Sistema Annual Report 2017

← All annual reports

FY2017 Annual Report · Sistema

Loading PDF…

Annual Report 2017

Annual Report 2017 — Sistema — 1

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityCONTENTS

Profile of Sistema

Structure of shareholders’
equity

Mission and strategy

CEO's statement

Investment portfolio

Strategic progress

Key events

Financial results

Credit ratings

Dividends

MTS

Detsky Mir

Segezha Group

Agroholding Steppe

Real-estate assets

BPGC

Medsi

Binnopharm

RTI

MTS Bank

Hospitality assets

Other investments

Funds

Risks

To get more information, please
visit our corporate web site:
www.sistema.com

Corporate governance

Corporate governance principles

General Meeting of shareholders

Board of Directors

Committees of the Board
of Directors

President

Management Board

President's Committees

Specific characteristics of risk
management, internal control
and internal audit systems

Development of the corporate
governance system

Remuneration of board members
and senior management

Corporate social responsibility

Principles for responsible
investment

Contribution to sustainable
development

Social investments
and partnerships

Environmental responsibility

Responsibility
towards employees

Annex

Additional information

102

104

154

2 — Sistema — Annual Report 2017

sistema.сom

Apis Cor
is a developer and manufacturer
of unique 3D construction printers.
The Apis Cor printer can build a house
of up to 130 sq m in 24 hours.
The technology has no peers anywhere
in the world. This 3D printer can compete
with conventional technologies on cost
and significantly outperforms them
on speed and ease of construction.
Applications to patent the technology
have been filed in 146 countries.
The business model is based on provision
of wall-construction services
in partnership with local companies
to reduce printer replication risks
and control the construction process.

sistema.ru

Годовой отчет 2017 – Система – 3

PROFILE OF SISTEMA

Sistema is one

Overview

Key indicators for 2017

of the largest private

investors in Russia’s

real economy.

Sistema’s investment

portfolio is dominated

by Russian companies

in various sectors including

telecommunications,

consumer retail, paper

and packaging, agriculture,

high-tech, real estate,

healthcare, financials

and hospitality. Sistema

holds controlling interests

in most of its portfolio

companies.

Sistema’s shareholding structure

3.4 %

14.8 %

17.6 %

64.2 %

V. Evtushenkov

GDRs in free float

Ordinary shares in free float
Others

Sistema’s strategic goal is to create
long-term growth of shareholder value
by boosting returns on investments
in existing assets and reinvesting
available cash in new investment projects
to diversify its portfolio and increase
overall return on investment.

Sistema’s specialises in improving
the operational efficiency of the assets
it acquires by restructuring and by working
with industrial partners to enhance
expertise and mitigate financial risks.

The Corporation’s shares trade
on Moscow Exchange (ticker: AFKS)
and on the London Stock Exchange
in the form of global depositary receipts
(ticker: SSA). One GDR represents
20 ordinary shares.

Structure of shareholders’
equity

Sistema has 9,650,000,000 ordinary
shares outstanding with a nominal value
of RUB 0.09 each. Its authorised capital
is RUB 868,500,000.

Sistema held an initial public offering
in 2005. Its shares trade on the London
Stock Exchange in the form of global
depositary receipts (GDRs) under
the ticker SSA. One GDR represents
20 ordinary shares. The Corporation’s
ordinary shares are also listed on Moscow
Exchange in the first listing level under
the ticker AFKS. The GDRs traded
on the London Stock Exchange represent
about 17.6% of Sistema’s equity, while
the shares traded on Moscow Exchange
represent 14.8%.

Revenue

RUB 704.6bn

Investments

RUB 130.5bn

Cash inflows from
investments

RUB 68.1bn

Adjusted OIBDA

RUB 199.5bn

Adjusted OIBDA margin

28.3%

 Investments of the Corporate Centre (management reports).
 As of 31 March 2018.
 Ordinary shares and GDRs owned by Sistema Group companies, members of the Board of Directors
and the management of Sistema.

4 — Sistema — Annual Report 2017

sistema.сomSistema’s fastest growing assets

HOSPITALITY
ASSETS

54.5%

MEDSI

24.0%

STEPPE
AGROHOLDING

22.2%

Sistema’s shares are included in Moscow
Exchange’s two key indices, the MOEX
Russia Index (formerly MICEX) and RTS,
as well as its Broad Market Indices .

Shares of Detsky Mir, a Sistema subsidiary,
began trading on Moscow Exchange
in February 2017 under the ticker DSKY
in the first listing level.

Shares of MTS, a Sistema subsidiary, trade
on Moscow Exchange under the ticker MTSS
and on the New York Stock Exchange (NYSE)
in the form of ADRs under the ticker MBT.

Sistema’s principal shareholder
is its Chairman Vladimir Evtushenkov, who
owns 64.2% of the Corporation’s equity.

Changes in Sistema's GDR and ordinary share prices

In 2017, Sistema’s share price fell by 47.8%
and the price of its GDRs by 53.7%, mainly
due to investors’ reaction to claims made
by Rosneft, Bashneft and the Republic
of Bashkortostan against the Corporation
throughout the year (the claims were
settled in December 2017).

On the first trading day of 2017, the closing
price of one GDR on the London Stock
Exchange was USD 9.0, corresponding
to Sistema’s total market capitalisation
of USD 4,342.5m. On the last trading day
of the year, the closing price was USD 4.8,

with Sistema’s total market capitalisation
standing at USD 2,012.0 m.

The closing price of GDRs reached
a record high of USD 10.0 on 24 January
2017, and the ordinary shares peaked
at RUB 25.1 on 20 January 2017.
The lowest closing GDR and ordinary
share prices were recorded on 18 December
2017 at USD 3.0 and RUB 9.0, respectively.
Average daily trading volume on the London
Stock Exchange in 2017 was 775,715
GDRs, and on Moscow Exchange
21,592,735 ordinary shares.

DETSKY MIR GROUP

21.9%

BINNOPHARM

21.8%

02.01.17

02.03.17

02.05.17

02.07.17

02.09.17

02.11.17

02.01.18

02.03.18

GDRs of Sistema

Ordinary shares of Sistema

RTS Index

 Revenue growth in 2017 YoY.
 Broad Market Indices of the Moscow Exchange include top 100 securities selected based on the criteria of liquidity, capitalisation and the number of shares in free float and form the bases
for calculation of the Moscow Exchange›s other indices. The calculation bases include the shares whose free float coefficient is at least 5%.
 Source: Bloomberg.

Annual Report 2017 — Sistema — 5

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityMISSION AND STRATEGY

Sistema’s mission

Sistema’s strategic focus

is to build an investment

company with multi-

industry expertise

and a strong track record

in managing shareholder

and third-party funds.

Investments focus

primarily on new

and innovative industries,

with no restrictions

on geography or industry.

Value creation model

Sistema’s investment company model
envisages monetisation of the portfolio
through incoming dividends and asset
sales, as well as:

1 investment in new, high-potential
investment projects capable
of generating high returns
on invested capital;

2 distribution of profit to Sistema’s
shareholders through dividends;

3 investment in the development
of existing assets to increase
their value.

6 — Sistema — Annual Report 2017

Basic principles
of the investment strategy

Direct investments from Sistema’s
Corporate Centre

Maximising total shareholder
return (TSR) and reducing
the discount to net asset value (NAV)

Investments in controlling stakes
of large assets, including distressed/
undervalued businesses,
or in large tech companies

Value creation via active management
of acquired assets with potential
engagement of a financial partner

Raising and managing outside capital
to expand available resources for
investment, and receiving income
from management of assets

Asset type:
mainly mature businesses

Geography:
mainly Russia

Reducing the Corporate Centre’s debt
to acceptable levels within

1-2 years

Industries: no restrictions,
but in order of priority: consumer
segment, B2B segment with export
potential, and real estate

Deal size: starting from

USD 100 m;

stake: starting from 50%+1;
required IRR: more than 25% in rubles

Focusing
on investments
in high-potential
technologies

Acquisition of assets with acceptable debt
levels (Debt/OIBDA of the acquired asset less
than 3.0), or higher debt levels if there is a plan for
reduction to the acceptable level within two years

sistema.сomDirect investment through
own funds (PE/VC)

Investments of portfolio
companies that require
investment from Sistema

Principles of managing
Sistema’s assets

Investments in promising future
technologies, e.g., companies
developing technologies and solutions
that create new industries or disrupt
existing sectors

Investments in portfolio companies
to increase their market share
or enter adjacent/synergistic business
segments

Investments will be made through
own funds with mandatory participation
of outside investors as financial partners
(share of outside partners:
at least 20%)

Involvement of strategic
and financial partners as needed

Geography: no restrictions

Geography: in accordance with
the approved strategy for portfolio
companies

Target fund size: starting from

USD 100 m;

required IRR: more than 20%
in USD

Deal sizes, stakes and stages
of financing will be determined
in the funds' investment theses

Market principles of income
distribution and incentives
for the team

Industries: companies' industries
and adjacent/synergetic industries

Required IRR: higher than weighted
average cost of capital (WACC)
with discounted payback period
(DPBP) of

3-10 years

(WACC and DPBP are approved
for each asset annually)

Annual Report 2017 — Sistema — 7

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityIntroduction of a partnership management model that allows key executives of the Corporation to share the risks and returns from investment activities with the shareholdersManaging of assets across sector verticals led by Managing PartnersManaging Partners have responsibility for implementing the investment strategies of portfolio companiesBoards of Directors of portfolio companies provide control, coordination and support for management in decision-making in key functional areas (strategy, key deals, budget planning, HR and internal audit) Engagement of industrial experts as members of the Boards of Directors of portfolio companiesIncentives of Managing Partners is designed to:1 increase Sistema's capitalisation; 2 maximise the value of assets under management and monetise this value; 3 raise outside capital for management.CEO'S STATEMENT

Dear shareholders,

Today Sistema continues

its transformation as a leading

investment company operating

in the Russian and global

markets and I’m excited

to be appointed as President

of Sistema at such an important

time for the company.

In 2017 Sistema overcame

a number of serious challenges,

most notably the legal dispute

with Rosneft, Bashneft and

the Republic of Bashkortostan.

In December all parties reached

a settlement agreement

to resolve all litigation related

to Sistema’s ownership

of Bashneft. In the first

quarter of 2018, we fulfilled

all of Sistema’s obligations

under the agreement,

securing the necessary

financing and completing

payments to Bashneft totalling

RUB 100 billion. All legal claims

related to this case are now

withdrawn, and all of Sistema’s

assets are free of the injunctions

imposed as part of the

previously filed claims.

Despite 2017’s difficulties, which put
significant pressure on our share price,
Sistema was able not only to retain
its assets but also to support their dynamic
growth and improvements to efficiency.
This was reflected in the strong
financial results of the Corporation’s
and of our portfolio companies. Sistema’s
consolidated revenue grew by 3.5%
in 2017, while adjusted OIBDA increased
by 8.0%. All of our core assets were
profitable at the adjusted OIBDA level.

Our publicly traded assets, MTS and
Detsky Mir, strengthened their leadership
in their respective markets. MTS benefited
from an improved operating environment,
increasing revenue by 1.7% and delivering
solid OIBDA growth and a strong free
cash flow. The company made good
progress on its digital strategy in 2017
as it continues its transformation into
a multi-service, data-focused integrated
telecommunications firm.

Detsky Mir continued to consolidate
the Russian children’s goods market and
maintained strong growth rates, with
revenue increasing by 21.9% despite
a more challenging market environment.
The company opened 104 new stores
and increased its share of the Russian
children’s goods market from 17% to about
20%. Online was the fastest-growing sales
channel, with the Internet store’s sales
up by approximately 70% during the year,
thanks also to its strong synergies with
Detsky Mir’s chain of over 620 stores.

Our healthcare operator, Medsi, significantly
improved its performance, increasing
revenues by 24.0% and growing adjusted
OIBDA more than three-fold. These strong
results were achieved by increasing
utilisation rates at key facilities thanks
to stronger vertical integration, as well
as by building new clinics and through
acquisitions. The market for high-quality
private healthcare is one of the most
dynamic sectors of the Russian economy,
and Medsi will continue to grow capacity
by launching new clinics and making further
acquisitions in 2018.

Our paper and packaging holding,
Segezha Group, was also able to achieve
revenue growth despite strong exchange-

rate pressure due to the path of the
rouble rate. Throughout the year,
the company continued to implement
its investment and modernisation program
and to optimise production and SG&A
costs. We are excited that Segezha is now
led by Mikhail Shamolin, my predecessor
as President of Sistema and one of Russia’s
strongest senior managers. Mikhail’s skills
and experience will undoubtedly take
Segezha Grop to a new strategic level.

Agroholding Steppe brought in a record
harvest in 2017 thanks to the expansion
of its asset base and strong yields.
The aggregated OIBDA of our agricultural
assets reached RUB 5 billion, while the
total land bank reached 380 thousand
hectares.

We were also pleased with the results
of MTS Bank, which returned to profitability
thanks to lower provision charges
as well as good strategic progress
in its cooperation with MTS.

In recent years Sistema has made good
progress in developing venture capital
and private equity investment vehicles.
Our VC funds – Sistema Venture Capital,
Sistema Asia Fund and Rusnano Sistema
SICAR, as well as our investment
platforms Sistema Finance and Sistema
Capital – now give the Corporation
and other investors access to a unique
asset base and successful investment
strategies.

The strong results of our portfolio companies
were one of the key drivers of cash flow
at the Corporate Centre. We received around
RUB 34 billion in dividends and regular
returns of cash from portfolio companies
in 2017, and generated approximately
the same amount through monetisations
of our investments. The largest and most
significant of these transactions was the IPO
of Detsky Mir in February 2017, which raised
a total of around RUB 19.2 billion.

The signing of the settlement agreement
in the Bashneft case led to a significant
increase in our levels of debt. As of the
end of 2017, net debt at the Corporate
Centre level had increased by 78.1%
to RUB 213.4 billion. Despite this, Sistema’s
financial position and liquidity remain stable,

8 — Sistema — Annual Report 2017

sistema.сomin part thanks to the financing provided
by Sberbank, the Russian Direct Investment
Fund and Gazprombank, and also
to Sistema’s successful return to the public
debt markets in the first quarter of 2018.

The Corporation is continuing
its sure-footed development as a leading
investment company creating value
for shareholders by making investments
in high-potential projects, developing
portfolio companies and effectively
monetising its assets.

Our main goal is to increase Sistema’s
market capitalisation, and our strategic
priorities for 2018-19 are:

1 Diversifying our sources of investment

resources and remodelling our
investment processes, including
by creating new investment funds;

2 Optimising the Corporation’s structure

and administrative costs;

3 Strengthening our focus on future

technologies;

4 Reducing our debt burden.

In 2018 we started optimising
Sistema’s management system. Today
the Corporation manages its assets
through sector-based verticals headed
by Managing Partners, each of whom
bears full responsibility for the financial
results of the companies under their
management and who as a shareholder
in these companies will be highly
interested in increasing their value.
Our senior managers will also continue
to invest a significant portion of their
earnings in shares of Sistema, thereby
further strengthening the alignment
of the interests of management
and all of the Corporation’s shareholders.

I would like to thank all of our investors
and partners and the employees of Sistema
Group companies, and also all those who have
helped and continue to help the Corporation
to grow. I believe that we are on track to deliver
an effective strategy that will drive further
increases in the Corporation’s value to the
benefit of all shareholders.

Andrey Dubovskov

President of Sistema PJSFC

Annual Report 2017 — Sistema — 9

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityINVESTMENT
PORTFOLIO

10 — Sistema — Annual Report 2017

MTS

50%
Sistema's stake

Leading telecom operator
in Russia and the CIS

>106.5 m

mobile subscribers

Detsky Mir

52%

The largest children's goods
retailer in Russia

> 650

stores

Segezha Group

100%

A major forest holding that performs
a full cycle of logging and advanced
wood processing operations

№1 in Russia
№2 in Europe

in paper sacks
manufacturing

Agroholding "STEPPE"

91%

Highly efficient agricultural enterprises
operating in the crop farming,
animal breeding, fruit and vegetable
growing segments

380,000 ha

of land

Medsi

100%

A leading national chain of healthcare
facilities, offering a full range
of medical services

≈ 8 m

visitors annually

RTI

87%

Russia’s largest high-tech company
in the radio-technical systems,
microelectronics and comprehensive
communication industries

>RUB 50bn

revenue

МТS Bank

87%

A universal financial organisation
that provides banking services

RUB 142.4bn

total assets

sistema.сom

Real estate assets

100%
Sistema's stake

Moscow development full cycle
company and rental assets with
a unique pool of properties

≈ 3 m sq m

in 45 development
projects

Hospitality assets

100%

Cosmos Group is one of Russia's
leading hotel management companies

>3,700 rooms –

under management

Binnopharm

74%

One of Russia’s largest full-cycle
biopharmaceutical companies

2 state-of-the-art
pharmaceutical plants under
management

BPGC

91%

A large Russian regional
power grid company

≈ 88,000 km

length of power lines

Kronstadt Group

96%

One of Russia’s leading developers
and manufacturers of high-tech products

High-tech products

Concept Group

63%

One of the largest players in lingerie
wholesale and childrenswear
monobrand stores

Women’s and children’s
clothes and underwear

Investment funds

74%

Private equity
and asset management funds

A strong focus
on technology-driven industries

Annual Report 2017 — Sistema — 11

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibility

STRATEGIC
PROGRESS

Key events

Financial results

Credit ratings

Dividends

Mikron
is among Europe’s five largest full-
cycle microelectronics producers,
and the largest in the CIS. Mikron
launches serial production of more
than 20 new products annually,
each of which forms the basis for
new digital solutions and services.
One of the key areas for new
product development is the RFID
segment, in which Mikron produces
more than 480 items a year.

12 — Sistema — Annual Report 2017

sistema.сom

Annual Report 2017 — Sistema — 13

KEY EVENTS OF 2017

Detsky Mir's IPO

In February 2017, Detsky Mir listed its
shares on Moscow Exchange. The company's
market capitalisation at the start of trading
was about RUB 62.8bn. Following the IPO,
Sistema's stake in Detsky Mir amounted
to 52.1% + 1 share.

Appointment of new
president and election of new
Management Board

In March 2018, Sistema's Board of Directors
approved the appointment as President
of Sistema of Andrey Dubovskov, the former
president of MTS. Andrey Dubovskov took
office on 13 March 2018.

Also in March 2018, the Board of Directors
elected a new Management Board effective
from 2 April 2018.

Completion of merger between
SSTL and RCom

In October 2017, Sistema completed the
merger of the telecoms business of Sistema
Shyam TeleServices (SSTL) with Reliance
Communications (RCom). SSTL received
a 10% equity stake in RCom following a new
share issue by the Indian operator. If the
Department of Telecommunications and the
courts of India confirm that SSTL's spectrum
can be used to deploy 4G networks without
any additional payments, SSTL may be entitled
to an earn-out payment from RCom.

Launch and successful
implementation of MTS's share
repurchase programme

In 3Q 2017, MTS launched a share
repurchase programme totalling
up to RUB 20bn to create additional returns
for shareholders. As of the end of March 2018,
MTS had repurchased RUB 19.8bn worth
of shares from its shareholders, including
Sistema.

Legal dispute and settlement
agreement with Rosneft and
Bashneft

In May 2017, Rosneft and Bashneft
filed a legal claim with the Arbitration
Court of the Republic of Bashkortostan
against the Corporation and its 100%
subsidiary Sistema-Invest seeking damages
in the amount of RUB 106.6bn allegedly
incurred by Bashneft as a result of its
reorganisation in 2014. Later, the Ministry
of Land and Property Relations of the
Republic of Bashkortostan joined the claim,
which was increased to RUB 170.6bn.

At the beginning of December 2017,
Rosneft and Bashneft filed a second lawsuit
against Sistema and Sistema-Invest seeking
damages in the amount of RUB 131.6bn
allegedly suffered by Bashneft due
to payment of dividends to its shareholders.

On 22 December 2017, Sistema signed
an amicable settlement agreement with
Rosneft, Bashneft and the Republic
of Bashkortostan under which the parties
were to drop their lawsuits and withdraw
all mutual claims. Sistema undertook to pay
Bashneft RUB 100bn before 30 March 2018.

In 1Q 2018, Sistema fully fulfilled its liabilities
under the agreement by making payments
totalling RUB 100bn to Bashneft. The parties
withdrew all legal claims against each other,
and all interim restrictive measures imposed
on Sistema's assets were lifted. The settlement
agreement was therefore executed in full.

14 — Sistema — Annual Report 2017

sistema.сom
Events at portfolio companies

MTS and MTS Bank: launch of MTS
Money Wallet

At the beginning of 2017, MTS
in cooperation with MTS Bank launched
a new service, MTS Money Wallet, which
offers quick and convenient access
to financial services offered by MTS. The new
service brings together several payment
tools, including the MTS e-wallet account,
subscribers’ personal accounts and bank
cards. The service is available to both
individuals and corporate customers.

Agroholding Steppe: successful
expansion of land holdings

In 2017, Agroholding Steppe expanded
its land holdings by 67,000 ha to 380,000 ha
by acquiring new assets with high growth
potential in the Stavropol and Rostov regions.

OZON: appointment of a new CEO

In December 2017, Alexander Shulgin was
appointed CEO of online retailer Ozon. Before
joining Ozon, Alexander Shulgin worked
for seven years at Yandex – from 2010
as CFO involved in preparing the company's
listing on the NASDAQ stock exchange
and from 2014 as CEO. Alexander Shulgin
replaced Danny Perekalsky, who had been
Ozon's CEO since 2014.

Detsky Mir: opening of a new
distribution centre in the Urals

Detsky Mir opened a new distribution
centre in the Urals to ensure more efficient
deliveries in the Urals, Siberia, the Volga
region and Kazakhstan. In September
2017, the company signed a lease
agreement for a class A distribution
centre with an area of 46,000 sq m at the
Yuzhnouralsky transportation and logistics
centre in the Chelyabinsk region. Under
the agreement, which was signed for 10 years,
the leased area may be expanded to 82,000
sq m. The company will start using the new
centre in 2Q 2018.

Medsi: new acquisitions
in regions

Medsi continues investing in the expansion
of its business in Moscow and other regions.
In August 2017, it acquired the Medem
clinic to enter the St Petersburg market.
The 6,800 sq m clinic consists of 28
departments. In September 2017, Medsi
acquired Medlife, a leading healthcare chain
in Perm, consisting of five clinics and a sports
and recreation centre with a total area of over
6,400 sq m.

Segezha Group: commissioning
of a new paper-making machine
at Segezha PPM

In 4Q 2017, Segezha Pulp and Paper Mill
launched paper-making machine No 11 with
capacity of 110,000 tons. It is a unique machine
with a high level of automation. Investments
in the project amounted to EUR 80 m.
The machine was built by an international team
of engineers and technologists from Germany,
Russia, China, Finland, Brazil, Croatia and the
Czech Republic. Following its launch, Segezha
PPM became the world's biggest producer
of unbleached sack paper.

Annual Report 2017 — Sistema — 15

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityFINANCIAL RESULTS

In 2017, Sistema’s

Financial results

consolidated revenues

increased by 3.5%, mainly due

to strong like-for-like sales

growth and the ramp-up

of new stores at Detsky

Mir, solid mobile revenue

growth from MTS’s Russia

business as well as successful

expansion and higher

capacity utilisation at Medsi.

(RUB millions)

Revenues

Adjusted OIBDA

Operating income

Loss attributable to Sistema

FY 2017

FY 2016

Change

704,551

680,864

199,549

91,223

(94,602)

184,800

82,169

(11,759)

3.5%

8.0%

11.0%

Adjusted profit attributable to Sistema

4,119

1,481

178.1%

Group selling, general and administrative
expenses (SG&A) for the full year 2017
remained under control, increasing by 1.6%
year-on-year to RUB 154.5 billion. Growth
of SG&A expenses at Detsky Mir driven
by the company’s robust and cost-efficient
expansion in Russia (with 104 new stores
opened during the year) was largely offset
by a decline of SG&A expenses at the
Corporate Centre due to lower management
incentive payments.

Group adjusted OIBDA increased by 8.0%
in 2017, reflecting stronger operating
performance at MTS, MTS Bank’s return
to profitability due to lower provision charges,
as well as improved efficiency at Detsky Mir
and Medsi and lower SG&A costs at the
Corporate Centre. The adjusted OIBDA
margin 28.3% for the full year, a year-on-year
increase of 1.1 percentage points.

The adjusted profit attributable to Sistema
was RUB 4.1 billion in 2017, up 2.8 times
against the result for 2016, thanks to solid
bottom-line performance at MTS and
the turnaround at MTS Bank.

The adjusted OIBDA
margin

28.3%

The adjusted profit attributable
to Sistema was

RUB 4.1bn

SISTEMA’S CREDIT RATINGS

Rating agency

Date of most recent rating update

Long-term credit rating

Standard & Poor’s

Fitch

Expert RA

16 — Sistema — Annual Report 2017

04 April 2018

19 January 2018

B+

BB-

01 March 2018

ruBBB+

Outlook

Stable

Negative

Stable

sistema.сomREPORT ON DIVIDENDS DECLARED
(ACCRUED) ON SISTEMA SHARES

Dividend policy

In April 2017, the Board of Directors
of Sistema approved a revised dividend
policy. In accordance with the policy
the amount of dividends recommended
by the Board for each reporting year
will be the higher of either an amount
equivalent to a dividend yield of at least
6% or RUB 1.19 per ordinary share.
The Corporation has set itself the goal
of paying dividends twice a year, based
on the results for the first nine months
of a reporting year and for a full
reporting year.

After the end of the reporting period, the
Board of Directors, taking into account
the priority of the strategic goal to reduce
the Corporation's debt, decided to pay
dividends for 2017 in the amount of
RUB 0.11 per share, agreeing with the
Corporation's deviation from the current
dividend policy. In order to maintain a
balance between the rights and interests
of all shareholders and the Corporation's
ability to pay dividends, the Board of
Directors, when determining the amount
of dividends, will take into account the
acceptable rate of Sistema's debt reduction

and the proportionality of dividends to
the current cash flow of the Corporation.
Sistema plans to continue to pay dividends
in accordance with the current dividend
policy after achieving the goal of debt
reduction.

shareholders and custodians being
professional participants of the securities
market, were not due for payment.

Omitted dividends

Dividends distributed for
the first nine months of 2017

On 3 November 2017, an Extraordinary
General Meeting of Sistema's shareholders
(Minutes No.2-17) approved a distribution
in the form of interim dividends
of 6,562,000,000.00 (six billion five hundred
and sixty-two million) rubles, or 0.68 (zero
point sixty-eight) rubles per ordinary
share in Sistema.

As of 31 December 2017, the total amount
of interim dividends for 9M 2019 paid
was 2,121,721,383.40 rubles (the total amount
of dividends paid to nominee shareholders
and custodians being professional
participants of the securities market who
are registered in the shareholders register).

As of 31 December 2017, dividends payable
to persons included in the shareholders
register, with the exception of nominee

As of 31 December 2017, the total amount
of outstanding dividends due for payment
was RUB 1,032,976.28, including:

dividends payable in 2017 –
RUB 149,006.16;

dividends payable for previous years –
RUB 883,970.02;

The reason for non-payment of the declared
dividends due as of 31 December 2017
was the absence of information required
for making payments due to shareholders
entitled to dividends.

After 31 December 2017, the amount
of unpaid dividends increased
by RUB 4,213,003,660.24. Reasons
for non-payment of the indicated
amount of dividends include a written
application of a shareholder and absence
of information required for paying dividends
in the shareholders register.

2012

2013

2014

2015

2016 (for the full year 2015)

2016 (for 1H 2016)

2017 (for the full year 2016)

2017 (for 9M 2017)

Total amount of declared
dividends, RUB

Dividend per share,
RUB

Declaration date

Payment date

2,702,000,000

9,264,000,000

19,879,000,000

4,535,500,000

6,465,500,000

3,667,000,000

7,816,500,000

6,562,000,000

0.28

0.96

2.06

0.47

0.67

0.38

0.81

0.68

30/06/2012

24/08/2012

29/06/2013

26/08/2013

28/06/2014

31/07/2014

27/06/2015

29/07/2015

25/06/2016

27/07/2016

23/09/2016

20/10/2016

24/06/2017

28/11/2017

22/12/2017

 Date of payment of dividends to the nominee shareholders and custodians being professional participants of the securities market who are included in the shareholders register.

Annual Report 2017 — Sistema — 17

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibility
MTS

PJSC Mobile TeleSystems is a leading telecom operator in
Russia and the CIS. MTS Group has more than 106.5m mobile
subscribers in Russia, Armenia, Ukraine and Belarus.

Sistema's stake

50.25%

The company also provides
fixed-line telephony,
broadband Internet, cable
and satellite television,
digital, mobile application
and e-commerce
services in Russia, as well
as additional GPON-based
services in Moscow
(MGTS).

MTS has about

5.7th.

retail outlets
in Russia

MTS business model

Assets

Network infrastructure

Experienced employees

Frequencies and licences

Competences and procedures

Retail chain

Strong brand

Customer base

Services
portfolio

Traditional telecoms
services:

Mobile and fixed-line

services, satellite services

Phones and smartphones

Infrastructure leasing

Services new for the industry:

Financial services

Systems integration

Cloud services, data processing

and storage

Internet of Things, M2M

Mobile services (OTT applications)

E-commerce

Mass-market segment

Households

Corporate customers

Groups
of clients

Revenues

Alexey Kornya
President,
Chairman
of the Management
Board

Ron Sommer
Chairman
of the Board
of Directors

18 — Sistema — Annual Report 2017

Operational
and capital
expenses

Tax payments

Dividends
for shareholders

Charity

Social projects

Shareholders

 As of 31 December 2017.
 As of 31 December 2017 and until 13 March 2018: Andrey Dubovskov.

sistema.сomВыручка бизнеса

Группы МТС выросла на

+ ХХ %

2017 financial performance

Business development strategy

(RUB m)

Revenue
Adjusted OIBDA

Operating income

Adjusted net income attributable to Sistema

2017

2016

Change

442,910

178,358

94,671

29,926

435,692

167,647

86,065

25,377

1.7%

6.4%

10.0%

17.9%

“3D: Data. Differentiation. Dividends”
strategy was transformed into “3D:
Data. Digital. Dividends”. The Digital
segment envisages introduction of digital
technologies into the company's main
operations and active development
of digital products.

Business development in 2017

As the leading Big 3 operator in terms
of revenue and OIBDA, in 2017, MTS
continued developing its networks,
optimising costs, increasing operational
efficiency and implementing its digital
transformation strategy . In 2017,
MTS Russia extended its lead over its
competitors in terms of income from
mobile business and OIBDA and ensured
the smallest outflow of subscribers (10%
per quarter on average).

In 2017, MTS continued constructing
networks in all spectrums, mainly 4G,
and tested a 5G network in partnership
with Ericsson in Q3 2017. In addition, MTS
is implementing projects for joint use
of infrastructure and spectrum with Veon
and Megafon. Joint use reduces capital
expenses per base station by half.

MTS is the leader in the Russian М2М/
IoTmarket. In December 2017, MTS

opened the first permanent Internet
of Things laboratory in Russia under
the aegis of the GSMA international
association, presenting to its customers
and partners pilot solutions based on
Narrow Band IoT (NB-IoT) technology that
can be used at home, in security systems,
in city infrastructure and utility services.

In September 2017, MTS started providing
services for cloud processing of big data –
Big Data as a Service (BDaaS) – using its
own data centres. First Cargo Company,
Sberbank and BAT Russia became the first
users of the virtual data centre.

Acquisition of LiteBox, a cloud
retail software developer, gave MTS
an opportunity to expand its ecosystem
of financial products and strengthen
its B2B platform.

In early 2018, MTS acquired e-sports club
Gambit Esports, which has one of the
top teams in the world, thus entering the
e-sports market.

MTS's revenue structure in Russia, RUB bn

412.3

304.0

60.8

5.6

52.5

MTS Russia

Mobile services

Fixed-line services

System integration

Sale of goods

 Including share in MTS Bank's net income / (loss).
 Internet of Things.
 Revenue from the businesses of MTS Russia is shown excluding intra-group operations.

MTS’s operational strategy focuses
on development of basic mobile and
package services, fixed-line services and
digital products. MTS will strengthen the
convergence of services and expand its
multiservice portfolio.

The 2018-2020 investment programme
envisages implementing digital services
and VoLTE (Voice over LTE) projects,
increasing the capacity of optic fibre
lines for new services and products, and
preparing networks for commercial use
of the 5G spectrum in Russia.

In April 2016, the Board of Directors
of MTS approved a new dividend
policy for 2016-2018, under which MTS
intends to pay dividends in the amount
of RUB 25-26 per 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. To ensure additional shareholder
returns, the Board of Directors of MTS
also approved a programme to buy back
MTS's own shares and ADRs in the
amount of up to RUB 30bn within 3 years.
As a result of the first (4Q 2016) and
second (1Q 2017) tender offers MTS
purchased 35,121,665 ordinary shares
worth RUB 10bn in total. In 3Q 2017, MTS
launched a share buyback programme for
up to RUB 20bn. As of the end of March
2018, MTS purchased shares worth
RUB 19.8 from Sistema and minority
shareholders.

Annual Report 2017 — Sistema — 19

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilitySTRATEGIC PROGRESS

Industry overview for 2017

According to analytical agencies, in 2017
the telecoms market grew by +1.3% year-
on-year, vs a decline of -0.6% in 2016. The
market size was RUB 1.6tn, of which mobile
communications accounted for RUB 0.9tn
(growth by +1.5%). The number of mobile
subscribers was down by 180,000, from
255.6m in 2016 to 255.4m in 2017. All Big
3 operators experienced this drop as they
shifted focus from increasing the number
of new connections to attracting and
retaining high quality subscribers, as well
as due to changes in their retail strategies
and a reduction in price competition.

Markets for fixed-line telephony and inter-
operator services continued falling year-
on-year, by 9% and 7% respectively.

Income of the mobile business, RUB bn

The anti-terrorism package on storage
of information (text, images, audio and
video) transmitted via communication
networks signed by the President of Russia
in July 2016 (to enter into force on 1 July
2018) was widely discussed by all market
players in 2016-2017. The final document
is expected to be approved in 1H 2018.
In order to comply with the law, MTS has
already started construction of module data
processing centres in Nizhny Novgorod
and other Russian regions.

In 2017, the market for fixed-line broadband
Internet continued growing both in terms
of income (+3.7%) and subscriber numbers
(+4.3%).

Markets for additional services increased
at a faster pace. The Russian Internet
of Things market in 2017 grew by 22%
to RUB 9.3bn.

Significant changes were made to
communications legislation in 2017. Two bills
on cancelling internal roaming in Russia were
submitted to the State Duma. MTS already
has tariff plans and tariff options that allow its
subscribers to use communications services
at home-region prices while travelling within
the country.

MTS

Vimpelcom (Veon)

Megafon

Big 3 in total

2014

290.4

221.4

265.5

777.3

2015

296.2

219.0

265.1

780.3

2016

295.0

218.5

259.0

772.5

2017

304.0

224.2

260.0

788.2

The market size was

RUB 1.6tn.

 TMT Consulting (www.tmt-consulting.ru, December 2017, February 2018), AC&M Consulting (ComNews.ru 2 April 2018).
 According to preliminary data from AC&M Consulting.

MTS business model

2017 financial performance

In 2017, MTS achieved strong results and
continued to deliver on its digital strategy.
Amid an improved operating environment
and higher usage of data services, the
company posted 1.7% growth in revenues.

Adjusted OIBDA increased by 6.4% in 2017,
while the adjusted OIBDA margin rose by 1.8
percentage points for the full year. In addition
to revenue growth, factors positively affecting
OIBDA and the OIBDA margin included
a decline in SIM-card sales in Russia, higher
gross margins on handset sales and a 12.4%
decrease of MTS’s retail network during the
year to 5,696 stores at year-end 2017.

MTS creates and offers various groups
of customers both traditional telecoms
services and solutions that are new for the
industry. The fees paid for these services
and solutions form MTS's revenue, which
is used for operational and capital expenses,
tax payments and dividend payments to
shareholders.

MTS has been gradually expanding
its business by adding new areas that have
high growth potential and synergies with
the traditional telecoms industry. Digital
transformation helps to increase the efficiency
of the company's business processes and
successfully integrate and develop new
segments, products and services.

20 — Sistema — Annual Report 2017

sistema.сom
Detsky Mir

Detsky Mir Group is the largest children's goods retailer in Russia, comprising
the Detsky Mir and ELC chains. It offers toys, apparel and footwear, stationery,
arts and crafts kits, sporting goods, and baby and pregnancy products.

Sistema's stake

52%

The Detsky Mir chain
has 578 stores in 207
cities and towns in Russia
and 12 cities and towns
in Kazakhstan, while the
ELC chain has 44 stores
in Russia. The total selling
space of the Group’s
stores is 688,000 sq m.

Detsky Mir's share
in the Russian children's goods market

20%

Business model

Detsky Mir’s retail concept combines five key components:

A one-stop children's
goods store with
an extensive and unique
product mix

Smart visual merchandising
focusing on two target
audiences – children and
parents

Affordable prices
with a focus
on the medium/medium-
minus segment

Building long-term
customer relationships
using a loyalty
system

Vladimir Chirakhov
CEO

Christopher Baxter
Chairman of the
Board of Directors

Convenient stores located in
modern shopping malls and densely
populated residential areas

 Detsky Mir Group consists of PJSC Detsky Mir, LLP Detsky Mir Kazakhstan and LLC Kub-Market (ELC brand).
 As of 31 December 2017.
 By revenue in 2017.
 According to Ipsos Comcon.

sistema.сom

Annual Report 2017 — Sistema — 21

STRATEGIC PROGRESS

2017 financial performance

Growth of return on invested capital
(ROIC), %

(RUB m)

Revenue

Adjusted OIBDA

Operating income

2017

2016

Change

97,003

79,547

21.9%

88%

78%

86%

10,664

8,203

30.0%

56%

61%

8,024

6,620

21.2%

Adjusted net income attributable to Sistema

2,871

2,775

3.5%

2013

2014

2015

2016

2017

Business development in 2017

In 2017, Detsky Mir continued its robust
development by opening 104 new stores.
The company opened a record 62 new
stores in the fourth quarter of 2017.
Detsky Mir continued its expansion
in Kazakhstan by opening 10 new
supermarkets, almost doubling its retail
chain in the country to 22 stores in 12
cities. In 2017, like-for-like sales in tenge
increased by 25%.

In addition to retail stores, Detsky Mir
Group offers all of its products for purchase
online. Since its launch in 2011, the online
segment has been the company’s fastest
growing sales channel (CAGR in 2011-2017
of 121%). One of the key drivers of turnover
growth in this segment in 2017 was the
launch of in-store pick-up.

A unique feature of Detsky Mir's
e-commerce is using sources of free traffic.
The company has no significant expenses
on promoting its online store, but remains
profitable, and thereby more operationally
efficient than its competitors.

Online Revenue

0.04

2011

A strategic area for Detsky Mir is the
development of private labels. On average,
private labels accounted for 26.7%
of Detsky Mir's entire product mix in 2017.

In 2017, Detsky Mir continued to improve
its operating efficiency by reducing
operating costs, primarily rental and
personnel costs, and by optimising labour

productivity and improving commercial
terms with lessors.

Automation of business processes and
introduction of new software helped cut
transaction times and reduce the labour
intensity of business processes. As a result,
the average number of employees per store
decreased from 26 in 2013 to 18 in 2017.

Growth of online revenue after the launch of in-store pick-up across the chain

Online as a % of Total Revenue

0.2%

0.5%

0.6%

1.0%

2.1%

3.5%

Launched
online

CAGR 2011-2017 OF 121%

4.7%

4.6

Launched
in-store
pickup

1.3

2.8

0.1

0.2

0.4

2012

2013

2014

2015

2016

2017

Visits to the online store

Online orders

>133 m

>2.4m

Online as a share
of total revenue

4.7%

22 — Sistema — Annual Report 2017

sistema.сom

A key element of the company's strategy
is the development of its logistics
infrastructure. To optimise logistics costs,
the company introduced a comprehensive
transport management system in 2017.

In March 2017, Detsky Mir updated its loyalty
programme, adding competitive advantages.
Now bonuses can be used to pay for up to 100%
of the purchase; the only exceptions are gift
cards and services. As of the end of 2017,
the loyalty programme had 18m participants.

In February 2017, Detsky Mir held an
IPO on the Moscow Exchange. Trading
commenced on 10 February 2017 under the
ticker symbol DSKY. The placement price
was RUB 85 per share, giving a market cap
of RUB 62.8bn. The company attracted bids
for 2.1x the number of shares offered. The
EV/EBITDA multiple was 9x. The successful
IPO confirmed Detsky Mir's status as
a highly attractive asset.

The first IPO of a Russian non-food retailer
over the last 10 years

The IPO book was 2x oversubscribed; more
than 90% of the final offering went to foreign
investors

Since the IPO, the price has risen by 13%
(as of the end of March 2018)

IPO results

Share of private labels in turnover by categories, %

70.1

29.8

75.3

79.4

45.9

18.3

22.3

27.1

7.5

7.8

9.8

0.5

1.7

Clothes
and footwear

Bulky items

Other products

Toys

Baby products

2015

2016

2017

"We are delighted by the strong
market interest in our offering,
and are pleased now to move
forward with a high-quality
and geographically diverse shareholder
base. The IPO caps off an extremely
successful year for Detsky Mir.”

Vladimir Chirakhov, CEO of Detsky Mir

Business development strategy

The company plans to further consolidate the
children's goods market through its unique
and highly diversified product mix, affordable
prices and digitalisation of sales. Detsky Mir
sees additional potential to expand in Russia
and Kazakhstan and plans to open at least 250
stores in the medium term.

Detsky Mir continues to develop omni-channel
sales, in which buyers are not tied to any
channels but can choose whichever is most
convenient. The same prices, the same product
mix and the opportunity to pick up an order
in a retail store create synergy.

The level of service in 2018 will improve
in-store pick-ups. The project "Perfect
In-Store" sets an ambitious target: 90%
of orders must be ready within 1 hour. After
making an order online, the customer will
be able to pick it up in the nearest store
in just one hour.

Annual Report 2017 — Sistema — 23

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityClothing and footwear traditionally account
for a substantial part of the children's
goods market, with total share in 2017
of 38.5% (28.8% and 9.7%, respectively).
Baby products and toys have 29.9% and
19.0%, respectively. Baby products are
growing at a faster rate: in 2017, this
category reached RUB 157bn in money
terms compared with RUB 89bn in 2011.

Share in the online segment

9.6%

Children's goods market: sales channels, %

Detsky Mir's awards

Winner of the Debut category
and most transparent retailer in Russia
according to Corporate Transparency
of Russian Companies 2017

32nd in the list of 50
Fastest Growing Companies
in Russia compiled by RBC

17th (up 5) in the INFOLine
Retail Russia Top 100 ranking
of largest retail chains

Winner of the Leader
of the Year – Children's Goods
at the 2017 Retail Week Awards

20.0%

5.0%

46.0%

29.0%

14.8%

7.6%

41.3%

36.6%

11.1%

8.1%

40.8%

13.6%

8.9%

38.6%

10.4%

10.1%

39.8%

40.0%

39.1%

39.7%

2013

2014

2015

2016

2017

Hypermarkets

Specialised stores

E-comm

Other

STRATEGIC PROGRESS

Industry overview for 2017

The Russian children's goods market
can be divided into five categories: toys,
clothes, footwear, baby products, and
stationery and other products for children
aged 0 to 12. The size of the children's
goods market in Russia in 2017
amounted to RUB 525bn, compared
with RUB 396bn in 2011. The market's
CAGR over the past 7 years was 4.8%.
Analysts project that the market will grow
by an average of about 1% per year and
will reach RUB 547bn by 2021.

The children's goods market is highly
resilient to crises (along with FMCG).
In 2016-2017, some specialised players left
the market, while other national and regional
chains lost traffic and closed stores, with
a significant decrease in like-for-like sales.
Nevertheless, specialised retailers remain
the main sales channel for children's goods,
along with hypermarkets and supermarkets
(39.8% and 39.7% market share, respectively,
in 2017).

E-commerce is an increasingly popular
sales channel, with an average annual
growth rate in 2011-2017 was 24.5%.
Online sales of children's goods in 2017
amounted to RUB 53.1bn.

2017 financial performance

In 2017 revenue at Detsky Mir increased by
21.9% year-on-year, thanks to the roll-out of
new stores and the strongest growth in like-
for-like sales among Russia’s publicly traded
retailers (+7.2% for the full year). E-commerce
continued to be the fastest-growing sales
channel. Online sales accounted for 4.8%
of total sales in 2017.

Detsky Mir posted an adjusted OIBDA
margin of 11.0% in 2017 as a result
of continued improvements to operational
efficiency on the back of stronger labour
productivity and strict control of rental costs.
The adjusted SG&A/revenue ratio declined
by 0.9 percentage points year-on-year
to 22.8% in 2017.

 According to Ipsos Comcon.

24 — Sistema — Annual Report 2017

sistema.сomSegezha Group

Segezha Group is a fast-growing Russian forest holding
with a vertically integrated structure and a full cycle
of logging and advanced wood processing.

Sistema's stake

100%

Segezha's products
are sold across

87 countries

The Group’s companies employ

13,000 people

Segezha Group includes
Russian and European
producers of high-quality
unbleached sack paper,
paper sacks, birch
plywood, sawn timber
and pre-fabricated
glulam houses.

