2015
Annual
report
02
CONTENTS
Contents
Our mission is building a first-rate Russian investment company that can ensure long-term growth
of shareholder value through efficient management of the asset portfolio and achievement of high
returns on investment.
>20
years
Years of track record
>13
sectors
Sectors of investments and expertise
RUB 709 bln
Revenue for 2015
RUB 176 bln
Adjusted OIBDA for 2015
ABOUT THE GROUP
PORTFOLIO & STRATEGIC
PRIORITIES
STRATEGIC
DEVELOPMENT
04
06
08
Sistema today
CEO’s statement
Shareholder capital
10 Mission and strategy
12
Investment portfolio
16
19
22
23
Key highlights of 2015
24 MTS
Financial performance
in 2015
Credit ratings
Dividends
28
32
36
40
Detsky Mir
Segezha Group
RTI
BPGC
42 Medsi
46
52
56
58
Agricultural businesses
Targin
SSTL
Binnopharm
60 MTS Bank
64
68
70
Real-estate assets
SG-trans
Other investments
You can find more information
on our corporate web site:
www.sistema.com
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
Contents Sistema today
03
RISKS
72
73
75
Integrated ERM
system
External risks
Risks related
to Sistema’s
operations
SOCIAL RESPONSIBILITY
102
105
106
Responsible investor
Social investments
and charity
Lift to the Future:
innovations and talents
for high-tech industries
108 Taking Care
of Veterans
109 Culture, historical
and religious heritage
110
112
Corporate volunteer
movement
Shared values
and social marketing
114 Green economy
and environmental
protection
116
Responsibility towards
employees
CORPORATE
GOVERNANCE
81
84
92
General Meeting
of Shareholders
Board of Directors
President
93 Management Board
95
97
99
President’s committees
Risk management,
internal control and
internal audit systems
Development of
corporate governance
in 2015
100
Remuneration policy
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
04
ABOUT THE GROUP
Sistema today
Sistema JSFC is Russia’s largest public investment company.
Incorporated in 1993, Sistema JSFC is today one of Russia’s
10 biggest companies by revenue and one of the world’s largest
publicly traded investment companies. Sistema’s investment
portfolio is dominated by companies operating in various
sectors including telecoms, oil & gas, power, retail and
high-tech. Sistema is the controlling shareholder
of most of its portfolio companies.
STRATEGY
Sistema’s strategic goal is to grow
shareholder value by boosting return on
investment in existing assets and reinvesting
available cash in new investment projects
to achieve diversification and growth of
its asset base.
SISTEMA’S PORTFOLIO(1)
61%
Telecom
4%
Banking
11%
High-tech
4%
Oil services
9%
Children’s retail
6%
Other
5%
Pulp & paper
61%
11%
9%
5%
4%
4%
6%
Sistema is a reliable partner
for states and foreign
businesses.
Partner: Allianz
Investment: ROSNO
Partner: Thomas Cook
Investment: Intourist
In 2002, Sistema partnered with Allianz
to develop ROSNO, an insurance holding
company. In 2007, Allianz bought Sistema’s
interest in ROSNO based on a total equity
valuation for ROSNO of US$ 1.58 bln.
In 2011, Sistema partnered with Thomas Cook
to develop Intourist, a tourism agency. The
partnership resulted in Thomas Cook acquiring
75% of shares in the joint venture.
(1) Based on Sistema’s consolidated revenues.
ANNUAL REPORT 2015 | Sistema
www.sistema.ru Sistema today CEO’s statement
05
COMPETENCE
SHARES
Share capital structure
Sistema’s approach focuses on improving
the operating efficiency of its assets through
restructuring and cooperation with industrial
partners to enhance expertise and mitigate
financial risks.
The Company’s shares are traded on the
London Stock Exchange (LSE) in the form of
global depositary receipts (GDRs) under the
ticker SSA. One GDR represents 20 ordinary
shares. Sistema’s shares are also traded on
Moscow Exchange under the ticker AFKS.
2.7%
14.1%
19%
64.2%
Vladimir Evtushenkov
Global depositary programme (LSE)
Ordinary shares (MOEX)
Other
KEY FIGURES 2015
>13
sectors of operation
>160
patented solutions
>100 mln
consumers
Industry presence
Patented innovations
Consumers of the Group’s companies production
150,000
employees
>20 years
RUB 709 bln
Responsible employer
In the high-tech market
Revenue
Partner: Deutsche Telekom
Partner: Russian government
Partner: Louis Dreyfus
Investment: MTS
Investment: SSTL
Investment: RZ Agro
Sistema struck a partnership with Deutsche
Telekom during the early years of MTS, a major
Russian telecoms operator.
In 2011, Sistema partnered with the Russian
Government’s Federal Agency for State
Property Management (Rosimushchestvo),
who bought 17% in Sistema’s Indian
subsidiary SSTL, a telecom operator.
In 2012, Sistema and the Louis Dreyfus family
set up RZ Agro, an agricultural business owning
more than 100,000 ha of land. Sistema and
Louis Dreyfus are continuing to jointly develop
their agrobusiness in Russia
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
0606
ABOUT THE GROUP
CEO’s statement
Dear shareholders,
Although 2015 was a challenging year for
the Russian economy, for Sistema it was a
year when we secured new drivers of growth
for our investment portfolio and shareholder
value. We performed strongly in terms of
strategy execution and achieved all key
targets, delivering robust growth at our key
portfolio companies and reporting solid
financial results as well as bolstering our
cash position. In the new macroeconomic
environment, we continued to actively
reinvest funds in some of the most promising
assets in Russia – assets that we expect will
become important drivers of value creation
going forward.
All key portfolio companies achieved
strong operating and financial performance,
ensuring significant growth of the Group’s
consolidated results. Sistema’s revenue for
FY 2015 increased by 10%, while OIBDA
rose by 7%. Our non-listed subsidiaries
continued to increase their contribution
to the Group’s overall performance as their
share in consolidated revenue rose from
36% in 2014 to 39% in 2015 and 41% in
the last quarter of the year.
MTS and other major Sistema companies
confirmed their status as leaders in their
respective industries.
Detsky Mir strengthened its leadership
position as Russia’s top children’s goods
retailer as it continued to pursue an
aggressive growth strategy. In 2015
Detsky Mir Group opened 104 new stores,
bringing its retail chain to 425 stores.
At the end of 2015 Sistema sold a 23.1%
stake in Detsky Mir to the Russia-China
Investment Fund. This transaction is a good
example of successful monetisation of our
investments and a testament to the effective
development of this asset.
Segezha Group, the pulp and paper holding
we acquired in late 2014, delivered the
highest growth rates among Sistema’s key
assets: revenue increased by 35% and
OIBDA doubled. In 2015 we transformed
Segezha into an efficient business and a
global market leader, providing one more
proof that our strategy of turning distressed
assets into industry champions is working.
We are currently supporting a large-scale
investment programme, which we expect
will help drive value growth at Segezha for
the benefit of Sistema and our shareholders.
Although 2015 was a challenging
year for the Russian economy,
for Sistema it was a year when
we secured new drivers of
growth for our investment
portfolio and shareholder value.
Mikhail Shamolin
Sistema’s President
ANNUAL REPORT 2015 | Sistema www.sistema.ru Sistema today CEO’s statement Shareholder capital
0707
41%
Non-listed
subsidiaries share
in consolidated
revenue in 4Q 2015.
MTS and other major Sistema
companies confirmed their status as
leaders in their respective industries.
We also increased our stake in Medsi,
Russia’s largest chain of private medical
clinics, reflecting our confidence in the huge
potential of the Russian private healthcare
market.
Successful implementation of our investment
strategy, stronger cash generation and
growing value of the Group’s assets create
a strong base for further growth in our
shareholder return. In 2016, we adopted
a new dividend policy, which stipulates that
the total dividend recommended by the
Board of Directors for each reporting year
will be, at a minimum, the higher of either
an amount equivalent to a dividend yield
of 4% per Sistema ordinary share or
RUB 0.67 per share. We believe that the
new policy will provide our investors with
a progressive dividend story going forward.
As a major investor in the Russian economy,
Sistema has a strong focus on social
responsibility. We seek to ensure that our
businesses help to improve living standards
and the social, economic and environmental
well-being of the country. We continue
to increase our social investments, which
includes creating new jobs, improving
infrastructure and making important services
more accessible.
I have no doubt that Sistema is on the
right track towards achieving its key strategic
goals. And with our extensive knowledge
of the Russian economy, we remain
absolutely confident in Russia’s high growth
potential and in the prospects of our key
investments.
Our Indian telecommunications asset
SSTL significantly improved its financial
performance and achieved positive OIBDA
in all operating circles in the fourth quarter
of 2015. In November we announced plans
to merge SSTL’s telecommunications
business with RCom, one of India’s major
telecom operators, in exchange for an
equity stake in the combined company.
The completion of the transaction is now
subject to final approvals from courts and
the Department of Telecommunications
of India.
We also continue to grow our high-tech
businesses in microelectronics, IT and
defence through our portfolio company RTI,
whose key divisions show strong growth
and profitability.
Effective re-investment of cash remains
a key priority for Sistema as an investment
company. We continue to see attractive
opportunities for efficient capital allocation
in the current macroeconomic environment.
In 2015, our biggest investment was into
expansion of our presence in agriculture,
where we see strong growth potential,
clear production cost advantages and
excellent prospects to capitalise on import
substitution.
At the end of the year, we acquired
a large and highly efficient dairy operation,
Rodina, which is among Russian leaders
for productivity and OIBDA margins;
a top apple producer, Sady Kubani;
and the largest greenhouse farm in Europe
and Russia, Yuzhny Agricultural Complex,
which produces vegetables.
On the basis of existing assets as well as
new acquisitions we intend to create one
of the country’s largest and most efficient
agricultural holdings with a total land bank
of at least 500,000 hectares. We will
continue investing in the most attractive
segments in the agriculture sector and
expect that this business will make a
notable contribution to the Group’s financial
performance in 2016 and beyond.
Among Sistema’s investments in other
sectors, I would like to highlight the
acquisition of Kronshtadt Group, a
prominent player on the Russian high-tech
market with a set of competencies, products
and solutions complementary to those
of RTI.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 0808
ABOUT THE GROUP
Shareholder capital
Sistema JSFC has
9,650,000,000 ordinary
shares outstanding with a
nominal value of RUB 0.09
each. Its shareholder capital
amounts to RUB 868.5 mln.
Sistema's shareholding structure(1)
2.7%
14.1%
19.0%
64.2%
Vladimir Evtushenkov
Deutsche Bank (GDR)(2)
National Settlement Depository
(MOEX)
Other(3)
+54.8%
share price
Sistema’s ordinary shares growth in 2015 г.
+13.2%
GDR’s price
Sistema’s GDR growth in 2015 г.
In February 2005, Sistema held an
IPO on the London Stock Exchange
(LSE). Its shares are traded on the
LSE in the form of global depositary
receipts (GDRs) under the ticker SSA.
One GDR represents 20 ordinary
shares. Sistema’s ordinary shares are
listed on Moscow Exchange (MOEX)
under the ticker AFKS. The GDRs
traded on the LSE represent about
19% of Sistema’s equity, and shares
traded on MOEX about 16.8%.
Moscow Exchange includes Sistema’s shares
in calculations of its main equity indexes
(MICEX and RTS). Sistema’s shares are also
included in calculations of MOEX’s MICEX
FNL sector index, which includes shares
of banks and financial-services companies.
Sistema’s GDRs are included in the MSCI
Russia index which is one of the MSCI
Emerging Markets indexes. Inclusion in
MSCI indexes testifies to the company’s
international recognition and promotes
the issuer’s good reputation among major
institutional investors that use these indexes
when selecting securities.
Shares of OJSC MTS, a Sistema subsidiary,
are traded in the form of ADRs under the
ticker MBT on the New York Stock Exchange
(NYSE) and as ordinary shares under the
ticker MTSS on Moscow Exchange.
The Chairman of Sistema’s Board of
Directors, Vladimir Evtushenkov, is the
principal shareholder of the company,
and owns 64.2% of the equity.
(1) As of 31 December 2015.
(2) 1.4% of Sistema’s authorised capital is represented by GDRs owned by Sistema Group companies.
(3) 0.3% of Sistema’s authorised capital is represented by ordinary shares owned by Sistema Group companies.
ANNUAL REPORT 2015 | Sistema www.sistema.ru
CEO’s statement Shareholder capital Mission and strategy
0909
SISTEMA’S SHARE PRICES
PERFORMANCE(1)
The dynamics of Sistema’s GDRS and ordinary
shares (1)
10.0
8.0
6.0
4.0
2.0
10.0
8.0
6.0
4.0
2.0
05.01.15 05.02.15 05.03.15 05.04.15 05.05.15 05.06.15 05.07.15 05.08.15 05.09.15 05.10.15 05.11.15 05.12.15
Sistema GDRS
Sistema ordinary shares
RTS index
Sistema’s ordinary shares in 2015 grew
by 54.8% in 2015, recovering after the
recession year of 2014 and significantly
outperforming the RTS, which declined
by 15.0%. Sistema’s GDRs rose by 13.2%
during 2015, although much of that growth
was offset by the depreciation of the ruble
against the US dollar.
The closing price of Sistema’s GDRs on
the LSE on the first trading day of 2015 was
US$ 4.80, giving Sistema a total market
capitalisation of US$ 2,361.8 mln. On the last
trading day of the year, the closing price was
US$ 5.90, for a total market capitalisation
of US$ 2,246.8 mln.
On 30 June 2015, the closing GDR price
reached the highest value during the year
of US$ 8.85, and on 7 August 2015 the
Company’s ordinary shares peaked at
RUB 21.13. The lowest closing GDR price
was seen on 27 January 2015 (US$ 4.24),
and for ordinary shares on 12 January 2015
(RUB 12.13). Average daily trading volume
on LSE in 2015 was 527,030 GDRs, and
on MOEX 11,922,240 ordinary shares.
(1) As of 31 December, 2015.
Source: Bloomberg, Moscow Exchange.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
1010
ABOUT THE GROUP
Mission and strategy
Mission
Sistema’s mission is building a first-rate Russian investment
company that can ensure long-term growth of shareholder
value through efficient management of the asset portfolio
and achievement of high returns on investment.
KEY LONG-TERM
GOALS
MEDIUM-TERM GOALS
OF SISTEMA AS AN
INVESTMENT COMPANY
SISTEMA’S
OBJECTIVES
FOR 2016
•
Become one of Russia’s leading
companies by shareholder return
• Diversify investment and achieve a
more even distribution of portfolio value
among assets
•
•
Reduce debt of the Corporate Centre and
make new efficient investments;
Reduce MTS’s share in Sistema’s
overall portfolio value by prioritising the
development of businesses with the
potential to rapidly grow equity over the
short and medium term;
• Create investment platforms in Europe,
Asia and the US to invest in international
projects in order to raise capital from co-
investors, diversify country risks and find
new points of growth for Sistema’s asset
portfolio (export markets).
• Generate cash flow to Sistema through
portfolio monetisation and higher
dividends from assets;
•
•
Take advantage of unique investment
opportunities, including those unlocked
by economic uncertainties in Russia;
Rebalance the Group’s asset portfolio
by acquiring large and medium-sized
export-oriented companies capable of
generating revenues in foreign currencies
for Sistema’s benefit;
• Use current key assets to create new
national leaders in their respective
industries, including private healthcare,
agriculture, timber processing, high-tech
and real estate, to capitalise on their
market position;
•
Restructure and support portfolio
companies operating in those
segments most vulnerable to current
macroeconomic trends and struggling
to implement their strategies.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Shareholder capital Mission and strategy Investment portfolio
1111
Value creation
model
The model selected by Sistema as an
investment company envisages portfolio
monetisation by accumulation of cash from
incoming dividends and sale of assets, and
further:
•
investment in new, promising
investment projects which are capable
of providing high return on capital.
•
•
distribution of profit among Sistema’s
shareholders through dividends;
investment in the development of
existing assets to increase their value;
Basic principles of the investment
strategy:
Investment criteria set forth
by Sistema’s portfolio strategy:
Asset-management
principles:
Generation of returns on investments
above the cost of capital (IRR>WACC)
with a five-to-seven-year payback
period.
Focus on investments that can yield
positive net cash flow to Sistema over
the medium term
Acquire assets with an acceptable
debt level (Debt/OIBDA < 3.0x) to
maintain the Group’s stable financial
position
Pay considerable amounts
of dividends to shareholders in
compliance with the dividend policy
•
Sectors and industries: The Group
mostly buys assets in sectors that are
complementary to the ones in which
it already operates and that allow
available competences to be used and
synergies with the existing portfolio
to be unlocked. It also invests in new
economically attractive industries,
including export-oriented ones, where
it has expertise or industrial partners.
• Geography: The Group sees Russia
and other CIS countries as top-priority
investment locations, and also remains
open to opportunities to further expand
its business geography for the sake
of diversification of its currency and
country risks.
• Asset size: Sistema focuses on large
and mid-size assets with the potential
to become market leaders through
synergies, industry consolidation, and
efficient investment and operational
strategies.
Sistema improves assets’ operational
efficiency through restructuring,
implementing corporate governance
best practices and working with
industrial partners to enhance
expertise and mitigate financial risks;
The Group aims to maintain
a balanced portfolio of stable
core assets paying dividends and
developing assets at active stages
of growth;
Sistema controls implementation
of the strategies of its portfolio
companies through involvement
in their governance bodies and by
appointing industrial experts as
members of their boards of directors.
Assets are split into separate
portfolios based on deal originators
and the industrial expertise of
the portfolio managers. The most
important key performance indicator
(KPI) used to assess management
performance is total shareholder
return (TSR).
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 12
ABOUT THE GROUP
Investment portfolio
MTS
Leading telecoms operator
in Russia and the CIS
>107 mln
subscribers
Steppe Agro
Holding
Crop farming, animal farming,
fruit growing and vegetable
growing
Segezha Group
Detsky Mir
Leading pulp and paper holding
with a full cycle of logging and wood
processing
Largest children’s goods retailer
in Russia and the CIS
53%
№3 globally by total
output of sack paper
>420
stores
100%
76%
Medsi
Leading provider of private
healthcare in Russia
>6 mln
visits per year
100%
MTS Bank
One of Russia’s 50 largest
banks by assets
18.5%
Capital adequacy ratio
100%
BPGC
Top-10 power grid company
in Russia
> 80,000 km
power lines with transformer
capacity of 21,000 MVA
91%
SG-trans
One of the leading rolling stock
operators in Russia
> 29,000
railcars under management
50%
Targin
Major Russian oil field
services provider
52
drilling rigs
87%
100%
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
Mission and strategy Investment portfolio
13
Binnopharm
Pharmaceutical company operating
one of Russia’s largest full-
cycle facilities manufacturing
biotechnological drugs
6 mln
supplied doses of Hepatitis B
vaccines annually
74%
Real estate
assets
Sistema’s strategy in real estate
is focused on increasing the value
of its portfolio and subsequent
monetisation through rentals,
development and sale
RZ Agro
Major producer of grain and oil
crops in southern Russia
100%
>100,000 ha
50%
SSTL
High-speed data transmission
services
>800
towns of India
57%
Intourist
Russia’s largest tourist holding,
successfully operating in the hotel
business for many years
2,501 rooms
under management
RTI
One of Russia’s largest industrial
groups, a developer and producer
of high-tech products and
infrastructure solutions
66%
5.8 mln
industrial microchips
annually
85%
Concept Group
Fast-growing retailer
and a leader in the Russian
market for women’s and
children’s clothing
Kronshtadt
Group
Leading designer and
manufacturer of high-tech
products
OZON Group
Russia’s leading e-commerce
platform with a strong brand
and own logistics service
40%
100%
10.8%
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
14
CONTENTS
Growth prospects
and strategic
developement
Key highlights of 2015
Financial performance in 2015
16
19
22 Credit ratings
23 Dividends
24 Growth prospects and strategic development of portfolio companies:
• MTS
• Targin
• Detsky Mir
• SSTL
• Segezha Group
• Binnopharm
• RTI
• BPGC
• Medsi
• Agricultural
businesses
• MTS Bank
• Real-estate assets
• SG-trans
• Other investments
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
15
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
1616
ABOUT THE GROUP
Key highlights of 2015
Investments and M&A transactions
Development
of Segezha Group
In February 2016, LLC LesInvest, a Segezha
Group company, acquired a controlling
equity interest in OJSC Lesosibirsk
Woodworking Plant No.1, one of Russia’s
largest producers of sawn timber,
fibreboards, planed timber, and furniture
from Angara pine, based in the Krasnodar
region. LWP No.1 processes more than
a mln cbm of round timber annually
and has access to an allowable cut
of 2.9 mln cbm a year.
Monetisation
of a stake
in Detsky Mir
In December 2015, Sistema’s subsidiary
CJSC DM Finance sold 23.1% of equity
shares in OJSC Detsky Mir to the Russian-
China Investment Fund (RCIF) for RUB
9.75 bln. As a result, RCIF is now entitled
to nominate two directors on Detsky Mir’s
board out of ten.
23.1%
of equity shares
Was sold to the Russian-China investment fund
Increase of
ownership in Medsi
Group to 100%
In October 2015, Sistema acquired 25.02%
of shares in CJSC Medsi Group from
State Unitary Enterprise Medical Center
of the Moscow Mayor and Government
Administration («GUP») for RUB 6,116 bln,
with half to be paid on a one-year instalment
plan. The increased ownership in Medsi
Group will give Sistema more flexibility
in expanding the chain of private clinics,
building new facilities, and making the
company more manageable.
Sale of NVision
Group
In July 2015, Sistema’s subsidiaries - LLC
Sistema Telecom Assets and OJSC RTI - sold
100% of JSC NVision Group’s equity to
telecoms operator PJSC MTS.
The transaction value including NVision
Group’s debt was around RUB 15 bln.
Acquisition of
Kronshtadt Group
In October 2015, Sistema acquired 100% of
shares in JSC Kronshtadt Group and assets
belonging to the Group from Industrial
Investors Group for RUB 4.8 bln. Kronshtadt
Group combines a range of Russian
innovative companies that manufacture
high-tech products and world-class solutions
for aircraft engineering, security, transport
and development of natural resources
(including in the Arctic region).
The Group has a number of key
technological competences and unique
intellectual potential in mathematical
modelling and engineering of complex
informational systems as well as
engineering and production of commercial
unmanned aerial vehicles (UAVs), modern
comprehensive training simulators,
visualisation systems, and on-board &
land-based electronic navigation equipment.
Because Kronshtadt Group’s competences
are highly complementary to RTI (another
Sistema subsidiary), the companies will
work in synergy to strengthen their market
position and create a platform for future
growth.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Key highlights of 2015 Financial performance in 2015
1717
Merger of telecom
assets in India
Sistema has signed binding documents
to merge its Indian telecom business with
Reliance Communications Ltd (RCom), one
of India’s biggest telecom operators.
The deal structure has been approved by
Indian courts and envisages a demerger
of the telecom business from Sistema
Shyam TeleServices Ltd. (SSTL) to be
further merged with RCom under the
RCom brand, with SSTL holding 10% of the
combined company. SSTL plans to repay its
outstanding debt before closing.
Once the deal is closed, RCom will assume
obligations towards the Indian Department
of Telecommunications (DoT) to pay
spectrum fees due from SSTL. If the DoT
confirms that SSTL’s spectrum may be used
for the roll-out of 4G networks at no extra
charge, SSTL will be entitled to an additional
earn-out payment of US$ 300 mln.
Closing is scheduled for Q2 2016 subject
to several conditions precedent, including
obtaining corporate approvals from both
SSTL and RCom and regulatory and judicial
approvals from relevant authorities in India.
After closing, SSTL’s minority shareholders
may exchange their shares in SSTL for shares
in RCom in proportion to their interests in
SSTL pre-closing.
Investments
in real estate
In December 2015, LLC Razvitie, a joint
venture of Sistema and LSR Group, won
an open tender for the right to acquire
100% of LLC ZIL-Yug for RUB 34.2 bln. The
terms of the tender envisage an eight-year
instalment plan. Razvitie will have to make
no further payments in 2016 (as it already
paid a RUB 1.5 bln deposit in 2015), but will
pay RUB 2.5 bln in 2017 and one-third of
the total amount in 2023. Sistema plans to
invest no more than 10% of the amount now
attributed to it based on its stake in Razvitie
(or no more than RUB 1.7 bln), and expects
to find co-investors to cover the rest of the
expenses. LLC ZIL-Yug owns development
rights for 109.9 hectares in the southern
premises of the now-defunct automobile
manufacturer ZIL (23 Avtozavodskaya St.).
The development project envisages
construction of 1.5. sqm of real estate,
including 1.1m sq. m. in housing, 0.35m sq.
m. in commercial real estate and 0.05 sqm
in infrastructure. The city will finance about
40 hectares of infrastructure, including new
roads and landscaping of adjacent areas.
Sistema’s subsidiary Leader-Invest, charged
with managing the project on Sistema’s
behalf, already has another project in the
same industrial park, called Nagatino i-Land.
Corporate events
Loan facility
agreement
In December 2015, Sistema signed a loan
facility agreement with Chinese banks for
an unsecured 6-year credit limit of US$ 350
mln. The advantageous long-term club deal
is a product of many years of cooperation
between Sistema and Chinese banks.
The banks’ in-depth knowledge of Sistema
Group’s business was a key success factor
in the deal.
Issue registration-
exempt series
001P-03 bonds
In December 2015, Sistema issued a
RUB 10 bln worth of registration-exempt
series 001P-03 bonds. The bonds mature in
2.25 years, with no put option embedded.
The first coupon rate is 12.70% p.a., and all
further coupon rates will be calculated as
the Bank of Russia’s key interest rate plus
170 bps.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
1818
ABOUT THE GROUP
Issue registration-
exempt series
001Р-02
In November 2015, Sistema issued RUB
1.7 bln worth of registration-exempt series
001P-02 bonds. The bonds mature
in 10 years, but bondholders are provided
with put options exercisable four years after
the float. The coupon rate on the bonds is
10.90% p.a.
Issue registration-
exempt series
001Р-01
In October 2015, Sistema issued RUB 5 bln
worth of registration-exempt series 001P-01
bonds. The bonds mature in 10 years, but
bondholders are provided with put options
exercisable three years after the float. The
coupon rate on the bonds is 12.50% p.a.
Issue registration-
exempt series
БО-01
In February 2015, Sistema issued RUB 10
bln worth of certificated interest-bearing
non-convertible registration-exempt series
BO-01 bonds with a principal value of RUB
1,000 apiece. Despite the challenging
market environment, the bonds were in high
demand, with the book built at a coupon
rate of 17% p.a., payable semi-annually.
The bonds mature in 15 years but are putable
at 18 months after the issue date.
Developments
after the transfer
of Bashneft shares
to the government
In January 2016, criminal charges against
Sistema’s majority shareholder and
chairman of the Board of Directors Vladimir
Evtushenkov over his acquisition of shares in
oil and energy companies in Bashkortostan
were dismissed due to a lack of evidence
that any crime had been committed. Sistema
was recognised as a good faith buyer.
In March 2015, Sistema JSFC and LLC Ural-
Invest signed a settlement agreement under
which Ural-Invest would transfer to Sistema
RUB 46.5 bln in cash assets, constituting all
of Ural-Invest’s property at that moment.
In April 2015, Sistema signed another
agreement with Ural-Invest to receive an
additional RUB 12.9 bln in cash assets for
the recovery of damages arising from the
confiscation from Sistema of shares in OJSC
ANK Bashneft.
ANNUAL REPORT 2015 | Sistema www.sistema.ru
Key highlights of 2015 Financial performance in 2015 Credit ratings
1919
Financial performance in 2015
Sistema’s consolidated financial results
in accordance with IFRS
(RUB mln)
Revenues
Adjusted OIBDA
Operating income
FY 2015
FY 2014
Change
708,641
646,269
176,438
165,335
69,048
60,329
Net income/ (loss) attributable to Sistema
33,592
(156,237)
Adjusted net income/ (loss) attributable
to Sistema
(5,354)
(19,123)
Sistema’s consolidated debt
556, 760
462,433
Net debt at the Corporate Centre
66,226
39,994
Revenue breakdown by assets
61%
6%
4%
4%
5%
11%
9%
MTS
Detsky Mir
RTI
Segezha Group
Targin
MTS Bank
Other
9.7%
6.7%
14.5%
-
-
20.4%
65.6%
In 2015, the Group’s revenues increased
by 9.7% due to consolidation of Segezha
Group since the fourth quarter of 2014,
robust growth in MTS data traffic revenues
and handset sales and continued expansion
of Detsky Mir in the Russian market. The
share of Sistema’s non-public assets in the
consolidated revenues increased from 36%
in 2014 to 39% in 2015 and 41% in the
fourth quarter of 2015. Newly consolidated
Segezha Group contributed 5% to total
revenues in 2015.
Acquisitions of Kronshtadt and agricultural
businesses in the fourth quarter of 2015
contributed RUB 1.2 bln and RUB 0.8 bln,
respectively, to the Group’s revenues.
In 2015, selling, general and administrative
expenses (SG&A) grew by 7.7% year-on-
year, which is lower than the rate of inflation
in Russia over the same period, despite
consolidation of Segezha Group and other
new assets in 2015. Depreciation and
amortisation expenses increased by 8.6%
year-on-year in 2015.
Adjusted OIBDA analysis,
RUB bln
Consolidated revenue analysis,
RUB bln
+3.0
176
+2.2
+5.6
165
+20.5
+26.1
646
+15.1
+1.3
709
OIBDA 2014
Consolidation of Segezha Group Growth
RTI OIBDA growth
Detsky Mir OIBDA growth and other
OIBDA 2015
Revenue 2014
Consolidation of Segezha Group
MTS revenue Growth
Detsky Mir revenue growth
Other
Revenue in 2015
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
2020
ABOUT THE GROUP
The Group’s adjusted OIBDA increased
by 6.7% year-on-year in 2015, mainly
due to consolidation of Segezha Group,
organic growth at Detsky Mir and OIBDA
improvements at RTI’s Defence Solutions
and Information and Communication
Technologies (ICT) business units. Sistema’s
non-public assets showed profit on
aggregated OIBDA.
In 2015, consolidated net income
attributable to Sistema amounted to
RUB 33.6 bln as compared to net loss in
2014 due to recognised gain from settlement
agreements with Ural-Invest.
Growth of debt at the Corporate Centre level
was due to refinancing of SSTL’s liabilities,
guaranteed by Sistema as per agreement
with RCOM.
The core business of Sistema’s JSFC is
management of interests in commercial
organisations.
Financial performance according to Russian Accounting Standards
(RAS)
(RUB th.)
Revenue
Sales profit
2015
2014
30,843,245
59,553,440
20,632,717
50,824,355
Net income (loss) in the reporting period
34,461,228
(307,202,105)
Revenue structure
(RUB th.)
2015
2014
Equity holdings in other companies
30,794,973
59,425,402
Other operating income (property rent, agency
services and sureties)
48,272
128,038
TOTAL
30,843,245
59,553,440
Structure of other incomes and expenses
(RUB th.)
Interest receivable
Interest payable
Other incomes
Other expenses
TOTAL
2015
2014
8,908,439
3,349,784
(9,073,920)
(5,829,656)
97,047,630
21,922,856
(71,367,743)
(387,064,514)
25,514,406
(367,621,530)
ANNUAL REPORT 2015 | Sistema www.sistema.ru
Key highlights of 2015 Financial performance in 2015 Credit ratings
2121
Operational performance
Equity capital and liabilities
Productivity, RUB th./FTE
Debt to equity ratio
Long-term debt to the sum of long-term debt
and equity
Debt service coverage ratio
Overdue debt, %
Financial stability
2015
2014
109,762.4
197,196.8
31%
0.451
0.240
0.21
0
0.310
0.191
0.31
0
Equity
Liabilities
2015
2014
Structure of liabilities
Net working capital, RUB th.
59,739,476
31,944,852
Current ratio
Quick ratio
2.50
2.50
30%
2.64
2.63
69%
70%
Sistema’s net working capital
as of 31 December 2015 totalled
RUB 59,739,476,000, short-term liabilities
equalled RUB 39,797,347,000, and
production costs in 2015 totalled
RUB 19,675,000.
