Annual report 2016
02
ANNUAL
REPORT
2016
www.sistema.com
Contents
04
RISKS
>> Integrated ERM system
>> Risks related to Sistema’s
activities
CORPORATE GOVERNANCE
SYSTEM
>> General Meeting
of Shareholders
>> Board of Directors
>> Committees of the Board
of Directors
>> President
>> Management Board
>> The President’s committees
>> Specific characteristics of risk
management, internal control and
internal audit systems
>> Development of the corporate
governance system in 2016
64
64
66
70
74
76
80
86
87
88
89
92
CORPORATE SOCIAL
RESPONSIBILITY
>> Principles for responsible
investment
>> Contribution to sustainable
development
>> Social investments and
partnerships
94
94
96
99
>> Environmental responsibility
102
04
06
08
09
12
14
16
19
22
22
24
24
27
30
34
39
43
46
49
51
54
57
58
ABOUT THE GROUP
>> Sistema today
>> CEO’s statement
>> Structure of shareholders’ equity
>> Mission and strategy
>> Investment portfolio
STRATEGIC PROGRESS
>> Key events of 2016
>> Financial results for 2016
>> Credit ratings
>> Dividends
STRATEGIC DEVELOPMENT
>> MTS
>> Detsky Mir
>> Segezha Group
>> Agroholding Steppe
>> Real-estate assets
>> BPGC
>> Medsi
>> Binnopharm
>> RTI
>> MTS Bank
>> Other investments
>> Funds
To get more information, please
visit our corporate web site:
www.sistema.com
ANNUAL REPORT 2016www.sistema.com Contents
03
04
Sistema today
Sistema PJSFC is the
SISTEMA’S VISION
VALUE CREATION MODEL
largest private investor
in the real sector of
the Russian economy.
Sistema’s investment
portfolio mostly
comprises Russian
Sistema’s mission is to build a first-
class Russian investment company that
grows long-term shareholder value by
efficiently managing its asset portfolio
and achieving high returns
on investment.
companies operating
APPROACH
Sistema improves the operational
efficiency of its acquired assets
through restructuring and by working
with industrial partners to enhance
expertise and mitigate financial risks.
in sectors including
telecoms, agriculture,
retail, real estate,
high-tech, pharma
and forest products.
Sistema is a controlling
shareholder in most of
its portfolio companies.
Sistema’s investment model aims to
monetise its portfolio of assets by
accumulating cash from incoming
dividends and proceeds from asset
sales, and subsequently either
investing in new, high-potential
investment projects capable
of generating high returns
on invested capital;
distributing profit to shareholders
in the form of dividends;
investing in the development
of existing assets to increase their
value
Sistema PJSFC’s shareholding
structure(1)
STRUCTURE OF
SHAREHOLDERS’ EQUITY
The Company’s shares are traded on
the London Stock Exchange (LSE) in
the form of global depositary receipts
(GDRs). The GDRs trade under the ticker
SSA. One GDR represents 20 ordinary
shares. Sistema’s shares also trade
on Moscow Exchange under the ticker
AFKS.
64.2%
17.6%
15.3%
2.9%
Vladimir Evtushenkov
GDRs in free float
Ordinary shares in free float
Other(2)
(1) As of 31 March 2017.
(2) Ordinary shares and GDRs owned by Sistema Group companies, Sistema’s management and members
of the Board of Directors.
ANNUAL REPORT 2016www.sistema.com
Sistema today
05
Sistema’s fastest growing assets
(Year-on-year revenue growth in 2016)
KEY PERFORMANCE INDICATORS IN 2016
Steppe Agro
Holding
Real estate
portfolio
Х4.2
Х2.8
RUB
698 bn
Revenue
RUB
100 bn
Cash inflows from investments(1)
15.2%
Share of non-public companies and
Detsky Mir in consolidated OIBDA
6%
Dividend yield on Sistema shares
in 2016
KEY EVENTS IN 2016 AND SINCE THE END OF THE REPORTING
PERIOD
Detsky Mir Group
IPO of Detsky Mir
Progressive dividend policy
Segezha Group
Binnopharm
In February 2017, Detsky Mir’s shares
were listed on the Moscow Exchange.
Detsky Mir’s market capitalisation at
the start of trading was approximately
RUB 62.8bn. Following the offering
Sistema’s stake in Detsky Mir
amounted to 52,1%. Sistema raised
approximately RUB 12.9bn from the
transaction.
Monetisation of the transport
business
In August 2016, Sistema sold 50% of
SG-trans for RUB 6.0bn. The Corporation
remains the owner of assets previously
spun off from SG-trans, including SG-
trading and real-estate assets.
31%
29%
17%
(1) At the Corporate Centre (management accounts).
In April 2016, Sistema’s Board of
Directors adopted a new dividend
policy. In line with the new policy,
total dividends recommended for each
reporting year will be, at a minimum,
the higher of either an amount
equivalent to a dividend yield of at
least 4%, or RUB 0.67 per ordinary share
In April 2017, the Board of Directors
approved amendments to the dividend
policy: total dividends recommended
for each reporting year will be, at a
minimum, the higher of either an
amount equal to a dividend yield of at
least 6%, or RUB 1.19 per ordinary share.
19
To get more info about dividends,
please visit
Strategic progress section
About Company 06
CEO’s statement
Consolidated revenue and adjusted
OIBDA increased by 2.8% and 5.7%,
respectively, in 2016. We continued to
benefit from MTS’s leading position in
the Russian market, stable cash flow
and focus on shareholder returns. In
the face of tough competition and a
challenging operating environment,
MTS increased its subscriber base
to 109.9m subscribers and increased
revenue by 2.1% thanks to the
implementation of its 3D strategy
(Data, Differentiation and Dividends).
At the same time, we further diversified
our portfolio and significantly improved
the performance of other assets, which
together generated 39% of consolidated
revenues, more than 15% of total OIBDA
and more than 35% of all dividends and
regular cash returns to the Corporate
Centre.
Detsky Mir continued to implement a
strategy focused on aggressive organic
development and market consolidation,
with a 31.4% revenue increase driven
by a 12.3% growth in like-for-like
sales, completion of a ramp-up of
stores opened in previous years and
continued expansion of the retail chain.
Detsky Mir opened 101 new stores in
2016, expanding its retail chain to 525
stores. Financial performance also
continued to improve, with SG&A
expenses as a percentage of revenue
in particular decreasing further due to
continued automation of key business
processes.
Our timber holding, Segezha, achieved
high operating and financial results due
to an increase in production capacity
and sales in almost all key segments. In
2016, the group sold a record number
of paper sacks and more than doubled
production of sawn timber with the
acquisition and successful integration
of Lesosibirsk Woodworking Plant No.1,
Russia’s largest vertically integrated
woodworking enterprise, located in
the Krasnoyarsk region.
Dear shareholders,
In 2016, Sistema made significant progress towards
strategic objectives, and reported steady growth
in key financial indicators. Despite challenging
macroeconomic conditions, we delivered robust
growth at our portfolio companies, successfully
monetised a number of investments, reduced our
debt burden and increased payouts to shareholders.
ANNUAL REPORT 2016www.sistema.com 07
Segezha Group is implementing a
large-scale investment programme
to overhaul Segezha Pulp and Paper
Mill and increase production capacity
for sack paper, paper sacks and birch
plywood.
In 2016 Sistema continued to actively
invest in the agricultural business to
create one of the largest and most
efficient agricultural holdings in the
Russian market. In 2016, our agricultural
assets in Steppe Agro Holding more
than doubled their land bank to 315,000
ha, quickly scaled up major business
lines and achieved excellent operating
results including an all-time high crop
yield of more than 1m tonnes of grain,
about 46,000 tonnes of tomatoes and
cucumbers, and more than 16,000
tonnes of apples. Milk production
within the dairy farming segment
exceeded 36,000 tonnes.
In 2016, the aggregate OIBDA of
Sistema’s agricultural assets reached
RUB 4bn, with an OIBDA margin
of above 34%. We are confident that
Steppe Agroholding operates in the
most promising segments of the
agricultural business and is managed
by one of the best teams in this fast-
growing market, and we will continue to
actively invest in this business in 2017.
Another sector that has become an
important part of our portfolio is real
estate, and the main priority of our
assets there is effective monetisation
of the Group’s real estate properties
and a number of new investments.
As of the end of 2016, the portfolio
of projects which our property
development company Leader Invest
is a partner of amounted to about 3m
sq m, while the total area of our rental
assets exceeded 470,000 sq m.
One of the Corporation’s key priorities
during 2016 and the first quarter
of 2017 was effective monetisation
of investments. We are proud that
in February 2017 Sistema reopened
the Russian IPO market for foreign
investors, with the successful listing
of Detsky Mir with a total placement
volume of approximately RUB 19.2bn.
Detsky Mir achieved a solid valuation
of roughly 9 EV/2016 EBITDA,
representing a fivefold increase
since 2012. Along with other notable
monetisations, including the sale of
stakes in MTS in 2016 and 2017 and the
successful disposal of 50% in SG-trans
in August 2016, this IPO allowed us to
raise additional funds to achieve our
strategic objectives.
In 2016, the Corporation fulfilled
plans to reduce and optimise its debt
burden, significantly increasing the
financial stability of its business. The
total financial liabilities of Sistema’s
Corporate Centre decreased by 33%
in 2016 to RUB 135.4bn as a result of
early repayment of the debt of the
Corporation’s Indian subsidiary SSTL,
as well as restructuring of the put
option for SSTL shares and related
payments to the Russian budget. At the
same time, the share of FX-denominated
debt in total financial liabilities
decreased from 61% to 46% as
of 31 December 2016.
We have devoted considerable attention
to improving corporate governance and
creating the optimal incentive system
within our business model. This is
why in May 2016 the Board of Directors
approved a programme introducing
co-investment by members of the
management team in the equity of
Sistema and its subsidiaries. Under
this programme, the heads of Sistema’s
functions and departments annually
invest portions of their total annual
income in shares of the Corporation,
while Sistema’s investment portfolio
managers invest portions of their total
annual income in shares of assets in
their portfolios. We are confident that
this system helps align the interests
of shareholders and management, and
facilitates the adoption of the best
management decisions by our team.
Progress in strategy implementation
allowed Sistema to continue increasing
payouts to shareholders. Last year, we
adopted a new dividend policy that
significantly increased the transparency
and predictability of our dividend
payments. In accordance with this
policy, the Corporation’s dividends will
correspond to either the minimum
annual dividend yield, or the minimum
dividend per share, whichever is larger.
In April 2017, the Board of Directors of
Sistema updated the dividend policy to
increase the minimum annual dividend
yield from 4% to 6% and the minimum
dividend per share from RUB 0.67 to RUB
1.19, which confirms our confidence in
our chosen strategy, our assets and the
markets in which we operate.
In the second quarter of 2017, the
Corporation faced a number of serious
challenges related to the claims of
Bashneft and its current shareholder,
which had a negative impact on the
market capitalisation of Sistema and
its key subsidiaries. We adhere to a
policy of open dialogue with all parties
and intend to continue moving forward
to maximise shareholder value and
develop the Corporation for the benefit
of the Russian economy and all of
Sistema’s stakeholders.
I would like to thank our investors,
the Sistema team and employees of
our portfolio companies, as well as
everyone who has supported and
continues to support the Corporation
in its activities. I believe that in 2017 we
will continue to make progress with the
goal of maximising the Corporation’s
shareholder value and growing it
to benefit the whole of the Russian
economy.
Mikhail Shamolin
President of Sistema PJSFC
About Company 08
Structure of shareholders’
equity
Sistema PJSFC has 9,650,000,000
ordinary shares outstanding with
a nominal value of RUB 0.09 each.
Charter capital amounts to RUB
868,500,000.
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 symbol SSA.
One GDR represents 20 ordinary shares.
Sistema’s ordinary shares are listed
on Moscow Exchange (MOEX) under
the ticker symbol AFKS. Sistema's free
float on London Stock Exchange is
approximately 17.6% and on Moscow
Stock Exchange is 15.3%.
Moscow Exchange includes Sistema’s
shares when calculating its key indices
(MOEX Russia Index, formerly known
as MICEX, and RTS), as well as its Broad
Market Index and Banks and Finances
Index.
Sistema’s GDRs are included in the
MSCI Russia Index, one of the MSCI
Emerging Markets indices. Inclusion
in the MSCI indices testifies to the
company’s international recognition
and promotes the issuer’s good
reputation among major institutional
investors that use these indices when
selecting securities.
Shares of PJSC MTS, a Sistema
subsidiary, are traded on MOEX under
the ticker MTSS and on the New York
Stock Exchange (NYSE) in the form of
American Depository Receipts (ADRs)
under the ticker MBT.
Shares of PJSC Detsky Mir, a Sistema
subsidiary, began trading on MOEX in
February 2017 under the ticker DSKY.
Sistema’s principal shareholder is
Chairman of the Board of Directors
Vladimir Evtushenkov, who owns 64.2%
of the Corporation’s equity.
SISTEMA GDR AND
ORDINARY SHARE PRICES
PERFORMANCE»(3)
Sistema’s GDRs rose at the same rate
as the market in 2016, growing by 52.5%,
while its ordinary shares increased
by 31.3%. Growth of Sistema’s market
capitalisation during the year was
driven mostly by higher valuations
of non-public assets, selective
monetisations, adoption of a new
dividend policy and increased dividend
payments.
On the first trading day of 2016,
Sistema’s GDRs on the LSE closed
at USD 6.04, for a total market
capitalisation of USD 2,914.3m. On the
last trading day of the year, the closing
price was USD 9.00, for a total market
capitalisation of USD 4,342.5m.
The highest GDR closing price of 2016,
USD 9.00, was achieved on the final
trading day of the year. On 8 December,
ordinary shares rose to a maximum
Sistema PJSFC’s shareholding
structure(1)
64.2%
17.6%
15.3%
2.9%
Vladimir Evtushenkov
GDRs in free float
Ordinary shares in free float
Other(2)
of RUB 23.49. The lowest GDR closing
price was seen on 21 January 2016 (USD
5.06), while the lowest price for the
ordinary shares was registered on 7
April 2016 (RUB 16.99). The average daily
trading volume on the LSE was 395,144
GDRs, while the average trading volume
on MOEX was 6,891,000 ordinary shares.
GDRs of PJSFC Sistema
Shares of PJSFC Sistema
RTS Index
9.5
8.5
7.5
6.5
5.5
4.5
01. 2016
03. 2016
05. 2016
07. 2016
09. 2016
11. 2016
(1) As of 31 March 2017.
(2) Ordinary shares and GDRs owned by Sistema Group companies, Sistema’s management and members
of the Board of Directors.
(3) Source: Bloomberg.
ANNUAL REPORT 2016www.sistema.com Mission and strategy
09
Multi-step investment process
with streamlined procedures set
in Sistema’s internal documents
Potential investment projects
are registered in Sistema’s Ideas
Bank and analysed by investment
portfolios
Each project requires thorough
initial preparation prior to review
by Expert Council and FIC and
needs to be approved separately
by strategy, finance and
compliance functions
x ≈ 10% of M&A ideas analysed by
investment portfolios reach Expert
Council and FIC.
RIGOROUS INVESTMENT PROCESS IN PLACE
Board of Directors
Shareholder meeting
All related party transaction
reviewed by an independent
committee
Related party transactions
exceeding 10% of Sistema
assets book value
Top management
Finance and Investment Committee (FIC)
Step 1: Project approval (including
business plan, timeline, prelim term
sheet
Step 2: Transaction approval (final
terms and conditions)
Positive review of strategy, finance and compliance functions required at each step
Portfolio / functional managers
Expert Council
Approval
of investment
idea
Positive review of strategy,
finance and compliance functions
required
Investment Portfolios
24
More info in section
Portfolio companies
About Company
10
SISTEMA’S VISION
Sistema’s mission is to
build a first-class Russian
investment company
that grows long-term
shareholder value by
efficiently managing
its asset portfolio and
achieving high returns
on investment.
BASIC INVESTMENT
STRATEGY PRINCIPLES
INVESTMENT CRITERIA
Generation of returns on investment
above the long-term cost of capital
(IRR>WACC) with payback period of
5 -7
years
Focus on investments
with a positive net cash flow;
Sectors and industries:
Sistema mostly buys assets in
sectors that are complementary to
those in which it already operates,
making it possible to leverage
existing expertise and build
synergies with its existing portfolio.
It also invests in new attractive
industries, including export-oriented
sectors, where it has expertise or
partners with relevant expertise.
Acquisition of assets with acceptable
debt levels
Debt/OIBDA of the acquired asset
<3.0X
Geography:
Sistema sees Russia and other CIS
countries as its highest-priority
investment locations, while also
considering opportunities for further
expansion to support future growth
and diversity its FX and country risks.
Maintaining the consolidated debt/
EBITDA ratio at
2.5Х or less
Substantial dividend payouts
|pursuant to dividend policy
Asset size:
Sistema focuses on large and
medium-sized assets with the
potential to become market
leaders through synergies, industry
consolidation, and efficient
investment and operational
strategies
VALUE CREATION MODEL
Sistema’s investment model aims
to monetise its portfolio of assets
by accumulating cash from incoming
dividends and proceeds from asset
sales, and subsequently either
investing in new, high-potential
investment projects capable of
generating high returns on invested
capital;
distributing profit to shareholders
in the form of dividends;
investing in the development of
existing assets to increase their
value.
ANNUAL REPORT 2016www.sistema.com 11
SISTEMA’S GOALS FOR THE
NEXT THREE TO FIVE YEARS
MEDIUM-TERM GOALS OF SISTEMA AS AN INVESTMENT
COMPANY
Maximising total shareholder
return (TSR)
Creating undisputed leaders
in key industries, in particular
agriculture, forest products,
healthcare, etc.
Dividend yields for shareholders
above the market average
x Raising and managing external
capital
y Increasing the share of assets
other than MTS to approximately
70%
of the portfolio
z Reducing market capitalisation
discount to NAV
20
Mere information
in section
Dividends
Consistent implementation
of portfolio strategy:
Generating substantial cash
flows to Sistema through
portfolio monetisation and
higher dividends from portfolio
companies
Diversifying the asset portfolio
by acquiring large and medium-
sized export-oriented companies
in Russia capable of generating
revenues in foreign currencies for
Sistema’s benefit
Creating value in current
portfolio companies:
Transforming existing assets into
new industry leaders by applying
best business practices
Restructuring and supporting
portfolio companies operating
in segments that are most
vulnerable to negative
macroeconomic factors and are
struggling to implement their
strategies
Implementing best corporate
governance practices at
subsidiaries, including appointing
independent directors to their
boards.
Developing international
investment platforms in Europe,
Asia and the US to:
Raise funds from co-investors
Ensure extra points of growth for
the asset portfolio by entering
export markets.
CO-INVESTMENT
PROGRAMME
In May 2016, Sistema adopted a
programme for senior management
of the Company to participate in the
share capital of Sistema and Group
companies ("the Programme").
Under the Programme, heads of
Sistema's investment portfolios have
the obligation to make a one-off
investment equal to a substantial part
of their total annual income in shares
and participatory interests of existing
assets under their management. Heads
of investment portfolios also invest a
portion of their total annual income in
shares and participatory interests of
each of new assets acquired under their
management during a year. Heads of
Sistema's functional subdivisions invest
a substantial part of their total annual
income in in the Company’s shares every
year.
About Company
12
Investment portfolio
SUBSCRIBERS
> 109 M
IN RUSSIA
№1
№2 in Europe
in paper sacks
manufacturing
STORES
> 520
50.03%(1)
100%
52%
MTS
Segezha Group
Detsky Mir
A leading telecom operator in
Russia and other CIS countries
A major forest holding that performs
a full cycle of logging and advanced
wood processing operations
The biggest children’s goods
retailer in Russia and Kazakhstan.
Successful IPO in February 2017
REVENUE IN 2016
PATIENT VISITS
CAPITAL ADEQUACY
> 8
RUB BN
> 7 MLN/YEAR
20.2 %
PORTFOLIO OF
DEVELOPMENT PROJECTS
3 MLN M2
88%
100%
87%
100%
Steppe Agro Holding
Medsi
MTS Bank
Real estate assets
Highly efficient
agricultural enterprises
operating in the crop
farming, animal
breeding, fruit and
vegetable growing
segments
Russia’s largest national
privately owned chain
of clinics offering a full
range of healthcare
services
One of Russia’s 50 largest
banks by assets
Rental business
comprises ≈472,000 m2
of commercial properties
in Moscow
(1) Here and thereafter Sistema's stake in the company's capital.
ANNUAL REPORT 2016www.sistema.com
13
POWER GRIDS
OWN R&D CENTRE
ROOMS
82 TH. KM
400 M2
>3,770
91%
74%
100%
BPGC
Binnopharm
Sistema Hotel Management
One of Russia’s biggest power
grid companies. Total installed
sub-station capacity of more
than 22,000 MVA
One of Russia’s largest full-cycle
pharmaceutical companies
17 hotels in Russia and abroad
REVENUE IN 2016
> 45
RUB BN
FASHION RETAILER:
WOMEN’S AND CHILDREN’S
CLOTHES
HIGH-TECH PRODUCTS
87%
63%
100%
RTI
Concept Group
Kronstadt Group
Russia’s largest high-tech
company in the defence,
microelectronics, comprehensive
communication and security
systems industries
A fast-growing retailer that is one
of Russia’s leading women’s and
children’s clothes and underwear
retailers
One of Russia’s leading
developers and manufacturers
of high-tech products
About Company
14
ANNUAL
REPORT
2016
www.sistema.com
Strategic progress
Key events of 2016
Financial results for 2016
Credit ratings
Dividends
16
19
22
22
24
More information
about cases in
Portfolio Companies
ANNUAL REPORT 2016www.sistema.com Contents
15
24
Growth prospects and strategic development of portfolio companies:
>>MTS
>> Detsky Mir
>> RTI
>> MTS Bank
>> Segezha Group
>> Other investments
>> Agroholding Steppe
>> Funds
>> Real-estate assets
>> BPGC
>> Medsi
>> Binnopharm
Co-investment Programme
Under the Programme, heads of
Sistema's investment portfolios have
the obligation to make a one-off
investment equal to a substantial part
of their total annual income in shares
and participatory interests of existing
assets under their management. Heads
of investment portfolios also invest a
portion of their total annual income
in shares and participatory interests
of each of new assets acquired
under their management during a
year. Heads of Sistema's functional
subdivisions invest a substantial part
of their total annual income in the
Company’s sharesevery.
16
Key events
CORPORATE GOVERNANCE
New progressive dividend
policy
In April 2016, the Board of Directors
of Sistema PJSFC (“Sistema” or
“the Company”, together with its
subsidiaries, “the Group”) adopted a
new dividend policy. The new policy
stated that dividends recommended
for each reporting year would be, at
a minimum, the higher of either an
amount equivalent to a dividend yield
of at least 4%, or RUB 0.67 per ordinary
share.
In April 2017, the Board of Directors
approved amendments to the dividend
policy: total dividends recommended
for each reporting year will be, at a
minimum, the higher of either an
amount equal to a dividend yield of at
least 6%, or RUB 1.19 per ordinary share.
Sistema will seek to distribute
dividends twice per year, based on its
results for the first nine months and
the full year.
Sistema’s calculation of the dividend
yield on its ordinary shares shall use
the weighted average price of one
ordinary share of the Company traded
on Moscow Exchange in the relevant
reporting year.
In July 2016, Sistema paid dividends for
2015 in the amount of RUB 6.47bn (RUB
0.67 per ordinary share or RUB 13.4 per
GDR).
In October 2016, Sistema distributed
RUB 3.667bn in dividends for H1 2016
(RUB 0.38 per ordinary share or RUB 7.6
per GDR).
In April 2017, the Board of Directors
recommended that the AGM approve
a final dividend for the 2016 financial
year of RUB 7.8bn. As a result, the
total amount of the interim and final
dividends paid for 2016 will be RUB
11.5 billion, which is equivalent to a
dividend yield of 6% based on the
weighted average price of Sistema’s
shares in 2016.
Total dividends
for the year
The higher of
Minimum
Yield
Minimum DPS,
RUB
Set in 2017: 6%
Set in 2017: 1.19
Set in 2016: 4%
Set in 2016: 0.67
Sistema’s dividends: continuing
growth, RUB bn
2016
2015
2014
11.5*
6.5
4.5
* In accordance with the Board of Directors
recommendations for approval by the Annual
General Meeting of shareholders
ANNUAL REPORT 2016www.sistema.com 17
MONETISATION OF INVESTMENTS
NEW PROJECTS
Detsky Mir Group’s IPO
x
The transaction represented the
first Russian IPO with full-scale
international marketing in three
years
The order book was 2x
oversubscribed
More than 90% of the final
offering went to foreign investors
The EV/EBITDA’2016 ratio for
2016 was ~9х comparable to the
multiples of the largest food retail
companies in Russia
In February 2017, Detsky Mir’s shares
were listed on the Moscow Exchange.
The offering price was set at RUB 85 per
share corresponding to the company’s
market capitalisation of approximately
RUB 62.8bn. The shares WERE admitted
to Level 1 of the List of Securities
Admitted to Trading on Moscow
Exchange under the ticker DSKY.
Sistema owned 72.57% of the company’s
shares before the Offering and sold
151,301,256 shares, which corresponds
to approximately 20.5% of Detsky Mir’s
share capital,. Following the offering
Sistema’s stake in Detsky Mir amounted
to 52.1% . As a result of the transaction,
Sistema raised ~RUB 12.9bn (before
underwriting fees and other expenses).
History of Detsky Mir’s valuation,
RUB bn
Feb 2017
2015
2013
2012
62.8
42.2
18.0
13.1
Sale of the stake
in SG-trans
Development of Sistema’s
land bank
In August 2016, Sistema sold 50% of
SG-trans to a group of non-affiliated
buyers for RUB 6.0bn. The Corporation
remains the owner of assets previously
spun off from SG-trans, including SG-
trading and real-estate assets.
RUB
6.0 bn
Trade amound of 50%
of SG-trans
Sistema continues to make significant
investments in agricultural assets.
During 2016, Sistema’s agricultural
business increased its total land
bank 2.3 times to 315,000 hectares
adding 176,000 hectares of land with
acquisitions in May, November and
December of 2016 in the Rostov and
Stavropol regions.
Acquisition of Lesosibirsk
LDK No. 1
In 2016, Segezha Group, Sistema’s pulp
and paper holding, acquired a 99%
stake in Lesosibirsk LDK No. 1 (“LDK”),
one of the largest vertically integrated
wood processing enterprises in Russia,
based in Krasnoyarsk region. LDK is
Russia’s leading producer of lumber,
fibre board, planed mouldings and
furniture made from Angara pine. The
acquisition allowed Segezha Group
to more than double sales of lumber
during the year. In 2016, LDK delivered
strong operational and financial
performance, contributing RUB 5.7
billion in revenue.
Strategic progress 18
NEW PROJECTS
OTHER EVENTS
The merger of SSTL’s
telecommunications business
with RCom
In 2016, Sistema and Reliance
Communications Ltd (“RCom”)
continued to work towards the merger
of SSTL’s telecommunications business
with RCom.
The transaction has been approved by
India’s two main stock exchanges (NSE
and BSE), the Securities and Exchange
Board of India (SEBI), the Competition
Commission of India (CCI), and the
Bombay and Rajasthan High Courts.
All necessary shareholder and creditor
approvals have also been properly
secured.
At the moment Sistema and RCom are
in discussions with the Department of
Telecommunication of India (DoT) and
other regulatory and judicial bodies
regarding final conditions
of the potential transaction.
Development of the hotel
business
Changing ownership stake
in MTS
In November 2016, Sistema’s
subsidiary Sistema Hotel Management
agreed to acquire nine Regional
Hotel Chain (RHC) hotels from VIYM, a
company managing the private equity
funds in the CIS and Europe, for RUB
2.6bn.
The hotels include Courtyard by
Marriott Paveletskaya (Moscow),
Holiday Inn Express (Voronezh) and
seven Park Inn hotels in Astrakhan,
Volgograd, Izhevsk, Kazan, Novosibirsk,
Sochi, and Yaroslavl, and have a total
of 1,379 rooms with floor space of
87,613 sq m. The hotels have total
external debt of RUB 4bn. All of the
hotels were built over the past five
years and do not currently require any
capital investments. The hotels opened
in 2014-2015 – Holiday Inn Express
(Voronezh), Park Inn (Volgograd), Park
Inn (Novosibirsk) and Park Inn (Sochi) –
have significant potential for increased
profitability when they achieve their
target performance indicators.
