2014
ANNUAL REPORT
TABLE OF CONTENTS
Sistema today
History timeline
Company structure
President’s speech
Strategic Review
Strategy
Sistema’s financial results
Shareholder capital and securities
Our investments
MTS
Detsky Mir
Medsi Group
Lesinvest Group (Segezha)
Bashkirian Power Grid Company
RTI
SG-trans
MTS Bank
RZ Agro Holding
Targin
Binnopharm
Real estate
Sistema Shyam TeleServices
Sistema Mass Media
2
4
8
10
11
12
20
24
27
28
34
38
44
52
56
60
64
68
72
76
80
84
88
Corporate governance system
Corporate governance principles
General Meeting of shareholders
Board of Directors
Commitees of the Board of Directors
91
92
94
96
99
President and the Management Board 101
Internal control and audit
Development of the corporate
governance system in 2014
Remuneration
Risks
Sustainable development
Responsible investor
Social investment
Education, science, innovation
Culture
Environment
Society
Appendices
103
104
105
106
113
114
115
115
117
119
121
124
1
SISTEMA
TODAY
Established in 1993, today Sistema
is a large private investor operating
in the real sector of the Russian
economy. Sistema’s investment
portfolio comprises stakes in
predominantly Russian companies
from various sectors of economy,
including telecommunications,
utilities, retail, high tech, pulp and
paper, pharmaceuticals, healthcare,
railway transportation, agriculture,
finance, mass media, tourism,
etc. Sistema is the controlling
shareholder in most of its portfolio
companies. Sistema’s competencies
focus on improvement of the
operational efficiency of acquired
assets through restructuring and
attracting industry partners to
enhance expertise and reduce
financial risks.
>13
sectors
>20
years
>150 000
employees
of operations
of history
jobs created
Sectors of operations
Telecom
HighTech
Consumer
Pulp&Paper
Oil services
Banking
Energy
Other
60%
17%
9% 4% 3%
2% 2%
3%
Real estate
Transportation
services
Agriculture
Healthcare and
pharmaceuticals
Tourism
Note: Based on aggregate income from assets
Contribution to national development
RUB 100
billion
Payments to the
federal and regional
budgets in 2014
Over RUB 700
million
Social and charity
investment in
2014
RUB 62.8
billion
Investment in existing
and new assets in
2014
2
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Shareholder value
Efficient
management
Transparent
corporate
governance
Strong
government
relations
Financial
stability
Experienced
risk
management
Clear
strategy
High level of
expertise
Shareholder capital structure
V. Evtushenkov
GDR Programme (LSE)
Ordinary shares
(Moscow Exchange)
64.2%
19%
16.8%
Note: including the shares held by insiders, management
and members of the Board of Director and ordinary shares
on Sistema Group’s balance sheet.
Financial
stability
Revenue for 2014
631.9
RUB
billion
Adjusted OIBDA for 2014
165.2
RUB
billion
The company’s shares are traded on the London Stock
Exchange (LSE) as Global Depositary Receipts (GDRs), with one
GDR representing 20 ordinary shares. Its Global Depositary
Receipts are listed on the LSE under ticker symbol SSA. The
company’s shares are also listed on the Moscow Exchange
under ticker symbol AFKS.
Dividends received in 2014
55.6
RUB
billion
3
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT HISTORY TIMELINE
1993-1995
1996-2002
2003-2004
1993 Sistema JSFC
is founded.
Sistema acquires a 40.4% stake
in MTS and starts its development
in partnership with Deutsche
Telekom.
Sistema acquires control of
Comstar (50%) and Kosmos TV
(50%) in a transaction totalling
approximately US$ 35 million.
Sistema actively consolidates assets
in the core sectors of Russia’s
economy, acquiring assets in
telecommunications, electronics,
tourism, retail, oil and gas,
construction and real estate.
Sistema invests in MGTS,
establishes Vimpel
Communications and Sistema-
Hals, as well as project
management companies.
During VimpelCo’s IPO on the New
York Stock Exchange, raising US$
110.8 million Sistema, sells its stake
in VimpelCom.
MTS completes an IPO on the New
York Stock Exchange, generating
US$ 323 million.
As a result of consolidation,
Comstar-OTS received a 99%
controlling stake in MTU-Inform,
100% stake in Telmos, 100% stake
in MTU-Intelm and 55.62% stake
in MGTS. This event became a
milestone in the consolidation
of alternative communication
operators under our control to
create a united digital operator.
Sistema creates an insurance
holding on the basis of ROSNO and
attracts a strategic partner – Allianz
AG, one of the largest insurance
groups in the world. As a result of
this transaction, Sistema received a
49% stake in ROSNO and Allianz AG
received 47.2%.
4
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH 2005
2006
2007-2008
Sistema launches its IPO on the
London Stock Exchange, raising
US$ 1.56 billion.
IPO of Comstar-OTS. Sistema
launches an IPO for Comstar-
OTS, raising US$ 1 billion on the
London Stock Exchange.
Sistema acquires a 100% stake
in American Hospital Group and
a 100% stake in the Medexpress
chain of clinics, later merged into
Medsi Group.
Sistema buys minority stakes in
Bashkir oil and energy companies
(together, the «BashTEK compa-
nies»), including Bashneft and
Bashenergo, for a total amount of
about US$ 600 million.
Sistema actively develops bank-
ing business and increases its
stake in the Moscow Bank for
Reconstruction and Development
(MBRD) to 98.9%. Later, MBRD
consolidated 66% of the shares in
East-West United Bank.
Sistema-Hals launches its IPO,
raising US$ 409 billion on the
London Stock Exchange.
SITRONICS is established as
a result of development and
consolidation of high-tech assets
by Sistema.
Sistema successfully exits from
insurance business by selling
47.4% of ROSNO to Allianz, with
an option for Allianz to buy the
remaining 3% over the next
several years.
Sistema increases its stake in
SITRONICS to 60% and launches
an IPO on the London Stock
Exchange, raising US$ 2.35 billion.
Sistema first acquires a 10%
and then a 41% stake in Shyam
Telelink Ltd and enters into a call
option agreement allowing it to
increase its stake from 51% to
74%. The transaction was worth
US$ 46.74 million.
5
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT 2009-2010
2011
2012
Sistema establishes RTI, a
company consolidating Sistema’s
high-tech business, including
Concern RTI Systems and
SITRONICS.
Sistema transitions from the
operating holding model to the
investment company model.
Rosimushchestvo acquires 14%
of SSTL for US$ 647 million as
a result of an additional issue of
shares.
VAO Intourist and Thomas Cook
Group Plc complete a transaction
to form a joint venture based
on the tour operator and retail
business of Intourist. Thomas
Cook purchased a 50.1% stake for
a total of US$ 45 million. Later,
Thomas Cook increased its stake
in the JV to 75%.
Sistema sells 24.4% of MGTS
to MTS for RUB 10.56 billion,
completing consolidation of its
telecom assets.
Sistema makes its first invest-
ments in the agricultural sector by
acquiring a 100% stake in Don-
skoe for RUB 476.5 million and a
100% stake in First Cavalry Army
Stud Farm for RUB 303 million.
Both land clusters are located in
the Rostov Region with a com-
bined land of 39,000 hectares.
Sistema acquires a 100%
stake in SG-trans, the largest
independent LPG transport
operator in Russia, for
RUB 22.77 billion.
Medsi Group commences merger
of assets with the Medical Centre
for the Mayor and Government of
Moscow. In exchange for a 25%
stake, Medsi received 3 hospitals,
3 health resorts and 3 outpatient
clinics. Thus, Medsi Group
became a full-service medical
company.
RTI buys a 50% stake in NVi-
sion Group and increases its
stake in SITRONICS to 100%.
SITRONICS was delisted from
the London Stock Exchange
on August 23, 2012
Sistema sells power generation
assets of Bashkirenergo to Inter
RAO UES for RUB 11.2 billion.
Sistema and Louis-Dreyfus
family members form a farming
joint venture in Russia. The
JV combines both parties’
agricultural assets, totalling
approximately 90,000 hectares.
Sistema consolidates its telecom
assets and sells its 50.91%
stake in Comstar-OTS to MTS
in a transaction worth about
US$ 1.32 billion.
Sistema acquires controlling
stakes in BashTEK companies
for US$ 2 billion, increasing
its shareholding in Bashneft
to 76.5%.
Sistema exits from real estate
construction business. VTB
Bank acquires a controlling
stake in Sistema-Hals. Later,
Sistema completed the sale
of the remaining shares
in Sistema-Hals.
Sistema buys a 49% stake in NK
RussNeft in a transaction worth
less than $100 million.
6
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH KEY EVENTS
2013
2014
Sistema sells its 49% stake in NK
RussNeft for US$ 1.2 billion.
Sistema acquires 51% of
Business-Nedvizhimost, which
owns 76 properties with a total
area of 178,000 sq m, from MGTS-
Nedvizhimost for RUB 3.2 billion.
Later, Sistema purchased the
remaining 49% for RUB 3.1 billion.
In April 2014, Sistema acquired
a 10.8% stake in OZON for US$
75 million. MTS also acquired a
10.8% stake at the same price.
In July 2014, Sistema pays
RUB 19.9 billion in dividends. This
translates to a dividend yield of
around 5% as of the payout date.
Sistema invests in oil service
assets by acquiring 100% of
Bashneft-Service Assets (later
renamed Targin) from Bashneft
for RUB 4.1 billion.
The Board of Directors of
Sistema approves a new incentive
programme, based on share price
performance and cash flow at the
Corporate Centre level.
Sistema begins investment in
forestry and pulp and paper
industries.
In September 2014, LLC LesInvest,
part of the Group, acquired 100%
shares of OJSC Segezha Pulp
and Paper Mill from the Bank of
Moscow and 100% of shares of LLC
Derevoobrabotka-Proekt (Group
of companies). The net external
debt of the acquired assets is equal
to zero (see p. 44). The Group of
companies is the largest producer
of sack paper and paper sacks in
Russia and the second largest man-
ufacturer of paper sacks in Europe.
In 2014, Sistema increased its stake
in NVision Group to 100%.
Sistema expands its footprint in
the retail sector. In October 2014,
Sistema buys a 40% stake in the
holding company which owns
the assets of Concept Group,
one of the leaders in the Russian
retail clothing market in terms of
revenue growth, in a transaction
worth about RUB 1 billion. The
documents signed provide for an
option for Sistema to increase
its shareholding in Concept
Group to the controlling level
within three years.
MTS-Bank issues additional
shares for RUB 13.1
billion. Sistema purchased
2,474,818 ordinary shares for
RUB 9.46 billion. MTS purchased
952,000 ordinary shares
for RUB 3.64 billion.
In December 2014 by the court Siste-
ma transfered all its shares in Bash-
neft to the Government. In February
2015 the Moscow Arbitration Court
upheld the claim of the Corporation
to the LLC Ural-Invest and decided
to recover losses from the defendant
in favor of Sistema. In March 2015
Sistema and LLC Ural-Invest signed
a settlement agreement under which
the fund transfers RUB 46.5 billion
to the Corporation, of which RUB 4.6
billion invested in the fund charita-
ble projects. Later on Sistema has
received additional compensation of
RUB 12.9 billion.
7
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT 1. Основные логотипы
Основной цвет pantone 647c
1.1. Допустимый цвет pantone 195c.
Использовать только после согласования
с представителями АФК «Система»!
2. Допустимые варианты логотипов
COMPANY STRUCTURE
Используются при невозможности размещения основного варианта.
(на перетяжках, в ряду одинаковых по высоте логотипов компаний и т. д.)
Использовать только после согласования с представителями АФК «Система»!
2.1. Допустимые варианты логотипов
53%
87%
RZ Agro
Group
50%
Используются при физической невозможности воспроизведения мелкой текстовой части логотипа.
Over
(ручки, шильдики, значки и т. д.)
100,000
Использовать только после согласования с представителями АФК «Система»!
104 mln
195
hectares of land
worth of assets
subscribers
RUB
billion
Over
99%
91%
100%
Over
109 mln
store visits per year
80,000 km
of power
grids
49
drilling rigs,
180 crews
3. Допустимые цветовые решения
75%
50%
company of JSFC Sistema
74%
Использовать только после согласования с представителями АФК «Система»!
6 mln doses
Over
Over
6 mln
visits per year
34,000
«Выворотка»
of railcars under
management
of Hepatitis B
vaccine per year
на белой плашке (при пестром фоне)
Черный
серый элемент марки – 50%
черного цвета
8
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH World-wide reach of activities and diversified
asset structure enable Sistema JSFC to achieve
sustainable operating and financial performance.
86%
66%
Real estate
100%
11.8 mln
subscribers
2,617
rooms under
management
388,000 m2
under design and
construction and over
442,000 m2 under
management
SSTL
57%
85%
10.8%
HSD services in over
800
Indian cities and towns
Mikron has
developed a
proprietary 65 nm
chip technology
21million
unique users
monthly
100%
40%
4.5 mln m3
of allowable cut
342
stores
9
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT PRESIDENT’S SPEECH
32% in the previous year.
One of the key assets in our
portfolio is Detsky Mir, Russia’s
best-known children’s goods brand,
demonstrated the third largest
revenue and highest growth rate of
all the Group’s assets. Detsky Mir’s
value increases each year, and the
company continues to retain its
leading industry position, with over
330 stores across Russia.
Our company RTI develops high-
tech assets in the microelectronics
and defence industries, as well as
smart IT systems. The initiatives
we have implemented to optimise
the business and increase its
financial stability in 2014 have led to
a considerable improvement in the
Group’s returns.
Last year Sistema continued to
actively develop its healthcare
business Medsi, which generated a
4% year-on-year revenue growth,
in rouble terms, despite the closure
for redevelopment of some medical
facilities during the year. Medsi’s
strategy is currently focused on
increasing its market share in the
medium term, both by constructing
new treatment facilities and
increasing patient loyalty.
Our Indian business, SSTL, has
largely delivered on its financial
targets and we expect that it will
near OIBDA breakeven in 2015 as
we continue to reduce its reliance
on Sistema. Whilst numerous
regulatory challenges continue
to persist, the latest licensing
rounds have shown both demand
and price increase in the 800 mhz
spectrum that SSTL operates in.
This is encouraging and may create
strategic opportunities as the sector
outlook improves and evolves.
In 2014, we continued our search for
attractive investment opportunities
in Russia, investing in the pulp and
industry. With vast felling area, low
production costs, and proximity of
export markets, LesInvest Group,
Russia’s biggest producer of sack
paper and paper sacks and Europe’s
second largest paper sack maker,
has significant growth potential.
We intend to further enhance
its value, create new jobs and
modernize production facilities.
Last year, Sistema also entered
the e-commerce and fashion retail
market by acquiring interests in
OZON Holdings Limited and Concept
Group.
With more than 20 years of
experience operating in Russia, we
have proved that Sistema has the
capacity and expertise to create
value for all the stakeholders not
only during periods of growth,
but also in times of volatility and
uncertainty. Meeting our social
responsibilities is a core element of
our business strategy, and we are
committed to developing our people,
investing in talent and diligence, as
well as fostering regional innovation
and social development.
As we look into 2015, Sistema
remains in a strong financial
position. We have a stable and
growing dividend flow from current
investments, a much reduced
corporate costs and a process
of vigorous assessment of each
opportunity on its financial merits.
With these fundamentals in place,
we believe Sistema is well placed
to capitalise on new investment
opportunities and we look forward
to delivering value to the Group’s
shareholders in the coming year.
Mikhail Shamolin
President of Sistema
2014 was a challenging year both
in corporate and macroeconomic
terms. In this period, Sistema faced
numerous operational and strategic
pressures and I am pleased to
see the Group has successfully
navigated these obstacles,
demonstrating the resilience of
our business model and acquiring
invaluable experience, which will
assist us in our future development.
In addition to external
macroeconomic factors, Sistema
was, undoubtedly, affected by the
situation surrounding Bashneft
last year. Following litigation,
Sistema transferred the asset to
the state, subsequently obtaining
cash compensation as a good-faith
buyer. The events had a significant
impact on our portfolio, but it did
not change the essence of our
business and our competencies. We
are still a unique Russian company
that employs efficient management,
the right strategic decisions and a
professional team to turn distressed
and complicated assets into leaders
in their respective industries.
In 2014, we have achieved solid
results, with consolidated revenues
growing by 7.2%. Ten out of our
thirteen biggest assets increased
their revenues; eleven out of
thirteen achieved positive OIBDA;
nine showed positive net income
and paid dividends. Developing
assets’ share of Sistema’s total
revenue grew to 41% in 2014 from
10
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH STRATEGIC
REVIEW
Strategy
Financial results
Shareholder capital and securities
12
20
24
STRATEGY
Mission
Long-term growth of shareholder value
through efficient management of the asset
portfolio and achievement of high returns on
investment.
High
returns on
investment
Lower
investment
risk
Unique expertise on the Russian
market and a strong management
team
Diversified and balanced portfolio in the
fundamental segments of the Russian
economy and balanced contribution of
assets to the total value
Value creation
model
The model of Sistema as an
investment company envisages
creation of shareholder value
through constant reinvestment of
capital - accumulation of cash from
incoming dividends and monetisation
of assets, distribution of the
received profit in form of dividends
among Sistema’s shareholders,
reinvestment in existing assets and
new investment projects in order to
receive further income.
• Shareholder
dividends
• New
investments
1
n
pital allo c a ti o
a
C
Search fo
opportu
r i
niti
n
v
e
e
s
s
t
m
e
n
t
Sistema JSFC
4
M
o
n
2
G rowing in
a r e h older valu
e
e
tiz
ation
3
h
s
• Profit on sales
• Dividend yield
12
Resources:
• Expert evaluation
and experience
• Financial
resources
• Management
resources
• Reputational
resources
New
investments:
• Strategy
development
• Business
optimization
• Synergy with
the Group
companies
• Management
efficiency
• Preparation for
monetization
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Components of successful growth
Our
business
Our principles
of operation
Our
strategy
Our
efficiency
Creation of value
by leveraging
competencies:
Lean and
competitive
structure:
Science
applications
to create art:
No cash –
no reward:
• Internal rate of return
on investments above
weighted-average cost
of capital (IRR>WACC)
with a 5-7-year payback
period
• Focus on investment
with a positive net cash
flow
• Acquiring assets with
an acceptable debt level
(Debt/OIBDA < 3.0x) for
preserving the Group’s
stable financial situation
• Keeping consolidated
Debt/EBITDA at 2x
• Payout to shareholders
of up to 30% of profit
• Remuneration of
investment managers
fully depends on cash
generated by their
portfolio for Sistema
• Cash may be received
from dividends or
monetisation
• Current dividends from
MTS are not included
in calculation of
remuneration
• Remuneration is paid
after deducting the
portfolio’s expenses and
the Central Bank’s rate
• Assessment and
• Managing assets
development of business
strategies for our assets
without involvement in
operations
according to the principle
of deal origination and
industry expertise of
portfolio managers
• Monitoring of M&A
• A team of
strategic experts,
macroeconomists
and communication
professionals
opportunities in current
and new sectors
• Development and
implementation of asset
monetisation plans
• Hiring efficient
management for
companies under our
control
• Providing comprehensive
support to our assets in
attracting financial and
other resources
• Increasing operational
efficiency of acquired
assets through
restructuring and
attracting industry
partners to increase
expertise and share
financial risks
13
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Investment strategy
Medium-term goals of Sistema as an investment company
• Generating a substantial cash
flow at Hold Co through portfolio
monetisation and dividends from
subsidiaries, as well as by finding
and benefiting from unique
investment opportunities in Russia
• Balancing investment portfolio
with export-oriented industrial
companies in Russia that may
become a source of foreign
currency liquidity
• Restructuring and supporting
portfolio companies operating in
segments that are most sensitive
to changes in the economic
situation
• Building industry leaders in private
healthcare, high technology and
microelectronics, pulp and paper
industry, in order to maximise
returns on shareholder capital
Investment criteria
Sectors and
industries:
sectors, that are
complementary to
current investments
and enable the use
of the competence
of Corporation and
implementation of
synergy with the current
portfolio;
new, economically
attractive industries
subject to availability
of expert evaluation
or industry partner
Business
geography:
primarily Russia and
the CIS;
monitoring of
other geographical
opportunities from
the viewpoint of
diversification of
market outlets and
currency risk
Scope of assets:
large and medium assets ensuring leadership in the market due to synergetic effects,
opportunities for industry consolidation and successful implementation of investment
and operating strategy
14
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Sistema JSFC Investment Vision
Industry
Telecommunications
in Russia
Strategy
Develop to
obtain stable
dividend flow
Key industry
characteristics
• Slowing down
growth of the mobile
communications market
• Growing penetration of
data transfer services
• Growth in the OTT
services segment
Children’s goods
retail
• The sector is resistant
to deterioration of
macroeconomic situation
• Low market concentration
with opportunities for
consolidation
• Demographic situation
will continue promotion
of growth of consumer
expenditures on
children’s goods
Grow business
volume to
obtain dividend
income; and
possible partial
sale given the
favourable
conditions
Sistema JSFC
investment vision
Sistema JSFC views MTS as a strategic asset
that is generating high dividend income.
In order to achieve the targets on dividend
flow, MTS will continue to develop actively
the data transfer services, focus its
marketing efforts on holding its leading
positions in Russia and explore potential for
synergies with other businesses of Sistema
JSFC Group, including, MTS Bank and Ozon
Holding, to get competitive advantages
on the market.
More about the operating strategy see p. 28
Sistema JSFC views Detsky Mir as a
promising asset that has already achieved
significant results and is able to bring
in substantial returns on capital in the
form of dividends or by means of partial
monetization.
Since the children’s goods retail sector is
resistant to economic recessions, Sistema
JSFC is planning active development of
the Detsky Mir chain and opening about
40 new stores in 2015.
More about the operating strategy
see p. 34
Private healthcare
• High growth rate of
the Russian private
healthcare services
market
• Government support to
the sector
• Low market concentration
with opportunities for
consolidation
Grow business
volume and
introduce the
best practices
in healthcare
Sistema JSFC sees a high potential of
the Russian private healthcare market
development and is building up the federal
network providing high-quality healthcare
and rehabilitation services for the country
citizens.
During the next two years, Medsi will
focus its efforts on expanding business
scale by constructing new medical
centers, introducing new healthcare
technologies and further improving of the
quality of services.
More about the operating strategy
see p. 38
15
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Industry
Wood processing
industry
Key industry
characteristics
• The ruble rate
depreciation and large
transport leverage reduce
the competitiveness of
importers
• Rated wood cutting of
Russia exceeds in three
times the felling volume
• Export-oriented industry
with the largest great of
currency returns
Electric grid business • Steady and slight growth
of power consumption –
by 0.4% in 2014
• In autumn 2013, tariffs of
natural monopolies for
2014 were frozen
• In 2014 tariff growth was
limited at the rate of 3.8%
Strategy
Sistema JSFC
investment vision
Develop the
asset by
restructuring
and optimizing
of business;
getting on the
dividend flow
in the medium
term
Sistema JSFC acquired assets of GC
LesInvest at the end of 2014.
Sistema JSFC is planning to ensure
return on capital by optimizing of current
business, improving controllability and
transparency, as well as subsequently
expanding production (in particular, paper
sacks and plywood).
More about the operating strategy
see p. 44
Further develop
the business
after successful
transition to
RAB regulation
of tariffs,
maintain a
steady dividend
flow
The strategy of electric grid assets
is focused on growth of business by
modernizing of equipment, building
of modern grids using Smart Grid
components and developing the region
infrastructure. Sistema JSFC intends to
develop the business by consolidating
and subsequently modernizing
of regional assets.
The company transition to the 10-year
tariff regulation using the return-on-
investment (RAB) method will enable
effective long-term business development
planning and is aimed to improve its
investment attractiveness. The company
expects to invest over 29 bln. rub. in the
electric grid sector of the Republic for the
10-year term.
More about the operating strategy
see p. 52
Railway
transportation
• The segment of
liquefied gases (LNG)
transportation shows the
highest stability in the
sector
• LNG transportation
volume has grown by
8% in 2014, while bulk
oil cargo transportation
volumes by 2% in total
Develop LNG
transportation
segment and
maintain
profitability
In 2015, Sistema JSFC will focus on
supporting SG-trans current business
and achieving operational objectives.
Maintaining of profitability will be achieved
by efficient wagon fleet management and
optimization of leasing agreements.
More about the operating strategy
see p. 60
16
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Industry
Key industry
characteristics
Strategy
Sistema JSFC
investment vision
Pharmaceuticals
• The market volume
has grown by 9.3% in
monetary terms in 2014
• Share of foreign
producers in the Russian
market is over 70%
• Russia has launched the
programme for import
substitution
• Starting from 2014, the
government may limit
participation of foreign
companies in government
tenders
Expand product
portfolio and
establish
partnership
with an industry
expert
Sistema JSFC is planning to develop the
pharmaceutical business by implementing
large-scale projects on launching new
production lines and procurement of third-
party products. Gain in product portfolio by
partnership with international companies
will contribute in increase of production
capacity utilization, Binnopharm is
also planning to upscale production by
participating in the programme for import
substitution.
More about the operating strategy
see p. 76
High Technologies
• The government demand
for high-tech products is
growing
• Growing demand for
intelligent transport
systems
• Development of
microelectronics will be
supported by the import
substitution programme
Improve the
economic
performance of
the business,
develop own
intellectual
products and
achieve a
steady dividend
flow in the
medium term
In 2014, Sistema JSDC has begun
restructuring JSC RTI high-tech assets
in order to improve the economic
performance of the business and achieve
a stable dividend flow in the medium
term. The main development focus will
be on the segments of defense industry,
microelectronics and intelligent IT
systems. RTI is planning to increase
its profitability by growing intellectual
property share in finished products,
to increase production of microchips
by extending cooperation with the
government and to focus on new products
in the aerospace industry.
More about the operating strategy
see p. 54
17
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Industry
Oilfield services
Key industry
characteristics
Strategy
Sistema JSFC
investment vision
• Industry consolidation
with the biggest players
• Increase of volumes of
horizontal drilling
• Demand for high-tech
oilfield services
Develop
promising
segments
of high-tech
drilling,
improve the
profitability
of business
and potential
partnership
with an industry
expert
Investments in Targin have a significant
growth potential by modernization of
the vehicle fleet to increase profitability,
introduction of new technologies
to diversify range of services and
optimization of business and its structure.
Sistema JSFC is planning to attract an
industry partner to extend Targin expert
evaluation.
More about the operating strategy
see p. 72
Banking sector
• Increased cost of funding
• Tougher regulation of
retail lending
• For the first time in
several years, corporate
lending grew faster than
retail lending
Develop
and support
the banking
business,
provide
effective risk
management
Sistema JSFC investment strategy in the
banking business provides for growth
of shareholder capital returns while
maintaining the high level of MTS Bank
financial stability.
Under current economic conditions,
Sistema JSFC is focused on improvement
of the risk management system and
growing of Bank’s customer deposits.
Sistema JSFC also sees a growth potential
for the banking business in the synergy
with MTS.
More about the operating strategy
see p. 54
Real estate
• Due to an unprecedented
volume of commissioned
real estate in 2014, the
office real estate market
now has a surplus
• Subsidizing of the
mortgage rate will
support the residential
real estate market
Construct and
develop the
most liquid
real estate
assets and
monetize by
leasing and
sales
Sistema JSFC is planning construction
and monetization of residential real estate
assets, as well as aggregation of office
real estate assets and increase in revenue
from management and leasing and
property management, which will be used
to finance new projects and will enable to
pay portfolio dividends.
More about the operating strategy
see p. 80
18
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Industry
Key industry
characteristics
Telecommunications
in India
• • Three largest Indian
operators have taken up
58% of the market
• Competition in the data
transfer services segment
is growing
• In 2015, a new auction for
several frequency bands
was held, including for
800 MHz, where SSTL
operates
Media assets
• Rate of growth of the
Russian media market is
slowing down
• Ownership ratio of foreign
companies in any Russian
mass media company has
been limited to 20%
• The government is
stimulating telecasting
of the Russian content on
the part of state
Agriculture
• Export-oriented industry
with a high share of
currency returns
• Russia became the
world’s third largest
wheat producer in 2014
• Russia’s wheat output
in comparison with the
previous year grew up by
13% as compared with the
global growth of 1%
Strategy
Reduce
expenditures
for the
business
funding
and resolve
regulatory
issues
Search for
new promising
markets
and develop
convergent
media
products in
partnership
with other
Sistema Group
companies
Expand the
land bank and
develop export
channels
Sistema JSFC
investment vision
In 2015, we plan to continue with financial
rehabilitation of the Indian business
and significantly reduce its need in
financing of its operating activity on the
part of Sistema JSFC. In case of resolved
regulatory issues regarding frequency
spectrum use, Sistema JSFC may
consider opportunities of partnership with
an industry expert.
More about the operating strategy
see p. 84
Sistema JSFC investment strategy
in regard to media assets of SMM is
focused on creating conditions for entry
into emerging markets in the new digital
environment, developing new digital
services and digital media. Successful
implementation of the strategy will
contribute in maximum use of current
competitive advantages of Sistema Group
as a whole.
More about the operating strategy
see p. 88
The strategy of agriculture business
development proposes further expansion
of the land bank by strategic acquisitions
and partners attracting . The targeted
regions are Rostov region, Stavropol
territory and Krasnodar territory. Sistema
JSFC is also planning to develop export
channels and such segments as seeds
production and sale and contracted
harvest works.
More about the operating strategy
see p. 68
19
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Sistema’s financial results
(US$ millions)
Revenues
Adjusted OIBDA
Operating income
Adjusted operating income
FY 2014
FY 2013
Change
16,585.0
18,502.0
(10.4%)
4,438.3
5,570.2
(20.3%)
1,738.4
3,566.6
(51.3%)
2,146.1
2,936.7
(26.9%)
Net (loss)/ income attributable to Sistema
(4,087.6)
2,257.5
-
Adjusted net income attributable to Sistema
1,194.9
1,623.5
(26.4%)
(RUB millions)
Revenues
Adjusted OIBDA
Operating income
Adjusted operating income
FY 2014
FY 2013
Change
631,865
589,251
7.2%
165,171
177,400
(6.9%)
60,876
113,588
(46.4%)
78,353
93,527
(16.2%)
Net (loss)/ income attributable to Sistema
(232,556)
71,898
-
Adjusted net income attributable to Sistema
44,194
51,706
(14.5%)
Note: The reporting currency of the Group’s US GAAP consolidated financial statements is the US dollar. Here and hereafter, the financial
information in Russian roubles has been presented for the users’ convenience and is not derived from audited financial statements. Financial
figures in US dollars were converted to roubles using following approach: amounts from the statement of financial position – using closing
rates as of the reporting dates, amounts from the income statement – using average rates of the reporting periods except for significant
transactions / accruals, which were converted using exchange rate as of date of a transaction /accrual or actual rouble amounts for
transactions/accruals nominated in roubles.
Following its transfer to the Russian
Federation in December 2014 of
shares in Bashneft, Bashneft’s
results are treated as a disposal,
reported as discontinued operations
and excluded from the Group’s
financial results for all periods
presented. The Group’s financial
results for the fourth quarter and the
full year of 2014 were impacted by
the rouble depreciating significantly
against the US dollar.
In 2014, Sistema recognised loss
from certain one-off items, which
significantly impacted the company’s
financial results. The largest one-
off items include: US$ 5.0 billion
loss from the deconsolidation of
Bashneft, US$ 290.0 million loss
from the impairment of long-lived
assets in India (SSTL) and US$92.5
million of accrued provisions
for cash and deposits in Delta
Bank (MTS).
20
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Revenues
Sistema’s consolidated revenues
in rouble terms increased by 7.2%
year-on-year in 2014 despite the
challenging economic environment,
and reflect a strong contribution
from all the Group’s companies,
particularly from MTS, Detsky mir, as
well as Targin (acquired in the third
quarter of 2013) and the pulp and
paper business (acquired in the third
quarter of 2014). Ten of Sistema’s 13
major assets demonstrated revenue
growth in 2014 in rouble terms.
Revenues by sectors*
Telecom
HighTech
Consumer
Pulp&Paper
Oil services
Banking
Energy
Other
61%
17%
9%
4% 3% 2% 2% 2%
* Based on aggregate revenues of 4Q 2014
As of the fourth quarter of 2014,
the Company began consolidating
LesInvest into the Group’s financial
results. In the fourth quarter of 2014,
LesInvest already contributed RUB
7.2 billion and RUB 1.1 billion to the
Group’s consolidated revenue and
OIBDA. The consolidation of Targin
contributed approximately RUB 16
billion to the Group’s revenue growth
for the full year of 2014.
Revenue analysis, RUB bln
+12.3
+13.7
+9.4
+7.2
631.9
589.3
Revenue
2013
MTS revenue
growth
Growth at other assets
and consolidation of
Targin, net
Detsky mir
revenue
growth
Consolidation of
LesInvest
in 4Q
Revenue
2014
21
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT OIBDA
The Group’s adjusted OIBDA
decreased by 6.9% year-on-year
in rouble terms in 2014, mainly
due to accrued provisions for the
loan portfolio to individuals at MTS
Bank. Eleven of Sistema’s 13 major
companies reported positive adjusted
OIBDA in the reporting year.
OIBDA analysis, RUB bln
177.4
+2.1
+1.5
+1.1
–1.1
OIBDA
2013
Destky mir
OIBDA
growth
Decreased
loss
of SSTL
Consolidation of
LesInvest
in 4Q
Decreased OIBDA
of other assets,
net
165.2
OIBDA
2014
–15.8
Decrease in
MTS Bank
OIBDA
Net income
In 2014, adjusted consolidated net
income attributable to Sistema
decreased by 14.5% year-on-
year in rouble terms, mainly due
to US$ 548.6 million (RUB 21.1
billion) worth of foreign exchange
losses. Nine of Sistema’s 13 major
companies reported net income
in 2014. The Group’s net income
includes Sistema’s share in
Bashneft’s net profit for the period
of ownership: US$ 1.2 billion in 2014
and US$ 1.1 billion in 2013.
Capital expenditures
Capital expenditures increased by
21.4% YoY mainly driven by MTS due
to US dollar appreciation. Active
construction and modernisation of
medical facilities at MEDSI added
RUB 3 bln to capital expenditures
of the Group in 2014. Other largest
contributors to the Group’s CAPEX
are RTI, BPGC, Detsky mir and real
estate projects.
The Group’s SG&A expenses
grew by 6.2% YoY, which is lower
than the rate of inflation. Corp
Centre’s SG&A increased by 4.9%
YoY in 2014, mainly due to one-off
optimisation costs in 4Q 2014 and
non-cash accruals for incentive
programme in 2014. In 2015,
Sistema plans to reduce its SG&A
by 25-30%.
22
Group’s capital expenditures, RUB bln
MTS 81.6
RTI
3.0
BPGC
3.1
Other
7.7
21.4%
115.8
95.4
2013
2014
92.6
MTS
4.0
3.3
RTI
BPGC
3.0
Medsi
12.9
Other
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Group’s debt
A 35% increase in consolidated
debt was mainly due to the dollar
appreciating against the rouble and
MTS increased obligations.
MTS debt increased due to borrowing
of additional funds at attractive terms
to hedge risks of low liquidity in the
future on the back of market situation.
In October 2014, MTS signed an
agreement with Sberbank of Russia to
open a non-revolving line of credit for
a total amount of RUB 50 billion and
maturity in September 2021.
The Group’s debt currency profile
remained largely stable. A large part
of US dollar denominated debt relates
to MTS and the Corporate Centre,
obligations of Sistema’s other Russian
subsidiaries are largely denominated
in roubles.
Group’s debt, RUB bln
Group’s debt by currency
464.9
56.7
68.8
47.3
MTS
RTI
Corporate Centre
292.1
Other assets
344.3
33.9
51.5
40.2
218.7
4%
4%
66%
59%
30%
37%
2013
2014
2013
2014
USD
RUB
Other currencies
Debt at Corporate level
The Corporate Centre’s debt
increased due to dollar appreciation
against the rouble. The Corporate
Centre’s obligations in US dollars are
mostly represented by Eurobonds
with maturity in 2019. Corp Centre’s
cash position amounted to RUB 28.8
bln , 70% of Sistema’s cash was
denominated in US dollars. Net debt
at Corporate level amounted to RUB
40 bln. In 2015, Sistema plans to
repay RUB 2.8 bln of rouble bonds
and RUB 12.2 bln of loans from
banks (RUB 8.6 bln had already been
repaid after the reporting period).
Corporate Centre’s debt, RUB bln
Corporate Centre’s debt by currency
68.8
Cash
position
Debt
51.5
41.8
28.8
66%
59%
USD
RUB
34%
41%
2013
2014
2013
2014
* Including highly liquid financial instruments
23
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT SHAREHOLDER CAPITAL
AND SECURITIES
Sistema’s shareholders*
Evtushenkov V.P.
Deutsche Bank (GDR programme)
National Settlement Depositary (Moscow Exchange)
Sistema Finance Investments (Ordinary shares)**
Sistema Holding Limited (ГДР)**
Other***
64.2%
17.6%
0.8%
9.5%
1.4%
6.5%
Sistema has 9,650,000,000 ordinary
shares outstanding, with a par value
of RUB 0.09 each. The company’s
shareholder capital amounts to
RUB 868,500,000. Sistema had its
IPO in February 2005 and was listed
on the London Stock Exchange
under ticker symbol SSA. The
company’s shares are traded on the
London Stock Exchange as Global
Depositary Receipts (GDRs) with
one GDR representing 20 ordinary
shares. Its ordinary shares are
traded on the Moscow Exchange
under ticker symbol AFKS.
Sistema’s free float on the London
Stock Exchange is approximately
19% and 16.8% of the shares are
traded on the Moscow Exchange
(including positions of insiders,
shares owned by management and
members of the Board of Directors,
and ordinary shares on Sistema’s
Group balance sheet).
Sistema’s shares are included in the
benchmark indices of the Moscow
Exchange (MICEX Index and RTS
Index). These are capitalisation-
weighted composite indices
calculated based on prices of the 50
most liquid stocks of major Russian
issues from Russia’s key sectors.
Sistema’s shares are also included
in MICEX Financial Services Index
(a sector index). Sector Indices are
capitalisation-weighted indices
calculated based on prices of the
most liquid shares of Russian
issuers operating in the relevant
sector, which are admitted to
trading on the Moscow Exchange
and are included in the Broad
Market Index.
The Moscow Exchange’s multi-
asset indices are composite indices
comprised of stocks and bonds
admitted to trading on the Moscow
Exchange, that can be used as
investment vehicles by Russian
Pension Funds. Sistema’s shares
are included in equity sub-index and
bond sub-index.
Sistema’s GDRs are also included
in MSCI Russia Index. This serves
to confirm international recognition
of the company and strengthen
its reputation among the largest
institutional investors with
index strategies.
Shares of MTS, Sistema’s subsidiary,
are traded on the New York Stock
Exchange as ADRs (ticker: MBT). Its
ordinary shares are traded on the
Moscow Exchange under ticker sym-
bol MTSS. Chairman of the Board
of Directors of Sistema Vladimir
Evtushenkov, with 64.19% of shares,
is Sistema’s principal shareholder.
Number of outstanding shares amounts
9,650,000,000
Ordinary shares with nominal value of RUB 0.09
The share capital amounts RUB 868.5 million
* As of December 23, 2015
*Shares and GDRs owned by Sistema Group
*** Shares held by insiders (management, members of the Board of Directors and others)
24
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Sistema’s shareholders*
Sistema’s GDRs and ordinary shares
significantly decreased in the sec-
ond half of 2014 due to the situation
around Bashneft and changes in
macroeconomic conditions. The rou-
ble depreciated against the US dollar
by 75.3% in 2014, Brent oil price fell
by 44.5% in 2014.
Sistema’s GDRs dropped by 83.8%
between January 1, 2014 and Jan-
uary 1, 2014. The closing price of
Sistema’s GDR on the London Stock
Exchange on the first trading day of
2014 was US$ 31.25 with a market
capitalisation of US$ 15,078 million,
while on the last trading day it was
US$ 5.21 with a market capitali-
sation of US$ 2,514 million. Siste-
ma’s ordinary shares decreased by
74.5% in 2014, RTS index lost 45.2%
for the year.
Sistema’s GDRs reached a high of
US$ 32.08 on January 10, 2014 and
a low of US$ 1.88 on December 16,
2014. The average daily trading vol-
ume on the London Stock Exchange
in 2014 was 997,240 GDRs.
Between January 1, 2015 and March
31, 2015, Sistema’s GDRs gained
42% and its ordinary shares rose by
57%, while RTS Index was up 11.3%.
The company’s market capitali-
sation as of March 31, 2015, was
USD$ 3.6 billion.
Ordinary shares
s
e
r
a
h
s
f
o
.
l
l
i
m
n
i
e
m
u
l
o
V
250
200
150
100
50
e
r
a
h
s
r
e
p
B
U
R
50
45
40
35
30
25
20
15
10
5
12.2013
01.2014 02.2014
03.2014
04.2014
05.2014
06.2014
07.2014
08.2014
09.2014
10.2014
11.2014
12.2014
01.2015 02.2015
03.2015
Trading volume
Ordinary shares
RTS Index
Global depositary receipts
R
D
G
f
o
.
s
u
o
h
t
n
i
e
m
u
l
o
V
10 000
9 000
8 000
7 000
6 000
5 000
4 000
3 000
2 000
1 000
R
D
G
r
o
f
S
U
$
35
30
25
20
15
10
5
12.2013
01.2014 02.2014
03.2014
04.2014
05.2014
06.2014
07.2014
08.2014
09.2014
10.2014
11.2014
12.2014
01.2015 02.2015
03.2015
Trading volume
GDR of Sistema JSFC
* Source: Bloomberg
25
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
556
5.0%
300
3.1%
Dividends,
US$ mln
Yield
Dividend yield of Sistema
in 2010-2014
87
0.7%
17
0.0%
82
0.8%
2010
2011
2012
2013
2014
In June 2014, the Annual General
Meeting of Shareholders approved
the total amount of dividend payment
on Sistema’s shares for 2013 at RUB
19.9 billion, representing a payment of
RUB 2.06 per ordinary share (RUB 41.2
per GDR). The total proposed dividend
payment has been determined on the
basis of Sistema’s full year 2013 US
GAAP net income and the corporate
centre’s net gain from the sale of stake
in RussNeft in July 2013. In July 2014,
Sistema paid out record dividends,
corresponding to dividend yield of 5%.
Dividends
Sistema’s dividend policy aims to
provide a regular and sizeable divi-
dend flow, while allowing the compa-
ny to maintain the financial flexibility
to take advantage of attractive invest-
ment opportunities in the future.
Dividends are declared on the basis
of results from the previous financial
period, and the company’s dividend
policy is for annual dividends to be a
minimum of 10% of the corporation’s
consolidated net income under US
GAAP (net of any special dividends
paid). In addition, in the event of a
large asset sale for cash, special div-
idends will be declared in an amount
of at least 10% of the net gain from
such a transaction, as determined
by the Board of Directors. Under
Russian law, the total amount of div-
idends with respect to any year may
not exceed the company’s annual
unconsolidated net income deter-
mined in accordance with Russian
Accounting Standards (RAS).
BOND PORTFOLIO
Debt profile at the holding company
level includes rouble bonds and
Eurobonds. As of December 31, 2014,
Sistema had two rouble bond issues
and one Eurobond issue:
• Eurobonds issued in May 2012
with a par value of US$ 500 million
and a coupon rate of 6.95% (semi-
annual payments), maturing on
May 17, 2019
The bonds mature in 15 years. In
addition, bondholders have the right
to redeem their bonds at the point of
expiration, 18 months from the date
the bonds were placed.
• 3-series rouble bonds with a par
value of RUB 19 billion maturing
on November 24, 2016 and with a
coupon rate of 8.75% (semi-annual
payments)
• 4-series amortised rouble bonds
with a par value of RUB 19.5 billion
maturing on March 15, 2016 and
with a coupon rate of 7.65% (semi-
annual payments)
In 2014, Sistema repaid its 2-series
rouble bond issue with a par value of
RUB 20 billion.
In February 2015, Sistema completed
the placement of RUB 10 billion
Series BO-01 unconvertible interest-
bearing bonds with a par value of
RUB 1,000 at the rate of 17% per
annum. Coupon payments will
be made on a semi-annual basis.
Placement of exchange bonds was
the first market transaction in the
Russian market since the turn
of 2014 among BB credit rating
corporate borrowers, as well as
the first market transaction in the
corporate segment in 2015. The
successful placement showed the
attractiveness of Sistema JSFC
securities and interest to the current
investment strategy.
26
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH OUR INVESTMENTS
MTS
Detsky Mir
Medsi group
LesInvest group (Segezha)
Bashkirian Power Grid Company
RTI
SG-trans
MTS Bank
RZ agro holding
Targin
Binnopharm
Real estate
Sistema Shyam Teleservices
Sistema mass media
28
34
38
44
52
56
60
64
68
72
76
80
84
88
MTS
Mobile TeleSystems (MTS) is a
leading telecom operator in Russia
and the CIS countries. Together
with its subsidiaries, MTS provides
services to about 104m mobile
subscribers in Russia, Armenia,
Ukraine, Turkmenistan and
Uzbekistan. The company also
provides fixed telephony and pay-
TV services in Moscow (MGTS),
in all federal districts of Russia
and in Ukraine.
Management
President – A.A. Dubovskov
Chairman of the Board of Directors – R. Sommer
Sistema’s
effective
ownership
53%
Revenue
Number of
subscribers
Market share in
data segment
Position in Russian
mobile market
410.8 104
RUB bln
mln
37%
№1
Industry*
The growth rate of the Russian
telecom market slowed down in
2014 to 2.7% compared to 5% in
2013, mainly due to the decline in
the growth rate of the mobile market
from 5% to 3%. The penetration of OTT
services (Skype, WhatsApp, Viber, etc.)
continues to increase and has reached
13% in Moscow. This trend is expected
to result in a further downturn in the
mobile voice market as part of mobile
voice usage continues to be replaced
by Voice over IP (VoIP) and SMS is
replaced by iMessaging.
Operators’ revenues from data services
in Russia, mln RUB
176,806
139,713
99,994
75,636
53,026
2010
2011
2012
2013
2014
* According to company data and information from ACM-Consulting, TMT-Consulting, iKS-Consulting and Svyaznoy.
28
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Data communication services continue
to drive growth in the mobile business
through incentives to increase smart-
phone and tablet penetration, promo-
tion of packaged “voice&data” plans,
development of data communication
networks and distribution channels. In
2014, the penetration rate for data ser-
vices in Russia reached 60%. Over the
last three years, data traffic in Russia
has grown sevenfold, with LTE traffic
accounting for 12% of total traffic as of
December 2014.
