SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 20-F

Commission file number 333-12032

MOBILE TELESYSTEMS OJSC
(Exact name of Registrant as specified in its charter)

RUSSIAN FEDERATION
(Jurisdiction of incorporation or organization)

4 Marksistskaya Street, Moscow 109147 Russian Federation
(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:

NONE
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

10.95% NOTES DUE 2004NONE
(Title of Class)

        Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.

        1,983,359,5071,986,124,030 ordinary shares, par value 0.10 Russian rubles each and 21,620,747 American Depositary Shares, as of December 31, 20032004.

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

        Indicate by check mark which financial statement item the Registrant has elected to follow:

⁽¹⁾

Listed, not for trading or quotation purposes, but only in connection with the registration of ADSs pursuant to the requirements of the Securities and Exchange Commission.

TABLE OF CONTENTS

i

        Unless the context otherwise requires, references to "MTS," "we," "us""us," or "our" refer to Mobile TeleSystems OJSC and its subsidiaries. "UMC" refers to Ukrainian Mobile Communications, our Ukrainian operations, which we acquired in March 2003. We refer to Mobile TeleSystems LLC, our 49%-owned joint venture in Belarus as MTS-Belarus. As MTS-Belarus is an equity investee, our revenues and subscriber data do not include MTS-Belarus. Our reporting currency is the U.S. dollar and we prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.

        In this document, references to "U.S. dollars," "dollars," "$" or "USD" are to the lawful currency of the United States, references to "rubles" or "RUR" are to the lawful currency of the Russian Federation, references to "hryvnias" are to the lawful currency of Ukraine and references to "€," "euro" or "EUR" are to the lawful currency of the member states of the European Union that adopted a single currency in accordance with the Treaty of Rome establishing the European Economic Community, as amended by the treaty on the European Union, signed at Maastricht on February 7, 1992.

ii

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

        Matters discussed in this document may constitute forward-looking statements.statements within the meaning of Section 27A of the U.S. Securities Act of 1933 (the "U.S. Securities Act") and Section 21E of the U.S. Securities Exchange Act of 1934 (the "U.S. Exchange Act"). The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their businesses. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts.

        Mobile TeleSystems OJSC, or MTS, desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe harbor legislation and other relevant law. This document and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events and financial performance. The words "believe," "expect," "anticipate," "intend," "estimate," "forecast," "project," "predict," "plan," "will," "may," "should""should," "could" and similar expressions identify forward-looking statements. Forward-looking statements appear in a number of places including, without limitation, "Item 3. Key Information—D. Risk Factors," "Item 4. Information on Our Company—B. Business Overview" and "Item 5. Operating and Financial Review and Prospects," and include statements regarding:

•

strategies, outlook and growth prospects;



•

future plans and potential for future growth;



•

liquidity, capital resources and capital expenditures;



•

growth in demand for our services;



•

economic outlook and industry trends;



•

developments of our markets;



•

the impact of regulatory initiatives; and



•

the strength of our competitors.

        The forward-looking statements in this document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, management's examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we may notcannot assure you that we will achieve or accomplish these expectations, beliefs or projections. In addition to these important factors and matters discussed elsewhere herein and in the documents incorporated by reference herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include the achievement of the anticipated levels of profitability, growth, cost and synergy of our recent acquisitions, the timely development and acceptance of new products, the impact of competitive pricing, the ability to obtain necessary regulatory approvals, the condition of the Russian economy,economies of Russia, Ukraine and certain other CIS countries, political stability in Russia, Ukraine and certain other CIS countries, the impact of general business and global economic conditions and other important factors described herein and from time to time in the reports filed by us with the U.S. Securities and Exchange Commission.

        Except to the extent required by law, neither we, nor any of our respective agents, employees or advisors intends or has any duty or obligation to supplement, amend, update or revise any of the forward-looking statements contained or incorporated by reference in this document.

PART I

Item 1.    Identity of Directors, Senior Management and Advisors

        Not applicable.

Item 2.    Offer Statistics and Expected Timetable

        Not applicable.

Item 3.    Key Information

A. Selected Financial Data

        The selected consolidated financial data for the years ended December 31, 2001, 2002, 2003 and 2003,2004, and as of December 31, 20022003 and 2003,2004, are derived from the audited consolidated financial statements, prepared in accordance with U.S. GAAP included elsewhere in this document. In addition, the following table presents selected consolidated financial data for the years ended December 31, 19992000 and 2000,2001, and as of December 31, 1999, 2000, 2001 and 2001,2002, derived from our audited consolidated financial statements not included in this document. Our results of operations are affected by acquisitions. Results of operations of acquired businesses are included in our audited consolidated financial statements from their respective dates of acquisition. The summary financial data should be read in conjunction with our audited consolidated financial statements, included elsewhere in this document, "D. Risk Factors" and "Item 5. Operating and Financial Review and Prospects." Certain industry and operating data are also provided below.

⁽¹⁾

Service revenues represent subscription fees, usage charges and value-added service fees, as well as roaming fees charged to other operators for their subscribers, or guest roamers, utilizing our network. Guest roaming fees were $44.0Service revenues amounted to $484.5 million, $43.2$830.3 million, $52.6$1,274.3 million, $83.4$2,435.7 million and $153.3$3,753.3 million for the years ended December 31, 1999, 2000, 2001, 2002, 2003 and 2004, respectively. Guest roaming fees included in service revenues were $43.2 million, $52.6 million, $83.4 million, $112.0 million and $93.3 million for the years ended December 31, 2000, 2001, 2002, 2003 and 2004, respectively.

⁽²⁾

OperatingSundry operating expenses include taxes (other than income taxes), primarily revenue and property-based taxes, of $15.6 million, $26.9 million, $25.3 million, $39.1 million, $40.4 million and $40.4$50.0 million for the years ended December 31, 1999, 2000, 2001, 2002, 2003 and 2003,2004, respectively.

⁽³⁾

Includes dividends on treasury shares of $0.4 million and $1.1 million for the years ended December 31, 2003 and 2004, respectively. In May 2005, our Board of Directors recommended cash dividends in the amount of $409.48 million (including dividends on treasury shares of $1.5 million). Our shareholders will vote on this recommendation at the annual shareholders meeting on June 21, 2005.

⁽⁴⁾

Capital expenditures include purchases of property, plant and equipment and intangible assets.

⁽⁴⁾⁽⁵⁾

Includes notes payable, bank loans, capital lease obligations and other debt.

⁽⁵⁾⁽⁶⁾

Calculated as book value of total debt divided by the sum of the book values of total shareholders' equity and total debt at the end of the relevant period. See note 45 above for the definition of "total debt."

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Source: Sotovik, J'Son & Partners and AC&M-Consulting.

⁽⁷⁾

Source: Ukrainian News.

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Source: Sotovik, J'Son & Partners, AC&M-Consulting, Ukrainian News and our data.

⁽⁹⁾⁽⁸⁾

We define a subscriber as an individual or organization whose account does not have a negative balance for more thanshows chargeable activity within 61 days. Fordays (or 183 days in the case of the "Jeans" tariffs only, introduced in November 2002, we define a subscriber as an individual or organizationand "SIM-SIM" brand tariffs) and whose account does not have a negative balance for more than 183 days. Forthis period. Prior to October 1, 2004, UMC used a description of our90-day period for such purposes with respect to its "Jeans" tariffs, see "Item 4. Information on Our Company—B. Business Overview—Sales and Marketing—Tariffs.""SIM-SIM" subscribers.

^(10)(9)

Average monthly minutes of usage per subscriber is calculated by dividing the total number of minutes of usage during a given period by the average number of our subscribers during suchthe period and dividing by the number of months in suchthat period. For Ukraine, the 2003 figure has been calculated based on the months of March through December 2003.

^(11)(10)

Average monthly service revenue per subscriber is calculated by dividing our service revenues for a given period, including guest roaming fees, by the average number of our subscribers during that period and dividing by the number of months in that period. For Ukraine, the 2003 figure has been calculated based on the months of March through December 2003.

^(12)(11)

Subscriber acquisition costs are calculated as total sales and marketing expenses and handset subsidies for a given period divided by the period per additional subscriber.total number of gross subscribers added during that period. Effective January 1, 2001, we changed our accounting policy and began expensing dealer commissions on new connections as incurred instead of amortizing them over the estimated average subscriber life. For Ukraine, the 2003 figure has been calculated based on the months of March through December 2003.

^(13)(12)

We define our churn as the total number of subscribers who cease to be a subscriber (as defined above) during the period (whether involuntarily due to non-payment or voluntarily, at such subscriber's request, including those switching to a different tariff plan)request), expressed as a percentage of the average number of our subscribers during that period. For Ukraine, the 2003 figure has been annualized based on the months of March through December 2003. The significant decrease in the 2004 churn rate in Ukraine is largely attributable to the change in our churn policy for "Jeans" and "Sim-Sim" subscribers in Ukraine. See note 8 above. Under the previous churn policy, the 2004 churn rate in 2004 was 23%.

B. Capitalization and Indebtedness

        Not applicable.

C. Reasons for the Offer and Use of Proceeds

        Not applicable.

D. Risk Factors

        An investment in our securities involves a high degree of risk. You should carefully consider the following information about these risks, together with other information contained in this document, before you decide to buy our securities. If any of the following risks actually occur, our business, prospects, financial condition or results of operations could be materially adversely affected. TheIn that case, the value of our securities could also decline and you could lose all or part of your investment.

We have described the risks and uncertainties that our management believes are material, but these risks and uncertainties may not be the only ones we face. Additional risks and uncertainties, including those we currently are not aware of or deem immaterial, may also result in decreased revenues, increased expenses or other events that could result in a decline in the value of our securities.

Risks Relating to Business Operations in Emerging Markets

Emerging markets such as the Russian Federation, BelarusUkraine and Ukraineother CIS countries are subject to greater risks than more developed markets, including significant legal, economic and political risks.

        Investors in emerging markets such as the Russian Federation, BelarusUkraine and Ukraineother CIS countries should be aware that these markets are subject to greater risk than more developed markets, including in some cases significant legal, economic and political risks. Investors should also note that emerging economies such as the economyeconomies of the Russian Federation Belarus and Ukraine are subject to rapid change and that the information set out herein may become outdated relatively quickly. Accordingly, investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved and investors are urged to consult with their own legal and financial advisors before making an investment in our securities.

Risks Relating to Our Business

If UMC or our purchase of UMC is found to have violated Ukrainian law or the purchase is unwound, our business, prospects and results of operations would be materially adversely affected.

        On June 7, 2004, the General Prosecutor of Ukraine filed a claim against us and others in the Kiev Commercial Court seeking to unwind the sale by Ukrtelecom of its 51% stake in UMC to us. The complaint also seekssought an order that would prohibitprohibiting us from alienating 51% of our stake in UMC until the claim is

was resolved on the merits. The claim iswas based on a provision of the Ukrainian privatization law that included Ukrtelecom among a list of "strategic" state holdings prohibited from alienating or encumbering its assets during the course of its privatization. While the Ukrainian Cabinet of Ministers of Ukraine in May 2001 issued a decree specifically authorizing the sale by Ukrtelecom of its entire stake in UMC, the General Prosecutor assertsasserted that the decree contradicted the privatization law and that the sale by Ukrtelecom was therefore illegal and should be unwound. On August 12, 2004, the Kiev Commercial Court rejected the General Prosecutor's claim.

        On August 26, 2004, the General Prosecutor requested the Constitutional Court of Ukraine to review whether certain provisions of the Ukrainian privatization law limiting the alienation of assets by privatized companies were applicable to the sale by Ukrtelecom of UMC shares to us. As of the date of this document, the Constitutional Court of Ukraine has yet to respond to the General Prosecutor's request.

        If the Constitutional Court of Ukraine determines that Ukrtelecom's sale of its stake in UMC contradicted the terms of the Ukrainian privatization law, the General Prosecutor would be able to request the Kiev Commercial Court to reopen the case based on new circumstances and could potentially include additional plaintiffs that were not parties to the original proceeding and/or additional claims.

In addition, it is not clear whetheras UMC had met all ofwas formed during the time when Ukraine's legislative framework was developing in an uncertain legal requirements associated withenvironment, its corporateformation and capital structure priormay also be subject to its acquisition, including those relating to capital contributions and amendments to its charter.challenges. In the event that UMC or our purchase of UMC is found to have violated Ukrainian law or the purchase is unwound, in whole or in part, our business, prospects and results of operations would be materially adversely affected.

Our principal shareholders havecontrolling shareholder has the ability to control our operations and theirits interests may conflict with those of holders of our securities, and theyit may make decisions that materially adversely affect your investment.

        Together our principal shareholders, Sistema and T-Mobile, control directly or indirectly approximately 77% of our voting shares and Sistema alone controls 50.6% of our outstanding shares. As a result, our principal shareholders haveSistema has the ability to implement actions requiring shareholder approval, including the election of a majority of our directors and the declaration of dividends, and havehas the ability to control our operations. Therefore, decisions made by Sistema or T-Mobile will influence our business, results of operations and financial condition, and these decisions may conflict with the interests of the holders of our securities.

        Moreover, under a shareholders' agreement between Sistema and T-Mobile, T-Mobile undertakes to vote to ensure (in so far as it is able) that Sistema has a majority of the members of our board of directors. However, certain corporate actions will require T-Mobile's approval, including new issuances of our shares, actions which would dilute T-Mobile's shareholding in us and acquisitions by us with a value greater than 25% of the balance sheet value of MTS OJSC's total assets, in accordance with Russian accounting standards. Under the shareholders' agreement, both Sistema and T-Mobile have a right of first refusal with respect to sales of our shares by the other party to third parties, subject to certain exceptions. The shareholders' agreement may, subject to a three-month remedy period, be terminated by either party, if the other party holds less than 25% of our share capital.

        Our controlling shareholder        Sistema has outstanding a significant amount of indebtedness, including $350.0 million of notes maturing in 2008 and $350.0 million of notes maturing in 2011. In addition, the notes maturing in 2011 can be redeemed at the option of the noteholders in 2007. Therefore, Sistema will require significant funds to meet its obligations, which may have to come in part from dividends paid by its subsidiaries, including us.

        Under the shareholders' agreement, Sistema and T-Mobile have also agreed to consult each other with respect to any dividend policy, with the expectation that annual dividends will be not less than the equivalent of 25% of MTS OJSC's net profits, in accordance with Russian accounting standards. Our principal shareholders voted in favor of declaring dividends of $111.4 million in 2003 and are expected to do so at our next annual shareholders' meeting$220.0 million in 2004. The indentures relating to our outstanding notes do not restrict our ability to pay dividends. As a result of paying dividends, our reliance on external sources of financing may increase, and our cash flow and ability to repay our debt obligations, or make capital expenditures, investments and acquisitions could be materially adversely affected. See "Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources."

        In addition, Sistema has agreed to fund the full and timely repayment of one of our loans, which had a balance of $23.4 million as of December 31, 2003. Sistema's failure to pay this amount could adversely affect our cash position.        Sistema also owns interestsan interest in SkylinkSky Link CJSC, JSC Personal Communications and MCC, which currently operateoperates on CDMA and older NMT standardsa CDMA-2000 standard in thea number of key regions, including Moscow and St. Petersburg and certain other license areas, but plan to develop broader wireless network in Russia using the latest CDMA standard. These companies intend to be niche players, targetingPetersburg. Sky Link may pursue business strategies that specifically target high-end businesses and residential customers, which could result in increased competition for us.

Increased competition and a more diverse subscriber base have resulted in decreasing average monthly service revenues per subscriber, and increasing subscriber churn, which may materially adversely affect our results of operations.

        While our subscriber base and revenues are growing as we continue to grow our operations, our average monthly service revenues per subscriber are decreasingdecreasing. For example, our average monthly service revenues per subscriber in Russia for 2002, 2003 and subscriber churn is increasing.2004 was $23, $17 and $12, respectively. We expect our average monthly service revenues per subscriber revenues to continue to decrease and subscriber churn to continue to increase

due to tariff decreases, lower tariffs in the regions outside of the Moscow license area and the increase of mass-market subscribers as a proportion of our overall subscriber mix. See "Item 5. Operating and Financial Review and Prospects." ThisIn addition, the Russian government may consider the introduction of a "calling party pays," or CPP, scheme. The introduction of CPP may have a negative impact on our average monthly service revenues per subscriber and margins depending on the settlement rate between mobile and fixed line operators set by the government. A decrease in our average monthly service revenues per subscriber and increase in subscriber churn may materially adversely affect our results of operations.

We are substantially dependent onin the process of transferring to a single supplier ofnew billing system, software, which may adversely affectcould have a material adverse effect on our ability to control our costsbusiness and expand our network.results of operations in the short term.

        We are substantially dependent onin the process of implementing a single Russian supplier of ournew billing system, equipmentwhich we expect to complete in December 2005. We expect the new billing system will ultimately increase our overall efficiency and software. Asreduce our expenses in the long term. During the transition period, however, we have expandedwill be required to run both the old and our subscriber base has grown, we have routinely required upgrades to ournew billing systems to managesimultaneously, creating additional burdens on our technical support staff. We may also experience technical problems with the increased capacity. Because of the high cost of investing in and installing billing systems, our ability to change our suppliers is limited. As a result, ournew billing system supplier hasduring the ability to unilaterallytransition period. These factors may increase our operational risks and expenses and inconvenience subscribers in the costs for systemshort term and, software upgrades to above-market prices which, in turn, may adversely affectconsequently, have a material adverse effect on our ability to control our costsbusiness and expand our network.results of operations.

Our failure to implement the necessary infrastructure to manage our growth could have a material adverse effect on our business and results of operations.

        Our billing system registers and debits the account of a subscriber for calls made by such subscriber one to two hours after such calls are made. There is also an additional delaycould be potential delays between the time that a subscriber's balance reaches zero and the disconnection of such subscriber from our network.network and, to the extent that this occurs, there would be an increase in our doubtful accounts receivable. During the first quarter of 2003, certain dealers and subscribers together fraudulently exploited these billing time lags by placing a sizeable amount of domestic and international long distance calls using subscriber accounts registered under false names. We discovered this fraud in March 2003, and we estimate that we incurred approximately $16.7 million in losses during 2003 as a result of this dealer fraud. We have taken measures that we believe will prevent further use of this scheme, such as requiring our subscribers to activate their long distance services in person at our service centers. This, in turn, may cause us to lose subscribers who view the new requirement as burdensome and materially adversely affect our market share. We have also canceled our contracts with certain dealers who had the highest numbers of fraudulent accounts. In 2004, we did not incur any significant losses as a result of subscriber or dealer fraud.

        The failure or breakdown of key components of our infrastructure in the future, including our billing system, could have a material adverse effect on our business and results of operations.

If we cannot successfully develop our network or integrate our acquired businesses, we will be unable to expand our subscriber base.base and maintain our profitability.

        We plan to expand our network infrastructure in the following ways:

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extend coverage and increase the capacity of our existing network in the Moscow and regional license area;areas;



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further develop our operations in Ukraine and Uzbekistan and make investments in MTS BelarusBelarus; and further develop coverage in the other regions of Russia in which we currently operate; and

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introduce service in the regions in which we have licenses and have not yet commenced operations.

        Our ability to increase our subscriber base depends upon the success of our network expansion. We have expended considerable amounts of resources to enable this expansion. For a discussion of our regional expansion, see "Item 4. Information on Our Company—A. History and Development—Expansion." Limited information regarding the potential regional markets into which we have or are considering expanding, either through acquisitions or new licenses, complicates accurate forecasts of future revenues from those regions, increasing the risk that we may overestimate these revenues.

        In addition, we have expanded our network through acquisitions and we may continue to engage in further acquisitions. We may not be able to integrate previous or future acquisitions successfully or operate them profitably.

        The Such integration of our businesses, including those we may acquire in the future, requires significant time and effort from our senior management, who are also responsible for managing our existing operations. TheSuch integration of our businesses may also be difficult as our technical systems and culture may differ from those of the acquired businesses,businesses. In addition, unpopular cost cutting measures may be required and control of cash flow may be difficult to establish. Any difficulties encountered in the transition and integration process could have a material adverse effect on our results of operations.

        We also may face problems and complicationsrisks during the course of our expansion into countries outside of the Russian FederationFederation. Differing cultures and more uncertain business operating environments could lead to which we are unaccustomed. For example, after we signed agreements for the acquisition of a majority stake in UMC in November 2002, a lawsuit was filed in Ukraine seekinglower profitability and higher risks to prevent the sale by one of the selling shareholders, Ukrtelecom, of its shares in UMC. This lawsuit was dismissed and our acquisition of a majority stake in UMC was consummated in March 2003. In June 2004, the General Prosecutor of Ukraine filed a claim against us and others seeking to unwind our purchase of Ukrtelecom's stake in UMC.business.

        The buildout of our network is also subject to risks and uncertainties, which could delay the introduction of service in some areas and increase the cost of network construction, including difficulty in obtaining base station sites on commercially attractive terms. In addition, telecommunications equipment used in Russia and Ukraine is subject to governmental certification, which must be renewed at least every three years. The failure of any equipment we use to receive timely certification or re-certification could also hinder our expansion plans. We also, at times, put our equipment into operation prior to receiving certification, which could lead to administrative sanctions including fines and/or the seizure of such equipment. To the extent we fail to expand our network on a timely basis, we could experience difficulty in expanding our subscriber base.

DifficultyRapid growth and expansion may cause us difficulty in obtaining adequate managerial and operational resources may restrictand strain our financial resources, restricting our ability to successfully expand our operations.

        We have experienced substantial growth and development in a relatively short period of time. Managementtime, and we believe that our businesses may continue to grow for the foreseeable future. The operating complexity of our business, as well as the responsibilities of management, have increased as a result of this growth, has requiredplacing significant strain on our managerial and operational resources and is likely to continue to do so. In response to this growth, we have recently added two new first vice president positions, subordinate only to our chief executive officer.resources. Our future operating results depend, in significant part, onupon the continued contributions of a small number of our key senior management and technical personnel.

        We will need to continue to improve our operational and financial systems and managerial controls and procedures to keep pace with our growth. We will also have to maintain close coordination among our logistical, technical, accounting, finance, marketing and sales personnel. Management of growth will require, among other things:

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stringent control of network buildout, operating and other costs;



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the ability to integrate new acquisitions into our operations;



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continued development of financial and management controls and information technology systems, and their implementation in newly acquired businesses;



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implementation of adequate internal control over financial reporting and disclosure controls and procedures;



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increased marketing activities;



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provision of additional service centers; and



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hiring and training of new personnel; and



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coordination among our logistical, technical, accounting, finance, marketing and sales personnel.

        Our success will depend, in part, on our ability to continue to attract, retain and motivate qualified personnel. Competition in Russia, Ukraine and Ukrainein the other CIS countries where we operate for personnel with relevant expertise is intense due to the small numbersnumber of qualified individuals. Although we attempt to structure our compensation packages in a manner consistent with evolving standards of the Russian and Ukrainian labor markets,

weWe are not insured against damage that we may be incurredincur in case of the loss or dismissal of our key personnel. Our failureinability to successfully manage our growth andor personnel needs could have a material adverse effect on our business, financial condition and results of operations.

If we cannot interconnect cost-effectively with other telecommunications operators, we may be unable to provide services at competitive prices and therefore lose market share and revenues.

        Our ability to provide commercially viable services depends on our ability to continue to interconnect cost-effectively with the Moscow City Telephone Network, or MGTS, and other incumbent fixed-line operators in Russia, Ukrtelecom, in Ukraine, and other local, domestic and international telecommunications operators. Fees for interconnection are established by agreements with network operators and vary, depending on the network used, the nature of the call and the call destination. We have entered into interconnection agreements with several local, domestic and international telecommunications operators, including MGTS and Rostelecom in Russia and UTEL and Ukrtelecom in Ukraine. Interconnection with these operators is required to complete calls originating on our network but terminating outside of it and to complete calls to our subscribers originating outside of our network.

        In Ukraine, mobile telecommunications operators currently charge Ukrtelecom a lower rate for its use of their networks than Ukrtelecom chargesRussia, the mobile telecommunications operators for their use of Ukrtelecom's fixed line network. In addition, the Ukrainian government plans in 2004to privatize Svyazinvest, a holding company that controls several regional fixed-line operators. In Ukraine, the government plans to privatize Ukrtelecom, whosewhich has a market share of over 80% of all fixed linefixed-line telecommunications services in UkraineUkraine. The timing of these privatizations is over 80%,not yet known, and it is unclear how this privatizationthese privatizations will affect our interconnection arrangements and costs.

        Although Russian legislation requires that operators of public switched telephone networks may not refuse to provide interconnections or discriminate against one operator by comparison withover another, we believe that, in practice, some public network operators attempt to impede mobilewireless operators by delaying interconnection applications and by charging varying interconnect rates to different mobilewireless operators and, in particular, more favorable rates to local mobilewireless operators, potentially enabling our competitors to offer lower prices. Any difficulties or delays in interconnecting cost-effectively with other networks could hinder our ability to provide services at competitive prices or at all, causing us to lose market share and revenues, which could have a material adverse effect on our business and results of operations.

Governmental regulation of our interconnect rates in Ukraine could adversely affect our results of operations.

        Under the Ukrainian Telecommunications Law adopted in November 2003, the State CommitteeNational Commission for the Regulation on Communications, and Informatization, or the SCCI, in Ukraine isNCRC, commencing January 1, 2005, has been entitled to regulate the tariffs for public telecommunications services rendered by fixed linefixed-line operators, whereas the mobile cellular operators (including UMC) are entitled to set their retail tariffs and negotiate interconnect rates with other operators. However, the SCCINCRC would be entitled to regulate the interconnect rates of any mobile cellular operator declared a "dominant market force" by the Antimonopoly Committee of Ukraine, or the AMC. In March 2004, the AMC began a review of the telecommunications services market for the purpose of determining the status of competition and the existence of dominant market forces. In April 2004, UMC reduced its interconnect rates at the recommendation of the AMC. Government regulation of our interconnect rates could cause our interconnect revenues to decrease or be limited, which could have a material adverse effect on our results of operations.

        In addition, we believe that the state-owned fixed linefixed-line operator monopolies, Ukrtelecom and UTEL, are currently able to influence telecommunications policy and regulation and may cause substantial increases in interconnect rates for access to fixedfixed-line operators' networks by the mobile cellular operators. Such increases could cause our costs to increase, which could have a material

adverse effect on our results of operations. Similarly, Urktelecom and UTEL may cause substantial decreases in interconnect rates for access to mobile cellular operators' networks by the fixed-line operators, which could cause our revenues to decrease and materially adversely affect our results of operations.

If frequencies currently assigned to us are reassigned to other users or if we fail to obtain renewals of our frequency allocations, our network capacity will be constrained and our ability to expand limited, resulting in a loss of market share and lower revenues.

        There is a limited amountnumber of frequencies available for mobilewireless operators in each of the regions in which we operate or hold licenses to operate. We are dependent on access to adequate spectrum allocation in each market in which we operate in order to maintain and expand our subscriber base. While we believe that our current spectrum allocations are sufficient, frequency may not be allocated to us in the future in the quantities, with the geographic span and for time periods that would allow us to provide wireless services on a commercially feasible basis throughout all of our license areas. For example, the availability of frequencies in the GSM 900 MHz band in Ukraine is limited by the fact that the Ukrainian military has a number of frequencies for its exclusive use. While future capacity constraints could be reduced by an increase in the GSM frequencies allocated to us, including additional frequencies in the GSM 1800 MHz band, we may not be awarded some or allany of the remaining GSM spectrum. In addition, the Ukrainian government is currently delaying the allocation of new frequencies to mobilewireless communications operators in Ukraine which, in turn, may constrain our network capacity in those areas of Ukraine characterized by high subscriber usage.

        A loss of assigned spectrum allocation, which is not replaced by other adequate allocations, could also have a substantial adverse impact on our network capacity. For example, on September 5, 2000, we received a letter from the State Service for Communication Control, a department of the Ministry of Information Technologies and Communications, informing us of the cancellation of the approval the State Service for Communication Control had given usit in May 2000 for certain frequencies within the 900 MHz band in order to install base stations with restricted emanation, which we used primarily for the development of our network in the underground stations of the Moscow subway system. While the Department of Communications Control, also under the Ministry of Information Technologies and Communications, halted the implementation of this letter on September 14, 2000, and the Ministry of Information Technologies and Communications reinstated these frequency allocations to us on November 14, 2000, such future such attempts may be made to remove frequency allocations from us. In addition, frequency allocations are often issued for periods that are shorter than the terms of the licenses, and such allocations may not be renewed in a timely manner or at all. If our frequencies are revoked or we are unable to renew our frequency allocations, our network capacity would be constrained and our ability to expand limited, resulting in a loss of market share and lower revenues.

We may be required to contribute to the cost of the Russian government's 900 MHz frequency conversion, which could have a material adverse effect on our results of operations.

        A program was approved by the Russian government in November 2001 providing for the transfer during 2002-2003 of the frequency used by air traffic control systems in order to allocate additional frequency for mobile communications. In the event that we and other mobile operators are required by the Russian government to finance the costs of such frequency transfer and we are unable to pass on all or some of this expense to our subscribers, our results of operations could be materially adversely affected. To date, neither we nor, to our knowledge, any of our competitors have been required to make any such contribution.

Because we lack full redundancya comprehensive back-up system for our network and insurance for our computer systems, a network or computer systems failure could prevent us from operating our business and lead to a loss of subscribers, damage to our reputation and violations of the terms of our licenses and subscriber contracts.contracts and penalties.

        We have back-up capacity for our network management, operations and maintenance systems, but automatic transfer to back-up capacity is limited. In the event that the primary network management center was unable to function, significant disruptions to our systems would occur, including our inability to provide services. Disruptions in our services occurred in the Moscow license area have occurred on August 3, 2000, December 15, 2000, January 23, 2001 and May 30, 2003, in the Kiev license area on August 31, 2004 and theseSeptember 1–2, 2004, in the Nizhny Novgorod license area on December 10, 2004 and in the Kirov license area on December 21, 2004. See "Item 4. Information on Our Company—B. Business Overview—Regulation in Ukraine—Competition" for a description of the recommendation issued by the AMC to UMC following the Kiev area disruptions.

These types of disruptions may recur, which could lead to a loss of subscribers, damage to our reputation, and violations of the terms of our licenses and subscriber contracts.contracts and penalties.

        Our computer and communications hardware is protected through physical and software safeguards. However, it is still vulnerable to fire, storm, flood, loss of power, telecommunications failures, interconnection failures, physical or software break-ins, viruses and similar events. WeAlthough we have insured our computer and communications hardware against fires, storms and floods, we do not carry business interruption insurance to protect us in the event of a catastrophe, even though such an event could have a material adverse effect on our business.

Failure to fulfill the terms of our licenses, including the payment of license contributions, could result in their suspension or termination, which could have a material adverse effect on our business and results of operations.

        Our licenses contain various requirements. These include participation in a federal communications network, adherence to technical standards, investment in network infrastructure and employment of Russian technical personnel. GSM operators are required to provide service to the federal government at regulated tariff rates.

        In addition, mostsome of our current licenses in Russia provide for payments to be made pursuant to a decision by the Association of GSM Operators, or the Association, to finance telecommunication infrastructure improvements, which in the aggregate could total approximately $110.0up to $103.0 million as of December 31, 2003. However, no decisions regulating2004. The Association is a nongovernmental not-for-profit organization comprised of representatives from the termsmajor cellular communications companies, including us. Neither the Association nor Russian lawmakers have established a procedure for enforcing and conditions ofcollecting such payments have been formulated.and the new Federal Law on Communications, which came to effect on January 1, 2004, does not provide for such payments to be made. Accordingly, we have made no payments to date pursuant to any of the current licenses which could require such payments.

Each of our licenses also requires service to be started by a specific date. Each of our licenses, other than the licenses which cover the Moscow license area, also containsdate and most contain further requirements as to the number of subscribersnetwork capacity and required territorial coverage to be reached by specified dates. Our licenses for the Moscow license area contain requirements relating to network capacity. These requirements are subject to adjustment during the term of the license.

        If we fail to comply with the requirements of applicable Russian, Ukrainian or Ukrainian law,other legislation or we fail to meet theany terms of our licenses, our licenses and other authorizations necessary for our operationoperations may be suspended or terminated. For example, our Ukrainian licenses have not been updated to reflect changes in our identification information. A suspension or termination of our licenses or other necessary governmental authorizations could curtail our operations, which could have a material adverse effect on our business and results of operations.

        In addition, the regulatory authorities' review of our compliance with licensing regulations and terms of our licenses may be politically motivated. For example, according to press reports, the Russian governmental authorities' investigation in late 2003 of Vimpelcom on the grounds that Vimpelcom was illegally operating in Moscow pursuant to a license issued to its 100% owned subsidiary, rather than to Vimpelcom itself was politically motivated. The matter was thereafter resolved in favor of Vimpelcom.

If we are unable to maintain our favorable brand image, we may be unable to attract new subscribers and retain existing subscribers, leading to loss of market share and revenues.

        Our ability to attract new subscribers and retain existing subscribers depends in part on our ability to maintain what we believe to be our favorable brand image. Negative publicity or rumors regarding our services

company or shareholders and affiliates or our companyservices could negatively affect this brand image, which could lead to loss of market share and revenues.

We may be unable to obtain licenses for third-generation, or UMTS, mobile cellularwireless services on commercially reasonable terms or at all, which would hinder us from competing effectively with operators who are able to provide these services and limit our ability to expand our services.

        TheDuring the past few years, the Ministry of Information Technologies and Communications has previously stated that it expectedits intention to announce the procedures for the award of licenses for UMTS mobile cellular services during 2002, and then during 2003.wireless services. To date, however, no procedures have been announced. Depending upon the procedures adopted, we may be unable to obtain UMTS licenses on commercially reasonable terms or at all. Failure to obtain UMTS licenses for the Moscow and other license areas or Ukraine (although we do not believe that the award of UMTS licenses in Ukraine is imminent) would hinder us from competing effectively with

operators who are able to provide these services and limit our ability to expand our services, which could have a material adverse effect on our prospects, business and results of operations.

        In addition, we employ technology based primarily on the Global System for Mobile Communications, or GSM, standard. The UMTS standard is significantly superior to existing second-generation standards such as GSM. The adoption of UMTS may consequently increase the competition we face. The technology we currently use may become obsolete or uncompetitive and, if we are not able to develop a strategy compatible with this or any other new technology, we may not be able to acquire new technologies necessary to compete on reasonable terms. In addition, expenditures in connection with new technology may adversely affect our ability to expand in other areas.

        Licenses for the use of code division multiple access, or CDMA, technology have already been granted for the provision of fixed wireless services in a number of regions throughout Russia. CDMA is a second-generation digital cellular telephony technology that can be used for the provision of both wireless and fixed services. Although CDMA technology is currently classified in Russia as a fixed radio-telephone service, it may be used for wireless communications, and it may be offered for use via portable handsets. Currently, CDMA technology is offered by certain mobile operators in Russia using the NMT-450 standard. If CDMA operators were able to develop a widespread network throughout Russia, we would face increased competition.

Failure to renew our licenses or receive renewed licenses with similar terms to our existing licenses could have a material adverse effect on our business and results of operations.

        Our licenses expire in various years from 20062005 to 20132016 and may be renewed in Russia, Ukraine and UkraineUzbekistan upon application to the Federal Service for Supervision in the Area of Communications, the NCRC and the SCCI,Agency of Communications and Informatization, respectively. From time to time, as required, we also apply for the re-issuance of licenses prior to their expiration.

        Governmental officials have broad discretion in deciding whether to renew a license, and may not renew our licenses after expiration. If our licenses are renewed, they may be renewed with additional obligations, including payment obligations, or for reduced service areas.obligations. Failure to renew our licenses or to receive renewed licenses with similar terms to our existing licenses particularly for the Moscow, Ukraine, North-West and Krasnodar license areas, could significantly diminish our service area, which could have a material adverse effect on our business and results of operations.

We engage in transactions with related parties, which may present conflicts of interest, potentially resulting in the conclusion of transactions on terms not determined by market forces.

        We our principal shareholders and their affiliates have engaged in several significant transactions among us and may continue to do so. We have purchased interests in various mobile telecommunications companies from Sistema and T-Mobile, and entered into arrangements with affiliatessubsidiaries of Sistema for advertising and(Maxima), interconnection services (MTT), insurance services. In addition, we have entered intoservices (Rosno), interconnection and telephone numbering capacity purchase agreements with MGTS, Telmos(MGTS, Comstar and MTU-Inform, which are subsidiaries of Sistema, as well asMTU-Inform), IT services and hardware purchases (Kvazar-Micro), banking services (MBRD), office leases with MGTS.(MGTS) and the purchase of a new billing system (STROM telecom). Furthermore, we have entered into a number of arrangements with T-Mobile and its affiliates, including agreements for the purchase of shares of UMC, and we have entered into a number of equipment lease agreements with Invest-Svyaz-Holding,Invest-Svyaz Holding, one of our shareholders and a wholly-owned subsidiary of Sistema. ConflictsThese transactions may present conflicts of interest, may arise between us, our affiliates and our principal shareholders or their affiliates,potentially resulting in the conclusion of transactions on terms not determined by market forces.

If the Federal Antimonopoly Service werewas to conclude that we acquired or created a new company in contravention of antimonopoly legislation, it could impose administrative sanctions and require the divestiture of this company or other assets, which could have a material adverse effect on our business and results of operations.

        Our business hasbusinesses have grown substantially through the acquisition and foundingformation of companies, many of which required the prior approval of, or subsequent notification to, the Federal Antimonopoly

Service or its predecessor agencies. In part, relevant legislation in certain cases restricts the acquisition or formation of companies by groups of companies or individuals acting in concert without such prior approval or notification. While we believe that we have complied with the applicable legislation for our acquisitions and formation of new companies, this legislation is sometimes vague and subject to varying interpretations. If the Federal Antimonopoly Service werewas to conclude that an acquisition or creationformation of

a new company was done in contravention of applicable legislation, it could impose administrative sanctions and require the divestiture of this company or other assets, which could have a material adverse effect on our business and results of operations.

        In addition, if we or any of our subsidiaries were to be classified by the Federal Antimonopoly Service as a dominant market force or as having a dominant position in the market, the Federal Antimonopoly Service would have the power to impose certain restrictions on their businesses. These restrictions could result in competitive disadvantages, and materially adversely affect the business and results of operations of these entities. See "—Risks Relating to Our Industry—If we are found to have a dominant position in our markets, the government may regulate our tariffs and restrict our operations."

In the event that the minority shareholders of our subsidiaries were to successfully challenge past interested party transactions or do not approve interested party or other transactions in the future, we could be limited in our operational flexibility.flexibility and our results of operations could be materially adversely affected.

        In many of our subsidiaries weWe own less than 100% of the equity in some of our subsidiaries, with the remaining equity balance being held by minority shareholders. These subsidiaries have in the past carried out, and continue to carry out, numerous transactions with us and our other subsidiaries, which may be considered "interested party transactions" under Russian law, requiring approval by disinterested directors, disinterested independent directors or disinterested shareholders. See "Item 10. Additional Information—7. Major Shareholders and Related Party Transactions—B. Charter and Certain Requirements of Russian Legislation—InterestedRelated Party Transactions." These transactions have not always been properly approved and, therefore, may be challenged by minority shareholders. In addition, Russian law requires a three-quarters majority vote of the holders of voting stock present at a shareholders meeting to approve certain transactions, including, for example, charter amendments, major transactions involving assets in excess of 50% of the assets of the company, repurchase by the company of shares and share issuances. In some cases, minority shareholders may not approve transactions which are interested party transactions requiring their approval or other transactions requiring supermajority approval. In the event these minority shareholders were to successfully challenge past interested party transactions, or do not approve interested party or other transactions in the future, we could be limited in our operational flexibility and our results of operations could be materially adversely affected.

All or part of our subscriber database, containing private information relating to our subscribers, was illegally copied and stolen in early 2003, and is currently publicly sold in Russia.

        In January 2003, we discovered that part of our database of subscribers, containing private subscriber information, was illegally copied and stolen. The database contained information such as the names, addresses, home phone numbers, passport details individual tax numbers and other personal information of approximately 5five million of our subscribers. ThisFollowing its theft, this database is currently being soldwas available for sale in Russia. In addition, in May 2003, certain subscriber databases of several operators in the North-West region, including those of MTS, MegaFon, Delta Telecom and two other operators, were stolen and are currently being sold.

        In December 2003, we completed our internal investigation relating to the theft of our subscriber databases and found that these incidents were due to weaknesses in our internal security in relation to physical access to such information. We have taken measures that we believe will prevent such incidents from occurring in the future, but such incidents may recur in the future.

        In January 2003, lawsuits were filed by two of our subscribers seeking compensation for damages resulting from the leak of the subscribers' confidential information. While the subscribers subsequently withdrew their claims, if similar lawsuits are successful in the future, we might have to pay significant damages, including consequential damages, which could have a material adverse effect on our results of operations. Future breaches of security may also negatively impact our reputation and our brand image and lead to a loss of market share, which could materially adversely affect our business, prospects and results of operations.

Risks Relating to Our Financial Condition

Servicing and refinancing of our indebtedness will require a significant amount of cash. Our ability to generate cash or obtain financing depends on many factors beyond our control.

        We have a substantial amount of outstanding indebtedness, primarily consisting of the obligations we entered into in connection with our notes and bank loans. At December 31, 2003,2004, our consolidated total debt, including capital lease obligations, was approximately $1,660.3$1,937.1 million, and we received a $200.0have signed several agreements for additional financing for an aggregate amount of approximately $493.0 million short-term bridge loan in Aprilsince December 31, 2004. We have approximately $703.3$370.9 million in notes and bank loans that are due in 2004.by December 31, 2005.

        Our ability to service, repay and refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, we may default under the terms of our indebtedness, and the holders of our indebtedness would be able to accelerate the maturity of such indebtedness, which could cause defaults under our other indebtedness.

        We may not be able to generate sufficient cash flow or access international capital markets or incur additional indebtedness to enable us to service or repay our indebtedness or to fund our other liquidity needs. We may be required to refinance all or a portion of our indebtedness on or before maturity, sell assets, reduce or delay capital expenditures or seek additional capital. We cannot assure you that any refinancing or additional financing would be available on commercially reasonable terms or at all, or whether our assets could be sold, or if sold, whether the proceeds therefrom would be sufficient to meet our debt service obligations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance debt on commercially reasonable terms, would materially adversely affect our business, financial condition, results of operations and prospects. See "Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources."

If we are unable to obtain adequate capital, we may have to limit our operations substantially, which could have a material adverse effect on our business, prospects and results of operations.

        We will need to make significant capital expenditures, particularly in connection with the development, construction and maintenance of, and the purchasing of software for, our GSM network. We spent approximately $441.0 million in 2001, approximately $574$574.3 million in 2002, approximately $959.0$958.8 million in 2003 and expect to spend approximately $1.2 billion$1,358.9 million in 2004 for the fulfillment of our capital spending plans.plans, and we may need to significantly increase our capital expenditures in the future to facilitate our regional growth and maintain our competitive network coverage. In addition, the acquisition of UMTS licenses and frequency allocations and the buildout of a UMTS network wouldwill require substantial additional capital expenditures. However, future financings and cash flow from our operations may not be sufficient to meet our planned needs in the event of various unanticipated potential developments, including the following:

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a lack of external financing sources;

•

changes in the terms of existing financing arrangements;



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construction of the wireless networks at a faster rate or higher capital cost than anticipated;



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need for greater than anticipated service and customer support;



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pursuit of new business opportunities or investing in existing businesses that require significant investment;



•

acquisitions or development of any additional wireless licenses;



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slower than anticipated subscriber growth;



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adverse slower than anticipated revenue growth;



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regulatory developments;



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adverse changes in existing interconnect arrangements; or



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a deterioration in the Russian economy.

        To meet our financing requirements, we may need to attract additional equity or debt financing. Russian companies are limited in their ability to issue shares in the form of ADSsADRs or other depository receipts due to new Russian securities regulations that came into force in 2003 providing that no more than 40% of a Russian company's shares may be circulated abroad through sponsored depositary receipt programs. Although asAs of April 1, 2004, our ADS programMay 31, 2005, depositary receipts, including ADRs, accounted for only 17.4%approximately 37% of our outstanding shares and may receive another 5% ofshares. Therefore, our shares from the conversion of GDRsability to ADSs, the unused portion of this limit could become unavailable to us if our principal shareholders decide to sell their shares in the form of ADSs or otherraise additional equity financing through depositary receipts. Moreover, the Russian securities regulatory authority may reduce the 40% limit in the future.receipt programs is substantially limited. If we cannot obtain adequate funds to

satisfy our capital requirements, we may need to limit our operations significantly, which could have a material adverse effect on our business, prospects and results of operations.

        In addition, from time to time, we may merge our subsidiaries into us for operational reasons. Under Russian law, such merger would be considered a reorganization and we would be required to notify MTS'our creditors of this reorganization. Russian law also provides that, for a period of 30 days after notice, these creditors would have a right to accelerate MTS'our debts and demand reimbursement for applicable losses. In the event that we elect to undertake any such merger and all or part of MTS'our debt is accelerated, we may not have the ability to raise the funds necessary for repayment and our business and financial condition could be materially adversely affected. On November 9, 2004, our general meeting of shareholders approved a merger of seven of our wholly-owned subsidiaries into us. The term for notifying our creditors has not yet commenced. We do not, however, expect a substantial portion of our indebtedness to be accelerated.

Devaluation of the ruble against the U.S. dollar could increase our costs and reduce our revenues.

        Over the past several years,Until recently, the ruble has fluctuated dramatically against the U.S. dollar, in the great majority of instances falling in value. The Russian Central Bank from time to time has imposed various currency-trading and transfer restrictions in attempts to support the ruble. The ability of the government and the Russian Central Bank to maintain a stable ruble will depend on many political and economic factors. These include their ability to finance budget deficits without recourse to printing money, to control inflation and to maintain sufficient foreign currency reserves to support the ruble.

        Substantially allA significant portion of our costs, expenditures and liabilities, including capital expenditures as well as liabilities,and borrowings (including our U.S. dollar-denominated notes), are either denominated in, or tightlyclosely linked to, the U.S. dollar. These include capital expenditures and borrowings, includingdollar, while substantially all of our U.S. dollar-denominated notes.revenues are denominated in rubles. As a result, the devaluation of the ruble against the U.S. dollar can adversely affect us by increasing our costs in ruble terms. In order to hedge against this risk, we link our tariffs in Russia, which are payable in rubles, to the U.S. dollar. The effectiveness of this hedge is limited, however, as we may not be able to maintain ourincrease prices in line with ruble devaluation against the U.S. dollar-linked tariffsdollar due to competitive pressures in the event that the ruble devaluates against the U.S. dollar,or regulatory restrictions, leading to a loss of revenue in U.S. dollar terms. We do not engage in any other hedging arrangements. Additionally, if the ruble declines against the U.S. dollar and price increases cannot keep pace, we could have difficulty repaying or refinancing our U.S. dollar-denominated indebtedness, including our notes. The devaluation of the ruble also results in losses in the value of ruble-denominated assets, such as ruble deposits. In order to hedge against this risk, we invest a significant portion of our cash in U.S. dollar-denominated deposits.

        The decline in the value of the ruble against the U.S. dollar also reduces the U.S. dollar value of tax savings arising from the depreciation of our property, plant and equipment, since their basis for tax purposes is denominated in rubles at the time of the investment. Increased tax liability would increase total expenses.

Inflation could increase our costs and adversely affect our results of operations.

        The Russian economy has been characterized by high rates of inflation. In 2003,2004, the inflation rate of 12%11.7%, combined with the nominal appreciation of the ruble, resulted in the appreciation of the ruble against the U.S. dollar in real terms. As we tend to experience inflation-driven increases in certain of our costs, including salaries and rents, which are sensitive to rises in the general price level in Russia, our costs in U.S. dollar terms will rise. In this situation, due to competitive pressures, we may not be able to raise the prices we charge for our tariffsproducts and services sufficiently to preserve operating margins. Accordingly, high rates of inflation in Russia combined with the nominal appreciation of the ruble could significantly increase our costs and adversely affect our results of operations.

The requirementsRussian currency control regulations hinder our ability to obtain permission from theconduct our business.

        The Central Bank of Russia and/orhas from time to time imposed various currency control regulations in attempts to support the National Bank of Ukraineruble, and may hinder our ability to enter into certain hard-currency-denominated transactions.

        Certain payments in foreign currency are subject to prior permission by the Central Bank of Russia, including, with various exceptions, the following:

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direct investments, except investments from abroadtake further actions in the charter capital of a Russian company;



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portfolio investments;



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payments for export-import transactions with settlement over 90 days following completion;



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payments with respect to real estate; and



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other capital transactions.

        These regulations are subject to substantial changes and varying interpretations, complicating bothfuture. Furthermore, the process of determining whether permission of the Central Bank of Russia is requiredgovernment and the process of obtaining permission. Applying for a currency operation license can be a burdensome and time-consuming process. The Central Bank of Russia may impose additional requirements or deny our request for currency licenses on an arbitrary basis. Similarly, in Ukraine, certain payments in foreign currency are subject to prior permission by the National Bank of Ukraine.

        If we are unable to obtain Central Bank of Russia and/or National Bank of Ukraine permissions for hard-currency-denominated transactions requiring such permissions, our long-term borrowing sources may be limited to Russian or Ukrainian financial sources, which may be inadequate or unfavorable compared to international sources. In addition, in the event that we have failed to obtain Central Bankcash inflows and outflows into and out of Russia or National Bankon the use of Ukraine permissions for hard-currency-denominatedforeign currency in Russia, which could prevent us from carrying on necessary business transactions, and borrowings requiring such permissions in the past, such failure could result in severe penalties, including the unwinding of the relevant transactions, fines and administrative penalties assessed against us, and criminal and administrative penalties assessed againstor from successfully implementing our management.

        As of December 31, 2003, we had outstanding debt (excluding capital lease obligations) of approximately $1,549.8 million denominated in U.S. dollars and approximately $65.0 million denominated in euro. Although we have Russian Central Bank licenses to make payments of principal and interest on these loans, the termination of any of our Russian Central Bank licenses or a breach by us of the terms of a Russian Central Bank license could result in cash flow difficulties and fines and penalties. The loss of a Russian Central Bank license may also constitute an event of default under certain of our agreements, which may result in the acceleration of some or all of our outstanding hard-currency-denominated debt.business strategy.

        A new Russian framework law on exchange controls is scheduled to taketook effect on June 18, 2004. This law will empowerempowers the Russian government and the Central Bank of Russia to further regulate and restrict currency control matters, including operations involving foreign securities and foreign currency borrowings by Russian companies. The new law will also abolishabolishes the need for companies to obtain transaction-specific licenses from the Central Bank of Russia (except for opening bank accounts outside Russia), envisaging instead the implementation of generally applicable restrictions on currency control operations. Although Central Bank officials have not yet indicatedAs the nature or extent of the regulations they will introduce under the new law, the newevolving regulatory regime couldis new and untested, it is unclear whether it will be more or less restrictive than the restrictions currently in effectprior laws and could prevent us from carrying out necessary business transactions, or from successfully implementing our business strategy.regulations it has replaced.

Vaguely drafted Russian transfer pricing rules and lack of reliable pricing information subject us to the risks of additional costs and penalties.

        Russian transfer pricing rules entered into force in 1999, giving Russian tax authorities the right to make transfer pricing adjustments and impose additional tax liabilities in respect of all controlled transactions, provided that the transaction price differs from the market price by more than 20%. Controlled transactions includecontrol prices for transactions between related entities and certain other types of transactions between independent parties, such as foreign trade transactions or transactions with significant (by more than 20%) price fluctuations. The Russian transfer pricing rules are vaguely drafted, leaving wide scope for interpretation by Russian tax authorities and courts. Duearbitration courts, and they could be used in politically motivated investigations and prosecutions. We believe that the prices used by our group are market prices and, therefore, comply with the requirements of Russian tax law on transfer pricing. However, due to the uncertainties in interpretation of transfer pricing legislation, the tax authorities may challenge our prices and requirepropose adjustments. If such price adjustments are upheld by the Russian arbitration courts and implemented, our future financial results could be adversely affected. In addition, we could face significant costslosses associated with the assessed amount of prior tax underpaid and related interest and penalties, which couldwould have a materialan adverse effectimpact on our financial condition and results of operations. Although Ukraine has reformed its transfer pricing rules, similar concerns with interpretation and enforcement by the Ukrainian tax authorities exist.

Restrictions on investments outside of Russia or in hard-currency-denominated instruments in Russia expose our cash holdings to devaluation.

        Currency regulations established by the Russian Central Bank of Russia restrict investments by Russian companies outside of Russia and in most hard-currency-denominated instruments in Russia, and there are

only a limited number of ruble-denominated instruments in which we may invest our excess cash. Any balances maintained in rubles will give rise to losses if the ruble devalues against the U.S. dollar.

        Additionally, Russian companies must repatriate 100% of offshore foreign currency earnings to Russia and convert 25%10% of those earnings into rubles within seven days from the date on which they were received,of receipt, although Russian legislation allows the Central Bank of Russia to modifydecrease this conversion requirement. Werequirement or increase it up to 30%. For example, we earned primarily from roaming agreements, approximately $53.0around $83.4 million, $83.0$112.0 million and $154.0$93.3 million in foreign currency in 2001, 2002, 2003 and 2003,2004, respectively, constituting around 6% ofprimarily from our total revenues each year. Theroaming agreements. This requirement to repatriate and convert foreign currency earnings further increases balances in our ruble-denominated accounts and, consequently, our exposure to devaluation risk.

Continued or increased limitations on the conversion of rubles to foreign currency in Russia could increase our costs when making payments in foreign currency to suppliers and creditors and could cause us to default on our obligations to them.

        OurMany of our major capital expenditures are generally denominated and payable in various foreign currencies, including the U.S. dollar and euro. AsFor example, as of December 31, 2003,2004, we had $157.1$164.7 million and $109.0 million committed in U.S. dollars and euro, respectively, under contracts with foreign suppliers for purchasesthe purchase of network infrastructure that were primarily denominated in connection with our network infrastructure. To the extent such major capital expenditures involve the importation of equipment and related items,U.S. dollars. Although Russian legislation currently permits the conversion of ruble revenuesrubles into foreign currency. However,currency, the market in Russia for the conversion of rubles into foreign currencies is limited. The scarcity of foreign currencies may tend to inflate their values relative to the ruble, and such a market may not continue to exist, which could increase our costs when making payments in foreign currencycurrencies to suppliers and creditors.

        Additionally, any delay or other difficulty in converting rubles into a foreign currency to make a payment or delay or restriction in the transfer of foreign currency could limit our ability to meet our payment and debt obligations, which could result in the loss of suppliers, acceleration of debt obligations and cross-defaults.cross-defaults and, consequently, have a material adverse effect on our business, financial condition and results of operations.

Indentures relating to our notes and our controlling shareholder Sistema's notes contain, and our syndicated loan agreement contains, restrictive covenants, which limit our ability to incur debt and to engage in various activities.

        The indentures relating to our outstanding notes maturing in 2010, 2008 and 2004 each contain covenants limiting our ability to incur debt, create liens on our properties and enter into sale and lease-back transactions. The indentures also contain covenants limiting our ability to merge or consolidate with another person or convey our properties and assets to another person, as well as our ability to sell or transfer any of our or our subsidiaries' GSM licenses for the Moscow, St. Petersburg, Krasnodar and Ukraine license areas. See "Item 10. Additional Information—C. Material Contracts—Notes IndenturesOur syndicated loan facility contains similar and Guarantees."other covenants. Failure to comply with these covenants could cause a default and result in the debt becoming immediately due and payable, which would materially adversely affect our business, financial condition and results of operations.

        In addition, Sistema, which controls over 50%50.6% of our outstanding shares and consolidates our results in its financial statements, is subject to various covenants in the indentures related to its $350.0 million in aggregate principal amount of notes due 2008 and $350.0 million in aggregate principal amount of notes due 2011, which impose restrictions on Sistema and its restricted subsidiaries (including us) with respect to,inter alia,, incurrence of indebtedness, creation of liens and disposal of assets. In these indentures, Sistema undertakes that it will not, and will not permit its restricted subsidiaries (including us) to, incur indebtedness unless a certain debt/EBITDA (as defined therein) ratio is met. In addition

to us, Sistema has other businesses that require capital and, therefore, the consolidated Sistema group's capacity to incur indebtedness otherwise available to us could be diverted to its other businesses. Sistema may also enter into other agreements in the future that may further restrict it and its restricted subsidiaries (including us) from engaging in these and other activities. We expect Sistema to exercise its control over us in order for Sistema, as a consolidated group, to meet its covenants, which could materially limit our ability to conduct our operations, including the implementation of our business strategy.

If a change in control occurs, our noteholders and other debt holders may require us to redeem notes not previously called for redemption,or other debt, which could have a material adverse effect on our financial condition and results of operations.

