fs.rts.rufs.rts.ru/...ar-2012-sm-12-05-2012-single-for-web.pdf · contents about the company...

possibilitiesANNUAL REPORT 2011

CONTENTSAbout the company ............................................................................... 2

Key financial & operational highlights ............................................. 12

Key events of 2011 & early 2012 ...................................................... 14

Bright upside potential from the reorganization ............................. 18

Strong market position ................................................................... 20

Up in the “Clouds” ........................................................................... 22

Chairman’s statement ........................................................................ 24

Letter from the President ................................................................... 26

Strategy .............................................................................................. 28

M&A activity ........................................................................................ 31

Corporate governance ........................................................................ 34

Board of Directors & committees .................................................... 34

Management Board & committees ................................................. 37

Internal Audit Commission ............................................................. 40

Remuneration of members of the Board of Directors and the Management Board ............................................................. 40

Dividend policy ................................................................................. 41

Shareholders & share capital ......................................................... 43

Corporate social responsibility .......................................................... 46

Risk management .............................................................................. 49

Risk factors ..................................................................................... 49

Risk management system ............................................................... 51

Operating & financial review ............................................................... 52

Consolidated financial statements ..................................................... 56

Glossary ............................................................................................ 143

Contacts ............................................................................................ 146

ROSTELECOM ANNUAL REPORT 2011

2 www.rostelecom.ru

ABOUT THE COMPANY

We (“the Group” or “the Company”) are a major Russian telecom-munications provider, with points of presence (“PoPs”) in every region in Russia. On the basis of our advanced telecommunica-tions network consisting of approximately 500,000 km of back-bone infrastructure plus last mile connection and a fibre to the building or fibre to the home (“FTTx”) network we are providing access to 43 million subscribers.

We organize our business by two primary customer groups – residential customers (i.e., individuals) and corporate customers (i.e., legal entities, Russian Government agencies and entities under direct and indirect control of the Russian Government, telecommunications carriers and resellers that purchase our interconnection services), which represented 54% and 46% of our revenue, respectively, for the year ended December 31, 2011.

Our business is centred on providing integrated telecom solu-tions including local and intra-zone telephone services, interna-tional long-distance (“ILD”) and domestic long-distance (“DLD”) services, mobile voice, data services, broadband Internet access services and Pay-TV services to our broad base of customers in all regions of Russia.

Rostelecom had 28.5 million local fixed-line voice subscrib-ers, 12.5 million mobile voice subscribers, 8.2 million fixed-line broadband subscribers and 5.9 million Pay-TV subscribers at the end of 2011. The Group generated RUB 296.0 billion of con-solidated revenues, RUB 117.7 billion of OIBDA (39.8% of rev-enues) and RUB 46.1 billion of net income for the twelve months ended December 31, 2011.

Company’s ordinary shares were included in the Large Cap Seg-ment of the MSCI Global Standard Indices and MSCI Russia Index with 3.43% weight, effective from September 1, 2011.


www.rostelecom.ru 3

Key state interest in telecom industry

Rostelecom networks and services cover all Federal districts of Russia, including Moscow

1


4 www.rostelecom.ru

2

~ 500,000 km of national backbone and strong “last-mile” infrastructure with

~43.4 millionhouseholds passed

Unique infrastructure


www.rostelecom.ru 5

~ 28.5 million fixed-line subs,

~ 8.2 millionfixed broadband subs,

~ 5.9 millionPay-TV subs and

~ 12.5 millionmobile voice subs

Strong subscriber base

3Unique infrastructure


6 www.rostelecom.ru

Backbone

Existing digital RRL

Satellite

Data centers

Vladivostok

Yekaterinburg

Krasnodar

Sochi

NovosibirskNizhny Novgorod

St. Petersburg

Kaliningrad

Moscow

~28.5 million Fixed-voice subs

~5.9 million Pay-TV subs

~8.2 million BB subs

~12.5 million Mobile subs


www.rostelecom.ru 7

Backbone

Existing digital RRL

Satellite

Data centers

Vladivostok

Yekaterinburg

Krasnodar

Sochi

NovosibirskNizhny Novgorod

St. Petersburg

Kaliningrad

Moscow

~43.4 million Households passed

~500,000 km Backbone

8 Commercial data

centers of 1,223 m2


8 www.rostelecom.ru

4

Revenue 2011:

RUB 296.0 billionOIBDA 2011:

RUB 117.7 billionOIBDA margin 2011:

39.8%Net Income 2011:

RUB 46.1 billionCash CAPEX 2011:

RUB 82.8 billion Net debt 2011:

RUB 152.4 billion

Positive Financial Results


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Revenue:

High Single Digit OIBDA margin:

Enhancement CAPEX:

Average 20% of revenues for the period 2011–2015

50% of fixed broadband market share

22% of wireless broadband market share

30% of Pay-TV market share

Strategic Goals

5Positive Financial Results


10 www.rostelecom.ru

6

Government controls

> 53%of ordinary shares

Treasury shares¹

~ 7%of ordinary shares and

~13%of preferred shares

Minority shareholders

< 40%of ordinary shares and

> 70%of preferred shares

Clear Ownership Structure

1 Shares held by Rostelecom subsidiary MOBITEL


www.rostelecom.ru 11

Traded on MICEX-RTS

On September 01, 2011 Rostelecom was included in MSCI Large Cap with weight in MSCI Russia of 3.43%

Free Float

< 40%of ordinary shares

> 70%of preferred shares

Market capitalisation is

US$ 14.4 billion1

Blue chip7

Clear Ownership Structure

1 As of April 30, 2012



KEY FINANCIAL AND OPERATIONAL HIGHLIGHTS1

Change

201120102009

264.6275.7+4%

+7%296.0

1

201120102009

45.4 51.8

82.8

4

CAPEX/Revenue

17.1%28.0%

18.8%

5

2011

Net debt/OIBDA

20102009

82.0

119.8

×0.8

×1.3×1.1

152.4

201120102009

101.6

106.0

117.7

2

OIBDA margin

38.4%

39.8%38.5%

+19%+47%

201120102009

26.331.3

46.1

3

Change

Revenue, RUB billion CAPEX, RUB billion

Net debt, RUB billion

OIBDA, RUB billion

Net income, RUB billion

1 Consolidated results of the merged companies and Rostelecom according to IFRS



KEY FINANCIAL AND OPERATIONAL HIGHLIGHTS1

201120102009

29.6 29.4 28.5

6

Change

-3.0%-0.9%

201120102009

5.3

6.7

+24%+26%

7

8.2

Change

201120102009

0.8 0.9

+540%

+19%

5.9

8

Change

Local voice subscribers, million Broadband subscribers, million

Pay-TV subscribers, million Revenue breakdown by services, 2011

9% Others 30% Local Telephone services

2% Pay-TV6% Data services

7% Interconnect and traffic transit8% DLD/ILD

12% Mobile communication services

3% Rent of channels

16% Broadband internet

7% Intra-Zonal



February 2011

On February 04, 2011, the Group completed the transaction to ac-quire 71.8% stake in OJSC National Telecommunications (“NTK”), larg-est independent cable TV operator and information provider in Russia.

The acquisition of NTK enabled Rostelecom to enter Moscow mar-ket and to attain a leading position in the Russian Pay-TV segment.

March 2011

Rostelecom and each of the Inter-regional Companies of Svyazin-vest (IRCs) contributed their re-spective repurchased shares to the share capital of MOBITEL, which became a 99.9% owned subsidi-ary of new Rostelecom when the merger was completed. MOBITEL therefore received 2.7% of Rostele-com’s outstanding ordinary shares and 28.8% of Rostelecom preferred shares.

KEY EVENTS OF 2011 & EARLY 2012

2011



April 2011

On April 1, 2011, the IRCs and OJSC Dagsvyazinform were exclud-ed from the Unified State Register of Legal Entities, following their merger with OJSC Rostelecom. The ordinary and preferred shares and bonds of the merged companies were exchanged for newly issued Rostelecom ordinary shares and bonds. This completed the legal process of creating an integrated Group based on Rostelecom.

May 2011

On May 12, 2011, Rostelecom’s newly issued shares commenced trading on the CJSC Moscow Inter-bank Currency Exchange (“MICEX”) as 16 separate issues.

On May 13, 2011, the Board of Directors of Rostelecom approved its development strategy for 2011–2015.

On May 13, 2011, Standard & Poor’s upgraded Rostelecom to “BB+” with a “Stable” outlook.

June 2011

On June 2, 2011, Rostelecom acquired 39.87% of the ordinary shares of OJSC Bashinformsvyaz, the largest telecoms operator in the Republic of Bashkortostan. This acquisition enabled Rostelecom to enter the market of Bashkortostan.

On June 9, 2011, the Company’s Board of Directors approved changes to the employee long-term incentive programme by launching an additional stock option pro-gramme, amounting to 16.3% of the total preferred shares or 1.2% of the total number of Rostelecom shares.

On June 27, 2011, Rostelecom AGM approved the payments of an an-nual dividend of RUB 105.5 mil-lion for the full year 2010, to be paid to holders of Rostelecom preferred shares as at the record date of May 10, 2011. The divi-dend, amounted to a payment of RUB 0.4344 per preferred “class A” share. The AGM also approved that no annual dividends be paid to holders of ordinary shares for the full year 2010.

August 2011

On August 10, 2011, Rostelecom ordinary shares of the unified is-sue commenced trading on MICEX under the ticker RTKM in line with the approval of the cancellation of the individual numbers (codes) of the 16 additional issues of ordinary Rostelecom shares by the Rus-sian Federal Service for Financial Markets (“FSFM”). Since Au-gust 10, 2011 one issue of Rostele-com ordinary shares (RTKM) and one issue of preferred shares (RTKMP) are traded on MICEX.

On August 31, 2011, Rostelecom acquired a 50% stake in CJSC Vol-gograd-GSM from SMARTS Group. As a result, Rostelecom now holds a 100% stake in Volgograd-GSM. The company had 855,000 mobile subscribers as at the end of the first quarter of 2011.



February 2012

On February 2, 2012, Rostelecom acquired 75% minus one share control over GNC ALFA, one of the largest independent backbone operators in Armenia.

On February 09, 2012 MOBITEL completed the acquisition of 3.86% of Rostelecom shares for a total cash consideration of RUB 19 bil-lion through the over-the-counter market. As a result, MOBITEL’s ordinary share stake in Rostelecom increased to 6.55%.

On February 09, 2012, Rostele-com signed an agreement with Svyaznoy, the owner of Russia’s largest mobile communications and equipment retail network, which establishes the terms of coopera-tion between the companies to sell mobile equipment and services in 45 Russian regions.

On February 17, 2012, Rostelecom signed an agreement with Euroset, Russia’s largest mobile communica-tions retailer, to establish unified conditions for cooperation between the companies to sell mobile equip-ment and services. Euroset’s shops will provide a full range of services for mobile voice subscribers of Ros-telecom, its subsidiaries and also SkyLink in the 44 regions, in which they operate.

2012

1 According to the exchange rate of the Central Bank of Russia as at 01/02/2012

September 2011

The MSCI included the Company’s ordinary shares in the Large Cap Segment of the MSCI Global Stand-ard Indices and MSCI Russia Index with 3.43% weight, effective from September 1, 2011.

On September 2, 2011, Rostelecom acquired a 49% stake in CJSC Oren-burg-GSM from SMARTS Group. As a result, Rostelecom now holds a 100% stake in Orenburg- GSM. The company had 185,000 subscrib-ers at the end of the first quarter of 2011.

October 2011

On October 31,2011, Rostelecom announced that its Board of Direc-tors has authorized a buyback of Rostelecom’s ordinary and pre-ferred shares up to a total value of US$ 500 million.

December 2011

On December 26, 2011, Board of Directors approved a revision of the Company’s dividend policy. According to the new policy, the Company will pay not less than 20% of its net profit, as determined in accordance with International Financial Reporting Standards (“IFRS”), as a dividend on ordinary shares. The dividend per one pre-ferred share was set at 10% of net profit according to RAS, divided by the total number of shares, which comprise 25% of the Company’s share capital.


On February 24, 2012, Rostelecom signed a strategic cooperation memorandum with Mobile TeleSys-tems to jointly develop fixed and mobile networks. According to the memorandum, the companies in-tend to share each other’s existing infrastructures, such as fibre optic network resources, technological equipment sites, power supply sta-tions, antenna towers and antenna feeder stations. As part of the signed agreement, Rostelecom and MTS will also jointly develop and maintain the transport network and base station infrastructure, and also develop network monitoring software systems.

On February 29, 2012, Rostelecom completed the acquisition of a 100% stake in Enter LLC a broad-band Internet services provider to individual subscribers in Barnaul, Novokuznetsk and Tyumen. The deal serves as an alternative to capital expenditure in Enter’s regions.

March 2012

Rostelecom successfully set up a video surveillance system to monitor the voting process during the Rus-sian Presidential elections as part of contracts awarded by the Minis-try of Communications of Russia. Under the agreed scope of work, the Company collected and stored live video records, provided access to a data-communication network, and also organised the Internet trans-mission of live voting station videos during the Presidential elections on March 4, 2012. The video surveillance operation was solely executed by Rostelecom and over 90,000 polling stations were equipped with video surveillance systems. The value of the contract amounted to RUB 13 billion.

On March 6, 2012, Rostelecom completed the acquisition of a 28.2% stake in NTK. As a result, Rostelecom now holds a 100% stake in NTK. The transaction with NTK is expected to result in the realisation of approximately RUB 2 billion in synergies by 2015.

On March 24, Decree № 340 on the reorganisation of OJSC Rostelecom was signed by the President of Rus-sia. It states that a unified company will be created by merging Svyazin-vest OJSC (“Svyazinvest”) and its total assets with Rostelecom. The Russian Federation’s stake in Rostelecom will amount to over 50% of ordinary shares when coupled with a stake belonging to the State Corporation Bank for Development and Foreign Economic Affairs (“Vnesheconom-bank”, “VEB”). At the same time, the Decree excludes Svyazinvest from the list of strategic joint stock companies.

April 2012

Rostelecom signed an agreement with Yota, the Russian mobile broadband provider, that gives Company access to Yota’s LTE network infrastructure. Rostelecom will utilise a feature-driven devel-opment (FDD) range of frequencies of between 2500–2530 MHz and 2620–2650 MHz to provide telecom-munications services as a Mobile Virtual Network Operator (MVNO). Rostelecom intends to start provid-ing commercial services using an LTE network in the Moscow region from September 1, 2012 and the provision of these services across other Russian regions will be rolled out at a later stage.




BRIGHT UPSIDE POTENTIAL FROM THE REORGANIZATION

On April 1, 2011, we completed the merger of the seven IRCs and Dags-vyazinform into the Company. The purpose of the Reorganisation is to establish an integrated telecommu-nications operator, a market leader in each segment of the Russian tel-ecommunications market, eliminate internal conflicts of interest, expand into new market segments and opti-mize costs and capital expenditures.

As part of the Reorganisation, ordinary and preferred shares of the IRCs and Dagsvyazinform were exchanged for our newly issued or-dinary shares pursuant to exchange ratios approved by the shareholders of the Company and each of the IRCs and Dagsvyazinform on the basis of reports of an independent ap-praiser LLC Ernst & Young. Prior to the Reorganisation, the Company’s issued share capital comprised of 728.7 million ordinary shares and 242.8 million preferred shares. To effect the Reorganisation, the annual general meeting of the Company’s shareholders approved an increase of the Company’s authorized share capital to 5.9 billion ordinary shares and our Board of Directors approved an increase in the Company’s share capital through the issue of an ad-ditional 2.2 billion ordinary shares.

The Company, the IRCs and Dags-vyazinform repurchased shares representing, in aggregate, 2.7% of the ordinary shares and 28.8% of the preferred shares post-Reorganisation for approximately RUB 14 billion from the Company’s, the IRCs’ and Dagsvyazinform’s shareholders who voted against or did not vote on the Reorganisation, respectively. Each of the Company, the IRCs and Dagsvy-azinform contributed their respective repurchased shares to the share capital of MOBITEL, which became a 99.9% subsidiary of the Company

upon completion of the merger of the IRCs and Dagsvyazinform into the Company. Shares of the IRCs and Dagsvyazinform acquired by MOBITEL were exchanged for our newly issued ordinary shares in the same manner as shares of the IRCs and Dagsvy-azinform owned by their respective shareholders. MOBITEL currently holds 6.6% of the Ordinary Shares and 12.6% of the Preferred Shares.

On April 1, 2011, the IRCs and Dagsvyazinform were excluded from the Unified State Register of Legal Entities following their merger with the Company, which assumed all rights and obligations of the merged companies.

In accordance with Russian legis-lation, the ordinary and preferred shares and bonds of the IRCs and Dagsvyazinform were exchanged for newly issued ordinary shares and bonds. Trading in the respective shares and exchange-traded bonds of the merged companies was discontin-ued with effect from March 28, 2011.

On April 28, 2011, the FSFM regis-tered reports on the results of ordi-nary shares issuance. These newly issued shares commenced trading on MICEX on May 12, 2011. The newly issued securities traded indepen-dently on MICEX for a three month period starting April 28, 2011 as 17 separate issues of ordinary shares and one issue of preferred shares.

On August 3, 2011, the FSFM ap-proved the cancellation of the individual numbers (codes) of the 16 additional issues of ordinary shares (RTKM-002D to RTKM-017D). Following the receipt of the notifi-cation of the cancellation of these codes, it was passed to the registrar and to nominee holders. The indi-vidual numbers of each registered

additional issue and the respective tickers were merged with the main issue of the ordinary shares (RTKM). These changes were reflected on each owner’s account in line with each nominal holder’s and stock exchange’s individual operating procedures. The total number of the ordinary shares corresponded exactly to the number of ordinary shares prior to the Reorganisation.

On August 10, 2011, the unified issue of the ordinary shares commenced trading on MICEX. Since August 10, 2011, one issue of the ordinary shares (ticker: RTKM) and one issue of preferred shares (ticker: RTKMP) have been traded on MICEX.

The merger of the separate deposi-tary receipt issues, representing both newly issued ordinary shares and those relating to the previous issue, was also finalized under the ticker ROSYY.

MSCI included the ordinary shares in the Large Cap Segment of the MSCI Global Standard Indices, ef-fective from September 1, 2011, to coincide with the effective date of the August 2011 Quarterly Index Review. The preferred shares were not added to the MSCI indices.

The Decree № 340 on the reor-ganisation of OJSC Rostelecom was signed by the President of Russia on March 24, 2012. The Decree states that a unified company will be created by merging Svyazinvest and its total assets with Rostelecom. The Russian Federation’s stake in Rostelecom will amount to over 50% of ordinary shares when coupled with a stake belonging to the VEB. It will enhance Rostelecom’s invest-ment case by simplifying its share-holder structure and eliminate the cross ownership of Rostelecom.



DagsvyazInform

Minority Shareholders

7 IRCs51%1

51%1

49%

100%

1

49%1

9%1

Other telecomassets

40%1 51%1

25%+1

Treasury shares


State Property Agency

Stock option plan

6.6%

2.7%

2

37.5%1

Other telecomassets

Operationalmanagement

53.2%

100%

1

25%+1

State stake State stake

Central Telegraph4,80%

BashInformsvyaz4

68.1%

MOBITEL(treasury shares)

Giprosvyaz74,99%

ChukotkasvyazInform4,100%

Ingushelectrosvyaz4,100%

OtherAssets

MMTS-94,99,8%


>50%1

99.99%

100% >40%1 ~X%3

State stake

State Property Agency

Before April 1, 2011

Target structure

Current structure

1 Percentage of voting shares 2 These shares are held by Rostelecom 99.9% subsidiary MOBITEL. Rostelecom also controls 28.8% of preferred shares of which 16.3% are under 2011–2013 stock option program3 X will depend on the valuation of Svyazinvest assets4 Only after State Property agency contributes the assets into Svyazinvest. Additionally the Company considers the possibility to merge some of its subsidiaries into Rostelecom at the time of merger with Svyazinvest



STRONG MARKET POSITION

As of December 31, 2011 Rostelecom was by far the biggest fixed-line operator by subscribers and backbone network and second best in terms of revenues.

12% Others

70% ROSTELECOM

18% MTS

Fixed-line leader Market size in 2011 US$ 4.6 billion

Penetration 2011 75%

Total lines 2011 40.7 million

Source: iKs-Consulting, Companies’ data, 2011, by number of lines, all data including corporate clients

Future growth will be supported by:

• strong fundamentals;

• leading positions in most segments of the Russian telecommunications market;

• largest network infrastructure in Russia;

• strong brand awareness and marketing expertise;

• solid financial platform for further development;

• experienced management team.



30% Others 34% ROSTELECOM

3% Vimpelcom17% MTS

10% Er-Telecom6% Akado

8% Others47% ROSTELECOM

7% MTS

38% Vimpelcom

25% Others 40% ROSTELECOM

11% MTS11% Vimpelcom

4% Akado

10% Er-Telecom

2% Others31% MTS

6% ROSTELECOM

27% Megafone

9% Tele2

25% Vimpelcom

Pay-TV (cable and IPTV) leader IPTV

Broadband leader Challenger in mobile voice

Market size 2011 US$ 2.4 billion


Total subscribers 2011 19.2 million



Total customers 2011 227.6 million




Market size 2011 US$ 65 million

Penetration 2011 3%


Source: iKs-Consulting, Companies’ data, 2011

Source: AC&M-Consulting, 2011, by residential subs Source: AC&M – Consulting, 2011, Rostelecom share includes SkyLink subs

Source: iKs-Consulting, Companies’ data, 2011



UP IN THE “CLOUDS”

MArkeT Overview:

• in 2010 global market for cloud computing was estimated at US$ 58.6 billion with forecasted growth of up to US$ 178.6 billion in 2015 (CAGR 20%)1;

• in 2012 around 80% of companies from Fortune 1000 list will be cloud users, around 20% of them will be fully transferred to cloud computing;

• in Russia the market was around US$ 35 million in 2010 compared to US$ 700 million in Germany. The forecast for 2015 – to reach US$ 1.2 billion (103% CAGR)2.

BACkGrOUnD AnD GOAlS OF nATiOnAl ClOUD COMpUTinG plATFOrM:

• boost reliability and operation security of scalable infrastruc-ture;

• cost reduction of creation, mod-ernization and maintenance of infrastructure solutions and hard-ware due to dynamically provided Platform resources;

• elimination of services develop-ment duplication due to typical services on SaaS model;

• ensuring of IT costs transparency of executive authorities of differ-ent levels due to standardized services with fixed price;

• reduction of solutions deployment and implementation time;

• large-scale informatization of municipalities’ activities on the basis of available services and dy-namically provided infrastructure;

• development of cloud services engineering market and IT-ser-vices provision market.

Russia 2015

Russia 2010

Germany 2010

700

35

1,200

1

CAGR2010–2015+103%

Market for Cloud computing in Russia (US$ million)

1 Gartner Technology research2 IDC research

key SeGMenTS OF nATiOnAl ClOUD ServiCeS:

• electronic government – full spectrum of e-services in a cloud with over 70 federal governments already subscribed. All services are provided via www.gosuslugi.ru;

• cloud document management system for federal and regional governments;

• electronic Medicine – over 14,000 clinics across Russia with electronic card, on-line registrar, etc. (Federal budget – RUB 240 billion);

• electronic Education – “School of the Future” Project on-line journals and school books, distant education, web-cameras security for schools (Federal budget – RUB 60 billion);

• housing services and Utilities – unified information and billing system for over 100,000 local management companies;

• virtual Office – cloud solution for small and mid-size enterprises;

• safe city – № 112 emergency ser-vice, ecological monitoring.



Satellite networks

Information systems and platforms

Core servicesConvergent

package solutions

Interactive platform

Content, multimedia, services М2МContent

Cloud computing infrastructure

INFORMATION TECHNOLOGIES

NETWORK INFRASTRUCTURE

Regional networks

Wireless networks

Backbone

APPLIED SERVICES

BSSNSS/OSS ERP SDP VSP

Data centre

IaaS PaaS SaaS

B2C B2B B2G

Integrated solutions



Dear Shareholders and Stake-holders,

Rostelecom embarked on a major new chapter of its history in 2011. The reorganisation of our Com-pany and the consolidation of its regional telecom operators mean that as well as becoming a giant of the domestic telecommunica-tions market, Rostelecom is also one of the world’s largest telecom companies in terms of scale. This brings with it a wide range of benefits as it expands our share of the telecommunications market as well as our presence in the capital markets.

The decision to reorganise Rostele com was driven by our de-sire to take the Company to a new and exciting stage of its develop-ment. As a result of its restructur-ing, Rostelecom is a larger entity, the value of its assets has grown,

the business has become far more stable and its investment appeal has significantly increased. It also means we have the largest tele-communications infrastructure in Russia, our ability to promote innovative telecommunications solutions has been enhanced and our competitive positioning is superior to anything else in the marketplace.

The consolidation brings a range of additional benefits, particularly to consumers and end users. The quality and variety of services pro-vided by Rostelecom to the public, to businesses and to the government will improve and the introduction of a fourth major federal-level player to the industry will intensify compe-tition. A larger, universal operator also strengthens the State’s ability to modernise Russia’s network in-frastructure, of which Rostelecom’s networks form a major part.

Minority shareholders benefit from higher trading liquidity, due to the increase in Rostelecom’s outstanding shares, and the inclu-sion of Rostelecom’s shares into the MSCI Index means that share-holders now have a blue chip investment in their portfolio. The additional fundamental value cre-ated by the consolidation has at-tracted interest from a wide range of investors and this has strength-ened our position when negotiat-ing strategic M&A transactions. New partners are increasingly requesting the use of Rostelecom shares as currency in transac-tions due to their high investment potential. This is why the Board of Directors has approved a share buyback, in which the Company accumulated a 3.86% stake of its ordinary shares. Some of these shares, which were acquired from minority shareholders in over-the-counter transactions to limit

Minority shareholders benefit from higher trading liquidity, due to the increase in Rostelecom’s outstanding shares, and the inclusion of Rostelecom’s shares into the MSCI Index means that shareholders now have a blue chip investment in their portfolio.

CHAIRMAN’S STATEMENT



any dilution of the Company’s free float and to prevent stock price fluctuations caused by an open market buyback, may be sold during the Company’s SPO. The buyback presents obvious benefits and when Rostelecom’s growth potential is taken into considera-tion, we consider the deal do be highly accretive to all our share-holders.

Looking further ahead, the Board’s approval of the united Rostelecom’s strategy up until 2015 is an additional significant landmark. The strategy, which sets out clear medium-term objectives, has been designed to ensure high levels of success, stability and sustainability for Rostelecom. A clear plan has

been designed to improve opera-tional performance and modernize and diversify the Company’s offer-ing. The new, united Rostelecom is fast on the way to becoming a modern service company with a range of quality services, sup-plied by highly skilled and talented personnel.

Rostelecom’s Corporate Govern-ance policies are being reviewed as part of our restructuring, as is the approval of a new united Rostelecom dividend policy. Changes to the Company’s divi-dend policy are of benefit both to existing shareholders and to po-tential investors, as the threshold for minimum dividend payout for ordinary shares has been revised. The Company also now uses International Financial Reporting Standards to determine united Rostelecom’s net profit for the purpose of calculating total divi-dend payments. This corresponds to best international practices and enables more objectivity in evaluating the Company’s per-formance, as contributions from Rostelecom’s subsidiaries and affiliates are taken into account.

The Board of Directors recom-mended that the AGM approves to pay a dividend for 2011 that amounts to RUB 14,961.559 mil-lion or 45.95% of 2011 net profit in accordance with RAS, which

equals 32.48% of 2011 net profit as determined in accordance with International Financial Reporting Standards (“IFRS”), including: • a 2011 cash dividend of

RUB 4.6959 per share on the Company’s Class A preferred shares, which represents 3.5% of 2011 net profit under RAS or 2.48% of 2011 net profit under IFRS on all Class A preferred shares;

• a 2011 cash dividend of RUB 4.6959 per share on the Company’s ordinary shares, which is equivalent to 42.45% of 2011 net profit under RAS or 30% of 2011 net profit under IFRS on all ordinary shares.

I am confident that the reorgani-sation is just the beginning of bet-ter changes. We are proving that Rostelecom is able to promote change within itself and the com-petitive landscape that surrounds it. This creates unique advantages for the Company, sets the course for the market and creates bigger opportunities for its customers, partners, employees and share-holders.

Sincerely,

Ivan RodionovChairman of the Board of Directors of Rostelecom

The strategy, which sets out clear medium-term objectives, has been designed to ensure high levels of success, stability and sustainability for Rostelecom.



Dear Shareholders and Stake-holders,

A great deal has been achieved in 2011 and it has become clear that the foundations we have been laying to create a national telecommunications champion are bearing fruit. We successfully completed the legal reorganisa-tion of the Group by finalising the merger of seven inter-regional telecoms companies, and Dagsvy-azinform, with Rostelecom and the united Company started trading under a single share on MICEX in August 2011. Our ordinary shares have now also been included in the Large Cap Segment of the MSCI Global Standard Indices and the MSCI Russia Index in September, carrying a 3.43% weighting. This is a major development for us and reflects Rostelecom’s standing as a blue chip investment.

In May, we announced a 5-year strategy designed to make Rostele-com the top Russian telecoms operator both in terms of revenue and the number of subscribers. The new strategy is Rostelecom’s response to significant market changes and once the strategy is fully implemented, Rostelecom will become a universal operator with a particular focus on wireless and wireline broadband services. Our new strategy brings together all of our businesses into one and all our businesses will operate under a single new brand identity that we launched in September.

A number of successful new tariffs and offerings have been launched as part of this strategy. Among them is a bundle service which combines all of Rostelecom’s united services in a single offer-ing, which has led to more than

500,000 new subscribers signing-up. We have also launched a unique federal broadband offering, capa-ble of reaching customers across the whole of Russia, which offers customers the freedom to choose which services they require to bet-ter control their spending.

Our current infrastructure places us in a position of unprecedented strength across Russia, and major steps have been taken to unlock significant potential in other parts of our business, primarily in fixed and mobile data, and the Pay-TV segment. We are looking to develop our data services, we are modern-ising our last mile technology, we are constructing a multi-standard mobile network and we are looking to invest in a ten-fold increase of our backbone capacity. Our mobile segment now has all the approv-als it needs to use our licensed

Our current infrastructure places us in a position of unprecedented strength across Russia, and major steps have been taken to unlock significant potential in other parts of our business, primarily in fixed and mobile data, and the Pay-TV segment.

LETTER FROM THE PRESIDENT



frequencies and we plan to build 3G networks in 27 Russian regions in 2012. We are also ahead of the curve in terms of providing 4G net-works, having been one of the first players to sign an agreement with Scartel (Yota), the Russian mobile broadband provider, to jointly de-velop and utilise fourth generation networks across Russia. We always look at ways of sharing costs and if teaming up with other provid-ers helps us achieve this, then we will share infrastructure, as, for example, our strategic cooperation memorandum with Mobile TeleSys-tems suggests.

2011 was an extremely busy year on the M&A front too. As well as acquiring NTK, the largest inde-pendent cable TV operator and information provider in Russia, to strengthen our triple services, we also acquired a series of regional

Russian operators to strengthen our market positions and we also bought an operator in the Republic of Armenia in line with our strategy to acquire operators in the CIS region with a high concentration of traffic.

All of this strengthens our position to do more work for the Russian Government. We carried out a great deal of work for the Govern-ment, including the E-Government programme and video surveillance system to monitor the voting pro-cess during the Russian Presiden-tial elections, and the quality and efficiency with which the projects have been completed demonstrates why we have become a preferred partner. We are therefore well po-sitioned to participate competitively in Government tenders as they look to invest over RUB 300 billion in the modernisation of education and public health systems in 2012.

Finally, we worked closely on the merger of Svyazinvest into Rostelecom. This process was started, following the signing of Decree on the reorganisation of OJSC Rostelecom by the President of Russia. The Decree states that a unified company will be created by merging Svyazinvest and its total assets with Rostelecom. The Rus-sian Federation’s stake in Rost-elecom will amount to over 50% of ordinary shares when coupled with a stake belonging to Vnesheconom-bank. We hope that this deal will be finalized within the time stated by the President of Russia.

We are therefore well on the way to achieving our objective of becoming the number one Russian telecoms operator both in terms of revenue and the number of subscribers. We operate in markets with tremen-dous growth potential and we fully intend to capitalize on this. Pos-sessing a leading position in such a dynamic market will only serve to strengthen our economic value as well as our ability to deliver supe-

rior shareholder returns regardless of the global economic outlook.

Apart from tremendous potential in our fundamental business we see 3 areas of further unlocking currently hidden value in:• proposed decreasing in the num-

ber of shares outstanding after the planned merge with Svayz-invest and subsequent change in multiples;

• capitalizing on revision of real estate portfolio; and

• increasing the share of IT and clouding projects using the exper-tize from E-Government project diversifying us from being a pure telecom company.

We look forward to keeping you up to date with our progress over the coming year.

Alexander ProvotorovPresident and Chief Executive Officer

We carried out a great deal of work for the Government, including the E-Government programme and video surveillance system to monitor the voting process during the Russian Presidential elections, and the quality and efficiency with which the projects have been completed demonstrates why we have become a preferred partner.



Our key strategic objective is to en-sure our sustainable growth and to continue to deliver significant eco-nomic value to our shareholders. To achieve this goal, we plan to under-take a set of strategic initiatives in order to strengthen our market po-sition in the most promising growth segments of the Russian telecom-munications market, improve over-all operational efficiency, and boost overall profitability by optimizing key business processes, upgrading infrastructure and improving labour productivity.

We plan to offer our services throughout Russia, including Moscow and St. Petersburg, as well as regions that are not currently covered by our licenses. We plan to accomplish our strategic initiatives by developing both organically and through M&A activity.

Our strategic initiatives include:

Utilising our existing backbone network to provide mobile voice and wireless broadband inter-net services across russia. We intend to develop our mobile voice and broadband Internet busi-ness across Russia, and increase our wireless broadband internet access market share. In order to achieve this, we plan to develop a nationwide multi-standard voice and data transmission network

STRATEGY

We aim to become a truly integrated operator and to increase our overall market share

to 26% by 2015 from current 22%.

key directions for rostelecom development are focused on creating the integrated telecom leader in all the segments1 of the russian market both in terms of revenues and subscribers

Revenue and margins growth

The structure of the Russian telecommu-nications market is currently undergoing significant changes and Rostelecom shall therefore focus on the development of wireline and wireless broadband services for private clients and the corporate servi-ces segment, in order to further strengthen the Company’s market positions.

Stable revenue growth, OIBDA margin enhancement

Market position enhancement

50% – fixed broadband market share², 22% – wireless broadband market share², 30% – Pay-TV market share²

Healthy debt to OIBDA ratio

Net debt / OIBDA ratio of up to 2x during the implementation period of the develop-ment strategy

Balanced investment policy

We expect 20% average CAPEX to reve-nues ratio for the 5-year period, mainly in 2011–2013

Goal: increase in revenue along with margins enhancement

1 Excl. mobile voice segment 2 All market shares are calculated by number of subscribers



based on CDMA (450 MHz), GSM (900/1800 MHz), Univer-sal Mobile Telecommunications Services (“UMTS”) (2100 MHz) and LTE (2300–2400 MHz) standards. We plan to utilize all mobile com-munications licenses and frequen-cies currently available to us, including GSM licenses in 40 re-gions of Russia and LTE licenses in 39 regions of Russia. We plan to participate in frequency allocation auctions announced by regulatory authorities and will seek to have allocated frequency bands real-located for use in third generation wireless (“3G”) and 4G networks.

We believe wireless broadband Internet access is the key mo-bile service offered to custom-ers. Our mobile coverage plans provide for high levels of quality and availability of wireless data services to users of all types of connection devices and across all transmission standards. In order to achieve this, we intend to reorganise our mobile com-munications business to create an integrated wireless operator, centralise technical and techno-logical policies, ensure cross-usage of backbone network infrastructure and integrate busi-ness processes in our mobile and fixed-line businesses. We plan on developing our nationwide multi-standard voice and data transmis-sion network in accordance with the following principles:• in large Russian cities (i.e., those

with a population of more than 750,000), we intend to provide services based on LTE and UMTS standards;

• in the administrative and eco-nomic centres of the Russian regions (i.e., those cities with a population between 350,000 and 750,000), we intend to provide services based on UMTS stand-ard; and

• in other urban areas (i.e., those cities with a population of less than 350,000) and in rural areas, we intend to provide services based on CDMA 450 standard.

Strengthening leadership in the fixed-line broadband internet access segment. We intend to develop our fixed-line broadband Internet access services by ensur-ing the availability of broadband Internet access services based on our multi-standard network throughout Russia. We plan on de-veloping our nationwide broadband Internet network in accordance with the following principles:• in large Russian cities (i.e., those

with a population of more than 750,000), we intend to develop a fibre optic network infra-structure, primarily through the acquisition of alternative telecom operators, and also through organic development;

• in the administrative and eco-nomic centres of the Russian regions (i.e., those cities with a population between 350,000 and 750,000), we plan to organically develop our fibre optic network infrastructure;

• in other urban areas (i.e., those cities with a population of less than 350,000), we plan to utilise the potential of existing copper wire infrastructure providing broadband Internet access based on digital subscriber line tech-nology (“xDSL”) and to build fibre optic network infrastructure;

• in rural areas, we plan to provide Internet access based on the existing copper wire network through xDSL technology and potentially through the use of Sky Link’s wireless CDMA net-work; and

• across our entire network, in-cluding both trunk and last mile segments, we intend to deploy high-performance transmission equipment and maintain a high level of data transmission capac-ity to ensure connection reliability and high quality of service.