According to expert estimates, the
broadband access (BBA) subscrib-
er base in Russia totalled 28.9 mln
households in 2014. The fixed BBA
market in 2014 increased by 5.1%. In
2015, the BBA and pay-TV markets
will remain highly competitive, with
3-4 players in every large city of Rus-
sia. The growth in the BBA subscriber
base will be mainly driven by churn
from competitors. According to fore-
casts, the number of BBA subscribers
in 2015 may increase by 3.7% to 29.96
mln households.
The pay TV market in Russia grew by
6.1% in 2014 to RUB 57 bn, with the
number of pay-TV subscribers rising
by 8.3% to 37.8 mln. The TV market re-
mains among the fastest growing mar-
kets due to the development of hybrid
and satellite TV. In 2015, growth rates
of the pay TV market and subscriber
base in Russia are predicted to slow
down from 4.2% to 3.8%, respectively,
with a penetration rate of above 70%.
Subscriber base in Russia, m
243
240
231
228
219
Subscribers
in Russia,
mln
MTS
market
share
32.6%
30.7%
30.9%
31.0% 31.0%
2010
2011
2012
2013
2014
Over 2014, the sales of mobile
phones and smartphones in Russia
increased by 6% to 44m units with
the share of smartphones in total
phone sales reaching 64%. The
market is characterised by a fall in
the average smartphone price with
an increase in the share of low cost
models in total sales to 60-65%.
The growth of tablet unit sales also
slowed down to 33% in 2014 year-
on-year compared to 125% growth
in 2013; however, in monetary
terms, sales remained stable.
In 4Q 2014, the financial results of
telecom companies were affected by
fluctuations in the rouble exchange
rate against foreign currencies and
lower growth in retail lending, push-
ing up the costs of imported telecom
equipment and international roam-
ing and interconnect costs of tele-
com operators. Therefore, rates for
premium international roaming and
voice calls are expected to increase.
The majority of markets where MTS
operates will continue to be exposed
to currency risks In 2015. Besides,
there is the risk of a decline
in consumption in the telecom
market, especially for international
roaming services.
Steady growth in 2014
MTS remains the leader in total
revenues and OIBDA among the
Russian «Big Three» operators,
with the lowest churn rate in 2014
and a 7.5% year-on-year growth
in the mobile subscriber base in
Russia. MTS also leads in mobile
data revenue with a 38.8% market
share among the «Big Three» as
of the end of 2014 and a 35.9%
year-on-year increase in data
revenue in 2014.
* Calculated from company press releases.
** mobile subscriber base in Russia for the 2010-2013 includes MTS subscribers recorded on the
basis of 6-month activity. From the 3rd quarter of 2014 MTS has moved to the account of subscribers
based on 3-month activity, the data for 2014 include a 3-month MTS subscribers.
MTS revenues by geographies,
bln RUB
378.2
11%
398.4
11%
410.8
9%
89%
89%
91%
2012
2013
2014
Revenue in Russia
Revenue in other countries
29
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT MTS revenues in Russia by services, bln RUB
Mobile revenue
Fixed-line revenue
Other revenue
291
62.5
21.4
In 2014, MTS continued active
investments in the construction of
3G and 4G data networks along with
modernization and expansion of 3G
networks in strategic regions and
quality improvement projects imple-
mented in Moscow and Saint-Pe-
tersburg. According to Speedtest
data, MTS has the best data down-
load speeds and the lowest network
lag in Russia. In Moscow, according
to Speedtest user measurements,
MTS’s LTE networks have the high-
est data download speeds, following
the large-scale construction of net-
works undertaken in 2013-2014.
The 4G network was launched into
commercial operation in 76 Russian
regions compared to 15 regions at
the end of 2013, with MTS leading
in terms of the number of Russian
regions covered by LTE networks as
of the end of 2014.
In Moscow, MTS focused on the
quality of data services, which
resulted in a 10-fold growth in LTE
traffic with over half of the total
Internet (smartphone) traffic being
generated by LTE users.
The launch of a small cell
deployment project in large Russian
cities will enable MTS to increase
the LTE network speeds and
capacity and improve radio coverage
in locations where mobile Internet
usage is particularly high. At the
first stage, MTS will implement the
project in Moscow (200 cells) and
Saint Petersburg.
MTS LTE coverage map
in Russia
Regions of
LTE coverage
in 2013
The launch of
LTE networks
in 2014
The launch of
LTE networks
in 2015
In 2014, fixed broadband access
was the main driver of growth in
the subscriber base and revenues
in fixed-line business, coming from
new connections and increase
in average monthly revenue
per user (ARPU).
apartments or 90% of households in
Moscow. The number of MTS GPON
users reached 1.1 bln. The number
of fixed BBA and GPON TV users in
the corporate segment was up 50%.
Total Internet traffic in the MGTS
network grew by 45% for the year.
MGTS GPON (GigabitPON) network
with digital TV signal and home
Internet with the speed of up to 1
GB/s became available in 3.5 mln
In 2014 MGTS implemented several
contracts for connecting transport
hubs in the capital, student hostels,
and traffic lights to high-speed data
channels. MGTS also successfully
implemented a video surveillance
project for the elections to the
Moscow Duma in September 2014.
Large-scale projects implemented
in 2014 include the launch of
MVNO on MTS network, which
provided subscribers with access to
packaged services, including fixed-
line Internet, telephony and pay
TV; mobile Internet and voice calls;
30
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH and mobile TV. Implementation of
IMS (IP Multimedia Subsystem)
was completed in Moscow, which
enables the operator to launch its
own OTT services.
Deterioration of macroeconomic
conditions and the political situation
in Ukraine in 2Q 2014 has led
to a drop in the consumption of
communication services by MTS-
Ukraine subscribers, especially
data and content delivery services.
Starting from August 2014, MTS-
Ukraine ceased services in the
Crimea for technical reasons.
Key events
• In April 2014 MTS acquired a 10.8%
stake in OZON Holdings Limited,
one of Russia’s largest e-com-
merce businesses, for US$ 75 mil-
lion. Sistema also acquired a 10.8%
stake in OZON at the same price.
• In May 2014, MTS became the
only Russian telecom brand to be
included in the BRANDZ™ Top 100
Most Valuable Global Brands for the
seventh time, ranked 9th among the
world’s 10 most valuable telecom
brands. Its brand value increased by
14.5% over the year to US$ 12.18 bln.
• I In July 2014, MTS signed a settle-
ment agreement with the Republic
of Uzbekistan to resume opera-
tions in the country, under which
MTS received a 50.01% stake in
UMS. The network was launched
on December 1, 2014.
• In November 2014, MTS in partner-
ship with Sistema Mass Media an-
nounced plans to launch satellite
TV services under the MTS brand.
The services will be available for
95% of the country’s population.
• In December 2014, MTS signed a
Operational strategy
15,000
base stations
(LTE/3G/2G) built in 2014
76
regions with LTE
coverage
infrastructure facilities, non-
transport monitoring (people, trouble
notification).
Development of new sales channel
formats will take place at ОZON
Holding, the largest multi-brand
player engaged in online sales of
operator products. In 2015, MTS
will launch its service and product
offerings, sale of SIM cards and
subscriber equipment, payments
from MTS account using Ozone
applications, etc. in real time.
MTS will continue to actively
develop data services as the most
promising business segment and
deploy multiband LTE networks with
frequency aggregation at a later
stage. In 2015, MTS plans to provide
4G network coverage in all Russian
regions. Construction of micro
cells will be continued in locations
with massive web traffic along with
installation of indoor base stations
in large cities. SON (self-organizing
network) implemented in Moscow
since 2014 will also be deployed
in other Russian regions. As for
construction and modernisation of
fixed-line networks based on target
technologies, MTS plans to connect
over 90% households with FTTB
(fiber-to-building) technology.
In response to OTT market trends,
from mid 2015, MTS plans to
launch its own IP telephony and
messaging service based on Rich
Communication Suite technology
(similar to Skype, Viber, WhatsApp).
Work on the Big Data project -
search for additional revenue
opportunities and improvement of
operational efficiency by using IT
assets – MTS data storages - will be
continued.
4,245
retail stores
including
2,919
MTS brand stores
According to the 2015-2018
development strategy for financial
services offered by MTS and MTS
Bank, the share of MTS subscribers
in the bank’s client portfolio is
expected to expand from 2% to 7%.
The key focus in the development of
financial services in 2015 will be on
the launch of a single digital wallet
for MTS customers, development
of NFC services and launch of new
products: digital signature on a SIM
card, virtual card, money transfer
service, expansion of fee-based
financial services (insurance, railway
and air tickets).
The MTS strategy for foreign
markets is aimed at maintaining and
strengthening its leadership position
in the broadband internet segment,
building and upgrading networks,
improving efficiency, expanding the
frequency band, developing new
growth points: mobile advertising,
mobile commerce, М2М, Big Data.
31
partnership agreement with Vimpel-
Com to jointly plan, develop and use
LTE networks in certain Russian
regions. Under the agreement,
between 2014 and 2016, MTS will de-
velop shared mobile data networks
in 19 regions, while VimpelCom will
construct networks in 17 regions.
According to the M2M service
strategies for 2015-2017, work will
be carried out in the following 5
areas: motor vehicle monitoring
and dispatching, insurance
telematics, security and search
systems, monitoring of residential
and commercial properties and
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Financial results of MTS
RUB million
Revenue
OIBDA
2014
2013
Change
410,758
398,443
3.1%
171,812
176,299
(2.5%)
Operating income
98,698
114,866
(14.1%)
Net income attributable to Sistema
27,725
42,270
(34.4%)
Capital expenditures
Net debt
92,599
81,575
230,651
188,086
13.5%
22.6%
MTS retained its leading position
among the Big Three operators
in the Russian telecom market
in 2014, both in terms of revenue
and profitability. MTS’ revenue in
rouble terms increased by 3.1%
year-on-year in 2014, as a result of
the continued development of its
data services and subscriber base
growth. The total subscriber base
increased by 4.1% to 104.1 million
customers as of December 31,
2014.
In February 2015, MTS’ subsidiary
MTS Ukraine won a tender for
a nationwide licence for 3G
telecommunication services in the
1950-1965 MHz/2140-2155 MHz
spectrum ranges. Granted for a
term of 15 years, the licence cost
UAH 2.715 billion. In accordance
with the conditions stipulated in
the tender papers, MTS is required
to launch 3G services in all of the
regional centres across Ukraine
within 18 months upon allocation
of the licence.
MTS mobile subscriber
base, mln
104.1
99.8
74.6
Russia
20.2
Ukraine
1.7
2.2
0.2
Turkmenistan
Armenia
Uzbekistan
5.3
Belarus
2013
2014
Revenue per user and minutes of usage at MTS
in Russia
372
359
339
339
ARPU, RUB
MoU, min
2013
2014
32
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH In 2014, MTS’ capital expenditures
of RUB 92.6 billion slightly exceeded
the target of RUB 90 billion due
to prepayments to the vendors in
anticipation of further depreciation of
the rouble.
Key projects include the
enhancement of 3G networks in
Russia, roll-out of LTE/4G networks
throughout Russia, and the ongoing
deployment of GPON in Moscow, as
well as network modernization in
other markets of operations.
Sberbank of Russia to open a non-
revolving credit facility for a total
amount of RUB 50bn maturing in
September 2021.
MTS debt increased due to additional
borrowings made on attractive
terms to hedge the risks of low
liquidity in the future. In October
2014, MTS signed an agreement with
The high proportion of rouble-
denominated debt mitigates the risks
associated with currency volatility
and enhances the company’s
financial stability.
MTS debt profile
Debt by instruments
Loans
Bonds
Debt by currency*
RUB
USD
EUR
62%
38%
75%
24%
1%
* The debt structure by currency includes risks of currency hedging in the amount of US$ 675.3 million at the end 4th quarter of 2014
As of December 31, 2014, MTS
Ukraine, a subsidiary of MTS, held
US$ 90.2 million in current accounts
and deposits in Delta Bank, the
fourth largest bank in Ukraine. In
December 2014, Delta Bank delayed
customer payments and put limits on
cash withdrawals. In March 2015, the
National Bank of Ukraine adopted a
resolution declaring Delta Bank to
be insolvent. The Group recognised
a provision for cash and deposits
in Delta Bank in the financial
statements for 2014.
MTS Free Cash Flow, RUB bln
159.9
159.5
73.7
2013
57.0
2014
Free cash
flow
Operating
cash flow
33
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT DETSKY MIR
The Detsky Mir Group is the largest
children’s goods retailer in Russia
and the CIS. The Group includes the
Detsky Mir retail chain in Russia and
Kazakhstan, the early development
chain ELC in Russia and the online
stores detmir.ru and elc-russia.ru.
Management
President – V.S. Chirakhov
Chairman of the Board of Directors – C. A. Baxter
Sistema’s
effective
ownership
99%
Revenue
Number
of stores
Visits
per year
Like-for-like sales
growth in roubles
45.4
RUB bln
322
>109
mln
+13.6%
Industry*
In 2014, the market of children’s
goods kept growing despite a
slowdown in Russia’s economy.
Similar to food retail, the market
for children’s goods is resistant
to macroeconomic challenges,
as was clearly demonstrated by
the financial crisis of 2008-2009
when the population’s spending
on children’s goods rose by 9%
(outpaced only by spending on food
with 11%). Replacement of so-called
uncivilised retail (open-air markets,
kiosks, fairs) by modern formats
and market consolidation by the
largest players continued in 2014.
Detsky Mir retained its leadership
in 2014 with its market share rising
from 8.1% to 10.0%.
* RosInter, M-Video, Synovate Comcon,
X5 Retail Group, Rosstat.
34
Market for children’s
goods during the crisis
period (2008-2009),
RUB per capita
Disposable
income
Children
goods
Spending per
capita
Food
retail
3.9%
5.7%
9.9%
10.8%
–30.0%
–21.1%
Restaurants
–7.8%
–6.0%
GDP in nominal
terms
Electronics
GDP in real terms
In 2014, the market for children’s
goods increased by 3.2% in rouble
terms. In 2015, experts expect market
growth to slow down to 2.7%, however,
demographics will continue to drive up
spending on children’s goods. The gov-
ernment’s support of family and moth-
erhood, including the Maternity Capital
Programme, contributes significantly
to a rise in birth rates. According to
Rosstat, Russia had a record num-
ber of births in 2014 (1.9 million). By
resolution of the Russian Government
the Maternity Capital Programme was
extended to 2017, which will probably
have a positive effect on the birth rates
in 2015-2016 through additional finan-
cial support provided to families.
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Birth and death rates convergence, % per 1,000 habitants
Birth rate
Death rate
16.4
15.9
16.1
15.1
14.6
14.5
14.1
14.2
13.5
13.3
13.2
10.2
10.4
10.2
10.3
11.3
12.0
12.3
12.5
12.6
13.3
13.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Steady growth in 2014
In 2014, Detsky Mir continued to
improve business efficiency. Key
projects implemented during
the reporting year include the
construction of Detsky Mir’s
warehouse in the Moscow region,
the introduction of a unified SAP
IT platform and the launch of a
7,000 sq.m. flagship store in the
centre of Moscow, which became
the biggest children’s goods store
in Russia. In 2014, the company
opened 56 new Detsky Mir stores
and 16 ELC stores*.
Detsky mir stores
and retail space
322
390
252
216
291
320
2012
2013
2014
Amount
of stores
Retail space,
‘000 sq m
The retail space of Detsky Mir
expanded by 22% in 2014 to 390,000
m2 from 320,000 a year earlier. All
newly launched Detsky Mir stores
were designed in a new concept
providing for a large number of play
areas, which was first implemented
in the Mega – Belaya Dacha mall in
December 2013. Ten largest stores
in the chain were remodelled to the
new concept.
Detsky Mir’s share in total
children’s retail market
10%
8.1%
7.1%
2012
2013
2014
The key growth segments in 2014
were toys and baby products where
the market share of Detsky Mir in
2014 rose from 13.2% to 16.3% and
from 9.2% to 11.9%, respectively.
These two categories are expected
to remain the key growth areas in
2015. Thus, according to a forecast
by Synovate Comcon, in 2015 the
market share of Detsky Mir in the
toys category will reach 19.7%
and in the baby products category
it will expand to 13.1%.
Key events
• In August 2014, the flagship Detsky
Mir store was opened in the centre
of Moscow in Vozdvizhenka St. With
a total area of 7,000 m2, the store
became the largest children’s
goods store in Russia, and also
a leader in the Detsky Mir chain
in terms of customer traffic and
sales in two months after opening.
• In December 2014, Vladimir
Chirakhov, CEO of Detsky Mir,
became the company’s minority
shareholder, with a 1.08% stake,
as part of a long-term incentive
programme.
• In August and December 2014,
Detsky Mir paid out RUB 2.5 bln
in dividends based on performance
in 2013 and 9 months of 2014.
* ELC stores – stores selling learning toys
35
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Operational strategy
In 2015, Detsky Mir expects to see
positive effects from the measures
taken to improve operational
efficiency: the launch of a unified
SAP platform, modernisation of
cashier services, opening of a
new warehouse in Bekasovo and
introduction of a new concept.
In July 2015, it is planned to launch
the company’s own warehouse
for 70,000 pallets, which will
significantly increase the speed
of deliveries. This, in turn, will
considerably increase inventory
turnover and inventory management
efficiency. The company will
continue opening new stores in
cities with a population of at least
50,000 people and replacing chains
of other retailers on the back of
the deteriorating macroeconomic
conditions.
In 2015, Detsky Mmir expects to
open 60 new stores. The affordable
price policy will remain the chain’s
priority in 2015 and subsequent
years, which will help to attract
new customer and increase loyalty
among the existing clientele. Online
sales will remain the key driver of
Detsky Mir’ development as a multi-
channel retailer. All initiatives which
were launched in the pilot format,
namely, electronic kiosks, online
application for smartphones, in-
store pick-up service will be actively
used to maximise the customer
interaction efficiency.
№1
on the market for
children’s goods in Russia
7,000 м2
the largest toy store
in Russia
123%
growth in the online
store’s revenue
38%
gross profit
margin
1.6х
Net debt/OIBDA
36
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Financial results of Detsky mir
RUB million
Revenue
OIBDA
Operating income
Net income attributable to Sistema
Net debt
2014
2013
Change
45,446
36,001
4,910
4,170
2,043
7,866
2,771
2,137
1,299
5,062
26.2%
77.2%
95.1%
57.2%
55.4%
Detsky mir revenue
and OIBDA margin
45,446
10.8%
36,001
7.7%
2013
2014
Revenue, mln RUB
OIBDA margin
A minor decrease in gross margins
in 2014 was due to the rouble de-
preciation against global currencies
and the need to maintain affordable
prices at our stores, which ensured
additional incoming traffic.
Double-digit growth of like-for-like
sales resulted from a competitive
price policy, marketing activities and
improved merchandising.
The key driver of like-for-like sales
growth was increase in traffic, i.e.
inflow of new customers and higher
conversion. Opening of new stores in
the new format, an attractive loyalty
programme and competitive prices
will encourage like-for-like sales
growth in the future.
Detsky mir’s OIBDA in rouble terms
grew by 77.2% year-on-year in
2014. The OIBDA margin increased
to 10.8% in 2014 compared to
7.7% in 2013, reflecting improved
operating efficiency. Detsky
mir’s SG&A expenses declined
as a percentage of revenues to
29.4% in 2014, compared to 31.8%
in the previous year.
Retailer’s net debt is at a
comfortable level – Net debt/OIBDA
amounted to 1.6. The company’s
debt is denominated in roubles.
Like-for-like growth of Detsky mir
Detsky mir saw its rouble revenues
increase by 26.2% year-on-year
in 2014 to RUB 45.4 billion as a
result of double-digit growth in
like-for-like sales and high revenue
growth in the stores opened in
2012 and 2013. Like-for-like sales
increased by 13.6% year-on-year
in rouble terms.
12.40%
13.60%
8.20%
7.90%
2013
2014
Like-for-like
traffic growth
Like-for-like
sales growth
37
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT MEDSI GROUP
1
№1 provider
of private
healthcare
services in
Russia
Medsi Group is a leading provider
of private healthcare in Russia,
offering a complete range of
preventive, diagnostic and treatment
services as well as rehabilitation
services for children and adults.
Management
President – E.A. Brusilova
Chairman of the Board of Directors – M.V. Shamolin
Sistema’s
effective
ownership
Revenue
Number
of doctors
Patient visits
per year
Healthcare
facilities
75% 9.8
RUB bln
1,842 >6
mln
230,000
m2
Industry*
The market for private healthcare
services in Russia demonstrated
double-digit growth in 2014 and
reached RUB 530 bln. The com-
bined effect of structural market
changes and the government’s
initiatives will continue to support
the development of the private
healthcare sector. The trend to-
wards consolidation, and reduction
in the number of public healthcare
facilities, which emerged in 2013,
will continue in 2015.
In 2014, the Moscow market held
28% of legal private healthcare
market, which is primarily due
to the fact that the VHI (voluntary
health insurance) segment is much
* Sources: Biznesstat, analysis of the Company.
38
more developed in the capital.
Over the last 5 years, the private
healthcare market grew more than
twofold, reflecting a considerable in-
crease in the number of private clin-
ics and a higher quality of services
compared to free public healthcare
and shadow healthcare services.
Private healthcare market in Russia, bln RUB
29% 28%
25%
91
98
17%
41
51
66
85
7%
7%
2011
2012
2013
2014
2015
2016
Fact
Forecast
Market
value,
RUB bln
Growth
rate, %
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH The value of the VHI segment, which
has historically been showing high
growth rates, amounted to almost
RUB 100 bln in 2014, up 50% from
2009. The Moscow market, which
accounts for more than 60% of the
total VHI market, is characterised
by a high concentration of large
corporations and dynamic growth
of businesses that are the main
customers of insurance companies.
The VHI segment exhibits a strong
correlation with the economic and
Voluntary medical insurance market in Russia, RUB bln
13% 13%
58
60
61
11%
11%
41
47
53
3%
2%
2011
2012
2013
2014
2015
2016
Fact
Forecast
Market
value,
RUB bln
Growth
rate, %
Steady growth in 2014
Medsi is the largest federal chain
of clinics, serving more than 6 mln
patients every year. Its market
share by revenues amounted to 2%
in Russia and over 6% in Moscow
in 2014.
business environment in Russia.
The economic downturn results in a
reduction in the scope and options of
VHI programmes and, in some cases,
VHI being denied to some employees.
In the next year, the healthcare
industry will mainly be shaped
by ongoing reforms stimulating
the public and private sectors to
consolidate their efforts to further
develop the healthcare market in the
country. There is a tendency towards
engaging private clinics to provide
services under OHI (obligatory health
insurance) programmes; initiatives
are being proposed to enable patients
to pay extra on top of the fees covered
by OHI or set off their expenses
against VHI and to grant certain
benefits to healthcare facilities.
Moreover, the government is
taking measures aimed at curbing
under-the-counter payments for
medical services, which currently
account for about 25% of the entire
healthcare market.
MEDSI medical facilities
Moscow
1 clinical diagnostic centre
16 clinics
3 hospitals
2 sanatoriums
3 welness centres
Regions
7 clinics
1 sanatorium (Yalta)
Bryansk
1
25
Moscow
1
N.Novgorod
1
Nyagan
Perm
1
Nizhnevartovsk
1
1
Yalta
Barnaul
1
39
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT In 2014, the construction of the
second flagship clinical and
diagnostic centre with a total
area of 22,000 m2 was started at
Krasnaya Presnya. The centre will
offer a complete range of outpatient
and diagnostic medical services,
as well as inpatient treatment and
rehabilitation services.
Last year, four inefficient loss-
making clinics were closed in the
regions; however, Medsi continued
its development in Moscow by
opening a new clinic for outpatient
primary and diagnostic care.
After the integration with SUE
Medical Centre assets was
completed in 2014, the company
launched a large-scale investment
programme to modernise its
assets and install new high-tech
equipment, introduce new medical
services and modern treatment
methods, and establish cross sales
within the Group by providing a full
range of medical services.
Patient visits growth at MEDSI, mln
Number of surgeries
6.0
6.0
5.0
+135%
7,838
4.1
3.4
+19%
3,336
2,797
2010
2011
2012
2013
2014
2012
2013
2014
Medsi started implementation of
the first reconstruction phase at the
hospital in Otradnoe in collaboration
with Royal Philips and works to
convert one of its outpatient clinics
into a modern children’s healthcare
centre in cooperation with Vamed.
The key initiative for the Group’s
business efficiency improvement
in 2014 was restructuring
of the management system,
granting additional powers and
responsibilities to key assets and
at the same time optimising the
motivation system. In addition, the
company continued to improve
business efficiency by introducing a
cutting-edge unified IT system and
expanding medical space in two
existing clinics.
40
The introduction of new high-
precision diagnostic equipment
and modern surgical applicances
resulted in substantial shifts in
the quantity, quality and scope of
provided medical care.
The refurbishment of its asset
base has enabled Medsi to obtain
licenses and quotas for high-tech
medical care (HTMC) under the state
programmes from the beginning
of 2015.
Improved efficiency of clinical
hospitals is largely due to the im-
plementation of new technologies;
in particular, the company gradu-
ally transitioned to a laparoscopic
approach which is now used in
most surgeries, thereby increasing
the patient flow and reducing the
duration of their stay in the hospi-
tal. As a result, the total number of
surgeries performed increased by
135%, while the occupancy rate in
clinical hospitals in Otradnoe and
Botkinsky proezd reached 43% and
65%, respectively. In the near future,
the company will implement invasive
arrhythmology and open a full-ser-
vice pain management clinic.
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Key events
• In November 2014, Elena
• In January 2015, at the World
Brusilova was appointed President
of Medsi Group.
Economic Forum in Davos, Medsi
and Royal Phillips announced a
new joint initiative to set up a new
unique training centre on the basis
of Medsi’s assets.
The decline in the purchasing
power caused by the deterioration
of the macroeconomic environment
is affecting the private healthcare
segment. The most significant
drop in demand is expected in the
regions with a low average income
per capita.
Operational strategy
The company’s strategy is focused
on organic growth and selective
investments in the most successful
and efficient healthcare assets.
The key long-term drivers for
growth inlcude investment
projects scheduled for 2015, such
as launching the clinical and
diagnostic centre on Krasnaya
Presnya, completing modernisation
of the surgery, intensive care and
sterilisation units in the hospital
in Otradnoe, creating a radiology
unit in Otradnoe, renovating the
outpatient clinic in Khoroshevsky
proezd and creating a specialised
children’s clinic on its basis.
In addition to the large-scale
investment programme, the
company will increase its patient
flow and improve operational and
management efficiency. Strong
emphasis will be placed on the
retail segment: the marketing
promotion programme for services
and clinics started in 4Q 2014 will
be continued in 2015. Medsi is
currently cooperating with all major
insurance companies. Maintaining
and increasing the insurance flow
through new products and flexible
pricing, despite the challenging
economic situation, is also one of
the company’s KPIs. Qualifying for
state quotas on high-tech medical
care (HTMC) and providing services
under obligatory health insurance
programmes at affordable
rates, will present additional
opportunities for Medsi.
The company’s optimisation
programme provides for creating
an efficient and manageable
business process chain. A new
unified information system to be
implemented in 2015-2016 will
help cut the managing company’s
expenses through automation. In
2014, the incentive system for the
operational staff and management
was updated to include a variable
component linked to individual
performance and financial and
operating KPIs.
41
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Financial results of Medsi
RUB millions
Revenue
OIBDA
Operating income
Net income attributable to Sistema
2014
9,767
866
382
533
2013
Change
9,362
1,408
4.3%
(38.5%)
970
(60.6%)
1,011
(47.3%)
Net debt
(1,003)
(4,415)
77.3%
Medsi’s rouble revenues grew by
4.3% year-on-year in 2014, reflect-
ing an 0.7% rise in the number
of patient visits to 6.035 million,
and a 4.0% increase in the aver-
age bill in rouble terms, which
totalled RUB 1,618.
The share of individual contracts in
the company’s revenues decreased
by 2.0 p.p. to 22%, while the share
represented by insurance compa-
nies and legal entities increased to
42% and 11%, respectively.
Healthcare facilities in Moscow and
the Moscow region were the biggest
contributors to the Group’s revenue.
In 2014, they accounted for 88.1% of
MEDSI’s revenue. This growth was
largely driven by a strong increase
in the revenue generated by CDC
on Belorusskaya, which increased
by 12.9% (with an OIBDA margin of
45.9%) and accounted for 20.4% of
the Group’s total revenue in 2014.
MEDSI’s revenue by assets
CDC on Belorusskaya
Hospitals
Clinics
Other
20.4%
12.4%
58.5%
8.7%
MEDSI’s revenue by clients
Insurance companies
Corporate clients
Individuals
State contract
Other
42%
22%
24%
11%
1%
42
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH In 2014, the Group’s selling, general
and administrative expenses (SG&A)
rose by 22.5%, due to an increase in
personnel expenses and growth of
advertising and marketing expens-
es. Increase of personnel expenses
reflected MEDSI’s management
system redesign and introduction of
new functional areas and business
units. Growth of advertising expenses
resulted from the Group’s stepped-
up marketing activities targeting indi-
vidual customers to improve utilisa-
tion rates across its medical assets
and increase brand awareness. The
SG&A/revenue ratio grew to 17.4%
versus 14.8% in the previous year. In
the reporting period, OIBDA declined
by 38.5% versus 2013 to RUB 866
million, OIBDA margin was 8.9%.
MEDSI’s CAPEX in 2014 totalled
RUB 2,981.1 million, a more
than eight-fold increase over the
previous year.
In 2014, Medsi launched three
investment projects in Moscow,
including the construction of a
new clinical and diagnostic centre
in Krasnaya Presnya, which will
include an adult and children’s in-
patient hospital. This new clinical
and diagnostic centre is scheduled
to open in the second half of
2015. The company also started
the renovation of its clinics in
Otradnoe and on Khoroshevskoye
highway, the latter is to be
converted into a specialised
children’s clinic.
MEDSI’s CAPEX,
mln RUB
+770.7%
2,981
342
2013
2014
SG&A expenses of
MEDSI, mln RUB
+22.5%
1,695
As of 31 December 2014, the
Group’s total debt stood at RUB
2,352.3 million versus RUB 2,397.3
million at the end of 2013. All liabili-
ties of the Group are denominated in
roubles. Most of MEDSI’s debt (67%)
is made up by long-term liabilities
with maturing in 3-5 years. As aof
the end of 2014, MEDSI had a net
cash position of RUB 1,003 million.
MEDSI’s debt, mln RUB
-1,9%
6,813
17.4%
2,397
3,355
2,352
1,384
14.8%
2013
2014
2013
2014
SG&A/Revenue
SG&A
Total debt
Cash position
43
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT LESINVEST GROUP (SEGEZHA)
LesInvest Group is a vertically
integrated pulp and paper
company with a full cycle of
timber harvesting and advanced
wood processing operations.
LesInvest Group manufactures
pulp and paper products, paper
sacks, birch plywood, chipboard,
and fibreboard.
Management
President – S.A. Pomelov
Chairman of the Board of Directors – A.M. Uzdenov
Sistema’s
effective
ownership
100%
Revenue
24.7
RUB bln
Number of
plants in Russia
and Europe
9+8
Share of
export
sales
61%
Industry*
Sack paper
The share of sack paper in the
global paper packaging consumption
amounts to 3%. The global sack
paper market is dominated by
unbleached sack paper, accounting
for 87%.
Over the next 5 years, the global
market for unbleached paper is
expected to grow at 2% annually,
with consumption growth to
be led by Asia, Latin America
and the Middle East.
* Source: LesInvest, Vision Hunters, RISI, Enter
Vision, BNP Paridas UNECE, Bloomberg, Morgan
Stanley, Russian Ministry of Industry and Trade,
Rosstat, Federal Customs Service, Pöyry, Federal
Forestry Agency, NETLA, Food and Agriculture
Organization.
Consumption of unbleached paper, mln tonnes
+2%
–1%
+2%
+2%
CAGR
+2%
6.5
6.6
2010
2011
6.6
6.8
2013
2014
6.7
2012
Fact
7.5
2020
Forecast
China producers occupy 41% of the
unbleached paper global market,
however, this paper is of low quality.
Paper quality depends on the avail-
ability of coniferous wood feedstock.
Only 21% of paper produced globally
(in Europe, Russia, North America)
corresponds to these standards and
delivers high profitability.
44
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Paper sacks
In 2014, the consumption of paper
sacks in Russia was 841 mln pieces
with 32% share of import (the main
importers are Ukraine, Poland,
Germany). The market is expected
to grow by 1.5% annually through
2020 and is local in its nature (with
geographic proximity between
consumers and producers), which is
due to lead time and short hauling
distance benefits.
About 86% of consumers are
manufacturers of building materials
(cement and dry mixtures).
Production of paper sacks in Russia, mln
917
780
803
700
723
541
562
554
562
841
575
CAGR
+1,5%
2020
Forecast
121
146
160
238
241
266
2010
2011
2012
2013
2014
Fact
Import
Production in Russia
Plywood
World production of plywood, mln m3
The global production of birch ply-
wood is approximately 5.9 mln m3.
The largest reserves of feedstock
(birchlogs) for plywood production
are concentrated in Russia, which
accounts for 53% of global market.
Birch plywood is a premium segment,
growing 4% annually and generating a
steady growth in demand and prices.
The largest consumers of birch
plywood are Europe (36%), Russia
(27%) and Asia (25%). The key growth
driver for the birch plywood market
is development of shipbuilding,
construction and machine building
industries, where birch plywood is
non-substitutable.
High growth in birch plywood
consumption is predicted for both
the mature European and North
American markets and emerging
markets in Asia and the Middle East.
85
79
+9%
108
+8%
99
+8%
92
CAGR
+3%
102
113
87
93
5.4
2010
5.4
2011
5.7
2013
5.9
2014
Fact
CAGR
+4%
Birch plywood
Plywood (coniferous, tropical etc)
7.7
2020
Forecast
45
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Production of timber products in Russia
(fiberboards, MDF, HDF), ‘000 m3
2,468
2,579
2,612
2,056
2,743
CAGR
+1%
2,908
2010
2011
2013
2014
2012
Fact
2020
Forecast
Production and export of sawn timber in Russia, mln m3
19.1
17.7
21.0
18.5
20.6
19.3
21.7
19.5
21.4
20.8
22.7
22.0
2010
2011
2012
2013
2014
Fact
Production
Export
2020
Forecast
The largest sawn timber producers are located in the Irkutsk and
Arkhangelsk regions as well as in the Krasnoyarsk territory.
Fibreboard
Consumption of FB (fibreboard),
MDF (medium density fibreboard),
HDF (high density fibreboard)
in Russia totals 3,438,000 m3,
with approximately 24% being
imported. Production in Russia is
2,743,000 m3 with only 5% being
exported. The Russian market is
highly fragmented with unmet
demand for high-quality boards
of 500,000 m3. The share of low-
quality board produced by outdated
equipment in Russia is still high
(21%). The main consumers of
wood boards are manufacturers
of furniture and doors (57%); the
construction industry consumes
approximately 39% of the output.
Total consumption growth through
2020 is expected at 1% per.
Sawn timber
Out of the 21.4 mln m3 of soft
sawn timber produced in Russia,
approximately 1 mln m3 per year is
consumed within the country and
over 90% is exported, mainly to China
(32%). The sawn timber market is
not saturated with top-5 companies
occupying only 10% of the market in
Europe and 7% in Russia. The bulk of
consumption growth is expected to
take place in China, USA, Russia and
is estimated at 1.2% per year.
Stagnation in the European market
may lead to a drop in sawn timber
prices in the short run, while in
Asia prices are expected to rise,
reflecting growing construction rates
and positive GDP growth. The main
consumer of sawn timber is the
construction industry.
46
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Forest resources
Worldwide forest resources amount
to 527 bln m3; 16% of them are locat-
ed in Russia with its world’s largest
coniferous forests of 46.3 bln m3.
Russia has a high growth potential
with the annual allowable cut of
669 mln m3, which is three times
higher than the actual cut.
Allowable and actual cut in Russia, mln m3
633
669
669
CAGR
+4%
India and China are among
countries that have a deficit of forest
resources, while Russia, Brazil and
Finland have a potential for growth in
wood harvesting.
176
2010
195
203
2013
Fact
2014
Allowable cut
Actual cut
669
251
2020
Forecast
Business of LesInvest Group
On September 29, 2014, Les-
Invest, a subsidiary of Sistema
JSFC, completed a transaction
to acquire 100% of Segezha
Pulp and Paper Mill and 100% of
Derevoobrabotka-Proekt.
In 2014, the company conducted
negotiations with the key customers
and successfully secured contracts
for 2015, managing to maintain sta-
ble volumes and win new custom-
ers. In 2014, LesInvest focused on
the reorganisation of the procure-
ment system, logistics services,
which enabled the company to re-
duce wood harvesting costs and to
improve the terms of wood supply
contracts. LesInvest Group imple-
mented a new efficient business
model, modified the organisational
structure and formed a new top
management team, which includes
professionals with high expertise in
the industry.
In the second half of 2014, on the back
of growth in foreign currency sales,
which account for 61% of the Group’s
total revenue, and a weakening rouble,
the advantages of LesInvest Group
over its key competitors both in Russia
and abroad increased substantially.
Segezha Pulp and Paper Mill – sack paper
Sack paper accounts for 17% of
the Group’s total revenue and
approximately for 25% of its foreign
currency revenue.
Segezha PPM is ranked number
four globally and number one in
Russia in the production of high-end
unbleached sack paper of European
quality. Around 45% of produced
paper is supplied to the converting
plants of the Group producing
paper sacks in Russia, Europe
and Turkey. Its market share of
unbleached paper production in
Russia is 70%. The mill is a major
exporter supplying products
to Egypt, Indonesia, Pakistan,
Mexico, Malaysia, Vietnam. In 2015,
LesIinvest costs, which are mostly
denominated in local currency, will
receive an additional competitive
advantage before the importers in
the form of more attractive pricing
and low transport costs.
In 2015, LesInvest Group plans to
implement an investment project
for modernisation of Segezha PPM,
which is expected to increase the
sack paper output by 44% to 366,000
tonnes by 2017.
Segezha Paper Plant. Sack
paper export, ‘000 tonnes
199
195
180
2012
2013
2014
47
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Segezha Packaging – paper sacks
Segezha Packaging is a
manufacturer of high-quality sacks,
which has one plant in Russia, six
plants in Europe (Netherlands,
Germany, Denmark, Czech
Republic, Romania, Italy) and two
plants in Turkey.
Segezha Packaging is ranked
number one in Russia and number
two in Europe by the production
of high-end paper sacks. Own
resource base allows to control the
cost of production. 11% of sacks
produced in Russia are exported
to Kazakhstan, Uzbekistan and
Kyrgyzstan. Approximately 49.6% of
sacks manufactured at the plants in
Europe and Turkey are supplied to
Spain, Belgium, France, Hungary,
Georgia, USA and Iraq.
In 2015, LesInvest Group started an
investment project to increase the
conversion capacity for production
of paper sacks in Russia. In 2016,
supported by import substitution
policy, production and sales are
expected to grow by 28%. The
company also plans to increase
maintenance capital expenditures
for the plants in Europe and Turkey.
Export of paper sacks, mln
372
380
32
45
2013
2014
Russia
Europe, Turkey
Vyatka Plywood Mill – birch plywood, fibreboard
Vyatka Plywood Mill is the fourth
largest producer of birch plywood
production Russia. Thanks to its
advantageous geographic location
(North-West of Privolzhsky Federal
District), the company is able to
supply products worldwide. The
company uses wood feedstock
certified by the FSC (Forest
Stewardship Council – international
organisation which created a system
for certification of environmentally
and socially responsible forest
management). Approximately 56%
of the products are exported to
Turkey, Germany, Netherlands,
France, USA and other countries.
Export of plywood,
‘000 m3
53
52
44
In 2015, LesInvest Group will launch
an investment programme to
build new production facilities in
the Vologda and Kirov regions. By
2020, the company expects to see a
threefold increase in production of
birch plywood.
Fibreboard
For Vyatka Plywood Mill, fibreboard
is a complementary product received
in the process of plywood production,
enabling the company to efficiently
recycle waste. The share of Vyatka
Plywood Mill in the Russian fibreboard
market is 5%. All products are sold
domestically.
Fibreboard production,
running m2
23,872
22,815
20,274
Sawn timber
LesInvest Group is a vertically
integrated company, which also
owns timber sawing facilities
making it possible to achieve
synergies between the Group’s
business segments. LesInvest
Group holds a 1.4% share of total
sawn timber production in Russia
and a 3% share in the North-
Western Federal District, where
major producers are located.
The bulk of the Group’s
sawn timber is produced by
Sokol Woodworking Plant,
Segezha Woodworking Plant
and Onega Woodworking Plant.
The share of export is 95%,
products are supplied to the UK,
Egypt, France and Belgium.
In 2015, LesInvest Group plans
to construct a new boiler
plant at Onega WWP. In-house
heat production will enable
the company to reduce gas
consumption and benefit from
cost reduction.
2012
2013
2014
2012
2013
2014
48
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Complete house sets
Wood feedstock
Wood feedstock is a major cost item
in the cost structure of LesInvest’s
product portfolio (30% to 60%). Own
resource base allows the Group to
control the cost of production and
guarantees feedstock secutiry. The
Group includes 15 wood harvesting
companies located in the Republic
of Karelia, Kirov, Vologda and
Arkhangelsk Regions. The annual
allowable cut for LesInvest Group is
4.5 mln m3.
In 2015, LesInvest will continue
implementation of the investment
project to renew its fleet of
lumber trucks, logging and
auxiliary equipment. Investments
are also planned to build forest
roads. These steps will allow it to
substantially increase the utilisation
of allowable cut.
• In February 2014, «Sokolsky
• As a result of the 2014 LesInvest
won the All-Russian forest industry
award Lesprom Awards in the
category Business Strategy of the
Year. (The award was established in
2002 by the online trading system
Lesprom Network and it is the
only professional award in the
Russian forest industry). The award
ceremony was not only an annual
meeting place for representatives of
the state, forest industry companies
and the leading media but also one
of the key events in the business
community of Russia.
DOK» won the award of Lesprom
Awards-2014 for the project
«Residence of Father Christmas»
in the Olympic Sochi in the category
«Design of wood». The construction
of the residence took 110 cubic
meters of timber. The palace was
built in the coastal area of the park
near the Iceberg Ice Palace, which
held the Olympic figure skating
competitions.
• In 2014, «Sokolsky CBK» in the
competition of the Golden Mercury
National Prize was awarded a
diploma as «The best company-
exporter in the production of
consumer goods».
• In 2014, Vyatka FC made the first
deliveries of birch plywood in Saudi
Arabia, UAE and Australia.
Sokol WWP is the only company
in Russia producing high-quality
laminated veneer lumber (LVL) and
complete house sets. The plant holds
a 15% share of the LVL market in
Russia. Sokol WWP is ranked num-
ber one in Russia by the production
of complete house sets and LVL. The
average annual growth rate of this
market is expected at around 4.5%
through 2020. LVL is an export prod-
uct which is supplied to Italy, Ger-
many, France, Slovenia and Japan. In
2015, LesInvest Group plans to build a
new boiler house at Sokol WWP.
Key events
• On September 29, 2014, LesInvest
LLC, a subsidiary of Sistema JSFC,
completed a transaction to acquire
100% of Segezha PPM and 100% of
Derevoobrabotka-Proekt.
• In 2014, LesInvest Group implement-
ed the Wood Supply Project to renew
logging and auxiliary equipment at
key production facilities of the Group.
• The head office of LesInvest Group
was relocated from Moscow to
Petrozavodsk (Republic of Karelia).
This relocation will create additional
jobs in Karelia and increase contri-
butions to the Republic’s budget.
• In 2014, «Segezha Packaging»
(Russia) signed a contract with IKEA
to supply paper consumer packag-
ing (bags with handles). In 2015 it is
planned to increase the volume of
supply by 30%.
№1
in Russia
№2
in Europe
№4 №1
in the world
in Russia
by production of
high-end paper
sacks
by production
of high-quality
unbleached
sack paper
№4
in Russia
by production of birch plywood
by LVL production
№1
in Russia
49
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Financial Results of LesInvest*
Financial results, RUB bln
20.8
20.9
24.7
10.2%
2.1
11.4%
2.4
12.9%
3.2
2012
2013
2014
Revenue
OIBDA
OIBDA margin
Revenue by geography
Russia
Export
Sistema JSFC consolidates the
results of LesInvest in Q4 2014.
LesInvest’s revenue and OIBDA in Q4
2014 brought RUB 7.2 bln and RUB
1.1 bln to the Group, respectively.
In 2014, due to measures aimed at
optimizing the business, LesInvest
improved the OIBDA margin from
11.4 pct in 2013 up to 12.9 pct
in 2014. In general, the growth
in revenue was affected by the
depreciation of the ruble against the
US dollar and euro, given that more
than 61 pct of LesInvest’s revenue
accounts for exports sales. Over
42 pct of all export sales are exports
to European countries.
39%
61%
UK
Austria
Germany
UAE
Estonia
Indonesia
Sweden
France
Finland
Other
15%
12%
8%
7%
6%
6% 6% 5% 5%
30%
The depreciation of the ruble had
a positive impact and improved
the LesInvest’s competitive
advantage in the market. Thus, the
production cost of pouch paper
reduced from 510 euro/ton to 394
euro/ton – it is the lowest figure
among LesInvest’s competitors.
The production cost of birch
plywood at the Vyatka Plywood
Factory reduced from 280 euro/
cu.m to 232 euro/cu.m.
Revenue by segments
Logging
Housebuilding and glued beam
Sacks and sack paper
Dendrochemistry
Plywood and slabs
Lumber
Other
4%
62%
4%
17%
3%
10%
2%
* Based on the management reporting data
50
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH In 2014, the production segment of
pouch paper and paper bags brought
the most of the Group’s revenue –
65 pct. Operative marketing-control
of market prices, elimination of the
excessive number of agents in chain
sales and increased demand for
bleached and unbleached paper in
Europe allowed for raising prices
in Q3 2014, which in turn resulted
in increase in revenue from pouch
paper sales by 24 pct. During 2014,
due to an increase demand in the
market, production of high-tech
paper – the highest cost-effective
product among all types of paper –
was actively developing.
In 2014, the revenue from paper
bags has also increased by 14 pct
owing to growth of construction
materials production and
increased demand for this product
in the market. The segment
profitability rose through the
development of manufacture
of high-margin products for dry
construction mixtures.
The revenue of plywood production
segment makes 10 pct in the
Group’s total revenue, and it
increased by 13 pct in 2014. More
than 50 pct of this product were
exported. The growth of the segment
revenue and profitability was also
supported by the depreciation
of the ruble.