24
During 2016, Sistema conducted a
number of transactions to sell MTS
shares, bringing Sistema’s effective
stake in MTS’s share capital to 50.03%.
As a result of the sales, Sistema raised
RUB 18.1bn in 2016; an additional RUB
4.7bn was received in the first quarter
of 2017 from participating in MTS’s
share buyback programme.
Restructuring of Rusnano’s
put option
In October 2016, Sistema signed an
agreement with Rusnano to restructure
an option agreement dated 15 May
2014 with respect to shares of Mikron.
Under the terms of restructuring,
in 2017 Sistema will acquire from
Rusnano 20.42% of Mikron shares for
RUB 8.1bn, of which RUB 4.8bn were
paid in 2016 and RUB 3.3bn will be
paid on or before 29 December 2017.
The option agreement signed on 15
May 2014gave Rusnano the right to sell
a stake in Mikron to Sistema for RUB
8.1bn between 31 October 2016 and
1 November 2017.
For more details about Sistema’s
hotel business see:
Other Investments.
ANNUAL REPORT 2016www.sistema.com
Financial results
19
In 2016, the Group’s
revenue increased by
2.8%, driven by Detsky
Mir’s further expansion
in the Russian market,
acquisitions and organic
growth in the agricultural
business, the consolidation
of Kronstadt Group and
strong results at Segezha
Group. Lower revenues of
RTI, in particular due to the
disposal of NVision in 2015,
partially offset the Group’s
strong growth in 2016.
Selling, general and administrative
expenses (SG&A) growth was contained
to 5.9% year-on-year, generally in line
with the inflation rate in Russia over the
same period, despite organic growth at
MTS and Detsky Mir and an acquisition
by Segezha Group driving SG&A higher.
Depreciation and amortisation expenses
increased by 9.1% year-on-year in 2016.
Despite a modest decline in adjusted
OIBDA at MTS, the Group’s adjusted
OIBDA increased by 5.7% year-on-year
in 2016, mainly due to a reduction
in provision charges and continued
improvements in asset quality at MTS
Bank, as well as OIBDA growth at Detsky
Mir, Steppe and Segezha.
Adjusted consolidated profit attributable
to Sistema was RUB 1.7 billion, compared
to a net loss in 2015, largely due to
improved results at MTS Bank.
Key financials and overview of the group’s operations under IFRS
(RUB m)
Revenue
2016
2015
Change
697,705
678,821
2.8%
5.7%
Adjusted OIBDA
183,719
173,826
Operating income
79,844
68,387
16.8%
Net (loss) / income attributable to
Sistema
Adjusted net (loss)/ income
attributable to Sistema
(11,758)
28,799
1,702
(5,852)
-
-
Analysis of Group consolidated revenue, RUB bn
19.0
+10.2
+9.6
(18.8)
(1.1)
697.7
678.8
Revenue
2015
Detsky Mir
revenue
growth
Growth at
agro assets,
consolidation
of Kronstadt
Segezha
revenue
growth
Contaction
at RTI*
MTS Bank and
other assets,
net
Revenue 2016
*Excluding the effect of NVision’s exclusion from the revenue of RTI.
Analysis of Group adjusted OIBDA, RUB bn
14.3
4.4
+2.2
(5.6)
(4.2)
(1.2)
183.7
173.8
OIBDA
2015
Improvement
at MTS Bank
Growth at
Detsky
Mir and
Segezha
Growth at agro
assets
Decline
at MTS
Decline at RTI,
R&D costs at
Kronstadt
Other
OIBDA
2016
Impressive growth of key assets:
MTS: continuing revenue growth
and stablest OIBDA margin
among Russian mobile operators
(38.5% in 2016)
Detsky Mir and Segezha Group:
revenue growth of 31.4% and
28.7% and adjusted OIBDA
growth of 32.6% and 37.6%,
respectively
x
y
Steppe Agro Holding: acquisition
of 136,000 ha of agricultural land;
four-fold increase in revenue and
OIBDA
Real estate: 2.8x revenue growth
and OIBDA margin around 40%
Medsi and Binnopharm: revenue
growth of 14.4% and 16.9% and
OIBDA growth of 72.4% and 114.7%,
respectively
Strategic progress 20
The Corporate Centre’s financial
liabilities decreased by
approximately 33% during 2016
Foreign currency liabilities as
a proportion of total financial
liabilities decreased to 46%** at the
end of 2016, compared 61% at the
start of the year
Key drivers of debt reduction in
2016: (i) early repayment of SSTL’s
debt guaranteed by Sistema; (ii)
payments to the Russian budget
for SSTL shares, (iii) payment to
Rusnano for Mikron shares, (iv)
early repayment of RUB 10bn bonds
with a coupon rate of 17% in August
2016.
The core business of Sistema PJSFC is
management of interests in commercial
organisations.
Corporate Centre’s financial liabilities, RUB bn
(based on management accounts)
202.4
(20.8)(1)
SSTL debt
repayment
(10.7)
Corp
Centre's
debt
repayment,
net
(19.4)
Payments
under
agreements
to buy SSTL
and Mikron
shares
20.8
64.7
45.6
71.3
31.12.2015
(16.1)
135.4
Fix-revaluation
36.3
28.8(2)
70.3(2)
31.12.2016
Put options (SSTL and Mikron shares)
RUB debt at Corp Centre
Fix debt at Corp Centre
Liabilities related to:
- SSTL shares: RUB 33.0 bn.(3)
- Mikron shares: RUB 3.3 bn
SSTL debt
Key financials under RAS
RUB thousand
2016
2015
Revenue, thousand RUB
36,665,582
30,843,245
Income from sales, thousand RUB
25,205,282
20,632,717
Net income (loss) in the reporting period,
thousand RUB
(37,372,723)
34,461,228
Revenue structure
RUB thousand
2016
2015
Equity holdings in other companies
36,635,669
30,794,973
Other operating income (property rent,
agency services and sureties)
29,914
48,272
TOTAL:
36,665,582
30,843,245
Structure of other incomes and expenses
RUB thousand
Interest receivable
Interest payable
Other incomes
Other expenses
TOTAL:
2016
2015
5,285,355
8,908,439
(11,362,516)
(9,073,920)
81,398,676
97,047,630
(138,572,228)
(71,367,743)
(63,250,713)
25,514,406
(1) RUB amounts recalculated at the RUB/USD exchange rate as of 31 December 2015.
(2) Including the effect of currency hedging of the Corporate Centre’s bank debt.
(3) Liabilities to Rosimushchestvo concerning SSTL shares are denominated in US dollars.
ANNUAL REPORT 2016www.sistema.com 21
Sistema generally possesses
considerable amounts of equity along
with the ability to raise debt funding
without creating the risk of doubt about
its ability to repay such loans. Most of
the Group’s borrowed funds are long-
term liabilities. Neither receivables nor
payables are overdue.
Performance indicators
RUB thousand
2016
2015
Productivity, RUB thousand per full time
employee
124,290.1
109,762.4
Debt to equity ratio
Long-term debt to the sum of long-term
debt and equity
Debt service coverage ratio
Overdue debt, %
0.610
0.328
1.11
0
0.451
0.240
0.21
0
Equity capital and liabilities
Financial stability indicators
62%
38%
Equity
Debt
RUB thousand
Net working capital
Current ratio
Quick ratio
Information about fuel and energy consumption
Type of resources
Unit of
measurement
2016
2015
12,641,154
59,739,476
1.42
1.41
2.50
2.50
Actual resource consumption
in 2016
in monetary
terms, RUB
thousand
2,612
8,488
8,440
Structure of liabilities
Heat power
Electric power
Petrol
Gcal
kWh
litres
1,626
2,311
235,141
80%
20%
Long-term
Short-term
Strategic progress 22
Credit ratings
In November 2016, Sistema terminated
its contractual relationship with
Moody’s on the grounds that two
international ratings is sufficient
for creditors and investors in the
Corporation’s debt securities.
Moody’s has revoked all of Sistema’s
ratings. Any ratings assigned by
Moody’s to Sistema Group companies
from now on will be based exclusively
on public information and issued at the
sole discretion of the agency.
Sistema PJSFC
MTS
MTS Bank
Detsky Mir
S&P
BB
(stable)
S&P
BB+
(positive)
FITCH
B+
(stable)
S&P
B+
(stable)
24 July 2015
21 March 2017
10 March 2017
21 March 2017
FITCH
BB-
(stable)
FITCH
BB+
(stable)
20 May 2016
20 May 2016
Dividends
In 2016, Sistema’s Board
of Directors approved a
revised dividend policy.
In line with the new policy, total
dividends recommended for each
reporting year will be, at a minimum,
the higher of either an amount
equivalent to a dividend yield of at
least 4%, or RUB 0.67 per ordinary
share.
RUB
3.7 bn
the total amount of dividends,
distributed for the first six months
of 2016 (or RUB 0.38 per ordinary
share)
In April 2017, the Board of Directors
recommended that the AGM approve
a final dividend for the 2016 financial
year of RUB 7.8bn. As a result, the
total amount of the interim and
final dividends paid for 2016 will be
RUB 11.5bn, which is equivalent to a
dividend yield of 6% based on the
weighted average price of Sistema’s
shares in 2016.
The Corporation also set itself the goal
of paying dividends twice a year: for the
first half of a reporting year and for a
full reporting year.
In April 2017, after the end of the
reporting period, the Board of Directors
made further amendments to the
Dividend Policy and approved increases
of minimum annual dividend yield to
6% from 4% and minimum dividend
per share to RUB 1.19 from RUB 0.67.
This revised approach to distribution
of dividends allows the Corporation to
increase the total amount of dividends
paid, thereby increasing shareholder
returns and strengthening the
Corporation’s investment case.
ANNUAL REPORT 2016www.sistema.com 23
DIVIDENDS DISTRIBUTED
FOR FY 2015
On 25 June 2016, the AGM approved
a dividend payment of RUB
6,465,500,000.00 in dividends, or
RUB 0.67 per ordinary share. As of
31 December 2016, the total amount
of dividends distributed was RUB
6,465,433,999.64. Withholding tax
on dividends distributed to foreign
shareholders totalled RUB 2,383,622.00.
DIVIDENDS DISTRIBUTED
FOR THE FIRST SIX MONTHS
OF 2016
On 23 September 2016, an EGM
approved the distribution of RUB
3,667,000,000.00 in dividends, or RUB
0.38 per ordinary share in Sistema
PJSFC. As of 31 December 2016, the total
amount of dividends distributed was
RUB 3,666,960,913.20. Withholding tax
on dividends distributed to foreign
shareholders totalled RUB 1,337,413.00.
OMITTED DIVIDENDS
Omitted dividends as of 31 December
2016 totalled RUB 899,034.32, including
RUB 105,087.16 due in 2016. These
dividends were declared but unpaid
due to lack of necessary information
about the recipients to make the cash
transfers.
2012
2013
2014
2015
2016
(for FY 2015)
2016 (H1 2016)
Total dividends, RUB
2,702,000,000
9,264,000,000
19,879,000,000
4,535,500,000
6,465,500,000
3,667,000,000
Dividend per share,
RUB
Date of dividend
announcement
0.28
0.96
2.06
0.47
0.67
0.38
30.06.2012
29.06.2013
28.06.2014
27.06.2015
25.06.2016
23.09.2016
Payable date
24.08.2012
26.08.2013
31.07.2014
29.07.2015
27.07.2016
20.10.2016
Strategic progress
www.sistema.com
24
ANNUAL
REPORT
2016
MTS
PJSC Mobile TeleSystems
is a leading telecom
operator in Russia and
the CIS. MTS Group
has more than 109m
mobile subscribers
in Russia, Armenia,
Ukraine, Turkmenistan
and Belarus.
The company also provides fixed-line
telephony, broadband Internet access
and television services in Moscow
(through its subsidiary MGTS) and
all federal districts of Russia. The
company has more than 6,000 retail
outlets in Russia. MTS also offers
financial services, including the MTS
Wallet application.
SECTOR OVERVIEW (1)
According to preliminary estimates,
revenue growth in the Russian telecom
market slowed from 0.8% in 2015
to 0.6% in 2016, due to the ongoing
decline in revenue from fixed-line
telephony, zero growth of mobile
revenue and a slowdown in two
significant market segments: land-line
Internet access and pay television.
The decline in Russian mobile
operators' revenue slowed to
approximately 0.3% in 2016 vs. 0.7%
in 2015. The decline was driven by
macroeconomic factors affecting
among other things revenue from
roaming, and also by high competition
in retail among telecom operators.
50.03%
Sistema's stake
Leadership
Andrey
Dubovskov
President
Ron Sommer
Chairman
of the Board
of Directors
2016 financial performance
(RUB m)
Revenue
Adjusted OIBDA(2)
Operating income
Net income attributable
to Sistema
Net debt
CAPEX
2016
2015
Change
435,692
426,639
167,647
173,255
86,065
90,198
25,377
26,460
265,850
86,149
310,937
106,537
2.1%
(3.2%)
(4.6%)
(4.1%)
(14.5%)
(19.1%)
(1) Sources: ACM-Consulting (report 2016); J'Son&Partners Consulting; articles in Vedomosti and Kommersant
dated 16 January 2017; reports of MTS, Euroset, Svyaznoy, TMT Consulting, Comnews.
(2) Incl. share in MTS Bank's net loss.
ANNUAL REPORT 2016www.sistema.com 25
The aggregate number of mobile
subscribers in Russia grew by 1.5%
during the year, to 255.6m people.
Mobile Internet remains the main
driver of revenue growth. In 2016,
leading operators tested and launched
commercial IMS-based services (Voice
over LTE (VoLTE) and Wi-Fi calling) in
the Moscow region, which they later
plan to roll out to other regions of
Russia.
At present, one of the main barriers to
mass uptake of VoLTE technology is low
penetration of smartphones supporting
this technology (at most 5% at the end
of H1 2016).
The fixed BBA (broadband access
market remains promising. Revenue
from BBA grew by 3.8% in 2016, while
the number of subscribers increased
by 4% and exceeded 31m people. An
increasing number of subscribers have
a high-speed Internet connection
due to growing penetration of GPON
technology. The main supplier of this
service in Moscow is MGTS (a subsidiary
of MTS), and its share of the BBA
market is 33% (as of Q4 2016).
The telecoms market is projected to
grow steadily over the next five years
with a CAGR of 0.4%. Revenue from new
business segments (financial services,
machine to machine (M2M), cloud
services, Big Data, e-commerce, system
integration) is so far not significant
compared to revenue from MTS's
traditional telecom services. However,
these segments have a positive effect
on customer loyalty and should in
time become strong growth drivers
(as envisaged by the operator's digital
strategies).
BUSINESS DEVELOPMENT
IN 2016
MTS remains the leader among the
Russian Big Three operators by revenue
and OIBDA in absolute terms. In 2016,
MTS's active mobile subscriber base
grew by 3.5%. The share of mobile
Internet users in MTS’s active one-
month subscriber base reached 49%.
Growth of the number of mobile
web users continues to be driven by
increased penetration of smartphones
into MTS's subscriber base, competitive
bundle plans, and development of
MTS’s own-brand retail chain. The share
of smartphones in MTS's sales reached
76% as of the end of 2016.
In 2016, MTS Russia maintained a
positive revenue growth rate, 2.4%
YoY, while revenue from the mobile
business remained approximately the
same as in 2015.
MTS's share in total mobile revenue of
Russia’s Big Three operators grew by 0.4
p.p., from 37.7% to 38.1%. In 2016, voice
traffic grew by 3.2%, while data traffic
generated by owners of smartphones
more than doubled.
As for its investment programme,
MTS allocated significant amounts
for network construction (CAPEX as
a proportion of revenue in Russia
amounted to 20% in 2016). The
company continued building out
2G/3G/4G networks throughout the
year. The number of 4G base stations
exceeded 28,000, covering all 83 regions
of operations. MTS therefore plans
no significant spending on network
construction in the next few years and
sees potential for CAPEX reduction in
future periods.
49.0%
share of mobile Internet users
in MTS’s active one-month
subscriber base
MTS share in subscriber base
in Russia*, %
4Q'16
4Q'15
4Q'14
37.4
36.5
37.0
* based on 3M subscriber activity
Smartphones penetration
on MTS network, %
2016
2015
2014
53.8
48.4
42.4
Assets 26
In the financial services sector, MTS
successfully implemented projects of
money transfers between cards using
the platforms of MTS Bank, Russian
Post and Western Union; SMS transfers
to subscribers’ accounts; the Troika
mobile ticket project, and also micro
loans for m-commerce services.
BUSINESS DEVELOPMENT
STRATEGY
MTS’s strategic goals are to preserve
its share of the traditional market
(voice communications and mobile
data transfer, as well as text messages),
and to monetise the growing
consumption of web traffic and new
business segments (digital projects).
The business growth potential lies in
optimal frequency use, development
of data-oriented networks, advanced
technologies (VoLTE, Wi-Fi calling, IMS,
5G) and development of a portfolio of
digital products.
In April 2016, the Board of Directors
approved a new dividend policy for
2016-2018, under which MTS intends
to pay dividends of RUB 25-26 per
RUB
52 bn
dividends paid
for 2016
ordinary share and RUB 50-52 per ADR,
with a guaranteed minimum payout of
RUB 20 per ordinary share and RUB 40
per ADR per calendar year. Dividends
paid for calendar 2016 amounted to
RUB 52bn. The Board of Directors asked
management to consider the possibility
of organising a share buy back and
subsequent redemption to guarantee
shareholder returns for three years
(2016-2018) of up to RUB 30bn. The first
buy-back programme was announced
in Q4 2016, and MTS bought 3,069,409
shares for a total RUB 747m. In Q1 2017,
it announced another buy-back and
acquired 32,061,256 shares for RUB
9.3bn.
2016 FINANCIAL
PERFORMANCE
The company's revenue in 2016 grew
by 2.1% YoY. Growing consumption of
data services and phone sales offset
the decline of roaming consumption
and lower contribution from foreign
subsidiaries. Despite the ongoing
macroeconomic volatility and spending
on expansion of the retail chain,
adjusted OIBDA slumped just by 3.2%
in 2016. The adjusted OIBDA margin
remained at a high 38.5% for FY 2016.
The margin was affected by growing
sales of mobile phones with relatively
low margins. The minor decline in
net income in 2016 was due to OIBDA
dynamics.
MTS revenue by geography in 2016,
RUB bn
MTS revenue by type in Russia
in 2016, RUB bn
400.6
29.2
22.3*
8.1
5.0
Russia
Ukraine
Belatus*
Armenia
295.0
61.2
49.6
5.6
Turkmenistan
Mobile service
Fixed line
Sales of goods
Integrated Services
* is not consolidated in the Group financial
results
ANNUAL REPORT 2016www.sistema.com Detsky Mir Group
Assets
27
Detsky Mir Group is the
largest children's goods
retailer in Russia and
Kazakhstan, comprising
Detsky Mir and ELC stores,
which offer toys, products
for pregnant women
and infants, children’s
apparel and footwear,
stationery, arts and crafts
kits, and sporting goods.
72.6%
Sistema's stake(1)
(1) Sistema's stake after Detsky Mir's IPO in February
2017: 52.1%.
SECTOR OVERVIEW (2)
The size of Russia's children's goods
market in 2016 was RUB 519.5bn.
Analysts project that the market will
grow by an average of about 1.5%
per year, and will reach RUB 554.4bn
by 2020. After double-digit growth in
2011-2013, the market found itself in
a period of long-term stagnation. The
current economic situation has forced
Russians to reconsider their approach
to purchases of children's goods. Since
2015 consumer behaviour shifted,
with a greater emphasis on cheaper
products. Online stores have also
become an increasingly popular sales
channel, offering both a wide range of
products and good prices, as well as
giving buyers time to evaluate, select
and consult. At the same time, the
children's goods market is among the
most resilient to crises (together with
FMCG), and showed growth after both
the crisis of 2008-2009 and the crisis
of 2014-2015.
In 2016, several children’s goods
retailers left the market, which led to
a short-term drop in the market share
of specialised retailers; however,
specialised retailers remain the main
sales channel for this segment, along
with hyper- and supermarkets.
Leadership
2016 financial performance
(RUB m)
Revenue
Adjusted OIBDA
Operating income
Adjusted net income attributable
to Sistema
2016
2015
Change
79,547
60,544
8,203
6,620
2,775
6,185
3,805
2,167
31.4%
32.6%
74.0%
28.0%
Net debt
12,193
16,425
(25.8%)
(2) According to data from Ipsos Comcon and Detsky Mir Group.
Vladimir
Chirakhov
CEO
Christopher Alan
Baxter
Chairman
of the Board
of Directors
28
The sales of children's goods in Russia
varies depending on the region and
income levels. The highest levels of per
capita spending on children's goods
in 2016 were recorded in Moscow (RUB
11,400 versus RUB 6,900 for all
of Russia).
BUSINESS DEVELOPMENT
IN 2016
In February 2017, Detsky Mir completed
its IPO on the Moscow Exchange. The
share offering was 2.1x oversubscribed,
with a placement price RUB 85 per
share, implying a market capitalisation
of RUB 62.8bn and an EV/2016 EBITDA
multiple of roughly 9x. Trading
commenced on 10 February 2017 under
the ticker DSKY. The success of Detsky
Mir's IPO can be seen as recognition
of the company's outstanding
performance in recent years.
Share of Russian children's goods
in retail market*, %
2018E
2017E
2016
2015
2014
32
30
28
23
23
Children’s market sales structure
in Russia, %
39.0%
38.5%
13.6%
8.9%
Hyper-supermarkets
Specialise stores
Other
Internet
Detsky Mir Group growth
Stores, totally
New stores
Retail space, th. sq m
2014
2015
2016
390
71
322
491
104
425
2015
69%
71%
30%
596
101
525
2016
81%
74%
32%
Share of Detsky Mir's private labels in goods turnover
Footwear
Apparel
Oversized goods
2014
64%
65%
30%
As of 31 December 2016, Detsky Mir
Group had 525 stores (480 Detsky Mir
stores and 45 ELC stores) in 171 Russian
cities and seven cities in Kazakhstan.
The company delivered significant
growth during the past two years,
opening 103 new Detsky Mir stores and
1 ELC in 2015, and another 100 Detsky
Mir stores and 1 ELC store in 2016.
The Group’s total selling space as of
31 December 2016 was 596,000 sq m.
Detsky Mir's market share in Russia’s
specialised children's goods retail was
44% in 2016 (compared to 32% in 2015),
while the company had 17% of Russia's
total market for children's goods
including non-specialised hyper- and
supermarkets (vs. 13% in 2015). Detsky
Mir is absolute No 1 player in the
children’s goods market and c. 3x size
of the 2nd largest competitor.
Successful measures and projects
aimed at improving operating efficiency
helped to bring down SG&A expenses
as a percentage of revenue from 28.2%
in 2014 to 23.7% in 2016.
525
Detsky Mir stores,
as of 31 December 2016
Transition to a single SAP platform
played an important role in improving
efficiency, helping not only to ensure
the creation of a unified information
space and the ability to obtain real
time analytical information, but also
significantly optimising key business
processes through automation.
Further centralisation of supply via
Detsky mir’s own warehouse in the
village of Bekasovo (the Moscow region)
was another key business development
projects during the year. Having own
warehouse allowed the company
to reduce logistics costs, increase
ANNUAL REPORT 2016www.sistema.com 29
centralisation of supplies, improve
stock management and, ultimately,
increase turnover.
In 2016, Detsky Mir’s online store
(http://www.detmir.ru) became the
largest retailer in terms of online sales
in the specialised children's goods
market. Revenue grew more than two-
fold in 2016, supported by improved
services and expanded product mix.
The share of the online store in Detsky
Mir Group’s total revenue was 2.1% in
2015, and grew to 3.5% by the end of
2016.
One of the key drivers of revenue
growth was the in-store pick-up feature
launched in June 2015: around 50% of
online orders in 2016 were picked up
in Detsky Mir stores. In addition, orders
can be collected at Ozon.ru pick-up
points under a partnership agreement.
The Detsky Mir online store had a total
of 1,387 own and partner pick-up points
as of 31 December 2016.
Detsky Mir Group also seeks to sign
exclusivity agreements with suppliers.
Such agreements help to increase
traffic, grow like-for-like sales, improve
customer loyalty and protect against
price competition in the pre-sale
period. In 2016, new exclusivity
agreements were signed with such
companies as Mattel, Hasbro, Lego,
Maclaren and Artsana.
4.4
RUB bn paid Detsky Mir in 2016 -
record-high dividends, including
RUB 3.0bn to Sistema
BUSINESS DEVELOPMENT
STRATEGY
Detsky Mir intends to continue its rapid
development in Russia and Kazakhstan,
with a focus on increasing the number
of stores in the Moscow region, St
Petersburg, and cities with populations
over 50,000 and a high potential for
business growth.
Detsky Mir strives to further enhance
its flexible logistics and distribution
model, combining (1) a centralised
platform based on two distribution
centres in the Moscow region
(Bekasovo and Krekshino) and (2) direct
distribution of products to stores by
suppliers.
The company has already increased the
share of centralised supplies from 20%
of purchase costs for goods that passed
through the warehouses in 2013 to 65%
of the purchase costs for goods that
passed through the warehouses in 2016,
and intends to continue increasing the
share of centralised supplies to 75-80%
of the purchase costs for goods that
passed through the warehouses by
2019.
2016 FINANCIAL
PERFORMANCE
Detsky Mir’s revenue grew by 31.4%
year-on-year in 2016, driven by
12.3% growth in like-for-like(2) sales,
completion of ramp-up of stores
opened in previous years and
continued expansion of the retail chain.
The online store remains the fastest-
growing sales channel, with more than
two-fold growth in sales in 2016.
Adjusted OIBDA increased by 32.6% in
2016 on the back of improved operating
efficiency.
Adjusted net income attributable to
Sistema grew by 28.0% year-on-year
in 2016, to RUB 2.8bn. Detsky Mir paid
record-high dividends of RUB 4.4bn for
2016, including RUB 3.0bn to Sistema.
(1) Like-for-like growth includes only DM stores in Russia that have been in operations for at least 12 full calendar months.
Assets 30
ANNUAL
REPORT
2016
www.sistema.com
Segezha Group
Segezha Group is
Russia's largest vertically
integrated forest holding,
with a full cycle of
logging and advanced
wood processing. It
has a global presence
and a diversified
product portfolio.
The Group comprises forest, wood
processing and pulp & paper assets
in Russia and Europe. Its production
facilities are located in eight countries
and six regions of Russia. Segezha's
products are available in 88 countries.
Its enterprises employ 13 thousand
people.
SECTOR OVERVIEW (1)
Sack paper
The global market for unbleached sack
paper continues growing steadily. The
projected CAGR for global consumption
till 2020 is 2.3%, with growth mostly
driven by demand from Asian countries.
Anti-dumping duties introduced by
China in April 2016 (for virtually all
producers from Europe, North America
and Japan) have created advantages
for paper sack producers from Russia
and Canada.
Throughout 2016, the dollar-
denominated markets of Africa,
America and Asia saw a decline in
consumption due to falling demand
for cement. In Europe, demand for
paper recovered (growing by 1.2%
vs. 2015), and the output of all key
international players increased after
a drop in the previous year. In 2017, we
expect prices for sack paper to remain
just above the average price of 2016.
2016 financial performance
(RUB m)
Revenue
Adjusted OIBDA
Operating income
Adjusted net income attributable
to Sistema
Net debt
CAPEX
(1) Sources: Indufor, FAO.
2016
43,018
8,655
5,165
1,961
23,715
9,555
2015
Change
33,436
6,289
4,123
2,289
698
4,648
28.7%
37.6%
25.3%
(14.3%)
х34
x2
100%
Sistema's stake
Leadership
Kamil Zakirov (*)
President
Sergey
Pomelov(**)
Chairman
of the Board
of Directors
*as of 31 December 2016 — Sergey Pomelov
**as of 31 December 2016 — Ali Uzdenov
ANNUAL REPORT 2016www.sistema.com 31
The US gets sawn timber mostly from
Canadian producers. China (the world's
second biggest market) has had one
of the highest growth rates of demand
for sawn timber. In 2016, it continued
increasing supply from Russia, and the
share of Russian producers reached
50% of its total imports.
BUSINESS DEVELOPMENT
IN 2016
Paper and Packaging
In 2016, Segezha exported paper and
packaging to 53 countries. Paper
supplies to South Africa grew six-fold,
to South Korea four-fold, and to Saudi
Arabia, Mexico, China, Turkey and
Kuwait two-fold. While the Russian
market of industrial sacks shrank,
Segezha Group increased its market
share thanks to a more successful
pricing policy than foreign competitors.