        Under the terms of our outstanding notes, maturing in 2004, 2008 and 2010, if a change in control occurs, our noteholders will have the right to require us to redeem notes not previously called for redemption. The price we will be required to pay upon such event will be 101% of the principal amount of the notes, plus accrued interest to the redemption date. A change in control will be deemed to have occurred in any of the following circumstances:

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Any person acquires beneficial ownership of 50% or more of the total voting power of all shares of our common stock; provided that the following transactions would not be deemed to result in a change in control:



•

any acquisition by Sistema, T-Mobile or their respective subsidiaries that results in the 50% threshold being exceeded if, immediately following such transaction, each of Sistema (together with its subsidiaries) and T-Mobile (together with its subsidiaries) beneficially owns more than 25% of the total voting power of all shares of our common stock;exceeded; and



•

any acquisition by us, our subsidiary or our employee benefit plan.



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We merge or consolidate with or into, or convey, sell, lease or otherwise dispose of all or substantially all of our assets to, another entity or another entity merges into us and, immediately following such transaction, Sistema and T-Mobile together do not beneficially own at least 50% of the total voting power of all shares of common stock of such entity and, individually, do not beneficially own more than 25% of the total voting power of all shares of common stock of such entity.



•

We no longer beneficially own more than 50% of the issuer's share capital.

        If a change in control occurs, and our noteholders and other debt holders exercise their right to require us to redeem all of their notes not previously called for redemption,or debt, such event could have a material adverse effect on our financial condition and results of operations.

Risks Relating to Our Industry

We face increasing competition from existing licensees that may result in reduced operating margins and loss of market share, as well as different pricing, service or marketing policies.

        The Russian mobile cellularwireless telecommunication services market is becoming increasingly competitive. The trend in Russian government licensing policies has been to increase competition among mobile cellularwireless telecommunication service providers. Russian regulatory authorities have moved from granting exclusive licenses for each technology standard per region to granting multiple licenses covering the same territory. Increased competition, including from the potential introduction of new mobile operators in the markets where we operate, may result in reduced operating margins and loss of market share, as well as different pricing, service or marketing policies.

Some of our competitors may receive preferential treatment from the government, potentially giving them a substantial advantage over us.

        According to press reports, MegaFon is majority owned by Telecominvest (31%), LV Finance (25.1%), and TeliaSonera (36%), a leading Swedish telecommunications operator. In turn, Telecominvest is 15% owned by North-West Telecom, a subsidiary of Svyazinvest, and 29.5% by TeliaSonera. Svyazinvest is effectively controlled by the Russian government.

        Press reports have pointed to the previous involvement of federal government officials, including the current Minister of Communications, in entities owned by MegaFon as a potential reason for preferential treatment in regulatory matters. This could result in an uneven regulatory playing field and give MegaFon an advantage over us in competing for additional frequency allocations or new licenses. For instance, the temporary loss of frequency allocation in Moscow we suffered in the fall of 2000 has been linked in press reports to MegaFon's need for frequency allocation.

        In Ukraine we compete with Kyivstar, a GSM operator with over two million subscribers and a market share of 46% as of December 31, 2003, according to Ukrainian News. Kyivstar is majority-owned by Telenor, a leading Norwegian telecommunications group. Press reports have indicated that relatives of Ukrainian President Leonid Kuchma, including his daughter and brother-in-law, are involved in the ownership and top management of Kyivstar. This could result in Kyivstar receiving preferential treatment from the Ukrainian government in regulatory and other matters, and potentially lead to arbitrary treatment of UMC by governmental authorities.

A merger between our two largest competitors would constrain our ability to effectively competeresult in a competitor substantially larger than us with leading market shares in the Russian mobile communications market.

        In August 2003, Russian financial industrial conglomerate Alfa Group, which owns a 25.1% stake in Vimpelcom, announced its purchase of LV Finance,CT-Mobile, which owns a 25.1% stake in MegaFon. This acquisition gives Alfa Group a 25.1% blocking stake in MegaFon and the press reported that Alfa Group might seek to merge Vimpelcom and MegaFon, Russia's second and third largest mobilewireless communications providers and our two largest competitors. Though it is unclear whether such merger might occur, in the event that it does, our ability to effectively compete against such merged entity may be constrainedit would result in relation to the combined networks, resources, subscriber bases and improved economies of scale of such company.

Our reliance on the GSM standard may preventa competitor substantially larger than us from competing effectively against other existing technologies and new technologies, causing us to losewith leading market share.

        The adoption of UMTS may also increase the competition we face. In Russia, the government expects to complete preparatory work for license tenders for third-generation mobile cellular standardsshares in the near future. The UMTS standard is significantly superior to existing second-generation standards such as GSM, and given our reliance on the GSM standard, we may not be able to develop a strategy compatible with this or any other new technology. The technology we currently use may become obsolete or uncompetitive, and we may not be able to acquire new technologies necessary to competeRussian wireless communications market.

on reasonable terms. In addition, expenditures in connection with new technology may adversely affect our ability to expand in other areas.

        Licenses based on code division multiple access, or CDMA, technology have already been granted for the provision of fixed wireless services in a number of regions throughout Russia. CDMA is a second-generation digital cellular telephony technology that can be used for the provision of both mobile and fixed services. Although CDMA technology is currently classified in Russia as a fixed radio telephone service, it may be used for mobile communications, and it may be offered for use via portable handsets. If CDMA operators were able to obtain permission to offer mobile CDMA services, we would face increased competition.

The regulatory environment for telecommunications in Russia and Ukraine is uncertain and may be subject to political influence resultingor manipulation, which may result in negative and arbitrary regulatory and other decisions against us on the basis of other than legal grounds.considerations and in preferential treatment for our competitors.

        We operate in an uncertain regulatory environment. There is no comprehensiveThe legal framework with respect to the provision of telecommunication services in Russia and Ukraine and in other areas in which we may operate in the future althoughis not well developed, and a number of conflicting laws, decrees and regulations apply to the telecommunications sector. In particular, in Russia, the telecommunications system is regulated by the Ministry of Information Technologies and Communications, the Federal Service for Supervision in the Area of Communications and the Federal Agency of Communications. The Ukrainian telecommunications sector is regulated by the State Committee on Communications and Informatization. Regulation in both countries

        Moreover, regulation is conducted largely through the issuance of licenses and instructions, and governmental officials have a high degree of discretion.

In this environment, political influence or manipulation could be exertedused to affect regulatory, decisions against us. Although Sistema, our controlling shareholder, has no formal ties with the Mayor of Moscow, Yuri Luzhkov, it has been linked in press reports to him. We believe the likely source of such press reports is the fact that the controlling shareholdertax and Chairman of the Board of Sistema, Vladimir P. Evtushenkov, for many years worked at the government of Moscow as Mr. Luzhkov's advisor. Because Mr. Luzhkov has been, at times, politically adverse to President Putin, in the event of a political clash between the two politicians, some commentators in the press have suggested that President Putin could seek to exert pressure against Mr. Luzhkov through attacks on companies perceived as linked to him, such as Sistema and us. If those commentators are correct, this could result in regulatoryother decisions against us on the basis of other than legal considerations. For example, Russian government authorities investigated Vimpelcom in late 2003 on grounds potentially increasingthat it was illegally operating in Moscow pursuant to a license issued to its wholly-owned subsidiary rather than to Vimpelcom itself. In addition, some of our costs and leading to negative impacts on our business or reducing our rights under our licenses. Similarly, in Ukraine, press reports have indicated that relatives of Ukrainian President Leonid Kuchma, including his daughter and brother-in-law, are involved in the ownership and top management of Kyivstar. This could result in Kyivstar receivingcompetitors may receive preferential treatment from the Ukrainian government, potentially giving them a substantial advantage over us. For example, according to press reports, MegaFon and Kyivstar, our competitors in Russia and Ukraine, respectively, received preferential treatment in regulatory and other matters and potentially lead to arbitrary regulatory decisions against UMC.in the past.

Because of limitations on the rights of license holders and the need to have a license reissued in the event of a merger, our ability to integrate our networks may be restricted, thus preventing us from offering integrated network services.

        As our regional development program proceeds, we intend to integrate our various networks to create a single, unified GSM network. The Federal Law on Communications and other telecommunications regulations prohibit the transfer or assignment of licenses and require that telecommunications services must be provided by the licensee only. Further, applicable regulations require that agreements for the provision of telecommunications services must be concluded and performed only by the licensee. This requirement has been an important factor in our recent acquisitions. As we are unable to buy licenses, we must ratherinstead purchase the company holding the license. We must also must continue to operate through such company in its license area by entering into agency, lease, services and similar agreements.

        We have entered into a series of agreements with a number of our subsidiaries for the provision of network construction services, the lease of mobilewireless switching centers and related services. The government may change its position and view these agreements as violating the general prohibition on the transfer or assignment of licenses. For example, in 2003, the government challenged Vimpelcom on the grounds that it was illegally operating in Moscow pursuant to a license issued to its 100% owned subsidiary rather than to Vimpelcom itself.

        Additionally, Russian law requires that, in the event of a merger, a license held by either of the merging entities must be reissued to the successor entity, rather than simply transferred. We intend to continue to merge with our wholly-owned subsidiaries as part of our efforts to integrate our networks; however, a failure to receive a new license as part of a merger would result in the loss of our ability to operate in that license area.

        Restrictions on our ability to enter into contracts with our subsidiaries, or the failure to receive a new license in the event of a merger, would restrict our ability to create a single, unified GSM network, reducing our ability to attract and retain subscribers and compete with a federal, nation-wide licensee in the event that such a license was granted.

If we wereare found to have a dominant position in our markets, the government may regulate our tariffs and restrict our operations.

        Under Russian legislation, the Federal Antimonopoly Service may categorize a company as a dominant force in a market. Current Russian legislation does not clearly define "market" in terms of the types of services or the geographic area. As of July 25, 2003,December 31, 2004, MTS OJSC and ourits subsidiaries CJSC Kuban-GSM, Tomsk Cellular Communications LLC, CJSC Siberian Cellular System-900 and UDN 900CJSC UDN-900 are categorized as companies with a market share exceeding 35%. Tomsk Cellular Communications, which we purchased in September 2003, was also categorized as a company with a market share in excess of 35% as of July 25, 2003. This classification, in turn, gives the Federal Antimonopoly Service the power to impose certain restrictions on the businesses of those entities.

        Additionally, UMC, which has over a 50% market share of the Ukrainian mobile cellularwireless communications market, can be categorized as a company with a dominant position in the market and become subject to specific government-imposed restrictions. While UMC is currently not categorized as a company with a dominant position in the market, it reduced certain of its tariffs at the recommendation of the AMC in April 2004. See "Item 4. Information on Our Company—B. Business Overview—Regulation in Ukraine—Competition" for additional information.

        If we or any of our subsidiaries were classified as a dominant market force or as having a dominant position in the market, the imposition of government-determined tariffs could result in competitive disadvantages, and our business and results of operations could be materially adversely affected. Our refusal to adjust our tariffs according to such government-determined rates could result in the withholding of all our revenues by Russian authorities. Additionally, restrictions on expansion or government-mandated withdrawal from regions or markets could reduce our subscriber base and prevent us from implementing our business strategy. Moreover, we could be required to make additional license applications at an additional unexpected cost.

The public switched telephone networks have reached capacity limits and need modernization, which may inconvenience our subscribers and may require us to make substantial investments in public switched telephone networks.

        Due to the recent growth in fixed and mobilewireless telephone use in Moscow, the city's "095" code has reached numbering capacity limits and an additional code or codes are expected to be introduced in the future. Calls between a new code and another code will require callers to dial through "8," the long distance dialing prefix, which is also used by our "federal" number subscribers. See "Item 4. Information on Our Company—B. Business Overview—Sales and Marketing—Tariffs" for a description of our 11-digit federal telephone numbers. The overtaxing of these long distance lines may inconvenience our federal number subscribers by causing incoming and outgoing calls to have lower completion rates. Resolving these issues will require additional investment. In addition, continued growth in local, long-distance and international traffic, including that generated by our subscribers, may require substantial investment in public switched telephone networks.

        Although the operators of public switched telephone networks are normally responsible for these investments, their weak financial condition may prevent them from making these investments. Since we are financially strong relative to these public network operators, we may be compelled to make such investments on their behalf, placing an additional burden on our financial and human resources. Additionally, assuming we do make such investments, we may not own the assets resulting from such investment. While we cannot estimate the financial and operating burdens associated with such investments, they may be substantial.

        Additionally, to meet subscriber demand and provide for an adequate inventory of numbering capacity, we have entered into contracts with local fixed-line providers for allocation of numbering capacity to us. These contracts are now under review by the Ministry of Information Technologies and Communication and are subject to change in order to comply with new legislative requirements. The Ministry of Information Technologies and Communications may also require cellular communication service providers to allow their customers to retain their mobile number when switching from one

provider to another. These changes in our contracts and in the regulations may cause us to incur additional expenses and a loss of numbering capacity.

        In Ukraine, new numbering capacity must first be established on the networks of Ukrainian public fixed-line operators before the numbers are made available for use by mobile operators. Thus, depending on the rate in which new numbers are established on the fixed-line networks, UMC may be constrained in its ability to allocate new phone numbers to potential customers which could hinder UMC's ability to attract new subscribers and cause its market share to decline.

Alleged medical risks of cellular technology may subject us to negative publicity or litigation, decrease our access to base station sites, diminish subscriber usage and hinder access to additional financing.

        Electromagnetic emissions from transmitter masts and mobile handsets may harm the health of individuals exposed for long periods of time to these emissions. The actual or perceived health risks of transmitter masts and mobile handsets could materially adversely affect us including in the following ways:

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reducedby reducing subscriber growth;



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reducedgrowth, reducing usage per subscriber;



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increasedsubscriber, increasing the number of product liability lawsuits;



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increasedlawsuits, increasing the difficulty in obtaining or maintaining sites for base stations;stations and/or



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reduced reducing the financing available to the wireless communications industry.

Computer viruses may harm or disrupt our network.

        As mobile cellulartelecommunications and IT networks increase in size and complexity, they are becoming increasingly subjectsusceptible to computer viruses. These viruses can potentially spread throughout a network system, slowing the network and disrupting service. We may beIn the event that any of our telecommunications or IT networks are the target of a virus, and if we are, we may not be ableunable to maintain the integrity of our networksuch networks and operational software operations, which could result inhave a material adverse effect on our business and results of operations.

Risks Relating to the Russian Federation and Ukraine

Economic Risks

Economic instability in Russia and Ukraine could adversely affect our business.

        Since the dissolution of the Soviet Union, the Russian and Ukrainian economies have experienced at various times:

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significant declines in gross domestic product;



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hyperinflation;



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an unstable currency;



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high government debt relative to gross domestic product;



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a weak banking system providing limited liquidity to domestic enterprises;



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high levels of loss-making enterprises that continued to operate due to the lack of effective bankruptcy proceedings;



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significant use of barter transactions and illiquid promissory notes to settle commercial transactions;



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widespread tax evasion;

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growth of a black and graygrey market economy;



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pervasive capital flight;



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high levels of corruption and the penetration of organized crime into the economy;

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significant increases in unemployment and underemployment; and



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the impoverishment of a large portion of the population.

        The Russian and Ukrainian economies have been subject to abrupt downturns. In particular, on August 17, 1998, in the face of a rapidly deteriorating economic situation, the Russian government defaulted on its ruble-denominated securities, the Russian Central Bank of Russia stopped its support of the ruble and a temporary moratorium was imposed on certain hard currency payments. These actions resulted in an immediate and severe devaluation of the ruble and a sharp increase in the rate of inflation; a dramatic decline in the prices of Russian debt and equity securities; and an inability of Russian issuers to raise funds in the international capital markets. Certain other CIS countries, including Ukraine and Belarus, were similarly affected by these events.

        These problems were aggravated by the near collapse of the Russian banking sector after the events of August 17, 1998, as evidenced by the termination of the banking licenses of a number of major Russian banks. This further impaired the ability of the banking sector to act as a consistent source of liquidity to Russian companies and resulted in the losses of bank deposits in some cases.

        Recently, the Russian and Ukrainian economies have experienced positive trends, such as the increase in the gross domestic product, relatively stable national currencies, strong domestic demand, rising real wages and a reduced rate of inflation; however, these trends may not continue or may be abruptly reversed.

We are only able to conduct banking transactions with a limited number of creditworthy Russian banks as theThe Russian banking system remains underdeveloped, and another banking crisis could place severe liquidity constraints on our business, materially adversely affecting our business, financial position and results of operations.business.

        Russia's banking and other financial systems are not well developed or regulated, and Russian legislation relating to banks and bank accounts is subject to varying interpretations and inconsistent applications. The August 1998 financial crisis resulted in the bankruptcy and liquidation of many Russian banks and almost entirely eliminated the developing market for commercial bank loans.loans at that time. Although the Central Bank of Russia has the mandate and authority to suspend banking licenses of insolvent banks, many insolvent banks still operate. Most Russian banks also do not meet international banking standards, and the transparency of the Russian banking sector still lags far behind internationally accepted norms. Aided by inadequate and lax supervision by the regulators, many banks do not follow existing Central Bank regulations with respect to lending criteria, credit quality, loan loss reserves or diversification of exposure. In Russia,Further, bank deposits generally are generally not insured under any governmental program.in Russia.

        Recently, there has been a rapid increase in lending by Russian banks, which many believe is beinghas been accompanied by a deterioration in the credit quality of the borrowers. In addition, a robust domestic corporate debt market is leading to Russian banks increasingly holding large amounts of Russian corporate ruble bonds in their portfolios, which is further deteriorating the risk profile of Russian bank assets. The serious deficiencies in the Russian banking sector, combined with the deterioration in the credit profile of the loan portfolios of Russian banks, may result in the banking sector being more susceptible to market downturns or economic slowdowns.slowdowns, including due to Russian corporate defaults that may occur during any such market downturn or economic slowdown. In addition, the Central Bank of Russia in 2004 revoked the licenses of certain Russian banks, which resulted in market rumors about additional bank closures and many depositors withdrawing their savings. If a banking crisis were to occur, Russian companies would be subject to severe liquidity constraints due to the limited supply of domestic funding sourcessavings and the withdrawal of foreign funding sources that would occur during such a crisis.

        There areis currently a limited number of creditworthy Russian banks, most of which are located in Moscow and there are fewer in the regions outside of Moscow. Although weWe have tried to reduce our risk by receiving and holding funds in a number of Russian banks, including subsidiaries of foreign banks. Nonetheless, we hold the bulk of our excess ruble and foreign currency cash in Russian banks, anotherincluding subsidiaries of foreign banks, in part because we are required to do so by Central Bank regulations and because the ruble is not transferable or convertible

outside of Russia. There are few, if any, safe ruble-denominated instruments in which we may invest our excess ruble cash. Another banking crisis or the bankruptcy or insolvency of the banks infrom which we receive or with which we hold

our funds could adverselyresult in the loss of our deposits or affect our ability to complete banking transactions in Russia, andwhich could have a material adverse effect on our business, financial conditions and results of operations.

The physical infrastructure in Russia and Ukraine is in very poor condition, which could disrupt normal business activity.

        The physical infrastructure in Russia and Ukraine largely dates back to Soviet times and has not been adequately funded and maintained over the past decade. Particularly affected are the rail and road networks; power generation and transmission; communication systems; and building stock. In August 2000,For instance, in May 2005, a fire atand explosion in one of the main communications towerMoscow power substations built in 1963 caused a major outage in a large section of Moscow interrupted television and radio broadcastingsome surrounding regions. The blackout also hit the ground electric transport, led to road traffic accidents and massive traffic congestion, disrupted electricity and water supply in office and residential buildings and affected mobile communications. The trading on exchanges and the operation of mobile phones for weeks.many stores and markets were also halted. Road conditions throughout Russia and Ukraine are poor, with many roads not meeting minimum quality requirements. The Russian and Ukrainian governments are actively considering plans to reorganize the nation'snations' rail, electricity and telephone systems. Any such reorganization may result in increased charges and tariffs while failing to generate the anticipated capital investment needed to repair, maintain and improve these systems.

        The deterioration of physical infrastructure in Russia and Ukraine harms the national economies, disrupts the transportation of goods and supplies, adds costs to doing business in these countries and can interrupt business operations. These difficulties can impact us directly; for example, we have needed to keep portable electrical generators available to help us maintain base station operations in the event of power failures. Further deterioration in the physical infrastructure could have a material adverse effect on our business and the value of our securities.

Fluctuations in the global economy may materially adversely affect the Russian and Ukrainian economies and our business.

        The Russian and Ukrainian economies are vulnerable to market downturns and economic slowdowns elsewhere in the world. As has happened in the past, financial problems or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in Russia and Ukraine and Russian and Ukrainian businessbusinesses could face severe liquidity constraints, further adversely affecting their economies. Additionally, because Russia produces and exports large amounts of oil, the Russian economy is especially vulnerable to the price of oil on the world market and a decline in the price of oil could slow or disrupt the Russian economy. Recent military conflicts and international terrorist activity have also significantly impacted oil and gas prices, and pose additional risks to the Russian economy. Russia and Ukraine are also major producers and exporters of metal products and their economies are vulnerable to world commodity prices and/orand the imposition of tariffs and/or antidumping measures by the United States, the European Union or by other principal export markets.

Political and Social Risks

GovernmentalPolitical and governmental instability could materially adversely affect the value of investments in Russia and Ukraine and the value of our securities.

        Since 1991, Russia has sought to transform itself from a one-party state with a centrally-planned economy to a democracy with a market economy. As a result of the sweeping nature of the reforms, and the failure of some of them, the Russian political system remains vulnerable to popular dissatisfaction, including dissatisfaction with the results of privatizations in the 1990s, as well as to




demands for autonomy from particular regional and ethnic groups. Moreover, the composition of the Russian government, the prime minister and the other heads of federal ministries has at times been highly unstable. For example, six different prime ministers headed governments between March 1998 and May 2000. On December 31, 1999, President Yeltsin unexpectedly resigned. Vladimir Putin was subsequently elected president on March 26, 2000 and re-elected for a second term on March 14, 2004. WhileThroughout his first term in office, President Putin has maintained governmental stability and even accelerated the reform process, he may adopt a different approach over time.process. In February 2004, for example, President Putin dismissed




his entire cabinet, including the prime minister. This was followed on March 12, 2004, by President Putin's announcement of a far-reaching restructuring of the Russian government, with the stated aim of making the government more transparent and efficient. The changes included, for example, reducing the number of ministries from 30 to 14 and dividing the government into three levels: ministries, services and agencies. The

        In addition to the restructuring of the Russian Federal government, the Russian parliament adopted legislation proposed by President Putin whereby the executives of sub-federal political units will no longer be directly elected by the population and will instead be nominated by the President of the Russian Federation and confirmed by the legislature of the sub-federal political unit. Further, President Putin has proposed to eliminate individual races in State Duma elections, so that voters would only cast ballots for political parties. These new structure isstructures are largely not yet finalized and implemented.

        Future changes in government, major policy shifts or lack of consensus between President Putin,various branches of the prime minister, Russia's parliamentgovernment and powerful economic groups could also disrupt or reverse economic and regulatory reforms.

        SimilarSimilarly to Russia, Ukraine has experienced political instability since its independence in 1991, having seen nine changes in prime minister since 1991. The various state authorities, and the relations between them, as well as the Ukrainian government's policies and the political leaders who formulate and implement them, are subject to rapid change. For example, during late 2000 and early 2001, President Kuchma survived a political crisis arising from charges that he was connected to the death of a local journalist. Allegations have also been made that he approved the sale of weapons to Iraq in contravention of United Nations sanctions. In October 2004, Ukraine will holdfollowing the presidential elections in November 2004, mass demonstrations and it is possible thatstrikes took place throughout Ukraine to protest the Constitutionelection process and results. While tensions in Ukraine appear to have subsided following the invalidation of Ukraine may be substantially amended within next few years.the November election results and the new presidential election held on December 26, 2004, the long-term effects of these events and policy direction of the new government are not yet known.

        Any disruption or reversal of the reform policies, recurrence of political or governmental instability or occurrence of conflicts with powerful economic groups could have a material adverse effect on our business and the value of investments in Russia and Ukraine, and the value of our securities could decline.

Conflict between central and regional authorities and other conflicts could create an uncertain operating environment hindering our long-term planning ability and could materially adversely affect the value of investments in Russia.Russia, including the value of our securities.

        The Russian Federation is a federation of 89 sub-federal political units, consisting of republics, territories, regions, cities of federal importance and autonomous regions and districts. The delineation of authority and jurisdiction among the members of the Russian Federation and the federal government is, in many instances, unclear and remains contested. Lack of consensus between the federal government and local or regional authorities often results in the enactment of conflicting legislation at various levels and may lead to further political instability. In particular, conflicting laws have been enacted in the areas of privatization, securities, corporateland legislation and licensing. Some of these laws and governmental and administrative decisions implementing them, as well as certain transactions consummated pursuant to them, have in the past been challenged in the courts, and such challenges may occur in the future. This lack of consensus hinders our long-term planning efforts and creates uncertainties in our operating environment, both of which may prevent us from effectively and efficiently implementing our business strategy.




        Additionally, ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, military conflict, such as the continuing conflict in Chechnya, which has brought normal economic activity within Chechnya to a halt and disrupted the economies of neighboring regions. Various armed groups in Chechnya have regularly engaged in guerrilla attacks in that area, and recently, other parts of Russia have experienced violence related to the Chechen conflict. Violence and attacks relating to this conflict have also spread to other parts of Russia, and several terrorist attacks have been carried out by Chechen terrorists throughout Russia, including in Moscow. The further intensification of violence, including terrorist attacks and suicide bombings, or its spread to other parts of Russia, could have significant political consequences, including the imposition of a state of emergency in some or all of Russia. Moreover, any terrorist attacks and the resulting heightened security measures are likely to cause disruptions to domestic commerce and exports from Russia, and could materially adversely affect our business and the value of investments in Russia, including the value of our securities.

        In Ukraine, tensions between certain regional authorities and the central government were recently ignited following the November 2004 presidential elections. Amid the mass demonstrations and strikes that took place throughout Ukraine to protest the election process and results, the regional authorities in three regions in eastern Ukraine threatened to conduct referendums on creating a separate, autonomous region within Ukraine. Though the regional authorities backed down from these threats, and tensions in Ukraine appear to have subsided following the invalidation of the November election results and the new presidential election held on December 26, 2004, the long-term effects of these events and their effect on relations among Ukrainians is not yet known.

Crime, corruption and negative publicity could disrupt our ability to conduct our business and could materially adversely affect our business, financial condition and results of operations or prospects.

        The political and economic changes in Russia and Ukraine in recent years have resulted in significant dislocations of authority. The local and international press have reported that significant criminal activity, including organized crime, has arisen, particularly in large metropolitan centers. Property crime in large cities has increased substantially. In addition, the local press and international press have reported high levels of official corruption in the locations where we conduct our business, including the bribing of officials by competitors and others for the purpose of initiating investigations by government agencies. Press reports have also described instances in which government officials engaged in selective investigations and prosecutions to further the commercial interests of certain government officials or certain companies or individuals. Additionally, published reports indicate that a significant number of Russian and Ukrainian media regularly publish disparaging articles in return for payment. The depredations of organized or other crime, demands of corrupt officials, claims that we have been involved in official corruption or engaged in improper transactions or slanted articles, press speculation and negative publicity could disrupt our ability to conduct our business and could materially adversely affect our business, financial condition and results of operations or prospects.

Social instability could increase support for renewed centralized authority, nationalism or violence and thus materially adversely affect our operations.

        The failure of the government and many private enterprises to pay full salaries on a regular basis and the failure of salaries and benefits generally to keep pace with the rapidly increasing cost of living have led in the past, and could lead in the future, to labor and social unrest. For example, in 1998, miners in several regions of Russia, demanding payment of overdue wages, resorted to strikes which included blocking major railroads. More recently, mass protests and strikes erupted across Ukraine following the country's presidential election in November 2004. Such labor and social unrest may have political, social and economic consequences, such as increased support for a renewal of centralized authority; increased nationalism, with restrictions on foreign involvement in the economies of Russia






and Ukraine; and increased violence. An occurrence of any of the foregoing events could restrict our operations and lead to the loss of revenue, materially adversely affecting our operations.

Major changes in Ukraine-RussianUkraine-Russia relations may adversely affect our business.

        The relationship between RussiaUkraine and UkraineRussia has been historically strained due, among others,other things, to Ukraine's failure to pay arrears relating to the supply of energy resources, Russia's introduction of a 20% VAT on Ukrainian imports and border disputes. In addition, the impact of the recent political crisis in Ukraine and the results of the December 26, 2004 presidential election on Ukraine-Russia relations is not yet clear.

        In recent years, bilateral relations between Ukraine and Russia have improved, due in part to the conclusion in May 1997 of the Friendship and Cooperation Treaty, the conclusion in December 2000 of two inter-governmental agreements on the transit and supply of Russian natural gas, the conclusion in October 2002 of a framework agreement to ensure natural gas transit for the next 30 years and provide for the construction, modernization and operation of gas pipelines, and by Ukraine's ratification in September 2003 of an agreement with Russia, Kazakhstan and Belarus to create a "free trade" economic zone.

        However, any major changes in Ukraine-Russia relations, in particular any such changes adversely affecting energy supplies from Russia to Ukraine and/or Ukraine's export of services and goods to Russia, could materially adversely impact the Ukrainian economy and our Ukrainian operations.

Risks Relating to the Legal System and Legislation in Russia and UkraineRisks

Weaknesses relating to the legal system and legislation create an uncertain environment for investment and business activity in Russia and Ukraine, which could have a material adverse effect on an investment in our securities.

        Each of Russia and Ukraine is still developing the legal framework required to support a market economy. The following risk factors relating to the Russian and Ukrainian legal systems create uncertainty with respect to the legal and business decisions that we make, many of which uncertainties do not exist in countries with more developed market economies:

•

inconsistencies between and among laws, the Constitution, Presidential decrees and governmental, ministerial and local orders, decisions, resolutions and other acts;



•

conflicting local, regional and federal rules and regulations;



•

the lack of judicial and administrative guidance on interpreting legislation;



•

the relative inexperience of judges and courts in interpreting legislation;



•

corruption within the judiciary;



•

a high degree of discretion on the part of governmental authorities, which could result in arbitrary actions such as suspension or termination of our licenses; and



•

poorly developed bankruptcy procedures that are subject to abuse.

        Additionally, several fundamental laws have only recently become effective. The recent nature of much of Russian and Ukrainian legislation, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of the Russian and Ukrainian legal systems in ways that may not always coincide with market developments place the enforceability and underlying constitutionality of laws in doubt and results in ambiguities, inconsistencies and anomalies. In addition, Russian and Ukrainian legislation often contemplates implementing regulations that have not yet been promulgated, leaving substantial gaps in the regulatory infrastructure. All of these weaknesses could affect our ability to enforce our rights under our licenses and under our contracts, or to defend






ourselves against claims by others. Furthermore, we cannot assure you that regulators, judicial authorities or third parties will not challenge our internal procedures and by-laws or our compliance with applicable laws, decrees and regulations.






The judiciary's lack of independence and inexperience, the difficulty of enforcing court decisions and governmental discretion in enforcing claims could prevent us or you from obtaining effective redress in a court proceeding, materially adversely affecting an investment in our securities.

        The independence of the judicial system and its immunity from economic, political and nationalistic influences in each of Russia and Ukraine remain largely untested. The court system in each of Russia and Ukraine is understaffed and underfunded. Judges and courts are generally inexperienced in the area of business and corporate law. Judicial precedents generally have no binding effect on subsequent decisions. Not all Russian and Ukrainian legislation and court decisions are readily available to the public or organized in a manner that facilitates understanding. The Russian and Ukrainian judicial systems can be slow.slow or unjustifiably swift. Enforcement of court orders can in practice be very difficult in Russia and Ukraine. All of these factors make judicial decisions in Russia and Ukraine difficult to predict and effective redress uncertain. Additionally, court claims are often used in furtherance of political aims or infighting. We may be subject to such claims and may not be able to receive a fair hearing. Additionally, court orders are not always enforced or followed by law enforcement agencies, and the government may attempt to invalidate court decisions by backdating or retroactively applying relevant legislative changes.

        These uncertainties also extend to property rights. During Russia and Ukraine's transformation from a centrally planned economyeconomies to a market economy,economies, legislation has been enacted in both countries to protect private property against expropriation and nationalization. However, it is possible that due to the lack of experience in enforcing these provisions and due to potential political changes, these protections would not be enforced in the event of an attempted expropriation or nationalization. In Russia, for example, in October 2003, the prosecutor general's office "arrested" or attached approximately 42% of Yukos' shares alleged to be controlled by Mikhail Khodorkovsky following his arrest on charges of fraud and tax evasion. Press reports have indicated that the decision of the court to grant this provisional remedy to the prosecutor general's office was influenced by political factors. Some government entities have also tried to renationalize privatized businesses. In Ukraine, politicians, including President Kuchma, have publicly threatened the re-nationalization of certain businesses. Expropriation or nationalization of any of our entities, their assets or portions thereof, including UMC, potentially without adequate compensation, would have a material adverse effect on our business.

UnlawfulSelective or arbitrary government action may have ana material adverse effect on our business, financial condition and the valueresults of an investment in our securities.operations or prospects.

        We operate in an uncertain regulatory environment. Governmental authorities in Russia and Ukraine have a high degree of discretion in Russia and Ukraine and, at times, exercise their discretionact selectively or arbitrarily, without hearing or prior notice, and sometimes in a manner that is contraryinconsistent with legislation or influenced by political or commercial considerations. Selective or arbitrary governmental actions have reportedly included the denial or withdrawal of licenses, sudden and unexpected tax audits, criminal prosecutions and civil actions. Federal and local government entities have also used ordinary defects in matters surrounding share issuances and registration as pretexts for court claims and other demands to law.invalidate such issuances and registrations or to void transactions, often for political purposes. Moreover, the government also has the power in certain circumstances, by regulation or government act, to interfere with the performance of, nullify or terminate contracts. Unlawful or arbitrary governmental actions have included withdrawalStandard & Poor's has expressed concerns that "Russian companies and their investors can be subjected to government pressure through selective implementation of licenses, suddenregulations and unexpected tax audits, criminal prosecutions and civil actions. Federal and local government entities also used common defects in matters surrounding the documentation of financing activities as pretexts for court claims and other demands to invalidate such activities and/or to void transactions, often for political purposes. For example, in Russia, press reports have indicatedlegislation that the Yukos-related prosecutions are selective andis either politically motivated in response to Mr. Khodorkovsky's political ambitions and thator triggered by competing business groups." In this environment, our competitors may receive preferential treatment from the investigation into Vimpelcom's Moscow operations were politically motivated.government, potentially giving them a competitive advantage over us.

        In addition, in 2003 and thus far in 2004, the Ministry for Taxes and Levies has begun to aggressively crack downbrought tax evasion claims on certain Russian companies' use of tax-optimization schemes, and press reports have speculated that these enforcement actions have been selective and politically motivated. For example, in April 2004, Yukos was assessed more than $3 billion in back taxes in addition to $5 billion in back taxes assessed in December 2003. Similarly, in March 2004, oil company Sibneft was






assessed over $1 billion in back taxes. UnlawfulSelective or arbitrary government action, if directed at us, could have a material adverse effect on our business, financial condition and on the valueresults of our securities.operations or prospects.




Developing corporate and securities laws and regulations in Russia may limit our ability to attract future investment.

        The regulation and supervision of the securities market, financial intermediaries and issuers are considerably less developed in Russia than in the United States and Western Europe. DisclosureSecurities laws, including those relating to corporate governance, disclosure and reporting requirements, have only recently been adopted, whereas laws relating to anti-fraud safeguards, insider trading restrictions and fiduciary duties are relatively new to Russiarudimentary. In addition, the Russian securities market is regulated by several different authorities, which are often in competition with each other. These include

•

the Federal Service for the Financial Markets;



•

the Ministry of Finance;



•

the Federal Antimonopoly Service;



•

the Central Bank of Russia; and



•

various professional self-regulatory organizations.

        The regulations of these various authorities are unfamiliar to most Russian companiesnot always coordinated and managers.may be contradictory.

        In addition, Russian corporate and securities rules and regulations can change rapidly, which may materially adversely affect our ability to conduct securities-related transactions. While some important areas are subject to virtually no oversight, the regulatory requirements imposed on Russian issuers in other areas result in delays in conducting securities offerings and in accessing the capital markets. It is often unclear whether or how regulations, decisions and letters issued by the various regulatory authorities apply to our company. As a result, we may be subject to fines or other enforcement measures despite our best efforts at compliance, which could have a material adverse effect on our business and financial condition.compliance.

Shareholder liability under Russian legislation could cause us to become liable for the obligations of our subsidiaries.

        The Civil Code of the Russian Federation dated January 26, 1996, or the Civil Code, and the Federal Law on Joint Stock Companies of December 26, 1995, or the Federal Law on Joint Stock Companies, generally provide that shareholders in a Russian joint stock company are not liable for the obligations of the joint stock company and bear only the risk of loss of their investment. This may not be the case, however, when one person is capable of determining decisions made by another.another person or entity. The person or entity capable of determining such decisions is calleddeemed an effective"effective parent." The person whose decisions are capable of being so determined is calleddeemed an effective"effective subsidiary." The effective parent bears joint and several responsibility for transactions concluded by the effective subsidiary in carrying out these decisions if:

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this decision-making capability is provided for in the charter of the effective subsidiary or in a contract between the companies; and



•

the effective parent gives obligatory directions to the effective subsidiary.




        In addition, an effective parent is secondarily liable for an effective subsidiary's debts if an effective subsidiary becomes insolvent or bankrupt resulting from the action or inaction of an effective parent. This is the case no matter how the effective parent's capabilityability to determine decisions of the effective subsidiary arises. For example, this liability could arise through ownership of voting securities or by contract. In these instances, other shareholders of the effective subsidiary may claim compensation for the effective subsidiary's losses from the effective parent, which caused the effective subsidiary to take action or fail to take action knowing that such action or failure to take action would result in losses. Accordingly, we could be liable in some cases for the debts of our consolidated




subsidiaries. This liability could have a material adverse effect on our business, results of operations and financial condition.

Shareholder rights provisions under Russian law may impose additional costs on us, which could causematerially adversely affect our financial condition and results to suffer.of operations.

        Russian law provides that shareholders including holders of our ADSs and GDRs, that vote against or abstain from voting on certain matters have the right to sell their shares to us at market value in accordance with Russian law. The decisions that trigger this right to sell shares include:

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decisions with respect to a reorganization;



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the approval by shareholders of a "major transaction," which, in general terms, is a transaction involving property worth more thanbetween 25% and 50% of the gross book value of MTS OJSC'sour assets calculated




according to the Russian accounting standards, regardless of whether the transaction is actually consummated; and





•

the amendment of our charter in a manner that limits shareholder rights.

        Our obligation to purchase shares in these circumstances, which is limited to 10% of MTS OJSC's net assets calculated according to thein accordance with Russian accounting standards at the time the matter at issue is voted upon, could have a material adverse effect on our businessresults of operations and financial condition.

Limitations on foreign investment could impair the value of your investment in our securities and could hinder our access to additional capital.

        Russian and Ukrainian legislation governing foreign investment activities does not prohibit or restrict foreign investment in the telecommunications industry. However, a lack of consensus exists over the manner and scope of government control over the telecommunications industry. While draft legislation protecting the rights of foreign investors specifically in the telecommunications industry has been considered at various times, the Law on Foreign Investment in the Russian Federation does not provide any specific protections in this regard, nor are there specific protections in Ukraine. Because the telecommunications industry is widely viewed as strategically important to Russia and Ukraine, governmental control over the telecommunications industry may increase, and foreign investment in or control over the industry may be limited. Any such increase in governmental control or limitation on foreign investment could impair the value of your investment in our securities and could hinder our access to additional capital.

The implementation of the new Federal Law on Communications and the new Ukrainian Law on Telecommunications will impose an additional financial burden on us, which may materially adversely affect our financial condition and results of operations.

        The new Federal Law on Communications came into force on January 1, 2004. Among other things, this law provides for the establishment of a "universal services reserve fund" for the purpose of supporting communications companies operating in less developed regions of Russia. This reserve fund will be funded by a levy imposed on all communication services providers, including us and our other Russian telecommunications subsidiaries, commencingus. According to a government decree enacted on January 1, 2005. TheApril 21, 2005, such providers must make quarterly payments in the amount of this levy,1.2% of the procedure ofdifference between their total revenues and revenues generated by interconnection services. However, the procedures for its collection and procedures forsubsequent distribution from this reserve fund willhave not yet been established. This additional levy, the amount of which may be determined in the futurechanged by the federal government. This additional levyRussian government at its own discretion, will increase our costs and may materially adversely affect our financial condition and results of operations.

        In addition, the new Ukrainian Law on Telecommunications also came into force on January 1, 2004, though2004. However, regulations implementing the new law have not yet been promulgated. Thispromulgated and certain regulatory bodies established by the new law have not yet commenced their regulatory functions. For






example, the regulatory body tasked with regulating the telecommunications industry and issuing telecommunications licenses in Ukraine, the NCRC was formed in January 2005 but has not begun to perform its regulatory functions and no other regulatory authority has been designated or is permitted to perform these functions under the law. In addition, the new Ukrainian Law on Telecommunications, among other things, may require companies with a dominant position in the telecommunications market to develop public telecommunications services if directed to do so by the regulatory authorities. See "Item 4. Information on Our Company—B. Business Overview—Regulation in Ukraine.Ukraine—Competition." As UMC's estimated market share in mobile telecommunication services in Ukraine is over 50%, implementation of the new law may materially adversely affect our financial condition and results of operations.

Changes in the Russian tax system could materially adversely affect an investment in our securities.

        Generally, taxes payable by Russian companies are substantial and numerous. These taxes include, among others:

•

income taxes;



•

value-added tax, or VAT;



•

excise taxes;taxes and import duties;



•

unified social tax; and



•

property tax.




        The tax environment in Russia has historically been complicated by the fact that various authorities have often issued contradictory pieces of tax legislation. For example, tax laws are unclear with respect to the deductibility of certain expenses and at times we have taken a position that may be considered aggressive by tax authorities, but that we consider to be in compliance with current law. This uncertainty potentially exposes us to significant fines and penalties and enforcement measures despite our best efforts at compliance, and could result in a greater than expected tax burden and the suspension or termination of our telecommunications licenses.

        Because of the political changes which have occurred in Russia over the past several years, there have recently been significant changes to the Russian taxation system. Global tax reforms commenced in 1999 with the introduction of Part One of the Tax Code of the Russian Federation, or the Tax Code, which sets general taxation guidelines. Since then, Russia has been in the process of replacing legislation regulating the application of major taxes such as corporate income tax, VAT and property tax with new chapters of the Tax Code.

        In practice, the Russian tax authorities often have their own interpretation ofinterpret the tax laws in a way that rarely favors taxpayers, who often have to resort to court proceedings to defend their position against the tax authorities. Differing interpretations of tax regulations exist both among and within government ministries and organizations at the federal, regional and local levels, creating uncertainties and inconsistent enforcement. Furthermore, following the recent reorganization of the Russian government, the authority for tax regulation is being transferred to the Russian Ministry of Finance, which may lead to further changes in the interpretation of tax laws.

Tax declarations, together with related documentation such as customs declarations, are subject to review and investigation by a number of authorities, each of which may impose fines, penalties and interest charges. Generally, taxpayers are subject to inspection for a period of three calendar years of their activities which immediately preceded the year in which the audit is carried out. As previous audits do not exclude subsequent claims relating to the audited period, the statute of limitations is not entirely effective. In addition, in some instances, new tax regulations have been given retroactive effect.

        The taxation system in Russia is subject to frequent changes, varying interpretations and inconsistent enforcement at the federal, regional and local levels. In some instances, new tax regulations have been given retroactive effect, while under the Tax Code only laws benefiting the taxpayer may have retroactive effect. In addition to our substantial tax burden, these conditions complicate our tax planning and related business decisions. For example, tax laws are unclear with respect to the deductibility of certain expenses and at times we have taken a position that may be considered aggressive by tax authorities, but that we consider to be in compliance with current law. Prior to 2003, we also refused to pay a certain levy imposed by government decree rather than established as prescribed under Russian law, though a recent Russian Supreme Court decision upheld the validity and enforceability of this levy, and we have begun paying this levy for periods commencing January 1, 2003. See "Item 4. Information on Our Company—B. Business Overview—Regulation in the Russian Federation—Licensing of Telecommunications Services and Radio Frequency Allocation." This uncertainty potentially exposes us to significant fines and penalties and enforcement measures despite our best efforts at compliance, and could result in a greater than expected tax burden and suspension or termination of our licenses.

        Although during the past three years, the Russian government undertook a revision of the Russian tax system and passed certain laws implementing tax reform, the new tax laws continue to rely heavily on the judgments of local tax officials and fail to address many existing problems. Many issues associated with the practical application of new legislation are unclear and this complicates our tax planning and related business decisions. This uncertainty may expose us to fines and penalties. Moreover, additional tax collection measures may be introduced. Accordingly, we may have to pay significantly higher taxes, which could have a material adverse effect on our business and the value of our securities.

Moreover, financial statements of Russian companies prepared in accordance with Russian accounting standards are not consolidated for tax purposes. Therefore, each of our Russian subsidiariesentities pays its own Russian taxes and may not offset its profit or loss against the loss or profit of any ofanother entity in our other subsidiaries.group. In addition, pursuant to legislation that entered into force on January 1, 2002,payments of intercompany






dividends are subject to a withholding tax of 6%9% to 15% (the 6% rate is applicable, though this tax does not apply to payments of dividends between two Russian entities). Thesepaid out further up the ownership chain once they have already been taxed at the lower level.

        The foregoing conditions create tax requirements imposerisks in Russia that are more significant than typically found in countries with more developed tax systems, imposing additional burdens and costs on our operations, including management resources. In addition to our substantial tax burden, these risks and uncertainties complicate our tax planning and related business decisions, potentially exposing us to significant fines and penalties and enforcement measures despite our best efforts at compliance, and could materially adversely affect our business and the value of our securities.

The implications of the tax system in Ukraine are uncertain and various tax laws are subject to different interpretations.

        Ukraine currently has a number of laws related to various taxes imposed by both central and regional governmental authorities. Applicable taxes include value addedvalue-added tax, corporate income tax (profits tax), customs duties, payroll (social) taxes and other taxes. These tax laws have not been in




force for significant periods of time compared to more developed market economies and are constantly changed and amended. Accordingly, few precedents regarding tax issues are available.

        Although the Ukrainian Constitution prohibits retroactive enforcement of any newly enacted tax laws and the Law on Taxation System specifically requires legislation to adopt new tax laws at least six months prior to them becoming effective, such rules have largely been ignored. In addition, tax laws are often vaguely drafted, making it difficult for us to determine what actions are required for compliance. Differing opinions regarding the legal interpretation of tax laws often exist both among and within governmental ministries and organizations, including the tax administration, creating uncertainties and areas of conflict for taxpayers and investors. In practice, the Ukrainian tax authorities tend to interpret the tax laws in an arbitrary way that rarely favors taxpayers.

        Tax declarations/returns, together with other legal compliance areas (for example, customs and currency control matters), may be subject to review and investigation by various administrative divisions of the tax authorities, which are authorized by law to impose severe fines, penalties and interest charges. These circumstances create tax risks in Ukraine substantially more significant than typically found in countries with more developed tax systems. Generally, tax declarations/returns in Ukraine remain open and subject to inspection for a three-year period. However, this term may not be observed or may be extended under certain circumstances, including in the context of a criminal investigation. While we believe that we are currently in compliance with the tax laws affecting our operations in Ukraine, it is possible that relevant authorities may take differing positions with regard to interpretative issues, which may result in a material adverse effect on our results of operations and financial condition.

Social Risks

Crime and corruption could disrupt our ability to conduct our business as we haveWe face similar risks in other countries of the past and could materially adversely affect our financial condition and results of operations.CIS.

        The politicalIn addition to Russia and economic changesUkraine, we currently have operations in other CIS countries, including Belarus and Uzbekistan. We may acquire additional operations in other countries of the CIS. In many respects, the risks inherent in transacting business in these countries are similar to those in Russia and Ukraine, especially those risks set out above in recent years have resulted in significant dislocations of authority. The local and international press have reported that significant organized criminal activity has arisen, particularly in large metropolitan centers. Property crime in large cities has increased substantially. In addition, the local press and international press have reported high levels of official corruption in the locations where we conduct our business, including the bribing of officials for the purpose of initiating investigations by government agencies. For instance, former Ukrainian prime minister Pavel Lazarenko is charged in California with using U.S. banks to launder $114 million he either stole or extorted in Ukraine. Press reports have also described instances in which government officials engaged in selective investigations and prosecutions to further commercial interests of the government officials or certain individuals. Additionally, published reports indicate that a significant number of Russian and Ukrainian media regularly publish slanted articles in return for payment. The depredations of organized or other crime, demands of corrupt officials or claims that we have been involved in official corruption may in the future bring negative publicity, could disrupt our ability to conduct our business effectively and could thus materially adversely affect our financial condition and results of operations.

Social instability could increase support for renewed centralized authority, nationalism or violence and thus materially adversely affect our operations.

        The failure of the government and many private enterprises to pay full salaries on a regular basis and the failure of salaries and benefits generally to keep pace with the rapidly increasing cost of living have led in the past, and could lead in the future, to labor and social unrest. For example, in 1998, miners in several regions of Russia, demanding payment of overdue wages, resorted to strikes which included blocking major railroads. Such labor and social unrest may have political, social and economic consequences, such as increased support for a renewal of centralized authority; increased nationalism, with restrictions on foreign involvement in the economies of Russia and Ukraine; and increased violence. Any of these could restrict our operations and lead"—Risks Relating to the loss of revenue, materially adversely affecting our business.Russian Federation and Ukraine."




Risks Relating to the ADSs and the Trading Market

Because the depositary may be considered the beneficial holder of the shares underlying the ADSs, these shares may be arrested or seized in legal proceedings in Russia against the depositary.

        Because Russian law may not recognize ADS holders as beneficial owners of the underlying shares, it is possible that you could lose all your rights to those shares if the depositary's assets in Russia are seized or arrested. In that case, you would lose all the money you have invested.

        Russian law might treat the depositary as the beneficial owner of the shares underlying the ADSs. This would be different from the way other jurisdictions, such as the states of the United States, treat ADSs. In those jurisdictions, although shares may be held in the depositary's name or to its order and it is therefore a "legal" owner of the shares, the ADS holders are the "beneficial," or real owners. In those jurisdictions, no action against the depositary, the legal owner, would ever result in the beneficial owners losing their shares. Because Russian law may not make the same distinction between legal and beneficial ownership, it may only recognize the rights of the depositary in whose name the shares are held, not the rights of ADS holders, to the underlying shares.

        Thus, in proceedings brought against a depositary, whether or not related to shares underlying ADSs, Russian courts may treat those underlying shares as the assets of the depositary, open to seizure or arrest. We do not know yet whether the shares underlying ADSs may be seized or arrested in Russian legal proceedings against a depositary. In the past a lawsuit has been filed against a depositary bank other than our depositary seeking the seizure of various Russian companies' shares represented by ADSs issued by that depositary. In the event that this type of suit were to be successful in the future, and the shares were to be seized or arrested, the ADS holders involved would lose their rights to the underlying shares.

Your voting rights with respect to the shares represented by our ADSs are limited by the terms of the deposit agreement for our ADSs and relevant requirements of Russian law.

        You will be able to exercise voting rights with respect to the shares represented by ADSs only in accordance with the provisions of the deposit agreement relating to the ADSs and relevant requirements of Russian law. However, there are practical limitations upon your ability to exercise your voting rights due to the additional procedural steps involved in communicating with you. For example, our charter requires us to notify shareholders at least 30 days in advance of any meeting. Our shareholders will receive notice directly from us and will be able to exercise their voting rights by either attending the meeting in person or voting by power of attorney.

        As an ADS holder, you, by comparison, will not receive notice directly from us. Rather, in accordance with the deposit agreement, we will provide the notice to the depositary. The depositary has undertaken in turn, as soon as practicable thereafter, to mail to you the notice of such meeting, voting instruction forms and a statement as to the manner in which instructions may be given by holders. To exercise your voting rights, you must then instruct the depositary how to vote its shares. Because of this extra procedural step involving the depositary, the process for exercising voting rights may take longer for you than for holders of shares. ADSs for which the depositary does not receive timely voting instructions will not be voted at any meeting.

        In addition, although securities regulations expressly permit the depositary to split the votes with respect to the shares underlying the ADSs in accordance with instructions from ADS holders, this regulation remains untested, and the depositary may choose to refrain from voting at all unless it






receives instructions from all ADS holders to vote the shares in the same manner. You may thus have significant difficulty in exercising voting rights with respect to the shares underlying the ADSs.






You may be unable to repatriate your earnings from our ADSs.

        Russian currency control legislation pertaining to payment of dividends provides that ruble dividends on common stock may be paid to the depositary or its nominee and converted into U.S. dollars by the depositary for distribution to owners of ADSs without restriction. Also, ADSs may be sold by non-residents of Russia for U.S. dollars outside Russia without regard to Russian currency control laws as long as the buyer is not a Russian resident.

        Under the terms of the deposit agreement, there is no restriction on the sale of our ADSs to Russian residents. However, Russian currency control legislation effectively limits the ability of a non-resident of Russia to sell our ADSs to a Russian resident. Without a special license or a general banking license granted by the Central Bank, either of which is in practice difficult to obtain:

•

Russian legal entities must purchase securities for rubles and may not purchase foreign currency-denominated securities, such as our ADSs; and



•

Russian individuals may only purchase up to $75,000 worth of such securities in one calendar year.




        Moreover, sales of ADSs (as opposed to sales of underlying shares) to Russian residents may violate Russian securities laws. Accordingly, an ADS holder seeking to sell its holding to a Russian resident may in practice need first to withdraw the shares underlying its ADSs and establish a special ruble account to receive the proceeds from the sale of the shares. The repatriation of sale proceeds may be subject to significant costs and delays.

        The ability of the depositary and other persons to convert rubles into U.S. dollars or another foreign currency is also subject to the availability of U.S. dollars or other foreign currency in Russia's currency markets. Although there is an existing market within Russia for the conversion of rubles into U.S. dollars and other foreign currencies, including the interbank currency exchange and over-the-counter and currency futures markets, the further development of this market is uncertain. At present, there is no market for the conversion of rubles into foreign currencies outside of Russia and no viable market in which to hedge ruble-currency and ruble-denominated investments.

Future sales of common stock or ADSs may affect the market price of our common stock and ADSs.

        Sales, or the possibility of sales, of substantial numbers of shares of our common stock or ADSs in the public market, including the Russian stock market, could have an adverse effect on the market trading prices of the ADSs. Our subsequent equity offerings may reduce the percentage ownership of our shareholders. Newly issued preferred stock may have rights, preferences or privileges senior to those of common stock.

You may not be able to benefit from the United States-Russia double tax treaty.

        In accordance with Russian legislation, dividends paid to a nonresident holder generally will be subject to Russian withholding tax at a 15% rate for legal entities, and at the rate of 30% for individuals. This tax may be reduced to 5% toor 10% under the United States-Russia income tax treaty for U.S. holders.holders: a 5% rate applies for U.S. holders who are legal entities owning 10% or more of the company's outstanding shares, and a 10% rate applies to dividends paid to U.S. holders, including individuals and legal entities, owning less than 10% of the company's outstanding shares. However, the Russian tax rules applicable to U.S. holders are characterized by significant uncertainties and by an absence oflimited interpretive guidance. Russian tax authorities have not provided any guidance regarding the treatment of ADS arrangements, and it is unclear how the Russian tax authorities will ultimately treat those arrangements. In particular, it is unclear whether Russian tax authorities will treatThus, while a U.S. holders as the beneficial owners of the underlying shares for the purposes of the United States-Russia income tax treaty. If the Russian tax authorities were not to treat U.S. holders




as the beneficial owners of the underlying shares, then the U.S. holders would notholder may technically be ableentitled to benefit from the provisions of the United States-Russia doubleincome tax treaty.treaty, in practice such relief may be difficult or impossible to obtain. See "Item 10. Additional Information—E. Taxation—Russian Income and Withholding Tax Considerations" for additional information.




Capital gain from sale of ADSs may be subject to Russian income tax.

        Under Russian tax legislation, gains arising from the disposition of Russian shares and securities, such as our common stock, as well as financial instruments derived from such shares, such as our ADSs, may be subject to Russian income or withholding taxes. However, no procedural mechanism currently exists to withhold any capital gains or for subsequent remittance of such amounts to the Russian tax authorities with respect to sales made between non-residents or sales of ADSs on the New York Stock Exchange.

Foreign judgments may not be enforceable against us.

        Our presence outside the United States may limit your legal recourse against us. We are incorporated under the laws of the Russian Federation. Substantially all of our directors and executive officers named in this document reside outside the United States. All or a substantial portion of our assets and the assets of our officers and directors are located outside the United States. As a result, you may not be able to effect service of process within the United States on us or on our officers and directors. Similarly, you may not be able to obtain or enforce U.S. court judgments against us, our officers and directors, including actions based on the civil liability provisions of the federal securities laws of the United States.