Attaining sizeable market posi-tions in the pay-Tv segment. We plan to increase marketing of our Pay-TV, including internet protocol TV (“IPTV”), services to our exist-ing subscriber base via bundled

offerings with our broadband In-ternet access services. We intend to develop an integrated platform to deliver content to the end-cus-tomers; build a centralised content portfolio, including through lever-aging our own content production, as well as enhancing the quality of the content portfolio by concluding exclusive contracts with leading content providers; launch and develop “over-the-top” TV services (i.e., providing video/TV content via wireline or wireless broadband network to our subscribers TV sets over the top of other operators’ cable networks); offer IPTV ser-vices to other operators’ subscrib-ers; and retain and develop our cable TV business, while ensuring gradual migration of our exist-ing subscribers to IPTV services as we modernise and upgrade our networks based on fibre optic technology.

enhancing leadership positions in the business to business (“B2B”) and business to government (“B2G”) segment. We intend to establish a separate organisational and functional business line to serve B2B customers. We plan to increase our service offerings to all types of corporate customers, in-cluding national corporations, large businesses and SMEs. We intend to accomplish this by utilising our highly qualified sales managers, able to efficiently conduct direct sales; improving our IT infrastruc-ture, including centralising our billing system and implementing a customer relationship manage-ment, or CRM, system; unifying and centralising all business processes, including sales and marketing and provision of services; and establishing an integrated product portfolio for corporate customers, including IP VPN services, satellite communication services and infra-structure services including data centres. We also plan on leveraging our unique nationwide infrastruc-ture to become the unparalleled leader in the provision of a full range of services to large corporate



clients with operations throughout Russia.

As part of this strategy, we plan on establishing commercial relation-ships with B2G clients, providing them with telecommunication and IT infrastructure, which will enable them to provide public services online. As part of our B2G busi-ness, we plan on implementing the “Electronic Government” project, launched and supported by the Russian Government. We intend to leverage our expertise gained from implementing the “Electronic Gove r nment”, including the Soft-ware as a Service (“SaaS”) model, to provide a broader range of ser-vices to our corporate customers. We also plan to partner with third parties to enable provision of their services through the public servic-es portal, developed as part of the “Electronic Government” project.

enhancing leadership positions in and further developing our operator business. We intend to establish a separate organizational and functional business line and leverage our nationwide telecom-munications infrastructure to serve telecommunications network car-riers. We also intend to aggregate the most popular Internet content in Russia at our data centres to enhance the quality of our IP traf-fic transit services. We plan on increasing network connectivity by expanding peering agreements with the largest network infra-structure operators in Russia while increasing traffic exchange with international carriers.

Maintaining leading positions in the traditional fixed-line telepho-ny business. We intend to limit the impact of the trend of fixed-line traffic and subscribers shifting to mobile networks in order to preserve our fixed-line telephony revenues. We plan to increase the scope of our tariff plans with re-spect to local, intra-zone and DLD/ILD services through the introduc-tion of new tariff offers attrac-

tive to different segments of our customer base. We also plan on centralising our fixed-line churn management business processes and applying international and Russian best practices to protect fixed-line traffic and subscribers churn, including the introduction of session initiation protocol, or SIP, telephony, bundling fixed-line telephony services with broadband Internet access and Pay-TV, or triple-play, as well as with mobile telephony as part of our fixed to mobile convergence package, or quadruple-play.

realizing the potential operational efficiencies resulting from the completion of the reorganisation. Following the Reorganisation we plan to reengineer our key business processes, which account for a ma-jor part of our operational expenses, and optimize our management structure. In particular, we intend to achieve multiple operating syner-gies by removing network overlaps and ensuring the centralised devel-opment of our network and IT re-sources based on unified standards; reorganising our sales network and reengineering our marketing pro-cesses; unifying remote marketing and customer support by launching an integrated call centre; launching a single portal to market services and customer support; centralising procurement functions, including network equipment purchases; transitioning a significant portion of our fixed-line telephony subscribers in remote towns to wireless access technology; removing duplicative administrative and support func-tions and optimising our personnel structure; and eliminating internal competition between the Company and the IRCs in the wholesale (op-erator) market.

Development of innovative services. We intend to develop and launch a variety of innovative services, including:• cloud computing;• content delivery networks

(“CDN”);

• large government-sponsored projects involving the use of our telecommunications infrastruc-ture, such as Electronic Educa-tion and Electronic Medicine;

• remote applications;• web portal providing paid access

to third party content provid-ers and solutions for social networks, niche web-sites and search engines; and

• outsourcing services and IT func-tions, managing clients’ networks and equipment maintenance.

re-branding. We intend to gradu-ally introduce the “Rostelecom” brand across the entire Group while terminating use of the brands the IRCs used prior to the Reorgani-sation. We launched a promotion campaign of the new brand at both the national and regional levels.



ACqUiSiTiOn OF nTk

On February 4, 2011, we, together with two IRCs, OJSC Uralsvyaz-inform and OJSC North-West Telecom, acquired 71.8% of the share capital of NTK for a com-bined cash consideration of RUB 27.9 billion. The shares were acquired from CJSC National Me-dia Group, OJSC Surgutneftegaz and Raybrook Limited. In addi-tion, we acquired NTK promissory notes previously issued by it to one of the sellers of NTK shares with the aggregate face value of RUB 3.9 billion for a cash con-sideration of RUB 3.7 billion. The interest rate under these notes varies from 6.0% to 9.5% per annum and the notes mature in June 2012 and 2013.

NTK is a major cable TV operator in Russia and also has a signifi-cant presence in the broadband Internet access market. NTK provides Pay-TV services, both social and extended packages, as well as broadband Internet ac-cess for corporate and residential customers. NTK also provides distribution services to 93 Pay-TV channels, operates 7 TV channels of its own production and pro-vides telephony and line leasing services.

NTK owns and operates mod-ern network infrastructure in seven Russian cities – Moscow, St. Petersburg, Ekaterinburg, Novosibirsk, Kurgan, Elektrostal and Sredneuralsk. In Moscow and Ekaterinburg, NTK utilizes FTTx technology, while in St. Pe-tersburg, Novоsibirsk, Kurgan, Elektrostal and Sredneuralsk, NTK uses hybrid fibre coaxial (“HFC”) technology. As of Decem-ber 31, 2011 in Moscow, St. Pe-tersburg and Ekaterinburg NTK

network covers 85%, 80% and 85% households, respectively.

On March 6, 2012, Rostelecom completed the acquisition of a 28.2% stake in NTK for a total cash consideration of RUB 13.8 billion. As a result, Rostelecom acquired 100% shares in NTK for RUB 41.7 billion, after taking into account a 71.8% stake purchased in February 2011. The transaction with NTK is expected to result in the realisation of approximately RUB 2 billion in synergies by 2015.

ACqUiSiTiOn OF STAke in BAShinFOrMSvyAz

In June 2011, we acquired 39.9% of the ordinary shares in OJSC Bashinformsvyaz from Bashtelekominvest LLC for a combined cash consideration of RUB 3,640 million.

OJSC Bashinformsvyaz is a major telecoms operator in the Republic of Bashkortostan which provides fixed-line telephony, broadband Internet services and Pay-TV ser-vices to residential and corporate clients. It also leases channels to other telecoms operators. OJSC Bashinformsvyaz owns and oper-ates modern network infrastruc-ture in Ufa, Salavat, Oktyabrsky, Sterlitamak and other major cities of the Republic of Bashkor-tostan.

In 2010, OJSC Bashinformsvyaz generated RAS revenues of RUB 5,676 million and EBITDA of RUB 1,722 million.

The FASPM and the Ministry for Property Relations of the Republic of Bashkortostan currently own 29.3% and 18.5% of the voting shares in OJSC Bashinformsvyaz,

respectively. The federally owned interest of 29.3% ordinary shares in OJSC Bashinformsvyaz is ex-pected to be contributed into the charter capital of OJSC Svyazin-vest in accordance with the edicts of the Russian President № 1005 “On the development of the open joint stock company Svyazinvest”, dated August 12, 2010, and № 1418 “On the further develop-ment of the OJSC Svyazinvest”, dated November 15, 2010.

ACqUiSiTiOn OF STAke in vOlGOGrAD-GSM

In August 2011, we acquired a 50% interest in CJSC Volgograd-GSM from SMARTS Group for a total cash consideration of RUB 2,322 million, increasing our aggregate shareholding in CJSC Volgograd-GSM to 100%.

CJSC Volgograd-GSM provides GSM mobile services in the Vol-gograd region covering 33 of the region’s districts, or 90% of the region’s 2.6 million inhabitants. CJSC Volgograd-GSM had 857,000 mobile subscribers as at the end of the second quarter of 2011, and a 20% share of the region’s GSM market as at the end of 2010. In 2010, CJSC Volgograd-GSM reported RAS revenues of RUB 1,748 million and EBITDA of RUB 708 million.

ACqUiSiTiOn OF STAke in OrenBUrG-GSM

In September 2011, we acquired a 49% interest in CJSC Orenburg-GSM from SMARTS Group for a total cash consideration of US$ 4 million, increasing our aggregate share-holding in CJSC Orenburg-GSM to 100%.

M&A ACTIVITY



CJSC Orenburg-GSM provides GSM mobile services in the Oren-burg region and its major cities Orenburg, Orsk, Novotroitsk, Mednogorsk, Buzuluk, Bugu-ruslan, Kuvandyk, Sol-Iletsk and other towns. CJSC Orenburg-GSM had 185,000 subscribers at the end of the second quarter of 2011, and an 8% share of the region’s GSM market as at the end of 2010. In 2010, CJSC Orenburg-GSM reported RAS revenues of RUB 194 million and EBITDA of RUB 32.6 million.

eXpeCTeD ACqUiSiTiOn OF Sky link

In November 2011, the FAS grant-ed clearance to LLC MOBITEL (“MOBITEL”), our 99.9% owned subsidiary, to acquire 50% of voting shares in CJSC Sky Link (“Sky Link”), a leading Russian 3G operator and a wholly owned subsidiary of Svyazinvest.

ACqUiSiTiOn OF GnC-AlFA

In February 2012, our wholly owned subsidiary Teleset Net-works Ltd acquired a 75% minus one share stake in GNC-Alfa, one of the largest independent back-bone operators in Armenia, for US$ 22.5 million.

GNC-Alfa operates a modern fiber-optic network spanning approximately 1,500 km, which covers approximately 70% of

the territory of the Republic of Armenia. GNC-ALFA’s network is interconnected with the region’s major backbone networks and major MMR (“meet-me-room”) centres, as well as with certain international gateways. GNC-Alfa is a majort independent aggrega-tor of national IP-traffic, and its subsequent transit, in Armenia. In 2011, GNC-Alfa reported revenues of approximately US$ 12 million.

ACqUiSiTiOn OF enTer

In February 2012 Rostelecom completed the acquisition of a 100% stake in Enter LLC (“En-ter”), a broadband Internet servic-es provider to individual subscrib-ers in Barnaul, Novokuznetsk and Tyumen, for a total cash consid-eration of RUB 305 million.

The acquisition of Enter reflects Rostelecom’s strategy to increase its subscriber base and modern-ise its network infrastructure. The deal also serves as an alternative to capital expenditure in Enter’s regions, as it provides Rostelecom with access to Enter’s modern network and it provides the Com-pany with the technical ability to offer a broader range of services, including IPTV services to Enter’s existing subscribers and more modern and high-speed commu-nications services to Rostelecom customers.

Enter’s network infrastructure was built in 2010 and it is among the most modern networks in the three cities it serves. The network is built using Metro Ethernet technology and has fibre-optic communications lines that exceed 480 km in length. The network’s technical scope covers around 2,600 multi-storey build-ings passed, or around 80% of all multi-storey buildings in Barnaul and over 50% of the multi-storey buildings in Novokuznetsk.

BUyBACk OF 3.86% ShAreS

In February 2012 MOBITEL LLC has completed the acquisition of 3.86% of Rostelecom shares for a total cash consideration of RUB 19 billion with the help of debt financing. As a result, Motel’s ordinary share stake in Rostelecom increases to 6.55%.

To limit the dilution of the Com-pany’s free float, as well as any stock price fluctuations caused by an open market share buyback, the 3.86% stake in Rostelecom’s ordinary shares has been accu-mulated by VTB Capital Plc and Renaissance Securities (Cypus) Limited on behalf of MOBITEL. The shares were acquired from minority shareholders through the over-the-counter (OTC) mar-ket.

This additional stake is expected to be used to facilitate strate-

The acquisitions we made in 2011

added 6 million subscribers to our subscriber base, made us a leader of the Russian Pay-TV market and strengthened our positions on mobile market.



gic acquisitions, or it may be sold during the Company’s SPO, depending on the status of the securities market.

AGreeMenT wiTh SkArTel (yOTA)

Rostelecom signed an agree-ment with Yota, the Russian mobile broadband provider, that gives Rostelecom access to Yota’s LTE network infrastruc-ture. Rostelecom will utilise a feature-driven development (FDD) range of frequencies of between 2500 – 2530 MHz and 2620–2650 MHz to provide tel-ecommunications services as a Mobile Virtual Network Operator (MVNO). Under the terms of the contract test services are expected to commence July 1, 2012. Ros-telecom intends to start provid-

ing commercial services using an LTE network in the Moscow region from Septem ber 1, 2012 and the provision of these services across other Russian regions will be rolled out at a later stage. The Company also plans to offer sub-scribers its branded telecommu-nication equipment. MVNO-model will enable Rostelecom to optimise its costs and resources when starting to provide 4G network ser-vices in the near future. It will also help to expand Rostelecom’s range of services in Moscow.



СORPORATE GOVERNANCE

We are governed by the General Meeting, the Board of Directors and our management board (the “Management Board”). The Board of Directors is responsible for our strategic development, while the Management Board is responsible for implementing such strategies and our overall management. There are no service contracts between us and the Directors. There are no family relationships between any of the Directors and the members of the Management Board.

BOArD OF DireCTOrS & COMMiTTeeS

Board of Directors

Pursuant to the Joint Stock Compa-nies Law and our charter, members of the Board of Directors are elected annually by a general meeting of shareholders. A person elected as a member of the Board of Direc-tors may be re-elected an unlim-ited number of times. The business address for each of our Directors is 14, 1-st Tverskaya-Yamskaya Street, Moscow 125047, Russian Federa-tion.The membership of the Board of Directors is set out below:

All of the Directors were elected or re-elected on June 27, 2011 by the Com-pany’s annual general shareholders’ meeting. The terms of appointment for each Director expire on the date of the next annual general shareholders’ meeting of the Company.

The qualifications and certain other information for each Director are set forth below:

ivan i. rodionov has been a mem-ber of our Board of Directors since May 2009 and its Chairman since June 2011. Mr. Rodionov also serves as a member of the board of direc-tors and a member of the audit committee of Svyazinvest. He also serves as a member of the boards of directors of OJSC FosAgro, Svyaz-invest, OJSC IBS Group Holding, OJSC EnergoMashinostroitelny Alliance, OJSC Rusinvest, and OJSC Amofos. Mr. Rodionov has also served as a member of the board of directors of OJSC MGTS from 2005 to 2007. In addition, he is a profes-sor at the Russian State University for the Humanities and a professor at the National Research Univer-sity – Higher School of Economics. From 2004 to 2006, Mr. Rodionov

served as the managing director of AIG-Interros RCF Advisor. Mr. Rodio-nov graduated from the Lomonosov Moscow State University in 1978 with a degree in economics.

vladimir n. Bondarik has been a member of our Board of Directors since May 2009 and served as its Chairman in 2010. He also serves as the general director of OJSC Gypro-svyaz, deputy general director of Svyazinvest and advisor to the Min-ister at the Ministry of Communica-tions and Mass Media of the Russian Federation. Mr. Bondarik also serves as the chairman of the board of directors of OJSC Vitanet since 2010. From 2005 to 2008, Mr. Bondarik held various management positions, including the general director, the managing director and the deputy general director, at LLC Roilcom. In addition, he served as the general director of LLC Sensor Systems from 2004 to 2005. Mr. Bondarik gradu-ated from the Moscow Institute of Physics and Technology in 1980 with a degree in radio-electronic devices.

yury A. kudimov has been a mem-ber of our Board of Directors since June 2010. He also serves as the

Members of the Board of Directors

name Date of Birth position SinceIvan I. Rodionov November 30, 1953 Chairman of the Board of Directors May 2009Vladimir N. Bondarik November 7, 1957 Director May 2009Yury A. Kudimov April 19, 1953 Director June 2010Sergey I. Kuznetsov December 25, 1953 Director June 2011Anatoly A. Milyukov April 15, 1972 Director June 2011Alexander N. Pertsovsky September 2, 1968 Director June 2011Alexander Y. Provotorov November 7, 1974 Director May 2009Igor O. Shchegolev1 November 10, 1965 Director June 2011Vadim V. Semenov August 21, 1965 Director January 2011Anatoly V. Tikhonov June 13, 1969 Director June 2010Anton A. Zlatopolsky September 12, 1966 Director June 2011

1 As per Mr. Shchegolev’s request, Rostelecom does not notify him of the Board of Directors’ meetings and/or absentee voting, and does not submit to him meeting materials



general director of LLC Investment Company of Vnesheconombank (VEB Capital). Mr. Kudimov serves as the chairman of the boards of directors of VEB-Invest LLC and Globeks-Capital LLC, and a member of the boards of directors of Svyazin-vest, OJSC First Freight Company, and OJSC Terminal. From 2005 to 2009, Mr. Kudimov held various management positions at OJSC Na-tional Reserve Bank, including the President and the chairman of the management board. Mr. Kudimov graduated from the Lomonosov Moscow State University in 1979 with a degree in journalism and from the Dowling College in 1998 with a master’s degree in banking and international financial systems.

Sergey i. kuznetsov has been a member of our Board of Directors since June 2011. Mr. Kuznetsov also serves as a member of the Inde-pendent Directors’ National Register of the Russian Union of Industrialists and Entrepreneurs. From 2004 to 2009, he served as chairman of the Board of Directors of Rostelecom, OJSC Central Telegraph, OJSC Tel-ecominvest and several IRCs. From 2004 to 2006, he served as deputy general director and member of the management board of OJSC Svyazin-vest. Mr. Kuznetsov graduated from North-Western Polytechnics Institute where he specialized in computer technologies. He also trained at Columbia University and studied business administration at the Fuqua Business School at Duke University.

Anatoly A. Milyukov has been a member of our Board of Directors since June 2011. Mr. Milyukov has also served as the managing vice president of OJSC Gazprombank and a member of the board of directors of CJSC Gazprombank – Asset Management, GBP Asset Management S.A. and CJSC New Instrumental Solutions since 2008. From 2001 to 2006, he also served as the Chief Managing Director of Alfa-Capital Management Company. Mr. Milyukov graduated from the Lomonosov Moscow State Univer-

sity with a degree in economics. In 2001, Mr. Milyukov graduated from Harvard Business School (MBA).

Alexander n. pertsovsky has been a member of our Board of Directors since June 2011. Mr. Pertsovsky also serves as the chairman of the management board of Renaissance Group and Renaissance Capital and as the chairman of the board of directors of Bank Renaissance Finance LLC. Mr. Pertsovsky is a member of the boards of direc-tors of OJSC Svyazinvest, and CJSC Moscow Interbank Currency Exchange. Mr. Pertsovsky gradu-ated from the Moscow Institute of Radio Engineering, Electronics and Automatics, and from Columbia Business School (MBA).

Alexander y. provotorov has been a member of our Board of Direc-tors since May 2009. Mr. Provotorov also serves as our President and the Chairman of the Management Board and a member of the management board of Svyazinvest. He is also the chairman of the board of directors of OJSC Giprosvyaz, and a member of the boards of directors of Svyazinvest, OJSC Central Telegraph, OJSC Ros-infocominvest, and Telecom-Soyuz Pension Fund. He also served as a member of the boards of direc-tors of CJSC PTT and OJSC MGTS. From 2009 to 2010, he served as the first deputy general director at Svyazinvest. In 2009, he served as the senior managing director of MarCap Advisors Limited. From 2006 to 2008, he served as the general director of Marshall Capital. In 2005, Mr. Provo-torov served as the deputy general director of Marshall Capital Partners. Mr. Provotorov graduated from the Lomonosov Moscow State University in 1996 with a degree in law.

igor O. Shchegolev has been a member of our Board of Directors since June 2011. Mr. Shchegolev also serves as Minister of Commu-nication and Mass Media of the Rus-sian Federation. From 2002 to 2008, he served as the head of protocol of the President of the Russian Fed-

eration. Mr. Shchegolev graduated from the M. Tores Moscow State Institute of Foreign Languages, and from Leipzig University. As per Mr. Shchegolev’s request, Roste- lecom does not notify him of the Board of Directors’ meetings and/or absentee voting, and does not submit to him meeting materials.

vadim v. Semenov has been a member of our Board of Directors since January 2011. Mr. Semenov also serves as the general director and the chairman of the manage-ment board of Svyazinvest. He also serves as the chairman of the boards of directors of OJSC Mos-cow Inter-city Telephone Exchange № 9, Sky Link, OJSC Gyprosvyaz, CJSC Delta Telecom, OJSC Mos-cow Cellular Communications, and OJSC Central Telegraph. Mr. Se-menov has also been a member of the boards of directors of Svyazin-vest and Telecom-Soyuz Pension Fund since 2011 and 2010, respec-tively. From 2009 to 2010, he served as an advisor to our general direc-tor, our vice President for corporate development and a member of the Management Board. From 2003 to 2009, Mr. Semenov held various management positions at MegaFon, including the head of legal depart-ment, the director for legal affairs and the deputy director for legal af-fairs. Mr. Semenov graduated from the Saint Petersburg State Univer-sity in 1997 with a degree in law.

Anatoly v. Tikhonov has been a member of our Board of Directors since June 2010. He also serves as a management board member – the first deputy chairman at VEB. Mr. Tikhonov is also the chairman of the board of directors at the Interregional Bank for Settlements of the Telecommunications and Postal Services, and a member of the boards of directors of CJSC Alrosa, United Company RUSAL Limited, OJSC International Airport Sherem-etyevo, VEB Engineering LLC, and OJSC Corporation of North Caucus Development. He has also served as a member of the boards of direc-



tors of OJSC Corporation of Samara Oblast Development and OJSC Cor-poration of Krarsnoyarsk Krai Devel-opment from 2006 to 2009. In 2008, Mr. Tikhonov served as a deputy Gov-ernor – the deputy chairman of Kras-noyarsk Region Government. From 2003 to 2008, he served as a deputy Governor – the head of foreign rela-tions and investment department of Krasnoyarsk Region Administration. Mr. Tikhonov graduated from the Lomonosov Moscow State University in 1995 with a degree in law.

Anton A. zlatopolsky has been a member of our Board of Directors since June 2011. He also serves as the Director of Russia State Television and Deputy General Director of FGUP VGTRK and has held these positions since 2006. Mr. Zlatopolsky graduated from the Lomonosov Moscow State University with a degree in law.

Committees

Audit CommitteeThe Audit Committee of the Board of Directors was established in December 2004 by the Board of Di-rectors and performs its functions in accordance with the regulations approved by the Board of Directors. It is currently comprised of the fol-lowing four members:• Yuri Kudimov (Chairman) – inde-

pendent director; • Alexander Pertsovsky – inde-

pendent director; • Vadim Semenov - non-executive

director; and • Ivan Rodionov – independent

director.

The goals and objectives of the Audit Committee of the Board of Directors, as set forth in its regula-tions, are to assist the Board of Di-rectors in carrying out its oversight responsibilities in the areas of: • he quality and integrity of our

financial statements;• the qualifications and independ-

ence of our independent auditor; • the performance of functions and

responsibilities of our independ-ent auditor;

• monitor the activities of our inter-nal auditor; and

• our compliance with legal and regulatory requirements.

Nominations and Remuneration CommitteeThe Nominations and Remunera-tion Committee of the Board of Directors was established in September 2003 by the Board of Di-rectors and performs its functions in accordance with regulations approved by the Board of Directors. It is currently comprised of the fol-lowing four members:• Alexander Pertsovsky (Chair-

man) – independent director;• Vladimir Bondarik - non-execu-

tive director;• Anton Zlatopolsky – independent

director; and • Anatoly Milyukov – independent

director.

The goals and objectives of the Nominations and Remuneration Committee, as set forth in its regu-lations, are to assist the Board of Di-rectors in carrying out its oversight responsibilities in the areas of: • development of our policy in re-

spect of appointment of members of the Management Board;

• preparation of recommendations on appointment of the General Director;

• determination of qualifications for candidates for the Board of Direc-tors;

• development of our policy defining principles and criteria to determine compensation of members of the Board of Directors, the Internal Audit Commission, the President and members of the Management Board, as well as criteria for the appraisal of their activity;

• preparation of recommendations on our personnel policy, including the employee incentive system; and

• appraisal of activities of our man-agement.

Strategy CommitteeThe Strategy Committee of the Board of Directors was established in September 2003 by the Board of

Directors and performs its functions in accordance with regulations ap-proved by the Board of Directors. It is currently comprised of the following seven members:• Vadim Semenov (Chairman) – non-

executive director;• Yuri Kudimov – independent direc-

tor;• Sergey Kuznetsov – independent

director;• Anatoly Milyukov – independent

director;• Alexander Provotorov – President

of Rostelecom;• Ivan Rodionov – independent direc-

tor; and• Anatoly Tikhonov – independent

director.

The goals and objectives of the Strat-egy Committee, as set forth in its regulations, are to assist the Board of Directors in carrying out its over-sight responsibilities in the areas of: • preliminary consideration of and

preparation of recommendations for our strategic development plan;

• oversight of implementation of the strategic development plan;

• preliminary consideration and preparation of recommendations and policy in respect to participa-tion in other organizations;

• preparation of recommendations for our dividend policy;

• preliminary consideration and preparation of recommendations in respect to alteration of our charter capital;

• preliminary consideration and preparation of recommendations for approval of major transactions and interested-party transactions;

• preliminary consideration and preparation of recommendations in respect to reorganization and liquidation;

• preparation of recommendations for the implementation of our in-vestment planning and monitoring procedure;

• preparation of recommendations for adjusting our current strategy; and

• preparation of recommendations for improving our procedures for



interaction with our affiliated and subsidiary companies.

Corporate Governance CommitteeThe Corporate Governance Com-mittee of the Board of Directors was established in March 2008 by the Board of Directors and performs its functions in accordance with regulations approved by the Board of Directors. It is currently comprised of the following four members:• Sergey Kuznetsov (Chairman) –

independent director;• Vladimir Bondarik – non-executive

director;• Anton Zlatopolsky – independent

director;• Alexander Provotorov – President

of Rostelecom OJSC.

The goals and objectives of the Corporate Governance Committee, as set forth in its regulations, are to assist the Board of Directors in car-rying out its oversight responsibilities in the areas of: • issues related to our Corporate

Secretary;

• convocation, preparation and hold-ing of annual and extraordinary general meetings of shareholders with due consideration for the best corporate governance practices;

• approval of and amendments to our internal document(s), setting forth internal rules for disclosure, as well as establishing procedures for using non-public information about our operations, our securi-ties and transactions relating to such securities;

• submission for voting by the gener-al meetings of shareholders of the proposals on approval of or making amendments to our charter and other internal documents govern-ing operations of our management bodies;

• approval of and amendments to our Corporate Governance Code, annual evaluation of and recommendations to the Board of Directors concern-ing inclusion in the annual report information about our compliance with the Corporate Governance Code recommended by the FSFM,

as well as ensuring compliance with our Corporate Governance Code;

• resolution of various corporate conflict;

• oversight of compliance with ethical norms reflecting our social responsibility;

• review of our compliance with the requirements of applicable laws; and

• preparation of recommendations for appointment of our registrar.

MAnAGeMenT BOArD & COMMiTTeeS

Management Board and president

The Company has a collective executive body, i.e. the Manage-ment Board, and a sole executive body, i.e. the President. The busi-ness address for each of members of the Management Board is 15, Dostoevskogo Street, St. Peters-bourg, 191002, Russian Federation. The business address for our sole executive body is 14, 1st Tverskaya-

Members of the Management Board

name Date of Birth position Since

Alexander Y. Provotorov1 November 7, 1974 President July 2010Roman A. Frolov August 7, 1976 Chief Accountant February 2006Viktor V. Iudin February 17, 1967 Senior Vice President August 2010Anton A. Khozyainov October 14, 1974 Senior Vice President August 2010Sergey A. Lukash May 9, 1957 Vice President September 2010Vaagn A. Martirosyan December 8, 1951 Senior Vice President August 2011Vladimir K. Mironov July 29, 1956 Vice President August 2011Alexey S. Nashchokin October 1, 1976 Vice President for Innovative Development November 2011Alexander M. Rogovoy July 18, 1979 Vice President for Legal Issues and

Corporate DevelopmentOctober 2010

Olga N. Rumyantseva June 29, 1973 Executive Director – Director of Corporate Clients Sales Department

November 2011

Galina V. Rysakova May 9, 1967 Executive Director – Director for Organisational Development and Human Resources

July 2006

Viktor V. Strelkov June 1, 1968 Executive Director – Director for Information Technologies

October 2009

Pavel A. Zaytsev December 14, 1977 Vice President – Sales Director October 2010

Ivan I. Zima August 27, 1971 Vice President – CTO January 2012

1 Chairman of the Management Board



Yamskaya Street, Moscow 125047, Russian Federation. The following senior managers play a significant role in our management:

The qualifications and certain other information for each member of the Management Board are set out below:

Alexander Y. Provotorov. See “Board of Directors” above.

Roman A. Frolov has served as our chief accountant since Febru-ary 2006. Since 2002, he has held several senior positions with us, including the tax manager, the head of the tax department and the deputy chief accountant prior to serving as our chief account-ant. Mr. Frolov graduated from the Plekhanov Russian Academy of Economics in 1997 with a degree in finance and credit.

Victor V. Iudin served as our senior vice President from August 2010 to February 2012. From 2009 to 2010, he served as our first vice Presi-dent. From 2005 to 2009, Mr. Iudin was our deputy general director – director of the Company’s Central Branch. Mr. Iudin graduated from the Moscow Institute of Railroad Transport Engineers in 1988 with a degree in railroad telemechanics and telecommunications.

Anton A. Khozyainov has served as our vice President for economics and finance since August 2010. He has also served as a member of the board of directors of OJSC Moscow Inter-city Telephone Exchange № 9 since 2009. From 2009 to 2010, Mr. Khozyainov served as our deputy general director – the finance director. In 2009 Mr. Khozyainov served as our deputy finance direc-tor. Mr. Khozyainov was an advisor to the general director of CJSC MTs NTT in 2009. From 2006 to 2008, he served as the finance director of Marshall Capital, and in 2005 as the finance director of Marshall Capital Partners. Mr. Khozyainov graduated from the Moscow Elec-tronics and Mathematics Institute

(Technical University) in 1997 with a degree in applied mathematics with the qualification of an engineer-mathematician. In 2002, he became a member of the Association of Chartered Certified Accountants.

Sergey A. Lukash has served as our vice President since Septem-ber 2010. Since 2010 he has held the position of the general director and the chairman of the manage-ment board at OJSC Uralsvyazin-form. Mr. Lukash is also currently a member of the board of directors of Svyazinvest. From 2009 to 2010, he served as the deputy general director of Svyazinvest. From 2008 to 2009, Mr. Lukash was acting the general director of Federal Unitary Enterprise Svyaz-Bezo-pasnost. In 2006, he also served as the senior assistant to the Chief State Prosecutor of the Russian Federation. From 2005 to 2006, Mr. Lukash served as the deputy Minister of Justice of the Russian Federation. In 2005, he served as the first deputy general director of Non-Commercial Organization Na-tional Scientific Fund. Mr. Lukash graduated from the Almaty School of Communications in 1976, from the All-Union Extra-Mural Electric and Technical Institute of Com-munications in 1986 with a de-gree in radiocommunications and radiobroadcasting and from the Russian Academy of State Service at the President of the Russian Federation in 1997 with a degree in state and municipal management. Mr. Lukash holds a doctorate in economics and a Ph.D. in law.

Vaagn A. Martirosyan has served as our senior vice President since August 2011. From 2007 to 2011, he served as the general direc-tor of OJSC CenterTelecom. From 1993 to 2007, Mr. Martirosyan served as the general director of OJSC Central Telegraph. Mr. Martirosyan graduated from the K. Marks Erevan Polytechnic Institute with a degree in automat-ics and telemechanics.

Vladimir K. Mironov has served as our vice President since August 2010. From 2004 to 2010, he served as our deputy general director and from 2002 to 2004 he served as the deputy general director on person-nel provision and security. From 2001 to 2002, Mr. Mironov was the head of the security department at CJSC PeterStar. Mr. Mironov has previously served in the military and graduated from the Obraztsov Leningrad Rail Transport Institute with a degree in electrification of rail transport.

Alexey S. Nashchokin has served as our vice President for Innovative Development since March 2011. He also served as our vice President for Federal Programs and advi-sor to our general director since April 2010. From 2007 to 2010 Mr. Nashchokin held various posi-tions including general director in CJSC Envision Group. From 1999 to 2007 he served in atomic power sector. Mr. Nashchokin graduated from Ivanovo State Energy Univer-sity with a degree in atomic power stations. He holds a Ph.D. in techics and graduated from extension curses in finance and credit.

Alexander M. Rogovoy has served as our vice President for Legal Issues and Corporate Governance since October 2010. In 2010, he served as our deputy head of legal department. From 2003 to 2009, Mr. Rogovoy held various manage-ment positions, including the legal counsel and the head of the legal department at MegaFon. Mr. Ro-govoy graduated from the Moscow State Legal Academy in 2001 with a degree in law.

Olga N. Rumyantseva has served as our executive director – direc-tor of corporate clients sales department since November 2010. In 2010 she served as a deputy general director – sales director of OJSC Svyazdorinvest. From 2004 to 2010 Mrs. Rumyantseva held various positions in the Company, including sales director and head



of mass market department. From 1994 to 2004 she served in varios telecommunicational companies in sales, client service and market-ing. Mrs. Rumyantseva graduated from Moscow State Engineering University Stankin with a degree in computer-aided design systems.

Galina v. rysakova has served as director of our organisational development and human resources Department since July 2006. From 2003 to 2006, she served as our the deputy general director – the direc-tor of organisational development and human resources. Ms. Rysako-va graduated from the Lomonosov Moscow State University in 1999 with a degree in law.

viktor v. Strelkov has served as the director of our Informa-tion Technologies Department since October 2009. From 2007 to 2009, Mr. Strelkov held various management positions, including the director of marketing depart-ment and the chief architect, at OJSC Sitronics. In 2006, he was the general director of LLC Intelotek Group. Mr. Strelkov graduated from the Moscow Aviation Institute of Sergo Ordzhonikidze in 1991 with a degree in applied mathematics.

pavel A. zaytsev has served as our Vice President – Sales direc-tor since October 2010. He also serves as a member of the boards of directors of CJSC Wireless Informational Technologies and OJSC Moscow Inter-city Telephone Exchange No.9. From 2009 to 2010, he was the deputy general director – the sales director of OJSC Uralsvyazinform. From 2005 to 2009, Mr. Zaytsev served as the general director of CJSC Uraltele-comservice. Mr. Zaytsev gradu-ated from the Ural State Technical University in 2000 with a degree in information systems in economy.

ivan i. zima has served as our vice President – Chief Technical Officer since January, 2012. Since 1998, Mr. Zima has held various manage-

ment positions with us, including the executive director – director of planning and development of networks department and the deputy general director – director of the Company’s Far-East Branch. Mr. Zima graduated from Irkutsk State Technical University in 1994 with a degree in radio engineering, from Siberia State University of Telecommunications in 2002 with a degree in management and from Moscow Technical University of Communications in 2006 (MBA).

Committees

Our Management Board currently has the following committees:

Budget and Investment CommitteeThe main purpose of the Budget and Investment Committee is to en-hance our effectiveness in making budget and investment decisions required for the implementation of our business plans, strategies and development programs, and our financial, business and tariff policies. The main functions of the Budget and Investment Committee include maintaining a correlation and consistency between the budg-eting and investment processes, control over compliance with those processes and preparation of pro-posals for our Management Board on the foregoing matters.

Compensation CommitteeThe purpose of the Compensation Committee is to create an effective compensation system designed to manage human resources so as to enhance our competitiveness. The main function of the Compensation Committee is to maintain a correla-tion between the overall strategy of our development and our policies related to the payment of salaries and bonuses to our employees.

