ANNUAL REPORT
of Open Joint-Stock Company
Sistema Joint-Stock Financial Corporation
for 2013
This report was compiled in accordance with the
requirements of the Federal Law “On the Stock
Market”.
The financial information presented in this Annual
Report is based on the accounting reports made
pursuant to the Russian laws and contains elements
of consolidated financial statements compiled in
conformity with international standards.
Moscow, 2014
Contents
1.
POSITION OF SISTEMA JSFC IN THE INDUSTRY
1.1. Sistema JSFC’s profile
1.2. Shareholders’ equity structure
2.
BUSINESS PRIORITIES AND DEVELOPMENT STRATEGY
2.1. Sistema JSFC’s mission and strategy
2.2. Sistema JSFC’s portfolio
3.
REPORT OF THE BOARD OF DIRECTORS ON THE RESULTS OF THE
CORPORATION’S DEVELOPMENT IN PRIORITY BUSINESS AREAS
3.1. Key events of 2013
3.2. Financial results of Sistema JSFC
3.3. Overview of operational results
3.4. Financial overview
3.5. Sistema JSFC’s credit ratings
3.6. Report on payment of the announced (allocated) dividends on the shares of Sistema
JSFC
4.
PROSPECTS AND DEVELOPMENT STRATEGY OF THE SISTEMA JSFC GROUP
OF COMPANIES
4.1. Mobile TeleSystems (MTS)
4.2. Bashneft
4.3. Bashkirian Power Grid Company (BPGC)
4.4. United Petrochemical Company (UPC)
4.5. Bashneft Service Assets (BNSA)
4.6. Detsky Mir
4.7. Medsi
4.8. Binnopharm
4.9. MTS Bank
4.10. SG-trans
4.11. Sistema Shyam TeleServices Limited
4.12. RTI
4.13. Media assets
4.14. Real estate assets
4.15. RZ Agro Holding Ltd
5.
DESCTIRPTION OF KEY RISK FACTORS
5.1. External risks
5.2. Risks related to Sistema JSFC’s operations
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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 system, internal control and audit
6.6. Development of the corporate governance system in 2013
7.
8.
SOCIAL RESPONSIBILITY
CRITERIA FOR DETERMINING THE AMOUNT OF REMUNERATION PAYABLE
TO THE MEMBERS OF THE BOARD OF DIRECTORS AND SENIOR MANAGERS
OF THE COMPANY
9.
ANNEX
9.1. Brief biographies of the Board of Directors’ members and their stakes in Sistema JSFC’s
authorised capital
9.2.
Information on the transactions made by the members of Sistema JSFC’s Board of
Directors with their shares from 1 January to 31 December 2013
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54
60
61
63
64
66
69
70
70
77
9.3. Brief biographies of the President and the Management Board members of Sistema JSFC 78
9.4.
Information on the number of shares held by the President and the management Board
members of Sistema JSFC
9.5. The list of transactions made by the Company in the reporting period that are recognised
as major transactions in accordance with the Federal Law “On Joint-Stock Companies”,
as well as other transactions that should be approved as major transactions in accordance
with the Charter of the Company
9.6. The list of transactions made by the Company in the reporting period that are recognised
as related party transactions in accordance with the Federal Law “On Joint-Stock
Companies”
9.7.
9.8.
Information on the Company’s compliance with the Corporate Conduct Code of the
Federal Financial Markets Service
Information on the Company’s compliance with the main requirements of the UK
Corporate Governance Code
84
85
86
90
98
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1. POSITION OF SISTEMA JSFC IN THE INDUSTRY
1.1. Sistema JSFC’s profile
Overview
Sistema is Russia’s largest publicly listed holding company. Incorporated in 1993, Sistema is now one of
Russia’s top 10 companies by revenue, and is one of the largest public holding companies in the world.
The company’s investment portfolio comprises stakes in predominantly Russian businesses in a range of
sectors, including telecommunications, oil, utilities, consumer, high tech and others. 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 20 ordinary shares) and the Company's ordinary shares are listed under the symbol "AFKS" on
the MICEX-RTS stock exchange.
Value creation model
The model of Sistema as an investment company provides for the creation of value for shareholders
through an investment process consisting in monetisation of investments in the form of dividends or
divestment of stakes in portfolio companies and further reinvestment of proceeds in attractive projects
with the aim of making profit. Some of the profit generated in this way is then distributed to Sistema’s
sharehol
ders in dividends.
Sector
Oil&Energy
Telecom&Media
Consumer
High tech
Banking
% of 2013 revenue
50.8%
36.0%
4.2%
6.5%
2.5%
1.2. Shareholders’ equity structure
Sistema has 9,650,000,000 ordinary shares issued, 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. The listing of shares was held 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
Moscow Stock Exchange. 17.7% of the Company’s shares are traded as GDRs on the London Stock
Exchange and 11% of shares are traded on the Moscow Stock Exchange.
Sistema’s portfolio also includes two public companies. MTS’s shares are traded on the New-York Stock
Exchange in the form of ADRs (ticker: MBT) and MTS’s ordinary shares are traded on the MICEX-RTS
stock exchange (ticker: MTSS). Bashneft’s ordinary and preference shares are also traded on MICEX-
RTS (ticker: BANE, BANEP).
The Chairman of the Board of Directors of Sistema JSFC Vladimir Evtushenkov, holding 64.19% of the
company’s shares, is the principal shareholder.
3
5.34%
1.99%
9.47%
19.01%
Sistema's shareholders'equity as of 31 December 2013
Vladimir Evtushenkov
Deutsche Bank (GDR programme)
National Settlement Depository
64.19%
Sistema Finance Investments
Other
Performance of Sistema’s GDRs on the London Stock Exchange
Sistema’s GDR price increased by 57.5% in 2013 and outperformed key stock market indices including
RTS and MSCI Russia. The closing price of Sistema’s GDR on the London Stock Exchange on the first
trading day of 2013 was US$ 20.4 with a market capitalisation of US$ 9,843m, while on the last trading
day it reached US$ 32.12 with a market capitalisation of US$ 15,498m. Sistema’s GDRs reached a high
of US$ 32.28 on December 30, 2013 and a low of US$ 18.0 on April 16, 2013. Average daily trading
volumes on the London Stock Exchange in 2013 amounted to 552,417 GDRs.
Chart 1:
Comparative performance of Sistema’s GDRs and RTS index in 2013*
Sistema
RTS Index
35
30
25
20
15
10
Jan-13
Feb-13 Mar-13
Apr-13 May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
*Source: Bloomberg
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2. BUSINESS PRIORITIES AND DEVELOPMENT STRATEGY
2.1. Sistema JSFC’s mission and strategy
Mission
Long-term growth of shareholder value through efficient management of the asset portfolio and
achievement of high returns on investment.
Value creation model
The model of Sistema as an investment company provides for the creation of value for shareholders
through an investment process consisting in monetisation of investments in the form of dividends or
divestment of stakes in portfolio companies and further reinvestment of proceeds in attractive projects
with the aim of making profit. Some of the profit generated in this way is then distributed to Sistema’s
shareholders in dividends.
Investment strategy
Investment criteria
The Company acquires assets mostly in those sectors that are complementary to the existing investments,
making it possible to use the competences of the Company and to build synergies. The Company also
invests in other economically attractive industries, provided that it has the required expertise or a reliable
industry partner.
Sistema JSFC makes investments predominantly in Russia and the CIS region, but it is also open to
potential investments in other markets.
Sistema JSFC is focused on big or mid-sized assets with the aim of becoming a leader in the respective
market through synergies, industry consolidation and introduction of operational and structural
improvements.
Asset management
Sistema's competences are concentrated in the area of increasing the operational efficiency of the
acquired assets through restructuring and attracting industry partners with a view to strengthen expertise
and reduce financial risks.
Sistema aims to maintain a balanced portfolio that includes core assets generating stable cash flows and
developing assets being at the stage of rapid growth.
Sistema oversees the development of its portfolio companies through participation in the work of their
boards of directors and engagement of professional independent directors.
Sistema’s assets are divided into portfolios based on the principle of deal origination and portfolio
managers’ industry expertise. The key performance indicator (KPI) for the management is TSR (total
shareholder return), which is set for each asset individually.
The Company is pursuing a progressive dividend policy. The amount of dividends is determined based on
performance in the previous financial period and is at least 10% of the Group's net profit under US GAAP
and at least 10% of net profit from transactions, such as sale of assets.
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2.2. Sistema JSFC’s portfolio
In November 2012 Sistema’s Board of Directors approved a new organisational structure and all
investments of the Company were split into portfolios.
In 2013 the Company actively managed its investment portfolios and generated more than USD 3.2bn in
profit from asset monetisation, restructuring and dividends. Significant inflow of cash made it possible to
increase dividend payments to the shareholders of Sistema JSFC.
Sistema’s portfolio companies:
MTS – the biggest mobile operator in Russia, Central and Eastern Europe.
Bashneft – one of the biggest oil companies in Russia.
Bashkirian Power Grid Company – one of the largest regional power grid companies.
Bashneft Service Assets – a managing company of an oilfield service holding
comprising 11 companies.
United Petrochemical Company – a vertically integrated petrochemical group of
companies.
Sistema Mass Media – a leading media company in Russia.
MTS Bank – one of the leading commercial banks in the Russian Federation.
Detsky Mir – the largest children’s goods retailer in Russia and the CIS region.
Intourist – one of the leading Russian companies in the tour operating industry.
Medsi – the biggest federal chain of private clinics in Russia.
RTI – the largest Russian company in the area if defence, comprehensive
communication systems, system integration and microelectronics.
Binnopharm – a pharmaceutical company operating one of
biotechnological production facilities in Russia.
the biggest
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NIS – one of the leaders in the Russian navigation market.
Russkaya Zemlya – a major grain producer.
SG-trans – one of the largest independent operators of a liquefied gas transportation
business in Russia.
Sistema Shyam TeleServices Limited (MTS India) –an Indian mobile operator.
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3. REPORT OF THE BOARD OF DIRECTORS ON THE RESULTS OF THE
CORPORATION’S DEVELOPMENT IN PRIORITY BUSINESS AREAS
3.1. Key events of 2013
Asset restructuring
Restructuring of transportation assets
Goal: developing a partnership with Unirail, achieving a partial monetisation of initial investments.
The restructuring of the transportation assets of Sistema JSFC was conducted in three stages. At the first
stage in April 2013, SG-trading was spun off from SG-trans and turned into a separate company owned
by Sistema and uniting non-core LPG storage and sale assets.
In April 2013, Sistema sold a 70% stake in SG-trans for RUB 12.0bn to Financial Alliance (Sistema’s
50/50 joint venture with Unirail). In July 2013 the Corporation sold additional 15% of SG-trans shares to
Unirail for RUB 2.5bn. As a result of this deal Unirail and Sistema JSFC each own 50% of the united
transportation business.
At the start of 2014 SG-trans and Financial Alliance were united under the SG-trans brand.
Result: RUB 14.5bn of return on investment, consolidation of the transportation assets, development of
the transportation business jointly with Unirail.
Reorganisation of Sistema Invest
Goal: simplifying Bashneft’s corporate structure
The structure of reorganisation provides for a split of Sistema Invest’s assets with the aim of eliminating
cross-ownership at Bashneft. As a result of restructuring, Sistema Invest remains an owner of 8.4% of the
authorised capital of Bashneft and also holds stakes in Ufaorgsintez and BPGC. Sistema’s stake in
Sistema Invest is increased up to 100%. Bashneft Invest, created as a result of a spin-off from Sistema
Invest, is owned by Bashneft (100%) and receives Bashneft ordinary shares accounting for 16.8% of its
authorised capital and inherits Sistema Invest’s accounts payable to Bashneft.
Result: elimination of cross ownership at Bashneft.
Mergers and acquisitions
Sale of RussNeft
Goal: monetisation of investments
In July 2013, Sistema sold its 49% stake in RussNeft for US$ 1.2 billion.
Acquisition of United Petrochemical Company
Goal: entering a promising petrochemical market
In September 2013, Sistema acquired a 98% stake in United Petrochemical Company from its subsidiary
Bashneft for RUB 6.2 billion. UPC is a vertically integrated petrochemical group which owns four
enterprises located in the Bashkortostan region: Ufaorgsintez, Tuymazinkoye and Shkapovskoye Gas
Processing Plants and Bisphenol-A plant.
In September 2013, United Petrochemical Company signed a joint venture agreement with a Mexican
company Grupo Petrotemex, S.A. de C.V., a subsidiary of Alpek, S.A.B. de C.V., for the construction of
an integrated purified terepthalic acid - polyethylene terephthalate plant in Ufa, Bashkortostan.
Acquisition of Bashneft Service Assets
Goal: entering a fast-growing oilfield service market; unlocking the existing value potential
In October 2013, Sistema completed the acquisition of a 100% stake in Bashneft Service Assets (BNSA)
from Bashneft for RUB 4.1 billion. BNSA is a group of oilfield service companies focused on onshore
drilling and well workover operations, equipment servicing and manufacturing, transportation and
construction services.
Acquisition of a controlling stake in Business Nedvizhimost
Goal: unlocking hidden value of the real estate portfolio
In December 2013, Sistema acquired 51% of the ordinary shares of Business Nedvizhimost from MGTS
Nedvizhimost for RUB 3.2 billion. The company’s main areas of operation are property management and
leasing. Business Nedvizhimost owns 76 properties, which were previously used by MGTS as automatic
8
telephone stations; covering the total area of approximately 178,000 square metres. Later, in April 2014,
Sistema acquired the remaining 49% for RUB 3.1 billion and now owns 100% of the company.
Key events after the reporting period
Investment in the forest, timber processing and pulp and paper industries
In April 2014, Sistema, through its subsidiary LLC LesInvest, signed legally binding agreements with the
Bank of Moscow to acquire 100% of OJSC Segezha Pulp and Paper Mill and 100% of LLC
Derevoobrabotka-Proekt (Group of companies), together with all debt obligations to the Bank of
Moscow. The transaction is expected to be completed by the end of the third quarter of 2014.
The acquired group of companies is the largest manufacturer of sack paper and paper sacks in Russia and
the second largest producer of paper sacks in Europe. It is also one of the largest manufacturers and
exporters of timber products and plywood in Russia. In 2013, the Group's estimated revenue and
EBITDA amounted to approximately RUB 20.9 billion and RUB 2.4 billion respectively. Export
accounted for 54% of the Group's total revenue.
3.2. Financial results of Sistema JSFC
Financial results in accordance with the Russian accounting standards (RAS)
Revenue
Income from sales
Net income (loss) in the reporting period
Revenue structure :
Stakes in the authorised capital held by other organisations
Other sales (property lease, agency services and guarantees)
TOTAL:
2013
47, 238, 145
36, 022, 581
133, 893, 543
2013
47, 112, 485
125, 660
RUB’000
2012
26, 460, 099
20, 114, 968
62, 664, 467
RUB’000
2012
26, 104, 253
355, 846
47, 238, 145
26, 460, 099
The main business operations of the issuer are focused on the management of stakes and shares in
commercial organisations.
Structure of other profit and losses:
Interest receivable
Interest payable
Other income
Other expenses
TOTAL:
Efficiency indicators :
Labour productivity, RUB ths/person
Debt to equity ratio
Long-term debt to the sum of long-term debt and equity ratio
Coverage of debt by current revenue (income) ratio
Overdue debt, %
2013
2, 453, 277
(4, 805, 748)
138, 700, 920
(31, 270, 215)
105, 078, 234
2013
217, 687.3
0.130
0.058
0.86
0
RUB’000
2012
2, 774, 833
(4, 575, 040)
98, 390, 528
(55, 722, 927)
40, 867, 394
RUB’000
2012
135, 692.8
0.197
0.082
2.19
0
The analysis of the issuer’s financial solvency and the level of credit risk shows that, overall, the issuer
has both significant own resources and is capable of raising additional debt without the risk that the
repayment of such debt would be called into question.
Long-term liabilities make up 47% of debt. Accounts receivable and payable pertain to the current period.
9
Financial stability indicators:
Net working capital , RUB ths
Current ratio
Quick ratio
2013
25, 553, 733
1.63
1.62
2012
(2, 940, 356)
0.94
0.90
As of 31 December 2013 the Corporation’s current assets amounted to RUB 66, 026, 652 ths, the volume
of short-term liabilities was RUB 40, 472, 919 ths, the cost of goods sold in 2013 was RUB 33, 653 ths.
Liabilities and equity
Debt structure
11%
Equity
Liabilities
53%
47%
Long-term
liabilities
Short-term
liabilities
89%
The share of equity in the Company's liabilities
is 89%.
The share of long-term liabilities in the total debt of
the Company is 47%
Information on fuel and energy consumption
Type of resource
UoM
Consumed in 2013
Boiler fuel
Heat energy
Electric energy
Water
equivalent fuel tonnes
G cal
thousand kW*h
cubic meters
0
3, 114.36
3, 556
35, 186.91
For reference : consumed
in 2012
0
5, 745.48
7, 328.48
32, 255.33
Consolidated financial results in accordance with US GAAP1
In 2013, Sistema’s consolidated revenues increased by 5.9% in US dollar terms and by 8.4% in rouble
terms year-on-year. The top-line growth reflects a strong contribution from all the Group’s companies
despite the rouble depreciating by an average of 2.4% against the US dollar in 2013. Almost all of the
portfolio assets demonstrated revenue growth in the reporting year, with the exception of SSTL (due to
closing its operations in 13 circles in India). Along with MTS and Bashneft, significant contributions
came from Detsky Mir, MTS Bank and Medsi. In the fourth quarter, the Group’s revenues were up 4.6%
year-on-year.
Selling, general and administrative expenses (SG&A) increased by 8.6% year-on-year to US$ 4,422.8
million in 2013, mainly due to one-off restructuring costs at RTI, business expansion at Detsky Mir and
other factors. Bashneft reduced its SG&A expenses by 8.1% year-on-year, while SSTL demonstrated a
36.5% decrease in SG&A expenses in 2013.
Depreciation, depletion and amortisation expenses increased by 5.7% year-on-year to US$ 3,242.6
million in 2013.
1 This section and subsequent sections include financial information prepared in conformity with the accounting principles of the USA, or US
GAAP, as well as other financial indicators not related to US GAAP. The financial indicators that are not related to US GAAP should be
considered as an addition to the US GAAP indicators rather than as a replacement of them.
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The Group’s adjusted OIBDA increased by 5.8% year-on-year in 2013, adjusted OIBDA margin
amounted to 24.8%. All portfolio companies, except for SSTL, achieved positive adjusted OIBDA. SSTL
narrowed its adjusted OIBDA loss by 56.0% in the reporting year.
Adjusted consolidated net income attributable to Sistema grew by 11.1% year-on-year in 2013, despite a
US$ 268.0 million currency exchange loss. Most of the Group’s companies were profitable and, with
exception of SSTL and RTI, reported net income for 2013.
Key financial indicators
(USD million, except per share amounts)
2013
2012
YoY change
Revenue
Adjusted OIBDA
Operating income
35, 942.1
33, 950.4
8, 918.5
8, 430.6
5.9%
5.8%
5, 663.0
4, 725.8
19.8%
Adjusted operating income
5, 675.9
5, 361.7
5.9%
Net income attributable to Sistema
2, 257.5
946.1
138.6%
Adjusted net income attributable to Sistema
1, 992.1
1, 793.8
11.1%
Basic and diluted earnings per share (US cents)
24.43
10.18
140.1%
3.3. Operating results overview 1
MTS
(USD million)
Revenue
Adjusted OIBDA2
Operating income
Adjusted operating income
Net income attributable to Sistema
Adjusted net income attributable to Sistema
2013
2012
YoY change
12, 510.8
12, 161.1
5, 656.1
3, 606.7
3, 365.1
1, 264.6
1, 146.2
2.9%
7.0%
5, 285.8
3, 011.3
19.8%
3, 099.6
8.3%
533.9
136.9%
1, 123.8
2.0%
MTS’s revenues increased by 2.9% year-on-year in 2013 due to significant improvements in subscriber
base quality with excellent growth in average monthly revenue per user (ARPU) and services
consumption, the resumption of operations in Turkmenistan, restored subscriber base growth in Russia
and across all markets where MTS operates. The active development of its data services and fixed-line
businesses also contributed to revenue growth.
In 2013 adjusted OIBDA was up 7.0% year-on-year, due to continued operational improvements and
revenue growth from high-margin data services. The adjusted OIBDA margin increased to 45.2% in 2013
compared to 43.5% in 2012.
1 Hereinafter the comparison of revenue by periods is presented on an aggregated basis, excluding revenue from transactions inside the segment (between companies
in one segment), but before excluding inter-segment turnovers (between companies in different segments) unless the word ‘consolidated’ is used. The amounts
attributable to specific companies are indicated where necessary before excluding turnovers inside and between segments and may differ from the respective stand-
alone indicators of companies as a result of making isolated adjustments.
2 MTS’ OIBDA of 2013 was influenced by the recognition of income from the compensation received as a result of the settlement of Bitel dispute.
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MTS’s mobile subscriber base totalled 1 102.4m customers as of 31 December 2013. ARPU in Russia
grew by 3.7% year-on-year to RUB 308 in 2013, reflecting an increase in data services consumption.
Russian subscribers’ average monthly minutes of usage (MOU) rose by 7.6% year-on-year to 327
minutes in 2013, compared to 304 minutes in 2012. In the fixed broadband business, the number of
covered households increased by 4.7% year-on-year and reached 12.3m in 2013.
During the fourth quarter, MTS launched LTE networks in several regions across Russia, including the
Rostov and the Novosibirsk regions.
In August, MTS paid RUB 30.2bn in dividends for the fiscal year 2012, and in November, RUB 10.8bn
for the first six months of 2013.
Bashneft
(USD million)
Revenue
Adjusted OIBDA2
Operating income
2013
2012
YoY change
17, 684.6
17, 125.2
3.3%
3, 172.3
3, 278.7
(3.2%)
2, 054.3
2, 557.7
(19.7%)
Adjusted operating income
2, 575.5
2, 686.4
(4.1%)
Net income attributable to Sistema
1, 130.3
1, 279.5
(11.7%)
Adjusted net income attributable to Sistema
1, 447.5
1, 374.7
5.3%
In 2013, Bashneft’s revenue grew by 3.3% year-on-year, mainly as a result of an increase in export
volumes of oil products, particularly to countries outside the Customs Union. At the same time, the year-
on-year revenue growth was offset by the falling oil prices in the world market.
Adjusted OIBDA decreased by 3.2% year-on-year in 2013, largely due to a rise in export duties on oil
products, as well as in production costs. This production cost increase was primarily the result of organic
production growth in Bashkiria and the launch of operations in the Trebs and Titov fields.
In 2013, Bashneft’s oil production increased by 4.1% year-on-year to 16.1 million tonnes, including
291,000 tonnes produced at the Trebs and Titov fields, while mature fields added 2.2% to the production
growth. Exports amounted to 4.7 million tonnes of crude oil and 9.4 million tonnes of oil products in
2013.
Bashneft reported a 3.0% year-on-year increase in oil refining volumes in 2013, reaching 21.4 million
tonnes of crude oil. In 2013, the average refining depth was 84.7% and light-product yield was 60.4%.
In December 2013, Bashneft paid dividends for the nine months of 2013, amounting to RUB 45.25
billion. Earlier, in August 2013, Bashneft paid RUB 5.32 billion in dividends for the full year of 2012.
In December 2013, Bashneft acquired LLC Bashneftegazrazvedka, which holds a licence for geological
exploration of subsoil blocks in the Vostochno-Ikskiy licence area, located in the Bakalinsky District of
the Republic of Bashkortostan.
1 Excluding subscribers in the Republic of Belarus.
2 Bashneft’s OIBDA for 2013 and 2012 was adjusted for the effect from the sale of a stake in Belkamneft and other one-off events.
12
BPGC
(USD million)
Revenue
OIBDA
Operating income
Net income attributable to Sistema
2013
416.7
177.4
123.4
87.5
2012
YoY change
373.1
129.0
84.2
24.4
11.7%
37.6%
46.7%
259.0%
In 2013, Bashkirian Power Grid Company’s revenues grew by 11.7% year-on-year, mainly as a result of a
3% increase in net electricity supply, as well as a 10% boiler tariffs indexation effective from July 1,
2013.
BPGC reported a significant OIBDA increase in 2013, reflecting growth in revenue and in other income
related to the disposal of fixed assets and accrued penalties for late customer payments.
Distribution grid losses decreased from 8.67% in 2012 to 8.25% in 2013, while the effective power output
was up 3.1% year-on-year reflecting organic consumption growth.
Transmission grid losses further decreased from 1.51% in 2012 to 1.37% in 2013. The effective
transmission grid output was up 3.7% year-on-year in 2013.
Detsky Mir
(USD million)
Revenue
OIBDA
Operating income
Net income attributable to Sistema
2013
2012
YoY change
1 130.4
892.5
26.7%
87.0
67.1
40.8
54.3
35.6
11.1
60.3%
88.7%
268.1%
In 2013 Detsky Mir’s revenues rose by 26.7% year-on-year, driven by strong sales in the stores opened in
2012, a 13.4% increase in like-for-like revenue in rouble terms and 41 new store openings, including 33
Detsky Mir branded stores and 8 Early Learning Centre (ELC) stores.
In 2013, Detsky Mir focused on its competitive pricing strategy. OIBDA grew by 60.3% in 2013. The
OIBDA margin increased to 7.7% in 2013 from 6.1% in 2012, which had been stimulated by enhanced
control over operating expenses and improved operational efficiency. Detsky Mir’s SG&A expenses
declined as a percentage of revenue to 31.8% in 2013 compared to 33.7% in 2012.
Detsky Mir’s successful product and pricing policies resulted in an 8.2% increase in like-for-like traffic,
while also achieving a 4.8% increase in like-for-like average cheque.
As of 31 December 2013, Detsky Mir’s retail chain numbered 252 stores, including 27 ELC franchise
stores located in 102 cities across Russia and Kazakhstan. The aggregate retail space was up 10% to
319,900 sq m as of the end of 2013.
In 2013, Detsky Mir paid dividends for 2012 in the amount of US$ 12.7 million.
13
In July 2013, Detsky Mir repurchased its 25%+1 share from Sberbank for RUB 4.5 billion. Following the
completion of the deal, Sistema’s effective stake in Detsky Mir increased to 100%.
Medsi
(USD million)
Revenue
OIBDA
Operating income
Net income attributable to Sistema
2013
294.0
44.2
30.4
31.8
2012
YoY change
208.1
41.3%
27.6
60.1%
8.6
0.2
253.3%
16, 157.6%
Medsi achieved significant year-on-year revenue growth in 2013 following the integration of its assets
with the Medical Centre for the Mayor and Government of Moscow (GUP) at the end of 2012, and
increased its patient traffic and medical assets utilisation. Medsi reported a 60.1% year-on-year increase
in OIBDA in 2013.
In 2013, the number of patient visits and services provided increased by 20.8% and by 15.2% year-on-
year, respectively, as a result of the integration with GUP assets and expansion of the number of services.
An average bill totalled US$ 48.7.
As of 31 December 2013, Medsi chain consisted of 29 clinics, a consultation and diagnostic centre, 3
hospitals, 82 first aid stations, an ambulance service, 3 wellness centres and 3 sanatoriums, with 198,500
sq.m of healthcare facilities.
Binnopharm
(USD million)
Revenue
OIBDA
Operating income
Net income attributable to Sistema
2013
104.3
20.5
13.4
12.1
2012
YoY change
73.8
16.0
6.1
2.1
41.3%
28.3%
119.1%
466.6%
Binnopharm’s revenue rose by 41.3% year-on-year in 2013, mainly due to increased sales of its own
biotechnical products.
The company demonstrated significant OIBDA growth by increasing the share of the high-margin
distribution segment and boosting the production of proprietary drugs.
In 2013, Binnopharm completed a large-scale project, installing a filling line for syringes (erythropoetins,
interferones, vaccines). The line is expected to be used in contract manufacturing and for other purposes.
Binnopharm is conducting an upgrade at an infusion solutions unit at Alium plant, including the
installation of a new plastic filling machine instead of the previous bottle packing machine.
14
In 2013, Binnopharm successfully continued its cooperation with ViiV Healthcare, a subsidiary of
GlaxoSmithKline, on the localisation of antiretroviral medicines in Russia.
In April 2013, Binnopharm completed the merger with Alium Group of Companies, a producer of
infusion solutions and blood substitutes.
MTS Bank
(USD million)
Revenue
OIBDA
Operating income
Net income attributable to Sistema
2013
903.1
38.1
19.0
18.8
2012
YoY change
712.3
26.8%
50.7
32.3
11.1
(24.9%)
(41.3%)
69.3%
In 2013, MTS Bank generated revenue growth of 26.8% year-on-year, as a result of a significant increase
in interest and commission income.
The bank’s OIBDA dropped by 24.9% year-on-year, mainly due to increased retail loan provisions
following a 40% year-on-year growth in the retail loan portfolio up to US$ 2.1 billion. The loan
provisions to loan portfolio ratio does not exceed 9%.
MTS Bank’s gross loan portfolio increased by 3.1% year-on-year to US$ 5,771 million in 2013, with
retail loans accounting for 36% of the total loan portfolio compared to 27% in 2012. Interest income from
retail and corporate transactions rose by 27.2% year-on-year to US$ 731.8 million.
In November 2013, the international rating agency Fitch Ratings confirmed MTS Bank's Long-term
Issuer Default Rating at “B+” with a Stable outlook.
Sistema Shyam TeleServices Ltd.
(USD million)
Revenue
Adjusted OIBDA1
Operating loss
Net loss attributable to Sistema
Adjusted net loss attributable to Sistema
2013
209.4
2012
YoY change
303.0
(30.9%)
(146.5)
(333.2)
(210.2)
(621.2)
(225.1)
(462.9)
(225.1)
(341.3)
-
-
-
-
SSTL reported a year-on-year decrease in revenues in 2013, as a result of the company ceasing operations
in 13 circles and focusing on its development in the nine most economically attractive regions.
SSTL narrowed its adjusted OIBDA loss in 2013 by 56.0% to US$ 146.5 million. The company’s SG&A
expenses decreased by 36.5% over the full year 2013, reflecting the effects of the ongoing cost
optimisation programme.
As of 31 December 2013, SSTL’s total wireless (voice and data) subscriber base declined by 34.1% year-
on-year to 9.8 million customers, following the termination of the company’s operations in a number of
1 SSTL’s results of 2012 were influenced by a one-off write-down related to the devaluation of the SSTL assets in India.
15
circles. However, in the fourth quarter of 2013, growth was restored with the subscriber base expanding
by 2.2%, while the number of data customers increased by 10.7% quarter-on-quarter.
RTI1
(USD million)
Revenue
Adjusted OIBDA
Operating loss
Adjusted operating income 2
Net loss attributable to Sistema
Adjusted net loss attributable to Sistema
2013
2012
YoY change
2, 195.5
2, 196.2
0.0%
122.7
181.5
(32.4%)
(776.9)
(59.3)
-
26.3
73.6
(64.2%)
(412.6)
(129.9)
(21.0)
(14.9)
-
-
In 2013, RTI’s revenues remained flat as the 23% year-on-year growth in revenues at the Defence
Solutions BU was largely off-set by decreased revenues at the Information and Communication
Technologies BU.