Mikhail Shamolin
President

Ali Uzdenov
Chairman
of the Board
of Directors

 As of 31 December 2017 – K. Zakirov.

sistema.сom

Segezha Group's business model
Full service production

Log housebuilding

Conversion

49%

of Sokol WP's sawn
softwood timber is
processed to produce

36%

of unbleached paper is converted
into sacks

69%

67%

Sawmill

Chips

PPM

40%

Share of in-house
raw wood supply

Plywood

Sawlogs

Pulpwood

Plylogs

Sawlogs

Pulpwood

Plylogs

Wood resources

62%

Average share
of in-house raw wood supply

Annual Report 2017 — Sistema — 25

STRATEGIC PROGRESS

Financial results in 2017

(RUB m)

Revenue

Adjusted OIBDA

Operating income

2017

2016

Change

43,725

43,018

1.6%

7,081

3,132

8,655

5,165

(18.2%)

(39.4%)

Adjusted net income attributable to Sistema

1,961

(95.9%)

Segezha's awards in 2017:

Third place in the ranking
of 50 biggest forest companies

Seven senior managers topped
the annual list of best 1,000
Russian managers in the forest
and paper and packaging industry

The investment project for
modernising Segezha Pulp and
Paper Mill took top prize at the
annual Lesprom Awards 2017

Development of the Group's business in 2017

Sack paper

Segezha Group is the world’s fourth biggest
producer of unbleached sack paper.
Segezha Pulp and Paper Mill (Segezha PPM)
is a leader in Russia for production and export
of unbleached sack paper. Exports account
for 92% of Segezha Group's paper sales.

High quality raw materials and low costs
enable Segezha Group to increase

the production output of sack paper
by substituting products made by less
competitive market players.

In 2017, Segezha PPM's sack paper
sales (including intra-group supplies)
totalled 298,000 tonnes, increasing by 8%
year-on-year due to the launch of a new
paper-making machine (No.11) produced

by the Germany’s Voith. The new machine
is expected to reach full capacity in 2018,
making Segezha Group the world's second
biggest producer of kraft paper.

Segezha Group's paper is sold in 60 countries
and successfully competes with the products
of market leaders. Segezha Group is the world
No 1 in terms of production cost of kraft paper.

Segezha Group is No 4 in the world for production of unbleached sack paper,
thousandt t

167

№4

293

317

358

№2

384

531

Smurfit Kappa
Group

Segezha
Group-2016

KapStone

BillerudKorsnäs

Segezha Group-
2021

Mondi

№4 in the world for manufacturing
of quality unbleached sack paper

in Russia

№ 1

Indicator

Sack paper sales, thousand t

2017

204

2016

170

+20,1

 The data for 2021 is a forecast based on analytical models. The actual results may differ from forecast numbers.
 After the capacity expansion.

26 — Sistema — Annual Report 2017

sistema.сomPaper sacks

The sales of paper sacks decreased
in 2017 as sales fell in Russia due
to stronger competition and a temporary
drop in demand. Segezha Group's share
in the Russian paper sacks market did not
change significantly, and stood at 51%
at the end of 2017. Segezha Group
strengthened its leading positions in the
European market with sales growing by 9%
year-on-year. The Group also substantially
increased its export to Africa, the Middle
East and the US.

Innovations:
Integrated packaging solution

In 2017, Segezha Group developed an
integrated packaging solution jointly with
Mikron (a Sistema Group company): a smart
sack with an embedded RFID tag enabling
quick and accurate product identification.
The technology makes it possible
to improve customers’ internal logistical
processes and keep track of a product's
location and final destination. The first
commercial batch of smart packaging
was produced in September 2017.

Indicator

Paper sack sales, m items

2017

1,191

2016

1,270

-6.2%

in Russia

№ 1

№2 in Europe for paper sacks
manufacturing

Birch plywood

In 2017, Segezha Group was the world’s
seventh biggest producer of large-size birch
plywood, with output increasing by 4%
year-on-year. Exports accounted for 78%
of plywood sales, up from 74%. Segezha
Group's key strategic markets are Germany,

Benelux, the United States, France, Italy,
Finland, South Africa, Spain, the Czech
Republic and Denmark. In 2017, the company
started deliveries to Algeria. In 2017, Segezha
Group sold its plywood to 53 countries in total
(compared to 57 in 2016).

Segezha Group is No 7 in the world for production of birch plywood, thousand cu m,
2018 forecast

In 2017, Segezha Group continued the
construction of a new plywood mill
in Kirov (at the Vyatka Plywood Mill)
with production capacity of 86K cu m.
The new production facility will enable
Segezha Group to enter new markets with
long-grain plywood and expand production
of short-grain plywood. The Kirov plywood
mill will be commissioned in the first
half of 2018.

№8

151

160

№6

192

215

227

305

380

1 072

UPG

Segezha
Group-2019

Metsa Wood

Syktyvkar

Latvijas Fineris

UPM
(incl Chudovo)

Sveza
(incl 5x5)

№7 in the world for manufacturing
of large-size birch plywood

in Russia

№ 5

2017

2016

+3.2%

Koskisen

Segezha
Group
2017-2018

Indicator

Plywood sales, K cu m

 The data for 2021 is a forecast based on analytical models. The actual results may differ from forecast numbers.
 After the capacity expansion.

Annual Report 2017 — Sistema — 27

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilitySTRATEGIC PROGRESS

Sawn timber

In 2017, Segezha Group accounted for
2.5% of the total sawn timber output
in Russia. About 47% of sawn timber
produced by Lesosibirsk Woodworking
Plant No.1 was sold to China and about
46% to countries in the MENA region:
Egypt, Iraq, Lebanon and Syria.
Sales to European countries totalled
approximately 6%.

in Russia

№ 1

for production
of sawn timber

Indicator

Paper sack sales, thousand cu m

2017

894

2016

912

-2.0%

Prefab houses

According to expert estimates, the total
production of prefabricated glulam
houses in Russia was about 104,000 cu m.
Segezha Group's share in this market
is roughly estimated at 20%.

The Sokol Woodworking Plant, part
of Segezha Group, continues strengthening
its leadership in the Russian market.
In 2017, the plant reached record
production volumes of laminated beams
and prefab glulam houses, at more
than 67,000 cu m.

The glulam houses manufactured
by Segezha Group meet European
standards EN 14081 and FSC, and may
be classified as a business-class product.

Segezha Group is planning to increase
the production of pre-fabricated glulam
houses by 10% and enter new markets
in the Baltic region and Scandinavia
(Estonia, Sweden and Norway).

Innovations: systems for
analysing forest reserves

In cooperation with Kronstadt Group
(a Sistema Group company), Segezha
Group is developing solutions
for the forest industry that ensure
more accurate and effective planning
of forest resources. The company
is planning to use the latest
product developed by Kronstadt
Group: a scalable cloud service
with ready-made desktop solutions
for cartographers and geoportal
solutions. In future, the company will
use drones to monitor forest reserves
and produce detailed reports, with
no need for field inspections. The first
stage of the project will be completed
by the end of 2018. This project
will make it possible to significantly
improve long-term planning for logging,
construction of forest roads and
management of the logging fleet,
and to reduce the cost of logging.

28 — Sistema — Annual Report 2017

in Russia

№ 1

for production
of glulam houses

sistema.сomBusiness development strategy

Key principles of Segezha
Group's development:

Efficiency

Advanced technology

Safety

Segezha Group produces quality and sought-
after solutions and seeks to increase the
share of high value-added products.

Investment programme Segezha Group's
investment programme focuses on:

Segezha Group is committed to continuous
improvement of efficiency at its production
facilities. The Group constantly looks for
opportunities to increase its production
capacity by increasing the effectiveness
of business processes, debottlenecking,
automating production, and other methods.

Segezha Group's strategy is aimed
at creating an industry leader in terms
of production efficiency using a vertically
integrated and diversified business model.
The Group is developing as a major
forest holding with strong competitive
advantages in the global market.

modernisation;

improving efficiency;

reducing environmental impact;

improving product quality;

increasing production output in key
segments.

Capacity of the Group's
production facilities

Sack paper

Birch plywood

MDF

Sawn timber

Glued timber
and prefab houses

thousand t

thousand cu m

m sq m

thousand cu m

Segezha Pulp and Paper Mill (PPM)

Sokol PPM

Vyatsky Plywood Mill
Segezha LDK

Onega LDK

Sokol PPM

Lesosibirsk LDK

360

–

192

–

297

542

489

1500

–

Industry overview for 2017

Sack paper

Paper sacks

In 2017 the largest producers of sack
paper increased their production output
by 4.6% amid high demand in most markets
and significant growth of prices for paper
(up to 10%).

The global paper market is estimated
at 6,900 t, while projected global
consumption CAGR until 2020 is 2.3%. This
growth will mostly be driven by demand
in the Asian market.

According to expert estimates, the size
of the European paper sacks market did not
change significantly in 2017 year-on-year,
at 5.5bn items. There were no substantial
year-on-year changes in prices for paper
sacks. The annual average growth rate
of the market until 2021 is projected at 1%.

In 2017, consumption of paper sacks
in Russia decreased to 742m items (-9.6%
vs 2016) on the back of the continued
fall in real household incomes and

a rainy construction season. As the ruble
strengthened against the euro in the first
half of 2017, importers managed to partially
substitute Russian producers of paper
sacks (imports as a share of the market
increased by 6% year-on-year and reached
26%). Prices for paper sacks in Russia fell
by an average of 5%.

The availability of the Group’s own high-
quality raw materials allows Segezha
to control the production cost of paper sacks
and successfully compete with European
producers both in Europe and Russia.

 LDK – “Sawmill”.
 Source of industry data: Indufor, Poyry.

Annual Report 2017 — Sistema — 29

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilitySTRATEGIC PROGRESS

Birch plywood

The birch plywood market is estimated
at 4.8-5m cu m. Russia is the world's
largest producer of birch plywood,
accounting for 71% of the global market
(3.5m cu m). The CAGR of global birch
plywood consumption is estimated
at 2.5-3%. The world's largest consumers
of plywood are Europe and Russia, which
together account for 67% of the market.

In 2017, plywood output in Russia was
approximately 3.68m cu m. Exports fell
by 3% to 2.46m cu m due to decreased
demand in the European market.

Exports accounted for 67% of Russian
plywood output.

In 2018, production of birch plywood
is expected to grow by 4.2% globally
and by 4.5% in Russia.

Output of sawn softwood timber
in Russia grew by 6% year-on-year
in 2017, to

m cu m

36.5

Sawn timber

The global market of sawn softwood
timber grew by 1.5% year-on-year in 2017,
reaching 337m cu m. Average annual
growth of consumption in Segezha
Group’s key markets is forecast at 1.6%
through 2022.

Financial results in 2017

Revenue at Segezha Group increased
by 1.6% in 2017, mainly due to higher
sales of sack paper (on the back of strong
growth of demand globally) and plywood.

During the year revenue was impacted
by lower sales of paper sacks in Russia
due to increased competition and
a temporary decline in demand
in the Russian sack market, as well
as the strengthening of the RUB versus
key currencies (69.6% of Segezha Group’s
revenues are denominated in foreign
currencies).

Revenue and OIBDA structure in 2017 by segment, RUB bn

24.1

4.9

13.4

1.6

5.9

1.8

0.4

-1.3

Paper and Packaging

Wood processing

Plywood and wood

Other

Revenue

Adjusted OIBDA

During 2017, Segezha implemented
a plan to reduce the adverse impact
of external factors by tightening
procurement expense controls, as well
as reducing shipping and administrative
costs. The decrease in adjusted OIBDA
and profit for the year was mainly due
to FX-rate pressures as well as inflation
of logistics and raw material costs.

Sales

Product type

Paper sacks, m

Sack paper, thsd tonnes

Sawn timber , thsd m3

Plywood , thsd m3

2017

1,191

204

894

2016

1,270

170

912

-6.2%

20.1%

−2.0%

3.2%

Own forestry consumption, %

61.7%

63.0%

1.3 p.p.

 Including sales of paper and paper board.

30 — Sistema — Annual Report 2017

sistema.сom
Agroholding Steppe

Agroholding Steppe is a major diversified agricultural player

in Russia with a portfolio of assets in four key segments:

crop farming, dairy farming, fruit growing and vegetable growing.

Strong operating results allowed
Steppe to increase revenues by

22.2%

Development
of the Group's business
in 2017

Crop farming

Business model

The business model of Agroholding
Steppe focuses on diversification
and development of several business
segments, each a flagship in its respective
agricultural sector.

Target segments for Agroholding Steppe are
the highest-potential agricultural segments
with high margins and growth rates.

In 2017, Steppe achieved an all-time
high crop yield of 1.35m t (including
about 720,000 t of wheat), 30% more
than in 2016. This was in part due
to the expansion of land assets
and introduction of new agricultural
technologies. Steppe's land assets
totalled 380,000 ha as of the end
of 2017, including 106,000 ha of RZ
Agro. In 2017, Steppe acquired
65,000 ha of land in the Stavropol
and Rostov regions.

Sistema's stake

91%

Located in southern Russia,
Agroholding 's assets are
in the most favourable regions
for climate, crop yields and
logistics. Agroholding Steppe
owns 50% of RZ Agro, a major
producer of grain and oil
crops in southern Russia
jointly controlled by Sistema
and the Louis-Dreyfus family.

Financial performance in 2017

(RUB m)

Revenue

Adjusted OIBDA

Operating (loss) / income

2017

2016

Change

10,210

4,019

2,647

8,358

2,857

2,941

22.2%

40.6%

(10.0%)

Adjusted net (loss) / income attributable to
Sistema

1,130

871

29.7%

Andrey Neduzhko
CEO

Ali Uzdenov
Chairman
of the Board
of Directors

sistema.сom

Annual Report 2017 — Sistema — 31

STRATEGIC PROGRESS

Fruit growing

Operating results

Gross apple output at Steppe's farms grew
by 35% in 2017 to 21,500 t. This significant
growth is due to new orchards starting
to bear fruit and older ones producing
bigger yields. The orchard yield also grew
by 5% in 2016, to 42.1 t/ha. The area
of Steppe's intensive orchards at the end
of 2017 was 780 ha.

Indicator

Gross grain harvest, m t

Milk production, K t

Vegetable harvest, K t

- Tomatoes

- Cucumbers

Gross apple harvest, K t

2017

1.0

39.4

44.9

23.2

21.8

Steppe's gross harvest (incl. RZ Agro), K t

Winter wheat

Winter barley

Sugar beet

Sunflower

Grain corn

Other

Total

2017

723.6

19.2

347.9

42.7

68.9

153

1,355.31

2016

Change, %

0.7

36.2

45.8

2.1

24.5

15.9

2016

485.6

21.9

339.5

31.9

40.5

121.8

1,041.0

145%

109%

-2%

-11%

137%

Change 2017 /
2016, %

49%

-12%

34%

70%

26%

30%

Dairy farming

As of the end of 2017, milk production
grew by 9.0% to about 40,000 t due
to an increase in the number of dairy
cows, while high levels of milk output
were maintained. Steppe remains Russia's
leader in terms of milk yield per cow,
at over 10,000 l per year.

In 2017, the company started the construction
of a new generation dairy farm with 1,800 dairy
cows (pilot operation began in March 2018).
The new farm is expected to reach its design
capacity of 20,000 t of milk per year in 2021.
Potential for import substitution, inefficient
producers leaving the market and a deficit
of high quality raw milk create favourable
conditions for developing dairy farming in Russia.

Vegetable growing

Yuzhny Agricultural Complex, part of
Agroholding Steppe, is Russia's biggest
producer of protected-ground vegetables,
with 144 ha of greenhouses. In 2017, the
gross harvest of tomatoes and cucumbers
was 44,900 t, and the average yield was
34.4 kg/sq m.

In 2017, Yuzhny Agricultural Complex
continued implementation of a programme
to increase operational efficiency. The
company also focused on promoting
its brand and developed a new modern logo
and packaging.

32 — Sistema — Annual Report 2017

sistema.сom
Business development strategy

Steppe's strategic goal is to be the market
leader in its key segments of operation.
The company plans to continue acquiring
new land, increasing the number of dairy
cows and commissioning new dairy farms.

To improve the efficiency of its
business, Steppe intends to develop
related businesses, in particular grain
procurement and trading, seed production
and irrigation.

By improving operational efficiency,
increasing gross yields and developing
its own infrastructure for grain storage and
handling, Steppe will be able to enter new
export markets by being able to produce
larger product batches and having control
over the entire value creation chain.

Steppe also continues to focus on developing
a high-quality corporate governance system.
A new Board of Directors was formed in 2017
with independent directors including industry
experts.

Industry overview for 2017

Crop farming

Gross grain and grain legume harvest in Russia, m t

In 2017, grain and grain legume output
in Russia was 134.1m t (+11% vs 2016).
The gross wheat harvest increased by 17%
to 85.8m t.

Growth was mainly due to a significant
yield increase on the back of production
intensification and favourable weather
conditions.

High yields continued to have a negative
impact on international grain prices,
including the price of wheat.

Export of Russian grain and processed
grain products reached an all-time high:
export shipments in the 2017-2018 season
were 47.5m t, or 10.6m t more than in the
previous year. Russia's leadership in the
international grain market is due both to
an advantageous price-to-quality ratio and
the weakening of the rouble against the
US dollar and the euro in recent years,
resulting in the US and European wheat
becoming less competitive.

134.1

120.7

105.3

104.8

94.2

92.4

70.9

2011

2012

2013

2014

2015

2016

2017

Source: Federal State Statistics Service

Dairy farming

Raw milk output in Russia, m t

In 2017, milk production in Russia grew
by 1.2% year-on-year to 31.1m t (the first time
growth has been recorded in the past three
years).

At the end of 2017, the total number of cattle
across all producers' farms was 18.6m head
of cattle (0.6% less than in 2016), 8.2 m
of which were cows (0.7% less than in 2016).

The decrease in the number of dairy cows
(by 8% to 8.2m in the last five years) was
offset by the growth of milk yield per cow
to 5,600 l in 2017, a 15-year high.

30.8

30.7

30.5

31.1

2013

2014

2015

2016

2017

Annual Report 2017 — Sistema — 33

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityGross pomaceous fruit harvest and import of apples in Russia, m t

1.2

1.3

1.5

1.4

1.0

1.6

1.7

0.9

1.6

0.9

1.9

0.9

2.0

2011

2012

2013

2014

2015

2016

2017

Import of apples

Pomaceous fruit output

Source: Federal State Statistics Service, Federal Customs Service

STRATEGIC PROGRESS

Fruit growing

Russian apple output has continued
growing (in 2017, gross pomaceous fruit
yield increased by 5% to 2.0m t), but the
Russian market still has high dependency
on apple imports (which account for about
36% of consumption). In 2017, apple imports
remained at the 2016 level of approximately
700,000 t.

The average apple yield of Russian
agricultural enterprises is about 11 t/ha,
while yields of intensive-type orchards
are 40-50 t/ha.

Vegetable growing

In 2017, production of protected-ground
vegetables in Russia reached 922,000 t
(an increase of 13% year-on-year), the highest
in the last 20 years. Vegetable yield growth
in recent years has been supported
by the introduction of a food embargo
in 2014 and subsequent ban on imports
of tomatoes and cucumbers from Turkey.
In 2017, imports of tomatoes and cucumbers
increased by 12%.

Financial performance in 2017

Strong operating results allowed Steppe
to increase revenues by 22.2% in 2017,
despite pressures stemming from lower
global wheat prices and the strengthening
of the ruble.

Adjusted OIBDA in 2017 amounted
to RUB 4.0 billion, a 40.6% increase
year-on-year.

Adjusted OIBDA
in 2017 amounted to

RUB 4.0bn

34 — Sistema — Annual Report 2017

sistema.сomReal 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 stake
Business Nedvizhimost

100 %

Leader Invest

Leader Invest is a development company
with a focus on housing and commercial
real-estate projects in Moscow. Its portfolio
includes 45 projects with a total area
of about 3.0m sq m in developed and well-
ordered districts of the city with a healthy
environment, which the company strives
to preserve.

Business Nedvizhimost

Business Nedvizhimost leases out its own
real estate assets and other assets under its
management. The average area of Business
Nedvizhimost's properties is 3,000-5,000 sq m.

Mosdachtrest is a subsidiary of Business
Nedvizhimost that focuses primarily on leasing
cottages (in Serebryany Bor and Barvikha)
and office buildings in Moscow, as well
as maintenance services.

Sistema's stake
Leader Invest

100 %

Management
Leader Invest

Oleg Mamayev
President

Felix Evtushenkov
Chairman
of the Board
of Directors

Management
Business Nedvizhimost

Financial performance in 2017
(Leader Invest and Business Nedvizhimost)

Vyacheslav Khvan
CEO

Leonid Monosov
Chairman
of the Board
of Directors

(RUB m)

Revenue

Adjusted OIBDA

Operating income

2017

2016

Change

15,267

12,810

19.2%

5,960

5,237

13.8%

4,998

7,757

(35.6%)

Adjusted net income attributable to Sistema

2,452

2,877

(14.8%)

 Leader Invest's 2017 results are presented in accordance with IFRS 15. The 2016 results are presented in accordance with IFRS 18.

sistema.сom

Annual Report 2017 — Sistema — 35

STRATEGIC PROGRESS

Development model

Leader Invest is a company expanding in those segments of the Moscow real estate market
that are most sustainable and have the strongest investment case. The company's development
model is based on:

Portfolio structure by class

13 %

38 %

49 %

Comfort

Business

Premium/Elite

social responsibility: the
company acts in the interests
of the city and its residents by
supporting initiatives launched
by Moscow construction
companies and creating new
points of growth – residential,
social and infrastructure facilities,
as well as jobs – as part of its
comprehensive and sustainable
development projects.

innovations: best technologies
and solutions in design
and construction;

Largest completed projects (commissioned in 2017)

Property

Clubhouse at Sretenka

Clubhouse at Serpukhovsky Val

Area, thousand sq m

Commissioning permit date

12.23

7.54

8 December 2017

27 December 2017

Major projects with construction launched in 2017

Property

Area, thousand sq m

Business-class residential project at 120 Lobachevskogo

Comfort-class residential project in Tushino

Comfort-class residential project at Volgogradsky

Comfort-class residential project in Sadovniki

Business-class residential project at Maslovka

Comfort-class residential project at Chertanovskaya

Business-class residential project at Leninsky

Comfort-class residential project at Veshnyakovskaya

Comfort-class residential project at Dmitrovka

Business-class residential project in Kuskovo

273.0

19.1

18.8

11.5

11.3

10.6

10.5

10.3

8.9

liquid high-quality assets:
all properties are in the
comfort, business, premium
or elite class and located
in residential areas of "old"
Moscow, with excellent public
transport accessibility and
social infrastructure;

unique niche product:
reasonable prices, rapid
construction, focus on modern
architectural trends;

strong and professional team;

Business development in 2017

In 2017, Leader Invest focused on
streamlining its business processes and
improving efficiency at all stages of the
project life-cycle. This involved optimising
design solutions, introducing new
procurement procedures to reduce costs,
strengthening the project management
function and making the Company’s sales
team more efficient.

Leader Invest's infill construction activities
include 42 projects at various stages with
a total area of 520,000 sq m. The average
area per project is 12,000 sq m and the
implementation period is 2.5 years. During
2017, the company launched 10 new infill
construction projects and commissioned
a further two. Active sales have already
started at 26 infill construction projects.

The company is building three large-scale
flagship complexes: ZIL Yug (1,690,000 sq m),
Nagatino i-Land (472,000 sq m) and 120
Lobachevskogo St. (273,000 sq m).

36 — Sistema — Annual Report 2017

sistema.сom

In 2017, the site design for the ZIL Yug
project was approved, the land survey
was started and applications for technical
specifications were submitted. P-stage
design documents are to be drafted in 2018.

The site design for Nagatino i-Land was
approved, the architectural concept
developed, the first stage of review by the
Moscow City Architecture Committee was

passed and P-stage design documents
were drafted. Construction of the first
stage of the project is to start in 2018.

Design documentation was developed for
120 Logachevskogo St., a positive opinion
obtained from the Moscow State Expert
Review Committee, the architectural and
urban planning solution was approved and
certification received, and a construction

permit was obtained. Sales of apartments
in the residential complex started in 2018.

In November 2017, Standard & Poor's
assigned Leader Invest a long-term
corporate credit rating of B with Stable
outlook. The agency cited Leader Invest’s
margins, which are among the highest
of any Russian property developer,
as a key factor in assigning the rating.

Business development strategy

Leader Invest's long-term strategic
goal is to become one of Moscow’s
leading residential developers and
to create value for Sistema through infill
projects and construction of large-scale
complexes.

The company's strategy envisages
maintaining a portfolio of development
projects of 1m sq m. Given the market
situation, Leader Invest focuses
on residential construction, including
both small projects in established
neighbourhoods and modern, large-scale

developments. The key target segments
of the Moscow residential real estate market
are the comfort and business classes. The
company aims to increase returns on its
project portfolio through higher turnover
and by making its design, construction
and sales processes more efficient.

Industry overview for 2017

Supply grew substantially in 2017 and the
number of deals registered on the new
housing market increased, while prices
stabilised. The market received some support
from a record drop in mortgage interest
rates: in November, the average interest rate
on loans for purchase of new housing was
9.66% p.a., compared to 11.37% the previous
year. Mortgage terms are expected
to further improve in 2018.

As of the end of 2017, there were 71
properties containing about 19,080
apartments (1.1m sq m in total) for sale
in the new mass-market housing segment.
During the year, sales started at 23 new
projects, up 1.6 times than in 2016.

Average prices in the business and
comfort class segments, RUB/sq m

Increase in the number of off-plan
sales, thousand

158.0

147.9

146.8

150.8

54.2

35.6

21.3

24.0

19.6

12.1

Q1 2014

Q4 2015

Q4 2016

Q4 2017

2013

2014

2015

2016

2017

Source: Metrium Group

Source: Federal Service for State Registration

In December 2017, the average price per
sq m of new comfort class housing was
RUB 150,790, 2.7% more than at the end
of the previous year.

According to the Federal Service for State
Registration, the total number of deals
in the new housing market in 2017 was
54,207 (off-plan sales), up 52.2% on 2016.

Legislative amendments to introduce more
stringent requirements for developers will
enter into force in July 2018, which may
prompt developers to launch planned
projects in the first half of the year.

 Industry overview based on data from consulting company Metrium Group.
 According to the Central Bank.

Annual Report 2017 — Sistema — 37

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibility
STRATEGIC PROGRESS

Business Nedvizhimost's business model

The company's main activity is leasing
properties. Mosdachtrest's assets are
residential houses, while Business
Nedvizhimost's assets are class
C offices, including former automatic
telephone systems (“ATS”) buildings. Both
companies also own assets intended for
sale (a number of ATSs and land plots
for construction of summer cottages
in the Moscow region). There is also
a group of assets for development:
construction of new cottage villages
at Serebryany Bor and conversion of former
ATSs into a network of rental properties.

Favourable property locations and
geographical diversification are the key
advantages of Business Nedvizhimost's
assets, which are within walking distance
of metro stations in established residential
and administrative districts and outside
industrial areas.

The average area of Business
Nedvizhimost's properties is 3,000-
5,000 sq m, which is optimal in terms
of leasing.

Business Nedvizhimost's assets
by groups

Group

Leased

For sale outside of Sistema

For renovation

TOTAL

As of 31 Dec 2017

181,416.1

84,290.3

31,593.6

297,300.0

Business Nedvizhimost's operating results in 2017

Total asset portfolio,
thousand sq m

Properties generating
rental income

Real estate assets, thousand sq m

Ownership

Management

297.3

63.7

Mosdachtrest's operating results in 2017

Total asset portfolio,
thousand sq m

Properties generating
rental income

Land assets, ha

Serebryany Bor Moscow region

58.0

145

19.3

89.1

Business development in 2017

In 2017, Business Nedvizhimost's portfolio
decreased by 24% as a result of property
sales to Leader Invest and in the open
market.

After restructuring its portfolio, Business
Nedvizhimost divided its assets into
three key groups: for lease, for sale
and for development. Two pilot serviced-
apartment projects (renovation of ATS
buildings) will be launched in 2018.

Mosdachtrest's key assets are land plots
in Serebryany Bor and the Moscow region.

In 2017, four buildings at the Serebryany Bor
Sanatorium with a total area of 1,578 sq m
were renovated, and pre-design works were
completed for further development of three
sites at Serebryany Bor.

 Preliminary distribution at the end of 2017.

38 — Sistema — Annual Report 2017

sistema.сom
Business development strategy

Business Nedvizhimost's operating strategy
includes:

increasing asset values and improving
efficiency

developing an efficient rental business with
annual returns of more than 10%

consolidating rental assets by combining
resources and creating expertise in focus areas
(ownership, development, service)

Business Nedvizhimost plans to renovate
and develop assets (including reconstruction
of 80,300 sq m of commercial floorspace)
and commission new housing for leasing
out, and to refurbish existing housing.

Business Nedvizhimost plans
to reconstruction

80,300

sq m

of commercial floorspace

Industry overview for 2017

Total size of the office space market as
of Q4 2017, thousand sq m

Increase of vacant floorspace

In 2017, 380,000 sq m of new office space
came onto the market, up 9% year-on-year.
The total size of the Moscow quality office
space market reached 20.3m sq m, with class
A offices accounting for 22% (4.5m sq m)
and class B+ offices accounting for 37%
(7.5m sq m), while the remaining 41%
(8.3m sq m) are class B- offices.

Service sector companies remain the
key customers for renting quality offices.
Telecoms companies account for 21%
of total rents, manufacturers for 17%,
and FMCG companies for 11%.

4,200

7,500

8,100

1,227

16.6%

14.5%

8.0%

12.3%

Class А

Class B+

Class B-

Class С

Class А

Class B+

Class B-

Average

 Change vs the end of Q4 2016

Annual Report 2017 — Sistema — 39

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityBashkir Power Grid Company

Bashkir Power Grid Company (BPGC) is a large Russian regional power grid company
providing electricity transit between the central part of the country and the Urals,
electricity transmission in Bashkortostan and distribution to end users.

Business model

The Company's aims to provide a reliable, high-quality and affordable power supply to
consumers. In addition to its core operating activities, the company focuses on supporting
regional economic growth, sustainable development and mutually beneficial cooperation.

Electricity
generation

Electricity
transmission
and distribution

Supply

Consumption

Renewable energy
sources

HPP

Generating
companies

TPP

BGC
Transmission grids

Bashkirenergo
Distribution grids

Bashkortostan Power
Sale Company

BPGC controls power grids of all voltage levels in Bashkortostan.

Sistema's stake

91%

Bashkir Power Grid Company
also designs, builds and
upgrades power facilities.
BPGC's subsidiaries include
Bashkir Grid Company
(BGC) (transmission grids),
Bashkirenergo (distribution
grids) and BPGC Engineering
(power engineering).

Dmitry Sharovatov
CEO
and Management
Board Chairman

Mikhail Cherny 
Chairman
of the Board
of Directors

 Vadim Pavlus as of 31 December 2017.

40 — Sistema — Annual Report 2017

sistema.сomFinancial performance in 2017

(RUB m)

Revenue

OIBDA

Operating income

Net income attributable to Sistema

2017

17,671

5,259

2,926

2,369

2016

16,052

5,636

3,404

2,706

Change

10.1%

(6.7%)

(14.0%)

(12.5%)

BPGC won the Socially Responsible
Power Grid Company and Most
Transparent Power Grid Company
categories at the 7th Russia's Best
Power Grids national awards

BPGC's business development in 2017

2017 was the third year of large-
scale construction of power facilities
in Bashkortostan. BPGC is continuing
to roll out its comprehensive equipment
modernisation programme and to implement
innovative solutions that enhance the reliability
of power supplies and reduce power losses.

In 2017, electricity consumption in
Bashkortostan grew by 1.1%. The “single pot”
net supply increased by 1.5% in 2017.

In 2017, the number of new connections
to power grids decreased (-19% compared
to 2016), preimarily because most developing
districts have already been covered by
Bashkirenergo in previous years.

creation of a two-level model to optimise
operational and technological management
at Bashkirenergo;

In 2017, electricity
consumption
in Bashkortostan grew by

1.1 %

implementation of solutions for automation
of power grids in Ufa by using Smart Grid
technologies to enhance the quality and
reliability of power supply to consumers.

The company continues the gradual automation
of its business processes using IT and ERP
systems.

In 2017, BPGC completed the construction
of the 110 kV Kustarevskaya substation in Ufa.
The company also put into operation the 110kV
Spartak substation in Sterlitamak and the 110 kV
Alekseevka substation in Belebey.

As part of its programme to improve operating
efficiency, BPGC implemented the following
major projects in 2017:

The number of accidents at BPGC facilities
decreased in 2017 by 0.97% (-64 accidents).

energy saving and energy efficiency
programme for 2014-2023 (automatic power
control and metering system);

Operating results of distribution grids (Bashkirenergo) and transmission grids (BGC)

Indicator

Units

2017

2016

Bashkirenergo

BGC

Bashkirenergo

BGC

Bashkirenergo

BGC

Power losses

Power in

8.36%

1.29%

8.23%

1.3%

+0.13 p.p.

-0.01 p.p.

m kWh

22,151.6

26,137.5

22,285.8

24,978.7

-0.6%

4.6%

Net supply from distribution grids

m kWh

20,298.8

25,804.1

20,451.6

24,657.9

-0.7%

4.6%

Number of new connections

connections

19,547

24,232

Connected capacity

334

2.36

393.9

-19.3

-50%

-15.2

-41%

Annual Report 2017 — Sistema — 41

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilitySTRATEGIC PROGRESS

Development strategy

Industry overview for 2017

Financial performance in 2017

BPGC’s key focuses are maximisation of free
cash flow and increasing the value of the
business.

Electricity consumption in Russia in 2017
totalled 1,059.5bn kWh, up 0.5% YoY.
Electricity production totalled 1,073.6bn
kWh, up 0.2% YoY.

Drivers for maximisation of free cash flow:

Limiting growth of spending and
implementing efficiency enhancement
projects;

Implementing an organic development
programme, including Smart Grid and
automatic power control and metering system
projects;

Maximising best use of free internal
resources (monetisation);

Actively negotiating tariffs and optimising
the investment programme

The value of the business will be increased
by growing the non-regulated business
(telecom, IT, engineering, etc.) and by
inorganic growth (acquisition of power grid
and infrastructure assets in line with the
company’s strategy).

In 2017, the average one-part “single pot”
tariff for electricity transmission increased
by 6.3% compared to 2016. Indexation
of single-rate tariffs since July 2017 averaged
109.6% for all voltage levels, while the rate for
the maintenance of electrical grids grew by
103.0% and the payment rate for technological
losses grew by 105.7%.

Electricity grid services constitute a natural
monopoly. All regional distribution grid
companies operate under similar market
conditions and a common tariff policy. The
main trend in the Russian power industry
is a moderate increase in demand for
electricity (up to 2% per year). Demand
is forecast to reach over 11.5tn kWh by 2029.

Bashkirenergo has one of the highest levels
of operational efficiency of any Russian grid
companies. With tariffs below market average,
it also achieves high profit margins.

BPGC's revenue increased in 2017
by 10.1% YoY mainly due to growth of tariffs
for electricity transmission services
from 1 July 2017. OIBDA and net profit
decreased in 2017 by 6.7% and 12.5%
YoY, respectively. Factors affecting OIBDA
included an increase in payments for
power losses in grids as a result of rising
market prices for electricity.

In 2017, as part of the modernisation
of Ufa's distribution grids using Smart Grid
technology, BPGC upgraded 87 distribution
and transformer substations, laid 20.3 km
of cable and installed about 8,700 power
metering units.

BPGC's revenue
increased in 2017 by

10.1%

In 2017 BPGC upgraded

distribution and transformer
substations

In 2017 laid

20.3 km

of cable

 According to forecasts from the Russian Ministry of Energy.

42 — Sistema — Annual Report 2017

sistema.сomMedsi

Medsi is a leading national chain of healthcare facilities,
offering a full range of medical services for children and adults
(prevention, diagnosis, treatment of diseases and rehabilitation services).

Sistema's stake

100%

Medsi's business model

Medsi is a vertically integrated chain of medical clinics offering a full range
of medical services for children and adults.

Vertical integration maximises synergies
and income per client:

Facilities

Clinical diagnostic centres (CDCs),
total

CDC Krasnaya Presnya

CDC Belorusskaya

CDC Grokholsky

St Petersburg (Medem)

Children's clinics

Primary care clinics

Hospitals

Wellness centres and sanatoriums

Regional clinics, total

Quantity

Optimised management

Management is based on clusters including all three types of in-patient
and out-patient facilities and clustered around teams with best expertise.

Full range of services

Patients transferred from primary screening to more advanced check-ups or in-patient treatment if required.

Maximising cross sales

Larger number of clients retained for advance diagnostics and hospitalisation.

Talent management and rotation

Unified HR resource and rotation of doctors improves expertise, cross-sales and quality of service.

Financial results in 2017

Elena Brusilova
President

Artyom
Sirazutdinov
Chairman
of the Board
of Directors

(RUB m)

Revenue

Adjusted OIBDA

Operating (loss)/ income

Adjusted net income / (loss) attributable
to Sistema

2017

11,670

1,968

1,142

837

2016

9,409

592

(432)

(720)

Change

24.0%

232.7%

sistema.сom

Annual Report 2017 — Sistema — 43

STRATEGIC PROGRESS

Client flow

Primary care

Diagnostics

In-patient care

Primary care

Advanced out-patient facilities

Hospital or CDC

Focus on growing the share
of preventive check-ups in clinics

Focus on strengthening diagnostic capabilities
and check-up programs at CDCs or clinics

In-patient care, diagnostics, coordination of operating
processes within relevant range of specialties

Vertical integration means Medsi can offer a full cycle of medical care, with patients transferred from primary screening
to in-patient treatment if required

Results include better management and maximisation of synergies, cross sales and income

2017

7,901

12,359

233

1.5

50.00

2016

7,314

11,483

221

1.3

42.55

+8.0%

+7.6%

+5.8%

+14.8%

+17.5%

Business development in 2017

Medsi improved key operating indicators
in 2017: number of visits rose by 7% and
average check by 15%. Revenue from
the MMI channel significantly increased
(+377% YoY) due to Medsia’s integration
into the MMI system in specialised
and high-tech care. The MMI channel
is becoming a major source of customers
for Medsi’s in-patient facilities.

The flagship facilities of the outpatient
diagnostic segment are the clinical
diagnostic centres (CDCs) at Belorusskaya
and Krasnaya Presnya. These are multi-
disciplinary centres with a total area
of more than 30,000 sq m using world-
class innovative technologies. CDC
Belorusskaya is Medsi’s leading facility
by volume of medical services provided
(+5% YoY). Opened at the end of 2015,
CDC Krasnaya Presnya reached full
capacity in 2017, including the launch
of a children's department, dentistry and
in-patient care. The number of medical
services provided increased by 2.7x.

In 2017, Medsi implemented a number
of projects as part of its investment
programme. In September 2017,
a modern multi-disciplinary medical

44 — Sistema — Annual Report 2017

Medsi's operating results

Indicator

Patient visits

Services provided

Area

Average cheque

Revenue per sq m

centre for children and adults with
an area of more than 4,000 sq m
opened on 3rd Khoroshovsky Proezd
in Moscow. In August 2017, Medsi
acquired Medem clinic, thus entering
the St Petersburg market. The clinic, with
an area of 6,800 sq m, offers a full range
of medical services for children and
adults, from primary and sophisticated
diagnosis to surgery and post-operative
rehabilitation.

In January 2018, Medsi opened a family
clinic on Leninsky Prospekt in Moscow
and a clinic for adults in Leninskaya
Sloboda after completing repairs,
equipping and licencing in 2017.

sistema.сomWhen the reorganisation is completed
in 2018, Medsi's management system
will be in line with best practices in the
management of medical companies.

Medsi is actively strengthening its
relationships with leading international
medical companies and research
organisations to gain expertise and bring
the latest medical technologies to Russia.
In 2018, Medsi’s clinical Hospital in
Otradnoe is expected to be included
in the International Medical Cluster being
implemented under Federal Law No 160-FZ.

The number of medical
services provided increased by

2.7x

In 2018, Medsi plans to open at least three
new clinics with an expanded diagnostic
and therapeutic base in Moscow and
the regions, and to start construction
of a flagship multifunctional medical centre
on Michurinsky Prospekt with an area
of more than 28,000 sq m.

A priority area in 2017 was the formation
of full-cycle medical care to provide
patients with a full range of services.
To this end, Medsi hired teams of highly
qualified physicians led by outstanding
specialists Konstantin Lyadov and Anatoly
Makhson. In early 2018, Medsi's team was
strengthened by the outstanding oncologists
Mikhail Davydov and Georgy Manikhas.

In 2017, Medsi and MTS jointly developed
a telemedicine service for online
consultations to increase access to medical
services. The pilot launch of the platform
took place in January 2018; the service
is planned to be expanded to most
of Russian regions by the end of 2018.

Medsi continues to transform its
management system: the company has
formed vertically integrated business
units at the level of clinics and prepared
a programme to improve the efficiency
of operational and business processes.

Business development strategy

Medsi's strategy aims to build Russia's
largest nationwide medical chain,
combining three main components:
healthcare, education and research. The
main goal is to create an innovative medical
platform based on a vertically integrated
system of medical care.

and patient care in clinics (the “patient
experience”). Medsi plans to increase
customer comfort by improving its
administrative and support functions,
eliminating delays and queues, introducing
advanced electronic and mobile services, etc.

One of Medsi's priorities is continuous
improvement of the operating efficiency
of its business processes. A key area
is to increase security and the quality
of customer service, including logistics

Medsi's five-year investment programme
aims to increase the company’s market
share by opening new clinics and/or
acquiring existing players, as well as
at providing key assets with advanced
high-tech equipment.

Annual Report 2017 — Sistema — 45

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilitySTRATEGIC PROGRESS

Industry overview for 2017

In 2017, the market for paid healthcare
services in Russia grew by 5.2% to RUB
542bn due to the ongoing transformation
of the healthcare system and a strengthening
of the role of private sector companies.

The largest and fastest growing segment
of the market was the commercial segment
(direct payments by individuals), which
exceeded RUB 399bn in 2017.

This segment is expected to continue
to grow due to recovered growth of real
incomes, adoption of the law on co-financing
of medical services (so-calle Mandatory
Medical Insurance Plus, or MMI+), pressure
on the shadow market from regulators and
growth of medical tourism.

Medsi's share in the market of paid medical
services in 2017 was 2.2% across Russia

(1.8% in 2016) and 4.1% in Moscow (3.8%
in 2016). Medsi's revenue growth rate in 2017
was almost double the market average
in all segments, strengthening Medsi’s
position as a leading private healthcare
operator in VMI channels and significantly
increasing the share of revenue received
as cash from individuals (+22% YoY).

Medsi’s market share in key customer segments

Commercial segment

VMI

2.4%

2.5%

2.6%

4.9%

5.2%

0.9%

1.0%

4.0%

4.2%

4.4%

2015

2016

2017

2015

2016

2017

Moscow and Moscow region

Russia

The voluntary medical
insurance (VMI) segment
has grown more than 1.5x to

RUB 142 bn

over the past seven years.

Financial results in 2017

Medsi increased revenue by 24.0% for the
full year 2017. Revenue growth was driven
by an increase in patient visits and a higher
average check as Medsi delivered a broader
array of integrated services and high-tech
surgeries. Revenue from the mandatory
medical insurance segment, derived primarily
from high-tech services, increased more than
five-fold in 2017 to RUB 1.2 billion.

The Clinical Diagnostic Centre at Krasnaya
Presnya, which opened in December 2015,
increased capacity utilisation to 23% in 2017
and delivered 8% of Medsi’s total revenue.

Adjusted profit attributable
to Sistema was

For the full year 2017,
the OIBDA margin was

RUB 838 m

16.9%

versus a loss in 2016

versus 6.3% in 2016

 Including the commercial segment (direct payments by individuals) and VMI.

46 — Sistema — Annual Report 2017

sistema.сomBinnopharm

Binnopharm is one of Russia’s largest full-cycle biopharmaceutical
companies with its own in-house R&D division.

Sistema's stake

74%

The company produces
biotechnological drugs,
including a hepatitis B
vaccine, pulmonology and
neurology drugs, infusion
solutions, and anti-viral and
immunomodulating drugs.
Binnopharm operates
two state-of-the-art
pharmaceutical plants
in the Moscow region.

Business model

Binnopharm is a full-cycle pharmaceuticals
company, from developing and registering
drugs and producing substances and
finished products to marketing and
promotion of drugs and sales to distributors
and pharmacy chains.

The company focuses on expanding
commercial sales while continuing supplies

to hospitals. An in-house sales service was
formed to promote commercially available
prescription-based (Rx) and over-the-
counter (OTC) drugs.

Binnopharm's portfolio targets the
neurology, pulmonology, cardiology
and gastroenterology segments.

Financial performance in 2017

(RUB m)

Revenue

OIBDA

Operating income

Net income attributable to Sistema

2017

2,363

482

323

2016

1,939

415

219

Change

21.8%

16.3%

47.7%

31.8%

In 2017 Binnopharm successfully delivered
on its strategy to grow the commercial
segment, with commercial sales accounting
for 63% of total revenue, versus 34% in 2016.
Revenue increased by 21.8% to RUB 2.4
billion on the back of an increase in sales
of its own products and an increase in
commercial distribution sales. The company
reduced reliance on sales of Regevac, with
the vaccine's share in revenue falling to 13%
vs 24% in 2016.

In 2017 the OIBDA margin declined
by 1.0 percentage point, as state-sector
sales of higher-margin drugs fell, though
this trend was partially offset by an increase
in OIBDA from sales of the company's own
products as well as distribution of products
in the commercial segment.

Alexey Chupin
CEO

Dmitry Zubov
Chairman
of the Board
of Directors

Annual Report 2017 — Sistema — 47

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibility
STRATEGIC PROGRESS

Binnopharm's business development in 2017

In 2017, Binnopharm continued to pursue
a strategy of portfolio expansion. The
company completed the registration
of three generic drugs – Ringer's solution,
Neurocholine and Moxifloxacin – and
launched production and sales in 2018. Ten
more generic drugs are being registered.
In 2017, five original combinations were
developed and submitted for registration.
The company continued work on
the last stage of clinical trials of two
biotechnological products.

Binnopharm's sales service in 2017
continued to actively promote proprietary
commercial drugs and products of partner
companies. Secondary sales of drugs
promoted by the company in 2017
increased by 68% YoY (by number of packs).

