleServices Ltd. After the end
of the reporting period, the Government of Russia acquired 17.14% of shares
for $600m in the course of an additional issue of shares.
Sistema completed the reorganization of its telecommunication assets, having
finalized
transactions between Comstar-UTS, Sistema JSFC and
Svyazinevst, including the transfer of shares in Sky Link and MGTS.
the
VAO Intourist and Thomas Cook Group Plc. signed an agreement on the sale
of a controlling stake in Intourist‘s tour operating and retail businesses for
$45m and on the establishment of a joint venture to manage the business.
of
the
closed
transaction
Sistema
in Sistema
Telecommunications, Informatics and Communications (Sistema Telecom)
for RUB 11.588bn. (ca $379m). Besides, MTS bought out the debts of
Sistema Telecom to the total amount of RUB 1.801bn (ca $59m), including
RUB 1.35bn ($44.04m) of debt liabilities between subsidiaries of MTS and
Sistema Telecom.
selling
100%
The transaction with Sberbank of Russia was closed resulting from which
Sberbank acquired 25%+1 share of Detsky Mir-Center. The stake was
acquired in the course of expanding the authorized capital of the company via
an additional issue of shares in favor of Sberbank of Russia, placed by closed
subscription. The transaction was worth about RUB 3.4bn. (ca $113m).
Sistema completed the sale of 27.6% in Sistema-Hals. The stake was bought
by Blairwood Limited and Stoneflower Limited that acquired 13.8% of
Sistema-Hals shares each. The total value of the transaction amounted to
$70m.
Sistema signed a Framework Agreement with the India‘s largest oil and gas
corporation, ONGC Videsh. The parties agreed to consider the opportunity of
combining all or some of their assets in oil production and refining. In
particular, the Corporation considers the stake in Bashneft and 49% in
RussNeft as potential assets for the combination, and ONCG Videsh‘s
considers its 100% stake in Imperial Energy Corp. - plus possible cash
investments, and any other oil and gas assets which both companies may
acquire before mutually binding agreements are signed.
11
Bashneft won
the
for
R. Trebs and A. Titov oilfields. The license obtained in February 2011 cost
RUB 18.5bn.
development
tender
the
the
of
3.2. Russian Accounting Standards (RAS) financial results of Sistema JSFC
Indicators
Revenue, RUB ‗000
Gross income, RUB ‗000
Net income (loss) in the reporting period, RUB ‗000
Return on equity, %
Return on assets, %
Net income ratio, %
Return on sales, %
Capital turnover
Net income/loss as of reporting date to grand total ratio
Revenue structure:
Indicators
Shareholdings: dividends receivable
Other income (rental, agent services, guarantees)
TOTAL:
2009
21,780,038
21,686,058
-43,401,803
-13.13%
-10.29%
-199%
82.06%
2010
42,188,113
42,090,662
111,694,947
25.29%
21.80%
265%
77.06%
0.053 0.086
0.1
0.22
2009
20,936,710
843,329
21,780,038
RUB ‗000
2010
41,390,818
797,295
42,188,113
The issuer's core business is managing stakes and shares in commercial organizations.
Structure of other earnings and costs:
Indicators
Interest receivable
Interest payable
Other earnings
Other expenses
TOTAL:
2009
3,630,831
-15,206,334
305,794,800
-349,355,289
-55,135,992
RUB ‗000
2010
2,615,670
- 9,912,875
184,967,477
- 97,152,643
80,517,629
Positive re-valuation of investment in the publicly listed shares of Bashneft and MTS acted as the key driver of
Sistema JSFC getting yield not related to its core business in 2010.
Efficiency indicators
Indicators
Net assets value, RUB ‗000
Funds raised to capital and provisions ratio, %
Short-term liabilities to capital and provisions ratio, %
Cover of debt servicing payments, %
Level of past-due debt, %
Receivables turnover, times
Share of dividends in profits, %
Productivity of labor, RUB ‗000 per employee
Depreciation to revenues
2009
330,512,110
26.71%
1.70%
-
0%
0.78
0%
70,258.19
1%
2010
441,737,914
15.27%
4.04%
241%
0%
1.51
0.48%
126,312
0.47%
Analysis of the financial solvency and the level of the credit risk of the issuer suggests that in general the issuer has
both material own resources and opportunities to raise additional credit resources without the risk of repayment of
such funds becoming doubtful.
In 2010 net assets amounted to RUB 441,737.9m, having grown by 33.7% vs. 2009.
12
Long-term liabilities account for a major part in the structure of borrowings (ca 70%). Accounts receivable and
payable are recurring.
Financial stability indicators
Indicators
Working capital, RUB ‗000
Fixed assets to equity ratio
Current ratio
Quick ratio
Equity ratio
2009
-41,257,875
1.12
5.80
5.76
0.78
2010
1,197,144
1.00
3.45
3.45
0.86
The issuer's liquidity and solvency indicators are satisfactory.
The amount of the issuer's own capital is sufficient to discharge its short-term liabilities and to cover its operating
costs. As of the end of 2009, the company's own capital amounted to RUB 441,737,914,000, the volume of its
short-term liabilities as of the mentioned date amounts to RUB 20,867,796,000, production costs in 2010 amounted
to RUB 97,451,000.
Liabilities and equity
Structure of borrowings
14%
30%
Equity Liabilities
86%
Long-term debt
70%
Short-term debt
The share of equity in the structure of the company's
liabilities amounts to 86%.
Long-term debts account for 70% of the total volume of
the company's liabilities.
13
3.3. US GAAP consolidated financial results of Sistema JSFC
- The revenues grew by 49.9% to $28.1bn.
- OIBDA increased by 8.6% to $7.3bn, OIBDA margin amounted to 26.0%.
- Net income attributable to Sistema JSFC went down by 44.1% to $918.7m.
Key financial indicators
(USD m)
Consolidated revenue
OIBDA
Operating income
Net income attributable to the Group
Base and diluted earnings per share (cents)
Review of consolidated results2
2010
2009
YOY variance
28,098.5
18,749.8
7,308.6
6,727.3
4,362.2
4,236.8
918.7
1,643.4
9.9
17.7
49.9%
8.6%
3.0%
(44.1%)
(44.1%)
In 2010, Sistema Group‘s consolidated revenues increased by 49.9% year-on-year, largely as a result of the
contribution from the Oil and Energy Business Unit. Non-telecommunication businesses, including the Oil and
Energy Business Unit, accounted for 59.2% of total Group consolidated revenues in 2010 vs. 46.9% in 2009.
Selling, general and administrative expenses increased by 25.1% year-on-year to $3,838.5 million in 2010, mainly
due to the growth in marketing expenses at MTS as well as consolidation of the full 2010 year Bashneft expenses
compared to only nine months consolidation in 2009.
The Group OIBDA for the full year 2010 increased by 8.6% year-on-year following the significant revenue growth,
with the OIBDA margin of 26.0%.
Depreciation, depletion and amortization expense increased by 18.3% vs. 2009 to $2,946.4 million in 2010, mainly
due to the consolidation of the full 2010 year Bashneft expenses compared to only nine months consolidation in
2009.
The Group‘s operating income in 2010 was 3.0% higher than that in the previous year, notwithstanding the $2.8
billion gain on acquisition of Bashkir Oil and Energy assets recognized by the Group in 2009. Such outstanding
operating results are due to the strong operational growth at Bashneft. The operating margin in 2010 was 15.5%
compared to 22.6% in 2009.
The Group‘s interest expense was $1,597.2 million for the full year 2010, compared to $1,246.4 million in the
previous year, mainly due to the increase in the share of debt denominated in currencies other than the USD
(particularly, SSTL debt is denominated in INR) and foreign exchange effects resulting from the decrease in
average USD/RUB exchange rates.
The effective tax rate was 37.3% for the full year 2010, compared to 24.4% for 2009. The increase in the effective
tax rate resulted from the decrease in non-taxable income, including $2.8 billion gain on the acquisition of Bashkir
Oil and Energy assets in 2009.
The consolidated net income attributable to Sistema decreased by 44.1% year-on-year from $1,643.4 million to
$918.7 million. The decrease resulted mostly from the gain on the acquisition of the Bashkir Oil and Energy assets
recognized in 2009.
2 The report of the financial results for 2010 is structured with the changes to the organizational structure that occurred in early
2011 disregarded, and includes analysis by segments that include 4 Business Units: Oil & Energy, Telecommunication Assets,
High Technologies and Industry, and Consumer Assets.
14
Review by segment
Telecommunication Assets Business Unit
(USD m)
2010
2009
YOY variance
Revenue
OIBDA
Operating income
Net income attributable to the Group
Debt
MTS
Revenue
OIBDA
Operating income
Net (loss)/ income attributable to the Group
SSTL
Revenue
OIBDA
Operating loss
Net loss attributable to the Group
Sistema Mass-media
Revenue
OIBDA
Operating (loss)/ income
Net (loss)/ income attributable to the Group
11,476.2
4,344.8
2,282.4
579.0
8,422.8
11,293.2
4,735.1
2,734.6
756.5
114.6
(329.0)
(410.8)
(349.7)
94.5
40.5
2.2
(11.5)
9,956.0
3,880.4
2,016.3
374.9
8,910.7
9,867.3
4,400.1
2,555.9
555.7
36.4
(222.7)
(250.8)
(191.3)
87.2
(14.3)
(72.1)
(51.7)
15.3%
12.0%
13.2%
54.5%
(5.5%)
14.5%
7.6%
7.0%
36.1%
215.1%
-
-
-
8.3%
384.4%
-
-
As of December 31, 2010, the Telecommunication Assets Business Unit comprised MTS, Sistema Shyam
TeleServices Ltd. (SSTL), and Sistema Mass-media. In 2010 Sistema JSFC completed the consolidation of its
telecom assets via a series of transactions, including the sale of the 25%+1 share stake in Svyazinvest held by
Comstar-UTS to Rostelecom, the transfer of 28% in MGTS held by Svyazinvest to a subsidiary of Sistema JSFC,
Sistema-Invenchur, the sale of a stake in Sky Link held by Sistema JSFC to Svyazinvest, and the sale of the debt of
Sky Link to subsidiaries of Svyazinvest. In a secondary share issuance by SSTL which was completed in March
2011, the Russian Government acquired a 17.14% stake in the Indian telecom operator for approximately $600
million with the funds of the Indian government‘s debt to the Russian Federation. SSTL plans to use the proceeds
to further strengthen its leading position in wireless broadband services, to expand its mono-brand retail network in
existing telecommunications circles, and to launch in new circles.
The revenues of the Telecommunication Assets Business Unit increased by 15.3% year-on-year in 2010. The unit
accounted for 40.8% of the Group‘s consolidated revenues for the full year 2010, compared to 53.1% in the
previous year.
The Telecommunication Assets Business Unit‘s OIBDA increased by 12.0% year-on-year for the full year 2010.
The OIBDA margin was 37.9% in 2010, compared to 39.0% in the previous year, following the write-offs in the
fourth quarter of 2010.
The Telecommunication Assets Business Unit‘s net income attributable to Sistema increased by 54.5% year-on-
year in 2010, mainly due to the gain from the disposal of Sky Link amounting to $324.7 million.
MTS‘ total mobile subscriber base reached 108.1 million customers at the end of 2010, resulting in a 5.7 million
subscriber growth year-on-year. MTS‘ revenues increased by 14.5% year-on-year in 2010 as a result of the growth
of its subscriber base and the volume of VAS services, as well as local currencies‘ appreciation against US dollar.
The average monthly service revenue per subscriber (ARPU) in Russia increased from RUB 248.4 in the fourth
15
quarter of 2009 to RUB 261.9 in the fourth quarter of 2010. Russian subscribers‘ monthly Minutes of Use (MOU)
were up by 18.3% year-on-year and amounted to 259 minutes in the fourth quarter of 2010, compared to 219
minutes in the fourth quarter of 2009.
MTS‘ broadband subscriber base increased by 31.8% year-on-year to 9.9 million customers in 2010, and its Pay-
TV customer base grew to 2.8 million, compared to 2.1 million customers in 2009.
The OIBDA of MTS increased by 7.6% vs. 2009. The OIBDA margin decreased year-on-year from 44.6% to
41.9% for 2010, primarily as a result of growth in dealer costs and a strong subscriber growth.
SSTL‘s revenues more than tripled year-on-year in 2010 as a result of strong growth of the mobile subscriber base,
the rollout of new networks in five telecom circles and the launch of EV-DO based high speed data services in 99
of India‘s largest cities. SSTL‘s mobile subscriber base increased by 27.3% in the fourth quarter of 2010 and
reached 8.4 million customers at the end of 2010. The number of mobile broadband subscribers totaled 430
thousand at the end of 2010.
SSTL‘s OIBDA loss increased year-on-year in 2010 due to the growth in expenses associated with the rollout of
new mobile networks.
Sistema Mass-media‘s revenues increased by 8.3% year-on-year in 2010 as a result of higher revenues from film
sales, including additional sales of rights to show TV series in the CIS countries, as well as increased revenues
from content distribution and aggregation resulting from the organic growth of TV Company Stream.
Sistema Mass-media reported an OIBDA profit for the full year 2010, compared to OIBDA loss in the previous
year, as a result of revenue growth and optimization of selling, general and administrative expenses. OIBDA
margin increased by 59.3 percentage points and equaled 42.9%.
Oil and Energy Business Unit3
(USD m)
Revenue
OIBDA
Operating income
Net income attributable to the Group
Debt
Bashneft
Revenue
OIBDA
Operating income
Net income attributable to the Group
Refineries
Revenue
OIBDA
Operating income
Net income attributable to the Group
Bashkirenergo
Revenue
OIBDA
Operating income
Net income attributable to the Group
2009
YOY variance
2010
13,318.0
3,004.3
2,295.3
927.0
3,932.6
5,730.7
1,086.0
587.8
391.4
2,500.4
11,578.7
4,134.4
2,344.4
2,165.4
1,112.0
1,490.5
555.9
161.0
85.4
680.8
565.3
320.3
1,083.2
291.5
4.6
4.9
2,067.8
1,165.4
234.0
116.5
23.7
107.4
25.2
3.5
132.4%
176.7%
290.5%
136.9%
57.3%
180.1%
244.4%
283.1%
247.2%
37.6%
90.7%
3,379.3%
1,633.0%
77.4%
117.9%
362.7%
583.6%
3 Hereinafter OIBDA, operating income and net income indicators of the Bashkir oil and energy group operations are shown
net of profits from acquiring the Bashkir oil and energy group operations.
16
Bashkirnefteprodukt
Revenue
OIBDA
Operating income / (loss)
Net (loss)/ income attributable to the Group
857.0
6.5
(11.7)
(3.5)
531.1
37.4
23.9
15.9
61.4%
(82.7%)
-
-
As of December 31, 2010, the Oil and Energy Business Unit comprised companies of the Bashkir Oil and Energy
Group, as well as Sistema‘s 49% stake in RussNeft which is accounted by the equity method. The unit‘s operating
results are included in the Group‘s consolidated results for the full year 2010, compared to nine months in 2009.
The unit‘s revenues more than doubled year-on-year in 2010 as a result of increased oil production, increased
volumes of oil products sold following the cancellation of the tolling scheme, increased effectiveness of the
companies in the business unit, and the rising oil prices. The unit contributed 47.4% of the Group‘s consolidated
revenues in 2010, compared to 30.6% for the nine months of the previous year.
The Business Unit‘s OIBDA increased year-on-year, mostly due to the gain resulting from the acquisition of
significant control in Belkamneft amounting to $477 million, and the growth in sales. The OIBDA margin was
22.6% in 2010, compared to 19.0% in the previous year.
The Business Unit‘s net income attributable to Sistema more than doubled year-on-year in 2010.
Bashneft‘s revenues more than doubled year-on-year as its oil production reached approximately 14.1 million tons
of oil, compared to 9.4 million tons for the nine months of 2009. In 2010, Bashneft sold 18.8 million tons of oil
products compared to 6.8 million tons in 2009.
Bashneft‘s OIBDA more than doubled year-on-year as a result of growth in oil and oil products sales volumes in
2010.
The Group‘s refining facilities that include four oil refinery companies - Ufaneftekhim, Ufimsky NPZ, Novoil and
Ufaorgsintez, - processed 21.2 million tons of crude oil in 2010, compared to 20.7 million tons in the previous year.
The Group‘s refining segment‘s revenue increased by 37.6% year-on-year to $1,490.5 m. This increase, net of
effect of comparing full 2010 to the nine-months‘ period of 2009, was primarily driven by the greater volumes of
processing.
The OIBDA of the refining segment of the Group nearly tripled year-on-year primarily due to higher prices of
processing services.
Bashkirnefteproduct‘s revenues increased by 61.4% year-on-year mainly due to increased volumes of oil products
sold. At the end of 2010 the total number of petrol stations owned and operated by Bashkirnefteproduct was 318 as
the company continued to develop its own retail network.
Bashkirnefteproduct‘s OIBDA decreased by 82.7% year-on-year due to provisions for business litigations made in
2010.
Bashkirenergo‘s revenues increased by 77.4% year-on-year in 2010, as a result of the growth in retail electricity
consumption and average retail electricity tariffs, as well as the increase in wholesale energy sales. Bashkirenergo
generated 22,612 million kW/h of electricity and supplied 24,128 thousand Gcal of heat in 2010, compared to
19,834 million kW/h of electricity and 23,899 thousand Gcal of heat supplied in the previous year.
The electric energy business‘ OIBDA more than doubled year-on-year with the OIBDA margin expanding to
11.3%, compared to 9.2% in the previous year.
Following the end of the reporting period, Bashneft received a license for federal-level subsoil deposits covering oil
fields named after Roman Trebs and Anatoly Titov located in the Nenets autonomous district of Russia. Bashneft
was granted the license to perform geological research, and to explore and produce hydro-carbon materials. Total
recoverable oil reserves (C1+C2) of both fields are estimated as 140.1 million tons.
17
Consumer Assets Business Unit
(USD m)
Revenue
OIBDA
Operating (loss)/ income
Net (loss)/ income attributable to the Group
Debt
Banking
Revenue
OIBDA
Operating (loss)/ income
Net (loss)/ income attributable to the Group
Retail
Revenue
OIBDA
Operating (loss)/ income
Net (loss)/ income attributable to the Group
Tourism
Revenue
OIBDA
Operating (loss)/ income
Net loss attributable to the Group
Private Healthcare
Revenue
OIBDA
Operating (loss)/ income
Net loss attributable to the Group
2010
2009
YOY variance
1,978.7
205.7
144.6
80.5
362.0
1,896.8
(183.8)
(236.2)
(326.4)
403.0
613.8
39.9
21.3
10.1
659.9
40.9
24.4
(3.1)
518.2
6.9
(4.0)
(15.5)
156.5
17.1
8.1
(2.5)
720.4
(63.5)
(77.1)
(91.4)
583.1
(47.4)
(65.1)
(99.1)
399.7
7.8
(1.1)
(8.8)
125.9
6.2
(0.4)
(7.3)
4.3%
-
-
-
(10,2%)
(14,8%)
-
-
-
13.2%
-
-
-
29.7%
(11.7%)
-
-
24.3%
174.7%
-
66.3%
As of December 31, 2010, the Consumer Assets business unit comprised of the following segments: Banking,
Retail, Tourism, and Healthcare. In 2010 Sistema JSFC continued the optimization of the consumer assets portfolio
by means of establishing a joint venture with Thomas Cook (the JV will own the tourism business of VAO
Intourist), and selling a stake in a consumer assets operating company, Detsky Mir-Center, to Sberbank. In 2010 the
revenues of the unit increased by 4.3% vs. 2009 thanks to the growth of revenues in the retail, tourism and
healthcare sectors. In 2010 the unit accounted for 7% of the Group‘s consolidated revenues, compared to 10% in
the previous year.
Resulting from a significant improvement of performance in all segments, the Consumer Assets Business Unit
demonstrated a notable growth of OIBDA, with the OIBDA margin reaching 10.4% in 2010 vs. negative values in
2009. The significant growth in 2010 was achieved thanks to the good results of all companies of the unit.
In 2010 the Consumer Assets Business Unit generated net income attributable to Sistema, compared to net loss in
the preceding two years.
The Banking business‘ revenues declined by 14.8% year-on-year in 2010 due to a contraction in the debt securities
and loan portfolio, as well as a decrease in the average interest rates charged on loans to corporate and retail
customers.
The Banking business‘ loan portfolio, excluding leases, decreased by 16.64% year-on-year to $ 4,603 million as of
December 31, 2010. The retail deposits-to-loans ratio stood at 236.7% at the end of 2010. Interest income received
18
from retail and corporate lending operations decreased by 16.9% year-on-year to $529.7 million in 2010. The retail
banking business included 162 points of sales, including 23 points located in Moscow and 138 points in 37 Russian
regions, and one in Luxembourg as of the end of 2010.
The Banking business reported an OIBDA profit in 2010, compared to an OIBDA loss in the previous year.
Revenues from the Retail business increased by 13.2% year-on-year in 2010, mainly as three stores were opened in
2010. The retail network included 131 stores located in 67 Russian cities with the aggregate retail space of 214.5
thousand square meters as of the end of 2010.
The Retail business reported a significant OIBDA growth in 2010, compared to the OIBDA loss in the previous
year, following the introduction of a large-scale cost cutting program.
The Tourism business‘ revenues increased by 29.7% year-on-year in 2010 as a result of better market conditions and
following the launch of new travel routes. The tourism companies of the business unit serviced 812.1 thousand
customers in 2010, compared to 667.3 thousand clients in the previous year. The hotel group‘s total number of
rooms owned, managed and rented was 3,059 at the year end.
The OIBDA of the Tourism sector went 11.7% down year-on-year as the competition became more intensive.
The Healthcare business‘ revenues increased by 24.3% year-on-year in 2010 as a result of the growth in the volume
of services by 13.1% year-on-year to 6.0 million, the increase in the number of visits to medical clinics by 10.6%
year-on-year to 3.4 million, and the rise in the average bill by 12.4% year-on-year to $45.5 despite the unfavorable
weather conditions in the third quarter of 2010. At the end of 2010 the network consisted of 80 medical clinics and
hospitals, including 20 based in Moscow and the Moscow Region, and 4 fitness clubs. The business launched the
second building of the Clinic and Diagnostics Center at the Belorusskaya station (Gruzinsky Per. 3a) in Moscow, and
a clinic in Shchyolkovo (a town in the Moscow Region), extending the total clinics' space to 46,914 square meters, an
18.3% increase year-on-year.
High Technologies and Industry Business Unit
(USD m)
Revenue
OIBDA
Operating (loss)/ income
Net loss attributable to the Group
Debt
High Technologies
Revenue
OIBDA
Operating (loss)/ income
Net loss attributable to the Group
Radars and Aerospace
Revenue
OIBDA
Operating income
Net income attributable to the Group
Pharmaceuticals
Revenue
OIBDA
Operating income / (loss)
Net income / (loss) attributable to the Group
2010
1,781.6
143.8
37.6
(63.5)
935.6
1,166.9
114.9
24.1
(31.9)
506.0
69.5
57.5
15.2
32.1
(27.9)
(34.1)
(33.9)
2009
YOY variance
1,508.5
61.6
(6.4)
(64.6)
926.2
1,024.2
0.9
(54.8)
(83.0)
409.9
51.3
39.2
13.8
55.7
10.8
8.2
3.9
18.1%
133.4%
-
1.7%
1.0%
13.9%
13,403.3%
-
-
23.5%
35.4%
46.7%
10.2%
(42.3%)
-
-
-
As of December 31, 2010, the High Technologies and Industry Business Unit comprised the High Technology, the
Radars and Aerospace, and the Pharmaceuticals businesses, as well as NIS and M2M Telematics. The unit‘s
19
revenues increased by 18.1% year-on-year in 2010, largely as a result of growth in the High Technology and Radars
and Aerospace businesses. The unit accounted for 6.3% of consolidated Group's revenues in 2010, compared to
8.0% in the previous year.
The High Technologies and Industry Business Unit‘s OIBDA more than doubled year-on-year in 2010, following a
significant growth of OIBDA in the High Technology business.
Net loss of the High Technologies and Industry Business Unit attributable to Sistema JSFC remained at the 2009
level despite the reduction of net loss in the High Technology and Industry segment. The loss resulted from a
material loss in the Pharmaceuticals segment.
Revenues for the High Technology business increased by 13.9% year-on-year in 2010 due to growth in the
Information Technologies and Microelectronics business segments.
The High Technology business‘ OIBDA expanded substantially in 2010, compared to the loss in the previous year,
with the OIBDA margin of 9.9%. The year-on-year increase resulted from the large amount of provisions for
accounts receivable and impairment of inventories, fixed assets and investments in 2009, as compared to these
accounts balance in 2010.
The Radars and Aerospace business‘ revenues increased by 23.5% year-on-year in 2010 as a result of completion of
several large contracts and increased government spending on defense.
The OIBDA of the Radars and Aerospace business grew by 35.4% year-on-year in 2010 with the OIBDA margin of
13.7%, compared to 12.5% in the previous year, due to higher profitability of completed projects and the expenses
optimization program.
The Pharmaceuticals business‘ revenues declined by 42.3% year-on-year in 2010, following a reduction in the
volumes of supplies to the federal vaccine project and a delay in the production of new drugs.
The Pharmaceuticals business reported an OIBDA loss in 2010, compared to the OIBDA profit in the previous
year, following an overall decrease in profitability on the produced and distributed drugs and some write-offs of
assets.
After the end of the reporting period the Board of Directors of Sistema JSFC approved the sale of the 63% stake
held by the Group in SITRONICS, an operating company of the High Technology sector, to RTI, a company
established together with the Bank of Moscow. Sistema JSFC also contributed 97% in RTI Systems Concern, an
operating company of the Radars and Aerospace segment, in the authorized capital of the new company. Resulting
from that, the Bank of Moscow got 15.4% of shares in RTI, and Sistema JSFC controls 84.6% of the new entity.
Sistema hopes that the effects of scale will help the new structure to implement large-scale governmental projects,
including projects related to the development of geoinformatics and the GLONASS systems, in a more efficient
manner.
Corporate & Other
(USD m)
OIBDA
Net Income/ (loss)
Total debt
2010
2009
YOY variance
(281.3)
(538.6)
1,749.5
328.6
(12.1)
2,704.9
-
-
(35.3%)
The Corporate and Other segment comprises companies that control and manage the Group‘s interests in its
subsidiaries.
Financial Review
Cash flow from the operations of the Group in 2010 increased by 10.1% year-on-year to $4,056.0 million due to
changes in the working capital.
20
Cash used for investment activities amounted to $4,589.6 million in 2010 vs. $6,070.8 million in 2009. The Group
spent $4,179.6 million on capital investments in 2010 vs. $3,434.4 million in 2009. The Group paid $364.5 million
(net of cash proceeds) to acquire new businesses in 2010, including the purchase by MTS of 100% stake in
Multiregion for $123.5 million, the purchase of the remaining stake in Sky Link, a Group‘s affiliate (which
increased Sistema‘s effective ownership to 100%) for $168.5 million, as well as other acquisitions by the Group
during the year.
Cash flow from the financial operations amounted to $6.9 million in 2010 vs. $5,207.9 million in 2009. The Group
spent $787.4 million to acquire additional stakes in the subsidiaries in 2010, including $171.9 million in 4Q 2010
(mostly related to the Group's acquisition of 10% in Sistema-Invest for $120.0 million).
Other major changes in the financial activities during the 4Q 2010 included:
- Voluntary repayment by MTS of the second tranche of the syndicated loan (ING Bank N.V., The Bank of
Tokyo-Mitsubishi, Bayerische Landesbank, HSBC, Raiffeisen, Sumitomo) to the amount of $161.5
million. The loan was originally signed in April 2006 for a term of 5 years;
- Redemption by MTS of the $400.0 million 2010 eurobonds;
- Placement of the Series 07 and Series 08 ruble-denominated bonds totaling RUB 25 billion (approximately
$820.3 million);
- MTS signing an agreement with Sberbank to open two non-revolving lines of credit for the total amount of
RUB 100.0 billion (approximately $3,281.2 million);
- Voluntary repayment by Sistema JSFC of the Sberbank loan amounting to $341.7 million. The loan was
signed in July 2008 for the term of five years;
- Placement by Sitronics of the RUB 3 billion (approximately $98.8 million) bonds maturing in 2013;
- Voluntary repayment by Bashneft of the loan from VTB-Capital in the amount of $250.0 million. The loan
was signed in August 2010 for a term of seven years;
- Redemption by the Group of the Sistema-Capital notes to the amount of $89.1 million.
In addition, the cash outflow from financial activities in the 4Q resulted from the payment of $823.6 million of
dividends by Bashneft and MTS and the net increase in liabilities of the Banking business‘ operations totaling
$1,167.7 million.
The Group‘s cash balances stood at $ 5,050.7 million as of December 31, 2010 (including the balance of $2,163.9
million related to the banking operations), compared to $5,600.5 million as of December 31, 2009 (including the
balance of $2,785.6 million related to the banking operations). The Group‘s net debt (short-term and long-term debt
less cash and cash equivalents) amounted to $13,137.4 million as of December 31, 2010, compared to $12,008.5
million as of December 31, 2009.
3.4. Credit ratings of Sistema JSFC
Agency
Fitch Ratings Ltd
Eldon House,
2 Eldon Street
London EC2M 7UA
UK
Standard & Poor’s
Garden House
18 Finsbury Circus
London EC2M 7NJ
UK
ВB-
(forecast positive)
confirmed on 26.11.2010
BB
(forecast stable)
confirmed on 09.03.2011
21
Moody’s Investors Service Limited
2 Minster Court,
Mincing Lane,
London EC3R 7XB
UK
Вa3
(forecast stable)
assigned on 05.02.2010
3.5. Report on the payment of announced (paid out) dividends on the shares of Sistema
JSFC
The resolution on the payment of dividends was passed by the Annual General Meeting of the shareholders of
Sistema JSFC on June 26, 2010 (Minutes No 2-10).
Pursuant to the resolution of the General Meeting of shareholders, the amount of RUB 530,750,000 was allocated
to the payment of the dividends, which equals RUB 0.055 per one ordinary registered share.
The total amount of dividends paid out as of December 31, 2010 amounted to RUB 530,749,642.74, and tax on
dividend income paid to foreign legal entities in the amount of RUB 16,459,903 was subtracted.
As of December 31, 2010, non-paid dividends amounted to RUB 276,757.26. Reasons for the non-payment of the
announced dividends are as follows: lack of the information on the recipients of the dividends required to remit the
respective amounts to them.
22
4. OUTLOOK AND DEVELOPMENT STRATEGY OF THE SISTEMA GROUP
4.1. Core Assets
The Core Assets include companies being leaders in their industries that generate stable cash flow in the form of
dividends for the Group. These are companies with developed operations that service their liabilities independently.
Sistema is the majority shareholder in these core assets. The Business Unit combines telecom and oil&gas
companies and includes Mobile TeleSystems (MTS) and the companies of the Bashneft holding, including
Bashkirenergo.