In 2013, the company’s adjusted OIBDA was down 32.4% year-on-year, largely as a result of reduced
profitability at the Information and Communication Technologies BU.
In December 2013, RTI was appointed as the sole contractor for a project to establish a National Integrated
Monitoring Centre for biological threats, which was commissioned by the President and the Government
of the Russian Federation.
In December 2013, RTI’s shareholders, Sistema and the Bank of Moscow, participated in the additional
share issue of RTI, therefore effectively converting shareholder debt to equity.
In September 2013, as a result of restructuring SITRONICS, a number of assets, including SITRONICS
KASU, Kvant, Elaks, Koncel and SITRONICS (owns certain assets in the high technology sector,
including Intellect Telecom), were transferred to a newly established company, SITRONICS-N. Later, in
November 2013, SITRONICS-N came into Sistema’s direct ownership and management.
SMM
(USD million)
Revenue
OIBDA
Operating income / (loss)
Net income / (loss) attributable to Sistema
2013
109.8
45.7
6.2
0.5
2012
YoY change
81.7
20.5
(14.7)
(11.1)
34.3%
123.1%
-
-
Sistema Mass Media’s revenue was up 34.3% for the full year of 2013, as a result of launching new
services at Stream3, as well as an increase in Stream-TV’s subscriber base.
1 RTI consolidates RTI Systems Concern, NVision Group and Mikron Group and consists of four major business units: BU Defence Solutions,
BU Comprehensive Security Systems, BU Microelectronics, BU Information and Communication technologies.
2 RTI’s results of 2012 and 2013 were influenced by the recognition of loss from the impairment of goodwill and other assets. The RTI results do
not include the results of SITRONICS-N for all of the presented periods.
3 Stream is owned by Sistema (55%) and MTS (45%). For the purpose of consolidated Sistema accounting the results of Stream are included in
the results of SMM.
16
SMM’s OIBDA demonstrated a significant year-on-year increase in 2013 as a result of cost optimisation
at the managing company level. The OIBDA margin expanded to 41.6% in 2013.
In 2013, the Stream-TV subscriber base increased by 39.0% year-on-year and reached 10.7 million
subscribers following active expansion of Stream-TV in the CIS region. On the back of growing market
demand WRS increased the production of short TV series. The WRS content library grew to 1,729 hours
as of 31 December 2013.
In 2013, Stream successfully launched a number of new services, including a ringback tone service
“Gudok”, an informational service “MTS Info”, a “Video” option in the mobile TV service for MTS
subscribers, as well as new applications for viewing Stream online-cinema content for all major mobile
phone platforms and TVs with Smart TV support.
Intourist
(USD million)
Revenue
OIBDA
Operating income / (loss)
Net loss attributable to Sistema
2013
88.4
18.0
12.3
(0.9)
2012
YoY change
87.5
1.0%
(13.5)
(23.2)
(24.7)
-
-
-
In 2013, despite improved business operations, Intourist’s revenues remained at the level of 2012, largely
as a result of terminating the management services contract for “Severnaya” hotel in Petrozavodsk and
“Oktyabrskaya” hotel in Nizhny Novgorod. Intourist’s OIBDA was restored in 2013, after recognising
the loss from the joint venture with Thomas Cook in 2012. OIBDA margin rose up to 20.4% in 2013,
following the optimisation of costs, including outsourcing of certain functions, as well as revising
contracts with food suppliers.
As of 31 December 2013, Intourist owned and managed 11 hotels across Russia, Italy, Czech Republic,
Turkey, Ukraine and Namibia. The total number of rooms owned, managed and rented in the reporting
year amounted to 2,688.
Corporate Centre
(USD million)
OIBDA1
Net Income (loss)
Debt
2013
870.0
518.1
2012
YoY change
(240.7)
(251.7)
-
-
1, 574.5
1 646.8
(4.4%)
The Corporate Centre segment comprises the companies that control and manage the Company’s interests
in its subsidiaries.
In 2013, the Corporate Centre segment reported positive OIBDA as a result of recognised gain from the
sale of RussNeft.
1 Hereinafter OIBDA and net income (loss) of the Corporate Centre and other indicators do not take into account intra-group dividends.
17
In 2013, the Corporate Centre’s SG&A expenses increased by 54.6% year-on-year to US$ 349.0 million.
This includes US$ 54 million of non-cash expenditure related to awarding ordinary shares to the top
management. The amount of recognised expense was calculated based on the share price as of the date of
the transaction in 2013.
Dividend flow from Sistema’s investments totalled US$ 1.5 billion (net of tax) in the reporting year.
3.4. Financial overview
Net cash flow from operations in 2013 increased by 15.4% year-on-year to US$ 6,828.8 million.
Net cash spent by the Group on investment activities totalled US$ 2,912.7 million in 2013, compared to
US$ 4,672.3 million used in 2012.
The year-on-year reduction in net cash outflow from investments was mainly due to the cash
consideration of US$ 2,046.7 million that the Group received from the monetisation of investments in its
affiliated and subsidiary companies in 2013, in particular US$ 1,200.0 million from the sale of a 49%
stake in Oil and Gas Company RussNeft, US$ 199.0 million from the sale of 500 ordinary shares of
Belkamneft, and US$ 417.7 million, net of cash disposed, from the sale of 85% in SG-trans to Financial
Alliance and Unirail. In 2013 the Group also sold INTER RAO UES promissory notes received in 2012
for the sale of the power generation assets for the cash consideration of US$ 220.2 million.
The Group’s capital expenditure in 2013 amounted to US$ 4,013.3 million compared to US$ 4,209.6
million in 2012. The 4.7% year-on-year decrease in CAPEX was due to the reduction of capital
expenditures at MTS by 11.8%, partially offset by Bashneft’s growing investment programme in
connection with developing the Trebs and Titov fields. In addition, in the reporting year, net increase in
short-term and long-term investments was US$ 429.2 million mainly due to depositing free cash funds
into bank accounts. Investments in affiliates grew by US$ 386.9 million mainly as a result of loans issued
to Bashneft-Polus.
Net cash outflow from financing activities in 2013 was slightly lower than in 2012 (US$ 3,083.0 million
in 2013 compared to US$ 3,171.7 million in 2012). Cash outflow from financial activities in 2013 were
mainly related to the payment of US$ 950.3 million to the shareholders of subsidiaries compared to US$
575.8 million in 2012, and dividends of US$ 275.1 million paid by Sistema compared to US$ 82.3
million in 2012.
The Group’s net principal payments on long-term borrowings in 2013 totalled US$ 1,253.8 million. Net
principal payments of US$ 231.0 million on short-term borrowings resulted in 86% repayment of short-
term loans at the reporting date.
The Group’s cash balances from continuing operations stood at US$ 2,059.1 million as of 31 December
2013 (excluding an amount of US$ 1,132.4 million which is attributable to the Group’s banking
activities) compared to US$ 1,859.2 million as of 31 December 2012 (excluding an amount of US$ 769.4
million which is attributable to the Group’s banking activities). The Group’s net debt (short-term and
long-term debt less cash and cash equivalents and highly liquid deposits) amounted to US$ 11,007.4
million as of 31 December 2013, compared to US$ 13,460.1 million as of 31 December 2012.
Operating income before depreciation and amortisation (OIBDA) and OIBDA margin
The OIBDA indicator stands for operating income before depreciation and amortisation of intangible
assets. OIBDA margin is OIBDA measured as percentage of net revenue. Our interpretation of the
OIBDA indicator may differ from the use of this parameter in other companies; this indicator is not a US
GAAP parameter and should be seen as an addition to the data contained in the consolidated US GAAP
reports rather than as a replacement of this data. The Company believes that OIBDA is a useful indicator
for investors, since it shows the stability and efficiency of the company’s operations, including the
company’s ability to finance capital expenses, acquisitions and other investments, as well raise and
service debt. Although under US GAAP depreciation and amortisation are treated as operating expenses,
18
these expenses are mostly related to non-cash spending on the long-term assets that had been acquired or
created in previous periods. This OIBDA calculation methodology is widely used by investors, analysts
and credit rating agencies for the assessment of the current and future operations of companies and their
valuation. The calculation of OIBDA net of adjustments correlates with the consolidated operating results
as follows:
Operating income and OIBDA
(USD million)
Operating income
One-off adjustments
Adjusted operating income
Depreciation and amortisation
Adjusted OIBDA
(USD million)
Net income
One-off adjustments
Adjusted net income
3.5. Sistema JSFC’s credit ratings
2013
5, 663.0
12.9
5, 675.9
3, 242.6
8, 918.5
2013
2, 257.5
(265.4)
1, 992.1
2012
4, 725.8
635.9
5, 361.7
3, 068.9
8, 430.6
2012
946.1
847.7
1, 793.8
Net income
Rating agency
Date of the most recent
rating update
Standard & Poor’s
Moody’s
Fitch
30 August 2013
30 May 2013
26 February 2014
Long-term credit rating
Forecast
BB
Ba3
BB-
Stable
Positive
Positive
3.6. Report on payment of the announced (allocated) dividends on the shares of Sistema JSFC
The dividend policy of Sistema JSFC is aimed at paying a predictable amount of dividends and enabling
the company to reinvest profits into attractive investment opportunities in the future.
The amount of dividends is determined on the basis of the results of the previous financial period and
should be at least 10% of the net income of Sistema JSFC Group under US GAAP (net of special
dividends paid). Moreover, Sistema JSFC will pay special dividends accounting for at least 10% of net
income following the respective decision of the Board of Directors in the event of asset divestments and
completion of any other deals. In accordance with the Russian legislation the total amount of paid
dividends is limited by the amount of consolidated net income under the Russian Accounting Standards.
On 29 June 2013, the Annual General Meeting of Sistema’s shareholders (Minutes No1-13) took the
decision to pay RUB 9, 264, 000, 000.00 in dividend for 2012, which amounts to RUB 0.96 per one
ordinary share of Sistema (RUB 19.2 per one GDR). The amount of dividends was determined as
percentage of net income under US GAAP for 2012 and percentage of net income from the transactions
closed in 2012.
As of 31 December 2013, the total amount of dividends paid was RUB 9, 263, 999, 999.04. The tax
withheld on dividends paid to foreign individuals and legal entities totalled RUB 348, 380, 234.00.
As of today the amount of unpaid dividends for 2012 is RUB 0.96. As of 31 December 2013, the amount
of unpaid dividends was RUB 461,143.74. The specified amounts were not paid due to the lack of the
required payment information on dividend recipients.
19
4. PROSPECTS AND DEVELOPMENT STRATEGY OF THE SISTEMA JSFC GROUP OF
COMPANIES
4.1. Mobile TeleSystems
Mobile TeleSystems (MTS) is the largest telecommunication operator in Russia, Eastern Europe and
Central Asia. MTS offers mobile and fixed telephony, broadband internet access and pay TV, as well as
information and entertainment services, in one of the world's most dynamically developing regions.
Company
Mobile TeleSystems
Effective ownership
53.5%
President: Andrey Dubovskov
Chairman of the Board of Directors: Ron Sommer
Industry
The key growth driver in the telecoms market is the data and mobile internet access segment. Analysts
expect the annual growth rates of the market to slow down to 3% in the next few years, with the
traditional voice segment expected to continue shrinking due to strong competition and growing inter-
network roaming.
In these conditions significant growth potential lies in developing convergent products, partnerships in
adjacent segments such as financial services, media and advertising, and in designing all-embracing
products.
Steady growth in 2013
MTS remains a leader by total revenues and OIBDA among the Russian ‘Big Three’ operators. The
quality of subscriber base improved significantly in 2013: average revenue per user (ARPU) in Russia
increased by 3.7% to RUB 308, MOU (minutes of usage) also was up 7.6% to 327 minutes. MTS
demonstrated superior rates of growth in mobile data income in 2013. Churn rate in Russia impressively
declined to 36.3% from 42.4% a year ago.
MTS built over 31,500 base 3G stations (increasing coverage to 76%) and over 5,000 base LTE stations.
MTS accelerated the construction of its digital platform based on MGTS's GPON (fibre access) project in
Moscow. By the end of 2013, 700,000 subscribers had migrated to GPON, 240,000 customers were using
GPON for internet access, and over 2.3 million households were ready to migrate. MTS’s share of the
national broadband market reached 26.5% in 2013, and the share of the pay TV market (by subscribers)
increased to 11.7%.
Operational strategy
MTS’s main operating objectives include the development of convergent products and services, and the
increase of data penetration.
MTS plans to grow its 3G population coverage to 93% by 2015. By the end of 2014, the company will
provide high-speed LTE internet access to over 70 Russian regions. MTS’s new digital platform will be
ready in 2014, aimed to expand the range of digital services provided.
The company’s financial services development strategy, shared with MTS Bank, envisages a five-fold
increase in the size of the retail loan portfolio by 2016.
20
Investment strategy
Sistema's strategy for MTS provides for steady dividend payments, based on MTS’ free cash flows.
Starting from 2013 MTS dividend payments are determined on the basis of free cash flows. In February
2014, MTS upgraded its forecast for total dividends in 2014-2015 to at least RUB 90 billion.
Key results of 2013
(USD million)
Revenue
Adjusted OIBDA*
Financial indicators
Adjusted OIBDA margin*
Adjusted net income attributable to Sistema *
Debt
CAPEX
2013
12, 511
5, 656
45.2%
1, 146
6, 682
2, 561
2012
YoY change
12, 161
5, 286
43.5%
1, 124
7, 584
2, 903
2.9%
7.0%
1.7 p.p.
2.0%
-11.9%
-11.8%
*The OIBDA of MTS in 2013 was influenced by the recognition of income from the compensation received after the settlement of
Bitel dispute.
Operating indicators
Mobile subscribers (m)**
ARPU in Russia (RUB)
MOU in Russia (min)
**Excluding the subscribers of the Republic of Belarus
Key events of 2013
2013
102.4
308
327
2012
95.8
297
304
YoY change
6.9%
3.7%
7.6%
In March 2013, MTS acquired a 25%+1 stake in MTS Bank for RUB 5.1 billion. MTS signed an
agreement with MTS Bank for joint development of MTS Money loans, with MTS receiving 70% of the
profit generated.
In May 2013, MTS launched Moscow's first LTE FDD network.
In June 2013, the MTS annual general meeting of shareholders approved a new dividend policy providing
for a direct correlation between the company's free cash flows and the dividends. The minimum amount
of dividends payable in 2013-2015 will be the bigger of these two values: 75% of MTS's free cash flow
over the past financial year or RUB 40 billion a year.
In August 2013, MTS completed the dividend payment for the fiscal year 2012, amounting to RUB 30.2
billion.
In September 2013, an Extraordinary General Meeting of MTS shareholders approved the payment of the
company's first-ever semi-annual dividends, for the first half of 2013. The amount paid was RUB 10.8
billion.
4.2. Bashneft
Bashneft is a vertically integrated oil company combining the largest fuel and energy producers of the
Republic of Bashkortostan. It ranks among the top ten Russian oil producers, and in the top five oil-
refining companies.
21
Company
Bashneft
Effective ownership
75%
President: Alexander Korsik
Chairman of the Board of Directors: Felix Evtushenkov
Industry
Volatility in the world commodity and FOREX markets brought oil prices down: average Brent crude oil
price in 2013 decreased by 2.7%, to US$ 108.7 a barrel. However, falling prices were partially
compensated for by a decrease in export duties on crude oil and petroleum products - as well as in the
mineral extraction tax.
In 2013, Russia set a 25-year record for crude oil production, and experts expect the upward trend in the
Russian crude oil production to continue. Depletion of the main oil deposits in West Siberia creates a
need for further development of oil fields in the continental shelf of the Arctic and far-eastern seas, as
well as in East Siberia and the Far East.
Steady growth in 2013
In 2013 Bashneft’s oil production increased by 4.1% to 16.1 million tonnes. Bashneft reaffirmed its
leadership in Russia by annual growth in crude oil output, thanks to introducing highly efficient
geological techniques and state-of-the-art technology, both at mature fields and at the Afanasyev oil field,
launched in 2013. Trial operations started at the Trebs and Titov field in the Nenets Autonomous District
in August 2013, adding 291 thousand tonnes of crude oil to production. In 2014, Bashneft expects the
field's output to grow to around 1 million tonnes.
Bashneft retained absolute leadership among Russian oil companies by refining depth, which was 84.7%.
Yield of light oil products grew to 60.4% compared to 59.7% in 2012.
The company is also a leader in oil product quality, with 87.7% of its 2013 petrol output meeting Euro-4
and Euro-5 standards, and 67.2% meeting Euro-5 standard.
Bashneft and Sistema took steps to improve corporate structure and unlock the company’s hidden value.
Bashneft sold its non-core businesses - United Petrochemical Company and Bashneft Service Assets - to
focus on efficiency and development of its key segments.
Operational strategy
Bashneft’s operational strategy in the production and exploration sector is to sustain production at the
company’s mature fields while carrying out an extensive exploration programme in Bashkiria. Bashneft is
planning to continue the development of the Trebs and Titov oil field, along with further exploration, and
to launch production at new sites in the Nenets Autonomous District. The company will also consider
acquiring new licences in promising regions, and participating in new international projects.
In oil processing, Bashneft is planning to upgrade its refineries, and by 2015, to fully migrate to the Euro-
5 fuel standard. It is also a priority within the company’s commercial strategy to rebrand the chain of
retail petrol stations.
Investment strategy
In 2014, Bashneft intends to further streamline its corporate structure. In 2013 it started the reorganisation
which includes elimination of cross-ownership with Sistema Invest. Sistema believes Bashneft has
considerable growth potential attainable through its operational strategy and the development of its key
assets, as well as through strategic partnerships and M&A deals. The oil business possesses sufficient
resources to provide a stable dividend flow.
22
Key results of 2013
(USD million)
Revenue
Adjusted OIBDA*
Financial indicators
Adjusted OIBDA margin *
Adjusted net income attributable to Sistema *
Debt
2013
2012
YoY change
17, 685
17, 125
3, 172
17.9%
1, 447
2, 756
3, 279
19.2%
1, 375
3, 601
3.3%
-3.2%
-1.3 p.p.
5.3%
-23.5%
CAPEX
9.9%
* In 2013 and 2012, Bashneft’s OIBDA was impacted by the effect from the sale of Bashneft’s stake in OJSC Belkamneft and other one-offs.
890
978
Operating indicators
2013
16.1
21.4
60.4
84.7
2012
15.4
20.8
59.7
84.9
YoY change
4.1%
3.0%
0.7 p.p.
-0.2 p.p.
Crude oil production (million tonnes)
Refining volumes (million tonnes)
Yield of light oil products (%)
Refining depth (%)
Key events of 2013
In September, Bashneft sold its 98% stake in United Petrochemical Company to Sistema for RUB 6.2
billion.
In October, Bashneft sold the entire authorised share capital of Bashneft-Service Assets to Sistema for
RUB 4.1 billion.
In October, Bashneft won the auction for the geological survey, exploration and production of
hydrocarbons at the Astashevsko-Sosnovsko-Nazarovsky field.
In October, Bashneft obtained the right to enter into a Production Sharing Agreement for Oil Block EP-4
in Myanmar with a participatory interest of 90%, and to become the operator of the project.
In December, Bashneft launched a corporate reorganisation through a merger with Bashneft Invest, a
100% subsidiary established following the spin-off from Sistema Invest.
In December, Bashneft paid out dividends for the nine months of 2013, amounting to RUB 45.25 billion.
Earlier, in August, Bashneft had paid RUB 5.32 billion in dividends for the 2012 full year.
In December, Bashneft completed the acquisition of the Bashneftegazrazvedka company, which has a
licence for the East-Iksky field.
In March 2014, Bashneft acquired a 100% stake in Burneftegaz, an oil exploration and production
company in the Tyumen District, which owns the rights to explore and develop the Sorovskoye field and
the Tortasinskoye field. Total С1+С2 oil reserves of the fields amount to 53.4 million tonnes. The amount
of the deal exceeded US$1 billion, including debt.
4.3. Bashkirian Power Grid Company
Bashkirian Power Grid Company (BPGC) is a large power grid company providing power transmission
services to consumers in the Republic of Bashkortostan.
23
Company
Bashkirian Power Grid Company
Effective ownership
79%
CEO: Andrey Makarov
Chairman of the Board of Directors: Felix Evtushenkov
Industry
The new development strategy of the Russian power grid network sets targets for reducing the costs of
grid companies. To meet the strategy’s recommendations, regulated power transmission tariffs were
indexed to remain stable for 2014.
There are now plans to introduce benchmarking tools for estimating operating and investment expenses,
an availability charge for consumers, and measures to reduce cross-subsidies. Power grid tariffs
indexation in 2014 for 2015 will be fixed below the rate of inflation. In the Republic of Bashkortostan,
power consumption is expected to rise by 1.59%.
Steady growth in 2013
BPGC increased electricity output by 3.1%, thanks to economic growth and increased consumption in the
Bashkiria region. Successful execution of investment programme worth RUB 3,481m allowed increasing
the capacity and the number of connected consumers. BPGC’s improved performance was also driven by
a 32.6% increase in technological connections, to 17,180 units, with a connected capacity of 250.6 MW.
BPGC also renovated power facilities, and improved efficiency and reliability in electric power
transmission. The company signed an agreement with Siemens to conduct a provisional feasibility study
for modernising the power grid infrastructure in Ufa, the capital of Bashkortostan, using a ‘smart grid’
technology. Smart grid is a priority for the global power grid sector, and Ufa will become the first
Russian city to introduce it, which will reduce its power outages by almost 50%.
Operational strategy
In 2014, BPGC will work to switch to RAB regulation of tariffs, which will make the company more
attractive to investors and create a stable source of income to support its long-term investment
programme.
To generate additional revenue from non-regulated activities, BPGC will also set up an engineering
company that specialises in planning power grid infrastructure, designing complicated electro-technical
facilities and constructing cyber safety systems for power grids. BPGC is also considering strategic
partnerships with leading foreign companies that already have smart grid technology implementation
experience.
Investment strategy
Sistema’s strategy for BPGC envisages growth of the company’s market share in the Republic of
Bashkortostan through organic and possibly acquisition opportunities.
Key results of 2013
(USD million)
Revenue
Financial indicators
2013
417
2012
373
YoY change
11.7%
24
OIBDA
OIBDA margin
Net income attributable to Sistema
177
42.6%
87
129
37.6%
43.4%
-0.8 p.p.
24
259.0%
Operating indicators
Distribution grid effective output (m kWh)
Distribution grid losses (%)
Transmission grid effective output (m kWh)
Transmission grid losses (%)
Key events of 2013
2013
19, 080
8.25%
20, 936
1.37%
2012
YoY change
18, 514
3.1%
8.67%
-0.42 p.p.
20, 192
3.7%
1.51%
-0.14 p.p.
In January, BPGC commissioned the Zaton-Krasnodonskaya 110 kV aerial cable line and completed
reconstruction of the Krasnodonskaya substation (110/10/6 kV).
In November, BPGC began construction of a new 110/10 kV substation at Gafuri, and a 110 kV aerial
cable line to resolve a power deficit in the Buzdyaksky district of Bashkortostan.
4.4. United Petrochemical Company
United Petrochemical Company (UPC) is a vertically integrated petrochemical group with four
businesses in the Republic of Bashkortostan: Ufaorgsintez, the Tuymazy and Shkapovo gas processing
plants, and a Bisphenol-A production facility.
Company
United petrochemical Company
Effective ownership
99%
President: Kirill Tyurdenev
Chairman of the Board of Directors: Vladislav Bazhenov (as of December 31, 2013 -Yakov Goldovsky)
Industry
In 2013, Russia’s petrochemical industry increased its output of polymers by 9.3%, polyethylene by
19.8% and polypropylene by 25.2%. With introduction of new capacities and resumption of operations at
some plants, Russian-produced petrochemicals are beginning to replace imported ones, and this trend is
expected to continue, given the growth of investment in the sector.
Russia still lags behind the developed and some developing countries in per-capita polymer consumption.
The growth rate of polymer consumption will outpace the GDP growth rate as the market is far from
saturation.
Steady growth in 2013
In September, Sistema purchased 98% of UPC from Bashneft for RUB 6.2 billion. Later in the year, UPC
signed an agreement with Mexico's Grupo Petrotemex, a subsidiary of Alpek, for a joint venture to build
a plant producing purified terephthalic acid (PTA) and polyethylene terephthalate (PET) in Ufa. The
25
PTA/PET plant will use Petrotemex’s IntegRex technology and have a maximum capacity of 600,000
tonnes of PTA and 600,000 tonnes of PET, supplying products to the Russian and export markets.
In 2013 UPC accounted for a 12% share of the Russian market in polypropylene, 14% in low-density
polyethylene, 26% in phenol, and 30% in acetone – and generated revenues of US$ 697 million, of which
11% came from Bashneft. In 2013, UPC processed 752 thousand tonnes of hydrocarbons.
Operational strategy
In 2014, UPC aims to increase processing volumes at Ufaorgsintez and the Bisphenol production facility,
and reduce costs. With regard to the JV with Alpek to build the PTA/PET plant, the parties plan to sign
licence agreements in 2014, as well as to begin the design work and hold a tender for FEED and EPC.
Investment strategy
Sistema sees significant growth potential in the petrochemical business, through developing state-of-the-
art petrochemical production facilities in partnership with major petrochemical players (for pyrolysis,
production of polyethylene, polypropylene, ethylene oxide and glycols, and epoxy resins).
Implementation of this strategy will increase UPC’s value and ensure a stable dividend flow.
Key results of 2013
(USD million)
Revenue
OIBDA
Debt
Financial indicators *
* Full-year 2013 results, no comparable data for 2012 is available
Operating indicators *
(‘000 tonnes)
Processed hydrocarbons, thousand tonnes
Output of finished products, thousand tonnes
Including : Polypropylene
Polyethylene
Phenol
Acetone
Bisphenol A
LPG and stable gas naphtha
* Full-year 2013 results, no comparable data for 2012 is available.
Key events of 2013
2013
697
74
0
2013
752
725
119
91
49
39
27
163
In October 2013, UPC began operating automated LPG fillers at the Tuymazy and Shkapovo plants, each
with a monthly capacity of 2,800 tonnes, which will support significant expansion of LPG sales
geographically.
In December 2013, UPC registered a joint venture with Mexico's Grupo Petrotemex, a subsidiary of
Alpek, one of the world's biggest petrochemical players, to build a PTA/PET plant in Ufa.
26
4.5. Bashneft Service Assets
Bashneft Service Assets (BNSA) is a major oilfield services company in the Republic of Bashkortostan,
operating in East Siberia and in the north-west of the Russian Federation.
Company
Bashneft Service Assets
Effective ownership
100%
CEO: Kamil Zakirov
Chairman of the Board of Directors: Felix Evtushenkov
Industry
In-house oilfield services account for over a third of the oilfield service market in Russia. BNSA’s market
share is approximately 1.6%.
Drilling is the main oilfield service market in Russia. Aggregate drilling volumes in Russia in 2013 were
up by 7% as compared to 2012. Industry experts forecast the drilling segment to grow in the medium
term, while in the long run growth will depend mostly on the success of the exploration projects of the
next few years.
There is growing demand for high-tech oil and gas services in Russia, with the competitiveness of
independent service companies depending on their ability to offer advanced technologies and
multifunctional equipment. Growth of the oilfield service market will come from the need to maintain
production levels at mature deposits and from projects aimed at extracting hard-to-recover reserves.
Steady growth in 2013
BNSA comprises eleven companies, providing more than 130 different oilfield services in five business
segments: drilling, well servicing and workover, mechanical service, transport, and construction. The
main production facilities are based in Bashkortostan. Drilling volumes in 2013 amounted to 408
thousand meters and the number of commissioned wells amounted to 161.
BNSA’s major customer is Bashneft, with a long-term contract for the provision of oilfield services. The
contract with Bashneft generated 77% of BNSA’s revenues in 2013. Other customers include TNK BP,
RN-Samaraneftegaz, Slavneft Megionneftegaz, and RN-Yuganskneftegaz. In 2013, BNSA expanded its
client base by signing contracts with Gazpromneft and Russneft.
BNSA generated revenue of US$ 767 million in 2013. The OIBDA margin of 8% can be significantly
improved through equipment modernisation and diversification of the client base. The company’s debt
amounted to US$ 8 million. BNSA has significant debt capacity to finance its investment programme.
Operational strategy
BNSA aims to increase its market share through investing in the drilling segment, with 2014 investments
expected to reach RUB 6.3 billion, mainly through debt.
The company is also aiming to diversify its client base, expand its range of services and streamline its
internal structure.
Investment strategy
Sistema’s investment strategy for BNSA envisages further restructuring and optimisation of the company,
expansion of its operations and client base and possible future monetisation through M&A or a sale to
strategic investors.
27
Key results of 2013
(USD million)
Revenue
OIBDA
Debt
Financial indicators*
* Full-year 2013 results, no comparable data for 2012 is available.
Operating indicators
Number of drilling crews
Drilling volumes, ths m
Number of commissioned wells
Number of well servicing and workover crews
Well servicing and workover work plan, ths hours
Transport: number of vehicles
2013
767
60
8
2013
30
408
161
154
1, 138
5, 068
2012
YoY change
37
474
212
137
1, 039
5, 190
-19%
-14%
-24%
12%
10%
-2%
0%
24%
-31%
39%
-2%
Transport: work plan, ths hours
Mechanical service: overhaul of oilfield equipment, oil-well
tubing and pump rods, ths units
Mechanical service: Maintenance of oilfield equipment, ths
units
Mechanical service: Polymer coating services for pipes, ths
m
Maintenance of ESP units, ths per day
12, 937
12, 904
332
55
474
267
80
342
1, 229
1, 257
Key events of 2013
In December 2013, BNSA and Bashneft signed a Framework Agreement for cooperation in oilfield works
and services from 2014-2018.
4.6. Detsky Mir
Detsky Mir Group is the largest children's goods retailer in Russia and the CIS. The Group includes
Detsky Mir retail chain in Russia and Kazakhstan, early development chain ELC in Russia, the luxury
centre Yakimanka Children's Gallery, and the online stores detmir.ru and elc-russia.ru.
Company
Detsky Mir
Effective ownership
100%
CEO: Vladimir Chirakhov
Chairman of the Board of Directors: Christopher Alan Baxter
28
Industry
A reduction in the market share of non-organized retail, from 36% to 20%, and increased consumer
spending, has contributed to the continued growth of the children's goods retail market in Russia.
Children's clothing, toys, and baby products are still the market segments with the highest potential. In
2013, there was significant growth in the market share of medium-price goods, the segment Detsky Mir
operates in. In addition, the improving demographics, growing consumer spending, and the strengthening
positions of specialist retail chains will drive further growth. There are new duty reductions scheduled for
2014, based on Russia’s WTO membership, which will improve the contractual terms for sourcing high-
quality children's goods from abroad.
