Sistema Annual Report 2012

FY2012 Annual Report · Sistema

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ANNUAL REPORT
of Open Joint-Stock Company
Sistema Joint-Stock Financial Corporation
for 2012

This report has been 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 2013

CONTENTS

1. Sistema’s position in the sector.

1.1. Profile of Sistema JSFC.

1.2. Shareholders’ equity structure of Sistema JSFC.

2. Priority business areas and development strategy.

2.1. Mission and strategy of Sistema JSFC.

2.2. Portfolio of Sistema JSFC.

3. Board of Directors’ Report on the results of the Company's development in the priority

areas.

3.1. Key Events in 2012.

3.2. Russian Accounting Standards (RAS) financial results of Sistema JSFC for

2012.

3.3. US GAAP consolidated financial results of Sistema JSFC for 2012.

3.4. Credit ratings of Sistema JSFC.

3.5. Report on payment of announced (accrued) dividends on the shares of Sistema

JSFC.

4. Outlook and development strategy of the Sistema Group companies.

4.1. MTS.

4.2. Bashneft.

4.3. BPGC.

4.4. SMM.

4.5. MTS Bank.

4.6. Detsky Mir.

4.7. Intourist.

4.8. Medsi.

4.9. RTI.

4.10. Binnopharm.

4.11. NIS.

4.12. RZ Agro Holding.

4.13. SG-trans.

4.14. RussNeft.

4.15. SSTL.

5. Description of core risk factors.

5.1. External risks.

5.2. Risks related to the core activities of Sistema JSFC.

6. Corporate governance system.

6.1. General Meeting of shareholders.

6.2. Board of Directors.

6.3. President.

6.4. Management Board.

6.5. Risk management, internal control and audit system.

6.6. Development of corporate governance system in 2012.

7. Social responsibility.

8. Criteria for and amounts of remuneration of 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 of the Company over the period from 1 January
to 31 December 2012.

9.3. Summary biographies 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 Management Board members.

9.5. List of transactions performed by the Company in the reporting year that are
recognised 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
recognised 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 of the Federal Service for Financial Markets.

9.8. Information on the Company's compliance with the requirements of the UK

Corporate Governance Code.

104

105

110

123

1. SISTEMA’S POSITION IN THE SECTOR.

1.1. Profile of Sistema JSFC.

Overview
Sistema JSFC (hereinafter – “Sistema”, “Corporation” or “Company”) is Russia's largest publicly listed financial
corporation. Incorporated in 1993, Sistema is now one of Russia's top 10 companies by revenue, and is one of the
largest public investment holding companies in the world. The investment portfolio of the Company comprises
stakes in predominantly Russian businesses in a range of sectors, including telecommunications, oil, electric
power, consumer, high tech and other industries. Sistema is a controlling shareholder in most of its portfolio
companies.

Sistema's global depository receipts are listed under the symbol "SSA" on the London Stock Exchange (1 GDR is
equal to 20 ordinary shares). The Company's ordinary shares are listed under the symbol "AFKS" on the MICEX-
RTS Stock Exchange.

Business concept
Sistema invests in a range of private and public companies which meet its investment criteria, the main one being
return on invested capital. Investments are managed by Sistema’s portfolio managers. Assets are distributed
among investment portfolios depending on the relevant sector experience of each portfolio manager. Investment
portfolio managers work on continuous improvement of the portfolios’ key business indicators through the
corporate governance procedures of portfolio companies. Effective use of key competences and Corporate
Centre’s financial resources lies at the basis of successful realisation of Sistema assets’ potential.

Sector
Bashneft
MTS
RTI
MTS Bank
SSTL
Corporate Centre
Other

% of 2012 revenue
50.2
37.4
6.4
1.7
0.8
0.2
3.3

1.2. Shareholders’ equity structure.

Sistema has 9,650,000,000 ordinary shares outstanding, with the par value of RUB 0.09 each. The Company’s
shareholders’ equity amounts to RUB 868,500,000.

In February 2005, Sistema conducted an initial public offering and listed its shares in the form of Global
Depositary Receipts on the London Stock Exchange under the symbol SSA. One GDR represents 20 ordinary
shares. The company’s ordinary shares are traded under the symbol AFKS on the MICEX-RTS Stock Exchange.
Approximately 19% of Sistema’s shares are traded on the London Stock Exchange as GDRs and 5.2% of shares
are traded on MICEX-RTS.

The portfolio of Sistema includes two public companies: MTS ADRs are traded on the New York Stock
Exchange (ticker: MBT) and MTS ordinary shares are traded on the MICEX-RTS Stock Exchange (ticker:
MTSS), Bashneft ordinary and preference shares are traded on the MICEX-RTS Stock Exchange (ticker: BANE,
BANEP).

The Chairman of the Board of Directors Vladimir Evtushenkov is the principal shareholder of Sistema (64.18% of
shares).

Chart 1:

7.67%

2.67%

6.47%

19.01%

Shareholders' equity structure

V. Evtushenkov

Deutsche Bank (GDRs)

National Settlement Depository

Sistema Finance Investments

64.18%

Other

GDR Holders - Top 10 Institutional Investors*

# Institutional investor

1 UBS AG
2 SKAGEN AS
3 J.P. Morgan Asset Management
4 The Vanguard Group
5 GIC Asset Management Pte.
6 Baring Asset Management
7 TKB BNP Paribas Investment Partners
8 East Capital Asset Management AB
9 HSBC Global Asset Management
10 BlackRock Investment Management
* As of January 30, 2013

% of total
GDRs
25.1
15.1
6.0
5.4
4.4
3.7
3.1
2.9
2.5
2.1

% of authorised share capital

4.77
2.87
1.14
1.03
0.84
0.70
0.59
0.55
0.48
0.40

Sistema’s GDR price performance on the London Stock Exchange
Sistema’s GDR price increased by 20.2% in 2012 and outperformed key indices including RTS and MSCI Russia.
The closing price of Sistema’s GDR on the London Stock Exchange on the first trading day of 2012 was US$
16.81 with Sistema’s market capitalisation of US$ 8,111m, while on the last trading day the price reached US$
20.2 with the market capitalisation of US$ 9,745m. The Corporation's GDRs reached a high of US$ 23.56 on
September 12, 2012 and a low of US$ 15.79 on May 17, 2012. Average daily trading volume on the London
Stock Exchange in 2012 amounted to 707,684 GDRs.

Graph 1:

Sistema’s GDRs vs RTS Index in 2012*

* Source: Bloomberg

Buyback programme
In May 2012, Sistema launched a buyback programme for its Global Depository Receipts and ordinary shares. In
aggregate, Sistema bought back 6,452,619 GDRs at an average price of US$ 19.96 per GDR, and 19,784,700
ordinary shares at an average price of RUB 25.96 per share within the period from the start of the buyback
programme on June 6, 2012 to its completion on October 15, 2012.

2. PRIORITY BUSINESS AREAS AND DEVELOPMENT STRATEGY.

2.1. Mission and strategy of Sistema JSFC.

Mission
Long-term growth of shareholder value through effective management of asset portfolio and achievement of high
returns on investments.

Value creation model
The investment portfolio of Sistema is composed of predominantly Russian businesses, which include mature
companies with stable cash flows and developing companies with significant growth potential. Since the mature
assets comprise the largest part of the portfolio, Sistema has significant resources for investing in developing
assets and taking new opportunities available in the market.

Investment strategy

Criteria and process
• The Corporation acquires assets mainly in complementary sectors making it possible to use the expertise of the
Corporation and to realise synergies with the existing portfolio. The Corporation also invests in new economically
attractive industries, such as agriculture, infrastructure, transportation and logistics, as well as chemicals and
petrochemicals.
• Sistema JSFC concentrates its efforts on large-scale assets and projects worth at least US$ 300m, which enables
the company to take a leading position in the sector by means of achieving synergy effects, taking industry
consolidation opportunities and ensuring successful implementation of its investment and operational strategy.
• The Corporation makes investments in accordance with the adopted internal investment criteria aimed at
increasing economic efficiency:

generation of returns on investments above the long-term cost of capital (IRR>WACC) with a 5-7 year
payback period;
focus on projects generating positive income within 3 years.

Asset management
• Sistema JSFC creates its value due to effective portfolio management, including the restructuring of existing
assets, selling to strategic investors or an IPO.
• The Corporation aims to maintain a balanced portfolio that includes large cash-generating core assets and
companies at the stage of active business development.
• The assets are split into portfolios based on the sector expertise of the portfolio manager. The key indicator of
investment performance (KPI) for the management is the TSR (total shareholder return), which is set for each
asset.
• The Corporation is pursuing a progressive dividend policy. The amount of dividends is determined on the basis
of the performance results of previous financial periods and equals at least 10% of the Group’s net income under
US GAAP and a minimum of 10% of net gain from transactions, such as sale of assets.

Financial discipline
• To ensure financial stability, Sistema seeks to maintain an optimum level of debt both at the Corporate Centre
and portfolio company level.
• The key indicator of financial stability used by the Corporate Centre is the dividend flow / debt ratio, which will
be kept at the level of 1 in the long-term perspective.
• The Corporation also aims to acquire assets with an acceptable debt level (Debt/OIBDA of the acquired asset
<3.0x) in order to maintain a stable financial position for the Group as a whole.

Cooperation with partners and professionals with relevant sector expertise
• The Corporation aims to set up and to develop partnerships with leading international and Russian companies, to
exchange experience and industry-specific expertise, and to diversify financial risks.
• Sistema JSFC oversees the implementation of portfolio companies’ investment strategy by participating in the
work of their governance bodies and by engaging industry experts for the work on the boards of directors.

2.2. Sistema JSFC portfolio.

In November 2012, the Board of Directors of Sistema approved a new organisational structure, with assets to be
split into portfolios.
With the introduction of a new organisational structure the capital management principles were revised to ensure
competition for project funding based on NAV and IRR. The incentive system of the management was also
improved and tied primarily to the returns generated by investment projects.

Portfolio companies of Sistema JSFC:

MTS, a leading telecommunications operator in Russia, Central and Eastern Europe.

Bashneft, one of the largest oil companies in Russia.

Bashkirian Power Grid Company (BPGC), one of Russia's largest regional power grid
companies.

Sistema Mass-Media (SММ), one of the leading media holding companies in Russia.

MTS Bank, one of the biggest commercial banks in Russia.

Detsky Mir Centre, the largest retailer of children's goods in Russia and the CIS.

VAO Intourist, one of the major companies operating in the tourism market in Russia.

Medsi Group (Medsi), Russia's largest federal chain of commercial healthcare
facilities.

RTI, the largest Russian company operating in the field of defence, comprehensive
security systems, system integration and microelectronics.

Binnopharm, a biopharmaceutical company that operates Russia’s largest full-cycle
manufacturing facility.

Navigation-Information Systems (NIS), one of the leading companies in the Russian
navigation market.

Russkaya Zemlya (RZ Agro Holding Ltd), a major grain producer.

SG-trans, one of Russia's largest independent operators in liquefied gas transportation.

RussNeft, one of Russia's leading oil companies.

Sistema Shyam TeleServices Limited (MTS India), a mobile operator in India.

3. REPORT OF THE BOARD OF DIRECTORS ON THE COMPANY’S PERFORMANCE RESULTS IN
PRIORITY AREAS.

3.1. Key Events in 2012.

Macroeconomic review of 2012
In 2012, the key indicators of the Russian economy showed volatile performance. The rapid growth of GDP early
in the year slowed towards the middle, and the final growth rate turned out to be the lowest over the entire post-
crisis period. Nevertheless, the external environment was mostly favourable for the country and for the Group’s
businesses throughout the year. Average Urals oil prices remained at the level of 2011, which was US$ 111 per
barrel. The rouble strengthened against the dollar and against the euro by 7.2% in real terms. The rise of the
rouble’s value had a generally positive impact on domestic demand figures, and supported Sistema’s businesses
focused on the Russian market.

Graph 2

Graph 3

GDP growth and oil prices

Corporate loans vs loans to individuals

Graph 4

Graph 5

Share of household consumption in GDP growth

Consumer confidence index and retail sector

Key 2012 events of the Corporation:

 US$ 885 million dividend from portfolio companies
 US$ 370 million from the successful exit from power generation
 20.2% growth in share price
 New organisational structure
 High Tech assets restructuring
 New projects in agriculture
 Partnership in healthcare business and new opportunities for growth

 New projects in transportation sector
 Eurobonds issue
 61% of the Board are independent directors
 Buyback programme
 New development strategy in the banking business
 Developments around SSTL

Increased transparency of Bashneft’s shareholder structure

M&A transactions

New projects in agriculture
Objective: to create a leading company in the sector; secure an experienced partner in agriculture to expand
scale.
In April 2012, Sistema announced a joint venture with RZ Agro Ltd in the agricultural sector. RZ Agro Ltd was
established in 2009 and is affiliated with the Sierentz Group, both controlled by several members of the Louis-
Dreyfus family. Sistema contributed 46,000 hectares of farm land to the JV, and the total acreage of the JV is now
87,500 hectares.

Partnership in the healthcare business and new opportunities for growth
Objective: to establish a leading full-cycle healthcare provider.
In April 2012, Medsi commenced a merger of assets with the State Unitary Enterprise (SUE) Medical Centre
under the Administration of the Mayor of Moscow and the Moscow Government, a large group of healthcare
facilities in Moscow. SUE gained a 25.02% stake in the combined entity in exchange for contributing its property
with the market value of RUB 6.043bn.

Exit from the power generation business
Objective: to monetise power generation assets due to regulatory uncertainty; maintain an upside in distribution
in the event of privatisation opportunities.
In July 2012, the Board of Directors of Bashkirenergo approved the company’s reorganisation in the form of a
spin-off resulting in the establishment of two companies: generating company OJSC Bashenergoactiv, and OJSC
Bashkirian Power Grid Company. Sistema obtained a 92.48% voting stake in Bashkirian Power Grid Company
and received RUB 11.2bn in cash and promissory notes from INTER RAO. Sistema no longer has any interest in
the power generation assets.

New projects in the transportation sector
Objective: to enter into a new, growing sector; to build synergies with existing railcar fleet; ability to unlock
hidden value within SG-trans; opportunity to create the biggest player in the sector.
In August 2012, Bashneft acquired a 50% equity stake in Financial Alliance LLC, a professional railcar operator,
by transferring its fleet of approximately 4,500 railcars to it.
In November 2012, Sistema acquired a 100% stake in SG-trans, Russia’s largest independent provider of
specialised railcars for transporting liquefied petroleum gas for RUB 22.77bn.
In December 2012, Sistema acquired a 50% equity stake of Financial Alliance LLC from Bashneft for RUB
3.41bn (approximately US$ 110m). As a result, Sistema increased its rolling stock to 34,500 railcars.

Corporate Highlights

Bond issue
In May 2012, Sistema issued a US$ 500m Eurobond with an annual interest rate of 6.95% and a maturity date in
May 2019.

61% of directors on the Board are independent
In June 2012, three new members to the Board of Directors were elected - Brian Dickie, Jeannot Krecké and Marc
Holtzman, increasing the number of Independent Directors on the Board to 8 out of 13 members.

Buyback programme
In May 2012, Sistema launched a buyback programme for Sistema’s Global Depository Receipts and ordinary
shares. In aggregate Sistema bought back 6,452,619 of GDRs at an average price of US$ 19.96 per GDR and
19,784,700 of ordinary shares at an average price of RUB 25.96 per share from the start of the buyback
programme on June 6, 2012 to its completion on October 15, 2012.

New organisational structure
In November 2012, the Board of Directors of Sistema approved a new organisational structure where assets are
distributed by portfolios depending on the industrial expertise of the respective portfolio manager.

Portfolio Highlights

New development strategy in the banking business
Objective: to unlock synergies between financial and mobile services and benefit from the growth of consumer
finance.
In February 2012, MBRD changed its name to MTS Bank, and chose the MTS brand name for its further
development.

In October 2012, Sistema, MTS and MTS Bank signed a non-binding offer for MTS acquiring a 25.095% stake in
MTS Bank in the course of a new share issue. In March 2013, the transaction was concluded on the agreed terms.

Development of SSTL
The licence crisis in India was successfully resolved; licences were acquired on more favourable terms, cashburn
was reduced.
In February 2012, the Supreme Court of India issued a judgment revoking 122 telecom licences of 8 telecom
operators, including 21 of the 22 licences held by SSTL.
In May 2012, in an attempt to reverse the judgment SSTL filed a curative petition to the Supreme Court.
In October 2012, Indian mobile operators were due to submit their bids to the country's upcoming 2G spectrum
auction. SSTL did not submit an application due to an unjustifiably steep recommended reserve price of INR
182bn (US$ 3.3bn) for a 5MHz spectrum.
In February 2013, the Supreme Court of India dismissed SSTL's curative petition. In the meantime, SSTL
informed the Ministry of Telecommunications of India that it was discontinuing its operations in the following ten
circles: Assam, Andhra Pradesh, Bihar, Himachal Pradesh, Haryana, Jammu & Kashmir, Madhya Pradesh, North
East, Orissa and Punjab.

In March 2013, SSTL won a spectrum in the 800 MHz band in eight circles following its participation in the
second round of the licence auction. The circles won by SSTL include Delhi, Kolkata, Gujarat, Karnataka, Tamil
Nadu, Kerala, Uttar Pradesh (West) and West Bengal. The company's operational footprint will also include the
Rajasthan circle, which was not affected by the Supreme Court’s decision of February 2, 2012. SSTL decided not
to bid for spectrum in Mumbai, Maharashtra and Uttar Pradesh (East), and will close its operations in those
circles. As a result, SSTL will be able to provide services to 10.45m customers in 9 circles using 3 carriers of 1.25
MHz each.

Assets restructuring

High Tech assets restructuring
Objective: to expand the systems integration division.
In September 2012, RTI and NVision Group Managing Company LLC completed the transaction aimed at
strategic integration of RTI’s and NVision Group’s information and communication technology assets. As a result
of the deal, RTI (including the assets of SITRONICS) became the owner of 50%+0.5 shares in NVision Group.
As part of the transaction RTI contributed cash in the amount of RUB 3bn and some of its assets.

Increasing the transparency of Bashneft’s shareholder structure
Objective: to improve ownership structure and corporate governance.
In April 2012, the EGM of Bashneft approved the consolidation of its downstream assets through a merger of its
subsidiaries – OJSC Bashkirnefteprodukt, OJSC Ufaneftekhim, OJSC Orenburgnefteprodukt, OJSC Ufa refinery
plant and OJSC Novoil – with Bashneft. In October 2012, Bashneft completed the reorganisation.

3.2. Russian Accounting Standards (RAS) financial results of Sistema JSFC

Revenue, RUB K
Income from sales, RUB K
Net income (loss) in the reporting period RUB K

Revenue structure:

2012
26, 460, 099
20, 114, 968
88, 026, 615

2011
29,208,979
20,345,902
(13,605,646)

2012

RUB K

2011
11

Shareholdings: dividends receivable
Other income (rental, agent services, guarantees)
TOTAL:

26, 104, 253
355 846
26, 460, 099

28,658,070
550,909
29,208,979

The issuer's core business is managing stakes and shareholdings in commercial organisations.

Structure of other earnings and expenses:

Interest receivable
Interest payable
Other income
Other expenses
TOTAL:

Efficiency indicators

Productivity of labour, RUB K per employee
Debt to equity ratio
Long-term debt to the sum of long-term debt and equity
Coverage of debt with current income (profit) ratio
Level of overdue debt, %

RUB K

2012
2, 774, 833
(4, 575, 040)
168, 304, 649
(100, 274, 901)
66, 229, 541

2011
2,799,878
(5,698,818)
116,447,056
(149,036,660)
(35,488,544)

2012
135, 692.8
0.179
0.076
2.41
0

2011
129,817
0.131
0.086
0.65
0

Analysis of the financial solvency and the level of the credit risk of the issuer shows that in general the issuer has
both considerable own funds and borrowing capabilities, with no risk of defaulting on its debt repayment
obligations.
Long-term liabilities account for a minor part in the structure of borrowings (46%). Accounts receivable and
payable are recurring.

Financial stability indicators

Net working capital, RUB K
Current ratio
Quick ratio

2012
(2, 940, 356)
0.94
0.90

2011
68,720,564
5.33
5.32

Current assets of the Corporation as of December 31, 2012 were RUB 46, 966, 530K, the volume of its short-term
liabilities as of the specified date amounted to RUB 49, 906, 886K, production costs in 2012 amounted to RUB
110, 645K.

Chart 2: Chart 3:
Liabilities & shareholder equity Structure of borrowings

15%

Equity

Liabilities

85%

54%

46%

Long-term
liabilities

Short-term
liabilities

The share of equity in the structure of the Company’s
liabilities amounts to 85%.

The share of long-term debt in the total amount of the
Company’s liabilities is 46%.

Data on fuel, energy and water consumption

Type of resource

UoM

Consumed in 2012

For reference: consumed in
2011

Boiler fuel

Heat energy

Electric energy

Water

tons of fuel
equivalent

G cal

thousand kW*h

cubic meters

5,745.48

7,328.48

32,255.33

2,136.325

6,953.139

26,582.0

3.3. US GAAP consolidated financial results of Sistema JSFC.
In 2012, Sistema’s consolidated revenues increased by 3.9% and 9.9% year-on-year in US dollar and rouble terms
respectively, as a result of organic growth at MTS, higher sales at Bashneft, RTI’s consolidation of NVision
Group, as well as strong performance at Detsky Mir and MTS Bank. In the fourth quarter of 2012, the Group’s
revenues were up 13.0% year-on-year.

In 2012, selling, general and administrative expenses (SG&A) decreased by 1.6% to US$ 3,855.8m year-on-year
mainly due to the cost efficiency measures taken at MTS, as well as lower costs at the Corporate Centre’s level.
Depreciation, depletion and amortisation expenses decreased by 3.4% to US$ 3,159.4m year-on-year.

The Group’s adjusted OIBDA increased by 3.3% year-on-year in 2012, largely as a result of MTS’ growing
profitability, as well as improved OIBDA in Detsky Mir and MTS Bank. Year-on-year decline in adjusted
OIBDA by 1.9% in the fourth quarter was mainly due to higher tax expenses at Bashneft. The Group’s adjusted
OIBDA margin was 21.9% in the fourth quarter and 25.0% in 2012.

Adjusted consolidated net income attributable to Sistema grew by 80.0% year-on-year in 2012, reflecting
excellent underlying results across most portfolio companies. The Group reported a 36.9% year-on-year increase
in adjusted net income in the fourth quarter of 2012.

Key financial indicators

(US$m, except for per share amounts)

Revenues

Adjusted OIBDA

Operating income

2012

2011

Year on year
change

34, 240.7

32, 940.9

8, 543.1

8,268.5

3.9%

3.3%

3, 718.7

3, 942.2

(5.7%)

Adjusted operating income

5, 383.6

4, 999.2

7.7%

Net income/(loss) attributable to Sistema

946.8

218.0

334.3%

Adjusted net income attributable to Sistema

1, 794.5

996.8

80.0%

Basic and diluted earnings per share (US cents)

10.2

2.3

333.4%

Operating review1
MTS

(US$m)

Revenues

OIBDA

2012

2011

Year on year
change

12, 435.7

12, 318.7

0.9%

4, 275.7

5, 187.0

(17.6%)

Operating income

2, 000.8

2, 851.8

(29.8%)

Net income attributable to Sistema

533.9

769.5

(30.6%)

Despite the weakening of the Russian rouble against the US dollar and the mid-year suspension of the company’s
operations in Uzbekistan, MTS’ revenues increased by 0.9% year-on-year in 2012 primarily due to the growth in
sales of handsets and data products. The total subscriber base (including Belarus subscribers) decreased to 101
million customers as of December 31, 2012, following the suspension of MTS’ operations in Uzbekistan.
Excluding customers in Uzbekistan, the company’s subscriber base grew by 4.4% year-on-year due to resumed
operations in Turkmenistan, as well as the growing subscriber base in Russia and Ukraine.

In 2012, MTS’ OIBDA decreased year-on-year due to recognised loss relating to impairments and provisions in
Uzbekistan. MTS’ adjusted OIBDA increased slightly year-on-year in 2012 as a result of growing income from
data services and a reduction in marketing expenses.

The average monthly service revenue per subscriber (ARPU) in Russia increased to RUB 306 in the fourth
quarter of 2012, compared to RUB 284 in the corresponding period of 2011, as a result of MTS’ on-going efforts
to stimulate voice and data usage. Russian subscribers’ monthly minutes of use (MOU) increased by 35.7% to
323 minutes in the fourth quarter of 2012, compared to 283 minutes in the fourth quarter of 2011, as MTS
continued to focus on increasing voice usage to drive loyalty and customer value.

In the fixed broadband business, the number of households covered increased by 3.0% year-on-year to 11.7
million at the end of the fourth quarter of 2012. The Pay-TV customer base totalled 2.9 million subscribers at the
end of the reporting quarter. The number of broadband Internet subscribers increased to 2.3 million year-on-year.

In November 2012, MTS announced a strategic initiative with Microsoft, the global IT leader, to promote
innovative mobile solutions by launching Windows 8 “Ecosystem Demo Zones” in MTS retail stores.

In October 2012, Sistema, MTS and MTS Bank signed a non-binding indicative offer received from MTS to
acquire 25.095% in MTS Bank in the course of an additional share issue of MTS Bank. In March 2013, the
transaction was closed on the agreed terms.

1 Here and hereinafter the comparison of period to period revenues is presented on an aggregate basis, excluding revenues from intra-segment (between
entities in the same segment) transactions, but before inter-segment (between entities in different segments) eliminations, unless accompanied by the word
“consolidated”. Amounts attributable to individual companies, where appropriate, are shown prior to both intra-segment and inter-segment eliminations and
may differ from respective standalone results due to certain reclassifications and adjustments.

Bashneft

(US$m)

Revenues

OIBDA

2012

2011

Year on year
change

17, 125.2

16, 549.1

3.5%

3, 150.1

3, 390.7

(7.1%)

Operating income

2, 557.7

2, 778.8

(8.0%)

Net income attributable to Sistema

1, 279.5

1, 220.7

4.8%

Bashneft’s revenue increased by 3.5% year-on-year in 2012 due to an increase in export volumes, as a result of
higher exports of oil products, particularly to non-CIS countries.

Bashneft’s OIBDA decreased by 7.1% year-on-year in 2012, primarily due to higher tax expenses.

In 2012, Bashneft’s oil production increased by 2.2% year-on-year to 15.4 million tonnes. The company sold 4.9
million tonnes of oil products in the fourth quarter of 2012, a 2.1% year-on-year increase, with exports amounting
to 1.1 million tonnes of crude oil and 2.2 million tonnes of oil products.

The output of the company’s refineries in 2012 decreased slightly down to 20.8 million tonnes of crude oil due to
the performance of regular repair works at the Ufa refinery plant. In 2012, the average refining depth was 84.9%
and light-product yield amounted to 59.7%, while the Nelson complexity index increased from 8.3 to 8.55 as a
result of increasing the capacity of a delayed coking unit at Bashneft Ufaneftekhim from 1.2 million to 1.6 million
tonnes per year.

As of December 31, 2012, Bashneft owned and operated a total of 488 petrol stations.

In December 2012, Bashneft acquired LLC Garsar and LLC Mobel-Neft holding licences for oilfields and
promising subsoil areas in the Ermekeyevsky district in the west of the Republic of Bashkortostan.

In November 2012, the Consortium comprising Bashneft (70%) and Premier Oil (30%) signed an exploration,
development and production service contract (EDPSC) with South Oil Company acting on behalf of the Republic
of Iraq for Block 12 in Baghdad. In accordance with the signed contract, the Consortium will conduct an
obligatory geological exploration programme at Block 12 for the 2D seismic survey totalling 2,000 linear
kilometres and drilling one exploration well. In addition, the Consortium will invest US$ 120 million in
geological exploration over a five-year period.

In October 2012, Bashneft completed its reorganisation through the consolidation of its subsidiaries (OJSC Ufa
refinery plant, OJSC Novoil, OJSC Ufaneftekhim, OJSC Bashkirnefteprodukt and OJSC Orenburgnefteprodukt),
resulting in the transition to a single share.

Bashkirian Power Grid Company (BPGC)2

(US$m)

Revenues

OIBDA

Operating income

Net income attributable to Sistema

2012

2011

Year on year change

373.1

387.7

(3.8%)

129.0

84.2

24.4

99.3

57.7

20.4

29.9%

45.9%

19.7%

Bashkirian Power Grid Company’s revenues decreased by 3.8% year-on-year in 2012, mainly due to changes in
the payment procedure for power transmission services effective from July 1, 2012, as well as rouble depreciation
against the US dollar.

The company’s OIBDA increased by 29.9% year-on-year in 2012, mainly due to the optimisation of the
company’s organisational structure and decreased operating expenses. The OIBDA margin reached 34.6% in
2012, compared to 25.6% in 2011.

In 2012, distribution grid losses decreased by 0.6 p.p. year-on-year as a result of the reduced commercial losses,
an increased number of installed electricity meters, and tests conducted to detect non-contractual and non-metered
consumption and control over electricity meter readings. Transmission grid losses increased in 2012 mainly due
to a decline in consumer demand and operational factors.

In Q4 2012 the effective output of transmission grids remained virtually at the level of Q4 2011, while the
effective output of distribution grids increased by 2.6% year-on-year.

In November 2012, the reorganisation of Bashkirenergo was completed. Pursuant to the agreement signed
between Sistema and INTER RAO UES in May 2012 Bashkirenergo was split into two companies: generating
company Bashenergoaktiv and Bashkirian Power Grid Company. Following the completion of the reorganisation
process Sistema obtained a 92.48% voting stake in Bashkirian Power Grid Company and received RUB 11.2bn in
cash and promissory notes from INTER RAO UES, payable in installments by September 29, 2013. Sistema no
longer has any interest in the power generation assets.

Sistema Shyam TeleServices Ltd.

(US$m)

Revenues

OIBDA

2012

2011

Year on year change

303.0

262.3

15.5%

(546.5)

(730.0)

Operating income (loss)

(621.2)

(828.1)

On November 07, 2012 Bashkirenergo was split into 2 companies: Bashkirian Power Grid Company OJSC (power grid
assets) and Bashenergoaktiv OJSC (generating assets). Sistema- Invest got 92.48% of the voting shares of BPGC OJSC. In
accordance with the US GAAP standards all generating segment’s operations were excluded from the results.

Net income (loss) attributable to Sistema

(462.9)

(636.1)

In 2012, SSTL’s revenues increased by 15.5% year-on-year in US dollar terms and by 31.0% in local currency
terms mainly due to the growth in the revenue share from non-voice and mobile value-added services (VAS).

SSTL’s total wireless (voice and data) subscriber base reached 15 million customers as of December 31, 2012.
Blended mobile ARPU in Q4 and full-year 2012 amounted to US$ 1.48 and US$ 1.52 respectively.

The data card subscriber base increased by 36.9% year-on-year in 2012 and amounted to 1.78 million subscribers.

Non-voice revenues from both data and VAS in 2012 increased to US$ 109 million. The share of non-voice
revenue as a percentage of total revenue stood at 36%.

In February 2012, the Supreme Court of India revoked 122 licences issued to eight Indian operators in 2008,
including 21 out of 22 licences held by SSTL.

In October 2012, Indian mobile operators were due to submit their applications to bid in the country's upcoming
2G spectrum auction. SSTL did not submit its application.

In March 2013, SSTL participated in new spectrum auctions, acquiring licences in eight circles, resulting in a
nine circle footprint, including the Rajastan circle.

Sistema Mass-media3

(US$m)

Revenues

OIBDA

2012

81.8

20.5

2011

101.9

(32.0)

Operating income (loss)

(14.7)

(73.7)

Net income (loss) attributable to Sistema

(11.1)

(63.9)

Year on year

change

(19.8%)

Sistema Mass Media’s revenues decreased by 19.8% year-on-year in 2012 largely due to the closure of the studio
in Moscow as a result of business restructuring, changes in the accounting methods for revenue from the
advertising segment and the rouble depreciation against the US dollar.

Sistema Mass Media’s OIBDA stabilised in 2012 due to the cost optimisation programme, business restructuring
and organic growth in key high-margin segments.

The Stream-TV subscriber base increased by 21.0% in 2012 to 7.5 million subscribers, while the share of revenue
from advertising on Stream-TV as a percentage of total revenue grew by 0.6 p.p. year-on-year to 15.4%. In 2012,
the RWS content library grew by 7.3% to 1,600 hours. RWS produced 109 hours of content in-house and sold
140 hours of content in the reporting year.

3 The financial results of Stream.ru are consolidated in the SMM financial results for all the periods presented.

In the third quarter of 2012, SMM continued its business restructuring and closed its film studio in Moscow. The
studio production business was divided into OJSC ORK (studios) and RWS (production).

In June 2012, SMM began managing the multimedia content portal Stream.ru (formerly Omlet.ru).

RTI4

(US$m)

Revenues

OIBDA

2012

2011

Year on year

change

2, 376.3

2, 093.0

13.5%

12.5

154.4

(91.9%)

Operating income (loss)

(83.2)

50.4

Net income (loss) attributable to Sistema

(129.9)

(18.3)

RTI consolidates SITRONICS, NVision Group and RTI Systems and is comprised of four principal business units
(“BU”) – Defence Solutions BU, Comprehensive Security Systems BU, Microelectronics Solutions BU and
System Integration BU.

RTI revenues were up 13.5% year-on-year in 2012 due to the consolidation of NVision Group in the third quarter
of 2012 and growing revenue in Defence Solutions BU.

The OIBDA loss in 2012 is the result of recognised loss from the impairment of investments in INTRACOM in
Greece, as well as higher operating expenses following the restructuring.