Mobile TeleSystems (MTS)
Bashneft
Bashkirenergo
*Voting shares
Core Assets management goal
Ordinary shares held by Sistema JSFC,
directly or indirectly
54.8%
73.0%
50%+1*
The key goal in the management of the Core Assets of Sistema JSFC is to gain a substantial dividend yield from
the assets of the unit, and to achieve stable growth of its businesses that should outperform the market growth.
Provided they continue to perform to the expectations, these investments are held long term.
Core Assets management strategy
Sistema JSFC is pro-actively involved in the development of the Core Assets companies by means of optimizing
their performance and, if necessary, reorganizing them. We are also ready to consider combining these assets with
the leading players in the respective markets. We expect such development to increase the scale of the assets and to
realize a range of synergies.
Businesses included in Core Assets are mature assets that are fully independent, and all operations and business
development is driven by their management teams. Sistema‘s role in managing these companies is to apply the best
corporate governance practices for the purpose of implementing the approved strategy.
Financial results
MTS
2010
11,293.2
Revenue
2009
9,867.3
Δ
14.5%
2010
4,735.1
OIBDA
2009
4,400.1
USD m
Net income attributable to Sistema
Δ
7.6%
2010
2009
756.5
555.7
Δ
36.1%
BashTEK
11,578.7
4,134.4
180.1%
2,344.4
680.8
244.4%
1,112.0
320.3
247.2%
Bashkirenergo
2,067.8
1,165.4
77.4%
234.0
107.4
117.9%
23.7
3.5
583.6%
Mobile TeleSystems
Mobile TeleSystems (MTS) is the largest telecommunications operator in Russia, Eastern Europe and Middle Asia.
MTS offers mobile and fixed telecommunications, broadband Internet access and pay TV, as well as information
and entertainment services in one of the most dynamically developing regions globally. The company was founded
in 1993. MTS renders GSM services in 82 regions of Russia, and in the Ukraine, Belarus, Uzbekistan, Armenia and
Turkmenistan. In 2010, MTS continued expanding rapidly, delivering revenue growth and maintaining solid
profitability and dividends.
23
President of Mobile TeleSystems - Andrey Dubovskov, Chairman of the Board of Directors - Ron Sommer.
Operating and financial results
In 2010 MTS retained its leading position in the Russian mobile telecommunications market in terms of both
subscriber numbers and revenues. Over the year the number of Russian subscribers increased from 69.3 million in
December 2009 to 71.4 million in December 2010. The consolidated number of MTS subscribers exceeded 100
million people for the first time in 2010.
In 2010, MTS increased its share of subscribers in the mobile market of the Ukraine from 31.8% to 33.7%. In
December 2010, MTS was the leading operator in Armenia, Belarus, Turkmenistan and Uzbekistan by the total
number of subscribers. On December 21, 2010 the company halted its operations in Turkmenistan following the
announcement by the country‘s Telecommunications Ministry that MTS‘s operating license had been suspended.
MTS continued to develop its retail network in Russia in 2010, which enabled the company to expand its subscriber
base substantially and improve customer loyalty; this was also a key driver of revenue growth.
In July 2010, MTS acquired Multiregion, a cable operator, thus strengthening its position in the rapidly expanding
market of broadband Internet access and cable TV. The transaction is in line with the ―3i‖ strategy of MTS, as it
broadens its portfolio of integrated services and improves the company‘s competitive position. The development of
the 3G network prompted greater demand for 3G services, which helped to deliver stronger revenues in 2010.
The full consolidation of Comstar-UTS helps to reduce the operating expenses and to further develop convergent
services. In early October 2010 Sistema sold a 25% + 1 share stake in Svyazinvest for RUB 26 billion in order to
streamline the telecommunication assets portfolio and reduce debt. The proceeds were used to repay the Sberbank
loan of Comstar-UTS. As part of the transaction, Sistema swapped a 50% stake in Sky Link for 28% of the
ordinary shares of MGTS.
In 2010, for the third year in a row, MTS was chosen as the most expensive Russian brand in the BRANDZ™
annual rating of the world‘s top 100 brands. It ranked 72 overall, with a brand value of $9.7 billion.
In 2010 the company restructured its backbone network assets and created a new Backbone Division on the basis of
the assets of MTS and its Eurotel subsidiary.
MTS became a member of the Wholesale Applications Community (WAC), an international telecommunications
alliance which aims to create an open global platform for designing and selling mobile applications.
Key financial results of MTS in 2010:
(USD m)
Revenue
OIBDA
OIBDA margin
Operating income
Net income attributable to the Group
Debt
CAPEX
Key operating results of MTS in 2010:
Indicator, (region: Russia)
MOU
ARPU (USD)
Subscribers
2010
11,293.2
4,735.1
41.9%
2,734.6
756.5
7,160.6
2,647.1
2010
234
8.3
2009
9,867.3
4,400.1
44.6%
2,555.9
555.7
8,350.2
2,328.3
2009
213
7.8
- Mobile, million
- Households passed, thousand
71.4
9,890
69.3
7,502
YOY variance
14.5%
7.6%
2.7 pp
7.0%
36.1%
(14.3%)
13.7%
YOY variance
10%
6%
3%
32%
24
- Broadband customers, thousand
- Pay-TV, thousand
1,805
2,753
1,298
2,124
39%
30%
Number of subscribers in Russia vs. peers4
Subscribers in Russia, million
MTS subscribers
Vimpelcom subscribers
MegaFon subscribers
2010
71.4
52.0
56.6
2009
69.3
50.9
50.2
YOY variance
3.0%
2.1%
11.1%
Development strategy
MTS is expected to continue the implementation of the ―3i‖ strategy – Integration, Innovation and the Internet – in
2011. The company will be developing comprehensive communication services for all subscriber groups and
promoting them via integrated sales channels.
As the competition intensifies, one of the key objectives for MTS is to enhance the quality of client service and to
continue offering unique and convenient services. To achieve this objective, MTS will continue its rapid rollout of
3G networks in Moscow and the RF regions. In 2011 the company plans to increase its 3G CAPEX year-on-year,
as it believes this investment creates great potential and high returns.
Importantly, the integration of Comstar-UTS allows MTS to offer both fixed and wireless Internet services via
cable broadband and 3G.
Coupled with the expansion of the 3G network, MTS is focused on developing and launching 3G related products.
MTS intends to drive sales in this segment by extensively deploying its own retail network. It will also continue to
offer high-quality products and services, attractively priced and transparent tariff plans, innovative bundles of
services, and loyalty programs.
MTS aims to retain its position as the leading national mobile telecommunications operator in Russia and the wider
CIS, in terms of both subscriber numbers and revenues.
Market
The Russian mobile telecommunications market is one of the most developed in the world. In 2010 the penetration
of cellular communication services reached 151.0%5. In value terms, the mobile communication industry grew by
6.5% over the year. The mobile segment‘s share of the country‘s telecommunications industry rose to 44.1%, up
0.4 p.p. year-on-year. The high saturation of the Russian mobile market leads to a gradual shift in marketing efforts
of mobile operators towards retaining existing subscribers by enhancing service quality and offering attractive
products.
Market growth prospects
By the end of 2013 Russia‘s mobile telecommunications market is expected to expand at a CAGR of around 8%6.
The growth is expected to be predominantly generated by the mobile segment (7%) and the broadband and TV
segments (20% and 31%, respectively).
Consolidation trends may become stronger in the fixed-line segment this year, other trends include greater
competition in the mobile broadband segment resulting from the strategies of the other Big Three operators (MTS,
Vimpelcom and MegaFon). We expect the strongest growth to come from the Internet traffic segment, both mobile
and fixed, while sales of USB modems will also increase due to the expansion of 3G networks, higher speed of data
connection and stronger demand for mobile broadband services.
4 According to data from MTS and its peer companies.
5 According to AC&M, 2011.
6 According to Sistema JSFC.
25
Bashneft
Bashneft is a vertically integrated oil company that manages oil and energy assets in the Republic of Bashkortostan,
the Russian Federation. The company‘s assets include Bashneft-Production, one of Russia‘s most modern refining
complexes comprising three facilities (Ufimsky NPZ, Novoil and Ufaneftekhim), plus the Ufaorgsintez
petrochemical plant and the Bashkirnefteprodukt oil trading company.
Bashneft
Ufimsky NPZ
Novoil
Ufaneftekhim
Ufaorgsintez
Bashkirnefteprodukt
* as of December 31, 2010
Ordinary shares held by Sistema JSFC,
directly or indirectly*
73%
88.2%
95.6%
88.3%
90.2%
80.6%
President of Bashneft - Alexander Korsik (appointed in April 2011), Chairman of the Board of Directors -
Alexander Goncharuk.
Operating and financial results
In 2010, Bashneft produced 14.1 million tons of oil, up 15.6% year-on-year. These strongest in the industry growth
tempos resulted from streamlining the wells pool, enhanced recovery techniques and improved geotechnical work,
reduction of technological losses and cutting internal utilization of oil. The receipt of licenses to develop the Trebs
and Titov oil deposits was an important event in terms of expanding the resource base. In 2010, the main growth
drivers of the Bashneft Group were the increase in the output of own crude oil bolstered by higher oil prices and a
recovery in domestic demand, as well as corporate restructuring - building a vertically integrated oil company on
the basis of Bashneft.
In 2010, Bashneft‘s refineries processed over 21 million tons of crude oil, up 2.2% year-on-year. The refining
depth increased by 3 percentage points to 86.3%, while the share of light products was up by 0.3 percentage points
to 65.6%.
The company made significant progress in expanding its commercial activities and establishing own sales channels:
a partnership program for fuel stations was designed and launched, agreement was reached on the acquisition of a
fuel stations network in Udmurtiya and a jobber company specializing in oil products. In addition, Bashneft signed
an agreement to acquire a retail network in the Orenburg region.
Key financial results of Bashneft in 2010:
(USD m)
Revenue
OIBDA
OIBDA margin
Operating income
Net income attributable to the Group
Debt
CAPEX
Crude production in the RF, million tons
Company
Rosneft
Lukoil
2010
11,578.7
2,344.4
20.2%
2,165.4
1,112.0
3,894.0
846.2
2009
YOY variance
4,134.4
680.8
16.5%
565.3
320.3
1,655.0
171.0
180.1%
244.4%
3.8%
283.1%
247.2%
135.3%
394.8%
2010
112.4
90.1
2009
105.4
92.2
YOY variance
6.6%
-2.3%
26
TNK-BP
Surgutneftegaz
Gazprom Neft
Tatneft
Slavneft
Bashneft
RussNeft
Russia:
Refining volume in the RF, million tons
Company
Rosneft
Lukoil
TNK-BP
Bashneft
Surgutneftegaz
Gazprom Neft
Slavneft
RussNeft
Russia:
Key events in 2010:
71.7
59.5
29.8
26.1
18.4
14.1
13.0
505.1
2010
50.8
45.2
24.0
21.2
21.2
19.0
14.3
5.2
250.0
70.2
59.6
29.9
26.1
18.9
12.2
12.7
494.2
2009
50.2
44.1
21.5
20.7
20.5
18.4
13.6
5.1
235.7
2.0%
-0.1%
-0.2%
0.0%
-2.8%
15.6%
2.3%
2.2%
YOY variance
1.1%
2.4%
11.8%
2.2%
3.7%
3.0%
4.9%
1.0%
6.0%
In 2010, Bashneft produced 14.1 million tons of oil, up 15.6% year-on-year;
-
- Bashneft gained the license for the development of the Trebs and Titov oilfields in the Nenets Autonomous
District;
- Long-term agreement on oil supplies signed with RussNeft;
- Retail network acquired in Udmurtia;
- Acquisition of a trading company.
Development strategy
Strategic goals of Bashneft through 2013 are to improve the balance between upstream and downstream and to
increase the scale while maintaining the leading position in refining. Key strategic initiatives aimed at achieving
those goals include the following: (i) growing oil production and development of current assets, (ii) development of
large new deposits, (iii) acquisition of upstream assets in the RF, (iv) participation in international upstream
projects. Plans also include strengthening positions in the segments of the petrochemical market that have the
highest margins by means of expanding the jobber and the fuel stations network up to 1,200-1,300 points of sale.
Market
In 2010, the Russian oil and gas industry enjoyed a benign operating environment, mainly due to rising oil prices
and the continued consolidation in the industry.
Production of crude oil in Russia for the first time since 1991 exceeded 505 million tons a year allowing the
country to maintain its leadership position in global crude production. Production went 2.3% up year-on-year.
Refining volumes grew by 5.6% vs. 2009 to 248.7 million tons. The depth of refining at Russian facilities on
average fell from 71.4% to 70.6% year-on-year, and the share of light products declined from 56.3% to 55.5%. The
production of petrol stood at the previous year's level, while the output of diesel fuel rose by 3.6% and that of fuel
oil by 7% year-on-year.
In 2010 changes in the tax regulations were introduced. In particular, excise taxes on petrol and diesel fuel were
increased.
27
Market growth prospects
The oil and energy sector plays the leading role in the economy of Russia. Sustained and dynamic operation of its
segments makes a crucial contribution to the acceleration of the economy growth processes in the country and to
the achievement of high GDP growth rates. New oilfields are the core contributors to the growth of crude oil
production in Russia. Their importance for this sector grows every year. In 2010 production in Russia increased
2.2% thanks to new fields alone (Vankorskoe, Uvatskoe, Verhnechonskoe and Talakanskoe oilfields). Without new
projects crude production in Russia would have fallen by ca 1.0% year-on-year in 2010. Further growth of oil
production in the RF will depend on the development of the existing new deposits and the implementation of new
projects.
In the near term, a further increase in the tax burden of the RF oil industry is expected, as this segment accounts for
most of the taxable income of the state budget. Starting from 2012 it is planned to gradually increase the Mineral
Extraction Tax on oil. In 2011 a decision may be made to equalize export duties on light and heavy products, and
there are suggestions to compensate for the consequent losses by reducing export duties on crude oil (the '60-60'
regime).
The presence of excessive primary refining capacities in Russia pushes the competition between oil processing
facilities up. At the same time, the secondary process capacities are not sufficient to improve the quality structure
of the products. Hence, Russian refining companies are currently facing the task of prompt modernization of
equipment.
Bashkirenergo
Bashkirenergo is one of the largest regional energy systems in Russia. The installed electric capacity amounts to
4,235.2 mW, and installed heat capacity reaches 12,472.327 Gcal/h.
The generating capacities of the Republic of Bashkortostan energy systems include one state district power station
(GRES), ten combined heat and power plants, including the Zauralskaya gas piston power plant, two hydro power
plants, five gas turbine plants, seven gas piston units, one wind power station and eight smaller hydro power
plants. The total number of retail customers of Bashkirenergo as of July 01, 2010 amounts to 1,191,452 clients.
General Director of Bashkirenergo - Alexei Doronin, Chairman of the Board of Directors - Nikolai Kurapov.
Operating and financial results
In 2010, Bashkirenergo retained its dominant position in the Bashkir electricity market. The company generated
revenue growth and expanded OIBDA and net profit margins in the Generation and Transmission segments ahead
of the rest of the market. Bashkirenergo delivered results in line with sector averages in the Sales segment.
Throughout the year 2010 Bashkirenergo was actively preparing for the inclusion of its generation capacities into
the wholesale electricity and power market, which will make it possible for the company to become a full
participant of this market from January 01, 2011. Bashkirenergo took initial steps to convert unregulated wholesale
prices for end users in Bashkortostan starting from January 1, 2011 to make them compliant with the existing
regulatory requirements for the electricity supply contract scheme.
Preparations started to move transmission companies to RAB-based tariffs from January 1, 2012.
In 2010, in accordance with antimonopoly requirements, Bashkirenergo began the process of divesting its
transmission business. The restructuring is expected to be completed in 2011 after the EGM of Bashkirenergo
passes the respective resolution.
In 2010, Bashkirenergo reported results at the same level as in the previous year following an increase in
production, a decrease in costs, and more prudent use of fuel and energy resources. However, the profitability of
the business declined as a result of the rise in fuel prices ahead of the electricity and heat tariff increases. The
28
company completed the expansion of the Zauralskaya Thermal Power Plant with its installed capacity increased to
16 MW. It also commissioned substation Zaton (2*125 MVA). Bashkirenergo continued construction of new
generating facilities, including the expansion of the Ufimskaya Thermal Power Plant (60 MW), and the Yuryuzan
boiler plant (36 Gcal/h).
Key financial results of Bashkirenergo in 2010:
(USD m)
Revenue
OIBDA
OIBDA margin
Operating income
Net income attributable to the Group
Debt
CAPEX
Development strategy
2010
2,067.8
234.0
11.3%
23.7
5.3
107.3
2,067.8
2009
YOY variance
1,165.4
107.4
9.2%
3.5
49.5
113.9
1,165.4
77.4%
117.9%
2,1 pp
583.6%
(89.4%)
(5.7%)
77.4%
The development strategy of Bashkirenergo implies material expansion of its generating capacities. The company
intends to achieve this goal by means of restructuring the business model via divestiture of the grid business and
migration to RAB-regulation of tariffs. It is also planned to invest in enhancing the performance of the current
assets, optimizing the boiler houses pool, and developing smaller generating facilities.
Furthermore, Bashkirenergo plans to build new capacity in Bashkortostan and seek M&A targets outside the
region.
Market
In 2010, the volumes of electricity consumption in Russia were recovering steadily. RF installed capacity went
1.4% up to 214.9 GW, with 68% of the total capacity contributed by thermal, 20.7% by nuclear and 11.3% by
hydroelectric power plants.
Production of electric power by the UES of Russia power stations grew by 5% year-on-year in 2010 and reached
1,005 bn kWh. In 2010 the total consumption of electric power in the sector increased by 4.9% up to 989 bn kWh.
In 2010, rules for the long-term capacity market were adopted and the first competitive tender for capacities for
2011 was run. The activity of the government related to the restriction of the electric power tariff growth
accelerated (keeping down the growth of regulated gas tariffs, proposals to review the already approved RAB
regulation parameters for grid companies, introduction of the price cap in the capacity market for 2 years).
Furthermore, in 2010 the government approved a list of investment projects to expand generation capacity, which
will be financed through the long-term capacity contracts mechanism. In addition, it adopted a regulatory
framework for the heating market and established RAB parameters for the heating network business.
Market growth prospects
In the medium term (up to 10 years) the demand for electricity in Russia is expected to rise by at least 2% on an
annual basis7. Given the announced investment program in new capacity construction is implemented, the
competition in the electricity market is expected to intensify from as early as 2013, and old generation capacity
may be out of demand by that time.
The Russian government is expected to continue controlling the tariff increases for end users, which could restrain
the growth of returns in the regulated electricity sectors (electricity transmission and supply, heat generation and
7 According to the Agency for forecasting balances in the electric energy sector.
29
transmission). The government may also encourage the market players to upgrade their generation and transmission
assets by potentially prohibiting the use of outdated equipment.
4.2. Developing Assets
Developing Assets include companies that are at the intensive development stage. There are two portfolio scenarios
assumed for the companies of this category: (i) the company becomes a reliable source of the dividend flow and is
moved to the Core Assets group; (ii) monetization of the accumulated development potential via an IPO, a strategic
partnership or divestiture.
Sistema JSFC expects that in some cases, in order to achieve their targets, the companies of the Developing Assets
sector will need funding or guarantees from Sistema JSFC.
Developing Assets include the following companies: RussNeft, Sistema Mass-media, Sistema Shyam TeleServices
Limited, SITRONICS, RTI, Binnopharm, Detsky Mir Group, MBRD, EAST-WEST UNITED BANK,
Dalcombank, VAO Intourist, Medsi Group, and NIS.
RussNeft
Sistema Shyam TeleServices Ltd.
SITRONICS
RTI Systems Concern
MBRD
EAST-WEST UNITED BANK
Dalcombank
Detsky Mir - Center
Sistema Mass-media
VAO Intourist
Medsi Group
Binnopharm
NIS
* Data as of December 31, 2010.
Ordinary shares held by Sistema JSFC,
directly or indirectly*
49%
73.7%
70%
97%
99%
99%
99%
75%-1
75.0%-1
66.2%
100%
100%
51%
Developing Assets management strategy
Sistema JSFC views its developing assets as potential points of shareholder value growth. Developing Assets get
aggressive objectives in growing the volumes of their business with a simultaneous increase of profitability. Such
growth will be achieved by means of developing competencies in sales and operating expertise.
The goal of the Developing Assets’ strategy is to search for opportunities to acquire assets with a high potential.
When performing such M&A transactions, most attention will be paid to whether the target assets have a high
quality business model and whether they have opportunities for a substantial growth of their value. Another
important factor for selecting assets will be the volume of potential synergies.
Sistema JSFC plans to invest own funds and the funds of potential partners to ensure growth of the Developing
Assets. The key factors for attracting partners to the projects of Sistema JSFC are the potential partners'
opportunities for financing and their expertise that could be used to rapidly increase the value of the joint projects.
Financial results
USD m
Revenue
OIBDA
2010
2009
Δ
2010
2009
Δ
Net income attributable to
Sistema
2009
Δ
2010
SSTL
114.6
36.4
215.1%
(329.0)
(222.7)
(47.7%)
(349.7)
(191.3)
(82.8%)
30
SITRONICS
1,166.9
1,024.2
114.9
0.9
13,403.3%
(31.8)
RTI
МBRD
Detsky Mir
SMM
Intourist
Medsi
Binnopharm
506.0
613.7
659.9
94.5
518.2
156.5
32.1
13.9%
23.5%
(14.8%)
13.2%
8.3%
29.7%
24.3%
409.9
720.4
583.1
87.2
399.7
125.9
69.5
39.9
40.9
40.5
6.9
17.1
51.3
(63.5)
(47.4)
(14.3)
7.8
6.2
10.8
35.4%
-
-
-
(11.7%)
174.7%
15.2
10.1
(3.1)
(11.5)
(15.5)
(2.5)
(83.0)
13.8
(91.4)
(99.1)
(51.7)
(8.8)
(7.3)
-
10.2%
-
-
-
-
-
55.7
(42.3%)
(27.9)
-
(33.9)
3.9
(968.8%)
In 2010 the Group's developing assets demonstrated substantial organic growth, many of the companies were
consistently recovering after the crisis. Partners were attracted to some of the assets, which helped to strengthen
their competitive position in their sectors and to expand the range of further development opportunities.
RussNeft
RussNeft is a top 10 Russian vertically integrated oil company. The company’s 2P reserves amount to over 2.2
billion barrels of oil, and the company’s annual production reached 13 million tons in 2010.
President of RussNeft - Mikhail Gutseriev, Chairman of the Board of Directors - Leonid Melamed.
Operating and financial results
The key achievement of RussNeft in 2010 was restructuring the debt and prolonging its maturity, which freed up
part of cash flows that can be reinvested in new projects in 2011. In December 2010 RussNeft restructured its debt
to Sberbank of Russia and Glencore amounting to ca $6.2 billion. The interest rate was reduced to 9%, and the
repayment term was postponed until 2020.
In 2010 RussNeft increased its oil output volume to 12.9 million tons vs. 12.7 million tons in 2009. The growth
resulted from the enlarged CAPEX program that totaled $347m vs. $227m in 2009. 121 new wells were
commissioned in 2010 vs. 73 wells in 2009. Successful implementation of the drilling program in the Zapadno-
Varjeganskoye oilfield, where 11 new wells were drilled, one of them providing the regional record high flow rate
of 600 tons of hydrocarbons per day, - was the key operating result. At the strategic Shapshinskoye group of oil
fields 45 new wells were put into operation, increasing group production by 29%.
The structure of RussNeft includes two refineries - Orsknefteorgsintez (ONOS) and Neftemaslozavod (NMZ).
Installed capacity of the facilities is 6,630 thousand tons per annum (ONOS), 90 thousand tons per annum (NMZ).
In 2010 the volume of refining reached 5.1 million tones, which is 2% more than in 2009.
Key events
- Crude production volume increased to 13 million tons.
-
- Restructuring of $6.2bn of debt: reduction of the interest rate and prolonging the terms till 2020.
2P reserves increased by 58 million barrels to 2.2 billion.
Development strategy
RussNeft is expected to keep its focus on growing production volumes and increasing its reserves in 2010. It is
planned to increase the production volumes by 5% to 13.6 million tons and to raise CAPEX to $481m. RussNeft is
also expected to continue its refining facilities modernization program to improve their efficiency and margins. In
the middle term, RussNeft plans to achieve the production level of 18 million tons per annum.
Description of Oil Market and Market growth prospects see at pp. 27-28.
31
Sistema Shyam TeleServices Ltd
(MTS India)
Sistema Shyam TeleServices Ltd. (SSTL) is an Indian mobile and fixed communication operator with spectrum in
22 license circles that cover all of the 28 administrative states and seven union territories in India with a total
population of approximately 1,160 million people.
President of Sistema Shyam TeleServices Ltd. - Vsevolod Rozanov, Chairman of the Board of Directors - Ron
Sommer.
Operating and financial results
In 2010, SSTL‘s mobile subscriber base nearly tripled year-on-year, reaching 8.5 million customers, compared to
3.1 million customers in the previous year, with the Indian mobile market share exceeding 1.1%. The number of
mobile broadband subscribers increased to 430,000 from 7,000. SSTL reached a 15% market share in the mobile
broadband segment and occupied a leading position with approximately 60% market share in the pre-paid
broadband services segment.
Over the past year SSTL expanded it geographical footprint, having launched operations in four new circles, thus
broadening its coverage to 15 circles. The company now renders services to ca 80% of the population of India.
SSTL rolled out its high-speed mobile broadband services in 99 major cities in India, including five metropolises,
and received an industry award as the fastest-growing data services provider in India.
The company was actively developing its franchise network of retail stores under the MTS brand in order to attract
more voice subscribers with a high ARPU, as well as mobile broadband subscribers. At the end of the reporting
year, the company‘s retail network consisted of approximately 1,000 stores.
In March 2011 the company closed the transaction for getting an equity investment from the RF Government
amounting to $600 million in the course of an additional placement of shares.
Key financial results of SSTL in 2010:
(USD m)
Revenue
OIBDA
Operating loss
Net loss attributable to the Group
Debt
Key operating indicators of SSTL in 2010:
Subscribers, million
Fixed line subscribers, million
Mobile subscribers, million
Mobile services ARPU, $
Development strategy
2010
2009
YOY variance
114.6
(329.0)
(410.8)
(349.7)
1,245.9
36.4
(222.7)
(250.8)
(191.3)
530.7
215.1%
-
-
-
134.8%
2010
2009
YOY variance
8.5
0.1
8.4
1.8
3.1
0.2
2.9
1.7
174.19%
(50%)
189.66%
5.88%
SSTL‘s strategy is aimed at developing high-speed mobile broadband and profitable voice services in the priority
circles. The goal of Sistema Shyam TeleServices Ltd. is to create a pan-Indian CDMA 800 MHz mobile network.
In 2011 Sistema Shyam TeleServices Ltd. intends to consider options of strategic partnership with a telecom
operator in the Indian market, and get ready for an IPO in the Indian stock market.
32
SSTL plans to pro-actively promote sales of Blackberry and Android-based smartphones in a variety of price
segments, including smartphones under the brand of MTS with content services focused on corporate clients and
the mass market. The company also plans to launch new value-added services (VAS) for retail users (mCommerce,
mAdvertising, Location Based Services, MTS TV) and corporate clients (Blackberry BES, Bulk SMS), which may
ensure a stable growth of revenues for the coming years.
The company plans to achieve nation-wide coverage in the voice segment before the end of 2011. To achieve this
objective, SSTL plans to sign agreements on sharing networks and roaming with one or more existing operators.
Market
As of the end of 2010, India had more than 752 million mobile communication users, with a quarterly growth of the
subscriber base exceeding 50 million. Mobile penetration increased from 44.3% to 63.2% over 2010. In 2010 there
were 15 mobile operators in the market that continued competition by offering tariff plans with per second billing.
The penetration level of Internet access in India is ca 7%, and that of broadband access is only 1%, which is due to
the low level of fixed communications development and lack of personal computers in the country. In 2010 the
government of India held an auction for the 3G spectrum that resulted in seven operators winning frequencies.
Development of wireless data services is the key growth driver for Internet access penetration in India that is
expected to exceed 10% in the coming years.
In 2010, mobile number portability (MNP) was introduced in the first test circle of Haryana. The Indian market
continues operating predominantly as a prepaid market with contract voice customers representing around 2% of
the total. Further spread of MNP is expected to lead to still higher competition.
Market growth prospects
By the end of 2012, according to a Business Monitor International (BMI) forecast, India is expected to have one
billion mobile service subscribers.
According to the national development plan for broadband Internet, the total number of users is expected to
increase from 10.3 million to 160 million by 2014, with 60 million wireless users.
SITRONICS
The largest high-tech company in Eastern Europe, one of the leading vendors of solutions in telecommunications,
information technologies, system integration, consulting and microelectronics.
President of SITRONICS - Sergey Aslanyan, Chairman of the Board of Directors - Sergey Boyev.
Operating and financial results
The year 2010 was a successful one for SITRONICS. The company kept its promises to the investment
community. Revenues grew by almost 14% year-on-year to $1.2bn, adjusted OIBDA increased from $0.9m in 2009
to $114.9m in 2010 with a margin of 9.9%. In 2010 SITRONICS signed a number of contracts for the total amount
of $935m. The sound financial indicators resulted from the strict abidance by the strategy of SITRONICS. During
the year the company strengthened its positions as the leading technology partner to the government in high
technologies, and once again proved that it is the leader of the Russian ICT market in innovations that is actively
developing its R&D.
Key events
- Within the framework of a joint project with RUSNANO on the establishment of a 90 nm microelectronics
manufacturing facility, at the end of 2010 test 90 nm microchip structures were produced at the Micron
factory.
33
-
Implementation of the project for introducing the Oracle Siebel CRM system at Sberbank of Russia and its
subsidiary in the Ukraine was launched.
- The first ITSM project for the automated support to the operation of the MTS retail network on the basis of
the Axios assyst platform was successfully implemented.
- Project for the integration of the universal banking solution Oracle FLEXCUBE started at Prominvestbank;
project for the automation of the budgeting process at VTB-Ukraine on the basis of Oracle Hyperion
Planning was completed, which was the first case of implementing Oracle Hyperion in the banking sector
of the country.
- Agreement with Aeroexpress (a subsidiary of Russian Railroads) for the supply of RFID tickets to be used
on railroad connections to Moscow airports was signed.
- Agreement with Vimpelcom and SMARTS for supply of SIM cards was signed, resulting from which the
company now supplies SIM cards to all the Big Three operators and occupies 60% of the market.
Key financial results of SITRONICS in 2010:
(USD m)
Revenue
OIBDA
OIBDA margin
Operating income (loss)
Net loss attributable to the Group
Debt
Amount of contracts signed
Development strategy
2010
1,166.9
114.9
9.85%
24.1
(31.8)
840.2
578.4
2009
1,024.2
0.9
0.09%
(54.8)
(83.0)
834.4
672.5
YOY variance
13.9%
13,403.3%
9.76 pp
-
-
0.7%
(14.0%)
The strategy of SITRONICS provides for the development of partnership with the government in the area of high
technologies, the strengthening of its leading positions in the Russian ICT market and in R&D for new products to
be created.