        There is no treaty between the United States and the Russian Federation providing for reciprocal recognition and enforcement of foreign court judgments in civil and commercial matters. These limitations may deprive you of effective legal recourse for claims related to your investment in the ADSs. The deposit agreement provides for actions brought by any party thereto against us to be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, provided that any action under the U.S. federal securities laws or the rules or regulations promulgated thereunder may, but need not, be submitted to arbitration. The Russian Federation is a party to the United Nations (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards, but it may be difficult to enforce arbitral awards in the Russian Federation due to a number of factors, including the inexperience of Russian courts in international commercial transactions, official and unofficial political resistance to enforcement of awards against Russian companies in favor of foreign investors and Russian courts' inability to enforce such orders and corruption.

Other Risks

We have not independently verified information regarding our competitors, nor have we independently verified official data from Russian government agencies.

        We have derived substantially all of the information contained in this document concerning our competitors from publicly available information, including press releases and filings under the U.S. securities laws, and we have relied on the accuracy of this information without independent verification.

        In addition, some of the information contained in this document has been derived from official data of Russian government agencies. The official data published by Russian federal, regional and local governments aremay be substantially less complete or researched than those of Western countries. Official statistics may also be produced on different bases than those used in Western countries. Any discussion of matters relating to Russia and Ukraine in this document must, therefore, be subject to uncertainty due to concerns about the completeness or reliability of available official and public information.

        The veracity of some official data released by the Russian government may be questionable. In the summer of 1998, the Director of the Russian State Committee on Statistics and a number of his






subordinates were arrested and charged in connection with manipulatingtheir misuse of economic data to hide the actual output of various companies.data.






Because no standard definition of a subscriber, average monthly service revenue per subscriber (ARPU), average monthly usage per subscriber (MOU) or churn exists in the mobile telecommunications industry, comparisons between subscribercertain operating data of different companies may be difficult to draw.

        The methodology for calculation ofcalculating subscriber numbers, ARPU, MOU and churn varies substantially in the mobile telecommunications industry, resulting in variances in reported subscriber numbers from that which would result from the use of a singleuniform methodology. Therefore, comparisons of subscriber numbers and churncertain operating data between different mobile cellular communications companies may be difficult to draw.


Item 4.    Information on Our Company


A. History and Development

        Mobile TeleSystems CJSC, or MTS CJSC, our predecessor, was formed in 1993. The founding shareholders included the Moscow City Telephone Network, or MGTS and three other Russian telecommunications organizations,companies, which collectively held 53% of our original share capital, and two German companies, Siemens AG and T-Mobile Deutschland GmbH, an affiliate of Deutsche Telekom AG, which collectively held the remaining 47%. Our two principal shareholders are currently JSFC Sistema, or Sistema, and T-Mobile International AG&Co KG, or T-Mobile, an affiliatecurrently owns 50.6% of Deutsche Telekom AG.our share capital. See "Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders."

        MTS CJSC inaugurated service in the Moscow license area in 1994 and began expanding into nearby regions in 1997. Since that time, we have continued to grow by applying for GSM licenses in new regions, investing in new GSM licensees, increasing our ownership percentage in these licensees and acquiring existing GSM license holders and operators.

        Mobile TeleSystems OJSC was created on March 1, 2000, through the merger of MTS CJSC and RTC CJSC, a wholly-owned subsidiary. In accordance with Russian merger law, MTS CJSC and RTC CJSC ceased to exist and MTS OJSC was created with the assets and obligations of the predecessor companies. Our charter was registered with the State Registration Chamber on March 1, 2000, which is our date of incorporation, and with the Moscow Registration Chamber on March 22, 2000. Our initial share issuance was registered by the Russian Federal Commission on the Securities Market on April 28, 2000.

        We completed our initial public offering on July 6, 2000, and listed our shares of common stock, represented by American Depositary Shares, or ADSs, on the New York Stock Exchange under the symbol "MBT." Each ADS represents 20five underlying shares of our common stock. Prior to January 1, 2005, each ADS represented 20 shares.

        In April 2003 and December 2004, T-Mobile also sold 5%completed offerings of approximately 5.0% and 15.1% of our shares, respectively, in the form of Global Depositary Receipts, or GDRs in April 2003.through an unsponsored GDR program.

        Our legal name is Mobile TeleSystems OJSC, and we are incorporated under the laws of the Russian Federation. We operate primarily in the Russian Federation under the commercial names "Mobile TeleSystems," "MTS,""MTS" and "Jeans."Jeans," We also operate in Ukraine through our subsidiary, Ukrainian Mobile Communications.Communications and in Uzbekistan through our subsidiary, Uzdunrobita. Mobile TeleSystems LLC, our 49%-owned joint venture, operates in Belarus. Our head office is located at 4 Marksistskaya Street, Moscow 109147, Russian Federation, and the telephone number of our investor relations department is +7 095 911 6553.911-6553. We maintain a website at http://www.mtsgsm.com. The information on our website is not a part of this report. We have appointed Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19715 as our registeredauthorized agent for service of process.

Acquisitionsprocess for any suit or proceeding arising out of or relating to our shares, ADSs or the Deposit Agreement.

        SinceArticle 2.1 of our IPO, we have entered intocharter provides that our principal purpose is to obtain profits through the following transactions:

•

In 2000, we acquired 51.0%planning, marketing and operation of MSS. Our acquisitiona radiotelephone mobile cellular network in 2001 and 2004 of an additional 32.5% and 7.5%, respectively, increased our ownership of MSS to 91.0%;

the Russian


•

In 2001, we acquired 100.0% of Telecom XXI, which holds dual-band licenses in 10 regions, including St. Petersburg;



•

In 2001 and 2002, we acquired 81.0% and 19.0%, respectively, of Telecom-900, which owns a controlling stake in three regional operators, including FECS-900 (60.0%), Uraltel (53.3%) and SCS-900 (51.0%); we increased our stakes in Uraltel and SCS-900 to 99.9% and 99.5%, respectively, in 2003 and 2004; we increased our stake in FECS-900 to 100.0% in 2004;



•

In March 2002, we acquired a 51.0% controlling stake in Krasnodar-based CJSC Kuban-GSM. Our acquisition in October 2002 and September 2003 of additional 1.7% and 47.3% stakes, respectively increased, our ownership of Kuban-GSM to 100.0%;



•

In May 2002, we acquired 100.0% of BM-Telecom, a telecommunications services provider

Federation. We are recorded in the Bashkortostan Republic;



•

In July 2002, we acquired 100.0%Unified State Register of Mobicom-Barnaul, a GSM 900 mobile operator in the Altai region, which we renamed MTS-Barnaul in September 2002;



•

In September and October 2002, we acquired 66.6% and 33.3%, respectively, of Dontelecom, a GSM 900/1800 mobile operator in the Rostov region;



•

In October 2002, we acquired 100.0% of Bit LLC, which holds GSM 900 licenses for four regions of Russia;



•

In March, June and July 2003, we acquired 57.7%, 26.0% and 16.3%, respectively, of UMC, a provider of GSM 900/1800 mobile services in Ukraine;



•

In April 2003, we acquired 51.0% of the common shares and 50.0% of the preferred shares in TAIF Telcom, which provides mobile services in the GSM 900/1800 standard in the Republic of Tartarstan and in the Volga region of Russia. We acquired an additional 1.7% of TAIF Telcom's common shares in May 2003;



•

In August through October 2003, we acquired 50.0% stakes in Primtelefon, Astrakhan Mobile and Volgograd Mobile, as well as 100.0% of Mar Mobile GSM in a series of related transactions;



•

In August 2003, we acquired 100.0% of Sibchallenge, a GSM 900/1800 and DAMPS mobile operator in the Krasnoyarsk region of Siberia; and



•

In September 2003, we acquired 100.0% of Tomsk Cellular Communications, a GSM 900/1800 mobile operator in eastern Siberia.

        For a description of our acquisitions after December 31, 2003, see Note 24 to our audited consolidated financial statements included elsewhere in this document.Legal entities with registration number 1027700149124.

Expansion

Russia

        In furtherance of our goal to be a nationwide operator in Russia, we have extended our focus beyond our original market of Moscow and the Moscow region with a view towards developing our existing license areas in the regions, acquiring new regional licenses and acquiring regional operators.

        St. Petersburg is among the key regions in Russia that we have focused on in developing and expanding our commercial operations. Telecom XXI, which we acquired in May 2001 for approximately $50.0 million, has GSM 900 and 1800 licenses to operate in 10 regions of Russia: the city of St. Petersburg, Leningrad region, the Republic of Karelia, Nenetsky autonomous district, Arkhangelsk region, Vologda region, Kaliningrad region, Murmansk region, Novgorod region and Pskov region. The






total population of Telecom XXI's license areas is 13.1 million people, and it had no subscribers at the time For a listing of our acquisition. We launchedacquisitions, see "Item 5. Operating and Financial Review and Prospects—Acquisitions" and Note 3 to our network in St. Petersburg on December 11, 2001, and as of December 31, 2003, we had approximately 1.2 million subscribers in St. Petersburg. Our network is also operational in each of the other nine regions covered by the Telecom XXI's licenses.

        We have also expanded into the Krasnodar region with our acquisition of a 51% stake in Krasnodar-based CJSC Kuban-GSM in March 2002 for $71.4 million and an additional 1.7% stake in October 2002 for $5.0 million. In addition, in September 2003, we acquired 100% of Kubtelesot for $107.0 million. Kubtelesot owns 47.3% of Kuban-GSM, and our purchase of this stake increased our ownership interest in Kuban-GSM to 100%. Kuban-GSM is currently Russia's largest mobile operator in the regions outside of Moscow and St. Petersburg in terms of subscribers. As of December 31, 2003, Kuban-GSM had approximately 1.4 million subscribers and operated in the most populous areas of the Krasnodar region, including Sochi, Krasnodar and Novorossiysk.

        In April 2003, we acquired a controlling stake in TAIF Telcom, the largest cellular operator in Tartarstan, from the company's shareholders, for $61.0 million. We also signed put and call option agreements with shareholders to acquire the remaining shares of the company, and we purchased an additional 1.7% stake in TAIF Telcom pursuant to this agreement in May 2003 for $2.3 million. We can exercise the call option for common shares during the 48 months following the date of our acquisition of a controlling stake in TAIF Telcom, or the initial acquisition date, and the call option for the preferred shares during the 48 months following the date falling 24 months after the initial acquisition date. The company's shareholders can exercise the put options for common shares during the 36 months following the date falling 18 months after the initial acquisition date and the call options for the preferred shares during the 24 months following the initial acquisition date. The minimum price of the put and call options is $49.0 million for the common shares and $10.0 million for the preferred shares, in each case plus 8% per annum starting from the initial acquisition date. We intend to exercise the call options within the time periods described above.

        TAIF Telcom provides mobile services in the GSM 900/1800 standard in the Republic of Tartarstan in the Volga region of Russia with a population of approximately 3.8 million. As of December 31, 2003, mobile penetration in Tartarstan was estimated at 21%, according to AC&M-Consulting, and TAIF Telcom had a subscriber base of approximately 360,200 people, or 47% of all mobile users in the region, according to AC&M-Consulting.audited consolidated financial statements.

Belarus

        In September 2001, we won a tender held by the Telecommunications Ministry of the Belarus Republic to form a joint venture with a GSM 900/1800 license to operate in Belarus. Belarus had a population of approximately 10 million and a nationwide mobile penetration rate of approximately 11%24% as of December 31, 2003,2004, according to AC&M-Consulting. Pursuant to the tender conditions:

•

we formed a joint venturecompany in Belarus, MTS Belarus, and contributed approximately $2.5 million in exchange for 49% of the share capital of the company (the other 51% of which is held by a state-owned enterprise);



•

we paid a lump sum of $10.0$10 million to the government of Belarus;



•

MTS Belarus made a one-time payment of $5.0$5 million (which was funded by a $5.0$5 million loan from us to it) and will make annual payments of $60,000 to the government of Belarus for its GSM 900/1800 license;; and



•

we will pay $6.0$6 million to the government of Belarus in five annual installments of $1.2 million from 2003 through 2007.




        On June 26, 2002, MTS Belarus received all of the governmental approvals and licenses required to commence operations in Belarus and it began operations on June 27, 2002. See Note 20 to our audited consolidated financial statements for further description of MTS Belarus.

        Under the terms of the tender, MTS Belarus'sBelarus' license will be valid for ten years, after which it may be prolonged for twoan additional five-year periods,period as long as the joint venture fulfills the terms of the license. At the time we won the tender, Cellular Digital Network, or Velcom, already held a GSM 900 license to operate in Belarus. Velcom's license was issued in 1998 and is also valid for ten years and may be renewed for twoan additional five-year periods.period. Velcom is a joint venture between two Belarussian state enterprises, Beltelecom and Beltechexport, two Belarusian state enterprises which jointly own 51%,collectively have a controlling stake in Velcom, and SB Telecom, a Cypriot company owning 49%.several other companies.

        MTS Belarus plans to spend up to $52.0spent $62.5 million in 2004 for network development in Belarus.Belarus and expects to spend approximately $75 million in 2005 for further network development. MTS Belarus initially plans to develop fullhas developed GSM 900 and 1800 networks in Belarus' major cities and regions, including Minsk and the Minsk region, the Gomel region, the Mogilev region and the Brest region, as well as to coverthroughout certain major highways, including the Moscow-Brest highway and train route. In addition, MTS Belarus expects to develophas also developed its network in certain areas near Belarus' border with Ukraine and Russia.Russia, and plans to further extend and improve the technical capabilities of its network throughout Belarus.

Ukraine

        In March 2003, we purchased a 57.7% stake in UMC for $199.0 million. We purchased a 16.33% stake from KPN, a 16.33% stake from Deutsche Telekom, and a 25.0% stake from Ukrtelecom. In June 2003, we purchased an additional 26.0% stake in UMC from Ukrtelecom for $87.6 million




pursuant to a call option agreement, which increased our ownership in UMC to 83.7%. We purchased the remaining 16.33% stake in UMC from TDC for $91.7 million in AugustJuly 2003 pursuant to a put and call option agreement. Prior to our entering into the agreements for the purchase of UMC, UMC did not make payments when due under certain loans from certain of its shareholders. In connection with our agreement to acquire UMC, UMC has agreed to restructure, and we have agreed to guarantee, such indebtedness. As of December 31, 2003, $14.8 million of such indebtedness remained outstanding.2004, these loans were fully repaid.

        At the time of our acquisition, UMC had trailed the market leader, Kyivstar, in terms of subscribers, but had maintained market leadership in revenue terms.terms of revenue. Our main strategy for UMC for 2003 was to regain market leadership in terms of subscribers. By the end of the third quarter of 2003, UMC had regained the market leadership by subscribers, following four strong months of subscriber growth, in part, fuelled by the launch of the "Jeans" brand in mid-August 2003. UMC ended the year with 3.3 million subscribers, a growth of 97% during the year, and achieved a 51% overall market share in Ukraine. As of December 31, 2004, UMC had 7.4 million subscribers and a 53.4% market share, according to AC&M-Consulting. As of May 31, 2005, UMC had 8.9 million subscribers.

Uzbekistan

        In August 2004, we acquired a 74% stake in Uzdunrobita, the largest wireless operator in Uzbekistan, for $126.4 million in cash. We also entered into put and call option agreements with the existing shareholders to acquire the remaining 26% stake for not less than $37.7 million. The exercise period for the call and put option is 48 months from the acquisition date. As of December 31, 2004, Uzdunrobita had 0.3 million subscribers and a 57.6% market share, according to our estimates. As of May 31, 2005, Uzdunrobita had 0.4 million subscribers.

B. Business Overview

        We are a leading provider of mobile cellular communications services in the Russian Federation, Ukraine and Ukraine,certain other CIS countries, employing technology based primarily on Global System for Mobile Communications, or GSM. In 2003,2004, we generated net revenues of $2.55 billion ($2.15 billion in Russia and $394.0$3,887.0 million in Ukraine) and had a subscriber base of 16.734.2 million (13.4(26.5 million in Russia, and 3.37.4 million in Ukraine)Ukraine and 0.3 million in Uzbekistan) at December 31, 2003,2004, making us the largest mobile operator in each of Russia and Ukraine,these three countries in terms of net revenues and subscribers. We acquired our Ukrainian operations in March 2003.




subscribers.

        In addition to standard voice services, we offer our subscribers value-added services including voice mail, short message service, or SMS, general packet radio service, or GPRS, and various SMS- and GPRS-based information and entertainment services (including multi-media message service, or MMS) and data and fax transmission.. We also offer our subscribers the ability to roam automatically throughout Europe and in much of the rest of the world, and as of December 31, 20032004 we had bilateral roaming agreements with 298 GSM service providers355 wireless operators in 146 countries and certain regions in Russia.186 countries.

        We have grown rapidly since 1999 through organic growth, as well as acquisitions. The table below sets forth our total subscribers as of the end of, and net revenues for each of, the last five years:

Period		Subscribers(1)		Net revenues			Subscribers(1)		Net revenues
		(in thousands)					(in thousands)
1999		306		$	358,327
2000		1,194		$	535,712		1,194		$535,712
2001		2,650		$	893,247		2,650		$893,247
2002		6,644		$	1,361,756		6,644		$1,361,756
2003		16,720		$	2,546,198		16,719		$2,546,198
2004							34,224		$3,886,994

---

⁽¹⁾

We define a subscriber as an individual or organization whose account does not have a negative balance for more thanshows chargeable activity within 61 days. Fordays (or 183 days in the case of the "Jeans" tariffs only, introduced in November 2002, we define a subscriber as an individual or organizationand "SIM-SIM" brand tariffs) and whose account does not have a negative balance for more than 183 days. Forthis period. Prior to October 1, 2004, UMC used a description of our90-day period for such purposes with respect to its "Jeans" tariffs, see "—Tariffs."and "SIM-SIM" subscribers.




        According to AC&M-Consulting, we had a 37%leading 36% market share of total mobile cellularwireless subscribers in Russia at December 31, 2003.2004. Our market share in the Moscow license area, which encompasses the City of Moscow and the Moscow region, was higher at 43%45%. The Moscow license area accounts for approximately 30%22% of our total subscriber base. Approximately 20% of our subscriber base is inIn Ukraine, where we had a 51%leading 53% market share at December 31, 2003,2004, according to Ukrainian News.AC&M-Consulting. Our subscriber base continued to grow in 2004.the first quarter of 2005. At May 31, 2004,2005, we had approximately 16.942.4 million subscribers, of which 33.0 million were in Russia, 8.9 million were in Ukraine and 4.40.4 million subscriberswere in Ukraine.Uzbekistan.

        Russia is our principal market, both in terms of subscribers and revenues. At December 31, 2003,2004, approximately 80%77.6% of our subscriber base was in Russia and approximately 20%21.5% was in Ukraine. For the year ended December 31, 2003,2004, approximately 84.5%78.1% of our revenues came from our operations in Russia and 15.5%21.2% from our operations in Ukraine.

        Overall mobile cellularwireless penetration in Russia was at approximately 25%51% at December 31, 2003,2004, and higher in Moscow at 68%99%, according to AC&M-Consulting. Mobile cellular penetration in Ukraine was lower than in Russia at approximately 13.4%29% at December 31, 2003,2004, according to Ukrainian News.AC&M-Consulting. Mobile cellular penetration in Uzbekistan was at approximately 2% at December 31, 2004, according to the Uzbek Agency for Communications and Informatization. The currentlyrelatively low level of mobile penetration in the Russian regions and Ukrainemarkets in which we operate presents us with future growth opportunities.

        As of December 31, 2003,2004, we had licenses to operate in 7687 regions of Russia with a population of approximately 128.3142.6 million people, or approximately 88.4%98% of the country's total population, for the entire territory of Ukraine with a population of approximately 47.5 million people and for the entire territory of Ukraine, which hasUzbekistan with a population of approximately 4826.5 million people. As of December 31, 2003,2004, we had commenced commercial operations in 6077 regions of Russia, with a combined population of approximately 116.6137.3 million people, in all of Ukraine and in mostselected areas of the regions of Ukraine.Uzbekistan. Since December 31, 2003,2004, we have acquired licenses for 11commenced operations in one additional regions in Russia, coveringregion with a population of approximately 14.30.3 million people, and have commenced operations in two such additional regions.people.

        To maintain and increase our market share and brand awareness, we use a combination of newspaper, magazine,print media, radio, television, direct mail and outdoor advertising, focusing in particular on brand and image advertising and public relations, to position us as the leading cellular operator in Russia and Ukraine.well as promotion of particular tariff plans. Supporting these efforts, we had a sales andhave developed an extensive distribution network consistingcomprised of 25 integrated389 of our own sales and customer service centers and over 4,670 independent dealer distribution outlets in the Moscow license area asapproximately 25,000 additional points of






December 31, 2003. In addition, we had 243 sales and customer service centers in Russia and 36 in Ukraine, sale operated by our dealers, as of December 31, 2003.2004.

        We seek to minimize our exposure to the credit risk of our subscribers through our advance-payment billing system, which is used by over 97%98% of our subscribers in Russia and approximately 80%86% of our subscribers in Ukraine. Under this system, our subscribers prepay for their access, usage and value-added service fees.

        We also have equity investments in local mobile operators in Russia and Belarus, which had a total of 587,898 subscribers as of December 31, 2003. In particular, MTS Belarus had 464,7831.2 million subscribers and a leading market share of 42%50% at December 31, 2003,2004, according to AC&M-Consulting. The subscriber base of MTS Belarus grew to 690,0001.5 million at May 31, 2004.2005. Belarus, a country with a population of approximately 109.8 million, had a mobile cellular penetration rate of 11%24% at December 31, 2003.2004, according to AC&M-Consulting.

Business Strategy

        Our primary goal is to maintain our position as a leading mobilewireless operator in Russia and Ukrainethe CIS by strengthening our position across the markets in which we operate and deploying a customized approach to different customer segments. To accomplish this, we intend to implement the following strategies:

•

Maintain our leading position in Russia and Ukraine by growingthrough the continued development of our subscriber base by attracting new subscribers and focusing onretaining our existing subscribers.



•

Continue to provide high quality service in order to maintain our status as a premium, high quality operator.



•

Continue to provide clearly structured segmented market offerings which appeal to the qualityvarious groups of subscribers within our customer base.



•

Realize the benefits of our subscriber mix.integrated company approach through the streamlining of regional operations and unifying the services offered across our entire license area under a single brand.



•

Continue to enhance our market offerings by providing a wide range of value-added services based on SMS, GPRS and other technological platforms targeted at various market segments.



•

Selectively expand our network to areas of Russia and Ukraine in which we do not already operate, focusing on high-density population areas and on areas along transportation routes.



•

Continue to provide clearly structured and new and varied tariff plans, as well as value-added service options, which appeal to the various groups of subscribers within our network, including SMS- and GPRS-based services.



•

Continue to take advantage of our strong position in the Moscow license area as a platform from which to test and launch new products and services.



•

InitiateFurther develop subscriber loyalty programs aimed at retaining our most valuable high-revenue subscribers, including bonus programs and the introduction of limited term contracts with a fixed discount for subscribers who commit to use our services for not less than one year.subscribers.

        In the past few years, we have rapidly expanded into the Russian regions. We plan to refocus our regional expansionregions and selected CIS countries through launches of operations in Russia fromterritories in which we had licenses and through acquisitions of local cellular companies toother mobile operators. Starting in 2003, we have become particularly focused on the integration of our existing businesses into a single company with a unified marketing approach and centralized network and operations management. We are currently working to develop and implementcomplete the implementation of a simplified and strengthened centrally-managed corporate function to enhance performance and efficiency at all levels of our operations and simultaneously integrate our operations. Furthermore,In addition, we intend to continue to consolidate our ownership in regional subsidiaries by acquiring remaining minority stakes.

        Our cash outlays for capital expenditures (consisting of purchases of property, plant and equipment and intangible assets) in 2003 and 2004 were $958.8 million and $1,358.9 million, respectively, and we expect to invest approximately $1.2$2.0 billion in 2004.2005. These investments are required to support the growth of our subscriber base (i.e., to improve network capacity) and to develop our network in the new regions for which we received licenses in 2003.2003 and 2004.

        We may also expand our operations into other countries of the CIS through the acquisition of existing operators or new licenses as attractive opportunities arise.

        Implementation of these strategies is subject to a number of risks. See "Item 3. Key Information—D. Risk Factors" for a description of these and other risks we face.






Current Operations

Subsidiaries

        For a list of our major subsidiaries and our ownership percentages in these subsidiaries, see Note 2 to our audited consolidated financial statements.

        Consistent with our strategy, in November 2004, the general meeting of our shareholders approved a reorganization of MTS OJSC in the form of merger with Telecom XXI, Kuban-GSM, UDN-900, Dontelecom, MTS Barnaul, MTS-NN and Telecom-900.




License Areas

        The following table shows, as of April 1, 2004,May 31, 2005, information with respect to the license areas in which we and our affiliatessubsidiaries and associate provide or expect to provide GSM services:

		GSM 900				GSM 1800
License Region		Licensee		Expiry date		Licensee		Expiry date
Moscow License Area
Moscow		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Moscow region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
St. Petersburg License Area
St. Petersburg		Telecom XXI		April 28, 2008		Telecom XXI		April 28, 2008
Leningrad region		Telecom XXI		April 28, 2008		Telecom XXI		April 28, 2008
Russian Regional License Areas
European Russia
Adygeya Republic		Kuban-GSM		April 28, 2008		Kuban-GSM		April 28, 2008
Arkhangelsk region		Telecom XXI		April 28, 2008		Telecom XXI		April 28, 2008
Astrahanskaya oblastAstrahansk region		MTS OJSC		December 11, 2013		Astrahan-Mobile		October 18, 2011
Bashkortostan Republic		BM-Telecom		August 22, 2007		BM-Telecom		August 22, 2007
Belgorod region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Belgorod region		ReCom		May 15, 2008		—		—
Bryansk region		ReCom		May 15, 2008		—		—
Bryansk region		—		—		MTS OJSC		April 28, 2008
Chuvashia Republic(1)		MTS OJSC		December 30, 2013		MTS OJSC		December 30, 2013
Dagestan Republic(1)		MTS OJSC		December 30, 2013		MTS OJSC		December 30, 2013
Ivanovo region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Ingushetia Republic(1)		MTS OJSC		December 30, 2013		MTS OJSC		December 30, 2013
Kabardino-Balkar Republic(1)		—		—		MTS OJSC		December 30, 2013
Kaliningrad region		Telecom XXI		April 28, 2008		Telecom XXI		April 28, 2008
Kalmykia Republic(1)		BITMTS-RTK		January 25, 2011		MTS OJSC		December 30, 2013
Kaluga region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Karachaevo-Cherkesia Republic(1)		MTS OJSC		December 30, 2013		MTS OJSC		December 30, 2013
Karelia Republic		Telecom XXI		April 28, 2008		Telecom XXI		April 28, 2008
Kirov region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Komi Republic		MTS OJSC		August 22, 2007		MTS OJSC		April 28, 2008
Komi-Permyatsk(1) Autonomous District		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Kostroma region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Krasnodar regionterritory		Kuban-GSM		May 30, 2007		Kuban-GSM		May 30, 2007
Kursk region		MTS OJSC—		April 28, 2008—		MTS OJSC		April 28, 2008
Kursk region		ReCom		May 15, 2008		—		—
Lipetsk region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Lipetsk region		ReCom		May 15, 2008		—		—
Mari-El Republic(1)		Mar Mobile GSM		January 15, 2012		Mar Mobile GSM		January 15, 2012
Mordovia Republic(1)		MTS OJSC		December 30, 2013		MTS OJSC		December 30, 2013






Murmansk region		Telecom XXI		April 28, 2008		Telecom XXI		April 28, 2008
Nenetsk regionAutonomous District		Telecom XXI		April 28, 2008		Telecom XXI		April 28, 2008
Nizhny Novgorod region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Novgorod region		Telecom XXI		April 28, 2008		Telecom XXI		April 28, 2008
Orel region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Orel region		ReCom		May 15, 2008		—		—
Orenburg region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008




Perm region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Rostov region		Dontelecom		July 1, 2005		Dontelecom		July 1, 2005
Pskov region		MTS OJSC		October 1, 2006		—		—
Pskov region		Telecom XXI		April 28, 2008		Telecom XXI		April 28, 2008
Ryazan region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Samara(1) region		MTS OJSC		December 30, 2012		MTS OJSC		December 30, 2012
Saratov region		MTS OJSC		July 11, 2012		MTS OJSC		July 11, 2012
Severnaya Osetia-Alania Republic(1)		Telesot Alania		September 1, 2006		Telesot Alania		September 1, 2006
Severnaya Osetia-Alania Republic		—		—		MTS OJSC		December 30, 2013
Smolensk region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Stavropol region(1)territory		MTS OJSC		December 30, 2013		MTS OJSC		December 30, 2013
Tambov region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Tatarstan Republic		TAIF Telcom		June 26, 2007		TAIF Telcom		June 26, 2007
Tula region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Tver region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Udmurt Republic		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Udmurt Republic		UDN-900		February 21, 2007		—		—
Ulyanovsk(1) region		—		—		MTS OJSC		December 30, 2013
Vladimir region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Volgogradskaya oblastVolgograd region		—		—		Volgograd-Mobile		October 4, 2011
Vologda region		Telecom XXI		April 28, 2008		Telecom XXI		April 28, 2008
Voronezh region		ReCom		May 15, 2008
Voronezh region		—		—		MTS OJSC		April 28, 2008
Yaroslavl region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Asian Russia
Aginski-Buryatski Autonomous Disctrict(1)District		Sibintertelecom		July 1, 2013		—		—
Aginski-Buryatski Autonomous District		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Altai regionAltaisk territory		MTS-Barnaul		September 8, 2010		MTS-Barnaul		September 8, 2010
Altai Republic		SCS-900		July 19, 2011		MTS OJSC		December 30, 2013
Amur region		ACC		January 10, 2007		ACC		January 10, 2007
Amur region		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Buryatiya Republic(1)		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Chelyabinsk region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Chita region(1)		Sibintertelecom		January 1, 2006		—		—
Chita region		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Chukotiski Autonomous District(1)		BIT		July 19, 2011		—		—
ChukotiskiChukotsk Autonomous District(1)		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Evenkia autonomous regionAutonomous District(1)		MTS OJSC		December 30, 2013		MTS OJSC		December 30, 2013




Jewish Autonomous District(1)		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Irkutsk region(1)		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Kemerovo(1)Irkutsk region		MTS OJSC		December 30, 2013		—		—
Irkutsk region		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Kamchatka region		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Kemerov region		MTS OJSC		December 30, 2013		MTS OJSC		December 30, 2013
Khabarovsk Territory		FECS-900		January 10, 2007		FECS-900		January 10, 2007
Khabarovsk Territory(1)		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Khakassiya Republic		Sibchallenge		September 13, 2011		Sibchallenge		September 13, 2011
Khanty Mansiysk regionAutonomous District		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Koryakski Autonomous District(1)		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Krasnoyarsk Territory		Sibchallenge		December 21, 2010		Sibchallenge		September 13, 2011






Kurgan region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Magadan region(1)		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Novosibirsk region		SCS-900		February 21, 2007		SCS-900		February 21, 2007
Omsk region		MSS		December 20, 2006		MSS		December 20, 2006
Primorsky Territory(1)		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Sakhalin(1)Sakha Republic (Yakutia)		BITPrimtelefon		April 28, 2008		Primtelefon		April 28, 2008
Sakha Republic (Yakutia)		Gorizont-RT		July 19, 20111, 2005		—Gorizont-RT		—July 1, 2005
Sakhalin(1) region		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Sverdlovsk region		Uraltel		March 1, 2006		Uraltel		March 1, 2006
Sverdlovsk region		—		—		MTS OJSC		April 28, 2008
Taimyr autonomous regionAutonomous District		Sibchallenge		December 21, 2010		Sibchallenge		September 13, 2011
Tomsk region		TSS		June 5, 2008		TSS		June 5, 2008
Tyumen region		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Tyva Republic(1)		BITMTS-RTK		July 19, 2011		MTS OJSC		December 30, 2013
Ust-Ordynski Buriatsk Autonomous District(1)		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Yakutiya Republic(1)		Primtelefon		April 28, 2008		Primtelefon		April 28, 2008
Yamalo-Nenetsk region(1)Autonomous District		MTS OJSC		April 28, 2008		MTS OJSC		April 28, 2008
Ukraine
Ukraine		UMC		December 3, 2013		UMC		December 3, 2013
Uzbekistan
Uzbekistan		Uzdunrobita(2)		June 30, 2016		Uzdunrobita		June 30, 2016
Belarus
Belarus		MTS Belarus		April 30, 2012		MTS Belarus		April 30, 2012

---

⁽¹⁾

Our regional license areas in which the licensee haswe have not commenced commercial operations.operations as of the date of this document.



⁽²⁾

Our GSM 900 license for Uzbekistan excludes the city of Tashkent.




        Each of our licenses except the licenses covering the Moscow license area and our Belarus and Ukraine licenses, contains a requirement thatrequires service to be commenced and that subscriber-number and territorial-coverage targets be achievedstarted by a specific date and most contain further requirements as to network capacity and territorial coverage to be reached by specified date.dates. We have met these targets or received extensions to these dates in those regional license areas in which we have not commenced operations. We believe that we are in compliance with all material terms of our licenses. Neither the government nor other parties have taken or attempted to take legal actions to suspend, terminate or challenge the legality of any of our licenses. We have not received any notice of violation of any of our licenses, and we believe that we are in compliance with all material terms of our licenses.




Services Offered

Network Access

        We primarily offer mobile cellular voice, data and facsimile communication services to our subscribers on the basis of various tariff plans. In general, subscribers pay a monthly subscription fee and a per-minute charge for usage. However, we also offer tariff plans that do not require subscribers to pay a monthly subscription fee.

Automatic Roaming

        Roaming allows our customers, both subscribers and guest roamers, to receive and make international, local and long-distance calls while traveling outside of their home network. Roaming is provided through individual agreements between us and other GSM operators. Unlike many non-GSM providers that require additional equipment or prior notification, our roaming service is instantaneous, automatic and requires no additional equipment.




        As of December 31, 2003,2004, we had bilateral roaming contracts with 298 GSM service providers355 wireless operators in approximately 146186 countries, including with regional operators in Russia. We continually seek to expand our roaming capability and are currently in negotiations with additional operators. In Russia, as of December 31, 2003,2004, in addition to our network coverage area in 6077 regions of Russia, GSM service is available to our subscribers in several regions of Russia where we do not currently operate through our roaming agreements with approximately 2013 regional operators.

        Roaming agreements regulate the relations and billing procedures between operators. The host operator sends the roamer's home operator a bill for the roaming services provided to the roamer. The roamer's home operator pays the host operator directly for the roaming services and then includes the amount due for the provision of roaming services in the roaming subscriber'sroamer's monthly bill.

Value-Added Services

        We offer several value-added services to our customers. These services may be included in the tariff plan selected by the subscriber or subscribers may pay additional monthly charges and, in some cases, usage charges for them. Some basic value-added services that we offer include:

•

Call Divert/Forwarding;



•

Call Barring;



•

Caller ID Display;



•

Call Waiting;



•

Itemization of Monthly Bills;



•

Voicemail;



•

Information and Directory Service;



•

International Access Service;



•

Automatic Customer Care System;



•

Customer Care System via the Internet;



•

Short Message Service, or SMS;



•

General Packet Radio Service, or GPRS;



•

Multi-Media Message Service, or MMS;





•

Wireless Application Protocol, or WAP;



•

New technologies-based services, including wireless local area network, or WLAN, location based services, or LBS, and others; and



•

SIM-browser.

        We also provide many voice and SMS-based value-added services in cooperation with various content providers.

Other Services

        In addition to cellular communication services, we offer corporate clients a number of telecommunication services such as design, construction and installation of local voice and data networks capable of interconnecting with fixed line operators, installation and maintenance of cellular payphones, lease of digital communication channels, access to open computer databases and data




networks, including the Internet, and provision of fixed, local and long-distance telecommunication services, as well as video conferencing.

Sales and Marketing

Target Customers

        Our target customers historically have included companies, professionals, high-income individuals, reporters, government organizations, businesspersons and diplomats. However, following the economic crisis in August 1998, we launched lower tariffs and widened our mobile cellular services market, aggressively targeting new customer segments. With mobile cellular penetration in Russia above 29%59%, as of March 31, 2004,2005, mobile cellular services are now used by a much wider group of the population, including students and retirees. Though we have historically focused primarily on our core segment of business customers, we have now extended our focus more toward the general population, developing customized products for different market segments. We believe that we will be able to provide network capacity and expand our coverage area to serve these new customer segments.

        Over time, we have adjusted our service model to provide differentiated levels of service to meet the needs of distinctive customer segments as such segments have developed. For example, we introduced prepaid tariffs marketed to young subscribers and low-volume subscribers under the "Jeans" brand name in 2002. Based on the popularity of our "Jeans" tariffs, we subsequently revised our service offerings marketed under the "Jeans" brand name to develop unique products for different customer segments, including corporate and individual subscribers.segments. We also actively promote our prepaid services to family members of existing subscribers, students, retirees and other mass market customers.

Advertising and Marketing

        Our advertising and public relations initiatives include:

•

brand and image advertising and public relations to position us as the leading mobile cellular operator in Russia and Ukraine;



•

information advertising and promotion to inform potential customers of the advantages of the high quality and variety of our services and the extensive coverage we offer; and



•

product- and tariff-related advertising and promotion for specific marketing campaigns, new tariffs and pricing discounts.

        We use a combination of newspaper, magazine, radio, television and outdoor advertising, including billboards and signs on buses and kiosks, and exhibitions to build brand awareness and stimulate demand. Our indirect advertising includes sponsorship of selected television programs, sporting events,






concerts and other popular events. We are also coordinatingcoordinate the advertising policies of our dealers with respect to joint marketing efforts to capitalize on the increased volume of joint advertising and preserve the integrity and high-quality image of the MTS brand. As we have expanded our network, we have concentrated a greater part of our advertising and marketing effort on positioning the MTS and Jeans brands as national brands. In addition, we focus our advertising and marketing on the affordability and variety of our tariff plans, on the broad coverage of our network and the use and availability of national roaming.

Sales and Distribution

        As of December 31, 2003,2004, we had 243327 sales and customer service centers in Russia, 37 in Ukraine and 3625 in Ukraine.Uzbekistan. In response to the demand shift to mass marketmass-market subscribers, we have adjusted ourdeveloped an extensive distribution strategy and begun to open new dealernetwork through independent dealers that operate numerous outlets in places of high consumer activity, such as supermarkets and malls. Some of our dealers purchase handsets directly from us and then sell them to the subscribers that they enroll. Whether a new subscriber connects to our network with equipment purchased from a dealer or directly from us, in most of the regions, we do not charge a connection fee. Under our current policy, dealers receive a




commission per subscriber connected based on revenues generated during the first six months by subscribers that they enroll. The commission in the Moscow license area up tocurrently ranges between $25 and $120 per subscriber as of March 31, 2004, increases with the number of new subscribers a dealer signs. As of March 31, 2004,and the commission in St. Petersburg wasranges between $15$10 and $55.$50. Dealer commissions in the other regional license areas in Russia wereare between $7$4 and $30.$54. Dealer commissions in Ukraine were between $6 (for prepaid) and $56 (for postpaid).are calculated differently, ranging from 12% to 17% of the revenues generated by a newly enrolled subscriber during the first eighteen months. Dealers generally receive a higher commission of approximately $120$40-50 for enrolling subscribers in our "VIP" tariff plan. We limit our credit exposure to dealers by controlling the cash flow from customers. If a new customer pays in cash, the dealer remits the full amount received to us within three days, and we then pay the commission to the dealer by the end of the month.days. If the customer chooses to pay by bank transfer or by credit card, the customer pays us directly, and we pay the dealer its commission after the end of the month.

        Prior to February 1, 2004,In Russia, we paidpay the full amount of commission when a dealer activatedactivates a subscriber's contract. If such subscriber's usage of our voice and non-voice services over the following six-month period amountedamounts to less than the amount of the dealer's commission, the dealer wasis required to reimburse the difference to us. Effective fromCommencing on February 1, 2004 in the Moscow license area, dealer commission contracts have been gradually migrated to a new payment scheme. Specifically, we have begun linking commissions are deferred overpayable to a period of up to one year. We now pay commissions to dealersdealer on a monthly basis based onto the amount of revenues we receive during the twelve-month period from subscribersthe date a subscriber is activated by a particular dealer. However,such dealer, with the totaldealer receiving the lesser of the full commission amount or 50% of commissions paid to dealers has remained unchanged.the revenues received from the subscriber during the year following enrollment. We believe that the new method for paying commissions to dealers provides dealers with greater incentives to renew subscriptions, reduces the risk of dealer fraud and improves our cash-flow management, as dealers are not credited for up to a year after a subscriber is activated.

        During 2003,2004, approximately 78%82.5% of our new subscribers enrolled through independent dealers in Russia and 87%90.0% in Ukraine, and we enrolled the remainder directly. We intend to continue expanding our internal distribution network, as well as our independent dealer distribution network. Independent dealers have also begun servicing some aspects of our subscribers' accounts, such as the switching on and off of additional services and payment collection.

        As the geographic range of our network expands, we expect to increase the number of distribution points, primarily through increasing the number of dealers under contract with us and creating joint ventures with local partners to act as our dealers.

Competition

The Russian wireless telecommunications market

        We compete with at least one other mobile cellular operatorThe Russian wireless telecommunications market is characterized by rapid growth in subscribers and revenues and increasing consolidation among a few large national operators. As of December 31, 2004, overall wireless penetration in Russia was 51%, or approximately 73.9 million subscribers, according to AC&M-Consulting.

        Demand for wireless communications services in Russia grew rapidly over the last ten years due to rising disposable incomes, increased business activity and declining prices due to intensified competition among wireless communications providers. The number of wireless subscribers more than doubled in each of the last two years, with Russia's regional markets growing at almost triple the rate of Moscow and St. Petersburg. The Russian market has achieved high levels of penetration in Moscow and St. Petersburg, with more than 99 and 89 subscribers per 100 residents, respectively, at December 31, 2004, according to AC&M-Consulting. Regional markets remained relatively under-penetrated, with an average of less than 42 subscribers per 100 residents.






        The following table sets forth key data on Russia's wireless telecommunications market:

		As of December 31,
		2000		2001		2002		2003		2004
		(Amounts in millions, except for percentages)
Subscribers(1)		3.5		8.0		18.0		36.2		74.4
Subscriber penetration		2%		4%		12%		25%		51%

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Source: AC&M-Consulting.

⁽¹⁾

Based on registered subscribers. There is no uniform definition of active lines in service in the Russian fixed line market.

        According to AC&M-Consulting and our markets.own data, we accounted for 43% and 45% of subscribers in Moscow, 34% and 32% of subscribers in St. Petersburg and 37% and 36% of total Russian subscribers as of December 31, 2003 and 2004, respectively.

        The competition has evolved in recent years to exist primarily between us, Vimpelcom and MegaFon, each of which has effective national coverage in Russia. Competition today is based largely on local tariff prices and secondarily on network coverage and quality, the level of customer service provided, roaming and international tariffs and the range of services offered. For a description of the risks we face from increasing competition, see "Item 3. Key Information ?D. Risk Factors—Risks Relating to Our Industry—We face increasing competition that may result in reduced operating margins and loss of market share, as well as different pricing, service or marketing policies."






Russia

        The following table illustrates the number of mobile cellularwireless subscribers for each network operator in Russia at the year-endas of 2001,December 31, 2002, 2003 and 2003:2004:

								As of December 31,
Operator		December 31, 2001		December 31, 2002		December 31, 2003
Operator								2002		2003		2004
								(Amounts in millions)
MTS(1)		2,650,000		6,640,000		13,370,000		6.6		13.4		26.5
Vimpelcom(2)		2,111,500		5,153,088		11,436,900
MegaFon group(2)		913,004		2,935,936		6,340,335
Vimpelcom(1)								5.2		11.4		25.7
MegaFon group(1)								2.9		6.3		13.6
Others(2)								3.3		5.1		8.0

---

⁽¹⁾

According to ourSubscriber information based the relevant operator's data.



⁽²⁾

Source: AC&M-Consulting.

Vimpelcom

        Vimpelcom, which operates both D-AMPS and dual-band GSM 900/1800 networks, is one of our primary competitors in Russia, and it is the second largest GSM mobilewireless operator in Russia in terms of subscribers.

        In the Moscow license area, we We believe that Vimpelcom will continue to be our primary competitor for the foreseeable future.

        According to Vimpelcom, reportedit had approximately 11.425.7 million subscribers in Russia at December 31, 2003,2004, including 5.67.5 million in the Moscow license area. At December 31, 2003,2004, according to AC&M-Consulting, Vimpelcom had a 49%44% market share in Moscow while we accounted for 43%. Vimpelcom and its subsidiaries also hold licenses to operate GSM networks in the North-West region, Central region and Central Black Earth region, the Volga region, the North Caucasus region and the Siberian region. At December 31, 2003, according to AC&M-Consulting, Vimpelcom had a 31%35% market share of total wireless subscribers in Russia, while we accounted for 37%.Russia.

        Vimpelcom operators also compete with us in many regions outside of Moscow and the Moscow region, including in the North Caucasus region, Siberia and Central Russia. In addition, in 2002 and 2003 Vimpelcom was awarded licenses to operate a GSM 900/1800 network for the North-West region, which includes St. Petersburg, and launched its network there in April 2003. Vimpelcom's entry into the North-West region has lead to an increase in competition in that area and, as a result, may lead us to invest additional amounts in our operations in the region.

        Since 1998, Vimpelcom has been developing its dual-band GSM network, which offers its GSM subscribers international roaming capability comparable to ours. For a description of the risks we face from increasing competition, see "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Industry—We face increasing competition from existing licensees that may result in reduced operating margins and loss of market share, as well as different pricing, service or marketing decisions."






MegaFon

        In addition to Vimpelcom, we also compete with MegaFon, which is the third largest operator in Russia in terms of subscribers. The MegaFon hasgroup holds GSM 900/1800 licenses to operate in all 89 regions of the Russian Federation.

        The MegaFon group has a GSM 900/1800 license for the Moscow license area where its predecessor, Sonic Duo, launched commercial operations in November 2001. According to AC&M-Consulting, MegaFon, it had 850,300a subscriber base of 13.6 million in Russia at December 31, 2004, including 1.8 million subscribers in the Moscow license area as ofarea. At December 31, 2003. MegaFon is our primary competitor in the North-West region, where St. Petersburg is located, and it was the first company to provide GSM services in that region. As of December 31, 2003,2004, according to AC&M-Consulting, MegaFon had a 51%43% market share in the North-West region while we accounted for 34%.






        According to AC&M-Consulting, MegaFon had a combined subscriber baseSt. Petersburg and an 18% market share of 6.3 milliontotal wireless subscribers in Russia as of December 31, 2003. MegaFon has instituted a unified intra-network roaming tariff, and is expected to introduce unified tariffs in each of the regions in which it operates. For a description of the risks we may face in connection with the development and growth of MegaFon, see "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Industry—Some of our competitors may receive preferential treatment from the government, potentially giving them a substantial advantage over us."Russia.

        In addition, there has been speculation in the media of a merger between MegaFon and Vimpelcom following Alfa Group's August 2003 purchase of a 25.1% stake in MegaFon. For a description of the potential impact of such merger on us, see "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Industry—A merger between our two largest competitors would constrain our ability to effectively competeresult in a competitor substantially larger than us with leading market shares in the Russian mobile communications market."

LocalOther Operators

        In addition to our principal competitors, Vimpelcom and MegaFon, we also compete with local GSM and D-AMPS operators in several Russian regions.

        In Nizhny Novgorod,certain regions of the Urals part of Russia, our primary competitor is Nizhny Novgorod Cellular Communications,Uralsvyazinform, which had approximately 368,3002.0 million subscribers as of December 31, 2003.2004. In Ekaterinburg,certain regions of the Volga part of Russia, we compete with Ekaterinburg Cellular Communications, a D-AMPS operator with over 230,100 subscribersSMARTS, which had approximately 1.8 million customers as of December 31, 2003. In Tartarsan, we compete primarily with Tatinkom, a D-AMPS operator with over 105,000 subscribers as of December 31, 2003.2004. The preceding subscriber numbers, in each case, are according to AC&M-Consulting.

UkraineThe Ukrainian wireless telecommunications market

        The Ukrainian wireless telecommunications market has, until recently, been characterized by low levels of penetration and historical under investment in wireless telecommunications infrastructure. Since 2000, the Ukrainian wireless telecommunications market has enjoyed rapid growth in part due to broader economic recovery in Ukraine, changes in ownership of the two major operators and the more recent introduction of calling-party pays billing arrangements. In 2004, overall wireless penetration in Ukraine we compete primarily with Kyivstar, a GSM operator with over 3increased from 13% to 29%, or approximately 13.8 million subscribers, as of December 31, 2003.according to AC&M-Consulting and World Mobile Subscriber Database, Informa (UK).

        The following table shows the number of subscribers as of the dates indicated and the coverage area of UMC and our competitors in Ukraine:

Operator		December 31, 2003		March 31, 2004		Coverage Area		December 31, 2003		December 31, 2004		Coverage Area
								(amounts in thousands)
UMC		3,348,610		3,848,972		Nationwide		3,349		7,373		Nationwide
Kyivstar		3,036,607		3,221,000		Nationwide		3,036		6,252		Nationwide
Golden Telcom		41,000		50,000		Kiev, Odessa		41		60		Kiev, Odessa
DCC		85,000		85,000		Kiev, Odessa, Dnepropetrovsk, Donesk, Lugansk, Crimea		85		85		20 major cities, including Kiev, Odessa, Dnepropetrovsk, Donesk, Lugansk, Crimea
WellCOM		39,810		42,000		Kiev
Others								40		50		Major cities

---

Source: MForum.ruSubscriber information based the relevant operator's data.

        In Ukraine, we compete primarily with Kyivstar, is our primary competitor in Ukraine anda GSM operator with 6.3 million subscribers as of December 31, 2004. Kyivstar is owned by Telenor and Alfa Group. Kyivstar offers mobilewireless services






using GSM 900 and GSM 1800 technologies and was the market leader in terms of subscribers from JuneJuly 2001 until September 2003, according to Kyivstar press releases. Golden Telecom Ukraine, which is beneficially owned by Alfa Group, TelnorTelenor and Rostelecom, offers mobilewireless services using GSM 1800 technology. DCC holds a license to provide mobilewireless cellular services using the D-AMPS standard and, through its recently acquired subsidiary Astelit, holds a GSM-1800 license. According to press reports, Turkcell has acquired a controlling interest in DCC. URS WellCOM has a license and operates a limited network in the GSM-900 standard.

Tariffs

        We customize our marketing efforts and pricing policies in each region of Russia in consideration of such factors as the average income levels, competitive environment and subscriber needs in a






particular region, all of which vary from region to region. Consistent with our marketing strategy, we have developed new tariff plans to appeal to a broader market. All of our tariff plans combine different monthly network access fees (with the exceptions of the "Jeans" tariff plans discussed below), per minute usage charges and value-added services in packages designed to appeal to different market segments.

        In February 2003, we launched a new unified system of tariff plans across our nationwide network in Russia. The new tariff plans are divided into four categories—"MTS Corporation," "MTS VIP," "MTS Business" and "MTS Optima"—with each category designed to target specific segments as follows:

•

MTS Corporation:Corporation: MTS Corporation tariff plans are available to corporate clients nationwide. They feature substantial discounts on calls within the group of subscribers under a particular contract, international roaming and voice traffic depending on the quantity of calls, as well as a variety of free value-added services.



•

MTS VIP:VIP: MTS VIP tariff plans are geared toward heavy users who spend over $100 per month on mobile communications.



•

MTS Business:Business: MTS Business tariff plans are designed for active users who spend $40 to $100 per month on mobile communications.



•

MTS Optima:Optima: MTS Optima tariff plans are designed for mass-market users who spend up to $40 per month on mobile communications.




        Although we offer the same categories of tariff plans throughout Russia, the prices of these plans differ from region to region and are generally higher in the Moscow license area. We introduced a unified system of tariff plans to achieve such benefits as better perception of tariff plans and clarity, simplicity and transparency for prospective subscribers throughout Russia, as well as savings on our marketing and advertising expenses through unified advertising campaigns in Moscow and the regions.

        We set prices with reference to market conditions and believe that our pricing is competitive vis-à-visas compared to other providers of mobile communications services. While we have traditionally designed our tariff plans to appeal to high- and medium-usage subscribers, we began to target the mass-market subscriber segment with a prepaid tariff plan launched in November 2002. We market this new tariff under the distinct brand name "Jeans" rather than "MTS" in order to maintain our core image as a premium mobile services provider. We expect that, as the mass market is penetrated and subscriber numbers increase, competition will place downward pressure on the prices we charge for our services.

        Our tariff plans offer a variety of pricing schemes. The following description of tariffs and charges are, in each case, exclusive of VAT. As of December 31, 2003,2004, the per-minute tariff for calls to Moscow from Moscow (excluding Jeans tariff plans) varied from $0.06$0.15 per minute to $0.16$0.18 per minute during peak periods and from $0.06$0.075 per minute to $0.09 per minute during off-peak periods, with some plans offering discounted rates at night, sometimes as low as $0.06$0.075 per minute. The "Jeans" tariffs varied






from $0.01 per minute to $0.34$0.36 per minute in Moscow. The per minute prices in the regions outside of the Moscow license area (excluding Jeans tariff plans) ranged from $0.01 per minute to $0.39$0.20 per minute during peak periods, and from $0.01 per minute to $0.39$0.10 per minute during off-peak periods, with some plans offering discounted rates at night, sometimes as low as $0.01 per minute; in St. Petersburg tariffs varied from $0.01$0.05 per minute to $0.17 per minute. The "Jeans" tariffs varied from $0.01 per minute to $0.21$0.27 per minute in the regions outside of Moscow. Higher rates apply to domestic long distance calls and we assessed a surcharge for all international calls that ranged from $0.87 per minute for calls to Europe to $2.55 per minute for calls to Africa. Our value-added services, such as Caller ID and Call Waiting, are sometimes included in the plan at no additional charge and sometimes carry a charge between $1.00 andof up to $3.00 per month, depending on the plan.






        We also offer unified tariff plans in all territories of Ukraine in which we operate, including private contract, business and prepaid plans. In addition, we are developing new tariff plans for Ukraine that focus on the differing needs of subscribers in the various market segments.

        As of December 31, 2003,2004, the per minute prices in Ukraine varied from $0.14$0.09 per minute to $0.56$0.47 per minute during peak periods and from $0.07$0.06 per minute to $0.50$0.47 per minute during off-peak and night periods. Certain UMC plans also include special tariffs for intra-network calls that ranged from $0.02 per minute to $0.20$0.25 per minute. Higher rates applied to international calls ranging from $0.53$0.44 per minute to $3.37$11.23 per minute.minute (excluding VAT).

        In addition, in the Moscow license area, calls from one mobile cellular telephone to another within the same network connected to the same mobile switching center are charged at no cost to the subscriber receiving the call and, depending on the tariff plan, at a discount of 20%up to 50%75% to the subscriber placing the call. Similar discounts are also available to subscribers in other regions. In comparison, some of our competitors do not charge their subscribers for specific categories of incoming calls under certain of their tariff plans.

        We launched our "Jeans" brand tariff plans geared at mass-market subscribers on November 15, 2002 in Moscow and in 37 other regions in Russia. "Jeans" tariffs were launched in Ukraine in August 2003. The "Jeans" brand is comprised of a set of prepaid tariffs that generally include features such as no monthly subscription fee, per-second billing, free incoming calls from MTS subscribers and, for certain tariff plans, advance payment credit expiration dates. In December 2002, we introduced a promotion whereby ourOur "Jeans" tariff subscribers in the Moscow license areaRussia receive all incoming calls free of charge from other MTS subscribers and, Vimpelcomin many regions, from subscribers and are able to call Vimpelcom subscribers at the same price as MTS intra-network calls. This promotion is valid through August 31, 2004.of other mobile operators. As of MarchDecember 31, 2004, Jeans subscribers accounted for 49.9%68.3% of our total subscribers and 56.5%77.0% and 23.7%39.1% of our subscribers in Russia and Ukraine, respectively. In addition, we offer a second set of prepaid tariffs in Ukraine marketed under the "Sim-Sim" brand. As of December 31, 2004, "Sim-Sim" subscribers accounted for 47.2% of our subscribers in Ukraine.

Customer Payments and Billing

        Before 1997, subscribers were enrolled in a credit payment system under which they were billed monthly for their access, usage and value-added service fees. Since November 1997, we have enrolledWe enroll new subscribers, except for certain corporate clients, in an advance-payment program, under which the customersubscriber prepays a specific amount of money to cover these fees.

        We believe that customer acceptanceuse our services. As of December 31, 2004, approximately 95% of our consolidated subscriber base was enrolled in the advance-payment option is due toprogram and 5% used the high degree of automation of our customer care and billing system, which telephonically transmits reminders to add funds before service is discontinued, helping subscribers to monitor and control their mobile telephone expenses.credit system.