In November 2012, RTI and its subsidiaries acquired 83.54% of the voting shares in OJSC NIIDAR. Following
the transaction, RTI made a mandatory offer to acquire up to 100% of NIIDAR's ordinary shares.

In August 2012, after a mandatory buyout process, RTI became the owner of 100% of the shares of SITRONICS.
Following the buyout, SITRONICS was delisted from the London Stock Exchange, and the depositary receipts
and Depositary Agreements were terminated.

In June 2012, RTI was included in the Defence News TOP 100 list of the largest defence companies in the world.

In February 2012, RUSNANO and SITRONICS launched the production of microchips on the basis of the 90 nm
technology. The project is budgeted at RUB 16.5 billion, including co-financing from RUSNANO in the amount
of RUB 6.5bn.

4 Financial results of RTI Systems and SITRONICS are consolidated in RTI financial results for all the periods presented.

5 Molecular Electronics Research Institute

Binnopharm

(US$m)

Revenues

OIBDA

Operating income (loss)

Net income (loss) attributable to Sistema

2012

73.8

16.0

6.1

2.1

2011

38.5

Year on year

change

91.5%

1.3

1,103.2%

(3.6)

(4.4)

Binnopharm’s revenues nearly doubled in 2012, reflecting the higher sales of Binnopharm’s own products, and
the expansion of its distribution volumes.

Binnopharm’s OIBDA demonstrated significant growth in 2012, mainly due to improvements in operating
efficiency, and as a result of completing the government contract for delivering the Hepatitis B vaccine ahead of
schedule.

During the reporting year, a new bio-technology product Erythropoietin β 2000 МЕ was added to the company’s
product portfolio. In 2012, Binnopharm also restarted the production lines for tablets and aerosols.

In 2012, Binnopharm agreed on a merger with Alium, a leading pharmaceutical company. As part of the
agreement Sistema’s shareholding in Binnopharm decreased from 100% to 74%, while 26% is currently held by
Zenitco Finance Management Ltd. The integration was completed in April 2013.

MTS-Bank6

(US$m)

Revenues

OIBDA

Operating income (loss)

Net income (loss) attributable to Sistema

2012

2011

Year on year

change

712.3

560.8

27.0%

50.7

32.3

15.7

(6.2)

(23.5)

(19.9)

MTS Bank’s revenues increased by 27.0% year-on-year in 2012. MTS Bank reported significant OIBDA growth
year-on-year in 2012, largely due to the increased interest and commission income from its retail business.

MTS Bank’s loan portfolio, excluding leases, increased by 11.8% to US$ 5,593 million in 2012, compared to US$
5,004 million in 2011. Despite the relatively small increase in the loan portfolio before provisions, the structure of
the portfolio changed significantly in 2012 with a higher volume of retail loans, including mortgages, consumer
loans and credit cards. The volume of mortgage loans grew by 38% to US$ 623 million, while the consumer loans

6 In February 2012 Joint-Stock Commercial Bank MBRD changed its name to MTS-Bank OJSC.

portfolio more than doubled to US$ 558 million. In 2012, interest income grew by 20.3% year-on-year to US$
575.2 million.

In October 2012, Sistema, MTS and MTS Bank signed a non-binding indicative offer. Under the terms of the
indicative offer, MTS would acquire up to 25.095% in MTS Bank through an additional share issue by MTS
Bank worth up to RUB 5.09 billion. The proceeds from the transaction would be contributed to MTS Bank’s
authorised capital. In March 2013, the transaction was concluded on the terms announced earlier.

In April 2012, the EGM of MTS Bank’s shareholders initiated the reorganisation of MTS Bank through a merger
with Dalcombank.

Detsky Mir

(US$m)

Revenues

OIBDA

Operating income

Net income (loss) attributable to Sistema

2012

892.5

54.3

35.6

11.1

2011

782.9

27.4

9.8

(5.6)

Year on year

change

14.0%

97.9%

264.5%

Detsky Mir’s revenues increased by 14.0% in 2012 as a result of regional store expansion and higher like-for-like
sales. OIBDA increased by 97.9% in 2012, which was primarily driven by higher revenues and the cost
optimisation programme.

The network of retail outlets amounted to 216 stores, including 20 Early Learning Centre’s (ELC) franchised
stores acquired in the third quarter of 2012, located in 96 cities across Russia and Kazakhstan. The aggregate
retail space was 291,000 m2 as of December 31, 2012. In the fourth quarter of 2012, Detsky Mir opened 23 new
stores. The online store’s delivery network expanded to all the cities covered by the Detsky Mir retail chain, with
revenues more than tripling to US$ 4.1 million.

In October 2012, the Board of Directors appointed Vladimir Chirakhov as the CEO of Detsky Mir.

Intourist

($USm)

Revenues

OIBDA

Operating income (loss)

Net income (loss) attributable to Sistema

2012

87.5

(13.5)

(23.2)

(24.7)

2011

276.6

43.8

34.5

8.9

Year on year change

(68.4%)

Intourist reported a decrease in revenues for the full year of 2012, as a result of the change in the accounting
method for the company’s tour operating and retail sales businesses following the transaction with Thomas Cook.

Intourist reported an OIBDA loss in 2012 due to the recognised losses from the tour operating business in its JV
with Thomas Cook.

The termination of a management contract with the owners of Oktyabrskaya Hotel (Nizhniy Novgorod) and
Severnaya Hotel (Petrozavodsk) led to a decrease in the number of rooms owned, managed and rented in 2012.
The number of tourists travelling through the Thomas Cook JV fell by 19.4% in 2012, mainly due to a decrease in
package sales to travel agencies as a result of the growing trend of tourists making their travel arrangements
independently.

Medsi

(US$m)

Revenue

OIBDA

Operating income

Net income (loss) attributable to Sistema

2012

2011

223.9

199.0

29.1

12.0

0.6

31.1

19.6

6.7

Year on year change

12.5%

(6.4%)

(38.8%)

(90.1%)

Medsi revenues increased by 12.5% in 2012, reflecting the wider range of services provided and the growth in
patients’ visits.

Medsi’s OIBDA declined year-on-year for 2012, due to increased expenses relating to the integration with the
assets of State Unitary Enterprise Medical Centre, and consultancy services expenses.

In 2012, the number of patient visits and services provided increased by 20.9% and by 47.6% year-on-year,
respectively, while the average cheque amounted to RUB 1,400. In the fourth quarter of 2012, the number of
services provided increased by 77.0% year-on-year, while the number of patient visits were up 25.5%, and the
average cheque grew by 28.6% to RUB 1,800. This is mainly due to an increase in the range of services and an
expansion in the number of hospitals, clinics and rehabilitation centres operated by Medsi.

In April 2012, Medsi agreed on a merger of its assets with State Unitary Enterprise Medical Centre, a large group
of healthcare institutions in Moscow, which now holds a 25% share in the united company. Following the
completion of the merger in the fourth quarter of 2012, Medsi manages 22 medical clinics in Moscow and 11
clinics in the regions, 3 in-patient clinics with a total bed count of 1,160, more than 80 first aid stations across
Russia, an ambulance service, 3 wellness centres in Moscow and 3 sanatoriums in Moscow and Crimea. As of
December 31, 2012, the total floor space of healthcare facilities was over 230,000 sq.m.

Corporate Centre

(US$m)

OIBDA7

Net loss

Debt

2012

(240.7)

(251.7)

2011

(219.0)

(380.6)

Year on year change

1, 646.8

1, 246.8

32.1%

The Corporate segment comprises the companies that control and manage the Company’s stakes in its
subsidiaries.

The dividends declared by subsidiaries to Sistema’s Corporate Centre segment in the second quarter of 2012
amounted to US$ 842.0 million.

In 2012, the Corporate Centre’s SG&A decreased by 18.1% to US$ 225.7 million.

In October 2012, Sistema replaced Deutsche Bank Trust Company Americas with Deutsche Bank
Aktiengesellschaft as the depositary for its GDR programme, effective from October 22, 2012.

In September 2012, the Board of Directors approved a new composition of Sistema’s Management Board. The
Board also approved a decision to place a new bond issue by public subscription, comprising series 01, 02 and 03
three-year unconvertible interest-bearing bonds. Each series will consist of 10 million bonds with a face value of
RUB 1,000 per bond. The EGM later approved the amendments to the Company's Charter in order to allow the
Company to increase share capital by issuing additional 386 million ordinary shares with a par value of RUB 0.09
per share.

In August 2012, Sistema paid its annual dividends of RUB 0.28 per ordinary share for 2011, amounting to a total
of RUB 2.7 billion.

Financial review

Net cash provided by operations slightly increased by 4.9% year-on-year in 2012 to US$ 5,844.3 million.

Net cash used in investing activities totalled US$ 4,672.3 million in 2012, compared to US$ 5,185.9 million in
2011.

The Group spent US$ 4,209.6 million on capital expenditure in the reporting year, compared to US$ 4,132.1
million spent in 2011, as a result of MTS’ planned investment in further deploying its networks, as it develops its
LTE network. In 2012 the Group paid US$ 889.4 million for the acquisition of businesses, net of cash received,
including the purchase of SG-trans by Sistema, the cash consideration for the completion of the transaction with
NVision paid by RTI, the acquisition of the Russian franchise of Early Learning Centre by Detsky Mir and
purchases made by MTS and Bashneft. The Group also used US$ 367.3 million to increase its banking assets and
US$ 3,438.4 million to increase short-term and long-term investments.

Net cash outflow from financing activities amounted to US$ 3,098.6 million in 2012, compared to US$ 481.9
million in 2011. The Group’s proceeds from borrowings in 2012 totalled US$ 3,057.4 million, whereas the
principal payments on long-term and short-term borrowings amounted to US$ 4,444.2 million. Cash outflow from
financial activities in 2012 resulted from payments to the shareholders of subsidiaries totalling US$ 575.8 million
compared to US$ 871.0 million in 2011, and dividends paid by Sistema of US$ 82.3 million compared to US$
89.4 million in 2011.

7 Hereinafter OIBDA and net profit (loss) of Corporate Centre are indicated excluding intra Group dividends.

The Group’s cash balance from continuing operations stood at US$ 1,872.7 million as of December 31, 2012
(excluding an amount of US$ 769.4 million which comprises the Group’s banking activities and cash and cash
equivalents from discontinued operations worth US$ 0.9 million) compared to US$ 2,919.2 million as of
December 31, 2011 (excluding an amount of US$ 1,315.1 million which comprises the Group’s banking activities
and cash and cash equivalents from discontinued operations worth US$ 88.4 million). The Group’s net debt
(short-term and long-term debt less cash and cash equivalents and highly liquid deposits) amounted to US$
13,509.0 million as of December 31, 2012, compared to US$ 12,454.5 million as of December 31, 2011.

Non-GAAP financial indicators

The present section includes financial information prepared in accordance with accounting principles generally
accepted in the United States of America, or US GAAP, as well as other financial indicators referred to as non-
GAAP. The non-GAAP financial indicators should be considered in addition to, but not as a substitute for, the
information prepared in accordance with US GAAP.

Operating Income Before Depreciation and Amortisation (OIBDA) and OIBDA margin

OIBDA represents operating income before depreciation and amortisation. OIBDA margin is an OIBDA indicator
that equals a percentage of net revenues. The interpretation of OIBDA may differ from the OIBDA indicators of
other companies; it is not a US GAAP indicator and should be considered in addition to, but not as a substitute
for, the information contained in our consolidated US GAAP accounts. The Corporation believes that OIBDA
provides useful information to investors because it is an indicator of the strength and performance of our ongoing
business operations, including our ability to fund capital expenditures, acquisitions of businesses and other
investments and our ability to raise and service debt. While depreciation and amortisation are considered
operating costs under US GAAP, these expenses primarily represent the non-cash current period allocation of
costs associated with long-lived assets acquired or constructed in prior periods. Our OIBDA calculation is
commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the
current and future operating performance and value of companies. Adjusted OIBDA can be reconciled to our
consolidated operating results as follows:

Operating income and OIBDA

Operating income
One-off items

Adjusted operating income
Depreciation, depletion
and amortisation

Adjusted OIBDA

Net income

Net income
One off items
Adjusted operating income

4Q 2012
967.5

372.6

4Q 2011
299.1

1, 014.8

2012
3, 718.7

1, 664.9

1, 340.1

1, 313.9

5, 383.6

2011
3, 942.2

1, 057.0

4, 999.2

(733.4)

(800.4)

(3, 159.4)

(3, 269.4)

2, 073.5

2, 114.2

8, 543.1

8, 268.5

4Q 2012
200.9
157.1
357.9

4Q 2011
(530.2)
791.6
261.4

2012
946.8
847.7
1, 794.5

2011
218.0
778.8
996.8

3.4. Credit ratings of Sistema JSFC

Sistema JSFC

Rating agency

Date of most recent update
of the rating

Long-term credit rating

Forecast

Standard & Poor’s
Fitch
Moody’s

13.02.2013
04.12.2012
01.11.2012

BB
BB-
Ba3

Stable
Stable
Stable

3.5. Report on payment of announced (accrued) dividends on the shares of Sistema JSFC.

Sistema's dividend policy aims to provide a regular and sizeable dividend flow, while allowing the company to
maintain the financial flexibility to take advantage of attractive investment opportunities in the future.

Dividends are declared on the basis of results from the previous financial period, and equal at least 10% of the
corporation's consolidated net income under US GAAP (net of any special dividends paid). In addition, in the
event of a large asset sale for cash, special dividends will be declared in an amount of at least 10% of the net gain
from such a transaction, as determined by the Board of Directors. Under Russian law, the total amount of
dividends with respect to any year may not exceed the company's annual unconsolidated net income determined
in accordance with Russian Accounting Standards (RAS).

On June 30, 2012 the Annual General Meeting of Shareholders (Minutes No. 2-12) approved the total amount of
dividend payment on Sistema’s shares for 2011 at RUB2,702,000,000.00, representing a payment of RUB 0.28
per ordinary share (RUB 5.6 per GDR). The total proposed dividend payment has been determined on the basis of
Sistema’s full year 2012 US GAAP net income and the corporate centre’s net gain from the sale of CJSC
Sistema-Inventure to OJSC MTS in December 2011.

As of December 31, 2012 the total amount of dividends paid amounted to RUB 2, 701, 785, 762.96. Dividend tax
on dividends paid to foreign entities and individuals totaled RUB 102, 430, 413.00.
At present unpaid dividends amount to RUB 214, 237.04. As of December 31, 2012 unpaid dividends amounted
to RUB 490, 793.66. The reasons for non-payment of the announced dividends: absence of required information
on dividend recipients.

4. OUTLOOK AND STRATEGY OF SISTEMA GROUP COMPANIES.

4.1. Mobile TeleSystems (MTS)
Mobile TeleSystems (MTS) is the leading telecommunications group in Russia, Eastern Europe and Central Asia.
It offers mobile and fixed-line, broadband, and pay TV, as well as content and entertainment services, in one of
the world's fastest-growing regions.

Ownership and management

Company
MTS

Effective ownership
53%

The President of MTS is Andrey Dubovskov, and the Chairman of the Board of Directors is Ron Sommer.

Sector
The Russian mobile telecommunications market is one of the most developed in the world, with the service
penetration rate still growing, reaching 161% in 2012. The marketing efforts of mobile operators continue to
focus on increasing the loyalty of existing customers by improving quality of service, stimulating consumption
and enhancing the attractiveness of the product range. The operators' transition to a profit sharing scheme with
dealers has improved the quality of the subscribers attracted.

In 2012, the volume of mobile data business in Russia increased by 32% in revenue. The ‘Big 3’8 operators have
seen mobile internet traffic rise by 36%, while revenues from their data businesses increased by 112%. The
broadband market in Russia grew by 15% and reached 22m households, while the penetration rate of broadband
services reached 50.1%. MTS is one of the top-5 broadband operators by subscriber numbers.

At the end of 2012, the pay TV market in Russia passed 41.24m households, with 11.46m households having
access only to satellite TV. The pay TV market grew by 17.9% in 2012.

Outlook
Revenue growth in the Russian telecom market is projected at 3.4% annually until 2015. Data services will be the
main driver for this, while mobile and fixed internet traffic will continue to grow rapidly, and will increase 1.5 to
2 times every year due to the greater penetration of smartphones and the considerable potential for development
in the fixed broadband segment. In the next three years, the fixed broadband and pay TV markets are expected to
increase by 20% in monetary terms.

The market for mobile payments and convergent products created at the interface of the telecom and financial
services markets is projected to grow significantly. The consolidated annual growth rate in the world market of
mobile payments will amount to 102% in 2012-2014, while the Russian market for mobile billing services will
grow 15% each year and the Russian retail lending market will grow by 8%.

Steady growth in 2012
In 2012, MTS focused on developing mobile data services based on innovative communication technology. Over
the year, MTS expanded its 3G network in Russia by 24.9%, increasing the number of base stations to more than
27,000, and launched 4G networks in the Moscow region and in Kazan.

In October 2012, MTS completed its mobile network modernisation project in Moscow, creating the
infrastructure required for explosive growth of data traffic and large-scale development of LTE networks.

Thanks to the GPON project implemented in 2012, the broadband networks based on fibre-optic cables, with a
speed of up to 200 Mb/sec, became available to 1m Moscow households. Further development of convergent
services based on GPON in Moscow will focus on selling off-the-shelf products, cloud services and security
systems.

8 MTS, Megafon, Beeline

Operating strategy
MTS aims to strengthen its position as a leading national mobile operator in Russia and the wider CIS, both in
subscriber numbers and revenue. MTS will invest in expansion of its 3G networks and preparations for a major
roll-out of 4G networks, including searching for new sites, connecting base stations to fibre-optic lines and
developing the GPON project in Moscow.

MTS prioritizes the development of new products. MTS's pay TV will continue expanding due to the launch of
digital TV in various Russian regions in September 2012, and in 2013, the implementation of a hybrid TV
platform which will consolidate TV broadcasting on three screens (TV, mobile device and computer), and a CDN
network.

MTS is becoming an important player in the Russian retail lending market due to its joint project with MTS Bank.
The main strategic areas of the MTS Money project are expanding mobile commerce, enhancing mobile payment
opportunities, promoting new financial products to the non-banking market, and stimulating the sales of
smartphones and data-generating devices.

Investment strategy
Sistema sees MTS as a promising core asset capable of maintaining good growth rates and increasing shareholder
value by implementing its operating strategy. This includes the sectors bordering the traditional telecom business,
which have significant growth potential: retail sales, M2M, content sales on the internet, mobile banking through
MTS Bank, services based on NFC technology, cloud computing and others. The investment strategy for MTS is
aimed at delivering a gradual increase in dividend pay-out.

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA
Net income, stake of Sistema
Debt

Operating results
Indicator
Mobile subscribers (million)
ARPU (RUB)
MOU (minutes)

2012
12, 436
4, 276
534
7, 631

2012
101.0
297
304

2011
12, 319
5, 187
770
8 ,700

2011
106.1
273
269

%
0.9
(17.6)
(30.6)
(12.3)

%
(4.7%)
9.2%
13.0%

Key events of 2012
In October 2012, Sistema, MTS and MTS Bank signed a non-binding indicative offer regarding an acquisition of an up to
25.095% stake in MTS Bank by MTS in a follow-on offering. In March 2013, the transaction was concluded in line with the
terms announced on October 25, 2012.

In September 2012, MTS launched Russia’s first TDD (time division duplexing) LTE network in Moscow and the Moscow
region.

In August 2012, the Tashkent Commercial Court granted a petition by the State Agency for Communications and
Information of Uzbekistan (SACI) to withdraw all operating licences of Uzdunrobita FE LLC, MTS’ wholly owned
subsidiary in Uzbekistan.

In July 2012, the Federal Service for Supervision in the Sphere of Communications, Information Technologies and Mass
Media (Roskomnadzor) allocated MTS the necessary licence and frequencies to provide LTE telecommunication services in
Russia.

In August 2012, MTS resumed its operations in Turkmenistan, having received the licences it required to operate in the
country, and satisfied legal and technical conditions.

In June 2012, MTS and Sistema agreed to join forces in developing and managing the multimedia content portal Stream.ru
(formerly Omlet.ru).

In June 2012, the AGM of MTS shareholders approved an annual dividend payment of RUB 14.71 per ordinary MTS share
for the 2011 fiscal year, amounting to a total of RUB 30.4bn.

In May 2012, MTS acquired a 100% stake in CJSC Tascom through its subsidiary MGTS.

In May 2012, MTS signed a memorandum of understanding with OJSC VimpelCom, OJSC MegaFon and OJSC Rostelecom
to jointly lay and operate an underwater fibre-optic cable joining the Russian Far East with Sakhalin Island.

In February 2012, MTS received the first licence in Russia to provide wireless communication services in the LTE TDD
(time-division duplexing) standard in 2,595-2,620 MHz range in Moscow and the Moscow region.

4.2. Bashneft
Bashneft is a vertically integrated oil company set up on the basis of the largest fuel and energy producers of the
Republic of Bashkortostan. The Company ranks among the top-ten Russian oil producers and the top-five oil
refining companies. Oil production in 2012 reached 15.4m tonnes, oil resources at the end of 2012 equalled
2,006.8m barrels.

Ownership and management

Company
Bashneft

Voting stake
89%

Effective ownership
75%

The President of Bashneft is Alexander Korsik, and the Chairman of the Board of Directors is Felix Evtushenkov.

Sector
In 2012, the economic situation in the Russian oil sector was determined by a fluctuation of world oil prices, where the Brent
oil price per barrel grew on average by 0.6%, up to US$ 111.4, and in March 2012 the price reached US$ 126.2, its
maximum over the period. The fluctuation of prices in the external market has an impact on the export duties for crude oil
and oil products and the Mineral Extraction Tax, which on average went down by 1.1%, to US$ 404.3 per ton.

Oil production in Russia in 2012 increased by 1.3%, up to 518m tonnes. Despite the new tax regime 60-66 introduced in
2011 and having a negative effect on the economics of refining, the total refining volume grew by 4.6%, reaching 265.9m
tonnes. The growth of refining volumes was also reflected in the reduction of oil export by 1.7% to 238.9m tonnes (including
CIS and non-CIS countries). The gasoline prices for 2012 grew on a par with the inflation – by 6.8%.

Auctions were held in December 2012 for three subsoil blocks, including Shpielmann, Imilorskoye, Zapadno-Imilorskoye
and Istochnoye deposits in the Khanty-Mansiisk autonomous district, and Lodochnoye deposit in the Krasnoyarsk region.

In 2012, the trend for consolidation in the industry grew stronger, as the largest Russian oil company Rosneft acquired TNK-
BP for US$ 61bn.

Outlook
According to industry experts, oil production in Russia is not expected to grow in Russia in 2013, while stabilisation, or a
slight volume reduction, is anticipated. Leading vertically integrated oil companies will increase their investments in
upgrading refineries, aiming to comply with technical regulations. They may make other significant investments to achieve a
bigger refining depth and reduce the yields of heavy fractions, for which protective duties are expected to be introduced.

In accordance with the Energy Strategy of Russia for the period up to 2030 approved by Russia’s government, the main oil
deposits of West Siberia are petering out, which will soon make it necessary to explore oil resources of the continental shelf
of the Arctic and Far-Eastern seas, East Siberia and the Far East. The share of hard-to-recover oil resources is expected to
grow, and exploitation of oil & gas multi-component deposits will be extended.

Oil recovery in the European part of the country will continue to grow, primarily through exploration of resources in the
Timan-Pechora province, on the continental shelf of the Arctic Sea, and in the Russian sector of the Caspian Sea, while
upstream production in the Volga region and in the Urals may decrease.

Steady growth in 2012
By applying the latest technology, and with the increased efficiency of geological and technical measures, Bashneft’s 2012
production volumes grew by 2.2%, reaching 15.4m tonnes. Refining volumes dropped by 1.4% to 20.8m tonnes due to

scheduled maintenance at a number of units. In 2012, Bashneft retained its absolute leadership among Russian oil companies
in refining depth, which was 84.9%.

Aiming to increase the raw material supply base, the company has been searching for and exploring new oil deposits in
recent years, both in Bashkortostan and in the Nenets Autonomous District, the new strategic region for exploration and
production. During late 2011 and early 2012, Bashneft acquired five licenced blocks in the Nenets Autonomous District, with
a total area of 6,209 sq. m. The company is also undertaking a large new project in the north of Timano-Pechora, developing
the Trebs and Titov deposits, with aggregate recoverable resources of 140.1m tonnes according to the Russian classification
(C1+C2). A 3D seismic acquisition on Trebs and Titov deposits was completed in 2012.

To extend its capabilities in exploring and producing hydrocarbons, in 2012, Bashneft joined an international project in Iraq.
The Services Agreement for the exploration, development and production of Block 12 (Iraq) was signed in November by
Bashneft, Premier Oil, and the South Oil Company of Iraq's Ministry of Oil.

PRMS audit results confirmed Bashneft's oil resources equalled 2,006.8m barrels at the end of 2012, while probable reserves
went up by 25.7% and reached 528.3m barrels, and possible reserves increased by 12.9%, up to 657.4m barrels. The recovery
efficiency of proved oil reserves in 2012 equalled 123.4%.

In 2012, Bashneft completed reorganisation through merger with its downstream subsidiaries – the Ufa Oil Refinery, Novoil,
Ufaneftekhim, Bashkirnefteproduct, and Orenburgnefteproduct. The reorganisation increased the company's transparency
and the quality of corporate governance, and provided for centralised management of investment decisions, while
consolidating the cash flows.

Operating strategy
In the upstream segment, Bashneft aims to stabilise production at existing oil fields at 15m tonnes a year, and to start
production at the Trebs and Titov fields. Bashneft also aims to increase its reserves by executing M&A transactions and
buying new licences.

In the downstream segment, the company intends to achieve a refining depth of 94.4% and increase the light product yield to
73.4%, while focusing on cost control, improving the product quality, and securing capacities to produce 100% of engine
fuels under the Bashneft brand. The company's strategic plans also include developing export logistics and controlled
distribution channels to the end consumer.

Investment strategy
Having restructured the oil business and streamlined the corporate structure in 2012, Bashneft represents significant growth
potential for Sistema, both through implementing the operational strategy and development of key assets, and through
strategic partnership and M&A transactions. The oil business possesses sufficient resources to provide a stable dividend
flow.

Key financial and operating results 2012

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA
Net income attributable to Sistema
Debt

Operating results
Indicator
Crude production (m tonnes)
Refining (m tonnes)
Light product yield (%)
Depth of refining (%)

2012
17, 125
3, 150
1, 279
3, 601

2012
15.4
20.8
59.7%
84.9%

2011
16, 549
3, 391
1, 221
3, 393

2011
15.1
21.1
59.9%
85.9%

%
3.5%
(7.1%)
4.8%
6.1%

%
2.2%
(1.4%)
-0.2 p.p.
-1.0 p.p.

Key events of 2012
In November 2012, the consortium comprising Bashneft (70%) and Premier Oil (30%) signed the exploration, development
and production service contract (EDPSC) with South Oil Company acting on behalf of the Republic of Iraq, for Block 12 in

Baghdad. Under the contract, the consortium will conduct an obligatory geological exploration programme at Block 12, for
2D seismic survey totalling 2,000 linear kilometres and drilling one exploration well. In addition, the consortium will invest
US$ 120m in geological exploration within a five-year period.

In October 2012, Bashneft completed a reorganisation started in March 2012 through consolidation of its subsidiaries (the
Ufa refinery plant, Novoil, Ufaneftekhim, Bashkirnefteprodukt and Orenburgnefteprodukt), resulting in the transition to a
single share. Later, the Bashneft Board of Directors also approved the results of the additional share placements, which were
exchanged for the common and preferred shares of Bashneft’s subsidiaries as part of the reorganisation process.

In July 2012, Bashneft’s retail network completed its transition to full compliance with the Euro-5 standard for sales of petrol
and diesel fuel.

In June 2012, the AGM of Bashneft approved annual dividend payments of RUB 99 for each ordinary and each preferred
share for 2011, as well as a new composition of the Board of Directors comprising more independent directors.

In June 2012, as part of a reorganisation, Bashneft and its subsidiaries (the Ufa refinery plant, Novoil, Ufaneftekhim,
Bashkirnefteprodukt and Orenburgnefteprodukt) completed the share buyout process.

4.3. Bashkirian Power Grid Company (BPGC)
Bashkirian Power Grid Company (BPGC) was founded in November 2012 as a result of the reorganisation of OJSC
Bashkirenergo, one of Russia's largest regional energy companies, and incorporated power grid assets in the Republic of
Bashkortostan: transmission grids (LLC Bashkirian Grid Company), distribution grids (LLC Bashkirenergo), and a service
company (LLC Bashenergouchet).

Ownership and management

Company

BPGC

Effective ownership

79.2%

Voting stake

92.5%

The CEO of BPGC is Andrey Makarov, and the Chairman of the Board of Directors is Felix Evtushenkov.

Sector
Government control and regulation mechanisms play a defining role in the development of Russia's power industry. A
government decree issued in May 2012 simplified the procedures of customer transition from guaranteed supply companies
to utility companies, and direct access to the wholesale power market. These changes may have a negative effect on the
financial performance of Russian utility companies and restrain end-user power prices.

Other factors that had a substantial effect on the industry in 2012 included a government resolution on limiting tariffs of
power enterprises, and rescheduling of the introduction of new tariffs from January 1 to July 1, along with a 'reset' of the
RAB system for power grid companies and review of the parameters for certain interregional distribution grid companies
(IDGCs), effective from July 1.

Another key development in the industry was the incorporation of OJSC Russian Grids, a single management company for
the Russian electric power grid system, based on OJSC IDGC Holding. This is expected to ensure further centralised growth
of the electric grid system and manage the growth of end-user tariffs.

Russian power grid companies are benefiting from the growth of nationwide power consumption by 1.7% year-on-year. The
consumption in Bashkortostan has grown by 3.1% on the back of the low-height housing programme implemented in the
region during recent years.

Outlook
Growth in the investment potential of the power grids sector comes from the government preparations currently underway for
privatising distribution grid companies, as well as the implementation of pilot IDGC privatisation projects.

The industry is waiting for a finalized regulatory framework for controlling power grid company tariffs, including those
migrating to RAB. Appraisal standards for grid company activity within the new framework are expected to include
benchmarking mechanisms, which will provide an incentive for all grid companies to increase their operating efficiency and
ensure growing profitability for the industry leaders.

According to the forecast by the Federal Tariff Service, power consumption in Russia in 2013 is expected to increase by
2.1%. The growth rate in Bashkortostan for 2013-2014 is projected at 1%.

Steady growth in 2012
The reorganisation of OJSC Bashkirenergo resulting in the establishment of generating company OJSC Bashenergoactiv, and
OJSC Bashkirian Power Grid Company was a key event in 2012. Sistema no longer has any interest in the power generation
assets.

In 2012, BPGC initiated and executed a number of projects aimed at organisational development, internal optimisation and
ensuring the company's competitiveness. Important goals for 2012 included cutting commercial losses during power
transmission. The newly implemented programme enabled the company to reduce losses in distribution grids from 9.2% in
2011 to 8.6% in 2012.

Successful implementation of the RUB 2.4bn investment programme made it possible to complete Phase II Akberdino
substation, the reconstruction of the substation, and installation of an underground section of the Zaton-Krasnodonskaya
overhead cable line, with the total length of the overhead section exceeding 6 km. In December 2012, the company
commenced a large-scale project in the south-east of Bashkiria, involving reconstruction of the republic's last 110 kV high-
voltage line on timber supports. Relocation of the Glumilino-Krasnodonskaya high-voltage line to an underground cable line
is in progress. The schematics of power allocation for the PGU Power Plant 5 under construction in Ufa are complete. In
2012, BPGC provided power connections totaling 178.4 MW for new consumers.

Operating strategy
The organic growth strategy of BPGC for 2012-2016 provides for a higher operational efficiency in all segments, and will be
implemented in close collaboration with the local authorities and major consumers. The company is planning to equip
consumers with metering units and transfer to a ‘smart’ metering system, to upgrade, partly replace, and increase the
efficiency of existing equipment. The Smart Grid pilot project has started, and large-scale work is in the pipeline.

The electrical grid assets currently have sufficient potential for value growth due to the introduction of the RAB long-term
tariff-making system by the electrical grid companies, combined with the elaboration of the regulatory framework and
availability of significant reserves to improve the operating efficiency of the assets.

Investment strategy
The investment strategy of Sistema mainly focuses on the consolidation of business in distribution grids both through organic
growth and M&A transactions, aiming to create a major inter-regional distribution grid company. Sistema will consider the
possibility of participating in the IDGC privatisation programme. In addition Sistema may consider monetisation
opportunities for transmission grids.

Key financial and operating results 2012

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA
Net income attributable to Sistema

Operating results
Indicator
Transmission grid, effective output (m kW)
Transmission grid, losses (m kW)
Distribution grid, effective output (m kW)
Distribution grid, losses (m kW)

2012
373
129
24

2012
20, 192
305
18, 514
1, 741

2011
388
99

2011
21, 296
315
17, 962
1, 815

%
(3.8%)
29.9%
19.7%

%
-5.2%
-3.2%
3.1%
-4.1%

Key events of 2012
In July 2012, the EGM of Bashkirenergo’s shareholders approved the decision on the company’s reorganisation in the form
of a spin-off resulting in two companies: generating company Bashenergoactiv and Bashkirian Power Grid Company. Upon
completion of the reorganisation process in November, Sistema-Invest obtained a 92.48% voting stake in Bashkirian Power
Grid Company and received RUB 11.2bn in cash and promissory notes from INTER RAO, payable in installments by
September 29, 2013. Sistema no longer has any interest in the power generation assets.