Increase in revenue from fiberboard
is due to increase both in sales
volume of goods manufactured and
accumulated inventories as well as
to rise in market prices. Granting the
deferral of payment for laminated
chip boards made it possible to
maintain the sales volumes, as well
as to sell the accumulated stock.
The revenue from the Timber
segment accounts for 10 pct in
the total revenue, and in 2014 it
increased by 20.1 pct, which was
due to rising market prices and the
currency exchange rate.
The logging segment showed in
increase by 7 pct in 2014 thanks to
review and optimization of current
contracts, including through elimi-
nation of intermediaries. In addition,
high-value assortments were sold
and export supplies were increased.
Revenue from housing construction
and LVL segment grew by 9 pct
in 2014. Last year, this segment
saw an increase in market
prices and reduction in rates
of commission fees.
Revenue from wood chemistry
segment increased in 2014 by 34 pct
mainly due to the grown in demand
for some products and, as a result,
increase in sales volume.
Production Cost
Production cost for sack paper, EUR/tonnes
510
394
474
471
654
555
Segezha
Plant
Segezha plant
(after RUB
depreciation)
China
Mondi
(Steti),
Europe
Mondi
(Frantschach),
Europe
Horizon/Kehra
Estonia
Production cost for birch plywood, EUR/m3
491
500
361
280
260
232
215
Vyatka
plywood
plant
Vyatka plywood
plant (after RUB
depreciation)
Sveza
(Russia)
Sveza (Russia)
(after RUB
depreciation)
Latvia
Poland
Finland
Own lumbering helps control
the cost of wood raw material,
giving additional advantages over
competitors. Production cost of
pouch paper and birch veneer is one
of the lowest in the global market.
51
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT BASHKIRIAN POWER GRID COMPANY
Bashkirian Power Grid Company
(BPGC) is a large regional company
providing electricity transmission
services between central Russia and
the Urals, and power transmission
and distribution services to
consumers in the Republic of
Bashkortostan.
Management
CEO – A.Y. Makarov
Chairman of the Board of Directors – F.V. Evtushenkov
Sistema’s
effective
ownership
91%
Revenue
Metering
devices
Circuit
length
Transformer
capacity
13.8
RUB bln
88,000 >80,000
km
>21,000
MVA
Industry*
One of the main trends in
the power utilities industry
is a moderate growth rate of
demand for electricity, balanced
with an increased efficiency
of consumption. Electricity
consumption in Russia grew by
0.4% in 2014 to 1,035.2 bln kW*h,
while power generation increased
only by 0.1% to 1,046.3 bln kW*h.
There is a considerable shift in de-
mand - while in rural areas elec-
tricity consumption is declining, its
consumption in large cities is grow-
ing considerably. At the same time,
within the cities, a decline in electric-
ity consumption in industrial zones
is offset by its growth in areas where
construction of office, commercial
or residential properties is under-
52
Electricity production and consumption in Russia,
bln kVt*h
1,021
1,040
1,025
1,009
1,054
1,045
1,046
1,049
1,038
1,031
1,035
1,041
2010
2011
2012
2013
2014
2015
Forecast
Production
Consumption
way. Such changes in the geography
of demand for electricity create the
need to support underutilised elec-
tric grids and invest in power grids
on the new sites.
* Source of information: official site
of JSC "SO UPS".
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Electricity production and consumption in Republic
of Bashkortostan, bln kVt*h
24.2
25
25.4
25.7
26.4
26.2
25.2
25.5
24.3
22.4
22.2
18.1
2010
2011
2012
Fact
2013
2014
2015
Forecast
Production
Consumption
As a state-regulated business, the
power grid business is affected by
frequent changes in legislation. In
the autumn of 2013, the Russian
Government froze the tariffs of natu-
ral monopolies for 2014, which, first
of all, was aimed to curb inflation
and support companies operating in
the construction materials sector,
wood processing, metal and mining
and chemical industries. In these
sectors, the costs of monopoly ser-
vices account for 11% to 21% of total
costs. In 2014, the increase in tariffs
for 2015 was capped at 3.8%. At the
same time, according to the regional
department of Rosstat, the inflation
rate in Bashkortostan in 2014 was
11.2%, which is higher than in the
previous five years.
Steady growth in 2014
BPGC is among the ten largest pow-
er grid companies in Russia in terms
of transmitted power, and holds a
leading position relative to other ter-
ritorial grid companies (TGCs), that
are part of Interregional Distribution
Grid Company (IDGC), in terms of the
total length of transmission lines in
operation and the number of substa-
tions, transformer substations and
distribution points.
Circuit length and
transformer capacity
85,714
85,959
82,257
4,742
4,583
4,597
2012
2013
2014
Transformer capacity, MVA
Circuit length, km
In 2014, BPGC continued installing
electricity meters (Automatic
System for Commercial Measuring
of Power Consumption) as part
of the the programme aimed at
improving the performance of
existing power grid assets. During
the project implementation,
BPGC installed over 88,000
meters, resulting in a substantial
reduction of actual power losses.
The company also implemented
new IT systems to automate
project reporting and progress
tracking, ensure the efficiency and
transparency of business processes.
In 2014, BPGC was also developing
non-regulated activities and
established BPGC Engineering LLC,
which acts as EPC contractor for a
number of power grid infrastructure
facilities in the Republic of
Bashkortostan.
One of the priorities in BPGC’s
activities is consolidation of power
grid assets in the Republic of
Bashkortostan to expand the power
grid business. In 2014, the company
continued to acquire and lease
abandoned and municipal power
grids. In particular, comprehensive
preparatory work was carried out to
privatise power grid assets in Ufa
and Kumertau.
Number of new
connections per
year
17,180
12,948
19,790
2012
2013
2014
53
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT BPGC’s investment programme in
2014 amounted to RUB 3.3 bln. The
company’s capital investments in
2014 were directed towards devel-
oping the grid infrastructure in the
Republic of Bashkortostan, improv-
ing energy efficiency at production
facilities and meeting the demand
for electric power and capacity
in the long- and medium term .
The modernisation programme is
designed to create conditions for
ensuring reliable power supply to
consumers and reducing harmful
environmental impacts.
Key events
• In 2014, BPGC’s subsidiary,
Bashkirenergo LLC, became
the first power company in Rus-
sia to switch to a 10-year tariff
regulation and to determine its
rates based on return on invested
capital (RAB), while rates of other
power companies are set for no
more than 5 years. Regulation
of tariffs by return on invested
capital has a number of advan-
tages for power grid companies,
consumers and the country as a
whole. These include incentives
to reduce costs, solid invest-
ments with favourable rates, an
opportunity for distribution grid
companies to plan development
programmes over the long-term,
as well as to improve their ser-
vice quality and offer predictable
tariffs. The 10-year regulation
period will enable both energy
consumers and energy providers
to effectively implement long-term
business development planning
with the aim of enhancing their
investment appeal. Investments
into the Republic of Bashkorto-
stan’s electricity sector will total
more than RUB 29 billion for the
10-year period.
• In 2014 the preliminary feasibility
study for the comprehensive
modernization of the electric
grid infrastructure Ufa with
elements of Smart Grid was
completed. The pilot project
(1.5% of the total project) will
be implemented in April and
May 2015 for the network
in which it is in need to
provide the maximum level of
automation and observability.
The main part of the project
will be implemented until
the end of 2020.
Operational strategy
The key objectives of BPGC are to
ensure reliable power supply to con-
sumers and improve the operational
efficiency of the business.
In 2015, BPGC will proceed with its
efficiency improvement programme
in order to reduce losses and create
a Data Centre (DC) and a Grid
Control Centre (GCC). Key strategic
areas include implementation
of the long-term equipment
upgrade programme, efficient tariff
investments, reduction of operational
losses. The company also plans
to complete the main part of the
Smart Grid project in Ufa and TGC
consolidation. As for the company’s
development in the non-regulated
segments, the engineering company
plans to replicate the Smart Grid
technology in all of BPGC’s assets
and provide IT and communication
services to customers.
Structure of capital expenditures
Reconstruction
New construction
Other investments
37%
31%
37%
54
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Financial results of BPGC
RUB millions
Revenue
OIBDA
Operating income
Net income attributable to Sistema
Capital expenditures
2014
2013
Change
13,778
13,271
5,267
3,444
2,701
3,262
5,651
3,981
2,786
3,054
3.8%
(6.8%)
(13.5%)
(3.1%)
6.8%
BPGC’s revenue grew by 3.8% year-
on-year in 2014, reflecting organic
growth in electricity consumption
and an increase in technological
connections to the power grids.
Boiler tariffs for transmission
services were frozen in 2014.
Power consumption in 2014 was
up 3.2% year-on-year, largely as
a result of acceleration of power
connections. BPGC acquired 19,790
new consumers in 2014, 15.2% more
than in 2013.
BPGC’s OIBDA in rouble terms
declined by 6.8% year-on-year in
2014. This mainly resulted from a
rise in operating expenses in 2014
compared to 2013, as well as from
the recognition of income from one-
off transactions in 2013, including
the disposal of fixed assets and
accrued penalties for late customer
payments.
Distribution grid losses increased
from 8.27% in 2013 to 8.46% in 2014,
as BPGC started to operate electric
grid systems previously owned by
territorial grid operators (OJSC
Rosenergoatom Concern and LLC
Teploelektroset) from the second
half of 2014, in addition to the grids
already in operation.
BPGC is a debt-free company. Its capital expenditures grew by 6.8%
to RUB 3.3 billion in 2014.
Distribution grids
Transmission grids
20,936
19,683
20,680
19,080
20,192
18,514
8.7%
8.2%
8.8%
1.7%
1.5%
1.6%
2012
2013
2014
2012
2013
2014
Productive supply, mln kWh
Productive supply, mln kWh
Losses
Losses
55
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT RTI
RTI Group 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, threat monitoring and
control solutions, microelectronics
and system integration. RTI was
established by Sistema and the
Bank of Moscow in February 2011.
RTI Group includes RTI Systems
Concern, NIIME and Mikron, and
NVision Group.
Management
President – S.F. Boev
Chairman of the Board of Directors – E.M. Primakov
Sistema’s
effective
ownership
Revenue
84.7%
70.9
RUB bln
Industry*
The defence segment is expected
to see a considerable growth in
demand for high-tech products.
In accordance with the approved
National Arms Programme through
2020, budgetary defence spending
will total about RUB 20 trln. Up to
70% of this amount is expected to
be invested in procurement of new
defence systems and equipment.
М | B | Т
Transport
tickets
produced
300
mln
Micro-chips
exported
731
mln
Employees
20,000
Russia’s government defence
spending, trln RUB
3.3
2.1
2.5
3.1
3.2
2013
2014
2015
2016
2017
Fact
Forecast
The Russian microelectronics mar-
ket in 2014 is estimated at over US$
2 bln, which is only 1% of the global
market. Mass civil market segments
in Russia are dominated by foreign
companies. Russian microelectron-
ics companies mainly manufacture
products for military and special
applications, which account for
about 40% of the domestic micro-
electronics market. In the future,
the microelectronics industry will be
supported by the growing demand
for RFID (Radio Frequency Identifi-
cation) based solutions, including
orders from the government. The
main demand drivers are the semi-
conductor segment and the telecom
sector, which, given the import sub-
stitution programme, the imposed
sanctions and devaluation of the
national currency, is likely to boost
the demand for Russian microelec-
tronic products.
* Source: the main directions of budgetary policy for 2015 and the planning period of 2016 and 2017, RTI analysis
56
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH The Russian market of information
and communication technologies in
general showed strong growth with
the main consumers being the top
20 largest Russian companies. The
average annual growth rate in this
market is forecast to stand at 10%
until 2017, with the segment of in-
tegrated security systems being the
most attractive one.
Steady growth in 2014
RTI develops assets in the defence
industry, microelectronics and
system integration. In 2014, Sistema
developed and started implementing
a restructuring plan for RTI’s high-
tech assets to improve its operating
efficiency and profitability.
In particular, Sistema completed the
transaction to purchase the shares
of NVision Group («NVision») and
became the sole shareholder of this
company. NVision is now headed by a
new management team. The system
integration segment was severely hit
by the economic downturn in Russia
in 2014, which also affected the finan-
cial results of ths business. In 2014,
Sistema launched an initiative aimed
at streamlining its business and cut-
ting costs. NVision managed to retain
its position in its traditional markets
and maintained relationships with
such anchor customers as MTS,
VimpelCom, FGC (UES). Besides,
the company increased its customer
base by adding such major custom-
ers as the Moscow Department of
Information Technologies, Transneft,
Severstal, Special Economic Zones,
regional governments, etc.
RTI’s Defence Solutions BU demon-
strated the highest growth rates
with revenues rising by almost 30%
in 2014. This growth was driven by
active implementation of contracts
Information and Communication technologies market
services for government and companies, bln RUB
721
735
780
830
910
2013
2014
2015
2016
2017
Fact
Forecast
RTI Group’s
structure
Sistema
50% –0.5 share
84.7%
RTI
63%
97%
50% +0.5 share
RTI Concern Systems
Micron
NVision Group
for construction of radar stations.
RTI has a big portfolio of national
defence orders and the Defence
Solutions BU generates the highest
profit margin in the Group.
Moreover, RTI develops its own
R&D competencies and pays a lot
of attention to the development
of R&D initiatives. In 2014, RTI
started pre-project research and
development of proprietary aero-
space systems (ASSs), which will
enable the company to enter new
promising markets. A programme
of cooperation between RTI and
the Russian Academy of Sciences
provides for a broad range of joint
activities in a number of promising
areas, including the development
of complex robotised energy and
transportation systems.
The head company in RTI’s Micro-
electronics Solutions BU is NIIME
and Mikron («Mikron»). Mikron is the
largest microelectronics manufac-
turer in Russia, up to 50 mln of its
microchips per month are exported
to Europe, USA and South-East Asia.
Currently, Mikron is implementing
ca. 40 R&D projects aimed at de-
veloping nearly 100 new products,
some of which are to be launched
in the near future.
RTI Group’s revenue structure
Defence solutions
ICS
Microelectronics
Complex security systems
Other
50%
28%
16%
3% 3%
57
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT In February 2014, Mikron completed
the development of its proprietary
65 nm chip technology and is now
actively carrying out R&D work on
the 45 nm technology. Micron Group
has set up a complete production
chain from chip development to
the final product, which allows it to
produce the entire range of high-
tech products for the mass market:
intelligent chip cards – smart cards,
transport and other RFID cards (us-
ing Radio Frequency Identification
technology), SIM cards, chip bank
cards, social cards and other iden-
tification documents, new products
for industrial electronics. The com-
pany supplies products to 400 cus-
tomers in Russia and 100 customers
in other countries. Moscow Metro,
State Company Transportation
Organizer from Saint Petersburg,
state transportation companies
in Kazan, Magnitogorsk, Tyumen,
Nizhny Novgorod are among Mikron
Group’s customers.
In March 2014, Mikron obtained a
licence from Cadence Design Sys-
tems, the world’s leader in e-design
innovations, for chip design software
using 90 nm technology.
In 2014 Mikron:
• Supplied over 2 mln chips for pre-
vious-generation travel passports
and 800,000 chips for biometric
travel passports;
• Developed 32 types of integrated
circuits for industrial and com-
mercial applications;
• Launched production of 51 inte-
grated circuits for various appli-
cations;
• Supplied 300 mln transport tickets;
• Exported 713 mln chips.
In 2014, RUSNANO acquired a
25.1% stake in Mikron as a result
of conversion of its share in Sitron-
ics-Nano – a joint project between
RUSNANO and Mikron to set up the
manufacturing of 90 nm microchips.
No. 5 in terms of
microchip sales
among full cycle
manufacturers in
Europe
500
types of microchips
in production
3,500
customers
60
countries of
exports
Key events
• In February 2014, Mikron became
• In May 2014, Mikron became a
• In December, Mikron produced
a member of the OSPT (Open
Standard for Public Transport) Al-
liance, which was created in 2010
by the leaders of the payment in-
dustry to develop new-generation
fare payment systems.
partner of the Silicon Trust interna-
tional marketing programme, which
comprises more than 20 compa-
nies, including the world’s micro-
electronics industry leaders such as
Gemalto, Giesecke & Devrient and
Infineon Technologies.
first Elbrus-2СМ processors man-
ufactured with 90nm technology.
Based on these processors, MCST
plans to start production of com-
pact motherboards «Monokub-M».
Financial results of RTI
RUB millions
Revenue
Adjusted OIBDA
Adjusted operating income
Adjusted net loss attributable to Sistema
Net debt
58
2014
2013
Change
70,892
69,923
4,564
1,267
(4,416)
3,908
839
(670)
1.4%
16.8%
51.1%
-
37,907
29,748
27.4%
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH In 2014, RTI’s rouble revenues increased by 1.4% year-on-year as a result of revenue growth at the Defence
Solutions BU and the Microelectronics Solutions BU.
RTI Group’s revenue,
bln RUB
70.9
69.9
2013
2014
In 2014, the Defence Solutions BU
delivered a 29.0% year-on-year
increase in rouble revenue, following
the accelerating execution of radar
station construction contracts, which
Key segments results
Defense solutions
24.9
17%
32.2
15%
2013
2014
Revenue, bln rub
Adj OIBDA margin
were put on experimental combat
duty during the reporting period.
the Information and Communication
Technologies BU.
Rouble revenue at the Microelec-
tronics Solutions BU grew by 4.1%
year-on-year in 2014, reflecting
higher sales of integrated circuits
as a result of an increase in demand
for home technology in the current
economic environment. Thus, in
2014, Mikron produced more than 2.8
million chips for passports, delivered
300 million transport tickets, and
exported 713 million chips. The reve-
nue growth in both BUs was, howev-
er, offset by decreased revenues at
RTI’s adjusted OIBDA in rouble terms
increased by 16.8% year-on-year in
2014 and by 23.6% year-on-year in
the fourth quarter, following revenue
growth. The OIBDA margin of De-
fence Solutions BU exceeded 15%
and the OIBDA margin of Micro-
electronics Solutions BU increased
to 11%. The OIBDA loss of the
Information and Communication
Technologies BU was reduced from
RUB 2.5 billion in 2013 to RUB 0.8
billion in 2014.
Microelectronics
solutions
Information and Communi-
cation Technologies
9.8
10%
2013
10.2
11%
2014
33.3
–2,5
2013
24.1
–0,8
2014
Revenue, bln rub
Adj OIBDA margin
Revenue, bln rub
Adj OIBDA,bln RUB
Growth of debt in 2014 was mainly due to
increased liabilities relating to the loans
received under state defence contracts
from large state-owned banks against the
guarantees of the Defence Ministry and
with full compensation of interest (effec-
tively zero interest rate). The debt related
to state defence contracts accounted for
50.1% of the total debt amount.
Sales by geography
Russia and CIS (excl. Ukraine)
Ukraine
Asia-Pacific
Central and Eastern Europe
93%
3% 2%2%
Sales by currency
RUB
USD
UAH
Other
83%
11%
3% 3%
59
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT SG-TRANS
SG-trans is a leading railcar opera-
tor in Russia, accounting for about
40% of the county’s LPG tank car
fleet. SG-trans owns a diversified
fleet with more than 34,000 rail cars
under management in 2014. Siste-
ma has been developing the trans-
portation business in collaboration
with its industry partner Unirail
since late 2012.
Management
President – A.R. Taicher
Chairman of the Board of Directors – A.M. Uzdenov
Sistema’s
effective
ownership
50%
Revenue
Share of
Russia’s LPG
tank car fleet
Number of rail
cars under
management
Share of Russia’s
LPG transportation
market
20.4
RUB bln
40% 34.0
thousand
30%
Industry*
The fall in railway transportation
volumes in 2014 was 0.8% compared
to a decrease of 2.8% in the previous
year. However, the negative
trend is expected to continue
due to the unfavourable market
environment in 2014.
As in 2013, open-car shipments of
goods such as building materials,
ferrous and non-ferrous metal
ore demonstrated the largest
decrease. Transportation of
fertilizers, grains and timber rose
considerably, reflecting increased
attractiveness of exports due to the
rouble depreciating against the US
dollar and favourable export prices.
Freight volumes of liquefied gases
(LPG) – one of the main segments
of ST-trans – grew by 8% in 2014,
while oil cargo volumes rose by 2%
over the year. The share of SG-trans
in the LPG transportation market
in 2014 was 30%.
LPG gross production in Russia**, mln tonnes
22.4
20.1
18.3
16.4
17.3
2010
2011
2012
2013
2014
* Source of information: Russian Railways, Cortes, Petromarket **
According to preliminary company data.
60
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Despite the stagnation of
transportation in certain segments,
there is still a surplus of rail
car fleet in the market, mainly
attributable to state-owned rail car
manufacturers, which is partially
offset by a gradual replacement
of old fleet by private carriers.
The daily leasing rate for open rail
cars in December 2014 dropped by
approximately 25% year-on-year to
RUB 425-450, for oil & petroleum
tank cars it fell by 30% to RUB 600
per day, while the rate for LPG
tank cars lowered only by 5% to
RUB 1,400 per day.
The LPG transportation segment
is expected to grow in 2015,
Steady growth in 2014
In 2014, company management
focused its efforts on streamlining
operational processes and optimis-
ing the rolling stock to meet cus-
tomer requirements and to respond
to the current market conditions.
In particular, the leasing portfolio
was streamlined and part of the oil
and petroleum fleet was returned
driven by the increasing demand
for petrochemical products and
launch of new production facilities.
However, the growth rate will slow
down as export attractiveness will
decrease amid falling prices and
reduced investments in the oil and
gas sector.
LPG transportation volumes on the Russian
Railways network, mln tonnes
18.5
19.4
15
15.8
16.8
2010
2011
2012
2013
2014
to the leasing companies earlier
than planned, which made it possi-
ble to reduce cash outflows caused
by a drop in leasing rates and
to reduce debt.
The company increased its own
fleet of LPG tank cars to meet its
obligations under long-term con-
tracts. About 60% of the contracts of
SG-trans are long-term in nature,
securing a strong market position.
In 2014, SG-trans customer base
exceeded 100 clients, including
major oil and gas market players
such as SIBUR, Bashneft, SANORS,
NOVATEK, Rosneft. In 2014, Tatneft
Group became SG-trans’ client.
Operated fleet size and composition
Oil tank cars
LPG carriers
LPG carriers
Other
12,438
17,395
4,135
72
In addition, SG-trans successfully
operates in the sector of the loose
and bulk cargo, providing services
to metal and mining companies. The
company chose to take advantage
of low spot rates to rent additional
railcars to facilitate volume commit-
ments, as this was more efficient
than purchasing railcars in current
market conditions. The share of
rented rail cars in the total fleet
under management increased from
12% at the end 2013 to 24% at the
end of 2014.
According to preliminary company data.
61
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Growth of rail car fleet
managed by SG-Trans
Operational strategy
In September 2014, Sistema ap-
proved an updated development
strategy for SG-trans, reflecting
the new market environment. The
main emphasis will be placed on
reducing costs and debt. Oil and
liquefied gas transportation will
remain the company’s target seg-
ment. Special attention will be paid
to financial discipline and cash
management efficiency. In 2015,
management will focus on main-
taining and expanding contracts
with current customers.
In 2015, SG-trans may purchase new
rail cars, provided that favourable
opportunities are presented and the
demand for such cars is guaranteed.
Key investments will be made in the
company’s own railway infrastructure
and IT to reduce operating expenses.
>100
customers
60%
of long-term
contracts
31,655
34,040
26,463
2012
2013
2014
In 2014, the company established
a repair management business
segment and concluded repair
contracts with five companies.
In 2014, SG-trans repaired about
4,000 rail cars. As part of an
effort to cut costs the company
purchases the most expensive
components directly from
producers.
SG-trans loading volumes,
ktonnes
18,771
20,536
11,092
2012
2013
2014
Key events
• In January 2014, the consolidation
of SG-trans, Financial Alliance and
Bashneft-trans was successfully
completed.
62
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Financial results of SG-trans*
RUB millions
Revenue
OIBDA
Net income attributable to Sistema
2014
2013
Change
20,429
20,119
1.5%
3.9%
6,016
439
(40.5%)
6,253
261
Net debt
21,700
28,010
(22.5%)
Despite the unfavourable trends in
the railway freight industry, SG-
trans increased its revenue by 1.5%
YoY, which was driven by increased
shipping volumes for LPG, crude oil
and petroleum products. OIBDA rose
by 3.5% YoY as a result of railcar fleet
optimisation and improved repair and
maintenance management.
Net income fell year-on-year due to
a rise in interest expenses. In 2014,
management’s efforts were directed
towards streamlining operational
processes and optimising the rolling
stock to meet customer requirements
and to respond to the current market
conditions. Thus, the leasing portfo-
lio was reduced and some of the oil
and petrol rail cars were returned to
the leasing companies earlier than
planned, which made it possible to re-
duce cash outflows caused by a drop
in leasing rates and to decrease debt.
The railcar fleet under SG-trans’
management increased by 7.5%
year-on-year to 34 thousand units
(including 17.4 thousand of LPG
cars). The share of leased cars in
the total fleet rose from 12% as of
the end of 2013 to 24% as of the
end of 2014. Railcars in ownership
accounted for 51% of the total fleet.
SG-trans turnover,
mln tonnes*km
SG-trans debt
profile
35,674
31,941
18,564
5.3
5.3
22.1
12.0
10.1
23.9
12.0
11.9
2012
2013
2014
2012
2013
2014
* Sistema owns 50% of SG-Trans shares and does not consolidate this company in financial results. Data for 2013
are presented in accordance with US GAAP.
Leasing
Bank loans
63
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT MTS-BANK
MTS Bank is engaged in banking ac-
tivities in Russia providing a complete
range of financial services to individu-
als and corporate customers. Being a
systemically important operator in the
payment, lending and savings market,
the bank has a strong position among
Russia’s largest banks.
Management
President – I.V. Filatov (before March 2015 – M.M. Chaikin)
Chairman of the Board of Directors – A.V. Abugov
Sistema’s
effective
ownership
87%
Industry*
Assets
Gross loan
portfolio
Total
capital
196.3 111.9
RUB bln
RUB bln
27.7
RUB bln
Capital
adequacy ratio
(N1.0)
16.95%
Assets of the banking sector,
trln RUB
23%
15%
29.4
33.8
19%
41.6
49.5
16%
77.6
57.4
35%
2009
2010
2011
2012
2013
2014
Assets, trln RUB
Growth rate
Key Central Bank rate, %
17.00%
8.75%
7.75%
8.00%
8.25%
5.50%
2009
2010
2011
2012
2013
2014
* CBR
64
The past year was a challenging one
for the financial sector. The increase
in the CBR’s key interest rate from
5.5% p.a. to 17.0% p.a. and a sharp
rise in interest rates on other funding
sources substantially increased the
cost of borrowing. The slowdown in
economic growth rates prevented the
Russian banks from compensating
for this increase by active operations,
putting serious pressure on their
revenues and capital levels.
According to the year-end results,
the consumer lending sector
demonstrated slower growth
compared to the previous years. In
addition to higher interest rates and
slower economic growth, consumer
lending was affected by tighter
regulations introduced by the CBR,
a decline in real household income
and gloomier consumer sentiment.
As a result, retail lending growth
rates dropped by half against 2013
and transactional risks increased
considerably in all segments by the
end of the year.
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH The situation in the corporate
lending segment is slightly different.
The restrictions on foreign fund-
raising forced Russian companies to
borrow more actively in the domestic
market. According to the year-end
results, corporate lending grew
faster than retail for the first time in
the last few years.
Growth rate of retail lending
40%
38%
7.7
10
30%
3.6
11%
4
5.6
2009
2010
2011
2012
2013
Retail loans, trln RUB
Growth rate
Corporate lending growth
rates
13%
14.1
12.5
26%
17.7
20
13%
13%
22.5
13%
11.3
13%
13%
2014
32%
29.6
2009
2010
2011
2012
2013
2014
Corporate loans, trln RUB
Growth rate
Steady growth in 2014
Over the last three years, MTS
Bank strengthened its position as a
reliable savings institution. Following
the expansion of its regional office
network, the retail deposit portfolio
grew by 23% year-on-year despite
the negative market trends.
Number of cards issued
by MTS Bank, mln
217
224
191
Plastic cards
issued, mln
Credit cards
issued, mln
163
15
22
29
32
2011
2012
2013
2014
65
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT The retail business imposes very
strict requirements on bank capital.
Over 2014, MTS Bank increased its
capital more than twofold: at the
beginning of 2015, the Bank’s equity
was RUB 27 bln against RUB 12 bln
at the beginning of 2012. The largest
increase in capital took place in 2014
and during an additional share issue,
which was subsequently purchased
by MTS and Sistema and generated
RUB 13.1 bln for MTS Bank.
Capital adequacy ratio (N1), MTS Bank
17.58%
13.59%
13.26%
11.95%
11.38%
12.18%
01.01.2010 01.01.2011 01.01.2012 01.01.2013 01.01.2014 01.01.2015
In response to the deterioration
of the macroeconomic conditions,
the Bank adjusted its retail and
corporate credit policies to reduce
credit risks. In 2014, the Bank
pursued a conservative provisioning
policy, which will be also continued
in 2015. In 2014, the Bank took
timely measures to reduce costs
and optimise the retail office
network.
The CBR granted accreditation
to MTS Bank to provide financial
services to the companies operating
in priority and strategic industries,
which testifies to the bank’s
reliability.
MTS Bank is included in the list
of banks that may receive state
funds from the Deposit Insurance
Agency for recapitalisation. Through
participation in the programme, the
Bank will be able to rise over RUB
7 bln for Tier 2 capital on attractive
terms for a 3-year period. The
main condition of the programme
is that the recipient bank should
provide loans to sectors that
are strategically important for
the Russian economy, and grant
mortgage loans and loans to
SMBs (small and medium-sized
businesses) for an amount at least
equal to 1% of the Bank’s portfolio
on a monthly basis.
In 2014, the Bank started issuing
China UnionPay cards. By joining
China UnionPay, the Bank substan-
tially minimised the risks associated
with the processing of its payments
and was able to make attractive
propositions to sole traders and pri-
vate individuals in the Russian Far
East, who actively cooperate with
suppliers from China.
Key events
Operational strategy
• In March 2015, Fitch Ratings
confirmed the rating of MTS Bank
at В+ with a stable outlook.
• According to the 2014 year-end
results, MTS Bank was ranked
number eight among plastic card
issuers.
• In December 2014, MTS Bank
successfully completed an
additional share issue, raising
RUB 13.1 bln.
TOP-50
Russian banks
which was started in 2012, resulted
in explosive growth in the retail
assets portfolio, including the credit
card segment. Over the last three
years the household loan portfolio
increased more than threefold with
an annual growth rate of 62%.
In 2012, MTS Bank completed
rebranding and started the
implementation of its strategy
based on synergies with MTS. The
business model restructuring,
MTS Bank’s strategy is aimed
at development of retail lending
and transactional services for
individuals segment. However, the
Bank does not seek to turn into
66
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH a retail monoliner and maintains
moderate growth rates in the target
corporate segments, having kept its
portfolio of corporate borrowers.
The Banks’ operational strategy
provides for greater cooperation
with the mobile operator MTS.
MTS Bank already widely uses
the operator’s retail chain and IT
infrastructure. In the future, the
Bank and MTS intend to share a
common database under the Big
Data Project in order to mitigate
risks, boost sales and speed up
product development.
Capital adequacy ratio (N1) of Russian banks
17.6%
17.1%
16.2%
15.5%
15.1%
15.0%
14.2%
13.7%
13.5%
12.5%
12.4%
12.3%
11.7%
11.6%
11.5%
MTS Bank
ING Bank (Eurasia)
BNP Paribas
TKS Bank
CitiBank
Home Credit Finance
MCB
Unicredit Bank
Rosbank
Gazprombank
Raiffeisen Bank
Promsvyazbank
VTB 24
Uralsib
Sberbank
17.6%
Result of MTS Bank
Financial results of MTS Bank
RUB millions
Revenue
Operating (loss)/income
Net income/(loss) attributable to Sistema
2014
2013
Change
26,565
28,763
(7.6%)
(15,252)
(11,212)
604
598
-
-
In 2014, MTS Bank’s revenues
decreased by 7.6% year-on-year in
rouble terms. This was largely due
to lower revenues reported in the
fourth quarter amid unfavourable
market conditions. Interest income
grew by 4.9% in 2014, gross loan
portfolio increased by 3.1%.
Assets and loan portfolio,
RUB bln
220.4
183.8
220.7
198.5
Interest and commission income, RUB bln
24
25.1
4.6
4.4
2013
2014
Interest income
Commission income
2013
2014
Assets
Credit portfolio
* CBR
The bank reported a net loss in
the fourth quarter and in 2014 due
to increased provisions for the
loan portfolio to individuals, which
amounted to RUB 73 billion or 39%
of total loan portfolio (including
interbank financing). MTS Bank has
a conservative provisioning policy
and demonstrates high stability
ratios. Its provisions/retail loans
ratio amounted to 28% compared
to 16% in 2013.
67
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT AGRICULTURE
Sistema’s business in the agricultural sector is represented by RZ Agro
(50%) and the Group of companies «Step».
RZ Agro
Group
RZ Agro Holding («RZ Argo») – is
one of the largest producers of grain
and oil-bearing crops in the south
of Russia with a land bank of 99
thousand ha, jointly controlled by
Sistema JSFC and members of the
Louis-Dreyfus family. Currently it
comprises six farms grouped into
three regional clusters in the Rostov
Region and the Stavropol Territory.
GC «Step» unites five farms located
in the Krasnodar region, with a land
bank to manage - 26.3 thousand
hectares.
Management
RZ Agro:
CEO – S. MacFarlane
GC «Step»:
CEO – K. Averin
Chairman of the Board of Directors - T. Schultz
Chairman of the Board of Directors – A. Uzdenov
Sistema’s effective
ownership in RZ Agro
Sistema’s effective
ownership in GC «Step»
Gross
harvest
50%
85%
>470
‘000 tonnes
RZ Agro
land bank
125
тыс. га
Industry*
As a result of a steady growth of
grain exports over the last few years,
Russia, which has 9% of the world’s
arable land, regained its status as
one of the largest global exporters.
In 2014, grain exports from Russia
totalled 27 mln tonnes, including
20 mln tonnes of wheat, or 12% of
global wheat exports. In 2014, owing
to favourable weather conditions in
Russia, gross production of main
crops – grain, oil-bearing plants,
sugar beet, vegetables and fruit –
grew considerably.
The 100 mln tonne grain harvest
became one of the largest in the last
20 years. Wheat production amounted
to 59 mln tonnes, placing Russia
among the three largest global
producers (after China and India)
with 9% shares. Wheat production
in Russia grew by 13%, while the
growth in the total worldwide
production in 2014 was only 1%.
Gross harvest volume of grain in Russia, mln tonnes
58
7%
17,7
89
31%
27
66
23%
16
88
29%
25
100
28%
27
2010
2011
2012
2013
2014
Gross harvest
Export
% of export
* Source: USDA, International Grains Council.
68
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH According to a forecast by the
International Grains Council, in 2015-
2020 global grain consumption and
production will grow at approximately
the same rate – around 1.5% per year,
driven by the continuous expansion
of the world’s population and rising
demand from the food and livestock
breeding industries. Production
growth will be primarily driven by an
improvement in crop yields.
Wheat production and consumption forecast,
mln tonnes
CAGR stock ~1,5%
1,988
1,960
1,988
1,960
1,978
1,987
2,007
2,015
2,037
2,043
2,066
2,071
22%
21%
20%
20%
19%
19%
2014/15
2015/16
2016/17
2017/18
2018/19
2019/20
Production
Consumption
Forecast
Stock / Consumption, %
RZ Agro Group operates in the So-
thern and North Caucasian Federal
Districts – Russia’s key grain pro-
ducing regions, which account for
about 70% of winter wheat, over 95%
of winter barley and approximately
35% of oil-bearing crops produced
in Russia. In 2014, the grain produc-
ers in Rostov Region, where the RZ
Agro Group has five farms, harvested
9.5 mln tonnes of grain and grain
legumes, almost 3 mln tonnes more
than last year. It was a record harvest
of the last 24 years.
RZ Agro today
The total land bank under RZ Agro’s
management is 99 thousand ha,
including 65 thousand ha (66%)
of land in its ownership. Around
91% of RZ Agro land is under
cultivation. The Group includes six
farms grouped into three territorial
production clusters: Rostov-East,
Rostov-South and Stavropol-West.
Land bank
by clusters
(99,000 ha)
Lipetsk
Tambov
Kursk
Voronezh
Belgorod
Saratov
Volgograd
1
Rostov East
cluster
• 43 kha
• 3 farms
• 30% freehold
• 70% long term lease
(maturity 13 years)
2
Rostov South
cluster
• 47 kha
• 2 farms
• close to Azov sea port
• 98% under freehold
1
2
Rostov- on-
Don
Krasnodar
3
Stavropol
3
Stavropol
cluster
• 10 kha
• 1 farm
• 39% freehold,
• 61% mid-term leases
(maturity 3 years
Novorossiysk
port
RZ Agro is a highly specialised
farm holding. In 2014, crop farming
generated 98% of its total income.
The main crop types grown are
winter wheat, barley, sunflower,
corn, pea, sugar beet. Livestock
breeding is represented by First
Cavalry Army Stud Farm – a famous
horse breeding farm maintaining a
nucleus herd and having the largest
number of Budyonny horses.
RZ Argo has developed and im-
plemented a long-term crop rota-
tion plan, with minor adjustments
made annually depending on the
expected profitability of crops and
previous harvest.
69
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Structure of cultivated area in 2014
Winter grain
Forage crops
Summer grain
Legumes
Sunflower
Sugar beet
Other oil-making
Par
48
13
8
8
4
4 1
14
In 2014, special attention was paid
to soil condition diagnostics and
climate monitoring; soil remediation
and land productivity improvement;
implementation of technologies
that help to adopt production to
climatic changes, especially to
drought conditions. Starting from
the 2013/2014 production year,
certain drought-resistant crops
such as camelina and sorghum
were included in the crop rotation
schemes in the Rostov-East cluster.
RZ Agro sells approximately 90%
of its products on the international
and domestic markets. The
remaining 10% is used as seeds and
to pay land rent.
Over the last four years, RZ Agro
managed to increase its sales 5-fold
with the share of direct exports rising
from 14% in 2011 to 32% in 2014.
In 2014, RZ Agro carried out direct
grain deliveries to Egypt, Georgia,
Armenia, Turkey, Iran, Saudi Arabia,
South Africa.
RZ Agro actively expands its pool of
counterparties by establishing part-
nership relations with end consum-
ers in the importing countries and on
the domestic market. To this end, co-
operation is being strengthened with
the Russian Export Insurance Agency
(EXIAR). Domestic sales (68%) are
mainly made to medium-sized ex-
porters and large trading houses and
directly to domestic consumers.
were made to install monitoring
and security systems, such as fuel
consumption monitoring, video
surveillance, fencing and automated
accounting.
In 2014, a new grain quality
laboratory was set up and outfitted
with modern equipment at SP
Novotroitskoe (part of the Stavropol-
West cluster) along with a new
electronic weighing scale with a
maximum capacity of 80 tonnes. The
quality laboratory at Krasnaya Zvezda
(Rostov-East cluster) received a new
device for express analysis of grain.
Re-equipment of production is one of
RZ Agro’s priorities. In 2014, 13 new
units of modern tillage machinery
(cultivators, harrows), 4 sowing
machines, 1 tractor, 2 loaders, and
other agricultural machinery were
purchased. Additionally, investments
The company prepared a five-
year production re-equipment
programme for 2015-2020. The key
objectives are to continue replacing
old machinery with modern high-
performance units and to upgrade
the fleet and equipment.
GC "Step" today
In the second half of 2014, Sistema,
via its wholly owned subsidiary
Krasnodar-Argo, acquired another
agricultural asset - Stepppe
Group comprising five agricultural
enterprises located in the
Krasnodar Territory with a land
bank of 26.3 thousand ha under
management. In 2014, the average
wheat yield at the enterprises was
6.7 tonnes/ha. The high (Class 3)
export quality and proximity to
export ports enable the enterprises
to obtain maximum selling prices
for their products.
Operational strategy
Management of agricultural assets
is carried out through a cluster
approach, whereby self-sufficient
clusters of 30,000-50,000 ha of
closely located land areas work
together to optimise operating and
investment costs.
Operational strategy aims to in-
crease crop yields and optimise pro-
70
duction and management expenses
by using modern agricultural tech-
nologies and implementing modern
cost monitoring systems.
Sistema’s management focuses on
the development of related activi-
ties to enhance business efficiency.
Focus areas include:
• grain procurement and trading
(target procurement programme –
up to 500,000 tonnes per year);
• seed production and sale pro-
gramme;
• harvesting contracting (crop
harvesting services in the north
regions).
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Financial results of RZ Agro
RUB million
Revenue
OIBDA
Operating income/(loss)
Net income/(loss) attributable to Sistema
2014
2 387
735
594
182
2013
Change
895
166.7%
(150)
(241)
(187)
-
-
-
Revenue of RZ Agro increased by 167% YoY driven by a record harvest of 300, 000 tonnes in 2014.
Gross harvest volumes,
‘000 tonnes
In 2014, RZ Agro developed its own
export channels – the share of direct
export sales increased to 32% in 2014.
RZ Agro exported wheat to Egypt,
Georgia, Armenia, Turkey, Iran and
other countries.
16.3
26.8
Key operating statistics
2012
(5 clusters)
2013
(5 clusters)
2014
(6 clusters)
Total land bank , ha
89,000
89,000 100,000
Freehold land ratio,%
Cultivated land ratio, %
Production (all crops), kmt
188.7
Wheat yield, t/ha
15%
89%
134
2.8
68%
89%
141
3.0
66%
91%
300
4.5
Export sales of RZ Agro
14.4
18.6
96.9
2013
2014
Wheat
Barley
Sunflower
Crop yield of wheat grew by 50% to
4.5 tonnes/ha, yield of barley in-
creased by 80% to 3.4 tonnes/ha,
yield of sunflower also grew by 28%
to 2.3 tonnes/ha. The OIBDA margin
expanded to 30.8%.
22%
78%
18%
82%
14%
86%
2011/2012
2012/2013
2013/2014
Direct export
Indirect export
32%
68%
2014/2015
Forecast
71
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
TARGIN
Targin is a major Russian oilfield
services holding operating in the
Republic of Bashkortostan, Nenets
Autonomous District, Western
and Eastern Siberia. Targin
Group consists of a managing
company and subsidiaries
providing drilling, well repair and
workover, mechanical maintenance
and transportation services.
TARGIN
Management
President – K.F. Zakirov
Chairman of the Board of Directors – F.V. Evtushenkov.
Sistema’s effective
ownership
Revenue
Transport
vehicles
Annual wells
commissioning
Employees
100%
23.5
RUB bln
5,010
193
18,000
Industry*
The global oilfield services market
reached US$ 150 bln in 2014, with
Russia capturing about 17% of
the market. According to expert
forecasts, over the next five years,
the market may grow by 33%. The
share of foreign companies in the
Russian oilfield services market
is about 18%, more than half of it
is held by Schlumberger, a global
oilfield services company. Targin’s
share of the Russian market is
around 2.7%.
Revenue of oil service companies in Russia, US$ bln
Intensification
2.2
3.9
4.4
Geophysics
Well servicing
Drilling
15.4
* Sources: RU-Energy, Delloitte, Vedomosti, Kommersant.
72
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Drilling services occupy over half of
the Russian oilfield services market.
In 2014, Europe, the US and Can-
ada imposed sanctions restricting
access to drilling and production
technologies in Arctic environment
and to offshore and shale projects
for major Russian oil companies.
Simultaneously, foreign players
started withdrawing from the Rus-
sian market, which may slow down
the implementation of new projects.
These events forced Russian oil
companies to start developing their
own oilfield service divisions. The
acquisition of Orenburg Drilling
Company and Weatherford’s drilling
operations by Rosneft will consider-
ably increase the market share held
by domestic service divisions.
Key players of Russia’s drilling market in 2014
Eurasia Drilling
Surgutneftegaz
Siberian Service Company
Weatherford
Ru-Energy
Other
29%
24%
5% 5% 5%
32%
2014 was also marked by a trend
towards active market consolidation.
Closing of the transaction on
purchase of Russian drilling
industry leader Eurasia Drilling
Company (EDC) by a global company
Schlumberger will increase the
concentration of players in the
market in the near future.
Oil well drilling in Russia dropped by
7% in H1 2014 for the first time since
the financial crisis of 2008-2009.
This drop is also associated with the
transition to horizontal drilling with
its volumes increasing by 63%. The
share of horizontal drilling in Russia
grew from 10% to 25% since 2011.
Currently, only 20% of oil is extracted
by tertiary recovery methods such
as hydraulic fracturing and drilling
multilateral wells.
Steady growth in 2014
The demand for high-tech oilfield
services is continuously growing.
The competitiveness of independent
service companies in the market
is determined by the availability
of cutting-edge technologies and
highly productive multi-functional
equipment.
Sistema acquired Targin at the end
of 2013 and carried out work to
modernise and restructure the busi-
ness in 2014. The completed consol-
idation of the Group companies in
accordance with the one segment –
one company principle will enable it
to reduce costs in future periods.
Implementation of the approved
investment programme will improve
the company’s technological infra-
structure to a level in line with best
industry practice in just a few years.
Capital expenditures totalled RUB
3.7 billion, through which Targin
formed four new workover crews,
purchased five mobile drilling rigs
(160 tonnes each) and a 320 tonne
drilling rig, and upgraded five rigs
(250 tonnes each). In addition, it
bought more than 290 units of
special equipment, over 100 units
of process equipment for various
purposes and other. Approximately
40% of capital expenditure in 2014
was invested in production devel-
opment, with about 63% of the total
cost spent on the drilling segment.
Investment projects are financed
with the company’s own (32%) and
borrowed funds (68%).
Rouble loans were obtained
from Russia’s largest banks at
comfortable terms to finance the
investment programme.
In 2015, 60% of investment pro-
gram will be directed at production
development. The largest projects
include acquisition of four drilling
rigs, two backfill equipment fleets
and two fleets of coiled tubing units
with nitrogen pumping equipment,
modernisation of one drilling rig and
purchase of over 150 specialised
equipment units.
73
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Geographical scope
Drilling
WRR*
Mechanical
service
Transport
2,100 people
42 drilling
crews
2,200 people
175 WRR crews
8 FPCP** crews
4,200 people
2 plants
9,100 people
> 5,100 units of
equipment
Moscow
One of the objectives of Targin
was to diversify its client base
following reorientation of the
company from Bashneft’s oilfield
services division. In 2014, in addition
to Bashneft, the company also
provided services to Rosneft and its
subsidiaries, Gazpromneft, Slavneft-
Megionneftegaz, and others.