Strategic priorities in the SITRONICS Telecom Solutions business segment are as follows: development of the
current portfolio of products and solutions, focus on developing markets with a low share of technological know-
how, and entering into new industry markets, in particular - development and promotion of solutions for the
housing and utilities sector, development of comprehensive products and solutions for corporate and governmental
clients. It is also planned to strengthen the existing strategic alliances in R&D, and to create new ones.
Strategic priorities in the SITRONICS Information Technologies business segment are as follows: expansion of the
company's market share in the IT markets of Russia and the CIS, increase of the share of high margin services and
the margins of the business in general, including the priority development of consulting and system integration
services.
Strategic priorities in the SITRONICS Microelectronics business segment are as follows: strengthening positions of
the technology leader and the leading manufacturer of integrated circuits and smart cards in the RF and the CIS,
participation in governmental programs for modernization and in social projects, strengthening positions in the
segments of SIM cards, transport cards, RFID and other types of smart cards in the RF, forming a full chain of
adding value - from developing technologies of manufacturing, design and production of microchips to the
manufacturing and assembly of finished products and solutions.
Market
Market segments where SITRONICS operates - telecommunication solutions, information technologies and
manufacturing of microelectronics products - demonstrated material growth in 2010, though still failed to achieve
the pre-crisis level.
34
The IT sector is a service one in relation to other industries, hence it is very sensitive to the situation in the
economy in general. Hence the growth factors in 2010 included the improvement of the financial sustainability in
the corporate sector, the increase in the personal income, and more intensive investment activities in the country.
The growth to a great degree depended on the demand for IT products and solutions that was delayed in the crisis.
The industry also got substantial support from the government, which is currently the largest client in the IT
systems area.
According to Gartner, a market research company, in 2010 the market grew by 5.6% and reached $24bn.
The most rapidly growing market is the Russian microelectronics one that grew by 25% to $1bn after the dip to
$0.8bn in the crisis year of 2009.
Market growth prospects
According to Gartner, the Russian IT market will grow by 3.5% in 2011 and will reach $24.8bn. By 2014 the
volume of the IT market should come close to $30bn.
Growth tempos in Russian microelectronics will be less intensive than in 2010, still in 2011 the industry will earn
$1.05bn, and by 2014 it will reach $1.3bn. During 2011-2015 growth is expected in the market of microchips for
RFID cards and tags, and in that of chips for documents with electronic data carriers. Growth is expected in car
electronics (6%) and in security systems equipment (5%). If the government takes the decision to place a public
contract in RFID, smart cards and electronic components for the modernization of the infrastructure, the
development of the industry may speed up significantly and exceed 10% per annum.
RTI Systems Concern
RTI Systems Concern is a large Russian defense industry holding specializing in the development of projects in:
radar and missile technology, integrated communications and security systems, and drive technology. It also acts as
lead contractor in creating land-based guidance and warning systems for space and missile defense. Its main clients
are the RF Ministry of Defense, the RF Ministry of Emergency Situations, the Federal Security Service, the State
Corporation for Atomic Energy, the RF Ministry of the Interior.
Among the Company‘s largest projects are: the new generation Voronezh radar station (Voronezh-M), the National
Crisis Management Center (under the Ministry of Emergency Situations), and networks for regional anti-crisis
management centers.
General Director of RTI Systems Concern - Sergey Tishchenko, Chairman of the Board of Directors - Sergey
Boyev.
Operating and financial results
The organizational structure of RTI Systems Concern was changed in 2010, with the industry business segments
introduced (radars and missile equipment, comprehensive communications and security systems, drive equipment).
Transparency and quality of the corporate governance structure were improved, a common automated enterprise
management system was implemented, and the property structure of the Concern was optimized.
Key events
- Concern's work program under the State Arms Program till 2020 and the Public Defense Contract for 2011-
-
2013 was approved.
Investment agreement on the establishment of the International Innovative Nanotech Center at Dubna
signed with the State Corporation RUSNANO, the United Institute for Nuclear Research, and CJSC
Information Technologies and OJSC Special Economic Zones.
- Contract signed with Rosoboronexport to design and supply telecom terminals for the People's Republic of
China.
35
- Agreement on cooperation signed with EADS, framework agreement signed with THALES - for the
development and production of communication units for military control systems at the Yaroslavl Radio
Factory.
- Open tender of Rosreyestr for creating maps of the Central, the Volga, the Urals and the Far East Federal
Regions won, total amount - RUB 1.2bn.
- About five M&A transactions were performed, including the acquisition of 100% of shares in Intellect-
2009
YOY variance
Telecom.
Key financial results of RTI Systems Concern in 2010:
(USD m)
Revenue
OIBDA
OIBDA margin
Operating income
Net income attributable to the Group
Debt
Key operating results of RTI Systems Concern in 2010:
2010
506.0
69.5
13.7%
57.5
15.2
77.2
409.9
51.3
12.5%
39.2
13.8
81.9
Output per employee ($K)
Development strategy
2010
2009
52
43
23.5%
35.4%
1.22 pp
46.7%
10.2%
(5.8%)
2008
50
The strategy of the RTI Systems Concern is aimed at maintaining its RF leadership in military radar building and at
diversification into related segments to provide state and large business clients with high-tech products and create
new series of products with a high R&D content.
The company‘s main strategic goals for 2011 are to accelerate the pace of organic growth, including via investment
projects for modernizing its businesses; to attract additional public contracts, to access new markets through public-
private partnerships, and to carry out targeted acquisitions, both in its current and in the related industry segments.
RTI Systems Concern's long-term development strategy includes commercializing R&D, promoting dual-use goods
for export, as well as continuing with M&A transactions aimed at accumulating technological, managerial and
market-based competitive advantages in its core areas of expertise.
Market
The government defense contracts in 2010 were worth approximately $40bn. Russia's arms and military equipment
exports in 2010 were worth $10bn.
The Concern is present on the following key segments of the defense industry market: radio engineering and
information systems (worth $2bn), comprehensive security and management systems for the Russian regions
(worth $1.2 bn) and drive equipment (worth $709m).
In 2010 the drive equipment market recovered from the slump of 2009, the growth was 20-30%. The sector's
growth rates are directly dependent on the economic growth of the country. In 2010 the segment of low-voltage
equipment rose by 40% up to $225m, the segment of automated structures increased by 5-7% up to $484m.
The Russian market of information devices for ground-based missile defense and missile warning systems has
increased by 20% up to RUB 9.47bn.
36
Market growth prospects
In accordance with the arms program adopted by the Government the total defense spending will reach
approximately $700bn by 2020. It is expected that in 2011 the Government defense contracts will increase by more
than one-third, up to $51.7bn, while the arms and military equipment exports will be maintained at the minimum
level of $10bn.
The growth rate of the radio engineering and missile market is expected to remain at 10-15% in 2011.
The market of comprehensive security and management systems for the Russian regions is on the threshold of
explosive post-crisis growth and is strictly controlled by the Russian Government. At present, this is one of the
most promising and fastest-growing markets. The Russian Government has adopted a program "Informational
society (2011-2020)". The key priorities of the strategy for development of informational society through the year
2020 were determined; among other things, attention was focused on the creation of comprehensive systems for
informational and analytical support of the federal districts and the constituent entities of the Russian Federation.
The financing to be allocated for the Program amounts to RUB 88bn.
Moscow Bank for Reconstruction and Development
Moscow Bank for Reconstruction and Development is a top 30 Russian universal commercial bank with branches
located in 49 cities of the country. MBRD also owns Dalcombank in Khabarovsk and East-West United Bank in
Luxemburg.
Chairman of the MBRD Management Board - A. Shlyakhovoy, Chairman of the Board of Directors -
F. Evtushenkov.
Operating and financial results
In 2010, MBRD continued its progress towards becoming a universal bank. The international rating agency
Moody's assigned to MBRD the long-term debt rating in national currency of B1, with outlook stable. Fitch Ratings
upgraded its outlook for MBRD's long-term default ratings from stable to positive. At the same time the agency
confirmed the long-term IDR8 of the bank of B+.
MBRD continued to maintain a diversified and balanced corporate loan portfolio with the aim to protect current
and future profitability, while factoring in the risks. Moreover, as part of achieving the priority goals of the
corporate block the Bank expanded its customer base by offering loans that meet both customer requirements and
modern industry standards.
MBRD was active in the investment banking segment and was involved in 50 share offerings in 20 of which it had
the status of co-manager, underwriter, co-underwriter; in 2 of the offerings it acted as the lead manager (Sitronics
and Intourist). In 2010 MBRD was an active player in the reverse REPO market and became a top 20 operator in
this segment.
In 2010, MBRD resumed its retail lending program including mortgage, credit card and emergency loans. MBRD
adopted a new lending policy in this segment in 2010.
Key events
- The total investments of the Banking Group in securities (including investments in bank promissory notes)
-
-
increased by $82.7m and reached $1.05bn as of the end of 2010.
In 2010 MBRD issued additional shares worth RUB 471.215m and, consequently, tier 1 capital of the Bank
reached RUB 10.5bn.
In October 2010, Moody's affirmed MBRD‘s long-term national currency debt rating as B1, outlook stable.
The assigned rating is consistent with the deposit rating of MBRD in national currency, which is based on
E+ level of the lender's financial stability.
8 Issuer default rating
37
-
In November 2010, Fitch Ratings revised its outlook for the long-term issuer default ratings of MBRD and
Dalcombank from stable to positive. The outlook for these ratings was revised following the upgrade of
ratings outlook for Sistema JSFC from stable to positive.
Key financial results of MBRD in 2010:
(USD m)
Revenue
OIBDA
OIBDA margin
Operating income (loss)
Net income (loss) attributable to the Group
Development strategy
2010
2009
YOY variance
613.7
39.9
6.5%
21.3
10.1
720.4
(63.5)
(8.8%)
(77.1)
(91.4)
(14.8%)
-
15.3 pp
-
-
MBRD‘s strategic objectives in the medium term are to diversify the client base and enhance business efficiency by
modernizing banking technologies and streamlining business processes. The Banking Group intends to further
grow lending to both individuals and organizations.
MBRD pays particular attention to developing partnerships with the companies of Sistema JSFC Group in retail.
As part of strategic partnership with the companies of the Sistema JSFC Group, MBRD launched a pilot credit
product line jointly with MTS in 2010. Further development of this project will be the key factor defining the
prospects for the Bank to capture the leading positions in the banking industry.
Market
In 2010, the Russian banking sector showed clear signs of recovery from the crisis of 2008-2009. By the end of 3Q
2010, the Central Bank‘s loans to financial organizations were nearly repaid, with the main source of funding being
replaced by client deposits and debt financing.
At the same time, the majority of Russian banks were able to absorb losses and maintain their capital adequacy
ratios at an acceptable level, having accumulated substantial reserves. In 2010, banking assets (liabilities) increased
by 14.9% year-on-year (compared with 5% growth in 2009), while the banking sector‘s share of GDP remained
unchanged at 76%.
Negative trends being gradually overcome in most industries of the Russian economy, credit activity is rebounding.
In 2010, the growth rates of corporate lending stood at 12.1% (compared to 0.3% in 2009). In 2010, retail lending
increased by 14.3% year-on-year (compared to an 11% decline in 2009), while overdue loans to the non-financial
sector decreased from 6.1% to 5.3% in the same period.
The share of retail deposits in banks‘ liabilities increased from 25.4% to 29% in 2010, while the volume of retail
deposits was up by 31.2% year-on-year, reflecting the ongoing trend to save more following the crisis period.
In addition, there was further consolidation in the industry, while profit margins were falling as a result of the need
to build reserves for bad debts and losses in open currency positions.
Market growth prospects
The recovery in the banking sector looks set to continue following the emergence of positive trends in the financial
sector in 2010 and the efforts taken by the Bank of Russia to deal with the effects of the crisis. The potential drivers
of continued recovery are retail lending, as well as development of a wide range of high-tech products to facilitate
client access to high-quality banking services.
In 2011, credit portfolio is expected to grow at an average monthly rate of 1-2% per month.
38
Detsky Mir Group
The Detsky Mir Group is the leading Russian operator in children's goods retail. The group has a chain of 131
stores with the total floor space of about 215,000 sq meters in 68 cities. Detsky Mir is the largest Russian company
in the children's retail sector by the number of stores, floorspace and turnover.
CEO of Detsky Mir - G. Kravchenko, Chairman of the Board of Directors - F. Evtushenkov.
Operating and financial results
In 2010, Detsky Mir was actively enhancing its competitiveness by promoting its own brandname, developing its
retail network and own trademarks, upgrading its stores with new merchandising technologies, introducing loyalty
programs and unique product offers.
In 2010, the Company continued implementing its expansion project in the cities of its presence: two stores were
opened in Moscow and one in Omsk. In December 2010, Detsky Mir launched its online store.
Key events
In 2010, Detsky Mir opened three new stores in Moscow and in Omsk
Internet store launched - www.detmir.ru - with a wide range of children's goods and services
-
-
- Transaction with Sberbank of Russia was closed under the terms of which Sberbank acquired 25%+1 share
of Detsky Mir Center. The transaction was worth about RUB 3.4bn. (about $113 m)
Key financial results of Detsky Mir Center in 2010:
(USD m)
2010
2009
YOY variance
Revenue
OIBDA
OIBDA margin
Operating income (loss)
Net loss attributable to the Group
Debt
Key operating results of Detsky Mir Center in 2010:
Retail space, thousand sq meters
Number of outlets
Development strategy
659.9
40.9
6.2%
24.4
(3.1)
121.3
583.1
(47.4)
(8.1%)
(65.1)
(99.1)
208.0
13.2%
-
14.3 pp
-
-
(41.7%)
2010
2009
YOY variance
214.5
131
213.5
128
0.5%
2.3%
Detsky Mir‘s strategy is focused on increasing its operating efficiency, implementing projects with short payback
periods and strengthening its market position. The company is planning to continue developing the retail chain by
opening stores in the most attractive cities and locations. The company aims to increase efficiency of the existing
stores by streamlining business processes, cutting costs and developing the logistics function.
Detsky Mir‘s product offering is attractively priced and structured to make the most of the recovery in consumer
purchasing power. The company is focused on developing products under its own brandnames, a highly profitable
business segment which also improves customer loyalty. Implementation of the Supply Chain Management system,
which makes the management of product flows within the chain more effective, will also help enhance business
efficiency.
39
Market
In 2010, the Russian market for children‘s goods was worth RUB 392bn (approximately US$ 1.3bn), up 13% year-
on-year, returning to pre-crisis levels 9. The rising birth rate of the Russian population was seen as the main driver
for the growth of demand, especially for newly born baby goods and toys.
The key trend of the sector‘s development is a noticeable fall in the volume of unorganized retail sales of
counterfeit and cheap, low-quality products which do not meet the health and safety standards. The government
played an active role in combating the sales of counterfeit products by introducing new legislation.
The market is going to see toughened competition in the children's goods retail driven by the development of such
modern retail formats as retail chains and large format stores, both at the federal and the regional levels.
Market growth prospects
Many experts forecast the children's goods market to grow up to $2.5bn, which is 2.5 times higher than the current
level10. The most promising segments are considered to be infant goods and toys. In Russia, consumer spending on
toys still accounts for one quarter to one third of such spending in developed countries11.
According to Detsky Mir Group, unorganized retail is going to contract from 21% in 2010 to 15% by 201512. In the
future, the key distribution channels for children's goods should be multi-category stores, hyper- and supermarkets.
By 2015 the share of online stores in sales will rise from 11% to 13% of the total volume of the children's goods
market in Russia13.
Sistema Mass Media
SММ is one of the leading media holding companies in Russia, managing assets in pay TV, premium movie and
TV content production, and advertising.
President of Sistema Mass-media - Andrey Smirnov, Chairman of the Board of Directors - Ron Sommer.
Operating and financial results
The rise in movie production was positive for the financial performance of SMM last year. The expansion of
Russia‘s TV broadcasting market was an important revenue driver for the SMM group.
In 2010 STREAM launched four new TV channels and, as of today, the number of STREAM's proprietary
channels has reached nine. In 2010 the total subscriber base of STREAM TV channels went up 7.4% year-on-year
and reached about 5.8m of subscribers.
The Maxima communications group was restructured in 2010. By the middle of the year, however, Maxima won
several large tenders and resumed its normal work. It continues to actively participate in tenders and attract new
clients.
In 2010 Russian World Studios produced over 400 hours of TV series, up 33% year-on-year.
Key events
- National Ratings Agency raised its credit rating for Sistema Mass-media to A+ (high creditworthiness, first
class).
- SRG-Appraisal carried out an audit of Russian World Studios (RWS) and valuated its rights library at $60
million.
- RWS managed to considerably expand its customer pool in 2010, with REN, Domashny and the main
Ukrainian TV channel Inter all becoming new clients.
9 According to Detsky Mir Group
10 According to Detsky Mir Group analysts
11 According to Detsky Mir Group analysts
12 According to Detsky Mir Group analysts
13 According to Detsky Mir Group analysts
40
- Signed a letter of intent with Zee Zee Entertainment Enterprise Ltd regarding cooperation in distributing
and broadcasting TV content in India, Russia and a number of other countries. Hunting and Fishing will be
the first SMM channel to be broadcast in the Indian company‘s networks.
Key financial results of SMM in 2010:
(USD m)
Revenue
OIBDA
Operating loss
Net loss attributable to the Group
Debt
Key operating indicators of SMM in 2010:
Stream TV subscriber base
Russian World Studios production load ratio, Moscow, %
Russian World Studios production load ratio, Saint-
Petersburg, %
Library, hours
Development strategy
2010
94.5
40.5
2.2
(11.5)
16.3
2009
YOY variance
87.2
(14.3)
(72.1)
(51.7)
50.5
8.3%
384.4%
-
77.8%
(67.6%)
2010
5.8
2009
5.4
66.0%
36.0%
66.0%
48.0%
1,210
790
YOY variance
7.4%
30 p.p.
18 p.p.
53.1%
In the TV broadcasting segment, SMM plans to increase the subscriber base of its non-terrestrial TV channels by
expanding across both MTS and external networks in 2010. In addition, to develop the car-TV business, the
Company plans to widen coverage zones and improve service quality by converting to the MPEG-4 format.
In the TV and movie production segment, SMM plans to expand its TV series production and to maintain
distribution through various platforms. It also intends to increase the volume of repeat sales, the rights to which will
be released during the year.
The key initiatives in the Advertising segment are development of the buying function 14, increasing the agency's
headcount and active bidding in tenders, as well as launching a new sales house to sell advertising capacity.
In the mobile and internet content, SMM‘s strategy is to become a leader on the value-added services (VAS) and
internet advertising markets, which would allow for the efficient monetization of content across mobile and
internet-based platforms.
Market
The media sector continued to recover from the economic crisis in 2010. The key trend on the pay TV market was
increased viewer interest in cable and satellite channels, which led to the emergence of numerous niche channels
(Russian and foreign) and their widespread inclusion on the major operators‘ networks. Last year also saw the
launch of several HD and 3D channels.
In 2010 the sector also experienced extensive restructuring, prompted by restrictions imposed by the Federal
Antimonopoly Service. This resulted in the largest media companies opening their own sales houses.
Market growth prospects
In 2011, the penetration of pay TV is expected to reach 50% of all households. The pay TV market will be
growing by 10-14%. The number of ―premium‖ TV channels, including HD channels, will also increase.
14 Purchase of advertizing capacity by media buyer at wholesale prices and its later resale
41
One of the key trends on the premium content market in 2011 will be greater competition from Internet portals, as
well as the launch by content producers of new platforms and models to monetize their content.
The advertising market will continue its recovery this year. The next 12 months are likely to see a 20-25% rise in
TV advertising prices, which will bring the market back to its pre-crisis level. One trend, which is gaining
momentum, is more advertiser interest in new and innovative media.
Intourist
Intourist is the largest vertically integrated tourism holding in Russia, with tour operator services, a retail sales
network and a hotel business.
President of Intourist - Alexander Arutiunov, Chairman of the Board of Directors - Felix Evtushenkov.
Operating and financial results
In 2010, Intourist‘s main focus was on growing sales and strengthening its leading market position.
It retained its position in the outbound travel market and increased its share of inbound tourism.
In 2010, the Company entered into an agreement for setting up a joint venture with Thomas Cook Plc, one of the
leaders in the international tourism market. Under the terms of the agreement Intourist contributed its tourism
businesses (tour operator and retail chain) to a joint venture with Thomas Cook in exchange for $45m and a 49%
stake in the JV.
Key events
In March 2010, Intourist opened 3 new branches: in Kazan, Ufa and Nizhniy Novgorod.
-
- An agreement was signed to set up a joint venture with Thomas Cook (Intourist owns 49.9% in the
-
-
authorized capital of the JV) by contributing to it its tour operating and retail businesses for $45m.
In July 2010, the 5-star Principe Hotel was opened in Forte dei Marmi, one of the best Italian resorts.
In May 2010, the company took under its management the 5-star Maxim Resort Hotel located 1 km away
from the center of Kemer (Turkey) and in January - the Amber SPA Boutique Hotel in Yurmala, Latvia.
Key financial results of Intourist in 2010:
(USD m)
Revenue
OIBDA
OIBDA margin
Operating income (loss)
Net loss attributable to the Group
Debt
Key operating indicators of Intourist in 2010:
Rooms owned (managed and rented)
Tourists, thousand
2010
518.2
6.9
1.3%
(4.0)
(15.5)
166.0
2009
YOY variance
399.7
7.8
1.9%
(1.1)
(8.8)
121.8
29.7%
(11.7%)
(0.6 pp)
-
(75.9%)
36.3%
2010
2009
YOY variance
3,054
781.7
3,362
667.4
(9.0%)
17.7%
42
Development strategy
The strategic partnership of Intourist and Thomas Cook will make it possible to combine the extensive product and
technology know-how of Thomas Cook and the local expertise of Intourist. This should enable the joint venture to
expand its packages and destinations, as well as achieve substantial economies of scale.
To develop its hotel business, Intourist is considering attracting another strategic partner.
Market
In 2010, the demand for tourism services in Russia showed strong signs of recovery aided by an economic upturn
and growth in disposable income. The tourist numbers in the Russian market are now above the pre-crisis 2008
levels. However, increased price competition and concentration of demand in the lower price segments of the
market resulted in downward margin pressure, which, in its turn, prompted exits from the market and a number of
bankruptcies among tour operators in the second half of 2010.
Market growth prospects
The following trends are forecast to dominate the tourism market in 2011:
-
-
-
-
the existing demand structure will remain as regards distribution of price segments and
concentration in the lower price segments;
growth of average prices;
increased share of regional markets;
greater influence of global European players.
The tendency of demand shifting toward independent tourism will persist, the Internet will continue to serve as the
communications and sales channel and its role will be increasing.
The hotel industry is going to see active expansion of foreign players in the regions and a slight increase in prices.
Medsi Group
The Medsi Group is Russia‘s leading national network of private clinics, providing healthcare services in Moscow
and other Russian regions. Set up in 1996, the company has 31 clinics and 49 medical facilities across the country.
President of Medsi - Galyna Talanova, Chairman of the Board of Directors - Felix Evtushenkov.
Operating and financial results
In 2010 Medsi continued to expand and remained the number one provider of paid healthcare in Russia. In 2010,
revenues increased due to the launch of new clinics. Net loss declined following the rise in the general number of
patients, growth of the average bill and increased patient traffic.
Key events
-
-
a new walk-in clinic in the Moscow regional town of Shchyolkovo was opened;
the clinical diagnostic center near Moscow‘s Belorusskaya metro station was expanded.
Key financial results of Medsi in 2010:
(USD m)
Revenue
OIBDA
OIBDA margin
Operating income (loss)
Net loss attributable to the Group
2010
2009
YOY variance
156.5
17.1
11
8.1
(2.5)
125.9
6.2
5
(0.4)
(7.3)
24.3%
174.7%
6.0 pp
-
66.3%
43
Debt
71.9
62.1
15.8%
Key operating indicators of Medsi in 2010.
Client visits, thousand
Services provided
Average bill, $
Development strategy
2010
2009
YOY variance
3.436
6.011
45.5
3.107
5.312
40.5
10.6%
13.1%
12.4%
Medsi‘s strategic aim is to grow its brandname recognition and increase customer loyalty. The Company plans to
increase profitability by entering the high-tech aid segment, which is more profitable and less competitive than the
outpatient care segment.
The Company intends to get accreditation with the internationally recognized Joint Commission International‘s
(JCI) quality management system for medical services, and affiliation with Johns Hopkins Medicine. If these
intentions are fulfilled, the high quality of the healthcare services will be confirmed and it will enable the company
to provide services mostly to the customers of international insurance companies and strengthen the position of the
American Medical Center in the VIP segment.
In 2011 the Company plans to implement a unified patient routing technology with access to all network resources
from any point of entry and a common information space based on new IT systems. It will also begin introducing
uniform medical and quality standards at all of its healthcare centers and launch a centralized management system.
To improve the profitability of the business the Company is going to focus its efforts on the development of direct
sales to employers and individuals, in addition to working with insurance companies.
Market
The Russian market for private healthcare services continued to expand in 2010, growing by 15% to RUB 450bn
according to BusinesStat estimates15. Medsi accounts for almost 4% of the commercial healthcare sector in
Moscow.
Consolidation among the largest and most successful independent private players continued, while the economic
crisis accelerated the departure of some smaller players. Insurance companies continue to raise requirements for
clinics with which they enter into service provision agreements, which further strengthens the position of the larger
players.
Market growth prospects
In 2011-2015 experts expect the value of healthcare services to grow faster than inflation.
Binnopharm
Binnopharm is a pharmaceuticals company managing the largest in Russia full-cycle facility for the manufacturing
of bio-technology drugs in line with the GMP (Good Manufacturing Practice) international quality standards. The
capacity of its production lines allows for annual production of up to 90m ampoules, 300m pills and capsules, 20m
spray cans. The priority production areas of the company are the development and manufacturing of drugs for
treatment of socially important diseases (oncology, hematology, infectious and respiratory diseases), as well as
genetically engineered drugs, vaccines and cellular and tissue technology products for the regenerative medicine.
General Director of Binnopharm - I. Varlamov; Chairman of the Board of Directors - D. Zubov.
15 According to BusinessStat
44
Operating and financial results
In 2010 Binnopharm was involved in establishing the first Russian bio-pharmaceuticals R&D center in Zelenograd.
The center will facilitate the development of the Russian pharmaceuticals industry as a whole, will serve the
national interests and create jobs in line with the priority goals of the government.
In accordance with the government strategy on the import substitution Binnopharm is actively expanding
production of import-substituting generics. Besides, the company is cooperating with international pharmaceuticals
producers under the projects aimed at localizing manufacturing of drugs that are new to the Russian market.
In 2010, the company initiated a number of infrastructure projects aimed at strengthening marketing of B2G
contracts and attracting partners with innovative research products, including the Lomonosov Moscow State
University.
Key events
- An agreement was signed for setting up a consortium 'Moscow nano-biopharmacuetical cluster Biocity' by
five Russian R&D centers: Binnopharm, Lomonosov Moscow State University, Mendeleyev University of
Chemical Technology, Biomak and the Consortium of the Russian Academy of Sciences institutes
'Orkhimed'.
- An agreement was signed for establishing a strategic alliance between Binnopharm and GlaksoSmitKlein.
Under the cooperation agreement, GlaksoSmitKlein shall transfer the know-how and technologies and also
train specialists and conduct an audit of production processes for Binnopharm. Implementation of this
project will ensure localization of production of innovative vaccines for children in Russia.
Key financial results of Binnopharm in 2010:
(USD m)
2010
2009
YOY variance
Revenue
OIBDA
OIBDA margin
Operating income
Net income attributable to the Group
Debt
Development strategy
32.1
(27.9)
(86.9%)
(34.1)
(33.9)
2.7
55.7
10.8
19.4
8.2
3.9
8.5
(42.3%)
-
(106.3%)
-
-
(68.2%)
Binnopharm operates in the industries which are of strategic importance for the country: biotechnologies,
innovations and pharmaceuticals. Substantial funding is allocated from the state budget for the public purchasing of
pharmaceutical products. One of the key goals of the company is to become one of the leading Russian producers
acting as a partner to the government in this industry.
To achieve the strategic goal of building a highly profitable portfolio of pharmaceutical products within the existing
therapeutic areas, mostly of import-substituting nature, Binnopharm is planning to continue building alliances and
partnerships with the leaders of the world pharmaceuticals industry in order to ensure transfer of technologies and
development of the Russian R&D sector. The alliance struck by Binnopharm with GlaksoSmitKlein in 2010 is of
special importance because it is designed to bring production of innovative vaccines to Russia.
Binnopharm intends to present to the Russian market a combined vaccine for simultaneous prevention of six
infectional diseases under its own trademark in 2011.
45
Market
The year 2010 was very challenging both for Binnopharm and the pharmaceuticals industry as a whole. The
Russian pharmaceutical market demonstrated a 6% growth in rubles compared to the 18% growth in 200916. The
pharmaceuticals industry is socially important; therefore the Russian Government allocates substantial funding for
its development.
The Government pursues an import-substitution policy in the pharmaceutical industry by allocating grants to the
Russian producers, so that they could develop innovative products, and also stimulates domestic manufacturing of
those pharmaceutical products which account for the main share of consumer spending. The Government is the key
consumer of medicines, and it allocates a lot of funding for public purchasing of pharma products (the public
purchasing segment showed a 13% growth compared to 2009).
Market growth prospects
The Russian pharmaceuticals market is a promising industry, with the annual growth rates forecast at 15% over the
next five years17. The Russian Federation‘s Government pays a lot of attention to the development of the Russian
pharmaceutical products and, in the medium term, one can expect new lawmaking initiatives supporting the
industry, and increased government spending on the development of this industry.
NIS
NIS is a federal operator of the GLONASS navigation system which in its purposes may be compared to GPS.
CEO of NIS - A. Gurko, Chairman of the Board of Directors - S. Shoigu. Sistema‘s stake in the company is 51%.
Operating and financial results
In 2010, NIS started implementing solutions based on GLONASS both in Russia and abroad, and also launched the
development and implementation of the strategic program 'ERA GLONASS', and its alignment with a similar EU
program eCall.
The main growth drivers for the company in 2010 were an active government policy aimed at supporting and
developing systems and solutions based on GLONASS, improvement of the Russian legislation in the area of
navigation, implementation of large-scale government, regional, municipal and industrial GLONASS programs;
developing navigation technologies and devices based on GLONASS; as well as the interest of other countries in
multi-system GPS/GLONASS solutions which could lessen their dependence on one navigation system.