        Our advance-payment system monitors each subscriber account and sends a seven-day advance warning on the customer'ssubscriber's mobile telephone when the advance-payment amountbalance on the subscriber's account decreases below a certain threshold, which is approximately the average consumption by the subscriber for a ten-day period. Then the system sends a telephonic reminder or SMS twice in suchthe following seven-day period of the decreasing account balance and an additional reminder one day prior to termination, including the current level of the subscriber's remaining depositbalance and a recommendation as to the sum that should be advanced to us based on the subscriber's historical usage.






        Under the credit payment system, customers are billed monthly in arrears for their network access and usage. If the invoice is not paid within 25 days,on time, the customer may face anbe liable for a late payment charge of up to $20 late0.3% of the amount due for each day payment charge.is past due. We limit the amount of credit extended to customers based on the customer's payment history, type of account and past usage. As of December 31, 2003,2004, subscribers using the credit system of payment had a maximum credit limit of $1,000.$500. When the limit is reached, the subscriber receives an invoice, which must be paid within five days. If the subscriber fails to do so, we block the telephone number until the invoice is settled. We actively manage our subscriber base to migrate existing credit payment customers over to the advance-payment system. However, existing credit payment customers may continue onto use their old tariff plan as long as their accounts remain in good standing. As of December 31, 2003, approximately 3% of our customers used the credit system, while 97% used the advance-payment system.

        We upgraded our billing system in October 2001. Prior to this upgrade, we had experienced some negative reaction from subscribers in the Moscow license area due to the sometimes substantial time gap between the time of use and the date on which the use was actually charged to the subscriber. This time gap problem intensified as our subscriber base increased. In order to remedy this problem, we upgraded our billing system software to decrease the delay between usage and billing for subscribers in the Moscow license area. As a result of this upgrade, the time gap between usage and billing has rarely exceeded two hours, making it easier for our subscribers to keep track of their balances. However, during 2003, certain dealers and subscribers together fraudulently exploited these billing time lags by placing a sizable amount of long distance calls using subscriber accounts registered under false names. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Our failure to implement the necessary infrastructure to manage our growth could have a material adverse effect on our business and results of operations" for further description of this fraud.

        We are currently in the process of testing new billing equipment and software, and we believe that we will begin using this system for some ofmigrating our "Jeans" subscribers in late 2004. Theonto a new billing system is expectedand plan to reduce the time gap between the time of use by a subscriber and the time the use is actually charged.migrate our other subscribers in Russia onto this system during 2005.

        Our tariffs are primarily quoted in currency units equivalent to U.S. dollars, except for some regions of Russia where tariffs are quoted in rubles or the local currency.rubles. Invoices quoted in U.S. dollar-equivalent units specify the amount owed in such units and require translation into rubles in order to make payments. We offer our subscribers various ways to pay for our services, including by cash or credit card, wire transfer, on account, prepaid cards and express-payment cards.

        All tariffs for UMC subscribers are quoted in hryvnias. We offer our subscribers in Ukraine various ways to pay for our services, including by cash or credit card, wire transfer, on account, prepaid cards.

Customer Service

        We believe that to attract and retain customers, we must provide a high level of service in the key areas of customer assistance, care and billing. In most markets in which we operate, we have a call center that provides customer service 24 hours a day, seven days a week. Customer service representatives answer inquiries regarding disconnection due to lack of payment, handset operation, roaming capabilities, service coverage and billing. A special group of customer service representatives handles customer claims and assists customers who wish to change their services. In addition,

        With the aim of improving the quality of our customer service staffand optimizing our expenses, we began the reorganization of our call centers into consolidated macro-regional contact centers in 2004. The aim of the project is to transform our call centers into effective channels for client relationship management, or CRM, offering a full range of services and CRM functions.

        In connection with this reorganization, we have established a Customer Retention Department in each macro-region, which develops and implements customer retention programs. Representatives of this department handle customer claims and follow up with customers who have discontinued servicedisconnected from our network to determineunderstand the reasons for the disconnection and properly respond to help us improvethe changing needs of our services or tariff plans to accommodate subscriber needs.customers. We also have a Credit Control Department in each macro-region, which manages the bad debts and credit restrictions. In addition, we have established walk-in centers and combined offices for sales and customer service and financial control department representatives at our walk-in centers located in several of the regions where we operate to assist customers and address their questions.






        Our customers are able to automatically access their account balance information, activate certain value-added features and receive information regarding us and our services by calling, at no charge to the customer, our Automatic Customer Care System at "0880" or "767-0880." In December 1999, we also introduced a new, Internet-based service, "Customer Care System Through the Internet." This service allows subscribers to access their accounts via our Internet site and carry out, on-line, all major account activities such as payments by credit cards, viewing and delivery of itemized statements by fax or via e-mail and changes in the selection of value-added services.

        UMC subscribers are ableregions. We plan to access the information about their account balance, order additional services and receive information about UMC by calling, at no chargeimplement a segmentation approach to the customer our call center at "111" or "8-800-500-0-500."service in 2005.

Network Technology

        We believe that geographic coverage, capacity and reliability of the network are key competitive factors in the sale of mobile cellular telecommunication services. Our network is based primarily on GSM 900 infrastructure, augmented by GSM 1800 equipment. We use GSM 1800 equipment in high-use areas, because 1800 MHz base stations are more efficient in relieving capacity constraints in high traffic areas. Although there is no difference in quality between GSM 900 and GSM 1800 services,






the higher-frequency 1800 MHz signals do not propagate as far as 900 MHz signals. As a result, more 1800 MHz base stations are typically required to achieve the same geographic coverage. Accordingly, in regions where geographic coverage, rather than capacity, is a limiting factor, networks based on GSM 900 infrastructure are typically superior to those based on GSM 1800, because they require fewer base stations to achieve coverage and, therefore, cost less. In most markets, including in Russia and Ukraine, the most efficient application of GSM technology is to combine GSM 900 and GSM 1800 infrastructure in a unified network, which is commonly referred to as a dual-band GSM network.

Network Infrastructure

        We use switching and other network equipment supplied by Motorola, Siemens, Ericsson, Lucent Technologies, Huawei, Alcatel and other major network equipment manufacturers. The radio

        In the Moscow license area, we have allocated frequencies spanning 2 × 11.4 MHz of spectrum in the GSM 900 frequency band and 2 × 24.6 MHz of spectrum in the GSM 1800 frequency band for operation of a dual GSM 900/1800 network.

        In St. Petersburg and the Leningrad region, we have allocated frequencies spanning 2 × 8.0 MHz of spectrum in the GSM 900 frequency band and 2 × 18.2 MHz of spectrum in the GSM 1800 frequency band for operation of a dual GSM 900/1800 network.

        We have frequencies allocated to us for the operation of GSM 900 span 11.4 MHz of spectrum in the city of Moscow and 10.2 MHz of spectrum in the Moscow region. The frequencies allocated to us in the city of Moscow include 1.2 MHz of limited capacity spectrum with restricted emanation that we may only use in the Moscow underground or in a microcell to enhance coverage and capacity within buildings. During 2001, we returned 3.2 MHz of limited capacity spectrum with restricted emanation to the Ministry of Information Technologies and Communications to allow research into the joint use of frequency spectrum by cellular operators. In addition, we have frequencies spanning 24.6 MHz of spectrum in the Moscow license area for operation of GSM 1800 base stations.

frequency bands in all regions of Ukraine. The radio frequencies allocated to us for the operation of GSM 900 span 8 MHz of spectrum in the city of St. Petersburg. We also have frequencies spanning 18.2 MHz of spectrum in the St. Petersburg license area for operation of GSM 1800 base stations.

        In Ukraine, the radio frequencies allocated to us for the operation of GSM 900 span from 5.6 MHz of spectrum in the Kiev and Zakarpattya regions to 10.4 MHz in Kiev city. We also have been allocated frequencies spanning from 1023.2 MHz in the Ivano-FrankovskTchernigov region to 52.861.6 MHz in the Dnepropetrovsk region for operation of GSM 1800 base stations. We have yet to be allocated frequencies in eight regions of Ukraine. In addition, we have applied for an additional 247.2137.6 MHz of GSM 1800 MHzfrequency allocations for all19 major license regionsareas in Ukraine and intend to apply for additional frequency allocations in the 1800 MHz band.

        We believe that we have been allocated adequate spectrum in each of our license areas.






GPRS and Internet Access

        In September 2000,many regions we began installing GPRS equipment in the Moscow license area, and we currently have enough GPRS softwareupgraded our network to support a majority of our base stations in the Moscow license area. In May 2003, we launched GPRS in the Moscow license area as a value-added service. GPRS technology permitsenable us to offer GPRS services, which permit our subscribers access to the Internet, WAP and MMS. We have also installedAs of December 31, 2004, GPRS technology in several of our regional license areas in Russia, and we currently offer GPRS in test mode free of chargeservices were available to our subscribers in those regions. We intend to examine its commercial viability as a pay service in those23 regions in Russia, including major metropolitan areas such as Moscow, St. Petersburg and Novosibirsk. We also offered GPRS services in all regions of Ukraine. In addition, we introduced international GPRS roaming to our subscribers in 2004, enabling them to use various GPRS-based services while traveling abroad.

        In 2004, we entered into an exclusive strategic partnership with NTT DoCoMo under which we will launch the future.i-mode mobile internet platform in Russia by the end of 2005. Through i-mode, subscribers are offered easy access to numerous internet sites with premium content, email and other applications using specialized handsets developed especially for i-mode users. We plan to initially launch i-mode in Moscow and St. Petersburg, with gradual expansion into the other regions of Russia and into the other CIS countries where we operate.

        We also entered into an agreement with In Motion in May 2005 to offer BlackBerry services to our subscribers in Russia. BlackBerry, which we plan to launch by the end of 2005, will enable our subscribers to easily access e-mail, phone, text messaging, Internet, organizer and corporate data applications from a single, integrated device. It will operate on our GSM/GPRS network in Russia with international roaming supported in the countries where we have GPRS roaming agreements.

        In addition, we launched a trial program for our EDGE services in February 2002, we began providing GPRSthe Samara region in test mode freeDecember 2004. EDGE is a high-speed, high-quality data transfer application capable of charge for a limited number of subscribers in Kiev area. In July 2003, we begantransmitting streamline video and TV programs onto mobile phones. We plan to offer commercial GPRS as a value-added service for contract users in seven ofexpand EDGE services to cover the largest cities in Ukraine. Beginning in 2004, we extended GPRS coverage to each area in Ukraine in whichmost developed markets where we operate. In November 2003, we began offering GPRS-based services to our pre-paid tariff plan subscribers in Ukraine.




Third-Generation Technology

        Third-generation networks, using UMTS technology, will allow subscribers to send video images and access the Internet using their handsets at transmission speeds of up to 2,000 Kb2 Mbps per second. We currently operate onehave conducted trials of four experimental third-generation networks existing in the Russian Federation utilizing rented network equipment. The 3G Association, an industry group charged with advising the GovernmentMinistry of Information Technologies and Communications of the Russian Federation on the procedure for allocating third-generation licenses and regulating third-generation operations, has proposed that we, Vimpelcom and MegaFon each be issued a third-generation license, and that a fourth license be issued to a fourth operator. ThoughAlthough the Government wasgovernment is expected to announce the license allocation procedure during the second half of 20022005 and issue the licenses during 2003,2006, to date, no allocation procedures have been announced. We estimate thatcurrently do not include the costs for the initial buildout of our third-generation network in our capital expenditure plans and, at present, cannot estimate the Moscow license areaexpenditures that will require an investment of $60.0 million to $100.0 million.be required.

Base Station Site Procurement and Maintenance

        The process of obtaining appropriate sites requires that our personnel coordinate, among other things, site-specific requirements for engineering and design, leasing of the required space, obtaining all necessary governmental permits, construction of the facility and equipment installation. WeIn Russia, we use site development software supplied by Lucent Technologies to assess new sites so that the network design and site development are coordinated. Our own software in Russia and Ukraine can create digital cellular coverage maps of our license areas, taking into account the peculiarities of the urban landscape, including the reflection of radio waves from buildings and moving automobiles. Used together, these software tools enable us to plan base station sites without the need for numerous field trips and on-site testing, saving us considerable time and money in our network buildout.

        Base station site contracts are essentially cooperation agreements that allow us to use space for our base stations and other network equipment. The terms of these agreements range from one to 49 years, with the term of a majority of agreements being three to five years. Under these agreements, we have the right to use premises located in attics or on top floors of buildings for base stations and space on roofs for antennas. We pay the lessor in cash or with telephones that provide a specified amount of free usage or a combination of both, which is accounted for on the basis of standard rates. In areas where a suitable base station site is unavailable, we construct towers to accommodate base station antennae. We anticipate that we will be able to continue to use our existing GSM 900 base station sites and to co-locate GSM 1800 base stations at some of the same sites.

        To provide quality service to subscribers, our maintenance department, staffed 24 hours per day, performs daily network integrity checks and responds to reported problems. Our technicians inspect base stations and carry out preventative maintenance at least once every six months.






Interconnect Arrangements and Telephone Numbering Capacity

        Cellular operators must interconnect with local, inter-city and international telephony operators to obtain access to their networks and, via these operators, to the networks of other operators around the world. We have local interconnection agreements, including agreements for the provision of telephone numbering capacity, with several telecommunications operators in Moscow and in the other regions and in Ukraine, including the public switched telephone network operator in the city of Moscow, MGTS, as well as MTU-Inform, majority owned by MGTS, Telmos, a joint venture of MGTS with Sistema and Rostelecom, and Ukrtelecom, UTEL, Golden Telecom and other public switched telephone network operators in Ukraine. See "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions" for additional information regarding these operators. For use of 11-digit telephone numbering capacity and the associated interconnection, we have agreements with Rostelecom. Local interconnection typically entails payment of a one-time connection fee, a monthly fee per subscriber connected and a usage charge based on minutes of traffic, or some combination thereof.






        To provide our subscribers in Russia with domestic long-distance services, we have interconnection agreements with Rostelecom and Interregional Transit Telecom and, to provide international services, with Rostelecom and Golden Telecom. MTU-Inform and Telmos also provide domestic long-distance and international services through interconnection with the RostelecomRostelecom's network. Most interconnection fees are based on usage by minute and vary depending on the destination called.

        Russian legislation requires that public switched telephone networks may not refuse to provide interconnection or discriminate against one operator in comparison to another; in practice, however, it has been our experience that some regional network operators do discriminate among mobile cellular operators by offering different interconnection rates to different mobile operators. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we cannot interconnect cost-effectively with other telecommunications operators, we may be unable to provide services at competitive prices and therefore lose market share and revenues." Certain interconnection fees are subject to government regulation, such as those set by Rostelecom.

        AThe Ministry of Information Technologies and Communications has allocated special numbering codes for "federal" 11-digit telephone numbers on a non-geographical basis for all cellular operators. We believe that we have been allocated sufficient numbering capacity for the development of our network. However, a combination of regulatory, technological and financial factors has led to the limited availability of local"local" 7-digit telephone numbering capacity in Moscow and the Moscow region. Moscow's "095" code and the Moscow region's "096" code have already reached numbering capacity limits. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Industry—The public switched telephone networks have reached capacity limits and need modernization, which may inconvenience our subscribers and may require us to make substantial investments in public switched telephone networks." To meet subscriber demand and provide for an adequate inventory of numbering capacity, we have purchasedentered into contracts with local fixed-line providers for allocation of numbering capacity from various vendors for cash.to us. These contracts are now under review by the Ministry of Information Technologies and Communication and are subject to change in order to comply with new legislative requirements. Our right to use this numbering capacity ranges from five years to an unlimited period of time. As of December 31, 2003,2004, we had numbering capacity (federal and local) for over 4.715.4 million subscribers in the Moscow license area. For a description of how we amortize the acquisition costs of numbering capacity, see Note 2 to our audited consolidated financial statements.

        To fosterIn accordance with legislation, interconnection and traffic transit between the growthnetworks of telecommunications in Russia and to increase the telephone numbers available to GSMcellular operators in Russia is organized through the Russian government has devised a plan to link all GSMnetwork of Interregional Transit Telecom, or MTT, one of the largest alternative operators in Russia, by meansor through direct channels connecting the switches of a national network. As envisioned, this network would be based around eight hubs to be linked together through fiber-optic cable connections. In accordance with a ministerial decree, we were appointed a coordinating operatorthe different cellular operators located in the Central region of Russia. We expect that we and other GSM operators in Russia will, if and when this national network is implemented, be able to decrease reliance on current interconnection arrangements.one city.

        In Ukraine, mobile operators are allocated numbering capacity by the SCCI.NCRC. We believe that we have been allocated sufficient numbering capacity in Ukraine for the development of our mobile






network. However, the numbering capacity for fixed network development (if we decide to utilize a local license granted to UMC) is insufficient.

Network Monitoring Equipment

        Through ourWe have operation and maintenance centercenters in Moscow, weSt. Petersburg, Nizhny Novgorod, Samara, Ekaterinburg, Omsk, Tomsk, Novosibirsk, Irkutsk, Kazan, Ufa, Krasnoyarsk, Chita, Blagoveshchensk, Vladivistok and Yuzhno-Sakhalinsk. We constantly control and monitor the performance of our network, and our call completion rate.rate and other major key technical performance indicators. We use our monitoring systems to optimize our network and to locate and identify the cause of failures or problems, and also to analyze our network performance and obtain network statistics. We have agreements with ourdifferent suppliers for technical support services that allow us to obtain their assistance in trouble shooting and correcting problems with our network within the warranty period.






        Our networknetworks in Ukraine isand Uzbekistan are monitored by our Kiev and Tashkent operations and maintenance center.centers, respectively. In addition to monitoring performance of the network, our Kiev and Tashkent operations and maintenance center analysescenters analyze network quality parameters and providesprovide reports and recommendations to management.

Handsets

        To receive service from us, subscribers must have a handset that can be used on our network. New subscribers who do not own a GSM handset must buy one, either directly from us or from an independent dealer. We and our dealers also offer an array of mobile telephone accessories, with the average new subscriber spending between $12$5 to $50 on such accessories in addition to the cost of the handset.

        Since July 1998, we have offered subscribers dual-band GSM 900/GSM 1800 handsets. These dual-band handsets are currently in widespread use on networks in Western Europe and, because they send and receive communications on both GSM 900 and GSM 1800 frequencies, they can relieve possible congestion on our network and increase the ability of our customers to roam. The share of dual-band handsets has increased from approximately 1% of our total handset sales in 1998 to approximately 100% in 2003. We also offer our subscribers tri-band handsets. These handsets, which function in the GSM 900, GSM 1800 and PCS-1900 standards, provide users with greater automatic roaming possibilities in Russia, Europe, the United States and Canada. During 2001, we responded to competitive pressure by introducing limited handset subsidies. Our handset subsidies in Russia for the year ended December 31, 20032004, were not significant. For the year ended December 31, 2003,2004, we provided net handset subsidies of $34.9$52.7 million in Ukraine. These subsidiaries are expected to be compensated within two years of a subscriber's enrollment though the subscriber's usage of our services. However, in view of the experience and practice of mobile services providers in more mature markets, increased competition may compel us to more heavily subsidize handsets in the future. We are also consideringIn December 2004, we launched a new marketing initiative in Russia under which we wouldbegan to sell MTS-branded low-end handsets. These handsets are not subsidized.

        We have entered into arrangements with Sony Ericsson, Nokia, Motorola, Philips, Panasonic, Samsung, Siemens, Benefon, Alcatel and Alcatelothers to purchase handsets. We offer approximately 80 GSM 900/GSM 1800 handset models, the majority of which are manufactured by Sony Ericsson, Nokia, Siemens and Motorola. We are not dependent on any particular supplier for handsets. The handset manufacturers provide training to our sales force, customer service personnel, dealers and engineering staff and cooperate with us on marketing and promotion. To ensure quality control and to maintain the MTS brand image, we encourage our dealers to purchase handsets for use on our network directly from us. Typical dual-band handsets range in cost from approximately $55$50 to $689.$650.






Regulation in the Russian Federation

        In the Russian Federation, the federal government regulates telecommunications services. The principal law regulating telecommunications in the Russian Federation is the Federal Law on Communications, which provides, among other elements, for the following:

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licensing of telecommunications services;



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requirements for obtaining a radio frequency allocation;



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equipment certification;



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equal rights for individuals and legal entities, including foreign individuals and legal entities, to offer telecommunications services;



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fair competition;




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freedom of pricing other than pricing by companies with monopoly power; and



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liability for violations of Russian legislation on telecommunications.




        The new Federal Law on Communications came into force on January 1, 2004 and replaced the law of 1995 regulating the same subject matter. The Federal Law on Communications creates a framework in which government authorities may enact specific regulations. Regulations enacted under the legislative framework in place prior to enactment of the new Federal Law on Communications continue to be applied to the extent they do not conflict with the Federal Law on Communications. In the transition period before these regulations are put in compliance with the new Federal Law on Communications,law, it is not clear how they would interact with provisions of the new law.

        The new Federal Law on Communications,law, which confers broad powers to the state to regulate the communications industry, including the allocation of frequencies, the establishment of fees for frequency use and the allocation and revocation of numbering capacity, significantly modifies the system of government regulation of the provision of communications services in Russia. In particular, while under the previous law the Ministry of Information Technologies and Communications issued licenses for the provision of mobilewireless communications services at its own discretion, under the new Federal Law on Communications,law, licenses to provide communications services in territories where frequency and numbering capacity are limited may be issued only on the basis of a tender. In addition, the new Federal Law on Communicationslaw provides for the establishment of a "universal services reserve fund" to be funded by a levy imposed on all telecommunications service providers, including us. See "Item 3. Key Information—D. Risk Factors—Risks Relating to the Russian Federation and Ukraine—Risks Relating to the Legal System and Legislation in Russia and Ukraine—Risks—The implementation of the new Federal Law on Communications and the new Ukrainian Law on Telecommunications will impose an additional financial burden on us, which may materially adversely affect our financial condition and results of operations." The new Federal Law on Communicationslaw also attempts to simplify the succession of licenses to merged or otherwise reorganized companies by instituting a notification requirement,license re-issuance procedure, whereas under the previous law, merged or reorganized companies were required to apply to the Ministry of Information Technologies and Communications for the reissuanceissuance of thea new license in such circumstances.

Regulatory authoritiesAuthorities

        The Russian telecommunications industry is regulated by several governmental agencies. These agencies, whose functions are not always clearly defined, form a complex, multi-tier system of regulation that resulted, in part, from the implementation of the Federal Law on Communications, as well as from the March 2004 large-scale restructuring of the Russian government. The system of regulation is still evolving and further changes are expected. See "Item 3. Key Information—D. Risk Factors—Risks Relating to the Russian Federation and Ukraine—Political and Social Risks—Governmental




Political and governmental instability could materially adversely affect the value of investments in Russia and Ukraine and the value of our securities."

        The Ministry of Information Technologies and Communications is the federal executive body that develops and supervises the implementation of governmental policy in the area of communications and coordinates and controls the activities of its subordinate agencies. The Ministry may issue regulations in the area of communications if authorized to do so by federal legislation (including presidential and governmental decrees).

        The following bodies, each of which is subordinate to the Ministry of Information Technologies and Communications, also regulate the telecommunications industry.

        The Federal Service for Supervision in the Area of Communications is a federal executive body that supervises and controls certain areas of communications and information technologies, including:

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the issuance of licenses and permissions in the area of communications and informatization;



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the registration of radio frequency allocations, radio-electronic and high-frequency equipment;



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the technical supervision of networks and network equipment throughout Russia;




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the monitoring of compliance by network operators with applicable regulations, terms of their licenses and terms of the use of frequencies allocated to them; and



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the enforcement of equipment certification requirements.

        The Federal Agency of Communications is a federal executive body that implements governmental policy, manages federalstate property and provides public services in the area of communications, including:

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the allocation of numerical resources and radio frequencies for civilbased on decisions taken by the State Radio Frequencies Commission and commercial use;registration of such allocations;



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the allocation of numerical resources;



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the certification of equipment for compliance with technical requirements;



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the examination of electromagnetic compatibility of equipment with existing civil radio-electronic equipment; and



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the organization of tenders with respect to licenses in the maintenance and developmentsphere of federal communications and national information and telecommunications infrastructure.communications.

        State Radio Frequencies Service.    The State Radio Frequencies Service issues frequency permits. As part of this process, the State Radio Frequencies Service obtains consents from other federal authorities for a particular frequency allocation, including consents from the Ministry of Defense and civil aviation authorities.

State Radio Frequencies Commission.The State Radio Frequencies Commission is primarilyan inter-agency coordination body acting under the Ministry of Information Technologies and Communications which is responsible for the developmentregulation of radio frequency spectrum and implementation ofdevelops a long-term policy for frequency allocation.allocation in the Russian Federation.

        PursuantOther regulatory authorities.In addition, the Federal Antimonopoly Service supervises competition regulations and enforces the Federal Law on the Natural Monopolies and the regulations enacted thereunder. The Federal Tariffs Service regulates certain tariffs in the sphere of telecommunications, including the tariffs on the local and DLD calls by subscribers of PSTNs and installation and subscription fees. The Federal Service for Supervision in the Area of Consumer Rights Protection and Human Well-Being is responsible for the enforcement of sanitary regulations, including some authority over the location of telecommunications equipment, and supervises the compliance of companies with the regulations relating to the March 2004 governmental restructuring, the statutory powersprotection of the State Radio Frequencies Service and the State Radio Frequencies Commission were effectively reassigned by the government to other regulatory authorities. It is therefore anticipated that further changes to the regulatory structure will be forthcoming.consumer rights.

Licensing of telecommunications servicesTelecommunications Services and radio frequency allocationRadio Frequency Allocation

        Telecommunications licenses are issued based on the Regulations on Licensing in the Field of Telecommunications in the Russian Federation, enacted in June 1994, as amended, and, with regard to mobilewireless telecommunications services, on the Approval of Regulations for Holding a Competitive Tender for Receipt of Licenses Associated with the Provision of Cellular Radiotelephone Services, enacted in June 1998. Under these regulations, licenses for telecommunications services were issued and renewed for periods ranging from three to fifteen years. Under the new Federal Law on Communications,law, effective January 1, 2004, licenses may be issued and renewed for periods ranging from three to twenty-five years. Several different licenses to conduct different communication services may be issued




to one entity. Provided the licensee has conducted its activities in accordance with the applicable law and terms of the license, renewals may be obtained upon application to the Federal Service for Supervision in the Area of Communications. Government officialsOfficials of the Federal Service for Supervision in the Area of Communications have broad discretion with respect to both issuance and renewal procedures.

        A company must complete a multi-stage process before the commercial launch of its communications network. A company must:

•

obtain approval to use specific frequencies within the specified band from the State Radio Frequencies Service if providing mobile telecommunications services;



•

receive a license from the Federal Service for Supervision in the Area of Communications to provide communications services;



•

obtain approval to use specific frequencies within the specified band from the State Radio Frequencies Commission and the Federal Agency of Communications if providing wireless telecommunications services; and



•

obtain permission from the Federal Service for Supervision in the Area of Communications for network operations. To receive this permission, a mobilewireless telecommunications services provider must develop a frequency allocation and site plan, which is then reviewed and certified by the Federal Service for Supervision in the Area of Communications for electromagnetic compatibility of the proposed cellular network with other radio equipment operating in the license area. The Federal Service for Supervision in the Area of Communications has discretion to modify this plan, if necessary, to ensure such compatibility.

        Under the old Federal Law on Communications and related licensing regulations, the transfer of a license, including assignment or pledge of a license as collateral, was prohibited except for transfer of licenses for the provision of mobilewireless telecommunications services awarded through a competitive tender. Effective January 1, 2004, the prohibitions on the transfer of licenses were relaxed and, in particular, in case of mergers, licenses may be re-issued upon notificationapplication by a transferee as a new license holder following the transfer. Additionally, the governmentMinistry of Communications has declared that agreements on the provision of telecommunications services must be concluded and performed by the license holder.

        If the terms of a license are not fulfilled or the service provider violates applicable legislation, the license may be suspended or terminated. Licenses may be suspended for various reasons, including:

•

failure to comply with the Russian law andor the terms and conditions of the license;



•

failure to provide services for over three months from the start-of-service date set forth in the license; and



•

annulment of a frequency allocation if it prevents from renderingresults in the inability to render communications services.

        In addition, licenses may be terminated for various reasons by the court, including:

•

failure to remedy in a timely manner a violation that led to the suspension of the license;



•

provision of inaccurate information in documents on the basis of which a license was issued; and



•

failure to fulfill obligations undertaken in the process of a tender or auction.

        The license may also be terminated in a number of cases, including liquidation of a license holder or failure to pay a license fee on time. A suspension or termination of a license may be appealed in court.

        Frequencies are allocated for a maximum term of ten years, which may be extended upon the application of a frequency user. Under the new Federal Law on Communications, frequency allocations may be changed for the purposes of the state management, defense, security and protection of legal order in the Russian Federation with compensation of losses to the license holder out of such change.to be compensated for related losses. Further, a frequency allocationallocations may be suspended or terminated infor a number of cases,reasons, including failure to comply with the conditions on which a frequency was allocated.






        The following one-time license fees are payable in respect of each region covered by the license; 15,000 rubles, (approximately $500), for services involving use of a frequency spectrum, lease of communication channels running beyond one Russian region of Russia as well as in number of other cases specified by law; and 1,000 rubles in other cases. The license fee for a license received through a tender or auction is determined by the terms of such tender or auction.






        In addition to licensing fees, a government decree enacted on June 2, 1998 requires payment of fees for the use of radio frequencies for cellular telephone services. The payment procedure was established by a government decree enacted on August 6, 1998, which requires that all mobilewireless telecommunications services operators pay an annual fee set by the State Radio Frequencies Commission and approved by the Federal Antimonopoly Service for the use of their frequency spectrums. Finally, accordingAdditionally, as prescribed in government decree No. 223 on Reorganization of the System of State Surveillance over Telecommunications, dated April 26, 2004, operators must make monthly payments to fund supervisory services in the communications sphere. In 2004, this fee amounted to 0.3% of revenues generated from the provision of communications services. The fee was abolished from 2005. In addition, the new Federal Law on Communication contemplates an industry-wide levy to finance the provision of universal communication services. According to a government decree enacted on April 28, 2000, all communications21, 2005, operators mustare required to make monthlyquarterly payments to fund the operations of the Federal Service for Supervision in the Area of Communications. These fees are fixed by the government in the amount of 0.3%1.2% of the difference between their total revenues generated by rendering communicationsand revenues that resulted from interconnection services. The new Federal Law on Communication provides for the establishment of a "universal services reserve fund" to be funded by a levy imposed on the telecommunications services providers, including us. See "Item 3. Key Information—D. Risk Factors—Risks Relating to the Legal System and Legislation in RussiaRussian Federation and Ukraine—Legal Risks—The implementation of the new Federal Law on Communications and the new Ukrainian Law on Telecommunications will impose an additional financial burden on us, which may materially adversely affect our financial results.condition and results of operations."

        The new Federal Law on Communications empowers the Russian Governmentgovernment to determine and annually review the list of licensing conditions. Licenses also generally contain a number of other detailed conditions, including a date by which service must begin, technical standards and a schedule of the number of subscribers and percentage coverage of the licensed territory that must be achieved by specified dates. We have either commenced service by the applicable deadline or received an extension of the applicable deadline for all of our licenses.

Equipment certificationCertification

        Telecommunications equipment must be certified to be used in the interconnected communications network of the Russian Federation, which includes all fixed-line and mobilewireless networks open to the public. All networks of our telecommunications subsidiaries must be certified. A government decree on Regulation of Use of Equipment in the Interconnected Telecommunications Network, enacted on August 5, 1999 gives the Ministry of Information Technologies and Communications and the Federal Antimonopoly Service the right to restrict the use of certain equipment, including equipment manufactured outside Russia, and to set the technical requirements for the equipment used in the interconnected telecommunications network. The Federal Agency of Communications issues certificates of compliance with technical requirements to equipment suppliers based on the Agency's internal review. In addition, a Presidential decree requires that licenses and equipment certifications be obtained from the Federal Security Service to design, produce, sell, use or import encryption devices. Some commonly used digital cellular telephones are designed with encryption capabilities and must be certified by the Federal Security Service.

        Further, allcertain high-frequency equipment, defined as involving frequencies in excessa list of 9 kHz,which was approved by Government Resolution No. 539 of October 12, 2004, manufactured or used in the Russian Federation requires special permission from the Federal Service for Supervision in the Area of Communications. These permissions are specific to the entity that receives them and do not allow the use of the equipment by other parties.

Competition, Interconnection and pricingPricing

        The Federal Law on Communications requires federal regulatory agencies to encourage competition in the provision of communication services and prohibits the abuse of a dominant position




to limit competition. The Federal Law on Communications provides that telecommunications tariffs may be regulated in cases provided for by legislation. Presidential Decree No. 221, enacted on




February 28, 1995, on Measures for Streamlining State Regulation of Prices (Tariffs), and a government decree enacted on October 11, 2001, allow for regulation of tariffs and other commercial activities of telecommunications companies that are "natural monopolies."

        Under Russian law, Government Decree No. 332, dated June 30, 2004, authorized the Federal AntimonopolyTariffs Service to set the following tariffs for the natural monopolies in the communication market:

•

installation fees;



•

monthly subscription fees; and



•

local call charges, including per-minute charges, if used by the operator.

        In accordance with the Federal Law on Natural Monopolies, the Federal Tariffs Service maintains a Register of Natural Monopolies.Monopolies whose tariffs are controlled and regulated by the state. A telecommunications operator may be included in this register if: (1) there is no other operator providing similar servicesupon the decision of the Federal Tariffs Service based on the Service's analysis of the operator's activities and (2) the operator is properly licensed.market conditions. At present, none of our subsidiaries is included in the Register of Natural Monopolies.

        The Federal Antimonopoly Service is authorized by law to maintain a register of companies holding a market share in excess of 35%. Companies entered in this register may become subject to certain restrictions in conducting their business, including limitations in decisions relating to price formation, geographical expansion, associations and agreements with competitors. Acquisitions of assets or shares in or by other entities involving such companies are subject to particular scrutiny by the Federal Antimonopoly Service. As of July 25, 2003,December 31, 2004, MTS OJSC and its subsidiaries CJSC Kuban-GSM, Tomsk Cellular Communications LLC, CJSC Siberian Cellular System-900 and CJSC UDN-900 are categorized by the Federal Antimonopoly Service has categorized us and our subsidiaries Tomsk Cellular Communications, CJSC Kuban-GSM and UDN 900 as companies with a market share exceeding 35%. See also "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Risks Relating to Our Industry—If we wereare found to have a dominant position in our markets, the government may regulate our tariffs and restrict our operations."

        The Federal AntimonopolyTariffs Service also has certain oversight authority with regard to rates between certain regional telephone operators, long-distance provider Rostelecom and mobile operators. In addition, Russian legislation requires that operators of PSTNs may not refuse to provide connections or discriminate against one operator in favor of another. However, a regional fixed-line operator may charge different interconnection rates to different mobile operators. Notwithstanding the above, fixed-line operators not included in the Register of Natural Monopolies, as well as mobile operators, are free to set their own tariffs.

Regulation in Ukraine

Regulatory Authorities

        The State Department on Communications and Informatization, or SDCI (formerly the State Committee on Communications and Informatization, or SCCISCCI), formerly the Ministry of Information Technologies and Communications, regulatesregulated the telecommunications industry through December 31, 2004 largely through the issuance of regulations, andestablishment of requirements relating to the issuance of all licenses for the provisionquality of telecommunications services in Ukraine for all standards and technologies.technical requirements relating to telecommunications networks and facilities. The SCCISDCI also allocates funding for the telecommunications industry and overseesoversaw the technical condition and development of the telecommunications industry, including the licensingdevelopment of standards and technical rules and supervision of the GSM, D-AMPS, NMT and TDMA networks. The SDCI was established in September 2004 as a division of the Ministry of Transport and Communications of Ukraine, or MTCU. The MTCU was established in July 2004 as a result of the merger of the Ministry of Transport and the SCCI. The SDCI is headed by a director nominated by the Minister of Transport and Communications and appointed by the Cabinet of Ministers of Ukraine. Following the establishment of the NCRC in January 2005, which, as described below, assumed most of the SDCI's functions, the SDCI remains responsible mainly for establishing and overseeing technical policies and standards.




        The National Commission for the Regulation of Communications, or NCRC, established by the new Telecommunications Law described in "—Legislation" below, will beis an independent regulatory body consisting of 7seven members and a chairperson and must be formed before the end of 2004.chairperson. The members and chairperson of the NCRC will beare nominated by the Prime Minister and appointed by the President of Ukraine for a five-year term. The NCRC will beis responsible for issuing licenses for telecommunication services commencing January 1, 2005 and will take overas well as various other responsibilities of the SCCISDCI from that date. The SCCI,SDCI, on the other hand, will remainremains responsible mainly for establishing and overseeing technical policies and standards.






The appointment of the initial members of the NCRC in January 2005 by the former Prime Minister of Ukraine was challenged in court by the new Ukrainian government that came into power on January 23, 2005. As a result of this challenge, the NCRC has been unable to commence operations.

The State Center for Radio Frequencies of Ukraine, or SCRF.While licenses for radio frequencies for mobilewireless communications are issued by the SCCI,NCRC, SCRF is the authority responsible for all technical issues related to the use of radio frequency resources and, in such capacity, is also involved in the issuance of radio frequency licenses. In particular, the SCRF determines frequency availability and the technical aspects of frequency allocation, as well as provides the SCCINCRC with an expert opinion in relation to each application for radio frequency. The SCRF also monitors use of the frequencies and will continue monitoring compliance with the license terms and physically inspectsinspecting operators and providers of telecommunications services.services until the establishment of the State Inspection of Communications, as described below. The SCRF also independently issues individual permissions for the use of radio-electronic and radio-emitting equipment, its development, import, sale and purchase.

        The Inter-Agency Commission on Radio Frequencies UseState Inspection of Communications, or the SIC is an advisory body, established by the new Telecommunications Law, will be a division of the NCRC. The SIC will be responsible for the SCCI, which provides recommendations ongeneral supervision of the telecommunications market and the use of radio frequency resources. The SIC will also monitor compliance with license applicationsterms, physically inspect operators and decides on whether public tenders forproviders of telecommunications services and, together with the license should be held.SCRF, review cases relating to administrative violations in the areas of telecommunications and radio frequencies. The SCRF will perform the functions of the SIC until the SIC's establishment.

Legislation

        The principal legislation regulating the telecommunications industry consists of the Law on Telecommunications dated November 18, 2003, or the Telecommunications Law, and the Radio Frequencies Law dated June 1, 2000, as amended, or the Radio Frequencies Law.

The Radio Frequencies Law sets forth comprehensive rules regarding the allocation, assignment, interrelation and use of radio frequencies, the licensing of the users of radio frequencies and other relevant issues. However, the Radio Frequencies Law has not yet been reformed to match reforms madewas amended in other areas of the telecommunications market.its entirety in June 2004.

        The Telecommunications Law has yet to be implemented and as the NCRC ishas yet to commence its duties. Thus, as of the date of this document, the NCRC has not yet formed, the SCCI will continue to regulatecommenced regulating the telecommunications area and issueissuing telecommunications licenses, through December 31, 2004.and no other regulatory authority has been designated under the law to perform these functions. Regulations implementing the 1995 Communications Law (now repealed) and the Radio Frequencies Law prior to its amendment are still in effect, as are certain regulations enacted prior to the 1995 Communications Law and the Radio Frequencies Law. Telecommunications operators are required to comply with the Telecommunications Law and the Radio Frequencies Law, as well as with the older regulations to the extent that such regulations do not conflict with the Telecommunications Law or the 2004 amendments of the Radio Frequencies Law. Consequently, the current regulatory environment for telecommunications in Ukraine is complicated and uncertain.

        The Telecommunications Law provides for, among other things, equal rights for individuals and legal entities, including foreign entities, to offer telecommunications services, fair competition and freedom of pricing. The Telecommunications Law also sets forth the legal, economic and organizational framework for the operation of companies, associations and government bodies forming part of the






telecommunications and postal networks. The licensing of telecommunications services, the requirements for equipment certification and liability for violations of Ukrainian legislation on telecommunications are also determined by this legislation. The Telecommunications Law also governs the relations between the state and local governmental bodies, telecommunications operators organizations, and users of telecommunications services and radio frequencies.

        The Telecommunications Law addresses new areas of telecommunications services in Ukraine, including numbering requirements, tariff and settlement regulations, interconnection, public telecommunication services, market access rules and licensing issuance and renewal. The Telecommunications Law also significantly expands the definition of the telecommunication services market, including in its scope Internet Protocol telecommunications, transmission of data and facsimile communications.

        The Telecommunications Law also restructured the regulatory bodies governing the area of telecommunications. It provided for the creation of the NCRC, which, as of January 1, 2005, will beis assigned many powers currentlyfunctions previously held by the SCCI.SDCI. The NCRC will beis authorized,inter alia, to issue






regulations for the telecommunications services, issue telecommunications licenses to operators and providers, issue frequency licenses, request information from operators, providers and authorities, impose administrative penalties and maintain the register of the operators and providers. The NCRC willis also be authorized to conduct hearings and to resolve disputes among operators concerning the interconnection of telecommunications networks. The powers of the SCCISDCI in the telecommunications area will beare now relegated primarily to that of technical standards overseer. The SCCI, however, will retain the authority to issue licenses for radio frequency.

        Foreign investments in Ukrainian telecommunications operators are not limited.limited; however, in order to provide telecommunications services in Ukraine an entity must be located on the territory of Ukraine and registered in accordance with Ukrainian legislation.

        The Radio Frequencies Law sets forth comprehensive rules regarding the allocation, assignment, interrelation and use of radio frequencies, the licensing of the users of radio frequencies and other relevant issues. The 2004 amendments to the Radio Frequencies Law introduced new procedures for issuance, re-execution and termination of frequency licenses and operation permits.

Licensing of Telecommunications Services and Radio Frequency Allocation

        Ukrainian legislation provides for two types of telecommunications licenses: telecommunications licenses and frequency licenses. The SCCI issuesPrior to January 1, 2005, the SDCI issued telecommunications and frequency licenses based on the Law on Licensing Certain Types of Business Activity dated June 1, 2000, the Telecommunications Law and the TelecommunicationsRadio Frequencies Law. Commencing January 1, 2005, the NCRC will assumehas assumed responsibility for issuing telecommunications licenses and frequency licenses pursuant to the Telecommunications Law. The SCCI also issuesLaw and the frequency licenses based on the Law on Licensing Certain Types of Business Activity and2004 amendments to the Radio Frequencies Law.

        Telecommunications licenses are issued for the following specific types of telecommunications services:

•

fixed telephone (local, intercity, international) communication services;



•

mobile telecommunications services;



•

technical maintenance and exploitation of telecommunications networks and the lease of electric communications channels; and



•

intercity and international telecommunications services.




        Other telecommunications services do not require licenses.

        An operator that is granted a telecommunications license may not commence the provision of mobilewireless telecommunications services until it receives a frequency license. The issuance of a frequency






license is, in turn, subject to the availability of radio frequencies in the respective regions of Ukraine. Frequency licenses are issued for specific bandwidths within certain frequency spectrums in specific regions. The GSM spectrum is presently considered to be the most commercially attractive for telecommunications operators. It is currently deemed to be virtually impossible to obtain a license for GSM frequencies in major Ukrainian cities because most of the GSM radio frequencies in such cities are already licensed to the existing GSM operators, including us.

        Under applicable legislation, licenses for telecommunications services may be issued and renewed for periods of not less than 5five years, with the actual period generally ranging from 10 to 15 years. Renewal of a license is made by an application submitted to the SCCINCRC at least 4four months prior to the expiration of the license term. SCCINCRC officials have fairly broad discretion with respect to both the issuance and the renewal of licenses. According to theThe Telecommunications Law from January 1, 2005, licenses will be issued and renewed by the NCRC. The law further provides that the NCRC must award licenses on a first come-first serve basis within 30 days from submission of an application.

If resources are limited or consumer interests so require, the SCCINCRC may adopt a decision to limit the number of licenses. In this event, the law requires that such decision be made public along with the rationale and that the licenses be allocated through a tender.

        With respect toIn accordance with the Radio Frequencies Law, the NCRC issues a frequency license concurrently with the issuance of the license for the type of telecommunication services requiring use of radio frequencies,frequency resources. A telecommunications operator that has a respective telecommunications license may apply for licenses for additional radio frequency bands. Frequency licenses may not be issued for a period shorter than the process has three steps: first, the applicant must secure allocationterm of the radio frequency by the SCCI (which grants frequency based upon the expert opinion of the SCRF); second, the license is issued by the SCCI (upon the recommendation of the






Inter-agency Commission on Radio Frequencies Use); and third, the SCRF provides technical assignment of the radio frequency.relevant telecommunications license.

        Under applicable legislation, a public tender or an auction for a radio frequency license must be held by the NCRC if there are several applicationsdemand for a license for an activity associated withradio frequency resources exceeds available resources. Radio frequency licenses issued on the usebasis of a limited resource. The decision to holdpublic tender or an auction is made byfor the Inter-Agency Commission on Radio Frequencies Use,same type of radio technology must include identical conditions regarding the radio frequency bands and the auction is organized and held by the SCCI.development period.

        Applicable legislation prohibits the transfer of a license by the licensee, including by means of assignment or pledge of a license as collateral, and agreements regarding the provision of telecommunications services must be executed and performed by the actual licensee.

        Licenses generally contain a number of detailed conditions, including the date by which service must be commenced, the requirement to use only certified equipment, the technical standards which must be observed and the requirement to comply with all environmental regulations. Frequency licenses issued after January 1, 2005 will also contain the date by which the radio frequency resources must be fully utilized.

Telecommunications operators are subject to strict environmental regulations, especially regarding electromagnetic radiation; construction and technical maintenance of a telecommunications network must be carried out in accordance with local regulations applicable in particular regions of Ukraine. Telecommunications operators must submit annual and semi-annualperiodical reports to the SCCINCRC on the amount and quality of services provided under the telecommunications license. We believe that we are in material compliance with the applicable laws and regulations related to our Ukrainian licenses.

        Some licenses also provide that services for persons entitled to certain social benefits must be provided at or below maximum tariffs established by Ukrainian legislation in effect at that time.

        If the terms of a license are not fulfilled or the service provider violates legislation, the license may be suspended or terminated. LicensesBoth telecommunications services licenses and radio frequency licenses may be terminated for various reasons, including:

•

failure to comply with the terms and conditions of the license, including failure to provide services within the period set forth in the license;




•

provision of inaccurate information in the application or about the communications services rendered to consumers;



•

refusal to provide documents requested by the SCCINCRC or SCRF;the SIC;



•

failure to remedy in a timely manner the circumstances which resulted in a violation of the license terms;



•

unfair competition by the license holder in providing the licensed services;



•

repeated violation of the license terms;



•

transfer or assignment of the license to a third party; and



•

other grounds set forth by Ukrainian laws or international treaties.

        Radio frequency licenses may also be terminated for the following reasons:

•

failure to commence using radio frequency resources within the time period specified in the license;



•

termination of use of radio frequency resources specified in the license for more than one year; and



•

failure to use radio frequency resources to the full extent within the time period specified in the license.

Decisions of the SCCINCRC on termination of licenses may be appealed in court.

Equipment Certification

        The Telecommunications Law requires that all technical devices and equipment to be used in interconnected communications networks of general usein Ukraine, including fixed-line and wireless networks, must be certifiedcertified. The Ministry of Transport and Communications of Ukraine sets the technical standards for equipment to be used in Ukraine. All radiotelecommunications networks in Ukraine and issues the equipment must also be certified in Ukraine.

compliance certificates. If the equipment a prospective operator intends to use is certified in Ukraine by either the manufacturer or the vendor, there is no need for the operator to go through the equipment certification process. However, if the equipment is not certified in Ukraine or if it is certified by a third






party that is unwilling or unable to give the operator its permission to utilize its certification, then the operator will need to apply for the certification of the equipment in its own name.

        The Radio Frequencies Law provides that every entity wishing to import, acquire, construct or operateusers of radio equipmentfrequency resources must obtain permits for the operation of radio-electronic and radio-emitting equipment, except for equipment used on a permit from the SCRF prior to such import, acquisition, construction or operation.permit-free basis in accordance with this law. In order to obtain thesuch operation permit, for the importation of radio equipment, a company is generally required to file an application with the SCRF. The Radio Frequencies Law also requires producers and importers of radio-electronic and radio-emitting equipment to be used on the territory of Ukraine to register such equipment with the NCRC.

Competition

        The Communications Law provides that one of the purposes of the licensing of telecommunication services is to encourage competition and de-monopolization in the telecommunications industry.

        The Anti-monopolyAntimonopoly Committee of Ukraine, or the AMC, is the state administrative body charged with the administration of competition legislation and the protection and regulation of economic competition in Ukraine, including economic competition among industry participants in the telecommunications sector.






        Ukrainian anti-monopolyantimonopoly legislation prohibits a company operating in Ukraine from using its dominant position in its market to gain an unfair or anti-competitive advantage in the provision of its services or products. A businesslegal entity is deemed to be in a dominant position if such entity has no competitor in the market or is not subject to substantial competition due to restricted access or entry barriers for other business entities. Moreover, Ukrainian antimonopoly legislation sets forth that a company having more than 35% of the market share in a given product market may be deemed to be in the dominant position on such market, unless it proves that it is subject to substantial competition.

        A telecommunications operator which is found by the AMC to have a dominant position in the market, in particular, may specifically be required to:

•

annually submit to the SCCINCRC irrevocable public offers regarding interconnection with the other operators' telecommunications networks;



•

comply with the regulations of the SCCINCRC regarding the technical, organizational and commercial terms of interconnection with the other operators' telecommunications networks;



•

comply with the calculation factors set by the SCCINCRC for access to the operator's own network;



•

not discriminate against other players in telecommunications market; and



•

undertake to develop the "public telecommunications services" at the operator's own expense if the SCCINCRC so decides based on the insufficient supply of such services in certain regions.

        The NCRC will take over many of the SCCI's responsibilities as set forth above from and after January 1, 2005.

Although UMC currently has over a 35% market share of the mobile cellularwireless communications market in Ukraine, it has not been declared a dominant market force by the AMC. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Industry—If we were found to haveIn September 2003, the AMC began a review of the telecommunications services market for the purpose of determining the status of competition and the existence of dominant market forces. In August 2004, the AMC notified UMC and its largest competitor, Kyivstar, that the preliminary results of its review of the wireless telecommunications industry indicated that each of UMC and Kyivstar qualified as having a dominant position in our markets, the government may regulate our tariffsmarket. The AMC offered UMC and restrict our operations."Kyivstar the opportunity to submit their objections to these preliminary findings and indicated that it would issue a decision following its review thereof. On December 21, 2004, the AMC announced its issuance of a decision in which it confirmed that neither UMC nor Kyivstar qualified as having a dominant position in the wireless communications market.

        In addition, following disruptions of UMC's service that occurred in the Kiev area on August 31, 2004 and on September 1-2, 2004, the AMC issued a recommendation to UMC to (i) restore trouble-free network operation and provision of cellular services of due quality; (ii) reimburse damages caused to UMC's subscribers; and (iii) take measures to prevent such disruptions in the future. According to an AMC press release, UMC carried out these recommendations by, inter alia, providing compensation to subscribers affected during the period of service disruptions and installing a new switchboard that would service 350,000 additional subscribers.

Tariffs

        Telecommunications tariffs are regulated by the SCCI through December 31, 2004 and will thereafter be regulated by the NCRC for:

•

"public telecommunications" services; and





•

access to the telecommunications networks (use of electric communications channels) of the operator with the dominant position on the market.

        The Telecommunications Law withdrew the authority of the Ukrainian Cabinet of Ministers of Ukraine to regulate the prices for telecommunications services.






        Prior to enactment of the Telecommunications Law, the SCCI set maximum tariffs for fixed linefixed-line public telecommunications services and for access to the mobilewireless communications networks from local universal telephone networks. These tariffs will be revised or cancelled pursuant to the Telecommunications Law. There are currently no other tariff limits in respect of mobilewireless telecommunications services or operators. It is not yet clear how the NCRC when it comes into effect on January 1, 2005, will regulate the tariffs for telecommunications services.

        Also, where competition laws are violated, the AMC can find tariffs unfair and injurious to competition. In such cases, the AMC may request the violating telecommunications operator to remedy the situation, in particular, by amending its tariff schedule.

        Subject to the above, mobilewireless operators are free to set tariffs at levels they consider appropriate.

Interconnection

        Interconnection activity is currently regulated by the SCCI. However, under the Telecommunications Law, the NCRC will assume regulation in this sector asAs of January 1, 2005, with broader powers thaninterconnection activity is to be regulated by the SCCI. Under the Telecommunications Law, commencing January 1, 2005, operatorsNCRC. Operators may provide offers for interconnection to the NCRC, and the NCRC will beis required to publish on an annual or regular basis a catalog of such offers. Operators with a dominant market position on the market will beare obligated to submit interconnection offers to the NCRC for each catalog.

        Interconnection is made pursuant to interconnection agreements between network operators.operators as prescribed by the regulatory authorities. Such agreements are required under the law to contain certain provisions. An operator with a dominant market position cannot refuse an offer to conclude an interconnection agreement with otheranother operator, if the offeror has offered points of interconnection that were previously published by the NCRC in the catalog of interconnection proposals.

        The NCRC will beis authorized to conduct hearings and to resolve disputes among operators concerning the interconnection of telecommunications networks. The decision of NCRC will beis binding upon the parties in the dispute.

Seasonality

        Our results of operations are impacted by certain seasonal trends. Generally, revenue is higher during the second and third quarter due to increased mobile phone use by subscribers who travel in the summer from urban areas to country homesmore rural areas where fixed line penetration is relatively low.low, as well as an increase in roaming revenues and guest roaming revenues during these quarters. In the fourth quarter, operating income and average revenue per user tend to be low as the increase in new subscribers tends to outpace the increase in phone usage. However, quarterly trends can be influenced by a number of factors, including promotions, and may not be consistent from year to year.

C. Organizational Structure

        The table below presents our significant operating and holding entities and our ownership interests therein as of December 31, 2003.2004. Our ownership interest and voting power in each of the entities is






identical. All of the entities, with the exception of MTS Belarus, UMC, Uzdunrobita and Mobile TeleSystmsTeleSystems Finance S.A. are organized and operate under the laws of the Russian Federation.




		Accounting Method		Ownership Interest
ACC		Consolidated		100.0	%
Telecom XXI		Consolidated		100.0	%
Telecom-900		Consolidated		100.0	%
SCS-900		Consolidated		88.5100.0	%
FECS-900		Consolidated		60.0100.0	%
Uraltel		Consolidated		99.8	%
MTS Finance		Consolidated		100.0	%(1)
BM Telecom		Consolidated		100.0	%
Kuban-GSM		Consolidated		100.0	%
Dontelecom		Consolidated		100.0	%
MTS-Barnaul		Consolidated		100.0	%
BIT		Consolidated		100.0	%
MTS-Capital		Consolidated		100.0	%
UMC		Consolidated		100.0	%
Sibchallenge		Consolidated		100.0	%
TSS		Consolidated		100.0	%
Volgograd Mobile		EquityConsolidated		50.0100.0	%
Astrakhan Mobile		EquityConsolidated		50.0100.0	%
Mar Mobile GSM		Consolidated		100.0	%
Primtelefon		EquityConsolidated		50.0100.0	%
MSS		Consolidated		83.591.0	%
ReCom		Consolidated		53.9	%
TAIF Telcom		Consolidated		52.7100.0	%
UDN-900		Consolidated		51.0100.0	%
MTS Kostroma		Consolidated		100.0	%
MTS-NN		Consolidated		100.0	%
Novitel		Consolidated		51.0100.0	%
Uzdunrobita		Consolidated		74.0	%
Sibintertelecom		Consolidated		93.5	%
Gorizont-RT		Consolidated		76.0	%
Telesot-Alania		Consolidated		52.5	%
MTS-Komi Republic		Equity		26.0	%
MTS-Tver		Equity		26.0	%
MTS Belarus		Equity		49.0	%

---

⁽¹⁾

Represents beneficial ownership interest.

D. Property, Plant and Equipment

        We occupy premises in Moscow at 4 Marksistskaya Street, 5/2 Vorontsovskaya Street, 12/12 Pankratievskaya Street and 10 Teterinsky Pereulok, which we use for administration, as well as operation of mobile switching centers. The rights to use the Marksistskaya and Teterinsky premises were contributed to our charter capital by a founding shareholder. We intend to acquire additional buildings for placement of our switching systems, as well as for use by our sales and customer service, billing, financial control and technical services departments. We also lease buildings in Moscow for similar purposes, including marketing and sales and other service centers. We intend to build new technical and administrative offices overin the course of the next two yearsfuture and to lease office space on an as-needed basis. We






also own office buildings in some of our regional license areas and in Ukraine, and we lease office space on an as-needed basis.

        The primary elements of our network are base stations, base station controllers, transcoders and mobile switching centers. GSM technology is based on an "open architecture," which means that equipment from one supplier can be combined with that of another supplier to expand the network. Thus, there are no technical limitations to using equipment from other suppliers. Several major suppliers currently offer GSM 900/1800 mobile cellular equipment and the market for suppliers is competitive.

