Sistema Annual Report 2019

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2019

ANNUAL
REPORT

SISTEMA

PUBLIC JOINT STOCK

FINANCIAL CORPORATION

sistema.com

SISTEMA.COM

About this report

This annual report presents information on business operations of Sistema Public Joint Stock
Financial Corporation and its portfolio companies in 2019. All projections and forward-looking
estimates regarding Sistema PJSFC, portfolio companies’ industries, their performance and
strategy were made before February 2020 and do not account for the influence of COVID-19
pandemic, unless specifically noted otherwise.

The annual report of Sistema PJSFC for the year 2019 has been prepared in compliance with
Federal Law on Joint Stock Companies, Federal Law on Securities Market, Bank of Russia
Regulation on Disclosure by Issuers as amended.

This annual report was approved by the Annual General Meeting of Sistema PJSFC on 27 June
2020 (Minutes No. 1-20, dated 1 July 2020).

Unless specifically noted otherwise, all financial performance indicators in this annual report are
based on consolidated financial statements under IFRS.

Certain immaterial discrepancies in percentage calculations and in arithmetic operations
of addition in tables and charts in this annual report are attributable to rounding.

You may access other annual reports of the Corporation at its official website, www.sistema.
com, in Information Disclosure and Investors & Shareholders.

Disclaimer

Certain statements in this annual report may contain assumptions or projections regard-
ing forthcoming or expected events related to Sistema PJSFC or its portfolio companies.
Statements of this nature may be expressed by using the words “expect,” “estimate,” “intend,”
“will,” “could,” negations of such words, as well as similar expressions. These statements are
only predictions, and actual events or results may differ materially.

Sistema PJSFC does not commit to reviewing these statements in order to correlate them with
actual events and circumstances that may occur after the above-mentioned date or to highlight
the events that were not expected to occur when this annual report was prepared. Many factors
could cause the actual results of Sistema PJSFC or its portfolio companies to differ materially
from those set forth in our projections or forward-looking statements, including, among oth-
ers, macroeconomic conditions, our competitive environment, country-specific risks of operat-
ing in Russia, rapid technological and market changes in the industries where Sistema PJSFC
and its portfolio companies operate, the impact of the COVID-19 pandemic on the macroeco-
nomic situation in the markets where Sistema PJSFC and its portfolio companies operate and
on their financial performance, as well as many other risks specifically related to Sistema and
its operations.

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SISTEMA.COMSISTEMA — ANNUAL REPORT 2019

CONTENT

SISTEMA
PROFILE

PERFORMANCE
IN 2019

Sistema overview

Investment portfolio

CEO’s statement

Strategic overview

Key events

Financial overview

Shareholders’ equity

Dividend statement

KEY ASSETS'
PERFORMANCE IN 2019

MTS

Detsky Mir

Etalon Group

Segezha Group

Medsi

Steppe Agroholding

Ozon

Alium

Sintez

Business Nedvizhimost

Cosmos Hotel Group

BPGC

RTI

Other Assets

106

Funds

SISTEMA.COM

CORPORATE
GOVERNANCE

SUSTAINABILITY
MANAGEMENT

ANNEXES

118

Corporate governance system

150

Sustainability management

162

Annex 1

137

Board and senior management
remuneration policy

140

Risk management

151

154

Key ESG areas as a continuation
of investment strategy

Examples of key ESG efforts
of portfolio companies

158 Corporate social responsibility

and Sistema Charitable Foundation

172

Annex 2

174

175

Annex 3

Annex 4

176

Annex 5

178

Annex 6

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SISTEMA.COMSISTEMA — ANNUAL REPORT 2019О КОМПАНИИ

SISTEMA PROFILE

SISTEMA.COM

SISTEMA PROFILE

SISTEMA OVERVIEW

INVESTMENT PORTFOLIO

CEO’S STATEMENT

STRATEGIC OVERVIEW

SISTEMA — ANNUAL REPORT 2019
6

SISTEMA PROFILE

KEY HIGHLIGHTS 2019 2

SISTEMA.COM

SISTEMA
OVERVIEW

SISTEMA PROFILE

Sistema PJSFC (“Sistema” or the “Corporation”) is one of the largest
public investment companies in Russia. Founded in 1993, Sistema
is today represented across over 15 high-potential sectors of the
Russian economy through its portfolio companies that serve over
150 million consumers. Sistema’s investment portfolio includes mostly
Russian companies in such sectors as telecommunications, forestry,
agriculture, healthcare, real estate, consumer retail, and others.

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

STRATEGY

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

AWARDS AND ACHIEVEMENTS

BEST MULTI-SECTOR INVESTMENT
COMPANY 2019 — RUSSIA
Alternative Investment Fund Awards
2019 (Wealth & Finance Magazine)

ISSUER OF THE YEAR
Cbonds Awards

TOP 20

PUBLIC RUSSIAN COMPANIES IN
FORBES GLOBAL 2000

TOP 20

TOP-12
Leaders of the sustainable develop-
ment indices of the RSPP 1

LARGEST RUSSIAN COMPANIES
BY REVENUE (RBC)

›150

CONSUMERS

1,264

BN
RUB

TOTAL ASSETS

REVENUE

656.9

BN RUB

ADJUSTED
NET PROFIT

53.4

BN RUB

ADJUSTED
OIBDA

223.9

BN RUB

INVESTMENTS

28.1

BN RUB

›15

SECTORS

PUBLIC ASSETS

MTS

NYSE: MBT
MOEX: MTSS

AFKS

MOEX

SSA

LSE

DETSKY MIR

MOEX: DSKY

ETALON GROUP
LSE / MOEX 3: ETLN

BB–

FITCH

BB–

S&P

ruA

RAEX

Russian Union of Industrialists and Entrepreneurs.

2 Hereinafter the results for 2019 are presented taking into account reclassification of Detskiy Mir, Leader-Invest, MTS business in Ukraine and RTI enterprises in

the field of microelectronics as part of discontinued operations. The results for 2018 have been restated to reflect the results of this reclassification.
Etalon’s GDRs started trading on Moscow Exchange on 3 February 2020.

SISTEMA — ANNUAL REPORT 2019

SISTEMA PROFILE

INVESTMENT
PORTFOLIO

Sistema is the majority
shareholder in most of its
portfolio companies.

20+

COUNTRIES

15+

INDUSTRIES

 SISTEMA’S EFFECTIVE
SHAREHOLDING

98.6% 5
HIGH TECH
KRONSTADT

98.6% 5
HIGH TECH
AEROMAX

100%
REAL ESTATE
BUSINESS
NEDVIZHIMOST

91%
POWER GRIDS
BPGC

SISTEMA.COM

50%
HIGH TECH
ELEMENT

50.01 %
TELECOMMUNICATIONS

MTS

Leading telecommunications operator
and digital services provider in Russia

MOEX: MTSS / NYSE: MBT

25 % 1
REAL ESTATE DEVELOPMENT

33.4 %
RETAIL

ETALON GROUP

One of the leading public development
and construction companies in Russia

DETSKY MIR

Leading children goods retailer
in Russia and Kazakhstan

LSE / MOEX: ETLN

MOEX: DSKY

100%
BANKING
EWUB

80%
FUNDS
SISTEMA_VC

42.999%
E-COMMERCE

OZON
Largest multicategory
online retailer in Russia

96.9%
PRIVATE HEALTHCARE

MEDSI
Largest private
healthcare chain
in Russia

84.6% 2
AGRICULTURE

STEPPE
AGROHOLDING
Major agricultural holding
and one of Russia’s
largest land owners

98.3%
FORESTRY

SEGEZHA GROUP
Largest vertically integrated
forestry holding in Russia

100%
HOSPITALITY
COSMOS
HOTEL GROUP

83%
FUNDS
SISTEMA
ASIA FUND

70%
FUNDS
SISTEMA CAPITAL MC

42.9%
RETAIL
CONCEPT GROUP

24.9% 3
PHARMA
ALIUM

46.5% 4
PHARMA
SINTEZ

87%
HIGH TECH
RTI

1
2
3
4
5

Shareholding of Sistema and its affiliates.
92.8% as of 31 December 2019.
26.3% as of 31 December 2019.
Joint shareholding with a financial partner.
97.8% as of 31 December 2019

SISTEMA PROFILE

SISTEMA.COM

CEO’S STATEMENT

Dear Shareholders,

I am honoured to be chosen to lead Sistema, the
largest public diversified company in Russia, and
join a team of outstanding investment management
professionals.

In 2019, Sistema demonstrated sustained
growth in its public and key non-public assets,
significantly lowered its financial liabilities at the
Corporate Centre, continued to invest in high-po-
tential businesses and executed several success-
ful monetisations.

Sistema’s consolidated revenue increased by 5.1%
year-on-year in 2019 to RUB 656.9 bn, driven
by greater revenue at key assets. At MTS, revenue
increase was fuelled by growth in mobile services
as well as other complementary areas, including
financial services, system integration services and
software sales. Steppe delivered top-line growth
due to increased exports of traditional and niche
crops, positive dynamics in the dairy farming
segment, and sales growth in the sugar and grocery
product trading segment. At Medsi, we saw revenue
increase as a result of the growth of services
provided across key segments: VMI, MMI and retail.
In 2019, adjusted OIBDA of the Group remained
largely unchanged year-on-year and amounted
to RUB 223.9 bn as softer global markets put
pressure on the performance of our export-oriented
assets.

Over the course of the year, we continued to expand
our presence in segments where we identified
significant potential for growth due to market con-
solidation. Acquisition of a stake in Etalon Group,
one of the leading development and construction
companies, and its subsequent integration with
Leader Invest, our developer in Moscow, allowed
us to create one of the largest players in the real
estate markets of Moscow and St Petersburg.
The consolidation of our pharmaceutical assets,
Binnopharm and OBL Pharm, under the Alium brand,
as well as the acquisition of a stake in Sintez, have
created the opportunity to establish a leading phar-
maceutical holding that may potentially become
a Top-3 player in the commercial (non-state) seg-
ment of the pharmaceutical market.

In 2019, Sistema gradually increased its share
in Ozon by acquiring stakes from other share-
holders, including an 18.7% stake from MTS.
Following a debt-to-equity conversion in December
2019, Sistema’s stake in Ozon increased
to 42.999%.

During 2019, Ozon focused on developing its logisti-
cal infrastructure. The online retailer has more than
doubled its fulfilment capacity to almost 200,000
sq m and invested significantly in the expansion
of last-mile delivery infrastructure. This invest-
ment in infrastructure, the parcel lockers network,
product assortment expansion and the develop-
ment of the marketplace enabled Ozon to accel-
erate its growth. In 2019, Ozon boosted its GMV

by 93% to RUB 80.7 bn (including VAT), significantly
strengthening its leading position in the Russian
e-commerce market.

Sistema uniquely benefits from its diversified port-
folio structure, which includes:

• Assets in sectors resilient in the face of dete-
riorating economic environment, such as
telecommunications (MTS), children's goods
retail (Detsky Mir), power grids (BPGC);

• Export-oriented businesses that benefit from the
weakening of the rouble (Segezha and Steppe);

• Companies that gain unique opportunities dur-

ing the current crisis to scale up their client base
and strengthen their market position (Ozon).

It is difficult to assess the full gravity or the duration
of the crisis, and its potential impact on the oper-
ational and financial performance of our portfolio
companies. However, I am confident that at this
time of uncertainty there is a source of strength
in our diversified business lines and a sound finan-
cial position.

Vladimir Chirakhov
SISTEMA PRESIDENT AND CEO

The successful SPO of Detsky Mir was among
the key achievements of 2019. The public offering
of 175 M shares in Detsky Mir achieved a price
of RUB 91 per share and raised RUB 12.5 bn
in funds. The SPO substantially increased the
company’s free float, thereby significantly improving
liquidity and strengthening Detsky Mir’s investment
case. In January 2020, Sistema also benefited from
a special dividend payout from MTS, amounting
to RUB 10.3 bn in cashflow, related to its disposal
of its Ukraine asset. We fully divested MTS Bank,
and its consolidation into MTS is already starting
to yield synergy benefits.

Proceeds from monetisations along with the
dividend flow from portfolio companies were
used to reduce the Corporate Centre’s gross
debt by RUB 34.0 bn (or 15.2% year-on-year)
to RUB 189.2 bn. We have also continually
decreased foreign exchange risk of our debt
portfolio throughout 2019. In May, we retired our
USD 500 M Eurobond series. In November 2019,
we repaid a US dollar-denominated bank loan.
As a result, the share of the Corporate Centre’s
FX-denominated liabilities has decreased to 4%.
In addition to limiting the foreign exchange risk
of the portfolio, Sistema has considerably improved
its debt maturity profile to 3.5 years. We also used
the favourable funding environment to substantially
reduce our average cost of debt.

In early 2020, we expanded our venture capital
portfolio by establishing the Sistema SmartTech
fund, a startup fund specialising in early-stage
investment. Sistema SmartTech will primarily invest
in projects of Russian origin operating in a variety
of sectors and demonstrating growth potential
through the creation of new market niches.

Faced with the outbreak of COVID-19 in the first
quarter 2020, we have promptly taken measures
to protect our employees, clients and partners. Our
portfolio companies have focused on adjusting
their operations to ensure uninterrupted service.
As of early April 2020, we invested approximately
RUB 1 bn to tackle the spread of the virus, ensure
safety of our employees and clients, and alleviate
social and economic consequences of lock-
down measures.

Our outlook for 2020 is now subjected to unprec-
edented challenges and uncertainty of business
environment that the COVID-19 epidemic presents.
However, the diligent implementation of our strat-
egy and successful optimisation of debt portfolio
have put us in a much stronger position to handle
the situation and sustain strong growth that ben-
efits our shareholders and the economic environ-
ment in general.

SISTEMA — ANNUAL REPORT 2019
12

SISTEMA PROFILE

SISTEMA.COM

STRATEGIC
OVERVIEW

Mission

Sistema’s mission is to build Russia's leading investment
company with a diversified expertise and a strong track
record, which will become an investment platform
for managing own and third-party capital, while
simultaneously providing access to unique investment
opportunities in the most attractive industries of the
Russian economy and high-potential technologies, and
ensuring long-term growth of shareholder value.

STRATEGIC GOALS OF SISTEMA

STRATEGIC FOCUS

• Maximising total shareholder return (TSR) and reducing the dis-

• Building businesses worth over USD 1 bn

count of market capitalisation to net asset value (NAV);

(Steppe AgroHolding, Segezha Group, Medsi, Ozon);

• Raising and managing outside capital to expand

• Embracing unique investment opportunities in traditional sectors in Russia;

available investment resources.

• Focusing on investments in the high-potential technological industry;

• Creating value at existing assets, including through adop-
tion of state-of-the-art technologies and digital solutions;

• Continuous enhancement of corporate governance.

PARTNERSHIP MANAGEMENT MODEL

ASSET MANAGEMENT PRINCIPLES

The Corporation has adopted a partnership management model that
allows the key executives (Managing Partners) of the Corporation to share
the risks and returns from investment activities with the shareholders.

Managing Partners are responsible for implementation of investment strat-
egies of portfolio companies. This means that they participate in making
strategic decisions and, depending on the maturity of a particular asset,
provide assistance with operational management. In most cases, Managing
Partners chair the boards of directors and are in charge of forming the
board and organising its work. They also bear responsibility for recruit-
ment and appointment of the management of respective companies.

The incentive plan of Managing Partners is aimed at:
•
Increasing Sistema's market capitalisation;
• Maximising the value of assets under manage-

ment and monetising this value;

• Raising outside capital under management.

Managing Partners co-invest in assets under their management.

Investing in the development of existing portfolio assets to grow their
value is one of the key stages of Sistema's value creation model.

Value creation in assets
1. A board of directors is formed at portfolio companies, which must
include independent directors with a recognised industry and/or
functional expertise. The board of directors provides supervision,
coordination and support to the management of portfolio compa-
nies in decision-making in key functional areas: strategy and major
transactions, budget planning, HR policy, and internal audit
2. Efficient managers are recruited for each company, with incen-

tive plans aimed at creation of shareholder value.

3. Strategic and financial planning cycles are introduced based
on the best international practices of corporate governance.

4. New technologies are identified that may help to enhance efficiency,
streamline processes, develop innovative products and services
for customers, and expand the portfolio companies' markets.

INVESTMENT PRINCIPLES

CURRENT INVESTMENTS

NEW INVESTMENTS

Focus: investments in own high-potential assets
that can be developed to reach the value of over
USD 1 bn.

Investment strategy: investments in portfolio
companies to increase their market share or enter
adjacent/synergetic business segments.

Geography: in accordance with the approved
strategy for portfolio companies.

Industries: companies' industries and com-
plementary/synergetic industries.

Discounted payback
period (DPBP): 3–10 years

Focus: unique investment opportunities in tradi-
tional industries in Russia.

Focus: investment in high-potential technological
industries and technologies of the future.

Mature undervalued assets

Investment in major IT companies

Investment strategy: acquisition of sub-
stantial or controlling stakes in large assets
in attractive Russian markets with
a significant discount to the market value
and a possibility of quickly reducing the
discount and selling within 2–3 years.

Growing assets

Investment strategy: acquisition and
consolidation of players, further value
creation by ousting competitors, consoli-
dating the industry, leveraging economies
of scale and market growth; exit in 4–5 years
through sale to a strategic investor/IPO.

Investment strategy: direct investments by the
Corporate Centre in large stakes in technol-
ogy companies that do not meet the require-
ments of investment theses of Sistema's
own funds, with an opportunity of creating
businesses valued at over USD 1 bn and mon-
etisation prospects in 5–7 years.

Venture projects

Investment strategy: investments by Sistema's
existing and new venture funds; monetisation
through funds' closing. Mandatory engagement
of external investors as financial partners (the
share of outside partners is at least 20%).

Geography: mostly Russia.

Geography: no restrictions.

Industries: sectors with large markets (at least
USD 1 bn), high growth rates, import substitu-
tion capacity and strong export prospects.

Industries: software development, e-commerce,
e-businesses, Internet of Things, virtual assis-
tants, machine learning and neural networks,
cybersecurity, medtech, AR/VR and others.

RESPONSIBLE INVESTING

For Sistema, responsible investing is an inte-
gral element of the investment strategy and
long-term success. It means that at all stages
of its investment activities and asset own-
ership the Corporation considers not only
financial and operating aspects but also sig-
nificant ESG factors to create long-term value
for shareholders and other stakeholders.

Sistema’s indirect ESG impact through its
portfolio assets is more significant than the
direct one. Therefore, as a responsible inves-
tor, the Corporation continually makes efforts
to promote the following principles in Sistema
Group companies through their governance
bodies under established corporate procedures:
• Compliance with high standards
of corporate governance and cor-
porate responsibility principles;
Improvement of their sustainability manage-
ment approaches and performance indicators;

•

• Minimisation of negative and maximisa-
tion of positive impact through innova-
tion, services, products and investments
in local communities.

To learn more about responsible investing and
sustainable development management, please
refer to the section “Sustainability management”.

SISTEMA — ANNUAL REPORT 2019
14

OPERATING RESULTS

SISTEMA.COM

01
01

02
02

03
03

04
04

05
05

06
06

PERFORMANCE
IN 2019

KEY EVENTS

FINANCIAL OVERVIEW

SHAREHOLDERS’ EQUITY

DIVIDEND STATEMENT

SISTEMA — ANNUAL REPORT 2019
16

OPERATING RESULTS

SISTEMA.COM

KEY EVENTS

IN 2019 AND AFTER REPORTING PERIOD

Corporation

CORPORATE
GOVERNANCE

In June 2019, Anna Belova was elected to the Board
as an independent director and was appointed
Deputy Chair of the Board. Anna has extensive
experience as a board member of major Russian
companies and has been a member of Sistema's
Board of Directors since 2017.

In April 2020, Sistema’s Board of Directors
appointed Vladimir Chirakhov, Chairman of the
Board of Directors of Detsky Mir, as President and
CEO of Sistema. Andrey Dubovskov, who previously
served as President and CEO of Sistema, was
appointed Deputy Chair of the Board of Directors
of Sistema.

MONETISATIONS

Sale of Leader Invest and consolidation
of real estate assets
In accordance with its strategy for real estate
assets, Sistema sold a 51% stake in JSC Leader
Invest to Etalon Group in February 2019 for
RUB 15.2 bn. In a separate transaction Sistema
acquired 25% of Etalon Group from its founder and
largest shareholder Vyacheslav Zarenkov and his
family for USD 226.6 M.

In August 2019, Sistema sold the remaining
49% stake in Leader Invest to Etalon Group for
RUB 14.6 bn. As a result of the transaction, Etalon
Group consolidated 100% ownership of Leader
Invest.

SPO of Detsky Mir
In November 2019, Sistema and the Russia-China
Investment Fund organised a successful SPO
of PJSC Detsky Mir, selling 175 M shares at a price
of RUB 91 per share. The total amount raised
was RUB 15.9 bn, out of which Sistema received
RUB 12.5 bn. Following the transaction, Sistema's
shareholding in Detsky Mir decreased from 52.1%
to 33.4%. The offering substantially increased the
company’s free float, enhancing liquidity and further
improving Detsky Mir’s investment case.

Sale of MTS Bank
In February 2019, Sistema and its subsidi-
ary Sistema Telecom Assets sold a 39.5% stake
in PJSC MTS Bank to Mobile Telesystems B.V.,
a 100% subsidiary of PJSC MTS, for RUB 11.4 bn.
Later on, in December 2019, Sistema sold the resid-
ual 4.5% stake in MTS Bank to Mobile Telesystems
B.V. for RUB 1.4 bn. As a result, Sistema fully
divested the asset, while MTS Group's shareholding
in the bank reached 99.7% 1.

INVESTMENTS
AND TRANSACTIONS

Securing a foothold in the fast-growing
e-commerce segment
Throughout 2019, Sistema consistently increased
its equity holding in Ozon Holdings Limited
by acquiring its shares from other shareholders,
including an 18.7% stake from MTS. In December
2019, a loan previously provided by the Corporation
was converted into Ozon's equity. As of 31 March
2020, Sistema Group's shareholding in the com-
pany was 42.999%. Building up the stake in Ozon
is driven by expectations of further growth in the
e-commerce market and Sistema’s strategy
of increasing its presence in the sector by investing
in a leading multi-category online retailer.

Strengthening of position
in the pharma market
In December 2018, Sistema, VTB Bank and the man-
agement of JSC OBL Pharm acquired a stake
in OBL Pharm from Alvansa Ltd 2. Sistema's invest-
ment in the deal was RUB 1.83 bn. In April 2019, the
Russian Direct Investment Fund (RDIF), the Russia-
China Investment Fund (RCIF) and several major
Middle Eastern funds joined the project, investing
over RUB 4 bn. Following the transaction, Sistema's
effective shareholding in OBL Pharm was 13%, that
of VTB — 46%, and of the investors' consortium —
28%. In the course of the reporting year, steps were
taken to integrate OBL Pharm and JSC Binnopharm,
which resulted in the establishment of the merged
pharma company, Alium, in October 2019. Sistema
subsequently participated in the placement of OBL
Pharm's additionally issued shares in October 2019.

After consolidation of the company’s ownership
structure, Sistema's effective shareholding in Alium
reached 24.9% as of 31 March 2020.3

In August 2019, Sistema, along with with a financial
partner, acting through a holding company Sinocom
Investments Limited, acquired 46.5% in OJSC
Sintez and 75.1% in CJSC Biocom from the invest-
ment company Marathon Group for RUB 11.8 bn.
Together with Alium, Sintez and Biocom have the
potential to become a Top-3 Russian pharmaceu-
tical company in the commercial segment. After
the end of the reporting period, in March 2020,
Sinocom made a mandatory tender offer to share-
holders of Sintez for the acquisition of their shares.

Agreement on construction
of an R&D laboratory
In January 2020, Sistema and its subsidiary
LLC Sistema BioTech signed an investment
agreement with the International Medical Cluster
Fund on establishment of a multi-specialty biotech-
nological R&D laboratory and a centre for non-clin-
ical testing of latest international products and
technologies at the International Medical Cluster
in Skolkovo. The agreement envisages construction
of a lab building with a total area of 15,000 sq m.
The lab will be made operational in mid-2022 and
will become one of Russia's largest private R&D
centres.

Focus on investments via funds
In 2019, Sistema continued investing in attractive
projects in the Russian and global markets through
its funds, Sistema_VC and SAF. After the end of the
reporting period, in February 2020, the Corporation
established a new fund, Sistema SmartTech,
which will invest in companies at early develop-
ment stages (from seed investment to round A).
The fund's life is 8 years, and its target size is
RUB 5 bn. Sistema's investment in the fund will not
exceed RUB 1.5 bn. Sistema SmartTech is expected
to support about 20 early-stage VC projects, with
investments in each individual project ranging from
RUB 50 M to RUB 300 M.

STRENGTHENING OF
FINANCIAL PROFILE

ENHANCING SUSTAINABLE
DEVELOPMENT

In 2019, Sistema initiated a revision of its
approaches in the area of sustainable development
and responsible investment. Based on the analysis
of the current situation, a roadmap was developed
to systematise activities of the Corporation and
bring them into compliance with best practices and
investor expectations.

Sistema began to actively communicate with inves-
tors and analytical agencies, such as Sustainalytics,
MSCI, FTSE, on ESG⁴ topics. These interactions and
corrections of analysts' reports helped to improve
the Corporation's positions in many aspects.

Based on the results of 2019, Sistema was once
again included in the leading groups of sustain-
able development indices of the Russian Union
of Industrialists and Entrepreneurs (RSPP):
“Responsibility and Transparency” and “Sustainable
Development Vector”. The Corporation's securities
(MOEX: AFKS) were included in the updated base
for calculation of the corresponding indices at the
Moscow Exchange.

Debt reduction
Throughout 2019, Sistema worked on gradually
reducing its debt. By 31 December 2019, the
Corporate Centre's financial liabilities had decreased
by 15.2% year-on-year to RUB 189.2 bn.

Active participation in capital markets
Sistema was active in capital markets on the back
of a strong demand for its debt securities in 2019.
The Corporation issued four series of exchange-
traded bonds, each for RUB 10 bn, and redeemed
a USD 500 M Eurobond issue. It also organised
a secondary offering of two issues purchased
earlier in a tender offer for RUB 2.8 bn. Sistema's
achievements earned it a Cbonds Awards prize
in the “Issuer of the Year” nomination.

Upgrade in credit ratings
In August 2019, the S&P rating agency
upgraded Sistema's credit rating from B+ to BB-,
with a stable outlook. In September 2019, RAEX
(Expert RA) raised Sistema's credit rating from
ruBBB+ to ruA, also with a stable outlook.

DIVIDENDS AND
SHAREHOLDERS’ RETURNS

Dividends
In June 2019, the Annual General Meeting of share-
holders of Sistema decided to pay dividends for
2018 in the amount of RUB 1,061,500,000.00,
or RUB 0.11 per ordinary share.

Share buyback
In September 2019, Sistema started a RUB 3 bn
share buyback programme, valid until 29 February
2020. In the course of 2019, Sistema Finance,
a subsidiary of the Corporation, acquired
120.6 M Sistema shares for a total of RUB 1.6 bn as
part of the programme. In February 2020, after the
end of the reporting year, the buyback programme
was extended till the end of 2020.

1
2
3

Including a 0.2% stake held by PJSC MGTS, a subsidiary of MTS.
The main shareholders of Alvansa Ltd are Gazprombank and UFG Private Equity.
26.3% as of 31 December 2019.

ESG stands for Environmental, Social and Governance.

SISTEMA — ANNUAL REPORT 2019
18

OPERATING RESULTS

SISTEMA.COM

KEY EVENTS IN 2019 AND AFTER
REPORTING PERIOD

Portfolio assets

MTS

Dividend payouts
In March 2019, the board of directors of PJSC MTS
approved a new dividend policy for 2019–2021 with
a target dividend of at least RUB 28 per ordinary
share (RUB 56 per ADR) for each calendar year.

In June 2019, MTS's annual general meeting
of shareholders approved dividends for 2018
to a total amount of RUB 39.93 bn, or RUB 19.98
per share (RUB 39.96 per ADR). In September 2019,
interim dividends for the 1H 2019 were approved
in the amount of RUB 8.68 per share (RUB 17.36
per ADR), or RUB 17.35 bn in total. Upon the
closing of the deal to sell the business in Ukraine,
special dividends were approved in the amount
of RUB 13.25 per share (RUB 26.50 per ADR),
or RUB 26.48 bn in total.

Sale of Ukraine business
In December 2019, MTS sold 100% of shares
in PrJSC VF Ukraine for USD 734 M to a company
controlled by Bakcell, a telecom arm of the inter-
national group NEQSOL Holding. The deal is in line
with the updated strategy of MTS, which focuses
on the Russian market and the development
of a range of advanced digital services on the basis
of the core telecom business.

Share buyback
In May 2019, MTS completed its two-year buyback
programme for a total amount of RUB 30 bn. Under
the programme, LLC Bastion, a wholly-owned sub-
sidiary of MTS, acquired 113.5 M ordinary shares
(including ADRs), or 5.9% of the authorised capital
of MTS, for RUB 29.8 bn.

In March 2020, the board of directors of MTS
approved a buyback programme in the amount
of up to RUB 15 bn.

New strategy CLV 2.0
In October 2019, the board of directors of MTS
approved MTS’s new strategy, Customer Lifetime
Value 2.0, for 2020–2022, which provides for the
accelerated creation of a large-scale ecosystem
of new digital products for MTS customers based
on accumulated expertise and achievements in the
telecom business. MTS intends to focus its efforts
on the improvement of people’s quality of life,
well-balanced business development, market cap
growth and higher return on invested capital.

DETSKY MIR

International expansion
In 2019, PJSC Detsky Mir successfully entered
the market of Belarus by opening 8 retail stores
in Minsk and other cities. The results of the chain
in Belarus exceeded expectations, and at the end
of 2019 the company reached the operating break-
even point. Detsky Mir also continued consolidating
the market in Kazakhstan, where it opened 8 new
supermarkets and increased the like-for-like sales
of the chain by 35.5% compared to 2018. In view
of such strong results the management decided
to expand its foothold in Central Asia and extend
the Detsky Mir chain to Kyrgyzstan in 2020.

Online development
In 2019, Detsky Mir's revenues from online orders
increased by 65.2% year-on-year, to RUB 14.5 bn,
with the online store www.detmir.ru receiving more
than 238 million visits. In total, the company
fulfilled more than 9.8 M online orders. Detsky Mir
launched a same-day and next-day delivery service
in 30 largest cities of Russia and started the pilot
phase of the new "microstore" format that com-
bines a retail outlet and a pick-up point. Moreover,
starting from 2019, the customers of Detsky
Mir may use a fully-functional mobile application
that makes it possible to purchase goods through
a convenient interface using a virtual loyalty card.

Dividend payouts
In May 2019, the annual general meeting of Detsky
Mir's shareholders approved the distribution
of RUB 3.3 bn (RUB 4.45 per share) in dividends
for 2018, and in December 2019, the distribution
of RUB 3.7 bn (RUB 5.06 per share) in interim divi-
dends for 9M 2019.

ETALON GROUP

Integration with Leader Invest
In February 2019, Etalon Group purchased
from Sistema a 51% stake in the property develop-
ment business JSC Leader Invest for RUB 15.2 bn,
and in August 2019, acquired the remaining 49% for
RUB 14.6 bn. In June 2019, Etalon Group increased
its share in the Zil-Yug project to 100%. These
acquisitions enabled Etalon Group to expand its
land holdings in Moscow by 1.9 M sq m.

Etalon Group completed the integration of Leader
Invest in the third quarter of 2019 by adopting a sin-
gle brand for all projects, cutting duplicate func-
tions and costs, and speeding up the construction
of acquired unfinished properties. The successful
integration of Leader Invest enabled Etalon Group
to boost sales in Moscow by 26%, commission
a record 353,000 sq m of real estate and raise the
price for residential properties in Moscow by 42%
by the end of 2019 by changing the project mix and
introducing dynamic pricing.

Dividend payouts
In August 2019, Etalon Group's annual general meet-
ing of shareholders approved the payment of USD
56.04 M (USD 0.19 per share/GDR) in 2018 dividends.

In January 2020, Etalon Group's Board
of Directors adopted a revised dividend policy and
approved minimal guaranteed dividend payments
in the amount of RUB 12 per share/GDR unless the
ratio of EBITDA to interest payments made by the
company in the reporting period falls below 1.5.

Listing on Moscow Exchange
In February 2002, the global depositary receipts
of Etalon Group, previously trading only on the LSE,
were also listed on Moscow Exchange and included
in the Level 1 Quotation list.

SEGEZHA GROUP

STEPPE AGROHOLDING

OZON

Expansion and reconstruction
of production facilities
In 2019, LLC Segezha Group started the construc-
tion of Russia's first CLT plant to produce a modern
engineering material for wooden house-building,
and launched a new line for the production of indus-
trial paper packaging in Salsk with a capacity
of 83 M sacks a year. In July 2019, the company
launched the reconstruction of its Segezha Pulp
and Paper Mill, which provides for an increase in the
capacity of the enterprise to 850,000 t of products
per year and product portfolio expansion.

Expansion of land assets
In 2019, the land bank of JSC Steppe AgroHolding
(Steppe) totaled 416,000 ha, up from 401,000
ha year-on-year, mostly due to the acquisition
of an 11,000 ha asset in the Stavropol region in the
first half of the year. After the reporting period,
in March 2020, the company further expanded its
land bank to 527,000 ha by acquiring the Rodnaya
Zemlya farm (30,300 ha) and leasing land (80,500
ha) from the Zerno Don group in the Rostov region.

MEDSI

In April 2020, Segezha Group received a govern-
ment permit for the construction of a new ply-
wood mill in Galich (Kostroma region) with a design
capacity of 125,000 cu m of plywood a year.
The 31.2 ha site will accommodate a production
area of some 48,000 sq m, warehouses for finished
products and an office building. Production is
scheduled to start in 2021.

Chain expansion
As a step to expand its regional chain, in December
2019, JSC Medsi Group acquired a second clinic
in St. Petersburg. After the reporting period, Medsi
acquired a chain of 4 clinics in Izhevsk with a total
floorspace of 4,300 sq m. The chain includes a clini-
cal, diagnostic and hospital centre, a pediatric clinic,
a clinic for adults and a women's health centre.

Entry to capital markets
In January 2020, Segezha Group issued RUB 10 bn
in three-year exchange-traded bonds. Although the
coupon rate was preliminarily set at 7.25–7.50%,
high demand for the bonds enabled a more moder-
ate final rate of 7.1%.

In September 2019, Medsi started developing its
own franchise network, expected to grow to 20
Medsi-branded partnership clinics across Russia
over the course of 5 years. Partnership clin-
ics may open both in cities where Medsi is already
represented and in new cities with populations
of >300,000 people.

Product range expansion
In 2019, Ozon focused on expanding its assortment
as one of the most important factors to e-com-
merce growth. By the end of 2019, the number
of stock keeping units increased threefold year-on-
year, to 5 M SKUs. The main growth driver was the
development of the marketplace: its share in Ozon’s
turnover increased from 5% in January 2019 to 30%
at the end of the year, and in March 2020, about
70% of Ozon’s assortment was formed by its mar-
ketplace partners. At the end of 2019, about 6,500
partners already had active sales on Ozon, with
about 15,000 in the process of registration.

Investments in the logistics infrastructure
In 2019, Ozon more than doubled the area of its
fulfilment centres (to almost 200,000 sq m) and
expanded the last-mile delivery infrastructure. At the
end of 2019, the company had the largest network
of parcel lockers in Russia with 6,900 automated
Ozon lockers. Ozon’s total network, including its
own and partner lockers and order pick-up points,
grew threefold during the year, to 16,700 locations.

SISTEMA — ANNUAL REPORT 2019
20

OPERATING RESULTS

SISTEMA.COM

FINANCIAL OVERVIEW

FOR 2019

Consolidated financial results

M RUB

Revenue

OIBDA

Adj. OIBDA 1

Operating income

Adj. operating income 1

Net profit/(loss)

Adj. net profit 1

2019

656,861

201,701

223,929

86,417

108,646

28,597

53,379

2018

625,032

221,078

226,027

108,578

113,527

(45,896)

1,114

CHANGE

5.1%

(8.8%)

(0.9%)

(20.4%)

(4.3%)

—

4,693.7%

REVENUE, bn RUB

ADJ. OIBDA, bn RUB

ADJ. NET PROFIT, bn RUB

2019

2018

 5.1%

657

625

2019

2018

 0.9%

224

226

2019

2018

1.1

 4,693.7%

53.4

Sistema’s consolidated revenue increased
by 5.1% year-on-year to RUB 656.9 bn in 2019,
driven by improved revenue at key assets: at MTS
due to growth in mobile services as well as other
complementary areas including financial services,
system integration services and software sales;
at Steppe due to increased exports of traditional
and niche crops, positive dynamics in the dairy
farming segment and sales growth in the sugar
and grocery product trading segment; and at Medsi
due to growth of services provided across key
segments.

Sistema Group’s adjusted OIBDA in 2019 slightly
decreased by 0.9% year-on-year to RUB 223.9 bn
amid a negative impact of weak global conditions
on the OIBDA dynamics of the Group’s key non-pub-
lic assets (Segezha Group and Steppe). The Group’s
adjusted OIBDA dynamics were also affected
by a net loss at Ozon of RUB 7.8 bn, accounted for
using the equity method (investment in associates).

Adjusted net profit amounted to RUB 53.4 bn
in 2019, compared to RUB 1.1 bn in 2018.
The dynamics of net profit year-on-year were
influenced by the sale of 100% of shares in Leader
Invest and its deconsolidation, the public offering
of 18.3% of Detsky Mir shares and reclassification
of the remaining stake in Detsky Mir (33.4%) as
investment in associates.

The Group’s selling, general and administrative
(SG&A) expenses for 2019 increased by 8.4%
to RUB 129.0 bn. The SG&A/revenue ratio at key
assets remained almost unchanged year-on-year.
In 2019, the Corporate Centre SG&A/Group reve-
nue ratio increased by 0.5 p.p to 2.0% as a result
of an increase in Corporate Centre expenses related
to the monetisation of assets.

The Group’s CAPEX slightly decreased year-on-year
by 5.2% to RUB 117.6 bn in 2019.

Debt portfolio overview

In 2019, Sistema allocated a significant portion of the funds received
from monetisation of assets, including the secondary public offering
of Detsky Mir shares and the sale of Leader Invest, to repay the debt
of the Corporate Centre, reducing financial obligations by 15.2% year-
on-year to RUB 189.2 bn as of 31 December 2019. The Corporation’s
efforts were also aimed at reducing its foreign currency (FX) exposure: as
a result of the retirement of Eurobonds in May 2019 and the repayment
of an FX loan in November 2019, the share of the Corporate Centre’s
FX-denominated liabilities decreased to 4% of the total debt portfolio.

In order to optimise and diversify its debt portfolio, Sistema was active
in the capital markets in 2019, having issued four series of bonds 2 for
a total of RUB 40 bn and also having improved the terms of a number
of loan agreements, including due to the general reduction in rates
in the Russian market. The Corporation managed to improve its debt
portfolio maturity to 3.5 years and achieve a record low coupon rate
of 6.85% during the secondary placement of series 001P-05 bonds
in February 2020.

THE CORPORATE CENTRE’S
FINANCIAL LIABILITIES, bn RUB 3

SCHEDULE FOR REPAYMENT OF FINANCIAL
OBLIGATIONS OF THE CORPORATE CENTRE, bn RUB 3

 15.2%

 LOCAL BONDS WITH PUT OPTIONS

 LIABILITIES TO ROSIMUSHCHESTVO

189.2

203.8

222.1

231.5

223.2

 DEBT

AFTER

9.8

9.4

17.8

69.6

2023

2022

2021

2020

38.3

11.0

10.0

15.8

7.2 0.3

79.4

27.2

49.3

10.0

23.3

31 DEC 2019

30 SEP 2019

30 JUN 2019

31 MAR 2019

31 DEC 2018

Credit ratings

As a result of the Corporation’s achievements in debt reduction
during 2019, a number of rating agencies revised Sistema’s credit
ratings. In August 2019, S&P Global Ratings upgraded Sistema’s
credit rating to BB- with a stable outlook. In September 2019, Expert
RA upgraded Sistema’s rating to ruA with a stable outlook. In May
2019, Fitch Ratings upgraded its credit rating outlook to stable.

LONG-TERM
CREDIT RATING

OUTLOOK

Standard & Poor’s

BB–

Fitch

Expert RA

BB–

ruA

Stable

DATE OF MOST
RECENT RATING
UPDATE

29/08/2019

15/05/2019

25/09/2019

1 Hereinafter, adjusted OIBDA, adjusted operating income and adjusted profit are used to evaluate financial performance of the Corporation and Sistema Group

companies and represent underlying financial measures adjusted for a number of one-off gains and losses that are not related to business operations.

Series 001P-09, 001P-10, 001P-11 and 001P-12.

2
3 Based on management accounts.

SISTEMA — ANNUAL REPORT 2019

OPERATING RESULTS

SISTEMA.COM

SHAREHOLDERS’
EQUITY

Structure of shareholders’ equity

Changes in Sistema’s GDR and ordinary share prices

As of 31 December 2019

103%
FREE FLOAT (GDR)

59.2%
VLADIMIR EVTUSHENKOV

9.3%
OTHER 1

21.2%
FREE FLOAT (SHARES)

9.65

SHARES OUTSTANDING

868.5

SHARE CAPITAL

RUB
M

In 2019, the price of Sistema’s shares and GDRs
grew by 129.0% and 110.1% respectively, signif-
icantly outperforming the market: the RTS and
the MOEX Russia Index grew by 44.9% and 28.6%
respectively. Market capitalisation at the end
of 2019 was USD 2.4 bn, compared with USD 1.1 bn
at the end of 2018. The share price was driven,
among other factors, by strong results of portfolio
companies, a decrease in debt burden, success-
ful monetisation of a number of the Corporation’s
assets and the launch of the share buyback pro-
gramme. Stock liquidity also improved year-on-year:
the average daily trading volume in monetary terms
increased from USD 3.9 M in 2018 to USD 4.4 M.
Since the beginning of 2020, shares have been
under market pressure amid the COVID-19 pan-
demic and ruble depreciation.

In September 2019, the Corporation launched
the share buyback programme in the amount
of RUB 3 bn. As of 31 December 2019, the
programme was implemented in the amount
of RUB 1.6 bn. In February 2020, it was decided
to extend the programme until the end of 2020.

On the first trading day of 2019, the closing price
of one GDR on the London Stock Exchange was
USD 2.32. Strong performance was observed
during the year, with the price of one GDR peaking
at USD 5.01 on 26 November. On the last trading
day of the year, the closing price was USD 4.87.
The average daily trading volume in 2019 was 3.0 M
GDRs.

On the first trading day of 2019, the closing price
of one ordinary share on the Moscow Exchange
Exchange was RUB 8.04. Strong performance was
observed during the year, with the price of one ordi-
nary share peaking at RUB 16.5 on 20 November.
On the last trading day of the year, the closing price
was RUB 15.24. The average daily trading volume
in 2019 was 20.9 M ordinary shares.

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 the Moscow Exchange in the first listing
level under the ticker AFKS. The GDRs traded on the
London Stock Exchange represent about 10.3%
of Sistema’s equity, while the shares traded on the
Moscow Exchange represent 21.2%. The free float is
about 31.5% of equity.

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

Sistema is also the largest shareholder in three pub-
lic companies: MTS, Detsky Mir and Etalon Group.

Sistema’s principal shareholder is its Chairman
of the Board of Directors Vladimir Evtushenkov,
who owns 59.2% of the Corporation’s equity.

Sistema’s GDR and ordinary share price dynamics

The indicator is calculated as share price/index appreciation in relation to the value as of 31 December 2018

Shares of PJSC 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.

Shares of PJSC Detsky Mir, a Sistema subsidiary,
began trading on the Moscow Exchange in 2017
under the ticker DSKY in the Level 1 Quotation list.

In February 2019, the Corporation acquired a 25%
stake in Etalon Group plc. Etalon’s GDRs have
been listed on the London Stock Exchange under
the ticker ETLN since 2011 and on the Moscow
Exchange in the Level 1 Quotation listsince
February 2020.

120%

100%

80%

60%

40%

20%

— SISTEMA GDRS
— SISTEMA ORDINARY SHARES
— RTS INDEX
— MOEX INDEX

129.0%

110.1%

44.9%

28.6%

JAN 2019

MAR 2019

MAY 2019

JUL 2019

OCT 2019

DEC 2019

SOURCE: BLOOMBERG

1 Ordinary shares and GDRs owned by Sistema Group companies, members of the Board of Directors and the management of Sistema.

The volume-weighted average price of one ordinary share of Sistema on Moscow Exchange was RUB 8.097
for the last 60 trading days of 2018 and RUB 14.717 for the last 60 trading days of 2019.

SISTEMA — ANNUAL REPORT 2019

OPERATING RESULTS

SISTEMA.COM

REPORT ON DIVIDENDS
DECLARED (ACCRUED)
ON SISTEMA
SHARES IN 2019

Dividend policy

Dividends serve as the main tool for enhancing
shareholder value. In determining the amount of div-
idends the Board of Directors of the Corporation
takes into account a number of factors, including
the following:

•

cash flows generated by key public assets
of Sistema that are mostly used to support the
Corporate Centre and make future investments;
the growth and development prospects
of non-public assets whose cash flows
and monetisation proceeds may be allo-
cated for dividends, and other tools for
generating for shareholder returns;

• debt and other liabilities of the Corporate Centre.

When making decisions with regard to any pay-
ments, the Board of Directors also considers the
situation in financial markets, current macroeco-
nomic environment in Russia and other countries
where Sistema operates.

DIVIDENDS DISTRIBUTED FOR
THE FULL YEAR 2018

On 29 June 2019, the Annual General Meeting
of Sistema’s shareholders (Minutes No. 1–19)
approved the distribution of RUB 1,061,500,000.00,
or RUB 0.11 per ordinary share of Sistema, as
dividends.

UNPAID DIVIDENDS

As of 31 December 2019, the total amount
of unpaid dividends equalled RUB 4,213,795,709.62,
including:

• RUB 4,213,003,658.88 not paid in accord-

ance with a shareholder’s request in writing;

As of 31 December 2019, the total amount of divi-
dends distributed equalled RUB 1,061,387,737.52.
Withholding tax on dividends distributed to foreign
shareholders totalled RUB 440,084.00.

• RUB 792,050.74 not paid due to absence

of information about dividend recipients
necessary to transfer the due amounts.