4.4. Sistema Mass-Media (SММ)
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. SMM owns and manages CJSC TV Company STREAM (Stream), CJSC
Russian Worldwide Studios (RWS), Maxima Advertising Agency (Maxima), CJSC TsTV (TsTV), and the web portal
Stream.ru.

Ownership and management

Company
Sistema Mass-Media

Effective ownership
75%-1

The President of SMM is Peter Gerwe, and the Chairman of the Board of Directors is Evgeniy Savostyanov.

Sector
According to PriceWaterhouseCoopers, the media market in Russia in 2012 grew by 10.3% to US$ 26.6bn. At the
end of 2012, according to J’son&Partners Consulting, the Russian pay TV market was 31.9m households
subscribing to cable, satellite and IPTV, 30.3m of which were active users of the TV services. At the same time,
the Russian market's revenues still lag behind global trends: ARPU (average revenue per user) in Russia is around
US$ 4.4, whereas the US figures reach US$ 86.

Production of feature films in Russia is decreasing due to low distribution monetisation and high competition
from world leaders in motion picture production. On the other hand, the TV series production rate was stable at
1,800 hours per year.

Growth in the Russian advertising market is outstripping other markets, with an annual growth rate in 2012 of
13%. Internet and cable/satellite TV remain the most promising advertising market segments. Russia belongs to
the world's top 10 countries by internet users, and is still showing the highest growth rates in user figures (38% in
2012). Russia's advertising market is highly concentrated, with 50 companies accounting for over 70% of the
market. Internal market integration is also significant, with over 80% of budgets attributable to network agencies
(19 companies or seven groups).

Outlook
The Russian media market will keep growing in 2013-2015, with the internet remaining its basic platform. A
major event in the internet content market in 2012 was the launch of the international iTunes and Google Play
services. These will heighten competition in the Video On Demand segment but will drive content consumption
upwards, due to the popularity of the brands and their high compatibility with existing devices. The industry
development in 2013 will be aided by alliances of TV content producers and OTT (over-the-top) service
operators, as well as the growing penetration of Smart TV with internet access.

The advertising segment will consolidate around the major network agencies shaping the media advertising
landscape. Growth in competition from global market players is also anticipated due to the established
preferences of major Russian advertising clients. Still, the solid growth dynamics according to ZenithOptimedia's
forecast are expected to make Russia one of the top seven world powers by advertising expenses in 2015.

The studio production segment is expected to enjoy continued demand for TV series in 2013, although a decrease
of purchase prices is anticipated owing to growing competition, including that from Western producers.

Steady growth is projected for the Russian pay TV service sector: according to IKS-Consulting, 64% of all
Russian families will use pay TV in 2016.

Steady growth in 2012
In line with market demand, RWS's studio business ramped up production of mini-TV series in 2012, which
enabled it to get a higher number of TV channels interested in RWS’ products. Its content library increased to
1,600 hours. In 2012, it decided to spin off the production studios into a separate business, OJSC ORK, unrelated
to RWS's producing activity. This will make it possible to decrease the administrative load on the producer
centre, develop the assets independently, and centralise professional expertise. As a result of the restructuring, the
studio in Moscow was closed, and production transferred to St Petersburg.

In May 2012, SMM re-branded its Stream.ru service. It launched applications for all popular devices and
platforms, and by the end of 2012 had created one of the largest high-quality content libraries in Russia.

Stream TV strengthened its market position and became a leader by average monthly reach in every niche group.
Stream's channel distribution network includes over 1350 cable, satellite and IPTV operators in more than 800
Russian cities and towns. The subscriber base grew by 21%, to 7.5m unique subscribers, while the audience
increased to 19.5m viewers.

Operating strategy
The company's film production plans for 2013 include increasing the market share of TV series through
enhancing the number of projects and monetising the library. The main goal of the film production business is to
achieve net profit, particularly as a result of transferring film production to St Petersburg, and by expanding the
company’s customer base.

The company's goals for 2013 include increasing Stream.ru's market share by both audience and income, and
developing its functionality and accessibility from all mainstream devices.

The advertising business will develop the key segment of outdoor advertising by bringing in new high-margin
mid-range advertising customers, as well as competing for the advertising budgets of the major customers.

SMM will look into opportunities to strengthen its position in the advertising market significantly through M&A
deals and partnerships with other market players.

In the TV segment, SMM is focused on enhancing its telecom operator and subscriber base, growing incomes and
monetising additional content.

Investment strategy

SMM's investment strategy is aimed at the company's stabilisation and building core assets using TV and digital
resources. The company is set to develop these areas both organically and through M&A, with a view to creating
an effective leader in the new media and pay TV sectors.

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA
Net loss attributable to Sistema
Debt

Operating results
Indicator
Stream TV subscriber base, m
Library, hours

2012
82
21
(11)
33

2012
7.5
1, 600

2011
102
(32)
(64)
46

2011
6.2
1, 491

%
(19.8%)
-
-
(28.8%)

%
21.0%
7.3%

Key events of 2012
In June 2012, SMM started managing the multimedia content portal Stream.ru (formerly Omlet.ru) within the agreement
signed by MTS and Sistema regarding the management of LLC Stream.

In the third quarter of 2012, SMM continued its business restructuring, closed its film studio in Moscow, and divided its
studio production business into two entities, OJSC ORK (studios) and RWS (producing).

4.5. MTS Bank
MTS Bank is a universal commercial bank of federal scale and is among Russia's biggest banks by equity and net assets.

Ownership and management

Company
MTS Bank

Effective ownership
94%

The Chairman of the Management Board is Mikhail Chaikin (before February 2013 - Andrey Shlyakhovoy), and the
Chairman of the Board of Directors is Alexey Buyanov.

Sector
A liquidity shortage in the banking market at the beginning of 2012 caused banks to depend heavily on private money.
Active engagement of all banks with private individuals brought significant growth in private deposits rates in the market,
which increased by 21.5% over the year.

Despite the liquidity shortage, at the end of 2012 Russia's banking system enjoyed peak post-crisis growth rates, retail
lending becoming the most active banking segment. The growth of private debt to banks exceeded 40%, outperforming the
Central Bank's forecast by 20%.

The credit card market grew drastically, by over 80%, compared to the 70% rate recorded in 2011. The total number of loans
in 2012 was up 44.5%, while the number of loans provided through credit cards increased by 74.8%.

The share of state-run banks in the country's total banking sector in 2012 exceeded 60%. Banking regulations continued
toughening: the H1 capital adequacy ratio increased and Russian banks took measures to implement Basel II and Basel III
standards.

Outlook
Resources being scarce, banks are cutting back on corporate lending. They are giving preference to the retail sector, with its
associated higher margins, while tightening terms of lending to major corporate customers. Corporate lending rates will
continue to slow down in 2013.

The banking industry is becoming increasingly interested in the fastest-growing markets - telecommunications and consumer
electronics - for providing financial services to individuals. A significant growth in the number of bank card holders and an
evolution of related services in the retail banking sector is projected for the near future.

Credit card penetration in Russia is much lower than in developed economies, which creates a favourable environment for
aggressive growth. The share of credit cards in the total private debt to bank is expected to grow from 6.5% to 16.1% by
2016. Thanks to the explosive growth of retail card lending, the average annual increase in lending in the retail sector over
2011-2015 is estimated at 36%.

Steady growth in 2012
The key driver of the bank's development in 2012 was a joint project with MTS, integrating telecom and banking platforms.
In February 2012, the bank changed its name to OJSC MTS Bank (previous name: JSCB MBRD) and began to re-brand. In
September 2012, the reorganisation of OJSC Dalcombank through a merger with MTS Bank was completed; as a result,
MTS Bank received a branch network encompassing the whole of Russia.

In mid-2012, MTS Bank, MTS and MasterCard presented Russia's first NFC shopping solution (the MasterCard PayPass
payment service). The segment's development forecasts as well as pilot project results testify to solid prospects for these fast-
growing new payment instruments. In November 2012, the bank issued its millionth MTS Money card.

In 2012, MTS Bank's retail loan portfolio almost doubled, exceeding RUB 40bn. It plans to increase private debt to the bank
more than six-fold in the next five years.

Operating strategy
The bank's operating goals include optimising internal business processes, cutting costs and improving customer service
quality. Investment in re-branding of the Banking Group is an important part of the strategy, designed to create a uniform
concept for promoting financial products and services under the MTS Bank brand. MTS Bank also aims to increase the share
of high-margin products in the loan portfolio, as well as grow its non-interest income.

Investment strategy
To increase value of its banking assets, Sistema aims to utilize synergies between the mobile communication and banking
markets.

As part of the joint project, in October 2012 MTS decided to buy up to 25% of the bank's shares for an amount of up to RUB
5.09bn. A blocking stake in MTS Bank enables MTS to influence the bank's development strategy, and develop its retail
segment and the services with the greatest potential for synergies throughout the Group's entire business: credit cards, e-
commerce, and distance payments.

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA

Net income/(loss) attributable to Sistema

Operating results
Indicator
Assets, US$ m
Loan portfolio, US$ m
- Loan portfolio attributable to the joint project with

MTS, US$ m

2012
712

2012
6, 977
5, 596

234

2011
561
(6)

(20)

2011
6, 958
5, 097

%
27.0
-

%
0.3%
9.8%

1, 571.4%

Key events of 2012
In February 2012, MBRD changed its name to OJSC MTS Bank and chose the MTS brand name as the basis for its further
development.

In April 2012, the EGM of MTS Bank’s shareholders initiated the reorganisation of MTS Bank by merging with
Dalcombank.

In October 2012, Sistema, MTS and MTS Bank signed a non-binding indicative offer regarding the issuance of up to a
25.095% stake in MTS Bank to MTS through an additional share issue by MTS Bank. In March 2013, the transaction was
concluded in line with the terms announced on October 25, 2012.

4.6. Detsky Mir Group
Detsky Mir Group is the largest retailer of children's goods in Russia and the CIS. Today the group incorporates the Detsky
Mir retail store chain in Russia and Kazakhstan, the ELC chain of early development centres in Russia, the luxury centre
Yakimanka Children's Gallery, and the online stores detmir.ru and elc-russia.ru.

Ownership and management

Company
Detsky Mir - Centre

Effective ownership
75%-1

The CEO of Detsky Mir is Vladimir Chirakhov (before November 2012 – Gennady Levkin), and the Chairman of
the Board of Directors is Christopher Baxter.

Sector
According to Detsky Mir Group, the children's goods market in Russia in 2012 grew by 10.5% and totaled US$
14bn. Considering Renaissance Capital forecast for the 4.6% growth of Russia's total consumer market, children's
goods account for one of its most promising and fast-growing segments. At the same time, Detsky Mir's growth
rate is almost the double of that of Russia's overall children's goods market, while the company's market share
increased from 5.8% in 2011 to 6.4% in 2012.

An especially important pre-requisite for the development of the Russian children's goods market is legislation
aimed at reducing unorganized retail, sales of counterfeit products and low-quality goods. Although there were no
significant changes to the legal framework along these lines in 2012, there is a strong trend towards tightening the
responsibility for violating trade regulations and toughening judicial practices, especially after Russia's WTO
accession in August 2012.

Outlook
The trend for regional expansion will continue in the Russian children's goods market over the next few years,
projected development of the high-quality retail property market being one of the growth factors. Quality retail
facilities available at significantly lower lease rates than those in Moscow and the Moscow region make the
Russian regions especially attractive for retail chain development.

Further development of retail chains will cause the share of unorganised retail in the children's goods market to
continue shrinking. Another factor promoting this trend is the change in consumption patterns. According to
RBC's research, growing incomes in Russia not only increase consumption generally, but also encourage sales of
higher-quality, safer products.

The most promising market segments remain infant products, children's clothes, and toys, which account for 80%
of the entire segment.

Steady growth in 2012
In 2012, the number of Detsky Mir stores increased by 44% to 216 (including ELC franchise stores), while the
chain expanded into 22 new cities in three Russian and three Kazakhstan regions.

In 2012, Detsky Mir acquired the Early Learning Centre (ELC) chain, enabling it to enter the early development
children's product niche, broaden its product range by adding new concepts, and also to adopt Western
technologies and successful practices in the segment.

The company is active in the fast-growing online sales market. The geography of deliveries from the online store
www.detmir.ru expanded from 13 to 66 cities in 2012.

Operating strategy
The company's development strategy is aimed at increasing the operating efficiency of the business, on the back
of growing revenue per square meter, reducing operational spending and improving purchasing conditions.

The company is focusing on further developing its own-brand products, a highly profitable business segment that
also improves customer loyalty. Further promotion of online sales also remains one of the company's priority
development areas.

Other operating objectives include optimising business processes, delivery chain management, and improving the
IT infrastructure.

Investment strategy
Sistema's investment strategy is to strengthen Detsky Mir's leading position in the market and further expand the
chain, with a focus on organic growth in the Russian regions. There is also potential for M&A transactions,
subject to favourable purchasing conditions and synergies with other companies within the Group.

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA
Net income/(loss) attributable to Sistema
Debt

Operating results
Indicator
Retail floor space, thousand sq.m
Number of outlets

2012
893
54
11
99

2012
291
216

2011
783
27
(6)
125

2011
236
150

%
14.0%
97.9%
-
(21.3%)

%
23.3%
44.0%

Key events of 2012

In July 2012, Detsky Mir acquired the British chain of children's early learning goods, Early Learning Centre (ELC)
franchise in Russia. ELC is a fast-growing company - as of the end of 2012, it included twenty stand-alone outlets, a number
of corners in Detsky Mir stores, and an online store.

4.7. VAO Intourist
VAO Intourist is the largest tourism holding in Russia. It comprises VAO Intourist Managing Company, which has
successfully operated and developed in the hotel business for many years, and a tour-operating and retail business managed
jointly with Thomas Cook. Intourist owns a 49.9% stake in the joint venture with Thomas Cook.

Ownership and management

Company
Intourist

Effective ownership
66%

The President of VAO Intourist is I. Maydanov (before March 2013 – D. Bass, before May 2012 - Alexander
Arutyunov). The Chairman of the Board of Directors is Arnold Spivakovsky (before January 2013 - Raphael
Nagapetyants).

Sector
In 2012, the outbound tourism market was under pressure due to the force majeure events of 2011 (revolutions
and armed conflicts in a number of countries of North Africa and the Middle East). Consumer demand shifted
towards the countries of Europe and South-East Asia. The average price of package tours remained at the level of
the previous year, except for the countries with strong price competition (Greece and Spain), where the average
tour price dropped by 10-15%. Despite positive trends in tourist traffic and the average tour price, the financial
indicators of the industry's operators did not improve, as the tough pricing competition exerted a downward
pressure on business profitability.

About 70% of tourist traffic is concentrated in Moscow and St. Petersburg. According to the results of monitoring
conducted by STR-Global, the occupancy and profitability rates of hotels in Moscow in 2012 increased by 5%
and 7%, respectively. According to the State Statistics Service, there were 285 hotels in Moscow in 2012, with a
total of 35,000 rooms. The 3-star hotel segment accounts for about 30% of the entire hospitality market. Non-
Russian hotel operators are mostly represented in the 4- and 5-star hotel segment, with a market share of about
29%. During the low season, there is strong pricing competition among Moscow hotels of different categories.

Outlook
According to the forecast for 2013, the demand structure in the tourist market will remain the same in terms of the
distribution of price segments and concentration in the lower price segments. It is projected that average prices
will grow, except in segments experiencing strong competition, and that the influence of global European players
will strengthen and further structuring of the market will continue. According to the forecast of UNWTO – the
World Tourist Organisation – tourist traffic in Russia will grow at 3-5% a year on average over the next few
years.

The hotel market will see positive trends in the key operating indicators - profitability and occupancy.
International hotel operators, such as Accor, Rezidor Hotel Group, Hilton and Starwood Hotels, continue their
expansion in the Russian regions.

One of the most important trends that will continue to influence the tourist and hotel markets is the increase in the
number of customers booking their accommodation independently on the internet. Direct customer bookings have
a positive impact on hotel operators, while in the tour-operating business this trend leads to a decrease in sales.

Steady growth in 2012
The main goal of Intourist in 2012 was to retain its position in the hotel market and to increase the operating
efficiency of its hotel chain. Most of the company's efforts were aimed at increasing occupancy rates and
improving quality. Active sales development, including sales on the internet, made it possible to increase the

ADR (average price per room/night) and RevPar (Revenue per room) indicators by 20% and 22% respectively,
and to reduce the managing company's and hotels’ costs.

Operating strategy
The 2013 operating strategy in the hotel business is focused on increasing business efficiency through cost
optimisation. Thomas Cook is in charge of developing and implementing the operating strategy of the tour-
operating and retail businesses and the main goal of the joint venture is to reach a net income break-even point.

Investment strategy
The investment strategy of Sistema for 2013-2017 is to strengthen Intourist’s positions in the hotel and tour-
operating markets. The tour-operating business will be developed jointly with Thomas Cook by introducing the
best management practices. The hotel business will be reorganized and split into two units: City Hotels 3* and
Medical SPA. The creation of the City Hotels 3* chain implies bringing in an international brand (franchise) and
renovating the operating facilities to ensure they meet the brand standards; another objective is to build new
facilities in Moscow.

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA
Net (loss)/income attributable to Sistema
Debt

Operating results
Indicator
Rooms
Number of tourists, thousands

2012
88
(14)
(23)
81

2012
2, 610
584

2011
277
44
35
102

2011
2, 866
725

%
(68.4)
-
-
-21.1%

%
-8.9%
-19.4%

Key events of 2012
In April 2012, the management contract with the owners of Severnaya Hotel (Petrozavodsk) was terminated.

In October 2012, the management contract with the owners of Oktyabrskaya Hotel (Nizhniy Novgorod) was
terminated.

4.8. Medsi Group (Medsi)
Medsi Group (Medsi) is Russia's largest federal chain of commercial prevention and treatment facilities,
providing a full range of medical services. The Group includes three inpatient facilities, 18 clinics, three clinical-
diagnostic centres, two rehabilitation centres, and three health centres in Moscow and the Moscow Region, as
well as ten primary clinics and over 80 medical stations in other Russian cities, and a rehabilitation centre in
Ukraine.

Ownership and management

Company
Medsi Group

Effective ownership
75%-1

The President of Medsi Group is Khawar Mann (before February 2013 - Tatiana Sergeyeva). The Chairman of the
Board of Directors is Mikhail Shamolin (before February 2013 - Khawar Mann).

Sector
According to BusinessStat, the Russian paid-healthcare services market grew by 9% in 2012 to RUB 417.8bn.
This was caused by the rising price of healthcare services, due in part to promoting service packages, as well as
the overall growth in the personal incomes of Russians.

Russian medical centres have lately been actively pursuing their own service contract programmes, while cutting
back on their voluntary health insurance plans. They have therefore been claiming a potential extra profit of 15-
20% of a policy value, which is normally charged by insurers as a markup.

The growth of the commercial healthcare services market was also supported by a decline in shadow medicine,
which resulted from doctors transferring from state-run institutions to private clinics. An overall increase in the
demands Russians place on the quality of healthcare services was another factor encouraging this growth.

A significant 2012 event was MD Medical Group's IPO on the London Stock Exchange which testified to the
high appeal of the industry to financial investors, and to positive expectations of the future development of the
sector. A number of other major private healthcare services players also have IPO plans for the near future.

Outlook
According to analyst forecasts, the growth rate of the paid-healthcare services sector will be around 12% per year
until 2017, with the increasing costs of services and the commercialisation of state-run medical institutions
remaining the key growth factors.

The volume of commercial medicine is expected to grow in 2013 on the back of new legislation dividing all
medical services into either paid or free ones. The new law rigorously limits the list of free services covered by
mandatory health policies.

The inpatient treatment segment is today's most promising segment of commercial healthcare services. There
were no private inpatient facilities in Russia until recently, as they were normally provided on the premises of
state-run medical institutions or by minor inpatient departments of commercial clinical and diagnostic centres. An
agreement entered into by the State Unitary Enterprise (SUE) and Medsi Group virtually laid the foundations for
the private inpatient facilities sector in Russia, with a commercial bed count exceeding 1,000.

Steady growth in 2012
In 2012, Medsi continued to expand, and remained the number-one provider of paid healthcare in Russia. An
expansion of its range of services, as well as the acquisition of SUE healthcare assets in 2012, enabled the
company to achieve significant revenue increase. The company attained high financial results due to an increase
in the total number of patients, growth of the average check indicators and increased overall patient traffic.

Through an agreement signed with SUE in early 2012, Medsi became the owner of three inpatient treatment
facilities with a total bed count over 1,000, as well as four adult and one pediatric clinic, two rehabilitation centres
in Moscow and a centre in Ukraine, giving it the capacity to provide a full range of medical services. The Group's
product range has been enhanced through the inpatient and rehabilitation care segment – a unique feature of
Russia's commercial healthcare market.

In 2012, the company focused heavily on optimising its organisational structure and business processes. It
launched a project to unify its IT infrastructure and create a shared information space, and drafted a new
programme to adopt world-class healthcare service standards.

Operating strategy
Medsi's key strategic goals include business expansion, increasing efficiency and profitability through a presence
in all its target markets, strengthening its position in diseases attracting increasing attention, and developing high-
tech assistance. The company is planning to use its newly acquired infrastructure to create an integrated
healthcare services platform, encompassing a wide range of services from initial consultations and outpatient
diagnostics to inpatient and rehabilitation care.

The new inpatient care segment is one of the Group's priority areas, and Medsi's strategy envisages modernising
its inpatient facilities and upgrading them in line with the latest international healthcare standards.

The company also plans to continue developing its regional network in Russia and the CIS, and to open up to
three new clinics every year, including the possible acquisition of operational regional clinics with solid market
positions.

Investment strategy
Sistema plans to develop its healthcare assets and tap into new market segments through efficient mergers and
partnerships. To improve Medsi's corporate governance, and increase its investment attractiveness and
recognition in international markets, we plan to sell a 25% stake to an international partner with extensive
experience in healthcare management. Our investment goal is to prepare Medsi for entering capital markets by
2016.

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA
Net income attributable to Sistema
Debt

Operating results
Indicator
Patient visits, ths.
Services provided, ths.

Key events of 2012

2012
224
29
1
84

2011
199
31
7
69 21.7%

%
12.5%
(6.4%)
(90.1%)

2012

2011

4, 979
11, 055

4, 118
7, 491

20.9%
47.6%

In April 2012, Medsi commenced a merger of assets with the State Unitary Enterprise (SUE) Medical Centre
under the Administration of the Mayor of Moscow and the Moscow Government, a large group of healthcare
institutions in Moscow. SUE gained a 25% stake in the combined entity in exchange for contributing its property,
which has a market value of RUB 6.043bn.

In February 2013, Khawar Mann was appointed new President of Medsi Group.

4.9. RTI
RTI is the largest holding in the field of defence, comprehensive security systems, system integration and
microelectronics. It has its own R&D infrastructure, and implements projects in radio and space technologies,
navigation and microelectronic products, which are unique in scale and complexity. RTI comprises RTI Systems
Concern (97%), SITRONICS (100%), and NVision Group (50% + 0.5 share).

Ownership and management

Company
RTI

Effective ownership
84.6%

The CEO of RTI is Sergey Boev. The Chairman of the Board of Directors is Evgeny Primakov.

Sector
RTI operates in the defence industry, focusing mainly on the IT segment for the airspace defence market, a total
market of approximately US$ 1bn. There is hardly any direct product competition in the high-tech segments of
state defence contracts, due to unique competencies that differentiate each player. In the mass production of
weapons and military equipment, the competitive position is determined by the company's ability to reduce the
cost of production.

According to a security systems market survey by AMICO, the Russian security systems market grew by 12% in
2012 and had an estimated value of approximately US$ 7bn. The narrower segment of comprehensive security
and control systems for the regions of Russia is on the threshold of exceptional growth. It is under the strict
control of the Russian Government, because demand is growing in more and more regions as they see the
possibility of creating intellectual transportation systems and ‘Safe City/Region’ systems.

According to Frost & Sullivan, the total value of the Russian microelectronics market in 2012 was estimated at
US$ 2bn. Advanced semiconductor products are currently in high demand, which, considering the government's
goal to find import substitutes, should provide a maximum load on the Russian production facilities for
microelectronics.

Based on analytical data, the Russian information technologies market went up by 10% in 2012 and reached US$
30bn. According to IDC, around 67% of IT expenses in Russia are still allocated to hardware, and only 19% to
services. Major IT projects are executed as part of federal regional and municipal programmes.

Outlook
According to the state programme, government defence expenses in 2013 may reach US$ 70bn. RTI considers the
defence market to be stable, with long-term government funding. The airspace defence segment RTI operates in is
among the Russian state’s priority defence areas.

At present, security systems is one of the fastest growing and most promising segments. According to RTI, the
expected rate of market growth in the medium term is 15-20%. In the opinion of RTI’s management, the key
trends are: demand growth related to the need for security provision at the major world sports events to be held in
Russia in 2013, 2014, and 2018; a growing need among security agencies for intellectual analytical systems; the
development of cognitive information processing and situation analysis centres.

In 2013-2015, the market for microchips for RFID cards and tags is expected to grow by 10-15% annually, as is
the market for chips for documents with electronic information carriers. The Russian Government has started
forming a regulatory base for developing microelectronics, implementing government projects, and increasing
major companies' interest in RFID-based solutions. The key competitive advantage for companies in this segment
will be achieving optimal use of production capacities and vertical integration of the supply chain.

According to analysts, the growth of the IT market in 2013, especially in the services segment, is expected to be
10%.

Steady growth in 2012
The key factors behind the successful development of RTI in 2012 are expansion of the company's presence in the
system integration market through consolidation of NVision Group and the growth of revenues in defence
solutions.

The merger of RTI-based assets was completed in 2012 with the integration of Concern RTI-Systems and
SITRONICS, and of SITRONICS and NVision Group assets. The purpose of this consolidation was to create the
right conditions for developing the CIS's largest system integrator capable of implementing major IT projects and
having the broadest regional presence among Russian IT companies.

Major projects successfully completed in 2012 include hardware and software video surveillance facilities for the
presidential elections in Russia, a video surveillance system for the parliamentary elections in Ukraine, and a
number of large-scale projects to develop Russia’s missile approach warning system.

In the field of integrated security systems in 2012, RTI continued working on the Intellectual Transportation
System of Moscow, and commissioned the Resource Management Centre in Tyumen.

The microelectronics segment began manufacturing and supplying products using the 90 nm technology.

In 2012, NVision Group expanded its chain of affiliates and implemented a number of innovative projects for
outsourcing networks, telemedicine, and building GPON networks. It also completed the construction of the IT
centre for the Sochi Olympics.

Operating strategy
The company will achieve a leading position in the government defence contracts market by developing land-
based early-warning intelligence systems and information support for the airspace defence system. It will also do
this by planning to develop modern radar stations for internal and export purposes, participating in the

development of satellite communication systems and forming its own R&D centres for communication
equipment.

Investment strategy
Sistema’s investment strategy aims to improve the efficiency of its assets and to capture leading positions in the
high-tech sector in Russia. To achieve this, Sistema intends to develop three standalone businesses focused on
defence, systems integration and navigation services. RTI is expected to focus on defence projects and
microelectronics, SITRONICS will merge with NIS and oversee development of the navigation segment, while
NVision will retain its focus on systems integration.

Key financial and operating results 2012

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA
Net loss attributable to Sistema
Debt

2012
2, 376
13
(130)
1, 338

2011
2, 093
154
(18)
1, 126

%
13.5%
(91.9%)
-
18.8%

Key events of 2012
In February 2012, the Military Industrial Committee of the Russian Government appointed Sergey Boev, CEO of
RTI, as the General Designer for the Missile Approach Warning System.

In February 2012, RUSNANO and SITRONICS began producing microchips using the 90 nm technology.
Launching this new line will double the plant’s capacity, making it possible to produce 36,000 plates a year with a
diameter of 200 mm. The total budget for the project is RUB 16.5bn, including co-financing from RUSNANO of
RUB 6.5bn.

In April 2012, SITRONICS completed the sale of a 3% stake in Intracom Telecom to Rydra Trading Company.
As a consequence, SITRONICS’ share in Intracom Telecom shrank from 51% to 48%.

In June 2012, RTI was listed among 2011’s Top-100 world's largest defense companies according to the annual
international ranking, Defense News Top 100.

In August 2012, after a mandatory buyout, RTI became the owner of 100% of SITRONICS’ shares. Following
the buyout, SITRONICS was delisted from the London Stock Exchange, and the depositary receipts and
depositary agreements were terminated.

In September 2012, RTI completed the strategic integration of the assets of RTI Group and NVision Group for IT
and communication technologies. Following the transaction, RTI became the owner of 50%+0.5 shares of
NVision Group. The RTI Group made the payment under the transaction partly in cash, and partly by transferring
to NVision Group the assets currently under the management of SITRONICS Information Technologies and
SITRONICS Telecom Solutions (except for Intracom Telecom).

In November 2012, RTI and its affiliates became the holders of 83.54% of voting shares in OJSC NIIDAR.
Following the transaction, RTI declared a mandatory offer to acquire up to 100% of NIIDAR's ordinary shares.

In December 2012, RTI, X5 Retail Group N.V. and RUSNANO launched the trial operation of Perekrestok Store
of the Future. The project benefited from the interaction of NVision Group, Russia's largest integrator, and
NIIME and Micron, with its full chain of development and production facilities for RFID semi-conductor
products.

is a pharmaceuticals company

4.10. Binnopharm
largest full-cycle GMP-compliant
Binnopharm
manufacturing facility, producing bio-technology drugs. The company is focused on developing and producing
treatments for such serious conditions as cancer, blood disorders, and infectious and respiratory diseases. It also
develops genetically engineered medicines, vaccines and cell technology products for use in regenerative therapy.

that operates Russia’s

Ownership and management

Company
Binnopharm

Effective ownership
74%

The CEO of Binnopharm is Pavel Medvedev (before April 2013 - Alexey Chupin). The Chairman of the Board of
Directors is Dmitry Zubov.

Sector
The Russian pharmaceutical market continues to be one of the fastest-growing pharmaceutical markets in the
world. In 2012, the finished pharma products sector grew by 16.4%, mainly as a result of retail price rises.

In volume, Russian manufacturers account for almost two-thirds of the market, but are still behind international
players in monetary terms. In 2012, the market share occupied by Russian manufacturers increased by 1 p.p. in
monetary terms and reached 26.3%, despite a slight reduction in volumes.

Medicines that are not classified as vital and essential are still the most promising part of the industry, as they
dominate the current growth rates and are not under pressure from government regulation.

Outlook
Most experts share a positive view on the prospects of the Russian pharmaceuticals market. According to the
latest forecast by the Pharmexpert Market Research Centre, the growth in market volumes in 2013-2014 is
expected to remain at 13-14% annually. Among growth factors are the programme of healthcare modernisation,
the government programme Pharma-2020, the continuing increase in income per capita, and increasing individual
health and disease prevention awareness.

Steady growth in 2012
In 2012, Binnopharm's sales doubled as a result of the increase in sales of its own products, as well as the
extension of distribution volumes.

The company fulfilled the RUB 500m government contract for delivering the Hepatitis B vaccine ahead of
schedule. It complemented its product portfolio with a new bio-technology product – Erythropoietinβ 2000 МЕ,
and commissioned its production lines for tablets and aerosols.

It also continued a successful partnership with GlaxoSmithKline, and its subsidiary ViiV Healthcare, on the
localisation of antiretroviral drugs through manual repackaging of Kivex. In cooperation with ViiV Healthcare,
Binnopharm also started the distribution of Combivir.

In 2012, Binnopharm started a full-scale operation for the Group's distribution division, with representative
offices in Moscow, Ekaterinburg, Rostov-on-Don and Krasnodar.

The integration of Binnopharm and Alium, a producer of infusion solutions and blood substitutes, also started in
2012. The deal was structured as an additional share issuance, with Sistema contributing cash and LLC Zenitko
Finance Management, Alium's assets. The combined entity will operate under the Binnopharm name. After
combining Binnopharm's and Alium's assets, Binnopharm represents a group consisting of two large production
facilities that meet high European standards in pharmaceutical production and several distribution companies. The
additional share issuance totalled approximately RUB 1.749bn. As a result of the deal, Sistema has decreased its
shareholding in Binnopharm from 100% to 74%. LLC Zenitko Finance Management holds a 26% stake in
Binnopharm.

Operating strategy
Binnopharm has a goal to become one of the largest Russian developers and manufacturers of pharmaceuticals,
and to capture 50% of the Russian market of biotech drugs.

As part of the first stage of biotech production development, the company is expanding its vaccine product mix
and launching its own manufacturing facilities for erythropoietin β, interferon α, and filgrastim.

Developing its own distribution chain in the Russian regions will enable it to continue increasing sales volumes.

Investment strategy
Creating strategic alliances and joint ventures with major foreign producers of pharmaceuticals is an important
part of Sistema’s investment strategy. We are considering a number of companies that have complementary
product portfolios or businesses for acquisition.

Key financial and operating results 2012

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA
Net income/(loss) attributable to Sistema
Debt

Operating results
Indicator
Capacity utilisation, ampules
Capacity utilisation, tablets
Capacity utilisation, aerosols

2012
74
16
2
21

2012
44.0%
1.2%
3.6%

2011
39
1
(4)
7

2011
16.0%
0.1%
3.5%

%
91.5%
1,103.2%
-
206.0%

%
28 p.p.
1.1 p.p.
0.1 p.p.

Key events of 2012
In March 2012, Binnopharm launched the first stage of the strategic project with ViiV Healthcare to package the
Kivex vaccine.