Bashneft accounted for about 77% of
the company’s revenues in 2014.
In 2014, Targin commenced
project in Serbia under a well
repair contract. After successful
completion of the first stage, the
number of crews for the project may
be increased. Drilling services are
also planned for the future.
In 2014, Targin started a project to
provide integrated services involving
the preparation of wells for hydraulic
fracturing.
Operational strategy
Targin’s strategy focuses on increas-
ing its market share and diversifying
its client base by providing a full cycle
of high-tech drilling services. The
Drilling segment plans to develop well
construction services and new service
areas in line with the development of
Russia’s oil and gas industry.
The well repair and workover seg-
ment requires implementation of
new technologies and services for
emergency response and develop-
ment of enhanced oil recovery and
other techniques.
The key objective of the Logistics
segment is to maintain the fleet age
structure in line with the require-
ments of the main customers. The
key target is the transition from
conventional transportation service
to transport logistics.
130
types of oilfield
services
290
drilling and
repair crews
* WRR - Wells repairs and renewals
** FPCP - Flexible pump and compressor pipes
74
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Financial results of Targin
RUB millions
Revenue
OIBDA
Operating income
Net income attributable to Sistema
2014
2013
Change
23,549
24,435
-3.6%
58.3%
52.3%
1,901
1,136
459
124.8%
3,008
1,731
1,032
Sistema acquired Targin in October
2013. During 2014, Targin contributed
RUB 23.5 billion and RUB 3.0 billion to
the Group’s consolidated revenue and
OIBDA, respectively. OIBDA margin
grew from 7.8% to 12.8%.
Operational results
in the Drilling
segment
Operational results in
the Well Repair and
Workover segment
193
407
2014
161
408
2013
Drilling volumes,
th m
Commissioned wells
1 138
1 158
167
175
2013
2014
Workover,
khours
Crews
During 2014, Targin’s business
was restructured and its operating
facilities underwent reconstruction.
Capital expenditures totalled RUB
3.7 billion, through which Targin
formed four new workover crews,
purchased five mobile drilling rigs
(160 tonnes each) and a 320 tonne
drilling rig, and upgraded five rigs
(250 tonnes each). In addition, it
bought more than 290 units of special
equipment, over 100 units of process
equipment for various purposes and
other. Approximately 40% of capital
expenditure in 2014 was invested in
production development, with about
63% of the total cost spent on the
drilling segment.
23.5 RUB
bln
Revenue
12.8%
OIBDA margin
75
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT BINNOPHARM
Binnopharm is a pharmaceutical
company that operates one of Rus-
sia’s largest full-cycle manufacturing
facility, producing biotech drugs in
line with the international quality
standard GMP (Good Manufacturing
Practice). The priority areas of the
company’s activities include devel-
opment and commercialisation of
drugs for treating socially significant
diseases (oncologic, haematologic,
contagious and respiratory diseases).
Binnopharm Group includes Ali-
um Plant - a modern complex for
production of infusion solutions –
and distribution company Binno-
pharm Distribution, which sells
both Binnopharm’s and third-party
pharmaceuticals.
Management
CEO – A.N. Chupin
Chairman of the Board of Directors – D.L. Zubov
company of JSFC Sistema
Sistema’s
effective
ownership
74%
Revenue
Area of
Binnopharm
plant
Area of
Alium
plant
Supplied doses
of Hepatitis B
vaccine
2.5
RUB bln
32,000
m2
19,000
m2
5.4
mln
Industry*
The Russian pharmaceutical market
remains one of the fastest growing
markets in the world. According to
DSM Group, the total market size
increased by 9.3% in value terms
in 2014 to RUB 1.14 trn, with the
commercial segment increasing
by 10.8% and hospital segment by
10.0% in monetary terms, while the
additional pharmacological support
segment contracted by 0.9%.
* DCM Group
76
Volume of Russian pharmaceutical market
and share of foreign players, mln RUB
735.0
524.0
211.0
2010
824.0
598.0
226.0
2011
1,045.2
1,142.0
778.2
267.0
2013
857.0
285.0
2014
920.0
686.0
234.0
2012
Russian producers
Foreign producers
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Most of the year-on-year growth
in the Russian market came from
increases in product selling prices;
in physical terms, the market
contracted by 3.6%. According to
estimates by the Russian Ministry
of Health, the market share held by
foreign manufacturers in 2014 was
over 70% in monetary terms.
The key focus of the import
substitution programme is placed
on increasing the share of Russian
manufacturers in the pharmaceutical
industry. The most important event
in 2014 in the state control over the
industry was a resolution prepared
by the Ministry of Industry and Trade,
banning the admission of foreign
drugs to government tenders in case
two or more bids are received from
Russian manufacturers.
Another important event in the
sector in 2014 was the entry into
force of Federal law “On contract
system in the area of state
procurement” and the government’s
transition to the Federal Contracting
System, which had a short-term
effect of reduction in regional
purchasing volumes.
Experts are mostly positive on
the outlook for the domestic
pharmaceutical market. According
to the latest forecasts by DSM
Group, market volumes will grow by
around 9% in 2015 versus 2014. The
growth in the commercial segment
is expected at about 10%, and in
the state segment at about 6%.
Most of that growth will be provided
by the Russian pharmaceuticals,
facilitated by the import substitution
programme.
Volume of state procurements in pharmacy
and share of Russian players, bln RUB
211
77%
23%
2010
267
285
226
234
77%
76%
79%
85%
24%
2011
24%
2012
21%
2013
Fact
15%
2014
Forecast
Russian producers
Foreign producers
Binnopharm’s business in 2014
Binnopharm Group
Binnopharm
State-of-the-art biotech production, meeting the
GMP and ISO standards with area of 32 thousand
square meters
20 thousand square meters of classified
premises
Strong R&D department with a number of
biotech products in a pipeline
Alium
Binnopharm Distribution
• I.V. generics production
corresponded to GMP
requirements
• Located in 5 km from Moscow
ring road
• An overhaul project in 2013-2014
- replacing the filling line bottling
from glass bottles to modern
plastic containers
• Current production capacity:
14.4 mln plastic bottles per year;
launched in September 2014
• Presence in nearly 30
regions across Russia
• Sales of third-party
products, mainly in
the hospital segment
(government procurement)
• Direct contract with big
international companies
• Sale of Binnopharm’s
products
77
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT In 2014, Binnopharm’s results
were affected by the government’s
transition to the Federal Contracting
System. After the relevant law took
effect, regional purchases of drugs
were virtually frozen, resulting
in more than 45% reduction in
Binnopharm’s distribution revenues
in the first half of 2014.
In 2014, Binnopharm continued
deliveries of Regevac (a hepatitis
B vaccine) under government
contracts. The delivery volume in
2014 dropped by 1.8 mln doses from
the previous year to 5.4 mln, which
also contributed to the decline in the
company’s revenue.
The expected revenue fall due to
structural changes was offset by
adequate optimisation measures:
selling, administrative and man-
agement expenses were reduced by
RUB 70 mln, and thus the ratio of
these expenses to revenue remained
at the level of the previous year.
Binnopharm’s annual output capacity, mln pcs
Tablets
up
to
1,400
Capsules
up
45
to
Ampoules
80
up
to
Aerosols
20
up
to
Syringes
up
18
to
Binnopharm actively cooperates with
foreign manufacturers under the ex-
isting contract production agreements
and plans to enter into new ones
(among the company’s partners are
ViiV Healthcare and Fresenius Kabi).
In early 2015, Binnopharm’s facility
started repackaging operations for
Ketosteril – one of the key products in
Fresenius Kabi’s Russian portfolio.
In 2014, a new drug, Beklometazon
(aerosol for treatment of lung
diseases), was registered, the market
for this product in Russia is estimated
at RUB 500 mln per year.
Key events
• In February 2014, Binnopharm
launched a new syringe line for
production of pre-filled syringes.
The line has an annual capacity of
18 mln of syringes. Registration of
Binnopharm’s biotech products in
the new form is in progress.
• In March 2014, the company
signed an agreement with
ViiV Healthcare Trading to
78
continue ViiV drug production at
Binnopharm’s facilities up to the
end of 2016.
• In December 2014, Alexey
Chupin was appointed CEO of
Binnopharm.
• In September 2014, Binnopharm
launched its upgraded filling line
for infusion solutions at the Alium
plant. Binnopharm also signed
new cooperation agreements
with international pharmaceutical
companies.
• In December 2014, Binnopharm’s
aerosol product line was expanded
following the registration of
Beklometazol; development and
registration of new drugs are
underway.
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Operational strategy
The key objective of the company’s
operational strategy is to expand
the company’s own drug portfolio
and efficiently utilise its main
production units: biotech production
facility, aerosol line, lines for
production of solid drug forms
and infusion solutions.
Binnopharm will continue producing
Regevak B vaccine, erythropoietin β,
interferon ingredient. Furthermore,
the second and third phases
of clinical research for its own
biotech drugs – Interferon α2β,
Erythropoietin α will be carried
out in 2015. Binnopharm actively
works on the list of drugs to
develop in the medium term, both
by the in-house R&D department
and through technology transfer
by obtaining production licenses
for the new drugs.
Utilisation of the lines producing
aerosol and solid pharmaceutical
forms will be ensured through im-
plementation of contract production
projects with foreign pharmaceuti-
cal companies and commencement
of Binnopharm’s generic drugs
production. Alium Plant is currently
producing simple infusion solu-
tions – dextroglucose and sodium
chloride. In 2015, the plant will start
production of amylum and intrave-
nous generics that do not require
clinical trials and may be registered
by the end of 2015.
Financial results of Binnopharm
RUB millions
Revenue
OIBDA
Operating income
Adjusted net income attributable to Sistema
Binnopharm’s rouble revenue
declined by 25.2% year-on-year in
2014 and by 33.1% year-on-year in
the fourth quarter. The results were
impacted by the entry into force of
the Federal law “On the Contract
System in the State and Municipal
Procurement of Goods, Works
and Services” and government’s
transition to the federal contract
system which practically put
freeze on regional procurement
of medicines and resulted in a
temporary decrease of revenues
from Binnopharm’s distribution
business by more than 45% in
the first half of 2014. However,
government procurement of drugs
is generally expected to increase
in 2015. Furthermore, Binnopharm
will participate in the government’s
import substitution programmes for
drugs as a local manufacturer.
Binnopharm’s sales
of Regevak
538
970
350
600
2013
2014
Sales of Regevak B,
mln rub
Supply of Regevak B,
thousands doses
2014
2,485
322
136
4
2013
Change
3,321
(25.2%)
652
425
285
(50.7%)
(68.1%)
(98.5%)
In 2014, Binnopharm’s OIBDA
decreased following a decline in
revenue and gross profit. A drop
in revenue was expected due
to structural changes, but this
was supported by corresponding
optimisation measures, which led
to Binnopharm’s SG&A expenses
falling by RUB 70 million in 2014.
The SG&A/revenue ratio therefore
remained at the same level
as in 2013.
79
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT REAL ESTATE
This business area is represented
by a number of companies, in-
cluding the following key players:
Leader-Invest, Business -Nedvizhi-
most and Mosdachtrest. Sistema’s
strategy in real estate business is
focused on increasing the value of
the portfolio under management
with further monetisation through
rent income, development and sale.
Management
Leader-Invest:
CEO – E.G. Rubtsov
Business-Nedvizhimost:
CEO – I.V. Shabdurasulov
Mosdachtrest:
CEO – S.V. Gavrilenko
Chairman of the Board
of Directors – F. V. Evtushenkov
Chairman of the Board
of Directors – L.A. Monosov
Chairman of the Board
of Directors – S.A. Drozdov
Sistema’s
effective
ownership
100%
Under
design and
construction
>388
‘000 m2
Under
management
>442
‘000 m2
Cottages
>60.1
‘000 m2
Industry*
In 2014, new residential space
commissioned in Moscow increased
to 3.2 mln m2 from 3.1 mln m2
in 2013. Between January and
October 2014, 135,370 real estate
transactions were made on the
market, which is only 7% lower than
the record of 2013.
Sources: Rosreestr, AHML, Knight Frank, ILM
80
Deals with real estate in Moscow,
for 5 years
1,402
19,798
4,555
24,770
12,107
31,961
85,650
91,224
96,656
21,251
35,282
18,650
35,725
145,775
135,370
2010
2011
2012
2013
2014
Purchase and sale
Mortgage
Share participation agreement
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Early 2015 saw a decline in
purchasing activity due to a rise
in mortgage interest rates and
toughening of requirements for
borrowers. The most badly-hit
segment will be the construction
of comfort class housing where
the share of mortgage-based
transactions is about 60%.
However, the anti-crisis measures
taken by the Russian Government to
subsidise mortgage interest rates
are expected to support the market
in the second half of 2015.
Weighted-average mortgage rate for 5 years
%
6
.
4
1
%
6
.
4
1
%
4
.
4
1
%
5
.
3
1
%
5
.
3
1
%
1
.
3
1
1
%
3
.
4
1
%
7
.
2
1
%
6
.
3
1
%
5
.
3
1
%
4
.
3
1
%
1
.
3
1
%
1
.
1
1
%
1
.
1
1
%
1
.
1
1
%
0
.
1
1
%
4
.
2
1
%
8
.
0
1
The interest rate on ruble loans
The interest rate on foreign currency loans
%
2
.
2
1
%
1
.
2
1
%
0
.
2
1
%
1
.
2
1
%
9
.
1
1
%
2
.
2
1
%
3
.
2
1
%
8
.
2
1
%
7
.
2
1
%
6
.
2
1
%
4
.
2
1
%
2
.
2
1
%
2
.
2
1
%
2
.
2
1
%
8
.
9
%
6
.
9
%
7
.
9
%
7
.
9
%
6
.
9
%
7
.
9
%
8
.
9
%
7
.
9
%
8
.
9
%
6
.
9
%
6
.
9
%
3
.
9
%
5
.
9
%
4
.
9
I
‘09
II
‘09
III
‘09
IV
‘09
I
‘10
II
‘10
III
‘10
IV
‘10
I
‘11
II
‘11
III
‘11
IV
‘11
I
‘12
II
‘12
III
‘12
IV
‘12
I
‘13
II
‘13
III
‘13
IV
‘13
I
‘14
II
‘14
III
‘14
It is most likely that in 2015 the
competition among developers will
increase and the market will become
a buyer’s market: the quality of
properties offered in the primary
market is expected to increase along
with active promotion campaign.
The office property market hit a
record high in new space delivery
(1.4 mln m2), which is almost two
times more than in 2013. The
vacancy rate grew by 29% for A class
space and 17% for B class space
amid depressed demand caused
by general economic crisis. Dollar-
denominated rental rates fell by
more than 10%.
During 2014, 1.29 mln m2 of office
space was rented or bought out,
15% lower than in 2013. The activity
of tenants and investors slowed
down by the end of 2014, and in 2015
the demand for office space may
continue falling.
Office real estate,
commissioned in 2014,
‘000 m2
1,366
707
650
9
Class А Class B+ Class B- Average
Rent rates
850
High volatility in currency markets
in late 2014 resulted in a decline
in average rental rates by 10% to
15% depending on the class of
properties.
Class А
Class В
830
833
800
760
710
690
685
455
480
483
492
430
410
410
670
400
2008
2009
2010
2011
2012
2013
2014
2015
2016
81
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT The planned increase in new space
delivery in 2014-2016 (almost 3 mln
m2) amid slack demand may lead to
a further increase in vacancy rate
to 30% on average, decline in rental
rates by 10% and toughening of
competition among the landlords.
According to the 2014 end year results,
the demand for rent of premium
real estate dropped by 9% year-on-
year. The main reasons for the fall in
demand for properties of this category
are the general economic situation as
well as the practice of setting rental
rates in foreign currency prevailing in
the market.
The Moscow premium rental market
in 2015 will depend on two key
factors: geopolitical situation and
currency exchange rates.
Steady growth in 2014
Sistema’s real estate assets are
grouped into several distinct
areas – real estate management,
development, and management of
Serebryany Bor real estate – which
are represented by Business-
Nedvizhimost, Leader-Invest and
Mosdachtrest, respectively.
Leader-Invest is a development
company investing in construction
of residential property (comfort,
business, premium and deluxe
classes in the Central Moscow) and
commercial property.
As at the end of 2014, the
development project portfolio held
by Leader-Invest included 13 real
estate objects with a combined
area of 388,000 m2. Six of these
properties with a combined
area of 103,000 m2 are under
construction. In 2014, Leader-
Invest continued implementation
of the project for the construction
of an office building in Nagatino
iLand with a total area of 31,000
m2. The company successfully
completed work on renovation of
three buildings (former automatic
telephone exchanges) totalling
28,000 m2 in area and signed
contracts to participate in shared-
equity construction of 6,600 m2
of apartments worth RUB 1.4 bln
in total.
In April 2014, Sistema acquired
an additional 49% stake in Busi-
ness-Nedvizhimost for RUB 3.1
bln, bringing its stake to 100%.
Business Nedvizhimost owns 76
real estate sites located across
Moscow which cover a total area
of approximately 178,000 m2 and
were used by MGTS as automat-
ic telephone stations (ATS) prior
to the implementation of GPON
(Gigabit-capable Passive Optical
Network) technology.
Business-Nedvizhimost provides
professional and management ser-
vices both for its own commercial
real estate and that of its partners,
including renting and selling of
buildings. Business-Nedvizhimost
owns a unique pool of real estate
properties: mansions in the centre
of Moscow, office and retail prop-
erties, business centres located
virtually in every district of Mos-
cow, industrial and warehousing
properties in Moscow and Moscow
Region. The total portfolio of prop-
erties under management as at the
end of 2014 was over 442,000 m2.
In 2014, a detailed operational
programme was developed for
further commercialisation of the
buildings previously occupied by
ATS. During 2014, the company
partially renovated premises in
six properties located in the centre
of Moscow with a total area over
22,000 m2, which were cleared from
the MGTS equipment.
In 2014, Business-Nedvizhimost
completed the sale of a property in
Moscow’s downtown and entered
into a new project together with
a co-investor partner for the
construction of a residential building
with a total area of 13,000 m2 and
aggregate apartment space of 6,300
m2. The project will be completed in
the first quarter of 2016.
Mosdachtrest is a management
company focusing on the rental
and maintenance of cottages
(Serebryany Bor, Barvikha,
Zhavoronki, Trudovaya) and office
premises in Moscow. The total
cottage area as at the end of 2014
was over 60,100 m2.
In 2014, Mosdachtrest approved
the architectural concept for
reconstruction of buildings
and performed repair work in
Serebryany Bor cottages.
82
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Key events
• In April 2014, Sistema acquired an
additional 49% stake in Business-
Nedvizhimost for RUB 3.1 bln.
• In early 2015, Business
-Nedvizhimost acquired a 51%
stake in Rent-Nedvizhimost for
RUB 3.8 bln.
Operational strategy
In accordance with the set
objectives, in 2015 Leader-Invest
plans to put into operation three
projects totalling 11,300 m2 in area
and start construction of four real
estate objects with a total area of
41,800 m2. Also, there is a plan for
Business -Nedvizhimost to transfer
16 properties with a combined area
of 179,000 m2 to Leader-Invest for
development in 2015.
The operational strategy of
Mosdachtrest in 2015 will focus on
maintaining a steady rental cash
flow as well as reconstruction
and monetisation of cottages in
Serebryany Bor.
83
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT SISTEMA SHYAM TELESERVICES
Sistema Shyam TeleServices Ltd.
(SSTL) is a CDMA mobile operator
providing telecom services in India
under the MTS brand.
Management
CEO – D.V. Shukov
Chairman of the Board of Directors – R. Sommer
Sistema’s
effective
ownership
56.7%
Revenue
Regions of
operations in
India
Subscribers
Data services
subscribers
220.7
US$ mln
9
9.1
mln
1.6
mln
Industry*
The telecom market in India
continued to grow steadily in 2014,
with most of its growth coming from
GSM subscribers and accelerated
development of the data services.
As of December 2014, the total
subscriber base in the country
reached a historical high of 971 mln
with the total penetration of 77.6%.
The active subscriber base grew by
9.2% over the year.
CDMA subscriber base and market
share contracted by 1.1%. Although
several companies left the market
in 2012-2013, there are still 12
mobile operators in the country,
including 8 GSM operators, 3 GSM/
CDMA operators and one CDMA
operator (SSTL). The top three
operators in India (Bharti Airtel,
Vodafone and Idea) strengthened
their positions in 2014 with a
combined market share based on
subscriber base exceeding 58%.
* Source: TRAI, Statista.com
84
Data services segment is the major
driver in the industry’s development.
During 2014, traffic generated by
2G and 3G broadband services grew
by 74%, with 3G network traffic
growing by 114%, and 2G network
traffic growing by modest 41%. Over
the year, the share of 3G services
as a percentage of total telecom
services rose from 42% to 52%.
Data services penetration in India
5.6%
3.3%
0.96% 1.1% 1.2%
2010
2011
2012
2013
2014
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH 15% each quarter, the current
penetration rate is only 22%. The
aggressive growth is supported
by active promotion of low-priced
handsets.
Operators in India are starting
to develop and promote 4G (LTE)
networks and services in the
market. With about 5.5 mln 4G
subscriber terminals purchased
in the country, only 85 thousand of
them are active. The competition in
the data services segment should
become tougher considering the
scheduled launch of LTE by RJIO
and growing market activity of 3G
operators.
Smartphones penetration
in India
34%
30%
27%
22%
14%
9%
5%
2011
2012
2013
2014
2015
2016
2017
Fact
Forecast
The 900 and 1800 MHz licenses
of Airtel, Vodafone, Idea Cellular
and Reliance Telecom will expire
in 2015-2016 in 18 districts. In this
connection, the Indian Ministry
of Communications held a new
auction in March 2015 for a number
of frequency bands, including 800
MHz used by SSTL. According to the
auction terms, the starting prices
for 800 MHz frequencies were
almost twice as high as the price
quoted at the last auction in March
2013. SSTL did not participate
in the auction.
To provide more efficient utilisation
of the limited frequency resources
in the country, the Government of
India prepared draft regulations on
the spectrum sale and spectrum
sharing by operators; however,
these regulations are not expected
to be finalised and approved
until the second quarter of 2015
at the earliest.
Steady growth in 2014
In 2014, SSTL’s revenue in Indian
rupees grew by 10% from 2013, with
a 33.6% increase in the revenue
from data transmission services - of
company’s key area of development.
The share of data revenue in total
sales grew from 27% to 47%.
SSTL subscriber base
8.5
1.3
2013
7.4
1.6
2014
Voice subscribers, mln
Data subscribers, mln
85
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT In March 2014, SSTL introduced
one of the cheapest rate plans in
India for data services, presented its
own Internet movie theatre called
MTS Movies, where the subscribers
can watch movies free of charge,
and conducted an active marketing
campaign, with the MTS Internet
Baby video watched by 25 mln of
viewers, marking a new record in
viewing on Youtube in India.
SSTL was able to rapidly develop
its data services by introducing
measures to streamline and
improve sales efficiency. This
included implementing a pilot
project to launch SSTL’s distribution
sales model in Gurgaon and New
Delhi, a pilot project in Kerala
providing distributors with loans
to purchase voice devices and data
transmission equipment, and a
model for sharing revenue with
distributors in Delhi.
Key events
Operational strategy
The key strategic objective of
SSTL in 2015 is to achieve OIBDA
breakeven. SSTL will focus on
growth in the data segment, active
monetisation of voice services and
optimisation of company costs.
• In July 2014, SSTL started
selling a new innovative device
(Mblaze PowerWifi) – a mobile
Wi-Fi router with high-capacity
storage battery and smartphone
recharging function.
• In October 2014, SSTL launched
a new advertising campaign GB
Festival and started promotion
of a new line of data rate plans,
thus strengthening its position
as a price leader.
• In 2014, for the third year in a row,
the MTS brand was included in
the list of Brand Equity 50 Most
Trusted Service Brands in India.
The brand was also recognised
as the most innovative brand in
the telecom sector in India and
ranked among the top three most
recognizable brands of mobile
Internet providers.
86
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH 2013
Change
209.4
5,4%
(146.5)
-
-
-
Financial results of SSTL
US$ millions
Revenue
Adjusted OIBDA
2014
220.7
(81.5)
Adjusted operating loss
(141.8)
(210.2)
Adjusted loss attributable to Sistema
(129.7)
(225.1)
Net debt
544.0
568.6
(4.3%)
SSTL’s revenues increased by 5.4%
year-on-year in 2014, mainly as a result
of development of its data segment.
Non-voice revenues from both data and
VAS accounted for 46.9% of the opera-
tor’s total revenue in the fourth quarter
of 2014, compared to 34.5% in the
corresponding period of 2013.
In 2014, SSTL significantly narrowed
its year-on-year adjusted OIBDA loss
by 44.3% through its cost optimisa-
tion programme despite the active
marketing campaign it conducted in
the fourth quarter of 2014.
SSTL results in local currency
3,520
2,909
2,844
2,996
3,188
3,348
3,427
3,508
35.7%
34.4%
34.5%
34.5%
34.5%
38.6%
43%
47%
I '13
II '13
III '13
IV '13
I '14
II '14
III '14
IV '14
Revenue, mln rupees
Share of non-voice revenues
SSTL operating results
89
328
95
363
97
373
107
414
115
117
117
416
401
401
II '13
III '13
IV '13
I '14
II '14
III '14
IV '14
81
295
I '13
ARPU (rupees)
MOU (min)
As of December 31, 2014, SSTL’s wire-
less (voice and data) subscriber base
totalled 9.0 million. The data subscrib-
er base grew by 23.0% year-on-year
in 2014 to 1.6 million. In the fourth
quarter, subscribers’ MOU increased
by 6% year-on-year to 396 minutes.
Blended mobile ARPU in rupees grew
by 26% year-on-year to INR 122.
87
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT SISTEMA MASS MEDIA
Sistema Mass Media (SMM) is one
of Russia’s leading media holdings
that manages media assets in pay
TV, advertising, digital content
distribution and VAS services for
telecom operators. SMM owns and
manages STREAM TV Company
JSC («Stream TV»), RA Maxima JSC
(«Maxima»), TsTC LLC («TsTV»), and
Stream LLC («Stream»).
Management
President – G.Sh. Khasianova
Chairman of the Board of Directors – A.V. Abugov
Sistema’s
effective
ownership
86%
Revenue
Audience
Own TV
channels
Pay TV
subscribers
3,4
RUB bln
30,2
mln
9
11,8
mln
Pay-TV market in Russia
35.1
37.1
64%
68%
40.9
75%
31.9
28.7
53%
58%
2011
2012
2013
2014
2015
Pay-Tv subscriber base, mln
Pay-TV penetration
Industry*
Russia’s multimedia market in
2014 was affected by the overall
slowdown in economic growth
rates and changes in the geopoliti-
cal situation.
In the segment of TV content pro-
duction, changes in the geopolitical
situation caused a decline in sales
of Russian content in Ukraine and,
as a result, a fall in profitability
of Russian producers. The neg-
ative effect was partially offset by
the growth of the Russian pay TV
market. Due to the rapid growth of
digital technologies, the market ex-
perienced considerable changes in
terms of subscriber base structure,
with the share of cable TV subscrib-
ers dropping from 52% to 49%.
* Association of Russian Communication
Agencies, ZenithOptimedia, company data.
88
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH In 2014, the federal Law «On Mass
Media» was amended to include
provisions which capped the stake
that can be held by foreign compa-
nies in any Russian media at 20%.
The law affects the following three
groups of market players: represen-
tative offices of foreign publishing
holdings in Russia, Russian versions
of foreign TV channels broadcast via
cable networks and public media
holdings with foreign participation.
Advertising on non-terrestrial
channels has been banned with
effect from January 1, 2015; how-
ever, in February 2015, commercial
channels with a foreign content not
exceeding 25% regained this right.
The most promising segments in the
industry under the current condi-
tions are still represented by digital
media and Internet advertising using
new audience targeting and analysis
tools and technologies.
Steady growth in 2014
In 2014 work to optimise Sistema’s
media assets and improve their
efficiency continued, allowing SMM
to generate a net profit despite the
general deterioration of the situation
in the industry.
Stream TV channels maintain their
leadership position in the market
in terms of average annual reach
in the majority of niche groups.
The company has been actively
expanding its subscriber base in the
Russian and CIS markets: in 2014,
its subscriber base grew by 10.3%
to 11.8 mln.
In 2014, Stream LLC, which
provides a universal multimedia
entertainment service, actively
developed in cooperation with MTS
the following services launched in
2013: GOOD’OK (RBT – replacing
the usual ringback tone sound
with music), MTS-Info (information
services for MTS subscribers), MTS
Puls (application with entertainment
content for mobile phones). The
GOOD’OK service was also launched
for subscribers of MTS Ukraine
and MTS Belarus in 2014. Primary
sales of RBT service to MTS
Russia subscribers grew by 31%
over the year.
Key events
In 2014, Stream LLC launched a
new area – mobile advertising
and distribution of А2Р messages
with information and service
content based on its own
proprietary solution. The successful
implementation of the strategy
ensured considerable growth of
revenue and OIBDA. The revenue
grew by approximately 60% to
RUB 1.3 bln, while OIBDA reached
RUB 330 mln, with the increase in
OIBDA margin from 7% in 2013 to
26% in 2014.
• In March 2014, Gyulnara
Khasianova was appointed SMM
President.
• In April 2014, ORK signed a
contract to launch a full-cycle
film production project under the
order of Rossiya Channel.
• In October 2014, Okhota i Кybalka
(Hunting and Fishing) TV channel
owned by TVC Stream won in the
«Best Lifestyle Channel» category
at the Golden Ray Awards.
• In December 2014, SMM took
control over Stream LLC.
TC Stream subscriber
base, mln
10.7
11.8
7.7
2012
2013
2014
89
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Operational strategy
SMM’s strategy aims to further
improve efficiency and profitability
in traditional areas and launch new
business areas in digital media and
online advertising.
In the situation of changes in
market conditions, Stream TV will
focus on retaining current positions
and increasing distribution in the
CIS markets. The company plans to
launch and promote an international
version of the Hunting and Fishing
Channel and special versions of
channels for foreign markets.
Stream’s development strategy
envisages further development of
value-added services (VAS) for MTS
and development of mobile adver-
tising services (A2P) in partnership
with MTS.
Financial results
RUB millions
Revenue
OIBDA
Operating profit
Net income attributable to Sistema
Net debt
2014
3,366
977
308
95
292
2013
Change
3,498
1,454
199
15
204
(3.8%)
(32.8%)
54.7%
554.0%
43.1%
Revenue of SMM in rubles fell by
3.8% for the full 2014 and by 28.1%
year on year in the fourth quarter.
OIBDA in rubles decreased in 2014
by 32.8% compared to the previous
year and by 65.0% year on year in
the fourth quarter of 2014. Decrease
in revenues and OIBDA was due
to a general deterioration of the
situation in the industry (reducing
advertising budgets led to a fall in
demand for TV series) as well as
the loss of the market of Ukraine
for the re-sale and distribution
of television series.
90
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH CORPORATE
GOVERNANCE
SYSTEM
Corporate Governance Principles
Corporate Governance Structure
General Meeting of Shareholders
Board of Directors
Commitees of the Board of Directors
President and the Management Board
Internal Control and Audit
Development of the Corporate
Governance System in 2014
Remuneration
Risks
92
93
94
96
99
101
103
104
105
106
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
as an investment company. High
quality of corporate governance
and informational transparency
enable the company to attract
partners and investors and increase
return on equity by taking more
efficient managerial decisions. The
Corporation’s corporate governance
system is based on the following
core principles:
• transparency and clarity of all
processes for investors and
partners;
• a transparent dividend policy;
• an active and professional Board of
Directors;
• investment decisions made in
compliance with the established
procedures;
• the attention of the Board of
Directors to all transactions with
related parties;
• an active role of the Board of
Directors in the strategic planning
process;
• development of corporate
governance in portfolio companies.
Sistema is guided by these
principles in all of its activities,
including strategic and financial
management, HR and social policy,
reporting, control and audit, risk
management.
Sistema’s principles and procedures
of corporate governance are
set forth in its Charter and a
number of publicly available
internal regulations. Together
these documents define the
structure and competence of the
Corporation’s governance and
control bodies. The Corporate
Governance and Ethics Code sets
forth additional commitments of
Sistema in the area of transparency,
social responsibility, and ethical
business principles.
Sistema makes every effort to bring
its corporate governance practices
in line with the recommendations
specified by the Bank of Russia in
the Corporate Governance Code
(Letter of the Bank of Russia No.
06-52/2463* dated April 10, 2014)
and the guidelines set out in the
UK Corporate Governance Code.**
The consistency of Sistema’s
corporate governance practices
with the standards set out in the
Corporate Governance Code and
the UK Corporate Governance Code
is analyzed in Annexes 9.7 and 9.8
to this report. Where corporate
governance practices at Sistema
deviate from the recommendations
set forth in the above documents,
the Corporation clarifies how the
balance of interests is otherwise
maintained in accordance
with the applicable standards
of corporate governance.
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
conduct a more in-depth analysis of
the proposed solutions in specific
areas and develop recommendations
for the governance bodies
of Sistema.
The existing organizational structure
of the Corporation that was adopted
in December 2013, including the
adjustments and amendments made
later, reflects Sistema’s operation
in accordance with investment
company model.
* The text of the Corporate Conduct Code
is available at the following address:
http://www.cbr.ru/sbrfr_new/files/legislation/
letters/2014/Inf_apr_1014.pdf
** 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
92
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Corporate Governance Structure of Sistema JSFC*
Secretariat of the Chairman
of the Board of Directors
Secretariat of the Board
of Directors
Board of
Directors
Chairman of Board of Directors
V.P. Evtushenkov
Internal Control and Audit
Department
Executive Vice-President –
Head of Department
Secretariat
of the President
President,
Chairman of Management Board
Management Board
First Vice-President,
Senior Vice-President,
Vice-President
Investment portfolio
* As of 31 December 2014.
Finance
and Investment Division
Senior Vice-President,
Head of Division
Corporate
Governance Division
Senior Vice-President,
Head of Division
Legal Division
Vice-President,
Head of Division
Corporate
Communications Division
Vice-President,
Head of Division
Strategy Division
Vice-President,
Head of Division
Human Resources Division
Vice-President,
Head of Division
Security and IT Department
Executive Vice-President –
Head of Department
Administrative Department
Head of Administration –
Head of Department
93
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT GENERAL MEETING OF SHAREHOLDERS
Principles of operation
The General Meeting of shareholders
is the supreme governance body of
Sistema. 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 sharehold-
ers 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 Eng-
lish 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 Meet-
ings of shareholders are always
located in the vicinity of the Corpora-
tion’s headquarters.
Observance of shareholders' rights
Sistema aims to ensure maximum
protection of the shareholders’ right
to participate in running the Cor-
poration and receiving profit. The
fundamental rights of a shareholder
in this respect are the rights to par-
ticipate in the work of the General
Meeting of shareholders and to vote
on the items on the agenda, and
also the right to receive dividends.
To secure the right of the share-
holders to take part in the work
of the general meeting, a notice
of Sistema’s General Meetings of
shareholders, as well as voting bal-
lots, are circulated to all the share-
holders 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 may
be filled out by the shareholder in
advance and mailed to Sistema to
the address specified in the ballot.
In this case the vote of the share-
holder will be taken into account
when counting the voting results.
Depositary receipt holders may vote
on the agenda items of shareholder
meetings by proxy through Deutsche
Bank AG, which is used as the
depositary bank for Sistema’s GDR
programme:
Global Equity Services,
Trust and Securities Services,
Email: adr@db.com
thus providing a guarantee for the
protection of the rights of all the
shareholders of the Corporation.
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
asking for access to the documents
that the shareholder wishes to see.
When a shareholder is granted
access to confidential documents,
such a shareholder makes a
written non-disclosure obligation
Holders of material blocks of
shares are entitled to make
proposals on the agenda of the
General Meeting of shareholders
and nominate candidates to the
Corporation’s governance and
control bodies*. Proposals on the
agenda of the Annual General
Meeting of shareholders of Sistema
are accepted in writing within 100
days after the end of the financial
year**. Candidates nominated to
the governance and control bodies
of the Corporation are preliminarily
interviewed by the Nomination,
Remuneration and Corporate
Governance Committee of the Board
of Directors of Sistema.
.
* 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.
** If 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.
94
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH For the purposes of 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 this policy, the
amount 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 2014 and their results
Quorum at General Meetings of Shareholders for three years
81.60%
83.66%
82.39%
79.18%
76.55%
EGM dated
14/06/2012
AGM dated
30/06/2012
EGM dated
01/11/2012
AGM dated
29/06/2013
AGM dated
28/06/2014
The Annual General Meeting of the
shareholders of Sistema was held on
28 June 2014. The AGM (1) approved
the Company’s annual report
and annual financial statements,
including the profit and losses
account for 2013, (2) determined
the amount, procedure, forms and
timelines of dividend payments on
the company’s shares, (3) elected
members of the Board of Directors,
(4) elected members of the Auditing
Commission, (5) and approved the
auditors of the Corporation.
As resolved by the Annual General
Meeting of shareholders and
recommended by the Corporation’s
Board of Directors, RUB 19, 879m
were allocated to pay dividends,
which equalled RUB 2.06 per
one ordinary share of Sistema.
The amount of dividends was
determined in compliance with the
current dividend policy. Dividends
increased by 115% compared with
the amount paid in 2013.*
The Annual General Meeting of
shareholders approved CJSC
Deloitte and Touche CIS as
Sistema’s auditor for 2014 to
perform the audit according to the
Russian Accounting Standards
and the US GAAP. The auditor was
selected following an open tender
organized by the Audit, Finance and
Risk Committee of the Board of
Directors of Sistema.
In 2014, Sistema did not convene
any Extraordinary General Meetings.
* In 2013, RUB 9,264m were allocated for dividends, equalling RUB 0.96 per one share of Sistema JSFC.
95
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT BOARD OF DIRECTORS
The Board of Directors of Sistema
is responsible for strategic
management of the Corporation
and plays the key role in organising
an effective system of corporate
governance: 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 of the Board of
Directors are set out in the Charter
of Sistema.
The Board of Directors of Sistema
effective as of 31 December 2014 was
elected at the Annual General Meet-
ing of the Company’s Shareholders
on 28 June 2014, and its membership
remained unchanged compared to
the previous year. The Board of Di-
rectors of Sistema has 13 members.
Independent members of the Board
of Directors form a majority.
Members of the Board of Directors of Sistema elected on June 28, 2014
Vladimir Evtushenkov
Alexander Goncharuk
David Yakobachvili
Sergey Boev
Brian Dickie
Chairman of the Board
of Directors
Deputy Chairman of the
Board of Directors
Non-executive member
Deputy Chairman of the
Board of Directors
Independent Director
Non-executive member
Independent Director
Dmitry Zubov
Robert Kocharyan
Jeannot Krecké
Peter Mandelson
Munnings Roger
Non-executive member
Independent Director
Independent Director
Independent Director
Independent Director
Mark Holtzman
Serge Tchuruk
Independent Director
Independent Director
Mikhail Shamolin
Executive member,
President and CEO
96
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Composition of Board of Directors
Executive member (Mikhail Shamolin)
Independent Director (B. Dickie, R. Kocharyan, J. Krecké, P. Mandelson, R. Munnings, M. Holtzman,
S. Tchuruk, D. Yakobachvili)
Non-executive member (S. Boev, A. Goncharuk, D. Zubov.)
61%
31%
8%
Meetings of the Board of Directors
approved work plan for the year. The
work plan of the Board of Directors
is developed proceeding from the
logics of the strategic planning and
reporting cycle of Sistema. 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 organized whenever an urgent
matter needs to be considered.
Forming the work plan of the Board
of Directors and including additional
items into the plan falls within the
remit of the Board Chairman.
In 2014 the Board of Directors held
10 meetings: eight scheduled regular
Board meetings, and two extraordinary
meetings, one of which was held in the
form of absentee voting. The Board
of Directors reviewed a total of 100
agenda items in 2014:
Number of in-person meetings
Number of letter ballots
Number of items in accordance with the BoD work plan
Number of items reviewed at Board meetings
Subjects reviewed by the Board of Directors in 2014
2014
2013
9
1
39
100
8
1
43
105
Business strategies, investments, new types of activities
Corporate governance and securities
Participation in affiliates, groups, unions; branch offices
Approval of transactions
Approval of internal documents
Financial reports, planning and audit
Functional strategies
Personnel appointment, HR policy
27%
7%
12%
21%
1%
17%
6%
9%
In 2014 the agenda of the Board
of Directors was mainly related to
business strategy, approval of trans-
actions (including shareholdings in
portfolio companies) and corporate
governance. The Board of Direc-
tors’ focus on these areas proceeds
from the nature of the Corporation’s
operation as an investment compa-
ny, when particular attention should
be given to strategy and corporate
governance of portfolio compa-
nies, portfolio strategy, analysis
of new investment opportunities
and transactions.
97
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Preparation for the meetings and quorum of the Board of Directors
The procedure of preparation for the
meetings of the Board of Directors
is aimed at ensuring an efficient use
of the time and experience of the
Board members in order to enable
them to take important decisions
on the Corporation’s strategic
development. Materials on the
agenda are provided to the Board
of Directors of Sistema 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 the meetings
of Committees of the Board of
Directors of the Corporation.
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
2014 was 91.5%.
Participation of the Sistema Board members in meetings
of the Board of Directors and its committees in 2014*
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
9/10**
S. Boev
A. Goncharuk
B. Dickie
D. Zubov
R. Kocharyan
J. Krecké
P. Mandelson
R. Munnings
M. Holtzman
S. Tchuruk
M. Shamolin
D. Iakobachvili
9/10
7/10
10/10
10/10
10/10
10/10
8/10
10/10
7/10
9/10
10/10
10/10
8/11
6/11
4/11
0/3
5/8
1/3
10/11
10/13
11/13
13/13
12/13
2/5
6/8
13/13
4/7
3/7
7/7
6/7
5/8
3/3
8/8
8/8
8/8
8/8
7/7
6/7
5/5
7/7
5/7
7/7
5/7
1/7
7/7
* The membership of the Board of Directors is given as of 31 December 2014.
** 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 potentially participate in.
98
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Commitees of the Board of Directors
Nomination, Remuneration and Corporate Governance Committee
R. Kocharyan
Committee Chairman,
A. Goncharuk
B. Dickie, D. Zubov,
J. Krecké,
R. Munnings.
Independent Director
Non-Executive Director
67%
33%
The main tasks
• preliminary consideration of the
- to the boards of directors of
• management’s performance evalua-
candidates:
- to the board of directors;
- to the top management posi-
tions in the Corporation and
portfolio companies;
portfolio companies;
- to the position of corporate sec-
retary of the Corporation;
• the policy of motivation and compen-
sation for the Corporation employees;
tion and determination of parameters
of awarding bonuses to employees;
• systems of corporate governance
of the Corporation and portfolio
companies, protection of rights and
interests of shareholders.
Meetings and issues considered in 2014
8 meetings, considered 26 issues
formation of a system of motivation, performance evaluation and awarding bonuses to employees
corporate governance and protection of shareholders’ rights
preliminary consideration of the candidates
12
6
6
Audit, Finance and Risk Committee
R. Munnings
Committee Chairman,
S. Boev, P. Mandelson,
M. Holtzman,
S. Tchuruk,
D. Iakobachvili
Independent Director
Non-Executive Director
83%
17%
The main tasks
• Preparation and audit of the finan-
cial statements of the Corporation,
control of these processes:
• interaction with the external audi-
tors of the Corporation;
• assessment of the risk manage-
ment system and compliance with
applicable legal requirements in
the area of financial reporting,
auditing and planning;
• budget process and financial modeling;
• internal audit;
• warning system on potential cases
of fraud;
• preliminary assessment of large
transactions and transactions with
interested parties.
Meetings and issues considered in 2014
13 meetings, considered 74 issues
Evaluation of individual transactions
The process of financial planning and risk management
Processes of internal control, audit and warning systems for potential cases of fraud
Organizational and other matters
Preparation and audit of financial statements
External auditors
35
15
8
6
2
8
99
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Strategy Committee
V. Evtushenkov
Committee Chairman,
S. Boev, A. Goncharuk,
R. Kocharyan, M. Shamolin,
D. Iakobachvili,
M. Hecker
Independent Director
Non-Executive Director
Management
29%
42%
29%
The main tasks
• strategy development for portfolio
• reviewing mergers and acquisitions
• all projects of the Group
companies;
• strategic planning methodology
review;
• preliminary approval of the
strategy and the strategic
objectives of the Corporation;
and major investment projects;
• all mergers and acquisitions in the
Group with monetary value of more
than US$ 100 million;
• all projects of the Group associated
with entering new markets;
with substantial Government
participation.
Meetings and issues considered in 2014
11 meetings, considered 12 issues, all questions on the development strategy of the portfolio companies.
Ethics and Control Committee
A. Goncharuk
Committee Chairman,
S. Boev, B. Dickie,
R. Kocharyan,
Independent Director
Non-Executive Director
R. Munnings,
S. Tchuruk
67%
33%
The main tasks
• internal control and audit (together
with the Audit, Finance and Risk
Committee);
• function of corporate security;
• monitoring of compliance with the
• anti-corruption system in the
Corporation and Group companies.
Code of Ethics;
Meetings and issues considered in 2014
7 meetings, considered 16 issues.
internal audits of the internal control and audit and quality control environment
functional strategy and internal control in the field of internal control and security
anti-corruption system
organizational matters
6
4
2
4
Investor Relations and Dividend Policy Committee
D. Iakobachvili
Committee Chairman,
J. Krecké, P. Mandelson,
R. Munnings,
M. Holtzman,
M. Shamolin
Independent Director
Management
83%
17%
The main tasks
• maintaining effective relationships
with the financial community
and public authorities as well
as increasing the investment
attractiveness of Sistema
securities;
100
• the dividend policy of Sistema,
• protect the rights and interests of
including the formation of
recommendations to the Board of
Directors in respect of the amount
of dividends payable;
the shareholders.
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH PRESIDENT AND THE MANAGEMENT BOARD
Mikhail Shamolin
President of Sistema,
Chairman of the Management Board
• Mikhail was born in 1970
in Moscow.
• In 1992, he graduated from the
Moscow Automobile and Road
Technical Institute.
• In 1993, graduated from the
Russian Presidential Academy
of Public Administration.
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.
The President of Sistema is a
permanent chief executive officer
whose main function is executive
management and settlement of
relevant matters outside the remit of
the General Meeting of shareholders,
Board of Directors and Management
Board for the purposes of ensuring
profit of the Corporation, as well
as observance of its shareholders’
rights and legitimate interests. The
President reports to the Board of
Directors and the General Meeting of
the Corporation’s shareholders.