Information Disclosure CommitteeThe main purpose of the Informa-tion Disclosure Committee is to establish and implement a uniform information policy consistent with applicable legal requirements,

as well as with our development strategy. The main functions of the Information Disclosure Committee include maintaining consistency between our information policy and our strategy and development goals, enhancing the accuracy and timeliness of our disclosure of information in accordance with applicable legal requirements and our internal regulations, as well as enhancing the conformity and consistency of information publicly disclosed by us.

Tender CommitteeThe main purpose of the Tender Committee is to ensure that our Management Board makes ef-fective decisions when selecting suppliers and contractors for goods and services on a tender basis. The main functions of the Tender Com-mittee include defining the terms of tenders, reviewing commercial bids from tender participants, select-ing the winning bid and providing overall control, coordination and supervision in the preparation and conduct of tenders.

Internal Control CommitteeThe main purpose of the Internal Control Committee is to design, implement and maintain effective internal controls, as well as risk management procedures. The main functions of the Internal Control Committee include ensuring ef-fective control and an effective risk management environment, further enhancement of risk management and control procedures, as well as ensuring effective management control over financial reporting.

Information Security CommitteeThe main purpose of the Infor-mation Security Committee is to ensure compliance of our infor-mation security requirements with all applicable laws, rules and regulations, as well as our goals and objectives. The main functions of the Information Security Com-mittee include promptly reviewing and making decisions on issues relating to ensuring the security



of our information and information resources.

Charity CommitteeThe main purpose of the Char-ity Committee is to consider our participation in various charity initiatives and socially important projects.

inTernAl AUDiT COMMiSSiOn

The Internal Audit Commission verifies the accuracy of our finan-cial reporting under Russian law, generally supervises our finan-cial activity and performs certain internal control functions. Our current Internal Audit Commis-sion was elected on June 27, 2011, and is comprised of five mem-bers. Pursuant to our charter, the Audit Commission is elected by the annual general shareholders’ meeting (or, as applicable, an ex-traordinary general shareholders’ meeting) for a term expiring on the date of the next annual sharehold-ers’ meeting. Any shareholder or any other person nominated by a shareholder may be a member of the Internal Audit Commission provided that a member of the In-ternal Audit Commission may not simultaneously be the President, a member of the Board of Directors, a member of the Management Board or a member of the liquida-tion commission (elected in case of our liquidation). The Internal Audit Commission elects its Chairman and Secretary.

The Internal Audit Commission reviews our financial and busi-ness operations and, in particular: audits our financial and business documents; reviews the legal impact of agreements executed on our behalf, transactions and settlements with counterparties; analyses the accounting state-ments and statistical records for compliance with applicable regula-tions; checks whether payments to suppliers of goods and services,

payments to the budget, calcula-tion and payments of dividends and redemption of other obligations are made accurately and in due course; audits our balance sheets and our profit and loss statements and performs other functions related to financial issues. In the performance of its duties, the Internal Audit Commission has the right to request, and officers of our governing bodies must pro-vide, documents on our financial and business operation, including confidential documents.

reMUnerATiOn OF MeMBerS OF The BOArD OF DireCTOrS AnD The MAnAGeMenT BOArD

The contractual salaries of the members of the Management Board of the Company consist of a fixed amount payable on a monthly basis, as well as quarterly and yearly performance bonuses.

The Directors receive compensa-tion for service as directors in accordance with the Regulation on the Board of Directors ap-proved by the general sharehold-ers meeting on June 26, 2011. According to this regulation, the Directors receive quarterly and annual compensation. Quarterly compensation for each Director is equal to RUB 1.5 million and can be decreased by 10% (in case of non-participation in up to 25% of meetings), 30% (in case of non-participation in more than 25% but fewer than 50% of meetings) and 100% (in case of non-participation in more than 50% of meetings). An-nual compensation of all Directors is approved by the general share-holders meeting as a percentage of the Company’s OIBDA determined on the basis of RAS accounts for the next reporting financial year, and in any case shall not exceed 0.13%. Annual compensation can be decreased by 50% if the Direc-tor participated in less than 50% of meetings. Also according to the

Regulation, we shall reimburse the Directors’ expenses incurred in connection with their functions as directors.

The Company’s service contracts with members of the Manage-ment Board do not provide spe-cial benefits upon termination of employment, other than common compensation prescribed by the Russian Labour Code which varies from two to three monthly sala-ries. The Company does not cur-rently have service contracts with the Directors.

Management incentives

The Group is committed to re-cruiting and retaining highly skilled personnel. To this end, the Company offers members of the Management Board and other selected employees performance linked and other incentives. These incentives are designed to moti-vate and award the Company’s key personnel for achieving long-term corporate financial and operational performance goals and maximiz-ing shareholder value. Long-term incentives also serve to encourage retention of the Company’s key personnel.

BonusIn July 2009, we adopted an in-ternal regulation on cash bonus award which replaced the similar regulation that came into effect in December 2008. The current cash bonus award program is designed for all our employees and provides for quarterly and annual individual performance-based compensations depending on the relevant perfor-mance targets.

Share OptionsOn May 28, 2010, the Board of Direc-tors approved a long-term employee incentive share option program gov-erned by Russian law (the “Incentive Program”). The Incentive Program regulates the general procedures and sets forth the key incentive



principles for the employees of the Company to facilitate the realization of the Company’s strategy to create an integrated telecom operator rendering a full range of services to individuals, corporate clients, government agencies and network carriers in Russia and further to accomplish business objectives on a regular basis in the long run. The effective date of the Incentive Program is May 28, 2010.

The Incentive Program is aimed at attracting and retaining the key employees, encouraging sustained development of the Group and also targets certain long-term objec-tives.

The Incentive Program seeks to accomplish the following tasks:• to ensure competitive conditions

to retain key employees; • to increase the loyalty of and

provide incentives for the key employees for long-term and efficient work during both the Reorganisation period and the Company’s operations thereafter;

• to combine the interests of the Company’s shareholders and our key employees;

• to draw the attention of our key employees to increasing the value of the Shares; and

• to encourage our key employees to increase the performance of the Company and the value of the Shares.

The following of the key employees of the Company are participants of the Incentive Program: our Presi-dent, members of the Management Board, deputy presidents, heads of the Company’s branches and other key managers of the Com-pany (specialists who have shown remarkable results and who are invited into the Phase II Program at the discretion of the President).

The operator of the Incentive Program is CJSC Gazprombank Asset Management. When partici-pants enter the Incentive Program,

CJSC Gazprombank Asset Manage-ment and the participants of the Incentive Program enter into sale and purchase agreements with re-spect to the ordinary shares which, among others, provide for the pay-ment for the ordinary shares by the participants on a deferred basis at the price of RUB 96.80 per ordinary share. Each participant must make an advance payment of RUB 30,000 to the operator of the Incentive Program.

The term of the Incentive Program is 2.5 years and the share options shall be exercised as follows:• 60% shall be exercised by the

participant in 1.5 years from the effective date of the Incentive Program; and

• 40% shall be exercised by the participant in 2.5 years from the effective date of the Incentive Program.

As of December 31, 2011, 80,904,349 ordinary shares have been allocated to the Incentive Program, which constitute 2.7% of all ordinary shares and 2.5% of all Shares.

On June 9, 2011, the Board of Directors approved an amendment to the Incentive Program, which adds the Phase II RUB 3.5 billion employee share option program (the “Phase II Program”) to the Incentive Program. For purposes of the Phase II Program, the Company will allocate 39,554,794 preferred shares, which constitute 16.3% of all preferred shares and 1.2% of all shares. The effective date of the Phase II Program is June 9, 2011.

The participants of the Phase II Program are members of the Board of Directors and key manag-ers (specialists who have shown remarkable results and who are invited into the Phase II Program at the discretion of the President).

The operator of the Phase II Program is CJSC Gazprombank

Asset Management. When partici-pants enter the Phase II Program, CJSC Gazprombank Asset Manage-ment and the participants of the Phase II Program enter into sale and purchase agreements with respect to the Preferred Shares which, among others, provide for the payment for the Preferred Shares by the participants on a deferred basis at the price of RUB 87.6 per Preferred Share. Each participant must make an advance payment of RUB 30,000 to the operator of the Phase II Program.

The term of the Phase II Program is 2 years and the share options shall be exercised as follows:• 50% shall be exercised by the

participant in 1 year from the effective date of the Phase II Program; and

• 50% shall be exercised by the par-ticipant in 2 years from the effec-tive date of the Phase II Program.

Other benefits

Members of the Management Board have the benefit of the medi-cal insurance the cost of which is reimbursed by the Company. In ad-dition, the Directors and members of our Management Board have the benefit of the D&O insurance pro-vided by LLC Insurance Company Soglasie.

DiviDenD pOliCy

Pursuant to the Joint Stock Com-panies Law, our charter and the dividend policy, dividends on shares may be paid based on the results of our first three, six or nine months of our fiscal year and/or based on our annual results. Declaring and paying dividends on the ordinary shares is our right, but not an obli-gation, while declaring and paying dividends in respect of the pre-ferred shares is our obligation, and the amount of and procedure for paying dividends on the preferred shares are set forth in our charter.



Annual dividends are proposed by the Board of Directors, based on the year-end statutory account-ing reports prepared in accord-ance with IFRS (in case of ordinary shares) and RAS (in case of Pre-ferred Shares), and are approved by our annual shareholders’ meeting, which is usually convened by the Board of Directors during the sec-ond quarter of each year. The right to receive dividends is attributable only to shareholders included in the list of persons entitled to receive dividends, which is compiled as of the record date for shareholders eligible to participate in our general shareholders’ meeting at which the decision on the relevant dividend payment is to be made.

The following table sets forth, on the per share basis, dividends which we paid on our ordinary shares and preferred shares for the years ended December 31, 2011, 2010 and 2009, and the nine months ended September 30, 2010, as discussed in note 16 to the Audited and Consolidated Financial Statements.

The Board of Directors recom-mended that the AGM approves to pay a dividend for 2011 that amounts to RUB 14,961.559 mil-lion or 45.95% of 2011 net profit in accordance with RAS, which equals 32.48% of 2011 net profit as determined in accordance with International Financial Reporting Standards (“IFRS”), including: • a 2011 cash dividend of

RUB 4.6959 per share on the Com-pany’s Class A preferred shares, which represents 3.5% of 2011 net profit under RAS or 2.48% of 2011

net profit under IFRS on all Class A preferred shares;

• a 2011 cash dividend of RUB 4.6959 per share on the Company’s ordinary shares, which is equivalent to 42.45% of 2011 net profit under RAS or 30% of 2011 net profit under IFRS on all ordinary shares.

In addition, for the years ended De-cember 31, 2010 and 2009, the IRCs also paid dividends in the aggregate amounts of RUB 4,036 million and RUB 3,484 million on their ordinary shares, respectively, and in the ag-gregate amounts of RUB 2,344 mil-lion and RUB 2,275 million on their preferred shares, respectively.

Under Russian law, dividends payable to shareholders may not exceed the amount proposed by the board of directors. The decision on the payment of dividends, as well as the amount and form of the dividend payable, is adopted by the shareholders’ meeting.

Dividends payable on the preferred shares are fixed by our charter in the amount of 10% of our net profits, based on the year-end RAS statu-tory accounting report, divided by the number of shares representing 25% of our outstanding shares. We may not pay dividends on ordinary shares unless dividends on pre-ferred shares are paid in full. In addition, if the dividend per ordinary share exceeds the dividend payable per preferred share, our meet-ing must increase the dividend per preferred share to that per ordinary share. Failure to pay a dividend on preferred shares in full authorises holders of the preferred shares to

vote on all matters considered by our general shareholders’ meet-ing until the date when dividends on preferred shares are paid in full. The total amount of dividends paid by us on the preferred shares for the years ended December 31, 2011, 2010 and 2009 represented approximately 3.5%, 12.6% and ap-proximately 10.0% of our annual net profits under RAS, respectively.

Under our dividend policy approved by the Board of Directors adopted in September 2010, dividends payable on ordinary shares had to amount to at least 20% of our net profit for the past fiscal year, based on the year-end RAS statu-tory accounting report, divided by the total number of outstanding ordinary shares. The total amount of dividends paid by us on the ordinary shares for the years ended December 31, 2011, 2010 and 2009 represented approximately 42.5%, 23.4% and approximately 20.0% of our annual net profits under RAS, respectively. In December 2011, this policy was revised to require that dividends payable on ordinary shares must be equal to at least 20% of our net profit for the past fiscal year based on the year-end IFRS financial statements.

Our annual dividend, if declared, must be paid within sixty days following the date the decision on dividend payments was made at our general shareholders’ meeting.

We anticipate that any dividends we may pay in the future with respect to the shares represented by the DRs will be declared and paid to the Depositary in roubles and will

Dividend History

year ended December 31 nine months ended September 302011¹(rUB)

2010(rUB)

2009(rUB)

2010(rUB)

Dividend per Preferred Share 4.6959 0.4344 2.1005 1.6667Dividend per Ordinary Share 4.6959 — 1.4002 1.1113

1 Subject to AGM approval on June 14, 2012



be converted into US dollars by the Depositary and distributed to holders of the DRs, net of the Depositary’s fees and expenses. Accordingly, the value of dividends received by holders of the DRs will be subject to fluctuations in the exchange rate between the rouble and the US dollar. In addition, divi-dends that we may distribute to the Depositary will be subject to appli-cable Russian withholding taxes.

ShArehOlDerS & ShAre CApiTAl

principal shareholders

The Company’s share capital is RUB 7,965,224.3450, consisting of 2,943,258,269 ordinary shares and 242,831,469 preferred shares. We neither have convertible securities, nor exchangeable securities, nor securities with warrants.

The following table sets out certain information with respect to the ownership of our ordinary shares by each shareholder.

The Company is indirectly con-trolled by the Russian Govern-ment, which holds 53.2% of the Company’s ordinary shares through Svyazinvest, VEB and Federal Agency for State Property Management (FASPM). There are no measures in place to ensure that such control is not abused.

Russian law, including the Joint Stock Companies Law and cor-porate governance requirements applicable to companies listed on Russian stock exchanges, provide certain protections to minority shareholders. For instance, there are supermajority shareholder approval requirements for cer-tain corporate actions, pursuant to which a shareholder is able to demand that the company pur-chase the shares held by that shareholder if the shareholder voted against or did not partici-pate in voting on certain types of actions. In addition, companies are required to obtain the approval of disinterested shareholders for certain transactions with inter-

ested parties and the sharehold-ers owning not less than 1% of the company’s stock may bring an action for damages caused by the company’s managers or directors. Furthermore, since our Shares are listed on MICEX-RTS, we are and expect to continue to be required to comply with a number of corpo-rate governance standards which provide additional protection to its shareholders, including minority shareholders. However, no assur-ance can be given that the applica-ble Russian laws and the corpo-rate governance standards with which we have to comply will be able to fully protect the interests of our minority shareholders if such interests are in conflict with the interests of its other shareholders.

None of the Company’s share-holders have voting rights differ-ent from any other holders of the Shares.

Each shareholder of the Company has an obligation under Russian law to notify in writing the Company

Ownership of ordinary shares by each shareholder as at April 30, 2012

Shareholder Ordinary Shares

number %

Svyazinvest1, 2 1,276,624,469 43.37FASPM1, 2 218,620,597 7.43LLC MOBITEL3 192,719,452 6.55VEB1 72,013,105 2.45

Other minorities4 1,183,301,243 40.20Total 2,943,258,269 100.00

Ownership of preferred shares by each shareholder as at April 30, 2012

Shareholder preferred Shares

number %

LLC MOBITEL 30,487,109 12.55Other minorities 212,344,360 87.45Total 242,831,469 100.00

1 Controlled by the Russian Government2 Holds an interest in the share capital in the Company notifiable to the Company and the FSFM, as described below3 The Company owns 99.9% of the share capital of LLC MOBITEL4 Including stock option program



and the FSFM about (i) an acquisi-tion of 5% or more of the ordinary shares, and (ii) any circumstances which result in a change in the number of such shares above/be-low the 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% or 95% threshold. Pursuant to the FSFM regulation such notice shall be given within ten days after the shareholder became or should have become aware of (i) the acquisition or disposal of such shares, or (ii) if such acquisition or change results from additional share issuance, after the date the shareholder became or should have become aware of the state registra-tion of the report on the results of such additional share issuance.

Description of share capital

GeneralPursuant to our charter, we have the right to issue ordinary shares, preferred shares and other securi-ties provided for by the legislation of the Russian Federation with respect to securities.

Our charter capital is currently RUB 7,965,224.3450 and consists of 2,943,258,269 ordinary shares and 242,831,469 preferred shares, all of which are fully paid, issued and outstanding and have a nominal value of RUB 0.0025 each. All of our shares have been issued and registered in accordance with procedures set out in the Federal Law № 39-FZ “On the Securities Markets” of April 22, 1996 (the “Securities Market law”), and other applicable securities regula-tions. The ordinary shares and the Preferred Shares are in regis-tered, book-entry form. The entity responsible for keeping book-entry records is OJSC United Registra-tion Company (Leninskaya Sloboda Street 19, Moscow, Russia). We are also authorized to issue additional 3,685,438,051 ordinary shares and 531 preferred shares, all such shares having a nominal value of RUB 0.0025. Under Russian legisla-tion, charter capital refers to the aggregate nominal value of the is-

sued and outstanding shares. As of December 31, 2011, 80,904,349 of the ordinary shares and 34,477,106 of the preferred shares are sub-ject to the Incentive Programme providing for our employee’s op-tions in respect of these shares. MOBITEL held 6.6% of the ordinary shares and 12.6% of our preferred shares acquired by us, the IRCs and Dagsvyazinform as a result of the statutory share buy-out procedures during Reorganisation and then contributed to MOBITEL. The Joint Stock Companies Law requires us to dispose of any of our shares that we acquire within one year of our acquisition or, failing that, reduce our charter capital.

In accordance with the Joint Stock Companies Law and our charter, a decision on any is-suance of shares or securities convertible into shares by closed subscription, or an issuance by open subscription of ordinary shares or securities convertible into ordinary shares constituting more than 25% of the number of issued ordinary shares, requires a three quarters majority vote of a shareholders’ meeting. The Board of Directors is authorized to issue additional ordinary shares up to 25% of the previously issued shares through open subscription without obtaining further share-holder approval.

The amount of our charter capital significantly exceeds the minimum requirement established by the laws of the Russian Federation for open joint stock companies. If we adopt a decision to decrease our charter capital in accordance with the Joint Stock Companies Law, we must notify the authority which carries out state registra-tion of legal entities of the decision the decision to reduce our charter capital within three business days and we must publish this decision twice with a monthly interval be-tween publications. Within 30 days of the last of such publications, our creditors, whose claim rights

had occurred prior to the publica-tion, would then have the right to accelerate our indebtedness and to demand reimbursement of ap-plicable damages.

Our ordinary shares are listed on quotation list “A1” of MICEX-RTS under the ticker “RTKM”. Our Pre-ferred Shares are listed on quota-tion list “A1” of MICEX-RTS under the ticker “RTKMP”. Our ADRs are also traded over-the-counter in the United States on the OTCQX under the ticker “ROSYY”.

Rights of shareholdersShares of each category (ordinary shares and preferred shares) grant equal rights to holders of shares of each respective category.

Ordinary sharesAs required by the Joint Stock Companies Law and the Com-pany’s charter, all ordinary shares grant identical rights to each holder. Each fully paid ordinary share, except for certain circum-stances expressly provided for by law (e.g. when a shareholder ac-quires shares in excess of certain threshold and is required to make a mandatory offer to purchase shares of other shareholders), gives its holder the right to:• transfer such ordinary share

freely without the consent of other shareholders;

• participate in the Company’s management as provided by the Joint Stock Companies Law and the Company’s charter;

• participate in the general share-holders’ meeting with the right to vote on all matters within the shareholders’ competence, in-cluding through a representative acting on the basis of a power of attorney;

• receive dividends in accordance with the Joint Stock Companies Law and the Company’s char-ter if the general shareholders’ meeting resolves to pay such dividends (always subject to the Board of Directors’ recommen-dation);



• upon the Company’s liquidation, receive a proportionate amount of the Company’s property after the Company’s liabilities are discharged;

• demand repurchase of all or some of the shares owned by such holder if the holder votes against or does not participate in voting on the decision of the shareholders meeting approving any of the following:– any reorganisation;– entering into a major transac-

tion, as defined by the Joint Stock Companies Law; and

– amendment of the Com-pany’s charter or approval of a new addition to the Company’s charter that limit shareholder’s rights;

• exercise statutory pre-emption rights to acquire our ordinary shares in accordance with ap-plicable Russian law;

• have access to certain of the Company’s documents, receive copies for a reasonable fee and, if holding alone or with other shareholders 25% or more of the voting shares, have free access to accounting documents;

• if holding, solely or with other holders, 1% or more of the vot-ing shares, file a lawsuit against a Director or member of any of our executive bodies (including the chief executive officer) to reimburse damages suffered by us due to their fault;

• if holding, solely or jointly with other shareholders, not less than 1% of the Company’s voting shares, obtain a list of persons entitled to participate in the gen-eral shareholders’ meeting;

• if holding, solely or jointly with other shareholders, not less than 2% of the Company’s voting shares, may, not later than 60 days after the end of the relevant financial year, propose matters for the agenda of the annual shareholders’ meeting and nom-inate candidates to the Board of Directors, the Audit commission, the ballot committee and a can-didate for the President;

• if holding, solely or jointly with other shareholders, not less than 10% of the Company’s voting shares, demand that the Board of Directors call an extraordinary general meeting of shareholders or an unscheduled audit of the Company by the Audit Commis-sion or an independent auditor; and

• exercise other rights of a share-holder provided by the Company’s charter, under Russian law or by decisions of a general sharehold-er’s meeting.

Preferred Shares (or type “A” pre-ferred shares)Our preferred shares generally confer on their holders the follow-ing principal rights:• to receive a fixed dividend, except

in certain cases envisaged by the Joint Stock Companies Law and our charter; and

• to enjoy preference over ordi-nary shares in any distribution of profits and any proceeds from our liquidation.

While there are no limits on ad-mission of shareholders to share-holders’ meetings, in accordance with our charter and the Joint Stock Companies Law, only hold-ers of our ordinary shares have the right to vote on any matter within the competence of the meeting. The preferred shares confer no voting rights unless our charter and the Joint Stock Companies Law provide otherwise. Holders of preferred shares are entitled to vote on:• the adoption of amendments to

the charter that would adversely affect their rights as preferred shareholders, including the issu-ance of any other type of pre-ferred shares that would enjoy a priority in right of payment of dividend, a preference in respect of liquidation value over the preferred shares, amendments to the formula for calculating dividends and/or the liquidation value attached to the Preferred Shares; or

• our reorganization or liquidation.

They may also vote at shareholders’ meetings following the sharehold-ers’ meeting at which a decision was adopted not to pay dividends on preferred shares or to pay them only in part. Such right to vote con-tinues until the dividends to which the holders of preferred shares are entitled are paid in full.

Holders of ordinary shares and preferred shares may:• freely transfer the shares with-

out the consent of other share-holders;

• participate in the distribution of our net profits (as reported un-der RAS) in the form of dividends (see “Dividend Policy”) and in the distribution of our assets in the event of liquidation;

• enjoy the right of first refusal in respect of additional shares be-ing placed by us through an open subscription and, in certain cir-cumstances, by way of a closed subscription; and

• have access to certain company documents, receive copies for a reasonable fee and, if holding alone or with other holders, 25% or more of the voting stock, have access to accounting documents and minutes of the management board meetings.

Our shareholders may also exer-cise other rights provided by Rus-sian law and our charter.



CORPORATE SOCIAL RESPONSIBILITY

MAnAGeMenT OF ChAriTABle AnD SOCiAlly reSpOnSiBle ACTiviTieS

In 2011, Rostelecom developed a unified external social policy and a number of other documents that govern the charitable activities of the united Company. The policy was approved by the Board of Directors and implemented by Rostelecom itself and by our subsidiaries.

The external social policy defines the Company’s principles, pri-orities and main activities in the field of social projects and pro-grammes. It is not only a tool for managing Rostelecom’s reputa-tion, but also the means whereby we deal with social factors that affect the sustainable develop-ment of the Company and address important social issues.

As part of the implementation of its external social policy, Rostelecom manages programmes focusing on education, sport, care in the commu-nity, ecology and spiritual heritage.

OUr eDUCATiOn prOGrAMMe

Supporting professional education

In 2011, Rostelecom supported various universities and profession-al colleges, such as the Moscow Technical University of Communi-cations and Informatics, the Bonch-Burevich Saint-Petersburg State University of Telecommunications, the Siberian State University of Telecommunications and Informa-tion Sciences (SIBSUTIS) and the SIBSUTIS College of Telecommuni-cations and Information Sciences.

Professional education support mainly encompasses improving the

facilities and equipment within ed-ucational establishments, providing support for students’ projects and clubs, offering scholarships and setting up internship programmes for students within Rostelecom.

new technologies in education and children’s art centres

In February 2011, as part of the IV International Winter Arts Festival in Sochi, Rostelecom organised a unique workshop for young musi-cians with Yuri Bashmet, People’s Artist of Russia and a world-famous viola player and a conductor. This took place in four Russian cities - Sochi, Yaroslavl, Perm and Novo-kuibyshevsk in the Samara region.

The Company also organised a multi-channel video conference to connect Sochi Organ and Chamber Music Hall with concert halls in the four cit-ies by setting up modern video con-ferencing systems. As a result, young musicians and their teachers had a unique opportunity to attend a lesson given by the great maestro and to ask him questions in real time about the secrets of his viola technique.

In May 2011, Rostelecom organ-ised a webcast of the “Art, Youth and Talent” Competition at the 10th Youth Delphic Games in Rus-sia. For the first time in the history of the Games, all Internet users were able to take part, not only the spectators and guests who attended. On its website, Rostele-com organised the live broadcast of various events from 12 different sites during the entire period of the Games.

Generation On-line

Generation On-line remains one of Rostelecom’s most ambitious social

projects. It is an extensive pro-gramme to improve the computer literacy of elderly people in Russia.

Participants in the programme’s learn the basics of personal com-puters, obtain the skills to search for information on the Internet and learn to use personal emails. They also learn how to use popular applications for communicating on-line, such as ICQ and Skype, social networking and much more.

In 2011 Rostelecom added an ad-ditional module to the programme, which includes teaching elderly people how to use the government portal www.gosuslugi.ru in order to obtain the government services they need via the Internet.

youth Olympic Games and competitions

As well as providing support to a number of educational estab-lishments, Rostelecom supports various competitions in the re-gions which aim to develop pupils’ and students’ interest in creative aspects of computer science, and also to involve them in using in-ternet technologies and computer graphics.

An example of this was Rostele-com’s support for the “Volga IT – 2011” students’ IT competition, which was held in the Volga region.

OUr SpOrT prOGrAMMe

Social initiatives in partnership with the Sochi 2014 Organising Committee

Rostelecom has been the General Partner of the XXII Olympics Winter Games in Sochi since the beginning of 2009, participating on



the basis of the “Olympic Games for Everyone!” principle.

The Company has taken part in a number of social initiatives, organ-ised by the Sochi 2014 Organising Committee, that promote Olympic values in the Russian regions.

1,000 days prior to the start of the Olympics, Rostelecom co-operated with the Sochi 2014 Organising Com-mittee to organise competitions for young sportsmen under the slogan “1,000 days before the Olympics – 1,000 days before the fun starts!”, which were held in 42 cities across Russia. Olympic athletes, medallists and competition winners in various sports took part in the programme, and many local residents were able to attend these competitions and support the participants.

At the beginning of the new aca-demic year 2011–2012, the Com-pany held a series of educational events called “Olympic Knowledge Day”. Around 5,000 students and pupils from schools, residential schools and orphanages that are sponsored by Rostelecom in over 60 Russian cities took part.

The key objective of Olympic Knowl-edge Day was to introduce young people to the Olympic movement, promote a healthy lifestyle, and to help teach children with disabilities and socially disadvantaged adoles-cents to socialise.

Cooperating with the Figure Skating Federation of russia

Rostelecom has been the Gen-eral Partner of the Figure Skating Federation of Russia (FSFR) since 2009. Every year, the Company provides financial assistance that enables the Federation’s competi-tions to be organised and held and Russian national team athletes to be trained for the Olympic Games, European Championships, World Championships and various other competitions, including the final stage of the ISU Grand Prix.

In December 2011, as part of the World Figure Skating Champion-ship in Saransk, Rostelecom and the FSFR launched a joint pro-gramme called Rostelecom’s Star Track master classes. In 2012, as part of this programme, Rostele-com will organise events in big cities across Russia. The project is designed to find young talented sportsmen and sportswomen in the Russian regions. Famous athletes will share their professional skills with young figure skaters during master classes, and young sports-men and sportswomen will have a unique opportunity to demonstrate their talents and skills to well-known coaches.

OUr CAre prOGrAMMe

Assisting child care centres

Rostelecom takes an active part in assisting a number of social institutions, such as hospitals and orphanages. The Company purchases medical equipment, pays for urgent medical operations, allocates funds for the refurbishment of buildings and purchase of essential supplies, we help organise festive events for children from orphanages, meetings with professional psychologists and we provide communications channels for children’s distance learning.

The Company assists institutions that have applied just once and it also provides help on an ongoing basis. Many of these establish-ments are supported by macro-re-gional subsidiaries of Rostelecom.

new opportunities for children with disabilities

Rostelecom traditionally tries to help people, particularly children, with disabilities to integrate them in the best way possible into soci-ety. Rostelecom’s corporate centre as well as its macro-regional sub-sidiaries have been implementing a programme of distance learning for

disabled children at home and also in specialised institutions. Thus in 2011, as part of this programme, Rostelecom provided many children with special needs with unlimited access to the Internet while also delivering and installing all the equipment necessary to take them on-line.

efforts to combat the spread of illegal drugs

In 2011, Rostelecom took part in a number of public events to raise awareness about drug abuse and illicit trafficking in Russia. Rostele-com organised a videoconference to bring together Moscow and Irkutsk as part of the State Council Pre-sidium meeting on combating il-legal drugs use. The Company also held a videoconference between St. Petersburg – Vienna – Perm, as part of the international TV project “The Right to Live”, initiated by the United Nations to fight illegal drugs and crime.

Supporting veterans

The day before Victory Day, Ros-telecom and its subsidiary Zebra Telecom held a traditional meeting with the Russian Committee of War and Military Service Veterans. In 2011, companies presented veter-ans with Zebra Telecom multi-pur-pose cards, which allowed them to make free long-distance calls from their landline and also from mobile phones. As part of the Victory Day celebration, Rostelecom also or-ganised a multi-channel videocon-ference “Generations relay race” to connect veterans of the Great Patriotic War, soldiers and Mos-cow cadets with their colleagues, friends and compatriots from CIS countries, such as Belarus, Ukraine, Moldova and Kazakhstan.

Rostelecom also organised a number of other multi-channel videoconferences for Great Patri-otic War participants to celebrate the 66th anniversary of the lifting of the siege of Leningrad, the 67th



anniversary of the victory in the Battle of Stalingrad and the 65th anniversary of Japan’s surrender in World War II.

Our EcOlOgy prOgrammE

conserving ecosystems

Rostelecom seeks to eliminate any negative impact from its operations on the environment. Telecom infra-structure does not itself produce harmful emissions and industrial waste but the construction of new sites can have short-term damage on the natural world. Therefore, when the building of telecoms infrastructure begins, Rostelecom institutes a number of preventative measures to reduce environmen-tal risks, preserve soil and water reservoirs, and carry out manda-tory biological and technical land reclamation. In addition, Company’s volunteers take part in federal and regional promotions, “ecological landings”, to boost commitment to environmental protection and the removal of waste.

Our Spiritual HEritagE prOgrammE

Supporting the nation’s art

From 2008, Rostelecom’s repre-sentatives have become members of the Board of Trustees of the State Academic Bolshoi Theatre of Russia. The Board’s priority is to attract financial means from the private sector, to assist the Bolshoi Theatre to present new produc-tions, to organise tours, to recruit stars and talented young soloists, and likewise to provide assistance in improving the Theatre’s man-agement and finance systems and the day-to-day running of the Theatre.

Now, thanks to Rostelecom, thou-sands of spectators in Moscow can enjoy the talents of exceptional masters and novice dancers of the world famous school of Russian ballet, who perform on the his-

toric stage of the Bolshoi Theatre, recently re-opened in 2011 after a long period of reconstruction.

In 2011, Rostelecom provided sig-nificant support to the XIV Inter-national Tchaikovsky Competition that was held in Moscow and St. Petersburg. During a three-week period, Rostelecom organised an unprecedented global webcast of the competition and performances from seven concert venues were streamlined in real time. A Content Delivery Network and an innovative platform were used by Rostele-com to distribute content to end users around the world to secure high-levels of availability and high performance streaming.

Rostelecom also organised a web-cast for the Sochi Winter Interna-tional Arts Festival. Yuri Bashmet is the Festival’s Artistic Director, and the Company also streamed the webcast of productions of the Mos-cow theatre’s New Opera named after E. Kolobov.

Supporting industry museums

Rostelecom has been cooperating with the Russian Fund for the His-tory of Communications, the annual programme of which includes supporting the A. S. Popov Central Museum of Communications devel-opment in St. Petersburg.

The museum is one of the oldest science and technology museums in the world. The museum’s unique collection, devoted to the history of communications development, contains authentic objects relating to the history of post, telegraph and telephone, radio and broadcasting, mobile, space communications and all modern means of telecommu-nication. In 2011, Rostelecom made donations to develop the museum’s exhibits.

Rostelecom macro-regional sub-sidiaries also provide annual sup-port to regional communications

museums, which are either funded by these subsidiaries or were founded by enthusiasts at their own expense. The Company organises tours around museums, carries out scientific research and constantly updates museums’ collections.

reviving spiritual traditions

Rostelecom traditionally pro-vides support to Russian Ortho-dox Churches across Russia and abroad.

On September 21, 2011, as part of the project “Seven Temples in Seven Cities in a Day”, Rostelecom organised a live webcast to stream-line the construction of wooden temples, which were built within one day. The webcast was held from seven large Russian cities, which included Tver, Kaliningrad, Ufa, Sochi, Yekaterinburg, Irkutsk and Yuzhno-Sakhalinsk, and was available on Rostelecom’s website.

In November 2011, Rostelecom, as the largest Russian high-tech company, provided technological support and a wide range of multi-media services to organisers of the “Orthodox Rus” exhibition, which was opened in Moscow on the Day of People’s Unity and devoted to the 20th anniversary of the revival of the Russian Orthodox Church.



RISK MANAGEMENT

riSk FACTOrS

An investment in our shares and DRs involves risks, including:

risks relating to our business

• we face increasing competition in all segments of the Russian telecommunications market;

• we may not be able to success-fully develop and/or deploy fourth generation wireless ser-vices in Russia;

• changes in the regulation of Rus-sian telecommunication markets may materially adversely affect our business;

• if the demand for certain tel-ecommunications services that we offer or are developing and promoting does not increase, our ability to achieve further revenue growth from these services will be limited;

• significant delays in the col-lection of receivables and the inability to collect payments for various telecommunications ser-vices provided to our customers may result in losses and could materially adversely affect our business;

• continuing rapid changes in technologies could increase competition and/or require us to make substantial investments which may be ineffective;

• our inability to obtain equipment, software and other network components and related services in a timely manner and at mar-ket prices could have a material adverse effect on our business;

• we depend on the reliability of our networks;

• if the calculation of our tax liabil-ity and certain initiatives we have used to reduce our tax burden are successfully challenged by

Russian tax authorities, we will face significant losses;

• our existing arrangements with trade unions may not be renew-able on terms favourable to us;

• insurance coverage under our insurance agreements may be insufficient to compensate us for losses incurred;

• transactions and/or the transac-tions of members of our Group and their predecessors-in-interest could be challenged on the basis of non-compliance with applicable legal requirements;

• our minority shareholders or the minority shareholders of our subsidiaries may success-fully challenge past or future interested party transactions, or fail to approve interested party transactions or other matters in the future;

• a finding by the FAS that we have acted in contravention of Russian antimonopoly legislation could have a material adverse effect on our business;

• we are subject to the regulation and control of the FST and the FAS;

• we are subject to anti-corruption laws in the jurisdictions in which we operate;

• failure to renew our telecom-munication licenses and radio frequency permits, comply with the terms thereof or receive renewed telecommunication licenses and radio frequency permits with similar terms to our existing licenses and permits could have a material adverse effect on our business;

• our intellectual property rights are costly and difficult to protect;

• leaks of confidential information, including information relating to our subscribers, may negatively impact our reputation and our brand image;

• a part of our fixed-line infra-structure is outdated, and we may be required to make signifi-cant investments beyond those that are currently planned to modernize it;

• if we are unable to maintain our favourable brand image, we may be unable to attract new custom-ers and retain existing custom-ers, leading to loss of market share and revenues;

• social projects that we implement may put pressure on our margins;

• alleged medical risks of cellular technology may subject us to negative publicity or litigation, decrease our access to base sta-tion sites, diminish subscriber usage and hinder access to ad-ditional financing;

• systems failures, delays and fail-ure to optimise our information technology systems could materi-ally adversely affect our business, financial condition, results of operations or prospects or the value of the Shares and DRs;

• we may be forced to repay the indebtedness of our subsidiary CJSC GlobalTel owed by it to Loral Space and Communica-tions Corporation and we may not be able to recover the debt of GlobalTel owed to us;

• we could be materially adversely affected if lenders accelerate our debt due to any failure to comply with loan agreements.

risks relating to the reorganisation

• the merger of the IRCs and Dagsvyazinform into the Com-pany may be challenged by our shareholders and the former shareholders of the IRCs as well as Russian state authorities;

• we may have difficulty integrat-ing the assets of the IRCs and



Dagsvyazinform that have been acquired by us as a result of the Reorganisation;

• we cannot be certain that the an-ticipated positive synergy effects of the Reorganization will materi-alise or reach expected levels;

• following the Reorganisation, we may face significant tax liabilities as a legal successor to the IRCs;

• a finding by the FAS that we have acted in contravention of Russian antimonopoly legislation in con-nection with the Reorganisation could have a material adverse effect on our business.

risks relating to our strategy

• the assumptions underlying our growth strategy may prove to be incorrect;

• we may acquire, invest in or merge with other companies to expand our operations which may pose risks to our business;

• we may have difficulty integrat-ing the assets and companies that we have acquired and we may not realize the anticipated benefits from our acquisitions and business combinations;

• the failure of our geographic expansion strategy could hamper our continued growth and profit-ability and could have a material adverse effect on our business;

• we may not be able to secure sufficient financing to fund our acquisition strategy and capital expenditure plans.

risks relating to our financial condition

• servicing and refinancing our indebtedness;

• fluctuations in the value of the rouble against the US dollar and the euro;

• inflation.