In July 2012, the company launched the production of aerosols and set up the commercial manufacturing of the
Salbutamol inhaler for asthma and bronchitis.

Also in July 2012, Binnopharm completed preparations for the transaction with Panacea Biotec Ltd (India), aimed
at transferring the technology for producing a vaccine against haemophilus influenza and a combined quintavalent
vaccine against tetanus, diphtheria, whooping cough, hepatitis B and haemophilus influenza.

4.11. NIS
Navigation-Information Systems (NIS) is a leader in the Russian navigation market, carrying out the major
technological projects of GLONASS and the Russian satellite navigation system.

Ownership and management

Company
OJSC NIS

Effective ownership
60%

The CEO of NIS is Alexander Chub (before September 2012 – Alexander Gurko). The Chairman of the Board of
Directors is Alexey Shavrov.

Sector
The total volume of the Russian navigation and information market in 2012 reached RUB 18-19bn,
approximately RUB 12bn of which was allocated to navigation systems and vehicle services, transport safety
43

projects, and cargo and passenger transportation control systems. The Russian navigation and information
systems market comprises over 300 players, and is characterized by a high concentration rate: the 10 major
players account for around 80% of the market. The service market focuses mainly on security and navigation
services for vehicle owners.

Major state transport safety projects were completed in the world navigation and information market in 2012. The
market also showed significant growth in mobile subscribers' requirements, including seamless navigation
technologies and a tendency to use multisystem GLONASS/GPS equipment. GLONASS technologies became the
standard for the global mass market.

The main drivers for the development of the Russian market are the major state initiatives: the ERA-GLONASS
project, road toll systems for heavy vehicles, intellectual city transport systems, cartographic control, as well as a
growing demand for telematics and navigation services among private clients.

Outlook
The Russian navigation market is expected to grow by 20% in 2013. The biggest growth is expected in 2014, with
the launch of the ERA GLONASS projects, digital tachographs, a toll-collection system for heavy trucks, and
regional implementation of the GLONASS technology.

The services segment is expected to outstrip and dominate the market in the future, due largely to the
development of the Connected Car concept. The demand for telematics and navigation services will grow among
private clients and other categories of users, owing to new opportunities for using satellite navigation
technologies to provide comfort and safety, both on the road and inside the car.

Steady growth in 2012
In 2012, NIS proceeded with the two largest state projects – ERA GLONASS and the Intellectual Transport
System (Moscow). With the introduction of monitoring and dispatcher control systems, over 30,000 vehicles were
equipped with GLONASS/GPS equipment in 2012. The largest clients included OJSC Transneft, FSUE Post of
Russia, Olympic Games Transport Directorate, the Russian Ministry of Internal Affairs, the Russian Ministry of
Emergencies, and the Government of Moscow.

In 2012, NIS undertook the strategic government initiative to promote GLONASS technologies in the various
regions of Russia. Under this programme, regional companies were set up in 19 constituent entites of Russia, and
they will be future operators of regional navigation and information GLONASS systems.

Operating strategy
In 2013, NIS intends to create regional navigation and information systems and roll out these services to federal
agencies, regional and city authorities, commercial enterprises, and private clients. The full implementation of the
regional programme will enable NIS to create a federal network in 58 regions, becoming the only provider of a
broad range of navigation and information and telematics services for all categories of clients in each region.

Investment strategy
The investment strategy for NIS focuses on forming the key competencies of the operator business, including the
development of a centralized technological operator's infrastructure and a fast market entry with a set of the most-
needed navigation and information services. The company will pursue this strategy through organic growth,
strategic partnership, and the acquisition of key players in the security and search systems market.

Key financial and operating results 2012

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA
Net loss attributable to Sistema
Debt

2012
90
(21)
(19)
45

2011
112
(3)
(5)
-

%
(19.7%)
-
-
-

Operating results
Indicator
Equipped transport (thous. vehicles)*
*Jointly with regional partners

2012
180

2011
150

%
20.0%

Key events of 2012
In September 2012, the NIS Board of Directors confirmed the appointment of Alexander Chub as the CEO.
Alexander has experience of managing the representative offices of major IT vendors: 3Com, Bull and HP.

4.12. RZ Agro Holding Ltd
Russkaya Zemlya (RZ Agro Holding Ltd) is a major grain producer in the South of Russia, with a land pool of
89,000 hectares, jointly controlled by Sistema and certain members of the Louis-Dreyfus family. At present,
Russkaya Zemlya comprises five farm units, forming two regional clusters in the Rostov region – Rostov-East
and Rostov-South, with 42,000 hectares and 47,000 hectares, respectively.

Ownership and management

Company
RZ Agro Holding Ltd.

Effective ownership
47%

The President of RZ Agro Holding is Stéphane MacFarlane. The Chairman of the Board of Directors is Thomas
Schultz.

Sector
Global factors will create a growth in demand for agricultural products in the future, and for wheat in particular.
Russia is one of the major exporters of wheat, with competitive advantages such as low production costs, the
potential for profitability improvement, and plenty of arable land.

The land and water resources of Russia make it a unique place for grain farming: Russia is privileged to have
10% of all arable land, 55% of all black soil, and 20% of all fresh water on the planet. Grain farming (mainly for
wheat) is Russia's most successful agricultural activity; the country continuously maintains its second or third
position in the world wheat export market.

The 2012 drought harmed many major agricultural producers including Russia, Australia and Brazil. The drought
in the US was the worst in 56 years. This considerably reduced the production and reserves of major grains,
which caused world prices to rise by 50-80%.

Outlook
Wheat production in Russia is expected to grow and reach 54m tonnes by 2018. According to the Russian
Ministry of Agriculture, productivity growth will outperform current rates, which will provide for vast wheat
production and export. Experts believe the agricultural sector will become one of the main factors supporting the
Russian economy, due to modernisation and innovation in agriculture. Emerging markets are expected to increase
their import share in the overall consumption from 24-26% to 30%, due to the growing demand for wheat in
livestock farming.

Steady growth in 2012
In 2012, Sistema established RZ Agro Holding Ltd jointly with members of the Louis-Dreyfus family, to enter the
agricultural sector. The joint venture's land pool in the South of Russia was 89,000 hectares. RZ Agro focuses on
wheat production and other traditional crops.

The company's main achievement in 2012 was improved financial performance in spite of drought conditions,
through efficient budget management and adapted agronomic practices. RZ Agro also received compensation
from the insurance company for areas affected by the drought.

In 2012, the Rostov-South cluster was established on the basis of Donskoye and Horse Farm of the First Cavalry
Army. It was integrated into the company.

Operating strategy
The operating strategy of RZ Agro Holding sees growth coming from the creation of self-sufficient clusters, each
with 30,000-50,000 hectares of closely located arable land. The close locations will allow us to reduce operational
and investment costs significantly, and to improve the clusters’ management.

Investment strategy
Sistema’s strategy for the joint venture is to establish Russia's leading agricultural company and to focus on
increasing its pool of arable land through organic growth and strategic acquisitions. The joint venture will
continuously monitor M&A opportunities in the key grain-producing regions – in the South of Russia and in the
Central Black Earth Region.

Key events of 2012
In April 2012, Sistema, along with RZ Agro Ltd, established an agricultural joint venture to be named RZ Agro
Holding Ltd. RZ Agro Ltd was created in 2009 and is affiliated with the Sierentz Group, and both are controlled
by certain members of the Louis-Dreyfus family. Earlier, Sistema acquired two grain and oilseed farms in the
Rostov Region of Russia, with a total area of 46,000 hectares. These farms became part of the joint venture, along
with the existing agricultural holdings of RZ Agro Ltd, which consist of the management company LLC
Russkaya Zemlya and three grain and oilseed farms in the Rostov Region with a total area of 41,500 hectares.

4.13. SG-trans
SG-trans OJSC is Russia's largest independent operator in liquefied gas (LG) transportation. SG-trans operates
15,000 rail cars, including tank cars especially equipped to transport LG and LG-based products.

LLC Financial Alliance is a joint venture set up by Sistema and a group representing the company's management.
As of year-end 2012, Financial Alliance owns, leases and rents 12,000 tank and open cars.

Ownership and management

Company
OJSC SG-trans
LLC Financial Alliance

Effective ownership
100%
50%

SG-trans' management
The President of SG-trans is Alexey Taicher, and the Chairman of the Board of Directors is Mikhail Kurbatov.

Financial Alliance's management
The CEO and Chairman of the Board of Directors of Financial Alliance is Alexey Taicher.

Sector

The Russian railway freight market is growing at a steady pace, and in 2012 grew by 2.4%. There was practically
no market downturn during the crisis of 2008-2009, with oil shipments enjoying strong growth. According to
OJSC Russian Railways (RZD), transportation of oil and mineral oil products in 2012 increased by 3.3% to 258.2
m tonnes. In 2012, transportation of gasoline grew by 5.4% to 38.2m tonnes, diesel fuel by 9.3% to 54.4m tonnes,
and transportation of masut by 0.4% to 68.6m tonnes. At the same time, the number of companies operating
specialised tank cars remains low, with more than half the segment serviced by Sibur-Trans, Gazpromtrans,
Lukoil-Trans and SG-trans.

A key factor in the growing demand for LPG transportation is new legislation passed by the Russian Government,
which requires oil companies to ensure utilisation of up to 95% of associated petroleum gas starting from 2012.
Among other factors influencing the sector are an increasing oil conversion ratio, growth in exports of natural gas
and escalating volume of liquefied petroleum gas production, with natural gas as a by-product.

Outlook
According to a forecast by RZD, railway transportation in 2013 is expected to grow by 3.3%. Strengthening of
prices in the global oil market is expected to have a positive effect on the exports of oil and oil products.

In general, industry consolidation is expected in the railway transportation market, through M&A transactions
accompanied by a redistribution of transport volumes.

Freight car manufacturers are mostly opposing a ban on extending the operation of cars beyond their standard
service lives. As FCC, Russia's largest petroleum cargo operator, operates the oldest tank car fleet in the market,
adoption of these measures by the government may lead to increased demand for the services of other operators
during peak periods.

Steady growth in 2012
In 2012, Sistema entered the transportation sector with the goal of creating a top-three player in the industry. In
November 2012, Sistema acquired a 100% stake in SG-trans, Russia’s largest independent provider of specialised
railcars for transporting liquefied petroleum gas (LPG), with a railcar fleet of 15,000, for RUB 22.77bn. SG-trans’
railcar fleet in 2012 accounted for 47% of the total fleet in Russia, with a 37% share of all volumes in the LPG
transportation segment.

In December 2012, Sistema acquired a 50% stake in Financial Alliance from Bashneft for RUB 3.41bn
(approximately US$ 110m). Financial Alliance’s main client in 2012 was Bashneft, which expanded its pool of
trading counterparties and needed additional transportation capacity, using Financial Alliance’s fleet. In 2012,
Financial Alliance started a business optimisation programme aiming to increase the company’s competitiveness
and stimulate organic growth, which led to a significant improvement in its financial indicators.

The total fleet managed by Sistema thus totals 34,500 rail cars (15,000 in SG-trans, 13,000 in Financial Alliance,
and around 7,000 under management in TLC), which makes Sistema Russia's top-5/6 player in the railway
transportation segment.

Operating strategy
One of the mid-term strategic missions for Financial Alliance is to expand the geography of freight operations
using the company's rolling stock, into the CIS and other countries. The rail transportation markets of Ukraine,
Kazakhstan, Belarus and the Baltic states hold the most potential for regional expansion.

One of SG-trans' main development lines is the spin-off and sale of non-core assets, as well as the development of
its freight business. In particular, the company has been assigned a goal to substantially raise its OIBDA by
increasing its market exposure, revising tariffs and improving utilisation of capacity.

Investment strategy
Sistema's investment strategy in transport includes participating in the consolidation of the industry, and creating
of one of the country's biggest players, capable of ensuring high return on investment, stable cash flows and
dividends. Sistema is contemplating consolidating all of its transport assets under Financial Alliance, and will
seek potential M&A targets in the sector.

Key events of 2012
In March 2012, Financial Alliance leased 3,485 tank cars.

In August 2012, Bashneft acquired 50% of the authorised capital of Financial Alliance LLC, a professional railcar
operator, by transferring its fleet of approximately 4,500 railcars to it.

In September 2012, Financial Alliance acquired 3,923 cars using Bashneft's equity contribution.

In November 2012, Sistema acquired a 100% stake in SG-trans OJSC, Russia’s largest independent provider of
specialised railcars for transporting liquefied petroleum gas, with a railcar fleet of 15,000, for RUB 22.77 bn.

In December 2012, Sistema acquired a 50% stake in LLC Financial Alliance from Bashneft for RUB 3.41bn
(approximately US$ 110m).

4.14. Russneft
Russneft is a vertically integrated oil company, one of Russia's top ten oil & gas companies by production.
Russneft includes 24 production enterprises in 11 Russian regions, CIS and North Africa.

Ownership and management

Company
Russneft

Effective ownership
49%

The President of Russneft is Mikhail Gutseriev, and the Chairman of the Board of Directors is Mikhail Shamolin.

Sector
In 2012, the economic situation in the Russian oil sector was determined by a fluctuation of world oil prices,
where the Brent oil price per barrel grew on average by 0.6% up to US$ 111.4, and in March 2012 reached US$
126.2, its maximum over the period. The fluctuation of prices in the external market has an impact on the export
duties for crude oil and oil products, and the Mineral Extraction Tax, that on average went down 1.1%, to US$
404.3 per ton.

Oil production in Russia in 2012 increased by 1.3%, to 518m tonnes. The new 60-66 oil tax reform caused capital
investment in oil production to soar by 14.8%, to RUB 836.9bn. This growth was due to an increase in production
drilling volumes, which led to a stabilisation of production in the traditional oil extraction regions.

Auctions were held in December 2012 for three subsoil blocks, including Shpielmann, Imilorskoye, Zapadno-
Imilorskoye and Istochnoye deposits in the Khanty-Mansi autonomous district, and Lodochnoye deposit in the
Krasnoyarsk region.

Outlook
According to expert opinions, oil production is not expected to grow in Russia in 2013. On the contrary, experts
anticipate a stabilisation in production or a slight volume reduction. Leading vertically integrated oil companies
will increase their investments in upgrading refineries, aiming to comply with technical regulations. They should
make other significant investments to achieve a bigger refining depth and reduce the yields of heavy fractions, for
which protective duties are expected to be introduced.

In accordance with the Energy Strategy of Russia for the period up to 2030 approved by the Russia’s government,
the main oil deposits of West Siberia are petering out, which will soon make it necessary to explore oil resources
in the continental shelf of the Arctic and Far-Eastern seas, East Siberia and the Far East. The share of hard-to-
recover oil resources is expected to grow, and exploitation of oil & gas multi-component deposits will be
extended.

Oil recovery in the European part of the country will continue to grow, primarily through exploration of resources
in the Timan-Pechora province, on the continental shelf of the Arctic Sea and in the Russian sector of the Caspian
Sea, while upstream production in the Volga region and on the Urals will go down.

Steady growth in 2012
In 2012, Russneft increased its oil production by 4.0%, to 13.1m tonnes. The company became one of the oil &
gas leaders by growth rates, which were well ahead of the industry-average indicators. The Novo-Aganskoye and
Poselkovoye oilfields were commissioned in 2012.

In 2012, Russneft increased the efficient use of associated gas by 19%, on the back of steady financing and timely
construction of facilities.

In 2012, the company restructured its debt to Sberbank and Glencore: the maturity of Sberbank's loan was
extended until May 2019, the loan interest was reduced to 7%, and the repayment plan was changed. Russneft met
all its repayment obligations in due time. The operating and management achievements made it possible to reduce
the debt burden by US$ 5.03bn as of the end of 2012.

Operating strategy
Russneft's operating strategy is aimed at maintaining the average annual growth rates of oil production and is
focused on production drilling and infrastructure building. The total investment for 2012-2017 is estimated at
US$ 3.2bn. Besides, an intensification of oil production at the existing oil fields is envisaged. The company's
financial goals include further deleveraging, diversification of sources of financing, and gaining access to the
international capital markets.

Investment strategy
Sistema believes Russneft has significant potential to grow value by implementing its operational and financial
strategy. This foresees a near term increase in production and further reduction of the company’s debt, as well as
growth of its reserve and resources base.

Key financial and operating results 2012

2012 results

Financial results*
Indicator, $ m
Revenue
OIBDA
Net income attributable to Sistema
Debt

2012
5, 384
1, 652
203
5, 031

2011
5, 507
1, 662
378
5, 403

Operating results
Indicator
Oil production (m tonnes)
Oil reserves (2P), m barrels
Gas reserves, m cub.f.
*In accordance with IFRS
** Financial results of LLC ZMB were excluded from 2011 and 2012 consolidated results due to sale of LLC ZMB in December 2012.

2011
12.6
2, 165
1, 313, 212

2012
13.1
2, 191
1, 380, 728

%
(2.2%)
(0.6%)
(46.3%)
(6.9%)

%
4.0%
1.2%
5.1%

Key events of 2012

In August 2012, Russneft obtained a certificate to carry out exploration works in Algeria as an onshore operator-investor.
Russneft's long-term development strategy determines the company's active position in the world mineral markets, and plans
to enter new regions and expand its geographic footprint internationally. Russneft's area of interest includes raw hydrocarbon
deposits in Africa and CIS.

In October 2012, Russneft signed an agreement establishing new loan terms with its key creditors: Sberbank and Glencore.
The new agreement provides for a reduction of the loan interest rate to 7%. The effective interest rate of the Glencore loan
was also reduced by 1%.

In December 2012, Russneft sold LLC Zapadno-Malobalykskoye, following its early loan repayment strategy, and used the
proceeds for early repayment of its loan to Sberbank.

4.15. SSTL (MTS India)

Sistema Shyam TeleServices Ltd (SSTL) is a mobile operator in India.

Ownership and management

Company
SSTL Ltd

Effective ownership
56.7%

The President of SSTL is Vsevolod Rozanov. The Chairman of the Board of Directors is Ron Sommer.

Sector
In February 2012, the Supreme Court of India revoked 122 licences from eight telecom operators in India,
including 21 licences from SSTL. The order was issued on the grounds that these licences had been granted in
violation of procedures and requirement of India’s Department of Telecommunications.

As a result, two operators (STel and Etisalat DB) decided to leave the Indian market, and five operators
considerably scaled down their operations and the size of their businesses. For the first time, the industry
experienced a significant decline in mobile subscribers.

Another factor causing reductions in subscriber bases was the introduction of new rules for accounting for the
number of active subscribers, according to which all Indian operators had to write off part of their subscriber
bases.

The outcome of the regulatory crisis was that in 2012 the mobile subscriber base in India fell by 3% from 894m to
865m, while the penetration of cellular communication services dropped from 74% to 71%.

In November 2012, the Indian Government organised an auction to sell the frequencies that had been revoked
earlier. Due to the unjustifiably steep reserve prices, only five operators submitted their bids for the 1,800 MHz
auction and only 57% of the offered frequencies were sold, mainly at starting prices. In three major circles (Delhi,
Mumbai and Karnataka), the frequencies failed to sell due to a lack of bidders. The auction for the 800 MHz
spectrum, where SSTL operates, did not take place, because no applications from bidders were received.

Outlook
The broadband access market is still in its initial development stage, and considerable growth is expected in the
mobile data market due to the roll-out of 3G and EVDO networks, as well as the launch of 4G (LTE) networks.

At the end of 2012, the Indian Government took steps to stabilise the situation and stimulate the development of
the industry. After the failure of the November auction in 2012, the reserve prices for GSM frequencies in the
1,800 MHz spectrum in the most expensive licence circles (Delhi, Mumbai, Karnataka) were reduced by 30%, the
reserve prices for CDMA frequencies in the 800 MHz spectrum were cut by half, and a new auction was
scheduled for the remaining undistributed frequencies on March 2013. The frequencies awarded at the auction are
liberalised (technologically neutral), which will create
the accelerated
implementation of advanced technologies and high-speed 3G data services (UMTS, EVDO) and 4G (LTE).

the necessary conditions for

Anti-crisis development in 2012
As a result of the regulatory crisis caused by the decision of the Supreme Court of India, SSTL had to virtually
suspend its investment programme. Since March 2012, the company has been implementing an anti-crisis
strategy, aimed at retaining the business and ensuring its differentiated development.

This strategy provided for: developing the business in priority licence circles with the most favourable economic
environments; reducing capital expenses in the second half of 2012 down to almost zero; focusing on data
services; supporting and developing the broadband subscriber base; reducing all operating costs to the minimum
level.

As a result of these activities in 2012, the company maintained its presence in all 22 of India’s circles, and
deployed the high-speed data network in more than 150 major Indian cities. The total number of Indian cities
covered by broadband services exceeded 450.
Despite a slight reduction in the total subscriber base from 15.1m to 15.0m, the most promising and profitable
broadband base increased by 33%, to 1.8m. The company’s annual revenue increased by 15.5% to US$ 303.0m
despite the crisis, while the actual revenue in local currency went up by 31%.

Post Reporting Period

In March 2013, SSTL won a spectrum in the 800 MHz band in eight circles following its participation in the
second round licence auction. The circles won by SSTL include Delhi, Kolkata, Gujarat, Karnataka, Tamil Nadu,
Kerala, Uttar Pradesh (West) and West Bengal. The company's operational footprint will also include the
Rajasthan circle, which was not affected by the Supreme Court’s decision, the other circles were closed. The final
footprint covers 40% of the country's population, addresses over 60% of data potential and safeguards 75% of
SSTL's current revenues. Finally SSTL's footprint will include 3 carrier slots of 1.25MHz each in 9 circles,
servicing 10.45 million of its customers. The spectrum in 8 circles is technologically neutral and is valid for 20
years.

The total cost of licences received amounted to US$ 678m. Payments for the spectrum will be made in the
following order: 25% advance payment, 75% by deferred payments during 10 years at 9.75% per annum
(cumulative) starting from 2016. SSTL made no actual payments in 2013 because of the offset of licence costs
paid in 2008 in the amount of US$ 296m. Deferred payments since 2016 will amount up to US$ 73m per year
during 10 years.

Operating strategy
SSTL will develop the most economically attractive circles and customer segments with a focus on garnering the
data opportunity and development of assets that can be transferred to LTE.

To capture data growth opportunities SSTL will focus on Tier 2/3 cities, where there is a low variety of choice
handsets, and low cost voice as a dominant product used on smartphones. SSTL can successfully compete in this
segment by offering value low cost voice services along with data. A sharper focus on the circles with the greatest
data potential plays to MTS brand positioning.

The availability of 5 MHz spectrum provides an opportunity for SSTL to migrate to LTE and to provide users
with much better experience than in 3G. LTE roll out expenditures are estimated at US$ 200m with potential
synergies of US$ 100m. With the new strategy SSTL is expected to achieve OIBDA breakeven from the end of
2014 till mid of 2015.

Investment strategy
Sistema continues to consider India as a promising telecom market and will focus on implementation of SSTL’s
operating strategy in the most attractive circles with future plans for LTE roll-out. Sistema will also concentrate
on substantially reducing the operating losses and the debt of its Indian subsidiary, with total cash requirements in
2014-2015 to fall further to less than US$ 250m per year.

Key financial and operating results 2012

2012 results

Financial results
Indicator, $ m
Revenue
OIBDA
Net loss attributable to Sistema
Debt

Operating results
Indicator
Mobile voice subscribers (m)
Data subscribers (m)

2012
303
(547)
(463)
1, 047

2012
13.2
1.8

2011*
262
(730)
(636)
1, 574

2011
13.7
1.3

%
15.5%
-
-
(33.5%)

%
(4)
33

Key events of 2012
In February 2012, the Supreme Court of India issued a judgment revoking 122 telecom licences of 8 telecom
operators, including 21 of the 22 licences held by SSTL.

In May 2012, Sistema Shyam Teleservices filed a curative petition in the Supreme Court seeking re-examination
of its judgment.

In October 2012, Indian mobile operators were due to submit their applications to bid in the country's upcoming
2G spectrum auction. SSTL did not submit an application due to an unjustifiably steep recommended reserve
price of INR 18,200 crores (US$ 3.3bn).

In February 2013, the Supreme Court of India dismissed SSTL's curative petition. In the meantime SSTL
informed the Ministry of Telecommunications of India about the closure of services in the following ten circles:
Assam, Andhra Pradesh, Bihar, Himachal Pradesh, Haryana, Jammu & Kashmir, Madhya Pradesh, North East,
Orissa and Punjab.

In March 2013, SSTL won a spectrum in the 800 Mhz band in eight circles following its participation in the
second round licence auction. The circles won by SSTL include Delhi, Kolkata, Gujarat, Karnataka, Tamil Nadu,
Kerala, Uttar Pradesh (West) and West Bengal. The company's operational footprint will also include the
Rajasthan circle, which was not affected by the Supreme Court’s decision. SSTL decided not to bid for Mumbai,
Maharashtra and Uttar Pradesh (East), and will close its operations in those circles. As a result, SSTL's final
footprint will include three carrier slots of 1.25 Mhz each in nine circles.

5. DESCRIPTION OF CORE RISK FACTORS.
The risks that the corporation may face are diverse, and many of these arise from the processes and factors on
which Sistema has limited, or no influence. However, the Corporation can mitigate the negative effect, should a
risk occur. Hence, effective assessment and management of risks remains an important component of our
strategy.
We have introduced an integrated enterprise risk management (ERM) system, designed to enable us to achieve
our strategic goals while keeping the level of risk within limits that are acceptable to our shareholders and senior
management. Our ERM system was established in compliance with international standards, recommendations and
best practices in risk management.

5.1. External risks
The risks related to changes in the political and economic situation in Russia are significant to Sistema, since the
bulk of our business is carried out in the Russian Federation (RF).Moreover, many of our subsidiaries maintain
operations in other emerging markets, including Ukraine, Uzbekistan, Armenia, Belarus and India, which also
pose many external risks.

Economic risks
• Sistema’s business is substantially affected by the state of the global economy and financial markets, and
depends significantly on fluctuation of prices on oil, gas and other commodities exported by the Russian
Federation.

• Weak macroeconomic conditions in many of the countries where we operate could make it necessary to

reassess the value of goodwill on some of our assets.

• An increase in inflation could increase some of our costs, exerting downward pressure on our profit margins

and perhaps also having a negative impact on domestic demand for the products of our subsidiaries.

• Depreciation of the rouble against the US dollar and Euro could increase our costs and reduce our revenues, or

make it more difficult for us to comply with financial ratios and repay our debts.

• Exchange controls and repatriation restrictions could adversely affect our ability to transact business, and may

lower the value of our investments in the Russian Federation.

• The poor condition or further deterioration of the Russian Federation’s physical infrastructure may harm the
national economy, disrupt the transportation of goods and supplies, add costs to doing business there, and
interrupt business operations - all of which may have a material adverse effect on our business, results of
operations, financial condition or prospects.

Political and social risks
• Future political and governmental instability, and any significant struggle over the direction of future political
developments, could lead to increased capital flight and an overall deterioration in the Russian Federation’s
investment climate.

• Unlawful, selective or arbitrary government action could create a difficult business climate in the Russian

Federation.

• Terrorist attacks or the involvement of the Russian Federation in any future economic and military conflicts

could lead to instability and hinder our planning ability.

• Organised crime, fraud, corruption and social instability could create an uncertain operating environment for

us, and make it more costly to conduct business.

• Conflicts between Russian federal and regional authorities and legislation could create an uncertain operating

environment for us.

Legal risks and uncertainties
• Risks associated with the Russian legal system include, to varying degrees:

inconsistencies among, and ambiguities and anomalies regarding, (i) federal laws, (ii) decrees, orders and
regulations issued by the President, the Government and federal ministers, (iii) regional and local laws,
rules and regulations

the relative unavailability of Russian legislation and court and administrative decisions in an organised
manner that supports understanding of such legislation and court decisions
substantial gaps in the legal framework, due to the delay or absence of implementing regulations for
certain legislation
a lack of judicial independence from political, social and commercial forces, and the difficulty of
enforcing court decisions and foreign arbitral awards
alleged corruption within the judiciary and governmental authorities
ambiguous and inconsistent court practices relating to interlocutory remedies that may disrupt our
ordinary business activities.

• The lack of developed corporate and securities laws and regulations in the Russian Federation may limit our

ability to attract future investment.

• It is not yet clear how the Strategic Foreign Investment Law and the new customs code among the Russian

Federation, Belarus and Kazakhstan will affect us and our foreign shareholders.

• The accession of the Russian Federation into the World Trade Organisation may lead to uncertainty.

Legislative and other changes in our operating environment
• Shareholder liability under Russian corporate law could result in us becoming liable for the obligations of our

subsidiaries.

• If the minority shareholders of our subsidiaries were to challenge successfully past or future interested-party
transactions or other transactions, or were not to approve interested-party transactions or other transactions in
the future, we could be limited in our operational flexibility.

• If the FAS was to conclude that Sistema, or any of its significant subsidiaries, had acquired or created a new
company in contravention of antimonopoly legislation, or otherwise violated competition rules, it could
impose administrative sanctions.

• Our Russian legal entities may be forced into liquidation, their ownership structure may be challenged or their
subsidiaries’ indebtedness may be accelerated on the basis of formal non-compliance with certain
requirements of Russian law.

The Russian taxation system
• Russian tax laws, regulations and practice are complex, uncertain, often not well developed, and subject to

frequent changes and various interpretations, which could have an adverse effect on us.

• Russian transfer pricing legislation may require pricing adjustments and impose additional tax liabilities

relating to controlled transactions.

Stock markets
• There is a risk that the shares of Russian companies will grow more slowly than those of their counterparts in
other emerging markets. The key reason for this may be a substantial outflow of capital from the Russian
market, caused by political and economic factors inside the country and by the situation on world stock
exchanges.

Risks relating to Sistema’s operations
There can be no assurance that we will be able to achieve the targets set out in our strategy.
In early 2011, our management team took the decision to transition Sistema into an investment company, and we
are continuing to implement this strategy. The key elements of the strategy are to develop a balanced and a
diversified asset portfolio, to focus on sectors and geographies where Sistema has a competitive advantage, to
pursue an active portfolio management approach and to attract leading international and local companies as
partners in portfolio companies. There can be no assurance, however, that we will be able to achieve the targets
set out in the strategy, or that current portfolio companies will be managed effectively, while at the same time
new investment opportunities are identified.
There are risks of untimely or incomplete transformation of the organisational structure and the respective human
resources. Furthermore, even if our initiatives of transformation into an investment holding can be implemented,

we cannot assure you that these initiatives will allow Sistema to increase revenues from existing services or
products of its subsidiaries.
The success of our new strategy depends on many factors, including, but not limited to, receipt of necessary
government approvals, proper identification of customer needs, successful development of technology, the ability
to manage costs and expenses, timely completion and introduction of new services and products by our
subsidiaries, differentiation from offerings of our subsidiaries’ competitors and market acceptance.

We may experience problems in identifying profitable opportunities for acquisitions and disposals, and in
integrating acquisitions and implementing restructurings in our business.
Sistema has, in the past, expanded operations through acquisitions or changing its asset portfolio through
acquisitions and disposals, and we may do this in the future. The process of identifying and implementing
acquisitions entails certain risks, including: failing to identify and approach suitable new acquisition targets;
failing to conduct adequate due diligence on a target’s operations or financial condition; overvaluing the target
and thus overpaying for it; incurring significantly higher than anticipated financing-related risks and operating
expenses; discovering larger than anticipated or previously undisclosed liabilities.
Acquiring additional businesses could also place increased pressures on our cash flows, especially if we pay for
an acquisition in cash. Furthermore, if an acquisition is not completed, or is not completed in a timely manner,
this may adversely affect our strategic growth objectives or have a material adverse effect on our current business,
results of operations, financial condition or prospects.
In addition, we may experience problems with integrating acquisitions into our current business and managing
them optimally, or in implementing necessary restructurings. These risks include: failing to assimilate and
integrate effectively the operations and personnel of an acquired company into our business; failing to install and
integrate all necessary systems and controls, including logistics and distribution facilities and arrangements;
conflicts between majority and minority shareholders; hostility or lack of cooperation from the acquisition’s
management; the potential loss of the acquisition’s customers.
We may also dispose of some of our operations. Such disposals entail certain risks, including: potential failure in
execution; potential undervaluation of the disposed asset; contingent liabilities relating to the sold assets; delays
in disposal; potential loss of synergies with the remaining assets. Furthermore, completion of the pending or
contemplated transactions - including restructurings, business combinations and financing - is, in each case,
subject to a number of conditions, including corporate and governmental approvals. No assurance can be given
that these pending or contemplated transactions will be completed on the terms and conditions described, or at all.

Our ability to maintain our competitive position and to implement our business strategy depends to a large
degree on the services of our senior management team and other key personnel.
Our senior management team and its organisation are essential to the implementation of our business strategy.
Furthermore, the continued success of our investment portfolios and their ability to execute our overall strategy
effectively - including our growth and expansion plans - will depend, in large part, on the organisational efforts of
our separate management teams supervising each asset within our portfolios.

Our ability to meet our financial obligations depends, to a large extent, on receiving sufficient funds from our
subsidiaries.
Sistema depends in part on dividends from subsidiaries to generate the funds necessary to meet our financial
obligations, including the payment of principal and interest on our present debt and on any of our borrowings
incurred in the future. Our subsidiaries may from time to time be subject to regulatory, fiscal or other restrictions
on their ability to make such payments. For example, certain loans to our subsidiaries are subject to restrictive
covenants, including, but not limited to, compliance with certain financial ratios, limitations on dispositions of
assets, and limitations on transactions within our portfolio companies. There can be no assurance that such
restrictions will not have a material adverse effect on our ability to service our borrowings or to meet any other
costs we may incur.