From 10 March 2011, Sistema’s
President is Mikhail Shamolin. On 15
March 2014, the Board of Directors
took the decision to extend his
appointment as the Corporation’s
President for three years.
• In 1996-1997, he completed an Execu-
tive Programme in Finance and Man-
agement at the University of Pennsyl-
vania’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 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 and President of MTS.
• Appointed President of Sistema on
10 March 2011. On 15 March 2014,
the Board of Directors reappointed
Mr Shamolin President and Chair-
man of the Management Board of
Sistema for a three-year term.
In 2014, the Management Board of
the Company held 24 meetings and
considered 33 agenda items in the
following key areas:
2. Preparation of forecasts of
and reports on the execution
of quarterly, semi-annual, and
annual budgets.
1. Preliminary review of matters to be
submitted to the Board of Directors,
including:
• the Corporation’s investment
policy and priority investment
areas;
3. Strategic planning at the
Corporation and S/As, including
the establishment of top-down
indicators of the strategic
planning cycle.
4. Debt and borrowings
management.
• development strategy and value
creation for key portfolio assets
of Sistema;
5. Risk management and
preparation of risk maps.
• internal control and audit;
6. Monitoring and management of
investment projects.
• HR policy;
• corporate social responsibility.
101
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Members of Sistema's Management Board
Mikhail Shamolin
Anton Abugov
Christopher Alan Baxter
Elena Vitchak
Chairman of the Management
Board, President and CEO
First Vice-President, Investment
portfolio manager
Senior Vice-President,
Investment portfolio manager
Vice-President,
Head of HR Department
Sergey Drozdov
Felix Evtushenkov
Leonid Monosov
Oleg Mubarakshin
Senior Vice-President, Head of the
Corporate governance division
First Vice-President, Investment
portfolio manager
Vice-President, Investment
portfolio manager
Vice-President, Head of the Legal
functional division
Vsevolod Rozanov
Senior Vice-President,
Chief Financial Officer
Andrei Terebenin
Senior Vice-President,
Investment portfolio manager
Ali Uzdenov
Senior Vice-President,
Investment portfolio manager
Michael Hecker
Vice-President,
Head of Strategy
After the end of the reporting period,
in February 2015, Nikolay Vasilkov
became member of the Management
Board, after being appointed Vice
President, Head of Strategy Function.
Michael Hecker was at the same
time relieved of the responsibilities
of a Management Board member.
Changes in the top management in 2014
A number of changes in the top management of the Company took place in 2014:
A. Buyanov
25 June 2014
was relieved of his duties as First Vice President.
A. Terebenin
22 May 2014
was appointed Senior Vice President and relieved of his duties as
Vice President, Head of the Corporate Communications Function.
А. Chupin
07 May 2014
was relieved of his duties as Vice President.
D. Khidasheli
30 September 2014
was relieved of his duties as Vice President.
M. Hecker
12 February 2014
was appointed Vice President, Head of Strategy Function.
A. Shlyakhturov
10 September 2014
was transferred from the position of Executive Vice President,
Head of the Security and IT Department to the position of the
Advisor to the Chairman of the Board of Directors.
V. Shukshin
10 September 2014
was appointed Executive Vice President, Head of the Security and
IT Department.
102
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH INTERNAL CONTROL AND AUDIT
The process of internal control
is implemented at all levels of
the Corporation’s management,
including the Board of Directors,
Board Committees, the Corporation’s
management and the Internal
Control and Audit Department.
To perform its key tasks, the Internal
Control and Audit Department
carries out the following functions:
• performing independent audits of
individual operations, processes,
and units;
Internal audit at the Corporation and
Sistema Group companies is the scope
of responsibility of the Internal Control
and Audit Department that functionally
reports to the Board of Directors and
administratively to the President. Head
of the Department is appointed and
dismissed by the President following a
resolution passed by the Corporation’s
Board of Directors after preliminary
approval of the Board’s Ethics and
Control Committee. Head of the De-
partment is a certified internal auditor
and has more than 15 years of experi-
ence in the field.
The main tasks of the Internal
Control and Audit Department are:
• helping shareholders and the
management improve the internal
control system by performing
regular audits of efficiency of the
Corporation’s internal control,
risk management, and corporate
governance systems;
• contributing to the achievement of
the Corporation’s strategic goals in
the most efficient ways possible;
• supplying the management and the
shareholders of the Corporation
with objective information on
existing internal risks and their
probability;
• enhancing the awareness of the
Corporation’s management about
the performance of Sistema Group
companies;
• controlling the achievement of the
goals of the shareholders of the
Corporation and Sistema Group
companies.
• assessing the efficiency of the
internal control system;
• assessing the efficiency of the risk
management system;
• assessing the corporate
governance system, preventing
violation of law and the
Corporation’s regulations,
ensuring observance of
professional and ethical standards,
and preparing recommendations
for improvement thereof;
• developing recommendations to
remedy deficiencies identified and
monitoring remediation thereof;
• examining and evaluating
documents provided with regard
to specific investment projects
for compliance with current
regulations; performing scheduled
and unscheduled monitoring
of performance against project
targets;
• ensuring uninterrupted functioning
of the whistleblowing programme;
• administering investigations,
including internal ones;
• monitoring compliance with the
Corporation’s internal regulations;
• monitoring execution of
assignments issued by the
Management Board and the
President of the Corporation;
• monitoring and investigating
instances potentially qualifying
as disciplinary violation and/or
violation of execution discipline
and/or conflict in the Corporation
or Sistema Group companies.
The Internal Control and Audit
Department has all the resources
and authority required to perform the
above functions.
The Internal Control and Audit
Department closely interacts
with the Corporation’s external
auditors, coordinates work and
offers consultations in the course of
preparing the Department’s annual
audit plan with regard to assessment
of the efficiency of internal control
over financial accounts, and also
during discussion and assessment of
identified risks.
In 2014, the Internal Control and
Audit Department conducted 65
scheduled and unscheduled audits
to assess the efficiency of internal
control and risk management
systems. Audits performed by
the Internal Control and Audit
Department did not uncover any
weaknesses or risks that could
affect the sustainability of the
Corporation’s business as a whole.
Reports on results of activities
performed by the Internal Control
and Audit Department in H1 2014 and
FY2014 were submitted to the Audit,
Finance and Risk Committee and to
the Ethics and Control Committee
of Sistema’s Board of Directors*.
The Department’s report for FY2014
was reviewed by Sistema’s Board of
Directors.
In December 2014, in accordance
with requirements of the Listing
Rules of the Moscow Exchange, the
Corporation’s Board of Directors
approved the Policy on internal audit
at Sistema, which defines the goals,
objectives and powers of the Internal
Control and Audit Department.
* Joint meetings of the Committees.
103
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT After the end of the reporting period,
in February 2015, the Board of
Directors approved the Policy on
the internal control system. This top
level documents sets forth the key
principles of organisation of internal
control as an ongoing and integrated
process, which involves all divisions
and governance bodies of the
Corporation. Notably, the Policy on
the internal control system defines:
• the goals and objectives of the
internal control system;
• principles of functioning of the
internal control system;
• the structure of the internal control
system and the list of its entities;
• division of responsibilities and
powers between entities of
the internal control system
(management, the Internal
Control and Audit Department,
the Board of Directors and Board
Committees).
External Audit
In compliance with the decision of the
Board’s Audit and Finance Commit-
tee, the following procedures have
been developed at the Corporation
for selecting external consultants for
the purposes of audit of the financial
and accounting reports of Sistema.
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 deemed insufficient, the Au-
dit Committee arranges a tender for
selection of a new auditor. If the qual-
ity of services provided by the current
auditor is deemed sufficient, nego-
tiations will be held with the auditor
about the price of auditing services for
the next period. However, to ensure
impartiality and objectivity of the audi-
tor, the Audit and Finance Committee
of Sistema has decided that a tender
for auditing services shall be held at
least once in every five years.
DEVELOPMENT OF THE CORPORATE GOVERNANCE SYSTEM IN 2014
All independent directors
have extensive practical work
experience and solid reputation
in the international professional
community, which means that their
judgment in the capacity of Board
members will not be influenced
by the management or individual
shareholders. One of the Board
members has vast experience in the
audit of financial statements.
Independent directors make up
the majority of the Board, which
ensures the required level of
objectivity and independence from
the influence of the Corporation’s
executive bodies in the course of
decision-making by the Board.
In June 2014, the Corporation’s
ordinary shares were included in
the first (top) quotation list of the
Moscow Stock Exchange, thus
confirming their status as the first
class securities in the Russian
market, attesting to the high
assessment of Sistema’s corporate
governance standards and granting
access to a broader range of
investors.
In view of the above, the
Corporation assumed additional
commitments to maintain the
corporate governance system at
the high level and bring some of
its components in compliance
with the new requirements of
the Listing Rules of the Moscow
Exchange. In December 2014, the
Board of Directors approved new
versions of the terms of reference
of some Board Committees and the
Corporate Secretary and adopted
a new Policy on internal audit. The
In 2014, 13 members were elected
to the Corporation’s Board of
Directors, out of whom eight meet
the independence criteria of the
Moscow Exchange and the Russian
Corporate Governance Code. The
following independent directors
were elected to the Board:
• David Iakobachvili;
• Brian Dickie;
• Robert Kocharyan;
• Jeannot Krecké;
• Peter Mandelson;
• Roger Munnings;
• Marc Holtzman;
• Serge Tchuruk.
104
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH introduced amendments formalised
the functions of Board Committees
and the Corporate Secretary that
are directly specified in the Listing
Rules and introduced provisions
on the procedure of appointment
of head of the Internal Control and
Audit Department. The Corporation
also plans to amend the Terms of
Reference of the General Meeting
of Shareholders and the Terms of
Reference of the Board of Directors
in the near term.
In June 2014, Sistema’s Annual
General Meeting of shareholders
approved payment of dividends
in the amount of RUB 19,879m,
i.e. RUB 2.06 per ordinary share,
which corresponds to a dividend
yield of ca. 5.22% per annum. The
sum of dividends was determined
in compliance with the current
dividend policy, which was applied
for the second successive year.
Remuneration
Remuneration and compensations
payable to members of Sistema’s
Board of Directors are calculated on
the basis of the Policy on remuner-
ation and compensations payable to
members of the Board of Directors
of the Corporation, approved by the
resolution of the General Meeting of
shareholders of Sistema on 30 June
2006 (Minutes No.1-06) as amended
by the resolution of the General Meet-
ing of the shareholders of Sistema on
16 February 2009 (Minutes No.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, including re-
imbursement of expenses related
to participation in meetings of the
Board of Directors;
• fixed amounts for acting in the
capacity of the Chairman or a
Deputy Chairman of the Board of
Directors, and for chairing Board
Committees;
• based on the performance during
a year, members of the Board of
Directors get additional perfor-
mance-related remuneration in
the form of a fixed amount, half
of which is payable in shares
(US$ 250,000 - 325,000);
• also, if the capitalisation of the
Corporation has grown over the
year, members of the Board of
Directors get additional remuner-
ation amounting to 0.1% of the
incremental capitalisation.
The Policy on remuneration and
compensations payable to members
of the Board of Directors of the Cor-
poration also envisages standard lia-
bility insurance for Board members.
The Corporation does not provide
loans to Board members.
The short-term (up to 1 year) incen-
tive scheme for the top managers
of Sistema in 2014 consisted of the
following elements:
• a fixed monthly salary determined
in line with the internal system of
job categories (grades);
employment and corporate relations
between the Corporation and its
management;
No extra compensation above the
level stipulated by labour laws of
the Russian Federation is paid to
the President or other senior ex-
ecutives in case of termination
of employment.
Sistema does not pay remuneration
to members of executive bodies for
serving on the Management Board.
The Corporation does not grant loans
to senior executives.
• bonuses paid for project imple-
mentation and generating cash in-
come. Remuneration is paid based
on workers’ individual performance
and positive cash flow generated
by projects of Investment Portfolios
and Functions and Departments of
Sistema. Payments may amount to
up to 20% of cash income exceed-
ing the target.
Top executives of the Corpora-
tion were paid a total of RUB
2,746,764,517 in fixed salary and
bonuses for the calendar year 2014.
Payments to top executives under the
long-term incentive programme in
the form of the Corporation’s shares
totalled RUB 1,659,419,767 in 2014,
including RUB 1,559,140,150 for
years 2013 and 2012.
Remuneration paid to the members
of Sistema’s Board of Directors
in 2014 totalled RUB 334,447,900.
Board members also received reim-
bursement of their expenses in-
curred in connection with their duties
amounting to RUB 3,608,900.
In 2014, the three-year long-term in-
centive programme for Sistema’s top
management (2012-2014) was com-
pleted. Its members were allocated
the last shares due for distribution
for the last period of the programme.
The long-term incentive system for
top management of Sistema was
extended for another three-year peri-
od (2015-2017). The programme is
aimed at increasing Sistema’s share-
holder value and creating additional
incentives for maintaining long-term
105
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT RISKS
The key risk factors related to Sistema
The Corporation may face a variety
of risks in the course of its business
operations. The main risks that the
Corporation may encounter are the
consequences of the processes and
factors that Sistema has little or no
influence on. Hence, efficient as-
sessment and management of risks
remain an important component of
the strategy of Sistema.
The risk management system of
Sistema is based on a two-level
approach to risk management,
namely, detection of risks in
subsidiaries and affiliates and in the
Corporation and their integration
for assessing their influence on
the Group in general. The main
objective is to provide a reasonable
guarantee that the strategic goals
will be achieved and to ensure that
the level of risk will be kept within
the limits that are acceptable for the
shareholders and the management
of the Corporation. The integrated
risk management system (ERM)
operating at Sistema was built
in compliance with international
standards, recommendations and
best practices in risk management.
Corporation
Risk assessment
Information
on risks
Risk
identification
Monitoring
Risk reporting
Risk mitigation
At subsidiaries level
Risk assessment
Risk
identification
Мониторинг
Risk assessment
Риск
Limits,
regulations, etc.
Risk
identification
Снижение
Мониторинг
Risk assessment
Риск
Risk
identification
Снижение
Monitoring
Risk reporting
Risk mitigation
The integrated risk management system (ERM) implemented in the Corporation
envisages the 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;
Company’s key financial indicators
(Monte Carlo modelling);
• development of plans to mitigate
identified risks at all management
levels;
• regular risk monitoring and
control;
• preparation of reports on the
company’s risks.
• primary assessment of the
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
106
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Risk management
process
Link with the decision-making
process
Within ERM
processes
Key management
processes
Risk appetite
Strategic planning
• Dynamic financial planning
• Overview of risk-adjusted strategic options
• Portfolio optimisation based on risk-gain ratio
Risk assessment
Risk
identification
Monitoring
Risk reporting
Limits and
thresholds
Performance management
• Investment management
• Risk-adjusted performance measures
Risk reduction
Budget/CAPEX
• Criteria based on the risk at the annual budgeting
• Risk-based criteria for large projects
Risk-adjusted
ROI
Interaction with stakeholders
• Understanding and coordination of risk appetite
of all stakeholders
• Rating management
As part of quarterly ERM procedures
the risk managers of Sistema
Group compile risk registers for
subsidiaries and a consolidated risk
register for the Group, prioritise
risks and aggregate them into
portfolios, develop a risk map and
analyse its key trends, conduct an
analysis of the impact that material
risks have on the financial results
of specific subsidiaries and Sistema
Group as a whole, using simulation
and financial modelling methods.
In order to deal with the risks
included in the risk register of
Sistema Group the company
developed risk management
(mitigation) and response plans for
specific subsidiaries, which may
be extended, adjusted and then
approved by the risk committees of
the respective companies.
Quarterly monitoring of the
Corporation’s risks is performed
at the level of the Management
Board and the Risk Sub-Committee
operating under the umbrella of the
Finance and Investment Committee
of Sistema by reviewing the effects
of the mitigation and response
measures taken and by reassessing
the already identified and/or new
risks, as well as by evaluating their
potential impact on the financial
results of the Corporation and
Sistema Group as a whole.
The top management of Sistema
presents a regular risk management
report to the Audit, Finance and Risk
Committee of the Board of Directors
of Sistema. Sistema’s Board of
Directors review risk management
reports on a biannual basis.
The Group’s risk management
system keeps developing and
improving. Various risk mitigation
mechanisms are being widely
applied (including insurance),
financial risk control and response
procedures are being improved.
At the Corporation level particular
attention is given to the risks of
investment projects starting from
the stage of project origination up
to the stage of completion. The risk
management systems of subsidiaries
are currently at different stages of
development depending on the time
of their introduction. These systems
are being gradually improved in
accordance with the plans approved
earlier. As new assets are added to
Sistema’s portfolio, individual plans
are developed in order to implement
risk management systems
depending on the specific needs of
such assets. The risk management
processes of subsidiaries are
monitored by the Corporation
via Sistema’s representation in
collective governance and executive
bodies of S/As.
107
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT External risks
The risks related to changes in the
political and economic situation
in Russia are material to Sistema
because most of the Corporation’s
business is conducted in the Russian
Federation. Moreover, many of the
Corporation’s subsidiaries operate
in the emerging markets, including
Armenia, the Republic of Belarus,
Ukraine, Uzbekistan, Turkmenistan
and India, which are also character-
ized by the risks listed below.
Economic risks
• The business of Sistema is inex-
tricably linked with the state of
the global economy and financial
markets and heavily depends on
the Russian economy in particu-
lar, which in its turn relies on the
export of oil, gas and other com-
modities. Further weakening of the
rouble against the US dollar and
Euro amid a slump in the oil prices,
imposed sanctions and increased
capital flight from Russia may
result in a rise in costs and a drop
in revenues or impede the achieve-
ment of financial targets and
repayment of debt by the Group’s
subsidiaries.
• Capital flight from Russia and
the downgrading of the sovereign
credit rating by international rating
agencies, as well as restrictions
introduced for foreign companies
in Russia as a result of sanctions,
may have a negative impact on the
joint ventures (partnerships) and
new investment projects of the
Group’s companies. Growing infla-
tion 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.
• If in the medium term sanctions
are maintained and the access of
Russian banks and businesses to
foreign debt remains restricted, this
may significantly increase the current
liquidity deficit in the market and
result in further interest rate rises.
• An unfavourable macroeconomic
environment in many countries of
Sistema’s operations may make it
necessary to reevaluate goodwill
for some of the assets.
• Foreign currency control and
restrictions on capital repatriation
may adversely affect the business of
Sistema Group and reduce the value
of Sistema’s investment in Russia.
Political and social risks
• The influence of geopolitical
• The risks of inter-state conflicts
risks has significantly intensified
as protectionism and economic
sanctions are increasingly being
used as a tool for achieving
geopolitical goals.
have significantly risen compared
with the beginning of 2014, both in
terms of their probability and the
effect that they may produce on
various areas.
Legal risks and uncertainty
The risks related to weaknesses in
the Russian regulatory framework
include, to various degrees, the
following.
• Possible discrepancies, ambiguity
and anomalies in: (1) federal
laws; (2) orders, directives
and regulations issued by the
Russian President, Government
and federal ministers; (3) and
regional and local laws, rules and
requirements.
• Relative unpredictability of
legislative and administrative
decisions and court rulings and a
lack of means that could make the
understanding of such legislative
decisions and court rulings easier.
• There is no clarity about the
influence of the Federal Law «On
Strategic Foreign Investment» and
the new Customs Treaty of Russia,
Belarus and Kazakhstan on
Sistema’s business and its foreign
shareholders. Russia’s accession
to the World Trade Organisation
may result in certain legislative
and other changes in the markets
of Sistema’s operations.
• The shareholder responsibilities
provided for by the corporate
laws of the Russian Federation
may result in Sistema being
held financially liable for its
subsidiaries.
108
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH • 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 operational capacity.
• If the Russian Federal Anti-mo-
nopoly Service (FAS) concludes
that Sistema or one of its mate-
rial subsidiaries has acquired or
founded a new company in vio-
lation of the anti-monopoly law
or has otherwise violated com-
petition laws, this may result in
administrative sanctions.
• Failure to formally comply
with certain requirements of
the Russian law may result in
Sistema or one of its subsidiaries
incorporated in Russia being
forced to carry out liquidation,
their ownership structure may be
called into question and early debt
repayment claims may be made.
Taxation system of the Russian Federation
• The Russian law on transfer
• On 1 January 2015 new rules
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.
were introduced relating to the
taxation of undistributed profits of
controlled foreign companies, the
concept of a beneficiary owner, tax
residence of legal entities and in-
direct sale of properties in Russia.
As a result of the need to apply
new taxation rules the Group’s
companies may face new tax lia-
bilities arising due to the uncer-
tainty around interpretation of the
tax law and the lack of previous
law enforcement practice.
Risks related to the operations of Sistema
There is no certainty that
the business strategy will be
successfully implemented.
• The key components of the
business strategy include
development of a balanced and
diversified asset portfolio in
sectors and regions where Sistema
has competitive advantages,
and also proactive management
of the investment portfolio
and involvement of leading
international and Russian partners.
Despite having a well-formulated
strategy, Sistema 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
by the market.
The company may face
difficulties in generating
profits from acquisitions,
integration, disposal or
restructuring of assets.
• Sistema grows its business
via new acquisitions, sale and
restructuring of assets. The
process of taking investment
opportunities in the market entails
certain risks, including the 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 overvalued 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 additional
pressure on the Corporation’s
cash flows, especially if the
acquisition is paid for in cash.
Besides, if an acquisition deal is
not closed or closed with delays,
it may negatively affect Sistema’s
achievement of its strategic growth
goals and have a substantial
negative impact on the current
business, operational results,
financial situation and prospects.
109
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT • 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
sizable investments;
• a slower than planned growth
of revenue;
• deterioration of the economic
situation in the countries of
Sistema’s operations.
Covenants might limit the
ability to raise debt financing,
carry out investment
programmes or participate
in various businesses.
Sistema’s bank loan agreements
and agreements of some of its S/As
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 result in restriction
of Sistema’s operations, including
financing of capital expenses, or limit
the possibilities for timely repayment
of debt or payments on liabilities.
If operations of subsidiaries are
restricted, their revenue may decline,
which, in turn, may limit Sistema’s
opportunities for using such revenue
to service the debt or finance its
subsidiaries. Moreover, mergers
and restructuring of subsidiaries,
in certain circumstances, disposal
of assets may lead to breach of
restricting covenants under such
subsidiaries’ loan agreements, which
may bring about acceleration of such
loans or reclassification of long-term
loans into short-term loans.
• Moreover, Sistema may encounter
problems of integrating assets
into the existing structure, their
optimal management or 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.
• Potential disposals of assets
carry certain risks related to
potential inability to execute the
transaction or undervaluation of
the sold asset, liabilities arising
from the sale of asset, failure to
meet deadlines for 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. There is no certainty
that such deals will be completed
on the announced terms
or closed at all.
Sistema’s ability to maintain
its competitiveness and
implement its business
strategy in many respects
depends on the management
and key employees.
• The top management team
is the key to implementing
Sistema’s strategy. 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 the efforts
of individual management teams
working with the specific assets.
110
Sistema’s ability to service
its debt largely depends
on the cash flows from its
subsidiaries.
Sistema’s financial performance
largely depends on the ability of
its subsidiaries 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 Group companies’
abilities to make such payouts may
be limited as a result of regulatory,
tax or other restrictions. Disposal
of one of the Group’s core assets
reduces the Group’s materiality and
the amount of expected dividend
flow from subsidiaries, which along
with tightening of bank funding may
have a negative impact on servicing
current liabilities and hinder access
to debt financing in the future.
The success of Sistema in
many respects depends
on the success of its core
asset, MTS.
Sistema’s financial performance
in many respects depends on the
success of its core asset, MTS. If
MTS fails to generate the necessary
income, it may impinge on Sistema’s
ability to service its debt liabilities
and secure growth and business
expansion through restructuring and
acquisition of assets. Consequently,
the risks and events that may have
a material detrimental effect on
MTS, its operating results, financial
standing and prospects may, in turn,
have a material detrimental effect
on Sistema, its operating results,
financial standing or prospects.
In the event of problems with
fund raising or financing,
Sistema’s operations would
be curtailed accordingly.
Future financial receipts and cash
flows from Sistema’s subsidiaries
and affiliates may not be sufficient
to cover the planned expenses in the
event of contingencies, such as:
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Licences and permits
required for Sistema Group
companies’ business may
be deemed invalid, revoked,
rescinded or not prolonged,
or contain encumbrances
that restrict Sistema’s
operations.
Operations of Sistema Group
companies are regulated by various
government bodies and agencies as
pertains to obtaining and renewing
licences, approvals and permits and
also the need to constantly abide by
existing legislation, regulations and
standards. Regulating authorities
to a large extent rely on their own
judgment when interpreting and
implementing requirements of
applicable laws, regulations and
standards, issuing and extending
licences, approvals, sanctions and
permits and monitoring compliance
with licence requirements. There is
no guarantee that 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
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.
If ambiguity of privatisation
laws is used to challenge
Sistema’s property rights to
its privatised subsidiaries,
and the company is unable
to defend its position, there
is a risk of losing its share in
such assets or subsidiaries.
• Sistema’s portfolio contains
several privatised assets. Since the
Russian laws on privatisation are
rather ambiguous, inconsistent
and conflicting with other laws,
for example, there are conflicts
between federal and local laws, the
privatisation of many companies
could be challenged, including
the possibility of discriminatory
challenges.
• If the legitimacy of privatisation of a
company is contested, and Sistema
is unable to defend its stand in the
dispute, there is a risk of losing
a stake in such company or its
assets, which may have a material
adverse effect on the business,
financial situation, performance
or development prospects of the
Corporation..
The business of Sistema
is regulated by the anti-
corruption laws under
the jurisdictions in which
it operates, including the
anti-corruption laws of
the Russian Federation
and the Foreign Corrupt
Practices Act of the USA,
and may be regulated by the
UK Bribery Act 2010, and
violations of applicable laws
may lead to penalties and
reputational risks.
• Any investigation into potential
violations of the FCPA, the
UK Bribery Act or other anti-
corruption laws of the US, the UK
or other jurisdictions may affect
the reputation, business, financial
situation and performance of
Sistema.
All segments where
Sistema operates are open
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.
Each segment exhibits
strong competition between
companies in Russia and other
countries, including but not
limited to competition in terms
of price, product and service
quality. Inability of Sistema
Group companies to compete
efficiently may have a material
negative impact on the business,
performance, financial situation
and prospects.
Sistema depends on the
ability to maintain its brand
quality and reputation.
• Developing and maintaining
brand awareness for the Group
companies is a crucial component
of shaping the public opinion about
their existing and future products
and services. Sistema believes that
the importance of company brand
is growing steadily at the 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
useful and quality products and
services at competitive prices.
The efforts to develop the brand
may be incommensurate with
actual revenues which may be
insufficient to cover expenses on
such activities.
111
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT EVENTS RELATED TO THE DECONSOLIDATION OF BASHNEFT
The civil proceedings
brought against Sistema
and Sistema-Invest
In December 2014, Bashneft Shares
were transferred to the Russian
Federation.
Criminal proceedings
relating to the privatization
of Bashneft
On September 24, 2014, a civil claim
was filed with the Arbitrazh (Com-
mercial) Court of the City of Mos-
cow (“Arbitrazh Court”) by the First
Deputy General Prosecutor of Russia
seeking to return shares of JSOC
“Bashneft” (Bashneft”) held by Siste-
ma and its wholly owned subsidiary
Sistema-Invest (“Bashneft Shares”)
to the Russian Federation (the “Civil
Claim”). The Civil Claim asserted
that the privatization of Bashneft was
unlawful as Bashneft was originally
the property of the Russian Federa-
tion and, as a result, the authorities
of the Republic of Bashkortostan
were not legally entitled to privat-
ize Bashneft without obtaining the
requisite consents from the Russian
Federal authorities.
On November 7, 2014, the Arbitrazh
Court issued a written decision, rul-
ing in favour of the Civil Claim.
On November 12, 2014, Sistema’s
Board of Directors considered and
decided not to appeal the deci-
sion of the Arbitrazh Court, but
rather focus on filing claims for
the recovery of damages from the
counterparties and/or their legal
successors (LLC Ural-Invest) which
sold the Bashneft Shares to Sistema
and Sistema-Invest.
In December 2014, Sistema as
a good faith buyer filed a claim
with the Arbitrazh Court for the
recovery of damages from LLC
Ural-Invest (“Ural-Invest”), suffered
by Sistema as a result of loss of the
Bashneft Shares.
In February 2015, the Arbitrazh
Court ruled in favour of Sistema’s
claim for the recovery of RUB 70.7
billion damage from Ural-Invest.
In March 2015, Sistema and
Ural-Invest signed a settlement
agreement. In accordance with
the terms of the settlement
agreement, all the property owned
by Ural-Invest, i.e. cash assets of
approximately RUB 46.5 billion, will
be transferred to Sistema.
Given the social importance
of the projects of the URAL
charitable fund (“Fund”), which is
affiliated with Ural-Invest, and in
accordance with the terms of the
settlement agreement Sistema
will invest RUB 4.6 billion of the
funds receivable from Ural-Invest
to the Fund’s socially important
charitable projects.
On March 30, the Arbitrazh Court
approved the settlement agreement
signed by Sistema and Ural-Invest.
In April 2014, a criminal
investigation was commenced in
respect of Mr. Ural Rakhimov (the
son of Mr. Murtaza Rakhimov, who
was the President of the Republic
of Bashkortostan during the period
when the BashTEK companies
were privatized) and Mr. Levon
Airapetyan. These persons have
been accused of misappropriating
Bashneft via an illegal privatization
process and have also been
accused of legalization with respect
to Bashneft.
On September 16, 2014, the majority
shareholder and Chairman of the
Board of Directors of Sistema, Mr.
Vladimir Evtushenkov was charged
with legalization of assets that
were wrongfully acquired by other
persons, and placed under house
arrest.
In December 2014, Mr. Vladimir
Evtushenkov was released
from house arrest and is now
participating as normal in business
of Sistema Group, as the Chairman
of Sistema’s Board of Directors.
112
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH SUSTAINABLE
DEVELOPMENT
Responsible investor
Social investment
Education, science, innovation
Culture
Environment
Society
Responsibility towards employees
114
115
115
117
119
121
122
Responsible investor
Sistema has substantial influence
on the development of many sectors
of the Russian economy and society
in general. The Corporation abides
by the Principles for Responsible
Investment developed by an
international investor group under
the UNO’s aegis in response to
growing concerns involved in the
interplay of environmental and
social issues as well as issues
of corporate governance and
investment practices. The Company
measures up its business goals
against the background of social
interests and gives consideration
to environmental, social, and
corporate governance (ESG) factors
underpinning the development of
market sectors and regions its
portfolio companies operate in.
Matrix of Interested Parties
h
g
i
H
s
s
e
n
i
s
u
b
n
o
i
t
a
r
o
p
r
o
c
e
h
t
n
o
e
c
n
e
u
l
f
n
i
f
o
e
e
r
g
e
D
w
o
L
Shareholders and investors
Government
Local communities
Employees
Customers
Mass media
Partners
Suppliers
Competitors
Non-profit and social
organisations
Low
Degree of interest on behalf of Sistema
High
Sistema's core documents governing sustainable development
Corporate Social
Responsibility Policy
of Sistema
The key strategic
management tool
for sustainable
development of the
Company. Determines
the basic principles,
fields and priorities for
stakeholder relationship
management)
Ethics Code
Regulates the standards of corporation
relations and ensures open, honest and ethical
business conduct
Corporate Code of Conduct
Defines commitments voluntarily assumed
by the Corporation in addition to the
requirements of effective law in terms of
transparency, openness and anti-corruption
procedures
Reports on corporate social
responsibility are reviewed annually
by the Board of Directors, who
determines strategic goals and
assesses the efficiency of social
investment made. Sistema’s
Corporate Communications
Function and specialised units of the
Corporation’s subsidiaries manage
corporate social responsibility and
prepare and publish related non-
finance reports.
114
СМИКонкурентыМестные сообществаКлиентыГосударствоНКО и общественныеорганизацииПоставщикиСотрудникиАкционеры и инвесторыПартнерыABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
Social investment
An important component of Siste-
ma’s corporate social responsibility
is charity promoted in line with the
social investment concept, i.e., a
purposeful long-term social policy
linking strategic interests of the
corporation and its shareholders
with society’s needs. The basic
principles of charity efforts as well
as areas to be addressed are out-
lined in the Policy Sistema’s Charity
Work. The key body in charge of the
Corporation’s charity and social
projects is Sistema Charitable Foun-
dation (Sistema CF), who accumu-
lates funds allocated from profits of
subsidiaries for general corporate
programmes. The Foundation works
in the following key focus areas:
• science;
• education;
• awareness;
• culture and art;
• preservation of religious and his-
torical heritage;
• healthcare and social security;
• fitness and sports.
On top of that, subsidiaries pursue
their own CSR and charity projects.
In the last three years (2012, 2013,
and 2014), Sistema Group’s total
spending on charity and social re-
sponsibility exceeded RUB 5.3 bln.
The Corporation seeks to consist-
ently deepen integration of its CSR
projects and improve their efficiency
through combined effort of all com-
panies of the Sistema Group. These
companies increasingly use projects
designed to develop business and
address social needs at the same
time. 2014 was the year when the
Corporation reached a whole new
level of synergies in corporate social
responsibility: its subsidiaries and
affiliates took active part in joint
projects promoting high technol-
ogies, human development, and
education of the youth, as well as
volunteer campaigns, the corner-
stones of Sistema’s social policy.
>4,5
RUB
mln
total amount of expenses
on charity and social
responsibility projects for
three years
Education, science, innovation
Sistema’s broadest-scale project
in education and science is Lift
to the Future, a nationwide young
talent development programme
launched in 2011 with the support
of the Russian Ministry of Educa-
tion and Science, the Agency for
Strategic Initiatives (ASI), and more
than 500 partner organisations.
The programme uses a special
procedure for talent screening and
development and intends to provide
students with early career guidance
and inspire scientific and techno-
logical creativity. The ASI’s supervi-
sory board (chaired by the Russian
president V.Putin) recommended the
project for replication in various re-
gions of Russia (administrations of
19 regions of Russia signed related
cooperation agreements).
115
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT 2014 became the year of
establishment of four talent high
schools for science and research
in the Moscow, Smolensk, and
Vladimir regions and Bashkortostan.
School and university students
submitted 370 innovation projects in
Environment & Natural Resources,
Power Engineering, Information
Technologies, Telecommunications,
Transport Technologies,
Healthcare & Pharmaceuticals,
Microelectronics, etc., to be reviewed
by expert contest judges. Master
classes, lectures, contests, and
conferences for school and university
students involved representatives
of most companies of the Sistema
Group. The Corporation also offered
a career guidance programme for
participants of Lift to the Future,
children of employees of S/As,
and students of sponsored child
welfare centres and schools by
organising tours to MTS, MTS Bank,
MGTS, Detsky Mir, Mikron, Stream,
and BPGC.
Lift to the Future
19 regions
of Russia
>150
ths
>30
ths
participants of innovation
project contests
64
winners
admitted for traineeship
in European hi-tech
enterprises
project participants
500
holders
of the Programme scholarship
95
contests
270
academic
mentors
held among school and college
students since the beginning
of the Programme
provided with grants to organise
projects for school students in
various regions of Russia
In December 2014 Sistema and its
subsidiaries MTS and SSTL held
a first-ever Russian-Indian Youth
Innovation Summit in New Delhi
dedicated to latest technologies
and prospects of international
cooperation in telecom innovations.
The summit was supported by the
Russian Embassy in India. MTS
hosts Telecom Idea, a contest of
new ‘smart’ IT solutions helping
city environments become more
comfortable, eco-friendly, and
accessible for all social groups.
After four years in Russia, in 2014
the contest was extended to India
for the first time.
>400
colleges and
startups
participating in the
contest since its start
>600
projects
submitted by young scientists for
potential use in business; some of
them successfully implemented
The summit also involved an
interactive culture and technology
exhibition From Russia with
Progress dedicated to outstanding
Russian inventions.
116
1968
THe beST AVAilAble
mAcHiNe foR
coNTRolled
NucleAR fuSioN
Physicists in many countries tried to
tackle the problem, aiming to create
the world's first fusion reactor.
Tachomac enabled scientists to
reproduce nuclear fusions similar to
those observed on the Sun.
proteins,
To get power today, we mostly burn oil, gas,
and coal. However, the planet's oil and gas
reserves are limited, and with ever-growing
power consumption, they may be almost
exhausted within 30-50 years. besides, oil
and gas are not just fuels, they are valuable
feedstocks used to produce a variety of
chemicals,
useful
substances.
what kind of progress
should power
engineering now aim for? within the universe,
there is colossal energy released from the
interior of the Sun and stars
in nuclear
fusions. using such power on planet earth
might seem nothing more than
fantasy
at first: it would require temperatures of
millions and millions of degrees. Physicists in
many countries tried to tackle the problem,
other
and
first
aiming to create the world's first fusion
reactor. one method showing promise was
tochamac, special contraptions for magnetic
plasma confinement. These enabled scientists
to reproduce nuclear fusions similar to those
observed on the Sun.
The
tochamac was developed and
demonstrated in 1968 by a group of physicists
lead by lev Artsimovich,
fellow of the
Soviet Academy of Sciences. The name of
the device is an acronym of the Russian full
name translated as "Toroidal cHamber with
mAgnetic coils".
The tochamac is still perceived as the best
available machine
for controlled nuclear
fusion, and it is hoped it will provide mankind
with inexhaustible energy.
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH MTS and MGTS are partners of the
New Technology School project
originated by the IT Department
of Moscow and designed to
broaden the use of information and
communication technologies (ICT)
in education.
VivaCell-MTS supported Armenian
schools in setting up Creativity
Labs, modern classrooms equipped
with interactive blackboards, latest
computers and movable furniture
specially designed for individual
and group use.
Sistema takes active part in the
development of national innovation
infrastructure. The Corporation
is among the shareholders of
Technopark Sarov (co-run with
Rosatom and RUSNANO) designed
for innovation projects to be carried
out at the VNIIEF Russian Federal
Nuclear Centre for the benefit of
Russian economy.
In October 2013 Sistema CF
first provided support to Valdai
International Discussion Club,
a convention in Sochi bringing
together more than 800
representatives of the global
academic community, including
professors from major universities
of nearly 50 countries.
Technopark Sarov
1.5
RUB
bln
in aggregate revenue of the
Technopark’s companies as
of the end of 2014
54
resident
companies
at Technopark Sarov (with
over 600 employees)
Culture
Sistema pursues several sizeable
initiatives in culture and arts aiming
to preserve and promote national
cultural and historical legacy.
Sistema CF supports numerous
theatre, music, and art projects, as
well as leading performance teams
and museums.
Its charity recipients include over 20
institutions and foundations active
in the field of culture, including
the Nikolay Petrov Foundation, the
Benois Centre, the Valery Gergiev
Foundation, the Foundation for
Support of Church Construction
in Moscow, the Valaam Convent
& Nature Reserve, and the
Field of Prokhorovka Museum
of Armoured Vehicles.
117
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT The largest recipient of the
Corporation’s long-term social
investments is the Russian
Museum, Sistema’s partner since
2003. Support of the Sistema CF
allows the museum to carry out
large-scale exhibition, editorial,
art restoration, and educational
projects. In particular, the museum
is currently building an extensive
interregional and international
network of ‘virtual branches’ to
make the vast collection of Russian
arts accessible to the mainstream
audience. The number of new
museum branches doubled in
2013-2014. In 2014 the museum
opened 28 information and
education centres based in libraries,
museums, and learning institutions
in St Petersburg, Angarsk,
Arkhangelsk, Volsk, Izhevsk, Ishim,
Kaluga, Kostomuksha, Kondopoga,
Petrozavodsk, Pikalyovo, Saransk,
Sortaval, Yuzhno-Sakhalinsk, and
locations in Turkey and Finland.
The West wing of St Michael’s
Castle (the Engineers’ Castle)
in St Petersburg now hosts an
«e-museum», a state-of-the-art
multi media centre providing access
to the Russian Museum’s rich art
collection via latest technologies.
Sistema helps the museum to
constantly upgrade the centre’s
hard- and software to maintain
its high-tech status. The various
projects performed by the Russian
Museum in 2014 with support from
Sistema include new multi media
programmes, books on Russian
arts, and the VIIth international
Imperial Garden of Russia festival.
118
Russian Museum
A new cooperation agreement
between Sistema and the
Russian Museum on financing
of various museum’s projects
was signed. It is termed
until 2023 and contemplates
financing in amount of
The Russian Museum
currently operates
158
«virtual
branches»
300
RUB
mln
(119 – in Russia,
37 – abroad
2 – in the
Antarctica)
4,000 of the multi media
centre in 2011-2014
visitors
4,700
participants
of video
conference calls
127
events
organised in
the multi media
theatre
600 images
exhibited in the multi
media centre’s gallery
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Since 2009 Sistema has been
sponsoring the annual May Festival
of Children’s Films organising
free charity shows of Russia’s
best motion pictures and cartoons
for children. The programme
is designed to develop modern
learning methods and provide
leisure experience to children from
orphanages and social boarding
schools, disabled children, and
families with foster children.
Another project that made great
progress in 2014 is Mobile Library,
an innovative social learning project
originated by MTS and involving the
installation of «virtual» bookshelves
in libraries and other broad access
institutions allowing users to down-
load masterpieces of the Russian
and foreign literature, including
those from school curricula, on
mobile devices using QR codes. MTS
pursues the Mobile Library project
in over 30 regions of Russia, as well
as Ukraine and Belarus.
>400 mobile
libraries
opened in just 8
regions of Central
Russia in 2014
>10
ths
books
of a combined volume that would
take almost 300 years to read
have been downloaded by mobile
library users
Environment
The Corporation’s
environmental
efforts are
focused on:
• implementation of energy-saving principles;
• safe waste reclamation;
• protection of the atmosphere;
• protection of water and land resources;
• environmental education of the younger generation.
Sistema and its subsidiaries are
actively involved in environmental
efforts in regions where they
operate, working to gradually
reduce their environmental impact,
improve the ecology and enhance
environmental consciousness. The
Corporation rigorously abides by
environment protection principles
and complies with all relevant laws
and regulations.
The amount of resources used*
Resource type
Thermal energy
Electrical energy
Water
Used for 2014
2,738.12 Gcal
3,422,652.91 RUB
3,491 thous. kWh
13,266,014.45 RUB
16,470 m3
438,275.64 RUB
Sistema participated in financing
of the Republic of Bashkiria’s
water programme. The programme
embraced 20 districts and 8
cities of Bashkiria and envisaged
reconstruction and major repairs
of existing and construction of new
water intakes, conduits and water
supply systems, drilling of wells
and installation of water towers,
mainly in remote rural areas where
they are often the only source
of drinking water.
Companies whose activities are
directly related to natural resources
management or have an impact on
public health pay special attention
to environmental safety. Notably,
Targin has introduced an HSE
(health, safety and environment)
system that enables it to work
safely at a customer’s facilities and
helps to preserve the environment.
In 2014 the system was first
certified by ISO 9001, ISO 14001,
and OHSAS - 18001.
LesInvest Group, the biggest forest
user in the European part of Russia,
is certified to FSC**, which, among
other things, envisages forest
restoration and close cooperation
with environmental organisations
and local communities.
* Data for 2014 according to the Corporate Center
** FSC (Forest Stewardship Council) is an independent international organisation who has created
a certification system for environmentally and socially responsible forest management.
119
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT 94%
of forest lands
leased by Sistema
are FSC-certified
In 2014, the pilot project
for safe disposal of batter-
ies and electronic waste
was launched at 300 sales
outlets in Moscow and the
Moscow region.
The project was
then carried out
in 10 Russian cities.
>3,000
Sistema Group
employees
took part in the
corporate Saturday
clean-up
It has already become a good
tradition for Sistema employees
to volunteer to clean up public
areas in cities and natural sites by
organising spring Saturday clean-
ups in Moscow and other regions.
Since 2010, Sistema has been
supporting projects of the Russian
Geographic Society. In 2014 it
supported the Society’s first
nationwide festival involving all
of its 85 regional divisions at the
Central House of Artists in Moscow.
The week-long festival attracted
about 60,000 visitors, including
many children and teenagers who
also participated in the event’s rich
educational programme.
Reforestation, ha
12,427
12,380
11,929
2012
2013
2014
The amount of the Group’s
reforestation work is growing year
after year: In 2014, the area where
planting and combined reforestation
work took place grew by 4.2%
vs 2012.
Medsi Group strictly complies with
Russian sanitary regulations on
hospital waste handling. Medsi
clinics take regular steps to prevent
hospital-acquired infections and
ensure epidemiological safety
of their patients and employees.
Bacteriological tests show a definite
improvement in the epidemic safety
of Medsi clinics in recent years.
MTS’ retail outlets now serve
as drop-off stations for used
batteries to be disposed as
per high environmental safety
standards. The campaign runs
under the title Discard It Right
and fits into a broader Eco Office
programme promoting environment
conservation principles since 2012.
In 2014 MTS organised its first
national open eco lesson Mobile
Technology for Ecology as part of
the Green Schools programme sup-
ported by the inter-regional public
organisation EKA Green Movement
of Russia. During the lesson, teach-
ers and volunteers at more than
1,000 Russian schools talked about
the role of modern technologies in
environment protection.
In Armenia, VivaCell-MTS together
with the Foundation for the
Preservation of Wildlife and Cultural
Assets (FPWC) launched a number
of innovative projects seeking to
develop alternative energy sources
and introduce environment-friendly
solutions in rural areas.
The Corporation is also involved in
preservation of biological diversity,
notably, by supporting the Eurasian
Center for Leopard Studies and
Preservation and particularly one of
its key projects, the Leopard Land
national park. Thus, in 2014 it spon-
sored biochemical works in the park
and the development of technology
infrastructure, fire control, and an
electronic database of the Amur
leopard population. Sistema also
contributed to a leopard-themed
education campaign targeting
local communities, including
school students of the Khasansky
municipality (Primorye).
120
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Society
In 2014, the Sistema Charitable
Foundation began shaping a corpo-
rate volunteer movement as a tool
of non-financial charity. Volunteers
from Sistema supported tens of
cultural, social, educational and
sports projects in various regions
where the Group operates. MTS
has launched a corporate volun-
teer theater, whose actors stage
educating performances for the
employees’ children and inmates of
orphanages. Detsky Mir joined this
project in 2014. BPGC arranged an
educational show on electrical safe-
ty staged by the Bashkirian State
Puppet Theater in Belebei, Kumer-
tau, Neftekamsk and Ufa.