1.06

BN
RUB

TOTAL DIVIDENDS PAID
for 2018

RUB

0.11

DIVIDEND PER SHARE
for 2018

TOTAL AMOUNT OF DECLARED
DIVIDENDS, RUB

DIVIDEND PER
SHARE, RUB

DECLARATION
DATE

PAYMENT
DATE

2014
(FOR THE FULL YEAR 2013)

2015
(FOR THE FULL YEAR 2014)

2016
(FOR THE FULL YEAR 2015)

2016
(FOR H1 2016)

2017
(FOR THE FULL YEAR 2016)

2017
2017 (FOR 9M 2017)

2018
(FOR THE FULL YEAR 2017)

2019
(FOR THE FULL YEAR 2018)

19,879,000,000

4,535,500,000

6,465,500,000

3,667,000,000

7,816,500,000

6,562,000,000

1,061,500,000

2.06

0.47

0.67

0.38

0.81

0.68

0.11

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 1—

19/01/2018 2

30/06/2018

31/07/2018

29/06/2019

31/07/2019

1 Date of payment of dividends to nominee shareholders and custodians who are professional participants of the securities market and who are included in the shareholders register.
2 Date of payment of dividends to other persons included in the shareholders register.

SISTEMA — ANNUAL REPORT 2019
26

KEY ASSETS' RESULTS

SISTEMA.COM

KEY ASSETS'
PERFORMANCE
IN 2019

MTS

DETSKY MIR

ETALON GROUP

SEGEZHA GROUP

MEDSI

STEPPE AGROHOLDING

OZON

ALIUM

SINTEZ

BUSINESS NEDVIZHIMOST

COSMOS HOTEL GROUP

BPGC

RTI

OTHER ASSETS

106

FUNDS

SISTEMA — ANNUAL REPORT 2019
28

KEY ASSETS' RESULTS

SISTEMA.COM

MTS

PJSC MOBILE TELESYSTEMS

50.01%

SISTEMA’S EFFECTIVE STAKE

BUSINESS MODEL

In 2019, as part of its updated strategy, MTS introduced
a new matrix-based organisational structure built around
four key business segments: telecommunications,
fintech, media, cloud and digital solutions for businesses.

New segments were established: artificial intelligence and big data. The company also launched
MTS Media, a new unit combining all TV segments of the Group. The reorganisation is aimed
at creating separate units based on innovative teams at the level of top management and creat-
ing functional business segments needed to launch an ecosystem of digital products.

Alexey Kornya
PRESIDENT AND CHAIRMAN

OF THE MANAGEMENT BOARD

Felix Evtushenkov
CHAIRMAN OF THE BOARD OF DIRECTORS

PJSC Mobile TeleSystems (“MTS”) is a leading Russian
company offering mobile and fixed-line services,
Internet access, cable and satellite TV, digital services
and mobile apps, financial and e commerce services,
and convergent IT solutions in the areas of system
integration, Internet of things, artificial intelligence,
data processing and cloud computing.

MOBILE SUBSCRIBERS
in Russia, Belarus and Armenia

240

THSD
SQ M

OF FIBRE-OPTIC LINES

DATA CENTRES

› 20.3

USERS OF MY MTS APP

200

200 CITIES IN RUSSIA
where fixed-line, broadband and
digital TV services are provided

UP TO 20%

OF CAPITAL EXPENDITURES
TO BE ALLOCATED ANNUALLY
TO NEW SEGMENTS

121.5

BN
RUB

MTS BRAND VALUE 1,
making it the most valuable brand
among Russian telecom operators

83.7

BN
RUB

DIVIDENDS PAID OVER 2019

TOP-15

RUSSIAN COMPANIES IN
TERMS OF SUSTAINABLE
DEVELOPMENT 2

BUSINESS VERTICALS

TELECOM

FINTECH

MEDIA

CLOUD &
DIGITAL B2B

NEW DIGITAL
SERVICES

PARTNERSHIPS

TOOLS

CUSTOMER EXPERIENCE

SINGLE CUSTOMER ID

LOYALTY PROGRAMMES

BIG DATA

1 / 3
—

S
T
M

mts.ru

1
2

Source: Brand Finance.
Source: Expert media group.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

INDUSTRY
OVERVIEW
FOR 2019 1

1.73

TN
RUB

SIZE OF RUSSIAN
TELECOM MARKET

in 2019

2 / 3
—

S
T
M

The size of the Russian telecom market reached RUB 1.73 tn
in 2019 having grown by 2.1% year-on-year, which is lower
compared to 2017 and 2018 (2.7% and 3.3% respectively).

This result was mainly due to a slowdown in the growth of mobile communications
and pay TV segments, as well as a reduction in the markets of fixed telephony and
inter-operator services. Subscribers continue to abandon landline phones, while com-
panies optimise the costs of telephone communications. The inter-operator market is
shrinking due to market consolidation and falling revenues in a number of international
segments. The slowdown in telecom market growth was also due to regulatory changes
including abolition of intra-network roaming charges from September 2018 as well as VAT
increase from 18% to 20% in January 2019.

Russian telecom market dynamics in 2014–2019P2

 REVENUES, tn RUB
 GROWTH RATE

2.7%

3.3%

1.7%

1.57

0.8%

0.6%

1.58

1.59

1.69

1.64

2.1%

1.73

2014

2015

2016

2017

2018

2019F

SOURCE: TMT Consulting.

The mobile segment grew by 3.3% in 2019. In the mobile market, the efforts of operators to increase reve-
nue per subscriber were partially offset by competition between operators and by introduction of unlimited
plans. Growth in the corporate segment and the M2M market slowed down significantly. Despite these
negative factors, most federal operators managed to maintain positive revenue trends in 2019 by continuing
their “more for more” policy, i.e. offering more voice and data for more money.

Also in November 2019, a package of amendments to the Federal Law “On Communications” and the
Federal Law “On Information, Information Technologies and Protection of Information” (the so-called
“sovereign Internet law”) came into force, which stipulates, among other things, the obligation of operators
to install equipment for analysing and filtering traffic at Internet exchange points.

The mobile subscriber base in Russia grew by 1.7%, to 260 M, mainly due to the efforts of operators to build
up their customer base and an increase in the number of mobile M2M connections.

Russia’s communications market may begin active introduction of 5G technology in 2020 and the share
of 5G communications may reach 20% of the total number of connections by 2025 4.

Traditional telecommunication services remained the main source of income for Russian telecom compa-
nies in 2019. It is expected that in 2020 telecom operators will mainly focus on increasing revenues from
core services, and will continue to develop their offering in IT, media and other related markets.

All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.

1
2 Hereinafter 2019P stands for 2019 projection.
3 Machine-to-machine.
4

Sources: GSMA, the Analytical Centre under the Government of the Russian Federation and the Russian LTE Union.

SISTEMA.COM

In 2019, MTS remained the leader in the Russian telecommunications market due to its stable operating
activities, promotion of strategic business segments based on mobile data transmission and strength-
ened position as a leading provider of digital services. MTS Group’s revenue grew 5.5% year-on-year and
amounted to RUB 476.1 bn in 2019.

In 2019, MTS updated its brand positioning by introducing a new slogan and a new visual style. This
change in branding reflected the company’s new strategy aimed at the transformation and development
of new digital products.

In December 2019, MTS sold 100% of shares in PrJSC VF Ukraine for USD 734 M to a company con-
trolled by Bakcell. The deal is in line with the updated strategy of MTS, which provides for a focus on the
Russian market and development of a range of advanced digital services on the basis of the core
telecom business.

In December 2019, MTS acquired a 4.5% stake in PJSC MTS Bank (“MTS Bank”) for RUB 1.4 bn
from Sistema. As a result of this transaction, MTS Group’s stake in MTS Bank increased to 99.7% 5,
while Sistema withdrew from MTS Bank completely.

In January 2019, MTS acquired a 100% stake in LLC IT Grad 1 Cloud for RUB 2.5 bn 6 , which holds the
assets of IT Grad Group, one of the largest cloud providers of IaaS 7 in the Russian market. The trans-
action is aimed at expanding MTS’s competences in the cloud business and increasing the efficiency
of #CloudMTS.

MTS continued to develop its innovation centre in 2019. The company began the fourth enrolment round
of the MTS StartUp Hub acceleration programme. At the end of May 2019, MTS announced the launch
of a programme for creating a partnership network in the main global centres of innovation (Israel,
Germany and Singapore) to attract and transfer startups. In July 2019, an incubation programme for 5G
startups was launched in Moscow.

In June 2019, as part of the St. Petersburg International Economic Forum (“Forum”), MTS and Huawei
signed an agreement on the development of 5G technologies, providing for introduction of 5G and IoT
on the existing MTS infrastructure, development of the LTE network to 5G-ready level, and launch of test
zones and pilot 5G networks for various use cases. As part of the Forum, MTS also signed a number
of agreements with the governments of Moscow, Republic of Tatarstan, Kaluga Region, Ryazan Region
and Samara Region for the development of the digital economy for a total amount of RUB 24 bn.
The agreement with the Moscow government provides for the development of innovative infrastructure
based on 5G networks.

In 2019, MTS continued to develop the segment of AI, launching sales of chatbot systems for customer
service. The company also launched its Virtual Lawyer product called, a system for automated work
with documents and contract lifecycle management. In November 2019, MTS, Sberbank, Gazprom Neft,
Yandex, Mail.ru Group and the Russian Direct Investment Fund announced the signing of a cooperation
agreement for the creation of the AI-Russia Alliance during the Artificial Intelligence Journey (AIJ) forum.

In the second half of 2019, MTS joined GSMA’s global initiative to develop an industrial road map setting
out actions aimed at minimising the impact of the telecom industry on climate in accordance with the
Paris Agreement on climate change.

MTS continues to successfully improve the My MTS app and grow its user base. My MTS had over
20.3 M monthly users at the end of 2019. The app is used as a platform for developing the ecosystem
and promoting other digital services offered by the company.

In May 2019, MTS completed its two-year buyback programme for RUB 30 bn. Under the programme,
LLC Bastion, a wholly-owned subsidiary of MTS, acquired 113.5 M ordinary shares (including ADRs),
or 5.9% of the authorised capital of MTS, for RUB 29.8 bn.

In March 2020, the board of directors of MTS approved a buyback programme in the amount of up
to RUB 15 bn.

BUSINESS
DEVELOPMENT
IN 2019

5
6
7

Including the 0.2% stake of PJSC MGTS.
Taking into account net debt.
Infrastructure as a service.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

NEW
STRATEGY
CLV 2.0

In October 2019, the board of directors of MTS approved MTS Group’s new strategy — Customer Lifetime
Value 2.0 (“CLV 2.0”) — for 2020–2022, which provides for the accelerated creation of a large-scale ecosys-
tem of new digital products for MTS customers based on accumulated expertise and achievements in the
telecom business. MTS intends to focus its efforts on improvement of people’s lives, well-balanced busi-
ness development, market cap growth and higher return on invested capital.

CLV 2.0 elaborates on the company’s current strategic goals and is aimed at building a digital ecosystem
with a seamless user experience on top of a strong telecommunications core. MTS plans to allocate up
to 20% of its core Capex for new segments and take on a customer-centric approach designed to increase
overall time customers spend within the MTS ecosystem. The new strategy is focused on maximising long-
term customer value by better meeting the customer’s needs, while enhancing loyalty and offering attractive
bundled offerings. MTS intends to extend convergence beyond connectivity by providing fit-for-purpose
offerings for the modern digital lifestyle to improve people’s lives, support the development of Russia’s
digital economy and continue to pay significant dividends to investors.

FINANCIAL
PERFORMANCE
IN 2019

INDICATOR, M RUB 1

Revenue

OIBDA

Operating income

Adj. net profit attributable to Sistema

2019

476,106

211,513

115,235

25,403

2018

CHANGE

451,466

202,564

107,178

32,951

5.5%

4.4%

7.5%

(22.9%)

In 2019, revenue of MTS increased 5.5% year-on-year by RUB 476.1 bn due to higher revenue from mobile
services, as well as complementary segments, including financial services, system integration services and
software sales. OIBDA grew by 4.4% to RUB 211.5 bn, as the growth in revenue from the core business off-
set the negative effect of the cancellation of internal roaming charges. Adjusted net profit decreased 22.9%
year-on-year to RUB 25.4 bn due to an increase in debt service costs, derivatives transactions and non-cash
losses from the sale of assets, including the sale of the Ukraine business in December 2019.

In March 2019, the board of directors of MTS approved a new dividend policy for 2019–2021. The target
dividend yield is at least RUB 28 per ordinary share (RUB 56 per ADR) for each calendar year.

In June 2019, the annual general meeting of MTS shareholders approved dividends for 2018 in the amount
of RUB 39.93 bn or RUB 19.98 per share. In September 2019, interim dividends for the first half of 2019
were approved in the amount of RUB 8.68 per share (RUB 17.36 per ADR), or RUB 17.3 bn in total. After
closing the deal to sell the business in Ukraine, it was decided to pay special dividends in the amount
of RUB 13.25 per share (RUB 26.50 per ADR), or RUB 26.48 bn in total.

SINGLE
UMBRELLA
BRAND

A SET OF CONNECTED

PRODUCTS

MUTUAL REINFORCEMENT AND

SEAMLESS EXPERIENCE

OFFERS FROM PARTNERS

CONVENIENT FOR CUSTOMERS

AND BENEFICIAL FOR

PARTNERS

CLV 2.0 STRATEGY

Customer

Lifetime

Value

• Best customer experience due to a deep
personalised approach based on AI, big
data and a single client ID.

• Seamless transition between digi-
tal storefronts and products.

• Focus on long-term customer relationship&.

• Deliberate receipt of benefits by the cus-
tomer from being part of the ecosystem.

• Focus on maintaining brand loyalty

and emotional attachment.

• User-friendly tech platform for efficient

interaction with partners offering additional
services and for best customer experience.

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1 MTS’s results reflect reclassification of the Ukraine business as part of discontinued operations since 4Q 2019.

The results for 2018 have been revised to reflect the results of this reclassification.

SISTEMA — ANNUAL REPORT 2019

BUSINESS
MODEL

SISTEMA.COM

A standard supermarket of the Detsky Mir retail chain includes about 20 to 30 thsd items
of children's goods in the medium price segment: toys, clothing and footwear, infant products,
stationery, arts and crafts, sports goods, car seats and furniture. The company's target audience
is families with medium income, which represent the majority of customers in shopping malls.

Detsky Mir's retail concept combines five key elements:

A multi-category children's
goods store with the
broadest and most
unique product mix

Affordable prices with
a focus on the medium
and below medium-
price segments

Convenient stores in
modern shopping malls
and densely populated
residential areas

Building long-term
customer relationships
through the loyalty
programme

Smart visual
merchandising designed
to appeal specifically to
children and parents

KEY ASSETS' RESULTS

DETSKY
MIR

33.4%

SISTEMA'S EFFECTIVE STAKE

Maria Davydova 1
CEO

Vladimir Chirakhov 2
CHAIRMAN OF THE BOARD OF DIRECTORS

Detsky Mir Group (Detsky Mir)3 is a multi-format retail
operator and a leader in the children’s goods segment in
Russia and Kazakhstan. It comprises the retail chain Detsky
Mir (in Russia, Kazakhstan and Belarus), the Detsky Mir online
store (Detmir.ru), the Detmir chain (in Belarus), ELC (in Russia)
and ABC stores, and the Zoozavr chain of pet stores.

842

STORES

766

STORES

OF DETSKY MIR GROUP
at the end of 2019

OF DETSKY MIR CHAIN
at the end of 2019

BRANDED ELC AND ABC
at the end of 2019

ANNIVERSARY

OF DETSKY MIR BRAND
in 2019

26%

19%

DETSKY MIR'S SHARE IN
RUSSIA'S CHILDREN'S
GOODS MARKET

DETSKY MIR'S SHARE IN
RUSSIA'S ONLINE CHILDREN'S
GOODS MARKET

843

THSD
SQ M

TOTAL SELLING SPACE
at the end of 2019

No.1

BY REVENUE IN THE
CHILDREN'S GOODS MARKETS
OF RUSSIA AND KAZAKHSTAN
in 2019

IN ONLINE SALES OF
CHILDREN'S GOODS
according to Data Insight

detmir.ru

As of 31 December 2019: Vladimir Chirakhov.

1
2 As of 31 December 2019: Alexey Katkov.
3 As of 31 December 2019, the Group included PJSC Detsky Mir, LLC KUB-Market (ELC and ABC), LLP Detsky Mir Kazakhstan,

JSC Detsky Mir Orel, LLC DM North-West, LLC Detmir BEL and LLC DM Capital.

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SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

INDUSTRY
OVERVIEW
FOR 2019 1

In 2019, the volume of children's goods market in Russia
increased by 0.6% year-on-year and reached RUB 526.5 bn 2.
The market’s CAGR over the last four years was 0.5%. Analysts
project that the market may grow by an average of about
1% per year and may be worth RUB 533.1 bn by 2021.

Annual volume of children’s goods market in Russia by category, bn RUB

Children’s goods market structure by sales channel

 TOYS

 STATIONARY

 BABY PRODUCTS

 CLOTHING

 FOOTWEAR

2021П

2020П

2019

2018

2017

2016

151

156

159

157

104

153

166

161

157

154

151

147

533.1

529.7

526.5

523.1

521.5

521.1

 FOOD RETAIL CHAIN

 SPECIALISED RETAILERS

 E-COMMERCE

 OTHER

2019

2018

2017

2016

2015

2014

38.6%

38.9%

39.7%

39.1%

40.0%

36.3%

SOURCES: RUSSIAN TARGET GROUP INDEX, IPSOS COMCON.

IPSOS COMCON estimates the volume of the Russian children's goods market by the volume of retail sales (including a 10% VAT) in cities and towns with population over 100,000 people.

SOURCE: IPSOS COMCON.

38.8%

39.1%

39.8%

38.6

40.8%

15.6%

7.0%

12.6%

9.4%

10.1%

10.4%

8.9%

13.5%

8.1%

11.1%

41.3%

7.6%

14.8%

of online stores in 2019, the shares of specialised
and food retail chains decreased by 0.3 p.p. year-
on-year to 38.8% and 38.6% respectively.

Demand for online sales of children's goods is
growing backed by a broad product range, afforda-
ble prices and convenience of product search and
delivery. In 2019, the share of e-commerce in the
children's goods market increased by 3.0 p.p.
year-on-year to 15.6%. The average annual growth
of online sales in the children's goods market
in 2015–2019 was 19.4%.

Detsky Mir's share
of Russian children's goods market

Detsky Mir’s share of the children’s goods market
among specialised retailers increased from 14%
in 2011 to 67% in 2019, driven by the opening
of a large number of stores during the period and
the attraction of consumer traffic from competing
smaller retail chains, as well as dynamic growth
of online sales. In 2012–2019 Detsky Mir opened
544 3 new stores, while the CAGR of e-commerce
channels was 104%.

Clothing and footwear traditionally account for
a substantial part of the children’s goods market.
In 2019, the share of this category increased
by 0.4 p.p. year-on-year to 39.5%. Toys accounted
for 17.9% of the market, similarly to 2018. Sales
of baby products have dropped amid falling birth
rates in Russia, and the market share of this
product category decreased by 0.2 p.p. year-on-
year to 30.1%. Toys, clothing and footwear were
expected to remain the fastest growing categories
until 2021, while the share of baby products was
expected to continue its decline due to the projected
negative demographic trends in Russia according
to Rosstat outlook.

At the same time, demand for baby products is
expected to recover in the next 3–4 years on the
back of the measures by the Russian govern-
ment in 2020 to address the demographic crisis.
These measures include extension and expansion
of the maternity capital programme, subsidis-
ing mortgages for young families and additional
payments for each child aged 3–7 in families whose
average income per person is below the minimal
living wage.

Although in the second half of 2019 the macroe-
conomic situation in Russia showed some signs
of recovery, the growth of real disposable incomes
remained weak, putting negative pressure on the
purchasing power of households: Russian consum-
ers remained price-sensitive with demand shifting
from the premium and medium-price segments
to the mass market and economy segment.
Therefore, domestic products and private labels
were gaining popularity due lower pricing than that
of similar imported or branded goods.

In 2019, the share of unorganised retail formats
in the children's goods market in Russia contin-
ued to shrink amid a growing demand for a wider
product mix, development of large retail chains and
rapid growth of e-commerce. In 2019, the share
of unorganised retail fell by 2.4 p.p. year-on-year
to 7%, mainly due to growth of online sales.

In 2019, specialised retailers remained the main
sales channel for children’s goods, along with food
retail, as a result of active development of the
Detsky Mir retail chain and other smaller specialised
chains. However, due to the fast growth in the share

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1
2

3 Net increase without taking into account closed stores.




SHARE AMONG SPECIALISED CHILDREN'S RETAILERS

SHARE OF CHILDREN'S MARKET

44%

17%

32%

13%

24%

10%

14%

16%

18%

65%

59%

50%

23%

20%

26%

2011

2012

2013

2014

2015

2016

2017

2018

2019

SOURCE: IPSOS COMCON.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

BUSINESS
DEVELOPMENT
IN 2019

In 2019, Detsky Mir maintained rapid growth despite the
unfavourable macroeconomic environment and increased its
revenue by 16.1% to RUB 128.8 bn. The company fulfilled its plan
for expansion of Detsky Mir retail chain, having opened 101 new
stores in Russia, Kazakhstan and Belarus in the reporting year.

› 238

ONLINE STORE VISITS

+16% 2018/19
M

HOLDERS OF DETSKY MIR
CHAIN LOYALTY CARDS

the like-for-like sales of the chain by 35.5% as
compared to 2018. In view of such strong results
the management decided to expand its foothold
in Central Asia by expanding to Kyrgyzstan in 2020.

As part of its effort to form a unique customer
proposition and boost customer loyalty, Detsky Mir
continued to develop its private label goods. As
of the end of 2019 Detsky Mir chain offered 8,000
items under its private label with their share in the
chain's turnover in 2019 having increased by 3.3 p.p.
up to 33.1%. The company sees significant potential
for growth of private label sales in the toys and
diapers categories.

The total like-for-like sales of Detsky Mir stores
in Russia and Kazakhstan increased by 7.2%, a 50%
increase from 2018 (4.7%). Such strong results
were achieved due to an effective pricing policy
and continuous improvement of product range.
The main driver of Detsky Mir's robust performance
is Detsky Mir's ability to attract new customers.
As a result, like-for-like growth in the number
of transactions was 8.5%. In 2019, the total footfall
in Detsky Mir's retail chain exceeded 244 M people.

The number of loyalty card holders increased
by 16% year-on-year reaching 24 M, with the
number of active card holders standing at 10.6 M.
The sales to loyalty card holders accounted for
77.7% of total sales.

One of the key strategic initiatives of the company is
expansion to international markets. In 2019, Detsky
Mir successfully entered the market of Belarus
by opening 8 retail stores in the largest shop-
ping malls in Minsk and other cities. The results
of the chain in Belarus were higher than the KPIs,
and at the end of 2019 the company achieved
break-even. Detsky Mir also continued to consol-
idate the market in the Republic of Kazakhstan,
where it opened 8 new supermarkets and increased

E-commerce sales channel growth

REVENUE FROM E-COMMERCE AS A SHARE OF TOTAL REVENUE


 REVENUE FROM E-COMMERCE, bn RUB

11.7%

8.2%

14.5

4.9%

8.8

4.6

3.6%

2.8

2016

2017

2018

2019

In November 2019, Detsky Mir's sharehold-
ers Sistema and the Russia-China Investment Fund
organised a successful SPO of Detsky Mir, selling
175 M shares, equivalent to 23.7% of the company's
authorised capital. Following the SPO, Detsky Mir's
shares in free float accounted for 57.6%, Sistema’s
stake was 33.4%, and RCIF held 9.0%.

On 3 April 2020, the Board of Directors of Detsky
Mir appointed Maria Davydova CEO of the com-
pany. Maria Davydova previously held the posi-
tion of Deputy CEO of Commercial activities.
Vladimir Chirakhov, the former CEO of Detsky Mir,
was elected Chairman of the company's Board
of Directors.

› 9.8

ONLINE ORDERS

109%

CAGR IN 2011–2019

15.7%

ONLINE BUSINESS AS A SHARE
OF DETSKY MIR’S TOTAL
REVENUE IN 4Q 2019

0.2%

0.04

2011

0.5%

0.7%

0.1

2012

0.2

2013

1.0%

0.4

2014

2.1%

1.3

2015

The company supports the growing popularity
of online sales and is working to develop this seg-
ment. In the reporting year Detsky Mir successfully
launched same-day and next-day delivery service
in 30 largest cities of Russia. Starting in 2019
Detsky Mir customers are able to use a fully-func-
tional mobile app to purchase goods through a con-
venient interface featuring a virtual loyalty card.

As part of its omnichannel business model, the
company has launched a pilot phase of the new
"microstore" format that combines a retail outlet
and a pick-up point. These stores will have a total
selling space of up to 170 sq m and will be located
in small towns. In 2019, the company opened four
pilot microstores. The new format is expected
to improve the quality of delivery of online orders
and increase the company's penetration in the
children's goods market in Russia.

In 2019, Detsky Mir launched a pilot version
of the marketplace for the clothing and footwear
category. Given that the turnover of the new elec-
tronic platform is the same as that of the online
store, the company expects to expand the range
of clothing and footwear available on the market-
place from 20,000 items to 250,000 items.

In 2019, Detsky Mir opened six new pet stores
under the Zoozavr brand. By the end of 2019, the
chain comprised 10 pet stores.

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SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

BUSINESS
DEVELOPMENT
STRATEGY

The key strategic goal of Detsky Mir is the consolidation the
children's goods market in Russia, Kazakhstan and Belarus.
The company plans to achieve this by expanding the retail
chain, developing omni-channel sales and offering affordable
and diverse products, including private labels.

FINANCIAL
PERFORMANCE
IN 2019

STRATEGIC FOCUS

REGIONAL AND
INTERNATIONAL
EXPANSION

OMNI-CHANNEL
DEVELOPMENT

PRIVATE LABEL
DEVELOPMENT

IMPROVED OPERATING
PERFORMANCE

INFRASTRUCTURE
DEVELOPMENT

Detsky Mir is planning to open at least 80 1 new
stores in 2020 and at least 300 stores
in 2020–2023. The company also intends
to continue cutting its operating costs, with
its EBITDA margin to reach at least 10%.

•

Increase the share of sales of private
labels and direct imports to 40% for
toys and 15% for diapers.

• Open a new distribution centre in the

Urals macro-region by 2021.

In October 2019, the Board of Directors of Detsky
Mir approved a new three-year long-term incentive
plan for the company’s key employees. The plan
came in effect in February 2020 and aims
to ensure further growth of Detsky Mir's market
capitalisation.

Key mid-term goals and initiatives:

• Remain a number one player in the

Kazakh market and increase the number
of Detskiy Mir stores by 50% to over 60.

• Become a number one player in the mar-
ket of Belarus and increase the number
of Detskiy Mir stores to 45.

• Develop the Hub Store project enabling
customers to pick up online orders from
any convenient store in their region.

• Open the first warehouse to cater for

courier delivery and in-store pick-up
services outside Moscow Region.

• Launch a fully-functional marketplace for

the clothing and footwear category in order
to expand the product mix from 20,000 SKUs
to 250,000 SKUs in the medium term.

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128.8

BN
RUB

DETSKY MIR’S CONSOLIDATED
REVENUE IN 2019

INDICATOR, M RUB 2

Revenue

Adj. EBITDA

Operating income

Adj. net profit

In 2019 Detsky Mir’s consolidated revenue grew
by 16.1% year-on-year and reached RUB 128.8 bn.
Growth was driven by new store openings (+101
stores in 2019), an increase in like-for-like (LFL)
sales by 7.2% and online sales by 65.2%, as well as
the launch of a courier delivery service and a ful-
ly-functional mobile application.

The company managed to maintain high operational
efficiency by improving commercial lease terms
and cutting marketing expenses: adjusted EBITDA
increased by 12.7% year-on-year to RUB 23.8 bn.
The share of SG&A expenses in revenue decreased
from 21.8% in 2018 to 20.8% in 2019.3

2019

2018

CHANGE

128,764

110,874

23,797

12,893

7,262

21,114

11,232

6,320

16.1%

12.7%

14.8%

14.9%

The company reduced its net debt, enabling it
to fully implement its development programme and
increase dividend payments by 14.6% to RUB 7 bn,
equivalent to a dividend yield of 10%.

Including Detsky Mir stores in Russia, Kazakhstan and Belarus.

The results are in line with Detsky Mir’s financial statement. The results of Detsky Mir are not consolidated in the financial statement of Sistema PJSFC since November 2019.
The results of Sistema PJSFC for 2019 are presented taking into account reclassification of Detsky Mir in discontinued operations. The table provides 100% net profit.
In accordance with IAS 17.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

ETALON
GROUP

25% 1

SISTEMA'S EFFECTIVE STAKE

BUSINESS
MODEL

SISTEMA.COM

Etalon Group's vertically integrated business provides
for value creation for customers and shareholders
at every stage: from acquisition of a land plot
to maintenance of finished properties.

Over the entire project life cycle, which usu-
ally lasts from three to four and a half years,
Etalon Group aims to introduce state-of-the-art
approaches to design, construction and mainte-
nance of finished properties, maximise returns
on investments and create unique environ-
ments for future residents, thus enhancing
customer loyalty.

Etalon Group is focused on the medium-range
segment, which accounts for 60–70% 5 of
the total housing demand in Moscow and St.
Petersburg and includes development projects
in the upper economy, comfort and business seg-
ments. The mid-range segment is more resilient
to macroeconomic volatility and has significant
growth potential due to its affordability, attractive
profit margins and sufficient market volumes.

Gennady Shcherbina
CEO

Sergey Egorov
CHAIRMAN OF THE BOARD OF DIRECTORS

Etalon Group is one of the largest and oldest residential
real estate developers and construction companies
in Russia with more than 30 years of experience and
strong positions in Moscow and St. Petersburg.

Etalon Group has the highest reliability rating among
Russian developers2 and holds the second place in the
Forbes ranking of Top-20 most reliable developers.

PROJECTS
in design and construction
phase

3.3

NSA3

M
SQ M

40%

OF CURRENT PORTFOLIO
TO BE SOLD WITHOUT USING
ESCROW ACCOUNTS

188

BN
RUB

MARKET VALUE
OF ASSETS 4

630

THSD
SQ M

OF REAL ESTATE SOLD
in 2019

622

THSD
SQ M

OF REAL ESTATE
COMMISSIONED IN 21
DEVELOPMENT PROJECTS
in 2019

20%

INCREASE IN AVERAGE
PRICES FOR RESIDENTIAL
REAL ESTATE
in 2019

77.7

+24% 2018/19

M RUB

CASH INFLOWS
in 2019

77.6

+13% 2018/19

M RUB

NEW SALES
in 2019

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etalongroup.com

Source: www.erzrf.ru.

1 Held by Sistema and affiliated persons.
2
3 Net saleable area.
4 As of 31 December 2019. Source: Colliers International.

S
E
C
V
R
E
S
G
N
O
G
N
O

Source: Knight Frank.

T M E N T

E I N V E

EFFECTIVE PROFIT
REINVESTMENT

LAND PLOT ANALYSIS
AND ACQUISITION

ONGOING
MAINTENANCE

DESIGN AND
PERMITTING

VALUE
CREATION

FITTING-OUT AND
FURNISHING

MARKETING AND
ONGOING SALES

T
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M
P
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V
E
D

GENERAL CONTRACTING
AND SUBCONTRACTING

PROJECT
MANAGEMENT

NSTRUCTION

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

INDUSTRY
OVERVIEW
FOR 2019 1

2019 saw an increase in demand for housing on the back of
declining interest rates and greater government support
for young families. Combined with the reduced offering
from small and medium-size developers, resulting from
the new industry regulations related to escrow accounts
that took effect on 1 July 2019, this trend may create
conditions for further growth and strengthening of market
positions of such major players as Etalon Group.

IMPROVED POSITIONS
OF MAJOR MARKET PLAYERS

On 1 July 2019, amendments to the federal law "On Co-Funding
Apartment Block Construction" took effect. In line with the law, develop-
ers will have to switch from off-plan contracts to escrow-based project
financing. These measures will create conditions for further growth and
will bolster market positions of such major developers as Etalon Group
by ousting smaller developers from the market, as they will not be
able to withstand higher competition and new regulatory environment.
The trend toward consolidation will be supported by the new market
entry barriers emerging as a result of new legislation and the need for
cooperation with major banks in off-plan projects.

In 2019, the number of small and mid-size
developers facing bankruptcy reached 350,
a 77% increase year-on-year (according to
Construction Industry Rating Agency)

NEWLY COMMISSIONED
HOUSING MARKET




TOP-20 PLAYERS' SHARE OF THE MARKET

TOTAL HOUSING COMMISSIONED, M SQ M

56%

41.2

40%

37%

39%

15.4

16.0

16.4

45%

17.1

2016

2017

2018

2019

. . .

2020–2023

SOURCES: ROSSTAT, WWW.ERZRF.RU, WWW.DOMRF.RU. DATA FOR THE KEY
REGIONS OF ETALON GROUP: MOSCOW, MOSCOW REGION, ST. PETERSBURG

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All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.
Source: Central Bank of Russia. Average weighted mortgage rate for housing loans issued in 2019.

1
2
3 Housing per capita as of the end of 2018, sq m.
4 Affordability of housing is calculated as a ratio of an average wage to an annuity payment. The annuity payment

was calculated for a 20-year mortgage loan with a 15% deposit to buy a 60 sq m property.

5 Affordability of housing is calculated as a ratio of an average wage to an annuity payment. The annuity payment was calculated
for a mortgage loan whose value was calculated as a ratio of issued loans to the number of loans issued in a specific year.
The annuity payment was calculated on the basis of an average weighted mortgage term and interest rate for a specific year.
Source: a public survey conducted in 2018 in Russia by www.domrf.ru.

6
7 As of the end of 2019. Maximum tax benefits and savings from subsidised mortgage loans are calculated for a 20-year mortgage with
a 6% interest rate and a 20% deposit for a 60 sq m apartment and based on the average price of housing in Moscow. Source: Rosstat.

NEED FOR IMPROVEMENT
OF LIVING CONDITIONS

INCREASED HOUSING
AFFORDABILITY

Housing per capita in Moscow and St. Petersburg is relatively
low compared to most major cities in developed countries, which
preconditioned further growth of demand for residential properties
in the two largest cities in Russia.

With mortgage rates reaching a record low of 9% in 2019 2, housing was
becoming more affordable for a greater number of residents in Moscow
and St. Petersburg, while the maternity capital programme and tax bene-
fits helped first-time buyers to make a deposit and contributed to a reduc-
tion in debt servicing costs.

HOUSING PER CAPITA 3

sq m

36 sq m
AVERAGE FOR EUROPEAN CITIES

MOSCOW

ST. PETERSBURG

WARSAW

LONDON

PARIS

BERLIN

РИМ

HOUSING AFFORDABILITY IN MAJOR EUROPEAN CITIES 4

1.5×
AVERAGE

1.4×

1.5×

PARIS

0.8×

LONDON

1.1×

PRAGUE

MUNICH

WARSAW

ROME

BERLIN

1.7×

1.8×

2.0×

SOURCES: ROSSTAT, AMT FÜR STATISTIK BERLIN-BRANDENBURG,
CENTRE FOR CITIES, ISTAT, URZĄD STATYSTYCZNY W WARSZAWIE

SOURCES: BANQUE DE FRANCE, BANK OF ENGLAND, ČESKÁ NÁRODNÍ BANKA (CNB),
DEUTSCHE BUNDESBANK, NARODOWY BANK POLSKI (NBP), BANCA D’ITALIA

HOUSING AFFORDABILITY IN MAJOR RUSSIAN CITIES 5

INCREASED
ATTRACTIVENESS
OF INVESTMENTS
IN RESIDENTIAL PROPERTIES

 MORTGAGE RATE
 MOSCOW /  ST. PETERSBURG

12.5%

12.9%

11.5%

Younger people increasingly preferred renting to house buying: only
13% of individuals under the age of 25 were planning to purchase
a home 6, which may create additional demand for rental properties.
Combined with a drop in interest rates on bank deposits, this may
stimulate an inflow of private investments into the real estate mar-
ket, as the reliability and profitability of investments in real estate is
comparable to that of bank deposits, while the inflation risks related
to residential properties are low. The total amount of deposits
in Russia at the end of 2019 was RUB 30.5 tn.

9.8%

9.7%

9.0%

2.2×

2.1×

2.0×

1.9×

1.6×

1.7×

1.4×

1.0×

2010

. . .

2015

2016

2017

2018

2019

SOURCES: ROSSTAT, CENTRAL BANK OF RUSSIA

Total payments to families with one to three
children amount to RUB 1–2 M. Additional
savings due to tax benefits and subsidised
mortgage loans may reach RUB 3.2 M 7

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

BUSINESS DEVELOPMENT IN 2019

In February 2019, Sistema acquired 25% of Etalon Group shares from its
founder and largest shareholder Vyacheslav Zarenkov and his family mem-
bers for USD 226.6 M. As part of a separate transaction Etalon Group
purchased a 51% stake in JSC Leader Invest (Leader Invest), Sistema's
subsidiary and one of the largest development and construction companies
in Russia, for RUB 15.2 bn. In August 2019, Etalon Group consolidated a 100%
stake in Leader Invest after acquiring the remaining 49% from Sistema for
RUB 14.6 bn. In June 2019, Etalon Group increased its share in the Zil-Yug
project to 100%. These acquisitions enabled Etalon Group to expand its land
holdings in Moscow by 1.9 M sq m.

Etalon Group completed integration of Leader Invest in Q3 2019 by adopting
a single brand for all projects, cutting duplicate functions and costs, and
speeding up the construction of acquired unfinished properties. Successful
integration of Leader Invest enabled Etalon Group to boost sales in Moscow
by 26%, commission a record 353,000 sq m of real estate and raise the price
for residential properties in Moscow by 42% by the end of 2019 by changing
the project mix and introducing dynamic pricing.

Another important event of 2019 was the launch of the second largest project
added to the company's portfolio after the acquisition of Leader Invest:
the residential island Nagatino i-Land with a total area of 472,000 sq m 1.

The estate located on the banks of the Moscow River in a district with
well-developed infrastructure will combine the existing business cluster with
new residential and commercial spaces.

Etalon Group launched apartments sales in two new business-class prop-
erties: Schastye Lomonosovsky in Moscow and Chernigovskaya St. in St.
Peterburg. The offering increased in St. Petersburg due to the start of sales
in Galaxy residential complex. In view of the higher class of the property, the
apartments in this estate are being sold under a separate brand Galaxy Pro.

On 3 February 2020, the global depositary receipts of Etalon Group, which had
previously traded only on the LSE, were listed on the Moscow Exchange and
included in the Level 1 Quotation list. In February 2020, the Moscow Exchange
decided to include Etalon Group's GDRs in the calculation base of the Broad
Market Index starting 20 March 2020.

BUSINESS DEVELOPMENT STRATEGY

In January 2020, the Board of Directors of Etalon Group approved a revised
development strategy until 2024 aimed at achieving the following goals:

1. Improving business efficiency. Comprehensive implementa-

4. Development of an ecosystem for additional services and cus-

tion of digital solutions in the area of cost control and sales effi-
ciency combined with streamlining of asset ownership structure
and proportionate reduction of administrative costs will enable
Etalon to become a leader in terms of efficiency by 2024.

2. Digital and technological transformation of production processes.

Etalon Group aims to develop new construction technologies to create
an alternative to traditional brick-monolithic construction techniques.
The new approaches will include modern prefabricated construc-
tion methods, modular construction and construction from CLT 2 pan-
els, which can significantly cut the costs and time of construction..

3. Strengthening presence in key markets. Etalon Group intends to make
up for its shortage of supply in St. Petersburg during 2020–2021 and
then to stabilise its residential portfolio both in the Moscow Metropolitan
Area and in St. Petersburg by replenishing its land bank annually
in an amount equal to the volume of real estate sold during the year.

tomer retention. Etalon Group plans to actively develop additional
services for the ever-growing number of people who live in prop-
erties built by the company. This will enable it to achieve the high-
est NPS (net promoter score) score among Russian developers
and, as a result, increase its share of repeat purchases, while also
generating additional profit from complementary businesses.

5. Further geographic expansion. Subject to the achievement
of stable operational and financial growth, Etalon Group will
consider entering other Russian regions in cities with sta-
ble demand, high incomes and high real estate prices.

In January 2020, Etalon Group's Board of Directors adopted a revised dividend policy policy and
approved minimal guaranteed dividend payments in the amount of RUB 12 per share/GDR unless
the ratio of EBITDA to interest payments made by the company in the reporting period falls below 1.5.

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FINANCIAL AND
OPERATIONAL
PERFORMANCE IN 2019

84.3

+16.6% 2018/19
BN
RUB

ETALON GROUP’S REVENUE
IN 2019

OPERATIONAL PERFORMANCE

FINANCIAL PERFORMANCE

In 2019, Etalon Group, demonstrated growth across the most significant
indicators, including new commissionings, for the first time in the last
five years. The company completed the construction of 622,000 sq m
of properties at 21 projects and sold 630,000 sq m of real estate for
a total of RUB 77.6 bn, marking a 13% increase from 2018.

INDICATOR, M RUB3

2019

20184

CHANGE

Revenue

EBITDA

84,330

72,327

8,897

6,118

16.6%

45.4%

2019

2018

CHANGE

Operating income

6,484

3,204

102.4%

INDICATOR

Sales, M RUB

Sales, sq m

77,627

68,731

630,000

628,000

Average price, RUB / sq m

123,000

109,000

Average price (housing), RUB / sq m 149,000

124,000

Cash inflows, M RUB

77,713

62,785

Commissionings, sq m

622,000

479,000

12.9%

0.4%

12.5%

19.8%

23.8%

29.7%

Major completed projects

PROJECT

Summer Garden residential complex, first set

Blyukhera St. residential complex

Galaxy residential complex, second set

AREA, sq m

122,000

100,000

91,000

Adj. net profit / (loss)

3,110

(700)

—

Etalon Group's revenue increased by 16.6% up to RUB 84.3 bn in 2019,
while revenue from the main segment (residential development)
rose by 26.5% and totalled RUB 73.5 bn. Such record-high results
were achieved due to strong sales and the highest number of newly
commissioned properties in the company's history: Summer Garden
residential complex (first phase), Galaxy residential complex (second
phase), Serebryany Fontan and Blyukhera St. residential complexes, etc.
The development projects of the acquired Leader Invest also made a sig-
nificant contribution to revenue growth and accounted for 15% of total
revenue from the main business segment.

EBITDA was up 45.4% reaching RUB 8.9 bn with EBITDA margin rising
10.6% in 2019. The growth of this indicator was achieved by boosting
gross income and keeping the share of SG&A expenses in revenue
at stable levels.

Net profit adjusted for one-off acquisition and integration expenses
reached RUB 3,1 bn compared to a net loss of RUB 0.7 bn in 2018.

In 2019, Etalon Group paid USD 56 M in dividends (19 cents per GDR).

As of 31 December 2019. Source: Colliers International.

1
2 Cross-laminated timber.

The results are in line with Etalon Group’s financial statements. Alternative performance measures reconciliation is provided in Etalon’s disclosure
materials. The results of Etalon Group are not consolidated in the financial statements of Sistema. The table shows 100% of net profit.
EBITDA, operating and net profit results for 2018 were revised due to changes in the accounting policy with
regard to capitalisation of borrowing costs and significant financing component.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

SEGEZHA
GROUP

STRONG LEADERSHIP IN EMERGING MARKETS

ACCORDING TO COMPANY’S ESTIMATES AS OF 31 DECEMBER 2019

98.3%

SISTEMA'S EFFECTIVE STAKE

No. 1 in russia
No. 3 globally

BY OUTPUT
OF SACK PAPER

No. 1 in russia
No. 2 in europe

BY OUTPUT
OF PAPER SACKS

No. 5
in russia

BY OUTPUT
OF LARGE-SIZE
BIRCH PLYWOOD

No. 1
in russia

BY OUTPUT
OF SOFTWOOD
SAWN TIMBER

No. 1
in russia

BY OUTPUT
OF PREFABRICATED GLUED
LAMINATED TIMBER
HOUSES

Mikhail Shamolin
PRESIDENT

Ali Uzdenov
CHAIRMAN OF THE BOARD OF DIRECTORS

BUSINESS MODEL

Segezha Group is a fast-growing vertically integrated
Russian forestry holding with a full cycle of logging
and advanced wood processing. Segezha Group
comprises forest, wood processing and pulp
and paper assets in Russia and Europe.

PLANTS
IN EUROPE

REGIONS OF
OPERATIONS
IN RUSSIA

~13

THSD

EMPLOYEES

Segezha Group's business model is based on the principle of vertical integra-
tion with the aim of creating added value and ensuring business sustainability
by diversifying risks amid a changing macro environment. High levels of oper-
ational efficiency and a presence in all key stages of value creation, from own
logging on leased woodland to sale of high-margin products to end consumers,
allow Segezha Group to maintain market leadership in terms of cost of finished
products in all business segments.

›100

COUNTRIES

with representative offices

sales

7.4

M HA

TOTAL WOODLAND
IN LEASEHOLD

The main production facilities
are located in the European part
of Russia and EU nations, with
representative offices in 11 coun-
tries. Segezha Group employs
about 13,000 people.

The company exports products
to over 100 countries. Exports
of finished products account for
70% of the company's reve-
nue. Segezha Group is among
Russian, European, and global
leaders in the production of ply-
wood, paper sacks, unbleached
sack paper, and sawn timber.

Segezha Group is the largest
forest user in the European
part of Russia. The total area
of woodland in leasehold is 7.4 M
ha, with 95% certified according
to FSC standards 1.

Forest
resources

Segezha Group's
assets

Side
products

Integrated paper
grade pulp

Secondary
processing

Tertiary
processing

×2

PULPWOOD

PULP AND PAPER MILLS

FOREST CHEMICALS

×9

CONVERTING PLANTS

×4

SAWMILLS

PAPER

PAPER
PACKAGING

SAWDUST

CHIPS

SAWN TIMBER

GLULAM

HOME KITS

PELLETS

FIBREBOARD

SOFTWOOD
SAWLOGS

TECHNICAL RAW
MATERIALS

×2

SAWDUST,
DUST

BRIQUETTES

BIRCH PLYLOGS

PLYWOOD MILL

PLYWOOD

CHIPS

FIBREBOARD

— PRODUCTS MADE
OF RECYCLED
RAW MATERIALS

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segezha-group.com

Forest Stewardship Council® (FSC-C133272).

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

INDUSTRY OVERVIEW
FOR 2019 1

SACK PAPER

PAPER SACKS

SAWN TIMBER

PLYWOOD

GLUED LAMINATED TIMBER

PREFABRICATED HOUSES

In 2019, global sack paper output totalled
7.4 M t, up from 7.1 M t in 2018 2. Having peaked
in 2018, global prices of sack paper first stopped
growing and then demonstrated substantial
decline in the reporting period. This was primar-
ily due to stabilisation of China's demand as the
balance of its waste paper market recovered.
The key factors that may have a positive effect
on prices in 2020 include the increase in the
number of bans on plastic packaging and its
replacement with paper packaging, and grow-
ing consumption in Asia and Latin America.
According to analyst forecasts 3, CAGR of paper
consumption is expected at 1% in 2019–2025.