Steady growth in 2013
Detsky Mir's growth rate was more than double the average market growth rate, with revenue growing
26.7% in 2013 compared to 2012. Detsky Mir's share of the total market increased to 8.2%, reaching
12.9% in toys, 11.1% in clothing and footwear, and 9.4% in baby products.
The company opened 33 Detsky Mir stores and 8 ELC stores, reaching a total store count of 252 with a
total floor space of 320 thousand m2.
Detsky Mir also focused on its competitive pricing strategy and efficient customer proposition which
resulted in an 8.2% like-for-like increase in traffic and a 4.8% like-for-like increase in the average ticket.
By the end of 2013, Detsky Mir's private label portfolio included 11 clothing and footwear brands, and
generated 20% of the company’s revenue.
In December 2013, Detsky Mir unveiled a new innovative store concept with substantially improved
shopping experience for the customers. Key attributes of the new concept include modern merchandising
technology, a broader product mix, and a combination of play space and retail space to further increase
traffic and sales. For 2014, Detsky Mir plans to open 30 to 40 stores in this new format as well as
refurbish 5-7 existing stores, mainly largest Detsky Mir stores in Mega shopping malls.
Operational strategy
Over the next few years, Detsky Mir plans to increase the share of its highly profitable private-label
clothing and footwear, to 70% of the total clothing and footwear sales.
Focus on omni-channel sales development would allow improving marketing and customer experience
across a wider range of platforms, from mobile devices and computers, to television, radio and direct
mail. For example, in 2014 the company plans to open 5-7 e-kiosks.
Detsky Mir will also continue developing its logistics system, increasing its centralisation and improving
turnover rates.
Investment strategy
Based on the trend of market consolidation, Detsky Mir is assessing a range of opportunities to grow the
business. These include potential M&A deals on attractive terms to secure expertise in new retail market
segments, and further strengthening Detsky Mir’s market position in specific regions and in Russia
overall. At the same time, Sistema is considering various strategic options to further support Detsky Mir’s
growth plans.
Key results of 2013
(USD million)
Revenue
OIBDA
OIBDA margin
Net income attributable to Sistema
Financial indicators
2013
1, 130
87
7.7%
41
2012
YoY change
893
54
6.1%
11
26.7%
60.3%
1.6 p.p.
268.1%
29
Debt
181
99
83.3%
Operating indicators
2013
320
252
2012
YoY change
291
216
10.0%
16.7%
Floor space (ths sq. m)
Number of stores
Key events of 2013
In July, Detsky Mir bought out a 25%+1 stake of its shares from Sberbank, for RUB 4.5 billion. This
resulted in Sistema's effective shareholding in Detsky Mir increasing to 100%.
In August, Detsky Mir paid RUB 420.5 million worth of dividends for 2012.
In December, Detsky Mir launched its first store under new interactive concept in the shopping mall
Mega Belaya Dacha.
4.7. Medsi
Medsi is a leading provider of private healthcare services in Russia, which operates the largest private
chain of medical facilities in the country. Medsi Group includes one clinical and diagnostic centre, 29
clinics, 82 first aid stations, three hospitals, an emergency medical service, three wellness centres and
three healthcare resorts.
Company
Medsi
Effective ownership
75% -1 share
President: Alexey Chupin (before May 2013 - Khawar Mann)
Chairman of the Board of Directors: Mikhail Shamolin
Industry
The Russian private healthcare market continued growing rapidly in 2013. Many private clinics opened,
and the range of healthcare services increased.
Private medical insurance – with its 10% and 29% share in Russian and Moscow healthcare markets
respectively – is one of the segments showing the highest growth. High income in Moscow, where more
than 30% of residents have an average monthly income over RUB 50,000, will contribute to further
growth in the private medical insurance sector and the Moscow private healthcare market overall. A
reduction in the number of services available under mandatory medical insurance in 2013 has also created
revenue growth among private companies.
The Russian private healthcare segment remains heavily fragmented: Medsi's share of Russia’s healthcare
services market is around 2%, and its share of the Moscow market is around 6%.
However, consumers are increasingly choosing large clinical and diagnostic centres that provide a wider
range of services over regular clinics.
Steady growth in 2013
Medsi completed the integration of the acquired GUP Medical Centre assets into the Group, and now
focuses on the efficiencies available through implementing a full-cycle healthcare model. Among other
30
factors, this successful integration allowed Medsi to increase revenue and OIBDA by 41.3% and 60.1%
respectively, compared with 2012.
Medsi also launched several new healthcare and check-up programmes, and about ten new rehabilitation
programmes using health resorts and wellness centres – and prepared to launch new products in 2014 in
partnership with insurance companies. The merger with GUP Medical Centre had secured Medsi a
contract to provide healthcare among state and municipal agency employees, which was extended into
2014. The total number of patient visits in 2013 rose by 20.8% to over 6 million.
Medsi has significant potential for further development. The company can improve on the current 40%
use of capacity in its hospitals, and also in one of its most successful projects – a clinical and diagnostic
centre in Moscow that currently has an OIBDA margin of 48% and utilization of 64%.
In association with Royal Phillips, Medsi is developing flagship clinical and diagnostic centres that use
hospital-substituting technology as a key way of developing complex and comprehensive services. The
company began the construction one of these in December 2013.
Operational strategy
Medsi’s strategy focuses on developing complex, full-range medical services and building the large
clinical and diagnostic centres popular with private customers. In 2014, Medsi plans to commence
construction of two such centres jointly with Royal Philips.
In addition, Medsi plans to optimise some of its smaller clinics, modernise and re-equip hospitals as part
of its organic growth plans and increase utilisation and diversify the client base in the recently integrated
assets. Medsi will continue cooperating with major international healthcare leaders, sharing experience
and technology, educating staff, and improving quality standards.
Investment strategy
Sistema regards healthcare as one of the key long-term growth opportunities in Russia. The Group
actively assists Medsi in implementing its strategic direction, establishing relationships with leading
international healthcare providers and assessing strategic opportunities to maintain the company’s
ambitious plans.
Key results of 2013
(USD million)
Revenue
OIBDA
OIBDA margin
Net income attributable to Sistema
Debt
Number of visits (thousand)
Services provided (thousand)
Average cheque (US$)
Key events of 2013
Financial indicators
Operating indicators
2013
294
44
2012
208
28
15.0%
13.3%
YoY
change
41.3%
60.1%
1.7 p.p.
32
73
0.2
84
16, 157.6%
-13.1%
2013
2012
6, 013
12, 736
48.7
4, 979
11, 055
41.7
YoY
change
20.8%
15.2%
16.8%
In May, Alexey Chupin was appointed new President of Medsi Group.
31
In January 2014, Medsi announced a strategic collaboration with Royal Philips which will commence
with the construction of two new clinics and diagnostic centres in Otradnoe and Michurinsky prospect in
Moscow.
4.8. Binnopharm
Binnopharm is a pharmaceutical company, which operates one of Russia's largest facilities manufacturing
biotechnological drugs in line with the international quality standard GMP (Good Manufacturing
Practice).
Company
Binnopharm
Effective ownership
74%
CEO: Pavel Medvedev
Chairman of the Board of Directors: Dmitry Zubov
Industry
Russia’s pharmaceuticals market demonstrates consistent growth, especially in the commercial segment
of finished pharmaceutical products. Domestic producers control almost two-thirds of the market by
product, though less than a quarter in monetary terms.
In 2013, a government decree required all Russian drug producers to adopt the GMP standards by 1
January 2014. Binnopharm already meets these standards.
Steady growth in 2013
Binnopharm’s revenue grew significantly reaching record US$ 104 million thanks to higher sales of its
own biotechnological drugs such as vaccine Regevak and aerosol generics, and growth of distribution
operations. For the sixth successive year, Binnopharm met most of the country's hepatitis vaccine needs.
In August 2013, Binnopharm’s dosage production line started manufacturing the original anti-asthmatic
medication, Theopec, which was previously produced under contract manufacturing.
To meet demand, the company installed a line for filing biotechnological products (erythropoetins,
interferones, vaccines) in pre-filled syringes. Among others, the line is expected to be used in contract
manufacturing.
Binnopharm continued working with ViiV Healthcare (a subsidiary of GlaxoSmithKline) to localise
manufacturing of antiretroviral drugs in Russia. The company also started preparations for a transfer of
technology for full-cycle manufacturing of Kivex and Ziagen.
Binnopharm recreated technology to produce erythropoietin α. The samples of substance, as well as of
finished forms for registration, were manufactured at a new eukaryotic production facility. This
technology is unique to Russia and meets all European Pharmacopoeia requirements.
Operational strategy
Binnopharm aims to expand its range of manufactured medications and launch its own production of
erythropoietin α, interferon α, interferon β and Filgrastim. Meanwhile, the company will develop its
distribution chain in the Russian regions. Binnopharm is also looking for new markets outside Russia,
initially in the CIS.
Investment strategy
Sistema is considering several strategic developments for Binnopharm, including strategic alliances, joint
ventures and attractive M&A opportunities.
32
Key results of 2013
(USD million)
Revenue
OIBDA
OIBDA margin
Net income attributable to Sistema
Debt
Key events of 2013
2013
104
20
2012
74
16
19.7%
21.7%
12
22
2
21
YoY
change
41.3%
28.3%
-2 p.p.
466.6%
6.7%
In April 2013, Binnopharm completed the merger with Alium Group of Companies, a producer of
infusion solutions and blood substitutes. In 2013, Binnopharm carried out reconstruction of the infusion
solutions unit, including the installation of a new plastic filling machine, at the Alium plant.
In October, Binnopharm finalised the contract to manufacture antiretrovial medications with ViiV
Healthcare. GlaxoSmithKline audited Binnopharm’s compliance with GMP standards and approved
Binnopharm for further transfer of technology. The new technology of Binnopharm for the production of
erythropoietin α is unique for Russia and meets all the requirements of the European pharmacopeia.
In November, Binnopharm developed technology to produce erythropoietin α, and manufactured samples
of substance and finished product for registration, at a new eukaryotic production line.
In December, Binnopharm submitted a dossier for registering a hepatitis B vaccine in the Republic of
Belarus. Sales there are planned to start in 2014.
4.9. MTS Bank
MTS Bank is a universal commercial bank of federal scale, one of the top 50 Russian banks by the size of
equity and net assets.
Company
MTS Bank
Chairman of the Management Board: Mikhail Chaykin
Chairman of the Board of Directors: Alexey Buyanov
Effective ownership
87%
Industry
In 2013, growth in the Russian banking sector slowed down, and assets were increasingly concentrated in
the largest banks. However, retail lending continued to grow at a significant pace, with a 29% increase in
individual borrowings in 2013. Meanwhile, regulations tightened, and the Central Bank revoked the
licenses of 27 Russian banks and introduced stricter requirements for impairment provisions. On 1
January 2014, the banking system moved to the Basel 3 standards.
Telecom companies are showing an increasing interest in banking – all the Big 3 operators are either
collaborating with banks or looking to enter banking. Credit card use is much lower in Russia than in
more developed economies, which creates a favorable environment for active growth of this market
segment.
33
Steady growth in 2013
MTS Bank achieved significant success in the retail business segment, in partnership with MTS. The
company’s loan portfolio from joint projects with MTS grew to US$ 563 million, expanding over 25%
each quarter in 2013. MTS Bank’s total loan portfolio to individuals increased by 40% to US$ 2.1 billion.
Interest income rose by 27.2% to US$ 731.8 million.
Provisions to loan portfolio ratio amounted to approximately 9%. MTS Bank meets all the accounting
standards of the Bank of Russia at all reporting dates and regulatory requirements, including the capital
adequacy ratio.
The company developed a range of new products with MTS. MTS subscribers were able to make NFC
contactless payment transactions in shops and on public transport. The segment development forecasts, as
well as pilot project results, suggest good prospects for this payment technology.
Operational strategy
The main operational objectives of MTS Bank are to reduce operational costs and improve customer
service, while investing in rebranding, and developing a consistent concept for promoting financial
products and services. The bank also plans to increase its share of high-margin products and non-interest
income.
Investment strategy
Sistema’s strategy for the banking business includes developing the retail lending segment in partnership
with MTS, and continuing to grow the business.
Key results of 2013
(USD million)
Revenue
OIBDA
Net income attributable to Sistema
Financial indicators
2013
2012
903
38
19
2013
6, 920
5, 771
563
712
51
16
2012
7, 006
5, 596
234
YoY
change
26.8%
-24.9%
18.8%
YoY
change
-1.2%
3.1%
140.6%
Operating indicators
(USD million)
Assets
Loan portfolio
Loan portfolio attributable to joint project with MTS
Key events of 2013
In March, MTS Bank obtained access to the credit histories database and subscribed to the ‘National
Hunter’ service that helps fight banking fraud.
In November, MTS Bank became one of the biggest bank card issuers in the Russian Federation – in the
first half-year, and was ranked tenth according to Banki.ru, an informational and analytical web portal.
In November, the international rating agency, Fitch, affirmed MTS Bank’s Long-term Issuer Rating as
B+ with a Stable Outlook. In March 2014 the Outlook was improved to Positive.
In December, MTS Bank was included in the list of 51 lending organisations approved by the Russian
Government to provide accounts for government procurement, effective from 1 January 2014.
34
4.10.
SG-trans
SG-trans is one of Russia’s leading railcar operators. Sistema is developing its transportation business in
a 50/50 partnership with Unirail.
Company
SG-trans
Effective ownership
50%
President: Alexei Taicher
Chairman of the Board of Directors: Ali Uzdenov
Industry
Generally negative economic trends in Russia meant cargo shipments fell by 2.8% in 2013, with
shipments of metal products and coke dropping significantly. Yet shipments in liquefied gas, one of the
key segments for SG-trans, grew by 10% (SG-trans held a 29% market share in Russian LPG
transportation in 2013).
Growth of total Russian railcar fleet in recent years has been higher than that of cargo turnover. The daily
lease rate of a gondola car fell by 25% year-on-year to RUB 600 in December 2013, while the lease rate
of oil tank cars nearly halved, and the lease rate of LPG carriers decreased by 18% to RUB 1,400-1,500.
In 2014, further growth in the liquefied gas shipments is expected, based on increasing demand for
petrochemical products and the opening of new production facilities.
Steady growth in 2013
Having acquired SG-trans in 4Q 2012, in 2013 Sistema restructured the business and attracted industry
partner Unirail (50/50) to develop it jointly. Sistema returned RUB 14.5 billion of the original investment,
spun off SG-trans non-core assets in the gas segment to SG-Trading, which is now a 100% Sistema
subsidiary, and merged Sistema’s transportation assets – Financial Alliance and SG-trans – under SG-
trans brand in the first quarter of 2014.
SG-trans aimed to expand the fleet and improve fleet management effectiveness, optimise business
processes and attract new clients. Notably, SG-trans signed long-term contracts with RN-trans, Sanors
and Sibur-Trans, which helped the company to reduce the volatility of its revenue significantly. SG-
trans’s client portfolio was diversified to more than 100 companies, including such majors as Novatek,
Tatneft, Rosneft, Lukoil, Gazpromneft.
The scope of work for Bashneft also grew significantly, with shipment of about 65% of its cargo flow.
SG-trans overall transportation volumes increased by 69% including substantial expansion of oil and oil
product volumes. Signing new long-term contracts allowed SG-trans to start renewing the car fleet,
buying 1,174 modern oil tank cars, about 1,200 LPG carriers and 1,001 gondola cars. SG-trans railcar
fleet under operation increased by 20% in 2013 amounting to 31,665 cars with 88% fleet owned and
leased. Average fleet age amounts to 9 years for oil tank cars, 23.7 years for LPG carriers and 14.4 years
for gondolas.
Operational strategy
In 2014, SG-trans will focus on car fleet renewal, including acquiring LPG tank cars, as well as signing
new long-term contracts and increasing market share. SG-trans also sees significant growth potential in
vertical integration – buying railway infrastructure assets such as servicing stations, repair depots and
approach railway lines. Vertical integration will allow SG-trans to diversify the business and reduce its
volatility, cut costs and strengthen its position in the regions of operations.
35
Investment strategy
Sistema considers transportation business as one of the key segments of its portfolio. Monetisation is
planned to be carried out through dividend flow and then through IPO or sale to third parties. Sistema and
Unirail will monitor opportunities for market consolidation, including potential M&A deals within the
industry and related areas.
Key results of 2013
(USD million)
Revenue
OIBDA
OIBDA margin
Net income attributable to Sistema
Debt
Financial indicators
2013*
2012*
632
190
30%
32
856
436
125
29%
15
331
YoY
change
45%
52%
1 p.p.
113%
159%
* SG-trans Group aggregates full year unaudited financial results based on management accounts of the SG-trans OJSC, Financial Alliance
LLC, SG-trading LLC and Bashneft-Trans LLC for the year ended 31 December 2013. These assets formed SG-trans Group in 2013 and going
forward it is planned to consolidate their financial accounts. As a result, financial figures are shown on an aggregated pro forma basis for 2012
and 2013, excluding intragroup turnover and balances between companies.
(items)
Total railcar fleet
Oil tank cars
LPG carriers
Gondolas
Boxcars
Cement hoppers
Flatcars
Key events of 2013
Operating indicators
2013
31, 665
12, 893
16, 331
2, 377
27
27
10
2012
YoY change
26, 463
10, 594
14, 964
841
27
27
10
20%
22%
9%
183%
-
-
-
In April, SG-trading separated from SG-trans and became a standalone entity. It is now 100% owned by
Sistema and controls assets related to LPG trading and storage.
In April, Sistema sold 70% of its shares in SG-trans to its 50%-owned Financial Alliance (50/50 with
Unirail) for RUB 12 billion. In July, Sistema sold another 15% of SG-trans to Unirail for RUB 2.5 billion
to form 50%/50% JV with partner on the base of SG-trans.
4.11. Sistema Shyam TeleServices Limited
Sistema Shyam TeleServices Ltd (SSTL) is a CDMA mobile operator in India
Company
Sistema Shyam TeleServices Limited
Effective ownership
56.7%
CEO: Dmitry Shukov
36
Chairman of the Board of Directors: Ron Sommer
Industry
The total subscriber base in the Indian market remained fairly steady in 2013, after a drop in 2012 caused
by a regulatory crisis - yet the active subscriber base increased by 7%. In the fourth quarter of 2013, the
growth was restored and Indian mobile subscriber base increased by 2% to 887 million, penetration of
services reached 71.8%.
In November 2012 and March 2013, there were auctions for 2G frequencies. As a result, two operators
left the market in 2012, while many others had to reduce their presence to only 6-8 circles. The
companies were forced to shut down their networks in other circles – where acquisition of frequencies
became commercially unviable because of high starting prices – and become regional, rather than pan-
Indian, operators.
Fewer new operators meant reduced competition. Most mobile operators increased tariffs for voice
services and, for the first time in the last few years, improved their revenues and returns. Growth is
projected to continue in 2014, based on the launch of new 4G (LTE) networks and other factors.
Facing a record-breaking slump in foreign investment in the telecoms industry, the Indian Government
looked to improve regulation and increase the investment appeal of the industry. For example, restrictions
on the foreign ownership ratio in telecom companies were eliminated in 2013. Since February 2014, the
undistributed spectrum (900 MHz and 1,800 MHz) has been auctioned off, although the prospects for
auction sales of the 800 MHz spectrum remain uncertain.
Steady growth in 2013
In March 2013, SSTL resolved issues with operator licences following the Indian telecoms market crisis.
SSTL acquired three carriers in eight circles and in total continued development in nine most
economically attractive Indian regions: Rajasthan, Delhi, Gujarat, Uttar Pradesh (West), Kolkata, West
Bengal, Kerala, Tamil Nadu, and Karnataka.
By focusing on developing these circles, SSTL cut adjusted OIBDA loss from US$ 333 million in 2012
to US$147 million in 2013. SG&A expenses dropped by 36.5%. The debt also decreased significantly, by
43%, and interest expense fell by 31.1%.
Following restructuring, SSTL managed to revive revenue growth in the last quarter of 2013, showing a
7.4% quarter-on-quarter increase, and shifted its focus back to business expansion and development. The
company’s subscriber base grew by 2.2% in the last quarter, while its data customer base increased by
10.7%. Subscribers’ monthly minutes of usage also increased by 39.5% to 373 minutes. Blended mobile
ARPU grew by 22.8% in local currency, while non-voice revenues from data and value-added services
accounted for 34.7% of SSTL’s total revenue in 2013.
In October, having secured new licences and three carriers from the nine above-mentioned circles, SSTL
launched the EVDO Rev.B Phase 2 high-speed data transfer services, offering an access speed of up to
9.8 Mb/sec and the highest quality available in the market to date.
Operational strategy
SSTL’s 2014 organic growth strategy for the nine circles focuses on accelerating development of its data
services and promoting smartphones, with maximised monetisation of voice services. SSTL is expected
to achieve OIBDA profitability in the first half of 2015.
Investment strategy
Sistema’s strategy is focused on Indian business profitability and financial recovery. The Group’s
financing of SSTL will continue to reduce sharply in 2014. Sistema will also continue to monitor closely
the regulatory changes in the sector and assess their impact and opportunities for SSTL.
37
Financial indicators
Key results of 2013
(USD million)
Revenue
Adjusted OIBDA
Adjusted net loss attributable to Sistema
Debt
2013
209
-147
-225
597
2012*
YoY change
303
-333
-341
-30.9%
-
-
1, 047
-43.0%
*SSTL’s results in 2012 were affected by the recognised loss from the impairment of long-lived assets.
(m)
Mobile voice subscribers (million)
Data subscribers (million)
Key events of 2013
Operating indicators
2013
8.5
1.3
2012
13.1
1.8
YoY change
-35.4%
-24.8%
In March, SSTL secured three carriers in eight circles and continued developing in the nine most
economically attractive Indian circles. In March to May 2013, SSTL discontinued activities in 13 circles.
In June, Dmitry Shukov was appointed SSTL's CEO.
In October, SSTL launched the EVDO Rev.B Phase 2 high-speed data transfer services in all nine
operating circles.
4.12. RTI
RTI is a major Russian industrial holding, which develops and manufactures high-tech products and
infrastructure solutions using proprietary microelectronic technologies. RTI subsidiaries have their own
R&D infrastructure and implement projects of unique complexity and scale in the fields of radio
communication and space technology, security, microelectronics and Information and communications
technology.
Company
RTI
Effective ownership
84.7%
CEO: Sergei Boev
Chairman of the Board of Directors: Yevgeny Primakov
Industry
In the defence industry, demand for high-tech products is expected to grow significantly. Under the
government weapons programme until 2020, aggregate government spending on defence will amount to
around US$ 650 billion and it is projected that up to 70% of funds will be used to purchase new systems,
weapons and equipment.
The microelectronic market in Russia exceeded US$ 2 billion and will thrive on a growing demand for
RDIF-based solutions, partly from the government. Demand for semiconducting products for
manufacturing and telecom industries is also growing, which as part of an import-substituting
programme, should boost the demand for local microelectronic production.
The Russian information and communication technology sector grew by around 7% in 2013, with
Russian top-20 companies among the largest consumers. An average annual 10% growth rate in the
38
information and communication technologies sector is projected until 2017, with the comprehensive
security systems segment showing the most promise.
Steady growth in 2013
Sistema began its high-tech assets restructuring, looking for an optimal management model. Non-core
assets of the group, including Sitronics KASU, which is involved in the intelligent transport system
project for Moscow, were transferred to a newly established company - Sitronics-N, and acquired by
Sistema. RTI now operates in four principal segments: defence solutions, comprehensive security
systems, microelectronics (Micron Group) and information and communication systems (NVision
Group).
RTI’s defence solutions business showed the highest growth, with revenues increasing by 23%. At the
end of 2013, RTI was appointed the only executor of the major project to set up the National Integrated
Biohazard Monitoring Centre. The key customers of Defence Solutions are Russian military and law-
enforcement agencies and operators of strategic installations and critical infrastructure. RTI was also
involved in providing security systems for Olympic facilities in Sochi.
RTI’s Microelectronics division supplied over 360 million transport cards for Moscow transport
companies. Mikron is planning to launch production using 65 nm technology, which will increase the
company's competitive position and support the expanding use of microchips.
Operational strategy
RTI’s strategy focuses on the intensive development of economically attractive segments. The
Defence Solutions division will focus on complex information systems for aerospace defence and
over-the-horizon radars to detect air, sea and ground targets.
In the field of radio communications, RTI will continue serial production of 6th-generation radio
equipment and mobile satellite communications equipment, as well as development work in new
areas: network-centric trusted systems and communication facilities; radio and control systems and
complex unified satellite communications system.
Threat monitoring focuses on the development of IT solutions and services for monitoring and
control of risks to be used by law-enforcement agencies and government. The main objective in
coming years is to become the leading Russian supplier of situation centres, and equipment for
control, monitoring and multisensory networks.
RTI also focuses on increase of profitability by the application of advanced technologies and
intellectual property to end products. Strategy of the Group’s R&D is to develop breakthrough and
advanced technologies, ensuring RTI’s long-term leadership on targeted markets.
Investments strategy
Sistema has begun restructuring its high-tech assets to improve RTI’s economic performance and ensure
a stable dividend flow in the medium term. The main focus will be on the defence industry,
microelectronics and ICT.
Key results of 2013
(USD million)
Revenue
Adjusted OIBDA*
Adjusted OIBDA margin*
Debt
Financial indicators
2013*
2, 196
123
5.6%
1, 229
2012*
2, 196
182
8.3%
1, 140
YoY
change
0.0%
32.4%
-2.7 p.p.
7.8%
39
* RTI results do not include the results of SITRONICS-N for all periods presented. RTI’s OIBDA in 2013 and 2012 was adjusted for the
recognised loss from impairment of goodwill and other assets.
Operating indicators
(m)
Mobile voice subscribers (million)
Data subscribers (million)
Key events of 2013
2013
8.5
1.3
2012
13.1
1.8
YoY
change
-35.4%
-24.8%
In January, the Crisis Management Centre of the Republic of Mordovia opened in Saransk. RTI helped
design the Centre and were involved in installing and setting up equipment.
In March, NVision Group and Vimpelcom signed agreements on the transfer of broader functions of
servicing broadband data networks in the Ural, Siberian, North-West, Central, South and Moscow regions
for five years.
In July, RTI rose seven notches to 80th in the top 100 international defence companies, according to
Defence News.
In July, Mikron won the Moscow Metro tender for manufacturing and supplying plastic cards for
contactless fare payment.
In August, construction work officially began on the Voronezh-M-type new generation ready-to-use radar
station in Orsk.
In November, RTI designed a security system for the Far Eastern Federal University, which hosted the
APEC summit on the island of Russky.
In December, in compliance with the President's decree, the Russian government appointed RTI as the
only executor of the project to set up the National Integrated Biohazard Monitoring Centre. In December
2013, the company's shareholders, Sistema and the Bank of Moscow, participated in the additional share
issue of RTI, therefore effectively converting shareholder debt to equity.
4.13. Media assets
Sistema Mass-Media (SMM) is one of Russia's leading media holding that manages media assets in pay
TV, cinema and TV content production, and advertising. SMM owns and manages CJSC TV Company
STREAM (Stream), CJSC Russian World Studios (RWS), OJSC United Russian Studios (URS), OJSC
Maxima and TsTV LLC.
Stream LLC is a joint venture of Sistema (55%) and MTS (45%) in distribution of digital content and
VAS services for telecom operators. For reporting purposes, Stream’s financial results are allocated to
SMM segment.
Company
Sistema Mass Media
Stream
Effective ownership
85.7%
78.9%
President of Sistema Mass-Media: Gulnara Khasyanova (until January 31, 2014 – Vladimir Khanumyan)
Chairman of the Board of Directors of Sistema Mass-Media: Evgeniy Savostyanov.
CEO of Stream LLC: Artem Zasursky
Chairman of the Board of Directors of Stream LLC: Vasil Latsanich.
40
Industry
According to preliminary estimates, the Russian media market in 2013 increased to US$ 27.8 bln, whilst
in 2013-2017 an average annual market growth rate will amount to 9.4%. The most fast-growing
segments remain pay TV and online advertising; annual growth rates will amount to 12% and 20%,
respectively.
Within pay TV market, developing possibilities for TV signal delivery result in growing competition and
increasing demand for production of theme TV channels. By 2017 online advertising market will come
close to TV advertising market, online and mobile advertising will be the most promising segments.
Thanks to improving legislation (Federal Law No 187), launch of iTunes and Google Play stores and
other OTT services, the Internet market of legal digital content distribution demonstrated significant
growth in online video and music segments in 2013. Revenue from sales of video content grew by 67% in
2013, and from music by 158%. Further development in the sector will be supported by growth of Smart-
TV penetration (the technology of Internet and digital interactive services integration into televisions and
digital TV receivers).
In the segment of TV content production, demand for TV series remains, but because of growing
competition and participation of big FTA channels in preparations for and broadcasting of the Olympics
in Sochi, demand for premium series content may reduce for a short time in 2014.
Steady growth in 2013
In 2012-2013, optimisation of media assets continued, with commercial and administrative expenses
reduced. As a result of these measures, Sistema's media assets reached a breakeven point in terms of net
profit and demonstrated an increase in revenue and OIBDA.
In 2013, RWS moved a significant part of its production to the ORK studio in St Petersburg and
intensified sales of services to foreign cinema and TV content producers. These measures allowed to
significantly increase the studios's work load and create conditions for improving its economic
performance.
Stream strengthened its market position and remained a leader in terms of average annual reach in every
niche group compared to its rivals. Stream's distribution network exceeds 1,400 operators in more than
800 Russian cities and abroad. Thanks to the company's more active stance in the former Soviet Union,
the subscriber base grew by 39% over the year, to 10.7 million unique subscribers, while the audience
grew to 27.7 million.
In 2013, the Stream.ru business also demonstrated net profit, thanks to the successful launch of the
GOOD'OK service, MTS Info, the Video section as part of mobile TV services for MTS and also new
applications for watching the Stream online cinema for all major mobile platforms and for TV sets with
Smart TV functionality.
Operational strategy
SMM plans to further optimise its asset management structure and to start transfer to the model of a sole
operating media company.
The cinema production strategy aims at preserving the share of the series market. The studio business is
expected to break even, including due to development of segments related to organisation of the full-
cycle shooting process.
Stream's strategy envisages further development of the distribution network by increasing the number of
telecom operators and improving the quality of the content produced. The company is also preparing
proposals for the promising segment of HDTV.
The strategy of distribution of Stream digital content is aimed at launching new services, including in
partnership with MTS, and on the OTT services market, and also at development of the online cinema.
41
Investment strategy
Sistema's strategy envisages further business optimisation with assets development around TV, mobile
and online theme sources with their cross-interaction. The strategic objective is creating a leader in the
segment of new media and pay content. The company will develop these areas both organically and
through M&A and partnerships.
Results of 2013
(USD m)
Revenue
OIBDA
OIBDA margin
Net income attributable to Sistema
Debt
Financial indicators
2013
110
46
2012
82
20
YoY
change
34.3%
123.1%
41.6%
21.5%
20.1 p.p.