Long term
Short-term
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
2222
ABOUT THE GROUP
Credit ratings
Standard & Poor’s
Rating agency
Moody’s
Rating agency
Fitch
Rating agency
Date of most recent rating update
Date of most recent rating update
Date of most recent rating update
18 December 2015
22 January 2016
18 March 2015
Long-term credit rating
Long-term credit rating
Long-term credit rating
BB
Forecast
Stable
Ba3
Forecast
Stable
BB-
Forecast
Stable
ANNUAL REPORT 2015 | Sistema www.sistema.ru Financial performance in 2015 Credit ratings Dividends
2323
Dividends
In 2016, Sistema’s Board of Directors approved new dividend policy. The policy states
that the recommended total dividend for each reporting year will be, at a minimum, the higher
of either an amount equivalent to a dividend yield of 4% per Sistema ordinary share or RUB 0.67
per Sistema ordinary share.
Sistema’s dividend policy aims
to both pay a predictable amount
of dividends and enable investment
of profits in new attractive projects.
The amount of dividends paid in 2015
was calculated based on performance in
the previous financial period. Pursuant to
Sistema’s dividend policy effected in 2015,
dividends equalled at least 10% of the
Sistema’s IFRS net income (net of distributed
special dividends). Sistema could also
distribute in special dividends at least 10%
of net income as determined by the Board
of Directors in the event of cash proceeds
being generated by transactions such as
asset sales. According to Russian law,
the maximum amount of dividends that a
company may distribute to shareholders is
its entire non-consolidated RAS net income.
On 27 June 2015 the Annual General
Meeting of Sistema’s shareholders (Minutes
No.2-15 dd 01 July 2015) issued a decision
to distribute 4,535,500,000.00 (four billion
five hundred and thirty-five million five
hundred thousand) roubles, or 0.47 (zero
point forty-seven) roubles per one ordinary
share of Sistema JSFC.
As of 31 December 2015, the total amount
of dividends distributed equalled RUB
4,535,221,388.70. Tax on dividends
distributed to foreign shareholders
(individuals and legal entities) totalled RUB
1,303,565.00.
Amount of dividends accrued and paid
from 2011 to 2015
2011
2012
2013
2014
2015
Total amount of
dividends, RUB m
Amount of dividends
per share, RUB
2,509.0
2,702.0
9,264.0
19,879.0
4,535.5
0.26
0.28
0.96
2.06
0.47
Declaration date
25.06.2011
30.06.2012
29.06.2013
28.06.2014
27.06.2015
Payment date
23.08.2011
24.08.2012
26.08.2013
31.07.2014
29.07.2015
Sistema seeks to distribute dividends
twice per year. Sistema’s calculation of the
average dividend yield on its ordinary shares
is based on the weighted average price of
one ordinary share of the Company traded
on Moscow Exchange in the respective
reporting period: full year or six months.
Omitted dividends as of 31 December 2015
totalled RUB 793,947.16, including RUB
278,611.30 due in 2015. These dividends
were declared but unpaid due to lack of
information about the recipients necessary
to make the cash transfers.
In 2016, Sistema’s Board of Directors
approved an updated dividend policy. The
policy states that the recommended total
dividend for each reporting year will be, at
a minimum, the higher of either an amount
equivalent to a dividend yield of 4% per
Sistema ordinary share or RUB 0.67 per
Sistema ordinary share.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
24
24
PORTFOLIO COMPANIES
MTS
Mobile TeleSystems (MTS) is a leading telecoms operator
in Russia and the CIS. Together with its subsidiaries,
MTS services approximately 107 mln mobile subscribers
in Russia, Armenia, Ukraine, Turkmenistan, Uzbekistan
and Belarus. MTS and its subsidiaries also provides fixed
telephony and cable TV services in Moscow (MGTS),
all federal districts of Russia and in Ukraine. In 2015, MTS
entered the market of systems integration and satellite TV.
53%
Effective shareholding
Management:
Andrey Dubovskov
(President)
Ron Sommer
(Chairman of the Board of Directors)
Financial results of MTS
(RUB mln)
Revenues
Adjusted OIBDA(1)
Operating income
Net income attributable to Sistema
2015
2014
Change
431,232
410,780
171,821
84,135
26,460
171,558
98,133
28,075
5.0%
0.2%
(14.3%)
(5.8%)
(1) Including share in net losses of MTS Bank.
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
MTS Detsky Mir
25
25
Sales of smartphones in Russia in 2015
increased by 5%-6% year-on-year in ruble
terms due to a 13-15% increase in the average
price of smartphones. However, unit sales fell
by 8%, compared to 40% growth in 2014(5).
In October 2015, LLC T2 RTK Holding
entered the Moscow market under
the Tele2 brand, offering 3G/4G mobile
communications services (the company
does not have any GSM spectrum in Moscow).
Tele2’s market entrance did not have
a material effect on the performance of other
operators.
The profit margins of mobile operators
in Russia declined as a result of decreased
consumption of international roaming
services, all communication services
in the B2B segment, as well as higher
operating expenses caused by the ruble’s
weakening against the US dollar and euro
and a higher inflation rate.
431
RUB bln
Revenues in 2015
>20 years
In the telecomunications market
77,3 mln
MTS subscriber base in Russia
2015
2014
77.3
74.6
Mobile subscriber base of MTS
in Russia, mln
74.6
69.7
57.2
77.3
74.8
59.8
1Q ’15
4Q ’15
MTS
VimpelCom
Megafon
INDUSTRY(1)
Despite the unfavourable macroeconomic
environment, the combined profits
of the telecoms market rose by 2.1% year-
on-year in 2015 driven by growth of mobile
data, pay TV and fixed broadband services.
The growth rate of the mobile communications
segment slowed to 1.2% vs 1.9% in 2014
as a result of a downturn in traditional
mobile services (voice, SMS) and their
partial replacement by OTT services
(such as Skype, WhatsApp and Viber)
and a decline in consumption of roaming
services. At the same time, voice traffic
continued to grow due to a wider range
of bundled tariffs including free calls,
and cancellation of intra-network roaming
charges for calls inside Russia.
The penetration of OTT services in Moscow
reached 15% in 2015 and continues to grow.
The launch of own-brand messaging
applications(2) by telecoms operators
(IP telephony, message and file sharing)
and associated regulatory changes
to be introduced by the Ministry
of Communications in 2016 may help boost
operator’s incomes and enhance customer
loyalty.
Mobile data consumption remained the key
driver of revenue and increased by 20%
in 2015 due to greater penetration
of smartphones and tablets, including
4G-enabled devices (the number of LTE
users increased from 6.5 mln in 2014
to 11 mln(3)), promotion of bundled tariffs,
and development of data networks
and distribution channels.
Changes introduced to communications
regulations at the end of 2015 will facilitate
the further development of LTE technology.
The changes enabled operators to unite LTE
frequencies in the 900Mhz, 1800 MHz
and 2.2GHz spectrum bands, which will
increase Internet access speeds and reduce
costs. Voice-over-LTE (VoLTE) and Wi-Fi
calling(4) using IP Multimedia Subsystem
(IMS) technology will make it possible
to reduce connection time six-fold, improve
voice quality and enable operators to use
spectrum more effectively.
(1) Source: Company data, as well as TMT-Consulting, Comnews.
(2) МТС In December 2015 MTS launched MTS Connect Messenger, which deploys the Rich Communication Suite (RCS) standard. Megafon has been developing its Multifon project since 2010. Vimpelcom in
partnership with WhatsApp offers free-of-charge messenger traffic to subscribers of its bundled tariffs (October 2015).
(3) Forecast by TMT consulting.
(4) VoLTE (voice-over-LTE) and Wi-Fi calling technologies. Before the introduction of the new regulations LTE networks were used only for data transfer, while GSM and 3G networks were used for voice
services.
(5) Preliminary data of Euroset, Svyaznoy and MTS. News dd 13, 14 January 2016.
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
2626
PORTFOLIO COMPANIES
MTS
SUSTAINABLE GROWTH OF MTS
AND KEY EVENTS IN 2015
MTS remains a leader by revenue and OIBDA
in absolute terms among the Russian
“Big Three” operators. In 2015, MTS’s active
mobile subscriber base grew by 3.6%.
Churn of mobile subscribers in 2015 remained
the lowest among the Big Three (10.8%
in Q4 2015). The share of mobile Internet
users in MTS’s active one-month subscriber
base increased by 3.7 p.p. to 47.2%. The share
of mobile Internet users may increase
further due to greater penetration of mobile
smartphones among MTS’s subscriber base
(48.4% in 2015 vs 42% in 2014).
In Q4 2015 MTS Russia’s revenue from sales
of smartphones and other devices rose
by 50% year-on-year due to a flexible pricing
policy and marketing activities(1), cooperation
with leading equipment manufacturers
and the development of MTS’s own retail
chain. In 2015, MTS’s retail chain expanded by
22% and reached 5,136 retail outlets.
In response to competitors’ activities,
in the middle of 2015 MTS revised its retail
development strategy and increased
the number of new retail outlets to be
opened in order to boost revenues from this
segment(2). By the end of 2015, MTS’s retail
chain had become the biggest in Russia’s
mobile retail segment. In April, retail prices of
mobile phones, smartphones and tablets were
reduced by an average of 30% with the aim
of stimulating Internet traffic consumption
and boosting the company’s revenue.
MTS’s website entered the 20 most-visited
websites in Russia. Internet sales doubled
year-on-year.(3)
In 2015, MTS Russia continued the trend
of strong income growth. Revenue rose
by 4.4% year-on-year, while revenue from
the mobile business grew by 2%. Revenue
from the mobile data segment in 2015
increased by 19.8% year-on-year, MTS’s
market share in Q4 2015 reached 38.5%
among the Big Three.
Smartphones Sales and Penetration,
2011 – 2015
GPON Subscribers of MTS,
(mln)
88%
63%
91%
69%
42%
48%
78%
48%
32%
66%
29%
23%
52%
20%
14%
1.2
0.6
1.3
0.7
1.1
0.5
1.5
0.9
1.4
0.8
2011
2012
2013
2014
2015
4Q ‘14
1Q ‘15
2Q ‘15
3Q ‘15
4Q ‘15
Sales of smartphones through MTS own stores as %
of total handsets sold in RUB
(period average)
Sales of smartphones through MTS own stores as %
of total handsets sold in units
(period average)
Smartphones penetration as %
of all mobile phones on MTS network
(eop)
Telephony subscribers
Broadband/Pay TV subscribers
(1) Discounts of up to 30% on phones, bonuses, branded MTS devices, advertising campaigns.
(2) Source: Vedomosti, http://www.vedomosti.ru/technology/articles/2015/11/30.
(3) MTS’ marketing strategy for 2016.
(4) MGTS is subsidiary of MTS.
(continued)
Lower consumption of international roaming
services due to a decline in outbound tourism
and a drop in the number of international calls
had a negative impact on revenue from the
mobile business.
In 2015, MTS built more than 15,000 base
stations (of which 7,300 were built for LTE
and 4,400 for 3G networks). Most of the base
stations were commissioned in the first half
of 2015 to minimise currency risks related
to equipment procurement. In 2015, MTS
completed the construction of infrastructure
and in future periods it will aim to reduce
capital expenses by an average of RUB 5 bln
per annum, which will have a positive impact
on free cash flow.
In 2015, MGTS(4) completed the construction
of a Gigabit-capable Passive Optical Networks
(GPON) optical network in Moscow.
More than 4.6 mln ports were built during
the project, while the number of GPON-based
service users reached 1.5 mln. Penetration
of double- and triple-play among the GPON
subscriber base was 62%. The total length
of MGTS’s fibre-optic network exceeded
40,000 km. Subscribers of MGTS’s Home TV
service had access to 230 channels, of which
more than 40 are in HD quality.
In 2015, MTS’s fixed-line telephony business
grew by 3.1% year-on-year due to the growth
of the broadband and TV subscriber base
driven by modernisation of networks using
target technologies (GPON and fibre-to-the-
building (FTTB)), development of convergent
services (including mobile virtual network
operator (MVNO)), and launch of a uniform
TV platform with a multi-screen digital TV
function.
In April 2015, MTS launched satellite TV
services, initially for residents of the Moscow
region and later for other regions across
Russia (potential coverage of 90% of Russia’s
population). The launch of a hybrid platform
in September 2015 enabled MTS to expand
the capabilities of traditional digital and
satellite TV by adding interactive services.
MTS and Vodafone conducted a rebranding
of MTS Ukraine, with the Vodafone brand
from now being used for construction of 3G
networks and provision of communication
services. As of the end of December 2015,
the 3G network had been launched in
18 regional centres of Ukraine and in Kiev.
ANNUAL REPORT 2015 | Sistema www.sistema.ru MTS Detsky Mir
2727
Mobile service revenue growth rate, %, YoY
FINANCIAL RESULTS OF MTS
Please see table on page 24.
MTS reported robust results in the fourth
quarter and full year 2015, retaining its
leadership position among the “Big Three”
mobile operators in Russia with 5.0%
revenue growth in 2015. This was primarily
driven by increased sales of mobile phones
as part of the rapid expansion of MTS’ retail
business, higher data revenues and also
by growing sales in Uzbekistan.
MTS’ total subscriber base increased
by 3.5% to 107.8 million customers
as of December 31, 2015. In Russia, MTS
continues to attract and retain high-quality
subscribers by promoting innovative tariff
plans and driving sales through
its proprietary network.
Despite continued volatility during the reporting
period, adjusted OIBDA remained stable
and amounted to RUB 171.8 mln in 2015.
Adjusted OIBDA margins were only slightly
down year-on-year as a result of higher
sales volumes of relatively low-margin mobile
phones, retail expansion and increased
costs of international calls and roaming in
connection with the weakening of the rouble.
Net income attributable to Sistema in 2015
declined due to expenses associated with the
development of operations in Uzbekistan,
goodwill impairment with regards to MTS’
Armenia business and more expensive
financing. Net income increased in the fourth
quarter of 2015 year-on-year thanks to lower
foreign exchange losses compared to 2014.
2.8%
0.6%
0.1%
3.9%
-0.5%
-1.6%
1.0%
1.0%
0.9%
2.0%
MTS
VimpelCom
Megafon
0.4%
0.3%
0.2%
-0.6%
-0.2%
1Q ’15
2Q ’15
3Q ’15
4Q ’15
‘14/’15
In the segment of mobile devices, MTS
will continue selling smartphones through
its own retail outlets, with the main focus
being on 4G, including branded MTS devices
offered at prices close to production cost
(a “shock price” campaign). In 2016,
the company plans to further expand
its chain up to 5,500 stores, including
multi-brand Telefon.ru outlets.
Key drivers of added value creation include
further growth of earnings from the mobile
and data segments, retention of MTS’s share
in the market of traditional services,
and monetisation of new business segments.
MTS’s entrance into new markets (systems
integration, satellite TV and content)
and development of joint projects with other
Sistema portfolio companies (Ozon, MTS
Bank) will enhance sustainability and create
competitive advantages. Maintaining a high
level of dividend payouts remains MTS’s
top priority.
STRATEGY
In 2016-2018, MTS will continue actively
developing the fastest-growing business
segment of data transfer and new projects
aimed at differentiating itself from
competitors. The company will continue
building out multi-range LTE networks with
subsequent frequency aggregation, resulting
in increased speeds of up to 190 Mb/s.
In 2016, the company will embark on a large-
scale development of small cell micro base
stations using MGTS’s GPON network.
It will continue building microcells in places
of mass Internet traffic consumption
and indoor base stations in big cities.
In 2016, MTS jointly with Ericsson will start
research and development of 5G mobile
technologies. The 5G solutions will be tested
at the football World Cup in 2018.
The strategy for developing financial services
in 2016 envisages integration of mobile and
financial services under a single MTS brand,
promotion of cash transfers, traditional
banking products, development of payment
and transport NFC applications, and an
e-wallet. The integration of MTS Bank offices
and RTK(1) outlets will continue.
(1) Russian Telephone Company, subsidiary of MTS.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
28
PORTFOLIO COMPANIES
Detsky Mir
Detsky Mir Group is the largest children’s goods retailer in
Russia and the CIS. The Group comprises a retail chain under
the Detsky Mir brand in Russia and Kazakhstan, a retail chain
under the Early Learning Centre (ELC) brand in Russia, and
the online stores www.detmir.ru and www.elc-russia.ru.
Financial results of Detsky Mir
(RUB mln)
Revenues
Adjusted OIBDA
Operating income
Adjusted net income attributable to
Sistema
Net income
FY 2015
FY 2014
Change
60,544
45,446
6,185
3,805
2,167
976
4,463
4,170
33.2%
38.6%
(8.8%)
1,600
35.4%
2,043
(52.2%)
76%
Effective shareholding
Management
Vladimir Chirakhov
(CEO)
Christopher Baxter
(Chairman of the Board of Directors)
№1
retailer
Russian retailer of children goods and fashion
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
MTS Detsky Mir Segezha Group
29
INDUSTRY
In today’s turbulent economic environment,
children’s goods remains one of the most
resilient retail segments in Russia. Despite a
decline in consumer spending, the children’s
goods market expanded by 1.8% in 2015(1).
At the same time, many other non-food
retail segments experienced a drop in
demand in 2015: sales of furniture dropped
by 11%, electronics by 12% and cars by 16%.
In 2016, the market for children’s goods is
expected to continue expanding, with growth
forecast at up to 3.0%.
The demographic situation continues to
play a key role in the development of the
market. Government support for families
and mothers, including the Maternity Capital
programme, has made a sizable contribution
to higher birth rates. In 2015, 1.9 mln babies
were born in Russia(2), the same as in 2014,
which was a record year. The Russian
Government has extended the Maternity
Capital programme until 2017, which will
have a positive effect on birth rates in
2016, as families will be granted additional
financial aid.
Specialised retail remained the main sales
channel for children’s goods in 2014-2015,
and gradually it is squeezing out the
unorganised retail, which accounted for
41% of the market in 2014(3). Hypermarkets
account for about 36% of the children’s
goods market. Although online sales
account for only 8% of children’s goods
sales in Russia, Internet channels have the
highest growth rates. Russia is experiencing
difficulties in developing this segment due to
the lack of high-quality delivery systems and
the vast territory of the country.
Detsky Mir Group sees a lot of development
opportunities in the e-commerce segment: in
June 2015 pick-up outlets became available
in more than 400 retail stores, which also
function as distribution centres, significantly
reducing delivery time and costs.
60.5
RUB bln
Revenue in 2015
Detsky Mir has become an undisputed
market leader in the specialised retail
channel, leaving direct competitors such
as Korablik, Dochki Synochki and others far
behind. Moreover, the fast pace of expansion
and revenue growth with an almost
unchanged market size enabled Detsky Mir
to strengthen its leadership in 2015 and
increase its market share from 10% to 13%.
104
new stores
Opened by Detsky Mir in 2015
Detsky Mir's retail stores
revenue breakdown
6%
1 9%
425
stores
Detsky Mir stores, totally
42 %
2015
2014
425
322
491
Retail space, th. sq m
Detsky Mir total retail space
2015
2014
491
390
33 %
Toys & Stationery
Newborn
Apparel
Footwear
(1) Source: ComconSynovate.
(2) Source: Rosstat.
(3) Source: ComconSynovate.
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
3030
PORTFOLIO COMPANIES
Detsky Mir
(continued)
SUSTAINABLE GROWTH OF
DETSKY MIR AND KEY EVENTS
IN 2015
In 2015, Detsky Mir opened a new logistics
centre in Bekasovo, Moscow region, with
a total area of 70,000 sqm. In the long
term, the warehousing complex will make
it possible to cut logistical costs and boost
gross margins. Having its own warehouse
will enable the company to increase
centralisation of supplies from the current
20% to 60%, which will improve profit
margins in 2016.
An important factor in enhancing efficiency
was the adoption of a single IT platform
to automate key business processes. For
example, the automation of cash-desk and
goods-acceptance services made it possible
to cut in-store staff numbers.
With the aim of minimising expenses related
to leasing selling space, Detsky Mir Group
set new fixed ruble tariffs in contracts with
retail space owners.
Thanks to its strong negotiating position,
the company’s management successfully
cut rental expenses by 10%-15%.
Implementation of an omni-channel strategy
is a key driver of the company’s sustainable
growth. Including in-store pick-up services,
revenue from online sales in 2015 almost
tripled year-on-year to RUB 1.3 bln.
In 2015, the Group opened a record
104 new stores. Total selling space of
stores under management increased by
26% (from 390 thousand to 491 thousand
sqm). All new Detsky Mir stores were
opened in accordance with a new retail
concept, including new trade equipment,
merchandising channels and play zones.
Toys and baby goods were the key drivers
of growth in 2015, with Detsky Mir’s market
share increasing from 16.3% to 24.8% and
from 11.9% to 16.4%, respectively in these
segments.
Number of Detsky Mir stores
2011-2015
CAGR: 26%
274
204
74
107
143
52
105
44
166
58
2011
2012
2013
2014
2015
Other regions
Moscow and Moscow region
Detsky Mir selling space (sqm)
Children’s market dynamics(3), RUB bln
3%
2%
3%
5%
11%
10%
487
500
437
509
524
548
207
78
162
71
9%
5%
14%
304
331
396
348
CAGR: 20%
231
83
278
107
350
173
2008
2009
2010
2011
2012
2013
2014
2015
2016F
2017F
2011
2012
2013
2014
2015
Other regions
Moscow and Moscow region
(1) Calculated for DM stores excl. ELC stores and Yakimankastores.
(2) Includes Kazakhstan.
(3) Source: ComconSynovate
ANNUAL REPORT 2015 | Sistema www.sistema.ru
MTS Detsky Mir Segezha Group
3131
In addition, Detsky Mir will aim to increase
the dividend yield for its shareholders.
In 2015, Detsky Mir Group paid the total
of RUB 3 bln in dividends.
>132 mln
Visits per year
FINANCIAL RESULTS
OF DETSKY MIR
Please see table on page 28.
Detsky Mir revenues increased by 33.2% for
the full year 2015 thanks to like-for-like sales
growth of 12.4% combined with continued
expansion of the retail space by 26% to
491,000 sq.m. Detsky Mir opened 104
new stores in 2015 (the company’s record),
bringing the total number of its stores
to 425 as of December 31, 2015.
Adjusted OIBDA increased by 38.6%
for the full year 2015 as a result of
improved operational efficiency. The ratio
of administrative expenses to revenues
declined from 29.4% in 2014 to 27.8% in
2015 as efficiencies came on line, including
further automatisation of key business
processes.
Detsky Mir’s share in total children’s
retail market
13%
9%
8%
7%
6%
2011
2012
2013
2014
2015E
STRATEGY
Implementation of a single SAP platform in
2015 supported uninterrupted informational
support for the retail chain, which will be
expanded to 600 and more outlets in the
future. In 2016, Detsky Mir will continue
upgrading its cash-desk services and
automating the work of shop personnel.
Online sales are a key element of Detsky
Mir’s omni-channel strategy. Since June
2015, customers making purchases online
have had the option to pick up their orders at
any Detsky Mir store. This function, coupled
with the multiplier effect of new openings,
will enable the company to significantly
decrease delivery costs and enhance the
conversion rate.
While Detsky Mir’s direct competitors
are cutting back on their development
programmes, Detsky Mir continues to
expand in Russia’s regions, and is opening
stores in towns with populations of less than
50 th. people.
In 2016, Detsky Mir expects to open more
than 50 new stores. The policy of affordable
pricing will remain a priority for 2016,
bringing in new customers and retaining and
growing the loyalty of existing ones.
On 31 December 2015, Sistema sold a 23.1%
stake in Detsky Mir for RUB 9.75 bln to the
Russian-Chinese Investment Fund (RCIF,
co-founded by the Russian Direct Investment
Fund and China Investment Corporation).
A significant part of the proceeds will be
invested in further expansion, including
financing of an investment programme
aimed at achieving target growth rates.
In 2016, Sistema will continue considering
options for further monetisation of Detsky
Mir, including a private placement or an IPO.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
32
32
PORTFOLIO COMPANIES
Segezha Group
Segezha Group is a Russian vertically integrated pulp and paper
holding with a full cycle of logging and deep wood processing.
The holding comprises Russian and European enterprises in
the forest, wood-processing and pulp and paper industries,
as well as paper packaging.
№1
in Russia
№2
in Europe
Producer of high-end paper sacks
Producer of high-end paper sacks
100%
Effective shareholding
Management:
Sergey Pomelov
(President)
Ali Uzdenov
(Chairman of the Board of Directors)
Financial results of Segezha Group(1)
(RUB mln)
Revenues
OIBDA
Operating income
Net income attributable to Sistema
FY 2015
33,436
6,805
4,639
2,787
(1) Sistema acquired Segezha Group on September 30, 2014, and has consolidated it starting from the fourth quater of 2014.
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
Detsky Mir Segezha Group RTI
33
33
INDUSTRY: SACK PAPER(1)
Sack paper consumption is forecast to grow
at 2% annually until 2020. Unbleached sack
paper, Segezha Group’s main production
segment, accounts for 87% of the global
paper market. The fastest-growing markets
in terms of consumption are Asia, Latin
America and the Middle East.
Paper quality depends on the availability
of soft timber. Only 21% of the world’s paper
output (Europe, Russia, North America) is
of high quality, has high profit margins and
is in demand among consumers. Segezha
Pulp and Paper Mill’s (PPM) has a 17% share
in production of the global market for high-
quality unbleached paper.
INDUSTRY: PAPER SACKS
The European paper sacks market has a
surplus of production capacity. Consumption
of paper sacks in Europe is projected to grow
by 2.5% annually until 2020.
Meanwhile, there is a deficit of paper
sacks in the Russian market, as production
facilities of Russian manufacturers are fully
utilised. The main consumer of paper sacks
in Russia is the construction industry (dry
construction mixes – 47%, cement – 39%).
INDUSTRY: BIRCH PLYWOOD
Global output of birch plywood is forecast
to grow by 2.6% annually until 2020.
Europe and Russia are the biggest global
consumers, accounting for 70% of
consumption. The greatest growth of birch
plywood consumption is expected in Asia,
where annual rates exceed 6%. In 2015,
consumption in Russia slumped by 15% due
to an unfavourable economic environment.
Demand is expected to recover by 2017.
Key drivers of the birch plywood market
are development of shipbuilding,
construction and machine-building, which
are all industries in which birch plywood
cannot be substituted.
In 2013-2015, birch plywood producers
reached full production capacity. Current
and contracted capacities will fully meet the
increase in demand only by 2020. Additional
growth of production capacity is possible
only in Russia, and in limited volumes in
the Baltic region, due to large reserves of
the raw materials needed for birch plywood
production. In Russia the biggest reserves
of birch veneer logs are in the Vologda and
Kirov regions, with 62% of the national
total. Russian producers have lower
production costs than their European rivals
thanks to lower costs of wood resources
and personnel. Russia is the leading global
producer, with global market share of 67%
share.
INDUSTRY: SAWN TIMBER
The global market for sawn timber will grow
by 3.8% annually until 2020. The market
is fragmented: the five largest producers
account for 10% of the market in Europe
and 7% of the market in Russia. China and
the US are expected to be key drivers of
consumption growth. The US is the biggest
sawn timber market, with demand for
imported timber mainly met by Canadian
producers.
In China, the deficit of sawn timber
is growing at 10% annually. Imports
from Canada are falling due to growing
consumption of sawn timber in the US,
which increases the available market for
Russian producers. Segezha Group accounts
for 1.4% of Russia’s total sawn timber output
and for 3% of the output of the Northwest
federal district, where the key manufacturers’
assets are concentrated.
33.4
RUB bln
Revenue in 2015
Segezha Pulp and Paper Mill:
№4 of world sack paper producers,
th. tonnes
531
321
317
253
167
Mondi
Bellerud
Korsnas
KapStone
Segezha
Group
Smurfit
Kappa
Competition of world plywood
market, th. m cu
970
335
310
215
165
140
94
Sveza
UPM (Finland, Estonia, RF)
Latvijas Finieris
Syktyvkar Plywood Mill
Zheshart Plywood Mill
Mets Wood
Vyatka Plywood Mill (Segezha Group)
(1) Source: BCG, RISI, Vision Hunters, Poyry, Indufor, Eurosac, FAOSTAT.
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
3434
PORTFOLIO COMPANIES
Segezha Group
(continued)
INDUSTRY: HOUSE-BUILDING
In 2015, about 1 mln sqm of laminated
log houses were produced in Russia,
while exports accounted for 9% of total
production. Sokol Woodworking Plant
accounted for 7% of the Russian market
of prefabricated houses. Consumption of
laminated log houses in Russia amounted
to 0.98 mln sqm, with imports accounting
for 6.2% of total consumption. The
prefabricated houses market is very
fragmented, as smaller production facilities
mostly import their house kits to Europe,
China and Mongolia. Manufacturers have
laminated log production capacities but,
unlike Segezha Group, do not have their
own raw materials base. Most of the
prefabricated houses made in Russia and
Europe are sold via a network of dealers,
which include construction companies.
INDUSTRY: WOOD RESOURCES
Global wood reserves total 527 bln cu. m,
of which Russia accounts for 16%. Russia
also has the world’s biggest reserves of soft
timber. Russia has a high logging area growth
potential: Its annual allowable cut is three
times the current logging volume.
SUSTAINABLE GROWTH OF
SEGEZHA GROUP AND KEY EVENTS
IN 2015
Segezha Group is the largest forest user
in the European part of Russia, with the
total area of leased forest of 5.5 mln ha,
including FSC-certified resources of 5.2 mln
ha. (94%). The Group has a 16.5% share of
the European paper packaging market, and
52% of the Russian market. The holding is
the second largest in Europe by volume of
brown sack paper output, and third largest
globally by total output of sack paper. In
2015, Segezha Group became the world’s
seventh-largest producer of birch plywood
by output.
In February 2016, Segezha Group acquired
a controlling stake in OJSC Lesosibirsk LDK
No. 1, one of the largest vertically integrated
wood processing enterprise in Russia, based
in Krasnoyarsk region. OJSC Lesosibirsk LDK
No. 1 is one of Russia’s largest producers
of lumber, fibre board, planed mouldings
and furniture made from Angara pine. It
processes more than 1 mln cubic meters of
logs annually. The total annual allowable cut
comprises 2.9 mln cu. m.
Wood resources
In 2015, as part of its Wood Supply project,
the company purchased modern logging
equipment, including 12 state-of-the-art
logging complexes, and 50 log trucks.
Total investment in the project was
RUB 1.3 bln. Acquisition of new equipment
made it possible to significantly increase
the volume of logging at Segezha Group
facilities and ensure efficient use of the
forest resource base. Wood resources are
the main item in Segezha Group’s production
costs (accounting for 30% to 62% of the
total). The project made it possible for the
Group’s production facilities to increase the
share of own logging in their raw material
base to 72%.
Segezha PPM – sack paper
In 2015, the company launched a
comprehensive investment project to
upgrade PPM in order to reduce production
costs of paper and ramp up production
capacity. Segezha PPM ranks fourth globally
by production of unbleached sack paper.
Segezha PPM is Russia’s undisputed leader
by production and export of sack paper,
accounting for 70% of total national output.
In 2015, Segezha PPM’s output rose by
6% to 266 th. tonnes. The mill’s key
export markets include Europe, Mexico,
Saudi Arabia, Egypt, Indonesia and China.
The share of marketable paper in sales
totalled 59% in 2015, while the share of
paper converted into sacks at third-parties
production facilities in Europe and Russia
stood at 41%.
Segezha Group's revenue by business
segments, 2015
Operating results of Segezha Group
5 %
14 %
13%
Paper, production output, th. tonnes
Paper, production sales, th. tonnes
Sacks, production output, mln ps
68%
Sacks, production sales, mln ps
Paper & Paper bags
Plywood
Wood production
Wood resources
Sawn timber, production output, th. cu. m.
Sawn timber, production sales, th. cu. m.
Prefab houses, production output, th. cu. m.
Prefab houses, production sales, th. cu. m.
Plywood, production output, th. cu. m.
Plywood, production sales, th. cu. m.
2015
2014
%
285.4
286.8
1,136.1
1,135.0
394.7
398.4
27.0
26.4
95.0
89.9
268.8
268.9
1,184.0
1,187.3
306.6
293.6
22.1
22.0
93.9
90.5
6.2%
6.7%
-4.0%
-4.4%
28.7%
35.7%
22.2%
20.0%
1.2%
0.6%
ANNUAL REPORT 2015 | Sistema www.sistema.ru
Detsky Mir Segezha Group RTI
3535
FINANCIAL RESULTS OF SEGEZHA
GROUP
Please see table on page 32
Segezha Group (“Segezha”) reported strong
growth in revenues and OIBDA in the fourth
quarter of 2015 and the full reporting year
(based on management accounts of 2014),
primarily due to increased sales in its core
segments, as well as the strengthening of
global currencies in relation to the Russian
rouble. The share of export sales in overall
revenue amounted to 79% in 2015.
Segezha managed to ramp up sales in its
new markets of Asia and North America.