In 2017, the Group plans to start selling
sacks in some new countries in the
Middle East, Africa and Latin America,
while maintaining its current share
of the European market.
Last year, the company began
modernising Segezha Pulp and Paper
Mill. It is Russia's first investment
project in the last 25 years that
envisages installation of a new paper-
making machine (PMM No.11). The
project is divided into three stages and
will be completed in 2018. During the first
stage, in autumn 2016, digester No. 4 was
upgraded, which increased the capacity
of the pulp production facility by 28%,
to 1,150 t daily.
Segezha PPM is the world No.4 and
Russia's No.1 producer of unbleached
sack paper, accounting for 70% of
Russia's total output. Exports account
for 92% of paper sales, excluding intra-
group supply (Russia, Europe).
Production capacity of large-scale
quality unbleached sack paper
producers, th. tonnes
Mondi
531
Segezha Group-2018*
№2
380
BillerudKorsnäs
KapStone
Segezha Group-2016
№5
Smurfit Kappa Group
*After capacity extension
321
317
270
167
Production capacity of large-scale
quality unbleached sack paper
producers, th. tonnes
Свеза
UPM
Segezha Group-2020*
№3
Latvijas Finieris
Syktyvkar
Zheshart
Metsa Wood
Segezha Group-2016
№8
*After capacity extension
970
335
311
310
215
165
140
95
Segezha Group:
№ 1
in Russia and №2 2 in Europe
for paper sacks manufacturing
№ 1
in Russia and №4 globally
for manufacturing of quality
unbleached sack paper
Paper sacks
Segezha Group's sack business can
be divided into two business units:
Russia and Europe. The European
market for paper sacks is saturated,
with consumption projected to grow
at a 1% CAGR through 2020. Europe
currently has a surplus of production
capacity, while growth of sack prices in
the construction segment has slowed
down due to consolidation of the
global cement industry, which has had
a negative impact on sack prices.
Paper sack consumption in Russia grew
by 2% in 2016 to 826m sacks. In H2 2016,
with stabilisation of the euro rate and
aggressive import substitution efforts
by Russian manufacturers (the share
of imports went down by 8 p.p. year-
on-year to 22%), there was no pressure
on prices from importers.
Birch plywood
Birch plywood is a high-margin product
for Segezha Group. The biggest
consumers of birch plywood are Europe
and Russia, with a total share of the
global market in 2016 of 67%. Global
consumption is estimated to grow at
2.6% CAGR through 2020.
Russia is the world's No.1 producer
of birch plywood, accounting for 71%
of the total output. In 2016, Russian
exports of plywood grew by 11.3%
year-on-year, accounting for 65.8%
of the country's total plywood output.
As a result, there was a deficit in the
domestic market, which sparked a
1.3% growth of imports year-on-year.
The birch plywood market is likely to
remain balanced in 2017, with supply
and demand remaining unchanged.
Sawn timber
The global market of sawn softwood
timber grew by 1.5% YoY in 2016.
Consumption in Asia-Pacific, Central
Asia and some Middle Eastern countries
(key markets for Segezha Group) is
expected to grow by 1%-3% per annum
till 2020. The biggest consumers of
sawn timber are the US and China.
Assets 32
Wood processing (sawn timber)
Exports account for 99% of Segezha
Group's sawn timber sales. The
geographical footprint of sales
expanded from 11 to 14 countries. The
biggest growth of exports was seen in
China, the UK, France, Egypt, Estonia,
Germany, Belgium and the Netherlands.
The company achieved its annual target
for sawn timber production ahead of
schedule, reaching an all-time high of
2.3m cu m. In 2016, Segezha expanded
its fleet of logging machines and timber
trucks. The share of own resources in
total raw wood consumed by the Group
reached 63%. The area of leased forests
now equals 6.8m ha.
Lesosibirsk LDK No.1, which was
acquired in early 2016, reported strong
financial and operational performance
during the year. The plant modernised
its production facilities, optimised
business processes and improved
management efficiency. Segezha Group
is beginning to work with new timber
species that are in high demand: larch
and Angara pine. After the acquisition
of Lesosibirsk LDK, Segezha Group has
become Russia's biggest exporter of
sawn timber.
Plywood and wood boards
In 2016, with domestic demand
declining and demand on foreign
markets rising, Segezha increased the
share of export in its sales from 71%
to 77%. The company's products in
this segment are now available in 59
countries (vs. 46 in 2015). In 2017, the
Group plans to develop its customer
base, and to enter new markets and
consumption segments, such as car-
making and shipbuilding.
Segezha Group:
№ 5
in Russia and №7 globally
for manufacturing of large-size
birch plywood
Segezha Group revenue by business
segments in 2016
56%
28%
12%
4%
Paper & Paper sacks
Wood processing
Polywood
Forestry
Last year, it began the construction
of a new plywood facility at the
Vyatka Plywood Mill in Kirov, which in
addition to short-grain plywood will
manufacture long-grain plywood, a new
product for the company. Long-grain
plywood has a more appealing look
due to the position of the wood fibres
and is in high demand for furniture
manufacturing, interior decoration and
design works. The new product will
allow Segezha to increase its presence
on the markets with the highest
demand, i.e. Asia, UK and US.
Prefab houses
Segezha Group remained Russia's No.1
producer of prefabricated log houses
(30,300 cu m) in 2016. To increase its
share of the domestic market in 2017,
the company plans to develop a sales
force in regions, and set up an in-house
architectural and design unit and a
customer support service. It will also
build a large timber-processing cluster
around the Sokol Woodworking Plant in
Vologda region.
Production
Sales of paper sacks grew in 2016
vs. previous year thanks to the
commissioning of a new production
facility. As a result, Segezha
Group beat its own record and
manufactured 1.2bn paper sacks last
year.
x
y
By expanding paper sack production,
the Group increased consumption
of its own paper. As a result, sales
of sack paper to outside buyers fell
year-on-year. In 2016, Segezha Group
manufactured 286,400 t of paper,
the same amount as in 2015, despite
the stoppage at the Segezha PPM for
modernisation works.
Sawn timber sales more than
doubled YoY thanks to acquisition of
Lesosibirsk LDK and increased output
of other enterprises, which was
achieved through a set of measures
aimed at enhancing efficiency.
Sales of birch plywood grew in 2016
vs. 2015. The slump in sales in Q4
2016 was due to a temporary decline
in demand from customers following
a rise in demand in Q2 and Q3
caused by the strengthening of the
ruble.
Logging in Q4 grew by 62.2%, thanks
to the takeover of LWP's logging area,
upgrade of the logging fleet with
machines with higher productivity,
and the management's efforts to
encourage more logging.
BUSINESS DEVELOPMENT
STRATEGY
Segezha Group's primary strategic goal
is to become a leader for efficiency
among Russian and global players
in the pulp-and-paper and timber
processing sectors, and to expand
into the most profitable and growing
markets.
ANNUAL REPORT 2016www.sistema.com
33
Production parameters
Sales
Paper sacks
Paper and cardboard (net of intra-group
operations)
Sawn timber
Laminated wooden structures
Prefab glulam houses
Birch plywood
Fibreboards
Share of self-supplied wood
Units
m pcs
K t
K cu m
K cu m
K cu m
K cu m
K sq m
%
Round timber production
million cu m
2016
1,269.8
169.9
912.0
21.9
30.3
92.1
49.3
63%
3.8
2015
1,125.0
185.6
389.7
5.8
23.9
89.9
24.2
57%
3.0
%
12.9%
-8.5%
134.0%
275.3%
26.6%
2.5%
103.6%
6 p.p.
25.5%
One of the company's areas of focus is
increasing the share of raw materials
supplied from its own woodland
to 80%. As part of the investment
project to modernise Segezha PPM,
the capacity of its digester will be
increased to 380,000 t of pulp p.a., and
a new paper-making machine will be
launched, with a capacity of 110,000 t
of sack paper p.a.
Segezha Group will continue optimising
its production facilities in Europe
(Segezha Packaging) and will create
new conversion facilities on growing
markets with a high share of imported
sack paper to increase vertical
integration and guarantee sales of sack
paper.
It also intends to commission a new
plywood mill in Kirov later this year.
The company is currently considering
construction of another plywood mill in
Sokol, Vologda region, with a capacity
of 130,000 cu m.
Alongside the increase in plywood
production capacity, Segezha Group
will continue developing sales in high-
margin segments (transport, LNG, and
casing) and launching new products
by working with customers and setting
upa plywood R&D centre in Kirov.
2016 FINANCIAL
PERFORMANCE
Segezha Group's revenue grew by
28.7% in 2016, which was achieved
by increasing production capacity,
expanding the geography of paper sack
sales, and acquisition of Lesosibirsk
LDK, which contributed RUB 5.7bn to
the Group's revenue in 2016.
Adjusted OIBDA grew by 37.6%, mainly
due to Lesosibirsk LDK and the launch
of the new paper sacks production
facility in Salsk, Rostov region.
Adjusted net income attributable
to Sistema decreased due to higher
depreciation costs as a result of
implementation of the investment
programme, and due to increased
interest expenses.
In 2016, Segezha Group took out its
first EUR 383.6m syndicated loan. The
money is provided for five years and
will mostly be used to finance the
company's large-scale investment
programme.
Assets 34
ANNUAL
REPORT
2016
www.sistema.com
Steppe Agro Holding
JSC Steppe Agro
Holding is a major
player in the Russian
agricultural sector,
and owns a diversified
portfolio of assets in
four key segments:
crop farming, dairy
farming, fruit farming
and vegetable farming.
88.1%
Sistema's stake
Leadership
Agro Holding's assets are located
in four regions of southern Russia
– Krasnodar, Stavropol, Rostov and
Karachai-Cherkessia – which offer the
most favourable climate, crop yields
and logistics. Steppe Agro Holding
holds a 50% equity stake in RZ Agro(1),
a joint venture with the Louis Dreyfus
family.
SECTOR OVERVIEW (2)
Crop farming
Crop farming delivered substantial
growth in 2016: Russia harvested 119m
tons of grains and grain legumes, the
biggest crop in its post-Soviet history.
Wheat production reached an all-time
high of 73.3m tons, up 19% on 2015.
Wheat exports in the 2016/2017 crop
year are projected at 28.5m tons, which
will make Russia the world's leading
wheat exporter.
Financial results of Steppe Agro Holding
(RUB m)
Revenue
Adjusted OIBDA
Operating income
Adjusted net income attributable
to Sistema
2016
8,358
2,857
2,941
871
2015
2,122
674
548
136
Change
293.8%
323.9%
436.2%
540.5%
Net debt
8,265
1,549
х5
Konstantin
Averin
CEO
Ali Uzdenov
Chairman
of the Board
of Directors
(1) RZ Agro's results are not consolidated into Steppe's
financial results.
(2) Sources: Russian Federal Statistics Service, USDA,
FAO, the Russian Federal Customs Service
Financial results of RZ Agro
(RUB m)
Revenue
OIBDA
Net income
(Net cash position) / Net debt
2016
3,164
1,134
965
(291)
2015
2,266
1,189
941
62
Change
39.6%
-4.6%
2.6%
-
ANNUAL REPORT 2016www.sistema.com 35
Gross harvest volume
of grain and legumes
in Russia, mn tonnes
2016
2015
2014
2013
119.1
104.8
105.3
92.4
Gross harvest volume and
export of wheat in Russia
2016
2015
2014
2013
73.3
39%
61.8
41%
59.7
38%
52.1
36%
Wheat production, mln tonnes
Share of export, % of gross harvest volume
Production of raw milk
in Russia, mn tonnes
2016 2.1
2015
2
2014
1.9
13.5
14
14.5
2013
1.8
14.7
15
14.7
14.4
14
30.7
30.8
30.8
30.5
Farms and self-employed
Personal small-holdings
Agricultural organizations
International prices for agricultural
produce continued falling in 2016, which
is a serious negative factor for the
industry. Wheat prices hit a low vs. the
10-year average, but the depreciation
of the rouble offset the negative effect
from the decline of international prices
for Russian agricultural producers.
Dairy farming
Russia has seen a gradual decline in
milk output over the last five years. The
main reason is the decline in output
from household farms (which in 2016
accounted for 44% of Russia's total milk
output). Marketable milk accounted for
an estimated 66% of Russia's total milk
output in 2016. This low share results in
a deficit of milk suitable for processing,
higher milk prices and a need to
import milk. Imports accounted for an
estimated 20% of Russia's total milk
consumption.
The total number of milk-producing
dairy cows in Russia in 2016 was 8.3m,
down 8% in the last five years, mainly
due to the reduction of livestock kept
by household farms and inefficient
producers leaving the market. The
decrease is offset by the gradual
growth of milk yield per cow: in 2016,
the average annual milk yield at
agricultural companies reached 5,500
litres, a 15-year high.
Fruit farming
Fruit farming in Russia has delivered
continued growth, including apple
production. However, despite increasing
output and the continued embargo
on certain food imports from Western
countries, dependence on imports
remains high: imported apples account
for about 36% of consumption.
Fruit farming has substantial potential
for growth and import substitution
through planting of new intensive-
type orchards. The average apple yield
of Russian agricultural enterprises
is about 11 t/ha, while yields from
intensive-type orchards are 40-50 t/ha.
Fast development of the fruit farming
segment in Russia is hindered by its
high capital intensity and fairly long
payback periods.
Assets 36
Vegetable farming
Production of protected-ground
vegetables in Russia grew substantially
in 2013-2016, reaching 783,000 t in 2016,
the highest in the last 20 years.
Growth was to a large extent spurred
by introduction of the food embargo
in 2014 and the subsequent ban on
imports of tomatoes and cucumbers
from Turkey, as well as the depreciation
of the rouble, which made imported
vegetables more expensive and less
competitive.
BUSINESS DEVELOPMENT
IN 2016
Steppe Agro Holding is a large
agricultural holding with land assets
of 315,000 ha, operating in four high-
potential agricultural segments: crop
farming, dairy farming, fruit farming
and vegetable farming.
Steppe Agro Holding operates in the
Krasnodar, Rostov, Stavropol and
Karachay-Cherkessia regions, which
are among Russia's most favourable
regions for agricultural development.
Soil quality and an optimal amount of
precipitation in these regions make it
possible to achieve high yields, while
short transportation distances create
advantages in terms of logistics costs.
171,800
tonnes was the gross wheat harvest
of the new assets
Steppe Agro Holding's gross harvest (incl. RZ Agro), K t
(including assets acquired in May 2016)
Crop
Winter wheat
Winter barley
Sugar beet
Sunflower
Grain corn
Other
Total
2014*
2015*
2016**
2016 / 2015
297.1
19.8
303.8
21.8
35.5
124.8
802.9
269.7
17.2
252.2
29.4
52.1
133.4
754.0
485.6
21.9
339.5
31.9
40.5
121.8
1,041.0
+80%
+27%
+35%
+9%
-22%
-9%
+38%
* pro forma including five farms in the Krasnodar region and OJSC Rodina.
** net of assets acquired in November and December 2016
Average yields of Steppe Agro Holding's main crops (including RZ Agro), t/ha
(including assets acquired in May 2016)
Crop
Winter wheat
Winter barley
Sugar beet
Sunflower
Grain corn
2014*
2015*
2016**
2016 / 2015
5.1
5.5
52.5
2.3
5.4
4.8
6.0
46.8
2.4
6.9
5.1
5.5
60.0
2.5
6.0
+7%
-9%
+28%
+7%
-13%
* pro forma including five farms in the Krasnodar region and OJSC Rodina.
** net of assets acquired in November and December 2016
Crop farming
Steppe Agro Holding's land assets
totalled 315,000 ha as of the end of
2016, including 99,000 ha of RZ Agro.
In 2016, the company acquired 178,000
ha of land.
In 2016, Steppe Agro reported an all-
time high grain crop of 1.04m tons.
This substantial increase was achieved
thanks to acquisition of new land
assets and introduction of state-of-
the-art agricultural technologies and
agronomic discipline.
In May 2016, Steppe Agro Holding
acquired 110,000 ha of land in the
Stavropol and Rostov regions. The
assets were fully integrated into the
Holding and included in the harvesting
campaign of 2016. Gross wheat harvest
of the new assets was 171,800 t, an
increase of 65% from 2015. Substantial
growth of gross collection and yield
was achieved by using the required
amount of fertilisers and optimising
the harvesting time.
At the end of 2016, Steppe Agro Holding
acquired another 68,000 ha of land,
which is currently being integrated into
the company.
ANNUAL REPORT 2016www.sistema.com 37
Dairy farming
Operational results of dairy farming
Number of milk-producing
cows
Gross milk yield, K t
2014
3,084
27.9
2015
3,272
30.2
2016
2016/2015
3,700
36.2
13%
20%
Operational results of fruit farming
Area under orchards, ha
Gross harvest, K t
Orchard yield, t/ha
2014*
2015
2016
2016/2015
630
11.6
32.7
630
15.1
40.2
780
16.4
42.1
+24%
+5%
+5%
* Based on management accounts (proforma).
Operational results of vegetable farming
Gross harvest, K t
Tomatoes
Cucumbers
Yield, kg/sq m
Tomatoes
Cucumbers
2014*
2015
2016
2016/2015
33.4
20.4
12.9
29.7
34.0
24.7
37.5
19.6
17.9
31.6
32.6
30.6
45.8
21.3
24.5
35.1
35.6
34.8
+22%
+9%
+37%
+11%
+9%
+14%
* Based on management accounts (proforma).
In 2016, its gross harvest of tomatoes
and cucumbers grew by 22% to 45,800 t
due to an increase in land used for
production from 118.5 ha in 2015 to
130.5 ha in 2016, and an increase in the
average yield from 31.6 kg/sq m in 2015
to 35.1 kg/sq m in 2016.
In 2016, Yuzhny began implementing
a programme to increase operational
efficiency: it expanded the area of land
under seedlings from 6 to 12 ha, which
enabled it to start planting earlier and
begin harvesting in November.
Argroholding Steppe land bank
growth, th. ha
+66
+2
315
+110
+38
99
'12-'13
'14-'15
05/'16
11/'16
12/'16
Total
Steppe Agro Holding achieved a
substantial improvement in its
operational results from 2015.
The key event of 2016 for the dairy
farming segment was receipt of a
certificate confirming the farms’
compliance with European standards,
allowing Steppe to supply milk for
production of dairy products to be
exported to the EU.
Fruit farming
Steppe Agro Holding owns two fruit-
farming assets: OJSC Trudovoye and LLC
Sady Kubani. At the time of acquisition,
the area of intensive orchards was
630 ha. In 2016, the company planted
another 150 ha of orchards, which are
expected to reach their projected yields
in 2018. The total area of the holding's
orchards had reached 780 ha by the
end of 2016.
The gross apple output of Steppe's
farms grew by 5% in 2016 to 15,900 t.
The orchard yield also grew by 5%,
to 42.1 t/ha.
Vegetable farming
Yuzhny Agricultural Complex (acquired
by Steppe Agro Holding in December
2015) is Russia's biggest producer of
protected-ground vegetables, with 144
ha of greenhouses.
Assets
38
BUSINESS DEVELOPMENT
STRATEGY
Steppe Agro Holding's
development strategy
is focused on building
a leading agricultural
company, which would
be one of Russia's five
biggest producers in each
of the four segments of
its operations. It plans
to continue increasing
its land holdings and
livestock, building new
dairy farms, planting
orchards and upgrading
greenhouses.
HA
315,000
land bank of Agroholdin Steppe
as of 31 December 2016
The operational strategy envisages increasing the assets' efficiency and fullly
unlocking their production potential:
Crop farming
Dairy farming
through introduction of new
agricultural technologies, optimisation
of crop rotation, expansion of the fleet
of high-power machines and increase
of land in freehold.
through maintaining yield per cow at
>10,000 p.a. and ensuring compliance
with European standards.
Fruit farming
Vegetable farming
through achieving maximum yields of
intensive orchards and increasing the
share of produce sold as own brand.
through optimisation of the variety
split, increase of the share of
produce sold during the high season
(November-May) and the share of
produce sold as own brand.
ANNUAL REPORT 2016www.sistema.com Assets
3939
Real estate assets
This segment is represented by
a number of companies, the key
ones being Leader Invest (property
development) and Business
Nedvizhimost (rental assets). Sistema's
strategy in real estate is focused
on increasing portfolio value with a
view to its subsequent monetisation
through rental income, property
development and sales.
100%
Sistema's stake in Leader
Invest and Business
Nedvizhimost
Leadership
(Business Nedvizhimost)
Stanislav
Khatskevich*
CEO
Leonid Monosov
Chairman
of the Board
of Directors
*as of 31 December 2016: Igor Shabdurasulov
Leader Invest
Business Nedvizhimost
Leader Invest is a development
company carrying out housing and
commercial real estate projects in
Moscow. The portfolio includes 45
projects with a total area of roughly 3.0
million sq m. The priority segment is
housing construction – both small infill
construction projects and large-scale
comprehensive development projects.
Business Nedvizhimost is managing,
leasing and operating commercial real
estate. The company owns over 300,000
sq m of real properties in Moscow, and
also has assets in Saint Petersburg.
Business Nedvizhimost comprises
100% of Mosdachtrest charter capital
(rental assets).
Leadership
(Leader Invest)
Financial performance
(Leader Invest, Business Nedvizhimost and Mosdachtrest)(1)
(RUB m)
Revenue
Adjusted OIBDA
Operating income
Adjusted net income / (loss)
attributable to Sistema
Net cash position
2016
12,810
5,237
7,757
2,877
666
2015
4,532
659
116
(362)
632
Change
182.6%
694.2%
6,575.2%
-
-
(1) The results of rental assets (Business Nedvizhimost and Mosdachtrest) are presented on the basis
of management reports.
Yevgeny Rubtsov
CEO
Felix
Evtushenkov
Chairman
of the Board
of Directors
Assets 40
SECTOR OVERVIEW(1)
Residential properties
In 2016, the new housing market
was marked by high activity of both
property developers and buyers.
Twenty-one new projects in the
business class segment and 14 new
projects in the comfort class segment
were started in the past year. As of the
end of the year, the average price of
sq m of new business class housing
increased by 5%, while the prices in the
comfort segment remained the same as
a year before.
Moscow's market of existing housing
has stabilised after a record plunge in
2015. The number of concluded sale
and purchase agreements increased
by 11%. As for the market of new
housing, the number of concluded
construction participation agreements
(off-plan sales) almost doubled. It was
largely a result of the extension of the
government's programme supporting
mortgage interest rates, as well as
sales promotion by developers through
special offers and discounts.
Given the prospects of launch of
projects and new stages in existing
housing projects, an increase in the
volume of supply can be expected in
2017.
Prices in the primary housing
market of Moscow, Comfort Class
2016
2015
2014
2013
RUB th. per sq m
Growth rate, %
152
+4%
146
+1%
145
+11%
131
+3%
Commercial real estate
Roughly 350,000 sq m of office facilities
were commissioned in the past year,
which is less than half of the volume
of new construction last year. This is
the lowest result of the past 10 years in
Moscow's market of office real estate.
The total amount of quality office space
in Moscow reached 19.8m sq m, with
class A offices accounting for 21% and
class B+ offices accounting for 38%.
There is a continued trend of tenants
moving to high-quality A/B+ class
offices that are getting cheaper.
The vacancy rate in class A was 20.3%,
down 5.7% year-on-year. The share
of vacant premises in B+ class in
December was 19.4%, down 0.3% year-
on-year.
The average rent rates of high-quality
offices kept slumping in 2016.
(1) Sources: Rosreestr, Metrium Group, JLL, Knight Frank, ILM and NAI Becar
BUSINESS DEVELOPMENT
IN 2016
Leader Invest
In 2016, the company shifted its focus
from infill construction, where it has
certain experience, to comprehensive
development projects. Diversification
of the portfolio through the inclusion
of large-scale projects ensures the
company's continuous operations until
at least 2019.
SQ. M
872,000
are of project ZIL Yug
SQ. M
472,000
are of project Nagatino i-Land
SQ. M
243,000
are of project 120 Lobachevskogo St.
ANNUAL REPORT 2016www.sistema.com
41
Largest completed projects
Project
Lyusinovskaya
Nagatinskaya
Rogozhsky
Dekart Business Centre
Area, K sq m
Date of commissioning
12.1
36.2
19.6
31.0
24 March 2016
07 October 2016
30 September 2016
25 January 2016
Largest projects with launched construction
Project
Area, K sq m
Premium class residential project at Pokrovsky Bulvar
Business class residential project at Usievicha St.
Comfort class residential project in Kuzminki
Business class residential project in Mnevniki
Business class residential project in Olympic Village
Comfort class residential project at 10 Abramtsevskaya St.
Comfort class residential project at Chertanovskaya St.
Business class residential project in Kuskovo
Comfort class residential project at Skhodnenskaya St.
Comfort class residential project at Veshnyakovskaya St.
9.8
14.1
15.2
13.5
10.8
13.1
11.3
8.9
12.0
10.5
Leader Invest portfolio
structure by class
Leader Invest portfolio
structure by segments
53%
44%
3%
81%
19%
Comfort
Business
Premium/Elite
Housing
Commercial properties
Infill development is represented by 42
projects with a total area of 520,000 sq
m. The average area of one project is
small and amounts to 12,000 sq m, with
the implementation period of 2.5 years.
In 2016, the competence of in-
house sales service was significantly
strengthened – most of the services
of brokerage companies were replaced
by own resources in 2016, and four
additional sales offices were opened
on the construction sites.
Comprehensive development is
represented by three projects: ZIL
Yug (872,000 sq m), Nagatino i-Land
(472,000 sq m) and 120 Lobachevskogo
St. (243,000 sq m). The company's
total project portfolio doubled in 2016,
reaching 3.1 million sq m.
An architectural concept was developed
for ZIL Yug, and an urban planning
project was submitted for approval to
the Moscow government. In 2017, the
first lots will be designed.
Nagatino i-Land's urban planning
project was also submitted for approval
to the Moscow government, and the
designer and general contractor were
selected. Construction of the first stage
of the project will start in 2017.
In 2017, Leader Invest will continue
to focus on residential properties,
the most liquid real estate segment,
maintaining a steady portfolio of
projects.
Assets 42
Business Nedvizhimost
Business Nedvizhimost has a unique
pool of properties: mansions in
the centre of Moscow, office and
commercial space, business centres
located almost in each district of the
capital, and manufacturing and storage
facilities in Moscow and the Moscow
region. The restructuring of Business
Nedvizhimost, during which it was
merged with Rent Nedvizhimost, was
completed in H1 2016. As of the end of
2016, the merged company managed a
portfolio of properties with a total area
of over 440,000 sq m.
In accordance with the approved work
plan for 2016, the company leased out
29,703 sq m and sold three real estate
properties. At the end of 2016, the
company agreed the principal terms of
the framework agreement with X5 Retail
Group on the organisation of stores on
the first floors of former ATS buildings.
The first pool of properties for the
conclusion of the lease agreements
was determined.
In 2017, Business Nedvizhimost plans
to develop a chain rental product on
the basis of its own properties.
The company developed a work plan
providing for the commercial use of
each property released by MGTS and
partially renovated six properties. To
attract the largest number of potential
tenants, the company plans to start
a complete renovation of seven
properties with a total area of 28,500
sq m in 2017.
BUSINESS DEVELOPMENT
STRATEGY
In the medium term, Leader Invest
will continue to build a strong and
recognisable brand with a view
to achieve leading positions in
Moscow. Further organic growth and
development of the company will
be achieved, in particular, through
attraction of strategic partners and
co-investors.
Business Nedvizhimost plans to sell
to Leader Invest 16 land plots for the
construction of residential properties.
Monetisation of other properties in
2017-18 will be considered only if it
is not possible to effectively use the
properties for commercial purposes
in another way (by leasing out or
implementing a joint investment
project).
2016 FINANCIAL PERFORMANCE
Leader Invest's revenue grew 9-fold
in 2016 and reached RUB 8.8bn. This
was mostly due to recognition of
revenues from the sale of apartments
in Moscow's apartment buildings
Lyusinovskaya, Nagatinskaya,
Samarinskaya, Rogozhsky and
Izumrudnaya.
Leader Invest's OIBDA amounted to RUB
3.0bn in 2016, which corresponds to an
OIBDA margin of 34.2%. The company
reported a net income of RUB 2.3bn in
2016.
In December 2016, Leader Invest issued
a RUB 3bn worth of registration-
exempt bonds. The issue provides for
the payment of semi-annual coupons
and a 1.5 year put option. The rate for
coupons 1-3 was set at 13.5% p.a.
In 2016, Sistema's rental assets
(Business Nedvizhimost and
Mosdachtrest) generated aggregate
revenue of RUB 4.0bn, mainly by leasing
out properties, but also by selling
assets.