Operating indicators
Number of Stream's subscribers (million)
RWS library (hours)
1, 729
1, 600
0.5
27
2013
10.7
-11
33
-
-16.1%
2012
7.7
YoY
change
39.0%
8.1%
Key events of 2013
In April 2013, Stream became a provider of GOOD’OK service for MTS.
In April 2013, Stream's cable channels were included in MTS's Mobile TV package.
In August 2013, Stream became a provider of MTS Info service for MTS.
In August and October 2013, Stream's TV channels became available in Megafon's Mobile TV packages,
and in packages of satellite TV operator Orion Express, respectively.
In September 2013, Stream expanded its presence in Beeline's Domashneye TV network from 2 to 7 TV
channels and intensified distribution in Ukraine, adding its TV channels to local operators' networks.
In November 2013, Stream launched a “Video” option in the mobile TV service for MTS subscribers,
entered VAS services market of Ukraine and started preparation for the launch of GOOD’OK service
from January 2014 (the launch was successful).
In 2013, Stream launched new applications for watching the Stream online cinema for all major mobile
platforms (iOS, Android, Windows Phone, Bada) and for TV sets with Smart TV support (Samsung, LG,
Panasonic, Philips, Sony).
On February 25th 2014 SMM announced the change in shareholder structure of SMM and RWS. Yuriy
Sapronov, RWS CEO, transferred to SMM his formerly owned 50% stake in CJSC RVS, which owns
25% stake in SMM, in exchange for 49% stake in RWS. As a result of this non-cash transaction, Sistema
owns 87.5% stake in SMM, Yuriy Sapronov owns 49% stake in RWS and 51% stake in RWS belongs to
SMM. Yuriy Sapronov will focus on development of producing business within RWS.
42
4.14. Real estate
Sistema’s real estate portfolio includes 760,000 m2 of commercial and residential property, either owned
or under management, and 25 ha of land and cottages with a total area of 62,000 m2. Its key companies
are Leader-Invest, Business-Nedvizhimost and Mosdachtrest.
Company
Leader Invest
Business Nedvizhimost
Mosdachtrest
Effective ownership
100%
100%
100%
Industry
The Russian real estate market demonstrated encouraging growth in 2013. The capitalization rate for
prime commercial real estate in Moscow amounted to 10.2% - a 4.1 p.p. higher than in largest European
cities. Residential real estate amounted to the biggest share of the Moscow region's market, with the
average offer price growing by approximately 5.0% in 2013. Experts estimate that about 888,000 m2 of A
and B class office buildings were commissioned in Moscow in 2013, up almost 40% from 2012.
Steady growth in 2013
In 2013, Sistema established two main business segments: Leader-Invest for real estate development, and
Business-Nedvizhimost for real estate management. Sistema acquired Business-Nedvizhimost, with 76
property objects of 178,000 m2 on its balance sheet, significantly increasing its pool of commercial real
estate.
In the development segment, Sistema has formed a portfolio of priority projects, including the
construction of offices, multi-purpose centres, luxury and business class apartments. 21 of these, totalling
600,000 m2, were at the design stage at the end of 2013. The Mosdachtrest business continued the
planned renovation of cottages in Serebryany Bor.
Operational strategy
In 2014, the construction stage of 13 projects is expected to start - 12 housing projects and the second
stage of Nagatino i-Land business park. Three B-class office buildings with an aggregate area of 26,000
m2 will be commissioned after capital repairs.
Investment strategy
Sistema aims to create a successful business in real estate management and development, using its
investment potential and own land resources and real estate. Projects will be monetised through sale or
income from lease.
Key results of 2013
Owned real estate (ths m2)
Managed real estate (ths m2)
Real estate in design/construction stage (ths sq. m)
Mosdachtrest land resources (ha)
Mosdachtrest cottages (ths m2)
2013
194.2
563.1
681
24.8
61.8
2012
-
777.6
-
24.8
66.17
YoY
change
100%
-28%
100%
-
-7%
43
Key events of 2013
To secure Leader-Invest's foothold in the real estate market, a controlling stake (75%+1 share) was
bought in the authorised capital of Moscow Business Incubator, the developer of the Nagatino i-Land
business park. Design and construction of the second stage of the business park, an area of 144,000 m2,
will start in January 2014 - the total area of the park is 872,000 m2, and the first stage of 209,000 m2 is
already built.
In December 2013, Sistema acquired a 51% stake in Business-Nedvizhimost, and in April 2014,
increased its stake to 100%.
4.15. RZ Agro Holding Ltd.
Russkaya Zemlya (RZ Agro Holding Ltd.) is a major grain producer in the south of Russia with a land
bank of 99 thousand ha, jointly controlled by Sistema and certain members of the Louis-Dreyfus family.
It comprises six farms, united in three regional clusters in the Rostov region and the Stavropol territory.
Company
RZ Agro Holding Ltd.
Effective ownership
50%
CEO: Stéphane MacFarlane
Chairman of the Board of Directors: Thomas Schultz
Industry
Russian agriculture is a promising and competitive sector based on the potential for significant crop yield
growth and a low cost of production.
The Rostov region, where RZ Agro's key assets are located, is one of Russia's leading grain-producing
regions alongside the Krasnodar and Stavropol territories. Last year the production fell due to difficult
weather conditions in the region, but the market expects a significant increase in the yield of key crops in
the 2013-2014 crop year compared to the previous year.
Steady growth in 2013
Despite the difficult weather conditions, RZ Agro farms increased yields of the main crops, wheat and
sunflower, and gross output of wheat reached about 97,000 tonnes. The integration of the Stavropol West
land increased the company’s land bank by 10 thousand ha.
During the year, RZ Agro restructured its general management, developed satellite tracking systems on
agricultural vehicles, centralised the equipment maintenance and repairs, and set up modern product
quality control laboratories on the farms.
Operational strategy
RZ Agro manages its agricultural assets using a cluster approach, where self-sufficient clusters of 30,000-
50,000 ha of land work together for efficient use of operating and investment expenses.
RZ Agro’s operating strategy aims to increase crop yields, and to reduce production and management
costs by using the latest agricultural technologies, modern agricultural equipment and modern cost-
monitoring systems.
Investment strategy
The strategy is to increase the land bank under management further through organic growth and strategic
acquisitions, with the goal of creating a leading Russian agricultural company based initially in the
Rostov region, the Stavropol territory and the Krasnodar territory. In 2014, RZ Agro is planning to set up
a cluster in the Krasnodar territory by acquiring several farms in the region. It will later consider
44
acquiring land in other key grain producing regions in the south of Russia and the Central Black Earth
Region. Ultimately, RZ Agro aims to manage over 300 thousand ha.
Key results of 2013
Gross wheat harvest, ths tonnes
Gross sunflower harvest, ths tonnes
Wheat yield, t/ha
Sunflower yield, t/ha
Key events of 2013
2013
2012
96.9
14.4
3.0
1.8
84.8
12.0
2.6
1.6
YoY
change
14.3%
20.0%
15.4%
12.5%
In November, RZ Agro Holding acquired a controlling stake in JSC Novotroitskoye, located in the
Izobilnensky district, one of the most attractive areas in Stavropol for soil quality and climate.
Novotroitskoye manages a land bank of 10 thousand ha, 96% of which is cultivated land, 39% of the land
bank is in freehold. This has allowed RZ Agro to enter a new, large agricultural region, and the company
will be able to consolidate further agricultural assets in the Stavropol region.
45
5. DESCRIPTION OF KEY RISK FACTORS
The main risks the business of the Corporation can encounter are the consequences of the processes and
factors that Sistema JSFC has little or no influence on. At the same time, the Corporation can take
measures to reduce negative consequences in case some or other risk occurs. In this connection, efficient
assessment of existing risks and probability of their occurrence and their efficient management are an
important part of Sistema's strategy.
The Corporation has introduced an integrated enterprise risk management system (ERM) that is designed
to provide a reasonable guarantee that the strategic goals will be achieved and ensure that the level of risk
will be kept within the limits that are acceptable for the shareholders and the management of the
Corporation. ERM at Sistema JSFC was built
international standards,
recommendations and best practices in risk management.
in compliance with
5.1. External risks
The risks related to changes in the political and economic situation in Russia are material to Sistema
JSFC because most of the Corporation's business is conducted on the territory of the Russian Federation.
Besides, many of its subsidiaries operate in countries with transitional economies, including Ukraine,
Uzbekistan, Armenia, Belarus, India and therefore are also prone to material external risks.
Economic risks
The business of Sistema JSFC is inextricably connected to the state of the global economy and financial
markets and, in particular, depends on fluctuation of prices on oil, gas and other commodities exported by
the Russian Federation.
Unfavourable macroeconomic conditions in many countries of the company's operations can have
negative consequences for the business reputation of Sistema Group's companies and result in the need to
reassess the value of its intangible assets.
Growing inflation may result in higher expenses and, therefore, put pressure on profit margins and also
affect the domestic demand for products of Sistema Group's companies.
Devaluation of the national currency can entail an increase of expenses and reduction of revenue of
Sistema Group's companies and can also make it more difficult to achieve financial targets and repay
debt.
Currency control and restrictions on capital repatriation may affect the business of Sistema Group and
reduce the value of Sistema's investment in Russia.
Deterioration of the state of Russian infrastructure may damage the national economy, complicate goods
shipments, increase expenses or suspend companies' operations, which will affect the business of Sistema
Group, its performance, financial situation and prospects.
Political and social risks
An unstable political situation may result in a higher capital outflow and general deterioration of the
investment climate on markets of Sistema's operations.
Government moves and decisions on the markets of Sistema's operations may have a negative impact on
the business climate.
Terrorist attacks or Russia's involvement in an economic or military conflict in the future may bring
instability and complicate business planning.
46
Organised crime, fraud, corruption and social instability can create uncertainty and result in certain losses
or increased spending on the business conducted by the Group's companies.
Domestic political conflicts on markets of Sistema's operations can create an unfavourable business
environment and affect Sistema's revenue.
Legal risks and uncertainty
Risks related to the weakness of the legal framework on markets of Sistema's operations include, to a
different degree, the following factors:
possible discrepancies, ambiguity and anomalies in: (i) federal laws, (ii) bylaws issued by
the President, the Government and other federal executive bodies of power; (iii) regional
and municipal bylaws;
relative unpredictability of legislative and administrative decisions and court rulings and
lack of means that could make the understanding of such legislative decisions and court
rulings easier;
significant gaps in the legal framework;
the legal system is not independent from the influence of political, social and commercial
factors;
a risk of corruption in legislative and executive bodies of power;
inconsistent court practice with regard to interim measures, which may disrupt ordinary
business activities.
Incompleteness of the existing legal framework related to corporate law, regulation of the securities
market on markets of Sistema's operations can limit possibilities for raising capital in the future.
There is no clarity about the influence of the Federal Law "On the Procedure for Foreign Investment in
Business Companies Which Are of Strategic Importance for National Defence and State Security" and
regulations of the Customs Union of Russia, Belarus and Kazakhstan on Sistema's business and on the
situation of its foreign shareholders.
Russia's accession to the World Trade Organisation may result in certain legislative and other changes on
the markets of Sistema's operations.
Since, under certain circumstances envisaged by the Russian corporate law, a shareholder becomes liable
for obligations of its affiliates, Sistema may become financially liable for obligations of its subsidiaries.
If minority shareholders of Sistema's subsidiaries contest past or future related-party transactions or other
transactions or vote against related-party transactions or other transactions in the future, this will limit
Sistema's operating possibilities.
If the Russian Federal Anti-monopoly Service concludes that Sistema JSFC or one of its material
subsidiaries has acquired or founded a new company in violation of the anti-monopoly law or has
otherwise violated law with regard to protection of competition, this may result in administrative
sanctions.
Failure to formally comply with certain requirements of the Russian law may result in Sistema JSFC or
one of its subsidiaries registered in Russia being forced to carry out liquidation. Moreover, the ownership
structure of Sistema Group can be contested or creditors may demand early repayment of debt.
Tax system
The tax law and tax practices on the markets of Sistema's operations are complicated and uncertain and
prone to frequent changes and ambiguous interpretation, which may affect the Group's companies.
47
The Russian law on transfer pricing may make it necessary to introduce adjustments to the price setting
system of Sistema Group's companies and result in additional tax obligations with regard to controlled
transactions.
Stock markets
There is a risk that Russian companies' stock will grow more slowly than their peers on other emerging
markets. The key reason of that is a substantial outflow of capital from Russia caused both by the political
and economic factors inside the country and the situation on the international stock exchanges.
5.2. Risks related to Sistema JSFC’s operations
Implementation of the business strategy
Key components of the business strategy include development of a balanced and diversified asset
portfolio in sectors and regions where Sistema JSFC has competitive advantages, and also proactive
management of the investment portfolio and involvement of leading international and Russian partners.
Despite the existing developed strategy, Sistema JSFC cannot guarantee achievement of the established
goals, efficient management of the portfolio companies or taking up of new investment opportunities.
The success of Sistema's strategy depends on numerous factors, including obtaining of the necessary
permits from the authorities, sufficient demand from consumers, successful development of technologies,
efficient management of spending, timely completion of development and introduction of new products
and services by the Group's companies, successful differentiation of the companies' offers from their
rivals and perception of the goods on the market.
Profiting from asset acquisition, integration, disposal or restructuring
Sistema JSFC grows its business via new acquisitions, sale and restructuring of assets. The process of
carrying out investment opportunities on the market entails certain risks, including risks of not finding
relevant targets or their not being available for acquisition, a risk of insufficient or inadequate due
diligence of the target company's operations and/or financial situation, risks of the assets being
overvaluated and overpaid for and, consequently, of occurrence of financial risks exceeding expectations
and discovery of financial liabilities not found earlier.
Acquisition of additional businesses may also put pressure on the Corporation's cash flows, especially if
the acquisition is paid for in cash. Besides, untimely closing of the deal or refusal to close it may
negatively affect Sistema's achievement of its strategic growth goals and have a substantial negative
impact on the current business, operational results, the financial situation and prospects.
Moreover, Sistema JSFC may encounter problems of integrating assets into the existing structure, their
optimal management or the necessary restructuring. These risks include inability to efficiently assimilate
and integrate operating assets and personnel of the acquired company into the business, inability to
establish and integrate all the necessary control systems and mechanisms, including with regard to
facilities and agreements related to logistics and distribution, conflicts between majority and minority
shareholders, hostility and/or unwillingness to cooperate on the part of the acquired asset's management,
potential loss of customers of the acquired asset.
Transactions of asset disposal carry certain risks related to potential inability to execute the transaction or
undervaluation of the sold asset, which arise from asset sale as future debt, failure to meet the deadline
for the transaction closure or loss of synergy between existing assets. Besides, execution of such
transactions, including restructuring, merger of businesses or financial resources depends on a
combination of necessary conditions, including corporate and government consents. This creates a risk of
not all transactions being finalised on declared terms or at all.
48
Management and key personnel
Implementation of Sistema's strategy depends on the top management team. Moreover, further success of
the investment portfolios and their ability to efficiently implement a common strategy, including plans of
growth and increase of scale, will to a large degree depend on efforts of individual management teams
working with every individual asset.
Cash flows from subsidiaries and affiliates.
The Corporation's financial performance significantly depends on the ability of Sistema Group's
companies to generate cash flows needed to service its financial liabilities, including repayment of debt
and interest and any other borrowing in the future. From time to time, the company's ability to make these
payments can be limited by regulatory, tax-related or other obstacles.
Dependence on the performance of MTS and Bashneft
Sistema's financial performance significantly depends on the success of its core assets - OJSC MTS and
OJSC Bashneft. A decline in these businesses' revenue may jeorpardise not only Sistema's ability to
service its debt, but also its ability to increase the scale of the business through restructuring and
acquisition of assets. As a result, the risks and events that may have a material negative impact on the
business of OJSC MTS and OJSC Bashneft can in turn directly affect the current state of Sistema's
business in general and its prospects.
Attracting capital or financing
Future financial receipts and cash flows from Sistema's subsidiaries and affiliates may not be sufficient to
cover the planned expenses, e.g. if the following risks occur:
absence of external sources of financing;
changes in the terms of existing agreements on financing;
emergence of new business opportunities or investment in existing businesses, in case of
significant investment;
a slower than planned growth of revenue and operating income;
deterioration of the economic situation in countries of Sistema's operations.
Restrictive covenants
Sistema's bank loan agreements and agreements of some of the Group's companies on bank loans and
debt securities contain certain restrictive covenants. These covenants put restrictions on attraction of
additional debt financing, encumbrance of property with pledges, sale of assets and transactions with
affiliates. Such covenants may put restrictions on Sistema's operations, including financing of capital
expenses, or limit possibilities for timely repayment of debt or making payments on liabilities. If
operations of portfolio companies are restricted, their revenue may decline, which, in turn, may limit the
Corporation's opportunities for using this revenue to service the debt or finance Sistema Group's
companies. Moreover, restructuring of the Group's companies, under certain circumstances, may violate
restrictive covenants of these companies' loan agreements, which may result in a request of early
repayment of such loans.
Licences and permits
Operations of Sistema Group's companies are regulated by different government bodies and agencies,
with regard to obtaining and renewing licences, approvals and permits and also due to the need to
constantly abide by the existing legislation, regulations and standards. Regulating authorities to a large
extent rely on their own judgment when interpreting and implementing requirements of applicable laws,
issuing and extending licences, approvals and permits and monitoring compliance with licence
requirements. There is no guarantee that the existing licences and permits, including those issued to the
Group's companies, will be extended, new licences and permits will be issued or that the companies will
be able to comply with the terms of corresponding licences. There is no guarantee either that any of the
49
existing or future licences or permits will not be suspended or revoked on some or other grounds. Any of
these circumstances can have material negative consequences for the business of Sistema JSFC.
Privatised companies
The business structure of Sistema JSFC includes several privatised companies, including OJSC MGTS,
OJSC Bashneft, OJSC VAO Intourist and several subsidiaries in the energy and technology sectors. It is
quite likely that in the future the Corporation will participate in privatisations pursuant to its business
strategy. Since Russia's privatisation-related legislation remains somewhat unclear, inconsistent and
contradicts some other provisions of the law (e.g., there are contradictions between federal and regional
provisions on privatisation), privatisation of many companies can potentially be contested, including
selectively.
If the legitimacy of privatisation of a company is contested and Sistema JSFC is unable to defend its
stand in the dispute, there is a risk of losing a stake in the corresponding company or its assets, which
may have a material negative impact on the business, financial situation, performance and development
prospects of the Corporation.
Anti-corruption rules
Activities of Sistema JSFC are covered by anti-corruption laws in the jurisdiction where it operates,
including regulations of the Russian Federation and the US Foreign Corrupt Practices Act (FCPA) and
may also be covered by the UK Bribery Act of 2010. Violation of applicable laws may result in fines and
reputation risks.
Any investigation into potential violations of the FCPA, the UK Bribery Act or other anti-corruption laws
of the US, Britain or other jurisdictions may affect the reputation, business, financial situation and
performance of Sistema JSFC.
Competition on the part of other companies
All segments where Sistema JSFC operates are prone to competition on the part of other companies.
Operations in the segments of telecommunications, high technology, banking, retail, media, tourism,
private healthcare services and pharmaceuticals are exposed to the influence of economic and other
factors. In these sectors, there is high competition between companies in Russia and other countries.
Inability of Sistema Group's companies to compete efficiently may have a material negative impact on the
business, performance, financial situation and prospects.
Brand quality and reputation
Developing and maintaining brand awareness for the Group's companies is a crucial component of
shaping the public opinion about the existing and future products and services of the Group's companies.
Sistema JSFC believes that importance of a company brand is growing steadily on highly competitive
markets. Successful development and improvement of brand awareness to a large extent depends on the
efficiency of marketing operations and the companies' ability to provide quality products and services at
competitive prices. Efforts to develop brands may not correspond to received revenue, which may be
insufficient to cover expenses on these activities.
50
6. CORPORATE GOVERNANCE SYSTEM
Corporate Governance Principles
Maintaining the system of corporate governance and transparency at the level of the world's best practices
is one of the crucial elements of the strategy of Sistema JSFC as an investment company. To achieve this
goal, the Corporation's corporate governance policy is based on the following fundamental principles:
transparency and clarity of all processes for investors and partners,
a proactive and professional Board of Directors,
a consistent and collective approach to decision-making;
a transparent dividend policy;
making investment decisions in compliance with the established procedures;
the Board of Directors' attention to all related-party transactions;
an active role of the Board of Directors in the strategic planning process.
Sistema JSFC 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.
Principles and procedures of Sistema JSFC corporate governance are set out in its Charter and in a
number of publicly available bylaws that, all together, determine the structure and the scope of the
Corporation's governance and control bodies. The Corporate Conduct Code and the Ethics Code set forth
additional commitments of Sistema JSFC in the area of transparency, social responsibility, and ethical
business principles.
Sistema JSFC takes 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 from the Federal Commission
for the Securities Market of Russia No. 421/r dated 4 April 2002, and in the UK Corporate Governance
Code. ,1 2. The consistency of corporate governance practices of Sistema JSFC with the standards set out
in the Corporate Conduct Code and the UK Corporate Governance Code is analyzed in Annexes 9.7 and
9.8 to this report. Should the corporate governance practices of Sistema JSFC diverge from the standards
recommended in the above documents, the Corporation provides an explanation as to how else it makes
sure that the balance of interests fixed in the applicable corporate governance standards is observed.
text
The
1
the
http://www.fcsm.ru/ru/legislation/corp_management_study/corp_codex/
2 The text of the UK Corporate Governance Code is available at the following address: http://www.frc.org.uk/Our-Work/Publications/Corporate-
Governance/UK-Corporate-Governance-Code-September-2012.aspx
Corporate
following
available
Conduct
address:
Code
the
of
at
is
51
Corporate governance structure of Sistema JSFC
The Corporation's main governance bodies are: the General Meeting of shareholders, the Board of
Directors, the President and the Management Board. The Board of Directors and the President have
committees that develop recommendations for forming Sistema's decisions in the respective areas.
The existing organisational structure of the Corporation that was adopted in May 2012, including the
adjustments and amendments made later, reflects Sistema's transition to the investment company model.
As of the December 31, 2013, the organisational structure of Sistema JSFC was comprised of 4 functions,
8 investment portfolios and 5 departments.
6.1. General Meeting of Shareholders
Principles of operation
The General Meeting of shareholders is the supreme governance body of Sistema JSFC. Its operation is
governed by the laws of the Russian Federation on joint-stock companies as well as the provisions of the
Corporation’s Charter and bylaws. The General Meeting procedure aims to make sure 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 in
English and are published on Sistema's official website (www.sistema.ru; www.sistema.com). Along with
the notice of the forthcoming meeting, shareholders get voting ballots. The venues of Sistema's General
Meetings of shareholders are always located in the vicinity of the Corporation's headquarters.
52
Observance of shareholders' rights
Sistema JSFC aims to ensure the maximum protection of the shareholders' rights to participate in running
the Corporation and receiving profit. The fundamental rights of a shareholder in this respect are the right
to participate in the work of the General Meeting of shareholders and to vote on items on the agenda, and
also the right to receive dividends.
For this right to be secured, notice of the conduct of the General Meetings of Sistema JSFC as well as
voting ballots is circulated to all the shareholders at least 30 days before the meeting, and all materials
covering the agenda items are published on the Company's website in Russian and in English
(www.sistema.ru; www.sistema.com). The ballot can be filled out by the shareholder in advance and
mailed to Sistema JSFC 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 of GDR holders, information about whom has been disclosed to the depositary, are collected by
Deutsche Bank AG via clearing systems and are included in the general voting ballot of the depositary,
with all votes cast for the proposed draft resolution, against it, and abstentions specified.
Each shareholder can also attend General Meetings of shareholders in person or through a representative
and vote on the agenda items directly at the Meeting.
An important guarantee of the shareholder's right to participate in running the Corporation 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 of Sistema JSFC asking for access to the documents that the shareholder wishes to
see. After the time for providing the documents is agreed upon, the requested documents will be provided
to the shareholder.
Holders of material blocks of shares are entitled to make proposals on the agenda of the General Meeting
of shareholders and nominate candidates to the Corporation's governance and control bodies1. Proposals
on the agenda of the Annual General Meeting of shareholders of Sistema JSFC are accepted in writing
within 100 days after the end of the financial year2. Candidates nominated to governance and control
bodies of the Corporation are preliminarily interviewed by the Nomination, Renumeration and Corporate
Governance Committee of the Board of Directors of Sistema JSFC.
For the purposes of maximal observance of the shareholders' rights to the Company's profit the
Corporation announces the amount of dividends recommended by the Board of Directors in advance
along with the date on which the shareholder register is to be made for the purposes of the payment.
Therefore, the shareholders always have the opportunity to dispose of their shares taking into account the
expected dividend payments.
Dividend policy
To determine the recommended amount of dividends payable, the Corporation's Board of Directors
abides by the dividend policy approved in October 2011. In compliance with the said policy, the amount
1 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.
2 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. Proposals to this effect must be
received by the Company no later than 30 days before the date of such a meeting.
53
of dividends payable shall be at least 10% of the group's net income generated during the previous
financial year as per reports prepared in compliance with international accounting standards and at least
10% of the net cash income generated by the Corporation's investment transactions over the same period
(special dividend). This approach allows the Corporation to pay predictable amounts of dividends.
General Meetings held in 2013 and their results
In 2013, on General Meeting of the Company's shareholders was held: The Annual General Meeting of
the shareholders of Sistema JSFC on 29 June 2013.
The Annual General Meeting of shareholders (i) approved the Corporation's annual report and accounts
including the profit and loss report for 2012, as well as (ii) determined the amount, procedure, forms and
timelines for paying dividends on Sistema JSFC's shares. Besides, it (iii) elected members of the Board of
Directors and (iv) the Audit Commission, (v) approved the auditors of the Corporation and (vi)
introduced amendments to the Charter of Sistema JSFC.
As resolved by the Annual General Meeting of shareholders and recommended by the Corporation's
Board of Directors, RUB 9.264bn were allotted to pay out dividends, which equalled RUB 0.96 per
ordinary share of Sistema JSFC. The sum of dividends was determined in compliance with the current
dividend policy. Compared to 2012, dividends grew by 243%.1
The Annual General Meeting of shareholders approved CJSC Deloitte and Touche CIS as Sistema's
auditor for 2013 to perform the audit according to the Russian Accounting Standards and the US GAAP.
The auditor was selected following an open tender organised by the Audit Committee of the Board of
Directors of Sistema JSFC.
The amendments to the Charter of Sistema JSFC were made to bring it in line with the new requirements
of the Federal Law "On the Stock Market" and the Federal Law "On Joint-Stock Companies."
6.2. Board of Directors
The Board of Directors of Sistema JSFC is responsible for the strategic governance of the Corporation: it
determines the strategy, works out strategic and financial development plans, sets the principles for
investing, appraises executive performance and assesses risks, approves principles for corporate
governance procedures, approves transactions and controls the work of the Corporation in general. The
terms of reference for the Board of Directors are set out in the Charter of Sistema JSFC.
Board of Directors membership
The Board of Directors of Sistema JSFC effective as of 31 December 2013 was elected at the Annual
General Meeting of the Company's Shareholders on 29 June 2013, and it comprised 13 persons. A
majority of members of the Board of Directors are independent directors.
Membership of Sistema's Board of Directors
elected on June 29, 20132*
1.
2.
3.
4.
5.
Vladimir Evtushenkov
Alexander Goncharuk
Sergey Boev
Brian Dickie
Dmitry Zubov
Chairman of the Board
Deputy Chairman of the
Board
1 In 2012, RUB 2.702bn were allotted to pay dividends, which equalled RUB 0.28 per ordinary share.
* Short biographies of the members of the Board of Directors and data on their shareholdings in Sistema JSFC are available in the Annex.
54
Robert Kocharyan
6.
Jeannot Krecké
7.
Peter Mandelson
8.
9.
Roger Munnings
10. Marc Holtzman
Serge Tchuruk
11.
12. Michael Shamolin
13. David Iakobachvili
Members of the Board of
Directors of Sistema JSFC
61%
B. Dickie
R. Kocharyan
J. Krecke
P. Mandelson
R. Munnings
M. Holzman
S. Tchuruk
I. Iakobachvili
8%
M. Shamolin
31%
V. Evtushenkov
S. Boev
A. Goncharuk
D. Zubov
Executive director
Non-executive director
Independent director
Changes to the membership of the Board of Directors
Former members of the Board of Directors V.Kopyev and Y.Novitsky were not re-elected to the Board
on 29 June 2013.
New independent director P.Mandelson and non-executive director S.Boev were elected to the Board of
Directors.
Meetings of the Board of Directors
Meetings of the Board of Directors of Sistema JSFC are held regularly in compliance with the approved
work schedule for the year. The work schedule of the Board of Directors is developed proceeding from
the logics of the strategic planning and reporting cycle of Sistema JSFC. Reports on and discussions of
additional matters (such as transactions) are included in agendas of scheduled Board meetings on a
routine basis. 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 into the plan is the frame
of reference of the Board Chairman.
In 2013 the Board of Directors had 9 sessions: 8 scheduled in-person meetings and 1 unscheduled
meeting in form of a letter ballot. In 2013, the Company's Board of Directors considered 105 agenda
items, which is an increase of 18% from the previous year:
Number of in-person meetings
Number of letter ballots
Number of items on the BoD work plan
Number of items considered at Board meetings
In 2013, the Board of Directors considered the following key items:
2013
2012
8
1
43
105
8
2
40
89
55
1) Development strategy of Sistema JSFC.
2) Top-down indicators and key performance indicators as part of the strategic planning cycle of
Sistema JSFC.
3)
Investment policy of the Corporation and priority investment areas in 2013-2014
4) Progress report on the Corporation's transition to an investment company model.
5) Development strategy and value creation for key portfolio assets of Sistema JSFC:
telecom assets;
media assets;
oil assets;
hotel assets;
bank assets;
high-tech assets;
transport assets;
real estate assets;
healthcare assets;
biotech assets;
power grid assets;
consumer assets.
6) The performance results of Sistema JSFC and budget execution.
7) Approval of the consolidated budget of Sistema and key performance indicators of the management
for 2014.
8) Long-term financial and economic model of the Corporation's development
9) Functional strategy in finance management and financial planning
10) Placement of securities (exchange-traded notes)
11) Risk and opportunity management in the Corporation.
12) Internal control and audits of the companies of the Sistema Group conducted by the Internal Control
and Audit Department.
13) Legal protection of the Corporation's interests and legal risk management in 2013-2014.
14) HR issues, HR management and personnel motivation.
15) IR and PR current operations and development plans for 2013-2014.
16) Corporate social responsibility of Sistema JSFC.
17) Convening the Annual General Meeting.
18) The status and main target areas of the corporate governance system of Sistema JSFC.
19) Membership of Committees of the Board of Directors.
20) Approval of transactions.