Segezha’s OIBDA margin was 17.7% in the
fourth quarter of 2015, up from 14.8% a
year ago. In 2015, Segezha’s OIBDA margin
reached 20.4% compared to 13.0% in 2014
(based on management accounts).
Segezha Packaging – paper sacks
STRATEGY
Segezha Group is aiming to expand its sales
geography and ramp up exports, both in its
traditional markets across Europe and in new
regions. Strategic priority will be given to
the Middle East and North Africa, as well as
China, South-East Asia and Latin America.
The company will open representative
offices in UAE and Egypt.
The overall portfolio of paper products
will be maintained with a slight increase
in the share of high-tech grades, while the
processing of sack paper at Segezha Group’s
own conversion facilities will be increased.
The Group’s main objective in the Russian
and CIS paper sacks markets is to expand
market share on the back of import
substitution and squeezing out of local
players. The total increase in production
capacity in Russia will be 54%, with
projected capacity reached by 2017.
The Group’s strategy envisages construction
of two new plywood mills in Kirov, Kirov
region, at the Vyatka Plywood Mill, and
in Sokol, Vologda region. These mills are
expected to reach their design capacity: in
2018 in Kirov with total production capacity
of 83.2 th. cu. m.; and in 2019 in Sokol with
total production capacity of 130 th. cu. m.
After completion of the project Segezha
Group will become the world’s fourth-largest
company by production of birch plywood.
A new investment project to build a new
Segezha Woodworking Plant is scheduled for
2016-17 and is aimed at boosting output of
sawn timber and enhancing Segezha PPM’s
access to wood chips.
Segezha Group’s logging strategy for 2016
envisages implementation of an investment
project to upgrade logging equipment and
trucks, and construction of forest roads.
These steps will reduce the cost of raw
wood, boost logging volumes and ensure
much-needed security in terms of supplies
of raw materials, given Segezha Group’s
growing demand for raw wood.
Segezha Group is a producer of high quality
sacks under Segezha Packaging brand. It has
one Segezha Packaging factory in Russia, six
in Europe (Netherlands, Germany, Denmark,
Czech Republic, Romania, Italy) and two
in Turkey. Segezha Packaging is Europe’s
second-largest and Russia’s largest producer
of high quality paper sacks, with European
market share of 16.5% and 52% of the
Russian market.
In 2015, the company launched a new fast
sack production line with capacity of 90
mln pcs/year, and had a new high-speed
printing machine installed. Construction of a
state-of-the-art multi-functional paper sack
production plant in Salsk, Rostov region, is
nearing completion. Production capacity of
the new plant will amount to 90 mln sacks
a year. The plant will be launched in 2016.
Paper-to-sack conversion makes it possible
to improve profit margin per tonne of paper,
and is an efficient sales channel.
Vyatka Plywood Mill – birch plywood
As part of modernisation of the Vyatka
Plywood Mill, a new gluing machine was
acquired and commissioned in 2015,
enabling the company to reduce specific
consumption of raw wood, enhance
productivity and start making plywood of
premium grades.
At the end of 2015, the first stage of an
investment project to build new production
facilities in Kirov was launched. Birch
plywood is a high-margin product for
Segezha Group, with the OIBDA margin of
this segment reaching 45%, while the share
of plywood in the Group’s revenue is 8.4%.
Sawn timber
In 2015, Segezha Group achieved a 26%
increase in production of sawn timber
by boosting the operational efficiency of
its sawmilling facilities. Export volumes
rose by 38% due to overall growth in
production and the favourable effect of the
ruble depreciation. The geographical sales
footprint expanded from 11 to 14 countries.
The share of sawn timber in exports is 95%.
The UK remains Segezha Group’s biggest
market, accounting for 30.5% of its exports.
Egypt’s share in exports has soared 15-fold
since 2013, and reached 27.1% in 2015.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 36
36
PORTFOLIO COMPANIES
RTI
RTI is a major holding company that operates in the defence,
microelectronics, comprehensive communication and security
systems segments, and a leading integrator of high-tech R&D
and manufacturing companies. RTI’s production facilities have
their own R&D infrastructure and implement projects in radio
and space technologies, security and microelectronics that
are unique in terms of their scale and complexity. RTI Group
comprises the assets of RTI Systems Concern (defence and
security systems) and NIIME and Mikron (microelectronics).
85%
Effective shareholding
Management
Sergei Boev
(CEO)
Evgeny Novitsky
(Chairman of the Board)
Financial results of RTI
(RUB mln)
Revenues
Adjusted OIBDA
Operating income
Adjusted net income attributable to Sistema
Net income attributable to Sistema
FY 2015
FY 2014
Change
77,287
7,030
4,548
(2,074)
(2,074)
81,028
(4.6%)
4,816
4,067
(5,622)
(3,476)
46.0%
11.8%
-
-
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
Segezha Group RTI BPGC
37
37
77.3
RUB bln
Revenue in 2015
3.11
RUB trln
Russia’s government national defence spending
in 2015
2015
2014
3.11
2.47
INDUSTRY
The defence sector is expected to see
considerable growth in demand for high-
tech products. Under the National Arms
Programme through 2020, state defence
spending will amount to about RUB 20 tln,
with up to 70% expected to be invested in
acquisitions of new defence systems and
equipment.
The Russian microelectronics market
exceeded US$ 2 bln in 2015, but accounts
for only 1% of the global market. Commercial
microelectronics in Russia is dominated by
foreign companies. Russian microelectronics
companies mainly manufacture military and
special-purpose products, which account for
about 40% of the domestic microelectronics
market. In the future, the microelectronics
industry will be supported by growing
demand for RFID-based solutions, including
orders from the government. Major demand
drivers are the semiconductor segment and
the telecoms sector, which, given the import
substitution programme, Western sanctions
and the depreciation of the ruble, is likely to
boost demand for Russian microelectronic
products.
The Russian market for information and
communication technologies grew in ruble
terms in 2015. The company expects the
average annual growth rate in this market to
stand at 7% until 2018, with the segment of
comprehensive security systems being the
most attractive.
SUSTAINABLE GROWTH OF RTI
AND KEY EVENTS IN 2015
As Russia’s biggest private defence concern,
RTI continues to assert its position in the
sector. In 2015, it improved its standing in
the Defence News Top 100 international
ranking from 78th to 69th place. RTI’s core
business is the segment of defence solutions,
which accounts for the bulk of the Group’s
revenue and OIBDA.
Mikron, which manufactures over 50 mln
items per month, is the biggest producer of
microelectronic components, RFID cards
and tags in Russia and the CIS. In 2015,
Mikron continued working to commercialise
its solutions. It developed a prototype
for the Citizen’s ID chip, supplied a batch
of chips for issuing in the trial area (the
Southern Federal District) and developed
and delivered to Goznak, the state-owned
security products manufacturer, RF tags
for producing identification tags to be used
on products supplied within the Eurasian
Economic Community.
In July 2015, Mikron renewed a contract with
Mosgortrans to supply contactless tickets for
public transport, under which it will deliver
12 mln tickets within the next three months.
In September, Mikron and its subsidiary
NIIME became residents of the Zelenograd
special economic zone, where they will
carry out an investment project to develop
technologies and launch production of
microchips using 65 nm topology. The
project will be carried out in 2015-2017,
with production launch scheduled for
2018. Residency in the Zelenograd special
economic zone will ensure lower tax rates
for the companies and make it easier for
them to get customs clearance of imported
components and equipment. Preferential
rates of the unified social tax (14%), a
lower income tax rate, zero customs duties
on materials and components needed for
production, and exemption from the property
and transport taxes offered to residents
will allow them to significantly reduce their
expenses, with the funds released going
towards development of new technologies
and products.
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
3838
PORTFOLIO COMPANIES
RTI
(continued)
A new division of RTI, the Mikron Design
Centre, which develops microelectronic
equipment, in 2015 successfully completed
a pilot project for design, software
development, assembly, start-up and
commissioning of the Regional System
for processing of unified social e-cards in
Mordovia.
In April 2015, RTI acquired a 45% stake
in the IKAR engineering centre, which has
competencies in development of metal
and composite aerostructures, such as
components of airplane wings and body.
RTI plans to use IKAR to create enduring
composite structures for UAV and to
develop system engineering.
STRATEGY
The strategy of the defence solutions
segment is aimed at growing the business
through entering promising innovative
segments of government contracts,
developing and modernising the core
product range, developing schools of thought
and the research and education system.
The company focuses on development of
complex information systems for aerospace
defence and OTH radio positioning of
air, marine and ground objects. Its key
customers within the segment are law
enforcement agencies and operators of
strategic facilities and critical infrastructure.
The strategy of the microelectronic
solutions segment aims at integrating
the development and production of
microelectronic components into processes
to supply ready-to-use sensor equipment
and provide technical support. The key
objective is to ensure technological parity
of Russian microelectronic solutions for the
defence, space and nuclear industries.
Overall, in 2015 Mikron:
>350 mln
transport cards
Issued transport cards
1.5 mln
chips
Delivered for biometric foreign passports
5,8 mln
industrial microchips
39 types
of curcuits
Supplied to Russian customers
Developed to industrial and commercial companies
Information technologies market,
bln RUB
794
850
897
698
740
2014
2015
2016
2017
2018
RTI is also actively developing the
comprehensive security systems
segment. Its objective for the next few
years is to become Russia’s biggest
supplier of comprehensive solutions in
threat monitoring and control, as well as
decision-making support systems based on
technologies and products developed by
RTI and its partners. One of the segment’s
strategic goals is increasing profitability by
expanding the share of intellectual property
in the end product, and developing exports.
The strategy of RTI’s R&D divisions is
aimed at developing the most promising
breakthrough technologies to support the
company’s long-term leadership on target
markets, and capitalisation of its solutions
and competencies by bringing new high-
tech segments to the market. RTI plans
to develop its R&D network through the
acquisition, retention and development
of key competencies and interaction with
leading developers in segments that are
of interest to the company.
ANNUAL REPORT 2015 | Sistema www.sistema.ru
Segezha Group RTI BPGC
3939
750 mln
chips
Exported to assembly plants in Southeast Asia and Europe
45 types
of integral circuits
Set up production for different purposes
FINANCIAL RESULTS OF RTI
Please see table on page 36.
RTI’s revenues declined for the full year 2015
and in the fourth quarter of 2015 year-on-
year due to uneven revenue recognition on
a number of long-term contracts, as well
as decreased revenues in the Information
and Communication Technologies business
unit (ICT, mainly represented by NVision) in
particular as a result of disposal of NVision in
2015. Excluding the ICT unit, RTI’s revenues
grew by 11.8% year-on-year in 2015.
Revenue of the Defence Solutions business
unit increased by 25% year-on-year in 2015.
Adjusted OIBDA increased for the reporting
year by 46.0% following strong revenue
performance at the Defence Solutions
business unit as well as due to reduced
OIBDA loss at ICT.
Results by RTI business segments
in 2015
39.4
14%
11.4
11%
2014
2015
Defence solutions (Revenue)
Microelectronics (Revenue)
Margin OIBDA
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 40
40
PORTFOLIO COMPANIES
Bashkirian Power Grid Company
Bashkirian Power Grid Company (BPGC) is one of Russia’s
leading power grid companies. The company’s assets comprise
distribution and transmission assets located in Bashkortostan.
Financial results of BPGC
(RUB mln)
Revenues
OIBDA
Operating income
Net income attributable to Sistema
Operational results of BPGC
FY 2015
FY 2014
Change
14,816
4,325
2,088
2,027
14,061
5,083
3,279
2,626
5.4%
(14.9%)
(36.3%)
(22.8%)
2015
2014
%
Power losses in transmission grids, %
Power losses in distribution grids, %
Net supply from distribution grids, m kWh
1.38%
8.22%
20,013
1.49%
8.46%
19,683
-0.11 p.p.
-0.24 p.p.
1.7%
91%
Effective shareholding
Management:
Dmitry Sharovatov
(CEO)
Andrey Makarov
(Chairman of the Board)
INDUSTRY(1)
Power generation in Russia increased by
0.2% in 2015, while consumption increased
by an average of 0.4%. One of the factors
influencing consumption was outdoor
temperature: last year’s winter months were
much warmer compared to 2014.
Power generation by power plants in
Bashkortostan declined by 0.4% last year,
while consumption saw a small rise of 0.3%.
Despite continued economic challenges,
power consumption in Bashkortostan is
expected to remain stable. The biggest
consumers are oil refining companies,
which have stable power demands, and the
authorities are working to create a favourable
investment climate. Moreover, domestic
energy demand has grown in recent years
thanks to the active development of low-rise
housing construction.
(1) Source: OJSC SO UES.
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
RTI BPGC Medsi
41
41
SUSTAINABLE GROWTH OF BPGC
AND KEY EVENTS IN 2015
In terms of transmission capacity, BPGC
ranks among Russia’s 10 largest power grid
companies, and ranks among the leading
regional grid operators that make up Russia’s
inter-regional distribution grid companies
(IDGCs) by total length of power lines and
number of substations, transformer and
distribution substations.
Under its programme to improve the
operational efficiency of its power grid assets,
the company is continuing to install power
metering units. The total number of units
installed as part of the programme has reached
111 th., of which 31 th. were installed in 2015,
which helped to significantly reduce power
losses.
The volume and number of new connections
to distribution grids continued to grow in 2015.
BPGC Engineering, which was established
in 2014, acted in 2015 as general contractor
for 49 of BPGC’s facilities, or 31% of the total
investment programme.
BPGC’s priorities include consolidation of
power grid assets in Bashkortostan. In 2015,
the company continued acquiring ownerless
networks and renting municipal networks.
It signed 17 sale-and-purchase agreements
for power-grid equipment, including a
RUB 320 mln contract to acquire the
majority of transmission facilities in Ufa,
the regional capital. The company also
signed 30 contracts to rent transmission
facilities.
As part of its project to completely overhaul
distribution grids in Ufa and introduce Smart
Grid technology, BPGC implemented a pilot
project in Ufa, including construction of a
grid management centre and introduction
of an automated dispatch control system.
The company also signed an agreement with
Siemens AG on localisation of power-grid
equipment manufacturing in Bashkortostan.
STRATEGY
The main objective of the investment
strategy is to increase BPGC’s market share
in Bashkortostan by acquiring assets of
territorial grid operators and expanding
and modernising existing grid infrastructure.
The goal of the investment strategy is to
ensure reliable power supply for consumers
and a stable dividend flow for shareholders.
FINANCIAL RESULTS OF BPGC
Please see table on page 40.
BPGC’s revenue grew by 6.4% in the fourth
quarter and by 5.4% for the full year 2015
as a result of organic growth of electricity
usage and an increase in the number of
connections. Electricity consumption was
up 1.7% year-on-year in 2015 thanks to the
addition of new connected customers, in part
due to the backdrop of a growing economy in
Bashkortostan. Successful implementation of
the investment programme and accelerated
connection to the distribution grids allowed
BPGC to increase the number of new
connections.
OIBDA and net income declined for the
year as a result of the decreased gains from
the sale of non-core assets, combined with
the additional provisions to cover potential
customer disputes. BPGC’s net income
excluding these effects for 2015 increased
by 2.5%.
14,8
RUB bln
Revenue in 2015
80
th. km
Circuit length of BPGC
Number of new connections
of BPGC per year, pcs
21,765
19,790
17,180
2013
2014
2015
Losses on distribution
and transmission grids
8.46%
8.22%
1.49%
1.38%
2014
2015
Transmission
Distribution
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
42
42
PORTFOLIO COMPANIES
Medsi
Medsi Group is one of Russia’s largest nationwide private
healthcare providers, offering a full range of preventive,
diagnostic and treatment services, including rehabilitation
services for children and adults.
Financial results of Medsi
(RUB mln)
Revenues
OIBDA
Operating income
Net income attributable to Sistema
Medsi’s operating highlights
Area, thousand sqm
Visits, thousand
Rendered services, thousand
Average cheque, RUB
Revenue per sqm, thousand RUB
FY 2015
FY 2014
Change
8,227
9,764
(15.7%)
471
(161)
(127)
2015
233.2
7,265.8
11,403.3
1,132.3
35.3
843
249
261
(44.1%)
-
-
2014
Change
228.7
7,663.1
1.98%
-5.18%
13,384.8
-14.80%
1,274.5
-11.16%
42.7
-17.40%
100%
Effective shareholding
Management
Elena Brusilova
(President)
Vasil Latsanich
(Chairman of the Board of Directors)
One of Russia’s
largest private
healthcare providers
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
BPGC Medsi Agricultural businesses
43
43
SUSTAINABLE GROWTH OF MEDSI
AND KEY EVENTS IN 2015
In early 2015, Medsi Group encountered a
number of external challenges that affected
its development strategy. Termination of
state contracts on 1 January 2015 as a
result of monetisation of benefits to civil
servants and a slowdown in the private
healthcare market were the key drivers for a
restructuring of Medsi’s asset portfolio and
a greater emphasis on sales to individuals.
This enabled the company to maintain
its leading position in the VMI segment.
Substituting lost revenues from state
contracts in the inpatient care segment
will require more time, due to high levels of
competition between private and municipal
hospitals offering the lowest tariffs. Despite
this, Medsi managed to increase the number
of commercial hospital admissions by more
than 49%, while the number of surgeries
increased by 30% and the average length
of stay in hospitals was reduced from four
and a half to three and a half days.
High standards
of healthcare
services
20
medical clinics,
55
medical posts
>230
th. sqm
Healthcare facilities
The structure of commerce medical industry in Moscow
51%
44%
57%
57%
56%
57%
41%
40%
40%
40%
Individuals
VHI
Corporate clients
5%
2%
3%
4%
3%
1Q ’15
2Q ’15
3Q ’15
4Q ’15
‘14/’15
INDUSTRY(1)
In 2015, the private healthcare market
was influenced by various trends. Under-
financing of obligatory medical insurance
(OMI) programmes and the contraction
of the state-subsidised healthcare market
stimulated growth in the private medical
sector. An audit conducted by the Audit
Chamber showed that in 2015 the OMI
funding deficit increased by 25% year-on-
year. However, this growth was inhibited
by a number of macroeconomic factors,
including rising inflation, shrinking consumer
purchasing power and a crisis in the
voluntary medical insurance (VMI) market
in some regions of Russia.
In absolute terms, Russia’s private healthcare
market was worth RUB 638.8 bln in 2015.
At the same time, growth rates dropped by
almost half, to 12% vs 21% in 2014, due to
a slowdown in the retail sector (direct
services to individuals).
The VMI segment is closely correlated
with business and market trends. In 2015,
only 2% of employers offering VMI as part
of their employee benefits packages cut
spending on medical insurance, with almost
a quarter of companies increasing medical
expenses and 14% of employers maintaining
spending at the same level as the previous
year. However, 62% of companies did not
provide VMI policies to their employees
at all, with some companies abandoning
the practice due to the financial crisis.
HR experts expect the main reductions
in spending on benefits and non-financial
employee compensation to take place in
2016.
The Moscow region remains Russia’s largest
healthcare market, accounting for 25%
of the total volume of private healthcare
services provided nationwide. The Moscow
VMI segment is also the biggest in Russia.
In 2015, its share reached 64% of the total
as regional markets declined. Overall, over
the last six years the total private healthcare
market in Moscow has doubled.
(1) Source: Company data.
(2) Source: Superjob.ru.
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
4444
PORTFOLIO COMPANIES
Medsi
As part of the reorganisation of its asset
portfolio, Medsi plans to sell its non-
strategic non-core assets and reinvest
the proceeds in the development of its
core healthcare business. To ensure the
implementation of its investment plans the
company is considering engaging strategic
partners not only to co-invest in Medsi
projects but also to enhance the company’s
competences in project implementation and
management and to contribute additional
medical expertise to the company’s day-
to-day operations.
The introduction of polyclinics in the hospital
segment in 2015 is aimed at creating fully-
featured clinical and diagnostic centres
at existing inpatient facilities to ensure
maximum satisfaction of clients’ needs and
stimulate effective development of these
assets.
One of the most important events was the
launch of the second flagship clinical and
diagnostic centre (CDC) at Krasnaya Presnya
in December 2015. The CDC is designed
to service 1.8 mln patients per year, and its
advanced technological capabilities means
it is able to provide a wide range of
outpatient services and perform high-tech
surgeries in its day and 24-hour clinics.
(continued)
Market volume of commerce
medical industry (incl. VHI)
Average medical expenses growth
for a person
173
162
119
143
20%
14%
13%
7%
188
9%
2,743
2,540
2,380
2,077
2,086
33%
8%
14%
7%
0%
2013
2014
2015
2016E
2017E
2011
2012
2013
2014
2015E
Market volume, RUB bln
Growth rate, %
Volume of expenses, RUB/ppl
Expenses growth
ANNUAL REPORT 2015 | Sistema www.sistema.ru
BPGC Medsi Agricultural businesses
4545
The OIBDA and OIBDA margin of Medsi
were also impacted by ending of the large
state contract due to decreased utilisation
ratios in certain assets. Significant OIBDA
growth in the fourth quarter of 2015 year-on-
year resulted from optimisation of Medsi’s
administrative expenses.
Medsi’s largest facility, the clinical-diagnostic
centre at Belorusskaya accounted for 26% of
revenues in 2015, with a 41% OIBDA margin
and a 66% utilisation rate, which improved
by 2 percentage points year-on-year in 2015.
>1,800
doctors
Work in Medsi centres
>7,800
surgeries
Performed in 2015
MEDSI's Revenue by clients 2015
MEDSI's Revenue by assets 2015
9%
11%
7%
26%
54%
17%
37%
Corporate
Individuals
Insurance
38%
CDC at Belorusskaya
Clinics
Children's
Hospitals
Other
STRATEGY
Medsi’s development strategy is aimed
at ensuring exponential growth, primarily
by increasing efficiency and expanding its
clinical chain in the most promising regions.
Medsi’s long-term development strategy
envisages enhancement of the efficiency
of its existing assets and investment in
personnel training, new technologies,
renovation of infrastructure and expansion
of facilities.
Completion of a project launched in 2014
to renovate medical centres and install
state-of-the-art medical equipment as well
as development of children’s clinics is an
important element of the strategy designed
to increase Medsi’s share in the children’s
healthcare market in Moscow.
To make Medsi a national-scale operator,
management is aiming to increase the
company’s share in regional markets that
are attractive to both financial and strategic
investors. The company has earmarked more
than ten strategic cities for expansion in the
medium term. Partnerships with local market
players will be built either via M&A deals or
by opening own clinics on leased premises.
FINANCIAL RESULTS OF MEDSI
Please see table on page 42.
Revenues at Medsi declined as a result of
the ending of a state contract in 2014 that
had accounted for 24% of total revenues.
However, new clients partially offset this
effect, with sales to individuals accounting
for 37% of revenues in 2015 versus 24% in
2014. Revenue from individuals rose more
than 26% in 2015 as patient visits in this
segment increased by 29%.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
46
46
PORTFOLIO COMPANIES
Agricultural businesses
Sistema’s agricultural assets are represented by the RZ Agro
joint venture (50%) and Steppe Agro Holding (100%).
50%
Effective shareholding
in RZ Agro
100%
Effective shareholding
in Steppe Agro
Management
of RZ Agro:
Management
of Steppe Agro Holding:
Stephane MacFarlane
(CEO)
T. Schultz
(Chairman of the Board of Directors)
Konstantin Averin
(CEO)
A. Uzdenov
(Chairman of the Board of Directors)
INDUSTRY(1)
Russia’s agricultural sector grew by 2.9% in
2015, thanks to another high yield of grains
and oil crops and increased poultry and pork
production.
Even though weather conditions were worse
than the previous year, Russia harvested
104.3 mln tonnes of grains and grain
legumes, the third-most in the country’s
post-Soviet history after 2008 and 2014.
In 2015, Russia accounted for 5% of
global grain production and 10% of grain
exports, and its share continues to grow.
Russian wheat accounted for 8% of global
production and 15% of exports in 2015.(2)
The global agricultural market is undergoing
serious changes. The strengthening US dollar
and euro make purchases of US, Canadian
and European wheat unprofitable, while
Russia is gradually becoming a leader in
terms of grain export volumes. Russia’s
prominence on the international market
is supported by global trends: on the one
hand, US and European wheat is becoming
less competitive due to exchange rates and
the shift towards corn seen in the American
agricultural sector; on the other, Russia has
set the bar high with the price-to-quality
ratio of its wheat.
Last year, agricultural producers’ margins
were seriously affected by the drastic fall
of international grain prices, which hit a six-
year low.
Most experts and market participants expect
the Russian agricultural sector to continue
growing in 2016. Growth will remain
positive, but will be limited to 2%-3%, or
approximately the same as in 2015. The
Agricultural Ministry expects to harvest
at least 105 mln tonnes of grain in 2016.
RZ Agro Holding (RZ Agro) is a major
producer of grain and oil crops in
southern Russia with a land bank
of 99,000 hectares. It is controlled
jointly by Sistema JSFC and members
of the Louis-Dreyfus family, and
currently comprises six farms
grouped into three regional clusters
in the Rostov and Stavropol regions.
JSC Steppe Agro Holding (Steppe
Agro) comprises a number of farms
in Krasnodar region, with a total
land bank under management of
37,600 ha. Steppe Agro operates in
four segments: crop farming, animal
farming, fruit growing and vegetable
growing.
(1) Source: Agricultural Ministry, FAS USDA, WASDE - 500, Rosstat.
(2) Source: Rosstat, USDA, RGU
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
Medsi Agricultural businesses Targin
47
47
Krasnodar region is Russia’s main agricultural region:
7% of gross
agricultural output
40% of fruit
output
Gross agricultural output of Russia
Leader in terms of fruit output
10% of gross
grain output
15% of sunflower
seeds output
Leader in terms of gross grain output
Major producer of sunflower seeds
17.3% of sugar
beet output
37%
of wines output
Leader in terms of sugar beet output
Leader in terms of wines output
Gross harvest volume of grain and
legumes in Russia, mln tonnes
Gross harvest volume and export of grain in Russia,
mln tonnes
94.2
105.3
104.3
92.4
89
70.9
27
31%
66
15
23%
88
25
29%
99
98
31
31
32%
32%
Gross harvest
Export
% of export
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
4848
PORTFOLIO COMPANIES
Agricultural businesses
(continued)
Further development of the sector will
depend on the government taking measured
actions to support domestic producers and
exporters at a time when macroeconomic
risks are high. The drastic deterioration of
the macroeconomic environment in 2014-
2015 and high exchange-rate volatility have
had negative consequences for agricultural
producers including reduced ability to
borrow and a significant rise in prices of
basic production tools.
STEPPE AGRO IN 2015
All of Steppe Agro’s companies, except for
the greenhouse farm Yuzhny, are located
in the northern part of Krasnodar region.
Southern Russia, and Krasnodar region in
particular, have the best natural and weather
conditions for agriculture.
Steppe Agro’s land bank as of the end of
2015 totalled 37,600 ha (including the
Rodina dairy farm and two fruit farms
acquired at the end of 2015).
The land cultivated by Steppe Agro is
classified as improving. According to the
UN, improving land accounts for just 10%
of the world’s agricultural land. The rest is in
different stages of degradation.
Approximately 40% of the harvested winter
wheat was exported and 60% sold on the
domestic market. Steppe Agro’s high yields
in 2015 were driven by its high farming
standards, use of state-of-the-art agricultural
technologies, consistent work to improve
soil fertility, and also favourable weather
conditions. According to Kuban State
Agricultural University, Steppe Agro’s soil is
the best in Krasnodar region for microflora
quality.
NEW AGRICULTURAL ASSETS
At the end of 2015, Steppe Agro Holding
acquired four companies operating in three
agricultural segments: fruit, dairy and
greenhouse vegetable growing.
Crop farming
Livestock production
Fruit growing
Vegetable growing
(Krasnodar region)
(Krasnodar region)
(Krasnodar region)
(Karachaevo-
Cherkessiya)
5 companies
1 company
(acquired by Steppe Agro
in December 2015)
2 companies
(acquired by Steppe
Agro in November 2015)
1 company
(acquired by Steppe Agro
in December 2015)
Sistema’s stake
85%
Sistema’s stake
85%
Sistema’s stake
85%
Sistema’s stake
100%
Average yields of Steppe Agro’s main crops, t/ha
(excluding assets acquired at the end of 2015)
Crop
2015
2014
%
Average for
Krasnodar region,
2015
Sugar beet
Winter wheat
Winter barley
Corn
50.0
54.1
6.8
6.6
7.5
6.7
5.9
7.7
-7.6%
+1.5%
+11.9%
-2.6%
Gross output, k t (excluding assets acquired at the end of 2015)
Crop
Sugar beet
Winter wheat
Winter barley
Corn
Sunflower
Feed crops
Other crops
Total
2015
198.6
81.4
7.9
23.5
7.8
49.9
1.8
2014
216.7
81.5
9.9
14.6
11.6
34.5
4.7
370.9
373.4
46.6
5.6
5.9
5.6
%
-8.4%
-0.1%
-20.2%
+61.0%
-32.8%
+44.6%
-61.7%
-0.7%
ANNUAL REPORT 2015 | Sistema www.sistema.ru
Medsi Agricultural businesses Targin
4949
Dairy
OJSC Rodina
(Kanevskoy district, Krasnodar region)
1. Reducing crop farming risks through
vertical integration. Entering an import-
substituting agricultural segment.
2. OJSC Rodina is a leading milk producer
in Krasnodar region. Its output in 2015
was 31,100 tonnes. It has Russia’s
highest milk yield, with 10.8 tonnes per
lactating cow.
Rodina’s land pool totals 9,800 ha, out
of which 9,540 ha is farmland, including
1,084 ha of irrigated land.
Farm infrastructure for 8,000 cows,
including:
•
four state-of-the-art fourth-
generation farms with feeding
sites, and hay, haylage and manure
storage facilities
The average number of lactating
cows per year - 2,973; 1,100 bull
calves;
• milk output - min. 30,000 t/year;
• meat output - min. 1,500 t/year;
•
•
possibility to produce pedigree
heifers, 1,500 heads/year;
highly productive cattle with a yield
of min. 10,000 litres.
Own stock reproduction capacity.
Production of own quality fodder.
Vegetables
JSC Yuzhny Agricultural Complex
(Ust-Dzheguta, Karachayevo-Cherkessiya )
1. The share of vegetables produced in
greenhouses is growing fast. Entering
a potentially high-profit agricultural
segment.
2. JSC Yuzhny Agricultural Complex
is Russia’s biggest producer of
protected-ground vegetables, with
144 ha of greenhouses in Karachayevo-
Cherkessiya.
It has a developed sales market,
greenhouses, most of which are in
a good condition, and a qualified
management team. In 2015, the
company’s revenue was RUB 2.2 bln.
Sistema plans to gradually replace the
greenhouses with newer ones, which
may double the farm’s productivity and
reduce costs.
Fruit
OJSC Trudovoye
LLC Sady Kubani
(Leningradsky district, Krasnodar region)
1. Diversification of Sistema’s agricultural
business. Entering an import-
substituting agricultural segment.
2. OJSC Trudovoye is a fruit orchards
owner and a fruit producer. It is one of
Russia’s top five apple producers. High-
quality table apples account for ca. 97%
of the output.
LLC Sady Kubani owns fruit storage and
processing infrastructure.
Total land owned: 1,772 ha. The existing
intensive orchards and infrastructure
occupy 630 ha. Total refrigerator
capacity for fruit storage is 16,000 t,
with a new module (+7,900 tonnes)
under construction. An AWETA sorting
and grading conveyor with a capacity
of 22,000 t per season. In 2015, the
infrastructure was modernised and now
allows packaging apples both in 15 kg
boxes and in 4-6-piece trays.
The structure of Agroholding Steppe
land under cultivation in 2015(1)
Land bank of Agroholding Steppe,
ha
3.8%
4.5%
6.5%
12.0%
15.2%
12.0%
Winter corn
Sunflower
Sugar beet
Maize
45.9%
17,044
20,536
Forage crops
Winter barley
Other
Ownership
Rent
(1) Excl. the assets ascuired at the end of 2015.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
5050
PORTFOLIO COMPANIES
Agricultural businesses
(continued)
RZ AGRO IN 2015
In 2015, RZ Agro’s farms had a good harvest,
with gross output of 272,000 tonnes (just
9% below the record set in 2014), including
168,000 tonnes of the main crop, wheat.
The farms operated in different weather
conditions, which influenced their results.
All of the farms strengthened their positions
in their respective geographies in terms
of both gross production and financial
performance.
Farms of the Rostov South cluster
(Zernogradsky district, Rostov region)
harvested an unprecedented amount of
crops. Production targets were outperformed
by 13%, and OJSC Donskoye and OJSC 1st
Cavalry Army Horse Farm were the district’s
leaders for gross grain output. Overall, crop
yields in these farms have increased by 36%
in the last three years, with output increased
by 60%. Production growth required
expansion of grain storage facilities, and
additional warehouses were commissioned
in 2015.