        Of the 7,16610,693 base stations comprising our network in Russia as of December 31, 2003, 4,9212004, 6,803 operated in the 900 MHz band and 2,2453,890 operated in the 1800 MHz band. We also operated 212300 base station controllers in Russia and approximately 86110 switches in Russia as of December 31, 2003.2004.






        Of the 2,5213,817 base stations comprising our network in Ukraine as of December 31, 2003, 1,6822004, 2,116 operated in the 900 MHz band and 8391,701 operated in the 1800 MHz band. We also operated 73106 base station controllers and 15 switches in Ukraine as of December 31, 2004.

        Of the 334 base stations comprising our network in Uzbekistan, as of December 31, 2004, 144 operated in the 900 MHz band and 136 operated in the 1800 MHz band. We also operated 7 base station controllers and 7 switches in UkraineUzbekistan as of December 31, 2003.2004.

        We do not lease a significant amount of property or equipment, except in Ukraine, where most of our property is leased.        In addition, certain of our subsidiaries entered into capital lease agreements for network equipment and a billing system with Invest-Svyaz-Holding,Invest-Svyaz Holding, a wholly-owned subsidiary of Sistema and our shareholder. See "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions."


Item 5.    Operating and Financial Review and Prospects


        The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, related notes and other information included elsewhere in this document. In particular, we refer you to the risks discussed in "Item 3. Key Information—D. Risk Factors" for information regarding governmental, economic, fiscal, monetary or political policies or factors that could materially adversely affect our operations or your investment in our shares and ADSs. In addition, this section contains forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements as a result of various factors, including those described under "Item 3. Key Information—D. Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements." Our reporting currency is the U.S. dollar and our consolidated financial statements have been prepared in accordance with U.S. GAAP.

Overview

        We are the largest mobile operator in Russia and Ukraine both in terms of net revenuessubscribers and subscribers.revenues. Revenues for 2003the year ended December 31, 2004 were $2.55 billion,$3,887.0 million, an increase of 87.0%52.7% from the prior year.year ended December 31, 2003. Net income for 2003the year ended December 31, 2004 was $517.2$1,022.7 million, up 86.6%97.7% from the prior year.year ended December 31, 2003. At December 31, 2003, our total2004, we had a subscriber base was at 16.7of 34.2 million with 13.4(26.5 million in Russia, and 3.37.4 million in Ukraine.Ukraine and 0.3 million in Uzbekistan).

        As of December 31, 2003, we had licenses to operate in 76 regions of Russia with a population of approximately 128.3 million people, or approximately 88.4% of the country's total population, and for the entire territory of Ukraine, which has a population of approximately 48 million people. As of December 31, 2003, we had commenced commercial operations in 60 regions of Russia, with a combined population of approximately 116.6 million people, and in all of Ukraine.

        WeOur revenues have increased our revenues by increasing our subscriber base through organic growth, as well as through acquisitions. InDuring March throughto July 2003, we acquired 100% of UMC, a mobile operator in Ukraine, for approximately $378.3 million in cash and assumed debt of UMC in the amount of $62.0 million. UMC's results of operations have been included in our consolidated financial statements beginning March 1, 2003. For the year ended December 31, 2003 and 2004, UMC accounted for approximately 15.5% and 21.4%, respectively, of our net revenues. We acquired a 74% stake in Uzdunrobita in August 2004, and Uzdunrobita's results of operations have been included in our audited consolidated financial






statements. For the period from August to December 31, 2004, Uzdunrobita had net revenues of $26.8 million. We spent $143.4 million, $667.2 million $143.4 million and $75.9$355.7 million in cash (net of cash acquired) in 2002, 2003 2002 and 2001,2004, respectively, to acquire businesses.

        We seek to minimize our exposure to the credit risk of our subscribers through our advance-payment billing system, which is used by over 97% of our subscribers in Russia and approximately 80% of our subscribers in Ukraine. Under this system, our subscribers prepay for their access, usage and value- added service fees. In 2003, however, we incurred a loss of $16.7 million due to dealer and subscriber fraud.

        We require significant funds to support our subscriber growth, primarily for increasing network capacity and developing networks in new licencelicense areas. Our cash outlays for capital expenditures (consisting of purchases of property, plant and equipment and intangible assets) in 2002, 2003 2002 and 20012004 were $574.3 million, $958.8 million $574.3 million and $441.2$1,358.9 million, respectively. We have financed our cash






requirements through our operating cash flows and borrowings. Net cash provided by operating activities in 2002, 2003 2002 and 20012004 was $412.8 million, $966.0 million $412.8 million and $338.2$1,711.6 million, respectively. In December 2001 and MarchSince 2002, we have raised approximately $294.0 milliona total of $1.8 billion through six U.S. dollar-denominated unsecured notes offerings in international capital markets. In January, August and October 2003,July 2004, a syndicate of international banks made available to us an unsecured loan facility in an aggregate amount of $500.0 million, which is repayable in three years. In September 2004, this syndicated loan facility was increased to $600.0 million, of which we raised approximately $396.0have drawn $600.0 million $297.0 million and $396.0 million respectively, through additional U.S. dollar-denominated notes offerings in international capital markets.as of December 31, 2004. As of December 31, 2003,2004, we had indebtedness of approximately $1.66$1.9 billion, including capital lease obligations, and our interest expense for 2003the year ended December 31, 2004 was $106.6 million.$108.0 million, net of amounts capitalized.

        We also havehold a 49% equity investmentsinvestment in locala mobile operatorsoperator in Russia andBelarus, MTS Belarus, which had a total of 587,8981.2 million subscribers as of December 31, 2003. In particular, we own 49% of2004. MTS Belarus which had 464,783 subscribers as of December 31, 2003.is an equity investment, and its results are not consolidated in our financial statements. The remaining stake in MTS Belarus is owned by a Belarus state-owned enterprise.

Segments

        We have three reportableseveral operating segments corresponding to separate legal entities within our group. For reporting purposes, we group them as follows: (1) our company, Mobile TeleSystems OJSC, or MTS OJSC, which holds licenses for and operates in the Moscow license area and a number of areas outside of the Moscow area;Moscow; (2) our subsidiary, Telecom XXI, which holds licenses for and operates in St. Petersburg and a number of areas in northwest Russia; (3) our subsidiary, Kuban-GSM, which holds licenses for and (3)operates in the Krasnodar region of Russia (4) our subsidiary, UMC, which holds licenses for and operates in Ukraine. In addition, we haveUkraine; and (5) several other smaller subsidiaries, which hold licenses for and operate in the remainingdifferent regions of Russia. We have grouped these legal entities into an additional segmentRussia and our newly acquired subsidiary, Uzdunrobita, which holds licenses for the purposes hereof,and operates in Uzbekistan, which we call "Russian"Other regions." See Note 2322 to our audited consolidated financial statements. We acquired UMC in March 2003, andstatements for that reason, we provide limited comparative analysis by segment with respect to UMC.information.






Subscriber Data

        The following table shows our subscribers by segmentcountry as of the dates indicated.

				At December 31,
				2003		2002		2001
Subscribers(1)
Russia				13,370		6,644		2,650
	MTS OJSC			6,529		3,746		2,275
		Moscow license area		4,936		3,082		2,035
	Telecom XXI			1,666		854		n/a
	Russian regions			5,175		2,044		375
UMC				3,350		n/a		n/a
Total				16,720		6,644		2,650

				At December 31,
				2002		2003		2004
				(in thousands)
Subscribers(1)
Russia, including:				6,644		13,370		26,540
	MTS OJSC			3,746		6,529		13,398
		Moscow license area		3,082		4,936		7,516
	Telecom XXI			854		1,666		2,733
	Kuban-GSM			844		1,396		2,543
	Other Russian regions			1,200		3,779		7,866
Ukraine (UMC)				—		3,350		7,373
Uzbekistan (Uzdunrobita)				—		—		311
		Total consolidated		6,644		16,720		34,224
MTS Belarus (unconsolidated)				43		465		1,214

---

⁽¹⁾

We define a subscriber as an individual or organization whose account does not have a negative balance for more thanshows chargeable activity within 61 days. Fordays (or 183 days in the case of the "Jeans" tariff only, introduced in November 2002, we define a subscriber as an individual or organizationand "SIM-SIM" brand tariffs) and whose account does not have a negative balance for more than 183 days.this period. Prior to October 1, 2004, UMC used a 90-day period for such purposes with respect to its "Jeans" and "SIM-SIM" subscribers.

        TheWe had approximately 26.5 million subscribers in Russia at December 31, 2004 of which 7.5 million were in the Moscow license area whichthat encompasses the City of Moscow and the Moscow region, remains our principal market in terms of revenues, although today more than one-half of our total subscriber base resides outside of the Moscow license area.region. According to AC&M-Consulting, approximately 32%23% of all mobile cellular subscribers in Russia reside in the Moscow license area, where penetration stood at approximately 68%99% as of December 31, 2003.2004. Penetration in all of Russia was lower, at approximately 25%51%, according to AC&M-Consulting. We had approximately 4.9 million subscribers in the Moscow license area as of December 31, 2003, representing approximately 43% of all mobile cellular subscribers in the area according to AC&M-Consulting. Our subscribers in Russia outside of the Moscow license






area totaled approximately 8.419.0 million as of December 31, 2003.2004. According to AC&M-Consulting, as of December 31, 2003,2004, we had a 37%leading 36% market share of total mobile cellular subscribers in Russia. Our market share in the Moscow license area was higher at 45% as of December 31, 2004, according to AC&M-Consulting. We had approximately 3.37.4 million subscribers in Ukraine as of December 31, 20032004 and, according to Ukrainian News,AC&M-Consulting, a 51%53% market share of total mobile cellular subscribers in Ukraine. In addition, we had approximately 0.3 million subscribers in Uzbekistan, representing a 58% market share, according to AC&M-Consulting.

        We considerdefine our churn as the total number of subscribers who are disconnected from our network, whethercease to be a subscriber during the period (whether involuntarily due to non-payment or voluntarily, at such subscribers' request (including those switching tosubscriber's request), expressed as a different tariff plan), for more than 61 days in any given period as churned subscribers (or 183 days inpercentage of the caseaverage number of our "Jeans" tariff introduced in November 2002).subscribers during that period. We view the subscriber churn (the ratio of disconnected subscribers to the average number of subscribers in any given period) as a measure of market competition and customer dynamics. The following table shows our Russian and Ukrainian subscriber churn for the periods indicated.

		Year Ended December 31,							Year Ended December 31,
		2003		2002		2001			2002		2003		2004
Subscriber Churn
Russia		47.3	%	33.9	%	26.8	%		33.9	%	47.3%		27.5	%
Ukraine		23.8	%(1)	n/a		n/a			—		23.8%	(1)	15.8%	(2)

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⁽¹⁾

Annualized value calculated based on the months of March through December 2003.



⁽²⁾

We define our churn as the total number of subscribers who cease to be a subscriber (as defined above) during the period (whether involuntarily due to non-payment or voluntarily, at such subscriber's request),




expressed as a percentage of the average number of our subscribers during that period. For Ukraine, the 2003 figure has been annualized based on the months of March through December 2003. The significant decrease in the 2004 churn rate in Ukraine is largely attributable to the change in our churn policy for "Jeans" and "Sim-Sim" subscribers in Ukraine. See note 8 above. Under the previous churn policy, the 2004 churn rate in 2004 was 23%.

        The trend of increasing churn rate is due to the continued growth ofhighly dependent on competition in our license areas an increase in seasonaland those subscribers who usemigrate as a result of such competition. The decrease in our network onlychurn rate during the summer months of May through October,2004 occurred mainly due to successful marketing initiatives, focused on customer loyalty. Churn in Ukraine continued to be lower than in Russia due to several factors, including less competition, higher connection fees for subscribers and a general increase in migrating subscribers (including those switching between different tariff plans we offer).higher percentage of contract subscribers.

        While our subscribers and revenues have been growing, our average monthly service revenuesrevenue per subscriber havehas been decreasing. We calculate our average monthly service revenue per subscriber by dividing our service revenues for a given period, including guest roaming fees, by the average number of our subscribers during that period and dividing by the number of months in that period. The following table shows our average monthly service revenue per subscriber and average monthly minutes of use per Russian and Ukrainian subscriber for the periods indicated.

		Year Ended December 31,									Year Ended December 31,
		2003			2002			2001			2002		2003		2004
Average monthly service revenue per subscriber
Russia		$	17		$	23		$	36		$23		$17		$12
Ukraine		$	15	(1)		n/a			n/a		—		$15	(1)	$13
Average monthly minutes of use per subscriber
Russia			144			159			157		159		144		157
Ukraine			97	(1)		n/a			n/a		—		97	(1)	114

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⁽¹⁾

Calculated based on the months of March through December 2003.




        Average monthly service revenue per subscriber for Russia decreased from $23 for the year ended December 31, 2002 to $17 for the year ended December 31, 2003.2003 and to $12 for the year ended December 31, 2004. We expect to see a continued decline in average monthly revenuesservice revenue per subscriber due to tariff decreases and the increasing ratio of mass-market subscribers with lower average monthly service revenue per subscriber in our subscriber mix. Average monthly minutes of use per subscriber is increasing due to tariff decreases and other general factors resulting in increased mobile use. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Increased competition and a more diverse subscriber base have resulted in decreasing average monthly service revenues per subscriber, which may materially adversely affect our results of operations,operations." "Trend Information—Sales" below

        The following table shows the mix between Jeans and non-Jeans subscribers for Russia and Ukraine for the periods indicated. The "Jeans" brand tariffs were introduced in November 2002. For a description of our Jeans and SIM-SIM brands, see "Item 4. Information on Our Company—B. Business Overview.Overview—Tariffs."

		At December 31,
		2002		2003		2004
Russia
Jeans		3	%	44	%	77	%
Non-Jeans		97	%	56	%	23	%
Ukraine
Jeans (including SIM-SIM)		—		79	%	86	%
Non-Jeans		—		21	%	14	%




Revenues

        Our principal sources of revenue are:

•

service revenues, including usage fees, monthly subscription fees, roaming fees,and value-added service fees, and prepaid phone cards;



•

connection fees; and



•

revenues from sales of equipment, primarily handsets and accessories.

        We set our fees and prices with reference to the competitive environment and we expect price competition to increase in the future. Our fees are not currently regulated by any organization or governmental authority.authority in Russia, while in Ukraine there have been cases where governmental authorities imposed restrictions on our tariffs.

Service Revenues and Connection Fees

        Service revenues.    Usage fees include amounts charged directly to our subscribers, both for their usage of our network and for their usage of other operators' GSM networks when roaming outside of our service area. We generally bill our subscribers for all incoming and outgoing calls, except for incoming local calls originated by one of our subscribers and received by another one of our subscribers. However, we currently have in place certain promotions whereby our "Jeans" tariff subscribers receive all incoming calls from certain other mobile providers in the same region free of charge.

        The charges for outgoing calls to other cellular operators and to the public service telephone network are usually higher than charges for outgoing calls within our network. The usage fees charged for a call originating or terminating on our network depend on a number of factors, including the subscriber's tariff plan, call duration, the time of day when the call was placed, call destination and whether the call was incoming or outgoing. Usage fees as a percentage of total net revenues were 67.3% in 2002, 71.7% in 2003 67.3%and 70.5% in 2002 and 69.3% in 2001. We generally expect usage fees to grow as a percentage of total net revenues.2004, respectively. The further development of our "Jeans" tariff, which has no monthly subscription fee, will support this trend. However,growth of the usage fees declined as a percentage of revenues for the year ended December 31, 2002 due to the introduction of new tariff plans based on monthly subscription fees.total revenues. The percentage of total net revenues represented by usage fees as compared to monthly subscription fees will continue to be affected by changes in our tariff plans, as well as the relative product mix between usage fee-based tariff plans versus monthly subscription fee-based tariff plans.

        Monthly subscription fees consist of fixed monthly charges for network access.access and access to additional services. Monthly subscription fees represented 17.9%as a percentage of our total net revenues in 2003,represented 18.2% in 2002, 17.9% in 2003 and 16.9%12.7% in 2001.2004, respectively. The main reason for the decline of the monthly subscription fees as a percentage of total net revenues is a decrease in the share of subscribers with a monthly subscription fee in the subscriber mix. Many of our monthly subscription fee-based tariff plans also include a usage fee-based component for minutes used over a certain number of pre-paid minutes. The percentage of total net revenues represented by usage fees as compared to monthly subscription fees will continue to be affected by the factors discussed in the previous paragraph.

        Roaming fees include amounts charged to other GSM operators for their subscribers,i.e., guest roamers, utilizing our network while traveling in our service area. We bill other GSM operators for calls of guest roamers carried on our network. Roaming fees represented 6.0%6.7% of our total net revenues in 2002, 6.0% in 2003 6.7%and 2.4% in 2002, and 6.7% in 2001.2004, respectively. We generally expect roaming fees to decline as a percentage of total net revenues as we expect the increase in our subscribers to continue to outpace the increase in guest roamers. In addition, roaming tariffs between mobile operators have a tendency to decrease relative to the increase of total number of mobile users.

        We offer our subscribers an array of value-added services, including SMS, call forwarding, call waiting, call barring, call identification, voice mail, itemized billing and SMS.content-based services. For the years ended December 31, 2002, 2003 and 2002,2004 monthly average SMS usage was 10, 16 and 1017 text messages sent per subscriber in Russia, respectively. These services have historically comprised a small proportion






approximately 10% of total net revenues and are






primarily reflected as usage fees, but we generally expect value-added services as a proportion of total net revenues to increase slightly with subscriber growth.due to the introduction of new value-added services and an increase in the usage of value-added services by our subscribers. We expect that revenue from value-added services will vary based upon penetration rates, customer usage, pricing and advertising and promotional programs.

Connection Feesfees.

    Connection fees consist of charges paid to us by subscribers for the initial connection to our network and sign-up for value-added services. We defer connection fees and recognize them as revenues over the estimated average subscriber life as described in Note 2 to our audited consolidated financial statements. Connection fees represented 1.2%1.8% of our total net revenues in 2002, 1.2% in 2003 1.8%and 1.2% in 2002, and 2.3% in 2001.2004, respectively. We expect connection fee revenues to remain at a low level as a percentage of total net revenues.

Equipment Sales (Handsetsof Handsets and Accessories)Accessories

        Some of our subscribers purchase theirWe sell handsets and accessories directly from usto subscribers in our sales offices and fromalso to dealers who purchase such handsets and accessories from us.for further resale. Since 1998, we have offered subscribers primarily dual-band and tri-band handsets that operate in the 900 and 1800 MHz bands and 900, 1800 and 1900 MHz bands, respectively. Revenue from the sale of handsets and accessories represented 3.2%4.6% of our total net revenue in 2002, 3.2% in 2003 4.6%and 2.2% in 2002, and 4.7% in 2001.2004, respectively. Our average selling price of handsets declined significantly between 2000 and 20022003 and continued to decline in 2003.year ended December 31, 2004. We generally do not subsidize handset sales in Russia. InRussia, but in Ukraine, we subsidize handsets for contract subscribers. See "—Expenses—Cost of ServicesHandsets and Products—Costs of Equipment"Accessories" below.

        We expect the demand for our handsets and accessories to continue to decrease due to the availability of cheaper "grey" market handsets in our markets, as well asentering the fact thatmarket. In addition, many new subscribers already own a handset,handsets, either purchased on the grey market or because they are churn clients from other operators. We expect that as subscribers are added to our network and the price of handsets continues to decrease, our sales of handsets and accessories as a percentage of total net revenues will decline.

Expenses

        Our principal expenses are:

•

cost of services, and products, including interconnection, and line rental cost of equipment and roaming expenses;



•

operatingcost of handsets and accessories;



•

sales and marketing expenses;



•

general and administrative expenses, such as salaries, rent and other general and administrative expenses, including provisions for doubtful accounts;expenses;



•

sales and marketing expenses;provision for doubtful accounts;



•

depreciation of property, network equipment and amortization of telephone numbering capacity, license costs and other intangible assets;



•

interest expense;expenses; and



•

provisionprovisions for income taxes.

Cost of Services and Products

        Interconnection and Line Rental.    Interconnection and line rental charges include charges payable to other operators for access to, and use of their networks, which are necessary in the course of




providing service to our subscribers as described under "Item 4. Information on Our Company—




B. Business Overview—Network Technology—Interconnect Arrangements and Telephone Numbering Capacity."

        We expect unit interconnect costs to decline, although the aggregate amount payable by us to other operators will increase as our subscriber base and traffic volumes increase. We expect the cost of leasing telecommunication lines to vary based on the number of base stations, base station controllers, the number and capacity of leased lines utilized and competition among providers of leased lines, as well as availability and usability of substitutes such as microwave links owned by us. We expect that expenses relating to leased lines will decrease as a percentage of total net revenues as we continue to expand the use of our own fiber-optic network in our license areas.

        Roaming Expenses.    Roaming expenses consist of amounts charged by other GSM operators under agreements for roaming services provided to our subscribers while outside our service area.

        Costs of Equipment.Cost of equipmentHandsets and Accessories

        This type of expense includes primarily the cost of handsets and accessories sold to dealers and subscribers, and the cost of production of SIM cards.cards provided to our customers. We have entered into supply agreements with various producers and suppliers of handsets and accessories to satisfy our requirements at what we believe to be competitive prices. We expect the cost per handset to decline due to our ability to work directly with suppliers to secure volume discounts, technological advances and competitive pressures in the market for handsets.

        In Ukraine, we subsidize handsets for contract subscribers. In the years ended December 31, 2003 and 2004, we provided net handset subsidies in Ukraine for a total cost of $34.9 million and $52.7 million, respectively, which is includedare reported as a loss on sales of handsets. However, we do not subsidize handset sales in cost of equipment. Handset subsidies in Russia for the year ended December 31, 2003 were not material.Russia.

        Generally, we provide SIM cards to our customers free of charge. Production costsCost of SIM cards used amounted to $26.3 million in 2002, $68.3 million in 2003 $26.3and $80.6 million in 2002, and $13.4 million in 2001.2004, respectively. The growth of SIM cards expense in 2003 occurred mainly due to2004 was primarily the result of an increase in subscribers and internal churn within our subscriber base, especially following the launch in November 2002 of the "Jeans" tariff plan.base.

OperatingSales and Marketing Expenses

        Our operatingsales and marketing expenses primarily consist of:

•

dealer commissions on new connections and advances collected from subscribers; and



•

expenses for advertising and promotion.

        Sales and marketing expenses reflect, among other things, advertising, promotions and other costs associated with the expansion of services in our license areas and are expected to increase as subscriber numbers and market competition increase. In addition, we expect these costs to increase as we further develop our brand and introduce value-added services.

        In Russia, we pay the full amount of commission when a dealer activates a subscriber's contract. If such subscriber's usage of our voice and non-voice services over the following six-month period amounts to less than the amount of the dealer's commission, the dealer is required to reimburse the difference to us. Commencing on February 1, 2004 in the Moscow license area, dealer commission contracts have been gradually migrated to a new payment scheme. Specifically, we have begun linking commissions payable to a dealer on a monthly basis to the amount of revenues we receive during the twelve-month period from the date a subscriber is activated by such dealer. In addition, we have established caps or a maximum commission amount for our dealers. We believe that the new method for paying commissions to dealers provides dealers with greater incentives to renew subscriptions, reduces the risk of dealer fraud and improves our cash-flow management.






        We measure subscriber acquisition costs, or SAC, to monitor the cost-effectiveness of our sales and marketing. We define SAC as total sales and marketing expenses and handset subsidies for a given period. Sales and marketing expenses include advertising expenses and commissions to dealers. SAC per gross additional subscriber is calculated by dividing SAC during a given period by the total number of gross subscribers added by us during the period. The following table shows SAC in Russia and Ukraine for the periods indicated:

		Year Ended December 31,
		2002		2003		2004
Subscriber Acquisition Costs (SAC)
Russia		$35		$26		$21
Ukraine		—		$32	(1)	$19

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⁽¹⁾

Calculated based on the months of March through December 2003.

        SAC continued to decline in 2004 reflecting the lower cost of attracting mass-market subscribers and increased economies of scale.

General and Administrative Expenses

        Our general and administrative expenses consist primarily of:

•

employee salaries;salaries and bonuses;



•

social contributions payable to the government;state pension fund;



•

taxes other than income taxes,e.g., taxes based on sales and property taxes;



•

general and administrativeoffice maintenance expenses;



•

network repair and maintenance;



•

provision for doubtful accounts; and



•

rent.rental of premises.

        GeneralTotal general and administrative expenses include costs relating to the technical support group for network development, the finance and accounting group and the billing department. Rent expenses include lease payments for base station sites and office space. Total operating expenses are expected to increase over time to reflect the increasing costs and staff required to service our growing subscriber base, but we expect they will decline on a per subscriber basis.

Provision for Doubtful Accounts

        We generally expect our provision for doubtful accounts as a percentage of net revenues to remain stable as a result of our continued use of our advance payment system, whereby subscribers' fees are debited from amounts paid by subscribers into their accounts in advance of line usage. In the future, our provision for doubtful accounts may increase if we increase the availability of tariff plans under the






credit payment system. See "Item 4. Information on Our Company—B. Business Overview—Customer Payments and Billing." However, our operating expensesexpense for provision for doubtful accounts for the year ended December 31, 2003 includedtotaled $32.6 million of provision expense in comparison with $7.0 million of provision expense incurred in 2002 mainly due to dealer and subscriber fraud discovered in the first quarter of 2003 for which we took a chargethe amount of $16.7 million. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Our failure to implement the necessary infrastructure to manage our growth could have a material adverse affecteffect on our business and results of operations."

Sales and Marketing

        Our sales and marketing expenses consist of:

•

dealer commissions on new connections and advances collection from subscribers; and



•

expenses for advertising and promotion.

        Sales and marketing expenses reflect, among other things, advertising, promotions and other costs associated with the expansion of services in our license areas and are expected to increase as subscriber numbers and market competition increase. In addition, we expect these costs to increase as we further develop our brand and introduce value-added services.

        Prior to February 1, 2004, we paid the full amount of commission when As a dealer activated a subscriber's contract. If such subscriber's usageresult of our voice and non-voice services over the following six-month period amounted to less than the amount of the dealer's commission, the dealer was required to reimburse the difference to us. Effective from February 1, 2004, dealer commissions are deferred over a period of up to one year. We now pay commissions to dealers on a monthly basis, based on the revenues we receive from subscribers activated by a particular dealer. However, the total amount of commissions paid to dealers has remained unchanged. We believe that the new methodcorrective actions, our expense for paying commissions to dealers provides dealers with greater incentives to renew subscriptions, reduces the risk of dealer fraud and improves our cash-flow management, as dealers are not creditedprovision for up to a year after a subscriber is activated.

        We measure subscriber acquisition costs to monitor the cost-effectiveness of our sales and marketing. We define subscriber acquisition costs as total sales and marketing expensesdoubtful accounts decreased for the period per additional subscriber. The following table shows subscriber acquisition costs by segment foryear ended December 31, 2004 to $26.5 million compared to $32.6 million in the periods indicated:

			Year Ended December 31,
			2003			2002			2001
Subscriber Acquisition Costs
Russia			$	26		$	35		$	56
	MTS OJSC		$	32		$	48		$	65
	Telecom XXI		$	22		$	24			n/a
	Russian regions		$	17		$	18		$	22
UMC			$	32	(1)		n/a			n/a

---

⁽¹⁾

Calculated based on the months of March throughyear ended December 31, 2003.






Depreciation of Property, Network Equipment and Amortization of Intangibles

        We expect depreciation expense, which is principally associated with the depreciation of network equipment, to continue to increase significantly in line with our network development program and the build outbuildout associated with our regional license areas. Correspondingly, we also expect amortization of telephone numbering capacity, license costs and other intangible assets to increase in line with our




network development programprograms and the expansion of our subscriber base, including subscribers in our regional license areas. From January 1, 2002, we no longer amortize goodwill. At that date, we reclassified the carrying value of goodwill of $22.0 million to licenses.

Research and Development, Patents and Licenses, Etc.

        Our research and development activities were not significant for the last three years and primarily included activities focused on new telecommunication technologies and evaluation of new or improved services and systems. Expenditures on research and development are recognized as expenses when they are incurred. We did not spend any significant amounts during the last three financial years on our research and development activities.

Interest Expense

        We expect interest expense to continue to increase, which is principally associated with external debt incurred to finance our network development program and the build outbuildout associated with our regional license areas.

Provision for Income Taxes

        Taxation on income of Russian companies is regulated by a number of laws, government decrees and implementation instructions. From January 1, 2002, the new Chapter 25 "Income Tax of Organizations" of the Tax Code became effective, which to some extent consolidates and simplifies income tax regulations.

        The income tax base for Russian companies is defined as income received from sales of goods, works and services and property rights and income from non-sale operations, reduced by the amount of certain business expenses incurred in such operations. During each of the past three years,Prior to 2002, these expenses were computed according to several special deductibility regulations. These regulations combined very detailed guidance as to what can be deducted for income tax purposes with specified limitations and restrictions on deductibility. For example, there were ceilings on deductibility of advertising or entertainment expenses. Deductions were limited or denied for a number of items commonly seen as fully deductible under Western tax systems, such as:

•

interest on loans;



•

advertising and business travel expenses above a stated limit;



•

non-mandatory insurance expenses; and



•

training expenses.

        The new income tax legislation significantly liberalized the deductibility rules for business expenses. Therefore, starting January 1, 2002, the following business expenses are deductible:

•

interest on loans (with certain exceptions);



•

management expenses;



•

secondment expenses; and



•

training expenses (with certain exceptions).




        Interest paid on loans, including the loans from our subsidiary, Mobile TeleSystems Finance S.A., made to us in connection with our notes, is deductible to the extent the interest rate does not exceed 15%. The deductibility rules for advertising and business travel expenses were also revised and relaxed significantly.






        The tax legislation that was in force prior to 2002 established certain benefits and concessions for companies engaged in the production and service industries. Notably, taxable income could be reduced by amounts reinvested for specific purposes. However, the total reduction from this form of incentive together with certain other reductions could not exceed 50% of the taxable income for the period. The most significant reinvestment purposes that benefited from these concessions were technical re-equipment, reconstruction, expansion and development of production facilities, and the installation of new facilities. We used these concessions extensively in prior years. The new income tax legislation does not provide for special tax concessions related to investments in infrastructure.

        In 2001, our statutory income tax rate in Russia was 35%. Effective January 1, 2002, the statutory income tax rate in Russia was reducedestablished at 24%.

        In 2003, the statutory income tax rate in Ukraine was 30%. From January 1, 2004, the Ukrainian statutory income tax rate changed to 24%.25% as a result of changes in legislation. As the result of this reduction, we recognized a net deferred tax benefitexpense of approximately $22.0$4.8 million in 2001.

        In 2003, statutory income tax rate in Ukraine was 30%. From January 1, 2004, Ukrainian statutory income tax rate changes to 25% as a result of changes in legislation.2003.

        Generally, tax declarations remain open and subject to inspection for a period of three years following the tax year. We believe that we have adequately provided for tax liabilities in our consolidated financial statements; however, the risk remains that relevant authorities could take differing positions with regard to interpretive issues and the effect could be significant.

Acquisitions

        Our results of operations for the periods presented are significantly affected by acquisitions. Results of operations of acquired businesses are included in our audited consolidated financial statements for the periods after their respective dates of acquisition.






        Below is the list of our major acquisitions during 2001–2003.2002, 2003 and 2004.

Company		License area		Date of acquisition		Stake acquired		Purchase price*			License area		Date of acquisition		Stake acquired		Purchase price*
								(in millions)
2001
Telecom XXI		10 regions in northwest Russia, including St. Petersburg		May 2001		100.0	%	$	49.7
Telecom-900		Controlling stake in 3 regional operators: (1) 60% of FECS-900 (several regions in Far East of Russia); (2) 53% of Uraltel (Ural region); and (3) 51% of SCS-900 (several regions in Siberian part of Russia)		August 2001		81.0	%		26.8
								$	76.5
																	(in millions)
2002
Kuban-GSM		Krasnodar region		March 2002		51.0	%	$	71.4		Krasnodar region		March 2002		51.0%		$71.4
Kuban-GSM		Krasnodar region		October 2002		1.7	%		5.0		Krasnodar region		October 2002		1.7%		5.0
BM-Telecom		Bashkortostan Republic		May 2002		100.0	%		41.0		Bashkortostan Republic		May 2002		100.0%		41.0
MTS-Barnaul		Altai region		July 2002		100.0	%		2.4		Altai region		July 2002		100.0%		2.4
Dontelecom		Rostov region		October 2002		100.0	%		22.5		Rostov region		October 2002		100.0%		22.5
BIT		4 regions in the Far East of Russia		October 2002		100.0	%		0.9		4 regions in the Far East of Russia		October 2002		100.0%		0.9
Telecom-900		See above		November 2002		19.0	%		6.9		Controlling stake in 3 regional operators: (1) 60% of FECS-900 (several regions in the Far East of Russia); (2) 53% of Uraltel (Ural region); and (3) 51% of SCS-900 (several regions in the Siberian part of Russia)		November 2002		19.0%		6.9
								$	150.1								$150.1
2003
UMC		Ukraine		March 2003		57.7	%	$	199.0		Ukraine		March 2003		57.7%		$199.0
UMC		Ukraine		June 2003		26.0	%		87.6		Ukraine		June 2003		26.0%		87.6
UMC		Ukraine		July 2003		16.3	%		91.7		Ukraine		July 2003		16.3%		91.7
TAIF Telcom		Tatarstan Republic and Volga region		April 2003		51.0	%		61.0		Tatarstan Republic and Volga region		April 2003		51.0%		61.0
TAIF Telcom		Tatarstan Republic and Volga region		May 2003		1.7	%		2.3		Tatarstan Republic and Volga region		May 2003		1.7%		2.3
Sibchallenge		Krasnoyarsk region		August 2003		100.0	%		45.5		Krasnoyarsk region		August 2003		100.0%		45.5
Vostok Mobile BV											50% stake in Primtelefon (several regions in the Far East of Russia)		August 2003		100.0%		29.0
Uraltel											Ural region		August 2003		46.7%		35.7
TSS		Eastern Siberia		September 2003		100.0	%		47.0		Eastern Siberia		September 2003		100.0%		47.0
Kuban-GSM		Krasnodar region		September 2003		47.3	%		107.0		Krasnodar region		September 2003		47.3%		107.0
								$	641.1								$705.8
2004
SCS-900											Several regions in the Siberian part of Russia		March 2004		11.0%		$8.5
FECS-900											Several regions in the Far East of Russia		April 2004		40.0%		8.3
MSS											Eastern Siberia		April 2004		7.5%		2.2
Primtelefon											Several regions in the Far East of Russia		June 2004		50.0%		31.0
UDN-900											Udmurtiya Republic		August 2004		49.0%		6.4
Volgograd Mobile											Volga region		August 2004		50.0%		2.9
Astrakhan Mobile											Volga region		August 2004		50.0%		1.1
Uzdunrobita											Uzbekistan		July 2004		74.0%		126.4
TAIF Telcom											Tatarstan Republic		October 2004		47.3%		63.0
Sibintertelecom											Two regions in the Far East of Russia		November 2004		93.5%		37.4
Telesot Alania											Severnaya Osetia-Alania Republic		December 2004		52.5%		6.2
Gorizont-RT											Republic of Sakha (Yakutia)		December 2004		76.0%		53.2
																	$341.2

---

*

Excluding acquisition-related costs.costs and debt assumed.




        In addition, we acquired controlling and non-controlling stakes in several small regional companies. Moreover, we increased our shareholdings in several subsidiaries by acquiring stakes from minority shareholders. See "Item 4. Information on Our Company—A. History and Development—Acquisitions" andalso Note 423 to our audited consolidated financial statements for further details. See also Note 2 to our audited consolidated financial statements for the list of our significant subsidiaries as ofadditional acquisitions since December 31, 2003.2004.




Results of Operations

        The following table sets forth selected financial information by segment:reportable segment.

		Year Ended December 31,										Year Ended December 31,
		2003			2002			2001				2004		2003		2002
		(in thousands)										(in thousands)
Revenues
MTS OJSC		$	1,471,198		$	1,044,877		$	831,857			$2,129,544		$1,471,198		$1,044,877
UMC												832,313		394,038		—
Telecom XXI			210,460			79,166			n/a			297,194		210,460		79,166
Russian regions			601,171			291,143			64,780
UMC			394,038			n/a			n/a
Kuban-GSM												225,350		168,401		79,317
Other												796,256		432,770		211,826
Eliminations(1)			(130,669	)		(53,430	)		(3,390	)		(393,663	)	(130,669	)	(53,430	)
Net revenues as reported		$	2,546,198		$	1,361,756		$	893,247
Revenues as reported												$3,886,994		$2,546,198		$1,361,756
Costs of services and products, exclusive of depreciation and amortization shown separately below
Costs of services and cost of handsets and accessories, exclusive of depreciation and amortization shown separately below
MTS OJSC		$	315,021		$	235,957		$	168,323			$585,092		$315,021		$235,957
UMC												221,226		94,959		—
Telecom XXI			33,348			18,415			n/a			46,917		33,348		18,415
Russian regions			141,765			75,467			17,144
UMC			94,959			n/a			n/a
Kuban-GSM												22,963		20,870		11,376
Other												189,720		120,895		64,092
Eliminations(1)			(110,914	)		(43,168	)		(1,974	)		(366,231	)	(110,914	)	(43,168	)
Cost of services and products as reported		$	474,179		$	286,672		$	183,493
Cost of services and cost of handsets and accessories as reported												$699,687		$474,179		$286,672
Operating expenses
Sundry operating expenses(2)
MTS OJSC		$	241,069		$	173,377		$	121,055			$327,113		$241,069		$173,377
UMC												88,937		50,192		—
Telecom XXI			28,071			18,894			n/a			45,832		28,071		18,894
Russian regions			88,074			39,213			13,543
UMC			50,192			n/a			n/a
Kuban-GSM												37,091		25,385		11,197
Other												142,257		62,689		28,016
Eliminations(1)			(684	)		(2,428	)		—			(9,698	)	(684	)	(2,428	)
Operating expenses as reported		$	406,722		$	229,056		$	134,598
Sundry operating expenses as reported												$631,532		$406,722		$229,056
Sales and marketing expenses
MTS OJSC		$	187,325		$	125,841		$	102,806			$240,146		$187,325		$125,841
UMC												79,355		50,791		—
Telecom XXI			31,627			22,183			n/a			42,244		31,627		22,183
Russian regions			58,672			27,599			5,516
UMC			50,791			n/a			n/a
Kuban-GSM												22,534		15,249		7,795
Other												86,275		43,423		19,804
Eliminations(1)			(1,632	)		(3,646	)		(593	)		(9,571	)	(1,632	)	(3,646	)
Sales and marketing expenses as reported		$	326,783		$	171,977		$	107,729			$460,983		$326,783		$171,977
Depreciation and amortization
MTS OJSC		$	199,946		$	144,004		$	114,923
Telecom XXI			36,782			17,343			n/a
Russian regions			114,484			48,333			18,395
UMC			66,392			n/a			n/a
Eliminations(1)			(1,688	)		—			—
Depreciation and amortization as reported		$	415,916		$	209,680		$	133,318




Operating income
Depreciation and amortization
MTS OJSC		$	527,837		$	365,698		$	316,894			$253,485		$199,946		$144,004
UMC												124,935		66,392		—
Telecom XXI			80,632			2,331			n/a			57,265		36,782		17,343
Russian regions			198,176			100,531			8,039
Kuban-GSM												68,140		32,299		21,224
Other												175,221		82,185		27,109
Eliminations(1)												(3,317	)	(1,688	)	—
Depreciation and amortization as reported												$675,729		$415,916		$209,680
Operating Income
MTS OJSC												$728,101		$527,837		$365,698
UMC			131,704			n/a			n/a			317,860		131,704		—
Telecom XXI												104,936		80,632		2,331
Kuban-GSM												74,622		74,599		27,725
Other												198,390		123,577		72,806
Eliminations(1)			(15,751	)		4,189			(824	)		(4,846	)	(15,751	)	(4,189	)
Operating income as reported		$	922,598		$	464,371		$	324,109			$1,419,063		$922,598		$464,371

---

⁽¹⁾

Represents the elimination of intercompany sales, sundry operating expenses, sales and marketing expenses and the related operating income, primarily for intercompany roaming arrangements and management and marketing support provided by MTS OJSC to regional companies, as well as of other intercompany transactions.



⁽²⁾

For the purposes of this analysis "Sundry operating expenses" consists of general and administrative expenses and other operating expenses.

Year Ended December 31, 2004 compared to Year Ended December 31, 2003

Revenues and cost of services and cost of handsets and accessories

Consolidated revenues for the year ended December 31, 2004 increased by $1,340.8 million, or 52.7%, to $3,887.0 million from $2,546.2 million for the year ended December 31, 2003. This increase was primarily due to the significant growth in our subscriber base from 16.72 million as of December 31, 2003 to 34.22 million as of December 31, 2004. As of December 31, 2003, UMC had 3.35 million subscribers, which grew to 7.37 million subscribers as of December 31, 2004. A portion of the growth in the subscriber base was due to acquisitions during the year ended December 31, 2004, including the two most significant acquisitions of Uzdunrobita with 0.31 million subscribers and Primtelefon with 0.2 million subscribers. The growth was also attributable to our sales and marketing efforts and the expansion of our network, as well as improving general economic conditions and income levels in Russia and Ukraine. The increase in revenues from subscriber growth was partially offset by a decrease in tariffs in the Moscow and other highly competitive license areas, an increase of mass-market subscribers in our subscriber mix and our continued expansion into the regions of Russia outside of the Moscow license area where tariffs are lower. As a result, average monthly service revenue per subscriber in Russia decreased by 29% from $17 per subscriber for the year ended December 31, 2003 to $12 for the year ended December 31, 2004.

        For the year ended December 31, 2004, service revenues and connection fees increased by $1,335.2 million, or 54.2%, to $3,800.3 million compared to $2,465.1 million for the year ended December 31, 2003 due to the growth in the number of our subscribers, as explained above. Revenues from the sales of handsets and accessories increased by $5.6 million, or 6.9%, for the year ended






December 31, 2004 compared to the year ended December 31, 2003, due to growth of handsets sale activity. This growth was partially offset by a decline in the average selling price of handsets.

Consolidated cost of services and cost of handsets and accessories for the year ended December 31, 2004 increased by 47.6% to $699.7 million from $474.2 million for the year ended December 31, 2003. The increase in costs was primarily attributable to subscriber growth and related growth of traffic related expenses and cost of handsets and accessories sold. For the year ended December 31, 2004, interconnection and line rental expenses grew to $352.6 million from $187.3 million for the year ended December 31, 2003 and roaming expenses grew to $128.5 million from $113.8 million, respectively. For the year ended December 31, 2004, cost of handsets and accessories sold, including SIM cards provided to customers, grew to $218.6 million from $173.1 million for the year ended December 31, 2003.

Consolidated gross margin was $3,187.3 million, or 82.0% of consolidated revenues for the year ended December 31, 2004, compared to $2,072.0 million, or 81.4% of consolidated revenues for the year ended December 31, 2003. This slight increase in our consolidated gross margin percentage is due to lower interconnection and line rental charges payable to other operators for access to their networks relative to our increasing revenues because, as we have expanded our network, more calls are placed and completed solely within our network, thereby avoiding the need to pay such charges to other operators while still fully earning the related revenues from such calls. We also believe that this increase can be explained, in part, by lower costs of leasing telecommunication lines relative to our increasing revenues as we build-out our own fiber-optics network in our license areas.

MTS OJSC revenues for the year ended December 31, 2004 increased by 44.7% to $2,129.5 million from $1,471.2 million for the year ended December 31, 2003. Our subscriber base in the MTS OJSC license areas increased by 106.2% from 6.5 million as of December 31, 2003 to 13.4 million as of December 31, 2004. The effect on revenues of the increase in our subscriber base was partially offset by a decrease in the average selling prices of handsets and accessories, a decrease in tariffs in the Moscow license area and an increase of mass-market subscribers share in our subscriber mix.

MTS OJSC cost of services and cost of handsets and accessories for the year ended December 31, 2004 increased by 85.7% to $585.1 million from $315.0 million for the year ended December 31, 2003. The growth occurred as a result of $45.6 million and $172.7 million increases in roaming expenses and cost of handsets and accessories, respectively. This was primarily driven by an increase in the number of subscribers and related growth of roaming traffic and cost of handsets and accessories sold (including SIM cards). Roaming expenses increased to $172.3 million, or 8.1% of segment revenues, for the year ended December 31, 2004 from $126.7 million, or 8.6% of segment revenues, for the year ended December 31, 2003. Cost of handsets and accessories increased to $274.9 million, or 12.9% of segment revenues, for the year ended December 31, 2004 from $102.2 million, or 6.9% of segment revenues, for the year ended December 31, 2003.

MTS OJSC gross margin increased by 33.6% to $1,544.4 million in the year ended December 31, 2004 from $1,156.2 million in the year ended December 31, 2003. MTS OJSC's gross margin percentage decreased to 72.5% in the year ended December 31, 2004 from 78.6% in the year ended December 31, 2003. The main reason for the decrease in the gross margin by 6.1% was the significant growth in sales of equipment and handsets from MTS OJSC to subsidiaries. MTS OJSC charges minimal mark-up, ranging from 3% to 10%, on these sales. The effect of these transactions is eliminated in the consolidated financial statements.

UMC revenues for the year ended December 31, 2004 were $832.3 million, while for the year ended December 31, 2003, $394.0 million of UMC's revenues were consolidated (representing revenues from the date of our acquisition of UMC in March 2003 to December 31, 2003). Growth in sales revenues occurred mainly due to an increase in UMC's subscriber base from 3.4 million as of December 31, 2003 to 7.4 million as of December 31, 2004.






UMC cost of services and cost of handsets and accessories for the year ended December 31, 2004 and for the period from March 1, 2003 to December 31, 2003 were $221.2 million and $95.0 million, respectively. The growth occurred primarily due to an increase of $84.0 million in interconnection and line rental expenses and a $33.9 million increase in cost of handsets and accessories. Interconnection and line rental expenses increased to $112.8 million, or 13.6% of segment revenues, in the year ended December 31, 2004 from $28.8 million, or 7.3% of segment revenues, in the year ended December 31, 2003 mainly due to an increase in the number of base stations in use and overall growth in traffic on the network. Cost of handsets and accessories increased to $87.6 million, or 10.5% of segment revenues, in the year ended December 31, 2004 from $53.8 million, or 13.7% of segment revenues, in the year ended December 31, 2003 mainly due to growth of sales of handsets and accessories and an increase in cost for SIM cards used by new subscribers.

UMC gross margin for the year ended December 31, 2004 grew to $611.1 million from $299.0 million for the period from March 1, 2003 to December 31, 2003. As a percentage of total revenues, gross margin decreased to 73.4% in the year ended December 31, 2004, from 75.9% in the same period in 2003. This decrease in gross margin was mainly due to the introduction in September 2003 of the calling party pays scheme. Under this scheme, starting from September 2003, UMC pays termination fees to other mobile operators for calls initiated by its subscribers. During the year ended December 31, 2004, this scheme had a full effect on financial results, while during the same period in 2003, only the months of September through December were included.

Telecom XXI revenues for the year ended December 31, 2004 increased by 41.2% to $297.2 million from $210.5 million for the year ended December 31, 2003. Our subscriber base in the Telecom XXI license areas increased by 58.8% from 1.7 million as of December 31, 2003 to 2.7 million as of December 31, 2004. The growth of subscribers in percentage terms is higher than the growth of revenues mainly because the newly acquired subscribers have lower average monthly service revenue per subscriber compared to subscribers already connected to our network. This trend is typical when we seek to expand our subscriber base in a competitive environment.

Telecom XXI cost of services and cost of handsets and accessories for the year ended December 31, 2004 increased by 40.8% to $46.9 million from $33.3 million for the year ended December 31, 2003. This was primarily due to a $6.4 million increase in roaming expenses. Interconnection and line rental expenses increased to $15.2 million, or 5.1% of segment revenues, in the year ended December 31, 2004 from $14.0 million, or 6.7% of segment revenues, in the year ended December 31, 2003 mainly due to an increase of the number of base stations in use and overall growth in traffic on the network. Roaming expenses increased to $18.9 million, or 6.4% of segment revenues, for the year ended December 31, 2004 from $12.5 million, or 5.9% of segment revenues, for the year ended December 31, 2003 mainly due to subscriber growth and related traffic expenses.

Telecom XXI gross margin increased by 41.3% to $250.3 million in the year ended December 31, 2004 from $177.2 million in the year ended December 31, 2003. Telecom XXI gross margin percentage remained stable at 84.2% during the year ended December 31, 2004, as compared to the 84.2% during year ended December 31, 2003.

Kuban-GSM revenues for the year ended December 31, 2004 increased by 33.8% to $225.4 million from $168.4 million for the year ended December 31, 2003. Our subscriber base in the Kuban-GSM license area increased by 78.6% from 1.4 million as of December 31, 2003 to 2.5 million as of December 31, 2004. The growth of subscribers in percentage terms is higher than the growth of revenues mainly because the newly acquired subscribers have lower average monthly service revenue per subscriber compared to subscribers already connected to our network. This trend is typical when expanding s subscriber base in a competitive environment.

Kuban-GSM cost of services and cost of handsets and accessories for the year ended December 31, 2004 increased by 10.0% to $23.0 million from $20.9 million for the year ended December 31, 2003.






This was primarily due to a $4.4 million increase in interconnection and line rental expenses to $14.2 million, or 6.3% of segment revenues, in the year ended December 31, 2004 from $9.8 million, or 5.8% of segment revenues, in the year ended December 31, 2003. This increase is mainly due to an increase in the number of base stations in use and overall growth in traffic on the network.

Kuban-GSM gross margin increased by 37.2% to $202.4 million in the year ended December 31, 2004 from $147.5 million in the year ended December 31, 2003. Kuban-GSM's gross margin percentage increased to 89.8% in the year ended December 31, 2004 from 87.6% in the year ended December 31, 2003 primarily as the result of continued expansion of the network in 2004 and the related economies of scale effect.

Other regions revenues for the year ended December 31, 2004 increased by 84.0% to $796.3 million from $432.8 million for the year ended December 31, 2003. Our subscriber base in these regions increased by 107.9% from 3.8 million as of December 31, 2003 to 7.9 million as of December 31, 2004, which is the result of our expansion into the regions both through organic growth and acquisitions. As of December 31, 2004, we had commenced commercial operations in 77 regions of Russia, compared to 60 as of December 31, 2003. The growth of subscribers in percentage terms is higher than revenue growth mainly due to the fact that newly acquired subscribers have lower average monthly service revenue per subscriber compared to subscribers already connected to our network. This is a usual trend for expanding subscribers' base in the competitive environment.

Other regions cost of services and cost of handsets and accessories for the year ended December 31, 2004 increased by 56.9% to $189.7 million from $120.9 million for the year ended December 31, 2003. The growth occurred primarily due to a $37.1 million increase in interconnection and line rental expenses and a $27.6 million increase in cost of handsets and accessories. Interconnection and line rental expenses increased to $76.6 million, or 9.6% of segment revenues, in the year ended December 31, 2004 from $39.5 million, or 9.1% of segment revenues, in the year ended December 31, 2003 mainly due to an increase in the number of base stations in use and overall growth in traffic on the network. Cost of handsets and accessories increased to $63.6 million, or 8.0% of segment revenues, in the year ended December 31, 2004 from $36.0 million, or 8.3% of segment revenues, in the year ended December 31, 2003 mainly due to a growth in sales of handsets and accessories and an increase in cost for SIM cards used by new subscribers.

Other regions gross margin increased by 294.7 million, or 94.5%, from $311.9 million in the year ended December 31, 2003 to $606.6 million in the year ended December 31, 2004, primarily due to the increase in the number of subscribers. Our gross margin percentage for the other regions segment increased to 76.2% in the year ended December 31, 2004 from 72.1% in the year ended December 31, 2003, which can be explained by the same factors discussed above with respect to the increase in the consolidated gross margin.

Sundry operating expenses

Consolidated sundry operating expenses for the year ended December 31, 2004 increased by 55.3% to $631.5 million from $406.7 million for the year ended December 31, 2003. The increase in sundry operating expenses was largely attributable to a general increase in expenses caused by subscriber growth and the consolidation of a full year of UMC's operations, which together contributed $88.9 million to consolidated sundry operating expenses for the year ended December 31, 2004 after intercompany elimination. For the year ended December 31, 2003, only 10 months of UMC's operations were consolidated, contributing $50.2 million to sundry operating expenses in that period. In the year ended December 31, 2004, salary expenses and related social contributions increased by $100.2 million due to an increase in personnel. In addition, network repair and maintenance expenses increased by $42.1 million in the year ended December 31, 2004 due to the expansion and aging of our network, as compared to the same period in 2003. Generally, sundry operating expenses as a






percentage of net revenues slightly increased to 16.2% for the year ended December 31, 2004 from 16.0% in the year ended December 31, 2003.

MTS OJSC sundry operating expenses for the year ended December 31, 2004 increased by 35.7% to $327.1 million from $241.1 million for the year ended December 31, 2003. The major reason for this growth was an increase in salaries, bonuses and related social contributions for additional personnel of $56.5 million. Sundry operating expenses as a percentage of segment revenues decreased to 15.4% for the year ended December 31, 2004 from 16.4% for the year ended December 31, 2003. This decrease was mainly attributable to economies of scale with respect to an increase in our overall volume of operations and a reduction in the bad debt provision expense from $28.6 million for 2003, or 1.9% of segment revenues, to $12.4 million for 2004, or 0.6% of segment revenues. The higher expense in 2003 was related to the dealer and subscriber fraud discovered in March 2003, as discussed above.

UMC sundry operating expenses for the year ended December 31, 2004 were $88.9 million, or 10.7% of segment revenues, while for the year ended December 31, 2003, these expenses were $50.2 million, or 12.7% of segment revenues. The increase in such expenses in absolute terms during 2004 was the result of an overall increase in UMC's activity. The main reason for the decrease in sundry operating expenses as a percentage of segment revenues was the economies of scale we achieved related mainly to rent and maintenance expenses.

Telecom XXI sundry operating expenses for the year ended December 31, 2004 increased by 63.0% to $45.8 million from $28.1 million for the year ended December 31, 2003. The most significant increases were in the areas of salaries and related social contributions for additional personnel of $4.9 million, repair and maintenance of $3.3 million and billing and processing expenses of $3.5 million. The increases were primarily the result of the general expansion of our network in the region. Sundry operating expenses as a percentage of segment revenues increased to 15.4% for the year ended December 31, 2004, as compared to 13.3% for the year ended December 31, 2003. The main reason for this increase was one-off repair expenses incurred during the year ended December 31, 2004.

Kuban-GSM sundry operating expenses for the year ended December 31, 2004 increased by 46.1% to $37.1 million from $25.4 million for the year ended December 31, 2003. The most significant increases were in the areas of salaries and related social contributions for additional personnel of $3.6 million and repair and maintenance of $8.2 million. The increases were primarily the result of the general expansion of our network in the region. Sundry operating expenses as a percentage of segment revenues slightly increased to 16.5% for the year ended December 31, 2004, as compared to 15.1% for the year ended December 31, 2003.

Other regions sundry operating expenses for the year ended December 31, 2004 increased by 127.0% to $142.3 million from $62.7 million for the year ended December 31, 2003. The most significant increases were in the areas of salaries and related social contributions for additional personnel of $27.3 million and administrative expenses of $11.4 million for additional offices and expanded operations. Sundry operating expenses as a percentage of segment revenues increased to 17.9% for the year ended December 31, 2004, as compared to 14.5% for the year ended December 31, 2003 mainly due to start-up expenses in connection with our continuing expansion into the regions.

Sales and marketing expenses

Consolidated sales and marketing expenses for the year ended December 31, 2004 increased by 41.1% to $461.0 million from $326.8 million for the year ended December 31, 2003. The increase in sales and marketing expenses was largely related to our strategy to develop our subscriber base through organic growth. The components of growth in sales and marketing expenses were an increase of $77.2 million in commissions to dealers and an increase of $57.0 million in advertising and promotion expenses. The increase in commissions to dealers was primarily due to an increase in the volume of sales through dealers. The increase in advertising and promotion expenses related to increased overall






marketing efforts and relatively higher costs of television commercials. Sales and marketing expenses as a percentage of net revenues decreased to 11.9% for the year ended December 31, 2004 from 12.8% for the year ended December 31, 2003. The main reason for this decrease was the introduction in Russia of the new dealer commission scheme in 2004 described above, which resulted in a decrease in dealers' commissions as a percentage of revenues from 8.8% to 7.8%.

MTS OJSC sales and marketing expenses for the year ended December 31, 2004 increased by 28.2% to $240.1 million from $187.3 million for the year ended December 31, 2003. Sales and marketing expenses as a percentage of segment revenues decreased to 11.3% for the year ended December 31, 2004 from 12.7% for the year ended December 31, 2003. MTS OJSC has traditionally incurred consolidated costs of national TV advertising campaigns, which have experienced significant inflation in the last few years. MTS does not allocate a portion of these advertising costs to Telecom XXI, Kuban-GSM and other regions segments even though sales in these regions benefit from this national advertising. The main reason for the decrease in sales and marketing expenses as a percentage of segment revenues was the introduction of the new dealer commission scheme in 2004, which resulted in a decrease in dealers' commissions as a percentage of revenues from 8.5% to 6.9%.