ANNUAL REPORT 2016www.sistema.com Assets
43
BPGC
Bashkir Power Grid Company
JSC Bashkir Power Grid
Company (BPGC) is one of
Russia's largest regional
energy companies. It
manages distribution
and transmission grid
assets in the Republic
of Bashkortostan. The
aggregate installed
capacity of its substations
is 22,048.12 MVA. BPGC
owns 100% of equity
in LLC Bashkirenergo,
LLC BGC and LLC
BPGC Engineering.
91.0%
Sistema's stake
Leadership
SECTOR OVERVIEW
For an overwhelming majority
of territorial grid operators in
Bashkortostan, 2016 was the first year
of a new long-term regulation period.
The gross revenue requirement and
long-term regulation parameters
for these TGOs were set using peer
benchmarking in accordance with
current legislation. Bashkirenergo (a
subsidiary of BPGC) will continue using
the regulated asset base (RAB) method
of tariff regulation (applicable from
2014 till 2023).
According to the Russian Federal
Anti-Monopoly Service, the net supply
growth rate will decline to 0.6% in
2017 due to widespread introduction
of energy saving technologies and an
overall slump in power consumption.
In 2016, the number of TGOs was
reduced further, in accordance
with the Russian government's
development strategy for the sector.
In Bashkortostan, 6 companies lost
the status of a territorial grid operator,
their total number down to 46.
Dmitry
Sharovatov
CEO
Vadim Pavlus
Chairman
of the Board
of Directors
2016 financial performance
(RUB m)
Revenue
OIBDA
Operating income
Net income attributable
to Sistema
2016
16,052
5,636
3,404
2,706
2015
14,816
4,331
2,094
2,027
Change
8.3%
30.1%
62.6%
33.5%
44
The key changes in power grid
regulations in 2016 included:
introduction of standard tariff
rates, determining the amount
of utility connection fee;
permission to regional regulators
to transfer reasonable expenses
(and withdrawals) for five years
for big TGOs with at least 10%
share in regional revenue;
toughening of criteria for granting
the TGO status.
In 2017, we expect tariff regulation
to become even more stringent, with
the government introducing the
"inflation minus" principle for the
earnings forming process, toughening
requirements to reliability and quality
of services provided and criteria for
granting the TGO status.
The key macroeconomic factor having
impact on the business of BPGC Group
is inflation. The main customers of grid
transmission services in Bashkortostan
are large industrial enterprises and,
given that the Russian government
expects the country's economic growth
to resume, net power supply may grow
in 2017.
BUSINESS DEVELOPMENT
IN 2016
BPGC is an innovative, efficient and
dynamic company, which dominates the
power grid market in the Republic of
Bashkortostan. BPGC is well-positioned
among neighbouring inter-regional
grid companies in terms of the size of
power grid infrastructure and is one of
the leaders for the amount of uniform
(common pot) tariffs.
BPGC owns 82,000 km of 0.4-500 kV
trunk and distribution grids, three 500
kV substations, 12 220 kV substations,
250 110 kV substations, 334 35 kV
substations and 22,894 6-10/0.4 kV
transformer stations.
Based on the tariff and balance
decisions for 2017, BPGC's share in
the total amount of gross revenue
requirement for maintenance of power
grids in Bashkortostan grew to 80%.
In 2016, the company's investment
programme was increased by 24% due
to implementation of a large project -
construction of the Gvardeiskaya 220
kV substation with a 220 kV supply
main worth RUB 801.9m. Last year, the
company also put into operation some
large grid infrastructure facilities: the
Zubovo 110 kV substation and the Irek
110 kV substation.
Investment in the project of
comprehensive reconstruction of power
grids in Ufa (Smart Grid) amounted to
RUB 796.2m in 2016. Financing for 2017
is projected at RUB 967m.
BPGC investment programme,
RUB bln, VAT included
2019E
2018E
2017E
2016
2015
4.0
4.2
4.6
5.4
4.0
BPGS companies share in regionals
revenue, %
73%
20%
7%
Bashkirenergo
Other TSE
BGC
The number of new customers
connecting to power grids continues
growing. The number of utility
connections grew by 11.3% in 2016 to
24,232. Power losses remained the same
as in 2015, despite connection of new
TGOs.
24,232
number of utility connections
grew by 11.3% in 2016
ANNUAL REPORT 2016www.sistema.com 45
Year
2015
2016
Change
Distribution grids (Bashkirenergo)
21,806
20,013
8.22
21,765
454
Transmission grids (BGC)
21,797
21,500
1.36
22,286
20,452
8.23
24,232
394
24,979
24,658
1.29
+2.2%
+2.2%
+0.01 p.p.
11.3%
-13.2%
+14.6%
+14.7%
-0.07 p.p.
2016 FINANCIAL PERFORMANCE
The company's revenue in 2016 grew
by 8.3% YoY. OIBDA increased by 30.1%.
BPGC continues using the regulated
asset base (RAB) method of tariff
regulation (applicable from 2014 to
2023). OIBDA margin grew by 5.9 p.p.
over the year to 35.1%. OIBDA margin
growth was mostly driven by a decrease
in provisions made for potential
disputes with counterparties in relation
to power transmission and sales.
35.1%
OIBDA margin
in 2016
20%
reduction of maintenance
costs – as a result of Smart Grid
technology
Production parameters
Parameter
Power in, m kWh
Power out, m kWh
Losses in distribution grids, %
Number of connections
Connected power, MW
Power in, m kWh
Power out, m kWh
Losses in transmission grids, %
BUSINESS DEVELOPMENT
STRATEGY
BPGC's key strategic focus areas
with regard to development of the
regulated business are optimisation
of the investment programme and
overhaul of its grids using state-of-
the-art innovative and intelligent
solutions, including implementation
of the programme of comprehensive
reconstruction of power grids in
Ufa using Smart Grid technology.
Preliminary results of the programme's
implementation show its high efficiency
and allow expecting a substantial
decrease of electricity losses and of the
number of accidents and interruptions
in power supply to consumers, as well
as a 20% reduction of maintenance
costs.
The experience gained from the Smart
Grid project and manufacturing of
equipment adapted for Russian grids
that was set up together with Siemens
form the basis for promoting BPGC's
subsidiary, BPGC Engineering, which
offers turn-key overhaul of power grids,
on external markets.
Assets 46
ANNUAL
REPORT
2016
www.sistema.com
Medsi Group
Medsi Group is Russia's
largest private national
healthcare chain. It
offers a full range of
preventive, diagnostic
and treatment services,
including rehabilitation
for children and adults.
SECTOR OVERVIEW (2)
Russia's private healthcare market was
influenced by some opposite trends
in 2016. On the one hand, insufficient
financing of OMI (obligatory medical
insurance) programmes and lower
availability of state-financed healthcare
stimulated growth in the private
healthcare sector. OMI financing deficit
amounted to around RUB 27bn in 2016.
On the other hand, the market growth
was constrained by macroeconomic
factors, such as the decline of the
population's real disposable income
and the ongoing crisis on the VMI
(voluntary medical insurance) market.
The size of the Russian private
healthcare market was RUB 679.6bn
in 2016. However, the growth rate fell
almost by half, from 12% in 2015 to 7%.
The Moscow region remained the
country's biggest market, accounting
for 26% of Russia's private healthcare
market; its share of the VMI segment
grew from 64% in 2015 to 68% in 2016.
The VMI segment has grown by 50%
in Russia in the last six years, but its
growth rate is still behind the retail
segment. Moreover, VMI demonstrated
in slump in Russian regions, although
growing by 6% in Moscow.
Next year the trend towards engaging
private clinics to provide services
under OMI programmes and giving
patients an opportunity to co-finance
treatment above OMI tariffs is likely
to sustain.
100%
Sistema's stake
Leadership
Elena Brusilova
President
Vladimir
Aleksandrovsky(1)
Chairman
of the Board
of Directors
2016 financial performance
(RUB m)
Revenue
OIBDA
(1) As of 31 December 2016: Vasil Latsanich
(2) Source: mresearcher.com, Businessstat, cbr.ru,
Insurance Wikipedia (Business-Service), the Federal
Fund of Obligatory Medical Insurance, the Federal State
Statistics Service
Operating loss
Net loss
2016
9,409
813
(432)
(499)
2015
8,227
471
(161)
(127)
Change
14.4%
72.4%
-
-
ANNUAL REPORT 2016www.sistema.com BUSINESS DEVELOPMENT
IN 2016
Last year, Medsi demonstrated positive
dynamics, its annual revenue growing by
14.4% year-on-year. Revenue from direct
sales to individuals grew by 11%. Sales
via insurance companies (including OMI)
increased by 19%, supported by the 13%
growth in the number of visits following
occurrence of insurance events.
An important area for Medsi in 2016
was work under the programme of state
guarantees of free medical care for
Russian citizens. The four-fold increase
in the amount of medical services
provided in the OMI sector was achieved
through active involvement of in-patient
facilities, which provided treatment
to over 1,200 patients to an aggregate
amount of RUB 154m. Besides, about
1,500 patients needing rehabilitation
under OMI programmes (with the
aggregate amount of quotas totalling
RUB 78m) were treated at the Otradnoye
sanatorium, in addition to fee-for-
service customers.
Revenue of Medsi's outpatient clinics
in Moscow grew by 14% in 2016 and was
brought about by the 11% increase in
the number of visits and 3% increase
in the average transaction value.
The Clinicodiagnostic Centre at
Belorusskaya again provided the
biggest volume of services, its revenue
up 6% year-on-year. In accordance
with the general strategy, the clinic
focused on increasing direct sales to
individuals (non-insured), and they grew
by 13% in 2016 due to a shift towards
comprehensive healthcare services and
packaged offers.
The new clinicodiagnostic centre in
Krasnaya Presnya, which opened in
December 2015, is positioned as the
company's second flagship asset. In
2016, it opened consultation rooms in
all medical disciplines with expert-level
equipment, with consultations provided
by highly qualified doctors (the centre
employs 8 holders of post-doctoral and
40 of doctoral degrees in medicine). The
clinic's average daily traffic in 2016 grew
from 31 visits in January to around 700 in
December. The centre provided services
to over 38,000 unique patients in 2016.
The work intensity of its doctors reached
65% by the end of the year. However,
there is still a substantial potential for
increasing the patient traffic through
opening of new units.
In 2017, the company plans to open at
least two new family clinics in Moscow:
a clinic for adults and children in
the Leninsky avenue, with an area
of over 3,000 sq m and a capacity
of 740,000 visits per annum.
a clinic for adults and children in
the 3rd Khoroshevsky lane, with
an area of about 4,000 sq m and
a capacity of 790,000 visits per
annum.
47
Market volume of commerce
medical industry in Moscow(1)
217
13%
193
11%
173
7%
2018E
2017E
2016
Market volume, RUB bln.
Growth rate, %
(1) Including VHI
Market volume of VHI in Moscow
2017П
2016
2015
Market volume, RUB bln.
Growth rate, %
Medsi's assets
Primary care clinics
Regional clinics
Clinicodiagnostic centres
Children's clinics
Hospitals
Sanatoria
Wellness centres
74
8%
68
6%
64
10%
14
7
3
2
2
2
2
RUB
154 mln
aggregate amount
for provided treatment
to over 1,200 Medsi's patients
Assets 48
Medsi revenue
by clients in 2016, %
56%
35%
7%
2%
Insurance
Private
Corporate
Others
Medsi revenue
by assets in 2016, %
45%
22%
16%
8%
6%
3%
Clinics
CDC at Belorusskaya
Children’s clinics
Hospitals
Other
CDC at Krasnaya Presnya
Operating performance
Indicator
Patient visits
Services provided
Units
K
K
2016
7,314
2015
7,266
11,483
11,403
Area
K sq m
221
227
Average cheque
RUB
1,265.0
1,120.8
Revenue per sq m
RUB K
42.55
36.18
%
0.7%
0.7%
-3.0%
12.9%
17.6%
BUSINESS DEVELOPMENT
STRATEGY
Medsi's strategic goals include organic
growth through increased direct sales
of services - at least 20% a year, ahead
of the market. Given the slowdown in
the VMI segment, the top priority of the
strategy in this channel is enhancing
the efficiency of partnerships with
insurance companies by optimising
product offers and increasing the
number of visits of patients with VMI
policies.
The strategy also envisages an
investment programme for expanding
the company's operations in Moscow
and other regions. The chain aims
at achieving high results of medical,
operational and financial efficiency and
should ensure comfortable routing of
patients and provision of the full range
of outpatient, hospital substitution,
inpatient and rehabilitation services.
2016 FINANCIAL PERFORMANCE
The company's revenue in 2016 grew
by 14.4% YoY. Revenue from direct
sales to individuals grew by 11%. OIBDA
increased by 72.4% year-on-year despite
negative dynamics in Q4 caused by
an increase in marketing expenses
and non-monetary provisions. Medsi
reported a net loss of RUB 499m for
2016 due to increased depreciation
and amortisation expenses and the
negative effect from exchange rate
differences.
ANNUAL REPORT 2016www.sistema.com Binnopharm
Assets
4949
JSC Binnopharm is
a Russian full-cycle
pharmaceutical
company with an in-
house R&D division
Binnopharm operates two advanced
pharmaceutical plants in the
Moscow region, which comply
with the international GMP (Good
Manufacturing Practice) standards
and produce six types of dosage
forms: ampoules, syringes, aerosols,
pills, capsules and solutions. The
company produces and develops new
medications in several treatment
groups: pulmonology, neurology,
cardiology, gastroenterology and
infectious diseases.
74%
Sistema's stake
SECTOR OVERVIEW(1)
Growth of the Russian pharmaceutical
market continued to slow down in 2016
and was 4% vs. 2015 in monetary terms.
At the same time, after the market's
decline in physical terms in 2015, it
stabilised at the same level in 2016 and
totalled RUB 1,309bn.
Like in the previous year, the
commercial pharma segment grew
faster than the public one (5.0% and
3.8%, respectively), mostly on the back
of a faster growth of retail prices.
The share of foreign medications on
the Russian market slumped from
73% in 2015 to about 71% in 2015 in
monetary terms. In physical terms,
the share of imported drugs remained
virtually unchanged at 40%. Domestic
manufacturers still hold the strongest
positions in the hospital segment
(accounting for 36% in monetary
terms and 76% in physical terms).
This trend reflects the government's
policy towards import substitution in
the pharmaceutical market and is the
first result of corresponding legislative
initiatives, notably, the decree adopted
in 2015 that prohibits foreign products
to participate in government tenders
if there are bids from two or more
Russian-made products.
Most experts expect the market's
moderate growth in rouble terms
(around 7%) to continue in 2017. The
main growth driver will be recovery of
consumption and substantial inflation
in the retail segment.
Leadership
2016 financial performance
(RUB m)
Revenue
OIBDA
Operating income
Net income (loss), attributable
to Sistema
Net debt
2016
1,939
415
219
11
1,548
2015
1,660
193
21
(68)
843
Change
16.9%
114.7%
931.5%
-
83.6%
(1) Source: DSM.
(2) The Russian government's decree No.1289 dd 30 November 2015 "On restrictions of and terms of access
of medications manufactured in foreign countries"
Alexey Chupin
CEO
Dmitry Zubov
Chairman
of the Board
of Directors
Assets 50
Medicine average price
growth rate in Russia, %
2016
2015
2014
2013
4%
14%
14%
7%
BUSINESS DEVELOPMENT
IN 2016
In 2016, Binnopharm continued
implementation of its strategy of
shifting sales from public procurement
towards the private segment. The
following steps were taken to refocus
the business:
1. Opening of an R&D centre with an
area of 400 sq m and 7 laboratories.
The centre employs over 30 people,
many of them with doctoral
degrees. Over 20 drugs are now at
various stages of development and
registration.
2. Active promotion of proprietary
products (Noben, Salbutomol,
Beclomethasonum, Theopec,
Combipec) in the retail segment.
The company signed 70 contracts
with pharmacy chains (32% of the
market) covering 11,522 pharmacies.
Binnopharm's products are now
available in every fourth pharmacy
in Russia.
3. Acquisition of LLC Alpharm, a
manufacturer of two medications
of the pharmacy segment, Kipferon
and Prostopin. The acquisition
allowed Binnopharm to enter
the OTC drugs market and secure
potential commercial advantages by
using own interferon substance for
manufacturing of Kipferon.
4. Obtaining exclusive rights for
promotion and sale of third-
party products in Russia. Licence
agreements were signed with
German Medice and Russian BIS,
which provided efficient and
quality drugs in such segments
as neurology, pediatrics, anti-viral
and cold-relief medications, for
distribution and promotion.
Progress made:
The share of proprietary drugs
in revenue grew from 43% to 78%.
The share of proprietary drugs sales
in the commercial segment grew from
29% to 47%.
The main goal for 2017 is raising the
share of commercial segment in
revenue to 90%. The company expects
proprietary products to account for
65% of sales, and products sold under
licence agreements with third-party
manufacturers for 35%.
Binnopharm will continue expanding
its product portfolio in 2017. It expects
to launch proprietary drugs that
are currently undergoing market
authorisation.
Production capacity
Form
Pills
Capsules
Ampoules
Aerosols
Syringes (a new modern
line)
Infusion solutions,
plastic bottles
Annual
capacity,
m
packages
1,400
45
80
20
18
14.4
It also plans to sign licence agreements
to sell third-party products and
carry out projects of contract-based
manufacturing for foreign partners.
BUSINESS DEVELOPMENT
STRATEGY
The company's operational strategy
envisages development of a proprietary
portfolio of strong commercial brands
focusing on neurology, pulmonology,
infectious diseases, cardiology and
gastroenterology. The key tool of this
strategy is development and launch
of new proprietary drugs.
Another component of the strategy
is signing of licence agreements with
large pharmaceutical companies,
both for exclusive promotion of their
medications in Russia and the CIS and
for contract-based manufacturing at
Binnopharm's production facilities.
The company's investment
strategy envisages acquisition of
smaller pharmaceutical producers
complementary to its business or
of portfolios of drugs and brands.
Key criteria for selecting acquisition
targets are the drugs belonging to
the commercial segment and target
nosologies of Binnopharm, and the
possibility to transfer manufacturing
to Binnopharm and use its commercial
structures for promotion.
2016 FINANCIAL PERFORMANCE
Binnopharm demonstrated strong
financial results in 2016 thanks to its
consistent strategy. Its revenue for FY
2016 grew by 16.9%. OIBDA increased by
114.7%. Net income totalled RUB 11m, as
opposed to a net loss reported for 2015.
ANNUAL REPORT 2016www.sistema.com Assets
51
RTI
RTI is a major holding
company in the
field of defence and
microelectronic solutions,
which integrates
high-tech research
and manufacturing
companies. RTI comprises
OJSC RTI Systems Concern
and PJSC Mikron.
87.0%
Sistema's stake
Leadership
Igor Bevzyuk
CEO
Sergey Boev
Chairman
of the Board
of Directors
RTI's enterprises 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.
INDUSTRY (1)
Defence Solutions
for national defence. In 2016, the
technological focus was on improving
high-precision weapons systems
and increasing the effectiveness
of decision support information
systems. The company continued to
aim at import independence of the
entire manufacturing chain, including
components and firmware.
One of the main trends in the defence
sector is the optimisation of State
budgets; however, RTI's key segment
(radars) was affected to a lesser extent
by this trend due to its high priority
> 600 000
integrated circuits
Mikron produced in 2016
Financial results in 2016
(RUB m)
Revenue w/o NVision(2)
Revenue
Adjusted OIBDA
Operating (loss) / income
Adjusted net loss attributable to
Sistema
Net debt
2016
44,588
44,588
4,036
275
(2,418)
27,053
2015
Change
63,679
77,287
7,030
4,548
(2,074)
26,743
(29.7%)
(42.3%)
(42.6%)
(94.0%)
-
1.2%
(1) Source: Ministry of Finance of the Russian Federation.
(2) The Information and Communication Technologies segment was divested in H2 2015.
52
Microelectronics
The demand for microelectronics is
growing in the global market, which
creates opportunities for increasing
the sales of chips, diodes and
sensors produced by the Group. A
continuing shift from architecture of
systems and services to cloud and
distributed solutions creates additional
demand for telecommunications
microchips, solid-state memory and
microprocessors suitable for the
processing of Big Data.
The adoption of the Governmental
decree on the procedure for
designation of chips as products
of Russian origin has created new
opportunities for enforcement of
this procedure to protect certain
markets, and to ensure subsidies and
preferences for Mikron's products. In
particular, the supplies of Russian-
made chips for Mir cards will be
subsidised under the programme of the
Ministry of Industry and Trade.
Information technologies market
in Russia, RUB bn
2018
2017
2016
2015
2014
897
850
794
740
698
Russia’s government national defence
spending, RUB trln
2016
2015
2014
2013
3,2
3,1
2,5
2,1
(1) In accordance with the orders of the President
of the Russian Federation Vladimir Putin and Prime
Minister Dmitry Medvedev.
BUSINESS DEVELOPMENT
IN 2016
Defence Solutions
In 2016, the defence business of RTI
was focused on state defence contracts,
most of which were for radars.
As part of the creation of a continuous
radar field for the missile warning
system, RTI Group companies have
completed testing of three new radar
stations in Orsk, Barnaul and Yeniseysk,
and also commissioned radar stations
in Irkutsk and Kaliningrad.
The next step will be the radar station
Voronezh-VP, also being developed by
RTI Group.
In addition, the company is working
on a next generation of mobile rapid-
deployment radars and radars using
new types of radio photons.
Also, one of the key tasks of the
defence division for 2017-2018 is the
expansion of international military-
technical cooperation. RTI is planning
to monetise its competences and
in-house solutions on foreign markets
on the basis of existing technologies
in the field of mobile radars and radar
stations for all environments, systems
and control and decision-making
support tools.
Microelectronics
In 2016, Mikron Group reaffirmed its
status of Russia's largest producer
of microelectronic products and a
technological leader, and made a
breakthrough in the field of import
independence for Russia's strategic
industries and expansion of exports.
Mikron remains the undisputed
market leader in terms of sales and
technological sophistication. With the
only functioning production facility
at the level of 180-90 nm in Russia,
Mikron provides more than 30% of all
supplies of Russian microelectronics
manufacturers. The importance of
having its own component base for
Russia's technological independence
and cybersecurity strengthens Mikron's
position in the public sector and
expands opportunities in the formation
of protected markets and PPPs for
developing next-generation microchips
for the energy sector, healthcare and
distributed computing systems.
In the domestic market, the key event
of 2016 for Mikron was the approval
of a plan for guaranteed purchases
of Russian civilian microelectronic
products in the medium term(1).
The main mass-delivered microchips
of Mikron were granted the status of 1st
category microcircuits, which opens up
opportunities for using preferences in
state and municipal purchases.
ANNUAL REPORT 2016www.sistema.com 53
> 30%
of all supplies of Russian
microelectronics manufacturers
are provided by Mikron
In 2016, Mikron began supplying
chips for third-generation navigation
satellites Glonass-K.
Mikron-produced microchips will
replace foreign counterparts in units
performing information processing and
communications functions.
Mikron's main achievement in the area
of bank cards was the development
and production of a 100% Russian-
made microchip with proprietary
operating system for the national
bank cards Mir. Mikron produced
more than 600,000 integrated circuits
in 2016 as part of the Mir project. In
2017, the company plans to reach the
level of 15 million microchips for bank
cards. Mikron managed to establish
close cooperation with MTS Bank, KS
Bank and a number of other financial
institutions.
Mikron identified the Internet of Things
as a new promising market where RFID
chips will be used as part of Sensor
Fusion technologies.
STRATEGY
2016 FINANCIAL PERFORMANCE
The decrease in revenue in 2016 was
a result of RTI's spinning off NVision
in 2015 and a reduction in the volume
of work under a major contract in the
field of State defence orders, which
was implemented in 2015 and 2014.
In addition, there was a decline in
revenues of key segments of Defence
Solutions and Microelectronics due to
late signing of contracts for 2017.
Adjusted OIBDA decreased in 2016 in
line with the revenue, as well as due to
the recognition of impairment losses
on accounts receivable and inventories.
Adjusted OIBDA margin remained at the
level of 9.1% in 2016.
In December 2016, RTI Group's debt
portfolio was restructured as a result
of conclusion of loan agreements
with VTB Bank. The loan agreements
provide for a deferment of a significant
portion (about 60%) of RTI Group's debt
until 2021 to be followed by annual
settlement payments through the end
of 2026, as well as a grace period for
interest payments. The rest of the debt
was refinanced via 5-year revolving
lines of credit, which gave RTI Group
additional flexibility in managing
working capital.
The strategy of RTI is creating a strong
investment profile and financially
stable company, a high-tech leader in
Russia's defence and microelectronics
markets.
The main task of Mikron is to expand
the scope of its business by further
commercialising new technological
opportunities. In addition to promoting
sales of Mikron's new competitive
products in the Russian and global
markets, and providing Russian design
centres with broad opportunities for
localisation of their production in
Russia, plans to reach a new level of
integration through the transition from
traditional serial sales of microcircuits
to development and delivery of
finished system solutions based on
domestic microelectronics.
In 2017, in the defence industry
segment, RTI will continue to work
within the approved National Arms
Programme through 2020, increasing
the share of own production.
RTI’s investment programme will
amount to RUB 2.7 bn in 2017. The
main focus areas of the programme
include the creation of a shop for
the production of new types of space
products, revamping of the Mikron
plant, a project to develop and organise
the production of new types of electric
motors and other construction and
installation works.
Assets 54
ANNUAL
REPORT
2016
www.sistema.com
MTS Bank
PJSC MTS Bank was
established in 1993. By
the end of 2016, the bank
became a prominent
financial institution, one
of Russia's top 50 banks
for the size of assets.
It provides services to
individuals and corporate
customers in Russia. The
bank has been consistently
pursuing a policy based
on cooperation with the
mobile operator MTS in
order to provide financial
services of high quality.
86.7%
Sistema's stake
Leadership
Ilya Filatov
Chairman of the
Management
Board
Vsevolod Rozanov
Chairman
of the Board
of Directors
SECTOR OVERVIEW
In 2016, most of Russia's
macroeconomic parameters
stabilised, with the national currency
strengthening and the interest rates
continuing to decline.
Positive macroeconomic trends
resulted in a further decrease of credit
risks both in the retail and corporate
sectors. Under these circumstances,
the Russian banking sector continued
to successfully adapt to the new
operational environment: banks revised
their risk management models, and
began cutting costs by optimising
business processes and shutting
down non-profitable segments.
Assets of Russian banks fell by 3.5%
in 2016 as a result, among other
things, of the rouble's strengthening
against the main international
currencies. Despite that, the banking
sector earned RUB 930bn in income,
an increase of almost 400% from 2015
(RUB 188bn) and just 8% below the
all-time high of 2014 (RUB 1.0tn).
MTS Bank's key operational and financial results (MTS Bank, IFRS)
Project, RUB bn
Revenue
Interest income
Fee income
Financial result before SG&A
Operating expenses (SGS&A)
Operating loss
Net loss attributable to Sistema
Net assets
Retail loan portfolio
Capital adequacy H1.0
2016
20,233
16,411
3,242
4,834
(7,395)
(3,282)
(2,827)
20,238
44,157
20.2%
2015
25,619
20,458
3,416
(8,870)
(7,983)
(17,658)
(15,282)
8,743
59,570
18.5%
%
(21.0%)
-19.8%
-5.1%
-
-
-
-
131.5%
-22.5%
1.7 p.p.
ANNUAL REPORT 2016www.sistema.com
55
Russian banks net profit,
RUB bln
BUSINESS DEVELOPMENT
IN 2016
2016
2015
2014
2013
х4.8
930
192
589
994
As of 31 December 2016, MTS Bank was
ranked 47th among Russian banks for
the size of assets, 36th for individual
deposits and 38th for the size of
capital.
The corporate loans portfolio fell
by 9.5% to RUB 30.1tn, which was to
a large extent due to the rouble's
strengthening.
The dynamics of provisions for
potential losses stabilised. Their
amount grew by 3.5% in 2016 (vs.
36% in 2015 and 31% in 2014). If the
trend sustains, it will signal a lasting
improvement of banks' loan portfolios
and the Russian economy in general.
The amount of individual loans
resumed growth, increasing by 1.1% last
year to RUB 10.8tn (vs. a 6% decline in
2015).
The growth rate of individual deposits
slowed down to mere 4.2%. Interest
rates on rouble deposits at the largest
banks moved down to 8.0%-8.5% per
annum by the end of 2016.