In the eastern part of Rostov region, the
farmers encountered problems during
the autumn sowing season. Winter crops
were sown during a dry period, but after
rains started the weather grew colder. On
35%-40% of the sown area, crops did not
germinate before the winter, so the grain
production target was not achieved. At
the same time, the eastern farms reported
strong financial results thanks to other crops
(flax, coriander). A new crop, safflower,
was introduced into the crop rotation of the
Rostov East cluster, and its yield exceeded
the budget target.
RZ Agro’s sales strategy in the 2015-2016
marketing year, which ends in June 2016,
has been developed taking into account
the current situation on the global grain
market, where prices have come down as
a result of the high yields of recent years.
Relying on its experience and tools for
forecasting global price trends, RZ Agro’s
commercial department organised timely
sales of the bulk of the harvest to minimise
the reduction in margins caused by falling
prices. To mitigate risks related to global
price fluctuations, the company hedged grain
prices on international exchanges.
As of 1 March 2016, RZ Agro had sold 95%
of its output.
In 2015, RZ Agro expanded its export
geography. Apart from traditional
destinations such as Turkey, Egypt and
Armenia, the company began exporting
to Lebanon, Albania and Africa.
RZ Agro’s opearting results
2015
2014
%
Total land, ha
Owned land, %
Arable land under cultivation, %
Gross output, k t
Wheat yield, t/ha
Sunflower yield, t/ha
Corn yield, t/ha
100,000
100,000
68%
91%
272
4.1
2.3
4.7
66%
91%
300
4.5
2.3
3.6
0%
+2%
0%
-9%
-9%
0%
+31%
Sistema agriculture assets
(aggregated)(1)
Revenue 2015
Sistema agriculture assets
(aggregated)(1)
OIBDA 2015
2.197
0.618
1.335
Crop production
Milk / livestock farming
Gardening
Vegetable farming
0.172
0.441
4.380(2)
0.540
1.834(3)
Crop production
Milk / livestock farming
Gardening
Vegetable farming
(1) Aggregated FY 2015 results of newly acquired assets and RZ Agro (not consolidated by Sistema).
(2) Revenue of RZ Agro (not consolidated by Sistema) in the amount of RUB 2.5 bln and crop production segment (consolidated by Sistema) in the amount of RUB 1.9 bln.
(3) OIBDA of RZ Agro amounted to RUB 1.1 bln, crop production segm-ent’s OIBDA was RUB 0.7 bln.
ANNUAL REPORT 2015 | Sistema www.sistema.ru
Medsi Agricultural businesses Targin
5151
In 2015, RZ Agro for the first time
participated in a government tender for
wheat supply and won, delivering 27,000
tonnes to the intervention fund.
In a ranking of Russian agricultural
companies released in September 2015 and
based on the 2014 performance, RZ Agro
was among the top three companies by
EBITDA margin and among the top five by
net margin.
RZ AGRO’S STRATEGY
RZ Agro’s operating strategy has been
developed in response to present-day
challenges. In 2015, the company decided to
build a seed plant and develop drip irrigation.
The goal of the first stage (2016-2019) is to
provide Super Elite and Elite category seeds
for the Rostov South cluster to meet 100%
of its own demand for winter wheat seeds.
The project aims to obtain quality seed
material for the company’s own production,
increasing crop yields and reducing costs.
Domestic and export sales of RZ Agro
86%
82%
78%
14%
18%
22%
50% 50%
Domestic sales
Export
69%
31%
2011/2012
2012/2013
2013/2014
2014/2015
2015/2016
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
52
PORTFOLIO COMPANIES
Targin
Targin is a large Russian multi-purpose oilfield services holding.
It consists of a management company and four subsidiaries:
Targin Drilling, Targin Well Workover, Targin Logistics and
Targin Mechanical Services.
Financial results of Targin
(RUB mln)
Revenues
OIBDA
Operating income
Net income/(loss) attributable to Sistema
FY 2015
FY 2014
Change
25,538
3,330
1,711
1,156
27,516
3,109
1,786
1,032
(7.2%)
7.1%
(4.2%)
12.0%
100%
Effective shareholding
Management:
Kamil Zakirov
(CEO)
Mikhail Cherny
(Chairman of the Board of Directors)
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
Agricultural businesses Targin SSTL
53
INDUSTRY(1)
The Russian oilfield services market grew by
8% in 2015 in ruble terms, from RUB 880 bln
to RUB 950 bln. Spending on oilfield services
is expected to increase further despite
conservative oil price expectations. A large
portion of the market (40%) is serviced by
vertically integrated oil companies.
Reduction of competition through
consolidation of service companies with
oil producers (e.g., the acquisition of Trican
Well Service by Rosneft) is a national trend,
primarily driven by the appeal of guaranteed
access to service facilities at minimal prices.
This restricts competition and leaves less
room for the development of the assets
acquired.
Other key trends in the oilfield services
market in 2015 include production at
traditional oilfields; growing extraction
volumes; rescheduling of operations at new
oilfields (East Siberia); development of
hard-to-recover and offshore reserves; price
pressure from consumers due to general
growth of spending; and restricted access to
bank and corporate loans due to sanctions.
The main oilfield service in the Russian
market is drilling (30% of total market
volume). To maintain production at 530-
540 mln tonnes per year, operators will need
more wells. Production drilling in Russia in
2015 gained 11.5%, while exploration drilling
increased by 8%. Horizontal drilling in Russia
is continuing to grow, and reached 30% of
total drilling volume in 2015.
The development of the coil tubing segment
is primarily driven by growth of fracking
and the introduction of new sophisticated
fracking technologies, as well as drilling
of new wells.
Coil tubing is increasingly used for well
completion. Being directly related to fracking
and horizontal drilling, the future prospects
for the coil-tubing segment are closely linked
to progress in those two areas. Coil-tubing
operations are growing at an average rate
of 10% a year, with a peak expected in 2017.
After the industry was put under sanctions
restricting imports of certain types of
equipment, the Russian government adopted
a special programme to support investment
projects with project financing. This
programme is designed to boost long-term
lending to the real economy on preferential
terms.
Key players of Russia’s oilfield
services market
30.0%
2.3%
2.3%
2.7%
3.0%
9.0%
11.0%
Oil companies
Eurasia Drilling Company
Schlumberger
Siberian Service Company
Targin
Вaker Hughes
Halliburton
Other
25.2
RUB bln
Revenue of key business segments(2)
40.0%
18,000
employees
Work in Targin
>130
services
Number of oilfield services
(1) Sources: www.rbc.ru, www.renergy.ru, www.cttimes.org, www.kommersant.ru.
(2) Excluding disposed construction segment.
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
(continued)
Targin’s operating highlights
Units
2015
2014
%
Drilling crews
Meters drilled
Wells commissioned
Drilling
units
th. m
units
38
480
240
37
407
193
Well Servicing and Workover
Well servicing and workover crews
Work plan
Vehicles
Work plan
units
th. hours
154
1,168
153
1,158
Transport
units
4,824
5,009
th. hours
12,482
12,466
Mechanical services
Overhaul of oilfield equipment, coil
tubing, and pump rodse
Oilfield equipment maintenance
Polymer coating of pipes
th. units
‘th. units
‘th. m
612
30
621
532
33
579
2%
18%
24%
1%
1%
-4%
0%
15%
-9%
7%
Targin is a member of the Industry and Trade
Ministry’s imports substitution group for
fracking and well completion. The company
also cooperates with the Skolkovo Fund,
thereby benefiting from immediate access
to new technological ideas as well as to the
fund’s infrastructure and financing.
5454
PORTFOLIO COMPANIES
Targin
SUSTAINABLE GROWTH OF TARGIN
AND KEY EVENTS IN 2015
Targin’s total revenue(1) in 2015 increased by
7%, to RUB 25.3 bln. OIBDA and net income
rose by 23% and 27%, respectively.
Growth in the drilling segment was driven
by the commissioning of five new rigs (a
320-ton rig and four 120-ton rigs). A slight
increase in the Well Servicing and Workover
segment was due to a new customer in
Serbia (Naftna Industrija Srbije a.o.). The
holding’s customers in 2015 (other than
Bashneft) included Gazpromneft, Slavneft-
Megionneftegaz, Rosneft and Tatneft.
According to research by RBC, Targin ranks
among Russia’s 500 largest companies.
Its subsidiary Targin Drilling is viewed by
the Industry and Trade Ministry as one of
Russia’s most reliable drilling contractors.
RAEX (Expert RA) rated Targin as A+ («Very
high level of creditworthiness»), third sub-
level, with a stable outlook.
The company operates in Russia’s key oil-
and-gas basins: Volga-Urals, West Siberia
and Timan-Pechora. To reach out to foreign
markets, Targin has started providing well-
servicing and workover services to NIS,
Serbia’s national oil company. Targin has also
signed a memorandum of understanding
with Wafrat Al Tawasul of Saudi Arabia
with a view to creating a state-of-the-art
producer of oilfield equipment in Saudi
Arabia. The project was initiated under the
aegis of the intergovernmental Russian-
Saudi Commission for Trade and Economic
Cooperation. Targin also signed MoUs
to participate in well construction and
maintenance of electrical centrifugal
pumps in Iran.
(1) Excluding disposed construction segment.
ANNUAL REPORT 2015 | Sistema www.sistema.ru
Agricultural businesses Targin SSTL
5555
STRATEGY
Targin’s development strategy focuses on
upgrading existing equipment and machines
to cutting-edge standards while investing
in new businesses and partnerships with
technology companies. The strategy’s chief
focus is on expanding the company’s product
portfolio to meet customer expectations.
Targin’s investment programme is designed
to enhance technical capabilities to match
those of its leading peers in the industry.
FINANCIAL RESULTS OF TARGIN
Please see table on page 52.
Targin’s revenues decreased year-on-year
in the fourth quarter and for the reporting
year following disposal of its construction
segment. Revenue from key business
segments (excluding the construction
segment) in 2015 increased by 7.1% largely
driven by growth in Targin’s core drilling
segment, where drilling volumes were up
18% for the year.
Strong growth in OIBDA and OIBDA margin
both for the quarter and the full year were
due to an increase in revenues attributable
to high-margin services, successful
well-workover operations in Serbia and
optimisation of the business structure. The
ratio of administrative expenses to revenues
for the full year 2015 was 1.9%.
Targin continued to modernise and expand
its fleet of drilling rigs and specialised
equipment during the reporting period.
Results of the drilling business
segment
407
193
480
240
+7.1%
Growth of OIBDA in 2015
+12%
Growth of net income in 2015
2014
2015
Wells commissioned, units
Drilled, th. m
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 56
56
PORTFOLIO COMPANIES
Sistema Shyam TeleServices Limited
(SSTL)
Sistema Shyam TeleServices
(SSTL) is a CDMA mobile
operator offering telecom
services in India under
the MTS brand.
57%
Effective shareholding
Management:
Sergey Savchenko
(CEO)
Alexander Gorbunov
(Chairman of the Board of Directors)
Financial results of SSTL
(RUB mln)
Revenues
Adjusted OIBDA
Operating loss
Adjusted net loss attributable to Sistema
Net loss attributable to Sistema
FY 2015
FY 2014
Change
13,965
(2,395)
(3,227)
(7,721)
(7,721)
8,480
(3,112)
(16,592)
(10,202)
(18,460)
64.7%
-
-
-
INDUSTRY
In Q4 2015, the Indian telecoms market
continued its slow but stable growth, mostly
driven by GSM subscribers and accelerated
development of the data segment. For
the first time ever, the total number of
subscribers in India exceeded 1 bln people,
with overall services penetration of 78.8%.
The active subscriber base rose by 8.9%
over the year.
The CDMA subscriber base and market
share shrank by 1.1%. Although several
operators left the market in 2012-2013,
12 mobile companies continue to operate,
of which eight provide only GSM-based
services, three offer both the GSM and
CDMA standards and one (SSTL) uses
only CDMA. The “big three” Indian
operators (Bharti Airtel, Vodafone and
Idea) strengthened their positions in 2015,
with their total market share by subscribers
exceeding 59.7%.
Income from voice services is falling due
to a decrease in the average rate per
minute (ARPM): at the end of March
2015, the regulator lowered the rate for
traffic interconnect by 30% and set the top
threshold for roaming rates.
Revenues from data transfer remain the key
growth driver across the industry (growth of
36% per annum) thanks to the development
of 3G networks (which cover three quarters
of the population(1)), reduction of network
construction costs (new regulations allow
joint use of networks, and as of the end of
2015 also joint use of frequencies in the
same spectrum), and an increase in supplies
of smartphones (one third of which are
4G-enabled(2)).
In 2015, traffic generated by broadband 2G
and 3G services grew by 13% year-on-year,
and the number of active 3G/EVDO data
subscribers rose by 12%. By December 2015,
penetration of data services in India reached
9% (compared with 0.96% in 2010).
(1) ПSource: GSMA report. The Mobile Economy of India 2015.
(2) Source: CMR.
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
www.sistema.ru Targin SSTL Binnopharm
57
57
for data subs and by 20% for voice subs
year-on-year. These measures helped reduce
the OIBDA loss in rupees by 49% year-on-
year.
STRATEGY
SSTL’s key priority in 2016 is inorganic
development through the merger with
RCom. SSTL’s key objective in terms of
organic development in 2016 is to maintain
the current CDMA business until the RCom
deal is closed.
FINANCIAL RESULTS OF SSTL
Please see table on page 56.
SSTL’s revenues increased by 35.6% year-
on-year in the fourth quarter and by 64.7%
for the full year 2015, mainly driven by rouble
depreciation in 2015 and higher data service
revenues. In the fourth quarter, total non-
voice revenues grew by 28% year-on-year
in Indian rupees.
SSTL’s OIBDA loss contracted substantially
year-on-year in 2015 due to the increase
in data revenues, optimisation of sales
and marketing costs and reduction in
interconnect charges. In the fourth quarter
2015, SSTL became OIBDA positive in all
operating circles in India (profitability of
operations was offset by expenses at the
holding level). SSTL’s high-speed data
services now cover over 1,250 towns across
9 circles.
The current level of smartphone penetration
in the Indian market is still quite low (22%),
while the share of smartphone supplies
in 2015 increased from 36% to 38%.
Aggressive growth is supported by active
promotion of 3G/4G equipment made
by producers such as Asus, Micromax,
Samsung, ZTE and Lenovo, while
smartphone prices vary from US$ 40 to
US$ 150. The price of 4G smartphones
was almost the same as 3G smartphones,
resulting in a 74% rise in supplies of 4G
devices: one smartphone in three was
4G-enabled.
SSTL’S DEVELOPMENT AND KEY
EVENTS OF 2015
In 2015, the company made its was most
successful in the data segment. EVDO
Revision В technology remains competitive
with 3G.
The number of mobile data customers
increased by 0.3 mln (+18%) and stood at
1.9 mln as of the end of 2015. During the
year SSTL renewed its tariff plans, thereby
increasing the share of highly profitable data
subscribers with prepaid tariffs up to 30%.
In future, LTE services will dominate the
market due to the launch of 4G networks
by leading operators (Airtel, Idea, Vodafone)
and a single price for 3G/4G tariff plans. In
2016, competition in the telecom market is
expected to get tougher, as one more 4G
operator (RJio) will enter the market, offering
aggressive equipment prices and tariff plans.
SSTL’s total subscriber base(1) fell by 11%
year-on-year to 8.1 mln due to higher churn
of voice subscribers: the subscriber base
shrank by 1.2 mln to 6.2 mln. Measures
aimed at retaining voice subscribers
(M-Bonus, and the new STV 27/28 voice
tariff) reduced subscriber churn to 4% in
December 2015 against 6% in Q3 2015
In 2015, SSTL’s revenue rose by 9% year-
on-year in rupee terms, while revenue from
data services increased by 60% compared
with 40% growth in 2014. The share of data
revenue in total revenue increased from 34%
to 50%.
An increase in revenues from the mobile
data segment in 2015 fully compensated for
the decline in profits from voice services. The
average monthly growth rate of income from
data services exceeded the increase in data
traffic consumption by 2.1%.
In 2015, the company tightened its cost-
control measures. As a result, costs related
to acquisition of new subscribers fell by 16%
In 2015, the process of industry
consolidation started. On 2 November
2015, SSTL and Reliance Communications
(RCom) completed a merger that will enable
RCom to obtain necessary frequencies in
nine circles. SSTL will receive a 10% stake
in the combined company. In December
2015, the companies started applying for
the necessary permits and approvals from
Indian state authorities. RCom and RJio have
entered into an agreement on a joint use and
sharing of frequencies, and are considering
adding Aircel to this alliance.
Videocon has sold frequencies in Gujarat
and Uttar Pradesh West to Idea; negotiations
on selling frequencies in four more circles are
under way.
To enhance the efficiency of using
limited frequency spectrum, the Indian
government has adopted regulations making
it possible for operators to buy, sell and
share frequencies. In January 2016, the
government announced plans to hold a
new frequency auction in May-June 2016.
An unprecedented number of frequencies
(2142MHz) in seven spectrum bands (700,
800, 900, 1800, 2100, 2300 and 2500
MHz) will be put up for auction.
Data services penetration
in India
SSTL subscriber base,
mln
9.00%
7.40
1.38
5.60%
3.30%
1.10%
1.20%
8.46
8.22
(1) Based on 6M subscriber activity.
www.sistema.ru
Voice subscribers
Data subscribers
ANNUAL REPORT 2015 | Sistema
2011
2012
2013
2014
2015
2014
2015
www.sistema.ru
58
58
PORTFOLIO COMPANIES
Binnopharm
JSC Binnopharm is a pharmaceuticals company and Russia’s
largest full-cycle producer of bio-technology drugs certified
according to Good Manufacturing Practices (GMP).
Financial results of Binnopharm
(RUB mln)
Revenues
OIBDA
Operating income / (loss)
Net income/ (loss) attributable to Sistema
FY 2015
FY 2014
Change
1,660
193
21
(68)
2,485
(33.2%)
322
136
(26)
(40.0%)
(84.4%)
-
74%
Effective shareholding
Management:
Alexey Chupin
(CEO)
Dmitry Zubov
(Chairman of the Board of Directors)
INDUSTRY(1)
The growth of Russia’s pharma market in
2015 slowed to 8% from a CAGR (in ruble
terms) of 14% for 2008-2014. The physical
market shrunk by 4.4%, meaning that the
growth in money terms is clearly a product
of inflation.
The commercial pharma segment grew
faster than public pharma (9.4% and 6.4%,
respectively), mostly driven by the rapid
growth of retail prices. While prices in the
commercial segment grew by an average
of 16%, those in the corporate segment
gained 6%, restricted by a regulatory ceiling
imposed on life-saving medications.
The Russian market remains heavily
dependent on imported medicines, which
account for about 75% of total pharma
sales (in money terms). However, import
substitution in the pharma market remains
a priority for the Russian government.
(1) Source: DSM.
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
SSTL Binnopharm MTS Bank
59
59
To support local producers, in 2015
the government issued a decree banning
foreign pharma producers from participating
in governmental tenders where two
or more bids have been received from local
producers.
Most experts expect moderate market
growth in ruble terms to continue in 2016
as average prices continue to rise despite
a reduction in the number of physical
packages sold.
The share of imported products in the
market is expected to shrink as a result
of restricted access to governmental
tenders, stimulation of local production,
and the significant weakening of the ruble.
SUSTAINABLE GROWTH
OF BINNOPHARM
AND KEY EVENTS IN 2015
Binnopharm’s main priority for 2015 was
to formulate a new strategy for 2016-2020
and build a new management team capable
of achieving the long-term goals.
Binnopharm also set up an R&D department
and shaped a promising product portfolio,
with applications for seven marketing
authorisations filed at the end of the year.
With a view to delivering on the new strategy,
the company created an in-house marketing
system comprising a regional chain of medical
representatives. As a result, by the end of 2015
the company reported a spike in the sales
of Binnopharm/Alium products, while
third-party product sales were slashed.
The new focus on in-house products pushed
profits up.
In October, Binnopharm signed a contract
with National Immunobiological Company
to supply 6 mln doses of the hepatitis B
vaccine (Regevac) (against 4.5 mln in 2014).
As a new step towards a foreign partnership,
in November the company signed a contract
with Fresenius Kabi to localise production
of Ketosteril in Russia through 2023.
Quantity of packs,
mln pack
5,580
208
183
5,315
5,460
160
149
5,081
2012
2013
2014
2015E
Quantity of packs, mln pack
Average price of pack, RUB/pack
STRATEGY
Binnopharm’s key operating objectives
for 2016 include aggressive marketing
of Binnopharm products for pulmonology
and neurology applications, icrease of
total sales, and export deliveries to other
member states of the Eurasian Economic
Union.
Binnopharm plans to maintain its current
level of production of hepatitis B vaccines
while ramping up R&D expertise.
FINANCIAL RESULTS
OF BINNOPHARM
Please see table on page 58.
Revenue at Binnopharm declined in 2015 as
a result of a planned reduction of the low-
margin distribution business and lowered
price for the vaccine of its own production.
The reason for OIBDA decline in 2015, apart
from the lower revenue, was an increase
in SG&A, as well as expenses to set up the
sales and marketing function. Binnopharm’s
OIBDA was restored in the fourth quarter
of 2015, following increased share of sales
from its own products. Earlier in 2015,
Binnopharm signed a contract with the
National Immuno-biological Company for
delivery of 6 million doses of the hepatitis B
vaccine Regevak B, which tops the vaccine’s
entire sales for 2014.
Russian medicine market, RUB bln
537
609
677
741
296
149
267
169
296
183
315
195
Retail sector
Parapharmaceuticals
TOTAL market
2012
2013
2014
2015
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
60
60
PORTFOLIO COMPANIES
MTS Bank
MTS Bank provides a full range of banking services to private
and corporate customers in Russia. It is one of the country’s
largest banks (№44 by assets) and a systemically important
operator in payments, loans and savings markets.
87%
Effective shareholding
Management:
Vsevolod Rozanov
(Chairman of the Board of Directors)
Ilya Filatov
(Chairman of the Management
Board)
Financial results of MTS Bank
(RUB mln)
Revenues
OIBDA
Operating loss
Net loss attributable to Sistema
FY 2015
FY 2014
Change
25,619
26,965
(5.0%)
(16,969)
(17,658)
(15,282)
(14,571)
(15,252)
(12,392)
-
-
-
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
INDUSTRY(1)
Russia’s banking sector was under significant
pressure throughout 2015 that weighed on
banks’ profitability. These factors include
Western sanctions, a decline in GDP of
almost 4%, withdrawal of banking licences
and the need for additional loan.
As a result of the ruble depreciation, the
banking sector suffered from a decline in
capital adequacy, which came close to
minimum required levels.
Deteriorating loan quality in all segments
posed another challenge, with the share of
non-performing loans in the lending portfolio
increasing. The need to make loan provisions
became a significant barrier to profitability
for many Russian banks in 2015. On top
of that, the year was marked by a general
shrinking of lending portfolios
and a slowdown in retail lending due to a rise
in interest rates, slumping real household
earnings and worsening consumer
sentiment.
The Central Bank lowered its key interest
rate in a series of rate cuts from 17% in
December 2014 to 11% by August 2015, thus
reducing the cost of liabilities for lending
institutions. However, the increasing cost
of capital negatively affected the borrowing
appetites of end customers. Banks are now
more focused on the quality of their retail
and corporate customers, and are restricting
unsecured lending. This caused a toughening
of competition for customers in all sectors
of the economy.
Faced with the urgent need to improve
efficiency, Russian banks in 2015 focused
on strategic cost-cutting, technological
innovation and efficient risk management.
Binnopharm MTS Bank Real-estate assets
61
61
Assets of the banking sector,
RUB bln
33 301
RUB bln
83 000
Corporate loans, Russia
77 653
57 423
49 510
41 628
2015
2014
33 301
29 536
2011
2012
2013
2014
2015
Retail deposits in Russia, RUB bln
10 684
RUB bln
Retail loans, Russia
2015
2014
23,219
10 684
11 330
16,958
18,553
14,251
11,871
2011
2012
2013
2014
2015
Key Central Bank rate, %
17.00
8.00
8.25
11.00
5.50
2011
2012
2013
2014
2015
(1) Source: Review of the Banking Sector of the Russian Federation by the Bank of Russia (regular information and analytics report).
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
6262
PORTFOLIO COMPANIES
MTS Bank
SUSTAINABLE GROWTH OF MTS
BANK AND KEY EVENTS IN 2015
In 2015, MTS Bank suffered from a
worsening of borrower quality in all
market segments and had to increase its
loan reserves. This was the biggest factor
weighing on the bank’s profits in 2015.
Despite shrinking its gross loan portfolio,
MTS Bank had to maintain a conservative
approach to lending given the unfavourable
economic environment. Although this
conservatism resulted in a reduction in
lending in all segments in 2015, it will
contribute to a higher-quality loan portfolio
in the long term.
To boost profitability, MTS Bank took a series
of steps to improve the efficiency of credit
scoring, renew its product offering and start
cross-sales.
MTS Bank recorded a loss for 2015, mostly
due to the sizeable reserves it was obliged
to create with respect to major corporate
borrowers. The bank’s conservative reserve
policy aims to maintain high stability of the
business. The bank’s reserves to loans ratio
as of the end of 2015 was 38%, up from
24% at the end of 2014. MTS Bank’s capital
adequacy ratio remains among the highest
in the sector.
(continued)
In December 2015 the bank received a tier
II capital injection of RUB 7.2 bln from the
national Deposit Insurance Agency (DIA).
The DIA provided the funds on condition
that MTS Bank dedicate at least 1% of
its monthly lending portfolio to loans for
SMEs and businesses in industries deemed
strategically important to the Russian
economy, as well as mortgage loans.
In December 2015, MTS Bank’s retail
lending portfolio reached the pre-crisis level
registered in August 2014.
STRATEGY
The bank’s operating strategy is to maintain
a diverse portfolio and lend to a wide
spectrum of private and corporate customers
while staying as risk-intolerant as possible.
The bank uses a special technological
platform enabling close cooperation with
mobile operator MTS to offer transactional
products. State-of-the-art technologies used
in credit risk assessment allow the bank to
upscale its transactional and lending services
at a solid rate.
MTS Bank’s operating highlights
2015
2014
%
MTS Money portfolio, RUB mln
Retail lending portfolio, RUB mln
Interest income, RUB mln
Fee income, RUB mln
N1.0 (capital adequacy)
15,583
59,446
20,455
5,817
18.3%
20,716
73,169
25,102
5,444
16.1%
(24.7%)
(18.8%)
(18.5%)
6.9%
n/a
Gross loan portfolio of МТS Bank,
RUB bln
Retail loans portfolio of МТS Bank,
RUB bln
137.1
124.3
110.8
114.1
62.6
62.4
49.5
88.3
41.2
14.6
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
Binnopharm MTS Bank Real-estate assets
6363
The funds received from the DIA in 2015
helped the bank intensify corporate lending
to businesses in the defence sector, food
and chemical industries, heavy engineering,
instrumentation technologies and
infrastructure, among others.
In 2015, MTS Bank started developing
factoring services, which have proved very
popular among customers due to restricted
access to lending from Russian banks.
The bank’s factoring portfolio is growing fast
through cooperation with vendors servicing
MTS, Detsky Mir, Concept Club and other
Sistema companies. The factoring business
also thrives on networking with Russian
representative offices of leading global
FMCG and DIY chains.
In 2016, the bank will stay committed to the
cost-cutting programme it launched in 2015.
Retail deposits of MTS Bank,
RUB bln
65.3
67.0
65.7
53.4
35.6
2011
2012
2013
2014
2015
Assets of MTS Bank
(total, RUB bln)
192.0
193.8
173.6
170.6
149.0
2011
2012
2013
2014
2015
FINANCIAL RESULTS OF MTS BANK
Please see table on page 60.
For the full year 2015, revenue declined by
3.6% and interest income was down by
18.5%. The bank’s OIBDA loss in 2015 was
also impacted by an increase in provisions
for the loan portfolio to corporate clients. In
2015, the share of corporate clients in the
total provision expense amounted to 62%.
The bank continued to cut costs throughout
the year. Administrative expenses declined
by 16.2% year-on-year in the fourth quarter
and by 9.2% for the year.
MTS Bank’s gross loans decreased by 11.4%
in 2015 as the bank continued to manage its
balance sheet and reduce risk. MTS Bank’s
top priorities in 2016 are improving the
quality of its loan book and continuing to
optimise administrative expenses.
(1) On a stand-alone basis.
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
64
64
PORTFOLIO COMPANIES
Real-estate assets
Sistema’s interests in the real-estate sector are represented
by a number of companies, the key ones being Leader-Invest,
Business Nedvizhimost and Mosdachtrest. Sistema’s strategy
in real estate is focused on increasing the value of its portfolio
and subsequently monetising it through renting, development
and sale.
113.8
th. contracts
Sale and purchase contracts concluded
in 2015(1)
19.6
th. contracts
Equity participation agreements(1)
Management
of Leader-Invest:
Evgeny Rubtsov
(President)
Felix Evtushenkov
(Chairman of the Board of Directors)
Management
of Mosdachtrest:
Igor Kashcheev
(CEO)
(before September 2015: Sergei Gavrilenko)
Sergei Shishkin
(Chairman of the Board of Directors)
(before July 2015: Sergei Drozdov).
Management
of Business Nedvizhimost:
Igor Shabdurasulov
(CEO)
Leonid Monosov
(Chairman of the Board of Directors)
Leader-Invest: A development
company that builds housing and
commercial real estate projects in
Moscow. Its portfolio comprises
30 projects with an aggregate area
of over 1.0 mln sqm. The priority
segment is housing construction.
Mosdachtrest: Renting and
management of cottages in
Serebryany Bor, improvement of
quality of services offered to tenants.
Business Nedvizhimost:
Management, renting and
maintenance of commercial real
estate.
(1) According to the Federal Service for State Registration, Cadaster and Cartography (Rosreestr).
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
MTS Bank Real-estate assets SG-trans
65
65
As competition in 2015 toughened,
new projects entered the market with a
substantial discount, which resulted in a
decline of the average price per sqm in
2H 2015. In addition, the apartment mix
of new projects is skewed towards smaller
apartments, which resulted in a significant
reduction in budgets for housing acquisition.
As of the end of the year, the average price
per sqm of new business-class housing
fell by 5.5%, while prices in the comfort
segment remained the same as the previous
year.(2)
According to the Federal Service for State
Registration, Cadaster and Cartography
(Rosreestr), demand for existing housing
in Moscow plunged by 30%: the number
of sale and purchase contracts concluded
in 2015 was 113,769 vs. 162,038 in 2014.
The new housing market avoided such a
serious decline thanks to the government’s
programme to support mortgage interest
rates and developers’ response to the
changing economic situation in the form
of special offers and discounts. As a result,
this segment fell by 18%, with 19,611 equity
participation agreements vs. 24,029 a year
before.(3)
Premium housing rent market
The rent rates for premium housing in the
Moscow region dropped in 2015 to the
level of 2009, a crisis year.(4) Compared to
2013, average rates fell by 40%. In 2016, the
number of premium real estate transactions
in Moscow is projected to be the same as
in 2015.(5) Rental rates will remain affected
by exchange rates. However, a drastic
correction is not expected.
The main trend on the Moscow region’s
land market in 2015 was a drop in liquidity.(6)
Some owners were willing to offer discounts
of up to 20%-30% in order to sell their
land plots. There were some changes in the
structure of the demand: the share of land
plots sold without contracts grew from 72%
to 79%. At the same time, demand for the
segment fell by about 15%, the first decline
in five years. Analysts project that the price
of land plots will continue to fall in 2016,
possibly by as much as 25%.
Average level of price in business and comfort class segments,
RUB/sqm
235
240
247
244
252
242
234
230
Business
Comfort
145
139
144
146
158
161
153
148
1Q`14
2Q`14
3Q`14
4Q`14
1Q`15
2Q`15
3Q`15
4Q`15
ANNUAL REPORT 2015 | Sistema
INDUSTRY
Office real estate
In 2015, the area of commissioned offices
dropped by half compared to 2014. Many
projects in the early construction stage
have been put on hold or are being revised;
activity on construction sites has declined.
This is due to economic factors and a
slowdown in office sales. The overwhelming
majority of properties scheduled for
completion in 2016 and 2017 were initially
due to be put into operation in 2015.
The vacancy rate as of the end of 2015 was
the same as the previous year, due to lower
demand caused by the economic crisis. In
2015, the share of class A offices grew from
28% to 29%, while the share of class B
offices declined from 46% to 45%.