Additional risks relating to our business

• salary increases in Russia;• dependence on our senior man-

agement’s experience and exper-

tise and our ability to recruit and retain qualified personnel;

• legal uncertainties relating to pri-vatisation of our shares and assets;

• failure to fulfil our obligations to state authorities;

• our beneficial controlling share-holder may have interests that conflict with the interests of our other shareholders;

• failure to comply with the re-quirements of Russian customs authorities;

• failure to comply with existing laws and regulations or to obtain all approvals, authorizations and permits required to operate our telecommunications equipment;

• it may be difficult to ascertain the validity and enforceability of title to land in Russia and the extent to which it is encumbered.

political risks

• political and governmental insta-bility;

• the reversal of reform policies or government policies targeted at specific individuals or companies could have an adverse effect on our business, as well as invest-ments in Russia more generally;

• deterioration of Russia’s rela-tions with other countries;

• political and social conflicts or instability could create an uncertain operating environment and adversely affect the value of investments in Russia.

Social risks

• social instability, particularly if caused by worsening economic conditions and turmoil in the Russian financial markets, could lead to labour and social unrest, increased support for renewed centralised authority, nationalism or violence;

• crime, corruption and negative publicity.

economic risks

• emerging markets companies are generally subject to greater

risks than companies operating in more developed markets;

• economic instability in Russia could have an adverse effect on our business;

• the physical infrastructure in Russia is in poor condition;

• weaknesses in the Russian bank-ing sector.

legislative and legal risks

• weaknesses relating to the Rus-sian legal system;

• unlawful, selective or arbitrary government action;

• failure to comply with new per-sonal data protection laws;

• lack of independence and inexperi-ence of the judiciary, the difficulty of enforcing court decisions and gov-ernmental discretion in enforcing claims could prevent us or holders of the DRs from obtaining effective redress in a court proceeding;

• russian companies can be forced into liquidation on the basis of formal non-compliance with cer-tain requirements of Russian law;

• the law relating to Russian corpo-rate governance and control may be applied inconsistently and is difficult to enforce;

• lack of developed corporate and securities laws and regulations in the Russian Federation;

• shareholder rights provisions under Russian law may impose additional costs on us;

• shareholder liability under Rus-sian corporate law could cause us to become liable for the obliga-tions of our subsidiaries;

• russian currency regulation has only recently been liberalised and may remain subject to change;

• russian legislation may not ad-equately protect against expro-priation and nationalisation;

• russia’s unpredictable acknowl-edgement and enforcement of foreign court judgements or arbi-tral awards give rise to significant uncertainties;

• the lack of a central and rigorously regulated share registration system in Russia may result in improper record ownership of the Shares.



risks relating to the Drs and the Trading Market

• DR holders may have limited re-course against us, our Directors and our senior managers;

• we may decide not to pay divi-dends in the future;

• new Russian legislation will re-quire the disclosure of beneficial ownership of the DRs;

• non-russian resident DR holders may not be able to benefit from double tax treaties in relation to Russian withholding taxes on dividends paid via the Depositary;

• resident holders of the DRs may be subject to increased effective rates of tax on dividends due to the lack of clarity in the Russian tax law with respect to beneficial ownership;

• capital gains from the sale of the DRs may be subject to Russian income tax;

• because the Depositary may be considered the beneficial holder of the Shares underlying the DRs, these Shares may be ar-rested or seized in legal pro-ceedings in Russia against the Depositary;

• voting rights with respect to the Shares represented by DRs are limited by the terms of the

Deposit Agreements for the DRs and relevant requirements of Russian law;

• we are not subject to the same takeover protection as a com-pany incorporated in the United Kingdom;

• holders of our DRs may not be able to exercise their pre-emp-tive rights in relation to future issues of Shares;

• the Shares may be de-listed from MICEX-RTS, the FSFM permission for the DR programmes may be revoked and the DR facilities may have to be terminated.

risks relating To Taxation

• our business has a significant exposure to taxation in Russia;

• we are subject to tax audits by Russian tax authorities which may result in additional liabili-ties;

• we may be deemed to receive unjustified tax benefits;

• we may encounter difficulties in recovery of VAT paid to vendors or at customs;

• the Russian transfer pricing rules are vaguely drafted and are subject to varying interpretations by Russian tax authorities and courts.

riSk MAnAGeMenT SySTeM

In order to manage potential risks, the Company has introduced and developed a risk-based approach to conducting business. This ensures that the management of Rost-elecom takes the most effective decisions when circumstances are uncertain, and also is able to form an opinion on business opportuni-ties for the Company.

Each year, the Board of Directors approves a Risk Management Programme. Rostelecom regu-larly updates its risk profiles and develops and monitors its ac-tion plans in order to reduce the occurrence of risk to an accept-able level. The Company always assesses risks associated with the development of operational business solutions and their im-plementation. This may be done during discussions at meetings of the Board of Directors, the BoD’s Audit Committee, the Manage-ment Board, the Internal Control Committee and during working group meetings.



OPERATING & FINANCIAL REVIEW

FUll yeAr 2011 hiGhliGhTS

• Consolidated revenues up 7% year on year to RUB 296.0 billion

• OIBDA up 11% year on year to RUB 117.7 billion with OIBDA margin of 39.8%

• Net income up 47% year on year to RUB 46.1 billion

• Capital expenditure1 of RUB 82.8 billion representing 28% of the consolidated revenues

• Net debt2 of RUB 152.4 billion (net debt / OIBDA of x1.3) as of December 31, 2011

• Total broadband subscriber base up 24% year on year to 8.2 million

• Total Pay-TV subscriber base increased by over six times year on year to 5.9 million

FinAnCiAl SUMMAry

rUB million Fy 2011 Fy 2010 % change, y-o-y

revenue 296,015 275,731 7%OiBDA 117,708 106,036 11% OIBDA margin, % 39.8% 38.5%Operating income 63,668 50,280 27% Operating margin, % 21.5% 18.2%net income 46,071 31,338 47% Net margin, % 15.6% 11.4%Capital expenditures 82,776 51,845 60% % of revenue 28.0% 18.8%net debt 152,363 119,830 27% Net debt/annualized OIBDA 1.3х 1.1х

1 Here and below, capital expenditure (“CAPEX”) comprises cash spent on purchase of property, plant and equipment and intangible assets

2 Here and below, net debt is calculated as the sum of long-term loans and short-term borrowings minus cash and cash equivalents and short-term investments



OperATinG review

Revenue structure by services1


Local telephony services 88,018 85,396 3%Intra-zone telephony services 21,447 23,358 (8%)DLD/ILD telephony services 24,070 27,939 (14%)Interconnection and traffic transit services 20,202 19,703 3%Broadband Internet 46,993 39,215 20%Pay-TV 7,011 1,102 536%Mobile communication services 35,560 33,872 5%Data services (VPN, data centres, wholesale Internet sales) 18,929 17,191 10%Rent of channels 9,756 9,149 7%Other 24,029 18,806 28%Total revenue 296,015 275,731 7%

Revenue structure by customer segments


Residential customers 160,444 154,787 4%Corporate customers 69,774 62,175 12%Governmental customers 34,484 28,445 21%Operators 31,313 30,324 3%Total revenue 296,015 275,731 7%

1 Effective from April 1, 2011, the methodological changes in the revenue structure include the following: 1) revenues from DLD/ILD traffic transit , which were previously included in the “DLD / ILD telephony services” reporting line, are now included in the “Interconnection and traffic transit services” reporting line; 2) revenues from mobile interconnection services, previously included in the “Interconnection and traffic transit services” reporting line, are now presented under “Mobile Communication Services”; 3) other methodological changes have had no significant impact on the reporting structure.

2 Excluding Skylink Group (subsidiary of Svyazinvest)3 Excluding traffic, generated by other telecom operators

The Company generated a 7% year on year increase in revenue for the year to date to RUB 296.0 billion, which reflected:• a 20% year on year growth of revenues from broadband services in line with the growth in subscriber base;• a more than six times growth in revenues from Pay-TV services, primarily due to the consolidation of cable

TV subscribers of newly acquired operators and development of IP TV services in line with the modernization of broadband networks;

• a 28% year on year increase in other revenues, mainly as a result of increased income from lease of infra-structure as well as the Company’s contribution to the electronic government service.

Key operating indicators

number of Subscribers (million): Fy 2011 Fy 2010 % change, y-o-y

Local telephony 28.5 29.4 (3%)Mobile telephony2 12.5 12.0 4%Broadband Internet access incl. 8.2 6.7 24% Residential 7.6 6.1 25% Corporate 0.6 0.6 9%Pay-TV 5.9 0.9 540%Traffic, generated by residential and corporate subscribers3 (billions of minutes)Intra-zone 2.7 3.0 (9%)DLD 1.3 1.6 (15%)ILD 0.1 0.2 (17%)



The broadband and Pay-TV sub-scriber bases continued to grow, both on an organic basis due to the increased penetration of broadband and Pay-TV services among local telephony subscribers, and as a result of the acquisition of telecom operators.

The total broadband subscriber base was up 24% year on year to 8.2 mil-lion, while the total Pay-TV subscrib-er base increased almost by seven times year on year to 5.9 million.

The number of mobile telephony subscribers increased by 4% year on year to 12.5 million. The increase

resulted from the consolidation of the remaining 50% in Volgograd GSM in fourth quarter of 2011. Ros-telecom’s total subscriber base for local telephony services was down 3% year on year. The decrease was mainly due to the ongoing change in customer patterns regarding the use of traditional fixed-line services.

Structure of operating expenses


Personnel costs 74,838 74,417 1%Interconnection charges 40,225 37,374 8%Materials, repairs and maintenance, utilities 27,282 25,072 9%Other operating income (14,638) (14,629) 0%Other operating expenses 50,600 47,461 7%Total 178,307 169,695 5%

Operating expenses, before depre-ciation and amortization expenses, increased by 5% year on year to RUB 178.3 billion for the year to date (including expenses of “NTK” and Volgograd GSM, acquired in 2011). The performance primarily reflected: • a 7% year on year increase in

other expenses due to one-off rebranding campaign and cost related to the promotion of cloud computing solutions and E-Gov-ernment project;

• an 8% year on year increase in in-terconnect charges mainly due to an increase in the share of transit to mobile operators.

The Company reported a 11% increase in OIBDA to RUB 117.7 bil-lion for the year to date, with an OIBDA margin of 39.8%.

Depreciation and amortization expenses decreased by 3% year on year for the year to date to RUB 54.0 billion, primarily due to the reversal of the reserve on Amdocs software in line with the

plans to launch CRM system based on Amdocs and subsequent conver-sion of licenses for billing software into CRM licenses.

Rostelecom’s capital expenditure increased by 60% year on year for the year to date to RUB 82.8 billion. The Company’s capital expenditure primarily comprised the launch of new projects to modernize broad-band networks and IT systems; the launch of new services; and the construction of 3G and data trans-mission networks.

The Company reported an operat-ing profit of RUB 63.7 billion for the year to date, with an operating margin of 21.5%.

The year on year increase in finan-cial expenses reflected the pay-ment of interest on the credit lines which were used to acquire the 25% stake in Svyazinvest and 71.8% in NTK. The Group’s equity partici-pation in the earnings of Svyazin-vest and Bashinformsvyaz totaled RUB 3.4 billion for the year to date.

Profit before taxes increased by 38% year on year for the year to date to RUB 57.0 billion.

The Company’s income tax in-creased 9% year on year for the year to date to RUB 11.0 billion respectively, which reflected an increase in profit before taxes.

Rostelecom’s effective tax rate was 19% for the year to date, which was below the Russian Statutory Income tax rate of 20%, mainly due to certain expenses which were non-taxible, primarily the income from the decrease in long-term social obligations, as well as the reversal on Amdocs and revaluation of Volgograd-GSM.

Net income for the year to date increased by 47% year on year to RUB 46.1 billion. Net income adjusted for the reversal of Amdocs reserve increased by 23% year on year to RUB 42.7 billion for the year to date.



FinAnCiAl review

Net cash generated by operating activities decreased by 0.4% year on year for the year to date and amounted to RUB 84.7 billion.

Cash used in investing activities increased more by 65% year on year for the year to date to RUB 114.4 bil-lion, mainly as a result of the acquisition of 71.8% of NTK and 39.9% of Bashinformsvyaz, as well as purchases of property, plant and equipment.

Cash provided by financing activi-ties for the year to date amounted to RUB 24.3 billion, and primarily comprised loans secured to finance

the acquisition of NTK and Bashin-formsvyaz.

The Group’s total borrowings, including current and non-current obligations, were up 18% during the quarter to RUB 163.5 bil-lion, and comprised loans raised by the companies to acquire the 25% stake in Svyazinvest and the 71.8% stake in NTK, as well as RUB 8.9 billion of bonds. More than 97% of the Group’s total debt was ruble denominated at the end of the year.

The Group’s net debt therefore amounted to RUB 152.4 billion. This was equivalent to 1.3x times OIBDA.

reconciliation of OiBDA

OIBDA is a non-U.S. GAAP and non-IFRS financial measure, which the Company defines as operating income before depreciation and amortization. We believe that OIB-DA provides useful information to investors because it is an indicator of the strength and performance of our business operations, including our ability to finance capital ex-penditures, acquisitions and other investments and our ability to incur and service debt. OIBDA should not be considered in isolation as an alternative to net income, operat-ing income or any other measure of performance under U.S. GAAP or IFRS.


Operating income 63,668 50,280 27%Add: Depreciation and amortization 54,040 55,756 (3%)OiBDA 117,708 106,036 11%OiBDA margin, % 39.8% 38.5%



Independent auditors’ report ..................................................................................................................................... 57

Consolidated statements of financial position .......................................................................................................... 58

Consolidated statements of comprehensive income ................................................................................................ 60

Consolidated statements of cash flows ..................................................................................................................... 62

Consolidated statements of changes in equity ......................................................................................................... 64

Notes to consolidated financial statements .............................................................................................................. 70

OJSC ROSTELECOM CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 and 2011 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

CONTENT



The Board of direcTors and shareholders oJsc rosTelecom

We have audited the accompanying consolidated financial statements of OJSC Rostelecom (the “Company”) and its subsidiaries (the “Group”), which comprise the consolidated statements of financial position as at Decem-ber 31, 2011, 2010 and 2009, and the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

management’s responsibility for the сonsolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from mate-rial misstatement, whether due to fraud or error.

auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the as-sessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s prepara-tion and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presenta-tion of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at December 31, 2011, 2010 and 2009, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

ZAO KPMG April 26, 2012

INDEPENDENT AUDITORS’ REPORT

Zao KPmG 10 Presnenskaya Naberezhnaya Moscow, Russia 123317

Telephone +7 (495) 937 4477 Fax +7 (495) 937 4400/99 Internet www.kpmg.ru

ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europa LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.



notes december 31, 2011

december 31, 2010

december 31, 2009

asseTs

non-current assets

Property, plant and equipment 6 327,971 301,068 293,497

Investment property 259 356 330

Goodwill and other intangible assets 7 68,187 30,209 32,623

Investments in associates 9 33,646 27,517 1,197

Other investments 10 14,616 10,589 4,074

Deferred tax assets 20 775 530 193

Other non-current assets 11 13,820 3,645 5,308

Total non-current assets 459,274 373,914 337,222

current assets

Inventories 12 4,490 4,156 3,789

Trade and other accounts receivable 13 29,377 25,611 22,243

Prepayments 2,409 2,083 2,130

Prepaid income tax 3,304 1,745 1,882

Other investments 10 3,926 5,580 20,622

Cash and cash equivalents 14 7,177 12,627 13,621

Other current assets 15 1,151 1,095 1,671

Total current assets 51,834 52,897 65,958

Total assets 511,108 426,811 403,180

OJSC RostelecomCONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In millions of Russian Roubles)

The accompanying notes are an integral part of these consolidated financial statements.



notes december 31, 2011

december 31, 2010

december 31, 2009

eQUiTY and liaBiliTies

equity attributable to equity holders of the Group

Share capital 16 106 100 100

Additional paid-in capital 33,424 33,424 33,424

Treasury shares (25,143) (25,410) (67)

Retained earnings and other reserves 251,752 204,981 184,026

Total equity attributable to equity holders of the Group 260,139 213,095 217,483

Non-controlling interests 7,787 12 (72)

Total equity 267,926 213,107 217,411

non-current liabilities

Loans and borrowings 17 84,527 87,941 67,092

Employee benefits 19 11,752 16,197 15,578

Deferred tax liabilities 20 18,662 12,281 11,124

Accounts payable, provisions and accrued expenses 18 85 202 44

Other non-current liabilities 3,675 1,574 1,766

Total non-current liabilities 118,701 118,195 95,604

current liabilities

Loans and borrowings 17 78,939 50,096 49,104

Accounts payable, provisions and accrued expenses 18 37,396 38,935 34,960

Income tax payable 242 45 292

Other current liabilities 7,904 6,433 5,809

Total current liabilities 124,481 95,509 90,165

Total liabilities 243,182 213,704 185,769

Total equity and liabilities 511,108 426,811 403,180

These consolidated financial statements were approved by management of OJSC Rostelecom on April 26, 2012 and were signed on its behalf by President:

A.Y. Provotorov

OJSC RostelecomCONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)(In millions of Russian Roubles)




notes Year ended december 31,

2011 2010 2009

revenue 21 296,015 275,731 264,645

operating expenses

Wages, salaries, other benefits and payroll taxes 22 (74,838) (74,417) (66,926)

Depreciation, amortisation and impairment losses 6, 7 (54,040) (55,756) (51,344)

Interconnection charges (40,225) (37,374) (40,502)

Materials, utilities, repairs and maintenance 23 (27,282) (25,072) (24,100)Loss on disposal of property, plant and equipment and intangible assets (287) (933) (1,195)

Bad debt expense 13 (627) (682) (1,068)

Other operating income 24 14,638 14,629 14,252

Other operating expenses 25 (49,686) (45,846) (43,709)

Total operating expenses, net (232,347) (225,451) (214,592)

operating profit 63,668 50,280 50,053

Income from associates 3,439 239 216

Finance costs 26 (12,473) (11,798) (16,452)

Other investing and financial gain 27 2,656 2,745 3,237

Foreign exchange loss, net (265) (87) (2,717)

Profit before income tax 57,025 41,379 34,337

Income tax expense 20 (10,955) (10,041) (8,074)

Profit for the year 46,070 31,338 26,263

other comprehensive income

Revaluation gain on available-for-sale investments 19 198 593Revaluation gain on available-for-sale investments transferred to profit on sale – (1)Income tax relating to revaluation gain on available-for-sale investments (4) (41) (82)

other comprehensive income for the year, net of tax 15 157 510

Total comprehensive income for the year 46,085 31,495 26,773

OJSC RostelecomCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions of Russian Roubles unless otherwise stated)





2011 2010 2009

Profit attributable to:

Equity holders of the Group 46,240 31,418 26,125

Non-controlling interests (170) (80) 138

Total comprehensive income attributable to:

Equity holders of the Group 46,255 31,575 26,635

Non-controlling interests (170) (80) 138

earnings per share attributable to equity holders of the Group – basic (in rUB) 30 15.81 10.14 8.20earnings per share attributable to equity holders of the Group –diluted (in rUB) 30 15.56 10.06 8.20

OJSC RostelecomCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (continued)(In millions of Russian Roubles unless otherwise stated)





2011 2010 2009

cash flows from operating activities

Profit before income tax 57,025 41,379 34,337Adjustments to reconcile profit before tax to cash generatedfrom operations:

Depreciation, amortization and impairment losses 6, 7 54,040 55,756 51,344Loss on sale of property, plant and equipment and intangible assets 287 933 1,195

Bad debt expense 13 627 682 1,068

Income from associates (3,439) (239) (216)Finance costs excluding finance costs on pension and other long-term social liabilities 26 11,434 10,374 14,881

Other investing and financial gain 27 (2,656) (2,745) (3,237)

Foreign exchange loss, net 265 87 2,717

Share-based payment expenses 29 588 3,930 –

Changes in net working capital:

(Increase) /decrease in accounts receivable (2,204) (3,659) 1,345

(Decrease)/increase in employee benefits (4,445) 619 846

(Increase)/decrease in inventories (85) (367) 355(Decrease)/increase in accounts payable, provisions and accrued expenses (5,607) (416) 2,360

(Decrease)/increase in other assets and liabilities (851) (252) 1,113cash generated from operations 104,979 106,082 108,108

Interest paid (11,234) (11,356) (16,412)

Income tax paid (9,050) (9,704) (5,441)

net cash provided by operating activities 84,695 85,022 86,255

OJSC RostelecomCONSOLIDATED STATEMENTS OF CASH FLOWS(In millions of Russian Roubles)





2011 2010 2009

cash flows from investing activities

Purchase of property, plant and equipment and intangible assets (82,776) (51,845) (45,352)Proceeds from sale of property, plant and equipment and intangible assets 1,484 1,284 1,006

Acquisition of financial assets (8,565) (10,764) (31,138)

Proceeds from disposals of financial assets 9,176 20,152 18,399

Government grant received 24 1,105 – –

Interest received 934 2,282 2,513

Dividends received from associates 193 188 145

Purchase of subsidiaries, net of cash acquired (32,281) (4,548) (496)

Proceeds from disposals of equity accounted investees - - 2

Acquisition of equity accounted investees (3,640) (26,000) (2)

net cash used in investing activities (114,370) (69,251) (54,923)

cash flows from financing activities

Sale of treasury shares 1,754 - -

Purchase of treasury shares (1,487) (25,343) -

Proceeds from bank and corporate loans 289,470 123,353 44,384

Repayment of bank and corporate loans (246,941) (83,215) (59,328)

Proceeds from bonds - 126 13,390

Repayment of bonds (13,932) (11,077) (19,712)

Proceeds from promissory notes 12,050 5,340 3,515

Repayment of promissory notes (13,068) (7,276) (5,306)

Repayment of vendor financing payable (368) (890) (1,721)

Proceeds from / (repayment of) other non-current financing liabilities 72 47 (29)

Repayment of finance lease liabilities (2,514) (3,764) (5,097)

Acquisition of non-controlling interest (366) - (1,318)

Dividends paid to shareholders of the Group (116) (14,106) (6,099)

Dividends paid to non-controlling shareholders of subsidiaries (303) - (50)

net cash provided by/(used in) financing activities 24,251 (16,805) (37,371)

Effect of exchange rate changes on cash and cash equivalents (26) 40 33

net decrease in cash and cash equivalents (5,450) (994) (6,006)

cash and cash equivalents at beginning of year 12,627 13,621 19,627

cash and cash equivalents at the end of year 7,177 12,627 13,621

OJSC RostelecomCONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(In millions of Russian Roubles)




attributable to equity holders of the Group attributable to equity holders of the Group non-control-ling interest

Total equity

share capital

additional paid-in capital

Unrealized gain/ (loss) on available-for-sale

investments

Treasury shares

share option reserve

retained earnings

Total equity attributable to shareholders

of the Group

Balances at January 1, 2009 100 33,424 120 (67) – 162,908 196,485 1,648 198,133

Profit for the year – – – – – 26,125 26,125 138 26,263


Revaluation gain on available-for-sale investments – – 593 – – – 593 – 593

Revaluation gain on available-for-sale investments transferred to profit on sale – – (1) – – – (1) – (1)

Income tax in respect of other comprehensive income items – – (82) – – – (82) – (82)

Total other comprehensive income, net of tax – – 510 – – – 510 – 510

Total comprehensive income – – 510 – – 26,125 26,635 138 26,773

Transactions with shareholders, recorded directly in equity:

Dividends to equity holders of the Group – – – – – (6,135) (6,135) – (6,135)

Dividends to non-controlling shareholders of subsidiaries – – – – – – – (50) (50)

Acquisition of non-controlling interest – – – – – 525 525 (1,843) (1,318)

Other changes in equity – – – – – (27) (27) 35 8

Total transactions with shareholders – – – – – (5,637) (5,637) (1,858) (7,495)

Balances at december 31, 2009 100 33,424 630 (67) – 183,396 217,483 (72) 217,411

OJSC RostelecomCONSOLIDATED STATEMENTS OF CHANGES IN EQUITY(In millions of Russian Roubles)





Total equity

share capital



investments

Treasury shares


retained earnings


of the Group

Balances at January 1, 2009 100 33,424 120 (67) – 162,908 196,485 1,648 198,133

Profit for the year – – – – – 26,125 26,125 138 26,263


Revaluation gain on available-for-sale investments – – 593 – – – 593 – 593

Revaluation gain on available-for-sale investments transferred to profit on sale – – (1) – – – (1) – (1)



Total comprehensive income – – 510 – – 26,125 26,635 138 26,773




Acquisition of non-controlling interest – – – – – 525 525 (1,843) (1,318)

Other changes in equity – – – – – (27) (27) 35 8

Total transactions with shareholders – – – – – (5,637) (5,637) (1,858) (7,495)

Balances at december 31, 2009 100 33,424 630 (67) – 183,396 217,483 (72) 217,411




Total equity

share capital



investments

Treasury shares


retained earnings


of the Group

Balances at January 1, 2010 100 33,424 630 (67) – 183,396 217,483 (72) 217,411

Profit for the year – – – – – 31,418 31,418 (80) 31,338


Revaluation gain/(loss) on available-for-sale investments – – 198 – – – 198 – 198



Total comprehensive income/ (loss) – – 157 – – 31,418 31,575 (80) 31,495



Acquisition of treasury shares – – – (25,343) – – (25,343) – (25,343)

Acquisition and disposal of non-controlling interest – – – – – 2 2 – 2

Non-controlling interest in acquired subsidiaries – – – – – – – 164 164

Employee benefits within share-based employee motivation program – – – – 4,186 – 4,186 – 4,186

Total transactions with shareholders – – – (25,343) 4,186 (14,806) (35,963) 164 (35,799)

Balances at december 31, 2010 100 33,424 787 (25,410) 4,186 200,008 213,095 12 213,107

OJSC RostelecomCONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (continued)(In millions of Russian Roubles)





Total equity

share capital



investments

Treasury shares


retained earnings


of the Group

Balances at January 1, 2010 100 33,424 630 (67) – 183,396 217,483 (72) 217,411










Acquisition and disposal of non-controlling interest – – – – – 2 2 – 2

Non-controlling interest in acquired subsidiaries – – – – – – – 164 164

Employee benefits within share-based employee motivation program – – – – 4,186 – 4,186 – 4,186

Total transactions with shareholders – – – (25,343) 4,186 (14,806) (35,963) 164 (35,799)

Balances at december 31, 2010 100 33,424 787 (25,410) 4,186 200,008 213,095 12 213,107




Total equity

share capital



investments

Treasury shares


retained earnings


of the Group

Balances at January 1, 2011 100 33,424 787 (25,410) 4,186 200,008 213,095 12 213,107








Dividends to equity holders of the Group – – – – – (5) (5) – (5)



Sale of treasury shares – – – 1,754 – – 1,754 – 1,754

Acquisition and disposal of non-controlling interest – – – – – (154) (154) (212) (366)

Non-controlling interest in acquired subsidiaries – – – – – – – 8,465 8,465

Employee benefits within share-based employee motivation program – – – – (45) 683 638 – 638

Issue of share capital 6 (6) – – – – – – –

Other changes in equity – – – – – 43 43 – 43

Total transactions with shareholders 6 (6) – 267 (45) 567 789 7,945 8,734

Balances at december 31, 2011 106 33,418 802 (25,143) 4,141 246,815 260,139 7,787 267,926

OJSC RostelecomCONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (continued)(In millions of Russian Roubles)





Total equity

share capital



investments

Treasury shares


retained earnings


of the Group

Balances at January 1, 2011 100 33,424 787 (25,410) 4,186 200,008 213,095 12 213,107








Dividends to equity holders of the Group – – – – – (5) (5) – (5)



Sale of treasury shares – – – 1,754 – – 1,754 – 1,754

Acquisition and disposal of non-controlling interest – – – – – (154) (154) (212) (366)

Non-controlling interest in acquired subsidiaries – – – – – – – 8,465 8,465

Employee benefits within share-based employee motivation program – – – – (45) 683 638 – 638

Issue of share capital 6 (6) – – – – – – –

Other changes in equity – – – – – 43 43 – 43

Total transactions with shareholders 6 (6) – 267 (45) 567 789 7,945 8,734

Balances at december 31, 2011 106 33,418 802 (25,143) 4,141 246,815 260,139 7,787 267,926



1. rePorTinG enTiTY

The accompanying consolidated financial statements are of OJSC Rostelecom (“Rostelecom” or the “Company”), and its subsidiaries (together the “Group”), which are incorporated in the Russian Federation (“Russia”).

The Group provides communication services (including local, intra-zone, long-distance domestic and interna-tional fixed-line telephone services, mobile services), data transmission, Internet, Pay-TV, VPN and data centers services, rent of communication channels and radio communication services in the territory of Russian Federa-tion. The Group operates the main intercity network and the international telecommunications gateways of the Russian Federation, carrying voice and data traffic that originates in its own network and other national and international operators’ networks to other national and international operators for termination.

The Company operates socially important Government programs, including “E-Government”, “Unified communi-cation service” and other.

On April 1, 2011, the Company completed the merger with OJSC North-West Telecom, OJSC Centrtelecom, OJSC South Telecommunications Company, OJSC VolgaTelecom, OJSC Uralsvyazinform, OJSC Sibirtelecom, OJSC Far East Telecom (collectively referred to as the Interregional Companies (“IRCs”) and OJSC Dagsvyazin-form (“Dagsvyazinform”) with the IRCs and Dagsvyazinform ceasing to exist as separate legal entities and all of their assets (including licenses), rights and liabilities being transferred to the Company as the legal succes-sor of the IRCs and Dagsvyazinform under Russian law. The purpose of the reorganization was to establish an integrated telecommunications operator, a market leader in each segment of the Russian telecommunications market, eliminate internal conflicts of interest, expand into new market segments and optimize costs and capital expenditures.

Rostelecom was established as an open joint stock company on September 23, 1993 in accordance with the Di-rective of the State Committee on the Management of State Property of Russia № 1507-r, dated August 27, 1993. As at December 31, 2011 the Government of the Russian Federation controls the Company by holding of 53.2% of the Company’s ordinary shares through OJSC “Svyazinvest”, “Vnesheconombank” and Federal Agency of State properties management.

The Company’s headquarters are located in Russian Federation, Moscow at 1st Tverskaya-Yamskaya Street, 14, 125047.

2. Basis of PreParaTion

(a) statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Report-ing Standards (“IFRSs”).

(b) Basis of measurement

The consolidated financial statements are prepared on the historical cost basis except for measurement of available-for-sale investments at fair value and certain other items when IFRS requires accounting treatment other than historical cost accounting (refer to Note 4).

(c) functional and presentation currency

The national currency of the Russian Federation is the Russian Rouble (“RUB”), which is the functional currency of Group entities and the currency in which these consolidated financial statements are presented. All financial information presented in RUB has been rounded to the nearest million, unless otherwise stated.

OJSC RostelecomNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In millions of Russian Roubles unless otherwise stated)



(d) Use of estimates and judgements

The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

Changes in Estimate of Useful LivesThe Group assesses the remaining useful lives of items of property, plant and equipment at least at each finan-cial year-end and, if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Fair Values of Assets and Liabilities Acquired in Business CombinationsThe Group is required to recognize separately, at the acquisition date, the identifiable assets, liabilities and con-tingent liabilities acquired or assumed in a business combination at their fair values, which involves estimates. Such estimates are based on valuation techniques, which require considerable judgment in forecasting future cash flows and developing other assumptions.

Share-based employee benefitsThe Group measures cost of share-based employee benefit by reference to the fair value of equity instruments granted. This requires judgment in estimating future volatility of basis asset which is determined using historical data on market price of the shares. Future volatility may differ significantly from that estimated.

Employee BenefitsThe Group uses actuarial valuation methods for measurement of the present value of defined employee benefit ob-ligations and related current service cost. This involves the use of demographic assumptions about the future char-acteristics of current employees who are eligible for benefits (mortality, both during and after employment, rates of employee turnover, etc.) as well as financial assumptions (discount rate, future salary and benefit levels, etc.).

AllowancesThe Group makes allowances for doubtful accounts receivable. Significant judgment is used to estimate doubt-ful accounts. In estimating doubtful accounts historical and anticipated customer performance are considered. Changes in the economy, industry, or specific customer conditions may require adjustments to the allowance for doubtful accounts recorded in the consolidated financial statements.

Impairment of non-current assetsEach asset or cash generating unit is evaluated at the end of every reporting period to determine whether there are any indications of impairment. If any such indication exists, a formal estimate of the recoverable amount is performed and an impairment loss recognised to the extent that carrying amount exceeds the recoverable amount. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, recover-able amount is estimated at each reporting date.

This requires an estimation of the value in use of the cash-generating units. Estimating of value in use requires the Group to make significant judgement concerning expected future cash flows and discount rates applicable. Expected future cash flows of cash-generating unit are tipycally based on approved budgets for next financial years and strategic plan for the period from second till fifth years. Cash flows beyond five–year periods are extrapolated using industry growth rate. Discount rates are determined based on historical information of cost of debt and equity of a respective cash-generating unit. Any future changes in the aforementioned assumptions could have significant impact on value in use.



Lease classificationA lease is classified as financial lease if it transfers substantially all risks and rewards incidental to ownership, otherwise it is classified as operating lease. Determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement, but not its legal form and requires judgements.

LitigationThe Group exercises considerable judgment in measuring and recognizing provisions and the exposure to contingent liabilities related to pending litigation or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgment is necessary in assessing the likelihood that a pending claim will succeed, or a liability will arise, and to quantify the possible range of the final settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated provision. These estimates are subject to change as new information becomes available. Revisions to the estimates may significantly affect future operating results.

3. oPeraTinG enVironmenT of The GroUP

The Group’s operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and financial risks of the Russian Federation which displays characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation. The consolidated financial statements reflect management’s as-sessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment.

4. siGnificanT accoUnTinG Policies

The accounting policies set out below have been applied consistently by the Group to all periods presented in these consolidated financial statements.

(a) Principles of consolidation

The consolidated financial statements comprise the financial statements of the companies comprising the Group and its subsidiaries.

Business combinationsBusiness combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable.

The consideration transferred does not include amounts related to the settlement of pre-existing relations. Such amounts are generally recognised in profit or loss.

Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent con-sideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss.

Costs related to the acquisitions other than those associated with issue of debt or equity securities, that the Group incurs in connection with business combination are expensed as incurred.

Combination of entities under common controlBusiness combinations arising from transfers of interests in entities that are under the control of the share-holder that controls the Group are accounted for as if the acquisition had occurred at the beginning of the earliest comparative period presented or, if later, at the date that common control was established; for this purpose comparatives are revised. The assets and liabilities acquired are recognised at the carrying amounts recognised



previously in the Group’s controlling shareholder’s consolidated financial statements. The components of equity of the acquired entities are added to the same components within Group equity except that any share capital of the acquired entities is recognised as part of share premium. Any cash paid for the acquisition is recognised directly in equity.

Acquisitions of non-controlling interestsAcquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result. Acquisitions of non-controlling interests that do not result in a loss of control are accounted for as equity transactions.

SubsidiariesSubsidiaries are entities that are directly or indirectly controlled by the Group. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases.

The financial statements of the subsidiaries are prepared for the same reporting period as the Group, using consistent accounting policies.

All intra-group balances, income and expenses and unrealized gains and losses resulting from intra-group transactions are eliminated in full.

Losses are allocated to the parent and to non-controlling interest based on their respective interests.