SHARE OF SEGEZHA GROUP
IN THE GLOBAL OUTPUT
OF SACK PAPER

70%

SHARE OF SEGEZHA GROUP
IN THE RUSSIAN OUTPUT
OF SACK PAPER

Segezha Pulp & Paper Mill is
Russia's only manufacturer of
high-porosity and high-strength
unbleached sack paper.

Paper sack consumption in Europe totalled
5.9 bn units in 2019, a decrease of 2.1% 4 com-
pared to the previous year. The decline
came mostly from the construction and chem-
icals segments. The demand for paper sacks
in the construction industry dropped mainly
due to certain cement producers transitioning
to large-size packaging.

In the European market, Germany, Turkey,
Italy, France and Spain account for about 55%
of demand for paper sacks. 56% of demand
comes from the construction industry (cement
and dry construction mixes).

The compound annual growth rate of paper
sack consumption is projected at 0.5% in 2019–
2025, mainly due to the food and animal
food segments. Following the market trends,
Segezha Group reduced the share of sacks pro-
duced for the construction sector in 2019 and
increased the share of products for high-margin
and growing segments.

In Russia, similarly to the European market, the
construction industry (cement and dry construc-
tion mixes) accounts for most of paper sack
consumption (85%). At the same time, demand
exceeds domestic production, and the deficit is
compensated with imports, the share of which
in 2019 was 22%.

11 %

SHARE OF SEGEZHA GROUP IN THE
EUROPEAN PAPER SACK MARKET 5

In 2019, paper sack consumption in Russia
was 771 M units, down 1.9% 6 year-on-year.
The decline came mostly from the construction
segment, as certain cement producers tran-
sitioned to large-size packaging. Paper sack
consumption in Russia is expected to grow
by an average of 0.4% p.a. in 2019–2025.

No.1

IN RUSSIA BY GROSS SAWN
TIMBER OUTPUT 7

In 2019, the global market of softwood sawn timber
was estimated at 349 M cu m 7. Global consump-
tion of sawn timber had been growing by 2.4% p.a.
in the previous five years, driven by upward trends
in the construction and furniture markets of the
United States and China, which are the world's
largest consumers of sawn timber.

Throughout 2019, prices of sawn timber were falling
in all major markets due to an excess of output over
demand. This was caused by overstocking in China,
the yuan's depreciation against major global curren-
cies, trade wars, high competition for the market,
and overproduction in Russia and Europe.

Stocks, prices and solvency of market players are
expected to stabilise in 2020. Deficit of afforda-
ble quality raw materials is likely to grow in all
the key production regions till 2025, which will
result in a slowdown of production rates in Europe,
Canada and the US. Global consumption is pro-
jected to grow by 1.8% p.a. The highest growth rates
till 2025 will be seen in China, the US, and Middle
East and North Africa (MENA).

The output of softwood sawn timber in Russia
totalled 44 M cu m in 2019, an increase
of 13% 7 against 2018. Russia is the world's
fourth-largest producer of softwood sawn timber
after Europe, the US and Canada, with a market
share of 11%.

In 2019, Russia increased its softwood sawn
timber exports by 5% to 31.4 M cu m, mainly on the
back of higher demand for Russian products
in China, which remains the biggest consumer
of Russian sawn timber. In 2019, China increased
purchases in the Russian market by 11% year-on-
year, to 19 M cu m, which accounted for 61% of all
exports 7. Similarly to the global market, export
prices of Russian sawn timber saw a negative trend
throughout 2019.

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72%

+2%

+4.2%

RUSSIA’S SHARE IN GLOBAL BIRCH
PLYWOOD OUTPUT IN 2019

GLOBAL GLULAM CONSUMPTION
IN 2019

RUSSIAN CONSUMPTION OF
PREFABRICATED GLULAM HOUSES

Europe and Japan remain the main consumers
of laminated beams, which are mostly used
in construction. In 2019, global consumption
of glued laminated timber grew by 2% to about
4.2 M cu m 7, mainly due to growth of construc-
tion in Germany. France is a promising market
for glued laminated timber due to a high share
of rented wooden housing.

Consumption of prefabricated glulam houses
in the Russian market grew by 4.2% in the reporting
period. The key regions consuming prefab houses
are the Central, Northwest and Volga federal
districts.

SEGEZHA GROUP’S SHARE
IN RUSSIAN BIRCH PLYWOOD
OUTPUT IN 2019

The global plywood market has demonstrated
a steady growth in recent years. In 2019, its
size was estimated at 4.94 M cu m, up 1% from
2018. Europe and Russia remained the largest
global consumers in 2019, accounting for 72%
of total consumption 8. Growth of plywood con-
sumption in Russia in 2019 exceeded the global
rate and reached 2.7%.

Segments consuming plywood vary geographi-
cally: the share of its consumption for construc-
tion and formwork in 2019 was 57% in Europe,
35% in Russia, 90% in North America and 87%
in MENA.

Global consumption of birch plywood is pro-
jected to grow by 2% p.a. on average till 2025.
Demand for birch plywood will be driven by the
construction, transportation (light and medium
segments) and shipbuilding industries.

Russia remains the world's indisputable leader
in birch plywood production: its share of the
global market was 72% 9 in 2019. Segezha
Group accounted for 4% of Russia's total birch
plywood output in 2019.

Sources: Fisher, Hawkins Wright, Poyry, CEPI, Eurosac, Rosstat, Indufor, FAOSTAT, GWMI, EUWID, FEA. All projections and forward-looking estimates
regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.
The previously reported figure for 2018 (7.2 M t) was updated following expansion of database used by Segezha Group and subsequent adjustment of calculations.
Source: Hawkins Wright.
The previously reported figure for 2018 (5.4 bn units) was updated to 6.0 bn units due to expansion of Eurosac's database.
Excluding Russia and Ukraine..
The previously reported figure for 2018 (766 M t) was updated to 786 M t following expansion of database used by Segezha Group and subsequent adjustment of calculations.

2
3
4
5
6
7 As of 31 December 2019. Source: company’s proprietary data.
8
9

Source: Indufor.
This indicator was revised down due to an update of Indufor database.

SISTEMA — ANNUAL REPORT 2019

Wood resources

Manufacturing assets

Sustainability

Innovation

Revenue, bn RUB

5.5

4.5

KEY ASSETS' RESULTS

BUSINESS DEVELOPMENT STRATEGY

Segezha Group's strategy is aimed at creating an industry
leader in production efficiency on the basis of a vertically
integrated and diversified business model.

• Increase in the share of proprie-

• Upgrade of current pro-

tary wood resources by expansion
of allowable cut and increase
of its utilisation rate.

• Quality forest reproduction.

duction facilities.

• Construction of new energy-efficient

facilities to meet growing global
demand for timber products.

• Health and safety of employees.
• Minimising environmental impact.
• Moving towards zero-
waste production.

• Development of regions

of operations.

• Development of R&D
within the company.

• Development of new prod-

ucts, production processes
and solutions of the future.

• Automation and state-of-

the-art IT solutions.

BUSINESS DEVELOPMENT IN 2019

PAPER AND PACKAGING

Production, sales and revenue
in the paper segment

Output, sales and revenue
in the paper packaging segment

INDICATOR

Output, t

Sales, t 1

2019

2018

CHANGE

2019

2018

CHANGE

388,000

375,000

254,000

244,000

3.4%

4.1%

Output, M units

Sales, M units

Revenue, bn RUB 2

15.2

15.6

(2.0%)

Revenue, bn RUB

1,262

1,286

1,238

1,284

18.1

17.2

(1.8%)

(3.6%)

5.2%

PLYWOOD

Output, sales and revenue in the plywood segment

INDICATOR

Output, cu m

Sales, cu m

2019

2018

CHANGE

192,000

136,000

182,000

120,000

41.1%

52.0%

18.5%

Most of the plywood produced by Segezha Group is made for export (72%
in 2019) and supplied to 60 countries, with key markets being Europe, the USA
and countries of Asia-Pacific, including China, South Korea and India.

SAWN TIMBER

Output, sales and revenue in the sawn timber segment

INDICATOR

Output, cu m

Sales, cu m

2019

2018

CHANGE

1,014,000

924,000

1,004,000

931,000

9.8%

7.9%

Revenue, bn RUB

13.8

13.9

(0.8%)

Segezha Group exports 99% of its sawn timber to dozens of countries,
with most volumes consumed by construction companies and producers
of furniture and packaging. The main markets for the company's sawn timber
are China, Europe and MENA.

SISTEMA.COM

In 2019, Segezha Group produced 192 cu m of birch plywood, up 41.1%
from 2018, primarily as a result of full capacity utilisation at the new ply-
wood mill in Kirov Region commissioned in July of 2018. Segezha's sales
of plywood in 2019 reached 182,000 cu m, up 52.0% from 2018. Extra
product volumes were sold in the high-margin markets of North America
and Europe, with industrial consumers becoming an increasingly large
customer category.

Plywood revenue in 2019 was up 18.5% from 2018, to RUB 5.5 bn.
The growth is primarily driven by the rising output and physical sales of ply-
wood as well as an increasing share of high-margin products, including
new plywood grades.

In 2019, Segezha Group’s enterprises increased the output of sawn
timber by 9.8% year-on-year, to 1,014,000 cu m, due to increased
production efficiency at all four facilities. The output growth brought
about an increase in sales by 7.9% year-on-year, to 1,004,000 sq m,
with the extra volumes mostly consumed by current customers.

Sawn timber revenue in 2019 totalled RUB 13.8 bn, down 0.8% from
2018, primarily as a result of a 9% reduction in the mean annual
prices for exported Russian sawn softwood timber (in rouble
terms) 3. The negative effect of the slump in sawn timber prices was
partially offset by an increase in sales.

Segezha Group produces 70% of sack paper in Russia. About 36%
of the paper output is supplied to the company's facilities in Russia
and Europe to manufacture paper sacks, while the remaining 64% is
sold in Russia or exported. Exports account for 89% of external sales.
Segezha's paper is supplied to 74 countries. The key export markets are
Latin America, Southeast Asia, North America, and MENA.

In 2019, Segezha Group increased its paper output by 3.4%
to 388,000 t, mainly due to strong performance in the first half of the
year. The company managed to increase its output by advancing equip-
ment repairs at Segezha PPM. Paper sales grew by 4.1% to 254,000 t
following the output gains. Additional volumes were sold to existing
customers and to over 100 new clients from 70 countries.

Revenue from paper sales totalled RUB 15.2 bn in 2019, 2.0% lower than
in 2018, due to unfavourable market situation. The negative effect was
offset by an increase in output and optimisation of the product portfolio
structure.

Packaging products of Segezha Group's enterprises in Europe (Segezha
Packaging) are mostly sold in the European market, while the needs of the
Russian and CIS market are met by its Russian facilities located in Karelia and
Rostov Region.

In 2019, the output of industrial paper sacks remained at the level of 2018 due
to full utilisation of production capacity. At the end of the year, the company
produced 57% of all paper sacks consumed by the Russian market.

In 2019, the company sold 1,238 M units of paper packaging, marking
a decrease of 3.6% against 2018. The decline came from a lower demand
for paper sacks in Europe and increased production under the off-season
programme, which envisages production in the low winter season and
sale of products during the high season. In Russia, demand for sack paper
remained steady throughout the year. The decline in physical sales was offset
by a more aggressive pricing policy with regard to paper products in Russia
and Europe in 2019. The company increased the share of sales in high-margin
segments (packaging for powdered milk and animal food, consumer packag-
ing). Revenue from sales of paper packaging grew by 5.2% in 2019 against
2018 to RUB 18.1 bn.

GLUED LAMINATED TIMBER AND PREFABRICATED HOUSES

Output, sales and revenue in the laminated
wood structures segment

Output, sales and revenue
in the prefab houses segment

INDICATOR

Output, cu m

Sales, cu m

Revenue, bn RUB

2019

2018

CHANGE

INDICATOR

2019

2018

CHANGE

55,000

51,000

55,000

51,000

1.4

9.6%

8.1%

5.4%

Output, cu m

Sales, cu m

Revenue, bn RUB

28,000

26,000

27,000

28,000

0.6

0.7

5.6%

(3.1%)

(1.0%)

Segezha Group's glulam is mostly exported to Europe due to high demand
in the region. In 2019, 88% of all glulam sales were made in Italy, Germany and
Austria.

Segezha Group supplies laminated-beam prefab houses mainly to the
Russian market and is the undisputable market leader with a 20% 4 market
share in 2019.

In 2019, Segezha Group increased glulam output by 9.6% year-on-year,
to 55,000 cu m, due to increased production efficiency. Accordingly, physical
sales went up 8.1% year-on-year.

Glulam revenue in 2019 totalled RUB 1.4 bn, up 5.4% from 2018, primarily as
a result of improvements in the company's product portfolio.

The output of prefab houses in 2019 went up 5.6% year-on-year, to 28,000
cu m, mostly due to equipment efficiency enhancement. The 3.1% and 1.0%
reduction in physical sales and revenue, respectively, is primarily the result
of some of the unsold volumes of Q4 2019 being rescheduled to be sold in the
first half of 2020. The drop in revenue was partially offset by an increase
in the prices for prefab houses in the second half of 2019.

Around 36% of the paper output is converted into paper packaging.

1
2 Net of intra-group turnover.

Source: Rosstat.

3
4 As of 31 December 2019. Source: company’s proprietary data.

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KEY ASSETS' RESULTS

SISTEMA.COM

FINANCIAL PERFORMANCE
IN 2019

58.5

+1% 2018/19
RUB
BN

SEGEZHA GROUP’S REVENUE

INDICATOR, M RUB

2019

2018

CHANGE

Revenue

Adj. OIBDA

58,495

57,889

13,993

12,984

Operating income

8,333

8,178

1.0%

7.8%

1.9%

Adj. profit attributable
to Sistema

5,040

9,272.1%

In 2019, Segezha Group’s revenue grew by 1.0% year-on-year, to RUB 58.5 bn.
The moderate revenue growth rate mostly results from a downturn in the
global prices for sack paper, plywood and sawn timber in 2019. The negative
trend was offset by an increase in domestic prices for paper packages and
an increased output of plywood after the achievement of the full design
capacity at the plywood factory in Kirov Region.

Segezha Group’s adjusted OIBDA in 2019 was up 7.8% year-on-year,
to RUB 14.0 bn, as a result of reduced production costs. The adjusted
OIBDA margin is up 1.5 p.p. year-on-year, to 23.9%, primarily driven by effi-
cient cost management, especially in SG&A costs.

The adjusted net profit in 2019 reached RUB 5.0 bn. The substantial
increase in the adjusted net profit year-on-year was largely due to revaluation
exchange gains.

OTHER ACHIEVEMENTS

•

In 2019, Segezha Group launched the construction of Russia’s first
factory producing CLT panels, a state-of-the-art engineering material
for wooden houses, and commissioned a new line in Salsk producing
up to 83 M industrial paper packages per year. In July 2019, the com-
pany launched a modernisation programme at Segezha Pulp & Paper
Mill toincrease capacity to 850,000 tonnes per year and expand the
product portfolio.

In April 2020, Segezha Group received a government permit for the
construction of a new plywood mill in Galich (Kostroma Region) with
a design capacity of 125,000 cu m of plywood a year. The 31.2 ha
site will accommodate a production area of some 48,000 sq m,
warehouses for finished products and an office building. Production
is scheduled to start in 2021.

• New solutions: The company launched a wood processing centre

to produce special grades of plywood. The move has made it possible
to move away from outsourcing plywood drilling and milling, reduce
production costs and deliver finished products to customers.

•

In February 2019, Lesosibirsk WP completed the international
Sustainable Biomass Program (SBP) certification. The audit was per-
formed by NEPCon, a global non-profit that contributes to sustainable
land use and climate-friendly solutions.

• As part of the second phase of pellet facility construction, a new

pellet mill with a production capacity of 15,000 t a year was commis-
sioned at Lesosibirsk WP, which has brought the plant’s total pellet
production capacity to 85,000 t of pellets a year, making timber waste
yet another source of income for the company.

NEW PRODUCTS

Innovative packaging paper SKE i4

Five new types of plywood

In 2019, Segezha Group’s paper facilities successfully produced pilot
batches of a new product ordered by customers, i.e. high-strength paper
SKE i4 with high stretching properties. In May 2019, Segezha Group's SKE
i4-based packaging was awarded a Silver Grand Prix at the international
Eurosac 2019 congress in Ljubjana.

In 2019, Segezha Group launched five new products, including Segezha
PlyForm, a unique formwork product for construction. The company
developed several new solutions, i.e. Segezha Creative (laminated coloured
plywood), Segezha Art (plywood ready for painting), Segezha ClearPly
(eco-style plywood with transparent and semi-transparent coating), and
Segezha Anthracite (plywood for floor covering in light commercial vehi-
cles). Three out of these five new plywood products are currently unique
in the market.

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KEY ASSETS' RESULTS

SISTEMA.COM

MEDSI

96.9%

SISTEMA’S EFFECTIVE STAKE

Elena Brusilova
PRESIDENT

Artyom Sirazutdinov
CHAIRMAN OF THE BOARD OF DIRECTORS

Medsi Group (“Medsi”) is Russia’s largest
national healthcare chain offering a full range
of preventive, diagnostic, treatment, and
rehabilitation services for children and adults.

8.2%

VMI MARKET SHARE
in Moscow and Moscow Region

FACILITIES

9.6

PATIENT VISITS

REGIONS
OF OPERATIONS

› 100

THSD
SQ M

MEDICAL
FLOOR SPACE

2,284

AVERAGE CHEQUE

RUB

ASSETS OVERVIEW

Clinical & diagnostic centres (CDCs), Moscow

Krasnaya Presnya

Belorusskaya

Grokholsky

Solyanka

Primary care clinics, Moscow and Moscow Region ¹

Children’s clinics, Moscow

Hospitals, Moscow and Moscow Region

Sanatoriums and wellness centres, Moscow and Moscow Region

Regional clinics

Perm

St Petersburg

Barnaul

Bryansk

Volgograd

Nizhnevartovsk

Nyagan

Izhevsk ²

BUSINESS MODEL

PATIENTS FROM
OTHER REGIONS

PATIENTS FROM
OTHER CLINICS

INPATIENT HOSPITALS

HOSPITAL 1
(OTRADNOYE)

HOSPITAL 2
(BOTKINSKAYA)

CDCS PROVIDING EXTENSIVE DIAGNOSTIC SERVICES

OUTPATIENT CLINICS

ADULT AND CHILDREN'S
CLINICS IN MOSCOW

CLINICS
IN REGIONS

FIRST-TIME AND REGULAR PATIENTS OF THE MEDSI CHAIN

INDIVIDUALS

VMI

MMI

Medsi’s business model is a three-tier vertically integrated system of medical
care, including outpatient care, diagnostics, and hi-tech inpatient care. Patient
flow organisation is based on internal patient routing system across key
segments: individuals, VMI, MMI. Due to a wide range of diagnostic services
in regional hubs (CDCs) as well as hi-tech medical services in Medsi’s hos-
pitals, Medsi sees an inflow of patients from other regions and other clinics.
The company’s medical strategy adheres to P4 medicine principles (predic-
tive, preventive, personalised, and participatory).

In 2019, the company implemented a hub-based management model com-
bining outpatient, diagnostic and inpatient assets under common control
based on geographic or operational criteria. The model enabled integration

and standardisation of business processes across assets in Moscow and
Moscow Region, enhanced operating efficiency, and formed the backbone for
the development strategy of regional assets, which will be clustered into hubs
as the chain grows.

Standardisation of business processes in 2019 empowered Medsi to come
up with a franchise product that is unique in the industry. The company offers
a standardised suite of protocols and processes, as well as information sup-
port and consultations at launch and promotion stages. The first franchisee
primary care clinics were launched in Q1 2020.

Revenue structure by channel

1.8%
OTHER

28.5%
INDIVIDUALS

66.2%
INSURANCE COMPANIES

3.5%
CORPORATE CLIENTS

Revenue structure by asset

27.9%
CDCS

33.3%
PRIMARY CARE CLINICS

34.8%
HOSPITALS

medsi.ru

1
2

Including a franchisee clinic at Tulskaya in Moscow.
The chain of clinics in Izhevsk was acquired in March 2020.

4.9%
OTHER

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KEY ASSETS' RESULTS

SISTEMA.COM

INDUSTRY
OVERVIEW
FOR 2019 1

In 2019, the size of Russian private healthcare market
reached RUB 644 bn 2, up by 8.5% from 2018.

The growth was primarily driven by higher fees,
growing demand for specialty services, and
the development of ancillary businesses, such
as medical tourism and telemedicine. The private
healthcare services market has also been grow-
ing on the back of paid services penetrating the
state-run healthcare system (historically working
within the MMI system) and patients increasingly
favouring private healthcare providers over public

ones due to notoriously long waiting periods
at state-run establishments and a limited range
of services covered by MMI policies. On the other
hand, similarly to 2018, market growth in 2019 was
contained by a slump in real disposable incomes
of households that pushed some patients to opt for
self-medication and cheaper “shadow operators”.

PRIVATE HEALTHCARE MARKET IN RUSSIA 3

bn RUB

 REGIONS OTHER THAN MOSCOW AND MOSCOW REGION
 MOSCOW AND MOSCOW REGION

CAGR 4

CAGR

644

+8.5% 2018/19
BN
RUB

SIZE OF RUSSIAN PRIVATE
HEALTHCARE MARKET

in 2019

272

295

317

344

515
41,2

460
41,2

414
41,2

376

202

219

235

250

268

291

318

352

2015

2016

2017

2018

2019

2020

2021

2022

ACTUAL

PROJECTED

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All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.
Source: BusinessStat. This amount includes revenue from self-pay patients and VMI policy holders.
Source: Businesstat.

1
2
3
4 CAGR stands for compound annual growth rate.

BUSINESS DEVELOPMENT IN 2019

EXISTING ASSETS

NEW ASSETS
AND PROJECTS

In 2019, Medsi continued expanding floor space
and stepping up floor space utilisation rates.
Total medical floor space in 2019 was up 4.5%,
translating into 1.1% revenue growth over the year.
The floor space optimisation programme cov-
ers most of the chain’s assets, aiming to increase
the capacity of clinics and accessibility of a wide
range of medical specialties. The Floor space was
expanded most substantially at Clinical Hospital
No.1 (by 4.5%), CDC Krasnaya Presnya (by 13.8%)
and PCC Prechistenka (by 48.5%).

In 2019, Medsi continued the construction
of Michurinsky multi-purpose medical centre,
scheduled to open in Q4 2020. The facility will
include a clinical and diagnostic centre for adults
and children, a day hospital, and a 24-hour hospital
with a hi-tech surgery unit, spread over 28,000 sq m
of medical areas.

Medsi has also maintained focus on the modernisa-
tion of existing clinics and improvement of business
processes, with 2019 capital expenditure up 191.4%
from 2018.

Medical equipment is another focus of the compa-
ny’s modernisation programme. Medsi has invested
over RUB 470 M in equipment and technology over
the two years since programme launch, with priority
given to diagnostic radiology and sonography as
well as surgical and dentistry equipment. A visible
outgrowth of the investment programme, upgrades
of CT and MRI machines in 2019 enabled capacity
utilisation to grow by 15% and 3%, respectively.

Medsi has moved away from acquiring heavy
equipment to comprehensive equipment sup-
port throughout its lifecycle, from installation
to maintenance to upgrades. Consultancy projects
effected in 2019 jointly with leading vendors made
it possible to set global benchmarks as strategic
objectives across the chain, in addition to adopting
lean production principles as well as analysing and
optimising current processes. The projects are
expected to continue in 2020.

In March 2020, Medsi signed an agreement with
Bioniq Health-tech Solutions to launch Russia’s
first digital personalised health monitoring system
combining AI-assisted tracking of personal medical
readings, consultative support from expert doctors,
lifestyle enhancement programmes, tailored diets,
workout plans and vitamin and mineral intake
recommendations.

The 2019 Customer Loyalty Rating of Moscow
Clinics features Medsi as the most-recognised
healthcare provider for a third consecutive
year.3 The company also tops the 2019 Top-100
Private Multi-Specialty Clinics ranking released
by Vademecum Analytics, up from No. 2 in 2018.

Asset modernisation and equipment upgrades set
patient traffic and work flow management as one
of the priorities for 2019, which enabled the com-
pany to increase overall occupancy at inpatient and
outpatient hospitals. Medsi continued to expand
its range of specialties, with flagship assets setting
up specialized units in the areas of neurosurgery,
X-ray surgery, lower limb pathologies, robot-assisted
surgery, and a pediatric surgical facility under the
leadership of renowned doctors.

As a further step to expand its national chain,
Medsi acquired a second clinic in St. Petersburg
in December 2019. The increased spectrum
of healthcare services catering specifically to can-
cer patients in St. Petersburg is meant to repli-
cate the success of a similar strategy of Medsi’s
Botkinsky clinical hospital in Moscow.

In September 2019, Medsi first started developing
its own franchise network, expected to grow to 20
Medsi-branded franchisee clinics across Russia
in a five-year term. Franchisee clinics may open
both in cities where Medsi already operates and
in new cities with populations over 300,000 people.

In March 2020, Medsi acquired 4 clinics in Izhevsk
with a total floorspace of 4,300 sq m. The chain
includes a CDC with an inpatient facility, a clinic for
adults, a clinic for children and a women’s clinic.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

BUSINESS DEVELOPMENT STRATEGY

Medsi’s strategy aims to create the nation’s first
countrywide multi-specialty healthcare provider offering
a full spectrum of services. This includes:

Further increase of market share
in Moscow and other regions

Further enhancement of
operating efficiency

Digital
transformation

• Launch of new multi-specialty medical centre

• Change of customer relationship approach

Michurinsky with 28,000 sq m of medical areas.

from managing traffic to managing lifetime value.

• Launch of at least 5 new outpatient clinics.

• Seasonality management through demand pro-
jections, cost planning, and smart scheduling.

• Expansion through regional M&A and

franchise partnership projects.

• Optimisation of incentive plans
through economies of scale.

• Flexible OpEx management.

• Further refinement of SmartMed telemed-
icine platform and expansion of the range
of telemedicine services provided.

• Partnership projects in AI and

healthy lifestyle services.

• Development of BigData for joint clinical research
with pharmaceutical and technological partners.

VMI
SEGMENT 1

In 2019, Medsi increased its VMI market share from 5.0% to 5.8%. With the
overall Russian VMI market up 6.9% in 2019, Medsi registered a revenue
growth of 27.2% across Russia and 27.3% in Moscow and Moscow Region.

MEDSI'S VMI MARKET SHARE GROWTH
RUSSIA

MEDSI'S VMI MARKET SHARE GROWTH
MOSCOW AND MOSCOW REGION

Revenue

Patient visits

Revenue

Patient visits

5.0%

5.8%

7.8%

9.0%

24.0%

20.4%

6.9%

8.2%

2018

2019

2018

2019

2018

2019

2018

2019

RETAIL
SEGMENT 1

In 2019, Medsi grew its market share in the retail segment of the private
healthcare market from 1.2% to 1.3%. While the overall Russian retail segment
grew in 2019 by 9%, Medsi registered a revenue growth of 21.5% across
Russia and 27.5% in Moscow and Moscow Region.

MEDSI'S MARKET SHARE GROWTH
RUSSIA

MEDSI'S MARKET SHARE GROWTH
MOSCOW AND MOSCOW REGION

Revenue

Patient visits

Revenue

Patient visits

1.3%

1.2%

4.6%

4.0%

3.4%

2.9%

2018

2019

2018

2019

2018

2019

2018

2019

MMI
SEGMENT 1

In 2019, Medsi increased its share in the MMI market in Moscow and Moscow
Region from 1.7% to 2.1% by revenue. With the overall Moscow-Region
MMI market up 8.5% in terms of revenue and 1% in terms of patient visits,
Medsi registered a growth of 34.0% and 19.6%, respectively.

MEDSI'S MARKET SHARE GROWTH
RUSSIA

MEDSI'S MARKET SHARE GROWTH
MOSCOW AND MOSCOW REGION

Revenue

Patient visits

Revenue

Patient visits

0.49%

0.39%

2.1%

1.7%

0.01%

0.02%

0.10%

0.12%

2018

2019

2018

2019

2018

2019

2018

2019

Source: calculations based on data from Businesstat and company statistics.

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KEY ASSETS' RESULTS

SISTEMA.COM

22.3

+25.8% 2018/19
BN
RUB

MEDSI’S REVENUE IN 2019

FINANCIAL PERFORMANCE

INDICATOR, M RUB

2019

2018

CHANGE

Revenue

Adj. OIBDA

22,322

17,747

5,916

3,600

Operating income

2,848

693

Adj. net profit attributable
to Sistema

2,920

1,061

25.8%

64.3%

311.1%

175.3%

Medsi’s revenue in 2019 increased by 25.8% to RUB 22.3 bn as a result
of revenue growth across all key segments amid increasing number
of services provided.

Adjusted OIBDA grew by 64.3% on the back of revenue dynamics and due
to higher occupancy rate in hospitals as well as the impact of participation
in the Michurinsky Project, a joint venture with Capital Group, to con-
struct the Nebo business class residential project with a positive effect
of RUB 1.1 bn in 2019.

Adjusted net profit almost tripled, mostly due to OIBDA dynamics.

9.6

VISITS IN 2019

+12.8% 2018/19

In 2019, Medsi registered an increase in patient
visits in all business segments by a total of 12.8%.
The growth rate reached 6.8% in the retail segment,
13.7% in VMI and 19.6% in MMI.

FINANCIAL AND
OPERATIONAL
PERFORMANCE IN 2019

OPERATIONAL PERFORMANCE 1

PATIENT VISITS IN 2018–2019, M visits

8.501

9.593

6.388

7.266

2.007

2.144

0.156

0.187

2018

2019

2018

2019

2018

2019

2018

2019

TOTAL

INDIVIDUALS

VMI

MMI

AVERAGE CHEQUE IN 2018-2019, RUB

29,158

32,667

The average cheque in 2019 increased across all
segments by an average of 11.5%. The biggest
increase in the average cheque was observed
in the retail (13.7%) and MMI (12.0%) segments.
The growth rate in theVMI segment was 9.0%.

2,049

2,284

2,612

2,970

1,193

1,300

2018

2019

2018

2019

2018

2019

2018

2019

TOTAL

INDIVIDUALS

VMI

MMI

INDICATOR

Patient visits

Services provided

Medical floor space 2

Average cheque

Occupancy at inpatient clinics

Occupancy at outpatient clinics

UOM

M visits

2019

9.6

2018

8.5

services

17,334,000

14,532,000

sq m

RUB

100,500

96,200

2,300

84.7%

47.3%

2,100

69.7%

47.0%

Source: data from 2019–2020 commercial strategy, calculated based on company statistics.

1
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CHANGE

12.8%

19.3%

4.5%

11.5%

15 p.p.

0.3 p.p.

SISTEMA — ANNUAL REPORT 2019

BUSINESS
MODEL

Steppe's business model is based on vertical integration
and diversification across most promising agricultural
segments. Steppe is active in crop and dairy farming and
vegetable and fruit growing. The company also develops
logistical capabilities and trades in grain, sugar and grocery.

SISTEMA.COM

100% ASSETS OF STEPPE

50% RZ AGRO

AGROHOLDING

CROP FARMING

DAIRY FARMING

GRAIN TRADING
AND LOGISTICS

SUGAR AND GROCERY
TRADING

VEGETABLE GROWING

FRUIT GROWING

BUSINESS
DEVELOPMENT
STRATEGY

Steppe's development strategy relies on further increases
of the land bank, aggressive advancement in the trading
segment, development of proprietary logistics infra-
structure and construction of new dairy farms.

STEPPE
AGROHOLDING

KEY ASSETS' RESULTS

84.6% 1

SISTEMA'S EFFECTIVE STAKE

Andrey Neduzhko
CEO

Ali Uzdenov
CHAIRMAN OF THE BOARD OF DIRECTORS

Steppe Agroholding ("Steppe") is among Russia's
largest agricultural players, with a diversified asset
portfolio and a land bank of 527,000 ha.

Steppe is a national leader in terms of operating
efficiency, asset quality, and agricultural expertise
in crop and dairy farming. The company enjoys a
competitive edge in agricultural trading due to access
to a commodity base and its own logistical facilities.

No.5

IN RUSSIA BY LAND
ASSETS' AREA 2

56.9

MILK PRODUCTION
IN 2019

THSD
T

5,850

MILK COWS

1.3

M T

GROSS HARVEST OF CROPS 3

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ahstep.ru

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92.8% as of 31 December 2019.
Source: BEFL.
Steppe AgroHolding jointly with RZ Agro.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

INDUSTRY OVERVIEW
FOR 2019 1

DAIRY
FARMING

Milk output in 2019 was up 2.4% year-on-year,
to 31.3 M t. Yield per cow in the corporate
sector also increased substantially by 6.6%
year-on-year.

Russia's total output of market grade milk
in 2019 is estimated at 22.2 M t, or 71% of all
produced milk, which creates substantial poten-
tial for boosting the production of high-qual-
ity milk as raw material for the dairy product
industry.

TOTAL MILK YIELD

thsd t

CROP FARMING

GRAIN TRADING

FRUIT GROWING

VEGETABLE GROWING

MILK YIELD PER COW IN THE
CORPORATE SECTOR

2019

2018

2017

2016

SOURCE: UISIS

6,492

6,091

5,660

5,370

The output of cereals and pulses in Russia in 2019
was up 7.0% year-on-year, to 121.2 M t. In par-
ticular, wheat output was up 3.2% year-on-year,
to 74.5 M t 2, primarily as a result of a 3.0% increase
in wheat-growing area.

The average crop yield of cereals and pulses
in 2019 went up 5.1% year-on-year, to 2.7 t/ha 2.
At the same time, the crop yield of wheat is down
3.1%, to 3.4 t/ha, due to unfavourable weather con-
ditions in much of Russia.

In 2018–2019, the larger Russian agricultural
businesses continued to acquire land to expand
their holdings, a trend that supported further growth
of prices for agricultural land.

In 2019, Russia remained among the world's
leading exporters of agricultural crops and
the global number one in wheat exports. Grain
exports in the 2018–2019 season reached
42.2 M t, of which 34.6 M t (roughly 82%) was
wheat.3

In the first half of the 2019–2020 season, grain
exports totalled 24.8 M t, down 14.1% from
the first half of the 2018–2019 season. Wheat
exports reached 20.8 M t, down 15.0% from the
first half of the 2018–2019 season.3 The reduc-
tion in export volumes in the period is a result
of the sales of some products being resched-
uled for the second half of the crop year.

The gross harvest of pomaceous fruit in 2019
was up 9.1%, to 2.2 M t, mostly due to the
planting of new intensive orchards. The area
under perennial pomaceous fruit crops was up
by 4,000 ha, to 233,000 ha.

Apple imports in 2019 equalled 0.7 M t, down
17.1% from 2018. The reduction notwithstand-
ing, imports still represent a substantial percent-
age of Russia's pomaceous fruit consumption.

In 2019, the protected-ground vegetables sector
continued to grow, with farms increasingly
commissioning new greenhouses. The total
area of greenhouses in Russia currently stands
at 2,600 ha, up 4.9% from 2018. The total output
of vegetables grown in protected-ground green-
houses is up 17.7% year-on-year, to 1.273 M t.

Russia’s imports of tomatoes and cucumbers
in 2019 were down 6.2%, to 658,000 t.

FORAGE-FED COWS IN FARMS
OF ALL CATEGORIES

GROSS CEREAL AND PULSE
HARVEST IN RUSSIA

EXPORTS
OF CEREALS

GROSS POMACEOUS FRUIT HARVEST
AND IMPORT OF APPLES IN RUSSIA

GROSS VEGETABLE HARVEST
IN PROTECTED-GROUND
GREENHOUSES

thsd

 AGRICULTURAL BUSINESSES

 OTHER

2019

2018

2017

2016

2015

2014

2013

16,961

14,377

3,280

4,686

31,338

2019

16,245

14,366

3,283

4,659

30,611

2018

15,674

14,511

3,316

4,635

30,185

2017

15,061

14,726

3,359

4,607

29,787

2016

14,718

15,169

3,387

4,728

29,887

2015

14,365

15,630

3,439

4,824

29,995

2014

14,046

15,819

3,533

4,898

29,865

2013

7,966

7,942

7,951

7,966

8,115

8,263

8,431

M t

2019

2018

2017

SOURCE: UISIS

42.2

39.8

52.7

M t

2019

2018

2017

2016

2015

2014

2013

2012

121.2

113.3

135.5

120.7

104.7

105.2

92.4

70.9

M t

2019

2018

2017

1.273

1.082

0.922

M t

 POMACEOUS FRUIT HARVEST

 APPLE HARVEST

2,179

1,997

701

845

1,521

710

SOURCE: UISIS

1,726

678

1,495

892

1,597

1,527

1,050

1,352

2019

2018

2017

2016

2015

2014

2013

SOURCE: ROSSTAT

SOURCE: UISIS

1
2

Source: RusAgroTrans.

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SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

BUSINESS
DEVELOPMENT
IN 2019

In 2019, Steppe demonstrated growth across all key business
segments, particularly in crop and dairy farming and fruit growing.

In March 2020, the company expanded its land bank under
management to 527,000 ha by acquiring the Rodnaya
Zemlya farm (30,300 ha) and leasing land (80,500 ha)
from the Zerno Don group in Rostov Region.

FINANCIAL AND
OPERATIONAL
PERFORMANCE IN 2019

+28.5% 2018/19
BN
RUB

STEPPE AGROHOLDING’S
REVENUE IN 2019

CROP FARMING

GRAIN TRADING AND LOGISTICS

OPERATIONAL PERFORMANCE

FINANCIAL PERFORMANCE

As of the end of 2019, Steppe's land bank totalled 416,000 ha, up
from 401,000 ha at the end of 2018, mostly due to the acquisition
of an 11,000 ha farm in Stavropol Region in the first half of the year.

Steppe's grain exports reached 1.22 M t in the 2018–2019 crop year
and 0.957 M t in the first half of the 2019–2020 crop year, placing the
company among Russia's 8 largest grain producers.

The yields of most of the company's crops were under pressure in 2019
due to challenging weather conditions observed in Russia's grain-produc-
ing regions in the ripening season. Steppe managed to largely offset the
negative effect of climatic factors through increased operating efficiency,
greater fleet of technological machinery and equipment in crop farm-
ing, innovative tech solutions, and digitalisation of the company's main
business processes.

FRUIT AND VEGETABLE GROWING

In 2019, the gross harvest of apples totalled 30,700 tonnes, up 65.8%
from 2018, representing an all-time high for the fruit growing segment.

Further development of the fruit and vegetable growing segments will
involve intensive farming technologies, sales optimisations and brand
strengthening.

At the end of the calendar year 2019, total grain exports reached
1.198 M t.

STEPPE AGROHOLDING'S GRAIN EXPORTS

thsd t

2019

2018

2017

269

SOURCE: UISIS

1,198

1,115

DAIRY FARMING

The dairy farming segment remains a driver of Steppe's business growth
in terms of both business diversification and vertical integration.

The company's milk cow headcount reached 5,850 as of the end
of 2019, up 22.9% year-on-year. The total milk production in 2019 was up
21.9% year-on-year, to 57,000 t, with a per-cow milk yield of 11,100 litres
a year.

The segment's further development will be driven both by the com-
missioning of new farms and by operational improvements such as
enhancement of cows' genetic potential and use of latest technologies
and accumulated know-how.

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STEPPE AGROHOLDING: PRODUCTION

FINANCIAL PERFORMANCE

INDICATOR, thsd t

2019

2018

CHANGE

INDICATOR, M RUB

2019

2018

CHANGE

Gross harvest (crop farming)

945.0

814.1

Milk production

Vegetable harvest, including

Tomatoes

Cucumbers

Gross apple harvest

56.9

41.3

21.4

19.9

30.7

46.7

46.3

25.1

21.2

18.5

(14.8%)

(6.0%)

65.8%

STEPPE AGROHOLDING'S GROSS
HARVEST (RZ AGRO INCLUDED)

CROP, thsd t

2019

2018

CHANGE

Beetroot

Wheat

Corn

Winter barley

Sunflower

Other

TOTAL

368.5

251.8

707.7

685.9

46.9

22.0

57.5

40.1

25.0

49.4

117.5

102.4

1,320.0

1,154.6

46.3%

3.2%

16.8%

(11.8%)

16.4%

14.8%

14.3%

16.1%

21.9%

Revenue

OIBDA

31,044

24,161

4,103

4,909

(10.8%)

Operating income

2,283

3,261

28.5%

(16.4%)

(30.0%)

Net profit / (loss)
attributable to Sistema

(584)

1,095

(153,3%)

Steppe's 2019 revenue was up 28.5% year-on-year, to RUB 31.0 bn.
The growth came on the back of rising exports of both traditional and
niche crops, strong performance of the dairy farming segment and inten-
sive development of sugar and grocery trading.

The 2019 OIBDA equalled RUB 4.1 bn, down 16.4% year-on-year due
to a global slump in grain prices and a negative effect of biological
assets revaluation, a trend that was partially mitigated by the enhance-
ment of operating efficiency in the key business segments.

In 2019, Steppe's CapEx totalled RUB 1.9 bn. Most of the amount went
towards the construction of dairy farms, gradual acquisition of land par-
cels for expansion purposes, development of the logistics infrastructure
and new equipment and machinery purchases.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

OZON

BUSINESS MODEL

TECHNOLOGIES

LOGISTICS

42.999%

SISTEMA GROUP’S STAKE

Alexander Shulgin
CEO

• ACTIVE DEVELOPMENT OF THE MARKETPLACE

• BROAD MULTI-CATEGORY PRODUCT MIX

• No. 1 BRAND IN RUSSIAN E-COMMERCE

• COMPREHENSIVE DELIVERY NETWORK

• MOBILE FIRST APPROACH

GROUP

Ozon is a diversified online platform for millions of
consumers, which includes a leading Russian multi category
online retailer (OZON online store), Ozon.Travel online
travel agency, LitRes e-library and various financial services
for customers and partners. The company ranks first by
GMV 1 among multi-category online stores in Russia and is a
leader in terms of SKUs, online traffic and brand awareness.

No.1

MULTI-CATEGORY ONLINE
RETAILER IN RUSSIA

BRAND BY AWARENESS

80.7

BN
RUB

GMV (INCL. VAT)
in 2019

32.3

ORDERS DELIVERED
in 2019

93%

GMV GROWTH
in 2019

› 5

UNIQUE SKUS

6.5

THSD

MARKETPLACE
PARTNERS

› 38

UNIQUE VISITORS OF THE
ONLINE PLATFORM
in December 2019

40%

OF POPULATION HAVE ACCESS
TO NEXT-DAY DELIVERY

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1 GMV stands for Gross Merchandise Value, i.e. turnover excluding returns.

FINANCIAL SERVICES

• CROWDLENDING PLATFORM

• LOAN BROKER

• No. 1 DIGITAL PLATFORM IN

THE BOOK MARKET
60%+ share of the e-book market

• A WIDE RANGE OF E-BOOKS

AND AUDIOBOOKS
›300 thsd e-books

• THE LARGEST ONLINE

TRAVEL AGENCY IN RUSSIA

• LARGE CUSTOMER BASE

›780 thsd unique clients in 2019

20%

of the company's total
turnover is attributable
to marketplace

200

THSD SQ M

warehouse space,
×2 growth compared
to 2018

16.7

THSD

700 order pick-up
locations

› 5M

unique SKUs

65%

unaided brand
awareness

› 60%

of orders
in the mobile app

INDUSTRY OVERVIEW FOR 2019 2

In 2019, Russia’s total e-commerce market, including domestic and cross-border trade,
maintained a high growth rate of ~21% year-on-year and exceeded RUB 1.5 tn 3

At the same time, the domestic e-commerce market grew by 25% and reached
RUB 1 tn 3. Despite rapid growth, e-commerce penetration in Russia still lags
behind most countries (6.4% in 2019 compared with 22% in the UK, 11% in the
US and 37% in China 4) ), which indicates a significant potential for further
growth of the Russian market. Russia is Europe’s largest market in terms
of the Internet audience (93 M users) with Internet penetration of 81% 5.
According to analysts, e-commerce penetration in Russia could reach 9.5%
by 2022, which corresponds to a market size of RUB 3.8 tn with a compound
annual growth rate of 23% 6.

Legislative changes in Russia also contribute to the development of the
domestic e-commerce market and the strengthening of local players com-
pared to their foreign competitors. On 1 January 2020, the threshold for
duty-free imports of parcels was reduced from EUR 500 per month to EUR
200 per parcel, with the duty rate reduced from 30% to 15%. In the future, the
threshold for duty-free imports will be gradually reduced to EUR 20 7, which
can lead to a significant decrease in the growth rate of orders in foreign

stores. It is expected that as a result of the proposed legislative changes the
share of cross border e-commerce will decrease from 31% to 20% by 2022,
and large Russian market players will benefit the most.

Developed e-commerce markets have a significantly higher level of consol-
idation, with Top-2 players controlling more than two-thirds of the market
(as in China, the US and India). The main consolidators will be the largest
fast-growing multi-category marketplaces. Active investments in the logistics
infrastructure, expansion of own product mix, development of the marketplace
and competitive prices will allow Ozon to strengthen its leading positions
in the market.

2 All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.
3 VAT exclusive. Source: company's estimates..
4
5
6
7
8

Source: JP Morgan.
Source: Data Insight, E-commerce in Russia 2019.
Excluding structural changes of the market amid coronavirus outbreak. Source: Sberbank CIB.
This duty threshold will become effective from 2022.
Source: Data Insight and company's estimates.

SISTEMA — ANNUAL REPORT 2019

BUSINESS
DEVELOPMENT
STRATEGY

SISTEMA.COM

Ozon’s strategic goal is to transform the company into a
full-fledged online platform while maintaining high business
growth rates. A key element of the company’s strategy is
increasing the availability of e commerce for residents of small
towns where the selection of goods and affordability are limited.

In 2020, Ozon will focus on further development of its logistics infrastructure and expan-
sion of the product mix (including through the development of its marketplace), increased
offering of funding programmes for partners and customers, launch and development
of new products for partners (advertising platform and analytical tools, logistics market-
place, Ozon.Invest, etc).

KEY ASSETS' RESULTS

BUSINESS
DEVELOPMENT
IN 2019

80.7

+93% 2018/19
BN
RUB

OZON’S TURNOVER (GMV)

in 2019

In 2019, Ozon’s turnover (GMV) grew by record-high 93%
year-on-year to RUB 80.7 bn (VAT inclusive). The number of
delivered orders increased 2.1 times over the year to 32.3 M.