Starting from 2H 2015, net absorption, which
reflects changes in rented out office space,
left the red zone and grew by 121,000 sqm
in the final quarter of the year. This increase
was driven first of all by growing demand for
additional offices in high-quality buildings.
Despite positive dynamics, tenants’ demand
for new premises is still seen as weak.
Net absorption for the whole of 2015 was
3.5 times lower than in the previous year.
Given tenants’ low activity and an excess
of supply, owners were forced to adjust rent
rates to meet effective demand. Average
rent rates of high-quality offices declined
throughout the year.
However, after a rapid fall of rental rates in
Q4 2014 and Q1 2015, the pace of decline
slowed in the second half of the year.
Housing market
Last year saw a substantial increase in
supply on the new housing market, to
a large extent due to active development
of Moscow’s former industrial sites. Most
residential developments commissioned
in 2015 were large-scale projects on such
sites. The total number of apartments on
sale rose by 65% over the year, from 15,750
to 26,000.(1)
(1) Source: Metrium Group.
(2) Source: Metrium Group.
(3) Source: Rosreestr.
(4) Source: RBC Real Estate (quoting Savills).
(5) Source: Savills Russia.
(6) Source: Pilgrim Development.
www.sistema.ru
6666
PORTFOLIO COMPANIES
Real-estate assets
(continued)
SUSTAINABLE GROWTH OF REAL
ESTATE BUSINESS AND KEY EVENTS
IN 2015
Business Nedvizhimost
Business Nedvizhimost has a unique pool
of properties: mansions in the centre of
Moscow, office and commercial space,
business centres in almost every district of
the capital, and manufacturing and storage
facilities in Moscow and the Moscow
region. Its portfolio as of the end of 2015
totalled 433,000 sqm. In 2015, Business
Nedvizhimost rented out 25,653 sqm of
properties, sold one property to a third party
and transferred 16 properties to Leader-
Invest for further development.
Leader-Invest
At the end of 2015, Leader-Invest’s portfolio
consisted of 30 projects with a total area of
over 1.0 mln sqm. By the end of the year, the
company had completed and commissioned
three apartment buildings with a total area
of 39,000 sqm and a 31,000 sqm office
building. The company concluded equity
participation agreements for apartments
with a total area of 22,650,000 sqm and
an aggregate price of RUB 5.8 bln.
Mosdachtrest
The main assets of Mosdachtrest are
land plots in Serebryany Bor (19.9 ha) with
187 cottages (total area 38,948 sqm).
Most of the properties in Serebryany Bor
are in reasonably good condition, but
some show signs of obsolescence and
deterioration. Mosdachtrest’s main task
for this year is to repair and upgrade the
cottages. To maintain the rent pool in a good
condition, the company is developing a plan
of detailed stock-taking of all properties and
a schedule for repairs and overhaul, which
will help to retain tenants.
In 2015, Mosdachtrest sold non-profitable
assets in Moscow region for a total of
RUB 367.4 mln, and continued developing
its asset base by acquiring land plots in
Solnechnogorsk district, Moscow region
(58.9 ha). It also completed construction of
the first stage of the Klinskoye hunting farm.
Business Nedvizhimost
Operating highlights of Business
Nedvizhimost
Area under management, thousand sqm
Rented by MGTS, thousand sqm
Rented by external counterparties,
thousand sqm
Leader-Invest
Vacancy rates
2015
446
141.2(1)
116.3
2014
569
228.8
%
- 22%
- 38%
91.8
+ 27%
17%
28%
29%
29%
30%
29%
10%
10%
10%
10%
9%
8%
9%
9%
8%
7%
7%
2%
2013
2014
1Q`15
2Q`15
3Q`15
4Q`15
Class A
Class B
Class C
Operating highlights of Leader-Invest
Number of projects on sale
Equity participation agreements
concluded, RUB
Apartments sold, sqm
Apartments sold, pcs
2015
8
2014
3
5,810,377,103
1,593,409,940
22,649.88
7,283.7
325
113
%
167%
265%
211%
188%
(1) The main reason for the decline was the transfer of some assets (75,900 sqm) to Leader-Invest and contribution of three properties (12,000 sqm) to joint investment projects.
ANNUAL REPORT 2015 | Sistema www.sistema.ru
MTS Bank Real-estate assets SG-trans
6767
STRATEGY
The restructuring of Business Nedvizhimost,
during which it will be merged with Rent
Nedvizhimost, will be completed in 1H
2016. Following the consolidation, Business
Nedvizhimost will become the owner of
about 430,000 sqm of commercial real
estate. In 2016, it plans to conduct partial
repairs at 33 properties and reconstruct
the building at Milyutinsky 5, with total
investment planned at RUB 400m. Repairs
at other properties will mostly include
renovations of entrance lobbies and utility
systems. A total of 44 properties will be
rented out as is. In accordance with the
development strategy, several properties will
be sold in 2016.
In accordance with its goals for 2016,
Leader-Invest plans to commission five
apartment blocks with an area of 87,400
sqm and launch construction of another
17 with a total area of at least 200,000
sqm. Two large-scale projects – Nagatino
i-Land and Lobachevskogo 120 – are in
the pre-design stage. Sales in 2016 are
projected to exceed 70,000 sqm. Apart from
construction, Leader-Invest plans to search
for tenants for the office building it has built
and expects to rent out at least 80% of it by
year-end.
The operational strategy of Mosdachtrest
envisages asset sales in the Moscow region,
including the Barvikha, Zhavoronki and
Trudovaya summer communities, and also
streamlining of business processes with
regard to rental activities, and revision and
expansion of the company’s competences,
including a new approach to rent price
setting and increasing the efficiency of the
maintenance department.
The structure of office real estate
supply at the end of 2015
8%
18 %
29%
45%
А
В+
В
С
Rent rates, RUB/sqm/year
New building supply 2014-2015, ‘000 pieces
35
35
24
14
16
11
36
16
11
34
33
15
11
14
11
32
14
11
7
6
7
7
8
8
9
6
8
7
5
4
14
12
11
10
2013
2014
1Q`15
2Q`15
3Q`15
4Q`15
1Q`14
2Q`14
3Q`14
4Q`14
1Q`15
2Q`15
3Q`15
4Q`15
Class A
Class B
Class C
Business
Comfort
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
68
68
PORTFOLIO COMPANIES
SG-trans
SG-trans is a leading railway operator in the oil and petrochemicals
shipping market, and a major shipper of liquefied petroleum gas
(LPG) and the largest operator of cars designed specifically
for this class of freight. Other special rail cars operated
by SG-trans include oil-and-gasoline tanks, tank containers,
flat cars, and gondolas.
50%
Effective shareholding
Management:
Sergey Kaletin
(President)
(until October 2015: Alexey Taicher)
Ali Uzdenov
(Chairman of the Board of Directors)
INDUSTRY
Rail freight volumes in Russia in 2015 declined
1.1% year-on-year, to 1,215 bln tonnes(1).
Freight volumes in Russia have been declining
for three consecutive years, driven by an
unfavourable economic situation as well as
a downturn in local production volumes.
Shippers of construction materials, scrap
metals, ferrous metals and oil have been
hit hardest. A 2.3% drop in rail shipments
of oil and oil products resulted from the “tax
manoeuvre” that caused output to fall,
as well as the addition of new pipeline
capacity. In contrast, shipments of coal,
mineral fertilisers, non-ferrous ores
and timber all increased from 2014.
An upward trend continued in transportation
of LPG, SG-trans’s most important business
segment, which grew 4.4% over the year.
SG-trans’s LPG shipments grew faster than
the rest of the market, leading to an increase
in the company’s market share from 30%
in 2014 to 32% in 2015.
Higher LPG(2) production stabilised demand
for gas tanks, which increased utilisation
of the company’s gas tanks and meant daily
rent rates(3) rose by an average 10% year-
on-year.
Although the company’s gondola cars
are invariably underutilised, new legislation
adopted at the end of 2015 to ban
the practice of extending operations
of railcars beyond their standard service
lives may reverse this trend.
(1) Source: Russian Railways.
(2) Source: Central Dispatching Department of Fuel Energy Complex.
(3) Source: Promyshlennye Gruzy (magazine).
ANNUAL REPORT 2015 | Sistema www.sistema.ru Real-estate assets SG-trans Other investments
69
69
36.6
bln tonnes/km
JSC SG-trans turnover
19.4
RUB bln
Revenues in 2015(1)
2015
2014
36.6
35.7
19.7
thous. tonnes
JSC SG-trans loading volumes
2015
2014
19.7
20.5
19.6
mln tonnes
LPG transportation volumes on the Russian Railways
network
2015
2014
19.6
18.7
Rail car fleet managed by SG-Trans
by ownership type
25%
18%
Private
Rent
On lease
57%
SUSTAINABLE GROWTH
OF SG-TRANS AND KEY EVENTS
IN 2015
As of the end of 2015, SG-trans operated
29,829 freight cars, 12.4% fewer than
a year before. To honour its obligations
to customers, the company actively leased
out cars despite persistent volatility in leasing
rates throughout 2015. Leased cars account
for 43% of the total fleet operated by SG-trans.
Although shipments by SG-trans declined 4%
year-on-year due to a reduction in the number
of cars under operation, the company’s
overall freight turnover increased due to more
efficient operations throughout the year.
To increase its competitiveness, SG-trans
expanded its portfolio of services by offering
shipments of chemicals and LPG in tank
containers. An operator of tank containers
since 2013, SG-trans ran 700 tank containers
and 350 flat cars in 2015. To date, the new cars
have carried freights for SIBUR, Ufaorgsintez,
Independent Petroleum Company and other
customers of SG-trans.
STRATEGY
While the overall economic situation in the
rail freight market remains bleak, with traffic
volumes falling and cars largely underutilised,
SG-trans’s new strategy aims to keep
operations profitable. LPG and oil cargo
transportation will remain the company’s key
business areas.
LPG will be the focus of the company’s
organic growth strategy, which envisages
an expansion of its market share by providing
more cars under existing long-term contracts
with key LPG producers.
Oil cargo will undergo logistical improvements
to reduce downtime and optimise long-term
contractual terms signed with existing
customers with the goal of keeping the tank-car
business profitable despite the downturn in
the market.
(1) Sistema owns 50% of SG-trans and does not consolidate the Company in Sistema’s finance results.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
70
70
PORTFOLIO COMPANIES
Other investments
CONCEPT GROUP
Founded in 2005, Concept Group is
a fast-growing retailer and a leader
in the Russian market for women’s
and children’s clothing. The group
uses a multi-brand, multi-channel
business model that underpins
steady revenue growth through
product diversification and enhances
operational efficiency.
9.8
RUB bln
The Group’s revenue in 2015
Concept Group’s portfolio includes four
brands: children’s clothing brand Acoola,
women’s clothing and accessory brands
Concept Club and Bestia, and women’s
lingerie brand Infinity Lingerie. The group’s
products are sold through Acoola and
Concept Club retail chains (both branded
and franchise outlets), wholesalers and
online shops (branded and third-party
partner websites). As of the end of 2015,
the Acoola chain included 201 stores
(142 branded and 59 franchise outlets),
while the Concept Group chain had 214
stores (95 branded and 119 franchise
outlets).
Fashion collections are prepared by a
professional team of designers and produced
in partner factories in China, Bangladesh and
Uzbekistan under stringent quality control.
The group’s annual revenue in 2015 rose by
35% to RUB 9.8 bln, of which RUB 5.2 bln
derived from the retail chain, RUB 2.9 bln
from wholesale, RUB 1.5 bln from franchise
operations and RUB 196 mln from online
sales.
In 2015, the Group opened 73 Acoola stores
(54 branded and 19 franchise outlets) and
21 Concept Club stores (eight branded and
13 franchise outlets). In 2015, like-for-like
(LFL) sales gained 23% at Acoola and 7%
at Concept Club, despite declines in the
women’s and children’s clothing markets of
5% and 7% , respectively. Concept Club is
headquartered in St Petersburg(1).
KRONSHTADT GROUP
Kronshtadt Group is a leading
designer and manufacturer of high-
tech products in several strategic
markets: aircraft engineering
and operations; navigation and
communications; national security;
prevention of emergencies;
extraction, refining, and
transportation of mineral
resources; professional technical
education; and culture.
Part of Sistema’s portfolio since the end
of 2015, Kronshtadt Group comprises
several innovative companies that use
their intellectual and engineering potential
to create high-tech products for both
Russian and foreign markets. Sistema
acquired Kronshtadt Group as a business
complementary to its existing high-tech
assets and charged with vast growth
potential. The acquisition also allows
Sistema to enter new market segments, such
as engineering of aircraft and commercial
unmanned aerial systems, simulators and
training units, as well as on-board controls
and navigation tools. The up-and-coming
industry of simulation and modelling of
technical processes is also seen as very
lucrative in the long term.
Kronshtadt Group services 25% to 50%
of the Russian aircraft simulators and tools
market (depending on simulator type).
The company’s strongest suit is helicopter
simulators, including simulators equipped
with motion systems.
Sistema’s short-term plans for Kronshtadt
Group include a demerger and monetisation
of non-core assets (such as real estate),
once the company’s long-term development
strategy is finalised, and an audit of
technologies and expertise to identify
the target business structure and improve
operational efficiency.
(1) Source: Euromonitor.
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
SG-trans Other investments
71
71
OZON HOLDINGS LIMITED
In 2014, Sistema and MTS each
acquired 10.8% in Ozon Holdings,
which owns Ozon.ru, a leading
Russian online retailer, and Ozon.
Travel, a leading online travel agency.
13.5
RUB bln
The Group’s revenue in 2015
Ozon.ru offers more than 3.5 mln items,
and this number is constantly growing.
Ozon’s key product categories are books,
electronics, children’s and sports products,
and homeware. The website is visited by
over 700,000 users daily. Ozon’s delivery
chain covers more than 100 mln residents of
Russia and allows for overseas deliveries.
The group’s revenue in 2015 increased by
30% to RUB 13.5 bln. Purchases made from
mobile devices jumped from 21% to 33% of
the total number of transactions. According
to research by GFK-Yandex.Market in the
autumn of 2015 among Russian online
shoppers, 32% of respondents had made
purchases from Ozon, with 20% naming
Ozon.ru as their preferred online retailer.
INTOURIST
Intourist Management Company has
been growing rapidly for many years
in the hospitality segment, where it
focuses on managing and developing
hotels in Russia and abroad.
7 hotels
Company runs hotels with 2,501 rooms
with chain diversified across several Russian cities
Intourist currently runs seven hotels with
2,501 rooms, and is a 3*/4* hotel chain
diversified across several Russian cities.
In Moscow, the company is represented by
the Cosmos Group hotel complex. Intourist’s
overseas assets are Principe Forte Dei Marmi
in Italy (luxe segment), Savoy Westend
Hotel 5* in the Czech Republic, and Leopard
Lodge in Namibia.
In addition, the group owns the modern
Altay Resort northwest of Altai region;
the 4* Onego Palace , Karelia’s largest
hotel; and the state-of-the-art Intourist
Kolomenskoye Hotel 4* in Moscow region,
which opened in 2014.
The new operations strategy launched
in September 2014 delivered visible
improvements at Altay Resort, with revenue
in 2015 up more than 40%.
The external factors that most contributed
to Intourist’s growth in 2015 were: changes
in the guest flow segmentation in Russian
hotels, caused by a boost in domestic
tourism and replacement of guest flows
from Russia and Ukraine that previously
dominated overseas Intourist hotels with
flows from Europe and the US.
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
7272
RISKS
Description of main risk factors
The Group has introduced an integrated enterprise risk management (ERM) system based on
international standards, recommendations, and risk management practices. The ERM system
is designed to provide a reasonable guarantee that the Group can achieve its strategic goals
and to ensure that risks will be kept at a level acceptable to shareholders and management.
The Group may face a variety of
risks in the course of its business
operations as a result of processes
and factors over which Sistema as
little or no influence. That said, the
Group can take measures to reduce
the negative consequences of such
factors in the event that a certain
risk occurs. This makes efficient
assessment of existing risks, the
probability of their occurrence
and efficient risk management an
important part of Sistema’s strategy.
SISTEMA GROUP’S
INTEGRATED ERM SYSTEM
As part of Sistema’s quarterly ERM
procedures, the Group’s risk managers
compile individual risk registers for each
subsidiary and a consolidated risk register
for the Group. As part of this they prioritise
risks and aggregate them into portfolios,
develop a risk map and analyse its key
trends, and analyse the potential impact of
material risks on the financial performance
of individual subsidiaries and Sistema Group
as a whole using simulation and financial
modelling methods.
To address the risks listed in the Group’s
risk register, the company has developed
risk management (mitigation) and response
plans covering specific mitigation measures.
These plans are modified, adjusted and then
approved by Sistema’s Risk Subcommittee.
Risk management reports are submitted
for review to relevant collective governance
bodies at least once a quarter. Each risk
management report contains a revaluation
of risks, an assessment of the effectiveness
of risk mitigation and response plans, and
a list of potential risk areas (areas requiring
attention) identified for future periods.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Description of main risk factors External Risks Risks related to activities of Sistema
7373
External Risks
Risks related to changes in the political and economic situation in Russia are material to Sistema,
because most of the Group’s business is conducted in the country. In addition, many of its
subsidiaries operate in transitional economies including Ukraine, Uzbekistan, Armenia, Belarus,
Turkmenistan and India, and therefore are also exposed to material external risks.
FINANCIAL RISKS
The business of Sistema is inextricably
connected to the state of the global
economy and financial markets, and in
particular is sensitive to movements in prices
of oil, gas and other commodities that Russia
exports. Further weakening of the rouble
against the US dollar and the euro amid
a slump in oil prices, sanctions imposed on
Russia and increased capital flight may result
in higher costs and lower revenues or may
impede Sistema’s subsidiaries in achieving
their financial targets and repaying debt.
Foreign investors leaving Russia and
downgrades of the sovereign credit rating
by international rating agencies, as well as
restrictions on foreign companies in Russia
as a result of sanctions, may have a negative
impact on Sistema Group’s joint ventures
(partnerships) and new investment projects.
Growing inflation may result in higher
expenses, putting pressure on profit margins,
and may also affect domestic demand for
products and services provided by Sistema
Group companies.
In the medium term, if 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 raises, making
it difficult for Sistema Group to raise funding
for its operations and to refinance the debt
of the Group and its portfolio companies.
An unfavourable macroeconomic
environment in many countries where
Sistema’s assets operate may make it
necessary to re-evaluate goodwill at some
of these assets.
Currency control and restrictions on capital
repatriation may adversely affect Sistema’s
business by posing barriers to capital
flows and reduce the value of Sistema’s
investments in Russia.
Potential bankruptcy of one or several
Russian or foreign banks due to restricted
access to financing may result in a reduction
in the sources of borrowing for the Group
and portfolio companies, and may lead
to direct losses of funds deposited in the
accounts of such banks.
POLITICAL
AND SOCIAL RISKS
The influence of geopolitical risks on
the Group and its portfolio companies has
significantly intensified over the reporting
period, as protectionism and economic
sanctions are increasingly being used as
a tool for achieving geopolitical goals.
The risk of inter-state conflicts has risen
significantly since the beginning of 2014,
both in terms of probability and in terms
of potential effect on various areas of
Sistema Group’s activities. For example,
insurance companies may set higher
insurance premiums for Sistema Group
or refuse to insure against specific risks,
which may lead to a deterioration of the
Group’s financial results.
Imposition of sanctions against Russia or
Russian companies may result in disruption
to international payment systems, which in
turn may prevent the Group and its portfolio
companies from making settlements and
reduce Sistema’s investment appeal.
A potential rise in social unrest in the
regions where the Group operates
may threaten its profits.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 7474
RISKS
On 1 January 2015, new rules were
introduced relating to taxation of
undistributed profits of controlled foreign
companies, the concept of a beneficiary
owner, and new criteria to establish tax
residency of legal entities. These rules were
revised several times throughout 2015, with
all amendments having retroactive effect.
As a result of the need to apply new taxation
rules, the Group’s companies may face new
tax liabilities due to the uncertainty regarding
interpretation of tax law and lack of relevant
precedents.
SECURITIES MARKETS
Deterioration of the geopolitical
situation, the imposition of sanctions on
Russian companies, a worsening of the
macroeconomic environment and capital
and investor flight from the Russian
market led to a reduction in valuations of
Russian companies in 2014-2015. In these
circumstances, Sistema’s access to investor
funding through securities markets may be
restricted further as a result of the imposition
of sectoral sanctions against Russian
companies in segments where Sistema
operates and/or due to investors adopting
a cautious approach to Russian companies
in general. In particular, Sistema’s ability to
raise funding via bond issues may be limited,
which could lead to a lack of working capital
and cash available for investment and affect
the Group’s financial performance.
LEGAL RISKS
There is a risk of unpredictable court rulings
and administrative decisions being passed
with respect to the business of Sistema
Group, which may have an adverse effect.
This risk is caused by numerous factors,
including:
1. possible discrepancies
and ambiguities in:
•
•
•
federal and other laws;
bylaws issued by executive
authorities of states where Sistema
Group operates;
regional and local laws, rules
and requirements;
2. gaps in legislation and lack of court
and administrative guidelines regarding
the interpretation of some laws, as well
as conflicting court guidelines
and rulings;
3.
influence of political, social and
commercial factors on the judicial
system;
4. potential selective or arbitrary actions
of government authorities.
Gaps in Russia’s existing corporate and
securities legislation may create barriers
to raising funds in the future. A lack of clarity
regarding the applicability to Sistema’s
business of the Federal Law on the Procedure
for Foreign Investment in Companies of
Strategic Importance to National Defence
and State Security and regulations of the
Customs Union of Russia, Belarus and
Kazakhstan may have a negative impact
on the business of Sistema Group,given
that the Group has foreign shareholders.
There is a risk of amendments to legislation
in countries where Sistema Group
companies operate, due to potential changes
that may be introduced by foreign states or
international organisations to legislation or
regulations governing international trade
and investments. For example, Russia’s
accession to the World Trade Organisation
may result in certain unpredictable
legislative and other changes in markets
where Sistema’s companies operate.
Since Russian corporate law makes
shareholders liable for the obligations of
their affiliates, Sistema may incur financial
losses related to the liabilities of its portfolio
companies.
Minority shareholders of Sistema’s
subsidiaries may contest or vote against
related-party or other transactions, which
could limit Sistema’s ability to close
investment deals and restructure businesses.
If Russia’s Federal Anti-Monopoly Service
concludes that Sistema or one of its
material subsidiaries has violated existing
anti-monopoly legislation, this may result
in serious administrative sanctions involving
losses for the Group. The Federal Anti-
Monopoly Service may also prevent the
Group and its portfolio companies from
closing and/or servicing certain transactions,
which would also limit Sistema’s capacity to
conclude investment deals and restructure
businesses.
TAXATION
Tax laws, regulations and practices of
jurisdictions where Sistema’s assets
operate are intricate, opaque and prone
to frequent modifications and ambiguous
interpretations. If the Group’s actions are
interpreted as being in breach of tax law,
this may produce an adverse effect on the
business of Sistema Group.
Russia’s law on transfer pricing may make
it necessary to introduce adjustments to
price-setting practices at Sistema Group’s
companies and result in additional tax
liabilities related to some transactions.
ANNUAL REPORT 2015 | Sistema www.sistema.ru External Risks Risks related to activities of Sistema Corporate governance
7575
Risks related to activities of Sistema
IMPLEMENTATION
OF BUSINESS STRATEGY
The Group’s strategy aims to develop
a balanced and diversified asset portfolio
in sectors and regions where Sistema has
expertise and competitive advantages,
while attracting leading international
and Russian partners. Although it has
a well-formulated strategy, Sistema cannot
guarantee achievement of its goals, efficient
management of portfolio companies or
benefits from new investment opportunities.
Failure to achieve the goals set in its strategy
may undermine Sistema’s financial results.
The development of Sistema Group
companies depends on numerous factors,
including receipt of necessary permits
from state authorities, sufficient demand
from consumers, successful development
of technologies, efficient risk and cost
management, timely completion of R&D
and introduction of new products and
services. Weaknesses in any of these
areas may have a detrimental effect on the
development of Sistema Group companies
and the Group’s financial figures.
.
ACQUISITION,
INTEGRATION, DISPOSAL
OR RESTRUCTURING
OF ASSETS
Sistema implements its strategy via
acquisitions, disposals and restructuring
of assets. New investment opportunities
come with certain risks, including failure
to find relevant targets or their not being
available for acquisition, inadequate due
diligence of the target company’s operations
and/or financial situation, and potential
overvaluation of assets. These risks can
also affect Sistema’s financial performance.
Acquisition of assets may increase pressure
on Sistema’s cash position and create a need
for raising external funding.
Delays in the implementation of investment
deals or failure to close them may obstruct
the achievement of Sistema’s strategic goals
and affect its performance, financial position
and investment appeal.
Sistema may struggle to implement
an efficient system for managing and
controlling new assets. The mainrisks
in this area include:
•
inability to efficiently integrate operating
assets and personnel of the acquired
company;
•
•
•
inability to establish and integrate
necessary control mechanisms,
including those related to logistics
and distribution;
conflicts among shareholders;
hostility and/or unwillingness
to cooperate on the part of the
management and personnel of the
acquired asset;
•
loss of customers by the acquired asset.
If any of the above risks materialise, the
relevant asset may lose part of its value
and/or report a deterioration in financial
performance.
When disposing of its assets the Group
may face the following risks:
•
delays in closing or failure to close the
deal due to inability to obtain corporate
or state approvals;
• mistakes in asset valuation;
•
assuming excessive obligations towards
the buyer;
•
loss of synergies with other assets
staying in the portfolio.
If one or more of these risks materialise,
the Group may lose potential profit and thus
report poorer financial performance.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 7676
RISKS
MANAGEMENT
AND KEY PERSONNEL
OVERDEPENDENCE
ON MTS
LICENCES
AND PERMITS
The implementation of Sistema’s strategy
in many respects depends on the efforts and
professionalism of the management team.
Failure to hire a sufficiently competent and
motivated management team can jeopardise
Sistema’s business, performance, financial
position and growth prospects.
CASH FLOWS
FROM SUBSIDIARIES
AND AFFILIATES
The Group’s financial performance depends
on the ability of Sistema Group companies
to generate the cash flows needed to service
its financial liabilities, including repayment
of debt and interest, and to make other
investment activities in the future. Such
cash-generation capacity may be restricted
due to regulatory, tax or any other barriers,
which may have an adverse effect on the
Corporation’s financial position and liquidity.
BORROWINGS
Cash flows from portfolio companies may
be insufficient to fund all of the Group’s
investments scheduled for a particular time.
This can make it necessary to borrow
funds and thus slow down strategy
implementation.
Sistema’s financial results in many respects
depend on the success of its core asset,
MTS. Therefore, any deterioration in the
financial performance of MTS may lead
to a deterioration in Sistema’s financial
results. Any events that damage the
business of MTS may also negatively
influence the current state of Sistema’s
business and its future prospects and lead
to poorer financial figures.
LOAN
COVENANTS
Loan and debt securities agreements signed
by Sistema and its portfolio companies
contain certain restrictive covenants. These
covenants restrict further borrowings,
encumbrance of property with pledges,
asset sales and transactions with affiliates.
They may also restrict certain aspects of
Sistema’s operations, such as financing
of capital expenses, or limit its capacity
to repay debts and service other liabilities.
Any breach of covenants, however
inadvertent, may entitle creditors of the
Group and/or its portfolio companies to
demand early repayment of loans, which
would threaten the Group’s financial
performance.
Operations of Sistema Group’s companies
are regulated by different government bodies
and agencies issuing and renewing licences,
approvals and permits, and also depend on
applicable laws, regulations and standards.
Regulating authorities to a large extent rely
on their own judgment when interpreting
and implementing legal requirements,
issuing and extending licences, approvals
and permits, and monitoring compliance
with such licences. There is no guarantee
that the existing licences and permits,
including those issued to the Group’s
companies, will be extended; that new
licences and permits will be issued; or
that the companies will be able to comply
with the terms of such licences. There is
no guarantee either that existing or future
licences or permits will not be suspended
or revoked on some grounds. Any of these
circumstances could have material negative
consequences for the business of Sistema.
ANNUAL REPORT 2015 | Sistema www.sistema.ru External Risks Risks related to activities of Sistema Corporate governance
7777
PRIVATISED
COMPANIES
ANTI-CORRUPTION
RULES
BRAND QUALITY
AND REPUTATION
Sistema’s portfolio contains several
privatised assets including MGTS, Intourist,
BPGC, Targin, RTI and several other
businesses in the technology sector. Some
of Sistema’s subsidiaries own privatised
assets. It is also probable that the Group
and/or its portfolio companies will take part
in privatisations in the future. Since Russia’s
privatisation-related legislation remains
somewhat unclear and inconsistent, and
contradicts some other provisions (e.g.,
there are contradictions between federal
and regional provisions on privatisation),
privatisation of companies or assets can
potentially be contested, however selectively.
If the legitimacy of a privatisation of
a company or an asset is contested and
Sistema or its portfolio company is unable
to defend its position, it may lose its holdings
in the relevant company or its assets, which
may have a material negative impact on the
business, financial situation, performance
and growth prospects of the Group.
Sistema’s operations are regulated by
anti-corruption legislation in relevant
jurisdictions, including Russian law, the
UK Bribery Act and/or the US Foreign
Corrupt Practices Act (FCPA). Any
investigation into potential violations
of the FCPA, the UK Bribery Act or other
anti-corruption laws of the US, UK or other
jurisdictions may affect the reputation,
business, financial situation and
performance of Sistema.
COMPETITION
All business segments where Sistema
operates are open to competition. Telecoms,
high-tech, banking, retail, media, tourism,
private healthcare and pharma markets
in Russia and elsewhere are highly
competitive. Inability of Sistema Group’s
companies to compete efficiently may have
a material negative impact on the business,
performance, financial situation and growth
prospects of the Group.
Developing and maintaining brand
awareness for the Group’s companies
is crucial to shaping public opinion about
their existing and future products and
services. Sistema believes that company
brand is becoming increasingly vital
in highly competitive markets. Successful
development and improvement of brand
awareness depends in large part on the
efficiency of marketing and the ability
to provide quality products and services
at competitive prices. Effort and money
spent on brand development may prove
greater than the income they yield, which
could mean potential financial losses for
Group companies.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 78
CONTENTS
Corporate
Governance
President
81 General Meeting of Shareholders
84 Board of Directors
88 Board of Directors committees
92
93 Management Board
95
97
99 Development of corporate governance in 2015
President’s committees
Risk management, internal control and internal audit systems
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
79
Sistema JSFC’s Corporate Governance Structure(1)
COMMITTEES OF THE
BOARD OF DIRECTORS
Strategy Committee
Audit, Finance and Risk
Committee
Nomination, Remuneration
and Corporate Governance
Committee
Ethics and Control
Committee
Investor Relations
and Dividend Policy
Committee
Internal control
and audit department
Corporate Secretary
r
e
d
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e
l
e
h
t
f
o
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e
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o
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A
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e
m
t
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o
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p
A
i
Investment
portfolios
Matching leader
candidates
Finance and investment
committee
GENERAL MEETING
OF SHAREHOLDERS
BOARD OF DIRECTORS
Chairman of the Board
Vladimir Evtushenkov
Appointment
PRESIDENT
Chairman
MANAGEMENT BOARD
s
r
e
b
m
e
m
e
h
t
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A
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o
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M
Sistema’s key governing bodies are
the General Meeting of Shareholders,
the Board of Directors, the President
and the Management Board. The Board
of Directors and the President have
committees that conduct a more in-depth
analysis of proposed decisions that fall
within their respective remits and make
recommendations for Sistema’s governing
bodies.
FUNCTIONAL COMPLEXES
Finance and investment
function
Legal function
Corporate Governance
function
Corporate communications
function
Strategy function
HR department
(1) As of 31 December 2015.
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
8080
CORPORATE GOVERNANCE
Corporate Governance Principles
Maintaining an efficient system of corporate governance and ensuring transparency in accordance
with international best practices are crucial elements of Sistema JSFC’s strategy as an investment
company. Pursuing such policies enables Sistema to attract partners and investors to work
together in an atmosphere of mutual trust and to increase returns on equity by implementing
highly effective management solutions.
To achieve these goals, Sistema’s
corporate governance policy is
based on the following fundamental
principles:
•
•
•
•
•
•
transparency and clarity of all
governance processes for investors
and partners;
a transparent dividend policy;
professionalism of the Board of Directors
and its active involvement in strategic
planning, management and supervision
of business processes;
development of procedures for making
investment decisions and ensuring
compliance with such procedures;
paying particular attention to all
related-party transactions;
continuous development
of the individual corporate governance
systems within Sistema Group
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, and risk
management.