In 2018, the company will continue
development of its portfolio of proprietary
products: launches of four new drugs
are planned, while the company plans
to register more than 10 new drugs and
finalise a number of new products.

Revenue structure

3 %

27 %

25 %

45 %

Proprietary drugs (commercial segment)

Proprietary drugs (hospital segment)

Commercial distribution

Other

Business development strategy

Binnopharm’s operational strategy focuses
on further growing on the commercial
segment and reducing the importance
of the state segment to the company’s
business. Binnopharm continues
to develop its proprietary portfolio
of commercial brands, with a focus

on neurology, pulmonology, cardiology and
gastroenterology. An important element
of this strategy is to increase capacity
utilisation, and thus to increase profitability.
The company plans to launch about
30 drugs in 2018-2020, including new
combinations.

Binnopharm’s investment strategy
envisages acquisition of individual
portfolios of drugs and brands that are
complementary to its existing business.

Industry overview for 2017

The commercial pharma segment is the
main growth driver and remains the largest
and most attractive segment for investment,
accounting for 75% of the market.

An important trend is the ongoing transition
to cheaper generic drugs, which
consumers prefer to more expensive brand-
name products.

919

Growth of the Russian pharma market, RUB bn

1,043

1,140

1,250

1,309

1,401

In money terms, imported medicines
account for more than 70% of the Russian
market, highlighting the significant potential
for domestic producers to grow due
to import substitution.

Legislative initiatives and a number of
bills that have already been passed aim
to support Russian medicine producers.

2013

2014

2015

2016

2017

These include limitations on foreign
companies’ participation in government
medicine procurement tenders in which
two or more domestic producers
are involved, and also new rules that
simplify registration and clinical trials
for Russian drugs.

The Russian pharma market
in 2017 grew at

in ruble terms

 Source: DSM Group.
 Generic drugs are drugs that are equivalent to brand-name products in composition and effect.
Generic drugs may differ from brand-name products in presentation and trade name, and generally have a lower price.

48 — Sistema — Annual Report 2017

sistema.сom

RTI

RTI is a major Russian research and production company that develops,
produces and supplies technological solutions including radars,
automated control systems and situation centres, communications
systems, and electronic and microelectronic devices.

Sistema's stake

87%

RTI has a robust R&D
infrastructure and well-
equipped serial production
facilities employing more
than 15,000 researchers,
designers, engineers and
highly qualified personnel.
Thanks to this, the company
is able to implement major
and uniquely complex
projects on a national
scale, and create high-
tech innovative products.

Maxim Kuzyuk
CEO

Sergey Boev
Chairman
of the Board
of Directors

Financial results in 2017

(RUB m)

Revenue

Adjusted OIBDA

Adjusted operating income

Adjusted net
income (loss) attributable to Sistema

Business development in 2017

RTI continues developing new products
in the radar segment. In 2017, the company
commissioned three radar stations making
it possible to close the radar defence loop
around Russia. New very long-range radars
produced by RTI using prefabrication
technology significantly increased the
reliability and quality of radar surveillance
across Russia.

As part of the programme for developing
automated control systems, RTI developed
the Region 2020 experimental automation
system. The system is designed to optimise
the work of control bodies of regional and
municipal sub-systems of the Russian
Unified System for Prevention and Response
to Emergency Situations.

A joint project between RTI subsidiary
Yaroslavl Radio Factory and Thales Alenia
Space to produce communications
equipment entered the final phase
of implementation. The companies
developed and approved a road map and
production schedules for joint manufacturing
of equipment for the space industry.

RTI maintained its leadership of the
microelectronics segment. Mikron
is among Europe’s five argest full-cycle

2017

50,579

6,626

3,708

2016

52,628

5,809

3,014

Change

(3.9%)

14.1%

23.0%

(2,563)

(4,730)

–

microelectronics producers, and the largest
in the CIS. Mikron launches serial production
of more than 20 new products annually,
each of which forms the basis for new digital
solutions and services. One of the key areas
for new product development is the RFID
segment, in which Mikron produces more
than 480 items a year.

Among key new products tested and now
ready for serial production are eight new
RFID tags for various purposes, including
tags for animals and for marking wood
and metal goods. The results of such
R&D work are noticeable at the lab testing
stage: following a pilot project for tagging
transportation documents for raw wood
in Irkutsk region, volumes of illegal logging
fell by 53% in just three months year-on-year.

Mikron launches serial
production of more than

new products annually

Annual Report 2017 — Sistema — 49

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilitySTRATEGIC PROGRESS

Mikron's operational
achievements in 2017:

launching a new-generation
driving licence and vehicle
registration certificate

Operating results

Total microchips produced, m, of which:

manufacturing Mir-Maestro national
bank cards jointly with MTS Bank

supplying 2m chip modules for bank
cards of the Mir national payment system

transport cards, m

export chips, m

2017

2016

900

230

360

860

230

330

launching electronic mandatory
medical insurance policies
using Mikron's microchips
and Russian software

serial production of contactless
transport cards and tickets
for entertainment events

export of 919 million microchips

Mikron's product portfolio contains about
700 types of microchips, cards and tags,
with 15-25 new products tested and
certified every year, including standard
and customised chips. Most of Mikron's
microchips were given the status
of Category 1 domestically produced
integrated microchips by the Industry
and Trade Ministry.

Mikron is Russia’s biggest exporter
of microchips, accounting for

53%

of the national total.

Business development strategy

RTI's strategy aims to strengthen the
company’s market position and pursue
organic growth in those segments in which
the company already operates, to enter
adjacent market segments and boost
exports in all segments.

In the public procurement segment RTI
focuses on maintaining leadership in radio,
surveillance and communication systems,
as well as information systems for managing

and supporting decision-making. In addition
to very long-range radars, RTI is planning
to develop sales in adjacent segments and
increase exports.

In the microelectronics segment RTI
focuses on aggressive market growth
to meet the needs of the digital economy.
Key industry drivers in the near future will
include the Internet of Things and Artificial
Intelligence, which require a large number

of different microchips, 70% of which Mikron
produces using its own technologies.

In 2018, RTI Group will continue building
a sustainable business model to meet its
obligations to government and external
investors. RTI will continue implementing
a programme launched in 2017 to boost
business efficiency with a focus on creating
added value at the operating level and growing
cash flows to ensure financial stability.

Industry overview for 2017

Despite a decrease in defence spending
in 2017, the industry is expected to grow
in the medium term. Prevailing market
trends include increased automation and
intelligence of security systems. Russia
is following global trends, which will
result in increased spending on civilian
and military information and control
systems. Other trends in the Russian

defence sector include consolidation and
vertical integration involving other major
holdings.

In 2017, the Russian microelectronics market
was valued at RUB 131bn. Traditionally
the biggest segment, worth RUB 58bn,
is production of equipment for the defence,
aerospace and nuclear energy sectors.

50 — Sistema — Annual Report 2017

sistema.сomThis segment is currently migrating
to microcircuits with higher levels of integration,
as they have a lower weight and size, which
is crucial for most of specialised applications.

RFID tags and smart cards (worth RUB 6bn)
are mostly used in transport tickets and
chip modules for bank cards. The market
is growing by 5%-7% per annum in physical
terms, but volumes remain flat in money terms
due to falling prices. Growth in the segment
will be driven by introduction of RFID tagging
for individual inventory items and continued
migration of personal identification documents
to protected chip carriers.

Financial results in 2017

RTI saw a moderate decline in revenue
in 2017 due to a 6.8% year-on-year
decrease in revenue from the Radio-
technical Systems business unit, as well
revenue volatility in relation to a major
government contract. This was partially
mitigated by a 15.7% year-on-year revenue
growth in the Microelectronics business
unit as a result of increased import

The total value of the Russian
microelectronics market is RUB 32bn. Mikron
accounts for 31% of this, remaining the
undisputed leader by revenue, production
output and level of technology.

Russian microelectronics market
by sector

2 % 1 %

5 %

13 %

44 %

The total value of the Russian
microelectronics market is

RUB 32 bn

32 %

Defence industry
and aerospace
Industrial, energy
and medical electronics
Consumer electronics,
LED

RFID and smartcards

Automotive industry

Telecom

substitution of electronic components and
heightened demand for Mikron’s products.

Adjusted OIBDA
for 2017 improved by

Adjusted OIBDA for 2017 improved by 14.1%
largely due to strong OIBDA dynamics in the
Microelectronics business unit.

14.1%

The net result for the year improved
thanks to reduced financial expenses.

 RTI’s financial results in this press release are presented in accordance with IFRS 15 standards. In the consolidated accounts of Sistema Group,
RTI’s financial results are presented in accordance with IAS 18 standard.
 Former Defence Solutions business unit.

Annual Report 2017 — Sistema — 51

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityMTS Bank

MTS Bank is a universal financial organisation that provides

banking services to individuals and corporate customers.

Sistema's stake

87%

MTS Bank operates
in Russia and services
clients across the entire
chain of MTS outlets.
Corporate customers
are serviced in seven
branches and 80 bank
offices in Russia's
key regions.

The bank also ranked

30th

by net income under Russian
Accounting Standards

Financial results in 2017

(RUB m)

Revenue

OIBDA

Operating (loss) / income

Net (loss)/ income attributable to Sistema

MTS Bank's business model

A universal banking model: a substantial part
of the Bank's income is generated by lending
to individuals and corporate clients; the
main source of liabilities is customer funds
(individuals and corporates).

2017

2016

Change

18,106

18,268

(0.9%)

923

370

169

(2,345)

(3,034)

(2,616)

Development of MTS Bank in 2017

As of the end of 2017, MTS Bank ranked
48th among Russian banks by assets, 36th
by individual deposits and 44th by capital.
The bank also ranked 30th by net income
under Russian Accounting Standards.

In 2017, the Bank's focused on implementing
a digital transformation programme by
upgrading its range of cards, introducing
agile management of product development
processes, and launching product sales
through its own remote channels and those
of mobile operator MTS.

The number of active customers increased
by 36% in 2017, reaching 1.5m people.
The use of digital products (online and
mobile banking services) increased, with
penetration of these services within the
customer base reaching 24.3% (above the
market average) mostly as a result of the
Bank's cooperation with MTS. In 2017,
MTS Bank successfully integrated some
of its services with the mobile operator's
key product, MTS E-Wallet.

Ilya Filatov
Chairman of the
Management
Board

Vsevolod Rozanov
Chairman
of the Board
of Directors

52 — Sistema — Annual Report 2017

sistema.сomВыручка бизнеса

Группы МТС выросла на

+ ХХ %

The bank is actively developing digital
services for its customers, including online
lending. Sales of credit cards through
digital channels in 2017 rose from 0.1%
to 14% of the total. Digital sales accounted
for 7% of total sales in 2017. In the
corporate segment MTS Bank pursues
a conservative risk policy by focusing
on high-quality borrowers. During the year
MTS Bank increased the appeal of its offer
for corporate customers by developing
payment processing services.

MTS Bank continues to expand its cooperation
with MTS and other Sistema portfolio
companies. In October 2017, the Bank
signed an agreement for provision of Internet
acquiring services with Ozon, a leading multi-
category online retailer in Russia.

The Bank’s main goal for 2018 is to continue
aggressive growth of the retail customer
base by developing a digital banking
business model and transaction banking
services for small and micro businesses.

The number of active
customers increased by

36%

reaching 1.5m people

Business development strategy

Financial results in 2017

MTS Bank's strategy aims to build a digital
bank in cooperation with MTS and other
Sistema Group companies.

In 2017 MTS Bank successfully delivered
on its plan to return to profitability by pursuing
a strategy of partnering with MTS and other
Sistema portfolio companies.

In line with the Bank’s strategy
of building a leading digital
bank, MTS Bank grew fee
and commission income by

Key elements of the strategy are:

Aggressive growth of the retail
business through participation in MTS's
eco-system and development of own
partnership network to build a 5m
customer base and become a top-10 bank
by credit cards and a top-5 bank by point-
of-sale loans.

Conservative growth of corporate
business on a par with the market, and
optimisation of cross sales and operating
model.

Relaunching work with small and micro
businesses using a direct banking model
with a focus on transactions in remote
channels.

31.6%

for the full year

For the full year, interest income decreased
by 5.4% as a result of lower interest rates
in Russia and a smaller loan book following
the deconsolidation of East-West United
Bank. This was partially mitigated by an 8.3%
increase in higher-margin retail lending, with
retail loans accounting for 59% of the total
loan book at the end of the reporting period,
versus 53% a year earlier.

The Bank recorded a net
profit for the year of

RUB 169 m

Annual Report 2017 — Sistema — 53

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibility
Hospitality assets

Cosmos Group is one of Russia's leading hotel management companies,

providing a full range of hotel development services

from project consulting and pre-opening preparations

to cost optimisation and increasing asset capitalisation.

Sistema's stake

100%

Cosmos Group has more than 3,700 rooms
under management in 3-5 star hotels
located in tourist and business centres

including city business hotels and luxury
resorts in Russia, Italy, Namibia and the
Czech Republic.

Cosmos Group's portfolio
includes 17 hotels in 14
locations across Russia
and the world. Some of the
hotels operate under well-
known international brands
(Park Inn by Radisson and
Holiday Inn Express), and
some are stand-alone hotels.

Business model

Cosmos Group provides a broad range
of services from hotel concept development
and design and construction support
to brand selection and hotel management.

The company's diversified portfolio
comprises hotels of various types and
in different locations, with the main focus
being on 3-4 star city business hotels.
Cosmos Group also develops its own hotel
brands, which were created in 2017.

Number of hotel rooms by types

152

108

3,475

The majority of Cosmos Group's income
(about 70%) is generated by hotel
management fees.

City business hotels

Recreation services

Hotels outside Russia

Financial performance in 2017

Christian Mayer
President

Artem Sirazutdinov
Chairman
of the Board
of Directors

(RUB m)

Revenue

OIBDA

Operating (loss) / income

Net loss attributable to Sistema

2017

4,318

849

198

(517)

2016

2,794

487

182

(252)

Change

54.5%

74.5%

8.7%

–

 In Cosmos Group
 Christian Mayer was appointed President on 08 February 2018, before 07 February 2018 - Maxim Khoroshenkov

54 — Sistema — Annual Report 2017

sistema.сom2017

2016

1,909

1,891

56%

4,040

49%

3,771

7 p.p.

59%

Business development in 2017

Operating results (hotels under management)

Cosmos Group was founded in April 2017
as a result of the separation of Sistema’s
hotel asset ownership and management
functions.

At the end of 2016, Sistema acquired
Regional Hotel Chain (RHC) assets,
increasing the accommodation capacity
of Sistema's hotel business by 1,379 rooms.

Indicator

RevPAR, RUB

Occupancy rate

Number of rooms

In 2017, revenue at RHC hotels increased
by 18% and amounted to RUB 1,567m.
Revenue of other hotels in the chain
increased by 8% in 2017, and totalled
RUB 2,761m.

In 2017, the company also actively
developed and extended its eco-hotels
Izumrudny Les (in Klin, Moscow region)
and Altay Resort (in Gorno-Altaysk).

In November 2017, the 243-room Holiday
Inn Express Moscow-Paveletskaya
hotel was officially opened in the centre
of Moscow. Due to its favourable location

and well-known international brand,
the hotel's occupancy rate is expected
to exceed 50% in 2018.

In 2018, Cosmos Group is planning to take
more hotels under management, including
Sistema Group assets: two new economy-
class hotels under Ibis Budget brand and two
apartment hotels under its own CosmosStay
brand in Moscow, as well as the Don Plaza
hotel in Rostov-on-Don. The hotels have
total capacity of 804 rooms. In addition,
a new 134-room hotel will be taken under
management in the Alabuga special
economic zone under the Ramada brand.

Business development strategy

Financial performance in 2017

Cosmos Group’s main strategic goal
is to become a leading Russian hotel
operator and to expand into the European
hospitality market.

The company’s key focus is boosting
operational efficiency and service quality
at its hotels. In 2018 the company aims
to increase the gross operating income GOP
of Cosmos Group hotels by 17% compared
to 2017, primarily by implementing profit and
cost management programmes developed
on an individual basis for each hotel.

Cosmos Group will also continue
developing its proprietary hotel brand line.
In 2017, the root brand name Cosmos
Hotels and More was used to create four
new brands: My Cosmos for modern city
hotels, Cosmos for classical business
hotels, Cosmos Collection for premium
hotels and CosmosStay for apartments.

In addition to organic growth, Cosmos
Group is planning to attract independent
hotels in order to double the number
of rooms under management.

During 2017, Sistema’s hospitality business
continued to successfully integrate the RHC
hotels acquired in 4Q 2016. Revenue for 2017
increased by 54.5% driven by consolidation
of RHC, as well as by a higher occupancy
rate at Hotel Cosmos, the largest of Sistema’s
hospitality assets.

For the full year 2017 OIBDA increased
by 74.5% and the OIBDA margin added 2.2
percentage points thanks to the consolidation
of the RHC properties and improved efficiency
at Hotel Cosmos.

Annual Report 2017 — Sistema — 55

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibility
Other
investments

Kronstadt Group

Sistema's effective
shareholding

96%

Concept Group

Sistema's effective
shareholding

63%

56 — Sistema — Annual Report 2017

Kronstadt Group is a Russian high-
tech company that engineers and
manufactures knowledge-intensive
products. The company is one of Russia’s
leading producers of unmanned aerial
vehicles (UAVs), with deep experience
of designing and manufacturing UAVs
and on-board equipment.

In 2017, Kronstadt Group successfully
completed work under several key
government contracts, including supply
of 76 simulators to state educational
institutions and training centres. The
company also continued work on the
development and production of Orion,
a medium-altitude, long-endurance UAV –
the biggest market segment in monetary
terms, accounting for 53% of the global
market. The Orion project is now at the
flight-testing stage, and was successfully
presented at a number of major exhibitions

where potential customers from over 15
countries expressed interest in the product.

The company completed the next stage of the
e-Navigation project, providing additional
equipment for a test area covering the Russian
part of the Gulf of Finland, the Neva and Svir
Rivers and Lake Ladoga. Correcting stations
of the differential sub-system of GLONASS/
GPS were supplied.

Besides major government contracts,
Kronstadt Group successfully completed
its part of the work on creating and
reconstructing a number of museums
and education centres, including the Road
of Life museum at Lake Ladoga, the
CSKA museum and the Cultural Centre
of the Russian Federal Security Service.
The company also provided multimedia
installations for the Military World Games
in Sochi as part of the CISM-2017 project.

Concept Group is one of Russia’s leading
retailers of children's and women's
clothes and underwear. The company is
successfully developing retail chains under
the Acoola and Concept Club brands with
more than 410 stores in total, many of them
franchised.

The company's portfolio includes the
following brands:

Acoola (clothes for children aged 0-14);

Concept Club (clothes for women, men
and children, home textiles ).

Infinity Lingerie (underwear)

The company operates in Russia (120+
cities), Belarus, Kazakhstan, Armenia and
Azerbaijan both through its own retail

chain and in partnership with franchise
and wholesale partners. In August 2017,
it entered the Indian market under the Acoola
children's clothing brand, opening its first
retail store with an Indian partner.

In 2017, supply volumes grew by 6% year-
on-year to 20.1m items. The share of orders
from Russian suppliers doubled vs 2016 and
reached 2%. 20.8m items were sold in 2017,
an increase of 3% year-on-year. Overall
revenue across the company grew by 1.3%
to RUB 11.0bn.

Concept Group continues active market
expansion. In intends to open at least 35
of its own retail stores per year and find more
than 30 franchise partners. The company’s
plans also include active development of
online sales and an omni-channel customer
relationship system as a key goal for 2018.

sistema.сomSISTEMA'S FUNDS
AND OTHER INVESTMENT
ACTIVITIES

Sistema is continuing
to develop a range
of funds specialising
in venture and PE
investments. Sistema's
funds and investment
companies offer investors
access to a unique portfolio
of high-tech assets, as well
as assets in real estate,
industrial manufacturing

and healthcare.

Sistema Venture Capital

Sistema Venture Capital (Sistema VC)
is a venture fund focusing
on investment in growth-stage
tech companies.

Fund's target size

Year of establishment

Geography

Industry focus

Life

Sistema's stake in the fund

80%

RUB 10bn

2016

Russia, US, Europe, Israel

Internet projects and technology

No fixed term, investment phase
Q2 2016 to Q2 2019

Target returns

25-30% (in RUB)

Investment targets
and investment focus

Sistema VC invests in internet projects
at the growth stage that have strong unit
economics, are growing fast and have
the potential to become an industry
leader. The fund also invests in deep
tech projects at an earlier stage.

The key focus of the fund is finding
projects in deep tech, such as:

artificial intelligence,
machine learning;

next-generation network
technology (SDN, NFV);

ognitive technologies;

virtual/augmented reality
projects (VR/AR).

The fund also invests in high-potential
projects in communitainment, Internet
of Things (IoT), etc.

In 2017, Sistema VC maintained its strong
position in the Russian market and won the
Discovery of the Year category at the National
Venture Investor 2017 Award. The fund's
team reviewed over 700 projects and
successfully completed eight transactions
(including follow-on investments).

The fund is actively implementing
its strategy of entering the international
market: it opened an office in San Francisco
and expanded its search for new projects
to Europe and the United States.

The fund's team reviewed over

> 700

projects and successfully
completed eight transactions

Annual Report 2017 — Sistema — 57

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilitySTRATEGIC PROGRESS

Individual assets

VisionLabs is one of the world's leaders
in computer vision and machine learning.
Its flagship product is a face recognition
platform, VisionLabs LUNA, which can analyse
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.

Ozon is Russia's oldest and biggest multi-
category online store with more than 4m
SKUs. It has more than 18m customers, with
750,000 people visiting its website daily.
The company features in the annual Forbes
ranking of Russia's most valuable internet
companies.

MEL Science is an international company
offering scientific and educational products
based on VR/AR technologies. Its flagship
product is a chemistry self-study course,
MEL Chemistry, which comprises 38 kits
for chemical experiments, a learning app
and VR glasses that allow students to see
chemical substances and crystals "from the
inside". MEL Science kits are sold under a paid
subscription model and delivered by post.
At the end of 2017, Sistema VC and its
partners invested USD 2.2m in the project.

Sistema VC and its partners
invested

USD 2.2m

in MEL Science

New investments of 2017

NFWare is a developer of solutions for
virtualisation of (information) network
functions. NFWare develops network software
for popular x86 servers that processes
traffic as quickly as expensive specialised
network equipment produced by leading
manufacturers. The solutions are based on
NFV/SDN technologies, which allow some
functions of network infrastructure to be
virtualised.

FinalPrice is a subscription mobile app that
enables users to book flights and hotels and
rent cars at the lowest price available. For just
USD 99 a year, users get access to the floor
prices of over 800 airlines, 1m hotels and
the world's top 40 car rental companies. The
application is available only to US users and
targets frequent travellers.

Gosu.Ai is a training platform for cyber-athletes
and players of multi-player online games Dota 2,
League of Legend, CS:GO, World of Tanks and
Overwatch. The project is AI-based.

DataSine is a platform for analysing
information about personal financial
transactions to understand a user’s
psychological profile and life circumstances.
This information helps financial institutions
to determine the best communication
channels and products for a particular
customer.

58 — Sistema — Annual Report 2017

sistema.сomSistema Asia Fund

Sistema Asia Fund is Sistema's venture
fund. It is an active and recognisable
player in the Indian venture investment
market, and has become integrated
into the country's entrepreneurial eco
system. The fund's goal is to efficiently
invest investors' money into high-
potential projects in the fast-growing
Indian tech market

Investment targets and
investment focus

Sistema Asia Fund invests in tech
startups in India (predominantly) and
South-East Asia (in exceptional cases)
that meet the following criteria:

a proven business model
and/or loyal audience;

solutions specific for the Indian market;

founders are involved in
management of the business;

The fund is managed by a professional team
with a strong investment expertise. It has
an expert council comprising professionals
who are integrated into the Indian business
community and have a unique track record
and a broad network of contacts.

In 2017, the team of Sistema Asia Fund
reviewed over 200 projects, thoroughly
studied over 100 companies and successfully
completed four investment transactions.

Sistema's stake
in the fund

100%

Fund's target size

USD 50m, with potential increase to USD 120m

Year of establishment

2015

Geography

Industry focus

India, South-East Asia

Consumer tech (e-commerce, healthcare, transport,
media, finance, education), enterprise tech (IoT, VR/
AR, platform solutions, big data, artificial intelligence,
machine learning)

Life

10 years, with an investment stage of four years

co-investors.

Target returns

3x cash-on-cash

Individual assets

Seclore is the developer of an EDRM
(Enterprise Digital Rights Management)
system that enables 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, saw the
company included in Deloitte’s list of top
50 fast-growing tech companies and won
it Gartner’s Cool Vendor title. The company
has representative offices in the US, India,
the Netherlands, UAE, Saudi Arabia and
Singapore.

Qwikcilver is 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 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.

Annual Report 2017 — Sistema — 59

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityNetmeds.com is India's biggest online
pharmacy, with a nationwide presence.
The founder used the opportunities
offered by his family's pharma distribution
company established more than one
hundred years ago to create a profitable
business with high gross margins.

This transaction was approved in 2017
and closed at the beginning of 2018.

HealthifyMe is India's biggest digital fitness
platform (4m users and over 200 sports
instructors and nutritionists) that allows users
to control calories consumed, set personal
fitness goals and monitor progress. Efficiency
is achieved through access to online
consultations with nutritionists and instructors.
At the end of 2017, the company launched
a new service, Ria, which is the world's first
virtual AI-based nutritionist. The biggest
corporate customers are P&G, Unilever,
Accenture, Cognizant, Shell, and Philips.

4 m

users and
over 200 sports
instructors and nutritionists

Pharma distribution company
established more than

100 years ago

STRATEGIC PROGRESS

New investments in 2017

Lendingkart is a company that
fundamentally changes traditional lending
by using its own data-based lending
mechanism to provide loans to small and
medium-sized businesses. To acquire
customers and repay loans, the company
uses a model with a small headcount, and
has already provided loans to customers
in 600 cities and towns.

Mobikon is a marketing platform for
restaurants to attract customers. Restaurants
receive tools to manage customer loyalty
by monitoring profiles and transactions
on various digital platforms and payment
systems. The in-built database includes 8.5m
profiles from all over the world.

The in-built database
includes

8.5 m

profiles from
all over the world

60 — Sistema — Annual Report 2017

sistema.сomRusnano Sistema SICAR

RUSNANO

SISTEMA

Rusnano Sistema SICAR is a private
equity fund established by Sistema and
RUSNANO in August 2016. The fund
has a professional team with a strong
track record in the venture industry.
It focuses on investing in initial-stage
high-tech projects and in growing and
established companies in Russia, the
CIS, Europe and Israel. The fund is
open to outside investors.

All resolutions are passed unanimously
by the fund's board of directors, which
consists of three members. The
Investment Committee of the fund
comprises three directors from Sistema
and three from Rusnano.

Sistema's stake
in the fund

50%

In 2017, the fund reviewed a number
of projects and invested in Apis Cor and
GeoSplit. The fund is at the investment
stage, and will make investments in another
five projects in 2018, meaning it will have
invested 40%-45% of its committed capital.

The fund's target size

Up to USD 100m

Year of establishment

2016

Geography

Russia (min. 50% of the fund's investments in monetary terms), CIS, Europe, Israel

Industry focus

Information technology, robotics and onboard equipment, software and cloud technologies, communica-
tion equipment and end-to-end solutions, renewable sources of energy and energy-saving technologies
(including fuel cells), microelectronics, automated control systems, special communications systems,
and software for comprehensive security systems.

Life

Seven years (may be extended by three years if the parties agree)

Target returns

> 6% in USD

Investments of 2017

GeoSplit is a high-tech oilfield services
company that offers well diagnostics
after multi-stage fracturing. Oil wells
are diagnosed through tracer analysis
by introducing propping agents marked
by reporting markers that are several
microns in size. It has a number
of competitive advantages in terms
of price and accuracy.

Applications to patent the technology have
been filed in 146 countries. The business
model is based on provision of wall-
construction services in partnership
with local companies to reduce printer
replication risks and control the
construction process.

Annual Report 2017 — Sistema — 61

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibility
STRATEGIC PROGRESS

Sistema Finance S.A.

Sistema Finance S.A. is Sistema's
investment platform focusing on
investments in Europe and the US.

The average size of Sistema Finance's
investment is EUR 10-50m, and
investments are held for one to four years.

One of its subsidiaries, Sistema
Capital Partners, has been investing
Russian institutional capital
in the developed real-estate
markets of Europe and the US
since December 2015.

In June 2017, the company exited two
investments: HS IV and HS Prime I.
The portfolios of rental properties – a total
of 29 assets in several German cities with
an aggregate area of over 120,000 sq m –
were bought by BVK. IRR of the investments
amounted to 28%-36% in EUR.

Sistema's stake
in the company

100%

Geography

Large EU countries, US

Industry focus

PE, rental properties, real estate development

Target returns

> 15% in EUR and USD

Investment targets
and investment focus

Sistema Finance invests
in three main segments:

Private Equity: investments in public and
non-public mid-cap companies generating
positive cash flow with attractive growth
prospects and focus on Germany;

Real Estate: investments in
rental properties and opportunistic
development projects in highly liquid
markets of the EU and US;

The average size of Sistema
Finance's investment is

EUR 10 -50m

Individual investment projects

Project

Country / segment

Description

Germany / industrial production

A leading iron foundry with a 30% global share
in the segment of cylinder crankcase castings for engines

Germany / industrial production

A leading European producer of high-tech steel and iron
castings, with a focus on wind power generation and
transmission mechanisms

Germany / healthcare

A fast growing operator of home care services

Germany / rental properties

Three shopping centres in Flensburg, Lubeck and Bochum

HS Prime II

62 — Sistema — Annual Report 2017

sistema.сomLLC Sistema Capital MC

Sistema Capital is a management
company that invests and provides
asset management services on global
financial markets for individual and
corporate customers.

Sistema's stake
in the company

70%

Sistema Capital had

RUB 52 bn

in assets under
management

For more than 17 years, the company has
offered investment products in Russian
and international markets. Products
include bonds of Russian and international
issuers in various economic segments and
geographies, as well as securities across
a broad set of geographies and derivative
financial instruments.

As of the end of 2017, Sistema Capital had
RUB 52bn in assets under management,
an increase of 2.2 times from 2016 and 4.9
times from 2014. The company ranks seventh
in Russia for the net asset value of its mutual
investment funds, with an aggregate NAV
of RUB 9.1bn as of the end of 2017.

Mutual rouble bond funds managed by
Sistema Capital generate leading yields
among similar Russian funds with a NAV
of more than RUB 50m. At the end of 2017,
the Sistema Capital Mobile.Bonds fund was
ranked #1 (with a yield of 15.1%) and Sistema
Capital Reserve #3 (14.3%).

Mutual foreign-currency bond funds managed
by Sistema Capital rank among Russia's top
10 in yield terms, with NAV of more than
RUB 50m. Sistema Capital Mobile.Bonds.FX
ranks #3 (with a yield of 5.8%) and Sistema
Capital Reserve.FX #6 (5.2%).

The Expert RA rating agency (RAEX)
rates Sistema Capital at A+ with a stable
outlook. The agency cites the efficiency
of the management company's investment
process and the high quality of assets under
management for its rating.

The company works with three non-
government pension funds, including
Sberbank's Pension Fund, under trust
management agreements.

In 2017, Sistema Capital started working
with retail customers and offering its
products in the mass segment. It now actively
cooperates with MTS, and a service for
investing in mutual funds is being integrated
into the MTS Money Wallet application.

In 2017, Sistema Capital became a full-
fledged player on Moscow Exchange and got
direct access to the FX and stock markets.
This enabled it to expand and improve
services to customers.

In 2018, Sistema Capital expects to see
growth of its assets under management,
driven by a more active flow of assets from
bank deposits to management companies
due to continued decline in deposit rates.

Sistema Capital’s strategic goal is to develop
a high-quality investment management
company targeting private and institutional
investors (retail online, HNWI, non-
government pension funds), combined with
management of Sistema Group's liquidity
and investment of the Group's cash in liquid
securities with various risk levels.

Assets under management, RUB bn

51.6

22.3

23.7

10.7

2014

2015

2016

2017

Yields of mutual investment funds

2015

2016

SC-Reserve.FX – Eurobond fund, USD

+20.4%

+7.2%

SC-Reserve - Bonds fund, RUB

2017

+5.2%

+17.3%

+12.1%

+14.3%

SC-Mobile. Bonds. FX- Eurobond fund, USD

SC-Mobile. Bonds - Bond fund, RUB

+15.1%

+5.8%

Annual Report 2017 — Sistema — 63

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityMAIN RISK FACTORS

Sistema’s activities are subject
to a number of risks. Effective
management of these risks
is a fundamental factor
contributing to the successful
growth of the Corporation.

While risks arise from processes and
factors over which Sistema has little
or no influence, the Corporation can
take measures to reduce the negative
consequences in the event that a certain
risk event occurs. This makes efficient
assessment of existing risks and how likely
they are to occur, as well as efficient risk
management, an integral part of Sistema
Group's strategy.

The Corporation has introduced
an integrated enterprise risk management
(ERM) system based on international risk-
managament standards, recommendations
and practices. The ERM system
is designed to provide a reasonable
guarantee that the Corporation will achieve
its strategic goals and to ensure that
risks will be kept at a level acceptable
to shareholders and management.

Sistema Group’s integrated
enterprise risk management
(ERM) system

As part of quarterly ERM procedures,
Sistema’s risk managers compile
risk registers for subsidiaries and
a consolidated risk register for the Group,
prioritise risks and aggregate them into
portfolios, develop a risk map and analyse
key trends, and use simulation and
financial modelling methods to analyse
the impact that material risks have on the
financial results of specific subsidiaries
and Sistema Group as a whole.

To address the risks listed in the Group’s
risk register, the company has developed
risk management (mitigation) and
response plans that include specific
mitigation measures. These plans are
modified, adjusted and then approved
by the Risk Subcommittee of Sistema’s
Finance and Investment Committee.

Risk management reports are submitted
for review to relevant collective
governance bodies at least once a quarter.
Each risk management report contains
a revaluation of risks, an assessment
of the effectiveness of risk mitigation and
response plans, and potential risk areas
(those requiring attention) identified for
future periods.

External risks

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. Many Sistema
Group companies also operate in
transitional economies, including Armenia,
Belarus, India, Turkmenistan, Uzbekistan
and Ukraine, and therefore are also
exposed to material external risks. Group
companies sell a significant portion of their
products in the CIS, Southeast Asia, Eastern
Europe and North Africa. In the event
of major political turmoil in these regions,
the Group's business in the regions may
be discontinued or put on hold, potentially
leading to material losses.

Financial risks

Sistema’s business is inextricably
connected to the state of the global
economy and financial markets, and
is sensitive in particular to movements
in prices of oil, gas and other commodities
that Russia exports. A weakening of the
rouble against the US dollar and the
euro amid a slump in the oil prices,
sanctions measures imposed against
Russia and increased capital flight from
the country may result in a rise in costs
and a drop in revenues, or may affect
Group companies’ ability to achieve
financial targets and repay debt. At the
same time, a significant appreciation of the
rouble against the US dollar and the euro
may cause a rise in rouble-denominated
costs, resulting in a decline in operating
performance of some of Sistema's portfolio
companies.

64 — Sistema — Annual Report 2017

sistema.сomAny potential downturn or slowdown
in Russia's economic growth could lead
to a decrease in household incomes
and consumer demand, which could
have significant negative consequences
for the operating results and financial
position of all of Sistema Group
companies.

Rising inflation may result in higher costs,
putting pressure on profit margins and
affecting domestic demand for products
and services provided by Sistema Group
companies.

An exodus of foreign investors from Russia
and a downgrade 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 Group’s joint ventures
(partnerships) and new investment
projects.

If sanctions are maintained in the medium
term and access for Russian banks and
businesses to foreign debt remains
restricted, this may significantly increase
the current liquidity deficit in the market
and result in further interest-rate raises,
making it difficult for Sistema Group
to raise funding for its operations and
to refinance the debt of the 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 control and restrictions
on capital repatriation may adversely affect
Sistema's business by posing barriers
to capital flows, thus reducing 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.

Political and social risks

Geopolitical risks exerted a significant
influence on the Corporation and
its portfolio companies over the reporting
year as protectionism and economic
sanctions are increasingly used as tools
for achieving geopolitical goals.

The risk of international conflict remains
substantial, in terms of both probability and
potential effect on various areas of Sistema
Group's activities. For example, insurance
companies may set higher insurance
premiums for Sistema Group or refuse
to insure against specific risks, which may
lead to a deterioration in financial results.

The introduction of sanctions against
Russia or Russian companies may
result in disruptions to international
payment systems or other mechanisms
of international cooperation, which
in turn may prevent the Corporation
and its portfolio companies from making
settlements and reduce Sistema's
investment appeal.

A potential rise in social unrest in regions
where the Corporation operates may
threaten its profits.

Key risks for the Group’s telecommunications
business are geopolitical risks entailed
by a deterioration of the situation in Ukraine.
The political crisis in Ukraine has led
to a significant decrease in the growth of the
telecommunications market, and continues
to adversely affect the exchange rate
of the national currency.

Legal risks

There is a risk of unpredictable court rulings
and administrative decisions being passed
with respect to Sistema Group’s business.
Such rulings may have an adverse effect
on the Group's business. This risk is the
result of numerous factors, including:

possible discrepancies and
ambiguities in:
1) federal and other legislation;
2) bylaws issued by executive authorities
of the states where Sistema Group
operates; 3) regional and local laws, rules
and requirements;

gaps in legislation and a lack of court
and administrative guidelines regarding the
interpretation of some laws, as well as conflicts
between certain court guidelines and rulings.

the influence of political, social and
other external factors on the judicial system;

potential selective or arbitrary
administrative decisions by government
authorities.

Annual Report 2017 — Sistema — 65

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityMAIN RISK FACTORS

Gaps in civil and corporate legislation and
securities regulation in the markets where
Sistema operates, as well as frequent
and not always consistent changes
in legislation in these and related areas,
may create barriers to raising funds and
impair the company's ability to manage,
own and oversee the activities of portfolio
companies.

A lack of clarity regarding the
understanding, interpretation and
application of the Federal Law on the
Procedure for Foreign Investments
in Companies of Strategic Importance for
National Defence and State Security and
other regulations concerning investment
activities in the Russian Federation and
other countries where Sistema Group
operates, as well as customs and currency
regulations, may have a negative impact
on the business of Sistema Group, given
that the Group’s shareholders include non-
Russians.

There is a risk of legislative amendments
in countries where Sistema Group
companies operate, should governments
or international organisations amend
regulatory frameworks governing
international trade and investments.

Minority shareholders of Sistema's
subsidiaries may contest or vote against
the Corporation's transactions, which
may limit Sistema's ability to complete
investment transactions and restructure
businesses, and could also have a negative
effect on Sistema's investment case.

Should the Russian Federal Anti-Monopoly
Service conclude that Sistema or one
of its material subsidiaries has violated
anti-monopoly legislation, 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 completing
and/or servicing certain transactions,
which may also limit Sistema's capacity
to complete investment deals and
restructure businesses.

Tax risks

Tax legislation, regulation and practices
in jurisdictions where Sistema's assets
operate are complex and opaque, and prone
to frequent modifications and ambiguous
interpretations. If the Corporation's actions
are interpreted as breach of tax law, this
may have an adverse effect on the business
of Sistema Group.

Since shareholders are liable for the
obligations of affiliates under Russian
corporate law, Sistema may incur financial
losses related to the liabilities of its
portfolio companies.

Russian legislation on transfer pricing
may make it necessary to introduce
adjustments to price-setting practices
used at Sistema Group companies,

resulting in additional tax liabilities related
to some transactions.

As a result of application of rules relating
to the taxation in Russia of undistributed
profits of controlled foreign companies
and profits from the indirect sale
of properties in Russia, the concept
of a beneficiary owner and new criteria for
tax residency of legal entities, the Group's
companies may face new tax liabilities
that arise due to the uncertainty around
interpretation of tax law and the lack of
relevant precedents.

Securities market risks

A deterioration of the geopolitical
situation, sanctions imposed
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 2014-2017. In these circumstances
Sistema's access to investor funding
through capital markets may be restricted
further in the event that sectoral sanctions
are imposed on Russian companies
in segments where Sistema operates
and/or due to investors taking a cautious
approach to Russian companies
in general. Sistema's ability to raise funding
via bond issues may be limited, which is liable
to lead to a lack of working capital and cash
available for investment, and thus affect the
Corporation's financial performance.

66 — Sistema — Annual Report 2017

sistema.сomRisks 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 the full or partial achievement
of its goals, efficient management
of portfolio companies, or benefits from
new investment opportunities. Sistema's
failure to achieve goals set in its strategy
may put pressure on the Corporatoin’s
consolidated financial indicators.

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
growth of Sistema Group companies and
the Corporation's financial figures.

Liquidity risks

Acquisition, integration,
disposal or restructuring
of assets

Sistema implements its strategy by acquiring,
disposing of and restructuring assets. New
investment opportunities come with certain
risks, including failure to find relevant targets or
these targets not being available for acquisition,
incomplete due diligence of the target's
operations and/or financial situation, and
potential overvaluation of assets. These risks
can also affect Sistema's financial performance.

If any of the above risks materialise,
the relevant asset may lose part of its
value and/or worsen Sistema's 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;

Acquisitions may increase pressure on the
cash position and create a need for raising
external funding.

assuming excessive obligations
towards the buyer;

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 case.

Sistema may encounter difficulties in
creating 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;

inability to establish and integrate
necessary control mechanisms, including
those related to logistics and distribution;

loss of synergies with other assets
staying in the portfolio.

If one or more of the specified risks
materialise, the Corporation may lose
potential profit and thus see poorer
financial performance.

Management
and key personnel

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.

The Corporation may in the short or long
term lose the ability to fulfil its obligations
due to a lack of funds, as a result either
of losses or insufficient monetisation
of investments, combined with a high
debt burden and no possibilities to raise
the necessary financing.

conflicts between shareholders;

hostility and/or unwillingness to
cooperate on the part of the management
and personnel of the acquired asset;

loss of customers by the acquired asset.

Annual Report 2017 — Sistema — 67

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityMAIN RISK FACTORS

Cash flows from subsidiaries

Loan covenants

and affiliates

The Corporation's financial performance
depends on the ability of Sistema Group
companies to generate cash flows needed
to service financial liabilities, including
repayment of debt and interest, and
to make other investment activities in the
future. The cash-generation capacity
of Sistema Group companies may be
restricted due to regulatory, tax or any
other barriers, which may have an adverse
effect on the Corporation’s financial
position and liquidity of the Corporation.

Overdependence on MTS»

Sistema's financial results in many respects
depend on the success of its core asset,
MTS. Any deterioration in the financial
performance of MTS may therefore have
a negative effect on Sistema's financial
results. Any events damaging to the
business of MTS may also negatively
influence the current state of Sistema's
business and its future prospects, and have
an impact on financial results.

Borrowings

Cash flows from portfolio companies
may be insufficient to absorb all of the
Corporation's investments scheduled for
a particular time, making it necessary
to borrow funds and thus slowing down
strategy implementation.

Loan and debt securities agreements
signed by Sistema and its portfolio
companies contain certain restrictive
covenants. These covenants restrict further
borrowings, encumbrance of property with
pledges, asset sales, transactions with
affiliates and dividend payouts. 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

The operations of Sistema Group's
companies are regulated by different
government bodies that issue and renew
licences, approvals and permits, and
also depend on applicable laws and
regulations. Regulating authorities to
a large extent rely on their own judgement
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 also no guarantee 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,
Intourist, BPGC, RTI and several other
businesses in the technology and
agricultural sectors. Some of Sistema's
S/As 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 (e.g.,
there are contradictions between federal
and regional provisions on privatisation),
privatisation of companies or assets
may potentially be contested, however
selectively.

If the legitimacy of the privatisation
of a company or an asset is contested and
Sistema or its portfolio company is unable
to defend its position in the dispute, it may
lose its holdings in the relevant company
or its assets. This may have a material
negative impact on the Corporation’s
business, financial situation, performance
or growth prospects.

68 — Sistema — Annual Report 2017

sistema.сom The structure of cash flows of Sistema
Group companies should guarantee
the timely fulfilment of obligations
to customers in the short and long term;

In its operations, Sistema Group
aims to avoid an increased concentration
of risk by counterparties, industries and
countries/regions;

Sistema Group companies must
comply with the requirements of national
regulators in countries where they
operate, as well as the standards and
recommendations of international bodies.

Sistema Group companies should
maintain an impeccable business
reputation and avoid actions that could
undermine it.

Sistema Group companies should
maintain and improve their external
individual credit ratings issued by
international rating agencies.

Anti-corruption regulations

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. The
inability of Sistema Group's companies
to compete efficiently may have a material
negative impact on the Corporation’s
business, performance, financial situation
and development prospects.

Brand quality and reputation

that the importance of a company’s brand
is growing steadily in highly competitive
markets. Successful development
and improvement of brand awareness
depends in large part on the efficiency
of a company’s marketing and its ability
to provide quality products and services
at competitive prices. Effort and money
spent on brand development may prove
greater than the resulting income, entailing
potential financial losses for Group
companies.

Risk appetite

One of the key principles of risk management
in Sistema Group is the use of the risk
appetite method. This approach implies
identifying and monitoring the Corporation's
target risk profile in accordance with strategic
goals and in the context of integration of
these strategic goals into risk management
procedures.

Sistema Group's risk appetite determines
the level of risks acceptable for
shareholders, and includes the following
basic provisions:

Developing and maintaining brand
awareness for the Group's companies
is crucial to shaping public opinion
regarding their existing and future
products and services. Sistema believes

The amount of potential losses under
the risks accepted by Sistema Group should
not reach a level that would lead to the
termination of the Group's operations,
including under stressed conditions;

Annual Report 2017 — Sistema — 69

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityCORPORATE
GOVERNANCE
SYSTEM

70 — Sistema — Annual Report 2017

sistema.сom

Kronstadt Group
is a Russian high-tech company
that engineers and manufactures
knowledge-intensive products.
The company is one of Russia’s
leading producers of unmanned
aerial vehicles (UAVs), with
deep experience of designing
and manufacturing UAVs
and on-board equipment.

sistema.сom

Annual Report 2017 — Sistema — 71

CORPORATE GOVERNANCE
SYSTEM

High quality corporate
governance and
transparency are key
elements of Sistema’s
investment strategy.
Sistema aims to meet the
best international standards
of corporate governance
and transparency, and
to continuously improve
its corporate governance
practices through timely
implementation of any
required changes and high
efficiency of managerial
decision-making.