21) Organisation of administrative support for the Corporation in 2013-2014
Topics considered by the Board
in 2013
8%
6%
10%
31%
Business strategies, investment, new segments
Appointments and HR policy
Corporate governance and securities
Approval of transactions
Approval of internal documents
Participation in S/As, groups, unions; branches
11%
Financial accounting, planning and audit
13%
Functional strategies
56
2%
19%
Figure 6:
33
20
35
30
25
20
15
10
5
0
12
9
14
12
20
15
14
10
11
6
8
6
2
2
2012
2013
Business strategies,
investment, new
segments
Appointments and HR
policy
Corporate governance
and securities
Approval of
transactions
Approval of internal
documents
Participation in S/As,
groups, unions;
branches
Financial accounting,
planning and audit
Functional strategies
Most of the reports considered by the Sistema Board in 2013 are related to strategy, transaction
approvals, and corporate governance. Increased focus on these matters reflects the Company's transition
to an investment company management model that should result in an increase in the number of
industries and markets the Corporation operates in, a growth in the number of transactions made, and in
setting goals for building an efficient corporate governance system.
Preparation for the meetings and quorum of the Board of Directors
Materials on the agenda are provided to the Board of Directors of Sistema JSFC 10 days before meetings,
which gives them the possibility to comfortably form their own position for the voting. The majority of
main agenda items must be previewed at meetings of Committees of the Board of Directors of the
Corporation. The work plan of the Board of Directors determines in advance which Committee is to
preview a particular issue.
Members of the Sistema Board of Directors meet with the speakers and the management at a business
dinner the evening before the meeting, so that they can discuss the items on the agenda of the Board and
inquire about the voting positions of the parties in an informal environment.
Sessions of the Board of Directors normally take place with high attendance of the Board members. The
average quorum of meetings in 2013 was 99%.
Participation of the Sistema Board members in meetings of the Board of Directors and its committees in
20131
Board of
Directors
Strategy
Committee
Audit, Finance
and Risk
Committee
Nomination,
Remuneration and
Corporate
Governance
Committee
Ethics and
Control
Committee
Investor
Relations and
Dividend Policy
Committee
Participation in meetings
V. Evtushenkov
S. Boev
A. Goncharuk
B.Dickie
D.Zubov
R. Kocharyan
J. Krecké
P. Mandelson
R. Munnings
M. Holtzman
S. Tchuruk
M. Shamolin
D. Iakobachvili
9/92
4/4
9/9
9/9
8/9
9/9
9/9
4/4
9/9
9/9
9/9
9/9
9/9
15/15
9/15
14/15
4/15
6/15
14/15
4/5
5/8
5/5
13/13
13/13
12/13
9/9
6/6
6/9
9/9
3/3
8/9
7/9
3/3
6/6
5/6
5/6
3/3
0/3
6/7
2/3
6/7
5/7
4/4
3/7
7/7
1 The membership of the Board of Directors is given as of 31 December 2013.
2 The first number denotes the number of meetings attended by the Board member, the second number stands for the total number of meetings the
member could participate in.
57
Committees of the Board of Directors
Sistema JSFC has five committees of the Board of Directors:
Strategy Committee;
Audit, Finance and Risk Committee;
Nomination, Remuneration and Corporate Governance Committee;
Ethics and Control Committee;
Investor Relations and Dividend Policy Committee;
As a rule, only members of the Board of Directors are members of the Committees starting from 2011.
The main role of the Committees is to provide assistance to the Board in preparation and adoption of
decisions in the respective functional areas, as well as in ensuring detailed 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 includes 6 Board members: V. Evtushenkov (Committee Chairman), S. Boyev,
A. Goncharuk, S. Tchuruk, M. Shamolin.
The Committee discusses and analyzes strategic issues related to the management of the Sistema Group,
and monitors the strategic management cycles of Sistema JSFC and its subsidiaries including the
following:
reviewing the strategy planning methodology;
preliminary approval of the strategy and strategic goals of the Corporation;
consideration of M&A transactions and large investment projects.
The Committee is responsible for mandatory consideration of:
all M&A transactions in the Sistema Group with a value exceeding $100m;
all projects of the Sistema Group related to entering new markets;
all projects of the Sistema Group with significant government participation.
In 2013, 15 meetings of the Committee were held where 20 items were considered, including:
17 items related to the strategy of individual subsidiaries and affiliates;
2 items related to individual transactions;
1 item related to the motivation system for the management of subsidiaries and affiliates.
Audit, Finance and Risk Committee
The Audit, Finance and Risk Committee includes 5 Board members: R. Munnings (Committee
Chairman), S. Boev, P. Mandelson, M. Holtzman, and D. Iakobachvili.
In 2013, the Board of Directors of the Corporation approved a new version of the Regulation on the
Committee. The tasks of the Committee are:
assistance in preparing and auditing financial statements of the Corporation and
monitoring these processes;
facilitation in organizing interaction with the Company's external auditors;
assessment of the risk management system and compliance with applicable legal
requirements in financial reporting, audit and planning;
facilitation in the budgeting process and financial modeling of the Corporation;
58
support for development of internal audit function;
preliminary appraisal of related party transactions and major transactions;
In 2013, the Audit and Finance Committee held 13 meetings at which 73 items were reviewed, including
the following:
33 items related to appraisal of individual transactions submitted for consideration by the
Sistema Board of Directors;
18 items related to preparation and audit of financial reports;
10 items related to the processes of financial planning and risk management;
5 items related to interaction with external auditors, their selection and assessment of
their work;
3 items related to internal audit;
4 items related to organisational matters;
Nomination, Remuneration and Corporate Governance Committee
The Nomination, Remuneration and Corporate Governance Committee includes 6 Board members: R.
Krecke,
Kocharyan
R. Munnings, and M. Shamolin.
Committee),
Goncharuk,
(Chairman
Zubov,
A.
D.
J.
The purpose of the Committee is to facilitate the preparation and implementation of the Corporation's HR
policy and support and develop an efficient corporate governance system that would meet international
standards and make it easier to improve the efficiency of governance processes. Key functions of the
committee:
preliminary review of candidates to top management positions at Sistema JSFC and
nominees to the boards of directors and CEOs of portfolio companies;
appraisal of performance of Sistema's top managers;
development of the incentive and remuneration system for the employees of the
Company;
development of an efficient corporate governance system in line with international
standards that will help to increase governance efficiency and guarantee the protection of
the shareholders' rights and interests;
assistance in improving corporate governance practices in the Company’s subsidiaries
and affiliates.
In 2013, the Nomination, Remuneration and Corporate Governance Committee held 9 meetings at which
31 items were reviewed, including the following:
16 items related to development and implementation of the incentive system for Sistema's
employees;
7items related to corporate governance in Sistema JSFC;
8 items related to preliminary review of candidates to top management positions at
Sistema JSFC and nominees to the boards of directors and CEOs of portfolio companies.
Ethics and Control Committee
The Ethics and Control Committee includes 6 Board members: A. Goncharuk (Committee Chairman), S.
Boev, B. Dickie, R. Kocharyan, R. Munnings and S. Tchuruk
The tasks of the Ethics and Control Committee are:
support to the development of Corporation's internal control and audit function, analysis
of results in this field, jointly with the Audit, Finance and Risk Committee;
assistance in the development of the Corporation's security function, and analysis of the
results of related activities;
59
analysis of the appropriateness and effectiveness of the Corporation's internal control and
audit system;
monitoring of compliance with the requirements of the Ethics Code of the Corporation;
facilitating the operation of the corruption prevention system at the Corporation and the
companies within Sistema Group;
monitoring of compliance of the Ethics Code of Sistema JSFC.
In 2013, the Ethics and Control Committee held 6 meetings at which 18 items were reviewed, including
the following:
8 items related to particular internal audits and the audit environment;
5 items related to functional strategies in internal control and security;
2 items related to the efficiency of the corruption prevention system.
3 items related to organisational issues;
Investor Relations and Dividend Policy Committee
The Investor Relations and Dividend Policy Committee includes 6 Board members: D. Iakobachvili
(Committee Chairman), J. Krecke, P. Mandelson, R. Munnings, M. Holtzman, M. Shamolin.
The key objectives of the Investor Relations and Dividend Policy Committee are:
facilitation in forming a system in the Corporation aimed at maintaining effective
relations with the financial community and government agencies, as well as increasing
the appeal of Sistema's shares to investors;
facilitation in forming and maintaining a transparent and stable dividend policy of
Sistema JSFC;
assistance in increasing capitalisation of the Corporation;
protection of the rights and interests of Sistema's shareholders.
In 2013, 7 meetings of the Investor Relations and Dividend Policy Committee were held where 10 items
were considered, including:
8 items related to investor relations and dividend policy;
1 item related to corporate social responsibility of Sistema JSFC;
1 item related to the strategy of the Company's international development.
6.3. President
The President of Sistema JSFC 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 profit of the Corporation as well
as observance of its shareholders' rights and legitimate interests. The President acts within his scope 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
Mikhail was born in 1970 in Moscow.
President of Sistema JSFC,
Chairman
the
Management Board.
of
In 1992, he graduated from the Moscow Automobile and Road
Technical Institute.
In 1993, Mikhail graduated from the Russian Presidential Academy of
Public Administration.
In 1997, he completed an Executive Program
in Finance and
60
Management at the University of Pennsylvania’s Wharton School of
Business.
In 1998-2004, he worked at the international consulting company
McKinsey&Co.
In 2004-2005, he held the position of the Managing Director for the
Ferroalloys Division at Interpipe Corp (Ukraine).
In 2005-2011, he was Vice President for Sales and Customer Service,
then Vice President, Head of MTS Russia.
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 development strategy of the
Corporation, works out development plans, sets investment procedures and controls their observance,
appraises the performance of the personnel, and pre-considers items submitted to the Corporation's Board
of Directors.
In 2013, the Management Board of the Company held 26 meetings and considered 64 agenda items
dealing with all the areas of business activity of the Corporation. In 2013, the Management Board
considered agenda items in the following key areas:
1) Preliminary review of matters to be submitted to the Board of Directors, including:
internal control and audit;
the Corporation's investment policy and priority investment areas;
development of the India project;
development strategy and value creation for key portfolio assets of Sistema JSFC;
HR policy;
risk and opportunity management report;
long-term financial and economic model of the Corporation's development;
corporate social responsibility;
legal risks management;
corporate security;
investor and public relations.
2) Preparation of forecasts of and reports on the execution of quarterly, semi-annual, and annual
budgets.
3) Strategic planning at the Corporation and S/As, including the establishment of top-down indicators
during the strategic planning cycle.
4) Debt and borrowings management.
5) Risk management and preparation of risk maps.
6) Training and development of employees and talent management.
7) Monitoring and management of investment projects.
8) Public disclosure of financial information.
9) Charity.
Members of the Management Board of Sistema JSFC as of 31 December 20131:
1. Michael Shamolin
2.
Anton Abugov
Chairman of the Management Board
1 Short biographies of the members of the Management Board and data on their shareholdings
in Sistema JSFC are available in the Annex.
61
Christopher Alan Baxter
3.
Alexey Buyanov
4.
Elena Vitchak
5.
Sergey Drozdov
6.
Felix Evtushenkov
7.
Leonid Monosov
8.
9.
Oleg Mubarakshin
10. Vsevolod Rozanov
11. Andrey Terebenin
12. Ali Uzdenov
13. Alexey Chupin
In February 2014 Michael Hecker, the new Head of the Strategy Function and Vice President, was made a
member of the Corporation's Management Board.
Changes in the top management in 2013
A number of changes in the top management of the Company took place in 2013:
A. Buyanov
03 June 2013
was appointed First Vice President.
A. Goldin
16 December
2013
was transferred from the position of Vice President,
Head of the Legal Function to the position of the
Advisor to the Chairman of the Board of Directors.
A. Guryev
19 June 2013
was appointed Executive Vice President, Head of the
Internal Control and Audit Department.
O. Mubarakshin
16 December
2013
was appointed Vice President, Head of the Legal
Function.
V. Rozanov
03 June 2013
was appointed Senior Vice President, Head of the
Finance and Investment Function.
K.Tyurdenev
А. Chupin
A. Shavrov
A. Shlyakhturov
February
was relieved of his duties as Executive Vice President.
18
2013
14 May 2013
was appointed Vice President.
21
2013
02
2013
February
was relieved of his duties as Executive Vice President.
September
was appointed Executive Vice President, Head of the
Security and IT Department.
6.5. Risk management system, internal control and audit
Risk management
The risk management system of Sistema JSFC is based on a two-level approach to management of risks
of the Sistema Group, namely, detection of risks in subsidiaries and affiliates and in the Corporation and
their integration for assessing their influence on the group in general.
62
The integrated risk management system (ERM) implemented in the Corporation envisages presence of the
following components and procedures:
identification of risks at all levels of the management (from the top to the line
management), which includes finding the risk owner and making a risk passport;
primary assessment of materiality of identified risks and their analysis (VaR
methodology);
ranging of risks by management levels;
assessment of the aggregate influence of material risks on the Company's key financial
indicators (Monte Carlo modelling);
development of plans to mitigate identified risks at all management levels;
regular monitoring of execution of mitigation plans and assessment of their effectiveness;
risk monitoring, quarterly reports on the risks of the Company;
The risk management procedures of Sistema JSFC are carried out by a dedicated risk management unit.
Quarterly monitoring of the Corporation's risks is performed at the level of the Management Board and
the Risk Management Sub-Committee of Sistema JSFC by reviewing the effects of the mitigation and
response measures taken and by reassessing the already identified and/or new risks.
The top management 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. An annual report is
presented to members of the Board of Directors.
Internal control and audit
In 2013, the Board of Directors of Sistema JSFC decided to set up a united Internal Control and Audit
Department reporting to the President of the Corporation (administratively) and to the Board of Directors
(functionally).
The main tasks of the Internal Control and Audit Department are:
audit of the structure and operating efficiency of control procedures aimed to insure the
reliability of financial reports issued;
audit of the structure and operating efficiency of control procedures aimed to improve the
economic efficiency of Sistema's operating processes,
including procurement
optimisation;
control of safekeeping, integrity, and efficiency of utilisation of assets;
financial and economic audit;
monitoring of compliance with the principles and requirements of the Code of Ethics and
the Anti-Corruption Policy of the Corporation;
monitoring of compliance with the requirements of the Corporation's internal regulations,
including monitoring and control of execution of investment projects;
coordination of activities and development of unified standards for internal control and
audit units of Sistema's subsidiaries and affiliates.
To perform its key tasks, the Internal Control and Audit Department carries out the following functions:
financial audit;
operating audit:
audit and project support;
coordinating the activities of control and audit subdivisions of S/As.
The main tools of the Internal Control and Audit Department are audits designed to obtain and analyse
fair information on the said processes. Based on audit findings, the Internal Control and Audit
Department prepares recommendations for remediation of specific irregularities or weaknesses identified
63
in business processes. Important aspects of the work of the Internal Control and Audit Department are
prevention of irregularities by way of creating a violation-intolerant environment and improvement of the
Corporation's internal business processes.
The Internal Control and Audit Department submits semi-annual reports on the current internal audit
status to the Audit, Finance and Risk Committee and the Ethics and Control Committee of the Board of
Directors of Sistema JSFC1. Annual reports of the Department are delivered to the Board of Directors of
Sistema JSFC.
External Audit
In compliance with the decision of the Audit and Finance Committee, the following procedures have been
developed at the Corporation for selecting external auditors for the purposes of audit of the financial and
accounting reports 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 recognized to be
insufficient, the Audit Committee arranges a tender for selection of a new auditor. In case the quality of
services of the current auditor is recognized as satisfactory, negotiations are conducted on the price of
audit services for the next period. However, to ensure impartiality and objectivity of the auditor, the Audit
and Finance Committee of Sistema JSFC has decided that a tender for the audit of the RAS and US
GAAP financial statements shall be held at least once in every five years.
6.6. Development of the corporate governance system in 2013
In 2013 new independent director Peter Mandelson joined the Board of Directors of Sistema JSFC. It is
expected that Mr Mandelson's extensive experience will significantly strengthen the BoD's competences
in investment relations and strategic planning. Moreover, in 2013 the Corporation increased the focus on
using the potential of its Board members in its core business activities. In particular, the Corporation uses
the vast business contacts of the Board members for expanding its international contact network and
looking for new investment ideas.
In October 2013 Sistema's Board of Directors approved a full package of documents regulating the new
incentive system to be applied to the Corporation's management based on an investment company model.
According to the new incentive system, bonuses payable to employees shall be based on cash income
generated by each portfolio and shall factor in dividends received from Sistema's S/As2 and net cash
income from the sale of assets. The bonus pool shall be adjusted for the expenditure incurred by the
investment portfolio and the minimum rate of return envisaged.
The Corporation's top managers participate in an additional long-term incentive programme that entitles
them to remuneration in the form of Sistema shares. The long-term incentive programme is based on
changes in the price of Sistema shares and total shareholder return (TSR).
In June 2013, Sistema's Annual General Meeting of shareholders approved the payment of a RUB 9,264m
worth of dividends, or RUB 0.96 per ordinary Sistema share. The amount of dividends was determined in
compliance with the current dividend policy as min. 10% of Sistema's consolidated US GAAP net income
and min. 10% of the income generated by transactions made in 2012. The payment of dividends in
compliance with the established new dividend policy testifies to an improvement in the predictability of
dividend flows to be received by the Corporation's shareholders and direct correlation between the
dividend amounts and the performance of the Corporation's investment.
In June 2013 the Board of Directors resolved to strengthen internal control and audit functions by
combining them into a single department (the Internal Control and Audit Department) that would directly
report to the Board of Directors (functionally) and the President (administratively). The functions of the
new department are extensively described in cl.6.5 hereof. The strengthening of the control function
results from the adoption of the investment company model by the Corporation and is designed to protect
Sistema's interests in portfolio companies.
1Joint meetings of the Committees.
2Except for MTS and Bashneft
64
In December 2013 Sistema's Board of Directors stated that all the key actions envisaged for the purposes
of the Corporation's transition to the investment company management model had been carried out.
65
7. SOCIAL RESPONSIBILITY
Due to its activities, Sistema JSFC bears responsibility to several groups of stakeholders, namely:
consumers, company personnel, shareholders, local communities. The Corporation aims at building long-
term relations with all groups of stakeholders to ensure its sustainable development in the long term.
The basic document governing the activities of the corporation and its subsidiaries in the sphere of
corporate social responsibility is the Policy on Corporate Social Responsibility of Sistema JSFC. It
establishes the basic principles, areas and priorities for stakeholder interaction. The document is also used
as a tool for strategic management of the factors of Sistema's sustainable development and optimisation of
its contribution to social and economic development of the countries and regions of the Company's
operations. Other documents used by the company are the Code of Corporate Conduct that stipulates
responsibilities voluntarily assumed by Sistema as regards transparency, openness, and anti-corruption
procedures, and the Ethics Code governing corporate relationships, designed to ensure open and fair
business operations.
Sistema JSFC was one of the first Russian companies to join the United Nations Global Compact (in
2002) and strictly abides by the principles of sustainable development enshrined therein. In 2003, the
Corporation joined the World Business Council for Sustainable Development (WBCSD). The
Corporation fully embraces the social responsibility concept outlined by the Russian Union of
Industrialists and Entrepreneurs in the Social Charter of Russian Business and seeks to make its
contribution to the sustainable development permanent, consistent and socially intelligible.
Charitable activities
The consolidated charitable expenses of Sistema's subsidiaries in 2013 totalled RUB 1,825 m. Sistema's
Charitable Foundation is the Corporation's principal charity tool. The foundation manages funds donated
for charity by companies of Sistema Group. The foundation works in 4 key focus areas: education and
science; culture and art; social development and sports.
A major initiative of the foundation is Lift to the Future, an all-Russian talent development programme.
The long-term programme has been carried out since 2011 on an ongoing basis. By the end of 2013 over
8,000 school and university students had become prizewinners of various contests of the programme,
2,500 school students had received Lift to the Future grants, and 500 university students of natural and
technical sciences had been awarded scholarships. A new programme for traineeship at European hi-tech
companies was launched in 2013 and involved 50 winners of student papers contests.
In June 2013, Sistema and the Russian Museum signed an agreement on cooperation through 2023
envisaging an up to RUB 300m worth of financing to be provided by Sistema for the museum's various
projects. The previous 10-year agreement had been signed in 2003. The Corporation and the Russian
Museum continue several programmes originated in the previous years, including the development of a
unique regional network of "virtual branches", special information and education centres.
The corporation and its subsidiaries took active part in the relief assistance provided to the Far Eastern
regions that had suffered from the devastating flood in August-September 2013. They made money
contributions and procured equipment, clothing, and children's goods. Another related initiative was a
"winter school" session held for 150 children from the flooded regions, where school students prepared
their very own projects for the development of the Far East.
2013 was marked by an evolution of Sistema's cooperation with the Russian Geographical Society.
Sistema and its subsidiary RTI provided technical and financial support for the Arctic expedition of the
well-known Russian traveller Fyodor Konyukhov.
66
Environment protection
The Corporation rigorously abides by environmental principles, while compliance with environmental
standards is required by the Ethics Code of Sistema JSFC. As players in the hydrocarbon market, the
Corporation's companies invest substantial funds in environmental protection. The largest user of
subsurface resources among Sistema's subsidiaries is OJCS Bashneft.
In 2013 Bashneft's Board of Directors set up a Health, Safety, Environment and Social Responsibility
Committee to control the implementation of the company's functional strategy in these areas and prepare
related recommendations for the Board.
In 2013, Bashneft commissioned a sulfuric acid alkylation and black sulfuric acid regeneration plant with
a design output of 1,200 tonnes of alkylates per 24 hours, for production of Euro-5 high-octane gasoline.
This technology allows Bashneft to produce environmentally friendlier fuel. Bashneft's investment in the
project totalled RUB 8bn.
Bashneft's Health, Safety and Environment management system in 2013 was certified according to ISO
14001, an international environmental management standard, and OHSAS 18001, a standard for
occupational health and safety management systems.
In 2013, Bashneft became the first Russian company to enter the International Petroleum Industry
Environmental Conservation Association (IPIECA).
Responsibility towards local communities
Sistema and its subsidiaries carry out task-oriented investments in the social infrastructure of the regions
the corporation operates in. In 2013, OJSC Bashneft, OJSC BPGC and the Sistema Charitable Foundation
completed construction and reconstruction of large social facilities (hospitals and sports centres) in
Bashkortostan, the Orenburg region, and the Nenets Autonomous District, total 2013 investment being
RUB 1.14bn. The total investment in 2013 amounted to RUB 1.14 bn. The companies support the
development of children's and adult sports and carry out activities aiming to form environmental
consciousness of the young.
The MTS-initiated federal educational project for raising the Internet literacy of the senior generation All
Ages are Online was launched in 2013. Over 5,000 people had completed the programme course as of the
end of 2013. The Corporation's volunteers take active part in the programme.
A total of 3.5 thousand employees of the Corporation and its subsidiaries volunteer in various initiatives,
such as assistance to orphans and war veterans and educational and environmental projects. Moreover,
Sistema's first corporate volunteer city park and garden clean-up events were held in Moscow and Ufa in
May 2013.
Responsibility towards employees
Sistema adheres to best practices in HR management. When implementing their HR policies, Sistema and
its subsidiaries fully comply with the labour laws of the countries the corporation operates in. Its
employees receive competitive compensation and social benefits (additional life and health insurance;
sports events, which involved 1,500 employees in 2013, etc.).
The Corporation uses a two-tier incentive system: the short-term incentive programme is linked to
operational performance of employees, while the long-term incentive programme is designed for
personnel retention and development. A system of internal career lifts has been created: 46% of key
managers appointed in 2013 previously worked for Sistema or its S/As.
In 2013, Sistema launched The School of CEOs, an annual programme for the development of managerial
competences of the top managers of production companies within the corporation. Bashneft managers
became the first participants of the programme. Sistema plans to extend this practice to other subsidiaries.
67
In 2013, Sistema and MTS won leading positions in Russian employer ratings.
68
8. CRITERIA FOR DETERMINING THE AMOUNT OF REMUNERATION
PAYABLE TO THE MEMBERS OF THE BOARD OF DIRECTORS AND SENIOR
MANAGERS OF THE COMPANY
The remuneration of the members of Sistema JSFC Board of Directors is calculated on the basis of the
Policy on remuneration and compensations payable to the members of the Board of Directors of the
Company, approved by a resolution of the General Meeting of shareholders of Sistema JSFC on 30 June
2006 (Minutes #1-06) as amended by the resolution of the General Meeting of the shareholders of
Sistema JSFC 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 the Chairman or a Deputy Chairman of the Board of
Directors, and for Chairmanship of the Committees under the Board;
based on the performance during a year, members of the Board of Directors get additional
performance-related remuneration in the form of a fixed amount, half of which is payable in
shares (US$ 250,000 - 325,000);
also, given the capitalisation of the Corporation has grown over the year, members of the Board
of Directors get 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 JSFC in 2013 consisted
of the following elements:
a fixed monthly salary determined in line with the internal system of job categories (grades);
an annual bonus paid for the achievement of investment key performance indicators (KPIs) set
for the Corporation as a whole for a respective reporting period; In 2013, the following
indicators were approved as investment KPIs of Sistema JSFC: iTSR, TSR, Revenue
(dividends, proceeds from sale of businesses, revenue from capital management and debt
repayment), SG&A / NAV, Investment reserves at the yearend, External debt / OIBDA (for the
Group), Debt / OIBDA (for Sistema JSFC);
additional remuneration (1) for generating cash income for the corporation in the year, payable
subject to achievement of the year's investment KPIs, or (ii) 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 JSFC in 2013 consisted of
the following elements:
a three-year Long-term Incentive Program (2012-2014) aimed at building the shareholder value
of Sistema JSFC and at creating additional preconditions for maintaining long-term relations of
employment and corporate relations between the Company and its management;
an option program 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 capitalization of Sistema JSFC.
No remuneration is paid for the executive work of the managers sitting on the Management Board of
Sistema JSFC.
Top executives of the Corporation were paid a total of RUB 2,870,064,713 in remuneration for the
calendar year 2013. Remuneration paid to the members of the Board of Directors of Sistema JSFC in
2013 totalled RUB 154,995,692.
69
9. ANNEX
9.1. Summary biographies of the members of the Board of Directors and their shareholdings
in Sistema JSFC
Name, position
Brief Biography
Vladimir Evtushenkov
Was born in 1948 in the Smolensk Region.
Chairman of the Board of
Directors
Non-executive director
In 1973, he graduated from the Moscow Mendeleyev Chemical-Engineering
Institute, in 1980, from the Economics Department of the Lomonosov
Moscow State University. Holds a PhD degree in Economics.
1975 – 1982 Shop manager; deputy director; chief engineer, the
Karacharovo Plastics Factory.
1982 – 1987 Chief engineer, first deputy CEO, the Polymerbyt Research
and Manufacturing Association.
1987 – 1988 Head of the technical department, then head of the Main
Department of Science and Technology, the Moscow City Executive
Committee.
1990 Chairman of the Moscow Municipal Committee for Science and
Technology.
1993 Founded Sistema Joint-Stock Financial Corporation together with a
group of associates.
Principal shareholder, Chairman of the Board of Directors and Chairman of
the Strategy Committee of the Board of Directors of Sistema JSFC.
Member of a number of government commissions, actively involved in
decision-making for improvement of competitiveness of the Russian industry,
development of high technologies and innovations, science and culture;
chairman of the Russian side of the Russian-Arab Business Council and
member of the National Council on Corporate Governance, member of the
management boards of the main associations of entrepreneurs in Russia - the
Russian Union of Industrialists and Entrepreneurs, the Russian Chamber of
Industry and Commerce.
2004 Elected Chairman of the Council of Trustees of the Fund for
Development of the State Russian Museum “Friends of the Russian
Museum”. Member of the Board of Trustees of the Sistema Charitable
Foundation.
Share in the authorized capital of Sistema JSFC – 64.1855%.
Alexander Goncharuk
Was born in 1956 in Sevastopol.
Deputy Chairman of the
Board of Directors
Non-executive director
In 1978, graduated from the Sevastopol Higher Navy and Engineering
School, and in 1987, from the Grechko Navy Academy.
1995 – 1998 Vice President, Sistema JSFC.
1998 – 2003 President of CJSC Sistema Telecom
2003 – 2006 President of OJSC Sitronics
70
2006 – 2008 President of Sistema JSFC.
1998 and 2002 – 2003 Chairman of the Board of Directors, OJSC MTS.
2009 – 2012 Chairman of the Board of Directors, OJSC Bashneft.
Chairman of the Board of Directors of OJSC Sitronics, member of the Board
of Directors of OJSC Bashneft and some other companies. Member of the
Board of Trustees of the Sistema Charitable Foundation.
Member of the Board of Directors of Sistema JSFC since 1996. Chairman of
the Ethics and Control Committee, member of the Strategy Committee and
the Nomination, Remuneration and Corporate Governance Committee of the
Sistema Board of Directors.
Share in the authorized capital of Sistema JSFC – 1.0089%.
Sergey Boev
Was born in 1953 in Moscow.
Non-executive director
In 1978, graduated from the All-Union Correspondence Law Institute, in
1984, from the Ordzhonikidze Moscow Institute of Management. Holds a
PhD degree in Economics. Professor, honoured economist of the Russian
Federation.
Full member of the Academy of Military Science. Head of department at the
National Research University of the Moscow Institute of Physics and
Technology. Recipient of the 2012 State Prize in science and technologies.
Member of the Russian President's Council for Economy Modernisation and
Innovation Development of Russia, the Working Group for Technological
Development of the Russian President's Economic Council and the Academic
Board of the Russian Security Council.
Co-Chairman of the working group for innovations of the EU-Russia
Industrialists' Round Table.
Member of the Public Council of the Committee of Science and Science-
Intensive Technologies of the State Duma of the Russian Federation and also
of the Science and Technology Council of the Military and Industrial
Commission of the Russian Government.
1971 – 1999 Worked at the Mintz Radio Technology Institute where he
made a career from fitter's apprentice to CEO.
2000 – 2008 CEO of Radiotechnical and Information Systems Concern.
2008 – 2011 Vice President, Head of the Sistema JSFC's High Technology
and Industry Business Unit.
Since 2011 CEO of RTI.
2012 Appointed Chief Designer of the National Missile Warning System.
Chairman of the Board of Directors of OJSC Mintz Radio Technology
Institute, OJSC Research Institute of Long-Range Radio Communications,
member of the Board of Directors of Almaz-Antey Concern and a number of
other companies.
Member of the Boards of Trustees for Sistema's Charity Fund, Russian
Admirals' Club, and Suvorov Military School in Tver.
Member of the Board of Directors of Sistema JSFC since 2013. Member of
71
the Strategy Committee, the Audit, Finance and Risks Committee and the
Ethics and Control Committee of Sistema Board of Directors.
Share in the authorized capital of Sistema JSFC – 0.0140%.
Brian Dickie
Was born in 1955 in Belfast, the United Kingdom.