In 2019, Ozon’s priority areas in implementing its strategy aimed at business growth
acceleration were expanding the product mix while maintaining competitive prices, devel-
oping logistics and improving service quality for both customers and partner companies
(including through introduction of innovative products and services).

The company focused on the expansion of its product mix as one of the most impor-
tant factors in e-commerce growth. Over 2019, the number of SKUs increased threefold
to 5 M SKUs. The main growth driver was the development of the marketplace: its share
in Ozon online store’s turnover increased from 5% in January 2019 to 30% by the end
of the year, and in March 2020 about 70% of Ozon’s product mix was formed by its mar-
ketplace partners. At the end of 2019, about 6,500 partners had active sales on Ozon,
with about 15,000 in the process of registration.

Another important driver of GMV growth was the increase in the frequency of purchases
and the average transaction value (ATV). The launch of Ozon Premium subscription
service significantly contributed to performance improvement, and accounted for 20%
of deliveries in 2019. The ATV per Ozon Premium user was several times higher than ATV
per ordinary user, with one order averaging 6–7 items.

Ozon’s investment programme in 2019 was aimed primarily at developing the logistics
infrastructure, including doubling the area of fulfilment centres (to ~200,000 sq m) and
expanding last-mile delivery infrastructure. At the end of 2019, the company had the larg-
est network of parcel lockers in Russia with 6,900 own automated lockers. Ozon’s total
network, including own and partner lockers and order pick-up points, grew threefold over
the year to 16,700 locations. The share of automated pick-up points reached 23% of the
total volume of Ozon’s deliveries in 2019.

Ozon actively develops projects that are complementary to its core
business and are aimed at increasing the loyalty of both customers
and business partners. The following projects were launched in 2019:

• Ozon Premium, a subscription service for regular customers that helps save

on delivery and receive additional bonuses. Subscribers made 6.2 M orders in 2019.

• A bank card with higher cashback.

• Ozon.Invest, a crowdlending platform where Ozon’s partner

companies can raise funding from individuals.

• A logistics marketplace, i.e. a programme to develop a network of partner-operated

pick-up points and parcel lockers, as well as partner-enabled courier delivery.

INCREASING SISTEMA
GROUP’S STAKE IN OZON

Sistema consistently increased its equity holding in Ozon Holdings Limited throughout
2019 by acquiring its shares from other shareholders (including an 18.7% stake from
MTS) and making additional direct investments in the company. In December 2019, loans
issued by the Corporation during 2019 were converted into Ozon’s equity. As of 31 March
2020, Sistema Group’s total shareholding in the company was 42.999%.

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SISTEMA — ANNUAL REPORT 2019

BUSINESS
MODEL

SISTEMA.COM

Research
and development

Manufacturing

Promotion

Product
portfolio

Alium owns two R&D centres for
development of aerosols, injections,
liquid and solid dosage forms.

The aggregate area of the R&D
facilities exceeds 1,000 sq m. They
employ over 50 highly qualified
specialists with previous experience
at large R&D and test labs. Alium's
R&D capacity allows for development
of over 30 new drugs per year.

Alium's production facilities are
four pharma plants manufacturing
quality medications in compliance
with Russian GMP standards.

The maximum annual output is
3 bn tablets, 160 M capsules and
20 M sachets. In addition to solid
dosage forms, Alium produces
ampoules, syringes, solutions,
aerosols and suppositories.

Alium's key advantage is its efficient
promotion system that includes
active media advertising, a pool
of field representatives, competences
in medical promotion and a division
working with online retailers.

Alium holds market authorisations
for over 200 3 drugs with a focus
on the following medical areas:
gastroenterology, cardiovascular
diseases, respiratory diseases,
infectious diseases and neurology.

KEY ASSETS' RESULTS

ALIUM

24.9% 1

SISTEMA'S EFFECTIVE STAKE

Andrey Belashov 2
CEO

Dmitry Zubov
CHAIRMAN OF THE BOARD OF DIRECTORS

Alium Group is a vertically integrated full-cycle
pharmaceutical company that develops and manufactures
drugs, sells them to distributors and pharmacy chains
and actively promotes them in the market.

Alium was established in 2019 through the merger of two
pharma assets owned by Sistema, OBL Pharm and Binnopharm
(a 100% subsidiary of OBL Pharm from September 2019).

›200

MARKET AUTHORISATIONS
FOR DRUGS

NEW DRUGS BROUGHT
TO MARKET
in 2019

› 50

DRUGS UNDER DEVELOPMENT/
AWAITING REGISTRATION

~55%

~90%

OF THE PORTFOLIO'S REVENUE
COMES FROM OTC DRUGS

OF REVENUE COMES FROM
THE COMMERCIAL SEGMENT

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As of 31 December 2019 — 26.3%.

1
2 As of 31 December 2019 — Andrey Mladentsev.

The best-selling drugs are Venarus (No. 2 among vein tonics in 2019), Maxilac (a probiotic ranking No. 4 among nutritional supplements in 2019),
Neobutin (No. 4 among antispasmodic drugs for gastrointestinal system) and Reslip (No. 2 among medications for sleep disorders).

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

INDUSTRY
OVERVIEW
FOR 2019 1

BUSINESS
DEVELOPMENT
STRATEGY

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In 2019, the Russian drugs segment demonstrated growth of 9,6% 2. In 2020, the commercial segment
of the pharma market is expected to grow by 5.0%. The share of generics in drug consumption continues
to increase due to lower prices as compared to original medications and the declining purchasing power
of the Russian population. The share of generics was 62.5% in monetary terms in 2019, up 1.1 p.p. year-on-
year. The share of imported drugs fell by 1.2 p.p. in 2019 to 71.5% in monetary terms.

In 2020, a number of legislative initiatives were expected to take effect that would strongly impact the
Russian pharma market:

1. Mandatory tags for medications are expected to be introduced from 1 July 2020 to oust

low-quality and illegal products from the market and protect end consumers.

In 2020, all previously registered maximum selling prices for vital and essential medica-
tions are expected to be re-registered. Corresponding amendments to the Federal Law "On
Circulation of Medicines" were adopted in May 2019. The re-registration procedure was devel-
oped by the Healthcare Ministry and approved by a Government resolution.

In summer 2020, pharmacies with suitable licences are expected to be able to sell OTC drugs
and nutritional supplements online, provided the products are registered in Russia and have
been checked by the Federal Service for Consumer Rights Protection.

DEVELOPMENT
OF THE RUSSIAN DRUGS MARKET

bn RUB

 COMMERCIAL SEGMENT

 STATE SEGMENT

2020П

2019

2018

2017

2016

2015

1,072

1,021

992

948

896

824

573

560

452

450

401

374

1,645

1,581

1,443

1,398

1,297

1,198

SOURCE: DSM (PRELIMINARY DATA).

In 2020, the company plans to launch over 30 new commercial drugs. Sales growth will be ensured
by an active promotion programme, which includes raising awareness of the medical community, work with
pharmacy chains and advertising campaigns for OTC drugs.

The main strategic focus areas for 2020 are:
•
Intensive development of online sales;
• Establishment of a business unit for export sales;
• Development of medical promotion both at public clinics and private healthcare centres;
• Manufacturing of private labels for pharmacy chains.

Alium's strategy also envisages inorganic growth, such as acquisition of rights for promising medications
in target and adjacent areas, with subsequent investment in their promotion in order to create leaders
in respective categories.

BUSINESS
DEVELOPMENT
IN 2019

SISTEMA.COM

The integration of OBL Pharm and Binnopharm was a business development milestone in 2019, as it
created a large pharmaceutical player under the Alium brand, No. 9 by sales volume in monetary terms
among Russian companies in the commercial segment based on 2019 results. As a result of the integra-
tion, Sistema's effective stake in Alium increased from 12.8% to 24.9%.

The integration resulted in the companies’ merger of their sales services, transfer of sales to a single con-
tract, streamlining of their manufacturing and R&D activities and changes in top management.

Sales of Alium's drugs demonstrated
substantial growth in 2019 compared to 2018:

KEY DRUGS OF THE GROUP

NEW HIGH-POTENTIAL DRUGS

Neobutin: 93.5%

Reslip: 49.0%

Maxilac: 20.3%

Venarus: 11.5%

Elmucin: 323.9%

Primaxetine: 200.3%

Inspirax: 165.1%

Dexonal: 122.8%

In 2019, Alium launched 12 new drugs, including Sustaflex®, a nutritional supplement
for improving joint mobility, Cidocan®, a nootropic prescription drug, and Gastrostat®,
a gastroprotective medication.

ACQUISITION
OF OBL PHARM

At the end of 2018, a consortium of investors consisting of Sistema, VTB and the management
of OBL Pharm acquired a 95.14% stake in OBL Pharm from Alvansa Ltd, whose main shareholders are
Gazprombank and UFG Private Equity.

In July 2019, the Russian Direct Investment Fund (RDIF), the Russia-China Investment Fund (RCIF)
and major Middle Eastern funds became Alium's shareholders, having invested over RUB 4 bn. Following the
transaction, the effective shareholding of the consortium of investors in OBL Pharm was 28%, that of VTB
was 46%, and that of Sistema was 13%.

FINANCIAL
PERFORMANCE
IN 2019

INDICATOR, M RUB 3

Revenue

OIBDA

Operating income

Net profit

2019

7,568

1,877

1,401

748

2018

6,863

2,134

1,891

1,544

CHANGE

10.3%

(12.1%)

(25.9%)

(51.6%)

7.6

+10.3% 2018/19
BN
RUB

ALIUM’S REVENUE IN 2019

Revenue in 2019 grew year-on-year by 10.3% to RUB 7.6 bn due to growth in sales of promoted products
(Maxilac, Neobutin). In addition, Alium’s results were affected by the consolidation of Binnopharm’s results
starting from 1 September 2019. A decrease in OIBDA by 12.1% year-on-year to RUB 1.9 bn in 2019 was due
to increased expenses for the promotion of new products.

Net profit decreased to RUB 0.7 bn in 2019 as a result of OIBDA dynamics, higher depreciation charges
associated with the commissioning of a new factory in February 2019, new debt taken on for OBL Pharm’s
share buy-out in December 2018, and due to decision to no longer capitalise loan interest in 2019.

1
2

3 Management accounts. The results of Binnopharm are consolidated in the financial statements of OBL Pharm for 2019 starting

from 1 September 2019. Figures for 2018 are shown on a stand-alone basis from OBL Pharm accounts. The results of OBL Pharm and
Binnopharm are not consolidated in the financial statements of Sistema PJSFC. The table shows 100% of net profit.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SINTEZ

46.5% 1

SISTEMA'S EFFECTIVE STAKE

Sergey Klykov
CEO

Dmitry Zubov
CHAIRMAN OF THE BOARD OF DIRECTORS

Sintez is a major Russian pharmaceutical
company located in Kurgan.

Biocom is a subsidiary of Sintez located in
Stavropol and specialising in generics.

300

› 30

DRUGS IN THE PORTFOLIO
OF SINTEZ AND BIOCOM

DRUGS IN DEVELOPMENT

35%

OF PRODUCTS
MANUFACTURED FROM
OWN SUBSTANCES

TOP-10

RUSSIAN DRUG
MANUFACTURER 2

No.1

IN THE RUSSIAN
ANTIBIOTICS MARKET BY
PRODUCTION OUTPUT

BUSINESS
MODEL

SISTEMA.COM

Sintez is one of Russia's largest pharma companies, located in Kurgan. It is one of the region's largest
taxpayers and employers with over 3,000 people.

Sintez's three R&D laboratories develop 10–15 medications per year. The company's production
facilities meet the Russian GMP standards and include 7 production facilities and 28 production lines
for manufacturing 15 dosage forms, including tablets, capsules, powders, drops, sprays, suspensions,
solutions, ointments, gels and creams. In addition to ready-to-use drugs, Sintez produces active
pharmaceutical substances through chemical synthesis and extraction from biological and animal
sources. The substances are also used for Sintez’s own manufacturing process.

Sintez's subsidiary Biocom is a manufacturer of high-quality generics. Its plant in Stavropol meets the
European GMP standards.

At present, the diversified product portfolio of Sintez and Biocom comprises about 300 drugs
for major medical areas: infectious diseases, respiratory diseases, neurology, locomotor system
diseases, dermatology and cardiology.

ACQUISITION OF SINTEZ
AND BIOCOM FROM
MARATHON GROUP

In August 2019, Sistema and a financial partner acquired 46.5% in Sintez and 75.1% in Biocom from
Marathon Group for RUB 11.8 bn. Sintez and Biocom, which have complementary product portfolios,
have long been cooperating in sales and are under common management.

The goal of the transaction was to secure Sistema's foothold in the commercial and hospital seg-
ments of the Russian pharma market. At the next stage of consolidation of Sistema's pharma assets,
Sintez and Biocom may be integrated with Alium. Once the consolidation is complete, the merged
company could become a Top-3 Russian pharmaceutical company. The merged company's product
portfolio will comprise over 500 drugs produced at 6 pharmaceutical facilities in Moscow, Moscow
Region, Kurgan and Stavropol.

Potential synergies of the consolidation include stronger R&D competences, forming of a balanced
product portfolio with significant commercial potential, stronger negotiating positions and savings
on administrative costs.

FINANCIAL
PERFORMANCE
IN 2019

INDICATOR, M RUB 3

Revenue

OIBDA

Operating income

Net profit

2019

9,171

1,838

1,420

824

2018

7,411

1,535

1,213

953

CHANGE

23.7%

19.7%

17.1%

(13.4%)

9.1

BN
RUB

SINTEZ’S REVENUE IN 2019

Revenue grew by 23.7% year-on-year to RUB 9.2 bn due to growth in retail sales as well as launch
of promotion system in pharmacies and pharmacy chains, and increase in export (with Uzbekistan,
Kyrgyzstan and Turkmenistan as main export destinations). In addition, revenue growth was influ-
enced by the consolidation of Biocom.

OIBDA in 2019 showed a 19.7% growth year-on-year to RUB 1.8 bn following revenue dynamics and as
a result of effective cost controls.

Net profit decreased to RUB 0.8 bn by 13.4% year-on-year, primarily due to increased interest credit
payments resulting from taking out a loan to purchase shares of Biocom.

Z
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2

Joint shareholding with a financial partner.
Source: DSM.

3 Management accounts. The results of Biocom are consolidated in the financial statements of Sintez for 2019 starting from August 2019. Figures for 2018 are shown

on a stand-alone basis from Sintez accounts. The results of Sintez are not consolidated in the financial statements of Sistema PJSFC. The table shows 100% of net profit.

SISTEMA — ANNUAL REPORT 2019
81

BUSINESS
MODEL

Business Nedvizhimost’s business model is focused
on three key areas interlinked within the value
creation chain in the commercial segment: the value
created through redevelopment is subsequently
monetised by leasing the properties, accounting
for optimal maintenance plans for each asset.

SISTEMA.COM

MANAGEMENT OF RENTAL CONTRACTS
IN THE SEGMENT OF COMMERCIAL AND
LOW-RISE RESIDENTIAL REAL ESTATE

REDEVELOPMENT
OF COMMERCIAL PROPERTIES

MAINTENANCE OF COMMERCIAL
AND RESIDENTIAL PROPERTIES

BUSINESS
NEDVIZHIMOST

KEY ASSETS' RESULTS

100%

SISTEMA'S EFFECTIVE STAKE

Yuri Yakovchik
CEO

Sergei Egorov
CHAIRMAN OF THE BOARD OF DIRECTORS

Business Nedvizhimost Group is one of the largest
real estate owners in Moscow.

331.2

THSD
SQ M

TOTAL AREA OF LEASED
OUT PROPERTIES

88%

OF LEASED PROPERTIES
ARE COMMERCIAL

+63%

GROWTH OF LEASED-OUT
COMMERCIAL PROPERTIES
in 2019

127.2

THSD
SQ M

SOLD PROPERTIES
in 2019

187

COTTAGES IN MOSCOW
AND MOSCOW REGION
at the end of 2019

147

LAND PLOTS
at the end of 2019

At the end of 2019, the Group comprised over 15 legal entities with a broad pool of properties: mansions,
offices and shopping spaces, C class buildings, production and warehouse facilities, cottage estates within
Moscow and land plots in Moscow Region. The properties are leased out, while several properties and
land plots have been put up for sale. JSC Business Nedvizhimost also offers services in professional real
estate management.

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LEASED OUT PROPERTIES

REAL ESTATE SALES

thsd sq m

 COUNTRYSIDE PROPERTIES
 COMMERCIAL PROPERTIES

LAND PLOTS


 COMMERCIAL PROPERTIES

38.2

293.0

43.1

179.5

80.8

68.9

70.4

58.3

sistema-bn.ru

31 DEC 2018

31 DEC 2019

2018

2019

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

INDUSTRY OVERVIEW
FOR 2019 1

The area of new office properties commissioned in 2019 was 386,000 sq m,
with nearly half commissioned in Q4. The majority of new offices are located
outside the Central administrative district of Moscow. The commissioned
area remained flat year-on-year. The average annual commissioning rate was
similar to that in 2018.

The majority of commissioned offices pertain to B and B+ class, with only one
class A property. The size of the quality offices market reached 21 M sq m,
where 60% belong to class B and B+.

Net absorption of offices (the difference between leased and vacated prop-
erties) exceeded commissioning of new properties by almost 50%. The area
of newly leased properties was 2.0 M sq m in 2019, up 10% from 2018.

The volume of new deals (1.7 M sq m) was above the level of the pre-crisis
2007 for the second successive year, and a steady growth continued since
2015. A significant volume of deals was related to big rental contracts (from
5,000 sq m), with the majority signed with banks, IT companies and telecoms.
The demand peaked in Q4, due to existing agreements being linked to the
financial year and large companies planning their operations ahead for the
next 3 to 5 years.

In 2018–2019, there was an observable new trend towards positive absorp-
tion of all quality properties due tenants considering office premises with
an account for a potential headcount increase by 25% in the near future.
Additional demand encouraged developers to commission properties that
were frozen earlier. As the absorption rate increased, new office projects were
launched, due for commissioning in 2021–2022.

Growth in the real estate market was also driven by co-working spaces that
demonstrated a 25% increase year-on-year, accounting for a significant share
of office absorption. The market received a strong impetus from WeWork,
a US co-working chain, which entered the market by concluding five rental
deals with large Moscow business centres.

The weighted average requested rent rate for class A buildings (net
of A Premium) was RUB 27,600 per sq m per year at the end of 2019.
The rates for class B+ and B were RUB 16,900 and RUB 14,500, respectively 2.

AGGREGATE SIZE OF THE OFFICE PREMISES MARKET
AT THE END OF 2019, thsd sq m

CLASS A

4.6

CLASS B+

CLASS B

CLASS C

8.0

8.4

CHANGE IN RATE OF VACANT PREMISES
AT THE END OF 2019

CLASS A

CLASS B+

CLASS B

CLASS C

4.9%

8.5%

SOURCE: ILM, SWISS APPRISAL, CUSHMAN&WAKEFIELD.

14.6

10.9%

9.8%

FINANCIAL AND
OPERATIONAL
PERFORMANCE IN 2019

7.1

–9.9% 2018/19
BN
RUB

FINANCIAL AND OPERATIONAL
PERFORMANCE IN 2019

OPERATIONAL PERFORMANCE

OBJECTS

Office buildings

total

incl. vacant

Cottages in Moscow and Moscow Region

total

incl. vacant

Land plots

31 DECEMBER 2019

31 DECEMBER 2018

NUMBER

AREA, thsd sq m

NUMBER

AREA, thsd sq m

187

147

441

1,040

202

209

265

1,134

FINANCIAL PERFORMANCE

INDICATOR, M RUB3

2019

2018

CHANGE

Revenue

Adj. OIBDA

7,105

7,886

4,495

4,598

Operating income

4,014

4,184

Adj. net profit attributable
to Sistema

3,332

3,147

(9.9%)

(2.2%)

(4.1%)

5.9%

Revenue from rental assets declined by 9.9% to RUB 7.1 bn. Negative dynamics
year-on-year were due to decrease in sales volumes of land plots in Moscow
Region and commercial real estate as the company has completed optimization
of its real estate portfolio.

In 2019, adjusted OIBDA decreased slightly, 2.2% year-on-year, amounting
to RUB 4.5 billion. Adjusted OIBDA margin grew by 5 p.p. year-on-year to 63.3%
in 2019.

Adjusted net profit of Business Nedvizhimost in 2019 increased by 5.9% year-
on-year to RUB 3.3 billion.

BUSINESS
DEVELOPMENT IN 2019

BUSINESS DEVELOPMENT
STRATEGY

The company's real estate portfolio grew significantly in 2019
due to acquisition of former ATS buildings with an aggregate area
of 220,000 sq m from MGTS. The company now owns Moscow's
largest distributed chain of commercial properties (over 80 build-
ings). All buildings are leased out, with MGTS being the anchor
tenant of the new properties.

In 2019, the company continued a large-scale renovation of its
rental assets in Serebryany Bor, which had begun in 2017 and will
be completed in 2020. Under the programme, leased residential
buildings and infrastructure facilities have been remodelled and
repaired, which contributed to 8 additional houses being leased
in 2019.

Business Nedvizhimost's development strategy adopted in 2019 focuses
on in-depth redevelopment of certain assets in order to enhance their quality
and significantly raise rental rates. One redevelopment option is multi-pur-
pose centres that accommodate traditional offices, co-working and shopping
spaces, as well as serviced apartments.

The renovation programme is divided into several stages and is designed
to run until 2024.

In addition to renovation of own properties, the company plans to purchase
assets off the market for in-depth redevelopment, including joint redevelop-
ment with external partners.

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3 Management accounts.

SISTEMA — ANNUAL REPORT 2019

COSMOS HOTEL
GROUP

BUSINESS
MODEL

KEY ASSETS' RESULTS

100%

SISTEMA'S EFFECTIVE STAKE

Alexander Shvein
PRESIDENT

Leonid Monosov
CHAIRMAN OF THE BOARD OF DIRECTORS

Cosmos Hotel Group is one of Russia’s leading
hotel management companies providing a full
range of hotel development services from project
consulting and preparing hotels for opening to cost
cutting and increasing asset capitalisation.

Cosmos Hotel Group manages 4,122 rooms in 3–5 star
hotels located in tourist and business centres. Assets
under management include city business hotels and luxury
resorts in Russia, Italy, Namibia and the Czech Republic.

4,122

ROOMS
UNDER MANAGEMENT
at the end of 2019

HOTELS
UNDER MANAGEMENT
at the end of 2019

1.5

МЛН

VISITORS AT HOTELS
MANAGED BY COSMOS
HOTEL GROUP
in 2019

2,390

RUB

66.6%

AVERAGE REVPAR 1 GENERATED
BY THE HOTELS OF
COSMOS HOTEL GROUP
in 2019

AVERAGE OCCUPANCY
RATE AT THE HOTELS OF
COSMOS HOTEL GROUP
in 2019

21.8%

OF COSMOS HOTEL GROUP'S
REVENUE GENERATED BY
HOTELS OUTSIDE RUSSIA
in 2019

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RevPAR stands for revenue per available room per day.

SISTEMA.COM

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

Cosmos Hotel Group specialises in managing existing hotels, including implementation of service
standards, introduction of quality assurance systems, recruitment, training and regular assessment
of personnel, administrative and business operations, adoption of security standards, improvement
of sales, income management and centralised procurement systems, as well as providing other
highly skilled services in the hospitality segment.

HOTELS

RETAIL

WEAR

KID'S WEAR

ECO MARKET

LOUNGE

SERVICES

CATERING

CLEANING

TECHNOLOGIES

E-COMMERCE

TRAVEL

LAB

BUSINESS
DEVELOPMENT
STRATEGY

The development strategy of Cosmos Hotel Group is aimed at increasing its market share by expanding
accommodation supply in Moscow, St. Petersburg and the largest regional economic hubs. The main focus
of the business is development of 3–4 star business hotels. Most of Cosmos Hotel Group's hotels are
located in Russia's regions with the highest demand for hotel accommodation in this price segment.

In 2020, Cosmos Hotel Group expects to complete the rebranding of its luxury hotels Altay Resort and
Izumrudny Les under the Cosmos Collection brand. The rebranding programme will also cover Cosmos and
Intourist Kolomenskoye, which will operate under the Cosmos Hotel brand. In 2020, Cosmos Hotel Group
will launch its first serviced apartment property under the Cosmos Stay brand and re-open the Leopard
Lodge safari hotel after renovation.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

INDUSTRY OVERVIEW FOR 2019 1

CHANGES IN HOTEL
CAPACITY IN MOSCOW

 GROWTH
 NUMBER OF NEW ROOMS OVER THE YEAR
 NUMBER OF ROOMS AVAILABLE AT THE START OF THE YEAR

7.3%

7.7%

7.8%

9.4%

2.7%

4.0%

0.6%

1,661

778

128

1,143

1,003

1,237

471

13,791

14,794

15,937

17,174

17,645

19,306

20,084

2013

2014

2015

2016

2017

2018

2019

In 2019, a 128-room international brand hotel Holiday Inn Express
Baumanskaya was opened in Moscow. After a period of considerable growth
in 2017–2018, quality demand for rooms in international brand hotels
increased by less than 1.0% in 2019.2

The average occupancy rate of Moscow hotels in 2019 was 78%, which is
3 p.p. higher than in 2018.

Hotel accommodation prices increased by 2.9% in 2019 compared to 2017.
The luxury segment enjoyed the highest growth in room prices (7.9%) due
to a unique value proposition and attractive location.

All hotel segments saw substantial growth in revenues compared to 2017
(10.4%) on the back of higher occupancy rates, while the main growth driver
in the luxury segment was the average price per room.

The competition is Russia's hotel chains segment was low. Russian hotel
chains control about 40% of quality 3–5 star hotel capacity in Russia.

Competition was still high in Moscow’s hospitality market, especially in the
segment of budget tourist groups. The hotels of Cosmos Hotel Group have
a competitive advantage in the market due to their diversified product offering,
distribution channels and efficient business processes. Cosmos Hotel Group
accounts for more than 5% of the hotel capacity in the midscale segment
in Moscow, which is one of its key competitive advantages as it enables the
company to regulate prices through supply volumes.

BUSINESS DEVELOPMENT IN 2019

In 2019, Cosmos Hotel Group continued successful integration of the
Regional Hotel Chain (RHC) acquired in 2016. The revenue of RHC assets
increased by 5.1% in 2019 compared to 2017 as a result of the RHC consolida-
tion and the increased operational efficiency of Cosmos Hotel Group.

In 2019, Cosmos Hotel Group continued the rebranding of its hotels in Russia
with the exception of Holiday Inn Express and Park Inn, which are still oper-
ating under international brands. In 2018, the company opened Cosmos
Petrozavodsk, the first hotel operating under the Cosmos brand.

FINANCIAL AND
OPERATIONAL
PERFORMANCE IN 2019

–5% 2018/19
BN
RUB

COSMOS HOTEL GROUP’S
HOTEL ASSETS’ REVENUE
IN 2019

OPERATIONAL PERFORMANCE

FINANCIAL PERFORMANCE

INDICATOR 4

RevPAR, RUB

2019

2018

2017

2018/19

INDICATOR, M RUB5

2019

2018

CHANGE

2,390

2,564

1,977

(6.8%)

Revenue

5,034

5,301

Hotels in Russia

1,980

2,164

1,640

(8.5%)

Adj. OIBDA

1,251

1,314

Hotels abroad

12,749

12,640

9,734

0.9%

Operating (loss) / profit

(481)

555

Occupancy rate,

66.6%

64.4%

56.8%

2.2p.p.

Adj. net (loss) attributable
to Sistema

(238)

(532)

Hotels in Russia

66.7%

64.5%

57.0%

2.2p.p.

Hotels abroad

63.9%

60.2%

52.5%

3.7p.p.

Rooms

4,122

4,052

3,776

1.7%

The average occupancy rate of hotels in 2019 was 66.6 %, which is 2.2 p.p.
higher than in 2018 due to growth in the domestic and outbound tourism
segments and the effect of the 2018 FIFA World Cup. At the same time,
occupancy rate increased by 10 p.p. against 2017 mostly due to the improved
performance of Cosmos hotel and city hotels.

RevPAR decreased by 6.8% from RUB 2,564 in 2018 to RUB 2,390 in 2019.
In the meantime, the company’s RevPAR rose by 29.7% compared
to 2017 mostly due to the contribution from HIEX Moscow Paveletskaya and
hotels abroad.

In 2019, the hotel assets of Cosmos Hotel Group saw a drop in revenue
of 5.0% to RUB 5.0 bn compared to 2018. The negative dynamics in FY 2019
were impacted by the effect of a high base on the back of the 2018 FIFA World
Cup in Russia, and a decrease in the incoming tourist flow. In the meantime,
the company recorded revenue growth compared to 2017 mostly due to the
launch of HIEX Moscow Paveletskaya and improved performance of Cosmos
Hotel and RHC. In 2019, the share of revenue accounted for by hotels out-
side Russia increased from 22% to 24% on the back of lower revenues in the
segment of Russian hotels.

Adjusted OIBDA in 2019 decreased by 4.8% year-on-year to RUB 1.3 bn follow-
ing revenue dynamics. Adjusted net loss year-on-year in 2019 decreased as
a result of debt portfolio optimization.

(5.0%)

(4.8%)

—

In 2019, Cosmos Hotel Group launched comprehensive renovation of its flag-
ship asset, Cosmos hotel. The renovation project will be implemented in two
stages. The first stage, which is expected to be completed in 2020, will see
renovation of the main restaurant's kitchen and replacement of lifts. The sec-
ond stage (2020–2023) envisages a complete overhaul of hotel rooms,
including replacement of utility systems. All repair works at the property will
be performed without suspending operations.

In 2019, Altay Resort opened a new 60-room hotel building. Izumrudny
Les launched a new wellness centre featuring a 25-metre swimming pool,
a congress hall with multi-functional rooms of various sizes and 10 additional
duplex cottages with the total accommodation capacity of 20 rooms.

Izumrudny Les received the national hospitality award as the best country-
side hotel in 2019. Izumrudny Les also won the "Best hospitality company
in Moscow Region" award in the category "Eco hotel of the year".

REVPAR

thsd RUB

9.7

12.6

12.7

1
2
3 Comparison against 2017 is more representative due to a seasonal upsurge in the market during the FIFA World Cup in 2018.

The 2017–2018 figures have been adjusted for inclusion of resorts.

4
5 Management accounts.

2.0

2.5

2.4

2017

2018

2019

2017

2018

2019

1.3

2017

1.8

2018

1.5

2019

HOTELS ABROAD

HOTELS IN RUSSIA

COSMOS

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SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

BPGC

91%

SISTEMA'S EFFECTIVE STAKE

Dmitry Sharovatov
CEO

Oleg Mubarakshin
CHAIRMAN OF THE BOARD OF DIRECTORS

JSC Bashkir Power Grid Company (“BPGC”) is one
of Russia’s largest regional power grid companies.

16,487

NEW CONNECTIONS
in 2019

280

THSD

SMART METERS WITH
AUTOMATED DATA
COLLECTION
at the end of 2019

› 86.5

OF POWER GRIDS

THSD
KM

90.9%

IMPLEMENTATION OF SMART
GRID TECHNOLOGY IN UFA
at the end of 2019

35%

SHARE OF THE AUTOMATED
POWER CONTROL AND
METERING SYSTEM
at the end of 2019

7.7%

POWER LOSSES IN
DISTRIBUTION GRIDS
in 2019

82%

SHARE OF POWER
TRANSMISSION MARKET
IN THE REPUBLIC OF
BASHKORTOSTAN 1

8,011

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bashes.ru

By revenue.

BUSINESS
MODEL

SISTEMA.COM

BPGC’s activities are aimed at providing reliable, high-quality and
affordable power supply to consumers. In addition to the core
operating activities, the company pays attention to ensuring
conditions for the region’s economic growth, sustainable devel-
opment and mutually beneficial cooperation with the state.

BPGC manages companies in three main areas:

• LLC Bashkir Grid Company (“BGC”) provides for electric power transmission transmission

between the central part of Russia and the Urals.

• LLC Bashkirenergo ensures distribution of electric power to individual consumers in the Republic

of Bashkortostan.

• LLC BPGC Engineering carries out design, construction and overhaul of power facilities..

Most of the company’s revenue is generated from activities related to electric power transmission.
These activities are natural monopolies with tariffs regulated by the state. BPGC’s subsidiaries also
provide services in connection to power grids, design and construction of power facilities, IT and
communications.

FUEL SUPPLY

ELECTRICITY
GENERATION

ELECTRICITY TRANSMISSION
AND DISTRIBUTION

SUPPLY

CONSUMPTION

NATURAL
GAS

RENEWABLES

COAL

FUEL
OIL

TPP

LLC BGC
(INTER RAO
GROUP)

HPP

LLC BGC
(INTER RAO
GROUP)

HOUSING

TRANSMISSION GRIDS

DISTRIBUTION GRIDS

BGC

BASHKIRENERGO

LLC BPSC

OFFICES

LLC BPGC ENGINEERING

INDUSTRY

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

BPGC is one of the leaders in terms of oper-
ational efficiency among Russia’s power grid
companies. Compared to the “pot holders” in the
neighbouring regions, BPGC is the leader in terms
of operating costs.

FINANCIAL
AND OPERATIONAL
PERFORMANCE IN 2019

20.9

+9.4% 2018/19
BN
RUB

BPGC’S REVENUE IN 2019

INDUSTRY OVERVIEW FOR 2019 1

Electricity generation in Russia increased by 0.4%
to 1,096 bn kilowatt-hours (kW·h) in 2019, while
electricity consumption in the reporting period
remained at the level of the previous year —
1,075 bn kW·h, Russian Ministry of Energy data
suggests. A significant increase in electricity
generation was recorded at solar and wind power
plants: 1.6 bn kW·h of electricity was gener-
ated at such power plants in 2019, up 58.6%
year-on-year.

consumers will remain at the level of 5.0% 2 per
year on average in Russia. Regulated electricity
rates for residential consumers will grow at the
same pace.

The average “common pot” tariff for electric
power transmission services reached RUB 1.18
per kW·h in the Republic of Bashkortostan
in 2019. The indexation of single-rate rates aver-
aged 110.5% since July 2019.

In order to reduce the volume of cross-subsidies
in the power grid sector, indexation of tariffs
for the delivery of electric energy to residential

Electricity generation in Russia in 2020 is
expected to reach 1,126.2 bn kW·h, and domestic
consumption may increase to 1,115.0 bn kW·h2.

BUSINESS DEVELOPMENT IN 2019

In 2019, BPGC commissioned the Kustarevskaya
substation, which supplies electric power
to a large neighbourhood in Ufa. The technical
solutions employed in this project simplify the
processes associated with operations and main-
tenance, increase the reliability and quality
of power supply to consumers and represent new
steps in the development of Smart Grid.

In 2019, BPGC completed a project to electrify
the Belaya River waterfront in Ufa, one of the
city’s landmarks.

Losses on grids

 DISTRIBUTION

TRANSMISSION

8.2%

7.7%

1.2%

1.3%

2018

2019

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and reduced operating costs for the maintenance
of electrical equipment. The company also
upgraded equipment at three other substations
in the reporting year for a total cost of RUB 63 M.

In 2019, LLC BPGC Engineering completed the
design and construction of a large energy facil-
ity — a 220 kV substation in Revda (Sverdlovsk
Region) as part of its strategy to enter the
external market. In addition to the substation,
the company commissioned a 220 kV overhead
power transmission line with a length of more
than 1.5 km. At the end of 2019, the substation
was energised, and its commissioning is planned
for 2020.

The company recorded 16,487 connections
to power grids in 2019, down 14.7% year-on-year.
The decline was mostly due to the saturation
of the market in terms of demand for power
below 15 kW (a group that mainly includes house-
holds and small businesses).

In June 2019, BPGC was recognized as the
winner of the 9th Russian national competition
Russia’s Best Power Grids in the categories
“Socially Responsible Power Grid Company” and
“Most Transparent Power Grid Company”.

In 2019, BPGC continued to implement its
long-term programmes aimed at enhanc-
ing operating efficiency:
•
• development of digital energy based

energy conservation and energy efficiency;

on the comprehensive overhaul project
of distribution grids in Ufa and intro-
duction of Smart Grid technology;
• automation of business processes
employing IT and ERP systems.

LLC Bashkirenergo continued to roll out its pro-
gramme for the implementation of the automated
power control and metering system by installing
about 36,000 meters in 2019. The total number
of installed smart meters reached 280,000
at the end of 2019. In 2020, the company plans
to install 25,000 new meters and approximately
107,000 meters in 2020–2022, allowing it
to increase the share of smart meters to 40%.

In 2019, the company continued to implement
the Smart Grid project in the city of Ufa. Over the
reporting year, BPGC upgraded 83 distribution
and transformer substations, and laid 5 kilo-
metres of cable lines.

In 2019, BGC completed the long-term pro-
gramme to upgrade electrical equipment at the
open switchgear of the Beketovo substation,
which started back in 1998, having replaced 162
units of electrical equipment during this period.
Updating the equipment at the Beketovo sub-
station is crucial both for regional energy supply
and for electric power transmission between
the central Russia and the Urals through 500 kV
transmission grids. The overhaul of this substa-
tion increased the reliability of energy streams

1
2

All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.
Source: Ministry of Economic Development of the Russian Federation.

OPERATIONAL
PERFORMANCE

INDICATOR

Power in

Power losses

New connections

Connected capacity

FINANCIAL
PERFORMANCE

BASHKIR-
ENERGO

2019

BGC

BASHKIR-
ENERGO

2018

BGC

BASHKIR-
ENERGO

CHANGE

BGC

22,453

27,095

22,512

27,327

(0.3%)

(0.8%)

1.27

340

—

8.23

1,854

19,321

380.2

1.21

(0.54 p.p.)

0.06 p.p.

325

(6.9%)

4.5%

(14.7%)

(6.1%)

—

UoM

M kW·h

7.69

1,726

connections

16,487

356.9

INDICATOR, M RUB

2019

2018

CHANGE

Revenue

OIBDA

Operating profit

Net profit attributable to Sistema

20,931

19,130

6,205

3,537

2,698

6,369

3,872

2,930

9.4%

(2.6%)

(8.7%)

(7.9%)

In 2019, revenue increased by 9.4% year-on-year to RUB 20.9 bn due to the increase of electricity transmis-
sion tariffs and changes in the methodology for accounting revenue from grid connection services.

OIBDA in 2019 decreased by 2.6% year-on-year to RUB 6.2 billion. OIBDA dynamics were affected by the
growth of other operating income in 2019 due to one-off financial transactions on the settlement of oper-
ational disputes. OIBDA margin decreased by 3.7 p.p. year-on-year to 29.6% in 2019 as a result of OIBDA
decline.

In 2019, BPGC’s net profit amounted to RUB 2.7 billion, 7.9% lower than in 2018. Negative dynamics
was mostly due to OIBDA trend and growth in depreciation charges.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

RTI

87%

SISTEMA'S EFFECTIVE STAKE

BUSINESS
MODEL

SISTEMA.COM

RTI comprises 13 key enterprises, including JSC RTI
management company, R&D institutes, plants, construction
and assembly companies and software developers. RTI's
core activities are divided into two business segments:
radars, automated security and control systems, and the
remaining assets that are separate business units.

RTI has own well-developed R&D infrastructure and well-equipped serial production facilities
employing over 10,000 researchers, product developers, engineers and other highly qualified
specialists. Its enterprises are located in Moscow, Saransk, Zelenograd, Dubna, Yaroslavl, Veliky
Novgorod and Vladivostok.

Pavel Laptayev
CEO

Oleg Mubarakshin
CHAIRMAN OF THE BOARD OF DIRECTORS

RTI Group is a developer, manufacturer and supplier
of complex radar, information and integrated
automated control systems and command centres,
communications equipment and electronic devices.

›10,000

SCIENTISTS, DESIGNERS AND
ENGINEERS

BN
RUB

REVENUE IN 2019

RESEARCH AND DEVELOPMENT
INSTITUTES

INDUSTRIAL FACILITIES

1 / 2

—

I
T
R

aorti.ru

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

INDUSTRY
OVERVIEW
FOR 2019 1

Target markets for RTI are security solutions and automated control and communication systems.
Introduction of command and control systems (2C systems) is a global trend in the segment of automated
solutions for public administration. This market is expected to grow from USD 33.0 bn in 2019 to USD
43.9 bn by 2025, which is in line with a global CAGR of 4.9%.2

The size of the Russian ICT market in 2019 was USD 47.1 bn, making it the largest in Central and Eastern
Europe. Aggregate ICT spending in CEE totalled USD 136.7 bn in 2019, an increase of 4.0% from 2018.
Spending on telecom services accounted for 41% of the total market volume in the region, and sales
of equipment and IT services for 34% and 13%, respectively.3

In 2020, the Russian market of automated control systems is projected to demonstrate a high growth rate
of 10%-15% in the segment of service solutions (geoinformation platforms, business intelligence) and con-
trol systems for state authorities.4 The global trend towards automation and intellectualisation of control
and security systems, including use of artificial intelligence, is also expected to sustain.

RTI develops products for growing segments of the ICT market. Notably, it is actively working to create
a standard automated control system for Russian regions, the Region Administration Centre.

BUSINESS
DEVELOPMENT
STRATEGY

RTI's mission is to create a smart and safe future for the humankind. To achieve it, the company strives
to remain the leader in its traditional segments of long- and ultra-long-range radars and automated control
systems. RTI is also working to strengthen its position in promising markets by entering new segments,
such as short-range radars, space-based radars, civilian (regional) automated control systems, communica-
tions and navigation systems.

In addition, it promotes its existing competences in Southeast Asia, the Middle East and Eastern Europe.
Based on technological developments, it plans to fully digitalise all radars: using computing capacity of data
processing centres, artificial intelligence and big data analysis, and to unite all radars of the radar field into
a single information system for faster and more accurate data processing.

Moving in line with the global trend towards digitalisation of economy and public services, RTI is actively
developing a comprehensive B2G solution for Russian regions, the Region Administration Centre. This
solution is designed to collect reliable and comprehensive statistics on a region, process it, analyse and
forecast changes in indicators. This will be achieved through integration with federal databases and infor-
mation systems of municipal authorities. Region Management Centres will provide up-to-date information
to regional authorities for accurate strategic planning and project management and will reduce reporting-re-
lated workload of the regional executive and local government bodies.

BUSINESS
DEVELOPMENT
IN 2019

In February 2019, CJSC RTI Microelectronics (part of RTI Group) signed a legally binding agreement with
Rostec and Roselektronika, envisaging the setup of a joint venture, LLC Element, in the segment of microe-
lectronic component base. In May 2019, RTI transferred its microelectronics assets, with the largest ones
being PJSC Mikron and JSC NIIME, to the new joint venture.

In 2019, RTI Group completed trials of the first beyond-the-horizon Container radar, which was officially put
into operation on 1 December 2019.

Work is underway to develop and launch products in civilian segments. Notably, the company created proto-
types of the following products in 2019:

• Experimental space-based flight test system

• Yauza airfield landing system to ensure accurate land approach of aircraft

• Crowd security screening system that enables hidden and safe screening and
remotely identifies presence of weapons, explosives, chemicals or drugs.

In addition, in 2019 RTI became a partner of JSC MCST, a Russian developer of microchips. The partner-
ship will enable RTI to actively develop and promote own and joint developments, engaging other domestic
software developers and distributors.

FINANCIAL
PERFORMANCE
IN 2019

24.7

BN
RUB

RTI’S REVENUE IN 2019

INDICATOR, M RUB 4

2019

2018

CHANGE

Revenue

Adj. OIBDA

Operating profit / (loss)

Adj. net profit / (loss)
attributable to Sistema

24,740

5,389

(1,770)

3,195

22,886

4,919

921

(531)

8.1%

9.5%

—

In 2019, RTI’s revenue showed an 8.1% year-on-year increase to RUB 24.7 bn primarily due to the
increased volume of activity under large long-term contracts. Adjusted OIBDA grew by 9.5% year-on-year
to RUB 5.4 bn in 2019. Adjusted OIBDA margin remained at the 2018 level of 21.8%.

In 2019, RTI reported adjusted net profit of RUB 3.2 bn compared to a net loss a year earlier, which
was mostly due to disposal of assets in 2Q 2019.

The decrease in net debt by 33.0% to RUB 19.4 bn was due to the transfer of part of RTI Group's debt
together with microelectronics assets to Element LLC, as well as repayments of RUB 1 billion made
on RTI’s outstanding debt. In addition, funds totaling RUB 5.7 bn earmarked for work under state con-
tracts are held on RTI’s accounts but not factored into net debt calculations.

2 / 2

—

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1
2
3
4

All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.
Source: MarketsandMarkets Research.
Source: IDC.
Source: company’s estimates.

4 RTI’s results for 2019 reflect reclassification of RTI’s microelectronics assets as part of discontinued operations.

Results for 2018 have been revised to reflect the results of this reclassification.

SISTEMA — ANNUAL REPORT 2019

BUSINESS
MODEL

SISTEMA.COM

Element includes assets representing the entire value chain in the area of microelectronic
component base: from fundamental research to sales of finished solutions. Element's diversified
product portfolio comprises solutions from over 15 enterprises and design centres. The Group is
able to meet the demand of the market worth more than RUB 100 bn.

VALUE CHAIN OF THE INTEGRATED COMPANY

MANUFACTURING

DEVELOPMENT
(DESIGN CENTERS)

MICROELECTRONIC
COMPONENT BASE

SHARE IN

REVENUE

35%

47%

PACKAGES

15%

SALES

KEY ASSETS' RESULTS

ELEMENT

50.0001%

SISTEMA'S EFFECTIVE STAKE 1

Ilya Ivantsov
CEO

Oleg Bocharov2

CHAIRMAN OF THE BOARD OF DIRECTORS

Element Group is a leading Russian microelectronics devel-
oper and manufacturer that creates technologies to
ensure digital development of business and society.

Element is comprised of the most advanced Russian enterprises
operating in the field of microelectronics development, pro-
duction and design. The products developed by the company
are supplied as input material for the manufacturing, telecoms,
financial and energy sectors, thus facilitating the implementa-
tion of projects aimed at development of the digital economy.

›8,000

›1,000

EMPLOYEES

DEVELOPERS

20.8

BN
RUB

13%

REVENUE IN 2019

SHARE OF EXPORTS IN REVENUE

S
T
E
S
S
A
R
E
H
T
O

RTI’s stake

1
2 As of 31 December 2019 — Alexander Borisov.

SISTEMA — ANNUAL REPORT 2019

KEY ASSETS' RESULTS

SISTEMA.COM

INDUSTRY
OVERVIEW
FOR 2019 1

In 2019, the global microelectronics market was down 11.6% year-on-year to USD 409 bn 2. The decline
was mostly caused by the lack of breakthrough technologies and products in the market and a fall
in demand for memory storage resulting from the saturation of demand from media data storage systems.
The main sources of demand for microelectronic products are segments of computer and server equip-
ment, mobile devices and telecommunications. At the same time, the global demand is expected to recover
in 2020 2 on the back of the growing IoT, AI, industrial electronics and car electronics sectors.