Corporate governance principles:

clear and effective procedures for
taking investment decisions;

reasonable transparency
of management processes
for investors and partners;

high level of professionalism
of the Board of Directors, and active
involvement of the Board in strategic
planning, management and
supervision of business processes;

special Board focus on related-
party transactions and potential
conflict of interest situations;

a predictable dividend policy
taking into account reasonable
expectations of investors and
Sistema's financial resources;

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 lay the foundations
for strengthening the Corporation’s
investment case.

In its corporate governance practices
Sistema abides by applicable legislation,
the Moscow Exchange Listing Rules,
the recommendations of the Russian
Corporate Governance Code and the
guidelines set out in the UK Corporate
Governance Code.

In accordance with Russian legislation and
international best practice the Corporation's
Charter and internal regulations define
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 Corporation’s additional
commitments, as well as those of its senior
management and employees, in terms
of social responsibility, transparency and
ethical business principles.

 The text of the Corporate Governance Code recommended by the letter of the Bank of Russia No 06-52/2463 dated 10 April 2014.

 The conformity of Sistema's corporate governance practices with the standards set out in the Corporate Governance Code of Russia and the UK Corporate Governance Code is
analysed in Annexes 5 and 6 to this report. If Sistema's corporate governance practices diverge from the standards recommended in the above documents, the Corporation provides an
explanation of how it ensures that the balance of interests envisaged in the applicable corporate governance standards is observed.

 The text of the UK Corporate Governance Code.

72 — Sistema — Annual Report 2017

sistema.сomSistema's corporate governance structure as of 2 April 2018:

GENERAL MEETING
OF SHAREHOLDERS

Corporate Secretary

BOARD
OF DIRECTORS

Committees
of the Board of Directors

In accordance with its Charter, Sistema's
corporate governance bodies are:

General Meeting of shareholders;

President, Chairman
of the Management Board

Internal Control and
Audit Department

Board of Directors;

President;

Management Board.

MANAGEMENT BOARD

Managing Partner

Finance and investment
Department

Press Service

Managing Partner

Corporate Governance
and legal
Department

Administrative
Department

Managing Partner

Strategy Department

Managing Partner

HR-Department

Managing Partner

Security Department

Annual Report 2017 — Sistema — 73

Company todayStrategic ProgressCorporate governance Social responsibilitysistema.сomCORPORATE GOVERNANCE SYSTEM

General Meeting
of shareholders

The General Meeting
of shareholders
is the supreme governing
body of the Corporation.
The activities and powers
of the Annual General
Meeting of shareholders
(AGM) are governed
by the laws of the Russian
Federation, the provisions
of Sistema's Charter, and
the Terms of Reference
of the General Meeting
of shareholders.

Sistema aims to encourage
shareholders to participate
in the AGM. For the last
five years (2013-2017)
AGMs have therefore been
held at the Corporation’s
head office in Moscow.

All materials for General meetings
of shareholders are made available
on the website:

www.sistema.ru
www.sistema.com

Observance of shareholders'
rights

Proposing agenda items for the General
Meeting of shareholders, nominating
candidates to the Corporation's
governance bodies

Shareholders who own at least 2%
of the Corporation's voting shares are
entitled to propose items for the agenda
of the AGM and to nominate candidates
for the Corporation’s governance and
control bodies. Such proposals should
be submitted to the Corporation at least
100 days after the end of the financial year
in accordance with the Terms of Reference
of the General Meeting of shareholders
and other internal regulations of the
Corporation. Candidates nominated
by shareholders to governance and
control bodies are provisionally reviewed
by the Nomination, Remuneration and
Corporate Governance Committee
reporting to the Board of Directors.

Participation in General Meetings
of shareholders and voting
on agenda items

Sistema aims to ensure that shareholders
are fully able to exercise their right
to participate in managing the Corporation.
This includes the right to take part
in AGMs and vote on agenda items, as well
as the right to receive a share of Sistema’s
profits in the form of dividends.

To ensure shareholders are fully able
to exercise their right to take part in the
AGM, all materials regarding agenda
items are published on the Corporation's
website in Russian and in English (www.
sistema.ru and www.sistema.com,
respectively) at least 30 days before the
meeting. The AGM notice, ballots and all
other materials are also sent to registered
shareholders by post, and to nominee
shareholders in an electronic form.

All shareholders are entitled to take part
in General Meetings of shareholders

and to vote on agenda items in person
or through a representative (if the AGM
is held with in-person voting).

Shareholders may complete ballot papers
and send them to Sistema before the AGM.
From 2017 shareholders may also use the
e-voting system available on the website
of the Corporation's registrar, JSC Reyestr.
To use this service, shareholders should
apply through the Reyestr website for
access to a personal shareholder account.
If a shareholder has a personal account
on the e-government portal, they may
access the service without applying to the
registrar. More detailed information on how
to access the e-voting service is available
on Reyestr’s website: http://www.aoreestr.
ru/shareholders/e-voting.

Holders of Sistema's GDRs may vote on AGM
agenda items by proxy as per the established
procedure via a depositary bank servicing
Sistema's GDR programme. In 2017,
Sistema's depositary bank was Citibank, N.A.
For more information on the depositary bank
and voting procedures please go the bank's
website www.citiadr.idmanagedsolutions.
com. The depositary bank collects votes
of GDR holders about which it has
information via clearing systems. These votes
are included in the general ballot along with
all votes cast for and against the proposed
draft resolution, as well as abstentions.

The results of voting on agenda items
of General Meetings of shareholders held
with in-person voting are announced
before the end of the meeting. After
the minutes of the AGM are drafted,
shareholders may also view the AGM
voting results on the Corporation’s website.

Dividend policy

The Corporation announces the amount
of dividends recommended by the Board
of Directors and the record date in
advance. Shareholders are thus able to use
this information about expected dividends
in order to take informed decisions
regarding management of their shares.

 If an Extraordinary General Meeting of shareholders is conducted and its agenda includes the election of the Board of Directors, shareholders who own a sufficient number
of shares are entitled to nominate candidates for the Board. Proposals to this effect must be received by the Company at least 30 days before the date of such a meeting.

74 — Sistema — Annual Report 2017

sistema.сomIn determining the recommended
amount of dividends for 2016, the Board
of Directors was guided by the Dividend
Policy, which stipulates that dividend
distributions to be recommended
by the Board for a reporting year shall
be based on a target dividend yield
of at least 6%, or RUB 1.19 per ordinary
share, whichever is greater.

In line with the Corporation’s approved
dividend policy, Sistema aims to distribute
dividends twice a year: based on the
results of the first nine months and of the
full reporting year. In October 2017, in
accordance with the new Dividend Policy,
the Board of Directors recommended
that the General Meeting of shareholders
approve payment of interim dividends for
the nine months of 2017.

After the end of the reporting period,
the Board of Directors, taking into account
the priority of the strategic goal to
reduce the Corporation's debt, decided
to pay dividends for 2017 in the amount
of RUB 0.11 per share, agreeing with the
Corporation's deviation from the current
dividend policy. In order to maintain
a balance between the rights and
interests of all shareholders and the
Corporation's ability to pay dividends,
the Board of Directors, when determining
the amount of dividends, will take into
account the acceptable rate of Sistema's
debt reduction and the proportionality
of dividends to the current cash flow
of the Corporation. Sistema plans
to continue to pay dividends in accordance
with the current dividend policy after
achieving the goal of debt reduction..

Shareholder access to the
Corporation's documentation

An important guarantee of shareholders' right
to participate in managing the company is the
right to access documents that the Corporation
is obliged to provide to shareholders in
accordance with article 91 of the Federal
Law on Joint-Stock Companies. To exercise
this right, shareholders should send a written
request for access to the relevant documents
to Sistema’s Corporate Secretary. After the time
for providing the documents is agreed upon,
the requested documents will be provided
to the shareholder. When a shareholder
is granted access to confidential documents,
they undertake a written non-disclosure
obligation, thus providing a guarantee that the
rights of all the Corporations shareholders are
protected. If the shareholder requires copies
of documents, the shareholder bears the costs
incurred by the Corporation (RUB 10 per page).

Information about General Meetings of shareholders in 2017

Annual General Meeting of shareholders

Date and venue

Form of the meeting

24 June 2017, 13/1 Mokhovaya St, Moscow

Meeting (in-person voting)

annual report and financial statements for 2016 were approved,

dividends for 2016 were approved in the amount of RUB 7,816,500,000.00, or RUB 0.81 per ordinary
share (RUB 16.2 per GDR),

Items reviewed and decisions taken

Board of Directors and Audit Review Commission were elected,

auditors were appointed to audit the Corporation’s RAS and IFRS accounts for 2017,

decisions were taken to approve the revised Charter and internal documents regulating the work
of Sistema’s governing bodies.

Attended

Shareholders holding a combined 80.6% of votes

Date and reference number
of the minutes

24 June 2017, No1-17

Extraordinary General Meeting of shareholders

Date

Form of the meeting

28 November 2017

Absentee voting

Items reviewed and decisions taken

Interim dividends based on the 9M 2017 results were approved in the amount of RUB 6,562,000,000.00
or RUB 0.68 per ordinary share (RUB 13.6 per GDR)

Attended

Shareholders that together hold 79.8% of votes

Date and reference number
of the minutes

01 December 2017, No 2-17

 The revised dividend policy was approved in April 2017.

Annual Report 2017 — Sistema — 75

Company todayStrategic ProgressCorporate governance Social responsibilitysistema.сomCORPORATE GOVERNANCE SYSTEM

Board of Directors

The Board of Directors
is a collective governance
body in charge of oversight
and strategic management
of the Corporation.

Under Sistema's Charter the responsibilities
of the Board of Directors include:

supervising the operations
of the Corporation in general;

formulating strategic and financial
development plans;

determining investment principles
and criteria;

assessing the performance
of the management team;

defining the principles of Sistema’s
corporate governance;

approving transactions and strategic
projects in accordance with applicable
legislation and the Corporation’s internal
regulations

Board composition

The Board of Directors effective as of 31 December 2017 was elected at the Company's AGM,
which was held on 24 June 2017. Independent directors account for 45% of the Board of
Directors.

Composition of the Board of Directors
from 1 January to 24 June 2017

Composition of the Board of Directors
from 25 June to 31 December 2017

(elected on 25 June 2016)

(elected on 24 June 2017)

Independent directors

Executive directors

Non-executive directors

12 %
27%

28 %

18 %

55%

56 %

45%

18%

37%

Vladimir Evtushenkov
(Chairman)

Sergey Boev
(Deputy Chairman)

Andrey Dubovskov

Felix Evtushenkov

Patrick Clanwilliam

Robert Kocharyan

Jeannot Krecké

Peter Mandelson

Roger Munnings

Mikhail Shamolin

David Iakobachvili

Vladimir Evtushenkov
(Chairman)
Sergey Boev
(Deputy Chairman)
Anna Belova

Andrey Dubovskov

Felix Evtushenkov

Ron Sommer
Robert Kocharyan
Jeannot Krecké
Roger Munnings

Mikhail Shamolin
David Iakobachvili

V. Evtushenkov

S. Boev

A. Belova

A. Dubovskov

F. Evtushenkov

R. Sommer

R. Kocharyan

J. Krecké

R. Munnings

M. Shamolin

D. Iakobachvili

 Short biographies of the members of the Board of Directors and information about their shareholdings in Sistema are available in Annex 1.
 The Chairman and Deputy Chairman of the Board of Directors were elected at the first Board meeting on 24 June 2017.
 Anna Belova was nominated to the Board of Directors by a group of minority shareholders.
 Independent directors that meet the independence criteria set out in the Moscow Exchange Listing Rules.
 Robert Kocharyan was recognised as independent by the Corporation in accordance with the Moscow Exchnage Listing Rules. Information on this decision was disclosed
on Sistema's website.
 Independent directors that meet the independence criteria set out in the Moscow Exchange Listing Rules.
 Roger Munnings was recognised as independent by the Corporation in accordance with the Moscow Exchange Listing Rules. Information on this decision was disclosed
on Sistema's website.

76 — Sistema — Annual Report 2017

sistema.сomOver the reporting period the Board of
Directors considered the following key items:

8 Placement of securities (registration-

exempt bonds).

 Sistema's development strategy.

9 Management of the Corporation's risks.
10 Report of the Internal Control and Audit

Department.

 Sistema Group's strategic planning cycle.

11 HR matters and employee incentive

The Board of Directors has 11 members.
The main change compared to the
2016-2017 corporate year is that Patrick
Clanwilliam and Peter Mandelson left the
Board and new members Anna Belova and
Ron Sommer were elected.

Since the end of the reporting period
the status of two Board members
has changed. On 13 March 2018,
Andrey Dubovskov lost the status
of a non-executive director and became
an executive director following his
appointment as President and Chairman
of Sistema's Management Board, and
Mikhail Shamolin became a non-executive
director. Felix Evtushenkov (previously
an executive director) left the Management
Board on 1 April 2018 and became
a non-executive director.

Meetings of the Board
of Directors

Board meetings are held on a regular basis
in accordance with the Board’s approved
annual work plan, which is drawn up
based on Sistema’s strategic planning and
reporting cycle.

In 2017, the Board of Directors held
15 meetings: eight scheduled in-person
meetings and seven unscheduled meetings
with absentee voting. The Board of Directors
reviewed a total of 81 agenda items in 2017.

 Investment policy, strategy of Sistema's
investment funds and priority areas for
investment in 2017-2018.
 Managing and creating value for

Sistema's investments in the following
areas:
telecom assets;
consumer (retail) assets including
e-commerce assets;
agricultural assets;
timber processing and pulp and
paper assets;
banking assets;
high-tech assets and investments;
real-estate assets;
healthcare assets;
pharmaceutical assets;
power-grid assets;
hotel assets.

5 Sistema's results and performance

against budget.

6 Budget planning, approval of Sistema’s

consolidated budget and management’s
key performance indicators for 2017.

7 Functional strategies (for financial

management and financial planning,
human resources management,
corporate security, etc).

systems.

12 Assessment of corporate governance
including the results of external
assessment of the Board of Directors
and Committees of the Board
of Directors.

13 Corporate social responsibility.
14 Mandatory corporate procedures,
including convening the AGM and
developing the work plan
of the Board of Directors.

15 Composition of Board Committees
and determining the status of Board
members.

16 Approval of internal regulations
17 Approval of transactions, including

acquisition of equity stakes.

Items reviewed by the Board in 2017

10%

14%

37%

17%

Number of in-person meetings

Number of items in accordance
with the Board's work plan

2017

2016

Number of absentee votes

2017

2016

2017

2016

Actual number of items reviewed
by the Board

2017

2016

101

Business strategies, investments, new activities

Appointments and HR policy

Corporate governance and securities

Approval of transactions

Approval of internal documents

Holdings in subsidiaries, groups; branches

Financial reporting, planning and audit

Functional strategies

Annual Report 2017 — Sistema — 77

Company todayStrategic ProgressCorporate governance Social responsibilitysistema.сomCORPORATE GOVERNANCE SYSTEM

Most items on the agenda of Sistema's Board
of Directors in 2017 were related to the
business strategy of the Corporation and
the management of its investments in various
industries, approval of transactions (including
equity holdings in other companies) and
corporate governance. In 2017, the number
of items related to Sistema's investment
funds and their management structure
significantly increased.

Business strategies, investments,
new activities

Approval of internal documents

2017

2016

2017

2016

Appointments and HR policy

Holdings in subsidiaries, groups;
branches

Preparation for meetings and
quorum of the Board of Directors

2017

2016

2017

2016

Preparatory procedures for Board meetings
are designed to ensure maximum use
of the experience and expertise of the Board
members. Materials on agenda items are
published on the Board’s electronic portal
at least 10 days before the meeting, which
gives members sufficient time to form
an informed opinion on all agenda items.
Most the agenda items (including approval
of transactions) undergo a mandatory
preliminary review at meetings of the
Committees of the Board of Directors.

The Corporation has introduced the
procedure of challenging speakers on key
agenda items to enable Board members
(as a rule, independent members) to conduct
an in-depth review of materials and hold
discussions with management. This
approach makes it possible to increase
the involvement of Board members in the
development of the Corporation's strategy.

Board meetings usually have
a high attendance rate:
the average quorum of
meetings in 2017 was

99%

Corporate governance and securities

Financial reporting, planning and audit

2017

2016

Approval of transactions

2017

2016

2017

2016

Functional strategies

2017

2016

Participation of the Board members in meetings of the Board of Directors
and its Committees in 2017

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

V. Evtushenkov

A. Belova.

S. Boev

A. Dubovskov

F. Evtushenkov

R. Sommer 

P. Clanwilliam 

R. Kocharyan

J. Krecké

P. Mandelson

R. Munnings

M. Shamolin

D. Iakobachvili

14/15

9/9

15/15

8/9

6/6

15/15

6/6

15/15

9/9

4/9

8/9

5/9

1/4

7/9

9/9

5/9

6/6

2/6

6/6

12/12

10/12

8/8

2/3

8/8

2/5

8/8

7/8

3/3

6/6

3/6

6/6

1/3

6/6

3/3

6/6

0/3

6/6

 The first number shows the number of meetings attended by the Board member, the second number stands for the total number of meetings.

 Member of Sistema's Board of Directors from 24 June 2016.

 Member of Sistema's Board of Directors until 24 June 2017.

78 — Sistema — Annual Report 2017

sistema.сomAssessment of the Board
of Directors’ performance

The goal of the assessment was:

The assessment of the Board of Directors
was conducted based on:

Assessment of the Board of Directors'
performance is an important tool that helps
identify the areas where the work of the
Board of Directors and its Committees may
be improved.

In 2017, Sistema for the first time
conducted an external assessment
of its Board of Directors by engaging
Nestor Advisers, an independent
professional advisory firm that specialises
in corporate governance.

to increase the effectiveness of the Board
of Directors by identifying areas
for improvement in its structure, functions
and ability to constructively challenge
management;

to develop a shared position of the
Board of Directors as to how to maximise
the contribution of each member to the
Board's work;

to increase the trust of shareholders
and investors in the Corporation's corporate
governance practices.

The assessment covered the following areas of the Board's work:

Membership and activities of the Board of Directors

Balance of knowledge,
skills and industry
experience of the Board
members

Effectiveness of the procedure
for nominating candidates
to the Board of Directors

Quality of communication
between the Board
of Directors and the
Corporation’s executive
management

Functional areas of the Board's work

Involvement
of the Board
of Directors in strategy
development

Overseeing
the operation
of the internal audit
system

Work of Committees
of the Board
of Directors

Assessment
of management's
performance

analysis of the Corporation’s public
and internal documents ( Charter, Terms
of Reference of the Board of Directors, Terms
of Reference of Committees, 2016 Annual
Report, Corporate Governance Code), the
work plan of the Board of Directors, agendas
and minutes of the Board of Directors and
materials on agenda items provided to Board
members;

Board members completed online
questionnaires consisting of 70 questions
formulated individually for Board members,
the Chairman and the members of the
Board's Committees;

interviews were conducted with
members of the Board of Directors, the
Corporation's President, Senior Vice
President, Head of Finance and Investment
Function, Head of Internal Audit Department,
and Corporate Secretary.

The assessment found the work of the
Board of Directors to be high quality and
efficient. Nestor Advisors believes that the
Board of Directors provides the required
level of governance and control at the
company. The external assessment provided
an independent professional opinion of the
priorities for developing the Corporation's
corporate governance system.

Annual Report 2017 — Sistema — 79

Company todayStrategic ProgressCorporate governance Social responsibilitysistema.сomCORPORATE GOVERNANCE SYSTEM

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

Ethics and Control Committee

Investor Relations and Dividend Policy

Governance Committee

Committee

Functions

Strategy Committee;

Audit, Finance and Risk
Committee;

Nomination, Remuneration
and Corporate Governance
Committee;

Ethics and Control
Committee;

Investor Relations and
Dividend Policy Committee;

analysing strategic management issues
of Sistema Group;

reviewing strategy planning methodology;

reviewing M&A transactions with a value
exceeding USD 100m;

eviewing Sistema Group’s investment projects
related to entry into new geographies or industries
and projects with significant state ownership.

facilitating and supervising the processes
of preparing and auditing the Company's financial
statements;

assessing the quality of audit services based on
the audit of Sistema's financial statements
and making preliminary recommendations to the
Board of Directors with respect to selecting RAS and
IFRS auditors for the Corporation;

assessing the risk management system
and ensuring compliance with applicable legal
requirements in financial reporting, audit and
planning;

conducting a provisional appraisal of transactions
submitted to the Board of Directors;

budgeting and financial modelling.

facilitating the development of an efficient

forming an efficient system of economic

increasing the investment case for

corporate governance system that meets international

and corporate security;

the Corporation’s securities;

standards at the Corporation and its portfolio

companies;

conducting a preliminary review of candidates:

monitoring compliance with the requirements

supporting effective relations with

of the Corporation’s Ethics Code;

the financial community;

introducing a system for prevention of corruption

developing Sistema's dividend policy, including

for the Board of Directors of Sistema;

and fraud and other misconduct related to violations

development of recommendations for the

for the boards of directors of portfolio companies;

of applicable laws at Sistema Group companies.

Corporation's Board of Directors with respect

to the amount of dividends payable;

protection of the rights and interests

of Sistema's shareholders.

•

for senior management positions at the

Corporation and its portfolio companies;

for the position of the Corporation's Corporate

Secretary;

for the Corporation;

developing incentive and remuneration policies

organising the procedure of assessment

of the Board of Directors' performance.

Executive director

Non-executive director

Independent director

Executive director

Non-executive director

Independent director

29%

20%

42%

80%

The main role of the Committees is to provide
assistance to the Board in preparing and
adopting decisions in specific functional areas,
and to ensure prior in-depth scrutiny
of matters put forward for consideration
by the Board of Directors.

The status, procedures for nominating
members, responsibilities and decision-
making processes of the Board's Committees
are regulated by each committee’s Terms
of Reference, which are approved
by the Board of Directors and published
on the Corporate Documens section.

V. Evtushenkov Chairman of the Board
of Directors of Sistema;

S. Boev Deputy Chairman of the Board
of Directors of Sistema;

A. Dubovskov Until March 2018 – President of MTS;
starting from March 2018 – President of Sistema,
member of the Board of Directors of Sistema;

F. Evtushenkov Deputy Chairman of the Board
of Directors of Sistema;
R. Sommer Member of the Board of Directors
of Sistema, Chairman of the Board of Directors of MTS;

R. Kocharyan Independent Director;

M. Shamolin Until March 2018 – President of Sistema;
starting from March 2018 – President of Segezha
Group, member of the Board of Directors of Sistema;

D. Iakobachvili Independent Director.

R. Munnings Independent Director;

A. Belova Independent Director;

R. Sommer Member of the Board of Directors
of Sistema, Chairman of the Board of Directors of MTS

J. Krecké Independent Director;

D. Iakobachvili Independent Director.

R. Kocharyan Independent Director;

V. Evtushenkov Chairman of the Board

D. Iakobachvili Independent Director;

S. Boev Deputy Chairman of the Board

of Directors of Sistema;

of Directors of Sistema;

A. Belova Independent Director;

R. Sommer Member of the Board of Directors

S. Boev Deputy Chairman of the Board

of Sistema, Chairman of the Board of Directors of MTS;

of Directors of Sistema;

R. Munnings Independent Director;

R. Kocharyan Independent Director;

D. Iakobachvili Independent Director.

R. Munnings Independent Director.

A. Belova Independent Director;

J. Krecké Independent Director;

R. Munnings Independent Director.

Number of meetings in 2017

9 meetings

12 meetings

8 meetings

6 meetings

value creation at portfolio companies;
investment projects.

Topics discussed

assessment of the quality of audit services,
results of the tender for provision of audit services,
recommendations for the Board of Directors
on appointing an external auditor;

review and approval of the Corporation's
quarterly and annual financial reports, annual report,
annual budget and report on performance against
the budget;

review of management's reports on risk
management at Sistema and the risk map;

preliminary review of transactions submitted
to Sistema's Board of Directors.

 The President of Sistema attends Committee
meetings as a permanent invitee and does not vote on
matters submitted for consideration of the Committee.

 Felix Evtushenkov was elected Deputy Chairman of
the Board of Directors after the reporting period.

 As of 31 December 2017, the Chairman of the
Ethics and Control Committee was Sergey Boev. After
the reporting period, Felix Evtushenkov was appointed
Chairman of the Ethics and Control Committee.

80 — Sistema — Annual Report 2017

Number of meetings in 2017

6 meetings

Topics discussed

development of corporate governance

at Sistema and Sistema Group companies,

consideration of candidates for Sistema’s Board

of Directors;

incentive system, performance assessment

and bonuses for key managers and employees;

HR process and preliminary review of candidates

for top management positions at Sistema

and nominees for the boards of directors of the key

portfolio companies.

performance of the Internal Control and Audit

amount of dividends and changes

Department in 2016 and work plan for 2018;

in the Corporation's dividend policy;

system for preventing and curbing fraud

of Sistema by the investment community.

the Corporation's charity strategy

market analysis and monitoring, perception

results of ethics assessment

of the Corporation's employees;

and corruption at Sistema.

sistema.сom
Strategy Committee

Audit, Finance and Risk Committee

Nomination, Remuneration and Corporate
Governance Committee

Ethics and Control Committee

Investor Relations and Dividend Policy
Committee

Functions

analysing strategic management issues

facilitating and supervising the processes

of Sistema Group;

of preparing and auditing the Company's financial

reviewing strategy planning methodology;

reviewing M&A transactions with a value

exceeding USD 100m;

eviewing Sistema Group’s investment projects

related to entry into new geographies or industries

and projects with significant state ownership.

statements;

assessing the quality of audit services based on

the audit of Sistema's financial statements

and making preliminary recommendations to the

Board of Directors with respect to selecting RAS and

IFRS auditors for the Corporation;

assessing the risk management system

and ensuring compliance with applicable legal

requirements in financial reporting, audit and

planning;

conducting a provisional appraisal of transactions

submitted to the Board of Directors;

budgeting and financial modelling.

facilitating the development of an efficient
corporate governance system that meets international
standards at the Corporation and its portfolio
companies;

conducting a preliminary review of candidates:

•
•
•

•

for the Board of Directors of Sistema;
for the boards of directors of portfolio companies;
for senior management positions at the
Corporation and its portfolio companies;
for the position of the Corporation's Corporate
Secretary;

developing incentive and remuneration policies
for the Corporation;

organising the procedure of assessment
of the Board of Directors' performance.

forming an efficient system of economic
and corporate security;

increasing the investment case for
the Corporation’s securities;

monitoring compliance with the requirements
of the Corporation’s Ethics Code;

supporting effective relations with
the financial community;

introducing a system for prevention of corruption
and fraud and other misconduct related to violations
of applicable laws at Sistema Group companies.

developing Sistema's dividend policy, including
development of recommendations for the
Corporation's Board of Directors with respect
to the amount of dividends payable;

protection of the rights and interests
of Sistema's shareholders.

Executive director

Non-executive director

Independent director

Executive director

Non-executive director

Independent director

40%

60%

20%

60%

100%

V. Evtushenkov Chairman of the Board

R. Munnings Independent Director;

A. Belova Independent Director;

R. Sommer Member of the Board of Directors

of Sistema, Chairman of the Board of Directors of MTS

J. Krecké Independent Director;

D. Iakobachvili Independent Director.

R. Kocharyan Independent Director;

S. Boev Deputy Chairman of the Board
of Directors of Sistema;

V. Evtushenkov Chairman of the Board
of Directors of Sistema;

A. Belova Independent Director;

R. Sommer Member of the Board of Directors
of Sistema, Chairman of the Board of Directors of MTS;

S. Boev Deputy Chairman of the Board
of Directors of Sistema;

R. Munnings Independent Director;

R. Kocharyan Independent Director;

D. Iakobachvili Independent Director.

R. Munnings Independent Director.

D. Iakobachvili Independent Director;

A. Belova Independent Director;

J. Krecké Independent Director;

R. Munnings Independent Director.

of Directors of Sistema;

S. Boev Deputy Chairman of the Board

of Directors of Sistema;

A. Dubovskov Until March 2018 – President of MTS;

starting from March 2018 – President of Sistema,

member of the Board of Directors of Sistema;

F. Evtushenkov Deputy Chairman of the Board

of Directors of Sistema;

R. Sommer Member of the Board of Directors

of Sistema, Chairman of the Board of Directors of MTS;

R. Kocharyan Independent Director;

M. Shamolin Until March 2018 – President of Sistema;

starting from March 2018 – President of Segezha

Group, member of the Board of Directors of Sistema;

D. Iakobachvili Independent Director.

9 meetings

12 meetings

8 meetings

Number of meetings in 2017

Topics discussed

value creation at portfolio companies;

assessment of the quality of audit services,

investment projects.

results of the tender for provision of audit services,

recommendations for the Board of Directors

on appointing an external auditor;

review and approval of the Corporation's

quarterly and annual financial reports, annual report,

annual budget and report on performance against

the budget;

review of management's reports on risk

management at Sistema and the risk map;

preliminary review of transactions submitted

to Sistema's Board of Directors.

development of corporate governance
at Sistema and Sistema Group companies,
consideration of candidates for Sistema’s Board
of Directors;

incentive system, performance assessment
and bonuses for key managers and employees;

HR process and preliminary review of candidates
for top management positions at Sistema
and nominees for the boards of directors of the key
portfolio companies.

Number of meetings in 2017

6 meetings

Topics discussed

6 meetings

performance of the Internal Control and Audit
Department in 2016 and work plan for 2018;

amount of dividends and changes
in the Corporation's dividend policy;

results of ethics assessment
of the Corporation's employees;

system for preventing and curbing fraud
and corruption at Sistema.

the Corporation's charity strategy

market analysis and monitoring, perception
of Sistema by the investment community.

Annual Report 2017 — Sistema — 81

Company todayStrategic ProgressCorporate governance Social responsibilitysistema.сom
CORPORATE GOVERNANCE SYSTEM

Biographical information

Mikhail Shamolin

Born in Moscow in 1970.

In 1992, graduated from the Moscow Automobile
and Road Technical Institute, and in 1993 from the Russian
Presidential Academy of Public Administration.

In 1996-1997, completed a finance and management
course for senior executives at Wharton School
of Business.

In 1998-2004, worked for McKinsey & Co.

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.

In 2011-2018, President of Sistema.

Since March 2018, President and Chairman
of the Management Board of Segezha Group.

Member of the Board of Directors of Sistema and the
Board of Trustees of Sistema Charitable Foundation.

Andrey Dubovskov

Born in Almaty in 1966.

In 1993, graduated from the Russian State Gerasimov
University of Cinematography.

Has extensive experience at telecoms companies: since
1993, he has held multiple managerial positions at Millicom
International Cellular S.A., Millicom International Cellular
B.V., LLC Regional Cellular Telecommunications, CJSC 800,
and other companies in Moscow, Almaty, Nizhny Novgorod,
Yekaterinburg, Perm and Kiev.

In 2002-2004, CEO of Tele2 (Nizhny Novgorod).

In 2004, joined MTS as head of the company's Nizhny
Novgorod branch.

In 2006-2007, Director of the MTS Ural Macroregion.

In 2007, became First Deputy CEO of UMS (MTS Ukraine)
and in 2008 was appointed head of the MTS Ukraine
business unit.

In 2011-2018, President of MTS.

On 13 March 2018, appointed President of Sistema PJSFC
following a decision of the Board of Directors.

Member of the Board of Directors of Sistema and the Board
of Trustees of Sistema Charitable Foundation.

President

The President
is a permanent chief
executive officer whose
main tasks include
managing the day-to-
day operations of the
Corporation and dealing
with matters outside
the remit of the General
Meeting of Shareholders,
Board of Directors and
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 General Meeting of shareholders, and
performs the functions of chairman of the
collective executive body (Management Board).

Mikhail Shamolin was President of Sistema
from 10 March 2011 to 12 March 2018.
On 13 March 2018, following a decision
of the Board of Directors, Andrey Dubovskov
was appointed President and Chairman
of the Management Board of Sistema
for a three-year term.

82 — Sistema — Annual Report 2017

sistema.сomChanges to Sistema's Management Board

Members of the Management Board
as of 31 December 2017

1 Mikhail Shamolin

Alexander Gorbunov

Alexey Guryev

Felix Evtushenkov

Artem Zassoursky

Leonid Monosov

Oleg Mubarakshin

Vsevolod Rozanov

Artem Sirazutdinov

10 Ali Uzdenov

11 Mikhail Cherny

12 Evgeny Chuikov

13 Sergey Shishkin

14 Vladimir Shukshin

Members of the Management Board
as of 02 April 2018

Andrey Dubovskov
(Chief Executive Officer (President), Chairman
of the Management Board)

Igor Alyoshin
(Vice President for Security)

Alexey Guryev
(Vice President for HR)

Artem Zassoursky
(Vice President for Strategy)

Alexey Katkov
(Managing Partner)

Oleg Mubarakshin
(Managing Partner)

Vsevolod Rozanov
(Managing Partner)

Artem Sirazutdinov
(Managing Partner

Vladimir Travkov
(Vice President for Finance and Investment)

Ali Uzdenov
(Managing Partner)

Sergey Shishkin
(Vice President for Corporate Governance
and Legal Matters)

The following changes were made to the Management Board in 2017:

E. Vitchak

18 February 2017

Membership terminated.

A. Guryev

8 March 2017

Elected to the Management Board, appointed
Vice President and Head of the HR Department
of Sistema.

V. Korchunov

1 April 2017

Membership terminated.

Management Board

The Management Board
determines methods
for implementing the
Corporation's development
strategy, formulates
development plans,
determines and monitors
investment processes and
previews most matters that
are subsequently submitted
to the Corporation's
Board of Directors.

In 2017, the Management Board conducted
16 meetings and reviewed 46 agenda items
in the following key areas:

Sistema's development strategy.
Management strategy and structure
of Sistema's investment funds.
Sistema Group's strategic planning cycle.
Development strategy, value creation and
monetisation of Sistema's key portfolio assets.
Sistema’s functional strategies.
Budget execution, budget planning
and key performance indicators.
Debt and liquidity management.
Sistema's corporate social responsibility.
Review of specific deals.

In 2015, following the expiry of the term
of the previous Management Board,
Sistema's Board of Directors approved a new
Management Board for another three-
year term. As of 31 December 2017, the
Corporation's Management Board consisted
of 14 members.

 Short biographies of the members and information about their shareholdings in Sistema PJSFC are available in Annex 1.

Annual Report 2017 — Sistema — 83

Company todayStrategic ProgressCorporate governance Social responsibilitysistema.сom
CORPORATE GOVERNANCE SYSTEM

President's Committees

The following committees chaired by the
President contribute to the improvement
of managerial decision-making:

Finance and Investment
Committee

The responsibilities of the Finance and
Investment Committee include:

Finance and Investment
Committee;

review of the Corporation's investment
projects at different stages from project
idea to completion;

Tender
Committee;

HR Committee;

Security
Committee;

Discipline
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 and the Management
Board in their decision-making.

approval of financial models, business
plans and key performance indicators
for investment projects;

recommendations regarding feasibility
of projects, exit scenarios and sources
of financing;

review of external financing terms.

The Committee consists of 10 members.
As of 31 December 2017, the Chairman
of the Committee was the Corporation's
President, Mikhail Shamolin; and the Deputy
Chairman was Senior Vice President, Head
of the Finance and Investment Function
Vsevolod Rozanov.

In 2017, the Committee met

45 times

The Expert Council operates under
the Finance and Investment Committee
and considers all new investment ideas
for the Corporation and potential
acquisitions of assets in new and related
industries, as well as in industries in which
Sistema already has a presence.

The Expert Council consists of 13
members. As of 31 December 2017,
the Chairman of the Expert Council was
Vice President, Head of Strategy Function
Artem Zassoursky.

In 2017, the Expert Council met

13 times

The Finance and Investment Committee
also has a Risk Subcommittee responsible
for assessing the risks facing Sistema
and Sistema Group companies and for
monitoring performance against risk
management action plans.

The Risk Subcommittee consists
of six members.

In 2017, the Risk Subcommittee met

9 times

84 — Sistema — Annual Report 2017

sistema.сom
Tender Committee

HR Committee

Security Committee

The responsibilities of the Tender
Committee include:

The responsibilities of the HR
Committee include:

organising tenders for goods, works,
and services;

ensuring acquisitions of goods, works,
and services and sales of the Corporation's
property on the best terms available;

ensuring the transparency
of purchasing procedures;

facilitating prevention of corruption
and other wrongdoings in the area of
purchasing.

The Committee consists of 11 members.
As of 31 December 2017, the Chairman
of the Committee was Senior Vice President,
Head of the Finance and Investment
Function Vsevolod Rozanov.

reviewing and making proposals with
regard 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;

assessing candidates for senior
executive positions;

assessing the efficiency and
performance of the Corporation's
employees.

The Committee consists of nine
members. As of 31 December 2017, the
Chairman of the Committee was President
of Sistema Mikhail Shamolin.

In 2017, the Tender Committee met

30 times

In 2017, the Committee met

29 times

The Security Committee reviews matters
related to implementation of the adopted
security policy across Sistema Group.

The Committee consists of 37 members.
As of 31 December 2017, the Chairman of the
Committee was Vice President, Head of the
Security Department Vladimir Shukshin.

In 2017, the Committee met

4 times

Discipline Committee

The Discipline 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 seven
members. As of 31 December 2017,
the Chairman of the Committee was
President of Sistema Mikhail Shamolin.

In 2017, the Committee met

1 time

Annual Report 2017 — Sistema — 85

Company todayStrategic ProgressCorporate governance Social responsibilitysistema.сomCORPORATE GOVERNANCE SYSTEM

Specific characteristics of risk management, internal control and internal audit systems

Risk management

Internal control system

Sistema’s risk management system uses
a two-level approach, with risks identified
at Sistema and at portfolio companies
consolidated to assess their impact
on Sistema Group as a whole.

The Corporation’s integrated risk
management system (ERM) addresses
the following tasks:

identification of risks at all levels
of management (from senior to line
management), which includes finding risk
owners and creating risk passports;

The Internal Control Policy was approved by
the Corporation's Board of Directors and is an
internal senior-level document describing
the key principles of internal control
as a continuous and integrated process that
involves all of the Corporation’s units and
governance bodies of the Corporation.

The key objectives of the internal control
system are:

creating control mechanisms that
ensure business processes remain
efficient and the Corporation’s investment
projects are implemented;

primary assessment of the materiality
of identified risks and analysis of thess
risks using VaR methodology;

protecting the Corporation's assets
and making efficient use of its resources;

ranging risks by management levels;

assessment of the aggregate
influence of material risks on the
Corporation's key financial indicators
(Monte Carlo modelling);

development of plans to mitigate
identified risks at all management levels;

protecting the interests of the
Corporation's shareholders, and preventing
and resolving conflicts of interest;

creating conditions for timely
preparation and submission of reliable
reports and other information that the
Corporation is legally required to disclose
publicly;

regular monitoring of performance
against mitigation plans and assessment
of these plans’ effectiveness;

ensuring that the Corporation
complies with applicable legislation and
regulatory requirements.

risk monitoring and preparation
of quarterly reports on risks facing
the Corporation.

Sistema’s risk management procedures
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.

The Corporation maintains "three lines
of defence" (in addition to the Board
of Directors and the Corporation’s senior
management) to ensure the effectiveness
of its internal control system:

Level 1: Heads of subdivisions and
employees 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. For example:

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.

The risk management function and
the Risk Subcommittee are responsible
for developing and monitoring the
implementation of an effective risk
management practice;

The Finance and Investment
Committee approves and monitors
implementation of investment projects;

The Discipline Committee reviews
matters related to breaches of the Ethics
Code and disciplinary offences;

The Security Department
is responsible inter alia for economic
security, prevention of corruption and
information security.

Level 3: The Internal Control and Audit
Department conducts an independent
assessment of the effectiveness of the internal
control system, as well as risk-management
and corporate-governance procedures.

All employees in charge of various control
procedures are responsible for the
controls and risk management activities
set out in their job descriptions and
internal regulations.

Internal audit

The body in charge of internal control
at the Corporation and Sistea Group
companies is the Internal Control
and Audit Department, which reports
to the Board of Directors (functionally)
and Sistema's President (administratively).
The head of the Department is appointed
and dismissed by the President based
on resolutions passed by the 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
management improve the internal control
system by performing regular audits of the
effectiveness of the Corporation's internal-
control, risk-management, and corporate-
governance systems;

supplying management and
shareholders with objective information
on existing internal risks and the
probability that they will occur;

86 — Sistema — Annual Report 2017

sistema.сomExternal 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 Sistema’s financial statements.
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 five years to ensure that the
auditor is impartial and objective.

aising awareness among management
about the performance of Sistema Group
companies;

of internal controls as applied to financial
statements, as well as during discussions
and assessment of identified risks.

monitoring the 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 independent audits
of individual operations, processes and units;

assesses the effectiveness
of the internal-control system;

assesses the effectiveness
of the risk-management system;

assesses the effectiveness
of the corporate-governance system,
prevents legal and regulatory violations,
ensures compliance with professional
and ethical standards and prepares
recommendations to raise these standards;

develops recommendations to remedy
identified deficiencies and monitors the
execution of any remedial action taken;

examines documents provided
regarding investment projects for
compliance with current regulations;
performs scheduled and unscheduled
monitoring of performance against targets;

monitors compliance with
procurement procedures;

administers the Hotline, the Discipline
Committee and ethics assessments.

The Internal Control and Audit Department
has all the resources and powers required
to perform these functions.

In 2017, the Internal Control and Audit
Department conducted 70 scheduled
and unscheduled audits to assess the
effectiveness of internal-control, risk-
management and corporate-governance
systems. These audits did not uncover any
weaknesses or risks that could affect the
sustainability of the Corporation's business
as a whole.

Regular reports on the results of the
Internal Control and Audit Department are
reviewed by the Board’s Audit, Finance
and Risk Committee and Ethics and
Control Committee, and are also submitted
for consideration by the Board of Directors
at the end of the year.

Resolution of conflicts of interest

Matters related to conflicts of interest
are governed by the Corporation's Code
of Ethics. The Corporation has an ethics
assessment procedure: all senior managers
annually (or as conflicts of interest arise)
fill out Ethics and Conflict of Interest
Declarations. All new employees must
complete a training course and learn
the requirements of the Code of Ethics and
the procedure to fill out the Declaration.

In 2017, the Corporation held its second
ethics assessment. The results were
reviewed by the President and the Board’s
Ethics and Control Committee. 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
corporate governance practices.

The Internal Control and Audit Department
works closely with independent auditors,
coordinates audits and offers consultations
while preparing the Department's annual
audit plans to assess the effectiveness

The ethics assessment makes it possible
to identify and manage conflicts
of interests in a timely manner, thus
preventing shareholders' interests from
being compromised.

Annual Report 2017 — Sistema — 87

Company todayStrategic ProgressCorporate governance Social responsibilitysistema.сomCORPORATE GOVERNANCE SYSTEM

Corporate governance across Sistema Group

The quality of strategic
planning and the investment
case of Sistema's portfolio
companies depends inter alia
on the quality of corporate-
governance procedures.
To increase the value of its
investments Sistema focuses
on improving the quality
of corporate governance
at its portfolio companies.

The Corporation aims to execute strategic
management of its key portfolio companies
through the companies' boards of directors,
by bringing in professional independent
members with industry expertise, as well
as specialists in strategy, finance, audit
and corporate governance. Independent
directors account for about one-third
of members of the boards of key portfolio
companies (depending on the company's
organisational maturity).

The Corporation continuously improves its
corporate-governance system to increase
its effectiveness and ensure continued
compliance with best practices. Improving
the quality of corporate-governance
processes at portfolio companies and
bringing in competent professionals
to their boards of directors is designed
to increase the quality of decision-making
and shareholder value at Sistema's
portfolio assets.

Boards of directors of portfolio companies
provide control and coordination, and
support management in decision-making
in the following functional areas:

strategy and key transactions;

budget planning;

HR policy;

internal audit.

The Corporation's key tasks related to improving
corporate governance at portfolio companies
for the next year are:

increasing the responsibility of companies'
boards for decisions made in their key focus
areas;

bringing professional independent
directors to the boards of portfolio companies.

Development of the corporate governance system in 2017

Independent directors on the
Corporation's Board of Directors

The current Board includes the following
independent directors:

In 2017, 11 members were elected to the
Corporation's Board of Directors, five
of whom qualify as independent directors
or are recognised as independent according
to Moscow Exchange's Listing Rules and
the Russian Corporate Governance Code.

Anna Belova;

Robert Kocharyan;

Jeannot Krecké;

Roger Munnings;

David Iakobachvili.

All of the Corporation's independent directors
have vast experience in managing large
organisations and strong professional
reputations. This ensures that their
judgements are objective and that they
remain independent of the influence
of the Corporation's management and
shareholders when making decisions.

88 — Sistema — Annual Report 2017

Roger Munnings and Jeannot Krecké,
as members of the Audit, Finance and
Risk Committee, are experts in the field
of finance and audit and have extensive
relevant experience.