In just 2014, the number of
volunteers at the Sistema Group
grew by almost 2.5 times, from
3,300 to 8,000. Employees of all
Sistema Group companies took part
in New Year charity campaigns,
with over 2,000 employees acting
as volunteers.
The Wishing Tree
Charity Performances
Theater Season
In 2014, 200 volunteers bought
New Year gifts for children
at orphanages and helped
to organise holiday parties
for them.
Every December, the
Sistema Charitable
Foundation organises
charity performances for
disadvantaged children.
Sistema employees bought
tickets for Town Musicians of
Bremen, a musical.
New Year celebrations were
attended by children from
the Moscow region, Vladimir,
Torzhok, Emmaus, Tula,
Ryazan, Noginsk and Udomlya.
Children from 17 orphanages
and from poor families from
Moscow, the Moscow region
and the Tver region attended
the charity performances.
The project reached out to over
300 children from orphanages,
children from large families
and disabled children from the
Moscow and Tver regions.
In summer 2014, the Sistema
Charitable Foundation sponsored
the purchase and delivery of
a large relief consignment for
refugees from Ukraine. Employees
of all group companies joined the
Foundation’s initiative, contributing
over 200 cu m of humanitarian
aid, including living essentials and
vaccines.
The Group’s companies work hard
to implement social and educating
programmes for the benefit of their
customers. MTS pursues Children
and the Internet, a programme de-
signed to promote rules of useful
and safe use of the world wide web
among younger schoolchildren,
their parents and teachers, as well
as Internet for All, a programme
teaching older people to use the
Internet and adapt in the informa-
tion-oriented society.
121
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT The project has been
implemented in most cities of
Russia and Belarus, its total
audience exceeding
300,000
people
MTS and MGTS support the
Children Online help line, has by
now received over 10,000 calls
and processed over 2,500 e-mails
regarding safe use of the Internet
by minors.
In September 2014, BPGC signed
an agreement with the Bashkirian
Education Ministry on joint
implementation of initiatives to
prevent children’s electrical injuries
as part of the Safe Childhood
project. Bashkirenergo’s employees
gave electric safety lessons at 221
schools of the republic.
In November 2014, Medsi launched
a unique project under the slogan
Be Healthy with Medsi promoting a
healthy lifestyle among corporate
customers and partners of the com-
pany. Within this programme, Med-
si’s best doctors and fitness instruc-
tors offer lectures and consultations
on such issues as handling chronic
fatigue and stress, pregnancy and
work, children’s health, etc.
Healthcare, support of the disabled
and promotion of sports are among
priorities of Sistema’s social policy.
Renovation of a rehabilitation center
for children with cerebral palsy at
the Martha and Mary Convent of
Mercy began in 2014. Since 2008,
the Sistema Charitable Foundation
has provided a total of RUB 100m
for the Convent’s restoration. This
unique project supported by the
Moscow City Government and the
Russian Orthodox Church will help
to improve the quality of life of
families with disabled children that
are in need of continuous care.
For several years, SSTL has been
involved in an initiative to end polio
in India, working hard to increase
general awareness about polio
vaccination through promotional
text messages and other channels
of communication. In the past three
years, subscribers of MTS India
received 20m texts reminding them
to get their shots. As a result of
this large-scale programme, on
27 March 2014 the World Health
Organisation certified India polio-
free, and UNICEF is now considering
this model for use in Africa.
Sistema encourages the
development of Russian sports
by supporting the country’s
Olympic and Paralympic teams,
as well as sports schools and
clubs for children and the young.
In November 2014, Sistema
and the Russian Paralympic
Committee organised treatment
and rehabilitation of athletes
in the Republic of Altay, at the
unique Altay Resort belonging
to the Intourist Hotel Group. The
Sistema Charitable Foundation also
supported the Moscow Olympro
team of the Vozrozhdenie club,
which participated in the 12th
International Football Tournament
for Amputees that took place in
Sochi. Sistema sponsored the
establishment of a family camp for
the Moscow equestrian club for the
disabled in Yevpatoria (Crimea),
where children underwent a unique
course of rehabilitation through
exercise. Sistema’s subsidiaries
are also actively involved in
promotion of sports at regional
and national levels.
122
Responsibility towards
employees
Sistema is one of Russia’s biggest
and most attractive employers,
employing over 150,000 people
in Russia (0.4% of the workforce)
and other countries it operates
in. The Corporation uses the
best HR management practices
and fully complies with labour
legislation of countries it works in,
offering its employees competitive
remuneration and social benefits
(health and life insurance, sports
events, etc.).
For social aid to employees,
employees’ children and
retirees in 2014 Company
allocated
220
RUB
mln
Following the Corporation’s
transition to the investment
company model, the Board of
Directors approved a new incentive
system designed to ensure
profitability of investment and
monetisation of created value for
each individual project and for
the Corporation in general. The
incentive programme is geared
towards value creation and/or
implementation of projects, as
well as financial self-sufficiency of
project teams. The new incentive
mechanism provides the best way
to align the interests of Sistema’s
management and shareholders.
The incentive system for the senior
management first launched in
2010 is based on changes in the
price of Sistema shares and total
shareholder return (TSR). The
programme’s participants may
receive additional bonuses linked
to increase of the Corporation’s
capitalisation in the form of ordinary
shares.
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH The Corporation has a system
of internal career lifts. In 2014,
Sistema launched the Talent
Bank project that is designed to
search for, develop and rotate top
managers of subsidiaries that have
high potential and high motivation
for growth. In 2014, over 100
senior managers from the Group’s
companies underwent remote
and in-person assessment. Based
on its results, 53 managers were
selected to start a development
programme in 2015.
Yet another HR initiative that was
launched in 2014 is the School of
In-House Coaches. The project
seeks to create a pool of efficient
corporate coaches to develop key
business skills and competencies
of medium and junior management
using the best expertise
in the sphere.
Important tools of non-financial
motivation and employee
engagement promotion are
corporate volunteering and sports
movements. The central sports
event of the year was the 12th
Summer Games, which united over
3,000 employees from 60 companies
of Sistema Group from different
regions of Russia, the CIS and India.
Sistema conducts annual
engagement surveys to give its
employees an opportunity to
share their thoughts on the most
important issues and give feedback,
to find out the company’s strengths
and areas that need improvement
and development and to determine
priorities when planning HR events
for the next year. The Corporation
sets itself ambitious goals and
looks up to the most successful
international companies. In 2014,
about 28,000 employees took part
in the survey. The measures taken
by Sistema improved employee
engagement by 14% compared
to 2013, reaching the level of the
world’s most successful companies.
Almost all areas and parameters
of the survey demonstrated
a positive trend.
Sistema and MTS traditionally
win leading positions in
Russian employer ratings.
In 2014:
by 14%
employee engagement
increased
compared to 2013 and
reached the level of
the most successful
companies in the world
Sistema’s Board Chairman ranks
among the top 10 business leaders
of Russia according to Kommersant
and the Russian Managers’
Association. Sistema’s president was
ranked 1st among CEOs of diversified
holding companies in Russia’s
Top 1000 Best Managers 2014. Yet
another six of the company’s top
managers were named best in their
respective professional categories
(finance and investment, corporate
governance, HR, GR, PR, IT).
Sistema confirmed its
previously won A.hr grade
(«High level of employer
appeal») in Expert RA’s
employer rating
Sistema won the special
nomination award Best
Corporate Mass Media
System in the Best
Corporate Media 2014
competition
MTS won the #1 position
in HeadHunter’s annual
Employers of Russia
rating for a second
consecutive year, and
was also included in
HeadHunter’s list of top
Russian employers of the
young
123
CORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT SISTEMA JSFC
AND SUBSIDIARIES
Consolidated Financial
Statements
As of December 31, 2014 and 2013
and for the Years Then Ended
INDEPENDENT AUDITORS’ REPORT
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 2014 AND 2013 AND FOR THE YEARS
THEN ENDED:
Consolidated statements of financial position as
of December 31, 2014 and 2013
Consolidated statements of operations and comprehensive
income for the years ended December 31, 2014 and 2013
Consolidated statements of cash flows for the years ended
December 31, 2014 and 2013
Consolidated statements of changes in shareholders’ equity
for the years ended December 31, 2014 and 2013
Notes to the consolidated financial statements
125
126
126
128
130
132
134
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and
Shareholders of Sistema Joint Stock
Financial Corporation
We have audited the accompanying
consolidated financial statements
of Sistema Joint Stock Financial
Corporation and its subsidiaries,
which comprise the consolidated
statements of financial position as
of December 31, 2014 and 2013, and
the related consolidated statements
of operations and comprehensive
income, cash flows and changes
in shareholders’ equity for the
years then ended, and the related
notes to the consolidated financial
statements and appendix thereto.
Management’s Responsibility for the Consolidated
Financial Statements
Management is responsible for the
preparation and fair presentation
of these consolidated financial
statements in accordance with
accounting principles generally
accepted in the United States of
America; this includes the design,
implementation, and maintenance
of internal control relevant to the
preparation and fair presentation
of the consolidated financial
statements that are free from
material misstatement, whether due
to fraud or error.
Auditors’ Responsibility
Our responsibility is to express
an opinion on these consolidated
financial statements based on our
audits. We conducted our audits in
accordance with the Russian Federal
Auditing Standards and auditing
standards generally accepted in the
United States of America. Those
standards require that we comply
with ethical requirements and plan
and perform the audit to obtain
reasonable assurance about whether
the consolidated financial statements
are free from material misstatement.
An audit involves performing
procedures to obtain audit evidence
about the amounts and disclosures in
the consolidated financial statements.
The procedures selected depend on
the auditor’s judgment, including the
assessment of the risks of material
misstatement of the consolidated
financial statements, whether due
to fraud or error. In making those
risk assessments, the auditor
considers internal control relevant
to the entity’s preparation and fair
presentation of the consolidated
financial statements in order to
design audit procedures that are
appropriate in the circumstances, but
not for the purpose of expressing an
opinion on the effectiveness of the
entity’s internal control. Accordingly,
we express no such opinion.
Opinion
In our opinion, the consolidated
financial statements referred to above
present fairly, in all material respects,
the financial position of Sistema Joint
Stock Financial Corporation and its
subsidiaries as of December 31, 2014
and 2013, and the results of their
operations and their cash flows for
the years then ended in accordance
with accounting principles gener-
ally accepted in the United States
of America.
April 2, 2015
Moscow, Russian Federation
Raikhman M.V., Partner
(Certificate no. 01-001195 dated
January 14, 2013)
The Entity: Sistema Joint Stock Financial
Corporation
Certificate of state registration № 025.866,
issued by the Moscow Registration Chamber on
16.07.1993.
An audit also includes evaluating
the appropriateness of accounting
policies used and the reasonableness
of significant accounting estimates
made by management, as well as
evaluating the overall presentation of
the consolidated financial statements.
We believe that the audit evidence
we have obtained is sufficient and
appropriate to provide a basis for our
audit opinion.
Certificate of registration in the Unified State Register
№ 1027700003891 of 11.11.2002, issued by Moscow
Inspectorate of the Russian Ministry of Taxation № 46.
Address: Building 1, 13 Mokhovaya street, Moscow,
125009, Russia.
Independent Auditors: ZAO Deloitte & Touche CIS
Certificate of state registration № 018.482, issued by
the Moscow Registration Chamber on 30.10.1992.
Certificate of registration in the Unified State Register
№ 1027700425444 of 13.11.2002, issued by Moscow
Interdistrict Inspectorate of the Russian Ministry of
Taxation № 39.
Certificate of membership in “NP “Audit Chamber of
Russia”
(auditors’ SRO) of 20.05.2009 № 3026, ORNZ
10201017407.
125
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS
OF DECEMBER 31, 2014 AND 2013
(Amounts in thousands of U.S. dollars, except share and per share amounts)
Notes
2014
2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Short-term investments
Assets from banking activities, current portion (including cash
and cash equivalents of $843,715 and $1,132,368)
Accounts receivable
VAT receivable
Inventories and spare parts
Deferred tax assets
Other current assets
Current assets of Bashneft
Total current assets
NON-CURRENT ASSETS:
Property, plant and equipment
Advance payments for non-current assets
Goodwill
Other intangible assets
Investments in affiliates
Assets from banking activities, net of current portion
Debt issuance costs
Deferred tax assets
Long-term investments
Other non-current assets
Non-current assets of Bashneft
Total non-current assets
TOTAL ASSETS
8
7
9
11
21
10
2
12
13
14
16
7
21
17
2
$
1,288,722 $
479,341
2,180,196
1,163,092
236,438
1,244,509
245,571
832,060
-
7,669,929
7,191,394
84,560
817,537
1,721,389
356,018
1,374,367
42,267
392,866
316,625
703,525
-
13,000,548
1,537,492
1,562,547
3,898,740
1,630,593
335,289
1,131,302
330,388
1,084,547
3,054,728
14,565,626
11,151,341
162,978
1,327,779
2,162,700
365,266
2,554,229
78,348
297,419
249,071
714,458
9,619,779
28,683,368
$
20,670,477 $
43,248,994
См. Примечания к консолидированной финансовой отчетности и приложение к ним.
126
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable
Liabilities from banking activities, current portion
Taxes payable
Deferred tax liabilities
Subscriber prepayments, current portion
Accrued expenses and other current liabilities
Short-term loans payable
Current portion of long-term debt
Current liabilities of Bashneft
Total current liabilities
LONG-TERM LIABILITIES:
Long-term debt, net of current portion
Subscriber prepayments, net of current portion
Liabilities from banking activities, net of current portion
Deferred tax liabilities
Asset retirement obligations
Postretirement benefits obligations
Property, plant and equipment contributions
Other long-term liabilities
Non-current liabilities of Bashneft
Total long-term liabilities
TOTAL LIABILITIES
Commitments and contingencies
Redeemable noncontrolling interests
SHAREHOLDERS’ EQUITY:
Share capital (9,650,000,000 shares issued; 9,435,902,596
and 9,274,755,045 shares outstanding with par value
of 0.09 Russian Rubles, respectively)
Treasury stock (214,097,404 and 375,244,955 shares with par value
of 0.09 Russian Rubles, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Non-redeemable noncontrolling interests
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
Notes
2014
2013
18
21
19
20
2
20
18
21
28
2
30
29
24
24
$
1,584,251 $
2,180,491
290,635
64,947
390,736
1,315,656
129,938
1,598,770
-
7,555,424
6,534,055
59,064
167,860
787,631
53,715
45,344
41,358
475,713
-
8,164,740
15,720,164
-
792,766
1,943,133
3,864,415
490,564
114,192
620,281
1,567,890
40,836
2,102,911
2,663,432
13,407,654
8,375,161
101,240
772,525
902,591
83,809
53,943
74,174
443,032
3,734,024
14,540,499
27,948,153
-
805,130
30,057
30,057
(246,351)
2,604,913
4,210,623
(3,743,402)
2,855,840
1,301,707
4,157,547
$
20,670,477 $
(426,715)
2,616,608
8,993,469
(906,718)
10,306,701
4,189,010
14,495,711
43,248,994
See notes to the consolidated financial statements and appendix thereto.
127
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
(Amounts in thousands of U.S. dollars, except share and per share amounts)
Notes
2014
2013
$
15,886,775 $
698,182
16,584,957
17,623,153
878,832
18,501,985
(7,460,524)
(7,907,148)
(760,084)
(3,431,075)
(2,292,118)
(193,122)
73,124
-
(864,629)
-
181,305
-
(99,385)
1,738,449
212,774
(811,346)
-
(548,596)
591,281
(453,417)
$
137,864 $
15
15
4
6
30
21
2
2
1,517,054
(4,969,011)
(3,314,093)
(773,539)
(4,087,632)
(278,161)
(3,809,471)
(3,886,388) $
(52,099)
72,899
172
(3,865,416)
$
$
(523,960)
(3,896,207)
(2,633,548)
(239,814)
29,866
(258,048)
(804,545)
1,200,000
-
371,100
(273,109)
3,566,572
182,447
(960,136)
30,199
(298,264)
2,520,818
(842,107)
1,678,711
1,540,489
-
3,219,200
(961,672)
2,257,528
1,102,161
1,155,367
(885,770)
32,200
45,499
5,310
(802,761)
(7,179,509) $
2,416,439
Sales
Revenue from banking activities
TOTAL REVENUES
Cost of sales, exclusive of depreciation and amortization
shown separately below
Cost related to banking activities, exclusive of depreciation
and amortization shown separately below
Selling, general and administrative expenses
Depreciation and amortization
Taxes other than income tax
Equity in results of affiliates
Impairment of goodwill
Impairment of other assets
Gain on disposal of investment in RussNeft
Gain from reentry into Uzbekistan
Gain on Bitel case resolution
Other operating expenses
OPERATING INCOME
Interest income
Interest expense
Change in fair value of derivative instruments
Foreign currency transaction loss
Income before income tax
Income tax expense
Net income excluding Bashneft
Income of Bashneft operations, net of tax effect of $427,716
and $455,637
Loss on deconsolidation of Bashneft, net of tax effect of nil
NET (LOSS) / INCOME
Noncontrolling interests
NET (LOSS) / INCOME ATTRIBUTABLE TO SISTEMA JSFC
Including:
From continuing operations
From Bashneft operations and its deconsolidation
OTHER COMPREHENSIVE (LOSS)/INCOME, NET OF TAX
Currency translation loss
Unrealized (loss)/gain on available-for-sale securities
Unrealized gain on derivatives
Unrecognized actuarial gain
Other comprehensive (loss)/income, net of tax
TOTAL COMPREHENSIVE (LOSS)/INCOME
См. Примечания к консолидированной финансовой отчетности и приложение к ним.
128
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Including:
Attributable to noncontrolling interests
Attributable to Sistema JSFC
Weighted average number of common shares outstanding –
basic and diluted
Earnings per share, basic and diluted, U.S. cent
(Loss)/earnings per share from continuing operations
(Loss)/earnings per share from Bashneft operations and its
deconsolidation
Total (loss)/earnings per share attributable to Sistema JSFC
shareholders
Notes
2014
2013
(255,193)
(6,924,316)
738,912
1,677,527
9,350,539,484
9,239,817,019
(2.98)
(40.74)
(43.72)
11.93
12.50
24.43
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
(Amounts in thousands of U.S. dollars)
2014
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) / income
Income of Bashneft operations
Loss on deconsolidation of Bashneft
Net income excluding Bashneft
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization
Equity in results of affiliates
Deferred income tax expense
Foreign currency transaction loss
Gain from disposal of investment in RussNeft
Gain on Bitel case resolution, net of cash received of $125,000
Gain on reentry into Uzbekistan
Gain on disposal of property, plant and equipment
Gain on disposal of subsidiaries
Amortization of connection fees
Allowance for loan losses
Dividends received from affiliates
Non-cash compensation to employees
Impairment of goodwill
Impairment of other assets
Other non-cash items
$
$
(3,314,093)
(1,517,054)
4,969,011
137,864
2,292,118
(73,124)
36,338
548,596
-
-
(181,305)
(26,731)
(139,082)
(23,019)
260,417
70,369
79,430
-
864,629
19,937
3,219,200
(1,540,489)
-
1,678,711
2,633,548
(29,866)
140,292
298,264
(1,200,000)
(246,100)
-
(7,226)
-
(60,309)
212,081
65,247
54,158
258,048
804,545
(15,057)
129
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 (CONTINUED)
(Amounts in thousands of U.S. dollars)
Changes in operating assets and liabilities, net of effects from purchases
of businesses:
Trading securities
Accounts receivable
VAT receivable
Inventories and spare parts
Other current assets
Accounts payable
Subscriber prepayments
Taxes payable
Accrued expenses and other current liabilities
Net cash from operating activities excluding Bashneft
Net cash from operating activities of Bashneft
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Payments for purchases of intangible assets
Payments for businesses, net of cash acquired
Proceeds from sale of subsidiaries, net of cash disposed
Purchase of investments in affiliated companies
Payments for purchases of long-term investments
Proceeds from sale of long-term investments
Payments for purchases of short-term investments
Proceeds from sale of short-term investments
Payments for purchases of other non-current assets
Increase in restricted cash
Net decrease/(increase) in loans to customers of the banking segment
Net cash used in investing activities excluding Bashneft
Net cash used in investing activities of Bashneft (net of cash disposed of $961,733)
Net cash used in investing activities
$
2014
2013
267,153
(44,241)
(17,192)
(490,362)
(114,574)
560,603
(11,593)
(5,394)
281,592
4,292,429
2,755,291
7,047,720
(2,362,652)
80,332
(539,930)
(392,409)
150,000
(201,582)
(836,916)
511,227
(1,327,702)
1,622,718
-
-
664,089
(2,632,825)
(3,256,540)
(5,889,365)
$
(406,687)
(240,586)
(174,951)
(171,320)
(93,381)
533,948
110,112
109,503
(54,127)
4,198,847
2,629,988
6,828,835
(2,455,276)
39,592
(539,117)
(34,664)
561,402
(63,753)
(105,000)
1,286,292
(1,337,304)
1,047,317
(44,879)
(15,819)
(70,458)
(1,731,667)
(1,158,995)
(2,890,662)
См. Примечания к консолидированной финансовой отчетности и приложение к ним.
130
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from/(principal payments on) short-term borrowings, net
Net decrease in deposits from customers of the banking segment
Proceeds from long-term borrowings
Principal payments on long-term borrowings
Acquisition of noncontrolling interests in existing subsidiaries
Dividends paid
Proceeds from capital transactions with shares of existing subsidiaries
Net cash used in financing activities excluding Bashneft
Net cash provided by/(used in) financing activities of Bashenft
Net cash used in financing activities
Effect of foreign currency translation on cash and cash equivalents
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year, including Bashneft
(включая денежные средства и их эквиваленты АНК «Башнефть»)
Less: cash and cash equivalents of Bashneft at the end of the year
Cash and cash equivalents at the end of the year
Comprising:
Non-banking activities
Banking activities
CASH PAID DURING THE YEAR FOR:
Interest, net of amounts capitalized
Income taxes
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of intangible assets
Equipment and licenses acquired under capital leases
Amounts owed for capital expenditures
Payables related to business acquisitions
2014
2013
$
$
$
$
$
$
185,838
(701,620)
2,850,171
(2,274,350)
(67,432)
(1,198,028)
41,141
(1,164,280)
885,338
(278,942)
(1,938,436)
(1,059,023)
3,191,460
2,132,437
-
2,132,437
1,288,722
843,715
(876,692)
(377,298)
-
203,904
401,206
1,760
(231,036)
(177,105)
1,900,322
(2,539,405)
(299,184)
(1,225,440)
69,002
(2,502,846)
(580,164)
(3,083,010)
(293,247)
561,916
2,629,544
3,191,460
(521,600)
2,669,860
1,537,492
1,132,368
(1,160,300)
(735,797)
670,300
223,628
124,826
345
See notes to the consolidated financial statements and appendix thereto.
131
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
(Amounts in thousands of U.S. dollars, except share amounts)
Share capital
Treasury stock
Shares
Amount
Shares
Amount
Additional
paid-in capital
Retained
earnings
Accumulated
other compre-
hensive Loss
Shareholders’
equity
Non-redeemable
non-controlling
interests
Total equity
Redeemable
non-controlling
interests
Balances at January 1, 2013
Net income/(loss)
Other comprehensive
(loss)/income
Settlements under long-term
motivation program
Accrued compensation cost
Business combinations,
disposals and capital
transactions of subsidiaries
Change in fair and redemption
value of noncontrolling interests
Dividends declared
by Sistema JSFC
Dividends declared by
subsidiaries
9,650,000,000
-
30,057
-
(440,425,038)
-
(501,109)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
65,180,083
-
-
74,394
-
-
-
-
-
-
-
-
-
2,859,491
-
-
(13,262)
54,158
(283,779)
-
-
-
Balances at December 31, 2013
9,650,000,000
30,057
(375,244,955)
(426,715)
2,616,608
8,993,469
(906,718)
10,306,701
Net (loss)/income
Other comprehensive (loss)/
income
Settlements under long-term
motivation program
Accrued compensation cost
Business combinations,
disposals and capital
transactions of subsidiaries
Change in fair and redemption
value of noncontrolling interests
Dividends declared by Sistema
JSFC
Dividends declared by
subsidiaries
Deconsolidation of Bashneft
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
122,129,298
-
132,811
-
(141,239)
79,430
39,018,253
47,553
50,114
-
-
-
-
-
-
-
-
-
-
-
-
Balances at December 31, 2014
9,650,000,000
30,057
(214,097,404)
(246,351)
2,604,913
4,210,623
7,110,467
2,257,528
(326,717)
9,172,189
2,257,528
4,109,505
1,021,588
13,281,694
3,279,116
(580,001)
(580,001)
(229,192)
(809,193)
-
-
-
-
-
-
-
-
-
-
-
(99,406)
(275,120)
(120,957)
(574,257)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
61,132
54,158
(283,779)
(99,406)
(275,120)
-
(8,428)
79,430
97,667
(120,957)
(574,257)
-
2,291,873
2,855,840
2,291,873
(3,743,402)
237,429
-
-
-
-
-
-
(491,574)
(889,068)
(1,384,789)
1,301,707
61,132
54,158
(46,350)
(99,406)
(275,120)
(8,428)
79,430
(393,907)
(120,957)
(574,257)
(889,068)
907,084
4,157,547
731,661
(59,916)
6,432
27,547
99,406
805,130
(78,937)
(54,384)
120,957
792,766
-
-
-
-
-
-
-
-
-
(4,087,632)
(4,087,632)
852,476
(3,235,156)
(5,128,557)
(5,128,557)
(974,348)
(6,102,905)
(950,320)
4,189,010
(950,320)
14,495,711
See notes to the consolidated financial statements and appendix thereto.
132
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
Share capital
Treasury stock
Shares
Amount
Shares
Amount
Additional
paid-in capital
Retained
earnings
Accumulated
other compre-
hensive Loss
Shareholders’
equity
Non-redeemable
non-controlling
interests
Total equity
Redeemable
non-controlling
interests
Balances at January 1, 2013
9,650,000,000
30,057
(440,425,038)
(501,109)
2,859,491
7,110,467
2,257,528
(326,717)
-
9,172,189
2,257,528
4,109,505
1,021,588
13,281,694
3,279,116
Balances at December 31, 2013
9,650,000,000
30,057
(375,244,955)
(426,715)
2,616,608
8,993,469
(906,718)
10,306,701
Net income/(loss)
Other comprehensive
(loss)/income
Settlements under long-term
motivation program
Accrued compensation cost
Business combinations,
disposals and capital
transactions of subsidiaries
Change in fair and redemption
value of noncontrolling interests
Dividends declared
by Sistema JSFC
Dividends declared by
subsidiaries
Net (loss)/income
Other comprehensive (loss)/
income
Settlements under long-term
motivation program
Accrued compensation cost
Business combinations,
disposals and capital
transactions of subsidiaries
Change in fair and redemption
value of noncontrolling interests
Dividends declared by Sistema
JSFC
Dividends declared by
subsidiaries
Deconsolidation of Bashneft
65,180,083
74,394
(13,262)
54,158
(283,779)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
122,129,298
132,811
(141,239)
79,430
39,018,253
47,553
50,114
-
-
-
-
-
-
-
-
-
-
-
(4,087,632)
-
(4,087,632)
852,476
(3,235,156)
-
-
-
-
(99,406)
(275,120)
-
-
-
-
-
(120,957)
(574,257)
-
-
(580,001)
(580,001)
(229,192)
(809,193)
-
-
-
-
-
-
61,132
54,158
(283,779)
(99,406)
(275,120)
-
-
-
237,429
-
-
61,132
54,158
(46,350)
(99,406)
(275,120)
(950,320)
4,189,010
(950,320)
14,495,711
(5,128,557)
(5,128,557)
(974,348)
(6,102,905)
-
-
-
-
-
-
2,291,873
(8,428)
79,430
97,667
(120,957)
(574,257)
-
2,291,873
2,855,840
-
-
(491,574)
(889,068)
(1,384,789)
1,301,707
(8,428)
79,430
(393,907)
(120,957)
(574,257)
(889,068)
907,084
4,157,547
Balances at December 31, 2014
9,650,000,000
30,057
(214,097,404)
(246,351)
2,604,913
4,210,623
(3,743,402)
See notes to the consolidated financial statements and appendix thereto.
731,661
(59,916)
6,432
-
-
27,547
99,406
-
-
805,130
(78,937)
(54,384)
-
-
-
120,957
-
-
792,766
133
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
(Amounts in thousands of U.S. dollars, unless otherwise stated)
1. BASIS OF PREPARATION
Sistema Joint Stock Financial
Corporation (the “Company”, together
with its subsidiaries, the “Group”)
invests in, and manages a range
of companies which operate in the
telecommunications, oil and energy,
high technology, banking, timber, real
estate and other sectors. The Company
and the majority of its consolidated
subsidiaries are incorporated in the
Russian Federation (“RF”).
The controlling shareholder of the
Company is Vladimir P. Evtushenkov.
Minority holdings are held by certain
top executives and directors of the
Company. The rest of the shares are
listed on the London Stock Exchange in
the form of Global Depositary Receipts
(“GDRs”) and on the Moscow Exchange.
Below are the Group’s significant
entities and their principal activities as of
December 31, 2014:
Significant entities
Short name
Principal activity
Sistema Joint Stock Financial
Corporation
Sistema
Investing and financing
Mobile TeleSystems
SistemaShyamTeleS
ervicesLimited
MTS Bank
RTI
Detsky mir-Center
Medsi
Targin
Bashkirian Power Grid Company (Note 5)
LesInvest (Note 3)
Leader-Invest
Voting interests as of December 31, 2014 and 2013 – 93%.
MTS
SSTL
Telecommunications
Telecommunications
MTS Bank
Banking
RTI
Technology
Detsky mir
Retail trading
Medsi
Targin
BPGC
Healthcare services
Oilfield services
Energy transmission
LesInvest
Timber
Leader-Invest
Real estate
Beneficial ownership
as of December 31,
2014 года
2013 года
53%
57%
87%
85%
99%
75%
100%
91%(1)
100%
100%
53%
57%
87%
85%
100%
75%
100%
79%(1)
-
100%
The accompanying consolidated
financial statements have been
prepared in conformity with
accounting principles generally
accepted in the United States of
America (“U.S. GAAP”). The Group’s
entities maintain accounting
records in the local currencies of
the countries of their domicile in
accordance with the requirements
of respective accounting and tax
legislation. The accompanying
financial statements differ from
the financial statements prepared
for statutory purposes in that
they reflect certain adjustments,
appropriate to present the financial
position, results of operations and
cash flows in accordance with U.S.
GAAP, which are not recorded in
the accounting books of the Group’s
entities.
In determining and applying
accounting policies, judgement is
often required in respect of items
where the choice of specific policy,
accounting estimate or assumption
could materially affect the reported
results of operations or financial
position of the Group.
Management considers that certain
accounting estimates and assumptions
relating to business combinations
and disposals, property, plant and
equipment, intangible assets and
goodwill, provisions and contingent
liabilities and impairment are the
Group’s critical accounting estimates
A discussion of these estimates
together with the summary of the
Group’s significant accounting
policies is provided in appendix A1
to the notes to these consolidated
financial statements.
134
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
2. DECONSOLIDATION OF BASHNEFT
n September 2014, a civil claim
was filed with the Moscow Court
of Arbitration by the Prosecutor
General’s Office of the Russian
Federation seeking the transfer to
the Russian Federation of all shares
in Bashneft held by the Group. The
civil claim asserted that the transfer
of Bashneft from the property of the
Russian Federation into the property
of Bashkortostan in 1992-1993
had been unlawful, as no requisite
consent had been obtained from the
federal authorities, and therefore all
subsequent transactions with Bashneft
shares should be considered null and
void. In November 2014, the court ruled
in favour of the plaintiff and ordered the
transfer of the Bashneft shares held by
the Group to the Russian Federation.
The transfer of the shares took place in
December 2014.
The Group deconsolidated Bashneft in
December 2014 and recognized a loss
upon loss of control, measured as
the difference between the carrying
amount of noncontrolling interests
in the former subsidiary (including
accumulated other comprehensive
income attributable to the
noncontrolling interests) at the date
Bashneft was deconsolidated and
the carrying amount of its assets and
liabilities. The Group also removed
the amount previously accumulated
in the translation adjustment
component of equity and attributable
to Bashneft and reported it as part
of the loss on transfer of Bashneft
shares to the Russian Federation.
The loss on deconsolidation
of Bashneft recognized in the
consolidated statement of operations
and comprehensive income for the
year ended December 31, 2014 is
measured as follows:
Net assets as at deconsolidation date
Noncontrolling interests
Accumulated currency translation adjustment
Loss on deconsolidation of Bashneft
Noncontrolling interests
Loss on deconsolidation of Bashneft
Tax effect
Loss on deconsolidation of Bashneft, net of tax
$
$
$
4,061,927
(1,384,789)
2,291,873
-
4,969,011
-
4,969,011
-
4,969,011
Bashneft results were separately presented in the consolidated statements of
operations and comprehensive income for the years ended December 31, 2014
and 2013 as follows:
Revenues
Income from Bashneft, before income taxes
Income tax expense
Income from Bashneft, net of tax effect
2014
2013
$
16,224,383 $
1,944,770
(427,716)
1,517,054
17,783,111
1,996,126
(455,637)
1,540,489
135
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Additionally, the assets and liabilities pertaining to Bashneft have been presented
separately within the consolidated statement of financial position
as of December 31, 2013 as follows:
Cash and cash equivalents
Accounts receivable
Inventories and spare parts
Other current assets
Intragroup balances
Current assets of Bashneft
Property, plant and equipment
Other non-current assets
Intragroup balances
Non-current assets of Bashneft
Accounts payable
Debt, current portion
Other current liabilities
Intragroup balances
Current liabilities of Bashneft
Debt, long-term portion
Other long-term liabilities
Intragroup balances
Long-term liabilities of Bashneft
$
$
$
$
$
625,417
593,016
716,847
2,659,069
(1,539,621)
3,054,728
8,794,360
941,695
(116,276)
9,619,779
(1,351,326)
(367,147)
(1,096,320)
151,361
(2,6 63,432)
(2,419,639)
(1,344,437)
30,052
(3,734,024)
he Group retains no continuing
involvement with Bashneft after it
has been deconsolidated, other than
routine transactions in the normal
course of business.
In December 2014, the Group filed
a claim with the Moscow Court
of Arbitration for the recovery of
RUB 70.7 billion losses from Ural-
Invest, a legal successor of the
seller of the Bashneft shares to the
Group. In February 2015, the сourt
upheld the Group’s claim. In March
2015, the Group and Ural-Invest
signed a settlement agreement.
In accordance with its terms, all
assets owned by Ural-Invest of RUB
46.5 billion, will be transferred to
the Group, which will invest RUB
4.6 billion of this amount into the
projects of Ural charitable fund. In
March 2015 the Moscow Court of
Arbitration approved the settlement
agreement between the Group and
Ural-Invest. The transfer of assets
did not occur as of the date of the
issuance of the consolidated financial
statements and therefore the Group
did not recognize the gain in the
consolidated statement of operations
and comprehensive income.
136
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH 3. BUSINESS COMBINATIONS
Business combinations in 2014
LesInvest – In September 2014,
LesInvest, a wholly owned subsidiary
of the Group, acquired 100% of
the share capital of OJSC Segezha
Pulp and Paper Mill and LLC
Derevoobrabotka-Proekt (together
with their subsidiaries – “LesInvest
Group”), a leading manufacturer
of sack paper and paper sacks and
exporter of timber products and ply
wood, for a total cash consideration
of $287 million. The Group sees high
growth potential for the LesInvest
Group business, to be unlocked by
improving operating efficiency and
upgrading production facilities.
The following table summarizes
consideration paid and the amounts
of the assets acquired and liabilities
assumed that were recognized at the
acquisition date:
Property, plant and equipment
Inventories
Deferred tax assets
Other assets
Accounts payable and other liabilities
Cash consideration paid
$
$
110,917
109,876
76,047
117,367
(127,000)
287,207
The purchase price allocation of
LesInvest Group was not finalized
as of the date of these consolidated
financial statements, as the Group
had not completed the valuation
of individual assets and liabilities
of LesInvest Group. The Group’s
consolidated financial statements
reflect the allocation of the purchase
price based on a preliminary fair
value assessment of the assets
acquired and liabilities assumed.
Other acquisitions
The information on other business combinations which took place
in 2014 is summarized below:
Acquiree
Principal
activity
Date
of acquisition
Interest
acquired
Acquiring
segment
Purchase
price
SMARTS-Ivanovo
Mobile operator
SMARTS-Ufa
Penza-GSM
Step Group
Total
Mobile operator
Mobile operator
Grain production
December
December
December
December
100%
100%
100%
85%
MTS
MTS
MTS
Corporate
7,480
7,040
34,121
63,965
$
112,606
137
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
The following table summarizes the amounts of the assets acquired
and liabilities assumed relating to such acquisitions at the acquisition date:
Current assets
Property, plant and equipment
Rights to use radio frequencies
Goodwill
Other non-current assets
Current liabilities
Non-current liabilities
Noncontrolling interests
Purchase price
$
$
25,935
78,467
25,759
29,247
5,061
(32,722)
(9,546)
(9,595)
112,606
The purchase price allocations of
SMARTS-Ivanovo, SMARTS-Ufa and
Penza-GSM were not finalized as of
the date of these financial statements
as the Group had not completed the
valuation of the individual assets of
each entity. The Group’s consolidated
financial statements reflect the
allocation of the purchase price
based on a preliminary fair value
assessment of the assets acquired
and liabilities assumed. The excess of
the consideration paid over the value
of net assets in the amount of $29
million was preliminarily allocated
to goodwill which was attributable to
the MTS segment. Goodwill is mainly
attributable to the expected synergies
from combining the operations of
MTS and acquired companies.
In December 2014, Krasnodar Agro,
a wholly owned subsidiary of the
Group, acquired 85% of the voting
shares of the five grain producers in
Krasnodar region (Step Group).
Pro forma results of operations (unaudited)
The following pro forma financial
data for the years ended December
31, 2014 and 2013 give effect to the
acquisition of LesInvest Group as if it
had occurred as of January 1, 2013:
Revenues
Net income
The pro forma information is
based on various assumptions and
estimates. The pro forma information
is neither necessarily indicative of
the operating results that would have
occurred if the Group acquisitions
had been consummated as of
January 1, 2013, nor is it necessarily
indicative of future operating results.
The pro forma information does not
give effect to any potential revenue
enhancements or cost synergies
or other operating efficiencies that
could result from the acquisitions.
The actual results of operations of
these companies are included into
the consolidated financial statements
of the Group only from the respective
dates of acquisition.
Net revenues
Net income
2014
2013
$
17,130,212 $
(3,346,547)
19,199,485
3,052,629
The following amounts of revenue and
earnings of LesInvest Group since the
acquisition date in September 2014
are included into the consolidated
statement of operations and
comprehensive income for the year
ended December 31, 2014:
2014
$
151,227
14,178
The results of operations of other
acquired businesses have not been
included because the effects of these
business combinations, individually
and in aggregate, were not material
to the Group’s consolidated results
of operations.
138
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Business combinations in 2013
SITRONICS-Nano – In May 2013, the
Group acquired an additional 12.3%
ownership interest in SITRONICS-
Nano, previously an affiliate, from
RUSNANO for cash consideration
of RUB 2 billion ($61.1 million at the
acquisition date) increasing its voting
interest to 62.1%. Simultaneously,
the Group and RUSNANO amended
existing call and put option
agreements. Under the amended
agreements, the Group had a call
Current assets
Net investment in the lease
Current liabilities
Non-current liabilities
Noncontrolling interests
Fair value of previously held interest
Cash consideration
option to acquire RUSNANO’s
shares in Sitronics-Nano for RUB 6.1
billion plus 7.63% p.a. at any time till
November 1, 2017. RUSNANO had a
put option to sell its remaining shares
in SITRONICS-Nano for RUB 8.1 billion
not earlier than October 31, 2016 and
not later than November 1, 2017.
This acquisition allowed the Group to
secure its rights for use of 180 and 90
nanometre equipment that has been
leased from SITRONICS-Nano.
As a result of the transactions,
the Group obtained control over
SITRONICS-Nano and accounted
for this business combination by
applying the acquisition method.
The following table summarizes the
consideration paid for SITRONICS-
Nano and the assets acquired and
liabilities assumed recognized at the
acquisition date, as well as the fair
value of the noncontrolling interests in
the investee:
$
$
73,231
518,916
(76,700)
(18,829)
(187,164)
309,454
(248,309)
61,145
As part of this business
combination, the Group recognised
a revaluation gain resulting from
the remeasurement of its previously
held interest. The difference in the
amount of $22.4 million between the
fair value of previously held interest
and the carrying value of the Group’s
investment has been recorded
within other operating expenses,
net in the consolidated statement
of operations and comprehensive
income. The fair value of previously
held interest and the noncontrolling
interests in SITRONICS-Nano were
estimated based on the amount of
consideration in the transaction
described above.
In May 2014, following the issuance
of additional shares in Mikron, a
subsidiary of RTI, such put and call
option agreements between the
Group and ROSNANO were amended
(Note 5).
139
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT 4. DISPOSALS
Disposals in 2014
NIIDAR-Nedvizhimost – In 2014,
the Group sold its 100% interest in
NIIDAR-Nedvizhimost, a subsidiary of
RTI which managed rental property,
for a total cash consideration of
$150.0 million. As a result of this
transaction, the Group recognized
gain on disposal of subsidiaries
of $139.1 million, included in
other operating expenses in the
consolidated statement of operations
and comprehensive income.
Disposals in 2013
SG-trans – During 2013, the Group
completed a reorganisation of its
transportation assets. As a result
of the reorganization, SG-trans,
which was acquired in 2012 was split
into two legal entities: SG-trading
which comprised the non-core non-
transportation assets and SG-trans
which retained all the core transport
assets. In April 2013 the Group sold
a 70% stake in SG-trans to Financial
Alliance, an affiliate of the Group, for
cash consideration of RUB 12 billion
($380.2 million at the disposal date),
thereby reducing its direct ownership
in SG-trans from 100% to 30%.
Upon disposal, the Group
deconsolidated SG-trans and
accounted for its remaining
interest using the equity method.
As a result of the transaction,
the Group recognized a gain
of $4.0 million in the consolidated
statement of operations and
comprehensive income.
In July 2013, the Group further sold
additional 15% of SG-trans to Unirail,
a shareholder of Financial Alliance,
for a cash consideration of RUB 2.5
billion ($76.4 million) with no gain
or loss recognized as a result of this
transaction.
RussNeft – In July 2013, the Group
sold its 49% stake in RussNeft,
the Group’s affiliate, for cash
consideration of $1,200 million. Prior
to the disposal, the Group has been
accounting for this investment using
the equity method. As of the disposal
date, the carrying value of the Group’s
investment in RussNeft was nil.
Accordingly, the Group recognized a
$1,200 million gain on this disposal
being the difference between the
consideration received and the
carrying value of investment disposed.
5. CAPITAL TRANSACTIONS OF SUBSIDIARIES
Transactions in 2014
MTS Bank – In December 2014, the
Group participated in additional share
issue of MTS Bank for $309.0 million.
The transaction resulted in no change
in noncontrolling interests and
additional paid-in capital.
Mikron – In May 2014, Mikron issued
additional shares representing 25.1%
of its share capital in exchange
for 37.7% interest in SITRONICS-
Nano, owned by OJSC RUSNANO.
Upon completion of the transaction,
the Group’s effective ownership in
Mikron decreased to 53.0%. The
transaction was accounted for
directly in equity and resulted in a
decrease of noncontrolling interests
and an increase of additional
paid-in capital by $44.1 million.
Simultaneously, the Group and
RUSNANO substituted their existing
put and call option agreements on
RUSNANO’s share in SITRONICS-
Nano for new put and call option
agreements on its 25.1% share in
Mikron. The terms of the option
agreements remained unchanged.
Business-Nedvizhimost – In April
2014, MTS sold a 49% stake in
Business-Nedvizhimost, a company
which owns and manages a real
estate portfolio in Moscow, to the
Company for $91.8 million. This
transfer of ownership interest within
the Group resulted in an increase
of noncontrolling interests and a
decrease of additional paid-in capital
by $47.4 million.
NVision – In January 2014, the
Group acquired an additional 38.75%
stake in NVision from minority
shareholders for $82.5 million, $37.5
million of which was paid in cash
and $45.0 million in the Company’s
treasury shares. Upon completion
of this transaction, the Group’s
ownership in NVision was 88.75%.
The transaction was accounted for
directly in equity and resulted in an
increase of noncontrolling interests
by $42.0 million and a decrease of
additional paid-in capital by $121.8
million. In December 2014, the Group
acquired the remaining 11.25%
stake in NVision for approximately
$10.0 million. The transaction was
accounted for directly in equity
and resulted in a decrease of
noncontrolling interests by $13.8
million and a decrease of additional
paid-in capital by $24.0 million.
Transactions in 2013
Business-Nedvizhimost – In
December 2013, MTS sold a 51%
stake in Business-Nedvizhimost
to the Company for RUB 3.2 billion
($98.5 million as of the transaction
date). This transfer of ownership
interest within the Group resulted
in an increase of noncontrolling
interests and a decrease of additional
paid-in capital by $42.7 million.
RTI – In December 2013, RTI issued
4,687,500,000 common shares with par
value of 1 Russan ruble which were
acquired by existing shareholders,
the Company and the Bank of
Moscow, for cash consideration of
RUB 6.0 billion ($183.9 million as of
the purchase date) in proportion to
their existing ownership interests.
The Bank of Moscow received a put
140
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH option to sell its 703,125,000 shares
acquired upon their issuance to the
Group at a price of $27.5 million
plus 8.25% p.a. not earlier than
December 26, 2016 and not later than
December 26, 2018. As a result of this
put option, the Group classified the
underlying noncontrolling interests as
redeemable.
Targin – In September 2013, the
Company acquired a 100% stake in
Bashneft Services Assets, (renamed
to Targin in July 2014) from Bashneft
for RUB 4.1 billion ($126.8 million
as at transaction date). This transfer
of ownership interest within the
Group resulted in a decrease of
noncontrolling interests and an
increase of additional paid-in capital
by $24.4 million.
MTS – In September-December
2013, the Group acquired 0.6% of
MTS ordinary shares on the open
market for $120.0 million. The
transaction was accounted for directly
in equity and resulted in a decrease
of noncontrolling interests by $23.0
million and a decrease of additional
paid-in capital by $97.0 million.
Detsky mir – In September 2013,
Detsky mir purchased 25%+1 of its
own shares from Sberbank for cash
consideration of $140.0 million. The
transaction was accounted for directly
in equity and resulted in a decrease
of noncontrolling interests by $5.4
million and a decrease of additional
paid-in capital by $134.6 million.