The principles and procedures involved in
Sistema’s corporate governance are set out
in its Charter and in a number of publicly
available by-laws; taken together, these
determine the structure and the scope
of the Group’s governance and control
bodies. The Corporate Governance and
Ethics Code sets forth Sistema’s additional
commitments in the area of transparency,
social responsibility and ethical business
principles.
Sistema makes every effort to ensure that
its corporate governance practices are in
line with the recommendations specified by
the Bank of Russia’s Corporate Governance
Code (Letter of the Bank of Russia No.
06-52/2463(1) of 10 April 2014) and
the guidelines set out in the UK Corporate
Governance Code(2).
The conformity of Sistema’s corporate
governance practices with the standards
set out in the the above-mentioned
documents is analysed in Annexes 5 and
6 to this report. In cases where Sistema’s
corporate governance practices diverge
from the standards recommended in the
above documents, the Group explains how
it ensures that the balance of interests
envisaged in the applicable corporate
governance standards is observed.
Sistema conducts regular monitoring
of its corporate governance system
to ensure compliance with the Moscow
Exchange Listing Rules, which have been
mandatory for the Company since
its securities (shares and bonds) were
admitted to trading.
(1) The text of the Corporate Governance Code is available at: http://www.cbr.ru/sbrfr_new/files/legislation/letters/2014/Inf_apr_1014.pdf.
(2)The text of the UK Corporate Governance Code is available at: https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-2014.pdf.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Corporate Governance Principles General Meeting of Shareholders Board of Directors
8181
General Meeting of Shareholders
The General Meeting of Shareholders is Sistema’s supreme governing body. Its activities and
powers are governed by the laws of the Russian Federation on joint-stock companies and by the
provisions of the Group’s Charter and by-laws, in particular the Terms of Reference of the General
Meeting of Shareholders of Sistema JSFC.
PRINCIPLES OF OPERATION
The procedures applied at General
Meetings are intended to make sure that
the rights of shareholders are safeguarded
and that all applicable legal requirements
as well as best international practices
in corporate governance, are observed.
All materials for General Meetings are made
available to shareholders in both Russian
and English and are published on Sistema’s
website (www.sistema.ru; www.sistema.com).
In addition to a notice regarding an upcoming
meeting, shareholders also receive their
ballots. The venues for Sistema’s General
Meetings of Shareholders are usually located
in the vicinity of the Group’s head office and,
over the last three years (2013-2015), have
been held at Sistema’s head office.
OBSERVANCE OF SHAREHOLDERS’
RIGHTS
Sistema aims to ensure maximum protection
of shareholders’ right to take part
in the management of the Group by means
of participating in General Meetings
of Shareholders, voting on agenda items
and receiving returns on their investment
in the form of dividends.
To secure shareholders’ right to take
part in General Meetings in accordance
with the Group’s Charter, a notice of an
upcoming General Meeting of Shareholders
and ballots are sent to all shareholders in
advance (at least 30 days prior to the date
of the meeting). All materials related to the
agenda items to be discussed at a General
Meeting of Shareholders are published
on the Company’s website in both Russian and
English (www.sistema.ru; www.sistema.com)
within the same time frame.
The notice for a General Meeting
of Shareholders, ballots and all other
materials are also sent to nominal
shareholders in electronic form.
Ballots may be filled out by shareholders
in advance and mailed to Sistema JSFC
(to the address specified on the ballot)
prior to the meeting. Votes of shareholders
that cast their ballots in this way will be
taken into account at the time of the vote
count. Shareholders are also allowed
to vote in electronic form (provided that
this service is available with their depositary).
Holders of Sistema global depositary
receipts (GDRs) may vote on agenda items
at a General Meeting of Shareholders
by means of a proxy vote in line with
the established procedure via a depositary
bank servicing Sistema’s GDR programme.
In 2015, Sistema’s depositary bank was
Deutsche Bank AG, which the Company
is planning to replace in 2016.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 8282
CORPORATE GOVERNANCE
DIVIDEND POLICY
To determine the recommended amount
of dividends that will be payable, the Group’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 Sistema Group’s net income generated
during the preceding financial year as per its
financial statements prepared in compliance
with International Financial Reporting
Standards and at least 10% of the net cash
income generated by the Group’s investment
transactions over the same period (special
dividend).
This approach enables the Group to pay
a predictable amount of dividends, thus
ensuring the transparency of the procedure
for determining the amount of the dividend
payout and improving Sistema’s investment
appeal.
A more detailed report on the amount of
allocated and paid dividends for the period
from 2010 to 2015 is provided in Section
3.6. of this annual report. The new dividend
polycy was approved in 2016.
The votes of GDR holders – information
about such votes is disclosed to the
depositary – are collected by the depositary
bank via clearing systems and are included
in the general ballot with all the votes cast
for or against a proposed draft resolution
or abstaining.
Every shareholder can also attend General
Meetings of Shareholders in person
or participate via a representative and vote
on agenda items directly at the meeting
(if such a meeting is held with the joint
presence of shareholders).
The results of voting on the agenda items
of a General Meeting of Shareholders
conducted in the form of joint presence
must be announced before the meeting
closes. The results of voting are also made
available to the shareholders on the Group’s
website one day after the minutes of the
General Meeting of Shareholders have been
drawn up.
An important guarantee of shareholders’
right to participate in running the Company
is their right to access documents that the
Group is obliged to keep in line with the
provisions of the Federal Law on Joint-Stock
Companies. To exercise this right,
a shareholder must send a written request
to Sistema’s Corporate Secretary asking for
access to specific documents. Once a time
frame for provision of the documents
is agreed upon, the shareholder will be
granted access to the requested documents.
In the case of confidential documents,
shareholders must sign a written non-
disclosure agreement, thus providing
a guarantee that the rights of all the Group’s
shareholders will be protected.
If a shareholder requires copies of documents,
he or she shall bear the costs incurred
by the Group (RUB 10 per page).
Holders of material blocks of shares (at least
2% of the authorised capital) are entitled to
make proposals for the agenda of a General
Meeting of Shareholders and to nominate
candidates for the Group’s governing and
oversight bodies.(1) Proposals made in respect
of the agenda of the Annual General Meeting
(AGM) of Sistema Shareholders, including
any notes attached thereto in accordance
with the Terms of Reference of the General
Meeting of Shareholders of Sistema JSFC
and the Group’s other internal regulations,
shall be accepted in writing within 100 days
after the end of the respective financial year.(2)
The candidates nominated by shareholders
for the Group’s governing and oversight
bodies shall be provisionally reviewed by
the Nomination, Remuneration and Corporate
Governance Committee of Sistema’s Board of
Directors.
In order to ensure shareholders’ right
to receive a share of the Group’s profits
in the form of dividends, the Group 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 determined for payment purposes.
Therefore, shareholders always have
the opportunity to take expected dividend
payments into account when disposing
of their shares.
(1) Holders of 10% or more of the Group’s voting shares also have the right to request that an Extraordinary General Meeting of Shareholders be convened.
(2) In the event the agenda of an Extraordinary General Meeting of Shareholders includes 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 Group no later than 30 days before the date of such a meeting.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Corporate Governance Principles General Meeting of Shareholders Board of Directors
8383
GENERAL MEETINGS
OF SHAREHOLDERS HELD
IN 2015 AND THEIR RESULTS
An Extraordinary General Meeting of
Shareholders was scheduled to be held
by absentee vote on 17 February 2015.
The agenda of the meeting included
the following items:
•
•
approval of the revised Terms
of Reference of the General Meeting
of Shareholders of Open Joint-Stock
Company Sistema JSFC;
approval of the revised Terms of Reference
of the Board of Directors of Open Joint-
Stock Company Sistema JSFC.
The meeting was cancelled due to a lack
of a quorum and was not reconvened.
Sistema’s Annual General Meeting
of Shareholders was held on 27 June 2015.
The meeting’s agenda included the following
items:
•
•
approval of meeting procedures;
approval of the annual report and annual
financial statements, including the Group’s
profit and loss account for 2014;
•
•
•
•
•
•
•
•
distribution of income, approval
of the amount of dividends payable
on the Group’s shares, the form
and procedure for the dividend payment,
the date for determining the shareholders
entitled to dividends;
election of members of the Group’s
Audit Commission;
election of members of the Board
of Directors;
approval of the Company’s auditors;
approval of the revised Terms
of Reference of the General Meeting
of Shareholders of Sistema JSFC;
approval of the revised Terms
of Reference of the Board of Directors
of Sistema JSFC;
approval of the revised Policy
on Remuneration and Compensation
payable to members of the Board
of Directors of Sistema JSFC;
determination of the number of members
of the Board of Directors of Sistema JSFC.
The Annual General Meeting of Shareholders
was attended by shareholders that together
held 81.57% of votes, including GDR holders
with 9.47% of votes.
The Annual General Meeting
of Shareholders:
Approved the Annual report
and financial statements for 2014
Allocated RUB 4,535.500 mln
for dividend payout,
which amounted to RUB 0.47
per ordinary share
of Sistema JSFC
Elected the Audit Commission
and the Board of Directors
Approved the appointment
of auditors
Took a decision to approve
the revised versions
of the Terms of Reference
of the General Meeting
of Shareholders, the Terms
of Reference of the Board
of Directors and the Policy
on Remuneration
and Compensation payable
to members of the Board
of Directors of Sistema JSFC
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 8484
CORPORATE GOVERNANCE
Board of Directors
Sistema’s Board of Directors is responsible for the Group’s strategic governance: it formulates
strategic and financial development plans, establishes the principles and criteria for investing,
conducts assessments of executive performance and risks, approves principles for corporate
governance procedures, approves specific transactions and supervises the Group’s work in general.
The Terms of Reference of the Board of Directors are set out in the Charter of Sistema JSFC.
Membership of Sistema’s Board of Directors elected on 27 June 2015(1)
Vladimir Evtushenkov
Chairman of the Board
Sergey Boev
Deputy Chairman
of the Board
Brian Dickie(2)
Andrey Dubovskov
Felix Evtushenkov
Dmitry Zubov
Patrick Clanwilliam(1)
Robert Kocharyan(1)
Jeannot Krecké(1)
Peter Mandelson(1)
Roger Munnings(1)
Mikhail Shamolin
MEMBERSHIP OF THE BOARD
OF DIRECTORS
Sistema’s Board of Directors as
of 31 December 2015 was elected
at the Annual General Meeting of
the Company’s Shareholders held
on 27 June 2015. Independent members
of the Board of Directors form a majority
(54%).
15%
54%
31%
Executive Directors:
Evtushenkov F., Shamolin M.
Non-Executive Directors:
Evtushenkov V., Boev S., Dubovskov A., Zubov D.
Independent Directors:
Dickie B., Clanwilliam P., Kocharyan R., Krecke J.,
Mandelson P., Munnings R., Iakobachvili D.
David Iakobachvili(1)
(1) Short biographies of the members of the Board of Directors and information about their shareholdings in Sistema JSFC are available in Annex 1.
(2) Independent directors meeting the independence criteria established by the Moscow Exchange Listing Rules.
ANNUAL REPORT 2015 | Sistema www.sistema.ru
General Meeting of Shareholders Board of Directors Committees of Board of Directors
8585
In 2015, the Board of Directors held
11 sessions: eight scheduled in-person
meetings and three unscheduled
meetings in the form of absentee
voting. The Board reviewed a total
of 91 agenda items during the year.
•
•
•
•
•
•
•
•
•
•
transport;
high-tech;
real estate;
healthcare;
pharmaceuticals;
power grid;
agriculture;
hotels;
timber processing and pulp
and paper;
consumer (retail), including
e-commerce.
7.
6.
Sistema’s performance results
and budget execution.
Sistema’s budget planning, approval
of its consolidated budget and key
performance indicators for management
for 2016.
Functional strategy in finance
management and financial planning.
Placement of securities
(registration exempt bonds).
10. Risk and opportunity management
8.
9.
within the Group.
11. Report of the Internal Control
and Audit Department.
12. HR issues, HR management
and personnel motivation.
Investor and public relations
functional strategy.
13.
14. Reduction of Sistema’s discount.
15. Functional strategy on corporate
security.
16. Assessment of corporate governance,
including the self-assessment results of
Sistema’s Board of Directors and Board
Committees.
17. Corporate social responsibility.
18. Mandatory corporate procedures,
including the calling of the Annual
General Meeting of Shareholders
and developing the work plan
for the Board of Directors.
19. Membership of Board Committees.
20. Approval of internal regulations.
21. Approval of transactions.
22. Holdings in investment funds.
8 meetings
Number of in-person meetings
2015
2014
3 meetings
Number of meetings by absentee voting
2015
2014
40 items
Number of items in accordance
with the Board’s work plan
2015
2014
91 items
8
1
9
3
40
39
Number of items reviewed at Board meetings
2015
2014
91
100
CHANGES TO THE MEMBERSHIP
OF THE BOARD OF DIRECTORS
Aleksandr Goncharuk, Marc Holtzman
and Serge Tchuruk, who had been
members of the Board of Directors in the
2014-2015 corporate year, left the Board.
New members elected at the General
Meeting of Shareholders on 27 June 2015
included the President of PJSC MTS,
Andrey Dubovskov, independent director
Patrick Clanwilliam and member of the
Management Board and Investment
Portfolio Manager of Sistema JSFC
Felix Evtushenkov.
MEETINGS OF THE BOARD
OF DIRECTORS
Meetings of Sistema’s Board of Directors
are held regularly in compliance with
the approved work schedule for the year.
The Board’s work schedule is determined
on the basis of Sistema’s strategic planning
and reporting cycle. Additional matters
(such as approval of transactions)
are included on the agendas of scheduled
Board meetings in the ordinary course
of business. Extraordinary Board meetings
are organised whenever an urgent matter
needs to be considered. It is the Board
Chairman’s responsibility to determine
the Board’s work plan and to include
additional items in the plan.
During the reporting period, the Board
of Directors considered the following
key items:
1.
2.
3.
4.
5.
Sistema’s development strategy.
Sistema’s asset portfolio structure.
Sistema Group’s strategic planning
cycle.
The Company’s investment policy and
priority investment areas in 2015-2016.
Sistema’s strategy for development
and value creation for its key portfolio
assets:
•
•
•
telecoms;
oilfield services;
banking;
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 8686
CORPORATE GOVERNANCE
Items reviewed by the Board
of Directors in 2015
5%
7%
11%
3%
27%
29%
7%
11%
Business strategies, investments, new businesses
Appointments and HR policy
Corporate governance and securities
Approval of transactions
Approval of internal regulations
Shareholdings in subsidiaries, associations; branches
Financial reporting, planning and audit
Functional strategies
Most of the items included on the agenda
of Sistema’s Board of Directors in 2015 were
related to the Company’s business strategies
and its portfolio companies, approval
of transactions (including equity holdings
in the companies of Sistema Group)
and corporate governance. The prevalence
of such items reflects the Group’s focus on
investment activities. The Board of Directors
places a particular emphasis on reviewing
investment projects and formulating
a portfolio strategy against the backdrop
of sluggish economic growth, as well as
developing portfolio companies and their
corporate governance systems.
3 items
Approval of internal regulations
2015
3
2014
1
10 items
Shareholdings in subsidiaries, associations;
branches
26 items
Business strategies, investments,
new businesses
2015
2014
26
27
6 items
Appointments and HR policy
2015
2014
10 items
6
7
2015
2014
10
6 items
Corporate governance and securities
Financial reporting, planning and audit
2015
2014
25 items
Approval of transactions
2015
2014
10
21
12
25
2015
2014
5 items
Functional strategies
2015
2014
5
17
6
6
9
ANNUAL REPORT 2015 | Sistema www.sistema.ru
General Meeting of Shareholders Board of Directors Committees of Board of Directors
8787
PREPARATION FOR MEETINGS
AND QUORUM OF THE BOARD
OF DIRECTORS
The procedures for meetings of the Board
of Directors are aimed at ensuring efficient
use of the time and experience of the Board
members in order to enable them to take
important decisions on the Group’s strategic
development. Materials on the agenda are
provided to Board members at least 10 days
before the meeting, which gives members
sufficient time to formulate an informed
opinion about the items on the agenda.
Most agenda items (including approval
of transactions) have to be provisionally
discussed at meetings of the Board
Committees.
Sessions of the Board of Directors normally
take place with good attendance by Board
members. The average quorum of meetings
in 2015 was 86.7%.
Members of the Board routinely meet those
scheduled to speak at meetings and also
members of the management at a business
dinner the evening before a meeting.
In the course of these meetings, Board
members have an opportunity to receive
additional explanations on each agenda item
and clarify the provisional voting positions
of the parties.
Participation of Sistema Board members in meetings of the Board of Directors and its Committees in 2015:
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
Vladimir Evtushenkov.
10/11(1)
Sergey Boev
Aleksandr Goncharuk(2)
Brian Dickie
Andrey Dubovskov(3)
Felix Evtushenkov(3)
Dmitry Zubov
Patrick Clanwilliam(3)
Robert Kocharyan
Jeannot Krecké
Peter Mandelson
Roger Munnings
Marc Holtzman(2)
Serge Tchuruk(2)
Mikhail Shamolin
David Iakobachvili
9/11
0/4
11/11
6/7
6/7
11/11
7/7
11/11
11/11
9/11
11/11
0/4
3/4
11/11
11/11
Attendance
–
12/12
–
–
–
–
–
–
–
6/6
7/12
12/12
0/6
1/6
–
11/12
11/11
7/11
0/6
–
4/5
4/5
–
–
5/11
–
–
–
–
–
10/11
10/11
–
–
0/5
8/8
–
–
5/8
–
8/8
4/5
–
8/8
–
–
–
2/3
–
5/7
0/4
6/7
–
1/3
–
–
6/7
–
–
7/7
–
1/4
–
–
–
–
–
–
–
–
–
1/1
–
6/6
3/5
6/6
0/5
–
1/6
6/6
1 The first number denotes the number of meetings attended by the Board member, while the second number is the total number of meetings the member could have participated in.
2 This member left the Board of Directors on 27 June 2015.
3 This member joined the Board of Directors on 27 June 2015.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
8888
CORPORATE GOVERNANCE
Committees of the Board of Directors
Starting from 2011, only members of the Board of Directors may be elected to the Board’s
Committees, with some rare exceptions. When forming the Committees, the Company primarily
takes into account the expertise of Board members in relevant fields.
Sistema’s Board of Directors has five
committees:
Share of Independent Directors
in the Committee
AUDIT, FINANCE
AND RISK COMMITTEE
Strategy Committee;
•
• Audit, Finance and Risk Committee
• Nomination, Remuneration and
Corporate Governance Committee;
•
•
Ethics and Control Committee;
Investor Relations and Dividend Policy
Committee.
The main role of the Committees is to
provide assistance to the Board in preparing
and adopting decisions in its respective
functional areas, as well as to ensure
that matters brought for consideration
by the Board of Directors are scrutinised
prior to Board meetings. The meetings
of the Committees (except the Strategy
Committee) usually take place on the day
preceding the day of a Board meeting.
Board Committees have broad procedural
powers, may engage independent external
experts, obtain any information from
the Company’s executive management
that falls within their remit and may use
any other Company resources, as well as
set tasks for the Company’s management.
STRATEGY COMMITTEE
The Strategy Committee comprises
seven Sistema Board members
and one external business strategy expert:
Vladimir Evtushenkov (Committee Chairman),
Sergey Boev, Andrey Dubovskov,
Felix Evtushenkov, Robert Kocharyan,
Mikhail Shamolin, David Iakobachvili and
Vladimir Chirakhov (CEO of Detsky Mir).
29%
29%
The Audit, Finance and Risk Committee
includes five Board members:
Roger Munnings (Committee Chairman),
Sergey Boev, Jeannot Krecké,
Peter Mandelson and David Iakobachvili.
Share of Independent Directors
in the Committee
42%
20%
Independent Director
Non-Executive Director
Management (including Executive Directors)
The Committee discusses and analyses
strategic issues related to the management
of Sistema Group, and monitors the strategic
planning cycles of Sistema JSFC and its
subsidiaries, including:
•
•
•
reviewing the strategy planning
methodology;
preliminary approval of the Group’s
strategy and strategic goals;
consideration of M&A transactions
and large investment projects.
The Committee is responsible for a provisional
review of:
•
•
•
all M&A transactions within Sistema Group
with a value exceeding US$ 100 mln;
all Sistema Group projects related to
entering new regions or industries;
all Sistema Group projects with significant
government participation.
In 2015, the Committee held 11 meetings
at which 16 items related to the development
of Sistema’s portfolio companies were considered.
80%
Independent Director
Non-Executive Director
Roger Munnings, Chairman of the Audit,
Finance and Risk Committee, has vast
experience in the field of financial audit.
The Committee performs in-depth reviews
and analyses of matters related to managing
Sistema in the following areas:
•
•
•
•
•
preparation and audit of the Company’s
financial statements;
interaction with external auditors;
assessment of the risk management
system and compliance with
the applicable legal requirements
in financial reporting, audit and planning;
budgeting and financial modelling;
internal audit;
ANNUAL REPORT 2015 | Sistema www.sistema.ru
Board of Directors Committees of the Board of Directors President
8989
•
•
functioning of a whistle-blowing system
aimed at reporting potential instances
of wrongdoing;
provisional appraisal of transactions
submitted to the Board of Directors.
In 2015, the Audit, Finance and Risk
Committee held 16 meetings (including
three joint meetings with the Ethics and
Control Committee) and reviewed 66 items,
including:
•
•
•
•
•
•
32 items related to appraisal
of individual transactions submitted
for consideration by the Sistema
Board of Directors;
13 items related to the preparation
and audit of financial statements
and supervision of these processes;
7 items related to financial planning
and risk management;
6 items related to interaction with
external auditors, their selection
and assessment of their work;
5 items related to internal control
and audit processes and the whistle-
blowing system;
3 housekeeping matters.
The Audit, Finance and Risk Committee
of Sistema’s Board of Directors conducts
an appraisal of the quality of audit
services based on the audit of Sistema’s
financial statements and gives preliminary
recommendations in respect of selecting
auditors for the Group and determining
the fee for their services. Based on
the Committee’s opinion, the Board
of Directors gives recommendations
to the General Meeting of Shareholders
with respect to nominating a candidate
for the position of the Group’s external
auditor.
КNOMINATION, REMUNERATION
AND CORPORATE GOVERNANCE
COMMITTEE
The Nomination, Remuneration and
Corporate Governance Committee includes
five Board members: Robert Kocharyan
(Committee Chairman), Brian Dickie,
Dmitry Zubov, Roger Munnings and David
Iakobachvili. The President of Sistema JSFC,
Mikhail Shamolin, attends Committee
meetings as a permanent invitee but does
not take part in voting on matters submitted
for the Committee’s consideration.
Share of Independent Directors
in the Committee
20%
80%
Independent Director
Non-Executive Director
The purpose of the Committee is to facilitate
the preparation and implementation
of the Group’s HR policy, to support
and develop an efficient corporate governance
system that meets international standards
and to improve the quality of the Group’s
decisions. The Committee performs in-depth
reviews and analyses of issues related to
managing Sistema in the following areas:
1. preliminary review of candidates:
•
•
for the Board of Directors;
for top management positions
at Sistema and its portfolio
companies;
•
•
for the Boards of Directors
of portfolio companies;
for the position of the Group’s
Corporate Secretary;
2.
incentive and remuneration policy
for the Group’s employees;
3. assessment of the management’s
performance and setting parameters
for remunerating the Group’s employees;
4. the Group’s corporate governance
system and those of its portfolio
companies, protection of shareholders’
interests and rights.
In 2015, the Nomination, Remuneration
and Corporate Governance Committee held
eight meetings (including one joint meeting
with the Ethics and Control Committee)
and reviewed 28 items, including:
•
•
•
•
10 items related to corporate governance
at Sistema JSFC;
9 items related to HR processes
and preliminary review of candidates
for top management positions
at Sistema JSFC and nominees
to the Boards of Directors and CEO
positions at portfolio companies;
7 items related to the effectiveness
of the incentive scheme, performance
assessment and remuneration systems
for Sistema’s employees;
2 items related to provisional reviews of
the Company’s draft internal regulations.
Sistema’s Nomination, Remuneration
and Corporate Governance Committee
determines the Board’s self-assessment
procedure. An assessment is carried out
for 10 key criteria in order to identify those
areas of the Board’s work that are in need
of improvement. The Committee uses
the results of this self-assessment
to formulate an annual plan aimed
at developing Sistema’s corporate
governance systems, which is then
submitted to the Board of Directors
for approval.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
9090
CORPORATE GOVERNANCE
4,02 points
The Board’s performance
(on a five-point scale)
The most recent assessment
of the Board of Directors’ work
was performed in May 2015.
The Board’s performance was rated
as 4.02 (compared to 4.19 in 2014)
on a five-point scale.
1. Composition and structure of the Board
Number of members
and competencies
3,96
Support from the Management
4,05
Committees
4,26
2. Organisation of the Board’s work
Contents of agendas,
planning
4,05
Preparation
procedure
4,04
Meeting
procedure
4,03
Quality of
documentation
4,10
3. Functional areas in the work of the Board
Strategic management
matters
3,57
Finance, financial report,
and internal control
4,18
Control over executive
management and corporate
governance
3,90
Based on this assessment of the Board’s
performance, the work plan to improve
corporate governance systems in 2016
reflects the following areas:
•
•
amending the Group’s internal regulations
to add a requirement that material
transactions (both for the Group and for
Sistema Group as a whole should be
submitted for the consideration
of the Board of Directors;
implementing measures aimed at ensuring
greater involvement of Board members
in the assessment of the top management’s
performance at the companies that
make up Sistema Group. These activities
are to be completed by the end of 2016.
In 2015, the Committee’s role in nominating
candidates for the Group’s Board of Directors
was redefined. The Committee performs
a preliminary assessment of candidates in
terms of their independence and capacity
to contribute to the work of the Board
of Directors and Sistema JSFC as a whole.
Therefore, it is recommended that
shareholders nominating new Board
members make sure that such nominees
are interviewed by the Committee within
a reasonable time frame. To form an opinion
about a candidate, the Committee may take
into account various factors, including
professional experience, expert knowledge
and/or functional skills, business
and professional reputation, independence
and ability to form independent opinions,
as well as whether the Board is in need
of the candidate’s skills, expertise
and experience and whether the candidate
will be able to devote sufficient time
and energy to the performance of his/her
duties as a Board member. The Committee
then provides its opinion(s) about
the nominee to the person who made
the nomination. This opinion or assessment
may include the Committee’s recommendation
with regard to election of the candidate
to the Company’s Board.
The Committee conducts regular monitoring
of Sistema’s potential HR needs and
succession pool.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Board of Directors Committees of the Board of Directors President
9191
ETHICS AND CONTROL
COMMITTEE
The Ethics and Control Committee
includes five Board members: Sergey Boev
(Committee Chairman), Brian Dickie,
Felix Evtushenkov, Robert Kocharyan
and Roger Munnings.
Share of Independent Directors
in the Committee
20%
20%
60%
Management
Independent Director
Non-Executive Director
The Committee performs in-depth reviews
and analyses of issues related to managing
Sistema in the following areas:
•
internal control and audit (jointly with
the Audit, Finance and Risk Committee);
corporate security;
•
• monitoring compliance with
the requirements of the Group’s
Ethics Code;
•
the Group’s corruption prevention system,
as well as those of the companies within
Sistema Group.
In 2015, the Ethics and Control Committee
held seven meetings at which 21 items
were reviewed, including the following:
The Committee performs in-depth reviews
and analyses of issues related to managing
Sistema in the following areas:
•
•
•
•
•
5 items related to internal audits
conducted at Sistema Group companies,
as well as the quality of the internal
control environment;
4 items related to the functional strategy
in the area of internal control;
4 items related to the system
of corruption prevention;
2 items related to corporate security
and fraud prevention;
6 housekeeping matters.
INVESTOR RELATIONS AND
DIVIDEND POLICY COMMITTEE
The Investor Relations and Dividend Policy
Committee includes five Board members:
David Iakobachvili (Committee Chairman),
Patrick Clanwilliam, Jeannot Krecké, Roger
Munnings and Mikhail Shamolin.
Share of Independent Directors
in the Committee
20%
• maintaining effective relations with
the financial community and government
agencies, as well as increasing Sistema’s
investment appeal;
•
•
Sistema’s dividend policy, including
the development of recommendations
for the Group’s Board of Directors
with respect to the amount of payable
dividends;
protection of the rights and interests
of Sistema’s shareholders.
In 2015, eight meetings of the Investor
Relations and Dividend Policy Committee
were held at which 11 items were considered,
including:
•
•
•
•
6 items related to market monitoring
and measures aimed at capitalisation
growth;
3 items related to interaction
with the investment community
and recommendations for the amount
of dividends payable;
1 item related to corporate social
responsibility;
1 housekeeping matter.
80%
Independent Director
Management
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
9292
CORPORATE GOVERNANCE
President
The President of Sistema JSFC is a permanent chief executive officer whose main tasks
are executive management and settlement of matters outside the remit of the General Meeting
of Shareholders, the Board of Directors and the Management Board for the purposes of ensuring
the Group’s profitability, as well as safeguarding shareholders’ rights and legitimate interests.
The President reports to Sistema’s Board of Directors and the General Meeting of Shareholders.
Mikhail Shamolin has been Sistema’s
President since 10 March 2011.
On 15 March 2014, the Board
of Directors passed a resolution
to extend his appointment
as the Company’s President
for three more years.
Mr Mikhail Shamolin
President of Sistema JSFC,
Chairman of the Management Board
Mr Mikhail Shamolin was born in 1970
in Moscow
In 1992, he graduated from the Moscow
Automobile and Road Technical Institute.
In 1993, from the Russian Presidential
Academy of Public Administration.
In 1996-1997, he took a finance
and management course for senior
executives at the Wharton School
of Business.
In 1998-2004 , he worked for McKinsey&Co,
an international consultancy company.
In 2004-2005, he was Managing Director
for Ferroalloys 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.
Mr Mikhail Shamolin was appointed
President of Sistema JSFC on 10 March 2011.
On 15 March 2014, the Board of Directors
reappointed him to a new three-year term.
Mr Mikhail Shamolin sits on the Board
of Trustees of the Sistema Charitable
Foundation.
Mikhail Shamolin has been Sistema’s
President since 10 March 2011.
On 15 March 2014, the Board
of Directors passed a resolution
to extend his appointment
as the Company’s President
for three more years.
ANNUAL REPORT 2015 | Sistema www.sistema.ru President Management Board President’s Committees
9393
Management Board
Sistema’s Management Board determines the methods for implementing the Group’s
development strategy, formulates development plans, determines investment mechanisms
and monitors compliance therewith, appraises the performance of staff and previews reports
to be submitted to the Group’s Board of Directors.
In September 2015, the Board
of Directors re-elected
the Management Board upon expiry
of the term of the previous Man-
agement Board. Sistema’s current
Management Board comprises
14 members.
Members of the Management Board of Sistema JSFC(1)
Mikhail Shamolin
Chairman
of the Management Board
Nikolay Vasilkov(2)
Elena Vitchak
Felix Evtushenkov
Valentin Korchunov
Leonid Monosov
Oleg Mubarakshin
Alexander Gorbunov
Vsevolod Rozanov
Ali Uzdenov
Mikhail Cherny
Evgeny Chuikov
Sergey Shishkin
Vladimir Shukshin
(1) As of 31 December 2015. Short biographies of the members and information about their shareholdings in Sistema JSFC are available in Annex 1.
(2) Mr Nikolay Vasilkov’s membership on the Board was terminated after the reporting period, in March 2016.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 9494
CORPORATE GOVERNANCE
31 meetings
Meetings conducted in 2015
72 items
Items, reviewed on agenda
1. Preliminary review of matters to be
submitted to the Board of Directors,
including:
• Sistema’s development strategy;
• Sistema’s asset portfolio structure;
• Sistema Group’s strategic planning
cycle;
?
• development and value creation
strategies for Sistema’s key assets;
2. Debt and liquidity management.
3. Risk management and preparation
of risk maps.
4. Participation in investment projects.
5. Review of deals requiring no approval
from the Board of Directors
or the General Meeting of Shareholders.
• Sistema’s functional strategies;
• performance against budgets
and budget planning;
• corporate social responsibility
at Sistema JSFC;
• approval of internal regulations;
• approval of specific deals;
CHANGES MADE TO SISTEMA’S MANAGEMENT BOARD IN 2015
The Management Board went through a number of changes throughout 2015:
Nikolay Vasilkov
7 February 2015
Elected as a Board member. Appointed Vice President,
Head of the Strategy Function of Sistema JFSC.