Independent directors are directly involved
in discussing and formulating the strategy
of the Corporation and its key assets. For
this purpose, working groups headed by
independent members of the Board and
representatives of the Strategy Function
and Finance and Investment Function are
established to formulate substantiated
positions of the Board of Directors
on strategic issues related to development
of the Corporation and its key assets.

sistema.сomChanges to the Corporation's
Charter and internal regulations

Plans for development
of corporate governance

The Board’s Nomination, Remuneration
and Corporate Governance Committee
developed an action plan for improving
corporate governance at Sistema
in 2018 based on the results of the external
assessment. The plan envisages the
following activities:

revising the Corporation's dividend
policy with due account of the Corporation’s
investment needs (in the first half of 2018);

assessing the performance of the Board’s
Committees (in the first half of 2018);

formalising the principles of remuneration
payable to the board members of portfolio
companies, and approving a standard Policy
on remuneration and compensation payable
to the board members of portfolio companies
(in the second half of 2018);

revising and formalising a succession
plan for key managers of the Corporation
(in the second half of 2018).

In June 2017, the General Meeting
of shareholders approved new versions
of Sistema’s Charter, the Terms
of Reference of the General Meeting
of shareholders, the Terms of Reference
of the Board of Directors and the Terms
of Reference of the Management
Board. The changes to the Charter and
internal regulations were necessitated
by amendments made to the Russian
legislation on joint-stock companies with
respect to major transactions and related
party transactions. Internal regulations
were also brought into line with EU
legislation in view of the EU Market Abuse
Regulation coming into force.

Assessment of the Board
of Directors’ performance

In 2017, Sistema conducted an external
assessment of its Board of Directors
for the first time. The assessment found
the work of the Board of Directors
to be effective and of high quality. In the
opinion of the independent professional
consultant Nestor Advisors, the Board
of Directors provides the required
level of governance and control.
The assessment provided an independent
professional opinion on priorities for the
further development of the Corporation's
corporate-governance system.

Annual Report 2017 — Sistema — 89

Company todayStrategic ProgressCorporate governance Social responsibilitysistema.сomCORPORATE GOVERNANCE SYSTEM

Remuneration of board members and senior management

Remuneration policy applied to
Board members of Sistema PJSFC

Remuneration for performance
of additional duties

Remuneration for the work as a member
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.

Basic remuneration of members of the
Board of Directors

Basic remuneration of members of the
Board of Directors amounts to RUB 13.7m or
RUB 17.8m per year depending on whether
a director is a tax resident of Russia. Basic
remuneration is paid to Board members in cash
in equal quarterly instalments.

Supplementary remuneration of members
of the Board of Directors

Supplementary remuneration of members of the
Board of Directors is paid once a year in the
form of ordinary shares of Sistema, subject
to achievement of the Corporation's investment
targets in the reporting year:

the arithmetic mean of TSR and iTSR
exceeds or equals CoE,

TSR exceeds or equals the amount
of change of the MSCI index (ΔMSCI), provided
that iTSR exceeds or equals CoE.

The number of ordinary shares awarded
to members of the Board of Directors is
calculated as follows:

Remuneration
in monetary terms

Weighted average price
of one share

To calculate the number of shares to be
awarded to members of the Board of Directors,
the amount of remuneration in monetary terms
is equal to the amount of basic remuneration
less applicable taxes, while 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 Annual
General Meeting of shareholders.

Board members who perform additional
duties, e.g., the Chairman of the Board
of Directors, Deputy Chairman of the
Board of Directors and Chairmen of the
Board Committees, receive remuneration
on a quarterly basis in the amount
stipulated by the Policy on Remuneration
and Compensation Payable to Members
of the Board of Directors of Sistema PJSFC.

Compensation and other conditions

Members of the Board of Directors are
reimbursed for expenses incurred during
performance of 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 applied to
senior management of Sistema

Short-term incentive system

The short-term (up to 1 year) incentive
scheme for senior managers of Sistema
in 2017 consists of:

a fixed monthly salary determined in line with
the internal system of job categories (grades);

bonuses paid for project implementation
and generating cash income. Remuneration
is paid based on employees' individual
performance and positive cash flow generated
by projects of Sistema's Investment Portfolios
and Functions and Departments. Payments may
amount to up to 20% of cash income.

For the purpose of calculating bonuses, cash
income means the increase in the value of an
asset (in the event of an asset sale or an IPO)
or the amount of dividends (in the event
of a dividend payment), net of:

the hurdle rate determined by the
Corporation’s Finance and Investment
Committee prior to the commencement
of a project or the acquisition of an asset;

investment in an asset and project costs.

Long-term incentive system

The long-term (over 1 year) incentive
scheme for senior managers of Sistema
in 2017 was part of an incentive programme.
The programme aimed to increase Sistema's
shareholder value and create additional
incentives for maintaining long-term
employment and corporate relations between
the Corporation and its management.
Participants of the programme are assigned
a certain number of shares that are transferred
to them in instalments upon achievement
of targets set by Sistema's shareholders,
on condition that they retain ownership
of the shares transferred to them under the
programme. Transfers of shares take place
annually over the course of five years from
the launch of the programme. The number
of shares allocated to a programme participant
was calculated as follows:

Participant's
total annual income

Weighted average price
of one share during the year

Co-investment programme

In 2016, the Board of Directors approved
a Co-Investment Programme enabling
Sistema's senior managers to co-invest
in subsidiaries and/or Sistema PJSFC.
The Co-Investment Programme is designed
to incentivise senior management to increase
the Corporation's capitalisation, and provides
for additional incentives linked to achievement
of strong financial results through
origination and implemention of projects
and efficient management the Corporation's
assets, including asset acquisitions, sales,
restructurings, capitalisation growth
and increased dividend flows.

 Approved by the General Meeting of shareholders on 27 June 2015.

 This investment target was not achieved in 2017, since TSR was -41.4% and iTSR was -15.8%, while CoE was 14.6% and ΔMSCI was 0.3%. CoE represents the minimum level of
return that a company must provide to its shareholders for the expectation of profit and risk. It 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.

90 — Sistema — Annual Report 2017

sistema.сomProgramme participants are the President
and heads of investment portfolios, functions
and departments. Starting from 2017,
employees at Executive Vice President level
may also participate in the Co-Investment
Programme.

Participants of the Co-Investment Programme
use their own funds to acquire:

shares/stakes in Sistema's subsidiaries,
and/or

ordinary shares in Sistema PJSFC.

The amount of co-investment is limited to one
year’s average annual income of a participant.

Other terms and conditions

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
of remuneration is directly linked to the upside
in the value of the shares in the subsidiary and/
or ordinary shares in Sistema.

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.

Remunerations paid to Board members and senior management in 2017

Members of Sistema's Board of Directors received the following remuneration in 2017:

Cash remuneration
Remuneration for work as members of the Board of Directors and additional duties, as well as salaries and bonuses
for 2017 paid to Board members who were also employees of the Corporation in 2017.

Remuneration in the form of ordinary shares of Sistema PJSFC
Shares paid to Board members for the 2016-2017 corporate year and remuneration under the long-term incentive
programme paid to Board members who were also employees of the Corporation in 2017.

2017

2016

RUB 320,193,625

RUB 498,400,342

RUB 218,287,983

RUB 422,928,991

Reimbursement of expenses incurred by Board members in connection with their duties

RUB 2,477,710

RUB 3,713,752

Members of Sistema's Management Board received the following remuneration in 2017:

Cash remuneration
Including fixed salaries and bonuses..

Remuneration in the form of ordinary shares
of Sistema PJSFC
Shares transferred under the long-term incentive programme.

2017

2016

RUB 1,768,437,846

RUB 3,148,937,048

RUB 245,821,873

RUB 1,155,134,028

 All figures in this section are given before applicable income tax.

 Excluding members of Sistema's Board of Directors who were also members of its Management Board.

 Including the President of Sistema.

 Bonuses for 2017 were paid to Sistema's employees in January 2018.

 The amount only includes the shares awarded under the long-term incentive programme for 2016.
Shares allocated to employees for 2017 will only be distributed following a resolution of the Board of Directors.

Annual Report 2017 — Sistema — 91

Company todayStrategic ProgressCorporate governance Social responsibilitysistema.сomCORPORATE
SOCIAL
RESPONSIBILITY

Rusnano Sistema SICAR –
Rusnano Sistema SICAR is a private
equity fund established by Sistema
and RUSNANO in August 2016. The fund
has a professional team with a strong
track record in the venture industry.
It focuses on investing in initial-stage
high-tech projects and in growing
and established companies in Russia,
the CIS, Europe and Israel. The fund
is open to outside investors.

92 — Sistema — Annual Report 2017

sistema.сom

Annual Report 2017 — Sistema — 93

CORPORATE
SOCIAL RESPONSIBILITY

Sistema sees corporate
social responsibility (CSR) as
its sustainable contribution
to national social and
environmental development
in the interests of current
and future generations. The
Corporation supports social,
economic and technological
development, modernisation
of infrastructure and industry,
improvements to the
accessibility of essential
products and services, job
creation, as well as fostering
innovation and intellectual
and human capital,
and running large-scale
charitable and volunteer
programmes to improve
people’s quality of life.

In 2017, Sistema Group
companies paid into Russia’s
consolidated budge

bn
RUB 111
>

94 — Sistema — Annual Report 2017

Principles for responsible
investment

In its operations, Sistema is guided by the
basic principles of socially responsible
business practices as set out in the United
Nations Global Compact and the Social
Charter of Russian Business, including:

strict compliance with legislation,
fair competition and zero tolerance for
corruption;

observance of internationally
acknowledged human rights in the context
of business;

prevention of all forms of
discrimination and creation of equal
opportunities with respect to employment
relations;

creation of favourable employment
conditions precluding child and forced
labour and protecting the occupational
health and safety of staff at Group
companies;

reduction of environmental impact,
and protection of the environment and
climate.

These basic principles are implemented
through open and transparent interaction

with key stakeholders including
shareholders, investors, employees,
consumers, suppliers, government
authorities, civil society, non-profits and
local communities. The Corporation not
only requires its portfolio companies
to comply with these business standards;
it also expects ethical conduct from its
partners across the entire supply and
value-creation chain.

Sistema is also guided by the Principles
for Responsible Investment supported by
the UN Global Compact and Environment
Programme Finance Initiative (UNEP
FI), and shares the goal of integrating
environmental, social and governance
(ESG) issues in investment decision-
making and asset-management processes.
The Corporation's responsible approach
to investment is based on comprehensive
analysis of not just the financial condition
and market potential of the assets
it acquires, but also on identifying
non-financial aspects that can have
a significant impact on the sustainability
of the investment portfolio. As a strategic
investor interested in the long-term growth
of shareholder value, Sistema sees its role
in minimising ESG risks and improving
business efficiency by introducing best
practices in HR, prevention of corruption,
procurement, quality management
and environmental safety, as well

sistema.сom
as by implementing social projects
and building trust-based relationships
with stakeholders across its portfolio
companies.

At the end of 2017, Sistema received
the Russian Business Leaders:
Dynamics and Responsibility award
from the Russian Union of Industrialists
and Entrepreneurs (RUIE) for the high
quality of its sustainability reports, and
was also named among the leading
companies in the RUIE's corporate
stability, responsibility and transparency
indices, which include more than 100
of Russia’s largest corporates. The
Corporation was named in Group A, which
comprises 12 companies with the highest
individual scores in the Responsibility
and Transparency index, reflecting high
standards of information disclosure.
Sistema and its subsidiary MTS were also
among the top 24 companies based on
the consolidated results of the Sustainable
Development Vector and Prospects
indices, which reflect positive performance
dynamics, transparency and the
presence of specific SCR and sustainable
development goals.

According to the 2017 Corporate
Transparency of Largest Russian
Companies study by the Russian Regional
Network for Integrated Accounting,
which covers more than 950 companies
that together generate 80% of national
income, Sistema ranks among the top
three in terms of transparency in private
business and the finance and investment
sector, and in the top 10 among public
and strategic companies. The Corporation
demonstrated the highest level
of corporate-governance transparency
of all the companies included in the rating,
and was named in the 15 for sustainable

development and compliance with
international standards. MTS and
Detsky Mir, Sistema's public assets,
were also named among the companies
disclosing information in accordance with
international requirements. Detsky Mir was
the leader in terms of transparency in the
retail segment and won the Debut of the
Year category.

Sistema as a responsible investor

Sistema ranks among the top three
in terms of transparency in private
business

TOP-3

Investments
in fixed assets

Investment in
human capital and
new technologies

Social investments
and partnerships

High standards
of governance and
transparency

Modernisation
of production
facilities and creation
of state-of-the-art
infrastructure.

Training and
development
programmes for
staff of Sistema and
portfolio companies.

Creation
of a favourable social
environment
in regions
of operation.

Use of the best
hardware and
modern equipment
at Group enterprises.

Training of the next
generation of highly
qualified young
specialists and
managers.

Agreements
on social and
economic
cooperation with
regions.

Introduction
of the best available
technologies,
including in resource
and energy efficiency.

Own R&D centres
and venture
investments
in technological
start-ups.

One of Russia's
biggest corporate
charitable
foundations.

Uniform principles
of corporate
governance across
the Group in line with
Russian and global
best practices.

Introduction of quality-
management
systems in line
with international
standards.

Public non-
financial reporting
in accordance with
Global Reporting
Initiative (GRI)
standards.

Digitalisation and automation of production
and business processes.

Synergies among portfolio companies
for social and charitable projects.

Creation of shared value for the business and society.

Annual Report 2017 — Sistema — 95

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityВыручка бизнеса

Группы МТС выросла на

+ ХХ %

SOCIAL RESPONSIBILITY

Following the principles of responsible
investment, Sistema ensures that its
business strategy is consistent with
national priorities and the UN Sustainable
Development Goals (SDGs), increases
the investment case, profitability and
competitiveness of important economic
segments, creates jobs, and ensures

sustainable payments of taxes and social
contributions to budgets of all levels.

In 2017, Sistema Group companies paid
over RUB 111bn into Russia's consolidated
budget, 22% of which went into pension,
medical and social security funds. The
Corporation's total tax payments over the

past three years total almost RUB 300bn.
Sistema Group accounted for more than
1% of all private investments in fixed assets
in Russia, about 22% of capital investments
in the telecommunications sector, and 8%
of capital investments in the forestry
and pulp and paper industry in 2017.

Contribution to sustainable development

Sistema's contribution to achievement of the Sustainable Development Goals

Key focus areas and projects

Main impact

ECONOMY

Expansion of land area used for operations. Introduction of state-
of-the-art agricultural technologies and automated management
systems, R&D in agriculture, including to increase soil fertility and
improve the seed pool, in partnership with industry institutions and
agricultural companies.

Increase of crop yields and productivity, reduction of import
dependency by providing Russian-produced health and organic
food products.

Modernisation of forest industry enterprises and creation of high-
tech production lines, including installation of a new paper-making
machine in Karelia.

Development of modern industry with high value-added
products. .

Installation of next-generation telecommunications networks across
the country, including in small towns and villages. Fundamental
and applied research in microelectronics and radio engineering.
Development of RFID solutions and microchips for the Internet
of Things.

Reduction of digital inequality, improved access to e-services
for individuals and businesses. Creation of infrastructure for the digital
economy and qualitative growth in various industries.

96 — Sistema — Annual Report 2017

sistema.сom

Reconstruction of power grid infrastructure using Smart Grid
technology and introduction of smart power control and metering
system in Bashkortostan.

Improvement of energy efficiency and reliability of energy supply
to consumers, and reduction of losses in power grids.

Comprehensive urban development in Moscow, development and
promotion of new technologies for construction of wooden apartment
buildings, and investments in alternative construction technologies,
including 3D printing.

Safe City and Intelligent Transport System projects, smart city lighting
system (Sitronics), acoustic surveillance system (Sistema Sarov),
smart house services and the Window on a Nursery School video
surveillance project in Moscow (MGTS).

Higher speed of housing construction, and creation of a more
comfortable, eco-friendly and safe urban environment.

Improvement of road traffic flows, strengthening of public safety.

Establishment of an innovative eco-system for tech businesses and
R&D, including at Sarov Technopark (Nizhny Novgorod region).

Creation of an ecosystem for innovations and encouragement
of development.

SOCIETY

Promotion of social stability in regions of operation, support
for less privileged groups.

Introduction of the outcome-based 4P healthcare model:
prevention, prediction, personalisation and participation.

Social, volunteer and charitable projects aimed at helping children,
the elderly and people with special needs, including the Taking Care
of Veterans programme in Moscow and Medsi's partnership with
the Starost V Radost foundation, the Solony regional festival, the
Generation M project (development of children's creative abilities
and help for seriously ill children), the Participate! campaign to collect
goods for children from orphanages, public boarding schools and
large families across the Detsky Mir chain, etc.

Creation of a vertically integrated system to provide comprehensive
high-tech medical services: emergency aid, outpatient and inpatient
care, hospital substitution services and rehabilitation. Construction
of clinics and provision of advanced equipment, introduction of new
medical technologies and treatment methods, training programmes
for doctors (Medsi's Medical Academy), promotion of healthy lifestyles
("Be Healthy with Medsi!") and early diagnosis of dangerous diseases
(oncology, cardiology, etc.).

Annual Report 2017 — Sistema — 97

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibility

Выручка бизнеса

Группы МТС выросла на

+ ХХ %

SOCIAL RESPONSIBILITY

Production of vaccines and new "convenient" drugs with improved
characteristics, increasing knowledge levels among general
practitioners and pulmonologists at the Medical Academy
(Binnopharm).

Career guidance programmes for young people and development
of engineering and technology education, including youth contests
and schools organised by the Sistema Charitable Foundation, MTS's
telecom laboratories in universities, RTI's and Mikron's departments
at the Moscow Institute of Physics and Technology, conferences for
young scientists (the Mintz Readings), etc. The Higher School
of Management and Innovation – a faculty established jointly with
the Lomonosov Moscow State University.

Creation of a network of regional "virtual branches" and multimedia
resources for the Russian Museum, MTS's social and educational
projects for children ("Children on the Internet") and the older
population ("Mobile Academy"), the "Safe Childhood" educational
project on power safety (BPGC).

Reduction of sickness rates, higher efficiency of detection,
prevention and treatment of diseases.

Training of a new generation of developers, engineering
and technical experts and managers for high-tech and knowledge-
intensive industries.

Improvement of levels of digital literacy, safety and culture,
and introduction of new education technologies.

ENVIRONMENT

Segezha Group's transition to zero-waste production by processing
bark and wood waste into biofuel for its own needs and for external
consumers.

Promotion of resource-saving technologies, creation
of a foundation for the cyclical economy and development
of the green market.

Production of eco-friendly paper packaging for major retail chains,
including Detsky Mir. MTS's switch to eco-friendly packaging for
SIM cards. Joint project of MGTS and WWF Russia for switching
subscribers to electronic bills.

Reduction of greenhouse gas emissions and combatting
climate change.

Portfolio companies' projects to collect and dispose of waste,
including batteries and paper. Reduction of paper consumption.

Reduction of the environmental footprint.

Introduction of alternative power supply sources for MTS's
base stations, use of cell towers for monitoring and prevention
of forest fires.

Introduction of power saving technologies,
use of renewable sources.

Reforestation on leased sites, 96% of which are certified
in accordance with the international responsible forest management
standards of the Forest Stewardship Council (FSC). Introduction
of the intensive forest management model.

Maintaining a constant balance between economic growth
and environmental sustainability.

Support for the Far Eastern Leopards NGO and the Russian
Geographical Society, environmental volunteering and awareness-
raising programmes.

Preservation of biodiversity, and raising levels
of environmental knowledge and awareness.

98 — Sistema — Annual Report 2017

sistema.сom

Social investments
and partnerships

The Corporation's main vehicle for social
investment is the Sistema Charitable
Foundation, which manages portfolio
of corporate programmes in three strategic
focus areas:

in 2015-2017 was allocated for
Sistema Charitable Foundation

bn
RUB 1.4
>

Flagship programme Lift
to the Future
Support for human capital
development in knowledge-intensive
and high-tech industries.

Social projects
and volunteering
Help for people and non-profit
organisations in healthcare, social
security and promotion
of patriotism.

Culture and arts

Creation of an accessible cultural
environment, promotion
of the national cultural and historical
legacy, awareness-raising.

Projects and events to develop engineering
and technology education and the knowledge
base; support for research and invention
projects by young people in the field of new
technologies.

The key focus is support for Second
World War veterans and similar categories
of citizens, as well as development
of volunteering.

The Sistema Charitable Foundation
established a corporate volunteer centre
through which all employees of Sistema
Group can volunteer to tackle social tasks
and participate in charitable events organised
by the Foundation and its social partners.

Projects to support culture and museums,
introduction of new awareness-raising
technologies.

The Russian Museum is the key target for
long-term investment, with a total of about
RUB 0.5bn allocated to finance restoration
work, exhibitions, and multimedia and other
cultural projects until 2023.

In 2017, over 5,000 Russian schoolchildren
participated in qualifying competitions,
including the nationwide System of Priorities
competition.

Since 2015, about 1,600 veterans have
received free rehabilitation treatment
at Medsi's Otradnoye sanatorium
in the Moscow region.

330 students attended inter-regional
engineering and design schools
in Gorno-Altaisk, Tomsk, Yekaterinburg and
Petrozavodsk, and 150 finalists went on to the
Orlyonok youth camp, where they developed
eight potential technology start-ups.

In 2017, almost 600 veterans in Moscow and
another five regions (Karelia, Krasnoyarsk,
Vologda, Arkhangelsk and Kirov) were given
pharmacy gift certificates to purchase
medical supplies.

Over 200 information and education centres
known as "virtual branches" of the Russian
Museum have been opened in culture and
education institutions in the Russian regions
and abroad, and are attended by more than
500,000 people annually.

More than 300,000 people visited
an exhibition at the Russian Museum
to celebrate the 200th anniversiary
of the painter Ivan Aivazovsky's birth.

Annual Report 2017 — Sistema — 99

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibility

Выручка бизнеса

Группы МТС выросла на

+ ХХ %

SOCIAL RESPONSIBILITY

In 2016-2017, more than 80 of the best
school-leavers received additional points for
their Unified State Exam scores for admission
to the top seven universities in Russia.

Over 15,000 children from more than 20
communities in Altay and Karelia participated
in events at the Solony charitable festival.

Six Russian universities were awarded grants
of up to RUB 900,000 (RUB 5m in total)
to prepare graduates for the requirements
of the labour market.

32 STEM (science, technology, engineering
and mathematics) supplementary
education institutions in 22 regions
of Russia received grants of up to
RUB 500,000 (RUB 15m in total).

16 student projects developed for the Group's
companies were supported by grants of up
to RUB 500,000 (RUB 8m in total) to finalise
concept solutions and produce prototypes.

Sistema Charitable Foundation with
support from MTS, Segezha Group, Cosmos
Group, RTI, Steppe AgroHolding, Detsky
Mir and Medsi organised nine charitable
New Year parties for over 6,000 orphans,
disabled children, children from large and
low-income families in Moscow, Vologda,
Yaroslavl, Volgograd, Kazan, Onega
(Arkhangelsk region), Kemerovo, Ulyanovsk
and Rostov-on-Don. In the five years since
its establishment, the Corporation has
organised New Year performances for over
20,000 children across Russia.

About 700 volunteers from Sistema Group
companies participated in corporate
initiatives

Over 4,000 people visited exhibitions
at the Mikhailovsky castle free of charge
as part of a new outreach campaign called
Cultural Weekend; as a result, the number
of visitors to the museum surged five-fold
from usual levels.

More than 50,000 people attended the Imperial
Gardens of Russia international festival of
garden art in St Petersburg, where the central
theme was the Russian avant-garde.

Over 30,000 visitors came to see the People’s
Revolution exhibition about Russian scientific
and industrial achievements since 1917 at the
Lumière Brothers Centre for Photography.

More than 1,000 people watched the
19 best films about the lives of people with
disabilities at the Breaking Down Barriers film
festival held as part of the 6th St Petersburg
International Cultural Forum, which the SCF
joined as a partner for the first time.

The Sistema Charitable Foundation provided about RUB 3m for the creation of the Artillery
permanent exposition at the Lenino-Snegiri military history museum in the Moscow region.

Because of its focus on high-tech sectors and
introducing new technologies into traditional
industries, Sistema actively invests in human
capital and training the next generation
of leaders for the country's innovative
development. In 2015-2017, over RUB 735m
was allocated to support education through
the Sistema Charitable Foundation alone.
The majority of investments are made under
the Corporation's flagship programme,
which aims to raise the level of engineering
and technical education by bringing
together schools, universities and high-
tech businesses, and by developing and
implementing efficient ways of identifying
and training youth-led technology teams for
knowledge-intensive industries.

100 — Sistema — Annual Report 2017

sistema.сomSistema was named among Russia’s top five
companies for corporate charity in 2017,
while its flagship social programme, Lift
to the Future, was named among the top
three initiatives promoting educational
development in Russia (based on the
results of the annual contest of charity
projects organised by the Donors Forum,
the Vedomosti newspaper and PwC).

Sistema and its portfolio companies
run investment and social programmes
via mutually beneficial inter-sector
partnerships with government authorities,
research and education institutions
and non-profit organisations. As well
as providing financial support for joint
projects, the Corporation also contributes
its expertise and other resources, thereby
creating a systemic effect. For example,
having been an anchor investor for
several years not just in the Karelian
economy but also in the region’s social
sphere, the Corporation, under its General
Agreement with the region's Government,
invests in the development of the forest
industry, social infrastructure (the Sports
Palace in Segezha and other facilities),
culture (support for the Musical Theatre
in Petrozavodsk), sports (hockey and
boxing competitions for children and
young people) and education (work
with Petrozavodsk State University).
Agreements on social and economic
cooperation to implement joint initiatives
and projects to foster a healthy economic,
investment and social environment have
also been signed with the Arkhangelsk,
Vologda, Kirov, Irkutsk, Kostroma, Samara
and Krasnodar regions.

A vivid example of social cooperation is the
long-term programme for supporting Second
World War veterans that Sistema runs under
its agreement with the Moscow Government
and the Moscow City Council of veterans.
One of the programme's key elements is free
medical care and rehabilitation for veterans
and home-front workers, as well as volunteer
initiatives and promotion of patriotism among
young people.

Sistema was named among
Russia’s top five companies
for corporate charity in 2017,

ТОP-5

>5 000

young people in the region
who participated in the charity
festival Solony

Under the social partnership agreement
with the Government of the Altay region,
the first Solony charitable festival
was held in 2016 for more than 5,000
young people from the region who
participated in educational and cultural
events organised by Sistema Charitable
Foundation with support from regional and
local authorities and with the participation
of a number of the Group's companies
(MTS, Detsky Mir, Medsi, Segezha Group,
Binnopharm, Altay Resort, etc.) In 2017,
two such festivals devoted to the Russian
Year of Ecology were held in Altay and
Karelia, and participant numbers tripled.

The partnership model tested by
Sistema combines the resources, social
interests and capacities of businesses,
local communities, regional non-profits
and government authorities to ensure
maximum efficiency of the joint initiatives.
Such events have a positive effect
on social development.

Sistema Group companies also make
active use of various social partnership
mechanisms.

Annual Report 2017 — Sistema — 101

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityВыручка бизнеса

Группы МТС выросла на

+ ХХ %

SOCIAL RESPONSIBILITY

Environmental
responsibility

Responsibility
towards employees

The Corporation encourages its portfolio
companies' initiatives to promote greater
responsibility for the environment and
climate, conservation of natural resources,
development of the green market, popular
awareness of environmental issues and
sustainable production and consumption
patterns. Sistema Group companies try
to maintain a high level of compliance with
Russian and international environmental
standards.

development of biotechnological fuel
production and a waste-recycling project
using biofuel at Segezha Group;

training for employees of Leader
Invest in energy efficiency and
environmental safety at real-estate
facilities, and participation in a working
group on developing GREEN ZOOM
City regulations for comprehensive and
sustainable site development;

Sistema Group companies employ more
than 130,000 people in Russia. In its
relations with employees, the Corporation
is guided by standards that are in line with
both Russian labour legislation and the
generally accepted principles of the World
Labour Organisation. HR management
at Sistema is based on observance
of employees' fundamental rights, including
freedom of association and the right
to collective bargaining.

In 2017, major environmental projects
run by Sistema portfolio companies
included:

improvement of business processes
and practices at Mikron in accordance
with the new revision of ISO 14001:2015
Environmental Management Systems;

successful recertification audit for
compliance with quality and environmental
management standards (ISO 9001
and ISO 14001) at BPGC;

launch of production of an injury-proof
covering with improved characteristics
from reprocessed car tyres at Technopark
Sarov;

campaigns to promote preservation
of forest resources and reforestation
in regions of operation at Segezha Group
and other Sistema Group companies.

In 2017, new collective-bargaining
agreements regulating employer-
workforce relations were signed
at Segezha PPM, Sokol PPM and Vologda
Paper Mill (all part of Segezha Group).
As well as preserving all existing social
guarantees and compensations, the
agreements introduced additional staff
benefits covering provision of financial
aid, working conditions, etc. The collective
agreement at Saransk TV Factory (part
of RTI Group) was recognised as the best
in the Mordovia region.

Aside from competitive salaries and
welfare benefits, an important element
in the protection of employees' social
and labour rights is occupational
health and safety. For example,
Lesosibirsk Woodworking Plant No 1,
a major woodworking enterprise in the
Krasnoyarsk region, opened a training
centre with simulators of potential
emergencies to help staff learn the proper
procedures to avoid injuries.

With teams in various regions and
industries, Sistema supports diversity
and employment of local populations,
helps unlock employees’ professional
and personal potential, and creates
opportunities for professional and
career development. Management
focuses in particular on the quality
of internal communications and
the creation of a uniform corporate
culture and opportunities for growth
in order to significantly improve levels
of engagement and as a result the
operational efficiency of the business.

102 — Sistema — Annual Report 2017

sistema.сomIn order to strengthen intra-corporate
relationships and to provide non-financial
incentives for employees and stimulate
innovations, in 2017 the Corporation
announced its first Idea of the Year
contest, which was open to any employee
of Sistema and its portfolio companies.

In September 2017, Sistema held its third
annual Knowledge Week. More than 600
employees participated in workshops,
training sessions and interactive lectures
given by leading experts. This year,
the programme included Leadership
Saturday, a series of meetings with experts
on leadership. At the end of the event,
it was decided to hold Knowledge Days
on a regular basis to foster personal and
professional development. The Corporation
has also established discussion platforms
that bring together experts from various
industries who want to improve their skills,
learn something new, share their practical
experience and find business solutions
by thinking “outside the box”.

analysed coaching methods that can be
used at work meetings, expressed opinions
on the theory of generations from an
incentives point of view, and discussed
various scenarios for use of robot software
across Sistema. The experts were especially
interested in the new element of MTS's
training programmes called Development
of Digital Skills, which involves preparation
of a year-long DIGITAL_MTS programme
including a series of webinars on various
topics and an interactive training course.
Sistema's Corporate University holds
professional club meetings every month. Any
employee of the Corporation can participate
free of charge by submitting an application.

For many years, a key event uniting
employees of all Sistema companies has
been the corporate Games. Held in 2017
for the 15th time, they brought together
several thousand employees and their
family members. More than 700 athletes
from 17 teams competed in 14 disciplines.

For more than a year, Sistema has organised
corporate discussion clubs. Twenty meetings
have been held in total, with more than
530 experts from 20 portfolio companies
participating. Participants shared their
experience in business-process automation,

In 2017, Sistema Group strengthened its
position in the annual rating of Russia's
best managers published by the
Managers' Association and Kommersant
Publishing House: 83 senior executives
were included in the list, up from 66 the
previous year.

Three Sistema Group companies
operating in the of microelectronics,
pharmaceuticals and hospitality
segments were named as winners and
runners-up in the Best Moscow Employer
contest organised by the Moscow Social
Security Department, the Moscow
Federation of Trade Unions and the
Moscow Confederation of Industrialists
and Entrepreneurs (Employers). The
capital’s largest hotel complex, Cosmos,
managed by Cosmos Group, won in the
Further Professional Training of Employees
category, rising from second place in 2016,
while Binnopharm and Mikron took second
place in the Ensuring Work/Family Balance
for Employees with Children and Providing
Temporary Employment and Organising
Public Work for Young People categories,
respectively.

athletes

>700

from 17 teams competed
in 14 disciplines

Annual Report 2017 — Sistema — 103

sistema.сomCompany todayStrategic ProgressCorporate governance Social responsibilityAnnex 1.
Brief biographies of Sistema’s Board members, President, Management Board members,
and Corporate Secretary. Their shareholding in Sistema PJSFC.

Name and position

Brief biography

Members of the Board of Directors

Vladimir Evtushenkov
Chairman of the Board of Directors
Non-executive director

Anna Belova
Independent director

Born in 1948 in the Smolensk region.
He graduated from the Mendeleev Moscow Institute of Chemical Technology in 1973 and from the Economics
Department of the Lomonosov Moscow State University in 1980. Holds a PhD degree in Economics.
1975-1982 – Shop manager; deputy director; chief engineer, the Karacharovo Plastics Factory.
1982-1987 – Chief engineer, first deputy CEO, the Polymerbyt Research and Manufacturing Association.
1987-1988 – Head of the Technical Department, then head of the Main Department of Science and Technology,
the Moscow City Executive Committee.
1990 – Chairman of the Moscow Municipal Committee for Science and Technology.
1993 – Founded Sistema Joint-Stock Financial Corporation together with a group of associates.
Principal shareholder, Chairman of the Board of Directors and Chairman of the Strategy Committee of the Board
of Directors of Sistema PJSFC.
Member of a number of government commissions, actively involved in decision-making for improvement
of competitiveness of the Russian industry, development of high technologies and innovations, science and
culture; chairman of the Russian-Arab Business Council, member of the management boards of the main
associations of entrepreneurs in Russia – the Russian Union of Industrialists and Entrepreneurs and the Russian
Chamber of Commerce and Industry.
Chairman of the Council of Trustees of the Fund for Development of the State Russian Museum “Friends of the
Russian Museum”. Member of the Board of Trustees of Sistema Charitable Foundation.
Share in the authorised capital of Sistema PJSFC: 64.2030%.

Born in 1961 in Aleksandrovsk, the Sakhalin region.
In 1984, graduated from the Moscow Engineering Physics Institute. PhD (economics), professor
of the Higher School of Economics.
2001-2003 – Deputy Railway Minister of Russia.
2004-2005 – deputy chair of the Management Board, vice president for corporate governance, reform
and computerisation, OJSC Russian Railways.
2005-2007 – advisor to the head of the Federal Nuclear Energy Agency.
2005-2007 – first deputy CEO, OJSC TekhSnabExport.
2007-2011 – member of the Management Board, deputy CEO, director for strategy, corporate development
and integration, OJSC SUEK.
2008-2016 – member of the Board of Directors (independent director), OJSC Sheremetyevo International
Airport.
Author of over 50 articles and academic papers on economics, entrepreneurship, management strategy and
business transformation.
Holder of various public and government awards:
2010 – winner of the Russian national competition organised by the Russian Union of Industrialists and
Entrepreneurs and the Association of Independent Directors in the category “Independent Director of the Year”.
2014 – winner of the award “Best Corporate Director Among Companies Partially Owned by Government”
in the category “Best Board Chairperson” established by the National Association of Corporate Directors and
Top Managers.
2014 – winner of ARISTOS, the Russian national award in the area of management, in the category
“Best Independent Director”.
Member of the boards of directors of PJSC Unipro, JSC High-Speed Rail Lines and Tiscali S.p.A. Over the past 10
years, she has been a member of the boards of directors of more than 25 Russian and international companies.
Member of the Board of Directors of Sistema PJSFC since 2017. Member of the Audit, Finance and Risks
Committee, the Investor Relations and Dividend Policy Committee, and the Ethics and Control Committee
of Sistema’s Board.
Share in the authorised capital of Sistema PJSFC: 0%.

Sergey Boev
Deputy Chairman of the Board
of Directors
Non-executive director

Born in Moscow in 1953.
In 1978, graduated from the All-Union Correspondence Law Institute, in 1984, from the Moscow Ordzhonikidze
Institute of Management. Holds PhD degrees in Economics and Engineering. Professor.
Winner of the State Prize of the Russian Federation in science and technologies. Awarded the Order of Honour.
Awarded the titles of the honoured economist of Russia and the honoured radio engineer of Russia.

 As of 31 March 2018.

104 — Sistema — Annual report 2017

sistema.ruName and position

Brief biography

Sergey Boev
(Continue)

Andrey Dubovskov
Executive Director

Felix Evtushenkov
Non-executive director

Member of the Russian President’s Council for Economic Modernisation and Innovative Development
of Russia, the Working Group for Technological Development of the Russian President’s Economic Council, the
Federation Council’s council on legislative support for the defence industry and military technical cooperation,
the Science and Technology Council of the Military and Industrial Commission of the Russian Government, and
the Academic Board of the Russian Security Council; co-chairman of the working group for innovations of the
EU-Russia Industrialists’ Round Table; full member of the Academy of Military Science; head of the Intelligent
Information and Radiophysical Systems Department of the Moscow Institute of Physics and Technology;
professor of the Radio Engineering Department of the Ogarev Mordovia State University.
1971-1999 – Worked at the Mintz Radio Technology Institute where he made a career from fitter’s apprentice
to CEO.
2000-2008 – CEO, OJSC RTI Concern.
2008-2011 – Vice President, Head of the High Technology and Industry Business Unit, Sistema PJSFC.
2011-2016 – CEO, OJSC RTI.
Since 2016 – Chief Designer, OJSC RTI.
2012 – Appointed Chief Designer of the National Missile Warning System.
Chairman of the Board of Directors of OJSC RTI, OJSC Mintz Radio Technology Institute, OJSC Research Institute
of Long-Range Radio Communications, member of the Board of Directors of Almaz-Antey Concern
and a number of other companies.
Member of the Boards of Trustees of Sistema Charitable Foundation, the Russian Admirals’ Club and the
Suvorov Military School in Tver.
Member of the Board of Directors of Sistema PJSFC since 2013. Deputy Chairman of the Board of Directors,
Chairman of the Ethics and Control Committee, member of the Strategy Committee and the Nomination,
Remuneration and Corporate Governance Committee of the Board.
Share in the authorised capital of Sistema PJSFC: 0.0929%.

Born in Alma-Ata in 1966.
In 1993, graduated from the Gerasimov Institute of Cinematography.
Mr Dubovskov has extensive experience in telecommunication companies: since 1993, he has held multiple
managerial positions at Millicom International Cellular S.A., Millicom International Cellular B.V., LLC Regional
Cellular Telecommunications, CJSC 800, and other companies in Moscow, Almaty, Nizhny Novgorod,
Yekaterinburg, Perm and Kiev.
In 2002-2004, CEO of Tele2 (Nizhny Novgorod).
In 2004, joined OJSC MTS as head of the company’s Nizhny Novgorod branch.
In 2006-2007, Director of the MTS Ural Macroregion.
In 2007, became First Deputy CEO of CJSC UMS (MTS Ukraine) and in 2008 was appointed head of the MTS
Ukraine business unit.
In 2011-2018, President of PJSC MTS.
On 13 March 2018, was appointed President of Sistema PJSFC upon decision of the Board of Directors.
Member of the Board of Directors of Sistema PJSFC since 2015. Member of the Strategy Committee of the
Board. Member of the Board of Trustees of Sistema Charitable Foundation.
Share in the authorised capital of Sistema PJSFC: 0.0140%.

Born in Moscow in 1978.
In 2000, graduated from the Griboyedov Institute of International Law and Economics with a degree in law.
1999-2000 – Assistant to President of CJSC Sistema Invest, Executive Director of Industry Department
at Sistema PJSFC.
2000-2006 – Deputy CEO, CEO at CJSC Sistema Hals.
2006-2008 – President of OJSC Sistema Hals.
2008-2011 – Vice President, Head of Consumer Assets Business Unit at Sistema PJSFC.
2011-2012 – First Vice President, Head of Core Assets Business Unit at Sistema PJSFC.
2012-2018 – First Vice President of Sistema PJSFC.
Member of the Board of Directors of Sistema PJSFC since 2015 and Deputy Chairman of the Board of Directors
of Sistema PJSFC since April 2018. Member of the Ethics and Control Committee (and its Chairman since April
2018) and the Strategy Committee of the Board of Directors of Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.1817%.

 Andrey Dubovskov became an executive director after the end of the reporting period following his appointment as President and Management Board Chairman of Sistema PJSFC.
 Felix Evtushenkov became a non-executive director after the end of the reporting period as he left the Management Board of Sistema PJSFC.

Annual report 2017 — Sistema — 105

sistema.ruAnnexsName and position

Brief biography

Ron Sommer
Non-executive director

Robert Kocharyan
Independent director

Jeannot Krecké
Independent director

Roger Munnings
Independent director

Born in 1949.
In 1971, obtained a doctoral degree in mathematics from the University of Vienna.
1980-1986 – managing director, German branch, Sony Group.
1986-1990 – chairman of the Management Board, Sony Deutschland.
1990-1995 – president and CEO, Sony Corporation USA, from 1993 – Sony Europe.
1995-2002 – chairman of the Management Board, Deutsche Telekom AG.
1998-2018 – member of the Supervisory Board of Munich Reinsurance.
2004-2009 – member of the Board of Directors, Motorola Inc., USA.
2005-2011 – member of the Board of Directors (independent director) of Sistema PJSFC, chairman of the
Investor Relations Committee of the Board.
2009-2011 – first vice president, head of the Telecom Assets Business Unit, Sistema PJSFC.
Since June 2009 – chairman of the Board of Directors of PJSC MTS and chairman of the Strategy Committee
of the Board of Directors of PJSC MTS.
Mr Sommer is very active in the area of corporate governance; he is chairman of the Supervisory Board
of MTS Ukraine and member of the Board of Directors of Tata Consultancy Services, India.
Member of the Board of Directors of Sistema PJSFC since 2017. Member of the Strategy Committee, the Audit,
Finance and Risk Committee, and the Nomination, Remuneration and Corporate Governance Committee
of Sistema’s Board of Directors.
Share in the authorised capital of Sistema PJSFC: 0%.

Born in 1954 in Stepanakert, Nagorno-Karabakh Autonomous Region.
In 1982, graduated from the Yerevan Polytechnic Institute.
1991-1994 – Deputy of the first Supreme Council of the Nagorno-Karabakh Republic (NKR), Chairman
of the State Defence Committee of the NKR and Prime Minister of the NKR.
1994-1997 – President of the NKR.
1997-1998 – Prime Minister of the Republic of Armenia.
1998-2008 – President of the Republic of Armenia.
Member of the Board of Directors of Sistema PJSFC since 2009. Chairman of the Nomination, Remuneration
and Corporate Governance Committee, member of the Strategy Committee and the Ethics and Control
Committee of the Board.
Share in the authorised capital of Sistema PJSFC: 0.0228%.

Born in 1950 in Luxembourg.
Graduated from the Free University of Brussels. Further education in economics, accounting and taxation.
Co-author of the annual manual on taxation in Luxembourg and of books on tax control and tax fraud monitoring.
2004 – Minister of Sport, Luxembourg.
2004-2011 – Minister of Economics and Foreign Trade, Luxembourg, representative of the Luxembourg
Government in the Council of Ministers of the European Union.
Member of the board of directors of East-West United Bank S.A. since 2013 and its chairman since 2015.
Co-founded the Alzheimer Association Luxembourg and became its President (1987-1997).
Since 1997 – President of the Alzheimer Foundation.
1970-1977 – Played for the Luxembourg national football team; participated in transatlantic and polar
expeditions (Greenland, Svalbard).
Member of the Board of Directors of Sistema PJSFC since 2012. Member of the Audit, Finance and Risks
Committee and the Investor Relations and Dividend Policy Committee of the Board.
Share in the authorised capital of Sistema PJSFC: 0.0201%.

Born in 1950 in the United Kingdom.
Graduated from the Oxford University with a degree of Master of Arts in Politics, Philosophy, Economics.
Member of the UK Government’s working group on trade and investments between Great Britain and Russia,
Chairman of the Institute of Audit Committees of Russia.
Roger has had a long and successful career with the international auditor KPMG (1974-2008), including
during his time as the President and Managing Partner of KPMG in Russia and the CIS (1996-2008), as well
as Chairman of the world energy and natural resources committee of KPMG (1993-2008). Member of the
Institute of Certified Accountants of England and Wales.
Member of the Board of Directors of Sistema PJSFC since 2010. Chairman of the Audit, Finance and Risks
Committee, member of the Investor Relations and Dividend Policy Committee, the Nomination, Remuneration
and Corporate Governance Committee and the Ethics and Control Committee of the Board.
Share in the authorised capital of Sistema PJSFC: 0.0219%.

106 — Sistema — Annual report 2017

sistema.ruAnnex 1. (Continue)Name and position

Brief biography

Mikhail Shamolin
Non-executive director

David Iakobachvili
Independent director

Born in Moscow in 1970.
He 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.
2004-2005 – Managing Director for the Ferroalloys Division, Interpipe Corp (Ukraine).
2005-2011 – Vice President for Sales and Customer Service, then Vice President, Head of Business Unit,
President of OJSC MTS Russia.
2011-2018 – President and Management Board Chairman of Sistema PJSFC.
Since 2018 – President of LLC Segezha Group MC.
Member of the Strategy Committee of Sistema PJSFC. Member of the Board of Trustees of Sistema Charitable
Foundation.
Share in the authorised capital of Sistema PJSFC: 0.3541%.

Born in 1957 in Georgia.
Graduated from the Civil and Industrial Engineering Department of the Georgian Technical University in Tbilisi.
1986-2000 – Private entrepreneur involved in various projects: official dealership of General Motors cars, tourism
and hotel business, timber processing, retail, communications and banking.
1992 – One of the founders of a food producing company, Wimm-Bill-Dann.
1992-2011 – Member and later Chairman of the Board of Directors of Wimm-Bill-Dann.
President of LLC Orion Naslediye. Member of the boards of directors of a number of companies.
Member of managing bodies of various Russian and international organisations: Vice President and member
of the Management Bureau of the Russian Union of Industrialists and Entrepreneurs (RSPP), head of the RSPP
Committee for Corporate Social Responsibility and Demographic Policy, chairman of the RSPP United Ethics
Committee, chairman of the board of RusBrand, president of the Russian-American Business Council, member
of the board of the Russian Chamber of Commerce and Industry, the General Council of LLC Business Russia,
the World Economic Forum in Davos, of the President’s Global Council at New York University, the Public
Council of the Russian Culture Ministry, the Coordination Council for Intellectual Property Protection.
Member of the Board of Directors of Sistema PJSFC since 2011. Chairman of the Investor Relations and
Dividend Policy Committee, member of the Strategy Committee, the Nomination, Remuneration and Corporate
Governance Committee, and the Audit, Finance and Risk Committee of the Board.
Share in the authorised capital of Sistema PJSFC: 0.0267%.