Investments in associates (equity accounted investees)Associates in which the Group has significant influence but not a controlling interest are accounted for using the equity method of accounting. Significant influence is usually demonstrated by the Group owning, directly or indirectly, between 20% and 50% of the voting ownership interest or by power to participate in the financial and operating policy decisions of associates. The Group’s share of the net income or losses of associates is included in profit or loss, the Group’s share of movement in reserves is recognized in equity and the Group’s share of the net assets of associates is included in the consolidated statements of financial position.

An assessment of investments in associates for possible impairment or reversal of impairment recognized previously is performed when there is an indication that the asset has been impaired or the impairment losses recognized in prior years no longer exist. When the Group’s share of losses exceeds the carrying amount of the investment, the investment is reported at nil value and recognition of losses is discontinued except to the extent of the Group’s commitment to fund future losses. Unrealized profits and losses that arise from transactions be-tween the Group and its associates are eliminated in the proportion to the Group’s share in such associates.

Crossholding structures When the Group has significant influence over an entity, which also has significant influence or controls the Com-pany, the effective ownership interest approach is used. Under the effective ownership interest approach, the Group determines its share of comprehensive income of the associate on the basis of the Group’s effective inter-est in the associate. The effect of the reciprocal interests is incorporated into the associate’s financial statements through the associate’s own equity accounting or consolidation.

Special purpose entitiesA special purpose entity (“SPE”) is consolidated if, based on an evaluation of the substance of its relationship with the Group and the SPE’s risks and rewards, the Group concludes that it controls the SPE. SPEs controlled by the Group were established under terms that impose strict limitations on the decision-making powers of the SPEs’ management and that result in the Group receiving the majority of the benefits related to the SPEs’ opera-tions and net assets, being exposed to majority of risks incident to the SPEs’ activities, and retaining the majority of the residual or ownership risks related to the SPEs or their assets.



Non-controlling interestNon-controlling interest includes that part of the net results of operations and of net assets of subsidiaries attributable to interests which are not owned, directly or indirectly through subsidiaries, by the Group. Non-con-trolling interest at the reporting date represents the non-controlling shareholders’ portion of the fair values of identifiable assets and liabilities of the subsidiary at the acquisition date, and their portion of movements in net assets since the date of the combination.

The losses applicable to non-controlling interest, including negative other comprehensive income, are charged to non-controlling interest even if it causes non-controlling interest to have a deficit balance.

(b) Goodwill

Goodwill on an acquisition of a subsidiary is included in intangible assets. Goodwill on an acquisition of an as-sociate is included in the investment in associates.

The acquirer recognizes goodwill as of the acquisition date measured as the excess of (a) over (b) below:

(a) the aggregate of: • the acquisition-date fair value of consideration transferred; • non-controlling interest’s proportionate share of the acquiree’s identifiable net assets; and • in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously

held equity interest in the acquiree.

(b) the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed measured in accordance with IFRS 3.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Impairment losses for goodwill may not be reversed. If the impairment loss recognized for the cash-generating unit exceeds the carrying amount of the allocated goodwill, the additional amount of the impairment loss is recognized by al-locating to other assets on pro rata basis, but not below their fair value.

Goodwill is not amortized. Instead, it is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.

Where goodwill forms part of a cash-generating unit and part of the operations within that unit are disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of cash-generating unit retained.

In case of excess of the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over cost of business combination the Group:• reassesses the identification and measurement of the acquiree’s identifiable assets, liabilities and contin-

gent liabilities and the measurement of the cost of the combination;• recognizes in profit or loss any excess remaining after that reassessment immediately.

(c) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-con-structed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs.

The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost



can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.

Items of property, plant and equipment that are retired or otherwise disposed of are eliminated from the state-ment of financial position along with the corresponding accumulated depreciation. Any difference between the net disposal proceeds and carrying amount of the item is reported as a gain or loss on derecognition. The gain or loss resulting from such retirement or disposal is included in the determination of net income.

Depreciation is calculated on property, plant and equipment on a straight-line basis from the time the assets are available for use, over their estimated useful lives as follows:

number of years

Buildings and site services 10–50

Cable and transmission devices:

• Cable 10–40

• Radio and fixed link transmission equipment 8–20

• Telephone exchanges 15

• Other 5–10

The useful life of assets encompasses the entire time they are available for use, regardless of whether during that time they are in use or idle. Depreciation methods, useful lives and residual values are reviewed at each reporting date or more frequently if events occur that suggest a change is necessary and, if expectations differ from previous estimates, the changes are accounted for prospectively. Depreciation of an asset ceases at the ear-lier of the date the asset is classified as held for sale and the date the asset is derecognized.

Construction in progress represents properties under construction and is stated at cost. This includes cost of construction and other direct costs. Construction in progress is not depreciated until the constructed or installed asset is ready for its intended use.

Advances given to suppliers of property, plant and equipment are included in other non-current assets.

Interest costs on borrowings to finance the construction of property, plant and equipment are capitalized during the period of time that is required to complete and prepare the asset for its intended use.

Cost of machinery and plant and other items of property, plant and equipment related to core activities of the Group, which have been gratuitously transferred to the Group beyond the privatisation framework, is capitalised in property, plant and equipment at fair value at the date of such transfer. Such transfers of property, plant and equipment primarily relate to future provision of services by the Group to entities, which have transferred prop-erty, plant and equipment. In such instances, the Group records deferred income in the amount of the fair value of the received property, plant and equipment and recognises income in the income statement on the same basis that the equipment is depreciated.

(d) leases

Service contracts that do not take the legal form of a lease but convey rights to the Group to use an asset or a group of assets in return for a payment or a series of fixed payments are accounted for as leases. Determining whether an arrangement contains a lease is determined based on the facts and circumstances of each arrange-ment to determine whether fulfilment of the arrangement is dependent on the use of a specific asset or assets and whether the arrangement conveys a right to use that asset. Contracts meeting these criteria are then evalu-ated to determine whether they are either an operating lease or finance lease.

Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of the lease term at the fair value of the leased property



or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remain-ing balance of the liability. Finance charges are charged directly to profit or loss. Capitalized leased assets are depreciated on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term unless there is a reasonable certainty that the Group will obtain ownership by the end of the lease term, in which case the assets are depreciated over their estimated useful lives.

Indefeasible Rights of Use (IRU) leases represent the right to use a portion of asset granted for a fixed period. IRUs are recognized as an asset when the Group has the specific indefeasible right to use an identified portion of the underlying asset, generally optical fibers or dedicated wavelength bandwidth, and the duration of the right is for the major part of the underlying asset’s economic life. Such assets are included in property, plant and equip-ment in the consolidated statement of financial position. They are depreciated over the shorter of the expected period of use and the life of the contract.

Leases, including IRU leases, where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in profit or loss on a straight-line basis over the lease term.

(e) investment property

Investment properties are properties held to earn rentals and/or for capital appreciation (including property un-der construction for such purposes). Investment properties are measured initially at cost, including transaction costs. The Group applies cost model to its investments properties and subsequent to initial recognition invest-ment properties are measured in accordance with IAS 16’s requirements for that model.

An investment property is derecognised upon disposal or when the investment property is permanently with-drawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognised.

(f) intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition.

Development expenditures are capitalised if they meet criteria for an assets recognition. Expenditure on re-search phase are expensed as incurred

Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any ac-cumulated impairment losses.

The useful lives of intangible assets are assessed to be either finite or indefinite.

Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment when there is an indication that the intangible asset may be impaired. Useful lives of intangible assets with finite lives are determined on individual basis.

Amortization periods and methods for intangible assets with finite useful lives are reviewed at least at each financial year-end and, if expectations differ from previous estimates, the changes are accounted for as changes in accounting estimates. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The Group assesses whether there is any indica-tion that a finite lived intangible asset may be impaired at each reporting date. The Group also performs annual impairment tests for finite lived assets not yet placed in use. The amortization expense on intangible assets with finite lives is included in depreciation and amortization expenses in profit or loss.



Intangible assets with indefinite useful lives are not amortized, but tested for impairment annually or more frequently when indicators of impairment exist, either individually or at the cash-generating unit level. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assess-ment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.

(g) impairment of property, plant and equipment and intangible assets

At each reporting date or more frequently if events occur that suggest a change is necessary, an assessment is made as to whether there is any indication that the Group’s assets may be impaired. If any such indication ex-ists, an assessment is made to establish whether the recoverable amount of the assets has declined below the carrying amount of those assets as disclosed in the financial statements. In addition, annual impairment test is carried out for intangible assets with indefinite useful life or that are not yet available for use and goodwill. When such a decline has occurred, the carrying amount of the assets is reduced to the recoverable amount. The amount of any such reduction is recognized immediately as a loss. Any subsequent increase in the recoverable amount of the assets, except for goodwill, is reversed when the circumstances that led to the write-down or write-off cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future. Increase of the recoverable amount is limited to the lower of its recoverable amount and carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years.

The recoverable amount is determined as the higher of the assets’ fair value less cost to sell, or value in use. If it is not possible to estimate the recoverable amount of the individual asset, the Group determines the recoverable amount of the cash-generating unit (further – CGU) to which the assets belong. The value in use of the asset is estimated based on forecast of future cash inflows and outflows to be derived from continued use of the asset and from the estimated net proceeds on disposal, discounted to present value using an appropriate discount rate.

For the purposes of impairment testing, goodwill acquired in a business combination is, from the acquisition date allocated to each of the CGUs or groups of CGUs expected to benefit from the combination’s synergies, irrespective of whether other assets and liabilities of the Group are assigned to those units or group of units. Each unit or group of units to which goodwill is so allocated:• represents the lowest level within the Group at which the goodwill is monitored for internal management

purposes; and• is not larger than an operating segment determined in accordance with IFRS 8 Operating Segments.

(h) inventory

Inventory principally consists of cable, spare parts for the network and other supplies. Inventory is stated at the lower of cost incurred in bringing each item to its present location and condition and its net realizable value. Cost is calculated using weighted average cost formula, and includes expenditure incurred in acquiring the inven-tories, production or conversion costs, and other costs uncured in bringing them to their existing location and condition. Items used in the construction of new plant and equipment are capitalized as part of the related asset. Net realizable value is determined with respect to current market prices less expected costs to dispose. Inven-tory used in the maintenance of equipment is charged to operating costs as utilized and included in repair and maintenance and other costs in profit or loss.

(i) accounts receivable

Trade and other accounts receivable are stated in the consolidated statement of financial position at original invoice amount less an allowance for any uncollectible amounts. The allowance is created based on the historical pattern of collections of accounts receivable and specific analysis of recoverability of significant accounts.

Bad debts are written off in the period in which they are identified.



(j) financial instruments

Financial instruments carried in the consolidated statement of financial position include cash and cash equiva-lents, investments (other than in consolidated subsidiaries and equity method investees), non-hedge derivatives, accounts receivable, accounts payable and borrowings. The particular recognition methods adopted for financial instruments are disclosed in the individual policy statements associated with each item. The Group classifies financial assets and liabilities into the following categories: loans and receivables, financial assets and liabilities at fair value through profit or loss, held-to-maturity investments, available-for-sale financial assets, financial liabilities at amortized cost.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and not originated with the intent to be sold immediately. Such assets are carried at amortized cost using the effective interest method less any allowance for impairment. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. Gains and losses are recognized in profit or loss when the loans and receivables are derecognized or impaired, as well as through the amortization process.

Financial assets and liabilities at fair value through profit and loss are financial assets or liabilities, which are either classified as held for trading or derivatives or are designated by the Group as at fair value through profit or loss upon initial recognition. Financial assets are classified as held for trading if they are acquired for the purposes of selling in the near term. Gains and losses on investments held for trading are recognized in profit or loss.

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recogni-tion, held-to-maturity investments are measured at amortised cost using the effective interest method, less any impairment losses.

All other investments not classified in any of the three preceding categories are classified as available-for-sale. After initial recognition, available-for-sale investments are measured at fair value with gains and losses being recognized in other comprehensive income until the investment is derecognized at which time the cumulative gain or loss previously reported in equity is included in the determination of profit or loss.

All financial liabilities are carried at amortized cost using the effective interest method, except for derivative financial liabilities which are carried at their fair values.

Transactions with financial instruments are recognized using settlement date accounting. Assets are recognized on the day they are transferred to the Group and derecognized on the day that they are transferred by the Group.

At each reporting date or more frequently if events occur that suggest a change is necessary, an assessment is made as to whether there is any indication that the Group’s investments may be impaired. The fair value of investments that are actively traded in organized markets is determined by reference to the quoted market bid price at the close of business at the reporting day. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length transactions, refer-ences to the current market value of other instruments which is substantially the same, discounted cash flow analysis or other valuation models.

Investing and financial gains comprise interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets, fair value gains on finan-cial assets at fair value through profit or loss and gains on the remeasurement to fair value of any pre-existing interest in an acquiree. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Dividend income is recognised in profit or loss on the date that the Group’s right to receive payment is established, which in the case of quoted securities is normally the ex-dividend date.



Finance costs comprise interest expense on borrowings (other than capitalised into the cost of qualifying assets), unwinding of the discount on provisions and contingent consideration, losses on disposal of available-for-sale financial assets, dividends on preference shares classified as liabilities, fair value losses on financial instru-ments at fair value through profit or loss and impairment losses recognised on financial assets (other than trade receivables).

Foreign currency gains and losses are reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position.

(k) Borrowings

Borrowings are initially recognized at fair value less directly attributable transaction costs, and have not been designated ‘as at fair value through profit or loss’. In subsequent periods, borrowings are measured at amortized cost using the effective interest method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the amortization process.

Borrowing costs are expensed, except for those that would have been avoided if the expenditure to acquire the qualifying asset had not been made. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization is determined by apply-ing a capitalization rate to the expenditures on that asset. The capitalization rate is the weighted average rate of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, unless borrowings were made specifically for the purpose of obtaining the qualifying asset wherein that rate is used. Qualifying borrowing costs are capitalized with the relevant qualifying asset from the date the activities to pre-pare the asset are in progress and expenditures and borrowing costs are being incurred until the related asset is substantially ready for its intended use. Capitalized borrowing costs are subsequently charged to profit or loss in the period over which the asset is depreciated.

(l) foreign currency transactions

Transactions denominated in foreign currencies are translated into Roubles at the exchange rate as of the trans-action date. Foreign currency monetary assets and liabilities are translated into Roubles at the exchange rate as of the reporting date. Exchange differences arising on the settlement of monetary items, or on reporting the Group’s monetary items at rates different from those at which they were initially recorded in the period, or re-ported in previous financial statements, are recorded as foreign currency exchange gains or losses in the period in which they arise.

As at December 31, 2011, 2010 and 2009, the rates of exchange used for translating foreign currency balances were (in Russian Roubles for one unit of foreign currency):

2011 2010 2009

US Dollar (US$) 32.20 30.48 30.24

Japanese Yen (100) 41.50 37.38 32.83

Special Drawing Rights (SDR) 49.27 46.73 47.46

EURO (EUR) 41.67 40.33 43.39Source: the Central Bank of Russia

(m) cash and cash equivalents

Cash and cash equivalents consist of cash on hand, balances with banks, and highly liquid investments with original maturities of three months or less, with insignificant risks of diminution in value.



(n) deferred income taxes

Deferred income tax is provided, using the liability method, on all temporary differences at the reporting date between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences:• except where the deferred income tax liability arises from goodwill or the initial recognition of an asset or

liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and inter-ests in joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carry-forward of unused tax credits and unused tax losses can be utilized:• except where the deferred income tax asset relating to the deductible temporary difference arises from the

initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognized to the extent that it is probable that the tem-porary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred in-come tax asset to be utilized. Any such previously recognized reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset will be realized or the liability settled. Tax rates are based on laws that have been enacted or substantively enacted at the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on dif-ferent tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

In accordance with the tax legislation of the Russian Federation, tax losses and current tax assets of a company in the Group may not be set off against taxable profits and current tax liabilities of other Group companies. In ad-dition, the tax base is determined separately for each of the Group’s main activities and, therefore, tax losses and taxable profits related to different activities cannot be offset.

(o) revenue and operating costs recognition

Revenue and operating costs for all services supplied and received are recognized at the time the services are rendered. Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the entity and the amount of revenue can be reliably measured. Revenues and expenses are reported net of respective value added tax.

Revenues from directly billed subscribers are recognized in the period where the services were provided based on the Group’s billing system’s data. Revenue from time calls and data transfer is measured primarily by the vol-ume of traffic processed for the period. Revenues from subscribers billed via agents are recognized in the period where the services were provided based on agent reports.



The Group charges its subscribers throughout Russia for certain communication services based on pre-set tariffs regulated by the Ministry of Telecom and Mass Communications and Federal Tariff Service.

The Group charges amounts to interconnected operators for incoming traffic and is charged by operators for termination. These revenues and costs are shown gross in the consolidated financial statements.

Amounts payable to and receivable from the same operators are shown net in the consolidated statements of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle liability simultaneously.

Revenues from the sale of transmission capacity on terrestrial and submarine cables, which relates to IRU under operating leases where the Group is a lessor, are recognized on a straight-line basis over the life of the contract.

(p) Provisions

Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obli-gation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is charged in profit or loss or capitalized in an asset if it is required by IFRS.

Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the dis-count is recognised as finance cost.

(q) Government grants

Government grants are recognised initially as deferred income at fair value when there is reasonable assurance that they will be received and the Group will comply with the conditions associated with the grant, and are then recognised in profit or loss as other income on systematic basis over the useful life of the asset.

Grants that compensate the Group for expenses incurred are recognized in profit or loss as other income on systematic basis in the periods in which the expenses are recognised.

(r) employee benefits

The Group operates a defined benefit pension scheme which requires one-off contributions, representing the net present value of future monthly payments to employees, to be made by the Group to a separately administered pension fund upon employees’ dismissal. The pension fund is liable for payments to the retired employees.

The Group uses the Project Unit Credit Method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost.

Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for each individual plan at the end of the previous reporting period exceed 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plans.

The Group also participates in a defined contribution plan. Contributions made by the Group on defined contribu-tion plans are charged to expenses when incurred.

The Group accrues for the employees’ compensated absences (vacations) as the additional amount that the Group expects to pay as a result of the unused vacation that has accumulated at the reporting date.



(s) share-based payments

The Group operates an equity-settled, share-based compensation plan, under which the Group receives services from employees as consideration for options for shares of the Company. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted.

The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the entity revises its estimates of the number of op-tions that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the statement of comprehensive income, with a corresponding adjustment to equity.

(t) dividends

Dividends are recognized when the shareholder’s right to receive the payment is established. Dividends in re-spect of the period covered by the financial statements that are proposed or declared after the reporting date but before approval of the financial statements are not recognized as a liability at the reporting date in accordance with IAS 10 Events After the Reporting Period.

(u) Treasury shares

The cost of treasury shares presented is debited separate category of equity. When treasury shares are sold or re-issued, the amount received for the instruments is credited to this category, and any surpluses or deficits on sales of treasury shares are shown as an adjustment to additional paid-in capital. The average cost method is used to determine the cost of treasury shares sold. However, if the entity is able to identify the specific items sold and their costs, the specific cost is applied.

(v) earnings per share

IAS 33 requires the application of the “two-class method” to determine earnings applicable to ordinary share-holders, the amount of which is used as a numerator to calculate earnings per ordinary share. The application of the “two-class method” requires that the profit or loss after deducting preferred dividends is allocated to ordinary shares and other participating equity instruments to the extent that each instrument shares in earnings as if all of the profit or loss for the period had been distributed. The total profit or loss allocated to each class of equity instrument is determined by adding together the amount allocated for dividends and the amount allocated for a participation feature.

(w) segment information

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are reviewed regularly by the Management Board to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the Management Board include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

Segment capital expenditure is the total cost incurred during the year to acquire property, plant and equipment, and intangible assets other than goodwill.



(x) changes in accounting policies

The accounting policies adopted are consistent with those of the previous financial year except that the Group has adopted those new/revised standards and interpretations mandatory for financial years beginning on Jan-uary 1, 2011. The changes in accounting policies result from adoption of the following new or revised standards and interpretations:• IFRS 3 “Business Combinations” (as amended in May 2010);• IFRS 7 “Financial Instruments: Disclosures” (as revised in May 2010);• IAS 1 “Presentation of Financial Statements” (as revised in May 2010);• IAS 27 “Consolidated and Separate Financial Statements” (as revised in May 2010);• IAS 32 “Financial Instruments: Presentation” (as revised in October 2009);• IAS 34 “Interim Financial Reporting” (as revised in May 2010);• IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments”.

The adoption of new/revised Standards and Interpretations did not have material impact on the Group’s results of operations, financial position and cash flows.

(y) ifrss and ifric interpretations not yet effective

The following new Standards, amendments to Standards and Interpretations are not yet effective as at Decem-ber 31, 2011, and have not been applied in preparing these consolidated financial statements. The Group plans to adopt these pronouncements when they become effective.• IAS 19 (2011) Employee Benefits. The amended standard will introduce a number of significant changes to

IAS 19. First, the corridor method is removed and, therefore, all changes in the present value of the defined benefit obligation and in the fair value of plan assets will be recognised immediately as they occur. Secondly, the amendment will eliminate the current ability for entities to recognise all changes in the defined benefit obligation and in plan assets in profit or loss. Thirdly, the expected return on plan assets recognised in profit or loss will be calculated based on the rate used to discount the defined benefit obligation. The amended standard shall be applied for annual periods beginning on or after July 1, 2013 and early adoption is permit-ted. The amendment generally applies retrospectively. The Group has not yet analysed the likely impact of the new Standard on its financial position or performance.

• IAS 27 (2011) Separate Financial Statements will become effective for annual periods beginning on or after January 1, 2013. The amended standard carries forward the existing accounting and disclosure requirements of IAS 27 (2008) for separate financial statements with some clarifications. The requirements of IAS 28 (2008) and IAS 31 for separate financial statements have been incorporated into IAS 27 (2011). The amended stand-ard will become effective for annual periods beginning on or after January 1, 2013. Early adoption of IAS 27 (2011) is permitted provided the entity also early-adopts IFRS 10, IFRS 11, IFRS 12 and IAS 28 (2011). The new Standard will not have any impact on the Group’s financial position or performance.

• IAS 28 (2011) Investments in Associates and Joint Ventures combines the requirements in IAS 28 (2008) and IAS 31 that were carried forward but not incorporated into IFRS 11 and IFRS 12. The amended standard will become effective for annual periods beginning of or after January 1, 2013 with retrospective application required. Early adoption of IAS 28 (2011) is permitted provided the entity also early-adopts IFRS 10, IFRS 11, IFRS 12 and IAS 27 (2011). The new Standard is not expected to have a significant effect on the consolidated financial statements of the Group.

• IFRS 9 Financial Instruments will be effective for annual periods beginning on or after January 1, 2015. The new standard is to be issued in phases and is intended ultimately to replace International Financial Report-ing Standard IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding classification and measurement of financial liabilities was published in October 2010. The remain-ing parts of the standard are expected to be issued during 2012. The Group recognises that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on Group’s consolidated financial statements. The impact of these changes will be analysed during the course of the project as further phases of the standard are issued. The Group does not intend to adopt this standard early.



• IFRS 10 Consolidated Financial Statements will be effective for annual periods beginning on or after January 1, 2013. The new standard supersedes IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities. IFRS 10 introduces a single control model which includes enti-ties that are currently within the scope of SIC-12 Consolidation – Special Purpose Entities. Under the new three-step control model, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with that investee, has the ability to affect those returns through its power over that investee and there is a link between power and returns. Consolidation procedures are carried forward from IAS 27 (2008). When the adoption of IFRS 10 does not result a change in the previous consolidation or non-consolidation of an investee, no adjustments to accounting are required on initial application. When the adoption results a change in the consolidation or non-consolidation of an investee, the new standard may be adopted with either full retrospective application from date that control was obtained or lost or, if not practi-cable, with limited retrospective application from the beginning of the earliest period for which the applica-tion is practicable, which may be the current period. Early adoption of IFRS 10 is permitted provided an entity also early-adopts IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011). The Group has not yet analysed the likely impact of the new Standard on its financial position or performance.

• IFRS 11 Joint Arrangements will be effective for annual periods beginning on or after January 1, 2013 with retrospective application required. The new standard supersedes IAS 31 Interests in Joint Ventures. The main change introduced by IFRS 11 is that all joint arrangements are classified either as joint operations, which are consolidated on a proportionate basis, or as joint ventures, for which the equity method is applied. The type of arrangement is determined based on the rights and obligations of the parties to the arrangement arising from joint arrangement’s structure, legal form, contractual arrangement and other facts and circum-stances. When the adoption of IFRS 11 results a change in the accounting model, the change is accounted for retrospectively from the beginning of the earliest period presented. Under the new standard all parties to a joint arrangement are within the scope of IFRS 11 even if all parties do not participate in the joint control. Early adoption of IFRS 11 is permitted provided the entity also early-adopts IFRS 10, IFRS 12, IAS 27 (2011) and IAS 28 (2011). The new Standard is not expected to have a significant effect on the consolidated financial statements of the Group.

• IFRS 12 Disclosure of Interests in Other Entities will be effective for annual periods beginning on or after Janu-ary 1, 2013. The new standard contains disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. Interests are widely defined as contrac-tual and non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity. The expanded and new disclosure requirements aim to provide information to enable the users to evaluate the nature of risks associated with an entity’s interests in other entities and the effects of those in-terests on the entity’s financial position, financial performance and cash flows. Entities may early present some of the IFRS 12 disclosures early without a need to early-adopt the other new and amended standards. However, if IFRS 12 is early-adopted in full, then IFRS 10, IFRS 11, IAS 27 (2011) and IAS 28 (2011) must also be early-adopted. The new Standard is not expected to have a significant effect on the presentation and disclosures in the consolidated financial statements of the Group.

• IFRS 13 Fair Value Measurement will be effective for annual periods beginning on or after January 1, 2013. The new standard replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It provides a revised definition of fair value, establishes a frame-work for measuring fair value and sets out disclosure requirements for fair value measurements. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurement that currently exist in certain standards. The standard is applied prospectively with early adoption permitted. Comparative disclosure information is not required for periods before the date of initial application. The new Standard will not have any impact on the Group’s financial position or performance.

• Amendment to IAS 1 Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income. The amendment requires that an entity present separately items of other comprehensive income that may be reclassified to profit or loss in the future from those that will never be reclassified to profit or loss. Additionally, the amendment changes the title of the statement of comprehensive income to statement of profit or loss and other comprehensive income. However, the use of other titles is permitted. The amend-ment shall be applied retrospectively from July 1, 2012 and early adoption is permitted. The new amendment to the Standard is not expected to have a significant effect on the consolidated financial statements of the Group.



• Amendment to IAS 12 Income taxes – Deferred Tax: Recovery of Underlying Assets. The amendment introduces an exception to the current measurement principles for deferred tax assets and liabilities arising from in-vestment property measured using the fair value model in accordance with IAS 40 Investment Property. The exception also applies to investment property acquired in a business combination accounted for in accord-ance with IFRS 3 Business Combinations provided the acquirer subsequently measures the assets using the fair value model. In these specified circumstances the measurement of deferred tax liabilities and deferred tax assets should reflect a rebuttable presumption that the carrying amount of the underlying asset will be recovered entirely by sale unless the asset is depreciated or the business model is to consume substantially all the asset. The amendment is effective for periods beginning on or after January 1, 2012 and is applied retrospectively. The new amendment to the Standard is not expected to have a significant effect on the con-solidated financial statements of the Group.

• Amendment to IFRS 7 Financial Instruments: Disclosures – Transfers of Financial Assets introduces additional disclosure requirements for transfers of financial assets in situations where assets are not derecognised in their entirety or where the assets are derecognised in their entirety but a continuing involvement in the transferred assets is retained. The new disclosure requirements are designated to enable the users of financial statements to better understand the nature of the risks and rewards associated with these assets. The amendment is effective for annual periods beginning on or after July 1, 2011. The new amendment to the Standard is not expected to have a significant effect on the consolidated financial statements of the Group.

• IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine is effective for annual periods beginning on or after January 1, 2013 and provides guidance for entities with post-development phase surface min-ing activities. Under the interpretation, production stripping costs that provide access to ore to be mined in the future are capitalized as non-current assets if the component of the ore body for which access has been improved can be identified and future benefits arising from the improved access are both probable and reli-ably measurable. The interpretation also addresses how capitalized stripping costs should be depreciated and how capitalized amounts should be allocated between inventory and the stripping activity asset. The new Interpretation will not have any impact on the Group’s financial position or performance.

• Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect for annual periods beginning after January 1, 2011. The Group has not yet analysed the likely impact of the im-provements on its financial position or performance.

(z) changes in presentation of financial statements

Certain comparative amounts have been reclassified to conform with the current year’s presentation. The most significant reclassification relates to the impairment loss/ (reversal of impairment loss) which was reclassified from Other operating expenses to Depreciation, amortization and impairment loss in the amount of 4,618 for the year ended December 31, 2010 and (173) for the year ended December 31, 2009. Management believes that such presentation is more appropriate.

5. BUsiness comBinaTions

2011 transactions

Acquisitions of subsidiariesOJSC National TelecommunicationsIn February 2011 the Group acquired 71.8% equity interest in OJSC National Telecommunications from CJSC National Media Group, OJSC Surgutneftegas and Raybrook Limited. The purchase price amounted to US$ 951 million. Further, the Group purchased promissory notes issued by OJSC National Telecommunications for US$ 126 million from Shepton Holdings Limited. The acquisition-related costs of 206 were included in other investing and financial gain in this consolidated statement of comprehensive income for the year ended Decem-ber 31, 2011.

As of the acquisition date OJSC National Telecommunications was a holding structure consisting of 42 compa-nies. The primary activity of the entity mainly focused on IP-television and data transmission services. The Group intends to take up a leading role on the IPTV market through this acquisition. The Group accounted for the acqui-



sition of OJSC National Telecommunications by applying the acquisition method, in accordance with provisions of IFRS 3 Business combinations.

The results of operations and financial position of OJSC National Telecommunications were consolidated by the Group starting from February 1, 2011.

The goodwill is attributable mainly to the diversification of the activities of the Group and to the extension into new markets.

From the date of acquisition until December 31, 2011, OJSC National Telecommunications has contributed 0.2 to the increase of net profit of the Group and 9,170 to the increase of revenue for 2011. If the combination had taken place at the beginning of 2011, the profit of the Group would have been 46,127 and revenue would have been 296,774. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition had occurred on January 1, 2011.

CJCS Volgograd-GSMIn August 2011, the Group acquired an additional interest of 50% in CJCS Volgograd-GSM thus obtaining control of 100%. The shares were acquired from SMARTS Group for cash payment of 2,322. CJCS Volgograd-GSM pri-marily provides mobile communication services.

The Group accounted for the acquisition of Volgograd-GSM by applying the acquisition method, in accordance with the provisions of IFRS 3 Business combinations.

The goodwill is attributable mainly to the diversification of activities of the Group.

The remeasurement to fair value of the Group’s existing interest of 50% in CJCS Volgograd-GSM resulted in a gain of 1,505 which has been recognised in other investing and financial gains in this consolidated statement of comprehensive income for the year ended December 31, 2011.

From the date of acquisition until December 31, 2011, CJCS Volgograd-GSM has contributed 132 to the increase of net profit of the Group and 584 to the increase of revenue for 2011. If the combination had taken place at the beginning of 2011, the profit of the Group would have been 46,201 and revenue would have been 297,187. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition had occurred on January 1, 2011.

The following table summarizes the fair values of identifiable net assets of OJSC NTC and CJSC Volgograd-GSM as of the acquisition dates:

oJsc nTc cJsc Volgograd-Gsm Total

consideration

Paid in cash 27,907 2,322 30,229

Promissory notes 3,688 – 3,688

Total consideration transferred 31,595 2,322 33,917

nci 8,465 – 8,465

deferred consideration – 23 23

investment in associate before the acquisition – 817 817

fair value revaluation of previously acquired share – 1,505 1,505



oJsc nTc cJsc Volgograd-Gsm Total

fair value of identifiable assets and liabilities:

Property, plant and equipment 7,959 2,817 10,776

Intangible assets 16,867 1,250 18,117

Deferred tax assets 451 7 458

Other non-current assets 99 – 99

Non-current financial assets 1 4 5

Trade and other accounts receivable 2,368 147 2,515

Allowance for doubtful receivables (279) (20) (299)

Cash and cash equivalents 1,628 8 1,636

Current investments 1,808 – 1,808

Inventories 208 43 251

Non-current loans and borrowings (2) (131) (133)

Current loans and borrowings (2,471) (90) (2,561)

Accounts payable, provisions and accrued expenses (1,899) (190) (2,089)

Deferred tax liabilities (3,912) (479) (4,391)

Total net assets 23,105 3,386 26,491

Goodwill 16,955 1,281 18,236

Costs directly attributable to acquisition 206 3 209

Acquisition of non-controlling interestsIn September 2011 the Group acquired an additional 49% interest in CJCS Orenburg-GSM from SMARTS Group for US$ 4 million in cash, increasing its ownership from 51% to 100%. The Group recognised a decrease in non-controlling interests of 32 and a decrease in retained earnings of 84.

In April 2011 the Group acquired an additional 49% interest in CJCS STS from MELVOND HOLDINGS LIMITED for cash payment of 250, increasing its ownership from 51% to 100%. The Group recognised a decrease in non-con-trolling interests of 180 and a decrease in retained earnings of 70.

2010 transactions

Acquisitions of subsidiariesIn June 2010, OJSC Volgatelecom acquired 98.19% of ordinary shares in Teleset Networks Public Company Limited for 4,283 and obtained control over this entity. Teleset Networks Public Company primarily provides local fixed line communication services in Tatarstan and Ulyanovsk region.

In December 2010, OJSC North-West Telecom acquired 100% of ordinary shares in CJSC Severen-Telecom’s ordi-nary voting shares for 863 and obtained control over this entity. CJSC Severen-Telecom provides various telecom services in Saint-Petersburg.

The Group accounted for the acquisition of these entities by applying the acquisition method, in accordance with the provisions of IFRS 3 Business combinations.

(Continued from page 86)



The following table summarizes the fair values of identifiable net assets of Teleset Network Public Company Limited and CJSC Severen-Telecom as of the acquisition dates:

severen-Telecom Teleset networks Public company limited

Total

consideration

Paid in cash 863 4,283 5,146

Total consideration transferred 863 4,283 5,146

nci – 48 48


Property, plant and equipment 259 2,228 2,487

Intangible assets 206 714 920

Other non-current assets 19 10 29

Non-current investments – 1 1

Trade and other accounts receivable 55 169 224

Cash and cash equivalents 1 597 598

Other current assets – 128 128

Non-current liabilities (48) (391) (439)

Current liabilities (61) (319) (380)

Deferred tax liabilities – (322) (322)

Non-controlling interests – (164) (164)

Total net assets 431 2,651 3,082

Goodwill 432 1,680 2,112

Costs directly attributable to acquisition – – –

The goodwill is attributable mainly to the expected expansion of new and existing services in the potentially lucrative regions.

From the date of acquisition until December 31, 2010 Teleset Networks Public Company Limited has contrib-uted 443 to the increase of net profit of the Group and 612 to the increase of revenue for 2010. Financial results of CJSC Severen-Telecom from the date of its acquisition, December 21, 2010, until the end of year were not included in the Group’s financial results as immaterial.

If the combinations had taken place at the beginning of 2010, the profit of the Group would have been 31,765 and revenue would have been 276,803. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition had occurred on January 1, 2010.

2009 transactions

Acquisitions of subsidiariesIn July 2009, OJSC Volgatelecom acquired 100% of ordinary shares in LLC GTS for 350 and obtained control over this entity. LLC GTS primarily provided telecommunication services to corporate and residential customers.

In July 2009, OJSC Rostelecom acquired 100% of ordinary shares in CJSC Rosmedia for 0.01 and obtained control over this entity. CJSC Rosmedia was a start-up project for providing IPTV-services.



In December 2009, OJSC Uralsvyazinform acquired 100% of ordinary shares of LLC Uzhno-Uralskaya telefon-naya compania for 132 and obtained control over this entity. LLC Uzhno-Uralskaya telefonnaya compania mainly provide fixed-line telephone services, internet and data transmission services.

The Group accounted for the acquisition of these entities by applying the acquisition method, in accordance with the provisions of IFRS 3 Business combinations.

The following table summarizes the fair values of identifiable net assets of LLC GTS, LLC Uzhno-Uralskaya tel-efonnaya compania and CJSC Rosmedia as of the acquisition dates:

llc GTs Uzhno-Uralskaya telefonnaya compania

cJsc rosmedia Total

consideration

Paid in cash 350 132 – 482

Total consideration transferred 350 132 – 482

nci


Property, plant and equipment 120 111 17 248

Intangible assets 19 4 3 26

Non-current investments – – 7 7

Trade and other accounts receivable 14 13 12 39

Cash and cash equivalents 23 3 2 28

Other assets 3 8 7 18

Non-current liabilities – (1) – (1)

Current liabilities (16) (21) (100) (137)

Deferred tax liabilities (8) (8) – (16)

Total net assets 155 109 (52) 212

Goodwill 195 23 52 270

Costs directly attributable to acquisition – 8 – 8

The goodwill is attributable mainly to the diversification of the activities of the Group.