We depend to a material extent on the success of MTS and Bashneft.
Sistema’s financial results depend to a material extent on the financial results of MTS and Bashneft. The inability
of these businesses to generate necessary earnings may adversely affect our ability to service our debt obligations,
and to sustain our growth and expansion through restructurings and acquisitions. As a consequence, risks and
events that have a material adverse effect on MTS’ and Bashneft’s business, results of operations, financial
condition or prospects could, in turn, have a material adverse effect on Sistema’s business, results of operations,
financial condition or prospects.

If we are unable to obtain adequate capital or financing, we may have to limit our operations substantially.
Future financing and cash flow from Sistema’s operations may not be sufficient to meet planned needs in the
event of various unanticipated potential developments, including the following:
• lack of external financing sources;
• changes in the terms of existing financing arrangements
• pursuit of new business opportunities or investing in existing businesses that require significant investment
• slower than anticipated revenue growth
• regulatory developments
• changes in existing interconnect arrangements
• deterioration in the economies of the countries where Sistema operates

Restrictive covenants may limit our ability to incur debt, finance capital expenditures and to engage in various
activities.
Sistema’s bank loans, as well as bank loans and notes of certain subsidiaries contain restrictive covenants.
These covenants impose restrictions with respect to, inter alia, incurrence of indebtedness, creation of liens on the
properties, disposal of assets and transactions with affiliates. Such restrictive covenants may limit our operations,
including the financing of capital expenditures, or impede our ability to pay off our indebtedness on a timely
basis, or at all. Should the operations of our subsidiaries be limited, the earnings of our subsidiaries may fall,
which, in turn, may limit our ability to use such earnings to service indebtedness or finance operations. Further,
mergers and reorganisations of our subsidiaries could, under certain circumstances, trigger the restrictive
covenants under their credit agreements, which may lead to acceleration of debt repayment under such credit
facilities. Any invocation of these cross-acceleration or cross-default clauses could cause some or all of the other
debt to accelerate, creating liquidity pressures and affecting our business and operations.
The licences and permits required for our business may be invalidated, suspended or may not be issued or
renewed, or may contain onerous terms and conditions that restrict our ability to conduct our operations.
Our operations and properties are subject to regulation by various government entities and agencies in connection
with obtaining and renewing various licences, approvals, authorisations and permits, as well as with ongoing
compliance with existing laws, regulations and standards. Regulatory authorities exercise considerable discretion
in matters of enforcement and interpretation of applicable laws, regulations and standards, the issuance and
renewal of licences, approvals, authorisations and permits and in monitoring licenсes’ compliance with the terms
thereof. No assurances can be made that our existing licences and permits, including those held by our
subsidiaries, will be renewed, that any new licences and permits for which we apply will be granted or that we
will be able to comply with the terms of all applicable licences. There can also be no assurance that any of our
current or future licences or permits will not be suspended or revoked on any ground. Any of these circumstances
could have a material adverse effect on our business.
In the event that deficiencies or ambiguities in privatisation legislation are successfully exploited to challenge our
ownership in our privatised subsidiaries and we are unable to defeat these challenges, we risk losing our
ownership interests in our subsidiaries or their assets.
Our business includes a number of privatised companies, such as MGTS, Bashneft, Intourist, SG-Trans and
certain of our energy and technology subsidiaries, and our business strategy will likely involve future acquisitions
of companies that have undergone privatisation. To the extent that Russian privatisation legislation is vague,
inconsistent or in conflict with other legislation, including conflicts between federal and local privatisation
legislation, many privatisations are vulnerable to challenge, including selective challenges.
In the event that any of our privatised companies are subject to challenge as having been improperly privatised
and we are unable to defeat this claim, we risk losing our ownership interest in the company or its assets, which
could materially adversely affect our business, financial condition, results of operations and prospects.
We are subject to anti-corruption laws in the jurisdictions where we operate, including the anti-corruption laws
of the Russian Federation and the US Foreign Corrupt Practices Act (the “FCPA”), and we may be subject to the
UK Bribery Act of 2010 (the “UK Bribery Act”), and our failure to comply with these could result in penalties
and reputational harm.
Any investigation of potential violations of the FCPA, the UK Bribery Act, or other anti-corruption laws by US,
UK or foreign authorities, could also have an adverse impact on our brand image, business, financial condition
and results of operations.
We encounter competition from other companies in all areas of operations.

The operations of our telecommunications and technology, oil and energy, banking, retail, media, tourism, private
healthcare and pharmaceuticals businesses, and others can be affected by a variety of economic and other factors.
Each business is subject to significant competition from a large number of companies in the Russian Federation
and other countries, and competes on the basis of various factors, including, but not limited to, price,
performance and service. The inability of our businesses to compete effectively could have a material adverse
effect on our business, results of operations, financial condition or prospects.
We depend on our ability to maintain a favourable brand image and reputation.
Developing and maintaining awareness of the brands of our businesses is critical to informing and educating the
public about their current and future products and services. We believe the importance of brand recognition is
increasing as markets become more competitive. The successful promotion of the brands of our subsidiaries will
depend largely on the effectiveness of their marketing efforts and their ability to provide reliable, useful products
and services at competitive prices. Brand promotion activities may not yield increased operating revenues, and
even if they do, such operating revenues may not offset the expenses our subsidiaries incur in building their
brands.
Risks relating to Sistema’s portfolio companies
Risks relating to our Technology and Telecommunication Business include, to varying degrees, the following:

• Increased competition among operators for a market share in the conditions of maturing sector;
• Telecommunication companies’ dependency on its ability to implement the necessary infrastructure to

manage its growth and partnerships, develop its network and avoid service disruptions;

• Inability of mobile operators to effectively implement geographic expansion strategy could hamper its

continued growth and profitability;

• Operators’ dependency on the proper functioning of its network systems and its ability to avoid disruptions;
• Inability to respond to rapid technological change;
• Inability to develop additional sources of revenue;
• Failure to further develop its distribution network;
• Inability to interconnect cost-effectively with other telecommunications operators to provide services at

competitive prices;

• Inability of Russian telecoms to realise the expected benefits from its investments in, and deployment of, 3G

and 4G wireless services;

• Dependence on extensive regulation of roaming tariffs, which may negatively impact financial results of the

Russian operators;

• Failure to obtain renewals of its frequency allocations and its inability to control its frequencies that may be

are reassigned to other users;

• Compliance with the new Russian regulations on International Mobile Equipment Identity (“IMEI”)

numbers;

• Failure to fulfill the terms of MTS’ licences, renew and receive renewed or new licences with similar terms

to MTS’ existing licences;

• Failure to modernise its fixed line infrastructure;
• Changes to the rules and regulations in the Russian Federation (implementation of per-second billing,

cancellation of intra-network roaming, and the implementation of principle of number portability);

• High competition in the Indian mobile communications market;
• Unpredictability in India's legislation and court rulings relating to communications and foreign investment

protection;

• Incompatibility of LTE technology development with the frequency spectrum used in India;
• Infeasibility of achieving the planned figures of broadband services volume in India.

Risks related to our Oil and Energy Business include, to varying degrees, the following:

• Uncertainties related to the increased influence of the Russian government in the Russian oil and gas sector,
including the ability of the Russian government to mandate deliveries of crude oil and refined products,
including at less than market prices;

• Increased oil excise tax;

• An increase in export duties on oil products, including the introduction of the proposed “60-66-90” export

duty regime;

• Bashneft’s inability to realise its production targets and profits as a results of its development, exploration

and production projects;

• Bashneft’s inability to compete in the oil products retail sector, find suitable locations to open new gas

stations or encounter moderate costs in remodelling existing gas stations;

• Inability of Bashneft and Bashkirian Power Grid Company to control declines in crude oil, refined products,

natural gas, power or petrochemical products prices;

• Unexpectedly long scheduled repair and maintenance shutdowns or unscheduled shutdowns at Bashneft’s

production facilities;

• Governmental control of prices for refined products in the Russian market;
• Bashneft’s failure to estimate and achieve its goals relating to its actual reserves, production targets, revenues

and expenditures;

• Dependency of Bashneft and Bashkirian Power Grid Company upon the services provided by, and the assets

and infrastructure of, third parties;

• Risks relating to the ongoing reform of the Russian wholesale electricity market, price liberalisation and

tariff regulation in the heat and electricity;

• Inability of Bashkirian Power Grid Company transmission assets to address daily, seasonal or yearly

fluctuations in demand for electricity.

Risks related to our Consumer, High tech, Healthcare and Banking Business include, to varying degrees, the
following:

• Decline in demand for consumer goods and services as well as slow development of consumer lending;
• Insufficient purchasing power of the Russian population;
• Underdeveloped transportation and information infrastructure in the Russian regions and, consequently,

various barriers to development in the Russian regions;

• Further concentration and consolidation on the consumer market and in the banking sector;
• Tighter regulations in the banking, consumer, high tech and healthcare sectors;
• Stronger competition, including from the world’s leading companies;
• Possible loss, termination or weakening of connections with suppliers and sellers;
• Increased prices for raw materials, spare parts and services;
• Fluctuations in demand due to expected changes of product generations or technological cycles;
• Decreased volumes of government orders due to reduction of budget funds allocated for high-tech products;
• Operational and financial instability of small immature companies, including frequent corrections of strategy

as well as difficult working environments due to high competition.

Risks relating to our Railway Transport Business include, to varying degrees, the following:

• Decrease of liquefied petroleum gas (LPG) transport volumes as a result of severe competition from captive

operators of vertically integrated companies, the main users of LPG transportation services;

• Market risk associated with selling prices for liquefied petroleum gas established by LPG producers;

• There is no tariff regulation applicable to private transport operators, only the infrastructure and locomotive
components of railway service prices being subject to governmental control. At the same time, there is a risk
of negative consequences of future legal changes, including various technical regulation systems in railway
transport;

• RZhD's railway infrastructure in a number of regions is now stretched to the limit. Decreasing traffic

capacity may adversely affect the efficiency of car fleet utilisation.

6. CORPORATE GOVERNANCE.

Maintaining the system of corporate governance and transparency at the level of the world's best practices is one
of the elements of the strategy of Sistema as an investment company.

The corporate governance policy is based on the following fundamental principles:

• transparency of all processes for investors and partners
• a proactive and professional Board of Directors
• a consistent and collective approach to decision-making.

Sistema is guided by these principles in all of its activities, including strategic and financial management,
corporate governance throughout the group, HR and social policy, reporting, control and audit, risk management.

The principles and procedures of Sistema’s corporate governance are set out in its Charter and in a number of
publicly available bylaws that, all together, determine the structure and the scope of the corporation's governance
and control bodies. The Corporate Conduct Code and the Ethics Code set forth additional commitments for
Sistema in the area of transparency, social responsibility, and ethical business principles.

Sistema makes every effort to bring the corporate governance practices in line with the guidelines set out in the
Corporate Conduct Code, recommended in the Executive Order of the Federal Commission for the Securities
Market of Russia No. 421/r dated 4 April 2002, and in the UK Corporate Governance Code. Should the corporate
governance practices of Sistema diverge from the standards recommended above, the company provides an
explanation as to how else it makes sure it observes the balance of interests fixed in the applicable corporate
governance standards.

Sistema's main governing 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 develop
recommendations for forming Sistema's decisions in the respective areas.

The existing organisational structure of the company was adopted in May 2012, with adjustments and
amendments made in September 2012, and reflects Sistema's transition to the investment company model. At the
end of 2012 the organisational structure of Sistema comprised four function s, eight investment portfolios and five
departments.

6.1. General Meeting of shareholders
Principles of operation

The General Meeting of Shareholders is the supreme governing body of Sistema. Its operation is governed by the
laws of the Russian Federation on joint-stock companies, as well as by the provisions of the corporation’s Charter
and bylaws. The General Meeting procedure aims to ensure that the rights of the shareholders are respected, and
all applicable legal requirements, as well as best international practices in corporate governance, are observed.

Information and materials for the meeting are made available to the shareholders in Russian and English, and are
published on Sistema's website (www.sistema.ru; www.sistema.com). Together with a notice of a forthcoming
meeting, shareholders get voting ballots. The venues of Sistema's General Meetings of Shareholders are always
located in the vicinity of the company headquarters.

Observance of shareholders' rights to participate in management

Sistema aims to ensure the maximum protection of shareholders' rights to participate in running the company. The
fundamental right of a shareholder in this respect is the right to participate in the work of the General Meeting of
shareholders and the right to vote on items on the agenda.

For this right to be secured, notice of the conduct of the General Meetings of Sistema as well as voting ballots is
circulated to all the shareholders at least 30 days before the meeting, all materials covering the agenda items are
published on the company's website in Russian and English (www.sistema.ru; www.sistema.com). The ballot can
be filled out by the shareholder in advance and mailed to Sistema to the address specified in the ballot. In this
case the vote of the shareholder will be taken into account when counting the voting results.

Depositary receipt holders may vote on the items of Shareholder Meeting agendas by proxy through Deutsche
Bank AG, which is used as the depositary bank for the GDR programme:

Global Equity Services,
Trust and Securities Services,
Email: adr@db.com

The votes are collected by the depositary, Deutsche Bank AG, through clearing systems and are included in the
general voting ballot of the depositary, with all votes cast for the proposed draft resolution, against it, and
abstentions specified.

Each shareholder can also attend General Meetings of Shareholders in person (or via a representative) and vote on
the agenda items directly at the Meeting.

One of the important rights of a shareholder in relation to participating in running the company is the right to
access documents that the company is obliged to retain 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
asking for access to the documents the shareholder wishes to see. After the time for providing the documents is
agreed upon, the requested documents will be provided.

Holders of material blocks of shares are entitled to make proposals on the agenda of the General Meeting of
Shareholders and nominate candidates to the corporation's governance and control bodies. Holders of 10% and
more % of the company's voting shares also have the right to request an Extraordinary General Meeting of
Shareholders to be conducted. Proposals on the agenda of the Annual General Meeting of Shareholders of
Sistema are accepted in writing, within 100 days after the end of the financial year. In the event an Extraordinary
General Meeting of Shareholders is conducted with its agenda containing an item on the election of the Board of
Directors, holders of sufficient blocks of shares have the right to nominate candidates to the Board of Directors.
60

Proposals to this effect must be received by the company no later than 30 days before the date of such a meeting.
The Board of Directors studies the received shareholders' proposals and includes them in the agenda, provided
they meet the requirements of Russian law with regard to general shareholder meetings.

General Meetings held in 2012 and their results

In 2012, three General Meetings of Shareholders were held at Sistema. An Extraordinary General Meeting of
Sistema was held on 30 June 2012. The Annual General Meeting of Shareholders approved the company's annual
report and accounts, including the Income Statement for 2011, as well as the amount, procedure, forms and
timelines for paying dividends on the company's shares, elected members of the Board of Directors and the Audit
Commission, and approved the auditors.

As resolved by the Annual General Meeting of Shareholders and recommended by Sistema's Board of Directors,
RUB 2.702bn was allocated to pay out for dividends, or RUB 0.28 per ordinary share. The dividend amount was
based on net income under US GAAP for 2011 and net income of the corporate centre from the MTS transaction
on selling CJSC Sistema-Inventure in December 2011, which is in line with the dividend policy. The dividend
amount gained was 8% higher than in 2010.

The following auditors of Sistema were elected for 2012:

 CJSC BDO - to conduct the RAS audit;
 CJSC Deloitte and Touche CIS - to conduct the US GAAP audit.

The auditors were appointed following an open tender organised by the audit committee of the Board of Directors
of Sistema.

Moreover, two Extraordinary General Meetings of Shareholders were held in the form of letter ballots:

14 June 2012

01 November 2012

Agenda item considered: Approval of the Bashkirenergo assets swap transaction
between the Sistema Group and INTER RAO UES.
The transaction was approved by Sistema's General Meeting of Shareholders.
Minutes were drawn up on 18 June 2012.
Agenda item considered: Introduction of amendments to the Charter of Sistema
JSFC.
The General Meeting of Shareholders approved the amendments to the Charter to
issue 386,000,000 new authorised shares.
Minutes were drawn up on 02 November 2012.

6.2. Board of Directors.
The Board of Directors of Sistema is responsible for the strategic governance of the company: it determines the strategy,
works out strategic and financial development plans, sets investment principles, appraises performance of the management
and assesses risks, approves principles for corporate governance procedures, approves transactions and oversees the work of
the corporation in general. The terms of reference for the Board of Directors are set out in the Charter of Sistema.

Composition of the Board of Directors

The Board of Directors of Sistema effective at 31 December 2012 was elected at the Annual General Meeting of the
Company's Shareholders on 30 June 2012, and it comprises 13 persons:

Sistema JSFC Board of Directors as elected on 30 June 2012*

1. Vladimir Evtushenkov
2. Alexander Goncharuk
3. Brian Dickie
4. Dmitry Zubov

Chairman
Deputy Chairman

* See Annex for brief biographical notes and information on the equity stakes held by the Board members of Sistema JSFC

5. Vyacheslav Kopiev
6. Robert Kocharyan
7. Jeannot Krecké
8. Roger Munnings
9. Evgeny Novitsky
10. Marc Holtzman
11. Serge Tchuruk
12. Mikhail Shamolin
13. David Iakobachvili

Chart 4:

Composition of the Sistema JSFC Board of Directors

61%
B. Dickie
R. Kocharyan
J. Krecke
R. Munnings
M. Holtzman
S. Tchuruk
D. Iakobachvili

8%
M. Shamolin

31%
V. Evtushenkov
A. Goncharuk
D. Zubov
V. Kopoiev

Executive Director

Non-Executive Director

Independent Director

Changes to the composition of the Board of Directors
Former members of the Board of Directors, R. Sommer and L. Melamed, were not re-elected to the Board on 30 June 2012.
At the same time, new independent directors were elected to the Board: B. Dickie, J. Krecke, and M. Holtzman, who have a
vast practical experience in organising and managing large companies.

Meetings of the Board of Directors
Meetings of the Sistema Board are held regularly, according to an annual calendar, from 1 January to 31 December. The
agendas of the Board meetings are set following the logics of the strategic planning and reporting cycle of Sistema.
Additional sessions are organised whenever an urgent matter needs to be considered. Forming the work plan of the Board of
Directors and including additional items in the plan is within the remit of the Board Chairman.

In 2012, the Board of Directors had ten sessions: eight scheduled meetings and two extraordinary sessions in the form of a
letter ballot on urgent matters. In 2012, the Board of Directors considered 89 items in total.

Number of meetings in person
Number of letter ballots
Number of items on the BoD work plan
Number of items considered by the BoD

2012
8
2
40
89

2011
8
2
44
108

In 2012, the Board of Directors considered the following key items:

1) Corporate strategy of Sistema and approval of the high-level indicators for the strategic planning cycle.

2) Investment projects management.
3) Concept of the new organisational structure of Sistema for development of the corporate structure, approval of the new
organisational structure.
4) Development strategies for the core portfolio assets of Sistema:

telecom assets;


 media assets;

oil assets;

agricultural assets;

hotel assets;

bank assets;

healthcare assets;

pharmaceutical assets;

retail assets;

geonavigation assets;

pan-Indian project of Sistema Shyam TeleServices Ltd.;

RTI development strategy;
 MOSDACHTREST development strategy.

5) Sistema financial results.
6) Approval of the consolidated budget for Sistema and key performance indicators (KPIs) for the management.
7) Long-term financial and economic model of the company's development.
8) Debt and borrowings management.
9) Placement of securities (exchange-traded bonds).
10) Report on risk and opportunity management.
11) The results of implementing adequate procedures to meet applicable anti-corruption laws.
12) Implementing the priority action plan by the Internal Control of Sistema. Results of comprehensive inspections of the
corporate centre and subsidiaries and affiliates
13) Delivery of the corporate strategy in HR management, improvement of existing personnel incentive systems in Sistema
and in the companies of the Sistema Group; incentive systems for the managers and employees of the investment units of the
group; approval of documents regulating the implementation of the incentive system after 2012.
14) Participation in the national projects and federal target programmes of the government.
15) Sistema's strategy in public relations and investor relations.
16) Corporate social responsibility of Sistema.
17) Approval of a new version of the Code of Corporate Ethics of Sistema.
18) Convening the Annual General Meeting of Shareholders and Extraordinary General Meetings of Shareholders.
19) Report on the quality of corporate governance in Sistema.
20) Approval of transactions.

Chart 5:

Items reviewed by the Board of Directors in 2012

Business strategies, investments, new activities

12%

17%

14%

22%

16%

Functional strategies

Appointments and HR policies

Shareholdings in S/A, groups, alliances, branches

10%

Approval of transactions

Approval of internal regulations

Financial reporting, planning and audit

Corporate governance

Graph 6:

In addition to approving transactions, most of the items reviewed by the Board in 2012 were related to strategy,
corporate governance, shareholdings in subsidiaries and approval of functional strategies aimed at supporting and
improving the efficiency of efforts taken by the group’s business units.

The high proportion of items related to equity holdings in subsidiaries, groups and joint ventures reviewed by the
Board shows that the Board members closely followed the group’s investment activities, which represents one of
the key characteristics of the new governance model. The reduction in the total number of transactions reviewed
by the Board reflects a drop in the number of intra-group transactions.

Preparation for the meetings and quorum of the Board of Directors
Materials on the agenda are provided to the Board members of Sistema ten days before meetings, enabling them
to form their voting position. Most of the main agenda items are also discussed by the committees of the Sistema
Board of Directors before the Board meeting. The work plan of the Board of Directors determines which
committee is to preview each issue.

Members of the Sistema Board of Directors meet the key speakers and the management at a business dinner the
evening before the meeting, so they can discuss the items on the agenda of the Board and inquire about the voting
positions of the parties in an informal environment.

Meetings of the Board of Directors normally take place with high attendance of the Board members. No meetings
of the Board of Directors have ever been postponed due to the absence of quorum.

Participation of the Sistema Board members in meetings of the Board of Directors and its committees in 2012

Board of Directors

Strategy

Audit and
Finance

Nomination,
Remuneration and
Corporate
Governance

Participation in meetings

Ethics and
Control

IR and Dividend
Policy

3/3

10/11

6/7
2/3
7/7

16/16
14/16

V. Evtushenkov
A. Goncharuk
B. Dickie
D. Zubov
V. Kopiev
R. Kocharyan
J. Krecké
R. Munnings
E. Novitsky
M. Holtzman
S. Tchuruk
M. Shamolin
D. Iakobachvili
⃰The first number denotes the number of meetings in which the Board member participated, the second number stands for the total number of meetings the
member could participate in. The composition of the Board of Directors is valid as of 31 December 2012.

10/10*
10/10
5/6
10/10
10/10
10/10
6/6
10/10
10/10
6/6
9/10
10/10
10/10

11/11
9/11
4/6

5/5
3/3
3/3
8/8

1/3
7/8
2/3
8/8

3/16
16/16

6/7
7/7

13/16

11/11

7/7

1/7

7/7

6/7

5/5

Committees of the Board of Directors9
In 2012, after the new Board members were elected, the Board took the decision to update the profiles of the
Board committees. To achieve this, the Board specified the procedural powers of the committees and updated the
remit of the existing committees of the Board of Directors. These measures were undertaken to ensure high
involvement of the Board members in the material aspects of the corporation's activities, and to help with the
successful transition to the new investment company model.

Sistema has five committees of the Board of Directors:

Strategy committee
Audit and finance committee
Nomination, remuneration and corporate governance committee
Ethics and control committee

Investor relations and dividend policy committee.

Starting with 2011, as a rule, only members of the Board of Directors are elected to the committees. The main
role of the committees is to help the Board in preparing and adopting concepts and solutions in the respective
functional areas, as well as in ensuring an in-depth scrutiny of the issues submitted for consideration to the Board
of Directors. The Board committees have considerable procedural powers, have a right to bring in external
experts and use other resources of the corporation.

Strategy committee

The Strategy committee consists of 7 members, of which six are members of the Sistema Board: V. Evtushenkov
(Chairman), M. Shamolin, A. Goncharuk, B. Dickie, E. Novitsky, S. Tchuruk, and S. Boev.

The strategy committee analyses the strategic management issues of Sistema and provides for the functional cycle
of strategic management, which includes the following aspects:

 methodology of strategic planning;
 preliminary approval of strategy and strategic goals;


review of M&A transactions and major investment projects.

This committee also makes decisions about preliminary development of projects, assesses their risks and sets
priorities. The committee recommends projects for a review by the Board of Directors of Sistema and evaluates
and adjusts the project work in progress.

In 2012, 16 meetings of the committee were held where 21 items were considered, including:

 15 items relating to the development strategy of the Sistema Group companies
 5 M&A projects
 1 item relating to the development strategy of the corporation in general.

Audit and finance committee

The audit and finance committee includes five Board members: R. Munnings (Chairman), D. Zubov, E.
Novitsky, M. Holtzman, and D. Iakobachvili.

The audit and finance committee supervises preparation of financial reports and the internal audit of Sistema and
its subsidiaries. Moreover, the committee oversees the work of external auditors, makes recommendations for
their appointment and the amount of their remuneration, and also performs appraisal for the risk management
system and monitors its operation. The committee monitors compliance with the Russian legislation and with
corporate finance and reporting requirements. Apart from these tasks, the committee is to assist in the budgeting
process: preliminary review of the materials at the budget development stage, preliminary review of the financial
model of Sistema and also approval of the valuation of related-party and major transactions submitted for
approval to the Board of Directors.

9 The information on Committees’ work is provided as of December 31, 2012.

In 2012, this committee held 11 meetings at which 66 items were reviewed, including the following:

 22 items relating to the preparation and audit of financial reports
 6 items relating to internal audit
 21 transactions
 7 items relating to financial planning and risk management
 10 items relating related to organisational matters.

Nomination, remuneration and corporate governance committee

The nomination, remuneration and corporate governance committee consists of six Board members: R.
Kocharyan (Chairman), A. Goncharuk, B. Dickie, D. Zubov, R. Munnings, and M. Shamolin.

The nomination, remuneration and corporate governance committee previews the candidates to the top
management positions of Sistema and candidates to the Boards of the Directors of the key subsidiaries of the
corporation, participates in the development of and previews the draft functional strategies for HR and incentive
systems for the company's personnel, and appraises the performance of Sistema's top management for the Board
of Directors. The committee also facilitates development of corporate governance practices in Sistema and its
subsidiaries and affiliates.

In 2012, the nomination, remuneration and corporate governance committee held seven meetings at which 19
items were reviewed, including the following:

 7 items on incentive system improvement
 2 items on approval of the nominees to the key top management positions at Sistema
 2 items on HR policy and changes to the organisational structure of Sistema
 4 items related to reviewing the key performance indicators (KPIs)
 4 items on development of corporate governance.

Ethics and control committee

The ethics and control committee includes five Board members: A. Goncharuk (Chairman); V. Kopiev, R.
Munnings; R. Kocharyan, M. Shamolin.

The ethics and control committee forms an efficient system of economic security, internal control and prevention
of fraud and other misconduct which involves violations of the current legislation. Moreover, the committee
monitors compliance with the requirements of the Code of Ethics of Sistema.

In 2012, the ethics and control committee held seven meetings at which 23 items were reviewed, including the
following:

 9 items on functional strategies in internal control and security
 5 items on compliance with legislation and corporate ethics standards
 3 items related to the results of internal control, and assessment of the management's efficiency in

eliminating the identified weaknesses

 3 items on the efficiency of corruption prevention system
 3 items related to organisational matters.

Investor relations and dividend policy committee

The investor relations and dividend policy committee includes six Board members: D. Iakobachvili (Chairman),
M. Shamolin, J. Krecké, R. Munnings, M. Holtzman, S. Tchuruk.

The investor relations and dividend policy committee aims to increase the capitalisation of the company and
protect the rights and interests of its shareholders. In 2012, in addition to day-to-day matters, the committee
focused on conducting an in-depth analysis and monitoring of the investment appeal of the company's stock, and
assessing investors’ perception of the company.

In 2012, the committee held eight meetings at which 12 items were considered, including:

 10 items related to investor relations and dividend policy
 1 item on public relations
 1 item related to organisational matters.

6.3. The President
The President of Sistema is a permanent chief executive officer whose main function is executive management
and settlement of relevant matters outside the remit of the General Meeting of Shareholders, Board of Directors
and Management Board, for the purposes of ensuring the profitability of the company as well as observing its
shareholders' rights and legitimate interests. The President acts within the scope of his powers and reports to the
Board of Directors and the General Meeting of the corporation's shareholders.

The President of Sistema JSFC is Mikhail Shamolin appointed by the Board of Directors on 10 March 2011.

Mikhail Shamolin
President of Sistema JSFC,
Chairman of Sistema JSFC
Management Board.

Was born in 1970 in Moscow.

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 1996-1997 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 2004-2005 - Managing Director for the Ferroalloys Division at Interpipe
Corp (Ukraine).

From 2005 to 2011 - Vice President for Sales and Customer Service; Vice
President, Head of the MTS Russia business unit; President of MTS.

On 10 March 2011 Mikhail Shamolin was appointed President of Sistema
JSFC.

6.4. Management Board

Sistema's Management Board determines the methods of implementing the company’s development strategy,
prepares development plans, establishes and oversees compliance with investment procedures, appraises the
performance of personnel, and reviews items that are subsequently submitted to the Board of Directors.

In 2012 the Management Board held 31 meetings and considered 81 agenda items dealing with all the areas of the
Corporation’s business activity. In 2012 the Management Board reviewed agenda items in the following key
areas:
1) preliminary consideration of items put forward to the Board of Directors; the strategies of the Corporate Centre
and investment portfolios;
2) financial activities, forecasts and performance on the quarterly, half-year and annual budgets of Sistema JSFC;
risk management and a risk map; internal control; financial and economic model of the Corporation's
development;

3) procedures for investment projects management;
4) analysis of the organisational maturity of subsidiaries and affiliates;
5) HR and social policies; training and development of the employees of Sistema JSFC; charity work;
6) consideration and preliminary approval of transactions;
7) analytical reviews of the media's and investment community's perception of the performance results of the
Corporation.

Sistema JSFC Management Board composition as of December 31, 201210

Chairman of the Management Board, President of Sistema JSFC

1. Mikhail Shamolin
2. Anton Abugov
3. Christopher Baxter
4. Alexey Buyanov
5. Elena Vitchak
6. Anna Goldin
7. Sergey Drozdov
8. Felix Evtushenkov
9. Leonid Monosov
10. Andrey Terebenin
11. Kirill Tyurdenev
12. Ali Uzdenov
13. Alexey Shavrov

Changes in top management in 2012
A number of changes in the top management of the company took place in 2012:

A. Abugov

24 September 2012

was transferred from his position of First Vice
President, Head of the Strategy and Development
Function, to the position of First Vice President.

C. Baxter

E. Vitchak

F. Evtushenkov

L. Monosov

16 November 2012

was appointed Senior Vice President

03 September 2012 was appointed Executive Vice President, Head of HR

Department

24 September 2012 was transferred from his position of First Vice
President, Head of the Core Assets Business Unit, to
the position of First Vice President
was appointed Executive Vice President

24 September 2012

R. Nagapetyants

28 September 2012

was relieved of his duties as Senior Vice President,
Head of the Developing Assets Business Unit

K. Tyurdenev

A. Uzdenov

24 September 2012 was appointed Executive Vice President

01 October 2012

was appointed Vice President

A. Shavrov

24 September 2012 was appointed Executive Vice President

6.5. Risk management, internal control and audit system

The risk management system of Sistema JSFC is based on a two-tier approach to the management of the risks and
opportunities of the Corporation, namely, on identifying the risks of S\As and Corporate Centre with their further
integration, so that their impact on the Corporation as a whole could be assessed.

10 See Annex for brief biographies and the equity holdings of the Management Board members.

The integrated risk management system (ERM) of the Corporation includes the following basic principles:
-

identification of risks at all levels of management (from top to line management), which includes finding the
risk owner and making a risk passport;
assessment and analysis of the identified risks (based on VaR methodology);
ranging the risks by management level;
evaluation of the cumulative effect of material risks on the key financial indicators of the Company (Monte
Carlo modelling);
development of risk mitigation plans on all management levels;
a system of control over the implementation of mitigation plans and evaluation of their effectiveness;
risk monitoring, quarterly reporting on the risks of the Company.

-
-
-

The risk management procedures of Sistema JSFC are carried out by the Risk Management Group, which was
specially set up for this purpose.

The risk and opportunity management system of the Corporation is monitored on a quarterly basis by the
Management Board and the Risk Management Sub-Committee of Sistema JSFC, which review the effects of the
mitigation and response measures taken and reassess the identified and/or new risks.

The President of Sistema JSFC presents a regular report on risk management in the Corporation to the Audit and
Finance Committee of the Board of Directors of Sistema JSFC. Annual risk report is presented to the members of
the Board of Directors.

In 2011 the Board of Directors took the decision to separate the functions of internal control and internal audit of
the Corporation.

The Internal Control Service reports to the President and the Ethics and Control Committee of the Sistema JSFC
Board of Directors. The Internal Control Service is responsible for:
-
-
-
-
-

targeted actions for control of business processes and financial activities;
control over the elimination of systemic deficiencies in business processes;
control over compliance with internal procedures and legal requirements;
control over reports on performance and fulfillment of functional KPIs;
operation of a Hot Line as a tool for timely detection and efficient prevention of different types of fraud.

The main tools of the Internal Control Service are audits and analysis of the data received as a result of such
audits. The results obtained by the Internal Control Service are reported to the President of Sistema JSFC and the
Ethics and Control Committee to ensure that decisions are taken to eliminate the identified deficiencies.

The Internal Audit Service reports to the Audit and Finance Committee of the Sistema JSFC Board of Directors.
The Internal Audit Service is responsible for:
-
-
-

assessing the efficiency of the risk management system and preparing recommendations on improving it;
auditing the quality of the management business processes;
assessing the efficiency of the internal control system.