Key events
-
Implementation of some projects was started, for example, the Logistics and Transportation Center in
Sochi (as part of preparations for the 2014 Olympic Games)
- As part of implementing the regional strategy of the company, agreements were signed for implementation
of solutions based on GLONASS with 16 regions of Russia.
Development strategy
The strategic objective of NIS is to become a leader in navigation and information services based on GLONASS,
and to become a top 5 company in the navigation and information services industry globally.
At the first stage it is planned to build the technological infrastructure of NIS and strengthen the status of the
company as that of a federal operator by having large-scale projects for implementation of GLONASS solutions. At
the second stage commercial operation of the infrastructure will be launched in the interests of mass consumers and
operators of navigation and information services.
16 According to DSM Group
17 According to DSM Group
46
Market
In 2010, the Russian market for navigation and information services demonstrated substantial growth and exceeded
RUB 7.5bn (approximately $233m)18. This was achieved due to the active government policy on GLONASS
commercialization.
In 2010, the main trends in the navigation and information services market were: significant growth in sales of
multi-system GPS/GLONASS equipment, and the start of mass implementation of GPS/GLONASS technologies in
the B2G segment.
Market growth prospects
According to the estimates of the European Commission, the volumes of the global navigation market (equipment
and services) will go up from €58 bn in 2010 to €125 bn in 2016. The Russian market of GLONASS navigation
services for transport is expected to grow significantly. This growth will be driven by a number of factors, among
which one should emphasize the consistent policy of the Government aimed at implementation of GLONASS-
based solutions, deployment of full orbit GLONASS satellite constellation, creation of new GLONASS-based
solutions and products that meet international world requirements, increased global demand for multi-system
(GLONASS/GPS) navigation solutions and products.
18 According to NIS
47
5. Description of core risk factors
Risks faced by the Corporation are diverse. They arise as a result of processes and factors, over which Sistema
JSFC has no or limited influence. Hence, efficient assessment and management of risks remains an important
component of the strategy of Sistema JSFC.
The Corporation has introduced an integrated enterprise risk management system (ERM) which is to provide a
reasonable guarantee that the strategic goals will be achieved and the level of risk will be kept within the limits that
are acceptable for the shareholders and the management of the Corporation. ERM at Sistema JSFC was built in
conformity with the international standards, recommendations and best practices in risk management.
5.1. EXTERNAL RISKS
The external risks related to the operations of Sistema JSFC include: risks associated with the political situation in
Russia and the countries of the Corporation's presence; risks related to the economic situation in Russia and the CIS
countries; risks related to the situation on the stock exchange; risks related to changes in the legislation.
Political climate in Russia and the CIS
The risks related to the political situation in Russia and the CIS are material for Sistema JSFC because most of the
Corporation's business is done on the territory of the Russian Federation and the CIS countries; besides, the
Russian Government acts as a partner in several projects important for the Corporation.
Sistema JSFC estimates the political situation in Russia to be stable and believes that at the moment there are no
risks of any negative changes. In 2010 the political situation in Russia remained stable which is characterized by
the stability of the federal and regional branches of government.
At the same time, instability has intensified in a number of neighboring CIS countries, in particular, in
Turkmenistan and the Republic of Belarus. Suspension of the MTS subsidiary's licenses by the Communications
Ministry of Turkmenistan has already had an unfavorable impact on the Corporation's assets in Turkmenistan.
Potential alterations in the laws of the countries, where the Group operates, following some changes in the political
situation, pose certain risks for Sistema JSFC; especially so because the private companies in these countries
remain dependent on the influence of various political forces.
Political climate in other countries
Since the companies of the High Technology and Industry business segment have partnerships with companies in
South-East Asia, Africa and Central and Eastern Europe, in case of major political turmoil in these regions the
operations of the business segment in the regions may be put on hold, which may lead to material losses. Besides,
the operations of the Tourism business segment are also vulnerable to any major political risks.
Economic situation
Recovery of the Russian economy in 2010 was driven by the improved situation in the world economy, reviving
external demand and rising prices for the commodities exported by Russia, the rebound of the stock exchanges and
stronger current account balance. Along with the external demand, another positive contribution was made by the
recovery of the domestic demand, both investment and consumer, that was stimulated by anti-crisis measures and
restocking.
The regenerative growth that had started in the second half of 2009 continued in 2010. Although in the second half
of 2010 there was a pause in the economic recovery due to the drought and the decline in agricultural output, GDP
growth for the year in general was 4.0 % according to Rosstat.
Despite the successful recovery of the Russian economy the following factors may have a negative impact on the
country‘s economy and the performance results of Sistema JSFC:
Significant reduction of the gross domestic product
-
48
Inflation rate
Fluctuations of foreign exchange rates
State budget deficit and high level of sovereign debt as compared to the gross domestic product
-
-
-
- Underdeveloped banking system which is capable of ensuring only limited liquidity of national enterprises
- High level of capital outflow
- High level of corruption in the economy
- High unemployment rate
Financial risks
The financial risks of Sistema JSFC include the following elements:
Interest rate risk
- Forex risk
-
- Liquidity risk
-
Inflation risks
- Covenant risk.
Forex risk
Alterations in the ruble, hryvna, Euro and US dollar exchange rates may significantly influence the financial results
of Sistema JSFC. Besides, there is a risk that difficulties will be encountered in paying off or refinancing the debt
denominated in various currencies.
Interest rate
In the current conditions the alteration of interest rates in the capital market will not lead to any considerable
increase of our expenses because the predominant part of Sistema's borrowings has a fixed interest rate.
However, when raising funds in the future we may encounter the situation when borrowing becomes more
expensive. This prospect depends, in the first place, on the level of the future credit rating of the Russian
Federation, the interest rates in the capital markets and the level of liquidity both in the Russian Federation and the
world financial system.
Liquidity risk
In order to service and refinance the current and future liabilities it may become necessary to permit considerable
cash outflows. The ability to repay the debt may depend on many factors which are not always under our control.
There is a risk of deepening of the world financial crisis (the risk of the so called "double dip" recession) which
may lead to more severe borrowing rules and restricted access to liquidity. Undermined financial stability in a
number of countries of the European Union may become another risk factor.
Inflation risks
Inflation may be another driver of the rise in expenses of Sistema JSFC. For quite a while the Russian economy has
been showing high inflation rates.
In 2010, consumer market inflation amounted to 8.8%. Starting from August the inflation accelerated due to the
drought and the harvest failure that caused growth of agricultural products and foods prices both in the global and
in the domestic markets.
Covenant risk
Part of the Corporation‘s loan agreements contain certain restrictions (covenants) that include requirements to abide
by certain financial coefficients, and restrictions related to the divestiture of some assets. Potential risk of breaching
the covenants on loan agreement may result in the repayment of the debt under the respective agreement claimed
before term.
Stock markets
There is a risk that the shares of Russian companies will be growing slower than those of their counterparts in other
emerging markets. The main cause of that may be a substantial outflow of capital from the Russian market driven
both by political and economic factors inside the country and the situation in the world stock markets.
49
Legal risks
The key material legal risks include:
- The risk that foreign currency regulations, customs control and duties may be changed; in particular, there
is a risk of an increase in the volume of mandatory reserves for conducting some forex operations, a rise in
export duties, tightened customs control rules.
- Risk of amendments being introduced to the tax legislation, in particular, increased tax burden, more
complicated procedures for filing tax returns and other related documents, new interpretation of the
existing tax laws
- Risk of changes in laws regulating operations of the companies which are the main contributors to the
revenues of the Corporation (the companies of the telecom and the oil sector).
- Risk of changes in the legislation on the securities market and protection of investor rights, in particular,
changes which may have a negative impact on the Group‘s capabilities in conducting operations with
securities.
Instability and insufficient development of the judicial and legal system of the Russian Federation which
may lead to limitation of the Corporation‘s ability to defend the rights of its subsidiaries in the court of law.
-
5.2. RISKS RELATING TO THE CORE ACTIVITIES OF SISTEMA JSFC
Transformation of the organizational structure of Sistema JSFC
The Group has taken some major steps aimed at the transformation into becoming an investment holding. As a
result of this transformation the human resources pool of Sistema JSFC has been reduced. There are risks of
temporary deterioration of the efficiency and level of interaction between the Corporation‘s units, and between the
units and the portfolio companies, which is typical for a transition period of this type. There are risks of untimely or
incomplete transformation/adaptation of the organizational structure and the respective human resources, which
may eventually affect the implementation of the Corporation‘s portfolio strategy.
Implementation of the adopted strategy
There are risks of inconsistency of the actual deadlines and parameters of М&А deals with the adopted portfolio
strategy of the Corporation. The quality of the acquired assets may turn out to be lower than expected. There are
also risks related to the change in the Corporation‘s geographical presence, which may cause further
implementation of the current strategy to be ineffective.
Investment risks
Some of the investment risks faced by the Corporation in 2010 which were caused by a combination of unfavorable
economic and market conditions and factors which hindered the development of some of the Corporation‘s assets.
These risks include:
- Probability of stronger competition and inability of the Corporation to acquire the appropriate assets
- Potentially insufficient volume of new investments and, as a consequence, the portfolio companies‘ failure
to achieve their set targets
- Risk of inaccurate asset valuation, incorrect pricing and timing for M&A deals
- Potential lack of funding required for using attractive investment opportunities. Potential deficit of
financial resources for conducting specific M&A transactions, including the possible need for borrowings
to be made on conditions unfavorable for the Corporation
- Excessive dependence on one particular sector, geography of the business
Operating risks
The key operating risks of Sistema JSFC and its subsidiaries are associated with potential events that may have an
unfavorable impact on the ability of the subsidiaries to maintain ongoing and efficient operations and to achieve the
expected operating and financial results. The operating risks include:
- Risk of incomplete or untimely integration of the newly acquired companies to achieve the expected
synergies and keep the value of the acquired assets. There is a risk that the top management of Sistema
JSFC may have to spend a lot of time before the acquired companies are fully integrated
50
- Risks related to the hiring and retention of qualified managers for the Corporate Center and portfolio
companies. Lack of skilled personnel may affect the ability of the Corporation to efficiently find, assess
and implement transactions that are required to meet the targets of the approved strategy.
- Risk of poor efficiency of the cross-functional interaction within the Corporation and among the
companies of the Sistema Group, failure of the existing business processes or significant weakening of
control over the functioning of business processes.
- Reputational risks related to the possible unjustified claims to the Corporation and the portfolio companies.
- Risk related to the high level of potential fraud and unfaithful business practices in some of the markets
where the Corporation operates.
5.3. SECTOR RISKS
Core Assets
The Core Assets business unit includes the companies of the telecom and oil & energy sectors. The main risks
confronted by the companies of the Core Assets business unit include:
Mobile communications
⁻
⁻
⁻
⁻
⁻
⁻
⁻
Increased competition in all the segments of mobile communications in the markets where the
Corporation operates including the growing competition with the discount operators
Creation of the forth federal mobile operator in Russia on the basis of Svyazinvest
Growing competition in the wireless data sector in the regional markets of Russia from fixed line
operators and the development of high-speed access technologies which are in competition with 3G
– WiFi, WiMAX, CDMA-450, LTE, ADSL, FTTx
Acquisition of one of the key competitor companies by a large mobile operator with access to the
Western capital market
Adoption of the law on mobile number portability in Russia
High dependence of the business on the availability of licenses and the allocation of the frequency
resources by the relevant authorities of the countries where the Sistema Group operates. Risk that
the current licenses and/or spectrum may be recalled or suspended.
Fierce competition in the Indian market where Sistema Shyam TeleServices Ltd operates.
Fixed communications
⁻
⁻
⁻
⁻
Decline in the number of corporate subscribers, the switching of subscribers to lower tariffs, lower
growth rates of the Broadband market
Increase in the receivables caused by the decline in the purchasing powers of the population
Consolidation of the existing fixed telephony market players
Development of the high-speed access technologies which are in competition with ADSL – FTTx,
WiFi, WiMAX, 3G, CDMA-450, LTE, as well as home networks and cable TV networks.
Oil & energy
⁻
⁻
⁻
⁻
⁻
⁻
⁻
Risk of decline in production outputs
Sharp fluctuations in the oil and power prices
Risk of under-utilization of the refining capacities
Risk of introduction of government regulation on wholesale prices for oil products
Potential rise in tariffs for the services of natural monopolies (for example, transport)
The risk of the environmental laws being significantly tightened
The probability of stricter regulations being introduced as part of implementation of the government
programs, revision of the Mineral Extraction Tax benefits, limits on presence in the regional markets,
changes in import duties etc.
Developing Assets
The Developing Assets business unit includes companies of the consumer and high-tech sectors. The key risks
faced by the companies of this Business Unit are:
51
- Risk of slow recovery of the Russian economy from the crisis of 2010 and, consequently, weakened
demand for consumer goods and services, as well as the slow development of consumer lending
- Risk of the informational infrastructure in the regions being underdeveloped and, as a result, difficulties in
developing the consumer sector companies in the regions
Potential further consolidation of the companies of the consumer and banking sectors
-
- Risk of tightened legislation regulating the retail market (including the banking sector, tourism, healthcare
and retail)
- Growing competition from the leading companies of the world
- Loss, termination or contraction of relations and contacts with suppliers and sellers
- Risk of higher prices for raw materials, spare parts and services
- Risk of fluctuations in demand due to the expected change in the generations of products or technological
cycles
- Risk of decline in government orders due to the reduction of state budget spending on high-tech products
52
6. CORPORATE GOVERNANCE SYSTEM
Principles of Corporate Governance
It is one of the elements of Sistema JSFC strategy to maintain its corporate governance and informational
transparency system at a highest international level. The corporate governance of Sistema is based on the following
key principles:
-
-
-
transparency of all processes for investors and partners,
a proactive and professional Board of Directors,
consistency and collegiality in decision-making.
Sistema JSFC is guided by these principles in all of its activities, including strategic and financial management,
corporate governance, reporting, control and audit, risk management, HR and social policy.
The principles and procedures of Sistema JSFC corporate governance are set out in its Charter and in a number of
publicly available bylaws that, all together, determine the structure and the authority scope of the Corporation's
governance and control bodies. The Corporate Code of Conduct and the Ethics Code contain additional
commitments of Sistema JSFC in the area of transparency, social responsibility, and ethical principles of business.
Sistema JSFC takes all possible efforts to bring its corporate governance practices in line with the guidelines of the
Corporate Governance Code recommended by the Directive of the Federal Commission for the securities markets
of Russia, dated April 4, 200219, and by the UK Combined Code on Corporate Governance20. Analysis of the
consistency of the corporate governance practices of Sistema JSFC with the regulations set out in the Corporate
Governance Code and the UK Combined Code on Corporate Governance is given in the annex to this report. In
those cases when the corporate governance practice of Sistema JSFC deviates from the norms recommended in the
documents mentioned above, the company provides an explanation of the methods which it uses to ensure that the
respective element of corporate governance is in place.
Corporate governance structure of Sistema JSFC
The Corporation's core governance bodies are: the General Meeting
of shareholders, the Board of Directors, the President and the
Management Board. The Board of Directors and the President have
committees that work out recommendations on the forming of
Sistema JSFC policy in the relevant areas. The organizational
structure of Sistema JSFC includes 7 Functions and 2 Business Units
(Core Assets and Developing Assets), which
the
Corporation‘s migration to the ‗financial holding‘ model.
reflects
As of December 31, 2010 the organizational structure of Sistema
comprised nine functions and four industry-based business units.
6.1. General Meeting of shareholders
Key principles of operation
The General Meeting of shareholders is the main governance body of Sistema JSFC. Its operation is regulated by
the laws of the Russian Federation on joint-stock companies, the provisions of its Charter, and the Corporation's
bylaws. The procedure of conducting the General Meeting of shareholders aims to make sure that the rights of the
shareholders are respected and all the requirements of the RF laws are observed. Information and materials for the
19 The text of the Corporate Code of Conduct is available at
hhtp://www.fcsm.ru/ru/legislation/corp_management_study/corp_codex
20 The text of the UK Combined Code is available at http://www.fsa.gov.uk/pubs/ukla/lr_comcode2003.pdf
53
meeting are available to the shareholders in advance, both in Russian and in English languages, and are published
on the official Internet site of Sistema JSFC. Along with the notice of the forthcoming meeting, shareholders
receive voting ballots. Venues of all the meetings of Sistema JSFC shareholders are conveniently located not far
from the company's head office. The owners of global depository receipts of the company have an opportunity to
vote on the agenda items of the general meetings of shareholders by proxy voting through the depositary of the
GDR program of Sistema JSFC, Deutsche Bank Trust Company Americas.
Observance of the shareholders’ right to be involved in company governance
Sistema JSFC aims to ensure that the shareholders enjoy the maximum protection of their rights to participate in the
running of the Company. The main right of the shareholder in this respect is the right to take part in the General
Meeting of Shareholders and vote on the items of the agenda. For this right to be secured a notice of the General
Meetings of Sistema JSFC is circulated to all the shareholders at least 30 days prior to the meeting, all materials are
published on the website of the company in Russian and in English (www.sistema.ru). Besides the notice of the
General Meeting, Sistema JSFC also sends a voting ballot to each shareholder. The ballot can be filled out by the
shareholder in advance and mailed to the Company at the address specified in the ballot. Such a vote of the
shareholder will be taken into account when counting the voting results.
Holders of the company's depositary receipts have the opportunity to vote by means of proxy voting via Deutsche
Bank Trust Company Americas, the depositary of Sistema JSFC GDR program. The votes are collected by the
depositary, Deutsche Bank Trust Company Americas, via clearing systems and are included in the general voting
ballot of the depositary, with all votes cast for the proposed draft resolution, against it, or abstentions specified.
Each shareholder is also entitled to attend the shareholder meetings in person, given that the meeting is held in the
format of joint presence of shareholders, and to vote on the agenda items in the meeting.21
An important shareholder's right to participate in the running of the Company is the right to access documents that
the Company is obliged to keep in line with the provisions of the Federal Law "On Joint-Stock Companies". To
exercise this right, a shareholder should send a written request to the Corporate Secretary of the Company asking
for access to the documents that the shareholder is interested in seeing. After the time for providing the documents
is agreed upon, the requested documents will be provided to the shareholder.
Holders of material blocks of shares are entitled to make proposals on the agenda of the General Meeting of
shareholders, and to nominate candidates to the Company's governance and control bodies. The Company accepts
proposals on the agenda of the Annual General Meeting of shareholders in written form, within 100 days after the
end of the financial year. Proposals received from shareholders are considered by the Board of Directors of the
Company and, if the proposals meet the legal requirements to the work of the General Meeting of shareholders, the
proposed items are included in the agenda of the General Meeting.2223
General Meetings held in 2010 and their results
In 2010 four General Meetings of the Company's shareholders were held.
The Annual General Meeting of the shareholders of Sistema JSFC took place on 26 June 2010. The Annual
General Meeting of shareholders approved the annual report, the annual accounts including the profits and loss
account of Sistema JSFC for 2009, approved the amount, the procedure, the forms and the timelines for paying
dividends on the shares of the Company, elected members of the Board of Directors and the Revision Commission,
21 Or through a representative
22 The shareholders owning 10 and more % of the Company‘s voting shares also have a right to demand that an EGM is
convened.
23 In case an EGM is called with the agenda containing an item on election of the Board of Directors, the shareholders owning
sufficient number of shares are entitled to nominate the Board of Directors members. The written proposals should be
forwarded to the Company no later than 30 days before the date of such meeting.
54
approved the auditors, and approved the new version of the Company's Charter and the new version of the Terms of
Reference of the General Meeting of Shareholders of the Company.
Based on the amount of average dividend yield on Sistema JSFC shares and the amount of consolidated net income
calculated in line with the US GAAP standards, the General Meeting of shareholders resolved to allot
530,750,000.00 rubles to pay the dividends, which equals 0.055 rubles per one ordinary share of the Company.
Auditors of Sistema JSFC elected for 2010:
- CJSC BDO - to hold the Russian accounting standards audit;
- CJSC Deloitte and Touche CIS - to hold the US GAAP audit.
The auditors were suggested following an open tender organized by the Audit Committee of the Board of Directors
of Sistema JSFC.
The Annual General Meeting also approved the amendments to the Charter and the Terms of Reference of the
General Meeting of Shareholders which were made following amendments to the Federal Law "On Joint-Stock
Companies". Simultaneously some points of the section on the procedural matters of conducting General Meetings
of shareholders and the scope of the Company's Board of Directors were made more specific to reduce the risk of
corporate conflicts.
In 2010, three Extraordinary General Meetings of shareholders were also held in the form of a letter ballot:
08 February 2010
02 August 2010
The following agenda item was considered: "Approval of related
party transactions: Sistema JSFC participation in the Investment
Agreement and the Agreement on Joining the Investment
Agreement and Amending the Investment Agreement dtd 19
December 2009 signed by and between Rostanotech State
Corporation, Sistema JSFC, SITRONICS OJSC, Research
Institute for Molecular Electronics and Micron OJSC, AMEKS
CJSC, and SITRONICS-Nano LLC".
These agreements regulate the procedure and the conditions of
implementing the project of establishing commercial production
of extra large-scale integrated circuits on the basis on 90 nm
nanoelectronic technology in the Russian Federation. The goal of
the project
to create an advanced microelectronic
manufacturing facility which will strengthen the positions of the
project participants in the Russian market of microelectronics and
expand their domain.
is
The General Meeting of shareholders approved the proposed
transaction
The following agenda item was considered: "Approval of a
related party transaction of granting a surety to Svyazinvest
OJSC under which Sistema JSFC undertakes to guarantee
fulfillment of the obligations of Sistema-Invenchure CJSC under
the Agreement of exchange of shares of MGTS OJSC for the
shares of Sky Link CJSC entered into by Svyazinvest OJSC and
Sistema-Invenchure CJSC".
This agreement was proposed within the project of exchange of
assets with the government performed in line with the assignment
from the Prime Minister of the Russian Federation Mr. V. Putin
dtd 10.09.2009 #VP-P13-5227.
The project implies the following transactions:
1) The Comstar Group sells 25%+1 share of Svyazinvest to
Rostelekom and repays the debt of RUB 26bn to
55
21 December 2010
Sberbank;
2) Sistema-Invenchure CJSC (a 100% subsidiary of Sistema
JSFC) exchanges 50% in Sky Link CJSC (effectively
100%) for 23.3% in the authorized capital of MGTS
(28% of ordinary shares), and Sistema-Invenchure pays
the difference between the assets' prices;
3) Sistema JSFC restructures and sells the debt that the Sky
Link Group owes to Sistema - in favor of the Svyazinvest
Group.
The surety of Sistema JSFC on the obligations of its subsidiary
Sistema-Invenchure CJSC under the exchange agreement granted
in favor of Svyazinvest OJSC is necessary to ensure (1) an
optimum transaction structure, and (2) maximum protection of
the interests of the parties to the project of exchanging assets with
the government.
The General Meeting of shareholders approved the proposed
transaction
The following agenda item was considered: "Approval of a
related party transaction: divestment of 99.9998 % in the charter
capital of LLC Sistema Telecom".
The transaction provides for a transfer by Sistema-Telecom LLC
that, at the point of granting approval on the transaction, owned
the following assets: a 45% stake in the authorized capital of TS-
Retail (the other 55% is owned by MTS); promissory notes worth
RUB 2bn issued by MTS; rights to the trademarks of the
‗umbrella brand of Sistema‘ with graphic symbols shaped in the
form of eggs, including the trademarks of MTS, Comstar-UTS
and MGTS, in favor of MTS.
Full consolidation of TS-Retail operations should make it
possible for MTS to strengthen its positions in the distribution
sector. MTS acquiring full control over its brand is in line with
the current international practice when the user of a trademark
owns the trademark. The transfer of the promissory notes reduces
the current volume of borrowings within the Group.
The General Meeting of shareholders approved the proposed
transaction
6.2. Board of Directors
The Board of Directors of Sistema JSFC is responsible for the strategic governance of Sistema JSFC. It determines
the strategy of the Corporation's development, works out strategic and financial development plans, sets the
principles for investing, appraises executive performance and assesses risks, approves principles for corporate
governance procedures, approves transactions and controls the work of the Corporation in general. The authority
scope of the Board of Directors is set out in the Charter of Sistema JSFC.
Board of Directors membership
The Board of Directors in place as of 31.12.2010 was elected by the General Meeting of shareholders on 26 June
2010. The Board of Directors has 11 members:
56
BoD membership as elected on 26 June 2010*
1
2
3
4
5
6
7
8
9
10
11
Vladimir Evtushenkov
Alexander Goncharuk
Ron Sommer
Dmitry Zubov
Vyacheslav Kopiev
Robert Kocharyan
Roger Munnings
Leonid Melamed
Rajiv Mehrotra
Evgeny Novitsky
Sergey Cheremin
Chairman
Deputy Chairman
Deputy Chairman
The Board of Directors includes:
Executive directors
2 (18.2%)
R. Sommer, L. Melamed**
Non-executive directors
6 (54.5%)
V. Evtushenkov, A. Goncharuk, D. Zubov, V. Kopiev, R.
Mehrotra, S. Cheremin
Independent directors
3 (27.3%)
R. Kocharyan, R. Munnings, E. Novitsky
** On 09 March 2011 Mr. L. Melamed was relieved of his duties as President and Chairman of the Management
Board of Sistema JSFC and received the status of "Non-executive director" of the Board of Directors of Sistema
JSFC.
Changes in the membership of the Board of Directors
In the beginning of 2010 the Board of Directors consisted of 13 members elected by the General Meeting of
shareholders on 27 June 2009. When the new Board of Directors was elected on 26 June 2010, the number of its
members was reduced most significantly since 2005. The new Board of Directors did not include A. Gorbatovsky,
S. Newhouse and R. Skidelsky from the previous Board; at the same time, a new member, R. Munnings, who has
significant experience in financial reporting and audit, was elected to the Board to strengthen the Board
competencies in audit.
Board of Directors meetings
Meetings of the Board of Directors are pre-scheduled. If necessary, extraordinary meetings are convened to make
decisions on urgent matters. The Corporation has an Annual Calendar Planning Cycle (from January 1 through
December 31). This practice makes it possible for the new Board of Directors to maintain continuity and act on the
basis of the previously approved plan.
Meetings of the BoD are planned in advance, proceeding from the logics of the strategic planning and reporting
cycle of Sistema JSFC.
The unplanned issues which may arise in the course of the Corporation's operations and which had not been
included in the work plan of the Board of Directors are put on the agendas of the meetings of the Board of
Directors as necessary upon the decision of the Chairman of the Board.
In 2010 the Board of Directors held 16 sessions: eight scheduled meetings and eight extraordinary sessions in the
form of a letter ballot on urgent matters. In 2010 the Board of Directors considered 115 items in total.
* Summary biographies and information on the shares held by the Board members in the authorized capital of Sistema JSFC
are provided in the Annex.
57
Number of meetings held
Number of letter ballots
Number of items on BoD work plan
Number of items considered by the BoD
In 2010 the Board of Directors considered the following key items:
2010
8
8
46
115
2009
9
4
46
124
-
status of Sistema JSFC strategy implementation in 2009-2010. Corporation's development strategy;
-
development of the Sistema Group oil and energy assets;
- Sistema JSFC subsidiaries and affiliates governance strategy;
-
development strategies of the core subsidiaries of Sistema JSFC: SITRONICS OJSC, the Banking Group,
Binnopharm CJSC, Sistema Shyam TeleServices Ltd.;
report from the Internal Control and Audit Function;
results of MTS-Comstar integration;
financial strategy of the Corporation;
development of innovations and R&D activities of Sistema JSFC companies;
development strategies of the Business Units of Sistema JSFC;
approval of the consolidated budget of Sistema JSFC and Key Performance Indicators of the management
for 2011;
strategy of establishing the united Concern on the basis of high-tech assets of Sistema JSFC;
public and investor relations activities;
financial performance results;
convening the Annual General Meeting of shareholders, reports from the Committees of the Board of
Directors, report on the quality of corporate governance;
approval of transactions.
-
-
-
-
-
-
-
-
-
-
-
Items considered by the Board of Directors in 2010
14; 12%
0; 0%
10; 9%
29; 25%
43; 37%
1; 1%
4; 4%
14; 12%
Strategy, investments, new activities
Issue and trading of securities
Appointments and HR policies
Participation of S/As in groups and alliances
Aproval of transactions
Approval of internal documents and policies
Financial statements, planning, audit
Corporate governance
Items considered by the Board of Directors in 2010 (vs. 2008 and 2009)
29
50
40
30
20
10
0
43
1
4
0
14
14
10
Items considered in
2010
Strategy,
Securities
Appointments
S/As
Transactions
Intrnal docs
Financial reports
Corporate
governance
In addition to the approval of transactions, most of the items considered by the Board of Directors in 2010 belong
to the category of strategy, financial reporting and corporate governance. In 2010 the number of items on strategy,
approval of transactions and shareholding in subsidiaries increased vs. 2009, which is a proof of intensified activity
the area of updating the development strategy and non-organic business development solutions.
58
Preparation for sessions and quorum of the Board of Directors
Materials on the agenda items are provided to the Board members 10 days before the meeting, which makes it
possible for the Board members to get acquainted with them in advance and to form their position for voting. The
most important agenda items are normally pre-considered in the meetings of the committees of the Board. The
members of the Board of Directors meet with the speakers and the management during a business dinner the
evening before the session, where they can receive explanations on the materials of the Board of Directors and
clarify voting positions of the parties in an informal environment.
Sessions of the Board of Directors are held with sufficiently high attendance of the Board members. No cases when
a Board meeting had to be rescheduled due to the lack of quorum have been registered over the past few years.
Attendance of the Board members at the meetings of the Board of Directors and its committees in 2010
Board of Directors
Strategy Committee Audit Committee
Attendance at meetings
Nomination and
Remuneration
Committee
Corporate Governance
and Ethics Committee
Investor Relations
Committee
V. Evtushenkov
A. Goncharuk
R. Sommer
D. Zubov
V. Kopiev
R. Kocharyan
L. Melamed
R. Mehrotra
E. Novitsky
S. Cheremin
R. Munnings
A. Gorbatovsky
S. Newhouse
R. Skidelsky
15/16
15/16
16/16
16/16
15/16
16/16
16/16
13/16
14/16
15/16
11/11
4/5
5/5
3/5
13/13
9/13
12/13
7/13
3/4
4/4
2/2
2/2
4/4
4/4
2/2
10/11
4/4
7/7
4/7
5/5
4/5
3/5
4/5
8/8
1/3
2/4
Note. The first number denotes the number of meetings attended by the Board member, the second number stands for the total number of meetings the member
could participate in.
Committees of the Board of Directors24
Sistema JSFC has five Committees under the Board of Directors:
Strategy Committee;
Audit Committee,
Nomination and Remuneration Committee,
Corporate Governance and Ethics Committee,
Investor Relations Committee.
The members of the Board of Directors manage the work of the committees, and constitute the majority of their
membership. The role of the Committees is to preliminarily examine the items brought up for the consideration of
the Board of Directors to formulate recommendations on voting, and to develop and supervise the functions
assigned to them by the Board of Directors.