UMC sales and marketing expenses for the year ended December 31, 2004 were $79.4 million, or 9.5% of segment revenues, while for the year ended December 31, 2003, these expenses were $50.8 million, or 12.9% of segment revenues. Absolute growth in these expenses for the year ended December 31, 2004 occurred due to overall growth of UMC's activity. The decrease in sales and marketing expenses as a percentage of segment revenues was caused by two factors: a decrease in advertising and promotion expenses from 4.6% to 3.6% of segment revenues due to extensive advertising campaigns organized in the third quarter of 2003 related to the Jeans tariff launch and a decrease in dealers' commissions from 8.3% to 5.9% of segment revenues due to a change in the commission scheme in December 2003 (commission is calculated based on revenue received from subscribers contracted by the dealer).

Telecom XXI sales and marketing expenses for the year ended December 31, 2004 increased by 33.5% to $42.2 million from $31.6 million for the year ended December 31, 2003, as a result of the expansion of the operations into regions other than St. Petersburg and an increase in dealers' commissions due to general growth of sales volume through dealers. Sales and marketing expenses as a percentage of segment revenues decreased to 14.2% for the year ended December 31, 2004 from 15.0% for the year ended December 31, 2003. The main reason for this decrease was a decrease of dealers' commissions as a percentage of segment revenues from 11.5% to 11.0% for the year ended December 31, 2003 and 2004, respectively, which was primarily due to the introduction in the third quarter of 2003 of our Jeans tariff in the region, which became popular and has lower commission fees than our contract tariff plans.

Kuban-GSM sales and marketing expenses for the year ended December 31, 2004 increased by 48.0% to $22.5 million from $15.2 million for the year ended December 31, 2003, as a result of an increase in dealers' commissions due to a general increase in sales volume through dealers. Sales and marketing expenses as a percentage of segment revenues increased to 10.0% for the year ended December 31, 2004 from 9.0% for the year ended December 31, 2003. The main reason for this growth was an increase of dealers' commissions as a percentage of segment revenues to 8.7% for the year ended December 31, 2004 from 8.0% for the year ended December 31, 2003.

Other regions sales and marketing expenses for the year ended December 31, 2004 increased by 98.8% to $86.3 million from $43.4 million for the year ended December 31, 2003, as a result of our expansion of the regional operations. Sales and marketing expenses as a percentage of segment revenues increased to 10.8% for the year ended December 31, 2004 from 10.0% for the year ended December 31, 2003. The main reasons for this increase were the growth of advertising expenses (in order to promote our services in the regions and continue our regional expansion) and dealers' commissions caused by increases in our subscriber base.




Depreciation and amortization expenses

Consolidated depreciation and amortization of property, network equipment, telephone numbering capacity, license costs and other intangible assets for the year ended December 31, 2004 increased by 62.5% to $675.7 million from $415.9 million for the year ended December 31, 2003. Depreciation and amortization expenses as a percentage of net revenues slightly increased to 17.4% for the year ended December 31, 2004 from 16.3% for the year ended December 31, 2003. This increase was mainly due to a change of accounting policy with respect to the depreciation period for the cost of leasehold improvements related to base station sites that went into effect in 2004. The depreciation period was accelerated and as a result, an additional depreciation expense of approximately $27.7 million was recognized in 2004, but not in prior periods.

MTS OJSC depreciation and amortization for the year ended December 31, 2004 increased by 26.8% to $253.5 million from $199.9 million for the year ended December 31, 2003, but declined as a percentage of segment revenues to 11.9% for the year ended December 31, 2004 from 13.6% for the year ended December 31, 2003 mainly due to expansion of our subscriber base in our existing network, which was partially offset by the effect of accelerated depreciation.

UMC depreciation and amortization for the year ended December 31, 2004 was $124.9 million, or 15.0% of segment revenues, while for the year ended December 31, 2003 depreciation and amortization was $66.4 million, or 16.9% of segment revenues. Absolute growth of depreciation and amortization expense was mainly due to the continued build-out of UMC's network in Ukraine. The decrease in depreciation and amortization expense as a percentage of segment revenues was mainly due to the effect of economies of scale, which was partly offset by the effect of accelerated depreciation.

Telecom XXI depreciation and amortization for the year ended December 31, 2004 increased by 55.7% to $57.3 million from $36.8 million for the year ended December 31, 2003 and slightly increased as a percentage of segment revenues to 19.3% from 17.5%. This increase was mainly the result of the acceleration of the depreciation period for leasehold improvements on the base station sites.

Kuban-GSM depreciation and amortization for the year ended December 31, 2004 increased by 110.8% to $68.1 million from $32.3 million for the year ended December 31, 2003 and increased as a percentage of segment revenues to 30.2% from 19.2% mainly due to significant investments in our network and an additional depreciation expense recognized in 2004 for leasehold improvements.

Other regions depreciation and amortization for the year ended December 31, 2004 increased by 113.1% to $175.2 million from $82.2 million for the year ended December 31, 2003 and increased as a percentage of segment revenues to 22.0% from 19.0%. The increase in the depreciation and amortization expense was driven primarily by two factors: the continued build-out of our network in the regions and assets acquired through acquisitions.

Operating Income

Consolidated operating income for the year ended December 31, 2004 increased by 53.8% to $1,419.1 million, including $317.9 million of UMC's results after intercompany elimination for the year ending December 31, 2004 from $922.6 million for the year ended December 31, 2003, of which $131.7 million was contributed by UMC. Operating income as a percentage of net revenues was relatively stable at 36.5% for the year ended December 31, 2004 and 36.2% for the year ended December 31, 2003.

MTS OJSC operating income for the year ended December 31, 2004 increased by 37.9% to $728.1 million from $527.8 million for the year ended December 31, 2003 and remained relatively stable as a percentage of segment revenues at 34.2% for the year ended December 31, 2004, as compared to 35.9% for the year ended December 31, 2003.






UMC operating income for the year ended December 31, 2004 was $317.9 million, or 38.2% of segment revenues, while for the year ended December 31, 2003 operating income was $131.7 million, or 33.4% of segment revenues. Absolute growth of operating income primarily was the result of the overall growth in UMC's subscriber base and the continued build-out of its network. In addition, for the year ended December 31, 2003, only 10 months of UMC's operations were consolidated into our results, as we did not acquire a controlling stake in UMC until March 2003. Growth of operating income as a percentage of segment revenues occurred mainly due to a decrease in expenses realized through economies of scale and the growth in UMC's subscriber base.

Telecom XXI operating income for the year ended December 31, 2004 increased by 30.1% to $104.9 million, or 35.3% of segment revenues, from $80.6 million, or 38.3% of segment revenues, for the year ended December 31, 2003. The main reason for the decrease in operating income as a percentage of segment revenues was the additional depreciation expense incurred as a result of accelerated depreciation for leasehold improvements.

Kuban-GSM operating income for the year ended December 31, 2004 remained stable at $74.6 million, or 33.1% of segment revenues, and $74.6 million, or 44.3% of segment revenues, for the year ended December 31, 2003. The main reason for the decrease of operating income as a percentage of segment revenues was the additional depreciation expense incurred as a result of accelerated depreciation for leasehold improvements.

Other regions operating income for the year ended December 31, 2004 increased by 60.5% to $198.4 million, or 24.9% of segment revenues, from $123.6 million, or 28.6% of segment revenues, for the year ended December 31, 2003. The main reason for the decrease in operating income as a percentage of segment revenues was the additional depreciation expense incurred as a result of accelerated depreciation for leasehold improvements.

Currency exchange and translation gain

Consolidated currency exchange and translation gain for the year ended December 31, 2004 was $6.5 million, compared to $0.7 million for the year ended December 31, 2003. We conduct our operations primarily within the Russian Federation and Ukraine. We are subject to currency fluctuations, including U.S. dollar versus ruble/hryvnia and U.S. dollar versus euro. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Financial Condition—Continued or increased limitations on the conversion of rubles to foreign currency in Russia could increase our costs when making payments in foreign currency to suppliers and creditors and could cause us to default on our obligations to them." and "Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk."

Interest expense

Consolidated interest expense for the year ended December 31, 2004 increased by 1.3% to $108.0 million from $106.6 million for the year ended December 31, 2003, primarily as the result of additional interest expense incurred in conjunction with our $300.0 million notes issued in August 2003 and $400.0 million notes issued in October 2003.

Other income

Consolidated other expenses (income) for the year ended December 31, 2004 increased to a gain of $33.5 million from a loss of $3.4 million incurred for the year ended December 31, 2003. The main reason for this change relates to the significant growth in profitability of MTS Belarus. During the year ended December 31, 2003, $1.5 million of MTS Belarus' loss was included in our results, while for the year ended December 31, 2004, $23.2 million of income was included in our results.






Provision for income taxes

Consolidated provision for income taxes for the year ended December 31, 2004 increased by 46.3% to $354.7 million from $242.5 million for the year ended December 31, 2003. The effective tax rate decreased to 25.8% in the year ended December 31, 2004 from 29.2% in the year ended December 31 2003 mainly as a result of an increase in deductible foreign currency exchange losses for purposes of our statutory accounts and a decrease in the statutory tax rate in Ukraine from 30% in 2003 to 25% in 2004.

Minority interest

Minority interest for the year ended December 31, 2004 decreased by $41.4 million to $30.3 million from $71.7 million for the year ended December 31, 2003 as a result of purchases of additional stakes from minority shareholders in regional companies, the major ones being FECS-900, Uraltel, TAIF Telcom and SCS-900.

Net income

Net income for the year ended December 31, 2004 increased by $470.7 million, or 91.0%, to $987.9 million, compared to $517.2 million for the year ended December 31, 2003, due to overall growth of our operations and the factors discussed above. Net income as a percentage of revenues was 25.4% in the year ended December 31, 2004 and 20.3% in the year ended December 31, 2003. The main reasons for the increase in net income as a percentage of revenues were the relative decrease as a percentage of revenues in sales and marketing expenses and costs of services, handsets and accessories and an increase in the profitability of MTS Belarus.

Year Ended December 31, 2003 compared to Year Ended December 31, 2002

Revenues and cost of services and products

        Consolidated revenues for the year ended December 31, 2003 increased by $1,184.4 million, or 87.0%, to $2,546.2 million from $1,361.8 million for the year ended December 31, 2002. This increase was primarily due to the significant growth in our subscriber base from 6.64 million as of December 31, 2002 to 16.72 million as of December 31, 2003. A portion of the growth in the subscriber base was due to acquisitions during 2003, including UMC. At the time of acquisition, UMC had 1.8 million subscribers, which grew to 3.3 million subscribers as of the end of the year. The increase in revenues from subscriber growth was partially offset by a decrease in tariffs in the Moscow license area, an increase of mass-market subscribers in our subscriber mix and our continued expansion into the regions of Russia outside of the Moscow license area where tariffs are lower. As a result, average monthly service revenue per subscriber in Russia decreased 26% from $23 per subscriber for the year ended December 31, 2002 to $17 for the year ended December 31, 2003. Our sales and marketing effort and the expansion of our network, as well as improving general economic conditions and income levels in Russia and Ukraine were primarily responsible for the growth in our subscriber base.

        For the year ended December 31, 2003, service revenues increased by $1,161.4 million, or 91.1%, to $2,435.7 million compared to $1,274.3 million for the year ended December 31, 2002 due to the growth in the number of our subscribers, as explained above. Connection fees increased by only $4.5 million, or 18.2%, compared to the year ended December 31, 2002 due to the introduction of tariff plans without connection fees, including our "Jeans"Jeans tariff, and low connection fee tariff plans. Equipment revenues increased by $18.5 million, or 29.5%, for the year ended December 31, 2003, compared to the year ended December 31, 2002 due to subscriber growth in 2003, although not as fast as subscriber growth because the average selling price of handsets declined andas many of our new subscribers already own handsets.

        Consolidated cost of services and productscost of handsets and accessories for the year ended December 31, 2003 increased by 65.4% to $474.2 million from $286.7 million for the year ended December 31, 2002.






The increase in costs was primarily attributable to subscriber growth and related growth of traffic related expenses and cost of equipment sold, as well as the inclusion of ten months of UMC's results, which added $94.1$95.0 million to consolidated cost of services and products after intercompany eliminations.

        Consolidated gross margin was 81.4% for the year ended December 31, 2003, compared to 78.9% for the year ended December 31, 2002. We believe that this increase in our consolidated gross margin is due to lower interconnection and line rental charges payable to other operators for access to their networks relative to our increasing revenues because, as we have expanded our network, more calls are






placed and completed solely within our network, thereby avoiding the need to pay such charges to other operators while still fully earning the related revenues from such calls. We also believe that this increase can be explained, in part, by lower costs of leasing telecommunication lines relative to our increasing revenues as we build outbuild-out our own fiber-optics network in our license areas.

        MTS OJSC revenues for the year ended December 31, 2003 increased by 40.8% to $1,471.2 million from $1,044.9 million for the year ended December 31, 2002. Our subscriber base in the MTS OJSC license areas increased by 74.3% from 3.7 million as of December 31, 2002 to 6.5 million as of December 31, 2003. The increase in the subscriber base was partially offset by a decrease in tariffs in the Moscow license area and an increase of mass-market subscribers in our subscriber mix.

        MTS OJSC cost of services and productscost of handsets and accessories for the year ended December 31, 2003 increased by 33.5% to $315.0 million from $236.0 million for the year ended December 31, 2002. This was primarily due to the $37.8 million and $27.6 million increases in roaming expenses and cost of equipment,handsets and accessories, respectively, resulting from an increase in the number of subscribers and related growth of roaming traffic and cost of equipment sold. Roaming expenses increased to $126.7 million, or 8.6% of segment revenues, for the year ended December 31, 2003 from $88.9 million, or 8.5% of segment revenues, for the year ended December 31, 2002. Cost of equipmenthandsets and accessories increased to $89.8 million, or 6.1% of segment revenues, for the year ended December 31, 2003 from $62.2 million, or 6.0% of segment revenues, for the year ended December 31, 2002.

        MTS OJSC gross margin increased by 42.9% to $1,156.2 million in 2003 from $808.9 million in 2002. MTS OJSC's gross margin percentage increased to 78.6% in 2003 from 77.4% in 2002, which increase iscan be explained by the same factors discussed above with respect to the increase in the consolidated gross margin.

        UMC revenues for the year ended December 31, 2003 were $394.0 million.

UMC cost of services and products for the year ended December 31, 2003 was $95.0 million, resulting in a gross margin of $299.0 million.

UMC gross margin percentage was 75.9% in 2003.

Telecom XXI revenues for the year ended December 31, 2003 increased by 165.8% to $210.5 million from $79.2 million for the year ended December 31, 2002, which was Telecom XXI's first year of operations. Our subscriber base in the Telecom XXI license areas increased by 95.1% from 0.9 million as of December 31, 2002 to 1.7 million as of December 31, 2003. We also increased our tariffs in 2003.

        Telecom XXI cost of services and productscost of handsets and accessories for the year ended December 31, 2003 increased 81.0%by 81.1% to $33.3 million from $18.4 million for the year ended December 31, 2002. This was primarily due to the $8.5 million and $7.5 million increases in interconnection and line rental expenses and roaming expenses, respectively. Interconnection and line rental expenses increased to $14.0 million, or 6.7% of segment revenues, in 2003 from $5.5 million, or 6.9% of segment revenues, in 2002 mainly due to an increase ofin the number of base stations in use. Roaming expenses increased to $12.5 million, or 5.9% of segment revenues, for the year ended December 31, 2003 from $5.0 million,






or 6.3% of segment revenues, for the year ended December 31, 2002 mainly due to subscriber growth and related traffic expenses.

        Telecom XXI gross margin increased by 191.3% to $177.1 million in 2003 from $60.8 million in 2002. Telecom XXI gross margin percentage increased to 84.2% in 2003 from 76.7% in 2002, which increase iscan be explained primarily explained by the increase in tariffs discussed above.

        RussianKuban-GSM revenues for the year ended December 31, 2003 increased by 112.3% to $168.4 million from $79.3 million for the year ended December 31, 2002. This increase was primarily due to the significant growth in our subscriber base. Our subscriber base in the Kuban-GSM license areas increased by 75.0% from 0.8 million as of December 31, 2002 to 1.4 million as of December 31, 2003.

Kuban-GSM cost of services and cost of handsets and accessories for the year ended December 31, 2003 increased by 83.3% to $20.9 million from $11.4 million for the year ended December 31, 2002 primarily due to the $4.2 million and $4.1 million increases in interconnection and line rental expenses and cost of handsets and accessories, respectively. Interconnection and line rental expenses increased to $9.8 million, or 5.8% of segment revenues, in 2003 from $5.6 million, or 7.1% of segment revenues, in 2002 mainly due to an increase in the number of base stations in use. Cost of handsets and accessories increased to $7.3 million, or 4.3% of segment revenues, for the year ended December 31, 2003 from $3.2 million, or 4.0% of segment revenues, for the year ended December 31, 2002 mainly due to subscriber growth and the related growth of SIM cards costs.

Kuban-GSM gross margin increased by 117.2% to $147.5 million in 2003 from $67.9 million in 2002. Kuban-GSM gross margin percentage increased to 87.6% in 2003 from 85.6% in 2002, which was primarily the result of growth in our subscriber base.

Other regions revenues for the year ended December 31, 2003 increased 106.5%by 104.3% to $601.2$432.8 million from $291.1$211.8 million for the year ended December 31, 2002. Our subscriber base in the Russianother regions segment increased by 153.2%216.7% from 2.01.2 million as of December 31, 2002 to 5.23.8 million as of December 31, 2003, consistent with our expansion into the regions.

        RussianOther regions cost of services and productscost of handsets and accessories for the year ended December 31, 2003 increased 87.8%by 88.6% to $141.8$120.9 million from $75.5$64.1 million for the year ended December 31, 2002 due to subscriber growth and related growth of traffic related expenses.




        RussianOther regions gross margin increased $243.7by $164.1 million, or 113.0%111.1%, from $215.7$147.8 million in 2002 to $459.4$311.9 million in 2003, primarily due to the increase in the number of subscribers. Our gross margin percentage for the Russianother regions segment increased to 76.4%72.1% in 2003 from 74.1%69.7% in 2002, which increase iscan be explained by the same factors discussed above with respect to the increase in the consolidated gross margin.

UMC revenues for the year ended December 31, 2003, were $394.0 million. UMC cost of services and products for the year ended December 31, 2003 was $95.0 million, resulting in a gross margin of $299.0 million. Gross margin percentage was 75.9% in 2003.

OperatingSundry operating expenses

        Consolidated sundry operating expenses for the year ended December 31, 2003 increased by 77.5% to $406.7 million from $229.1 million for the year ended December 31, 2002. The increase in sundry operating expenses was largely attributable to subscriber growth and the acquisition of UMC, which contributed $50.2 million to consolidated sundry operating expenses for the year ended December 31, 2003 after intercompany elimination. In 2003, we experienced an increase of $72.1 million in salaries and related social contributions for additional personnel and an increase in network repair and maintenance expenses of $19.0 million due to the expansion and aging of our network, as compared to the prior period. Our operating expenses for the year ended December 31, 2003 also included a $16.7 million provision related to dealer and subscriber fraud. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Our failure to implement the necessary infrastructure to manage our growth could have a material adverse effect on our business and results of operations."






Operating expenses as a percentage of net revenues were, however, relatively stable at 16.0% and 16.8% for the yearsyear ended December 31, 2003 and 2002, respectively.

        MTS OJSC sundry operating expenses for the year ended December 31, 2003 increased by 39.0% to $241.1 million from $173.4 million for the year ended December 31, 2002. The most significant increases were in the areas of bad debt, mainly related to dealer and subscriber fraud as discussed above ($16.7 million), and salaries and related social contributions for additional personnel ($28.6 million). OperatingSundry operating expenses as a percentage of segment revenues remained relatively stable at 16.4% for the year ended December 31, 2003, as compared to 16.6% for the year ended December 31, 2002.

        Telecom XXIUMC sundry operating expenses for the year ended December 31, 2003 were $50.2 million, or 12.7% of segment revenues.

Telecom XXI sundry operating expenses for the year ended December 31, 2003 increased by 48.7% to $28.1 million from $18.9 million for the year ended December 31, 2002. The most significant increases were in the areas of salaries and related social contributions for additional personnel ($5.3 million). OperatingSundry operating expenses as a percentage of segment revenues decreased to 13.3% for the year ended December 31, 2003, as compared to 20.8%23.9% for the year ended December 31, 2002 mainly due to the fact that 2002 was the first year of the commercial operations and we incurred more start-up operating expenses in that period.

        Russian regionsKuban-GSM sundry operating expenses for the year ended December 31, 2003 increased 124.7%by 126.7% to $88.1$25.4 million from $39.2$11.2 million for the year ended December 31, 2002. The most significant increases were in the areas of salaries and related social contributions due to an increase in personnel ($4.9 million) and billing and data processing expenses ($4.5 million) due to growth in our subscriber base. Sundry operating expenses as a percentage of segment revenues increased to 15.1% for the year ended December 31, 2003, as compared to 14.1% for the year ended December 31, 2002.

Other regions sundry operating expenses for the year ended December 31, 2003 increased by 123.9% to $62.7 million from $28.0 million for the year ended December 31, 2002. The most significant increases were in the areas of salaries and related social contributions for additional personnel ($21.316.4 million) and repair and maintenance expenses for expanded network ($4.62.2 million). OperatingSundry operating expenses as a percentage of segment revenues increased to 14.7%14.5% for the year ended December 31, 2003, as compared to 13.5%13.2% for the year ended December 31, 2002, primarily due to higherincreased expenses incurred in connection with our continuing expansion into the regions.

UMC operating expenses for the year ended December 31, 2003 were $50.2 million, or 12.7% of segment revenues.

Sales and marketing expenses

        Consolidated sales and marketing expenses for the year ended December 31, 2003 increased by 90.0% to $326.8 million from $172.0 million for the year ended December 31, 2002. The increase in sales and






marketing expenses was largely related to subscriber growth and the acquisition of UMC, which contributed $50.8 million to the consolidated sales and marketing expenses for the year ended December 31, 2003. The components of growth in sales and marketing expenses were an increase of $101.4 million in commissions paid to dealers and an increase of $57.0$53.4 million in advertising and promotion expenses. The increase in commissions paid to dealers was primarily due to an increase in the volume of sales through dealers, partially offset by a decrease in the amounts payable to dealers for every customer connected to our network. The increase in advertising and promotion expenses related to the separate marketing effort for the "Jeans" brand, which was launched in November 2002, increased overall marketing efforts and higher costs of television commercials. Sales and marketing expenses as a percentage of net revenues remained relatively stable at 12.8% for the year ended December 31, 2003, as compared to 12.6% for the year ended December 31, 2002.




        MTS OJSC sales and marketing expenses for the year ended December 30, 2003 increased by 48.9% to $187.3 million from $125.8 million for the year ended December 31, 2002. Sales and marketing expenses as a percentage of segment revenues increased to 12.7% for the year ended December 31, 2003 from 12.0% for the year ended December 31, 2002. This increase in sales and marketing expenses as a percentage of segment revenues can be explained by our strategy of pursuing distinct and separate marketing of our MTS and "Jeans" brand identities. Moreover, MTS OJSC has traditionally incurred the costs of our national television advertising campaign, which has experienced significant inflation in the last year. We do not allocate a portion of these television advertising costs to the Telecom XXI and Russianother regions segments even though sales in these regions benefit from this national advertising.

UMC sales and marketing expenses for the year ended December 31, 2003 were $50.8 million, or 12.9% of segment revenues.

        Telecom XXI sales and marketing expenses for the year ended December 31, 2003 increased by 42.3% to $31.6 million from $22.2 million for the year ended December 31, 2002, as a result of the expansion of the operations into regions other than St. Petersburg and an increase in dealersdealers' commission due to general growth of sales volume through dealers. Sales and marketing expenses as a percentage of segment revenues decreased to 15.0% for the year ended December 31, 2003 from 28.0% for the year ended December 31, 2002 mainly due to the start-up advertising campaign in 2002, the first year of commercial operations of Telecom XXI.

        RussianKuban-GSM sales and marketing expenses for the year ended December 31, 2003 increased by 94.9% to $15.2 million from $7.8 million for the year ended December 31, 2002. This increase was largely attributable to an increase in dealers' commissions by $6.5 million due to a growth in sales through dealers. Sales and marketing expenses as a percentage of segment revenues remained stable at 9.0% for the year ended December 31, 2003, as compared to 9.8% for the year ended December 31, 2002.

Other regions sales and marketing expenses for the year ended December 31, 2003 increased 112.7%by 119.2% to $58.7$43.4 million from $27.6$19.8 million for the year ended December 31, 2002, as a result of our acquisitions during 2002 and 2003 and the expansion of the existing regional operations. Sales and marketing expenses as a percentage of segment revenues remained stable at 9.8%slightly increased to 10.0% for the year ended December 31, 2003, as compared to 9.5%from 9.3% for the year ended December 31, 2002.

UMC sales and marketing expenses for the year ended December 31, 2003 were $50.8 million, or 12.9% of segment revenues.

Depreciation and amortization expenses

        Consolidated depreciation and amortization of property, network equipment, telephone numbering capacity, license costs and other intangible assets for the year ended December 31, 2003 increased by 98.3% to $415.9 million from $209.7 million for the year ended December 31, 2002. Depreciation and amortization expenses as a percentage of net revenues increased to 16.3% for the year ended December 31, 2003 from 15.4% for the year ended December 31, 2002. This increase was attributable to the increased asset base resulting from our continuing expansion of our network, especially with respect to Telecom XXI, and acquisitions of regional operations in Russia and the amortization of license costs, acquired customer base and tangible assets of UMC, which contributed $66.4 million to consolidated depreciation and amortization during 2003.

        MTS OJSC depreciation and amortization for the year ended December 31, 2003 increased by 38.8% to $199.9 million from $144.0 million for the year ended December 31, 2002 but remained relatively






stable as a percentage of segment revenues at 13.6% for the year ended December 31, 2003, as compared to 13.8% for the year ended December 31, 2002.

UMC depreciation and amortization for the year ended December 31, 2003 was $66.4 million, or 16.9% of segment revenues.






        Telecom XXI depreciation and amortization for the year ended December 31, 2003 increased by 112.7% to $36.8 million from $17.3 million for the year ended December 31, 2002 and decreased as a percentage of segment revenues to 17.5% from 21.8%. This decrease is explained by the fact that 2002 was the first year of Telecom XXI commercial operations and therefore revenues were lower in 2002 compared to 2003 although extensive capital investments into network build-up resulted in a high depreciation expense in both years.

        RussianKuban-GSM depreciation and amortization for the year ended December 31, 2003 increased by 52.4% to $32.3 million from $21.2 million for the year ended December 31, 2002 and decreased as a percentage of segment revenues to 19.2% from 26.8%. Absolute growth of depreciation and amortization expenses is mainly due to the continued build-out of our network in this region, while the decrease as a percentage of segment revenues was primarily the result of a large increase in revenue generated by the network.

Other regions depreciation and amortization for the year ended December 31, 2003 increased 137.1%by 203.3% to $114.5$82.2 million from $48.3$27.1 million for the year ended December 31, 2002 and increased as a percentage of segment revenues to 19.0% from 16.6%12.8%. The increase in the depreciation and amortization expense is associated with assets of acquired businesses and amortization of license costs recognized in the acquisitions of Kuban-GSM, Dontelecom, BM-Telecom, TAIF Telcom and other regional operators.

UMC depreciation and amortization for the year ended December 31, 2003, was $66.4 million, or 16.9% of segment revenues.

Operating Income

        Consolidated operating income for the year ended December 31, 2003 increased by 98.7% to $922.6 million, including $127.6 million of UMC's result after intercompany elimination for ten months ending December 31, 2003 from $464.4 million for the year ended December 31, 2002. Operating income as a percentage of net revenues was at 36.2% for the year ended December 31, 2003 and 34.1% for the year ended December 31, 2002.

        MTS OJSC operating income for the year ended December 31, 2003 increased by 44.3% to $527.8 million from $365.7 million for the year ended December 31, 2002 and remained relatively stable as a percentage of segment revenues at 35.9% for the year ended December 31, 2003, as compared to 35.0% for the year ended December 31, 2002.

UMC operating income for the year ended December 31, 2003 was $131.7 million, or 33.4% of segment revenues.

        Telecom XXI operating income for the year ended December 31, 2003 increased to $80.6 million, or 38.3% of segment revenues, from $2.3 million, or 2.9% of segment revenues, for the year ended December 31, 2002. Telecom XXI experienced higher profitability as large start-up expenses incurred in 2002 resulted in revenue growth in 2003 and due to higher tariffs that were implemented in 2003.

        RussianKuban-GSM operating income for the year ended December 31, 2003 increased to $74.6 million, or 44.3% of segment revenues, from $27.7 million, or 35.0% of segment revenues, for the year ended December 31, 2002. Growth of operating income as a percentage of segment revenues is primarily due to a relative decrease in operating expenses realized through economies of scale and the growth in Kuban-GSM's subscriber base.

Other regions operating income for the year ended December 31, 2003 increased 97.2%by 69.8% to $198.2$123.6 million, or 33.0%28.6% of segment revenues, from $100.5$72.8 million, or 34.5%34.4% of segment revenues, for the year ended December 31, 2002. The growth in operating income of Russianthe other regions segment occurred due to overall organic and acquisitional growth of the regional business (growth of subscriber base and revenues), followed by respective growth of cost of services and operating expenses.

UMC operating income for the year ended December 31, 2003, was $131.7 million, or 33.4% of segment revenues.






Currency exchange and translation gain

        Consolidated currency exchange and translation gain for the year ended December 31, 2003 was $0.7 million, compared to a $3.5 million loss for the year ended December 31, 2002. We conduct our operations primarily within the Russian Federation and Ukraine. We are subject to currency fluctuations, including U.S. dollar versus ruble/hryvnia and U.S. dollar versus euro. See "Item 3. Key Information—D. Risk Factors—Risks Relating to ourOur Financial Condition—Changes in exchange ratesDevaluation of the ruble against the U.S. dollar could increase our costs decreaseand reduce our reserves or prevent us from repaying our debt"revenues" and "Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk."






Interest expense

        Consolidated interest expense for the year ended December 31, 2003 increased by 140.1% to $106.6 million from $44.4 million for the year ended December 31, 2002 primarily as the result of interest expense related to our $400.0 million notes issuancesissuance in January 2003, $300.0 million notes issuance in August 2003, and $400.0 million notes issuance in October 2003. In addition, debt assumed in our acquisitions of UMC, TAIF Telcom, Sibchallenge and TSS in 2003 amounted to $88.3 million.

Provision for income taxes

        Consolidated provision for income taxes for the year ended December 31, 2003 increased by 119.7% to $242.5 million from $110.4 million for the year ended December 31, 2002. The effective tax rate increased to 29.2% in 2003 from 25.8% in 2002 as a result of the UMC acquisition in 2003 (in Ukraine the tax rate was 30% in 2003) and a lower level of non-deductible expenses for the year ended December 31, 2003. In addition, the deferred income tax benefit increased by $24.0 million to $43.0 million for the year ended December 31, 2003 from $19.0 million for the year ended December 31, 2002 as a result of the increase in the amortization of licenses and other intangible assets of the regional operators acquired during 2002 and 2003.

Minority interest

        Minority interest for the year ended December 31, 2003 increased by $32.0 million to $71.7 million from $39.7 million for the year ended December 31, 2002 as a result of growth in net income of regional operators, including $23.4 million for Kuban-GSM, $17.0 million for Telecom-900 and $13.1 million for Recom, and due to regional operators acquired in 2003, including $3.6 million for TAIF Telcom and $10.6 million for UMC for the period prior to the purchase of 100% of UMC in July 2003.

Net income

        Net income for the year ended December 31, 2003 increased by $240.1 million, or 86.6%, to $517.2 million, compared to $277.1 million for the year ended December 31, 2002, due to overall growth of our operations and the factors discussed above. Net income as a percentage of revenues was 20.3% in 2002 and 2003.

Year Ended December 31, 2002 compared to Year Ended December 31, 2001

Revenues and cost of services and products

Consolidated revenues for the year ended December 31, 2002 increased 52.5% to $1,361.8 million from $893.2 million for the year ended December 31, 2001. This increase was primarily due to the significant growth in our subscribers from 2.7 million as of December 31, 2001 to 6.6 million as of December 31, 2002, an increase of 151%. The increase in our subscriber base was partially offset by a decrease in tariffs in the Moscow license area and our continued expansion into the regions outside of the Moscow license area where tariffs are lower. As a result, average monthly service revenue per subscriber decreased 36.4% from $36 per subscriber in 2001 to $23 in 2002.

        For the year ended December 31, 2002 service revenues increased by $444.0 million, or 53.5%, from the year ended December 31, 2001 due to the growth in the number of our subscribers. Connection fees increased by only $3.8 million, or 18.0%, compared to the year ended December 31, 2001 due to the introduction of tariff plans without connection fees and low connection fee tariff plans. Equipment revenues increased by $20.7 million, or 49.5%, for the year ended December 31, 2002, compared to the year ended December 31, 2001 due to subscriber growth in 2002, offset by a decrease in the average selling price of handsets.






Consolidated cost of services and products for the year ended December 31, 2002 increased 56.2% to $286.7 million from $183.5 million for the year ended December 31, 2001. The increase in costs was primarily attributable to subscriber growth. Consolidated gross margin remained at 79% for the years ended December 31, 2001 and 2002.

MTS OJSC revenues for the year ended December 31, 2002 increased 25.6% to $1,044.9 million from $831.9 million for the year ended December 31, 2001. Although mobile penetration in the Moscow license area is higher than in the Russian regions, we continued to attract new subscribers in the Moscow market by introducing new tariff plans and actively marketing our services. As a result of these efforts, our subscriber base in the Moscow license area increased from 2.0 million as of December 31, 2001 to 3.1 million as of December 31, 2002.

MTS OJSC cost of services and products for the year ended December 31, 2002 increased 40.2% to $236.0 million from $168.3 million for the year ended December 31, 2001. This was primarily due to the cost of equipment increasing by $27.2 million to $62.2 million for the year ended December 31, 2002 from $35.0 million for the year ended December 31, 2001, resulting from an increase in the number of subscribers. This represents an increase as a percentage of segment revenues to 6.0% from 4.2%. Interconnection and line rental charges increased to $84.9 million in 2002 from $68.2 million in 2001, but declined slightly as a percentage of segment revenues to 8.1% from 8.2%. Roaming expenses increased to $88.9 million, or 8.5% of segment revenues, in 2002 from $65.1 million, or 7.8% of segment revenues, in 2001.

MTS OJSC gross margin increased 21.9% to $808.9 million in 2002 from $663.5 million in 2001. However, our gross margin percentage decreased from 79.8% in 2001 to 77.4% in 2002 primarily as a result of lower revenue per minute of use due to the introduction of lower tariffs during 2002.

Russian regions (including Telecom XXI) revenues for the year ended December 31, 2002 increased 471.5% to $370.3 million from $64.8 million for the year ended December 31, 2001. The growth in revenues resulted from our continued expansion into the regions through organic growth and acquisitions. Our subscriber base in the Russian regions increased from 375,000 as of December 31, 2001 to 2.9 million as of December 31, 2002. Our acquisitions of Kuban-GSM and other regional operators, added approximately 640,000 subscribers. Additional subscribers were attracted through active marketing campaigns in Kuban, St. Petersburg and other license areas.

Russian regions (including Telecom XXI) cost of services and products for the year ended December 31, 2002 increased 449.1% to $93.9 million from $17.1 million for the year ended December 31, 2001 due to subscriber growth.

Russian regions (including Telecom XXI) gross margin increased $231.0 million, or 480.7%, from $47.6 million in 2001 to $276.4 million in 2002, primarily due to acquisitions of Kuban-GSM and other regional operators during 2002 as well as the launch of commercial operations by Telecom XXI in St. Petersburg in the end of 2001. Our gross margin percentage for the Russian regions increased to 74.6% in 2002 from 73.5% in 2001 primarily as a result of the increase in revenues from subscriber growth being greater than the growth in costs.

Operating expenses

Consolidated operating expenses for the year ended December 31, 2002 increased 70.2% to $229.1 million from $134.6 million for the year ended December 31, 2001. Operating expenses as a percentage of net revenues increased to 16.8% for the year ended December 31, 2002, as compared to 15.1% for the year ended December 31, 2001. The increase in operating expenses was primarily due to an increase of $40.3 million in salaries and related social contributions for additional personnel, an increase of $13.8 million in taxes other than income taxes and an increase in network repair and maintenance expenses of $9.8 million.






MTS OJSC operating expenses for the year ended December 31, 2002 increased 43.2% to $173.4 million from $121.1 million for the year ended December 31, 2001. The most significant increases were in the areas of salaries and related social contributions and network repair and maintenance expenses, as discussed above. Operating expenses as a percentage of segment revenues increased to 16.6% for the year ended December 31, 2002, as compared to 14.6% for the year ended December 31, 2001.

Russian regions (including Telecom XXI) operating expenses for the year ended December 31, 2002 increased 330.4% to $58.1 million from $13.5 million for the year ended December 31, 2001. Operating expenses as a percentage of segment revenues decreased to 15.7% for the year ended December 31, 2002, as compared to 20.9% for the year ended December 31, 2001 primarily due to the consolidation of Kuban-GSM, with a relatively low ratio of operating expenses to revenues.

Sales and marketing expenses

Consolidated sales and marketing expenses for the year ended December 31, 2002 increased 59.6% to $172.0 million from $107.7 million for the year ended December 31, 2001. The increase in sales and marketing expenses of $64.2 million resulted from an increase of $58.3 million in commissions paid to dealers and an increase of $13.8 million in advertising and promotion expenses, offset by a decrease of $7.9 million in handset subsidies. The increase in commissions paid to dealers primarily resulted from the increase in the volume of sales through dealers. Sales and marketing expenses as a percentage of net revenues was 12.1% for the year ended December 31, 2001 and 12.6% for the year ended December 31, 2002.

MTS OJSC sales and marketing expenses for the year ended December 31, 2002 increased 22.4% to $125.8 million from $102.8 million for the year ended December 31, 2001. Sales and marketing expenses as a percentage of segment revenues fell to 12.0% for the year ended December 31, 2002 from 12.4% for the year ended December 31, 2001.

Russian regions (including Telecom XXI) sales and marketing expenses for the year ended December 31, 2002 increased to $49.8 million from $5.5 million for the year ended December 31, 2001. Sales and marketing expenses as a percentage of segment revenues increased to 13.4% for the year ended December 31, 2002 from 8.5% for the year ended December 31, 2001. This increase resulted primarily from increased advertising expenses in 2002 in connection with our expansion into the regional markets.

Depreciation and amortization expenses

Consolidated depreciation and amortization of network equipment, telephone numbering capacity and license costs for the year ended December 31, 2002 increased 57.3% to $209.7 million from $133.3 million for the year ended December 31, 2001. Depreciation and amortization expenses as a percentage of net revenues increased to 15.4% for the year ended December 31, 2002 from 14.9% for the year ended December 31, 2001. This increase was attributable to the increased asset base resulting from our continuing expansion of our network, increased numbering capacity to support our growing subscriber base and the amortization of license costs recognized in the acquisitions of Kuban-GSM, BM-Telecom, Telecom-900, Telecom XXI and other regional operators during 2001 and 2002.

MTS OJSC depreciation and amortization for the year ended December 31, 2002 increased 25.3% to $144.0 million, or 13.8% of segment revenues, compared to $114.9 million, also 13.8% of segment revenues, for the year ended December 31, 2001. The increased depreciation and amortization costs related to an increase in the continued build out of our network.

Russian regions (including Telecom XXI) depreciation and amortization for the year ended December 31, 2002 increased 257.1% to $65.7 million from $18.4 million for the year ended December 31, 2001 but declined as a percentage of segment revenues to 17.7% from 28.4%. The






increase in the depreciation and amortization expense is associated with the consolidation of assets of acquired businesses and amortization of license costs recognized in the acquisitions of Kuban-GSM, BM-Telecom, Telecom-900, Telecom XXI and other regional operators during 2001 and 2002.

Impairment of investment

Impairment of investment for the year ended December 31, 2001 was $10.0 million. This charge related to payments made to the government of Belarus in connection with our tender for a license in Belarus which, at that time, we believed would not be recoverable. See Note 22 to our audited consolidated financial statements. We did not record any impairment charges for the year ended December 31, 2002.

Operating Income

Consolidated operating income for the year ended December 31, 2002, increased 43.3% to $464.4 million from $324.1 million for the year ended December 31, 2001. Operating income as a percentage of net revenues for the year ended December 31, 2002 decreased to 34.1% from 36.3% for the year ended December 31, 2001.

MTS OJSC operating income for the year ended December 31, 2002 increased 15.4% to $365.7 million from $316.9 million for the year ended December 31, 2001 but declined as a percentage of segment revenues to 35.0% from 38.1%. Our increased operating income primarily resulted from the growth of our subscriber base, partially offset by higher operating expenses and lower tariffs.

Russian regions (including Telecom XXI) operating income for the year ended December 31, 2002 increased to $102.9 million, or 27.8% of segment revenues, from $8.0 million, or 12.4% of segment revenues, for the year ended December 31, 2001. The increased operating income in the Russian regions was due to the benefits of lower costs of operations resulting from the significant expansion in the regions, partially offset by lower average monthly service revenue per unit and higher depreciation and amortization expenses.

Currency exchange and translation losses

Consolidated currency exchange and translation losses for the year ended December 31, 2002 increased to $3.5 million from $2.3 million for the year ended December 31, 2001. The ruble continued to devalue against the dollar during 2002 resulting in the increased loss. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Financial Condition—Changes in exchange rates could increase our costs, decrease our reserves or prevent us from repaying our debt" and "Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk."

Interest expense

Consolidated interest expense for the year ended December 31, 2002 increased to $44.4 million from $6.9 million for the year ended December 31, 2001 as the result of interest expense related to our $250.0 million and $50.0 million notes issuances in December 2001 and March 2002, respectively, as well as debt assumed in our acquisitions of Kuban-GSM and BM-Telecom in 2002.

Provision for income taxes

Consolidated provision for income taxes for the year ended December 31, 2002 increased 12.5% to $110.4 million from $98.1 million for the year ended December 31, 2001. The effective tax rate decreased to 25.8% in 2002 from 29.8% in 2001 as a result of a decrease in the corporate income tax rate from 35% to 24% effective January 1, 2002. The decrease in the corporate income tax rate was partially offset by the elimination in 2002 of investment tax concessions related to investments in infrastructure that were used extensively by us, that approximated $27.1 million in 2001. In addition,




effective January 1, 2002 tax rules were changed such that expenses previously not deductible for tax purposes became deductible. Non-deductible expenses decreased $35.4 million from $44.4 million in 2001 to $9.0 million in 2002.

Minority interest

        Minority interest for the year ended December 31, 2002 increased by $32.2 million to $39.7 million, compared to $7.5 million for the year ended December 31, 2001 primarily due to minority shareholders' interest in net income of Telecom-900 of $12.2 million and Kuban-GSM of $8.7 million.

Cumulative effect of a change in accounting principle

        In 2001, we changed our accounting method regarding recognition of subscriber acquisition costs. There were no changes in accounting principles in 2002. See Note 3 to our audited consolidated financial statements.

Net income

Net income for the year ended December 31, 2002 increased by $71.3 million, or 34.6%, to $277.1 million, compared to $205.8 million for the year ended December 31, 2001, as a result of the foregoing factors.

Liquidity and Capital Resources

        In July 2000, we completed our initial public offering on the New York Stock Exchange. The proceeds from the offering, net of underwriting discount, were $349.0$349 million. In December 2001 and March 2002, we raised approximately $294.0 million through U.S. dollar-denominated notes offerings in international capital markets. In January, August and October 2003, we raised approximately $396.0 million, $297.0 million and $396.0 million, respectively, through additional U.S. dollar-denominated notes offerings in international capital markets. In total,Since that time, we have accessed the international capital markets through the sale of unsecured notes fivesix times since December 2001 in an aggregate principal amount of $1.4 billion, with $1.1 billion$1.8 billion. In July 2004, a syndicate of suchinternational banks made available to us an unsecured loan facility in an aggregate amount being raisedof $500.0 million, which is payable in 2003.three years. In September 2004, this syndicated loan facility was increased to $600.0 million, of which we have drawn $600.0 million as of December 31, 2004. As of December 31, 2003,2004, we had indebtedness of






approximately $1,660.3$1,937.1 million, of which $16.8$12.5 million was capital lease obligations. See Note 11 to our audited consolidated financial statements for a description of our indebtedness.

Capital Requirements

        We need capital to finance the following:

•

capital expenditures, consisting of purchases of property, plant and equipment and intangible assets;



•

acquisitions;



•

repayment of debt;



•

changes in working capital; and



•

general corporate activities, including dividends.

        We anticipate that capital expenditures, acquisitions, repayment of long-term debt and dividends will represent the most significant uses of funds for several years to come.

        Our cash outlays for capital expenditures in 2002, 2003 2002 and 20012004 were $574.3 million, $958.8 million $574.3 million and $441.2$1,358.9 million, respectively. We expect to continue to finance most of our capital expenditure needs through our operating cash flows, and to the extent required, to incur additional






indebtedness through borrowings or additional capital raising activities. Historically, a significant portion of our capital expenditures have been related to the installation and build out of our GSM network and expansion into new license areas; however future expenditures may be significantly higher, in particular if licenses relating to new technologies become available.areas. We expect that capital expenditures will remain a large portion of our cash outflows in connection with the continued installation and build out of our network. We expect our capital expenditures in 2005 to invest approximately $1,200.0 millionbe at least comparable with or higher than our capital expenditures in 2004, of which approximately $1,025.0 million will be spent in Russia, and approximately $175.0 million in Ukraine.2004. These investments are required to support the growth of our subscriber base (i.e.,, to improve network capacity) and to develop our network in the new regions for which we received licenses in late 2003. Our actual capital expenditures may vary significantly from our estimates.

        In addition to capital expenditures, we spent $143.4 million, $667.2 million $143.4 million and $75.9$355.7 million in 2002, 2003 2002 and 2001,2004, respectively, to acquire businesses. We may continue to expand our business through acquisitions. Our cash requirement relating to potential acquisitions can vary significantly based on market opportunities.

        We also expect to refinance our existing debt when it becomes due. In May 2004, we retired $300.0$300 million in principal amount of our Floating Rate Notes due August 2004 fromwith the proceeds of a $200.0 million short-term bridge loan from Credit Suisse First Boston International and operating cash flows. This $200.0 million bridge loan was repaid from our operating cash flows and drawings on the syndicated loan facility described above. In December 2004, we repaid our 10.95% notes due 2004 in principal amount of $300.0 million will become due. We expect to refinance these notes.from further drawings on the syndicated loan facility.

        Under the shareholders' agreement, Sistema and T-Mobile have agreed to consult each other with respect to any dividend policy, with an expectation that annual distributions of not less than the equivalent of 25% of MTS OJSC's net profits (as determined under Russian accounting standards) will be made as dividends. In addition,        Sistema, which controls over 50% of our outstanding shares and consolidates our results in its financial statements, will requirehas a significant funds to meet its obligations (including its outstanding notes in the aggregate principal amount of $700.0 million)outstanding debt and service its debt.requires funds for debt service. These funds may come in part from dividends paid by its subsidiaries, including us. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Indentures relating to our notes and our controlling shareholder Sistema's notes contain restrictive covenants, which may limit our ability to engage in various activities." On June 30, 2003, our shareholders approved cash dividends totaling $111.0 million. As$111.4 million (including dividends on treasury shares of December 31, 2003,$0.4 million), which have been fully paid. On June 26, 2004, our shareholders approved cash dividends in the amount $219.9 million (including dividends on treasury shares of $1.1 million), which have also been fully paid. In May 2005, our Board of Directors recommended cash dividends in the amount of $96.7$409.48 million net(including dividends on treasury shares of tax in$1.5 million). Our shareholders will vote on this recommendation at the amount of $10.5 million, had been paid. In April 2004, our board of directors recommended for approval dividends in the total amount of 6.38 billion rubles, which is approximately $221.1 million using the Russian Central Bank exchange rateannual shareholders meeting on the date of recommendation.June 21, 2005. We generally intend to finance our dividend requirements through operating cash flow,flows, and accordingly, our payment of dividends may make us more reliant on external sources of capital to finance our capital expenditures and acquisitions.






        We expect that we will also need to makeincur certain expenditures and devote significant management resources over the next threetwo years in relation to our system of internal controls to ensure our compliance with certain provisions of the Sarbanes Oxley Act of 2002 that will apply to us starting from the fiscal year ending December 31, 2005.starting January 1, 2006.

        In addition, we are in the process of implementing an enterprise resource planning system that will require additional expenditures and devotion of significant management resources.

Capital Resources

        We plan to finance our capital requirements through a mix of operating cash flows and financing activities, as described above. Our major sources of cash have been cash provided by operations and the proceeds of our U.S. dollar-denominated notes issuances. We expect that these sources will continue to be our principal sources of cash in the future. We do not depend on off-balance sheet financing arrangements.

        The availability of financing is influenced by many factors, including our profitability, operating cash flows, debt levels, credit ratings, contractual restrictions and market conditions. We cannot assure






you that we will be able to continue to obtain large amounts of financing in the future, through note offerings or otherwise.

        At December 31, 2003,2004, our debtindebtedness was comprised of the following:

		Currency		Annual interest rate (Actual rate at December 31, 2003)		December 31, 2003
9.75% notes due 2008		USD		9.75%		$	400,000
8.375% notes due 2010		USD		8.375%			400,000
10.95% notes due 2004		USD		10.95%			299,640
Floating Rate Notes due 2004		USD		LIBOR+4% (5.15%)			298,196
ING Bank (Eurasia)		USD		LIBOR+4.15% (5.30%)			60,000
Dresdner Bank		USD		LIBOR+3.20%-3.35% (4.35%-4.50%)			15,400
Ericsson		USD		LIBOR+4% (5.15%)			23,400
Deutsche Telekom AG		USD		LIBOR+5%-7% (6.22%-8.22%)			7,981
TDC Mobile International A/S		USD		LIBOR+5%-7% (6.22%-8.22%)			6,838
Citibank		USD		LIBOR+3.5% (4.65%)			10,000
West LB		EUR		EURIBOR+2% (4.17%)			5,092
KFW		EUR		LIBOR+0.95%-4% (2.41%-5.46%)			4,313
HSBC		USD		LIBOR+2.75% (3.88%)			25,000
Hermes Credit Facility		EUR		EURIBOR + 0.65% (2.82%)			55,550
AVAL bank		UAH		10-16%			10,890
Motorola		USD		LIBOR + 1.5% (2.72%)			1,361
Guta Bank		USD		7%-15%			1,511
International Moscow Bank		RUR		13.4%			10,864
International Moscow Bank		USD		LIBOR+3.45% (4.60%)			—
MBRD		RUR		18.5%			1,220
Other debt		RUR		13.4%-20%			5,860
Other debt		USD		7%-15%			450
Total debt						$	1,643,566
Less current portion							701,148
Total long-term debt						$	942,418

Indebtedness		Currency		Annual interest rate (Actual rate at December 31, 2004)		Amount (in thousands)
9.75% notes due 2008		USD		9.75%		$400,000
8.38% notes due 2010		USD		8.38%		400,000
Syndicated loan		USD		LIBOR + 2.50% (5.28%)		600,000
EBRD		USD		LIBOR + 3.10% (5.88%)		150,000
CSFB		USD		LIBOR + 2.20% (4.76%)		140,000
HSBC Bank plc & ING BHF-Bank		USD		LIBOR + 0.44% (3.21%)		77,003
Hermes Credit Facility		EUR		EURIBOR + 0.65% (2.86%)		63,851
ING Bank (Eurasia)		USD		LIBOR + 2.25%-4.15% (4.81%-6.71%)		46,667
HSBC		USD		LIBOR + 2.75% (5.24%)		17,500
Ericsson		USD		LIBOR + 4.00% (6.56%)		14,850
Nordea Bank Sweden		USD		LIBOR + 0.40% (3.18%)		6,499
West LB		EUR		EURIBOR + 2.00% (4.22%)		4,000
KFW		EUR		EURIBOR + 0.95% (3.16%)		1,478
Citibank		USD		LIBOR + 1.15% (3.71%)		868
Other ruble-denominated debt		RUR		4.30%-16.50%		1,924
Total debt						$1,924,640
Less current portion						370,845
Total long-term debt						$1,553,795




        The following table presents aggregate scheduled maturities of debt principal outstanding as of December 31, 2003:2004:

					Amount (in thousands)
Payments due in the year ended December 31,
2004		$	701,148
2005			69,974		$370,845
2006			48,014		365,749
2007			16,128		227,195
2008			408,302		447,240
2009					40,100
Thereafter			400,000		473,511
		$	1,643,566		$1,924,640

        In addition, we had capital lease obligations in the amount of $12.5 million and $16.8 million as of December 31, 2003.2004 and December 31, 2003, respectively. The terms of our material debt obligations and capital lease obligations are described in Notes 1211 and 13,12, respectively, to our audited consolidated financial statements.

        Our ability to incur further indebtedness is limited by the covenants in our outstanding notes, including a debt/cash flow incurrence test and restrictions on our ability to grant liens on our properties and to enter into sale and lease-back transactions." Our syndicated loan facility contains similar and other covenants, including debt/EBITDA and EBITDA/interest expense maintenance covenants. In addition, Sistema, which controls 50.6% of our outstanding shares and consolidates our results in its financial statements, is subject to various covenants in the indentures relating to its notes (in the aggregate principal amount of $700.0$700 million), which impose restrictions on Sistema and its restricted subsidiaries (including us) with respect to,inter alia, among others, incurrence of indebtedness and liens. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Financial Condition—Indentures relating to our notes and our controlling shareholder Sistema's notes contain, and our syndicated loan agreement contains, restrictive covenants, which may limit our ability to incur debt and to engage in various activities."

        A summary of our cash flows and cash outlays for capital expenditures and acquisitionacquisitions of subsidiaries follows:

		Year Ended December 31,										Year Ended December 31,
		2003			2002			2001				2002		2003		2004
		(in thousands)										(in thousands)
Cash flows:
Net cash provided by operating activities		$	965,984		$	412,772		$	338,201			$412,772		$965,984		$1,711,589
Net cash used in investing activities			(1,910,087	)		(697,921	)		(441,523	)		(697,921	)	(1,910,087	)	(1,543,201	)
Net cash provided by financing activities			997,545			100,817			247,592			100,817		997,545		10,773
Net increase (decrease) in cash		$	55,715		$	(184,968	)	$	143,801
Net increase/(decrease) in cash												$(184,968	)	$55,715		$183,774
Cash outlays for:
Capital expenditures(1)		$	(958,771	)	$	(574,272	)	$	(441,200	)		$(574,272	)	$(958,771	)	$(1,358,944	)
Acquisition of subsidiaries, net of cash acquired		$	(667,206	)	$	(143,396	)	$	(75,858	)		$(143,396	)	$(667,206	)	$(355,744	)

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⁽¹⁾

Includes acquisitions of property, plant and equipment and intangible assets.

        For the year ended December 31, 2004, net cash provided by operating activities was $1,711.6 million, an increase of 77.2% from the year ended December 31, 2003. This increase was






primarily attributable to a growth in net revenues from subscribers, which was caused by an increase in our subscriber base.

        Net cash used in investing activities in the year ended December 31, 2004 was $1,543.2 million, a decrease of 19.2% from the year ended December 31, 2003. This decrease is the result of several factors, including a decrease in cash spent for the business acquisitions from $667.2 million in the year ended December 31, 2003 to $355.7 million in the year ended December 31, 2004 and net cash inflow resulting from disposals of short-term investments,i.e., matured bank deposits of $171.9 million during the year ended December 31, 2004. These factors were partially offset by an increase in cash spent on acquisition of property, plant and equipment and intangible assets from $958.8 million for the year ended December 31, 2003 to $1,358.9 million for 2004.

        Net cash provided by financing activities in the year ended December 31, 2004 was $10.8 million. In May 2004, we retired $300.0 million in principal amount of our Floating Rate Notes due 2004 from the proceeds of a $200.0 million short-term bridge loan and our operating cash flows. We paid dividends in the total amount of $232.7 million during the year ended December 31, 2004, which also included dividends paid to minority shareholders of certain of our subsidiaries. These outflows were offset by net proceeds from the new loans, reduced by repayments of $857.1 million.

        In 2003, net cash provided by operating activities was $966.0 million, an increase of 135.0%134.0% from the year ended December 31, 2002. The increase was primarily attributable to an increase in net revenues from subscribers, which was a result of an increase in our subscriber base.