The main tools of the Internal Audit Service include obtaining information on the above processes, analysing the
received information and preparing recommendations and assessments for the Sistema JSFC management. The
results obtained by the Internal Audit Service are reported to the Audit and Finance Committee and the Board of
Directors to enable decision-making on the improvement of the internal control system and the quality of risk
management and corporate governance.

The Internal Audit Service submits a quarterly report on its performance to the Audit and Finance Committee of
the Sistema JSFC Board of Directors.

Pursuant to the decision of the Audit and Finance Committee, Sistema JSFC has developed procedures for
purchasing external audit services for the purpose of auditing the financial/ accounting statements of Sistema
JSFC. The Audit and Finance Committee performs annual assessment of the quality of audit services. If the
quality of services provided by the current auditor is recognised as unsatisfactory, the Audit and Finance

Committee holds a tender and selects a new auditor. If the quality of services of the current auditor is recognised
as satisfactory, negotiations are conducted on the price of audit services for the next period. In the meantime, to
ensure the impartiality and objectivity of the auditor, the Audit Committee of Sistema JSFC took the decision that
a tender for the audit of the RAS and US GAAP financial statements should be conducted at least once every five
years.

6.6. Development of corporate governance system in 2012
In 2012, Sistema took a number of measures to further develop its corporate governance system.

After electing new members, the Board of Directors took the decision to renew the terms of references of the
Board's committees as part of completing the company's transition to the investment company model. It was also
necessary to increase the engagement of the Board of Directors in the important aspects of the company's work
according to the new model. To achieve this, the procedural powers of the committees were specified and the
remit of the existing committees of the Board of Directors updated.

As a rule, only members of the Board of Directors are elected to committees. The committees of the Board of
Directors have extended procedural powers and the right to use external expertise and other company resources.
Every committee is responsible for a particular activity, which is closely monitored by every member of a
committee.

These changes are designed to ensure that Board members are closely involved in the material aspects of the
company's activities, and to help with a successful transition to the new investment company model.

In June 2012, a number of new members were introduced to the Board of Directors. Brian Dickie, Jeannot Krecké
and Mark Holtzman were elected as independent directors of the Board for the first time. Their vast practical
investment experience and track record on successful management of big companies will make it possible to
significantly strengthen the business competencies of the Sistema Board of Directors.

7. SOCIAL RESPONSIBILITY.
Corporate Social Responsibility (CSR) is a comprehensive system that pervades all the activities of the company
and influences its key strategic business decisions and their day-to-day implementation. Sistema's CSR strategy is
aimed at achieving practical results in various spheres of public life: improving social climate, developing
Russian culture, increasing the intellectual potential of the country and strengthening its national identity. Thus,
the CSR policy of Sistema is a long-term investment in the future of the whole of Russia, as well as the company
itself.
The main document governing the CSR activities of the company and its subsidiaries is the Policy on Corporate
Social Responsibility of Sistema. It establishes the basic principles and priorities for cooperation with all the
stakeholders of the CSR process. The document is also used as a tool for the strategic management of the social
factors affecting the company's sustainable development, and for the optimisation of our contribution to the social
and economic development of the country and the regions where we operate, as well as for enhancing our
reputation.

Another internal document is the Code of Corporate Conduct which reflects the company’s voluntary
commitments made on top of the requirements of the applicable corporate legislation, and the Code of Ethics
governing corporate relationships with stakeholders.

Sistema's social responsibility approach to business includes a commitment to the following principles:

Improving living standards through business development


 Safeguarding occupational health and safety and developing human potential
 Protecting the environment
 Contributing to the development of local communities
 Showing consideration for social expectations and opinions
 Being open and transparent

The key CSR principles approved at Sistema Group level are consistently implemented in all portfolio companies.
We have designed a system for implementing social responsibility that includes forming standards, building the
management structure, training personnel, and controlling implementation through a system of indicators.

When implementing the key CSR principles, we take into account global experience and adhere to best
international practices. Sistema became one of the first Russian companies to join the United Nations Global
Compact (in 2002) and to abide strictly by the ten principles of sustainable development enshrined in it. We fully
embrace the social responsibility concept outlined by the Russian Union of Industrialists and Entrepreneurs in the
Social Charter of Russian Business, and seek to make our contribution to sustainable development permanent,
consistent and socially understandable.

Key stakeholders

Sistema's policy in the sphere of Corporate Social Responsibility is indivisible from achieving sustainable growth
and hitting the company's strategic targets. Responsible behaviour and taking into account the interests of all
stake-holders, which includes shareholders, investments, employees, suppliers, partners, public organisations and
local communities, as well as the state, is essential for business development.

Sistema JSFC is one of the largest national taxpayers, and its portfolio companies are often notable contributors to
the budgets of the regions of their presence.

The corporation operates in strict compliance with the ecological requirements. Participation in environmental
programmes is part of the Code of Ethics of Sistema.
Being participants of the hydrocarbon market, the Corporation's companies invest substantial funds in
environmental measures. For instance, in 2012 Bashneft alone spent RUB1.4bn on these purposes.

In the reporting period the company implemented the strategy of health, safety and environmental protection
(HSE) designed for a span of 5 years. According to the plan of actions until the end of 2016, the expenses on the
five-year Functional Strategy should total RUB16.44bn.
Bashneft's priorities in reducing the negative footprint on the environment are: recycling the oil sludge, including
that from the Soviet period, building effluent treatment systems, and switching to more environmentally-friendly

types of fuel. In 2012 the company moved 100% to selling EURO-5 petrol.

A significant project in 2012 was the launch of the programme increasing the reliability of pipelines covering the
period of 2013-2017. Its goal is to minimise the negative impact of oil extraction on the environment, along with
reducing product losses by reducing equipment failures and pipeline leak rate.

Under this programme in 5 years' time the company is planning to remodel over 1,258km of pipeline, including
pipe replacement, and to do a major overhaul of nearly 250km of pipeline.

Bashneft is planning to allocate RUB11.1bn to the pipeline reliability programme over the span of 2013-2017.

Responsibility to the community

Another key focus area of Sistema's Corporate Social Responsibility programme is investing in the social sphere,
which aims to enhance the educational, scientific and cultural potential of the country.

Sistema, together with its portfolio companies, is one of the largest employers in Russia. The total headcount of
the Corporation exceeds 140 thousand employees. With the family members of the employees taken into account,
the Corporation is responsible for the welfare of about half a million citizens of the Russian Federation.
Provision of good working conditions necessary for building a high quality of life is an unquestionable priority
and the corner stone of the Company's CSR policy.
The Corporation is one of the major philanthropists and investors in the Russian social sphere. Social investments
were mostly made in the following areas:

 Science and education
 Culture
 Sports
 Direct support to social initiatives and projects

Sistema supports unique, innovative projects, often in the spheres that were, until then, not in the sight of
sponsors and charity organisations.

In 2012 the Corporation's aggregate investments in the social sphere exceeded 2 million roubles.

Science and education

Education and science programmes have a special place in Sistema's social investment structure.

In addition to supporting young professionals and scientists the company also invests in its business and thus
provides its enterprises with qualified personnel. By enabling its current and future customers to have access to
the most advanced technologies at the stage of training Sistema JSFC simulates the formation of strong demand
for high-tech products and services for years to come.

The company is engaged in a step-by-step programme encompassing: youth talent search; support for young
people’s academic and creative initiatives; provision of grants and scholarships to students and highly proficient
teachers and promising research workers; joint educational projects with academic and scientific institutions;
helping students and young scientists develop their ideas and put them into industrial production.

Lift to the Future

Since 2011 Sistema has been developing a large-scale Lift to the Future project, with the mission to help talented
Russian young people fully unlock their academic and creative potential and to provide them with the opportunity
of making an independent educational and occupational choice.

Our key partner in the Lift to the Future project is Lomonosov Moscow State University, which acted as a co-
founder of the Research and Education Centre Institute for Developing the Intellectual Potential of the Youth.
Other project participants include Bauman Moscow State Technical University, the Russian Rectors' Union, the
Russian Union of School Academic Contests, leading scientific teams, and Russian high-tech companies.

All Russian universities, research centres, vocational institutions, regional intellectual contest centres, centres for
talented children, orphanages etc. have been invited to take part in the Lift to the Future programme. Thus we
create an all-Russian talent bank integrated in a new-type of educational environment. Every year at least 100
students take part in the Lift to the Future scholarship programme.

As part of the project, we have already set up a unique Lift to the Future web portal. This portal consolidates
information on the academic programmes of all the Russian academic institutions, and the projects of the key
federal and regional research centres, vocational education institutions and businesses - and tailors it for a young
audience.

An important part of the project is a supervision programme, where accomplished professionals mentor young
people and help them choose the right field for their further education. Today the portal has over 100,000
registered participants and over 200 supervisors.

Results

Such innovative approaches taken by Sistema help achieve tangible results making the company a leader in CSR
in Russia.

• We are recognised as the best company in the area of CSR in Russia: Sistema was ranked first in the
biggest annual ranking Leaders of Corporate Charity set up by the Vedomosti business daily,
PriceWaterhouseCoopers and Donors Forum, a non-profit partnership of grant awarding organisations.
• Lift to the Future is the best CSR project: in the same ranking, the project has been recognised as one of
the best charitable programmes aimed at engaging young people in social and economic development.
• Lift to the Future was approved by the Agency of Strategic Initiatives in the Young Professionals
category: the meeting of the Supervisory Board chaired by the Russian President Vladimir Putin took
place on 22 November 2012.

Other companies of the Group

BASHNEFT is implementing the Group’s largest social action programme in Bashkortostan:

MTS:

 The social action report of Bashneft for 2011 was awarded as the best in the category of Best
Report on Sustainable Growth and Social Responsibility at the 15th annual contest of annual
reports and corporate websites hosted by the Securities Market magazine and the Investor.ru
social network, in partnership with the Russian Federal Financial Markets Service. Through the
Ufa branch of Sistema's Charity Fund, Bashneft is participating in the programme focusing on
providing potable water to the Bashkortostan people, which is part of funding the social
infrastructure in Bashkortostan under and agreement with the government of the Republic.
 The Corporate Volunteer Programme among the employees of Bashneft was launched in 2012.

 The company received IX National Award for its contribution to the development of the Russian
segment of the Internet (RuNet awards of 2012) in a special nomination "Safe RuNet" (such MTS
projects as Federal Programme "Children in the Internet", the web portal "Safety is Simple"
(safety.mts.ru)).

 MTS received a Leaders of Corporate Charity-2012 award in the category Best Programme

Promoting Volunteering in Russia, and became a top-10 charitable company in Russia.

 The Reputation Rating Agency granted to MTS the first national rating in corporate social

responsibility – AA(s).

 MTS launched a unique for Russia project under the title of "All Ages are to Net Submissive"

which aims to provide Internet training for elderly people.

 Jointly with the Lift to the Future project and Cisco, the company launched an IT Fitness test

where any Russian can test his or her IT skills, and a contest ''IT for Equal Opportunities''.

 MTS projects in the CSR sphere (All Ages are to Net Submissive, CSR+Marketing, Telecom
Idea) are taken into account in all business processes of the company and are also implemented in
the other portfolio companies of the Sistema Group.

DETSKY MIR

 The company received an award from the national programme "Best Social Projects in Russia".
 Detsky Mir won the Little Golden Bear national award for goods and services for children, in the

category "Year's Best Social Project".

 The "Contribute!" campaign organised by the company provided support to the disadvantaged

Russian citizens totaling 100 million roubles.

 In 2012, to aid the victims of the natural disaster in Krymsk, the company organised the gathering
and delivery of a relief consignment for babies under 3 years of age worth RUB500k, set up a hot
line for insulin-dependent children, etc.

RTI

 MIC Sistema-Sarov won the award in Best Project Promoting Innovations (Time of Innovations
2012) – an independent award set up by the Social Projects and Programmes Foundation with
support from the RF Economic Development Ministry and the RF Ministry for Telecom and
Mass Communications, for achievements in the field of innovative work.

8. CRITERIA FOR AND AMOUNTS OF REMUNERATION OF THE MEMBERS OF THE
BOARD OF DIRECTORS AND TOP EXECUTIVES OF THE COMPANY.
The remuneration of the members of Sistema's Board of Directors is calculated on the basis of the Policy on
remuneration and compensations payable to the Company Board members, approved by a resolution of the
General Meeting of Shareholders of Sistema on 30 June 2006 (Minutes #1-06) as amended by the resolution of
the General Meeting of the Shareholders of Sistema on 16 February 2009 (Minutes #1-09). The Policy provides
for the payment of the following to the Board members:




fixed amounts for participation in meetings of the Board of Directors and its committees;
fixed amounts for acting in the capacity of Chairman or Deputy Chairman of the Board of Directors, and
for chairmanship in the committees under the Board;

 based on the performance in the year, members of the Board of Directors receive additional performance-
related remuneration in the form of a fixed amount, half of which is payable in shares (US$ 250,000 -
325,000);

 given the capitalisation of the company has grown over the year, members of the Board of Directors

receive additional remuneration amounting to 0.1% of the incremental capitalisation.

The short-term (up to 1 year) incentive scheme for the top managers of Sistema in 2012 consisted of the following
elements:



fixed monthly salary determined in line with the internal system of job categories (grades);
an annual bonus paid for achievement of investment key performance indicators set for the entire
company over a respective reporting period; the investment KPIs of Sistema in 2012 include: iTSR, TSR,
revenue of Sistema - dividends and funds from the sale of businesses, SG&A / NAV, net Income of
Sistema, debt of Sistema);
additional remuneration for generating cash income for the company over the year, payable subject to
achievement of the year's investment KPIs, or additional bonus payable exclusively at the discretion of
the Board of Directors.



The long-term (over 1 year) incentive scheme for the top managers of Sistema in 2012 consisted of the following
elements:


a three-year long-term incentive programme (2012-2014) aimed at building the shareholder value of
Sistema and at creating additional preconditions for maintaining long-term relations of employment and
corporate relations between the company and its management;
an option programme for initiating and developing M&A projects aimed at strengthening the interest of
the management towards searching for, acquiring and developing new assets that increase the shareholder
value and the market capitalisation of Sistema.



No remuneration is paid for the executive work of the managers sitting on the Management Board of Sistema.

In 2012, the top executives of the company received an aggregate remuneration of RUB 996,076,264.
Remuneration paid to the Board of Directors members of Sistema in 2012 totalled RUB 122,402,181.

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.

Alexander Goncharuk

Deputy Chairman of the
Board of Directors.
Non-executive Director.

Vladimir Evtushenkov was born in 1948 in the Smolensk region.

In 1973 he graduated from the Moscow Mendeleyev Chemical-Engineering Institute,
in 1980 – Economic Faculty of the Moscow State University n.a. M. Lomonosov.
Doctor of Science in Economics.

1975-1982 - Machine Shop Manager; Deputy Director; Chief Engineer of the
Karacharovo Factory of Plastics.
1982 to 1987 – Chief Engineer, First Deputy Director General of Polymer Scientific
and Production Association.
1987-1988 - Head of Technical Department; Head of the Chief Department of Science
and Technology of the Moscow City Executive Committee.
1990 – Chairman of the Moscow Municipal Committee for Science and Technology.

In 1993 together with a group of associates Mr. Evtushenkov formed Sistema Joint-
Stock Financial Corporation. At present he is the principal shareholder, the Chairman
of the Sistema JSFC Board of Directors and the Chairman of the Strategy Committee
of the Board of Directors.

Mr. Evtushenkov is an active member of a number of government commissions for
improvement of the competitiveness of the Russian industry, development of high
technologies and innovations, science and culture; a member of the National Council
for 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.

Mr. Evtushenkov is the Chairman of the Council of Trustees of the Fund for
Development of the State Russian Museum “Friends of the Russian Museum”. He also
heads the Board of Trustees of the Sistema Charitable Foundation.

Share in the authorized capital of Sistema JSFC – 64.1843%.
Alexander Goncharuk was born in 1956 in Sevastopol.

In 1978 he graduated from the Sevastopol Higher Navy and Engineering School, and
in 1987 – the Grechko Navy Academy.

1995-1998 – Vice-President of Sistema JSFC.
Mr. Goncharuk headed Sistema Telecom from 1998 to 2003, SITRONICS from 2003
to 2006, Sistema JSFC from 2006 to 2008.

1998 and 2002-2003 – Chairman of the Board of Directors of MTS.

Mr. Goncharuk is Chairman of the Board of Directors of SITRONICS, member of the
Board of Directors of Bashneft, RussNeft and some other companies, member of the
Board of Trustees of the Sistema Charitable Foundation.

Alexander Goncharuk has been a member of the Board of Directors of Sistema JSFC
since 1996. Chairman of the Ethics and Control Committee, member of the Strategy
Committee, member of the Nomination, Remuneration and Corporate Governance
Committee of the Sistema Board of Directors.

Share in the authorized capital of Sistema JSFC – 1.0032%.

Brian Dickie

Brian Dickie was born in 1955 in Belfast, the United Kingdom.

Independent Director.

Graduated from the Oxford University with a Master of Arts degree in English
literature, obtained an MBA degree in Harvard Business School.

In 1981-1998 Brian worked for BOOZ, ALLEN & HAMILTON INC, an international
management consulting company.

From 1993 to 1998 - President, Chairman of the Management Board of the company's
branch in New-York; previously Brian was a managing partner of the company in the
Asia-Pacific region (Singapore); provided strategic and operational consulting to
major corporations and government agencies in North America, Europe and Asia-
Pacific region.

In 1999-2003 Mr. Dickie was President of TXU ENERGY, USA, where he headed
Retail, Generation (32 nuclear, gas-fired and coal-fired power stations) and Trading
divisions; simultaneously he oversaw the new businesses of the Group including
telecoms (USA) and international utilities businesses (Australia, Asia, Latin America).

From 2003 to 2012 Brian worked with INVESTCORP, a Bahrain-based alternative
investment company. Prior to 2010 he was Managing Director of the European private
equity division (London). At present Mr. Dickie is a senior advisor, member of the
Investment Committee of Gulf Opportunity Fund, one of the divisions of
INVESTCORP; and also a Chairman/Board member of a number of companies in
Europe and the Middle East.

Mr. Dickie has been a member of the Board of Directors of Sistema JSFC from 2012.
He is a member of the Nomination, Remuneration and Corporate Governance
Committee of the Sistema Board of Directors.

Share in the authorized capital of Sistema JSFC – 0.00%.
Dmitry Zubov was born in 1954 in the Gorkiy region.

In 1977 he graduated from the Moscow Automobile and Road Technical Institute.
Doctor of Science in Economics.

1992-1999 - Director General of Alon Close-Type JSC, later he held senior positions
in MosEximBank, IBN Sistema and PromChemInvest.

In 1999 Mr. Zubov was elected member of the Board of Directors of Sistema JSFC,
in 2000 – Deputy Chairman of the Board of Directors. At present he is the member of
the Nomination, Remuneration and Corporate Governance Committee, member of
the Audit and Finance Committee. Member of the Board of Trustees of the Sistema
Charitable Foundation.
Share in the authorized capital of Sistema JSFC - 0.9764%.
Vyacheslav Kopiev was born in 1954 in Moscow.

In 1977 graduated from the Cybernetics Department of the Moscow Institute of
Engineering and Physics, in 1993 - from the Law Department of the Russian
77

Dmitry Zubov

Non-executive
Director.

Vyacheslav Kopiev

Non-executive
Director.

Academy of Management, in 1994 - from the Economics Department of the
International Marketing and Management Academy. PhD in Technical Sciences, PhD
in Legal Sciences. Author of more than 70 scientific works.

In 1989-1997 Mr. Kopiev occupied leading positions at the Administrative Board of
the Union of Engineering Societies, including Director for International Relations and
Innovation. He also served as Chairman of the Board of Directors of JSC Sputnik
from 1990 to 1997. From 1995 – Deputy Chairman of the Executive Committee of
the Russian-British Chamber of Commerce and Industry.

In 1997 Mr. Kopiev was appointed Vice-President of Sistema JSFC, from 2000 to
2003 – Senior Vice-President, Head of the External Business Environment Complex.
From 2003 to 2010 – Deputy Chairman of the Sistema JSFC Board of Directors.
President of the Sistema Charitable Foundation.

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 in 2014 in Sochi, President of the Russian Rugby
Union.

Member of the Sistema JSFC Board of Directors since 1997. Member of the Ethics
and Control Committee.

Robert Kocharyan

Independent Director.

Share in the authorized capital of Sistema JSFC – 0.0569%.
Robert Kocharyan was born in 1954 in Stepanakert, the Nagorno-Karabakh
autonomous district.
In 1982 he graduated from the Yerevan Polytechnic Institute.

Jeannot Krecké

Independent
Director.

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.
1994-1997 – President of NKR.
1997-1998 - the Prime Minister of the Republic of Armenia.
1998–2008 – the President of the Republic of Armenia.

Member of the Sistema JSFC Board of Directors since 2009.
Chairman of the Nomination, Remuneration and Corporate Governance Committee,
member of Ethics and Control Committee of the Sistema Board of Directors.

Share in the authorized capital of Sistema JSFC – 0.0032%.
Jeannot Krecké was born in 1950 in Luxembourg.

Graduated from the Free University of Brussels. Later when studying in the USA he
specialized in economics, accounting and taxation. He co-authored an annually
published manual on taxation in Luxembourg, as well as books on tax control and tax
fraud.

2004-Minister of Sport of Luxembourg.

2004-2011 - Minister for Economy and External Trade of Luxembourg,
representative of the Luxembourg Government in the Council of Ministers of the
European Union.

Co-founded the Alzheimer Association Luxembourg and became its President (1987-

1997). President of the Alzheimer Fund since 1997.

In 1970-1977 played for the Luxembourg national football team; participated in
transatlantic and polar expeditions (Greenland, Svalbard).

Member of the Sistema JSFC Board of Directors since 2012.
Member of IR and Dividend Policy Committee of the Sistema Board of Directors.

Roger Munnings

Share in the authorized capital of Sistema JSFC – 0.0004%.
Roger Munnings was born in 1950 in the United Kingdom.

Independent Director.

He graduated from the Oxford University with a degree of Master of Arts in politics,
philosophy, and economics.

At present Mr. Munnings is a member of the UK Government's working group on
trade and investments between Great Britain and Russia, as well as Chairman of the
Institute of Audit Committees in Russia.

Since 1974 Roger Munnings has had a long and successful career in international
auditor KPMG, especially during his time in the office of the President and Managing
Partner of KPMG in Russia and the CIS (1996-2008), as well as Chairman of the
world energy and natural resources committee of KPMG (1993-2008). Mr. Munnings
is 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 the social 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.

Mr. Munnings is a member of the Board of Directors of Sistema JSFC from 2010. He
is also Chairman of the Audit and Finance Committee, member of the Nomination,
Remuneration and Corporate Governance Committee, IR and Dividend Policy
Committee and the Ethics and Control Committee of the Board of Directors.

Share in the authorized capital of Sistema JSFC – 0.0022%.
Evgeny Novitsky was born in 1957 in the Tomsk region.

In 1985 he graduated from the Moscow Bauman Higher Technical School. In 1989-
90 he studied management at the Moscow State University of International Relations
and the University of Manchester, UK; Candidate of Technical Sciences.

1985-1987 - engineer and mathematician at the Moscow Bauman Higher Technical
School.
1987-1990 - completed a post-graduate course.
1991-1995 he was in charge of developing and producing a series of Russian-made
computers, as well as of organising 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 a
number of publications, member of the Board of Trustees of the Bauman Moscow
State Technical University.

Since 1995 Mr. Novitsky worked at Sistema JSFC as the President of the Company

Evgeny Novitsky

Independent Director.

Marc Holtzman

Independent Director

and from January 2005 to February 2006 he 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. Currently he is also a
member of the Strategy Committee, the Audit and Finance Committee, member of
the Board of Trustees of the Sistema Charitable Foundation.

Share in the authorized capital of Sistema JSFC – 1.9925%.

Marc Holtzman was born in 1960 in the USA.
He holds a Bachelor of Arts degree in economics from Lehigh University. In
addition, Mr. Holtzman is Vice President at BarclaysCapital, and serves as non-
executive Chairman of the Board of Directors of Indus, a leading oil company listed
on the London AIM, with market capitalization of about USD 2bn.
He is member of the Board of Directors of Prospect Global Resources and Bank of
Kigali, a leading commercial bank in Rwanda.
Mr. Holtzman also serves as a member of the Board of Directors of the United States
Space Foundation and as a member of the Board of Trustees of the Colorado Animal
Rescue Shelter.
Drawing on almost two decades of political and public service, Mr. Holtzman has
developed close relationships with governmental and political leaders around the
world. He was on the Board of Trustees of the Almaty Regional Financial Center.
Mr. Holtzman co-founded and served as a member of the Board of Directors of a
non-partisan, non-profit group "Poland for Europe".
In 1989-1998 he lived and worked in Eastern Europe and Russia as a guest lecturer of
the World Economic Development Congress and Harvard University's John F.
Kennedy School of Government.
2003–2005 – President of
the University of Denver. The University has
approximately 10,000 students and includes the Daniels College of Business which,
during Holtzman’s tenure, was ranked by The Wall Street Journal as being among the
world’s top fifty MBA programs.
Before 2003 Mr. Holtzman served as Secretary of Technology of the Colorado
government. In addition, he was Chairman of Colorado’s Information Management
Commission and Co-Chairman of the Commission on Science and Technology. Mr.
Holtzman helped guide Colorado’s economic transformation into a fully diversified
technology hub.

Member of the Sistema JSFC Board of Directors since 2012. Member of the Audit
and Finance Committee and IR and Dividend POlicy Committee of the Sistema
Board of Directors.

Share in the authorized capital of Sistema JSFC – 0.00%.

Serge Tchuruk

Serge Tchuruk was born in 1937 in France.

Independent Director.

Serge graduated from Ecole Polytechnique.

1964-1979 - Mobil Corporation (France and USA); Chief Executive Officer of Mobil
Benelux.

1980-1986 he worked at Rhone-Poulenc, an
international chemical and
pharmaceutical company, where he had various managerial jobs, and in 1983 he was
appointed Managing Director of the company.

1986-1990 - Chairman and the CEO of Orkem (earlier known as CDF-Chimie).

1990-1995 - the Chairman and the CEO of Total, one of the largest oil and gas
80

Mikhail Shamolin

President, Chairman of
the Management
Board.
Executive Director.

David Iakobachvili

Independent Director.

companies globally.

In 1995 Serge Tchuruk became CEO of Alcatel.

Member of the Board of Directors of Sistema JSFC from 2011, member of the
Strategy Committee, member of the Investor Relations and Dividend Policy
Committee.

Share in the authorized capital of Sistema JSFC – 0.0013%.
Mikhail Shamolin was born in 1970.

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.

1998-2004 - worked at the international consulting company McKinsey&Co.

2004-2005 - Managing Director for the Ferroalloys Division at Interpipe Corp.
(Ukraine).

2005-2011 - Vice President for Sales and Customer Service; Head of the MTS Russia
business; President of MTS OJSC.

On 10 March 2011 Mikhail Shamolin was appointed President and Chairman of the
Management Board of Sistema JSFC.

Member of the Strategy Committee; Ethics and Control Committee; Nomination,
Remuneration and Corporate Governance Committee; IR and Dividend Policy
Committee of the Sistema Board of Directors; member of the Board of Trustees of
the Sistema Charitable Foundation.

Share in the authorized capital of Sistema JSFC – 0.0339%.
David Iakobachvili was born in 1957 in Georgia.

Studied at Civil and Industrial Engineering Department of the Georgian Technical
University in Tbilisi.

1986-2000 – private entrepreneur involved in various projects: official dealership of
General Motors cars, tourism and hotel business, timber processing, management of
furniture supplies, retail management, communications and banking.
In 1992 became one of the founders of a famous food company, Wimm-Bill-Dann.

1992-2001 – served as member of the Board of Directors, later the Chairman of the
Board of Directors of Wimm-Bill-Dann Foods OJSC.

At present serves on the Boards of Directors of a number of companies: CJSC Gorki-
2 Agro-Complex, Airport Financial Services Limited, OJSC Melnichniy kombinat
No.4 (grain mill), LLC Kolmogorovskaya-2 mine, LLC Promuglesbyt Managing
Company and some other companies.

Since 2000 – member of the Management Board of the Russian Union of
Industrialists and Entrepreneurs (employers), since June 2004 – member of the
Management Board's Bureau of the Union.

Serves on the Board of Directors of Sistema JSFC since 2011. He is also the

Chairman of Investor Relations and Dividend Policy Committee and member of the
Audit and Finance Committee of the Board of Directors of Sistema JSFC.

Share in the authorized capital of Sistema JSFC – 0.0031 %.

9.2. INFORMATION ON TRANSACTIONS PERFORMED BY MEMBERS OF THE BOARD OF
DIRECTORS OF SISTEMA JSFC WITH THE SHARES THEY HOLD IN THE COMPANY OVER THE
PERIOD 1 JANUARY - 31 DECEMBER 2012

Board member

V. Evtushenkov

Date
of the
transaction
09.07.2012

A. Goncharuk

16.01.2012

24.05.2012

09.07.2012

16.01.2012

09.07.2012

D. Zubov

V. Kopiev

16.01.2012

09.07.2012

08.08.2012

Transaction

Subject of the transaction

crediting
holder's account

securities

the

122,191
registered shares

ordinary

the

securities

crediting
holder's account
the
Debiting securities from
holder's
crediting
account,
securities to the account of a
nominal holder – DCC
crediting
holder's account
crediting
holder's account
crediting
holder's account
crediting
holder's account
crediting
holder's account

securities

the

102,897
registered shares
48,250,000
registered shares

ordinary

122,191
registered shares
9,114,968
registered shares
122,191
registered shares
1,997,144
registered shares
122,191
registered shares

ordinary

the
Debiting securities from
holder's
crediting
account,
securities to the account of a
nominal holder – BANK
CREDIT SWISS

2,000,000
registered shares

ordinary

R. Kocharyan

09.07.2012

crediting
holder's account

securities

the

127,808
registered shares

ordinary

J. Krecké

09.07.2012

crediting
holder's account

securities

the

1,950 global depositary
receipts

R. Sommer

16.01.2012

crediting
holder's account

securities

the

1,577,378
registered shares

ordinary

R. Munnings

09.07.2012

crediting
holder's account

securities

the

127,808
registered shares

ordinary

L. Melamed

16.01.2012

09.07.2012

securities

crediting
holder's account
crediting
holder's account

securities

the

7,810,741
registered shares
122,191
registered shares

ordinary

E. Novitsky

09.07.2012

crediting
holder's account

securities

the

122,191
registered shares

ordinary

S. Tchuruk

09.07.2012

M. Shamolin

16.01.2012

crediting
holder's account

securities

the

127,808
registered shares

ordinary

crediting
holder's account

securities

the

3,147,750
registered shares

ordinary

09.07.2012

crediting
holder's account

securities

the

122,191
registered shares

ordinary

D. Iakobachvili

09.07.2012

crediting
holder's account

securities

the

122,191
registered shares

ordinary

9.3. SUMMARY BIOGRAPHIES OF THE PRESIDENT OF SISTEMA JSFC AND THE MEMBERS OF
THE MANAGEMENT BOARD

Full name, Title

Brief Professional Background

Mikhail Shamolin
President of Sistema JSFC.

Chairman of the Sistema
JSFC Management Board.

Was born in Moscow in 1970.

In 1992 he graduated from the Moscow Automobile and Road Technical
Institute. In 1993 received his second diploma from the Russian Academy of
Public Administration under the President of the Russian Federation.

In 1996-1997 he completed the finance and management course for top
managers at the Wharton Business School.

1998-2004 he worked at the international consulting company McKinsey&Co.

•2004-2005 - Managing Director for the Ferroalloys Division at Interpipe Corp
(Ukraine).

2005-2011 - Vice President for Sales and Customer Service; Vice President,
Head of the MTS Russia business unit; President of MTS OJSC.

On 10 March 2011 Mikhail Shamolin was appointed President and Chairman
of the Management Board of Sistema JSFC. Holds positions of Executive
Director, member of the Strategy Committee, member of the Ethics and
Control Committee, member of Nomination, Remuneration and Corporate
Governance Committee, member of IR Committee of the Sistema Board of
Directors, member of the Board of Trustees of the Sistema Charitable
Foundation.

Members of the Management Board:

Full name, Title

Brief Professional Background

Anton Abugov

Was born in 1976 in Mytishchi, the Moscow Region.

First Vice President of
Sistema JSFC.

Member of the Sistema JSFC
Management Board.

In 1998 he graduated from the Academy of the National Economy under the
Government of the Russian Federation with a degree in management.

1995-1999 – Deputy Executive Officer of the Department of Transactions
with Securities, Trader of Closed-Type Joint-Stock Company United Financial
Group.
1999-2002 – Head of the Corporate Finance Department of Closed Joint-Stock
Company United Financial Group.
2003-2006 – Managing Director, Head of the Corporate Finance Division of
JSCB ROSBANK.
2006-2012 – First Vice President, Head of the Strategy and Development
Function of Sistema JSFC.
Since September 2012 - First Vice President of Sistema JSFC.

Christopher Baxter

Was

born

England

1963.

Senior Vice President of
Sistema JSFC.

Member of the Sistema JSFC
Management Board.

Graduated from Imperial College London in 1987 with First Class honours
as a Master of Engineering and was made a Fellow of the Royal Society of
Arts Manufactures and Commerce in recognition of exemplary academic
performance.