Strategy Committee
The Strategy Committee has nine members. The Chairman of the Committee is V. Evtushenkov. Committee
Members: A. Abugov, S. Boyev, F. Evtushenkov, R. Sommer, A. Korsik, L. Melamed, S. Cheremin and M.
Shamolin
The Committee considers and analyzes strategic development of Sistema JSFC and the core strategic projects of the
company.
24 All the information provided regarding the work of the committees is as of December 31, 2010.
59
In 2010, 13 meeting of the Committee were held where 31 items were considered, including: 23 items relating to
business strategies, five - transactions and non-organic growth projects, three - functional strategies.
Audit Committee
The Audit Committee has three members. The Chairman of the Committee is R. Munnings.
Committee members: E. Novitsky and R. Mehrotra.
Secretary of the Committee: L. Gorbatova.
The Audit Committee supervises the preparation of financial reports and internal audit of Sistema JSFC and its
subsidiaries, coordinates the work of internal control and audit services. Besides, the Committee oversees the work
of the independent auditors, gives recommendations on their appointment and the amount of their fees, and acts as
an intermediary in resolving disputable issues that may arise in the course of the audit.
In 2010, the Audit Committee held 11 meetings where 49 items were considered, 32 of which were on financial
reporting and accounting, three items - on internal control and audit, eight items were of administrative nature
(approval of the independent valuation companies, the procedure of approving the non-audit services etc).
Nomination and Remuneration Committee
The Nomination and Remuneration Committee has five members. The Committee Chairman is S. Cheremin.
Committee members: A. Goncharuk, D. Zubov, R. Kocharyan, L. Melamed.
Secretary of the Committee: G. Yermakov.
The Nomination and Remuneration Committee participates in the development of the company's human resources
policy, gives recommendations to the Board of Directors on appointments to top management positions, and works
out recommendations on remuneration and bonuses for the employees of Sistema JSFC.
In 2010 the Nomination and Remuneration Committee met four times. six items were considered at the meetings,
five of which were related to HR policies and incentive policies, one item was on the approval of key appointments
to Sistema's top management positions and the terms of the respective employment contracts.
Corporate Governance and Ethics Committee
The Corporate Governance and Ethics Committee has eight members. The Chairman of the Committee is V.
Kopiev.
Committee Members: A. Goldin, I. Belikov, S. Drozdov, G. Yermakov, R. Munnings, I. Petrov and I. Potekhina.
Secretary of the Committee: I. Petrov.
The Corporate Governance and Ethics Committee works out the proposals on enhancing the standards of corporate
conduct and improving the quality of corporate governance at subsidiaries and affiliates. Besides, it monitors
compliance with the current laws, the Charter of the Corporation, and the business ethics standards. The Corporate
Governance and Ethics Committee is responsible for preventing and settling corporate and ethical conflicts.
In 2010, the Corporate Governance and Ethics Committee held eight meetings and considered 26 items, 13 of
which were on the matters of corporate governance in Sistema JSFC, seven items on corporate governance in the
companies of the Sistema Group, and five items on corporate social responsibility and functional strategies.
Investor Relations Committee
As of December 31, 2010 the Committee had six members. The Chairman of the Committee is R. Kocharyan.
Committee members: A. Buyanov, R. Sommer, R. Mehrotra, I. Potekhina and S. Cheremin. Secretary of the
Committee: I. Potekhina.
The core objective of the Committee is to work out the corporate policy in investor relations. The Committee
presents recommendations on the topic to the Board of Directors.
In 2010, the Committee held five meetings at which 12 items were considered, including nine items on
organization of IR work in the Corporation and the companies of the Sistema Group, two administrative matters
and one item on preliminary approval of the Annual Report of Sistema JSFC.
60
6.3. President
The President of Sistema JSFC is the permanent sole executive body with the core objective of managing day-to-
day activities aimed at ensuring profitability of the Corporation and securing the legitimate rights and interests of
its shareholders. The President acts within his scope and reports to the Board of Directors and the General Meeting
of the Company's shareholders.
The President of Sistema JSFC is Mikhail Shamolin who was appointed by the Board of Directors on 10 March
2011. As of 31.12.2010 the post of the President of Sistema JSFC was held by Leonid Melamed * elected on 29
May 2008 by the Board of Directors.
Mikhail Shamolin
Mikhail Shamolin was born in 1970.
Since March 2011 –
President of Sistema
JSFC.
Chairman of the Sistema
JSFC Management
Board.
In 1992 he graduated from the Moscow Automobile and Road Technical
Institute.
In 1993 Mikhail received his second diploma from the Russian Academy of
Public Administration under the President of the Russian Federation.
In 1996-97 he completed the finance and management course for top
managers at the Wharton Business School.
In 1998-2004 he worked at
McKinsey&Co.
the
international consulting company
In 2004-05 Mikhail held the position as the Managing Director for the
Ferroalloys Division at Interpipe Corp (Ukraine).
From 2005 Mr. Shamolin was Vice President for Sales and Customer Service
and Head of the MTS Russia business unit. From 2008 to March 2011 he held
the position as the President of MTS.
On 10 March 2011 Mikhail Shamolin was appointed President of Sistema
JSFC.
Leonid Melamed
Leonid Melamed was born in 1967 in Moscow.
President of
Sistema JSFC
Chairman of the
Management Board of
Sistema JSFC
In 1992 graduated from the Moscow Medial Academy n.a. I. Sechenov with a
degree in General Medicine.
Doctor of Medicine.
02.1992-09.1997 – ROSNO JSC, Director of Medical Insurance Center,
Deputy Chairman of the Management Board, 1st Deputy Chairman of the
Management Board.
09.1997-09.2003 – ROSNO OJSC, 1st Deputy CEO.
09.2003-04.2006 – ROSNO OJSC, CEO.
04.2006-05.2008 – Mobile TeleSystems OJSC, President.
05.2008- 03.2010 – Sistema JSFC, President, Chairman of the Management
Board.
Member of the Boards of Directors of ANK Bashneft OJSC, Chairman of the
Board of Directors of NK Russneft OJSC, member of the Strategy Committee
of Sistema JSFC, member of the Board of Trustees of the Sistema Charitable
Foundation.
61
6.4. Management Board
The Management Board of Sistema JSFC is responsible for the day-to-day management of Sistema JSFC. It
determines the methods for implementing the development strategy of the Corporation, works out development
plans, sets investment procedures and controls their observance, appraises the performance of the personnel, and
pre-considers items submitted to the Board of Directors. Meetings of the Management Board are normally held
once a week.
Members of the Management Board:
Chairman of the Management Board,
President of Sistema JSFC
M. Shamolin
A. Abugov
R. Almakayev
A. Buyanov
A. Goldin
S. Drozdov
F. Evtushenkov
A. Terebenin
Membership of the Management Board as of 31.12.2010: *
Chairman of the Management Board,
President of Sistema JSFC
L. Melamed **
A. Abugov
R. Almakayev
S. Boyev
A. Buyanov
A. Goldin
S. Drozdov
F. Evtushenkov
R. Sommer
A. Korsik
I. Potekhina
1
2
3
4
5
6
7
8
1
2
3
4
5
6
7
8
9
10
11
In 2010, the Management Board of the Company held 54 meeting and considered 188 agenda items dealing with all
the areas of business activity of the Corporation. In 2010 the Management Board reviewed the following key items:
-
-
-
preliminary consideration of items put forward to the Board of Directors; the strategies of the Corporate
Center and the Business Units were reviewed first as top priority.
financial activities, forecasts and performance on the quarterly, half-year and annual budgets of Sistema JSFC
Group; risk management and risk map; internal control; financial and economic model of Corporation's
development; procedures for investment projects management;
priority activities aimed at migration to the financial holding model as applied to each Business Unit and
Function of Sistema JSFC;
analysis of the organizational maturity status of subsidiaries and affiliates;
-
- HR and social policies; training and development of the employees of Sistema JSFC Group; charity work;
-
-
consideration and preliminary approval of transactions;
analytical reviews on the media's and investment community's perception of the performance results of the
Corporation.
Changes in the top management in 2010
There were a number of changes in the top management of the Company in 2010:
* brief biographies of the President and members of the Management Board of Sistema JSFC are provided in the Annex
** On 9 March 2011, pursuant to the decision taken by the Board of Directors of Sistema JSFC Leonid Melamed was relieved
of his duties as President of Sistema JSFC. Mikhail Shamolin was appointed President of Sistema on 10 March 2011
62
D. Frolov was relieved of his duties as Head of Internal Control and Audit Function of Sistema JSFC on
29.07.2010.
N. Demeshkina was appointed Head of Internal Control and Audit Function of Sistema JSFC on 30.07.2010.
6.5. Specifics of the risk management, internal control and audit system
-
The risk management system of Sistema JSFC is based on the ERM (COSO) principles which include the
following key elements:
-
identification of risks at all levels of the company management (from the top to line management), which
includes finding the risk owner and making a risk passport;
assessment and analysis of the identified risks of the company (based on VaR methodology), ranging the risks
at the management level;
development of risk mitigation plans and further monitoring of their implementation;
risk monitoring, quarterly reports on the risks of the company.
-
-
The risk management procedures of Sistema JSFC are applied by a dedicated unit - Risk Management of Sistema
JSFC.
Regular monitoring of the company risks is performed at the level of the Management Board and the Risk
Management Sub-Committee of Sistema JSFC by reviewing the effects of the mitigation and response measures
taken and reassessing the already identified and/or new risks.
The President of Sistema JSFC presents a quarterly report on risk management in the Corporation to the Audit
Committee of the Board of Directors of Sistema JSFC. Such report and a risk map are also presented to the
members of the Board of Directors on a quarterly basis.
The internal control and audit of the Corporation is performed by the Internal Control and Audit Function of
Sistema JSFC reporting to the President and the Audit Committee of the Board of Directors of Sistema JSFC.
Responsibilities of the Function include:
-
-
-
assessment of risk management efficiency;
assessment of the internal control quality and efficiency in preventing misconduct and fraud risks;
audit and assessment of fairness of the accounting and tax reporting, compliance with the financial and tax
accounting rules;
- monitoring compliance with the requirements of bylaws and applicable legislation by the employees.
The key working tools of the Internal Control and Audit Function are audits and analysis of the obtained findings.
The performance results of the internal control and audit services are reported to the President of Sistema JSFC and
the Audit Committee of the Board of Directors to ensure that decisions are taken to eliminate the identified
deficiencies.
The Internal Control and Audit Function performs regular monitoring of the removal of the deficiencies identified
by the internal audits, inspections of the revision commissions for the Annual General Meeting of shareholders and
external audit. The findings of monitoring are reported to the President of Sistema JSFC and the Audit Committee
of the Board of Directors to ensure that the necessary management decisions are taken.
The Internal Control and Audit Function submits a quarterly report on the work done and the deficiencies identified
to the Board of Directors of Sistema JSFC. The Board of Directors makes an annual assessment of the performance
of the Internal Control and Audit unit and approves an audit plan for the year.
Pursuant to the decision of the Audit Committee of Sistema JSFC the following procedures have been developed
for purchasing external audit services for the purposes of audit of the financial accounting and reporting of Sistema
JSFC. The Audit Committee performs annual assessment of the quality of audit services. If the quality of services
provided by the current auditor is recognized to be insufficiently high, the Audit Committee arranges a tender for
selection of a new auditor. In case the quality of services of the current auditor is recognized as satisfactory,
negotiations are conducted on the price of audit services for the next period. In the meantime, to ensure impartiality
63
and objectivity of the auditor, the Audit Committee of Sistema JSFC made the decision that a tender for the audit of
the RAS and US GAAP financial statements shall be conducted, at any rate, at least once in every five years.
6.6. Specifics of the corporate governance system development in 2010
In 2010 the Corporation took a number of measures to further develop its corporate governance system.
In June 2010, the new independent director, Roger Munnings, was elected to the Board of Directors. Roger
Munnings, one of the most reputable specialists in financial reporting and audit, being an independent director on
the Board of Sistema, will enhance the level of the Board of Director's competency in financial reporting, internal
control and audit.
Sistema JSFC continued its practice of internal corporate governance ratings of the group's companies. The
findings of expert examinations were used to work out plans for further development of the corporate governance
systems of the subsidiaries.
A number of new bylaws of Sistema JSFC were approved in 2010: the Information Policy, the new version of the
Charter and the Terms of Reference of the General Meeting of Shareholders.
The new version of the information policy includes a revised description of the principles for the Corporation's
interaction with all potential recipients of information, and an extended list of information to be disclosed by the
Corporation. The document balances the interests of the company's transparency and compliance with the legal
requirements in control over the use of insider information.
Amendments were made to the Charter and the Terms of Reference of the General Meeting of Shareholders
following amendments to the Federal Law "On Joint-Stock Companies". Simultaneously, some points of the section
on the procedural matters of conducting General Meetings of shareholders and the authority scope of the Company's
Board of Directors were made more specific to reduce the risk of corporate conflicts.
64
7. SOCIAL RESPONSIBILITY
Corporate social responsibility is a comprehensive system encompassing all the activities of Sistema JSFC. While
adhering to the fundamental documents and standards in CSR, like GRI, the UN Global Compact and the Social
Charter of the Russian Business, the Corporation also focuses on four key areas:
1.
2.
3.
4.
Responsibility of the corporate citizen as contribution to the development of the society and the state in
general.
Responsibility of the employer towards the employees and their families, ensuring good working
conditions for building high quality of life.
Responsibility of a business partner implying adherence to the business ethics, application of best practice
in corporate governance and information disclosure, which makes it possible to provide sufficient
protection and respect for the rights of partners and shareholders, including the minority shareholders.
Responsibility of a party to social relations which allocates funding for science and education, culture and
sports, as well as support of social initiatives and projects.
The agenda item on corporate social responsibility was discussed at the Board of Directors meeting of the
Corporation and the Corporate Governance and Ethics Committee meeting in 2010. Importantly, the core CSR
principles approved at the Corporation's level are being implemented and applied at all of its subsidiaries and
affiliates. The Corporation has designed a system for cascading the CSR function that includes forming standards,
building the management structure, training the personnel, and controlling implementation via a system of
indicators.
Below, there is a brief description of the CSR performance results and achievements of Sistema JSFC for the last
year:
Responsibility of a corporate citizen.
Being the 7th largest Russian company by revenues, Sistema JSFC is one of the country‘s largest taxpayers.
The companies of Sistema JSFC have a significant influence upon the development of the national intellectual
potential and growth in areas related to innovations and state-of-the-art technologies. For instance, investment of
Sitronics in the microchip manufacturing facility alone amounted to 6.5 billion rubles.
Being a participant to the GLONASS target program and other large-scale federal projects, the Corporation plays a
key role in developing the high-tech industry, as it creates jobs, develops the entrepreneurial environment, and
participates in forming the national intellectual elite.
As participants of the hydrocarbon market, our companies invest significant funds into environmental measures.
For instance, in 2010 Bashneft spent 1.5 billion rubles on these purposes. Achievements of our companies in
resource and energy efficiency should also be noted, as they have demonstrated results above the industry average:
associated gas utilization rate at BashTEK companies is 85% (vs. the industry average of 73%); refining depth is at
86.3% (vs. the industry average of 71.8%). Our companies have received a number of awards to mark their
achievements in the area of ecology. For example, Bashneft has become a laureate of the 6th National Ecology
Awards in the ‗Science for Ecology‘ nomination.
Responsibility of an employer
Sistema JSFC, together with its subsidiaries and affiliates, is also one of the largest employers in Russia. In 2010,
the headcount of the subsidiaries and affiliates of the Corporation exceeded 135,000 people. Given the family
members of the employees, the Corporation is responsible for the welfare of around half a million citizens of the
Russian Federation. Provision of good working conditions necessary for building high quality of life is an
unquestionable priority and the corner-stone of the Company's CSR policy.
We believe that the quality of the workplace comprises a number of components, such as compensation level,
motivation system, working conditions, social guarantees, professional development and growth opportunities.
65
For instance, employees‘ salaries are differentiated in line with a grade system designed by Hay Group, a leading
international consultancy; on the basis of monitoring salaries across various reference groups in the labor market.
The total annual compensation of the employees is aligned with the advanced motivation system adopted in the
Corporation.
In addition to the social guarantees stipulated in the Labor Code of the Russian Federation, each of the
Corporation‘s companies offers additional guarantees and benefits to its employees in line with its Social Policy
fixed in the bylaws. In particular, the employees of Sistema JSFC and its subsidiaries can use the services of one of
the best private healthcare networks, Medsi, at a discount or free of charge.
The Corporation pays special attention to the development of each employee‘s intellectual potential. The Group
cooperates with eight major Russian higher educational establishments and finances its own Corporate University.
About 72 thousand employees of the Sistema JSFC companies are trained annually. The Corporation also creates
all the necessary conditions for professional and career development. As a result of these efforts, 39 managers of
the Group are on the Top-1000 Best Managers of Russia rating.
In 2010 the Corporation became one of Russia‘s Top-10 most attractive employers, rated No3 in the ‗Financial and
Industrial Groups and Diversified Holdings‘ category.
Responsibility of a business partner
In its Corporate Code of Ethics the Corporation has set a number of principles that reflect responsibility in business
relations, and it follows them rigorously.
These principles include: sound business practice, adherence to professional, legal and ethical standards of doing
business, adherence to corporate governance standards, and respect for the rights of the minority shareholders,
transparency and quality of disclosure.
Sistema JSFC was one of the first companies in Russia to join the UN Global Compact, and it has recently
confirmed its membership as it submitted a report that was approved by a special UN commission. In 2010 Sistema
JSFC was elected a member of the Steering Committee of the Global Compact Network Russia.
The Corporation and its subsidiaries have adopted an Ethics Code and a Corporate Conduct Code.
Sistema JSFC plays an active role in fighting corruption, which is reflected in its procedures and bylaws. Sistema
JSFC and its subsidiaries use transparent mechanisms, as well as purchasing and tender procedures.
The business practices of Sistema JSFC are highly appreciated by the market. The Corporation was ranked No16 in
the Standard&Poor‘s Russian companies transparency research in 2010 (No19 in 2009). S&P Corporate
Governance Score of MTS has been set as 7 on the international scale and 7.3 on the national scale. RID-Expert
RA Consortium confirmed the Corporate Governance rating of Sistema JSFC at NCGR 7+ ―Developed corporate
governance practice‖ on the national scale.
The Corporation does not only adhere to the international corporate governance standards but also sets standards of
its own, thus forming a civilized business environment around itself.
Responsibility of a party to social relations.
The Corporation is one of the major philanthropists and investors in the Russian social sphere. Such investments
totaled 1,708.8 million rubles in 2010. Social investments were mostly made in the following areas:
- Science and education.
- Culture.
- Sports.
- Direct support to social initiatives and projects.
Being aware of the importance of supporting education and science, Sistema JSFC is a patron of the Higher School
of Management of the Saint-Petersburg State University, the European University, the Russian Geographical
Society, and many other educational and scientific institutions and projects. The most gifted students of a number
of technical higher educational establishments are covered by a scholarship program.
66
Sistema JSFC is a major sponsor of numerous Russian cultural events. Since 2003 the Corporation has been the
main sponsor of the State Russian Museum, a sponsor of the Mariinsky Theatre festivals, the annual Musical
Kremlin concerts, and the international ballet contest Benois de la Danse. Sistema JSFC also sponsors the
Sovremennik Theater.
The Corporation traditionally provides support for the Russian sports: the Russian Olympians Foundation, the
Russian Rugby Union, the Federation of Cycling Sport of Russia,the Sports Federation of the Russian Ministry of
the Interior, and a number of junior sport schools.
Projects in the social sphere are an important component of our charitable activities: Sistema JSFC finances a
number of orphanages and shelters, and is in close cooperation with several charitable foundations that support the
disabled and veterans. In 2010 the Corporation implemented a nation-wide project on restoring houses and
buildings at the Verkhnaya Vereya settlement in the Nizhny Novgorod Region that was damaged by the devastating
summer wildfires.
The projects are implemented via the Sistema Charitable Foundation that was established in 2003 to ensure
effective management of the Corporation and its subsidiaries‘ social investments.
Sistema JSFC was ranked No2 on the annual Russian Corporate Social Responsibility and Philanthropy Ranking
by PriceWaterhouseCoopers and the Vedomosti.
67
8. CRITERIA AND AMOUNTS OF REMUNERATION FOR THE MEMBERS OF
THE BOARD OF DIRECTORS AND TOP EXECUTIVES OF THE COMPANY
The remuneration for the members of Sistema JSFC Board of Directors is calculated on the basis of the "Policy on
remuneration and compensations payable to the members of the Board of Directors of the Company", approved
with a resolution of the General Meeting of shareholders of Sistema JSFC on 30 June 2006 (Minutes No1-06) as
amended with the resolution of the General Meeting of the shareholders of Sistema JSFC on 16 February 2009
(Minutes No1-09). The Policy provides for payment of the following to the Board of Directors members:
⁻
⁻
fixed amounts for participation in meetings of the Board of Directors and its committees;
fixed amounts for acting in the capacity of the Chairman or the Deputy Chairman of the Board of Directors,
and for chairmanship of the committees under the Board;
⁻ based on the results of a year, members of the Board of Directors get additional performance-related
remuneration in the form of a fixed amount, half of which is payable in shares (US$ 250,000 - 325,000);
⁻
also, given the capitalization of the Corporation has grown over the year, members of the Board of Directors
get additional remuneration amounting to 0.1% of the incremental capitalization.
The short-term (up to one year) incentive scheme for the top managers of Sistema JSFC in 2010 consisted of the
following elements:
and
bonuses
quarterly
- monthly fixed salary determined in line with the internal system of job categories (grades);
-
four
of
annual
а) financial key performance indicators set for the Corporation as a whole and its Business Units for a
respective reporting period;
b) functional key performance indicators set individually for each of the top managers of Sistema JSFC for
the respective reporting period;
additional remuneration paid for achievement of investment targets of the Corporation for the year;
additional bonus which may be paid only following a decision of the Board of Directors.
achievement
bonus
paid
one
for
-
-
In 2010, the Board of Directors of Sistema JSFC approved a number of changes in the 3-year long-term incentive
program for the management of the Corporation. The remuneration of the program participants depends on the
capitalization growth of Sistema JSFC and may be paid both in cash bonuses and in ordinary shares of the
Corporation transferred to the ownership of the program participants on its expiration in 2012.
No remuneration is paid for the executive work of the managers sitting on the Management Board of Sistema
JSFC.
The top managers of the Corporation were paid the total of RUB 2,461,336,607 in remuneration for the calendar
year 2010. Remuneration paid to the Board of Directors members of Sistema JSFC in 2010 totaled RUB
290,139,550.
68
9. ANNEX
9.1. SUMMARY BIOGRAPHIES OF THE MEMBERS OF THE BOARD OF DIRECTORS AND
THEIR SHAREHOLDINGS IN SISTEMA JSFC
Full name, Title
Brief Professional Background
Vladimir
Evtushenkov
Chairman of the
Board of Directors,
non-executive
director, Chairman of
the Strategy
Committee of the
Board of directors of
Sistema JSFC.
Alexander
Goncharuk
Non-executive
director of the Board
of Directors of
Sistema JSFC
Was born in 1948 in the Smolensk Region.
In 1973 graduated from the Moscow Mendeleyev Chemical-Engineering Institute, in
1980 – the Economic Faculty of the Moscow State University. Doctor of Science in
Economics.
In 1975-1982 worked as a Machine Shop Manager, Deputy Director, Chief Engineer of
the Karacharovo Factory of Plastics, from 1982 to 1987 – Chief Engineer, First Deputy
Director General of Polymer Scientific and Production Association. In 1987 was
appointed Head of Technical Department, in 1988 – Head of the Main Department of
Science and Technology of the Moscow City Executive Committee, in 1990 – the
Chairman of the Moscow Municipal Committee for Science and Technology.
In 1993 together with a group of like-minded individuals formed the Sistema Joint-Stock
Financial Corporation. At present is the principal shareholder, the Chairman of the
Sistema JSFC Board of Directors and Chairman of the Strategy Committee of the Board
of Directors.
Active member of a number of government commissions for the improvement of
competitiveness of the Russian industry, development of high technologies and
innovations, science and culture; a member of the National Council on corporate
governance, member of the management boards of the main associations of entrepreneurs
in Russia - the Russian Union of Industrialists and Entrepreneurs, the Russian Chamber
of Industry and Commerce, Chairman of the Russian side of the Russian-Arab Business
Council.
In 2004 was elected Chairman of the Board of Trustees of the State Russian Museum
Development Fund ―Friends of the Russian Museum‖. Head of the Board of Trustees of
Sistema Charitable Foundation.
Share in the authorized capital of Sistema JSFC - 64.18%.
Was born in 1956 in Sebastopol.
In 1978 graduated from the Sevastopol Higher Navy and Engineering School, and in
1987 — the Grechko Navy Academy.
From 1987 to 1991 was serving in the Navy Headquarters in a position of the senior
officer. Then was the Head of Leader Joint-Stock Insurance Company.
From 1995 to 1998 – Vice-President of Sistema JSFC, from March 2006 to May 2008 –
President of the Corporation. While working in the Corporation he was the Chairman of
the Board of Directors of MTS (in 1998 and from 2002 to 2003), Sistema Telecom (1998
- 2003) and Sitronics Concern (2003 - 2006).
At present is a member of the Sistema JSFC Board of Directors, member of the
Nomination and Remuneration Committee and Sistema Charitable Foundation Board of
69
Trustees, and also Chairman of the Board of Directors of ANK BashNeft, Chairman of
the Board of Directors of Polief, member of the Presidential Council of the Republic of
Bashkortostan.
Share in the authorized capital of Sistema JSFC - 1.89%.
Ron Sommer
Ron Sommer was born in 1949.
Executive director,
member of the
Strategy Committee
and the IR Committee
of Sistema JSFC
Board of Directors.
In 1971 graduated from the Vienna University and received a Doctor‘s Degree in
mathematics.
In 1980 was appointed Managing Director in the German branch of the Sony Group and
in 1990 was appointed President and Chief Operating Officer of Sony Corporation USA.
In 1993 held the same position in Sony Europe. From May 1995 to July 2002 – Deutsche
Telekom AG, Chairman of the Management Board.
In 2003 was elected Chairman of the International Advisory Board of Sistema JSFC. In
2005 became independent director on the Board of Sistema JSFC where he also
performed the duties of the Chairman of the IR Committee.
From May 2009 - First Vice President of Sistema JSFC, Head of Telecom Assets
Business Unit, member of the Board of Directors of Sistema JSFC, Chairman of the
Board of Directors of MTS, Chairman of the Board of Directors of SMM, Chairman of
the Board of Directors of Sistema Shyam Teleservices Ltd. (SSTL), member of the
Strategy Committee, member of the Investor Relations Committee of Sistema JSFC.
Ron Sommer serves on the Boards of Directors of Tata Consultancy Services and Munich
Reinsurance, and he is also a member of the International Consultative Council of
Blackstone Group.
Share in the authorized capital of Sistema JSFC - 0.0042%.
Dmitry Zubov
Was born in 1954 in the Gorkiy Region.
Deputy
Chairman of the
Board of Directors,
non-executive
director, member
of the Nomination
and Remuneration
Committee of
Sistema JSFC.
In 1977 he graduated from the Moscow Automobile and Road Technical Institute.
Doctor of Science in Economics.
In 1978-79 worked as a foreman at the Lukhovitsy Engineering Plant, in 1979-1983 —
Secretary of the Young Communist League‘s Committee. From 1983 to 1988 worked in
the Department of Working Youth of the Central Committee of the Young Communist
League, in 1988-1989 was the Head of the All-Union Centre of Housing Cooperatives
for Youth. In 1989-1991 worked in the capacity of the Deputy Director General of the
All-Union Centre of Cinema and Television for Children and Youth. In 1992-1996 was
the Director General of Alon Close-Type Joint-Stock Company, and then held governing
positions in MosEximBank, IBN Sistema and PromChemVest.
In 1999 was elected member of the Board of Directors of Sistema JSFC, from 2000 -
Deputy Chairman of the Board of Directors; member of the Board of Trustees of the
Charitable Foundation of Sistema JSFC, member of the Nomination and Remuneration
Committee.
Share in the authorized capital of Sistema JSFC - 0.88%.
Vyacheslav
Kopiev
Was born in 1954 in Moscow.
In 1977 graduated from the Faculty of Cybernetics of the Moscow Engineering and
70
Non-executive
director, Chairman
the Corporate
of
Governance
and
Ethics Committee
the Sistema
of
JSFC Board of
Directors.
Physical Institute, in 1993 - the Faculty of Jurisprudence of the Russian Academy of
Management, and in 1994 – the Economic Faculty of the International Academy of
Marketing and Management.
PhD in Technical Sciences. PhD in Legal Sciences. Author of more than 70 scientific
works.
From 1977 to 1990 - Komsomol and public work, Secretary of the Krasnogvardeiskiy
District Committee of the Young Communist League, First Secretary of the Moscow
City Committee of the Young Communist League, Second Secretary of the Central
Committee of the Young Communist League.
From 1989-1997– member of the Board of Management of the Union of Scientific and
Engineering Societies, Director for International Relations and Innovation Activities of
this Union. From 1990 to 1997 – Chairman of the Board of Directors of Sputnik JC,
since 1995 – Deputy Chairman of the Executive Committee of the Russian-British
Chamber of Commerce and Industry.
In 1997 was appointed Vice-President of Sistema JSFC, from 2000 to 2003 – Senior
Vice-President, Head of the External Business Environment Complex. From 2003
December to 2010 - Deputy Chairman of the Sistema JSFC Board of Directors.
Chairman of the Charitable Foundation of Sistema JSFC, Chairman of the Corporate
Governance and Ethics Committee of Sistema JSFC.
Member of the Presidential Council of the Russian Federation for development of
physical education and sports, professional sports, preparations for the XXII Olympic
Games and XI Paralympic Games of 2014 in Sochi, President of the Russian Rugby
Union.
Member of the Sistema JSFC Board of Directors since 1997.
Share in the authorized capital of Sistema JSFC - 0.054%.
Robert
Kocharyan
Non-executive
director, member
of the IR
Committee and the
Nomination and
Remuneration
Committee of
Sistema JSFC
Board of Directors.
Was born in 1954 in Stepanakert, Nagorno-Karabakh Autonomous Oblast.
Polytechnic
In
graduated
Yerevan
1982
from
the
Institute.
From 1972 to 1981 served in the Soviet Army, worked at the Stepanakert
Electrotechnical Plant as an assembly fitter, and then – a mechanical engineer. In 1981-
1990 held various positions in the Komsomol and Communist Party bodies of Nagorny
Karabakh.
From February 1988 he was one of the leaders of the movement for separation of
Nagorny Karabakh autonomous district from the Soviet Republic of Azerbaijan and its
further annexation to Armenia. In 1989 and 1990 was elected a deputy of Armenia‘s
Supreme Council and member of the Presidium of the Supreme Council of the Armenian
SSR.