From the date of acquisition until December 31, 2009 LLC GTS, LLC Uzhno-Uralskaya telefonnaya compania and CJSC Rosmedia have contributed 1 to the increase of net profit of the Group and 49 to the increase of revenue for 2009.

If the combinations had taken place at the beginning of 2009, the profit of the Group would have been 26,206 and revenue would have been 264,855. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition had occurred on January 1, 2010.

Acquisition of non-controlling interestIn addition, in October 2009, OJSC Far East Telecom acquired 49% of ordinary shares in its subsidiary OJSC Sakhatelecom for 1,318 and increased its share to 100%. The carrying value of acquired share in net assets ex-ceeded additional shares purchase consideration by 525 and was accounted for as an equity transaction.



6. ProPerTY, PlanT and eQUiPmenT

The net book value of property, plant and equipment as at December 31, 2011, 2010 and 2009 was as follows:

Buildings and site services

cable and trans-mission devices

other construction in progress

Total

cost/deemed cost

At January 1, 2009 192,215 284,988 66,669 18,801 562,673Additions 235 29 252 35,493 36,009Acquisition through business combination 160 72 8 8 248Disposals (1,832) (14,802) (3,513) (1,091) (21,238)Transfer 10,118 22,808 6,950 (39,876) –Reclassification 427 (1,046) 702 (83) –At December 31, 2009 201,323 292,049 71,068 13,252 577,692

At January 1, 2010 201,323 292,049 71,068 13,252 577,692Additions 247 136 385 53,987 54,755Acquisition through business combination 1,521 814 98 54 2,487Disposals (2,282) (11,238) (3,200) (646) (17,366)Transfer 15,358 25,758 8,632 (49,748) –Reclassification 446 (1,688) 1,194 2 (46)At December 31, 2010 216,613 305,831 78,177 16,901 617,522

At January 1, 2011 216,613 305,831 78,177 16,901 617,522Additions 201 1,103 3,105 64,559 68,968Reclassification from investment property and assets held for sale 262 121 – – 383Acquisition through business combination 1,270 8,079 525 902 10,776Disposals (3,826) (7,551) (4,806) (483) (16,666)Transfer 16,905 36,615 6,405 (59,925) –Reclassification (12,240) 20,313 (8,204) 131 –At December 31, 2011 219,185 364,511 75,202 22,085 680,983



Buildings and site services

cable and trans-mission devices

other construction in progress

Total

accumulated depreciation and impairment losses

At January 1, 2009 (72,379) (140,958) (41,839) (419) (255,595)Depreciation expense (11,200) (26,058) (10,084) – (47,342)Impairment losses 253 (33) 19 (28) 211Disposals 1,268 14,035 3,228 – 18,531Reclassification (73) 609 (611) 75 –At December 31, 2009 (82,131) (152,405) (49,287) (372) (284,195)

At January 1, 2010 (82,131) (152,405) (49,287) (372) (284,195)Depreciation expense (11,352) (25,957) (9,576) – (46,885)Impairment losses (233) (22) 3 38 (214)Disposals 1,825 10,006 3,009 – 14,840Reclassification (186) (145) 179 152 –At December 31, 2010 (92,077) (168,523) (55,672) (182) (316,454)

At January 1, 2011 (92,077) (168,523) (55,672) (182) (316,454)Depreciation expense (9,654) (30,953) (9,779) – (50,386)Reclassification from investment property and assets held for sale (119) (61) – – (180)Impairment losses (1) (111) (1) (150) (263)Disposals 2,882 6,702 4,687 – 14,271Reclassification (9,274) 3,260 6,014 – –At December 31, 2011 (108,243) (189,686) (54,751) (332) (353,012)

net book value

at december 31, 2009 119,192 139,644 21,781 12,880 293,497at december 31, 2010 124,536 137,308 22,505 16,719 301,068at december 31, 2011 110,942 174,825 20,451 21,753 327,971

For the purposes of consistent classification of similar item of property, plant and equipment the Group made reclassification as at December 31, 2011.

At December 31, 2011, 2010 and 2009, cost of fully depreciated property, plant and equipment was 133,698, 120,414 and 111,439, respectively.

interest capitalization

Interest amounting to 948, 563 and 769 was capitalized in property, plant and equipment for the years ended December 31, 2011, 2010 and 2009, respectively. The capitalization rate used to determine the amount of borrowing costs eligible for capitalization is 7.50%, 9.48% and 10.54% for the years ended December 31, 2011, 2010 and 2009, respectively.




Pledged property, plant and equipment

Property, plant and equipment with a carrying value of 2,360, 9,949 and 30,245 was pledged in relation to loan agreements entered into by the Group as at December 31, 2011,2010 and 2009, respectively.

leased property, plant and equipment

As at December 31, 2011,2010 and 2009 net book value of leased property, plant and equipment comprised:

december 31, 2011 december 31, 2010 december 31, 2009

Buildings and constructions 1,107 1,629 969

Switches and transmission devices 2,735 5,482 10,224

Vehicles and other property, plant and equipment 657 1,348 3,022

Construction in progress 13 17 19

Total net book value of leased property, plant and equipment 4,512 8,476 14,234

impairment of property, plant and equipment

As at December 31, 2011 the Group conducted impairment testing of its property, plant, equipment, to identify possible irrecoverability of the assets. The Group assessed the recoverable amount of the assets for which esti-mation on individual basis is impossible within respective CGU. The Group defines CGUs as regional branches (in case of Rostelecom), legal entities or group of legal entities (in case of subsidiaries).

The recoverable amount of each CGU is determined by estimating its value in use. Value in use calculation uses cash-flow projections based on actual and budgeted financial information approved by management and a discount rate which reflects time value of money and risks associated with each individual CGU. Key as-sumptions management used in the calculation of value in use are as follows: • for all CGUs cash flow projections cover the period of five years, cash flows beyond five-year period are ex-

trapolated using growth rate of 2%;• discount rates are estimated in nominal terms as the weighted average cost of capital on pre tax basis and var-

ies from 11.6% to 16.26% per CGU.

For individual items of construction in progress for which the Group has no intention to complete and use or sell them impairment loss recognised in the amount of their carrying value.

2011 impairment testing Impairment loss of property, plant and equipment in the amount of 113 (CGU regional branch Ural) and construc-tion in progress of 150 were recognised in 2011 as a result of impairment testing. Impairment losses are includ-ed in the line Depreciation, amortisation and impairment losses in the statement of comprehensive income.

2010 impairment testing As a result of the impairment testing performed as at December 31, 2010, for certain CGUs the Group recognized an impairment loss of property, plant and equipment: Sibirtelecom (64), Uralsvyazinform (293), and reversal of impairment loss of property, plant and equipment: Rostelecom (93) and Southern Telecommunications Company (50).



7. GoodWill and oTher inTanGiBle asseTs

The net book value of goodwill and other intangible assets as at December 31, 2011, 2010 and 2009 was as fol-lows:

Goodwill number capacity

Trade-marks

computer software

customer list

licences other Total

cost

At January 1, 2009 5,819 560 371 34,262 1,554 1,310 785 44,661

Additions – 16 1 2,818 1 240 89 3,165Acquisition through business combination 270 2 15 3 – – 6 296

Disposals – (1) – (1,216) – (48) (10) (1,275)

Reclassification 16 1 (16) (1) 2 – (2) –

At December 31, 2009 6,105 578 371 35,866 1,557 1,502 868 46,847

At January 1, 2010 6,105 578 371 35,866 1,557 1,502 868 46,847

Additions – 11 – 3,128 – 80 508 3,727Acquisition through business combination 2,112 4 5 13 692 – 206 3,032

Disposals (35) (4) (57) (1,058) – (7) (95) (1,256)

Reclassification (1) (1) 133 (169) (27) (43) 108 –

At December 31, 2010 8,181 588 452 37,780 2,222 1,532 1,595 52,350

At January 1, 2011 8,181 588 452 37,780 2,222 1,532 1,595 52,350

Additions – 7 – 4,794 16 99 548 5,464Acquisition through business combination 18,236 310 263 124 13,157 217 4,046 36,353

Disposals (84) (1) – (3,989) – (295) (229) (4,598)

Reclassification 49 – (106) 393 209 (195) (374) (24)

At December 31, 2011 26,382 904 609 39,102 15,604 1,358 5,586 89,545

accumulated amortization and impairment losses

At January 1, 2009 (1,584) (132) (100) (8,404) (274) (550) (189) (11,233)

Amortization expense – (18) (57) (3,741) (102) (175) (82) (4,175)

Disposals – 1 – 1,199 – 17 5 1,222

Impairment losses (14) – – (9) – – (15) (38)

Reclassification (15) – (117) 105 25 1 1 –

At December 31, 2009 (1,613) (149) (274) (10,850) (351) (707) (280) (14,224)



Goodwill number capacity

Trade-marks

computer software

customer list

licences other Total

At January 1, 2010 (1,613) (149) (274) (10,850) (351) (707) (280) (14,224)

Amortization expense – (19) (25) (3,696) (106) (164) (243) (4,253)

Disposals 35 4 55 614 – 8 24 740

Impairment losses – (1) – (4,402) – – (1) (4,404)

Reclassification – – – 88 – – (88) –

At December 31, 2010 (1,578) (165) (244) (18,246) (457) (863) (588) (22,141)

At January 1, 2011 (1,578) (165) (244) (18,246) (457) (863) (588) (22,141)

Amortization expense – (28) (83) (4,613) (1,033) (189) (762) (6,708)

Disposals 84 – – 3,617 – 190 223 4,114

Impairment losses (197) – – (11) – – (5) (213)

Reversal of impairment losses – – – 3,566 – – – 3,566

Reclassification – 1 (8) (65) 31 64 1 24

At December 31, 2011 (1,691) (192) (335) (15,752) (1,459) (798) (1,131) (21,358)

net book value

at december 31, 2009 4,492 429 97 25,016 1,206 795 588 32,623

at december 31, 2010 6,603 423 208 19, 534 1,765 669 1007 30,209

at december31, 2011 24,691 712 274 23,350 14,145 560 4,455 68,187

Interest amounting to 172, 12 and 90 was capitalized in intangible assets for the years ended December 31, 2011, 2010 and 2009, respectively.

intangible assets with indefinite useful lives and goodwill

The owned number capacity with a carrying amount of 697 (2010: 402, 2009: 402) are intangible assets with indefinite useful lives and are not amortized. These assets have no legal restrictions on the term of their use and the Group can derive economic benefits from their use indefinitely. These assets are tested for impairment annu-ally or more frequently if there is an indication that the intangible assets may be impaired.

The Group, on an annual basis, performs testing for impairment of goodwill and intangible assets with indefinite lives.

At each reporting date the Group performs impairment testing of goodwill allocated to CGUs that were acquired upon business combinations. Principal approaches and assumptions which were used to determine value in use of cash-generating units, to which goodwill has been allocated, are disclosed in Note 6.




Goodwill and intangible assets with indefinite useful lives were allocated to the following CGU:

cGU december 31, 2011 december 31, 2010 december 31, 2009

Goodwill before

impairment loss

recognition

intangible assets with

indefinite useful lives

before impairment

loss recognition

Goodwill before

impairment loss

recognition



before impairment

loss recognition

Goodwill before

impairment loss

recognition



before impairment

loss recognition

Natsionalnye telecommunikatsii 16,955 290 – – – –Teleset Networks Public Company Limited 1,680 – 1,680 – –

Volgograd GSM 1,281 20 – – – –

Nizchegorodskaya sotovaya sviaz 1,076 – 1,076 – 1,076 –

MRF Dalniy Vostok 973 – 973 – 973 –

MRF Severo-Zapad 911 – 911 – 911 –

Globus Telecom 636 359 636 359 636 359

RTComm.RU 596 – 596 – 596 –

Severen telecom 432 – 432 – –

MRF Volga 210 – 210 – 210 –

Rosmedia 52 – 52 – 52 –

Other 86 28 37 43 52 43

Total 24,888 697 6,603 402 4,506 402

As a result of impairment testing loss amounted to 145 was recognised in respect of CGU Teleset Networks Pub-lic Company Limited. Impairment loss is included in the line Depreciation, amortisation and impairment losses in the statement of comprehensive income and decreased carrying amount of goodwill.

Discount rate and operating income before amortization and depreciation (OIBDA) margin are the key assump-tions to which calculations of value in use of CGUs with goodwill and indefinite useful life intangible assets al-located to are the most sensitive. Management approach to gross margin projection is based on historical actual results and growth rate forecasts which correlates to industry growth rate.

A 3% decrease in OIBDA margin in the forecasted period results in impairment loss of RTComm.RU by 496 and Globus Telecom by 142. For the value in use of these CGUs to be equal to the carrying amount of the assets OIBDA margin should decrease by 1.89% and 1.43% accordingly.

A 1% increase in discount rate applied to calculation of value in use for Globus Telecom results in impairment loss of 21. For the value in use of Globus Telecom to be equal to the carrying amount of its assets discount rate should increase by 0.85%.

As a result of impairment testing goodwill in respect of Rosmedia was impaired by 52. Impairment loss was rec-ognized in the line Depreciation, amortisation and impairment losses in the statement of comprehensive income.

2010 impairment testing As a result of the impairment testing performed as at December 31, 2010 no impairment loss was recognized.



impairment Testing of other intangible assets

At each reporting date the Group performs impairment testing of intangible assets not yet available for use and intangible assets with indefinite useful lives. Principal approaches and assumptions which were used to deter-mine value in use of cash-generating units, to which these intangible assets belong, are disclosed in Note 6.

2011 impairment testingAs at December 31, 2010 impairment loss on billing system Amdocs was recognized due to the absence of inten-tions to implement and use it. However, in 2011 management approved the decision to implement customer relations management system (further – CRM) on Amdocs platform. According to the agreement with vendor of software billing system licenses were converted into CRM licenses. As a result, previously recognized loss in respect of licenses amounting to 3,419 was reversed in the statement of comprehensive income for 2011 and recognised in the line Depreciation, amortisation and impairment losses.

2010 impairment testing As a result of the impairment testing performed as at December 31, 2010, the Group recognized impairment losses on intangible assets (including on Amdocs): Rostelecom (1,080), Volgatelecom (1,044), Southern Telecommunications Company (828), North-West Telecom (628), CenterTelecom (356), Sibirtelecom (348) and Far East Telecom (120).

2009 impairment testing As a result of the impairment testing performed as at December 31, 2009, Sibirtelecom recognized impairment losses on intangible assets in the amount of 24.

8. sUBsidiaries

These consolidated financial statements include the assets, liabilities and results of operations of the following significant subsidiaries:

subsidiary main activity effective share of the Group as at december 31,

2011 2010 2009

CJSC MTs NTT Communication services (fixed line) 100% 100% 100%

CJSC Westelcom Leasing of equipment 100% 100% 100%

CJSC Zebra Telecom Communication services 100% 100% 100%

OJSC RTComm.RU Communication services (internet) 99.51% 99.51% 99.51%

OJSC RTS Communication services 100% 100% 100%

LLC GTS Communication services – 100% 100%

CJSC NSS Communication services (mobile) 100% 100% 100%

OJSC Stavtelecom Communication services – 100% 100%

LLC Uzhno-Uralskaya telefonnaya compania Communication services 100% 100% 100%

CJSC Baikalwestcom Communication services (mobile) 100% 100% 100%

CJSC Yenisey telecom Communication services (mobile) 100% 100% 100%

OJSC Sahatelecom Communication services – – 100%

CJSC Akos Communication services (mobile) 94.45% 94.45% 94.45%

CJSC Novocom Communication services (internet) – 100% 100%

CJSC Globus-Telecom Communication services 94.92% 94.92% 94.92%

CJSC GlobalTel Communication services 51% 51% 51%

OJSC National Telecommunications Communication services (Pay-TV) 71.8% – –



subsidiary main activity effective share of the Group as at december 31,

2011 2010 2009

CJSC Volgograd-GSM Communication services (mobile) 100% 50% 50%

CJSC Orenburg-GSM Communication services (mobile) 100% 51% 51%

CJSC Severen-Telecom Communication services 100% 100% –

OJSC OK Orbita Recreational services 100% 100% 100%

CJSC RPK Svyazizt Recreational services 100% 100% 100%

CJSC BIT Communication services (mobile) 100% 100% 100%

Teleset Networks Public Company Limited Communication services 100% 100% –

OJSC Svyazintek IT consulting 98% 98% 98%

All of the above entities have the same reporting date as the Group.

All significant subsidiaries, except for Teleset Networks Public Company Limited, are incorporated in Russia. Teleset Networks Public Company Limited is incorporated in Cyprus.

In August 2011 the Group increased its share in CJSC Volgograd-GSM from 50% to 100%. Additional shares were bought for cash payment of 2,322 from Bolaro Holdings ltd, CJSC Info-Telecom and OJSC SMARTS.

In the year 2011 the Group increased its share in CJSC Orenburg-GSM from 51% to 100%. Additional shares were bought for cash payment of 116 from OJSC Srednevolzhskaya mezhregionalnaya assotsiatsia radiotelecommuni-catsionnih system.

OJSC Stavtelecom, LLC GTS and CJSC Novocom were liquidated during year 2011.

In February 2011 the Group acquired 71.8% equity interest in OJSC National Telecommunications from CJSC National Media Group, OJSC Surgutneftegaz and Raybrook Limited. The purchase price amounted to US$ 951 million.

9. inVesTmenTs in associaTes

Investments in associates as at December 31, 2011, 2010 and 2009 were as follows:

associate main activity Voting share capital, %

2011 carrying

amount

2010 carrying

amount

2009 carrying

amount

OJSC Svyazinvest Investments 25.00 29,190 26,309 –

OJSC Bashinformsvyaz Communication services 40.16 3,820 – –

CJSC Volgograd-GSM Mobile communication services 100.00 – 695 692

CJSC Samara Telecom Communication services 27.78 147 144 150

OJSC MMTS-9 Communication services 49.14 260 186 149

OJSC WestBalt Telecom Communication services 38.00 127 87 88

OJSC Vostoktelecom Communication services 25.00 75 65 61

Other Various – 27 31 57Total investments in associates 33,646 27,517 1,197




In September 2010, the Group acquired 25% plus one share of OJSC Svyazinvest for a cash payment of 26,000.

The acquisition of interest in OJSC Svyazinvest resulted in a crossholding because OJSC Svyazinvest is the Company’s parent. The Company is the main subsidiary of OJSC Svyazinvest and represents the major part of OJSC Svyazinvest group.

The investment in OJSC Svyazinvest is accounted for using the equity method applicable for crossholding struc-tures.

In March 2012 the decision about the merger of OJSC Svyazinvest and the Company was approved by the Presi-dent of Russian Federation (see note 34). The crossholding will be eliminated upon the merger’s completion.

In June 2011 the Group acquired 38.78 % equity interest (40.16 % of voting share capital) in OJSC Bashinformsvy-az from LLC Bashtelecominvest. The purchase price amounted to 3,640.

Summarized financial information as at December 31, 2011, 2010 and 2009 and for the years then ended of the associates disclosed above is presented below:

aggregate amounts 2011 2010 2009

Assets 531,872 447,301 3,456

Liabilities 296,126 260,501 694

Revenue 310,353 284,115 2,990

Net income 12,974 27,188 479

None of the Group’s associates are publicly listed entities and consequently do not have published price quota-tions, except for OJSC Bashinformsvyaz, which is listed on MICEX-RTS exchange, Moscow. Based on its closing bid price of 12.48 Roubles at the reporting date, the fair value of the Group’s investment is 4,722.

In 2011 the Group received dividends from its investments in equity accounted investees in the amount of 182 (2010: 151, 2009: 95).

10. oTher inVesTmenTs

december 31, 2011

december 31, 2010

december 31, 2009

non-current investmentsAvailable for sale financial assets 3,558 916 763Loans and receivables 11,058 9,673 3,311Total other non-current investments 14,616 10,589 4,074current investmentsAvailable for sale financial assets - 144 118Loans and receivables 3,926 5,436 20,504Total other current investments 3,926 5,580 20,622Total other investments 18,542 16,169 24,696

The Group’s exposure to credit, currency and interest rate risks related and fair value information related to other investments is disclosed in Note 31.



11. oTher non-cUrrenT asseTs

december 31, 2011

december 31, 2010

december 31, 2009

Non-current advances, given for investing activities 12,539 3,017 4,979

Non-current advances, given for operating activities 258 220 95

Non-current receivables 1,098 449 218

Other non-current assets 32 6 52

Less: doubtful debt allowance (107) (47) (36)

Total other non-current assets 13,820 3,645 5,308

12. inVenTories

december 31, 2011

december 31, 2010

december 31, 2009

Cable 854 885 770

Finished goods and goods for resale 423 445 433

Spare parts 945 841 783

Tools and accessories 188 158 219

Construction materials 69 212 80

Fuel 164 127 173

Other inventory 1,847 1,488 1,331

Total inventories 4,490 4,156 3,789

13. Trade and oTher accoUnTs receiVaBle

Trade and other accounts receivable as at December 31, 2011 and 2010, 2009 comprised of the following:

Gross,december 31,

2011

doubtful debt

allowance

net, december 31,

2011

Amounts due from customers for operating activities 28,311 (4,148) 24,163

Amounts due from customers for non-operating activities 2,572 (651) 1,921

Amounts due from commissioners and agents 1,624 – 1 ,624

Amounts due from personnel 89 – 89

Amounts due from other debtors 1,766 (186) 1,580

Total trade and other accounts receivable 34,362 (4,985) 29,377



Gross,december 31,

2010

doubtful debt

allowance

net, december 31,

2010



Amounts due from commissioners and agents 1,122 – 1,122


Amounts due from other debtors 1,085 (415) 670

Total trade and other accounts receivable 31,348 (5,737) 25,611Gross,

december 31, 2009

doubtful debt

allowance

net, december 31,

2009



Amounts due from commissioners and agents 1,157 – 1,157


Amounts due from other debtors 1,325 (215) 1,110

Total trade and other accounts receivable 28,039 (5,796) 22,243

As at 31 December 2011, 2010 and 2009 settlements with customers for operating activities included settlements with the following counterparties:

december 31, 2011

december 31, 2010

december 31, 2009

Residential customers 12,734 11,524 11,301

Corporate customers 4,969 4,193 3,432

Governmental customers 5,374 5,635 3,020

Interconnected operators – domestic 3,814 4,272 4,529

Interconnected operators – international 1,420 1,314 1,029

Social security bodies 0 3 48

Less: doubtful debt allowance (4,148) (4,470) (4,969)

Total accounts receivable due from customers for operating activities 24,163 22,471 18,390

Based on historic default rates, management believes that trade and other receivables are adequately provided.

As at December 31, 2011, 2010 and 2009 the share of accounts receivable that are past due but not impaired amounted to approximately nil, 4% and 6% of the Group’s total accounts receivable, respectively.



The following table summarizes the changes in the allowance for doubtful accounts receivable for the years ended December 31, 2011, 2010 and 2009:

2011 2010 2009

Balance, beginning of year (5,880) (6,064) (5,645)

Bad debt expense (627) (682) (1,068)

Acquisition through business combinations (299) (137) (8)

Accounts receivable written-off 1,588 1,003 657

Balance, end of year (5,218) (5,880) (6,064)

As at December 31, 2011, 2010 and 2009 amounts due from other debtors include finance lease receivables of 241, 151 and nil, respectively.

The Group entered into two finance lease agreements for use the terrestrial optical fiber cables with OJSC FSK EES. The periods of leases approximate the remaining useful life of the optical fibers. Effective interest rates of the leases are in range of 27–28 % p.a. In 2011 the Group entered into finance lease agreement for use of telecommu-nication equipment with CJSC Astarta. The period of lease 3 years, effective interest rate is 36 % p.a.

Finance income for the years ended December 31, 2011, 2010 amounted to 61 and 81, respectively, and are in-cluded in other investing and financial gain in these consolidated statements of comprehensive income.

Future minimum lease payments together with the present value of the net minimum lease payments as at Decem-ber 31, 2011 and 2010 are as follows:

december 31, 2011 december 31, 2010

Gross investments

in lease

Present value of minimum lease

payments

Gross investments

in lease

Present value of minimum

lease paymentsCurrent portion (less than 1 year 86 25 39 2

More than 1 to 5 years 236 54 156 12

Over 5 years 415 162 336 137

Total 737 241 531 151

14. cash and cash eQUiValenTs

Cash and cash equivalents as at December 31, 2011, 2010 and 2009 included cash in bank, cash in-hand, short-term deposits and bills of exchange with original maturities of less than three months as follows:

december 31, 2011

december 31, 2010

december 31, 2009

Cash in bank and in-hand 4,592 11,521 13,064

Short-term deposits and promissory notes up to 3 months 2,468 1,100 541

Other cash and cash equivalents 117 6 16

Total cash and cash equivalents 7,177 12,627 13,621



15. oTher cUrrenT asseTs

december 31, 2011

december 31, 2010

december 31, 2009

Deferred expenses 35 281 400

VAT recoverable 647 387 644

Assets held for sale 261 164 120

Other current assets 264 296 632

Less: doubtful debt allowance (56) (33) (125)

Total other current assets 1,151 1,095 1,671

16. eQUiTY

The nominal share capital of the Company recorded on its incorporation has been indexed, to account for the effects of hyperinflation from that date through December 31, 2002. The share capital of the Company in the Russian statutory accounts at December 31, 2011 amounted to 7,965,224 nominal (uninflated) RUB (2010, 2009: 2,428,819).

The authorized share capital of the Company as at December 31, 2011 comprised 6,628,696,320 ordinary shares and 242,832,000 non-redeemable preferred shares (2010: 6,628,696,320 and 242,832,000, 2009: 1,634,026,541 and 242,832,000). The par value of both ordinary and preferred shares amounted to RUB 0.0025 per share.

On the 2010 Annual General Meeting, the shareholders of OJSC Rostelecom resolved to increase the number of shares available for additional issue to 5,900,000,000 ordinary shares with par value of RUB 0.0025 per share with the same rights as previously issued ordinary shares. Of them 2,214,561,949 ordinary shares were actually issued on April 1, 2011 to the shareholders of IRCs and OJSC Dagsvyazinform as part of the merger.

As at December 31, 2011 the issued share capital of the Company was as follows:

Type of shares number of shares issued

Total par value

carrying value

Ordinary Shares, RUB 0.0025 par value 2,943,258,269 7.358 81Preferred Shares, RUB 0.0025 par value 242,831,469 0.607 25Total 3,186,089,738 7.965 106

As at December 31, 2010 and 31 December 2009 the issued share capital of the Company was as follows:

Type of shares number of shares issued

Total par value

carrying value

Ordinary Shares, RUB 0.0025 par value 728,696,320 1.822 75Preferred Shares, RUB 0.0025 par value 242,831,469 0.607 25Total 971,527,789 2.429 100

Ordinary shares carry voting rights with no guarantee of dividends. Preferred shares have priority over ordi-nary shares in the event of liquidation but carry no voting rights except on resolutions regarding liquidation or reorganization, changes to dividend levels of preferred shares, or the issuance of additional preferred shares. Such resolutions require two-thirds approval of preferred shareholders. The preferred shares have no rights of redemption or conversion.



Owners of preferred shares have the right to participate in and vote on all issues within the competence of share-holders’ general meetings following the annual shareholders’ general meeting at which a decision not to pay (or to pay partly) dividends on preferred shares has been taken.

In case of liquidation, the residual assets remaining after settlement with creditors, payment of preferred divi-dends and redemption of the par value of preferred shares is distributed among preferred and ordinary share-holders proportionately to the number of owned shares.

Accordingly, the preferred shares of the Company are considered participating equity instruments for the pur-pose of earnings per share calculations (refer to Note 30).

Treasury shares

As at December 31, 2011, 2010 and 2009 total number of treasury shares held by the Group was as follows:

Type of shares december 31, 2011

december 31, 2010

december 31, 2009

Ordinary Shares 183,348,169 191,795,532 4,080

Preferred Shares, 70,384,795 70,384,795 62

Total 253,732,964 262,180,327 4,142

As at December 31, 2010 and 2009 number of shares represents equivalent of shares of the Combined entity.

At the 2010 Annual General Meetings of Shareholders of the Companies, comprising the Group, which took place in May – June 2010, shareholders approved the merger of the seven Interregional Companies and OJS Company of Telecommunication and Information of the Republic of Dagestan with and into OJSC Rostelecom. Shareholders dissenting with the decision, could require redemption of their shares at predetermined rates for both ordinary and preferred shares. According to applicable law, funds allocated for share redemption are limited to 10% of net assets of the companies comprising the Group determined in accordance with Russian accounting principles. As at December 31, 2010, the Group had completed the repurchase of its shares from dissenting shareholders. Total number of treasury shares purchased was an equivalent of 79,356,780 ordinary and 70,384,733 preferred shares of the Combined entity. As at December 31, 2010, all repurchased shares were held by the Group.

During 2010, the Group also purchased share of the companies comprising the Group of an equivalent of 112,434,672 ordinary shares of the Combined entity for 10,850 as a part of a management motivation program (refer note 29).

In October 2011 the Board of Directors of the Company approved decision on shares buy back up to the amount of US$ 500 million.

In December 2011 first tranche of share options granted to employee under the management motivation program started to be exercisable. As at December 31, 2011 total number of ordinary shares realized as an exercise of the options constitutes 18,122,013.

In December 2011 the Group purchased 9,674,650 ordinary shares for 1,480.

dividends

According to the charter of the Company a preferred share carries dividend amounting to the higher of 10% of the net income after taxation of the Company as reported in the Russian statutory accounts divided by 25% of total number of shares and the dividend paid on one ordinary share.

Total amount of dividend paid on ordinary shares should be not less than 20% of net profit of the Group as re-ported under IFRS.



17. BorroWinGs

Borrowings as at December 31, 2011, 2010 and 2009 were as follows:

december 31, 2011

december 31, 2010

december 31, 2009

long-term Borrowings

Non-current portion of long-term borrowings

Bank and corporate loans 79,232 81,441 47,166

Bonds 4,604 4,365 13,894

Promissory notes 9 9 604

Vendor financing 69 135 499

Finance lease liabilities 572 1,901 4,563

Interest payable 13 77 270

Restructured customer payments 28 13 96

Total non-current portion of long-term borrowings 84,527 87,941 67,092

Current portion of long-term borrowings


Bonds 4,285 18,335 19,735

Promissory notes - 597 1,927

Vendor financing 2,362 2,424 2,803

Finance lease liabilities 1,491 2,474 3,880

Restructured customer payments 77 79 57

Total non-current portion of long-term borrowings 52,594 46,561 44,905

Total long-term borrowings 137,121 134,502 111,997

short-term Borrowings


Interest payable 452 1,266 1,786

Other short-term borrowings - - 396

Total short-term borrowings 26,345 3,535 4,199

Current portion of long-term borrowings 52,594 46,561 44,905

Total current borrowings 78,939 50,096 49,104

Total borrowings 163,466 138,037 116,196



Included in current portion of long-term loans is an amount of 537 on a credit agreement between Rostelecom and Vnesheconombank (VEB) entered into in December 2005. The loan is repayable annually up to the end of 2012. Under the existing credit agreement with Vnesheconombank and CSFB, the Group is required to meet at the end of each quarter various financial covenants applied to the statutory financial statements of the Company, including maintaining certain levels of debt to equity and debt to income ratios. As at December 31, 2011 the Group was not in compliance with some of the covenants and at the time these financial statements were author-ized for issue no waiver had been obtained by the Group from the bank. Consequently, the entire amount of the loan is included in the current portion of long-term borrowings as at December 31, 2011. As at December 31, 2010 the Group was not in compliance with some of the covenants and at that date no waiver had been obtained by the Group from the bank. Consequently, the entire amount of the loan is included in the current portion of long-term borrowings as at December 31, 2010. As at December 31, 2009 the Group was in compliance with all of the covenants, but as at June 30, 2009 and September 30, 2009 the Group was not in compliance with some of the covenants and as at December 31, 2009 no waiver had been obtained by the Group from the bank, so the entire amount of the loan is included in the current portion of long-term borrowings as at December 31, 2009.

In connection with the US$ 100 million loan from Vnesheconombank and CSFB, on June 28, 2006, the Group entered into an interest rate swap agreement with CSFB. In accordance with the interest rate swap agree-ment, twice a year on June 28 and December 28, commencing on December 28, 2006 and ending on Decem-ber 28, 2012, the Group undertakes an obligation to CSFB calculated at a fixed interest rate and CSFB undertakes an obligation to the Group in the amount calculated at floating rate payable by the Group on its loan. The Group did not designate the above interest rate swap derivative as hedging instrument. Therefore, this financial instru-ment was classified as financial liability at fair value through profit and loss amounted to 24 (2010: 70, 2009: 109). Fair value of the derivative is calculated by discounting future cash flows determined by condition and payments schedule of the agreement using forward rates of similar instruments at the reporting date. The net gain of 45 related to the change in the fair value of the interest rate swap contract was included in other investing and financial gain in the consolidated statement of comprehensive income for 2011 year (2010: 39; 2009: 67).

There is 359 outstanding on a credit agreement between CJSC GlobalTel and Loral Space and Communications Corporation (“Loral”) as at December 31, 2011, (2010: 329, 2009: 317). CJSC GlobalTel is in default in respect of this loan. A penalty in the amount of 136 is included in the outstanding balance. As no waiver has been obtained from Loral, these loans are classified as current in the consolidated statement of financial position as at Decem-ber 31, 2011. The loan does not provide for any collateral. In 2006, Loral brought an action against CJSC GlobalTel claiming immediate repayment of the full amount of the debt. In 2009, the Supreme Court of Arbitration ordered CJSC GlobalTel to repay the loan and penalty to Loral.

finance lease liabilities

In April 2005, the Group entered into a finance lease agreement for use of terrestrial optical fiber cables. The lease agreement is non-cancellable for the period of 15 years, which approximates the remaining useful life of the optical fibers. Effective interest rate of the lease is 7.21% p.a. Lease payments are denominated in US Dol-lars.

Also, the Group is involved in a finance lease agreement for use of a digital telecommunication station over its estimated remaining useful life of 7 years. Effective interest rate of the lease is 11.7% p.a. Lease payments are denominated in Russian Roubles.

The Group has two lease tranches of optical fibers with OJSC FSK EES until year 2030. The effective interest rates of these leases are 15% and 17% p.a. Lease payments are denominated in Russian Roubles.



Future minimum lease payments together with the present value of the net minimum lease payments as at December 31, 2011, 2010 and 2009 are as follows:


minimum lease

payments


lease payments

minimum lease

payments


lease payments

minimum lease

payments


lease payments

Current portion (less than 1 year) 1,734 1,491 2,817 2,474 5,160 3,880

More than 1 to 5 years 572 472 2,110 1,798 5,447 4,285

Over 5 years 218 100 238 103 334 278

Total 2,524 2,063 5,165 4,375 10,941 8,443

Depreciation of property, plant and equipment under the finance lease contracts for 2011, 2010 and 2009 amounted to 1,397, 1,961 and 2,542, respectively. Finance charges for the year ended December 31, 2011, 2010 and 2009 amounted to 653, 1,048 and 1,879, respectively, and are included in finance costs in these consolidated statements of comprehensive income.

Vendor financing

Vendor financing payable includes the following as at December 31, 2011, 2010 and 2009:

december 31, 2011

december 31, 2010

december 31, 2009

Government of Dagestan Republic 69 79 87

Sisko Capital CIS – 43 376

Huawei Technologies Co. Ltd. – – 3

CJSC Envision Group – 5 14

Other – 8 19

Vendor financing payable – long-term 69 135 499

Globalstar L.P. 2,159 1,919 1,780

Metrosvyaz Ltd 99 99 99

Sisko Capital CIS 47 342 371

Huawei Technologies Co. Ltd 45 45 68

Government of Dagestan Republic 10 – –

USP Kompyulink – – 257

CJSC Envision Group – 8 64

Other 2 11 164

Vendor financing payable – current portion 2,362 2,424 2,803

Total vendor financing payable 2,431 2,559 3,302

As at December 31, 2011, the Group had the following outstanding vendor financing payable:

2,159 (US$ 67 million) payable by CJSC GlobalTel to Globalstar L.P., which is the non-controlling shareholder of CJSC GlobalTel, for the purchase of three gateways and associated equipment and services. Globalstar L.P.



has a lien over this equipment until the liability is fully paid. CJSC GlobalTel is in default in respect of payments in 2004–2011 and has not obtained a waiver from Globalstar L.P. As a result, the entire balance of 1,323 (2010: 1,252, 2009: 1,242) (US$ 41 million) is classified as current in the consolidated statements of financial position as at 31 December 2011, 2010 and 2009. Penalty interest in the amount of 836, 667 and 538, accrued for each day of delay at the rate of 10% p.a., is included in the vendor financing payable in the consolidated statements of finan-cial position as at 31 December 2011, 2010 and 2009, respectively. In 2006, Loral, which is the legal successor of Globalstar L.P., brought an action against CJSC GlobalTel claiming immediate repayment of the full amount of the vendor financing payable. Management believes that immediate repayment of the defaulted vendor financing and loans would not have a material adverse effect on the Group’s results of operations, financial position and operating plans.