Michael Hecker
Anton Abugov
Christopher Baxter
10 February 2015
Membership terminated.
27 June 2015
27 June 2015
Membership terminated.
Membership terminated.
Andrey Terebenin
13 September 2015
Membership terminated.
Evgeny Chuikov
13 September 2015
Elected as a Board member. Appointed Vice President,
Head of the Corporate Communications Function of Sistema JFSC.
Vladimir Shukshin
13 September 2015
Elected as a Board member.
Alexander Gorbunov
11 December 2015
Elected as a Board member. Appointed Vice President of Sistema JFSC.
Valentin Korchunov
11 December 2015
Mikhail Cherny
11 December 2015.
Sergey Shishkin
11 December 2015
Elected as a Board member. Appointed Vice President,
Investment Portfolio Manager of Sistema JFSC.
Elected as a Board member. Appointed Vice President,
Investment Portfolio Manager of Sistema JFSC.
Elected as a Board member. Appointed Vice President,
Head of the Corporate Governance Function of Sistema JFSC.
Sergey Drozdov
11 December 2015
Membership terminated.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Management Board President’s committees Risk management, internal control and internal audit systems
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President’s Committees
The President’s committees are permanent consultative collective bodies tasked with producing
detailed analyses of current affairs and processes within their remit and assisting the President
in decision-making.
The Committee consists of seven members.
The Chairman of the Committee is the
Group’s President, Mikhail Shamolin, and
the Deputy Chair is Senior Vice President
and Head of the Finance and Investment
Function Vsevolod Rozanov.
In 2015, the Committee met 56 times.
The Committee has a Risk Subcommittee
that is responsible for assessing the risks
facing Sistema and its subsidiaries
and monitoring performance against
risk management action plans.
The Risk Subcommittee consists of nine
members, chaired by Sistema’s Managing
Director for Risks and Procurement,
Nadezhda Nosova.
In 2015, the Risk Subcommittee met 10 times.
TENDER COMMITTEE
The Tender Committee performs the following
tasks:
•
•
•
•
organising tenders for goods, works
and services;
ensuring the acquisition of goods, works
and services on the best terms available;
ensuring the transparency of purchasing
procedures;
facilitating the prevention of corruption
and other wrongdoing in the area
of purchasing.
The Committee consists of eight members.
The Chairman of the Committee is Senior
Vice President and Head of Sistema’s Finance
and Investment Function Vsevolod Rozanov.
The Deputy Chair is Managing Director
for Risks and Procurement Nadezhda Nosova.
In 2015, the Tender Committee met 36 times.
The following President’s committees
contribute to managerial decision-making
at Sistema:
Finance and Investment Committee;
Tender Committee;
•
•
• HR Committee;
•
•
• Discipline Committee.
Security Committee;
Internal Control Committee;
FINANCE AND INVESTMENT
COMMITTEE
The Finance and Investment Committee
performs the following tasks:
•
review of all of the Group’s investment
projects and isolated projects on the part
of portfolio companies at different stages
from project idea to completion;
•
approval of financial models, business
plans and key performance indicators
related to investment projects;
• making recommendations regarding
the viability of projects, exit scenarios
and sources of financing;
•
analysing credit terms for the Group
and portfolio companies.
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CORPORATE GOVERNANCE
HR COMMITTEE
SECURITY COMMITTEE
DISCIPLINE COMMITTEE
The HR Committee performs the following
tasks:
•
•
•
•
reviewing and making proposals
with regard to HR policies and internal
regulations at the Group and its portfolio
companies;
coordinating the activities of the Group’s
HR units and those of its portfolio
companies;
assessing candidates seeking executive
positions;
assessing the efficiency and perfor-
mance of the Group’s employees.
The Committee consists of eight members.
The Chairman of the Committee is Sistema’s
President, Mikhail Shamolin. The Deputy
Chair is Senior Vice President and Head
of the HR Department Elena Vitchak.
In 2015, the Committee met 18 times.
The Security Committee reviews matters
pertaining to security at the Group
and its subsidiaries.
The Committee consists of 31 members.
The Chairman of the Committee is Vice
President and Head of the Sistema’s Security
and IT Department Vladimir Shukshin.
In 2015, the Committee met 4 times.
INTERNAL CONTROL COMMITTEE
The Internal Control Committee reviews
matters pertaining to the coordination
of the Group’s internal control units
and those of its portfolio companies.
The Committee consists of 24 members.
The Chairman of the Committee
is Vice President and Head of Sistema’s
Internal Control and Audit Department
Alexey Guryev.
In 2015, the Committee met 6 times.
The Discipline Committee reviews matters
pertaining to compliance with labour law,
internal regulations and instructions from
governing bodies. The Committee is also
tasked with issuing opinions on whether
there is cause for disciplinary penalties
in specific cases where wrongdoing
is suspected.
The Committee consists of six members.
The Chairman of the Committee
is the Group’s President, Mikhail Shamolin,
and the Deputy Chair is Vice President
and Head of the Sistema’s Internal Control
and Audit Department Alexey Guryev.
In 2015, the Committee met 3 times.
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9797
Risk management, internal control and internal
audit systems
RISK MANAGEMENT
Sistema’s risk management system
uses a two-tier approach where
specific risks identified in the Group
and its portfolio companies are
further integrated to assess their
impact on Sistema Group as a whole.
The integrated risk management system
(ERM) used within the Group addresses
the following tasks:
•
•
•
•
•
•
•
identification of risks at all levels of the
management (from top management to
line managers), which includes finding
risk owners and making risk passports;
primary assessment of the materiality
of identified risks and their analysis (VaR
methodology);
ranging risks by management levels;
assessment of the aggregate influence
of material risks on the Group’s key
financial indicators (Monte Carlo
modelling);
development of plans to mitigate
identified risks at all management levels;
regular monitoring of performance
against mitigation plans and assessment
of their effectiveness;
risk monitoring, quarterly reports about
risks facing the Group.
Sistema’s risk management procedures
are implemented by a dedicated Risk
Management Unit.
The Group’s risks are monitored
on a quarterly basis by Sistema’s Management
Board and Risk Subcommittee, who review
the effects of mitigation and response
measures taken and reassess persisting
and/or new risks.
Sistema’s senior executives make regular
reports on risk management within
the Group to the Audit, Finance and Risk
Committee and annual reports to Sistema’s
Board of Directors.
In accordance with the ‘three lines of defence’
principle, the efficiency of the Group’s
internal control system is ensured at three
levels (in addition to the Board of Directors
and the Group’s top management):
•
•
•
Level 1: Heads of Functions and
employees of the Group are responsible
for assessing and managing risks
and for building an efficient internal
control system;
Level 2: The Risk Subcommittee,
Financial Control Unit, Procurement
Control Unit, Security Service,
Compliance Control Unit (project
support, execution discipline)
are responsible for overseeing
the implementation of efficient risk
management and internal control
procedures and for ensuring compliance
with standards and regulations;
Level 3: The Internal Control and Audit
Department conducts independent
assessments of the efficiency
of the internal control system,
the risk management procedures
and the corporate governance system.
All of the Group’s employees who are
responsible for various control procedures
bear responsibility for the efficiency
of such controls and risk management steps
as outlined in their job descriptions
and internal regulations.
INTERNAL CONTROL SYSTEM
Internal control procedures employed
by the Group involve all levels
of governance, including the Board
of Directors, its Committees
and Management of the Group,
as well as the Internal Control
and Audit Department.
In February 2015, Sistema’s Board of Directors
approved the Policy on the Internal Control
System, a top-level document designed
to formalise the organisation of internal
control as a continuous integrated process
involving all of the Group’s subdivisions
and governance bodies.
The key objectives of the internal control
system are:
•
•
•
•
•
creating control mechanisms that
will ensure the efficiency of business
processes and the implementation
of the Group’s investment projects;
ensuring the safety of the Group’s assets
and efficient use of its resources;
protecting the interests of the Group’s
shareholders and preventing
and resolving conflicts of interest;
creating conditions for timely
preparation and submission of reliable
reports and other information
that is legally required to be publicly
disclosed;
ensuring the Group’s compliance
with applicable laws and requirements
of regulators.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru
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CORPORATE GOVERNANCE
INTERNAL AUDIT
The body in charge of internal control
at the Group and its S/As is the Internal
Control and Audit Department, which reports
to the Board of Directors (functionally)
and Sistema’s President (administratively).
The Head of the Department is appointed
and dismissed by the President
based on resolutions passed by the Group’s
Board of Directors after preliminary
approval by the Board’s Ethics and Control
Committee. The Head of the Department
is a certified internal auditor with 15+ years
of experience in the field.
The main objectives of the Internal Control
and Audit Department are:
•
•
•
•
helping shareholders and management
improve the internal control system
by performing regular audits
of the efficiency of the Group’s internal
control, risk management and corporate
governance systems;
contributing to the achievement
of the Group’s strategic goals in the most
efficient ways possible;
supplying the Group’ management
and shareholders with objective
information on existing internal risks
and their probability;
enhancing the awareness of the Group’s
management about the performance
of Sistema Group companies;
• monitoring the achievement of the goals
of the shareholders of the Group
and Sistema Group companies.
To meet these objectives, the Internal
Control and Audit Department carries out
the following functions:
•
•
performing independent audits
of individual operations, processes
and units;
assessing the efficiency of the internal
control system;
•
•
•
•
•
•
assessing the efficiency of the risk
management system;
assessing the efficiency of the corporate
governance system, preventing violation
of the law and the Group’s regulations,
ensuring observance of professional
and ethical standards and preparing
recommendations for the 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 hotline for whistle-blowers;
administering investigations, including
internal ones;
• monitoring compliance with the Group’s
internal regulations;
• monitoring the execution of assignments
issued by the Management Board
and the President of the Group;
• monitoring and investigating instances
potentially qualifying as disciplinary
violations and/or violations of execution
discipline and/or conflict within
the Group 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
interacts closely with independent auditors,
coordinates audits and offers consultations
in the course of the preparation
of the Department’s annual audit plans
in regard of the assessment of the efficiency
of internal controls applied to financial
statements, as well as during discussions
and assessments of identified risks.
In 2015, the Internal Control and Audit
Department conducted 34 scheduled and
unscheduled audits to assess the efficiency
of internal control and risk management
systems. These audits did not uncover any
weaknesses or risks that could affect
the sustainability of the Group’s business
as a whole.
Reports on the results of the activities
performed by the Internal Control and Audit
Department in H1 2015 and FY2015 were
submitted to the Audit, Finance and Risk
Committee and to the Ethics and Control
Committee of Sistema’s Board of Directors(1).
A report on the work performed by the Internal
Control and Audit Committee in 2015
was made to Sistema’s Board of Directors
on 12 March 2016.
EXTERNAL AUDIT
In compliance with the decision of the Audit,
Finance and Risk Committee, the Group
uses the following procedures to appoint
independent auditors for Sistema’s financial
and accounting reports. The Committee
performs annual assessments of the quality
of the audit services provided. If the quality
of the services provided by the current
auditor is deemed insufficient, the Audit
Committee arranges a tender to hire a new
auditor. If the quality is deemed sufficient,
Sistema reaches out to the current auditor
to negotiate a fee for the services to be
provided for the next audit period. To ensure
the auditor’s impartiality and objectivity,
however, Sistema’s Audit, Finance and Risk
Committee has decided that a tender for
auditing services must be held at least once
every five years.
(1) At a joint meeting of the two committees.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Risk management, internal control and internal audit systems Development of the corporate governance Remuneration policy
9999
Development of the corporate governance in 2015
In 2015, 13 members were elected to the Group’s Board of Directors, seven of whom qualify
as independent directors according to the rules of Moscow Exchange and the Russian Corporate
Governance Code.
The current Board comprises the following
independent directors:
1. Brian Dickie;
2. Patrick Clanwilliam;
3. Robert Kocharyan;
4. Jeannot Krecké;
5. Peter Mandelson;
6. Roger Munnings;
7. David Iakobachvili.
2
4
6
1
3
5
7
All of the Group’s independent directors
have vast experience in managing large
organisations and possess strong
professional reputations. Independent
directors make up the majority of the Board,
which ensures the objectivity of their
judgments and freedom from the influence
of the Group’s management and shareholders
when making important decisions.
One of the independent directors, Patrick
Clanwilliam, was nominated by a group
of minority shareholders of the Group.
Upon his introduction to the Nomination,
Remuneration and Corporate Governance
Committee, the Board of Directors put him
on the list of Board candidates for voting by
the General Meeting of Shareholders.
In 2015, the Group distributed dividends
in accordance with its current Dividend Policy.
The dividends totalled RUB 4,535.5 mln, or
RUB 0.47 per ordinary share in Sistema JSFC
(RUB 9.40 per GDR). The dividend yield
as of the dividend decision (27 June 2015)
totalled 2.36%.
The Group aligned its corporate governance
system with current legal requirements
and the new Moscow Exchange Listing Rules.
In particular, it modified the definition
of «independent director» in the Terms
of Reference of Sistema’s Board of Directors
and introduced numerous procedural
and substantive amendments to the powers
of Sistema’s Board committees.
In 2015, Sistema issued formal regulations
to govern the nomination of candidates
for the Board of Directors, containing,
in particular, a detailed description of the role
of the Nomination, Remuneration and
Corporate Governance Committee
in the process. The Committee is tasked
with preliminary assessment of candidates
in terms of their independence and capacity
to contribute to the work of the Board
of Directors. We recommend that shareholders
nominating new Board members make sure
that such nominees are interviewed
by the Committee within a reasonable time
frame. The Committee then provides
the person having made the nomination
with its opinion(s) about the nominee,
which may include the Committee’s
recommendation as to whether to elect
the candidate to the Board.
The Group has broadened the requirements
to be imposed on its employees, especially
senior management, with regard to observance
of ethical business standards and prevention
of conflicts of interest. The new mandatory
ethics assessment procedure, effective
October 2015, requires employees to fill in
pecial Ethics and Conflict of Interest
Declarations.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 100
CORPORATE GOVERNANCE
Remuneration policy applied to Board members
and senior Management
REMUNERATION POLICY
REGARDING MEMBERS
OF THE BOARD OF DIRECTORS
Remuneration and compensation payable
to members of Sistema’s Board of Directors
for the first half of 2015 were calculated in
accordance with the Policy on Remuneration
and Compensation Payable to Members
of the Board of Directors of the Group
approved by the General Meeting
of shareholders on 30 June 2006 (Minutes
No.1-06), as amended by the General
Meeting of shareholders on 16 February
2009 (Minutes No.1-09). The Policy
provided for the following forms of
remuneration:
•
•
•
•
remuneration for participation in
meetings of the Board of Directors
and its Committees, including
reimbursement of expenses related
to participation in Board meetings;
remuneration for acting as Chairman
or Deputy Chairman of the Board
of Directors, and for chairing Board
Committees;
remuneration based on performance
during the year (US$ 250,000 or
US$ 325,000 depending on whether
a director is a tax resident of Russia),
half of which was paid in shares;
additional remuneration if the Groups’s
market capitalisation increased over
the year, amounting to 0.1% of
the incremental capitalisation.
On 27 June 2015, the General Meeting
of shareholders approved a new version
of the Policy on Remuneration and
Compensation Payable to Members of
the Board of Directors of the Group.
Under the updated Policy, a new system
of Board compensation comes into effect
from corporate year 2015-2016 onward,
and comprises the following elements:
1. Basic remuneration of RUB 13.7 mln or
RUB 17.8 mln (depending on whether a
director is a tax resident of Russia). Basic
remuneration is paid to Board members
in cash in equal quarterly installments.
2. Remuneration for acting as Chairman
(RUB 350,000 per quarter) or Deputy
Chairman of the Board of Directors
(RUB 140,000 per quarter) and for
chairing Board Committees (RUB 70,000
per quarter). Remuneration for additional
duties is paid to Board members in cash
on a quarterly basis.
3. Additional remuneration of RUB 13.7 mln
or RUB 17.8 mln (depending on whether
a director is a tax resident of Russia),
payable if one of the following
investment targets is met:
• the arithmetic mean of TSR and iTSR
exceeds or equals CoE(1);
• TSR exceeds or equals the change
in the Morgan Stanley Capital
International Russia Standard index
(ΔMSCI); and at the same time iTSR
exceeds or equals CoE.
Members of the Board of Directors are
reimbursed for expenses associated with
performance of their duties, including
participation in meetings of the Board
of Directors and Board Committees.
The Policy on Remuneration and
Compensation Payable to Members
of the Board of Directors of Sistema JSFC
also includes liability insurance for
Board members.
The Group does not grant loans
to members of the Board of Directors.
REMUNERATION POLICY
REGARDING MANAGEMENT
In 2015, the short-term (up to one year)
incentive scheme for senior managers
of Sistema JSFC consisted of:
•
•
a fixed monthly salary determined
in line with the internal system of job
categories (grades);
bonuses paid for project implementation
and generation of cash income.
Remuneration is paid based on employees’
individual performance and positive cash
flow generated by projects of Sistema’s
Investment Portfolios and Functions
and Departments. Payments may
amount to up to 20% of cash income
generated in excess of the target.
In 2015, the long-term (more than one
year) incentive scheme for senior managers
of Sistema JSFC was part of a three-year
incentive programme (2015-2017).
The programme is aimed at increasing
Sistema’s shareholder value and creating
additional incentives for long-term
employment and good corporate relations
between the Group and its management.
(1) This target was met in 2015, since the arithmetic mean of TSR and iTSR for the year is 26.9% and CoE is 14.6%. CoE stands for the minimum rate of return that a company ought to provide
to its shareholders for the risk they take. CoE is calculated as the sum of a risk-free rate of return (e.g. the return on government bonds) and a premium for the risk related to investing in the stock market,
taking into account the capital structure of the asset and country-specific risks.
ANNUAL REPORT 2015 | Sistema www.sistema.ru
Development of the corporate governance Remuneration policy
101
Participants are assigned a certain number
of phantom shares that are transferred
to them in installments, upon achievement
of targets set by Sistema’s shareholders.
Share transfers take place annually over
the course of five years from the launch
of the programme.
No extra compensation above the level
stipulated by Russian labour legislation
is paid to the President or other senior
executives in case of termination
of employment.
Sistema does not pay remuneration
to members of executive bodies
for serving on the Management Board.
The Group does not grant loans
to senior executives.
REMUNERATION PAID TO SISTEMA’S BOARD AND MANAGEMENT IN 2015(1)
Members of Sistema’s Board of Directors received the following remuneration for 2015:
Cash remuneration
RUB 630,769,427(2)
Remuneration in the form of Sistema’s
RUB 187,381,041
ordinary shares
Reimbursement of expenses incurred by
Board members in connection with their duties
RUB 2,771,634
Remuneration for work as the Board
of Directors and for additional duties
performed for the Board, as well as
salaries and bonuses for 2015(3).
Shares granted to Board members
for the 2014-2015 corporate year
and remuneration under the long-term
incentive programme.
Members of Sistema’s Management Board received the following remuneration for 2015(5):
Cash remuneration
RUB 2,639,907,058
This amount includes fixed salaries
and bonuses for 2015(6).
Remuneration in the form of Sistema’s
ordinary shares
RUB 632,975,030
The shares were paid under the long-term
incentive programme.
(1) All figures in this section are given before applicable income tax.
(2) The amount represents total remuneration paid to all members of the board for the 2014-2015 corporate year, being the ruble equivalent of fixed amounts in US$,
calculated at the Russian Central Bank’s exchange rate on the date of payment (see above in this section).
(3) Excluding members of Sistema’s Board of Directors who were also members of its Management Board.
(4) The ruble equivalent of fixed amounts in US dollars, calculated at the Russian Central Bank’s exchange rate on the date of payment (see above in this section).
(5) Including the President of Sistema JSFC.
(6) Bonuses for 2015 were paid to Sistema’s employees in January 2016.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 102
SOCIAL RESPONSIBILITY
Social responsibility
Because of the significant impact it has on the development
of a number of Russian industries, as well as society and the
environment more broadly, Sistema JSFC sees corporate social
responsibility (CSR) as a strategic platform for sustainable
development that enables it to combine doing business
successfully in its market sectors and geographical regions
of operation with basic human values and needs.
1.35
RUB bln
Sistema’s social investments
ТОP-5
ranking
Leaders of Corporate Charity
RESPONSIBLE INVESTOR
In its investment activities Sistema is
guided not only by financial and economic
parameters but also by environmental,
social and governance (ESG) factors to
ensure that the interests of all stakeholders
are protected: shareholders and investors,
government, employees, consumers,
partners and suppliers, local communities
and NGOs.
Building mutually beneficial
relationships with interested parties
based on business ethics
Contributing to the development
of local communities by building
mutually beneficial partnerships
in regions where the Group operates
Sistema’s CSR principles include:
Ensuring occupational safety
and investing in human potential
Making efficient investments in
the development of manufacturing
facilities aimed at enhancing
Sistema’s competitiveness to benefit
both its business and Russia’s
economy as a whole
Improving living standards through
innovative business development
and the adoption of new technologies
Protecting the environment
Openness and transparency, and
development of social reporting
ANNUAL REPORT 2015 | Sistema
www.sistema.ru
ANNUAL REPORT 2015 | Sistema www.sistema.ru Responsible investor Social investments and charity
103
As a signatory to the UN Global Compact, Sistema fully abides by the Compact’s principles of responsible business
practices in the areas of human rights, employment relations, environmental protection and zero tolerance to corruption.
Sistema’s contributions towards achieving the global sustainable development goals adopted by the 70th UN General
Assembly in September 2015 focus on the following key areas:
UN sustainable development goal
Contribution of Sistema JSFC
Ensure inclusive and equitable
quality education and promote
lifelong learning opportunities for all.
Investing in human capital and education, and supporting and providing vocational training
to young people are among Sistema's top priorities. Sistema's flagship CSR programme Lift
to the Future is a long-term project aimed at creating a pool of future talent for high-tech
and knowledge-based industries.
Ensure healthy lives and promote
well-being for all at all ages.
Sistema Group includes Russia's biggest private chain of clinics, Medsi, which uses modern
diagnostic and treatment methods aimed at promoting a healthy lifestyle, including the
flagship project Be Healthy with Medsi!
Ensure access to affordable, reliable,
sustainable and modern energy
for all.
Sistema’s subsidiary Bashkir Power Grid Company (BPGC) is implementing a unique project
to upgrade the Ufa city power grid infrastructure using Smart Grid technologies. The use
of the latest technologies, including the creation of highly integrated smart next-generation
power grids, is designed to enhance reliability and efficiency of energy transportation
and to reduce power losses.
Promote sustained, inclusive and
sustainable economic growth, full
and productive employment and
decent work for all.
Sistema and its subsidiaries provide jobs for about 0.2% of Russia’s total workforce by
creating favourable conditions for employment and providing professional development
for employees. The Group focuses on improving management competences in high-tech
and knowledge-based industries by working with the Moscow State University’s Higher
School of Management and Innovation , whose graduates go on to work in the global
market of innovative products and services.
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 104
SOCIAL RESPONSIBILITY
Responsible investor
Build resilient infrastructure,
promote inclusive and sustainable
industrialisation and foster
innovation.
Sistema Group includes a number of high-tech companies implementing telecoms
and electricity infrastructure projects, and developing and manufacturing knowledge-based
products in segments such as microelectronics and radio technology. To help drive the
modernisation of the Russian economy, Sistema joined efforts with Rosatom, the Russian
Federal Nuclear Centre VNIIEF and RUSNANO to develop the Sarov Technopark project.
The project is implementing a unique public-private financing programme and serves as
a platform for Innovation Technology Center Sistema Sarov, a Sistema R&D centre. In 2015,
the number of Technopark residents reached 60, with total staff numbers exceeding
730 and total revenue of RUB 1.2 bln. Sarov Technopark mostly specialises in information
technologies, energy efficiency, sensors and automation, and new materials.
Make cities and human
settlements inclusive, safe,
resilient and sustainable.
Sistema and its subsidiaries are developing and implementing high-tech solutions aimed
at creating a smart and safe environment across Russia. For example, Sitronics KASU has
developed a comprehensive automated security system and intelligent transport systems
for the city of Moscow.
Protect, restore and promote
sustainable use of terrestrial
ecosystems, sustainably manage
forests, combat desertification,
and halt and reverse land
degradation and halt
biodiversity loss.
Sistema Group includes Segezha Group, one of the largest forest users in the European part
of Russia, which pursues an active reforestation policy in its regions of operation. More than
94% of the forest leased by Segezha has been certified under the international environmental
standards adopted by the Forest Stewardship Council (FSC).
To support biological diversity Sistema is participating in a project to research and conserve
the population of Amur leopards, one of the rarest leopard subspecies on our planet
and classified as critically endangered.
In 2015 Sistema won the Investment
Angel 2015 global investment award in
the category For contributions to achieving
the UN Sustainable Development Goals.
The award was established in 2011 by the
World Organisation for Development, an
international non-governmental organisation
that has special consultative status with
the UN Economic and Social Council.
Sistema JSFC is one of the largest taxpayers
in Russia, paying RUB 88.4 bln into federal
and regional budgets in 2015. As part of its
activities in Russia’s regions, Sistema entered
into new agreements on social and economic
cooperation with the local governments
of the Arkhangelsk, Vologda, Irkutsk and
Kirov regions to implement joint initiatives
and projects based on public-private
partnerships aimed at facilitating economic
and social development and promote
investments.
The Group fully embraces the social
responsibility concept outlined by
the Russian Union of Industrialists and
Entrepreneurs in the Social Charter of
Russian Business, as well as the international
standard ISO 26000:2010 (Guidance on
Social Responsibility). Reports on corporate
social responsibility and charitable activities
are regularly reviewed by Sistema’s Board of
Directors, which determines strategic goals
and assesses the efficiency of the Group’s
social investments. Overall guidelines
for responsible business practices are
determined by the Code of Ethics, which
was revised by the Group’s Board
of Directors on 31 October 2015. Sistema’s
social responsibility and charity policies
were also amended to include anticorruption
procedures.
To improve CSR activities and sustainable
development, strengthen integration
between subsidiaries and implement
best CSR practices, in July 2015 Sistema
and MTS conducted a joint seminar on
CSR as a platform for sustainable business
development, which was attended by
more than 50 representatives of Sistema
subsidiaries. During the seminar Sistema
presented the results of the CSR audit
of Sistema Group conducted in 2015,
and named the best CSR projects
of its subsidiaries.
ANNUAL REPORT 2015 | Sistema www.sistema.ru
Responsible investor Social investments and charity Lift to the Future
105
Social investments and charity
33,4
млрд руб
Выручка за 2015 год
In 2003, Sistema JSFC established Sistema
Charitable Foundation (SCF), which
today is one of the 10 biggest charitable
organisations in Russia and which serves
as Sistema’s main social investment tool.
The key objective of SCF is to ensure
maximum efficiency of the Group’s social
and charitable investment. SCF develops
a social investment policy; organises
large-scale corporate programmes;
raises necessary funds; forms a portfolio
of projects encompassing science and
education, culture and art, conservation
of cultural heritage, healthcare and social
support, fitness and sports; and oversees
the implementation of such projects. The
Foundation gives priority to large-scale
infrastructure projects that are implemented
across Russia and deliver significant
improvements in the social sphere.
In 2015 SCF invested more than
RUB 540 mln in charity projects; Sistema
Group’s total social investments reached
RUB 1.35 bln.
540
RUB mln
In 2015, Sistema ranked fifth in the Leaders
of corporate charity rating published by
Vedomosti, Russia’s leading business
newspaper, the Donors Forum and PwC,
while two projects were nominated in the
best charity programme awards: a project
to support the State Russian Museum in
St Petersburg came second in the category
Best programme aimed at supporting
modern arts and culture, while Sistema
Charitable Foundation took third place in
the category Best programme promoting
the development of volunteering in Russia.
Invested in charity projects
in TOP-5
ranking
Leaders of corporate charity
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 106
SOCIAL RESPONSIBILITY
Lift to the Future: innovations and talents
for high-tech industries
One of Sistema’s social investment
priorities is the development of
science, education and culture. For
five years the Group has been running
a flagship CSR programme Lift to
the Future designed to help talented
young people choose a profession,
undertake research and implement
pilot projects.
By providing support to talented young
people and their mentors carrying out
research projects in natural sciences,
engineering and technology, Lift to the
Future facilitates the development of high
technologies in Russia and helps to build
a pool of future talent for high-tech Russian
companies, including Sistema Group
subsidiaries. The nationwide programme
was launched in 2011 in partnership with
Moscow State University; the following year
it secured the backing of Russian President
Vladimir Putin as part of cooperation
between Lift to the Future and the Agency
for Strategic Initiatives (ASI). Today the
project enjoys the support of regional
governments in 11 regions of Russia, and
accepts entries from school children and
university students from across the country.
Fourteen Sistema subsidiaries were
among the key partners of Lift to the Future
in 2015. Representatives of Sistema, RTI,
Sarov Technopark, NIIME and Mikron, MTS,
BPGC, Business Nedvizhimost, Detsky Mir,
Binnopharm, Medsi, Targin, Stream, MGTS
and Leader-Invest took part in events
organised as part of the programme,
including lectures, master classes and
appraisal of projects in areas including
information and communication
technologies, healthcare and
biotechnologies, transport, manufacturing
technologies and new materials, the living
environment and energy.
The System of Priorities annual national
contest of youth projects attracted entries
from more than 1,000 high school and
college students across over 40 regions
of Russia. The winners received grants to
help them attend training events organised
by Lift to the Future schools. In 2015, project
leaders organised three training programmes
in national youth camps located in Anapa,
Stupino and Crimea that attracted
750 participants from all over Russia.
Several other contests were organised
as part of Lift to the Future, including:
•
•
•
•
an award for the best teaching
methodology (13 winners);
a contest for students, young
researchers and post-graduates
(58 award-winning projects);
a contest of student start-ups (four
projects were granted access to the
Business Incubator at Plekhanov Russian
Economics University);
the Step to Success programme of work
placements for young professionals.
The best projects were presented at the
nationwide Future Intellectual Leadership
of Russia forum in Yaroslavl.
The Chess in Schools project launched by
the World Chess Federation (FIDE) and
supported by Sistema Charitable Foundation
has become an integral part of Lift
to the Future.
In February 2015, SCF and the non-profit
partnership Chess in Schools signed an
agreement on facilitating the inclusion
of chess in Russian school curriculums,
developing school books and teaching
materials and organising chess tournaments
for young people. In July SCF became
a partner of International Chess Day
in Moscow under the patronage of FIDE
President Kirsan Ilyumzhinov.
For several years SCF has been working with
the European University at St Petersburg,
one of Russia’s leading private post-graduate
institutions. In 2015, SCF supported the
University’s programme aimed at facilitating
promising educational initiatives and helping
Russia’s leading research and education
centres.
Sistema’s subsidiaries are also implementing
large-scale youth vocational training
initiatives, and supporting education
and innovations. MTS, Medsi, Detsky Mir
and Kronshtadt Group became partners of
KidZania, Europe’s largest training project for
children, launched in Moscow in December
2015. The companies established interactive
training zones that enable young visitors to
acquire real professional skills.
MTS Group joined forces with some Sistema
subsidiaries (MTS Bank, Medsi, Stream, etc.)
to develop Telecom Idea, a cross-functional
platform aimed at finding and supporting
talented young people working on ICT
projects for the private and public sectors
of the Russian economy.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Social investments and charity Lift to the Future Taking Care of Veterans
107
Since 2011, about 900 teams have taken
part in a youth innovations contest organised
by Telecom Idea, and more than a dozen
of projects have been granted support.
Telecom Idea’s geographical footprint and
partner network continues to grow. In 2015,
Telecom Idea organised an IT start-up
competition in Belarus, while the Russian
competition was integrated with the national
GenerationS technology start-up accelerator
sponsored by Russian Venture Company
(RVC). Projects selected after a multi-stage
appraisal were granted considerable fund-
raising opportunities.
In March 2015, Sistema, MTS and SSTL
in cooperation with the Higher School of
Economics and Moscow Skolkovo School
of Management held an International Youth
Innovations Summit to discuss state-of-
the-art technologies and prospects for
collaboration on telecom innovations.
The summit was attended by the winners
of the Telecom Idea India competition,
Russian participants of previous Telecom
Idea contests, college students and teachers
and employees of R&D centres, young
developers of breakthrough technologies
and entrepreneurs from the two countries.
The winners of the Indian competition
of 2014 were invited to Moscow to take
part in an educational telecom tour, while
the Russian winners of the fifth Telecom
Idea competition went on an educational
tour to Israel. MTS also ran the Telecom
Idea junior competition for 7th-to-11th-grade
schoolchildren for the second time.