1987-1995 held various positions at Chase Manhattan Bank (now part of
JPMorgan),
President.
1995-2002 – Energy and Power investment banking consultant, Merrill
Lynch.

position

Vice

incl.

2002-2012 – Head of Investment Banking Department of Renaissance
Group, member of the Renaissance Credit (Group’s consumer bank) Board
of Directors.

Since November 2012 – Senior Vice President of Sistema JSFC.

Alexey Buyanov

Was born in 1969 in Moscow.

Senior Vice President, Head
of the Finance and
Investment Function of
Sistema JSFC.

Member of the Sistema JSFC
Management Board.

In 1992 he graduated from the Moscow Physics and Technology Institute
with a degree in Applied Mathematics and Physics.

1995-1998 – Head of Division, Vice President, First Vice President of
Sistema Invest.
1998-2002 – Vice President of Mobile TeleSystems (MTS).
2002 –Vice President, Head of the Financial Restructuring Department of
Sistema JSFC.
2002-2005 – First Vice President of Sistema JSFC.
From 2005 – Senior Vice President, Head of Finance and Investment
Function of Sistema JSFC.

Chairman of the Board of Directors of MTS-Bank OJSC, member of the
Board of Directors of MTS OJSC, Bashneft OJSC, Sistema Shyam
TeleServices Limited (SSTL) and some other companies.

Elena Vitchak

Was born in 1971 in Moscow.

Executive Vice President, HR
Department Head of Sistema
JSFC.

Member of the Sistema JSFC
Management Board.

In 1992 graduated from
the Rostov State University (Linguistics
Department); in 2005 received a diploma in Human Resources Management
from the State Academy of Investment Specialists.

Member of the National Union of HR Specialists of Russia. Member of the
HR Committee of the Association of Russian Banks.

2002-2008 - HR Department Director at the Capital Insurance Group (IFD
Capital).

2008-2010 - HR Department Director, member of the Management Board at
Sistema Hals OJSC.

2010-2012 - Senior Vice President, Director of the HR Department at OJSC

MTS-Bank.

Since September 2012 – Executive Vice President, HR Department Head,
Sistema JSFC.

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.

1988-1989 – Lawyer/Trainee at Baker & McKenzie, Gibson, Dunn &
Crutcher, Morrison & Foerster.
1990-2007 – Lawyer, Partner, Managing Partner at Latham & Watkins.
Since June 2007 – Vice President, Head of the Legal Function of Sistema
JSFC.

Sergey Drozdov

Was born in 1970 in Arkhangelsk.

Senior Vice President, Head
of the Corporate Governance
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.

1994-1995 – Head of the Financial Innovations and Marketing Department
of Moscow Property Fund.
1995-1998 – Executive Director, Deputy Head of the Department of
Development and Investments of Sistema JSFC.
1998-2002 – Vice President, First Vice President of Sistema Invest.
2002 – Acting First Vice President, Head of the Corporate Property
Department of Sistema JSFC.
2002-2011 – First Vice President; Senior Vice President, Head of the
Property Function of Sistema JSFC.
Since April 2011 – Senior Vice President, Head of the Corporate
Governance Function of Sistema JSFC.

Felix Evtushenkov

Was born in 1978 in Moscow.

First Vice President of
Sistema JSFC.

Member of the Sistema JSFC
Management Board.

In 2000 graduated from the Griboyedov Institute of International Law and
Economy with a degree in law.

1999-2000 – Assistant to the President; Executive Director of the Industry
Department of Sistema Invest.
2000-2008 – Deputy Director General; Director General; President of
Sistema-Hals.
2008-2011 – Vice President, Head of the Consumer Assets Business Unit
of Sistema JSFC.
2011-2012 – First Vice President, Head of the Core Assets Business Unit of
Sistema JSFC.
Since 2012 - First Vice President of Sistema JSFC.

Chairman of the Board of Directors of Bashneft OJSC, BEGC OJSC;
Member of the Board of Directors of RussNeft OJSC, United
Petrochemical Company OJSC and some other companies.

Leonid Monosov

Was born in 1958 in Mozyr’ (Belarus).

Executive Vice President of
Sistema JSFC.

Member of the Sistema JSFC
Management Board.

Andrey Terebenin

Vice President, Head of the
Corporate Communications
Function of Sistema JSFC.

Member of the Sistema JSFC
Management Board.

In 1980 graduated from the Moscow Institute of Railroad Transport with a
degree in industrial and civil construction.

For his services and many years of work in construction received awards
and the title of Honored Construction Worker of the Russian Federation.

1999-2007 - General Director of Moskapstroy OJSC.

2007-2010
Department of Moscow Government.

- Head of Municipal Capital Development Contracts

2010-2012 - Vice President of Olympstroy State Corporation.

Since March 2012 - Executive Vice President of Developing Assets
Business Unit; Executive Vice President of Sistema JSFC.
Was born in 1962 in Moscow.

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 at the Publishing House
Economicheskaya Gazeta, Dun&Bradstreet CIS and AIG Russia.
1999-2006 - Partner at the Triangle Porter Novelli Communications
Agency; Director General and Partner at the R.I.M. Porter Novelli
Communications Holding.
2006-2011 – Vice President for Corporate Communications of MTS OJSC.
Since May 2011 - Vice President, Head of the Sistema JSFC Corporate
Communications Function.

Kirill Tyurdenev

Was born in 1977 in Moscow.

Executive Vice President of
Sistema JSFC.

Member of the Sistema JSFC
Management Board.

Ali Uzdenov

Vice President of Sistema
JSFC

Member of the Sistema JSFC
Management Board

In 1999 graduated from the Moscow State Institute of International
Relations; the same year got law degree (LL.M) in Manchester University.

1999-2000 - Unilever.
2000-2004 – A.T.Kearney (management consulting).
2004-2007 – McKinsey & Co.
2007-2012 – Deputy Director General on strategy and corporate
development of SIBUR-Fertilizers OJSC.
Since April 2012 held the positions of Executive Vice President of
Developing Assets Business Unit; Executive Vice President of Sistema
JSFC.
Was born in 1962 in Kislovodsk (Stavropol region).

In 1985 graduated from the Rostov Institute of Railroad Engineers with the
degree Automatics, Telematics and Intercom at Railway Transport.

In 1990 he continued his education at the International Survival School
(Italy).

1994-1997 - Head of the Rostov Commodity Exchange.

1997-1998 - Director of Ayaks LLC.

1998-2001 - Director of the Rostov office of Bashneft OJSC.

2001-2007 - Chairman of the Kormmash OJSC Board of Directors.

2007-2009 - General Director of Rostovregiongas LLC.

2009-2012 - First Vice President for Refining and Sales of Bashneft OJSC.

Alexey Shavrov

Was born in 1971 in Leningrad.

Executive Vice President of
Sistema JSFC

Member of the Sistema JSFC
Management Board

Graduated from the Moscow State Institute of International Relations with a
degree in international relations.

1992-1996 – Cargill Enterprises.
1996-2000 – General Director (Russia and CIS) of Oleina (Switzerland) and
Cereol Group (France-Italy).
2000-2002 – General Director (Russia and CIS) of Unibrasco (UBC Group
branch, Switzerland).
2002-2004 – Deputy General Director, member of the Management Board of
United Engineering Factories OJSC.
2004-2005 – General Director of Istok Group of Companies.
2005-2006 – General Director, member of the Board of Directors of Cascol
Group of Companies.
2006-2010 – Managing Director, member of the Management Board of A-1
Group Investment Company (Alpha-Group).
Since March 2012 held the position of Executive Vice President of
Developing Assets Business Unit of Sistema JSFC.

9.4. INFORMATION ON THE NUMBER OF SHARES OF SISTEMA JSFC HELD BY THE
PRESIDENT AND THE MANAGEMENT BOARD MEMBERS

Management Board members

Number of owned shares

Mikhail Shamolin

Anton Abugov

Christopher Baxter

Alexey Buyanov

Elena Vitchak

Anna Goldin

Sergey Drozdov

Felix Evtushenkov

Leonid Monosov

Andrey Terebenin

Kirill Tyurdenev

Ali Uzdenov

Alexey Shavrov

3, 269, 941 shares of Sistema JSFC

5, 029, 243 shares of Sistema JSFC

0 shares of Sistema JSFC

4, 596, 627 shares of Sistema JSFC

0 shares of Sistema JSFC

11, 027, 030 shares of Sistema JSFC

23, 545, 381 shares of Sistema JSFC

739, 688 shares of Sistema JSFC

0 shares of Sistema JSFC

400, 160 shares of Sistema JSFC

0 shares of Sistema JSFC

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

Persons that are
considered as related
parties to the
transaction

Shareholder holding
jointly with his
affiliates over 20
(twenty) % of
Sistema JSFC voting
shares.

No. of the Minutes
of the body that
approved the
transaction and
date of taking the
decision

01-12
14.06.2012
Item 1

Subject of the
transaction

Transaction
counterparties

Amount of the
transaction

Granting to
Sistema OJSC
regulated by GB
legislation the
Guarantee in
provision of
performance of
guarantee and
other obligations,
imposed on
Sistema Invest
and ECU GEST
HOLDING S.A.
in accordance with
the Agreement
concluded
between INTER
RAO EES OJSC,
Sistema Invest,
ECU GEST
HOLDING S.A.
and Sistema JSFC

RAO
INTER
OJSC,
UES
Invest,
Sistema
ECU
GEST
HOLDING S.A.
and Sistema JSFC

500,

000
22,
(twenty
000.00
two billion five
hundred million)
RUB

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"

No. of the Minutes
of the body that
approved the
transaction and
date of taking the
decision

01-12
04.02.2012
Item 7.2.1.

02-12
17.03.2012
Item 6.5.2.

Subject of the
transaction

Transaction
counterparties

Amount of the
transaction

Persons that are
considered as related
parties to the
transaction

The Guarantee
Agreements on
the liabilities of
Sistema Shyam
TeleServices
Limited being
signed with Bank
of China Limited
(Shenzhen
Branch)
The Agreement
with Raiffeisen
Bank on the letter
of credit
guaranteed by
Sistema JSFC
signed for the
purposes of
securing the credit
liabilities of
Sistema Shyam
TeleServices
Limited

Sistema JSFC
Bank
of China
Limited (Shenzhen
Branch)
Sistema
Teleservices
Limited

Shyam

Credit amount:
up to
50, 000, 000.00
(fifty million)
USD; the Credit
may be granted
in tranches

V. Evtushenkov
R. Sommer
M. Shamolin
A. Buyanov
F. Evtushenkov

Shyam

Sistema JSFC
Sistema
TeleServices
Limited
Raiffeisen Bank

Up to INR 10,
000, 000, 000.00
(ten billion)
which equals ca
198 million USD
at the rate of INR
50.3130 per 1
USD set as of the
date of taking the
decision

V. Evtushenkov
R. Sommer
M. Shamolin
A. Buyanov
F. Evtushenkov

03-12
21.04.2012
Item 2.9.

Sistema’s JSFC
contribution to the
charter capital of
Stream LLC

Sistema
Stream LLC

JSFC

496, 112, 222.00
(four hundred
and ninety-six
million one
hundred and
twelve thousand
two hundred and
twenty two)
RUB

Shareholder holding
jointly with his
affiliates over 20
(twenty) % of
Sistema JSFC voting
shares.
R. Sommer
M. Shamolin
R. Nagapetyanz

03-12
21.04.2012
Item 6.2.

Making changes
and amendments
to the Letter of
credit facility
agreement as of
December 29,
2011, as amended
on March 21,
2012 (“Letters of
credit

Sistema JSFC
The Royal Bank of
Scotland N.V.
Sistema
TeleServices
Limited

Shyam

Up to 300m USD
(an
equivalent
amount in Indian
rupees)

V. Evtushenkov
R. Sommer
M. Shamolin
A. Buyanov
F. Evtushenkov

agreement”),
regarding the
letters of credit
granted by The
Royal Bank of
Scotland N.V. in
the amount of up
to 300m. USD (an
equivalent amount
in Indian rupees)
to secure the
obligations of
Sistema Shyam
TeleServices
Limited
Conclusion of
Guarantee
Agreement
between Sistema
JSFC and
Gazprombank
OJSC on securing
the liabilities of
Sistema Shyam
TeleServices
Limited
Granting a
guarantee by
Sistema JSFC on
credit liabilities of
Sistema Shyam
TeleServices
Limited to Central
Bank of India for
the amount of
INR 5bn.

03-12
21.04.2012
Item 6.3.3.

03-12
21.04.2012
Item 6.4.2.

JSFC

Sistema
Gazprombank
OJSC

Equivalent of
200, 000, 000.00
(two hundred
million) of USD
in Indian rupees

V. Evtushenkov
R. Sommer
M. Shamolin
A. Buyanov
F. Evtushenkov

Shyam

Sistema JSFC
Sistema
TeleServices
Limited
Central Bank of
India

5, 000, 000, 000.
00 (five billion
Indian rupees)

V. Evtushenkov
R. Sommer
M. Shamolin
A. Buyanov
F. Evtushenkov

03-12
21.04.2012
Item 6.5.5.

Sistema’s JSFC
contribution to the
charter capital of
Altai Resort LLC

Sistema JSFC Altai
Resort LLC ОАО

08-12
03.10.2012
Item 1.4.

Acquiring by
Sistema JSFC of
UNPZ OJSC
preferred
registered shares

Sistema
UNPZ OJSC

JSFC

08-12
03.10.2012
Item 1.8.

Acquiring by
Sistema JSFC of
Ufaneftekhim

Sistema
Ufaneftekhim

JSFC

Up to
1, 009, 000,
000.00 (one
billion nine
million) RUB

Shareholder holding
jointly with his
affiliates over 20
(twenty) % of
Sistema JSFC voting
shares.

471, 765, 130.00
(four hundred
and seventy-one
million seven
hundred and
sixty-five
thousand one
hundred and
thirty) RUB
861, 153, 990.00
hundred
(eight
sixty-one
and

Sistema JSFC
shareholder

OJSC preferred
registered shares

08-12
03.10.2012
Item 1.11.

Acquiring by
Sistema JSFC of
Novoil OJSC
preferred
registered shares

Sistema
Novoil OJSC

JSFC

one
and

nine
and

million
hundred
fifty-three
thousand
hundred
ninety) RUB
584, 417, 820.00
(five
hundred
and eighty-four
four
million
hundred
and
seventeen
thousand
hundred
twenty) RUB

eight
and

Sistema JSFC
shareholder

08-12
03.10.2012
Item 1.14.

09-12
27.10.2012
Item 6.3.4.

10-12
14.12.2012
Item 8.4.4.

10-12
14.12.2012
Item 8.6.4.

10-12
14.12.2012
Item 8.7.2.

Acquiring by
Sistema JSFC of
Bashneft OJSC
preferred
registered shares

Reduction of
Sistema’s stake
(ordinary
registered book-
entry shares) of
NIS OJSC in
favour of Sistema
Telecom Assets
LLC

Acquiring by
Sistema JSFC a
50% equity stake
of Financial
Alliance LLC

Granting by
Sistema JSFC the
credit to Sistema
Shyam
TeleServices
Limited for the
purpose of further
refinancing of
Gazprombank
(Switzerland)
Limited loan
Granting
guarantee on
Sistema Shyam
TeleServices

Sistema
Bashneft OJSC

JSFC

Sistema JSFC
Sistema
Assets LLC

Telecom

Up to
7, 970, 000, 000.
00 (seven billion
nine hundred and
seventy million)
RUB

Sistema JSFC
shareholder, member
of the Board of
Directors and
members of the
Management Board
of Sistema JSFC

Not less than
229, 500, 000.00
hundred
(two
twenty-nine
and
million
five
hundred
thousand) RUB

Shareholder holding
jointly with his
affiliates over 20
(twenty) % of
Sistema JSFC voting
shares.

Sistema
Bashneft OJSC

JSFC

Up to
3, 410, 000, 000.
00 (three billion
four hundred and
ten million) RUB

Sistema JSFC
Sistema
TeleServices
Limited

Shyam

230, 000, 000.00
hundred
(two
and
thirty
million) USD

Shareholder holding
jointly with his
affiliates over 20
(twenty) % of
Sistema JSFC voting
shares.
A. Goncharuk
A. Buyanov
S. Drozdov
F. Evtushenkov
Shareholder holding
jointly with his
affiliates over 20
(twenty) % of
Sistema JSFC voting
shares.

V. Evtushenkov
M. Shamolin
A. Buyanov

Sistema JSFC
Sistema
TeleServices
Limited

Shyam

74 (seventy-four)
% of the total
cost
the
of
extended

Shareholder holding
jointly with his
affiliates over 20
(twenty) % of

Limited liabilities
to ICICI Bank
Limited under
Guarantee Facility
Agreement, based
on which ICICI
Bank Limited
provided and
prolonged the
bank guarantees
(FBG) in favour
of the Department
of
Telecommunicati
ons of the Indian
Ministry of
Communications
that secure the
fulfillment of the
terms and
conditions of the
licence
agreements by
Sistema Shyam
TeleServices
Limited

Sistema JSFC voting
shares.

V. Evtushenkov
M. Shamolin
A. Buyanov

amounts

Guarantees,
which
up to
1, 110, 000, 000.
00 (one billion
one hundred and
ten million) of
rupees,
Indian
which
is
equivalent to
20, 408, 914.00
(twenty million
hundred
four
thousand
eight
nine
hundred
fourteen) USD
the rate of
(at
Indian
54.388
rupees per 1 US
dollar), as well
as
interest
payments,
payment of fees
and
other
payments
stipulated by the
Guarantee
Facility
Agreement

9.7. INFORMATION ABOUT THE COMPANY’S COMPLIANCE WITH THE 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 A notice of the forthcoming Annual General Meeting
of shareholders shall be distributed not later than 30
days before the day of the Meeting unless a longer
term is provided for by legislation.

2 The procedure of announcement on holding the
Annual General Meeting of shareholders shall allow
shareholders to properly prepare for participation in
the meeting.

3 Shareholders may familiarise themselves with the list
of persons who have the right to attend the Annual
General Meeting of shareholders, starting from the
date of announcement of holding the General Meeting
of Shareholders and till the closure of the Annual
General Meeting of shareholders, and in case of
holding the meeting in the form of a letter ballot – till
the deadline for acceptance of ballot papers.

4 Shareholders can familiarise themselves with the
subject
to
(materials) which
information
is
presentation during preparation for
the Annual
General Meeting of shareholders, through electronic
means of communication

5 Shareholders may introduce an agenda item for the
Annual General Meeting of shareholders or demand
convocation of the Annual General Meeting of
shareholders without presenting an extract from the
register of shareholders if his/her rights for shares are
accounted for in the system of keeping the register of
shareholders, and in the event when his/her rights for
shares are registered in the depo account - an extract
from
the depo account shall be sufficient for
exercising the above-said rights.

6 Joint-Stock Company’s internal documents should set
out procedures for registering participants of the
Annual General Meeting of shareholders.

Observed

This provision was added to the Charter of
Sistema JSFC (item 28.9).

Observed

Announcement about the meeting is sent to
shareholders by mail and is published on
website
Company’s
the
(www.sistema.ru/www.sistema.com).

accordance with Sistema

In
JSFC
Regulations on Annual General Meeting of
Shareholders (“AGM”) (approved by the
Minutes of Sistema JSFC AGM No. 2-10 as
of June 30, 2010) shareholders have the
right to familiarise themselves with the list
of persons who may attend the Annual
General Meeting of
shareholders by
addressing
the Company’s Corporate
Secretary.
complete
The
information relating to the AGM on the
Company’s website
Internet
(www.sistema.ru/www.sistema.com).

Company

publishes

the

accordance with Sistema

In
JSFC
Regulations on Annual General Meeting of
Shareholders (“AGM”) (approved by the
Minutes of Sistema JSFC AGM No. 2-10 as
of June 30, 2010), there is no requirement
that shareholders should prove their right
with specific documents, with the exception
of the extract from the depo account.

Observed

Regulated by Sistema JSFC Regulations on
General Shareholders’ Meeting.

Work of the Board of Directors

1 The Joint-Stock Company’s Charter should define the
authority of the Board of Directors regarding annual
approval of the Joint-Stock Company’s financial and
business plan.

Observed

In accordance with the Company’s Charter,
the competence of the Board of Directors
includes: “determining the priority areas of
the Company’s activity, determining the
strategy of the Company’s development,
approving the Company’s annual budgets
(financial plans), considering the main areas
of activities and development strategy of
subsidiaries.”

2 The risk management procedure should be approved
the Joint-Stock

the Board of Directors of

by
Company.

3 The Board of Directors shall have the right to
determine requirements to the qualifications and
remuneration of the CEO and heads of the Joint-Stock
Company’s main structural divisions.

Observed

4 The Joint-Stock Company’s Charter of the Board of
Directors shall provide for the right of the Board to
approve the terms of agreements with the CEO and
members of the Management Board.

Observed

5 The Joint-Stock Company’s Board of Directors shall
include at least 3 independent directors who meet the
requirements of the Code of Corporate Conduct.

Observed

6 No members of the Joint-Stock Company’s Board of
Directors shall have 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 areas of
entrepreneurial activity, finances, taxes and duties or
equity markets.

Observed

7 In the Board of Directors there are no persons who are
shareholders, general directors (managers), members
of governing bodies or employees of legal entities
competing with the Company.

Observed

8 Joint-Stock Company’s internal documents set out the
requirement on holding the Board of Directors
meetings at least once in six weeks.

Observed

Appendix 3 to the Minutes of the Board of
Directors No. 03-09 of April 22, 2009.
Resolution of the Board of Directors dated
March 05, 2011, Minutes No. 03-11.

approving

The competence of the Board of Directors
includes: appointment of the President of
the Company; determining the number of
members of
the Management Board,
election of its members; approving the
terms of the agreement with the President
the Company’s
and with members of
Management Board; early termination of
authority of the President of the Company
the Company’s
and members
of
the
Management Board,
principles of performance assessment and
the
remuneration system, as well as
controlling activity of the Company’s top
officials who are directly reporting to the
Company’s President.
In accordance with the Company’s Charter,
terms of agreements with the President and
members of the Company’s Management
Board shall be approved by the Board of
Directors.
As of December 31, 2012, the Board of
Directors includes 8 members of the Board
of Directors who meet the criteria of the
Code of Corporate Conduct for independent
directors: B. Dickie, R. Kocharyan,
J. Krecke, R. Munnings, E. Novitsky,
M. Holtzman, S. Tchuruk, D. Iakobachvili.

The Company has reviewed this issue and
does not have any information on such
offenses committed by the members of its
Board of Directors.

information available to
According the
the Sistema Board of
Sistema JSFC,
Directors does not include persons being
shareholders, general directors (managers),
members of a governing body or employees
of a legal entity which competes with
Sistema JSFC.
According
the Company's Charter,
to
meetings of the Board of Directors are held
as necessary but at least 2 times per quarter.

9 Meetings of the Joint-Stock Company’s Board of
Directors shall be held at least once in six weeks
during the year for which the Joint-Stock Company’ s
Annual Report is compiled.

10 Joint-Stock Company’s internal documents set out the
procedure for holding meetings of the Board of
Directors.

Observed

In 2012 10 meetings of the Board of
Directors were held.

Observed

The procedure to hold meetings of the
Board of Directors is determined by the
Regulations on Board of Directors and

11 Joint-Stock Company’s internal documents provide
for the right of the Board members to get information
functions
necessary
from
their
the Joint-Stock
executive bodies and heads of
Company’s main structural divisions.

for performing

Observed

Working Procedures of the Sistema JSFC
Board of Directors.

The right of members of the Board of
Directors to get any information on the
activities of Sistema JSFC is stipulated by
the Sistema JSFC Regulations on the Board
of Directors.

12 The company shall establish a committee of the Board

Observed

of Directors responsible for strategic planning.

The Company has established the Strategy
Committee of the Board of Directors.

13 The company shall establish a committee of the Board
of Directors which recommends the auditor to the
Board of Directors and interacts with the latter, as
well as with the Joint-Stock Company’s Auditing
Commission.

14 The company shall establish a committee of the Board
of Directors responsible for determining the criteria
for selecting candidates to be appointed to the Board
of Directors and for developing the Joint-Stock
Company’s remuneration policy.

Observed

The Company has established the Audit and
the Board of
Finance Committee of
Directors.

the
has
The Company
Nomination, Remuneration and Corporate
Governance Committee of the Board of
Directors.

established

15 The Nomination and Remuneration Committee shall

Observed

be chaired by an independent director.

The Committee is chaired by independent
director R. Kocharyan.

16 The Joint-Stock Company shall have

internal
regulations approved by the Board, which set out a
procedure for forming the committees of the Board of
Directors and their working procedures.

Observed

The Company has approved the Terms of
Reference that set out the powers of the
Board Committees and the procedure of
their establishment and operation.

17 The Joint-Stock Company’s Charter sets out a
procedure to determine the quorum of the Board of
Directors that ensures participation of independent
directors in meetings of the Board of Directors.

Not observed

18 The issuer’s internal documents shall provide for the
obligations of
the Board of
the members of
Directors, members of a collective executive
governing body, person who carries out functions of
the sole executive body, including the governing
organisation and its officials, to disclose information
on the possession of the issuer's securities as well as
sale and (or) purchase of the issuer’s securities.

Observed

Executive bodies

1 The Joint-Stock Company shall have a collective

Observed

executive body (Management Board).

2 Joint-Stock Company’s internal documents set out
procedures for approval of transactions outside of the
Joint-Stock Company’s financial and business plan.

Observed

The quorum of the Board of Directors is
determined according to the number of
members of
the Board of Directors
attending the sitting regardless of their
status of an independent, non-executive or
executive director.
This
the
is
requirement
Corporate Conduct Code of Sistema JSFC,
the Regulations on the Board of Directors
and the Management Board of Sistema
JSFC, as well as internal documents that
set out liabilities of the Company in
implementing
the
legislation on preventing illegal use of
insider information.

requirements

included

The Company has formed a collective
executive body – the Management Board
(provided for by the Charter)
Procedures for approval of transactions
outside of the budget are set out in the
Corporation’s budget policy, the Regulation
on contracts approval and the Regulation on
such
mergers
transactions are preliminary reviewed by
the Audit and Finance Committee. When
the Board of
necessary, resolution of

acquisitions. All

and

3 Executive bodies shall not include persons who are
shareholders, general directors (managers), members
of a governing body or employees of a legal entity
which competes with the Joint-Stock Company.

Observed

4 The Joint-Stock Company’s executive bodies do not
include persons with 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.

5 The Joint-Stock Company’s Charter or

internal
documents prohibit the management company (the
manager) from performing similar functions in a
competing company as well as from having any other
property relations with the Joint-Stock Company apart
from the provision of services to the management
company (the manager).

6 Joint-Stock Company’s internal documents shall set
out obligations of executive bodies to refrain from
actions which lead or may lead to a conflict between
the Joint-Stock
their
Company, and in case of such conflict of an
obligation to inform the Board of Directors of that.

interests and

interests of

7 The Joint-Stock Company’s charger or

documents shall set out criteria
management company (manager).

internal
the

to select

Directors introduces amendments to the
budget.

being

persons

available

According
information,
executive bodies of Sistema JSFC do not
include
shareholders,
directors general (manager), members of a
governing body or employees of a legal
entity which competes with the Company.
According to the information available to
Sistema JSFC, executive bodies of Sistema
JSFC do not include such persons.

Observed

Provided by the Company’s Charter (item
34.10).

Observed

Not applicable

Such requirements are contained in the
Regulations on the Board of Directors,
Regulations on the Management Board,
Regulations on the President and in the
contracts with the President and members
of the Company’s Management Board.

It is not necessary because there is no
managing company and there are no plans
to engage the same to perform functions of
the Company’s sole executive body.

8 Joint-Stock Company’s executive bodies

shall
monthly present reports on their work to the Board of
Directors.

Observed

9 Agreements concluded by the Joint-Stock Company
with the General Director (management organisation,
manager) set out his/her liability for failure to comply
with regulations on the use of confidential and insider
information.

Observed

Corporate Secretary

The Board of Directors quarterly reviews
financial results of the Company's activity.
The Company’s management weekly
compiles a report on the most important
events and provides it to members of the
Board of Directors.

There is a requirement regarding protection
of confidential information in the contracts
with the President and members of the
Company’s Management Board.

secretary)

1. The Joint-Stock Company shall have an official
(company
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.

whose

Observed

The Company has appointed the Corporate
Secretary.

2 Joint-Stock Company’s Charter or internal documents
shall set out a procedure to appoint (elect) the

Observed

The Board of Directors has approved the
Regulations on the Corporate Secretary
99

which sets out responsibilities of
the
Corporate Secretary and procedure of
his/her appointment.

Partially observed These requirements are included in the

Regulations on the Corporate Secretary.

Partially observed Regardless of absence of this norm in the
always
this

requirement

Charter,
observed in practice.
In the above cases the Sistema Board of
Directors engages an independent appraiser.

Observed

Not observed

Such actions are hardly probable because
there is a controlling shareholder.

secretary of the Company and his/her responsibilities.

3 The Joint-Stock Company’s Charter shall set out the
requirements for the candidate for the position of a
Company’s secretary.
Material corporate actions

1 The Joint-Stock Company’s charter or

internal
documents shall include a requirement to approve
large transactions prior to performing them.

2 Mandatory engagement of an independent appraiser
for assessing the market value of the property which
is a subject of a large transaction.

and

3 The Joint-Stock Company’s charter shall prohibit
from undertaking any actions during acquisition of
large stakes of the Joint-Stock Company’s shares
(takeover) which are directed at protection of rights of
executive bodies (members of such bodies) and
members of the Board of Directors of the Joint-Stock
Company
the
actions which
shareholders’ position (in particular, prohibiting the
Board of Directors from adopting, before the end of
the period allocated for shares acquisition, resolutions
on issuing additional shares, securities convertible
shares or securities granting the right to acquire the
Company’s shares, even if the right to adopt such
resolutions is given to the Board of Directors by the
Charter).

aggravate

4 The Joint-Stock Company’s charter or

internal
documents shall include a requirement regarding
mandatory engagement of an independent appraiser to
determine the ratio for converting shares during
reorganisation.

Not observed

Disclosure of information

1 The Joint-Stock Company shall have an approved by
the Board internal document which sets out its rules
and approach
(the
to
Regulations on the Information Policy).

information disclosure

2 The Joint-Stock Company’s internal documents shall
contain a list of information, documents and materials
which should be provided to shareholders for taking
decisions on agenda items presented to the Annual
General Meeting of shareholders.

Observed

3 Disclosure of financial information on the Joint-Stock

Observed

Company’s activities.

4 The use of additional forms and methods of

Observed

information disclosure.

There is no such provision in the Charter,
but in case of reorganisation, in accordance
with the Regulations on the Board of
Directors, the Board of Directors of Sistema
JSFC will be
the decision on
taking
defining the ratio for converting shares only
if there are substantial grounds for this, for
example, the opinion of an independent
appraiser.

The Board of Directors has approved the
Regulations on the Information Policy of
the Corporation.

list

additionally

The
provided
information is contained in the Code of
Corporate Conduct, the Regulations on the
Information Policy and the Regulations on
the General Meeting of shareholders of
Sistema JSFC.
Russian Accounting Standard
(RAS)
financial statements are disclosed annually.
GAAP financial statements are disclosed
quarterly.

The Company has established
the IR
Department. It regularly holds meetings
with investors and organizes road shows.
The Department maintains the corporate
Internet
website

the

100

5 The issuer shall disclose information about 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 body, including the management company
and the manager.

Observed

6 The Joint-Stock Company shall have a website in the
Internet and regularly disclose information on its
activity.

Observed

(www.sistema.ru/www.sistema.com) with
extensive information about the Company’s
activities.

about

information

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
body is disclosed in the Annual report
(Section 8) and quarterly reports (Section
5.3).
The address of the Sistema JSFC website in
the
www.sistema.ru/
Internet:
www.sistema.com.

7 The Joint-Stock Company’s internal documents shall
contain a requirement for disclosure of information on
the Company’s transactions with persons who, in
accordance with the Charter, are considered the Joint-
Stock Company’s top officials as well as on the Joint-
Stock Company’s transactions with companies where
Joint-Stock Company’s
top officials directly or
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 internal documents shall
include a requirement for disclosure of information on
all transactions which may affect the market value of
the Joint-Stock Company’s shares.

9. The company shall have an

internal document
approved by the Board of Directors for the use of
material information on the Joint-Stock Company’s
activities, shares and other securities of the Company
and transactions with them when such information is
not commonly available and when its disclosure may
exert substantial influence on the market value of the
Joint-Stock Company’s shares and other securities.

Control of financial and business activities

Partially observed Observed

according

requirement
transactions.

regarding

the
legal
related-party

Observed

Observed according to requirements of the
Russian legislation on security markets and
requirements of the UK security market
regulator. Disclosure principles are set out
in the Regulations on the Information
Policy of Sistema JSFC.
the
The Board of Directors approved
Regulations on the Information Policy of
Sistema JSFC (Minutes No. 04-10 as of
April 21, 2010).

1 The company shall have procedures approved by the
board of directors for internal control over the Joint-
Stock Company’s financial and business activities.

Observed

2. The Joint-Stock Company shall have a special
division which ensures compliance with procedures of
internal control (control and audit service).

Observed

The internal control procedures are stated in
the regulatory documents of Sistema JSFC
approved by the Board of Directors and the
President of the Corporation.
The Company has established the following
divisions:
-Internal Audit Department (functionally
reporting
to Sistema JSFC Board of
Directors through the Audit and Finance
Committee of the Board of Directors).
Internal Audit Department acts in order to
evaluate the reliability and efficiency of the
existing internal control system;
-Control and Project Support Department
(functionally reporting to Sistema JSFC
Board of Directors through the Ethics and
Control Committee of
the Board of
Directors; administratively reporting to the

101

3 The Joint-Stock Company’s internal documents shall
contain 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 audit
services do not include persons with 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,
finances, taxes and duties or equity market.