In 1991-1994 - deputy of the first Supreme Council of the Nagorny-Karabakh Republic
(NKR), Chairman of the State Defense Committee of NKR and Prime Minister of NKR.
From 1994 to 1997 - President of NKR.
In 1997-1998 - the Prime Minister of the Republic of Armenia, in 1998–2008 - the
President of the Republic of Armenia.
Member of the Sistema JSFC Board of Directors since 2009. Chairman of the IR
Committee and the Nomination and Remuneration Committee of the Board of Directors.
Share in the authorized capital of Sistema JSFC - 0.00096%.
71
Roger Munnings
the
Independent
director; Chairman
of
Audit
Committee and the
Corporate
Governance
and
Ethics Committee
the Board of
of
Directors, Sistema
JSFC
Was born in 1950 in the United Kingdom.
Graduated from the Oxford University with a degree of Master of Arts in politics,
philosophy, and economics.
At present he is a member of the UK Government's working group on trade and
investments between Great Britain and Russia, as well as the Chairman of the Institute
of Audit Committees in Russia.
Roger Munnings has had a long and successful career (from 1974) with the international
auditor KPMG, especially during his time in the office of President and Managing
Partner of KPMG in Russia and the CIS (1996-2008), as well as the Chairman of the
world energy and natural resources committee of KPMG (1993-2008). Presently
serving as the deputy Chairman of the management board of the Association of
European Business (AEB) and member of the Institute of certified accountants of
England and Wales.
Roger Munnings is actively involved in public activities in Russia being a member of the
Russian National Council on Corporate Governance, the Russian Union of Industrials
and Entrepreneurs, the Russian institute of directors, the management board of the
American-Russian business council, the management board of the Russian-British
chamber of commerce etc.
Member of the Board of Directors of Sistema JSFC from 2010. Chairman of the Audit
Committee, member of the Corporate Governance and Ethics Committee of the Board of
Directors.
Has no shareholding in the authorized capital of Sistema JSFC.
Leonid Melamed
Was born in 1967 in Moscow.
Executive
Director*, member
the Strategy
of
Committee of the
Board of Directors
of Sistema JSFC.
In 1992 graduated from the Moscow Medical Academy n.a. I. Sechenov. Doctor of
Medicine.
From 1991 to 2006 worked with the ROSNO insurance company, in 2003 was appointed
CEO and Chairman of the Management Board.
In 2004-2006 headed the Expert Council on insurance legislation of the Duma
Committee of the Federal Assembly of the Russian Federation on credit organizations
and financial markets.
*from 9 March 2011 -
non-executive director
In 2006-2008 - President, Chairman of the Management Board, member of the Board of
Directors of MTS.
From May 2008 to March 2011 - President, Chairman of the Management Board of
Sistema JSFC. From 2009 – member of the Board of Directors of Sistema JSFC.
At present Leonid Melamed sits on the Boards of Directors of Sistema JSFC and
Bashneft, is Chairman of the Board of Directors of Russneft, member of the Strategy
Committee of the Sistema JSFC Board of Directors.
Share in the authorized capital of Sistema JSFC - 0.00094%.
Was born in 1954.
In 1973 graduated from the university in Harayana State, India, with a degree in radio
and TV.
72
Rajiv Mehrotra
Non-executive
director, member of
the
Audit
Committee and the
IR Committee of
Sistema
JSFC
Board of Directors.
Evgeny Novitsky
Independent
director. Member of
the Audit
Committee of the
Board of Directors
of Sistema JSFC.
Veteran of the Indian telecom industry. Founder and Chairman of the Shyam Group of
companies.
In 1974 initiated manufacturing of low-budget satellite TV equipment which provided
access to cable TV for many millions of Indian villagers. Was engaged in installation of
telephone services in rural districts.
Created the flagship of Shyam Group - Shyam Telecom, one of the leading developers of
mobile systems. In 1990s he launched Xecacom (now Bharti Hexacom) to provide GSM
services in Rajasthan.
The founder of Shyam Telelink Limited (now Sistema Shyam Teleservices Ltd.) - one of
the first operators in the world to deploy CDMA technology for fixed wireless services.
His efforts also established Essel Shyam as the leading name in VSAT satellite
communications.
Member of the Sistema JSFC Board of Directors since 2009. Member of the Audit
Committee and the IR Committee of the Board of Directors.
Share in the authorized capital of Sistema JSFC – 0.00096%.
Was born in 1957 in the Tomsk Region.
In 1985 graduated from the Moscow Bauman Higher Technical School. In 1989-90
studied management at the Moscow State University of International Relations and the
University of Manchester, UK. Candidate of Technical Sciences.
In 1985-1987 worked as an engineer and mathematician at the Moscow Bauman Higher
Technical School, and in 1987-1990 studied there at the post-graduate course. In 1991-
95 was in charge of developing and producing a series of Russian-made computers as
well as of organizing IBM computers assemblage at Quantum Factory (in Zelenograd),
was the Chairman of the Board of Directors of the Russian IT company IVK
(Information and Innovation Company). Author of a monograph and of a number of
publications, member of the Board of Trustees of the Moscow Bauman Higher Technical
School.
Since 1995 has been working at Sistema JSFC as the President of the Company, and
from January 2005 to February 2006 was the Chairman of the Corporation‘s Board of
Directors. Since 2006 – non-executive director and since 2010 – independent director of
the Sistema JSFC Board of Directors.
At present – independent director of the Sistema JSFC Board of Directors, member of
the Audit Committee, member of the Sistema Charity Fund Board of Trustees.
Share in the authorized capital of Sistema JSFC – 1.99%.
Sergey Cheremin
Deputy
Chairman of the
Board of Directors,
non-executive
director.
Chairman of the
Nomination and
Remuneration
Committee,
member of the
Strategy Committee
and IR Committee
of Sistema JSFC.
Was born in 1963 in Kislovodsk.
In 1989 graduated from the Moscow State Institute of International Relations with a
degree in International Journalism, and in 2003 finished the post-graduate course of the
Faculty of International Economic Relations at the Lomonosov Moscow State University
with a degree in World Economy. In 1992 took an internship at the University of New
York in the sphere of Investments and International Settlements, and in 1993 completed
the program for banking specialists at the Fairfield University (USA). Candidate of
Economic Sciences.
In 1991-1992 – First Deputy Chairman of the Management Board of PrintBank
Commercial Bank, 1992-1998 – Chairman of the Management Board of the Moscow
Export and Import Bank, 1998-2000 – Vice President of the Ural Trust Bank, 2000-2003
– Adviser to the President, and then the President of North-Eastern Alliance Commercial
Bank.
In 2004 was appointed Chairman of the Management Board of the MBRD bank, in
73
2005-09 held the position of Vice President, Senior Vice President and Head of the
External Communications Function of Sistema JSFC. In 2008 was elected a member of
the Sistema JSFC Board of Directors, in 2009 – Deputy Chairman of the Sistema JSFC
Board of Directors. Chairman of the Nomination and Remuneration Committee, member
of the Strategy and IR Committees of the Board of Directors. Also a member of the NIS
and SSTL Ltd. Boards of Directors.
Since November 2010 – Head of the Department of the External Economic and
International Relations of Moscow Government. Minister at the Moscow government.
Share in the authorized capital of Sistema JSFC – 0.0026%.
74
9.2. INFORMATION ON TRANSACTIONS PERFORMED BY THE MEMBERS OF THE
BOARD OF DIRECTORS OF SISTEMA JSFC WITH THE SHARES THEY HOLD IN THE
COMPANY OVER THE PERIOD 1 JANUARY - 31 DECEMBER 2010
Board member
V. Evtushenkov
D. Zubov
V. Kopiev
Date
of the
transaction
15.07.2010
15.07.2010
15.07.2010
26.11.2010
A. Goncharuk
15.07.2010
22.12.2010
E. Novitsky
15.07.2010
03.11.2010
Transaction content
Transaction subject
Crediting
holder's account
securities
to
the
89,139 ordinary registered shares
Crediting
holder's account
Crediting
holder's account
securities
securities
to
the
89,139 ordinary registered shares
to
the
89,139 ordinary registered shares
Debiting securities from
the
crediting
account,
holder's
securities to the account of a
nominal holder – DCC
1,930,000 ordinary
shares
registered
to
the
securities
Crediting
holder's account
the
Debiting securities from
crediting
account,
holder's
securities to the account of a
nominal holder – DCC
to
the
securities
Crediting
holder's account
the
Debiting securities from
holder's
crediting
account,
securities to the account of a
nominal holder – DCC
89,139 ordinary registered shares
37,644,644 ordinary registered
shares
89,139 ordinary registered shares
13,167,000 ordinary registered
shares
R. Sommer
No operations on this account
during the above mentioned
period
R. Kocharyan
15.07.2010
L. Melamed
15.07.2010
R. Mehrotra
15.07.2010
S. Cheremin
15.07.2010
Crediting
holder's account
Crediting
holder's account
securities
securities
Crediting
holder's account
securities
Crediting
holder's account
securities
to
the
93,237 ordinary registered shares
to
the
89,139 ordinary registered shares
to
the
93,237 ordinary registered shares
to
the
89,139 ordinary registered shares
75
9.3. SUMMARY BIOGRAPHIES OF THE PRESIDENT OF SISTEMA JSFC AND THE
MEMBERS OF THE MANAGEMENT BOARD
Mikhail Shamolin
Was born in 1970.
Since March 2011 –
President of Sistema JSFC.
Chairman of the Sistema
JSFC Management Board.
In 1992 he graduated from the Moscow Automobile and Road Technical
Institute.
In 1993 Mikhail received his second diploma from the Russian Academy of
Public Administration under the President of the Russian Federation.
Leonid Melamed
President of Sistema JSFC
till March 2011.
Chairman of the Sistema
JSFC Management Board.
In 1996-97 he completed the finance and management course for top managers
at the Wharton Business School.
In 1998-2004 worked at the international consulting company McKinsey&Co.
In 2004-05 Mikhail held a position of the Managing Director for the Ferroalloys
Division at Interpipe Corp (Ukraine).
From 2005 – Vice President for Sales and Customer Service and Head of the
MTS Russia business unit. From 2008 to March 2011 he worked as President of
MTS.
On 10 March 2011 Mikhail Shamolin was appointed President of Sistema JSFC.
Was born in 1967 in Moscow.
In 1992 graduated from the Moscow Medical Academy n.a. I. Sechenov. Doctor
of Medicine.
From 1991 to 2006 worked with the ROSNO insurance company, in 2003 was
appointed CEO and Chairman of the Management Board.
In 2004-2006 headed the Expert Council on insurance legislation of the Duma
Committee of the Federal Assembly of the Russian Federation on credit
organizations and financial markets.
In 2006-2008 - President, Chairman of the Management Board, member of the
Board of Directors of MTS.
From May 2008 to March 2011 – President, Chairman of the Management Board
of Sistema JSFC. From 2009 – member of the Board of Directors of Sistema
JSFC.
At present Leonid Melamed sits on the Boards of Directors of Sistema JSFC and
Bashneft, is Chairman of the Board of Directors of Russneft, member of the
Strategy Committee of the Sistema JSFC Board of Directors.
Share in the authorized capital of Sistema JSFC - 0.00094%.
76
Members of the Management Board:
Anton Abugov
Was born in 1976 in Mytishchi, the Moscow Region.
First Vice President, Head of
the Sistema JSFC Strategy
and Development Function.
Member of the Sistema JSFC
Management Board.
In 1998 graduated from the Academy of the National Economy under the
Government of the Russian Federation with a degree in management.
1995-99 – Closed-Type Joint-Stock Company United Financial Group, Deputy
Executive Officer of the Department of Transactions with Securities, Trader.
1999-2002 – Closed Joint-Stock Company United Financial Group, Head of the
Corporate Finance Department.
2003-06 – ROSBANK, Managing Director, Head of the Corporate Finance
Division.
Since August 2006 – Sistema JSFC, First Vice President, Head of the Strategy
and Development Function.
Alexander Korsik
Was born in 1956 in Minsk.
Senior Vice President, Head
of Oil and Energy Business
Unit.
Member of the Sistema JSFC
Management Board up to
April 2011.
In 1979 graduated from the Moscow Bauman Higher Technical School
(University) with a degree in Automated Control Systems.
1982-1995 – public service.
1995-1997 – KomiTEK-Moscow, Deputy Director General.
1999-2005 – SibNeft, Head of the Department, from May 1999 – First Vice
President.
1999-2005 – Renaissance Capital-Financial Consultant, Managing Director
2006-2007 – ITERA HGK, Executive Director.
2007-2009 – RussNeft NK, Chairman of the Board of Directors.
May 2009-April 2011 – Sistema JSFC, Senior Vice President, Head of Oil and
Energy Group Business Unit.
Since April 2011 – President of Bashneft.
Ron Sommer
Was born in 1949 in Israel.
In 1971 graduated from the Vienna University.
First Vice President, Head of
the BU Telecommunication
Assets of Sistema JSFC.
Member of the Sistema JSFC
Management Board up to
April 2011.
1980 – Sony Deutschland, Managing Director.
1986 – Sony Deutschland, Chairman of the Management Board.
1990 – Sony Corporation, USA, President and COO.
1993 – Sony Europe, President and COO.
1995-2000 – Deutsche Telekom AG, Chairman of the Management Board.
2003 – International Advisory Council of Sistema JSFC, Chairman.
2005 – Independent Director of the Sistema JSFC Board of Directors, Chairman
of the IR Committee.
Since September 2009 – Sistema JSFC, First Vice President, Head of
Telecommunication Assets Business Unit.
77
Alexei Buyanov
Was born in 1969 in Moscow.
Senior Vice President, Head
of Finance and Investment
Function of Sistema JSFC
Member of the Sistema JSFC
Management Board.
In 1992 graduated from the Moscow Physics and Technology Institute with a
in Applied Mathematics and Physics, Engineering Physicist.
degree
1992-1994 – Trainee Researcher at the Institute of Problems of Mechanics, the
Russian Academy of Sciences.
1994-1995 – Sistema JSFC, Chief Specialist, Lead Specialist, Executive
Director.
1995-1998 – Sistema Invest, Head of Division, Vice President, First Vice
President.
1998-2002 – Mobile TeleSystems, Vice President for Investments and
Securities.
2002-2002 – Sistema JSFC, Vice President, Head of the Financial Restructuring
Department.
2002-2005 – Sistema JSFC, First Vice President.
From April 2005 – Sistema JSFC, Senior Vice President, Head of Finance and
Investment Function
Sergey Drozdov
Was born in 1970 in Arkhangelsk.
Senior Vice President, Head
of Property Function of
Sistema JSFC.
Member of the Sistema JSFC
Management Board.
In 1993 graduated from the Ordzhonikidze State Academy of Management with
a degree in Engineering and Economy.
Candidate of Economic Sciences.
1993- 1994 – Yugorskiy Joint-Stock Bank, Economist in the Division of Trust
Operations and Funds, Deputy Head of the Division of Securities and Trust
Operations, Head of the Securities Department.
1994-1995 – Moscow Property Fund, Head of the Financial Innovations and
Marketing Department.
1995-1998 – Sistema JSFC, Executive Director, Deputy Head of the Department
of Development and Investments.
1998-2002 – Sistema Invest, Head of Division, Vice President, First Vice
President.
2002 – Sistema JSFC, Head of the Corporate Property Department, Acting First
Vice President.
2002-2005 – Sistema JSFC, First Vice President.
Since April 2005 – Sistema JSFC, Senior Vice President, Head of the Property
Function.
Ruslan Almakaev
Was born in 1963 in Kharkov.
Head of Property Function of
Sistema JSFC.
Member of the Sistema JSFC
Management Board.
In 1994 graduated from the Kharkov State Pedagogical University with a
diploma of the Teacher of Mathematics, Informatics and Computer Technology.
In 2003 graduated from the Krasnodar State University as a Systematizer of
Macroeconomic Processes.
1993-1995 – Eurasia Trading and Industrial Company, Deputy Director General.
1995-2002 – Russian AviaFund, Regional Public Fund for Protection of Air
Force Servicemen and Employees of the Aviation Industry, Deputy Director
General.
2002-2003 – Sistema JSFC, Vice President, Head of the Department of Non-
78
corporate restructuring.
2003-04 – System Project, Director General.
2004-2005 – Sistema JSFC, Vice President for Regional and Venture projects.
Since April 2005 – Sistema JSFC, Vice President, Head of the Administrative
Function.
Anna Goldin
Was born in 1963 in Leningrad.
Vice President, Head of the
Sistema JSFC Legal
Function.
Member of the Sistema JSFC
Management Board.
Graduated from the University of California in Berkeley, Boalt Hall.
Doctor of Law.
1988 – Baker & McKenzie, Lawyer/Trainee.
1989 – Gibson, Dunn & Crutcher, Lawyer/Trainee.
1989 – Morrison & Foerster, Lawyer/Trainee.
1990-1998 – Latham & Watkins, Lawyer.
1999-2007 – Latham & Watkins, Partner, Managing Partner.
Since June 2007 – Sistema JSFC, Vice President, Head of the Legal Group.
Sergey Boyev
Was born in 1953 in Moscow.
Vice President, Head of High
Tech and Industry Business
Unit of
Sistema JSFC.
Member of the Sistema JSFC
Management Board up to
April 2011.
In 1978 graduated from All-Union Correspondence Law Institute with a degree
in law.
In 1984 – the Moscow Ordzhonikidze Institute of Management with a degree in
Economy and Management in Industry.
Doctor of Economic Sciences, Professor.
1984-1999 – the Mints Radio Engineering Institute, Deputy Chief Accountant,
Chief Accountant, Deputy Director, Deputy Director General for Economy,
Director General.
1999-2000 – High-Tech and Strategic Systems, Director General.
2000-2008 – Radio-Engineering and Information Systems Concern, Director
General.
February 2008-April 2011 – Sistema JSFC, Vice President, Head of High Tech
and Industry Business Unit.
Felix
Evtushenkov
Vice President, Head of
Consumer Assets Business
Unit
of Sistema JSFC.
Member of the Sistema JSFC
Management Board.
Was born in 1978 in Moscow.
In 2000 graduated from the Griboyedov Institute of International Law and
Economy with a degree in law.
1999-2000 – Sistema Invest, Assistant to the President.
2000-2000 – Sistema JSFC, Executive Director of the Department of Industry.
2000-2006 – Sistema-Hals, Deputy Director General, Director General.
2006-2008 – Sistema Hals, President.
Since July 2008 – Sistema JSFC, Vice President, Head of the Consumer Assets
Business Unit.
Since April 2011 – Sistema JSFC, First Vice President, Head of the Core Assets
Business Unit.
Andrei Terebenin
Was born in 1962.
79
Vice-President, Head of the
Corporate Communications
Function of Sistema JSFC.
Member of the Sistema JSFC
Management Board since
April 2011.
In 1985 graduated from the Moscow State Institute of International Relations
with a degree in international relations and Arabic. Held a number of
management positions with the Publishing House Economicheskaya Gazeta,
Dun&Bradstreet CIS and AIG Russia. In 1999 became a partner at the Triangle
Porter Novelli Communications Agency, since 2003 to January 2006 was
Director General and Partner at the R.I.M. Porter Novelli Communications
Holding.
Irina Potekhina
Executive Vice-Presidentof
Sistema JSFC.
Member of the Sistema JSFC
Management Board untilto
April 2011.
January 2006 - April 2011 – Vice President for Corporate Communications of
MTS.
Since April 2011 – Executive Vice President, Head of the Sistema JSFC
Corporate Communications Function.
Was born in 1960 in the Cossack Village of Maryanskaya, in the Krasnodar
Territory.
In 1982 graduated from the Leningrad Institute of Textile and Light Industry.
In 2003 graduated from the North-West Academy of Public Service, Saint-
Petersburg with a degree in Public Relations.
1990-1994 – Correspondent for Komsomolskaya Pravda.
1994-2001 – Director General of the Komsomolskaya Pravda in Saint-
Petersburg.
2001-2003 – Vice Governor, member of the Saint-Petersburg Government.
2004-2005 – Prof-Media Print, Director General.
2005-2008 – Sistema JSFC, Head of the Public Relations Department, Director
of the Department of Relations with the Government and Social Organizations.
Since September 2008 – Sistema JSFC, Executive Vice President, Head of the
Corporate Communications Function.
80
9.4. INFORMATION ON THE NUMBER OF SHARES OF SISTEMA JSFC HELD BY THE
PRESIDENT AND THE MANAGEMENT BOARD MEMBERS
Management Board member
Number of shares held
Mikhail Shamolin
Leonid Melamed
Anton Abugov
Ruslan Almakaev
Sergey Boyev
Alexei Buyanov
Anna Goldin
Sergey Drozdov
Felix Evtushenkov
Ron Sommer
Alexander Korsik
Irina Potekhina
-
89,139 shares of Sistema JSFC
-
-
-
1,930,000 shares of Sistema JSFC
8,386,000 shares of Sistema JSFC
19,440,732 shares of Sistema JSFC
-
409,195 shares of Sistema JSFC
-
-
81
9.5. LIST OF TRANSACTIONS CARRIED OUT BY THE COMPANY IN THE REPORTING
YEAR THAT ARE RECOGNIZED AS MAJOR TRANSACTIONS UNDER THE FEDERAL
LAW "ON JOINT-STOCK COMPANIES", AND OTHER TRANSACTIONS COVERED BY
THE MAJOR TRANSACTIONS APPROVAL PROCEDURE PURSUANT TO THE
COMPANY'S CHARTER
During 2010 Sistema JSFC did not perform any transactions that in accordance with the Federal Law ―On Joint-
Stock Companies‖ are recognized as major transactions, or other transactions which in accordance with the
Company‘s Charter are covered by the procedure for approval of major transactions.
9.6. LIST OF TRANSACTIONS CARRIED OUT BY THE COMPANY IN THE REPORTING
YEAR THAT UNDER THE FEDERAL LAW "ON JOINT-STOCK COMPANIES" ARE
RECOGNIZED AS RELATED PARTY TRANSACTIONS
Minutes No. of
that
the
body
the
approved
transaction
and
date
Minutes of the
Board of
Directors No. 01-
10 dtd 06.02.2009
Item 3.2
Minutes of the
Board of
Directors No. 01-
10 dtd 06.02.2009
Item 3.2
Minutes of the
Board of
Directors No. 02-
10 dtd 20.03.2009
Item 6.2
Minutes of the
Board of
Directors No. 02-
10 dtd 20.03.2009
Item 6.2
Minutes of the
Board of
Directors No. 02-
10 dtd 20.03.2009
Item 6.3
Transaction subject
Transaction
counterparties
Amount of the
transaction
that
Persons
considered
related parties
the transaction
are
as
to
Agreement on provision of paid
information and consultation
services by Region
Region
RUB 75,496,086.00
R. Almakayev
S. Drozdov
Agreement on paid provision of
personnel by OJSC Region
Region
RUB 47,087,004.00
R. Almakayev
S. Drozdov
Surety on the liabilities of
Sistema Shyam TeleServices
Limited to ICICI Bank Limited
ICICI Bank Limited
Surety agreement for Sistema
Shyam TeleServices Limited
Sistema
TeleServices Ltd.
Shyam
Surety on the loan liabilities of
Sistema Shyam TeleServices
Limited to ICICI Bank Limited
Central Bank of
India
$98,590,619.00 at the
exchange rate set on 10
March 2010 of 45.41
Indian rupees for 1 US
dollar.
3% per annum accrued
to the part of main sum
of guarantees issued by
the Bank in the amount
of 74% from the total
prolonged
sum
guarantees secured by
the Surety
of
R. Sommer
R. Mehrotra
S. Cheremin
A. Goldin
S. Drozdov
R. Sommer
R. Mehrotra
S. Cheremin
A. Goldin
S. Drozdov
$110,107,905.75 at the
exchange rate set on 10
March 2010 of 45.41
Indian rupees for 1 US
dollar.
R. Sommer
R. Mehrotra
S. Cheremin
A. Goldin
S. Drozdov
82
Minutes No. of
that
body
the
the
approved
transaction
and
date
Minutes of the
Board of
Directors No. 02-
10 dtd 20.03.2009
Item 6.3
Minutes of the
Board of
Directors No. 02-
10 dtd 20.03.2009
Item 6.5
Minutes of the
Board of
Directors No. 04-
10 dtd 17.04.2010
Item 5.5
Minutes of the
Board of
Directors No. 04-
10 dtd 17.04.2010
Item 5.6
Minutes of the
Board of
Directors No. 04-
10 dtd 17.04.2010
Item 5.6
Minutes of the
Board of
Directors No. 04-
10 dtd 17.04.2010
Item 5.7
Transaction subject
Transaction
counterparties
Amount of the
transaction
that
Persons
considered
related parties
the transaction
are
as
to
Surety agreement for Sistema
Shyam TeleServices Limited
Sistema
TeleServices Ltd.
Shyam
the
that
to
3% per annum accrued
to the part of the main
issued
sum of
are
guarantees
accrued
the
remaining part of the
main debt under the
Loan
Agreement
starting from the date
of signing the Surety
Agreement between the
Guarantor
the
Bank till the end date
of this Agreement
and
Minutes of the
Board of
Directors No. 02-
10 dtd 20.03.2009
Item 6.4
Increasing the limit of financing
for Sistema Shyam TeleServices
through
letter of credit
issued by Bank RBS London
Branch
the
Bank RBS, London
Branch
RUB 1,100,000,000.00
R. Sommer
R. Mehrotra
S. Cheremin
A. Goldin
S. Drozdov
R. Sommer
S. Cheremin
A. Goldin
S. Drozdov
R. Sommer
A. Abugov
Converting promissory notes of
Sky Link into new promissory
notes due to expiration of the
due date
Granting a
to Sistema
loan
Telecom for payment of the
income tax under the transaction
selling COMSTAR-UTS
of
shares
Sky Link
RUB 1,004,468,740.15
Sistema Telecom
RUB 700,000,000.00
V. Evtushenkov
Approval of acquiring the share
in
the authorized capital of
M2M Telematics;
provisional Purchase and Sale
Agreement on 100% of shares
A. Gurko,
I. Grushelevsky,
NPO
Kosmicheskogo
Priborostroeniya
Purchase and Sale Agreement
on the 51% share in M2M
Telematics
A. Gurko,
I. Grushelevsky,
NPO
Kosmicheskogo
Priborostroeniya
-
A. Gurko
$20,000,000.00
A. Gurko
Guarantee on the loan of MSS
to Sberbank
Sberbank of Russia RUB 200,000,000.00
Sistema
Investments
Finance
83
Minutes No. of
that
body
the
the
approved
transaction
and
date
Minutes of the
Board of
Directors No. 05-
10 dtd 22.05.2010
Item 5.4
Minutes of the
Board of
Directors No. 05-
10 dtd 22.05.2010
Item 5.5
Minutes of the
Board of
Directors No. 05-
10 dtd 22.05.2010
Item 5.5
Minutes of the
Board of
Directors No. 05-
10 dtd 22.05.2010
Item 5.6
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.3
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.4
Transaction subject
Transaction
counterparties
Amount of the
transaction
Amendment of
the Surety
Agreement with EBRD on
-
liabilities of Detsky Mir
Center
Detsky Mir - Center
European Bank of
Reconstruction and
Development
$50,000,000.00
Signing
the
voluntary health insurance
agreement on
Insurance Company
ROSNO
RUB 11,724,117.00
that
Persons
considered
related parties
the transaction
are
as
to
V. Evtushenkov
F. Evtushenkov
R. Sommer
L. Melamed
S. Cheremin
V. Evtushenkov
R. Sommer
D. Zubov
V. Kopiev
L. Melamed
S. Cheremin
Presentation for the
Management Board
of Sistema JSFC
Sistema
JSFC
Insurance Agreement (Policy)
Property
Insurance Company
ROSNO
RUB 1,963,255.34
L. Melamed
guarantees
Providing
for
Ludaberg Investments Limited
and Merrill Lynch International
Ludarberg
Investments
Limited and Merrill
Lynch International
RUB 9,377,278,000.00
R. Sommer
R. Mehrotra
S. Cheremin
A. Goldin
S. Drozdov
Providing a short term loan for
the RTI-Systems Concern
RTI Systems
Concern
RUB 235,000,000.00
S. Boyev
in
Changes
interests of
the
Sistema JSFC in the equity of
MBRD
MBRD
RUB 5,149,999,018.29
V. Evtushenkov
S. Cheremin
A. Buyanov
F. Evtushenkov
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.5
Amending the surety on
liabilities of Medsi signed with
UniCredit Bank;
Signing Annex 4 to the Surety
Agreement No. 001/1569Z/08
of 30 May 2008
UniCredit Bank
$11,700,000.00
V. Evtushenkov
F. Evtushenkov
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.5
Signing Annex 4 to the Surety
Agreement No. 001/1568Z/08
of 30 May 2008
UniCredit Bank
$18,000,000.00
V. Evtushenkov
F. Evtushenkov
84
Minutes No. of
that
body
the
the
approved
transaction
and
date
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.7
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.9
General Meeting
of Shareholders
Minutes No 3-10
dtd 02.08.2010
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.10
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.10
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.10
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.10
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.10
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.10
Transaction subject
Transaction
counterparties
Amount of the
transaction
that
Persons
considered
related parties
the transaction
are
as
to
Granting a loan to the KAPALI
OVERSEAS CORP.
KAPALI
OVERSEAS
CORP.
$60,000,000.00
V. Evtushenkov
Divestment of 15% of TS-Retail
shares in favor of MTS
MTS
RUB 30
Preparation for the transaction
on exchanging shares of MGTS
for shares of Sky Link;
Surety agreement on the
liabilities of Sistema Invenchur
under the Agreement on
exchange of shares of MGTS to
shares of Sky Link.