        Net cash used in investing activities in 2003 was $1,910.1 million, of which $958.8 million related to the purchase of property, plant and equipment and intangible assets; $330.6 million were used to acquire the 100.0% stake in UMC; $107.0 million were used to acquire the 47.3% stake in Kuban-GSM in order to obtain 100% control over it; $62.9 million were used to acquire 52.7% of the common shares and






50% of the preferred shares of TAIF Telcom; $47.0 million were used to acquire the 100.0% stake in Sibchallenge; and $188.7 million were used for other acquisitions of stakes in regional operators and advances to our affiliates, primarily to MTS Belarus. See "Item 4. Information on Our Company—B. Business Overview," "A."Item 5. Operating Results—and Financial Review and Prospects—Acquisitions" and "Item 4. Information on Our Company—A. History and Development—Expansion." We financed our acquisitions of UMC, Kuban-GSM, TAIF Telcom and other regional operators primarily from the proceeds of $400.0$400 million of 9.75% notes due 2008 (issued in January 2003), $300.0$300 million of Floating Rate Notes due 2004 (issued in August 2003) and $400.0$400 million of 8.375% notes due 2010 (issued in October 2003).

        Net cash provided by financing activities in 2003 was $997.5 million. Net proceeds from the notes offerings during 2003 were $1,087.4 million, which were used, for, in addition to the acquisitions listed above, for the purchase of network equipment and intangible assets and advances to affiliates. We paid dividends in the total amount of $110.9 million during 2003, which also includesincluded dividends paid to minority shareholders of our certain of our subsidiaries.

        During the year ended December 31, 2002, net cash provided by operating activities was $412.8 million, an increase of 22%22.1% from the year ended December 31, 2001. The increase was primarily attributable to an increase in net income, adjusted for non-cash items, offset by a decrease in trade accounts payable, a decrease in income tax payable, and an increase in inventory. Net cash used in investing activities was $697.9 million, of which $574.3 million related to purchases of property, plant and equipment and intangible assets. Net cash provided by financing activities was $100.8 million, of which $50.8 million related to the proceeds from the 10.95% notes due 2004 (issued in March 2002) and $52.9 million was from loans.

        During 2001, net cash provided by operating activities was $338.2 million, an increase of 77.1% from 2000. The increase is primarily attributable to increases in net income, adjusted for non-cash items, income tax payable and trade accounts payable and a decrease in accounts receivable, offset by increases in receivables from related parties and VAT receivables. Net cash used in investing activities was $441.5 million, of which $441.2 million related to purchases of property, plant and equipment and intangible assets. Net cash provided by financing activities was $247.6 million, which was primarily from the issuance of 10.95% notes due 2004 (issued in December 2001). This was offset by repayment of certain debt obligations.






Liquidity

        AtAs of December 31, 2004 and 2003, we had total cash and cash equivalents of $274.2 million ($93.1 million in rubles, $152.5 million in U.S. dollars, $10.2 million in Ukrainian hryvnias and $18.4 million in other currencies) and $90.4 million ($60.8 million in rubles, $21.0 million in U.S. dollars and $8.6 million in other currencies)., respectively. In addition, as of December 31, 2004, we had short-term investments of $245.0$73.4 million mostly in U.S. dollar-denominated instruments at the Moscow Bank of Reconstruction and Development (MBRD), a related party. As of December 31, 2003,2004, we had unused availability under our credit facilities to draw another $22.4$167.1 million. In April

        For details of external financing refer to Note 11 to our audited consolidated financial statements. For subsequent events related to our external financing, refer to Note 23 to our audited consolidated financial statements.

        As of December 31, 2004, we obtainedhad a $200.0working capital deficit of $189.0 million short-term bridge loan.compared to a deficit of $457.5 million as of December 31, 2003. The decrease in working capital deficit was primarily attributable to the growth in the balance of total current assets as of December 31, 2004, compared to December 31, 2003 by $200.5 million. This growth was primarily attributable to an increase in the trade receivables balance by $62.5 million and an increase in the VAT receivables balance by $62.9 million. Repayment of our $300 million floating rate notes in May 2004 and repayment of the $300 million 10.95% notes in December 2004, included in current liabilities as of December 31, 2003, was offset by a $117.1 million increase in subscriber prepayments and a $267.5 million increase in the current portion of our debt. As a result, the change in the current liabilities balance as of December 31, 2004 compared to the balance as of December 31, 2003 was not significant. We expect to repay all long-term debts as they become due from our operating cash flows or through re-financings. We believe that our working capital is sufficient for our present and future requirements.

        As of December 31, 2003, we had a working capital deficit of $457.5 million compared to a deficit of $65.9 million as of December 31, 2002. The increase in working capital deficit was primarily attributable to the reclassification from long-term to current liabilities as at December 31, 2003inclusion of $300.0 million of 10.95% notes due 2004 (which are payablepreviously classified as long-term debt into current liabilities as of December 31, 2003 (these notes were repaid in December 2004), and the issuance of $300.0$300 million of Floating Rate Notes due 2004 (which were paidrepaid in May 2004). Cash and cash equivalents increased by $55.7 million to $90.4 million as at December 31, 2003. Short-term investments held at MBRD increased by $215.0 million as at December 31, 2003. Accrued expenses and other current liabilities increased by $174.5 million to $387.8 million primarily due to first-time inclusion of respective balances of UMC as a result of its acquisition in 2003. We also experienced a $76.9 million increase in subscriber prepayments and deposits as a result of growth in the subscriber base.

        Because most of our operating subsidiaries are incorporated in Russia, their ability to pay dividends to us is limited by provisions of Russian law. For example, Russian law requires that, among other things, dividends can only be paid in an amount not exceeding net profits as determined under Russian accounting standards. In addition, dividends may only be paid if the value of the company's net assets is not less than the sum of the company's charter capital, the company's reserve fund and the difference between the liquidation value and the par value of the issued and outstanding preferred stock of the company, if any, as determined under Russian accounting standards.






        We repaid our $300.0 million floating rate notes in May 2004 with the proceeds of a short-term bridge loan and operating cash flows and plan to refinance our $300.0 million 10.95% notes in 2004 using long-term debt, which we believe will convert our working capital position to positive. We believe our working capital is sufficient for our present requirements.

        As of December 31, 2002, we had a working capital deficit of $65.9 million compared to positive working capital of $168.2 million as of December 31, 2001. Cash and short-term investments decreased by $184.9 million and $55.3 million, respectively. The change in working capital was primarily due to the proceeds from issuance of 10.95% notes due 2004 (issued in December 2001) being spent to acquire regional operators and for capital expenditures in 2002. VAT receivables increased by $71.8 million in connection with the installation of property, plant and equipment not yet in use.

Foreign Currency Risk

        For a discussion of the impact of foreign currency fluctuations, see "Item 11. Quantitative and Qualitative Disclosures about Market Risks—Foreign Currency Risk."

Inflation

        The Russian economy has been characterized by high rates of inflation:

Year		Inflation rate		Inflation rate
1999		36.5%
2000		20.2%		20.2	%
2001		18.6%		18.6	%
2002		15.1%		15.1	%
2003		12.0%		12.0	%
2004				11.7	%

        The Ukrainian economy has been characterized by varying rates of inflation:

Year		Inflation rate		Inflation rate
1999		19.2%
2000		25.8%		25.8	%
2001		6.1%		6.1	%
2002		(0.6)%		(0.6	)%
2003		8.2%		8.2	%
2004				12.3	%

        WeIn most of the regions in which we operate, except for Ukraine (UMC) and Krasnodar region (Kuban-GSM), we denominate our tariffs in units linked to the U.S. dollar. While thea majority of our costs are denominated in U.S. dollars or are tightly linked to the U.S. dollar, certain of our costs, such as salaries and rents, are sensitive to rises in the general price level in Russia and Ukraine. When, however, the rate of inflation exceeds the rate of devaluation, this results in real appreciation of the local currency versus the U.S. dollar, as was the case with the ruble in 2002.2003. Moreover, in 2003 and 2004, the ruble appreciated in nominal terms against the U.S. dollar, which combined with the rate of inflation in Russia, resulted in a real appreciation of the ruble against the U.S. dollar by 13.6%.dollar. We would expect inflation-driven increases in these costs to put pressure on our margins. While we could seek to raise our tariffs to compensate for such increase in costs, competitive pressures may not permit increases that are sufficient to preserve operating margins. Accordingly, high rates of inflation in Russia and Ukraine combined with the nominal appreciation of the ruble against the U.S. dollar could significantly increase our costs and materially adversely affect ourits results of operations.

Credit Rating Discussion

        Our credit ratings impact our ability to obtain short- and long-term financing, and the cost of such financing. In determining our credit ratings, the rating agencies consider a number of factors, including






our operating cash flows, total debt outstanding, commitments, interest requirements, liquidity needs and availability of liquidity. Other factors considered may include our business strategy, the condition of our industry and our position within the industry. Although we understand that these and other factors are among those considered by the rating agencies, each agency might calculate and weigh each factor differently.

        Our credit ratings as of the date of this document are as follows:

Rating Agency		Long-Term Debt Rating		Outlook/Watch
Moody's(1)		Ba3		Stable
Standard & Poor's(2)		BB-		Stable

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⁽¹⁾

Rated on December 10, 2001.



⁽²⁾

Rated on April 28, 2004.March 24, 2005.

        None of our existing indebtedness has any triggers related to our credit ratings.






Critical Accounting Policies

        Critical accounting policies are those policies that require the application of management's most challenging, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sufficiently sensitive to result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies are those described below. For a detailed discussion of these and other accounting policies, see theNote 2 of our audited consolidated financial statements included elsewhere herein.statements.

Revenue Recognition

        Revenues are recognized on an accrual basis, when services are actually provided or title to equipment passes to customer, regardless of when the resulting monetary or financial flow occurs.

        We categorizescategorize the revenue sources in the statements of operations as follows:

•

Service revenues:revenue and connection fees: (a) subscription fees, (b) usage fees, (c) value added service fees, (d) roaming fees charged to other operators for guest roamers utilizing MTS'our network, (e) connection fees and (e)(f) prepaid phone cards;



•

Connection fees; and



•

Equipment sales: (a) salesSales of handsets and (b) sales of accessories.

        We defer initial connection fees receivedpaid by subscribers from customers activating their service on our network and amortize them over an average useful lifethe time of the initial signing of the contract with a subscriber which we estimate to three and one quarter yearsover the estimated average subscriber life in Russia and one year and four months in Ukraine.our network. We periodically evaluate actual churn of our subscribessubscribers and adjust our estimates of usefulaverage subscriber lives accordingly. For example, effective January 1, 2004, we have changed our estimates of average subscriber lives which increased our income for the year ended December 31, 2004 by $8.5 million. If we change our estimateestimates of the usefulaverage subscribers life of a subscriber,in the amountfuture, the amounts of connection fees and amortization of the acquired customer base we recognize in income would change accordingly. Historically, we have not made

Management estimates

        The preparation of our audited consolidated financial statements in accordance with U.S. GAAP requires management to make 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 for the reporting period. Actual results could differ from those estimates. Examples of significant adjustments.estimates include the provision for doubtful accounts and valuation allowance on deferred tax assets.

License Costs

        We capitalize the cost of licenses acquired in business combinations and directly from the government. As the telecommunication industryindustries in Russia, Ukraine and Ukraine doesUzbekistan do not have sufficient experience with renewal of licenses or extensions of license terms we amortize each license on a straight-line basis over the term of the license.license commencing from the date such license area becomes commercially operational. We review these licenses and their remaining useful life and, if necessary, revise the useful lives based on our actual utilization. The estimated useful lives of




licenses may vary depending on market or regulatory conditions, and any revision to the estimated useful lives may result in a cost write off or an increase in amortization costs.

        Most of our current licenses provide for payments to be made to finance telecommunication infrastructure improvements, which in the aggregate could total approximately $110.2$103.0 million, as of December 31, 2003. However, no decisions regulating2004. According to the terms of licenses, such contributions are to be made during the license period upon the decision and conditionsas defined by the Board of Directors of the Association of GSM-900 Operators. The Association is a nongovernmental, not-for-profit association, and their Board






of Directors comprises representatives of the major cellular communications companies, including us. The Association has not adopted any procedures for collecting such payments, nor have such procedures been formulated. Accordingly,established by Russian legislation. To date, we have not made noany payments to date pursuant to any of the current operating licenses issued to us and our consolidated subsidiaries. Further, our management believes that we will not be required to make any such payments in the future. In relation to these uncertainties, we have has not made any accruals for thisrecorded a contingent liability in the accompanying audited consolidated financial statements.

Useful Lives of Property Plant and Equipment

        We calculate depreciation expense for property, plant and equipment on a straight-line basis over their estimated useful lives. We establish useful lives for each category of property, plant and equipment based on our assessment of the use of the assets and anticipated technology evolution. We review and revise if appropriate the assumptions used in the determination of useful lives of property, plant and equipment at least on an annual basis.

        As a result of recent financial statement restatements by numerous U.S. public companies and publication of a letter by the Chief Accountant of the SEC regarding the interpretation of longstanding lease accounting principles, we have corrected our accounting practices for leasehold improvements in the fourth quarter of 2004. The primary effect of this accounting correction was to accelerate to earlier periods depreciation expenses with respect to certain components of previously capitalized leasehold improvements.

Impairment of Long-lived Assets

        We periodically evaluate the recoverability of the carrying amount of our long-lived assets in accordance with SFASStatement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable, MTS compareswe compare undiscounted net cash flows estimated to be generated by those assets to the carrying amount of those assets. When these undiscounted cash flows are less than the carrying amounts of the assets, MTS recordswe record impairment losses to write the asset down to fair value, measured by the estimated discounted net future cash flows expected to be generated from the use of the assets. Further, the potential impact, if any, that the new Law on Telecommunications that came into effect in Russia on January 1, 2004, may have on estimated useful lives of long-lived assets will be assessed where appropriate regulations consistent with the new law are promulgated.

Translation Methodology

        Effective January 1, 2003,We use the Russian economy ceased to be considered hyperinflationary. We believe that U.S. dollar isas the appropriate functional currency for us and most of our company due to pervasive use of U.S. dollar in our operations. Thesubsidiaries because the majority of our and their revenues, costs, property, plant and equipment purchased,and intangible assets purchases and debt are either priced, incurred, payable or otherwise measured in U.S. dollars. WeEach of the legal entities domiciled in Russia, Ukraine, Uzbekistan and our subsidiaries maintain ourBelarus maintains its records and prepareprepares its financial statements in the local currency, principally either the Russian rublesruble, the Ukrainian hryvnia, the Uzbek som or Ukrainian hryvniasthe Belarusian ruble, in accordance with the requirements of local statutory accounting and tax legislation.

        Translation (re-measurement) of financial statements denominated in local currencies into U.S. dollars has been performed in accordance with the provisions of Statement of Financial Accounting Standard ("SFAS")SFAS No. 52 "Foreign Currency Translation."

        For our subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities have been translated at the period-end exchange rates. Non-monetary assets and liabilities have been translated at historical rates. Revenues, expenses and cash flows have been translated at historical rates.






Translation differences resulting from the use of these rates have been accounted for as foreign currency translationexchange gains and losses in theour consolidated statements of operations.

        For UMC and Kuban-GSM, where the functional currency is the local currency, the Ukrainian hryvnia and the Russian ruble, respectively, for non-monetary assets and equity, a "new cost basis" as of January 1, 2003 had been established. Allall year-end balance sheet items have been translated into U.S. dollars at the period endperiod-end exchange rate. Revenues and expenses have been translated at period averagethe period-average exchange rate. CumulativeIn addition, a "new cost basis" for all non-monetary assets of Kuban-GSM has been established as of January 1, 2003, when the Russian economy ceased to be considered hyperinflationary. A cumulative translation adjustments are recorded directlyadjustment, related to the translation of UMC and Kuban-GSM, in the amount of $23.0 million was reported as accumulated other comprehensive income in our audited consolidated statement of shareholders' equity.balance sheet.






Taxation

        Generally, tax declarations remain open and subject to inspection for a period of three years following the tax year. While most of our tax declarations have been inspected without significant penalties, these inspections do not eliminate the possibility of re-inspection.

        We believe that we have adequately provided for tax liabilities in our financial statements; however, the risk remains that relevant authorities could take differing positions with regard to interpretive issues and the effect could be significant. See Note 23 to our audited consolidated financial statements and "Item 8. Financial Information—B. Significant Changes" for information regarding a recent tax audit and related assessment by the tax authorities.

        We recognize deferred tax assets and liabilities for the expected future tax consequences of existing differences between financial reporting and tax reporting bases of assets and liabilities, and for the loss or tax credit carry forwardscarry-forwards using enacted tax rates expected to be in effect at the time these differences are realized. We record valuation allowances for deferred tax assets when it is more likely than not that these assets will not be realized. We have recorded 100% valuation allowance against tax loss carryforwards.

Recently Adopted Accounting Standards

        In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the asset's useful life. Changes in the liability resulting from the passage of time will be recognized as operating expense. We adopted SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on our financial position or results of operations.

        In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 4, "Reporting Gains and Losses from Extinguishments of Debt," addressed statement of operations classification of gains and losses from extinguishment of debt. SFAS No. 64 amended SFAS No. 4 and is no longer necessary due to the rescission of SFAS No. 4. SFAS No. 145 also amended SFAS No. 13 "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Following the adoption of the requirements of SFAS No. 145 effective January 1, 2003, we reclassified a gain on the extinguishment of a credit facility with OJSC AB Inkombank of $2.8 million and the related income tax expense of $0.7 million from extraordinary gain on debt repayment to other income and income tax expense, respectively, in the consolidated statement of operations for the year ended December 31, 2001.

        In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires the recognition of a liability when incurred for costs associated with an exit or disposal activity. The fundamental conclusion reached by the FASB in this Statement is that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. We adopted the provisions of SFAS No. 146 effective January 1, 2003. The adoption of SFAS No. 146 did not have a material impact on our financial position or results of operations.

        In November 2002, FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires






additional disclosures about the guarantor's obligations under certain guarantees that it has issued. We adopted the initial recognition and measurement provisions of this interpretation on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our financial position or results of operations.

        In November 2002, the Emerging Issues Task Force ("EITF") issued a final consensus on EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on when and how an arrangement involving multiple deliverables should be divided in separate units of accounting. We adopted the requirements of EITF Issue No. 00-21 prospectively for arrangements entered into after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on our financial position or results of operations.

        In April 2003, FASB issued SFAS No. 149, "Amendments of FASB Statements No. 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under what circumstances a contract with an initial investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying and certain other existing pronouncements. We adopted the requirements of SFAS No. 149 for contracts entered into or modified and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on our financial position or results of operations.

        In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) certain classes of freestanding financial instruments that embody obligations for the issuer, including mandatory redeemable financial instruments, obligations to repurchase the issuer's equity shares by transferring assets and certain obligations to issue a variable number of shares. We adopted the requirements of SFAS No. 150 effective July 1, 2004. The adoption of this statement did not have a material impact on our financial position or results of operations.

New Accounting Pronouncements

        In DecemberJanuary 2003, the Financial Accounting Standards Board, or FASB, issued a revision toFASB Interpretation No. 46, "Consolidation of Variable Interest Entities, Entities—an Interpretationinterpretation of ARB No. 51" ("FIN 46R"FIN46"), to address perceived weaknesses in accounting for entities commonly known as special-purpose or the "Interpretation"). FIN 46R clarifiesoff-balance-sheet. In addition to numerous FASB Staff Positions written to clarify and improve the application of ARBFIN. 46, the FASB announced a deferral for certain entities, and an amendment to FIN. 46 entitled FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"). FIN. 46 establishes consolidation criteria for entities for which "control" is not easily discernable under Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which is based on the premise that holders of the equity investors do not haveof an entity control the characteristicsentity by virtue of voting rights.

        FIN. 46 provides guidance for identifying the party with a controlling financial interest resulting from arrangements or do not have sufficient equity at risk forfinancial interests rather than from voting interests. FIN 46 defines the entity to finance its activities without additional subordinated financial support. FIN 46R requires the consolidation of these entities, known asterm variable interest entities ("VIEs"), byentity, or VIE, and is based on the primary beneficiary of the entity. The primary beneficiary is the entity,premise that if any, that will absorba business enterprise absorbs a majority of the entity'sVIE's expected losses receiveand/or receives a majority of the entity'sits expected residual returns or both.

        Among other changes,(measures of risk and reward), that enterprise (the primary beneficiary) has a controlling financial interest in the revisions ofVIE. Under FIN 46R (a) clarified some requirements46, the assets, liabilities, and results of the original FIN 46, which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective dateactivities of the Interpretation for public companies, toVIE should be included in the endconsolidated financial statements of the first reporting period ending after March 15, 2004, except that all public companies must at a minimumprimary beneficiary. We were required to apply the provisions of the Interpretation to entities that were previously considered "special-purpose entities" under the FASB literature prior to the issuance of FINFIN. 46R by the end ofin the first reporting period ending afterquarter 2004. As we did not have any VIEs during the year ended December 15, 2003.

        We are evaluating whether31, 2004, the adoption of FIN 46this new method of accounting for VIEs did not affect our financial condition or results of operations as of December 31, 2004.




        In September 2004, the Emerging Issues Task Force (or EITF) issued a final consensus on EITF Issue No. 04-1, "Accounting for Preexisting Relationships between the Parties to a Business Combination." In this issue, the EITF reached a consensus that a business combination between two parties having a preexisting relationship is a multiple-element transaction with one element being the business combination and the other element being the settlement of the preexisting relationship. EITF Issue No. 04-1 is effective for reporting periods beginning after October 13, 2004. We do not anticipate that the adoption of EITF Issue No. 04-1 will have a material impact on our financial position cash flows andor results of operations. We did not enter into any transactions under

        At the scopeSeptember 2004 meeting of FIN 46Rthe EITF, the SEC staff issued an announcement D-108 "Use of the residual method to value acquired assets other then goodwill" stating that companies must use the direct value method to determine the fair value of their intangible assets acquired in business combinations completed after FebruarySeptember 29, 2004. The SEC staff also announced that companies that currently apply the residual value approach for valuing intangible assets with indefinite useful lives for purposes of impairment testing, must use the direct value method by no later than the beginning of their first fiscal year after December 15, 2004.

        As of December 31, 2004, we performed our annual impairment test to measure the fair value of our 900 and 1800 MHz licenses in our national footprint using the residual value approach. Under this new accounting guidance, we performed an impairment test to measure the fair value of our 900 and 1800 MHz licenses as of January 1, 2003.2005 using the direct value method. Based on the assessment, no impairment charge as of December 31, 2004 is required.

        In December 2003,2004, FASB issued SFAS No. 123R (revised 2004), "Share-Based Payment," a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123R supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The statement focuses primarily on accounting for translations in which we obtain employee services in share-based payment transactions. This statement requires a public company to measure the Commission issuedcost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This standard is scheduled to become effective in the first interim reporting period beginning after June 15, 2005. Assuming that the effective date is not delayed, we will apply this new standard to our interim reporting period beginning July 1, 2005. We have not yet determined the amount of impact on the consolidated statements of operations following adoption and subsequent to 2005 or the transition method we will use. We do not believe that results of the adoption of SFAS No. 123R will be significant to our consolidated financial position or results of operations.

        In March 2005, the SEC released Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition.107, "Share-Based Payments," or SAB 104 updates portions107. The interpretations in SAB 107 express views of the interpretiveSEC staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations, and provide the SEC staff's views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance includedrelated to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS No. 123R in Topic 13an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R and the modification of employee share options prior to adoption of SFAS No. 123R.

        In March 2005, FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143." This Interpretation clarifies that the term "conditional asset retirement obligation" as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity, in which the






codificationtiming and (or) method of Staff Accounting Bulletins in ordersettlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists to make this interpretive guidance consistent with current authoritative accountinga reasonable estimate of the fair value of the obligation. Interpretation 47 is effective for us beginning January 1, 2006. We are currently in the process of assessing effects of Interpretation 47 on our consolidated financial position and auditing guidance and Commission rules and regulations. We believe we are following the guidanceresults of SAB 104.operations.

Trend Information

Sales

        In 2002,2004, our revenues increased by 52.5%52.7% from $893.2$2,546.2 million to $1,361.8 million and our$3,887.0 million. Our subscriber base increased by 150.7%to 34.2 million subscribers as of December 31, 2004 from 2.716.7 million as of December 31, 2001 to 6.6 million as of2003, or by 104.8%. Our revenues for the year ended December 31, 2002. These trends continued2003 grew by 87.0% to $2,546.2 million in 2003 with our revenues increasing 87.0% fromcomparison to $1,361.8 million to $2,546.2 million.for the year ended December 31, 2002. Our subscriber base increased by 151.7% from 6.6 million subscribers as of December 31, 2002 to 16.7 million as of December 31, 2003.2003, or by 153.0%.

        Average monthly service revenue per subscriber in Russia fell from $36 in 2001 to $23 in 2002 to $17 in 2003 due to the introduction of lower tariffs in the Moscow license area and generally lower tariffs in regions, as well as penetration to mass-market. This trend continued in 2003. Averagethe year ended December 31, 2004 as average monthly service revenue per subscriber in Russia in 2003 decreased to $17.$12 for the year ended December 31, 2004.

        In 20022003 and 2003,2004, more than half of our subscriber growth occurred outside of the Moscow license area. However, as a result of competition and the tariff structure providing for lower price levels in the Russian regions ouroutside of the Moscow license area, average monthly service revenue per subscriber in the Russian regions remains lower than in the Moscow license area though(though costs are generally lower there, as well.well). See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Increased competition and a more diverse subscriber base have resulted in decreasing average monthly service revenues per subscriber, and increasing subscriber churn which may materially adversely affect our results of operations." We generally expect to see a continued decline in average monthly service revenue per subscriber due to the growth of the regional subscriber base outside Moscow and introduction of lower tariff plans or decrease in prices of the existing tariff plans in connection with our competitive marketing efforts.

        UMC has experienced subscriber growth from 1.0 million subscribers at December 31, 2001 to 1.7 million subscribers at December 31, 2002 and to 3.33.4 million subscribers at December 31, 2003. Consistent with the general trends in Russia,2003 and 7.4 million at December 31, 2004, and we expect averagethis trend to continue, assuming the Ukrainian economy continues to grow. The significant increase in subscriber growth is also the result of a change in the definition of a subscriber with respect to UMC's prepaid tariff subscribers, which starting in the fourth quarter of 2004 includes an individual or organization whose account shows chargeable activity within 183 days, rather than the previous 90-day period. Average monthly service revenue per subscriber decreased in 2004 to decrease at UMC.$13 from $15 in 2003 as a result of an extensive marketing campaign that promoted various new tariff offerings. We generally expect to see a continued decline in average monthly service revenue per subscriber in Ukraine due to increased competition

Churn

        Churn, as we define it, includes internal churn within our subscriber base,i.e., it includes subscribers who disconnect from our network in order to enroll in another tariff plan offered by us. Internal churn increased following the launch in November 2002 of our "Jeans" tariff plan. See "—Subscriber Data" above. Our subscriber churn in Russia increased from 26.8% in 2001 to 33.9% in 2002. The growth of the rate continued in 20032002 to 47.3%. in




2003. We believe that this trend reversed in the trendyear ended December 31, 2004 as a result of decrease in internal churn and certain marketing initiatives we launched with the aim of increasing subscriber loyalty. Our subscriber churn for the year ended December 31, 2004 was 27.5%, as compared to 47.3% for 2003. Although our subscriber churn in Russia decreased for the year ended December 31, 2004, we believe that subscriber churn is due to the continued growth ofhighly dependent on competition and the growing number of mass-market subscribers in our overall subscriber mix. Mass-market subscribers generally choose to prepay their mobile phone usage by purchasing pre-paid packages and are more likely to switch providers to take advantage of low-tariff promotions. As a result, competition for these subscribers will likely lead to sustained downward pressure on tariffs. The other reasonsIn order to decrease subscriber churn, in 2004, we launched a new marketing campaign that provides a 15% discount for growthservices rendered to certain contract subscribers if they do not terminate their contracts within one year of activation. Other initiatives taken to limit the churn ratio are the absence of timing contracts withrate include preventive SMSs or call center calls to subscribers in Russia (when some minimal period of usage is accepted by subscriber)offering different packages and by absence of connection fees, which generally prevent early churn. Churn, as we use it, includes internal churn within our subscriber base,i.e., our subscribers switching between different tariff plans we offer. Internal churn increased following the launch in November 2002 of the "Jeans" tariff plan. See "—Subscriber Data" above.services.




Off-balance Sheet Arrangements

Obligations under guarantee contracts

        As of December 31, 20032004 and 2002,2003, our off-balance sheet arrangements consisted of debt guarantees issued to related parties as follows:

		Guaranteed amount outstanding at December 31,						Guaranteed amount outstanding at December 31,
Related Party
		2003			2002
Invest-Svyaz-Holding		$	21.6		$	7.0
								2004		2003
								(in millions)
Invest-Svyaz Holding								$21.6		$21.6
MTS Belarus		$	14.5			—		25.0		14.5
Total		$	36.1		$	7.0		$46.6		$36.1

        We issued guarantees to various financial institutions on behalf of Invest-Svyaz-Holding, or ISH, to enable ISH to finance its operations. ISH'sInvest-Svyaz Holding, our shareholder and a wholly-owned subsidiary of Sistema. Invest-Svyaz Holding's primary business is leasing various types of telecommunications and other assets to us. See Notes 18 and 22Note 17 to our audited consolidated financial statements.statements for additional information regarding these transactions. We classify these leases as capital leases in our audited consolidated financial statements and the present value of future lease payments is reflected as a liability in our consolidated balance sheet.

        We issued financial guarantees on behalf of MTS Belarus, our equity investee to assist it with its financing needs. See Note 2219 to our audited consolidated financial statements. This guarantee is not reflected in our consolidated balance sheet.

Under each of the guarantees outstanding as of December 31, 2003,2004, we could be required to compensate financial institutions in the event of the borrower's default. We are currently not aware of any events, and do not expectanticipate that any event will occur, that willwould cause a default of the borrowers and, thustherefore, require us to fulfill our obligations to make payments under these guarantees. These guarantees are not reflected in our consolidated balance sheet due to the insignificance of their fair values.

Obligations under derivative contracts

        In connection with theour acquisition of 51% of the common shares and 50% of the preferred shares of TAIF Telecom in April 2003, we entered into call and put option agreements with shareholders of TAIF Telcom to acquire the remaining 49% of the common shares and 50% of the preferred shares of TAIF Telcom. See Note 4 to our audited consolidated financial statements.

The exercise periodperiods for the call option on the common shares iswas 48 months from the acquisition date and for the put option on the common shares iswas 36 months following an 18 month18-month period after the acquisition date. The call and put option agreements for the common shares stipulate stipulated




a minimum purchase price of $49.0 million plus 8% per annum commencing from the acquisition date.

The exercise periodperiods for the call option on the preferred shares iswas 48 months following a 24 month24-month period after the acquisition date and for the put option on the preferred shares iswas a 24 month24-month period from the acquisition date. The call and put option agreements for the preferred shares stipulatestipulated a minimum purchase price of $10.0 million plus 8% per annum commencing from the acquisition date.

We expect to exerciseexercised our optionscall option to acquire TAIF Telcom's commonthe remaining shares in September 2004 and preferredcompleted the acquisition in October 2004.

        In connection with our acquisition of 74% of the shares withinin Uzdunrobita in August 2004, we entered into call and put option agreements with the time periods described above. We expectexisting shareholders of the company to finance thisacquire the remaining 26% of the shares. See Note 3 to our audited consolidated financial statements. The exercise period for the option is 36 months from the acquisition date. The call and put option agreements stipulate a minimum purchase price of $37.7 million plus 5% per annum commencing from the acquisition date. The fair value of the put option was approximately $0.9 million as of December 31, 2004.

        In December 2004, we entered into two variable-to-fixed interest rate swap agreements with ABN AMRO Bank N.V and with HSBC Bank PLC to hedge our exposure to variability of future cash flows caused by the change in LIBOR related to the syndicated loan. We agreed with ABN AMRO to pay a fixed rate of 3.27% and receive a variable interest of LIBOR on $100.0 million for the period from operations.October 7, 2004 up to July 27, 2007. We agreed with HSBC Bank PLC to pay a fixed rate of 3.25% and receive a variable interest of LIBOR on $150.0 million for the period from October 7, 2004 up to July 27, 2007. These instruments qualify as cash flow hedges under the requirements of SFAS No. 133 as amended by SFAS No. 149. As of December 31, 2004, we recorded a liability of $0.6 million in relation to these contracts in the accompanying consolidated balance sheet and a loss of $0.5 million net of tax of $0.1 million as other comprehensive income in the accompanying consolidated statement of changes in shareholders' equity in relation to the change in fair value of these agreements.

Tabular Disclosure of Contractual Obligations

        We have various contractual obligations and commercial commitments to make future payments, including debt agreements, lease obligations and certain committed obligations. The following table






summarizes our future obligations (including capital lease interest) under these contracts due by the periods indicated as of December 31, 2003:2004:

		2004			2005- 2006			2007- 2008			2009- thereafter			Total			2005		2006- 2007		2008- 2009		2010- thereafter		Total
Contractual Obligations:
Notes payable		$	707,600		$	145,000		$	509,205		$	560,341		$	1,922,146		$—		$—		$400,000		$400,000		$800,000
Bank loans			112,346			127,271			25,481			—			265,098		370,845		592,944		87,340		73,511		1,124,640
Interest payments																	124,454		224,315		129,338		58,849		536,959
Capital leases			12,741			8,996			65			277			22,079		10,547		4,059		340		451		15,397
Operating leases and service agreements			14,407			7,421			3,308			12,389			37,525		45,889		32,053		18,028		35,475		131,445
Committed Investments:(1)
Purchases of property, plant and equipment			238,963			27,103			—			—			266,066		164,700		—		—		—		164,700
Total		$	1,086,057		$	315,791		$	538,059		$	573,007		$	2,512,914		$716,435		$853,371		$635,046		$568,286		$2,773,141

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⁽¹⁾

Non-bindingUnder non-binding purchase commitments.




        In addition, as of December 31, 2003,2004, we had guaranteed indebtedness of related parties not reflected in our financial statements, due to the insignificance of its fair value, under which we could be potentially liable for $36.1$46.6 million. See Note 2221 to theour audited consolidated financial statements.






        In connection withSince the acquisitioncommencement of TAIF Telcomour operations in April 2003, we entered into call and put option agreements with shareholders1994, a number of TAIF Telcom to acquire the remaining 49% of common shares and 50% of preferred shares of TAIF Telcom. The call and put option agreementstelecommunication licenses for the common sharesRussian Federation were issued to us and our now consolidated subsidiaries. These license agreements stipulate that certain fixed "contributions" be made to a minimum purchase price of $49.0 million plus 8% per annum commencing from the acquisition date. The call and put option agreementsfund for the preferred shares stipulate a minimum purchase pricedevelopment of $10.0 million plus 8% per annum commencing fromtelecommunication networks in the acquisition date.

        The termsRussian Federation. Most of our current licenses provide for payments to be made to finance telecommunications infrastructure improvements,the payment of such fees, which in the aggregate could total approximately $110.2$103.0 million as of December 31, 2003,2004, which are not reflected in our financial statements. See Note 2221 to theour audited consolidated financial statements.statements for additional information.







Item 6.    Directors, Senior Management and Employees


A. Directors and Senior Management

Key Biographies

        Our directors and executive officers, and their dates of birth and positions as of April 1, 2004,the date of this annual report were as follows:

Name		Year of Birth		Position
Vassily V. Sidorov		1971		President
Vladimir S. Lagutin		1947		Chairman
Vassily V. Sidorov		1971		Director, President and CEO
Alexei N. Buyanov(1)		1968		Director
Fridbert Gerlach		1957		Director
Alexander U. Goncharuk		1956		Director
Michael Guenther(1)		1944		Director
Paul A. KusubovHelmut Reuschenbach(1)		1966		Director
Mikhail A. Smirnov		1950		Director
Gernot Taufmann		19571948		Director
Dr. Yury A. Gromakov		1946		First Vice President
Mikhail V. Susov		1967		First Vice PresidentPresident—Technology
Nikolai V. Tsekhomsky		1974		Vice President—Finance/Finance and Chief Financial Officer
Tatiana V. Evtushenkova		1976		Vice President—Investments and SecuritiesCorporate Development
Valeriy A. KozlovIgor U. Stolyarov		19561969		Vice President—Administrative AffairsSales and Customer Service
Valery I. GrashenkovRainer Hennike		19461943		Vice President—Integration of Radio SystemsInternational Affairs
Sergey G. Aslanyan		1973		Vice President and Chief Information Officer

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Vassily V. Sidorov⁽¹⁾ has served as our President since October 2003. From 2002 until October 2003 he served as a member

Member of our Board of Directors. From 2000 until August 2003, he served as First Vice President for Finance and Investments at Sistema Telecom, a subsidiary of Sistema. He also serves on the Board of Directors of Sistema's subsidiaries MGTS and Personal Communications CJSC and our subsidiaries ReCom, UDN-900, MSS, TAIF Telcom, MTS Belarus and SCS-900. In addition, Mr. Sidorov serves as a director of MTT CJSC, a Russian telecommunications company not affiliated with us or Sistema.

Audit Committee.

        Vladimir S. Lagutin has served as Chairman of our Board of Directors since October 2003. He has also served as the General Director of Sistema Telecom since July 2003, and served as the General Director of MGTS from 1995 to July 2003. In addition, Mr. Lagutin serves as the Chairman of the Boards of Directors of MGTS, Telmos MTU-Intel and Comstar, and serves on the Boards of Directors of MGTSSistema Telecom and Sistema Telecom.OJSC CSC. All of these companies are subsidiaries of Sistema. Mr. Lagutin also serves on the Board of Directors of Sistema.

Vassily V. Sidorov has served as our President since October 2003 and has served as a member of our Board of Directors since June 2004. From 2000 until August 2003, he served as First Vice President for Finance and Investments at Sistema Telecom, a subsidiary of Sistema. He also serves on the Board of Directors of Sistema Telecom, a subsidiary of Sistema, and our subsidiaries and affiliate ReCom, MSS, UMC, Uzdunrobita, SCS-900 and MTS Belarus.

        Alexei N. Buyanov has served as one of our Directors since June 2003. Mr. Buyanov has served as First Vice President of Sistema since September 2002. From 1998 to 2002, he served as our Vice President for Finance and Investments. He also serves on the board of directors of various other companies affiliated with Sistema.

        Fridbert Gerlach has served as one of our Directors since June 2004. He is a member of the supervisory board of Polska Telefonica Cyfrowa Sp.z.o.o (PTC), which is affiliated with T-Mobile, and Zeta GmbH. He is Executive Vice President Joint Venture Management of T-Mobile International AG






and CoKG. He has also served as a member of the board of directors of T-Mobile Czech Republic a.s., T-Sistems PragoNet a.s., Slovak Telecom a.s., Eurotel Bratislava a.s. and Matav Mgyar Tavkozlesi
Rt & T-Mobile Hungary, and as a member of the supervisory boards of Telecom Croatia LLC, and T-Mobile Austria GmbH, T-Mobile Hungary and Makedonski Telekomunikacii AD.

Alexander U. Goncharuk has served as one of our Directors since 1996. He also acted as our Chairman from June 2002 until October 2003 and in 1998, and as Deputy Chairman during 1997 and from January 1999 through June 1999. Mr.��Goncharuk served as President of Sistema Telecom from 1998 until 2003. Since 2003, he has served as General Director of OJSC CSC, a subsidiary of Sistema. He also serves on the board of directors of various other companies affiliated with Sistema.

        Michael Guenther has served as one of our Directors since October 2000. Mr. Guenther is a member of the Board of Management of T-Mobile International AG. He is also a member of the board of directors or supervisory board of each of the following companies affiliated with T-Mobile: T-Mobile Deutschland GmbH, T-Mobile Worldwide Holding GmbH, T-Mobile Czech Republic a.s., Zeta GmbH,






Matav, HT Mobilne Kommunikacije,T-Mobile Croatia LLC, Polska Telefonica Cyfrowa Sp., C-Mobil B.V., WESTEL Mobil Tavkozlesi Rt.T-Mobile Hungary Co. Ltd., Eurotel Bratislava a.sa.s. and Hrvatski Telekom (HT).Hrvatske Telekomunikacije d.d.

        Paul A. KusubovHelmut Reuschenbach has served as one of our Directors since June 2003.November 2004. Mr. KusubovReuschenbach has served as Head of T-Mobile Internationala Director at Lazard & Co. GmbH Frankfurt since 2001. Prior to that, he was at Deutsche Telekom AG in Russia since January 2003. From 2001where he served as Treasurer and Senior Executive Vice President for Finance for six years. Prior to 2002,1994, he was the Director of International Joint Venture Management RF/CIS at T-Mobile International AG in Germany. From 1997 to 2000 he served as Deputy General Director of BaikalWestCom mobile company.

Mikhail A. Smirnov has served as one of our Directors since 1995. Mr. Smirnov served as our President from 1995 to August 2003Chief Financial Officer and has served as General Director of MGTS, a subsidiary of Sistema, since August 2003. He is Chairman of the Board of Directors of Sistema's subsidiary MTU-Intel CJSC and MGTS' subsidiary AMT CJSC. He is also a member of the Board of Directors of Sistema's subsidiaries Sistema Telecom CJSC, Sistema Pension FundMercedes-Benz S.A. in Belgium and Comstar CJSC. He has also served as chairmanChief Executive Officer of the Association of GSM Operators of Russia since 1995.

Gernot TaufmannDaimler-Benz Coordination Center S.A. and Daimler-Benz Financial Company S.A. From 1989 to 1993 Mr. Reuschenbach served as Vice President for Finance at Daimler-Benz AG in Stuttgart. Previously, he has served as oneDirector of our Directors since 1998. He is presidentFinance at AEG Aktiengesellschaft in Frankfurt, Director of the Moscow Office of Deutsche Telekom AGFinance and has overseen Deutsche Telekom's responsibilitiesAdministration at AEG Italiana S.p.A. in the Commonwealth of Independent States since 1995. Mr. Taufmann is Chairman of Board of Directors of UMC. He has also served as an executive director of ZETA Telekommunikationsdienste GmbH since 2000.Milan and Corporate Finance Manager at AEG-TELEFUNKEN Aktiengesellschaft in Frankfurt.

        Dr. Yury A. Gromakov has served as our First Vice PresidentPresident—Technology since March 2002, and served as our Vice President of Technology and Network Development from 1994 until February 2002. He has been involved in mobile communications for over 30 years and holds a degree of Doctor of Technical Sciences, the highest scientific degree in Russia, and has been awarded a degree as Honorable Radio Operator of Russia. Dr. Gromakov is also a member of the International Academy of the Science of Information and Information Processes and Technologies.

        Mikhail V. Susov has served as our First Vice President in charge of commercial operations since February 2002. From December 2001 until February 2002, Mr. Susov served as the General Director of Comstar, a subsidiary of Sistema. From 1996 until December 2001, he served as the General Director of Personal Communications CJSC, an affiliate of Sistema.

Nikolai V. Tsekhomsky has served as our Vice President of Finance/President—Finance and Chief Financial Officer since July 2003. From September 2002 through June 2003, he served as our Finance Director. Prior to joining us, Mr. Tsekhomsky served as Finance Director at Renaissance Capital from August 1999 to September 2002 and as Financial Controller at Brunswick UBS from August 1998 to August 1999. He also worked as a senior auditor at Ernst & Young in London and St. Petersburg from March 1995 to August 1998. Mr. Tsekhomsky also serves onas Chairman of the Board of Directors of our subsidiaries MTS-RK (Syktyvkar), Uraltel (Ekaterinburg), Primtelefon (Vladivostok), Astrakhan Mobile (Astrakhan), Volgograd Mobile (Volgograd) and as a member of the Board of Directors of our subsidiaries Mobile TeleSystems (Omsk), MTS P, SCS-900 (Novosibirsk), UMC and our affiliate MTS Belarus. He also serves on the board of directors of the Moscow Bank for Reconstruction and Development, a subsidiary TAIF Telcom.of Sistema.

        Tatiana V. Evtushenkova has served as our Vice President of President—Investments and SecuritiesCorporate Development since October 2002. From December 1999 to October 2002, Ms. Evtushenkova served as the Director of the Investment Department at Sistema Telecom, a subsidiary of Sistema. Prior to joining Sistema Telecom, she worked in the investment banking division of Salomon Smith Barney. Ms. Evtushenkova is the daughter of Vladimir P. Evtushenkov, the controlling shareholder and President of Sistema.






Igor U. Stolyarov has served as our Vice President—Sales and Customer Service since May 2004. Prior to joining us, Mr. Stolyarov worked at Gillette International as Regional Director in charge of the CIS and Baltic States from July 2000 to May 2004. From 1995 to 1997, he worked for Duracell Russia, and from 1993 to 1995, he worked for Coca-Cola Moscow.

Rainer Hennike has served as our Vice President—International Affairs since September 2003. Prior to joining us, Mr. Hennike worked at DeTeMobil Deutsche Telekom MobilNet GmbH, a subsidiary of Deutsche Telekom AG, as a Managing Director and Head of the representative office in the Russian Federation from 1995 to 2003. He has also worked at Deutsche Post, DETECOM and other subsidiaries of Deutsche Telecom AG. Mr. Hennike served as Chairman of theour Board of Directors of Sistema. Ms. Evtushenkova alsoduring 2001 to 2002 and as Vice Chairman during 2000 to 2001 and 2002 to 2003. He currently serves on the Board of Directors of the Moscow Bank for ReconstructionUzdunrobita, MTS Belarus and Development, a subsidiary of Sistema.UMC.

        Valeriy A. KozlovSergey G. Aslanyan has served as our Vice President of Administrative Affairsand Chief Information Officer since 1993. BeforeDecember 2003. Prior to joining us, Mr. Kozlov served as an administrative director for VAST, a joint Russian-Canadian venture formerly called M-Bell, which is also one of our shareholders.

Valery I. Grashenkov has served as our Vice President of Integration of Radio Systems since March 2002. From 1995 through March 2002, Mr. Grashenkov servedAslanyan worked at TNK-BP Management as the headDeputy Director of our networkInformation Technology. He worked at PricewaterhouseCoopers from 1997 to 2001.






planning department. Before joining us, he held various posts at the Moscow Radio-Technical Scientific and Research Institute.

        Pursuant to a shareholders' agreement entered into in 2003, each of our controlling shareholders, Sistema and T-Mobile, has agreed to vote to ensure (in so far as they are able) that a majority of the members of our board of directors are nominated by Sistema and that the remaining members are nominated by T-Mobile.        The terms of all of our directors expire on the date of our next annual shareholders'shareholders meeting, which will take place inon June 2004.21, 2005.

        The business address of each of our directors is 4 Marksistkaya Street, Moscow 109147, Russian Federation.

B. Compensation of Directors and Senior Management

Executive Compensation

        Our officers and directors were paid during 20032004 an aggregate amount of approximately $6.1$12.8 million for services in all capacities provided to us; this amount was comprised of $3.9$5.0 million in base salary and a $2.2$7.8 million bonus paid pursuant to a bonus plan for the management and directors whereby bonuses are awarded annually based on our financial performance.

Management Stock Bonus and Stock Option Plans

        On April 27, 2000, contingent on the closing of our initial public offering, we established a stock bonus plan and stock option plan for selected officers, key employees and key advisors. Under the plans, directors, key employees and key advisors received 3,587,987 shares of our common stock and will participate in a stock option plan under which they may receive options to purchase up to an additional 9,966,631 shares of our common stock. At the time of the initial public offering, we issued 13,554,618 shares of common stock to our subsidiary Rosico pursuant to these plans at a price of $1.024 per share for the total amount of $13.9 million. Following the merger of Rosico into us in June 2003, these shares were transferred to our wholly-owned subsidiary, MTS CJSC.LLC.

        Under the stock bonus plan, during the period from September 12, 2000, through September 22, 2000, 3,587,987 shares of common stock were purchased from Rosico at nominal price of 0.1 rubles per share as follows:

			Number of shares purchased		Percentage of total shares outstanding				Number of shares purchased		Percentage of total shares outstanding
Employees and Directors	Employees and Directors		3,049,786		0.153	%	Employees and Directors		3,049,786		0.153	%
Key Advisors	Key Advisors		538,201		0.027	%	Key Advisors		538,201		0.027	%
	Total		3,587,987		0.180	%	Total		3,587,987		0.180	%




        On the date the shares were granted, we recognized aggregate expenses under this plan as compensation and consulting expenses amounting to $4.5 million and $0.8 million, respectively, based on the fair value of the shares on the date they were granted.

        Under the stock option plan, board members and key employees, upon being granted stock options, will have the right to purchase up to 9,966,631 shares of our common stock.stock or, in lieu of shares, receive a cash award equal to the difference between the price per share fixed in the option agreement and the market price per share of our common stock on the date of exercise.

        On August 14, 2001, pursuant to option agreements, we granted options in respect of 1,020,682 shares of our common stock to our board members and 808,529 shares of our common stock to our key employees. These options provided that, on July 15, 2003, board members and key employees could purchase shares of our common stock at $1.31 per share, which represented the 100-day average sales price of the shares at August 14, 2001. The stock option agreement for a board member terminated if the board member was terminated as a board member prior to our 2002 annual shareholders'shareholders meeting. The stock option agreement for a key employee terminated if the employee left us before July 15, 2003.






        In July 2003, board members and key employees purchased a total of 37,557 shares pursuant to the August 2001 option agreements. Sixty-twoFifty-seven of the option holders elected cash awards in lieu of shares, and cash awards were granted in respect of 1,746,310 shares in the amount of $1.633 per share (the difference between $1.31, the price per share fixed in each agreement, and $2.943, the market price per share on July 15, 2003). In addition, options relating to 45,344 shares were cancelled pursuant to the termination provisions described above.

        On October 24, 2002, pursuant to option agreements, we granted options in respect of 1,739,640 shares of our common stock to our board members and 1,107,041 shares of our common stock to our key employees. These options have an exercise price of $1.49 per share, which represents the 100-day average market price of the shares at the date of grant and will vest 21 months from the date of the grant, which will be in July 2004.grant. The stock option agreement for a board member would have terminated if the board member was terminated as a board member before our 2003 annual shareholders'shareholders meeting. The stock option agreement for a key employee would have terminated if the employee left us before July 15, 2004.

        In July-August 2004, board members and key employees purchased a total of 2,726,966 shares pursuant to the October 2002 option agreements. In addition, options relating to 119,715 shares were cancelled pursuant to the termination provisions described above.

        In July 2003, pursuant to option agreements, we granted options in respect of 1,434,400 shares of our common stock to our board members and 518,232 shares of our common stock to our key employees. These options have an exercise price of $2.43 per share, which represents the 100-day average market price of the shares at the date of grant and will vest 24 months from the date of the grant. The stock option agreement for a board member would have terminated if the board member was terminated as a board member before our 2004 annual shareholders meeting. The stock option agreement for a key employee would have terminated if the employee left us before July 15, 2005. We expect to recognize a compensation expense of approximately $1.0 million based on the intrinsic value of these options over the 24-month period.

        In August 2004, pursuant to option agreements, we granted options in respect of 745,436 shares of our common stock to our board members and 919,820 shares of our common stock to our key employees. These options have an exercise price of $5.95 per share, which represents the 100-day average market price of the shares at the date of grant and will vest 23 months from the date of the grant. The stock option agreement for a board member will terminate if the board member is terminated as a board member before our 2005 annual shareholders meeting. The stock option agreement for a key employee will terminate if the employee leaves us before July 15, 2004.2006. We expect






to recognize a compensation expense of approximately $0.2$1.8 million based on the intrinsic value of these options over the 21-month23-month period.

        On June 30, 2003,We account for stock options relatingissued to 1,778,694 sharesemployees, non-employee directors and consultants following the requirements of our common stock were approved at our annual shareholders' meeting.

        We areSFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for Stock Based Compensation—Transition and Disclosure, an amendment to FASB Statement No. 123." Under the requirements of these statements, we elected to use the intrinsic value of the options on the measurement date as a method for accounting for the management stock option plan in accordance with APB No. 25, under which expensecompensation to employees and non-employee directors. Compensation to consultants is generally only recognized for a difference between the exercise price andmeasured based on the fair market value measuredof options on the measurement date as of the date the option was granted.determined using a binomial option-pricing model.

        In accordance with Russian legislation, our board members and key employees may be considered insiders with respect to us, and thus may be restricted from selling their shares.

C. Board Practices

Board of Directors

        Members of our Board of Directors are elected by a majority vote of shareholders at the annual shareholders'shareholders meeting using a cumulative voting system. Directors are elected for one year terms and may be re-elected an unlimited number of times. OurThe Board of Directors currently consists of seven members, although it may be increased to nine members by shareholder resolution. The Board of Directors has the authority to make overall management decisions for us, except those matters reserved to the shareholders. It must meet at least once per quarter, though it may meet more often at its election. The members of our Board of Directors do not serve pursuant to a contract.

        In 2004, the Board of Directors approved the establishment of, and guidelines for, three new Board committees: restructuring committee, budgeting committee and quality committee. The restructuring committee was established to oversee and address matters related to the development and implementation of a new organizational structure for our business. The budgeting committee was established to prepare recommendations to the Board of Directors on issues relating to the preparation, approval and supervision of our budgets, long-term business plans and investment plans. The quality committee was organized to manage issues relating to the quality of our cellular network's operation. The Board of Directors also approved a Code of Ethics applicable to our senior officers.

Audit Committee

        Our Audit Committee consists of twothree members appointed by the Board of Directors and functions pursuant to a Charter adopted by the Board of Directors. The current members are Alexei Buyanov, Helmut Reuschenbach and Michael Guenther. MembersMr. Reuschenbach, an independent member of ourthe Board of Directors, serves as Chairman of the Audit Committee areCommittee. The other two members not independent under SEC Rule 10A-3, as that rule and its requirements do not apply to foreign private issuers, including us, until July 31, 2005. The Audit Committee is primarily responsible for the integrity of our financial statements, our compliance with legal and regulatory requirements, assuring the qualifications and independence of our independent auditors and overseeing the audit process, including audit fees, resolving matters arising during the course of audits and coordinating internal audit functions.

President

        The annual shareholders'shareholders meeting, at the recommendation of the Board of Directors, appoints our President for a term of three years. The rights, obligations and the times and amounts of payment for the President's services are determined by a contract between him and us, as represented by our Chairman or by a person authorized by our Board of Directors. The President is responsible for






day-to-day management of our activities, except for matters reserved to our shareholders or the Board






of Directors.

Disclosure Committee

        Our Disclosure Committee consists The President reports to the shareholders meeting and to the Board of five members appointedDirectors and is responsible for carrying out decisions made by the shareholders and by the Board of Directors. The current members are Alexei Buyanov, Gernot Taufmann, Nikolai Tsekhomsky, Ulf Backmeyer and Bernd Willmann. Mr. Bakmeier is our DirectorVassily Sidorov was appointed President on October 25, 2003 for a term of Finance and Mr. Willmann is a member of our Review Commission. The Disclosure Committee is primarily responsible for overseeing the collection, review and reporting of information relating to our disclosure obligations and periodically evaluating our system of disclosure controls and procedures. In addition, the Disclosure Committee is generally responsible for all aspects of information disclosure in connection with the preparation of our annual reports and other disclosure documents in accordance with applicable law.three years.

Review Commission

        Our Review Commission supervises our financial and operational activities. Members of the Review Commission are nominated and elected by our shareholders for a term of one year. A Director may not simultaneously be a member of the Review Commission. As of December 31, 2003,2004, our Review Commission had three members:

•

Elena V. BekianNatalia G. Tomilina holds the position of Deputy Director of our Internal Audit Department.the Finance Department at Sistema Telecom.



•

Vassily V. Platoshin holds the position of Chief Accountant at Sistema.



•

Bernd Willmann holds the position of Head of Audit Competence Center Joint Ventures of T-Mobile International Auditing at Deutsche Telekom AG, the parent company of T-Mobile.AG.

        The members of our Review Commission do not serve pursuant to a contract, and their terms expire at the next annual shareholders'shareholders meeting, which will take place inon June 2004.21, 2005.

Corporate Governance

        We are required under the New York Stock Exchange listing rules to disclose any significant differences between the corporate governance practices that we follow under Russian law and applicable listing standards and those followed by U.S. domestic companies under New York Stock Exchange listing standards. This disclosure is posted on our website (http://www.company.mtsgsm.com/profile/ethics/).

D. Employees

        At December 31, 2003,2004, we had 18,434 employees, representing growth of approximately 67% from December 31, 2002.23,385 employees. Over 22%20% of these employees, or 4,067,4,603, worked in Moscow.Moscow (including employees of our corporate headquarters). Of our 20,818 employees in Russia, we estimate that 224 were executives (including the Moscow employees, 29 were executives; 971President and other officers); 3,383 were technical and maintenance employees; 2,08910,590 were sales, marketing and customer service staff; and 9786,321 were administration and finance staff.

        As of December 31, 2003, 14,3672004, 1,754 of our employees worked in the regions outside of the Moscow license area and in Ukraine. Of these employees, we estimate that 2927 were executives; 3,227540 were technical and maintenance employees; 7,409939 were sales, marketing and customer service staff; and 3,439268 were administration and finance staff.

        As of December 31, 2004, 813 of our employees worked in Uzbekistan. Of these employees, we estimate that 17 were executives; 300 were technical and maintenance employees; 224 were sales, marketing and customer service staff; and 272 were administration and finance staff.