The banking sector is expected to
grow more confidently in 2017 than in
2016, supported by stabilisation of key
macroeconomic indicators and ongoing
optimisation of internal business
processes and risk policies of Russian
banks.
№ 38
for the size of capital among
Russian banks
It successfully adapted to the new
macroeconomic environment. Revised
lending processes allowed the bank
to keep risks from new loans both in
the retail and corporate segments at
an extremely low level for the Russian
market.
The bank is successfully optimising its
retail network. In 2016, together with
MTS, it opened 18 flagship integrated
"Bank+Operator" offices, which feature
all characteristics of an MTS outlet and
simultaneously offer a broad range
of banking services for individuals. In
addition, 50 medium-sized MTS outlets
opened financial areas of the bank
to provide banking services to the
population. In 2017, the bank plans to
roll out the successful sales practices
to over 1,000 MTS outlets.
In accordance with the strategy of
cooperation with MTS, the bank
launched a line of SMART debit
cards, which offer free mobile
communications and mobile Internet
for MTS subscribers. The product has
attracted over 320,000 new customers
to the bank, and the accrued data on
their payment behaviour will allow
increasing lending to them, while
controlling the risks.
The amount of unsecured consumer
loans grew threefold in 2016 vs. 2015 to
RUB 3bn. POS loans reached RUB 7.7bn,
a surge of 330% and 167% from 2015
and 2014, respectively.
The bank's portfolio of performing
loans totalled RUB 28bn at the end
of 2016. Deposits and balance of
individual accounts did not change
substantially, equalling RUB 69bn.
Sales of POS-loans
in MTS stores
2016
2015
2014
7.6
38%
2.3
10%
4.6
4%
Sales, RUB bln
POS-loans portfolio yield after reserves, %
Last year, the bank's corporate loan
portfolio decreased, mainly due to
the slowed down lending because of
a more stringent credit policy. The
performing portfolio totalled just below
RUB 25bn at the end of 2016. Deposits
and balance of corporate accounts
were stable at about RUB 28bn.
MTS Bank participates in the
government programme of bank
recapitalisation which is carried out
by the Deposit Insurance Agency
(DIA) and seeks to support corporate
lending. The bank is also accredited
with Russia's biggest companies and
regions to provide services to public
sector organisations and state-owned
companies.
Assets 56
In 2016, the bank complied with all
requirements of the Russian Central
Bank, including capital adequacy ratio,
liquidity and risk per borrower/group
of related borrowers. Shareholders
increased MTS Bank's capital in the
amount of RUB 15.5bn in 2016, which
will ensure that it will continue to
strictly abide by all of the CBR's
requirements and its commitments
under the recapitalisation programme
of the DIA. No recapitalisation is
planned for 2017.
BUSINESS DEVELOPMENT
STRATEGY
The bank's key strategic goal is to build
a leading digital financial institution
offering the best remote banking
services and having an efficient
sales network based on synergies
with MTS's retail business. The bank
uses its partnership with MTS as an
important competitive advantage when
developing its retail segment and
creating new retail products. The bank's
corporate business is oriented towards
servicing large companies that are part
of Sistema Group, and non-affiliated
medium-sized companies, with a focus
on transactional services.
№ 47
for the size of assets among Russian
banks
№ 36
for individual deposits among
Russian banks
In 2017, the bank plans to carry out
the majority of measures aimed at its
digital transformation, upgrade the
IT infrastructure, enter new digital
sales channels and optimise the
management structure to accelerate
decision-making. It expects that these
steps will result in a substantial growth
of the individual customer base and
will improve the quality and efficiency
of customer service.
It also plans to increase the amount of
retail and corporate loans by 20%-25%
and 40%-50%, respectively. This growth
will be achieved through optimisation
of products in the retail segment and
intensive development of factoring and
low-risk lending for quality corporate
borrowers.
Administrative and general expenses
were reduced by 7%, or RUB 0.5bn.
Net loss attributable to Sistema was
significantly decreased thanks to
lower reserve provisions following
optimisation of the bank's lending
policy and introduction of a new credit
scoring system in 2015-2016.
2016 FINANCIAL
PERFORMANCE
In 2016, the bank reported an income
before SG&A expenses in the amount of
RUB 4.8bn, as opposed to a loss of RUB
8.9bn in 2015. Implementation of the
strategy aimed at increasing revenue
from low-risk transactional products
resulted in an increase of the share of
commission fees in revenue from 13.3%
in 2015 to 16.0%.
ANNUAL REPORT 2016www.sistema.com Assets
57
developed and supplied to a foreign
customer a full flight simulator for the
state-of-the-art transport and combat
helicopter Mi-35M designed for efficient
training of flight crews.
In addition to contracts with
the Defence Ministry, the Group
successfully completed its share of
work in the large-scale reconstruction
of the Aurora cruiser, which was one of
the company's most important projects
in 2016.
After Sistema acquired Kronshtadt
in 2015, the Group sold all non-core
assets, shut down loss-making projects,
signed new long-term contracts and
entered new markets. This has had
a serious impact on its financial
performance.
Other assets
KRONSHTADT
LLC Kronshtadt Group is a Russian
high-tech company that engineers and
manufactures knowledge-intensive
products and solutions for the
production, deployment, and safe use
of sophisticated air, sea, and land-
based systems. The Group's substantial
intellectual and engineering potential,
its portfolio of key technologies and
competences and state-of-the-art
manufacturing resources enable it
to create high-tech products and
solutions that are in demand in Russia
and are also able to successfully
compete on international markets.
Sistema's equity holding in Kronshtadt
is 100%.
In 2016, Kronshtadt Group successfully
completed work under some key
government contracts, including
supply of correcting stations for
the differential sub-system of the
GLONASS/GPS global navigation
satellite system, 18 module Kamaz-5350
driving simulators with a motion
generation system and 14 sets of
electronic conduct-of-fire trainers for
the schools and training centres of the
Russian Defence Ministry. Kronshtadt
100%
Sistema's stake
CONCEPT GROUP
Concept Group has been active in
the Russian market for over 10 years
and is a leader in the segment of
women's and children's fashion and
underwear. The company has two
own retail chains under the brands
Acoola and Concept Club with an
aggregate of over 400 stores, many of
which are franchised. Concept Group
operates under a multi-brand and
multi-channel business model, which
ensures stable revenue growth due
to the diversification of proceeds. A
professional team of fashion designers
located in the company's head
office in St Petersburg is in charge of
developing collections for all brands
of the Group. Manufacturing takes
place at partner factories in China,
Bangladesh, Uzbekistan, India, Russia
and Kyrgyzstan, with mandatory quality
control.
Continue
58
ANNUAL
REPORT
2016
www.sistema.com
CONCEPT GROUP
Continue
In 2016, Concept Group developed
and launched production of two new
wholesale brands of children's clothing
- Maloo for babies and toddlers and
Overmoon for children under 12. It
also developed an exclusive baby
clothes brand for Detsky Mir. Sales of
the new brands will start in 2017. In
2016, Concept Group expanded the
geography of its manufacturing, adding
factories of Kyrgyzstan to its suppliers'
list. At the same time, the share of
supply from India grew from 1.6% in
2015 to 8.3% and from Russia from 0.4%
to 2%.
Acoola and Concept Club stores are
present in over 120 cities of Russia; the
total number of stores is 432, out of
which 60% are owned by the company
and 40% are franchised. As of the end
of 2016, the Acoola chain comprised 234
stores, out of which 163 were owned by
the company. The Concept Club chain
comprised 198 stores, including 98 own
stores.
In 2017-2019, the Group plans to
continue active development of the
Acoola chain, investing in opening
20-30 stores per year. Concept Group's
revenue in 2016 amounted to RUB
10.9bn.
HOTEL ASSETS
Sistema's hotel business is represented
by two key companies: VAO Intourist
and Sistema Hotel Management. In
2016, Sistema decided to develop the
segment by acquiring and building
new assets, attracting management
resources and refurbishing old hotels.
Development of the Russian hotel
market will be driven by the country’s
hosting of the World Cup 2018, growth
of foreign tourism (6% in 2016) and
development of domestic tourism,
which has been demonstrating
two-digit growth (15% in 2016). Last
year, hotel occupancy reached
unprecedented figures, with RevPar
(revenue per available room) growing
by 19% to RUB 11,500.
The average income per room for
Moscow hotels increased by 14%, and
prices are expected to continue growing
in 2017. Room rates are estimated to
increase by 10%-30%.
At the end of 2016, Sistema Hotel
Management acquired Regional Hotel
Chain for RUB 2.6bn, increasing the
number of rooms under Sistema's
management from 2,501 to 3,771 rooms.
In November 2016, Sistema opened
Izumrudny Les - an eco hotel in
the Moscow region. Its investment
programme for 2017 exceeds RUB 1.3bn.
Sistema's investment strategy
envisages sourcing new acquisition
targets, consolidation of hotel assets
and simplification of the segment's
organisational structure. It is
constructing the Dubininskaya Plaza,
a 4* hotel in Moscow, which will be
commissioned already at the end
of 2017.
RUB10.9 bn
Concept Group revenue
in 2016
3,771
room number of rooms under
Sistema's management in 2016
59
Sistema's hotel assets
Hotel
Cosmos Hotel
Savoy Westend Hotel
Principe Forte dei Marmi
Yelets
Altay Resort
Leopard Lodge
Intourist Kolomenskoye
Onego Palace
Izumrudny Les
Rooms
in 2016
1,777
116
28
-
78
9
259
103
22
Rooms
in 2015
1,777
116
28
131
78
9
259
103
-
Park Inn Kazan
Park Inn Astrakhan
Park Inn Izhevsk
Park Inn Yaroslavl
Park Inn Sochi
Holiday Inn Express
Voronezh
Park Inn Volgograd
Park Inn Novosibirsk
Courtyard by Marriott
Paveletskaya Moscow
151
132
161
167
153
145
149
150
171
-
-
-
-
-
-
-
-
-
Total
3,771
2,501
In 2016, Sistema and RCom continued
work on merging SSTL's telecom
business with RCom. The deal
was approved by India's two main
exchanges (the National Stock
Exchange and the Bombay Stock
Exchange), the Securities and Exchange
Board of India, the Competition
Commission and the High Courts of
Rajasthan and Mumbai. All necessary
approvals from the shareholders and
creditors were obtained. Sistema
and RCom continue talks with the
Department of Telecommunications
and other regulators and judicial
authorities of India with regard to
final terms of the potential deal. The
decisions on closing the transaction
will depend on the approval timeframe
and the final terms.
SISTEMA SHYAM
TELESERVICES LTD.
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. After
closing, SSTL's minority shareholders
may exchange their shares in SSTL
for shares in RCom pro rata to their
interests in SSTL pre-closing. In Q4
2015, Sistema refinanced SSTL's debt
guaranteed by the Corporate Centre.
In June 2016, Sistema acquired a 17.14%
stake in SSTL from the Federal Agency
for State Property Management(1). It
will pay for the shares to the Russian
federal budget during the next 5 years
in accordance with the following
schedule: 30% of the amount - in 2016,
25% - in 2017 and 15% in 2018, 2019 and
2020.
In November 2015, Sistema signed
binding documents to merge its
Indian telecom business with Reliance
Communications Ltd (RCom), one of
India's biggest telecom operators.
(1) The Russian government bought 17.14% of SSTL shares in March 2011 and simultaneously signed an option agreement with Sistema for the repurchase of the shares
in five years for USD 777m or the market price of the shares determined by an independent appraiser, whichever is higher.
Assets www.sistema.com
SISTEMA VENTURE CAPITAL
Performance in 2016
In 2016, the fund was active on the
Russian and CIS markets. In 2017, it
intends to enter the US market to
become a global player and gain access
to the world’s leading projects.
In 2016, Sistema Venture Capital
became a prominent player both on
the Russian venture capital market
and on the European VR/AR market
(becoming one of Europe's top 3 funds
investing in VR/AR by number of deals).
The fund's team reviewed over 500
projects and closed 6 deals (including
transfer of Sistema's stake in Ozon
Holding Limited to the fund).
Investments
MEL Science - an international
company offering scientific and
educational products based on VR/
AR technology. Its flagship product
is a course for independent study of
chemistry, MEL Chemistry: it comprises
38 kits for chemical experiments, a
learning app and VR glasses that allow
users to see chemical substances and
crystals "from inside". MEL Science kits
are sold under a paid subscription
model and delivered by post.
VisionLabs - one of the world's leaders
in computer vision and machine
learning. Its flagship product is a face
recognition platform, VisionLabs LUNA,
which enables the analysis of vast
amounts of photo and video data
in real-time mode to detect people's
faces and run them against multi-
million databases. The company's
technological partners are Intel, Cisco,
Facebook and Google.
Segmento - Russia's biggest
programmatic platform, which uses
machine learning technologies for
targeting digital ads. Segmento uses
anonymised data of about 84m
customers of Sberbank and knowledge
about their online behaviour for real-
time communications on all types
of devices. Its solutions enable large
businesses to interact with potential
customers in any channel and to boost
their sales.
Luden.io develops instructive games
with a scientific component based
on VR technologies. The best known
games are InMind and InCell, devoted
to studying biology while playing. The
company was set up by one of Russia's
oldest game developers, Nival.
Continue
60
ANNUAL
REPORT
2016
Funds
Sistema Venture Capital is
a corporate venture fund of
Sistema, focused on investing
in Internet companies at the
growth stage. Sistema owns
100% of the fund. (1)
RUB
10 bn
Target fund size
Fund's life: Indefinite
Investment focus:
Cognitive technology, web projects
in the sphere of communitainment,
VR/AR (visual/augmented reality)
projects, new generation networks
(SDN, NFV).
Investment criteria:
Global technology, focus
on mobile devices for B2C
products;
proven business model
or MVP demonstrating
operating income;
a strong team with
technological and industry
expertise, founders remain
in charge of operations.
(1) As of 31 March 2017 Sistema’s stake is 80%.
61
SISTEMA VENTURE CAPITAL
Continue
YouDo.com - Russia's biggest online
service connecting customers with
service providers for performing
household errands and business
tasks. A user can publish a task
on the YouDo.com website or in a
mobile app (available for iOS and
Android), set the price and select a
provider among those who respond
to the announcement. All providers
are checked by the service and are
assessed by users, which guarantees
the high quality of their work. The
project is a winner of a grant from
Start Fellows, Runet and Golden
Website awards, semifinalist of the
Forbes' startup competition, and one
of Russia's top 50 startups according
to PricewaterhouseCoopers and Digital
October.
Ozon - one of the biggest players in the
Russian e-commerce segment, growing
by 20%-30% per annum. The company's
strategy is aimed at accelerating growth
and building a significant market
share to support a subsequent IPO.
Ozon has some unique competitive
advantages: its business model (an
online supermarket with an extremely
broad product mix; its own chain of
warehouses and distribution centres,
which allows for quick delivery); a
strong brand, sufficient funds to
implement its strategy; transparency
and qualified investors/shareholders
who are known to the market.
Sistema Rusnano Capital is
a joint private equity fund
established by Sistema and
the state-owned corporation
Rusnano in August 2016 on
a 50/50 basis.
USD100 bn
Target fund size
Fund's life: 7 years (with a possibility
of a 3-year extension)
SISTEMA RUSNANO CAPITAL
Performance in 2016
The fund was established in August
2016. A professional team with a track
record in the venture capital industry
was hired. A total of 120 projects were
reviewed by the end of 2016.
Investment focus:
Investment criteria:
The average ticket is USD 5-20m;
allowed targets: companies at the
growth stage or at the late venture
stage with a working product (the
latter may not take up more than 20%
of the portfolio).
Technology, microelectronics,
automated control systems, special
communications systems, software
for comprehensive security systems,
robotics and on-board control
systems, energy and energy efficiency.
Geographically, the fund is focused
on Russia, the European Union and
Israel; 50% of investment will go to
"Russia-related companies" that use
nanotechnology.
Assets 62
ANNUAL
REPORT
2016
www.sistema.com
Sistema Capital Partners
(SCP) is an investment arm of
Sistema, which invests Russian
institutional capital in developed
real estate markets in Europe and
the United States. The company
was established in December
2015 and comprises leading
professionals from the Russian
and international real estate
market.
EUR446 mln
Fund size (AUM)
EUR208 mln
Fund size
(capital invested by Sistema
and co-investors)
Fund's life: Indefinite
Investment focus:
Real estate
Investment criteria:
Real estate in countries with a stable
macroeconomic situation, high
market liquidity (annual amount
of transactions in the market) and
competitive cost of debt. Sistema
acts as an anchor investor, attracting
Russian co-investors.
SISTEMA CAPITAL PARTNERS
SCP also offers legal support
for transactions and asset
management for Western
institutional investors looking at
Russian commercial real estate.
SCP manages the publicly traded
Luxembourg fund Arista SICAV-
SIF.
Performance in 2016
In the reporting period, SCP set up a
joint venture with the German company
Corestate AG and successfully closed
three acquisitions of retail real estate
portfolios in Germany for a total
amount of EUR 332mln.
Investments
High Street IV - 25 high-street retail
properties in secondary cities in
Germany, acquired in 2015-2016. Gross
lease area: 57,700 sq m. Tenants: C&A,
Saturn, H&M, Peek & Cloppenburg.
Portfolio strategy: creating added value
through proactive asset management
(renting out vacant areas, repositioning,
capital improvements).
High Street Prime I - 4 high-street
retail properties in secondary cities in
Germany, acquired in 2016. Gross lease
area: 60,000 sq m. Tenants: Saturn,
H&M, Esprit, United Cinemas, Modehaus
Fischer, Cierpinski Sport. Portfolio
strategy: creating added value through
proactive asset management (renting
out vacant areas, repositioning, capital
improvements).
High Street Prime II - 2 high-street
retail properties in secondary cities in
Germany, acquired in 2016. Gross lease
area: 37,000 sq m. Tenants: Saturn,
TK Maxx, Mc Fit, Holmes Place, Apcoa.
Portfolio strategy: creating added value
through proactive asset management
(renting out vacant areas, repositioning,
capital improvements).
Arista – a Luxembourg real estate
fund managed by Sistema Capital
Partners. The fund manages 3
commercial properties (2 shopping
malls and an office building) with a
total area of 34,700 sq m, situated in
Moscow and the Moscow region. The
fund's shareholders are Scandinavian
institutional investors. Shopping mall
tenants: Perekrestok, Adidas, Levi’s,
l’Occitane, KFC, McDonald’s, KFC. Office
tenants: Volvo, SC Johnson, Yokohama.
Portfolio strategy: creating added value
through proactive asset management
(optimising rent payments, re-signing
lease agreements and renting out
vacant areas, cutting costs, refinancing).
63
Sistema Asia Fund Pte. Ltd. -
is a venture fund of Sistema.
USD50 mln
Fund size
Fund's life: Indefinite.
SISTEMA ASIA FUND
The fund was established in
Singapore and invests in high-
tech companies in India and
Southeast Asia that work in
the B2C and B2B segments and
have a professional team, stable
sources of revenue and potential
to go global. Sistema owns 100%
of the fund.
Investment focus:
Performance in 2016
High-tech companies in India and
Southeast Asia at the medium
development stage (Series B and
later investment rounds), oriented
towards mass and corporate markets.
Investment criteria:
An enthusiastic, persistent and
goal-oriented team with tech and
industry expertise, founders with
complementary skills, founders
remain in charge of operations;
The market size should be minimum
USD 1bn today or within three years;
Established industry leaders
or companies moving towards
leadership;
Positive economic performance with
a large safety margin (high gross
margin);
Clear and transparent strategy
for reaching investment breakeven;
Confidence about exit/obtaining
liquidity through strategic sale
or IPO.
In 2016, the fund concentrated on the
Indian market; it plans to enter the
Southeast Asian market in 2017, but
will retain its investment focus on
India. The fund's offices are situated in
Singapore and New Delhi.
In 2016, Sistema Asia Fund became a
noticeable player on the Indian venture
capital market, closing 4 deals with
such renowned international investors
as Accel Partners, Amazon, Mayfield,
and with Indian A league funds such as
Helion Ventures, and Ventureast.
Investments
Seclore — the EDRM (Enterprise Digital
Rights Management) system developed
by the company allows corporations
to control use of files within and
outside the company. It has more than
5m users from 600 companies in 29
countries. Advanced and reliable EDRM
solutions and innovations related to
access to protected documents via
browsers gained Seclore an award for
successful growth from Frost & Sullivan,
resulted in its inclusion in the top 50
fast-growing tech companies according
to Deloitte and brought it the Cool
Vendor title from Gartner. The company
has representative offices in the United
States, India, the Netherlands, UAE,
Saudi Arabia and Singapore.
Qwikcilver – a supplier of corporate
cloud software in the segment of gift
cards and loyalty programmes. The
company's product enables customers
to use pre-paid physical and virtual gift
cards at over 10,000 premium branded
stores, on e-commerce portals and in
mobile apps. Qwikcilver has a licence
from the Reserve Bank of India for
using prepaid payment instruments.
At the end of the financial year 2016,
the company reached a stable positive
net income with a gross merchandise
value of about USD 300m, and is set to
continue doubling its results every year.
Wooplr – a female fashion mobile
platform. The company has developed
a mobile shopping application with
customised offers for users. Wooplr
redefines web communication and
sales of women's clothing, using a
very scalable platform with a viral
approach. The female fashion segment
of the Indian Internet is so far under-
developed, but it is growing at an
extremely rapid pace. According to
some estimates, this market will
amount to USD 20bn by 2020, with
fast fashion accounting for 50% of
it. Wooplr has created an integrated
platform that brought together 200
brands, 10,000 opinion leaders and 3m
female customers.
Licious – a company building India's
first national brand in online meat
sales. The company manages the entire
value creation chain from sourcing
suppliers and meat processing to
delivery of meat products using a cold
chain with controlled temperatures
to ensure superior quality for end
consumers. Licious estimates the
Indian market of fresh meat and meat
products at USD 7bn annually.
Assets 64
Risks
Sistema may face a variety
SISTEMA’S ERM SYSTEM
EXTERNAL RISKS
of risks in the course of its
business operations. They
result from processes and
factors that Sistema has
little or no influence on.
That said, the Corporation
can take measures
to reduce negative
consequences of such
factors in case a certain risk
occurs. This makes efficient
assessment of existing
risks and probability of
their occurrence and their
efficient management
an important part of
Sistema’s strategy.
As part of quarterly ERM procedures,
Sistema’s risk managers compile
separate risk registers for subsidiaries
and a consolidated risk register for the
Group, prioritise risks and aggregate
them into portfolios, develop a risk
map and analyse its key trends, analyse
the impact that material risks have on
the financial performance of specific
subsidiaries and Sistema Group as a
whole using simulation and financial
modelling methods.
To address the risks listed in the risk
register of Sistema Group, the company
has developed risk management
(mitigation) and response plans
covering specific mitigation measures
to be taken. These plans are modified,
adjusted and then approved by
Sistema’s Risk Subcommittee.
Risk management reports are
submitted for review to the 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
potential risk areas (areas requiring
attention) identified for future periods.
The Corporation has introduced
an integrated enterprise risk
management (ERM) system
based on international standards,
recommendations and practices of
risk management designed to provide
a reasonable guarantee that the
strategic goals will be achieved and to
ensure that risks will be kept at a level
acceptable to the shareholders and the
management of the Corporation.
Risks related to changes in the political
and economic situation in Russia
are material to Sistema, because
most of the Corporation’s business is
conducted in the Russian Federation.
Additionally, many of its subsidiaries
operate in transitional economies,
including Ukraine, Armenia, Belarus,
Turkmenistan and India, and therefore
are also exposed to material external
risks. A significant portion of products
produced by the Group’s companies is
sold in the CIS, Southeast Asia, Eastern
Europe and North Africa. In case of any
major political turmoil in these regions,
the Group’s business in the regions
may be discontinued or put on hold,
which may lead to material losses.
Financial risks
Sistema’s business is inextricably
connected to the state of the global
economy and financial markets. In
particular, it is sensitive to movements
in prices of oil, gas, and other
commodities that Russia exports.
Weakening of the rouble against the US
dollar and euro amid a slump in the oil
prices, sanctions, and increased capital
flight from Russia may result in a rise
in costs and a decrease in revenues, or
impede the achievement of financial
targets and repayment of debt by
Sistema subsidiaries.
Any potential downturn or slowdown
in Russia’s economic growth can lead
to a decrease in household incomes
and consumer demand, which could
have significant negative consequences
for the results of operations and
the financial position of all Sistema
companies.
ANNUAL REPORT 2016www.sistema.com 65
Political and social risks
Legal risks
The significant influence of geopolitical
risks on the Corporation and its
portfolio companies has persisted over
the reporting year as protectionism and
economic sanctions are increasingly
being used as tools for achieving
geopolitical goals.
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 on the
Group’s business. This risk is caused by
numerous factors, including:
The risks of inter-state conflicts remain
substantial, both in terms of probability
and in terms of potential effect on
various areas of Sistema’s activities. For
example, insurance companies may set
higher insurance premiums for Sistema
or refuse to insure against specific
risks, which may lead to worsening
financial performance.
Introduction of sanctions against
Russia or Russian companies may
result in disruptions in international
payment systems, which in turn
may prevent the Corporation and its
portfolio companies from making
settlements and thereby reduce
Sistema’s investment appeal.
possible discrepancies and
ambiguities in: (i) federal and
other laws; (ii) bylaws issued by
executive authorities of the states
where Sistema Group operates;
(iii) regional and local laws, rules
and requirements;
gaps in legislation and lack
of court and administrative
guidelines to the interpretation
of some laws, as well as conflicts
between certain court guidelines
and rulings;
influence of political, social and
other external factors on the
judicial system;
A potential rise in social unrest in
regions where the Corporation operates
may threaten its profits.
x
potential selective or arbitrary
administrative decisions of
government authorities.
The most pressing risks for Group’s
telecommunications business are
geopolitical risks associated with
a deterioration in the situation in
Ukraine. The political crisis in Ukraine
has led to a significant decrease in the
growth rates of the telecommunications
market, and continues to adversely
affect the exchange rate of the national
currency.
Gaps in the corporate and securities
legislation and regulations in the
markets where Sistema operates may
create barriers to raising funds and
impair the company’s ability to manage,
own and oversee the activities of
portfolio companies.
The exit of foreign investors from
Russia, the downgrading of the
sovereign credit rating by international
rating agencies as well as restrictions
introduced for foreign companies in
Russia as a result of sanctions may
have a negative impact on Sistema’s
joint ventures (partnerships) and new
investment projects.
Growing inflation may result in higher
expenses and therefore put pressure
on profit margins, and also affect
domestic demand for products and
services offered by Sistema companies.
If sanctions are maintained and
Russian banks’ and businesses’
access to foreign debt capital remains
restricted in the medium term, this
may significantly increase the current
liquidity deficit in the market and
result in further interest rate increases,
making it difficult for Sistema to raise
funding for its operations and to
refinance the debt of the Corporation
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 the assets.
Currency controls and restrictions on
capital repatriation may adversely
affect Sistema’s business by posing
barriers to capital flows and reduce the
value of Sistema’s investment in Russia.
Potential bankruptcy of one or several
Russian or foreign banks due to
restricted access to financing may
result in a reduction in sources of
borrowing for the Corporation and
portfolio companies and may lead to
direct losses of funds deposited in the
accounts of such banks.
Risks
66
In view of these circumstances,
Sistema’s access to investor funding
through securities markets may be
restricted further in the event of
the imposition of sectoral sanctions
against Russian companies in business
segments where Sistema operates and/
or due to investors taking a cautious
approach to Russian companies in
general. In particular, Sistema’s ability
to raise funding via bond issues may
be limited, which is likely to lead to
a lack of working capital and cash
available for investment and affect the
Corporation’s financial performance.
RISKS RELATED TO SISTEMA’S
ACTIVITIES
Implementation
of the business strategy
The Corporation’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. Despite having a
well-formulated strategy, Sistema
cannot guarantee full or partial
achievement of its established goals,
efficient management of the portfolio
companies, or benefits from new
investment opportunities. Sistema’s
failure to achieve goals set in the
strategy may undermine its financial
results.
Taxation
Tax laws, regulations, and practices
of the jurisdictions where Sistema’s
assets operate are intricate, opaque
and prone to frequent modifications
and ambiguous interpretations. If the
Corporation’s actions are interpreted
as breach of tax law, this may produce
an adverse effect on the business of
Sistema Group.
Russian law on transfer pricing
may make it necessary to introduce
adjustments to price-setting practices
used at Sistema Group’s companies
and result in additional tax liabilities
related to some transactions.