In 2019, the Russian microelectronics market contracted by 5.2% to RUB 127 bn amid decreasing volumes
of government contracts. Demand for microchips remains strong in the defence, aerospace and healthcare
industries. The general trend towards digitalisation of business processes, automation of production facil-
ities and infrastructure is stimulating demand for microcontrollers. The high demand for microelectronic
products is supported by the communication equipment and security systems segments.

Demand is expected to recover in the domestic market by 2021 mostly due to the introduction of state
support measures for the industry. In 2019, the share of imported products in general microelectronics
consumption in Russia was 82% 3, indicative of substantial potential for expanding local production as part
of the import substitution programme.

The global trend toward greater technological and logistical isolation stimulates the demand for products
localised in Russia. In 2020–2025, the share of domestically manufactured components for navigation and
automated city management systems, internal and external environmental monitoring systems, energy and
energy transportation sectors is expected to grow considerably.

Structure of Russian microelectronics market

2%
TELECOM

13%
CONSUMER ELECTRONICS

41%
DEFENCE AND AEROSPACE

5%
ID, RFID AND SMART CARDS

32%
INDUSTRY, ENERGY AND MEDICAL ELECTRONICS

4%
IOT

3%
CAR INDUSTRY

Global microelectronics market,
bn USD

Russian microelectronics market,
bn RUB

2019

2018

2017

2016

2015

409

412

463

2019

2018

2017

2016

2015

339

335

SOURCE: COMPANY DATA.

127

134

131

129

128

SOURCE: COMPANY DATA, WORLD SEMICONDUCTOR TRADE STATISTICS.

1
2
3

All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.
Source: World semiconductor trade statistics.
Source: company data.

S
T
E
S
S
A
R
E
H
T
O

BUSINESS
DEVELOPMENT
IN 2019

BUSINESS
DEVELOPMENT
STRATEGY

Element was established in July 2019. RTI Microelectronics (controlled by Sistema), Rostec and
RosElectronics jointly contributed to the JV controlling stakes in 19 enterprises operating in the area
of development and production of microelectronic component base. Following the transfer of shares
to the joint venture RTI Microelectronics holds 50.0001%, while Rostec and RosElectronics together hold
49.9999% in the authorised capital of the merged company.

In September 2019, Element opened Vostok Centre, the first Russian centre for collective design of elec-
tronics in the Far East, on Russky Island on the basis of the School of Engineering and the School of Digital
Economics of the Far Eastern Federal University.

In November 2019, Element, Sozvezdie Concern (part of Rostec) and Rostelecom set up a consortium for
developing domestically produced equipment for communication networks to ensure security and reliability
of telecom infrastructure in Russia.

In December 2019, Element, MTS and the Skolkovo Institute of Science and Technology (SkolTec) signed
a trilateral agreement on cooperation in development and manufacturing of equipment for 5G networks
based on international Open Radio Access Network standards. Successful implementation of the agree-
ment will enable operators to stop using more expensive solutions supplied by foreign vendors. Under
the agreement SkolTec will provide a platform for experiments, Element will supply a component base for
testing areas and labs, while MTS will be in charge of standards and solutions required for the deployment
of 5G networks.

In December 2019, Element, RC Module and HighTech Group entered into a cooperation agreement in the
area of developing AI hardware platforms and solutions in Russia. The companies will work together
to develop strategies for supplying the Russian market with domestically produced AI hardware solutions
in order to reduce reliance on foreign producers of specialised AI computer systems, to create an effective
ecosystem for neural network learning and offer new solutions in the area of AI-enabled electronics.

Element's development strategy envisages growth of production capacity, expansion of product output, and
aims to achieve the following goals:

• Business scale growth
• Scientific and technological development
• Development of design centres
• Facilitation in development and implementation of effective government

support measures in the microelectronics industry
Improvement of operational efficiency.

•

Achievement of these strategic goals will allow for a considerable increase in value of Element's assets and
simultaneously address the priority objectives of Russia in the area of ensuring technological independence
of critical information infrastructure.

INDICATOR, M units

TOTAL MICROCHIPS PRODUCED

CHIP MODULES (PASSPORTS, VISAS, IDS, MEDICAL
INSURANCE POLICIES, BANK CARDS)

CHIPS FOR EXPORT (INTEGRATED CIRCUITS, SCHOTTKY DIODES, TVS DIODES)

CHIPS FOR DOMESTIC MARKET (TRANSPORT TICKETS,
TAGS, DEFENCE, R&D, FOUNDRY)

2019

2,201.8

13.7

2,016.3

171.8

SISTEMA — ANNUAL REPORT 2019

100

KEY ASSETS' RESULTS

101

SISTEMA.COM

CONCEPT
GROUP 1

42.9%

SISTEMA'S EFFECTIVE STAKE

Elena Bogomolova
CEO

Artyom Sirazutdinov
CHAIRMAN OF THE BOARD OF DIRECTORS

LLC Concept Group is one of the leading
fashion retailers in Russia.

352

STORES

17%

SHARE OF ONLINE SALES IN REVENUE

67.2

THSD
SQ M

› 100

AGGREGATE AREA OF STORES

CITIES OF OPERATIONS

Concept Group's portfolio comprises the following
brands: Acoola (children's clothes and accessories),
Concept Club (women's clothes and accessories),
and Infinity Lingerie (underwear). Concept Group's
business is based on a multi-brand and multi-chan-
nel model that enables the company to diversify
its revenue structure. A significant part of revenue
comes from the company's nationwide retail and
franchise chain that comprises over 350 stores.
The company is broadly represented on leading
Russian marketplaces and is developing its own
online store. Its production facilities are located
in China and Bangladesh.

In 2019, the clothes, footwear and accesso-
ries market exhibited a decline for the first time
since 2015. Analysts 2 estimate that the market
in monetary terms declined by 3%-4% year-on-
year, to RUB 2.26–2.29 tn. The main reasons for
the downturn were the falling real income of the
population, VAT increase and the unusually warm

autumn and winter in 2019. In 2020, redistribution
of sales channels is projected to continue, notably,
due to growth of the online segment.

In 2019, a new management team joined Concept
Group. The team has strong expertise both in build-
ing the key business processes in fashion retail and
in optimising sales channels. Over the course of the
year, the management overhauled the company's
operations, which made it possible to achieve a pos-
itive net profit for the first time in two years.

The company also devised and approved a new
development strategy aimed at becoming a Top-5
player in Russia’s fashion retail market.

S
T
E
S
S
A
R
E
H
T
O

conceptgroup.ru

1
2

THE COMPANY'S STRATEGY FOCUSES ON:

Organic
growth

Increase in operational
efficiency

Improved
offering

The company focuses on growing its market share
through large-scale expansion of its chain, launch-
ing stores of the new format in Russian cities with
population of 200,000+ residents.

through continuous work to reduce production
costs, optimise supply chains and logistics, estab-
lish own production in Russia.

backed by stronger designer competences and
increased brand awareness as a result of establish-
ment of an in-house design bureau.

SISTEMA — ANNUAL REPORT 2019

102

KEY ASSETS' RESULTS

103

SISTEMA.COM

KRONSTADT 1

AEROMAX 4

98.6% 2

SISTEMA'S EFFECTIVE STAKE

Sergey Bogatikov
CEO

98.6% 2

SISTEMA'S EFFECTIVE STAKE

Maxim Chizhov
CEO

+10% 2018/19
BN
USD

GLOBAL UAS PRODUCTION
MARKET

Kronstadt is a Russian high-tech company that engineers
and manufactures knowledge-intensive products and
solutions for the production, deployment and safe usage
of sophisticated air-, sea-, and land based systems.

The global market for the production of unmanned aircraft systems (UAS) has grown from USD 10 bn
in 2018 to USD 11 bn in 2019 3. The bulk of demand still comes from the defence industry due to technical
and regulatory restrictions; however, the share of defence customers will begin to gradually decline in favour
of corporate clients over the next 5 years. Some of the largest logistics companies in the world, such as SF
Express and Amazon, have already begun to introduce UAS into the business processes of their logistics
centres. At the same time, it is expected that the use of UAS for passenger transportation will only be possi-
ble once the technology is put into industrial use in freight transportation.

In 2019, Kronstadt fulfilled its production programme. During the year, two branches were established
to develop key components for UAS. In October 2019, Kronstadt filed an application with the Federal Air
Transport Agency (Rosaviation) for certification of Orion type UAS.

Kronstadt's key focus areas include:

The key strategic goals of Kronstadt include:

1. Unmanned systems and robotics.
2. On-board systems and equipment.
3. ACS and geographic information systems.
4. Training systems.

1. Maximising the presence in the market
of unmanned aerial vehicles (UAV) with
a take-off mass of 1–2.5 t for the government
customer and in the market of components
for other heavy unmanned systems.

2. Developing export opportunities for UAVs

with a take-off mass of 1.0–2.5 t.
3. Reducing UAS production costs.

Aeromax is an innovative centre for the
development of civilian unmanned projects.

The company’s activities are aimed at the development, implementation and subsequent replication
of intelligent hi-tech solutions that provide competitive advantages to businesses in the global market for
unmanned aircraft systems (UAS) and digitalisation services. Aeromax began its operations in 2018 by pro-
viding services to Sistema Group companies, but is now actively working to expand its client base. In 2019,
the company fulfilled 5 contracts for customers not affiliated with Sistema Group.

Aeromax offers solutions for monitoring, aerial photography, aerial laser scanning and implementation
of geographic analytical systems. Jointly with Far East and Arctic Development Fund (Vnesheconombank),
the company conducts research on advanced forest inventory methods that utilise UAS and develops
software for forest inventory automation that will expedite the process and lower its cost. Since the annual
demand for forest inventory in Russia amounts to 30 M ha, applying the new methods will establish a new
segment of UAS-related services.

Russia’s market for services employing UAS amounted to RUB 5.0 bn in 2019 and has potential to grow
to RUB 7.4 bn in 2020.5 Oil and gas, forestry, agriculture, logistics, media, construction and electric power
sectors may become major consumers of services employing UAS.

The company’s development strategy is aimed at assuming leadership in the market of services using UAS
in Russia.

S
T
E
S
S
A
R
E
H
T
O

kronshtadt.ru

aerom.ax

1
2
3

All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.
97.8% as of 31 December 2019.
Source: Strategy Partners.

4 All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.
5

Source: Strategy Partners.

SISTEMA — ANNUAL REPORT 2019

104

KEY ASSETS' RESULTS

105

SISTEMA.COM

EAST-WEST
UNITED BANK S.A.1

100%

SISTEMA'S EFFECTIVE STAKE

EWUB is registered in Luxembourg and targets private and corporate clients affiliated with Russia
or trading with Russian partners. EWUB provides private banking services to high net worth individuals
(HNWI), including personal and family investment and wealth management services. In the corporate
segment, EWUB provides its clients with transactional banking services, including cash management,
credit and treasury products.

In 2019, EWUB continued implementing its business strategy approved in 2018 and focused on private
banking and transactional banking activities. To support the strategy, a three-year digital transformation
plan was adopted, which enable the bank to launch new banking products in these two segments and
improve the efficiency of business processes. As part of this transformation, the bank launched a new
trade finance product line for corporate clients in 2019.

In 2019, the bank continued to stabilise and diversify its funding base through the fully digital deposit
platform DirektBank servicing retail clients in Luxembourg and Germany. As of the end of 2019, the
platform had about 4,000 active clients.

EWUB's investment portfolio consisting of marketable securities and participations in syndicated loans
grew 14% year-on-year to EUR 480 M.

Sergey Pchelintsev
CEO

Jeannot Krecké
CHAIRMAN OF THE BOARD OF DIRECTORS

East-West United Bank S.A. (“EWUB”) is a European
bank providing asset management services
to individuals and transaction banking services
to businesses with a focus on Russian clients.

›800

M
EUR

TOTAL ASSETS
UNDER MANAGEMENT

14.7

M
EUR

NET INTEREST INCOME IN 2019

2.8

M
EUR

NET FEE AND COMMISSION INCOME
IN 2019

›100

EMPLOYEES

S
T
E
S
S
A
R
E
H
T
O

ewub.lu

All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.

EWUB's key goal is to grow its business in private and corporate banking.
The main tasks that help achieve this goal include:

Improving the client
experience

Growing
the client base

Expanding the
product offering

through investments into digital channels
and infrastructure.

by increasing EWUB's brand awareness
in target markets, expanding own sales force
and the network of partners, including synergies
with Sistema Group companies like MTS Bank
and Sistema Capital.

New products to become available in 2020
include wealth management advisory for private
clients (complementing the existing portfo-
lio management, custody and brokerage offering)
and credit products for both private and business
clients.

SISTEMA — ANNUAL REPORT 2019

106

KEY ASSETS' RESULTS

80%

SISTEMA’S STAKE

BN
RUB

TARGET SIZE

90%

INVESTED
AS OF THE END OF 2019

SISTEMA
VENTURE CAPITAL

Dmitry Filatov
PRESIDENT

Sistema_VC is a venture capital fund investing in growth-
stage high-tech companies in Russia and Europe with potential
to become leaders in their industries or niches.

YEAR ESTABLISHED: 2016

GEOGRAPHY: RUSSIA, UK, ISRAEL, LITHUANIA, NETHERLANDS AND US

INVESTMENT INDUSTRIES: GROWTH-STAGE TECH COMPANIES

LIFE: NO FIXED TERM

TARGET RETURNS: 25%–30% (IN RUB)

INVESTMENT
FOCUS

Deep tech projects 1

• Projects leveraging artificial intelligence

(AI) and machine learning (ML)

New emerging market
niches in Russia (edtech,
logtech, foodtech 4)

• Cognitive technologies (machine

recognition of speech, sounds, movement,
video analytics, etc)

• Next-generation networks (SDN 2, NFV 3)

• Priority investment stages:
Late seed, Series A, B

sistema.vc

Technologies or scientific advances that are hard to reproduce or copy, often unique and patented, and take products and solutions to a new level.
SDN stands for software-defined networking, i.e. organisation of data transmission over networks with separation of programmed network management from data transmission devices.

1
2
3 NFV stands for network functions virtualisation, i.e. a network architecture that involves the virtualisation of entire

107

INDUSTRY
OVERVIEW
FOR 2019 5

SISTEMA.COM

In 2019, the European VC market continued its rapid growth, increasing 25.3% year-on-year
to USD 36.1 bn, despite an 8.4% decrease in the global market amid a slowdown in economic
activity in the US and China 6. The fastest-growing industries in terms of funding raised are e
commerce, health, AI and logistics. There is an observable increase in the activity of corporate
venture funds, which participated in one in five VC deals in Europe in 2019.

In 2019, the volume of the Russian VC market (by total size of deals excluding exits) grew 13.0%
to USD 868.7 M, marking its best result since 2014. The number of deals in 2019 decreased 1.5
times compared to 2018 mainly due to a decline in the activity of accelerators, yet the average
deal size increased across all segments: from seed to later stages. 2019 was also a record year
in terms of exits from VC projects: USD 5.6 bn, up 16 times compared to 2018.

The most promising VC investment areas in Russia are startups
related to AI, integrated technologies and logistics.

RUSSIAN VC MARKET DYNAMICS
IN 2016–2019, M USD

RUSSIA'S VC MARKET
STRUCTURE

2019

2018

2017

2016

232

869

769

4%
STATE

5%
ANGELS

550

42%
CORPORATIONS AND CORPORATE FUNDS

49%
FUNDS

SOURCE: DSIGHT

BUSINESS
DEVELOPMENT
IN 2019

In 2019, Sistema_VC continued to invest in startups in the area of artificial intelli-
gence. The fund’s portfolio now includes three UK-based companies: FiveAI, SenSat and
KisanHub. Sistema_VC’s partners new investments partners in 2019 included Tencent, Notion,
IQ Capital, Lakestar and Amadeus Capital Partners.

Seven companies from the fund’s portfolio raised additional funding in 2019: DataSine, MEL
Science, NFWare, Observe, Gosu AI, TraceAir and Connecterra. New partners that participated
in the rounds include Brighteye Ventures, Propel, Pentech, Yandex, TMT Investments and others.

Sistema_VC and MTS received the Venture Investor award from the Russian Venture Capital
Association and its partner Russian Venture Company. The fund was recognized in the Best
Syndicate Deal category for their investment in YouDo in 2018.

In 2019, the fund continued to hold conferences in the framework of own networking project
titled #public_tech. The conferences bring together promising startups that are relevant for spe-
cific portfolio companies and for Sistema_VC. In 2019, Sistema_VC held conferences on retail
tech and agrotech.

In June 2019, the fund’s portfolio company VisionLabs, with support from Sistema_VC, held its
third annual international conference on computer vision and machine learning titled Machines
Can See. The summit brought together 20,000 attendees, and its business programme
included machine vision researchers from around the world.

classes of network node functions into building blocks that may connect together.
Technologies in education, logistics and food.

4
5 All projections and forward-looking estimates regarding the industry in general and the funds’s business in particular were made before February 2020, unless specifically noted otherwise.
6

Source: Crunchbase.

S
D
N
U
F

SISTEMA — ANNUAL REPORT 2019

108

KEY ASSETS' RESULTS

109

SISTEMA.COM

BUSINESS
DEVELOPMENT
STRATEGY

In 2020–2021, Sistema_VC’s strategy will focus on exits from assets in which it invested
in 2016–2017. The fund’s team continues its work associated with raising funds for portfolio
companies. The fund reserves the right to participate in follow-on funding rounds of its
portfolio companies.

NEW INVESTMENTS MADE IN 2019

Tech solutions
for self-driving cars

Artificial intelligence to
optimise grain supply

Digital twins
of infrastructure facilities

The company develops self-driving software
solutions. FiveAI technologies are intended
to make human mobility safer, quicker, cheaper,
greener and more accessible. FiveAI software
is able to cope with narrow and winding streets
of European cities and account for the specifics
of their historic centres.

j five.ai

The company has developed a cloud platform
to optimise the supply chain for agricultural
companies.

SenSat has developed a technology for creating
“digital twins” of real-life locations for the infrastruc-
ture industry.

The startup operates at the intersection of precision
farming, big data, cloud computing, machine learn-
ing and mobile technology. Its platform collects and
analyses data on the state of grain crops to forecast
deliveries. The optimisation helps reduce the impact
of seasonal risks on yields and save resources.

The company uses real-time datasets and AI
algorithms to create accurate and up-to-date copies
of objects in a machine-readable format. SenSat is
committed to creating an intelligent ecosystem that
translates the real world into a version understand-
able to AI.

j kisanhub.com

j sensat.co.uk

KEY PORTFOLIO COMPANIES
as of 31 December 2019

Marketplace for domestic and
business services

Commercial computer vision
solutions

RUSSIA

Platform leveraging machine learn-
ing technologies to target digital
advertising

International company creating
scientific and educational products
for children using VR technologies

RUSSIA

SISTEMA CAPITAL
PARTNERS GROUP 1

INDUSTRIAL FOCUS: ASSET-HEAVY OPPORTUNITIES

GEOGRAPHY: EUROPE

INVESTMENT CYCLE: 3–5 YEARS

The SCP Group (“SCP”) is an investment
firm targeting scalable asset-heavy
opportunities in Europe.

49%

SISTEMA’S STAKE

›230

THSD
SQ M

COMMERCIAL REAL ESTATE AREA
UNDER MANAGEMENT

› 15%

TARGET IRR

› 5%

TARGET YIELD
CASH-ON-CASH

SCP’s strategy is to build market-leading operating platforms, which own
and manage asset portfolios aiming to benefit from structural changes and
rapid growth.

Since 2015, SCP has created a successful investment case in Europe, complet-
ing a full investment cycle in commercial real estate with a total gross asset
value (GAV) of approximately EUR 300 M. As a result of successful asset exits,
investor returns exceeded 20% IRR net of commissions. After exits, as of the
end 2019 GAV of assets under administration was around EUR 105 M.

In 2019 SCP strengthened the x + bricks platform, specialising in food-anchored
retail, to become a highly recognised player in the German real estate market.
The gross value of assets involved in completed transactions amounted to EUR
365 M as of 31 December 2019.

In 2019, SCP raised EUR 100 M in partnership capital from institutional and
large private investors.

In February 2020, SCP signed an agreement to acquire 100% of the Real hyper-
market chain from Metro AG. The transaction scope includes acquisition of over
250 Real stores and the operating business of Real. It is anticipated that third
parties will also take part in financing the transaction. Closing of the transaction
is expected in the first half of 2020 and depends on the fulfillment of a number
of conditions precedent.

Ultra-fast processing of large data
sets for business insights

AI-based monitoring of livestock
health at dairy farms

Machine learning and psychometry
for personalised marketing

Automation of construction based
on data from drones

ISRAEL

NETHERLANDS

thescpgroup.com

S
D
N
U
F

All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.

SISTEMA — ANNUAL REPORT 2019
110

KEY ASSETS' RESULTS

1 /2

SISTEMA
ASIA FUND

83%

SISTEMA'S STAKE

120

M USD

TARGET SIZE
WITH POTENTIAL INCREASE
TO USD 150 M

Andrey Terebenin
MANAGING PARTNER

Sistema Asia Fund (SAF) is Sistema's
venture fund which invests in high-tech
companies in India and Southeast Asia.

YEAR ESTABLISHED:

2015

GEOGRAPHY:

INDIA, SOUTHEAST ASIA

INDUSTRY FOCUS:

• CONSUMER TECH (E-COMMERCE, HEALTHCARE,

TRANSPORT, MEDIA, FINANCE AND EDUCATION)

•

ENTERPRISE TECH (IoT)

• VR/ AR (VIRTUAL REALITY)

•

BIG DATA

• AI (ARTIFICIAL INTELLIGENCE

• ML (MACHINE LEARNING)

LIFE:

8 YEARS MANDATORY + 2 YEARS OPTIONAL

INVESTMENT STAGE:

4 YEARS

TARGET RETURNS:

3Х CASH-ON-CASH

SAF invests in companies at various growth stages in the markets of India and Southeast Asia.
SAF is focused on investments in high-tech companies that operate in the sector of technology
products and services and also invests in other types of businesses and consumer brands that
use technologies as their key competitive advantage and operate in India and/or have signifi-
cant presence in the Indian market.

Target funding rounds: A-C.

Investment criteria:
1. A proven business model and/or loyal audience;
2. Solutions specific to the Indian market;
3. Startup founders heavily involved in business management;
4. Co-investors.

111

INDUSTRY
OVERVIEW
FOR 2019 1

BUSINESS
DEVELOPMENT
IN 2019

SISTEMA.COM

2019 was a milestone year for the Indian venture capital industry with USD 10 bn 2 in capital deployed,
about 55% more than in 2018. Deal volume increased by 30% year on year, mostly due to more ear-
ly-stage deals. Around 80% of venture capital investments in 2019 was concentrated in four sectors:
Consumer tech, Software/ SaaS, Fintech and B2B commerce and tech. Consumer tech continued
to be the largest sector accounting for approximately 35% of the total investments.

In March 2019, SAF completed its first monetisation by selling a stake in Qwikcilver, an Indian end-to-end
service provider of gift card and prepaid solutions. Qwikcilver was the first Indian company to develop gift
cards in India, becoming an undisputed market leader. As of March 2019, the company issued about 250 M
gift cards a year in 16 countries for 15,000 online platforms and mobile applications. Sistema Asia Fund
invested in Qwikcilver in 2016 and exited three years later with solid returns on the invested capital.

In July 2019, SAF took part in the Series C funding round of Uniphore, an Indian AI-based speech recog-
nition startup. Uniphore raised a total of USD 50 M in the round that was led by March Capital Partners
and joined by Chiratae Ventures, CXO Fund and other funds. Uniphore will use the raised funds to invest
in research and development and grow its employee base globally. The company has offices in the USA,
India and Singapore. The headcount is more than 150 people.

In 2019, SAF conducted eight additional rounds of funding for its existing portfolio assets. The most signifi-
cant rounds include:

REBEL FOODS
A Series D round was held in September 2019. As a result of the round the company raised USD 125 M
in investments from Goldman Sachs, the hedge fund Coatue Management and the Indonesian technology
group Gojek. Rebel Foods was valued at USD 525 M in the round.

LENDINGKART
A funding round was held in August 2019. The company raised a total of USD 146 M.

LICIOUS
A Series E funding round was held in December 2019. Vertex Growth Fund, a Singapore-based venture firm,
was the lead investor in the round, which raised a total of USD 30 M. Since its launch, the startup has raised
USD 94.5 M in total.

S
D
N
U
F

sistemaasiacapital.com

1
2

All projections and forward-looking estimates regarding the industry in general and the fund’s business in particular were made before February 2020, unless specifically noted otherwise.
Source: Bain & Company.

SISTEMA — ANNUAL REPORT 2019
112

KEY ASSETS' RESULTS

113

SISTEMA.COM

2 /2

NEW
INVESTMENTS
MADE
in 2019

KEY
PORTFOLIO
COMPANIES
as of 31 December 2019

UNIPHORE

LICIOUS

REBEL FOODS

LENDINGKART

KISSHT

HEALTHIFYME

Licious is a brand operating in the meat and meat
products-selling business in a market where over
90% of players represent disorganized retail with
poor quality and low sanitary standards. The com-
pany manages the entire value creation chain, from
sourcing to processing and delivery to customers,
using uninterrupted cold chain.

Rebel Foods is India's largest "food on demand"
company using cloud kitchen technology and is
based in Mumbai. The company operates five
brands including Faasos.

Lendingkart is a fintech lender that has created its
own data-based lending algorithm to provide loans
to SMEs. The company has a small team of employ-
ees to attract customers and collect debt.

Kissht is an online consumer lending platform
based on a proprietary algorithm for assess-
ing creditworthiness with AI elements.

HealtifyMe is India's largest digital fitness platform
(4 M users and over 200 sports instructors
and nutritionists) that allows users to monitor
calories consumption, set personal fitness goals
and monitor their progress. What makes it really
effective is access to online consultations with
nutritionists and instructors.

Uniphore was founded in 2008 and aims
to bridge the communication gap between man
and machine using voice and speech. The com-
pany develops and sells software solutions for
conversational analytics, conversational assis-
tance and conversational security. Over 4 M
people use Uniphore products in 80 companies
globally. Uniphore’s core products are:

auMina
Speech analytics software enabling organi-
sations to identify customer issues through
analysing customer dynamics and call centre
interactions. The product combines AI and NLP
(natural language processing) to uncover real
insights from customer conversations, empow-
ering organisations to deliver personalised
customer service experiences.

akeira
Conversational assistant software that helps
organisations in consumer interaction and
can be deployed using a variety of interfaces.
Backed by real-time customer analytics, the
software drives highly effective conversations
for supporting sales and customer service func-
tions across multiple industries.

amVoice
Authentication software providing security
to phone-based transactions. It works by iden-
tifying unique voice patterns, including behav-
ioural and physiological ones, to authenticate
individuals.

S
D
N
U
F

SISTEMA — ANNUAL REPORT 2019
114

KEY ASSETS' RESULTS

115

SISTEMA.COM

SISTEMA CAPITAL1

MANAGEMENT COMPANY

70%

SISTEMA'S EFFECTIVE STAKE

Igor Busarov
CEO

LLC Sistema Capital MC (“Sistema Capital”) is a
professional securities market participant that has
operated in the area of asset management since 2001.

A++

RATING

Expert RA

95.5

BN
RUB

No.15

ASSETS UNDER

MANAGEMENT

AMONG RUSSIA’S LARGEST ASSET

MANAGEMENT COMPANIES BY ASSETS

UNDER MANAGEMENT

Expert RA

S
D
N
U
F

sistema-capital.com

All projections and forward-looking estimates regarding the industry in general and the company’s business in particular were made before February 2020, unless specifically noted otherwise.

BUSINESS MODEL

BUSINESS DEVELOPMENT IN 2019

Sistema Capital offers corporate clients and retail investors invest-
ment products in both Russian and foreign markets representing
various asset classes: stocks, bonds and derivatives.

Sistema Capital’s corporate clients include insurance companies
and non-government pension funds (NPFs) such as Sberbank NPF,
Otkritie NPF, Bolshoy NPF and others.

ASSETS UNDER MANAGEMENT, bn RUB

 RANKING IN EXPERT RA'S LIST OF LARGEST ASSET MANAGEMENT

COMPANIES IN TERMS OF AUM

9×

95.5

68.3

51.6

22.3

23.7

10.7

2014

2015

2016

2017

2018

2019

According to the estimates of Expert RA rating agency, Sistema
Capital ranked 15th among Russia’s asset management com-
panies in terms of assets under management (AuM) in 2019.
In 2019, AuM grew by 40% from RUB 68.3 bn at the end
of 2018 to RUB 95.5 bn at the end of 2019.

Mutual investment fund Sistema Capital Mobile. Bonds man-
aged by Sistema Capital ranked third by yield growth in 2019
among open-end mutual bond funds with net assets of over
RUB 50 M, according to a ranking compiled by Investfunds
website.

In 2019, Expert RA rating agency upgraded its rating
for Sistema Capital from A+ to A++ (indicative of highest level
of reliability and service quality of a management company)
with stable outlook. The rating upgrade was due to the growth
of assets and profitability of the business, as well as improved
quality of the company’s risk management. The agency
also appreciated the results of market portfolios manage-
ment (the weighted average returns of the largest portfolios
exceed the agency’s benchmarks) and the quality of assets
under management.

In 2019, Sistema Capital continued to develop its retail busi-
ness under the MTS Investments brand, which allowed it
to expand its customer base to 7,000. The agent sales channel
also expanded backed by partnerships with MTS Bank’s
regional branches.

Sistema Capital’s strategic goal is to build a leading asset man-
agement company oriented towards private and institutional
investors (retail customers, HNWI and non-government pen-
sion funds) while continuing as a manager of Sistema Group’s
liquidity and the vehicle for investment of Sistema’s funds
in marketable securities with varied risk levels.

PERFORMANCE OF MUTUAL INVESTMENT FUNDS

Bonds

SISTEMA CAPITAL MOBILE. BONDS

SISTEMA CAPITAL MOBILE. BONDS. FOREIGN CURRENCY

SISTEMA CAPITAL RESERVE

SISTEMA CAPITAL RESERVE. FOREIGN CURRENCY

Stocks

SISTEMA CAPITAL MOBILE. STOCKS

SISTEMA CAPITAL MOBILE. STOCKS. FOREIGN CURRENCY

CURRENCY

2019

2018

2017

2016

2015

RUB

USD

RUB

USD

RUB

USD

15.3%

7.5%

15.1%

10.0%

0.8%

5.8%

—

12.6%

7.4%

14.2%

12.1%

17.3%

9.4%

2.0%

5.2%

7.2%

20.4%

28.4%

13.9%

4.2%

23.4%

56.3%

19.8%

—

SISTEMA — ANNUAL REPORT 2019
116

CORPORATE GOVERNANCE

117

SISTEMA.COM

CORPORATE
GOVERNANCE

118

CORPORATE GOVERNANCE SYSTEM

137

BOARD AND SENIOR MANAGEMENT REMUNERATION POLICY

140

RISK MANAGEMENT

SISTEMA — ANNUAL REPORT 2019
118

CORPORATE GOVERNANCE

119
119

SISTEMA.COM
SISTEMA.COM

CORPORATE
GOVERNANCE
SYSTEM

SISTEMA'S CORPORATE
GOVERNANCE STRUCTURE

AS OF 31 DECEMBER 2019

As an investment company, Sistema believes that superior
corporate governance and information transparency
are important elements of its strategy. Sistema seeks
to meet the best international standards of corporate
governance and transparency and improves its corporate
governance practices on an ongoing basis through
the timely implementation of necessary changes and
high efficiency of managerial decision-making.

The Corporation builds a stronger foundation for
its investment case by applying these principles
to all of its activities, including strategic and finan-
cial management, HR and social policy, preparation
of financial statements, control and audit, and
risk management.

In its corporate governance practices Sistema takes
guidance from legal requirements, the Listing Rules
of Moscow Exchange, and the recommendations
of the Russian Corporate Governance Code1, 2.
The Corporation also takes into account the UK

Corporate Governance Code3. 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 in accordance with
Russian laws and best international practices.
The Corporate Governance Code and Ethics Code
of Sistema set out additional commitments of the
Corporation, its top 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 is available at: https://www.cbr.ru/publ/Vestnik/ves140418040.pdf
Sistema's compliance with the standards set out in the Corporate Governance Code of Russia is
analysed in Annex 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 the balance of interests envisaged by applicable corporate governance standards.
The text of the UK Corporate Governance Code is available at:
https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf

SISTEMA'S
CORPORATE
GOVERNANCE
PRINCIPLES



clear and effective procedures
for making investment decisions

reasonable transparency of governance
processes for investors and partners

a dividend policy that takes
due account of both reason-
able expectations of inves-
tors and Sistema's financial resources

a professional Board of Directors that
is actively involved in strategic planning,
and oversight of business processes

particular focus of the Board of Directors
on related-party transactions and
potential conflicts of interest

SISTEMA'S CHARTER PROVIDES
FOR THE FOLLOWING CORPORATE
GOVERNANCE BODIES:

 GENERAL MEETING OF SHAREHOLDERS
 BOARD OF DIRECTORS
 PRESIDENT
 MANAGEMENT BOARD



COMPANY
SECRETARY



MANAGING
PARTNER

→ FUNCTIONAL SUBORDINATION
→ ADMINISTRATIVE SUBORDINATION



INTERNAL CONTROL AND
AUDIT DEPARTMENT
vice press
control and audit



GR DEPARTMENT
vice president for gr

PROTOCOL SERVICE
managing director for protocol

ADMINISTRATIVE
DEPARTMENT
head of the administrative department



GENERAL MEETING
OF SHAREHOLDERS



BOARD OF
DIRECTORS



PRESIDENT,
CHAIRMAN OF THE MANAGEMENT BOARD



MANAGEMENT BOARD



FINANCE AND INVESTMENT
DEPARTMENT
vice president for finance and investment

CORPORATE GOVERNANCE
AND LEGAL AFFAIRS DEPARTMENT
president for corporate
governance and legal affairs

STRATEGY
DEPARTMENT
vice president for strategy

HR DEPARTMENT
vice president for hr

EXTERNAL RELATIONS
DEPARTMENT
vice president for external relations

SECURITY DEPARTMENT
vice president for security

SISTEMA — ANNUAL REPORT 2019

120

CORPORATE GOVERNANCE

121

SISTEMA.COM

GENERAL MEETING
OF SHAREHOLDERS

OBSERVANCE
OF SHAREHOLDERS'
RIGHTS

The General Meeting of shareholders is the supreme governing body of the Corporation.
The activities and powers of the General Meeting of shareholders are governed by Russian
laws, Sistema's Charter and the Terms of Reference of the General Meeting of shareholders.
The Corporation seeks to create the most favourable environment for shareholders who wish
to participate in the General Meeting.

Proposing agenda items for the General Meeting of shareholders and
nominating candidates to the Corporation's governance bodies
Shareholders who own at least 2% of the Corporation's voting shares may propose items for
the agenda of the General Meeting of shareholders (AGM) and nominate candidates to the
Corporation's governance and control bodies. Such proposals must be submitted to the
Corporation no later than 100 days after the end of the reporting year, in accordance with the
Terms of Reference of the General Meeting of shareholders and other internal regulations of the
Corporation1. The Nomination, Remuneration and Corporate Governance Committee of the
Board of Directors conducts a preliminary review of candidates nominated by shareholders
to the governance and control bodies of the Corporation.

Participation in General Meetings of shareholders and voting on agenda items
Sistema seeks to safeguard the right of shareholders to take part in the governance of the
Corporation by participating in the General Meetings of shareholders and voting on agenda
items, as well as the right to receive dividends.

In order to ensure that shareholders can exercise their right to take part in the General Meeting,
the Corporation makes extensive use of electronic communications. All materials pertaining
to the General Meeting's agenda items are published on the Corporation's website in Russian
and in English (www.sistema.ru / www.sistema.com) at least 30 days before the date
of the meeting and are then electronically transmitted to nominee shareholders2.

Sistema's shareholders may use the e-voting system available on the website of the
Corporation's registrar, JSC Reestr. To use this service, shareholders should contact the office
of JSC Reyestr for access to their personal shareholder accounts on the registrar's website.
If a shareholder has a personal account on the Russian e-government portal, they may obtain
access to the service without making an appearance at the registrar’s office in person. More
detailed information on signing up for the e-voting service is available on the website of the
Corporation's registrar http://www.aoreestr.ru/shareholders/e-voting.

Each shareholder may also vote on agenda items either in person or by proxy (if the General
Meeting is held as an in-person meeting of shareholders). Shareholders whose shares are
recorded in the registry may fill out ballot papers and send them to Sistema by mail ahead
of the General Meeting.

Holders of Sistema's global depositary receipts (GDRs) may vote on General Meeting agenda
items by proxy through the depositary bank servicing Sistema's GDR programme (Citibank, N.A.
in 2019). For more information on the depositary bank and voting procedures, please visit the
bank's website www.citiadr.idmanagedsolutions.com. Votes of the GDR holders whose details
are disclosed to the depositary are collected by the depositary bank via clearing systems and
are included in the general ballot specifying all GDR holders’ votes cast for and against each
proposed draft resolution, as well as abstentions.

The results of voting on agenda items of a General Meeting of shareholders held in person are
announced before the close of the meeting. After the minutes of the meeting are drawn up,
shareholders may also view the 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, which enables shareholders to make informed decisions with respect to their
shares.

In determining the recommended amount of dividends for 2018, the Board of Directors took due account
of the priority of the strategic goal of reducing the Corporation's debt, and recommended that the General
Meeting of shareholders approve dividends totalling RUB 1,061,500,000, or RUB 0.11 per share, thus giving
its assent to a departure from the current dividend policy 3.

In determining the Company’s payout, the Board of Directors con-
siders a number of factors, including the following:
• Cash flows generated by Sistema’s core publicly traded assets, which primarily sup-

port the Corporate Centre and are earmarked for future investments;

• Prospects for growth and development of non-public assets, the cash flows and monetisa-

tions from which could be allocated towards dividends or a shareholder return; and
Indebtedness and other obligations at the Corporate Centre.

•

In assessing any payout, the Board also considers the state of financial markets, macroeconomic consider-
ations both within Russia and in key operating markets.

INFORMATION ON
GENERAL MEETINGS
OF SHAREHOLDERS
HELD IN 2019

Annual General Meetings of shareholders

DATE AND VENUE

29 June 2019, 3 Tverskaya St., the Ritz-Carlton Hotel

FORM OF THE MEETING

Meeting (in-person)

ITEMS REVIEWED

AND DECISIONS TAKEN

• Annual report and financial statements for 2018 were approved;
• Dividends for 2018 of 1,061,500,000, or RUB 0.11 per
ordinary share (RUB 2.2 per GDR), were approved.

• The Board of Directors was elected;
• Auditors were appointed for RAS and IFRS audits for 2019.
• The revised Charter and internal regulations of Sistema PJSFC governing

the activity of Sistema's governance bodies, as well as the regulation governing
the remuneration and compensations of the Board of Directors, were approved.

ATTENDED

Shareholders holding a combined 76.3% of votes

DATE AND

03 July 2019, No. 1–19

REFERENCE NUMBER

OF THE MINUTES

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
also may nominate candidates to the Board of Directors. Such proposals must be submitted in writing to the Corporation no later than 30 days prior to such General Meeting.
The notice of the General Meeting of shareholders and ballots are also sent by mail to shareholders whose rights to the shares of the Corporation are recorded in the shareholder register.

The current version of the Dividend Policy was adopted in April 2017.

SISTEMA — ANNUAL REPORT 2019
122

CORPORATE GOVERNANCE

123

SISTEMA.COM

BOARD OF
DIRECTORS

The Board of Directors is a collective governance body in charge of the oversight and strategic manage-
ment 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 management's performance;
• Defining corporate governance principles;
• Approving transactions and strategic projects in accordance with appli-

cable laws and the Corporation's internal regulations.

The composition of the Board
The Board of Directors effective as of 31 December 2019 was elected at the AGM held on 29 June 2019.
Independent directors account for 45% of the Board of Directors.

The Board of Directors consists of 11 members

INDEPENDENT DIRECTORS

NON-EXECUTIVE DIRECTORS

EXECUTIVE DIRECTORS 1

45.5%
A. BELOVA
R. KOCHARYAN
J. KRECKÉ
R. MUNNINGS
D. IAKOBACHVILI

45.5%
V. EVTUSHENKOV
S. BOEV
F. EVTUSHENKOV
M. SHAMOLIN
R. SOMMER

9%
A. DUBOVSKOV

Composition of the Board of Directors of Sistema PJSFC in 2019 (re-elected on 29 June 2019) 2

Vladimir Evtushenkov
board chairman 3

Anna Belova 4, 5
deputy chair of the board
from 29 june 2019

Sergey Boev

Andrey Dubovskov 6

Felix Evtushenkov
deputy chair of the board
before 29 june 2019

Ron Sommer

Robert Kocharyan 5, 7

Jeannot Krecké 5, 8

Roger Munnings 5, 9

Mikhail Shamolin

David Iakobachvili 5, 10

MEETINGS OF THE BOARD OF DIRECTORS

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

In 2019, the Board of Directors held 13 meetings: 8 in-person meetings held under the work plan and 5 ad
hoc meetings with voting by ballot. The Board of Directors reviewed a total of 74 agenda items in 2019.

Number of in-person meetings

Number of meetings with voting by ballot

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

Actual number of items reviewed by the Board

2019

2018

MEETINGS WERE
HELD BY THE BOARD
OF DIRECTORS
OF SISTEMA IN 2019

Over the reporting period the Board of Directors considered the following key items:

1. Sistema's development strategy.

2. Sistema Group's strategic planning cycle.

Investment policy, strategy of Sistema's investment funds and pri-
ority areas for investment in 2019–2020.

4. 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;

• Assets in financial services and investment management in capital markets;

• High-tech assets;

• Real estate assets;

• Healthcare assets;

• Hotel assets.

5. Sistema's results and performance against budget.

6. Budget planning, approval of the consolidated budget of Sistema

PJSFC and management's KPIs for 2019–2020.

7. Risk management.

8. Report of the Internal Control and Audit Department.

9. HR matters and employee incentive systems.

10. Assessment of corporate governance including the results of assessment of the Board

of Directors and Committees of the Board of Directors of Sistema PJSFC.

11. Corporate social responsibility.

12. Mandatory corporate procedures, including calling the General Meeting

and developing the work plan of the Board of Directors.

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

14. Approval of internal regulations.

15. Approval of transactions, including acquisition of equity stakes.

Independent Director.

After the end of the reporting period, on 19 April 2020, A. Dubovskov became a non-executive director due to termination of his powers as President of the Corporation.
Short bios and information on directors' stakes in Sistema's authorised capital are available in Annex 1.

1
2
3 Chairman and Deputy Chair of the Board of Directors were elected at the first Board meeting on 29 June 2019.
4 A. Belova was elected to the Board of Directors based on a proposal of minority shareholders.
5
6 After the end of the reporting period, at the Board meeting on 18 April 2020, A. Dubovskov was also elected Deputy Chairman of the Board of Directors.
7
8
9
10

In line with Moscow Exchange listing rules, R. Kocharyan was recognised as independent by Sistema. Information pertaining to the decision is available on Sistema's website.
In line with Moscow Exchange listing rules, J. Krecké was recognised as independent by Sistema. Information pertaining to the decision is available on Sistema's website.
In line with Moscow Exchange listing rules, R. Munnings was recognised as independent by Sistema. Information pertaining to the decision is available on Sistema's website.
In line with Moscow Exchange listing rules, D. Iakobachvili was recognised as independent by Sistema. Information pertaining to the decision is available on Sistema's website.

SISTEMA — ANNUAL REPORT 2019
01

124

CORPORATE GOVERNANCE

125

SISTEMA.COM

TOPICS REVIEWED BY THE BOARD IN 2019

Participation of Board members in meetings of the Board of Directors and its Committees in 2019 *

Most of the items considered by the Board of Directors in 2019 covered
the Corporation's business strategy, management of its invest-
ments in various industries, HR policy, approval of transactions
(including shareholdings in companies) and corporate governance.

1%
APPROVAL OF INTERNAL REGULATIONS

15%
CORPORATE GOVERNANCE AND SECURITIES

33%
BUSINESS STRATEGIES, INVESTMENTS, NEW ACTIVITIES

10%
FINANCIAL REPORTS, PLANNING AND AUDIT

24%
APPROVAL OF TRANSACTIONS

7%
APPOINTMENTS AND HR POLICY

5%
FUNCTIONAL STRATEGIES

5%
SHAREHOLDINGS IN PORTFOLIO COMPANIES, GROUPS AND ASSOCIATIONS; BRANCHES

Number of items considered by the Board of Directors in 2019

2018

2019

2018

2019

2018

2019

2018

2019

2018

2019

2018

2019

2018

2019

2018

2019

APPROVAL
OF INTERNAL
REGULATIONS

SHAREHOLDINGS
IN PORTFOLIO
COMPANIES,
GROUPS AND
ASSOCIATIONS;
BRANCHES

FUNCTIONAL
STRATEGIES

APPOINTMENTS
AND HR POLICY

FINANCIAL REPORTS,
PLANNING AND
AUDIT

CORPORATE
GOVERNANCE
AND SECURITY

APPROVAL OF
TRANSACTIONS

BUSINESS
STRATEGIES,
INVESTMENTS,
NEW ACTIVITIES

PREPARATION FOR MEETINGS AND QUORUM
OF THE BOARD OF DIRECTORS

Preparation procedures for Board meetings are designed to ensure the best use of
the experience and expertise of Board members. Materials for the agenda items are
published on the Board's electronic portal at least 10 days prior to the meeting, which
provides the directors with sufficient time to form an informed opinion on all agenda items.
Most agenda items (including the approval of transactions) undergo mandatory prelimi-
nary review at meetings of the Board's Committees.

The Corporation practices in-depth analysis and advance review of key items of the
agenda by independent directors involving thorough discussions between Board members
and management. This serves to increase the involvement of the Board members in the
development of the Corporation's strategy.

Meetings of Sistema's Board of Directors usually have a high attendance rate: the average
quorum of meetings in 2019 was 94.4%.

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

13/13

A. Belova

S. Boev

A. Dubovskov

F. Evtushenkov

R. Sommer

R. Kocharyan

J. Krecké

R. Munnings

M. Shamolin

D. Iakobachvili

13/13

7/13

12/13

13/13

12/13

13/13

ATTENDANCE

12/13

13/13

2/6

12/13

13/13

7/7

2/3

4/7

5/7

7/7

2/7

0/7

0/4

5/7

8/8

3/4

0/4

4/4

8/8

4/4

8/8

0/8

8/8

9/9

8/9

9/9

The first number shows the number of meetings attended by the Board member, the second number is the total number of meetings.