Svyazinvest
RUB 9,750,000,000.00
Granting a loan to Sistema-
Invenchur
Sistema-Invenchur
RUB 1,100,000,000.00
Selling promissory notes of Sky
Link to Astarta
Astarta
RUB 11,095.00
Agreement on the exchange of
promissory notes signed
between Sistema JSFC and
COMSTRAR-UTS
COMSTAR-UTS
RUB 126,839,070.18
V. Evtushenkov
F. Evtushenkov
R. Sommer
A. Buyanov
S. Drozdov
S. Drozdov
Sistema
Investments
Finance
S. Drozdov
Sistema
Investments
Finance
Sistema
Investments
Finance
A. Goncharuk
Sistema
Investments
Finance
Acquiring promissory notes of
Sky Link from Sistema Telecom
Sistema Telecom
RUB 440,954,022.58
Sistema
Investments
Finance
Acquiring promissory notes of
Uralvestcom, APEX,
Kaliningrad Mobile Systems
and Saratov Cellular
Communications System from
Sistema Telecom
Agreement on the novation of
Sky Link debt to Sistema JSFC
under the loan into Sky Link
promissory notes
Sistema Telecom
RUB 1,235,373,884.31
Sky Link
RUB 523,603,668.00
Sistema
Investments
Finance
R. Sommer
A. Abugov
Sistema
Investments
Finance
85
Minutes No. of
that
body
the
the
approved
transaction
and
date
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.10
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.10
Minutes of the
Board of
Directors No. 06-
10 dtd 26.06.2010
Item 7.10
Minutes of the
Board of
Directors No. 07-
10 dtd 26.07.2010
Item 1
Minutes of the
Board of
Directors No. 08-
10 dtd 10.09.2010
Item 1
Minutes of the
Board of
Directors No. 08-
10 dtd 10.09.2010
Item 1
Minutes of the
Board of
Directors No. 09-
10 dtd 18.09.2010
Item 5.5
Minutes of the
Board of
Directors No. 09-
10 dtd 18.09.2010
Item 5.8
Minutes of the
Board of
Directors No. 09-
10 dtd 18.09.2010
Item 5.8
Transaction subject
Transaction
counterparties
Amount of the
transaction
Agreement on the novation of
Sky Link debt to Sistema JSFC
under the loan into Sky Link
promissory notes
Sky Link
RUB 494,155,285.00
Selling promissory notes of Sky
Link to Sky Link
Sky Link
RUB 26,510.00
that
Persons
considered
related parties
the transaction
are
as
to
R. Sommer
A. Abugov
Sistema
Investments
Finance
R. Sommer
A. Abugov
Sistema
Investments
Finance
Selling promissory notes of Sky
Link to Delta Telecom
Delta Telecom
RUB 11,020.00
Sistema
Investments
Finance
Surety agreement for Sistema
Shyam TeleServices Limited
Sistema
TeleServices Ltd.
Shyam
Equivalent of
$282,000,000.00
Agreement on the exchange of
promissory notes of SSS for
promissory notes of Sky Link
Exchange of promissory notes
of Sky Link for promissory
notes of Sky Link
Sky Link (as part of
the transaction with
Svyazinvest
to
exchange the shares
of Sky Link and
MGTS)
Sky Link (as part of
the transaction with
Svyazinvest
to
exchange the shares
of Sky Link and
MGTS)
RUB 269,718,448.00
RUB
18,440,662,572.10
Sale of Sistema JSFC stake in
the authorized capital of
Bashneft Plus
Bashneft
RUB 10,000.00
R. Sommer
R. Mehrotra
S. Cheremin
A. Goldin
S. Drozdov
R. Sommer
A. Abugov
Sistema
Investments
Finance
R. Sommer
A. Abugov
Sistema
Investments
Finance
A. Goncharuk
L. Melamed
A. Abugov
R. Almakayev
A. Buyanov
A. Goldin
S. Drozdov
A. Korsik
Shareholding of Sistema JSFC
in Navigation and Information
Systems
RTI Systems
Concern
RUB 242,000,000.00
S. Boyev
Shareholding of Sistema JSFC
in Navigation and Information
Systems
SITRONICS
RUB 242,000,000.00
S. Boyev
S. Cheremin
86
Transaction subject
Transaction
counterparties
Amount of the
transaction
that
Persons
considered
related parties
the transaction
are
as
to
Minutes No. of
that
body
the
the
approved
transaction
and
date
Minutes of the
Board of
Directors No. 09-
10 dtd 18.09.2010
Item 5.9
Minutes of the
Board of
Directors No. 09-
10 dtd 18.09.2010
Item 5.10
Minutes of the
Board of
Directors No. 09-
10 dtd 18.09.2010
Item 5.11
Minutes of the
Board of
Directors No. 09-
10 dtd 18.09.2010
Item 5.12
Minutes of the
Board of
Directors No. 10-
10 dtd 29.09.2010
Item 1
Minutes of the
Board of
Directors No. 10-
10 dtd 29.09.2010
Item 2
Concluding the agreement on
guaranteeing the liabilities of
Kapali Overseas Corp.
Concluding the agreement on
opening a letter of credit and
covering the letter of credit
(deposit) for securing the loan
liabilities of Sistema Shyam
TeleServices Limited
Agreement on opening a letter
of credit with guarantees of
Sistema for securing the loan
liabilities
Surety agreement on liabilities
of Sistema Shyam TeleServices
Limited
Agreement on the exchange of
promissory notes of Kaliningrad
Mobile Systems
Agreement on the exchange of
promissory notes of
Uralvestcom
Unicredit Global
Export
Leasing
GmbH,
Kapali
Overseas Corp.
$29,150,000.00
Sistema JSFC
ING Bank N.V.,
Shyam
Sistema
TeleServices
Limited
RUB 5,302,535,000.00
(security (cover) of the
letter of credit)
R. Sommer
R. Mehrotra
S. Cheremin
A. Goldin
S. Drozdov
R. Sommer
R. Mehrotra
S. Cheremin
A. Goldin
S. Drozdov
R. Sommer
R. Mehrotra
S. Cheremin
A. Goldin
S. Drozdov
Equivalent of
$149,000,000.00
Equivalent of
$279,000,000.00
ING Bank N.V.,
ING Bank Vysya
Limited,
Sistema
Shyam
TeleServices
Limited
State Bank of India,
Sistema
Shyam
TeleServices
Limited
Kaliningrad Mobile
Systems (as part of
the transaction with
Svyazinvest
to
exchange the shares
of Sky Link and
MGTS)
(as
Uralvestcom
the
part
of
with
transaction
Svyazinvest
to
exchange the shares
of Sky Link and
MGTS)
RUB 374,869,865.36
Sistema
Investments
Finance
RUB 1,127,616,179.08
Sistema
Investments
Finance
and
Within
the Option
Agreement, Investment
Agreement
the
Guarantee Act, basic
price of the transaction
does not exceed RUB
3,400,000,000.00
Sistema
Investments
Finance
Minutes of the
Board of
Directors No. 11-
10 dtd 22.10.2010
Item 5.2
Agreement between Sberbank
of Russia and Sistema Finance
S.A. Agreement on an option
and transfer of shares of Detsky
Mir - Center
Sberbank of Russia
Sistema
Finance
S.A.
Detsky Mir - Center
Minutes of the
Board of
Directors No. 11-
10 dtd 22.10.2010
Item 5.3
Granting a loan to Hurdsfield
Corporation
Hurdsfield
Corporation
RUB 530,000,000.00
Sistema
Investments
Finance
87
Minutes No. of
that
body
the
the
approved
transaction
and
date
Transaction subject
Transaction
counterparties
Amount of the
transaction
that
Persons
considered
related parties
the transaction
are
as
to
Minutes of the
Board of
Directors No. 12-
10 dtd 10.11.2010
Item 1
Additional Agreement No.9 to
the Securities (Shares) Pledge
Agreement No.3559/1 dtd
15.12.2005 between Sberbank
of Russia and Sistema JSFC
General Meeting
of Shareholders
Minutes No 4-10
dtd 21.12.2010
Minutes of the
Board of
Directors No. 14-
10 dtd 24.11.2010
Item 1
Minutes of the
Board of
Directors No. 15-
10 dtd 07.12.2010
Item 1
Minutes of the
Board of
Directors No. 16-
10 dtd 18.12.2010
Item 5.8.2
Minutes of the
Board of
Directors No. 16-
10 dtd 18.12.2010
Item 5.8.3
Minutes of the
Board of
Directors No. 16-
10 dtd 18.12.2010
Item 5.9
General Meeting
of Shareholders
Minutes No 1-10
dtd 08.02.2010
Termination of shareholding in
the authorized capital of
Sistema Telecom by divesting
the 99.99% stake
Providing guarantees to Thomas
Cook Group on liabilities of
Intourist and other entities
Surety agreement on the
liabilities of Sistema Shyam
TeleServices Limited to ICICI
Bank Limited
Signing by Sistema JSFC of an
Individual Agreement (policy)
for insurance of the liability of
Directors, Officials and the
Corporation
Signing by Sistema JSFC
together with Sitronics of a
Collective Agreement (policy)
for insurance of the liability of
Directors, Officials and the
Corporation for 2011.
The transaction to indemnify the
member of the Management
Board of Sistema JSFC for
possible legal and other
expenses or losses associated
with potential actions or claims
brought against him for acts
committed in his official
capacity.
Investment Agreement,
Agreement on Joining the
Investment Agreement and
Amending the Investment
Agreement dtd 19 December
2009
Regulating the procedure and
conditions of implementing the
project of establishing
commercial production of 90
nm extra large-scale integrated
Sberbank of Russia
Milanfo
Mlada
IK Nadezhnost
Shaddock Trading
Ltd. (Cyprus)
Sistema-Invenchur
Tovarniye Znaki
Mobile
TeleSystems
Bermuda Limited
RUB 2,947,069,995.00
L. Melamed
S. Drozdov
A. Abugov
Equivalent of
$379,073,601.57
Sistema
Investments
Finance
V. Evtushenkov
A. Buyanov
F. Evtushenkov
R. Sommer
R. Mehrotra
S. Cheremin
A. Goldin
S. Drozdov
Intourist
$8,000,000.00
ICICI Bank Limited
Equivalent of
187,638,458.00
ROSNO
$210,000.00
ROSNO
SITRONICS
$230,000.00
Ecu Gest Holding
S.A.
Roger Munnings
Equivalent of
$26,000,000.00
R. Munnings
State Corporation
Russian
Corporation of
Nanotechnology
SITRONICS
Research Institute
of Molecular
Electronics and
Micron Factory
Amex
up to RUB
12,966,483,515.00
Abugov, A.
S. Boyev
A. Buyanov
88
Minutes No. of
that
body
the
the
approved
transaction
and
date
Transaction subject
Transaction
counterparties
Amount of the
transaction
that
Persons
considered
related parties
the transaction
are
as
to
circuits on the basis of a new
engineering company in the
format of a limited liability
company (SITRONICS-Nano
LLC)
SITRONICS-Nano
89
9.7. INFORMATION ABOUT THE COMPANY’S COMPLIANCE WITH REQUIREMENTS OF
THE CODE OF CORPORATE CONDUCT OF THE FEDERAL SERVICE FOR FINANCIAL
MARKETS
Provisions of the
Corporate Conduct Code
Observed / not
observed
Comment
General Meeting of Shareholders
1 Notice of
the forthcoming General Meeting of
Shareholders should be made not later than 30 days
before the day of the Meeting unless a longer term is
provided for by legislation.
2 Procedure of announcement of convening the General
Meeting of Shareholders should provide shareholders
with a possibility to properly prepare for participation
in the meeting.
3 Shareholders can familiarize themselves with the list
of persons who have the right to attend the General
Meeting of Shareholders starting from the date of
announcement of holding the General Meeting of
Shareholders and till the closure of the General
Meeting of Shareholders, and in case of holding the
meeting in the form of a letter ballot – to the deadline
for acceptance of ballot papers.
4 Shareholders can familiarize themselves with the
information
to
(materials) which
presentation when preparing for the General Meeting
of Shareholders,
through electronic means of
communication
subject
is
5 Shareholders can introduce an agenda item to the
General Meeting of Shareholders or demand
convocation of the General Meeting of Shareholders
without presenting an extract from the Register of
Shareholders if his/her rights and shares are accounted
in the system of keeping the Register of Shareholders,
and in the event when his/her rights to shares are
registered in the depo account, it is enough to provide
an extract from the depo account to exercise the above
rights
6 The Joint-Stock Company‘s
internal documents
describe the procedures of registering participants of
the General Meeting of Shareholders
Observed
This norm has been introduced to the
Company‘s Charter.
Observed
Observed
Observed
Observed
to
the meeting
Notice of
shareholders by mail and is published on
the Company‘s website.
sent
is
Shareholders have the right to familiarize
themselves with the list of persons who
have the right to attend the General Meeting
of Shareholders, addressing their request to
the Company‘s Corporate Secretary. Such
possibility is provided for by the Terms of
Reference of
the General Meeting of
Shareholders
The Company publishes such information
on the Company‘s website on the Internet
There is no requirement that shareholders
their right with specific
should prove
documents, with
the
the exception of
extract from the depo account. Provided for
by the Terms of Reference of the General
Meeting of Sistema JSFC Shareholders
(approved by
the General Meeting of
Sistema JSFC Shareholders, Minutes of
Meeting No. 2-10 of 30.06.2010).
Observed
Regulated by the Terms of Reference of the
General Meeting of Shareholders
Work of the Board of Directors
1 The Joint-Stock Company‘s Charter defines the
authority of the Board of Directors regarding annual
approval of the Joint-Stock Company‘s financial and
business plan.
Observed
the
―determining
In accordance with the Company‘s Charter,
the competence of the Board of Directors
includes:
priority
directions of
the Company‘s activities,
determining the strategy of the Company‘s
the Company‘s
development, approving
plans),
annual
considering
of
subsidiaries‘ activities and the development
strategy‖
the main
directions
(financial
budgets
90
2 The procedure for risk management is approved by
the Board of Directors in the Joint-Stock Company.
Observed
3 The Board of Directors has the right to determine the
requirements of qualification and remuneration for the
Director General and heads of
the Joint-Stock
Company‘s main structural units.
Observed
4 The Joint-Stock Company‘s Charter defines the right
of the Board of Directors to approve the terms of
agreements with the Director General and members of
the Management Board.
Observed
5 The Joint-Stock Company‘s Board of Directors
consists of not less than three Independent Directors
who meet requirements of the Code of Corporate
Conduct.
Observed
6 No members of the Joint-Stock Company‘s Board of
Directors have criminal record for economic crimes or
crimes against the state, interests of public services
and local governments or on whom administrative
penalties were imposed for offenses in the area of
entrepreneurial activity or finances, taxes and receipts
or equity market.
Observed
7 In the Board of Directors there are no individuals who
are shareholders, general directors (heads), members
of governing bodies or employees of legal entities
which compete with the Company
Observed
8 The Joint-Stock Company‘s
internal documents
include a requirement on holding the Board of
Directors meetings not less than once in six weeks
Observed
9 Meetings of the Joint-Stock Company‘s Board of
Directors during the year of the Annual Report should
be held not less often than once in six weeks
Observed
10 The Joint-Stock Company‘s
internal documents
describe the procedure for holding meetings of the
Board of Directors
Observed
the President of
Appendix 3 to the Minutes of the Meeting
of the Board of Directors No. 03-09 of
the Board of
22.04.2009. Decision of
Directors dtd 5 March 2011, Minutes
No.03-11.
The competence of the Board of Directors
includes: appointment of the President of
the Company; determining the quantitative
composition of the Management Board,
election of its members; approving the
terms of agreement with the President and
with members
the Company‘s
of
Management Board; early termination of
the authority of
the
Company and members of the Company‘s
the
Management Board, approval of
principles for assessing the work and the
system of rewards as well as carrying out
the control over activities of the Company‘s
top officials who are directly reporting to
the Company‘s President.
In accordance with the Company‘s Charter,
the terms of agreements with the President
the Company‘s
of
and members
Management Board shall be approved by
the Board of Directors
As of the end of 2009, the Board of
Directors includes four members of the
Board of Directors who meet criteria of the
Code of Corporate Conduct for Independent
Directors
The Company has reviewed this issue and
does not dispose of information about such
offenses committed by members of its
Board of Directors
In accordance with the information
available for Sistema JSFC, in the
composition of the Board of Directors of
Sistema JSFC there are no individuals who
are shareholders, general directors (heads),
members of the governing body or
employees of legal entities which compete
with Sistema JSFC.
The Terms of Reference of the Board of
Directors determines that its meetings, as a
rule, shall be held not less often than once a
month. There were 16 meetings of the
Board of Directors held in 2010.
In 2010 16 meetings of the Board of
Directors were held
The procedure to hold meetings of the
Board of Directors is determined by the
Working Procedures of the Sistema JSFC
Board of Directors
91
11 The Joint-Stock Company‘s
internal documents
stipulate the right of members of the Board of
Directors to receive all necessary information for
implementation of their functions from executive
bodies and heads of the Joint-Stock Company‘s main
structural units
Observed
Right of members of the Board of Directors
to receive any information on the activity of
Sistema JSFC is stipulated by the Terms of
Reference of the Board of Directors
12 A committee of the Board of Directors for strategic
Observed
planning should be in place
The Company has established the Strategy
Committee of the Board of Directors
Observed
The Company has established the Audit
Committee of the Board of Directors
13 A committee of
the Board of Directors
that
recommends the auditor to the Board of Directors and
interacts with the latter and with the Joint-Stock
Company‘s Revision Commission should be in place
14 Establishment of a committee of the Board of
Directors whose function is to determine the criteria
for the Board of Directors and to develop the Joint-
Stock Company‘s remuneration policy
Observed
15 The Nomination and Remuneration Committee is
Not observed
chaired by an Independent Director
16 Availability of the internal documents approved by
the Board of Directors that stipulate the procedure of
setting up and work of committees of the Board of
Directors
Observed
Not observed
Observed
17 The Joint-Stock Company‘s Charter describes the
procedure for determining the quorum of the Board of
Directors
the
mandatory participation of Independent Directors in
meetings of the Board of Directors
that makes it possible
to ensure
18 The issuer‘s internal documents should provide for
obligations of
the Board of
the members of
Directors, the members of the collective executive
governing body, the individual who carries out the
functions of the sole executive body, including the
governing organization and its officials, to disclose
issuer's
information on
securities as well as the sale and (or) purchase of the
issuer‘s securities
the possession of
the
established
the
has
The Company
Nomination and Remuneration Committee
of the Board of Directors. The Committee‘s
functions are determined in the Terms of
and
Reference
Remuneration Committee
The Committee is chaired by the non-
executive director S. Cheremin.
the Nomination
of
which
determine
The Company has approved the Terms of
Reference of Committees of the Board of
Directors,
the
Committees‘ competence and procedure for
their establishment and activities
The quorum of the Board of Directors is
determined according to the number of
members of
the Board of Directors
attending the meeting regardless of their
status of an independent, non-executive or
executive director
This requirement is included into the
Corporate Conduct Code of Sistema JSFC,
Terms of Reference of the Sistema JSFC
Board of Directors and Sistema JSFC
Management Board.
Executive bodies
1 The Joint-Stock Company‘s collective executive body
Observed
(Management Board) should be in place
2 The Joint-Stock Company‘s
internal documents
describe procedures for the approval of transactions
which are beyond
the Joint-Stock Company‘s
financial and business plan
Observed
body
The Company has formed a collective
executive
the Company‘s
–
Management Board (provided for by the
Charter)
Procedures for the approval of transactions
that are not included in the budget are set
out in the Corporation‘s budget policy,
regulation on contracts approval and
regulation on mergers and acquisitions. All
such transactions are preliminary reviewed
by the Finance and Investment Committee.
When necessary, resolution of the Board of
Directors introduces amendments to the
Budget
92
3 Executive bodies do not include individuals who are
shareholders, general directors (heads), members of
governing bodies or employees of legal entities which
competes with the Joint-Stock Company
Observed
4 The Joint-Stock Company‘s executive bodies shall
not include individuals with a criminal record for
economic crimes or crimes against the state, interests
of public services and local governments or on whom
administrative penalties were imposed for offenses in
the area of entrepreneurial activity or finances, taxes
and receipts or equity market
5 The Joint-Stock Company‘s Charter or
internal
documents prohibit the management organization (for
the manager) from performing similar functions in a
competing company as well as to be in any other
property relations with the Joint-Stock Company apart
from the provision of services of the management
organization (manager)
6 The Joint-Stock Company‘s
internal documents
define the obligations of the executive bodies to
refrain from actions which lead or may lead to a
conflict between their interests and interests of the
Joint-Stock Company, and in case of emergence of
such conflict the executive bodies have an obligation
to inform the Board of Directors of that fact.
Observed
Observed
7 The Joint-Stock Company‘s Charter or
internal
documents include criteria for the selection of the
management organization (manager)
Not observed
8 Presentation by the Joint-Stock Company‘s executive
bodies of monthly reports on their work to the Board
of Directors
Observed
9 Determining in the agreements concluded by the
Joint-Stock Company with the Director General
(management organization, manager) a liability for
failure to comply with regulations of the use of
confidential and insider information
Observed
Company Secretary
In accordance with the information
available for Sistema JSFC, in the
composition of the executive bodies of
Sistema JSFC there are no individuals who
are shareholders, general directors (heads),
members of governing bodies or employees
of legal entities which compete with the
Joint-Stock Company.
information
accordance with
In
available
the
in
composition of the executive bodies of
Sistema JSFC there are no individuals with
such criminal records.
for Sistema
JSFC,
the
Observed
Provided for by the Charter of Sistema
JSFC
Such requirements are contained in the
the Board of
Terms of Reference of
Directors, Terms of Reference of
the
Management Board, Terms of Reference of
the President and in the agreement with the
President and members of the Company‘s
Management Board
It is not necessary because there is no
management organization and no plans to
engage the same to perform functions of the
Company‘s sole executive body
The Board of Directors quarterly considers
the financial results of the Company's
activity. The Company‘s management
weekly compiles a report on the most
important events and submits it to Board
members
is a requirement regarding
There
the
observation of confidential information in
the Agreements with the President and
members of the Company‘s Management
Board
93
1. Availability in the Joint-Stock Company of a special
official (secretary of the Company) whose duty is to
ensure compliance of the Joint-Stock Company‘s
bodies and officials with procedural requirements,
which guarantee implementation of rights and legal
interests of the Company‘s shareholders
2 Availability in the Joint-Stock Company‘s Charter or
internal documents of a procedure to appoint (elect)
the secretary of the Company and availability of the
Company secretary‘s responsibilities
Observed
3 Availability in the Joint-Stock Company‘s Charter of
requirements to the candidate for the position of the
Company‘s secretary
Partially observed
Material transactions
1 The Joint-Stock Company‘s Charter or
internal
documents include a requirement to approve large
transactions prior to conducting them
2 Mandatory engagement of an independent appraiser
to assess the market value of the property which is a
subject of a large transaction
3 Availability in the Joint-Stock Company‘s Charter of
a prohibition to undertake any actions during the
acquisition of large holdings of the Joint-Stock
Company‘s shares (takeover) which are directed at the
protection of rights of the executive bodies (members
of such bodies) and members of the Board of
Directors of the Joint-Stock Company and also
aggravate the shareholders‘ position compared with
the current one (in particular, of a prohibition for the
Board of Directors to adopt a resolution before
completion of the assumed time of shares acquisition
to issue additional shares, securities, convertible
shares or securities which give the right to acquire the
Company‘s shares, even if the right to adopt such
resolution is given to the Board of Directors by the
Charter)
4 Availability in the Joint-Stock Company‘s Charter or
internal documents of a requirement of the mandatory
engagement of an independent appraiser to determine
the ratio of shares conversion during reorganization
Disclosure of information
1 Availability of an
internal document, which
is
approved by the Board of Directors and which
determines the Joint-Stock Company‘s regulations for
and approaches
information
to disclosure of
(Regulation for the Information Policy)
2 Availability in the Joint-Stock Company‘s internal
documents of a list of information, documents and
the
materials, which
shareholders for reviewing the agenda items presented
to the General Meeting of Shareholders
should be provided
to
3 Disclosure of financial information concerning the
Observed
Joint-Stock Company‘s activities
Observed
The Company has appointed a Corporate
Secretary
The Board of Directors has approved the
Terms of Reference of
the Corporate
Secretary which stipulates responsibilities
of the Corporate Secretary and procedure of
his/her appointment
These requirements are included in the
Terms of Reference of
the Corporate
Secretary.
Partially observed Regardless of absence of this norm in the
always
this
requirement
is
Observed
Not observed
the specified cases,
Charter,
observed in practice
In
the Board of
Directors of Sistema JSFC shall involve an
independent appraiser.
Such actions are hardly probable because
the Company has a controlling shareholder
Not observed
the specified cases,
In
the Board of
Directors of Sistema JSFC shall involve an
independent appraiser.
Observed
The Board of Directors has approval of the
Regulation for the Information Policy
Observed
of
list
additionally
The
provided
information is contained in the Code of
Corporate Conduct, the Regulation on the
the Terms of
Information Policy and
Reference of
the General Meeting of
shareholders of Sistema JSFC.
RAS financial statements are disclosed
annually. GAAP financial statements are
disclosed every quarter.
94
4 The use of additional forms and methods of
Observed
information disclosure
5 The issuer should disclose information concerning the
remuneration received by members of the Board of
Directors, members of the collective executive body
and by the person who performs functions of the sole
executive
the management
including
body,
organization and the manager.
Observed
6 The Joint-Stock Company‘s has a website on the
Internet and regularly discloses there information on
its activity there.
Observed
The Company has established
the IR
Department. It regularly holds meetings
with investors and organizes road shows.
The Department maintains the corporate
website
the Internet with extensive
information about the Company‘s activities
in
Issuance of
The said information is disclosed within the
Issuer‘s Annual Report, Quarterly Report
and Prospectus of
the
Company‘s Securities. The Company has
adopted and published
the Policy on
Remuneration and Compensations paid to
Members of the Company‘s Board of
Directors.
The Internet address: www.sistema.ru /
www.sistema.com
Partially observed Observed
according
to
the
legal
requirements to related party transactions.
the
requirement
on
7 The Joint-Stock Company‘s
for
internal documents
the disclosure of
include
the
Joint-Stock Company‘s
information
transactions with individuals who in accordance with
the Charter are considered Joint-Stock Company‘s top
officials as well as concerning
the Joint-Stock
Company‘s transactions with organizations where the
top officials directly or
Joint-Stock Company‘s
indirectly own 20 and more percent of the Joint-Stock
Company‘s authorized capital or on which such
persons may otherwise exert substantial influence
8 The Joint-Stock Company‘s
requirement
the
internal documents
including
for disclosure of
information on all transactions which may influence
the market value of the Joint-Stock Company‘s shares
Observed
Observed within the requirement of the
the Federal Service for
Resolution of
Financial Markets
the Russian
Federation on disclosure of information.
There is a corresponding Section in the
Regulation for the Information Policy of
Sistema JSFC.
of
Observed
There is a corresponding Section in the
Regulation for the Information Policy of
Sistema JSFC
9 There is an internal document in place which is
approved by the Board of Directors that regulates the
use of material
the Joint-Stock
information on
Company‘s activities, shares and other securities of
the Company and transactions with them when such
information is not commonly available and disclosure
of which may substantially influence the market value
of the Joint-Stock Company‘s shares and other
securities
Control of financial and business activities
1 Procedures approved by the Board of Directors for
the Joint-Stock Company‘s
internal control of
financial and business activities are in place
Observed
The Company has approved the Terms of
Reference of the Internal Control and Audit
Function
2 There
is a special division of
the Joint-Stock
Company which ensures compliance with procedures
of internal control (control and audit service)
Observed
The Company has established the Internal
Control and Audit Function
95
3 The Joint-Stock Company‘s
internal documents
include a requirement for the Board of Directors to
determine the structure and composition of the Joint-
Stock Company‘s control and audit service
Observed
4 The Joint-Stock Company‘s control and revision
services do not include individuals with a criminal
record for economic crimes or crimes against the
state, interests of the state and local governments or
on whom administrative penalties were imposed for
offenses in the area of entrepreneurial activity or
finances, taxes and receipts or equity market
Observed
In accordance with the Company‘s Charter
and Terms of Reference of the Internal
Control and Audit Function, the Head of the
Internal Control and Audit Department is to
be approved by the Company‘s Board of
Directors
The Company reviewed this issue and does
not dispose of information about such
offenses committed by employees of its
control and audit services
5 Control and
revision services do not
include
individuals who are shareholders, general directors
(heads), members of governing bodies or employees
of legal entities that compete with the Joint-Stock
Company
6 The Joint-Stock Company‘s
internal documents
stipulate the deadline for presentation to the control
and audit service of documents and materials for
assessing the financial and business transactions, as
well as a liability of the Joint-Stock Company‘s
officials and employees for their failure to present the
same by the deadline
7 The Joint-Stock Company‘s
internal documents
include an obligation of the control and audit service
to inform the Audit Committee, and if the latter is not
available – the Joint-Stock Company‘s Board of
Directors, about revealed irregularities
the
reasonability
8 The control and audit service is to carry out the
preliminary assessment of
to
perform transactions which are not included in the
Joint-Stock Company‘s financial and business plans
9 An internal document is in place which is approved
by the Board of Directors and determines a procedure
for the audit commission to carry out audits of the
Joint-Stock Company‘s
financial and business
activities
Observed
Observed
Observed
Observed
Observed
10 Assessment by the Audit Committee of the audit
opinion prior to its presentation to the shareholders at
the General Meeting
Observed
There are no such individuals in the
composition of the Audit Committee of
Sistema JSFC who have a criminal record.
The Internal Control and Audit Functional
Division has constant access to the current
and
information
business transactions and has the right to
independently determine the deadline for
presentation of such information.
financial
about
the
In accordance with the Terms of Reference
of the Audit Committee and Terms of
Reference of the Internal Control and Audit
Functional Division, the Department files
reports to the Audit Committee on the audit
results
The control and audit service examines all
transactions of the Company before they are
made
The Company has approved the Regulation
concerning
Internal
Control for Sistema JSFC Financial and
Business Activities
the Procedures of
In accordance with the Terms of Reference
of the Audit Committee, on 15 April 2011
the Audit Committee has assessed the audit
opinion on results of 2009
Dividends
1 Availability of the internal document approved by the
Board of Directors by which the Board of Directors is
guided in making recommendations on the amount of
dividends (the Regulation for the Dividend Policy)
Observed
The Company has approved the Regulation
for the Dividend Policy
96
2 Publishing the information concerning the Joint-Stock
Company‘s dividend policy and amendments to it on
the Joint-Stock Company‘s website on the Internet
and in a periodical. Such periodical is provided for by
the Joint-Stock Company‘s Charter for publishing
notices of holding General Meetings of Shareholders
Observed
The Regulation for the Dividend Policy is
published on the Company‘s website in the
Internet
97
9.8. INFORMATION ON THE COMPANY'S COMPLIANCE WITH THE REQUIREMENTS OF
THE UK COMBINED CORPORATE GOVERNANCE CODE
Provisions of the Code
A. DIRECTORS
A.1 Board of Directors
A.1.1. The work of the Board of Directors should
be organized efficiently. The board should meet
sufficiently regularly to discharge its duties
effectively.
Observed / not
observed
Observed
There should be a formal schedule of matters
specifically reserved for the decision of the Board
of Directors.
Observed
Comment
The Board of Directors meets at least eight times
a year, and this allows to review and make
decisions on issues reserved for the final decision
of
the Sistema JSFC Board of Directors
(hereinafter – the "Company").
The scope of the Board of Directors is set out in
the Charter of Sistema JSFC (p.32).
The annual report should include a statement of
how the board operates, including a statement of
which types of decisions and on which issues
were taken by the board and the board of
directors.
A.1.2 The annual report should identify the
chairman,
the chief
the deputy chairman,
executive, the senior independent director and the
chairmen and members of the board committees.
The annual report should set out the number of
meetings of the board and its committees and
individual attendance by directors.