18. accoUnTs PaYaBle, ProVisions and accrUed eXPenses

Accounts payable, provisions and accrued expenses consisted of the following as at December 31, 2011, 2010 and 2009:

december 31, 2011

december 31, 2010

december 31, 2009

Payables for purchases and construction of property, plant and equipment 10,839 10,011 5,076

Other taxes payable 6,268 7,779 7,813

Payable to personnel 8,126 8,448 8,305

Payable for operating activities 3,437 3,296 2,073

Payable to interconnected operators 3,487 4,017 4,314

Dividends payable 372 673 342

Payable for purchases of software 312 157 145

Current provisions 337 230 525

Other accounts payable 4,218 4,324 6,367

current accounts payable, provisions and accrued expenses 37,396 38,935 34,960

Non-current payables 42 129 37

Non-current provisions 43 73 7

non-current accounts payable, provisions and accrued expenses 85 202 44

Total accounts payable, provisions and accrued expenses 37,481 39,137 35,004

19. emPloYee BenefiTs

According to staff agreements, the Group contributes to pension plans and also provides additional benefits for its active and retired employees.

defined contribution plans

The non-state pension fund NPF Telecom-Soyuz maintains the defined contribution plan of Group. In 2011 the Group expensed 205 (2010: 148; 2009: 222) in relation to defined contribution plans.

defined benefit plans and other long-term employee benefits

To become eligible for benefits under the plan upon retirement the participant must achieve the statutory retire-ment age, which is currently 55 for women and 60 for men and fulfil certain minimum seniority requirements.



As at December 31, 2011, the Group employed 173,878 participants of defined benefit plan and supported 59,410 pensioners eligible for post-employment benefits.

As at December 31, 2011, management estimated that employees’ average remaining working period was 9 years (2010 – 10 years; 2009 – 14 years)

As at December 31, 2011, 2010 and 2009 net defined benefit plan liability comprised the following:

2011 2010 2009

Present value of obligations on defined benefit plans 11,189 16,759 15,964

Fair value of plan assets (4) (1) (5)

Present value of unfunded obligations 11,185 16,758 15,959

Unrecognized past service cost (960) (1,861) (2,451)

Unrecognized actuarial gains/losses 1,527 1,300 2,070 net defined benefit plan liability 11,752 16,197 15,578

Net expenses for the defined benefit plan recognized in 2011, 2010 and 2009 were as follows:

2011 2010 2009

Current service cost 604 835 902

Interest cost 1,039 1,423 1,571

Expected return on plan assets - - (15)

Actuarial gains - (101) (137)

Past service cost - guaranteed part - - 114

Amortization of past service cost - non-guaranteed part 483 608 735

Curtailment effect (5,115) (357) (254)

Final settlement effect - - (246)

net (gain)/expense for the defined benefit plan (2,989) 2,408 2,670

Net gain/expense for the defined benefit plan, excluding interest cost and return on plan assets, is included in the consolidated statement of comprehensive income in the line “Wages, salaries, other benefits and payroll taxes”. Return on plan assets and interest cost are recognized in “Other investing and financing gain” and “Finance costs” line items of these consolidated statements of comprehensive income.

Curtailment effect occurred due to introduction of the new collective labour agreement in December 2011. The agreement abolished certain social benefits in regard of the former Company’s employees and other miscellane-ous social payments.

The following table summarizes movements in the present value of defined benefit obligations for the above plan in 2011, 2010 and 2009:

2011 2010 2009

Present value of defined benefit obligations as at January 1 16,759 15,964 17,617

Curtailment of liabilities (4,868) (322) (154)

Interest cost 1,039 1,423 1,571

Current service cost 604 835 902



2011 2010 2009

Past service cost - 1 (10)

Benefits paid (1,453) (1,794) (435)

Business combinations - - (7)

Liabilities extinguished on settlements - - (1,661)

Actuarial (gains)/losses (892) 652 (1,859)

Present value of defined benefit obligations as at december 31 11,189 16,759 15,964

The following table summarizes movements in the fair value of defined benefit plan assets in 2011, 2010 and 2009:

2011 2010 2009

fair value of plan assets as at January 1 1 5 288

Expected return on plan assets - - 15

Actuarial (gains)/losses - 1 (42)

Benefits paid (1,453) (1,794) (435)

Assets distributed on settlement - - (1,661)

Contributions by the employer 1,456 1,789 1,840

fair value of plan assets as at december 31 4 1 5

As at December 31, 2011, 201 and 2009 the principal actuarial assumptions used in determining the amounts for the defined benefit plan were as follows:

2011 2010 2009

Discount rate 8.50% 8.00% 9.00%

Future salary increases 9.72% 9.72% 9.72%

Rate used for calculation of annuity value 4.00% 4.00% 4.00%

Increase in financial support benefits 5.50% 5.50% 5.50%Staff turnover 5% for aged 50 and below

0% for aged above 50 5% for aged 50 and below

0% for aged above 507.00%

Mortality tables (source of information) 1985/86 1985/86 1985/86

The amounts of experience adjustments and present value of defined benefit obligation and defined benefit as-sets for the current annual period and previous four annual periods are as follows:

2011 2010 2009 2008 2007

Defined benefit obligations 11,189 16,759 15,964 17,617 19,349

Defined benefit assets (4) (1) (5) (288) (300)

Plan (deficit)/proficit 11,185 16,758 15,959 17,329 19,049

Experience adjustments on defined benefit plan liabilities 664 266 301 851 1,714

Experience adjustments on defined benefit plan assets - (1) 8 30 2

The Group expects to contribute 1,500 to its non-state pension fund in 2012 in respect of defined benefit plans.

(Continued from pages 108)



20. income TaXes

The components of income tax expense for the years ended December 31, 2011, 2010 and 2009 were as follows:

2011 2010 2009

current income tax expense

Income tax for the year (8,715) (9,625) (7,225)

Adjustments of the current income tax for previous years (41) 41 159

Total current income tax for the year (8,756) (9,584) (7,066)

deferred tax expense

Origination and reversal of temporary differences (1,867) (719) (752)

Changes in unused tax losses (332) 262 (256)

Total deferred income tax (2,199) (457) (1,008)

Total income tax expense for the year (10,955) (10,041) (8,074)

A reconciliation of the theoretical tax charge to the actual income tax charge is as follows:

2011 2010 2009

Profit before tax 57,025 41,379 34,337

Statutory income tax rate 20% 20% 20%

Theoretical tax charge at statutory income tax rate (11,405) (8,276) (6,867)

Adjustments of the current income tax for previous years (41) 41 159

Non-deductible expenses and non-taxable income 918 (2,009) (1,045)

Tax on intragroup dividend income (44) (84) (134)

Changes in unrecognized deferred tax assets (513) 262 (256)

Tax exemptions 57 60 35

Other 73 (35) 34Total actual income tax (10,955) (10,041) (8,074)

effective tax rate, % 19.21% 24.27% 23.51%

Non-deductible expenses and non-taxable income comprised the following amounts for the year ended Decem-ber 31, 2011, 2010 and 2009:

2011 2010 2009

Effect of employee benefits curtailment 1,023 – –

Effect of business combination achieved in several stages 388 – –

Reversal/ (accrual) of impairment loss 665 (665) –

Other (1,158) (1,344) (1,045)

Total non-deductible expenses and non-taxable income 918 (2,009) (1,045)



Other non-deductible expenses and non-taxable income include income connected with depreciation of certain property, plant and equipment, expenses within share-based employee motivation program, promotional and sponsorship expenditures, travel expenditures in excess of certain statutory allowances, other expenses and value added tax accrued on free-of-charge services.

The components of net deferred tax assets and liabilities as at December 31, 2011, 2010 and 2009, and the re-spective movements during 2011, 2010 and 2009 were as follows:

Balance as at

January 1, 2011

movement during 2011 recognized in Balance as at december 31,

2011acquisition through

business combinations

other comprehen-sive income

Profit / or loss for the year

Tax effects of future tax deductible items

Property, plant and equipment – 9 – 224 233

Unused tax losses 240 476 – (332) 384

Trade and other accounts receivable 35 4 – 28 67

Inventories 9 1 – 42 52

Investments 469 1 – (470) –

Employee benefits 1,880 – – 104 1,984

Loans and borrowings 1,311 – – (927) 384

Other non-current liabilities 85 – – 469 554Accounts payable, provisions and accrued expenses 1,245 19 – 282 1,546

Other 782 30 – (737) 75

Gross deferred tax asset 6,056 540 – (1,317) 5,279

Tax effects of future taxable items:

Property, plant and equipment (14,709) (788) – (2,051) (17,548)

Intangible assets (1,495) (3,621) – 814 (4,302)

Investments (604) – (4) 447 (161)Accounts payable, provisions and accrued expenses (522) (55) – 338 (239)

Trade and other accounts receivable (410) (3) – (266) (679)

Loans and borrowings (13) – – 9 (4)

Other (54) (6) – (173) (233)

Gross deferred tax liability (17,807) (4,473) (4) (882) (23,166)

net deferred tax liability (11,751) (3,933) (4) (2,199) (17,887)



Balance as at

January 1, 2010

movement during 2010 recognized in Balance as at

december 31, 2010

acquisition through





Unused tax losses – – – 240 240

Trade and other accounts receivable 58 – – (23) 35

Inventories 15 – – (6) 9

Investments 234 – – 235 469


Loans and borrowings 1,824 – – (513) 1,311

Other non-current liabilities 92 – – (7) 85Accounts payable, provisions and accrued expenses 1,287 – – (42) 1,245

Other 550 – – 232 782

Gross deferred tax asset 5,866 – – 190 6,056


Property, plant and equipment (14,264) (344) – (101) (14,709)

Intangible assets (1,879) 22 – 362 (1,495)

Investments (98) – (41) (465) (604)Accounts payable, provisions and accrued expenses (347) – – (175) (522)

Trade and other accounts receivable (165) – – (245) (410)


Other (12) – – (42) (54)

Gross deferred tax liability (16,797) (322) (41) (647) (17,807)

net deferred tax liability (10,931) (322) (41) (457) (11,751)



Balance as at

January 1, 2009

movement during 2009 recognized in Balance as at

december 31, 2009

acquisition through





Trade and other accounts receivable 174 – – (116) 58

Inventories 21 – – (6) 15

Investments 223 – (82) 93 234


Loans and borrowings 1,651 1 – 172 1,824

Other non-current liabilities 93 – – (1) 92Accounts payable, provisions and accrued expenses 1,034 – – 253 1,287

Other 88 – – 462 550

Gross deferred tax asset 4,940 1 (82) 1,007 5,866


Property, plant and equipment (12,721) (18) – (1,525) (14,264)

Intangible assets (1,793) – – (86) (1,879)

Investments (49) – – (49) (98)Accounts payable, provisions and accrued expenses 15 – – (362) (347)

Trade and other accounts receivable (127) 1 – (39) (165)


Other (27) – – 15 (12)

Gross deferred tax liability (14,765) (17) – (2,015) (16,797)

net deferred tax liability (9,825) (16) (82) (1,008) (10,931)

Taxable temporary differences associated with investments in subsidiaries for which no deferred tax liabilities were recognized in the accompanying consolidated statements of financial position as at December 31, 2011, 2010 and 2009 amounted to 16,294, 11,315 and 8,736, respectively. Deductible temporary differences associated with investments in subsidiaries for which no deferred tax assets were recognized in the accompanying consoli-dated statements of financial position as at December 31, 2011, 2010 and 2009 amounted to 2,596, 1,760 and 1,807, respectively.

Deductible temporary differences for which no deferred tax assets were recognized in the accompanying con-solidated statements of financial position as at December 31, 2011, 2010 and 2009 amounted to 5,666, 3,103 and 4,475, respectively, of which unused tax losses with expiry date from 2013 to 2021 amounted to 4,418, 1,866 and 2,601 for 2011, 2010 and 2009, respectively.



Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and the deferred income tax assets and deferred income tax liabilities relate to the income taxes levied by the same fiscal authority on the same taxable entity.

The consolidated statement of comprehensive income for 2011, 2010 and 2009 includes tax expense in respect of following items of other comprehensive income:

2011 2010 2009

Change in fair value of available-for-sale financial assets (4) (41) (82)

21. reVenUe

Revenue comprised the following for the years ended December 31, 2011, 2010 and 2009:

2011 2010 2009

Local telephone services 88,018 85,396 79,654

Intra-zone telephone services 21,447 23,358 25,239Domestic long-distance/International long-distance telephone services 24,070 27,939 31,892

Interconnection and traffic transit services (excluding Internet) 20,202 19,703 23,706

Mobile communication services 35,560 33,872 29,864

Rent of channels 9,756 9,149 12,206

Broadband Internet 46,993 39,215 32,784

Pay-TV 7,011 1,102 865

Data services (VPN, data centres, wholesale Internet sales) 18,929 17,191 13,182

Other 24,029 18,806 15,253

Total revenue 296,015 275,731 264,645

In 2011, 2010 and 2009 the Group generated revenue by the following major customer groups:

customer Groups 2011 2010 2009

Residential customers 160,444 154,787 148,503

Corporate customers 69,774 62,175 60,737

Governmental customers 34,484 28,445 23,272

Interconnected operators 31,313 30,324 32,133

Total 296,015 275,731 264,645



22. WaGes, salaries, oTher BenefiTs and PaYroll TaXes

2011 2010 2009

Salary expenses 58,811 53,649 51,886

Share-based remuneration 588 3,930 –

Social taxes 16,705 12,313 11,508

(Gain)/loss for defined benefit plan (4,114) 1,072 1,331

Other personnel costs 2,848 3,453 2,201

Total wages, salaries, other benefits and payroll taxes 74,838 74,417 66,926

Gain on pension plans in 2011 occurred due to curtailments effects of some of the Group’s defined benefits schemes (refer to Note 19).

23. maTerials, UTiliTies, rePairs and mainTenance

2011 2010 2009

Repairs and maintenance 12,202 10,968 10,516

Utilities 7,661 6,926 6,108

Materials 7,419 7,178 7,476

Total materials, utilities, repairs and maintenance 27,282 25,072 24,100

24. oTher oPeraTinG income

2011 2010 2009

Reimbursement of losses incurred from universal services fund 11,528 11,297 11,012

Gain on disposals of other assets 132 138 105

Reimbursement of other losses incurred 246 83 48

Fines and penalties 536 617 418

Income on Government grants 11 – –

Other income 2,185 2,494 2,669

Total other operating income 14,638 14,629 14,252

In 2011 the Group received the grant from the Ministry of Communications for compensating expenses associ-ated with the organization and implementation of activities under the project “Organisation of high-grade access to information networks through a satellite communications system.” The Government grant received amounted to 1,105 and initially was recognised as long-term deferred income. As at December 31, 2011 long-term deferred income associated with the grant was included in other non-current liabilities in the accompanying consolidated statement of financial position in the amount of 1,094. For the year ended December 31, 2011 income related to the grant of 11 was recognised in other operating income in the accompanying consolidated statement of com-prehensive income.



25. oTher oPeraTinG eXPenses

2011 2010 2009

Agency fees 7,420 6,809 6,457

Taxes, other than income tax 6,795 6,377 6,210

Third party services and expenses related to administration 5,877 6,171 6,559

Advertising expenses 5,040 3,194 2,806

Rent 4,525 4,167 4,049

Transportation and postal services 3,527 2,633 2,722

Fire and other security services 3,090 2,935 3,003

Contributions to universal service fund 2,952 2,800 2,697

E-Government contract expenses 2,188 1,129 477

Audit and consulting fees 2,241 1,946 2,570

Member fees, charity contribution, payments to labour units 575 680 468

Reorganization expenses 395 951 –

Asset insurance 182 302 340

Fines and penalties 33 30 62

Other 4,846 5,722 5,289

Total other operating expenses 49,686 45,846 43,709

26. finance cosTs

2011 2010 2009

Interest expense of defined benefit plans 1,039 1,424 1,571Interest expense on bank and corporate loans, bonds, promissory notes and vendor financing 10,649 9,208 12,851

Interest expense on finance lease liabilities 653 1,048 1,879

Borrowing servicing expense 132 118 151

Total finance costs 12,473 11,798 16,452



27. oTher inVesTinG and financial Gain

2011 2010 2009

Interest income from finance assets 1,853 2,765 3,063

Income from pension plan assets – – 15

Dividend income 27 27 8

(Expenses)/ income related to business combinations (348) 51 (50)

Loss on disposal of subsidiaries (120) – –

Gain/ (loss) on disposal of other financial assets – 74 (82)

Gain on change of fair value of financial assets through profit and loss 51 39 67

Fair value revaluation of previously acquired associate 1,505 – –

Reversal of impairment of financial assets 30 20 70

Other (losses)/gains (342) (231) 146

Total other investing and financial gain 2,656 2,745 3,237

Other investing and financial gain include fair value revaluation of previously acquired share in CJCS Volgograd-GSM at the date of obtaining control in the amount of 1,505 (refer to Note 5).

28. seGmenT informaTion

In 2011 the basis of segmentation has changed as compared with 2010 due to the reorganization of the Company completed on April 1, 2011 (refer to Note 1). As at December 31, 2010 there was no single management body that could be identified as chief operating decision maker. However, the financial information of former Rostelecom and IRCs comprising Svyazinvest Group was regularly analyzed by OJSC Svyazinvest, the Group’s controlling shareholder, and was used for decision making in regards of their strategy and operations. Thus Rostelecom and IRCs were determined as operating and reportable segments with all subsidiaries included in the segment Other as they did not meet quantitative threshold.

After the merger the former Rostelecom branches and IRCs, which are located in the same geographical area, were integrated into macroregional branches of reorganised Company. Rostelecom Management Body which becomes chief operating decision maker started to analyze operating results of OJSC Rostelecom by macrore-gional branches. The results of subsidiaries are analysed on standalone basis. Consequently, the Group has determined its macroregional branches and subsidiaries as operating segments. However, subsidiaries do not meet quantitative threshold defined by IFRS 8 and financial information of these operating segments are com-bined and presented under the heading Other. Currently Group has nine reportable segments, which are the Group’s strategic business units. While differentiate geographically, the strategic business units offer mainly the same services to the customers.

Management of the Company assesses the performance of the operating segments based on the accounting data that is prepared using Russian statutory accounting principles on unconsolidated basis. A measure of segment profit or loss reported to the management of the company is earnings before interest, taxes, depreciation and amortization (EBITDA).



The following table illustrates financial information of reportable segment required for disclosure by IFRS 8 for the year ended December 31, 2011:

2011 corp. center north-West center south Volga Ural sibir far east other Total segments

adjustments and eliminations

Total

revenue

Third party revenue 21,789 31,598 45,450 26,607 32,737 45,596 31,471 20,217 40,967 296,432 (417) 296,015

Revenue from other segments 1,374 846 1,007 929 1,026 798 1,352 353 5,000 12,685 (12,685) –

Total revenue 23,163 32,444 46,457 27,536 33,763 46,394 32,823 20,570 45,967 309,117 (13,102) 296,015

eBiTda 302 14,828 15,581 11,250 13,730 19,927 12,741 6,413 13,477 108,249 13,459 121,708

The following table illustrates reconciliation of reportable segment EBITDA to profit before income tax for the year ended December 31, 2011:

eBiTda of reportable segments 94,772

eBiTda of other segments 13,477

Adjustments

Depreciation, amortization and impairment losses (50,608)

Finance costs and other investing and financial gain (9,817)

Income from associates 3,439

Net gain for defined benefit plan 4,335

Share-based remuneration (588)

Reversal of leasing expenses recognized in statutory books 4,177

Reversal of income from revaluation of associates and available-for-sale investments recognized in statutory books (760)

Intragroup dividends (563)

Adjustments to loss on disposal of property, plant and equipment and intangible assets (1,227)

Other adjustments 388

Profit before income tax 57,025



The following table illustrates financial information of reportable segment required for disclosure by IFRS 8 for the year ended December 31, 2011:



Total

revenue

Third party revenue 21,789 31,598 45,450 26,607 32,737 45,596 31,471 20,217 40,967 296,432 (417) 296,015

Revenue from other segments 1,374 846 1,007 929 1,026 798 1,352 353 5,000 12,685 (12,685) –

Total revenue 23,163 32,444 46,457 27,536 33,763 46,394 32,823 20,570 45,967 309,117 (13,102) 296,015

eBiTda 302 14,828 15,581 11,250 13,730 19,927 12,741 6,413 13,477 108,249 13,459 121,708




Adjustments



Income from associates 3,439

Net gain for defined benefit plan 4,335

Share-based remuneration (588)


Reversal of income from revaluation of associates and available-for-sale investments recognized in statutory books (760)


Adjustments to loss on disposal of property, plant and equipment and intangible assets (1,227)

Other adjustments 388




The following table illustrates information about reportable segment revenue and EBITDA for the year ended December 31, 2010:



Total

revenue

Third party revenue 18,448 30,869 43,777 25,831 31,788 45,472 31,000 19,609 30,416 277,210 (1,479) 275,731

Revenue from other segments 1,143 193 352 294 742 159 787 208 4,516 8,394 (8,394) –

Total revenue 19,591 31,062 44,129 26,125 32,530 45,631 31,787 19,817 34,932 285,604 (9,873) 275,731

eBiTda (4,349) 13,287 13,886 10,414 12,315 20,363 12,538 7,060 12,074 97,588 8,600 106,188




Adjustments



Income from associates 239

Share-based remuneration (3,930)

Net loss for defined benefit plan (923)


Adjustments to loss on disposal of property, plant and equipment and intangible assets (754)


Other adjustments (1,005)







Total

revenue


Revenue from other segments 1,143 193 352 294 742 159 787 208 4,516 8,394 (8,394) –

Total revenue 19,591 31,062 44,129 26,125 32,530 45,631 31,787 19,817 34,932 285,604 (9,873) 275,731

eBiTda (4,349) 13,287 13,886 10,414 12,315 20,363 12,538 7,060 12,074 97,588 8,600 106,188




Adjustments




Share-based remuneration (3,930)

Net loss for defined benefit plan (923)




Other adjustments (1,005)







Total

revenue


Revenue from other segments 708 376 258 178 327 75 488 141 1 842 4 393 (4,393) -

Total revenue 17,531 29,777 40,814 24,949 31,278 44,004 30,516 15,156 37,252 271,277 (6,632) 264,645

eBiTda (6,540) 13,110 13,827 10,608 13,749 17,472 11,429 5,473 11,342 90,470 8,426 98,896




Adjustments



Net loss for defined benefit plan (1,011)





Other adjustments (245)


Substantially all of the Group assets are located within the territory of the Russian Federation.

The Group had no individual customers, other than the Government of the Russian Federation and its related parties, that accounted for greater than 10% of its revenue during the years ended December 31, 2011, 2010 and 2009.



29. share-Based PaYmenTs

share-based program started in 2011 (preferred shares)

In June 2011, the Board of Directors of the Company approved changes to the employee long-term incentive program by launching an additional share option scheme. Members of the Board of Directors and senior em-ployees were granted options to buy preferred shares of the Company at an exercise price 87.6 RUB per share. Total funds allocating to the scheme amounted to 3,500. To operate the program, the Company established fund “Gazpombank – Telecommunication Plus” under management of ZAO “Gazprombank – Upravlenie aktivami”. To execute the program fund “Gazpombank – Telecommunication Plus” purchased shares from the Company’s subsidiary LLC MOBITEL. The contracts with part of employees were signed on June 29, 2011. Another part of employees will sign contracts on March 31, 2012.

The scheme is classified as equity-settled share-based payment plan. The Group receives services from its executives and senior employees and grants its own equity instruments as consideration. The share-based transaction is settled by the Fund, which is a SPE controlled by the Group and, therefore, is consolidated in the consolidated financial statements.

Options are exercisable in two tranches: not more than 50% are exercisable after June 14, 2012 and the rest after June 14, 2013. Options may be exercised within a six-month period after exercise date. Unclaimed options of the first tranche may also be exercised within the six-month exercise period attributed to the second tranche.

The following share-based payment arrangements were in existence during 2011:

options series number of options granted

Grant date exercise date exercise price, rUB

share price at grant date, rUB

(1) Granted on June 29, 2011 13,892,662 June 29, 2011 June 14, 2012 87.60 86.30

(2) Granted on June 29, 2011 13,892,662 June 29, 2011 June 14, 2013 87.60 86.30

(3) Granted on March 31, 2012 3,345,891 March 31, 2012 June 14 2012 87.60 88.67

(4) Granted on March 31, 2012 3,345,891 March 31, 2012 June 14, 2013 87.60 88.67

All options vested during the year ended December 31, 2011 and were outstanding with weighted average re-maining contractual life of 257 days for options (1) and (3) and 622 days for options (2) and (4).

The weighted average fair value of the share options as of the grant date is 16.83 RUB for options (1) and (2) and 22.17 for options (3) and (4). Total amount of 588 was recognized as an expense in wages, salaries, other benefits and payroll taxes in this consolidated statement of comprehensive income for the year ended December 31, 2011.

Fair values of options were determined using the Black-Scholes option pricing model. Expected volatility is based on the historical average industry share price volatility over the option lives for respective series.

inputs into the model series 1 and 2 series 3 and 4

Grant date share price, RUB 86.30 88.67

Exercise price, RUB 87.60 87.60

Expected volatility 39.8% 39.8%

Option life 1.75 year 1.75 year

Dividend yield 4.4% 4.4%

Risk-free interest rate 5.58% 5.58%



share-based program started in 2010 (ordinary shares)

The Group introduced a share option scheme for executives and senior employees of the Group in August 2010. In accordance with the terms of the scheme, executives and senior employees which were in service with the Svyazinvest Group during the vesting period from May 28, 2010 until December 1, 2010 were granted options to purchase ordinary shares of OJSC Rostelecom at an exercise price of 96.8 RUB per share. The contracts with em-ployees were signed on August 17, 2010. To operate the program, the Group established a fund under manage-ment of ZAO “Gazprombank – Upravlenie aktivami” (the “Fund”), which is also a party of the option agreements.

In addition to executives and senior employees of the Group, certain Board members, who are also executives and senior employees of Svyazinvest, were granted options as part of the scheme. The Group recorded a propor-tionate share of their share-based remuneration.

The scheme is classified as equity-settled share-based payment plan. The Group received services from its executives and senior employees and granted its own equity instruments as consideration. The share-based transaction is settled by the Fund, which is a SPE controlled by the Group and, therefore, is consolidated in the consolidated financial statements. The Fund purchased shares of the companies comprising the Group on open market using cash contributions from the Group of 10,850.

Options are exercisable in two tranches: not more than 60% are exercisable after December 1, 2011 and the rest after December 1, 2012. Options may be exercised within a six-month period after exercise date. Unclaimed options of the first tranche may also be exercised within the six-month exercise period attributed to the second tranche.

The following share-based payment arrangements were introduced during 2010:

options series number of options granted

Grant date exercise date exercise price, rUB

share price at grant date, rUB

(1) Granted on August 17, 2010 59,253,817 August 17, 2010 December 1, 2011 96.80 109.17

(2) Granted on August 17, 2010 39,502,545 August 17, 2010 December 1, 2012 96.80 109.17

All options vested during the year ended December 31, 2010. The weighted average fair value of the share options granted as of the grant date is 39.61 RUB. As at December 31, 2011 weighted average remaining contractual life of options comprised 60 and 425 for options (1) and (2) respectively (2010: 426 and 791).

For the year ended December 31, 2011 the Group recognized nil (2010: 3,930) as an expense in wages, salaries, other benefits and payroll taxes with the regard of those options.

Fair values of options on grant date were determined using the Black-Scholes option pricing model. Expected volatility is based on the historical average industry share price volatility over the option lives for respective series.

inputs into the model series 1 series 2

Grant date share price, RUB 109.17 109.17

Exercise price, RUB 96.80 96.80

Expected volatility 43.46% 47.88%

Option life 1.54 year 2.54 year

Dividend yield 0.27% 0.27%

Risk-free interest rate 4.99% 6.18%



The following table reconciles the share options on ordinary shares outstanding at the beginning and end of the year:

2011 2010

number of options Weighted average exercise price, rUB

number of options Weighted average exercise price, rUB

Balance at beginning of year 99,026,362 96.8 - -

Granted during the year - 99,026,362 96.8

Exercised during the year 18,122,013 96.8 - -

Balance at end of year 80,904,349 96.8 99,026,362 96.8

In December 2011 employees exercised 18,122,013 options. The weighted average share price at date of exercise for share options exercised in 2011 was 149.7 RUB (2010: no options exercised).

30. earninGs Per share

2011 2010 2009

Profit for the period attributable to shareholders of the Company 46,240 31,418 26,125Weighted average number of shares outstanding used in calculation of basic earning per shares 2,925,111,521 3,098,858,910 3,184,735,978Weighted average number of shares outstanding used in calculation of diluted earning per shares 2,971,118,825 3,124,596,635 3,184,735,978Basic earnings per share attributable to ordinary shareholders of the combined group, in rUB 15.81 10.14 8.20diluted earnings per share attributable to ordinary shareholders of the combined group, in rUB 15.56 10.06 8.20

Weighted average number of shares outstanding for the years ended December 31, 2011 is adjusted for the treasury shares of the Group, which amounted to 190,826,904 (2010: an equivalent of 191,530,851) ordinary and 70,151,313 (2010: 70,151,313) preferred shares of the Company.

Reconciliation of weighted average number of shares used in calculation of basic and diluted earnings per shares:

2011 2010 2009

Weighted average number of shares outstanding used in calculation of basic earning per shares 2,925,111,521 3,098,858,910 3,184,735,978

Dilutive effect of call options 46,007,304 25,737,725 -Weighted average number of shares outstanding used in calculation of diluted earning per shares 2,971,118,825 3,124,596,635 3,184,735,978

31. financial insTrUmenTs

The Group’s principal financial instruments comprise cash and cash equivalents, investments, bank loans, bonds and promissory notes issued and finance leases liabilities. These instruments serve to finance the Group’s op-erations and capital expenditures; its corporate financial transactions such as share repurchase and acquisition



strategy; place available funds in course of cash management. Other financial assets and liabilities such as trade receivables and trade payables arise directly from the Group’s operations. The following table presents the carry-ing amounts of financial assets and liabilities as at December 31, 2011, 2010 and 2009:

classes categories december 31, 2011

december 31, 2010

december 31, 2009

Cash and cash equivalents Loans and receivables 7,177 12,627 13,621

Trade and other receivables Loans and receivables 30,368 26,013 22,425

Available-for-sale financial assets at cost Available-for-sale 9 35 38

Available-for-sale financial assets at fair value Available-for-sale 3,549 1,025 843

Loans Loans and receivables 14,984 15,109 23,815

Total financial assets 56,087 54,809 60,742

Bank and corporate loans Liabilities at amortized cost 149,504 106,362 65,686

Bonds Liabilities at amortized cost 8,889 22,700 33,629

Promissory notes Liabilities at amortized cost 9 606 2,531

Vendor financing Liabilities at amortized cost 2,431 2,559 3,302

Finance lease liabilities Liabilities at amortized cost 2,063 4,375 8,443

Interest payable Liabilities at amortized cost 466 1,343 2,056

Hedge derivativeFinancial liabilities at fair value through profit and loss – – 396

Other borrowings Liabilities at amortized cost 105 92 153

Trade and other payables Liabilities at amortized cost 30,077 30,035 24,750

Non-hedge derivativeFinancial liabilities at fair value through profit and loss 24 70 109

Total financial liabilities 193,568 168,142 141,055

The fair value of cash and cash equivalents, current receivables, trade payables, other current financial assets and liabilities approximate their carrying amount largely due to the short-term maturity of these instruments.

The fair value of long-term debt investments, long-term accounts receivable and non-current accounts payable correspond to the present values of the payments related to the assets and liabilities, taking into account the current interest rate parameters that reflect market-based changes to terms and conditions and expectations.

Available for sale investments accounted for at cost include unquoted equity investments whose value cannot be measured reliably. Quoted prices are not available for these investments due to the absence of an active mar-ket. It is also impracticable to derive fair value using the similar transaction method. The discounting cash flow method cannot be applied to such investments as there are no reliably determinable cash flows related to them.

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices).Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).



2011 2010 2009

available-for-sale financial assets

Long-term equity investments at fair value

Level 1 776 1,007 815

Level 2 2,773 18 28

Level 3 – – –

Total long-term equity investments at fair value 3,549 1,025 843

financial liabilities at fair value through profit and loss

Non-hedge derivatives

Level 1 – – –

Level 2 24 70 109

Level 3 – – –

Total non-hedge derivatives 24 70 109

Hedge derivatives

Level 1 – – –

Level 2 – – 396

Level 3 – – –

Total hedge derivatives – – 396

income and expenses on financial instruments

2011 finance costs other investing and financing gains and losses

other investing and financing gains and losses

equity

Bad debt income / (expense)

interest expense interest income dividend income Gains / losses on asset disposal

fair value change

impairment loss (reversal of

impairment)

other foreign exchange

gains / losses

fair value change

Total

Cash and cash equivalents – – 332 – – – – – (42) – 290

Trade and other receivables (627) 21 62 – – – – – 141 – (403)

Available for sale financial instruments – – – 27 – – – – – 19 46

Loans – – 1,459 – – – 76 – (88) – 1,447

Total financial assets (627) 21 1,853 27 – – 76 – 11 19 1,380

Bank and corporate loans – (8,849) – – – – – – (32) – (8,881)

Bonds – (1,589) – – – – – – – – (1,589)

Promissory notes – (74) – – – – – – – – (74)

Vendor financing – (148) – – – – – – (125) – (273)

Finance lease liabilities – (653) – – – – – – (2) – (655)

Interest payable – (10) – – – – – – (7) – (17)

Trade and other payables and non-hedge derivatives – – – – – 51 – (1) (110) – (60)

Total financial liabilities – (11,323) – – – 51 – (1) (276) – (11,549)



2011 2010 2009

available-for-sale financial assets

Long-term equity investments at fair value

Level 1 776 1,007 815

Level 2 2,773 18 28

Level 3 – – –

Total long-term equity investments at fair value 3,549 1,025 843

financial liabilities at fair value through profit and loss

Non-hedge derivatives

Level 1 – – –

Level 2 24 70 109

Level 3 – – –

Total non-hedge derivatives 24 70 109

Hedge derivatives

Level 1 – – –

Level 2 – – 396

Level 3 – – –

Total hedge derivatives – – 396

income and expenses on financial instruments


other investing and financing gains and losses

equity



fair value change


impairment)


gains / losses

fair value change

Total

Cash and cash equivalents – – 332 – – – – – (42) – 290

Trade and other receivables (627) 21 62 – – – – – 141 – (403)

Available for sale financial instruments – – – 27 – – – – – 19 46

Loans – – 1,459 – – – 76 – (88) – 1,447

Total financial assets (627) 21 1,853 27 – – 76 – 11 19 1,380

Bank and corporate loans – (8,849) – – – – – – (32) – (8,881)

Bonds – (1,589) – – – – – – – – (1,589)


Vendor financing – (148) – – – – – – (125) – (273)

Finance lease liabilities – (653) – – – – – – (2) – (655)

Interest payable – (10) – – – – – – (7) – (17)

Trade and other payables and non-hedge derivatives – – – – – 51 – (1) (110) – (60)

Total financial liabilities – (11,323) – – – 51 – (1) (276) – (11,549)




other investing and financing gains and losses equity



fair value change


impairment)


gains / losses

fair value change

Total

Cash and cash equivalents – – 989 – – – – – 29 – 1,018

Trade and other receivables (681) – 19 – – – – – (21) – (683)

Available for sale financial instruments – – – 27 74 – 4 – – 198 303

Loans – – 1,757 – – – 16 – (283) – 1,490

Total financial assets (681) – 2,765 27 74 – 20 – (275) 198 2,128

Bank and corporate loans – (5,535) – – – – – (37) 168 – (5,404)

Bonds – (2,933) – – – – – – – – (2,933)


Vendor financing – (184) – – – – – – 3 – (181)

Finance lease liabilities – (1,048) – – – – – – (12) – (1,060)

Interest payable – (39) – – – – – – 2 – (37)

Other borrowings and hedge derivatives – (64) – – – – – (48) – – (112)

Trade and other payables and non-hedge derivatives – (53) – – – 39 – – 27 – 13

Total financial liabilities – (10,255) – – – 39 – (85) 188 – (10,113)





fair value change

impairment loss

(reversal of impairment)


gains / losses

recognition of fair value

change in income

statement

fair value change

Total

Cash and cash equivalents – – 784 – – – – – (96) – – 688

Trade and other receivables (1,068) – 1 – – – – – 214 – – (853)

Available for sale financial assets – – 13 8 (81) – – 63 (692) (1) 593 (97)

Loans – – 2,265 – (1) – 70 70 (65) – – 2,339

Total financial assets (1,068) – 3,063 8 (82) – 70 133 (639) (1) 593 2,077

Bank and corporate loans – (7,681) – – – – – 28 (1,180) – – (8,833)

Bonds – (4,426) – – – – – – – – – (4,426)

Promissory notes – (666) – – – – – – 1 – – (665)

Vendor financing – (43) – – – – – – (70) – – (113)

Finance lease liabilities – (1,879) – – – – – – (45) – – (1,924)

Interest payable – (35) – – – – – – (22) – – (57)

Other borrowings and hedge derivatives – – – – – 67 – – – – – 67

Trade and other payables and non-hedge derivatives – – – – – – – 69 (762) – – (693)

Total financial liabilities – (14,730) – – – 67 – 97 (2,078) – – (16,644)







fair value change


impairment)


gains / losses

fair value change

Total

Cash and cash equivalents – – 989 – – – – – 29 – 1,018

Trade and other receivables (681) – 19 – – – – – (21) – (683)

Available for sale financial instruments – – – 27 74 – 4 – – 198 303

Loans – – 1,757 – – – 16 – (283) – 1,490

Total financial assets (681) – 2,765 27 74 – 20 – (275) 198 2,128

Bank and corporate loans – (5,535) – – – – – (37) 168 – (5,404)

Bonds – (2,933) – – – – – – – – (2,933)


Vendor financing – (184) – – – – – – 3 – (181)

Finance lease liabilities – (1,048) – – – – – – (12) – (1,060)

Interest payable – (39) – – – – – – 2 – (37)

Other borrowings and hedge derivatives – (64) – – – – – (48) – – (112)

Trade and other payables and non-hedge derivatives – (53) – – – 39 – – 27 – 13

Total financial liabilities – (10,255) – – – 39 – (85) 188 – (10,113)





fair value change

impairment loss

(reversal of impairment)


gains / losses

recognition of fair value

change in income

statement

fair value change

Total

Cash and cash equivalents – – 784 – – – – – (96) – – 688

Trade and other receivables (1,068) – 1 – – – – – 214 – – (853)

Available for sale financial assets – – 13 8 (81) – – 63 (692) (1) 593 (97)

Loans – – 2,265 – (1) – 70 70 (65) – – 2,339

Total financial assets (1,068) – 3,063 8 (82) – 70 133 (639) (1) 593 2,077

Bank and corporate loans – (7,681) – – – – – 28 (1,180) – – (8,833)

Bonds – (4,426) – – – – – – – – – (4,426)

Promissory notes – (666) – – – – – – 1 – – (665)

Vendor financing – (43) – – – – – – (70) – – (113)

Finance lease liabilities – (1,879) – – – – – – (45) – – (1,924)

Interest payable – (35) – – – – – – (22) – – (57)

Other borrowings and hedge derivatives – – – – – 67 – – – – – 67

Trade and other payables and non-hedge derivatives – – – – – – – 69 (762) – – (693)

Total financial liabilities – (14,730) – – – 67 – 97 (2,078) – – (16,644)



(a) credit risk

Each class of financial assets represented in the Group’s statement of financial position to some extent is exposed to credit risk. Management develops and implements policies and procedures aiming to minimize the exposure and impact on the Group’s financial position in case of risk realization.