On 1 January 2015, the rules were
introduced relating to the taxation
of undistributed profits of controlled
foreign companies, the concept of a
beneficiary owner and criteria to be
used to establish tax residency of legal
entities. Throughout 2015-2016, these
rules were revised several times, with
all the amendments having retroactive
effect. As a result of the need to
apply taxation rules, the Group’s
companies may face new tax liabilities
arising due to the uncertainty around
interpretation of tax law and lack of
relevant precedents.
Securities markets
A deterioration of the geopolitical
environment, 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 2014-2016.
Lack of clarity about 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 the regulations of
the Customs Union of Russia, Belarus
and Kazakhstan may have a negative
impact on Sistema’s business due
to the fact that the Corporation has
foreign shareholders.
There is a risk of amendments to the
laws of the countries where Sistema
companies operate, due to potential
changes in the laws and regulations
governing international trade and
investments that may be introduced
by foreign states or international
organisations. For instance, Russia’s
accession to the World Trade
Organization may result in certain
unpredictable legislative and other
changes in the markets in which
Sistema’s companies operate.
Since Russian corporate law provides
for liability of shareholders for the
obligations of its 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 the Company’s transactions,
which may limit Sistema’s capability to
complete investment transactions and
restructure businesses.
If the Russian Federal Anti-Monopoly
Service concludes that Sistema or
one of its material subsidiaries has
violated any of the existing anti-
monopoly laws, this may result in
serious administrative sanctions
involving losses for the Corporation.
The Federal Anti-Monopoly Service may
also prevent the Corporation and its
portfolio companies from closing and/
or delivering on certain transactions,
which may also limit Sistema’s capacity
to do investment deals and restructure
businesses.
ANNUAL REPORT 2016www.sistema.com 67
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 Corporation’s
financial results.
Acquisition, integration,
disposal or restructuring
of assets
Sistema PJSFC 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.
Acquisitions of assets may increase
pressure on the 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 with building
an efficient system for managing and
controlling new assets. The top risks in
this area include:
inability to efficiently integrate
operating assets and personnel
of the acquired company;
Management and key
personnel
inability to establish and integrate
necessary control mechanisms,
including those related to logistics
and distribution;
conflicts between shareholders;
x
y
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 experience a
deterioration in financial performance.
When disposing of its assets the
Corporation 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;
x
loss of synergies with other assets
staying in the portfolio.
If one or several of the specified risks
materialise, the Corporation may lose
potential profit and thus see an impact
on its financial performance.
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 development
prospects.
Cash flows from subsidiaries
and affiliates
The Corporation’s financial
performance depends on the ability
of Sistema Group companies to
generate 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 financial position and liquidity of
the Corporation.
Overdependence on MTS
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 have a
negative impact on Sistema’s financials.
Any events damaging to the business
of MTS may also negatively influence
the current state of Sistema’s business
and its future prospects and worsen
financial figures.
Risks
68
Anti-corruption rules
The operations of Sistema and its
portfolio companies are regulated by
the anti-corruption laws of 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, UK Bribery Act or other
anti-corruption laws of the US, UK, or
other jurisdictions may affect Sistema’s
reputation, business, financial situation
and performance.
Competition
All business segments where Sistema
operates are open to competition.
Telecom, high-tech, banking, retail,
media, tourism, private healthcare,
pharma, property development, forestry
and agricultural markets in Russia
and elsewhere are highly competitive.
Any inability on the part of Sistema’s
companies to compete efficiently may
have a material negative impact on
Corporation’s business, performance,
financial situation or growth prospects.
Borrowings
Cash flows from portfolio companies
may be insufficient to absorb all of the
Corporation’s investments scheduled
for a particular time. This can make it
necessary to borrow funds and thus
slow down the implementation of
Sistema’s strategy.
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, sale of assets,
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. Breach of covenants,
however inadvertent, may entitle
creditors of the Corporation and/or
its portfolio companies to demand
early repayment of loans, which is a
threat to the Corporation’s financial
performance.
Licences and permits
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 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
can have material negative
consequences for Sistema’s business.
Privatised companies
Sistema’s portfolio contains several
privatised assets including MGTS, VAO
Intourist, BPGC, RTI, and several other
businesses in the technology and
agricultural sectors. Some of Sistema’s
subsidiaries own privatised assets. It
is also probable that the Corporation
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 of law (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 privatisation of
a company or an asset is contested
and Sistema or its portfolio company
is unable to defend its position in
the dispute, Sistema may lose its
ownership stakes 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 Corporation.
ANNUAL REPORT 2016www.sistema.com 69
y
Sistema’s companies should
maintain an impeccable business
reputation and avoid actions that
could undermine it;
z
Sistema’s companies should
maintain and improve their
external individual credit ratings
issued by international rating
agencies.
Brand quality and reputation
RISK APPETITE
Developing and maintaining brand
awareness for the Group’s companies
is crucial to shaping the public
opinion about their existing and
future products and services. Sistema
believes that company brand becomes
increasingly vital in highly competitive
markets. Successful development and
improvement of brand awareness
depends in large part on the efficiency of
marketing and ability to provide quality
products and services at competitive
prices. Effort and money spent on
brand development may prove greater
than incomes they yield, which means
potential financial losses for the Group
companies.
One of the key principles of risk
management in Sistema Group is the
use of risk appetite. This approach
implies identifying and monitoring of
the Corporation’s target risk profile in
accordance with its strategic goals and
in the context of their integration into
risk management procedures.
Sistema Group’s risk appetite
determines the level of risks acceptable
for the shareholders, and includes the
following basic provisions:
The amount of potential losses
under the risks accepted by
Sistema should not reach a level
leading to the termination of the
Group’s operations, including
under stressed conditions;
The structure of cash flows
of Sistema companies should
guarantee the timely fulfilment
of obligations to customers in the
short and long term;
In its operations, Sistema aims to
avoid an increased concentration
of risk by counterparties,
industries, and countries/regions;
x
Sistema’s companies must comply
with the requirements of national
regulators of their countries of
operation, and the standards and
recommendations of international
bodies;
Risks
70
ANNUAL
REPORT
2016
www.sistema.com
Corporate
Governance
system
General meeting of shareholders
Board of Directors
President
Management Board
Committees of the Board of Directors
Specific characteristics of risk management,
internal control and internal audit systems
Development of the corporate governance
system in 2016
Remuneration policy for board members
and senior management
74
76
86
87
88
89
92
94
ANNUAL REPORT 2016www.sistema.com Contents
71
72
Corporate governance system
In accordance with Russian law
and international best practice, the
Corporation’s Charter and internal
regulations underpin its corporate
governance principles and procedures,
as well as the composition, procedures
and powers of its governance and
control bodies.
Sistema’s Corporate Governance and
Ethics Code sets out the additional
commitments of the Corporation, its
senior management and employees
regarding social responsibility,
transparency and ethical business
principles.
In its corporate governance practices
Sistema abides by the Corporate
Governance Code recommended by
the Bank of Russia (Letter of the Bank
of Russia No. 06-52/2463,(1) dated April
10, 2014), the guidelines set out in the
UK Corporate Governance Code(2), and
Moscow Exchange’s Listing Rules.
High quality corporate
governance and
informational
transparency are key
principles underpinning
Sistema’s investment
strategy. The Corporation
aims to match the highest
international standards
of corporate governance
and informational
transparency, while
supporting effective
managerial decision-
making, to increase
Sistema’s long-term
appeal for investors.
CORPORATE GOVERNANCE
PRINCIPLES
Sistema’s corporate governance system
is based on the following principles:
x
transparency of management
processes for investors and
partners;
a predictable and progressive
dividend policy;
a professional Board of Directors
that is actually involved in strategic
planning, management and
supervision of business processes;
development of and compliance
with investment decision-making
procedures;
y
particular focus by the Board
of Directors on related-party
transactions and conflicts of
interest;
z
continuous development of
corporate governance at Sistema
Group companies.
Sistema is guided by these principles
in all of its activities, including strategic
and financial management, HR and
social policy, preparation of financial
statements, control and audit, and
risk management. These principles are
paving the way for strengthening the
Corporation’s investment case.
(1) Available here: http://www.cbr.ru/sbrfr_new/files/legislation/letters/2014/Inf_apr_1014.pdf
(2) Available here: https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-
Governance-Code-2014.pdf
ANNUAL REPORT 2016www.sistema.com
Sistema JSFC’s Corporate Governance Structure(1)
73
Approves portfolio
managers
Investment
portfolios
Corporate Secretary
GENERAL
MEETING OF
SHAREHOLDERS
COMMITTEES
OF THE BOARD
OF DIRECTORS
BOARD OF DIRECTORS
Chairman of the Board
Vladimir Evtushenkov
Appoints department head
Prepare recommendations
Internal control and audit
department
Finance and investment
committee
PRESIDENT
In accordance with its Charter, Sistema’s
key corporate governance bodies are
the: General Meeting of Shareholders;
Board of Directors; President;
Management Board.
Reports to (functionally)
Reports to (administratively)
Elects / appoints
Directs
(1) As of December 31, 2016
MANAGEMENT BOARD
Strategy Committee
Audit, Finance and Risk Committee
Nomination, Remuneration
and Corporate Governance
Committee
Ethics and Control Committee
Investor Relations and Dividend
Policy Committee
FUNCTIONAL COMPLEXES
Finance and investment function
Legal function
Corporate Governance function
Corporate communications
function
Strategy function
HR department
Corporate Governance 74
Shareholders can also attend general
meetings in person or participate
through a representative and vote on
agenda items directly at the meeting
(if the meeting is held with in-person
attendance).
Voting results from in-person meetings
are announced before the end of the
meeting, and are also made available
to shareholders on the Corporation’s
website one day after the meeting
minutes have been compiled.
Shareholders’ access to the
Corporation’s documentation
An important guarantee of
shareholders’ right to participate in
the running of the company is the
right to access documents that the
Corporation is obliged to keep by the
Federal Law on Joint-Stock Companies.
To exercise this right, shareholders
can send a written request to the
Corporate Secretary asking for access to
the documents they wish to see. After
the time for providing the documents
is agreed upon, the documents will
be provided to the shareholder.
Shareholders granted access to
confidential documents undertake
a written non-disclosure obligation,
in order to safeguard the rights of
all the Corporation’s shareholders.
Shareholders who require copies of
documents bear the Corporation’s costs
(RUB 10 per page).
GENERAL MEETING
OF SHAREHOLDERS
Principles of operation
In line with the Federal Law on Joint-
Stock Companies and Sistema’s Charter,
the General Meeting of Shareholders is
the Corporation’s supreme governance
body. Its activities and authority
are governed by Russian legislation
on joint-stock companies, the
Corporation’s Charter and the Terms
of Reference of the General Meeting
of Shareholders.
All materials for general meetings of
shareholders are made available to
shareholders in Russian and in English
and are published on Sistema’s website
www.sistema.ru
www.sistema.com
Shareholders are notified of
forthcoming meetings and are sent
ballot papers for voting. Over the past
four years (2013-2016) general meetings
of shareholders have been held at
Sistema’s head office.
Observance of shareholders’
rights
Participation in general meetings
of shareholders and voting on agenda
items
Sistema aims to fully guarantee
shareholders’ right to participate in
the running of the Corporation through
participating in general meetings of
shareholders and voting on agenda
items, as well as the right to receive
a share of profits as dividends.
To secure shareholders’ right to take
part in general meetings in accordance
with the Corporation’s Charter, a
notice of the general meeting of
shareholders and ballot papers are
circulated to all shareholders at
least 30 days before the meeting. All
materials for the meeting are made
available to shareholders in Russian
and in English and are published on
Sistema’s website (www.sistema.ru and
www.sistema.com). Notices of general
meetings of shareholders, ballot papers
and all other materials are also sent
to nominal shareholders in electronic
form.
Ballot papers may be completed by
shareholders in advance and mailed to
Sistema (to the address specified in the
ballot paper) before the meeting. Votes
of shareholders who cast their ballots
in this way will be counted during the
main vote count. Shareholders are
also allowed to vote in electronic form
(provided that their depositary offers
this service).
GDR holders may vote on agenda
items by proxy vote in accordance
with the established procedure via a
depositary bank servicing Sistema’s
GDR programme. In 2016, Sistema’s
depositary bank was Citibank, N.A. More
information on the depositary bank
and voting procedures is available
here: www.citiadr.idmanagedsolutions.
com. Votes of GDR holders for whom
the depositary bank holds information
are collected by the depositary bank
via clearing systems and are included
in the general ballot, along with all
votes cast for and against proposed
draft resolutions, as well as indicted
abstentions.
(1) Holders of 10 and more % of the Company’s voting shares also have the right to request that an Extraordinary General Meeting of shareholders (EGM) be convened.
(2) In the event an EGM is conducted with its agenda containing an item on election of the Board of Directors, holders of sufficient blocks of shares are entitled to
nominate candidates to the Board of Directors. Proposals to this effect must be received by the Company no later than 30 days before the date of such a meeting.
ANNUAL REPORT 2016www.sistema.com
75
Under the policy, the amount of
dividends payable was to be at least
10% of Sistema Group’s net income
generated during the previous
financial year to International Financial
Reporting Standards and at least 10%
of net cash income generated by the
Corporation’s investment transactions
over the same period (special
dividend).
In 2016, Sistema’s Board of Directors
approved a revised dividend policy. In
line with the new policy, total dividends
recommended for each reporting
year will be, at a minimum, the higher
of either an amount equivalent to
a dividend yield of at least 4%, or
RUB 0.67 per ordinary share. The
Corporation also set itself the goal of
paying dividends twice a year: for the
first half of a reporting year and for
a full reporting year. This approach
enables Sistema to pay predictable
dividends, ensuring transparency of the
procedure for determining the amount
of dividend payouts and strengthening
the Corporation’s investment case.
In accordance with the new Dividend
Policy, the Board of Directors in August
2016 recommended payment of an
interim dividend for the first half
of 2016.
Results of general meetings
of shareholders held on
25 June 2016:
Approved the annual report and
financial statements for 2015;
Distributed dividends for the full
year 2015 of RUB 6,465,500,000.00,
or RUB 0.67 per ordinary share;
Elected the Board of Directors
and Audit Review Commission;
x Approved the Corporation’s
external auditors;
y Approved the revised Charter
and Terms of Reference of the
Board of Directors.
RUB
3.7 bn
interim dividends
for the first half of 2016
79%
of votes were hold together
by attended shareholders
on AGM
Proposing agenda items for the
general meeting of shareholders,
and nominating candidates to the
Corporation’s governance bodies
Owners of significant stakes (at least
2% of Sistema’s authorised capital)
have the right to make proposals for
the agenda of the general meeting
of shareholders and to nominate
candidates to the Corporation’s
governance and control bodies(1).
Proposals for the agenda of the Annual
General Meeting of shareholders (AGM),
including any notes attached thereto in
accordance with the Terms of Reference
of the General Meeting of Shareholders
of Sistema PJSFC and other internal
regulations of the Corporation, are
accepted in writing within 100 days
after the end of the financial year(2).
Candidates nominated by shareholders
to governance and control bodies are
provisionally reviewed by the Board’s
Nomination, Remuneration and
Corporate Governance Committee.
Dividend policy
To ensure shareholders’ right to receive
a share of the Company’s profits in
the form of dividends, the Corporation
announces the amount of dividends
recommended by the Board of Directors
and the record date in advance. As a
result, shareholders are able to take
informed decisions with respect to
disposing of their shares.
To determine the recommended
amount of dividends payable for 2015(1),
the Board of Directors followed the
dividend policy approved in October
2011.
(1) Dividends for 2015 was paid in June 2016.
Corporate Governance 76
On 23 September 2016, an EGM
approved payment of RUB 3,667,000,000
in dividends, or RUB 0.38 per ordinary
share.
In April 2017, after the reporting period
was over, the Board of Directors of the
Corporation made new amendments
to the Dividend Policy providing for:
an increase in the total amount
of dividends for any reporting year
to an amount equivalent to an
annual dividend yield of at least
6% or RUB 1.19 per one share of
the Corporation;
payment of interim dividends
for 9 months of the reporting year.
The revised approach to distribution
of dividends allows the Corporation to
increase the amount of dividends paid,
thus increasing the shareholder returns
on the Corporation’s securities and
enhancing the investment appeal of
the Corporation.
A more detailed report on the amount
of allocated and paid dividends for the
period from 2010 to 2016 is provided in
Section Dividends of this annual report.
BOARD OF DIRECTORS
The Board of Directors is a collective
governance body in charge of oversight
and strategic management.
Under Sistema’s Charter the Board’s
responsibilities include:
supervising the operations
of the Corporation in general;
formulating strategic and
financial development plans;
determining investment
principles and criteria;
x assessing the performance
of the management team;
y setting the principles of
corporate governance;
z approving transactions in
accordance with applicable
legislation and the Corporation’s
internal regulations.
Composition of the Board of Directors
The Board of Directors effective as
of 31 December 2016 was elected at
the Company’s AGM on 25 June 2016.
Independent members of the Board
of Directors form a majority (55%).
Composition of the Board of Directors
from 1 January to 25 June 2016,
(elected on 27 June 2015)
54 %
31 %
15 %
Independent directors
Non-executive directors
Executive directors
Vladimir Evtushenkov
Chairman
Боев Сергей Федотович
Sergey Boev
Brian Dickie(1)
Andrey Dubovskov
Felix Evtushenkov
Dmitry Zubov
Patrick Clanwilliam(1)
Robert Kocharyan(2)
Jeannot Krecké(1)
Peter Mandelson(1)
Roger Munnings(1)
Mikhail Shamolin
David Iakobachvili(1)
(1) Independent directors meeting the independence
criteria of Moscow Exchange’s Listing Rules.
ANNUAL REPORT 2016www.sistema.com 77
2
4
6
8
10
1
3
5
7
9
11
Composition of the Board of Directors
from 25 June to 31 December 2016,
(elected on 25 June 2016) (3)
55 %
27 %
18 %
Independent directors
Non-executive directors
Executive directors
1.
2.
3.
4.
5.
Vladimir Evtushenkov
Chairman
Sergey Boev
Deputy Chairman
Andrey Dubovskov
Felix Evtushenkov
Patrick Clanwilliam(1)
6. Robert Kocharyan(2)
7.
Jeannot Krecké(1)
8. Peter Mandelson(1)
9. Roger Munnings(1)
10. Mikhail Shamolin
11. David Iakobachvili(1)
In 2015, the general meeting of
shareholders approved a reduction in
the number of Board members from 13
to 11. The main change from the 2015-
2016 corporate year is that Brian Dickie
and Dmitry Zubov left the Board.
Meetings of the Board of Directors
Board meetings are held regularly in
compliance with the adopted annual
Board work plan, which is developed
based on Sistema’s strategic planning
and reporting cycle.
In 2016, the Board of Directors of
Sistema PJSFC held 13 meetings: 8
scheduled in-person meetings and 5
unscheduled meetings in the form of
a letter ballot (an absentee vote). In
2016, the Company’s Board of Directors
considered 101 agenda items, an 11%
increase from the previous year:
Number of in-person
meetings
2016
2015
Number of absentee
votes
2016
2015
8
8
5
3
Number of items in accordance with
the Board’s work plan
2016
2015
43
40
Actual number of items reviewed
by the Board
2016
2015
101
91
(1) Independent directors meeting the independence criteria of Moscow Exchange’s Listing Rules.
(2) In accordance with Moscow Exchange’s Listing Rules the Corporation recognised Robert Kocharyan as independent.
Information on this decision was disclosed on Sistema’s website.
Corporate Governance 78
Over the reporting period the Board
of Directors considered the following
key items:
Sistema’s development strategy.
Sistema’s asset portfolio structure.
Sistema Group’s strategic planning
cycle.
x
Sistema’s investment policy and
priority investment areas in 2016-
2017.
y
z
{
|
}
Development strategy, value
creation and monetisation strategy
of key portfolio assets in the
following sectors:
telecom;
consumer (retail) including
e-commerce;
agricultural;
pulp and paper;
banking;
high-tech;
real estate and development;
healthcare;
pharmaceuticals;
power grids;
hotels.
Sistema’s results and performance
against budget.
Budget planning, approval of
Sistema’s consolidated budget
management KPIs for 2017.
Functional strategies (for financial
management and financial
planning, investor relations etc).
Placement of securities
(registration-exempt bonds).
10
11
12
13
14
15
16
17
18
Risk and opportunity management.
Report of the Internal Control and
Audit Department.
HR issues, HR management and
personnel motivation.
Assessment of corporate
governance including the self-
assessment results of the Board
and its committees.
Sistema’s corporate social
responsibility.
Mandatory corporate procedures,
including convening the AGM and
developing the Board’s work plan.
Composition of Board Committees
and determining the status of
Board members.
Approval of internal regulations.
Approval of transactions, including
acquisition of equity stakes.
Most agenda items at Board meetings
in 2016 related to strategies of
the Corporation and its portfolio
companies, approval of transactions
(including equity holdings in Sistema
Group companies) and corporate
governance. The Board of Directors
focuses on considering new investment
projects and building a portfolio
strategy, including asset monetisation.
In 2016 the number of items related to
business strategies and investments
increased by 25% from 2015.
Preparation for Board meetings
and attendance rates
Procedures for Board meetings aim to
use the time and experience of Board
members efficiently, to enable them to
take important decisions affecting the
Corporation’s strategic development.
Agenda materials are made available
via the Board’s electronic portal at
least 10 days before each meeting, to
give members enough time to form an
informed opinion on all agenda items.
Most agenda items (including approval
of transactions) undergo a mandatory
preliminary review at meetings of the
Board’s Committees.
Board members meet with speakers on
the agenda items and the Corporation’s
management at a business dinner the
evening before each meeting, where
they can get clarifications on all agenda
matters.
Board meetings usually have a
high attendance rate. The average
attendance in 2016 was 96%.
96%
the average attendance
in 2016
ANNUAL REPORT 2016www.sistema.com
79
Matters considered by the
Board of Directors in 2016
Business strategies, investments,
new businesses
Appointments
and HR policy
1 %
6 %
7 %
7 %
11 %
17 %
2016
2015
Approval of
transactions
2016
2015
32 %
19 %
33
26
2016
2015
Financial reporting,
planning and audit
19
25
2016
2015
Business strategies, investments, new
businesses
Shareholdings and
participation in groups
Functional
strategies
Approval of transactions
Shareholdings and participation in groups
Corporate governance and securities
Appointments and HR policy
Financial reporting, planning and audit
Functional strategies
Approval of internal documents
2016
2015
17
10
2016
2015
Corporate governance
and securities
Approval of internal
documents
2016
2015
11
10
2016
2015
7
6
7
6
6
5
1
3
Participation of Board members in meetings of the Board of Directors and its Committees in 2016
Board of Directors
Strategy Committee
Audit, Finance and
Risk Committee
Nomination,
Remuneration
and Corporate
Governance
Ethics and Control
Committee
Investor Relations
and Dividend Policy
Committee
V. Evtushenkov
12/13(1)
S. Boev
B. Dickie(2)
A. Dubovskov
F. Evtushenkov
D. Zubov(2)
P. Clanwilliam
R. Kocharyan
J. Krecké
P. Mandelson
R. Munnings
M. Shamolin
D. Iakobachvili
13/13
6/6
13/13
12/13
6/6
13/13
13/13
13/13
11/13
13/13
13/13
12/13
12/12
6/12
–
10/12
2/12
-
-
6/12
-
-
-
12/12
5/12
-
6/7
-
-
-
-
6/6
-
12/13
4/7
13/13
-
12/13
-
3/3
3/3
-
-
2/3
-
6/6
-
2/3
6/6
-
5/6
-
6/7
3/4
-
3/7
-
-
7/7
-
1/3
7/7
-
-
-
-
-
-
-
-
7/7
-
7/7
-
7/7
0/7
7/7
(1) The first number denotes the number of meetings attended by the Board member, the second number stands for the total number of meetings the member could
have participated in.
(2) Member of Sistema’s Board of Directors until 25 June 2016.
Corporate Governance
80
COMMITTEES OF THE BOARD
OF DIRECTORS
Sistema PJSFC has five committees
of the Board of Directors:
Strategy Committee;
Audit, Finance and Risk
Committee;
Nomination, Remuneration
and Corporate Governance
Committee;
Ethics and Control Committee;
Investor Relations and
Dividend Policy Committee;
The main role of the Committees is
to provide assistance to the Board in
preparation and adoption of decisions
in specific functional areas, as well as
to ensure in-depth review of matters
before they are brought forward for
consideration by the Board of Directors.
Meetings of the Committees (except
the Strategy Committee) usually take
place on the day preceding a full Board
meeting.
The Committees of the Board
of Directors have broad
procedural powers,
and have the right (within their remit)
to engage independent external experts
and to obtain all necessary information
from the executive management of the
Corporation, to use other resources of
the Corporation, and to set tasks for the
management of the Corporation.
Functions of the Board Committees
• analysis of strategic issues related to Sistema Group management ;
• eview of strategic planning methodology;
• consideration of M&A transactions and large investment projects.
• preparation and audit of the Corporation’s financial statements;
•
interaction with the Corporation’s external auditors;
• assessment of the risk management system and compliance with the applicable legal requirements
for financial reporting, audit and planning;
• preliminary appraisal of transactions submitted to the Board of Directors.
• preliminary review of candidates: (a) for the Board of Directors of Sistema PJSFC; (b) for the Boards of Directors
of portfolio companies; (с) for top management positions at the Corporation and its portfolio companies;
(d)for the position of the Corporation’s Corporate Secretary;
• development of the Corporation’s incentive and remuneration policies;
•
improving the corporate governance systems of the Corporation and its portfolio companies, safeguarding
shareholders’ interests and rights.
• corporate security;
• monitoring compliance with the requirements of the Corporation’s Code of Ethics;
• corruption prevention system at the companies that make up Sistema PJSFC.
• maintaining effective relations with the financial community and government agencies, strengthening
Sistema’s investment case;
• developing Sistema’s dividend policy, including the development of recommendations for the Corporation’s
Board of Directors with respect to the amount of dividends to be paid;
• protection of the rights and interests of Sistema’s shareholders.
ANNUAL REPORT 2016www.sistema.com
81
Strategy Committee
The Strategy Committee is an advisory
body of the Board of Directors and
is responsible for the mandatory
preliminary review of: all Sistema Group
merger and acquisition projects with
a value exceeding $100m; all Sistema
Group projects related to entering new
regions or industries, all Sistema Group
projects with significant government
participation.
The status, appointment procedures,
powers and decision-making processes
of the Strategy Committee are regulated
by the Terms of Reference of the
Strategy Committee.
At its meetings, the Strategy Committee
also considered matters related to the
development of Sistema assets that
were undergoing strategic reviews. The
Committee also reviewed Sistema’s
possible participation in investment
funds.
Share of independent directos
in Committee
Membership of the Strategy Committee
55 %
27 %
18 %
Management
(including executive directors)
Non-executive director
Independent director
12
meetings
Strategy Committee held in 2016
and reviewed matters related to the
development of Sistema’s portfolio
companies and considered one item
concerning the Corporation’s strategy
Name of Committee
Member
V. Evtushenkov
(Committee Chairman)
S. Boev
A. Dubovskov
F. Evtushenkov
Position held
Chairman of the Board of Directors of Sistema PJSFC
Deputy Chairman of the Board of Directors
of Sistema PJSFC
Management Board member of MTS, member
of Sistema’s Board of Directors
First Vice President of Sistema PJSFC, member of the
Board of Directors of Sistema PJSFC
A. Zassoursky
Head of the Strategy Function of Sistema PJSFC
R. Kocharyan
Member of the Board of Directors of Sistema PJSFC
V. Latsanich
Vice President for Strategy at MTS
O. Mubarakshin
Management Board member, Head of the Legal
Function of Sistema PJSFC
V. Chirakhov
CEO of Detsky Mir
M. Shamolin
President, member of the Board of Directors
of Sistema PJSFC
D. Iakobachvili
Member of the Board of Directors of Sistema PJSFC
Corporate Governance 82
The procedures for nominating
members, the responsibilities and
decision-making processes of the
Audit, Finance and Risk Committee are
regulated by the Committee’s Terms
of Reference adopted by the Board of
Directors on 13 December 2014.
In 2016, the Audit, Finance and Risk
Committee held 13 meetings, at which
the committee members:
conducted an appraisal of the
auditor’s services and issued
recommendations for the Board of
Directors on appointing an external
auditor;
reviewed and approved Sistema’s
quarterly and annual financial
reports, the annual report, the
annual budget and and the report
on performance against the
Corporation’s budget.