A.1.3. The chairman should hold meetings with
the
the
non-executive
executives present.
directors without
Led by the senior independent director, the non-
executive directors should meet without the
chairman present at least once a year to appraise
the chairman‘s performance and on such other
occasions as are deemed appropriate.
the
Observed
Observed
information on
The 2010 Annual Report of the Company
includes a statement on how the Board operates,
including the report on key issues, issues on
which decisions were taken by the Board of
Directors and the Management Board (pp. 6.2,
6.4).
The 2010 Annual Report of the Company
includes
election of
V. Evtushenkov, the Chairman of the Board of
Directors of the Company and concerning the
election of Deputy Chairmen of the Board of
Directors (p. 6.2)
The 2010 Annual Report of the Company also
includes information on the President of the
Company, Chairmen and members of all Board
the Nomination and
Committees,
Remuneration Committee
the Audit
Committee. (p. 6.2.)
Company's statutory documents does not provide
for the position of a senior independent director.
The 2010 Annual Report of the Company
includes information on the number of meetings
of the Board of Directors and Board Committees,
as well as their attendance by members. (p. 6.2.)
Formal meetings of the Board of Directors
without the executives present are not held, but
there are regular informal meetings of
the
Chairman of the Company's Board of Directors
with independent directors.
Partially observed Company's statutory documents does not provide
Partially observed
Observed
including
and
for the position of a senior independent director.
Prior to every meeting of the Board of Directors
independent members of the Board hold an
informal meeting in the form of a business
dinner, which is also attended by the management
for discussing urgent
of
the corporation,
the Company and
questions of governing
organizing the work
of the Board of Directors.
The whole course of the meeting of the Board of
Directors is recorded in writing in the form of
statements from participants and is subsequently
analyzed to ensure that all elements of decisions
that were made are reflected in the Minutes.
98
A.1.4. Where directors have special opinions
about decisions taken by the board, they should
ensure that their opinions are recorded in the
minutes of the meeting.
Observed
If Board members have comments or specific
proposals regarding efficiency of running the
company, they should send a letter with such
comments and proposals to the Chairman of the
Board of Directors. Other Board members should
have access to the information contained in such
letter.
Observed
A.1.5. The company should arrange appropriate
insurance cover in respect of legal action against
its directors.
Observed
A.2. Chairman of the Board of Directors and
President
А.2.1 The roles of chairman and chief executive
should not be exercised by the same individual.
The division of responsibilities between the
chairman and chief executive should be clearly
established and set out in internal documents of
the Company.
Observed
According to the Working Procedures of the
Board of Directors of the Company (approved by
the Board 27.10.2007), directors have an
opportunity to express their special opinion
within 24 hours after the meeting.
All Board members are provided with a copy of
minutes of every Board meeting.
Members of the Company's Board of Directors
regularly send to the Board Chairman letters with
their comments and proposals on different
aspects of running the company and organization
of the work of the Company's Board of Directors.
According to p. 2.4.5. of the Terms of Reference
of the Board of Directors, the Company insures
liability of the Board members that may be
incurred to him/them as a result of legal actions
or claims from third parties or shareholders of the
Company in relation to business decisions or
other actions, taken in connection with the
performance of his/their functions as a member
of the Board of Director of the Company or its
affiliates (D&O Policy).
Besides there are indemnification agreements
made with members of the Board of Directors.
the
the Company's Charter,
functions of
According to the legislation of the Russian
the
Federation and
the
person carrying out
Company's sole executive body cannot at the
same time serve as the Chairman of the Board of
Directors. The division of
responsibilities
between the Board Chairman, Board members
and the President are clearly set out in the Charter
of the Company.
А.2.2 The chairman should on appointment meet
the independence criteria. A chief executive
should not be chairman of the same company. If
exceptionally a board decides
that a chief
executive should become chairman, the board
should consult major shareholders in advance and
should set out sufficient reasons to shareholders
and include this information in the next annual
report.
the Company's Charter,
Partially observed According to the legislation of the Russian
Federation and
the
person carrying out functions of the Company's
sole executive body cannot at the same time serve
as a Chairman of the Board of Directors.
Chairman of the Board of Directors of the
Company is a non-executive member of the
Board, but does not meet the independence
criteria. At the same time he does not holds
positions in executive governance bodies of the
Company.
А.3 Board balance. Independence of directors.
А.3.1 The board should identify in its annual
report each non-executive director the board
considers to be independent.
Observed
Information on every non-executive director that
meets the independence criteria is included in the
2010 Annual Report (p.6.2.)
There are three directors among members of the
independence
Board of Directors
criteria: R. Kocharyan, R. Munnings, E. Novitsky
that meet
The board should determine regarding all the
Observed
According to p. 2.5.6. of the Terms of Reference
99
directors whether the director is independent.
of the Board of Directors on the first meeting of
the Board after
the General Meeting of
shareholders, during which the members were
selected, the Board identifies the status of every
director (independent, non-executive, executive).
Status of every member of the Board of Directors
was defined by the Board of Directors decision
(Minutes of 26.06.2010).
А.3.2 In large companies (according to FTSE 350
list) at least half the board, excluding the
chairman, should comprise of non-executive
directors determined by the board as independent.
Partially observed More than half of the Board members are non-
executive directors. three members of the Board
of Directors out of 11 meet the independence
criteria, and this is proportional to the number of
the publicly traded GDRs of the Company.
independent
A.3.3. The board should appoint one of the
independent non-executive directors to be the
senior
senior
independent director should be available to the
shareholders if they have concerns which contact
through the normal channels of chairman, chief
executive or finance director has failed to resolve.
director. The
А.4 Appointments to the Board
А.4.1 There should be a nomination committee
which should lead the process for the board
appointments and make recommendations to the
board.
Partially observed
Statutory documents of the Company do not
provide for the position of a senior independent
director, but the information about independent
directors is available on the Company's website.
Shareholders may contact any of them if they
have relevant questions.
Partially observed The Nomination and Remuneration Committee
was successfully created and is active.
The Terms of Reference of the Nomination and
Remuneration Committee defines the sphere of
competence of the Committee. One of the key
functions of the Committee is a provisional
review of candidates presented to the Board of
Directors for appointment to top positions in the
Company. But the Committee does not review
appointments to the Board, as it is in the sphere
of competence of shareholders.
A majority of the Nomination and Remuneration
Committee are non-executive directors, but only
one member of the Committee is an independent
director – R. Kocharyan.
S. Cheremin, non-executive member of
the
Board, chairs the Nomination and Remuneration
Committee.
The Nomination and Remuneration Committee is
not responsible for appointments to the Board of
Directors. This is in the sphere of competence of
the shareholders.
The Terms of Reference of the Nomination and
the
Remuneration Committee
Company's
/
www.sistema.com) and is available on demand
from the shareholders.
is posted on
(www.sitema.ru
website
the nomination
A majority of members of
committee should be independent non-executive
directors.
Not observed
The chairman or an independent non-executive
director should chair the committee, but the
the nomination
chairman should not chair
the
committee when
appointment of a successor to the chairmanship.
is dealing with
it
committee
The nomination
should make
available its terms of reference, explaining its
role and the authority delegated to it by the board.
information
to make
(The requirement
available should be met by satisfying requests of
any interested person and by including the
information on a website of the company).
the
Not applicable
Observed
А.4.2. The nomination
should
evaluate the balance of skills, knowledge and
experience on the board and, in the light of this
committee
the Board of
Partially observed Candidates for members of
Directors are proposed by
the Company's
shareholders according to pp. 23 and 28 of the
100
evaluation, prepare a description of the role and
capabilities required for a particular appointment.
А.4.3 For the appointment of a chairman, the
nomination committee should prepare a job
specification, including an assessment of the time
commitment expected.
Observed
Observed
to
A chairman‘s other significant commitments
should be disclosed
the board before
appointment and included in the annual report.
Changes to such commitments should be reported
to the board as they arise, and their impact
explained in the next annual report.
A full time executive director should not take on
more than one chairmanship in a FTSE 100
company.
A.4.4. The terms and conditions of appointment
of non-executive directors should be made
available for inspection to any interested parties
at the company's office and during the General
Meeting of shareholders.
Observed
Charter.
Capabilities required from the Company's Board
members are set out in the Terms of Reference of
the Company's Board of Directors. A candidate
should have substantial professional experience,
should not be previously convicted of economic
crimes, should not have been under a ban from
taking any managerial positions. The candidate
should not be a member of governance and
control bodies of
that are
competitors of the Company or be an affiliated
person of such companies.
The Nomination and Remuneration Committee
does not develop
for
formal
candidates to the Board of Directors, as a
candidate proposed to the Board Membership by
shareholders must be included in the voting list
according
the Russian
legislation of
Federation.
the companies
requirements
the
Type of work and tasks of the Board Chairman
are set out in the Terms of Reference of the
Board of Directors.
Chairman of the Board of Directors is selected by
the decision of all member of the Board at the
first meeting after the Annual General Meeting of
shareholders.
the
Information on all positions held by
Chairman of the Company's Board of Directors is
disclosed and included into the 2010 Annual
Report (p. 9.1). Chairman of the Company's
Board of Directors V. Evtushenkov does not hold
a position of a chairman of any other significant
companies except Sistema JSFC.
on
the
Terms and conditions of the appointment of non-
executive directors of the Board of Directors is
Company's website
available
(www.sistema.ru / www.sistema.com), at the
Company's office and during
the General
Meeting of shareholders to its participants.
According to the Russian legislation all Board
members are elected for one year and are eligible
for re-election unlimited number of times.
The letter of appointment should set out the
time commitment. Elected Board
expected
members should undertake that they will have
sufficient time to meet what is expected of them.
Partially observed Before
the
candidates
are proposed
for
appointment they familiarize themselves with the
working plan of the Board of Directors for the
upcoming year, rights and obligations of the
Board members and provisional membership in
the Board committees.
During the induction, a Corporate Secretary
explains to every new member of the Board its
procedures and preliminary time commitments
for their fulfillment. Before the election all
candidates sign a document confirming their
agreement with the proposal that includes, among
other issues, an agreement to follow all norms of
internal documents of the Company applicable to
101
Their other significant commitments should be
disclosed to the board and included in the annual
report. Changes to such commitments should be
reported to the board as they arise.
Observed
А.4.5 An executive director should not take on
more than one directorship in a FTSE 100
company.
Observed
the Board members.
Attendance of meetings and involvement of the
Board members in discussion of agenda items
during meetings is recorded and analyzed by the
secretariat of the Board of Directors and is
subsequently included into the Company's report
on the quality of corporate governance.
shareholders,
Biographies of the candidates to the Company's
Board, including information on positions held in
other organizations, are presented at the Annual
General Meeting
and
of
information on acting Board members is included
in the Annual Report.
All candidates to the Board of Directors fill in the
questionnaire for candidates for providing the
Company with the necessary information.
The obligation to disclose any changes to the
information provided by members of the Board
of Directors is set out in the Terms of Reference
of the Company's Board of Directors (p. 2.3).
executive
There are 11 members of the Board of Directors,
directors
are
out which
two
(R. Sommer, L. Melamed).
L. Melamed is the President of the Company,
Board member of Bashneft and Chairman of the
Board of Russneft.
R. Sommer is the First Vice President of the
Company, member of the Company's Board,
Chairman of the Board at MTS, SMM and SSTL
(companies of the Group), Board member of
TATA Consultancy Ltd. and member of the
Supervisory Board of Munich Reinsurance.
Membership in the Board of the companies of the
group is one of the duties of executive directors,
that is why this does not create conflict of interest
for work at the Company.
According to the opinion of the Company's Board
of Directors, membership of R. Sommer
in
Boards of TATA Consultancy Ltd. and Munich
Reinsurance does not take enough time to hinder
the discharge of his liabilities at executive
governance bodies of the Company and is not a
reason for potential or obvious conflict of
interests.
A.4.6. A separate section of the annual report
should describe the work, sphere of competence,
procedures and key issues of the nomination
committee, including the process it has used in
relation to board appointments.
An explanation should be given if neither an
external search consultancy nor open advertising
has been used in the appointment of a chairman
or a non-executive director.
information on
Partially observed The 2010 Annual Report of the Company (p.6.2)
includes
the powers and
competence of the Nomination and Remuneration
Committee of the Company's Board of Directors
and the key issues reviewed by the Committee.
At
the Nomination and
Remuneration Committee does not have powers
to directly propose candidates to the Company's
Board of Directors, as this is the sphere of
competence of shareholders.
same
time,
the
А.5 Information and professional development
A.5.1. The chairman should ensure that new
directors receive a full induction on joining the
board.
Observed
Every candidate to the Board of Directors before
the election meets with the Board Chairman,
the management and
Board members and
102
As part of this, the company should offer to
major shareholders the opportunity to meet the
new non-executive director.
Observed
А.5.2 The board should ensure that directors have
access to independent professional advice at the
company‘s expense where they judge it necessary
for discharge of their responsibilities as directors.
Observed
Board committees should be provided with
sufficient resources to undertake their duties,
including organizational, human and financial
resources.
А.5.3 All directors should have access to the
advice and services of the company secretary,
who is responsible to the board for ensuring that
board procedures are complied with.
Observed
Observed
Both
the
the appointment and removal of
company secretary should be a matter for the
board as a whole.
Observed
A.6 Performance evaluation
А.6.1 The board should state in the annual report
how performance evaluation of the board, its
committees and its individual directors has been
conducted.
Observed
receives information on the work of the Board of
Directors, his role in the Board of Directors and
the Company's business.
The Corporate Secretary gives consultation to
new members of the Board on procedures and
organization of the work of the Board and its
committees and gives out necessary statutory
documents, documents describing the company's
strategy, business, markets of presence and
financial reports.
This induction procedure for the new Board
members is not formalized.
The majority shareholder of the Company always
meets a candidate to the Board of Directors
before the election.
This procedure is not formalized.
The Terms of Reference of
the Board of
Directors (p.2.2.1) gives Board members the right
to engage external
independent experts for
providing expertise on materials and decisions on
any agenda items.
When needed, independent expertise is organized
by the secretariat of the Board of Directors.
Board Committees have access to necessary
human, financial and organizational resources of
the Company.
According to the Terms of Reference on the
Company's Corporate Secretary, the last version
of which was approved by the Board of Directors
(Minutes of 14.02.2004), one of the functions of
the Corporate Secretary is facilitation of work of
the Board of Directors, including: providing
Board members with requested information and
documents
work,
distribution among Board members of materials
for meetings of the Board, facilitation of the work
of the Board Committees.
Company's
regarding
The appointment and removal of the Corporate
Secretary is in the sphere of competence of the
Board of Directors according to the Charter
(p.32).
giving
The process of the performance evaluation of the
Board of Directors work is set out in p.6.5 of the
2009 Annual Report. Since 2009 there is a
the Board of
process of self-evaluation of
in
Directors work. Board members
on
questionnaires
organization of work of the Board of Directors:
membership and structure of
the Board of
Directors, process and organization of work,
work of committees of the Board of Directors,
quality of decisions of the Board of Directors in
relevant areas. Board Secretariat annually surveys
all members of the Board, analyses results and
the Corporate
provides
fill
opinion
final analysis
their
to
103
Governance and Ethics Committee, Board
Chairman and members of
the Board of
Directors.
Not applicable
Performance evaluation of the Board of Directors
Chairman is carried out during evaluation of
work of the Board of Directors in total.
The non-executive directors, led by the senior
independent director, should be responsible for
the performance evaluation of the chairman,
taking into account the views of executive
directors.
А.7 Re-election
А.7.1 All directors should be subject to an
election by the shareholders at the first annual
general meeting after their appointment, and to
re-election thereafter at intervals of no more than
three years.
The names of directors submitted for election or
re-election should be accompanied by sufficient
biographical details and any other relevant
information to enable shareholders to take an
informed decision on their election.
Observed
Observed
А.7.2 Non-executive directors
should be
appointed for specified terms subject to re-
election and
to Companies Acts provisions
relating to the removal of a director.
Observed
The board should set out to shareholders in the
papers accompanying a resolution to elect a non-
executive director why they believe an individual
should be elected.
Partially observed
According to the Russian legislation all Board
members are elected for one year and can be re-
elected for an unlimited number of times.
Information on candidates to the Board of
Directors including their biographical details is
provided among other materials for the Annual
General Meeting of shareholders which elects
members of the Board of Directors of the
Company.
According to the Russian legislation, Board
members are elected at the General Meeting of
shareholders for one year (till the next General
Meeting) and can be re-elected for an unlimited
number of times.
Shareholders are provided with biographical
details of directors submitted for election and this
allows them to make a conclusion on their
competence and advisability to be elected to the
Board.
The chairman should confirm to shareholders
when proposing re-election that, following formal
performance
individual‘s
performance continues to be effective.
evaluation,
the
Partially observed Every year when new membership of the Board
is appointed, information on the work of the
Board of Directors in the previous year is
disclosed, including attendance of meetings by
the Board members and the work of Committees
where Board members participated. Shareholders
take independent decisions on the quality of work
of the Board of Directors and their members.
Any term beyond six years for a non-executive
director should be subject to particularly rigorous
review, and the need for progressive refreshing of
the board should be taken into account.
Not applicable
for
According to the Russian legislation, Board
members are elected at the General Meeting of
shareholders for one year (till the next General
Meeting) and are eligible
re-election
unlimited number of times.
Every year when new membership of the Board
is appointed, information on the work of the
Board of Directors in the previous year is
disclosed, including attendance of meetings by
the Board members and the work of Committees
where Board members
and
shareholders take independent decisions on the
quality of work of the Board of Directors and
their members.
participated
If an executive director serves more than nine
years, his status should not be defined by the
Observed
According to the Russian legislation, Board
members are elected at the General Meeting of
104
Board of Directors as independent.
B. REMUNERATION
В.1 Level and make-up of remuneration
B.1.1. The performance-related elements of
remuneration
significant
proportion of the total remuneration package of
executive directors to give the keen incentives to
perform at the highest levels.
should
form
a
Observed
The Nomination and Remuneration Committee
should participate in developing the system of
remuneration for the Board members.
Observed
B.1.2 If share options are provided for by the
existing remuneration system, they should not be
offered at a discount rate.
Observed
Observed
В.1.3 Levels of remuneration for non-executive
directors should reflect the time commitment and
responsibilities of the role.
Remuneration for non-executive directors should
not include share options. If, exceptionally,
options are granted, the shareholder approval
should be sought in advance and any shares
acquired by exercise of the options should be
held until at least one year after the non-executive
director leaves the board.
Holding of share options could be relevant to the
determination of a non-executive director‘s
independence
В.1.4 Where a company releases an executive
director to serve as a non-executive director
elsewhere,
should
remuneration
include a statement on his earnings in such
company.
report
the
for
shareholders for one year (till the next General
Meeting) and are eligible
re-election
unlimited number of times.
The Terms of Reference of
the Board of
Directors (p.2.5.5) defines independence criteria
for members of the Board of Directors, according
to which a person who is a Board member for
longer than nine years cannot be considered
independent.
The performance-related remuneration in the
amount of $250-325K annually is paid to Board
Members if the Company secures the annual
profit. 50% of this remuneration consists of cash
and 50% – of the Company's shares. If the
Company's capitalization grows, Board members
are paid additional remuneration equaling 0.1%
from the amount of the capitalization growth
which was achieved between two annual general
meetings.
Special remuneration is paid for participation in
the Board meetings and meetings of the Board
Committees.
These mechanisms allow aligning the size of
remuneration of
the Board members with
fulfillment of shareholder goals of the company.
The Policy on remuneration and compensations
for the Company's Board members sets out a
clear formula for calculating their remuneration.
Currently there are no amendments to the above
mentioned Policy under consideration. If it is
necessary to make changes to the above Policy,
the Nomination and Remuneration Committee of
the Board of Directors plays a key role in
developing of such changes.
Board members are not provided with share
options at a discount rate. However part of the
yearly remuneration of the Board members is
paid out in the form of shares of the Company.
remuneration
the
Levels of
for non-executive
time commitment and
directors reflect
responsibilities of the role. Board members
receive additional remuneration for serving as the
Chairman of the Board of Directors, Deputy
the Board
and Chairman of
Chairman
Committee. Special remuneration is paid for
participation in the Board meetings and meetings
of the Board Committees.
Part of the yearly remuneration of the Board
members is paid out in the form of shares of the
Company.
Partially observed Members of the Management Board who are
the Boards of Directors of
members of
receive
additional
do
subsidiaries
not
remuneration for work
in such Boards of
Directors. Members of the Management Board
105
companies
in other companies
(executive directors) who are members of Boards
of Directors
receive
remuneration for work in Boards of Directors of
such
respective
regulations.
Information on the size of remuneration of
members of the Management Board received
from other companies for participation in their
Boards of Directors is not disclosed.
according
to
remuneration committee should
В.1.5 The
consider what compensation commitments their
directors‘ terms of appointment would entail in
the event of early termination. The remuneration
should be paid on a pro rata basis.
Observed
According to p.1.6 of the Policy on remuneration
and compensations for the Board members of the
Company, in the event of early termination of the
director's appointment, remuneration is calculated
on a pro rata basis.
В.1.6 Notice or contract periods should be set at
one year or less. If it is necessary to offer
directors longer notice or contract periods, such
periods should reduce to one year or less after the
initial period.
Observed
According to the Russian legislation, Board
members are elected at the General Meeting of
shareholders for one year (till the next General
Meeting) and can be re-elected for an unlimited
number of times.
В.2 Procedure
В.2.1 The board should establish a remuneration
committee of at least three (for large companies),
independent non-executive directors.
Partially observed The Nomination and Remuneration Committee of
the Company was successfully created and is
active.
The committee consists of five directors, majority
of which (four out of five) - S. Cheremin,
A. Goncharuk,
R. Kocharyan,
D. Zubov,
L. Melamed - are non-executive and one is
independent.
The
remuneration committee should make
available its terms of reference, explaining its
role and the authority delegated to it by the board.
(The requirement
information
to make
available should be met by satisfying requests of
any interested person and by including the
information on a website of the company).
the
Observed
The sphere of competence of the committee is set
out in the Terms of Reference of the Nomination
and Remuneration Committee, the last version of
which was approved by the decision of the Board
of Directors (Minutes of 26.072008). The Terms
and
of Reference
the
Remuneration Committee
Company's
/
www.sistema.com) and is available on demand
from shareholders.
is posted on
(www.sitema.ru
the Nomination
website
of
Where remuneration consultants are appointed, a
statement should be made available of whether
they have any other connection with
the
company.
В.2.2 The remuneration committee should have
delegated responsibility for setting remuneration
for all executive directors and the chairman.
Not applicable
In 2010 no external remuneration consultants
were engaged in the work of the Company's
Board of Directors.
Observed
to
compensation
and procedure
and
for paying out
Amount
remuneration
the
Company's Board member are set out in the
Policy on remuneration and compensations, the
last version of which was approved by the
General Meeting of shareholders (Minutes of
30.06.2006).
If changes should be made to the above Policy,
they are developed by the Nomination and
Remuneration Committee.
The committee should also recommend and
monitor the level and structure of remuneration
Observed
One of the key functions of the Nomination and
the
Remuneration Committee according
to
106
for senior management.
The definition of ‗senior management‘ for this
purpose should be determined by the board but
should normally
layer of
management below board level.
the first
include
В.2.3 The board itself or, where required by the
Articles of Association, the shareholders should
determine the remuneration of the non-executive
directors within the limits set in the Articles of
Association. Where permitted by the Articles,
the
this
responsibility to the remuneration committee.
board may
however
delegate
Observed
В.2.4 Shareholders should be invited specifically
to approve all new long-term incentive schemes
and significant changes to existing schemes.
Observed
Observed
Observed
Observed
С. ACCOUNTABILITY AND AUDIT
C.1 Financial reporting
С.1.1 The annual report should include financial
reports and the auditor's opinion.
С.1.2 Board members should prepare a report on
results of the development of the company over
the year.
С.2 Internal control
С.2.1 The board should, at
least annually,
conduct a review of the effectiveness of the
group‘s system of internal controls and should
report to shareholders that they have done so. The
review should cover all material controls,
including financial, operational and compliance
controls and risk management systems.
C.3 The Audit Committee and Auditors
С.3.1 The board should establish an audit
committee of at least three (for large companies)
independent non-executive directors. At least one
member of the audit committee has relevant
financial experience.
terms of
labor contracts of
respective Terms of Reference is preliminary
review of
the
President and Board members presented for
consideration of
the Company's Board of
Directors, evaluation of performance of the
Company's top management and defining the size
of their remuneration.
The Policy on remuneration and compensations
for the Company's Board members, the last
version of which was approved by decision of the
general meeting of shareholders (Minutes of
for
30.06.2006), sets out a clear formula
calculating
the Board
members. A special decision of the Nomination
and Remuneration Committee for such payments
is not required.
remuneration of
the
Long-term incentive schemes are approved by the
Board of Directors and, when needed, by the
General Meeting
and
of
shareholders discuss such matters both at the
level of the Board of Directors and the level of
the General Meeting of Shareholders.
shareholders,
Financial reports of the Company are disclosed
annually and include the auditor's opinion.
Report of the Board of Directors on development
of the Company is included in the text of the
Company's Annual Report.
The Board of Directors annually reviews the
report from the department of Internal Control
and Audit on results of the year, as well as the
analysis of detected deficiencies and existing
control systems.
A report from the Revision Commission is
attached to materials of every Annual General
Meeting.
Partially observed The Audit Committee of Sistema JSFC was
successfully created and is active. The Audit
Committee consists of three Board members, two
directors –
of whom
R. Munnings and E. Novitsky, one is a non-
executive director – R. Mekhrotra.
Position of the Chairman of the Audit Committee
is taken by the member of the Board of Directors
R. Munnings who meets independence criteria
and has vast experience in financial audit.
independent
are
С.3.2 The main role of the audit committee
should be set out in terms of reference.
Observed
the Audit Committee of
The sphere of competence of
the Audit
Committee is set out in the Terms of Reference
of
the Board of
Directors, the last version of which was approved
by
(Minutes of
21.01.2006).
the Board of Directors
107
С.3.3 The terms of reference of the audit
committee, including the authority delegated to it
by the board, should be made available.
(The requirement
information
to make
available should be met by satisfying requests of
any interested person and by including the
information on a website of the company).
the
Observed
A separate section of the annual report should
describe the work of the committee.
Observed
С.3.4 The audit committee should make sure that
staff of the company may, in confidence, raise
concerns about possible improprieties in matters
of financial reporting or other matters.
Observed
С.3.5 The audit committee should monitor and
review the effectiveness of the internal audit
activities. Where there is no internal audit
function, the audit committee should consider
annually whether there is a need for an internal
audit function and make a recommendation to the
board.
Observed
С.3.6 The audit committee should have primary
responsibility for making a recommendation on
the appointment of the external auditors.
Observed
Observed
Observed
report
should
include
С.3.7 The annual
information on independence criteria for auditors
and explain to shareholders how, if the auditor
provides
auditor
independence is safeguarded.
non-audit
services,
D. RELATIONS WITH SHAREHOLDERS
D.1 Dialogue with main shareholders
D.1.1 The chairman should ensure that the views
of shareholders on the development of the
company are communicated to the board.
The chairman should regularly discuss strategy
with major shareholders.
Non-executive directors should be offered the
opportunity
to attend meetings with major
shareholders and should expect to attend them if
requested by major shareholders.
The senior independent director should hold
sufficient meetings with shareholders to discuss
Not applicable
The terms of reference of the audit committee is
posted
website
(www.sistema.ru / www.sistema.com) and is
available on demand from shareholders.
Company's
the
on
The report on the work of the Audit Committee is
included in the Company's 2010 Annual Report
(p. 6.2).
‗hot
through
The Audit Committee reviews the information
received
is used
confidentially by the Company's employees and
other interested parties for raising concerns about
possible improprieties in the financial sphere and
other violations.
line‘ and
the Audit Committee
According to the Terms of Reference of the Audit
Committee of the Board of Directors, one of the
is
key functions of
supervision of the internal audit system of the
Company. The Internal Control and Audit
Function carries out internal control. The Audit
Committee together with the head of the above
and
mentioned Function
the Company's
implemented activities
management analyzes
aimed at removing deficiencies of
internal
business processes.
According to the Terms of Reference of the Audit
Committee of the Company's Board of Directors,
the Audit Committee analyzes the work of
external auditors and makes recommendations for
the Board of Directors on appointment, re-
appointment and removal of external auditors.
The 2010 Annual Report of the Company
includes statement on the policy of safeguarding
objectivity and independence of the Company's
auditor.
the majority of
Representatives of
large
shareholders are members of the Board of
Directors of the Company. The IR department of
the Company works with largest institutional
investors. Results of their work, including views
of main institutional investors of the Company on
strategy and development outcomes of
the
Company, are regularly reviewed by the Board of
Directors within the IR strategy of the Company.
It is mandatory for all members of the Board of
Directors, including non-executive directors, to
attend the Annual General Meeting.
Company's statutory documents does not provide
for the position of a senior independent director.
108
development of the company.
D.1.2 The annual report should state how the
members of the board develop an understanding
of
the views of major shareholders about
development of the company.
Observed
D.2 Constructive use of the AGM
D.2.1 The company should ensure that votes of
all persons
the general
that participated
meeting are properly recorded.
The minutes of the meeting should include the
number of persons that participated in the voting
on every agenda item and the number of votes
"for", "against" and "abstained".
in
Observed
D.2. At any general meeting, the company should
propose a separate draft resolution on each
separate issue.
Observed
D.2.3 All members of the Board of Directors are
to attend
the general meeting. Committee
Chairmen should be available for answering
questions of shareholders.
Observed
D.2.4 The company should arrange for the Notice
of the AGM and related papers to be sent to
shareholders at least 20 working days before the
meeting.
Observed
Prior to every meeting of the Board of Directors
independent members of the Board hold an
informal meeting in the form of a business dinner
which is also attended by the management of the
corporation.
Information on independent members of the
Board of Directors is available to shareholders
via the Company's website. Shareholders may
contact any of them if they have relevant
questions.
large
Representatives of
shareholders are members of the Company's
Board of Directors. The IR department of the
Company works with
institutional
investors. Results of their work, including views
of main institutional investors of the Company on
development of the Company, are regularly
reviewed by the Board of Directors within the IR
strategy of the Company. It is mandatory for all
members of the Board of Directors, including
non-executive directors, to attend the Annual
General Meeting.
the majority of
largest
this
information
All votes of shareholders are registered by the
Teller Committee and
is
included in the Minutes of the General Meeting
of Shareholders. All "for", "against" and
"abstained" votes on every agenda item are
recorded separately, voting results for every item
are not disclosed.
According to the Russian legislation and the
Company's Charter, every agenda item at the
general meeting is accompanied by a separate
draft
resolution with voting options "for",
"against" and "abstained".
According to p. 2.3. of the Terms of Reference of
the Board of Directors, all members of the Board
of Directors are to attend the General Meeting
and be able to answer questions from the
participants of the meeting.
Shareholders
the general
meeting may put questions to any member of the
Board of Directors attending the meeting.
According to its Charter, the Company sends the
the AGM and publishes related
Notice of
materials 30 days before the meeting.
that participate
in
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