        The substantial growth in the number of our employees is attributable primarily to the continued expansion of our network in Russia and the CIS and our increased focus on customer care. In addition, in 2004 we added a new intermediate management level for "macro-regions" to our management structure. Our 10 macro-region offices are responsible for implementing the strategy developed by our






corporate headquarters in all regions falling within their specific macro-region. The following chart sets forth the number of our employees at December 31, 2001, 2002, 2003 and 2003:2004:

			At December 31,
			2001		2002		2003
Moscow license area			2,633		3,388		4,067
Other regions (including Ukraine)			2,357		7,654		14,367
	Total		4,990		11,042		18,434
Percent increase of total employees over prior period			113	%	121	%	67	%

			At December 31,
			2002		2003		2004
Moscow license area (including employees of corporate headquarters)			3,388		4,067		4,603
Other regions in Russia			7,654		14,367		16,215
Ukraine			—		1,121		1,754
Uzbekistan			—		—		813
	Total		11,042		19,555		23,385

        Our future success will depend, in significant part, on the continued service of our key technical, sales and senior management personnel. To date, we have experienced a low level of departures,






voluntary or otherwise. Our employees are not unionized, we have not experienced any work stoppages and we consider our relations with employees to be strong.

E. Share Ownership

        Of our directors, senior management and employeesWe believe that own our shares, each individually beneficially owns less than one percent of our common stock.

        Thethe aggregate beneficial interest of our directors, senior management and employees as of December 31, 2003,2004 was 1,993,326 shares of common stock, equaling approximately 0.1%less than 1% of our outstanding common stock.


Item 7.    Major Shareholders and Related Party Transactions


A. Major Shareholders

        The following table sets forth, as of April 1, 2004,May 31, 2005, information regarding the beneficial ownership of our outstanding common stock by each person known by us to own beneficially any of our common stock and all our directors and executive officers as a group. All shares of common stock have the same voting rights.

			Beneficial ownership as of April 1, 2004
Name
			Number		Percentage
Sistema(1)(2)			619,860,752		31.2	%
Sistema Holding Limited(2)			193,473,900		9.8	%
T-Mobile(3)			501,325,554		25.4	%
Invest-Svyaz-Holding(4)			160,247,802		8.0	%
Deutsche Bank AG (London Branch)			500,000		*
VAST(5)			60,219,432		3.1	%
Holders of American Depositary Shares			348,830,060		17.4	%
Holders of Global Depositary Receipts			99,400,000		5.0	%
All executive officers and directors			*		*
	Total		1,983,397,064		100.0	%

			Beneficial ownership as of May 31, 2005
Name
			Number		Percentage
Sistema(1)(2)			619,860,752		31.2	%
Sistema Holding Limited(2)			193,473,900		9.8	%
Invest-Svyaz (3)			160,247,802		8.1	%
VAST(4)			60,219,432		3.0	%
T-Mobile Worldwide Holding GmbH			200,525,554		10.1	%
ING Bank (Eurasia) ZAO(5)			741,481,679		37.3	%
Other Public Float (including our directors and executive officers)(6)			10,314,911		0.5	%
	Total(7)		1,986,124,030		100.0	%

---

*

Less than 1%



⁽¹⁾

Vladimir P. Evtushenkov has a controlling interest in Sistema, and would be considered under U.S. securities laws as the beneficial owner of our shares held by Sistema, Sistema Holding Limited, VASTInvest-Svyaz and Invest-Svyaz-Holding, as further discussed in Note 4 below.VAST. Mr. Evtushenkov is also chairmanPresident and member of the board of directors of Sistema.



⁽²⁾

In connection with its April 2003 notesEurobond offering, Sistema has pledged 193,473,900 shares of our common stock held by Sistema Holding Limited to Deutsche Trustee Company Limited.



⁽³⁾

T-Mobile is a wholly-owned subsidiary of Deutsche Telekom AG.



⁽⁴⁾

Invest-Svyaz-HoldingInvest-Svyaz is a Russian closed joint stock company wholly ownedwholly-owned by Sistema. Invest-Svyaz-Holding has pledged 81,728,372 sharesIn 2005, Invest-Svyaz Holding was reorganized into two separate entities: Invest-Svyaz, which serves as a holding company of our common stock to Zeta Telekommunikationsdienste GmbH,shares and is one of our major shareholders and Invest-Svyaz Holding, a company 51% ownedalso wholly-owned by T-MobileSistema, whose primary business is leasing various types of telecommunications and 49% owned by Disantis S.A., an entity affiliated with Sistema. The total number of shares pledged by Invest-Svyaz-Holdingother assets to Zeta constitute 4.1% of our issued and outstanding common stock.us.





⁽⁵⁾⁽⁴⁾

VAST is a limited partnership formed under the laws of Russia. Sistema owns a 51% interest in VAST. ASVT OJSC, a Russian company engaged in telecommunications, owns the remaining 49% interest in VAST. An extract from our shareholders register dated May 31, 2005 contains an entry prohibiting any transfer of these shares.



⁽⁵⁾

ING Bank (Eurasia) is the local custodian for our sponsored ADR program and the unsponsored GDR programs.



⁽⁶⁾

We believe that our directors and executive officers as a group own less than 1% of our shares.



⁽⁷⁾

Our wholly-owned subsidiary, Mobile TeleSystems LLC, owns 7,202,108, or 0.4%, of our shares in connection with our Management Stock Bonus and Stock Option Plans.

        In April 2003, Sistema acquired directly and indirectly from T-Mobile 199,322,614 shares of common stock amounting, in aggregate, to an additional 10% of our outstanding common stock. This






included 120,811,184 shares of common stock acquired directly from T-Mobile and the acquisition of all the shares in Invest-Svyaz-HoldingInvest-Svyaz Holding previously held by T-Mobile, representing a beneficial interest in a further 78,521,430 shares of common stock.

        In April 2003 and December 2004, T-Mobile also sold an additional 99,400,000 shares, or 5.0% and 15.1% of our common stock, respectively, in the form of GDRs. We are not a party to the agreement governing the GDRs.GDRs through an unsponsored GDR program.

        As of April 1, 2004,May 31, 2005, the total number of ADSs outstanding was 17,441,503139,009,881 representing underlying ownership of 348,830,060695,049,405 shares, or approximately 17.5%35.0% of our outstanding common stock. The shares underlying the ADSs are deposited with JPMorgan Chase Bank, formerly known as Morgan Guaranty Trust Company of New York and the local custodian is ING Eurasia.

B. Related Party Transactions

Transactions with Sistema and its Affiliates

Dontelecom Acquisition

        In September 2002, we acquired 33.3% of Dontelecom from a company affiliated with Sistema, for $7.5 million.

Telecom-900 Acquisition

        During 2001 and 2002, we acquired 81% and 19% of the outstanding common stock of Telecom-900, for $26.8 million and $6.9 million, respectively, from Sistema and Invest-Svyaz-Holding, respectively.

Rosno OJSC

        We arrangearranged medical insurance for allour employees and insureinsured our property with Rosno OJSC, a subsidiary of Sistema. Insurance premiums paid to Rosno OJSC for the years ended December 31, 2004, 2003 and 2002 amounted to $8.0$7.6 million, in 2001,$16.9 and $4.9 million, in 2002 and $16.9 in 2003, including premiums for medical insurance of $2.5 million in 2001, $3.6 million for 2002 and $5.0 million in 2003. We believerespectively. Management believes that all of the insurance contracts with Rosno have beenOJSC were entered into on market terms.

Maxima Advertising Agency

        We have contracts for advertising services with Maxima Advertising Agency, a subsidiary of Sistema. Advertising fees paid to Maxima for the years ended December 31, 2004, 2003 and 2002 amounted to $8.7$48.9 million, in 2001, $13.1$23.7 million in 2002 and $24.7$12.1 million, in 2003. We believe all contracts with Maxima have beenrespectively. Management believes that these agreements were entered into on market terms.

Moscow City Telephone Network (MGTS)

        We have line rental arrangements with MGTS, a subsidiary of Sistema. We also rent a cable plant from MGTS for the installation of fiber-optic cable, as well as buildings for administrative offices, sales and marketing offices and premises for switching and base station equipment. The amounts paid under these arrangementsRental expenses for the years ended December 31, 2001,2004, 2003 and 2002 and 2003 were $1.5$5.9 million, $4.4$4.5 million and $5.0$3.4 million, respectively. In 2001 and 2002, we also purchased buildings from MGTS for $2.6 million and $2.0 million, respectively. We believeManagement believes that all of these purchasestransactions were and all other arrangements have been entered into on market terms.

Moscow Bank for Reconstruction and Development (MBRD)

        We maintain bank and deposit accounts with the Moscow Bank for Reconstruction and Development, or MBRD, which is a subsidiary of Sistema. As of December 31, 2004, our cash balance on current accounts at MBRD amounted to $72 million. As of December 31, 2003, our cash position at MBRD amounted to $279.7 million, including $265.2 million in time deposits and $14.5 million in current accounts.




current accounts.        During 2001, 2002, 2003 and 2003,2004, the related interest accrued and collected on the deposits amounted to approximately $3.0 million, $5.1 million, $9.9 million and $9.9$6.8 million, respectively, which is reflected in our financial statements as a component of interest income.

        In August 2004, one of our subsidiaries entered into a ruble-denominated credit facility with MBRD for approximately $1.5 million with an interest rate of 15% per annum. The loan was fully repaid before the end of 2004. The amount of interest paid for this borrowing was not significant.

        In 2003, one of our subsidiaries entered into a ruble-denominated loan agreement with MBRD. The amounts borrowed under this loan bearbore interest at a rate of 18.5%. During 2003 and are payable in June 2004. During 2003,2004, this subsidiary paid interest of $0.1 million.million and $0.1 million, respectively. As of December 31, 2003, the total amount payable under this loan agreement was $1.2 million. The loan was fully repaid in June 2004.

        During 2003, we signed several short-term loan agreements with MBRD. Amounts borrowed were payable during the period of one to two months. During 2003, interest expense on these loans was approximately $0.3 million.

        In January 2003, we paid MBRD $20,000 for acting as our financial advisor in connection with our January 2003 offering of 9.75% notes due 2008.

MTU-Inform

        We have interconnection and line rental arrangements with and receive domestic and international long-distance services from, MTU-Inform, a subsidiary of Sistema. Amounts paid under these arrangementsInterconnection and line rental expenses for the years ended December 31, 2001,2004, 2003 and 2002 and 2003 were $29.0$25.7 million, $24.1$23.3 million and $26.6$24.3 million, respectively. In 2001,2003 and 2002, and 2003, we also purchased telephone numbering capacity from MTU-Inform for $4.7 million, $1.6$2.0 million and $0.5$2.6 million, respectively. We believeManagement believes that these purchases were, and all other arrangements have been entered into, on market terms.

Telmos

        We have interconnection and line rental arrangements with, and receive domestic and international long-distance services from, Telmos, a subsidiary of Sistema. Amounts paid under these arrangementsInterconnection and line rental expenses for the years ended December 31, 2001,2004, 2003 and 2002 and 2003 were $4.0$1.6 million, $1.3$1.6 million and $1.6$1.8 million, respectively. We believeManagement believes that these arrangements were entered into on market terms.

Comstar

        We have interconnection and line rental arrangements with Comstar, a subsidiary of Sistema. Amounts paidexpensed under these arrangements for the years ended December 31, 2004, 2003 and 2002 and 2003 were $3.2$3.1 million, $3.6 million and $4.0$3.5 million, respectively. We believealso purchased telephone numbering capacity from Comstar for $4.2 million in 2004. Management believes that these arrangements were entered into on market terms.

Invest-Svyaz-HoldingInvest-Svyaz Holding

        We lease network equipment and a billing system from Invest-Svyaz-Holding,Invest-Svyaz Holding, a wholly-owned subsidiary of Sistema and one of our shareholders. These leases are classified as capital leases. The interest rate implicit in these leases varies from 11%14% to 44%, which we believemanagement believes are market terms. AsThe following table summarizes the future minimum lease payments under capital leases to




Invest-Svyaz Holding together with the present value of the net minimum lease payments as of December 31, 2003, the total minimum lease payments due through December 31, 2006, including interest, were $18.0 million.2004:

Payments due in the year ended December 31,		Amount
		(in thousands)
2005		$8,174
2006		3,058
2007		653
Total minimum lease payments (undiscounted)		11,885
Less amount representing interest		(2,436	)
Present value of net minimum lease payments		9,449
Less current portion of lease obligations		(6,103	)
Non-current portion of lease obligations		$3,346

        Principal and interest paid to Invest-Svyaz-HoldingInvest-Svyaz Holding for the years ended December 31, 2001,2004, 2003 and 2002 and 2003 were $0.5$6.4 million and $0.1$4.1 million, $5.4 million and $3.3 million and $2.9 million and $1.4 million, and $5.4 million and $3.3 million, respectively. Management believes that these agreements were entered into on market terms.

        We have also guaranteed debt of Invest-Svyaz-HoldingInvest-Svyaz Holding in the amount of $21.6 million to a third party, which is used by Invest-Svyaz-HoldingInvest-Svyaz Holding primarily to finance its leases to us. For the year ended December 31, 2003, our lease payments to Invest-Svyaz-Holding constituted 99% of its revenues for the year.






STROM Telecomtelecom

        During 2004 and 2003, we entered into agreements with STROM Telecom,telecom, a subsidiary of Sistema, for the purchasea total amount of a billing system, a communications software support systemup to $116.5 million and equipment. The total purchase price under these agreements was approximately $32.3 million.million, respectively. Pursuant to these contracts, we acquiredpurchased billing systems and communication software and equipmentsupport systems for approximately $9.1 million and $23.7 million in 2003.during the years ended December 31, 2004 and 2003, respectively. Advances paid under these agreements and outstanding as of December 31, 2004 and 2003 amounted to $51.0 million and $1.1 million, respectively. Management believes that these agreements were entered into on market terms.

MTT

        In 2004, we had an interconnection and line rental agreements with MTT, a subsidiary of Sistema. Amounts expensed under these agreements for the year ended December 31, 2004 amounted to approximately $16.1 million. Management believes that these agreements were entered into on market terms.

Kvazar-Micro Corporation (Kvazar)

        In 2004, we signed agreements for software implementation services with Kvazar, a subsidiary of Sistema. Related fees for the year ended December 31, 2004 amounted to approximately $9.7 million. Management believes that these agreements were entered into on market terms.

Transactions with T-Mobile and its Affiliates

T-Mobile

        We have non-exclusive roaming agreements with T-Mobile, one of our principal shareholders. These agreements were comparable to roaming agreements we have with other cellular mobile operators. Amounts paidRoaming expenses under these agreements for the years ended December 31, 2001,2004, 2003 and 2002 and 2003 were $0.7$6.1 million, $1.0$1.7 million and $1.1 million, respectively. Management believes that these agreements were entered into on market terms.




UMC Acquisition

        In March to July 2003, we purchased 100% of UMC, including a 16.3% stake from Deutsche Telekom AG for $55.0 million. Of this amount, $27.5 million was payable to Cetel B.V., a wholly ownedwholly-owned subsidiary of Deutsche Telecom AG, within one year, which was paid in March 2004. The amount payable accrued interest at 9% per annum. The remaining amount was paid in cash at the closing of the transaction.

        In addition, as part of the transaction, we guaranteed a shareholder loan from Deutsche Telekom AG to UMC in the amount of $21.3 million. The amount payable accrued interest at LIBOR plus 5-7%. At December 31, 2003, the unpaid balance was $8.0 million and during the year, we paid $2.1 million in interest. This debt was repaid in April 2004.

        See also Note 17 to our audited consolidated financial statements for related party accounts receivable and payable balances as of December 31, 2004 and 2003.

C. Interests of Experts and Counsel

        Not applicable.


Item 8.    Financial Information


A. Consolidated Statements and Other Financial Information

8.A.1-6. See Item 18.

8.A.7. Litigation

        On June 7, 2004, the General Prosecutor of Ukraine filed a claim against us and others in the Kiev Commercial Court seeking to unwind the sale by Ukrtelecom of its 51% stake in UMC to us. The complaint also sought an order prohibiting us from alienating 51% of our stake in UMC until the claim was resolved on the merits and on August 12, 2004, the Kiev Commercial Court rejected the General Prosecutor's claim. On August 26, 2004, the General Prosecutor requested the Constitutional Court of Ukraine to review whether certain provisions of the Ukrainian privatization law limiting the alienation of assets by privatized companies were applicable to the sale by Ukrtelecom of UMC shares to us. For a description of this lawsuit, see "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If UMC or our purchase of UMC is found to have violated Ukrainian law or the purchase is unwound, our business, prospects and results of operations would be materially adversely affected."

        See also "—B. Significant Changes—Tax Audit" below for a description of a tax assessment that we are currently in the process of challenging in the Moscow Arbitration Court.

8.A.8. Dividend Distribution Policy

        Pursuant to a shareholders' agreement entered into inOn June 30, 2003, our principal shareholders Sistema and T-Mobileapproved cash dividends totaling $111.4 million (including dividends on treasury shares of $0.4 million), which have agreedbeen fully paid. On June 26, 2004, our shareholders approved cash dividends in the amount $219.9 million (including dividends on treasury shares of $1.1 million), which have also been fully paid. In May 2005, our Board of Directors recommended cash dividends in the amount of $409.48 million (including dividends on treasury shares of $1.5 million). Our shareholders will vote on this recommendation at the annual shareholders meeting on June 21, 2005. We expect that our shareholders will continue to consult each other with respect to anyapprove annual cash dividends, although we do not have a formal dividend policy, with the expectation that annual dividends will be not less than the equivalent of 25% of MTS OJSC's net profits, in accordance with Russian accounting standards.policy.

        Annual dividend payments, if any, must be recommended by our Board of Directors and approved by our shareholders. We anticipate that any dividends we may pay in the future on the shares represented by the ADSs will be declared and paid to the depositary in rubles and will be converted






into U.S. dollars by the depositary and distributed to holders of ADSs, net of the depositary's fees and expenses. Accordingly, the value of dividends received by holders of ADSs will be subject to fluctuations in the exchange rate between the ruble and the dollar.

B. Significant Changes

CSFBiEurobond

        On January 27, 2005, MTS Finance issued $400.0 million 8.00% unsecured notes at 99.736%. These notes are fully and unconditionally guaranteed by us and mature on January 28, 2012. MTS Finance is required to make interest payments on the notes semi-annually in arrears on January 28 and July 28, commencing on July 28, 2005. The notes are listed on the Luxembourg Stock Exchange. Proceeds received from the notes were $398.9 million.

ADS Ratio Change

        Effective January 3, 2005, the our ADS per ordinary shares ratio changed from 1 ADS per 20 ordinary shares to 1 ADS per 5 shares of common stock.

Acquisition of Subsidiary

        In February 2005, we signed an agreement to acquire a 74.9% stake in Sweet-Com LLC, a holder of 3.5GHz radio frequency allocation for the Moscow region, for cash consideration of $2.0 million. Sweet-Com provides wide-range radio access services for the "last mile" based on Radio-Ethernet technology. The purchase price allocation for this acquisition has not yet been finalized.

Tax Audit

        In March 2005, the Russian tax authorities audited our compliance with tax legislation for the year ended December 31, 2002. Based on the results of this audit, the Russian tax authorities assessed that 372,152 thousand rubles (approximately $13.4 million as at December 31, 2004) of additional taxes, penalties and fines were payable by us. We have filed a petition with the Moscow Arbitration Court seeking the partial invalidation of the tax assessment. The amount of disputed taxes and fines equals 281,504 thousand rubles (approximately $10.1 million).

CSFB Loan

        In April 2004, we entered into2005, a short-term bridge loan facility withdue to Credit SuisseSwiss First Boston International in the amount of $200.0$140.0 million which we havewas fully drawn. Amounts outstanding under this bridge loan facility bear interest at LIBOR plus 2.25% per annum. We used the proceeds of this loan to repay our floating rate notes due 2004.

Recommendation of Dividends for 2004

        On April 30, 2004, we announced that our board of directors recommended for approval by the shareholders at our next annual shareholders' meeting on June 24, 2004, annual dividends for the 2003 fiscal year in the amount of 3.20 rubles per share. The total amount of dividends recommended for approval is 6.38 billion rubles, which is approximately $221.1 million using the Russian Central Bank exchange rate on that day. The record date for the dividend payment was May 10, 2004.

Redemption of Floating Rate Notes

        On May 5, 2004, we redeemed all of the outstanding $300.0 million in principal amount of our floating rate notes due 2004, which were due in August 2004.repaid.


Item 9.    Offer and Listing Details


        (Only Items 9.A.4 and 9.C are applicable.)

A.4. Market Price Information

        The following table sets forth the annual high and low market prices per ADS on the New York Stock Exchange for each of the fiscal years ended December 31, 2000, 2001, 2002, 2003 and 2003;2004; the high and low market prices per ADS for each full financial quarter during the fiscal years ended December 31, 20022003 and 2003;2004; and the high and low market prices per ADS for each of the most recent






six months. The table also sets forth the high and low market prices per share of common stock for the






first full financial quarter and each of the most recent six months followingmonths.

		Common Stock High		Common Stock Low		ADS High		ADS Low
May 2005		196.5 RUR		178.1 RUR		$35.50		$30.47
April 2005		209.4 RUR		182.0 RUR		$38.00		$32.36
March 2005		216.0 RUR		188.5 RUR		$40.09		$33.54
February 2005		222.0 RUR		199.0 RUR		$40.20		$34.93
January 2005(1)		205.0 RUR		182.0 RUR		$37.00		$32.02
December 2004		197.8 RUR		162.0 RUR		$142.00		$117.35
First Quarter 2005		222.0 RUR		182.0 RUR		$40.20		$32.02
Fourth Quarter 2004						$155.90		$117.35
Third Quarter 2004						$149.75		$108.20
Second Quarter 2004						$141.15		$98.40
First Quarter 2004						$131.70		$83.00
Fourth Quarter 2003						$87.50		$72.20
Third Quarter 2003						$76.49		$50.56
Second Quarter 2003						$61.10		$41.18
First Quarter 2003						$44.95		$35.40
2004						$155.90		$83.00
2003						$87.50		$35.40
2002						$41.50		$23.75
2001						$38.75		$22.41
2000						$32.00		$21.25

---

⁽¹⁾

Effective January 3, 2005, the listing of our common stock on the Moscow Interbank Currency Exchange in December 2003.

		Common Stock High		Common Stock Low		ADS High			ADS Low
May 2004		187.0 RUR		145.0 RUR		$	124.70		$	98.40
April 2004		198.5 RUR		160.0 RUR		$	141.15		$	106.20
March 2004		181.0 RUR		147.1 RUR		$	131.70		$	106.00
February 2004		155.0 RUR		135.0 RUR		$	109.25		$	96.00
January 2004		145.0 RUR		117.1 RUR		$	99.76		$	83.00
December 2003		123.0 RUR		110.0 RUR		$	83.80		$	74.10
First Quarter 2004		181.0 RUR		117.1 RUR		$	131.70		$	83.00
Fourth Quarter 2003						$	87.50		$	72.20
Third Quarter 2003						$	76.49		$	50.56
Second Quarter 2003						$	61.10		$	41.18
First Quarter 2003						$	44.95		$	35.40
Fourth Quarter 2002						$	41.50		$	28.70
Third Quarter 2002						$	32.80		$	23.75
Second Quarter 2002						$	38.00		$	25.67
First Quarter, 2002						$	40.05		$	30.60
2003						$	87.50		$	35.40
2002						$	41.50		$	23.75
2001						$	38.75		$	22.41
2000						$	32.00		$	21.25

ADS ratio was changed from 1 ADS per 20 ordinary shares to 1 ADS per 5 ordinary shares, a 1:4 ADS split.

C. Markets

        Our common stock has been listed on the Moscow Interbank Currency Exchange since December 2003. American Depositary Shares, each representing twenty sharesfive of our common stock, have been listed on the New York Stock Exchange under the symbol "MBT" since June 30, 2000. Our ADSs and GDRs are also traded on the London Stock Exchange under the symbols "MOBD" and "MBT" respectively, and on the Frankfurt Stock Exchange under the symbol "MKY." Our U.S. dollar-denominated notes are listed on the Luxembourg Stock Exchange.


Item 10.    Additional Information


A. Share Capital

        Not applicable.

B. Charter and Certain Requirements of Russian Legislation

        We describe below material provisions of our charter in effect on the date of this document and certain requirements of Russian legislation. In addition to this description, we urge you to review our charter to learn its complete terms.

Our Purpose

        Article 2.1 of our charter provides that our principal purpose is to obtain profits through the planning, marketing, and operation of a radiotelephone mobile cellular network in the Russian Federation.






        We are registered with the Ministry of Taxes and Duties of the Russian Federation under the Statestate registration number 1027700149124.

Rights Attaching to SharesGeneral Matters

        Pursuant to our charter, we have the right to issue registered common stock, preferred stock, and other securities provided for by legal acts of the Russian Federation with respect to securities. Our capital stock currently consists of 2,096,975,792 authorized common shares, each with a nominal value of 0.1 rubles, of which 1,993,326,138 are fully paid, issued and outstanding. Under Russian legislation charter capital refers to the aggregate nominal value of the issued and outstanding shares. No preferred shares are authorized or outstanding. Preferred stock may only be issued only afterif corresponding amendments have been made to our charter pursuant to a resolution of the general meeting of shareholders.

We have issued only common stock. The Federal Law on Joint Stock Companies requires us to dispose of any of our shares that we acquire within one year of their acquisition or, failing that, reduce our charter capital. We refer to such shares as treasury shares for the purposes hereof. Russian legislation does not allow for the voting of such treasury shares.

Rights Attaching to Shares

        Holders of our common stock have the right to vote at all general meetings of shareholders.shareholders meetings. As required by the Federal Law on Joint Stock Companies and our charter, all shares of our common stock have the same parnominal value and grant identical rights to the shareholders who own them an identical amount of rights.their holders. Each fully paid share of common stock, except for treasury shares, gives its holder the right to:

•

freely transfer the shares without consent of other shareholders;



•

receive dividends;



•

participate in shareholders meetings and vote on all matters ofwithin shareholder authority;competence;



•

transfer voting rights to itsother Company's shareholders or a representative on the basis of a power of attorney;



•

elect candidates forand dismiss members of the board of directors and audit commission;



•

if holding, alone or with other holders, 2% or more of the outstanding voting stock, within 105 days after the end of our fiscal year, make proposals for the annual shareholders' meeting and proposenominate candidates forto the board of directors, the management board, the counting commission, the audit commission and thefor company president;



•

if holding, alone or with other holders, 10% or more of the outstanding voting stock, demand fromthat the board of directors the calling ofcall an extraordinary shareholders meeting or an unscheduled audit by the audit commission or an independent auditor;



•

demand, under the following circumstances, repurchase by us of all or some of the shares owned by it, as long as such holder voted against or did not participate in the voting on the decision approving the following:



•

reorganization;



•

conclusion of a major transaction;transaction, as defined under Russian law; and



•

amendment of our charter that restricts the holder's rights;



•

upon liquidation, receive a proportionate amount of our property after our obligations are fulfilled;




•

have free access to certain company documents, and receive copies for a reasonable fee and, if holding alone or with other holders, 25% or more of the outstanding voting stock, have free access to accounting documents and minutes of the company's board of directors;documents; and



•

exercise other rights of a shareholder given inby our charter, under Russian legislation and by decisions of shareholders meeting approved in accordance with its competence.

Preemptive Rights and Anti-Takeover Protections

        OurThe Federal Law on Joint Stock Companies and our charter provides existingprovide shareholders with a preemptive right to purchase shares or convertible securities during an open subscription in the amount proportionate to their existing shareholdings. In addition, the Federal Law on Joint Stock Companies provides shareholders with a preemptive right to purchase shares or convertible securities during a closed subscription if the shareholders voted against or did not participate in the voting or voted againston the decision approving such subscription. ThisThe preemptive right does not apply to a closed subscription to the existing shareholders provided that such shareholders may each acquire a whole number of shares or convertible securities being placed in proportion to their existing holding of such securities. Russian legislation also requires that any person that intends, either alone orWe must provide shareholders with affiliates, to acquire 30% or morewritten notice of the common stockproposed sale of a company having more than






1,000 common shareholders must giveshares at least 30, but no more than 90, days'45 days prior written notice to the existing shareholders.

        Additionally, a person acquiring 30% or more of the common stock of a company with more than 1,000offering, during which time shareholders within 30 days of acquiring 30% or more, must offer to buy all of common stock or securities that are convertible into common stock at a price not lower than the weighted average acquisition price of the common stock over the six months before the date of acquisition of 30% or more of the common stock. This requirement also applies to any acquisitions of 5% or more of the outstanding shares of a company that would result in a person holding over 30% of the common stock in such company. Failure to observe this requirement results in the limitation of the acquirer to voting only those shares which were purchased in compliance with this requirement. This requirement is waived in our charter.may exercise their preemptive rights.

Dividends and Dividend Rights

        The Federal Law on Joint Stock Companies and our charter set forth the procedure for determining the quarterly and annual dividends that we distribute to our shareholders. According to our charter, we may declare dividends based on our first quarter, six month, nine month or annual results. Dividends are recommended to a shareholders meeting by a majority vote of the board of directors and approved by the shareholders meeting by a majority vote. A decision on quarterly, six month and nine month dividends must be taken within three months of the end of the respective quarter at the shareholders meeting; and a decision on annual dividends must be taken at the annual general shareholders meeting. The dividend approved at the shareholders meeting may not be more than the amount recommended by the board of directors. Dividends to be paid based on the shareholders decision shall be paid within one year from the date on which the decision to make the payment has been adopted, unless the shareholders decision provides for a lesser term. Dividends are distributed to holders of our shares as of the record date for the shareholders meeting approving the dividends. See "General Shareholders Meetings—Notice and Participation." Dividends are not paid on treasury shares.

        The Federal Law on Joint Stock Companies allows dividends to be paiddeclared only out of net profits for the current year calculated under Russian accounting principlesstandards and as long as the following conditions have been met:

•

the charter capital of the company has been paid in full;



•

the value of the company's net assets is not less (and would not become less as a result of the proposed dividend payment) than the sum of the company's charter capital, the company's reserve fund and the difference between the liquidation value and the par value of the issued and outstanding preferred stock of the company, if any;company;



•

the company has repurchased all shares from shareholders having the right to demand repurchase; and



•

the company is not, and would not become, insolvent as the result of payment of dividends, insolvent.the proposed dividend payment.




Distributions to Shareholders on Liquidation to Shareholders

        Under Russian legislation, liquidation of a company results in its termination without the transfer of rights and obligations to other persons as legal successors. OurThe Federal Law on Joint Stock Companies and our charter allows us to be liquidated:

•

by a three-quarters majority vote of a shareholders meeting vote;meeting; or



•

by a court order.

        Following a decision to liquidate us, the right to manage itsour affairs would pass to thea liquidation commission which, in the case of voluntary liquidation, is appointed by shareholders meeting and, in an involuntary liquidation, is appointed by the court. Creditors may file claims within a period to be determined by the liquidation commission, but which is at leastsuch period must not be less than two months from the date of publication of notice of liquidation by the liquidation commission.

        The Civil Code of the Russian Federation, or Civil Code, gives creditors the following order of priority during liquidation:

•

individuals owed compensation for injuries or deaths caused by a company;deaths;



•

employees;





•

creditors with obligations secured creditors;by a pledge;



•

federal and local governmental entities claiming taxes and similar payments;payments to the budgets and non-budgetary funds; and



•

other creditors in accordance with Russian legislation.

        The remaining assets of a company are distributed among shareholders in the following order of priority:

•

payments to repurchase shares from shareholders having the right to demand repurchase;



•

payments of declared but unpaid dividends on preferred stock and the liquidation value of the preferred stock determined by the company's charter, if any; and



•

payments to holders of common and preferred stock.

Liability of Shareholders

        The Civil Code and the Federal Law on Joint Stock Companies generally provide that shareholders in a Russian joint stock company are not liable for the obligations of the joint stock company and bear only the risk of loss of their investments. This may not be the case, however, when one person or entity is capable of determining decisions made by another person or entity. The person or entity capable of determining such decisions is called an "effective parent." The person or entity whose decisions are capable of being so determined is called an "effective subsidiary." The effective parent bears joint and several responsibility for transactions concluded by the effective subsidiary in carrying out these decisions if:

•

this decision-making capability is provided for in the charter of the effective subsidiary or in a contract between such persons; and



•

the effective parent gives obligatory directions to the effective subsidiary.

        Thus, a shareholder of an effective parent is not itself liable for the debts of the effective parent's effective subsidiary, unless that shareholder is itself an effective parent of the effective parent. Accordingly, you will not be personally liable for our debts or those of our effective subsidiaries unless you control our business.






        In addition, an effective parent is secondarily liable for an effective subsidiary's debts if an effective subsidiary becomes insolvent or bankrupt resulting from the fault of an effective parent only when the effective parent has used the right to give binding instructions, knowing that the consequence of carrying out this action would be insolvency of this effective subsiaidry. This is the case no matter how the effective parent's capability to determine decisions of the effective subsidiary arises, such as through ownership of voting securities or by contract. In these instances, other shareholders of the effective subsidiary may claim compensation for the effective subsidiary's losses from the effective parent that caused the effective subsidiary to take any action or fail to take any action knowing that such action or failure to take action would result in losses.

Alteration of Capital

Share Capital Increase

        We may increase our charter capital by

•

issuing new shares; or



•

increasing the nominal value of previously issued shares.

        A decision on any issuance of shares or securities convertible into shares by closed subscription, or an issuance by open subscription of common shares or securities convertible into common shares constituting 25% or more of the number of issued common shares, requires a three-quarters majority vote by our shareholders. Otherwise, a decision to increase the charter capital by issuing additional shares or increasing the nominal value of issued shares requires a majority vote of a shareholders meeting. In certain circumstances provided in our charter, a decision to increase the charter capital may be taken by our board of directors. In addition, the issuance of shares above the number provided in our charter necessitates a charter amendment, which requires a three-quarters affirmative vote of a shareholders meeting.

        The Federal Law on Joint Stock Companies requires that newly issued shares be sold at market value, except in limited circumstances where (i) existing shareholders exercise a preemptive right to purchase shares at not less than 90% of the price paid by third parties, or (ii) fees up to 10% are paid to intermediaries, in which case the fees paid may be deducted from the price. The price may not be set at less than the nominal value of the shares. The board of directors shall value any in-kind contributions for the new shares, based on the appraisal report of an independent appraiser.

        Russian securities regulations set out detailed procedures for the issuance and registration of shares of a joint stock company. These procedures require:

•

prior registration of a share issuance with the Federal Service for the Financial Markets;



•

public disclosure of information relating to the share issuance; and



•

following the placement of the shares, registration and public disclosure of the results of the placement of shares.




Share Capital Decrease; Share Buy-Backs

        The Federal Law on Joint Stock Companies does not allow a company to reduce its charter capital below the minimum charter capital required by law, which is 100,000 rubles for an open joint stock company. Our charter requires that any decision to reduce our charter capital, whether through the repurchase and cancellation of shares or a reduction in the nominal value of the shares, be made by a majority vote of a shareholders meeting. Additionally, within 30 days of a decision to reduce our charter capital, we must issue a written notice to our creditors and publish this decision. Our creditors




would then have the right to demand, within 30 days of such notice or the publication, repayment of all amounts due to them, as well as compensation for damages.

        The Federal Law on Joint Stock Companies and our charter allow our shareholders or the board of directors to authorize the repurchase of up to 10% of our shares in exchange for cash. The repurchased shares pursuant to a board decision must be resold at the market price within one year of their repurchase or, failing that, the shareholders must decide to cancel such shares and decrease the charter capital.

        A shares repurchase pursuant to a decision of our shareholders meeting to decrease the overall number of shares are cancelled at their redemption.

        The Federal Law on Joint Stock Companies allows us to repurchase our shares only if, at the time of repurchase:

•

our charter capital is paid in full;



•

we are not and would not become, as a result of the repurchase, insolvent;



•

the value of our net assets is not less (and would not become less, as a result of the proposed repurchase) than the sum of our charter capital, the reserve fund and the difference between the liquidation value and par value of our issued and outstanding preferred shares; and



•

we have repurchased all shares from shareholders having a right to demand repurchase of their shares under legislation protecting the rights of minority shareholders, as described immediately below.

        Russian legislation and our charter provide that our shareholders may demand repurchase of all or some of their shares as long as the shareholder demanding repurchase voted against or did not participate in the voting on the decision approving any of the following actions:

•

reorganization;



•

conclusion of a major transaction, as defined under Russian law; or



•

amendment of our charter in a manner which results in restrictions of the holder's rights.

        We may spend up to 10% of our net assets calculated under Russian accounting standards on the date of the adoption of the decision which gives rise to a share redemption demanded by the shareholders. If the value of shares in respect of which shareholders have exercised their right to demand repurchase exceeds 10% of our net assets, we will repurchase shares from each such shareholder on a pro ratapro-rata basis. Repurchase of the shares is at a price agreed on by the board of directors, but shall not be less than the market price determined by an independent appraiser.

Registration and Transfer of Shares

        Russian legislation requires that a joint stock company maintain a register of its shareholders. Ownership of our registered common shares is evidenced solely by entries made in such register. Any of our shareholders may obtain an extract from our register certifying the number of shares that such shareholder holds. Since May 10, 2000, Registrar NIKoil OJSC has maintained our register of shareholders.

        The purchase, sale or other transfer of shares is accomplished through the registration of the transfer in the share register, or the registration of the transfer with a depositary if shares are held by a depositary. The registrar or depositary may not require any documents in addition to that which is required by Russian legislation in order to transfer shares in the register. Refusal to register the shares in the name of the transferee or, upon request of the beneficial holder, in the name of a nominee holder, is not allowed and may be disputed.






Reserve Fund

        Russian legislation requires that each joint stock company establish a reserve fund to be used only to cover the company's losses, redeem the company's bonds and repurchase the company's shares in cases when other funds are not available. Our charter provides for a reserve fund of 15% of our charter capital, funded through mandatory annual transfers of at least 5% of our net profits until the reserve fund has reached the 15% requirement.

Disclosure of Information

        Russian securities regulations require us to make the following public disclosures and filings on a periodic basis:

•

filing quarterly reports with the FSFM containing information about us, our shareholders and depositary, the structure of our management bodies, the members of the board of directors, our branches and representative offices, our shares, bank accounts and auditors, important developments during the reporting quarter, and other information about our financial and business activity;



•

filing with the FSFM and publishing in the FSFM's periodical print publication, as well as in other media, any information concerning material facts and changes in our financial and business activity, including our reorganization, certain changes in the amount of our assets, decisions on share issuances, certain changes in ownership and shareholding as well as shareholder resolutions;



•

disclosing information on various stages of share placement, issuance and registration through publication of certain data as required by the securities regulations;



•

disclosing our annual report and annual financial statements prepared in accordance with Russian accounting standards;



•

filing with the FSFM on a quarterly basis a list of our affiliated companies and individuals; and



•

other information as required by applicable Russian securities legislation.

General Shareholders Meetings

Procedure

        The powers of a shareholders meeting are set forth in the Federal Law on Joint Stock Companies and in our charter. A shareholders meeting may not decide issues that are not included in the list of its competence by the Federal Law on Joint Stock Companies and our charter. Among the issues which the shareholders have the exclusive power to decide are:

•

charter amendments;



•

reorganization or liquidation;



•

election and removal of members of the board of directors;



•

determination of the amount of compensation for members of the board of directors;



•

appointment and removal of the company's president;



•

determination of the number, nominal value, class/type of authorized shares and the rights granted by such shares;



•

changes in our charter capital;



•

appointment and removal of our external auditor and of the members of our internal audit commission and the counting commission;



•

approval of certain interested party transactions and major transactions;



•

decision on our participation in holding companies, commercial or industrial groups, or other associations of commercial entities;



•

approval of certain internal documents and corporate records;



•

distribution of profits and losses, including approval of dividends; and



•

redemption by the company of issued shares.

        Voting at a shareholders meeting is generally based on the principle of one vote per share of common stock, with the exception of the election of the board of directors, which is done through cumulative voting. Decisions are generally passed by a majority vote of the voting shares present at a shareholders meeting. However, Russian law requires a three-quarters majority vote of the voting shares present at a shareholders meeting to approve the following:

•

charter amendments;



•

reorganization or liquidation;



•

major transactions involving assets in excess of 50% of the balance sheet value of the assets of a company;



•

determination of the number, nominal value, and type of authorized shares and the rights granted by such shares;



•

repurchase by the company of its issued shares;



•

any issuance of shares or securities convertible into shares of common stock by closed subscription; or



•

issuance by open subscription of shares of common stock or securities convertible into common stock, in each case, constituting 25% or more of the number of issued shares of common stock.

        The quorum requirement for our shareholders meetings is met if holders of shares (or their representatives) accounting for more than 50% of the issued voting shares are present. If the 50% quorum requirement is not met, another shareholders meeting with the same agenda may (and, in case of an annual shareholders meeting must) be scheduled and the quorum requirement is satisfied if holders of shares (or their representatives) accounting for at least 30% of the issued voting shares are present at that meeting.

        The annual shareholders meeting must be convened by the board of directors between March 1 and June 30 of each year, and the agenda must include the following items:

•

determination of the number and election of the members of the board of directors;



•

election of the president of the company and the counting commission, if their terms are expiring;



•

approval of the annual report and the annual financial statements, including the balance sheet and profit and loss statement;



•

approval of distribution of profits, including approval of dividends;



•

approval of an independent auditor; and



•

appointment of the members of an internal audit commission.




        A shareholder or group of shareholders owning in the aggregate at least 2% of the issued voting shares may introduce proposals for the agenda of the annual shareholders meeting and may nominate candidates for the board of directors, counting commission, audit commission and company president. Any agenda proposals or nominations must be provided to the company no later than 105 calendar days after the preceding financial year end.

        Extraordinary shareholders meetings may be called by the board of directors on its own initiative, or at the request of the audit commission, the independent auditor or a shareholder or group of shareholders owning in the aggregate at least 10% of the issued voting shares as of the date of the request. The decision by the board of directors to call or reject the call for an extraordinary shareholders meeting shall be sent to the party that requested the meeting within three days after such a decision was made.

        A general meeting of shareholders may be held in a form of a meeting or by absentee ballot. The form of a meeting contemplates the adoption of resolutions by the general meeting of shareholders through the attendance of the shareholders or their authorized representatives for the purpose of discussing and voting on issues of the agenda, provided that if a ballot is mailed to shareholders for participation at a meeting convened in such form, the shareholders may complete and mail the ballot back to the company without personally attending the meeting. A general meeting of the shareholders by absentee ballot contemplates the determination of collecting shareholders' opinions on issues of the agenda by means of a written poll.

        The following issues cannot be decided by a shareholders meeting by absentee ballot:

•

election of directors;



•

election of the internal audit commission;



•

approval of a company's independent auditor; and



•

approval of the annual report, the annual financial statements, including balance sheet, profit and loss statement, and any distribution of profits, including approval of annual dividends and losses, if any.

Notice and Participation

        All shareholders entitled to participate in a general shareholders meeting must be notified of a meeting, whether the meeting is to be held in direct form or by absentee ballot, no less than 30 days prior to the date of the meeting, and such notification shall specify the agenda for the meeting. However, if it is an extraordinary shareholders meeting to elect the board of directors, shareholders must be notified at least 50 days prior to the date of the meeting. Only those items that were set out in the agenda to shareholders may be voted upon at a general shareholders meeting.

        If a nominal holder of the shares registers in the register of shareholders, then a notification of the shareholders meeting shall be sent to the nominal holder. The nominal holder must notify its clients in accordance with Russian legislation or an agreement with the client.

        The list of shareholders entitled to participate in a general shareholders meeting is to be compiled on the basis of data in our shareholders register on the date established by the board of directors, which date may neither be earlier than the date of adoption of the board resolution to hold a general shareholders meeting nor more than 50 days before the date of the meeting (or, in the case of an extraordinary shareholders meeting to elect the board of directors, not later than 65 days before the date of the meeting).






        The right to participate in a general meeting of shareholders may be exercised by a shareholder as follows:

•

by personally participating in the discussion of agenda items and voting thereon;



•

by sending an authorized representative to participate in the discussion of agenda items and to vote thereon;



•

by submitting a written ballot reflecting the shareholders voting on the agenda items; or



•

by delegating the right to submit such written ballot to an authorized representative.

Board of Directors

        Our charter provides that our entire board of directors is up for election at each annual general shareholders meeting. Our board of directors is elected through cumulative voting. Under cumulative voting, each shareholder may cast an aggregate number of votes equal to the number of shares held by such shareholder multiplied by the number of persons on our board of directors, and the shareholder may give all such votes to one candidate or spread them between two or more candidates. Before the expiration of their term, the directors may be removed as a group at any time without cause by a majority vote of a shareholders meeting.

        The Federal Law on Joint Stock Companies requires at least a five-member board of directors for all joint stock companies, at least a seven-member board of directors for a joint stock company with more than 1,000 holders of voting stock, and at least a nine-member board of directors for a joint stock company with more than 10,000 holders of voting stock. Only natural persons (as opposed to legal entities) are entitled to sit on the board. Members of the board of directors are not required to be shareholders of the company. The actual number of directors is determined by the company's charter or a decision of the shareholders meeting. Our charter provides that our board of directors consists of seven members, which number may be increased to nine pursuant to a decision of the general meeting of shareholders.

        The Federal Law on Joint Stock Companies prohibits a board of directors from acting on issues that fall within the exclusive competence of the general shareholders meeting. Our board of directors has the power to perform the general management of the company, and to decide, among others, the following issues:

•

determination of our business priorities;



•

convening annual and extraordinary shareholders meetings, except in certain circumstances specified in the Federal Law on Joint Stock Companies;



•

approval of the agenda for the shareholders meeting and determination of the record date for shareholders entitled to participate in a shareholders meeting;



•

placement of our bonds and other securities in cases specified in the Federal Law on Joint Stock Companies;



•

determination of the price of our property and of our securities to be placed or repurchased, as provided for by the Federal Law on Joint Stock Companies;



•

repurchase of our shares, bonds, and other securities in certain cases provided for by the Federal Law on Joint Stock Companies;



•

recommendations on the amount of the dividend and the payment procedure thereof;



•

recommendations on the amount of remuneration and compensation to be paid to the members of our internal audit commission and on the fees payable for the services of an independent auditor;



•

the use of our reserve fund and other funds;



•

approval of our internal documents, except for those documents whose approval falls within the competence of our shareholders or the president;



•

the creation and liquidation of branches and representative offices;



•

approval of major and interested party transactions in certain cases provided for by the Federal Law on Joint Stock Companies;



•

increasing our charter capital by issuing additional shares within the limits of the authorized charter capital, except in certain circumstances specified in our charter;



•

approval of our share registrar and the terms of the agreement with it; and



•

other issues, as provided for by the Federal Law on Joint Stock Companies and our charter.

        Our charter generally requires a majority vote of the directors present for an action to pass, with the exception of actions for which Russian legislation requires a unanimous vote or a majority vote of the disinterested and independent directors, as described therein. A board meeting is considered duly assembled and legally competent to act when at least six directors are present.

        The special Regulation "About the Board of Directors of OJSC Mobile TeleSystems" was approved by the general shareholders meeting on November 11, 2004. In accordance with clause 1.8 of the Regulation, the members of the board of directors have the right to:

•

receive information regarding our operations;



•

propose issues to be discussed by the board of directors;



•

review the minutes of the board of directors meetings;



•

express their own point of view during the board of directors meetings;



•

request to include in the minutes of the meetings their personal opinion concerning issues on the agenda and decisions made with respect thereto; and



•

receive a remuneration and/or compensation of expenses related to the execution of their duties as members of the board of directors in accordance with decisions of the general shareholders meeting.

In accordance with clause 1.9 of the Regulation, the members of the board of directors must:

•

act in our interests;



•

execute their duties in a confident and scrupulous manner;



•

act within their rights and in accordance with the purposes of the board of directors;



•

not distribute confidential information concerning us and protect such information from unlawful and improper use and publishing, and not use such confidential information in their own or third parties' commercial purposes;



•

participate in the work of the board of directors;



•

participate in the voting process during the board of directors meetings;



•

complete the tasks assigned by the board of directors;



•

evaluate the risks and consequences of the decisions made;



•

inform us on a timely basis about their participation in the management of other companies and changes in such participation;



•

restrain from voting on issues of personal interest;



•

inform the board of directors about future deals in which they may have a personal interest;



•

disclose information about the holding, disposal or acquisition of our shares and other securities; and



•

restrain from actions, which could lead to a conflict between their personal and our interests.




Interested Party Transactions

        Under the Federal Law on Joint Stock Companies, certain transactions defined as "interested party transactions" require approval by disinterested directors or shareholders of the company. "Interested party transactions" include transactions involving a member of the board of directors or member of any executive body of the company (including the company's chief executive office and/or the company's managing organization), any person that owns, together with any affiliates, at least 20% of a company's issued voting shares or any person who is able to direct the actions of the company, if that person and/or that person's spouse, parents, children, adoptive parents or children, brothers or sisters or affiliates, is/are:

•

a party to, or beneficiary of, a transaction with the company, whether directly or as a representative or intermediary;



•

the owner of at least 20% of the issued voting shares of a legal entity that is a party to, or beneficiary of, a transaction with the company, whether directly or as a representative or intermediary; or



•

a member of the board of directors or a member of any management body of a company that is a party to, or beneficiary of, a transaction with the company, whether directly or as a representative or intermediary, or a member of the board of directors or of any management body of a management organization of such a company.

        The Federal Law on Joint Stock Companies requires that an interested party transaction by a company with more than 1,000 shareholders be approved by a majority vote of the independent directors of the company who are not interested in the transaction. For purposes of this rule, an "independent director" is a person who is not, and within the year preceding the decision to approve the transaction was not, a general director/president, a member of any executive body or an affiliate of the company, or a member of the board of directors or any management body of the company's management organization. Additionally, such person's spouse, parents, children, adoptive parents or children, brothers or sisters may not occupy positions in the executive bodies of the company or its management organization. For companies with 1,000 or fewer shareholders, an interested party transaction must be adopted by a majority vote of directors who are not interested in the transaction if the number of these directors is sufficient to constitute a quorum.

        Approval by a majority of shareholders who are not interested in the transaction is required if:

•

the value of such transaction or a number of interrelated transactions is 2% or more of the balance sheet value of the company's assets determined under Russian accounting standards;



•

the transaction or a number of interrelated transactions involves the issuance, by subscription, of voting shares or securities convertible into voting shares, or a secondary market sale of such securities, in an amount exceeding 2% of the company's issued voting stock;




•

the number of directors who are not interested in the transaction is not sufficient to constitute a quorum; or



•

all the members of the board of directors of the company are interested parties, or none of them is an independent director.

        Approval by a majority of shareholders who are not interested in the transaction may not be required for an interested party transaction if such transaction is substantially similar to transactions concluded by the company and the interested party in the ordinary course of business before such party became an interested party with respect to the transaction.

        The approval of interested party transactions is not required in the following instances:

•

the company has only one shareholder that simultaneously performs the functions of the executive body of the company;



•

all shareholders of the company are deemed interested in such transactions;



•

the transactions arise from the shareholders executing their preemptive rights to purchase newly issued shares of the company;



•

the transactions arise from the repurchase, whether mandatory or not, by the company of its issued shares; or



•

the company mergers with another company, and the latter owns more than three-fourths of the voting capital stock of the company.

Major Transactions

        The Federal Law on Joint Stock Companies defines a "major transaction" as a transaction, or a number of interrelated transactions, involving the acquisition or disposition, or a possibility of disposition (whether directly or indirectly) of property having the value of 25% or more of the balance sheet value of the assets of a company determined under Russian accounting standards, with the exception of transactions conducted in the ordinary course of business or transactions involving the placement of common stock, or securities convertible into common stock. Major transactions involving assets ranging from 25% to 50% of the balance sheet value of the assets of a company require unanimous approval by all members of the board of directors or, failing to receive such approval, a simple majority vote of a shareholders meeting. Major transactions involving assets in excess of 50% of the balance sheet value of the assets of a company require a three-quarters majority vote of a shareholders meeting.

Change in Control

Anti-takeover Protection

        Russian legislation requires that any person that intends, either individually or together with its affiliates, to acquire 30% or more (including, for such purposes, the shares already owned by this person or its affiliates) of the common stock of a company having more than 1,000 holders of common stock, must give at least 30, but no more than 90, days' prior written notice to the company. Additionally, the Federal Law on Joint Stock Companies provides that a person that has acquired either individually, or together with its affiliates, 30% or more (including, for such purposes, the shares already owned by this person or its affiliates) of the common stock of a company with more than 1,000 holders of common stock, within 30 days of acquiring the shares, must offer to buy all of the common stock or securities that are convertible into common stock at a market price which shall not be lower than the weighted average price of the common stock over the six month period before the date of acquisition. These requirements also apply to any acquisitions of each subsequent 5% or more of the




issued common stock of a company by a person already holding (together with its affiliates) over 30% of the issued common stock of such company. If the acquirer fails to observe these requirements, it will be limited to voting only those shares it purchased in compliance with these requirements. The requirement to make a buyout offer of securities may be waived in a company's charter or by a resolution adopted by a majority vote of a shareholders meeting, excluding the votes of the acquirer (and its affiliates). New Russian securities regulations strongly discourage listed companies from waiving the buyout offer requirement, and regulators have advised Russian companies to abandon any waiver of this requirement by July 1, 2005. Our charter does not contain a waiver of this requirement.

Approval of the Federal Antimonopoly ServiceInterested Party Transactions

        Pursuant to Russian antimonopoly legislation, transactions exceeding a certain amount, involving companies with a combined value of assets under Russian accounting standards that exceeds a certain threshold or companies registered as having more than a 35% share of a commodity market, and which would result in a shareholder (or a group of affiliated shareholders) holding more than 20% of the voting capital stock of the company must be approved in advance by the Federal Antimonopoly Service.

Notification of Foreign Ownership

        Foreign persons registered as individual entrepreneurs in Russia who acquire shares in a Russian joint stock company and foreign companies that acquire shares in a Russian joint stock company may need to notify the Russian tax authorities within one month following such acquisition if they are already registered with the Russian tax authorities at the time of acquisition. Russian law is unclear as to whether foreign persons and companies that are not registered with the Russian tax authorities at the time of their share acquisitions must register solely for the reason of such share acquisitions. Other than these requirements, there are no requirements or restrictions with respect to foreign ownership of shares in the Company.

Liability of Shareholders

        The Civil Code andUnder the Federal Law on Joint Stock Companies, generally provide thatcertain transactions defined as "interested party transactions" require approval by disinterested directors or shareholders in a Russian joint stock company are not liable for the obligations of the joint stockcompany. "Interested party transactions" include transactions involving a member of the board of directors or member of any executive body of the company and bear only(including the riskcompany's chief executive office and/or the company's managing organization), any person that owns, together with any affiliates, at least 20% of lossa company's issued voting shares or any person who is able to direct the actions of their investment. This may not be the case, however, when one company, is capable of determining decisions made by another company. The company capable of determining such decisions is called an effective parent. The company whose decisions are capable of being so determined is called an effective subsidiary. The effective parent bears joint and several responsibility for transactions concluded by the effective subsidiary in carrying out these decisions if:if that person and/or that person's spouse, parents, children, adoptive parents or children, brothers or sisters or affiliates, is/are:

•

this decision-making capability is provided for ina party to, or beneficiary of, a transaction with the charter of the effective subsidiarycompany, whether directly or inas a contract between the companies; andrepresentative or intermediary;



•

the effective parent gives obligatory directions to the effective subsidiary.

        Thus, a shareholderowner of an effective parent is not itself liable for the debtsat least 20% of the effective parent's effective subsidiary, unlessissued voting shares of a legal entity that shareholder is itself an effective parenta party to, or beneficiary of, a transaction with the effective parent. Accordingly, you will not be personally liable for our debtscompany, whether directly or those of our effective subsidiaries unless you control our business.

        In addition, an effective parent is secondarily liable for an effective subsidiary's debts if an effective subsidiary becomes insolventas a representative or bankrupt resulting from the action or inaction of an effective parent. This is the case no matter how the effective parent's capability to determine decisions of the effective subsidiary arises, such as through ownership of voting securities or by contract. In these instances, other shareholders of the effective subsidiary may claim compensation for the effective subsidiary's losses from the effective parent that caused the effective subsidiary to take any action or fail to take any action knowing that such action or failure to take action would result in losses.






Alteration of Capital

Share Capital Increase

        We may increase our charter capital by

•

issuing new shares;intermediary; or



•

increasinga member of the nominal valueboard of already issued shares using the company's net income.

        Generally,directors or a decision to increase the charter capital by issuing additional shares or increasing the nominal valuemember of issued shares requires a majority voteany management body of a shareholders meeting. In addition, the issuance of shares above the number provided in our charter necessitatescompany that is a charter amendment, which requires a three-quarters affirmative voteparty to, or beneficiary of, a shareholders meeting.

transaction with the company, whether directly or as a representative or intermediary, or a member of the board of directors or of any management body of a management organization of such a company.