Audit, Finance and Risk
Committee
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 with respect to
selecting RAS and IFRS auditors for
the company. Based on the opinion
formed by the Committee, the Board
of Directors gives recommendations to
the general meeting of shareholders
on appointment of the Corporation’s
external auditor.
Share of independent directos
in Committee
Composition of the Audit, Finance and Risk Committee
100 %
Independent director
Name of Committee
Member
Position held
R. Munnings
(Committee Chairman)
Member of the Board of Directors of Sistema PJSFC,
independent director
P. Clanwilliam
J. Krecké
D. Iakobachvili
Member of the Board of Directors of Sistema PJSFC,
independent director
Member of the Board of Directors of Sistema PJSFC,
independent director
Member of the Board of Directors of Sistema PJSFC,
independent director
13
meetings
Audit, Finance and Risk Committee
held in 2016
In 2016, an internal assessment of
the Committee’s performance was
conducted for the first time. Based
on the assessment results, potential
areas for improvement were identified:
the risk management system and
tax administration. The Committee
members also highly approved
of the effectiveness of the internal
and external audit systems of the
Corporation. The total score of the
Committee’s performance on a three-
point scale was 2.27.
ANNUAL REPORT 2016www.sistema.com
83
Nomination, Remuneration
and Corporate Governance
Committee
The purpose of the Committee is
to facilitate the preparation and
implementation of the Corporation’s
HR policy and support and develop an
efficient corporate governance system
that meets international standards and
help improve the quality of decision-
making by the Corporation. The
Committee conducts regular monitoring
of Sistema Group’s potential HR needs
and succession pool.
The Committee operates in accordance
with the Terms of Reference of the
Nomination, Remuneration and
Corporate Governance Committee
adopted by the Board of Directors
on 13 December 2014 and amended
on 29 October 2016.
.
Share of independent directos
in Committee
60 %
20 %
20 %
Independent director
Management
Non-executive director
Composition of the Nomination, Remuneration and Corporate Governance Committee
Name of Committee
Member
Position held
R. Kocharyan
(Committee Chairman)
Member of the Board of Directors of Sistema PJSFC,
independent director
S. Boev
Member of the Board of Directors of Sistema PJSFC
P. Mandelson
R. Munnings
D. Iakobachvili
Member of the Board of Directors of Sistema PJSFC,
independent director
Member of the Board of Directors of Sistema PJSFC,
independent director
Member of the Board of Directors of Sistema PJSFC,
independent director
Board of Directors that are in need
of improvement. The Committee
uses the results of self-assessment
to make an annual plan aimed at
developing Sistema’s corporate
governance systems, which is then
submitted to the Board of Directors
for approval.
6
meetings
Nomination, Remuneration and
Corporate Governance Committee
held in 2016
The President of Sistema PJSFC M.
Shamolin attends the Committee
meetings in the capacity of a
permanent invitee and does not vote
on matters submitted to the Committee
for consideration.
In 2016, the Nomination, Remuneration
and Corporate Governance Committee
held six meetings (including one joint
meeting with the Ethics and Control
Committee) and reviewed the following
items:
development of corporate
governance across Sistema Group;
incentive schemes, performance
assessments and remuneration
systems;
HR processes and preliminary
review of candidates for senior
management positions at Sistema
PJSFC and nominees for the boards
of directors and CEO positions at key
portfolio companies.
The Nomination, Remuneration
and Corporate Governance
Committee of Sistema PJSFC also
organises the self-assessment
procedure of the Board of
Directors. The assessment looks at
ten key criteria in order to identify
those areas in the work of the
Corporate Governance
84
Ethics and Control Committee
The Ethics and Internal Control
Committee serves the purpose
of forming an efficient system of
economic security, internal control
and prevention of fraud and other
potentially illegal misconduct. The
Committee abides by the Terms
of Reference of the Ethics and
Control Committee approved by the
Corporation’s Board of Directors.
In 2016, the Ethics and Control
Committee met seven times and
reviewed, inter alia, the following
matters:
x
results of an ethics assessment
at the Corporation;
methods of preventing and curbing
fraud and corruption at Sistema.
performance of the Internal
Control and Audit Department in
2015 and work plan for 2017;
a report on risk management
at Sistema;
Share of independent directos
in Committee
Composition of the Ethics and Control Committee
Name of Committee
Member
Position held
S. Boev
(Committee Chairman)
Deputy Chairman of the Board of Directors of Sistema
PJSFC
F. Evtushenkov
R. Kocharyan
P. Mandelson
R. Munnings
First Vice President of Sistema PJSFC, member of the
Board of Directors of Sistema PJSFC
Member of the Board of Directors of Sistema PJSFC,
independent director
Member of the Board of Directors of Sistema PJSFC,
independent director
Member of the Board of Directors of Sistema PJSFC,
independent director
60 %
20 %
20 %
Independent director
Management
Non-executive director
7
meetings
Ethics and Internal Control
Committee held in 2016
ANNUAL REPORT 2016www.sistema.com 85
Investor Relations and
Dividend Policy Committee
The Investor Relations and Dividend
Policy Committee aims to strengthen
the Corporation’s investment case; it
develops and maintains a transparent
and stable dividend policy; it supports
effective relations with the financial
community and government agencies.
The Committee abides by the Terms of
Reference of the Investor Relations and
Dividend Policy Committee approved by
the Board of Directors.
In 2016, seven meetings of the
Investor Relations and Dividend
Policy Committee were held, at which,
inter alia, the following matters were
considered:
items related to market analysis
and monitoring, the perception of
Sistema PJSFC by the investment
community and implementation
of measures to increase market
capitalisaion.
amendments to the Corporation’s
dividend policy;
.
corporate social responsibility
and the operations of the Sistema
Charitable Foundation;
Share of independent directos
in Committee
Composition of the Investor Relations and Dividend Policy Committee
Name of Committee
Member
Position held
80 %
20 %
D. Iakobachvili
(Committee Chairman)
Member of the Board of Directors of Sistema PJSFC,
independent director
P. Clanwilliam
J. Krecké
R. Munnings
M. Shamolin
Member of the Board of Directors of Sistema PJSFC,
independent director
Member of the Board of Directors of Sistema PJSFC,
independent director
Member of the Board of Directors of Sistema PJSFC,
independent director
President, member of the Board of Directors
of Sistema PJSFC
Independent director
Management
7
meetings
Investor Relations and Dividend
Policy Committee held in 2016
Corporate Governance 86
PRESIDENT
The President of Sistema PJSFC is
a permanent chief executive officer
whose main tasks include managing
the current operations of the
Corporation and dealing with matters
outside the remit of the General
Meeting of Shareholders, the Board
of Directors, and the Management
Board with the aim of ensuring
the Corporation’s profitability and
safeguarding the rights and legitimate
interests of its shareholders. The
President reports to the Board of
Directors and the General Meeting
of Shareholders of Sistema PJSFC.
Mikhail Shamolin has been Sistema’s
President since 10 March 2011. On 10
March 2017, the Board of Directors
re-appointed Mikhail Shamolin as
President of Sistema PJSFC for a three-
year term.
Mikhail Shamolin
President of Sistema PJSFC,Chairman of the Management Board.
Was born in Moscow in 1970.
Graduated from the Moscow Automobile and Road Technical Institute in 1992,
and from the Russian Presidential Academy of Public Administration in 1993.
In 1996–1997, completed a finance and management course for senior executives
at the Wharton School of Business.
In 1998–2004, worked for McKinsey&Co, an international consultancy firm.
In 2004–2005, Managing Director for Ferroalloys at Interpipe Corp (Ukraine).
in 2005–2011, Vice President for Sales and Customer Service, then Vice President,
Head of MTS Russia and President of MTS.
On 10 March 2011, appointed President of Sistema PJSFC. Sistema’s Board of
Directors reappointed Mr Shamolin as President and Management Board Chairman
for a new three-year term twice: on 15 March 2014 and on 10 March 2017.
Member of the Board of Trustees of Sistema Charitable Foundation.
ANNUAL REPORT 2016www.sistema.com 87
2
4
6
8
10
1
3
5
7
9
11
12
13
14
MANAGEMENT BOARD
Sistema’s Management Board
determines methods and means for
implementation of the Corporation’s
development strategy, formulates
development plans, determines
and monitors investment processes,
conducts assessment of personnel
performance, and reviews most of
the matters that are subsequently
submitted to the Corporation’s Board
of Directors.
In 2016, the Management Board
conducted 30 meetings and reviewed
82 agenda items in the following key
areas:
Preliminary review of the matters
to be submitted to the Board of
Directors, including:
x
y
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;
Sistema’s functional strategies;
performance against budgets
and budget planning;
Sistema’s corporate social
responsibility;
approval of specific deals;
Debt and liquidity management.
Risk management and preparation
of risk maps.
Participation in investment
projects.
Review of deals requiring no
approval from the Board of
Directors or the General Meeting
of Shareholders.
In September 2015, upon expiry of the
term of the previous Management
Board, Sistema’s Board of Directors
formed a new Management Board for
another three-year term. Sistema’s
current Management Board comprises
14 members.
Changes to Sistema’s Management
Board in 2016
In 2016, the Management Board went
through a number of changes:
N. Vasilkov
12 March 2016
Membership terminated.
A. Zassoursky
21 May 2016
Elected to the Management Board,
appointed Vice President, Head of the
Strategy Function of Sistema PJFSC.
After the reporting period, in 2017 the
following new members were elected to
the Management Board: A. Guryev (Vice
President, Head of HR Department)
and A. Sirazutdinov (Vice President,
Investment Portfolio Manager).
Members of the Management Board of
Sistema PJSFC as of 31 December 2016
1. Mikhail Shamolin
Chairman
Elena Vitchak(1)
Alexander Gorbunov
Felix Evtushenkov
Artyom Zassoursky
Valentin Korchunov(1)
Leonid Monosov
2.
3.
4.
5.
6.
7.
8. Oleg Mubarakshin
9.
Vsevolod Rozanov
10. Ali Uzdenov
11. Mikhail Cherny
12. Evgeny Chuikov
13. Sergey Shishkin
14. Vladimir Shukshin
(1) Upon completion of the reporting period in 2017 Elena
Vitchak and Valentin Korchunov left the Management
Board.
Corporate Governance
88
x
analysing the terms of external
financing for the Corporation and
portfolio companies.
The Committee consists of 10 members.
The Chairman of the Committee is
the Corporation’s President Mikhail
Shamolin, and the Deputy Chairman
is Senior Vice President, Head of the
Finance and Investment Function
Vsevolod Rozanov.
In 2016, the Committee met 60 times.
An Expert Council operates under the
Finance and Investment Committee
and considers all new investment ideas
of the Corporation for acquiring new
assets operating in new or multiple
industries, as well as in sectors where
Sistema already has a presence.
The Expert Council consists of 11
members: the Expert Council is chaired
by Vice President, Head of the Strategy
Function of Sistema PJSFC,
A. Zassoursky.
Tender Committee
The responsibilities of the Tender
Committee include:
x
organising tenders for goods,
works, and services;
ensuring acquisition of goods,
works, and services on the best
possible terms;
ensuring the transparency
of purchasing procedures;
facilitating prevention of
corruption and other wrongdoing
in the area of purchasing.
The Committee consists of 11 members.
The Chairman of the Committee
is Senior Vice President, Head of
Sistema’s Finance and Investment
Function V. Rozanov. The Deputy
Chairman is Executive Vice President
for Finance and Economic Affairs
A. Kamensky.
In 2016, the Expert Council met
15 times.
In 2016, the Tender Committee met
36 times.
The Finance and Investment Committee
also has a Risk Subcommittee
responsible for assessing the risks
facing Sistema and its subsidiaries and
for monitoring performance against risk
management action plans.
The Risk Subcommittee consists of
nine members. As of 31 December 2016,
the Subcommittee was chaired by
Sistema’s Managing Director for Risks
and Procurement N. Nosova.
In 2016, the Risk Subcommittee met
10 times.
HR Committee
The responsibilities of the HR
Committee include:
reviewing and making proposals
with regards to the HR policies
and internal regulations at the
Corporation and its portfolio
companies;
coordinating the activities
of HR units of the Corporation
and portfolio companies;
THE PRESIDENT’S
COMMITTEES
The following committees chaired
by the President contribute to the
improvement of managerial decision-
making:
Finance and Investment
Committee;
Tender Committee;
HR Committee;
Security Committee;
Internal Control Committee;
Disciplinary Committee.
The President’s Committees are
permanent consultative collective
bodies tasked with detailed analysis
of current affairs and processes within
their remit and with assisting the
President in decision-making.
Finance and Investment
Committee
The responsibilities of the Finance and
Investment Committee include:
review of all of the Corporation’s
investment projects and certain
projects of portfolio companies at
different stages from project idea
to completion;
approval of financial models,
business plans, and key
performance indicators of
investment projects;
making recommendations
regarding the feasibility of projects,
exit scenarios and sources of
financing;
ANNUAL REPORT 2016www.sistema.com
89
x
assessing candidates for senior
executive positions;
assessing the efficiency and
performance of the Corporation’s
employees.
The Committee consists of nine
members. The Chairman of the
Committee is the President of Sistema
PJSFC M. Shamolin.
In 2016, the Committee met 15 times.
Security Committee
The Security Committee reviews
matters related to implementation
of the adopted security policy across
Sistema Group.
The Committee consists of 32 members.
The Chairman of the Committee is
Vice President, Head of the Security
and IT Department of Sistema PJSFC V.
Shukshin.
In 2016, the Committee met four times.
Disciplinary Committee
The Disciplinary Committee reviews
matters pertaining to compliance
with labour law, internal regulations
and instructions of the company’s
governance bodies, and develops
recommendations on whether there
are reasons for imposing disciplinary
penalties on employees.
The Committee consists of six
members. The Chairman of the
Committee is the President of Sistema
PJSFC M. Shamolin.
In 2016, the Committee met six times.
SPECIFIC CHARACTERISTICS
OF RISK MANAGEMENT,
INTERNAL CONTROL AND
INTERNAL AUDIT SYSTEMS
Risk management
The Sistema PJSFC risk management
system uses a two-level approach
where risks identified in Sistema
and its portfolio companies are
consolidated to assess their impact on
Sistema Group as a whole.
The integrated risk management
system (ERM) used in the Corporation
addresses the following tasks:
identification of risks at all levels
of management (from top to line
management), which includes
identifying risk owners and
creating risk passports;
primary assessment of the
materiality of identified risks and
their analysis (VaR methodology);
ranging risks by management
levels;
x
assessment of the aggregate
influence of material risks on
the Corporation’s key financial
indicators (Monte Carlo modelling);
y
z
{
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
on risks facing the Corporation.
The risk management procedures of
Sistema PJSFC are carried out by a
dedicated risk management unit.
The Corporation’s risks are monitored
on a quarterly basis by Sistema’s
Management Board and Risk
Subcommittee, which 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 in
the Corporation to the Audit, Finance
and Risk Committee. The annual report
is submitted to the Board of Directors
of Sistema PJSFC.
Internal control system
In February 2015, the Board of
Directors approved the Policy on the
Internal Control System setting out
the key principles of internal control
and defining it as a continuous
integrated process involving all of
the Corporation’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 investment
projects of the Corporation;
ensuring safety of the
Corporation’s assets and efficient
use of its resources;
protecting the interests of the
Corporation’s shareholders and
preventing and resolving conflicts
of interest;
x
creating conditions for timely
preparation and submission
of reliable reports and other
information that is legally required
to be publicly disclosed;
y
ensuring the Corporation’s
compliance with applicable laws
and regulatory requirements.
Corporate Governance 90
In accordance with the “three lines of
defence” principle the efficiency of the
Corporation’s internal control system
is ensured at three levels (in addition
to the Board of Directors and the top
management of the Corporation):
All of the Corporation’s employees in
charge of various control procedures
bear responsibility for the efficiency
of such controls and risk management
activities as prescribed in their job
descriptions and internal regulations.
Level 1. Heads of subdivisions
and employees of the Corporation
are responsible for assessing and
managing risks and building an
efficient internal control system within
their remit;
Level 2. At this level the function is
performed by several subdivisions and
Committees of the Corporation. For
example:
the risk management function and
the risk committee are responsible
for developing and monitoring the
implementation of an effective risk
management practice;
the Finance and Investment
Committee of the Corporation
approves and monitors the
implementation of investment
projects;
the Discipline Committee reviews
matters related to breaches of
the Ethics Code and disciplinary
offences;
x
the Security and IT Department is
responsible, among other things,
for economic security, corruption
prevention and information
security.
Level 3. The Internal Control and Audit
Department conducts an independent
assessments of the efficiency of
the internal control system, the risk
management procedures, and the
corporate governance system.
Internal audit
The body in charge of internal control
at the Corporation and the companies
of Sistema Group is the Internal
Control and Audit Department that
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 the resolutions passed by the
Corporation’s Board of Directors
following preliminary approval by the
Board’s Ethics and Control Committee.
The main objectives of the Internal
Control and Audit Department are:
helping shareholders and the
management improve the internal
control system by performing
regular audits of efficiency of the
Corporation’s internal control,
risk management, and corporate
governance systems;
facilitating the attainment of the
Corporation’s strategic goals;
supplying the Corporation’s
management and shareholders
with objective information on the
existing internal risks and their
probability;
x
enhancing the awareness of the
Corporation’s management about
the performance of Sistema Group
companies;
y
monitoring achievement of the
goals of shareholders of the
Corporation and Sistema Group
companies.
To meet these objectives, the Internal
Control and Audit Department carries
out the following functions:
x
y
z
{
|
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 violations of the law
and the Corporation’s regulations,
ensuring observance of
professional and ethical standards,
and preparing recommendations
for improvement thereof;
developing recommendations to
remedy deficiencies identified and
monitoring remediation thereof;
examining and evaluating
documents provided with regards
to specific investment projects
for compliance with current
regulations; performing scheduled
and unscheduled monitoring
of performance against project
targets;
ensuring uninterrupted functioning
of the whistleblowing hotline;
administering investigations,
including internal ones;
ANNUAL REPORT 2016www.sistema.com
91
Resolution of conflicts of interest
External audit
In compliance with the decision of the
Audit, Finance and Risk Committee,
the Corporation uses the following
procedures to appoint the independent
auditors of the financial statements of
Sistema PJSFC. The Committee performs
annual assessments of the quality of
audit services received. If the quality
of services provided by the current
auditor is deemed insufficient, the
Audit Committee organises a tender
to hire a new auditor. If the quality is
deemed sufficient, Sistema negotiates
the price of services with the current
auditor for the following period.
According to the decision of the Audit,
Finance and Risk Committee, a tender
for external audit services should
be held at least every three years to
ensure the auditor’s impartiality and
objectivity.
In December 2015, the Board of
Directors of Sistema PJSFC approved
a revised Code of Ethics that provides
for an ethics assessment procedure:
the top managers of the Corporation
and Sistema Group’s subsidiaries are
now required to complete ethics and
conflict-of-interest declarations.
Before launching an ethics assessment
procedure Sistema conducted a
training course aimed at familiarising
employees with the revised Code of
Ethics and the procedure of completing
ethics declarations.
The results of ethics assessment
were reviewed by the President and
the Ethics and Control Committee of
Sistema’s Board of Directors. In most
cases the declared conflicts of interest
were not confirmed and did not require
any resolution measures. However,
action plans on conflict resolution were
implemented with respect to several
declarants in accordance with best
practice in corporate governance.
Ethics assessments make it possible
to identify and manage conflicts of
interests in a timely manner, thus
preventing shareholders’ interests from
being compromised.
}
10
monitoring compliance with the
Corporation’s internal regulations;
monitoring and investigating
instances potentially qualifying
as disciplinary offence and/
or violation of discipline and/
or conflict of interest in the
Corporation or Sistema Group
companies.
The Internal Control and Audit
Department interacts closely with the
independent auditors, coordinates
audits and offers consultations in
the course of preparation of the
Department’s annual audit plans
with regard to assessment of the
efficiency of internal controls applied
to financial statements, as well as
during discussions and assessment
of identified risks.
In 2016, the Internal Control and Audit
Department conducted 44 scheduled
and unscheduled audits to assess
the efficiency of internal control, risk
management and corporate governance
systems. The audits performed by the
Internal Control and Audit Department
did not uncover any weaknesses or
risks that could affect the sustainability
of the Corporation’s business.
Regular reports on the results of the
Internal Control and Audit Department
are reviewed by the Audit, Finance and
Risk Committee and Ethics and Control
Committee of the Board of Directors of
Sistema PJSFC, and are also submitted
for consideration by the Board of
Directors at the end of the year.
Corporate Governance
92
DEVELOPMENT OF THE
CORPORATE GOVERNANCE
SYSTEM IN 2016
Independent directors on the
Corporation’s Board
In 2016, 11 members were elected to the
Corporation’s Board of Directors, six of
which qualify as independent directors
or are recognised as independent
according to the rules of the Moscow
Exchange and the Russian Corporate
Governance Code.
The current Board includes the
following independent directors:
1.
Patrick Clanwilliam;
2. Robert Kocharyan;
3.
Jeannot Krecké;
4. Peter Mandelson;
5. Roger Munnings;
6. David Iakobachvili.
1
3
5
2
4
6
All of the Corporation’s independent
directors have vast experience
in managing large organisations
and possess strong professional
reputations. Independent directors
make up a majority on the Board,
which ensures the objectivity of
their judgements and freedom
from influence by the Corporation’s
management and shareholders when
making important decisions.
Dividend policy
In 2016, Sistema’s Board of Directors
approved a revised dividend policy. In
line with the new policy, total dividends
recommended for each reporting
year will be, at a minimum, the higher
of either an amount equivalent to
a dividend yield of at least 4%, or
RUB 0.67 per ordinary share. The
Corporation also set itself the goal of
paying dividends twice a year: for the
first half of a reporting year and for
a full reporting year. This approach
enables Sistema to pay predictable
dividends, ensuring transparency of the
procedure for determining the amount
of dividend payouts and strengthening
the Corporation’s investment case.
Top management co-investment
programme
In May 2016, the Board of Directors
approved a programme allowing
Sistema’s senior managers to co-
invest in subsidiaries and /or Sistema
PJSFC (hereinafter –”Co-investment
Programme”). The Co-investment
Programme aims to increase top
management’s motivation to boost
the Corporation’s capitalisation and
provides for additional incentives
linked to achievement of strong
financial results through originating
and implementing projects and
efficiently managing the Corporation’s
assets, including asset acquisition,
sale, restructuring, capitalisation
growth and increasing dividend flows.
More detailed information on the Co-
investment Programme is available in
Section 8 of this Annual Report.
Assessment of the work of the Board
of Directors
The most recent assessment of the
Board of Director’s work was performed
in May 2016. As a result of the analysis
of the Board’s performance the total
score on a 5-point scale was 4.16 (in
2015 the score was 4.02).
The Board of Directors’ performance
was assessed on the basis of
judgements made by the Board
members themselves.
As part of the assessment the Board
members completed questionnaires
containing the following sections:
1. membership and structure
of the Board of Directors;
2. procedures and organization
of the Board of Directors’ work;
3.
organisation of the work of the
Board’s Committees;
4. decisions of the Board of Directors
in the area of strategic planning;
5. decisions of the Board of Directors
in the area of finance, financial
reporting and risk management;
6. decisions of the Board of Directors
in the area of oversight over
executive management and
corporate governance
Moreover, each Board member was
requested to specify general strengths
and weaknesses of the Board of
Directors and indicate the projects and
functional areas to which this Board
member is capable of contributing. The
self-assessment results reflect the high
effectiveness of the Board of Directors
and its Committees.
In accordance with the assessment
results the action plan on improving
the corporate governance system for
2017 envisages increased involvement
of professional independent directors
in the analysis of investment projects
reviewed by the Board of Directors.
ANNUAL REPORT 2016www.sistema.com
93
1. Composition and structure of the Board
Number of members and
competences
Support from the
management
Committees
4.13
4.25
4.51
2. Organisation of the Board's work
Contents of
agendas,
planning
Preparation
procedure
Meeting
procedures
Quality of
documentation
4.22
4.21
4.15
4.25
3. Functional areas in the work of the Board
Strategic management
matters
Finance, finacial reports, and
internal control
Control over executive
management and corporate
governance
3.65
4.30
3.95
4.16
Total score
(on a 5-point scale)
The ISS assessment is based on four
components:
composition of the Board
of Directors
top management remuneration,
shareholders’ rights,
x
audit system.
To this end, in the autumn of 2016, the
Corporation introduced a procedure
for challenging reports on the items
included in the Board’s agenda. In
accordance with the procedure the
Chairman of the Board of Directors
appoints one or several independent
directors as opponents to ensure
thorough consideration of the
presented materials. The work of such
a group of opponents makes it possible
to ensure an in-depth and constructive
discussion of each matter reviewed at
the Board of Directors’ meeting.
Corporate governance ratings
In 2016, the Russian Institute of
Directors (RID) conducted a repeated
assessment of the corporate
governance practices of Sistema
PJSFC in accordance with the updated
methodology of the National Corporate
Governance Rating (NCGR). Sistema
scored 8 on the NCGR scale, denoting
“Advanced corporate governance
practice.”
RID assessed Sistema’s corporate
governance by four criteria, identifying
both strengths and areas in need of
further improvement:
shareholders’ rights,
activities of the governance and
control bodies,
disclosure of information,
x
corporate social responsibility and
sustainable development.
Institutional Shareholder Services (ISS)
agency, which specialises in giving
recommendations to shareholders
on voting at the general meetings of
issuers, assigned Sistema a governance
quality score of 1, implying the lowest
possible risk for investors.
Corporate Governance 94
REMUNERATION POLICY FOR BOARD MEMBERS AND SENIOR MANAGEMENT
Remuneration policy for
Sistema Board members
Remuneration for members of the
Board of Directors is calculated and
paid in accordance with the Policy
on Remuneration and Compensation
Payable to Members of the Board of
Directors of Sistema PJSFC(1).
Basic remuneration of Board members
Board members are paid RUB 13.7m
or RUB 17.8m per year, depending
on whether the director in question
is a tax resident of Russia. Basic
remuneration is paid to Board
members in cash in four equal
quarterly instalments.
Supplementary remuneration of Board
members
Board members are awarded
supplementary remuneration in the
form of ordinary shares of Sistema,
subject to investment targets for the
reporting year being achieved: (i) the
arithmetic mean of total shareholder
return (TSR) and internal total
shareholder return (iTSR) exceeds or
equals cost of equity (CoE)(2); or (ii) TSR
exceeds or equals the change of the
MSCI index (ΔMSCI), provided that iTSR
exceeds or equals CoE. The number
of ordinary shares awarded to Board
members is calculated as follows:
Remuneration in monetary terms
Weighted average price of one share
For the purpose of calculating bonuses,
cash income means the increase in the
value of an asset (in case of an asset
sale or IPO) or the amount of dividends
(in case of dividend payments), net of
the following:
hurdle rate determined by
the Corporation’s Finance and
Investment Committee before the
start of a project or the acquisition
of an asset;
investment in an asset and project
costs.
Long-term incentive system
In 2016, the long-term (more than
one year) incentive scheme for
senior managers formed part of a
three-year incentive programme
(2015-2017) designed to increase
Sistema’s shareholder value and create
additional incentives for maintaining
long-term employment and corporate
relations between the Corporation
and its management. Programme
participants are assigned a certain
number of shares that are transferred
to them in instalments in the form
of Sistema’s ordinary registered
shares when targets set by Sistema’s
shareholders are achieved. Share
transfers take place annually over the
course of five years from the launch of
the programme. The number of shares
allocated to a programme participant is
calculated using the following formula:
Participants total annual income
Weighted average price of one share
during the year
To calculate the number of shares to
be awarded to Board members, the
amount of remuneration in monetary
terms is equal to the amount of basic
remuneration less applicable taxes,
and the weighted average price of one
share is calculated based on the price
of the Corporation’s GDRs during the
month preceding the date of the AGM.
Remuneration for performance
of additional duties
Board members performing additional
duties such as Chairman and Deputy
Chairman of the Board of Directors,
and chairmen of Board Committees,
receive remuneration quarterly in the
amount stipulated by the Policy on
Remuneration and Compensation.
Board members are reimbursed for
expenses accrued in connection with
their duties, including participation in
meetings of the Board of Directors and
Board Committees.
Sistema insures the liability of
members of the Board of Directors.
Sistema does not grant loans to
members of the Board of Directors.
Remuneration policy for senior
management
Short-term incentive system
In 2016, the short-term (up to one year)
incentive scheme for senior managers
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,
Functions and Departments.
Payments may amount to up
to 20% of cash income.
(1) Approved by the General Meeting of Shareholders on 27 June 2015.