The Group took a long-term loan
from Sberbank to fund the purchase.
Simultaneously the Group has
pledged these shares to Sberbank as
security against the loan.
SITRONICS-N – In September 2013,
the Group undertook restructuring
of certain RTI assets. Upon
completion of a series of transactions,
SITRONICS, a subsidiary of RTI, spun
off two companies, SITRONICS-N and
RTI Microelectronics, with allocation
of all its major assets and liabilities
to these companies. To complete the
restructuring process a 100% stake in
SITRONICS was sold to SITRONICS-N
for 1 RUB. In October 2013, the
Company acquired a 100% stake in
SITRONICS-N from RTI for RUB 1.0
billion ($31.0 million as at transaction
date). This transaction resulted in an
increase of noncontrolling interests
and a decrease of additional paid-in
capital by $11.0 million.
Mikron – In August 2013, Mikron
issued 691,962 ordinary shares which
were purchased by the RF for cash
consideration of RUB 465 million
($14.1 million). This transaction
was accounted for directly in equity
and resulted in an increase of
noncontrolling interests by $5.2
million and an increase of additional
paid-in capital by $8.9 million.
MTS Bank – In April 2013, MTS
acquired a 25.0945% stake in MTS
Bank through the purchase of
its additional share issuance for
RUB 5 billion ($123 million). Upon
completion of the transaction, the
Group’s effective ownership in MTS
Bank decreased from 99% to 87%.
This transfer of ownership interest
within the Group resulted in an
increase of noncontrolling interests
and a decrease of additional paid-in
capital by $105 million.
Capital transactions of
Bashneft and its subsidiaries
UPC – In September 2014, the
Group terminated a contract for the
acquisition of a 98% stake in UPC
from Bashneft. As a consequence of
this transaction, Bashneft obtained
control over UPC. This resulted in the
Group’s ownership in UPC decreasing
from 99.0% to 78.0% and the
Group’s ownership in Ufaorgsintez
decreasing from 86.5% to 78.7%.
These transactions resulted in an
increase of noncontrolling interests
in the amount of $4.8 million and a
decrease of additional paid-in capital
by $20.9 million.
Bashneft-Polyus – On 23 May 2014,
in accordance with an order from
the Federal Agency for Subsoil Use
(“Rosnedra”) the Trebs and Titov
oilfield license was transferred from
Bashneft to its subsidiary Bashneft-
Polyus. This transaction resulted
in an increase in noncontrolling
interests in the amount of $113.0
million with a corresponding
decrease in the Group’s constructive
obligation to OJSC LUKOIL in the
amount of $139.1 million and an
increase in additional paid-in capital
by $26.1 million.
Sistema-Invest – In May 2014, the
reorganization of CJSC Sistema-
Invest (“Sistema-Invest”) was
completed. 38,139,925 ordinary
shares of Bashneft previously held
by CJSC Bashneft-Invest, wholly-
owned subsidiary of Bashneft created
through a spinoff from Sistema-
Invest, and 8,885,866 preferred shares
bought back from the shareholders
were cancelled. The transactions
were accounted for directly in
equity and resulted in a decrease of
noncontrolling interests by $694.6
million and an increase of additional
paid-in capital by $199.4 million.
The Group’s ownership in Bashneft
increased from 75.0% to 78.8% and in
BPGC – from 79.3% to 91.0%.
Ufaorgsintez – In March 2014,
pursuant to the terms of a voluntary
tender offer originally announced
in December 2013, Ufaorgsintez
completed the acquisition of
its ordinary shares for a total
consideration of $26.5 million. As
a result, the Group’s ownership in
Ufaorgsintez increased from 76.8% to
86.5%. The transaction was accounted
for directly in equity and resulted in a
decrease of noncontrolling interests
by $49.5 million and an increase of
additional paid-in capital by $22.5
million.
UPC – In September 2013, the
Company acquired a 98% stake in
United Petrochemical Company
(“UPC”) from Bashneft for RUB
6.2 billion ($192.0 million as at
transaction date), which resulted in a
decrease of noncontrolling interests
and an increase of additional paid-in
capital by $41.4 million.
141
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
6. ВREENTRY INTO UZBEKISTAN
Following unsuccessful tenders on
sale of Uzdunrobita equipment, the
representatives of the Republic of
Uzbekistan and MTS commenced
negotiations in relation to the
return of MTS to the market. In
July 2014, MTS signed a settlement
agreement with the Republic of
Uzbekistan eliminating all mutual
claims (“Settlement Agreement”).
International arbitration proceedings
between MTS and the Republic
of Uzbekistan in the International
Center for Settlement of Investment
Disputes, Member of the World Bank
Group (ICSID), were discontinued
following the submission of a joint
application by the both parties.
The government authorities provided
certain guarantees to MTS in
relation to the protection of any
future investment in the Republic of
Uzbekistan to encourage the return of
MTS to the market.
Also, the Republic of Uzbekistan
established a legal entity, Universal
Mobile Systems LLC (“UMS”), with
such entity having no legal connection
to the previously liquidated entity,
Uzdunrobita. UMS was granted 2G,
3G and LTE licenses and received
frequencies, numbering capacity and
other permits required for the launch
of operations.
In September 2014, a 50.01%
ownership interest in UMS was
transferred to the Group by a state-
owned enterprise established and
managed by the State committee
for communications, development
of information systems and
telecommunications technologies
of the Republic of Uzbekistan, which
retained the remaining 49.99%
in UMS.The Group concluded
that, upon receiving the 50.01%
ownership interest, the Group
obtained control over UMS and
consolidated the entity. The Group
estimated the fair value of the
entity’s assets and liabilities, as well
as the noncontrolling interests in
UMS as of the date of the transfer,
and recognized a gain from reentry
into Uzbekistan pursuant to the
Settlement Agreement in the amount
of $181 million.
The Group has determined that the
Settlement Agreement primarily
addressed two separate elements –
the elimination of all mutual claims
and guarantees granted to MTS in
connection with its reentry into the
Republic of Uzbekistan. The Group
concluded that the aforementioned
consideration of $181 million related
to, in its entirety, a financial incentive
to encourage the reentry into the
Republic of Uzbekistan and as such,
recognition in continuing operations
was appropriate. No element was
allocated to the non-satisfaction and
elimination of mutual claims as this
was deemed to have minimal value.
The following table summarizes the
amounts of the assets and liabilities
recognized at the date of obtaining
control, as well as the fair value of the
noncontrolling interests at that date:
Property, plant and equipment
Intangible assets
Other non-current assets
Noncontrolling interests
Gain from reentry into Uzbekistan
$
$
119,211
132,333
31,610
(101,849)
181,305
142
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH 7. ASSETS FROM BANKING ACTIVITIES
Assets from banking activities, net of an allowance for loan losses, as of December
31, 2014 and 2013 consisted of the following:
2014
2013
Cash and cash equivalents
Loans to customers
Investments in securities (trading)
Loans to banks
Investments in securities (available-for-sale)
Other investments
Less: allowance for loan losses
Assets from banking activities, net
Less: amounts maturing after one year
$
843,715 $
2,597,696
368,567
131,919
87,652
85,956
(560,942)
3,554,563
(1,374,367)
Assets from banking activities, current portion
$
2,180,196 $
Major categories of loans to customers as of December 31, 2014
and 2013 comprise the following:
1,132,368
4,842,982
551,513
161,229
154,356
127,096
(516,575)
6,452,969
(2,554,229)
3,898,740
Corporate customers
Individuals
Total
2014
2013
1,294,744 $
1,302,952
2,739,345
2,103,637
2,597,696
$
4,842,982
$
$
As of December 31, 2014, 79.7% and 0.6% of the balance of loans to corporate
customers and individuals, respectively, were evaluated individually for
impairment (2013: 80.0% and 0.5%).
The following table presents the effective average interest rates by category of
loans as of December 31, 2014 and 2013:
2014
2013
RUB
USD
Other
RUB
USD
Other
Loans to customers
- corporate customers
- individuals
Loans to banks
10.5%
19.0%
7.9%
8.8%
4.4%
0.01%
9.2%
6.5%
0.01%
10.8%
23.4%
4.5%
7.0%
8.3%
0.1%
9.8%
4.2%
0.1%
The movement in the allowance for loan losses in 2014 and 2013 was as follows:
2014
2013
Allowance for loan losses, beginning of the year
Additions charged to operating results less recovery of allowance
Amounts written off against the allowance
Currency translation adjustment
Allowance for loan losses, end of the year
$
$
516,575 $
423,121
(162,705)
(216,049)
560,942 $
329,803
248,032
(37,185)
(24,075)
516,575
143
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
8. SHORT-TERM INVESTMENTS
Short-term investments as of December 31, 2014
and 2013 consisted of the following:
Bank deposits with original maturities exceeding three months
Trading securities
Available-for-sale securities
Promissory notes and loans
Total
2014
2013
202,644 $
97,550
74,149
104,998
647,077
499,437
354,838
61,195
479,341
$
1,562,547
$
$
Promissory notes and loans to third parties are primarily denominated in USD
and bear interest rates varying from 4.0% to 6.0% as of December 31, 2014.
The effective interest rates on bank deposits with original maturities exceeding
three months as of December 31, 2014 are between 1.0% and 5.3% (December
31, 2013: 4.2% and 14.0%).
9. ACCOUNTS RECEIVABLE
Accounts receivable, net of provision for doubtful accounts, as of December 31, 2014
and 2013 consisted of the following:
Trade receivables
Less: provision for doubtful accounts
Total
2014
2013
1,246,580 $
(83,488)
1,808,403
(177,810)
1,163,092
$
1,630,593
$
$
Write-off of trade receivables against provision for doubtful accounts in 2014
and 2013 amounted to $134.7 million and $96.5 million respectively.
10. OTHER CURRENT ASSETS
Other current assets as of December 31, 2014 and 2013 consisted of the following:
Prepaid expenses and other receivables
$
564,594 $
Tax advances and overpayments
Advances paid to third parties
Less: provision for doubtful accounts
121,360
242,184
928,138
(96,078)
763,791
136,164
246,727
1,146,682
(62,135)
2014
2013
Total
144
$
832,060
$
1,084,547
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
11. INVENTORIES AND SPARE PARTS
Inventories and spare parts as of December 31, 2014 and 2013 consisted
of the following:
Finished goods and goods for resale
Raw materials and spare parts
Work-in-progress
Costs and estimated earnings in excess of billings on uncompleted contracts
Less: long-term portion
Total
2014
2013
$
405,243 $
232,248
89,506
531,052
1,258,049
(13,540)
593,500
377,292
151,434
116,984
1,239,210
(107,908)
$
1,244,509
$
1,131,302
12. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net of accumulated depreciation,
as of December 31, 2014 and 2013 consisted of the following:
Switches, transmission devices, network and base station equipment
$
9,066,682 $
14,083,007
2014
2013
Buildings and leasehold improvements
Power and utilities
Other plant, machinery and equipment
Construction in progress and equipment for installation
Land
Less: accumulated depreciation
1,392,585
496,303
1,495,420
897,260
148,238
2,166,179
760,686
2,620,291
1,576,285
160,973
13,496,488
21,367,421
(6,305,094)
(10,216,080)
Total
$
7,191,394
$
11,151,341
Depreciation expense for the years ended December 31, 2014
and 2013 amounted to $1,778.6 million and $2,089 million respectively.
Impairments of property, plant and equipment for the years ended December
31, 2014 and 2013 amounted to $290.4 million and $285.9 million
respectively (Note 15).
145
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
13. GOODWILL
The carrying amounts of goodwill attributable to each reportable segment
are as follows:
Balance as
of January 1, 2013
Gross amount
of goodwill
Accumulated
impairment loss
Impairment
(Note 15)
Disposals
Currency translation
adjustment
Balance as of
December 31, 2013
Gross amount
of goodwill
Accumulated
impairment loss
MTS
SSTL
RTI
MTS Bank
Other
Total
1,441,836
339,059
278,449
67,919
95,636
2,222,899
(48,261)
(339,059)
-
(67,919)
-
(455,239)
$
1,393,575 $
- $
278,449 $
- $
95,636 $
1,767,660
-
(722)
(93,958)
-
-
-
(258,048)
-
(17,210)
-
-
-
-
(67,816)
(258,048)
(68,538)
(2,127)
(113,295)
1,343,717
300,047
254,291
63,068
25,693
1,986,816
(44,822)
(300,047)
(251,100)
(63,068)
-
(659,037)
$
1,298,895 $
- $
3,191 $
- $
25,693 $
1,327,779
Business combinations
(Note 3)
Currency translation
adjustment
Balance as
of December 31, 2014
Gross amount
of goodwill
Accumulated
impairment loss
29,247
(524,502)
829,716
(
26,076)
-
-
-
(1,335)
-
-
-
29,247
(13,652)
(539,489)
293,424
147,937
36,691
12,041
1,319,809
(293,424)
(146,081)
(36,691)
-
(502,272)
$
803,640 $
- $
1,856 $
- $
12,041 $
817,537
146
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
14. OTHER INTANGIBLE ASSETS
Intangible assets other than goodwill as of December 31, 2014 and 2013
consisted of the following:
Amortized intangible assets:
Billing
and telecommunication
software
$
Operating licenses
Radio frequencies
Acquired customer
base and customer
relationships
Software and other
Unamortized intangible assets:
Trademarks
Numbering capacity
with indefinite
contractual life
2014
Accumu lated
amortization
Gross
carrying
value
Net
carrying
value
Gross
carrying
value
2013
Accumu lated
amortization
Net
carrying
value
974,142
704,536
203,419
(603,303)
(214,352)
(101,034)
225,495
855,003
(136,714)
(376,890)
370,839
490,184
102,385
88,781
478,113
1,053,559
768,488
301,042
(580,156)
(157,778)
(149,954)
468,497
973,084
(247,643)
(481,941)
473,403
610,710
151,088
220,854
491,143
2,962,595
(1,432,293)
1,530,302
3,564,670
(1,617,472)
1,947,198
184,811
6,276
-
-
184,811
206,135
6,276
9,367
-
-
206,135
9,367
Total
$
3,153,682
(1,432,293)
1,721,389
3,780,172
(1,617,472)
2,162,700
Impairments of intangible assets other than goodwill for the years ended
December 31, 2014 and 2013 amounted to $nil and $298.2 million
respectively (Note 15).
Amortization expense recorded on other intangible assets for the years ended
December 31, 2014 and 2013 amounted to $513.5 million and $544.6 million,
respectively. The estimated amortization expense for the five years ending
December 31, 2019 and thereafter is as follows:
Year ending December 31,
2015
2016
2017
2018
2019
Thereafter
Actual amortization expense to be reported in future periods could differ from
these estimates as a result of new intangible assets acquisitions, changes in
useful lives and other relevant factors.
$
367,272
306,060
214,242
122,424
61,212
459,092
$
1,530,302
147
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
15. IMPAIRMENT OF OTHER ASSETS
Impairment of other assets recognized by the Group in the years ended
December 31, 2014 and 2013 comprised the following:
Impairment of long-lived assets in India
$
290,438 $
2014
2013
Impairment of 180 and 90 nm equipment and intangible assets
Impairment of system integration intangible assets
Impairment of other long-lived assets
Impairment of available-for-sale securities
Provision for cash and deposits in Delta Bank (Ukraine)
Provision for doubtful accounts
Inventory obsolescence
Other
-
-
175,386
135,000
92,517
103,625
30,442
37,221
-
357,906
125,747
106,753
-
-
134,392
46,504
33,243
Total impairments of other assets
$
864,629
$
804,545
Impairment of 180 and 90 nm
equipment and intangibles assets –
As of December 31, 2013 the
Group carried out a review of the
recoverable amount of long-lived
assets used in the production of
microchips. As a result of this
impairment review, an impairment
charge of $357.9 million was
recognized in the consolidated
statement of operations and
comprehensive income for the year
ended December 31, 2013, which
was allocated to the RTI segment.
As of December 31, 2014, the
Group identified indicators that the
carrying amounts of 180 and 90
nm equipment with a total carrying
value of $108.4 million may not
be recoverable. These indicators
included lower than expected
revenue and profitability levels.
The Group carried out review that
supported the carrying value of the
equipment and indicated that no
additional impairment is required.
The estimated fair value of such
long-lived assets was determined
based on unobservable inputs (“Level
3” of the hierarchy established
by U.S. GAAP guidance). When
calculating the future cash flows
used in the assessment of the
fair value of long-lived assets, the
Group considered historical and
projected revenue and operating
costs, market conditions, asset ages,
asset utilization and other relevant
information. The key assumptions
used in the fair value calculations
included pre-tax discount rate of
25.0%-56.3% depending on the
business line (2013: 21.5%-43.8%),
compound annual growth rate during
the projected twelve-year period of
21.8% (2013: 11.7%), growth rate
after that period of 2.3% (2013: 2.3%).
Impairment of system integration
intangible assets – During the year
ended December 31, 2013, the Group
identified indicators that the carrying
amounts of long-lived assets
attributable to NVision, a subsidiary
of RTI, may not be recoverable.
These indicators included lower than
expected revenue and profitability
levels and downward revisions to
management’s forecasts for the
NVision business.
Subsequent to its acquisition by the
Group in 2012, NVision experienced
a significant decrease in purchases
made by its key customers and, as
a result, revenue forecasts were
substantially reduced as compared to
those existing at the acquisition date.
Based on the revised forecasts, the
Group determined that the carrying
value of the NVision asset group
exceeded its undiscounted cash
flows. The Group then compared the
fair value of the asset group to its
carrying value and determined the
impairment loss. The impairment loss
was allocated to the carrying values
of the long-lived assets, but not below
their individual fair values. The Group
estimated the fair value of the assets
primarily using an income approach
based on unobservable inputs (“Level
3” of the hierarchy established by
U.S. GAAP guidance), with the key
assumptions including a discount rate
of 16.5% and 3-7% of revenue royalty
payments for the trademark. The
decline in the fair value of the NVision
reporting unit and its intangible
assets, as well as fair value changes
for other assets and liabilities in the
two-step goodwill impairment test,
resulted in an implied fair value of
goodwill being substantially below its
carrying value.
As a result of the impairment review,
for certain intangible assets with
a carrying value of $129.1 million
the Group concluded that the fair
value amounted to $3.3 million and
recorded an impairment charge of
$125.7 million in the consolidated
statement of operations and
comprehensive income for the year
ended December 31, 2013. The
Group also recorded an impairment
charge on goodwill of $258.0 million
based on its implied fair value. The
relevant impairment charges were
allocated to the RTI segment.
148
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
Provision for cash and deposits
in Delta Bank (Ukraine) – As of
December 31, 2014, MTS Ukraine, a
subsdiary of MTS, held $90.2 million
in current accounts and deposits
in Delta Bank, the fourth largest
bank in Ukraine. In December
2014, Delta Bank delayed customer
payments and put limits on cash
withdrawals. In March 2015, the
National Bank of Ukraine adopted a
resolution declaring Delta Bank to
be insolvent. The Group treated Delta
Bank’s insolvency as a recognized
subsequent event and provided
against the full amount of deposited
funds ($90.2 million) and related
interest ($2.3 million).
16. INVESTMENTS IN AFFILIATES
Investments in affiliates as of December 31, 2014
and 2013 consisted of the following:
MTS Belarus
OZON
SG-trans (2013: SG-trans and Financial Alliance, Note 4)
Concept Group
Other
Total
2014
2013
Voting power
Carrying value
Voting power
Carrying value
49.0%
21.6%
50.0%
40.0%
$
107,237
49.0% $
165,174
91,080
83,555
18,913
55,233
50.0%
-
133,551
-
66 541
$
356,018
$
365,266
Investment in OZON – In April
2014, the Group acquired a 21.6%
of ownership interest in OZON
Holdings Limited (“OZON”), a
leading Russian e-commerce
company, through an additional
share issuance for $150.0 million.
The Group has the right to nominate
two out of eight representatives to
the board of directors. Management
concluded that, upon completion of
the acquisition, the Group gained
significant influence over OZON and
therefore adopted equity method of
accounting for this investment. The
Group also obtained a call option for
an additional 4.6% stake in OZON
exercisable through August 2015.
The difference between the equity
investment carrying amount of $91
million and underlying equity in net
assets as of December 31, 2014 of
$26.0 million represents equity-
method goodwill, mainly attributable
to the expected synergies from
commercial arrangements and co-
branding programs.
Investment in Concept Group –
In October 2014, the Group acquired
a 40% of ownership interest in
Rangecroft Ltd, a holding company
of Concept Group, one of Russia’s
leading fashion clothing retailers,
for $26.0 million, and obtained a
call option to acquire another 14.2%
of its share capital exercisable till
October 2017. In accordance with
the shareholders agreement, the
Group has the right to nominate
three out of nine representatives to
the board of directors and, if the call
option is exercised, up to five of the
nine representatives. A number of
key operating decisions for Concept
Group, including an approval of an
operating budget, require seven
out of nine votes; such operating
decisions represent participating
rights of the shareholders.
As a consequence of this, the Group
has concluded that it does not have
control over the investee and
has therefore adopted the equity
method of accounting for
this investment.
Merger of SG-trans and Finance
Alliance – In January 2014, SG-trans
and Finance Alliance merged into a
single legal entity named SG-trans.
The Group retained 50% beneficial
interest in the newly established entity.
The financial position and results of
operations of significant affiliates as of
and for the year ended December 31,
2014 were as follows:
149
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
The financial position and results of operations of significant affiliates as
of and for the year ended December 31, 2014 were as follows:
MTS Belarus
OZON
SG-trans
Concept Group
Total assets
Total liabilities
Net income/(loss)
$
303,315
(94,102)
194,317
192,860
(71,403)
(77,690)
641,193
(453,119)
12,059
91,607
(65,646)
5,792
(unaudited)
The financial position and results of operations of significant Group affiliates as
of and for the year ended December 31, 2013 were as follows:
(unaudited)
MTS Belarus
Financial Alliance(1)
Total assets
Total liabilities
Net income/(loss)
(1) Including SG-trans amounts.
$
379,050
(96,580)
145,975
1,480,703
(1,185,979)
13,435
17. LONG-TERM INVESTMENTS
Long-term investments as of December 31, 2014 and 2013 consisted
of the following:
Bank deposits
Loans and notes
Other
Total
The effective interest rates on long-term investments as of December
31, 2014 were between 6.2% and 6.3% for EUR denominated investments
(2013: 6.0% – 8.6%).
2014
2013
242,006 $
51,400
23,219
90,727
129,638
28,706
316,625
$
249,071
$
$
150
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
18. LIABILITIES FROM BANKING ACTIVITIES
Liabilities from banking activities as of December 31, 2014 and 2013 consisted
of the following:
Term deposits
Deposits repayable on demand
Promissory notes issued and other liabilities
Less: amounts maturing within one year
Total liabilities from banking activities, net of current portion
2014
2013
$
$
1,567,548 $
537,365
243,438
2,348,351
(2,180,491)
167,860 $
2,561,569
1,859,832
215,539
4,636,940
(3,864,415)
772,525
As of December 31, 2014 the fair value of liabilities from banking activities
amounted to $2,270 million; as of December 31, 2013 – approximated their
carrying value.
The following table presents the effective average interest rates by categories of
bank deposits and notes issued as of December 31, 2014 and 2013:
Term deposits:
- corporate customers
- individuals
Promissory notes issued
Deposits repayable on demand:
- corporate customers
- individuals
RUB
2014
USD
Other
RUB
2013
USD
Other
14.5%
10.0%
8.0%
0.5%
0.5%
3.0%
3.7%
-
-
2.9%
3.4%
-
-
0.1%
0.2%
7.4%
9.7%
7.3%
4.9%
0.6%
1.8%
3.7%
-
-
2.1%
2.3%
-
-
0.07%
0.1%
151
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT 19. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of December 31, 2014
and 2013 consisted of the following:
Customers’ advances
Accrued payroll
Accruals for services
Accrued interest on loans
Financial instruments at fair value
Dividends payable
Other
Total
2014
2013
$
546,793 $
267,971
210,924
51,805
47,086
1,369
189,708
350,896
430,946
328,050
74,621
13,199
6,729
363,449
$
1,315,656 $
1,567,890
20. LONG-TERM DEBT
Long-term debt as of December 31, 2014 and 2013 consisted of the following:
2014
2013
Loans from banks and financial institutions
$
5,049,820 $
Notes and corporate bonds
Capital leases
Loans from related parties
Vendor financing
Other borrowings
Less: amounts maturing within one year
2,781,512
239,401
37
16,662
45,393
8,132,825
(1,598,770)
5,447,071
4,888,603
80,506
64
31,871
29,957
10,478,072
(2,102,911)
Total
$
6,534,055
$
8,375,161
The schedule of repayments of long-term debt for the next five years and
thereafter is as follows:
Year ended December 31
2015
2016
2017
2018
2019
Thereafter
Total
152
$
$
1,598,770
1,185,257
1,469,871
1,022,949
1,148,236
1,707,742
8,132,825
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
Loans from banks and financial institutions – Loans from banks and financial
institutions as of December 31, 2014 and 2013 consisted of the following:
Maturity
Interest rate (as at
December 31, 2014)
2014
2013
2015-2020
LIBOR+1.15% (1.51%)
$
USD-DENOMINATED:
Calyon, INGBank, NordeaBank,
RaiffeisenZentralbankOsterreich
China Development Bank
Bank of China
2015-2018
2015-2021
LIBOR+1.5% (1.86%)
LIBOR+1.5%-3.5%
(1.86%-3.86%)
LIBOR+0.23%-1.8%
(0.59%-2.16%)
SkandinavskaEnskildaBanken
2015-2017
Bank of Moscow
2015
LIBOR+7.5% (7.76%)
HSBC Bank and ING BHF Bank
Other
EUR-DENOMINATED:
Credit Agricole Corporate Bank, BNP
Paribas
Bank of Moscow
LBBW
BankofChina
Other
RUB-DENOMINATED:
Sberbank
Gazprombank
Raiffeisenbank
Bank of Moscow
VTB
Unicredit
Alfa-Bank
Credit bank of Moscow
Other
Other currencies
Total
2015-2018
EURIBOR+1.65% (1.82%)
2015-2017
2015-2017
EURIBOR+5.0% (5.15%)
EURIBOR+1.52% (1.69%)
2015-2021
2015-2018
2015-2016
2015-2018
8.45%-15.0%
9.0%-10.6%
Mosprime+1.45%-5.25%
(23.42%-29.02%), 9.45%
CBR+3.0% (11.25%);
Mosprime+4.5%-8.85%
(28.27%-31.02%);
2015-2018
9.0%-22.75%
2016
2015
2016
Mosprime+5.2% (12.17%);
10.1-10.4%
9.75%-14.18%
19.0%
673,698
179,421
170,552
798,440
187,497
170,615
91,987
129,494
82,552
-
14,230
82,552
12,022
27,223
1,212,440
1,407,843
33,649
27,333
16,995
-
12,187
90,164
47,574
-
25,630
74,403
14,398
162,005
3,007,244
2,922,817
253,170
149,568
294,439
71,891
128,993
256,258
86,461
37,179
27,143
8,888
30,928
77,571
73,248
92,486
30,554
53,560
3,729,574
3,872,824
17,642
4,399
$
5,049,820
5,447,071
The fair value of loans from banks
and financial institutions, including
the current portion, is estimated
using discounted cash flows and
market-based expectations for
interest rates, credit risk and the
contractual terms of the debt
instruments (“Level 2” of the
hierarchy established by the U.S.
GAAP guidance). As of December
31, 2014 the fair value of loans from
banks and financial institutions,
including the current portion,
amounted to $4,730 million; as of
December 31, 2013 – approximates
their carrying value.
153
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
Notes and corporate bonds – Notes and corporate bonds as of December 31,
2014 and 2013 consisted of the following:
Currency
Interest rate
Fair value
2014
Carrying
value
2013
Carrying
value
MTS International 2020
MTS International 2023
Sistema International 2019
MTS OJSC Notes due 2020
SSTL 2019
MTS OJSC Notes due 2023
MTS OJSC Notes due 2017
Sistema JSFC Bonds due 2016
MTS OJSC Notes due 2015
Sistema JSFC Bonds due 2016
MTS OJSC Notes due 2016
DM-Center Bonds due 2015
MTS OJSC Notes due 2018
MTS OJSC Notes due 2014
Sistema JSFC Bonds due 2014
Other
Total
USD
USD
USD
RUB
INR
RUB
RUB
RUB
RUB
RUB
RUB
RUB
RUB
RUB
RUB
8.625%
$
601,019
$
623,140
$
5.00%
6.95%
8.15%
15.75%
8.25%
8.70%
8.75%
7.75%
7.65%
8.75%
8.50%
12.00%
-
-
369,641
338,193
253,296
202,111
133,313
151,181
113,840
131,364
60,376
29,851
16,238
2,298
-
-
531
478,500
464,979
266,627
202,111
177,751
171,894
145,949
134,045
65,271
31,780
16,418
2,419
-
-
628
747,634
500,000
487,854
458,306
206,795
305,538
294,191
329,790
230,567
406,985
54,627
35,137
117,442
416,098
296,544
1,095
$
2,403,252
$
2,781,512
$
4,888,603
All Group RUB-denominated notes
and corporate bonds are traded on
Moscow Exchange.
USD-denominated notes issued
by MTS International due 2020 and
2023 and Sistema International due
2019 are traded on the Irish Stock
Exchange. The fair values of notes
and corporate bonds are based on the
market quotes as of December 31,
2014 at the exchanges which they are
traded on.
In certain instances the Group
has an unconditional obligation to
repurchase notes at par value if
claimed by the noteholders, where
a subsequent sequential coupon is
announced. The notes therefore can
be defined as callable obligations
under the FASB authoritative
guidance on debt, as the holders
have the unilateral right to demand
repurchase of the notes at par
value upon announcement of new
coupons. The FASB authoritative
guidance on debt requires callable
obligations to be disclosed as
maturing in the reporting period
when the demand for repurchase
could be submitted disregarding
the expectations of the Group about
the intentions of the noteholders.
The Group discloses such notes in
the aggregated maturities schedule
in the reporting periods when the
noteholders have the unilateral right
to demand repurchase. The dates of
the announcement for each particular
note issue are as follows:
MTS OJSC Notes
due 2018
MTS OJSC Notes
due 2020
MTS OJSC Notes
due 2023
December
2015
November
2015
March
2018
154
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
Available credit facilities – As of December 31, 2014, the Group’s total
available unused credit facilities amounted to $1,344.2 million and related
to the following credit lines:
Sberbank
Maturity
2015 – 2018
CitiBank Europe
2024
Gazprombank
2016 – 2021
Interest rate
9.3%-18%
LIBOR 6M+0.9%;
9.75%-25%
ING BankEurasia
2015
Mosprime/LIBOR/ EURIBOR + 1.50%
2015
Other
Total
Available till
Available amount
2015 – 2018
2015
2016 – 2021
766,013
300,009
198,291
44,438
35,468
$
1,344,219
Covenants – Loans and notes
payable by the Group are subject
to various restrictive covenants,
including, but not limited to
compliance with certain financial
ratios, limitations on dispositions
of assets and transactions within
the Group and retention of
principal telecom licenses. The
adverse court’s ruling in respect
of the Bashneft shares owned
by the Group and their further
disposition (Note.2) gave certain
lenders the right to call the debt
under several loan agreements.
The lenders waived their rights
to demand early repayment with
regard to these covenant violations
prior to the issuance date of these
consolidated financial statements,
and the Group retained noncurrent
classification for this long-term
debt in its consolidated statement
of financial position as of December
31, 2014. As of December 31, 2014,
the Group also had $138.5 million
of its RUB-denominated long-
term debt which was presented
within current liabilities in the
consolidated statement of financial
position because of non-compliance
with certain financial ratios by its
subsidiaries.
21. INCOME TAX
The Group’s income tax expense for the years ended December 31, 2014
and 2013 was as follows:
Current provision
Deferred income tax expense
Total
$
$
2014
2013
417,079 $
36,338
453,417
$
619,643
222,464
842,107
Income tax expense calculated by applying the Russian statutory income tax
rate of 20% to income from continuing operations before income tax differs from
income tax expense recognized in the consolidated statements of operations and
comprehensive income as a consequence of the following adjustments:
Adjustments due to:
Equity in earnings of subsidiaries
Other non-deductible expenses
Change in valuation allowance
Settlements with tax authorities
Effect of rates different from standard
Currency exchange and translation differences
Non-taxable income
Other
Income tax expense
2014
2013
$
118,256 $
504,164
147,678
98,094
165,819
11,553
(43,477)
(5,685)
(21,491)
(17,330)
$
453,417
$
144,647
129,330
148,909
(9,108)
(44,044)
(10,828)
-
(20,963)
842,107
155
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
The tax effects of temporary differences that give rise to the deferred tax assets
and liabilities are presented below:
2014
2013
Deferred tax assets:
Tax losses carried forward
Accrued expenses and accounts payable
Property, plant and equipment
Intangible assets
Other
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Intangible assets
Undistributed earnings of subsidiaries and affiliates
Other
Total deferred tax liabilities
Net deferred tax assets, current portion
Net deferred tax assets, long-term portion
Net deferred tax liabilities, current portion
Net deferred tax liabilities, long-term portion
$
1,088,645 $
165,569
243,112
143,917
111,686
1,752,929
(1,194,858)
558,071
(348,206)
(219,907)
(124,444)
(79,655)
(772,212)
$
245,571 $
392,866
(64,947)
(787,631)
$
$
855,851
248,061
152,210
182,846
209,147
1,648,115
(996,221)
651,894
(534,109)
(218,014)
(208,995)
(79,751)
(1,040,869)
330,388
297,419
(114,192)
(902,591)
The Group has the following balances for income tax losses carried forward as
of December 31, 2014 and 2013:
Jurisdiction
India
Russia
Luxembourg
Total
Period for
carry-forward
2014
2013
2015-2020
$
2015-2024
не ограничен
521,547
442,370
124,728
$
483,680
246,870
125,301
$
1,088,645
$
855,851
Management has established valuation allowances against certain deferred
tax assets, which are less likely than not to be realized in future periods. In
evaluating the Group’s ability to realize its deferred tax assets, the Company
considers all available positive and negative evidence, including operating
results, ongoing tax planning, and forecasts of future taxable income on a
jurisdiction by jurisdiction basis. The valuation allowance as of December 31,
2014 and 2013 relates to the following deferred tax assets:
Tax losses carried forward
Sale of investment in Svyazinvest
Impairment of long-lived assets in SSTL
Other
Total
156
$
$
2014
2013
850,118
$
51,103
128,286
165,351
1,194,858
$
689,731
65,996
70,194
170,300
996,221
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
22. HEDGING ACTIVITIES
The Group regularly enters into
variable-to-fixed interest rate swap
agreements to manage exposure to
changes in variable interest rates
related to its debt obligations. The
instruments qualify for cash flow
hedge accounting under U.S. GAAP.
Each interest rate swap matches the
exact maturity dates of the underlying
debt allowing for highly-effective
hedges. Interest rate swap contracts
outstanding as of December 31, 2014
mature in 2015, 2018 and 2020
In addition to the above, the Group
has also entered into several
cross-currency interest rate swap
agreements. These contracts hedged
the risk of both interest rate and
currency fluctuations and assumed
periodic exchanges of both principal
and interest payments from RUB-
denominated amounts to USD- and
Euro- denominated amounts to be
exchanged at a specified rate. The
rate was determined by the market
spot rate upon issuance. Cross-
currency interest rate swap contracts
mature in 2019-2020. The Group
entered into cross-currency interest
rate swap agreements designated to
manage the exposure of changes in
variable interest rate and currency
exchange rate for 21.7% of its USD-
and Euro- denominated bank loans
and Eurobonds outstanding as of
December 31, 2014.
The following table presents
the fair value of the Group’s
derivative instruments designated
as hedges in the consolidated
statements of financial position
December 31, 2014 and 2013.
Location
2014
2013
ASSETS
Cross-currency interest
rate swaps
Interest rate swaps
Total
LIABILITIES
Other non-current assets
Other non-current assets
Interest rate swaps
Accrued expenses and other current liabilities
Total
$
$
389,915
$
142
390,057
(47,086)
(47,086)
$
55,760
367
56,127
(13,199)
(13,199)
The following table presents the effect of the Group’s derivative instruments
designated as hedges (i.e. gain/(loss) recognized) in the consolidated statements
of operations and comprehensive income for the years ended December 31, 2014
and 2013. The amounts presented include the ineffective portion of derivative
instruments and the amounts reclassified into earnings from accumulated other
comprehensive income.
Location
2014
2013
Interest rate swaps, including i
neffective portion of 4,503 and (879)
Cross-currency interest rate swaps,
including ineffective portion
of (60,252) and nil
Total
Interest income / (expense)
Foreign currency transaction loss / (gain)
$
$
6,012
$
(5,778)
397,901
(24,397)
403,913
$
(30,175)
157
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
The following table presents the effect of the Group’s agreements designated as
hedges in accumulated other comprehensive income for the years ended December
31, 2014 and 2013 (net of tax).
Accumulated gain, beginning of the year
Fair value adjustments
Reclassified into earnings
Accumulated gain
2014
2013
$
$
46,210 $
376,582
(303,683)
$
119,109
807
21,697
23,706
46,210
As of December 31, 2014, the outstanding hedging instruments were highly
effective. $18.0 million of accumulated gain is expected to be reclassified into net
income during the next twelve months.
Cash inflows and outflows related to hedging instruments were included in cash
flows from operating and financing activities in the consolidated statements of
cash flows for the years ended December 31, 2014 and 2013.
158
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
23. FAIR VALUE MEASUREMENTS
The following fair value hierarchy table presents information regarding the Group’s
assets and liabilities measured at fair value on a recurring basis as of December 31,
2014 and 2013:
Fair value measurements using
Quoted prices in active
markets for identical
assets (Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs (Level 3)
Total fair
value
DECEMBER 31, 2014
Assets at fair value:
Trading securities
$
Available-for-sale securities
Derivative instruments
Total assets
Liabilities at fair value:
Derivative instruments
Contingent consideration
Redeemable noncontrolling
interests
Total liabilities
DECEMBER 31, 2013
Assets at fair value:
Trading securities
Available-for-sale securities
Derivative instruments
Total assets
Liabilities at fair value:
Derivative instruments
Contingent consideration
Redeemable noncontrolling
interests
$
$
466,117 $
158,370
-
624,487
- $
-
390,057
390,057
(12,128)
(59,933)
-
-
-
-
- $
3,431
-
3,431
-
(1,760)
(56,734)
466,117
161,801
390,057
1,017,975
(72,061)
(1,760)
(56,734)
(12,128)
$
(59,933)
$
(58,494)
$
(130,555)
1,050,950 $
248,534
1,575
1,301,059
-
-
-
- $
- $
253,255
56,127
309,382
(12,863)
-
-
7,405
-
7,405
-
(336)
(89,583)
1,050,950
509,194
57,702
1,617,846
(12,863)
(336)
(89,583)
Total liabilities
$
$
(12,863)
$
(89,919)
$
(102,782)
159
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
24. SHARE CAPITAL
As of December 31, 2014 and 2013, the Company had 9,650,000,000 voting
common shares with a par value of RUB 0.09 issued, of which 9,435,902,596
and 9,274,755,045 shares were outstanding, respectively.
Dividends declared by the Company in the years ended December 31, 2014
and 2013 are as follows:
Dividends declared (including dividends on treasury shares
of $16,842 and $8,080 respectively)
2014
2013
591,099
283,200
Accumulated other comprehensive loss – The following table represents
components of accumulated other comprehensive loss balance, net of taxes, as of
December 31, 2014 and 2013:
Accumulated currency translation loss
Unrealized (loss)/gain on available-for-sale securities
Unrealized gain on derivatives
Unrecognized actuarial gain
Total accumulated other comprehensive loss
Less: amounts of accumulated other comprehensive loss attributable
to noncontrolling interests
Total accumulated other comprehensive loss attributable
to Sistema JSFC
$
$
$
2014
2013
(5,402,999) $
(1,516,611)
(14,499)
119,109
9,553
37,600
46,210
9,381
(5,288,836)
$
(1,423,420)
1,545,434
516,702
(3,743,402)
$
(906,718)
25. SEGMENT INFORMATION
As a diversified holding company,
the Company invests in a range
of companies which meet its
investment and return criteria. The
Chief Operating Decision Maker
is the Company’s Management
Board. Information reported to the
Company’s Management Board for
the purpose of resource allocation
and the assessment of segment
performance is focused on each
individual investment holding. The
Group’s reportable segments are
MTS, SSTL, MTS Bank, RTI and
Corporate. The Other category
includes other operating segments
including Targin, BPGC, LesInvest,
Sistema Mass-media, Detsky mir,
Intourist, Medsi, Binnopharm,
Sitronics-N, Leader-Invest and
SG-trans, none of which meets
the quantitative thresholds for
determining reportable segments.
See Note 1 for a description of the
activities of each operating segment
of the Group. The accounting policies
of the reportable segments are the
same as the Group’s accounting
policies described in appendix A1.to
the notes to the financial statements.
Segment profit represents the
operating income/(loss).
160
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
-
-
-
-
-
-
Financial information by reportable segment is presented below:
MTS
RTI
MTS
Bank
SSTL
Corporate
Total
reportable
segments
Other
Total
For the year ended
December 31, 2014
Net sales to external
customers(a)
Equity in results
of affiliates(b)
Чистый процентный
доход / (расход) (в)
Depreciation
and amortization
Intersegment sales
28,521
316,820
17,263
10,837,126
1,528,287
698,182
220,717
(37,940)
-
-
(377,575)
49,967
25,391
13,334,279
3,250,678
16,584,957
387,995
37,242
425,237
-
-
(37,940)
(24,477)
(62,417)
(377,575)
(377,575)
1,934,339
85,796
17,735
60,374
14,274
2,112,518
179,600
2,292,118
Operating income/(loss) 2,765,484
172,070
(396,963)
(431,828)
(546,842)
1,561,921
286,744
1,848,665
Interest income
120,926
42,160
Interest expense
435,117
143,175
-
-
7,477
90,277
Income tax expense/
(benefit)
533,856
33,831
(61,779)
Investments in affiliate
152,262
36
-
-
-
Segment assets
11,014,182 2,125,279 3,882,609
485,465
Indebtedness(d)
5,191,423
841,307
-
568,170
106,825
135,031
(127,264)
100,448
1,949,713
1,223,056
277,388
803,600
378,644
252,746
50,609
73,809
74,773
95,815
327,997
877,409
453,417
348,561
19,457,248
3,201,538
22,658,786
7,823,956
438,807
8,262,763
Capital expenditures (e)
2,314,951
105,052
27,592
43,296
28,099
2,518,990
383,592
2,902,582
MTS
RTI
MTS
Bank
SSTL
Corporate
Total
reportable
segments
Other
Total
For the year ended
December 31, 2013
Net sales to external
customers(a)
12,488,877
1,685,546
878,832
209,432
Intersegment sales
21,884
509,963
24,301
Equity in results
of affiliates(b)
Net interest revenue/
(expense) (c)
Depreciation and
amortization
77,615
(1,696)
-
-
-
2,244,014
96,374
40,678
19,152
46,237
36,742
15,308,924
3,193,061
18,501,985
592,890
18,115
611,005
-
-
75,919
(40,165)
35,754
40,678
-
40,678
63,666
14,378
2,437,584
195,964
2,633,548
Operating income/(loss) 3,662,740 (776,878)
18,954 (210,185)
Interest income
87,704
45,045
Interest expense
486,636
138,020
-
-
9,522
121,513
Income tax expense/
(benefit)
720,893
(80,025)
(2,645)
Investments in affiliates
153,168
-
-
-
-
Segment assets
15,218,084 2,530,299 6,919,610
847,342
Indebtedness(d)
6,682,047 1,228,635
-
596,641
834,945
116,328
159,215
140,376
45,210
3,572,805
1,574,531
3,529,576
84,721
3,614,297
258,599
45,791
304,390
905,384
129,802
1,035,186
778,599
63,508
198,378
166,886
842,107
365,264
29,088,140
3,250,757
32,338,897
10,081,854
437,054
10,518,908
Capital expenditures (e)
2,561,310
95,009
21,379
45,765
73,224
2,796,687
197,706
2,994,393
(a) Interest income and expense of MTS Bank are presented as revenues from financial services and cost of financial services, correspondingly, in the Group’s consolidated
financial statements.
(b) Equity in results of affiliates of MTS segment for the year,2014 includes $135 million of its share of the earnings of MTS Bank and Stream, which is further eliminated on
consolidation (2013: $5 million).
(c) Represents the net interest result of the Group’s banking activities. In reviewing the performance of MTS Bank, the chief operating decision maker reviews the net
interest result, rather than the gross interest amounts.
(d) Represents the sum of short-term and long-term debt.
(e) Represents purchases of property, plant and equipment and intangible assets.
161
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
The following table summarizes dividends to Corporate,
declared in 2014 and 2013:
Bashneft
MTS
Other
$
2014
2013
818,456 $
744,460
89,903
1,162,041
635,369
49,084
The reconciliation of segment operating income to the consolidated income from
continuing operations before income tax expense and a reconciliation
of segment assets to the consolidated assets are as follows:
Operating income – reportable segments
Operating income – other
Intersegment eliminations
Operating income
Interest income
Change in fair value of derivative financial instruments
Interest expense
Foreign currency transaction loss
Income from continuing operations before income tax
Total assets – reportable segments
Total assets – Bashneft
Total assets – other
Intersegment eliminations
Total assets
$
$
$
2014
2013
1,561,921 $
286,744
1,848,665
(110,216)
3,529,576
84,721
3,614,297
(47,725)
1,738,449
$
3,566,572
212,774
-
(811,346)
(548,596)
591,281
182,447
30,199
(960,136)
(298,264)
2,520,818
$
$
2014
2013
19,457,248 $
-
3,201,538
22,658,786
29,088,140
12,674,507
3,250,757
45,013,404
(1,988,309)
(1,764,410)
20,670,477
$
43,248,994
For the years ended December 31, 2014 and 2013, the Group did not have
revenues from transactions with a single external customer amounting to 10%
or more of the Group’s consolidated revenues. For the years ended December
31, 2014 and 2013 the Group’s revenues outside of the RF were as follows:
Ukraine
India
Armenia
Central and Eastern Europe
Other
Total
162
$
$
2014
2013
818,456 $
1,162,041
272,863
186,120
107,372
154,753
253,196
156,883
40,997
210,661
1,534,816
$
1,944,147
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH
As of December 31, 2014 and 2013, the Group’s long-lived assets located outside
of the RF were as follows:
Ukraine
India
Armenia
Central and Eastern Europe
Other
Total
$
$
2014
2013
332,987 $
320,604
288,308
68,369
87,870
755,373
710,225
354,840
34,953
111,887
1,098,138
$
1,967,278
26. RELATED PARTY TRANSACTIONS
The Group sells goods and provides services to and purchases goods and
services from its related parties on normal commercial terms. During the years
ended December 31, 2014 and 2013, the Group entered into transactions with
related parties as follows:
Sales
Revenue from banking activities
Cost related to banking activities
Cost of sales
Selling, general and administrative expenses
2014
2013
$
17,220 $
34
(48,385)
(45,595)
(515)
As of December 31, 2014 and 2013, the related party balances were as follows:
2014
2013
Assets:
Short-term investments
Accounts receivable, net
Other current assets
Long-term investments
Liabilities:
Accounts payable
Liabilities from banking activities
Accrued expenses and other current liabilities
Long-term debt
$
$
5,212 $
5,469
27,083
36,174
(4,134)
(541,556)
(3,411)
(37)
14,921
51
(30,370)
(1,188)
(12,110)
9,840
1,362
4,907
17,402
(890)
(526,056)
(646)
(64)
163
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
expense of $79.4 million and $54.2
million in the consolidated statement
of operations and comprehensive
income for the years ended December
31, 2014 and 2013, respectively. The
fair value of awards granted was
measured based on the fair value of
the Company’s ordinary shares.