Independent director
Master of Arts in English literature, Oxford University; MBA, Harvard
Business School.
1981 – 1998 Work at BOOZ, ALLEN & HAMILTON INC., an
international management consulting company.
1993 – 1998 President, chairman of the board of the company's office in
New York; before that, the company's managing partner for Asia Pacific
(Singapore); consulted big corporations and government agencies in North
America, Europe and Asia Pacific on strategic and operational matters.
1999 – 2003 President of TXU ENERGY, US, where he headed the
Retail, Generation (32 nuclear, gas and coal power plants) and Trading
divisions; simultaneously, he managed the sector of the Group's new
businesses, including telecoms (US) and the international energy industry
(Australia, Asia, Latin America).
2003 – 2012 Work at INVESTCORP, an alternative investment company
founded in Bahrain. Before 2010, Managing director of the European direct
investment division (London). Senior advisor, member of the investment
committee of the Gulf Opportunity Fund, a division of INVESTCORP, and
chairman/member of the board of directors of a number of European and
Middle Eastern companies.
Member of the Board of Directors of Sistema JSFC since 2012. Member of
the Strategy Committee and the Ethics and Control Committee of Sistema
Board of Directors.
Share in the authorized capital of Sistema JSFC – 0.0013%.
Dmitry Zubov
Was born in 1954 in the Gorkiy Region.
Non-executive director
In 1977, graduated from Ordzhonikidze Moscow Aviation Institute. Holds a
PhD degree in Economics.
1992 – 1999 Director General of CJSC Alon, then held executive
positions at MosEximBank, OJSC IBN Sistema and CJSC PromChemInvest.
1999 Elected member of the Board of Directors of Sistema JSFC, in 2000,
Deputy Chairman of the Board. Member of the Nomination, Remuneration
and Corporate Governance Committee of Sistema Board of Directors.
Member of the Board of Trustees of the Sistema Charitable Foundation.
Share in the authorized capital of Sistema JSFC – 0.9951%.
Robert Kocharyan
Was born in 1954 in Stepanakert, Nagorno-Karabakh Autonomous Region.
Independent director
1982,
graduated
In
Institute.
1991 – 1994 Deputy of the first Supreme Council of the Nagorny-
Karabakh Republic (NKR), Chairman of the State Defense Committee of the
NKR and Prime Minister of the NKR.
the Yerevan Polytechnic
from
1994 – 1997 President of the NKR.
72
1997 – 1998 Prime Minister of the Republic of Armenia.
1998 – 2008 President of the Republic of Armenia.
Member of the Board of Directors of Sistema JSFC since 2009. Chairman of
the Nomination, Remuneration and Corporate Governance Committee,
member of the Ethics and Control Committee of Sistema Board of Directors.
Share in the authorized capital of Sistema JSFC – 0.0045%.
Jeannot Krecké
Was born in 1950 in Luxembourg.
Independent director
Graduated from the Free University of Brussels. When studying in the USA
he majored in economics, accounting and taxation. Co-author of the annual
manual on taxation in Luxembourg and of books on tax control and tax fraud
monitoring.
2004 Minister of Sport of Luxembourg.
2004 – 2011 Minister of Economics and Foreign Trade of Luxembourg,
representative of the Luxembourg Government in the Council of Ministers of
the European Union.
1987 – 1997 Co-founder and President of the Alzheimer Association
Luxembourg.
Since 1997 President of the Alzheimer Fund.
1970 – 1977 Played for the Luxembourg national football team;
participated in transatlantic and polar expeditions (Greenland, Svalbard).
Member of the Board of Directors of Sistema JSFC since 2012. Member of
the Nomination, Remuneration and Corporate Governance Committee and of
the Investor Relations and Dividend Policy Committee of Sistema Board of
Directors.
Share in the authorized capital of Sistema JSFC – 0.0017%.
Peter Mandelson
Was born in 1953 in the United Kingdom.
Independent director
Graduated from the Oxford University, where he majored in political science,
philosophy and economics.
1985 – 1990 Director of Campaigns and Communications for the Labour
Party of Britain.
1992 – 2004 Member of Parliament.
July 1998 - December 1998 Secretary of State for Trade and Industry
1999 – 2001 Secretary of State for Northern Ireland.
2004 – 2008 European Commissioner for Trade.
2008 – 2010 Secretary of State for Business, Innovation and Skills; First
Secretary of State.
73
Life peer in the House of Lords since 2008.
2010 Became chairman of Global Counsel, a consultancy firm, and senior
advisor to Lazard Ltd., in 2013, elected chairman of the board of Lazard
International.
President of the Policy Network think tank and High Steward of Hull.
Member of the Board of Directors of Sistema JSFC since 2013. Member of
the Investor Relations and Dividend Policy Committee and of the Audit,
Finance and Risks Committee of Sistema Board of Directors.
Share in the authorised capital of Sistema JSFC – 0.00%.
Roger Munnings
Was born in 1950 in the United Kingdom.
Independent director
Graduated from the Oxford University with a degree of Master of Arts in
politics, philosophy, and economics.
Member of the UK Government's working group on trade and investments
between Great Britain and Russia, Chairman of the Institute of Audit
Committees in Russia.
Roger has had a long and successful career (from 1974) with the international
auditor KPMG, especially during his time as 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).
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.
Actively involved in the social activities in Russia as a member of the
Russian National Council on Corporate Governance, the Russian Union of
Industrials and Entrepreneurs, the Russian institute of directors, management
board of the American-Russian business council, management board of the
Russian-British chamber of commerce etc.
Member of the Board of Directors of Sistema JSFC since 2010. Chairman of
the Audit, Finance and Risks Committee, member of the Nomination,
Remuneration and Corporate Governance Committee, the Investor Relations
and Dividend Policy Committee and the Ethics and Control Committee of
Sistema Board of Directors.
Share in the authorised capital of Sistema JSFC – 0.0035%.
Marc Holtzman
Was born in 1960 in the United Kingdom.
Independent director
Holds a Bachelor of Arts degree in economics from Lehigh University.
Married with three sons.
1989 – 1998 Work 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.
Until 2003 Colorado's first Secretary of Technology. In addition, he was
Chairman of Colorado's Information Management Commission and Co-
Chairman of Governor's Commission on Science and Technology. Mr.
Holzman helped guide Colorado's economic transformation into a fully
diversified technology hub.
74
2003 – 2005 President of the University of Denver.
Was member of the Board of Directors of Kazyna, Kazakhstan's sovereign
wealth fund. Served as Deputy Chairman of the Board of ABN Amro Bank
and Barclays Capital.
2004 – 2010 Member of the Board of Trustees, the United States Space
Foundation.
Chairman of the board of Meridian Capital HK and member of the board of
Indus, FTI Consulting, The Bank of Kigali (Rwanda's biggest commercial
bank) and Prospect Global Resources (NASDAQ).
Member of the Board of Directors of Sistema JSFC since 2012. Member of
the Audit, Finance and Risks Committee and the Investor Relations and
Dividend Policy Committee of Sistema Board of Directors.
Share in the authorised capital of Sistema JSFC – 0.0013%.
Serge Tchuruk
Was born in 1937 in France.
Independent director
Graduated from «Ecole Polytechnigue».
1964 – 1979 Mobil Corporation (France, US), CEO of Mobil Benelux.
1980 – 1986 Held various executive positions at Rone Poulenc, an
international chemical and pharmaceutical company; in 1983, appointed
Managing Director of the company.
1986 – 1990 Chairman and CEO of Orkem, a European chemical company
(earlier known as CDF-Chimie).
1990 – 1995 Chairman and CEO of Total, one of the largest oil and gas
companies globally.
1995 – 2006 CEO of Alcatel.
Member of the Board of Directors of Sistema JSFC since 2011. Member of
the Strategy Committee and the Ethics and Control Committee of Sistema
Board of Directors.
Share in the authorised capital of Sistema JSFC – 0.0026%.
Mikhail Shamolin
Born in 1970 in Moscow.
President
Chairman of the
Management Board
Executive director
In 1992, graduated from the Moscow Automobile and Road Technical
Institute.
In 1993, graduated from the Russian Presidential Academy of Public
Administration.
1996 – 1997 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, Interpipe
Corp (Ukraine).
2005 – 2011 Vice President for Sales and Customer Service, then Vice
75
President, Head of Business Unit, President of OJSC MTS Russia.
10 March 2011 Appointed President of Sistema JSFC.
Chairman of the Management Board of Sistema JSFC, member of the
Strategy Committee, the Investor Relations and Dividend Policy Committee
and the Nomination, Remuneration and Corporate Governance Committee of
Sistema Board of Directors. Member of the Board of Trustees of the Sistema
Charitable Foundation.
Share in the authorized capital of Sistema JSFC – 0.1557%.
David Iakobachvili
Was born in 1957 in Georgia.
Independent director
Graduated from the 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, retail, communications and banking.
1992 One of the founders of a well-known dairy company, Wimm-Bill-
Dann.
1992 – 2011 Member and later Chairman of the Board of Directors of
Wimm-Bill-Dann.
Chairman of the board of LLC OrionService. Member of the board of CJSC
Agrokomplex Gorki-2, Airport Financial Services Limited and a number of
other companies.
Member of managing boards of influential Russian and international
organisations: Vice President and member of the Management Bureau of the
Russian Union of Industrialists and Entrepreneurs (RSPP), head of the RSPP
Committee for Corporate Social Responsibility and Demographic Policy,
chairman of the RSPP United Ethics Committee, chairman of the B20 Job
Creation, Employment and Investments in Human Capital Task Force (during
Russia's presidency in 2013), chairman of the board of RusBrand, president
of the Russian-American Business Council, member of the board of the
Russian Chamber of Commerce and Industry, the General Council of LLC
Business Russia, the World Economic Forum in Davos, of the President's
Global Council at New York University, the Public Council of the Russian
Culture Ministry,
the Coordination Council for Intellectual Property
Protection.
Member of the Board of Directors of Sistema JSFC since 2011. Chairman of
the Investor Relations and Dividend Policy Committee, member of the Audit,
Finance and Risks Committee of Sistema Board of Directors.
Share in the authorized capital of Sistema JSFC – 0.0043%.
76
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
2013
Member of the Board
of Directors
Date of transaction
Transaction content
Subject of the transaction
(Number of shares of
Sistema JSFC)
V. Evtushenkov
12 December 2013
A. Goncharuk
8 May 2013
A. Goncharuk
12 July 2013
A. Goncharuk
17 July 2013
A. Goncharuk
24 September 2013
A. Goncharuk
8 October 2013
B. Dickie
D. Zubov
D. Zubov
12 July 2013
8 May 2013
12 July 2013
V. Kopiev
8 May 2013
V. Kopiev
12 July 2013
R. Kocharyan
12 July 2013
J. Krecké
12 July 2013
R. Munnings
12 July 2013
E. Novitsky
13 June 2013
E. Novitsky
12 July 2013
M. Holtzman
12 July 2013
S. Tchuruk
12 July 2013
M. Shamolin
8 May 2013
M. Shamolin
12 July 2013
M. Shamolin
24 September 2013
M. Shamolin
30 December 2013
D. Iakobachvili
12 July 2013
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
debiting securities from the holder's
account to a nominee account of the
Central Depository
debiting securities from the holder's
account to a nominee account of the
Central Depository
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
debiting securities from the holder's
account to a nominee account of the
Central Depository
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
crediting securities to the holder's
account
debiting securities from the holder's
account to a nominee account of the
Central Depository
crediting securities to the holder's
account
115,691
435,000
115,691
858,850
19,300,000
16,300,000
121,010
1,689,603
115,691
64,979
115,691
121,010
121,010
121,010
122,191
115,691
121,010
121,010
1,987,769
115,691
9,650,000
15,023,401
115,691
77
9.3. Summary biographies of the President and Management Board members.
Name, position
Brief biography
Mikhail Shamolin
Was born in 1970 in Moscow.
President of Sistema JSFC
Chairman of the
Management Board of
Sistema JSFC
In 1992, graduated from the Moscow Automobile and Road Technical
Institute, and in 1993, from the Russian Presidential Academy of Public
Administration.
1996 – 1997 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, Interpipe
Corp (Ukraine).
2005 – 2011 Vice President for Sales and Customer Service, then Vice
President, Head of Business Unit, President of OJSC MTS Russia.
10 March 2011 Appointed President and Chairman of the Management
Board of Sistema JSFC.
The Executive Director, member of the Strategy Committee, the Ethics and
Internal Control Committee, the Nomination, Remuneration and Corporate
Governance Committee, the Investor Relations and Dividend Policy
Committee of Sistema Board of Directors, member of the Board of Trustees
of the Sistema Charitable Foundation.
Anton Abugov
Was born in 1976 in Mytishchi, the Moscow Region.
First Vice President, Sistema
JSFC
Member of the Management
Board of Sistema JSFC
In 1998, graduated from the Russian Presidential Academy of National
Economy with a degree in management.
1995 – 1999 Deputy Executive Officer of the Securities Transaction
Department, Trader, CJSC United Financial Group.
1999 – 2002 Head of Corporate Finance, CJSC United Financial Group.
2003 – 2006 Managing Director, Head of Corporate Finance, Rosbank.
2006 – 2012 First Vice President, Head of the Strategy and Development
Function, Sistema JSFC.
September 2012 Appointed First Vice President, Sistema JSFC.
Christopher Baxter
Was born in 1963 in the United Kingdom.
Senior Vice President,
Sistema JSFC
Member of the Management
Board of Sistema JSFC
In 1987, graduated from Imperial College London with First Class honours as
a Master of Engineering. Fellow of the Royal Society of Arts, Manufactures
and Commerce.
1987 – 1995 Held different positions at Chase Manhattan Bank (now part
of JP Morgan), including the position of Vice President.
1995 – 2002 Head of Energy and Power Investment Banking, Merrill
Lynch.
2002 – 2012 Head of Investment Banking, the Renaissance Group,
78
member of the board of Renaissance Credit (the Group's retail bank).
November 2012 Appointed Senior Vice President, Sistema JSFC.
Alexey Buyanov
Was born in 1969 in Moscow.
First Vice President, Sistema
JSFC
Member of the Management
Board of Sistema JSFC
In 1992, graduated from the Moscow Physics and Technology Institute with a
degree in Applied Mathematics and Physics.
1995 – 1998 Head of Department, Vice-President, First Vice-President,
CJSC Sistema Invest.
1998 – 2002 Vice President, OJSC MTS.
2002 Vice President, Head of the Financial Restructuring Department,
Sistema JSFC.
2002 – 2005 First Vice President, Sistema JSFC.
2005 – 2013 Senior Vice President, Head of the Finance and Investment
Function, Sistema JSFC.
June 2013 Appointed First Vice President, Sistema JSFC.
Chairman of the Board of Directors of OJSC MTS Bank, member of the
Board of Directors of OJSC MTS, OJSC Bashneft, Sistema Shyam
Teleservices Limited (SSTL) and a number of other companies.
Elena Vitchak
Was born in 1971 in Moscow.
Vice President, Head of the
HR Department, Sistema
JSFC
Member of the Management
Board of Sistema JSFC
In 1992, graduated from the Philology Department of the Rostov State
University, in 2005, from the State Academy of Investment Specialists with a
degree in HR management.
Member of the Expert Council of the National Union of HR Specialists of
Russia
Member of the HR Committee of the Association of Russian Banks.
2002 – 2008 Head of the HR Department, the Capital Insurance Group.
2008 – 2010 Director of the HR Department, Member of the Management
Board, OJSC Sistema Hals.
2010 – 2012 Senior Vice President, Director of the HR Department, OJSC
MTS Bank.
2012 – 2013 Executive Vice President, Head of the HR Department,
Sistema JSFC.
December 2013 Appointed Vice President, Head of the HR Department,
Sistema JSFC.
Sergey Drozdov
Was born in 1970 in Arkhangelsk.
Senior Vice President, Head
of Corporate Governance
Function of Sistema JSFC
Member of the Management
Board of Sistema JSFC
In 1993, graduated from the Moscow Ordzhonikidze Management Academy
with the qualification of a planning engineer. Holds a PhD degree in
Economics.
1994 – 1995 Head of the Financial Innovation and Marketing Department,
the Moscow City Property Fund.
79
1995 – 1998 Deputy head of the Development and Investment Department,
Sistema JSFC.
1998 – 2002 Vice President, First Vice President, CJSC Sistema Invest.
2002 Acting First Vice President, Head of the Corporate Property
Department, Sistema JSFC.
2002 – 2011 First Vice President, Senior Vice President, Head of the
Property Function, Sistema JSFC.
2011 Appointed Senior Vice President, Head of the Corporate Governance
Function, Sistema JSFC.
Chairman of the Board of Directors of OJSC Mosdachtrest, member of the
Board of Directors of OJSC Bashneft, OJSC United Petrochemical Company,
CJSC Binnopharm and a number of other companies.
Felix Evtushenkov
Was born in 1978 in Moscow.
First Vice President, Sistema
JSFC
Member of the Management
Board of Sistema JSFC
In 2000, graduated from the Griboyedov Institute of International Law and
Economics with a degree in law.
1999 – 2000 Assistant to the President of CJSC Sistema Invest, Executive
Director of the Industry Department, Sistema JSFC.
2000 – 2006 Deputy CEO, CEO, CJSC Sistema Hals.
2006 – 2008 President of OJSC Sistema Hals.
2008 – 2011 Vice President, Head of the Consumer Assets Business Unit,
Sistema JSFC.
2011 – 2011 First Vice President, Head of the Core Assets Business Unit,
Sistema JSFC.
2012 Appointed First Vice President, Sistema JSFC.
Chairman of the Board of Directors of OJSC Bashneft, OJSC BPGC, OJSC
United Petrochemical Company and a number of other companies.
Leonid Monosov
Was born in 1958 in Mozyr, Belarus.
Vice President, Sistema
JSFC
In 1980, graduated from the Moscow Institute of Railway Engineers with a
degree in industrial and civil construction.
Member of the Management
Board of Sistema JSFC
Recipient of various awards and the title of Honoured builder of the Russian
Federation.
1999 – 2007 CEO of OJSC Moskapstroy.
2007 – 2010 Head of the Moscow City Contract Repairs Department.
2010 – 2012 Vice President, the state-owned corporation Olymstroy.
2012 – 2013 Executive Vice President of the Developing Assets Business
Unit, Executive Vice President, Sistema JSFC.
December 2013 Appointed Vice President, Sistema JSFC.
80
Oleg Mubarakshin
Was born in 1968 in the Saratov Region.
Vice-President, Head of the
Legal Function, Sistema
JSFC.
Member of the Management
Board of Sistema JSFC
In 2000, graduated from the Moscow State Academy of Law with a degree in
law; in 2002, from the Finance Academy at the Government of the Russian
Federation with a degree in finance and credit.
In 1991, graduated from the Defence Ministry's Military Institute.
1996 – 1998 Deputy CEO for legal matters, the oil and gas company Belye
Nochi (Russia).
1998 – 2007 Vice President for Corporate and Legal Affairs for Central
and Eastern Europe, InBev FMCG Group (Russia).
2008 – 2009 Vice President for Legal Affairs for Western Europe, InBev
FMCG Group (Belgium).
2009 – 2013 Member of the Management Board, Head of Legal
Department, EastOne Investment and Consulting Group (Ukraine, Great
Britain).
December 2013 Appointed Vice President, Head of the Legal Function of
Sistema JFSC.
Vsevolod Rozanov
Was born in 1971 in Moscow.
Senior Vice President, Head
of the Finance and
Investment Function of
Sistema JSFC
Member of the Management
Board of Sistema JSFC
Graduated from the Economics Department of the Lomonosov Moscow State
University, with a degree in economics.
1993 – 2001 Held various positions at the consultancy Bain & Company
Inc. in Moscow, London and Stockholm.
2002 – 2004 Deputy CEO for Economics and Finance, CJSC MTU-
Inform.
2004 – 2006 Vice President for Economics and Finance, OJSC Comstar
United Telesystems.
2006 – 2008 Vice President for Finance and Investment, member of the
Management Board, OJSC MTS.
2008 – 2013 CEO of Sistema Shyam TeleServices Limited. Board member
of SSTL and OJSC MTS.
June 2013 Appointed Senior Vice President, Head of the Finance and
Investment Function of Sistema JFSC.
Andrey Terebenin
Was born in 1962 in Moscow.
Vice President, Head of the
Corporate Communications
Function of Sistema JSFC
Member of the Management
Board of Sistema JSFC
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
Economicheskaya Gazeta, Dun&Bradstreet CIS and AIG Russia.
the Publishing House
1999 Became a partner at the Triangle Porter Novelli Communications
Agency
2003 - January 2006 Director General and Partner, R.I.M. Porter Novelli.
2006 – 2011 Vice President for Corporate Communications, OJSC MTS.
May 2011
Appointed Vice President, Head of the Corporate
81
Communications Function of Sistema JSFC.
Ali Uzdenov
Was born in 1962 in Kislovodsk, the Stavropol Territory.
Senior Vice President,
Sistema JSFC
Member of the Management
Board of Sistema JSFC
In 1985, graduated from the Rostov Institute of Railway Engineers.
In 1990, continued his education at the International Survival School (Italy).
1994 – 1997 Head of the Rostov Commodity Exchange.
1997 – 1998 CEO of LLC Ayaks.
1998 – 2001 CEO of the Rostov branch, OJSC Bashneft.
2001 – 2007 Chairman of the Board of Directors, OJSC Kormmash.
2007 – 2009 CEO of LLC Rostovregiongaz.
2009 – 2012 First Vice President for Refining and Sales, OJSC Bashneft.
2012 – 2013 Vice President, Sistema JSFC.
December 2013 Appointed Senior Vice President, Sistema JSFC.
Michael Hecker
Was born in 1970 in Kiel, Germany.
Vice President, Head of the
Strategy Function of Sistema
JSFC
Member of the Management
Board of Sistema JSFC
In 1994, graduated from Pierre Mendes-France University, Grenoble, France,
with a degree in management and international politics. In 2001, graduated
from the University of Gottingen, Germany, with a degree in law and
contemporary history.
Doctor of Philosophy, PhD (Law).
Before 2000 Junior associate at various German firms.
2000 – 2006 Employed at A.T. Kearney Europe, responsible for projects in
the spheres of strategy, marketing and finance for telecom companies and
producers of consumer goods.
2006 – 2014 Vice President for Strategy, Mergers, Takeovers and
Corporate Development, Member of the Management Board, OJSC MTS.
February 2014 Appointed Vice President, Head of the Strategy Function of
Sistema JFSC.
Alexey Chupin
Was born in 1975 in Nevyansk, the Sverdlovsk Region.
Vice President, Sistema
JSFC
Member of the Management
Board of Sistema JSFC
In 1996, graduated from the Urals State Economics University with a degree
in finance and credit. In 2005, was awarded an MBA degree from the Urals-
Siberia Business University.
2002 – 2004 Head of the Analytical Centre, Director for Strategic
Development, Deputy CEO, the Nevyansk Machine-Building Plant.
2004 – 2009 Deputy CEO, LLC NMZ Finance.
2009 – 2011 CEO of LLC Zenitko Finance Management.
2011 – 2013 CEO of CJSC Binnopharm. Member of the Board of
Directors of CJSC Binnopharm.
82
May 2013 Appointed Vice President of Sistema JSFC.
83
9.4. Information on the number of Sistema shares held by the President and Management
Board members
Management Board members:
Number of Sistema shares
held by the Management Board
member
Mikhail Shamolin
Anton Abugov
Christopher Baxter
Alexey Buyanov
Elena Vitchak
Sergey Drozdov
Felix Evtushenkov
Leonid Monosov
Oleg Mubarakshin
Vsevolod Rozanov
Andrey Terebenin
Ali Uzdenov
Michael Hecker
Alexey Chupin
19,220,298
20,035,943
2,433,108
19,130,244
1,031,590
27,236,389
4,384,842
1,736,389
0
1,305,000
2,063,448
1,087,499
0
455,500
84
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
During 2013 Sistema JSFC has not performed any transactions that in accordance with the Federal Law
“On Joint-Stock Companies” are recognized as major transactions, and other transactions which in
accordance with the Company’s Charter are covered by the procedure for approval of major transactions.
85
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"
All the transactions closed by Sistema JSFC in 2013 that are recognised as related party transactions
under the Federal Law On Joint-Stock Companies were approved by the Board of Directors of the
Corporation.
Ref. No. of
BoD meeting
minutes and
date of
resolution
01-13
02.02.2013
#
1
2
01-13
02.02.2013
Subject of the transaction
Counterparties
Amount of the
transaction
Related parties
Supplementary Agreement to
Contract No. 108 dtd 23 May
2011 with OJSC Reyestr for
keeping and updating the
register of securities holders
(amendment to Annex 1 to
Contract No. 108 dtd 23 May
2011 between Sistema JSFC and
OJSC Reyestr)
Agreement with OJSC Region
on rendering a range of
informational, advisory,
consulting and other services to
ensure information and
economic security at Sistema
JSFC
OJSC Reyestr
RUB 620,000
OJSC Sistema
Finance
S.Drozdov
CJSC Region
RUB
198,724,980
OJSC Sistema
Finance
S.Drozdov
3
01-13
02.02.2013
Granting an interest-bearing loan
to CJSC Binnopharm.
Binnopharm
RUB
192,000,000
OJSC Sistema
Finance
D. Zubov
S.Drozdov
C. Baxter
OJSC Sistema
Finance
A.Abugov
OJSC Sistema
Finance
A. Buyanov
A. Goldin
OJSC Sistema
Finance
A.Uzdenov
01-13
02.02.2013
Repayment of the debt owed by
OJSC SMM to Sistema JSFC in
securities
LLC SMM
OJSC Sistema Finance
RUB
1,174,878,034.94
02-13
16.03.2013
Reduction of Sistema's
shareholding in MTS Bank
MTS Bank
MOBILE
TELESYSTEMS B.V.
RUB
5,088,888,248
03-13
20.04.2013
Divestment of 70% of SG-trans
shares in favor of LLC Financial
Alliance
LLC Financial Alliance RUB
12,000,000,000
4
5
6
7
03-13
20.04.2013
Acquiring a stake in the
authorised capital of CJSC
Leader-Invest
CJSC Leader Invest
RUB
550,000,000 and
US$ 130,000,000
US
OJSC Sistema
Finance
S.Drozdov
L.Monosov
8
03-13
20.04.2013
Granting a loan to LLC
Russkaya Zemlya.
Russkaya Zemlya LLC
RUB
100,000,000
OJSC Sistema
Finance
M. Shamolin
A.Abugov
9
03-13
20.04.2013
Surety for the obligations of
Sistema Shyam TeleServices to
the Central Bank of India under
the Guarantee Facility
Agreement
Central Bank Of India
US$ 120,664,892 OJSC Sistema
Finance
A. Buyanov
A.Terebenin
86
1
0
03-13
20.04.2013
Surety for the obligations of
Sistema Shyam TeleServices to
the Central Bank of India under
the Guarantee Facility
Agreement
Central Bank Of India
US$ 66,629,897
OJSC Sistema
Finance
A. Buyanov
A.Terebenin
1
1
1
2
1
3
1
4
1
5
1
6
1
7
03-13
20.04.2013
Granting a loan to LLC Altay
Resort
Altay Resort
RUB
250,000,000
OJSC Sistema
Finance
04-13
25.05.2013
Granting a loan from Sistema
JSFC to OJSC Sistema Finance
OJSC Sistema Finance
up to RUB
9,500,000,000
OJSC Sistema
Finance
04-13
25.05.2013
Granting a loan from Sistema
JSFC to OJSC Sistema Finance
OJSC Sistema Finance
up to RUB
8,000,000,000
OJSC Sistema
Finance
04-13
25.05.2013
Granting a free financial aid
from Sistema JSFC to OJSC
Sistema Finance
OJSC Sistema Finance
RUB
2,500,000,000
OJSC Sistema
Finance
06-13
29.06.2013
Granting an interest-bearing loan
to CJSC Leader Invest
Leader Invest
RUB
667,548,200
OJSC Sistema
Finance
06-13
29.06.2013
Granting an interest-bearing loan
to CJSC Leader Invest
Leader Invest
RUB
1,200,000,000
OJSC Sistema
Finance
06-13
29.06.2012
Acquiring 98% shares in OJSC
United Petrochemical Company
OJSCANK Bashneft
RUB
6,200,000,000
OJSC Sistema
Finance
V. Evtushenkov
A. Goncharuk
A. Buyanov
S.Drozdov
F.Evtushenkov
OJSC Sistema
Finance
A. Buyanov
A.Terebenin
V. Rozanov
OJSC Sistema
Finance
A. Buyanov
A.Terebenin
V. Rozanov
OJSC Sistema
Finance
A. Buyanov
A.Terebenin
V. Rozanov
1
8
06-13
29.06.2013
Sistema's shareholding in the
subsidiary of TCF PROJECTS
RTE LTD.
TCF Projects PTE. LTD Up to US$
300,000,000
Bank Of China Limited,
Shenzhen Branch
US$
12,213,307.45
Bank Of China Limited,
Shenzhen Branch
US$
15,567,249.35
1
9
06-13
29.06.2013
2
0
06-13
29.06.2013
2
1
06-13
29.06.2013
Amendments to the guarantees
provided by Sistema JSFC to the
Bank of China Limited,
Shenzhen Branch to secure all
liabilities of Sistema Shyam
Teleservices Limited under the
credit agreements between
Sistema Shyam Teleservices
Limited and the Bank of China
Limited, Shenzhen Branch to a
guarantee under the English Law
dtd 18 December 2009
Amendments to the guarantees
provided by Sistema JSFC to the
Bank of China Limited,
Shenzhen Branch to secure all
liabilities of Sistema Shyam
Teleservices Limited under the
credit agreements between
Sistema Shyam Teleservices
Limited and the Bank of China
Limited, Shenzhen Branch to a
guarantee under the English Law
dtd 18 December 2009
Amendments to the guarantees
provided by Sistema JSFC to the
Bank of China Limited,
Shenzhen Branch to secure all
liabilities of Sistema Shyam
Bank of China Limited,
Shenzhen Branch.
US$
43,860,463.94
OJSC Sistema
Finance
A. Buyanov
A.Terebenin
V. Rozanov
87
2
2
06-13
29.06.2013
Teleservices Limited under the
credit agreements between
Sistema Shyam Teleservices
Limited and the Bank of China
Limited, Shenzhen Branch to a
guarantee under the English Law
dtd 18 December 2009
Amendments to the guarantees
provided by Sistema JSFC to the
Bank of China Limited,
Shenzhen Branch to secure all
liabilities of Sistema Shyam
Teleservices Limited under the
credit agreements between
Sistema Shyam Teleservices
Limited and the Bank of China
Limited, Shenzhen Branch to a
Guarantee under the Legal Law
dtd 20 August 2009
Acquisition by Sistema JSFC of
ordinary registered shares in
OJSC Sitronics-N
07-13
15.09.2013
2
3
2
4
2
5
07-13
15 Sep 13
Item 5.1.2.5.