(2) This investment target was achieved in 2016, since the arithmetic mean of TSR and iTSR was 41.2% and CoE was 14.6%. CoE represents the minimum level of return that a
company must provide to its shareholders for the expectation of profit and risk. CoE is calculated as the sum of risk-free returns (such as government bonds) and the risk premium
associated with investing in the stock market, taking into account the capital structure of the asset in question and country risk.
ANNUAL REPORT 2016www.sistema.com 95
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 Corporation does not grant loans
to senior executives.
Remuneration paid to
Board members and senior
management in 2016(1)
Members of Sistema’s Board of
Directors received the following
remuneration in 2016:
Cash remuneration
RUB
498,400,342
Remuneration for work in the Board of
Directors and additional duties, as well as
salaries and bonuses for 2016 paid to Board
members who were also employees of the
Corporation in 2016(2).
Remuneration in the
form of ordinary shares
of Sistema
RUB
422,928,991
Shares paid to Board members for corporate
year 2015-2016(3) and remuneration under the
long-term incentive programme.
RUB 3,713,752
Reimbursement of
expenses incurred by
Board members in
connection with their
duties
Members of Sistema’s Management Board(4) received the following remuneration
in 2016:
Cash remuneration
RUB
3,148,937,048
Including fixed salaries and bonuses.(5)
Remuneration in the
form of ordinary shares
of Sistema
RUB
1,155,134,028
Shares paid under the long-term incentive
programme.
Co-investment programme
In May 2016, the Board of Directors
approved a programme allowing
Sistema’s senior managers to co-
invest in subsidiaries and/or shares of
Sistema. The Co-investment Programme
aims to increase senior management’s
motivation to boost the Corporation’s
market capitalisation, and includes
additional incentives linked to
achievement of strong financial
results through project origination
and implementation and efficient
management of the Corporation’s
assets, including asset acquisitions,
sales, restructurings, growth of market
capitalisation and increasing dividend
flows.
The programme participants are the
President and heads of Investment
Portfolios, Functions and Departments.
Co-investment Programme participants
use their own funds to acquire:
shares/stakes in Sistema’s
subsidiaries;
ordinary shares of Sistema PJSFC.
The amount of co-investment is limited
by the participant’s average annual
income.
Remuneration is paid if:
there is a liquidity event in relation
to a subsidiary (IPO or sale of a
stake);
a participant holds Sistema’s
ordinary shares for two years
without interruption.
Remuneration is paid in cash. The
amount is directly linked to the gain
in the value of the shares of the
subsidiary and/or ordinary shares
of Sistema.
(1) All figures in this section are given before the applicable income tax.
(2) Excluding members of Sistema’s Board of Directors who were members of its Management Board.
(3) The rouble 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).
(4) Including the President of Sistema PJSFC.
(5) Bonuses for 2016 were paid to Sistema’s employees in January 2017.
Corporate Governance 96
Corporate Social
Responsibility
PRINCIPLES FOR RESPONSIBLE INVESTMENT
Sistema’s investments in
a number of critical and
structurally important
sectors of the Russian
economy, as well as the
activities of its portfolio
companies, have a
significant economic,
technological, social and
environmental impact
on local communities.
The Corporation’s responsible
approach to investment and business
is based on universally recognised
international and national principles
for CSR and sustainable development,
as stipulated in the United Nations
Global Compact, ISO 26000
(Guidance on social responsibility),
the Russian Union of Industrialists
and Entrepreneurs’ Social Charter
of Russian Business and internal
corporate documents.(1) Key principles
of the Corporation’s approach include:
Strict compliance with legislation
and the norms of business ethics;
Zero tolerance for and prevention
of corruption in all its forms;
Long-term contribution to
regional development and
support for local communities;
x
y
Investment in human capital
and stimulation of innovation;
Creation of favourable
working conditions and equal
opportunities;
z
Observance of human rights
and non-discrimination;
For Sistema, all ten principles of the
UN Global Compact covering human
rights, labour, the environment and
anti-corruption are equally important.
The Corporation shares the UN-backed
Principles for Responsible Investment
(PRI), developed by an international
group of major institutional investors
in collaboration with experts from the
investment industry, intergovernmental
organisations and civil society. It is
committed to implementing them in its
investment practice by incorporating
the risks and opportunities associated
with environmental, social and
corporate governance (ESG) issues into
both investment analysis (portfolio
strategy and preparation of deals) and
development of operating strategies
and investment programmes for assets.
Sistema is interested in the sustainable
development of its subsidiaries. The
socioeconomic and environmental
performance of these subsidiaries
underpins not only the successful
creation of shareholder value for the
Corporation, but also the welfare of the
state and society, including employees,
consumers, partners, suppliers and
local communities.
Responsible investment is an approach
to investing that aims to incorporate
environmental, social and governance
(ESG) factors into investment decisions,
in order to better manage risk and
generate sustainable long-term returns.
{
|
Minimisation of environmental
impact;
Balance of stakeholder interests,
openness and transparency.
(1) Code of Ethics, Corporate Governance Code, HR Management Code, Corporate Social Responsibility Policy and Charity Policy.
ANNUAL REPORT 2016www.sistema.com
97
Sustainable development activities are
regularly monitored in preparation for
annual public non-financial reporting,
which details significant aspects of the
Corporation’s sustainable development.
Sistema encourages its companies to
be integrated into CSR projects, and
supports independent disclosure of
sustainable development information
by key assets in accordance with Global
Reporting Initiative (GRI) guidelines.
Compliance with these requirements
by Sistema’s new and existing assets
is ensured by implementing high
standards of corporate governance
and business ethics, as well as
unified approaches to HR, risks
and procurement management,
anti-corruption, CSR and charitable
activities. Subsidiaries are directly
responsible for environmental and
occupational safety, health and well-
being of employees and customers,
product quality and reliability
of services. Decisions are made
with the involvement of Sistema’s
representatives in the boards of
directors of portfolio companies, and
effective implementation is achieved by
recruiting highly qualified management
teams, including from the Corporation’s
internal talent pool. In 2016, CSR issues
considered by Sistema’s Board of
Directors were included in the regular
agendas of the collective corporate
governance bodies of all of the Group’s
key companies.
Sistema
was named best in class
for corporate transparency
among Russia’s largest private
companies, and Segezha Group won
the Debut of the Year category in
the annual study of public reporting
conducted by the Russian Regional
Network on Integrated Reporting to
identify best practices for information
disclosure, including the application of
national and international standards
and guidelines.
Sistema
was also among the leaders
in two sustainable development
indices
(Responsibility and Transparency and
Sustainable Development ) prepared
by the Russian Union of Industrialists
and Entrepreneurs based on public
corporate reporting by Russia’s 100
largest companies.
Social Responsibility 98
CONTRIBUTION TO SUSTAINABLE DEVELOPMENT
With innovative, infrastructural and systemically important companies in a number of strategic sectors and an intensive
social policy in its regions of operation, Sistema makes a significant contribution towards achieving priority goals in Russia’s
economic, social and environmental development, and also towards achieving most of the global Sustainable Development
Goals (SDGs) of the UN’s 2030 Agenda for Sustainable Development. Many of the Corporation’s projects operate at the
intersection of various SDGs, while simultaneously addressing urgent domestic objectives including growth of labour
productivity; technological development; import substitution; food security; educational, healthcare, social and environmental
improvements, and raising overall living standards.
SDGs
Sistema’s contribution
Key programmes
End poverty in all its
forms everywhere
Reduce income
inequality within and
among countries
End hunger, achieve
food security and
improved nutrition and
promote sustainable
agriculture
Ensure healthy lives and
promote well-being for
all at all ages
Social and charitable projects of
Sistema Charitable Foundation
(“SCF”) and the Group’s companies
to support the underprivileged and
create equal opportunities for all:
children, the elderly and people
with special needs.
Taking Care of Veterans, a joint programme of Sistema,
the Moscow City Government and the Moscow City Council
of Veterans.
Generation M, one of Russia’s largest charitable projects,
which was launched by MTS and combines ideas of
developing children’s creativity and supporting critically
ill children.
Participate!, a charity campaign that collects goods for
children in orphanages and social boarding schools,
disabled children and children from large families across
Russia and Kazakhstan.
Investments in agriculture:
renewal of agricultural machinery,
introduction of advanced
agricultural technologies, and
growth of crop yields and livestock
productivity.
Upgrading Yuzhny Agricultural Complex, Russia’s biggest
greenhouse farm, located in Karachay-Cherkessia.
Planting new intensive apple orchards in the Rostov region.
Introducing a modern comprehensive herd management
system – the technological core of a modern dairy farm.
Investments in healthcare,
pharmaceuticals, and promotion
of healthy lifestyles and social
inclusion.
Taking Care of Veterans, a programme to provide medical
insurance and free spa treatment for World War II veterans
and others (Sistema Charitable Foundation and Medsi
Group).
Be Healthy With Medsi, a programme designed to raise
public awareness of healthy lifestyles.
Setting up an R&D centre and launching a programme
for training medical personnel (Binnopharm).
ANNUAL REPORT 2016www.sistema.com
99
In 2016, Sistema Group companies
provided employment for around
0.2% of Russia’s total workforce.
Sistema Academy, a corporate-wide project that combines
the best coaches and educational programmes of all of the
Group’s subsidiaries.
Promote sustained,
inclusive and
sustainable economic
growth, full and
productive employment
and decent work for all
The Group paid a total of
approximately RUB 98bn in taxes
to federal and regional budgets
in 2016, of which about a quarter
goes to pension, medical and
social insurance. This is roughly
0.68% of all tax payments made to
Russia’s consolidated budget and
approximately 0.4% of total social
security contributions.
Subsidiaries’ programmes for training, development,
financial and non-financial incentives, and benefits for
personnel.
Ensure access to
affordable, reliable,
sustainable and modern
energy for all
Ensure inclusive and
equitable quality
education and promote
lifelong learning
opportunities for all
Investments in power grid
infrastructure, energy efficiency in
industrial processes and wider use
of alternative energy sources.
A large-scale project to upgrade power grids in
Bashkortostan using Smart Grid technologies, and
implementation of an automatic power control and
metering system.
Production and use of biofuel from woodworking waste
at Segezha Group enterprises.
Introduction of solar power supply systems for base stations
of the MTS network.
Supplementary education
programmes for schoolchildren,
college students, working
professionals and senior citizens.
Lift to the Future, a nationwide programme of Sistema
Charitable Foundation to improve engineering and
technology education.
The Higher School of Management and Innovation, a faculty
co-run by Sistema and Moscow State University.
Sistema and MTS support a regional network of special
information and education centres called The Russian
Museum: A Virtual Branch.
MTS Group’s projects Children and the Internet, All Ages Are
Online and Mobile Academy are designed to teach younger
schoolchildren and senior citizens useful skills for using the
Internet and mobile services.
Safe Childhood, BPGC’s project for teaching power safety
to schoolchildren.
Social Responsibility
100
Build resilient
infrastructure,
promote inclusive
and sustainable
industrialisation and
foster innovation
Make cities and human
settlements inclusive,
safe, resilient and
sustainable
Take urgent action to
combat climate change
and its impacts
Protect, restore and
promote sustainable
use of terrestrial
ecosystems, sustainably
manage forests, combat
desertification, and
halt and reverse land
degradation and halt
biodiversity loss
Ensure sustainable
consumption and
production patterns
(2) Forest Stewardship council (FSC)
Sistema includes a number of
high-tech companies investing
in modern communications
infrastructure, the electricity
industry, and innovative solutions
for roads and transport.a
MTS deploying next-generation telecommunication networks
(4G) throughout the country and BPGC building Smart Grids
in Ufa.
Development and introduction of innovative technologies
for railway transport safety at Sarov Technopark.
Investments in redevelopment
of the urban environment and
complex property development
projects, wooden prefab houses,
and innovative solutions for smart
and safe cities.
Developing more than 20 in-fill residential properties
in Moscow, Leader Invest also works on large-scale
development projects with a strong emphasis on
infrastructure. The company’s projects fall into the energy
efficiency classes A and B.
The high-tech projects Intelligent Transport System and Safe
City from the Corporation’s portfolio can improve road traffic
situation and increase public safety in cities.
Segezha Group reforests approximately 21,000 ha annually.
Conservation of forests;
introduction of energy-saving
and other technologies that help
reduce greenhouse gas emissions.
Interaction with environmental
non-profits, and responsible forest
and land use.
95% of Segezha Group’s leased forest is FSC-certified(2).
Sistema supports the non-profit organisation Far Eastern
Leopards, which aims to preserve and restore the
population of this rare species in the Russian Far East, as
well as projects of the Russian Geographical Society.
Introducing lean production
and promoting sustainable
consumption among customers
Projects for recycling used batteries (MTS) and switching
subscribers to electronic bills (MGTS); use of Segezha
Group’s paper packaging in the largest retail chains,
including Detsky Mir.
ANNUAL REPORT 2016www.sistema.com
101
Agreements on social and
economic cooperation with
Russian regions, and projects
based on cross-industry social
partnerships with the state and
non-profits.
Strengthen the means
of implementation
and revitalise the
global partnership
for sustainable
development
In 2016, Sistema signed a cooperation agreement with
the Kirov region government, envisaging joint initiatives
to create favourable economic, investment and social
environments in the region.
MTS signed an agreement to develop telecom infrastructure
with the Yamal-Nenets regional government, while Segezha
Group signed agreements with Karelia and the Kirov region.
The government of Altay and Sistema Charitable Foundation
signed a cooperation agreement envisaging joint projects
in culture, education and social welfare to develop
volunteering, promote patriotism among young people and
encourage social activity.
Sistema
ranked third in a list of leading
Russian corporate charity donors
in 2016
compiled by Vedomosti newspaper,
the Donors Forum and PwC. The
list includes 60 large Russian and
international companies with revenue
of more than RUB 100m and charitable
activities in Russia.
SOCIAL INVESTMENTS AND PARTNERSHIPS
The Corporation makes significant
investments in important social
projects every year. Total spending
on social and charitable activities in
2016 amounted to almost RUB 1.5bn, of
which about one third was allocated to
programmes run by Sistema Charitable
Foundation. This foundation, which is
financed by the Group’s companies,
is Sistema’s main vehicle for social
investment and manages a portfolio
of strategic programmes in three key
areas to generate long-term positive
effect and meet the interests of all
stakeholders:
Improvement of engineering
education;
Social projects and volunteering;
Use of advanced technologies
to promote culture and the arts.
The Corporation aims to unlock
synergies between the fund and
relevant objectives of its subsidiaries’
CSR strategies, and to involve as many
portfolio companies as possible in
corporate-wide and joint projects
aimed at creating shared value for
Sistema and stakeholders.
Supporting talent
and innovation
Sistema Charitable Foundation’s
flagship educational programme, Lift
to the Future, has been run jointly
with Group companies since 2011, and
aims to build an effective system for
training highly qualified engineering
personnel capable of solving complex
practical issues in knowledge-intensive
sectors of the Russian economy.
More than 3,200 children from across
Russia have taken part in Lift to the
Future qualifying competitions since
its inception, and about half of them
have visited temporary engineering and
design schools over the years.
In 2016, three camp-based schools
were organised, including the first ever
regional engineering and design school
in Altay. As of the end of the year, Lift to
the Future had partnership agreements
with 22 Russian universities. In
addition, a number of new projects
were launched covering the entire
spectrum of technical education,
including grants.
Social Responsibility 102
Social projects
and volunteering
Sistema’s social projects aim
to increase quality of life of
underprivileged groups by spreading
cutting-edge social technologies and
developing volunteering.
Since 2015, SCF and Medsi Group
have successfully run the Taking Care
of Veterans programme under an
agreement signed between Sistema,
the Moscow City Government and the
Moscow City Council of Veterans. About
700 programme participants, including
war veterans, have been treated
at Medsi clinics in Moscow, while
aggregate investment in the programme
has exceeded RUB 70m.
A special role in supporting war
veterans, children and other target
groups of CSR programmes is played
by the corporate volunteer movement,
Sistema
received the Russian Business
Leaders: Dynamics and
Responsibility 2016 award
from the Russian Union of Industrialists
and Entrepreneurs in the category
Development of Cross-Industry
Partnerships in Tackling Social Issues
of Russian Regions.
64
projects
in eight regions
Key results of by Sistema Charitable Foundation’s Volunteer Centre*
2015
2016
Growth
Number of subsidiaries involved
Number of events
Number of social partners
13
55
16
21
64
16
62%
16%
-
174
playrooms
in hospitals and rehabilitation
centres in Russia
A vivid example of a company’s
contribution to solving pressing
social problems in a region of
operation is Detsky Mir’s long-term
project to support underprivileged
children. During the traditional charity
campaign Participate! in 2016, Detsky
Mir customers in 160 cities of Russia
and Kazakhstan collected over three
million gifts worth RUB 112m for 550
beneficiaries. The company also
opened 79 playrooms in 30 hospitals
and rehabilitation centres in 18 Russian
cities. The total number of playrooms
opened by Detsky Mir in numerous
cities in the last three years reached
174.
*Source: Sistema Charitable Foundation
whose activities are coordinated
by Sistema Charitable Foundation’s
Volunteer Centre. In 2016, the
Foundation recruited employees of
the Group’s main donor companies
and external social partners as
volunteers for its projects. The number
of businesses regularly participating in
joint volunteer campaigns grew by 62%
to 21, including new assets (Concept
Group, Sistema Venture Capital), while
the share of the Group’s volunteers
participating in joint corporate
programmes amounted to 6.5%. The
Volunteer Centre implemented 64
projects in eight regions (Moscow,
Moscow region, St Petersburg, Tula
region, Kirov region, Karelia, Altay
and Bashkortostan) for over 15,000
beneficiaries, and secured support
from 16 external social partners.
Employees and senior managers of
Sistema and its subsidiaries began
providing regular support to specific
social projects in 2016. The New Year’s
charitable auction (organised for the
first time) and several fundraisers
as part of the annual Wishing Tree
campaign raised over RUB 11m from
Sistema employees that went to
recipients including the Volgograd
regional hospice and the Pavlovsky
assisted-living facility in St Petersburg.
ANNUAL REPORT 2016www.sistema.com 103
New technologies
for promotion of culture
and education
Last year was pivotal for the key
recipient of Sistema’s donations in the
sphere of culture and art, the State
Russian Museum. Sistema signed a
20-year agreement to support the
museum in 2003, with annual financing
envisaged at up to RUB 30m. With
support from MTS for the development
of multimedia museum technologies,
the museum was able to launch an
international educational project. More
than 200 information and education
centres dubbed “virtual branches” of
the Russian Museum have opened
at various museums, schools and
universities, cultural and scientific
centres. In March 2016, the Museum
presented its new website, developed
with support from Sistema Charitable
Foundation. This marked another
step towards making information
more accessible for a broad audience
about the museum’s activities,
exhibitions, permanent collection,
funds and Russian art in general.
On 1 December 2016, on the sidelines
of the St. Petersburg International
Cultural Forum, the Russian Museum
officially launched its new platform –
a multimedia information centre in the
Western pavilion of the Mikhailovsky
Castle.
MTS has teamed up with employees
of Moscow State University’s Psychology
Department to develop the Children
and the Internet programme, which
includes lessons in online safety
for younger schoolchildren, and an
interactive exhibition, workshops and
webinars for teachers and parents. Over
340,000 people in 30 regions completed
the programme in the last five years.
In 2016, exhibitions and lessons on
safe and productive web surfing were
organised in libraries, museums and
children’s art centres in eight cities:
Krasnoyarsk, Saratov, Kemerovo, Omsk,
Orenburg, Orsk, Kurgan and Izhevsk.
The multimedia centre was almost fully
equipped by sponsors, and primarily
Sistema. A multimedia cinema opened
here first in 2011 and then became a
platform for online lectures in 2013.
Sistema has an in-house centre
to develop cutting-edge museum
solutions. Kronshtadt Group
participated in the large-scale
reconstruction of the Aurora cruiser,
where a new multimedia exposition
opened in 2016.
MTS has been running Generation M,
Russia’s biggest charitable project to
promote creativity, for several years.
Using digital tools, the project brings
together ideas to develop young
talents from across Russia and support
seriously ill children. Since its launch,
the project has raised over RUB 15m.
An important place in Sistema Group’s
social and educational efforts belongs
to projects aimed at making web and
mobile technologies safer and more
accessible for all users, from children
to the elderly.
Social Responsibility 104
ENVIRONMENTAL RESPONSIBILITY
Given the scale of
its business and the
environmental impact of
its portfolio companies,
Sistema considers
reduction of its overall
environmental footprint,
including greenhouse gas
emissions and resource
consumption, as a
priority, and is striving
to achieve positive
change by introducing
environmentally
friendly technologies
and promoting
green lifestyles.
The Corporation’s key environmental
initiatives focus on responsible use,
preservation and restoration
of forests.
Segezha Group, the biggest forest
user in the European part of Russia,
promotes sustainable forest use, which
envisages sustainability of resources,
forest protection, reforestation, and
prevention of forest fires and illegal
felling to ensure that the forest brings
maximum value to people as well
as to the economy. Segezha Group
works actively with the government
on projects to implement new models
of intensive and responsible forest
management aimed at facilitating
sustainable forest development. Its
experience was used to develop the
required legal framework, first of all, for
the pilot project of intensive forest use
and reforestation in Karelia.
Segezha Group is actively engaged in
forest management on leased forest
areas in four regions of Russia. In 2016
alone, it restored about 22,000 ha
of forests. Segezha Group’s Russian
companies invested some RUB 85m in
environmental projects in 2016, while
its foreign subsidiaries contributed
EUR 150,000. The holding has an
environmental management system
HA
22
th.
forests
were restored in 2016
based on ISO 14000, performs internal
audits of the environmental activities
of all of its subsidiaries, and undergoes
voluntary Forest Stewardship Council
(FSC) certification of its forest resources
and supply chains. In 2015, the Group’s
largest enterprise, Segezha Pulp &
Paper Mill, confirmed the compliance of
its supply chain and controlled timber
with FSC standards until December
2021.
Sistema encourages the introduction
of high environmental standards in the
timber industry. In June 2016, Segezha
Group and WWF Russia teamed up
for a joint initiative to develop an
environmental responsibility ranking
for Russian timber companies, which
received support from other major
players.
RUB
85 m
total investments
in environmental projects
in 2016
ANNUAL REPORT 2016www.sistema.com
105
Paper packaging manufactured by
Segezha Group’s companies is broadly
used by leading retail chains as an
eco-friendly alternative to plastic bags.
Detsky Mir was the first children’s
goods retailer in Russia to offer its
customers eco-friendly bags produced
by Segezha Group. The bags appeared
at Detsky Mir stores in Moscow and
the Moscow region in December 2015,
and six months later the project
was rolled out to the entire chain,
with the number of paper bags sold
surging five-fold to 30,600. MTS has
also been gradually introducing eco-
friendly packaging for SIM cards since
2015. In 2016, 8.5m SIM cards were
packaged into envelopes made of kraft
cardboard, which does not contain any
synthetic agents and dissolves easily
and naturally.
MGTS, which is part of MTS Group,
launched a programme with WWF
Russia to preserve Russia’s forest
resources, encouraging Moscow
residents to reduce paper consumption
by switching to electronic billing and
inviting subscribers to made donations
to WWF Russia for reforestation. The
number of MGTS customers who
switched to e-bills doubled over the
year, which helped the company to
reduce its spending on paper bills by
6.5%. About 1,000 customers made
donations for forest preservation, and
MGTS contributed RUB 7 for each rouble
donated by subscribers. The funds
raised went to protect about 3 million
trees in particularly valuable forests in
Arkhangelsk.
Sistema companies (RTI, MTS, MTS Bank,
MGTS and Segezha) participated in an
environmental campaign organised
by FSC Russia to mark International
Day of Forests and collected about
2.4 tons of waste paper for recycling,
which saved more than 40 trees, 17,000
litres of water, 9,600 kWh of energy and
prevented the emission of more than
4 tonnes of CO2.
Two of Segezha Group’s
enterprises – Segezha PPM and
Lendery Timber Company –
were named among the most
environmentally responsible
forest operators,
in a ranking compiled by the regional
environmental organisation SPOK, which
rates forest users based on their stance
on preservation and use of Specially
Protected Natural Areas.
2.4 tons
waste paper
were collected and restored, whch
saved more than 40 trees
Social Responsibility 106
Information about fuel and energy consumption
Type of resources
Unit of
measurement
in physical terms
in monetary terms,
thousand RUB
Actual resource consumption in 2016
Heat power
Electric power
Petrol
Gcal
kWh
litres
1,626
2,311
235,141
2,612
8,488
8,440
A TEAM OF PROFESSIONALS
As one of Russia’s biggest employers,
Sistema creates jobs with competitive
salaries and additional social
guarantees, and offers employees
unique opportunities for career growth
and to develop new skills. In 2016, the
Group employed about 158,000 people
in all regions of Russia(1). The Group’s
companies strictly adhere to generally
accepted norms and principles of
labour relations, including those set
out in World Labour Organisation
guidelines and Russian legislation
to prevent discrimination, protect
employees’ personal data and observe
human rights(2).
istema sees its main HR task as
building strong and highly motivated
management teams for its investment
portfolios and assets, and organising
efficient transfer of best practices,
knowledge and professionals within the
Group.
In May 2016, Sistema took a new
important step towards transforming
long-term incentive system for senior
executives with the introduction
of a co-investment programme for
senior management. The programme
is designed primarily to align the
interests of investment portfolio
managers with those of shareholders,
in line with best global practices in the
investment sector.
In 2015, Sistema launched the Sistema
Academy, a corporate educational
project bringing together the best
coaches and educational programmes
from its subsidiaries. About 20 Group
companies are currently involved in the
project. In 2016, the Sistema Academy
introduced new professional clubs
that offer members opportunities for
professional development, informal
communication and networking.
Sistema’s management system is based
on regular assessment of executives’
efficiency, achievement of business
targets and meeting corporate culture
requirements (values, competences,
cross-sector and social skills). In 2016,
Sistema conducted assessment using
state-of-the-art tools and with active
support of the Corporate Centre’s
senior management. At the initial
stage, assessment was conducted for
56 executives of Sistema, including
members of the Management Board,
and 128 CFOs of the Corporate Centre
and subsidiaries.
The Corporation’s employees
may receive professional training,
including free courses, at the Moscow
State University’s Higher School of
Management and Innovation, a joint
department between the University
and Sistema that celebrated its 10th
anniversary last year. Over these years,
the school has awarded more than
300 master’s degrees, with holders
taking up executive positions at leading
Russian and foreign companies. Last
year, over 100 holders of master’s
degrees, including over 50 employees
of Sistema and its subsidiaries,
attended various advanced training
courses at the department.
(1) Including Targin.
(2) The Corporation is n Rights.
ANNUAL REPORT 2016www.sistema.com
107
The Corporation not only creates
a favourable environment for
professional growth and its employees’
development, but also shapes a
common corporate culture aimed
at teamwork and high achievement.
Sistema also takes its employees’
health very seriously. The biggest
annual event bringing together
employees of all Sistema Group
companies and their families in
support of healthy lifestyles is the
Summer Games, which in 2016 gathered
19 teams and about 4,000 participants
and supporters at the Yantar stadium
in Moscow.
The Corporation’s HR efforts result in
a high level of personnel engagement
and make Group companies attractive
employers. The Corporation conducts
an engagement survey once every two
years. In 2016, the survey covered 16
companies (56% of Group staff). The
average engagement level grew by 4%
since the last survey (in 2014) to 64%.
In 2016, MTS improved its position in
the ranking of Russia’s best employers
compiled by HeadHunter and RBC,
moving up one notch to fourth among
more than 230 companies and also
being named best employer among
telecoms companies. Detsky Mir was
named among the most attractive
Russian employers in the AON Best
Employers Russia 2016 survey, the
results of which were announced at
Vedomosti’s HR Forum. MTS also made
it to the top 14 employers of 2016.
Sistema Group’s
top managers
are regularly named as some of
Russia’s best managers in the annual
rating compiled by the Managers’
Association and Kommersant
Publishing House. In 2016, the number
of the Corporation’s representatives
in the list of the Top 1,000 Russian
Managers doubled compared to the
previous year. A total of 72 senior
executives made it to the list,
including 65 senior managers of
Sistema’s portfolio companies – the
highest result among the ranking’s
participants.
Mikhail
Shamolin
Vsevolod
Rozanov
Sistema’s President Mikhail Shamolin
was ranked #1 among CEOs of
diversified holding companies,
and Vsevolod Rozanov, Senior Vice
President and head of the Finance
and Investment Function, was
declared the best CFO.
Social Responsibility 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
forwardlooking 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.
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