ASSESSMENT OF THE WORK OF THE BOARD OF DIRECTORS AND ITS COMMITTEES

Assessment of the Board of Directors' performance is an important tool that helps identify areas where the
work of the Board of Directors may be improved. Sistema continues the practice of annual comprehensive
assessments of the work of the Board of Directors and all its Committees.

In 2019, the assessment was carried out in the form of a survey of members of the Board covering the following areas:

AREAS OF ASSESSMENT

MAIN FOCUS AREAS

SCORE IN 2019

SCORE IN 2018

MEMBERSHIP AND STRUCTURE
OF THE BOARD OF DIRECTORS

Number of Board members

Balance of knowledge, skills and industry
experience of Board members

ORGANISATION OF THE BOARD’S WORK

Content of the Board's agendas

Quality and timely provision of materials

Quality of discussions

FUNCTIONAL AREAS OF THE BOARD'S WORK

Strategic management

Finance and internal control

HR policy and corporate governance

4.57

4.13

4.25

4.38

4.33

4.30

4.20

4.56

4.33

4.11

4.21

4.40

4.25

As a result of the analysis of the Board's performance the total score on a 5-point scale was 4.33,
i.e., on the same level as in 2018. A heavier involvement of directors in succession planning for key manage-
ment and in the nomination of candidates to the boards of portfolio companies was indicated as an area for
improvemen.

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COMMITTEES OF THE
BOARD OF DIRECTORS

Sistema has five Committees of the Board of Directors:

• Strategy Committee;
• Audit, Finance and Risk Committee;
• Nomination, Remuneration and Corporate Governance Committee;
• Ethics and Control Committee;
•

Investor Relations and Dividend Policy Committee.

The main purpose of the Committees is to assist the Board in the reviewing and making
decisions in specific functional areas, as well as to ensure prior in-depth scrutiny
of matters submitted to the Board's.

The status, procedures for nominating members, responsibilities and decision-making
procedures of the Board's Committees are provided by the Terms of Reference of each
Committee as approved by the Board of Directors and published on the Corporation's
website in the Corporate Documents section
http://www.sistema.ru/o-kompanii/korporativnoe-upravlenie/korporativnye-dokumenty/.

Functions of the Board committees

STRATEGY COMMITTEE

AUDIT, FINANCE
AND RISK COMMITTEE

NOMINATION,
REMUNERATION
AND CORPORATE
GOVERNANCE COMMITTEE

ETHICS AND CONTROL
COMMITTEE

INVESTOR RELATIONS
AND DIVIDEND POLICY
COMMITTEE

• Analysis of strategic management issues of Sistema Group;
• Review of strategy planning methods;
• Review of M&A transactions with a value exceeding USD 100 M;
• Review of Sistema Group's investment projects involving entry into new geographic

regions or industries and projects with significant state participation.

• Facilitation and supervision of financial statements preparation and audits;
• Assessment of the quality of audit services and provision of preliminary recommendations

to the Board of Directors with respect to the selection of RAS and IFRS auditors;

• Assessment of the risk management and compliance in financial reporting, audit and planning;
• Provisional evaluation of transactions submitted to the Board of Directors.
• Budgeting and financial planning.

• Facilitation of the development of an efficient corporate governance system meeting international standards;
• Preliminary review of nominees:

– to the Board of Directors of Sistema;
– to the boards of directors of portfolio companies;
– to senior management positions across Sistema Group;
– to the position of the Corporation's Company Secretary;

• Development of the Corporation's incentive and remuneration policies;
• Coordination of the assessment of Board performance.

• Facilitation of an efficient system of economic and corporate security;
• Oversight of the Ethics Code compliance;
• Maintenance of a system for preventing corruption, fraud, and other misconduct at Sistema Group companies.

• Strengthening of the Corporation's investment case;
• Maintenance of effective relations with the financial community;
• Development of Sistema's dividend policy, including recommendations for the Corporation's

Board of Directors with respect to the amount of payable dividends;

• Protection of the rights and interests of Sistema's shareholders.

The structure of Sistema's Board Committees
as of 31 December 2019

THE STRATEGY COMMITTEE

THE AUDIT, FINANCE
AND RISK COMMITTEE

THE NOMINATION,
REMUNERATION AND
CORPORATE GOVERNANCE
COMMITTEE1

THE ETHICS AND
CONTROL COMMITTEE

THE INVESTOR RELATIONS
AND DIVIDEND POLICY
COMMITTEE

V. Evtushenkov

C H A I R M A N

A. Belova

S. Boev

A. Dubovskov

F. Evtushenkov

R. Sommer

R. Kocharyan

J. Krecké 2

R. Munnings 2

M. Shamolin

D. Iakobachvili

MEMBERS OF
THE COMMITTEE



INDEPENDENT
DIRECTOR

 NON-EXECUTIVE

DIRECTOR

 EXECUTIVE

DIRECTOR

A C T I N G C H A I R

C H A I R M A N

12.5%

20%

37.5%
CHAIRMAN

50%

80%
CHAIRMAN

25%

75%
CHAIRMAN

100%
CHAIRMAN

1
2

The President of Sistema attends Committee meetings in the capacity of a permanent invitee and does not vote on the matters submitted to the Committee.
R. Munnings and J. Krecké, both members of the Audit, Finance and Risk Committee, are experts in finance and audit with extensive experience in this area.

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CORPORATE GOVERNANCE

COMMITTEES OF THE
BOARD OF DIRECTORS

Matters considered by the Board Committees

COMMITTEE

NUMBER OF MEETINGS IN 2019

AREAS COVERED BY AGENDA ITEMS

STRATEGY COMMITTEE

AUDIT, FINANCE
AND RISK COMMITTEE

NOMINATION,
REMUNERATION
AND CORPORATE
GOVERNANCE
COMMITTEE

ETHICS AND CONTROL
COMMITTEE

INVESTOR RELATIONS
AND DIVIDEND POLICY
COMMITTEE

• Value creation by the Corporation's investments in various industries;
•
• Strategic management and planning system.

Investment projects;

• Assessment of the quality of audit services, results

of the tender for audit services, recommendations for
the Board of Directors on selecting an external auditor;

• Review and approval of the Corporation's financial

reports, the annual budget and report on performance
against the Corporation's budget;

• Review of management's reports on risk management

at Sistema, risk maps and mitigation plans;

• Preliminary review and evaluation of transactions

to be submitted to the Board of Directors;
• Development of the internal audit function.

• Development of corporate governance at Sistema Group, including
various scenarios for the transformation of the Corporate Centre;
Incentive system and its key parameters, performance assessment
and bonuses for the key managers and employees of Sistema;

•

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

• Performance of the Internal Control and Audit
Department in 2018 and its work plan for 2020;

• Results of ethics assessment of the Corporation's employees;
• Compliance system at Sistema;
• Fraud and corruption prevention at Sistema;
•

Internal control strategy for digital applications.

• Communications and interaction with minority shareholders;
• Amount of dividends and dividend policy of the Corporation;
• ESG strategy;
• Market analysis and monitoring;
• Sistema's investment case and its perception

by the investment community.

129

PRESIDENT

SISTEMA.COM

The President is the permanent chief executive officer whose main tasks include managing the current
operations of the Corporation and resolving any matters that are not reserved for the General Meeting
of Shareholders, the Board of Directors, or the Management Board, with the aim of achieving the stra-
tegic goals set by the Board of Directors, ensuring the Corporation's profitability and safeguarding the
rights and legitimate interests of its shareholders. The President reports to the Board of Directors and the
General Meeting of shareholders of Sistema. The President chairs the Management Board.

As of 31 December 2019, Andrey Dubovskov was President and Chairman of the Management
Board of Sistema.

Andrey Dubovskov

Born in Alma-Ata (now Almaty) in 1966.

In 1993, Andrey graduated from the Gerasimov
Institute of Cinematography.

Andrey has extensive experience in telecom com-
panies: 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, Alma-Ata, Nizhny Novgorod,
Yekaterinburg, Perm and Kiev.

2002–2004—CEO, Tele2 (Nizhny Novgorod).

In 2004, he joined OJSC MTS as head of the com-
pany's Nizhny Novgorod branch.

2006–2007—Director of the MTS Ural Macroregion.

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

2011–2018—President of PJSC MTS.

On 13 March 2018, Andrey was appointed President
of Sistema by the Board of Directors.

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

After the end of the reporting period, the Board of Directors approved Vladimir
Chirakhov's appointment as President and Chairman of the Management Board
of Sistema PJSFC, effective 20 April 2020 (for a three-year term).

Vladimir Chirakhov

Born in Tbilisi in 1974.

In 1996, Vladimir graduated with honours from the
Russian Federal Security Service Academy with
a degree in applied mathematics and mathematical
engineering. In 2000, he studied system analysis and
business management at the Moscow International
Higher Business School MIRBIS. In 2001, he grad-
uated from the Russian Presidential Academy
of National Economy with a degree in manage-
ment. In 2013, he completed Executive MBA at the
Moscow Skolkovo School of Management.

2005–2009—Senior Category Manager and Project
Manager at LLC MVideo.Management.

2009—Commercial Director at LLC Lindeks.

2009–2012—Commercial Director, Executive
Director, CEO of LLC Korablik-R.

In March 2012, Vladimir was appointed Deputy CEO
for sales at OJSC Detsky Mir, and from September
2012 until March 2020 was CEO of PJSC Detsky Mir.

On 20 April 2020, Vladimir was appointed President
of Sistema by the Board of Directors.

Chairman of the Board of Directors of PJSC Detsky
Mir, member of the Board of Directors of JSC
Progress and LLC Internet Solutions.

In March 2020, Vladimir was awarded the Order
of Friendship.

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MANAGEMENT
BOARD

The Management Board of Sistema determines methods for the implementation of the Corporation's
development strategy, formulates development plans, defines and monitors investment processes,
and reviews most matters to be subsequently submitted to the Corporation's Board of Directors.

In 2019, the Management Board held 11 meetings and reviewed
34 agenda items in the following key areas:

1. Sistema's development strategy.
2. Management strategy and structure
of Sistema's investment funds.

3. Sistema Group's strategic planning cycle.
4. Development strategy, value crea-

tion and monetisation of Sistema's
investments in various industries.

5. Corporate governance prac-
tices at the Corporation

6. Budget performance, budget planning

and key performance indicators.
7. Debt and liquidity management.
8. Sistema's corporate social responsibility.

In April 2018, the powers of the previously elected Management Board were terminated, and the
Board of Directors elected a new Management Board for a three-year term. As of 31 December 2019,
the Corporation's Management Board consisted of 15 members.

Members of the Management Board of Sistema as of 31 December 2019 1

1. Andrey Dubovskov

PRESIDENT, CHAIRMAN OF THE

MANAGEMENT BOARD

Igor Alyoshin
VICE PRESIDENT FOR SECURITY

Sergey Egorov
MANAGING PARTNER

9. Vsevolod Rozanov

MANAGING PARTNER

10. Artyom Sirazutdinov
MANAGING PARTNER

11. Joshua Tulgan

VICE PRESIDENT FOR

EXTERNAL RELATIONS

4. Artyom Zasursky

12. Vladimir Travkov

VICE PRESIDENT FOR STRATEGY

VICE PRESIDENT FOR FINANCE

5. Alexey Katkov

MANAGING PARTNER

Svetlana Matveyeva
VICE PRESIDENT FOR HR

7. Oleg Mubarakshin

MANAGING PARTNER

8. Andrey Pilipenko

VICE PRESIDENT FOR GOVERNMENT RELATIONS

AND INVESTMENTS

13. Ali Uzdenov

MANAGING PARTNER

14. Sergey Shishkin

VICE PRESIDENT FOR CORPORATE

GOVERNANCE AND LEGAL

15. Maxim Yanpolsky
MANAGING PARTNER

After the end of the reporting period, the Board of Directors
approved Vladimir Chirakhov's appointment as President
and Chairman of the Management Board of Sistema PJSFC,
effective 20 April 2020 (for a three-year term).

Changes to Sistema's Management Board in 2019

20 May 2019

Powers terminated

A. Guryev

S. Egorov

20 May 2019

S. Matveyeva

21 May 2019

Elected

Short bios and information on Management Board members' stakes in Sistema's authorised capital are available in Annex 1.

GOVERNANCE BODIES
REPORTING TO THE
PRESIDENT AND THE
MANAGEMENT BOARD

To improve management decision-making, Sistema has several governance bodies that report to the
President and the Management Board, i.e., the Expert Council, the Finance and Investment Committee,
the Risk Committee, and the Tender Committee.

These committees are permanent consultative collective bodies tasked with a detailed analysis of
current operations and processes within their functional areas and with assisting the President and
the Management Board in decision-making.

EXPERT COUNCIL

The Expert Council considers all of the Corporation's new investment ideas and projects for acquisitions
of assets in new and complementary industries, as well as in industries where Sistema already has a pres-
ence. The Expert Council verifies conformity of the projects with a number of formal requirements set out
in the Corporation's internal regulations, scores them, and opines on them in writing. Once approved by the
Expert Council, projects are further reported to the Finance and Investment Committee.

As of 31 December 2019, the Expert Council consisted of 13 members, and the Chairman of the Expert
Council was Artyom Zasursky, Vice President for Strategy.

In 2019, the Expert Council held 11 meetings.

THE FINANCE AND INVESTMENT COMMITTEE

The responsibilities of the Finance and Investment Committee include:
• Review of the Corporation's investment projects at different stages from conception to completion;
• Approval of financial models, business plans and key performance indicators of investment projects;
• Recommendations regarding the feasibility of projects, exit scenarios and sources of financing;
• Review of external financing terms.

The Committee considers the Corporation's investment projects once they are approved by the Expert
Council. An approval by the Committee is required for further review of a project by the Management Board
and/or Board of Directors.

As of 31 December 2019, the Committee consisted of 8 members, and the Chairman of the Committee was
the Corporation's President Andrey Dubovskov.

In 2019, the Committee held 38 meetings.

RISK COMMITTEE

The Risk Committee's responsibilities include:
• Assessment of the most material risks facing the Corporation and its portfolio companies;
• Ensuring the preparation of a risk register and a generalised risk map of Sistema;
• Preparation and approval of risk assessment reviews;
• Preparation of proposals regarding the acceptable risk level (risk appetite) of Sistema;
• Coordination of risk management strategies, plans and monitoring of their implementation.

As of 31 December 2019, the Committee consisted of 12 members, and the Chairman of the Committee
was Vladimir Travkov, Vice President for Finance and Investment.

The Risk Committee includes an Expert Group consisting of 10 members that reviews matters pertain-
ing to the approval of counterparty limits (applying to banks, insurers and management companies)
and guarantees (including bank guarantees) securing counterparty obligations, the preliminary approval
of WACC estimates for the evaluation of investment projects of portfolio companies to be further reported
to the Finance and Investment Committee, and other operational matters pertaining to risk management
across Sistema Group.

The Risk Committee and the Expert Group held a total of 4 meetings in 2019.

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RISK MANAGEMENT,
INTERNAL CONTROL
AND INTERNAL
AUDIT SYSTEMS

TENDER COMMITTEE

The responsibilities of the Tender Committee include:
• Ensuring the acquisition of goods and services on the best terms available;
• Minimising the costs of purchase (ownership, operation) of goods,

works and services without compromising their quality;

• Ensuring the sale of Sistema's property and rights as they become irrele-
vant to the company's operations on the best economic terms available;

• Ensuring the transparency of procurement procedures and impartial decision-making;
• Prevention of corruption, fraud and other wrongdoing in procurement.

As of 31 December 2019, the Committee consisted of 7 members, and the Chairman of the Committee was
Vladimir Travkov, Vice President for Finance and Investment.

In 2019, the Tender Committee held 32 meetings.

RISK MANAGEMENT

Sistema's risk management system employs a two-level approach, under which the risks identified
at Sistema and its portfolio companies are consolidated to assess their impact on Sistema Group
as a whole.

The enterprise risk management system (ERM) used in the
Corporation includes the following elements:
•

Identification of risks at all levels of management (from the top to line manage-
ment), which includes identifying risk owners and making risk passports;

• Primary assessment of the materiality of identified risks and their analysis (VaR method);
• 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;
• Regular monitoring of performance against mitigation plans and assessment of their effectiveness;
• Risk monitoring, quarterly reports on risks facing the Corporation.

Sistema's risk management procedures are carried out by a dedicated risk management unit with the sup-
port of risk management professionals from the Finance and Investment Department.

The reassessment of identified and/or new risks, the effects of mitigation and response measures and the
approval of limits applying to counterparties (banks, management companies and insurers) are monitored
at least on a quarterly basis by a dedicated Expert Group of the Risk Committee, which includes represent-
atives of all of the Corporation's key departments. The risk management system is monitored by Sistema's
Risk Committee and Management Board.

Sistema's senior executives submit regular reports on risk management at the Corporation to the Audit,
Finance and Risk Committee, which translate into further reports to the Board of Directors.

INTERNAL CONTROL SYSTEM

Sistema's internal control system is based on advanced international and Russian internal control practices,
involves all material decision-making levels, and serves the interests of the Corporation's shareholders,
investors and management.

The internal control system and the responsibility for the implementation of control procedures are formal-
ised in codes, policies, procedures, and other internal regulations of the Corporation.

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

The Corporation methodically works on the composition of a regulatory framework designed to govern all
issues relating to internal control through their cascading from the level of the Board of Directors to the level
of employees.

The key objectives of the internal control system are:
• Creating new and improving existing control mechanisms that will ensure efficient busi-

ness processes and the implementation of the Corporation's investment projects;
• Ensuring the safety of the Corporation's assets and efficient use of its resources;
• Protecting the interests of the Corporation's shareholders, preventing and resolving conflicts of interest;
• Creating conditions for timely preparation and submission of reliable reports

and other information that is legally required to be publicly disclosed;

• Ensuring the Corporation's compliance with applicable laws and requirements of regulators.

In accordance with advanced practices and approaches in internal control and audit, the efficiency of the
Corporation's internal control system is ensured at three levels (in addition to the Board of Directors and
the Corporation's senior management):

Level 1: Heads of structural units and employees of the Corporation are responsible for building an efficient
internal control system and assessing and managing risks within their remit.

Level 2: Sistema's controlling bodies and Committees perform control functions, e.g.:
• The Risk Committee and the Risk Management Function are responsible for develop-
ing and monitoring the implementation of an effective risk management practice;

• The Finance and Investment Committee of the Corporation approves

and monitors the implementation of investment projects;

• The Security Department is responsible, inter alia, for economic secu-

rity, the prevention of corruption and information security.

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

All of the Corporation's employees in charge of various control procedures bear responsibility for the efficiency
of such controls and risk management activities as prescribed in their job descriptions and internal regulations,
as well as laws of the Russian Federation and other relevant jurisdictions.

INTERNAL AUDIT

The body in charge of internal audit at the Corporation is the Internal Control and Audit Department, which
reports to the Board of Directors (functionally) and Sistema's President (administratively). The Department is
headed by Vice President for Internal Control and Audit, who is appointed and dismissed by the President based
on resolutions passed by the Corporation's Board of Directors following preliminary approval by the Board's
Ethics and Control Committee.

The main objectives of the Internal Control and Audit Department are:
• Helping shareholders and management improve the internal control system by performing regular audits

of the efficiency of the Corporation's internal control, risk management and corporate governance systems;

• Supplying management and shareholders with objective information on existing inter-

nal and external risks, as well as their probability and consequences;
• Enhancing awareness among the Corporation's management team

about the performance of Sistema’s structural units;

• Monitoring the achievement of the goals of shareholders of the Corporation.

To meet these objectives, the Internal Control and Audit
Department carries out the following functions:
• Performing independent audits of individual operations, processes and units;
• Assessing the effectiveness of the internal control system;
• Assessing the effectiveness of the risk management system;
• Assessing the effectiveness of the corporate governance system, preventing viola-

tions of law and the Corporation's regulations, ensuring the observance of professional
and ethical standards and preparing recommendations for improving them;

• Developing recommendations to remedy deficiencies identi-

fied and monitoring the execution of remedial actions;

• Monitoring compliance with procurement procedures and other profit and expend-

iture transactions associated with elevated risk and materiality levels;

• Administering the Hotline.

The Internal Control and Audit Department has all the resources and powers required to perform the above
functions and is an independent structural unit. In all of its operations, the Department abides by international
standards applying to internal control and audit and the code of ethics.

Aiming to improve the quality, widen the scope and increase the depth of audits, the Department continuously
works on a single set of methods to standardise audit and control procedures in specific fields and risk areas.

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SISTEMA.COM

The Internal Control and Audit Department closely interacts with Sistema’s external auditor. These interactions
include coordination and consultations over the annual audit plan (concerning the financial reporting control
effectiveness) and discussion and evaluation of detected risks.

Regular reports on the results of the Internal Control and Audit Department are reviewed by the Audit, Finance
and Risk Committee and the Ethics and Control Committee of Sistema's Board of Directors. The full-year report
is also submitted to the Board of Directors of Sistema for review.

In 2019, the Internal Control and Audit Department conducted 57 audits to assess the effectiveness of the
Corporation's internal control, risk management and corporate governance systems. Audits performed by the
Internal Control and Audit Department did not uncover any weaknesses or risks that could affect the sustaina-
bility of the Corporation's business as a whole. Specific comments pertaining to various aspects audited were
communicated to stakeholders in a timely manner and followed up by recommendations on how to eliminate
them.

Sistema's Internal Control & Audit Department continuously develops automation technologies in an effort
to improve the effectiveness of audit procedures, specifically at planning, risk analysis and testing stages.

RESOLUTION OF CONFLICTS OF INTEREST

Matters related to conflicts of interest are governed by the Corporation's Code of Ethics as well as the laws
of applicable jurisdictions. The Corporation has an ethics assessment procedure: all top managers of the
Corporation annually (or as conflicts of interests arise) fill out Ethics and Conflict of Interest Declarations.
All new employees are required to complete a training course and learn the requirements of the Code of Ethics
and the procedure to fill out the Declaration and are required to report relevant conflicts of interest (if any) before
starting their jobs.

In 2019, the results of the ethics declaration campaign were reviewed by the Ethics and Control Committee
of Sistema's Board of Directors. In most cases, declared conflicts of interest did not require any resolution
measures, as they posed no risks to the Corporation's interests. However, action plans on conflict resolution
were implemented with respect to several declarants in accordance with best corporate governance practices.

EXTERNAL AUDIT

In compliance with the decision of the Audit, Finance and Risk Committee, the Corporation employs specific
procedures to appoint the independent auditors of Sistema's financial statements. The Committee performs
an annual assessment 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 select a new auditor. If the quality is
deemed sufficient, Sistema negotiates the price of the 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 the auditor's impartiality and objectivity.

CORPORATE
GOVERNANCE
ACROSS SISTEMA
GROUP

The quality of strategic planning and the investment case of Sistema's portfolio companies depend, inter
alia, on the quality of corporate governance procedures. To increase the value of its investments, Sistema
pays special attention to improving the quality of corporate governance at its portfolio companies.

The Corporation carries out the strategic management of its key portfolio companies through efficient work
of boards of directors by including professional independent members with expertise in the companies'
industries, as well as 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 level of a com-
pany's organisational maturity).

The Corporation continuously improves the corporate governance system in order to increase efficiency and
remain compliant with best practices. Improving the quality of corporate governance processes at portfolio
companies and attracting competent professionals to their boards of directors is designed to increase the
quality of decision-making and the shareholder value of Sistema's portfolio assets. With that in mind, the
Nomination, Remuneration and Corporate Governance Committee of Sistema's Board of Directors gives
priority to the selection of candidates to be nominated to the boards of directors of portfolio companies and
is heavily involved in the process at each stage, from formulating the skills and expertise requirements for
each key asset to making recommendations with regard to specific lists of candidates.

Boards of directors of portfolio companies and their committees ensure control and coor-
dination and support management in decision-making in the following main functional
areas, seeking to further enhance the quality of management of portfolio companies:
• Strategy and key transactions;
• Budget planning;
• HR policy and incentive system;
•

Internal audit.

Committees of the boards of directors of portfolio companies play a pivotal role in the collective review
of function-specific matters to be reported to the Board of Directors.

The Corporation also seeks to facilitate the adoption of best compliance practices (such as anticorruption
and exchange compliance, data protection, AML) across Sistema Group, acting through its representatives
on the boards and special committees of portfolio companies.

DEVELOPMENT OF
THE CORPORATE
GOVERNANCE
SYSTEM IN 2019

INDEPENDENT DIRECTORS ON THE CORPORATION'S BOARD OF DIRECTORS

In 2019, 11 members were elected to the Corporation's Board of Directors, 5 of whom qualify as inde-
pendent directors or are recognised as independent under the Listing Rules of Moscow Exchange and the
Russian Corporate Governance Code.

The current Board comprises the following independent directors:
• Anna Belova;
• Robert Kocharyan;
• Jeannot Krecké;
• Roger Munnings;
• David Iakobachvili.

All of the Corporation's independent directors have significant experience in managing large organisations
and possess strong professional reputation, which ensures due objectivity of their judgements and freedom
from the influence of the Corporation's management and particular shareholders when making decisions.

Independent directors are directly involved in discussing and formulating the strategy of the Corporation.
For this purpose, working groups headed by independent members of the Board and including representa-
tives of the Strategy Department and the Finance and Investment Department are established to formulate
substantiated positions of the Board of Directors on strategic issues related to the development of the
Corporation.

Independent director Anna Belova was nominated to the Board of Directors by a group of minority share-
holders. At the first meeting of Sistema's Board of Directors held after the Annual General Meeting of share-
holders, Anna Belova was elected Deputy Chair of the Corporation's Board of Directors. In this position, she,
inter alia, coordinates the activities of independent members of the Board of Directors and interacts with the
Chairman of the Board of Directors, acting as the senior independent director. Anna Belova has extensive
experience as a board member of large Russian companies and has been a member of Sistema's Board
of Directors since 2017.

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SELECTION OF CANDIDATES TO THE BOARDS OF DIRECTORS OF ASSETS

In 2019, the Corporation introduced the practice of holding working meetings of the Nomination,
Remuneration and Corporate Governance Committee with executives responsible for the Corporation's
investments in a particular asset as part of the cycle of nominating candidates for election to the boards
of directors of portfolio companies. Such meetings involve the Deputy Chairman of the Board of Directors
and other independent directors. Their purpose is the discussion and identification of specific needs
of assets as regards director expertise. After such discussions, independent directors give recommended
director skill profiles to the management responsible for a particular asset. The Committee then proceeds
to consider lists of board nominees in light of such skill profiles and may suggest adjustments thereto
as necessary.

CHANGES TO THE CORPORATION'S CHARTER AND INTERNAL REGULATIONS

In June 2019, the General Meeting of shareholders of Sistema PJSFC approved the new versions of the
Charter of Sistema PJSFC, the Terms of Reference of the General Meeting of shareholders of Sistema
PJSFC, the Terms of Reference of the Board of Directors of Sistema PJSFC and the Terms of Reference
of the Management Board of Sistema PJSFC.

The amendments to the Charter and internal regulations of the Corporation were necessitated by the need
to update the scope of authority of Sistema's governance bodies in accordance with applicable laws. In par-
ticular, they set forth the authority of the Board of Directors in the area of internal control and audit as estab-
lished by law. Considering that the Board of Directors has a broad scope of authority in internal control and
audit and that the functions of the Audit Review Commission duplicated those of the Board's Audit, Finance
and Risk Committee, provisions on the Audit Review Commission were removed from the Company's
Charter and internal regulations in accordance with Federal Law “On Joint-Stock Companies”.

The Charter and other internal regulations were also updated to remove certain obsolete rules pertaining
to the standard procedures of preparation, convocation, and conduct of the General Meeting of Sistema's
shareholders and to ensure proper alignment with legal rules governing shareholder rights and obligations.

REMUNERATION SYSTEM FOR MEMBERS OF THE BOARD OF DIRECTORS

In June 2019, the General Meeting of shareholders approved a new version of the Policy on Remuneration
and Compensations Payable to Members of the Board of Directors of Sistema PJSFC.

The changes made to the remuneration system affected the directors’ supplementary remuneration for
payable in the form of shares of the Corporation. Under the new system, members of the Board of Directors
receive supplementary remuneration if the weighted average price of an ordinary share of Sistema on
Moscow Exchange at the end of the reporting year exceeds the weighted average price at the beginning
of the same reporting year, but in any case is greater than RUB 9.71. The amount of supplementary remu-
neration is now proportionate to the increase in the Corporation's market capitalisation in the relevant
reporting year, with the maximum amount of the supplementary remuneration remaining unchanged.

PLANS FOR THE DEVELOPMENT OF CORPORATE GOVERNANCE

Each year, the Nomination, Remuneration and Corporate Governance Committee of Sistema's Board
of Directors annually develops and approves the Corporation's action plan for improving corporate govern-
ance in the next year.

The plan for 2020 envisages the following actions:
1.

Improving the corporate governance system in Sistema Group, including the proce-
dure for selecting nominees to the boards of directors of portfolio companies in accord-
ance with the skill profiles made for particular assets (throughout 2020);

2. Updating the management incentive system by taking into account personal contri-

butions to an increase of Sistema's market capitalisation (throughout 2020);
Improving the procedure for making investment decisions for a better man-
agement of the growth of shareholder returns (throughout 2020);
4. Adjusting the system for managing the Corporation's funds based

on the corporate venture fund model (throughout 2020).

BOARD AND SENIOR
MANAGEMENT
REMUNERATION POLICY

BOARD REMUNERATION
POLICY

Remuneration for the work of members of the Board of Directors is calculated and paid in accordance with
the Policy on Remuneration and Compensations Payable to Members of the Board of Directors of Sistema
PJSFC (hereinafter, "the Policy") approved by the General Meeting of shareholders.

BASIC REMUNERATION OF MEMBERS OF THE BOARD OF DIRECTORS

In 2019, basic remuneration of members of the Board of Directors amounted to RUB 13.7 M or RUB 17.8 M
per year depending on whether a director is a tax resident of Russia. Basic remuneration was paid
to Board members in cash in equal quarterly instalments.

SUPPLEMENTARY REMUNERATION OF MEMBERS OF THE BOARD OF DIRECTORS

In 2019, the General Meeting of shareholders approved amendments to the Policy 1 which provide for
supplementary remuneration in the form of ordinary shares to members of the Board of Directors on the
condition that an increase in capitalisation is recorded in the reporting year 2. The amount of supplementary
remuneration is variable and is equal to a share 3 of the increase in capitalisation achieved in the relevant
financial year.

The amount of additional remuneration is, in any case, limited by the amount of basic remuneration
(no more than RUB 17.8 M a year).

REMUNERATION FOR PERFORMANCE OF ADDITIONAL DUTIES

Board members who perform additional duties, i.e., Chair of the Board, Deputy Chair of the Board and Chairs
of Board Committees, receive remuneration on a quarterly basis in the amount stipulated by the Policy.

REIMBURSEMENT OF EXPENSES AND OTHER CONDITIONS

Members of the Board of Directors are reimbursed for their expenses incurred during performance of their
duties, including participation in meetings of the Board of Directors and Board Committees.

Sistema PJSFC insures the liability of members of the Board of Directors.

Sistema PJSFC does not provide loans to members of the Board of Directors.

In accordance with the Policy on Remuneration and Compensations Payable to Members of the Board of Directors of Sistema PJSFC effective until
28 June 2019, additional remuneration of members of the Board of Directors was paid once a year in the form of ordinary shares of Sistema PJSFC
subject to achievement of the Corporation’s investment targets in the reporting year: (i) the arithmetic mean of TSR and iTSR exceeds or equals
CoE, or (ii) TSR exceeds or equals the amount of change of the MSCI index (ΔMSCI), provided that iTSR exceeds or equals CoE.
For an increase in capitalisation to be recorded for the purposes of the Policy, the weighted average price of one ordinary share of Sistema on Moscow Exchange at the end of
the reporting year (for 60 preceding trading days) must exceed the weighted average price of one share at the beginning of the reporting year (for 60 preceding trading days).
0.1% or 0.125% (depending on tax residency) of the increase in capitalisation for the financial year.

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BOARD AND SENIOR MANAGEMENT
REMUNERATION POLICY

SENIOR MANAGEMENT
REMUNERATION POLICY

The incentive scheme for senior executives of Sistema PJSFC in 2019 consisted of:
• A fixed monthly salary determined in line with the internal system of grades;
• Bonuses paid for implementation of projects, generation of cash income, achievement of KPIs
and objectives. Remuneration is paid based on employees’ individual performance and pos-
itive cash flow generated by projects implemented by the teams of Managing Partners and
Departments of Sistema. Payments may amount to (a) up to 20% of cash income for project
implementation, (b) certain percentage of annual income for achievement of KPIs.

For the purpose of calculating bonuses, cash income means:
• An increase in the value of an asset (in the event of asset sale or IPO) net

of (i) hurdle rate determined by the Finance and Investment Committee chaired
by the President of the Corporation prior to the start of a project or the acquisi-
tion of an asset, (ii) investments made in such an asset and project costs;

• Percentage of the project team's annual income.

CO-INVESTMENT PROGRAMME

In 2016, the Board of Directors approved a programme enabling Sistema’s senior man-
agers to co-invest in the Corporation and/or its portfolio companies (the “Co-Investment
Programme”). The Co-Investment Programme is designed to align the interests of the
Corporation’s shareholders and senior executives in terms of long-term management and
development of portfolio companies by granting rights to acquire participation inter-
ests in the Corporation’s privately held portfolio companies with growth prospects.

The Co-Investment Programme is designed for the President, heads of depart-
ments or business units, as well as employees of the Corporation who hold positions
no lower than Executive Director or Senior/Chief Investment Director.

Participants of the Co-investment Programme use their own funds to acquire:
• Shares/interests in Sistema’s portfolio companies and/or
• Ordinary shares in Sistema PJSFC.

The amount of co-investment is limited by one average annual income of a participant.

OTHER TERMS
AND CONDITIONS

No extra compensation above the level stipulated by Russian employment laws is paid to the
President or other senior executives in case of termination of employment.

Sistema does not pay remuneration to executive management for serving on the Management
Board.

The Corporation does not provide loans to senior executives.

REMUNERATION PAID TO SISTEMA'S BOARD MEMBERS
AND SENIOR MANAGEMENT IN 2019 1

Members of Sistema's Board of Directors received the following remuneration in 2019:

2019

2018

Remuneration for work on the Board of Directors

RUB 191,720,000

RUB 192,757,500

Fixed salary 2

Bonuses 3

RUB 106,523,000

RUB 102,889,800

RUB 631,513,400

RUB 130,000,000

Remuneration for work on Board Committees

RUB 6,750,000

RUB 6,850,000

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

RUB 4,917,6004

RUB 1,191,0005

Members of Sistema's Management Board 6 received the following remuneration in 2019:

Fixed salary

Bonuses 7

2019

2018

RUB 507,160,500

RUB 416,016,300

RUB 2,933,809,0008

RUB 1,289,507,5009

Other types of remuneration

RUB 946,700

RUB 424,100

All figures in this section are stated before applicable income tax.

1
2 Members of the Board of Directors who were also Sistema employees in 2019, with the exception of the President.
3 Members of the Board of Directors who were also Sistema employees in 2019, with the exception of the President. Bonuses for 2019 were paid to Sistema employees in Q1 2020.
4
5
6
7
8

Including reimbursement of travel and accommodation expenses related to participation of members in the meetings of the Board of Directors in 2019.
In addition, Sistema reimbursed RUB 3,652,400 of travel and accommodation expenses related to participation of members in the meetings of the Board of Directors in 2018.
Including the President of Sistema.
Bonuses for 2019 were paid to Sistema employees in Q1 2020.
In Q1 2020, some members of the Management Board used a part of their cash bonuses for 2019 to acquire about 12 million ordinary shares of
the Corporation, which is consistent with Sistema's strategy for increasing the participation of its employees in the company's equity.
In Q1 2019, members of the Management Board used a part of their cash bonuses for 2018 to acquire about 19.7 million ordinary shares of the Corporation.

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RISK MANAGEMENT

INTEGRATED RISK
MANAGEMENT SYSTEM
AND THE GROUP'S
RISK APPETITE

The risks that the Corporation may encounter are the consequences of the processes and factors over
which Sistema has little or no influence. At the same time, the Corporation can initiate actions to reduce
the negative consequences of such factors if a certain risk materializes. Therefore, efficient assessment
of existing risks and the probability of their occurrence, as well as effective risk management, are an impor-
tant part of Sistema's strategy.

GLOBAL AND
COUNTRY RISKS

Risks related to changes in the political and economic situation in Russia are material for Sistema
because most of the Group's business is conducted in Russia. The companies and investment funds
of Sistema Group also operate in the CIS, the EU, UK, South and Southeast Asia. A significant portion
of goods produced by the Group's companies is marketed in the CIS, Southeast Asia, Eastern Europe
and North Africa. In the event of any major political turmoil in these regions, the Group's business in these
regions may be disrupted or discontinued, which may lead to material losses.

Political and economic instability, as well as any potential downturn or slowdown in Russia's economic
growth may lead to a decrease in household incomes and consumer demand, which could have a material
adverse effect on the operations and the financial position of all Sistema Group companies.

The business of the Group may be adversely affected by a tightening of sanctions, a complete economic
blockade and change in the political situation in the country, as well as potential involvement of the Russian
Federation in military conflicts.

Due to the situation in Ukraine, Western countries have imposed sanctions on a number of Russian citizens
and companies. There is a probability of extension of existing sanctions or introduction of additional cat-
egories of sanctions that may affect the Group companies or their officers. Any potential breach of sanc-
tions may prevent the companies of the Group from cooperating with the government authorities of the
USA/EU, result in civil or criminal penalties for the sanctioned persons or their associates in accordance
with the laws of the USA/EU, or lead to significant fines and potential damage to reputation.

Any further tensions in the relationship between Russia and other countries and any escalation of exist-
ing conflicts, introduction of additional sanctions or continued uncertainty as to their scope may have
an adverse impact on the Russian economy, the financial status of the Group's partners and suppliers, the
capability of the Group companies to conduct trading and financial operations and to raise funding on com-
mercially viable terms, and the volatility of Sistema's stock price.

INDUSTRY RISKS

The presence of Sistema Group companies in various sectors of the economy engenders diverse risks.
The most material risks for the Group are related to operations in telecom, energy, retail, hospitality, health-
care, pharmaceuticals, forestry, agriculture, and real estate.

Any significant changes in these industries may have a material adverse effect on the financial position
of the respective companies and on the Group as a whole.

Risk management is an integral part of all processes at Sistema: it extends to strategy planning and imple-
mentation, investing, budgeting, procurement, and everyday operations. The integrated risk management
system (ERM) operating at Sistema was developed in compliance with international standards, recommen-
dations and best risk management practices. The ERM system is designed to keep risks at the level that is
acceptable for Sistema's shareholders and management.

As part of quarterly ERM procedures the risk managers at Sistema Group companies compile risk regis-
ters for portfolio companies and a consolidated risk register for the Group, prioritise risks and aggregate
them into portfolios, evaluate probability and materiality of all risks and analyse the impact of material
risks on the financial results of each company and Sistema Group as a whole, using simulation and finan-
cial modelling methods.

In order to address the risks listed in Sistema Group’s risk register , risk owners develop risk management
(mitigation) and response plans, conduct risk monitoring and make necessary adjustments.

One of the key principles of risk management at Sistema Group is the use of the risk appetite concept. This
approach implies identification and monitoring of the Corporation's target risk profile in line with the current
strategic goals and in the context of their integration into risk management procedures.

Sistema Group's risk appetite determines the level of risk acceptable for
the shareholders and includes the following basic provisions.
• The amount of potential losses under the risks accepted by Sistema Group should not reach a level
leading to the termination of the Group companies’ operations, even under stressful conditions;

• The structure of cash flows of Sistema Group companies should guarantee a timely

•

fulfilment of obligations to counterparties in the short and long term;
In its operations, the Group aims to avoid concentration of risks in counter-
parties, industries, and countries/regions with high risk levels;
• Sustainable development and economic efficiency in the long term;
• Compliance with the requirements of national regulators in the countries of opera-
tion and the standards and recommendations of international regulatory bodies;

• Maintaining an impeccable business reputation, avoiding actions

that could damage the company's public image;

• Maintaining external issuer credit ratings assigned by international rating agencies.

Risk management reports are submitted for review to relevant collective governance bodies of the
Corporation at least once a quarter. Each risk management report contains a re-evaluation of risks and their
impact on the financial results of the Corporation, an assessment of the effectiveness of risk mitigation and
response plans, and potential risk areas (areas requiring attention) identified for future periods.

The Corporation has developed a unified compliance system which encapsulates a set of activities aimed
at minimising risks in the area of anti-corruption and stock exchange compliance, as well as risks related
to data protection and confidentiality, prevention of money laundering and funding of terrorism.

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SISTEMA'S
EXTERNAL RISKS

FINANCIAL RISKS

The business of Sistema is inextricably connected to the state of the global economy and financial mar-
kets. In particular, it is sensitive to movements in the prices of oil, gas and other commodities exported
by Russia. A weakening or strengthening of the rouble against the US dollar and the euro amid fluctuating
oil prices and imposed sanctions may result in a rise in costs and/or a drop in revenues or impede the
achievement of financial targets and debt management by Sistema Group companies.

Investor flight from Russia amid restrictions for foreign companies as a result of sanctions may have
an adverse effect on joint ventures (partnerships) and new investment projects of Sistema Group.

Growing inflation may result in higher expenses and therefore put pressure on profit margins and affect
domestic demand for the products and services of Sistema Group companies.

The servicing and refinancing of existing and future liabilities of the Corporation may lead to significant
cash outflows. If sanctions are maintained and the access of Russian banks and businesses to foreign debt
remains restricted in the medium term, this may significantly increase the current liquidity deficit in the mar-
ket and result in further interest rate rises, making it difficult for Sistema Group to raise funding for its oper-
ations and to refinance the debt of the Corporation and its portfolio companies. Should the Corporation be
unable to raise necessary funding on the terms and within the timeframes required, it could face significant
restrictions in terms of business development and the Group's operating and investment activity.

An unfavourable macroeconomic environment in many countries where Sistema's assets operate may make
it necessary to re-evaluate goodwill at certain Sistema companies and their respective assets.

Foreign currency control and restrictions on capital repatriation may adversely affect capital flows and
reduce the value of Sistema's investments in Russia, which may have a material adverse effect on the
business of Sistema Group.

Potential bankruptcy of one of the Russian banks acting as the Group's counterparty may result in a reduc-
tion in the sources of borrowing for the Corporation and its portfolio companies and may lead to direct
losses of funds deposited in the accounts at such banks.

POLITICAL RISKS

The effect of geopolitical risks on the activities of the Corporation and its portfolio companies remains tan-
gible, as protectionism and economic sanctions are increasingly being used as tools for achieving geopoliti-
cal goals in unpredictable ways.

Imposition of sanctions against Russian government or Russian companies and individuals may cause
disruptions in international payment systems, which in turn may prevent the Corporation and its portfolio
companies from performing settlements and reduce Sistema's investment appeal.

SOCIAL AND ENVIRONMENTAL RISKS

•

Due to the variety of industries where the companies of Sistema Group operate, the social and environmen-
tal risks faced by the assets differ materially across the Group. However, it is possible to highlight a num-
ber of major trends that may eventually become risks or opportunities for the companies of the Group:
•

change in consumer preferences, a trend towards responsible consumption and healthy lifestyle, higher
expectations from brands in terms of their mission, responsibility and sustainable development;
change in the age structure of customers, the need to adapt and update prod-
ucts and services in accordance with the demands of an ageing population;
increased competition for talent acquisition due to demographic gaps and chang-
ing expectations of the young workforce in relation to working conditions;
climate change and extreme weather conditions that may impact crop yields,
the health of the population and the operations of infrastructure;
emergence of new technological solutions and economic transformation, includ-
ing digitalisation and automation in the manufacturing and service sec-
tors and potential redundancy of a large number of employees;
• growing cyber security threats and a tightening of regulations in the

•

area of confidentiality and personal data protection;

• deteriorating living standards and potential rise in social tensions in the regions where the Group

operates, which may reduce the income of the Corporation and its portfolio companies;

• a tightening of regulations in the area of sustainable develop-

ment, carbon regulations and information disclosure.

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Among the material risks faced by the Group's industrial companies are those related to environmental
protection, occupational health and safety, waste disposal, as well as risks related to the state of the infra-
structure, the threat of accidents and electromagnetic safety, which are critical for telecommunications and
power grid companies.

In the agricultural sector, the most material risks include climate risks and challenges related to the need
to adapt to changing weather conditions, greenhouse gases, water consumption and animal farming.

Emergencies and accidents at the production facilities of Sistema Group may have a significant impact
on the environment, i.e. pollution of land and water, emissions above allowances, discharge of waste waters
or leaks of hazardous substances, any of which may damage local communities, ecosystems and biodiver-
sity. Irrational use of natural resources (land, timber) may deplete the raw materials/production base and
lower the economic results of agricultural and forestry assets.

To manage these risks, the companies of the Group are implementing advanced technological solutions,
improving management systems in the area of environmental protection, energy efficiency, occupa-
tional health and safety, and developing measures aimed at prevention and mitigation of accidents and
emergencies.

The risks related to sustainability compliance failures in supply chains may result in disruption of supplies
and have an adverse effect on the reputation of Sistema Group. As part of their efforts to minimise such
risks the companies of the Group set strict requirements for suppliers, contractors and partners in terms
of compliance with existing laws and the companies’ internal regulations.

Due to increased global and regional terrorist threats, any potential accidents at the enterprises and infra-
structure facilities of the Group may cause significant economic damage, negatively affect people's health
and provoke a tightening of data access regulations.

LEGAL RISKS

There is a risk of unpredictable court rulings and administrative decisions with respect
to the business of Sistema Group and its portfolio companies, which may have an adverse
effect on the Group's operations. This risk is caused by a number of factors, including:
• possible discrepancies and ambiguities in: (i) federal and other laws; (ii) regulations issued by executive
authorities of the countries where Sistema Group operates; (iii) regional and local laws and regulations;

• gaps in laws and regulations and lack of court and administrative guidelines on the inter-

pretation of certain laws, as well as inconsistent court guidelines and rulings;
influence of political, social and commercial factors on the judicial system;

•
• potentially selective or arbitrary actions of government authorities.

Gaps in existing corporate and securities laws may create barriers to raising capital in the future.

Lack of clarity on the applicability of the Federal Law "On the Procedure for Foreign Investment in
Companies of Strategic Importance to National Defence and State Security" and the regulations of the
Customs Union of the Eurasian Economic Union to Sistema Group may have an adverse effect on the busi-
ness of Sistema Group due to the presence of foreign shareholders.

There is a risk of amendments being introduced to the laws and regulations of the countries where Sistema
Group companies operate due to potential changes in foreign states’ or international organisations’
approach to governing international trade and investments.

Since Russian corporate law provides for potential liability of shareholders for the obligations of their con-
trolled entities, Sistema may incur financial losses related to the liabilities of its portfolio companies.