 Mikhail Shamolin became a non-executive director after the end of the reporting period following the termination of his powers as President and Chairman of the Management
Board of Sistema PJSFC.

Annual report 2017 — Sistema — 107

sistema.ruAnnexsName and position

Brief biography

Andrey Dubovskov
President and Management Board
Chairman of Sistema PJSFC since
13 March 2018

Mikhail Shamolin
President and Management Board
Chairman of Sistema PJSFC until 12
March 2018

Igor Alyoshin
Vice President for Security
at Sistema PJSFC

Alexander Gorbunov

President and Board members

Born in Alma-Ata in 1966.
In 1993, graduated from the Gerasimov Institute of Cinematography.
Mr Dubovskov has extensive experience in telecommunication companies: since 1993, he has held multiple
managerial positions at Millicom International Cellular S.A., Millicom International Cellular B.V., LLC Regional
Cellular Telecommunications, CJSC 800, and other companies in Moscow, Almaty, Nizhny Novgorod,
Yekaterinburg, Perm and Kiev.
In 2002-2004, CEO of Tele2 (Nizhny Novgorod).
In 2004, joined OJSC MTS as head of the company’s Nizhny Novgorod branch.
In 2006-2007, Director of the MTS Ural Macroregion.
In 2007, became First Deputy CEO of CJSC UMS (MTS Ukraine) and in 2008 was appointed head
of the MTS Ukraine business unit.
In 2011-2018, President of PJSC MTS.
On 13 March 2018, was appointed President of Sistema PJSFC upon decision of the Board of Directors.
Member of the Board of Directors of Sistema PJSFC since 2015. Member of the Strategy Committee
of the Board. Member of the Board of Trustees of Sistema Charitable Foundation.
Share in the authorised capital of Sistema PJSFC: 0.0140%.

Born in 1965 in Kurgan.
In 1987, he graduated from the Omsk Higher School of Police of the USSR Ministry of Internal Affairs with
a degree in Law.
1983-2012 – Service with law enforcement.
2012-2013 – Management Board member, Vice President for Security and Assets Protection, Medsi Group.
2013-2014 – Vice President for Security, MTS Group Corporate Centre, Security Unit, MTS.
2014-2018 – Senior Vice President, Head of Security Service, MTS Bank.
From April 2018 – Vice President for Security, Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0%.

Born in Moscow in 1967.
In 1992, graduated from the Moscow Engineering and Physics Institute with a degree in experimental nuclear
and plasma physics. In 1999, received an MBA degree from Harvard University.
2002-2003 – Deputy CEO, Intellect Telecom.
2003-2005 – Head of Strategic Analysis Department, Director for Strategy at the Strategic Analysis Department,
OJSC MTS.
2005-2006 – Head of the Corporate Development Department, Acting First Vice President, Head of the Strategy
and Development Function, Sistema PJSFC.
2006-2010 – Vice President for Strategy and Development, OJSC Comstar United TeleSystems.
September-December 2010 – Advisor to the president of OJSC Sitronics.
2010-2012 – Executive Vice President of the Telecom Assets Business Unit, Executive Vice President for
Telecom Assets Development at the Core Assets Business Unit, Sistema PJSFC.
2012-2015 – Executive Vice President of an Investment Portfolio of Sistema PJSFC.
2015-2018 – Vice President, Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.0137%.

 Andrey Dubovskov was appointed President and Management Board Chairman of Sistema PJSFC after the end of the reporting period.
 His powers were terminated after the end of the reporting period.
 Elected as Management Board member after the end of the reporting period.
 His powers were terminated after the end of the reporting period.

108 — Sistema — Annual report 2017

sistema.ruAnnex 1. (Continue)Name and position

Brief biography

Alexey Guryev
Vice President for HR at Sistema
PJSFC

Felix Evtushenkov

Artyom Zasursky
Vice President, Head of Strategy
Function

Alexey Katkov
Managing Partner at Sistema PJSFC

Leonid Monosov

Born in Moscow in 1976.
In 1998, graduated from the Finance Academy under the Government of the Russian Federation with
a degree in finance and credit. In 2013, obtained an MBA degree from the University of Chicago Booth School
of Business.
From 1999 to 2009 held top management positions at Yukos and Severstal.
From 2009 to 2013 was Chief Auditor at TNK BP.
2013-2017 – Vice President, Head of the Internal Control and Audit Department of Sistema PJSFC.
2017-2018 – Vice President, Head of the HR Department of Sistema PJSFC; since April 2018 – Vice President
for HR at Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.0663%.

Born in Moscow in 1978.
In 2000, graduated from the Griboyedov Institute of International Law and Economics with a degree in law.
1999-2000 – Assistant to President of CJSC Sistema Invest, Executive Director of Industry Department
at Sistema PJSFC.
2000-2006 – Deputy CEO, CEO at CJSC Sistema Hals.
2006-2008 – President of OJSC Sistema Hals.
2008-2011 – Vice President, Head of Consumer Assets Business Unit at Sistema PJSFC.
2011-2012 – First Vice President, Head of Core Assets Business Unit at Sistema PJSFC.
2012-2018 – First Vice President of Sistema PJSFC.
Since April 2018 – Deputy Chairman of the Board of Directors of Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.1817%.

Born in 1979 in Moscow.
In 2005, he completed postgraduate studies at the Journalism Department of the Lomonosov Moscow State
University.
In 2001, he graduated from the Lomonosov Moscow State University with a degree in Foreign Social
and Economic Geography and Translation.
2002-2003 – Head of Department at LLC Crossmedia Solutions.
2005-2006 – Executive Director at LLC Territoriya Igr.
2007-2009 – CEO at LLC Dragonara.
2011 – Director for Development at LLC Stream.
2012-2013 – Vice President for Development at OJSC SMM.
2013-2016 – CEO at LLC Stream.
2017-2018 – Vice President, Head of the Strategy Department of Sistema PJSFC; since April 2018 –
Vice President for Strategy at Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.0120%.

Born in 1977 in Moscow.
In 1999, he graduated from the Russian Presidential Academy of National Economy with a degree
in Management.
2000-2015 – Advertising Manager, Sales Director, Commercial Director (since 2007) at LLC Mail.Ru.
2015-2017 – Member of Management Board, First Vice President, COO at JSC SMM; then President
of JSC Sistema Venture Capital.
2017-2018 – CEO and then President of LLC SVC Fund.
Since April 2018 – Managing Partner at Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.0560%.

Born in 1958 in Mozyr, Belarus.
In 1980, graduated from the Moscow Institute of Railway Engineers with a degree in industrial
and civil construction.
Recipient of various awards and the title of Honoured Builder of the Russian Federation.
1999-2007 – CEO of OJSC Moskapstroy.
2007-2010 – Head of the Moscow City Contract Repairs Department.
2010-2012 – Vice President, the state-owned corporation Olympstroy.
2012-2013 – Executive Vice President of the Developing Assets Business Unit, Executive Vice President,
Sistema PJSFC.
2013-2018 – Vice President, Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.0965%.

 His powers were terminated after the end of the reporting period.
 Elected as Management Board member after the end of the reporting period.
 His powers were terminated after the end of the reporting period.

Annual report 2017 — Sistema — 109

sistema.ruAnnexsName and position

Brief biography

Oleg Mubarakshin
Managing Partner at Sistema PJSFC

Vsevolod Rozanov
Managing Partner at Sistema PJSFC

Artyom Sirazutdinov
Managing Partner at Sistema PJSFC

Vladimir Travkov
Vice President for Finance and
Investment at Sistema PJSFC

Born in 1968 in the Saratov region.
He graduated from the Moscow State Academy of Law with a degree in Law in 2000 and from the Finance
Academy of the Government of the Russian Federation with a degree in Finance in 2002.
In 1991, he graduated from the Defence Ministry’s Military Institute.
1996-1998 – Deputy CEO for legal matters, the oil and gas company Belye Nochi (Russia).
1998-2007 – Vice President for Corporate and Legal Affairs for Central and Eastern Europe,
InBev FMCG Group (Russia).
2008-2009 – Vice President for Legal Affairs for Western Europe, InBev FMCG Group (Belgium).
2009-2013 – Member of the Management Board, Head of Legal, EastOne Investment and Consulting Group
(Ukraine, United Kingdom).
2013-2015 – Vice President, Head of the Legal Function, Sistema PJSFC.
2015-2018 – Senior Vice President, Head of the Legal Function of Sistema PJSFC; since April 2018 –
Managing Partner at Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.2444%.

Born in Moscow in 1971.
Graduated from the Economics Department of the Lomonosov Moscow State University with
a degree in Economics.
1993-2001 – Held various positions at the consultancy Bain & Company Inc. in Moscow, London
and Stockholm.
2002-2004 – Deputy CEO for Economics and Finance, CJSC MTU-Inform.
2004-2006 – Vice President for Economics and Finance, OJSC Comstar United Telesystems.
2006-2008 – Vice President for Finance and Investment, member of the Management Board, OJSC MTS.
2008-2013 – CEO of Sistema Shyam TeleServices Limited. Board member of SSTL and OJSC MTS.
2013-2018 – Senior Vice President, Head of the Finance and Investment Function of Sistema PJSFC; since
April 2018 – Managing Partner at Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.1599%.

Born in 1969 in Novokuznetsk.
In 1993, he graduated from the Siberian University of Metallurgy with a degree in Aluminium Production
Engineering.
In 1996, he received an MBA degree from Virginia Commonwealth University.
1996-2005 – Vice President at Russia Partners Managing Company.
2005-2007 – Managing Director at Sputnik Investment Group.
2007-2010 – Member of Management Board, Chief Investment Officer at EastOne.
2010-2016 – Deputy Management Board Chairman at OJSC International Financial Club Bank.
2016-2018 – Vice President at Sistema PJSFC; since April 2018 – Managing Partner at Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.0051%.

Born in 1979 in Tashkent, the Republic of Uzbekistan.
He received a degree in Economics from the Lomonosov Moscow State University in 2000 and a degree
in Management from the same university in 2002.
2003-2004 – Specialist of the strategic analysis service at MTS.
2004-2007 – Chief economist, head of the planning and analysis department at Comstar United TeleSystems.
2007-2010 – Head of the consolidation and planning methodology department at MTS.
2010-2011 – Head of the planning and management reporting department at Comstar United TeleSystems.
2011-2018 – Head of the functional controlling department at MTS.
From April 2018 – Vice President for Finance and Investment at Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0%.

 Elected as Management Board member after the end of the reporting period.

110 — Sistema — Annual report 2017

sistema.ruAnnex 1. (Continue)Name and position

Brief biography

Ali Uzdenov
Managing Partner at Sistema PJSFC

Mikhail Cherny

Evgeny Chuikov

Sergey Shishkin
Vice President for Corporate
Governance and Legal Affairs
at Sistema PJSFC

Born in 1962 in Kislovodsk, the Stavropol territory.
In 1985, he graduated from the Rostov Institute of Railway Engineers with a degree in Automation,
Telemechanics and Communications.
In 1990, he continued his education at the International Survival School (Italy).
1994-1997 – Head of the Rostov Commodity Exchange.
1997-1998 – CEO of LLC Ayaks.
1998-2001 – CEO of the Rostov branch, OJSC Bashneft.
2001-2007 – Chairman of the Board of Directors, OJSC Kormmash.
2007-2009 – CEO of LLC Rostovregiongaz.
2009-2012 – First Vice President for Refining and Sales, OJSC Bashneft.
2012-2018 – Vice President, Senior Vice President of Sistema PJSFC; since April 2018 – Managing Partner
at Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.1400%.

Born in 1971 in Saratov.
In 1994, he graduated from the Moscow State University of International Relations of Russia’s Ministry of Foreign
Affairs (MGIMO) with a degree in International Economics with the knowledge of a foreign language. In 2004,
obtained an MBA degree from Washington University.
2006-2009 – Vice President, head of the division for work with energy companies at LLC Morgan Stanley Bank.
2009-2011 – Deputy CEO for Strategy and Energy Markets at OJSC Bashkirenergo.
2011-2015 – Executive Vice President of an Investment Portfolio at Sistema PJSFC.
2015-2018 – Vice President at Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.0398%.

Born in 1984 in Kiev.
In 2005, received a BA degree from Courtauld Institute of Art.
2008-2009 – Anti-crisis manager at Imperial Energy (an independent oil company) and Ferrexpo
(one of the world’s leading producers of iron ore).
2009-2010 – Co-Director of Pelham Bell Pottinger, a financial PR Agency in the UK.
2010-2015 – Managing Director for Investor Relations of the Corporate Communications Function at Sistema
PJSFC.
2015-2018 – Vice President, Head of the Corporate Communications Function at Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.0519%.

Born in Moscow in 1970.
In 1992, he graduated with honours from the Lomonosov Moscow State University with a degree in Law.
In 1996, he received a PhD in Law.
1998-2000 – Director at the Foundation of International Institute for Development of Legal Economy.
2001-2003 – Member of the bar association of Moscow.
2005-2011 – Head of the Property Department, Director of the Department of Property Projects, Sistema PJSFC.
2011-2015 – Executive Vice President for Corporate Projects at Sistema PJSFC; October 2014 – December
2015 – Acting Senior Vice President, Head of the Corporate Governance Function at Sistema PJSFC.
2015-2018 – Vice President, Head of the Corporate Governance Function of Sistema PJSFC; since April
2018 – Vice President for Corporate Governance and Legal Affairs at Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0.0470%.

 His powers were terminated after the end of the reporting period.
 His powers were terminated after the end of the reporting period.

Annual report 2017 — Sistema — 111

sistema.ruAnnexsName and position

Brief biography

Vladimir Shukshin

Igor Petrov
Corporate Secretary of Sistema

Born in 1959 in the Kovylkinsky district of Mordovia, Russia.
He graduated from the State Institute of Physical Training in 1991, from the Academy of the Federal Security
Service with a degree in Law in 1999, and from the Russian Presidential Academy of National Economy
and Public Administration with a degree in State and Municipal Administration in 2003. PhD degree
in Political Science.
1998-2005 – Advisor to the Mayor of Moscow.
2005-2010 – Deputy head of staff of the Moscow city administration.
2010-2011 – Deputy Mayor of Moscow for coordination with law-enforcement agencies.
January 2012 – June 2012 – Deputy CEO for Security, IDGC Holding.
2012-2013 – Deputy Chairman of the Management Board, Federal Grid Company of United Energy System
(part-time).
2013-2014 – Deputy CEO for Security, OJSC Russian Grids.
2014-2015 – Executive Vice President, Head of the Security and IT Department, Sistema PJSFC.
2015-2015 – Executive Vice President, Head of the Security and IT Department, Sistema PJSFC.
Share in the authorised capital of Sistema PJSFC: 0%.

Corporate Secretary

Born in 1978 in Leningrad.
In 1999, graduated from the St Petersburg State University with a degree in Oriental and African studies.
In 2000, obtained a degree in Philology from the same university.
In 2004, graduated from the Utrecht University (the Netherlands) with a degree in International Law.
In 2009, obtained a degree in Corporate Finance and Financial Analysis from the Russian Academy
of National Economy, Moscow.
2005 – Lawyer, Freshfields Bruckhaus Deringer, Amsterdam.
2005-2006 – Lawyer, ICICI Bank Eurasia.
Corporate Secretary of Sistema PJSFC since 2006.
Share in the authorised capital of Sistema PJSFC: 0.0101%.

 His powers were terminated after the end of the reporting period.

112 — Sistema — Annual report 2017

sistema.ruAnnex 1. (Continue)Annex 2.
Financial results of Sistema PJSFC
in accordance with Russian accounting standards (RAS) in 2017

Revenue structure

(RUB K)

Equity holdings in other companies

Other operating income (property rent, agency services and sureties)

TOTAL

2017

2016

19,078,345

36,635,669

17,688

29,914

19,096,033

36,665,582

The core business of Sistema PJSFC (hereinafter, "the Corporation", "Sistema") is management of interests and stakes in companies.

Key financial indicators

(RUB K)

Revenue from sale of products, goods, works and services (net of VAT)

Administrative expenses

Profit from sales

Interest income

Interest expense

Other income

Other expenses

(Loss)/Income before tax

Current income tax

Net (loss)/income

Retained earnings (uncovered loss)

2017

2016

19,096,033

36,665,582

(7,063,287)

(11,460,300)

12,032,746

25,205,282

3,804,765

5,285,355

(10,221,884)

(11,362,516)

87,004,418

81,398,676

(132,928,216)

(138,572,228)

(40,308,171)

(38,045,431)

(32,187)

(1,477)

(31,509,403)

(37,372,722)

161,805,075

207,692,978

sistema.ru
sistema.ru

Annual report 2017 — Sistema — 113

Performance indicators

Productivity, RUB K/FTE

Debt to equity ratio

Long-term debt to the sum of long-term debt and equity

Debt service coverage ratio

Overdue debt, %

Financial stability

Net working capital, RUB K

Current ratio

Quick ratio

Information about fuel and energy consumption

2017

2016

59,489

124,290

1.236

0.389

9.55

0.610

0.335

0.97

2017

2016

-70,816,504

16,241,154

0.41

1.61

Type of resources

Heat, Gcal

Electric power, thous. kWh

Water, cu m

Petrol, l

TOTAL:

2017

2016

Amount

Cost with VAT,
RUB K

Amount

Cost with VAT,
RUB K

1,530.26

2,596.82

2,300.23

8,878.07

8,079.77

279.59

1,625.73

2,311.04

7,118

2,611.88

8,487.74

238.57

236,009.89

8,846.23

235,141.12

8,440.20

20,600.70

19,778.38

114 — Sistema — Annual report 2017

sistema.ruAnnex 2. (Continue)Annex 3.
Transactions involving shares of Sistema PJSFC performed by members of the Board
of Directors, President and members of the Management Board of Sistema PJSFC during
01 January-31 December 2017.

Name

Number of Sistema shares

Sistema shares received by members of Sistema’s Board of Directors on 07 July 2017 as remuneration for serving
on Sistema’s Board

S. Boev

A. Dubovskov

V. Evtushenkov

F. Evtushenkov

P. Clanwilliam

R. Kocharyan

J. Krecké

P. Mandelson

R. Munnings

M. Shamolin

D. Iakobachvili

878,334

918,201

878,334

918,201

Sistema shares received by members of Sistema’s Board of Directors and Management Board
on 18 January 2017 under the long-term incentive programme

S. Boev

E. Vitchak

A. Gorbunov

F. Evtushenkov

A. Zasursky

V. Korchunov

L. Monosov

O. Mubarakshin

V. Rozanov

A. Uzdenov

M. Cherny

E. Chuikov

M. Shamolin

S. Shishkin

2,958,823

2,115,808

1,331,174

5,077,940

394,904

1,361,036

2,821,078

3,878,982

5,077,940

4,993,951

1,774,899

1,504,299

7,447,645

1,673,990

 Information provided herein coincides with the information included in the notices of transactions with the Corporation’s securities sent to Sistema PJSFC by the Board mem-
bers, President and Management Board members.

Annual report 2017 — Sistema — 115

sistema.ruName

Number of Sistema shares

Dates of transactions

Divestment of Sistema shares by members of the Board of Directors, President and members
of the Management Board of Sistema PJSFC

A. Gorbunov

900,000

02 October 2017

Acquisition of Sistema shares by members of the Board of Directors, President and members
of the Management Board of Sistema PJSFC

O. Mubarakshin

A. Guryev

E. Chuikov

A. Zasursky

1,820,075

850,000

480,000

137,677

20 April 2017

21 April 2017

27 April 2017

28 April 2017

Annex 4.
List of transactions carried out by Sistema PJSFC in the reporting year, which are
recognised as major transactions in accordance with the Federal Law On Joint-Stock
Companies, and other transactions which are covered by the procedure for approval
of major transactions in accordance with the Company’s Charter.

During 2017 Sistema PJSFC did not perform any transactions which are recognised as major transactions in accordance with the Federal Law
On Joint-Stock Companies, or other transactions which are covered by the procedure for approval of major transactions in accordance with
the Company’s Charter.

116 — Sistema — Annual report 2017

sistema.ruAnnex 3. (Continue)Annex 5.
List of transactions carried out by Sistema PJSFC in the reporting year, which are recognised
as related party transactions in accordance with the Federal Law On Joint-Stock Companies.

All the transactions closed by Sistema PJSFC in 2017 which are recognised as related party transactions in accordance with the Federal Law
On Joint-Stock Companies were approved by the Board of Directors of the Corporation.

The decisions on consent to or subsequent approval of the transactions closed by Sistema PJSFC in 2017 which are recognised as related
party transactions in accordance with the Federal Law On Joint-Stock Companies were made by the Board of Directors of the Corporation.

No No of the BoD

Description

Counterparties

Transaction value

Related parties

minutes and
decision date

02-16,
12 March 2016

Acquisition of additionally issued ordinary
registered shares in JSC Leader Invest and
transfer of ordinary registered shares in JSC
Lobachevskogo 120 to JSC Leader Invest

JSC Leader Invest

RUB 1,527,821,460.00

13-16,
09 December 2016

Signing of the agreements providing for
indemnification of members of Sistema’s
Board of Directors against legal and other
expenses and losses

Sistema Finance S.A.,
A. Dubovskov,
F. Evtushenkov, P.
Clanwilliam

RUB 1,557,400,000.00

13-16,
09 December 2016

Signing of the indemnity agreement with
Sistema Finance S.A.

Sistema Finance S.A.

RUB 1,557,400,000.00

12-16,
29 October 2016

Sale of shares in JSC Leader Invest
to F. Evtushenkov

F. Evtushenkov

RUB 32,692,738.00

12-16,
29 October 2016

Sale of shares in JSC Intellect Telecom
to F. Evtushenkov

F. Evtushenkov

RUB 2,655,010.00

V. Evtushenkov,
F. Evtushenkov,
V. Rozanov,
S. Shishkin

V. Evtushenkov,
A. Dubovskov,
F. Evtushenkov,
P. Clanwilliam,
M. Shamolin,
V. Rozanov

V. Evtushenkov,
F. Evtushenkov,
M. Shamolin,
V. Rozanov

V. Evtushenkov,
F. Evtushenkov

12-16,
29 October 2016

Sale of shares in JSC Business Nedvizhimost
to L. Monosov

L. Monosov

RUB 7,396,754.00

L. Monosov

12-16,
29 October 2016

Sale of shares in JSC Mosdachtrest
to L. Monosov

L. Monosov

RUB 14,949,437.00

L. Monosov

12-16,
29 October 2016

Sale of shares in JSC Steppe AgroHolding
to A. Uzdenov

A. Uzdenov

RUB 14,000,000.00

A. Uzdenov

12-16,
29 October 2016

Sale of a stake in LLC Segezha Group
to A. Uzdenov

A. Uzdenov

RUB 21,619,552.00

A. Uzdenov

12-16,
29 October 2016

Sale of shares in JSC Binnopharm
to M. Cherny

M. Cherny

RUB 4,549,317.00

M. Cherny

12-16,
29 October 2016

Sale of a stake in LLC Kronstadt Group
to M. Cherny

M. Cherny

RUB 6,975,620.00

M. Cherny

13-16,
09 December 2016

Provision of a loan to LLC Kronstadt Group
and an additional contribution to the
authorised capital of LLC Kronstadt Group

LLC Kronstadt Group

RUB 4,251,928,408.00

V. Evtushenkov,
S. Boev,
F. Evtushenkov,
M. Shamolin,
M. Cherny,
S. Shishkin

Annual report 2017 — Sistema — 117

sistema.ruNo No of the BoD

Description

Counterparties

Transaction value

Related parties

minutes and
decision date

01-17,
11 January 2017

Signing of the Underwriting Agreement

01-17,
11 January 2017

Signing of the Engagement Letter

RUB 251,574,410.00

V. Evtushenkov,
F. Evtushenkov,
V. Korchunov,
O. Mubarakshin

RUB 0

V. Evtushenkov,
F. Evtushenkov,
V. Korchunov,
O. Mubarakshin

PJSC Detsky Mir, EXARZO
HOLDINGS LIMITED,
FLOETTE HOLDINGS
LIMITED, Credit Suisse
Securities (Europe)
Limited, Goldman Sachs
International, Morgan
Stanley & Co. International
plc, UBS Limited,
JSC Sberbank CIB,
SIB (Cyprus) Limited

PJSC Detsky Mir, Credit
Suisse Securities (Europe)
Limited, Goldman Sachs
International, Morgan
Stanley & Co. International
plc, UBS Limited, JSC
Sberbank CIB, SIB (Cyprus)
Limited and/or their
affiliates or other persons
that may be specified
in the Engagement
Letter or annexes
thereto as underwriters
or managers

03-15,
18 April 2015

Transfer of shares in JSC Mosdachtrest to JSC
Business Nedvizhimost and acquisition
of additionally issued shares in JSC Business
Nedvizhimost

JSC Business Nedvizhimost RUB 24,000,000,000.00

10-16,
10 September 2016

Acquisition of shares in East-West United
Bank S.A. from PJSC MTS Bank

PJSC MTS Bank

RUB 2,600,000,000.00

02-17,
18 February 2017

Acquisition of additionally issued shares
in JSC Business Nedvizhimost, and transfer
of shares in OJSC VAO Intourist and JSC
Mosdachtrest and an equity stake in LLC Altay
Resort to JSC Business Nedvizhimost

JSC Business Nedvizhimost RUB 1,050,360,800.00

V. Evtushenkov,
F. Evtushenkov,
A. Zasursky,
L. Monosov,
S. Shishkin,
V. Shukshin

V. Evtushenkov,
F. Evtushenkov,
V. Rozanov

V. Evtushenkov,
F. Evtushenkov,
A. Zasursky,
L. Monosov,
S. Shishkin,
V. Shukshin

 The grounds for recognising the person a related party: controlling person of the Corporation and JSC Business Nedvizhimost. Stake in the Corporation: 64.2030%. Stake in JSC
Business Nedvizhimost: 0%.
 The grounds for recognising the person a related party: close relative of the controlling person of the Corporation and JSC Business Nedvizhimost. Stake in the Corporation: 0.1817%.
Stake in JSC Business Nedvizhimost: 0%.
 The grounds for recognising the person a related party: member of the governance bodies of the Corporation and JSC Business Nedvizhimost. Stake in the Corporation: 0.0120%.
Stake in JSC Business Nedvizhimost: 0%.
 The grounds for recognising the person a related party: member of the governance bodies of the Corporation and JSC Business Nedvizhimost. Stake in the Corporation: 0.0965%.
Stake in JSC Business Nedvizhimost: 0.06%.
 The grounds for recognising the person a related party: member of the governance bodies of the Corporation and JSC Business Nedvizhimost. Stake in the Corporation: 0.0470%.
Stake in JSC Business Nedvizhimost: 0%.
 The grounds for recognising the person a related party: member of the governance bodies of the Corporation and JSC Business Nedvizhimost. Stake in the Corporation: 0%.
Stake in JSC Business Nedvizhimost: 0%.

118 — Sistema — Annual report 2017

sistema.ruAnnex 5. (Continue)No No of the BoD

Description

Counterparties

Transaction value

Related parties

minutes and
decision date

04-17,
01 April 2017

Pledge of shares in JSC RTI as security
for JSC RTI’s liabilities to PJSC VTB Bank

VTB Bank (Public Joint-
Stock Company), JSC RTI

RUB 22,944,442,363.54

05-17,
12 April 2017

Provision of an interest-bearing loan
to JSC Steppe AgroHolding

JSC Steppe AgroHolding

RUB 1,153,000,000.00

06-17,
20 May 2017

Provision of an interest-bearing loan
to JSC Steppe AgroHolding

JSC Steppe AgroHolding

RUB 1,840,000,000.00

03-15,
18 April 2015

Transfer to the trust management of LLC
Sistema Capital MC of the cash intended
for transactions with securities and other
transactions allowed by the Russian law

LLC Sistema Capital MC

RUB 2,985,500,000.00

07-17,
24 June 2017

Acquisition of units in real estate CEIF Sistema
Rental Real Estate 1 managed
by LLC LandProfit MC

LLC LandProfit MC

RUB 1,034,400,000.00

10-17,
14 October 2017

Change in the terms of the loans provided
to JSC Steppe AgroHolding

JSC Steppe AgroHolding

RUB 770,000,000.00

11-17,
18 November 2017

Extension and adjustment of the terms
of the letter of credit issued by ING Bank
(Eurasia)

13-17,
16 December 2017

Signing of the agreements providing for
indemnification of members of Sistema’s
Board of Directors against legal and other
expenses and losses

Joint-Stock Company ING
Bank (Eurasia), SISTEMA
SHYAM TELESERVICES
LIMITED

RUB 2,124,000,000

Sistema Finance S.A., A.
Belova, R. Sommer

Q4 2017 – RUB
1,498,380,000.00

15-17,
27 December 2017

Provision of an interest-bearing loan
to JSC Sistema Invest

JSC Sistema Invest

RUB 20,000,000,000.00

V. Evtushenkov,
S. Boev,
F. Evtushenkov,
S. Shishkin

V. Evtushenkov,
F. Evtushenkov,
A. Zasursky,
A. Uzdenov,
S. Shishkin

V. Evtushenkov,
F. Evtushenkov,
V. Rozanov

V. Evtushenkov,
F. Evtushenkov

V. Evtushenkov,
F. Evtushenkov,
A. Uzdenov,
S. Shishkin

V. Evtushenkov,
F. Evtushenkov,
A. Gorbunov,
V. Rozanov

V. Evtushenkov,
F. Evtushenkov,
A. Belova,
R. Sommer

V. Evtushenkov,
F. Evtushenkov,
S. Shishkin

 The grounds for recognising the person a related party: controlling person of the Corporation and JSC RTI. Stake in the Corporation: 64.2030%. Stake in JSC RTI: 0%.
 The grounds for recognising the person a related party: member of the governance bodies of the Corporation and JSC RTI. Stake in the Corporation: 0.0929%. Stake in JSC RTI: 3%.
 The grounds for recognising the person a related party: close relative of the controlling person of the Corporation and JSC RTI; member of the governance bodies of the Corporation
and JSC RTI. Stake in the Corporation: 0.1817%. Stake in JSC RTI: 0%.
 The grounds for recognising the person a related party: member of the governance bodies of the Corporation and JSC RTI. Stake in the Corporation: 0.0470%. Stake in JSC RTI: 0%.
 The grounds for recognising the person a related party: the controlling person of the Corporation and JSC Sistema Invest Stake in the Corporation: 64.2030%. Stake in JSC Sistema
Invest: 0%.
 The grounds for recognising the person a related party: close relative of the controlling person of the Corporation and JSC Sistema Invest Stake in the Corporation: 0.1817%.
Stake in JSC Sistema Invest: 0%.
 The grounds for recognising the person a related party: member of the governance bodies of the Corporation and JSC Sistema Invest. Stake in the Corporation: 0.0470%.
Stake in JSC Sistema Invest: 0%.

Annual report 2017 — Sistema — 119

sistema.ruAnnexsAnnex 6.
Report on compliance with the Corporate Governance Code recommended
by the Bank of Russia

In the opinion of Sistema’s Board of Directors, the Corporation complies with the principles and the guidelines of the Corporate Governance
Code recommended by the Bank of Russia (hereinafter, “the Code”) with the reservations mentioned herein below.

When assessing compliance of Sistema’s corporate governance practices with the Code’s recommendations, the Board assessed both formal
and actual adherence to the principles and recommendations of the Code by the Corporation and its officers, including achievement of the
general level of corporate governance standards stipulated by the Code, even through alternative mechanisms.

No.

Corporate governance principle Criteria for assessment

Compliance Notes

I. Shareholder rights and equality for exercise of their rights

1.1.

The company should ensure equal and fair treatment of all shareholders for exercise of their rights to participate in the company’s
governance.

1.1.1. The company should create for its
shareholders the most favourable
conditions for participation in the
general meeting, for developing
a substantiated position on the
general meeting’s agenda items,
coordinating their actions, and
expressing their opinions on the
items under consideration.

1.1.2. The procedure for notification

of the general meeting and
provision of materials for the
general meeting should enable
the shareholders to prepare for
the meeting as appropriate.

1.1.3. During preparation and

conducting of the general
meeting, the shareholders
should be able to receive
information about the meeting
and the relevant materials
in a timely manner and without
any hindrance, put questions
to executive bodies and
members of the company’s board
of directors and to communicate
with each other.

Observed.

1. An internal document of the
company approved by the general
meeting of shareholders and regulating
procedures of the general meeting
is publicly disclosed.

2. The company offers an available
means of communication with
the company, such as a hotline,
e-mail or a web forum, that allows
shareholders to express their opinions
and submit queries about the agenda
during preparations for the general
meeting. These actions were taken
by the company ahead of each general
meeting held in the reporting period.

1. A notice of the general meeting
of shareholders is published on the
website at least 30 days before the date
of the meeting.

Observed.

2. The notice specifies the venue and
documents needed for admission to the
meeting.

3. The shareholders are provided access
to information about persons that
proposed agenda items and nominated
candidates to the board of directors
and the auditing commission of the
company.

1. In the reporting period, the
shareholders had an opportunity
to ask members of the Company’s
governance bodies and board
of directors questions ahead of the
general meeting or during the meeting.

2. The stance of the board of directors
(including dissenting opinions included
in the minutes) on each agenda
item of the general meetings held
in the reporting period was included
in materials for the general meetings.

Observed.

The procedure for convening, preparing
and conducting the General Meeting of the
shareholders of the Corporation is regulated
by the Terms of Reference of the General Meeting
of shareholders that was approved by the General
Meeting of shareholders of Sistema PJSFC
(Minutes No. 1-17 dd 28 June 2017) and is freely
available on the Corporation’s website.

When holding each General Meeting
of shareholders, the Corporation communicates
to its shareholders an e-mail address to which they
may send their opinions or questions with regard
to the General Meeting, including its agenda.

In accordance with Sistema’s Charter, a notice
of the General Meeting of shareholders, including
the date, time and venue of the meeting and
documents needed for admission, is published
in both Russian and English on the Company’s
website (www.sistema.ru/www.sistema.com)
at least 30 days before the meeting.

The information about who proposed each
item to the agenda of the General Meeting and
about each candidate nominated for election
to the Corporation’s governance bodies and who
nominated them shall be provided in explanatory
notes or other relevant materials.

During preparations for a General Meeting, the
shareholders are entitled to receive answers
to their questions sent to a special email address
(osa@sistema.ru), which is included in the notice
of the General Meeting. Shareholders participating
in the General Meeting may put questions
to members of the governance bodies, of the
board of directors and the management board and
the President who are also present at the meeting.

The stance of the Board of Directors on the
agenda items of the General Meeting is included
in the explanatory note for each agenda item.

120 — Sistema — Annual report 2017

sistema.ru

No.

Corporate governance principle Criteria for assessment

Compliance Notes

1.1.3.
(Con-
tinue)

1.1.4. Exercise of a shareholder’s right

to request convention of the
general meeting, nominate
candidates to the company’s
governance bodies and make
proposals for the general
meeting’s agenda should
not be fraught with needless
complexities.

3. The company provided to eligible
shareholders access to the list
of persons that have the right
to participate in the general meeting
from the date it was obtained by the
company, in all instances of holding
general meetings in the reporting
period.

1. In the reporting period, shareholders
had the opportunity within at least 60
days after the end of the respective
calendar year to propose items for the
agenda of the annual general meeting.

2. In the reporting period, the company
did not refuse to accept items proposed
for the agenda or nominees to the
company’s governance bodies for
reasons of typos or other insignificant
deficiencies in a shareholder’s proposal.

1.1.5. Each shareholder should be able
to exercise their voting right in the
easiest and most convenient way
for the shareholder, without any
hindrances.

Observed.

The company’s internal regulations
(internal policy) include provisions that
entitle each participant of the general
meeting to request a copy of his/her
filled-in voting ballot certified by the
teller committee before the end of the
general meeting.

In accordance with the Terms of Reference
of the General Meeting of shareholders,
the shareholders are entitled to see the list
of persons that have a right to participate
in the General Meeting by contacting
Sistema’s corporate secretary.

Observed.

The Charter of Sistema PJSFC sets a deadline
for submission of shareholders’ proposals
for the general meeting’s agenda to 100 days
after the end of the financial year.

Should a shareholder’s proposals contain
material deficiencies, the Corporation informs
the shareholder accordingly in advance,
so that such deficiencies could be eliminated
before the Board of Directors has approved
the General Meeting’s agenda and the list
of candidates for election to the governance
and control bodies.

The provision that a person filling in the
voting ballot is entitled to have a copy of his/
her filled-in voting ballot certified by the
teller committee before the end of the
general meeting is included in the Terms
of Reference of the Annual General Meeting
of shareholders.

1.1.6. The procedure of general
meetings adopted by the
company should ensure equal
opportunities for all the persons
present at the meeting to express
their opinions and to ask their
questions.

1. General meetings of shareholders
held in the format of a meeting (joint
presence of shareholders) in the
reporting period allocated sufficient
time for reports on agenda items and
discussions.

2. Candidates to the company’s
governance and control bodies were
available for answering shareholders’
questions at the meeting at which their
nominations were to be voted on.

3. When making decisions related
to preparation and conduct of general
meetings of shareholders, the board
of directors considered use of telecom
technologies to give shareholders
remote access to general meetings
in the reporting period.

Observed.

In the reporting year, the General Meeting
of shareholders held in the format of joint
presence allocated up to 20 minutes for
a report on each agenda item and time for
discussion of such items.

The candidates nominated to the Board
of Directors and the Auditing Commission
are present at the respective general meeting.

Participants of the General Meeting have the
possibility to consult with each other on the
agenda items.

From 2017 Sistema’s shareholders, during
preparation for the General Meeting, may
also use the e-voting system available
on the website of the Corporation’s registrar
JSC Reyestr. Shareholders could also vote
remotely provided that the relevant depositary
ensured the technical conditions necessary
for such voting.

The Corporation provides a sufficiently big
room that accommodates all the persons
willing to participate in the General Meeting.

Annual report 2017 — Sistema — 121

sistema.ruAnnexsNo.

Corporate governance principle Criteria for assessment

Compliance Notes

1.2.

The shareholders should be given equal and fair opportunities to share in the company’s net income via dividends.

1.2.1. The company should develop

and implement a transparent and
clear mechanism for determining
the amount or dividends and their
distribution.

1. The company has developed
a dividend policy, which has been
approved by the board of directors and
publicly disclosed.

Observed.

The Corporation’s Board of Directors has
approved the Dividend Policy (Minutes of the
Board of Directors of Sistema PJSFC No.04-17
dd 03 April 2017).

2. If the company’s dividend policy
uses the indicators in the company’s
financial statements to determine
the dividend amount, the relevant
provisions of the dividend policy
are based on consolidated financial
statements.

1.2.2.

It is not recommended for
companies to take a decision
to distribute dividends if such
decision, while formally
being within the restrictions
imposed by the government,
is economically unreasonable
and can lead to misrepresentation
of the company’s business.

The company’s dividend policy
clearly specifies financial/economic
circumstances under which it should
not pay dividends.

Partially
observed.

The Corporation seeks to distribute dividends
twice a year. In accordance with the revised
Dividend Policy, the recommended amount
of dividend distributions for a reporting year
is based on a target dividend yield of at least
6%, or RUB 1.19 per ordinary share, whichever
is greater. The Dividend Policy of Sistema PJSFC
is published on its corporate website.

In case the amount and/or frequency
of dividend payments deviate from those
recommended in the Dividend Policy, the
Corporation discloses the reasons for such
deviation.

According to the Dividend Policy, dividends
to the Company’s shareholders shall only
be paid if there are sources and grounds for
their payment, as defined by the laws of the
Russian Federation.

The Corporation does not declare dividends
if net income or cash flow are insufficient
(liquidity shortage) or if it is economically
unreasonable.

1.2.3. Companies should not allow the
dividend entitlements of existing
shareholders to be downgraded.

The company did not take actions
that would downgrade the dividend
entitlements of existing shareholders
in the reporting period.

Observed.

The Corporation has issued only one type
of ordinary shares. Holders of global depositary
receipts are entitled to dividends on a par with
holders of ordinary shares.

In the reporting period, the Corporation did not
take actions that would downgrade dividend
entitlements of holders of ordinary shares and/
or global depositary receipts.

Observed.

The Corporation has the Ethics Code approved
by the Board of Directors (Minutes No.08-15
dd 02 November 2015), which stipulates that
officers responsible for transactions shall
timely report any conflicts of interest related
to a transaction to the Board of Directors.

1.2.4. Companies should strive to avoid

situations where shareholders
receive from the company any
types of profit (income) other than
dividends or disposal value.

In order to rule out situations
when shareholders receive any
types of profit (income) from the
company other than dividends
or disposal value, the company’s
internal regulations envisage control
mechanisms that ensure timely
identification and approval procedures
for transactions with persons
affiliated with material shareholders
(persons entitled to dispose of votes
allocated to voting shares) in cases
when such transactions are not
formally recognised as related party
transactions by law.

122 — Sistema — Annual report 2017

sistema.ruAnnex 6. (Continue)No.

Corporate governance principle Criteria for assessment

Compliance Notes

1.3.

Corporate governance system and practices should ensure equal footing for all shareholders that hold shares of the same category
(type), including minority and foreign shareholders, and equal treatment of them by the company.

1.3.1. Companies should create

conditions for fair treatment
of each shareholder by the
governance bodies and the
controlling persons of the
company, including prevention
of abuse of power by major
shareholders in respect
of minority shareholders.

1.3.2. Companies should not take
actions that will or may lead
to artificial redistribution
of corporate control.

Observed.

In the reporting period, the procedures
for managing major shareholders’
potential conflicts of interest were
efficient, and the board of directors paid
sufficient attention to conflicts between
shareholders, if there were any.

The Corporation has created all the conditions
necessary to prevent shareholders’ actions that
are intended to harm other shareholders or the
Corporation as well as other abuse of shareholder
rights.

There were no recorded conflicts between the
Corporation’s shareholders in the reporting period.

Quasi-treasury shares are absent
or do not participate in voting in the
reporting period.

Partially
observed.

The internal regulations of the Corporation do not
contain any prohibition on voting with the shares
of the Corporation held by legal entities under
the Corporation’s control, however, starting from
2018, the shares owned by the organisations
controlled by the Corporation will not actually
participate in the voting at the General Meeting
of shareholders.

1.4.

Shareholders should be provided with reliable and efficient ways to register rights to the shares, and the ability to dispose of their shares
freely and easily.

Shareholders should be provided
with reliable and efficient ways
to register rights to the shares,
and the ability to dispose of their
shares freely and easily.

The quality and reliability of services
provided by the company’s registrar
to keep the shareholder register meet
the needs of the company and its
shareholders.

Observed.

The Registrar of the Corporation is one of the
largest special registrars in Russia, which has
proven and reliable technologies that provide
the most efficient way to ensure registration
of proprietary rights and exercise of shareholder
rights. Jointly with the Registrar, the Corporation
is undertaking measures aimed at updating
information about the shareholders recorded
in the shareholder register.

2.1

The board of directors is in charge of strategic management of the company, determines the main principles and approaches
to organising the company’s risk control and internal control systems, controls the work of its executive bodies and performs other key
functions.

II. Board of Directors

Observed.

2.1.1. The board of directors should

bear responsibility for decisions
relating to appointment and
dismissal of executive bodies,
including cases of dismissal due
to improper performance of their
duties. The board of directors
should also control that the
company’s executive bodies act
in compliance with the approved
development strategy and the
core areas of the company’s
business.

1. The powers of the board of directors
to appoint and dismiss members
of executive bodies and determine the
terms of their employment agreements
are set out in the charter.

2. The board of directors reviewed
a report (reports) of the sole executive
body and members of the collective
executive body on implementation
of the company’s strategy.

The Charter of Sistema PJSFC stipulates that
the authority of the Board of Directors includes
appointment of the President of the Corporation,
election of members of the Management Board
and early termination of the President’s and
Management Board members’ employment, as well
as the terms of agreements with the President and
members of the Management Board.

The Nomination, Remuneration and Corporate
Governance Committee of the Board of Directors
approves candidates to the positions of sole
executive bodies of subsidiaries and approves
nomination of candidates to boards of directors
of subsidiaries.

The Board of Directors monitors implementation
of the Corporation’s strategy and business plans
by its executive bodies on a regular basis.

Annual report 2017 — Sistema — 123

sistema.ruAnnexsNo.

Corporate governance principle Criteria for assessment

Compliance Notes

2.1.2. The board of directors should set

the key long-term priorities for
the company’s business, assess
and approve key performance
indicators and key business goals
of the company, evaluate and
approve strategies and business
plans for the core businesses
of the company.

In the reporting period, the board
of directors reviewed items
on implementation status and update
of the strategy, approval of the
company’s financial plan (budget)
and criteria and indicators (including
interim ones) of implementation of the
company’s strategy and business plans.

Observed.

The Board of Directors controls and supports
each stage of the process of strategy development
and execution at the Corporation, evaluates
its execution status and feasibility, and makes
adjustments, if necessary.

The strategy and business plans of the
Corporation approved by the Board of Directors
contain clear criteria, most of which are expressed
in quantitative indicators, with interim control
indicators.

The Board of Directors approves the budget
of the Corporation on an annual basis.

At least once a year, the Board of Directors
reviews the Corporation’s strategy and assesses
its implementation status and need for updating.
In the reporting year, the Board of Directors
reviewed the Corporation’s strategy at its meetings
on 18 February 2017 and 20 May 2017.

2.1.3. The board of directors should

determine the principles of and
approaches to organising the risk
management and internal control
systems at the company.

1. The board of directors determined
the principles of and approaches
to organising the risk management and
internal control systems at the company.

Observed.

The Charter of Sistema PJSFC includes approval
of risk management principles in the remit of the
Board of Directors. The Corporation also adopted
the Risk Code.