Disposal by Sistema JSFC of
ordinary registered shares in
Technopark Sarov
07-13
15.09.2013
Item 5.2.5
Acquisition by Sistema JSFC of
additionally issued ordinary
registered shares of OJSC RTI
Bank of China Limited,
Shenzhen Branch.
US$
69,895,089.45
RTI
RTI
RTI
RUB
1,426,624,664
min. RUB
142,500,000
RUB
5,100,000,000
2
6
07-13
15 Sep 13
Sistema JSFC acquiring a stake
in LLC Bashneft Service Assets
Bashneft
RUB
4,100,000,000
OJSC Sistema
Finance
A. Buyanov
A.Terebenin
V. Rozanov
OJSC Sistema
Finance
S. Boev
A. Buyanov
OJSC Sistema
Finance
S. Boev
A. Buyanov
OJSC Sistema
Finance
S. Boev
A. Buyanov
OJSC Sistema
Finance
V. Evtushenkov
A. Goncharuk
A. Buyanov
S.Drozdov
F.Evtushenkov
V. Rozanov
OJSC Sistema
Finance
A. Buyanov
A.Terebenin
V. Rozanov
Bank of China Limited,
Shenzhen Branch.
Sistema Shyam
TeleServices Ltd.
up to US$
35,000,000.00
LLC DIK
max. RUB
12,000,000,000
OJSC Sistema
Finance
LLC DIK
max. RUB
12,000,000,000
OJSC Sistema
Finance
2
7
07-13
15.09.2013
2
8
07-13
15.09.2013
2
9
07-13
15 Sep 13
Providing a guarantee for the
liabilities of Sistema Shyam
Teleservices Limited to Bank of
China Limited, Shenzhen
Branch
Acquisition of units in the open
mutual bond fund Rezervny and
the open mutual bond fund
Rezervny. Foreign Exchange
Investments:
Acquisition by Sistema JSFC of
units in the open mutual fund
Rezervny from LLC DIK
Acquisition of units in the open
mutual bond fund Rezervny and
the open mutual bond fund
Rezervny. Foreign Exchange
Investments:
Acquisition by Sistema JSFC
from LLC DIK of units in the
open mutual fund Rezervny
Foreign Exchange Investments
3
0
07-13
15 Sep 13
Granting a loan to JSC NPK
NIIDAR
OJSC NIIDAR
RUB
1,000,000,000
OJSC Sistema
Finance
88
3
1
3
2
3
3
3
4
3
5
3
6
3
7
07-13
15 Sep 13
Shareholding in OJSC Intourist
Hotel Group
Intourist
max. RUB
110,000
S. Boev
OJSC Sistema
Finance
07-13
15 Sep 13
Granting a loan to LLC Altay
Resort
Altay Resort
RUB
230,000,000
OJSC Sistema
Finance
07-13
15 Sep 13
Granting a loan to RZ Agro
Holding Ltd
RZ Agro Holding Ltd.
LLC Russkaya Zemlya
up to US$
9,500,000.00
OJSC Sistema
Finance
A.Abugov
A.Uzdenov
07-13
15 Sep 13
Granting a loan to JSC
Navigation Information Systems
NIS
up to RUB
130,000,000
OJSC Sistema
Finance
07-13
15 Sep 13
Granting a loan to JSC
Navigation Information Systems
NIS
up to RUB
571,000,000
OJSC Sistema
Finance
07-13
15 Sep 13
Granting a loan to OJSC
Moscow Business Incubator
OJSC Moscow
Business Incubator
up to RUB
3,000,000,000
08-13
26 Oct 2013
Acquisition by Sistema JSFC of
additionally issued ordinary
registered shares of CJSC
Leader Invest
Leader Invest
up to USD
200,000,000
OJSC Sistema
Finance
L.Monosov
OJSC Sistema
Finance
V. Evtushenkov
S.Drozdov
F.Evtushenkov
L.Monosov
V. Rozanov
3
8
08-13
26 Oct 2013
Granting Security to the Bank of
Moscow for the liabilities of
OJSC RTI Concern under its
irrevocable offer
The Bank of Moscow
RTI Systems Concern
max. RUB
1,500,000,000
OJSC Sistema
Finance
3
9
4
0
4
1
08-13
26 Oct 2013
Granting a repayable interest-
bearing loan to OJSC RTI Estate
RTI Estate
RUB
4,100,000,000
OJSC Sistema
Finance
09-13
14 Dec 2013
Acquisition by Sistema JSFC of
100% equity in CJSC Business
Nedvizhimost
MGTS Nedvizhimost
max. RUB
6,303,000,000
OJSC Sistema
Finance
L.Monosov
09-13
14 Dec 2013
Sistema JSFC obtaining a loan
from CJSC Sistema Invest in the
form of cash as part of
restructuring of Sistema JSFC's
debt to CJSC Sistema Invest
CJSC Sistema Invest
RUB
9,370,000,000
OJSC Sistema
Finance
89
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
Notes
General Meeting of Shareholders
1. Notice of
the
forthcoming General
Meeting of Shareholders (AGM) should
be sent out not later than 30 days before
the day of the Meeting unless a longer
term is provided for by legislation.
Observed
This requirement is incorporated in the Charter
of Sistema JSFC (Section 28.9).
2. The procedure for announcement about
the AGM of shareholders should provide
shareholders with a possibility to properly
prepare for participation in the meeting.
Observed
Announcement about AGM is forwarded to the
shareholders by mail and is published on the
website of Sistema JSFC (www.sistema.ru).
Observed
3. Shareholders should have the opportunity
to study the list of persons entitled to take
part in AGM starting with the data of
AGM announcement and until the closure
of in-praesentia AGM, and in case of
AGM by ballot – until the deadline for
ballot submission.
In line with the Terms of Reference of the
the Shareholders of
General Meeting of
Sistema JSFC (endorsed by Minutes No. 2-10
dtd 30 June 2010 of the General Meeting of
Sistema JSFC), shareholders can obtain the list
of persons entitled to take part in AGM from
the Corporate Secretary of Sistema JSFC.
4. Shareholders should be able to familiarize
information
the
themselves with
(materials) which
to be presented
is
during preparation for the Annual General
Meeting
through
electronic means of communication.
Shareholders,
of
5. Shareholders should be able to add an
item to the agenda of the AGM or
demand convocation of the AGM without
presenting an excerpt from the register of
shareholders if his/her rights for shares
are
of
shareholders, and if his/her rights for
shares are registered in a depo account –
subject to a statement from the depo
account.
recorded
register
the
in
6. Provisions for the registration procedure
internal
of AGM participants
regulations of the joint-stock company.
the
in
Observed
Sistema JSFC publishes full information about
the General Meetings of Shareholders on its
Internet website (www.sistema.ru).
Observed
In line with the Terms of Reference of the
General Meeting of
the Shareholders of
Sistema JSFC (endorsed with Minutes No. 2-
10 dtd 30 June 2010), the General Meeting of
Shareholders of Sistema JSFC, apart from a
bank statement
the
shareholders are not required to present any
other documents to confirm their rights.
from depo account,
Observed
Envisaged in the Terms of Reference for the
General Meeting of Shareholders of Sistema
JSFC.
Work of the Board of Directors
include
1. A JSC's charter should
the
responsibility of the Board of Directors
(BoD)
the financial and
business plan of the JSC on an annual
basis.
to approve
Observed
In accordance with the Company’s Charter, the
responsibilities of the Board of Directors
include: “identifying the priority areas of the
the
Company’s
development
the Company,
approving
the Company’s annual budgets
(financial plans), considering the main focus
of
and
areas
subsidiaries.”
business,
strategy of
development
determining
strategies
90
2. A JSC should have a risk management
Observed
procedure approved by the BoD.
to
set
3. The Board of Directors should have the
to
right
the
qualification and size of remuneration of
the CEO and heads of the Joint-Stock
Company’s main structural divisions.
requirements
Observed
4. A JSC’s Charter should provide for the
right of the BoD to approve the terms of
contracts with the CEO and members of
the Management Board of the JSC.
Observed
Observed
Observed
5. A JSC’s Board of Directors should
include not
independent
directors who meet the requirements of
the Code of Corporate Conduct.
than 3
less
6. A JSC’s BoD does 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.
Annex 3 to the Minutes of Sistema Board of
Directors No. 03-09 of 22 April 2009.
Resolution of Sistema Board of Directors dtd 5
March 2011, Minutes No.03-11.
The responsibilities of Sistema Board of
directors include: appointment of the President
of the Corporation; determining the number of
members of the Management Board, election
of its members; approving the terms of the
the President and with
agreement with
members of the Corporation’s Management
Board; early termination of authority of the
President of the Corporation and members of
the Corporation’s Management Board,
approving
the principles of performance
assessment and the remuneration system, as
well as controlling activity of the Corporation’s
top officials who are directly reporting to the
Corporation’s President.
The Charter of Sistema JSFC states that the
terms of contracts with the President and
members of the Management Board are subject
to approval by the Board of Directors of
Sistema JSFC.
As of 31 December 2013, the Board of
Directors of Sistema JSFC included 8 members
who meet the requirements of the Code of
Corporate Conduct defining
independent
directors: B. Dickie, R. Kocharyan, J. Krecké,
P. Mandelson, R. Munnings, M. Holtzman, S.
Tchuruk, D. Iakobachvili.
Sistema has reviewed this issue and does not
information on such offenses
have any
committed by members of
its Board of
Directors.
7. A JSC's BoD shall not include persons
who are shareholders, general directors
(managers), members of a governance
body or employees of a legal entity which
competes with the Joint-Stock Company.
Observed
According to the information available to the
Corporation, the Board of Directors of Sistema
JSFC does not
include persons being
shareholders, general directors (managers),
members of a governance body or employees
of a legal entity which competes with Sistema
JSFC.
8. JSC’s internal regulations should set out
the requirement on holding BoD meetings
at least once in six weeks.
Observed
According to the Charter of Sistema JSFC,
meetings of the Board of Directors are held as
necessary but at least 2 times per quarter.
9. JSC's BoD meetings are to be held at least
once every six weeks during the JSC's
reporting year.
Observed
9 meetings of the Board of Directors of
Sistema JSFC were held in 2013.
91
10. JSC's internal regulations should provide
for holding BoD
for a procedure
meetings.
Observed
11. JSC’s internal regulations should provide
for the right of BoD members to get
information necessary for performing
their functions from executive bodies and
heads of the Joint-Stock Company’s main
structural divisions.
Observed
The procedure to hold meetings of the Board of
Directors of Sistema JSFC is determined by the
Terms of Reference and Working Procedures
of the Board of Directors of Sistema JSFC.
The right of members of the Board of Directors
to get any information about the activity of
Sistema JSFC is set forth in the Terms of
Reference of the Board of Directors of Sistema
JSFC.
12 A JSC should establish a committee of the
for
responsible
Board of Directors
strategic planning.
Observed
Sistema JSFC has a Strategy Committee of the
Board of Directors.
13. The BoD should have a Committee that
would recommend to the BoD the Auditor
of the JSC and interact with such auditor
and JSC's Auditing Commission.
Observed
Sistema JSFC has an Audit and Finance
Committee of the Board of Directors.
14. A JSC's BoD should have a Committee
responsible for setting the criteria for
selecting candidates to the BoD and
establishing
remuneration
police.
JSC's
the
Observed
Sistema JSFC has a Nomination, Remuneration
and Corporate Governance Committee of the
Board of Directors.
15 The Nomination
and Remuneration
Committee of JSC's BoD should be
chaired by an independent director.
Observed
The Committee is chaired by R. Kocharyan, an
independent member of the Board of Directors.
16. A JSC should have internal regulations
approved by the BoD, which set out a
procedure for forming Committees of the
Board of Directors and their working
procedures.
Observed
17. A JSC’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.
Partially
observed
Observed
18. The issuer’s internal regulations should
provide for obligations of members of
the Board of Directors, members of a
collective executive governance body,
the person who carries out the functions
of the sole executive body, including
JSC's governing organization 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.
Sistema JSFC has approved the Terms of
Reference that set out the responsibilities of the
BoD Committees, a procedure
their
establishment and their working procedures.
for
The quorum of the Board of Directors of
Sistema JSFC is determined according to the
number of BoD members attending
the
their status of an
meeting regardless of
independent, non-executive or
executive
director.
A majority of the members of the Board of
Directors are independent directors.
This requirement is included in the Corporate
Conduct Code, the Terms of Reference of the
Board of Directors and the Management
Board of Sistema JSFC, as well as internal
regulations that set out the obligations of
Sistema
legal
requirements on preventing illegal use of
inside information.
implementing
JSFC
in
92
Executive bodies
1. A JSC should have a Management Board
Observed
(a collective executive body).
2. JSC’s internal regulations should set out
procedures for approval of transactions
outside of the Joint-Stock Company’s
financial and business plan.
Observed
3. Executive bodies should 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
Pursuant to the Charter of Sistema JSFC, the
Corporation has a collective executive body –
the Management Board.
Procedures for approval of transactions outside
of the budget are set out in the budget policy,
the Regulation on contracts approval and the
Regulation on mergers and acquisitions of
Sistema JSFC. All such transactions are pre-
considered by
the Audit and Finance
Committee of the Board of Directors of
Sistema JSFC. When necessary, changes to the
budget are made by a resolution of the Board
of Directors.
information,
to available
According
the
executive bodies of Sistema JSFC do not
include persons being shareholders, directors
general (manager), members of a governing
body or employees of a legal entity which
competes with Sistema JSFC.
record
criminal
4. JSC’s executive bodies should not include
persons with
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.
5. A JSC’s Charter or internal regulations
should prohibit the management company
(the manager) from performing similar
functions in a competing company as well
as from being in any other property
relations with the Joint-Stock Company
apart from the provision of services to the
management company (the manager)
6 JSC’s internal regulations should set out
obligations of executive bodies to refrain
from actions which lead or may lead to a
conflict between their interests and the
interests of the Joint-Stock Company, and
in case of such conflict of an obligation to
of Directors
inform
accordingly.
the Board
Observed
According to the information available to
Sistema JSFC, executive bodies of Sistema
JSFC do not include such persons.
Observed
Set forth in the Charter of Sistema JSFC (s.
34.10).
Observed
Such requirements are set forth in the Terms of
Reference of the Board of Directors, of the
Management Board, of the President, and in
the Policy on contracts with the President and
Members of the Management Board of Sistema
JSFC.
7 A JSC’s charter or internal regulations
should set out the criteria to select the
management company (manager).
Not applicable
is not necessary because
It
is no
managing company and there are no plans to
engage the same to perform the functions of
Sistema JSFC’s sole executive body.
there
8. A JSC's Board of Directors should receive
monthly reports from the executive bodies
on their work.
Observed
The Board of Directors of Sistema JSFC
reviews its financial results on a regular
(quarterly) basis. The Company’s management
weekly compiles a report on the key events and
93
(management
9. Agreements executed by a JSC with the
CEO
organization,
manager) should provide for a liability for
failure to comply with regulations of the
use
inside
information.
confidential
and
of
Observed
submits it to the members of the Board of
Directors of Sistema JSFC.
There is a requirement regarding protection of
confidential information in the agreements with
the President and members of the Management
Board of Sistema JSFC.
Corporate Secretary
Observed
Sistema JSFC has a Corporate Secretary.
whose
1. A JSC should have an official (Corporate
Secretary)
duty
is to ensure compliance of the Joint-Stock
Company’s bodies and officials with
procedural requirements which guarantee
implementation of
legal
interests of the Company’s shareholders
rights and
set
2. JSC's Charter or
out
internal regulations
should
for
procedure
a
appointment (election) of the Corporate
his/her
Secretary
responsibilities.
(CS)
and
Observed
3 JSC's Charter
should
contain
the
requirements to the Corporate Secretary.
Partially
observed
The Board of Directors of Sistema JSFC has
approved the Terms of Reference of the
Corporate Secretary which sets out
the
responsibilities of the Corporate Secretary and
the procedure of his/her appointment.
Such requirements are included in the Terms of
the Corporate Secretary of
Reference of
Sistema JSFC.
Material corporate actions
1. The Joint-Stock Company’s Charter or
internal regulations should
include a
requirement to approve major transactions
prior to their closure.
Partially
observed
2. Mandatory engagement of an independent
appraiser for assessing the market value
of the property which is a subject of JSC's
major transaction.
Observed
Regardless of formal absence of this norm in
the Charter of Sistema JSFC, this requirement
is always observed in practice.
In the above cases the Board of Directors of
Sistema
independent
engages
appraiser.
JSFC
an
Not observed
Since Sistema
shareholder, such actions seem implausible.
JSFC has a controlling
3. Joint-Stock Company’s Charter should
prohibit any actions during acquisition of
large stakes of the Joint-Stock Company’s
shares (merger) which aim to protect the
interests of executive bodies (members of
such bodies) and members of the Board of
Directors of the Joint-Stock Company and
actions which aggravate the shareholders’
position (in particular, prohibiting the
Board of Directors from passing, before
the end of the period allocated for shares
acquisition,
issuing
resolutions
additional shares, securities convertible to
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).
on
94
4. Joint-Stock Company’s charter or internal
regulations should include a requirement
regarding mandatory engagement of an
independent appraiser to determine the
ratio for conversion of shares during
reorganization
Not observed
There are no such provisions in the Charter of
Sistema JSFC, but in case of reorganization, in
accordance with the Terms of Reference of the
Board of Directors, the BoD of Sistema JSFC
will take the decision on defining the ratio for
conversion of shares only
there are
substantial grounds for this, for example, the
opinion of an independent appraiser.
if
Disclosure of Information
1. A JSC should have an internal regulation
approved by the Board of Directors that
determined JSC's rules and approaches to
disclosure of information.
Observed
The Board of Directors of Sistema JSFC
approved a Regulation on the Information
Policy of the Corporation.
2. JSC’s internal documents should contain
a list of information, documents and
materials which should be provided to
shareholders for taking decisions on the
agenda items presented to AGM.
Observed
The list of information to be provided is
included in the Code of Corporate Conduct, the
Regulation on the Information Policy and the
Terms of Reference of the Annual General
Meeting of Shareholders of Sistema JSFC.
3. Disclosure of financial information on the
Observed
Joint-Stock Company’s operations.
4. The use of additional forms and methods
of information disclosure at the JSC.
Observed
Observed
the
5. The issuer should disclose information
received by
remuneration
about
members of
the Board of Directors,
members of the collective executive body
and by the person who performs the
functions of the sole executive body,
including the management company and
the manager.
The RAS financial accounts of Sistema JSFC
are disclosed on an annual basis. The US
GAAP financial accounts of Sistema JSFC are
disclosed on a quarterly basis.
Sistema JSFC has formed an IR Department. It
regularly holds meetings with investors and
organizes road shows. It maintains a corporate
website on the Internet (www.sistema.ru /
www.sistema.com) which contains extensive
information on the operations of Sistema JSFC.
the
information about
remuneration
The
the Board of
received by members of
Directors, members of the collective executive
body and by the person who performs the
is
functions of
disclosed
the
in
quarterly report of Sistema JSFC.
the sole executive body
the Annual Report and
6. A JSC should have a website on the
the
the JSC on such
regularly disclose
Internet and
information about
website.
Observed
The address of the Sistema JSFC website on
/
the
www.sistema.com)
(www.sistema.ru
Internet:
disclosure
requirement
7. JSC’s internal documents should contain
a
of
for
information on JSC’s transactions with
the persons who, in accordance with the
Charter, are considered to be JSC’s top
officials as well as on JSC’s transactions
with companies where JSC’s top officials
directly or indirectly own 20 or more
percent of its authorized capital or on
which such persons may otherwise exert
substantial influence.
Partially
observed
Observed according to the legal requirements
to related party transactions.
95
8 JSC's internal documents should contain a
requirement to disclose information about
all the transactions that may have an
impact on the market value of JSC's
shares.
Observed
Observed
9. A JSC should have an internal regulation
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
such
information is not publicly available and
when its disclosure may exert substantial
influence on the market value of the Joint-
Stock Company’s
shares and other
securities.
them when
Observed according to the requirements of the
Russian legislation on security markets and the
the UK security market
requirements of
regulator. Disclosure principles are set out in
the Regulations on the Information Policy of
Sistema JSFC.
The Board of Directors of the Corporation has
approved a Regulation on the Information
Policy of Sistema JSFC (Minutes No. 04-10
dtd 21 April 2010).
Control of financial and business activities
1. A JSC should have
internal control
procedures approved by the Board of
Directors.
Observed
2. A JSC should have a special division
the
which ensures compliance with
internal control procedures (control and
audit function).
3. JSC’s internal regulations should contain
a requirement for the Board of Directors
the
to
and
structure
determine
composition of
its control and audit
function.
Observed
Partially
observed
The internal control procedures are recorded in
all the internal regulations of Sistema JSFC
subject to approval by the Board of Directors
and the President of the Corporation.
Sistema JSFC has formed an Internal Control
and Audit Department that functionally reports
to the Board of Directors of Sistema JSFC.
Head of
the Internal Control and Audit
Department is approved subject to approval by
the Audit, Finance and Risks Committee and
the Ethics and Control Committee of the Board
of Directors of Sistema.
4. A JSC’s control and audit function should
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.
5. Control and audit functions should not
include persons being
shareholders,
general directors (managers), members of
a governing body or employees of a legal
entity which competes with the Joint-
Stock Company.
6. JSC’s internal regulations should set out a
deadline for submission to the control and
audit function 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.
Observed
The Internal Control and Audit Department
does not include such persons.
Observed
The Internal Control and Audit Department
does not include such persons.
Observed
The employees of the Internal Control and
Audit Department of Sistema JSFC have a
right to request and obtain any information
about financial and business transactions and to
set
the deadlines for provision of such
information at their own discretion.
96
7. JSC’s
internal
regulations
should
determine the responsibility of the control
and audit function to inform the Audit
committee, and
is not
available – the JSC’s Board of Directors,
about the identified irregularities.
latter
the
if
Observed
8. A JSC should have requirements to have
the control and audit service perform
preliminary assessment of the feasibility
of transactions that were not included in
the JSC's financial and business plans.
Observed
9. A JSC should have an internal regulation
that determines the procedure for an
auditing commission to audit the JSC’s
financial and business activities.
Observed
10. The Audit Committee of the Board of
Directors should assess
the auditors'
opinion prior to its presentation to the
shareholders at AGM.
Observed
In line with the Terms of Reference of the
Audit, Finance and Risks Committee of the
Board of Directors of Sistema JSFC, in order to
support development of the internal audit
function and to control its performance the
Committee reviews the results achieved by the
Internal Control and Audit Department on a
regular basis.
In line with the Terms of Reference of the
Ethics and Control Committee of the Board of
Directors of Sistema JSFC, the Committee's
responsibilities include reviewing the findings
of the comprehensive audits of the Corporation
conducted by the Internal Control and audit
Department, reviewing the remedial action
plan, and controlling its execution.
Feasibility assessment of the transactions that
were not included in the Corporation's financial
and business plans is performed in accordance
with the Code of Tender and Procurement
Procedures. Procurement commissions should
include employees from the Internal Control
and Audit Department.
The Board of Directors and the General
Meeting of Shareholders of the Corporation
have approved the Terms of Reference of the
Auditing Commission of Sistema
JSFC
(Minutes No. 2-04 dtd 01 September 2004).
Pursuant to the Terms of Reference of the
Audit, Finance and Risks Committee of the
in
Board of Directors of Sistema JSFC,
cooperation with
the
the
Corporation, the Audit and Finance Committee
analyses and appraises the work of external
auditors and considers their comments.
auditors of
1. A JSC should have an internal regulation
approved by the Board of Directors that
the BoD would follow when making
recommendations regarding the amount
of dividends.
Dividends
Observed
Sistema JSFC has approved the Policy on the
Dividend Policy.
97
9.8. Information on the Company's compliance with the key requirements of the UK
Corporate Governance Code
Provisions of the Code
Observed / not
observed
A. GOVERNANCE
A.1. Governance bodies
Note
А.1.1. Work of the Board of Directors (BoD)
should be organised efficiently, which implies
holding a sufficient number of regular BoD
meetings.
Observed
The Board of Directors of Sistema JSFC
meets at least 8 times a year, which allows
reviewing and taking decisions on issues
within its scope of authority.
The scope of authority of the Board of
Directors should be formally set out.
Observed
report should
The corporation's annual
include a description of the principles of work
of the BoD, including general description of
decisions made by the Board of Directors and
the Management Board.
Observed
А.1.2. The corporation's annual report should
identify the chairman, the deputy chairmen,
the president, the senior independent director
and the chairmen and members of board
committees.
Observed
The annual report should include information
on the number of meetings of the BoD and
the BoD Committees, and on their attendance
by Board members.
Observed
А.1.3. The corporation should ensure relevant
indemnification of BoD members.
Observed
The scope of authority of the Board of
Directors is set out in the Charter of
Sistema JSFC (Clause 32 of the Charter).
The 2013 Annual Report of Sistema JSFC
includes information on procedures of the
Board of Directors, including a report on
key items decisions on which were made by
the Board of Directors and the Management
Board (p. 6.2, 6.4).
The 2013 Annual Report of Sistema JSFC
includes information on election of V.
Evtushenkov Chairman of the Board of
Directors of Sistema JSFC, and also on
elected deputy chairmen of the Board.
Besides, the 2013 Annual Report includes
information on the President and also
Chairmen and Deputy Chairmen of the
BoD Committees of Sistema JSFC.
The Corporation's statutory documents do
not provide for the position of a senior
independent director.
The 2013 Annual Report of Sistema JSFC
includes information on the number of
meetings of the Board of Directors and
Board Committees, as well as
their
attendance by members (p. 6.2).
According to the Terms of Reference of the
Board of Directors, the Company insures
liability of the Board members from legal
actions or claims in relation to business
decisions or other actions taken in capacity
of a member of the Board of Director of
Sistema JSFC or
its affiliates (D&O
Policy).
Additionally, members of the Board of
Indemnification
Directors have signed
Agreements.
A.2. Division of powers between the Chairman of the Board of Directors and the President
А.2.1. The same person cannot at the same
time hold the position of the Chairman of the
Board of Directors and the President. The
Observed
The Russian legislation and the Charter of
that a person
Sistema JSFC envisage
the sole
performing
the functions of
98
division of powers between
the board
chairman and the president should be clearly
established and set out in the Corporation's
internal documents approved by the BoD.
executive body of Sistema JSFC cannot
simultaneously hold the position of the
Chairman of the Board of Directors of
Sistema JSFC (Clause 31.3 of the Charter).
The powers of the Board Chairman, Board
Members and the President are clearly
divided in the Charter of Sistema JSFC.
A.3. Chairman of the Board of Directors
А.3.1. A candidate to the position of board
chairman should meet
independence
criteria specified in Section B.1.1.
the
Not observed
Observed
the president
The president should not perform
the
functions of the board chairman of the same
is
company. If, however,
nominated board chairman after all, the board
should discuss his/her nomination with the
corporation's main shareholders in advance,
providing sufficient grounds for the election,
and should disclose this information in the
next annual report.
is
The Corporation's main shareholder V.
Evtushenkov, who
non-executive
member of the Board of Directors, but does
not meet the independence criteria, was
elected Chairman of the Board of Directors
of Sistema JSFC.
The Russian legislation and the Charter of
Sistema JSFC envisage
that a person
the sole
the functions of
performing
executive body of Sistema JSFC cannot
simultaneously hold the position of the
Chairman of the Board of Directors of
Sistema JSFC.
The powers of the Board Chairman and the
President are clearly divided in the Charter
of Sistema JSFC.
А.4. Non-executive directors
Partially
observed
directors meeting
to be
А.4.1. The board should appoint one of the
non-executive
the
the senior
independence criteria
independent director. The senior independent
director should be available to shareholders
for resolving issues that have not been
resolved through contacting the chairman,
president or other executive directors.
А.4.2. From time to time the board chairman
should hold meetings with non-executive
the executive directors
directors without
being present.
The corporation's non-executive directors
should hold a meeting chaired by the senior
the board
independent director without
chairman present at
least once a year,
including for the purpose of discussing the
chairman's performance.
Not applicable
А.4.3. If board members have dissenting
opinions about decisions taken by the board,
they should ensure that their opinions are
recorded in the minutes of the meeting.
Observed
Formal meetings of the Board of Directors
of Sistema JSFC without the executive
directors' presence are not held, but there
are regular informal meetings of the Board
Chairman with independent directors.
The Company's statutory documents do not
the position of a senior
provide for
independent director.
Prior to every meeting of the Board of
Directors of Sistema JSFC, independent
members of the Board hold an informal
meeting in form of a business dinner, which
is also attended by the management of the
Corporation, to discuss urgent questions of
managing the Company and organising the
work of the BoD.
Performance of the Board of Directors'
Chairman is assessed during the assessment
the Board of
of
Directors as a whole.
the performance of
The entire course of the meeting of the
Board of Directors is recorded in writing in
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 Procedures of the Board
of Directors of Sistema JSFC, approved by
99
to
to express (attach
the Board on 27.10.2007, directors have an
opportunity
the
their
minutes of a Board meeting)
dissenting opinion within 24 hours after the
meeting.
All Board members of Sistema JSFC are
provided with a copy of minutes of every
Board meeting.
B. EFFICIENCY
В.1. Board of Directors membership
В.1.1. The Corporation's annual report should
include information on each non-executive
director that meets the independence criteria.
The BoD should determine whether a director
is overall independent in decision-making and
decide whether there are certain relations or
circumstances that can to a larger or lesser
degree influence his/her decisions.
The BoD should justify its decision on
awarding the status of an independent director
if there are relations or circumstances that
could influence this status.1
В.1.2. In addition to the board chairman, at
least half of the members on boards of large
companies from the FTSE 350 list should be
non-executive
the
independence criteria.
directors meeting
Observed
Information on each non-executive director
that meets the independence criteria is
included in the 2013 Annual Report of
Sistema JSFC (p.6.2.).
There are 8 directors among members of
the Board of Directors that meet the
independence criteria:
B. Dickie, R. Kocharyan, J. Krecké, P.
Mandelson, R. Munnings, M. Holtzman, S.
Tchuruk, D. Iakobachvili.
Observed
Sistema JSFC is not included in FTSE 350,
however, 8 of its Board Members, or over
60% (apart from the Board Chairman),
meet the independence criteria.
В.2. Appointment of Board Members
В.2.1. The BoD should have a nomination
committee one of the tasks of which is to
accompany the process of nominating board
members and developing recommendations
on the matter for the BoD.
Observed
on
the
The Nomination, Remuneration
and
Corporate Governance Committee of
Sistema JSFC has been set up and is active.