The minority shareholders of Sistema's subsidiaries may contest or vote against related-party or other
transactions, which may limit Sistema's capabilities of closing investment deals and restructuring
businesses.

Should the Russian Federal Anti-Monopoly Service conclude that Sistema or one of its material subsidiaries
has violated any of the existing anti-monopoly laws, this may result in serious administrative sanctions
involving losses for the Corporation. The Federal Anti-Monopoly Service may also prevent the Corporation
and its portfolio companies from closing and/or performing certain transactions, which may also
limit Sistema's capacity to do investment deals and restructure businesses.

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CORPORATE GOVERNANCE

TAX RISKS

Tax laws, regulations and practices of the jurisdictions where Sistema's assets operate are intricate,
opaque and prone to frequent modifications and ambiguous interpretations. If the actions of the
Corporation and its portfolio companies are interpreted as breach of tax laws, this may produce
an adverse effect on the business of Sistema Group.

Russian law on transfer pricing may necessitate adjustments to the price-setting practices used
by Sistema Group's companies and result in additional tax liabilities related to some transactions.

In 2015, new rules relating to the taxation of undistributed profits of controlled foreign companies and
profits from indirect sale of properties in Russia were introduced, as well as the concept of a bene-
ficiary owner and new criteria for establishing tax residency of foreign legal entities in Russia. Since
taking effect, these rules have been revised multiple times, with the introduced amendments having
retroactive effect. As a result of applying such taxation rules, the Group's companies may face new
tax liabilities arising from the uncertainty around the interpretation of tax law and lack of consistent
administrative precedents.

RISKS RELATED TO SECURITIES MARKETS

Deterioration in the geopolitical situation, sanctions imposed on certain Russian companies, worsen-
ing of the macroeconomic environment and capital and investor flight from the Russian market led
to a reduction in the valuation of Russian companies in the years 2014 through 2019. In view of these
circumstances, Sistema Group's access to investor funding through securities markets may be further
restricted as a result of introduction of sectoral sanctions in the business segments where the com-
panies of Sistema Group operate and/or due to the cautious approach of investors to Russian com-
panies in general. In particular, Sistema's ability to raise funding via debt instruments may be limited,
which may lead to a lack of working capital and cash available for investment and have a material
adverse effect on the Corporation's financial performance.

RISKS RELATED TO CORONAVIRUS PANDEMIC

In March 2020, the World Health Organization in March 2020 declared the new coronavirus disease
(COVID-19) outbreak a pandemic due to its rapid spread. Responses put in place by many countries,
including Russian Federation, to contain the spread of COVID-19 are resulting in significant opera-
tional disruption for many companies and have significant impact on global financial markets. As the
situation is rapidly evolving it may have a significant effect on business of many companies across
a wide range of sectors, including, but not limited to such impacts as disruption of business opera-
tions as a result of interruption of production or closure of facilities, supply chain disruptions, quar-
antines of personnel, reduced demand and difficulties in raising financing. In addition, the Group may
face the increasingly broad effects of COVID-19 as a result of its negative impact on the global
economy and major financial markets. The significance of the effect of COVID-19 on Sistema Group’s
business largely depends on the duration and the incidence of the pandemic effects on the world and
Russian economy.

145

RISKS RELATED TO
SISTEMA GROUP'S
OPERATIONS

SISTEMA.COM

IMPLEMENTATION OF THE BUSINESS STRATEGY

The Corporation's strategic focus is to develop a balanced and diversified asset portfolio in the sec-
tors and regions where Sistema has expertise and competitive advantages while attracting interna-
tional and Russian partners. Despite having an established strategy, Sistema cannot guarantee that it
will achieve any of its goals, efficiently manage portfolio companies or take advantage of new invest-
ment opportunities due to its high debt and limited investment resources. Sistema's failure to achieve
the goals set in its strategy may undermine its financial results.

The development of Sistema Group companies depends on numerous factors, including the receipt
of necessary permits from state authorities, sufficient demand from consumers, successful devel-
opment of technologies, efficient risk and cost management, timely completion of R&D efforts
and deployment of new products and services. Difficulties arising in any of these areas may have
a detrimental effect on the development of Sistema Group companies and the Corporation's
financial results.

ACQUISITION, INTEGRATION, DISPOSAL OR RESTRUCTURING OF ASSETS

Sistema implements its strategy by acquiring, disposing, and restructuring assets. New investment oppor-
tunities entail various risks, including lack of relevant targets or their unavailability, insufficient or inadequate
due diligence of a target company's operations and/or financial situation, and potential overvaluation
of assets. These risks, if they materialize, may adversely affect Sistema's financial performance.

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

Delays in the implementation of investment deals or failure to close them may have an adverse effect
on the achievement of Sistema's strategic goals and on the results, financial position and investment appeal
of the Corporation.

Sistema may face difficulties associated with building an efficient govern-
ance system in newly acquired assets. Main risks in this area include:
•
•

inability to efficiently integrate operating assets and personnel of an acquired company;
inability to establish and integrate necessary control mecha-
nisms, including those related to logistics and distribution;
conflicts between shareholders;

•
• hostility and/or unwillingness to cooperate on the part of the man-

agement and personnel of an acquired asset;
customer attrition by an acquired asset.

•

If any of the above risks materialise, the asset in question may lose part of its value and/or Sistema's finan-
cial performance may be adversely affected.

When disposing of its assets, the Corporation may face the following risks:
• delays in closing or failure to close a deal due to inability to obtain corporate or state approvals;
• mistakes in asset valuation;
• assuming excessive obligations associated with the asset that is being disposed of;
•

loss of synergies with other assets remaining in the portfolio.

If one or several of the specified risks materialise, the Corporation may lose potential profit, which may
adversely affect its 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 may
adversely affect Sistema's business, performance, financial position and development prospects.

CASH FLOWS FROM SISTEMA GROUP COMPANIES

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

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CORPORATE GOVERNANCE

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RAISING CAPITAL AND FINANCING

HUMAN RIGHTS

Cash flows from portfolio companies may be insufficient to cover all of the Corporation's investments sched-
uled for a particular period. This may create a need to raise additional external funding and increase the debt
burden of the Corporation, which, in turn, will put pressure on the credit ratings of the Corporation and Sistema
Group companies. A downgrading of the credit rating may increase the cost of existing debt, make new bor-
rowings more expensive or inaccessible and, in some cases, trigger acceleration in maturity of existing loans.
The risk of deterioration or withdrawal of the Corporation's credit rating correlates with reputation and liquidity
risks. The current debt level of the Corporation also restricts new borrowings.

UNCERTAINTY OF ESTIMATES IN REPORTING

In the application of the Group’s accounting policies the management is required to make estimates and
assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other
sources. The estimates and their underlying assumptions are based on historical experience and other factors
that are considered to be relevant. Actual results may differ from these estimates, which may have a material
adverse effect on the Group's financial results.

The estimates and the underlying assumptions are reviewed on a regular basis. Revisions to accounting esti-
mates are recognised in the period in which the estimate is revised if the revision affect only that period or in the
period of the revision and in future periods if the revision influences both the current and future periods.

LOAN COVENANTS

The loan agreements and debt instruments of the Corporation and Sistema Group companies provide for certain
restrictive covenants. These covenants restrict further borrowings, encumbrance of property with pledges, sale
of assets, and transactions with affiliates. They may also restrict Sistema's operations, including financing of cap-
ital expenses, or limit its capacity to timely repay debts and service other liabilities. Any breach of covenants,
however inadvertent, may entitle the creditors of the Corporation and/or Sistema Group companies to demand
early repayment of loans and adversely affect the Corporation's financial performance.

LICENCES AND PERMITS

The operations of Sistema Group companies are regulated by various government bodies and agencies issuing
and renewing licences, approvals, and permits, and also depend on applicable laws, regulations, and standards.
Regulatory authorities largely rely on their own judgement when interpreting and implementing legal require-
ments, issuing and extending licences, approvals and permits, and monitoring compliance with such licences.
There is no guarantee that the existing licences and permits, including those issued to the Group's companies,
will be extended, that new licences and permits will be issued, or that the companies will be able to comply
with the terms of such licences. There is no guarantee either that existing or future licences or permits will not
be suspended or revoked on certain grounds. Any of these circumstances may have a material adverse effect
on Sistema's business.

PRIVATISED COMPANIES

The portfolio of Sistema Group contains several privatised assets. In the future, the Corporation and the com-
panies of the Group may also take part in privatisation of assets. Since Russia's laws and regulations related
to privatisation remain somewhat unclear and inconsistent (e.g., federal and regional rules on privatisation differ),
privatisation of many companies may be contested, including selective contestation, which may have a material
adverse effect on the business, financial situation, performance, or development prospects of the Corporation.

COMPLIANCE WITH APPLICABLE LAWS AND REGULATIONS

In their operations, the Corporation and Sistema Group companies are subject to a number of rules and stand-
ards in the area of market competition, corporate governance, fraud and corruption prevention, management
of conflicts of interest, compliance with sanctions, fair treatment of customers, prevention of money laundering
and funding of terrorism, data security, prevention of insider trading and market manipulation. Failure to comply
with these requirements may create the risk of legal and regulatory sanctions, significant financial losses and
reputational damage.

Moreover, the operations of Sistema and its portfolio companies are regulated by the anti-corruption laws of the
jurisdictions where they conduct their business or where their securities are listed, including the laws of the
Russian Federation, the UK Bribery Act and the US Foreign Corrupt Practices Act. Any investigation into potential
violations of the FCPA, UK Bribery Act or other anti-corruption laws of the US, the UK or other jurisdictions, may
adversely affect the reputation, business, financial situation and performance of Sistema and the companies
of Sistema Group.

The Corporation is aware of its responsibility for observing human rights, preventing any exertion of harmful
influence on human rights, eliminating or mitigating the potential consequences of such influence whenever
it takes place.

As part of its operations and cooperation with suppliers, contractors, partners and other stakeholders the
Corporation may exert direct and indirect impact on the rights of employees, local communities, customers,
patients, and consumers. Any instances of violations of human rights may have an adverse effect on the
Corporation's reputation and lead to court disputes, loss of confidence of investors, customers and employ-
ees, cause resistance from local communities, trade unions and NGOs.

The risks associated with human rights are taken into account in the risk management systems of Sistema
Group companies, and material items are regularly reviewed by their boards of directors. For more details
on the management of risks related to human rights, please refer to the section titled "Management of sus-
tainable development".

DIGITALISATION OF BUSINESS, DEVELOPMENT
OF IT AND PROTECTION OF PERSONAL DATA

With digitalisation of businesses (implementation of modern IT solutions and systems) and comprehensive
penetration of the Internet, the risks related to cybersecurity and personal data protection are becoming
a major threat to the business of Sistema Group companies. Inability to prevent cyberattacks and unsanc-
tioned access to their networks and databases may cause leaks of personal data and confidential and
other sensitive information, damage to the assets of the Group's portfolio companies, disruption in produc-
tion processes, network security breaches, costs related to the restoration of IT systems and equipment,
which may have a material adverse effect on the business of Sistema Group.

The risks related to personal data protection are most significant in the telecom, online services, telemed-
icine, financial and e-commerce sectors. Sistema Group companies implement programmes, projects
and measures that contribute to reducing the likelihood and possible negative consequences of indus-
try-specific risks.

COMPETITION

All business segments where Sistema operates are exposed to competition from other companies.
Telecom, retail, media, tourism, private healthcare, pharma, property development, forestry and agricul-
tural markets in Russia and abroad are highly competitive. Inability of the Group companiesto compete
efficiently may have a material adverse effect on the business, performance, financial situation and develop-
ment prospects of the Corporation.

BRAND QUALITY AND REPUTATION

Developing and maintaining brand awareness for the Group companies is crucial to shaping the public
opinion about their existing and future products and services. Sistema believes that the importance of a cor-
porate brand is growing steadily in highly competitive markets. Successful development and improvement
of brand awareness depends largely on the efficiency of marketing and ability to provide quality products
and services at competitive prices. The effort and funds invested in brand development may prove greater
than the incomes they yield, which may lead to potential financial losses for the Group companies.

Sistema’s reputation may suffer in the event of unethical business practices, professional errors (includ-
ing medical errors), negligence, failure to observe human rights, dissemination of insider information, and
corruption offences committed at the Corporation or its portfolio companies.

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SUSTAINABILITY
MANAGEMENT

150

SUSTAINABILITY MANAGEMENT

151

154

158

KEY ESG AREAS AS A CONTINUATION
OF THE INVESTMENT STRATEGY

EXAMPLES OF KEY ESG EFFORTS OF
PORTFOLIO COMPANIES

CORPORATE SOCIAL RESPONSIBILITY
AND SISTEMA CHARITABLE FOUNDATION

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SUSTAINABILITY MANAGEMENT

SUSTAINABILITY
MANAGEMENT

Approach to sustainability
management and responsible
investment

Sistema aims to build a competitive and sustainable
business that meets the principles of social and
environmental responsibility and ensures the
creation of value for shareholders and a wide
range of stakeholders in the long term.

In 2019, Sistema initiated an update of its sustaina-
bility and responsible investment
management system. Based on the analysis
of the current situation, a roadmap was developed
to streamline the relevant activities in the Group and
bring them into compliance with best practices and
investor expectations. Measures planned include
updating the Corporate Governance Code, devel-
oping a Sustainability Policy and a Human Rights
Policy, defining strategic sustainability areas, and
improving approaches to disclosure of non-financial
information.

Sistema’s investment process is regulated
by internal documents and procedures. Potential
investment projects and investment programmes
of portfolio companies are subject to detailed
review as part of Sistema’s multi-stage invest-
ment process. In addition to financial analysis and

industry analysis that underlie decision-making for
each project, such components as management
quality, staffing, state of production base, infrastruc-
ture and technology, related social obligations and
environmental risks are also considered for specific
projects.

Investment in prospective projects and develop-
ment of current portfolio assets include defining
a development strategy, increasing operational
efficiency, developing corporate governance and
sustainability management systems, managing ESG
risks and developing the corporate culture to ensure
opportunities for the investment portfolio’s sustain-
able development.

ESG risk management is part of the corporate
risk management system. To learn more about ESG
risks, please refer to section “Risk management”.

Sistema implements its investment and social
programmes on the basis of diverse expertise
and mutually beneficial cross-sector partnerships
with government bodies, scientific and educational
institutions, and public and non-profit organisations
that the Corporation and its portfolio companies
cooperate with.

Transparency and ongoing dialogue with stakehold-
ers are the basic principles of Sistema’s activities as
a public company. Sistema prepares public non-fi-
nancial reporting in accordance with recognised
international standards and facilitates disclosure
of significant non-financial information by its key
portfolio companies and funds

PARTICIPATION IN SUSTAINABILITY INITIATIVES

Sistema is a signatory to the UN Global Compact
promoting shared values and responsible business
practices, and to the Social Charter of the Russian
Business, a set of fundamental principles of respon-
sible business practices adopted by the Russian
Union of Industrialists and Entrepreneurs (RSPP).

Since 2016, Sistema has been included in the
FTSE4Good Index.

As of February 2020, Sistema received a Low risk
rating (15.3) in the ESG Sustainalytics Risk Rating
(#37 out of 578 diversified financials companies).

In 2019, the Corporation improved its position and
received a rating of BB (on a scale of AAA-CCC)
in the MSCI ESG Ratings assessment compared
to B in 2018.

Based on the results of 2019, Sistema was once
again included in the leading groups of the sus-
tainable development indices of the Russian
Union of Industrialists and Entrepreneurs
(RSPP): “Responsibility and Transparency”
and “Sustainable Development Vector”.
The Corporation’s securities (MOEX: AFKS) are
included in the updated base for calculation of the
corresponding indices at the Moscow Exchange.

Sistema and the Group’s companies were included
in the Sustainability Ranking 100 prepared
by Expert magazine.

The Corporation was recognised as one of the top
10 private Russian companies of the 2019 National
Corporate Transparency Ranking based on the
annual study of the Russian Regional Network
on Integrated Reporting.

151

Key ESG areas
as a continuation
of the investment
strategy

Sistema identified three key ESG areas that it is promoting
through its investment activities and making efforts to
have a significant positive impact within them: :

• Accessibility and quality of products and services
• Wellbeing of employees, customers and local communities
• Smart, efficient and safe environment.

SISTEMA.COM

Innovation and digital transformation are the focus
of the Corporation’s strategy. Sistema consistently
invests in building intellectual potential: science and
education, advanced research, tech startups, innova-
tions and digitalisation. The Corporation cooperates
with innovation support institutes, creates own R&D
centres, and facilitates the adoption of advanced
technologies and organisational innovations in its
portfolio companies.

Most of the projects implemented by the
Corporation, its assets and Sistema Charitable
Foundation contribute to solving socially important
issues at the intersection of the key ESG areas.

Examples of such projects are provided in sec-
tion “Examples of key ESG efforts of portfolio
companies”.

SMART ENVIRONMENT

• SMART HOMES, CITIES AND INDUSTRIES

• OPERATIONAL ECO-EFFICIENCY

• ENERGY MANAGEMENT AND CLIMATE CHANGE

WELLBEING

• HUMAN CAPITAL

• HEALTH AND SAFETY

• DATA PRIVACY AND SECURITY

ACCESSIBILITY AND QUALITY

• ACCESS TO PRODUCTS, SERVICES AND INFORMATION

• CUSTOMER EXPERIENCE

• RESPONSIBILITY FOR PRODUCTS

CORPORATE GOVERNANCE AND SYNERGIES

• BUSINESS ETHICS

• HUMAN RIGHTS AND STAKEHOLDER ENGAGEMENT

• RISK MANAGEMENT

• INNOVATION MANAGEMENT

• SUSTAINABLE SUPPLY CHAIN

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Sustainability
governance
structure

Business ethics
and responsible
business conduct

Respect for
human rights

Sistema’s Board of Directors plays a key role in determining the
strategic sustainability areas of the Corporation’s activities and
overseeing its results. Sustainability aspects essential for the
Corporation are managed at both strategic and functional levels,
and the key principles and approaches are communicated to the
Group’s companies through their boards of directors.

At the level of Sistema’s Board of Directors, sustainability is super-
vised by the Investor Relations and Dividend Policy Committee,
which preliminarily defines the Corporation’s position with regards
to ESG factors and considers the strategy of the corporate chari-
table foundation. Other Committees of the Board of Directors con-
sider certain aspects of ESG factors (corporate governance, ethical
business conduct, etc.) within their competence. Implementation
of the defined position at the operational level, its communication
to investors and public non-financial reporting are the responsi-
bilities of the IR Team, which was strengthened in 2019 in terms
of ESG expertise.

Corporate social responsibility, social communications, regional
policy and charitable activities are supervised by the Government
Relations Department; corporate governance and compliance
aspects are supervised by the Company Secretary, the Corporate
Governance and Legal Department and the Internal Control and
Audit Department, while the HR Department is responsible for HR
policy aspects. If necessary, cross-functional working groups are
created at the Corporate Centre to develop common approaches
to managing the key aspects of sustainable development.

The Corporation believes that it must adhere to the following corporate respon-
sibility principles when making strategic, investment and operational decisions:

• Consideration of environmental, social and governance risks and
opportunities when developing and implementing strategy, assess-
ing investment opportunities and developing portfolio companies.

•

Integrity and transparency. The Corporation refines its management
structures, policies and procedures to ensure compliance with applicable
laws and good business practices. The Corporation also discloses material
information about itself and its activities, including public non-financial
reporting, thus enabling stakeholders to properly oversee its activities.

• Respect for human rights. The Corporation promotes inclu-
sivity and diversity, ensures equal opportunities, preven-
tion of child and forced labour, protection of personal data,
respect for labour and other fundamental human rights.

• Ethics, loyalty and honesty in relations with partners, counter-

parties, and personnel. The Corporation strictly observes its own
Code of Ethics and provides comprehensive support to the devel-
opment of business ethics in the companies of Sistema Group.

• Employee care. The Corporation seeks to provide its employees with
decent and safe working conditions and fair compensation. It shall
develop and implement programmes designed to create conditions for
enhancing qualifications and education, expand the scope of health
insurance, develop sports, culture, volunteering, and charity opportu-
nities, and promote other social activities to benefit its employees.

• Focused allocation of the Corporation’s financial and intellectual

resources on promoting innovation and developing businesses in indus-
tries that can bring substantial social, economic and technological benefits
to the regions and local communities in which the Corporation operates.

• Respect for the environment. The Corporation seeks

to ensure responsible resource management and environmen-
tal safety of production processes, products and services.

•

Investment in socially impactful projects and programmes
through the Sistema Charitable Foundation and the char-
itable activities of Sistema Group companies.

The Corporation ensures, and requires all of its assets
to ensure, compliance with the provisions of Russian
and international human rights laws, including, but
not limited to, the Constitution and the Labour
Code of the Russian Federation, the Universal
Declaration of Human Rights, the International
Covenant on Economic, Social and Cultural Rights,
the International Covenant on Civil and Political
Rights, the ILO Declaration on Fundamental
Principles and Rights at Work, and the UN Guiding
Principles on Business and Human Rights.

As part of its operations and cooperation with suppliers, contractors, partners
and other stakeholders the Corporation may have direct and indirect impact
on the following aspects of human rights:

• Workers’ rights, including decent working conditions and

remuneration, occupational health and safety, inclusivity and
non-discrimination on any grounds, respect for the honour
and dignity of the individuals, prevention of forced and child
labour, freedom of association and collective bargaining.

• Community rights, including the right to a safe environment, access
to information, access to socially important infrastructure, water and
cultural facilities, respect for property rights, respect for traditions
and customs, and respect for the rights of indigenous peoples.

• Rights of clients, patients and consumers, including accessibility, safety

and quality of products and services, data privacy and security, availabil-
ity of reliable information and prevention of unfair marketing practices,
online safety (especially for children, elderly people and other vulnerable
groups), and assistance in realisation of the rights to education and health.

The Corporation has zero tolerance for human rights violations in the value
chain and expects its suppliers, contractors and partners to ensure the same
strict compliance with laws and respect for human rights.

The risks associated with human rights are considered within the risk man-
agement systems of Sistema Group companies, and material items are regu-
larly reviewed by their boards of directors. In addition, management systems
are constantly being improved to ensure respect for human rights, including
policies and procedures, compliance programmes, training and internal audits.
Human rights aspects are considered when conducting due diligence as part
of investment projects. The Group’s companies have formalised and accessi-
ble grievance mechanisms, which ensure confidentiality, unbiased considera-
tion, absence of negative consequences for the submitter, and feedback.

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EXAMPLES OF KEY ESG EFFORTS
OF PORTFOLIO COMPANIES

Responsibility for products
and the development of
the circular economy

Sistema and its portfolio companies ¬significantly contribute
to the shaping of a competitive labour and procurement
market, including the engagement of small and medium-size
businesses, the modernisation of infrastructure, industry and
agriculture, the enhancement of the accessibility and safety
of products and services, the development of the health
and education systems and the social and environmental
wellbeing of communities where they operate.

Given the diversity of industry sectors Sistema invests
in, sustainability risks and value creation potential
vary across the Group. Below we provide some of the
most illustrative examples of the efforts of portfolio
companies in 2019. The traditional synergies between
assets enabled many cross-sectional projects.

W E L L B E I N G

A C C E S S I B I L I T Y

S M A R T E N V I R O N M E N T

Recognition of customer
experience achievements

MTS and Medsi each received the international CX WORLD
AWARDS 2019 for their achievements in the field of customer
experience: Medsi for "Best Customer Experience in B2C"
and MTS for "Best Employee Engagement Programme"
and the "Best Customer Experience Team".

Telemedicine
and data privacy

Medsi and MTS carried on their cooperation in 2019 devel-
oping the telemedicine platform SmartMed that delivers
distance medical care to patients through online video
or chat communications. All patients’ records, including
medical charts, appointment history, prescriptions and test
results, are stored with secure #CloudMTS solution and are
accessible for reading on gadget screens at any time.

In 2019, MTS first offered #CloudMTS personal data
protection services to medical practices outside Medsi.
The solution helps health providers comply with data
privacy and security regulations and optimise IT costs.

In 2019, Segezha Group supported the "Sustainable Wood for a
Sustainable World" initiative of the Food and Agriculture Organisation
of the United Nations. Segezha Group works towards zero-waste
production by developing biofuel manufacturing, recycling sawmill
residues in multi-fuel boilers and generating renewable energy both for
industrial and domestic use. The company's 2019 project "Introducing
Bioenergy Technologies in Forest Industry" brought it a win in the
"Environment.Business” category of the second national profes-
sional award "Change Management. Visionaries". Segezha's multi-fuel
boilers fitted with state-of-the-art electrical filters purify atmos-
pheric emissions and reduce the consumption of fuel oil by 30%.

Pellets produced from waste wood became a high-added-value product
of the company, with its sustainability certified in accordance with
the Sustainable Biomass Programme (SBP), which assigned Segezha's
biofuel with an ash content of less than 0.5% the highest quality class.
The promotion of the circular economy principles becomes a key
criterion to further sustainable development of the company.

Improved work and
leisure conditions

Segezha Group's ongoing investment project The Cozy Workplace aims
to create comfortable work and leisure conditions for the company's
staff, on a par with best practices of global industry leaders.

Building a comfortable
living environment

The total investment in a sweeping programme of improvements,
the creation of new infrastructure, the disassembly of unused facilities
and the overhaul of production, cultural and sports facilities will amount
to RUB1 bn. The project is scheduled to be completed in early 2020.

The Cozy Workplace is part of a comprehensive modern-
isation and efficiency enhancement programme that
supplements large-scale investments in the technological
upgrades of Segezha Group's assets, the digitalisation and
automation of business processes, the enhancement of indus-
trial safety and the development of human capital assets.

Etalon Group's flagship apartment complex Wings is a signif-
icant step towards building a comfortable urban environment and
a sustainable ecosystem provided with all necessary services. The
school and kindergarten buildings incorporated in the housing estate
were designed in consultations with experts in education and child
psychology. In another sustainable move, Etalon Group teamed
up with Panasonic Russia to build an urban vertical farm, a pilot
innovative hi-tech solution allowing to grow vegetables and greens all
year round in immediate proximity to consumers, which guarantees
their freshness and nutritional value. Wings won the Environmental
Assessment prize at the 2019 Urban Awards, the nation-wide initiative
awarding best construction and property development projects.

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Supporting hi-tech medical
care for children

Safety and efficiency
of production and the
city infrastructure

Managing climate risks in
the telecom industry

In 2019 Detsky Mir embarked on a long-term cooperation with the National
Medical Research Centre for Children's Health of the Russian Ministry of
Health. Detsky Mir Charitable Foundation will finance the acquisition of
medical products required for the surgical treatment of the patients of the
National Children's Health Research Centre, including pacemakers, implants
and other special devices that are not fully covered by public financing.

MTS has been actively developing digital services making use of the IoT,
AI, cloud technology and Big Data. Employing these solutions contributes
to greater safety, lower energy consumption, and less emissions of
harmful substances generated by industrial plants, municipal facil-
ities and social services. In particular, MTS already has solutions in the
fields of environmental monitoring, digitalisation of waste collection
and recycling, and geoanalytics projects where MTS's Big Data is used
to create "digital copies" of cities and smart solutions for road traffic
management. In 2019, MTS signed a number of digitalisation agreements
with local governments, including that of Kalmykia, Tatarstan, Samara,
Lipetsk and Orenburg regions, the Far Eastern territories and others.

Mikron has come up with a new IoT solution for the handling of solid
municipal waste that remotely monitors the filling level of waste bins and
optimises pick-up logistics by saving trips and fuel for refuse collection
vehicles. On top of that, the company's new RFID solution makes it easy
to track tagged products throughout the supply chain, from start of
production to delivery, and to optimise the production cycle by reducing
downtime and minimising human errors, while also providing real-time
control of all key processes and enhancing production efficiency.

MTS joined a global GSMA-led initiative to develop a mobile
industry climate action roadmap in line with the Paris Agreement
aimed at combating climate change. Cooperation with the GSMA
on climate issues is designed to enhance the company's efforts in
the area of ensuring total transparency of environmental impact
and raising public awareness about the company's initiatives aimed
at increasing energy efficiency and cutting carbon emissions.

In addition, in 2019 MTS for the first time completed the CDP
questionnaire on climate and became one of Russia's 10 top-ranked
CDP-reporting companies, with an assigned score of C ("Awareness").

157

Smart solutions
for agriculture

SISTEMA.COM

In the summer of 2019, Connecterra, a portfolio company of Sistema's
venture fund Sistema VC, joined the Farming for Generations initi-
ative launched by an alliance of agricultural sector leaders based on the
understanding that the food system has to change in order to tackle a
number of environmental and health problems and that agriculture has
to play a pivotal role in the establishment of sustainable food systems
of tomorrow. Farming for Generations aims to help dairy farms study
the norms of regenerative agriculture for the preservation and replen-
ishment of the planet's resources, proper livestock management and
long-term economic viability of farms for future generations. Russia will
become one of the project's pilot regions, with best practices formulated
based on the experience gained from the 25 pilot projects in the USA,
EU and Russia to be rolled out all across the alliance's global network.

Hi-tech cattle management solutions are used at the dairy farm of
STEPPE AgroHolding. For example, special sensors worn on cow
feet provide data about each animal, including its weight, milk yield
and the chemical composition of its milk. The data is then processed
by special software and used to form guidance to introduce
necessary changes to the environment, the cow's diet, and staff's
duties. The technology translates into a significant increase in the
average annual yield per cow. To put it in perspective, in 2019 the
company reached a per-cow annual output of 13,500 kg, while the
national average according to RosStat is just over 6,000 kg.

C O R P O R A T E G O V E R N A N C E

Evolution of responsible
business practices
in agriculture

Interactions with local
entrepreneurs

In March of 2019, STEPPE AgroHolding joined the Association of Responsible
Agricultural Market Players, a cross-sector association aiming to develop
responsible transparent business practices in agriculture and related indus-
tries, drive the economic advancement of the farm produce selling market,
and ensure efficient market self-regulation. The association members
work hand in hand to reinforce the Agricultural Sales Charter by intro-
ducing a new policy that will counter illegal activities on the agro market.

The online retailer Ozon launched a "last mile" delivery programme
in the Urals Federal District, inviting local entrepreneurs to act as
Ozon's pick-up points, install postamats, or perform courier deliv-
eries. The marketplace curates partners so as to avoid unnecessary
competition (where pick-up points are placed at a sufficient distance
from one another) and offers a double service fee for each picked-up
order for the first three months of cooperation. Ozon also provides
new partners with an option of initial costs financing through the
company's online platform and a special staff training programme.

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Corporate social responsibility
and Sistema Charitable Foundation

For over 15 years, Sistema Charitable Foundation (SCF, the Foundation) has been
active in the Russian nonprofit universe, steadily developing the strategic areas
of the Corporation's social investments. The Foundation is the locomotive of the
philanthropic efforts of Sistema and its portfolio companies, working in three main
areas: Education and Technology, Culture and Art and Social Needs and Volunteering.

The Foundation sees its main objective in creating favourable conditions for
the creation of new tech solutions and raising a new generation of profession-
als capable of changing the quality of society's life. Every year, the Foundation
develops a social investing strategy, approves a charity programme, builds
a portfolio of projects and carries them out in accordance with the approved
budget. In 2019, the Foundation revisited its approach to human capital
investments, along with enhancing and scaling up its best projects and
practices.

The Foundation's operating principles are openness, transparency, regard for
the social priorities of donor companies and for social needs, establishment
of centres of excellence in each line of work, attainment of synergies between
parallel projects, and close long-term relations with partners.

The total social investments of Sistema and its portfolio companies in 2019
reached some RUB 1.1 bn, about one-third of which (RUB 275 M) was invested
through SCF, which accumulates the Group's funds to carry out cross-com-
pany infrastructure programmes.

1.1

RUB
BN

TOTAL SOCIAL INVESTMENTS
OF SISTEMA AND ITS
PORTFOLIO COMPANIES
~RUB 275 m through SCF

In 2019, over a million people from 73 Russian regions and 30 countries
of the world received healthcare and social services, access to state-of-
the-art educational, cultural and outreach programmes and opportunities
to unlock their potential in the hi-tech sector.

The autumn of 2019 marked the end of the nation-wide research project
Odyssey to create next generation search and rescue technologies. The project
that had lasted a year and a half is a strong example of harmonious cooperation
between the tech community, the state, businesses and NGOs. Over a thousand
scientists, entrepreneurs, students and engineers were involved in developing
technical solutions for the search and rescue of missing persons. The project
yielded three solutions that are already used by Russia's leading rescue teams,
both volunteer and professional.

Working in the area of Education and Technology, the Foundation has been
actively supporting the Russian engineering education, aiming to fos-
ter creativity in a tech-intensive environment. Among other things, the
effort translated into the establishment of the Vostok Centre, Russia's
first hub for collective design of electronics, in cooperation with the Far
Eastern Federal University. The Centre's first projects were developed
as part of the Foundation and Mikron's nation-wide learning programme
Microelectronics.Level 157, which helped narrow the gap between the knowl-
edge that students of technical universities gain and the actual requirements
of the market.

The Foundation's efforts in the field of Culture and Art aim to make the
Russian cultural artefacts accessible to all Russian citizens. In 2019, SCF lent
support to the exhibition projects of the State Russian Museum and several
inclusivity initiatives. The Foundation launched and rolled out a new model
of charity sociocultural festivals efficiently addressing specific social needs
of local communities.

Working in the field of Social Needs and Volunteering, throughout 2019
the Foundation pursued programmes aiming to provide comprehensive
hi-tech healthcare to war veterans, help the underprivileged and promote
volunteering.

Project Odyssey for search and rescue technologies development

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ANNEXES

162

ANNEX 1

Brief biographies of Sistema’s Board members, President, Management Board
members and Company Secretary. Their shareholding in Sistema PJSFC.

172

ANNEX 2

Financial results according to Russian Accounting Standards (RAS).

174

ANNEX 3

Transactions by Board members, President, and Management Board members
involving Sistema shares between 01 January 2019 and31 December 2019.

175

ANNEX 4

List of transactions carried out by Sistema PJSFC in the reporting year that are
recognised as major transactions under the Federal Law “On Joint-Stock Companies”.

176

ANNEX 5

List of transactions carried out by Sistema PJSFC in the reporting year that are recognised
as related-party transactions under the Federal Law "On Joint-Stock Companies".

178

ANNEX 6

Report on compliance with the Corporate Governance
Code recommended by the Bank of Russia.

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Members of the Board of Directors

NAME AND POSITION

BRIEF BIOGRAPHY

Born in 1961 in Aleksandrovsk, the Sakhalin region.

In 1984, she graduated from the Moscow Engineering Physics Institute. PhD degree
in 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.

Since 2017 — Academic supervisor of the Research Centre for Systemic Transformation
at the Lomonosov Moscow State University.

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. Chairman of the Investor
Relations and Dividend Policy Committee and member of the Audit, Finance and Risks
Committee and Ethics and Control Committee of the Board of Directors of Sistema PJSFC.

Share in the authorised capital of Sistema PJSFC: 0%.

Brief biographies of Sistema’s Board members, President,
Management Board members and Company Secretary.
Their shareholding in Sistema PJSFC.1

Anna Belova

Independent director

Members of the Board of Directors

NAME AND POSITION

BRIEF BIOGRAPHY

Vladimir
Evtushenkov

Chairman of the Board of Directors
Non-executive 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. 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.

Majority shareholder, Chairman of the Board of Directors and Chairman of the Strategy Committee
of the Board of Directors of Sistema PJSFC.

Chairman of the Russian-Arab Business Council and 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.

He heads the Board of Trustees of the fund “Friends of the Russian Museum” and is a member
of the boards of trustees of Sistema Charitable Foundation and many other charitable, non-profit and
educational organisations, including Lomonosov Moscow State University, Higher School of Economics,
Russian Geographical Society, etc. Mr. Evtushenkov is Honorary Consul of the Grand Duchy of Luxembourg
in the Russian Federation with jurisdiction over the Yekaterinburg and Khabarovsk regions.

Share in the authorised capital of Sistema PJSFC: 59.2030%.

As of 31 December 2018.

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Members of the Board of Directors

NAME AND POSITION

Sergey Boev

Non-executive director

BRIEF BIOGRAPHY

Born in Moscow in 1953.

In 1978, he graduated from the All-Union Correspondence Law Institute and in 1984, from the Moscow
Ordzhonikidze Institute of Management. Holds PhD degrees in Economics and Engineering. Professor.

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 and Head of the High Technology and Industry Business Unit at Sistema.

2011–2016 — CEO and Chief Designer of OJSC RTI.

2012 — Appointed Chief Designer of the National Missile Warning System.

2016–2018 — Chairman of the Board of Directors of JSC RTI.

Since 2018 — CEO of PJSC Vimpel.

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.

Member of the Council on Legislative Support for the Defence Industry and Military-Technical
Cooperation under the Federation Council of the Federal Assembly of the Russian Federation,
the Science and Technology Council of the Military and Industrial Commission of the Russian
Government, and the Commission on the Defence Industry of the Russian Union of Industrialists
and Entrepreneurs (RSPP). 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.

Chairman of the Board of Directors of JSC Research Institute of Molecular Electronics (NIIME) and
member of the Board of Directors of JSC Almaz Antey Concern.

Member of the Board of Sistema Charitable Foundation and the boards of trustees of the Russian
Admirals’ Club and the Suvorov Military School in Tver.

Member of the Board of Directors of Sistema PJSFC since 2013. Member of the Strategy Committee
and Ethics and Control Committee of the Board of Directors of Sistema PJSFC.

Share in the authorised capital of Sistema PJSFC: 0.0929%.

Andrey Dubovskov
Executive director1

Born in 1966 in Alma-Ata (now Almaty).

In 1993, graduated from the Gerasimov University 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, Alma-Ata, Nizhny Novgorod, Yekaterinburg, Perm and Kiev.

2002–2004 — CEO, Tele2 (Nizhny Novgorod).

In 2004, he joined OJSC MTS as head of the company’s Nizhny Novgorod branch.

2006–2007 — Director of the MTS Ural Macroregion.

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

2011–2018 — President of PJSC MTS.

From March 2018 to April 2020, he was President of Sistema PJSFC.

Member of the Board of Directors of Sistema PJSFC since 2015, elected Deputy Chair
of the Board in April 2020. Member of the Strategy Committee of the Board. Member of the Board
of Sistema Charitable Foundation.

Share in the authorised capital of Sistema PJSFC: 0.0570%.

1 On 19 April 2020, after the end of the reporting year, A. Dubovskov became a non-executive director as his powers as CEO ceased.

Members of the Board of Directors

NAME AND POSITION

BRIEF BIOGRAPHY

Felix Evtushenkov

Non-executive director

Ron Sommer

Non-executive director

Born in Moscow in 1978.

In 2000, he 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, CJSC Sistema Hals.

2006–2008 — President, OJSC Sistema Hals.

2008–2011 — Vice President, Head of Consumer Assets Business Unit, Sistema PJSFC.

2011–2012 — First Vice President, Head of Core Assets Business Unit, Sistema PJSFC.

2012–2018 — First Vice President, Sistema PJSFC.

Since 2019 — Chairman of the Board of Directors of MTS.

Member of the Board of Directors of Sistema PJSFC since 2015. Member of the Strategy
Committee of the Board of Directors of Sistema PJSFC. Chairman of the Board of Sistema
Charitable Foundation.

Share in the authorised capital of Sistema PJSFC: 5.1817%.

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.

Chairman of the Board of Directors of PJSC MTS and Chairman of the Strategy Committee
of the Board of Directors of PJSC MTS since June 2009.

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%.

Robert Kocharyan

Independent director

Born in 1954 in Stepanakert, Nagorno-Karabakh Autonomous Region.

In 1982, he 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 Audit, Finance and Risk Committee of the Board.

Share in the authorised capital of Sistema PJSFC: 0.0228%.

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Members of the Board of Directors

NAME AND POSITION

BRIEF BIOGRAPHY

NAME AND POSITION

BRIEF BIOGRAPHY

Jeannot Krecké

Independent director

Roger Munnings

Independent director

Mikhail Shamolin

Non-executive director

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). President
of the Alzheimer Foundation since 1997.

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. Chairman of the Ethics and Control
Committee, member of the Audit, Finance and Risk 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 and
Economics.

Member of the UK Government’s working group on trade and investments between Great Britain and
Russia, Chairman of the Institute of Audit Committees of Russia.

Roger 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
Risk 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%.

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, OJSC MTS.

2011–2018 — President and Management Board Chairman, Sistema PJSFC.

Since 2018 — President of LLC Segezha Group MC.

Member of the Board of Directors of Sistema PJSFC since 2011. Member of the Strategy Committee
of the Board Directors of Sistema PJSFC. Member of the Board of Sistema Charitable Foundation.

Share in the authorised capital of Sistema PJSFC: 0,2988%.

David Iakobachvili

Independent director

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.

In 1992, he became 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 and Petrocas Enegy International. Vice President of the Russian
Union of Industrialists and Entrepreneurs (RSPP) and Chairman of its Committee for Corporate Social
Responsibility and Demographic Policy. Chairman of the Joint Ethics Commission of the RSPP. Chairman
of the Board of Directors of RusBrand, the Association of Branded Goods Manufacturers in Russia. Head
of the Russian-American Business Cooperation Council. Member of the Public Council of the Ministry
of Construction and Utilities of the Russian Federation. Member of the General Council of LLC Business
Russia. Member of the World Economic Forum in Davos and B20 summits. Member of the Franco-Russian
Dialogue Association. Member of the President’s Global Council at New York University (NYU). Owner
of a private museum Collection.

Member of the boards of trustees of the Higher School of Economics, RSPP Business School, French
University College in Russia, Mstislav Rostropovich Foundation for Scholarships, State Hermitage Museum,
Russian Museum of Decorative, Applied and Folk Art, Russian Military History Society, Maria Charity,
Family Education Boarding House, and Foundation for Supporting Underprivileged Children.

Member of the Board of Directors of Sistema PJSFC since 2011. Member of the Strategy Committee,
the Nomination, Remuneration and Corporate Governance Committee, and of the Investor Relations and
Dividend Policy Committee of the Board of Directors of Sistema PJSFC.

Share in the authorised capital of Sistema PJSFC: 0.0267%.

President and Management Board members

MEMBERS OF THE BOARD OF DIRECTORS

BRIEF BIOGRAPHY

Andrey Dubovskov

President, Chairman of the Management
Board of Sistema PJSFC1

Born in 1966 in Alma-Ata (now Almaty).

In 1993, he graduated from the Gerasimov University 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, Alma-Ata,
Nizhny Novgorod, Yekaterinburg, Perm and Kiev.

2002–2004 — CEO, Tele2 (Nizhny Novgorod).

In 2004, he joined OJSC MTS as head of the company’s Nizhny Novgorod branch.

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.

2011–2018 — President of PJSC MTS.

From March 2018 to April 2020, he was President of Sistema PJSFC.

Member of the Board of Directors of Sistema PJSFC since 2015, elected Deputy Chair of the Board
in April 2020. Member of the Strategy Committee of the Board. Member of the Board of Sistema
Charitable Foundation.

Share in the authorised capital of Sistema PJSFC: 0.0570%.

A. Dubovskov ceased to be CEO after the end of the reporting year. On 20 April 2020, V. Chirakhov was appointed CEO.

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President and Management Board members

NAME AND POSITION

BRIEF BIOGRAPHY

President and Management Board members

NAME AND POSITION

BRIEF BIOGRAPHY

Igor Alyoshin

Vice President for Security
at Sistema PJSFC

Sergey Egorov

Vice President for HR
at Sistema PJSFC

Born in Kurgan in 1965.

In 1987, he graduated from the Omsk High School of Police, 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 1982.

In 2004, he graduated from the Kyrgyz National University with a degree in Finance and Credit.

2007–2008 — Senior Analyst, Private Equity and Structured Financing Department, LLC United Capital
Partners Advisory.

2008–2012 — Analyst, LLC Sberbank Capital.

He started working at Sistema PJSFC in 2012 and served as Director for Special Projects in 2018–2019.

Managing Partner of Sistema PJSFC since May 2019.

Share in the authorised capital of Sistema PJSFC: 0%.

Artyom Zasursky

Vice President, Head
of Strategy Function

Born in Moscow in 1979.

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.

Alexey Katkov

Managing Partner of Sistema PJSFC

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: 0.0199%.

Born in Moscow in 1977.

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%.

Svetlana Matveeva

Vice President for HR

Oleg Mubarakshin

Managing Partner of Sistema PJSFC

Andrey Pilipenko

Vice President for Government
Relations at Sistema PJSFC

Vsevolod Rozanov

Managing Partner
of Sistema PJSFC

Born in 1984.

In 2006, she graduated from the Plekhanov Russian University of Economics with a degree in Economics.
In 2007, she graduated from the Faculty of Computational Mathematics and Cybernetics of the Lomonosov
Moscow State University.

Until 2012, she held various positions at Sportmaster Group; in 2012, she joined Sistema.

2017–2019 — Executive Director for Motivation, Training and Organisational Development, HR Department
of Sistema PJSFC.

Vice President for HR at Sistema PJSFC since May 2019.

In 2019, she made it to the short list (15 finalists) of Leaders of Russia, a national management competition.

Share in the authorised capital of Sistema PJSFC: 0.0018%.

Born in 1968 in the Saratov region.

He graduated from 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: 0.2835%.

Born in 1973 in Gubkin, the Belgorod region.

In 1995, he graduated from the Voronezh State University with a degree in History.

2014–2015 — Vice President for Security at OJSC Bashneft Oil Company.

2015–2018 — Investment Director at Sistema PJSFC.

2015–2018 — Member of the Management Board and Vice President for Security at LLC Segezha Group.

Since August 2018 — Vice President for Government Relations at Sistema PJSFC.

Share in the authorised capital of Sistema PJSFC: 0.0079%.

Born in Moscow in 1971.

He 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: 0.1748%.

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President and Management Board members

NAME AND POSITION

BRIEF BIOGRAPHY

Artyom Sirazutdinov

Born in 1969 in Novokuznetsk.

Managing Partner of Sistema PJSFC

In 1993, he graduated from Siberian University of Metallurgy with a degree in Aluminium Production Engineering.

Vladimir Travkov

Vice President for Finance and
Investment at Sistema PJSFC

Joshua Blair Tulgan

Vice President for External
Relations at Sistema PJSFC

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.

Since April 2018 — Vice President for Finance and Investment at Sistema PJSFC.

Share in the authorised capital of Sistema PJSFC: 0.0073%.

Born in 1973 in Poughkeepsie, New York, the United States.

He studied at Phillips Academy and Bowdoin College, majoring in History and Russian Language. He obtained
a Bachelor of Arts degree from Bowdoin College. In 2004, Joshua received an MBA degree in Strategy and
International Development from Georgetown University.

1995–1999 — Consulted Russian companies on capital markets strategies and IR at Burson Marsteller.