Financial instruments that could expose the Group to concentrations of credit risk are mainly trade and other receivables. The credit risk associated with these assets is limited due to the Group’s large customer base and ongoing procedures to monitor the credit worthiness of customers and other debtors.

The Group’s accounts receivable are represented by receivables from the Government and other public organiza-tions, businesses and individuals each of them bearing different credit risk. Collection of receivables from the Government and other public organizations is mainly influenced by political and economic factors and not always under full control of the Group. However, management undertakes all possible efforts to minimize the exposure to risk of receivable from this category of clients. In particular, creditworthiness of such subscribers is assessed based on financing limits set by the Government. Management believes there were no significant unprovided losses relating to these or other receivables as at December 31, 2011, 2010 and 2009.

To reduce risk of exposure on receivables from businesses and individuals the Group implements a range of procedures. Credit risk is determined based on a summary of probabilities of occurrences and possible impact of events negatively influencing the customer’s ability to discharge its obligation. A credit rating is attributed to a customer on initial stage of cooperation and, then, reassessed periodically based on credit history. As a part of its credit risk management policy, the Group arranges preventive procedures which are represented by but not limited to advance payments, request for collaterals and banks and third parties guarantees. For collection of receivables, which are past due, the Group takes a variety of actions from suspension of rendering of services to taking legal action.

The Group deposits excess cash available with several Russian banks and makes investments in bills of ex-change. To manage the credit risk related to deposit of cash available with banks, management of the Group implements procedures to periodically assess the creditworthiness of the banks. To facilitate this assessment, deposits are mainly placed with banks where the Group has already had current settlement account and can eas-ily monitor activity of such banks. Prior to investing in bills of exchange, management of the Group performs an analysis of financial position of the issuer and monitors its creditworthiness over periods up to maturity.

Maximum exposures to credit risk are limited to the net carrying amounts of respective financial assets. Such exposure is mitigated by collaterals held by the Group.

(b) liquidity risk

The Group monitors its risk of a shortage of funds by preparing and monitoring compliance with cash flow budgets. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, bonds and finance leases. Cash flow budgets consider the maturity of both cash inflows and outflows from the Group’s operations. Based on projected cash flows the decision is taken on either investment of free cash or attracting financing required. Realization of liquidity risk management policy provides the Group with sufficient cash to discharge its obligation on a timely basis. However, since the compa-nies comprising the Group were managed on individual basis in 2009–2011 no financing was provided within the Group introducing the need for certain companies to raise financing from third parties rather than from fellow subsidiaries with excess liquidity.



Maturity analysis as at 31 December 2011, 2010 and 2009 represented below shows undiscounted cash flows, including estimated interest payments:

2012 2013 2014 2015 2016 and later

Total

december 31, 2011

Bank and corporate loans 80,245 49,099 10,994 13,703 13,865 167,906

Bonds 5,085 2,022 351 351 4,250 12,059

Promissory notes – – – – 8 8

Vendor financing 2,366 8 8 8 47 2,437

Finance lease liabilities 1,734 532 22 18 218 2,524

Other borrowings and hedge derivatives 77 13 10 9 12 121Trade and other payables and non-hedge derivatives 30,101 43 1 1 1 30,147

Total financial liabilities 119,608 51,717 11,386 14,090 18,401 215,202

2011 2012 2013 2014 2015 and later

Total

december 31, 2010


Bonds 20,091 4,018 721 – – 24,830

Promissory notes 612 – – – 8 620

Vendor financing 2,705 52 – – – 2,757

Finance lease liabilities 2,825 1,613 443 22 256 5,159

Other borrowings and hedge derivatives 207 23 28 13 13 284Trade and other payables and non-hedge derivatives 29,976 103 36 18 – 30,133


2010 2011 2012 2013 2014 and later

Total

december 31, 2009


Bonds 21,626 13,879 1,000 – – 36,505

Promissory notes 2,205 597 – – 23 2,825

Vendor financing 3,016 383 51 – – 3,450

Finance lease liabilities 4,793 2,833 1,803 430 404 10,263

Other borrowings and hedge derivatives 432 61 23 28 23 567Trade and other payables and non-hedge derivatives 24,822 27 10 9 92 24,960




In September 2011, the Group entered into a guarantee contract with OJSC Gazprombank for the benefit of OJSC MSS, a related party, with regard to counterparty’s liability on credit agreements for amount of 6,400 (refer to Note 33).

In December 2011, the Group entered into a guarantee contract with OJCS TransCreditBank for the benefit of OJSC MSS, a related party, with regard to counterparty’s liability on credit agreement for amount of 500 (refer to Note 33).

In December 2011, the Group entered into a guarantee contract with OJCS Promsvyazbank for the benefit of SJSC Skylink, a related party, with regard to counterparty’s liability on credit agreement for amount of 1,210 (refer to Note 33).

(c) market risks

Significant market risk exposures are interest rate risk, exchange rate risk and other price risk. Exposure to other price risk arises from available for sale investments quoted on active markets.

Interest rate riskInterest rate risk mainly relates to floating rate debt primary denominated in US dollars, Russian Roubles and euros and financial instruments denominated in Russian Rubles. To manage this risk, the Group entered into interest rate swaps to hedge significant amounts of its floating rate debt. Other borrowings do not materially influence the exposure to interest risk.

december 31, 2011

december 31, 2010

december 31, 2009

fixed rate instruments

Financial assets 22,026 27,736 37,436

Financial liabilities (157,266) (116,890) (88,376)

(135,240) (89,154) (50,940)

Variable rate instruments

Financial assets 135 – –

Financial liabilities (6,200) (21,147) (27,820)

(6,065) (21,147) (27,820)

Fair value sensitivity analysis for fixed rate instrumentsThe Group does not account for any fixed rate financial instruments as fair value through profit or loss.

Cash flow sensitivity analysis for variable rate instrumentsThe table below demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s profit before tax.

2011 2010 2009

LIBOR (+0.1%) (6) (10) (17)

LIBOR (-0.1%) 6 10 17

Euribor (+0.1%) – (1) (2)

Euribor (-0.1%) – 1 2

MosPrime (+0.1%) (2) (9) (10)

MosPrime (-0.1%) 2 9 10

CB refinancing (+0.1%) – (3) (2)

CB refinancing (-0.1%) – 3 2



Foreign exchange risk Currency risk is the risk that fluctuations in exchange rates will adversely affect the Group’s cash flows. As a result, these fluctuations in exchange rates will be reflected in respective items of the Group’s consolidated statement of comprehensive income, statement of financial position and/or statement of cash flows. The Group is exposed to currency risk in relation to its assets and liabilities denominated in foreign currencies, mostly from accounts receivable and payable from operations with international telecom operators, accounts payable for equipment, borrowings issued in foreign currencies. The Group does not have formal procedures to reduce its currency risks.

Financial assets and liabilities of the Group presented by currency as at 31 December 2011, 2010 and 2009 were as follows:


Us$ eUr Us$ eUr Us$ eUr

Cash and cash equivalents 272 32 568 16 1,647 529

Trade receivables 1,283 310 690 300 869 215

Loans and receivables 259 - 1,586 - 9,101 2,805

Bank and corporate loans (3,959) (770) (9,494) (1,520) (15,635) (2,538)

Vendor financing (2,204) - (1,969) - (2,081) (14)

Finance lease liabilities - - (1) (530) -

Other borrowings and hedge derivatives - - - - (396) -Trade and other payables and non-hedge derivatives (2,269) (242) (2,537) (416) (2,601) (198)

net exposure (6,618) (670) (11,157) (1,620) (9,626) 799

The table below demonstrates the sensitivity to a reasonably possible change in exchange rates, with all other variables held constant, of the Group’s profit before tax:


Us$ eUr Us$ eUr Us$ eUr

Strengthening (+10%) (662) (67) (1,116) (162) (963) 80

Weakening (-10%) 662 67 1,116 162 963 (80)

The analysis was applied to monetary items denominated in relevant currencies at the reporting date.

Other price riskAs at December 31, 2011, the Group’s assets include investments in quoted securities subject to other price risk. To mitigate this risk, the Group regularly analyzes market securities trends and makes a decision to sell a secu-rity, when necessary.

The table below demonstrates the sensitivity to a reasonably possible change in market indexes for securities, with all other variables held constant, of the Group in terms of the result of fair value revaluation recognized in other comprehensive income.



increase/decrease in percentage point

effect on revaluation result recognized in other comprehensive income

2011

MICEX + 30.0% 233

MICEX - 30.0% (233)

2010

MICEX + 30.0% 387

MICEX - 30.0% (497)

2009

MICEX + 30.0% 203

MICEX - 30.0% (203)

(d) capital management policy

Capital management policy of the companies comprising the Group is primarily focused on increasing credit ratings, improving financial independence and liquidity ratios, improving the structure of payables, and reducing cost of borrowings. Among the main methods of capital management are profit maximization, investment pro-gram management, sale of assets to reduce debt, debt portfolio management and restructuring, use of different classes of borrowings. In addition, the companies of the Group are subject to externally imposed capital require-ments, which are used for capital monitoring. There were no changes in the objectives, policies and processes of capital management during 2009–2011.

The Boards of directors of the companies comprising the Group review their performance and establish a variety of key performance indicators which are based on Russian statutory accounts. The companies comprising the Group monitor and manage their debt using financial independence ratio and net debt/equity, net debt/OIBDA ratios.

32. commiTmenTs and conTinGencies

(a) legal proceedings

The Group is subject to a number of proceedings arising in the course of the normal conduct of its business (refer to (b) below). Management believes that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Group.

(b) Taxation

Russian tax, currency and customs legislation is subject to varying interpretations and changes occurring fre-quently. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activity of the Group may not coincide with that of management. As a result, tax authorities may challenge transactions and the Group may be assessed additional taxes, penalties and interest, which can be significant. The Group’s tax returns are open for review by the tax and customs authorities with respect to tax liabilities for three calen-dar years proceeding the year in which the decision on the conduct of the tax audit was adopted. Under certain circumstances, reviews may cover longer periods.

As at December 31, 2011, management believes that its interpretation of the relevant legislation is appropriate and that it is probable that the Group’s tax, currency and customs positions will be sustained upon examina-tion. Management of the Group believes that it has adequately provided for tax liabilities in the consolidated statements of financial position as at December 31, 2011, 2010 and 2009. However, the general risk remains that relevant authorities could take different position with regard to interpretative issues and the effect could be significant.



In February 2010, the Federal Tax Service of the Russian Federation completed the comprehensive tax inspec-tion for the period of 2007–2008 and, as a result, issued a claim in the amount of 715 of additional taxes, fines and penalties. In September 2010, higher taxing authority declared 410 of the total amount invalid. The Group appealed the decision of the higher taxing authority in respect of the remaining 305 to the Arbitration Court of Moscow. In June 2011 the claim of the Group was fully settled, though in October 2011 that decision of the Court was changed as a result of the tax authority’s appeal. The Court declared 265 of 305 invalid. The Group and the tax authority disputed that decision in the Federal Arbitration Court of Moscow Region, which declared 242 of 305 invalid. The claim of the tax authority was declared valid in the amount of 34. The Group appealed the decision in the amount of 28 to a higher taxing authority. No consideration of the suit was held by the moment the present statements were published. Management believes that, overall, taxes for 2007–2008 have been properly calcu-lated by the Group and fairly stated in its financial statements based on the Group’s analysis of the sustainability of liability. However, certain transactions revealed during the tax inspection management assessed as unlikely to be successfully defended in higher courts. As a result, the Group has accrued additional tax liabilities. The total provision for tax liabilities for the period 2004–2008 amounted to 63 as December 31, 2011 (2010:16, 2009:169).

In September 2009 the Russian Federal Tax Service completed a comprehensive tax inspection of CJSC GlobalTel for the period of 2007–2008 and, as a result, issued a claim amounted to 217 of additional taxes, fines and penalties. Mostly, additional taxes were accrued as a result of the tax authorities’ interpretation of pricing for the services. In December 2009, CJSC GlobalTel initiated a lawsuit against the Russian Federal Tax Service in Moscow Arbitra-tion Court. The court declared the claim of the tax authority to be invalid. The decision was upheld in the Court of Appeals and the Federal Arbitration Court of Moscow region. As a result, the Group has accrued no additional tax liabilities with regard to GlobalTel tax inspection.

In December 2007, the Federal Tax Service of the Russian Federation completed the comprehensive tax inspec-tion for the period of 2004–2006 and, as a result, issued a claim in the amount of 1,812 of additional taxes, fines and penalties. More than 90% of the amount relates to assessments calculated on the basis of the tax authori-ties’ interpretation of telecommunication industry legislation in general and that of interaction between tel-ecommunication operators in particular. The Group appealed the decision to a higher taxing authority and to the Arbitration Court of Moscow. In November 2008, the Arbitration Court of Moscow declared the claim of the tax authorities in the amount of 1,803 invalid and ordered the Group to pay 9. In February 2009, the Court of Appeals confirmed the decision of the Arbitration Court of Moscow. Subsequently, the Federal Tax Service of the Rus-sian Federation filed an appeal to the Court of Cassation, which, in May 2009, upheld the ruling of the Arbitration Court of Moscow. Management believes that, overall, taxes for 2004–2006 have been properly calculated by the Group and fairly stated in its financial statements based on the Group’s analysis of the sustainability of liability. As a result, in 2010 the Group has reversed previously recognized provision for tax liabilities and has accrued no additional tax liabilities as at 31 December 2011 (2010: nil; 2009: 151) with regard to 2004–2006.

(c) licenses

Substantially all of the Group’s revenues are derived from operations conducted pursuant to licenses granted by the Russian Government. These licenses expire in various years from 2013 up to 2021.

The Group has renewed all other licenses on a regular basis in the past, and believes that it will be able to renew licenses without additional cost in the normal course of business. Suspension or termination of the Group’s main licenses or any failure to renew any or all of these main licenses could have a material adverse effect on the financial position and operations of the Group.

(d) capital commitments

As at December 31, 2011, contractual commitments of the Group for the acquisition of property, plant and equip-ment amounted to 56,453 (2010: 8,211; 2009: 5,993).



(e) operating leases

As at December 31, 2011, all lease contracts are legally cancellable. However, the Group was involved in a num-ber of operating lease agreements for land, on which the Group constructed certain leasehold improvements. Thus, it is reasonably certain that these leases would not be cancelled. Future minimum lease payments under these operating leases as at December 31, 2011, 2010 and 2009 were as follows:

december 31, 2011

december 31, 2010

december 31, 2009

as lessee

Current portion 461 1,963 1,849

Between one to five years 986 1,404 1,269

Over five years 2,217 4,960 4,620

Total minimum rental payables 3,664 8,327 7,738

as lessor

Current portion 100 834 942

Between one to five years 281 444 483

Over five years 94 490 379

Total minimum rental receivables 475 1,768 1,804

33. relaTed ParTY TransacTions

(a) The Government and oJsc svyazinvest as a shareholder

As indicated in Note 1, the Government of the Russian Federation controls the Company by indirect holding of 53.2% of the Company’s ordinary shares through OJSC “Svyazinvest”, “Vnesheconombank” and Federal Agency of State properties management. OJSC “Svyazinvest”, the major shareholder of the Company with 43.37% share, is fully owned by the Government. It is a matter of the Government policy to retain a controlling stake in sectors of the economy, such as telecommunications, that it views as strategic.

(b) interest of the Government in the telecommunications sector in the russian federation and the protection of that interest

Effective telecommunications and data transmission are of great importance to Russia for various reasons, including economic, social, strategic and national security considerations. The Government has exercised and may be expected to exercise significant influence over the operations of the telecommunications sector and consequently, the Group. The Government, acting through the Federal Tariff Service and the Federal Telecommu-nications Agency, has the general authority to regulate certain tariffs. In addition to the regulation of tariffs, the telecommunication legislation requires the Group and other operators to make certain revenue-based payments to the Universal service fund, which is controlled by the Federal Telecommunications Agency. Moreover, the Min-istry of Telecom and Mass Communications of the Russian Federation has control over the licensing of providers of telecommunications services.

(c) subsidiaries

The companies comprising the Group perform transactions with subsidiaries as part of their day-to-day opera-tions. Financial results and account balances on transactions with subsidiaries are excluded from the Group’s financial statements. The companies enter transactions with subsidiaries on market terms. Tariffs for subsidiar-ies are at the same level with tariffs for other parties and mostly are fixed by a regulatory body.



(d) associates

The Group is also involved in various telecommunication services with entities in which it has investments, in-cluding associates over which it exerts significant influence. A summary of these transactions is as follows:

2011 2010 2009

Revenue 127 115 134

Purchase of telecommunication and other services (452) (197) (170)

The amounts of receivables and payables due from these entities were as follows:

2011 2010 2009

Accounts receivable 14 15 23

Allowance for doubtful receivables (1) (9) (8)

Accounts payable and accrued expenses (27) (20) (24)

(e) Transactions with the companies of svyazinvest Group

The amounts of revenue and expenses relating to the transactions with Svyazinvest Group were as follows:

2011 2010 2009

Revenue 995 613 400

Purchase of telecommunication services (438) (933) (1,170)

Purchase of other services (129) (409) (47)

The amounts of receivables and payables due from and to Svyazinvest Group were as follows:

2011 2010 2009

Accounts receivable 796 99 258

Allowance for doubtful receivables (45) - (93)

Accounts payable and accrued expenses (186) (267) (181)

Dividends payable - (3,678) (1,032)

The Group also receives services related to the construction of the network from certain companies of the Svyazinvest Group which are included in additions of property, plant and equipment in amount of 658 (2010: 716, 2009: 370).

The Group held promissory notes issued by OJSC Tcentralniy Telegraf which is a part of Svyazinvest Group. In-vestments in promissory notes of related parties amounted to nil as at December 31, 2011 and 2010 (2009: 500), interest income accrued for the year ended December 31, 2011 is nil (2010: 65, 2009: 481).

On October 4, 2010, OJSC Svyazinvest exchanged its stake in OJSC MGTS for 100% effective shareholding interest in CJSC Sky Link.

In September – December 2010, the Group acquired the promissory notes of CJSC Sky Link and its subsidiaries. As at December 31, 2011 carrying value of those notes comprised 10,981 (2010: 9,710). Interest income accrued on those notes for the year ended December 31, 2011 is amounted to 1,271 (2010: 488).



In the end of 2011, the Group also entered into a number of guarantee contracts with Russian banks for the ben-efit of some Svyazinvest Group’s companies, with regard to counterparty’s liability on credit agreements totalling to 8,110 (refer to Note 31).

(f) non-state pension fund “Telecom-soyuz”

The Group has centralized pension agreements with a non-state pension fund “Telecom-Soyuz” (refer to Note 19). In addition to the state pension, the Company provides the employees with a non-state pension and other employee benefits through defined benefit and defined contribution plans.

The total amount of contributions to non-state pension fund paid by the Group in 2011 amounted to 1,661 (2010: 1,937, 2009: 2,062). The fund retains 3% of every pension contribution to cover its administrative costs.

(g) Transactions with other government-related entities

In January 2009, OJSC Rostelecom in partnership with mobile operator OJSC Megafon won a tender for sponsor-ship of the ХХII Winter Olympic Games and the XI Winter Paralympic Games 2014 in Sochi in a category “Tel-ecommunications”. According to the agreement with the Organisation committee of ХХII Winter Olympic Games and the XI Winter Paralympic Games 2014 in Sochi the sponsorship contribution amounts to US$ 260 million and should be contributed by each sponsor in the amount of US$ 130 million. Half of this amount shall be paid in cash and the other half shall be contributed in free services. In return, each partner will obtain exclusive rights to use the Olympic logo in its advertising and other activity. There is a joint responsibility of the Group and Megafon in respect of non-cash contributions. The total charge of sponsorship contribution to profit and loss for the year ended December 31, 2011 amounted to 463 (2010: 469, 2009: 170). As at 31 December 2011, the total commitment due to be paid in cash by 2014 is US$ 31.3 million.

The Group considers this transaction as a transaction with a related party because the Group treats the Organi-sation committee as a government-related entity. The reason for this is that the federal government was one of the founders of the Organisation committee and government executives are on the Oversight Board of this Organisation.

In December 2009, OJSC Rostelecom entered into a state contract with the Ministry of Telecom and Mass Com-munications of the Russian Federation to realise project Electronic government. The project involves equipment and software installation, development of web site for on-line access to information about government services, possibility to apply documents to government bodies via web-site, having support via call center and other relat-ed services. In 2010 the Company negotiated the new state contracts on maintenance of the Electronic govern-ment systems and on development of some new e-government applications. Total revenue under the contracts for the year ended December 31, 2011 is 2,763 (2010: 1,190, 2009: 655).

The Group received loans from government-related banks OJSC Sberbank, OJSC Bank VTB, OJSC Sviaz-bank, OJSC Gazprombank and others during years 2009–2011. The outstanding balances from these banks amounted to 118,880 as at December 31, 2011 (2010: 78,569, 2009: 37,193). During year ended December 31, 2011 the Group obtained loans from these banks in amount of 212,152 (2010: 101,317, 2009: 38,487), made repayments in amount of 179,439 (2010: 62,998, 2009: 41,621). Interest expense accrued on those loans during year ended December 31, 2011 amounted to 7,509 (2010: 3,080, 2009: 4,827).

The Group has collectively but not individually significant transactions with other government-related entities including but not limited to providing telecommunication services, consuming services having both production and miscellaneous nature, depositing and borrowing money. All these transactions are carried out in the course of normal day-to-day business operations on the terms comparable to those with other entities which are not government-related. Management assesses these transactions as not particular material except for placing deposits and purchase and sales of investments in promissory notes of government-related banks.



Proceeds from sales of government-related banks promissory notes for the year ended December 31, 2011 amounted to 1,766 (2010: 9,841, 2009: 5,546), purchases of the same kind of investments comprised 712, nil and 12,652 for 2011, 2010 and 2009 respectively. Related income recognized in profit and loss in respect of govern-ment-related banks promissory notes amounted to 66 for the year ended December 31, 2011 (2010: 41, 2009: 89).

The amount of funds placed on deposits with government-related banks for the year ended December 31, 2011 is 1,676 (2010: nil, 2009: 3,215) with related income recognised in profit and loss of 18 (2010: nil, 2009: 162) and amounts repaid back to the Company’s account of 875 (2010: nil, 2009: 7,579).

(h) remuneration of key management personnel

The key management personnel for the purpose of these consolidated financial statements comprises Manage-ment Board’s members, the Board of Directors’ members and Vice-Presidents.

Remuneration to the key management personnel for the year ended December 31, 2011 amounted to 432. Re-muneration includes salaries, bonuses, payments for participation in the work of management bodies and other short-term benefits.

The remuneration amounts are stated exclusive of social taxes.

Also in June 2011 the Company introduced a long-term motivation programme for executives and senior employ-ees of the Company. The amount of employee benefits related to the programme and attributed to the Manage-ment Board’s members, the Board of Directors’ members and Vice-Presidents for the year ended 31 Decem-ber 2011 amounted to 467.

The key management personnel in 2009–2010 comprises also members of the Management Boards and the Boards of Directors of IRC companies.

Short-term benefits accrued to the key management personnel for the year ended December 31, 2010 amounted to 1,756 (2009: 1,067). In 2010, the remuneration of the key management personnel in terms of share option granted amounted to 1,850.

In 2011 the Group made a contribution of nil to the non-state pension fund (2010: 8, 2009: 46) for its key man-agement personnel. The plans provide for payment of retirement benefits starting date employee complies with terms of acting non-state pension program.

34. sUBseQUenT eVenTs

acquisition of treasury shares by llc moBiTel

In February 2012 LLC MOBITEL completed the acquisition of additional 3.86% of ordinary shares of the Company for 19,000. As a result LLC MOBITEL increased its ownership of ordinary shares of the Company to 6.55%.

To finance the acquisition in January 2012 the Board of Directors of the Company approved decision on issue of guarantee to OJSC Bank VTB for the benefit of LLC MOBITEL with regard to counterparty’s liabilities on credit agreements for amount of 8,300 for 1 year period starting from January 31, 2012.

acquisition of non-controlling interest in oJsc national Telecommunications

In February 2012 the Group acquired an additional 28.23% interest in OJSC National Telecommunications from OJSC Gazprombank for 13,826, increasing its ownership to 100%.



acquisition of Gnc-alfa

In February 2012 the Group acquired 75% minus one share of GNC-ALFA for US$ 22.5 million (682).

GNC-ALFA is the largest independent Internet and data provider in Armenia. It operates a modern fibre-optic network, which passes through 70% of the territory of the Republic of Armenia.

The acquisition of GNC-ALFA is part of the Group’s international expansion policy. The acquisition of a control stake in GNC-ALFA provides the Group with access to a well-developed infrastructure for broadband and Pay-TV services in the Armenian telecommunications market, a market which has a significant growth potential.

acquisition of llc enter

In February 2012 the Group acquired 100% interest in LLC Enter, a broadband Internet services provider to indi-vidual subscribers in Barnaul, Novokuznetsk and Tyumen, for 305.

The acquisition of LLC Enter reflects the Group’s strategy to increase its subscriber base and modernise its net-work infrastructure. The deal also serves as an alternative to capital expenditure in LLC Enter’s regions.

LLC Enter’s network infrastructure was built in 2010 and it is among the most modern networks in the three cit-ies it serves.

Bonds issue

In March 2012 the Board of Directors of the Company approved decision on issue of non-convertible documentary interest-bearer bonds for a total nominal value of 100,000. The number of bonds approved for issue equals to 100,000,000.The offering price is 1,000 RUB per bond.

reorganization of oJsc rostelecom

The Decree № 340 on the reorganisation of OJSC Rostelecom was signed by the President of Russia on March 24, 2012. The Decree states that a unified company will be created by merging Svyazinvest and its total assets with Rostelecom.

As a result of the merger described in Note 9 the crossholding with OJSC Svyazinvest will be eliminated which will result in reduction of Group’s equity by the amount of Group’s investment in OJSC Svyazinvest and the carrying value of OJSC Svyazinvest’s assets other than its investment in the Company.



“base station” A fixed site with network equipment that is used for radio frequency communications with mobile stations, and is part of a cell, or a sector within a cell, and is connected to an MSC, an MTSO or other part of a mobile telecommunications system

“Board of directors” The board of directors of the Company

“cdma” Code Division Multiple Access. A digital wireless transmission technology for use in mobile telephone communications, personal communications services and other mobile communications systems. CDMA is a spread spectrum technology in which calls are assigned a pseudo-random code to encode digital bit streams. The coded signals are then transmitted on a frequency between the end user and a cell site, where a base station processes them. CDMA allows more than one wireless user to simultaneously occupy a single radio frequency band with reduced interference

“cdma 450” A 3G technology which uses CDMA 2000-1x air interface deployed in the 450 MHz range

“cdma 2000-1x” A member of the family of 3G mobile telecommunications standards that use CDMA to send voice, data and signalling data between mobile phones and cell sites. It is the second generation of CDMA digital cellular, with double the voice traffic capacity of CDMA

“cdn” Content Delivery Network

“cell site” The entire infrastructure and radio equipment associated with a mobile telecommunications transmitting and receiving station, including the land, building, tower, antennas and electrical equipment

“channel” A single path, either radio frequency or voice, for transmitting electrical signals

“cis” Commonwealth of Independent States

“cJsc” Russian closed joint stock company

“director(s)” Member(s) of the Company’s Board of Directors

“dld” Domestic long-distance

“dsl” Digital subscriber line

“edGe” Enhanced Data Rates for Global Evolution. An advanced technology that allows subscribers to connect to the Internet and send and receive data, including digital images, web pages and photographs, up to three times faster than an ordinary GSM/GPRS network

“fas” Federal Antimonopoly Service and its predecessors

“fasPm” Federal Agency for State Property Management

“frequency” The number of cycles per second, measured in hertz, of a periodic oscillation or wave in radio propagation

“fsfm” Federal Service for Financial Markets and its predecessors

“fTTx” Fibre to the building or fibre to the home

“fsT” Federal Service for Tariffs and its predecessors

“GlobalTel” CJSC Globalstar – Spase Telecommunications

“GPrs” General Packet Radio Services. A technology standard for high speed data transmission over GSM networks

“Gsm” Global System for Mobile Communications. A standard for digital mobile telephone transmissions in the frequency bands of 900 MHz, 1800 MHz and 1900 MHz

“Gsm-900” A GSM network in the 900 MHz frequency range

“Gsm-1800” A GSM network in the 1800 MHz frequency range

GLOSSARY

In this annual report, unless the context otherwise requires, the following words and expressions have the following meanings.



“hsPa” High Speed Packet Access. A collection of mobile telephony protocols that extend and improve the performance of existing UMTS protocols

“ifrs” International Financial Reporting Standards

“ild” International long-distance

“infrastructure” Fixed infrastructure equipment consisting of base stations, base station controllers, antennas, switches, management information systems and other equipment that receives, transmits and processes signals from and to subscriber equipment and/or between mobile telecommunications systems and the public switched telephone network

“interconnect” Any variety of hardware arrangements that permit the connection of telecommunications equipment to a communications common carrier network such as a public switched telephone network

“iP” Internet Protocol. A data-oriented protocol used for communicating data across a packet-switched network

“iP telephony” Internet Protocol telephony. The routing of voice conversations over the Internet or any other IP-based network. The voice data flows over a general-purpose packet-switched network, instead of traditional dedicated, circuit-switched telephony transmission lines

“iP TV” Internet Protocol television

“ircs” OJSC SibirTelecom, OJSC CenterTelecom, OJSC Dalsvyaz, OJSC VolgaTelecom, OJSC North-West Telecom, OJSC Uralsvyazinform and OJSC Southern Telecommunication Company, former interregional telecommunications companies that were merged into the Company on 1 April 2011

“irU” Indefeasible Rights of Use

“Joint stock companies law”

Federal Law of the Russian Federation № 208-FZ “On Joint Stock Companies” of 26 December 1995, as amended

“labour code” Labour Code of the Russian Federation № 197-FZ of 30 December 2001, as amended

“llc” Russian limited liability company

“lTe” Long-term evolution, the latest standard in the mobile network technology tree that produced the GSM/EDGE and UMTS/HSPA network technologies.

“management Board” The management board of the Company

“megafon” JSC MegaFon

“mGTs” OJSC MGTS, or the Moscow City Telephone Network

“mTs” Mobile TeleSystems OJSC

“mhz” Megahertz. A unit of measure of frequency; 1 MHz is equal to one million cycles per second

“miceX” Moscow Interbank Currency Exchange, a regulated stock exchange in Russia

“microwave” Electromagnetic waves in radio frequencies above 890 MHz and below 20 GHz

“moBiTel” LLC MOBITEL, our 99.9% subsidiary

“network equipment” The fixed infrastructure consisting of base stations, base station controllers, mobile switching centres and related information processing control points that manages communications between the mobile unit and the public switched telephone network

“notice” The 75-day prior written notice to be provided by VEB to Svyazinvest in connection with a sale of the Ordinary Shares pursuant to the Shareholders’ Agreement

“nTK” OJSC National Telecommunications

“oJsc” Russian open joint stock company

“PoP” Point of presence; a physical location where two or more types of communications devices establish a connection (e.g., Internet access points, the connection facility between a fixed line long distance network and the local telephone network)



“ras” Russian accounting standards

“reorganisation” The merger of the IRCs and Dagsvyazinform into the Company completed on April 1, 2011

“rTs” “Russian Trading System” Stock Exchange, a regulated stock exchange in Russia

“saas” Software as a Service

“securities market law” The Federal Law № 39-FZ “On the Securities Markets” of April 22, 1996, as amended

“shareholders’ agreement”

The shareholders’ agreement entered into by Svyazinvest and VEB on June 25, 2010

“skartel” LLC Skartel

“sky link” CJSC Sky Link

“spectrum” The range of electromagnetic frequencies available for use

“svyazinvest” Svyazinvest Telecommunication Investment Joint-Stock Company

“switch” The switch completes a call by connecting it to the wireline telephone network or another mobile telephone unit. Incoming calls are received by the switch, which instructs the appropriate cell to complete the communications link by radio signal between the cell’s transmitter-receiver and the mobile telephone. The switch also records information on system usage and subscriber statistics

“telephony” The process of converting sounds into electrical impulses for transmission over a connecting medium such as wires, fibre optics or microwave

“UmTs” Universal Mobile Telecommunications Services. UMTS is a type of 3G mobile telecommunications technology. It is a multi-function mobile system with wideband multimedia capabilities as well as present narrowband capabilities. UMTS will probably consist of a family of interworking networks, delivering the same new and innovative personal communication services to users regardless of used networks

“VaT” Value added tax, which is applied (and was applied during the Track Record Period) at the rate of 18%

“VeB” Bank for Development and Foreign Economic Affairs (Vnesheconombank) State Corporation

“VeB directors” The members of the Board of Directors elected from the list of candidates proposed by VEB

“Vimpelcom” OJSC “Vimpel-Communications”

“VoiP” Voice over Internet Protocol. A protocol optimized for the transmission of voice through the Internet or other packet switched networks

“VPn” Virtual Private Network

“xdsl” Digital subscriber line technologies. Digital data transmission over local telephone networks

“3G” Third generation wireless, the next generation of wireless communications. 3G wireless technologies allow for much higher transmission rates to wireless communications devices

“4G” Fourth generation wireless, successor to the 3G standard. 4G wireless technologies allow for much higher transmission rates to wireless communications devices compared to 3G



rostelecom head officeAddress: 14, 1st Tverskaya-Yamskaya, 125047 Moscow, RussiaTel. +7 (499) 972 82 83 Fax +7 (499) 972 82 22www.rostelecom.ru

investor contactsTel. +7 (499) 995 97 80 / +7 (499) 995 98 73Fax +7 (499) 999 82 22e-mail: [email protected]

corporate secretaryTel. +7 (499) 972 82 83Fax +7 (499) 972 82 22e-mail: [email protected]

media contactsTel. +7 (499) 999 82 83Fax +7 (499) 999 82 22e-mail: [email protected]

independent auditorKPMG LimitedTel. +7 (495) 937 44 77Fax +7 (495) 937 44 00/99e-mail: [email protected]

depositaryJ.P. Morgan Chase BankTel. +44 (0) 20 7325 6365Fax +44 (0) 20 7777 2989e-mail: [email protected]

registrar19 Leninskaya Sloboda st., Business Center Omega Plaza, 4th floor, Moscow Postal address: P.O. Box 151, Moscow 115280Tel. +7 (495) 775 18 20e-mail: [email protected]

CONTACTS

www.rostelecom.ru

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