Its scope of authority is defined by the
Regulation
Nomination,
Remuneration and Corporate Governance
Committee of Sistema JSFC approved on
29 June 2013 (minutes No. 06-13). One of
the Committee's main
is
preliminary consideration of nominees to
the Corporation's top management positions
to be approved by the Board of Directors of
JSFC. The Committee also
Sistema
considers candidates
the Board of
Directors of Sistema JSFC as part of
preparation for the Annual General Meeting
of shareholders.
functions
to
the board
A majority of members of
nomination committee
should be non-
executive directors meeting the independence
Observed
Half of the members of the Nomination,
Remuneration and Corporate Governance
Committee of the Board of Directors of
1 Including cases when a director: a) works or worked at the company or the group of companies in the last five years; b) has or had in the last
three years material business relations with the company directly as a partner, shareholder, director or top manager of a company that has such
relations with the company; c) receives or received additional remuneration from the company apart from the remuneration for performing the
functions of a board member, participates in the company's option plan, receives performance-based bonuses from the company or participates in
its retirement programme; d) is a close relative of a consultant, board member or top manager of the company; e) is simultaneously a board
member at an affiliated company or has material relations with other board members through participation in other companies or bodies; f)
represents interests of a big shareholder; or g) has been board member for 9 or more years since his/her first appointment.
100
criteria.
The board nomination committee should be
chaired by the board chairman or non-
executive director of the company meeting
the independence criteria; however, the board
chairman should not chair a meeting of the
nomination committee when a nominee to the
board chairman is considered.
В.2.2. The board nomination committee
should determine the combination of skills
and competencies
to
efficiently perform its functions and, based on
this
qualification
requirements for candidates to the position of
a board member.
the BoD needs
assessment,
prepare
Observed
Partially
observed
Sistema JSFC are independent directors (R.
Kocharyan
(Chairman), J. Krecke, R.
Munnings).
The Nomination, Remuneration
and
Corporate Governance Committee of the
Board of Directors of Sistema JSFC is
independent non-executive director R.
Kocharyan.
Candidates to the Board of Directors are
nominated by shareholders of Sistema
JSFC.
Requirements to candidates to the position
of a board member are set out in the Terms
of Reference for the Board of Directors of
Sistema JSFC. A candidate should have
substantial professional experience, should
not be previously convicted of economic
crimes, should not be banned from holding
executive positions, etc. A candidate should
not be member of governance and audit
bodies of
are
competitors of Sistema JSFC or be an
affiliate of such companies.
The Nomination, Remuneration
and
Corporate Governance Committee of the
Board of Directors of Sistema JSFC
considers candidates to be elected to the
Board of Directors when preparing for the
Annual General Meeting of shareholders.
companies
that
the
В.2.3. Non-executive directors should be
elected for specified terms and thereafter may
be re-elected or dismissed from office in
accordance with
corporate
legislation.
applicable
Observed
The decision on re-election of a non-
executive director for any term beyond six
years should be based on through review of
his/her performance and take into account the
need the gradually renew the membership of
the Board.
Not applicable
According to the Russian legislation, Board
Members are elected at the Annual General
Meeting of shareholders for a 1-year term
(for the period until the next Annual
General Meeting of shareholders) and have
a right to be re-elected for an unlimited
number of times.
According to the Russian legislation, Board
Members are elected at the Annual General
Meeting of shareholders for a 1-year term
(for the period until the next Annual
General Meeting of shareholders) and have
a right to be re-elected for an unlimited
number of times.
Every year, when new members of the
Board are elected, 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 the respective Committees, and it
is up
to make
the shareholders
conclusions about the performance of the
Board and its individual members.
to
В.2.4. A separate section of the annual report
should describe the powers and scope of
authority of the nomination committee, the
Partially
observed
The 2013 Annual Report of Sistema JSFC
(p.6.2) includes information on the powers
and scope of authority of the Nomination,
101
procedures and key items considered by it,
including the process it has used to nominate
candidates to the board.
If the nomination committee has not used the
services of an external consultant or has not
advertised its vacancies, the annual report
the
should
procedure used to select candidates to the
board.
If the nomination committee has used the
services of an external recruiting agency, it is
necessary to specify which one and whether it
is linked to the Corporation in any way.
the description of
include
A separate section of the annual report should
include confirmation of the principle of a
balanced board being applied.
Partially
observed
A separate section of the annual report should
for
include goals
the
nomination committee and
their progress
status.
and objectives
Observed
powers
Remuneration and Corporate Governance
Committee of the Board of Directors and
on key items considered by the Committee.
At the same time, the Committee does not
have
nominate
candidates to the Board of Directors of the
Corporation, since this is the shareholders'
scope of authority.
In 2013, the Committee did not use the
services of an external consultant.
directly
to
The Board of Directors of Sistema JSFC
has a balance of executive (1)1, non-
(8)3
executive
directors.
independent
(4)2 and
The Board Committees section (p. 6.2)
includes the description of the goals and
objectives
Nomination,
Remuneration and Corporate Governance
Committee and topics considered at its
meetings.
the
of
В.3. Appointments
В.3.1. Prior to electing the Chairman of the
Board, the Nominations Committee should
prepare a detailed description of the position
including information on the amount of time
that will be required for fulfilling
the
responsibilities of the Chairman, taking into
account availability of the Chairman in crisis
situations.
Information on all other positions held by the
Board Chairman in other companies should
be disclosed to the Board of Directors and
included in the annual report. Information on
all subsequent changes to such data should be
reported to the Board as such changes happen
and should be included in the next annual
report.
the
Information on
В.3.2.
terms and
conditions of appointment of non-executive
directors should be made available to any
interested parties at the Corporation's office
and during the Annual General Meeting of
shareholders (AGM).
Observed
Observed
Observed
Type of work and tasks of the Board
Chairman are set out in the Terms of
Reference of the Board of Directors of
Sistema JSFC.
The Chairman of the Board of Directors of
Sistema JSFC is elected by all members of
the Board of Directors at the first meeting
the Annual General Meeting of
after
shareholders of Sistema JSFC.
Information on all positions held by the
Chairman of Sistema JSFC's Board of
Directors was disclosed and included in the
2013 annual report. The Chairman of
Sistema
JSFC's Board of Directors
V. Evtushenkov does not hold the position
of a Chairman in any other significant
companies except Sistema JSFC.
Information on the terms and conditions of
appointment of the non-executive directors
of the Board is available on the corporate
web site of Sistema JSFC (www.sistema.ru
/ www.sistema.com) and at the office of
Sistema JSFC, the information is also
available to the participants of the AGM of
Sistema JSFC in the course of the meeting.
According to the Russian legislation all
Board members are elected for 1 year and
1 M. Shamolin
2 V. Evtushenkov, A. Goncharuk, S. Boev, D. Zubov
3 B. Dickie, R. Kocharyan, J. Krecké, P. Mandelson, R. Munnings, M. Holtzman, S. Tchuruk, D. Iakobachvili
102
indicate
The notice of nomination of a Board member
should
time
the
commitment. Elected Board members of the
Corporation should provide guarantees that
they will have sufficient time to fulfill their
responsibilities.
expected
Partially
observed
have a right to be re-elected for an
unlimited number of times.
Before nomination all candidates
for
election to the Board familiarise themselves
with the work plan of the Board of
Directors of Sistema JSFC for the coming
year, the rights and obligations of the Board
members and their potential inclusion in the
Board's committees.
induction procedures, a
As part of
Corporate Secretary of the Corporation
explains to every newly elected member of
the Board of Sistema JSFC the procedures
of the Board and the approximate amount
of time required for their execution. Before
the election, all candidates sign a document
confirming their consent to the nomination
that includes, inter alia, consent to follow
internal
all
regulations of Sistema JSFC applicable to
the Board members.
Attendance of
the Board meetings of
Sistema JSFC and involvement of the
Board members in the discussion of agenda
items is recorded and analysed in order to
subsequently include this information in the
report on
the quality of corporate
governance.
requirements of
the
the
Observed
Information on all the positions held by the
non-executive Board members
in other
companies (with indication of the respective
time commitment) should be presented to the
BoD. Information on all subsequent changes
in this data should be available when such
changes happen.
В.3.3. Executive directors should not have
either the status of non-executive directors or
hold the position of Board Chairman in more
than one major FTSE 100 companies.
Observed
The biographies of candidates to the Board
of Directors,
information on
including
positions held in other organisations, are
included in the materials for the Annual
General Meeting of shareholders, and
information on
incumbent Board
the
members of Sistema JSFC is included in
the annual report.
All candidates for election to the Board of
Directors
candidate
complete
questionnaires thus providing the Company
with necessary information.
The obligation to disclose any changes in
the information provided by the members
of the Board of Directors is set out in the
the Board of
Terms of Reference of
Directors of Sistema JSFC.
As of 31 December 2013 the Board of
Directors of Sistema JSFC consists of 13
members, 1 of which holds the position of
executive director (M. Shamolin)
M. Shamolin holds the position of the
President of the Corporation and is also a
member of the Board of Directors of a
number of Sistema's subsidiaries not
included in the FTSE 100 list.
Membership in the boards of directors of
the subsidiaries of Sistema JSFC Group is
one of
the main duties of executive
directors, therefore, this does not create any
the
conflict of
for work at
interest
103
Corporation.
В.4. Professional development
В.4.1. The Chairman of the Board of Directors
is responsible for organising a professional
and high-quality induction procedure for new
Board members. As part of this procedure
directors should be granted the opportunity to
meet
the
Corporation.
shareholders
the main
of
Observed
and
Every candidate for election to the Board of
Directors of Sistema JSFC meets the Board
the
Chairman, Board members
management before
the election and
receives information on the work of the
Board of Directors, his/her role in the
Board of Directors and on the Company's
business.
The Corporate Secretary of Sistema JSFC
provides consultations to new members of
and
the Board on
organisation of the work of the Board and
its committees and provides all
the
necessary regulatory documents describing
the company's strategy, business, markets
of presence and financial reports.
The induction procedure for new Board
members outlined above is not formalised.
the procedures
В.4.2. The Chairman of the Board of Directors
should discuss and agree with Board members
their individual training and development
needs.
Observed
The members of the Board of Directors of
Sistema JSFC, subject to the approval of
the
the Board Chairman,
at
Corporation
international
conferences, professional
symposiums,
workshops etc.
represent
various
В.5. Informational support
В.5.1. The Board of Directors shall provide
its members with the opportunity to receive
independent professional advice at
the
expense of the company when fulfilling their
professional duties.
Observed
В.5.2. If needed, all board members should
have access to the advice and services of the
Corporate Secretary, who is responsible to the
board for ensuring that board procedures are
complied with.
Observed
The Terms of Reference of the Board of
Directors of Sistema JSFC give Board
members the right to engage external
independent experts for assessing materials
and decisions on any agenda items. When
needed, such
is
organised by the Secretariat of the Board of
Directors.
independent appraisal
the Board of Directors,
In accordance with the Terms of Reference
of the Corporate Secretary of Sistema
JSFC, one of the functions of the Corporate
Secretary is to provide support to the work
including:
of
providing Board members with requested
information and documents regarding the
Company's business operations, distributing
among Board members the materials for the
Board meetings, facilitating the work of the
Board Committees.
В.6. Performance appraisal
В.6.1. The Annual Report shall contain
information on procedures for assessing the
performance of the Board of Directors, its
Committees and each director.
Observed
The procedure for assessing the work of the
Board of Directors of Sistema JSFC is set
out in cl. 6.5. of the Annual Report of the
Company for 2009. The Board of Directors'
self-appraisal procedure was introduced in
2009. Board members fill in questionnaires
giving their opinion on the organisation of
104
of
the Board
work
of Directors:
membership and structure of the Board,
procedures and organisation of the work of
the Board, its Committees, and the quality
of decisions taken by the Board in different
functional areas. The Secretariat of the
Board of Directors conducts an annual
survey of the Board members, analyses the
results and submits the final analysis to the
Nomination, Remuneration and Corporate
the Board
Governance Committee,
Chairman and the members of the Board of
Directors of Sistema JSFC.
В.6.2. At least every 3 years the work of the
Board of Directors of a company included in
the 350 FTSE list should be assessed by an
independent external consultant specified in
the annual report.
When hiring an external consultant it is
necessary to provide information on this
consultant and to make a statement on
whether this consultant has any connections
with the Company.
В.6.3. Non-executive directors, under the
guidance of a senior independent director,
should perform the assessment of the Board
Chairman taking into account the opinions of
executive directors.
Not applicable
Sistema JSFC is not included in the FTSE
350 list.
Not applicable
The Company's statutory documents do not
provide for
the position of a senior
independent director.
Performance assessment of the Board of
Directors' Chairman is carried out during
the assessment of the performance of the
Board of Directors as a whole.
В.7.1. All Board candidates should be
approved at the respective AGM. Thereafter,
Board members shall be re-elected at least
once every three years.
В.7. Re-election.
Observed
A non-executive director may hold his/her
position for more than 9 years on condition of
annual re-election. If an executive director
serves on the Board for more than nine years,
his/her status should not be defined by the
Board as independent.
Observed
include biographical data of
Information about
the Board candidates
the
should
candidates and/or any other information to
enable the shareholders to take an informed
decision on electing or re-electing the Board
Observed
According to the Russian legislation, Board
members are elected at the Annual General
Meeting of shareholders for a 1-year term
(for the period until the next Annual
General Meeting of shareholders) and have
a right to be re-elected for an unlimited
number of times.
According to the Russian legislation, Board
members are elected at the Annual General
Meeting of shareholders for a 1-year term
(for the period until the next Annual
General Meeting of shareholders) and have
a right to be re-elected for an unlimited
number of times.
The Terms of Reference of the Board of
Directors define independence criteria for
the Board members, according to which a
person that has served as a Board member
for more than 9 years cannot be considered
independent.
Information on
the Board candidates
including their biographies is provided
among other materials for the Annual
General Meeting of shareholders, which
elects members of the Board of Directors of
105
members.
the Company.
В.7.2. The Board of Directors should provide
the shareholders with a rationale for electing a
candidate to the position of a non-executive
member of
the Corporation's Board of
Directors.
Partially
observed
In the event of reelecting a non-executive
director for a new term, the Board Chairman
should provide
shareholders with
sufficient reasons for re-election, including
the performance assessment results of the
respective director.
the
Partially
observed
Shareholders
shall be provided with
biographical details and information on the
professional qualities of candidates to be
able to make independent conclusions on
their competence and on the advisability of
electing them to the Board.
Every year, when new members of the
Board are elected, 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
respective Committees.
work of
Shareholders take independent decisions on
the quality of work of the Board of
Directors and their members.
the
С. REPORTING AND AUDIT
C.1. Financial statements
Partially
observed
should
contain
report
С.1.1. Annual
statements of the Board members confirming
the annual report and the financial
that
the company are reliable,
statements of
the
and
balanced
information required by the shareholders for
assessing the results of the Company, its
business model and strategy.
include
clear,
and
to
report does not contain
the
Annual
respective statement of the Board members
of Sistema JSFC, however, this provision is
complied with due
the preliminary
approval of the annual report and the
financial statements of the Corporation at
the meetings of the Board of Directors and
the Audit, Finance and Risk Committee of
Sistema JSFC's Board, with the results of
such meeting being
the
recorded
respective minutes of meetings.
in
Annual report should contain an auditor
statement on the auditor's obligations with
respect to auditing financial statements.
Observed
The respective statement is contained in
the auditor's opinion which is an integral
part of the annual financial statements.
С.1.2. Annual report should contain
the
explanations of the Board members on the
creation or preservation of value for the
company in the long-term (business model)
and a strategy for achieving the goals of the
company.
Observed
Annual report contains the description of
the Corporation's development strategy.
С.1.3. Annual and semi-annual reports should
contain a statement of the Board members on
the continuity of the company's operations
with justified assumptions or qualifications, if
necessary.
Partially
observed
and
semi-annual
Annual
financial
statements do not contain the respective
statements of the Board of Directors of
Sistema JSFC, however, this provision is
complied with due to including, when
necessary, the respective qualifications in
the opinion/report of an
independent
auditor, which is an integral part of the
annual
financial
statements approved by the Audit, Finance
and Risk Committee.
semi-annual
and
С.2.1. The Board should, at least annually,
Observed
The Board of Directors annually reviews
С.2. Risk management and internal control
106
conduct a review of the effectiveness of the
Corporation's risk management and internal
control system and should report to the
shareholders that they have done so. This
analysis should encompass all
types of
control, including financial and operational
control and the monitoring of compliance
with the regulatory requirements.
the report from the Internal Control and
Audit Department of the Corporation on the
results of the year with analysis of the
existing control systems and
identified
deficiencies.
A report from the Auditing Commission is
attached to the materials of every Annual
General Meeting of Sistema JSFC.
C.3. Audit Committee and Auditors
С.3.1. The Board should form an Audit
Committee consisting of at
three
independent non-executive directors (for large
companies) meeting independence criteria.
At least one member of the audit committee
should have relevant financial experience.
least
Partially
observed
Observed in all
material aspects
the fairness of
С.3.2. The main functions of
the audit
committee should be set out in the Terms of
Reference of the Committee and should
include:
the company's
-audit of
financial statements and any public statements
on the financial indicators of the company,
review of any material judgment on the
company's financial statements;
-analysis of the company's internal financial
control system and, provided that this issue is
not expressly within the remit of a specific
risk committee of the Board consisting of
independent members or of the Board of
Directors itself, analysis of the internal control
and risk management systems of the company;
- control and analysis of the efficiency of the
internal audit function of the company;
- presenting recommendations for the Board
of Directors for their further submittal to the
AGM with respect to the appointment, re-
appointment of termination of the powers of
external auditors, and approval of
the
remuneration and the terms of appointment of
an external auditor;
- analysis and monitoring of the independence
and impartiality of the external auditor, and
the efficiency of the audit process taking into
account
respective professional and
the
regulatory requirements;
-development and implementation of a policy
for hiring an external auditor to provide
consulting services taking into consideration
ethical recommendations on the provision of
such services by an external audit company;
and submitting to the Board of Directors
the
reports
requiring
outlining
specific actions, and
improvements or
areas
The Audit, Finance and Risk Committee of
Sistema JSFC has been established and is
active. The Committee consists of 5
members of the Board of Directors, 4 of
independence criteria: P.
which meet
Mandelson, R. Munnings, M. Holtzman,
D. Iakobachvili.
The Chairman of the Audit, Finance and
Risk Committee of the Board of Directors
of Sistema JSFC is R. Munnings, who has
extensive experience in the area of financial
audit.
The responsibilities of the Audit, Finance
and Risk Committee of the Board of
Directors of Sistema are set out in the
Terms of Reference of the Committee
approved by the Corporation's Board of
Directors on 29 June 2013.
The Terms of Reference of the Audit,
Finance and Risk Committee meets the
recommendations of section С.3.2 of the
UK Corporate Governance Code.
107
presenting recommendations on such actions;
and
- presenting reports on the performance of the
respective responsibilities to the Board.
С.3.3. A company should have Terms of
Reference of the audit committee setting out
the main powers and responsibilities delegated
to the committee by the Board of Directors.
С.3.4. Following a request from the Board the
audit committee should provide an opinion on
whether the annual report and the financial
statements of
the company are reliable,
balanced and clear, and whether they include
the information required by the shareholders
for assessing the results of the Company, its
business model and strategy.
to
C.3.5. The audit committee should analyse the
procedures available
the company's
employees for anonymously expressing their
concern about any potential violations in the
area of financial reporting and other areas.
The task of the Audit Committee is to ensure
the
respective
procedures to conduct a proper independent
investigation into such violations and take
measures aimed at their elimination.
implementation
the
of
C.3.6. The audit committee should monitor
and analyse the efficiency of the internal audit
procedures.
In the event of absence of internal audit
function the audit committee should perform
an annual analysis of the need to create an
internal audit function and to submit the
respective recommendations to the Board of
Directors, while the reasons of the absence of
such a function should be specified in writing
in the respective section of the annual report.
the
provision
appointment,
is directly
C.3.7. The audit committee
of
for
responsible
recommendations
re-
on
appointment and termination of the powers of
external auditors. Companies included in the
FTSE 350 list should hold a tender for the
provision of external audit services at least
every 10 years. If the Board does not accept
the recommendations of the audit committee,
the committee should make sure that the
annual report and other documents containing
recommendations
re-
appointing an auditor, includes a rationale for
the recommendations given and states reasons
behind the decision taken by the Board.
for appointing or
Observed
Observed
Observed
Observed
Observed
The responsibilities of the Audit, Finance
and Risk Committee of Sistema JSFC were
set out in the Terms of Reference of the
Committee.
the annual
This requirement is complied with by
reviewing
the
financial statements of Sistema JSFC in
terms of their completeness and reliability
at the Audit, Finance and Risk Committee
meetings.
report and
The Audit, Finance and Risk Committee of
Sistema JSFC reviews issues related to the
operation of the hot line used by the
Company's employees and other interested
parties for raising concerns about any
potential
financial malpractice on a
confidential basis.
the main
functions of
In accordance with the Terms of Reference
of the Audit, Finance and Risk Committee
of the Board of Directors of Sistema JSFC,
one of
this
Committee is to oversee the internal audit
system of the Company as implemented by
the Internal Control and Audit Department.
The Audit and Finance Committee,
together with the head of the above-
mentioned Department and the Company's
implemented
analyses
management,
activities aimed at removing deficiencies in
internal business processes.
According to the Terms of Reference of the
Audit, Finance and Risk Committee of the
Company's Board of Directors,
the
Committee analyses the work of external
auditors and makes recommendations to the
Board of Directors of the Corporation on
the appointment and re-appointment of
external auditors or rejection of
their
services.
C.3.8. A separate section of the annual report
should be devoted to the performance of
Observed
The 2013 Annual Report of Sistema JSFC
includes information on the policy for
108
preserving
independence of the Company's auditor.
impartiality
the
and
responsibilities by the committee. The report
should include:
-a description of the material issues reviewed
by the committee with respect to financial
reporting and the way in which the issues
were resolved;
-a description of the process for assessing the
efficiency of external audit and the principles
of appointing and re-appointing an external
auditor, as well as information on the duration
of the contract with the current auditor and the
dates of the most recent tender;
- if the external auditor provides additional
the company –
to
consulting
services
explanation of how
impartiality and
the
independence of the auditor were ensured;
D. REMUNERATION
D.1. Level and structure of remuneration
D.1.1. When developing a remuneration
system for executive Board members the
remuneration committee should be guided by
Schedule A of the UK Corporate Governance
Code.
Observed
D.1.2. If the internal regulations of a company
allow an executive director to hold non-
executive directorships in other companies,
remuneration of such
the data on
executive director in another company should
be included in the respective report.
the
Partially
observed
in
the
The sections of Schedule A of the UK
Corporate Governance Code are in general
remuneration system
reflected
developed for the Corporation's Board of
Directors' members (including executive
directors).
Comments on specific sections of Schedule
A are provided below.
The managers of the Corporation elected to
the boards of directors of subsidiaries do
not receive any additional remuneration for
serving on such boards. The managers of
the Corporation or executive directors
elected to the boards of directors of other
companies retain their remuneration for
serving on the boards of directors of such
companies in accordance with the existing
internal regulations of such companies.
The
of
size
remuneration received by the employees of
Sistema JSFC for serving on the boards of
directors of other companies
is not
disclosed.
information
the
on
the
their duties and
stock options or other
D.1.3. The size of remuneration payable to
non-executive directors should depend, inter
alia, on
level of
responsibility.
Non-executive directors should not be granted
any
types of
remuneration linked to performance. If,
exceptionally, such options are granted,
shareholder approval should be sought in
advance. A member of
the Board who
acquired shares by exercising an option shall
hold them until at least one year after he/she
leaves the Board.
If a non-executive director receives a stock
option, it may mean that he/she does not meet
independence criteria any longer (see section
В.1.1.).
Observed
The Board members of Sistema JSFC
receive additional remuneration for serving
as Chairman of the Board of Directors,
Deputy Chairman and Chairman of the
Board Committee. Special remuneration is
also paid for attending the meetings of the
Board and its Committees.
Stock options are not granted for serving on
the Board of Directors.
109
D.1.4. The Board's remuneration committee
should define a methodology for determining
the remuneration of a director in the event of
early contract termination. The amount of
remuneration should be reduced on a pro rata
basis.
Observed
D.1.5. The term of directors' powers specified
in a contract or an appointment notice should
not exceed one year. If for some reasons new
term of
directors are offered a
later
employment,
reduced to a normal level.
term should be
longer
this
Observed
D.2.1. The Board of Directors should form a
remuneration committee consisting of at least
three independent non-executive directors (for
large companies).
D.2. Procedures
Partially
observed
The remuneration committee of the Board of
Directors should ensure unrestricted access to
the terms of reference of the committee
outlining the role of the committee and the
powers delegated to it by the Board of
Directors.
Observed
Pursuant to cl. 1.6. of the Policy on
remuneration and compensations for the
Board members of Sistema JSFC, in the
event of early termination of the powers of
a Board member,
amount of
remuneration is calculated in proportion to
the actual time of service of the specific
member on the Board.
the
In accordance with the Russian laws the
members of the Board of Directors of
Sistema JSFC are elected by the annual
general meeting of shareholders for a one-
year term (until the next AGM) with the
right to be re-elected an unlimited number
of times.
and
The Nomination, Remuneration
Corporate Governance Committee of
Sistema JSFC has been formed and is
active. The Committee consists of 6
directors, 2 of which (A. Goncharuk and D.
Zubov) are non-executive directors and 3
(R. Kocharyan, J. Krecke, R. Munnings)
are
independence
criteria).
independent
(meet
The responsibilities of the Nomination,
Remuneration and Corporate Governance
Committee of the Board of Directors of
Sistema JSFC are set out in the Terms of
Reference of the Committee approved by
the Corporation's Board of Directors on 29
June 2013. The Terms of Reference of the
above-mentioned Committee are available
on the corporate web site of the Company
(www.sistema.ru / www.sistema.com) and
may be provided to shareholders upon
request. .
When hiring external consultants on the
issues of remuneration payable to the Board
members,
to provide
is necessary
information on such consultants and their
relation to the Corporation.
it
D.2.2. The Board of Directors should vest the
remuneration committee with the powers to
determine
remuneration
payable to all executive directors and the
Board Chairman.
the amount of
Not applicable
In 2013 no external consultants on
remuneration were
the
Company's Board of Directors.
engaged by
Observed
The amounts of and the procedures for
paying remuneration and compensations to
the Corporation's Board members are set
out in the Policy on remuneration and
compensations for the Board members of
Sistema JSFC
If amendments should be made to the
above-mentioned Policy, the Nomination,
Remuneration and Corporate Governance
Committee should develop the required
amendments.
The remuneration committee of the Board
should also monitor the level and structure of
Observed
the key
One of
the
Nomination, Remuneration and Corporate
110
functions of
remuneration for senior management and
make the respective recommendations.
The definition of ‘senior management’ for
this purpose should be determined by the
Board but should normally include the first
line of management below the Board level.
Observed
D.2.3. Shareholders or the Board, depending
on the Charter of the Company, should set the
amounts of remuneration payable to non-
executive directors within the pre-approved
limits. If permitted by the Charter of the
company, the Board may delegate these
powers to the remuneration committee.
D.2.4. The shareholders of the company
should be invited to approve any new long-
term incentive systems for employees or any
significant changes in the existing incentive
systems.
Observed
the
review of
of Reference
Governance Committee according to the
respective Terms
is
terms of
preliminary
employment contracts of the President and
Board members presented for the approval
of the Company's Board of Directors, and
the
assessment
Company's top management and setting the
amounts of their remuneration.
performance
of
of
on
the
Policy
remuneration
and
The
compensations for the Board members of
Sistema JSFC sets a clear formula for
calculating
and
compensations payable to the Corporation's
Board members. No special decision of
and
the Nomination, Remuneration
Corporate Governance Committee
is
required for making such payments.
remuneration
Long-term incentive schemes are approved
by the Board of Directors and, when
needed, by the Annual General Meeting of
and
shareholders of Sistema
shareholders discuss such matters both at
the level of the Board of Directors and the
level of the Annual General Meeting of
shareholders.
JSFC,
E. RELATIONS WITH SHAREHOLDERS
E.1 Dialogue with the main shareholders
Observed
Е.1.1. The views of shareholders on the
development of
the company should be
communicated to the Board.
The Board Chairman should regularly discuss
the issues of company development with the
main shareholders.
Non-executive directors should be offered the
opportunity to attend meetings with the main
shareholders of
if
requested by the main shareholders, their
attendance at such meetings is mandatory.
the Company and,
The senior independent director should hold
regular meetings with shareholders to discuss
the development of the company.
Not applicable
Representatives of the main shareholders
were elected to the Board of Directors of
the Company. The IR department of the
Company works with major institutional
investors. The results of its work, including
the views of major institutional investors on
the Company's strategy and development,
are reviewed by the Board of Directors on a
regular basis as part of the IR strategy of
the Company.
It is mandatory for all members of the
including non-
Board of Directors,
executive directors, to attend the Annual
General Meeting of shareholders of Sistema
JSFC.
independent members of
The Company's statutory documents do not
provide for
the position of a senior
independent director.
Prior to every meeting of the Board of
the
Directors
Board hold an informal meeting in the form
of a business dinner, also attended by the
management of the Company.
Information on the Board members meeting
the independence criteria is available to the
shareholders on the corporate web site of
Sistema JSFC, so that the shareholders may
111
Е.1.2. The annual report of the company
should contain
the
opinions of the main shareholders on the
development of the company may be taken
into account by the Board.
information on how
Observed
contact any of them if they have any
questions.
The Board of Directors of Sistema JSFC
includes representative of most of the major
shareholders. The IR Department of the
Company works with major institutional
investors. As part of a review of the IR
strategy of Sistema JSFC, the Board of
Directors reviews the results achieved by
the IR Department including the opinions of
the key
the
institutional
development of the Corporation.
investors on
Е.2. Constructive approach to the AGM
Е.2.1. Each agenda item of the AGM should
be accompanied with a draft resolution with
'for",
"abstained" voting
options.
"against" and
Observed
According to the Russian legislation and
the Company's Charter, every agenda item
at the AGM is accompanied by a separate
draft resolution with "for", "against" and
"abstained" voting options.
Observed
Е.2.2. The company should ensure that the
votes of all persons that participated in the
AGM are properly recorded.
The minutes of the AGM should include the
number of persons that participated in the
voting on every agenda item and the number
of votes "for", "against" and "abstained".
Е.2.3. All members of the Board should
the AGM. Committee Chairmen
attend
should be available
the
questions of shareholders at the AGM.
for answering
Observed
and
the Teller Committee
All votes of the shareholders are registered
this
by
information is included in the Minutes of
the Company's Annual General Meeting of
shareholders.
All "for", "against" and "abstained" votes
on every agenda
recorded
separately, voting results for every item are
disclosed publicly.
item are
Based on clause 2.8 of the Policy of the
Board of Directors of Sistema JSFC, all
members of the Board of Directors should
attend the AGM and answer the questions
of the participants.
The shareholders attending the Annual
General Meeting of shareholders of Sistema
JSFC may put questions to any member of
the
the Board of Directors attending
meeting.
Е.2.4. The company should make sure that a
Notice of the AGM and all related papers are
sent to shareholders at least 20 working days
before the meeting.
Observed
According to its Charter, Sistema JSFC
circulates a Notice of
the AGM and
publishes the related materials no later than
30 days before the meeting.
President
M. Shamolin
Chief Accountant
I. Borisenkova
112