2001–2002 — Head of Foreign Media Relations at Sibneft (PJSC Gazprom Neft).

2006–2018 — Director of the Investor Relations Department of the Corporate Communications Division at PJSC
MTS; from 2012 — Director of the Corporate Finance and Investor Relations Department of the Finance and
Investment Division at PJSC MTS.

Since July 2018 — Vice President for External Relations at Sistema PJSFC.

Share in the authorised capital of Sistema PJSFC: 0.0030%.

Ali Uzdenov

Managing Partner of Sistema PJSFC

Born in 1962 in Kislovodsk, the Stavropol region.

In 1985, he graduated from 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: 0.1446%.

President and Management Board members

NAME AND POSITION

BRIEF BIOGRAPHY

Sergey Shishkin

Born in Moscow in 1970.

Vice President for Corporate Governance
and Legal Affairs at Sistema PJSFC

In 1992, he graduated with honours from the Lomonosov Moscow State Lomonosov 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: 0.0572%.

Born in Moscow in 1980.

In 2002, he graduated from the Lomonosov Moscow State University, the Department of Computational
Mathematics and Cybernetics with a degree in Applied Mathematics and Computer Science. In 2011, he
received an MBA degree from the University of Chicago’s Booth School of Business.

He started his professional career at Troika Dialog investment company, where from 1999 to 2002 he was
engaged in modelling and risk assessment of complex derivative instruments.

In 2000, he trained at the Weizmann Institute of Science (Israel), in Moross Lab specialising in computer
vision.

From 2002 to 2004, Maxim worked in the international consulting company Accenture as a consultant for
the financial services industry (FSI).

From 2004 to 2008, as Vice President at Renaissance Capital, he led the project office, product
development and business technology for Renaissance Investment Management Group in Russia,
Switzerland, the United Kingdom and Cyprus.

In 2009, he became a co-founder and Senior Partner of the investment company Third Rome, where he
was responsible for advising clients on M&A, making VC investments and launching a VC fund called BRV.

From 2014 to the end of 2017, he was engaged in business development of PJSC Otkritie Bank as Senior
Vice President, launching such projects and segments as Bank Tochka, Roketbank, Otkritie Factoring,
Customs Card, Business Advance, etc.

In April 2018, he was appointed Vice President for Financial Technologies at PJSC MTS and in September
2018 joined Sistema PJSFC as Managing Partner.

Share in the authorised capital of Sistema PJSFC: 0%.

BRIEF BIOGRAPHY

Born in 1978 in Leningrad (now St Petersburg).

In 1999, he graduated from the St Petersburg State University with a degree in Oriental and African studies.
In 2000, he obtained a degree in Philology from the same university. In 2004, he graduated from the Utrecht
University (the Netherlands) with a degree in International Law. In 2009, he obtained a degree in Corporate
Finance and Financial Analysis from the Russian Academy of National Economy in Moscow. In 2019, he
received an MBA degree from the University of Chicago Booth School of Business.

2005 — Lawyer, Freshfields Bruckhaus Deringer, Amsterdam.

2005–2006 — Lawyer, ICICI Bank Eurasia.

Company Secretary of Sistema PJSFC since 2006.

Maxim Yanpolsky

Managing Partner of Sistema PJSFC

Company Secretary

NAME AND POSITION

Igor Petrov

Company Secretary
of Sistema PJSFC

SISTEMA — ANNUAL REPORT 2019
172

ANNEX

ANNEX 2

Financial results according to Russian
Accounting Standards (RAS)

KEY FINANCIAL
INDICATORS

THSD RUB

2019

2018

Revenue from sale of products, goods, works and services (net of VAT)

44,947,796

31,192,955

Administrative expenses

Profit from sales

Interest receivable

Interest payable

Other income

Other expenses

Earnings (loss) before tax

Current income tax

Net income (loss)

(10,349,809)

(6,990,040)

34,597,987

24,202,915

6,087,299

4,811,069

(19,409,648)

(17,919,274)

118,021,673

14,170,159

(56,163,444)

(62,257,619)

83,133,867

(36,992,750)

(9,544)

(16,865)

79,089,695

(46,495,402)

173

PERFORMANCE
INDICATORS

FINANCIAL
STABILITY
INDICATORS

DATA ON FUEL
AND ENERGY
CONSUMPTION

Labour efficiency, thsd RUB/FTE

Debt-to-equity ratio

Share of long-term debt in the sum of long-term debt and equity

Debt service coverage ratio

Overdue debt, %

Net working capital, thsd RUB

Current ratio

Quick ratio

SISTEMA.COM

2019

2018

164,043

112,610

0.915

0.429

1.01

1.630

0.518

3.30

2019

2018

22,076,343

(32,177,701)

1.58

0.62

TYPE OF RESOURCES

QUANTITY

2019

AMOUNT,
INCLUDING
VAT, thsd RUB

QUANTITY

2018

AMOUNT,
INCLUDING
VAT, thsd RUB

Heat, Gcal

1,461.16

2,726.98

1,657.07

2,931.24

Retained earnings (accumulated loss)

192,276,831

114,248,636

Electric power, thousand kWh

2,191.69

9,159.37

2,287.78

9,141.74

The primary activity of Sistema PJSFC is management of interests in commercial organisations.

Water, cu m

Petrol, l

TOTAL

7,197.84

285.10

7,048.00

257.81

192,279.33

9,284.46

204,128.82

8,920.98

—

21,455.90

—

21,251.77

INCOME
STRUCTURE

THSD RUB

Total revenue, incl.

2019

2018

44,947,796

31,192,955

Income from participation in share capitals of other companies

44,931,482

31,178,987

Other operating income (rent, agency services and sureties)

16,314

13,968

SISTEMA — ANNUAL REPORT 2019

174

ANNEX

ANNEX 3

175

ANNEX 4

Transactions involving Sistema shares performed by
Sistema’s Board members, President and Management Board
members during 01 January — 31 December 2018.1

List of transactions carried out by Sistema PJSFC in the
reporting year that are recognised as major transactions
under the Federal Law “On Joint-Stock Companies”.

SISTEMA.COM

SISTEMA SHARES
RECEIVED

BY MEMBERS OF SISTEMA’S
BOARD OF DIRECTORS
AND MANAGEMENT BOARD
ON 18 JANUARY 2018
UNDER THE LONG-TERM
INCENTIVE PROGRAMME

DIVESTMENT OF
SISTEMA SHARES

BY MEMBERS OF THE BOARD
OF DIRECTORS, PRESIDENT
AND MEMBERS
OF THE MANAGEMENT
BOARD OF SISTEMA PJSFC

NAME

I. Alyoshin

A. Dubovskov

A. Guryev

A. Zasursky

O. Mubarakshin

A. Pilipenko

V. Rozanov

V. Travkov

J. Tulgan

A. Uzdenov

S. Shishkin

NAME

M. Shamolin

S. Matveyeva

NUMBER OF SISTEMA SHARES

All of the transactions performed by Sistema PJSFC in 2019 that qualify as
major transactions according to the Federal Law “On Joint-Stock Companies”
were approved by the Corporation's Board of Directors.

341,176

3,170,169

781,115

758,669

3,770,898

296,285

1,436,533

700,310

287,307

448,916

987,361

NUMBER OF SISTEMA SHARES

DATES OF TRANSACTIONS

3,000,000

122,400

28 June 2019

30 September 2019

No. No. OF BOARD MINUTES

DESCRIPTION

AND DATE OF RESOLUTION

COUNTERPARTIES

TRANSACTION
VALUE

01–19, 21/01/2019

10–19, 11/10/2019

Supplementary Agreement No. 1 to Non-Revolving Credit
Facility Agreement No. 6591 (dated 16 February 2018)
concluded between Sistema PJSFC as borrower and Sberbank
as lender, which provides for the extension of the availability
period under the said agreement until 31 December 2019.

Opening of a non-revolving credit facility for a period of up
to 72 calendar months with a limit of RUB 104,250,000,000.00
between Sistema PJSFC as borrower and Sberbank as lender,
secured by pledge of ordinary shares in MTS PJSC to the extent
of the the drawdown of funds in proportion to the loan-to-value
(LTV) ratio, for the purpose of refinancing Sberbank's secured loan
under Non-Revolving Credit Facility Agreement No. 6591 (dated
16 February 2018) in the amount of RUB 59,250,000,000.00,
with the undrawn credit facility balance in the amount of RUB
45,000,000,000.00 under the said Non-Revolving Credit Facility
Agreement No. 6591 (dated 16 February 2018) to be closed.

Pledge to Sberbank of 319,868,641 ordinary registered
book-entry shares in MTS PJSC owned by Sistema PJSFC
as security under Non-Revolving Credit Facility Agreement
No. 7297 (dated 25 November 2019), with the pledge
of the specified shares in MTS PJSC provided as security
to Sberbank under Non Revolving Credit Facility Agreement
No. 6591 (dated 16 February 2018) to be terminated.

Sberbank

Up to RUB 105,000,000,000.00 of the principal
amount of the debt, as well as interest, fees
and other payments, which, as assessed
at the time of the transaction, would not
exceed RUB 47,000,000,000.00 during
the entire term of the credit facility.

Up to RUB 104,250,000,000.00 of the principal
amount of the debt, as well as interest, fees
and other payments, which, as assessed
at the time of the transaction, would not
exceed RUB 55,000,000,000.00 during
the entire term of the credit facility.

Sberbank

RUB 64,615,384,693.85 (pledge value)

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 members, President and Management Board members. The persons whose transactions are presented
in this Annex were members of the governing bodies of the Corporation at the time of the relevant transactions.

SISTEMA — ANNUAL REPORT 2019
176

ANNEX

ANNEX 5

List of transactions carried out by Sistema PJSFC in the reporting
year that are recognised as related-party transactions under
the Federal Law "On Joint-Stock Companies".

All of the transactions performed by Sistema PJSFC in 2019 that qualify as relat-
ed-party transactions according to the Federal Law "On Joint-Stock
Companies" were approved by the Corporation's Board of Directors.

177

SISTEMA.COM

No. No. OF MINUTES AND
DATE OF RESOLUTION

DESCRIPTION

COUNTERPARTIES

TRANSACTION
VALUE

RELATED
PARTIES

No. No. OF MINUTES AND
DATE OF RESOLUTION

DESCRIPTION

COUNTERPARTIES

TRANSACTION
VALUE

RELATED
PARTIES

01–19, 21/01/2019

Sale of shares in PJSC MTS
Bank held by Sistema PJSFC
and Sistema Telecom Assets
LLC to Mobile TeleSystems B.V.

Sistema Telecom Assets LLC,
Mobile TeleSystems B.V.

RUB 11,409,274,606.80

V. Evtushenkov,
F. Evtushenkov

02–19, 08/02/2019

Loan agreement with Capgrowth
Investments Limited

Capgrowth Investments
Limited

USD 226,700,000.00

Dega Retail Holding Limited

RUB 7,901,500,600.00

V. Evtushenkov,
F. Evtushenkov

M. Shamolin

RUB 130,761,000.00

M. Shamolin

08–19, 23/07/2019

Additional contribution
to the equity capital of Sistema
Telecom Assets LLC

Sale of shares in OBL Pharm
to Sistema Telecom Assets LLC

Additional contribution
to the equity capital
of Intellectual Technical
Solutions

Sistema Telecom Assets LLC

RUB 2,363,147,134.00

Sistema Telecom Assets LLC

RUB 2,363,147,134.00

Intellectual Technical Solutions

RUB 3,497,236,837.08

12–19, 15/11/2019

Contribution to the equity
capital of Cosmos HG LLC

LLC Cosmos HG LLC

RUB 4,200,000,000.00

JSC RTI Microelectronics

RUB 4,151,052,750.00

V. Evtushenkov,
F. Evtushenkov

13–19, 21/12/2019

Sale of shares in PJSC MTS
Bank to Mobile TeleSystems B.V.

Mobile TeleSystems B. V.

RUB 1,445,829,622.10

PE Obolenskoe JSC

RUB 2,363,147,134.20

O. Mubarakshin

Etalon Group company AO,
KITROMELIDES, PETSAS
ADVOCATES LLC

RUB 14,600,000,000.00

S. Egorov,
O. Mubarakshin

08–19, 23/07/2019

Loan agreement with
Kronstadt Group LLC

Kronstadt Group LLC

RUB 877,000,000.00

V. Evtushenkov,
F. Evtushenkov,
O. Mubarakshin,
V. Travkov

12–19, 15/11/2019

Engagement agreement with
underwriters for a secondary
public offering of shares
in Detsky Mir PJSC

12–19, 15/11/2019

Underwriting agreement for
a secondary public offering
of shares in Detsky Mir PJSC

EXARZO HOLDINGS LIMITED,
FLOETTE HOLDINGS LIMITED,
Detsky Mir PJSC, Goldman
Sachs International, UBS
Europe SE, JSC Sberbank
CIB, Sberbank CIB (UK)
Limited, VTB Capital plc

EXARZO HOLDINGS
LIMITED, FLOETTE
HOLDINGS LIMITED,Detsky
Mir PJSC,Goldman
Sachs International, UBS
Europe SE, JSC Sberbank
CIB, Sberbank CIB (UK)
Limited, VTB Capital plc

USD 4,770,000.00

RUB 15,925,000,000.00

V. Evtushenkov,
F. Evtushenkov,
A. Katkov

02–19, 08/02/2019

07–18, 30/06/2018

03–19, 29/03/2019

08–19, 23/07/2019

02–19, 08/02/2019

Acquisition of shares in Ozon
Holding Limited from Dega
Retail Holding Limited

Divestment of a stake
in the equity capital of Segezha
Group LLC to M. Shamolin

Divestment of shares
in Mikron PJSC to JSC
RTI Microelectronics

Divestment of shares
in Binnopharm JSC to PE
Obolenskoe JSC in exchange
for newly issued shares
of PE Obolenskoe JSC

Sale and purchase agreement
with Etalon Group company
AO with regard to shares
in Leader Invest JSC

V. Evtushenkov,
F. Evtushenkov,
S. Shishkin

V. Evtushenkov,
F. Evtushenkov,
O. Mubarakshin,
V. Travkov

V. Evtushenkov,
F. Evtushenkov

V. Evtushenkov,
F. Evtushenkov,
A. Katkov

SISTEMA — ANNUAL REPORT 2019
01

178

ANNEX

ANNEX 6

179

SISTEMA.COM

No.

CORPORATE
GOVERNANCE PRINCIPLE

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

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 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 recommenda-
tions, the Board looked at both formal and actual adherence to the principles and recommendations of
the Code by the Corporation and its officers, including the achievement of the general level of corporate
governance standards stipulated by the Code through both conventional and alternative mechanisms.

No.

CORPORATE
GOVERNANCE PRINCIPLE

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

I. Shareholder rights and equality in their exercise

1.1.

The company should ensure equal and fair treatment of all shareholders as regards their rights to participate in the company’s governance.

1.1.1. The company should create for its

1. The company has made publicly

Observed

shareholders the most favoura-
ble conditions for participation
in the general meeting, for devel-
oping a substantiated position
on the general meeting’s agenda
items, coordinating their actions,
and expressing their opinions on
matters under consideration.

1.1.2. The procedure for notifying

shareholders of the forthcoming
general meeting and providing
materials for the general meeting
should enable the sharehold-
ers to prepare for the meeting
in an appropriate manner.

available the internal document that
sets out the procedures for conducting
the general meeting of shareholders,
and this document is approved
by the general meeting of shareholders.

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 audit
review commission of the company.

The procedure for convening, preparing and
conducting the General Meeting of shareholders
of the Corporation is regulated by the Terms
of Reference of the General Meeting of share-
holders that were approved by the General
Meeting of shareholders of Sistema PJSFC
(Minutes No.1–19 dd 03 July 2019) and is
freely available on the Corporation’s website.

When holding each General Meeting of share-
holders, 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, includ-
ing 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 (sistema.ru / 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 is provided in explan-
atory notes or other relevant materials.

1.1.3. During preparation for the general

meeting and the meeting itself
the shareholders should be able
to receive information about
the meeting and 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 communicate with each other.

In the reporting period, the shareholders had
an opportunity to ask questions to members
of the Company’s governance bodies
and board of directors ahead of or during
the annual general meeting of shareholders.

Observed

2. The stance of the board of directors (including
dissenting opinions entered in the minutes)
on each agenda item of shareholders'
meetings held in the reporting period
is properly reported in the materials
provided for the general meetings.

3. Prior to each general meeting held

in the reporting period, the company provided
eligible shareholders with lists of persons
entitled to participate in such meeting on
the same date as it itself obtained such lists..

1.1.4. Shareholders should be able

to request the convocation
of general meetings, nominate
candidates to the company's
governance bodies, and propose
items for the AGM's agenda
without needless difficulties.

In the reporting period, shareholders had
the opportunity within at least 60 days
after the end of the relevant calendar
year to propose items for the agenda
of the annual general meeting.

Observed

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 misprints
or other insignificant shortcomings
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 share-
holder, without any hindrance.

The company’s internal regulations (internal
policy) include provisions that entitle each par-
ticipant of the general meeting to request a copy
of their filled-in voting ballot, certified by the teller
committee, before the end of the general meeting.

Observed

1.1.6. The procedure of general meetings

adopted by the company should
ensure equal opportunities for all
persons present at the meet-
ing to express their opinions
and ask their questions.

Observed

1. Each physical meeting of shareholders
held in the reporting period afforded
ample time for reports on all agenda
items and discussions of such reports.

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 the preparation for and procedure
of general meetings of shareholders
in the reporting period, the board
of directors considered the use of telecom
technologies to give shareholders
remote access to general meetings.

During preparations for a general meeting,
the shareholders are able to receive answers
to their questions sent to a special email
address (osa@sistema.ru) indicated in the notice
of the general meeting. Shareholders participat-
ing 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 reported
in the explanatory note for each such agenda item.

In accordance with the Terms of Reference
of the General Meeting of Shareholders,
shareholders have the right to see the list
of persons entitled to participate in the gen-
eral meeting, for which purpose they should
contact Sistema's Company Secretary.

The Charter of Sistema PJSFC sets a dead-
line 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 proposal contain a mate-
rial shortcoming, the Corporation should inform
such shareholder about such shortcoming well
in advance, so that such shortcoming can be
properly eliminated before the Board of Directors has
approved the general meeting’s agenda and the list
of nominees to the governance and control bodies.

The provision that a person filling in the voting
ballot is entitled to have a copy of their filled-in
voting ballot certified by the teller commit-
tee before the end of the general meeting is
included in the Terms of Reference of the Annual
General Meeting of Shareholders.

Each physical General Meeting of Shareholders
held in the reporting period afforded up to 20
minutes for reports on each agenda item and
ample time for the discussion of such reports.

All of the current nominees to the Board
of Directors and the Audit Review Commission
are present at the relevant General Meeting.

Participants of the General Meeting
have the possibility to consult with
each other on the agenda items.

From 2017 on, when preparing for the General
Meeting, Sistema's shareholders may also use
an e-voting system available on the website
of the Corporation's registrar JSC Reyestr.
Shareholders are also given the opportunity to vote
remotely, provided that the relevant depository
provides the technical means for such voting.

The Corporation provides a sufficiently big
room that accommodates all the persons
willing to participate in the General Meeting.

SISTEMA — ANNUAL REPORT 2019
180

ANNEX

No.

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

1. The company has developed a dividend

Observed

and implement a transparent and
clear mechanism for determin-
ing the amount of dividends
and distributing them.

policy, which has been approved by the board
of directors and publicly disclosed.

If the company's dividend policy stipulates
that the amount of dividends to be distributed
should be based on the company's
financial performance, such performance
metrics are taken from the company's
consolidated financial reports.

1.2.2. The company is advised against

deciding in favour of any divi-
dend distribution that, although
being in no breach of statutory
restrictions, is economically
impractical and/or conducive
to misconceptions about the com-
pany's performance.

The company’s dividend policy clearly spec-
ifies financial/economic circumstances
under which it should not pay dividends.

Partially observed

1.2.3. The Company may not allow any

compromise of the dividend rights
of its existing shareholders.

The company took no actions that would compro-
mise the dividend rights of existing shareholders.

Observed

1.2.4. Companies should strive to avoid

situations where shareholders
receive from the company any type
of profit (income) other than divi-
dends or liquidating distributions.

Observed

In order to rule out situations where sharehold-
ers receive any type of profit (income) from
the company other than dividends or liquidating
distributions, the company’s internal regulations
envisage control mechanisms that ensure timely
identification of and approval procedures to be
applied to transactions involving any persons affil-
iated with material shareholders (persons entitled
to dispose of votes attaching to voting shares)
in cases where law does not formally recognise
such transactions as related party transactions.

The Corporation’s Board of Directors
approved the Dividend Policy (Minutes
of the Board of Directors of Sistema PJSFC
No.04–17 dd 03 April 2017), which is availa-
ble for reading at the company's website.

In case the amount and/or frequency of dividend
payments deviate from those recommended
in the Dividend Policy, the Corporation dis-
closes the reasons for such deviation.

According to the Dividend Policy, the Company's
shareholders shall receive dividends only
if there are sources and grounds for their
payment, as stipulated by Russian law.

The Corporation does not declare dividends if
net income or cash flow are insufficient (there
is a liquidity shortage) or if distributing divi-
dends is economically unreasonable. Although
such circumstances are not formally set out
in the Dividend Policy, the Corporation believes
it to pose no additional risks to shareholders.

The Investor Relations and Dividend Policy
Committee of the Board of Directors consid-
ers the management's suggestions regarding
dividend payouts and makes recommenda-
tions on this subject to the Board.

The Corporation expects to update its dividend
policy once volatility in financial markets is lower.

The Corporation has issued only one type
of ordinary shares. Holders of global depos-
itary receipts are entitled to dividends on
a par with holders of ordinary shares.

In the reporting period, the Corporation took
no actions that would compromise the divi-
dend rights of the holders of ordinary shares
and/or global depositary receipts.

The Corporation has a Code of Ethics approved
by the Board of Directors (Minutes No.08–15 dd
02 November 2015), which stipulates that officers
responsible for transactions shall in good time
report to the Board of Directors any conflicts
of interest related to such transactions.

181

No.

1.3.

CORPORATE
GOVERNANCE PRINCIPLE

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

The corporate governance system and practices should ensure an equal footing for all shareholders that own shares of the same
category (type), including minority and foreign shareholders, and equal treatment of them by the company.

SISTEMA.COM

1.3.1. Companies should create condi-
tions for fair treatment of each
shareholder by the governance
bodies and the controlling per-
sons of the company, including
prevention of abuse of power
by major shareholders in respect
of minority shareholders.

1.3.2. Companies should not take

any actions that cause or may
cause any artificial redistribu-
tion of controlling rights.

In the reporting period, the procedures
for managing major shareholders’ poten-
tial conflicts of interest were efficient, and
the board of directors paid sufficient attention
to conflicts between shareholders, if any.

Observed

The Corporation has taken every step nec-
essary to prevent any shareholders’ actions
that are intended to harm other share-
holders or the Corporation as well as any
other abuse of shareholder rights.

Either there are no quasi-treasury shares,
or such shares are not admitted for vot-
ing throughout the reporting period.

Observed

There were no recorded conflicts
between the Corporation’s share-
holders in the reporting period.

Although the Corporation's internal documents do not
restrict any entities controlled by the Corporations
from voting with equity shares in the Corporation,
no such quasi-treasury shares were actually
used for voting in the reporting period.

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.

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.

The quality and reliability of services provided
by the company’s registrar to keep the share-
holder register meet the needs of the com-
pany and its shareholders.

Observed

The Registrar of the Corporation is one of the larg-
est special registrars in Russia, which has proven
and reliable technologies that provide the most
efficient way to ensure registration of proprie-
tary rights and exercise of shareholder rights.
The Corporation cooperates with the registrar
to update information about shareholders
contained in the shareholder register.

II. Board of Directors

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.

2.1.1. The board of directors should bear
responsibility for decisions relating
to the appointment and dismissal
of executives and appointment
and dissolution of executive
bodies on relevant grounds,
including their poor or inappro-
priate performance. The board
of directors should also ensure that
the company’s executive bodies act
in compliance with the approved
development strategy and adhere
to a course of action consistent
with the company's line of activity.

Observed

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 CEO and
members of a collective executive body on
the implementation of the company’s strategy.

The Charter of Sistema PJSFC stipulates that
the authority of the Board of Directors includes
appointment and dismissal of the President
of the Corporation, election and dismissal
of members of the Management Board,
and approval of the terms of employment
agreements signed with the President and
members of the Management Board.

Sistema's Nomination, Remuneration
and Corporate Governance Committee
approves CEOs of subsidiaries and nom-
inees to their boards of directors.

The Board of Directors monitors implementation
of the Corporation’s strategy and business plans
by its executive bodies on a regular basis.

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CRITERIA FOR ASSESSMENT

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2.1.2. The board of directors should
set the key long-term priorities
for the company’s business,
assess and approve key per-
formance 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 matters relating to the implemen-
tation status and updates of the strategy,
approval of the company’s financial plan
(budget) and criteria and indicators (including
interim ones) of implementation of the com-
pany’s strategy and business plans.

Observed

2.1.3. The board of directors should

1. The board of directors determined

Observed

determine the principles of and
approaches to organising the risk
management and internal control
systems at the company.

the principles of and approaches
to organising the risk management and
internal control systems at the company.

2. The board of directors assessed the risk

management and internal control systems
of the company in the reporting period.

2.1.4. The board of directors should

1. The company developed and

Observed

determine the company’s
policy with regard to remuner-
ation and (or) reimbursement
of expenses to Board members,
executive bodies and other key
executives of the company.

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.

The Board of Directors controls and sup-
ports the formulation of and execution on
the Corporation's strategy at each stage,
evaluates its progress and feasibility,
and adjusts it as necessary.

The strategy and business plans of the Corporation
approved by the Board of Directors contain
clear criteria, most of which are quantity
indices, and use interim control metrics.

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 imple-
mentation status and need for updating. In particu-
lar, the Board reviewed the Corporation's strategy
as a whole on 11 October 2019 and discussed its
various functional constituents at each physical
Board meeting held throughout the reporting year.

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.

The Board of Directors reviews a risk man-
agement 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 02 February 2019.

The General Meeting of shareholders
of the Corporation approved the Policy on
remuneration and compensations paya-
ble to members of the Corporation’s Board
of Directors (Minutes No.1–19 dd 03 July 2019).

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

1. The board of directors plays

Observed

play a key role in preventing,
identifying and settling internal
conflicts between the compa-
ny’s governance bodies, share-
holders and employees.

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.

2.1.6. The board of directors should

1. The board of directors adopted

Observed

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.

a regulation on the information policy.

2. The company has designated persons

responsible for implementation
of the information policy.

2.1.7. The board of directors should
control the corporate govern-
ance practices at the company
and play a key role in material
corporate events of the company.

In the reporting period, the board of direc-
tors reviewed an item on corporate govern-
ance 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 pro-
vided to shareholders.

1. The company’s annual report for

Observed

the reporting period includes information
about directors’ attendance of the meetings
of the board and board committees.

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 avail-
able 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 com-
municate their stance on such matters.

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 mem-
bers of its Board of Directors and executive
bodies. In accordance with the Code of Ethics,
ethics assessment is performed during which
senior managers responsible for the trans-
actions 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 regula-
tions 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 compli-
ance with the Information Policy lies with
the Company 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 (sistema.ru / 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 Company Secretary.

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2.3.

2.3.1.

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CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

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.

2.4.

The board of directors should have a sufficient number of independent directors.

185

SISTEMA.COM

It is recommended to elect
to the board of directors persons
that have an impeccable busi-
ness 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.

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.

The Board’s Nomination, Remuneration and
Corporate Governance Committee assesses all
candidates nominated to the Board of Directors
regarding their independence and potential con-
tribution 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.

The annual assessment of the Board of Directors
includes assessment of the Board’s competences
and how they match the Corporation’s needs.

Observed

In all instances in the reporting period when
the agenda included items on election of board
members, the company provided the share-
holders 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 con-
sent 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 direc-
tors analysed its needs in terms of profes-
sional and business skills and experience.

Observed

2.3.2. Members of the board of directors
should be elected in a transparent
procedure enabling sharehold-
ers 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 qualifi-
cation, 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 direc-
tors 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.

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 com-
pany’s needs and shareholders’ interests.

Observed

The annual assessment of the Board
of Directors includes assessment of the num-
ber of the Board members.

In the reporting period, all independent board
members met all the independence crite-
ria set out in recommendations 102–107
of the Code or were recognised as independ-
ent 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.

2.4.1.

It is recommended to acknowl-
edge as independent directors
the persons that have sufficient
expertise, competence, experience,
and independence for formula-
tion 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 sharehold-
ers, 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.

2.4.2.

It is recommended to assess com-
pliance of candidates to the board
of directors with the independence
criteria and to analyse compli-
ance of independent directors
on the board with the independ-
ence criteria on a regular basis.
In such assessment, contents
should prevail over form.

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.

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.

Observed

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.

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.

2.4.3.

2.4.4.

It is recommended that independ-
ent 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) members
of the Board 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-ap-
proves all related party transactions.

Opinions of Board members are incor-
porated in the meeting materials.

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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 independ-
ent director among the elected
independent directors who would
coordinate the work of independent
directors and interact with the chair-
man of the board of directors.

The board chairman is an independent
director or a senior independent director is
elected among independent directors.

Observed

The role, rights and duties of the board
chairman (and, if applicable, of the senior
independent director) are duly set out in the com-
pany’s internal regulations.

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 exe-
cution 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 mak-
ing 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 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

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.1–19 dd 03 July 2019).

The Terms of Reference also define the role
of the Deputy Chairman of the Board, who,
together with the Company Secretary,
ensures interaction between independ-
ent 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, the Corporation
as a whole and the Board of Directors in particu-
lar have yet to reach a consensus on whether
the Board needs a senior independent direc-
tor. Independent director Anna Belova was
elected Deputy Chair of the Corporation's
Board of Directors. In this position, she, inter
alia, coordinates the activities of independent
members of the Board of Directors and interacts
with the Chairman of the Board of Directors,
acting as the senior independent director.

The annual assessment of the Board
of Directors includes assessment of the effi-
ciency of interaction between Board members
and the Board Chairman.

In accordance with the Procedure of the Board
of Directors, the Board Chairman takes nec-
essary 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.

Observed

The company’s internal regulations stipulate that
a board member shall notify the board of direc-
tors 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.

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 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.

The Terms of Reference of the Board of Directors
and the Ethics Code of the Corporation stip-
ulate that Board members shall timely notify
the Corporation if a conflict of interest arises
and shall not make decisions on any mat-
ter 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.

2.6.2. The rights and obligations of board

members should be clearly formu-
lated and recorded in the internal
regulations of the company.

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.

187

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CORPORATE
GOVERNANCE PRINCIPLE

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 com-
pany’s documents and informa-
tion. Newly elected members
of the board of directors should be
provided with sufficient infor-
mation about the company and
the work of the board of direc-
tors as soon as possible.

SISTEMA.COM

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

Individual attendance of board and com-
mittee meetings and the time spent pre-
paring 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 affili-
ates) 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 con-
trolled 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 pro-
gramme 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.

Observed

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 bod-
ies or where they intend to be elected.

Sistema’s Board members are able to promptly
receive answers to their queries and any
information they may require from the execu-
tive management directly or via the Company
Secretary. The employees’ obligation to pro-
vide such information is recorded in the inter-
nal regulations of the Corporation.

The Company 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, their preparation, and participation of board members in them should provide for efficient work of the board of directors.

2.7.1.

2.7.2.

It is recommended to hold
meetings of the board of direc-
tors as necessary, taking into
account the scale of business
and the company’s objectives
in a certain period of time.

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 pos-
sibility to prepare for the meeting.

The board of directors held at least six
meetings in the reporting year.

Observed

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.

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.

8 meetings of the Board of Directors
were held in 2019.

The Procedure of the Board of Directors deter-
mines 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.

Board members have permanent access
to the work plan of the Board of Directors. All infor-
mation 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 impor-
tant items should be discussed
at meetings in praesentia.

The company’s charter or internal reg-
ulations stipulate that the most impor-
tant items (according to the list set out
in recommendation 168 of the Code) shall
be reviewed at meetings in praesentia.

Observed

All scheduled meetings of the Board of Directors
are held in praesentia. Meetings in absentia
are held when some urgent issues arise.

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

The Procedure of the Board of Directors stip-
ulates that the most important items shall
be reviewed at meetings in praesentia.

According to the Charter of Sistema PJSFC, deci-
sions 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 diffi-
cult 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.

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NOTES

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 finan-
cial activities, it is recommended
to form an audit committee
consisting of independent directors.

The board of directors set up an audit commit-
tee consisting only of independent directors.

Observed

The company’s internal regulations
determine the objectives of the audit
committee, including objectives set out in rec-
ommendation 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.

2.8.2. For provisional review of issues

relating to development of effi-
cient and transparent practices
in the sphere of remuneration, it is
recommended to form a remu-
neration committee consisting
of independent directors and
chaired by an independent
director who is not the chair-
man of the board of directors.

The board of directors set up a remuneration com-
mittee consisting only of independent directors.

Observed

The remuneration committee is chaired by an
independent director who is not board chairman.

The company’s internal regulations deter-
mine the objectives of the remuneration
committee, including objectives set out
in recommendation 180 of the Code.

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 com-
pany is exposed to, it is recom-
mended 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.)

The board of directors set up a nomina-
tion committee (or its objectives set out
in recommendation 186 of the Code are
pursued by another committee) consist-
ing mostly of independent directors.

The company’s internal regulations deter-
mine the objectives of the nomination com-
mittee (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.

Observed

The Corporation has formed the Audit, Finance and
Risk Committee of the Board of Directors (herein-
after, “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 recommen-
dations 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.

13 meetings of the Committee were held in 2019.

The Corporation has formed the Nomination,
Remuneration and Corporate Governance
Committee of the Board of Directors (hereinaf-
ter, “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 recommen-
dations 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. Kocharyan, who is not the Board Chairman.

Independent directors constitute the majority
of the Committee members (4 out of 5).

The Corporation’s Board annually,
at the first meeting after its election, forms
Board Committees in accordance with
the Corporation’s goals and objectives.

189

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CORPORATE
GOVERNANCE PRINCIPLE

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.

SISTEMA.COM

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

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 (poli-
cies) include provisions that stipulate that
persons who are not members of the audit
committee, the nomination committee and
the remuneration committee may attend com-
mittee meetings only if invited by the chair-
man 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 inde-
pendent 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.

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 invita-
tion 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 chair-
men 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 com-
mittees and members of the board
of directors, adequacy of their per-
formance for the needs of the com-
pany’s development, intensification
of the board’s work or identify-
ing areas for improvement.

Self-appraisal or external assessment of the board
of directors conducted in the reporting period
included assessment of the committees, individ-
ual board members and the board as a whole.

Observed

The results of the self-appraisal or external
assessment conducted in the reporting period
were reviewed at a board meeting in praesentia.

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 assess-
ment of the professional and personal qualities
of members of the Board of Directors, their
independence, teamwork and personal contribu-
tion, 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-per-
son 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 (con-
sultant) 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.
An external organisation (Nestor Advisors
Ltd.) was enlisted for the review in 2017.

2.9.2. Performance review of the board

of directors, its committees
and members should be con-
ducted on a regular basis at least
once a year. It is recommended
to engage a third party (consult-
ant) to perform an independent
assessment of the board’s per-
formance on a regular basis, not
less than once every three years.

SISTEMA — ANNUAL REPORT 2019
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ANNEX

No.

CORPORATE
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III. Company Secretary

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

3.1

The company 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 company 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 refer-
ence of the company secretary.

The company’s website and annual report
include the company secretary’s biography
in as much detail as is given for the biog-
raphies of the board members and execu-
tive management of the company.

Observed

The Corporation’s Board of Directors approved
the Terms of Reference of the Company Secretary
of the Corporation (Minutes No.1–19 dd 03
July 2019). The Policy specifies the require-
ments to the person who may hold the position
of the Company Secretary, in line with the guide-
lines of the Corporate Governance Code.

Information about the Company Secretary
is disclosed in the Annual Report.

3.1.2. The company 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 appoint-
ment, dismissal and additional remu-
neration of the company secretary.

Observed

The Company 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 Company Secretary
of the Corporation setting the requirements
to the candidacies to the position of Company
Secretary, the appointment and dismissal proce-
dures, reporting lines, procedure for the Company
Secretary’s interactions with the governance bod-
ies and the subdivisions, his/her functions, rights
and obligations, the terms and procedure of remu-
neration and the liability of the Company Secretary.

IV. Remuneration of the Board of Directors’ members, executive bodies and key management of the Company

4.1.

4.1.1.

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.

The company adopted an internal docu-
ment(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.

Observed

It is recommended that the level
of remuneration paid by the com-
pany to the board members,
executive bodies and other key
management, should provide
sufficient motivation for their effi-
cient work enabling the company
to engage and retain competent
and highly qualified specialists. At
the same time, the company should
avoid paying excessive remunera-
tion 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 2019, Minutes
No.1–19 dd 03 July 2019). 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.

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

SISTEMA.COM

191

No.

CORPORATE
GOVERNANCE PRINCIPLE

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 remuner-
ation committee should ensure
oversight over the implementa-
tion 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 transpar-
ent 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 pay-
ments, benefits and compensation
granted to the specified persons.

It is recommended that the com-
pany should develop a policy for
expenses compensation, specify-
ing the list of costs to be reim-
bursed 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 com-
pany’s remuneration policy.

In the reporting period, the remuneration
committee reviewed the remuneration pol-
icy (policies) and the practice of its (their)
implementation and, if necessary, provided
recommendations for the board of directors.

Observed

The company’s remuneration policy envis-
ages transparent mechanisms for deter-
mining 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 mem-
bers, executive bodies and other key manage-
ment of the company for their expenses.

Observed

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 direc-
tors in the reporting period.

Observed

4.2.1. Fixed annual remuneration is a pref-

erable 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 incen-
tives and additional financial
motivation to board members.

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 exec-
utive 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 determin-
ing 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 meet-
ings and make any other business trips as part
of performing their job duties are reimbursed.

In accordance with the Policy on remunera-
tion 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 remuner-
ation to the Board members for achievement
of the Corporation’s investment goals. The amount
of such additional remuneration is also fixed.

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ANNEX

No.

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GOVERNANCE PRINCIPLE

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

4.2.2.

Long-term ownership of the com-
pany’s shares is the best tool facili-
tating the proximity of the financial
interests of board members and
the long-term interests of share-
holders. At the same time, it is not
recommended that the right to sell
shares be linked to the achieve-
ment of specific operating targets
of the company, nor is the partici-
pation of board members in stock
option schemes recommended.

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 encourag-
ing long-term ownership of such shares.

Partially observed

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 termina-
tion of their contract due to a change of the con-
trolling shareholder or other circumstances.

Observed

A portion of the remuneration of the Board mem-
bers (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. The Corporation immediately discloses
information on any transactions made by any
Board members and involving Sistema's shares or
any derivatives where Sistema shares are used as
underlying assets, which also stimulates long-term
ownership and contains the use of hedging.

The Board members have no obligation
to refrain from using hedging mechanisms.

There are no provisions on the Board mem-
bers’ entitlement to any additional remunera-
tion 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 manage-
ment of the company should
be determined in such a way as
to ensure a reasonable and justifi-
able 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.

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.

Observed

During the latest conducted assessment
of the remuneration system of members
of executive bodies and other key manag-
ers 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 mem-
bers 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 indica-
tors as an element of the incentive system.

The Nomination, Remuneration and Corporate
Governance Committee is involved in the devel-
opment 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 employ-
ees 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 manip-
ulation 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.

193

No.

CORPORATE
GOVERNANCE PRINCIPLE

4.3.2.

It is recommended that the com-
panies 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.

SISTEMA.COM

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

Observed

The company adopted a long-term incen-
tive programme for members of executive
bodies and other key managers of the com-
pany 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.

Observed

Severance payments (golden parachutes) paid
by the company in the event of early termina-
tion 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.

The Corporation has a long-term incentive scheme
for the top management and other key employ-
ees 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.

V. Risk management and internal control system

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.

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.

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 com-
pany approved by the board of directors.

Observed

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 distribu-
tion 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 develop-
ing, documenting, implementing, monitoring and
upgrading the risk management and internal con-
trol systems in their respective functional areas.

SISTEMA — ANNUAL REPORT 2019
194

ANNEX

195

SISTEMA.COM

No.

CORPORATE
GOVERNANCE PRINCIPLE

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 com-
pany, the integrity and transpar-
ency of the company’s financial
reporting, the reasonableness
and acceptability of the risks
assumed by the company.

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

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.

No.

CORPORATE
GOVERNANCE PRINCIPLE

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

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 inter-
action between the company,
shareholders, investors and
other interested parties.

2. The board (or a board committee) reviewed

the company’s compliance with its information
policy at least once in the reporting period.

1. The company’s board approved an

Observed

information policy that was developed taking
into account the Code’s recommendations.

The Corporation has developed and
implemented the Information Policy
approved by the Board of Directors.

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 whistle-
blowers are protected from any types of pressure
(including dismissal, persecution and any forms
of discrimination). The key approaches to the oper-
ation of the Hotline are outlined in the Sistema's
Hotline Whistleblowing Programme pub-
lished 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 recommenda-
tions 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 share-
holders as part of the Annual Report.

5.1.4.

It is recommended that the board
of directors should take all nec-
essary and sufficient measures
to make sure that the existing
risk management and internal
control system of the company
meets the respective princi-
ples and approaches approved
by the board of directors and
is functioning efficiently.

In the reporting period, the board of direc-
tors or the board’s audit committee assessed
the efficiency of the company’s risk manage-
ment and internal control system. Information
about the key results of such assessment are
included in the company’s annual report.

Observed

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 inter-
nal audits should be organised
by means of establishing a dedi-
cated subdivision (internal audit
unit) or engaging an independent
external auditor. In order to ensure
the independence of the inter-
nal 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 administra-
tively — directly to the compa-
ny’s sole executive body.

For the purposes of internal audits,
the company established a separate inter-
nal audit unit that functionally reports
to the board of directors or the audit com-
mittee 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 administra-
tively — 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.

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, cor-
porate governance, and con-
form 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 con-
trol and risk management system.

The company uses generally
accepted approaches to internal con-
trol 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.

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

Observed

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).

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.

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 infor-

mation regularly, consistently and
promptly and ensure the accessi-
bility, reliability, completeness and
comparability of the disclosed data.

The company’s information policy determines
approaches and criteria for identifying infor-
mation 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.

Observed

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, disclo-
sure of information in the reporting year was
made both in Russian and in one of the most
widely spoken foreign languages.

The executive bodies of the Corporation
and its Company 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.

The Corporation publishes information about
its governance bodies and their composi-
tion, including the biographies of the mem-
bers 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.

The Corporation’s information policy makes
it possible to coordinate the work of all units
and subdivisions of the Corporation deal-
ing with information disclosures.

The Corporation discloses informa-
tion in the shortest possible time.

The Corporation’s material information is
disclosed for Russian and foreign inves-
tors 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 unambig-
uous, objective and neutral and does not
avoid disclosing negative information.

SISTEMA — ANNUAL REPORT 2019
196

ANNEX

No.

CORPORATE
GOVERNANCE PRINCIPLE

6.2.2.

It is recommended that the com-
pany should avoid adopting a purely
technical approach when disclosing
information and should disclose
all material information about
its activities even if the dis-
closure of such information is
not required by the law.

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

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 state-
ment 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 accord-
ance 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 fol-
lowing additional information:
•
•

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 informa-
tion making it possible to assess
the company’s annual results.

The company’s annual report includes informa-
tion 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 recom-
mendations of the Corporate Governance Code.

The company’s annual report includes infor-
mation 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.

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 infor-
mation of the company’s controlled legal
entities, upon shareholders’ request.

Observed

6.3.2.

It is recommended that when
providing information to the share-
holders the company should ensure
a reasonable balance of interests
of specific shareholders and
the company itself, which is inter-
ested in maintaining confidentiality
of crucial commercial informa-
tion 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 infor-
mation policy, shareholders are notified about
the confidential nature of information and assume
the obligation to maintain its confidentiality.

When giving shareholders access to its doc-
uments 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 send-
ing the copies of such documents.

The matters of providing information about
controlled legal entities are not regulated
by the Information Policy, since the compa-
nies 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 con-
fidential 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 confi-
dentiality in accordance with applicable laws.

197

No.

CORPORATE
GOVERNANCE PRINCIPLE

VII. Material corporate actions

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

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.

SISTEMA.COM

7.1.1. Material corporate actions include

the company’s reorganisation,
acquisition of 30 or more %
of the company’s voting shares
(takeover), material transac-
tions, increase or decrease
of the company’s authorised capital,
listing of delisting of the com-
pany’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 deter-
mine the list (criteria) of transac-
tions or other actions constituting
material corporate actions and vest
the board of directors of the com-
pany with the exclusive powers
to take decisions on such matters.

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 inde-
pendent directors of the company.

7.1.3.

It is recommended that
in the course of taking material cor-
porate actions influencing the rights
and lawful interests of the share-
holders, equal terms should
be provided to all the company
shareholders, and when the mech-
anisms provided by the law are
insufficient, additional meas-
ures 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.

Observed

In accordance with the legislation, decisions on
listing and delisting of shares, as well as decisions
on reorganisation and approval of major transac-
tions in accordance with applicable laws are within
the remit of the General Meeting of sharehold-
ers. 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.

The company’s charter sets out a list
of transactions and other actions that consti-
tute 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 corpo-
rate actions: the company’s reorganisation, acqui-
sition 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.

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 transac-
tions as material corporate actions than
those envisaged by applicable laws.

In the reporting period, all material cor-
porate actions passed the approval pro-
cedure before they were carried out.

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 mem-
bers who are not related parties.

The Board of Directors reviews all material matters
of the Corporation in accordance with proce-
dures 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 2019, 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.

SISTEMA — ANNUAL REPORT 2019
198

ANNEX

No.

7.2.

CORPORATE
GOVERNANCE PRINCIPLE

CRITERIA FOR ASSESSMENT

COMPLIANCE

NOTES

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 con-
sequences of such actions.

7.2.2.

It is recommended that
the rules and procedures related
to the company’s taking mate-
rial corporate actions should
be set out in the internal reg-
ulations of the company.

In the reporting period, the company timely
and thoroughly disclosed information about its
material corporate actions, including the rea-
sons for and the timeframe of such actions.

Observed

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 trans-
action or in a related party transaction.

The company’s internal documents stipulate
a procedure for engaging an independent
appraiser for determining the price of acquir-
ing 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.

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.

To the extent that the rules and procedures
related to the Corporation’s taking material cor-
porate 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 deter-
mine 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.

CONTACT
INFORMATION

+7 495 730-66-00
+7 495 692-22-88

+7 495 228-15-32

General inquiries

+7 495 737-01-01

Location

13/1 Mokhovaya St.,
Moscow, 125009, Russia

sistema.com