2. The board of directors assessed the
risk management and internal control
systems of the company in the reporting
period.

The Board of Directors reviews a risk management
report and a report on the work of the internal
control system at the Corporation at least once
a year and issues its opinion. In the reporting year,
this item was reviewed by the Board of Directors
on 01 April 2017.

2.1.4. The board of directors should

determine the company’s policy
with regard to remuneration and
(or) reimbursement of expenses
to board members, executive
bodies and other key executives
of the company.

1. The company developed and
introduced a policy (policies),
approved by the board of directors,
on remuneration and compensation
of expenses of members of the board
of directors, executive bodies of the
company and other senior executives.

2. The board of directors reviewed items
pertaining to this policy (policies)
in the reporting period.

Observed.

The General Meeting of shareholders of the
Corporation approved the Policy on remuneration
and compensations payable to members
of the Corporation’s Board of Directors (Minutes
No. 2-15 dd 01 July 2015).

The Board of Directors of the Corporation
approved the HR policy and policies
on remuneration payable to the employees
of Sistema PJSFC. Employees’ remuneration
includes a fixed part, a bonus for execution
of projects and generation of cash income,
and long-term incentives.

The Board of Directors also approved the rules
for reimbursement of expenses to the top
executives of the Corporation.

2.1.5. The board of directors should

play a key role in preventing,
identifying and settling internal
conflicts between the company’s
governance bodies, shareholders
and employees.

1. The board of directors plays a key role
in preventing, identifying and settling
internal conflicts.

2. The company has created a system
for identifying transactions related
to conflicts of interest and measures
aimed at resolving such conflicts.

Observed.

The Board of Directors takes all the measures
necessary to prevent and settle internal conflicts.

The Corporation regularly collects information
about related and affiliated persons of the
members of its Board of Directors and
executive bodies. In accordance with the Code
of Ethics, ethics assessment is performed
during which senior managers responsible

124 — Sistema — Annual report 2017

sistema.ruAnnex 6. (Continue)No.

Corporate governance principle Criteria for assessment

Compliance Notes

2.1.5.
(Con-
tinue)

2.1.6. The board of directors should play
a key role in securing transparency
of the company, timely and full
disclosure of the company’s
information, unhindered access
of shareholders to the company’s
documents.

1. The board of directors adopted
a regulation on the information policy.

Observed.

2. The company has designated
persons responsible for implementation
of the information policy.

2.1.7. The board of directors should

control the corporate governance
practices at the company and play
a key role in material corporate
events of the company.

In the reporting period, the board
of directors reviewed an item
on corporate governance practices
at the company.

Observed.

2.2.

The board of directors should be accountable to the company’s shareholders.

2.2.1.

Information about the work
of the board of directors shall
be disclosed and provided
to shareholders.

1. The company’s annual report for the
reporting period includes information
about directors’ attendance of the
meetings of the board and board
committees.

Observed.

2. The annual report includes
information about the key results
of appraisal of the board’s work
conducted in the reporting period.

2.2.2. Chairman of the board

of directors should be available
for communication with the
company’s shareholders.

The company has a transparent
procedure that gives shareholders
a possibility to put questions to the
board chairman and to communicate
their stance on such matters.

Observed.

for the transactions submit ethics and
conflict of interest declarations. The Internal
Control and Audit Department analyses the
information received about the signs of the
management responsible for the transactions
having conflicts of interest

Resolutions on related party transactions are
made by persons that are not involved in the
relevant conflict of interest.

Employees’ compliance with the regulations
for resolution of conflicts of interests
is secured with disciplinary measures.

The Board of Directors of the Corporation
approved the Regulation on the Information
Policy (Minutes No. 04-10 dd 21 April 2010).

The responsibility to control compliance with
the Information Policy lies with the Corporate
Secretary reporting to the Board of Directors
of the Corporation.

Based on the results of annual appraisal
of the Corporation’s corporate governance
practices, the Nomination, Remuneration and
Corporate Governance Committee of the
Board of Directors formulates proposals
aimed at improving corporate governance
practices for review and approval by the Board
of Directors.

The Annual Report and the Corporation’s
website (www.sistema.ru/www.sistema.
com) disclose information about the number
of meetings of the Board of Directors and its
Committees held in the past year, specifying
the forms of meetings and Board members’
attendance.

The main results of the Board’s performance
assessment and that of its executive bodies
are disclosed in the Annual Report of the
Corporation.

Shareholders can put questions to the
Chairman of the Board of Directors regarding
issues within the remit of the Board
of Directors, and inform him about their
opinions (positions) on such matters via
the Corporate Secretary.

Annual report 2017 — Sistema — 125

sistema.ruAnnexsNo.

Corporate governance principle Criteria for assessment

Compliance Notes

2.3.

The board of directors should be an efficient and professional governance body of the company, capable of passing objective
independent judgements and taking decisions aligned with the interests of the company and its shareholders.

2.3.1.

It is recommended to elect
to the board of directors
persons that have
an impeccable business
and personal reputation and
possess the knowledge, skills
and experience necessary
for making decisions on the
matters falling within the remit
of the Board of Directors and
required for efficient discharge
of its functions.

1. The procedure for assessing
the board’s efficiency adopted
by the company includes assessment
of the professional skills of the board
members.

2. In the reporting period, the board
of directors (or its nomination
committee) assessed candidates
to the board in terms of their possessing
relevant experience, knowledge,
business reputation, absence
of a conflict of interest, etc.

Observed.

The annual assessment of the Board of Directors
includes assessment of the Board’s competences.

Observed.

The Board’s Nomination, Remuneration and
Corporate Governance Committee assesses
all candidates nominated to the Board of Directors
regarding their independence and potential
contribution to the work of the Board of Directors.

Sufficient professional experience, business
reputation and absence of a conflict of interest
are important criteria during the assessment
of candidates to the Board of Directors.

The biographies of candidates to the Board
of Directors and recommendations of the Board’s
Nomination, Remuneration and Corporate
Governance Committee with regard to voting
on such candidates, as well as information
about their meeting the independence criteria
are included in materials for General Meetings
of shareholders whose agendas include an item
on election of the Board of Directors.

The status of newly elected members of the
Board of Directors and their independence are
confirmed at the first meeting of the Board after
election.

Observed.

The annual assessment of the Board of Directors
includes assessment of the Board’s competences
and how they match the Corporation’s needs.

In all instances in the reporting period
when the agenda included items
on election of board members, the
company provided the shareholders
with biographies of all candidates
to the board, results of such candidates’
assessment by the board (or its
nomination committee), information
on whether such candidates meet the
independence criteria, in accordance
with recommendations 102-107
of the Code, and the candidates’
written consent to be elected
to the board of directors.

As part of the assessment of the board’s
work in the reporting period, the board
of directors analysed its needs in terms
of professional and business skills and
experience.

As part of the assessment of the
board of directors conducted in the
reporting period, the board of directors
considered whether the number of the
board members met the company’s
needs and shareholders’ interests.

Observed.

The annual assessment of the Board of Directors
includes assessment of the number of the Board
members.

2.3.2. Members of the board

of directors should be elected
in a transparent procedure
enabling shareholders
to receive information about
the candidates that is sufficient
to form an opinion of their
personal and professional
qualities.

2.3.3. The composition of the

board of directors should
be well balanced, in terms
of qualification, experience,
expertise and business
qualities, and board members
should enjoy the confidence
of shareholders.

2.3.4. The number of members
on the company’s board
of directors should make
it possible to organise the
work of the board of directors
in the most efficient manner,
allowing for formation of board
committees and giving
the opportunity to material
minority shareholders of the
company to elect candidates
they vote for to the board
of directors.

126 — Sistema — Annual report 2017

sistema.ruAnnex 6. (Continue)No.

Corporate governance principle Criteria for assessment

Compliance Notes

2.4.

The board of directors should have a sufficient number of independent directors.

2.4.1.

2.4.2.

2.4.3.

2.4.4.

It is recommended
to acknowledge as independent
directors the persons that
have sufficient expertise,
competence, experience, and
independence for formulation
of their own positions; that are
capable of making objective and
conscientious judgements; and
that are independent from the
company’s governance bodies,
particular groups of shareholders,
or other interested parties.
It should be noted that a candidate
is not normally considered
to be independent if he/she
is affiliated with the company,
its material shareholder, material
counterparty or competitor or with
the state.

It is recommended to assess
compliance of candidates
to the board of directors with
the independence criteria
and to analyse compliance
of independent directors on the
board with the independence
criteria on a regular basis. In such
assessment, contents should
prevail over form.

In the reporting period, all
independent board members met
all the independence criteria set
out in recommendations 102-107
of the Code or were recognised
as independent by resolution
of the board of directors.

Observed.

The criteria of independence of members of the
Corporation’s Board of Directors are aligned
with the criteria recommended by the Corporate
Governance Code and the Listing Rules
of Moscow Stock Exchange.

1. In the reporting period, the board
of directors (or its nomination
committee) formed an opinion about the
independence of each candidate to the
board and presented it to shareholders.

2. In the reporting period, the board
of directors (or its nomination
committee) reviewed the independence
of incumbent board members specified
as independent in the company’s annual
report at least once.

3. The company has procedures
in place that provide for actions a board
member has to take if he/she stops
being an independent director, including
timely notifying the board.

Observed.

The Nomination, Remuneration and Corporate
Governance Committee of the Board of Directors
(hereinafter, “the Committee”) issues an opinion
on the independence of candidates to the Board
of Directors.

At the first meeting of the Board of Directors
following the General Meeting of shareholders
where such new Board of Directors was
elected, the Board of Directors determines
the status of independent members
of the Board of Directors.

The Committee analyses compliance
of the independent directors on the Board with
the independence criteria on a regular basis.

When elected to the Board, Board members
undertake in writing to notify the Corporation
of any circumstances that may affect their
ability to have independent judgement on items
reviewed by the Board of Directors.

It is recommended that
independent directors constitute
at least one third of elected board
of directors.

Independent directors constitute at least
one third of the board of directors.

Observed.

About half (5 out of 11) of the members
of the Board of Directors are independent.

Independent directors should play
a key role in preventing internal
conflicts in the company and
in the performance of significant
corporate actions by the company.

Independent directors (not having
a conflict of interest) give preliminary
assessment to material corporate
actions related to a potential conflict
of interest, the results of which are
submitted to the board.

Observed.

Independent directors perform a preliminary
assessment of potential actions and draft
resolutions of the Corporation that may lead
to a conflict as they prepare for meetings of the
Board or Board Committees. Notably, the Audit,
Finance and Risk Committee pre-approves all
related party transactions.

Opinions of Board members are incorporated
in the meeting materials.

Annual report 2017 — Sistema — 127

sistema.ruAnnexsNo.

Corporate governance principle Criteria for assessment

Compliance Notes

2.5.

Chairman of the board of directors should facilitate the most efficient discharge of functions that fall within the remit of the board
of directors.

2.5.1.

It is recommended to elect
an independent director
as chairman, or to select a senior
independent director among the
elected independent directors
who would coordinate the work
of independent directors and
interact with the chairman of the
board of directors.

The board chairman is an independent
director or a senior independent director
is elected among independent directors.

Partially
observed.

The role, rights and duties of the
board chairman (and, if applicable,
of the senior independent director) are
duly set out in the company’s internal
regulations.

The role of the Board Chairman is set out in the
Terms of Reference of the Board of Directors
of Sistema PJSFC approved by the General
Meeting of shareholders on 24 June 2017
(Minutes No. 1-17 dd 28 June 2017).

The Terms of Reference also define the role of the
Deputy Chairman of the Board, who, together
with the Corporate Secretary, ensures interaction
between independent directors and the Board
Chairman.

Each independent director can communicate
his or her position on any agenda item to the
Board Chairman. In view of the above, neither the
Corporation in general nor the Board of Directors
reached a consensus on the need for creating
the position of senior independent director. The
Corporation continues discussing this issue with
its independent directors and intends to take the
decision within two years.

2.5.2. The board chairman should

ensure a constructive atmosphere
of the meetings, free discussions
of the matters on the meeting
agenda, and control over
execution of resolutions passed
by the board of directors.

2.5.3. The board chairman should take

necessary measures to provide
board members with information
required for making decisions
on the agenda items in a timely
manner.

Performance of the board chairman
is assessed during assessment of the
performance of the board as a whole
in the reporting period.

Observed.

The annual assessment of the Board of Directors
includes assessment of the efficiency
of interaction between Board members and the
Board Chairman.

The duty of the board chairman
to procure timely provision of materials
on agenda items for board members
is stipulated by the company’s internal
regulations.

Observed.

In accordance with the Procedure of the Board
of Directors, the Board Chairman takes necessary
measures to provide Board members with
information required for making decisions
on the agenda items in a timely manner.

The Board Chairman maintains regular contacts
with other governance bodies and executives
of the Corporation.

2.6. Members of the board of directors should act in good faith and reasonably, in the best interests of the company and its shareholders

proceeding from sufficient amount of information, with due care and diligence.

2.6.1. Reasonable and bona fide actions
of the board members imply
that decisions are made with
due consideration of all available
information, without conflicts
of interest, with equal treatment
of the company’s shareholders,
within usual entrepreneurial risks.

The company’s internal regulations
stipulate that a board member shall
notify the board of directors if he/she
is in the situation of a conflict of interest
in respect of any item on the agenda
of a board or committee meeting before
the start of discussion of the respective
agenda item.

Observed.

The company’s internal regulations
stipulate that a board member shall not
vote on any agenda item where he/she
has a conflict of interest.

The Terms of Reference of the Board of Directors
and the Ethics Code of the Corporation stipulate
that Board members shall timely notify the
Corporation if a conflict of interest arises and shall
not make decisions on any matter where they have
a conflict of interest.

The Board of Directors is entitled to engage
external independent experts for examination
of draft resolutions at the Corporation’s expense.

128 — Sistema — Annual report 2017

sistema.ruAnnex 6. (Continue)No.

Corporate governance principle Criteria for assessment

Compliance Notes

2.6.1.
(Con-
tinue)

The company has a procedure in place
that allows the board of directors
to receive professional advice
on matters within its remit at the
expense of the company.

2.6.2. The rights and obligations
of board members should
be clearly formulated and
recorded in the internal
regulations of the company.

2.6.3. Board members should have
enough time to perform their
duties.

2.6.4. All members of the board

of directors should have equal
possibilities to access the
company’s documents and
information. Newly elected
members of the board of directors
should be provided with sufficient
information about the company
and the work of the board
of directors as soon as possible.

The company has an internal document
in place that clearly defines the rights
and obligations of board members.

Observed.

Rights and obligations of Board members are
recorded in the Charter of Sistema PJSFC, the
Terms of Reference of the Board of Directors
of Sistema PJSFC, and the Procedure on the Board
of Directors.

Individual attendance of board and
committee meetings and the time spent
preparing for the meetings is taken into
account during the board’s assessment
procedure in the reporting period.

In accordance with the company’s internal
regulations, board members are obligated
to notify the board of their intention to join
governance bodies of other entities
(except for the company’s subsidiaries
and affiliates) and of the fact of such
appointment.

The company’s internal documents
stipulate the right of board members
to get access to documents and make
inquiries related to the company and
organisations controlled by the company,
and the obligation of the company’s
executive bodies to provide them with
such information and documents.

The company has a formal induction
programme for newly elected board
members.

Observed.

The annual assessment of the Board of Directors
includes assessment of the organisation and
attendance of the Board meetings.

When elected to the Board, Board members
fill in questionnaires envisaged by the Terms
of Reference of the Board of Directors, where they
must specify companies where they are members
of governance bodies or where they intend
to be elected.

Observed.

Sistema’s Board members are able to promptly
receive answers to their queries and any
information they may require from the executive
management directly or via the Corporate
Secretary. The employees’ obligation to provide
such information is recorded in the internal
regulations of the Corporation.

The Corporate Secretary familiarises newly
elected Board members with the activities of the
Board in accordance with the Terms of Reference
of the Board of Directors.

2.7. Meetings of the board of directors, preparation therefor, and participation of board members therein should provide for efficient work

The board of directors held at least six
meetings in the reporting year.

Observed. Meetings of the Board of Directors are held

at least six times a year in accordance with the
approved work plan of the Board of Directors.

of the board of directors.

It is recommended to hold
meetings of the board of directors
as necessary, taking into account
the scale of business and the
company’s objectives in a certain
period of time.

2.7.1.

2.7.2.

It is recommended to develop
and include in the company’s
internal regulations the procedure
for preparing and conducting
meetings of the board of directors
that would give the board
members the possibility to prepare
for the meeting.

The company adopted an internal
document that regulates the procedure
for preparing and holding board
meetings, which, among other things,
stipulates that the notice of a meeting
shall, as a rule, be sent at least 5 days
before the meeting.

15 meetings of the Board of Directors were held
in 2017.

Observed.

The Procedure of the Board of Directors
determines the procedure and the time of sending
a voting ballot to each member of the Board
of Directors and for obtaining the filled-in ballot
in case the meeting is held in absentia.

Annual report 2017 — Sistema — 129

sistema.ruAnnexsNo.

Corporate governance principle Criteria for assessment

Compliance Notes

2.7.2.
(Con-
tinue

Board members have permanent access
to the work plan of the Board of Directors. All
information for Board meetings is available
in Russian and English on the portal of the Board
of Directors (to which all Board members are
connected) at least 10 days before the Board
meeting.

2.7.3. The form of board meetings
should be determined with
consideration of the importance
of agenda items. The most
important items should
be discussed at meetings
in presentia.

The company’s charter or internal
regulations stipulate that the most
important items (according to the list
set out in recommendation 168 of the
Code) shall be reviewed at meetings
in presentia.

Observed.

All scheduled meetings of the Board of Directors
are held in presentia. Meetings in absentia are
held when some urgent issues arise.

The Procedure of the Board of Directors
stipulates that the most important items shall
be reviewed at meetings in presentia.

2.7.4.

It is recommended that decisions
on the most essential aspects
of the company’s business are
made by a qualified majority
or a simple majority of votes of all
the elected Board members.

The company’s charter stipulates that
resolutions on the most important items,
which are set out in recommendation
170 of the Code, shall be adopted
at board meetings by a qualified
majority of at least three fourths of votes
or by a simple majority of all the elected
Board members.

Partially
observed.

According to the Charter of Sistema PJSFC,
decisions on items relating to increase
of authorised capital, placement of certain types
of securities, approval of material and related
party transactions are made in compliance with
special voting rules.

Decisions on other agenda items are made
by simple majority of votes of the Board
members.

Independent directors who regularly attend the
meetings comprise almost half of the Board
of Directors of Sistema PJSFC. Considering
how the work is organised, it is rather difficult
to justify the necessity of introducing any special
voting rules for specific agenda items, and the
Corporation does not intend to establish them
in the near future.

2.8.

The board of directors should form committees for preview of the most important matters pertaining to the company’s business.

2.8.1. For provisional review

of matters pertaining to the
company’s financial activities,
it is recommended to form
an audit committee consisting
of independent directors.

The board of directors set up an audit
committee consisting only
of independent directors.

Observed.

The company’s internal regulations
determine the objectives of the audit
committee, including objectives set out
in recommendation 172 of the Code.

At least one member of the audit
committee, who is an independent
director, has experience and expertise
in preparation, analysis, evaluation and
audit of statutory (financial) accounts.

The audit committee met at least once
per quarter in the reporting period.

The Corporation has formed the Audit, Finance
and Risk Committee of the Board of Directors
(hereinafter, “the Committee”) and approved
the Terms of Reference of the Committee.
The objectives of the Committee as recorded
in the Terms of Reference are aligned with the
recommendations of the Corporate Governance
Code.

Independent directors constitute the majority
of the Committee members (4 out of 5). The
Committee is chaired by an independent director,
R. Munnings, who has a vast experience and
expertise in preparation, analysis, evaluation and
audit of statutory (financial) accounts.

12 meetings of the Committee were held in 2017.

130 — Sistema — Annual report 2017

sistema.ruAnnex 6. (Continue)No.

Corporate governance principle Criteria for assessment

Compliance Notes

The board of directors set
up a remuneration committee consisting
only of independent directors.

Observed.

2.8.2. For provisional review of issues

relating to development of efficient
and transparent practices
in the sphere of remuneration,
it is recommended to form
a remuneration committee
consisting of independent
directors and chaired
by an independent director who
is not the chairman of the board
of directors.

2.8.3.

It is recommended to form
a nomination (HR) committee
to preview issues relating
to HR (continuity) planning,
professional composition and
efficiency of the board of directors.
Most of the members of such
committee should be independent
directors.

2.8.4. Depending on the scale

of business and the level of risks
the company is exposed to,
it is recommended to form
other committees of the
board of directors (strategy
committee, corporate governance
committee, ethics committee, risk
management committee, budget
committee, EH&S committee, etc.)

2.8.5.

It is recommended to determine
the composition of committees
so as to allow for a thorough
discussion of the items under
preliminary consideration, taking
into account various opinions.

The Corporation has formed the Nomination,
Remuneration and Corporate Governance
Committee of the Board of Directors
(hereinafter, “the Committee”) and approved
the Terms of Reference of the Committee.
The objectives of the Committee as recorded
in the Terms of Reference are aligned with the
recommendations of the Corporate Governance
Code.

Independent directors constitute the majority
of the Committee members (3 out of 5). The
Committee is chaired by an independent
director, R. Kocharyan, who is not the Board
Chairman.

Independent directors constitute the majority
of the Committee members (3 out of 5).

Observed.

The Corporation’s Board annually, at the
first meeting after its election, forms Board
Committees in accordance with the
Corporation’s goals and objectives.

Observed.

The remuneration committee is chaired
by an independent director who is not
board chairman.

The company’s internal regulations
determine the objectives of the
remuneration committee, including
objectives set out in recommendation
180 of the Code.

The board of directors set
up a nomination committee (or its
objectives set out in recommendation
186 of the Code are pursued by another
committee) consisting mostly
of independent directors.

The company’s internal regulations
determine the objectives of the
nomination committee (or another
committee that carries out its
functions), including objectives set out
in recommendation 186 of the Code.

In the reporting period, the company’s
board of directors reviewed an item
on whether the composition of the
board committees is aligned with
the objectives of the board and the
company’s goals. Additional committees
either were set up or were found not
needed.

Board committees are chaired
by independent directors.

Observed.

Each Committee of the Board of Directors
consists of at least 4 members of the Board
of Directors.

The company’s internal regulations
(policies) include provisions that
stipulate that persons who are not
members of the audit committee,
the nomination committee and the
remuneration committee may attend
committee meetings only if invited
by the chairman of the respective
committee.

The Audit, Finance and Risk Committee, the
Nomination, Remuneration and Corporate
Governance Committee and the Investor
Relations and Dividend Policy Committee are
chaired by independent directors. Two of the
Board Committees are chaired by non-executive
directors (the Strategy Committee and the Ethics
and Control Committee).

The maximum number of committees
in which a member of the Corporation’s Board
of Directors can take part is not determined,
however, Board members are usually involved
in the work of three committees at the most.

Annual report 2017 — Sistema — 131

sistema.ruAnnexsNo.

Corporate governance principle Criteria for assessment

Compliance Notes

2.8.5.
(Con-
tinue

Persons who are not members of the Audit,
Finance and Risk Committee or the Nomination,
Remuneration and Corporate Governance
Committee may attend meetings of such
Committees only upon invitation from their
respective Chairmen.

2.8.6. Committee chairmen should
inform the board of directors
and its chairman about the work
of their committees on a regular
basis.

In the reporting period, committee
chairmen regularly reported to the
board about the work of their
committees.

Observed.

Chairmen of the Committees inform the Chairman
of the Corporation’s Board of Directors about the
work of their Committees on a regular basis.

The Committees present regular reports on their
work to the Board of Directors.

2.9.

The board of directors should ensure performance review of the board of directors, its committees and members of the board
of directors.

2.9.1. Performance review of the board

of directors should be aimed
at determining the efficiency
of the board of directors, its
committees and members of the
board of directors, adequacy
of their performance for the needs
of the company’s development,
activisation of the board’s
work or identifying areas for
improvement.

Self-appraisal or external assessment
of the board of directors conducted
in the reporting period included
assessment of the committees,
individual board members and the
board as a whole.

The results of the self-appraisal
or external assessment conducted
in the reporting period were reviewed
at a board meeting in presentia.

Observed.

Performance review of the Board of Directors
is provided for in the Terms of Reference of the
Board of Directors of Sistema PJSFC.

The Corporation’s assessment procedure for
the Board of Directors is based on extensive
experience and includes appraisal of the Board’s
performance, including organisation of its work,
and the performance of its Committees.

The criteria used to assess the performance of the
Board of Directors provide for assessment of the
professional and personal qualities of members
of the Board of Directors, their independence,
teamwork and personal contribution, as well
as other factors that have an impact on the
performance of the Board of Directors.

The assessment results are reviewed at the
in-person meeting of the Board of Directors
preceding the Annual General Meeting
of shareholders.

On the basis of these results, the Nomination,
Remuneration and Corporate Governance
Committee of the Board of Directors formulates
suggestions for improvement of the performance
of the Board of Directors and its Committees.

The company engaged a third party
(consultant) to conduct independent
assessment of the work of the board
of directors at least once in the last three
reporting periods.

Observed.

Performance review of the Board of Directors and
its Committees is performed annually. In 2017,
independent professional advisory firm Nestor
Advisors Ltd. was engaged to conduct the
performance review.

2.9.2. Performance review of the board

of directors, its committees and
members should be conducted
on a regular basis at least once
a year. It is recommended
to engage a third party
(consultant) to perform
an independent assessment
of the board’s performance
on a regular basis, not less than
once every three years.

132 — Sistema — Annual report 2017

sistema.ruAnnex 6. (Continue)No.

Corporate governance principle Criteria for assessment

Compliance Notes

III. Corporate secretary of the company

3.1

The corporate secretary should provide efficient day-to-day interactions with the shareholders, coordination of the company’s activities
aimed at protecting the shareholders’ rights and interests, facilitation of the work of the board of directors.

3.1.1. The corporate secretary should
have the expertise, experience
and qualification sufficient for
execution of his/her professional
duties, an impeccable reputation,
and enjoy the confidence
of shareholders.

The company adopted and disclosed
an internal document, terms of reference
of the corporate secretary.

Observed.

The company’s website and annual
report include the corporate secretary’s
biography in as much detail as is given
for the biographies of the board
members and executive management
of the company.

The Corporation’s Board of Directors approved
the Terms of Reference of the Corporate Secretary
of the Corporation (Minutes No. 08-17 dd 11
September 2017). The Policy specifies the
requirements to the person who may hold the
position of the Corporate Secretary, in line with the
guidelines of the Corporate Governance Code.

Information about the Corporate Secretary
is disclosed in the Annual Report.

3.1.2. The corporate secretary should

have sufficient independence
from the company’s executive
bodies and the authority and
resources required to fulfil his/her
professional duties.

The board of directors approves
appointment, dismissal and additional
remuneration of the corporate secretary.

Observed.

The Corporate Secretary reports directly to the
Board of Directors, and is appointed or dismissed
by the Board of Directors.

The Corporation’s Board of Directors approved
the Terms of Reference of the Corporate Secretary
of the Corporation setting the requirements to the
candidacies to the position of Corporate Secretary,
the appointment and dismissal procedures,
reporting lines, procedure for the Corporate
Secretary’s interactions with the governance
bodies and the subdivisions, his/her functions,
rights and obligations, the terms and procedure
of remuneration and the liabilities of the Corporate
Secretary.

IV. Remuneration of the board of directors’ members, executive bodies and key management of the company.

4.1.

The level of remuneration paid by the company should be sufficient for engaging, motivating and retaining employees possessing
the competencies and qualifications required by the company. The remuneration of the board members, executive bodies and key
management shall be paid in accordance with the remuneration policy adopted by the company.

Observed.

The company adopted an internal
document(s), a policy (policies)
on remuneration of members of the
board, executive bodies and other key
senior executives, which clearly defines
approaches to their remuneration.

4.1.1.

It is recommended that the level
of remuneration paid by the
company to the board members,
executive bodies and other key
management, should provide
sufficient motivation for their
efficient work enabling the
company to engage and retain
competent and highly qualified
specialists. At the same time, the
company should avoid paying
excessive remuneration or having
an unjustifiably big gap between
the remuneration levels of the
persons specified above and
other employees.

The approaches to remuneration of the
Board members are defined in the Policy
on Remuneration and Compensations for
Members of the Board of Directors of the
Corporation (approved by Sistema’s General
Meeting of shareholders on 27 June 2015, Minutes
No. 02-15 dd 01 July 2015). The document
is available on the Corporation’s website.

Remuneration of key executives is regulated by the
Corporation’s internal documents that stipulate
principles and approaches to remuneration of all
the employees.

The level of remuneration paid to the Board
members, executive bodies and other key
management of the Corporation corresponds
to the remuneration levels at peer companies.

Annual report 2017 — Sistema — 133

sistema.ruAnnexsNo.

Corporate governance principle Criteria for assessment

Compliance Notes

4.1.2. The company’s remuneration

policy should be developed
by the remuneration committee
and approved by the company’s
board of directors. The board
of directors with the support
of the remuneration committee
should ensure oversight over
the implementation of the
remuneration policy by the
company and, if necessary,
to revise and amend this policy.

4.1.3. The company’s remuneration

4.1.4.

policy should contain transparent
mechanisms for determining
the amount of remuneration
payable to the board members,
executive bodies and other key
management of the company,
as well as regulate all types
of payments, benefits and
compensation granted to the
specified persons.

It is recommended that the
company should develop a policy
for expenses compensation,
specifying the list of costs
to be reimbursed and the level
of services to which the board
members, executive bodies and
other key management of the
company may be entitled. Such
policy may be an integral part
of the company’s remuneration
policy.

Observed.

In the reporting period, the remuneration
committee reviewed the remuneration
policy (policies) and the practice of its
(their) implementation and, if necessary,
provided recommendations for the
board of directors.

Observed.

The company’s remuneration policy
envisages transparent mechanisms for
determining the amount of remuneration
payable to the board members,
executive bodies and other key
management of the company, as well
as regulates all types of payments,
benefits and compensation granted
to the specified persons.

Observed.

The remuneration policy (policies)
or other internal documents of the
company stipulate the rules for
compensating the board members,
executive bodies and other key
management of the company for their
expenses.

The Corporation’s remuneration policy
is developed by the Nomination, Remuneration
and Corporate Governance Committee of the
Board of Directors and approved by the Board
of Directors.

The Board of Directors has approved the internal
regulations on remuneration and long-term
incentives of the members of executive bodies
and other key management.

The Nomination, Remuneration and Corporate
Governance Committee annually reviews the
results of implementation of the Corporation’s
remuneration policy and, if necessary, makes
recommendations for the Board of Directors.

The Corporation’s internal regulations provide
detailed guidelines on the procedure for
determining the amount of remuneration and
for making the respective payments of all
remuneration components, as well as any other
compensation.

Decisions on the amount of remuneration payable
to specific employees are taken without the
participation of the respective employee and are
not discussed with him or her.

According to the Corporation’s internal regulations
compensation is due only for the expenses
incurred by the members of corporate governance
bodies and other employees of the Corporation
that are directly related to activities performed
in the interests of the Corporation. There are strict
regulations on the level of services to which the
Board members, the President, the Management
Board members and other key executives are
entitled.

The travel expenses of such persons related
to the need to attend the Corporation’s meetings
and make any other business trips as part
of performing their job duties are reimbursed.

4.2.

The remuneration system of board members should ensure that the financial interests of the directors are closely correlated
with the long-term financial interests of the shareholders.

Fixed annual remuneration was the only
form of monetary remuneration of board
members for serving on the board
of directors in the reporting period.

Observed.

In accordance with the Policy on remuneration
and compensations payable to members of the
Board of Directors of the Corporation, the main
form of remuneration of the Board members
is fixed remuneration.

The Company also pays additional remuneration
to the Board members for achievement of the
Corporation’s investment goals. The amount
of such additional remuneration is also fixed.

4.2.1. Fixed annual remuneration
is a preferable form of cash
remuneration payable to board
members. It is inadvisable to pay
remuneration for participation
in isolated meetings of the
board or its committees. It is not
recommended applying any
forms of short-term incentives
and additional financial motivation
to board members.

134 — Sistema — Annual report 2017

sistema.ruAnnex 6. (Continue)No.

Corporate governance principle Criteria for assessment

Compliance Notes

4.2.2.

Long-term ownership of the
company’s shares is the best
tool facilitating the proximity
of the financial interests of board
members and the long-term
interests of shareholders. At the
same time, it is not recommended
that the right to sell shares
be linked to the achievement
of specific operating targets of the
company, nor is the participation
of board members in stock option
schemes recommended.

Partially
observed.

If the company’s internal document(s) –
remuneration policy (policies) –
envisage payment of the company’s
shares to board members, the company
shall adopt and disclose clear rules
for board members’ ownership of its
shares, aimed at encouraging long-term
ownership of such shares.

A portion of the remuneration of the Board
members (additional remuneration) is paid
in shares. Board members’ long-term ownership
of the shares is encouraged, and, in accordance
with the existing practice, members of the Board
of Directors retain their shares at least until
their membership is terminated. Information
on the transactions involving Sistema’s shares
performed by the Board members is disclosed
by the Corporation immediately, which also
stimulates long-term ownership.

The Board members have no obligation to refrain
from using hedging mechanisms.

4.2.3.

It is inadvisable to allow paying
any additional remuneration
or compensation to board
members in the event of early
termination of their contract
due to a change of the
controlling shareholder or other
circumstances.

The company does not envisage
payment of any additional remuneration
or compensation to board members
in the event of early termination
of their contract due to a change
of the controlling shareholder or other
circumstances.

Observed.

There are no provisions on the Board members’
entitlement to any additional remuneration
or compensation (severance payments) in the
event of early termination of their contract due
to a change of the controlling shareholder
or other circumstances.

4.3.

The remuneration system of the executive bodies and key management of the company should ensure correlation of their remuneration
and the results of the company, as well as their personal contribution to the achievement of this result.

4.3.1. Remuneration of the executive
bodies and other key
management of the company
should be determined in such
a way as to ensure a reasonable
and justifiable ratio of the
fixed and variable parts of the
remuneration linked to the results
of the company and personal
(individual) contribution of the
employee in the final result.

Observed.

In the reporting period, the annual
performance indicators approved
by the board of directors were used for
determining the amount of the variable
part of remuneration of members
of executive bodies and other key
managers of the company.

During the latest conducted
assessment of the remuneration system
of members of executive bodies and
other key managers of the company,
the board of directors (the remuneration
committee) was satisfied that the
company uses an efficacious ratio of the
fixed and variable parts of remuneration.

The company has a procedure in place
that ensures that bonuses wrongly
received by members of executive
bodies and other key managers of the
company are repaid to the company.

The Corporation has a short-term and long-
term incentive system for the members of the
executive bodies and other key managers,
approved by the Board of Directors. The Board
of Directors approves key performance indicators
as an element of the incentive system.

The Nomination, Remuneration and Corporate
Governance Committee is involved in the
development of key indicators used as the
basis for the short-term and long-term incentive
systems and analyses the ratio of the fixed and
variable parts of remuneration.

According to the provisions of the short-term
incentive system the results of the employees are
assessed at the end of the year.

The assessment of the Corporation’s year-end
performance as part of the short-term and long-
term incentive systems takes into account the
risks carried by the Corporation.

In the event of discovering any instances
of manipulation with accounting figures
or any other types of wrongdoing committed
by employees that jeopardise the interests of the
shareholders, the respective employees shall
be penalised and shall have to compensate the
Corporation for its losses in compliance with the
current laws.

Annual report 2017 — Sistema — 135

sistema.ruAnnexsNo.

Corporate governance principle Criteria for assessment

Compliance Notes

4.3.2.

It is recommended that the
companies whose shares are
traded on a stock exchange
should implement a long-
term incentive scheme for the
executive bodies of the company
and other key managers based
on the shares of the company
(stock options or other derivative
financial instruments whose
underlying asset is the company’s
shares).

4.3.3. Severance payments (golden

parachutes) paid by the company
in the event of early termination
of the powers of executive
bodies or key managers should
not exceed the double amount
of their fixed annual remuneration,
provided that such early
termination was prompted by the
company and that the respective
employee was not guilty of any
wrongdoing.

The company adopted a long-term
incentive programme for members
of executive bodies and other key
managers of the company using the
company’s shares (financial tools based
on the company’s shares).

The long-term incentive programme for
members of executive bodies and other
key managers of the company stipulates
that the right to sell the shares or other
financial tools provided under such
programme shall not arise until at least
three years from the award. This right
shall be triggered by the company’s
achievement of certain performance
targets.

Severance payments (golden
parachutes) paid by the company in the
event of early termination of the powers
of executive bodies or key managers
did not exceed the double amount
of their fixed annual remuneration
in the reporting period, provided that
such early termination was prompted
by the company and that the respective
employee was not guilty of any
wrongdoing.

Observed.

The Corporation has a long-term incentive
scheme for the top management and other
key employees based on the shares of the
Corporation.

Under the long-term incentive scheme the shares
are awarded during a five-year period with annual
deferral, depending on the results achieved
over the previous years. There are no further
restrictions on the sale of shares.

In view of the fact that under the long-term
incentive scheme shares are granted with
a deferral, the scheme does not provide for any
additional restrictions on the sale of shares in the
event of early termination of powers and (or)
termination of the employment contract.

The amount of severance payment made by the
Corporation in the event of an early dismissal
of members of executive bodies or other key
managers prompted by the Corporation does not
exceed the mandatory amount set by the law,
which is less than the double amount of fixed
annual remuneration.

Observed.

5.1.

The company should have an effective risk management and control system aimed at providing reasonable assurance
in the achievement of the goals set for the company.

V. Risk management and internal control system

5.1.1. The company’s board of directors

should determine the principles
of and approaches to organising
the risk management and internal
control systems at the company.

Observed.

The powers of different governance
bodies and divisions of the company
in risk management and internal control
are clearly determined by internal
regulations/a respective policy of the
company approved by the board
of directors.

The Board of Directors approved the Internal
Audit Policy and the Internal Control Policy of the
Corporation. The Corporation also adopted the
Risk Management Code. All the regulations
were developed in accordance with the COSO
integrated concept on internal control.

The risk management and internal control systems
function at operational and organisational levels.

The roles and objectives of various governance
bodies of the Corporation in this process are set
out in the above-mentioned documents.

5.1.2. The company’s executive bodies
should ensure the establishment
and maintenance of effective risk
management and internal control
systems at the company.

The company’s executive bodies
ensured distribution of functions and
powers with regard to risk management
and internal control between heads
of divisions and departments that report
to them.

Observed.

A dedicated risk management subdivision was set
up within the Finance and Investment Function.

Heads of the Corporation’s subdivisions, in line
with their functional duties, are responsible
for developing, documenting, implementing,
monitoring and upgrading the risk management
and internal control systems in their respective
functional areas.

136 — Sistema — Annual report 2017

sistema.ruAnnex 6. (Continue)No.

Corporate governance principle Criteria for assessment

Compliance Notes

5.1.3. The risk management and

internal control systems of the
company should ensure objective,
fair and clear understanding
of the current status and
prospects of the company, the
integrity and transparency of the
company’s financial reporting, the
reasonableness and acceptability
of the risks assumed by the
company.

The company has adopted an anti-
corruption policy.

Observed.

The company provides for a way
to inform the board of directors or the
board’s audit committee about breaches
of laws, internal procedures or the
company’s code of ethics.

5.1.4.

It is recommended that the
board of directors should take
all necessary and sufficient
measures to make sure that the
existing risk management and
internal control system of the
company meets the respective
principles and approaches
approved by the board of directors
and is functioning efficiently.

Observed.

In the reporting period, the board
of directors or the board’s audit
committee assessed the efficiency
of the company’s risk management
and internal control system. Information
about the key results of such
assessment are included in the
company’s annual report.

The internal control and risk management
system enables the Corporation to timely
respond to the newly emerged risks.

The Board of Directors approved the
Anticorruption Policy of the Corporation.

The Corporation has a single whistleblower
hotline enabling any employee of the
Corporation to report any offences committed
by the Corporation and/or its officers. The
purpose of the hotline is to counteract
potential instances of abuse during
implementation of various projects and
business activities, including the procurement
of products, works and services, and
to prevent potential corrupt practices or fraud.
The whistleblowers are protected from
any types of pressure (including dismissal,
persecution and any forms of discrimination).
The key approaches to the operation of the
Hotline are outlined in the Sistema’s Hotline
Whistleblowing Programme published on the
Corporation’s website.

The Board of Directors reviews the matters
of organisation, functioning and efficiency
of the risk management and internal
control system and, if necessary, gives
recommendations for its improvement
on a regular basis (at least once a year).
Information on the results of the review held
by the Board of Directors on the efficiency
of the risk management and internal control
system is provided to the shareholders as part
of the Annual Report.

5.2.

To ensure a regular and independent assessment of the reliability and efficiency of its risk management and internal control systems
and corporate governance practices the company should organise internal audits.

5.2.1.

It is recommended that internal
audits should be organised
by means of establishing
a dedicated subdivision
(internal audit unit) or engaging
an independent external
auditor. In order to ensure the
independence of the internal
audit unit its functional and
administrative reporting lines
should be divided. It is advisable
that the internal audit unit should
functionally report to the board
of directors and administratively –
directly to the company’s sole
executive body.

For the purposes of internal audits, the
company established a separate internal
audit unit that functionally reports
to the board of directors or the audit
committee or engaged an independent
external company with similar reporting
principles.

Observed.

The Corporation has set up the Internal
Control and Audit Department operating
on the basis of the Terms of References
of the Internal Control and Audit Department.

The Department functionally reports to the
Board of Directors and administratively –
to the Corporation’s President.

Head of the Department is appointed and
dismissed by the President based on the
resolution of the Board of Directors.

Annual report 2017 — Sistema — 137

sistema.ruAnnexsNo.

Corporate governance principle Criteria for assessment

Compliance Notes

5.2.2.

It is recommended that the
internal audit function should
perform an assessment of the
efficiency of the internal control
and risk management systems,
corporate governance, and
conform to the generally accepted
standards in internal audit.

In the reporting period, an internal audit
was conducted that gave assessment
to the efficiency of the internal control
and risk management system.

The company uses generally accepted
approaches to internal control and risk
management.

Observed.

The Corporation’s internal audit procedures
comply with the International Internal Audit
Standards of the Institute of Internal Auditors.

The Corporation’s internal audits include
assessment of the efficiency of the internal control
and risk management system and assessment
of the corporate governance.

VI. Disclosing information about the company, information policy of the company

6.1.

The company and its operations should be transparent for the shareholders, investors and other interested parties.

6.1.1. The company should develop
and implement an information
policy ensuring efficient
interaction between the company,
shareholders, investors and other
interested parties.

1. The company’s board approved
an information policy that was
developed taking into account the
Code’s recommendations.

2. The board (or a board committee)
reviewed the company’s compliance
with its information policy at least once
in the reporting period.

6.1.2. The company should disclose

information on the corporate
governance system and practices,
including detailed information
on compliance with the principles
and recommendations of this
Code.

1. The company discloses information
about its corporate governance system
and general principles of corporate
governance used by the company,
including on its website.

2. The company discloses information
about the members of its executive
bodies and the board of directors, the
independence of board members and
their membership in board committees
(as defined in the Code).

3. If there is an entity controlling the
company, the company publishes
a memorandum of the controlling
entity disclosing its plans with regard
to corporate governance at the
company.

Observed.

The Corporation has developed and implemented
the Information Policy approved by the Board
of Directors.

The executive bodies of the Corporation and
its Corporate Secretary are responsible for the
implementation of the Information Policy. The
Board of Directors oversees compliance with the
Information Policy.

Members of the executive bodies hold meetings
with analysts on a regular basis to accompany
the disclosure (publication) of the Corporation’s
financial statements or to comment on the key
investment projects and development plans of the
Corporation.

Observed.

The Corporation publishes information
about its governance bodies and their
composition, including the biographies of the
members of governance bodies, on its website
(www.sistema.ru/www.sistema.com).

The Corporation has adopted the Corporate
Governance Code (hereinafter, “the Code”) setting
out the key principles of corporate governance
and the obligations assumed by the Board
of Directors including representatives of the
principal shareholder with respect to the
Corporation.

The Code has been published on the
Corporation’s website.

The Corporation’s controlling shareholder
is the Board Chairman and his plans with regard
to corporate governance at the Corporation
are reflected in publicly disclosed documents
approved by the Board of Directors and
the General Meeting of shareholders of the
Corporation.

138 — Sistema — Annual report 2017

sistema.ruAnnex 6. (Continue)No.

Corporate governance principle Criteria for assessment

Compliance Notes

6.2.

The company should timely disclose complete, relevant and reliable information about the company in order to enable its shareholders
and investors to take informed decisions.

6.2.1. The company should disclose

information regularly, consistently
and promptly and ensure
the accessibility, reliability,
completeness and comparability
of the disclosed data.

The company’s information policy
determines approaches and criteria for
identifying information that may have
a material influence on the valuation
of the company and the price of its
securities and procedures providing for
timely disclosure of such information.

If the company’s securities are
traded on foreign organised markets,
disclosure of material information
in Russia and on such markets is made
simultaneously and equally during the
reporting year.

If foreign shareholders hold a significant
amount of the company’s shares,
disclosure of information in the
reporting year was made both
in Russian and in one of the most widely
spoken foreign languages.

Observed.

The Corporation’s information policy makes
it possible to coordinate the work of all units and
subdivisions of the Corporation dealing with
information disclosures.

The Corporation discloses information in the
shortest possible time.

The Corporation’s material information is disclosed
for Russian and foreign investors simultaneously
and in equal volumes in the Russian and English
languages.

The Corporation promptly responds to any rumours
and/or unreliable information about its activities.

The Corporation uses its website (www.sistema.ru/
www.sistema.com) and the Interfax news feed for
disclosing information.

The Corporation is aiming to make sure that the
disclosed information is unambiguous, objective
and neutral and does not avoid disclosing negative
information.

6.2.2.