Observed

Project

control

and
performs
the

Support
over
internal control

President of Sistema JSFC).
The Control
Department
compliance with
procedures.
The Terms of Reference of the Internal
Audit Department and the Control and
Project Support Department, which set forth
the structure and composition of these units,
were approved.
There are no such employees in the Internal
Audit Department and the Control and
Project Support Department.

5 The control and audit services do not include any
persons being the shareholders, general directors
(managers), members of a governing body or
employees of a legal entity which competes with the
Joint-Stock Company.

Observed

There are no such employees
the
Internal Audit Department and the Control
and Project Support Department.

6 The Joint-Stock Company’s internal documents shall
set out a deadline for presentation to the control and
audit service of documents and materials for assessing
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 shall
set out 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 identified irregularities.

Observed

8 Internal documents shall contain a requirement for the
control and audit service to perform a preliminary
assessment of the reasonability of operations which
are not included in the Joint-Stock Company’s
financial and business plans.

Observed

9 The company shall have an

internal document
approved by the Board of Directors which determines
the procedure for the Auditing Commission to carry

Observed

required

The Internal Audit Department and the
Control and Project Support Department of
Sistema JSFC have the right to request and
receive any
information on
financial and business transactions and have
the right to independently determine the
deadline for presenting such information.
In accordance with item 2.3 of the Terms of
the Audit and Finance
Reference of
the Board of Directors,
Committee of
within the framework of internal function
development and its performance control,
the Audit and Finance Committee regularly
reviews the performance results of the
Internal Audit Department.
In accordance with item 2.1 of the Terms of
Reference of
the Ethics and Control
Committee of the Board of Directors, the
Committee is supposed to review the results
of complete audits of the Corporation
performed by
the Control and Project
Support Department as well as review the
its performance
remediation plan and
control.
A preliminary assessment of the feasibility
of operations which are not included in the
the
financial and business plans of
Corporation
the
is performed within
“Tender Procedures and Procurement”
Code. The Control and Project Support
Department employees are members of
procurement commissions.
The Board of Directors and the General
Shareholders’ Meeting approved the Terms
of Reference on the Auditing Commission
102

out audits of the Joint-Stock Company’s financial and
business activities

10 The Audit Committee shall assess the audit report
prior to its presentation to shareholders at the Annual
General Meeting of shareholders.

Observed

of Sistema JSFC (Minutes No. 2-04 as of
September 01, 2004).
In accordance with item 2.2 of the Terms of
Reference of
the Audit and Finance
Committee as of September 24, 2011,
within the framework of interaction with
the Corporation’s auditors, the Audit and
Finance Committee analyses and evaluates
the
internal auditors’ performance and
reviews their observations.

Dividends

1 The company shall have an

internal document
approved by the board of directors which is used as a
guideline
when making
the
recommendations on
the amount of dividends
(Regulations on the Dividend Policy).

board

Observed

The Company
approved
Regulations on the Dividend Policy.

has

the

103

9.8. INFORMATION ON THE COMPANY'S COMPLIANCE WITH THE REQUIREMENTS OF THE UK

Observed / not
observed

Comment

CORPORATE GOVERNANCE CODE

Provisions of the Code

to discharge

A. LEADERSHIP
A.1. The Role of the Board
A.1.1. The work of the Board of Directors shall
be organised efficiently. The board shall meet
its duties
regularly enough
effectively.
There should be a formal schedule of matters
specifically reserved for decision of the Board of
Directors.
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 of directors and the
management board.

Observed

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.

Observed

The annual report should indicate the number of
meetings of the board and its committees and
individual attendance by directors.

Observed

А.1.3. The Company
ensure due
indemnification coverage for members of the
Board of Directors.

shall

Observed

A.2. Division of responsibilities between
Chairman and President
A.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, set out in writing and agreed by the
board.

Observed

A.3. Chairman of the Board of Directors
А.3.1. The chairman should on appointment meet
the independence criteria set out in B.1.1 below.

Not observed

the

information on

The Board of Directors of Sistema JSFC meets at
least 8 times per year, and this allows reviewing
and taking decisions on issues within the sphere
of its competence.
The competence of the Board of Directors is set
out in the Charter of Sistema JSFC (item 32 of
the Charter).
The Annual Report of the Company for 2012
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 (items 6.2,
6.4 of the Annual Report).
The Annual Report of the Company for 2012
includes
election of
V. Evtushenkov as Chairman of the Board of
Directors of the Company and on the election of
Deputy Chairmen of the Board of Directors (item
6.2 of the Annual Report).
Besides, the 2012 Annual Report of the Company
includes information on the President of the
Company, Chairmen and members of the Board
Committees (item 6.2 of the Annual Report).
Company's statutory documents do not provide
for the position of a senior independent director.
The Annual Report of the Company for 2012
includes information on the number of meetings
of the Board of Directors and Board Committees,
as well as attendance by members (item 6.2.).
According to item 2.4.5. of the Terms of
Reference of
the
Company insures liability of the Board members
from legal actions or claims in relation to
business decisions or other actions taken in
connection with the performance of his/her
functions as a member of the Board of Director
of the Company or its affiliates (D&O Policy).
Additionally, the members of the Board of
Directors signed Indemnification Agreements.

the Board of Directors,

Russian legislation and Sistema JSFC Charter
stipulates that the individual performing the
functions of the sole executive body of Sistema
JSFC cannot simultaneously chair the Board of
Directors of Sistema JSFC (item 31.1 of the
Charter). The responsibilities of the Chairman,
the members of the Board of Directors and the
President are clearly distinguished by the Charter
of Sistema JSFC.

The Chairman of the Board of Directors of the
Company
the
Corporation, V. Evtushenkov, a non-executive

the main shareholder of

104

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
to
advance and should set out
shareholders at the time of the appointment and in
the next annual report.

its reasons

Observed

Partially observed

independent

director. The

A.4. Non-executive directors
A.4.1. The board should appoint one of the
independent non-executive directors to be the
senior
senior
to
independent director should be available
shareholders if they have concerns which contact
through the normal channels of chairman, chief
executive or other executive directors has failed
to
is
inappropriate.

for which such contact

resolve or

A.4.2. The chairman should hold meetings with
the non-executive directors without the executives
present.

Partially observed

Led by the senior independent director, the non-
executive directors should meet without the
chairman present at least annually to appraise the
chairman’s performance and on such other
occasions as are deemed appropriate.

Not applicable

A.4.3. Where directors have concerns which
cannot be resolved about the running of the
company or a proposed action, they should ensure
that their concerns are recorded in the board
minutes.

Observed

B. EFFECTIVENESS.
B.1. The Composition of the Board
B.1.1. The board should identify in the annual
report each non-executive director it considers to
be independent.
The board should determine whether the director
is independent in character and judgment and
whether there are relationships or circumstances
which are likely to affect, or could appear to
affect, the director’s judgment.
The board should state its reasons if it determines
that a director is independent notwithstanding the

member of the Board, who does not meet the
independence criteria.
According to the Russian legislation and the
Company's Charter, the person carrying out
functions of the 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 is clearly
defined in the Charter of the Company.

Formal meetings of the Sistema Board are not
held without the presence of executive directors.
At the same time, regular informal meetings of
the Sistema Chairman with independent directors
are held.
The Company’s regulations do not provide 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
of the Company, for discussing urgent matters of
governing the Company and organising the work
of the Board of Directors.
Chairman’s performance appraisal is performed
within the framework of Sistema Board of
Directors’ appraisal as a whole.

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
analysed to ensure that all elements of decisions
that were made are reflected in the minutes.
According to the Working Procedures of the
Board of Directors of the Company (approved by
the Board of Directors on October 27, 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.

Information on every non-executive director that
meets independence criteria is included in the
2012 Annual Report (item 6.2.).
There are 8 directors who meet independence
criteria: B. Dickie, R. Kocharyan, J. Krecke,
R. Munnings, E. Novitsky, M. Holtzman,
S. Tchuruk, D. Iakobachvili.

105

should

comprise

existence of relationships or circumstances which
may appear relevant to its determination11.
B.1.2. In large companies (according to FTSE
350 list) at least half the board, excluding the
chairman,
non-executive
directors determined by the board as independent.
B.2. Appointments to the Board
B.2.1. There should be a nomination committee
which should
for board
appointments and make recommendations to the
board. The nomination committee should make
available its terms of reference, explaining its role
and the authority delegated to it by the board.

the process

lead

A majority of members of
the nomination
committee should be independent non-executive
directors.

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

Observed

Not applicable

Observed

Sistema JSFC is not in FTSE 350 list, however,
more than 60% (8 of 12 members)12 of the Board
members meet independence criteria.

Partially observed The Nomination, Remuneration and Corporate
Governance Committee was established and is
active.
The Terms of Reference of the Committee define
the powers of the Nomination, Remuneration and
Corporate Governance Committee. One of the
key functions of the Committee is 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 of Directors, as it is in
the sphere of competence of shareholders.

Partially observed Half of

the members of

the Nomination,
and Corporate Governance

non-executive

Remuneration
Committee meet independence criteria
(B. Dickie, R. Kocharyan, R. Munnings).
R. Kocharyan,
independent
director chairs the Nomination, Remuneration
and Corporate Governance Committee.
The Nomination, Remuneration and Corporate
Governance Committee is not responsible for
selecting candidates to the Board of Directors.
This
the sphere of competence of
in
is
shareholders.

B.2.2. The nomination committee should evaluate
the balance of skills, knowledge and experience
on the board and, in the light of this evaluation,
prepare a description of the role and capabilities
required for a particular appointment.

the Board of
Partially observed Candidates for members of
Directors are proposed by
the Company's
shareholders according to items 23, 28 of Sistema
JSFC Charter.
Requirements to the Company's Board members
are set out in the Terms of Reference of the
Company's Board of Directors. Among other
things, a candidate should have sufficient
professional experience, should not be previously
convicted of economic crimes, not be under a ban
on taking 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, Remuneration and Corporate
Governance Committee does not develop formal
requirements to candidates to the Board of
Directors, as a candidate proposed to the Board
Membership by shareholders must be included in

the companies

11 Including if the director: a) has been an employee of the company or group within the last five years; b) has, or has had within the last
three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a
body that has such a relationship with the company; c) has received or receives additional remuneration from the company apart from a
director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension
scheme; d) has close family ties with any of the company’s advisers, directors or senior employees; e) holds cross-directorships or has
significant links with other directors through involvement in other companies or bodies; f) represents a significant shareholder; or g) has
served on the board for more than nine years from the date of their first election.

12 B. Dickie, R. Kocharyan, J. Krecke, R. Munnings, E. Novitsky, M. Holtzman, S. Tchuruk, D. Iakobachvili.

106

B.2.3. Non-executive directors
should be
appointed for a specified term and can be
reelected or relieved of their duties subject to the
applicable corporate law.
Any term beyond six years for a nonexecutive
director should be subject to particularly rigorous
review, and should take into account the need for
progressive renewal of the board composition.

Observed

Not applicable

the voting list according the legislation of the
Russian Federation.
In accordance with Russian legislation, the Board
members are elected at the Sistema AGM for a
one-year term (till the next AGM) and can be
reelected an unlimited number of times.
In accordance with the Russian legislation, the
Board members are elected at the Sistema AGM
for a one-year term (till the next AGM) and can
be reelected an unlimited number of times.
The information on the performance of the Board
of Directors over the past year, including data on
the members’ attendance, is disclosed annually,
and the shareholders make their own conclusions
on the quality of work of the Board and its
particular members.

B.2.4. A separate section of the annual report
should describe the work of the nomination
committee, including the process it has used in
relation to board appointments. This section
should include a description of the board’s policy
on diversity, including gender, any measurable
objectives that it has set for implementing the
policy, and progress on achieving the objectives.
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. Where an external
search consultancy has been used, it should be
identified in the annual report and a statement
made as to whether it has any other connection
with the company.

A separate section of the annual report should
include a description of the board’s policy on
diversity.
A separate section of the annual report should
include objectives of the nomination committee
and progress on achieving the objectives.
B.3. Nominations

Partially observed The Annual Report (item 6.2) includes the
information on the responsibilities and powers of
the Nomination, Remuneration and Corporate
Governance Committee of the Sistema Board, as
well as on the issues reviewed by the Committee.
The Committee does not have the powers to
directly nominate candidates to the Board of
Directors, since it lies within the scope of
authority of the shareholders.
In 2012 the Nomination, Remuneration and
Corporate Governance Committee did not engage
any external consultants.

Partially observed The Board of Directors consist of (1)13 executive,
(4)14 non-executive and
independent
directors.
The section “Board Committees” includes the
information on the tasks and objectives of NRCG
Committee, and the list of the issues reviewed.

Observed

(8)15

B.3.1. For the appointment of a chairman, the
nomination committee should prepare a job
specification, including an assessment of the time
commitment expected.

Observed

A chairman’s other significant commitments
the board before
should be disclosed
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.

Observed

B.3.2. The terms and conditions of appointment
of non-executive directors should be made
available for inspection to any interested parties

Observed

The type of work and tasks of the Board
Chairman are set out in the Terms of Reference
of the Board of Directors of the Company.
A Chairman of the Board of Directors is elected
by the decision of all the members of the Board
of Directors at the first meeting after the Annual
General Meeting of shareholders.
Information on all positions held by
the
Chairman of the Company's Board of Directors is
disclosed and included into the 2012 Annual
Report (Section 9.1). The Chairman of the
Company's Board of Directors V. Evtushenkov
does not hold a position of a chairman of other
significant companies except Sistema JSFC.
Terms and conditions of appointment of non-
executive directors of the Board of Directors are
Company's website
available

the

13 M. Shamolin
14 V. Evtushenkov, A. Goncharuk, D. Zubov, V. Kopiev
15 B. Dickie, R. Kocharyan, J. Krecke, R. Munnings, E. Novitsky, M. Holtzman, S. Tchuruk, D. Iakobashvili

107

at the company's office and during the Annual
General Meeting of shareholders.

The letter of appointment should set out the
expected
time commitment. Elected board
members should undertake that they will have
sufficient time to meet what is expected of them.

Information on all other positions held by the
non-executive Board members
other
companies (with the time commitment required)
should be disclosed to the Board of Directors.
Information on changes to such data should be
made available when such changes occur.

B.3.3. Executive directors can neither be
appointed as non-executive directors nor be a
Chairman at more than one major company
included in the FTSE 100 list.

(www.sistema.ru/www.sistema.com),
the
Company's office and during the Annual General
Meeting of shareholders to its participants.
According to the Russian legislation all Board
members are elected for 1 year and could be re-
elected an unlimited number of times.

Observed

Partially observed Before candidates are proposed for appointment
to the Board they familiarise themselves with the
work plan of the Board of Directors for the
coming year, the rights and obligations of the
Board members and provisional membership in
the Board committees.
During the induction, a Corporate Secretary of
the Company 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 the Board members.
Attendance of meetings and involvement of the
Board members in discussion of agenda items is
recorded and analysed for subsequently including
this information into the report on the quality of
corporate governance.
Biographies of candidates to the Company's
Board, including information on positions held in
other organisations, 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 Regulations on the
Company's Board of Directors (item 2.3).
As of December 31, 2012 the Board of Directors
includes 13 members, 1 of them is an executive
director (M. Shamolin).
M. Shamolin is the President of the Company and
a board member of some companies of Sistema
Group, which are out of the FTSE 100 list.
Sitting on the boards of the companies of the
Sistema Group is one of the main duties of
executive directors, therefore, this does not create
any conflict of interests for the work at the
Company.

shareholders,

Observed

B.4. Professional development
B.4.1. The chairman should ensure that new
directors receive full induction on joining the
board. As part of this, the directors should be
able to meet the main shareholders of the
company.

Observed

Every candidate to the Board of Directors before
the election meets the Board Chairman, Board
members and the management and receives
information on work of the Board of Directors,
his/her role in the Board of Directors and the
Company's business.
The Corporate Secretary gives consultation to
new members of the Board on the procedures and
organisation of work of the Board and its
committees and provides necessary statutory
documents, documents describing the company's

108

B.4.2 The chairman should regularly review and
agree with each director
training and
development needs.

their

Observed

B.5. Information and Support
B.5.1. The board should ensure that directors have
access to independent professional advice at the
company’s expense where they judge it necessary
to discharge their responsibilities as directors.
Committees should be provided with sufficient
resources to undertake their duties.
B.5.2. 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

B.6. Performance assessment
B.6.1. The Annual Report shall contain the
information on procedures for assessing the
performance of the Board of Directors, its
Committees and every director.

Observed

B.6.2. Assessment of the performance of the
board of FTSE 350 companies should be
externally facilitated at least every three years.
The external facilitator should be identified in the
annual report and a statement made as to whether
they have any other connection with the company.

B.6.3. The non-executive directors, led by the
senior independent director, should be responsible
for performance evaluation of the chairman,
taking into account the views of executive
directors.

Not applicable

B.7. Re-election

strategy, business, markets of presence and
financial reports.
The above induction procedure for new Board
members is not formalised.
The members of Sistema JSFC Board of
Directors with consent of the Chairman of the
Board of Directors represent the Company at
various international symposiums, conferences,
professional seminars etc.

The Regulations on Sistema JSFC Board of
Directors (item 2.2.1) provides for the right of the
Board members to engage external expertise of
the documents of any issue of the agenda.
Independent expertise is arranged by the Board of
Directors Administration.
According to the Terms of Reference of the
Corporate Secretary of the Company, the last
version of which was approved by the Board of
Directors (Minutes dated February 14, 2004), one
of the functions of the Corporate Secretary is
facilitating the work of the Board of Directors,
including: providing Board members with
requested information and documents regarding
Company's work, distribution among Board
members of materials for the meetings of the
Board, facilitation of the work of the Board
Committees.

their

giving

fill
opinion

The process of performance assessment of the
Board of Directors is set out in item 6.5 of the
2009 Annual Report of the Company. Since 2009
there is a process of self-appraisal of the Board of
in
Directors work. Board members
questionnaires
on
organisation of work of the Board of Directors:
membership, structure, process and organisation
of work of the Board of Directors, work of
committees of the Board of Directors, quality of
decisions of the Board of Directors in relevant
areas. The Board of Directors Administration
annually surveys all members of the Board,
analyses results and provides the final analysis to
the Nomination, Remuneration and Corporate
Governance Committee, the Board Chairman and
the members of the Board of Directors.
Sistema JSFC is not on the FTSE 350 list.

Performance assessment of
the Board of
Directors’ Chairman is carried out during the
appraisal of the performance of the Board of
Directors in general.
The Company’s regulations do not provide for
the position of senior independent director.

109

B.7.1. All candidates to the board should be
subject to election by shareholders at the first
annual general meeting after their appointment,
and to re-election thereafter at intervals of no
more than three years.
Non-executive directors who have served longer
than nine years should be subject to annual re-
election. 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.
Information about nominees to the Board of
Directors shall include biographical data about
the nominees and/or any other information to
enable shareholders to take an informed decision
about electing or re-electing members of the
Board of Directors.
B.7.2. The board of directors should explain to
shareholders why they believe an individual
should be elected non-executive member of the
Board of Directors.

the event of reelecting a non-executive
In
director,
to
the chairman should confirm
shareholders that, following formal performance
appraisal, the individual’s performance continues
to be effective.

Observed

Partially observed

According
to the Russian legislation Board
members are elected at the Annual General
Meeting of shareholders for 1 year (for the period
till
the next Annual General Meeting of
shareholders) and could be re-elected unlimited
number of times.
The Terms of Reference on the Board of
Directors (item 2.5.5) provide for Board member
independence criteria, stating that the directors
who have served longer than nine years should
not be defined as independent.

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.
Shareholders are provided with biographical
details and professional skills of candidates and
shareholders make independent conclusions on
their competence and advisability to elect them to
the Board.

Partially observed Every year when new members of the Board are
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.

C. ACCOUNTABILITY.
C.1 Financial reporting
С.1.1. The directors should explain in the annual
report their responsibility for preparing the annual
report and accounts, and state that they believe
that the annual report and accounts, taken as a
whole, are fair, balanced and understandable and
provide
for
information
shareholders
company’s
performance, business model and strategy.

necessary

assess

the

There should be a statement made by the auditors
about their responsibilities related to the audit of
financial reports.
С.1.2. The directors should include in the annual
report an explanation of the basis on which the
company generates or preserves value over the
longer term (the business model) and the strategy
for delivering the objectives of the company

C.1.3. The directors should report in annual and
half-yearly financial statements that the business
is a going concern, with supporting assumptions
or qualifications as necessary

Partially observed The Annual Report does not

include

the
respective statement of the Board, however, this
provision is observed via reviewing the Annual
Report and financial accounts of the Corporation
at the Board and Audit & Finance Committee
meetings. The results of review and discussion
are reflected in the Minutes.

Observed

Financial reports of the Company are disclosed
annually and include the auditor's opinion.

include

Partially observed The Annual Report does not

the
respective statement of the Board, however, this
provision is observed via reviewing long-term
business model and the strategy at the Board and
Audit & Finance Committee meetings. The
results of review and discussion are reflected in
the Minutes.
Partially observed The Annual Report does not

include

the
respective statement of the Board, however, this
provision is observed via reflecting supporting
assumptions or qualifications, if necessary, in the
report of independent auditor review, which is an
integral part of annual and half-annual reporting.

С.2. Risk management and Internal control
С.2.1. The board should, at least annually,
conduct a review of the effectiveness of the

Observed

The Board of Directors annually reviews the
report of the Internal Control and Project Support

110

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 independent non-
executive directors (for large companies). At
least one member of the audit committee shall
have relevant financial experience.

the

relating

reviewing

to monitor

integrity of

С.3.2. The main role and responsibilities of the
audit committee should be set out in written terms
of reference and should include:
-
the financial
statements of the company and any formal
the company’s
announcements
significant
financial performance,
financial reporting judgments contained in them;
- to review the company’s internal financial
controls and, unless expressly addressed by a
separate board risk committee composed of
independent directors, or by the board itself, to
review the company’s internal control and risk
management systems;
- to monitor and review the effectiveness of the
company’s internal audit function;
- to make recommendations to the board, for it to
put to the shareholders for their approval in
general meeting, in relation to the appointment,
the external
re-appointment and removal of
auditor and to approve the remuneration and
terms of engagement of the external auditor;
- to review and monitor the external auditor’s
independence
the
effectiveness of the audit process, taking into
consideration
relevant UK professional and
regulatory requirements;
- to develop and implement policy on the
engagement of the external auditor to supply non-
audit services, taking into account relevant ethical
guidance regarding the provision of non-audit
services by the external audit firm; and to report
to the board, identifying any matters in respect of
which it considers that action or improvement is
needed and making recommendations as to the
steps to be taken; and
- to report to the board on how it has discharged
its responsibilities.
С.3.3. The terms of reference of the audit
committee, setting forth the main powers and
responsibilities delegated to it by the board,
should be in place.

objectivity

and

Department of the Company on results of the
year with analysis of existing control systems and
detected deficiencies.
A report of the Auditing Commission is attached
to the materials of every Annual General Meeting
of Sistema JSFC.

Partially observed The Audit and Finance Committee of Sistema
JSFC has been established and is active. The
Committee includes 5 members of the Board of
Directors, 4 of whom meet independence criteria
- R. Munnings, E. Novitsky, M. Holtzman and
D. Iakobachvili.
R. Munnings is Chairman of the Audit and
Finance Committee of the Board of Directors. He
independence criteria and has vast
meets
experience in financial audit.
The remit of the Audit and Finance Committee is
determined in the Terms of Reference on the
last version of which was
Committee,
approved by the Board of Directors on September
24, 2011).
The Terms of Reference on the Audit and
Finance Committee in general meets Section
C.3.2. of UK Corporate Governance Code.

Observed
essential aspects

the

all

Observed

The powers and responsibilities of the Committee
are determined in the Terms of Reference of the
Audit and Finance Committee which were
approved by the Board of Directors on September
24, 2011.

C.3.4. Where requested by the board, the audit

Observed

This requirement is observed by reviewing the

111

Annual Report and financial accounts at the
Audit and Finance Committee meetings.

The Audit and Finance Committee reviews issues
of the functioning of the hot line used by the
Company's employees and other
interested
parties for raising concerns about possible
improprieties
the financial sphere on a
in
confidential basis.

the

is monitoring

According to the Terms of Reference of the Audit
and Finance Committee of the Company's Board
of Directors, one of the key functions of the
internal audit
Committee
system of the Company. The Internal Audit
Department carries out internal audit functions.
The Audit and Finance Committee together with
the head of the above mentioned Department and
the Company's management
the
implemented activities aimed at removing the
deficiencies of internal business processes.
According to the Terms of Reference of the Audit
and Finance Committee of the Company's Board
of Directors, the Committee analyses external
auditors’ performance, and provides the Board of
Directors with
regarding
appointment, reappointment or removal of the
external auditors.

recommendations

analyses

The Annual Report includes the statement on the
policy of
and
independence.

auditor’s objectivity

the

Observed

committee should provide advice on whether the
annual report and accounts, taken as a whole, is
fair, balanced and understandable and provides
the information necessary for shareholders to
assess
the company’s performance, business
model and strategy.

the

and

proportionate

C.3.5. The audit committee should
review
arrangements by which staff of the company may,
in confidence, raise concerns about possible
improprieties in matters of financial reporting or
other matters. The audit committee’s objective
should be to ensure that arrangements are in place
for
independent
investigation of such matters and for appropriate
follow-up action.
С.3.6. The audit committee should monitor and
review the effectiveness of the internal audit
process. 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, and the reasons for the absence of such a
function should be explained in the relevant
section of the annual report.

C.3.7. The audit committee should have primary
responsibility for making a recommendation on
the appointment, reappointment and removal of
the external auditors. FTSE 350 companies
should put the external audit contract out to tender
at least every ten years. If the board does not
accept the audit committee’s recommendation, it
should include in the annual report, and in any
papers
re-
the audit
statement
appointment, a
committee explaining the recommendation and
should set out reasons why the board has taken a
different position.

appointment or

recommending

from

that

issues

the significant

C.3.8. A separate section of the annual report
should describe the work of the committee in
discharging its responsibilities. The report should
include:
the committee
-
considered in relation to the financial statements,
and how these issues were addressed;
- an explanation of how it has assessed the
effectiveness of the external audit process and the
to
approach
or
taken
reappointment of
the external auditor, and
information on the length of tenure of the current
audit firm and when a tender was last conducted;
and
- if the external auditor provides non-audit
services,
auditor
objectivity and independence is safeguarded.

explanation of how

appointment

the

D. REMUNERATION
D.1. The
remuneration

level

and

components

112

D.1.1. In designing schemes of performance-
related remuneration for executive directors, the
the
remuneration committee
provisions in Schedule A to this Code.

should

D.1.2. Where a company releases an executive
director to serve as a non-executive director
elsewhere, the remuneration report should include
a statement as to whether or not the director will
retain such earnings and,
the
remuneration is.

if so, what

D.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 or other performance-related elements. If,
exceptionally, options are granted, 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
the
share options could be
determination of a non-executive director’s
independence (as set out in provision B.1.1).

relevant

what

consider

remuneration committee should
D.1.4. The
carefully
compensation
commitments (including pension contributions
and all other elements) their directors’ terms of
appointment would entail in the event of early
termination. The aim should be
to avoid
rewarding poor performance. They should take a
robust line on reducing compensation to reflect
departing directors’ obligations to mitigate loss.

Observed

The provisions of Schedule A
the UK
Corporate Governance Code, in general, are
observed at executive directors’ remuneration
system development.
The items of Schedule A are disclosed below.

Partially observed Members of the Management Board elected as
the members of Boards of Directors of
receive
subsidiaries
additional
not
remuneration for work
in such Boards of
Directors. Members of the Management Board
(executive directors) who are the members of the
Boards of Directors in other companies receive
remuneration for work in Boards of Directors of
such companies according to their regulations.
The information on the size of remuneration
received by employees of the Company for acting
as a Board member at other companies is not
disclosed.
Board members of Sistema JSFC
receive
additional remuneration for serving as Chairman
of the Board of Directors, Deputy Chairman and
Chairman of any Board Committee. Special
remuneration is paid for participation in the
Board meetings and meetings of the Board
Committees.
Share options are not granted for the work on the
Board of Directors.

Observed

the Policy on
item 1.6 of
According
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.

D.1.5. Notice or contract periods should be set at
one year or less. If it is necessary to offer longer
notice or contract periods
to new directors
recruited from outside, such periods should
reduce to one year or less after the initial period.

Observed

According to the Russian legislation all Board
members of Sistema JSFC are elected by General
Shareholders’ Meeting for 1 year (till next AGM)
and could be re-elected an unlimited number of
times.

D.2. Procedure
D.2.1. The Board of Directors should establish a
Remuneration Committee consisting of at least
three independent non-executive directors (for
large companies).

Observed

The Nomination, Remuneration and Corporate
Governance Committee was established and is
active. 6 Directors are the members of the
Committee, 2 of them are non-executive directors
(A. Goncharuk, D. Zubov) and 3 of them meet
independence criteria (B. Dickie, R. Kocharyan,
R. Munnings)

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remuneration committee

The
should make
available its terms of reference, explaining its role
and the authority delegated to it by the board.

Observed

Where remuneration consultants are appointed,
they should be identified in the annual report and
a statement made as to whether they have any
other connection with the company.

D.2.2.The remuneration committee should have
delegated responsibility for setting remuneration
for all executive directors and the chairman,
including pension rights and any compensation
payments.

Not applicable

Observed

The committee should also recommend and
monitor the level and structure of remuneration
for senior management. The definition of ‘senior
management’
should be
determined by the board but should normally
include the first layer of management below
board level.

this purpose

for

D.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
board may however delegate this responsibility to
a committee, which might include the chief
executive.

Shareholders should be invited specifically to
approve all new long-term incentive schemes and
significant changes to existing schemes.

Observed

and

Regulations

responsibilities of

the
The powers
Nomination, Remuneration
and Corporate
Governance are determined in the Terms of
Reference which were approved by the Board of
Directors on September 24, 2011.
The
the Nomination,
and Corporate Governance
Remuneration
Committee is posted on the Company's website
(www.sistema.ru/www.sistema.com)
is
available on demand from shareholders.
In 2012 no external remuneration consultants
were engaged in the work of the Company's
Board of Directors.

and

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
Annual General Meeting of shareholders as of
June 30, 2006 (Minutes No. 1-06), with changes
and amendments made by extraordinary General
Shareholders’ Meeting of Sistema JSFC on
February 16, 2009 (Minutes No. 1-09).
In case changes/amendments are necessary to be
made to the above Policy, the Nomination,
and Corporate Governance
Remuneration
necessary
Committee
changes/amendments.

develops

One of the key functions of the Nomination,
and Corporate Governance
Remuneration
Committee according to the respective Terms of
Reference is preliminary review of terms of labor
contracts 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,
the last version of which was approved by the
Annual General Meeting of shareholders as of
June 30, 2006 (Minutes No. 1-06), with changes
and amendments made by extraordinary General
Shareholders’ Meeting of Sistema JSFC on
(Minutes No. 1-09),
February 16, 2009
establishes
calculating
formula
remuneration of the Board members. A special
decision of the Nomination, Remuneration and
Corporate Governance Committee
for such
payments is not required.
Long-term incentive schemes are approved by the
Board of Directors and, when needed, by the
Annual General Meeting of shareholders, and
shareholders discuss such matters both at the
level of the Board of Directors and the level of
the Annual General Meeting of shareholders.

clear

for

E. RELATIONS WITH SHAREHOLDERS
E.1 Dialogue with shareholders
E.1.1. Shareholders’ opinions on the development

Observed

Representatives of

the majority of

large

114

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
development of the company.

Not applicable

E.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

E.2 Constructive use of the AGM
E.2.1.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".
E.2.2. The company should ensure that all valid
proxy appointments received for general meetings
are properly recorded and counted. The AGM
minutes should include the number of persons
participated on each item of the agenda, as well as
proportion of "for", "against" and "abstained" on
each item of the agenda.
E.2.3. All members of the Board of Directors are
the general meeting. Committee
to attend
chairmen should be available for answering
questions of shareholders.

Observed

E.2.4. The company should arrange for a Notice
of the AGM and related papers to be sent to
shareholders at least 20 working days before the
meeting.

Observed

shareholders are members of the Board of
Directors of the Company. The IR Department of
the Company works with the largest institutional
investors. Results of its 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
the Annual General Meeting of
attend
shareholders.
The Company's statutory documents do not
provide 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
of the Company.
Information on independent members of the
Board of Directors is available to shareholders
via the Company's website. If shareholders have
relevant questions they may address any of them.
Representatives of
large
shareholders are members of the Company's
Board of Directors. The IR department of the
Company works with the largest institutional
investors. The results of its work, including the
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

In accordance with Russian
legislation and
Sistema JSFC Charter, each issue of the agenda
include the draft resolution with "for", "against"
and "abstained" votes.
All the votes of the shareholders received by
Sistema
registered by Teller
Commission and included in the AGM Minutes.
The votes "for", "against" and "abstained" are
counted separately; and the results on each item
of the agenda are disclosed.

JSFC

are

that participate

According to item 2.3. of the Terms of Reference
on the Board of Directors, all members of the
Board of Directors are to attend the General
Meeting and to answer questions from the
participants of the meeting.
the Annual
Shareholders
General Meeting may put questions to any
member of the Board of Directors attending the
meeting.
According to its Charter, the Company circulates
the Notice of the AGM and publishes related
materials not later than 30 days before the
meeting.

115