Participants from Moscow, the Moscow
and Samara regions, Chita, Nizhny Novgorod,
Barnaul, Taganrog, Pyatigorsk and Obninsk
created models of a city of the future using
modern information and communication
technologies to make the city environment
more comfortable, convenient, safe and
environmentally friendly. The winners of the
competition were enrolled on the Lift to the
Future school programme enabling them
to finalise their projects under the guidance
of experienced mentors.
For many years RTI Group has been running
a project aimed at creating a pre-university
training system to prepare highly qualified
specialists. A comprehensive programme
for schoolchildren, students and young
specialists runs in cooperation with
specialised training facilities is designed
to provide participants with vocational
training under the auspices of RTI, to
involve schoolchildren in projects, to create
and support school classes specialising
in engineering, and to provide tutoring
to students entering technical universities
(Moscow Institute of Physics and
Technology, Moscow Aviation Institute,
Moscow State Technical University and
Moscow Institute of Radiotechnics and
Electronics). The Intellectual Information
and Radiophysical Systems Department
of the National Research Institute (Moscow
Institute of Physics and Technology) has
become a leader in providing R&D, training
and HR support for all subsidiaries of RTI.
To stimulate the R&D work of its employees,
the company grants an annual award for
outstanding achievements in theoretical
and applied research. RTI’s subsidiary NIIME
and Mikron provides vocational training to
young people in Zelenograd and elsewhere
in Russia on a regular basis. As part of the
vocational training programme the company
conducted 25 educational tours for more
than 500 young people during 2015.
In 2015, oil services holding Targin and
BPGC signed an agreement with Ufa State
Oil Technology University to work together
on education, research and innovations,
vocational training and career guidance for
graduates. Targin also signed an agreement
with the Skolkovo Foundation on establishing
an R&D centre. To find promising innovative
solutions and develop the skills of start-up
teams implementing high-tech projects,
Targin also became a partner of the Russian
Startup Tour (RST) organised by the
Skolkovo Foundation, the Federal Agency
for Youth Affairs, the Foundation for
Assistance to Small Innovative Enterprises
in Science and Technology, the Association
>150
th. people
Total audience of the Lift to the Future project
>500
companies
Are partners of Lift to the Future project
of Innovative Regions of Russia,
the Agency for Strategic Initiatives, RVC
and the Rusnano Fund for Infrastructure
and Educational Programmes.
Medsi Group was a key partner in the Digital
Health open discussion panel organised by
the Higher School of Marketing and Business
Development at the Higher School of
Economics to stimulate the digital medicine
market in Russia by exchanging knowledge
and by involving the expert medical
community, innovators and investors
in the search for new ideas.
As part of its partnership with the Smile
Foundation, SSTL provides support to the
Mission Education programme by granting
access to mobile broadband Internet
services to underprivileged children
from 23 educational facilities in India.
This unique project was launched in 2012
and had provided support to more than
16,800 children by the end of 2015.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 108
SOCIAL RESPONSIBILITY
Taking Care of Veterans - social partnership
and preserving the memory of the Second World War
Sistema’s social policy aims to
improve the quality of life of and
provide support to underprivileged
social groups. To mark the 70th
anniversary of the end of the Second
World War, Sistema launched
a comprehensive programme to
support war veterans and preserve
the historical memory of the bravery
of the Russian people.
In May 2015, a trilateral agreement was
signed by the Moscow Government, the
Moscow City Council of War, Labour, Armed
Forces and Law-Enforcement veterans and
Sistema JSFC. The signing of the agreement
paved the way for a comprehensive social
partnership between the government, the
business community and NGOs to support
war veterans and provide patriotic education
for young people in Russia.
An important area of cooperation is the
Taking Care of Veterans programme
launched by SCF, the Moscow Social
Security Department, the War Veterans
Council and Medsi Group. Under the
programme, more than 500 war veterans
received free healthcare services at Medsi
clinics and a special two-week rehabilitation
course at the Medsi Otradnoye sanatorium
in Moscow region.
Ahead of the Victory Day celebrations
marking the end of the Second World War
on May 9, the Group organised another
volunteer campaign, Aid to Veterans. More
than 200 Sistema employees volunteered
to visit over 100 veterans in Moscow,
Khimki, Mytishchi, Shchelkovo, Noginsk,
Krasnoarmeysk, Egoryevsk and Tomilino
to deliver special food baskets, help around
the house and record the veterans’ war
stories for future generations. MTS Group
then published a collection of more than
300 such stories in The Book of Memory.
Several printed copies of the book were
given to the library of the State Historical
Museum.
As part of the Live History educational
project, more than 1,000 children from
orphanages in Moscow and the Moscow,
Vladimir and Tver regions were taken on
free excursions organised by SCF and
Sistema volunteers at the Central Museum
of the Great Patriotic War of 1941-1945,
the Central Army Museum and the Central
State Museum of Modern History.
Large-scale celebrations were organised
for war veterans around Victory Day.
On 28 April, veterans were invited to
Sistema’s traditional reception at the Palace
of Scientists, which this year for the first
time included a gifting ceremony.
The veterans received personal certificates
from SCF towards much-needed household
appliances of their choice. On 16 May,
Sistema and MTS together with the War
Veterans Council organised a charitable
concert, Victory Fireworks, at the Central
Museum of the Great Patriotic War at
Poklonnaya Hill that was attended by more
than 250 veterans from 12 administrative
districts around Moscow. Sistema was also
a partner of the Wings of Victory programme
that honoured air and space veterans during
the official opening ceremony of the MAKS-
2015 International Aviation and Space Salon
in the Moscow region town of Zhukovsky.
As part of another campaign, Victory
Garden, volunteers of the Group helped to
clean up the grounds of four orphanages in
Moscow and the Moscow and Tver regions
and organised meetings between children
and war veterans.
More than 400 employees of Sistema
Group’s companies took part in these
and other activities devoted to Victory Day.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Lift to the Future Taking Care of Veterans Culture, historical and religious heritage
109
Culture, historical and religious heritage
For many years, Sistema and SCF
have taken part in large-scale projects
aimed at promoting Russian culture,
preserving historical monuments
and art, and developing inter-cultural
relations. SCF supports leading
Russian museums, musical bands
and theatres, finances restoration
of architectural monuments,
and helps children’s cinema.
Since 2003, the bulk of Sistema’s social
investment in the cultural sector has gone to
the State Russian Museum in St Petersburg,
one of the country’s most prominent art
centres with an outstanding collection of
Russian decorative arts. The Group annually
provides up to RUB 30 mln to the Museum,
in accordance with a long-term agreement
that runs through 2023. The partnership has
helped the Museum create a unique chain
of virtual branches that serve as information
and education centres, and a state-of-the-art
Multimedia Centre in the Western wing of
St Michael’s Castle. The goal of the project,
which has been supported by SCF and
MTS, is to acquaint a broader audience
with Russia’s cultural values and history
by offering free access to digital materials
and to create a single cultural and
information space by using the latest
computer technologies. In 2015, the Russian
Museum opened 20 new virtual branches
in Russia and abroad (Chile, Romania, Spain
and Cuba), bringing the total number to 177.
Yet another outstanding joint project
between SCF and the Russian Museum
is the annual international Imperial Gardens
of Russia festival of garden art. In 2015,
the festival was devoted to the countries
of the Great Silk Road. Expositions created
at St Michael’s Garden in July represented
Asian Pacific countries, Central Asia,
the CIS and Russia. On 5 September, the
International Day of Charity, the Russian
Museum and Sistema’s volunteers organised
an educational game for St Petersburg
residents in the famous Summer Garden.
From 23 April to 6 July 2015, the Russian
Museum hosted an exhibition called The
Sacred War. Art of 1941-1945 to showcase
works created by Soviet artists during WWII.
The exhibition was organised with support
from Sistema and SCF. On the day of the
official opening of the exhibition, Sistema
and volunteers from MTS and Stream
organised a reception for war and home-
front veterans and survivors of the Siege
of Leningrad. The first to visit the exhibition
were residents of War Veterans Nursing
Home No. 2 and the M.A. Savina Nursing
Home for Retired Actors, who were given
a personal tour, received gifts and had the
opportunity to make free calls to their war
comrades and relatives in other cities.
SCF also contributed to the establishment
of Russia’s first open-air shooting range
for armoured vehicles at the Prokhorovskoye
Field State Memorial Estate in Belgorod
region, the site of one of the biggest tank
battles in World War II. The decision to
establish the training ground was made
in 2014 by the Victory organisational
committee chaired by the Russian President,
and was inaugurated by Deputy Prime
Minister Dmitry Rogozin on 16 May 2015.
The Group contributes significantly to
the preservation and restoration of sites
of historical and cultural heritage in Russia’s
regions. Since 2014, SCF has supported the
Valaam Museum and Reserve of Church
Archaeology, and has helped to restore one
of Russia’s oldest architectural monuments
and religious centres, the Transfiguration
Cathedral of the Valaam monastery in
Karelia. Donations collected over the two
years totalled RUB 25 mln. The money has
been used mainly to refurbish the central
estate and territory of the monastery. SCF
also assisted in organising in 2015 the first
St Vladimir the Enlightener Valaam Festival
of Orthodox Singing, devoted to the 1,000th
anniversary of the death of Prince Vladimir,
who brought Christianity to Rus’ in the 10th
century.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 110
SOCIAL RESPONSIBILITY
Corporate volunteer movement
Sistema’s corporate volunteer
movement has gained prominence
across the Group as an important
activity platform for HR and CSR
purposes, a tool for social and charity
projects, and a powerful non-financial
motivator. For many subsidiaries,
corporate volunteering has become
part and parcel of corporate culture,
with the average rate of engagement
in voluntary activities increasing
by half, to roughly 7% of total
headcount, which matches the
maximum rate of volunteering
among Russians (according to
data from the Public Opinion
Foundation)(1).
The rapid proliferation of volunteering
is primarily due to the hard work of SCF’s
Volunteer Centre, established in June 2014
as an integrator and coordinator of general
corporate volunteer projects. The Centre ran
55 volunteer campaigns in 2015, attracting
more than 500 volunteers from Sistema
and 11 subsidiaries and associates, and
serving 8,200 beneficiaries, while also
bringing in 16 social partners.
Sistema’s largest volunteer event of the
year was a major clean-up at Medsi’s
Otradnoye Sanatorium on 30 May 2015,
dubbed Sistema’s Energy and dedicated
to the 70th anniversary of the end of the
Second World War. More than 2,000
participants – families of employees
of Sistema and its 27 subsidiaries and
associates – came to freshen up and
landscape the garden around the sanatorium,
which is known for its care programmes
for war veterans. Sistema senior executives
teamed up with representatives of the War
Veterans Council to lay the memorial Victory
Alley. Volunteers organised a celebratory
concert for veterans of the front line, and
arranged master classes, sports games,
a puppet show (by the Detsky Mir volunteer
puppet theatre) and other healthy open-air
activities for children.
In addition to support for war veterans
and the Victory Day campaigns, the Group’s
volunteers traditionally have a heavy focus
on helping underprivileged children and
providing socialisation and career guidance
to children in orphanages sponsored
by Sistema. Fundraising by the Group’s
volunteers and donations by MGTS, MTS,
Medsi and SCF helped Zhuravushka, a care
home for disabled children in Moscow region
surrounded by 4 ha of untended garden land,
to acquire a much-needed but costly mini-
tractor (RUB 500 th.). To help the children
further, SCF invited Paralympic champions
to Zhuravushka to arrange a sports event
called Equal Abilities Day.
To give career guidance to children from
seven orphanages that it supports, SCF
joined forces with Stroganov Moscow State
University of Arts and Industry, RT and the
National News Agency to conduct 10 special
events offering lectures, master classes
and tours, with dozens of children being
given a wonderful opportunity to undertake
internships at a radio station and a news
agency.
Among the largest charity campaigns
of 2015 were Backpack for a First-Grader
and The Wishing Tree. To help orphans start
off the new school year, corporate volunteers
organised a giving campaign and collected
more than RUB 1 mln worth of school
supplies (more than 50,000 items)
for children from 25 orphanages in
and around Moscow and in the Central
and Northwestern Federal Districts. For
a true New Year’s experience, donors from
Sistema companies collected and delivered
more than 800 gifts for children at eight
orphanages in Moscow, Tver, Vladimir,
and Yaroslavl.
To celebrate Children’s Day, SCF in concert
with Medsi and Hospital Clowns staged
a performance of Doctor Aybolit at the
Moscow International House of Music for
300 mentored orphans as well as children
from large and disadvantaged families and
children suffering from hard-to-manage
ailments. During the autumn school break
(15 October), SCF provided orphans with
tickets to Generation Mowgli, a musical
staged at the Grand Kremlin Palace as
a joint project by MTS and Konstantin
Khabensky’s Charitable Foundation.
(1) Source: The Public Opinion Foundation
www.sistema.ru
ANNUAL REPORT 2015 | Sistema www.sistema.ru Culture, historical and religious heritage Corporate volunteer movement Shared values and social marketing
111
7%
involved
Involved in corporate volunteering
55
campaignes
Conducted by The Volunteer Centre in 2015
The campaign had a double social effect:
proceeds from ticket sales to third-party
guests went towards treating cancer in
children, while 500 tickets worth more
than RUB 700 th.were distributed among
orphanages in and around Moscow.
In December, SCF arranged an annual
charity New Year party at the Maly Theatre
for 700 children from 12 care institutions
in Moscow and Tver. In addition, SCF’s
Volunteer Centre teamed up with the
Hospital Clowns non-profit to deliver New
Year greetings to 90 children with cancer
and other grave conditions forced to spend
the festive season at the Moscow Region
Cancer Treatment Centre, and in clinics
and hospitals.
The Volunteer Centre was awarded the
2015 Good Cause Champions national prize
established by the Managers’ Association
and the National Council for Corporate
Volunteering (supported by the Economic
Development Ministry) to encourage
corporate volunteering.
Sistema’s subsidiaries also have their own
regular volunteer campaigns. For example,
MTS Bank and Detsky Mir ran a special
New Year party for underprivileged children
at the Moscow Railwaymen’s Concert Hall.
The event was visited by about 450 children
from care institutions from Moscow and
Smolensk, including disabled children. MTS
volunteers staged a show, while Detsky Mir
provided gifts. Medsi’s volunteers had a busy
year, taking part in various events aiming
at social inclusion of children with special
needs, including Galafest, Russia’s only arts
festival for children promoting inclusion
and disability rights, organised by Galchonok,
a charitable foundation.
Support of junior disability sport is an
important area of focus of the Group’s
social citizenship programmes. SCF is
a long-standing sponsor of Olympro, a
unique football team of disabled adults
that achieved strong results in major
championships during 2015 including the
19th National Championship, the Caucasus
Cup and the European Cup (qualification
games).
MTS and Detsky Mir teamed up with the
Perspektiva regional union for the disabled
to set up Solidarity Cup, Russia’s first charity
futsal tournament, to promote employment
of young disabled people. Held at the
prestigious Locomotive soccer club,
the tournament brought together teams
from specialised schools and big business.
During a visit to Karelia in February 2015,
Chairman of the Board of Directors of
Sistema Vladimir Evtushenkov donated
a RUB 500,000 gift voucher to a sports
school in the town of Sortavala to purchase
skiing equipment.
In May 2015, SCF signed an agreement
with the National Sambo Federation to
cooperate in organising a National Sambo
Day. Events to promote this national sport
took place on 15-18 November 2015 in more
than 100 towns and cities across Russia.
The Foundation was also a general partner
of the President’s Sambo Cup in Manchester.
www.sistema.ru
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 112
SOCIAL RESPONSIBILITY
Shared values and social marketing
Sistema’s strategic approach
to CSR is based on the principles
of synergy and shared values, and
aims to involve as many subsidiaries
as possible to help causes that
address social issues while also
helping develop the Group’s
businesses.
Clear examples of clever “social marketing”
helping to expand the customer base and to
boost client loyalty include MTS’s signature
projects launched several years ago to
promote internet literacy among the younger
and older generations. Children and the
Internet, interactive exhibitions promoting
internet safety, have toured Novosibirsk,
Penza, and Kaliningrad, reaching a total
audience for web-themed events over
the past five years (exhibitions, elementary
school classes, master classes for teachers,
and public teacher-parent meetings)
of more than 320,000 children, parents
and teachers. As part of All Ages are
Online, a project designed to help elderly
people learn to use modern information
technologies and useful online services,
MTS designed a special learning course
dubbed Mobile Academy to promote
mobile and online services among potential
smartphone users aged 50+. The course
attracted more than 15,000 learners
over three years.
In August 2015, BPGC and the
Bashkortostan Ministry of Education
signed a new agreement to cooperate
in preventing electrical injuries in children
in the upcoming academic year. In 2015
alone, company officers taught more than
350 extracurricular power safety classes
at secondary schools across Bashkortostan,
reaching out to roughly 5,250 students.
BPGC commissioned a six-episode
educational cartoon mini-series addressing
power safety, which in turn later inspired
a theatre play that toured Ufa, Kumertau,
Belebei, Neftekamsk, Sibai and Beloretsk.
Called Safe Childhood, the project has
had an outstanding effect, with not a single
child suffering an injury on BPGC’s power
lines in the entire year 2015.
Medsi launched its Be Healthy with
Medsi project to promote healthy lifestyles
among corporate customers and partners,
with leading doctors and fitness coaches
delivering free lectures, master classes and
consultations to employees of companies
who care about the health of their staff.
In 2015 the project was rolled out across
Sistema Group companies: MTS, MGTS,
MTS Bank, Stream, NVision Group, SG-trans,
Detsky Mir, and OZON Group. Far from
being Medsi’s only social project, Be Healthy
with Medsi is complemented by numerous
efforts to raise public awareness of healthy
living and prevention of dangerous ailments,
such as School for Mums and School
for Happy Parents, which offer free
consultations and lectures on how to
keep kids healthy and nurture wholesome
habits. For example, in May 2015, Medsi
Group teamed up with La Roche-Posay in
a campaign dedicated to Global Melanoma
Prevention Day, inviting people for free
screening examinations for skin cancer
and consultations with dermatologists.
>335 th.
people
of MTS educational campaigns within 5 years
145
RUB mln
Donated Detskiy Mir to charity
www.sistema.ru
ANNUAL REPORT 2015 | Sistema www.sistema.ru Corporate volunteer movement Shared values and social marketing Green economy and environmental protection
113
Detsky Mir also supports Russian producers,
encouraging them to market affordable,
high-quality Russian-made products.
The company has a partnership with
the Ministry of Industry and Trade to run
a nationwide contest for the best school
uniform designs. The winner will be offered
to sign delivery contracts with the chain.
Medsi’s Blagoveshchensky paediatric clinic
organised an unusual sports event, an infant
swimming championship, to mark National
Children’s Day. The event involved more
than 20 children aged from 4 months
to 3.5 years, including from pre-schools
and child development centres in and
around Moscow. The company also took
part in a Christmas charity event,
Heartwarming Bazaar, with Medsi’s best
cardiologists, neurologists, breast physicians,
paediatric ophthalmologists and paediatric
exercise therapists providing free instant
screenings and consultations for everyone,
and volunteers offering master classes
in arts.
As a programme evolving its remote
banking system while also promoting
charitable giving, MTS Bank now offers
users of its online banking system and
mobile app a feature that enables online
fee-free contributions to Sistema Charitable
Foundation. The first fundraising project
promoted via remote banking channels was
Backpack for a First-Grader. In addition, MTS
Bank continued its efforts to raise financial
literacy nationwide, conducting a series
of learning events on digital technology in
banking and personal finance management
at NAUKA 0+, a national science festival
organised with support from the Ministry
of Education, and acting as a partner for a
national knowledge competition among high
school students on the topic of financial
markets and basic consumer rights.
A company undergoing massive regional
expansion, Detsky Mir designed a large-
scale charity giving campaign, Participate!,
whereby customers are invited to donate
Detsky Mir goods to help underprivileged
children. The company has also opened
numerous game rooms at paediatric
hospitals. In 2015, Detsky Mir donated
RUB 145 mln (in cash and goods) to
charity and relief efforts. Detsky Mir
sponsors 450 social institutions in more
than 150 cities and towns in Russia and
Kazakhstan. Over 2015, it opened 58 game
rooms in 20 hospitals and social institutions
in 12 cities: St Petersburg, Kaliningrad, Kazan,
Smolensk, Tula, Rostov-on-Don, Perm,
Ivanovo, Nalchik, Pskov, Yaroslavl and Tomsk.
Previously, game rooms had been set up in
paediatric hospitals in Moscow, Bryansk,
Kurgan, Petrozavodsk, Ryazan, the Vladimir
region, Tver, and Dzerzhinsk.
www.sistema.ru
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 114
SOCIAL RESPONSIBILITY
Green economy and environmental protection
Sistema boosted its environmental
activity in 2015, introducing a number
of new shared value projects. In line
with the Group’s aim of promoting
green lifestyles and mitigating
environmental impact, Sistema’s
companies pursue numerous
environmental initiatives that
benefit nature and business alike.
Sokol WP, a Segezha Group company,
started producing a new type of bioenergetic
fuel: the wood brick. It is free from toxic
contaminants, leaves less than 1% ash
when burnt, and is superior to brown coal
and regular wood in terms of calorific
capacity (nearing that of black coal).
The company’s immediate plans include
an energy-saving project to produce
fuelwood pellets, potentially for export
to Europe.
Segezha’s investment in modernisation
and business expansion also pursues
the good cause of forest care. An
environmentally minded timber producer,
Segezha invests considerable resources
into regenerating logged forest areas.
In 2015, it regenerated more than 12,000 ha
of forestland, spending over RUB 96 mln
on restoration and fire safety. The company’s
rented forest reserves and supply chains
are certified by Forest Stewardship Council
(FSC), an international non-commercial
and non-governmental organisation that
promotes responsible management of
the world’s forests. As of year-end 2015,
Segezha held 16 certificates (nine in forest
management and seven in supply chains)
covering 99.5% of the company’s forest
reserves.
Other Sistema companies also use Segezha’s
eco-friendly products. Detsky Mir stores
now offer shoppers eco-friendly paper bags
that decompose organically and are easily
disposable. The project started as a pilot
in December 2015, with 358,000 bags
distributed among Detsky Mir stores in and
around Moscow. Part of the proceeds from
sales will go to the Detsky Mir Charitable
Foundation.
MGTS, an MTS Group company, is slashing
paper consumption and developing remote
service channels. The company launched
a joint project with the World Wide Fund
for Nature to encourage Muscovites to
help reduce tree-felling by switching from
paper to electronic billing and making
donations to finance forest restorations.
Every 100 rubles donated will help WWF
Russia plant 10 trees. MGTS plans to transfer
1% of its printing savings to the Fund.
More than 500,000 MGTS subscribers
have already switched to electronic billing.
Sistema, MTS and RTI for the first time took
part in the environmental campaign Recycle
to Save Forests, promoting responsible
forest management by organising waste
paper collection at their offices (in an effort
dubbed FSC Friday). Sistema Group won
this year’s competition among commercial
organisations, collecting 1,650 kg of paper,
enough to save 28 trees, 11,500 litres of
water and 6,600 kW of electrical energy,
and to prevent emissions of 2,805 kg
of carbon dioxide. MTS collected most
paper among individual companies.
Resources used in 2015
(Corporate Centre data)
Resources
Heating, Gcal
Electricity, th. Kw
Total:
2015
2014
Amount
RUB th.
(VAT incl.)
Amount
RUB th.
(VAT incl.)
3,465.44
5,256.47
2,643.23
4,147.30
2,684
9,069.52
3,223
12,865.29
14,325.99
17,012.59
Far from being an environmental newcomer,
MTS has spent years promoting its
own Eco Office programme to promote
rational utilisation of electrical power and
consumables for office equipment, separate
waste collection, green waste-disposal
methods, and more broadly environmental
friendliness. In 2015 MTS was named in
the top-five companies in Green Offices
of Russia, a ranking published by Greens
Eco Bureau in collaboration with WWF
Russia.
MTS consistently introduces alternative
energy sources to supply power across
its national network. In May 2015, the
company commissioned a solar-powered
base station in Primorye (Far East), followed
by Russia’s first-ever hydrogen/air powered
LTE base station in Noginsk (Moscow
region), launched in December. The new
power system is eco-friendly and compact,
and has five times the service life of standard
solutions. Windmills are used to supply
power to MTS’s base stations on the shores
of the Barents Sea and Onega Lake in the
Northwest, the Lago Naki plateau in the
Western Caucasus, the Kitovoye Rebro
mountain pass on the coast of the Sea
of Japan, in the Urals, and in the Yamalo-
Nenets Autonomous District. Base stations
in the Chekhovsky district of the Moscow
region are powered by generators using
hydrogen fuel cells, while those in southern
Russia use solar batteries.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Shared values and social marketing Green economy and environmental protection Responsibility towards employees
115
NIIME & Mikron, an RTI Group company,
implemented a comprehensive energy
management system certified according
to ISO 50001:2011, an international energy
management standard. Mikron was among
the first Russian businesses to adhere
to the standard and has by now been
re-certified based on a favourable audit
opinion from Bureau Veritas Certification.
Over four years of use, the system has
allowed Mikron to cut electric power
consumption by 27.2%, heat power
consumption by 15.5%, and installed
electrical load by 27.3%. Another area
of the company’s conservation focus is
production of cutting-edge energy-saving
microelectronic products (such as LED
drivers) meeting the highest environmental
standards.
Mikron was among the leading organisers
of Bike to Work, a social campaign to
encourage staff of large companies in
Zelenograd (Mikron’s home town) and other
town residents to swap their cars and public
transport routes for bikes, if only for a day.
The idea was to prove that bicycles could
be an efficient alternative to other means
of transport, along with their obvious
benefits such as improvement of physical
fitness, eco friendliness and avoiding traffic
jams. The event attracted 400 people,
including 73 employees of Mikron.
OZON Green is another project within
Sistema Group that promotes responsible
consumption. The online marketplace Ozon.
ru offers shoppers a range of energy-saving
and eco-friendly products along with
a special page of useful daily tips on how
to live green, a feature that attracted over
6,000 new customers in 2015 alone.
The company not only promotes
environmentally friendly lifestyles, but also
supports social entrepreneurship through
partnership with a project titled Naive?Very,
an online marketplace for products made
by disabled artists.
Since 2012, Sistema has supported the
non-profit organisation Far Eastern Leopards,
making yearly donations to preserve
and restore the population of this rare
species in Primorye, carry out biotechnical
interventions, purchase new materials
and build necessary infrastructure
in The Leopard Land national park.
>12 th. ha
forestland
Regenerated by Segezha Group in 2015
>10
RUB mln
Donated Sistema to the Russian Geography Society
Another beneficiary of Sistema’s relief effort
is the Russian Geographic Society (RGS),
one of Russia’s oldest civic organisations,
tasked with research and preservation
of the country’s natural riches and Sistema’s
partner of five years. In 2015 alone, Sistema
donated RUB 10 mln to RGS. The money
went towards several research projects,
such as integral environmental assessment
of communities and regions of Russia and
assessment of the environmental, geological
and chemical condition of the mouth
of the River Don.
By participating in RGS’s 2015 grant
scheme, Sistema financed the publishing
of the first-ever electronic atlas of Karelia
and a handbook and audio lectures on the
geography of the Chuvashia region for the
visually challenged, a large-scale student
research expedition in Bashkortostan
From the Ik to the Jayıq, a youth ecology
and geography expedition in Karachay-
Cherkessia, and environmental learning
events for students in the Altaisky State
Nature Biosphere Reserve and on Lake
Teletskoye.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 116
SOCIAL RESPONSIBILITY
Responsibility towards employees
Sistema JSFC is one of the largest
employers in Russia, providing
jobs for more than 155,000 people
in numerous regions and countries.
The Group provides its staff
with competitive pay, additional
social guarantees, and extensive
professional and career growth
opportunities.
Sistema’s financial incentive system
is geared towards maximum return on
investment, monetisation of assets, value
creation, and financial self-sufficiency
of project teams. Compensation is directly
linked to investment projects, meaning that
management’s interests are fully aligned
with those of shareholders. The long-term
incentive programme now in place is based
on movements in Sistema’s share prices and
total shareholder return (TSR), and provides
for stock awards to the management based
on market cap growth.
On top of the standard benefits provided
to the Group’s employees, including private
health insurance, the Group spent roughly
RUB 320 mln in 2015 on additional support
to employees and their families as well as
Sistema retirees.
HR potential, skill levels, professionalism
and a responsible tone at the top are crucial
competitive advantages in a post-industrial
economy. The heaviest focus of the HR
strategy in 2015 was on HR programmes
and projects designed to improve the
personal efficiency of executives, promote
a culture of professional development,
build an internal corporate pool of highly
competent executives, and manage human
resources through an efficient system
of internal communications.
Sistema’s succession pool in 2015 was
expanded to 2,000 employees from various
subsidiaries (2% of the total headcount),
with 22% of talents from the pool getting
promotions in 2015. Early in 2015, the Group
started its new project dubbed Sistema
Academy to create a pool of efficient
corporate coaches to develop basic business
skills and competencies in junior and middle
management leveraging the expertise
of Sistema’s highest achievers. This model
allows employees to manage their own
professional development, makes training
available to all companies of the Group,
and enables Sistema to save up to 70%
on coaching costs (compared to market-
based coaching fees) while guaranteeing
sustainably high quality of learning focused
on industry-specific issues. Sistema coaches
designed more than 12 learning programmes
addressing key management skills and
personal efficiency habits. Sistema’s first
Knowledge Week announced in the autumn
of 2015 offered master classes, trainings,
and interactive lectures by leading coaches
in the Russian business training market.
More than 400 employees of Sistema
and its subsidiaries had a chance to improve
their business skills in leadership, time
management, negotiating, and change
management.
In October 2015, Sistema’s Corporate
University launched a professional
advanced training programme, Leadership
in Development, for executives of Leader-
Invest at Moscow State University’s Higher
School of Management and Innovation.
Sistema has also developed new education
programmes in innovation studies
(management in engineering systems)
to be deployed in partnership with other
departments of Moscow State University
(Physics, Chemistry, Biology, Computational
Mathematics & Cybernetics and the
Mechanics Research Institute) that will
make their labs and equipment available
for practical training.
ANNUAL REPORT 2015 | Sistema www.sistema.ru Green economy and environmental protection Responsibility towards employees Remuneration policy
117
MTS received its third crop of prizes from
HR Brand, another annual contest, with
a Career Starter prize as the best employer
of young people, a special award For
HR Branding Development acknowledging
the company’s extensive efforts in the
HR sphere, and a Heart of Gold prize
for the Generation M charity project.
The company was also named among
the five best employers in Russia, and
the best among telecoms companies.
>2 th.
employees
Sistema’s succession pool in 2015
in TOP-5
ranking
HR Brand in Russia (MTS)
The Group also gave a new impetus to
the tried-and-trusted Strategic Management
and Innovation master’s programme, with
a new modular format that provides
managers from Sistema’s subsidiaries
an opportunity to study at Moscow State
University. Last but not least, Sistema’s
employees are offered various advanced
training courses at Moscow State
University’s Higher School of Management
and Innovation free of charge.
Other effective tools of non-financial
motivation and employee engagement
promotion include corporate volunteering
and sports movements. As was the case
every summer for the previous 12 years,
Sistema’s 2015 Summer Games, a central
sports event, brought together families of
corporate employees (4,000 people in total)
in a fun festive atmosphere.
Sistema and MTS traditionally attain leading
positions in employer ratings. Last year’s Top
1,000 Russian Managers, an annual rating
by Kommersant, listed 39 senior executives
from various companies in Sistema Group,
more than any other corporation in Russia.
ANNUAL REPORT 2015 | Sistemawww.sistema.ru 168
CONTACTS
Disclaimer
Certain statements in this report may
contain assumptions or forecasts 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 occurring after
the above-mentioned date or to reflect
the occurrence of unanticipated events.
Many factors could cause Sistema’s actual
results to differ materially from those
contained in our projections or forward-
looking statements, including, among
others, deteriorating economic and credit
conditions, our competitive environment,
risks associated with operating in Russia,
rapid technological and market change in
our industries, as well as many other risks
specifically related to Sistema and its
operations.
ANNUAL REPORT 2015 | Sistema www.sistema.ru 169
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
www.sistema.ru
ANNUAL REPORT 2015 | Sistema
JSFC Sistema
13, Mokhovaya Str., Moscow 125009
Tel. +7 (495) 692 2288
ir@sistema.ru
www.sistema.com
© JSFC Sistema 2015. All rights reserved