27. SHARE-BASED COMPENSATION
The Company and several of its
subsidiaries operate share-based
compensation plans in order to
compensate their employees. This
is done through either “equity”
plans, in which employees may
exercise their options for shares, or
“phantom” plans, which generally
allow employees to receive cash
compensation which varies
depending on the share price that
the options are linked to.
All such plans, including those of
MTS, are immaterial to the Group
and consequently have not been
disclosed here. A discussion has
been included below of the plans
operated at the Company level.
Sistema JSFC share-based long-
term motivation program – In 2014
and 2013 the Company’s Board
of Directors established two-year
motivational programs for senior and
mid-level management. Participants
of the programs upon fulfillment of
certain performance conditions and
subject to continuing employment
with the Group will be granted
ordinary shares in the Company. As
a result, the Group recognized an
28. ASSET RETIREMENT OBLIGATIONS
As of December 31, 2014 and 2013, the estimated present value of the Group’s
asset retirement obligations and change in liabilities were as follows:
Balance, beginning of the year
Liabilities incurred in the current period
Property dispositions
Accretion expense
Revisions in estimated cash flows
Currency translation adjustment
Balance, end of the year
Current portion
Long-term portion
Balance, end of the year
$
$
$
2014
2013
83,809 $
1,900
(1,067)
6,559
677
(38,163)
53,715 $
-
53,715
53,715 $
90,986
9,257
-
2,963
(13,840)
(5,557)
83,809
-
83,809
83,809
The Group’s asset retirement obligations relate primarily to the cost of removing
telecommunication equipment from sites. Revisions in estimated cash flows are
attributable to changes in economic assumptions, such as inflation rates.
The Group recorded the long-term portion of asset retirement obligations as
a separate line item in the consolidated statements of financial position, the
current portion – as a component of accrued expenses and other
current liabilities.
164
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH 29. REDEEMABLE NONCONTROLLING INTERESTS
Redeemable noncontrolling interests as of December 31, 2014 and 2013
consisted of the following:
SSTL
K-Telecom, MTS subsidiary in Armenia
RTI (Note 5)
Total
$
$
2014
2013
720,000 $
56,734
16,032
792,766
$
688,000
89,583
27,547
805,130
The Group is a party to a put option
agreement to acquire the RF’s 17.14%
interest in SSTL during one year
beginning March 2016 at the higher of
$777 million or its market value at that
date determined by an independent
appraiser. The Group accounted
for the redeemable noncontrolling
interests in SSTL at the redemption
value and presented this as temporary
equity in its consolidated statements of
financial position.
30. COMMITMENTS AND CONTINGENCIES
Operating leases – The Group leases
land, buildings and office space mainly
from municipal organizations through
contracts which expire in various years
through 2068.
Rental expense under operating
leases amounting to $641.0 million
and $678.5 million for the years
ended December 31, 2014 and 2013,
respectively, is included in selling,
general and administrative expenses.
Rental expense under operating leases
amounting to $204.6 million and $238.1
million for the years ended December
31, 2014 and 2013 respectively, is
included in cost of sales.
Future minimum rental payments
under operating leases in effect as of
December 31, 2014, are as follows:
Year ended December 31
2015
2016
2017
2018
2019
Thereafter
Total
$
$
282,393
204,009
202,489
204,662
199,758
303,487
1,396,798
165
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT
Capital commitments – As of
December 31, 2014, the Group had
executed purchase agreements
of approximately $840.0 million
to acquire property, plant and
equipment and intangible assets.
Guarantees – As of December 31,
2014, MTS Bank and its subsidiaries
guaranteed loans for several
companies, including related parties,
which totaled $217.2 million. These
guarantees would require payment by
the Group only in the event of default
on payment by the respective debtor.
As of December 31, 2014, no event
of default has occurred under any of
the guarantees issued by the Group.
Commitments on loans and unused
credit lines – As of December 31,
2014, MTS Bank and its subsidiaries
had $126.9 million of commitments
on loans and unused credit lines
available to its customers.
Taxation – Russia currently has a
number of laws related to various
taxes imposed by both federal and
regional governmental authorities.
Applicable taxes include VAT,
corporate income tax, a number of
turnover-based taxes, and payroll
(social) taxes. Laws related to these
taxes have not been in force for
significant periods, in contrast to
more developed market economies;
therefore, the government’s
implementation of these regulations
is often inconsistent or nonexistent.
Accordingly, few precedents with
regard to tax rulings have been
established. Tax declarations,
together with other legal compliance
areas (for example, customs and
currency control matters), are
subject to review and investigation by
a number of authorities, which are
enabled by law to impose extremely
severe fines, penalties and interest
charges. These facts create tax risks
in Russia that are more significant
than those typically found in countries
with more developed tax systems.
Generally, according to Russian tax
legislation, tax declarations remain
open and subject to inspection for
a period of three years following
the tax year. As of December 31,
166
2014, tax declarations of certain
companies of the Group in Russia for
the preceding three fiscal years were
open for further review.
The Group purchases supplemental
software from foreign suppliers of
telecommunications equipment in
the ordinary course of business.
The Group’s management believes
that customs duties are calculated
in compliance with applicable
legislation. However there is a risk
that the customs authorities may
take a different view and impose
additional customs duties.
Pricing of revenue and expenses
between each of the Group’s
subsidiaries and various discounts
and bonuses to the Group’s
subscribers in the course of
performing its marketing activities
may be subject to transfer pricing
rules. The Group’s management
believes that taxes payable are
calculated in compliance with the
applicable tax regulations relating
to transfer pricing. However there
is a risk that the tax authorities
may take a different view and
impose additional tax liabilities. As
of December 31, 2014 and 2013,
no provision was recorded in the
consolidated financial statements in
respect of such additional claims.
In November 2014, the Russian
legislation was amended to introduce
the concept of “controlled foreign
companies” and the new tax regime
for such entities. It is expected that
the adoption of the new rules will
generally lead to an increase in the
administrative and, in certain cases,
tax burden for the Russian entities
that have subsidiary structures
incorporated outside the Russian
Federation. The management does
not believe the law can materially
impact the Group’s tax obligations as
of December 31, 2014.
Management believes that it
has adequately provided for tax
and customs liabilities in the
accompanying consolidated financial
statements. As of December 31,
2014 and 2013, the provision accrued
amounted to $53.3 million and $69.6
million, respectively. In addition, the
accrual for unrecognized income
tax benefits, potential penalties and
interest recorded in accordance with
the authoritative guidance on income
taxes totaled $6.1 million and $18.8
million as of December 31, 2014 and
2013, respectively. However, the risk
remains that the relevant authorities
could take differing positions with
regard to interpretive issues and the
effect could be significant.
With regard to matters where
practice concerning payment of taxes
is unclear, management estimated
possible tax exposure to be $21
million and $nil as of December 31,
2014 and 2013, respectively.
Operating environment – Starting
from March 2014, sanctions have
been imposed in several tranches
by the U.S. and the E.U. on certain
Russian officials, businessmen and
companies. Following the decline
in oil prices in 2014 and early 2015,
Russia, which is the main market
of the Group’s operations, has
experienced significant economic
instability, characterized by the
substantial depreciation of the
Russian rouble, growth of interest
rates caused by the decision of
the Central Bank of the Russian
Federation to significantly increase
its key interest rate, a forecasted
decline in gross domestic product
and a significant decline in the value
of shares traded on the Russian
stock exchanges. International credit
agencies downgraded Russia’s long-
term foreign currency sovereign
rating with a negative outlook.
Neither the Company, nor any of
its subsidiaries are subject to the
current sanctions, and the Group
does not appear on the U.S. or E.U.
lists of sanctioned parties. However,
there is significant uncertainty
regarding the extent or timing of any
potential further economic or trade
sanctions. Any continuing economic
and political instability could have
a negative impact on the Group’s
operating results.
Although the Group’s reporting
currency is the U.S. dollar, it
generates most of its revenues in
Russian roubles, which is also the
functional currency of its principal
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH operating subsidiaries. Therefore,
the Group’s reported results of
operations are significantly impacted
by the fluctuations in the exchange
rate between the U.S. dollar and the
Russian rouble, which depreciated
against the U.S. dollar by 42% in
2014, and was on average 17%
lower than the average value of the
Russian rouble compared to the
U.S. dollar during 2013. Also, given
that most of the Group’s revenues
are generated in Russian roubles,
the Group faces exchange rate risk
relating to payments that the Group
must make in currencies other than
the Russian rouble.
During 2014, a deterioration in the
political environment in Ukraine,
the second largest market of
the Group’s operations, has led
to general instability, economic
deterioration and armed conflict
in the eastern portion of Ukraine.
The deterioration has further
exacerbated the country’s already
weak macroeconomic trends,
which have led to reduced credit
ratings, significant depreciation of
its national currency and increased
inflation. In 2014, the Ukrainian
Parliament adopted a law allowing
for the imposition of sanctions
against countries, persons and
companies deemed by the Ukrainian
government to threaten Ukrainian
national interests, national security,
sovereignty or the territorial integrity
of Ukraine. The National Bank of
Ukraine passed a decree prohibiting
Ukrainian companies from paying
dividends to foreign investors. These
circumstances, combined with
continued political and economic
instability in Ukraine, could result in
a negative impact on our business,
including the Group’s financial
position and results of operations.
For example, such risks apply to the
Group’s funds deposited in Ukrainian
banks, the liquidity of which is
negatively affected by the economic
downturn. As of December 31, 2014,
the Group held $376.9 million in
current accounts and deposits in
Ukrainian banks, including $90.2
million in Delta Bank (Note15) (fully
provided as of December 31, 2014)
and $25.1 million in Kyivska Rus
Bank (Note 31).
LTE license – In July 2012, the
Federal Service for Supervision
in the Area of Communications,
Information Technologies and Mass
Media allocated MTS the necessary
license and frequencies to provide
LTE telecommunication services
in Russia. Under the terms and
conditions of the LTE license, the
Group is obligated to fully deploy
LTE networks within seven years,
commencing from January 1, 2013
and deliver LTE services in each
population center with over 50,000
inhabitants in Russia by 2019. Also,
the Group is obligated to invest
at least 15 billion rubles ($266.6
million using December 31, 2014
exchange rate) annually toward the
LTE roll-out until the network is fully
deployed. Management believes that
as of December 31, 2014 the Group is
in compliance with these conditions.
Bitel – In June 2013, an agreement
was reached between Altimo, Altimo
Holdings, MTS and its subsidiary
MTS Finance, Nomihold and other
associated parties to settle all
disputes that have arisen from the
Group’s investment in Bitel made
in 2005. The agreement covered
matters involving a number of
parties and legal proceedings,
including those in the Isle of Man,
London, Luxembourg and other
jurisdictions. Pursuant to the
agreement, all proceedings between
the parties and their associated
parties were discontinued and
waived, and MTS received a total
payment of $150 million. All parties
made the necessary submissions to
the respective courts and tribunals
to document the settlement,
which, among other actions, fully
discharged any and all outstanding
obligations under the award
previously rendered by the London
Court of International Arbitration
(LCIA) against MTS Finance in 2011,
as well as settled the tripartite
LCIA arbitration between MTS, MTS
Finance and Nomihold and a tort
action filed by Nomihold against MTS
in the English Courts.
Upon concluding the settlement
agreement, the Group released a
provision of $221 million, comprising
$170 million set by the LCIA plus
$51 million in damages, interest
and other costs, that had been
previously provided for in relation
to the dispute with Nomihold.
The Group also recognized a gain
of $150 million with respect to
the settlement payment in the
consolidated statement of operations
and comprehensive income for the
year ended December 31, 2013.
Restriction on transactions with the
shares of BPGC and Ufaorgsintez –
In 2014, in the course of a litigation,
which the Group is not a party to,
the court imposed restrictions on
transactions with the shares of
BPGC and Ufaorgsintez, owned by
the Group. The restrictions do not
limit the Group’s voting rights, rights
to receive dividends or any other
shareholders rights.
Investigations into former operations
in Uzbekistan – In March 2014,
the Group received requests for
the provision of information from
the United States Securities and
Exchange Commission and the
United States Department of
Justice relating to an investigation
of the Group’s former subsidiary
in Uzbekistan. The Group cannot
predict the outcome of the
investigations, including any fines
or penalties that may be imposed,
and such fines or penalties could be
significant.
Other – In the ordinary course of
business, the Group is a party to
various legal proceedings, and subject
to claims, certain of which relate to
the developing markets and evolving
fiscal and regulatory environments
in which the Group operates. In the
opinion of management, the Group’s
liability, if any, in all pending litigation,
other legal proceedings or other
matters will not have a material effect
upon the financial condition, results
of operations or liquidity of the Group.
Management estimates the range of
reasonably possible losses, if any, in
all pending litigations or other legal
proceedings being up to $28.0 million.
167
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT 31. SUBSEQUENT EVENTS
For the purpose of the accompanying
consolidated financial statements,
subsequent events have been
evaluated through April 2, 2015.
terms of the license MTS-Ukraine
is required to launch provision of 3G
services in all of the regional centers
across Ukraine within 18 months
upon allocation of the license.
Acquisition of 3G license in
Ukraine – In February 2015, MTS-
Ukraine won a tender to acquire a
nationwide license for the provision
of 3G telecommunications services.
The license with the cost of UAH
2,715 million ($156.9 million at the
acquisition date) has been granted
for 15 years. In accordance with the
Bond placement – In February
2015, the Company completed
the placement of Series BO-01
unconvertible interest-bearing RUB-
denominated bonds for the total
amount of RUB 10 billion ($160.3
million at the date of the placement)
at the coupon rate of 17% per annum.
Insolvency of Kyivska Rus Bank –
In March 2015, the National Bank
of Ukraine adopted a resolution
declaring Kyivska Rus Bank
(Ukraine) to be insolvent. As of
December 31, 2014, the Group held
$25.1 million in deposits in the
bank. Management determined that
insolvency of the bank did not provide
evidence related to conditions
existing as of December 31, 2014,
and therefore considered to be a
nonrecognized subsequent event.
A1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation –
The consolidated financial statements
include the accounts of the Company,
as well as entities where the Company
has operating and financial control,
most often through the direct or indirect
ownership of a majority voting interest.
Those ventures where the Group exer-
cises significant influence but does not
have operating and financial control are
accounted for using the equity meth-
od. Investments in which the Group
does not have the ability to exercise
significant influence over operating
and financial policies are accounted for
under the cost method and included in
long-term investments in the consoli-
dated statements of financial position.
The consolidated financial statements
also include accounts of variable inter-
est entities (“VIEs”) in which the Group
is deemed to be the primary beneficiary.
An entity is generally a VIE if it meets
any of the following criteria: (i) the entity
has insufficient equity to finance its
activities without additional subordinat-
ed financial support from other parties,
(ii) the equity investors cannot make
significant decisions about the entity’s
operations or (iii) the voting rights of
some investors are not proportion-
al to their obligations to absorb the
expected losses of the entity or receive
the expected returns of the entity and
substantially all of the entity’s activities
involve or are conducted on behalf of
the investor with disproportionately
few voting rights.
All significant intercompany transac-
tions, balances and unrealized gains
and losses on transactions have been
eliminated.
Use of estimates – The preparation
of consolidated financial statements
in conformity with U.S. GAAP requires
management to make estimates and
assumptions that affect the reported
amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts
of revenues and expenses of the
reporting period. Actual results could
differ from those estimates.
Significant estimates for the Group in-
clude the allowances for doubtful ac-
counts, customer loans and deferred
tax assets, the valuation of goodwill
and other long-lived assets, asset
retirement obligations, unrecognized
income tax benefits, redeemable
noncontrolling interests, derivative
instruments, share-based compen-
sation, assets acquired and liabilities
assumed in business combinations,
the recoverability of investments, and
the estimates of oil and gas reserves.
Concentration of business risk –
The Group’s principal business activ-
ities are in the RF, Ukraine and India.
Laws and regulations affecting busi-
nesses operating in these countries
are subject to rapid changes, which
could impact the Group’s assets and
operations.
Foreign currency – Management has
determined that the functional cur-
rencies of most of the Group’s operat-
ing subsidiaries are the currencies of
the countries of
their domicile.
In preparing the financial statements
of the entities within the Group,
transactions in currencies other than
the entities’ functional currency are
recognized at the rates of exchange
prevailing on the dates of the trans-
actions. At each balance sheet date,
monetary assets and liabilities that
are denominated in foreign curren-
cies are retranslated at the rates
prevailing at that date. Non-monetary
items carried at fair value that are
denominated in foreign currencies
are translated at the rates prevailing
at the date when the fair value was
determined. Non-monetary items that
are measured in terms of historical
cost in a foreign currency are not
restated.
The Group has selected USD as its
reporting currency. The Group’s as-
sets and liabilities are translated into
USD at exchange rates prevailing on
the reporting period end date. Rev-
enues, expenses, gains and losses
are translated into USD at average
exchange rates prevailing during the
reporting period. Equity is translated
at the applicable historical rates. The
168
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH resulting translation gain or loss is
recorded as a separate component of
other comprehensive income.
On the disposal of a subsidiary
whose financial statements are
prepared in a currency other than the
reporting currency of the Group, all
of the accumulated currency transla-
tion adjustments in respect
of that operation attributable
to the Group are reclassified to
profit or loss.
As of December 31, 2014, the official
exchange rate of the Russian Ruble,
the functional currency of most of the
Group’s subsidiaries, determined by
the Central Bank of the RF was RUB
56.26 for 1 USD (RUB 32.73 for 1 USD
as of December 31, 2013).
Revenue recognition – Generally,
revenues are recognized when all of
the following conditions have been
met: (i) there is persuasive evidence
of an arrangement; (ii) delivery has
occurred; (iii) the fee is fixed and
determinable; and (iv) collectability of
the fee is reasonably assured. Rev-
enue amounts are presented net of
value-added taxes.
Revenues under arrangements
specific to the respective reportable
segments of the Group are recognized
as follows:
of new subscribers, installation and
activation of wireless, wireline and
data transmission services (“connec-
tion fees”) are deferred and recog-
nized over the estimated average
subscriber life, as follows:
Mobile subscribers
Residential wireline
voice phone subscribers
Residential subscribers
of broadband
internet service
Other fixed
line subscribers
1 -12.5 yearsт
15 years
1 year
3-5 yearsт
MTS calculates an average life of
mobile subscribers for each region
in which it operates and amortizes
connection fees based on the aver-
age life specific to that region.
Incentives provided to customers
are usually offered on signing a new
contract or as part of a promotional
offering. Incentives representing the
reduction of the selling price of the
service (free minutes and discounts)
are recorded in the period to which
they relate, when the respective reve-
nue is recognized, as a reduction to
both accounts receivable and reve-
nue. However, if the sales incentive is
a free product or service delivered at
the time of sale, the cost of the free
product or service is classified as
an expense. In particular, the Group
sells handsets at prices below cost to
contract subscribers. Such subsidies
are recognized in the cost of sales.
MTS
Revenues derived from wireless, local
telephone, long distance, data and
video services are recognized when
services are provided. This is based
upon either usage (minutes of traffic
processed, volume of data trans-
mitted) or period of time (monthly
subscription fees).
Content revenue is presented net of
related costs when MTS acts as an
agent of the content providers while
the gross revenue and related costs
are recorded when MTS is a primary
obligor in the arrangement.
Upfront fees received for connection
RTI
Revenues from the long-term con-
tracts are recognised using the
percentage-of-completion method of
accounting, measured by the percent
of contract costs incurred to-date
to estimated total contract costs.
The completed-contract method is
used for a single contract or a group
of contracts for which reasonably
dependable estimates cannot be
made or for which inherent hazards
make estimates doubtful. Provisions
for estimated losses on construction
contracts in progress are made in
their entirety in the period in which
such losses are determined.
A total expected loss on a contract
is recognised immediately in
profit or loss.
Contract expenses are recognised as
incurred unless they create an asset
related to future contract activity.
The sales of software products and
system integration services are
generally multiple-element arrange-
ments, involving the provision of
related services, including custom-
ization, implementation and inte-
gration services, as well as ongoing
support and maintenance provided to
customers.
A multiple-element arrangement is
separated into more than one unit
of accounting if all of the following
criteria are met: (a) the delivered
items have value to the customer on
a standalone basis; and (b) the ar-
rangement includes a general right
of return relative to the delivered
items, delivery
or performance of the undelivered
items is considered probable
and substantially in the control
of the Group.
If evidence of the fair value of the
undelivered elements of the arrange-
ment does not exist,
all revenue from the arrangement
is deferred until such time that
evidence of fair value does exist, or
until all elements of the arrange-
ment are delivered. Fees allocated to
post-contract support are recognized
as revenue on a pro rata basis over
the support period. Fees allocated
to other services are recognized as
revenue as services are performed.
In cases where extended payment
terms exist, license and related cus-
tomization fees are recognized when
payments are due, unless a history of
collection, without providing conces-
sions, has been established under
comparable arrangements.
When sale agreements provide price
protection to the dealer, the revenue
is deferred until the dealer sells the
merchandise to a third party due
169
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT to the frequent sales price reductions
and rapid technology obsolescence.
Where certain products of this seg-
ment are sold with a product return
right, a reserve is established. In
addition other post-contract support
obligations are accrued at the time
of sale.
MTS Bank
Revenues from interest bearing as-
sets are recognized on an accrual ba-
sis using the effective interest meth-
od. The effective interest method is a
method of calculating the amortized
cost of a financial asset or a financial
liability (or group of financial assets
or financial liabilities) and of allocat-
ing the interest income or interest
expense over the relevant period.
The effective interest rate is the rate
that exactly discounts estimated fu-
ture cash receipts (including all fees
on points paid or received that form
an integral part of the effective inter-
est rate, transaction costs and other
premiums or discounts) through the
expected life of the debt instrument,
or (where appropriate) a shorter
period, to the net carrying amount on
initial recognition.
Regulated services – Regulated
tariff services provided by the Group
primarily consist of local fixed-line
telephone services and services
rendered to other operators, such as
traffic charges, connection fees and
line rental services, provided by MTS
in certain regions of RF, and energy
transmission services provided by
BPGC. Changes in the rate structure
for such services are subject to the
Federal Tariff Service approval. Rev-
enues from regulated tariff services
represented approximately 5.5% and
6.0% of the consolidated revenues for
the years ended December 31, 2014
and 2013, respectively.
Cash and cash equivalents – Cash
equivalents include demand deposits
and other highly liquid investments
with an original maturity of three
months or less. Within the cash and
cash equivalents balance are cash
170
equivalents of $777.2 million and
$1,211.8 million as of December 31,
2014 and 2013, respectively, which
primarily comprise term deposits
with banks and bank promissory
notes with original maturities of
three months or less.
Restricted cash – Restricted cash
includes cash and cash equivalents
restricted by agreements with third
parties for special purposes.
Financial instruments – The Group’s
financial instruments include cash
and cash equivalents, short-term
investments, accounts receivable,
derivative financial instruments,
financial assets and liabilities from
banking activities, accounts payable
and short-term and long-term debt.
Hedging activities – The Group uses
derivative instruments, including
swap, forward and option contracts
to manage foreign currency and
interest rate risk exposures.
The Group designates derivatives as
either fair value hedges or cash flow
hedges in case the required criteria
are met. Changes in the fair value of
derivatives that are designated and
qualify as fair value hedges are record-
ed in the consolidated statement of
operations and comprehensive income
together with any changes in the fair
value of the hedged asset or liability
that is attributed to the hedged risk.
The effective portion of changes in
the fair value of derivatives that are
designated and qualify as cash flow
hedges are recognized in accumu-
lated other comprehensive loss.
Gains and losses associated with the
related hedged items are recognized
in the consolidated statements of
operations and comprehensive in-
come, depending on their nature. The
gain or loss relating to the ineffective
portion is recognized immediately in
the consolidated statement of oper-
ations and comprehensive income.
For derivatives that do not meet the
conditions for hedge accounting,
gains and losses from changes in the
fair value are included in the consol-
idated statement of operations and
comprehensive income (Note 22).
Assets and liabilities related to
multiple derivative contracts with one
counterparty are not offset by the
Group.
The Group does not use financial in-
struments for trading or speculative
purposes.
Fair value of financial instruments –
The fair value of certain financial
instruments approximates their
carrying value due to the short-term
nature of these amounts, namely
cash and cash equivalents, short-
term investments, accounts receiva-
ble and accounts payable, short-term
debt and assets and liabilities from
banking activities which are included
in current assets and liabilities.
Fair value measurements – The
Group reviews its fair value hierarchy
classifications quarterly. Changes
in significant observable valuation
inputs identified during these reviews
may trigger reclassification of fair
value hierarchy levels of financial as-
sets and liabilities. During the years
ended December 31, 2014 and 2013
no reclassifications occurred.
A three-level valuation hierarchy has
been established under U.S. GAAP
for disclosure of fair value measure-
ments. The valuation hierarchy is
based on the transparency of inputs
to the valuation of an asset or liability
as of the measurement date. The
three levels are defined as follows:
• Level 1 – inputs to the valuation
methodology are quoted prices
(unadjusted) for identical assets or
liabilities in active markets;
• Level 2 – inputs to the valuation
methodology include quoted pric-
es for similar assets and liabilities
in active markets, and inputs that
are observable for the asset or
liability, either directly or indirectly,
for substantially the full term of
the financial instrument;
• Level 3 – one or more inputs to the
valuation methodology are unob-
servable and significant to the fair
value measurement.
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH Accounts receivable – Accounts re-
ceivable are stated at their net realiz-
able value after deducting a provision
for doubtful accounts. Such provision
reflects either specific cases of de-
linquencies or defaults or estimates
based on evidence of collectability.
Assets from banking activities – As-
sets from banking activities comprise
assets (cash and cash equivalents,
loans, investments and other) involved
in operations of MTS Bank. Impair-
ment losses on loans to customers
and banks are included in the allow-
ance for loan losses. The allowance for
loan losses represents management’s
best estimate of probable credit losses
inherent in the lending portfolios as
of the reporting period end. Loans
that are not individually reviewed are
evaluated as a group using reserve
factor percentages based on historic
loss experience and qualitative factors.
Loans deemed to be uncollectible are
charged against the allowance for loan
losses. Correspondingly, recoveries of
amounts previously charged as uncol-
lectible are credited to the allowance
for loan losses. A provision for loan
losses is charged to the consolidated
statement of operations and compre-
hensive income based on manage-
ment’s evaluation of the estimated
losses, after giving consideration to
the net chargeoffs which have been
incurred in the Group’s loan portfolio.
The Group performs detailed reviews
of its lending portfolios on a periodic
and systematic basis to identify in-
herent risks and to assess the overall
collectability of those portfolios. The
allowance on certain homogene-
ous loan portfolios, which generally
consist of consumer and mortgage
loans, is based on an evaluation of
aggregated portfolios of homogene-
ous loans, generally by loan type.
Loss forecast models are utilized
for portfolios of homogeneous loans
which consider a variety of factors
including, but not limited to, historical
loss experience, anticipated defaults or
foreclosures based on portfolio trends,
delinquencies and credit scores, and
estimated loss factors by loan type.
The remaining loan portfolios are re-
viewed on an individual loan basis.
Loans subject to individual reviews
are analyzed and segregated by risk
according to the Group’s internal risk
rating scale. These risk classifications,
in conjunction with an analysis of histor-
ical loss experience, current economic
conditions and performance trends
within specific portfolio segments, and
any other pertinent information result
in the estimation allowances for loan
losses. An allowance for loan losses
is established for individually impaired
loans. A loan is considered impaired
when, based on current information
and events, it is probable that the Group
will be unable to collect all amounts
due, including principal and interest,
according to the contractual terms of
the agreement. Individually impaired
loans are measured based on the
present value of payments expected to
be received, or for loans that are solely
dependent on the collateral for repay-
ment, the estimated fair value of the
collateral. If the recorded investment in
impaired loans exceeds the measure
of estimated fair value, an allowance
is established as a component of the
allowance for loan losses.
Inventories and spare parts – Invento-
ries comprise raw materials, work-in-
progress, finished goods and goods for
resale. Inventory and spare parts are
stated at the lower of cost or market
value. Inventory is accounted for using
either first-in, first-out or the weight-
ed-average cost method.
Depreciation for property, plant and equipment is computed under
the straight-line method utilizing estimated useful lives of the assets as follows:
The cost of raw materials includes
the cost of purchase, customs duties,
transportation and handling costs.
Work-in-progress and finished goods
are stated at production cost which
includes direct production expenses
and manufacturing overheads. Costs
and estimated earnings in excess of
billings on uncompleted contracts
include the accumulated costs of
projects contracted with third parties,
net of related progress billings. The
Group periodically assesses its inven-
tories and spare parts for obsolete or
slow-moving stock.
Value-added taxes – Value-added
taxes (“VAT”) related to sales are
payable to the tax authorities on
an accrual basis based on invoices
issued to the customer. VAT incurred
for purchases may be reclaimed,
subject to certain restrictions,
against VAT related to sales. VAT
related to purchase transactions that
will be reclaimed against future sales
are recorded as VAT receivable in the
accompanying financial statements.
Property, plant and equipment –
Property, plant and equipment are
stated at historical cost. Cost includes
major expenditures for improvements
and replacements, which extend use-
ful lives of the assets or increase their
revenue generating capacity. Repairs
and maintenance, including preventa-
tive maintenance, are charged to the
consolidated statement of opera-
tions and comprehensive income as
incurred.
The cost of major overhauls and
replacements, which extend useful
lives of the assets or increase their
revenue generating capacity, are cap-
italized to the cost of the assets.
Buildings
Leasehold improvements
Switches and transmission devices
Network and base station equipment
Power and utilities
Other plant, machinery and equipment
Lesser of the estimated useful life or the term of the lease
20-50 years
7-31 years
4-12 years
3-47 years
3-25 years
171
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT Whilst there are certain assets within
the Group that have useful lives longer
than those presented above, these
assets are quantitatively insignificant
in comparison to the overall Group
balance for each category. As such,
the Group has taken the approach of
reporting the useful economic lives
which most faithfully represent the
majority of assets, in order to provide
a more reasonable range that more
closely relates to the Group norm. As-
sets held under capital leases are ini-
tially recognized as assets of the Group
at their fair value at the inception of a
lease or, if lower, at the present value
of minimum lease payments. The
discount rate used in determining the
present value of the minimum lease
payments is the Group’s incremental
borrowing rate, unless (1) it is prac-
ticable to determine the implicit rate
computed by the lessor; and (2) the
implicit rate is less than the Group’s
incremental borrowing rate. If both of
those conditions are met, the interest
rate implicit in the lease is used.
Items of property, plant and equip-
ment that are retired or otherwise
disposed of are eliminated from the
consolidated statement of financial
position along with the corresponding
accumulated depreciation. Any gain
or loss resulting from such retirement
or disposal is included in the determi-
nation of net income.
Construction in progress and equip-
ment for installation are not depre-
ciated until an asset is placed into
service.
Asset retirement obligations –
The Group calculates asset retirement
obligations and an associated asset
retirement cost when the Group has a
legal or constructive obligation in con-
nection with the retirement of tangible
long-lived assets.
Business combinations – Acquisitions
of businesses from third parties are
accounted for using the acquisition
method, with assets and liabilities of
an acquired entities being measured
at their fair values as at the date of
acquisition. Noncontrolling interests
are measured at fair value.
172
Goodwill – Goodwill is determined as
the excess of the consideration trans-
ferred plus the fair value of any noncon-
trolling interests in the acquiree at the
acquisition date over the fair values of
the identifiable net assets acquired. The
excess of the fair values of the identifia-
ble net assets acquired over the cost of
the business combination plus the fair
value of any noncontrolling interests in
the acquiree at the acquisition date is
credited to income (“negative goodwill”).
Goodwill is not amortized to oper-
ations, but instead is reviewed for
impairment at least annually.
At first step, the Group asseses qual-
itative factors to determine whether
it is more likely than not that goodwill
is impaired as a basis for determining
whether it is necessary to perform the
quantitative impairment test. Goodwill
is than reviewed for impairment by
comparing the carrying value of each
reporting unit’s net assets (including
allocated goodwill) to the fair value
of the reporting unit. If the reporting
unit’s carrying amount is greater than
its fair value, the next step is per-
formed whereby the implied fair value
that relates to the reporting unit’s
goodwill is compared to the carrying
value of the reporting unit’s goodwill.
The Group recognizes a goodwill
impairment charge for the amount by
which the carrying value of goodwill
exceeds the fair value.
Other intangible assets – Other
intangible assets include billing and
telecommunication software and oth-
er software, operating licenses, ac-
quired customer bases and customer
relationships, radio frequencies,
trademarks and telephone numbering
capacity.
All finite-life intangible assets are
amortized using the straight-line
method utilizing estimated useful
lives of the assets as follows:
Billing
and telecommunication
softwareе
Operating licenses
Acquired customer base
Acquired radio frequencies
Software and other
1-20 years
3-20 years
1-8 years
2-15 years
1-10 years
Trademarks and numbering capacity
with indefinite contractual life are not
amortized, but are reviewed, at least
annually, for impairment.
If the fair value of the intangible asset
is less than its carrying value, an
impairment loss is recognized in an
amount equal to the difference. The
Group also evaluates the remaining
useful life of its intangible assets that
are not subject to amortization on an
annual basis to determine whether
events and circumstances continue
to support an indefinite useful life. If
an intangible asset that is not being
amortized is subsequently determined
to have a finite useful life, that asset is
tested for impairment.
Investments – The Group’s share in
the net assets and net income of cer-
tain entities, where the Group has the
ability to exercise significant influence
over their operating and financial
policies (“affiliates”) is included in the
consolidated financial statements
using the equity method of accounting.
The Group’s share in the net income
of affiliates is included within operat-
ing income, given that the Group has
day-to-day involvement in the business
activities and they are considered to
be integral to the Group’s business.
Other-than-temporary decreases in
the value of investments in affiliates
are recognized in net income.
All other equity investments, which
consist of investments for which the
Group does not have the ability to
exercise significant influence, are
accounted for under the cost method
or at fair value. Investments in private
companies are carried at cost, less
provisions for other-than-temporary
impairment in value. For public com-
panies that have readily determinable
fair values, the Group classifies its eq-
uity investments as available-for-sale
or trading. For available-for-sale
securities, the Group records these
investments at their fair values with
unrealized holding gains and losses
included in the consolidated state-
ment of operations and comprehen-
sive income/(loss), net of any related
tax effect. For trading securities,
the Group records the investment at
fair value. Unrealized holding gains
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH and losses for trading securities are
included in earnings.
The Group purchases promissory notes
for investing purposes. These notes are
carried at cost and the discount against
the nominal value is accrued over the
period to maturity. A provision is made,
based on management assessment,
for notes that are considered uncol-
lectible. The notes are classified as
held-to-maturity.
Investments which are expected to be
realized within twelve months after the
statement of financial position date are
classified as short-term investments.
Other investments are classified as
long-term investments.
Debt issuance costs – Debt issuance
costs are recorded as an asset and
amortized using the effective interest
method over the terms of the
related loans.
Impairment of long-lived assets other
than goodwill and indefinite lived
intangible assets – The Group periodi-
cally evaluates the recoverability of the
carrying amount of its long-lived assets.
Whenever events or changes in cir-
cumstances indicate that the carrying
amounts of those assets may not be
recoverable, the Group compares the
undiscounted net cash flows estimated
to be generated by those assets to the
carrying amount of those assets. When
these undiscounted cash flows are
less than the carrying amounts of the
assets, the Group records impairment
losses to write the asset down to fair
value, measured by the estimated dis-
counted net future cash flows expected
to be generated from the use of the
assets (Note 15).
Liabilities from banking activities –
Liabilities from banking activities
include deposits from banks and
customers, promissory notes issued
and other liabilities that arise out of
operations of MTS Bank.
Property, plant and equipment
contributions – Telecommunication
equipment and transmission devices,
installed at newly constructed prop-
erties in Moscow, have been histor-
ically transferred to OJSC Moscow
City Telephone Network (hereinafter,
“MGTS”), a fixed line operator and
subsidiary of the Group, by the Mos-
cow City Government free of charge.
These assets are capitalized by the
Group at their market value at the date
of transfer. Simultaneously, deferred
revenue is recorded in the same
amount and is amortized as a reduc-
tion of the depreciation charge in the
consolidated statement of operations
and comprehensive income over the
contributed assets’ life.
Income taxes – Income taxes of the
Group’s Russian entities have been
computed in accordance with RF laws.
The corporate income tax rate in the
RF is 20%. The income tax rate on
dividends paid within Russia is 9% or
0% subject to meeting certain condi-
tions. The foreign subsidiaries of the
Group are paying income taxes in their
respective jurisdictions.
Deferred tax assets and liabilities are
recognized for differences between
the carrying amounts of assets and
liabilities in the consolidated finan-
cial statements and the tax bases of
assets and liabilities that will result in
future taxable or deductible amounts.
The deferred tax assets and liabili-
ties are measured using the enacted
tax laws and rates applicable to the
periods in which the differences are
expected to affect taxable income.
Deferred tax assets are reduced by
a valuation allowance when, in the
opinion of management, it is more
likely than not that some portion or all
of the deferred tax assets will not be
realized. In making such determina-
tion, the Group considers all available
positive and negative evidence, includ-
ing future reversals of existing taxable
temporary differences, projected
future taxable income, tax plan-
ning strategies and recent financial
operations.
Uncertain tax positions are recognized
in the consolidated financial statements
for positions which are not considered
more likely than not of being sustained
based on the technical merits upon
examination by the tax authorities.
The measurement of the tax benefit
recognized in the consolidated financial
statements is based upon the largest
amount of tax benefit that, in man-
agement’s judgment, is greater than
50% likely of being realized based on a
cumulative probability assessment of
the possible outcomes.
The Group recognizes interest and
penalties relating to unrecognized tax
benefits within income taxes.
Treasury stock – If the Group re-
acquires the Company’s own equity
instruments, those instruments
(“treasury shares”) are recognized as
a deduction of equity at cost, being the
consideration paid to reacquire the
shares. No gain or loss is recognized
in profit or loss on the purchase, sale,
issue or cancellation of the Compa-
ny’s own equity instruments. Such
treasury shares may be acquired
and held by the Company or by other
subsidiaries of the Group.
Share-based compensation – The
Group calculates and records the fair
value of equity instruments, such
as stock options or restricted stock,
awarded to employees for services re-
ceived and recognizes such amounts
in the consolidated statement of op-
erations and comprehensive income.
The fair value of the equity instru-
ments is measured on the date they
are granted and is recognized over the
period during which the employees
are required to provide services in
exchange for the equity instruments
(Note 27). Share-based compensa-
tion expense includes the estimated
effects of forfeitures. Such estimates
are adjusted over the requisite service
period to the extent actual forfeitures
differ, or are expected to differ from
such estimates. Changes in estimat-
ed forfeitures are recognized in the
period of change and also impact the
amount of expense to be recognized
in future periods.
For share-based compensation that
include a component that will be
settled in cash, and a component that
is settled in equity, the Group accounts
for the awards separately, based on
their substance. For the component
that is settled in cash, the awards gen-
erally are accounted for as liabilities
with compensation cost recognized
over the service (vesting) period of the
award based on the fair value of the
award remeasured at each reporting
173
APPENDICESCORPORATE GOVERNANCE SYSTEMSUSTAINABLE DEVELOPMENT period. For the component that is
settled in equity, compensation cost
is measured based on the fair value
of the award on the date of grant and
the compensation cost is recognized
over the service (vesting) period of the
award.
Retirement and postretirement
benefits – Subsidiaries of the Group
contribute to local state pension
funds and social funds, on behalf of
their employees.
In Russia all social contributions paid
during the year ended December 31,
2014 are represented by payments to
governmental social funds, includ-
ing the Pension Fund of the Russian
Federation, the Social Security Fund
of the Russian Federation and the
Medical Insurance Fund of the Rus-
sian Federation.
In the Ukraine, subsidiaries of the
Group are required to contribute a
specified percentage of each employ-
ee’s payroll up to a fixed limit into a
pension fund, an unemployment fund
and a social security fund. The con-
tributions are expensed as incurred.
In addition to the above, MGTS have
defined benefit plans to provide their
employees certain benefits upon and
after retirement. The net period cost
of the Group’s defined benefit plans is
measured on an actuarial basis using
the projected unit credit method and
several actuarial assumptions. The
recognition of expense for defined
benefit plans is significantly impacted
by estimates made by management
such as discount rates used to value
certain liabilities, expected return on
assets, mortality rates, future rates of
compensation increase and other re-
lated assumptions. Gains and losses
occur when actual experience differs
from actuarial assumptions. If such
gains or losses exceed ten percent
of the greater of plan assets or plan
liabilities the Company amortizes
those gains or losses over the aver-
age remaining service period of the
employees.
Borrowing costs – Borrowing costs
are recognized as an expense in the
period in which they are incurred.
Borrowing costs for assets that
require a period of time to get them
ready for their intended use are capi-
talized and amortized over the related
assets’ estimated useful lives.
outstanding during the year, adjusted
for the dilutive effect of all potential
shares that were outstanding during
the year. Such potentially dilutive
shares are excluded when the effect
would be to increase diluted earnings
per share or reduce the diluted loss
per share.
Advertising costs – Advertising costs
are expensed as incurred. Advertising
costs for the year ended December
31, 2014 and 2013 were $266.0 million
and $328.7 million, respectively, and
were reflected as a component of
selling, general and administrative
expenses in the accompanying con-
solidated statements of operations
and comprehensive income.
Redeemable noncontrolling
interests – From time to time, in order
to optimize the structure of business
acquisitions and to defer payment of
the purchase price the Group enters
into put and call option agreements
to acquire noncontrolling interests in
the existing subsidiaries. As these put
and call option agreements are not
freestanding, the underlying shares of
such put and call option agreements
are classified as redeemable secu-
rities and are accounted for at either
redemption value or the fair value of
redeemable noncontrolling interests
as of the reporting date. The fair value
of redeemable noncontrolling inter-
ests is assessed based on discounted
future cash flows of the acquired entity
(“Level 3” significant unobservable
inputs of the hierarchy established by
U.S. GAAP guidance). Any changes
in redemption value of redeemable
noncontrolling interests are accounted
for in the Group’s retained earnings.
Redeemable noncontrolling interests
are presented as temporary equity
in the consolidated statement of finan-
cial position.
Earnings per share – Basic earn-
ings per share (“EPS”) is based on
net income attributable to the Group
divided by the weighted average
number of shares outstanding
during the year.
Distributions to shareholders –
Distributable retained earnings of the
Group are based on amounts ex-
tracted from the standalone statutory
accounts of the Company (based on
the Russian accounting standards)
and may significantly differ from
consolidated amounts calculated on
the basis of U.S. GAAP.
Reclassifications and revisions –
Certain comparative information
presented in the consolidated financial
statements for the year ended De-
cember 31, 2013 has been revised in
order to achieve comparability with the
presentation used in the consolidated
financial statements for the year ended
December 31, 2014. Such reclassifica-
tions and revisions were not significant
to the Group financial statements,
except for presentation of the loss on
deconsolidation of Bashneft (Note 2).
Recently adopted accounting pro-
nouncements – Effective January 1,
2014, the Group adopted Accounting
Standards Update (“ASU”) 2013-05,
Parent’s Accounting for the Cumu-
lative Translation Adjustment upon
Derecognition of Certain Subsidiaries
or Groups of Assets within a Foreign
Entity or of an Investment in a For-
eign Entity, ASU 2013-07, Liquidation
Basis of Accounting and ASU 2013-
11, Presentation of an Unrecognized
Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax
Loss, or a Tax Credit Carryforward
Exists. The adoption of these amend-
ments did not have a material impact
on the Group’s consolidated balance
sheet or results of operations.
Transition to International Financial
Reporting Standards –To conform
with the Russian legislation, the Group
will prepare its consolidated financial
statements for the year ended Decem-
ber 31, 2015 in accordance with Inter-
national Financial Reporting Standards
(“IFRS”).
The Group records in the statement
of financial position the funded sta-
tus of its pension plans based on the
projected benefit obligation.
Diluted EPS is based on net income
attributable to the Group adjusted in
certain circumstances, divided by the
weighted average number of shares
174
ABOUT COMPANYSTRATEGIC REVIEWOUR INVESTMENTSPRESIDENT’S SPEECH CONTACTS
Investor Relations
Department
+7 495 730-66-00
+7 495 692-22-88
Press Center
+7 495 730-71-88
Inquiry Desk
+7 495 737-01-01
Address
13, Mokhovaya Str.,
Moscow 125009
DISCLAIMER
Certain statements in this report
may contain assumptions or fore-
casts in respect to forthcoming
events within Sistema. The words
“expect”, “estimate”, “intend”, “will”,
“could” and similar expressions
identify forward-looking statements.
We wish to caution you that these
statements are only predictions and
that actual events or results may
differ materially. We do not intend to
update these statements to reflect
events and circumstances occur-
ring after the above-mentioned
date or to reflect the occurrence of
unanticipated events. Many fac-
tors could cause Sistema’s actual
results to differ materially from
those contained in our projections
or forward-looking statements,
including, among others, deteriorat-
ing economic and credit conditions,
our competitive environment, risks
associated with operating in Rus-
sia, rapid technological and market
change in our industries, as well as
many other risks specifically related
to Sistema and its operations.
JSFC Sistema
13, Mokhovaya Str., Moscow 125009
Tel. +7 (495) 692 2288
ir@sistema.ru
www.sistema.com
© JSFC Sistema 2015. All rights reserved