It is recommended that the
company should avoid adopting
a purely technical approach when
disclosing information and should
disclose all material information
about its activities even if the
disclosure of such information
is not required by the law.

In the reporting period, the company
disclosed its annual and semi-annual
financial reports prepared in accordance
with the IFRS. The company’s annual
report for the reporting period includes
its annual financial statement prepared
in accordance with the IFRS, together
with the auditors’ opinion.

The company discloses full
information about the structure of the
company’s capital in accordance with
recommendation 290 of the Code in its
annual report and on its website.

Observed.

The Corporation discloses all material information
not only about itself but also about its controlled
legal entities.

The Corporation discloses the following additional
information:

• mission, strategy and objectives of the

Corporation,

• financial operations and financial status of the

Corporation,

• capital structure of the Corporation,

• social responsibility of the Corporation.

6.2.3. The annual report, being one

of the most important tools
of informational interaction with
shareholders and other interested
parties, should contain information
making it possible to assess the
company’s annual results.

The company’s annual report includes
information about the key aspects of the
company’s operations and its financial
performance.

Observed.

The Corporation discloses all material information
in the Annual Report in accordance with the
recommendations of the Corporate Governance
Code.

The company’s annual report includes
information about the environmental
and social aspects of the company’s
operations.

The Annual Report includes all material data from
the annual statutory and financial reports, as well
as information about the Corporation’s CSR efforts.

Annual report 2017 — Sistema — 139

sistema.ruAnnexsNo.

Corporate governance principle Criteria for assessment

Compliance Notes

6.3.

The company should ensure that all shareholders have equal and unhindered access to information and documents upon their request.

6.3.1. The shareholders should be able

to exercise their right to access
documents and information
without any unjustifiable
difficulties.

The company’s information policy
stipulates an easy procedure for
providing shareholders with access
to information, including information
of the company’s controlled legal
entities, upon shareholders’ request.

Observed. When giving shareholders access to its

documents and information, the Corporation
is guided by applicable legislation and seeks
to avoid creating unnecessary difficulties. The
Corporation’s information policy sets out the
procedure for granting such access.

The Corporation does not overstate the costs
related to making and sending the copies of such
documents.

The matters of providing information about
controlled legal entities are not regulated by the
Information Policy, since the companies controlled
by the Corporation conduct independent
operations and Sistema PJSFC does not take
any operational decisions with respect to such
companies.

A shareholder may be granted access
to confidential information about the Corporation
only provided that the shareholder is aware
of the confidential nature of such information
and assumes the obligation to maintain its
confidentiality in accordance with applicable laws.

6.3.2.

It is recommended that when
providing information to the
shareholders the company
should ensure a reasonable
balance of interests of specific
shareholders and the company
itself, which is interested
in maintaining confidentiality
of crucial commercial information
that may have a significant impact
on its competitiveness.

In the reporting period, the company
did not refuse to accommodate
shareholders’ requests for information
or such refusals were justified.

Observed.

In instances stipulated by the company’s
information policy, shareholders
are notified about the confidential
nature of information and assume the
obligation to maintain its confidentiality.

VII. Material corporate actions

7.1.

Actions that have or may have a significant impact on the structure of the shareholders’ equity or the financial position of the company
and accordingly the position of its shareholders (material corporate actions) should be taken on fair terms providing for the protection
of the rights and interests of the shareholders and other interested parties.

Observed.

In accordance with the legislation, decisions
on listing and delisting of shares, as well
as decisions on reorganisation and approval
of major transactions in accordance with
applicable laws are within the remit of the General
Meeting of shareholders. In accordance with
the Charter of Sistema PJSFC, decision-making
on all other actions specified in the Corporate
Governance Code falls within the remit of the
Board of Directors.

7.1.1. Material corporate actions

include the company’s
reorganisation, acquisition of 30
or more % of the company’s
voting shares (takeover),
material transactions, increase
or decrease of the company’s
authorised capital, listing
of delisting of the company’s
shares, and other actions that
may result in a significant change
of shareholder rights or have
a detrimental effect on their
interests. It is recommended that
the company’s charter should
determine the list (criteria)
of transactions or other actions
constituting material corporate
actions and vest the board
of directors of the company with
the exclusive powers to take
decisions on such matters.

The company’s charter sets out a list
of transactions and other actions that
constitute material corporate actions
and criteria for identifying them.
Decisions with regard to material
corporate actions are within the
remit of the board of directors. If law
expressly stipulates that such corporate
actions shall be within the remit of the
general meeting of shareholders, the
board of directors gives shareholders
appropriate recommendations.

The company’s charter stipulates
that at least the following actions
constitute material corporate actions: the
company’s reorganisation, acquisition
of 30 or more % of the company’s voting
shares (takeover), material transactions,
increase or decrease of the company’s
authorised capital, listing of delisting
of the company’s shares.

140 — Sistema — Annual report 2017

sistema.ruAnnex 6. (Continue)No.

Corporate governance principle Criteria for assessment

Compliance Notes

7.1.2. The board of directors should

play a key role in taking decisions
or developing recommendations
on material corporate actions
on the basis of the opinions
of independent directors of the
company.

The company has a procedure in place
that allows independent directors
to state their position on material
corporate actions before their approval.

Observed.

The company’s charter, taking into
account the specifics of its business,
sets lower minimum criteria for
recognising transactions as material
corporate actions than those envisaged
by applicable laws.

In the reporting period, all material
corporate actions passed the approval
procedure before they were carried out.

7.1.3.

It is recommended that in the
course of taking material
corporate actions influencing
the rights and lawful interests
of the shareholders, equal terms
should be provided to all the
company shareholders, and
when the mechanisms provided
by the law are insufficient,
additional measures should
be taken to protect the rights
and lawful interests of the
company’s shareholders. At the
same time, the company should
be guided not only by formal
requirements of the law, but also
by the principles of corporate
governance set out in the Code.

Prior to being considered by the Board
of Directors, related party transactions are
provisionally reviewed by the Audit, Finance and
Risk Committee (hereinafter, “the Committee”),
which consists mostly of independent directors.
The Committee’s opinion is discussed when the
transactions are reviewed at a Board meeting.

Decisions on approval of related-party
transactions are taken by Board members who are
not related parties.

The Board of Directors reviews all material matters
of the Corporation in accordance with procedures
envisaged by the Corporation’s internal
documents. The thresholds for submission
of certain transactions for review of the Board
of Directors set in the Corporation’s Charter are
lower than those stipulated by the law.

In 2017, all actions that are recognised as material
corporate actions in accordance with the
Corporate Governance Code were approved
by the Board of Directors before they were carried
out.

7.2.

The company should establish such procedures for taking material corporate actions that would enable the shareholders to timely
receive information on such actions, and provide them with the opportunity to influence such actions and guarantee an adequate level
of protection of the shareholders’ rights.

7.2.1. Disclosures of information

on material corporate actions
should contain explanations of the
reasons, terms and consequences
of such actions.

In the reporting period, the company
timely and thoroughly disclosed
information about its material corporate
actions, including the reasons for and
the timeframe of such actions.

Observed.

Being a public company, the Corporation
discloses the maximum possible amount
of information on any corporate actions, including
those that may influence the dividend and/or any
other rights of the shareholders.

7.2.2.

It is recommended that the
rules and procedures related
to the company’s taking material
corporate actions should be set
out in the internal regulations
of the company.

Observed.

To the extent that the rules and procedures related
to the Corporation’s taking material corporate
actions are not provided for by applicable laws,
such rules and procedures are set forth in the
internal regulations of the Corporation.

When reviewing material transactions
at Board meetings, an independent appraiser
or an investment consultant is engaged
to determine the price of such transactions.

Only Board members that do not have any
conflict of interest and are not related parties vote
on approval of related party transactions.

The company’s internal documents
stipulate a procedure for engaging
an independent appraiser for
determining the value of assets
to be disposed or acquired in a major
transaction or in a related party
transaction.

The company’s internal documents
stipulate a procedure for engaging
an independent appraiser for
determining the price of acquiring and
buying back the company’s shares.

The company’s internal documents
set out an extensive list of reasons for
recognising board members and other
persons as stipulated by law as related
parties in the company’s transactions.

Annual report 2017 — Sistema — 141

sistema.ruAnnexsAnnex 7.
Report on compliance with key requirements of the UK Corporate Governance Code

Provisions of the Code

Compliance Note

A. LEADERSHIP

А.1. Governance bodies

А.1.1. The board should meet sufficiently regularly
to discharge its duties effectively.

Observed.

The Board of Directors of Sistema PJSFC meets at least 8 times a year,
which allows reviewing and taking decisions on issues within its remit.
15 meetings of the Board of Directors were held in 2017.

There should be a formal schedule of matters specifically
reserved for the board’s decision.

Observed.

The powers and responsibilities of the Board of Directors are set out
in the Charter of Sistema PJSFC (cl. 32 of the Charter).

The annual report should include a statement of how the
board operates, including a high level statement of which
types of decisions are to be taken by the board and which
are to be delegated to management.

Observed.

The Annual Report of Sistema PJSFC includes information on the
procedures of the Board of Directors, including a report on the key
items decisions on which were made by the Board of Directors and the
Management Board (cl. 6.2, 6.4).

А.1.2. The annual report should identify the chairman, the
deputy chairman (where there is one), the chief executive,
the senior independent director and the chairmen and
members of the board committees.

Observed.

Sistema’s Annual Report includes information on election of V.
Evtushenkov as Chairman of the Board of Directors of Sistema PJSFC,
and also on elected Deputy Chairmen of the Board.

The Annual Report also includes information on the President and
Chairmen and members of the Board Committees.

The Corporation’s statutory documents do not provide for the position
of a senior independent director.

The annual report should also set out the number
of meetings of the board and the board committees and
individual attendance by directors.

Observed.

Sistema’s Annual Report includes information on the number of meetings
of the Board of Directors and Board Committees, as well as their
attendance by members (cl. 6.2).

А.1.3. The company should arrange appropriate insurance
cover in respect of legal action against its directors.

Observed.

In accordance with the Terms of Reference of the Board of Directors,
the Corporation insures liability of the Board members from legal
actions or claims in relation to business decisions or other actions taken
in capacity of a member of the Board of Director of Sistema PJSFC or its
affiliates (D&O Policy).

А.2. Division of Responsibilities

А.2.1. The roles of chairman and chief executive should
not be exercised by the same individual. The division
of responsibilities between the chairman and chief executive
should be clearly established, set out in writing and agreed
by the board.

Observed.

The Russian legislation and the Charter of Sistema PJSFC stipulate
that a person performing the functions of the sole executive body
cannot simultaneously hold the position of the Chairman of the Board
of Directors of Sistema PJSFC (cl. 31.1 of the Charter of Sistema PJSFC).
The powers of the Board Chairman, Board members and the President
are clearly divided in the Charter of Sistema PJSFC.

А.3. Chairman of the Board of Directors

А.3.1. The chairman should on appointment meet the
independence criteria set out in B.1.1 below.

Not
observed.

The Corporation’s main shareholder V. Evtushenkov, who is a non-
executive member of the Board of Directors, but does not meet the
independence criteria, was elected Chairman of the Board of Directors
of Sistema PJSFC since his is the Corporation’s majority shareholder.

A chief executive should not go on to be chairman of the
same company. If exceptionally a board decides that a chief
executive should become chairman, the board should
consult major shareholders in advance and should set out its
reasons to shareholders at the time of the appointment and
in the next annual report.

Observed. The Russian legislation and the Charter of Sistema PJSFC envisage

that a person performing the functions of the sole executive body
cannot simultaneously hold the position of the Chairman of the Board
of Directors of Sistema PJSFC (cl. 31.3 of the Charter of Sistema PJSFC).

The powers of the Board Chairman and the President are clearly divided
in the Charter of Sistema PJSFC.

142 — Sistema — Annual report 2017

sistema.ru

Provisions of the Code

Compliance Note

А.4. Non-Executive Directors

А.4.1. The board should appoint one of the independent
non-executive directors to be the senior independent
director. The senior independent director should be available
to shareholders if they have concerns which contact through
the normal channels of chairman, chief executive or other
executive directors has failed to resolve.

А.4.2. The chairman should hold meetings with the non-
executive directors without the executives present.

Partially
observed.

Formal meetings of the Board of Directors of Sistema PJSFC without the
executive directors’ presence are not held, but there are meetings of the
Board Chairman with independent directors.

Sistema’s internal regulations provide for the position of a Deputy
Board Chairman, which is currently held by a non-executive director.
The Corporation’s regulations do not provide for the position of a senior
independent director.

Prior to every meeting of the Board of Directors of Sistema PJSFC,
independent members of the Board hold a meeting in form of a business
dinner, which is also attended by the management of the Corporation,
to discuss urgent questions of managing the Company and organising
the Board’s work.

Led by the senior independent director, the non-executive
directors should meet without the chairman present at least
annually to appraise the chairman’s performance and
on such other occasions as are deemed appropriate.

Not
applicable.

Performance of the Board of Directors’ Chairman is assessed during the
assessment of the performance of the Board of Directors as a whole.

А.4.3. Where directors have concerns which cannot
be resolved about the running of the company or a proposed
action, they should ensure that their concerns are recorded
in the board minutes.

Observed.

According to the Procedures of the Board of Directors of the Corporation
approved by the Board, directors have an opportunity to express (attach
to the minutes of a Board meeting) their dissenting opinion within 24
hours after the meeting.

All Board members of Sistema PJSFC are provided with a copy of minutes
of every Board meeting.

B. EFFECTIVENESS

В.1. The Composition of the Board

В.1.1. The board should identify in the annual report each
non-executive director it considers to be independent.

Observed.

Information on each non-executive director that meets the independence
criteria is included in Sistema’s Annual Report.

The board should determine whether the director
is independent in character and judgement and whether
there are relationships or circumstances which are likely
to affect, or could appear to affect, the director’s judgement.

The board should state its reasons if it determines that
a director is independent notwithstanding the existence
of relationships or circumstances which may appear relevant
to its determination.

В.1.2. Except for smaller companies (a smaller company
is one that is below the FTSE 350 throughout the year
immediately prior to the reporting year), at least half the board,
excluding the chairman, should comprise non-executive
directors determined by the board to be independent.

There are 5 directors among members of the Board of Directors that
meet the independence criteria: A. Belova, R. Kocharyan, J. Krecké,
R. Munnings, D. Iakobachvili.

Observed. Sistema PJSFC is not included in FTSE 350, however, 5 of its Board

Members, or almost 50%, meet the independence criteria.

 Including if the director: a) has been an employee of the company or group within the last five years; b) has, or has had within the last three years, a material business
relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company; c) has received
or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member
of the company’s pension scheme; d) has close family ties with any of the company’s advisers, directors or senior employees; e) holds cross-directorships or has significant links with
other directors through involvement in other companies or bodies; f) represents a significant shareholder; or g) has served on the board for more than nine years from the date of their
first election.

Annual report 2017 — Sistema — 143

sistema.ruAnnexsProvisions of the Code

Compliance Note

В.2. Appointments to the Board

В.2.1. There should be a nomination committee which
should lead the process for board appointments and make
recommendations to the board.

Observed.

The Nomination, Remuneration and Corporate Governance Committee
of Sistema PJSFC has been set up and is active. Its scope of authority
is defined in the Terms of Reference of the Nomination, Remuneration
and Corporate Governance Committee of Sistema PJSFC. One of the
Committee’s main functions is preliminary consideration of nominees
to the Corporation’s top management positions to be approved by the
Board of Directors of Sistema PJSFC. The Committee also considers
candidates to the Board of Directors as part of preparation for the Annual
General Meeting of shareholders.

A majority of members of the nomination committee should
be independent non-executive directors.

Observed.

Independent directors constitute a majority of the Nomination,
Remuneration and Corporate Governance Committee (R. Kocharyan
(Chairman), R. Munnings, D. Iakobachvili)

The chairman or an independent non-executive director
should chair the nomination committee, but the chairman
should not chair the nomination committee when it is dealing
with the appointment of a successor to the chairmanship.

В.2.2. The nomination committee should evaluate the
balance of skills, experience, independence and knowledge
on the board and, in the light of this evaluation, prepare
a description of the role and capabilities required for
a particular appointment.

Observed.

The Nomination, Remuneration and Corporate Governance Committee
of the Board of Directors of Sistema PJSFC is chaired by the independent
non-executive director R. Kocharyan.

Observed. Candidates to the Board of Directors are nominated by shareholders

of Sistema PJSFC.

Requirements for candidates to the Board are set out in the Terms
of Reference of the Board of Directors of Sistema PJSFC. In particular,
a candidate should have sufficient professional experience and business
reputation, and should be able to devote sufficient time and energy to the
performance of duties of a Board member.

The Nomination, Remuneration and Corporate Governance Committee
(hereinafter, “the Committee”) annually reviews and decides whether the
Corporation’s Board of Directors needs additional competences.

The Committee also considers candidates nominated for election to the
Board of Directors as part of preparation for the Annual General Meeting
of shareholders.

В.2.3. Non-executive directors should be appointed for
specified terms subject to re-election and to statutory
provisions relating to the removal of a director.

Observed.

According to the Russian legislation, Board members are elected at the
Annual General Meeting of shareholders for 1 year (for the period till the
next Annual General Meeting of shareholders) and can be re-elected
unlimited number of times.

Any term beyond six years for a non-executive director should
be subject to particularly rigorous review, and should take into
account the need for progressive refreshing of the board.

Not
applicable.

Observed. Sistema’s Annual Report includes information on the powers and scope
of authority of the Nomination, Remuneration and Corporate Governance
Committee of the Board of Directors and on key items considered by the
Committee, including the rules it used for selecting and assessing
candidates to the Company’s Board.

In 2017, the Committee did not use an external search consultancy.

В.2.4. A separate section of the annual report should describe
the work of the nomination committee, including the process
it has used in relation to board appointments.

An explanation should be given if neither an external search
consultancy nor open advertising has been used in the
appointment of a chairman or a non-executive director.

Where an external search consultancy has been used, it should
be identified in the annual report and a statement made
as to whether it has any other connection with the company.

144 — Sistema — Annual report 2017

sistema.ruAnnex 7. (Continue)Provisions of the Code

Compliance Note

A separate section of the annual report should include
a description of the board’s policy on diversity, including
gender, any measurable objectives that it has set for
implementing the policy, and progress on achieving the
objectives.

Observed. The Board of Directors of Sistema PJSFC has a balance of executive,

non-executive and independent directors.

A separate section of the annual report should include goals
and objectives for the nomination committee, and progress
on achieving the objectives.

Observed.

The Board Committees section includes a description of the goals
and objectives of the Nomination, Remuneration and Corporate
Governance Committee and topics considered at its meetings.

В.3. Commitment

В.3.1. For the appointment of a chairman, the nomination
committee should prepare a job specification, including
an assessment of the time commitment expected,
recognising the need for availability in the event of crises.

Observed.

Type of work and tasks of the Board Chairman are set out in the Terms
of Reference of the Board of Directors of Sistema PJSFC.

The Board Chairman is elected by all Board members at the first
meeting after the Annual General Meeting of shareholders.

A chairman’s other significant commitments should
be disclosed to the board before appointment and included
in the annual report. Changes to such commitments should
be reported to the board as they arise, and their impact
explained in the next annual report.

Observed.

Information on all positions held by Sistema’s Board Chairman
is disclosed and included in its Annual Report. Chairman of Sistema’s
Board of Directors V. Evtushenkov does not hold the position
of Chairman at any other significant company except Sistema PJSFC.

В.3.2. The terms and conditions of appointment of non-
executive directors should be made available for inspection
by any person at the company’s registered office during
normal business hours and at the AGM.

Observed.

Information on the terms and conditions of appointment of the
non-executive directors of the Board is available on the corporate
website of Sistema PJSFC (www.sistema.ru / www.sistema.com)
and at the office of Sistema PJSFC; the information is also available
to the participants of the AGM of Sistema PJSFC in the course of the
meeting.

According to the Russian legislation all Board members are elected for
1 year and have the right to be re-elected unlimited number of times.

The letter of appointment should set out the expected time
commitment. Non-executive directors should undertake
that they will have sufficient time to meet what is expected
of them.

Partially
observed.

Before nomination, all candidates for election to the Board familiarise
themselves with the work plan of the Board of Directors of Sistema
PJSFC for the coming year, the rights and obligations of the Board
members and their potential inclusion in the Board’s committees.

During the induction procedure, the Company’s Corporate Secretary
explains to every new member of the Board its procedures and
approximate time commitments for their fulfilment. Before the
election, all candidates sign a document confirming their consent
to the nomination that includes, inter alia, a consent to follow all the
requirements of the internal regulations of the Corporation applicable
to the Board members.

Attendance of meetings and involvement of the Board members
in discussion of agenda items is recorded and analysed for
subsequently including this information into the report on the quality
of corporate governance.

 As of 31 December 2017: F. Evtushenkov, M. Shamolin; as of 02 April 2018: A. Dubovskov.
 As of 31 December 2017: V. Evtushenkov, S. Boev, A. Dubovskov, R. Sommer; as of 02 April 2018: V. Evtushenkov, S. Boev, F. Evtushenkov, R. Sommer, M. Shamolin.
 A. Belova, R. Kocharyan, J. Krecké, R. Munnings, D. Iakobachvili.

Annual report 2017 — Sistema — 145

sistema.ruAnnexsProvisions of the Code

Compliance Note

The other significant commitments of non-executive board
members should be disclosed to the board, with a broad
indication of the time involved and the board should
be informed of subsequent changes.

Observed.

The biographies of candidates to the Board of Directors, including
information on positions held in other organisations, are included
in the materials for the Annual General Meeting of shareholders, and
information on the incumbent Board members of Sistema PJSFC
is included in the Annual Report.

All candidates for election to the Board of Directors complete candidate
questionnaires thus providing the Company with necessary information.

The obligation to disclose any changes in the information provided by the
members of the Board of Directors is set out in the Terms of Reference
of the Board of Directors of Sistema PJSFC.

В.3.3. The board should not agree to a full time executive
director taking on more than one non-executive directorship
in a FTSE 100 company nor the chairmanship of such
a company.

Observed.

As of 31 December 2017, the Board of Directors of Sistema PJSFC
consisted of 11 members, 2 of which held the positions of executive
directors (F. Evtushenkov and M. Shamolin). Starting from 02 April 2018,
the Board of Directors includes 1 executive director (A. Dubovskov).

В.4. Development

В.4.1. The chairman should ensure that new directors
receive a full, formal and tailored induction on joining the
board. As part of this, directors should avail themselves
of opportunities to meet major shareholders.

Observed.

They serve as members on boards of some of Sistema Group’s
companies that are not included in FTSE 100.

Membership in the boards of directors of the subsidiaries of Sistema
Group is one of the main duties of executive directors, therefore, this
does not create any conflict of interest for work at the Corporation’s Board
of Directors.

Every candidate for election to the Board of Directors of Sistema PJSFC
meets the Board Chairman, Board members and the management
before the election and receives information on the work of the Board
of Directors, his/her role in the Board of Directors and on the Company’s
business.

The Corporate Secretary of Sistema PJSFC provides consultations to new
members of the Board on the procedures and organisation of the work
of the Board and its committees and provides all the necessary regulatory
documents describing the Corporation’s strategy, business, markets
of presence and financial reports.

В.4.2. The chairman should regularly review and agree with
each director their training and development needs.

Observed.

Sistema’s Board members have the right to prepare and implement
an individual professional development plan.

The main tool, with consent of the Board Chairman, is their participation
in international conferences and professional associations on behalf
of the Corporation.

В.5. Information and Support

В.5.1. The board should ensure that directors, especially non-
executive directors, have access to independent professional
advice at the company’s expense where they judge
it necessary to discharge their responsibilities as directors.

Observed.

The Terms of Reference of the Board of Directors of the Corporation
give Board members the right to engage external independent experts
for assessing materials and decisions on any agenda items. Such
independent appraisal is organised by the Secretariat of the Board
of Directors.

В.5.2. All directors should have access to the advice and
services of the company secretary, who is responsible to the
board for ensuring that board procedures are complied with.

Observed.

In accordance with the Terms of Reference of the Corporate Secretary
of Sistema PJSFC, one of the functions of the Corporate Secretary
is to provide support to the work of the Board of Directors, including:
providing Board members with requested information and documents
regarding the Company’s business operations, distributing among Board
members the materials for the Board meetings, facilitating the work of the
Board Committees.

146 — Sistema — Annual report 2017

sistema.ruAnnex 7. (Continue)Provisions of the Code

Compliance Note

В.6. Evaluation

В.6.1. The board should state in the annual report how
performance evaluation of the board, its committees and its
individual directors has been conducted.

Observed.

The procedure for assessing the work of the Board of Directors
of Sistema PJSFC is described in the Company’s Annual Report.
The Board of Directors’ self-appraisal procedure was introduced
in 2009. Board members assess the organisation of work of the
Board of Directors using the following parameters: membership and
structure of the Board, procedures and organisation of the work
of the Board, its Committees, the quality of decisions taken by the
Board in different functional areas. The Secretariat of the Board
of Directors conducts an annual survey of the Board members,
analyses the results and submits the final analysis to the Nomination,
Remuneration and Corporate Governance Committee, the Board
Chairman and the members of the Board of Directors of Sistema
PJSFC.

В.6.2. Evaluation of the board of FTSE 350 companies
should be externally facilitated at least every three years.

Observed.

Sistema PJSFC is not an FTSE 350 company; however, in 2017,
it engaged independent advisory firm Nestor Advisors Ltd. not
affiliated with the Company for evaluation of its Board of Directors.

The external facilitator should be identified in the annual
report and a statement made as to whether they have any
other connection with the company.

В.6.3. The non-executive directors, led by the senior
independent director, should be responsible for
performance evaluation of the chairman, taking into account
the views of executive directors.

В.7. Re-election

Not
applicable.

The Company’s statutory documents do not provide for the position
of a senior independent director.

Performance evaluation of the Board Chairman is carried out during
assessment of performance of the Board of Directors as a whole.

В.7.1. All board candidates should be subject to approval
at the annual general meeting of shareholders and
to re-election thereafter at intervals of no more than three
years.

Observed.

According to the Russian legislation, Board members are elected
at the Annual General Meeting of shareholders for 1 year (for the
period till the next Annual General Meeting of shareholders) and can
be re-elected unlimited number of times.

Non-executive directors who have served longer than
nine years should be subject to annual re-election.
If an executive director serves on the board for more than
nine years, his/her status should not be defined by the
board as independent.

Observed.

According to the Russian legislation, Board members are elected
at the Annual General Meeting of shareholders for 1 year (for the
period till the next Annual General Meeting of shareholders) and can
be re-elected unlimited number of times.

The Terms of Reference of the Board of Directors set out
independence criteria for Board members.

The names of directors submitted for election or re-election
should be accompanied by sufficient biographical details
and any other relevant information to enable shareholders
to take an informed decision on their election.

В.7.2. The board should set out to shareholders in the
papers accompanying a resolution to elect a non-executive
director why they believe an individual should be elected.

Observed.

Information on the Board candidates including their biographies
is provided among other materials for the Annual General Meeting
of shareholders, which elects members of the Board of Directors.

Observed. The shareholders are provided with the candidates’ biographies

and information about their track record and expertise, along with
a recommendation of the Nomination, Remuneration and Corporate
Governance Committee, based on which shareholders make
an independent decision on voting in election of the Board.

Annual report 2017 — Sistema — 147

sistema.ruAnnexsProvisions of the Code

Compliance Note

The chairman should confirm to shareholders when
proposing re-election that, following formal performance
evaluation, the individual’s performance continues
to be effective and to demonstrate commitment to the role.

Observed. Every year, when the new membership of the Board is determined,

information on the work of the Board of Directors in the previous year
is disclosed, including attendance of meetings by the Board members
and the work of the respective Committees.

The shareholders are provided with the candidates’ biographies
and information about their track record and expertise, along with
a recommendation of the Nomination, Remuneration and Corporate
Governance Committee, based on which shareholders make
an independent decision on voting in election of the Board.

С. ACCOUNTABILITY

Observed. The Corporation’s Annual Report and accounts are pre-approved

at meetings of the Board and the Audit, Finance and Risk Committee
of Sistema PJSFC.

C.1. Financial and Business Reporting

С.1.1. The directors should state in the annual report
that they consider the annual report and accounts, taken
as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the
company’s position and performance, business model and
strategy.

There should be a statement by the auditor about their
reporting responsibilities.

Observed.

The respective statement is contained in the auditor’s opinion which
is an integral part of the annual financial statements.

Observed. The Annual Report contains the description of the Corporation’s

development strategy.

Observed. The Audit, Finance and Risk Committee analyses this when reviewing the

accounts.

If necessary, respective reservations are included in the opinion/report
of the independent auditor, which are integral pars of the annual and
semi-annual financial statements approved by the Audit, Finance and
Risk Committee.

Observed.

The Annual Report has a separate section devoted to description of risks
for the Corporation’s business and of the risk management system.

The Board regularly reviews items on risk management at the
Corporation.

Observed. The Annual Report includes a detailed description of the situation and

prospects of the Corporation and its portfolio companies, taking into
account existing risks.

С.1.2. The directors should include in the annual report
an explanation of the basis on which the company generates
or preserves value over the longer term (the business model)
and the strategy for delivering the objectives of the company.

С.1.3. In annual and half-yearly financial statements, the
directors should state whether they considered it appropriate
to adopt the going concern basis of accounting in preparing
them, and identify any material uncertainties to the company’s
ability to continue to do so over a period of at least twelve
months from the date of approval of the financial statements.

С.2. Risk Management and Internal Control

С.2.1. The directors should confirm in the annual report that
they have carried out a robust assessment of the principal
risks facing the company, including those that would threaten
its business model, future performance, solvency or liquidity.
The directors should describe those risks and explain how
they are being managed or mitigated.

С.2.2. Taking account of the company’s current position
and principal risks, the directors should explain in the
annual report how they have assessed the prospects of the
company, over what period they have done so and why they
consider that period to be appropriate. The directors should
state whether they have a reasonable expectation that the
company will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment,
drawing attention to any qualifications or assumptions
as necessary.

148 — Sistema — Annual report 2017

sistema.ruAnnex 7. (Continue)Provisions of the Code

Compliance Note

С.2.3. The board should monitor the company’s risk
management and internal control systems and, at least
annually, carry out a review of their effectiveness, and report
on that review in the annual report.

Observed.

The Board reviews reports from divisions responsible for risk
management and internal control at the Corporation at least once a year.
This information is disclosed in the Annual Report.

C.3. Audit Committee and Auditors

С.3.1. The board should establish an audit committee
of at least three, or in the case of smaller companies two,
independent non-executive directors. The board should satisfy
itself that at least one member of the audit committee has
recent and relevant financial experience.

Observed.
in all
material
aspects.

The Audit, Finance and Risk Committee of Sistema PJSFC has been
established and is active. The Committee consists of 5 Board members,
4 of which meet the independence criteria: A. Belova, J. Krecké, R.
Munnings, D. Iakobachvili.

The Chairman of the Audit, Finance and Risk Committee of the Board
of Directors of Sistema PJSFC is R. Munnings, who has extensive
experience in the area of financial audit.

С.3.2. The main role and responsibilities of the audit committee
should be set out in written terms of reference and should
include:

Observed.

The responsibilities of the Audit, Finance and Risk Committee of the
Board of Directors of Sistema PJSFC are set out in the Terms of Reference
of the Committee approved by the Corporation’s Board of Directors.

The Terms of Reference of the Audit, Finance and Risk Committee meet
the recommendations of section С.3.2 of the UK Corporate Governance
Code.

• to monitor the integrity of the financial statements of the
company and any formal announcements relating to the
company’s financial performance, reviewing significant
financial reporting judgements contained in them;

• to review the company’s internal financial controls and, unless

expressly
addressed by a separate board risk committee composed
of independent
directors, or by the board itself, to review the company’s
internal control and risk management systems;

• to monitor and review the effectiveness of the company’s

internal audit function;

• to make recommendations to the board, for it to put to the

shareholders for their approval in general meeting, in relation
to the appointment, re-appointment and removal of the
external auditor and to approve the remuneration and terms
of engagement of the external auditor;

• to review and monitor the external auditor’s independence

and

• objectivity and the effectiveness of the audit process, taking
into consideration relevant UK professional and regulatory
requirements;

• to develop and implement policy on the engagement of the

external auditor to supply non-audit services, taking into
account relevant ethical guidance regarding the provision
of non-audit services by the external audit firm; and to report
to the board, identifying any matters in respect of which
it considers that action or improvement is needed and making
recommendations as to the steps to be taken; and

• to report to the board on how it has discharged its

responsibilities.

С.3.3. The terms of reference of the audit committee, including
its role and the authority delegated to it by the board, should
be made available.

Observed.

Annual report 2017 — Sistema — 149

sistema.ruAnnexsProvisions of the Code

Compliance Note

С.3.4. Where requested by the board, the audit
committee should provide advice on whether the annual
report and accounts, taken as a whole, is fair, balanced
and understandable and provides the information
necessary for shareholders to assess the company’s
position and performance, business model and strategy.

C.3.5. The audit committee should review arrangements
by which staff of the company may, in confidence,
raise concerns about possible improprieties in matters
of financial reporting or other matters. The audit
committee’s objective should be to ensure that
arrangements are in place for the proportionate and
independent investigation of such matters and for
appropriate follow-up action.

Observed.

The Audit, Finance and Risk Committee reviews the Annual Report and
the financial statements for their reliability and completeness.

Observed.

The Audit, Finance and Risk Committee reviews issues related to the
operation of the hotline used by the Corporation’s employees and other
interested parties for raising concerns about any potential financial
malpractice on a confidential basis.

C.3.6. The audit committee should monitor and review
the effectiveness of the internal audit activities.

Observed.

Where there is no internal audit function, the audit
committee should consider annually whether there
is a need for an internal audit function and make
a recommendation to the board, and the reasons for the
absence of such a function should be explained in the
relevant section of the annual report.

C.3.7. The audit committee should have primary
responsibility for making a recommendation on the
appointment, reappointment and removal of the external
auditors. FTSE 350 companies should put the external
audit contract out to tender at least every ten years.
If the board does not accept the audit committee’s
recommendation, it should include in the annual
report, and in any papers recommending appointment
or re-appointment, a statement from the audit committee
explaining the recommendation and should set out
reasons why the board has taken a different position.

In accordance with the Terms of Reference of the Audit, Finance and
Risk Committee of the Board of Directors of the Corporation, one of the
main functions of this Committee is to oversee the internal audit system
of the Corporation as implemented by the Internal Control and Audit
Department. The Audit and Finance Committee, together with the head
of the above-mentioned Department and the Company’s management,
analyses implemented activities aimed at removing deficiencies
in internal business processes.

Observed.

According to the Terms of Reference of the Audit, Finance and Risk
Committee of the Company’s Board of Directors, the Committee analyses
the work of external auditors and makes recommendations to the Board
of Directors of the Corporation on the appointment and re-appointment
of external auditors or rejection of their services.

The Committee organises a tender for external auditor’s services at least
once in five years.

C.3.8. A separate section of the annual report should
describe the work of the committee in discharging its
responsibilities. The report should include:

Observed.

Sistema’s Annual Report includes information on discharge of its duties
by the Audit, Finance and Risk Committee and on the policy for ensuring
the impartiality and independence of the Corporation’s auditor.

• the significant issues that the committee considered
in relation to the financial statements, and how these
issues were addressed;

• an explanation of how it has assessed the effectiveness
of the external audit process and the approach taken
to the appointment or reappointment of the external
auditor, and information on the length of tenure
of the current audit firm and when a tender was last
conducted; and

• if the external auditor provides non-audit services,

an explanation of how auditor objectivity and
independence are safeguarded.

150 — Sistema — Annual report 2017

sistema.ruAnnex 7. (Continue)Provisions of the Code

Compliance Note

D. REMUNERATION

D.1. The Level and Components of Remuneration

D.1.1. In designing schemes of performance-related
remuneration for executive directors, the remuneration
committee should follow the provisions in Schedule A to this
Code. Schemes should include provisions that would enable
the company to recover sums paid or withhold the payment
of any sum, and specify the circumstances in which it would
be appropriate to do so.

D.1.2. Where a company releases an executive director
to serve as a non-executive director elsewhere, the
remuneration report should include a statement
as to whether or not the director will retain such earnings
and, if so, what the remuneration is.

Partially
observed.

D.1.3. Levels of remuneration for non-executive directors
should reflect the time commitment and responsibilities
of the role.

Observed.

Remuneration for non-executive directors should not include
share options or other performance-related elements. If,
exceptionally, such options are granted, shareholder approval
should be sought in advance and any shares acquired
by exercise of the options should be held until at least one year
after the non-executive director leaves the board.

Holding of share options could be relevant to the
determination of a non-executive director’s independence
(as set out in provision B.1.1).

Observed. The sections of Schedule A of the UK Corporate Governance Code

are in general reflected in the remuneration system developed for the
Corporation’s Board members.

All instances when the Corporation may refuse to pay some part
of remuneration are stipulated by its internal documents.

Comments on specific sections of Schedule A are provided below.

The managers of the Corporation elected to the boards of directors
of subsidiaries do not receive any additional remuneration for serving
on such boards. The managers of the Corporation or executive directors
elected to the boards of directors of other companies retain their
remuneration for serving on the boards of directors of such companies
in accordance with the existing internal regulations of such companies.

The information on the size of remuneration received by the employees
of Sistema PJSFC for serving on the boards of directors of other
companies is not disclosed.

The Board members of Sistema PJSFC receive additional remuneration
for serving as Chairman of the Board of Directors, Deputy Chairman
of the Board of Directors and Chairman of the Board Committee. Special
remuneration is also paid for attending the meetings of the Board and its
Committees.

Stock options are not granted for serving on the Board of Directors.

D.1.4. The remuneration committee should carefully consider
what compensation commitments (including pension
contributions and all other elements) their directors’ terms
of appointment would entail in the event of early termination.
They should take a robust line on reducing compensation
to reflect departing directors’ obligations to mitigate loss.

Observed.

Pursuant to cl. 1.6. of the Policy on remuneration and compensations for
the Board members of the Corporation, in the event of early termination
of the powers of a Board member, the amount of remuneration
is calculated in proportion to the actual time of service of the specific
member on the Board.

D.1.5. Notice or contract periods should be set at one year
or less. If it is necessary to offer longer notice or contract
periods to new directors recruited from outside, such periods
should reduce to one year or less after the initial period.

Observed.

According to the Russian legislation, Board Members are elected at the
Annual General Meeting of shareholders for a 1-year term (for the period
until the next Annual General Meeting of shareholders) and have the right
to be re-elected unlimited number of times.

D.2. Procedure

D.2.1. The board should establish a remuneration committee
of at least three, or in the case of smaller companies two,
independent non-executive directors.

Observed.
in all
material
aspects.

The Nomination, Remuneration and Corporate Governance Committee
of Sistema PJSFC has been set up and is active. The Committee consists
of 5 directors, 2 of which (S. Boev, R. Sommer) are non-executive directors
and 3 (R. Kocharyan, R. Munnings and D. Iakobachvili) are independent
directors (meet the independence criteria).

Annual report 2017 — Sistema — 151

sistema.ruAnnexsProvisions of the Code

Compliance Note

The remuneration committee should make available its terms
of reference, explaining its role and the authority delegated
to it by the board.

Observed.

The responsibilities of the Nomination, Remuneration and Corporate
Governance Committee of the Board of Directors of Sistema PJSFC
are set out in the Terms of Reference of the Committee approved
by the Corporation’s Board of Directors on 29 October 2016. The Terms
of Reference of the above-mentioned Committee are available on the
corporate website of the Corporation (www.sistema.ru / www.sistema.
com) and may be provided to shareholders upon request.

Where remuneration consultants are appointed, they should
be identified in the annual report and a statement made
as to whether they have any other connection with the
company.

Not
applicable.

In 2017, no external consultants were hired on the issues of remuneration
payable to the Board members.

D.2.2. The remuneration committee should have delegated
responsibility for setting remuneration for all executive
directors and the chairman, including pension rights and any
compensation payments.

Observed.

The amounts of and the procedures for paying remuneration and
compensations to the Corporation’s Board members are set out in the
Policy on remuneration and compensations for the Board members
of the Corporation.

The committee should also recommend and monitor the
level and structure of remuneration for senior management.

Observed.

The definition of ‘senior management’ for this purpose should
be determined by the board but should normally include the
first layer of management below board level.

If amendments should be made to the above-mentioned Policy, the
Nomination, Remuneration and Corporate Governance Committee
should develop the required amendments.

In accordance with the Terms of Reference of the Nomination,
Remuneration and Corporate Governance Committee of the Board
of Directors of Sistema PJSFC, the Committee’s functions include:

• preliminary review of employment agreements to be entered into

with the President and members of the Management Board of the
Corporation, which are submitted for the Board’s approval;

• assessment of the top managers’ performance and determination

of their respective bonuses.

D.2.3. The board itself or, where required by the Articles
of Association, the shareholders should determine the
remuneration of the non-executive directors within the limits
set in the Articles of Association. Where permitted by the
Articles, the board may however delegate this responsibility
to a committee, which might include the chief executive.

Observed.

The Policy on remuneration and compensations payable to members
of the Board of Directors of the Corporation stipulates a formula for
calculating the remuneration and compensations payable to the
Corporation’s Board members. A special decision of the Nomination,
Remuneration and Corporate Governance Committee for such payments
is not required.

D.2.4. Shareholders should be invited specifically to approve
all new long-term incentive schemes (as defined in the
Listing Rules) and significant changes to existing schemes,
save in the circumstances permitted by the Listing Rules.

Observed.

Long-term incentive systems are approved by the Board of Directors and,
when needed, by the Annual General Meeting of shareholders of Sistema
PJSFC, and shareholders discuss such matters both at the level
of the Board of Directors and the level of the Annual General Meeting
of shareholders.

E. RELATIONS WITH SHAREHOLDERS

E.1 Dialogue with Shareholders

Е.1.1. The chairman should ensure that the views
of shareholders are communicated to the board as a whole.

Observed.

The chairman should discuss governance and strategy with
major shareholders.

Non-executive directors should be offered the opportunity
to attend scheduled meetings with major shareholders and
should expect to attend meetings if requested by major
shareholders.

Representatives of the main shareholders were elected to the Board
of Directors of Sistema PJSFC. The IR Department of the Company works
with major institutional investors. The results of its work, including the
views of major institutional investors on the Company’s strategy and
development, are reviewed by the Board of Directors on a regular basis
as part of the IR strategy of the Company.

It is mandatory for all members of the Board of Directors, including
non-executive directors, to attend the Annual General Meeting
of shareholders of Sistema PJSFC.

152 — Sistema — Annual report 2017

sistema.ruAnnex 7. (Continue)Provisions of the Code

Compliance Note

The senior independent director should attend sufficient
meetings with a range of major shareholders to listen to their
views in order to help develop a balanced understanding
of the issues and concerns of major
shareholders.

Е.1.2. The board should state in the annual report the steps
they have taken to ensure that the members of the board,
and in particular the non-executive directors, develop
an understanding of the views of major shareholders about
the company, for example through direct face-to-face contact,
analysts’ or brokers’ briefings and surveys of shareholder
opinion.

Е.2. Constructive Use of General Meetings

Not
applicable.

The Company’s statutory documents do not provide for the position
of a senior independent director.

Prior to every Board meeting, independent directors hold a meeting,
which is also attended by the Corporation’s management.

Information on the Board members meeting the independence criteria
is available to the shareholders on Sistema’s website (www.sistema.ru /
www.sistema.com), so that the shareholders may contact any of them
if they have any questions.

Observed.

Sistema’s Annual Report includes a description of the Corporation’s
development strategy that reflects the opinion of the Board and the major
shareholders.

Е.2.1. At any general meeting, the company should propose
a separate resolution on each substantially separate issue,
and should in particular propose a resolution at the AGM
relating to the report and accounts.

Observed.

According to the Russian legislation and the Charter of Sistema PJSFC,
every agenda item at the AGM is accompanied by a separate draft
resolution with “for”, “against” and “abstained” voting options.

Е.2.2. The company should ensure that all valid proxy
appointments received for general meetings are properly
recorded and counted.

Observed.

All votes of the shareholders are registered by the Teller Committee and
this information is included in the Minutes of the Annual General Meeting
of shareholders.

All “for”, “against” and “abstained” votes on every agenda item are
recorded separately, voting results for every item are disclosed publicly.

In the reporting year, the number of votes cast against resolutions at the
General Meeting of shareholders was not significant.

The company should ensure that the following information
is given at the meeting and made available as soon
as reasonably practicable on a website which is maintained
by or on behalf of the company:

• the number of shares in respect of which proxy

appointments have been validly made;the number of votes
for the resolution;

• the number of votes against the resolution; and

• the number of shares in respect of which the vote was

directed to be withheld.

When, in the opinion of the board, a significant proportion
of votes have been cast against a resolution at any general
meeting, the company should explain when announcing the
results of voting what actions it intends to take to understand
the reasons behind the vote result.

Е.2.3. All members of the board should attend the AGM.
Committee chairmen should be available to answer
questions at the AGM.

Observed.

In accordance with the Terms of Reference of the Board of Directors
of Sistema PJSFC, all members of the Board of Directors are obligated
to attend the AGM and answer the questions of the participants.

The shareholders attending the Annual General Meeting of shareholders
of Sistema PJSFC may put questions to any member of the Board
of Directors attending the meeting.

Е.2.4. The company should arrange for the Notice of the
AGM and related papers to be sent to shareholders at least
20 working days before the meeting.

Observed.

According to the Charter of Sistema PJSFC, the Corporation publishes
the materials for the Annual General Meeting of shareholders no later
than 30 days before the meeting.

Annual report 2017 — Sistema — 153

sistema.ruAnnexsDISCLAIMER

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.

154 — Sistema — Annual Report 2017

sistema.сomAdditional
information

CONTACTS

Investor relations Department:

+7 495 730-66-00
+7 495 692-22-88

Press center:

+7 495 228-15-32

Inquiry desk:

+7 495 737-01-01

Address:

125009 Москва, ул. Моховая, 13

sistema.сom

Annual Report 2017 — Sistema — 155